Anne's Land

Local market update: January-October 2009

Hancock Park, Windsor Square, Larchmont Village and Brookside are small 1920s residential neighborhoods, centrally located between Downtown and Beverly Hills .  Today, the multiple listing service defines the broad "Area 18” as La Brea to Western, Melrose to Pico.

Overall, the statistics for January – October 2009 show that virtually the same number of  single family homes traded hands this year (145 this year vs 149 last year).  The average time on market was 2+ months, similar to last year.  Yet, well over half or 57% all sales were under $1 million versus 38% under $1 million in the prior year.  Lending requirements are MUCH more stringent, inventory is higher and a disproportionate share of homes on the outskirts of the prime neighborhoods sold, often in multiple offers.  The price segment under $1MM continues to be driven primarily by first time home buyers due to government stimulus:  low downpayment FHA requirements, low 30 year fixed interest rates and the $8,000 tax credits.  Some home owners took equity out of their larger homes, downsized and locked in a smaller conforming 30 year fixed loan at less than 5%.

At the high end, over $2 million, was much slower.  Only 20 homes sold versus 36 in the prior year.  The average price per square foot was down over 9% and time on market was 3.5 months,  over 30% longer than last year.   Downpayment requirements for jumbo loans  usually start 25%+ and fewer people are willing to make this cash commitment in light of current macro economic trends.  It follows that the prime homes that are up to the minute done are the ones chosen.    

 A summary of the numbers:      

                                           TOTAL MARKET                                           OVER $2MM                                            

                                          YTD ‘09             YTD ‘08                             YTD ‘09             YTD ‘08           
Number of Sales                 145                      149                                       20                     36       

Median price                $    898,000        $1,218,000 $2,458,500       $2,745,000   
Median price/sq ft         $          394        $         685                               $         579        $        586  

Average price                $1,230,774        $1,628,354                             $3,262,621         $3,271,228
Average price/sq ft         $        468        $          587                             $         598        $         660

Days on market                  67                         66                                    107                        65

Implications for Sellers:

Proper positioning has never been more important. 

Sellers must present their property in the best possible light in order to compete with other properties on the market – in your local area and citywide.  Nice landscaping, a fresh, uncluttered interior and strategic pricing are critical to get selected.  Spending a little extra money for finishes (or possibly staging)  may be the difference between getting sold and languishing on the market.  An agent with neighborhood expertise and a solid track record of closed transactions will help you prepare your home based on real time market insights.  Remember "days on market" is the time it takes to secure an accepted offer, then factor in another 45-60 days+ for the property to close escrow.  Lenders and buyers are often waiting until just before funding to release the loan contingency which can make planning for the next move challenging.

It is important to do your homework and make sure that you hire the best local professional to get the job done in a timely manner in order to yield YOU the highest net profit.

Implications for Buyers:
There is a window of opportunity for qualified buyers today. 

For the first time in 7+ years, there is choice.  Not only is there more inventory, but there is less competition among buyers due to current lending requirements and economic conditions.  This gives you time to be discerning and to make thoughtful decisions.  Cash is king and can be additional leverage with sellers today.   For those with solid credit and cash flow, the cost of money is near an all time low and loans are available.  There are also some Sellers who must sell and may be more flexible.

It is a particularly advantageous time for move-up buyers;  you may have to sell in order to buy and possibly for a lower price than a few years ago but you will also pay less for your next purchase. 

What, where, when and how to buy are the variables that together make the home buying process complex.  A knowledgeable professional is essential in navigating and advising you through the intricacies of the marketplace.

A seller's mindset today

The California Association of Realtors hosted an industry tradeshow in San Jose earlier this month and shared some results from a recent phone survey of home Sellers in the state of California.

If you are a Seller, perhaps this will provide some comfort that you are not alone.

If you are a Buyer, this should give you a broader perspective of the market dynamics today.

Key highlights:

Primary reasons for selling - 80% have to do with money

• trouble making mortgage payments
• job loss
• mortgage payments went up

Types of mortgages held by current sellers:

• 45% are 2 year fixed, then adjustable
• 25% are 3 year fixed, then adjustable
• The 5 year fixed rate mortgages will be the next wave to reset in the coming months

45% of Sellers have owned their homes less than 2 years.  The majority of the people purchased larger properties or properties in better locations.  Today, their income is not keeping up with their expenses.

Seller's biggest concerns with home selling process:

• 89% say time it take to sell
• 83% say sales price of home (ie. what they will NET)
• 74% say Buyers being able to get a loan to complete the purchase

63% of Sellers have had their home fall out of escrow before it actually sold.

• 69% due to buyer not getting an acceptable mortgage
• 24% due to the lender withdrawing

50% of all escrows did not close ON TIME due to loan delays.

A good agent with intimate local market knowledge can help Sellers price and market a property most effectively and assist in setting reasonable expectations for time on the market and the ultimate sales price. 

A Micromarket Summary - Q1 2009

Hancock Park, Windsor Square, Larchmont Village and Brookside are small residential neighborhoods in Los Angeles developed in the 1920s.  Today, the multiple listing service defines the broad "area 18” as La Brea to Western, Melrose to Pico.

What is happening in this micro marketplace?

Overall, the statistics for the first quarter of the year show that 10% more single family homes traded hands this year than the same time a year ago.  The average time on market was 2.5 months, much like the prior year.  Nearly 60% all sales were under $1 million versus 21% under $1 million in the prior year. Lending requirements were much more stringent, inventory was higher and a disproportionate share of homes on the outskirts of the prime neighborhoods sold, often in multiple offers.

At the high end, over $2 million 8 homes sold versus 6 in the prior year.  The average price per square foot was up over 2% and time on market was about the same.   The prime homes that were up to the minute done were the ones chosen.  We also saw multiple offers on occasion.  Given the sample size, these statistics can be misleading. So, did we have a “paired sale” (a property which sold last year and again this year)?  Yes, there was a property on Windsor Square which sold for $3.1MM last March and again in Q1 ’09 for $3.25MM in multiple offers.  The property had over $200k in upgrades, year over year.

 A summary of the numbers:                                   

                                        Q1 ‘09             Q1 ‘08           
Number of Sales                       31                    28       

Median price                $    869,900        $1,502,500   
Median price/sq ft        $          394        $          685       

Average price                $1,290,000        $1,703,321
Average price/sq ft        $         498        $         633                   

Days on market                          77                     81       

The market dynamics have changed daily since the beginning of April.  Currently there are 27 properties in escrow and 120 properties available today.

Implications for Sellers:
Proper positioning has never been more important. 

Sellers must present their property in the best possible light in order to compete with other properties on the market – in your local area and citywide.  Nice landscaping, a fresh, uncluttered interior and strategic pricing are critical to get selected.  Spending a little extra money for finishes maybe the difference between getting sold and languishing on the market.  An agent with neighborhood expertise and a solid track record of closed transactions will help you prepare your home based on real time market insights.  It is important to do your homework and make sure that you hire the best local professional to get the job done in order to yield YOU the highest net profit.

Implications for Buyers:
There is a window of opportunity for qualified buyers today. 

For the first time in 7+ years, there is choice.  Not only is there more inventory, but there is less competition among buyers due to current lending requirements and economic conditions.  This gives you time to be discerning and to make thoughtful decisions.  Cash is king and can be additional leverage with sellers today.   For those with solid credit and cash flow, the cost of money is near an all time lows and loans are available.  There are also some Sellers who must sell and may be more flexible.

It is a particularly advantageous time for move-up buyers;  you may have to sell in order to buy and possibly for a lower price than a few years ago but you will also pay less for your next purchase. 

What, where, when and how to buy are the variables that together make the home buying process complex.  A knowledgeable professional is essential in navigating and advising you through the intricacies of the marketplace.

Data Source:  The Multiple Listing Service (themls.com) defines Area 18 as Melrose to Pico, Western to La Brea of zip codes 90004, 90005, 90020, 90010 and 90036.

MARCHing on...

Many buyers and agents have been waiting to see the "rescue package".  Well, now it is here and there are some very good incentives, especially for first time buyers.  Not only is there more inventory to choose from, but prices are lower, conforming loan limits have been raised to $729,000 while 30% fixed rates are near historic lows and there is a tax credit of $8,000 for first time buyers.

Buying a property is also a great hedge against inflation.  Interest rates are sure to rise in the near future as government spending continues.

The window of opportunity is here!

If you are interested in the specifics of the tax credits, see the attached FAQs.
Download First time home buyer tax credit FAQ

Housing Market 2008: Wrap-Up from California Association of Realtors

Below is a macro perspective on how the California housing market fared in 2008.  Each micro market and neighborhood behaves differently based on supply and demand.  Let me know you have have questions regarding a specific area and/or price point.

2008 was a tumultuous year for the economy, financial markets, and the real estate market was no exception. The median price was battered as large proportions of highly-discounted distressed sales flooded the marketplace, the annual median price dropped at a record 32 percent in 2008 compared with 2007. However, sales of existing, single-family homes were 27 percent higher in 2008 compared with 2007.

Sales Bounced Back in 2008

Annual sales of existing homes for 2008 totaled 439,740 in 2008, up 27 percent from 346,940 in 2007. Statewide sales continued to be strong in December, as deeply-discounted distressed sales remained at high levels in many parts of the state. In December, sales totaled 544,580 homes, up by nearly 6 percent over November, and up 85 percent over sales of 294,520 homes a year ago. Large year-to-year percentage gains in sales will likely continue but at a diminishing rate in the next few months as current sales are compared against extremely low numbers that prevailed in the late 2007 and early 2008. In contrast to the headline national housing market where sales have remained virtually unchanged since late 2007, California home sales have improved more than 100 percent compared with the trough set back in 2007.

 

 
…But Home Prices Were a Different Story

For the year 2008, the annual median price fell 38.1 percent from $560,270 in 2007 to $346,750. With the economy deteriorating, the financial system struggling to stay above water, and consumer confidence at record lows, distressed properties with deeply discounted price will continue to affect the price side of the market. Home prices may not show clear signs of stability until the middle of 2009. The significant decline in price was attributed largely to the dramatic change in the mix of sales since late 2007 and the increase in the share of distressed sales. In August 2007, the sub $500,000 price range accounted for 43 percent of sales, in December that proportion accounted for 82 percent. As large as the price declines are, they have dramatically improved affordability and thus have opened up opportunities for first-time buyers to get their foot in the door where they were previously priced out of the market.

Source:  CAR.org

Tips for Buying a Condo in Los Angeles

Historically Los Angeles has been a  condo town like Chicago, New York and other major cities.  Here, people typically rent then buy a home with land.  In recent years with a growing density in the center of the city, the changes in zoning laws, easy credit and low interest rates we have seen substantial development and an exciting renaissance in neighborhoods such as Hollywood, Downtown and Play Vista.  Today this is more choice for the Angeleno looking for a cost effective way to get into the real estate market to start building equity or to diversify their investment portfolios.  With interest rates nearing 4.5% for loan amounts under $625,500 and a first time home buyer credit as much as $7,500 before June 2009, the time to buy is excellent.  The median price in Hollywood for example is  $490,000 down 35% from October 2007.

In November 2005 I clipped an article from the Personal Finance section of the Wall Street Journal that I thought would be useful prospective condo buyers in any market.  Lauren Baier article “Buying a Condo Is Getting Trickier:  Location Remains Crucial as Prices continue to Soar;  Avoid ‘White-Vanilla Boxes”” had the following tips which include my own observations as well.

1.    Location is the key factor.  Buying in a popular neighborhood will help assure a property maintain its value, although sellers might not always reap such big gains.  Plus, you will enjoy a great quality of life.  Appreciation may be better in a new or emerging neighborhood but resale is riskier.  Watch for location within building.  How many shared walls are there?  Light inside the unit?  Noise factor from street?
2.    Avoid “white-vanilla boxes”.  Buy something special or unique that will distinguishes your property when it comes to resale.  Examples are private outdoor space, a view, a garden, or a celebrity resident – whatever gives it a bit of cachet. 
3.    Look for name recognition.  A brand name may help fetch a premium price.  A well-known builder, architect or designer within our local market tends to generate more buyer interest, especially among foreign investors.
4.    Weigh old versus new.  If you are buying in an older complex, make sure that the building and its grounds have been kept in good condition.  It is probably better to buy a new condo if your objective is short term and your are banking on a quick resale.  If you are willing to invest some elbow grease, purchasing a condo that needs hardwood floors, a paint job and smooth ceilings may be the best way to go.
5.    Look for good management.  A good condo association is crucial to maintaining your condos value.  The association will cover expenses and maintain the property so it is important that it is well managed and has the money to make needed repairs.  Before you buy find out what is covered in the home owner dues such as earthquake insurance, the amount that goes into reserves, the total reserves available, special assessments within the last 2-3 years, special assessment expected, claims pending against the association, etc.  Once you own, get on the board so that you are informed and can influence management.  This is the best way to protect your asset.

Let me know if you are curious about my favorite buildings and locations.  I see a lot of properties each week.  The good ones always stand out!

A History of California Housing Prices

Sometimes a picture says a thousand words. 

The California Association of Realtors (CAR) put together this graphs showing the 30+ year history of California housing prices relative to the US.  I updated the graph to reflect 2007 and 2008 YTD actuals. 

Since 1975 the median price of a single family home has been much more expensive in California relative to the nation on average.  This seems to makes sense in light of our temperate climate, boundless recreational opportunities, employment opportunities, general mindset about how to live and sheer beauty.

Note the change in the price differences starting in the late 1990s.  California's home prices took off  exponentially.

Now, back to reality.

Real estate is cyclical.  Historically a cycle is about 7 years:  3 to 4 up, then a leveling, followed by 1-2  down.  Until now the only exception was in the early 1990s which was a 4 year downturn.  At that time we had a national economic malaise and a contraction of defense and aerospace industries in the state.

The run up in housing prices over last 10 years have been truly amazing in this 38 year history.  Adjustments have begun.

THE GOOD NEWS

In spite of these fluctuations, since 1968 the average 5-year rate of return on median priced homes  in California has been 11.6%*.

I am working on finding a graph to compare this with the average rate of return on the S&P 500 or another financial market. I think California home owners will be pleased.

*assumes home is purchased and sold after 5 years.

Some thoughts on markets

One of the most turbulent weeks in financial history has come to a close. The Dow was off 20% for the week and Friday marked the most volatile day in the stock market's 112-year history when the market swung over 1,000 points.  Throughout last week and weekend I am sure everyone was fixated to the markets and watching their investments decline. I know I was glued to the news and could not help but think back to Stuart Gabriel's Macro Economics during my first year as an MBA student at the Marshall School of Business at USC.  Gabriel, who has since left to be the Director of the Richard S. Ziman Center for Real Estate at UCLA, was among the most clear-headed professors I ever had.  Even though he has traded his cardinal and gold for Bruin blue, I still appreciate his wisdom and perspective in these times of turbulence.

I thought it might be helpful to share some of his wisdom from yesteryear which still has meaning for me and hopefully will help you too.  One of his most memorable lessons was about markets, how they stalled and how intervention restored their functioning.

In the 1970's, the US experienced a stagflation crisis.  Paul Volcker, chairman of the Federal Reserve under Carter, ended the crises by limiting growth of the money supply, abandoning the previous policy of targeting interest rates.  He was hugely unpopular at the time because the change contributed to the recession in the early 1980's and the highest unemployment levels since the Great Depression.  He suffered strong political attacks and the most wide spread protests in the history of the Fed.  Yet, under his leadership, inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.  Volcker restricted the dollars in circulation which was tough medicine for the market and hard to swallow for the country, but ultimately was effective for the ailment.

Our financial markets seem to have stalled due to a lack of liquidity and the government is beginning to intervene to try and get buyers and sellers back to trading.  During these times, I have found stepping back and reviewing fundamentals has helped me better understand what is happening and what it could mean for the future. I thought it might helpful to review fundamentals including some definitions of markets.

What is a market?

A market is a structure that allows for one thing traded against something else.  It can vary in size, organization, geography, etc.   Modern life revolves around markets when we go to work, the grocery store, fill up our gas tanks or trade on E-bay.  Buyers and sellers are the participants and play distinct roles with the ultimate goal of consummating a transaction.

How does a market work?

All buyers and sellers of a good or service come together to evaluate it and influence its price. This presumes of course that there is transparency and a reasonable assurance that the value of the good or service will be the same or better after the trade.   In economics, a "free" market is one in which the government makes no attempt to intervene through taxes, subsidies, minimum wages or price ceilings etc.

When does a market not work & why?

Markets function properly when both parties are rational and have sufficient information to arrive at a price for the good or service that is mutually acceptable.  The buyer must have confidence to part with something of value in exchange for something else.  The level of negotiating power held by the buyers affects the function of the market.  For example, when there are many buyers (demand) and limited supply of a commodity, a single buyer has less leverage and prices rise.   When supply outpaces demand then prices generally fall.

Market can become volatile and even freeze when fear, anxiety, vengeance or other emotions come into play.  If a buyer looses confidence he may withdraw from the market or become irrational in his behavior.  Sellers on the other hand may still need to sell or chose to because they do not think that the picture will improve.  In these instances, prices drop.   When many buyers and sellers behave in a similar fashion,  a herd mentality can occur and once the selling wave starts, it can be really hard to stop.   Yet opportunities abound in all markets.  Warren Buffet has long said "Be greedy when others are fearful" and "Be fearful when others are greedy".

Investor Benjamin Graham, Warren Buffet's personal mentor, published "Should Rich but Losing Corporations Be Liquidated?" following the Great Depression. Graham calculated that more than 1 out of every 12 companies on the New York Stock Exchange, were selling for less than the value of the cash and marketable securities on their balance sheets. An investor could theoretically take over, empty out the cash registers and the bank accounts, and own the remaining business for free.  Today, nearly 1/3 of all stocks tracked by Standard & Poor's Compustat are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly 1 in 10 stocks trade below the value of their per-share holdings of cash -- an even greater proportion than Graham found in 1932. This appears to be a great buying opportunity if you have the cash.  After sitting on the sidelines with ample cash, Warren Buffet has recently invested $3 billion in Goldman Sachs and another $3 billion in General Electric in spite of market trends.

There could be similar opportunities in the residential real estate market. In the short run, qualified buyers are better positioned that they have been in nearly 10 years to acquire a home where they want at the price they want. Plus with interest rates remaining low, the long-term cost will not be as great either.  Another potential long-term advantage, is that home prices tend to rise with commodity prices.   Prices of commodities like copper, steel and cement are commanding sky-high prices and the Producer Price Index is up 39% over the last 5 years. Using this logic, one could conclude that the increasing costs of raw materials will eventually push home prices higher. As housing is the ultimate commodity made up of materials like steel, wood and copper that combined with the cost of land and labor become a store of value for every commodity that has gone into a home's construction.  This tangible quality makes it a fundamentally different kind of investment than a stock or a bond.  It is a great way for you to stay ahead of inflation, plus you have the enjoyment of living in the home and creating lasting memories with your loved ones!

Wishing you all the best during these trying times. Hope this makes some of what is happening a little clearer.   Please let me know what you think.

PS - The stock market was up over 900 points today (+11%)