A tale of two markets: High end holding steady

This is a trend that has been with us for a while, and a couple of you reminded me in comments to revisit it. The trend is this: even as foreclosures pile up and prices collapse in less desirable neighborhoods of Los Angeles, prices continue to hold steady -- or even rise -- in higher-priced neighborhoods.

I'm not talking about luxury neighborhoods like Beverly Hills or Malibu, where entertainment money and foreign buyers are big factors. I'm talking about the $700,000 to $900,000 price range. Here are five sub-million-dollar neighborhoods where median sales prices held steady or rose from January 2007 to January 2008:

Neighborhood/ZIP             # of sales in Jan. 08/Median sales price         % change yoy
Woodland Hills 91364         15 / $875,000                                                 5.7%
Arcadia  91006                   20 / $761,000                                                 6.8%
Torrance 90505                 15 / $794,000                                                 2.8%
LA/Westchester 90045      15 / $772,000                                                 13.0%
LA/Mar Vista 90066            24 / $743,000                                                 -2.3%
Source: DataQuick/DQNews.com

DSL wrote in comments, "The homes in my target market of South Pasadena, Arcadia, Pasadena, San Marino rectangle have not come down one iota in terms of listing prices. Why is this 'bubble bursting' as you all put it seemingly only confined to areas no one with a decent income would ever dream of living?"

Just Call Me Maria added, "Good homes in good areas are still selling for ridiculously high prices..."

From here we venture into the unknown: Will prices inevitably fall in the higher-priced areas, or will they hold their value? The short answer is, I don't know.  My gut is that prices will eventually decline in pricier neighborhoods, but won't fall anywhere near as far as they will in cheaper areas. But I haven't seen this movie before.

Before you trot out the recent history, and quote the price declines suffered in "trophy neighborhoods" in the early and mid-1990s, I would say this: this cycle is different.  History may not be our guide.

I'd really like to hear your thoughts on this one -- why do we have two extremes in the market, and will they converge or not?
Photo Credit: The Sunset Strip home purchased recently by Mix Master Mike, resident DJ with the Beastie Boys, for $990,000, by Michael McCreary, via L.A. Times.

Comments

[LeavinLA]

Pete wrote: "...this cycle is different. History may not be our guide."

That's exactly right. Interest rates have stayed low this time around. Those 700K-900K properties are not starter homes -- that's where the market is getting clobbered. Odds are, those buyers have downpayments.

[sfvrealestate]

I'm stating the obvious here, but the reason for the two markets is that there is A LOT of money in some parts of L.A. There is a lot of money from foreign countries, and there are a lot of people who make astronomical livings.

[GDC]

I agree this cycle is different. Incomes have become very stratified in So Cal between the haves and the have nots.

I remember in the mid 90s the general range of incomes in the Westside was $30k - $80k. Over 10 years later it's about $40k - $300k. There is still huge pent up demand in the desirable areas.

I think they will still decline because the speculators are gone and credit has tightened. My prediction is a gradual decline in these areas for the next 5 years and about a 10-30% total drop in price depending on the specific area.

[campechano]

This is a good question. In my view the tell tales lie in SB and Riv counties. Price reductions have been the most severe there and it would seem the trend is moving east (inland) to west (beaches). This perhaps more obvious in San Diego than LA but LA is really a little different. IN the end however no neighborhood will be immune to this. And once sellers have to cut the price on one house the rest have to follow. Last but not least, my other point would be that there are always neighborhoods that are more established and where people seem to buy "just to live in" and not to speculate ( I am thinking Agoura Hills in North LA co--for instance or places like Encino in the valley).

[Neekolaaz]

On the bearish side: I would suspect that a lot of people who buy $900k homes are moving up from $500k condos as they get older, have families, get job promotions, etc.

But if prices decline and homeowners have no equity in their $500k condos, then they won't have downpayments to make on those $900k homes. And, if you can't sell your lower-end condo b/c the low end is getting clobbered, how do you trade-up to a $900k home?

I'm with Peter in believing that "prices will eventually decline in pricier neighborhoods, but won't fall anywhere near as far as they will in cheaper areas."

Is there any data about how many of the $900k home purchasers are "trading up?" i.e. sold another, cheaper home recently?

[Kate]

"Why is this 'bubble bursting' as you all put it seemingly only confined to areas no one with a decent income would ever dream of living?"

Maybe the bubble was proportionately bigger in those areas--on the other hand, as prices become affordable in the neighborhoods my husband and I find appealing, I have to wonder: what's so special about DSL? That statement just sounds like more of the entitled attitude that contributes to overspending in lots of sectors of the economy.

[mbob]

Sure, some will sell. Statistically tiny numbers though. Add up all the six figure earners, precipitate out the number of those earners who need a new home and you'll get the sales data.

The now yawning gulf between haves and have-nots determines what will play down in the housing market.

1. Collapse among what tatters are left of the middle/upper middle class.
2. slow steady buying and selling among the moneyed professions -- medicine, law, entertainment, securities sale, etc.

But the newbie hose at the pyramid's bottom has been cut. No new geyser of upwelling funny money.

[kat]

I would guess that it's because these houses were never caught up in the sub-prime mess. Sub-prime borrowers and the stupid speculators were mostly in the $700,000 and less range. These nicer homes were out of reach of the future deadbeats and other sundry idiots getting in over their heads on houses they couldn't afford.

I would guess there is little foreclosure among these higher level homes. They are and have been occupied by the upper middle class non-celebrity types. Also, these type homes are probably in demand because they are in neighborhoods that are free of what some people might consider, undesirables.

This range of mortgage is where the grown ups live.

[Onliwon Righterman]

I predict this post will be filled with real estate agents and people who don't live in Los Angeles.

Thanks for the bone Peter!

[El Guapo]

I think you'd be surprised how many people "stretched" to get into an $850K home. Many of my friends did this and they were first time buyers. The difference is the reset lag time. If you were subprime, you were looking at 2 years until you had a "come to Jesus" moment. In the 700-900 jumbo range, many have a 5 year option ARM. (Studies show 80% pay less than IO) It stands to reason that these areas will fall once they go through the same cycle. Also remember that credit got tight for subprime in Feb 07 and tight for Alt A jumbos in August 07. The pain has been going on the subprime arena for twice as long.

I also believe people vastly over estimate how much their neighbors make. A 900K home and two BMW's in the driveway doesn't necessarily mean wealth, but maybe overextended debtors. Good FICO and a good job don't mean much when your debt to income ratio is too high. Don't agree? Go to the census website, look up median household income for your favorite zip and look up median priced home.

[Jonah1979]

I don't exactly agree with the poster mentioned on the blog article. You can definitely get a heavily discounted home on foreclosure in Pasadena. Can't comment on the other areas...but here you can. All the other sellers haven't hit the reality phase yet. Foreclosures are everywhere in Pasadena. I live on the same street of the house that Peter highlighted in his article a week or so ago. That house sold in 06 for 780k and is now on the market for 459k. That's a heck of a discount and guess what? It's been for sale at that price for a few months...still no takers.

[copter]

I disagree that Pasadena-area prices have not come down by "one iota." For example, a nice Pasadena neighborhood I have been watching had a 3/2 home with a listing price that gradually dropped from $725k to $600k over the last 9 months, before finally being taken off the market (apparently without a sale). Around the corner a comparable 2/1 home sold in 2006 for $630k.

Another nice home, this time in upscale La Canada, got stale after being listed for several months at around $1M. It was then removed for a couple months, and now is re-listed below $900k.

The bubble is finally ending, and good riddance.

[Jason M]

Peter - When illustrating sale prices, you should really break your figures down to an average sale price per square foot as opposed to a median sale price of the group of properties. Doing so would yield more meaningful data. That way, a single sale of a large property (or a smaller property) would not affect the average sale price. As it is now, this data would only be reliable if all of the properties are model matches, which is never the case in LA.

[Tim K.]

First of all, there is no evidence that the "higher end" folks are actually making a lot more money in those very neighborhoods DSL is mentioning. Go check the IRS Adjusted Gross Income levels using Melissa Data. Go ahead, I'll wait.

Now check those zipcodes out. You'll find that in many of the high end zipcodes, those places where people are still asking $900K for their homes, the AGIs are still about 75K to 95K per year. There has been some increase in the wealthy, but they have not suddenly been able to afford vastly more in the last 8 years than everyone else.

The reason these areas are slower to reset is that there is less housing stock, and so fewer homes get sold per year, which means the comps take more time to influence the neighbors. Prices in Pasadena, Arcadia will return to $200 to $300 per square foot. They are dropping - they were just selling at $450 last year and are floating at $400 now.

I know you're impatient, and it sucks watching bargains written up in the LA Times about what kind of cheap houses you can get in the Inland Empire, but your time will come. Give it another 6 years. Yes, the MAGNITUDE of this housing bubble is unprecedented, but NONE of the rules are different this time. So you're just going to have to wait like the rest of us.

[mike]

Hey Peter, remember this article?
http://www.latimes.com/business/la-fi-howlow
27nov27,0,3723059,full.story?coll=la-home-center

I'm with Thorberg on this one 100%. I'm seeing price-pressure creep into the lower priced stuff in even the best neighborhoods. It will spread from there. If it doesn't, then I'll just buy a place that has been hit by massive price declines. I like Santa Monica, but I have a tipping point. So do most people. Take a look at the graph of home prices in places like Santa Monica and you'll see it rocket up in 2001 just like everywhere else. What changed in 2001 in Santa Monica? Lots of rich people wanted to live there in 2000, but home prices were affected by loose lending and speculation there too.

"Every place takes the hit in the long run," said Christopher Thornberg of Beacon Economics, a consulting firm in L.A.

If prices in high-end markets do not bend while prices fall in adjacent areas, many buyers will at some point choose the cheaper neighborhood, he said.

"If the gap between Riverside and Orange County becomes too great, a person will say, 'Forget it, I'm not going to live in Orange County,' " he said. "If prices get too high in Beverly Hills, it drives demand to Santa Monica." Such movement eventually drags top-end prices down, he said.

[JohnnyB]

They will fall too. We're in the initial stages of an enormous, deep and far reaching housing collapse. We know the higher end holds up longer. Yes, some more “sub-prime” areas hit harder and sooner in later ’06 and early ’07. But these are long cycles... 6, 7, 8 years.

There are ALWAYS "island" hold-outs... neighborhoods that have built a strong and lasting "brand" of exclusivity... beautiful neighborhoods, solid homes, better security, safer streets, better schools, etc. They house the rich and well to do. These folks are just waking up to the housing crisis. Seriously, unless you really look for information on this crisis all the main stream media (including the Wall Street Journal) have been limiting this to sub-prime up until very recently.

And, there are amazingly resilient and hi-powered RE professionals who really "OWN" their territories and their clientele. We know this to be true. Other than places like Manhattan, Greenwich and Boston, we’re in the most tightly controlled RE markets in the country. These folks are the masters of manipulating RE values… market timing, incentives over price reductions, pulling then re-listing homes, not listing at all, etc. So, the real home prices – based upon an extended market exposure in this current collapse - are not as clear cut.

There are also many penny-pinching rich folks out there. And, they don’t like the idea of getting screwed either. Many have the more sophisticated business sense that tells them not to sink enormous sums into a declining asset. It just takes longer to play out.

Will the higher end always be the higher end? Yes, obviously. Will the higher end also fall? Yes, definitely.

[Cal]

Rich people can "afford" to be in denial longer. But volumes have dropped tremendously. If they want to sell they have to accept market price or what for a hail mary buyer.

The housing food chain is broken. If the 1990s bust is a guide it showed that the high end was affected WORSE than the low end.. for the simple reason that its a much smaller market.

So if the people in the nice areas can afford to stay in their nice homes.. then there wont be a problem. But if they have to move due to job loss, want to retire on their equity, divorce, job move, etc.. then they have to sell into an illiquid market with fewer buyers able to reach the higher levels because the food chain has been broken.

[amir]

Prices in Studio City and Encino are crumbling.

Like it was stated here, if you can't sell your first house or condo, how are you going to afford the 900K house?

Also, the full brunt of recession has not hit yet. When people start losing their jobs you'll see massive drops. Contractors are still trying to sell the houses they built, and some trying to rent them out, but at a certain point they'll give up and get rid of a house that's only a money drain. Inventory will rise everywhere.

[fezco]

I think what makes these locations somewhat desireable is their proximity to decent jobs, schools, etc... I propose a 'logan's run' approach where upon retirement, older folks in these areas 'renew' and move out of the region to make room for working people. -:0)

[GeekSeek]

Couple of questions:

a) Is there any way to track how often real estate agents are "double ending" sales -- that is getting a full commission without splitting with buyer's broker? Do the various mls' reflect this when a deal is done? I would think that with commissions dropping in general, and volume way down, we might be seeing a big uptick in this behaviour -- which is probably not in the best interests of the buyers or sellers.

b) Is there any rule that prevents agents from showing buyers competing offers. Do the CAR forms include any standard confidentiality language?

[IToldu2CashOut]

I think Luxury homes will hold much more of their value but will eventually take a descent hit. People with money have the ability to hold on and "wait for the market to improve" so this is allowing them to keep inventory low. Less options for people means you might be able to get buyers to bid up a little. If banks start demanding 20% down across the board I think you will see a tipping point because people won't have it.

As far as luxury condo's I think you will see a huge drop. I work in Hollywood and am very close to the most expensive loft projects like "The Broadway Hollywood" and "Hollywood and Vine". The buildings are more than half empty and have been sitting this way for a long time. Entry point is around 800k and I think they imagined it being much higher. I expect they will fall down to around 450k, but who knows? I just can't imagine why you would want to live in 1100sf loft for that kind of money. Why not live in Santa Monica or Beverly hills? Same with downtown. You'd be taking a giant financial risk buying at a price that it might be worth someday.

Remember folks, "He who can walk away controls the deal"

[Cal]

Geekseek:"a) Is there any way to track how often real estate agents are "double ending" sales -- that is getting a full commission without splitting with buyer's broker? Do the various mls' reflect this when a deal is done?"

Some MLS do report this (SRAR calls it Coop sales) and the percentage is dropping not rising (Coop sales are rising so double ending the commission sales are falling).. I think with fewer deals in the pipe the smart realtors are playing small ball and not trying to force their listing on a buyer but instead trying to do anything to get a sale. .

[anonymous]

This is ridiculous. It has been a common underrstanding in this blogmunity that it is a pyramid. Declines spread from neighborhood to neighborhood, this is a function of time. As the foundation that one tier stands on is destroyed, the next tier begins its degradation cycle. If upper tiers are decoupled from lower tiers, then why did low interest rates and hyper-expanded credit of 1999-2006 inflate not only crummy neighborhoods, but high end neighborhoods? Whatever was the % increase during the bubble, that is your benchmark for gauging the % decrease during the deflation.

[CD]

2008 is especially not a good year to buy a house. Times are too uncertain. It's a big leap of faith to jump in the market right now. Though, there are many golden triangles, Rancho Palos Verde , Brentwood etc...Still, check foreclosure.com and you will see it has hit every area.
Although IF you can get the FEDS to buy your mortgage and cut your debt by half, then let's jump in today.
LEFTY, can I get on that free ride with the feds or is it too late?

[Laker]

I can comment about woodland hills 91364 area.
There are many nice house north of $800,000 and many in the $1M-$2M houses. However, there are also a huge supply of 3/1 1000sq ft shacks that are not selling for $500,000 and I'm talking about south of the bl. As many suggested, the speculators mainly played with the 1000 sqft shacks simply because there were many Macdonald's workers that could do that. There were also speculators in the high end, but magnitude less. In any case, housing is like the food chain. You can't take pieces out of it, and expect it to continue to kick. It will give, and high end will collapse too.
Also, high end owners have higher income and therefore can sustain losses longer. Once they realize the facts, they will jingle mail their keys using same $0.41 stamp...like the low end properties.
Another important point is that middle class is in fact disappearing. So it is safe to assume that down the road we will have low end median house price of $200,000 in LA and high end median price of $600,000 and nothing in between - essentially no median.