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An Uncertain Landing: The Fed and Beverly Hills Real Estate

Zillow home value index

After analyzing data from Zillow and Altos Research on the Beverly Hills real estate market, I’ve come to some conclusions.

Supply (inventory) is higher than it was a year ago. Given that prices are flat from a year ago, demand must also be increasing.

If only supply were increasing, we would expect prices to have fallen from a year ago. But since prices remain flat, there must be increased demand making up for the increased supply.

Both supply and demand for luxury real estate are increasing at the moment. I would assume that supply is increasing because people anticipate a severe recession ahead and might want to sell some assets now to weather the storm.

Demand could be increasing due to the cooling down of price increases and the anticipation that The Fed might lower rates in reaction to a coming recession, giving a buyer the opportunity to refinance on a currently “cheaper” home.

The primary uncertainty in the economy at the moment centers on expectations of The Federal Reserve’s interest rate hikes or potential cuts. There are those who expect The Fed to raise rates and keep them there during a recession, and those who expect The Fed to raise rates only to then lower them when a recession hits. Both camps anticipate a recession.

BlackRock recently said in its 2023 Global Outlook that a recession is “foretold.” JP Morgan CEO Jamie Dimon recently reiterated his position that a recession in 2023 is a certainty.

Some would also argue that despite unemployment being low, we are actually currently in a recession, as we experienced two consecutive quarters of negative GDP growth last year.

Whether you are a buyer or a seller in today’s market depends on your predictions on a highly disputed topic: how severe will The Fed’s 2023 induced recession be, and will The Fed lower rates to “save” the economy even if inflation remains above 2%?

If you believe the recession will be severe, that your job might be at risk, The Fed will not “rescue” the economy, and that demand will fall off a cliff, then right now might be the best time to sell your home.

If you believe that the recession will be mild, The Fed will lower rates to stimulate demand, and that all this uncertainty will soon be under control, then right now might be the best time to buy a relatively more affordable home (especially in cash).

However, it’s important to keep the long term in perspective. Beverly Hills prices have increased steadily since the last housing crisis and are also elevated significantly since the pandemic. A key question is whether the decline in prices seen on the graph since Summer 2022 represents most of the “correction” or is only just the beginning of a much larger correction. Again, the answer probably depends on what will happen with The Fed Scenario this year.

One closing thought is the fact that institutional buyers are preparing for a $110 Billion buying spree of single family homes, as reported by The Real Deal. These are investors with very long time horizons and they see increased opportunity in investing in single family homes, probably because the United States and Los Angeles have a systemic shortage of housing. When demand is high and supply is low, prices will continue to rise. Despite the risks and uncertainty in 2023, investing in single family homes seems to remain a good long term decision.

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