The original BeachChatter discusses the housing market in the coastal communities south of the city of Los Angeles. Some articles are peculiar to a single city. Some discuss the region as a whole. The focus is on privately owned housing.
Finding the right neighborhood can be difficult. You probably don’t know everything about a neighborhood you’re about to move to. Your agent may know more, but won’t know as well as you quite exactly what you’re looking for. But there are certain factors that are important for most everyone, and many of them can be researched objectively.
Everyone wants to feel safe in their community. No area is entirely without crime, but crime rates can give you a good idea of how safe you will be. The websites Neighborhood Scout and Crime Report can give some in-depth details. You should also look at transportation options and commute time. This includes not just your job, but also shopping, amenities, and schools. Not everyone is going to have the same needs in this respect, but everyone will want their specific needs met. Another important factor is the people in the community. It’s near impossible to judge them without going there, but you don’t have to be living there. You can visit community centers or even just knock on doors. Some people aren’t going to answer the door to strangers, but if that’s an important factor in providing a sense of community, that can also inform your decision.
Accessory Dwelling Units (ADUs) have been contentious for a while, but SB 9 has passed recently, ostensibly making them easier to construct in California. Unfortunately, this hasn’t panned out as well as expected, as local governments aren’t entirely on board. They’re trying to sidestep the requirements by introducing zoning ordinances that effectively, but not explicitly, ban ADUs. Zoning restrictions have always been the largest obstacle to ADUs.
What clearly isn’t much of an obstacle is popular support. Particularly in California, major cities are seeing support of over 70%, even up to 80% in San Jose. But California isn’t the only state. Nationwide support is at 69%, with the remaining 31% split between opposing and indifferent. It’s no surprise that more renters than homeowners support it, since they’re more likely to be searching for housing. But both groups show strong support — 76% of renters and 66% of homeowners.
While we can all agree that high prices and low inventory is not a recipe for a healthy real estate market, reversing the trend too quickly can cause issues as well. Prices are predicted to start declining towards the end of 2022 and throughout 2023 and 2024. This may be good for prospective homebuyers, but it’s not good for sellers who purchased relatively recently.
A sharp decline in prices could result in negative equity for some people looking to sell, meaning that they won’t be able to sell normally and may have to go into foreclosure. This is not the same type of recession that we’ve just experienced, but it’s a recession nonetheless. Fortunately, it’s not likely to result in a crash, since the continued low inventory is a positive for sellers. The market is expected to begin to stabilize in 2025, but not without steep economic losses.
In a normal year one would expect April to be the turning point for the LA real estate market. March is still cold and the children are still in school for another 10 weeks. April’s the month when the weather turns warm, the flower buds poke up, and the buyers come out to start the spring buying season. It hasn’t happened that way this year.
Prices had gone through the ceiling by the end of 2021, much of the activity stimulated by fear of escalating mortgage interest rates. Usher in 2022–January and February were typically slow and in March home sales bounced up like an indicator of business as usual. But, interest rates continued to climb and April ended with the total number of home sales down instead of up. Likewise, total sales dollars were down across the South Bay.
Number of Homes Sold
Judging from the charts, entry level homes in the Harbor area were clearly the center of activity for South Bay real estate. As interest rates pushed against the 5% mark, panic set in among first time buyers who had been outbid multiple times. Prices went up as high as buyers could afford, a number that shrinks amazingly fast with each tenth of a percent increase in the interest rate.
Across the South Bay, the number of homes sold in April dropped by -4% from March, which had been an increase of 59% over the prior month. As we see from the chart below, sales were uneven between the various areas.
On the entry level front, at the same time Harbor area home sales were dropping off, Inland homes gained sales. On the high end, sales on the Palos Verdes peninsula were also facing declining numbers, while Beach area sales increased.
So far declining sales counts have been modest, but a decline overall, coupled with a decline in half of the individual areas covered indicates that buyers are pulling back. Part of the resistance is a matter of simply being priced out of the market. Another important piece is the anticipation of price corrections in the near future. We have heard multiple buyers say they are watching and waiting for lower prices later this year.
At this point we’re well into the second quarter of the year and it looks as though those folks may be on track for some savings. even some of our most gung-ho pundits are beginning to see a market downturn on the horizon.
Median Price Sold
Interestingly, Harbor area prices went up at the same time the number of sales went down.The March to April price increase was a modest +6% compared to a +21% increase over April of last year. Similarly, the Beach cities had a month over month increase of +4%, while showing +19% year over year. While sales prices are still rising in those areas, the increase is a fraction of what it was last year.
Sold prices on the Hill continued to slide downwards. Because the February increase in the median price was created by the sale of new construction, and that building phase is now sold out, a downward turn in median price is expected. We anticipate that leveling off soon.
In the Inland area the median price for homes sold during April of 2022, was +12% greater than sales in April of 2021. By comparison, the median price of those sold in March of 2022 versus April of 2022 decreased by -1%. It’s a modest decrease that points to the direction of the South Bay real estate market for the balance of the year.
Area Sales Dollars
The total dollar value of home sales in the South Bay usually tracks right along with the number of units sold. The few times it differs are important times like these when the number of homes sold is dropping, and/or the sales prices are dropping. Today, of the four areas we track, PV Hill has a declining number of sales, both in comparison to last year and in comparison to last month. As we noted above, the area also is declining in total dollars compared to last year and last month.
As we discussed in last month’s issue, some of the reason for the drop is found in new construction homes that sold at a much higher price than the typical Palos Verdes resale home. The rest of it can be found in longer days on market waiting for a buyer, and in price reductions.
At the opposite end of the spectrum, the Beach cities showed gains last month for both number of units sold and for the total sales value of those homes. The only decline this month for the Beach was in number sold compared to April of last year. Sales this April were off by -21%.
The Harbor area still trended upward in dollar value, both month over month and year over year. But, the number of units sold was down for both time measurements. The price competition was very stiff in what is generally an entry level market. During the past couple years, bidding wars and over-asking sales prices have kept the dollars high. The April numbers show that changing rapidly.
Total dollar sales for the Inland community increased 15% month over month. That was the highest growth of all four areas. Scanning those individual transactions showed an odd pattern. Sales in the price range from about $325K up to about $750K were a familiar mix of some under asking price, some at asking and some above asking. The degree of variance was about what one would expect. Unexpectedly, for sales over $750K, nearly every property sold above asking price, and in many cases well above asking.
We found no clear explanation for why this phenomena occurred. There is a suspicion that buyers who were priced out of Beach properties may have shifted their bidding wars into the increasingly popular parts of west Torrance. This theory is supported by the distribution of sales among the various neighborhoods.
In Summary
In the table below are the core statistics comparing April to March of this year, and comparing April of this year to April of 2021. The prevalence of negative numbers is convincing evidence that high prices and high interest rates are pushing the South Bay real estate market into a recession.
Notable Properties
One of the more interesting properties sold in April is a four bedroom, five bathroom home located in west Torrance. The home was purchased by the seller as their family home in 1990 for just above $360K. The children grew up and the parents remodeled in 2022 and sold the house.
As would be expected in a good neighborhood with a contemporary remodel, the home sold for over the asking price of $2.7M. The final selling price was slightly over $3M. and just happened to be almost exactly $360K over the asking price.
In the 32 years that family owned the home it appreciated at an average rate in excess of $84K per year. It’s the classic “American Dream.”
With home prices on the rise, young adults are experiencing struggles paying for a home with just their own income. As a result, cohabiting is becoming more common, in which unmarried partners –or possibly just friends — choose to pool their money and purchase a home together. Some may be concerned that this can cause some financial headaches. But really, all you need to do is make sure you know your cohabiting partners well.
Marriage certainly confers some legal and financial benefits. As far as purchasing a house, though, the financial side of things doesn’t actually care whether you’re married or not. Relationship status is not a factor in mortgage rates, as every co-purchaser’s financial history is considered separately, whether they are married or not. However, this also means that if you don’t really know a partner’s financial history too well, you may be in for an unwelcome surprise. It’s also important to note that even after successfully purchasing the home, conflicts between co-owners can result in situations not too dissimilar to divorce proceedings, even if you aren’t married.
Fannie Mae was sued back in 2016 under allegations of fair housing violations, and the organization decided to settle in February of this year. The settlement amount was $53 million. Fannie Mae had acquired a large number of properties in the wake of the subprime mortgage crisis, and thus became responsible for their maintenance until they were sold. But fair housing organizations started to notice a trend: only the ones in predominantly white neighborhoods were being adequately maintained.
The settlement agreement was the first to determine that foreclosed properties, like the ones Fannie Mae holds, are also subject to fair housing laws. This was not officially determined prior. Also, it’s possible that they were in worse conditions to begin with, but that doesn’t absolve Fannie Mae of their responsibilities. Their argument was that their intentions were not discriminatory. Perhaps they simply were not able to maintain the homes as well since they were in worse shape. But they were unable to reject the claim that regardless of their intentions, the impact was obvious. This is what led to Fannie Mae needing to settle.
With mortgage rates on the rise, more and more buyers are struggling to obtain loans. Given this, an infrequently-used financing option is starting to make a comeback. Seller financing is an process in which the seller of a property offers to carry the mortgage, and the buyer will then owe the seller rather than a lender. This doesn’t have the same stringent requirements that mortgage loan approval has, so it’s much more accessible to buyers.
Seller financing tends to be attractive to buyers. Not only is it more accessible, but the interest rate is usually lower. It also doesn’t incur any fees such as loan origination fees. But why would a seller want to do this? Well, there are a couple reasons. Firstly, because seller financing is so attractive to buyers, it can improve the property’s marketability. There’s an additional benefit, though. It allows the seller to defer part of the taxes on sale profits. The seller only pays taxes on the principal as it is received. At the time of sale, they pay taxes on only the amount the buyer paid. This can include the down payment and any partial loans the buyer received.
The California Housing Finance Agency (CalHFA) has introduced a new loan program called the Forgivable Equity Builder Loan. It comes with some heavy restrictions — only first-time homebuyers are eligible, and it only covers up to 10% of the purchase price. This is because it’s a supplementary loan that can only be taken out in combination with a CalFHA first mortgage. The good news is that this loan has an interest rate of zero percent, and is also forgivable if you occupy the residence continually for five years. However, standard interest rates apply to the CalFHA first mortgage.
The program also requires borrowers to complete a course on homebuyer education and obtain a certificate of completion. This course does require a one-time fee of $99 if taken online, or a variable-rate fee if taken in person. You must also occupy the new home as your primary residence, as well as meet income requirements. The property must be a single-family residence or manufactured home. This can include condominiums if they meet the requirements for the CalFHA first mortgage, or ADUs in some cases.
You can find advice for prospective home buyers all over the internet — including, of course, in our articles. But who knows better than the buyers themselves what they’re having trouble with? For over half of survey respondents, 56% to be exact, the biggest problem is finding the right property. This is probably partially the current market, with very low inventory, and partially buyers not knowing what or where they can afford to buy.
This isn’t one of the categories buyers mention, though. For nearly a third of respondents, the most difficult part is understanding the process and paperwork involved. 20% cite primarily monetary issues, either with saving for a down payment or getting a loan. Comparatively few, only 7%, believe that COVID-19 was a significant complication. Meanwhile, 18% of respondents don’t think the process of buying a home is difficult at all.
Many homebuyers aren’t sure what to do when a home they want to make an offer on is in pending status. If you really want the home, the best thing to do is to make a backup offer. If you submit an offer normally, the seller is still contractually obligated to honor the original offer if it doesn’t fall through, even if your offer is better. But don’t get your hopes up — most pending sales carry through to completion, since it merely means that the seller has accepted an offer.
What does it mean if the sale does fall through, though? In certain situations, this could be a red flag, but in others, the problem lies elsewhere. Sometimes the home inspection reveals issues that the buyer (and possibly the seller) wasn’t aware of, which could change your mind as well. The bank could decide to cancel an unapproved short sale, which could entail more legal complications than you want to deal with. Other times, the problem was with the buyer, perhaps not being able to acquire a loan. If the issue is with contingencies that have yet to be met, the home may be listed as contingent rather than pending.
Home improvements have gotten more popular recently, as many people have switched to work-from-home and are spending more time there. Usually, these improvements are primarily made for the owner, rather than for a prospective buyer. These features would also be high in demand if you are planning to sell your home, but there are a few things that can actually increase the value of your home by much more than you spend.
You may be able to improve your energy efficiency by upgrading your windows, which is certainly value over time for a homeowner, but it’s also increased value for a home seller. Energy efficiency is a significant draw for buyers, and will improve the value by more than its cost, even if you aren’t reaping the rewards of it yourself. Kitchen remodels almost always pay for themselves. Homeowners spend a lot of time in their kitchen, and they want it to suit their needs. Figure out what people are looking for in a kitchen right now, and make it happen. A rather expensive upgrade is a stone veneer. You won’t recoup the entire cost if you sell immediately, but you’ll get back most of it. This is one that you’ll want to have accrue value over time.
The primary purpose of refinancing is in order to spend less money in the long term. It may seem like this is a good idea whenever rates drop even the slightest amount. However, it’s important to remember that you are technically originating a loan when you refinance, and doing so incurs the same fees. The upfront costs are what deter repeated refinancing.
Most of the fees are a few hundred dollars — unless otherwise specified, you can estimate they will be about that much. Since you are applying for a mortgage loan when you refinance, this requires both a mortgage application fee and a loan origination fee. The numbers vary, but typically, the the loan origination fee is 1% of the loan’s value. You will also need your home to be re-appraised, as lenders want to know the value of your home before approving a loan, which will require an appraisal fee. It’s also possible that your lender will require a title search, and you may need new title insurance, both of which incur fees. Title insurance, if required, could be $1000 or more.
The majority of homebuyers choose fixed-rate mortgages (FRMs) over adjustable-rate-mortgages (ARMs) in order to not have to deal with the uncertainty of changing interest rates. However, there’s very little uncertainty right now — interest rates are going up. This does include both FRMs and ARMs, but ARMs tend to have lower starting rates — a 5-year ARM was at 4.28% in mid-April. Buyers are predicting that even with an adjustable rate, their rate is not likely to surpass the 30-year fixed rate of 5.37% as of the end of April.
ARMs aren’t exactly popular, though. Even with their share doubling in the past three months, that’s still only 9% of mortgages. About as large a share of potential buyers are instead choosing to simply wait for a better time, with mortgage applications dropping by 8% and refinance applications dropping by 9%. Refinance applications are also drastically lower than the same time last year, having dropped a whopping 71%. New mortgage applications also dropped since last year, by a much more modest but still significant 17%.
The usual effect of rising interest rates is a decrease in demand, as buyers would rather wait to lock in a lower rate. Decreased demand should then translate to lower prices, since sellers want to encourage buyers. Not so in the San Francisco Bay Area right now. Prices are still going up, and demand didn’t really go down all that much.
The culprit? A couple of factors. Most significantly, inventory is extremely low in the Bay Area. Buyers are encouraged to take opportunities where they can, since they don’t come up often. That often means paying less-than-ideal prices. Secondly, the Bay Area is generally a high-income area and already has high prices. Even with rising prices, most people able to purchase there aren’t going to be suddenly priced out. Those looking for a median-income or lower household aren’t looking in that area to begin with.
We know that the wildly high post-lockdown demand was in large part driven by fear of missing out, or FOMO. People definitely took notice of the low interest rates and decided to take advantage of them. Interest rates are no longer low, and home purchasing demand has slowed. However, home renovations are still in high demand for just a bit longer. Renovating is not as expensive as buying, so homeowners with FOMO who could not afford to buy instead sought to remodel their current homes to better suit their needs.
In turn, though, home renovation costs have also increased rapidly in response to demand. By the last quarter of 2021, the year-over-year change in home remodeling costs had risen to 9.4%, about 2.5 times the expected 3.8% increase. Current projections have the Q3 2022 increase at an incredible 19.7%. But just like with rising home prices, increasing home remodeling costs will begin to price out even those affected by FOMO. Q3 is predicted to be the peak, with the prices starting to slow again by Q4 2022.
The Millennials are currently the generation that makes up most first-time homebuyers, and they’ve certainly been looking for homes with home offices so they can work from home, or extra rooms for their young kids. But there are also many Millennials that already own a home, and they’re probably aiming for the same thing. They will also want to make sure the home has a layout suitable to their needs.
For those Millennials that aren’t first-time buyers, it’s likely they’ll want to upsize. Even though they’re likely rather cash-poor due to the economic circumstances both in their early adulthood and now, some of them may have good equity in their homes because home prices are so high right now. That could help them to purchase something larger by selling their current home.
Under California’s Regional Housing Needs Allocation (RHNA) laws, each local government is required to work with the state government to establish what is called a housing element. The housing element identifies sites that can be redeveloped to meet regional housing needs, within an eight year timeframe. If the city can’t find a usable site under their current zoning laws, the zoning laws need to be modified. In Southern California, the housing element deadline was October 15, 2021. The deadline for Northern California is later this year.
Five cities — Bradbury, La Habra Heights, Laguna Hills, South Pasadena, and Vernon — failed to submit a housing element altogether prior to the deadline, and a sixth, Manhattan Beach, submitted a plan that indicated a site that could not be redeveloped in a reasonable timeframe. The site indicated was the Manhattan Country Club, which was purchased in 2017 and the City of Manhattan Beach cannot guarantee its availability by 2029. Without the 149 units provided by this redevelopment, Manhattan Beach fails to meet its regional housing needs. In response, the nonprofit organization Californians for Homeownership has sued all six of these cities.
A California law allowing duplexes to be built on lots zoned for single-family residences, SB 9, passed in 2021. However, the law doesn’t have much in the way of enforcement. Cities are finding it relatively easy to avoid this with local ordinances that make it effectively impossible, since they can’t legally ban it. The same sort of thing happened with the struggles with building ADUs, which actually became legal nationwide in 1982, but weren’t feasible in most states prior to 2016.
One example is the town of Woodside claiming that the entire town is a mountain lion habitat, and is therefore excluded from the requirement because it’s a habitat for a protected species. Once this reached the news, Attorney General Rob Bonta got on their case and forced them to reverse the decision. All the AG’s office needs is proof that municipalities are attempting to skirt the requirement, and then they can take action. Without an enforcement agency, though, they’re reliant on the spread of information through media, including social media.
Conventional wisdom says you should eat three meals per day, one when you wake up, one at midday, and one in the evening. This convention, though, is actually rather new. And not at all backed by science — it’s based around standard work schedules more than anything. You eat before work, you have a meal during your lunch break, and you come home and eat with your family. However, your meal times should be limited to a smaller window.
Fasting is actually a very necessary process to help repair damage to the body. Of course, this can include the normal eight hours of sleep. But for a healthy body, eight hours should actually be the time that you’re eating, and you should fast the rest of the day, or at least twelve hours. It is possible to do this while still eating three meals, but the standard work schedule makes this difficult. You don’t need as much food as you’re probably eating, though, and you could even just eat one meal per day if you really wanted to. Breakfast in the morning used to be reserved for wealthy people who could afford to eat that often. Skipping breakfast and waiting until your lunch break to eat is actually not a bad idea, even if many people nowadays only do so because they lack the time. For a while, you’re going to be hungry in the mornings, but this is a psychological effect because your body is used to eating at that time, and is temporary. The same thing would happen if you shifted to a new work schedule and had different meal times. It doesn’t actually mean your body needs food.
Over approximately the past decade, the average length of time homeowners have stayed in their home has steadily increased, from 10.1 years in 2012 to the peak of 13.5 years in 2020. Until last year. The figure actually dipped in 2021, decreasing to 13.2 years, even slightly below the 2019 average of 13.3 years.
Much of this can be attributed to the economic aftermath of the pandemic, as relocations increased dramatically in 2021 as a result of work-from-home opportunities and low mortgage rates. It’s unclear whether this is a temporary decline, or 2020 was the peak of homeowner tenure and it’s going to continue to decrease. Analyzing the reasons for the decrease and why it’s been increasing in the first place suggests it’s probably going to go back up. Work-from-home is still happening; however, mortgage rates are no longer low and are still going up. Meanwhile, the initial reasons for the increase over the past decade include increased propensity for aging in place and a desire to keep one’s property tax base low. Neither of these are changing much, even with the ability to transfer your property tax base in some cases.
