Where’s the L.A. luxury residential market headed? Depends on whom you ask and where they’re closing.
Brokers enter the final quarter of a year marked by plenty of turbulence: the presidential election, dwindling options for home insurance, clients struggling to accept Measure ULA taxes and hopefully the start of an interest rate relief cycle.
“2022 was tough and, in 2023, buyer agents needed to be super resourceful to make deals happen,” said Beverly Hills-based Carolwood Estates’ Bjorn Farrugia, who thinks business will improve in the coming quarters. “Every location is different. Beverly Hills Flats is on fire; Santa Monica, Brentwood and Palisades are on fire. It really depends on the price point as well.”
While many throughout this year noted continued activity of homes under $5 million, a price point range shielded from the Measure ULA transfer tax, recent signs suggest new shifts.
The bid-ask spread between what buyers are willing to pay and what sellers accept is getting wider, particularly in the $2 million to $3 million range, pointed out Beverly Hills-based Nourmand & Associates President Michael Nourmand.
He cited a couple of his own listings in that range. One received an offer $1,000 over ask. Nourmand thought the seller would be pleased. Instead, he read disappointment and maybe irritation from the client. The seller’s solution: re-list at a higher price, thinking that new buyers enter the market every day.
“It’s not an easy strategy to put your real estate agent in,” Nourmand said. “Vegas doesn’t like the move.”
He also noted an uptick more recently in deals contingent on buyers selling their property and guessed that trend will likely continue until the election.
There are also more escrows falling out, said Anthony Marguleas, founder of Pacific Palisades-based Amalfi Estates.
“There’s a lot of anxiousness,” Marguleas said. “Buyers are going into escrow and getting nervous for various reasons, either due to the property’s condition — once inspected — mortgage rates increasing, insurability challenges, the election uncertainty or the economy.”
The jitters underscore the challenges to navigate the market remains, even with bright spots, such as September’s interest rate drop by the Federal Reserve.
“What’s helping the market is lower interest rates, but what’s hurting the market is some concern about the potential recession and upcoming election,” Nourmand said.
Elections, policy talk
Plenty is riding on macroeconomic and regulatory factors, brokers say. In California, there are multiple impact points in the market.
Insurance carriers have either left the state or pulled back on writing new policies amid rising construction costs, increased wildfires and restrictions on how much companies can raise rates.
“Insurability has been a major problem with all of the major fires causing some insurance companies to drop out of California, so we are seeing some insurance premiums doubling or even tripling,” Marguleas said.
In other cases, clients are hampered by their own wait-and-see approach when it comes to election outcomes.
Historically, elections have a tendency to slow business, pointed out Marcy Roth, California managing director for Douglas Elliman’s Eklund Gomes team.
She mentioned a recent buyer on the fence about purchasing in an election year. Roth offered a practical view: “The bottom line is the country will still be here when the election ends.”
So will Measure ULA, which was blocked from having voters decide in November whether to overturn the property transfer tax. Many sellers appear to have accepted ULA, while others still hunt for loopholes to bypass paying it.
The tax, which went into effect last April, currently applies a 4 percent tax on properties sold for $5.15 million or more. A 5.5 percent tax kicks in for deals of $10.3 million and higher. Those thresholds get updated each year and are tied to the Consumer Price Index.
Roth said she has an over $24 million listing, and the seller is concerned about the impact of ULA.
“A lot of these developers started building well before there was ULA,” she said. “Costs have since gone up. A lot of them wouldn’t [build] right now.”
The flipside is another client of Roth’s who bought his house for a large sum and is now willing to take a loss as a seller.
“[ULA’s] still front and center,” Roth said. “I think last year people were paralyzed by it. Now, life goes on.”
Looking to 2025
Expectations the Fed will continue to lower rates are helping breathe new life into the market.
“There is the locked-in effect, where in 2021, many homeowners locked into a low, 2.5 percent to 3 percent mortgage,” Marguleas said. “Now, mortgages are around 6 percent. These homeowners have been waiting for interest rates to drop because, once they get to the low-to-mid 5s, they will be more open to selling and buying a new property, opening up more inventory over the next year and a half.”
Declining rates and an inventory shortage will lead to more demand that fuels price increases, said Carolwood’s Farrugia.
“There are a lot of people looking to buy and not a lot of pride in selling,” Farrugia said of the current state.
Roth is a little more measured in her outlook, saying she expects 2025 to be “a little stronger.”
Nourmand offered a similar view projecting luxury to see a slight improvement on account of lower interest rates, but fears of a recession will keep some buyers cautious.
He added one truth likely to hold regardless of where the market goes: “Unique properties will command higher prices, and average properties will be price sensitive.”