Affordability Issues Drive Down L.A. Condo Sales

Affordability issues are driving condo sales down significantly this year. According to research from Polaris Pacific, condo sales in Los Angeles were down 18.9% for year-over-year in October with a total of 1,093 condo closings during the month. Unlike the single-family housing market, condo sales activity was not impacted by a supply shortage. Condo listing were actually up 68.3% year-over-year in October with a 3.8 month inventory. This is still considered a seller’s market however as a buyer’s market is four to six months of inventory. Rather than supply, high pricing has driven prospective buyers out of the market.

“Although we are in the midst of an extremely strong economy that continues to drive demand, there are headwinds that are making home purchases more difficult for a portion of the potential pool of buyers,” Mike Akerly, VP and regional manager at Polaris Pacific, tells GlobeSt.com. “We have seen seven straight years of appreciation in the Los Angeles Metro which has had an impact on affordability. Although wage growth in recent years has been in the 2.5% to 3% range, it is barely outpacing inflation and not keeping up with appreciation rates in the residential sector. Over the past year, we have seen a significant bump in mortgage interest rates that, all other things remaining equal, have reduced the purchasing power of those in the market.”

Rising interest rates have put more pressure on affordability, and this combination has pushed certain buyers out of the market altogether. Still, despite the smaller buyer pool and decrease in transactions, there are still a lot of deals getting done. “Sustained appreciation and increased interest rates have made it more difficult to purchase for some, which in turn, has recently resulted in decreased transactions in the marketplace,” says Akerly. “That being said, there are still a very significant number of transactions taking place driven by people’s need for housing and the robust economic environment.”

Pricing is one indicator of the strong market—despite the decrease in transaction volume. Prices in October actually increased 7.3%, according to Polaris Pacific, with the median price for a condo in Los Angeles $804,000. However, Akerly says that it may just be taking the market a moment to adjust to the smaller buyer pool. “In this case, year-over-year price increases are a lagging indicator of the direction of the market,” he says. “These continued increases will likely not be sustainable in the future in the face of increased inventory and decreased transaction volume.”

Likely, there will likely be a pause before sellers begin to lower prices to meet new demand levels. “On a practical level, I think what you are seeing is the stand-off period when sellers attempt to continue to push pricing above prior levels and a portion of the market begins to balk at the continued increases,” says Akerly. “Ultimately, sellers are likely to adjust their expectations in the face of fewer buyers and more competition, which will in turn lead to an increased number of transactions until a new equilibrium is found.”

Condo sales volumes have trended down in the second half of the year, but Akerly still expects strong numbers overall, especially considering 2017 had the highest transactions volumes since 2007. “Though there has been a noted decrease in transaction volume in the latter part of 2018, I think it is helpful to put that in a historical perspective as well,” he says. “The drop is being measured on a year-over-year basis, but 2017 represented a peak in total transactions that was one of the two highest points since 2007, the other being in 2013/2014. “So, it could reasonably be stated that the decrease, though driven by affordability, is also a return to more typical levels of velocity in the marketplace.”