Saturday, February 28, 2009

Manhattan Beach-Beach Cities: Changes in the market

I've always said that real estate values in Manhattan Beach and the Beach Cities would hold up better then in other parts of Southern California ... and so far this has been true. I also said that all bets were off if we hit a recession. There is no question that we are in a very bad recession... with no end in sight. Today the stock market went where no one wanted to see it go. Unemployment in California jumped to 10.5% and we are going to see hikes in both Federal and state taxes. The South Bay may still be a bit better off then other parts of the state, but the outlook isn't pretty.

I thought we might squeeze by with another 10%-12% decline in home values this year but after hearing about the Administration's plans to increase revenue over the next few years coupled with the massive tax hikes in CA, and a complete lack of confidence in the market... it looks as if I was wrong. Yep... that's right... I was Wrong and I admit it.

I don't know how far prices will drop, and neither does anyone else, but the handwriting is on the wall that prices are moving lower and much faster then expected. A number of builders are in serious trouble. There are still new homes that have been on the market since 2007 without finding a buyer. Other projects didn't get off the ground until well into the market decline and are facing stiff competition for buyers. A number of homes that were rented may be hitting the market again as investors want to get their money out of the projects. You are going to see more short sales and REO's pop up on new construction. As prices on new construction float down that will put pressure on older homes.

In addition, if the recession continues much longer, a lot folks may be facing some real financial hardship over the coming year. As more people lose their jobs or have their income reduced many will opt to sell their homes in order to relocate to another area or state in search of employment. As inventory increases and buyers have more choices prices are going to fall... supply and demand on the other end of the spectrum.

A third factor in the Beach Cities might be because of the planned increase in the capital gain tax that the President wants. If I had owned a large home for a long time and planned to move to a smaller home or even out of the area I would definitely put my property on the market. There is a big difference between a 15% tax on gain and a 20% tax if you saw some major appreciation in the value of your property.

I've talked to a number of buyers in the last month or so who just don't know what they want to do. Some are dropping out of the market for a few months or a year. Others are still ready to buy but are very cautious about price. Today's low rates are enticing for those who plan to own for a long time. If you are in a quandary the best thing to do is pull out a pencil and see what the difference in your payment would be if you bought today at a low fixed rate vs if you wait and prices drop another 15% but rates move up 1%-2%.

All of these issues will put increased pressure on the South Bay-Beach Cities housing market. When you add tougher lending underwriting and down payment requirements, the pool of truly qualified buyers gets smaller. Homes are selling but at lower prices as buyers maneuver through a dicey market. Buyers are in the drivers seat for this ride and they are going to make payback rough for sellers.


Anonymous said...

Kaye-It's refreshing to see an agent be so honest. So many agents continue to sugar coat this situation, and in my opion, only do their reputation harm by doing so. It is what it is and the sooner everyone starts facing reality the sooner the market will stabilize and move forward. Prices will and must come down.

Anonymous said...

Thank you, Kaye, I have always appreciated your fair, balanced and seasoned analysis of our current market.

Kaye said...

Anon 10:47 and Anon 12:26,
Truthfully I thought we were going to squeeze by until around the end of January. When I started looking at the numbers in February I saw a new pattern taking shape.

If my crystal ball wasn't broken I might have a better idea about where we are headed ... but with all that is happening it's impossible to give more accurate information.

Anonymous said...

good for you Kate. Your honest assessment of the situation is really encouraging to see, and it is also quite rare. If I were looking to buy or sell, I would certainly be more inclined to use an agent such as yourself who can express her honest opinion, even if that opinion of the market is less than positive in the short term.

Kaye said...

Anon 7:30,
Thank you...
No one is smarter then the market...and right now the market is in trouble. I have clients who are buying but they are being very tough about what they expect.

Fight on said...

I really liked the point about the capital gains taxes. Its a point that hasn't been made much at MBCon. There are a ton of reason for people to sell right now and not all of them are related to spec owners trying to flip a house for profit.

Kaye said...

Fight On,

Other then builders, who build new homes on spec, most people who bought over the last few years were owner users.

Most homes on the market are occupied by the owners. There aren't many people who buy single family homes in MB as a rentals as the numbers don't make a lot of sense.

Historically people tended to keep their "starter" home if they could and rent it out as they moved up to something larger. Typically people have retained ownership of these properties for years. There are a number of people who will see some big appreciation if they choose to sell.

Waiting... said...

Kaye, nice post. It appears there is zero probability that prices will go up this year. Therefore, it just seems much more logical to let inventory build and wait to purchase a home.
There are quite a few builders that are not (in my opinion) being aggressive enough with their pricing. My take on it is because they would rather have the bank take it back if they don't receive a certain amount. Kaye, is that accurate? What is going on in the minds of these spec builders with homes just sitting. It looks like the new price point for a brand new tree section home (not A grade) will probably be around 1.7-1.75.

Kaye said...


The best we could hope for in this market is for prices to go flat.. but I'm not seeing that at the moment.

The issue with most builders is that they are really in over their heads. They paid some hefty prices for the dirt and by the time they built out they found themselves caught in a declining market.

Builders are a lot like parents... their homes are always better then the other guy's home. They have a hard time admitting that they are going to lose money even as they head toward foreclosure.

Some banks are working with builders and are willing to do short sales but often the bank wants more then the market will bear. So builders are caught in a vicious circle.

It only takes a couple of REO or short sales to change the market and we are seeing that happen. Lenders are being very tough with appraised values. If they see 2 REO's and 4 other sales they will use REO's rather then standard sales. They don't want to get caught with over valued homes in case the market tumbles even more.

Most folks who are buying at this time are looking for low interest rates and a deal on price. If it all comes together they will buy... if it doesn't then they will wait.

The biggest change I've noticed is that buyers are finally willing to make low offers. Even 6 months ago that was not the case they wanted the seller to lower the price first.

Anonymous said...


Are the sellers you are dealing with in denial about the situation or are they finally starting to realize that prices are dropping?

Kaye said...

There are still a few sellers who are having trouble with the change in the market but I think most have figured out that prices are down and not moving upward for a long time.

The biggest hurdle for many is finding the right price to entice a buyer which is often just below market value. That is a hard concept for sellers.