Friday, June 19, 2009

Broker Buzz: 6 Forces “Making” the Los Angeles Real Estate Market

Median Sale Price Southern CaliforniaYesterday, the Los Angeles Times published its first article in years that had positive news about the Southern California real estate market.

Entitled “Home prices edge up for the 1st time in nearly 2 years”, the article celebrated the fact that in May, home prices in the five-county Southern California region edged up from $247,000 to $249,000.

But what does this increase in median price really mean? That the housing market has finally hit bottom? That prices are going up? That homes of all types are selling? That the housing crisis is over? Most likely, none of these.

Don’t get me wrong -- the increase in median home price should be greeted with as much fanfare as the Lakers’ win over Orlando. Any upward movement in price is good news – and should be greeted as such.

As a Broker I’ve seen first-hand how difficult it is to operate in a declining market where sellers and buyers find themselves on opposite sides of a price chasm which widens with each day.

But to understand what’s happening in the Los Angeles area, we must dig beneath the surface. Let’s take a look at the numbers:

Southern California's median home price rose slightly in May for the first time in nearly two years.

The $249,000 median price in May was up less than 1% from April's $247,000 figure, and marked the fifth-straight month the median has held at roughly $250,000, according to San Diego-based MDA DataQuick.

Homes priced at $500,000 and above accounted for 17% of Southland home sales in May, up from 15% in April, DataQuick reported.

In May, foreclosed homes accounted for 50% of sales, down from 54% in April and a peak of 57% in February.

May's price was a 51% drop from that peak, and it was down 33% from the May 2008 median price of $370,000.

The median home price in May essentially matched April's figure in Los Angeles ($300,000), Riverside ($180,000) and San Bernardino ($137,000) counties.

In brief, Los Angeles County prices are flat. In the area, fewer sales are foreclosures, more sales are over $500,000. How can we draw meaningful conclusions about trends in the market from Downtown to the Beach? What characterizes this “market”?

1. The “market” is hyperlocal. Palmdale doesn’t have much to do with Beverly Hills, Glendale or Glendora. From the median sale price Southern California region, you can’t evaluate what’s happening in your neighborhood. Block by block, street by street, neighborhood by neighborhood, different market forces come into play. Although there are many high-end homeowners in distress, the Santa Monica home market isn’t influenced by the sub-prime crisis the way it may be in the Antelope Valley.

2. The “market” is active under $900,000. What’s selling in Los Angeles right now? Properties priced under $900,000. Why? Because buyers can finance them with a conforming loan (under $729,750 for a single family home in Los Angeles County). Loan terms are excellent: interest rates were up until recently at 50-year lows (below 5%), and with federally-backed FHA loans, buyers can put down as little as 3.5% – with FICO scores as low as 620. Furthermore, the federal government has sweetened the deal with a first-time buyer credit of $8,000 (federal) and a new construction credit of $10,000 (California).

3. The “market” is slow over $900,000. Consider the purchase of home with a jumbo loan (over $729,750). Downpayment requirements are typically 30% of the purchase price – with excellent credit. Interest rates have been in the high 6% range. And buyers must have documentable income. The unavailability of loans has had a huge impact on homes priced $900,000 and above. The trend seems to be reversing, with increased purchases on the high end. However, there is still a two- or three-year backlog of homes priced $2 million and above in Westside or Hollywood Hills neighborhoods.

4. The “market” is molded by macroeconomic trends. Homebuying is about jobs, wages, the stock market and consumer confidence. Unless individuals have disposable income and reserves to make a home purchase, they will continue to rent or will stay in their current home. Job losses, salary declines and the recent pummeling in the stock market are shaping the market in a big way.

5. The “market” is lumpy, inefficient and irrational. People often talk about the real estate market like the stock market. Both go up and go down, peak, decline and hit bottom. But you can’t sell a home with the push of a button. You can’t live in stock. Both areas are prone to speculation, but people don’t buy stock for emotional reasons the way they may buy a home.

6. You are “the market”. Your decision to buy or sell a home, your attitude about buying or selling a home, your conversations about buying or selling a home is “the market”. “The market” is the collective mind-meld of buyers and sellers making decisions about buying and selling.

You’re reading this blog about real estate – what are your attitudes about buying and selling today?