‘Yawn’ or ‘cold water’ on this week’s rate hike?

Here’s a best-case scenario for Southern California’s residential real estate market as the Federal Reserve gears up for another rate hike:

“I expect the market will yawn at this point,” said Eric Sussman, professor at UCLA’s Ziman Center for Real Estate. He noted that the big fireworks went off earlier this year when the Fed raised interest rates for the first time in a generation.

This week’s anticipated hike – widely expected to come in at 0.75 percent – is “not going to make any difference,” Sussman said.

Part of the reason for Sussman’s outlook is a three-quarter point hike in June and a 0.25 increase in March. Now the market expects the anticipated rate hike, and the economy might take the Fed’s medicine in stride, Sussman said.

“The June inflation number is likely going to be the peak, and I expect July, August and September (inflation) will be lower than 9.1 percent,” he said. “This rate hike and inflation are slowing the economy down, so the bad news will be short-lived. We should be over the storm shortly.”

Sussman doesn’t expect big changes in the larger arc of a Southern California market dominated in recent years by steady price increases to reach record levels amid consistently low inventory since the early days of the pandemic. He noted that home prices have not declined much despite demand dipping and supply increasing in the wake of the recent rate hikes. Sussman predicts that home prices will not decline in the most popular neighborhoods of Los Angeles. Other areas, he forecast, would experience modest drops, perhaps 5 to 10 percent in some places.

The view can also be considered in relative terms. Eric Finnigan of John Burns Real Estate Consulting, an independent research group, said to expect pain, especially in comparison to the overheated market of 2021.

“Going back to merely normal is going to feel like getting hit with a bucket of freezing cold water,” he wrote in an email. “The reality is at 5.5 percent mortgage rates, about 40 percent of the households that could get pre-approved for a $600,000 mortgage in December no longer qualify. That’s why you’re seeing cancellations spike right now. That 40 percent number is for the country as a whole, so it’s a little different for L.A. But there’s no way around it.”

Dana Potter, chief executive officer of Pinnacle Estate Properties, said some parts of the market have been roiling.

“It is a hard pill to swallow for both buyers and sellers – there are less multiple offers, with the exception of the lower-priced homes,” she said. “A significant change in interest rates takes buyers a little bit to wrap their head around when they have a new and often much higher payment.”

Kerry Ann Sullivan, partner at Pardee Properties in Venice Beach, said July is typically a slow month for real estate, but this year has packed an extra punch.

“People are hesitant and are uncertain,” she said.

But a slowdown does not mean a moratorium on business.

“The market is set by buyers and sellers,” she said. “As long as sellers are in line with what buyers are willing to pay, then the market will keep moving.”