Aggressive Fed rate hikes chill Southern California housing market into a freeze

The U.S. Federal Reserve recently announced another interest rate hike of one quarter of a point, allowing the nation's monetary tightening policy to continue to take effect. Even before this decision was released, the U.S. housing market was already feeling heavy pressure, the most representative indicator being the average rate for a 30-year fixed mortgage approaching the high of 7 percent. Amid this macroeconomic environment, the real estate market in Southern California has experienced a distinct chilling effect. Not only have potential buyers pulled back and adopted a wait-and-see attitude in the face of high financing costs, but existing homeowners—who should be the source of housing supply—are also reluctant to list their properties because they are loath to give up their existing low-rate mortgages. This has caused the region's entire housing market to fall into a stalemate where both supply and demand are rapidly freezing.

From a macroeconomic perspective, the Federal Reserve has adopted an aggressive rate-hike cycle to combat persistently high domestic inflation pressures in the United States. This series of monetary policy adjustments is most directly and rapidly reflected in the real estate lending market. As the 30-year fixed mortgage rate climbed all the way from historic lows to approach the 7 percent threshold, homebuyers' monthly repayment burdens experienced a leap-like increase, given Southern California's already high home prices. Taking a mid-to-high-priced single-family home in Southern California as an example, the doubling of interest rates means that homebuyers will have to pay tens of thousands of dollars more in interest expenses over the next thirty years, which directly squeezes the housing budgets and market entry willingness of middle-class families.

Facing sharply worsening borrowing conditions, potential buyers in Southern California have turned highly cautious. The bustling market scenes of the past—where any listed property triggered bidding wars and buyers were even willing to waive home inspections—are gone. Instead, many first-time homebuyers and those looking to upgrade have chosen to temporarily withdraw from the market, renting or maintaining the status quo. Theoretically, the rapid cooling of buyer demand should loosen prices; however, the Southern California housing market has encountered a peculiar structural obstacle, namely homeowners' reluctance to sell. The key reason behind this phenomenon is that the majority of existing U.S. homeowners locked in mortgage rates of 3 percent or even lower during the ultra-low-interest-rate environment of past years.

For these current property owners, selling their home at this time and moving to another of equivalent or even smaller value would cause their new mortgage rate to skyrocket from 3 percent to around 7 percent. This financial shift means that even if the transaction price of the home itself remains unchanged, their monthly mortgage expenses would increase substantially due to the soaring interest rate. Consequently, the vast majority of homeowners prefer to stay in their original homes to continue enjoying the advantage of their initial low rates rather than move lightly at this point in time. This mindset has directly resulted in a severe shortage of secondary housing supply in Southern California, leaving very few available properties for selection on the market.

This dual blow of "buyers withdrawing and homeowners holding back supply" has had a profound impact on the Southern California real estate market. On one hand, shrinking demand should theoretically put downward pressure on home prices; on the other hand, the extremely scarce market supply acts to support prices, preventing the collapse in home prices that outsiders had anticipated. This unusual state of simultaneous contraction in both supply and demand has led to a drastic decline in transaction volume. Real estate agents, mortgage specialists, and related decoration and moving industries have all felt the arrival of a severe winter. Overall, until the Federal Reserve clearly signals rate cuts and while overall financing costs remain at high levels, the Southern California housing market is expected to continue in this deadlock of a wait-and-see stance.