Southern California home prices have been falling. But will the drops continue?

A home for sale last year in the Mission Hills area of Los Angeles.

May 25, 2023 5 AM PT

Last year, rising mortgage interest rates chilled the previously hot Southern California housing market.

Buyers backed off, sales plunged and, for the first time in a decade, home prices underwent a sustained slide.

By one measure, prices in the six-county region fell 13% from the peak last spring.

That might be as low as they go.

In recent months, there have been growing signs home values may have resumed their climb, potentially dashing the hopes of first-time buyers holding out for cheaper housing in the months or years ahead.

What exactly is happening?

According to several data trackers, home prices ticked up in the last few months.

In April, the median sales price for an existing single-family house in Southern California rose 2% from a month earlier to $785,000, according to the California Assn. of Realtors. That was the third straight month prices climbed from the prior month.

Similar increases can be found in data trackers from mortgage company Black Knight and real estate brokerage Redfin.

But not all sources show prices rising across the board.

According to Zillow, the typical price in the combined six-county Southern California region continued to fall in April, but the decline was the smallest since values turned negative last year.

Why is this happening?

Essentially, buyers have been more willing than sellers to return to the market this spring.

A decline in mortgage rates from above 7% into the 6% range brought some buyers back, real estate agents say, as did a belief among buyers that rates wouldn’t fall much more if they continued to hold out.

Some agents said they’ve seen mostly first-time buyers return.

“Why pay high rent?” Ramon Sanchez, a Whittier-based agent, said. “They would rather see if they can qualify to buy.”

Jeff Tucker, an economist with Zillow, said first-time buyers may also be “bursting at the seams in their apartment” as their families grow, another reason “a lot of interested first-time buyers are not in a place where it’s easy to wait.”

At the same time, many homeowners are waiting, unwilling to list their homes and trade their sub-3% mortgages to borrow at 6%.

Since the start of the year, the total number of homes for sale in Southern California has dropped 21%, according to data from Redfin.

Despite fewer options, sales increased 34%.

“Inventory is just very low,” Tucker said. “There are enough folks who can afford prices at this height that they are still bumping into each other getting into a little competition.”

If I am looking to buy a home now, what should I know?

Well, there is a little more competition. Compared with a few months ago, open houses should be busier and there’s a greater chance you’ll need to bid against others.

Tracy Do, a Coldwell Banker agent who specializes in the highly sought-after neighborhoods of northeast L.A., said that once again, some homes are selling for more than $100,000 over asking.

In southeastern Los Angeles County, Sanchez isn’t seeing jumps as big, but the last three properties he listed had multiple offers and either sold, or are in escrow, for more than the list price.

“We got more buyers in the market than we have sellers,” Sanchez said.

Although the market is more competitive, it’s nothing like the pandemic housing boom.

In March 2022, buyers paid more than list price in 76% of home sales in Los Angeles and Orange counties, according to Zillow. Fast-forward to March 2023, that percentage was 42%.

Do said buyers — compared with early 2022 — are also more likely to get away with leaving in contingencies, or convincing the seller to pay for repairs.

Pricing is also lower.

According to the California Realtors, though April’s median in the combined six-county Southern California region was up $15,000 from March, it was $52,000, or 6.2%, below April 2022 levels.

In Los Angeles County, the median was 8% less than a year earlier and 17% lower than when prices topped out in the county last September.

In Orange County, April prices were 8% from that county’s peak; in the Inland Empire, 5% below the peak; in Ventura County, 7% below the peak; and in San Diego County 5% below the peak.

Will home prices drop further?

What ultimately happens will be influenced by a variety of factors including the direction of mortgage interest rates and whether the economy enters a recession.

But Tucker, the Zillow economist, said the most likely scenario is home prices rise from here on out, because high mortgage rates should keep many homeowners from listing their homes.

Jordan Levine, chief economist with the California Assn. of Realtors, also predicts rising prices, but like Tucker at a more modest level than during the pandemic.

Levine said still-high mortgage rates and a slowing economy are likely to damp demand enough to keep prices from soaring.

Other experts stressed that values could again turn negative.

“Home prices are still well out in front of what underlying incomes today would support at today’s interest rate levels,” said Andy Walden, vice president of research at Black Knight. “There is still potential price risk out there.”