The most amazing thing about the following prognostications
regarding the Los Angeles Real Estate Market in 2019-2020 is that economics 101 is
driving every single one of them. Here’s the list. The detailed explanations
follow.
1.
Prices of all homes in all price categories in
all neighborhoods will continue up
2.
Rents will also be up, except maybe in DTLA
3.
Mortgage interest rates will continue steady at
least through 2019
4.
Inventory of homes for sale and rental units
will be similar to 2017. Extremely limited
5.
Inglewood and Hawthorne will be the next cities
to gentrify
6.
The working poor and middle class will be forced out into the
Inland Empire
7.
DTLA to WLA will become like San Jose…almost
recession proof
If you are interested in this article, then it is likely
that you are actively watching the real estate scene in Los Angeles. If so, you
might think the above seven predictions aren’t all that surprising. But if you
are a residential real estate owner, or you plan to either buy or sell in this
market, then you might be looking for confirmation of your own ideas of what
lies ahead.
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| Silcon Beach exploding with tech companies https://uclavcfund.files.wordpress.com/2014/11/page1image14392.png |
For the most part, this article will examine the Los Angeles
market from Downtown Los Angeles (DTLA) to the beaches and from Malibu to Seal
Beach. Neighborhoods south of DTLA the 10 fwy) are under pressure to gentrify,
but there is political pressure to stop that from happening. The neighborhoods
east of DTLA will all be inventory challenged, but not in the way that we will
continue to see in the DTLA to Santa Monica area.
If you agree with this list, or if you disagree in whole or
in part, we’d love to see your thoughts in the comments.
1. Prices of all homes in all price categories
in all neighborhoods will continue up
At the core of all markets we know that
supply, demand, and price are forever linked. If supply outstrips demand,
prices will fall. If prices go up too far, it creates downward pressure on
demand. We have not reached either of those points yet. Whether you define the
neighborhoods under discussion as the Wilshire corridor, the 10 fwy corridor or
maybe, more expansively, Silicon Beach, the lack of land available for
development is not ever going to change.
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| Los Angeles has no place left to build except to increase density |
When there is no land available,
supply can only be increased through leveling existing property, and that is
happening. However, it takes far longer to increase residential units by
increasing density than it does to develop raw land. Therefore, it seems likely
that Silicon Beach will mirror New York City or San Francisco. When the land is
virtually 100% developed, prices resist downward pressure except in the most
extreme recessions.
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| Los Angeles 3rd highest Nominal GDP |
|
The other side of the equation is
demand. Los Angeles has finally become a world class city. Through a bit of
luck the necessary combination of location, culture, educational facilities,
and infrastructure have all come together in the last 10 years. You could say
this happened when the tech industries closed the gap between Santa Monica and
Marina Del Rey. Everyone knew that someday Venice beach would have to gentrify.
When that happened and Playa Vista was developed simultaneously, Silicon Beach
was born, and the entire region was impacted.
Now the demand for housing comes
from the tech influx in addition to wealthy international buyers who want a
home in the newest world class city. For this demand to drop would require a
huge international recession. And, of course, these are generally short lived.
One could imagine prices being shaved for a short time by 20 – 30%, but they
would inexorably begin up again after the recession ended.
Price pressure is the third
component. The prices might get so high that the rational buyer or the
incremental buyer is priced out. They’d rather live in Long Beach, San Diego,
or some other beach community. Anything is possible, but the prices in these
areas are not enough lower at this time to draw folks away from the wide
beaches of Santa Monica and Venice.
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Moreover, the other tech cities
along the coast have higher housing prices without the amazing weather,
entertainment, cultural facilities, educational options, not to mention
mountain and deserts playgrounds.
2. Rents will also be up, except maybe in DTLA
Econ 101 tells us about rents as
well. Supply, demand, price. Then you add in one more component…housing prices.
There are two reasons why housing prices effect rent. One is that tenants have
the choice to become owners, so there is always an equation that makes that
choice more appealing. It isn’t all about finance, of course. There are plenty
of emotional and practical elements, too. But the financial one is key even
then.
If the economics of owning a home
became so much better than renting, then the practical aspects, such as length
of planned occupancy, change. It becomes practical to own even if you only think
you’ll be in that home for four years instead of five.
The other side of the rent vs buy
story is the landlord’s equation. The cost of the property must be low enough
compared to the rent to provide the landlord with an appropriate return on
investment. As rents go up, so does the cost the landlord is willing to pay,
and vice-versa.
The same factors driving up home
prices are driving up rents.
The
only place in LA where there might be enough new apartments to meet demand is
DTLA. And that oversupply, if it is one, might be very short lived. If
developers can’t cross south of the 10 fwy, and the LA City Council voted in
November 2017 to make it much harder, there won’t be enough places to build
more apartments. But in the short term, there might be a little give back on
rents in DTLA.
3. Mortgage interest rates will continue
steady at least through the end of 2019
Can you find one pundit who, in
2012 or 2015 or even early 2017 would have estimated we’d still be under 5% for
30-year fixed mortgages? But here we are. We continue at these historic low
rates, even in the face of Fed tightening and the beginning of the Fed selling
off mortgages to reduce the huge overhang of assets that it has been carrying. Now the Fed has said they will stay neutral for the rest of 2019, which caused a drop in rates that should continue through the rest of 2019
The economy may get going again later this year, which could result in bond interest rates increasing, even if the Fed stays neutral. I don't expect mortgage rates to be above March 2019 levels for the rest of 2019. However, some tightening could start to drive rates higher in 2020. Expect the Trump administration to try and jawbone down any such increases, since a slowing housing market could hurt reelection chances.
Why are mortgage rates still so
low, and why might we get another year of only slight increases? Econ 101
again. The folks demand to receive “real” returns on their safe investments of
about 2%. So if inflation is at zero, or close to zero, then real interest
rates for treasuries and super-secure bonds will be around 2%. Mortgage lenders
need to charge more than that, as home mortgages are not as secure as US
treasuries.
What is the spread between inflation
and mortgage rates. Around 3%. So an argument can be made that interest rates
should be closer to 5% with inflation now moving towards 2%.
And there is every reason to
believe that this will take place over the next few years as the economy continues to
heat up and wages begin to climb faster.
Wage inflation has been the missing component, but is now starting to kick in.
Too many folks were out of the labor market or working way below their skill level.
That gap is starting to close and wages are starting to move to where they should be when
unemployment is so low. It will probably happen this year or next.
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| CPI in 2017 - Just barely 2% with recent months lower |
So the bond market doesn’t believe
in 2% inflation yet. Thus mortgages for around 4%. There is also a supply demand
issue for the mortgages themselves. Far fewer mortgages are being written,
because home purchases and refinances are way down. This means too many
mortgage companies chasing too few mortgages. That is not likely to continue.
Markets generally close such gaps.
Figure mortgages around 4% all of 2019. Then we might see 4.5%. If wage
inflation hits 2% or more for two quarters in a row, then 5% could happen in
2020 or 2021.
4. Inventory of homes for sale and rent will
be similar to 2018. Extremely limited
When the market for anything gets really tight, and the prices start
getting really high, those who own the thing commonly start thinking about
cashing out. After this huge run up in housing prices, why aren’t folks in LA
cashing out. The list is very, very long
A.
Where will they move? Housing gridlock. “I can’t
sell because there is nothing I want to buy.” It is possible that some wave
effect might occur where a bunch of folks decide to sell, and then there’s
enough inventory, which opens up another wave. This could happen because of a
fear of recession or future downward pressure on prices. This does not seem
likely. If you can afford to live in LA, there is not much motivation to leave.
If you do want a larger or smaller house, or one that is in another
neighborhood, you haven’t increased the local inventory at all.
B.
No mortgage. A very high percentage of the
owners in LA have no mortgage or a very low mortgage with very low payments.
There is absolutely no incentive to move.
C.
Low mortgage interest rate. No incentive to pay
for a new mortgage that might be a point higher than now.
D.
Low property taxes – prop 13. If you move, you
are now paying current year property taxes rather than what might be
substantially lower taxes.
E.
Cost of moving. Currently it will cost the
average owner $70,000 or more to sell an existing $1M home and buy another. For
some who bought that same home for $300,000, $70,000 seems like a lot of money.
F.
Been in the house for a very long time. Westside
residents, in particular, tend to live in their homes for a very long time.
Moving means uprooting friendships, learning new neighborhoods, etc.
We’ve already noted that inventory
is not going to grow from new construction. With the exception of DTLA, there
is no part of Los Angeles County where building permits are even hinting at the
kind of new units that would begin to catch up with demand.
You want a sure bet in real estate.
Think back to Venice in 2005. Santa Monica and Mar Vista were sold out. Culver
City had the fastest rising cost of housing in the state. Marina Del Rey was
sold out. Playa Vista was an old helicopter testing field and wildlife
preserve. Venice was surrounded and it was a gang-infested hell hole. Property
was dirt cheap and it was walking distance to some of the best beaches on
earth. What would one guess could happen someday.
Fast forward to 2019. Venice has
the highest cost per square foot for housing in Los Angeles. Playa Vista is
sold out and is moving north into the seedy part of Culver City. (homes are
only $1,100,000.) Westchester is gentrifying quickly. The airport is being
remodeled. The Crenshaw line is being constructed. The forum has new life. The
Rams and Chargers will be playing in Inglewood shortly.
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| City of Champions Stadium will force gentrification in Inglewood and Hawthorne |
Most of Inglewood and Hawthorn
could use some gentrification. And the owners of the Rams certainly saw the
potential for Westward expansion of Silicon Beach. Will it take a year or five
years? Hard to know, but there is no place else left to go. Inglewood has passed a short term rent control measure due to exploding rents. This expansion
might go all the way to the 10 fwy at La Brea – Crenshaw, but it will start in
Inglewood.
Hawthorne also benefits from the
stadium and the eastward expansion. In addition, it is also home to SpaceX and
the boring company. Who knows what impact Elon Musk might have on Hawthorne as
it becomes the starting point for the new car movers under the 405 freeway?
Already support companies for SpaceX are eating up industrial property in the
area. And you need to house all those engineers and skilled workers.
6. The working poor and middle class will be forced out into
the Inland Empire
What do you do if you can’t afford
$1500 a month for a bachelor or $2000 a month for a one bedroom in Silicon
Beach. You either have to move to poorer neighborhoods, go into the valleys, or
go much further east.
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| The Inland Empire leads by far as destination for buyers leaving primary markets |
There are places in South Central
that are now improving due to the same pressures that are creating improvements
on the West Side; not enough room for the folks who can afford more. Thus those
who can’t afford more have to move where the housing is affordable.
There are also places in the Valleys
that are more affordable, but only by a few hundred dollars per month. There
isn’t really much space to add more housing in San Fernando or San Gabriel. So
rents and home prices are high in the better neighborhoods.
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| Distribution and logistics facilities eating up land in Inland Empire |
Where can you go? There’s still a
lot of land in Ontario, Riverside, San Bernadino, Moreno Valley and surrounding areas. But there is an
explosion of industrial building in these regions as this area has become the
distribution center capital of the US. 2,000,000 square foot buildings are
eating up land in great gobs. Even so, Riverside is currently seeing the
largest number of new residential dwellings in the Southland. Housing is only
half the cost of West LA in Riverside, and less than that in the neighboring
cities. Watch this area explode in the next 5 years.
7. DTLA to WLA will become like San
Jose…almost recession proof
Los Angeles almost averted the 1991
recession. Unfortunately there was a corresponding reduction in military
spending which undermined the employment of engineers and skilled workers.
The 2000 recession was caused by
the dot com bust, and LA was hit pretty good due to heavy reliance on a broad
array of dot come issues.
The 2008 recession hit LA, but not
as hard as Phoenix or Miami. If you look at those recessions, the areas that
did best were those that had diverse economies and no more land. San Francisco
and NYC saw prices drop, but not as much and the rebound was faster.
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| Hi Tech and Entertainment need one another. They've come together in LA |
LA may be reaching that point. The
economy is now very diverse. Certainly some kind of tech based recession would
hurt. But LA and its neighbors are now the number 1 tourist destination in the
world. The entertainment sector is actually being helped by the tech infusion,
as the two often need one another.
The distribution centers in the Inland
Empire are driving massive increases in the ports and all types of
transportation businesses associated with distribution. Will we see hyperloops
built to move freight from LA and Long Beach Harbors to Ontario? Will headless
trucks be driving in special lanes? Or will drones be the answer?
The future of LA seems secure.
Nothing is certain, of course. But it is an exciting time for Silicon Beach.
If you are looking to buy or sell a
home In the Silicon Beach area, Whit Prouty wrote the book. Check out his newbook, “10 Keys to Selling Your LA Home,” on Amazon.com.
You can set an appointment to
discuss your real estate needs by calling Whit at
310-777-6302
If you liked this article, you might also like:
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http://blog.whitprouty.com/2017/08/housing-gridlock-baby-boomers-staying.html
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