Sunday, July 13, 2008

Manhattan Beach-Beach Cities: Why are prices still so high?

I received this from a reader and with their permission am writing a post in answer to a question they asked.. Below is the question and my answer.. Be prepared.. this is a very long post...

The Question:
Hi Kaye,

I've been reading your blog for a while now. I have a burning misunderstanding about the South Bay market. Fundamentally it has to do with the price curve I see on Zillow when I look at the last 10 years of prices here. The HUGE increase in the slope through the early 2000's is the key. If one looks at the slope of that price curve, for say 90266, over the last 20 years it seems that housing prices went up slowly and steadily. There were big peaks and valleys but the curve always came back to where it would've been had the peaks and valleys never happened. Until recently. Now prices have sort of stabilized around here it seems. But, they haven't crashed and they are no where even close to near what they "should" be according to that curve. Case in point, although a unique house near the beach is 220 19th street. I saw it as open on the MBC blog that I also read. So, I thought I'd reproduce it here and get your thoughts on it. My wife and I are in medicine but are currently on the sidelines but we watch the MLS. Here's the comment I posted, do you have any thoughts?:

***This post made me say, "Whaaaaaaaaaaaaat?" when I read about 220 19th going for $3.1M more than it was purchased for in 2001. So they bought it for $2M and are selling for $5M.I missed the right time to buy a few years ago and so put my money aside to wait. Everybody says that the market is down and aside from the Freddie and Fanny stuff yesterday, that its not going to crash here in the south bay. When a house goes up in price 2.4 times what it was 7 years ago... are we really saying this is reasonable and sustainable prices! Isn't M.B. still in a huge bubble?
When I look at a south bay home's price on Zillow in 2001...I say to myself "well, that's reasonable..." then I look at todays price and say "no, *that* house is NOT worth 2.5x as much as it was then..."I know it's totally subjective and the market is what it is. But, won't the curve have to eventually return to its average slope? Or stay flat for decades? Is that house really worth $5M? It sure doesn't seem like it. It does seem worth 2.5M though... It seems like we have no perspective when we look at this stuff. It's incredible...Help me understand this.--

My Answer:
I'll give it a try... I believe there are a number of things going on in the South Bay-Beach Cities market and especially in Manhattan Beach that may account for the difference in the reality of the market compared to the expectations of where buyers would like it headed. Short of a full on financial crash, i.e. more major bank failures, Fannie and Freddie going down, the stock market tanking and or a major recession, I suspect we will limp along bruised and battered but not permanently crushed. That's not to say we are not going to see a continual decline in prices until the end of the year and maybe into next year. But for now the decline appears to be far less then many predicted/wished to see. This has always been part of the appeal of the South Bay Beach Cities. Overall values tend to hold up better for our local real estate markets.

I think some of the major reasons for this phenomenon are:

1. The Beach Cities make up a relatively small area. Unlike many major metropolitan areas there are no unsafe parts of town. We may make local jokes about life east of Sepulveda or North Redondo but the fact is property values are high in all the Beach Cities.

2. There has been a change in the demographics in Manhattan Beach and the other South Bay Beach Cities over the last few years. It used to be that you lived at the beach until you became successful in your field or got married or a combination of both and then moved somewhere more “family” oriented like Palos Verdes. That changed in the late 70’s as more of us who had moved here as “singles” decided we loved the beach and wanted to continue living near the beach.

3. Each city has its own school system. This drew a number of folks with money who had been living on the Westside into our area. The public schools in our cities were far better then those on the Westside served by LA City Schools. A lot of parents decided that paying a little more for a home was a better deal then paying for private school tuition.

4. The 2000 stock market crash... The bust scared investors. Many of them decided they wanted a tangible asset as opposed to an intangible one. You may laugh now, but investors liked the idea of something solid like real estate after the debacle. Real estate in the South Bay looked great for a number of reasons…. location…who doesn’t want to live by the beach, no rent control and rents on the high side. A number of those with big bucks figured out that there is only so much ocean front and ocean view property…so they bought it and prices shot up. These investors had money and often paid cash and are probably not in financial trouble.

These little Beach Cities that had been home to middle management engineers and teachers saw an influx of folks with major financial resources. After the collapse of the aerospace industry during the early 90’s, a number of companies begin to relocate to the South Bay as office space was cheap. Soon all those office buildings on Sepulveda and Rosecrans were filled with companies that had little to do with aerospace. With the addition of Raleigh Studios, the Beach Cities became more and more popular. 20 years ago hardly anyone knew where Manhattan Beach was or cared. Now they give out weather reports for Manhattan Beach along with downtown LA on the nightly news. Manhattan Beach has become one of the in places to live for those in the know.

The mid-management person from TRW has been replaced by the managing partner of a downtown law firm, a CEO of a Fortune 500 company or other high income individual. Property may only be “worth" what someone is willing to pay... but the Beach Cities seem to have a number of people who are willing to pay some pretty steep prices for these properties. When you have buyers who will pay large amounts of cash for property in a specific community; then that community will trend toward more stable values over the long run. In the last 10 years we have seen a higher number of people who are not only willing to pay $XXX for certain properties but are paying in cash. The percentage doesn’t have to be huge just visible to be effective. These types of owners tend to be very stable and are not as affected by the ups and down that hit the rest of the population.

This doesn’t mean carte blanche for every home or homeowner in Manhattan Beach or the other Beach Cities; but it does mean that values are probably going to be “above normal” permanently. The phenomenon is often referred to as “the path of affluent migration”. At this point in time the Beach Cities seem to be smack in the middle of that path…even in this lousy real estate market. We probably will see prices drop a bit more but I doubt it will be catastrophic unless the entire country goes into a massive recession. East of Sepulveda will always be worth less the west of Sepulveda. Walk street and Sand section homes near downtown in the 100-200 block will be worth more then homes east of Highland. Strand properties will continue to be a very hot item no matter what happens to the overall housing market. Market forces will certainly affect us…just not as much as other areas. We aren’t immune we just seem to get by a bit better.

In answer to your question… I don’t know if 220 19th St. will get one offer, 10 offers or no offers at the asking price. That will depend on whether or not potential buyers find it to be of value at the asking price. I do know that 19th is a great street, the location is close to downtown and the house is lovely. In this case location and condition may well trump concerns about what the home sold for a few years ago. Here’s something else to consider... the person who might be willing to fork over that kind of money may see the $5M price as a bargain if the property fits his/her needs.

Finally, it may be that Manhattan Beach has permanently changed from an affordable little beach town to a very Pricey Beach Town. It’s quite possible that Manhattan Beach is going to wind up like many other areas where affordability will rise beyond the level of the average buyer. I suspect most coastal cities in Southern California are in fact headed in that direction. As a beach rat from way back, I hate to see this happening and will miss the old beach town atmosphere I grew up with.

So what’s the answer for people who want to buy in Manhattan Beach? I’m guessing that a number of buyers are going to have to adjust their expectations. Your first house might not be in Manhattan Beach. You might find yourself in Hermosa, Redondo or El Segundo. You might have to settle for a smaller house if you must live in Manhattan Beach. This is what buyers did 15-20 years ago. They bought a small house and upgraded it when they had more resources. Then again, you may choose to rent rather then buy a home. There are a lot of choices open to you.

Update 7/20/2008.. Today the LATimes had an article on the front page about the number of professional athletes living in Manhattan Beach ... a sign of the times?


Vicki Lloyd said...

Kaye -

I think your answer is excellent!

The principal of scarcity still applies - they just aren't making any more beach property - and there are more people who are willing and able to pay for it than those who are willing to sell it!

Kaye Thomas said...

I know you are seeing the same thing in the OC beach towns..

Anonymous said...

Come on Kaye, if you are going to pull out the same old tired lines, you should try to at least put some caveats in it.....and you are certainly mixing "national" and "local" explanations to come up with a meaningless answer.

Example: After the tech bust people but more value in tangible assets (that's NOT a local explanation)

You can't have it both ways....either you have to come up with some local reasons that MB took off in 2000, or you have to deal with the popping bubble elsewhere. Don't forget, they were not making any land in 1996 yesterday. Why did we have such a lower value on it then?

For instance: In 2000, a terrible tragedy caused half the MB real estate to crumble into the sea. This caused the remaining land to appreciate in value tremendously.

If you argue that real estate is LOCAL and then use NATIONAL trends to support it, your argument is significantly dilluted.

Of course, my personal belief is that it's the same old bubble, just a little slower to pop 'cause folks here are higher up on the food chain.

It'll be down 50% by 2012 due to tightening credit, the babyboomers saying "crap, all my net worth is tied up in this house, I better sell it or I'll be eating alpo while I watch the sunset".

Did I mention tightening credit? The opinion dujour last year was that "hedgies from new york" would save the sand section since they've got tons of cash and now know about MB.....yeah, good luck with that. There were a few dozen hedgies in 1999. 10's of thousands in 2007. In 2012, there will be a few dozen again.

Anonymous said...

That was a good answer Kaye. I especially agree with the change in demographics in Manhattan Beach. This is now officially a pricey beach community. The real question mark is the economy. IMO it is a bit premature to make a call on what degree this market will hold. Up to this point the economy has not been all that bad. There are some serious headwinds hitting right now.

It was the actual downturn in the economy of the early 90's (aerospace/defense)) that hit all areas of the California market. Contrast that to today all we have really seen is the popping of the credit/housing bubble. How this has impacted the economy and how this will impact the new demographic of the coastal communities?.......we just don't know at this point.

Kaye Thomas said...

Anonymous 2:35,
Hmmmmm.. Gee I don't think I have ever said that local areas are not impacted by National issues.. that would be silly.. of course local areas are affected by national economic problems. Just because we do not have massive numbers of foreclosures or a lot of people in trouble doesn't mean we don't have problems.

Home prices are down and sales volume has fallen off... these are factors that are a direct result of nationwide mortgage issues and concerns about the economy. We will continue to see more of the same for sometime to come and possibly into next year.

If we get a massive national recession or the credit market completely implodes we are going to be in trouble along with the rest of the country. However that has not yet happened and may never happen.. a lot depends on what happens in financial markets in the next 6 months.

I will say that if you see this market lose 60% in value then you won't have to worry about the real estate issue as 2 out of 3 people in our area will likely be unemployed and won't be buying anything.

Kaye Thomas said...

Anonymous 4:11,
If you want to check out just how much MB has changed take a look at some of the trendy women's clothing stores in downtown. You will find tops... not designer labels... priced at $200- $400.. the same for skirts and pants. These are a far cry from Pete's Bikini and clothing store prices.

I agree we don't know how much of an effect the credit/housing problems and general economic issues are going to affect us... but I'm guessing we are going to find out fairly soon.

Anonymous said...

You usually post some mid-month figures. How is the month of July so far(closed sales & new escrows)?

Kaye Thomas said...

Anonymous 10:07,
It will be posted later this afternoon.. and will try to geat sales for all Beach Cities by Saturday..