The Southern California housing market is experiencing a significant slowdown, with home sales dropping by nearly half compared to the previous year. According to CoreLogic, only 13,201 sales of existing and new single-family houses and condos were closed in April, marking the third-largest year-over-year decline since 1988. This sluggishness in the market is attributed to various factors, including high mortgage rates and soaring home prices. Let’s explore the five reasons behind this drastic dip and its impact on potential buyers and the overall housing landscape.
- Affordability Remains a Challenge: The median selling price of homes in Southern California remains stubbornly high, contributing to the declining sales. In April, the median price stood at $735,000, representing a 4.3% increase from the previous month. While it was only a 2% decrease from last year, it’s still 3% lower than the record high of $760,000 in May 2022. This pricing trend has made homeownership increasingly unaffordable for many prospective buyers.
- Rising Mortgage Rates: The Federal Reserve’s efforts to cool down an overheated economy led to a surge in mortgage rates since March 2022. This increase has significantly impacted the average homebuyer’s house payment. The average monthly cost in April reached $3,655, assuming a 6.34% mortgage rate and a 20% down payment. This represents a 14% increase from the previous year when rates were at 4.98% and a staggering 88% jump from the historically low rate of 2.67% in December 2020.
- Decreasing Affordability Index: Surging costs have made homeownership out of reach for a larger population segment. According to the California Association of Realtors affordability index, a Southern California household must earn $178,400 annually to afford a median-priced, single-family house in the first quarter. This estimate represents a painful 22% increase compared to the previous year. Consequently, the percentage of Southern Californians able to afford a home has declined to 19%, down from 24% a year ago and 29% in 2021.
- Limited Inventory: House hunters need more options in the market due to various factors. Many homeowners are reluctant to sell because they cannot afford another home or are benefiting from the low mortgage rates they secured during the pandemic. Some owners have also chosen to rent out their properties rather than sell them. The Realtor supply index reveals that Southern California has only 2.5 months’ worth of single-family houses for sale for every home bought, which is 34% below the average since 2008.
- Building Slowdown: The winter saw a surge in demand that depleted builders’ inventory of ready-to-sell houses. Consequently, developers need help to catch up with the market. Only 1,038 new homes were sold in Southern California in April, marking a 39% drop from the previous year. New homes accounted for a small portion of total sales, representing only 7.9% of all transactions, down from the 10-year average of 8.6%. The scarcity of new homes is particularly evident in Orange County, San Diego, San Bernardino, Los Angeles, and Ventura, where the share of recent home sales fell below their respective historical averages.
The Southern California housing market is facing an unprecedented slowdown, characterized by historically low levels of homebuying activity. The combination of soaring prices, rising mortgage rates, declining affordability, limited inventory, and a building slowdown has created a challenging environment for both first-time buyers and move-up buyers