Southern California home prices leveled off in May as buyers reacted to higher mortgage rates and rising inflation, causing sales to plunge 16% from year-ago levels.

Last month’s sales tally was one of the lowest for May in records dating back to 1988.

It’s not like a bubble bursting. It’s more like a punch in the stomach. … The sellers are coming to the realization the party is over.”

The median price of a Southern California home — or the price at the midpoint of all sales — was $760,000, unchanged from April’s record high, according to CoreLogic numbers released Wednesday by data firm DQNews.

Last month’s median still was up 13.4%, or $90,000, from May 2021.

Sales, meanwhile, fell to 20,470 transactions last month, down 4.8% from April and down 16.2% year over year.

Prices and sales both typically rise from April to May.

Given how much interest rates have been rising, I think it’s safe to say that home prices are leveling off. Those higher interest rates are going to put significant pressure on home prices.

The average rate for a typical 30-year, fixed mortgage averaged just under 3% through 2021, then jumped by more than 2 percentage points to more than 5% in just five months, according to government backed mortgage giant Freddie Mac.

“The Fed kind of woke up to the fact that inflation was not going to be transitory,” said Danielle Hale, Realtor.com’s chief economist. “The way that impacts the housing market is higher mortgage rates, which really have eaten into home buyer purchasing power this year.”

That jump in house payments sparked a chain reaction in the market, dampening transactions and boosting the inventory of for-sale listings. After falling to an 18-year low last winter, Southern California listings rose 29% to 34,193 homes last month.

“There are signs that demand is softening,” Hale said. “We’re seeing more homes on the market, in part because you’ve got more sellers, but in part, because buyers are being a bit choosier.”

Although listings remain low by historical standards, agents report homes are taking longer to sell, fewer buyers are waiving loan and appraisal contingencies and fewer are entering bidding wars. As the market slows, said Steve Thomas of Reports On Housing, “we will also see sellers paying closing costs and they will be more willing to negotiate on terms.”

Figures show that more home sellers are adjusting their asking prices downward. Marr said nearly 21% of sellers in Los Angeles County and nearly 28% in Orange County and the Inland Empire dropped their listing price last month, compared with 10% dropping their prices in May 2021.

“All of these areas have had pretty dramatic increases in price drops, and they’re likely to continue increasing,” Marr said.

Hale, meanwhile, revised her housing forecast for this year based on rising mortgage and inflation rates.

She predicted the market will continue to slow through the summer as buyers “step back from the market.” By year-end, U.S. home prices will be up a mere 6.6% vs. last year’s double-digit pace.

As the inventory of homes for sale continues to rise, the fall “could be an opportune time” for frustrated home shoppers to find the kind of property that eluded them until now, she said.

(Source: Star News, Realtor.comSCNG business columnist Jonathan Lansner contributed to this report, May 2022)