OVERVIEW/27″/mike1st/mark2nd
By JOYZELLE DAVIS
Staff Reporter
Heading into the spring home-buying season, Los Angeles County’s long-languishing residential real estate market is once again in a full-fledged upswing.
More than 300 of L.A.’s approximately 340 zip codes show increases in sales counts, and about 250 are seeing increases in median home sales prices, according to Acxiom/DataQuick Information Systems, a real estate research firm.
“There’s an awful lot of pent-up activity out there,” said John Karevoll, an analyst with Acxiom/DataQuick. “A lot of people couldn’t sell because they owed more than the homes were worth. Now with values going up, that provides more maneuverability.”
Jim Purcell is evidence of what’s going on.
Purcell, a 42-year-old engineer, bought a duplex in Long Beach during the buying frenzy of the late ’80s. For much of the recession, he thought he might never be able to move out with his family to an area with a better school district. But Purcell is shopping for a new home in El Segundo now that he thinks he can finally sell his property at a profit.
He’s hardly the only buyer interested in the El Segundo market, which has seen values rise 30 percent over the past year to an average median price of $289,750. Purcell said he feels an urgency to purchase a home soon, “before it gets priced beyond me,” he said.
Homeowners are not the only ones feeling the effects of the upswing.
The stocks of homebuilding companies such as Kaufman & Broad Home Corp. keep hitting new highs, home resales are at their highest level of the decade, and residential mortgage lending companies are scrambling to hire new employees to handle the workload.
The latest sales numbers show that the recovery is no mere flash in the pan. In February, the latest month for which statistics are available, the average sale price of a single-family home in L.A. County was 5.6 percent above the price during the same period last year, according to the California Association of Realtors.
Don’t call it a boom just yet. Home prices across the county are still 18 percent below their peak in 1991, according to Acxiom/DataQuick.
The average median home resale price last year was $155,000, compared with $152,000 in 1996. That’s still well off the 1991 peak of $189,000, but it marks the first time in five years that the slide in home values reversed.
In the Westside market, median home prices are up 21 percent from 1996, to $690,000. Sherman Oaks, Pasadena and Malibu also saw values rise by more than 20 percent.
Similarly, sales volume picked up across the county. Transactions were up 10 percent from 1996 to 91,752.
In fact, the housing recovery has uncharacteristically lagged the region’s economic resurgence. In the past, residential real estate has been among the primary sectors to lead Southern California out of recessions.
Part of the reason for this lag is that the economy “reinvented itself faster than anyone would have imagined the recovery was here before a lot of people fully realized it,” according to David Dale-Johnson, director of USC’s program in real estate.
Another reason the recovery has been somewhat slow in arriving is because many homebuyers are still shell-shocked from the severity of the bust. Property values fell by as much as 11 percent each year in the early ’90s, leaving many homeowners who bought in the late ’80s with the harrowing experience of being “underwater” with negative equity on their investment.
“The presumption was that once you bought your home, it would rise 10 percent in value each year,” Dale-Johnson said. But after five years of the market going the other way, he noted, “confidence has not been easily recovered.”
Consumer confidence might not have entirely returned yet, but the underlying fundamentals have grown stronger.
L.A. County employment grew by 1.7 percent in 1997, and jobs are forecasted to grow by 1.9 percent this year and 2.2 percent in 1999, according to the state Economic Development Department. The county’s population has grown in kind, adding a total of 600,000 people since 1989.
Los Angeles is the largest housing market in the nation, girded by one of the nation’s largest metro-area populations, highly mobile residents and a thin supply of single-family rental units.
“There’s a demand for housing right now, and price becomes secondary it’s not an investment decision for a lot of people,” said Alan Horowitz, a residential analyst with E & Y; Kenneth Leventhal Real Estate Group.
Nonetheless, investment conditions have rarely been so prime. Thirty-year fixed mortgage rates are at an accommodating 7 percent and the standard down payment on a home with a “conforming” loan (meaning it is small enough to be sold to Fannie Mae or Freddie Mac) is now at 10 percent, compared with 20 percent in the ’80s.
There’s little available land for new housing development in L.A. aside from the outlying edges of the county. So homebuyers are largely left with what inventory exists, and the laws of supply and demand dictate that prices will rapidly rise once buyers jump into the market again.
“We’re at the beginning of a major up cycle,” said G.U. Krueger, deputy chief economist for the California Association of Realtors, an industry trade group. He noted that the inventory of for-sale housing in L.A. County has shrunk to a 5.1-month supply, down from a 7.4-month supply a year ago.
He also noted that if demand continues to grow while supply stays at the same level, “home prices are going to shoot up and it’s going to feel like d & #233;j & #341; vu all over again.”
But some economists say the boom and bust of the late ’80s and early ’90s weren’t triggered by simple supply and demand. Rather, the market’s collapse was triggered by a confluence of circumstances unlikely to occur again.
There always will be cycles in real estate, said Nima Nattagh, a market analyst with Experian, a real estate information firm. But as long as the region’s economy continues to do well, he said, home prices should inflate at a moderate pace.
“Home values are more in line with people’s income right now,” he said. “I foresee a more normal housing cycle.”
A normal housing cycle begins when the economy is strong enough for consumers to buy a home. Prices increase as demand outpaces supply, and buyers fear home prices will soon shoot beyond their grasp. As prices rise further, fewer people can afford to buy a house. In 1989, only 11 percent of Californians could afford to buy a median-priced home, compared with 40 percent now.
Once the first-time homebuyer is priced out of the market, the volume of transactions slows. Then prices begin to come down, until the economy kicks in again and the cycle repeats itself.
That “normal” cycle is disrupted, however, when something extraordinary occurs, such as a massive earthquake, riots or severe downsizing all three of which occurred in Los Angeles.
The hemorrhaging of the local aerospace industry in the early 1990s, along with the recession and the 1994 Northridge quake, triggered a collapse in the residential market.
In the wake of these disasters, however, the region has emerged with a more diverse economy that balances its strength in the entertainment industry, trade, tourism, manufacturing and technology.
“When you’re in an economic up cycle, suddenly the economy is diverse,” said Krueger. “And in a down cycle, people put their fingers on their lips and say, ‘Suddenly this economy isn’t as diverse as we thought.’ ”
If some unexpected major event were to upend the entertainment industry, for example, it could cripple the high-end housing market. Entertainment industry growth is credited with leading the county’s residential market into recovery last summer. On the Westside, some homes are now almost at 90 percent of their peak values.
But no serious threats to the entertainment industry or other major L.A. economic engines are on the horizon, at least for now. The possibility of a Screen Actors Guild strike was recently resolved before it materialized, and events that were expected to possibly derail the recovery, such as the financial crisis in Southeast Asia, have in fact boosted it with cheaper imported Asian goods pouring into local ports.
Meanwhile, the other potential threat to the acceleration of home prices oversupply seems unlikely in Los Angeles because of its scarcity of developable residential land.
Horowitz described his outlook for the L.A. housing market as “very optimistic. Aside from World War III, I don’t see an end to this” before well into the next decade.
He noted that L.A.’s post-recession home-buying population is more international and cosmopolitan than the buyers of the mid ’80s.
“Not only is L.A.’s economy more diverse, but it’s more of a destination,” he said. “Our population is more tolerant of an urban environment, and they’re much less likely to leave in search of a better environment if trouble does occur.”
