A Tale of Two Cities (August 2019)
by Michael “Mickey” Kessler Coldwell Banker, mKessler@verizon.net, Cal DRE# 01088842
. . . And the questions keep coming. Still, the inquiries persist. Everywhere I go, everyone I see, every conversation that strikes up.
You see, pretty much everyone who knows me, knows that I’m in the real estate biz. And, every single one of them raise an array of questions, all echoing the same concern: “Mickey, what’s happening with real estate? How’s the market? I hear it’s slowing. Are we in a housing bubble? Are prices holding? Are prices dropping?” And so on. It’s a lot of responsibility for one humble Realtor to take on but I believe that I’m up for the task. I’m not a soothsayer but, I do read tea leaves, of sorts. However, the ones I “read” are not those that you’d expect.
Premise: To understand what’s happening with the Los Angeles real estate market, one must redirect their focus from home prices and focus the attention onto supply & demand and absorption rate. After all, price-based statistics such as the average or median sale price of homes in a neighborhood are 1) the aftereffects of pre-occurring market dynamics and 2) are often irrelevant or misleading, to say the least.
An increase in the number of homes experiencing price reductions, selling below their asking price, or a drop in median or average price in a neighborhood, these are all poor market indicators. For example, a downward trend in the average sale price in a neighborhood could be (and often is) the result of a shift in numbers of sales of lower priced homes vs sales of homes in the higher end. That’s not the same as a drop in prices, any more than reducing the price of one’s home, (which is almost always the result of bad pricing).
In my opinion, putting the focus squarely on statistics like supply & demand and rate of exchange (from home-for-sale to home-in-escrow to home sold) is the true window into our real estate market. This rate of absorption is the best and most immediate measure of the health of the real estate market for any given neighborhood and for our market, overall. And what is an “absorption rate”?
Absorption rate is the rate that homes are coming on the market (Active Listings) vs the rate they are going off the market (i.e. pending and sold homes). Expressed another way, absorption rate is the amount of time (usually expressed in months) that it will take to sell off all the active inventory, if no more homes were to come on the market.
Market Activity Snapshot & Absorptions Rate - As of July 15, 2019
*MLS Listings mis-located in West Los Angeles (MLS Area #7) were excluded from the West L.A. data pool.
What the absorption rates are showing us is that Los Angeles is both strong and not-so-strong from one neighborhood to the next. As seen in the chart (above), some areas such as Westwood, Santa Monica and Culver City have absorption rates that are fast/short (1-2 months) while in other neighborhoods such as Sunset Strip (Hollywood Hills), Beverly Hills and BHPO the rate is considerably slower/long (8-11 months). And, there are some areas that lie in between. Brentwood, Bel Air and Pacific Palisades.
And I haven’t neglected the Valley (see below). I ran absorption rates for Tarzana, Encino, Sherman Oaks and Studio City and all have absorption rates of 1-4 months which are close to historical lows. Moreover, Westside condominiums (Santa Monica, Brentwood and Westwood) are turning over rather quickly as well. To summarize, in many areas of Los Angeles, the picture is very encouraging.
Market Activity Snapshot & Absorptions Rate - As of July 15, 2019
San Fernando Valley - Single Family Homes
The manner which the absorption rates differ from neighborhood to neighborhood tells a very interesting story. The MLS Areas of Los Angeles that are composed mostly of homes in the hills are experiencing some of the longest absorption rates in Los Angeles while homes cited in areas in the flats present a striking contrast, with the shortest absorption rates seen. Lastly, there are the (what I call) hybrid areas. These are neighborhoods made up of homes in both, the hilly and flat areas. These neighborhoods (Brentwood, Pacific Palisades are experiencing absorption rates that fall in between (6-7 months).
It is also noteworthy that those neighborhoods experiencing slow absorption rates, (Beverly Hills, BHPO, Sunset Strip and Bel Air), are not only in hilly neighborhoods but, are also among the most expensive neighborhoods in Los Angeles.
Conclusion: So, what is the takeaway here? Is the slowdown in some of the neighborhoods the result of “buyer fatigue” (in the higher end)? Is it due to changes in tax laws? Specifically, the new limitations imposed on property tax deductions. Is it the result of devaluing assets of the wealthy held in the recently declining stock market? Or, concerns over tariffs and the volatile world economy?
Is the continually high demand for homes in some sectors the result of lower interest rates in the price range that we typically see home financing? Or, is it being driven by demand from growing families opting to stay out of the hills for wishing to live in relatively flat neighborhoods with usable back yards, highly rated schools and the resulting large numbers of children in those homes?
These are all viable explanations for the bifurcating into active and less active neighborhoods in the current Los Angeles real estate market, as are any of the many combinations of these “forces”. The bottom line, as I see it, is that we’re in a different real estate market from the market of the previous several years. However, we are not in a “bubble” nor a “down” or “bad” market in this time. If I had to characterize it, I’d say that it’s “layered”. Stay tuned...
News from the Trenches (April 2019):
As we settle into 2019 the real estate market is presenting new challenges, new questions, new tax codes with financial ramifications and for the first time in a while, concerns about what’s going on with the residential real estate market and where it’s headed.
Here are a few of my observations:
- I would continue to describe our real estate market as robust and stable. There is still a strong level of interest from buyers, characterized by listings receiving numerous showings, good turnout at Sunday Open Houses. Most listings are receiving offers (and in some cases), multiple offers.
- There’s a moderate rise in the number of available homes on the market, for sale. (more inventory)
- A noticeable change in the attitude of home-buyers, characterized by a lower sense urgency among this new crop of buyers. Based on my conversations with fellow agents, this seems to be a shared observation.
For example, I’m aware of many listings receiving strong interest and even multiple offers, however, in many cases, the buyers are not coming in at, or over the list price. In addition, we are not experiencing the run-away “bidding wars” that have characterized negotiations for the last couple of years.
Despite the lower offering prices, many sellers are giving very little ground in their counter offers and, in some cases, countering over the list price. However, the buyers are not “buying-in”. The sellers seem to believe it is still 2018 while the buyers believe it is 2008, and in many cases, neither party is giving much ground.
This shift in the market has caused some sellers to become frustrated. Some sellers have respond by taking their homes off the market because they were unable to get the over-asking sale prices that they had anticipated, while other sellers are “reading the tea leaves” and selling their homes for what the market will bear, even if it is a little less than hoped for. That said prices are not dropping significantly (most homes are still selling within 3% of the list price) and there are still the occasional homes that are selling over asking, when priced significantly below market.
So, are we in a bubble? Probably more like we’ve reached a “tipping point” and yes, in my opinion our residential real estate market has tipped.
That’s not to say that real estate prices are going to take a nose dive or that the market will collapse. Economic conditions today are nothing like the catastrophic events in the summer of 2008 that caused the “depression” (that was no recession) and subsequent collapse of our real estate and lending markets. On the contrary, there are no apparent signs or factors that would lead to another such event. We are simply tipping into a market in which Seller’s no longer have all the leverage and control in sales transactions. For most of the last decade, we have been in a seller’s market. But data suggests that the times are changing. We have seen home prices gradually level off in recent months, inventory is growing and historic low in the number of pending and closed sales in early 2019. As a result of these changes, downward pressure on prices is to be expected.
What are the lessons for home-sellers in this tipping market?
1) Price your home in-line with (or, slightly lower than) the comparable sales. In addition, it is important to pay careful attention to the prices of the homes that are listed for sale. Remember, the list price is your home’s best marketing tool. And keep in mind that in this age of information, home-buyers are better informed than ever and have a keen awareness of home values. It may seem counter-intuitive but a lower list price almost always leads to a better sale price.
2) Be prepared to negotiate in earnest over buyer-credits for inspection, appraisal and other items that may come up during the contingency periods. We are finding more buyers who are willing to walk away when sellers begin to play hard-ball.
And, the lessons for home-buyers?
1) Buy what you like. Yes, your home is a financial investment but, it is so much more. It is your haven, your solace, the place you raise family, entertain friends and feel a sense of safety and well-being. The emotional value that a home offers is hard to quantify but, I think it’s safe to safe to say it as significant.
2) If you see a house that you love, buy it now rather than wait around for prices to drop. What’s different about this market than any other over the last 20 or so years is that, although home prices may go down, it is highly unlikely that interest rates will decline. On the contrary, interest rates are expected to rise several times over the coming years. By waiting to buy your home, you may save some money on the purchase price, however, you could ultimately pay more to own the home by financing at a higher interest rate.
Whether buying or selling I wish you good luck out there. If you need me, I’ll be in the trenches.
Prepared and presented by:
Coldwell Banker/Global Luxury
Cal DRE# 01088842