Any time you are selling your home, you want to ensure that the transaction goes smoothly. The best way to do that is to pick the right buyer. Simply selling to the highest bidder may net the most profits, but that assumes the deal actually goes through. Even if it does, you may have lost time and gained headaches. Instead, make sure your buyer is qualified.
There are a few things to look for in a qualified buyer. The first is mortgage pre-approval. If your buyer is not pre-approved, they may have to back out after discovering they don’t qualify for a loan. If there’s a buyer you otherwise like but they aren’t pre-approved, you can certainly suggest getting a pre-approval before submitting an offer. You should also establish terms in the contract regarding an earnest money deposit and check that the buyer has the money ready. There are also a couple of red flags to watch out for. As cliché as it sounds, if an offer looks too good to be true, it probably is. In addition, a buyer who isn’t interested in an inspection may not be very serious.
The housing crisis is a well-established issue and many efforts have been made, or are in the process of being made, to address it. Most of these efforts are focused on low-income housing, since it ensures that the greatest number of people are served by it. However, San Diego faces a different issue. A significant number of residents don’t qualify for affordable housing programs and are instead looking at middle-income housing. Unfortunately for the city, they aren’t able to receive federal subsidies for middle-income housing construction.
So now they’re beginning to devise a plan. The city’s Middle-Income Housing Working Group has recommended a combination of immediate actions, short-term plans, and long-term plans. Immediate steps include streamlining codes and review processes, creating a list of public land available for middle-income housing construction, and converting public facilities to mixed-use structures. Future plans include tax modifications, a public rent registry, construction loan guarantees, investing in community land trusts, and redirecting philanthropic funds to middle-income housing.
The Chris Gardner Foundation is focused on helping disadvantaged youths jumpstart their careers, through their Permission to Dream program. AFL-CIO has now announced a partnership with them specifically directed at building and construction jobs. The program will help high school students, particularly students of color, to first complete their education and then secure a union apprenticeship.
If a student is selected for the program, they will first be given resources to help them in their studies as well as an instructional course in apprenticeships. Once they graduate, if they’ve maintained a certain GPA, they will be introduced to an affiliated union in the field of building and construction. The student will be placed into a paid and registered apprenticeship program. Tools and equipment are covered by a stipend, and transportation assistance is provided.
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.
With four months left in a very chaotic real estate year, we want to take this opportunity to lay some ground work for understanding why the market has headed into a recession. And, to keep things on a positive note, we end with a couple of suggestions on how you might profit from this turn of events.
Some of the nation’s most respected analysts (including Ivy Zelman of Zelman & Associates and Mark Zandi of Moody’s Analytics) are predicting recessionary price drops ranging from 10-20% and lasting through the next two years. (Arguing that we’re only looking at a brief correction, pundits at Goldman Sachs and the Mortgage Bankers Association continue to predict single digit growth.) Meanwhile, here on the street, we’re watching prices drop across the board for the second month in a row.
In August we reported that median home prices across the Los Angeles South Bay fell from July, the prior month. Now looking at August sales we find all four areas of the South Bay showed declining median prices again. The month-over-month price drops ranged from 6% at the Beach to 25% in the Inland cities. (See bottom for description of areas.)
Underlining the month-to-month price slippage, three of the four areas also showed declining prices versus the same month last year. Only in the Harbor area are homes still selling for more than they did in 2021. Even there, median price has slid from 9% down to 4% above August of 2021.
2022 Compared to “Normal” Business in 2019
The past two years have seen real estate stumble with the Covid lockdowns in 2020, then skyrocket with the low interest rates in 2021. It’s worth a look back to 2019 to see how the current conditions compare to the most recent “normal” market.
Looking at sales volume in the period January through August of 2019, 1064 homes had sold in the Beach cities. So far this year only 905 homes have sold. That is a 15% drop in sales since the last normal year of business. The trend line for the Beach area has been sliding downward since April.
For the first eight months of 2019 the Harbor area showed sales of 2955 compared to 2945 for this year. That is a drop of .3% – a statistically insignificant change. However, the trend line has been dropping since March. August sales were up slightly from July, which was an unusually slow month for the Harbor area. We expect sales to continue a downward trajectory into 2023.
Palos Verdes home sales for the same period in 2019 totaled 537 versus 568 in 2022. The Hill is the only part of the South Bay where year to date 2022 sales exceed those of 2019. At 6% it’s a healthy increase, too. Despite being the best performing area in South Bay, Palos Verdes sales volume peaked in March and continues to slide. Sales in July were unusually weak, so August shows an upward step in the trend line.
Sales in the Inland area, very much like the Harbor area are down only .4% from 2019 sales for the same period. The difference is statistically insignificant, and the trend line is headed downward.
Declining sales volume creates a larger inventory of homes to sell. As the inventory grows, sellers have more competition and buyers become more demanding and prices start declining. We anticipate continuing growth of available inventory, followed in late fall or early winter by a spate a price drops.
Median Price Up 54% Since 2019
Palos Verdes homes have seen the greatest impact of the Covid-era buying mania. Comparing median prices from the first eight months of 2019 to the first eight of 2022, we find a 54% escalation on the Hill. Normal growth over a three year period would have created 9-10% in price appreciation. Expect much of that excessive price expansion to be erased over the coming months.
Compared to 2019, Beach area median prices have shot up by 32%. This is easily three times normal growth. As we see in the chart below prices started adjusting downward as early as May in the Beach cities.
Since 2019 median prices for the Inland area have climbed 30%. Here in the August 2022 chart below we see Inland area prices have been dropping steadily since May when the median was $910K. During that four month period values have slipped by over $50K.
In the Harbor area home prices have escalated 34%. From 2019 at $565K to 2020 at $607K the Harbor area median grew $40k. Then in 2021, it added another $90K reaching $700K. So far in 2022 the median has reached as high as $830K – another $130K increase, but has now dropped back to $725K, losing $105K off the June median.
Most home buyers are constrained by their income to a particular price range, and salaries have not increased at a rate even remotely similar to real estate prices. Recent studies have shown about 25% of potential buyers were priced out of the purchase market in California by the soaring Covid-era prices.
Interest Rate Shrinks Annual Sales Dollars
In total sales dollars for January through August of 2019, the South Bay weighed in with $5.3 billion. During the same period in 2020 the aggregate amount shrank back to $4.9 billion, followed in 2021 by an upward explosion to $7.9 billion. So far in 2022 the area has reached $6.9 billion.
Each time the Federal Reserve System (fed) increases the short term interest rate the pool of potential buyers shrinks again. As this is written, the Fed is preparing to increase the rate by at least .75% in mid-September and two more increases are anticipated by the end of 2022.
At the current rate of declining value, we estimate the 2022 annual sales value to be approximately $9.5 billion, a decrease of 27% from 2021. Remember that huge budget surplus California had last year? Do not anticipate another this year, and possibly not for a couple of years as the state works its way through this recession.
The Silver Lining in the Cloud
One theory of success in real estate is “Buy low, sell high.” Flippers subscribe to that concept, buying at the bottom, updating and selling at the top of the immediate market. Another theory, not as well supported, but statistically more profitable, is “Buy and Hold.” Buy a piece of property at the best price you can and use it or lease it but – never sell it.
A deep market adjustment doesn’t come very often, so when it does one should take maximum advantage. At the moment it appears there will be a heavy price contraction starting late this year. We’ll know better in late fall and early winter, but all indications today are that a wise property investor should be preparing to buy at the bottom of the market – soon. We constantly search the Southern California coast for outsstanding investment bargains. Tell us what you want to invest – we’ll tell you where to buy.
Methodology
For purposes of comparing homes in the LA South Bay, we have divided the South Bay into four areas. Each is composed of homes of roughly comparable style, geographically similar location and physical characteristics, as well as approximately similar demographic characteristics.
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.
I’m looking forward to this upcoming songwriter’s show. Tuesday September 20, 2022 7-9PM. with JOEL RAFAEL, FREEBO, ALICE HOWE AND JODI SIEGEL!
Joel Rafael is a legendary artist in the folk and Americana world. He has worked with such legends as David Crosby, Graham Nash, Van Dyke Parks, Jackson Browne, Bonnie Raitt, Jason Mraz, Jennifer Warnes and more…his songs are guaranteed to move and inspire you.
Freebo and Jodi go back decades. As many of you know, he played bass with Bonnie Raitt for ten years, as well as many other legends (Ringo Starr, John Mayall, John Hall of Orleans, Dr John and more including my friend Maria Muldaur.) Also, many years ago Freebo produced a record that Jodi and her good friend Will Brady did called “Beer and Donuts”. Freebo has also had quite an interesting career as a singer/songwriter, guitarist over the last ten years or so, with many solo records to his name, songwriting awards and as a producer.
Alice Howe, before hooking up with Freebo (as her musical partner and producer), was already winning songwriting awards and creating a name for herself in the folk world. She has a new record coming out, “Circumstance” produced by Freebo, and it was recorded in Memphis at Fame studios. She will play some new and older stuff I’m sure, and will be backed up by Freebo on some tunes.
Jodi Siegel has created a heady and dynamic stew of musical influences (blues, pop, R & B, soul and jazz) into a sound and a style that make her a triple threat; songwriting, singing and guitar playing. Jodi’s fine-tuned solo performances are likened to a “one-woman” band!! Her truly original style can fill a room with explosive slide guitar, jazzy vocals and a fun, easy going rapport with her audience. She can go from funky bluesy grooves to folk, to jazz and back again with ease. She’s an old soul with a fresh sound.
Project Barley’s is located in Lomita (south of Torrance/Redondo on PCH). They have great food,(Gourmet pizza, sandwiches, gluten free/vegan options and of course wine and beer! ! For more information check out their website https://projectbarley.com/
If you live in the South Bay, you already know Carl and Arda Clark! They are two of the most generous people on the planet and huge music lovers and we at the showcase are so grateful for their continued support! For all your real estate needs give them a call or check out their website : https://carl-and-arda.beachcitybrokers.net/
Hope to see you all at this fabulous, one of kind, musical event…no reservations, so arrive early to get a table.
You may have heard of a home equity loan, but you may not know what it actually is. A home equity loan uses the accrued value of your home as collateral against a loan, and typically allows you to borrow up to 85% of the difference between the home’s value and the balance due on your mortgage. If you fail to pay back your loan, you may have to sell the house to pay it back. This is similar to a home equity line of credit (HELOC), but unlike a HELOC, a home equity loan is a one-time event with a fixed interest rate. The interest rate tends to be higher than the rate for a standard mortgage loan, but lower than rates for most credit cards. Normal regulations for mortgage loan approval apply to home equity loans as well.
A home equity loan is frequently called a second mortgage. Homeowners frequently still have some balance due when they take out a home equity loan, which means they now effectively have not one but two mortgages. In addition, the money is often used to finance the down payment on a second home. However, this isn’t the only purpose of a home equity loan. You don’t need to have a mortgage to get a home equity loan — if you don’t have one, it just means your balance due is zero, and therefore there is potentially a higher ceiling on loan amount. Furthermore, the money gained from a home equity loan doesn’t need to be used for a second home, or anything relating to homes. It’s simply your money, and can be used without restriction.
Traditionally, income inequality has been measured by something called the Gini coefficient. The Gini coefficient is measured on a scale from 0 to 1, with 0 meaning no inequality and 1 meaning a small number of people control the entirety of the wealth. While the Gini coefficient is an excellent indicator of whether or not there is inequality, it does nothing to tell us where it came from except in the case of extreme values. A new measure, the Ortega parameters, seeks to correct that.
It’s commonly thought that the wealth gap is primarily between high-income earners and low-income earners, and that the middle class is effectively nonexistent. That isn’t always the case, and the Ortega parameters can determine where this analysis is accurate and where it is not. There are two separate measures that make up the Ortega parameters: inequality between low-income and middle-to-high-income earners, and inequality between very high income earners and the rest of the population. If a population has low inequality on the first scale and high inequality on the second scale, it simply means that a small number of extremely wealthy individuals live there, but the overall inequality is actually fairly low. The Gini coefficient would not notice this nuance and just rate it as highly unequal. Determining the cause of inequality can also help to devise countermeasures: in areas with high inequality between the lower income earners and middle income earners, the solution is a higher minimum wage; in areas with a few very wealthy individuals, that is better fixed with taxes on high income earners.
The typical house in California is two bedrooms. This is traditionally considered a pretty standard starting point for homeownership. However, many individuals in California can’t even afford to rent a home of that size, let alone buy it. Between October 2020 and September 2021, the average Fair Market Rent value for a 2-bedroom home in California was measured at $2030 per month. Ideally, rent should be at most 30% of your income, meaning that in order to afford to rent a 2-bedroom home, a household would need to earn $6766 per month, or $39.03 per hour. With the average renter income being $25 per hour, a dual-income household is mandatory to be able to afford to rent a 2-bedroom house. Minimum wage workers have it even worse — at a minimum wage of $14 in California during that time period, even dual income is not enough. Minimum wage is barely higher now at $15 per hour.
So what about smaller homes? Well, unfortunately, it’s still not good enough. The average FMR for a studio — which would only be able to comfortably house one person — is $1394. But at $25 per hour, the most one person can comfortably afford is $1294 per month. At $14 per hour, minimum wage workers could only afford to pay $728 per month, which is a little over half of the rent for a studio. This is assuming full time employment, as well, and not all households have full time workers. Taking the average household income, and making sure to use only 30% of it for rent, the average household could only afford a rent of $706 per month, even less than a full time minimum wage individual.
Last month saw four new legislative changes in the field of real estate. Two bills were enrolled, AB 1738 and AB 2817. AB 1738 goes into effect in 2025, and will require builders to install electric vehicle chargers in some types of buildings. This includes multi-family dwellings, hotels and motels, and some nonresidential parking facilities. AB 2817 establishes a rental aid grant program that will provide grants directly to homeless people as well as participating landlords. SB 1126 was passed in the Senate, requiring employers to set up a retirement program or CalSavers payroll deposit savings program by the end of 2025. There was an amendment to SB 897, which increases the maximum height of an ADU from 16 feet to 25 feet.
In addition, three bills were just enrolled first day of September, AB 2221, AB 2053, and SB 869. AB 2221 includes various changes to make ADUs easier to get approved. AB 2053 requires annual regional housing reports indicating progress on meeting housing needs. SB 869 requires at least 18 hours of training for managers and assistant managers of mobile home parks.
Freshly back from their annual West Coast tour, Andy Hill and Renee Safier have landed a weekly gig at the world-famous Lighthouse Cafe in Hermosa Beach. The new owner has remodelled the club and established a full schedule of varied entertainment. Andy and Renee have the first showtime at 5:30-7:30pm every Tuesday. Get there early and take advantage of the easy parking (by Hermosa standards) and 4-7pm Happy Hour.
Do yourself a special favor and show up on September 13 for the Patrick’s Birthday Celebration. Renee says there will be cake!
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.
Vinyl has become a very popular option for flooring. It has a few important advantages going for it. Vinyl floors are both cost effective and durable, making them an attractive alternative to hardwood flooring. Many people also consider vinyl to be aesthetically pleasing. However, you can’t take advantage of that durability if you don’t know how to take care of it.
Spills and stains can become permanent if not dealt with quickly. Start by just wiping it up with clean water, then switch to a vinyl cleaning solution if you have one. For tougher stains, you can use a paste made with baking soda and water. Rub the paste into the affected area, let it sit for a few minutes, then wipe it up. If that doesn’t work either, try rubbing alcohol. As for regular maintenance, you should be sure to mop or vacuum the floor at least once per week. Wax polish isn’t necessary, but you should occasionally clean the floor with a mixture of baby oil, vinegar, and water.
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.
