‘Back to Normal?’

By MICHAEL EDLEN | Contributing Writer

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 five decades occur on average every eight to nine years, this cycle has had an almost unbroken increase in property values for the last 10 years. Over the last three years, prices of 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 nearly the same, whereas in 2021 the volume averaged 32 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 five to six months level of inventory available. Below that is favorable to sellers, such as it was in 2021 when the inventory level fell to 2.8 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 to November, it is still a ways off before buyers in the Palisades will have the upper hand, since inventory level as of January 1 is about 2.3 months.

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, versus the 43 currently for sale. Alternatively, the rate of sales would have to decrease even further than it has in 2022, which was 30% lower than 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 toward “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 37 years in real estate I have seen rates as high as 15 to 17%, with the average probably around 6.5 to 7.5%. What was highly abnormal were 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.

Michael Edlen is available for complimentary counseling about any real estate question. He has been a trusted advisor to two generations of clients over the last 37 years and has represented more than 1,500 people in their success. He can be reached at 310-600-7422 or michael@edlenteam.com.