L.A.'s Residential Real Estate Market May Be Cooling, But by How Much?

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"There is more nuance to the high end of the market," says one real estate analyst as Hollywood-favored Westside neighborhoods may be immune to forces rocking the city and state's home prices.

After years of explosive growth, Los Angeles' residential real estate market has been exhibiting signs that it may finally start to cool down. But among a range of agents and experts who spoke to The Hollywood Reporter, the when, where and how of a potential downturn is still very much up for debate.

A recent report issued by the California Association of Realtors painted a somewhat dour picture. Home sales in L.A. fell 17.7 percent in July from the month prior and are down 13.3 percent from the same period last year. And while the median price of a home in L.A. remains sturdy at $514,000 — which is a 4.8 percent increase over last year — California as a whole saw median home prices slip 1.8 percent from June to July. For the first time in 18 months, the number of year-to-date sales in California is down from the previous year by 0.3 percent.

"I don't want to be alarmist but if you look at the pace of growth, we had been seeing mid-single digit growth throughout 2015 and that really has cooled in the last three months," says Jordan Levine, an economist with the California Association of Realtors. The slowdown is being triggered by two factors, according to Levine: inventory and affordability. More buyers are questioning whether the chunk of their current income necessary to finance that median-priced home is justifiable.

But the sprawling and multitiered nature of L.A.'s residential market complicates matters, and things get tricky when trying to evaluate whether the same forces are at work at both the lower end of the market and the higher end, where high seven- and eight-figure sales have become almost commonplace.

"It is not unusual for there to be at least a breather in the market and for it to stabilize," says Michael Edlen, a seasoned broker for Coldwell Banker who focuses on the Palisades, Santa Monica and the far Westside, which include some of the most exclusive neighborhoods in the city. In an article Edlen recently published in the Palisadian Post, he noted that in the first seven months of 2016, the Palisades market has seen noticeably fewer sales, higher inventory and slightly lower prices than it did over the same period last year.

"It becomes untenable to continue going up at some point," Edlen added. "Whether it will continue down as a correction or just flatten out, ask me again in a month or two."

Whether the Federal Reserve decides to increase interest rates in the near future clearly will impact all sectors of the market, but when analyzing the luxury markets other factors come into play. "There is more nuance to the high end of the market," says CAR economist Levine. "Folks in that space tend to be affected by global economic news and developments from abroad like Brexit and fluctuations in the Chinese stock market."

Luxury broker Ben Bacal of Rodeo Realty focuses on high-end neighborhoods like Bel Air, the flats of Beverly Hills and Trousdale. He posits that cycles like the current one typically last six or seven years and that we are about three quarters of the way through the current boom. "I think there will be a change. Has it hit its peak? Not today but it will in a year," he says. Bacal does not anticipate a future downturn to have a major impact on the key luxury markets where his business is focused.

"Venice, Santa Monica and the flats of Beverly Hills are not going anywhere," says Douglas Elliman broker Juliette Hohnen. "The places that will go down first are the valley, and the far east like Los Feliz."

Compared to most other markets, real estate remains a safe bet, and if interest rates remain low no one is predicting a major collapse in the short term. Says Edlen, "We will still have fuel but the question will be how much."