In San Francisco and surrounding areas, wage growth has recently outpaced home price growth. Some real estate analysts are now calling the area “affordable,” since prices are dropping relative to wage growth. That label discounts a few rather important factors, though.
First, the majority of wage growth in the area was for high income jobs. These people were already homeowners with stable, high-paying careers. Wage growth doesn’t actually help them purchase a home, it just gives them more disposable income — which they aren’t necessarily lacking.
Second, only in San Francisco itself are home prices actually dropping. In the rest of the region, they’re still going up. And throughout the entire region, they remain exorbitantly high. The Bay Area is one of the most expensive regions in the world.
Third, wages actually may not have gone up at all overall when factoring in unemployment. Unemployed people aren’t considered to have an average wage of $0.00. They’re just not counted in the data. Therefore, the unemployment rate doubling to 5.45% in May from pre-pandemic numbers may have caused average wages to become artificially inflated. Not to mention that no home is actually affordable to unemployed people.
Inventory may be low, but housing isn’t the only thing in short supply. Once work from home became more popular, homeowners started looking to upgrade their homes since they would be spending more time there. Part of that was updating their appliances and buying new furniture, particularly stoves and grills because homeowners would be cooking at home more often. Combined with a decrease in manufacturing productivity due to labor shortages, appliances and furniture are selling out quickly.
While increased new construction is a potential solution to low housing inventory, it’s definitely not going to help the appliance shortage. Even with construction being low, the increased demand for already existing homes is stretching the appliance supply thin — and new constructions would require all new appliances. It’s even affecting the timing of real estate transactions. Closing time is being delayed because the new owners want the place to be move-in ready when it closes, and they aren’t able to get their hands on appliances and furniture.
The second quarter of this year was thought to be a potential turning point in our recovery, as fewer and fewer people were missing payments. This includes rent payments, mortgage payments, and even student loan payments, though the frequency of missed student loan payments is still alarmingly high at 44.8%. Renters received assistance both from government entities and also from their landlords, and the government provided mortgage assistance as well. However, students with loans haven’t been given much help, and there’s been another recent surge of COVID-19 cases due to the delta variant. Some regions that had previously eliminated mask mandates are now requiring them again. The economy won’t recover until the job market stabilizes, which is made much more difficult by health concerns.
Even with mortgage interest rates under 3% the July market had a hard time keeping momentum. March looked like a game changer, but May went soft. Total dollar sales were up in June but by July prices and sales volume were both headed down again.
So what’s going on here? Sales are yo-yoing across the charts like the economy can’t make up it’s mind. Are we leaving a pandemic or entering one? Banks have started raising the interest rates multiple times. Each time buyers walk away and the rates come down again.
The Coronavirus pandemic has been so pervasive most of us haven’t noticed there is a concurrent recession happening. One pundit I follow recently referred to it as a “two month recession–the shortest in history.” That’s a great punch line, but highly mis-leading. Real estate is a long term business proposition, not an impulse buy.
That’s part of the reason forecasting is so challenging this year. The statistics we would normally compare are last year versus this year. To do so is meaningless in today’s situation because last year was anything but normal and the result of a comparison makes no sense. To demonstrate, this table shows the comparison from this month to last month of the current year, and from last month of the current year to the same month last year.
Is the market good? Or just looking good?
Notice that comparing June to July of 2021, nearly every statistic is negative. Quantity sold was up 3% for the Inland cities, but down in all other areas. Prices were flat in the Harbor area, but down in all other areas. Looking just at the current stats, it looks like a slowing market.
However, it’s easy to portray everything as rosy when you only compare 2021 activity to 2020 activity. Reading it that way, sales volume is down 2% at the Beach, but volume and pricing are up in big numbers everywhere else. For those readers who like to study punditry, watch the authors you read to see who compares both ways, versus who only talks about positive numbers.
Sales volume flat last four months
By March of this year, all areas took a big jump upward in the number of units sold. The Harbor area, which is often the most friendly to first time buyers, took the biggest jump increasing from roughly 350 units per month to nearly 500 units per month.
Since March the number of units sold has remained stubbornly flat across the South Bay. The Harbor area showed strong activity, recovering almost immediately from a sharp dip in May.
Prices flat last four months
More accurately, Beach prices have been flat the last three months after a $100K jump in May. Inland and Harbor prices have seen very little change since the first of 2021. PV moved upward from January through April, picking up about $400K in median price appreciation. Since then the Hill has also been stable.
Usually more stable than the Beach or the Hill, the median Inland prices have remained very close to their starting point in January. Harbor area prices have bumped up about $100K since the first of the year. We see some of that in appreciation related to retail growth and renewal in San Pedro. On the Long Beach side, we’ve seen good appreciation in the first time buyer community and in the 1-4 rental community.
In summary, real estate in the Los Angeles Suth Bay is on the mend. Don’t mistake that for astronomical growth. We’re getting back to where we were and leveling out.
As more and more employers are considering the possibility of permanent work-from-home, homeowners need to think about ways to create dedicated office space in their home. Of course, if you can afford it, you can make an addition or even just buy a larger home. But not everyone can afford that, so for those who can’t, here are some ways to turn existing space in your home into office space.
For most jobs, a home office needs a desk. But a desk is just an elevated flat surface — it doesn’t have to look like an office desk. You can use a simple table or even just the shelf of a cabinet. You can also just use your dining table. You probably aren’t eating dinner while working. Other types of rooms can also become split-purpose, such as a guest bedroom. If you don’t have guests over — which you probably don’t during a pandemic — you’re free to use it as your office space whenever you want. Even if it’s occupied during the night when your guests are sleeping, you can still get work done there during the day. If you want to get creative and aren’t too spooked out, you can also turn your attic space into a home office with a table and proper lighting.
Many people try to reduce their energy bill by limiting their usage. While this will indeed reduce your bill, it also reduces your comfort. There are better ways to save money on energy bills without sacrificing anything. All these ways cost money, but the investment is worth it to save money over longer periods.
A couple things you can do are one-time investments that will continue to pay dividends. These are both simple modernization. Incandescent bulbs are largely outdated, and should be replaced with LED bulbs, which are more energy efficient and last longer. Expect to save around $75 per year. Smart thermostats are the other one-time investment that will work wonders to save you money. Your HVAC doesn’t need to be working when you’re working, and it can sleep when you’re asleep. A smart thermostat lets you manage that without much effort.
The other way to save money may need to be redone periodically, but it’s still worth it. That’s just simple routine maintenance. Not only does routine maintenance reduce the likelihood of needing to pay gigantic repair costs further down the line, but it can actually improve efficiency even if no repairs become necessary. Clogged HVAC filters won’t stop it from working, but they will make it work harder and expend more energy. The other type of maintenance you may not think of is sealing leaks. Up to 20% of the money you spend on heating and cooling may just be flowing out of small cracks near doors, windows, lighting units, and chimneys. Trapping the air by sealing these leaks with caulk will reduce stress on your HVAC unit.
In order to understand what a stepped-up basis is, first you need to know what a basis is. Basis in real estate is essentially the value of a home discounting any effects of appreciation or depreciation, and is used for tax purposes. It’s calculated as a property’s cost when it was purchased plus the value of any improvements made to the property. When determining the amount of taxable capital gains when selling the property, this is the amount subtracted from the sale price.
Where stepped-up basis comes in is in the case of inherited properties. When a property is inherited, the basis is recalculated based on market values, ignoring both the purchase price and any improvement values. It’s possible that this stepped-up basis causes your capital gains amount to be negative, in which case this can be deducted from your taxable income if it is not your primary residence. Only up to $3000 can be deducted in this way per year, but you can continue to deduct in later years until the loss is settled. The estate can choose to use the market value on either of two dates: the date of the previous owner’s death, or six months from that date, called the alternate valuation date.
Between April 2020 and March 2021, foreign investors purchased 31% fewer properties than the previous 12 months. The total sales volume was down 27%. In a way, this should be expected, since pandemic lockdowns made transactions more difficult. But it comes at the same time that domestic competition was, and still is, heavy. Competition shouldn’t be a huge issue for foreign investors, since they’re usually already wealthy and intending to pay cash.
That said, restrictions are still loosening in other countries, and they’re in a volatile place even in the US. It’s likely that foreign investment simply needs a bit of time to settle back into place. Though there was a drop of over 50% in dollar volume in China, Canada, and Mexico, they’re still all among the top investors in the US, along with India and the UK. This means it was probably a temporary drop-off due to adverse conditions, not a radical shift in general sentiment towards the US.
Mortgage rates have been low for quite a while, even despite a bump earlier due to pandemic-related fees. Those fees have now been eliminated, allowing lenders to drop their rates back down. The current average of 2.78% is not quite as low as the January record low of 2.65%, but anything below 3% is very good.
With rates being so low, now is probably a good time to refinance if you didn’t take advantage of the low rates already. But refinancing is not always the right choice, even with low rates. If you’ve already had your loan for a long time, starting over could just make you end up paying more overall. If you do think refinancing may be right for you, get multiple quotes and take steps to lower your rates. You can do this by improving your credit score, increasing your home equity, or paying optional fees upfront called discount points.
Before we get into the run-of-the-mill analysis of real estate, let’s look at the real estate market in South Bay from a different perspective. We’ve been using a microscope to zoom in on the details of sales volume and median price in various locations, etc. Pretty traditional stuff.
For a couple paragraphs, let’s zoom out and look back at what has happened to the LA South Bay market over the past few years. I want to take a moment to acknowledge my friend James Allen for prompting me to do some research and analysis along this vein. James is editor and publisher of Random Lengths News in the Harbor area. We trade thoughts occasionally about one aspect or another of local real estate and economy. Earlier this month he asked me what I thought about the recently announced 2021 property rolls for Los Angeles County.
Thank you for asking, James.
Let’s start by saying the primary task of the County Tax Assessor is to establish every year a value for all the property subject to tax in the county. This year the Assessor has given the total value of LA County property as $1.76 trillion.
Not knowing what to expect, first I pulled in the immediately available data from the Los Angeles County Assessor’s new web site. (I noted a couple of inconsistencies along the way, but given the relative size I decided to consider them rounding errors.) I pulled data back to 2006, which includes the “Great Recession.” The result is shown here and discussed below.
This chart shows the total assessed value, before exemptions, of all property assessed in Los Angeles county. It’s a snapshot in time, taken mid-year corresponding with the tax assessment year. The county has had a steady upward climb with the exception of a flat spot and a shallow trough following the Great Recession during 2007-2008. Taxes are paid in arrears, so the losses didn’t show up until about 18 months later. It took that long to work through the system and show up as a $20B drop in 2010, and then stretch into 2011 and 2012.
The loss of property values following the lending collapse is appears surprisingly shallow. Looking closer at the detail, we see that two of the three primary property value categories offset much of the decline in Single Family Residential (SFR) category. Residential Income (ResInc) values increased .3% and Commercial/Industrial (Comm) values increased .7%, while SFR decreased 1%.
The pattern since 1975 has been that each year the Residential Income category (that’s 5 or more residences in one complex) is stable and brings in about 14% of real property tax revenue. In 1975 ResInc represented 13.5% of real estate values in the County. In 2020 it represented 13.9% of the County value.
The Commercial/Industrial category, which deals in the sale/manufacture of products, has a slightly decreasing percentage of the tax revenue each year. In 1975 Comm property represented 46.6% of taxable real estate value in the County. By 2020 it had declined to 29.2%, about a 17% tax savings for business.
The Residential category represents single family homes and residential complexes of 2-4 units. Commonly termed Residential 1-4, this category has borne an increasing share of the tax burden since 1978. In 1975 SFRs represented 39.9% of taxable real estate in the county. By 2020 homeowners were paying 56.9% of the County’s real property taxes, about a 17% tax increase for homeowners.
Another interesting thing is the strong similarity between 2009 and 2021 relative to the surrounding history. Both years show the market rolling up to the top of the chart, and then taking a slight dip. If 2022 follows the same pattern we should be looking at 12-18 months of flat market followed by several years of steady appreciation.
We do want to be careful here to recognize that there will be adjustments after the fact. Some of these numbers may be changing for years as errors are discovered. Historically, those late changes seldom have a measurable impact.
June 2021 Total Dollars Sold
Continuing the trend of recent months, total sales dollars for residential real estate in the Los Angeles South Bay went up in every area. We saw the slowest growth in the Inland Cities which remained nearly level with dollar volume from May.
As usual, the Beach and the Hill had the steepest growth incline on the charts. Overall sales activity has been showing strength in the harbor area. Smart money would consider the future potential from both a residential perspective, which is the primary zoning of both San Pedro and Long Beach, but also from the Commercial/Industrial perspective. The Harbor area has one of the largest concentrations of manufacturing in Southern California.
June 2021 Inventory is Rising
June enjoyed a larger inventory of available homes in the South Bay than we’ve seen recently. Earlier this year the shortage of property on the market had reduced listings to as little as two weeks of inventory in some areas.
Active listings right now show that if we stopped listing homes today, all available properties in the Inland cities would be sold within 21 days. That’s a far cry from a normal inventory of 5-6 months, but is better than the 1-2 weeks we’ve been seeing. Similarly, inventory levels are up to 24 days in the Harbor area, 30 days in the Beach Cities and 32 days on the peninsula.
As the inventory climbed, June saw a sizable increase in sales. Back in May, every area recorded declining sales, not because no one wanted to buy, but because not enough people wanted to sell. The chart below shows a healthy increase in volume nearly everywhere. Sales dropped a mere 1% in the Inland cities and were up as much as 16% at the Beach.
Median Prices are Stabilizing
Let’s face it. Society cannot afford prices that climb 10+ percent in a month. Those are numbers that bespeak failing economies. So, watching South Bay prices level off on the chart below is a good thing. To put perspective on the matter, housing prices traditionally tend to rise at about 4% per year.
June brought some relief in that the steepest price increase was 5% on the Hill, closely followed by the Harbor area at 4%. (Keep in mind that the Palos Verdes peninsula is a very small market area and subject to more vacillation than the other, larger markets.) The Beach came in with no increase in prices and the Inland cities showed a restrained 1% increase.
While homes are selling quickly in the current market, the vast majority of those are existing homes. Construction has been slow for quite some time, and is weakened by high lumber prices. Though lumber prices are below their peak in May, wildfires are still hampering the ability to procure lumber. With so few homes being built, sales of new homes hit a 14 month low in June.
This is a problem not only for construction companies, but for the economy as a whole. Without many homes being built, supply is significantly lagging behind the already high demand. What’s more, many existing homes are not in the category of affordable housing, meaning low-income homebuyers are struggling to find something within their budget, especially with prices being high right now.
Properties selling above the asking price isn’t a new concept. It happens regularly if a property is in high demand or demand is just high in general. However, it doesn’t normally happen with condos, which are usually an option for people who are on a low budget. This year, the number of condos sold, percent of condos sold over asking price, the sale price, and the average price over asking all skyrocketed. The trend began in May, and June saw record numbers across the board.
In a climate of high demand and low mortgage rates, like the current real estate market, properties are selling fast. Very fast. The median days on market for condos halved in the past year. The reason it’s condos specifically is that prices are also high, which means many people are looking for a budget option. They still need to stretch their budget, though, since heavy competition means they’re probably not going to strike a deal without offering over asking price or paying cash.
The best way to turn a profit through real estate is with investment property. Flippers certainly wouldn’t do what they do without some return on investment, but the return is much greater if you’re keeping the property and renting it out. Of course, not everyone can afford to make that type of investment, but if you can, these tips will help ensure you do it right.
It should be obvious that your bottom line is important, so make sure to take a look at average rent values in the area where you’re buying. If it’s not enough to cover whatever your costs would be, look elsewhere. Also keep in mind vacancy rates; investment property won’t bring in any money if the properties are all being left unoccupied. The second factor is location. You can change a lot about a home through renovating or even demolishing it and rebuilding, but what you can’t change is where the plot of land is. The properties with the highest rental values tend to be in areas near good schools, recreation, and public transport, that are quiet and have a low crime rate. The final thing to look for depend on current trends, so be sure your information is up to date. Short of demolishing the home, it’s quite difficult to change a property’s overall floor plan. By contrast, peoples’ floor plan preferences do change over time. A home with a modern floor plan is most likely to be well received by tenants.
If you’re looking for a place that is affordable yet in a nice neighborhood, look no further than neighborhoods that are up and coming. The process of gentrification significantly increases an area’s desirability, but unfortunately also significantly raises prices. Areas that have just begun this process, though, are probably still inexpensive.
There are a few things you can look at to determine which neighborhoods are in this category. Two of them involve correlations with hard data that you can access from professionals. The city’s municipal office can provide information about building and renovation permits. A high degree of activity in either of these, but especially renovation permits, implies that the neighborhood is about to become more expensive — but isn’t yet. The other statistic to look for is days on market. Slowly dwindling days on market is a precursor to a highly desirable neighborhood. If this is information you’re interested in, just call or email us, since as your real estate agents, we can help you track it so you can grab the best deals before it’s too late.
The third way to find blossoming neighborhoods may take a wider social network, since it’s not easy to just find the data. This way is to figure out where the young, creative types are going. Young adults and all types of artists generally have lower income and will be looking in cheaper areas, but also seek out trends and will want to know what areas are becoming more popular. In addition, creativity gives neighborhoods a type of personality that strongly attracts multiple kinds of buyers.
The National Bureau of Economic Research (NBER), a private non-profit economic research institution well known for researching recessions, has declared that the 2020 recession is over. In fact, it ended quite a while ago, and only lasted two months, the shortest recession in history. NBER defines the start of a recession as the month following a peak in economic activity, and the end of a recession as the month at the bottom of economic activity. In this case, those months were March 2020 and April 2020 respectively. The delay in declaration is because it generally takes several months to figure out whether a recession is truly over or not, since there can be ups and downs in between the peak and trough. With this declaration, another downturn would officially be considered a separate recession.
So what does this mean? Well, it doesn’t mean the economy is healthy again. It just means we’re past the worst of it, and are in the recovery stage after the recession. We’ve been in recovery for quite some time, and will continue to be. It’s important to note that while the start of the pandemic and the start of the recession occurred at approximately the same time, they aren’t codependent. Rather, the pandemic was merely an exacerbating factor in a recession that was already approaching. Many of the effects, both psychological and government mandated, of the combined scare of a simultaneous recession and pandemic are still lingering and slowing down the recovery. The major factor keeping us back is lack of recovery in the job market.
Most of the time, investors look to buy when the market is down and sell when it’s up. This is actually quite useful for the health of the real estate market as a whole, since it makes up the majority of transactions during weak economies, even if it does primarily benefit the already wealthy.
However, that’s not what has happened in this situation. When the pandemic hit, investors were not immediately able to purchase and didn’t have a strong sense of where the market was headed, so investment dropped off dramatically. Prices actually continued to rise throughout the pandemic and even now, meaning there was never a low point for investors to take advantage of. They’re realizing that now, and starting to invest again, expecting prices to continue to go up.
While it’s not a huge cause for concern yet, this is problematic for people intending to buy homes to live in. Investors generally don’t live in the homes they invest in, yet frequently win out during heavy competition due to high cash volume. They’re also not serving the same purpose they do during down markets, since demand is already high. The most problematic type of investor is a flipper, who generates no value or utility at all, merely making a profit off of a home being temporarily vacant.
The first thing anyone is going to see when looking at a listing is the photos. People aren’t going to be interested if there are no photos. But that doesn’t mean you can just take snaps with your phone’s camera and toss them up there, even with some editing. The fact of the matter is that no one is going to come see your property if it looks terrible in the photos. In addition, while there are plenty of photography tricks to improve the appearance, no one is going to buy your property if it looks significantly different from the photos.
That’s where professional photography comes in. Professional photographers know how to manipulate not the photographs themselves, but the camera settings and lenses, angles, lighting, and even which aspects of your home to highlight. None of these are making false promises. Rather a professional will find the best way to make the truth of what your home is stand out to buyers. Good panoramic shots require a specific type of lens. The colors of your home influence what time of day and which flash settings will provide the best lighting. Pros will seek out intricate details and unique features that make your home stand out from the competition.
Even though racial discrimination against homeowners was banned in 1968, the homeownership gap between White and Black households in the US is actually higher now than it was before the ban. Between 1960 and today, the gap has increased by 4% and sits at 31% nationwide, and 27% in California.
In order to address this issue, the Black Homeownership Collaborative has drafted a plan that they hope will bring homeownership to 300,000 more Black households by 2030. Their 7-point plan was approved by the Mortgage Bankers Association. The focal points are homeownership counseling and education, down payment assistance, affordable construction, improved credit and lending opportunities, increased civil and consumer rights, sustainability of homeownership, and marketing and outreach towards Black communities. Similar proposals are also in the works for Latinx communities, which make up a significant percentage of California’s population.
The recent strong shift away from urban centers and towards more rural areas is thought to be a direct response to the increased popularity of the work-from-home model, brought on by the pandemic lockdowns. However, even though this is certainly a factor in the urban exodus, it’s not a new phenomenon. As early as 2010, people were starting to move away from urban areas towards suburban and rural areas. Being able to work from home simply accelerated the existing trend.
Why does the trend exist, though? Well, the statistics alone can’t give us a a certain answer, but we can speculate. It’s possible to conclude that people are liking the idea of living in a rural area. But that’s not necessarily the case. It’s important to note that the data holds true exclusively for mortgaged home purchases. This means that people who have excess cash lying around aren’t at all interested in rural living. In effect, this means that, quite possibly, no one is. Rural areas are generally less desirable, and because of this, are also generally cheaper. Buyers who need to take out a mortgage are looking within their budget, not necessarily for their dream home in their dream destination.
The FHFA established a new refinance fee at the end of 2020 called the Adverse Market Refinance Fee, which was designed to cover projected losses during the pandemic. But they’ve now said that their losses were not severe and that the market was not as adverse as they expected. Only 2% of single-family loans remain in forbearance. So, this fee is going to be removed come August 1st. The FHFA hopes this encourages more buyers to take advantage of low rates.
