California has always been an expensive place to live, and it’s only getting more and more expensive. The median home price is about 2.5 times higher than the national average, and 11 times the median income. Of course, prices are trending upwards across the nation. Appreciation over time is normal, and has accelerated in the wake of the 2020 pandemic. But these things affect everyone — so why is California specifically so much more expensive?
It’s not just as simple as having higher desirability, although that is certainly the case. The primary issue is a lack of affordable housing. There are multiple reasons for this. California may be the third largest state by area, but it also has the highest population of any state. It’s not among the densest, but it is rather sprawling. There’s just not a lot of open land to build on, particularly land that fits all the various zoning restrictions that are in dire need of updating. However, updating zoning laws is getting pushback from residents. Construction costs are also up. While construction companies typically would rather build multifamily residences, they have to build what’s in demand — which is mainly single-family residences.
In addition, because purchasing a home is so expensive, landlords are better served continuing to rent out their homes and units rather than attempting to sell, even though selling would decrease home prices. This is exacerbated by property tax laws in California. Prop 13 limits the rate at which property taxes can increase until a property exchanges ownership. Therefore, people who have owned a home for a long time can pay very little in property taxes, reducing the likelihood of any sort of market activity.
Much of the consideration for renting over buying comes from the lower initial cost. However, with quickly rising rents and increasing access to financial assistance especially for first-time homebuyers, that gap is closing somewhat. AB 12, which went into effect at the beginning of July, seeks to lessen the upfront cost burden on renters.
Under AB 12, no landlord can charge a security deposit greater than two months’ rent, and in some cases, it’s limited to one month’s rent. The one month limit applies to landlords who own either more than two rental properties or more than four units, as well as when the tenant is a military service member. In all other cases, the limit is two months. Unlike prior law, whether the unit is furnished or not is not taken into account.
What remains to be seen is how easily this law can be enforced, particularly whether landlords adhere to the one month or two month limit. Previously, the difference was whether the unit was furnished or not, something that could be easily confirmed or denied. However, landlords are under no obligation to reveal to tenants how many properties or units they own in total. Moreover, since a landlord can refer to either a person or a limited liability corporation, it’s possible to put properties managed by the same landlord under different names. There may be protections in place for tenants who discover a landlord attempting to sneak by this rule, but they may have a hard time proving it.
Increasing house prices and relatively stagnant wages have led to the need to rethink our strategies regarding housing. Of course, solving the root issue would be preferable — but if that’s not an option, easing the burden is a useful venture. There have been several recent innovations in methods to approach affordable housing.
A couple of them have been around for a while, but not necessarily targeted at affordable housing. These are government subsidies and grants and developer incentives. If you give people money or tax breaks to build or buy affordable housing, it’s going to become easier. Another that you may have heard of is micro-housing. You may dream of a large home, but the truth of the matter is that smaller houses are not only cheaper, but also more cost effective to build. The only reason they weren’t being built before is lack of demand.
There are also some options you may not be aware of, though. These are community land trusts (CLTs) and shared equity models. CLTs attempt to reduce the cost of homeownership by separating land cost from building cost — normally, a house and the land it’s built on are purchased simultaneously, but with CLTs, the land is owned by a trust and only the structure is sold, so it costs less to buy. A shared equity model allows a buyer to purchase only a portion of the ownership of a home, with the share owned increasing as the buyer accrues equity and uses it to purchase a greater share. This is somewhat similar to a loan, but carries less risk, with the downside being that the buyer doesn’t have exclusive legal ownership of the property.
Every city in California is required to present a general plan for housing development, which is to be updated each year. The general plan must take into account housing needs based on the population and expected population growth. However, what the general plan doesn’t account for is zoning laws, which currently take precedence over the general plan. This means cities can feign considerations in their general plan while implementing zoning laws that combat their own plan. Even cities that mean well may not be able to get sufficient votes to modify their zoning laws in accordance with the general plan.
That will change beginning January 1, 2024. Under AB 821, development plans that don’t meet zoning ordinances may still pass if the ordinance they fail to meet is inconsistent with the general plan. AB 821 allows for two possible outcomes in this scenario. The local agency controlling development applications has 180 days to either amend the zoning law that is inconsistent with the general plan, or simply process the development application regardless of failure to meet zoning laws. Note that this law doesn’t actually force changes in zoning ordinances. Nothing happens to zoning ordinances that aren’t challenged by a development application designed to further the general plan, and a very stubborn local agency could simply delay processing by up to 180 days, and then possibly a further 90 days in court.
In September, the share of homebuyers paying all cash was 34.1%. This is the highest it has been since the beginning of 2014, and an increase of 4.6% from September 2022. However, this doesn’t mean homes are more affordable; in fact, it’s the opposite.
While it’s true that a significantly higher share of buyers are paying all cash, there are much fewer sales overall. Total sales decreased by 23% over the past year. Compare this to a decrease of only 11% for all cash sales. Cash sales aren’t going up, rather sales overall are going down, and cash buyers are less affected.
The reason for this is high interest rates, since cash buyers don’t care what the interest rate is for a mortgage loan they aren’t getting. Interest rates fluctuate up and down on a daily basis, but rarely change by much at a time. But in this case, they hit a two decade high in September at 7.2 and then continued an upward trend into October, almost reaching 8%. As of last week, they had started to drop back down. Despite this decrease, with how erratic rates can be, that isn’t a sure sign that rates are now trending downward.
The Tenant Protection Act (TPA) was originally passed in 2019, and outlines the conditions under which a landlord can legally evict a tenant. The TPA has been revised and updated in the past, and is receiving a new update with the passage of bill SB 567. The new law goes into effect April 2024, and adjusts the requirements for no-fault evictions, as well as setting the fine for a landlord’s violation of the laws at three times the cost to the tenant plus additional fines.
Under current regulations, a landlord can perform a no-fault just cause eviction if the landlord or their immediate family intends to occupy the residence, or the landlord intends to demolish or substantially renovate the residence. Under SB 567, mere intent isn’t enough. Rather than only planning to occupy the residence, the landlord or relative must have already occupied it for at least 12 continuous months as their primary residence. Demolition or renovation plans require a written notice including permits, a description of the plans, and an expected duration, as well as the opportunity for the tenant to re-rent the property at the same price if the plans don’t go through. There are other conditions under which a landlord can perform a no-fault just cause eviction, but they aren’t affected by SB 567.
The share of teachers able to afford homes near where they teach is dwindling rapidly. This year, teachers can afford only 12% of homes within 20 miles of their schools. This is a decrease from 17% last year. In 2019, before the pandemic, they could afford 30% of homes in their school’s area. Fortunately, there are options to help teachers.
The Department of Housing and Urban Development (HUD) is sponsoring a program called Good Neighbor Next Door, which sells homes in revitalized areas to certain government workers at half the listing price. This program is available to pre-K through 12 teachers as well as law enforcement officers and firefighters. Some of Fannie Mae’s programs, while not specifically aimed at teachers, have qualifications that teachers frequently are able to meet.
In addition to federal programs, there are also state and private programs to help teachers. California created the School Teacher and Employee program back in 2018. This specific program is discontinued, but is now folded into their MyHome program, opening it up to more people. The private program Homes for Heroes provides a 0.7% rebate on home purchases made through the organization’s specialists. It is available to firefighters, EMS, law enforcement, military, healthcare professionals, and teachers.
Home values have been increasing across the board in the US, and the percentage of homes valued at over $1 million seemed poised to hit a record in June of 2023, when the share reached 8.2%. That record wasn’t quite hit, as it actually belongs to the value of 8.6% in June of 2022.
The total value of the US housing market did hit an all-time record in June of 2023. The total was $46.8 trillion. For comparison, in June of 2022 — when the largest percentage were over $1 million — the total value was $46.6 trillion. This isn’t much lower, but it does show that either the top end is increasing in value, bringing the total value up, or there are more homes on the low end, bringing the share over $1 million down. Both of these are possibilities, since inventory is still low despite an increase in affordable living construction.
The traditional family unit in the US has historically been the nuclear family; that is, a household consisting of only parents and their non-adult children. While the reasons for this were initially economic, convention has popularized it as the socially correct thing to do. Recently, neither of these reasons hold water anymore. Thus, multigenerational households are increasing in popularity.
Both the Great Recession in the late 2000s and the lockdowns and recession following the Covid-19 pandemic resulted in adults, primarily young adults, moving back in with their parents. In many cases the young adults didn’t have children yet, but in some cases, they did. In this situation, the household would have three generations. The reasons for this shift were partly economic, but there are other benefits to multigenerational households. Having grandparents in the home makes childcare a lot simpler. Or if the elder generation can’t care for themselves, their children are right there to take care of them. Having multiple generations in a household can also improve the efficiency of household tasks, leaving more time for family bonding.
The Regional Early Action Planning (REAP) 2.0 program was enacted in 2021 in order to achieve housing and climate goals, including infill development and appropriately priced housing. REAP 2.0 received its first round of funding in July of this year, and has decided where to allocate its grants. Over $352 million was awarded in grants.
Of this amount, $30 million was given to Higher Impact Transformative (HIT) communities. HIT communities are those that have demonstrated a commitment to underserved communities. For this round of funding, that includes the City of Oakland, the City of Rancho Cordova, Tahoe Regional Planning Agency (TRPA), San Diego Association of Governments (SANDAG), and Bay Area Rapid Transit (BART).
The majority of the funding went to Metropolitan Planning Organizations (MPOs), some of which also serve HIT communities. TRPA and SANDAG received funding in both categories. Most of the funding going to MPOs was awarded to the Southern California Association of Governments (SCAG) at $237.41 million. The other MPOs that received funding were Association of Monterey Bay Area Governments (AMBAG), Madera County Transportation Commission (MCTC), Sacramento Area Council of Governments (SACOG), and Shasta Regional Transportation Agency.
Representative Maxine Waters recently introduced the Downpayment Toward Equity Act of 2023, intended to help disadvantaged groups afford their first home. The bill would provide financial assistance for down payments, closing costs, and the costs to reduce interest rates for first-generation homebuyers who have not bought a home within the past three years. This mainly affects Black and Latine communities and could benefit up to around 5 million prospective homebuyers. However, while probably good-intentioned, this effort is not without its flaws.
We’re currently coming out of a historic peak in home prices. Prices have started to fall now, but they’re not going to suddenly bottom out overnight. It’s going to take a while for home values to fall. Pushing homeownership aid now is not the right time, for anyone, even if it’s directed at helping disadvantaged groups. And the last time minorities experienced a surge in homeownership turned out terrible for them in the end, albeit under different circumstances. In that case, it was predatory subprime lending that left minorities on the hook for massive mortgages with negative equity after the subsequent economic collapse. Of course, it’s doubtful that Waters’ intentions are predatory, but her plan could perhaps be better timed around the state of the economy.
In this November’s election, the Justice for Renters Act will reach the ballot. This bill would repeal the Costa-Hawkins Rental Housing Act, which is a 1995 state law that prohibits rent control for certain properties. Repealing it would allow local city governments more freedom in making decisions on rent control. This isn’t the first attempt — similar bills were put on the ballot in 2018 and 2020, but neither passed.
That doesn’t necessarily indicate a lack of support, though. What has actually happened in the past is that those who benefit from a lack of rent control are both more vocal and wealthier. Of course, it should come as no surprise that landlords are typically wealthier than those renting from them, and therefore able to contribute more campaign funds. But you may not be aware that renters are less likely to vote, particularly because non-citizens are more likely to rent than buy. In addition, the share of renters in California is slightly smaller than the share of homeowners. Even if homeowners also includes non-landlords, homeowners generally aren’t negatively impacted by high rent prices. This time, though, rent prices have become so exorbitant that the bill has a higher chance of passing this year.
Last week, the Federal Reserve, commonly known as the Fed, increased the federal funds rate by 0.25 points. The federal funds rate now sits at 5.25%-5.5%, the largest value in 22 years. In addition, the Fed made a statement regarding “determining the extent of additional policy firming that will be appropriate.” Policy firming refers to rate increases.
Barclays, a multinational bank based out of the UK, also noted a change in the Fed’s language regarding this policy. A prior statement by the Fed referenced “the extent to which additional policy firming may be appropriate.” Their new statement is significantly more certain about the appropriateness of additional policy firming, leading Barclays to believe that the Fed plans additional rate increases. Barclays predicts this will probably happen in September or November, which are the next two times the Fed meets.
However, it’s important to realize that the federal funds rate is not the same as mortgage interest rates. In fact, they aren’t directly related at all. Mortgage interest rates do frequently increase when the federal funds rate increases, but there are additional factors at play. These include demand and economic outlook. Both of these are somewhat mixed. Demand is not particularly high, but neither is supply. Our economy is currently in a recovery cycle, so it’s looking up, but isn’t necessarily stable. So, it’s definitely a possibility that interest rates increase some more, but not a guarantee.
The space mission Huginn, planned for August 2023, will be a six-month long research stay at the International Space Station. One of the astronauts on the mission, Andreas Mogensen, wanted to bring some sort of snack from Earth to keep his energy up during long research hours. Mogensen decided to look to his friend Thorsten Schmidt, a Danish chef who had previously worked with him on another mission.
Schmidt’s solution was a new kind of chocolate bar. These bars, which he calls SPACECRAFTED, have a dark chocolate base and contain over 70 natural ingredients. Schmidt checked with a food chemist with over two decades of experience, Lisbeth Ankersen, as well as the European Food Safety Authority to make sure SPACECRAFTED is packed with nutrients. But you don’t need to be an astronaut to get these chocolate bars. They’ll be available on Earth starting mid-August, with three flavors to start and more to come.
The scientific consensus up until now has been that the universe has been in a constant state of expansion since the Big Bang. The reason for this belief was the phenomenon of redshift. Redshift is the stretching of light wavelengths as an object moves away from the viewer. Because more distant objects had higher redshift, scientists interpreted this as universal expansion. There have certainly been disagreements on the various details, but this general assumption has remained relatively constant. But one topic of disagreement — the cosmological constant — has led some scientists to look at the issue from a different perspective.
But what is the cosmological constant, and why is it so contentious? The cosmological constant is the term for the background energy of space. When originally conceived, Einstein thought this constant to be equal to zero. However, when scientists began to notice that the expansion of the universe — as measured by redshift — appeared to be accelerating, they needed an explanation. It turned out that their hypothesis could be explained by having a cosmological constant that is not zero, but a positive number. Unfortunately, while this solved one issue, it created others. More and more calculations started simply not lining up to observations.
Lucas Lombriser, a theoretical physicist at the University of Geneva, thinks Einstein was right about the cosmological constant being zero. Lombriser proposes an alternate explanation for changes in redshift. He suggests that the identity of the elusive dark matter is an axion field. An axion is a hypothetical particle that is already one of the strongest contenders for the true identity of dark matter. According to Lombriser, the specific properties of an axion field could account for both dark energy and changes in redshift, preventing the need for universal expansion as a cause of redshift changes, thereby solving the dark matter problem and the cosmological constant problem at the same time.
The high mortgage interest rates we’ve been experiencing have been the result of benchmark rate increases by the Federal Reserve. The benchmark rate isn’t directly tied to mortgage interest rates, but the benchmark rate does have a strong effect on interest rates. Now, though, no more rate hikes are expected, which should cause interest rates to level off, and then start to decline.
This levelling off followed by a decline is exactly what the Fed was aiming for with the rate hikes. It’s impossible for mortgage rates to drop without the real estate market, and in turn the economy as a whole, taking a hit. By raising rates above what they should be during a period of high prices, what the Fed has done is soften the blow by allowing the decline to be more gradual. Of course, this comes at the cost of significantly decreased affordability for the period of the rate hikes. Once interest rates fall below 6%, which should happen before the end of the year, the market should pick back up again. However, the effect may not be noticed until next year, as the end of the year is not generally a time of heavy market activity.
Builders have had it rough the past few years. The pandemic resulted in skyrocketing lumber prices as well as many job losses for construction workers. In order to get the most bang for their buck, builders started building luxury homes, which generally have a higher profit to cost ratio. But this couldn’t last long, as both market demand and legislation pressured them towards construction of affordable living homes, while at the same time, zoning restrictions made even this rather difficult.
Pressures on construction companies have started to ease up in most of the country, but not everywhere. Particularly in the West and Northwest, available land is an issue. Fortunately, builders may have figured it out and now have a new plan: Make smaller homes. It’s predicted that more affordable starter homes will become available within the next year or two, as 42% of builders are reducing the square footage of their homes. It doesn’t even require a big change — the nation’s largest homebuilder, D.R. Horton, is only reducing home sizes by an average of 2%. Builders are also planning to build more townhomes and duplexes, which take up significantly less space per unit than single-family residences.
April of 2023 ended with a 40% drop in the number of homes sold across the South Bay compared to 2022. The median price was down 20% from last year in Palos Verdes and is up by a mere 1% at the Beach. Year to year median prices across the South Bay are down approximately 5%. Cumulative sales revenue for the first four months across the South Bay has dropped 39% from 2022 numbers.
Year to date, 2023 has been one of the slowest markets we’ve seen in recent years. Sales are off by 43% in the Beach Cities and are down by 22% across the South Bay compared to last year. Median prices escalated dramatically in 2021-2022, and are still above those of 2019 by 30-35%. However, the median has fallen in all four areas since late last year. We anticipate the median price continuing to drop until interest rates seriously decline again.
Business in the years between 2019 and 2023 was seriously impacted by the pandemic, and the massive government funds released to counter the effect of the pandemic. Looking back at 2019 and comparing it to 2023 offers a perspective on where the market is and where we can expect it to go during the balance of the year. Today we see a huge decline in the number of homes being sold. That has yet to translate into a significant decline in median prices, although 75% of year over year sales show prices falling.
At the same time the Average Days On Market (ADOM) has increased from about 7 days during the sales boom of 2021-2022 to about 30 days now. That’s a four-fold increase in the amount of time it takes to sell a home. For a seller who needs to move, that will feel like an eternity. It’s that sense of urgency that drives prices down and ultimately results in a shift of the market.
At the Beach “Sticky Prices”
Sellers in the Beach Cities had a good month in April—at least compared to March of this year. Compared to April of last year, the picture is far worse.
The number of homes sold in April was up 8% compared to March. That sounds positive, until the realization that sales volume was down 36% compared to April of 2022. At the same time, the median price was up 2% versus last month, and down 2% compared to the same month last year.
There’s a lot of talk among brokers these days about “sticky prices.” Recent sales at the Beach offer a good example of what that means. The statistics show that sales are down 36% from last year, however prices have only dropped 2%. Sales are falling because the number of viable buyers is down.
Interest rate increases have pushed the most tenuous group of prospective buyers out of the market. At the same time, sellers are still revelling in the boost to median prices that came with record low interest rates during the pandemic. Beach area sellers have yet to adjust to the reality of a re-trenching economy. That adjustment is “sticky prices.”
Harbor Sales and Prices Off
The neighborhood can affect how long it takes the median price to respond to changes in the economic environment. While sales volume and pricing has remained strong at the Beach, sellers and buyers in entry level communities are impacted more immediately by shifts in the economy.
Thus we see the give and take of the market bring median prices into a stable range early in the year in the Harbor area. The red line in the median price chart below shows four months of reasonably steady prices. While month over month prices have shown only a 1% drop, the monthly sales volume has taken a 12% dive from March, as shown in the Sales Volume chart, above.
The monthly decline in sales was multiplied in the year over year statistics. April sales volume was down 39% from April of 2022. For the same period, the declining sales volume was coupled with a 9% drop in median price. So the entry level communities demonstrate a much quicker and deeper response to changes in the financial picture.
Part of that response is the time on market, which has risen from 15 ADOM in mid-2021 to 26 ADOM in April of this year. The increasing time required to sell homes contributes to the number of homes available on the market. Both factors contribute to falling purchase prices.
Palos Verdes In Extremes
Through 2021 and 2022 home prices on the Palos Verdes peninsula benefitted from the Covid pandemic more than any area in the South Bay. In the median price by quarter chart, shown below, the yellow line is seen jumping up and away from the blue line of the Beach Cities. Unfortunately for home owners on the Hill, that price boost has already pulled back into line with prices of Beach area homes.
Comparing the first four months of the 2023 to 2022 median prices on the Hill have dropped 16%. It’s a steep decline in view of decreases at 3% and 6% in the Inland and Harbor areas, respectively. Even more so when looking at the 1% increase at the Beach.
The statistics look much better when comparing Palos Verdes sales from 2023 to statistics from 2019, the last “normal” year of real estate business. Sales volume on the Hill is down a modest 13%–modest by comparison to the Beach, which is down 43%. In contrast, median prices in 2023, compared to 2019, are still showing positive growth of 30%.
So, if one were to take the Federal Reserve System position that 2% annual growth is a desirable target, where would prices be today? The median price in Palos Verdes in May of 2019 was $1.5M. Jump forward to 2023 and that becomes about $1.6M. The median on the Hill last month was $1.9M, which suggests further price reductions.
Inland – The Steepest Fall
From an investment perspective, homes in the Inland area of the Los Angeles South Bay are “bread and butter.” These are the homes, much like those in the Harbor area, which reliably increase in value over long periods of time at a slow and steady rate. Most importantly, they house the bulk of our community.
In the short term, Inland home sales volume is down 25% from March to April of this year. Median prices are up 2% for the same period. This is the steepest fall in number of homes sold in the four areas charted.
Year over year, sales volume is off even more at 43% below April of 2022, and prices similarly down by 4%. We expect a seasonal boost to sales for the second quarter, when families most frequently schedule moves. Beyond that, most predictions are for continued softening in the real estate market as the Fed struggles with inflation. (The April Consumer Price Index, [CPI-U] for Los Angeles metro was 5.2% for Housing.)
At the start of May, the Federal Housing Finance Agency (FHFA) modified the fee structure for loans guaranteed by Fannie Mae or Freddie Mac. The goal of the change was to increase the accessibility of homeownership to disadvantaged groups. In order to achieve this, fees were reduced for low-income borrowers, first-time homebuyers, and those with credit scores below 680.
However, reducing some fees meant needing to increase fees elsewhere. Fees increased significantly for middle income earners, those making larger down payments, cash-out refinance applicants, and second-home buyers. Critics argue this is a bad idea, since middle-income earners are more ready to buy and less risky to lend to. But despite the fee increases for middle-income earners, fees are still lower the higher your credit score — that hasn’t changed. If the changes push middle-income earners away, the effect is probably psychological, not necessarily financial.
This year has not been a good year for banks. City National Bank settled for millions early this year. In March, two major banks — Silicon Valley Bank (SVB) and Signature Bank — went bankrupt. These weren’t the only banks to fail, but they were the most well known. Now, First Republic, the largest bank to fail since Washington Mutual in 2008, has been added to list of failed banks. After First Republic failed, it was briefly taken under government control before being auctioned off. JPMorgan Chase, who had also purchased Washington Mutual when it failed, is the new owner of First Republic. The entire situation with First Republic has cost the Federal Deposit Insurance Corporation (FDIC) about $13 billion.
However, analysts and federal regulators emphasize that the banking crisis has calmed down, now. When SVB and Signature Bank failed, fears were warranted. But those failures sparked an inquiry into which banks were likely to fail, and First Republic was identified as a likely candidate early on. So, this wasn’t entirely unexpected, and regulators were able to act quickly. Additionally, the FDIC admits that SVB’s failure was partially their fault, as they had not been meticulous in their supervision. Analysts aren’t expecting any additional major bank failures in the near future.
