LA South Bay Real Estate in a Post-Pandemic World

It’s official. We’re now in the post-pandemic phase. So what’s the real scoop on local real estate? Follow along as we review the May statistics and tease you with a little early June data.

Putting Statistics in Perspective

The first thing we want to do is remind everyone that in the first three months of the pandemic, the number of sales in the Los Angeles South Bay had dropped to approximately 50% of 2019 activity. So, when we say sales are up 100% from last year, what we’re really saying is that sales volume is pretty much back to normal. That is, “normal” in 2019.

Similarly, the fact all areas show higher sales prices than 2020 is relatively meaningless. We can only look to recent months or pre-pandemic statistics for market indications. We’ll get into more detail below, but remember that comparisons of 2020 to the Great Recession can be misleading.

Median Price Climbs: Everywhere

The median price in May of this year is shown in the chart below. Because 2020 wasn’t very meaningful in terms of normal real estate activity, we pulled up 2019 statistics. Respectively, the median price is up from 2019 by 25% at the Beach, 20% in the Harbor, 18% in PV and 16% Inland. That’s more than a healthy increase in prices for two years of appreciation. We can see from the charts there was some rapid inflation the first quarter of the year. More so at the Beach and in PV than elsewhere. Probably we’ll see some of that taken back as the market cools.

What we’re not talking about is what part of the market is selling? High? Low? Let’s look at the sales volume to find the hot spot in the market.

Sales Volume Starting to Smooth

The number of home sales per month across the South Bay has just about returned to normal. Sales in May 2020 were off by 45%-55% across the board from 2019. Now, comparing May of 2021 to 2019 we find that the Harbor cities have had virtually zero change in the number of sales. By contrast, the Beach shows 2% more sales, the Inland cities 5% growth in sales, and Palos Verdes 19% growth.

Two things stand out for me. The two year lack of growth in sales volume for the Harbor cities tells me the pandemic hit those cities the hardest. The recovery there will lag behind the rest of the South Bay offering some opportunity for those ready to buy now.

The second hot spot is 19% growth in sales volume on the Palos Verdes peninsula. Looking over the actual sales, I’ve concluded it’s simply that there are far fewer homes on the Hill, so minor change in sales statistics can look like a major fluctuation.

Total Sales Down Across the South Bay

Our chart below shows the total sales dollars climbing out of a winter slowdown that was accentuated by the pandemic. All areas rose uniformly in March and April of this year ending in May just about where they were the prior fall. June results will give us a better picture, but we expect a gradual leveling as inventories grow.

As of now, activity indicates that the peak of recovery from the pandemic is passing by us right now. Things should level out over the summer leaving us with a statistically somewhat normal sales year.

South Bay Summary

Across the South Bay we’re seeing a moderation of the wide swings and extreme numbers generated throughout the pandemic. For example, monthly March sales volume for all areas was up 57% over the prior month. By the end of April volume was only up by 6%. For May it was down -8%. Taking a peek at sales to date in June, it should be at -2% next month.

What we’re watching is the panic leaving the marketplace and stability returning. Pent-up demand earlier this year pushed property prices up as much as 14% on a month-to-month basis. While still steep, the high for May was 10%. Our forecast for June price increases in SoBay is a high of 9%, with a low of 0%.

At the moment there is little indication prices will move into negative territory beyond losing some of the rapid inflation of recent months. That may change as moratoriums on eviction and foreclosure dissipate. Currently slated to end September 30, 2021, some fear that the end of local moratoriums will release a flood of foreclosures and cause prices to plummet.

Locally, Los Angeles county and city have offered several alternative plans to minimize the impact. In some cases the entire debt may be covered by combined State, Federal and local government funds, completely rescuing both the tenant and the landlord from housing loss. As a result, many in the industry expect prices and activity levels to return to approximately where they were prior to the pandemic.

We believe the level of inventory will be nearly normal by this fall. Already we see offer prices declining and Average Days On Market (ADOM) stretching past 30 days for 15-20% of available homes. Following the usual slowdown for the holiday season, we predict a robust January in 2022 as the pandemic becomes a fading memory.

Judging from the downturn in May, we’re now returning to a more normal market. So, logically speaking, homes listed in June and later should come on the market at slightly lower prices. Our expectation is for area median sales to fall back by approximately $175K in the Beach and Harbor areas, with a decline of about $100K for PV and Inland area sales.

Cover photo by Martin Sanchez on Unsplash

2020/2021 Housing Summary & Forecast for the South Bay

The year 2020 was very nearly the least predictable time in local real estate history. Seriously, what other time have we experienced massive unemployment and rising home prices simultaneously? All indications suggest 2021 will be a tad more conventional.

Home Values Grew in 2020

Despite “turmoil” being the watchword of 2020, the year produced some remarkable results in the Los Angeles South Bay. The Beach cities recorded a 28% increase in median price for December compared to December 2019. The cost of building didn’t rise at that rate, so clearly there was a heavy investment in anticipated value. As the chart below shows, Even with all the up and down motion, during the final half of the year buyers & investors were betting heavily that things were headed for calmer, more profitable waters.

That activity was spread across the spectrum of prices, as you can see tracing the community lines shown above.

Note that May reflects the sudden market contraction from the Covid announcement the beginning of March. This is a rare moment when the chart shows how much delay there is between signing a purchase agreement, and closing escrow. In April, 30 days after the announcement of a Covid pandemic, escrows were starting to drop off and were at or slightly down from March closings. By May, 60 days later, the number of closed sales had fallen by ~50K units in each of the four market areas. It took the classic 45 day escrow period to show that the pandemic took away nearly 30% of the business in the local real estate market.

How Many Sales? Where? Why?

While the Beach and the Harbor areas fought it out for the highest total sales dollars throughout the year, the Harbor clearly enjoyed the highest number of units sold every month as we see in the chart below. While the number of sales climbed across the South Bay, at the end of the year it was the Harbor with the largest increase in sales. Starting 2020 with 315 sales in January, the number climbed consistently through the year to a strong finish with 476 in December.

Two factors play into the volume of Harbor area sales. Part is the sheer number of homes in what is physically a larger area. The more interesting aspect of Harbor area sales increasing while the rest are relatively flat is the reason.

Homes in the Harbor cities are lowest priced in the South Bay by about $100K. Interest rates are currently running below 3%, and it’s in the lowest price points of the market where low interest rates are most effective. The low rates mean more buyers can afford to purchase at the same price point, on the same income stream. The larger number of buyers competing creates multiple offers and drives the price higher, which is a major factor pushing the market today. If we are to believe the Federal Reserve Bank, current interest rates are expected to remain historically low for the foreseeable future. The demand should hang around for just about as long.

Different Strokes for Different Folks

In the chart below, it’s interesting to note that the Inland and Harbor cities progress across the months with stability and only a slight change from beginning to end. At the same time, the Beach and PV cities gyrate through the year, sometimes with $200K jumps from one month to the next. One is tempted to say it’s the comparative size of the market area, but the Inland cities have very nearly the same number of homes as the Beach cities.

This difference is often thought of as reflecting the nature of the home buyer in these communities. Looking at stereotypes, it’s easy to imagine an owner in Torrance or Long Beach, for example, who buys in their early twenties and doesn’t move again until retirement–very stable. In the Beach and PV price ranges, where a home is often considered more as an investment vehicle than a residence, it’s easy to see where market forces can result in sudden changes to where one lives.

Moving From 2020 to 2021

The beginning of 2021 marked the end of some of the more impactful aspects of 2020. A ferocious political battle is ended, and a new Federal administration looks inclined to use “all the available tools” to bring our collapsed economy back on line quickly. Time will tell how much that helps us here in the South Bay.

The ever-changing story of the international pandemic may be coming to an end with the approval of multiple vaccines for Covid-19. Rumors still abound as to the actual efficacy of the drugs, and rates of infection are still climbing dramatically, especially here in Los Angeles county. It will end, whether sooner or later. The big question today is if the price increases we’ve seen as a result of bidding wars will sustain as the pandemic eases and government assistance is strengthened.

Looking at December activity, we see big increases in sales volume for Month over Month (M-M) and Year over Year (Y-Y) statistics. A continuance of this trend could make 2021 an exceptional year for real estate in the South Bay.

Median prices show a large variation from area to area, and importantly show a slowdown in the climbing prices. Y-Y price growth was strong in December, reflecting the high demand at current interest rates. However, M-M prices predominantly showed a reversal in price growth. Some of the slowdown could be seasonal, but if you’ve been reading our blog posts you already know there’s a growing backlog of homes poised on the edge of foreclosure. The only thing preventing a mass of short sale and foreclosure properties on the market is the forbearance rules put in place to prevent a sudden jump in homelessness during the pandemic.

Beach

December activity in Beach cities showed insane growth for M-M and Y-Y sales, both in the the number of sales, and especially in the prices of sold homes.

As if annual growth of 28% in median price wasn’t crazy enough, look at that monthly increase of 18.2%! Annualized, that would be over 114% growth! Statistics with this much reach can only be attributed to a profound belief that prices will continue to increase at a similar rate. Or, continue until the property can be flipped, that is.

Palos Verdes

Palos Verdes in December was almost a reverse image of the Beach cities. The explosive growth in PV came in the number of home sales which shot up 18%, bringing the annual number to a phenomenal 42% growth in volume for the year.

Median prices in PV showed modest increases, ending the year only slightly higher than the Fed’s target growth rate. The shift from positive growth to shrinkage in December hints at an overall market trending toward lower median sales prices.

A side note: Homes on the hill have not maintained the “investment quality” image of those on the Beach. PV was once considered the place to buy a home from a prestige angle and from an investment perspective. New money moving into the Beach cities has diminished that role in recent years. I predict a rebirth of property values in the Palos Verdes cities over the next few years, which will make having a home on the peninsula key in local business and society.

Inland

For the most part, Inland homes are family homes. They are the places with hoops in the driveway and lemonade stands at the sidewalk. Investment here is a long term concept.

So, when we see over 20% M-M growth in number of homes sold accompanied by nearly 30% Y-Y, we’re seeing market movement rather than shifts in investment strategy. As it is throughout South Bay, the cause of that movement appears to be the sub-3% interest rate which enlarged the entry level market segment. More buyers flooding in created bidding wars and drove sales and prices higher.

Compared to last December, median prices in the Inland cities were up 5.5%, peaking at $733K. That’s a good healthy increase, only slightly above the expected Consumer Price Index (CPI) numbers. Caution though–the M-M median is down 2.3%. It could be a momentary blip; a result of the holiday season, or the Covid surge. That year end drop may also indicate that the $750K median from November is the market ceiling.

Harbor

In addition to the largest home sales volume in the South Bay, the Harbor area boasts the most entry level homes. There’s a good deal of lifestyle overlap with the Inland cities, to be sure. The Harbor dramatically displays the same message we see across most of the South Bay. Everything was going strong until December, then buyers put the brakes on.

Today’s environment in the Harbor points the direction to the future. Sales here had a stronger growth than the Inland cities over the months leading up to December, and show a more pronounced decline in December.

Some of the slowdown will ultimately prove to be driven by the holiday, and some the election, and some by the pandemic. Even then, it’s hard to avoid the feeling that some of the decline is a recession held back by a thin wall of regulations temporarily preventing foreclosure and eviction.

We can certainly hope for better news from the new year, but as of the end of 2020 many of our indicators are calling for a deeper recession in coming months. It’s possible. Somewhere in the range of 20%-40% of homeowners are in forbearance now, and a roughly equivalent number of tenants are building up deferred rent payments. If adequate measures are taken to protect both sides of the debt, all of this will amount to footnote in history. Otherwise, it’ll be the second worldwide recession in this generation.

Photo ‘Work From Home’ by Nelly Antoniadou on Unsplash