With an estimated GDP of over $950 billion in 2021, the economy of the combined Los Angeles-Long Beach-Anaheim metropolitan statistical area not only ranks as the second-largest in the U.S. but as a country would rank as the 18th-largest in the world. Not surprisingly, such economic success brings its own consequences, in this case providing enough affordable housing for its 6.3 million workers. For those who can afford it, the housing options are many, but for those who cannot, their options include doubling up with unrelated housemates, commuting further inland or joining the region’s growing homeless population.
Similar to the overall U.S. housing market in mid-2020, the housing market in the Los Angeles-Long Beach-Anaheim MSA entered a feeding frenzy marked by a sharp decline in months of inventory, bidding wars and rising prices. By early 2023, the Los Angeles-Orange County region was taking a bit of a breather featuring moderately more supply, moderating prices and more careful buyers looking more for recently renovated, turn-key homes versus fixer-uppers in need of some TLC.
Although best known as the combined Los Angeles-Orange County region, as defined by the Census Bureau the Los Angeles-Long Beach-Anaheim MSA includes a mix of 88 cities in Los Angeles County, 34 cities in Orange County and a mix of unincorporated communities in this region of close to 13 million people.
Using information from the U.S. News Housing Market Index, we’ve compiled the data you need for a better understanding of the Los Angeles-Long Beach-Anaheim MSA real estate market in 2023.
[Related:The Hottest Housing Markets in the U.S.]
How the Los Angeles-Long Beach-Anaheim Housing Market Changed in 2022
During 2022, the level of monthly single-family detached home building permits authorized in the Los Angeles-Long Beach-Anaheim MSA first peaked at 1,167 units in March then dipped to 818 units in July before rebounding to 1,034 units a month later as demand for homes continued to outstrip supply. However, once mortgage rates began to rise in the last few months of the year, single-family building permits again fell to 700 units in November before again rebounding to 829 units by January 2023. For the three-month period ending in January 2023 versus the same period a year earlier, single-family permit requests fell 4.9%.
For the multifamily sector, permit issuances steadily rose in 2022 and didn’t peak until September at over 2,000 units, the highest monthly level since February 2020. Since last September, developers have gradually pulled back on the number of building permits ordered, falling to just under 1,700 units by January 2023. Despite this decline, during the three-month period ending in January 2023 13.5% more multifamily permits were requested versus the same months ending in January 2022.
Los Angeles-Orange County Housing Supply and Demand
In general, if a balanced housing market includes four to six months of inventory, this Southern California market continues to favor sellers. The supply of housing in the Los Angeles-Long Beach-Anaheim MSA, which had dipped as low as 1.55 months in March 2022, continued edging up through the rest of the year to 3.6 months by November. Between then and January 2023, while months of inventory had ranged from 3.01 to 3.81 months, early signs show inventory again falling to 3.25 months in February.
For just the month of January 2023 year-over-year, the supply of homes for sale rose by 1.95 months to 3.81 months, or an increase of nearly 105%. Notably, this level of supply was healthier than the months of supply for the overall U.S. in January at 3.31 months, which rose 1.81 months year-over-year, or about 121%. However, early signs are showing national inventory dipping again in February to 2.62 months. For the Los Angeles MSA, inventory dipped to 3.2 months in February but was up 1.18% year over year.
According to Nicole Galati, an agent with Coldwell Banker in Los Angeles, given the vast geography encompassed by the two-county area, the current power balance really depends on the local neighborhood. “We’re still getting multiple offers, but it’s not quite as competitive as last year when buyers had to remove every contingency off the bat,” she says.
[Read: The Guide to Escalation Clauses in Real Estate.]
As for homes and multifamily properties selling for over $5 million in Los Angeles, there was a recent flurry of activity prior to April 1, 2023, which was the date the city’s Measure ULA, nicknamed “the mansion tax,” went into effect. The ballot measure, passed in November 2022 to fund affordable housing and prevent homelessness, imposes an additional transfer tax of 4.0% to 5.5% depending on the sale amount, and also applies to foreclosed properties. As for luxury-adjacent homes priced under $2 million, Galati says “the market is doing OK, especially for buyers who want to fix up a property themselves.”
In adjacent Orange County, agent Robert Casas with Trusted Realty Group in Anaheim advises buyers to be patient and to expect a longer home-finding process versus last year. Because sellers are usually listing mostly out of necessity due to the “three Ds” of death, divorce or dislocation, fewer homes for sale means fielding multiple offers from potential buyers. In response, sellers with the upper hand are asking for considerations including waiving appraisals and a shortened timeline for inspections.
Still, Casas’ potential buyers are both serious and choosy in a market in which all beginner homes are selling quickly. “Buyers that are really ready to buy are out there and not the ‘looky-loos,’ because they feel it’s their time,” he says. Still, in Orange County they’re generally not interested in fixer-uppers requiring additional work. For sellers, Casas suggests, “It’s about preparing, decluttering, painting, tidying and knowing the comparable price points to list it correctly.”
For buyers seeking out newly built homes, they’ll probably be focused on just a few areas of the region. “In Orange County, most new development is controlled by three large landowners who are pushing for higher-density housing, whether detached, attached or apartments,” says Evan Forrest, vice president for Zonda Advisory, which tracks new home communities. “In Los Angeles County, most new development is focused on the westside through downtown, scattered throughout the San Fernando Valley and the Santa Clarita Valley. In (the High Desert community of) Lancaster, there are more detached homes due to available land, and that’s a function of affordability.”
In the rental market, while there has been some new rental stock, the Los Angeles-Long Beach-Anaheim MSA’s vacancy rate of 3.3% reported for December 2022 by the Census Bureau still slipped 0.1% year-over-year.
If a vacancy level of 5% is generally considered to represent rental market equilibrium between supply and demand, the Los Angeles-Long Beach-Anaheim MSA is thus both a seller’s and a landlord’s market. While certainly an improvement from just 2.3% in January 2021, the vacancy rate in the combined counties has remained under 5% since August 2022 as the COVID-19 pandemic receded and more residents cooped up with family and roommates opted for their own places to live.
[Related:Is the Rental Market Finally Softening?]
In addition to the low inventory, sales activity in the months ahead may also be impacted by rebounding mortgage rates resulting from stubborn inflation. Although it is slowly trending down, annual inflation is still too high for the Federal Reserve, which hiked its federal funds rate another quarter-point in March. According to the seasonally adjusted Purchase Index from the Mortgage Bankers Association for the week ending March 24, although purchase applications did rise for the fourth consecutive week, they were still down 35% year-on-year. With mortgage rates tracked by the MBA up 1.65 basis points for the same period, many buyers and sellers remain on the sidelines.
Consumer sentiment as measured by the University of Michigan’s Survey of Consumers rose to 64.9 on a 100-point scale in January but was still down 2.3 points year-over-year.
Foreclosure Trends
With relatively low unemployment levels and most homeowners with mortgages benefiting from the low rates offered in 2021 and part of 2022, both foreclosures and delinquencies tracked by Black Knight remain at very low levels in the state of California. As of December 2022, just 0.10% of homes in California were in foreclosure versus 0.37% for the nation. Statewide delinquencies in December fell 0.3% to 1.8% versus just over 3% for the U.S..
Median Home Price in Los Angeles-Orange County
For buyers, a growing timeline of homes for sale in the latter half of 2022 helped to moderate values in the Los Angeles-Long Beach-Anaheim MSA, with the median sales price falling 3.2% year-over-year in January to $799,000. While this median price is still 109% higher than the national median of $383,000 and has fallen 11.2% from its peak of $900,000 last May, early signs for February show it leveling out at $795,000.
Galati’s partner at Coldwell Banker, Sheri Wegand, has noted more buyers and agents from the pricey westside of Los Angeles increasingly traveling north across the Hollywood Hills and scouring the southern San Fernando Valley for options. “It’s not that it’s cheaper for them, it’s about getting more for their dollars,” she says. Buyers are also asking sellers to credit them for 2-1 buydowns on the mortgage rate, which allows them to have extra money to spend on upgrades and furnishings during the first two years of ownership.
For newly built homes, potential buyers often have more negotiating room, especially for standing inventory. “What we’re seeing in terms of price discounts and incentives overall range from 8% to 10%,” says Tom Grable, Southern California division president for TriPointe Homes and vice chair of the California Building Industry Association. “We’re not in the price business as much as we’re in the monthly payment business, and to the extent we can get someone in that comfort level, we will sell homes.”
However, Grable also noted that when prices are lowered, that can also mean a related adjustment to what’s included in the home. “We look at the spec levels and the prices paid by people who bought last year to make sure they remain in a positive value proposition to justify the reductions.”
Although home prices did continue to rise in 2022, they peaked several months earlier in the year than median rental rates did from Zillow’s Observed Rent Index, which continued to rise through September to $2,931 per month. Since then, although area rents have continued to slide by 0.9% from the last peak to $2,905, they’re still up 4.3% year-on-year.
Although the Census Bureau’s American Community Survey did report a gain in the number of households of 80,000 per year between 2019 and 2021 to 4.45 million, since then the Los Angeles-Long Beach-Anaheim MSA has shown population losses as residents moved to find cheaper housing further inland in California as well as in other states. Between 2021 and 2022, the Census Bureau showed the combined counties of Los Angeles and Orange losing over 100,000 residents, while the neighboring counties of Riverside and San Bernardino gained nearly 21,500.
Nationally, while costs for new single-family homes as reported by the Census Bureau’s Construction Cost Index for January have retreated from their November peak of 195.5, they’re still up 12% year-over-year to 190.6.
Similarly, while average mortgage rates tracked by FreddieMac’s Primary Mortgage Market Survey did retreat from their peak of 6.90% in October to 6.27% in January, as of March 23, 2023, the rate for a 30-year fixed rate loan rebounded to 6.42%.
Unemployment Trends in Los Angeles-Orange County
Despite the continued low inventory of homes available to buy and to rent, the economy in the Los Angeles-Long Beach-Anaheim MSA continues to outperform the country, with non-farm employment in December 2022 rising by over 215,000 year-over-year to 6.33 million jobs. In February, it dropped slightly to 6.28 million. but was still up more than 190,000 jobs year over year. Notably, this growth accounted for 4.8% of the national gain for the same time period even though the metro area’s population accounts for 3.9% of the U.S. total. Even with this growth, however, while the local unemployment rate for December fell 1.2 percentage points year-over-year to 3.9%, it’s still higher than the U.S. average of 3.5%. By December, the local rate crept back up to 4.6% as the national rate dipped slightly to 3.4%.
Of this 215,700 annual rise in the total number of jobs, the fastest-growing fields included leisure and hospitality (6.4%), other services (5.1%) and education and health services (4.4%). Due in part to the region’s relatively anemic new construction, jobs in this field did rise by 1.7% year-over-year through December, but accounted for just 1,700 jobs, or just 0.8% of the total annual gain.
Zonda’s Forrest, who comes from a construction background, suggests that the lack of new entrants into the construction trades is an important reason the Los Angeles-Orange County region is not able to boost the supply of more affordable housing. However, TriPointe’s Grable argues that the state’s lack of housing is due more to policy choices than an inability of the building industry to meet demand. “We have a housing policy crisis that has been ongoing for 40-plus years but now we’re really seeing the manifestation of poor housing policies at the state and local levels,” he says. “In Sacramento, while housing is a priority issue, they’re pumping out more legislation which is actually detrimental to building more housing.”
Builder Confidence in Los Angeles-Orange County Recently Improves
Builder confidence on a scale of 0-100 for the West Census Region from the NAHB/Wells Fargo Housing Market Index fell 55 points year-over-year to 36 in March, but is still up from 29 in January, higher than the national level of 42.
For nonresidential construction activity, the Architecture Billings Index provides another economic indicator with a lead time of approximately nine to 12 months, with 50 marking the split between increases or decreases in billings. In January, the index for the West Census region rose 3.7 points year-over-year to 51.3 while the national index fell 1.7 points to 49.3. For the West region, it dipped slightly in February to 50.4, as the national index fell to 48..
Los Angeles-Orange County Real Estate Market Predictions
Despite its recent population declines resulting largely from the high price of housing, this economic giant of the western U.S. continues to attract both jobs and commuters from the surrounding areas, putting a floor under home prices and rents. While the two-county region certainly has its share of challenges including traffic gridlock, a relatively low use of public transit and a chronic affordable housing deficit, it continues to be creative with solutions including both carrots and sticks. Only time will tell if these solutions manage to retain the dynamism which made the California Dream come alive for millions.
The U.S. News Housing Market Index is forecasting nearly 3,800 single-home permits from February through June in addition to 6,968 permits approved for multifamily homes for the Los Angeles-Long Beach-Anaheim MSA. Permits for both sectors are anticipated to continue declining moderately during the forecast period.
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Los Angeles-Orange County Housing Market Forecast originally appeared on usnews.com
