What a Wild Year Means for 2024

From my perspective, 2023 might be the craziest year ever in Los Angeles real estate. So much happened that didn’t make sense, from unabating demand in the face of soaring interest rates to a ruling against the National Association of Realtors’ approach to agent commissions. The good news is, there are many lessons to extract from all this craziness as we jump headfirst into a new year. 

Eight percent isn’t as scary as we thought…

Stubbornly high interest rates forced the Federal Reserve to increase its overnight borrowing rate for almost 24 months in a row—peaking this past October at around 5.5%. These rate hikes increase the cost of borrowing for banks who, in turn, increase the cost of borrowing for consumers on everything from credit cards to car loans.

For those looking to buy a home, the Fed’s sustained rate hikes led to mortgage rates hitting 8%, a number that was unimaginable just a couple of years ago. In a normal environment, soaring interest rates would crush demand, and in some parts of the country buyer interest did start petering out.

But not in Los Angeles (or California overall). 

The supply and demand imbalance in our region is so entrenched that even soaring interest rates did little to diminish buyer interest for the very few homes hitting the market. 

As we head into 2024 and the very real possibility of the Fed cutting the short-term borrowing rate, mortgage rates should decline in lock-step.

For buyers, that means the cost of borrowing will go down but the competition for open listings will go up as more people feel capable of making those lower monthly payments.

And while more prospective sellers will become active sellers in the face of dropping rates (e.g. being freed from their “golden handcuffs”), there won’t be enough new units and single-family residences hitting the market to balance the inevitable uptick in demand. 

Therefore, sellers can (likely) expect the good times of 2021 to resume—multiple competing offers, big cash payments, no contingencies, etc. 

Questions abound around commissions

In November, a Missouri court ruled the National Association of Realtors (the largest professional organization for real estate agents in the US), Homeservices of America (a broker), and Keller Williams Realty (another broker…my broker), were liable for nearly $2 billion dollars in damages for non competitive practices. Specifically, the court ruled these parties kept buyer-seller commissions artificially high.

(There’s more to it than that, of course, but that’s the gist of it.)

Although this was just a state ruling, it comes with national implications. In the short term, it means real estate commissions here in California are going under the microscope of regulators, as well as buyers and sellers. In the long term, it means the days of 6% commissions split between agents on real estate transactions are coming to an end.

Candidly, I don’t expect much to change as it relates to commissions in 2024—this ruling is already in the appeals process and I expect real estate policy-makers in California will take a wait-and-see approach for the time being. 

However, if the ruling is upheld in Missouri, I expect similar changes to come to the commission structure in California. I won’t pretend to know how such changes will influence the nature of real estate in our region, but my expectation is that it will lead to more unrepresented buyers and more agents representing both the buyer and seller. Neither of these potential outcomes is a good thing. Unrepresented buyers can quickly get in over their own head, leading to missed details that put their ability to close on a quality home in jeopardy. Similarly, there’s serious risk of a conflict of interest when an agent represents both the buyer and seller simultaneously.

Long story short, it’s going to be really interesting to see how this whole thing plays out.

Escaping rate prison

In many ways, this is the year of “golden handcuffs.”

As a consequence of the ultra-low interest rates spurred by the pandemic, people who locked in a 2% or 3% mortgage (especially those who refinanced versus buying net-new) found themselves trapped in their homes when rates climbed. In other words, owners thinking about upsizing or downsizing (e.g. empty nesters or growing families) found themselves unable to move for fear of losing their wildly affordable monthly mortgage payments. 

This led to stalled deals, unsigned contracts, and declining listings. 

Fortunately, at least some of the inmates inside “rate prison” should get an opportunity to escape in 2024 as the cost of borrowing slips from the current high of 8% down to a more manageable 6% or 5%. 

When that happens, you can expect more listings to hit the market here in LA and across the country as a whole (as long as the economy remains strong). Unfortunately, I don’t anticipate enough downsizers or upsizers jumping into the market to balance buyer demand, which means prices will increase as it becomes more affordable to borrow.

LA’s continued pricing power

Speaking of rising prices, 2023 didn’t disappoint those looking to sell.

Despite high interest rates and some buyer pullback, prices still inched upward here in Los Angeles, albeit not in the sky-high fashion of 2020 and 2021. 

As we peer around the curtain to next year, prices will keep climbing and at a higher rate than 2022 or 2023. With the cost of financing expected to drop in the months ahead, a swarm of hungry buyers who’ve been standing on the sidelines for the last year will jump back into the market, snapping up any new listings that come online. This uptick in home consumption will further tighten the supply of homes, forcing listing prices higher and higher. 

A creative solution to an unpleasant problem

Accessory Dwelling Units remain all the rage, with more than 40,000 built in California in 2022 and 2023. Owners who locked in great mortgage rates between 2016 and 2022 continue to see ADUs as a great way to add more living space to their home (e.g., using an ADU as a home office) while also adding to their property’s overall value. Plus, given the well-documented housing shortage in California, ADUs turned into apartment rentals offer homeowners an easy route to passive income.

None of this will change next year—you can bank on owners across the state applying for construction financing and aggressively adding ADUs. You can also bank on prospective buyers showing higher demand for ADU-eligible properties or properties with ADUs already built. For owners of said properties looking to list, 2024 will be a boom year. 

For those of you considering buying or selling in 2024, the time to start talking is right now. The sooner we get started, the sooner we can get ahead of the competition so give me a call at 310-853-0335 or shoot me an email at ShannonShue@KW.com. 

See you in the new year…

-Shannon