Buyers Ride the La La Land Inventory Merry-Go-Round

Written by Breck Hapner

There has been a lot of consternation lately surrounding the present state of the Los Angeles real estate market, primarily fallout resulting from the consummate lack of supply.

In 2017, L.A. housing prices eclipsed all time heights due
to a lack of inventory, which was keeping prices inflated.
Nationwide, 24 percent of homes sold above the price owners
were asking. In the L.A. metro area, the figure was 38 percent.
That’s a significant difference.

Based on the current situation, experts agree it is entirely possible Southern California home prices could go up 6 percent a year for the next six to seven years, causing the median home price to reach $800,000 in Los Angeles County
by 2023.

Now, both the luxury and residential markets walk a tightrope due to the effects of the inventory stranglehold. Seeing no end in sight, desperate, well-heeled residential buyers have gobbled up $1 to $5 million luxury properties, leaving a glut of more expensive estates sitting idle or forcing them off the market altogether.

I guess you could say this is where things begin to get interesting.

The Tale of Two Markets

As stated in the California Association of Realtors January 2018 home sales and price report, a countywide median sale price well over $500,000 doesn’t seem to be deterring buyers.

“A tale of two markets continues to be the theme of California’s housing market with the lower end of the market bearing the brunt of the housing shortage as sales of homes priced under $300,000 declined by 17.2 percent from a year ago,” said C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young.

“At the other end of the spectrum where inventory is less constrained, homes priced $1 million and higher posted solid annual sales gains,” Appleton-Young said, “especially in the $1.5 million-$2 million range, which jumped 24 percent.”

An aggressive market can be like sucking a breath of fresh air, or an inhalation of poison gas, depending on which end of the market pipe you’re on. The housing shortage across California has driven prices up to unaffordable heights and locked many young buyers out of the market—and now, even the flotillas of La La Land mansions are disappearing.

The median sales price of L. A. luxury homes in the fourth quarter of 2017 dropped 17 percent compared to the same period in 2016, according to the report issued by residential brokerage
Douglas Elliman. Single-family estates sold for a median price of $8.9 million, down from nearly $10.8 million from the year prior. The average price for a luxury condo also dipped 11 percent year-over-year to $3 million.

“The high-end in Los Angeles is one of the tighter markets in the U.S. at least from my optics,” said Jonathan Miller, chief executive of Miller Samuel.

In other words, many luxury sellers have been severely cutting their asking price to accommodate residential buyers. The plunge in luxury inventory comes down to increased buying coupled with the expiration of overpriced listings that have been on the market for months or years.

“The pace of the market is moving much faster because we’re continuing to see a shift from larger properties to smaller,” Miller said. “The spread between the ask and sale price is narrowing and part of that is just because the newer product coming in is closer to market.”

The Residential Plight

From the residential seller’s perspective, soaring prices are cause for celebration, because their home values are considerably higher than what they were even just a year ago.

“A lack of available homes for sale continues to be the largest single factor influencing California’s housing market,” C.A.R. President Geoff McIntosh said. “We’ve experienced a full two years in which active listings have fallen on a year-over-year basis and the lowest inventory level this year.”

Of course, L.A. house hunting has become a bidding rumble in the inventory jungle, and lower-end buyers are taking the direct punch to the jaw. When you have demand increasing and a constant supply problem, prices have nowhere to go but up.

“The other side of that coin sees the pool of buyers shrink with each price hike, while two-thirds of transactions garner multiple offers from buyers wrestling over severely limited inventory,” Nancy Starczyk, president of the realtor association said.

So, virtually nothing is available. Prices are rocketing through the proverbial real estate roof, and those still trapped on the inventory merry-go-round

There’s no real mystery here

With home prices in much of L.A. at pre-recession levels, or exceeding them, first-time buyers don’t have much of a shot, and those with resources are finding their only alternative is higher priced real estate they can’t really afford anyway. But there is nowhere else to turn.

“The new record median home price is not what we would have expected,” said Tim Johnson, chief executive of the Southland Regional Association of Realtors. “If the Fed increases interest rates going forward, as some are expecting, coupled with these high prices and record-low inventory, housing affordability is going to be off the charts.”

For the few properties available —Those that are house hunting in L.A. know the drill — decent homes are gulped up almost instantly, at prices exacerbated by multiple bidders driving up the real value. It’s almost a shell game, with many left empty-handed.

“At some point, there’s going to be a correction, but I don’t see it on the horizon,” said Pat Veling, president of Breabased Real Data Strategies. “Sellers want more than sellers got six months ago.

What Happened to the Ride?

Well, the situation used to be different.

Once upon a time, there was space for the show. Then, decades ago, L.A. experienced a huge growth in population driving a building frenzy gobbling up nearly every square foot of available land. These sprawling suburban communities left little room for further development. And there isn’t much buildable land left. Aside from completely rebuilding pre- existing structures or lots, the pickings are very slim.

New developments that are approved and built take years, while the metropolitan L.A. population grows unchecked, ballooning to more than 4 million last year. According to state records, the city of L.A. has been adding housing relative to its burgeoning population at the lowest rate in 50 years. A fair economy and low interest rates propel a growing buyer contingent toward home ownership, creating a feeding frenzy.

Currently, extra housing is being created via more multi- family dwellings such as apartment buildings and condominium complexes, but elevated structures clash with the California suburban status-quo, spawning residents and municipal governments ready to fist fight over the escalated congestion imposed upon neighborhoods.

Over the past 40 years, homeowners have demanded more restrictions on development, further tightening the noose by limiting the number of yearly units that can be built, as well as many ancillary voter-based zoning restrictions detailing the minutiae of what is allowable.

Developments have also run into continued resistance from activists who claim city officials who allow unchecked development desecrate neighborhood character and sustainability, introducing crime while lowering property values.

This, and state level regulations governing environmental impact have affected what types of projects are possible for builders and developers. But it’s unlikely that builders will
catch up with the demand anytime soon.

“There is such a big lag time between when a developer puts money down and ties up the land to when they can get the entitlements to begin building,” Broker Mel Wilson said. “And the city of Los Angeles is seriously considering adding $12 per square foot to residential construction in the city. That is money they want to put into an affordable housing trust fund. But that would just make homes more unaffordable.”

Industry leaders and real estate professionals all agree there seems to be no easy supply and demand solution, but more housing is needed nonetheless.

According to findings detailed in the Legislative Analyst’s Office report, “California’s High Housing Costs: Causes and Consequences,” L.A. County needed to build three times the number of homes than it did from 1980 to 2010 to stop prices from spiraling out of control.

“The problem definition is simple,” LAO principle fiscal and policy analyst Brian Uhler said. “There are more people who want to live in L.A. than housing that gets built.”


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