Unprecedented Real Estate Appreciation in Pacific Palisades
We are now in a new year, having just experienced a period of unprecedented real estate value appreciation. Whereas historically we have seen adjustment cycles for the last 5 decades occur on average every 8-9 years, this cycle has had an almost unbroken increase in property values for the last 10 years. Over the last 3 years, prices of Pacific Palisades’ homes have increased at nearly 1.5% per month, driven by artificially low-interest rates in place to keep the economy healthy during the pandemic era.
Because 2021 was such an abnormally strong period, any comparisons between 2021 and 2022 are not as useful to make. For example, the average number of homes sold in 2020 and 2022 were almost identical at 20 per month, whereas in 2021 the volume averaged 31 sales per month.
Bear in mind that any real estate market is considered to be roughly in balance between buyers and sellers when there is about 5-6 months level of inventory available. Below that is favorable to sellers, such as it was in 2021 when the inventory level fell to 1.6 months by the end of the year. Although inventory has increased somewhat in recent months due to the rapid increase in interest rates from June-November, it is still a ways off before buyers in the Palisades will have the upper hand, since the inventory level as of January 1 is about 3.5 months.
Return to a More Balanced Market in Pacific Palisades
If “normal” means a market more in balance between sellers and buyers, then we will need to see close to 120 homes for sale here, vs the 60 currently for sale. Alternatively, the rate of sales would have to decrease even further than it has in 2022 which was 30% lower than in 2021.
Although there are too many factors and variables involved to cover in a brief article, we can observe that in the last several weeks of 2022, there were signs that the market is headed more towards “normal”. There are fewer multiple offers, far fewer loan applications being made, fewer escrows open, and more motivated sellers needing to adjust their prices for the first time in many years.
Inventory will logically have a seasonal Spring increase, and there may be additional homes for sale sooner due to the April 1 effective date of the huge transfer tax increase for homes over $5 million. Otherwise, it may take several more months for us to project what is likely to happen in 2023.
Incidentally, one major aspect that is already back to “normal” in real estate is the loan interest rate environment, now that the period of government subsidy of artificially low rates is past! During my 35 years in real estate, I have seen rates as high as 15-17%, with the average probably around 6.5-7.5%. What was highly abnormal was rates below 4%, and it’s unlikely that will happen again.
It does seem to be an ideal period for people to sell their homes here, being able to receive near all-time high prices. It also looks like a great time for buyers to come back into the picture and benefit from more stable rates, creative financing alternatives now available, and more leverage with fewer buyers to have to compete with in the purchase of a home.