Los Angeles

Recently released labor market data shows that employment growth in Los Angeles County was better in 2021 than originally estimated. In March, the California Employment Development Department (EDD) released revisions to their monthly employment survey estimates which indicate, by-and-large, that the local labor market has been recovering faster than originally thought. Each year the EDD releases an annual benchmark, in which monthly labor force and payroll data are updated. The monthly statistics are based on sample data from a survey of establishments, and the benchmark incorporates official information with the more lagged, but more accurate, Quarterly Census of Employment and Wages (QCEW), which covers roughly 97% of all wage and salary employees in the nation.

Prior to the revision, nonfarm employment growth for Los Angeles County came in at just 1.3% from December 2020 to December 2021. However, after the revision the annual growth rate ticked up to 3.1%.While there is still a considerable amount of lost ground to recover, economic conditions in Los Angeles County have gradually continued to improve. In the year-long period to January 2022, nonfarm payrolls grew 9.1%, compared to 4.7% at the national level. Although the pace at which jobs were added is impressive, and outpaced the statewide rate, the region is still in recovery mode and has more ground to cover compared to neighboring counties. Statewide, nonfarm payrolls were 2.8% below their pre-recession peak by January 2022, compared to 3.8% in Los Angeles County.

Much of the decline, and the subsequent slow pace of recovery, is due in large part to the industrial mix of jobs in Los Angeles (which are oriented more towards services and hospitality) and relatively stringent health-related mandates that limited the extent to which certain service-oriented businesses could operate. With restrictions easing, Los Angeles County is expected to transition from recovery to expansion in the early months of 2023.

There’s no doubt that the pandemic galvanized the real estate market, both in Los Angeles and at the state and national level. Among the primary factors driving the rapid upswing in both prices and sales was a steady decline in interest rates and a shift in consumer preferences for more space. The effect has been a collapse in real estate inventories as newly listed homes are seized on by prospective buyers willing to pay above asking price and engage in bidding wars with other buyers. New home construction has continued to pick up, but that has had a negligible impact on inventories, and it will take time for residential permits to bring any relief to the housing market. Most of the sales have occurred in the existing single-family homes segment. In fact, across Southern California, and the state in general, the median time on the market for a single-family home is trending near all-time lows.

A dwindling supply of homes on the market will help to keep prices from falling. However, rising mortgage rates will take buyers out of the market, softening the demand for housing. During the pandemic, the 30-year fixed rate mortgage average in the U.S. hit an all-time low of 2.65%, but rates have since ticked up to 4.7% – above where they stood prior to the downturn. The rise in rates was expected; improving economic conditions, rising inflation expectations, and the prospect of a more aggressive Fed will all have a cooling effect on real estate markets. Still, Beacon Economics does not expect price growth to turn negative in Los Angeles. In general, home prices tend to rise regardless of rising rates because homeowners prefer to withdraw from the market rather than sell below the market rate.

California needs policies that will increase home affordability for all residents, and that means addressing the fundamental imbalance between supply and demand by building more housing. By reducing and eliminating homebuilding fees and permit costs, reforming policies that restrict homebuilding (such as the California Environmental Quality Act) and eliminating policies like Proposition 13 that incentivize local governments to implement onerous homebuilding fees, California leaders will go a long way toward making housing in the state more affordable. All these factors will limit the extent to which the housing market can grow over the course of the year. In short, Beacon Economics expects home price appreciation in Los Angeles to remain positive, although not at an unsustainable double-digit pace.