Monday, February 2, 2009

"Fear Not" Santa Monica, Beverly Hills and Malibu

Beach Santa Monica California

Well-heeled Westside Angelenos were awakened this morning with dire headlines about their local real estate market. On their doorsteps, denizens of this high-end market read the grim LA Times headline: "Westside Housing Goes South."

The story goes -- as real estate prices plummeted in far-flung SoCal regions -- conversations at Santa Monica sushi bars and Beverly Hills steak houses concerned only multiple offers and escalating prices.

No longer, says the local Paper of record. The article reports that home prices "in Beverly Hills, Santa Monica and Malibu ... finally tanked at the end of the year, losing between 26% and 30% of their value in just a few months".

Now, before spitting out their mouthfuls of hamachi-shisho leaf roll or petit filet mignon sauce homard, Westsiders should take a deep breath and analyze the truth behind the numbers.

The Los Angeles Times' statistics determine the 'median' by sorting the sales in a given period by price and picking the middle value. The true "median" home price would involve assessing the value of every property in that market and selecting the middle value.

Let's analyze the stats of a fictional Santa Monica real estate market. In 1st quarter 2007, in a "hotter" real estate market with loans of all values being underwritten, there were 7 sales at the following prices:

- $8 million
- $6 million
- $3 million
- $2.5 million
- $2 million
- $1.8 million
- $1.4 million

Median home price: $2.5 million.

In the 4th quarter 2008, the market has cooled substantially. Loans of over $625,000 are in the 7+% range -- and are only obtainable with fully-documented income (how many Westsiders are 'salaried' employees?) With the ongoing "worst financial crisis since the Great Depression", only the most motivated buyers are buying (the speculators are gone). There are only 5 sales that quarter at the following prices:

$6 million
$2.5 million
$1.5 million
$1.2 million
$1 million

The headlines read: "Santa Monica median price tumbles 40%. Sales volume plummets 29%"

What's happening is that sellers at the high end are not selling (most are not motivated to do so, why sell in a time like this?) Buyers who can benefit from low-interest (jumbo-conforming) loans are buying at the lowest end of the price range.

The truth is, buyers are still clamoring to purchase any property in Santa Monica. First-time buyers or "move-up" buyers from less pricey neighborhoods are fulfilling their dreams and moving into this community during this down market.

"Move up" buyers in the $1.5 million+ range can't get loans and are staying put -- for now.

Individual homes have not declined 40% in value. Sale prices have skewed to the lower end. The Los Angeles Times is making the alleged "26%" to "30%" declines sound like the S & P rout -- creating (false) news and contributing to the vogue of financial fear and panic.

Granted, some Westsiders may find themselves in distress after recent stock market gyrations. Some may be forced to sell, and yes, their homes will sell at lower prices.

The stats generated by the Los Angeles Times, the Case-Schiller Index, etc. need to be examined in greater detail before being taken as mantra. Real estate is hyper-local, and local values must be analyzed hyper-critically.

Jamie Adner