The Iran war cooled the LA housing market. Will the ceasefire bring more sales?

Katie Davis has whiplash.

As a long-term renter, he is in the market for his first home, but needs mortgage rates to come down so he can afford the monthly payments. Anything less than 6% is possible.

Last year he was there following them like a hawk. He watched them drop from 7% last spring to 6.5% last fall and finally fell below 6% in February.

“I thought my time had finally come,” Davis said.

Days later, a series of airstrikes started the war in Iran, raising loan rates. Then in April, the US negotiated a cease-fire, bringing prices back up again. Meanwhile, Davis has alternated between pessimism and optimism every week.

“I want the first small house in El Sereno, but somehow it sounds like it depends on whether the Strait of Hormuz is open or not,” he said.

A small change in mortgage rates may not sound like much, but for many first-time homebuyers, the affordability threshold is very thin in Southern California's expensive market, and $200 more in monthly payments is the difference between complying with the loan or being overwhelmed by it.

The LA housing market was already freezing; According to Zillow, just 3,072 homes traded hands in LA County in January, the lowest number for the month in three years. The Iran war was devastating, sending mortgage rates back up to 6.46% and putting potential buyers out of the market.

In February, the median LA home for sale spent 80 days on the market — the longest median of the past five years, according to Redfin. In addition, 17.6% of home listings had price reductions, up 1.4 percent year-over-year.

There is a widening gap between the number of sellers and buyers in the LA market, reflecting the national trend. According to a March Redfin reportthere are 630,000 more sellers than buyers in the active US market – the largest gap in history dating back to 2013.

Bret Parsons, a real estate broker with the Craig Strong Group in Compass, said the war is having a psychological effect on buyers.

“Consumers are slow to pull the lever,” he said. “It's human nature. When a big event happens, consumers panic.”

He said the ceasefire could ease their feelings if it still holds.

“There will be a short-term effect, no doubt about it. People are very responsive,” Parsons said.

He said mortgage rates are only one part of the puzzle in the LA market's meltdown, citing rising insurance rates and Hollywood's bleak job market like other factors that keep demand low.

But rates below 6% would be a quick way to get wary buyers back into the market, so sellers are hoping the ceasefire will stabilize prices. Until then, for buyers, fluctuating prices mean that even if there is more profit, it doesn't feel like a buyer's market.

“February was brutal because we thought we were in a buyer's market. A lot of properties have been sitting since the fall,” said Ashley Moorhead, an attorney who has been buying real estate since December. “But prices dropped just before the war, and everyone seemed to be coming out at the same time to bid on homes that had been on the market for over 20 days.”

Moorhead said in every house he bids on, there are at least four other items. In one incident, a home in Pasadena was foreclosed on for $225,000.

His grand budget was $1.25 million. He ended up spending $1.39 million.

Depending on how you look at it, Moorhead got lucky. He closed on a 5.99% mortgage just before the war began. If he had waited a month, the rate would have been 6.5%. But if the war had never started in the first place, he said, it would have been 5.75% or less.

“I'm not optimistic that prices will go down,” Moorhead said. “I think timing the market is more than timing the market.”

Real estate agent Matthew Hoult said the spring market was slow for several reasons. For consumers, affordability is king, and many are speculating about what they'll get if prices go up. For sellers, many have “golden strings” of low interest rates locked in during the pandemic, so they are not motivated to move.

“It's not as simple as supply and demand because there are a lot of requirements,” said Hoult. “Many people want to buy a home, especially Millennials and Gen Z, but there is so much uncertainty about mortgage rates and the cost of living that they are choosing.”

He had two customers locked in at a 6.1% mortgage rate in December. If they had waited until spring, they would have been paying $200 more per month on a million dollar loan.

“The frustrating part is that no one really knows when this will end. Oil may stabilize, tensions may ease, but there is no crystal ball,” he said. “I've seen people wait for better rates and end up paying more six months later because the rates kept going up while they sat on the sidelines.”

For some, he said, the stagnant market situation can be an opportunity, pointing to Warren Buffett's famous quote: “Be fearful when others are greedy, and be selfish when others are fearful.”

“Now is the time to get deals. Use the war to get power,” Hoult said, urging buyers to ask for permission from sellers who are tired of waiting for more buyers to come along. “Ask them to pay money, buy a lower price or a lower price.”

Real estate agent Daniel Milstein said the market is already getting more information, but the sales numbers aren't showing yet.

“There's a clear connection between what people are learning from public data and what's happening on the ground,” he said. “Many of the most quoted real estate metrics lag by 30 to 60 days, which means the story many are reacting to today is out of date.”

He cites as evidence new escrows, which can be recorded as sales until they close weeks or months later. According to his colleague at the escrow company, Milstein said, new escrows have increased up to 50% in markets throughout LA County in the last few weeks compared to last month.

“Because most of the current transactions are in escrow and have not yet closed, they are not visible in the public records. In the next two to four weeks, we expect to see a noticeable influx of filings,” he said. “In other words, the market is already moving – people just haven't seen it.”