The return of the bubble?
Thanks to the economic recovery, the Westside tech boom, the end of the foreclosure wave and the return of cash-rich investors, L.A. has hit a milestone: The median home price has topped $500,000 for the first time in seven years.
For the month of May, Los Angeles County’s median home price hit $510,000, the highest since December 2007. That’s a remarkable recovery from January 2012, when the median was $305,000, and marks an increase of 66 percent in less than 30 months.
So does this mean that L.A.’s housing market is re-entering another bubble?
Local real estate brokers and economists who track the housing market say no. Or at least not today.
“Bubble? Definitely not yet,” said Chris Thornberg, principal economist with L.A. firm Beacon Economics, who accurately called the real estate bubble nearly a decade ago.
Thornberg and others say the market has actually returned to more normal pricing patterns. In fact, they note that after a sharp but brief run-up last year, with prices shooting up more than 20 percent in some areas, the market is actually slowing down, with houses remaining on the market a little longer and bidding wars happening less frequently. So it looks like a healthy tapering.
“We are not seeing the multidigit increases in pricing we saw last year,” said Robert Foster, L.A. region president for Coldwell Banker Real Estate of Madison, N.J. “We appear to be settling into a more normalized and sustainable rate of appreciation.”
So what drove prices above the $500,000 milestone?
A combination of factors, chief among them the limited supply of housing in the county. After the market tanked, homebuilders abandoned new housing projects. And with prices at depressed levels, few owners of existing homes chose to sell – unless they were underwater on their mortgages and had to sell.
In fact, Thornberg said, it was those forced sales and a huge overhang of foreclosures that drove the median price down to around $300,000, first in April 2009 and then in January 2012.
What’s more, traditional buyers were scarce because mortgage credit was tight. The only buyers were investors using cash to snap up foreclosed and distressed properties at fire-sale prices.
But all that changed very quickly in early 2012.
“It was a sharp and definite turn in the market, like a switch being turned on,” said
Jae Wu, co-owner of Heyler Realty, a brokerage mainly serving the Cheviot Hills-Westwood communities on L.A.’s Westside. “Everybody tried to jump back in all at once.”
Greater economic optimism, the tech boom on the Westside and a surge of foreign investors looking to park their cash all contributed to the turn. Also, the drop in the number of foreclosed and distressed properties on the market prompted bargain hunters to begin looking for deals among regular listings. In addition, steadily rising rents and lower housing prices changed the calculus for some renters who had previously shelved their homeownership dreams.
So, whereas just months earlier properties were languishing on the market, by March 2012, desirable properties were suddenly attracting dozens of bidders. The big difference from the buying frenzy during the bubble: Most purchases were 100 percent cash. Mortgage lending standards were still very tight.
This rebound was felt most sharply on the Westside and in other high-end, desirable markets. Wu said that one property in Cheviot Hills drew 43 bids. The property sold for well above the initial asking price.
Thornberg said the high end of the market is now within 10 percent of its precrash peak. The lower end of the market is still 30 percent below its peak.
But even more moderately priced regions saw some improvement. In the San Fernando Valley, for example, as older homeowners finally felt confident enough to put their homes on the market, there was enough pent-up demand for those properties to drive prices higher, said Katherine Stark, a Coldwell Banker broker serving the western part of the Valley. While most of these homes were listed in the high six figures, Stark said she’s also sold some homes in the $400,000-$500,000 range.
The last countywide threshold was crossed in April of last year, when the median price shot up beyond $400,000, according to data provided to the Business Journal by Seattle real estate research firm Redfin.
Slowing price rises
But unlike the home price run-up during the bubble a decade ago, where double-digit percentage increases went on year after year, the sizzle this time proved short-lived. The increases have recently slowed to the single-digit range.
More homes are coming on the market, increasing the inventory slightly. And, with prices having zoomed up, some buyers have been priced out of the market, especially with the stricter lending standards in place. That means sellers have to take buyers’ limitations into account in their asking price.
“This recent price rise has brought the whole affordability issue back into the picture,” said Michael Nourmand, president of Nourmand & Associates Realtors in Beverly Hills. “Unlike last year, people can no longer ask more for their home this month than last month just because.”
Wu said she’s seeing this, too. Some sellers have factored in a 20 percent or 30 percent increase from last year into their asking prices, but buyers are balking.
“Some sellers are getting a little too aggressive, too greedy,” she said.
But unlike 2007, few see any imminent price collapse. The main reasons: The housing supply remains tight and home prices are still in line with rents, which have also risen sharply.
Some observers believe the market is finding equilibrium.
“Just look at what we’ve been through: a bubble, followed by a collapse and then a rapid run-up over the past couple years,” said Eric Sussman, senior lecturer at UCLA’s Anderson School of Management and a local multifamily real estate investor. “We’re finally returning to more normal growth patterns.”