Southern California Home Market Cools Off, Prices Flatten

The red-hot Southern California housing market finally got a dose of cold water.

The region's median home price in July remained flat from a month earlier, at $385,000, real estate firm DataQuick said Wednesday. The figures followed a record-setting June, when the median price rose 4.6% over the previous month and 28% year-over-year, the highest percentage since DataQuick started tracking the statistic in 1989.

The cooling off came with a surge in the number of sales to an eight-year high, indicating a growing supply of homes that could steady the market after this year's frenzy. Rising mortgage rates may also have propelled more buyers to close deals, fearful that rates could climb higher, the San Diego research firm said. "We are slowly moving toward a normalized market," said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. The market nonetheless remained strong, with the median price up 25.8% from July 2012.

Prices have risen at a breakneck pace this year with an improving economy, a short supply of homes and heavy investor demand. The gains have frustrated many would-be buyers who found themselves on the losing end of bidding wars and raised questions about whether the market is getting overheated. Many economists say the increases should moderate as the inventory crunch loosens. Rising prices, many have predicted, will spur new-home construction and lure more sellers into the market.

Rising mortgage rates should also eventually help cool the market. But rate increases could also spur more sales and price increases in the short term, as buyers look to get into the market before rates go up further. Mortgage rates have risen about 1 percentage point since the beginning of May. Inventory has increased in all six Southern California counties last month from June, according to Realtor.com. Los Angeles County, for instance, saw 7.8% more home listings in July than a month earlier. Orange County inventory rose 8.4% last month.

The increasing supply and rising rates could now be putting a damper on prices, although economists usually like to see three months of data to prove a trend. "As the mismatch between supply and demand eases, it will be more difficult for home prices to rise as steeply as we've seen over the past year," DataQuick President John Walsh said in a statement. This year's sharp price rebounds have brought both pain and gain.

For those who bought during last decade's housing bubble, just before the housing crash, rising prices brought relief in the form of increased home equity. Thousands of homeowners have escaped negative equity positions — so-called underwater mortgages, on which they owe more than their home is worth. But many buyers have struggled in the fast-paced recovery, often losing out to cash buyers in bidding wars over the paltry selection of homes.

Many have been priced out of the market entirely as prices have soared. Only 36% of Californians could afford a single-family house at the state's median price in the second quarter, according to the California Assn. of Realtors. That's down from 44% during the first three months of this year and 56% during the first quarter of 2012.

Blair Newman, a real estate agent who specializes in Lakewood, said the market remains hot. Two weeks ago, Newman said one of his clients signed a contract to sell her three-bedroom home for about $15,000 over the asking price after receiving six offers within a week. "It's been pretty consistent," he said. Investors remained a heavy presence in the Southland in July, although their presence is receding.

Absentee buyers — mostly investors — purchased 27.4% of homes last month, down from 28.6% in June and the lowest level this year. Esmael Adibi, director of Chapman University's A. Gary Anderson Center for Economic Research, said because the market fell so hard during the bust, there is still room for future price appreciation. Still, he said interest rates are likely to rise, inventory expand and the year-over-year median price figures will soon be compared with a period of more robust growth.