Are Los Angeles home prices finally about to dip?

Los Angeles home prices may level off in coming months, new reports suggest.

The cost of buying a house in Los Angeles County has never been higher, but a new analysis from Zillow shows that the number of homes on the market with price cuts is slightly up since the beginning of the year.

Sellers slashed prices on 14.1 percent of homes in Los Angeles and Orange counties in June, up from 11.1 percent in January. The median value of those reductions was 2.6 percent of the original listing price.

“It’s far too soon to call this a buyer’s market,” writes Zillow economist Aaron Terraza, describing a national trend. But he notes that the “frenetic pace of the [U.S.] housing market over the past few years may be starting to return toward a more normal trend.”

Eric Sussman, adjunct professor of accounting and real estate at UCLA, agrees.

“I don’t think there’s any question that the housing market is slowing,” he says, adding that he “wouldn’t be surprised” if prices in LA start dropping “in the next few months.”

A separate report from Re/Max finds that homes sold in the LA metro area in July spent around three days longer on the market than in June. That’s in spite of a 5 percent decrease in the number of homes sold during the month and a slight uptick in the number of homes up for sale.

Fewer sales coupled with longer wait times for sellers could eventually cause home prices to level off, or even fall.

That bodes well for LA buyers, who now face median home prices well above $600,000.

If the market cools off in coming months, says Sussman, rising mortgage interest rates will likely be to blame. Since September 2017, interest rates on conventional home loans have shot up nearly a full percentage point.

To put that in perspective, the monthly mortgage payment on a $600,000 home—close to the median in LA County—is now more than $200 above what it was less than a year ago, according to Zillow’s mortgage calculator.

That estimate assumes a 20 percent down payment. If buyers pay less money up front when obtaining a loan, as is common in pricy markets like Los Angeles, monthly payments—as well as the interest rates on those loans—will be even higher.

Sussman says these costs might eventually force buyers on a budget to abandon their home searches.

“At some point you just hit a wall,” he says.

Renting might also become more appealing than buying, Sussman says.

While the costs of buying a house are soaring, rental prices in LA have stagnated. And though Los Angeles is still woefully short on affordable housing, developers have constructed tens of thousands of market rate units in recent years—apartments that appeal to many of the middle-to-high-income residents who may be considering buying a home.

A larger economic downturn could also drive down home prices. Economic analysts have been forecasting a looming recession for the past few years, though most agree it will be significantly milder than the Great Recession.

Sussman suggests that home prices could drop between 5 and 10 percent during a recession. That would be a silver lining for prospective buyers—but not much of one.

“That’s really not going to move the needle for most people,” he says.