Low-Income Housing Actually Increases Property Values

Much of the slow progress of zoning reform can be attributed to Not-in-my-backyard advocates, or NIMBYs for short. This refers to the homeowners that are resistant to reform because they believe it will decrease their home’s value, thus reducing their future sale profit. One big target for NIMBYs is low-income housing. It’s true that low-income housing is probably less valuable itself than the NIMBYs’ homes; however, to assume that it would drag down the value of nearby homes is simply inaccurate.

In fact, the addition of low-income housing actually increases the value of mid- and high-tier housing within a half mile radius by about 4%. There are a few different reasons for this. First, low-income housing in mid- or high-income areas generally also translates to multi-family residences. Higher density housing means an uptick in population density, which also usually increases home values. In addition, new multi-family housing construction is most often replacing either tear-downs or vacant lots. The area’s average value would actually increase just with that new construction alone, without any change to nearby home values. Finally, in areas that are already experiencing price growth, low-income housing further accelerates it by increasing existing high demand in that area.

Photo by Philippe Gauthier on Unsplash

More: https://journal.firsttuesday.us/nimbys-judge-low-income-housing-by-its-sound-and-judge-wrong/88650/

Why More Construction Doesn’t Always Mean More Homes

The housing shortage we’re currently experiencing has been attributed in large part to lack of construction. There’s a lot more to the story, though. First of all, the slow construction doesn’t even account for all of our housing shortage — there are other factors such as increasing population, a rapidly changing housing market, and vacant homes not for sale or rent. As far as construction, the problem isn’t merely a lack of it. It’s true that construction dropped significantly during the pandemic, but it’s mostly recovered now. The actual issue is that the homes being constructed are frequently not adding additional units.

The statistics you see when looking at construction starts account for all types of construction. However, much of the construction that’s occurring right now isn’t on vacant land. In 2021, 76% of builders reported that the number of available lots is low to very low. In California, a lot of this has to do with zoning laws. Many areas aren’t zoned for multi-family residences or even for residences at all. Even in areas that allow condos or apartment buildings, single-family residences (SFRs) are in higher demand in California. Building SFRs in the right place is also difficult. 28% of SFR construction is reliant on lots called infill sites. While these are vacant land, which is good, they’re in areas that already have a high density of housing and are less in need of additional construction. A further 20% of SFR construction starts come after teardowns, merely replacing one SFR with another SFR.

Photo by Becca Tapert on Unsplash

More: https://journal.firsttuesday.us/new-construction-doesnt-always-mean-more-homes-to-go-around/88622/

Is ‘Fair Market Rent’ Truly Fair?

One of the statistics used to track health of the rental market is Fair Market Rent, or FMR. By the name alone, one might think FMR is a normative measure that suggests what rent prices should be. Of course, such a measurement would have to take into account construction costs and home prices, but it would also have to take into account the tenant’s income. As a renter, you may be looking for rent prices at or below FMR thinking anything above that is simply a bad deal. But is it actually fair to anyone? Is it even a normative measure at all?

The first question that needs to be answered, though, is: What really is FMR? Well, at its core, it’s a series of vague estimates. The Department of Housing and Urban Development (HUD) calculates FMR on a per-metro basis for five separate categories of homes based on number of bedrooms. Homes with more than 4 bedrooms are excluded entirely. In reality, though, only one category is actually calculated. This is the category for the average home size of 2 bedrooms. The median rent price of 2 bedroom homes, excluding outliers, is averaged over a multi-year period, then the value is multiplied by various ratios to determine FMR for homes of different bedroom counts. Note that this calculation doesn’t factor in either construction costs or income, just rent price, although the price itself generally is indirectly related to constructed costs. This means that if it’s fair to anyone at all, it can only possibly be whoever bought the home. So, no, looking for a rental at or below FMR has no bearing on whether it’s fair to the tenant.

Does FMR perhaps still have some use, though? Though it’s a multi-year average, it’s based on actual rent prices, so maybe it be used to estimate current rent values. It’s a decent assumption, but unfortunately, it’s not actually very good at estimating rent prices. If you’re looking at FMR when considering whether to move to an area, don’t be surprised if your actual rent is far different, especially for multi-bedroom homes. Multi-year averages can’t very easily take into account economic cycles, and broad examinations of metro areas can significantly skew the numbers. Another issue the calculation faces is the notion of rent control. Rent control doesn’t generally happen in an entire metro, so the prices of rent-controlled units are significantly more likely to be taken as outliers and completely dropped. Even if they aren’t dropped, they will skew the median.

For a specific example, let’s take the local area — the Los Angeles metro. This metro area is rather large, and includes multiple cities of highly varied income levels. Despite this, the FMR for the Los Angeles metro is actually lower in every single category than that of the City of Los Angeles. The LA metro FMR for a studio is $1631, quite a bit lower than than actual median rent price for a studio in Los Angeles of $2100, between mid-June and mid-December. The difference only gets larger the bigger the home. The metro’s FMR for 4 bedroom homes is $3377. But the actual median rent of a 4+ bedroom house in LA is $8995, over 2.5 times as much. Considering homes larger than 4 bedrooms to be outliers, as the FMR criteria do, doesn’t do much to help the case for FMR, as the actual median rent is still $7900. The disparity is even greater for higher income regions of the metro, such as the Beach Cities — Manhattan Beach, Hermosa Beach, Redondo Beach, and El Segundo — with a studio median of $2495 and a 4+ bedroom median of $9175. This suggests that high-income units are being excluded as outliers, which isn’t particularly useful if you’re looking to rent in a place such as Manhattan Beach.

Why is FMR lower even for smaller homes, though? Well, there may be a valid reason for that. The actual median data presented here is calculated using information from a Multiple Listing Service (MLS), which is a service used by real estate agents to upload and search listings. Because this is an agent service, only properties listed by an agent will appear in the list. For lower income rental properties, the owner is less likely to use an agent, because they may feel it’s not worth the expense with a small revenue. But the HUD can access that information, which could drag the median down for smaller homes. So, the FMR may be useful to a tenant planning to rent a low-income property. However, remember that the studio FMR isn’t directly assessed, but rather calculated as a ratio of 2-bedroom FMR, so if FMR is more consistent with real values for studio rentals, this is at least partially coincidental and could mean either the 2-bedroom FMR is low or the ratio is off. Moreover, off-market rentals do very little to explain any disparity for larger homes, and especially not such a large disparity.

Photo by Tingey Injury Law Firm on Unsplash

More: https://constructioncoverage.com/research/cities-with-largest-increase-in-fair-market-rent-since-pre-covid

2022 South Bay Real Estate Wrap

We’re taking a little different approach with this post. Because it’s not only the end of the month, but the end of the year, we’re doing a quick summary of the monthly data, followed by some more detailed discussion of how the individual areas have fared over the past year. We’ll even try some crystal gazing while we walk through the annual data for each neighborhood.

This is a great place to bring in our At A Glance table. It displays in just a few numbers how all the areas of the LA South Bay are doing compared to last month, and compared to this same month last year.

Looking at December vs November, once again the percentage of unsold homes has increased and the number of homes sold below last month’s median price has also marginally increased. More importantly, on a year over year basis the amount of red ink is even greater. Losses in number of sales and in the value of those sales is clearly growing.

Despite all the negative numbers, there may be a light in the future. For the past couple weeks we have observed a softening in the mortgage interest rates. If that turns out to be more than a mid-winter teaser rate, this spring may shine a bit brighter than previously anticipated. We’re not holding our breath though. Recent speeches from Federal Reserve Bank leaders have stated a clear intent to “hold the line” on driving down inflation with mortgage interest rate increases.

Beach Cities Home Sales Down 47%

Compared to 2021, fewer homes have been sold in the Beach Cities every month of 2022 than the same month the previous year. January started the trend with a decline of 28% versus the number of homes sold in 2021. That difference continued to increase all year. By December sales were 47% lower than the previous December.

As the interest rates climbed, the number of home sales dropped. Looking at the total sales volume for the year, 35% fewer homes were sold in the Beach area during 2022, than were sold in 2021. Of course, 2020 and 2021 were the highly erratic pandemic years. So, looking into sales at the Beach for the last few years we find the number of homes sold has already dropped 21% below the number sold during 2019, our last normal economic year. Effectively, the Covid-19 pandemic created. Then erased any gains of the past three years at the Beach.

Homes sold in: 2019 – 1572 (market normal)
2020 – 1572 (market direction down six months, up six months)
2021 – 1910 (market direction down two months, up ten months)
2022 – 1242 (market direction down twelve months)

While the Beach Cities suffered the largest drop in sales volume for 2022, the South Bay as a whole has also dropped below the sales figures for 2019.

Sales Volume Down Across the Board

All areas started the 2022 year down from the prior month and down from the same month in the prior year. February results were mixed with the Harbor and Palos Verdes areas showing stronger results. March sales jumped up as buyers realized the rising interest rates were about to price them out of the market. From April on, sales volume across the South Bay was trending down on a year over year basis.

In sheer number of sales, the Harbor area fell the farthest. In 2021 annual sales 5292 homes were sold in the Harbor cities, while in 2022 the number dropped to 4017. That amounted to only a 24% decrease compared to the 35% annual collapse in the Beach areas.

On a month to prior month measure, sales declined six months out of nine across the South Bay. Occasionally one or two areas would post a positive sales month, but in the end, 2022 showed a 26% drop in sales volume from 2021 across the South Bay.

Sales Dollars Diving

With the number of sales dropping in a range of 25% to 50% it’s not a surprise to discover the total dollar value of those sales has taken a dive. As the chart below shows, the first quarter of the year was generally positive, then reality set in and the buyers started walking away. The rest of the year was little more than a measure of the recession.

Monthly revenue in the Harbor area alone dropped $200 million between March and December. The Beach cities and the Palos Verdes area lost about $150 million a month in sales value. Inland area sales for the same period are off approximately $75 million.

One should consider these declines in the context of the pandemic. Early on, while much of the world was in lockdown, the government flooded the citizenry with easy money, hoping to keep the economy afloat. Mortgage interest rates were already at the bottom because the economy was just recovering from the last recession. The result was a real estate boom starting in summer of 2021, which continued until March of 2022.

The housing market is now in the “bust” part of the cycle and we anticipate it to last through 2023. Gross sales across the South Bay jumped up from $8 billion in 2019 to $12 billion in 2021. That’s clearly unsustainable, especially from the perspective of a Federal Reserve System which is looking for 2% growth. So far the market decline has taken back about 23% of that $4 billion bubble.

Median Price Is Slipping

There is a lull between when buyers stop buying and prices start dropping. Most sellers need to see headlines about the market change before they make a price reduction. Median prices started to slide in August at the Beach and on PV Hill. The year ended with most areas having experienced multiple monthly declines in the median price. Despite that, median prices still exceeded those of 2021 by roughly 7%.

Comparing 2022 to 2019 better shows the inflation factor. Generally speaking the South Bay ended the year with median prices 30%-35% higher than they were in 2019.

The Palos Verdes market is comparatively small, thus is typically volatile on a monthly basis. The yellow line on the chart above shows the range of high and low median prices. Since mid-year the median price has drifted down and merged into the downward trend.

Year End Versus 2019

We’ve been comparing 2022 to 2019 all year because real estate sales during the height of the pandemic were so out of the ordinary, regular year over year comparisons yielded untenable results. The chart below depicts the current year total sales for the South Bay compared to sales from 2019.

Tracking the blue line, one can see where sales dropped below 2019 values in August, recovered in September, then slipped below again for the fourth quarter of the year. December sales didn’t fall quite as far as projected, but still came in about $200 million less than December of 2019.

The end of the year reflected accumulated sales of approximately $9.3 billion. That would mean 2022 total dollar sales come in at $1.3 billion above the $8 billion total dollar value sold in 2019. Across the South Bay that was an 18% increase.

Broken out by community, we found total dollars sold in the Beach cities to be 4% above 2019, followed by the Inland area with a 20% increase. Harbor came in next with a 21% increase and the PV Hill with a 35% increase.

We expect both sales volume and median price to continue declining through most, if not all, of 2023. By mid-year of 2024 there should be evidence of the beginnings of a recovery.

Disclosures:

The areas are:
Beach: includes the cities of El Segundo, Manhattan Beach, Hermosa Beach and Redondo Beach;
PV Hill: includes the cities of Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills and Rolling Hills Estates;
Harbor: includes the cities of San Pedro, Long Beach, Wilmington, Harbor City and Carson;
Inland: includes the cities of Torrance, Gardena and Lomita.

Photo by T Narr on Unsplash

End Of Year Real Estate Report For 2022

Data from December 2022 shows us that home prices in California are unquestionably going back down. December 2022’s median home price of $774,580 was just barely below November 2022’s median price, only by 0.4%. This isn’t necessarily a trend, but what is a trend is that it’s 2.8% below prices at the end of 2021. Home prices are down in every major region of California, and across both single-family residences and condos. However, all regions except for the San Francisco Bay Area had at least one county experience price growth.

The far northern regions of California had the most notable shifts. Year-over-year, prices are down a whopping 41.8% in Lassen County. Granted, this isn’t a massive dollar value given that Lassen County is the least expensive county in the state, with a median home price of just $170,000 in December 2022. Even so, it was actually the third cheapest at the end of 2021 — both Del Norte County and Siskiyou County were cheaper in December 2021, but both actually experienced price growth this past year. In fact, Del Norte was the county that had the most significant price growth at 13.8%. Del Norte and Siskiyou counties both border Oregon, and Lassen County is just south of Modoc County, which also borders Oregon but is not included in the rankings.

Photo by Bank Phrom on Unsplash

More: https://www.car.org/aboutus/mediacenter/newsreleases/2023-News-Releases/december2022sales

Risk Of Overappraisal Increasing As Prices Slow

When prices are changing rapidly — whether they’re going up or down — there’s always a risk of appraisers not being able to catch up. Most of the data available to appraisers is at least a week old, usually a few weeks. Most of the time, this is good enough, but not when price fluctuations are happening quicker than that. It’s expected that prices will be dropping rapidly throughout 2023 and 2024, which increases the risk of overappraisal. This is especially harmful to buyers who may end up paying more than the home’s actual value, immediately falling into negative equity. Lenders also want to avoid this, since they can incur losses when lending to a buyer who is suddenly in debt.

It’s not an issue that can be eliminated entirely, but luckily, there’s a way to at least mitigate it. In 2007, Fannie Mae encouraged appraisers to start including an assessment of the current market direction. Since 2009, oversight for appraisals is not handled by Fannie Mae but rather by appraisal management companies, but its still good advice. It means that even if the appraisal is off by a bit, involved parties will know in what direction the error is likely to be and can plan accordingly. Fannie Mae suggests that the assessment be limited to the neighborhood of the property in question and include data on recent price changes, average days-on-market, and inventory.

Photo by Paul Volkmer on Unsplash

More: https://journal.firsttuesday.us/the-danger-of-high-appraisals-in-a-spiraling-housing-market/88193/

Home Sales Volume Below Pre-Pandemic Seasonal Lows

Home sales volume tends to follow a similar seasonal pattern each year. It most often peaks in the middle of the year, falls off rapidly once winter arrives, and is at its lowest point the following January before restarting the cycle. The pandemic didn’t completely upset the pattern, but there were some noticeable shifts.

2020 could actually be described as having two cycles — one in the first quarter and one during the rest of the year. The first cycle peaked just before lockdowns in March, while the seasonal variance was on its upswing, before crashing down to the lowest point of the year in May. The peak of the second cycle was towards the end of the year. Home sales predictably shot up as the year entered June, but then continued their slight upward progression. The second cycle did reach bottom in January, as expected, but the low was significantly higher than prior years, as pent-up demand was still high.

The first half of 2021 seemed fairly normal. Home sales volume increased fairly steadily until the summer months. The peak was higher than normal, likely for the same reason the year started at a higher point. But the decline in the latter half of the year was quite a bit sharper than usual. The trough in January was lower than that in the beginning of the year, despite coming down from a higher point.

The shape of 2022 was rather odd. Like 2020, the peak was actually in March. But this time, it wasn’t because of a pandemic. It was the realization that we’re at the start of a downward cycle in the housing market overall. There was no steep increase just before June; it just continued to decline, though there was a minor upward bump later in the summer. The data is not yet available for December or January, but considering November’s home sales volume was already lower than the trough in January 2019 — the most recent trough of a normal cycle as well as the lowest value during a normal cycle in the past decade — and sales are continuing to decline, one can expect the numbers will be quite low.

Photo by Felipe Souza on Unsplash

More: https://journal.firsttuesday.us/california-home-sales-volume-ends-2022-in-a-free-fall/88172/

Build-To-Rent Market Rapidly Growing

A build-to-rent community is a community in which single-family homes are build solely for the purpose of renting them out. It isn’t a new concept, but it’s been under the radar for quite some time, comprising only 3% of the single-family residence (SFR) market. As just one of many changes in the type of demand brought in the wake of the pandemic, that number is now up to 12%.

Many people who transitioned to work-from-home needed more space for a home office. That meant looking for a larger home. For renters, that often wasn’t possible, since they were priced out of the homebuying market. But what if they could rent the type of home people normally would buy? In a build-to-rent community, they can. The SFRs in such communities have significantly more space than apartment units, and while they are certainly more expensive to rent than apartment units, rising home prices meant renters definitely couldn’t buy if they weren’t able to before. It’s definitely possible to find SFRs that are not in a build-to-rent community, but looking for such a community guarantees it, and also comes with community amenities.

Photo by Jason Jarrach on Unsplash

More: https://www.realtor.com/news/trends/those-who-cant-afford-a-single-family-house-are-turning-to-build-to-rent-communities/

More Counties Saw Declining Home Prices In November

Home prices have begun their decline after a period of incredibly high prices. More regions of California are following suit. In October, 22 of the 51 tracked counties (California has 58 counties) recorded a decline in median sale price from the prior year. In November, this increased to 33 counties. Only two broad regions of California experienced price growth from the prior year, the Central Coast, with an increase of a mere 0.1%, and the Inland Empire, with a 2.1% increase. In all regions, prices are down from October to November. Prices are declining for both single-family residences and condos.

The largest changes from November 2021 to November 2022 occurred in Napa County, an increase of 29.4%, and Mariposa county, a decrease of 27.2%. The biggest positive and negative changes between October and November 2022 occurred in Tehama County, an increase of 10.8%, and Santa Barbara County, a decrease of 28.3%. Home prices are not the only thing declining. Home sales volume has also dropped precipitously since November 2021, decreasing in every single county except Mendocino County, which saw an increase of 4.5%. Mendocino is also one of the counties in which prices are still increasing. In most counties, the decrease in sales volume hovered around 40-50%, though some were higher or lower. The decrease reached as much as 68.9% in San Benito County, but was only 12.5% in Glenn County.

Photo by GeoJango Maps on Unsplash

More: https://www.car.org/aboutus/mediacenter/newsreleases/2022releases/nov2022sales

The Recession Continues – November Home Sales

Home Sales Plunge

November saw the number of homes sold in the South Bay fall 12% from October totals. Sales volume has declined in seven of the eleven months on a month to month basis since the beginning of the year. Sales tipped up a modest 2% on Palos Verdes peninsula, while volume dropped 7% at the Harbor, 18% at the Beach and 24% in the Inland area.

Year over year sales look even more depressed with a 45% drop from 2021 sales across the South Bay. The Beach Cities led the plunge with a 50% fall, followed by the Harbor area at 46%. Palos Verdes and the Inland area brought up the rear with 35% and 41% respectively. The falloff in sales began with a 17% drop in January and has been increasingly negative since.

Because 2020 and 2021 were both significantly impacted by the coronavirus pandemic and the governmental response to it, 2019 is the most recent year with a normal business pattern. Comparing 2022 sales volume with 2019 provides the truest measure of the current recession. Overall, for the first 11 months of the year, the South Bay has experienced a 9% decline in sales compared to 2019.

Through the month of November, sales on the PV Hill have fared the best, showing a modest drop of 3% compared to the same time period in 2019. The Harbor and Inland areas which generally are entry level for the South Bay both fell back 8% for the same period. So far this year the Beach Area has suffered the largest declines with an 18% drop in number of sales versus 2019.

Annual Sales Dollars Off By $3.2 Billion

Comparing year-to-date sales of homes in the Los Angeles South Bay shows a drop in dollar value from 2021 to 2022 of over $3.2 billion. That represents an over-all decline of 22% in total dollars sold from the same 11-month period last year.

The Beach area has been the hardest hit so far with a drop of 34%. The PV Hill has dropped 29%, while the Harbor area has fallen 22%. The Inland area fared the best, only down 19% for the same 11 months.

On a month to month basis, the decline in sales accelerated from 7% in October to 18% in November. The Inland area which had flipped to a positive gain in October plummeted by 30% in November. Similarly the Beach which had been up 7% in October fell 25% in November. The Harbor and Hill areas were off by 8% and 11% respectively.

At this point year to date South Bay sales dollars for 2022 still exceed the total for 2019 by 22%. We expect the end of year numbers to be positive. However, with monthly sales figures shrinking by 30%-40%, we project 2023 to fall below 2019.

Median Price Shows Mixed Results

Statistically speaking, the Beach cities median price fell 8% from October to November. The reality is that the median in October was unusually high. Multiple sales of Strand property drove the median up 14% that month. The blue line on the chart below shows the one month blip and median prices dropping back to a steeper downward pace in November.

Palos Verdes was flat compared to the previous month. This is a rare event as one can see by the erratic yellow line on the chart. Because the physical area is smaller than the other geographical areas, the number of sales is smaller, and mathematically the sample size is smaller. Thus one or two outlier sales can create wide swings in the chart.

Similar to the Beach area, the median price dropped 7% in the Inland area. This decline follows two months of no change, preceded by three months of month over month negative median prices.

At the same time the Harbor area experienced a month to month increase of 2% in the median price. Researching this anomaly we discovered 11 new construction sales in Carson had been accumulated and posted simultaneously by the developer. It’s worth noting that Harbor area median prices have also been elevated to some extent by the new construction on Western Avenue in San Pedro.

From a year over year perspective, November median prices continued to fall in comparison to those of November 2021. The Harbor and PV Hill areas were down 5% and 2%, respectively. Median price in the Inland area dropped from positive 6% in October to negative .05% in November. The Beach cities remained positive with growth of 1% in November. That being in contrast to an unexpected growth of 20% last month caused by the sale of multiple Strand properties in Manhattan Beach.

Despite increasingly deep reductions in sales volume and in median price throughout this year, the median is still higher than it was in 2019. Palos Verdes home owners have fared the best with the current median price 40% above the November 2019 median. The Harbor area is still 34% higher and the Beach cities still maintain a 31% advantage. The Inland area has proven to be relatively stable throughout the pandemic and currently the median price is 27% above that of 2019 for the same 11 month period.

Year End Projection Updated

We’ve been comparing 2022 to 2019 all year because real estate sales during the height of the pandemic were so out of the ordinary, regular year over year comparisons yielded untenable results. The chart below depicts the current year total sales for the South Bay compared to sales from 2019.

Tracking the blue line, one can see where sales dropped below 2019 values in August, recovered in September, then slipped below again in October and November. Assuming the decline continues at the same rate, we are forecasting the December sales to drop another $75 million, or so.

The end of the year would then reflect accumulated sales of approximately $9.4 billion. That would mean 2022 total dollar sales come in at $1.4 billion above the $8 billion total dollar value sold in 2019. Across the South Bay that would be approximately an 18% increase.

Broken out by community, we forecast total dollars sold in the Beach cities to be 6% above 2019, followed by the Inland area with a 20% increase. Harbor comes in next with a 21% increase and the PV Hill with a 35% increase.

At a Glance

As 2022 draws to a close we find the final numbers for both sales volume and median price show the year to be rapidly declining from the final figures for 2021. However, the totals all remain positive. We expect December to continue the trend downward, though the year should end on a positive note.

With the number of units sold decreasing every month by 35% to 50%, and the median price now falling, 2023 should be firmly in the grip of the recession by mid-year.

Disclosures:

The areas are:
Beach: comprises the cities of El Segundo, Manhattan Beach, Hermosa Beach and Redondo Beach;
PV Hill: comprises the cities of Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills and Rolling Hills Estates;
Harbor: comprises the cities of San Pedro, Long Beach, Wilmington, Harbor City and Carson;
Inland: comprises the cities of Torrance, Gardena and Lomita.

Photo by Elias Shankaji on https://unsplash.com/

Despite GDP Growth, Real Estate Is Still On A Downturn

Although it was undeclared, we’ve been in a recession, which is usually indicated by two consecutive quarters of gross domestic product (GDP) loss. GDP has been going down, but now suddenly GDP is going back up. So does that mean we are out of the recession? Well, if it had ever been declared, it would be declared over — but that doesn’t mean it actually is, especially since it was never declared to begin with.

GDP is ultimately based on consumer spending. When consumers spend more, GDP goes up. This is indeed what happened. However, that isn’t necessarily a good thing. You may have read one of my posts from a few days ago about plummeting savings rates. As stated in that post, savings rates have recently dropped dramatically, which is normally an indicator of consumer confidence, but in this situation is actually a result of necessity due to increasing costs of living. In other words, inflation occurs, consumers must spend more to buy the products they need, therefore GDP goes up. We tend to think of GDP increases as good, but the reality is that it’s simply a mathematical value that can shift as a result of a variety of different factors, both positive and negative.

Photo by Thomas T on Unsplash

More: https://journal.firsttuesday.us/economic-recession-or-not-the-housing-market-recession-is-here/87069/

Closing Costs During a Cash Sale

Some of the most significant closing costs are related to loans. During a cash sale, loans aren’t a factor, so you may be thinking closing costs are no longer relevant. However, there are certainly closing costs unrelated to loans. And the rules for who pays don’t change; it’s still negotiated between the buyer and seller.

The costs related to loans include origination fees, processing fees, and credit checks. These are all generally paid by the buyer, but you don’t have to worry about these at all for a cash sale. That doesn’t mean everything else is automatically paid by the seller. Closing costs also include earnest money, property inspections, appraisals, title insurance, and a title search. It may also include attorney’s fees, notary expenses, and some escrow fees, if applicable. Earnest money is always paid by the buyer, and in most cases, all or nearly all closing costs are. However, there’s always room to negotiate. Particularly in the case of a cash buyer, the buyer may have more negotiating power because the seller is less likely to want to lose a cash buyer.

Photo by LinkedIn Sales Solutions on Unsplash

Qualified Vs Non-Qualified Mortgage Loans

Before you get a mortgage loan, ask yourself whether you want a qualified mortgage (QM) or non-qualified mortgage (Non-QM). You may be wondering under what circumstances you’d want your mortgage to not be qualified. Well, there are advantages and disadvantages to both. Non-QMs don’t conform to the regulations set forth by the Consumer Financial Protection Bureau (CFPB), but they’re actually entirely legal — the government simply can’t guarantee consumer protections.

So what are these protections, and why might you want to risk going without them? A QM loan cannot last longer than 30 years, cannot have prepayment penalties, cannot be a balloon loan, and should not have negative amortization. It requires a process for verifying several sources of information, including but not limited to bank statements and income. Because of this, it’s often more difficult to qualify for a QM loan. Therefore, someone who can’t qualify for a QM, such as many gig workers, may risk a non-QM loan. Investors, especially foreign investors, also frequently opt for non-QM loans that only require payments on interest. It’s also possible that you want to go for a longer-term loan, which would come with smaller payments, albeit a higher total amount paid once the loan is fully paid off. In any case, you probably want to ask a professional to explain the terms and risks of any loan you are considering taking, whether qualified or not.

Photo by Tim van der Kuip on Unsplash

A Recession on the Horizon

September Home Sales Down 35%

Last year saw home sales in the South Bay escalate dramatically as buyers sought to become homeowners while interest rates were still abnormally low. With interest rates rapidly rising it’s no surprise that sales are plummetting in 2022. The Harbor area, traditionally an entry level market, handily out-sold the balance of the South Bay with a drop of only 26%. The remaining areas suffered sales drops ranging from 42% to 47%, with the South Bay as a whole dropping 35%.

Compared to last year, cumulative South Bay home sales were down 21% as of September. The first three quarters of 2021 saw 7767 townhomes and single family residences sold, versus 6163 during the same period this year.

Recognizing that 2020 and 2021 were exceptionally aberrant, we also compared the 2022 year-to-date sales volume to 2019, the last normal year of business prior to the pandemic. As of the end of September 2022 cumulative sales volume was 4% lower than it was for the first nine months of 2019.

The decline from 2019 sales is uneven in that the biggest drop, 15%, is seen in the Beach area, which is typically at the high end of the market. Sales in the Harbor area only dropped back by 2%, while sales in the Inland area fell by 4%. The Palos Verdes peninsula fared best, actually increasing in quantity sold over 2019 by 4%. As always we offer a cautionary note when looking at statistics for property on the PV Hill. Because there are considerably fewer homes in that area, percentile statistics can take large swings.

Median Prices Mixed in September

The number of homes sold in 2022 has declined, indirectly affecting the median price of those homes, as well as the total dollar value of all the homes sold in the same period. A closer look at the median price of homes sold through September yields some surprising changes.

Since prices increased dramatically during the coronavirus pandemic we anticipated finding the median price from 2022 to be considerably higher than that of 2019. Indeed, that is the case with the median in the Beach area up 31% over that of 2019, the Harbor up 36%, PV Hill homes up a staggering 47% and the Inland area up 30%. But, that is gradually reversing.

July and August of this year showed depreciation in the median price across the South Bay. Prices consistently dropped in a range from 2% down (Inland) to 18% down on PV Hill. September sales broke the pattern with only the Beach cities losing value per the median. The Inland area was flat, showing no change from August. In an unexpected twist, both the Harbor area and the Hill came in with an increase in the median price. The growth was modest, up 6% for the Harbor area and up 3% for the Hill. Despite the slight improvement in September prices we anticipate continued downward pressure as inventory grows and time on market stretches.

Looking at the median price on a year-over-year basis, we find September with minor declines from August. The Palos Verdes cities showed prices dropping by 2% last month and this month. At the same time the Beach cities dropped 2%, while the Harbor and Inland areas increased by 4% and 2% respectively.

Median prices started 2022 with increases regularly coming in well above 10% growth. In April we saw the first negative where the median for the Hill fell 2% from 2021. Since then we have watched the rate of price appreciation decline from double digits until now in September with both the Beach and PV areas losing value.

We fully expect all areas of the South Bay to reflect declining median prices before the end of the year. While prices will be down on both a month-to-month and year-to-year basis, we don’t anticipate the median to fall below 2019 price points this year.

Total South Bay Sales Dollars

When the number of sales is decreasing and the median price of those sales is also decreasing, one has to assume the gross revenue will also decrease. Governor Newsome has been warning for several weeks that the 2022-23 fiscal year will not see the State level revenue surpluses California has been enjoying.

During the first quarter of 2022 gross revenue from real estate sales remained predominately positive, with year-over-year growth rates of about 6% per month. Since March the South Bay has only seen two instances of sales growth, 7% in the Harbor area for April and 3% in the Inland area for June. Every other entry on the chart is negative, with September declines averaging about 40%.

Cumulative sales for the first three quarters of 2022 were off by 29% compared to 2021. Our monthly sales dollars chart shows a zig-zag downward trend since spring of this year. Of course, 2019 is a more realistic point of comparison as a result of market gyrations created by the pandemic and our government’s fiscal response.

Comparing 2022 sales totals to 2019 yields a clearer picture of the current direction of the market. Instead of a sea of red ink, we can clearly see that 2022 sales have remained above those of 2019 with the exception of August. Sales started normally, then in March the Federal Reserve Bank announced a .25% interest rate hike, and promised more to come.

Buyers threatened with increasing monthly payments jumped into the fray and pumped sales up for a couple months. Then a new .5% increase, accompanied with the promise of multiple .75% increases throughout the year began a downward slide in home sales that is continuing.

Following the trajectory of the maroon line, and assuming the interest rates continue to increase, we predict 2022 sales will drop below 2019 again in October. The Federal Reserve Bank has already announced plans for another .75% increase in November, followed by a .5% increase in December. Adding another 1.25% will bring the full increase for the year to 4%. We envision the fall in sales growing steeper, bringing total sales below that of 2019 for the final quarter of the year.

Statistical Summary

This would be the heart of the discussion if we were dealing with a normal fiscal environment. Here we could talk about month-to-month changes and changes from the same month last year to this year. Instead we’re faced with an unanticipated side effect of the pandemic—out-of-control inflation followed by a steep recession.


The areas are:
Beach: comprises the cities of El Segundo, Manhattan Beach, Hermosa Beach and Redondo Beach;
PV Hill: comprises the cities of Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills and Rolling Hills Estates;
Harbor: comprises the cities of San Pedro, Long Beach, Wilmington, Harbor City and Carson;
Inland: comprises the cities of Torrance, Gardena and Lomita.

Goodbye Marymount, Hello UCLA!

Marymount California University, is no more. But, shed no tears! The prestigious University of California at Los Angeles plans to open the site for classes in the fall of 2023-24. Escrow had not yet closed as of this writing, but all appears to be moving forward at good speed.

We are told the finalists included four developers and three educational institutions. We’re pleased that UCLA was the successful bidder. We’ve heard some of their ideas and look forward to having them as neighbors.

However, we’re also interested in what kind of potential the developers saw in this deal. There’s a total of 11 acres already developed as residential and 24.5 acres developed as a campus. What would that have looked like if a residential developer purchased the site?

The 24.5 acres, some of it with gorgeous ocean views, is the jewel in the transaction. A little “back of the envelope” calculation says that using an average of 15,000 square feet per lot, Which is about the average in that neighborhood, one could build about 70 high end homes at the location. New construction on similar sites is selling for about $7.5M today, giving a value for the finished project of approximately $525M. Not bad for a land purchase of $80M, especially considering we haven’t started looking at the 11 acres.

There exist some legal complications in the 86 unit, 11 acre property. Deed restrictions purported to require the land to be used to house students. That can readily be accommodated by an educational institution, like UCLA. Developers on the other hand might have to pay some serious legal costs to do anything else with the land.

And it might have been worth the legal expense. A quick look at the apartment building market in the South Bay shows roughly comparable buildings selling for about $420K per unit. That would make 86 units worth about $36M, almost half the stated purchase price.

We’ll never know what might have been. The entire South Bay can look forward though, to an educational revival. A refreshed campus with UCLA’s academic resources and access to the university program at AltaSea and other port projects is a great starting ground.

Photo by D koi on Unsplash

Unlawful Evictions on the Rise

Much of the danger to tenants is being unable to pay rent, as both rental prices and cost of living continue to increase while the job market is still in recovery. However, that isn’t the only way tenants can get evicted. There are even a few ways landlords can legally evict tenants that haven’t done anything wrong. That isn’t enough for some landlords though, who are actually resorting to illegal methods of eviction instead of notifying the tenant and potentially going through the court process.

Though both are legal, the court process distinguishes at-fault and no-fault evictions. At-fault evictions are the category where failure to pay rent lies, and this category also includes various contract violations and criminal activity while on the premises. The no-fault category includes landlord’s intent to occupy the property, withdrawal from the rental market, property being deemed unfit for habitation, or landlord’s intent to demolish or substantially renovate the property. Some of these can be used misleadingly as the landlord can simply change their mind later, but the real problem is unlawful evictions. The Office of the Attorney General (OAG) is particularly concerned with the type known as self-help evictions. This includes the landlord shutting off utilities, changing locks, or removing the tenant’s personal belongings in order to force them out of the property. Landlords initiating a self-help eviction can get charged with a misdemeanor, and the sentence is either a fine or a jail term of a maximum of one year.

Photo by Mitchel Lensink on Unsplash

More: https://journal.firsttuesday.us/self-help-evictions-the-new-forbidden-fruit-for-california-landlords/86458/

Home Prices About to Enter Downward Cycle

Home prices fluctuate constantly, but have certainly been on an upward trend the past few years. In fact, it may not be quite as noticeable, but they’ve been trending upwards for about a decade. The difference is that the upward trend has occurred at an anomalous rate since 2019. But now, we’re starting to see hints that this isn’t going to continue. Currently, home prices are still high; however, sales volume has been dropping for the past four months, which will naturally lead to price drops.

On its own, rising home prices isn’t the problem; the issue is that they have been rising far quicker than wages. Even a period of flat home prices at their current high level would provide some slight respite to homebuyers, though of course they would benefit more from declining prices. Sellers aren’t going to be as happy in the next few years, especially if they bought recently. If they bought before 2019, they may still be able to sell at a profit, but not as much of one as if they had already sold by now. Without knowing how much prices are going to drop, there’s a risk of negative equity for homes purchased within the past three years, with the risk increasing the more recently it was purchased. If the downward cycle is particularly long or the decrease particularly steep, this could even extend to homes purchased much earlier.

Photo by Scott Webb on Unsplash

More: https://journal.firsttuesday.us/what-a-cooling-market-means-for-both-sides-of-real-estate-transactions/86063/

Get Everything Prepared Before Renting Out Your Home

Renting out your home, especially for a short period, can seem like a simple way to turn a profit without much effort. However, there’s a fair bit that goes into getting the home ready to be rented out. Just like if you were selling your house, you need to make sure there’s interest, which means making a good impression on potential renters.

The easiest way to do this is by repainting your home, which is something you’d probably do if you were selling as well. It may even be more important when renting, though, especially if you aren’t going to allow your tenants to repaint. Buyers may think they’re just going to repaint anyway, so they don’t care what color the walls are. But with tenants, you want to be sure to choose neutral colors that won’t offend anyone’s aesthetic.

You should also be sure that all the legal details are worked out. You may feel the desire to skip the middleman, but that’s not a good plan. A real estate agent will help draft a lease that protects both you and the tenant. Property management companies remove much of the headache of being away from the property. Regular maintenance can often be left to property management companies. That said, if the house is not in good condition from the outset, tenants won’t be interested enough to sign a lease. Make sure to take care of repairs before you start.

Photo by krakenimages on Unsplash

The Highest Crash Risk California Metros

The aftershocks of the Great Recession are already here. We’re currently in the midst of a second, undeclared recession, albeit a less severe one. The lower severity doesn’t necessarily mean lower impact, though. Government assistance is what pushed us through the Great Recession, and that’s unlikely to occur again.

A recession doesn’t have to mean a market crash, but it’s a very real possibility. Some areas are at higher risk of a crash than others. The highest risk metros are those with high loan-to-value ratios, home flipping, new residents, and rapid home price growth. In California, these metros are Riverside, Sacramento, Bakersfield, San Diego, Stockton, and Fresno. Those aren’t the only areas that may be affected, though. Market problems in any one area will also cascade to other regions.

Photo by Hans Isaacson on Unsplash

More: https://journal.firsttuesday.us/these-california-metros-risk-housing-crash-during-the-recession/85478/

Buyers Leveraging Home Defects to Negotiate Prices

In heated markets, it’s difficult for buyers to negotiate prices down, since their competition will likely be offering more. Now that the market has begun to cool, buyers are looking for ways to pay less. The answer is greater scrutiny of home defects — not to avoid purchasing defective homes, but to reduce the home’s value so they can offer less for it.

Sellers are always required to disclose any significant defects or malfunctions they are aware of in a large range of categories. These categories are walls, windows, ceilings, doors, floor, foundation, insulation, driveways, roof, sidewalks, fences, electrical systems, plumbing, and sewer or septic systems. While it can be difficult to prove that a seller was aware of a defect and the notion that it’s significant is subjective, it’s good advice for the seller to disclose anything they know. Since there’s a high chance something will have to be disclosed, buyers are jumping on the chance to leverage this to negotiate a lower sale price.

Photo by Pawel Czerwinski on Unsplash

More: https://journal.firsttuesday.us/home-defects-face-greater-scrutiny-in-2022s-cooling-market/85440/

Many Sellers Renting Instead of Repurchasing

When a homeowner sells the home they live in, their most common move is to use the proceeds to buy a replacement property, if they haven’t already done so. While it seems like homeowners would always remain homeowners, it does happen that people transition from homeownership to renting. But in most cases, the seller has decided to sell high and then rent for a short time while waiting for prices to bottom out. This is called timing the market.

This is not what’s happening now. Home prices and mortgage rates are both high, which is pricing homeowners out of their current home — and pricing 80% of them out of the market entirely. They aren’t waiting for a better time to buy; they’re simply no longer able to afford ownership. They become renters by necessity. Fortunately for people in such a predicament, it may not last too horribly long, though certainly longer than they would have wanted. It’s expected that prices will reach bottom around 2025.

Photo by Georgi Srebrev on Unsplash

More: https://journal.firsttuesday.us/home-sellers-unable-to-buy-in-2022/85079/