Los Angeles County, hit hard by the 2008 recession, is nearing a housing recovery. Most importantly, Los Angeles finally recovered all jobs lost during the recession at the end of 2014.

Until 2015, the housing recovery had been driven primarily by investors in Los Angeles County. But expect the housing market to begin to show more life from owner-occupants as employment and incomes continue to improve in 2017. The largest obstacles facing homebuyers in today’s market is home prices and interest rates, which have risen out of the reach of many, meaning competition in the low-tier is tight.

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

Updated December 19, 2016. Original copy posted March, 2013.

Home sales volume remains low

Chart update 12/19/16

2016 projection* 2015 2014 2003: Peak Year
Los Angeles County home sales volume 80,300 81,900 74,100 125,900

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

Los Angeles County during 2014 was on a relentless downward slope, ending the year 7% below 2013. This same annual decrease was also experienced across the state. However, LA home sales volume increased in 2015, finishing out the year 11% higher than 2014, just above 2013. Year-to-date home sales volume is 2% below 2015 in Los Angeles as of the third quarter (Q3) 2016. This mirrors the level-to-down performance experienced across the state this year.

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.

Despite 2015’s stronger performance, sales volume continues to feel downward pressure in 2016 as prices are still rising and incomes are in no way keeping pace. Sales volume reports for the last quarter of 2016 will show a more pronounced downward trend in response to the rise in interest rates that began in November. Thus, prices will dip 9-12 months hence (likely in mid- to late-2017) before Los Angeles will see sales volume begin to pick up steam in 2018.

A complete recovery of around 110,000 annual home sales will likely occur in 2019-2021, as end user demand in Los Angeles County is buttressed by a Great Confluence of Baby Boomers (Boomers) and first-time buyers who are lured by further employment (needed to accommodate population growth of roughly 1% annually since the beginning of the Great Recession).

Turnover is down


Chart update 12/19/16

2015 2014 2013
Los Angeles County homeowner turnover rate 6.0% 5.7% 6.1%

Los Angeles County renter turnover rate

14.7% 16.9%
18.1%

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 to relocate and renters to move. Turnover rates are highest when jobs are abundant 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.However, LA turnover remains relatively low today with one in 16 homes selling annually. For reference, one in 12 homes sold in the peak year of 2005.

With home prices running higher and average turnover dropping in 2015, expect homeowner turnover to slip a little in 2016.  Similarly, LA renters are motivated by the area’s exorbitant rise in rents to stay put for the time being, likely awaiting wage increases before making a move.

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.

Further, turnover rates are likely to rise dramatically across the county in the 2018-2020 boomlet period. The mini 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 12/19/16

Q3 2016
Q2 2016 Q3 2015
Los Angeles County homeownership 44.7% 46.5% 48.5%

The homeownership rate in Los Angeles County trended downward from the time the Millennium Boom ended in 2007 and is at its lowest in Q3 2016 at 44.7%. This is down from 55% at the height of the Boom. The rate will likely remain low until about 2019 as rising FRM rates and declining prices in the interim will 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 53% in Q3 2016. 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 below what may be considered a “normal” (pre-Millennium Boom) rate, which was 48% in 2000.

The rise and fall of home pricing

LA-Pricing-1989

Chart update 12/19/16

Low-tier annual change Mid-tier annual change High-tier annual change
Los Angeles County home pricing index: Q2 2016 +10% +6% +5%

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 price bump, most significant in low-tier home sales. The rapid jump in prices began to subside by the end of 2014, only to recommence in 2015 — driven by declining FRM rates, a fallback from the premature jump in mid-2013. Overall, home prices finished 2015 about 6% higher than the previous year.

Prices continue to rise in 2016, with low-tier prices 10% higher than a year earlier at the end of Q3 2016. Mid-tier prices are 6% higher and high-tier prices are 5% higher.  However, the FRM rate increase that began in late-2016 has decreased the amount of principal 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. Thus, prices will most likely decrease in mid- to late-2017.

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. 2018 is the likely year for recovery on that front.

Construction starts feed on rental demand

Chart update 12/19/16

2015 2014 2013
Los Angeles County single family residential (SFR) starts 4,800 4,400 3,700

Los Angeles County multi-family starts

18,700 13,800
10,400

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 and lenders are catching on.

SFR starts ended 2014 one-third higher than the prior year. This increase slowed in 2015, rising just 10% over 2014.

The next peak in SFR construction starts will likely occur in 2019-2021. 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.

More jobs needed

Chart update 12/19/16

Oct 2016 Oct 2016 Annual change
Los Angeles County employment 4,400,800 4,329,600 +1.6%

Since homeowners and renters require employment to make housing payments (with rare exception), the jobs recovery is key to the housing recovery. 4.4 million people are employed in Los Angeles County as of October 2016. This is 85,100 more jobs than at the outset of the 2008 recession.

Los Angeles’ jobs recovery rate has slightly trailed the statewide employment recovery in recent years and continues to slow. From Oct 2015 to October 2016, the number of jobs grew by a meager 1.6%. Contrast this with the statewide job growth of 2.2% over the same period of time.

Jobs by top employing industry


Chart update 12/19/16

Oct 2016 Oct 2015 Annual change
Trade, Transportation & Utilities
830,500 821,500 +1.1%
Professional & Business Services
620,700
611,500
+1.5%

Educational & Health Services

785,400 760,300
+3.3%

Chart update 12/19/16

Oct 2016 Oct 2015 Annual change
Construction 126,200 128,300
-1.6%

Real Estate

84,600 81,200
+4.2%

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 around 2019-2021.

Everyone needs income to buy or rent

Chart update 12/19/16

2015 2014 Annual change
Los Angeles County per capita income $53,521 $50,730 +5.5%
California per capita income $53,741 $50,988 +5.4%

The average income earner in Los Angeles County earned roughly $53,500 in 2015 (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.