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

[tew]

It's likely that effective taxes on high earners will increase during the next few years. In addition, some chunk of the high end buyers are employed in the financial sector including private equity, hedge funds, and money management. Those sub-sectors are in a bubble of their own and many of those firms will disappear in the next few years. So we will see some high end job losses. However, this could be offset by more high-middle foreign buyers that will come in to buy housing due to the weak dollar.

[Roger Moore]

I think it's foolish to look at those sales numbers and assume that prices aren't going to come down. Remember that sales prices for LA County as a whole peaked in August 2007; it shouldn't be surprising if some expensive areas peak a while later.

Besides, those numbers look severely cherry picked. Consider the numbers for Arcadia. Yes, Arcadia 91106 increased by 6.8%, but the slightly more expensive Arcadia 91107 dropped by 8.2%. I walk through both areas regularly, and I can assure you that there isn't something magic about 91106 that's making it go up while 91107 is going down. It's just that there aren't enough sales in either zip code to get a good handle on what prices are doing.

[CD]

On another note today the stock market is tanking AGAIN, the dollar drops to a record low( again and again) on speculation the Fed Plan will not work and the banks are going down anyway. So what will it take????Do we just give one trillion to the banks and nationalize them ? Buying right now would be insanity. Keep your cash .

[Tim K.]

One thing often overlooked in the common complaint about the growing divide between the rich and the poor - there are lot fewer rich people and many more poor people.

So you can't make the argument that the reason the high end neighborhoods are doing better is because the rich people aren't affected. Because many of those formerly rich people are now poor. The demographic show us anything, it's that there are FEWER rich people to go around, and therefore need fewer houses to live in.

Of course, every neighborhood realtor will attempt to explain why THEIR neighborhood is the one that the rich people are coming to.

[Pasadena'ed]

Jonah1979 wrote: "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."

Agreed. I've been watching homes in my corner of Pasadena (91104, 91107) and I can confirm price declines. My own neighbor who recently applied for a HELOC was told by the banks that his home wasn't "worth" the price he purchased for just over a year ago. Needless to say, the HELOC did NOT get approved. Also worth noting is all the "luxury" condos that are going up in Pasadena and are seemingly empty for the most part, just going by the non-lit interiors if you do a drive by at night.

Pasadena is not immune. There may be parts which have always had a tall barrier to entry for middle class folks that will continue to remain "exclusive" even when the median comes down back to Earth. That said, it won't happen over night, but I think it's inevitable that it will eventually happen. The price crash will start/has started in areas with massive new developments. I think older neighborhoods like Pasadena, South Pasadena and the like are mitigated by their large supply of old existing homes.

[PREFAB SPROUT]

The answer lies in what we define as "starter homes" vs "move up" homes vs "money is no object" homes.

The starter home market ($400,00 for a piece of junk in Glassell Park) has collapsed as we all know-the move up home market is seeing real price pressure (the $850,000 Woodland Hills-South Pasadena 3 bedroom 2000 sq ft'er) so its not logical to think the next level will also be affected?

Its become really obvious that the fate of LA is to be: the rich living in their gate guarded private policed areas and the poor in the crappy areas that are left. Middle class? Upper middle class? They have long ago bolted town for Thousand Oaks or Irvine---and the rest have left the state.

[Pasadena'ed]

Correction from my previous post: I mistakenly credited Jonah1979 instead of copter.

[toby]

The question is who's buying?

Is this the same people who, in a normal market, would be moving to the less expensive parts of Malibu and Beverly Hills?

Are these the ones who were priced out of the Beach Suburbs?

MEANING, are we seeing Upper-middle Class families buying Upper-middle class homes OR is it Rich families buying upper-middle class homes?

If it's the latter, then it's finite and will not last for long.

[Ken Newfield]

To Mike,
Unfortunately, the imminent Mr. Thornberg used a specious example to justify his thesis that "high end" markets must bend or buyers will go to "cheaper neighborhoods". He wrote: "If prices get too high in Beverly Hills, it drives demand to Santa Monica."
A check at DataQuick confirms that for the past two years, median prices in Santa Monica's 90402 have been about 10% higher than Beverly Hills' 90210, and cost per square foot about 20% more in S.M.
Over the past two decades, the Westside of L.A. has become one of the premier lifestyle destinations of an increasingly wealthy and international elite. It will not return to a middle class neighborhood despite all the Bubble Blog Schadenfreude.
This quote is from LA Times, Feb. 13, 2008, by Roger Vincent:
"Even at a time of economic uncertainty -- when Southern California employers are trimming payrolls, stock prices are falling and home values are dropping -- the demand for luxury housing continues nearly unabated in the Westside. "
So if you can't afford Santa Monica, start looking east, around, say, Beverly Hills.
Ken, University High, Class of "74

[GeekSeek]

Cal: thanks.

Tim K: You said it. I'm talking to more and more people who've got their homes paid off, a miillion dollars plus in retirement plans, and definitely do not feel rich.

[Ken Newfield]

Dear Peter,
I meant to write "eminent" Mr. Thornberg, not "imminent", although he may be both!
Can you correct this?
Thanks,
Ken

[Paul Hiller]

There are many more houses on the market now than a year ago. In the better areas, the choice properties are the ones selling. In the past those homes would have garnered multiple offers and sold at a primium. Today they show up as normal comps, supporting older values. As the outlying areas drop, eventually it will put pricing pressure on the better locations as buyers compare values. It is gradual but inevitable. The weak hands fold first. While we think that better areas don't have bad loans, that is a mistake. Bear Sterns was doing 100% loans to 1.5 million until mid last year.

[MyLessThanPrimeBeef]

As evolutionary biologists would tell you that a chimp will and can have sex any time with any chimp of opposite sex, so too will physicists tell you that the whole universe itself is one big expandig bubble.

That's enough to make you want to be an Existentialist or a chimp.

[Laura]

I have been watching 7 houses for sale in my Burbank hillside neighborhood since early November. All had been on the market for at least 2 months by then. All asking between $650 and $900K. Two appear to have gone off the market without selling. One house (3 bd, 1.75 ba with pool), asking $769K, finally did sell last month for $690K. Which is still way too much, in my opinion. However, it shows that every once in a while, a non-blog-reading buyer comes along. But not often, it seems.

[Kathy]

Mar Vista is high end? Whoa...as Keanu Reeves would say...

[left of lefty]

high-end areas do not necessarily equate with high income.

many are move-up buyers. if someone bought a house in a moderate area 10 years ago, they can afford to sell 'below market' today and still have enough cash left over to make a substantial down payment. and if they've been responsible and kept their credit ratings up, i.e. paying their mortgage on-time for the last 10 years and did not do any cash-out refis, they will have no trouble getting a new mortgage, even if their income-to-debt ratios are a bit stretchy. banks will still make these loans for buyers with substantial down payments and a good credit history.

most first-time buyers cannot afford those areas. or they must settle for condos. buy what you can afford today, wait another 10 years, and you'll be able to move up. you work your way from the bottom to the top. that's how life works. you must have patience. looking for instant gratification will only land you in trouble. just ask all of those who bought more than they could afford the last few years.

your first home is not going to be your ideal home. but probably neither was your first car. nor your first job. nor your first spouse (that last one's a joke, folks). you can speculate and wait for prices to maybe drop to your level (or not), or you can play it safe and buy somewhere you can afford today, and wait for the eventual appreciation that lets you move up.

[kat]

My personal theory is that one of the reasons the CA housing market is such a mess is because of instead of buying a home to live in, too many people buy homes to speculate. Buying a house out there seems to be more like musical chairs than a normal housing market.

Does anybody there live in a house for more than a few years in SoCal? Where are the people who are living in homes they've had for twenty years in all this? Did they cash in during the peak and ended up stuck in an overpriced house they bought with their capital?

I find it very strange as an outsider. I've had my house since 1995 and I have the same neighbors now I had when I bought it. My husband's mother has the same neighbors she had when he was a kid. Don't people do that in CA?

[firesale]

Several things wrong here:

1.) I know Pasadena is cracking. The plague
is spreading...
2.) These neighborhoods are much more
vulnerable to Option-ARMs that haven't
hit the re-sets that extend through 2011.
3.) Established "baby-boomers" who have
viewed their homes as sole savings
(approx. 37%, nationally) are about to
add enormous pressure on a much
smaller and financially beaten down
generation that follows them.

The scorched earth policy will continue until
all markets are consumed. Hang on and enjoy
the slow roasting. History repeats itself because
fear and greed are its roots.

[arroyogrande]

I'd be a little bit worried about Woodland Hills and LA/Westchester keeping their "no bubble here" status:

Woodland Hills 91364
January sales 2007: 30
January sales 2008: 15

Arcadia 91006
January sales 2007: 19
January sales 2008: 20

Torrance 90505
January sales 2007: 13
January sales 2008: 15

LA/Westchester 90045:
January sales 2007: 24
January sales 2008: 15

LA/Mar Vista 90066:
January sales 2007: 22
January sales 2008: 24

It would be interesting to see the "months of inventory" numbers for Jan 2007 and Jan 2008, to be able to judge actual supply and demand.

- arroyogrande

[Chris]

FIRESALE

Your right - let me rewrite your last line

History repeats itself because fear and greed always have and always will dominate the landscape.

Many commenters and actual experts keep pointing out the income demographics of southern california. Usually banks want a down payment and will then lend you an amount 4 times your annual income. Look at those average listing prices in Torrance and Woodland Hills. Those are OK places to live but do you really think people making more than 95% of the US population (200K per year) thought they would only be able to afford a middle of the road suburb?

SO Cal median household income $87K
SO Cal median home price $360K

DO NOT BUY until we get at least close to this

Thanks for listening

[John]

It's only a matter of time. If you look at the peaks of readjustment for the Alt-A and option ARMs, they won't readjust until the 2009-2011timeframe.

http://www.doctorhousingbubble.com/wp-
content/uploads/2008/03/imfresets.jpg

Right now, the low end market is in trouble, but this doesn't mean that the high-end market isn't facing a serious correction as well.

Sure, there are still a lot of people in some very nice homes patting themselves on the back for not facing foreclosure now, but we'll see how many are still feeling smug when their loans have readjusted.

The real question is, do these "homeowners" wait until they're upside down on their loans, behind on payments, and facing foreclosure to begin trying to get out of their homes, or will they see the writing on the wall and take advantage of the temporary price stability, and get out while they have equity or at least can still break even?

I'm guessing they'll be lazy and clueless and in denial, just like the sub-prime crowd, which means we probably won't hit bottom until 2012 or so.

Villaraigosa better take the initiative on getting that gang problem under control NOW, as I'm sure it's not going to be easier with less RE tax revenue coming in and less funding for non-essential expenditures. Nothing deters investors in urban real estate more than innocent people being killed in random shootings, and there has been a lot of new real estate coming on the market lately.

Come on Mayor V. if you're not going to make L.A. safe so the average citizen can walk the streets without thinking about getting shot, do it so your cronies don't lose their shirts on real estate bets gone bad.

[arroyogrande]

Now this is interesting...take those same areas, and compare the "median house price per square foot" for those areas Jan '07 and Jan'08:

Woodland Hills 91364
Jan '07 median home $/sq. ft. : $426
Jan '08 median home $/sq. ft. : $381

Arcadia 91006
Jan '07 median home $/sq. ft. : $417
Jan '08 median home $/sq. ft. : $427

Torrance 90505
Jan '07 median home $/sq. ft. : $474
Jan '08 median home $/sq. ft. : $446

LA/Westchester 90045
Jan '07 median home $/sq. ft. : $502
Jan '08 median home $/sq. ft. : $434

LA/Mar Vista 90066
Jan '07 median home $/sq. ft. : $617
Jan '08 median home $/sq. ft. : $543

$/sq. foot as a measure of house value has its own set of problems, but at least it *does* try to take into account the mix of houses sold during the period (more small houses sold in '07 vs. more big houses sold in '08).

By the median $/sq. ft measure, Arcadia is up 2.4%, while everyone else is down:

Table of change in median home $/sq. ft., Jan '07-Jan '08:

Woodland Hills 91364 : -10.56%
Arcadia 91006 : 2.40%
Torrance 90505 : -5.91%
LA/Westchester 90045 : -13.55%
LA/Mar Vista 90066 : -11.99%

- arroyogrande

(PS all data taken from LATimes/DQ numbers for Jan '07 and '08)

[Inland Empire]

Another factor might be that higher end neighborhoods may draw people who stay put longer. I don't know if this is true but given what I see in my neck of the woods, the rich tend to stay put.
I recently looked at house in a another upscale neighborhood. The selling agent had sold it before and was familiar with the area. He said that in that area, only four houses had sold in about five years time. I do not know exactly how many houses were in that area but my guess would be about 100.

[PasadenaResident]

Just want to comment on the Pasadena area since I live in Pasadena, we have to keep in mind that Pasadena is divided into a North and South area. The Northern part have seen a price discount from the peak times but the Southern part is still steady on it's price and have not really come down a bit. Prices on the houses bordering the South area are much the same as they were two years ago. They might start to come down once they can't sell the current inventory but I doubt if the sellers will lower their prices. We go to open houses every week in Pasadena as we are looking to buy but the ones we like get snap in a few days. We already found 3 houses that we like and they got in escrow in a few days. I guess in good times or bad, real estate still comes down to three words, location, location, location. If your house is in a good location, no matter what the market is, it's going to sell.

[Jason M]

Nice work Arroyo, I would have done it myself if I had the time. I would point out that $/psf is the preferred method from an appraisal standpoint, the county assessor uses this method to appraise property (even with the 2% cap).