Thursday, March 12, 2009

Who Wants to Be a Millionaire? - Part 1

Investors of all stripes have been whipsawed by two bubbles that emerged this decade: the Tech Stock bubble that peaked in 2000 and the housing bubble that burst in 2006 - 8. Stocks, bonds, homes and commercial property, seemingly in lock step, all declined in value.

After the current rout, investors are left scratching their heads wondering how to move forward in this uncertain environment. Should they dollar-cost-average into mutual funds? Buy stock indexes? Buy a home? Invest in a multi-unit property?

The daily news reminds us of the bleak stock market. The Dow Jones Industrial Average and the S & P 500 have fallen more than 50% in less than two years and are now at levels not seen since 1997.

But how has a home in Los Angeles performed as an asset? What types of yearly returns are homeowners getting on their investment?

This analysis looks at five neighborhoods – Venice, Pacific Palisades, Beverly Hills, West Hollywood and Los Feliz – a little bit of the Westside, a little bit of the East Side. The trend is uniform across these neighborhoods – outsized price increases over time.

Venice Los Feliz West Hollywood Home Price Increase
Here we see the median sale price of homes in Venice, Los Feliz and West Hollywood from 1996 to 2008. In 1996 in these neighborhoods, the average home was $250,000 – 325,000. Twelve years later, the median sale price in these neighborhoods had risen to $900,000 - $1,150,000.

Home values began a slow, steady climb in the late 1990s and then began to accelerate, rising rapidly in 2003 and finally cresting in 2006, and then ebbing and declining in 2007 to 2008 (although the Venice median sale price was unchanged from 2007 to 2008.)

The net returns are remarkable. In this twelve-year period, Venice prices increased 365%, Los Feliz values increased 175%, and West Hollywood prices increased 311%.

Venice West Hollywood Los Feliz Median Home Price
Two Westside neighborhoods show similar trends. The Beverly Hills median home price nearly quadrupled from $909,000 to $3,495,000 from 1996 to 2008. The median Pacific Palisades home price rose from $640,000 in 1996 to $2,225,000 in 2008, a 247% increase.

In spite of the recent market gyrations, long-term returns are impressive by any measure.

Los Angeles House Prices vs Stock Market
Over a twelve-year period from 1996 - 2008, while the S & P 500 sputtered along recording 2.7% appreciation per year, an investment in a Los Angeles home in these neighborhoods (without even considering leverage), was providing returns three and four times greater.

There has been much ballyhooing about the woes of owning real estate. What gets lost in the argument is that for those who “buy and hold” in Los Angeles – and who ride out the inevitable real estate cycles – returns can be impressive. Those renting should view the current downturn as an opportunity to buy what has proven in recent times to be a solid investment: a little piece of LA.