Southern California Real Estate: The Market That Won't Die!

Howard- I didn't say there would not be foreclosures .. what I said was that there probably won't be a lot in the Beach cities.. and that our market seemed to be settling down somewhat and possibly approaching a normal market.  We haven't seen a normal market in so long that many have forgotten what that is. In normal markets there are foreclosures and short sales.  In normal markets prices may go up a little in a neighborhood and then down a little in another neighborhood.  In a normal markets some homes will sell in 3 days with 5 offers while others will sit on the market for months without one offer. Our area just doesn't have a huge number of sub prime borrowers. Most people in the beach communities have the financial where withal to withstand a payment increase or a decline in price.   If you check the list on the link you provided there is not one property in El Segundo, Manhattan Beach, Hermosa Beach or Redondo Beach listed.   In the 90's the big problem for most of the South Bay was that 85% of the residents worked in some field related to aerospace. There were about 14,000 people who lost their jobs and could not get new ones. The workforce is far more diversified today and a slowdown in one industry will not affect the entire region. Now if we have a major disaster or a huge recession then that will be a different scenario.. but that doesn't appear imminent.

You will see foreclosures in CA. especially in the Inland Empire, San Bernardino County and other areas that had huge housing developments without a source of employment to anchor the developments.  Big jumps in gas for commuters coupled with increases in loan payments will take a huge toll. In the South Bay that means Hawthorne, Lawndale, Gardena, North Torrance and the Harbor Gateway will all see problems. North Long Beach is in big trouble with more to follow but these places have always been prone to foreclosure because most homeowners in the neighborhoods are a paycheck away from disaster. As credit tightens you will see fewer sales and prices will continue to drop in areas that are heavily affected by the market. 

The Real Estate Market is local.. I understand it is a concept that seems dubious for many. It may not make sense that an area 10 miles east of the beach will be in dire circumstances and property along the ocean will continue to see people buying and selling in a normal manner but I suspect that this is exactly what we will see throughout the country not just in California. There will places that are in huge trouble and other areas that will seem to have no housing problems at all.

Is it possible that I'm wrong.. You Bet.. if I could tell exactly what would happen in a given market I'd be  enormously wealthy and playing golf everyday. Real estate is cyclical and in CA that means that every 7-10 years there is a shift in value.. sometimes it goes up and sometimes it goes down with periods of  stable activity between the peaks and valleys.  We have been lucky in California as prices always seem to bounce back and increase.  The population continues to go up and people need somewhere to live so I suspect the pattern will continue with  some hiccups along the way.

Howard- I'm not trying to avoid answering your questions. I found his graph interesting but the fact is I have no idea exactly what he used for his figures. It states standard housing not new construction.. what is standard housing..? Did he use 2 bedroom 1 bath 900 sqft homes or did he use 3 bedroom 2 bath 1500 sqft homes.  Did he use all re-sale homes in the United States or a sampling  of homes. What if he had tracked individual markets throughout the country.. would he have seen differences?  Taking a large sample doesn't take into account individual markets.  We see that in drug research.. certain drugs that might work fine in an overall sample may come up with real problems once it is used to track individual groups.  Yes Mr. Schiller is a Yale economist but what if I find a different graph from an equally noted Harvard or MIT economist who disagrees because they use different valuations.  Will you say they are wrong because they draw different conclusions?

Coastal areas and other more affluent areas will always fare better then other parts of the market. People have the ability to ride out bad markets.  In the 90's Manhattan Beach was one of the last markets to decline and one of the first markets to go up again in price. 

Out of curiosity just what do you consider a normal market? I believe it is one that is fairly stable and right now that is true of the beach cities.   You may believe that this market will crash sometime in the future and you may be right... but for now it is very stable.  At this moment people are buying and selling homes in a rational manner.

Did you read the Daily Breeze article?  Home Reports tracks real estate markets all over the United States and they seem to think California may fare better then other parts of the country.

JG- I agree there are wild cards that may change the picture.. no question.. if we hit a recession and a large segment of the population loses their jobs as they did in the 90's then you will see problems in the beach cities.. if  LAX or the Port of LA have a major disaster then all bets are off.. As to speculation in the beach cities.. there was very little..I believe I read a report that in LA County less then 3% of properties were purchased by speculators... most of the property purchased was owner occupied ..  which is not to say that some were not purchased by people who should not have  bought a home.. they were.. and we will see these come down as short sales or foreclosures. So far they appear to be a small percentage. Prices may go down in the beach cities but we are not seeing that happen at this time.  I am  aware Mr Shiller is a very smart man and he may well be right.  But at this moment in time and for the last few years he has not been right about certain segments of the housing market in our area.  

The question is whether or not housing at the beach is in a classic  bubble  that will burst and values will drop 30-40%.. right now that doesn't seem likely given the way the current market appears to be responding.. market priced  and well located properties are selling at list and in some cases over with multiple offers and often all cash.. no loans.. You may disagree but  it is what is happening in this market.. Savvy people  with  money usually don't pay all cash for property in what they believe will be  a down market.. now  maybe they are stupid.   I know of investors who are selling large apartment buildings and buying individual single family residential properties as rentals and not necessarily with positive cash flows in the beach cities because they think it is a good move...maybe they are also stupid .. 

However these are the same guys who bailed out of the stock market before it went down in 2000 and were very liquid when it crashed.. now they are buying assets of value, jewelry, art, real estate.    They are not buying in Gardena, Hawthorne, Lawndale, Torrance or PV.. but in the beach cities.  Are they wrong.. I don't know.. only time will tell. 

Joe-I agree there should not be a bailout.. most of the people who are part of the subprime party had lousy credit and didn't make enough to buy a house..The loans used should never have been allowed.. and the market is as you note paying a price for that stupidity.  The problem in CA is that affordability will probably never get aligned with wages because we have lost a vast number of the  old middle class jobs.  They have been replaced by very cheap labor, moved out of state or outsourced and it's doubtful you will see a rise in income for most who were previously middle class.

You may lose a little in value as you bought last year but if you hold it you will make out just fine.  I also bought my current home at the top of the market and watched the value dive.. but it has come back and then some so patience does have it's virtues.

JG-  Who knows... I may be wrong and prices will take a nose dive next month.. but that  doesn't seem to be the case at this time. We are not seeing a big increase in NOD's in Manhattan, Hermosa, Redondo or El Segundo...The jumbo credit market seems to be settling a bit.   I'm not saying the real estate market is unlike other markets.. if we have a lot of foreclosures in the beach cities and people lose their jobs then we will see the same problems we saw in the 90's for the same reasons.  However we are not seeing that happen right now.  The job market seems to be good..in fact either Boeing or Douglas is poised to get a major government contract  which is good news for the South Bay.. especially if Boeing gets it as the work will be done at Boeing in El Segundo.

 Let's talk about beach home prices.  They have always been higher then in other areas.  They have never been affordable for the general population.    Are there people who want to live here and can't afford the prices.. Of Course... but they have never been able to buy here or in Newport or Laguna.  However the people who live here seem to be able to afford the prices.  That... I believe is  supply and demand.  

I have no idea how much illegal immigration plays in the current affordability crisis.  I suspect more of the problems we face in CA are because we have not built affordable housing over the years.   In the beach we are losing a lot of rental housing each time an older unit is torn down and replaced with a new property.   No one wants to increase density yet that is what we will need to do if we want  affordable housing.

Steve,

Appraisers on last two appraisals I had on Manhattan Beach properties say market has leveled off.  Agree with you about inland condos... no one wants to make loans on them and property just keeps sliding in value.