The real estate market has undergone a significant shift throughout 2022.

The biggest changes came thanks to the Federal Reserve, which increased interest rates seven times this year, most recently rising rates by 50 basis points in mid-December, significantly cooling the real estate market.

At the onset of the coronavirus pandemic, the Fed slashed its target rate to 0%-to-0.25%, where it stayed for two years.

But this year, interest rates reached their highest rates in four decades, said William Yu, an economist with the UCLA Anderson Forecast.

While raising interest rates is intended to prevent inflation from causing further damage to the economy, “what happened over the past two years is: We made a mistake,” Yu said. “Government policy has injected too much money into the market, so it dried out demand.”

As of Dec. 20, the average rate for the benchmark 30-year fixed mortgage was 6.47%, down 16 basis points over the prior week, according to Bankrate.

While interest rates are not at a historic high, the rapidity of the hikes is noteworthy, Yu said.

“We have perhaps the most rapid increase of rates since the 1980s,” he said.

Housing sector

A direct consequence of rising interest rates was an increase in mortgage rates, Yu said.

In January 2022, 30-year mortgage rates were in the 3.2% range; by November, the benchmark 30-year fixed mortgage reached 7.32%, according to Bankrate.

“A higher cost of borrowing and lending has had a significant negative effect on the real estate market across the country, including Los Angeles,” Yu said.

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, Phil Jones, Realtor and past president and director of the Greater Long Beach Board of Realtors, told the Business Journal in November.

Although average home prices in LA County have decreased 6.7% since its peak, according to Zillow, prices are still considered high, Yu said.

However, Yu noted that a decrease in home prices is “a pretty healthy adjustment in response to the rising interest rate,” he said.

Yu does not anticipate that interest rates will ease for a while—although, in some ways, Americans have become too accustomed to unusually low rates, he said.

“In the past two decades, because of the globalization, because of China, because of the global savings glut, we got to enjoy very low interest rates and very low inflation rates, so that gave us an illusion we can always get away with low interest rates,” Yu said.

For potential home buyers, some experts advise waiting at least a couple of months.

“Watch the market, and watch the particular neighborhood because all real estate is local,” Edward Coulson, director of research at the University of California, Irvine’s Center for Real Estate, told the Business Journal in November. “You should be cautious about buying right now.”

Commercial and office vacancies

Even as the pandemic has waned, commercial and office vacancies reached record highs this year.

Regarding commercial spaces, a trend of shifting to online shopping, which began several years ago, was only accelerated during the pandemic, Yu said.

“Online shopping can not fully replace traditional brick-and-mortar shopping,” Yu said. “We still have shopping malls and grocery stores, because people still have a desire to have that kind of experience.”

Yu anticipates that higher quality stores will still remain, while lower-end stores unable to compete with online shopping will transition fully to e-commerce, he said.

The same could be said of remote work—many jobs have since shifted to a fully remote or hybrid model, although this isn’t possible for every industry, Yu said.

According to recent data, only about 15-to-20% of the workforce could shift entirely to fully remote work, mainly impacting certain sectors such as tech, Yu said.

However, more companies could shift to a hybrid model, allowing them to downsize their office spaces, Cushman & Wakefield Senior Director Robert Garey told the Business Journal in August.

According to reports by Cushman, office buildings in Downtown Long Beach were 70.82% leased in the third quarter, while office buildings in suburban Long Beach, Bixby Knolls and Signal Hill, East Long Beach and Seal Beach, and the Long Beach Airport area, were 78% leased.

These shifts in trends could further impact the real estate market, and Long Beach and other cities could begin looking for alternative ways to utilize vacant office spaces, Yu said.

Recently, Long Beach was urged to examine other options, such as rezoning commercial spaces for residential development.

Several buildings in the Downtown area have already been converted to residential use, such as the former Verizon building at 200 Ocean Blvd. Other office buildings like 401 E. Ocean Blvd. and 1500 Hughes Way could also be repurposed for residential or industrial use.

Industrial sector

Despite the increase in interest rates across all sectors, unlike the commercial and housing markets, the industrial market has seemingly bucked the trend regarding vacancies, Yu said.

A Lee & Associates report indicates that industrial vacancies in the South Bay were extremely tight at 1.1% in the third quarter, and net absorption—which calculates the sum of square feet that became physically occupied, minus the sum of square feet that became physically vacant—was over 430,000 square feet.

Experts do not foresee demand for industrial spaces declining, although the report notes that by the first quarter of 2023, there will be a clearer picture regarding speculative development.

Lack of inventory

An even larger issue currently facing California’s housing market is a historic lack of inventory, Jones said in November.

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, but by November, that number  had dipped to 448—“a remarkably low level of homes for sale,” keeping upward pressure on pricing, Jones said.

While it has been estimated that to keep up with population growth, California should’ve built 180,000 new units annually, complicated and costly regulations around development have prevented the state from reaching that number in the past two decades, Jones said.

According to USC’s Lusk Center for Real Estate 2022 Multifamily Report, the Greater Los Angeles area (which includes Orange County) consistently builds half the housing or less of Houston and Dallas, despite the fact that it is over 70% more populous than either Texas city.

As local and state governments work to relax zoning policies and encourage high-density housing near transit stations, Yu hopes the situation will improve, he said.

“I hope over time, we make the effort to increase housing supply, I think home prices will become more affordable for more Californians,” Yu said. “When? It depends. The more effort we put into increasing housing supply, the sooner we will reach that kind of goal.”

Onward to 2023

It is a challenge to balance controlling inflation without causing a recession, which is a possibility within the next two years, Yu said—although Yu suspects it will be milder than the previous two recessions.

“The Federal Reserve needs to be very careful,” Yu said. “There’s a lot of uncertainty ahead of us.”