Los Angeles County, hit hard by the 2008 recession, is nearing a housing recovery, but is not there yet. Most importantly, LA finally recovered all jobs lost during the recession at the end of 2014. LA now needs to complete a full jobs recovery by accommodating the population growth over the past ten years of about 5%.

Until 2015, the home sales volume recovery had been driven primarily by investors in Los Angeles County. But the housing market has begun to show more life from owner-occupants as employment and incomes continue to improve in 2018, although at a slower rate of growth. The largest obstacles facing homebuyers in today’s market are home prices (driven higher by lack of residential construction starts to generate turnover and inventory) and interest rates, which are rising in 2018.

View the Los Angeles regional charts below for details on current activity and forecasts for its housing market.

Updated September 11, 2018. Original copy posted March 2013.

Home sales volume remains low

Chart update 09/11/18

2018* 2017 2016 2003: Peak Year
Los Angeles County home sales volume 77,000 82,000 81,000 125,900

*first tuesday’s projection is based on monthly sales volume trends, as experienced so far this year.

Los Angeles County home sales volume continued on a gradual upward slope in 2017, but has fallen back thus far into 2018. Most recently, 2014 saw the lowest home sales volume, ending the year 7% below 2013. Year-to-date home sales volume has Los Angeles on track for another similar decrease in 2018, as it is currently 7% below 2017.

Looking back, after home sales volume plummeted during the Great Recession of 2008, volume rose briefly in 2009 into early 2010, due primarily to the housing tax credit stimulus and a naturally recurring “dead-cat” bounce at the end of every recession. Sales volume fell back in 2011 for lack of end user homebuyers and a retreat in speculator acquisitions. Home sales volume picked up in 2012-2013 due to the return of heavy speculator activity. During this period, speculators burned through LA housing inventory, particularly in low-tier home sales.

At the same time, demand in the form of end users (homebuyer occupants and long-term income property investors) for low-tier homes subsided, driven down by very rapidly rising prices and increased mortgage rates mid-2013.

Sales volume continues to feel downward pressure in 2018 as prices are still rising and wages are in no way keeping pace. Nonetheless, strong homebuyer demand kept sales volume from declining in 2017, and by the end of the year 1,000 more homes sold than the previous year, amounting to an increase of 1%.

A complete recovery of around 110,000 annual home sales will likely occur in the years following 2021, once end user demand in Los Angeles County is buttressed by a Great Confluence of Baby Boomers and first-time homebuyers who are lured by further employment (needed to accommodate population growth of roughly 1% annually since the beginning of the Great Recession). Residential construction starts will increase dramatically as cities within the county open up the permit process by a reduction in zoning restrictions in urban centers that will enlarge inventory counts.

Turnover is down

los-angeles-home-turnover-2016
Chart update 12/31/17

2016 2015 2014
Los Angeles County homeowner turnover rate 6.7% 6.0% 5.7%

Los Angeles County renter turnover rate

13.5% 14.7%
16.9%

Home sales volume depends in large part on homeowner and renter turnover. The number of people moving from their residence each year is indicative of both the willingness and ability of homeowners and renters to relocate. Turnover rates are highest when jobs are abundant, wages are rising, housing starts increase and employee confidence in the economy is high.

The most recent trough in Los Angeles’ homeowner turnover rate was during 2008, when California was at the depths of the Great Recession. The number of homeowners relocating since then has increased, mostly due to turnover on foreclosures and short sales. To that end, LA homeowner turnover is relatively high today with one in 16 homes selling annually. Still, this is below the peak year of 2005 when one in 12 homes sold.

With home prices running higher and average turnover dropping, expect homeowner turnover reports to show a slip in 2017.  Similarly, LA renters are motivated by the area’s exorbitant rise in rents to stay put for the time being, likely awaiting wage increases and inventory enhancement before making a selection and moving.

The homeowner turnover rate will increase significantly as more jobs are available and employee turnover rates further improve (which presently are at half-normal). This is not expected before 2019-2020, when the additional and necessary factor of greatly increased residential construction will be experienced.

Further, turnover rates are likely to rise dramatically across the county in the post-2021 boom period. This boom will be fueled by a Great Convergence of demand from first-time homebuyers (members of Generation Y) and retiring Boomers buying replacement homes. Domestic and international emigrants will play a significant role in the county’s periphery housing — the suburbs.

Homeownership bottoms

Chart update 09/11/18

Q2 2018
Q1 2018 Q2 2017
Los Angeles County homeownership 48.8% 51.9% 48.3%

The homeownership rate in Los Angeles County trended downward from the time the Millennium Boom ended in 2007 to its lowest point in Q3 2016 at under 45%. This low homeownership rate has since increased slightly to 48.8% in Q2 2018. This is still below the 55% figure set at the height of the Boom. The rate will likely remain low until about 2021 as rising FRM rates and faltering prices in the interim drive many owners back into negative equity with attendant short sales and foreclosures.

LA County’s homeownership rate has historically been lower than the state average, which was 54% in Q2 2018. LA County has a smaller share of homeowners since much of the county is urbanized, and renting is a convenience, if not a financial necessity. LA’s homeownership rate today is right around what may be considered a “normal” (pre-Millennium Boom) rate, which was 48% in 2000.

The rise and fall of home pricing

Chart update 09/11/18

Low-tier annual change Mid-tier annual change High-tier annual change
Los Angeles County home pricing index: Q4 2017 +9% +7% +7%

Along with the rest of the state, Los Angeles home prices skyrocketed during the Millennium Boom, then plunged to below mean price levels during the financial crisis and have been climbing out of the wreckage ever since. Like in other regions, there was a small bump in prices in 2009 driven by various economic stimulus programs. The increases proved unsustainable and, without the support of fundamentals, home prices dropped back fully in 2011 to the price level of early 2009.

During 2013-2014, Los Angeles saw another rapid price bump, most significant in low-tier home sales. This rapid rise fell back somewhat in the following years, increasing about 6% each year.

Prices continue to rise in 2018, with low-tier prices 9% higher than a year earlier in Q2 2018. Mid-tier and high-tier prices are 7% higher than a year earlier.  However, the recent FRM rate increase has decreased the principal amount homebuyers are able to borrow while making the same sustainable mortgage payment. History has shown that prices naturally fall 9-12 months following commencement of a sustainable increase in mortgage rates. Therefore, expect prices to level off later in 2018, likely to fall in 2019.

The most sustainable prerequisite to a long-term and stable rise in prices occurs when end users collectively gain access to sufficient jobs with more competitive wages. 2019 is the likely year for recovery on that front, just in time for the next recession to set in, expected by economists around 2020.

Construction starts feed on rental demand

Chart update 09/11/18

2017 2016 2015
Los Angeles County single family residential (SFR) starts 5,600 5,000 4,800

Los Angeles County multi-family starts

16,200 15,600
18,700

Multi-family construction starts have jumped significantly in Los Angeles County, far outpacing the near-flat trend in single family residential (SFR) starts. This is due to the increased demand for rental housing, evidenced by the steep rise in rents, especially in the urban city-center areas of Los Angeles County. Builders know this, the City of Los Angeles is accommodating and lenders are catching on.

However, the multi-family recovery is finally slowing. Following a down year in 2016, 2017 saw multi-family starts rise just 4% over the previous year. Meanwhile, SFR starts continued their steady rise, increasing 12% in 2017 over 2016.

The next peak in SFR construction starts will likely occur in 2019-2021 due to a boost from state legislation. Even then, SFR starts will not return to the mortgage-driven peak experienced during the Millennium Boom. Multi-family housing will then experience higher levels last seen in the mid-1980s, which accommodated the arrival of Baby Boomers to the housing market. This time, the need for multi-family housing will be fueled by their Gen Y children — the millennials.

More jobs needed

Chart update 09/11/18

Jun 2018 Jun 2017 Annual change
Los Angeles County employment 4,490,800 4,428,800 +1.4%

Since homeowners and renters require employment to make housing payments (with rare exception), the jobs recovery is key to the housing recovery. Fewer than 4.5 million people are employed in Los Angeles County as of June 2018. This is about 200,000 more jobs than at the 2007 peak.

Los Angeles’ jobs recovery rate has slightly trailed the statewide employment recovery in recent years and has begun to slow. From June 2017 to June 2018, the number of jobs grew by a meager 1.4%. Contrast this with the also slow statewide job growth of 2.1% over the same period of time.

Jobs by top employing industry

Chart update 09/11/18

Jun 2018 Jun 2017 Annual change
Construction 143,600 139,300
+3.1%

Real Estate

84,400 84,000
+0.5%

Two out of three of top employing industries in Los Angeles have recovered from the 2008 Recession. The Education and Health Services and Professional and Business Services sectors have experienced steady increases throughout the recovery. However, the greatest drop in numbers occurred in the Trade, Transportation and Utilities job sector, which is slowly nearing recovery.

In the housing industry, construction jobs took a huge hit and continue to plod along the path to recovery. Likewise, the number of employed real estate professionals has remained low throughout this recovery period. The number of real estate professionals is increasing very slowly, but will not likely rise to pre-recession levels until the next influx of buyers and renters enter the market in the years following 2021.

Everyone needs income to buy or rent

los-angeles-per-capita-income-2016

Chart update 12/31/17

2016 2015 Annual change
Los Angeles County per capita income $55,624 $54,298 +2.4%
California per capita income $56,374 $54,718 +3.0%

The average income earner in Los Angeles County earned roughly $55,600 in 2016 (the most recently reported Census year). For perspective, this figure is just slightly below the statewide per capita income.

Income per person in actual dollar amounts has only recently exceeded pre-recession levels in Los Angeles. However, when considering the inflation (loss of purchasing power) occurring during the intervening years, Angelinos’ wages and wallets still need some fattening up to regain the standard of living experienced in 2007 – around $1,500 more today is needed to cover the interim inflation to simply match income’s purchasing power in 2007.

As long as income remains diminished across most job sectors, increases in home prices and rents are limited. This is because buyers and tenants ultimately determine sales prices and rent amounts — collectively they can pay no more to buy or rent a home or apartment than their savings and income qualify them to. According to the U.S. Census, the average Los Angeles resident with a mortgage pays 51% of their income on housing expenses, as of 2015. Renters pay 52% of their income on housing costs. This high price for housing can’t be sustained at today’s incomes without a long-term drop in their standard of living and a rise in poverty and related symptoms.