Increasing interest rates have cooled the housing market, causing prices and inventory to decrease, according to local experts. Tuesday, Nov. 22, 2022. Photo by Brandon Richardson.

While the first year of the pandemic brought low interest rates to the housing market, the pendulum has swung in the opposite direction throughout 2022, with some experts estimating that interest rates will continue to rise through the end of the year.

“Once we started to come out of that initial lockdown and interest rates dropped, it was so affordable to purchase that there was just this crazy frenzy,” said local real estate agent Michelle Tumanjan.

For many of Tumanjan’s clients looking to buy, there was no longer any inventory, and sellers would immediately receive multiple offers on their house right off the bat, she said.

“That was kind of a frustrating time,” Tumanjan said. “It’s never fun to tell a client they didn’t get a house.”

Nowadays, Tumanjan has many buyers who have been pre-approved, but they are faced with a less affordable situation due to interest rates nearly doubling over the past year, she said.

“A lot of people did sell when the market was hot, and they’re locked into such a great low rate,” Tumanjan said. “There’s just not a lot of inventory still, but now, not a lot of demand because people are already comfortable with the 30-year rates that they have that are extremely low.”

As of Nov. 21, the current average rate for the benchmark 30-year fixed mortgage was 7.32%, up 15 basis points since the prior week, and increases are expected to continue into 2023, according to Bankrate.

“I’ve never seen a market like the one we just experienced this year,” said Phil Jones, Realtor and past president and director of the Greater Long Beach Board of Realtors.

Particularly since mid-spring of this year, interest rates began to climb dramatically, Jones said.

“It’s kind of a shockwave that went through the economy when (the Federal Reserve) jumped the overnight rate as much as they did,” he said.

The impact on the mortgage industry was dramatic.

“As a whole, we’ve seen some large-scale, formerly strong lenders literally going out of business,” Jones said.

While major lenders typically carry 430 to 450 open loans on their books, Jones said he knew of one mortgage banker that was down to 29 by the middle of October.

“It’s an indication of how significantly it impacted lenders, buyers, sellers, the financial markets— in many ways, it’s been worse than the Great Recession,” Jones said.

For first-time home buyers, “they can be more impacted than anyone,” as they generally don’t have the ability to make larger down payments due to a lack of equity from a previous home they’ve owned, Jones said.

While there are programs that can make it possible for home buyers, payments will be higher, Jones said.

However, it is important to note that current rates are not historically high, but rather are high when compared to the recent 15 or 20 years, Jones said.

In the 1980s, for example, interest rates reached 17 and 18%, and on government-insured loans such as Federal Housing Administration loans, rates have reached as high as 22%, Jones said.

Still, today’s higher interest rates are significant enough that they’ve led to lower home prices—while the median price of a home in Long Beach was around $900,000 a year and a half ago, the number has dropped down to the $820,000 range, Jones said.

“That prices an enormous number of people out of the market, and with interest rates going up, it really dwindles, shrinks the buyer pool as well,” Jones said.

Trends are similar throughout LA County and California. Countywide, the median home price in October decreased to $854,280 from $891,770 in September, a 4.2% decline, according to the California Association of Realtors.

In October, home sales also fell by over 6% in LA County compared to September, and were off 40% compared to a year ago.

Statewide, the median price last month was $801,190, compared to $821,680 in September, a decrease of 2.5%.

However, what has been perhaps more significant than the interest rates themselves has been the rapidity of the increases, said Edward Coulson, director of research at the University of California, Irvine’s Center for Real Estate.

After the pandemic exacerbated supply chain issues, interest rates were kept low to stimulate investments and prevent a post-COVID recession, Coulson said.

Coupled with the Russian invasion of Ukraine, which put a strain on energy markets, there is now a significant level of inflation, Coulson said.

The Fed thinks “that this inflation is . . . so pervasive that really aggressive action is needed—that’s my personal opinion,” Coulson said.

For potential home buyers who are flexible with their timing, Coulson urged them to wait at least a couple of months.

“Watch the market, and watch the particular neighborhood because all real estate is local,” Coulson said. “You should be cautious about buying right now.”

Although median home prices are expected to level out, and there is some speculation that the next interest rate increase will be only half a point, according to Jones, there is a problem even larger than rising interest rates impacting the housing market: a historic lack of inventory.

“We’re seeing sales impacted, we’re seeing the buyers clearly impacted, in most cases priced out of the market,” Jones said.

The California Association of Realtors, which monitors home affordability based on current prices and interest rates, projects that affordability of median-priced homes will decrease to 18% of the public being able to afford a home with the current prices and interest rates, Jones said.

“It’s dropped consistently from 2020, 2021, because the market was so unexpectedly overheated during COVID,” Jones said.

In Long Beach, there has typically been an inventory of about 3,000 properties for sale at any given time, including condos and single-family detached homes, said Jones.

However, that number is currently at only 448—“a remarkably low level of homes for sale,” which keeps upward pressure on pricing, Jones said.

“If you were to look at a graph, it would look like a cliff,” Jones said.

In October, ending sales in Long Beach were down 65% compared to last October, and closed sales dropped 49%, Jones said.

There has also been a 31% drop in new listings coming on the market, Jones said.

“It’s a significant impact, the combination of the increase in interest rates and the stability of the median price,” Jones said.

The problem is indicative of larger challenges throughout California, where regulations make home development particularly complicated and costly, Jones said.

While certain cities in California can add “hundreds of thousands of dollars” to home development costs, the California Envoronmental Quality Act has been used to block development projects statewide over the past 40 years, Jones said.

“There does not look to be any appetite for reform politically, because no one wants to take on the environmentalists,” Jones said. “We all believe the environment is important, but when it’s being utilized to block housing, it creates a sizable problem.”

California is about 3 million houses short of meeting the needs of the current population, Jones said.

“We’ve underbuilt in this state for years,” Jones said. “It’s been estimated that to keep up with the population growth, California should’ve built 180,000 new units annually, and we haven’t hit that number in about 20 years.”

While Long Beach has been more successful in building than in other cities, it’s largely a renters’ city and is greatly in need of tenant housing as well as housing for ownership, Jones said.

Theoretically, rising interest rates could even impact rental rates, prompting landlords to ask for higher rents to compensate for their own payments, Jones said. And they can have other unintended impacts, as well.

“The housing shortage has grown exponentially, and of course, that exacerbates the homeless issue,” Jones said. “It impacts so many other elements of life.”

Efforts have been made to ease property development regulations. For instance, Gov. Gavin Newsom signed two bills into laws in September that would make it easier to create residential housing from unused commercial buildings.

However, its effects have yet to be seen, as both laws will go into effect in July 2023.

Jones anticipates interest rates in the 7% to 8% range to continue into 2023, and for the number of sales to continue to decline through the middle of next year, he said.

Despite the numerous challenges facing the real estate market, for those who have to move now, purchasing a home can still offer numerous tax benefits, and over the long term, real estate has the opportunity to appreciate in value, Jones said.

Tumanjan echoed this sentiment.

“Don’t let all the chatter scare you. I would advise talking to a professional always before you make a decision on what you can afford,” she said. “I feel like a lot of people are deterred by all this news, and it still could be an affordable situation.”