Skinny On Real Estate
Loft Deflation in Hollywood and Downtown LA
It’s still rough going for developers who overestimated demand for urban condominiums.
The owners of the Lofts at Hollywood and Vine are cutting prices over 40% in some cases.
A 1,200-square-foot unit in the building is now listed for $549,000, down from an earlier list price of $979,000. Those are list prices, so the original figure isn’t a price someone actually ever paid.
This building opened in 2007 and is still about half-empty. It had been the Equitable office building.
A couple of months ago, developers of the Evo high rise in Downtown Los Angeles began cutting prices 15% to 20%. Units in the 24-story tower at 12th and Grand now sell from the mid-$300,000 range into the $800,000 zone, with some seven-figure penthouses.
The Evo development has been open for over 15 months and has 155 units sold or under contract. The building has 311 units. . .Lots of blood still in the water.
By John SkinnerCalifornia’s median home sales price rises 4%
California’s median home sales price rose 4% in May, nudged up by an increase in sales volume (still mediocre) of higher-priced homes. The statewide median sale price was $230,000 in May, up from $221,000 in April. That’s a 52% drop from the state’s peak median price of $484,000 in 2007.
Despite the momentary pick up in higher-priced homes, foreclosures still comprised 51% of May sales and 1 out of every 5 homes sold was from the foreclosure ridden Inland Empire.
The high end momentarily picked up due to the typical spring selling season and seller’s realizing the reality of the market. After six months of very little activity, it is nice to see a faint heartbeat in this market.
Housing Inventory Chart
April 2008 (left side) vs. April 2009 (right side).
(*Source: Bloomberg)
High-End Price Decline Through 2012?
Prices for the most expensive U.S. homes may not reach bottom through 2012, according to JPMorgan Chase & Co. analysts. Compelling data backs up these claims even if most of it is not included in the Bloomberg article.
Besides some of the salient points the article makes, check out the graph posted above from the Bloomberg article that shows the months needed to clear inventory in each price range in Southern California in comparison to last year. The inventory levels for homes valued for more than $1 million dollars continues to escalate towards 20 months while homes worth $750,000 or less have shown a solid decrease in inventory levels. This is further evidence that the high end market is hit last in the cycle. It is safe to say the high end is 1.5 to 2 years behind the lower priced markets.
Furthermore, history seems to have away of repeating itself. In the late 1980s, the market was going strong before it started a downward trend and values dropped 40% on the high-end over a seven-year period. It was about 10 year period before prices got back to 1989 levels.
The average Westside home has declined approximately 20-25% since 2007, only 2 years into what is historically a 7-8 year cycle. With Financial, Insurance and Real Estate sectors losing many high paying jobs and the entertainment market slowing down, where will the new high paying jobs come from?
Couple this with the shift in lending practices back to fundamentals such as verifiable income and sales/price/rent ratios and the bevy of ALT-A and Prime loans set to reset after this summer and it looks like more of a fall will come in the millionaire home market.
With market activity showing signs of life on the high-end and the financial markets up over 30% from recent lows, this summer is the best time to sell your home if you are looking to move in the next 2 to 3 years. Selling at a realistic price this summer will leave more money in your pocket.
Please contact me if you would like to discuss your current situation and what your best options are.
Home Equity and the Economy
If homeowners did not use their homes as an ATM machine between 2002-2006 the American economy would not have had positive growth. The economy would not have prospered like it did during that stretch but the economy would not be in the mess it is right now. Question: How are we going to replace the borrow against your home ATM and spur economic growth in the near future?
Rates come back down after spiking 75 basis points
Rates had been skyrocketing the past few weeks (rising about 75 basis points) but the bond market has been sending slightly better news to mortgage borrowers as investors in securities carved out of home loans have been accepting lower returns. Yields on Freddie Mac and Fannie Mae mortgage securities fell last week meaning the buyers are OK with lower rates on the loans backing the securities.
The typical rate on a fixed-rate 30-year loan rose to 5.59% last week, up from a record low of 4.78% in late April, according to Freddie Mac. Yields on Fannie Mae 30-year fixed-rate mortgage bonds dropped to 4.71%, down from 5.07% last Wednesday and the lowest since June 3. Rising rates have throttled the home refinancing spree that took hold last fall and continued through the winter. While rates under 6% are still great by historic standards, the recent increase also made it tougher to qualify for home purchases, and higher rates generally can put the brakes on the economy
2 North Santa Monica Sales Worth Noting
415 17th street finally sold on June 15th for $1,600,000. In December of last year it was listed for $2,245,000. . .17th street is one of the busier streets north of Montana so it will take a little more of a hit (100K or so) than if it was located on another street. However, I think this presents strong evidence that 8,900 lots once selling for 2.25 will be selling in the 1.5 to 1.6 range within the next 4-6 months.
2006 vs. 2009. . .Talk About Dropping Off A Cliff
Since the market peaked in 2006, a steady decline in sales volume and increase in housing inventory is substantially apparent. You can see through a small representative sample of three entry level zip codes on the Westside, [Mar Vista (90066), Culver City (90232) and Santa Monica (90405)], exactly how much the market has slowed in May (year over year) the past four years.
Mar Vista 90066
(2006) 49 sales x $782K = $38,318K
(2007) 34 sales x $824K = $28, 016K (-26.9%)
(2008) 13 sales x $843K = $10,959K (-71.4%)
(2009) 11 sales x $569K = $6,259K (-83.7%)
Culver City 90232
(2006) 14 sales x $795K = $11,305K
(2007) 4 sales x $676K = $2,704K (-75.7%)
(2008) 5 sales x $805K = $4,025K (-63.9%)
(2009) 1 sale x $675K = $675K (-93.9%)
Santa Monica 90405
(2006) 26 sales x $1,178K = $30,628K
(2007) 17 sales x $1,020K = $17,340K (-43.4%)
(2008) 15 sales x $789K = $11,835K (-61.4%)
(2009) 8 sales x $734K = $5,872K (-81.8%)
With the last real estate recession continuing for 7 years, how long will this last?
(*Sources: Melissa Data and Westside Meltdown)
Forecasting Firm: L.A. Home Prices Undervalued? Not on the High End. . .
Economic forecasting firm IHS Global Insight says the real estate crash has now put home prices in Southern California below their historic norms.
IHS bases its forecast on prices, interest rates, incomes, population density, and historic premiums and discounts in given markets.
By those measures, Los Angeles County home prices are now 6% undervalued, the firm says. Orange County is 11% undervalued, and the Inland Empire is 16% undervalued.
San Diego is 21% undervalued and San Francisco is 25% below normal, IHS says.
“The deceleration in the rate of decline may indicate the market is beginning to stabilize,” the report says. But it warns that “it is too early to call a bottoming,” as “job losses continue, housing inventories remain elevated and consumers remain wary in light of economic uncertainty.”
It is important to note that with home values in areas such as Lancaster falling as much as 65%, good long-term investment opportunities exist. However, the Westside/South Bay and other higher end locales started to decline in value anywhere from 12-18 months later than areas that are currently stablizing and showing signs of a potentially good value.
When reading broad articles about the Los Angeles real estate market remember how large LA County is and the numbers you are reading may have nothing to do with your situation (especially if you are in a high end market). The markets differ so much in LA County that you really only want to pay attention to your specific area (i.e. your micro market).
The high end has yet to feel any type of foreclosure pinch and is down 20-25% from market heights. In some desirable areas that number is only a 15% decline while an other desirable areas it is over 30%! Ultimately, these numbers will continue a downward trend on the high end but they will not come close to the losses we have seen happen in areas like Lancaster.
Have We Seen The Last Of Sub 5% Mortgages?
As the government continues to print money inflation fears are flaring up and we have seen interest rates climb over 75 basis point in the past two weeks.
Rates for conforming 30-year fixed loans — the plain vanilla mortgages that make up most of the market — jumped from an average of under 5% two weeks ago to over 5.7% this week.
The bond market, which ultimately determines what happens to interest rates, tends to drive rates down when the economic outlook is bad. Signs that the economy may no longer be getting worse contributed to the shift away from the rates under 5% seen in recent months.
However, some financial analyst are cautioning against the idea that we are going to see a major jump in rates. The economy will have to improve to support higher price points and realistically that will probably not happen until 2010.
Bankrate.com senior analyst Greg McBride said federal government borrowing to fund its huge deficit spending is driving up borrowing costs for everyone, “and for consumers that means higher mortgage rates.”
“If you wanted a sub-5% rate, that opportunity has passed you by,” McBride aid.
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