For two weeks earlier this year, 30-year mortgage rates dipped below 6% in the South Bay of Los Angeles. Multiple offers materialized on properties that otherwise would have sat, and homes sold for $50,000 to $100,000 over list price. Then geopolitical conflict pushed oil prices and rates back up, and the market cooled just as fast. That sequence illustrates how dependent this coastal pocket of LA County has become on rate movements, and how much pent-up demand is waiting on the other side of a sustained decline.
David Coe, who leads Coe Real Estate Group in Redondo Beach and has closed over 500 transactions across resale and new construction, describes a market where fundamentals outside of rates are sound. “If you look at the rest of the economy, our GDP growth is pretty good, our job levels are pretty good, the stock market’s doing well,” he says. “If we can get our bond market back under control, get gas prices down and get interest rates down, that’s going to have a massive impact.”
The South Bay – everything south of LAX down to San Pedro – is running at roughly 60% of normal transaction volume, a figure Coe says reflects a national pattern rather than a local anomaly. The cause is a familiar lock-in effect: roughly 85% of homeowners hold mortgages at 4% or below, by his estimate, making any move financially punishing even when the destination home is less expensive.
On the demand side, prices have stayed flat rather than declining, so the payment math has not improved for buyers either. Move-up buyers who want more space, empty nesters looking to downsize, and first-time buyers priced out by monthly payments are all waiting on the same variable. “We’ve got trapped supply and trapped demand,” Coe says.
The spring selling season reflected this stalemate. August pending sales in the South Bay hit a historic low, according to Coe. He expects fall and winter activity to pick up modestly because the muted spring left transactions unfulfilled.
The buyers able to act in this environment fall into a few categories. Some are straightforward cash purchasers – including adult children whose boomer parents are tapping home equity or personal wealth to help fund a purchase. Others are investors willing to take on properties with deferred maintenance or awkward floor plans, the kind of listings that linger when financed buyers have options.
Coe draws a clear line between polished inventory and everything else. Homes that are well-presented and correctly priced still attract buyers. Properties that are not can sit – and those become opportunities for cash buyers who can close quickly. “Your all-cash matters right now,” he told a client recently. “It may not matter as much a year from now because people might be able to outbid you so much that a seller would be willing to wait for a finance deal.”
The condo segment is particularly soft. LA County had over eight months of condo supply at the time Coe checked – the highest level since the Great Recession. Condos tend to attract rate-sensitive, lower-budget buyers, making that segment especially exposed to the current environment.
For investors, Coe identifies a specific pricing gap between small multifamily properties – duplexes, triplexes, and fourplexes – and buildings with five or more units. Owners of smaller properties can hold 30-year fixed-rate financing and face no pressure to sell, so those prices have stayed firm. Larger commercial multifamily, where shorter-term loans are resetting at higher rates, is a different story. Owners facing refinancing shortfalls are selling, sometimes after capital calls.
Coe estimates that 60 to 70% of multifamily deals have required some form of capital call in recent years, even if only to cover a refinance. For investors with available capital, his suggestion is pointed: consider selling a smaller property at today’s stable prices and trading up into a larger building where pricing has softened. But he adds a warning about loan structure. “Make sure if you do that, that you’re not putting loans on it that are going to reset three years, five years from now,” he says. “You’re going to want to make sure that you can still cash flow that deal with 7 to 10 year kind of loans just so you’re not in the same situation that so many people are right now.”
Coe’s experience with infill projects through Capital Stack Investments offers a ground-level view of why new supply remains constrained. Land is expensive, construction labor costs have risen – partly because rebuilding from fires in the LA area pulled workers away from other projects – and the finished homes have to compete with renovated resale properties that buyers can get for far less. A renovated 3,500-square-foot home in Redondo Beach might sell for $1.8 million, while a comparable new construction home lists for $2 million to $2.4 million. Many families are choosing the renovation and pocketing the difference because higher interest rates make every dollar of purchase price more expensive to carry.
Regulatory friction compounds the cost problem. Coe describes being hit with unexpected infrastructure requirements – a streetlight, a road section, an electrical panel upgrade – months into a project. California’s legislature is considering laws that would require cities to disclose all requirements upfront. “That’s why you need to get the land really cheap,” he says, “because you know what expenses are coming at you and you don’t know what expenses are coming at you at the same time.”
Even at scale, the math is daunting. California needs roughly 200,000 new homes a year, according to Coe, and current production is nowhere close. Without lower construction financing costs and cheaper land, new supply will continue to lag demand – and the lock-in dynamic that has frozen the resale market will persist alongside it.
About the Expert: David Coe leads Coe Real Estate Group in Redondo Beach, California, covering resale and new construction in the Los Angeles area. He also operates Capital Stack Investments, focused on infill development projects.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
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