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.
As a result of the Federal Reserve’s decision to increase benchmark rates, both fixed and adjustable rate mortgages have been increasing. Rates are now beginning to reach a stable point. Of course, the rates are in constant flux, but the fluctuations are starting to level out. This doesn’t mean a reversal of the recent increases; the 30-year FRM rate is levelling at somewhere around 5.5%, which is still relatively high in comparison to recent years.
What it does mean is that the uncertainty regarding rates is decreasing. With this, the popularity of ARMs will drop, as uncertainty is their primary drawback. They had experienced a surge of popularity while FRM rates were similarly unstable, since FRM rates tend to be higher than ARM rates during the same time period. This is despite the fact that ARM rates also drastically increased between July 2021 and July 2022, from 2.48% to 4.30%.
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.
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.
Most of the time, vacations don’t last that long — a few days or maybe a few weeks. Homeowners are generally okay with leaving their homes unattended for that length of time. But what if you’re vacationing for the entire summer or winter? It’s simply not practical to leave your home vacant for three months or longer. You may want to rent out for home for the length of your vacation.
A three-month rental contract may not seem like a long time, but is actually considered a long-term contract, not a short-term contract. So it’s not any more complex of a process than any other standard rental contract. The most obvious benefit is the income generation, but there are less obvious reasons to want to keep your home occupied. Vacant homes are the primary target for burglaries, so if you have tenants in your house, you’re less likely to be a victim of crime. Tenants can notify you of any problems that arise, and also take care of regular maintenance such as mowing the lawn, though you should make sure to include this in the contract.
The 2022 recession appears to be coming in stronger and faster than predicted. Year to date home sales in the South Bay have dropped -17% compared to 2021 sales through July. Month to month, the change from June to July was -12%. The July drop followed a lackluster June performance of only 1% over May which was itself down -13% from April.
Money was cheap and readily available in 2021, and the Federal Reserve Bank (Fed) was fore warning everyone that the mortgage interest rates were going to rise. The number of homes sold sky-rocketed, purchased both by owner-occupants and by investors hoping to snag interest rates at the absolute lowest in decades. Along with that came the bidding wars and the escalating prices. Looking back, one can readily see a correction in the making. At the time most experts were considering 2021 a trade-off for all the transactions lost during the 2020 lockdowns.
The last year we could consider normal was 2019. Compared to 2019, the number of homes sold during the first seven months of 2022 is nearly identical, hinting at a return to normalcy. However, a deeper look shows recent months dipping as much as -25% below 2019 sales volume. If sales volume continues to drop at this pace, we can anticipate starkly lower prices before the end of the year.
Steeply climbing interest rates have cost today’s buyers over 25% of their purchasing power so far in 2022. Some of those potential buyers will simply buy a less expensive home. Some of them will wait and save longer for the down payment. Some of them will become permanent renters. On the other hand, sellers have fewer options. They can decide not to sell, if that’s possible for them, or they can lower the price until a buyer can afford the home.
Median prices fell in all four market areas for July versus June of the current year. The overall drop was approximately -5%. (See chart below for detail.) So far in 2022, median prices have remained higher than those from last year. But, since April of this year median prices have consistently fallen on the year over year comparison. As noted earlier, we anticipate the median price dropping below last year sometime this fall or early winter.
“Should we wait to purchase?”
We hear this question a lot, and the answer is an unequivocal “No.” In the end result, chasing the elusive “bottom of the market” is a fool’s quest. By definition, when one recognizes the bottom of the market, it‘s already gone. We recommend that when you find a home that meets most of your needs and is within your budget, you should move on it.There are several reasons.
First, because the Fed is already projecting future interest rate changes which could easily eclipse the savings to be found in a correction. Alternatively, those future rates will prevent some potential purchasers from qualifying for a loan.
Second, because economics today is a web that reaches around the world. As we have seen just in the first few days of August; allowing grain movement on the other side of the world will affect our stock market, and available interest rates overnight. We live in a very volatile world and a perfect deal today may not exist tomorrow.
Sales Volume Down, Inventory Up
In March of this year there was essentially no inventory of homes for sale in the South Bay. Sellers were reporting literally dozens of competing offers on the few homes available. Today, in August, there is easily two months of inventory and homes are sitting on the market for increasingly long periods of time.
Sales in July fell in all four sectors. The Harbor area has now shown declining sales in four consecutive months. PV Hill sales have been off three of the last four months.
The Average Days On Market (ADOM) for the homes sold in July was 17, meaning it took 17 days from the time it was listed on the MLS until an offer was accepted. The ADOM for the homes currently active on the MLS is 46 days, a full month longer than those closing escrow in July.
A lesser known indicator of market condition is the number of homes that don’t sell before leaving the MLS. In July alone, 194 homes fell off the MLS. Of those, 41 Expired never having received an acceptable offer. The remaining 153 were removed because buyers were not showing interest at the listed price. Some of those sellers truly need to sell and will come back at an improved price. Most of them were hoping for a financial windfall and have set aside their plans.
Median Price Falling for South Bay Homes
The median price fell in July for all areas. The hardest hit was the Harbor area with a -6% drop in the median. The Hill was next, with a -5% loss, followed by the Beach and the Inland areas with -4% and -3% respectively.
Of the 116 homes sold at the Beach, 22 (19%) required a price reduction before getting an offer. The Harbor required 59 out of 329 (18%), the PV Hill 9 of 53 (17%), and the Inland area 17 of 153 (11%). Those were price reductions necessary to get an offer on the property, followed by a successful sale. Let’s look at properties active on the market, still trying to get an offer.
As this is written, the Inland area, shows 211 properties available with 77 having taken one or more price reductions already, without receiving an offer. That represents 35% of the currently available Inland homes. Homes at the Beach show 96 reduced of 228 (42%), on the Hill 53 reduced of 140 (38%), Harbor 215 reduced of 547 (39%).
So we see that nearly 20% of the homes sold in July needed a price reduction to get an offer. We also see that roughly 40% of the homes currently on the market have had one price reduction and may need further changes to stimulate offers.
Total Sales Revenue
The decrease in the number of homes sold in July, combined with the decline in median price for those homes pretty much guaranteed that the total sales value would drop as well. Across the South Bay revenue fell from last month by -16%. This will not make our tax assessor happy. Interestingly enough, Los Angeles County Tax Assessor Jeff Prang recently announced with pride a $122 billion growth in County property tax assessments as of January 1, 2022.
The Beach area fared the best, dropping only -2% in value. We noted quite a number of homes being sold as furnished rentals in July, like this one in Hermosa Beach. The Beach Cities are noted for their short stay vacation rentals (often referred to generically as AirBnBs) whether approved by the various cities, or not. Unfortunately there is no official accounting system for these properties. Even if one existed, many of the operators would be very resistant to a governmental accounting which could cause them taxation issues.
For the moment, Beach values seem to be the strongest of the South Bay. The Inland area followed with a -9% decline in total sales dollars. The Harbor area was next, off by -17%.
On the surface homes on the Palos Verdes Peninsula took the worst beating with a -41% decline in value from June sales. We remind our readers that the PV Hill is small by comparison to the other areas. As such, statistical measurements often appear distorted because many of the homes are unique and generate significant sales prices. Having said that, this month was a relatively mundane one for PV. Of the 53 sales, the low was an attached two bedroom, two bath condo which sold at $557K. The high sale was a six bedroom, 8 bathroom house in Rolling Hills which sold at $8 million. (For your valuation purposes, click here to see photographs and descriptions of the two homes.)
Lots of Red Ink
The table below shows the percentage of change in the number of homes sold and the median price of those homes two ways. The yellow shows change for the current month versus the prior month. The green shows change for the current month versus the same month last year.
From a seller’s perspective, these numbers would ideally all be black/positive. When any of them become red it shows a retrenchment in the South Bay real estate market.
From a buyer’s perspective the red ink is a good sign. It means purchasers can get more home for their money. For them, the real savings will come when that last column turns red.
August 16, 2022 will be an epic soul/blues show at Project Barley Brewery & Pizzeria with Preston Smith, Brophy Dale, Mike Malone and organizer; Jodi Siegel. Put it on your calendar–it’s gonna be rocking!
Preston Smith
Guitarist Preston Smith is a multifaceted talent that has enabled him, both with his band and solo acoustic, to have worked with legends like: Robert Cray, Albert Collins, Foreigner, Salt-N-Pepa, The Red Hot Chili Peppers, Bonnie Raitt, Social Distortion, Wall of Voodoo, Concrete Blonde, Savoy Brown, Charlie Sexton, k.d. lang, John Mayall, Tower of Power, Joe Satriani, The Ventures, Dick Dale & the Deltones, Eric Burden & the Animals, Delbert McClinton, Paul Butterfield, Poco, Santana and many more!! His one man band performances are mind blowing!!
Brophy Dale
Guitar player Brophy Dale, originally from Texas, has worked with The Stray Cats bassman Lee Rocker, as well as Robert Lucas of Canned Heat, Smokey Wilson, Joe Houston, & King Ernest to name a few, on the Southern California blues scene. He’s also had the opportunity to work with some of his heroes, which include Dave Edmunds, Delbert McClinton and a few tours with Scotty Moore.
Mike Malone
Keyboard/vibe player, Mike Malone has shared the stage/ recorded/ worked with Eddie “Cleanhead” Vinson, Mick Taylor, Jimmy Vaughn, Mark Ford, Top Jimmy, Papa John Creach, Pee Wee Crayton, Guitar Shorty, Joe Houston, Deacon Jones and Big Joe Turner.
He plays with many Southern California bands including the Broughams, The Mighty Mojo Prophets to name a few and his jazz trio; an instrumental band featuring his fine vibe playing!! Mike recently released a solo album called “Just Passin Thru.”
Jodi Siegel
Host, guitarist, singer/songwriter Jodi Siegel has opened for and or shared the stage with many respected musicians including: Albert King, Robben Ford, Robert Cray, J.D. Souther, David Lindley, Fred Tacket and Paul Barrere (Little Feat) and more.
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.
Patrick Simmons (Doobie Brothers), Walter Trout, Maria Muldaur and more, give her new CD, “Wild Hearts,” rave reviews!
Wild Hearts is produced by Steve Postell (Immediate Family, David Crosby) is filled with great songs, cool grooves, intimate, smart lyrics and some of the best of the best musicians in Los Angeles today.
Conventional wisdom is that it’s more financially sound to buy a house than rent, if you can afford to do so. However, this may not be entirely true anymore. While house prices and rent prices are both increasing, house prices are increasing at a much higher rate. The gap between mortgage payments and rental payments increased from $25 in April 2021 to over $800 a year later. This difference is the highest in over 20 years. Unless you’re planning to live there for over thirty years, you’re probably better off renting. Importantly, this is based on a down payment of 5%, which is significantly lower than the commonly recommended 20%, but many buyers may not be able to afford a 20% down payment.
This won’t be permanent, but it could last several years. Home price growth has already started to lessen, but interest rates are high right now. Prices aren’t expected to be at a low until around 2025. Increased construction could aid in further reducing home prices. Given that we’re seeing the the beginnings of another recession, though, that probably won’t happen until a couple years after prices bottom out. Even after a return to normality, California is still going to have a lot of renters. With many lower-income workers permanently priced out of buying, the state has consistently had the first or second lowest homeownership rate of any state, frequently swapping places with New York.
In most cases, getting a mortgage loan requires a home appraisal. Usually, this is a rather long process that involves extensive analysis of a home by an appraiser, inside and out. But sometimes the process can be expedited by using a drive-by appraisal, in which the appraiser only looks at the home’s exterior. The other advantage, besides the speed, is that it’s much less invasive for any current occupants, especially if they are tenants. Of course, this is at the cost of a much less in-depth evaluation.
Also, it’s not always possible to get a drive-by appraisal. It’s essentially at the discretion of the lender whether a drive-by appraisal is allowed. If the lender wants a full investigation, they simply won’t approve the loan. That said, more and more lenders are permitting them as a result of COVID, since evaluating the interior can be risky. Lenders are also more likely to allow a drive-by appraisal for a refinance as opposed to a new loan.
The Biden administration recognizes that the best way out of the current housing crisis is to bolster supply through additional construction. In order to meet this goal, the new Housing Supply Action Plan was recently unveiled in a White House press release. The five-part plan is expected to solve the crisis within five years, and mostly addresses issues of financing.
The first part of the plan is aimed at directly assisting builders with increased resources and new programs. The plan also modifies federal grant prioritizations based on a new system of scoring for zoning and land use reform. Additional financing options will be provided for manufactured housing, ADUs, and smaller multifamily properties. In addition to new financing options, the plan expands existing Fannie Mae financing programs. The last part of the plan is unrelated to financing or construction; it prevents institutional investors from purchasing REO properties in favor of allowing them to be purchased by owners intending to occupy the property.
When getting a mortgage loan, that money generally comes from a bank. But it’s important to realize that a bank isn’t just an impersonal repository of money. Banks are businesses, and as such, they’re always looking for profit. This extends to deciding your interest rate, which is nearly always not the best rate you could get.
One of the ways banks pull a profit is by looking to the future of interest rates. They will frequently take an expected future average rate rather than the current average rate if they expect rates will rise soon. They get slightly ahead of the game this way. The other reason rates are often higher is not entirely within the bank’s control, although it is partially a result of their actions. A common method of reducing risk is for a bank to sell debt to an investor. This also frees up capital for the bank. But it introduces an additional party also looking for a profit, and the bank may need to make concessions for the deal to go through. Increasing interest rates is a way to recoup these losses.
Renovations can be expensive. Even if you can afford it, lowering the costs may end up being a better return on investment, even if the renovation is less extensive or lower quality than you wanted. Of course, if you can do the renovations yourself, that is by far the cheapest — though most time-consuming — option. But even hiring contractors has the potential to be much cheaper than you’d think.
When performing home renovations, the immediate assumption is that all the additions are going to be brand new. That doesn’t have to be the case. Gently used products may still be better quality than what you have now. The contractors you’re hiring may even have just taken some cabinets from a previous client — ask if they have anything suitable on hand that they would need to get rid of somehow anyway. You may even be able to do everything through one contractor. Though you’re still paying for every renovation, you may avoid repeated fees by not being charged by multiple companies. Of course, you may have to scale back your renovation plans to do this. Not every company is willing or able to perform every renovation.
One smart home feature you may not have heard of is smart windows. There are a couple reasons for that. First, they’re rather expensive and therefore not widely available except for industrial applications. Second, they’re actually a much older concept than what in modern days is called a smart feature. Smart windows originated in the 1980s and are a type of window that can be darkened or lightened by application of either electricity or heat, depending on the type of window, termed electrochromic or thermochromic.
Electrochromic windows are actually already in use, though generally not in houses — they are used on privacy screens, display panels, and vehicle windows or sunroofs. Thermochromic windows, while equally old in concept, haven’t been seriously produced until recently, with advances in two-way thermochromic glass. Old generations of thermochromic windows used a substance called vanadium dioxide, and a newer model uses a combination of water and hydrogel. Both are viable and have their own pros and cons. Cheaper models may be commercially available in about ten years, though they will still be more expensive than standard windows.
One of the most sought-after pieces of information to learn about a potential new neighborhood is the crime rate. No one wants to move to an unsafe area if they can avoid it. Even if you are required to move there because of a situation outside your control, you’ll want to know what you should be on the lookout for and how prepared you need to be. There are a few different websites to help you learn more about crime in your new neighborhood.
SpotCrime and CrimeReports are very similar. Both allow you to enter an address and gain an instant report of recent crimes in the neighborhood. They also both allow you to sign up for alerts. SpotCrime additionally lets you provide information to help others anonymously. Neighborhood Scout provides per capita crime rates in any neighborhood you select, not just your own, and also has a comparison feature that allows you to find other neighborhoods with similar crime rates. Family Watchdog has a more narrow purpose. It specifically looks for the locations of registered sex offenders and informs you if one is living in the area.
With high interest rates, more and more buyers are beginning to realize they can no longer afford to buy, or would prefer to buy something less expensive. Sometimes this moment of realization hits them after they’ve already signed a purchase agreement, and now they want to back out. This is entirely legal, but does come with some potential costs.
When prices are increasing, breach of contract isn’t a huge deal, but can annoy sellers who have to delay their home’s sale. But when prices are decreasing, as is beginning to happen now, sellers have more to lose. Which is why they have a few different options to remedy the situation: they can enforce the purchase agreement, relist their property, or just withdraw the listing and wait for a better time. If the seller chooses to relist, they may be entitled to compensation from the buyer who breached contract. If the profit from the sale after relisting is less than what it would be given the original contract amount, the amount of the buyer’s deposit that would be returned to them is decreased by the amount of the seller’s losses. There may be cases in which there was an agreed-upon limit to this amount, in which case the agreed-upon limit is used, plus an interest rate of 10%.
