SchifferLine 15 May 2014

Timely Real Estate News………………………………………………….15 May 2014
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Housing continues to show weakness in our economy….
When Federal Reserve Chair Janet Yellen testified before the Joint Economic Committee of Congress, she stated that the Fed had added a new variable to the Fed’s policy mix — weakness in the housing market.  This environment adds to the “push-pull” situation that I discussed in the last issue of the Schiffer Line.
 
While there are signs in our communities on the Westside (see below) that prices are climbing and sales volumes are up, it doesn’t necessarily mean we’re on the road to recovery.  When we have so many who want to enter the housing market and can’t (reduced inventory, high demand, and out-of-reach prices), this is a challenge that we’re facing today in our real estate industry. 

Yellen’s comments are very timely, because she definitely sees weaknesses in our housing market, which is one of the cornerstones of our economy.  If families who need and want housing can’t buy a home they can afford, that’s troubling.

Here is a snapshot of Yellen’s key comments:
While in recent weeks and months, the Fed has focused on two economic variables that are being most closely watched — unemployment and inflation — the mention of housing was significant. Not since the immediate aftermath of the bursting of the real-estate bubble has the Fed focused on the foundation of the American economy as a significant factor is guiding decisions on interest rates and quantitative easing.

You might say that it’s been a “winter of discontent” — with the severe weather causing a real economic slowdown on all sectors of the housing market — resales, new home construction, mortgage applications and refinancing.  Homebuyers couldn’t get out of their homes….sellers were tentative about putting their homes on the market in these wintry conditions, which seemed to last forever.  As a result, home-price appreciation slowed, and a renewed, anticipated “spark” hasn’t happened yet. 

Even with the long-term Treasury rates falling to 2.6 percent, mortgage rates have been pushed back down toward historic lows, and the flow of credit to potential home buyers has been literally choked off.  This has created a headwind in housing according to the Fed, and for the overall economy as well.  This is a far cry compared to the “tailwind” we had a year ago.  And if the spring fails to deliver its normal bounce in residential real estate, the Fed may employ several tactics to counter this actual slowdown.

Yellen has options…..
For example, with the cost of credit still quite low by historic standards, the Fed may have to reach into its toolbox and try some other unconventional means of reigniting the home fires in residential real estate. It could stop paying banks the quarter point interest for deposits held at the Fed, potentially forcing banks to take that money and make loans.
Such a move would likely be opposed by banks, who are earning a risk-free sum from the central bank, but the net effect could be quite forceful. It would force nearly $3 trillion of bank reserves held at the Fed into the economy according to a recent Los Angeles Times story.

Since banks would be earning zero, or even less than zero, on their deposits at the Fed, their incentives to lend could change quickly, particularly if the Fed were to adopt a negative deposit-rate policy — something no one is currently expecting. With that dramatic step, the Fed could actually charge a fee for holding those deposits. The Fed has written about such a maneuver in its myriad studies on how to get a deflationary economy moving again.

Last week, Fed policymakers continued to reduce the central bank’s bond-buying stimulus program. The reduction to $45 billion a month in purchases puts the Fed on pace to end the controversial purchases by year’s end.  And that is a game changer.  It’s too early to tell what effect that might have on prices and inventories according to Carole Schiffer.

“The real estate market can be viewed from different points of views,” Carole Schiffer stated.  “If you are the one selling your home on the Westside, you are pleased by the increase in home prices.  You benefit from decreased inventory.  But if you’re a young family who would be normally looking for a home here, you’re frozen out because of this lack of inventory, high demand and prices that put you out of the market.  In the long run, that’s not a good thing.” 

So, here we are in spring, awaiting the real estate bloom we are accustomed to each year….only to find that in some parts of the country, the flowers are in partial bloom (like here), but in many parts, there is still the dregs of winter hanging on…and hanging on. 

“Mortgage rates, credit standards, and tight money availabilities are not controlled by even improving conditions on the Westside.  But fortunately, we have not suffered the pain of the first quarter experienced in much of our country.  It’s perhaps better to read about the cold, but we can still feel a “chill” in our mortgage and financial worlds here, too“, Carole Schiffer said.

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Sale volume continues upward….units sold down
On the surface, we are seeing strong numbers across the board.  This is no surprise….with lower inventories and demand increasing, residential sales volume moved substantially ahead of last year’s growth levels for the first four months of 2014.  In the four areas I reported on in 2013 — Beverly Hills, Beverly Hills Post Office, Bel-Air, and Brentwood — total sales volume was $696 million by the end of April 2013.  A year later, sales volume for these four communities was $868 million or a 24% increase!

What is troubling, however, is the reduced number of sales.  One would think that with this large sales volume increase, the number of transactions would increase as well — but the actual number of single-family home sales for these four communities shows that 2013 there were 208 units sold vs. 180 units for 2014…..a 13% decrease for this year vs. last year.  But sales volumes for this year were up 24%, which shows how strong prices have continued their upward movement.

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Median sale prices are still climbing.
Despite strong numbers on the Westside, home sales are not picking up — but prices are. Many predicted (Data Quick out of San Diego, for example) come spring 2014, home sales would be accelerating, bolstered by strong sales in the latter quarter of 2013.  But of course, severe winter months didn’t make that possible.  But we haven’t seen that in terms of transactions.  Bel-Air, for example, only had three sales last month.

Median sales prices make it appear, for example, that the residential market appears to be very strong.  For example, Beverly Hills through the first four months of this year are up 9% to $4.925 million….Beverly Hills Post Office is up 31% to $2.500 million….Bel-Air is up 30% to $2.100 million….Brentwood is up 20% to $2.587 million.  Since January, I’ve added Westwood/Century City, and their median sales prices are up 38% to $1.724 million through the first four months of this year. 

But please remember, the median sales price only selects the “middle number” out of the total so sales prices are not influenced by one large sale, as occurred earlier this year ($102 million).  As I have said so many times, the trend to watch for prices are the median sales prices for “year to date”. 

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April 2104 was another strong month vs. 2013
The five communities that I now report on show that except for Beverly Hills, they are showing higher median sale prices for last month compared to a year earlier, April 2013.  For example, Bel-Air was up 290% when it’s median sales price went from $1.895 million to $7.400 million….an anomaly because there were only three sales last month vs. 22 in April 2013 — so statistically, it looks larger than it really is. 

Beverly Hills was down less than 1% for April-to-April period…Beverly Hills Post Office was up 12%….Brentwood was up 28%…..and Westwood/Century City was up 29%. 

If you continue your focus on median sales prices for the year, these five communities benefit from reduced inventories, which translates into higher prices but fewer sales.  Indicators of increased demand abound:  Multiple offers, busy open houses, and continued strong demand from foreign buyers all of whom are pushing Westside prices higher.  All-cash offers are fueling much of this as well.

Interest rates, which were expected to rise above 5% haven’t materialized, and as a matter of fact, they have gone lower –(below 4.25%).  Tight credit continues to be the norm.

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Central Los Angeles areas are starting to boom….that’s good news
Is USC moving in on UCLA’s home turf?  Well, sort of, but it’s all good news.  Let’s not jump to our standard Bruin-Trojan rivalry banter….it’s all about housing and improving communities that lie between the USC and UCLA campuses according to Data Quick.  The demand for lower-priced housing is rapidly expanding in all directions, especially westward in the nearby-communities of Jefferson Park, Leimert Park, West Adams and the Crenshaw District which are attracting young professionals who have been priced out the nearer-to-the-ocean areas. 

We’ve talked about the rapidly growing popularity of Culver City, Mar Vista, Palms and Venice in past issues of the SchifferLine, and now we bring you the “next best thing” — the communities that are becoming fashionable for upwardly mobile professionals who want to own their own home. 

Data Quick reports that prices in the ZIP codes of the above-mentioned neighborhoods are soaring — with the median home price increasing more than 40 percent to $450,000 in this year’s first quarter, compared to last year’s first quarter.  USC’s expansion over the years has spawned greater and greater extensions to the west of the campus.

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Transportation is the key to burgeoning growth
What city planners have recognized for years is the need to expand transportation services within   the City of Los Angeles and throughout the county as well..  The expanding Expo Line, which currently connects downtown with Culver City — will eventually reach Santa Monica, and it is the assumption that most areas of the city will be connected by rail before you know it.  Data Quick reports that during the first quarter, nearly 12 percent of home sales in the area were so-called “flips” — in which investors purchased, renovated, and resold the properties.

USC’s surrounding neighborhoods is ground zero….
If you’ve been to the Coliseum in recent years, you’ve noticed the huge student housing and apartment complexes that have sprung up around the campus and westward.  It is only natural that as the USC campus becomes an increasingly stronger influence in its core neighborhoods, we are going to see the outward push of development for more housing and the acquisition of residential housing on the fringes of their influence. The same thing is happening in the areas surrounding UCLA in Westwood.   Data Quick points out that this has been the trend with practically every major urban university that has always been a positive influence in gentrifying neighborhoods and bringing in more efficient and positive infrastructure, such as the expanding rail lines in the City of Los Angeles.

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All cash buyers are making a bigger impact on housing finance
According to a national real estate research firm, all-cash sales soared to a record 42.7% of all sales in the first quarter, 2014.  Even as deep-pocketed institutional investors pull back on buying homes, all-cash transactions accounted for an all-time high of nearly 43 percent of total homes sales in the first quarter, according to RealtyTrac. The demand is high, supply is low and that is precisely why more homebuyers today are relying on cash to be competitive.

Institutional investors, who bought large quantities of distressed properties in the past few years, are actually slowing their purchases, down to just 5.6 percent of all U.S. residential sales in the first quarter of 2014 from 7 percent one year ago, said RealtyTrac. “Strict lending standards combined with low inventory continue to give the advantage to investors and other cash buyers in this housing market,” said Daren Blomquist, vice president at RealtyTrac.

While the national report didn’t specify the percentage of all-cash sales in California, ” For the past 3 -4 years, I have been seeing between 30% to 40% of my sales being all cash” Carole Schiffer stated.  “It is not uncommon these days to get buyers — both foreign and domestic — to go with an all-cash offer, because it can give the buyer instant leverage. As a result, lenders, particularly First Capital Mortgage, who is affiliated with Coldwell Banker has created different programs to provide   buyers who are not all cash the same advantage(s) as an all cash buyer.  Please contact me for more details.  

The National Association of Realtors (NAR) is also reporting a growing number of all-cash buyers, but they point to a new cash cohort.  “The restrictive mortgage-lending standards are a factor, but the higher levels of cash sales may also come from the aging of the baby boom generation, with more trade-down and retirement buyers paying cash with decades of equity accumulation,” said Lawrence Yun, chief economist for  the NAR.
Boomers, however, are not the vast majority of the market. First-time home buyers as well as the move-up, credit-dependent buyers are the bread and butter of a normal housing market. They are losing out, as prices soar, fueled by cash.

Yun points out that it is making it harder for an ordinary single family — who’s getting a mortgage — to compete as a buyer, especially given how constrained inventory is.  And that is making for frustrated buyers in a lot of these seller’s markets.
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Millennials are starting to make an impact on housing
Millennials are reaching an age when, historically, a generation’s home buying activity has peaked. If this generation stays true to form, the shift potentially offers a demographic jump-start for the housing market — although one that comes with plenty of challenges.  Millennials were born in the early 1980s to the early 2000s.

The National Association of Realtors on Tuesday released its annual survey on homebuyers broken down by generation. Among the highlights: the growing influence of Gen Y, or the Millennials. At 78 percent, Millennials by far make up the largest share of first-time homebuyers.

“Given that Millennials are the largest generation in history after the baby boomers, it means there is a potential for strong underlying demand,” said Lawrence Yun, the association’s chief economist. “However, the challenges of tight credit, limited inventory, eroding affordability and high debt loads have limited the capacity of young people to own. Those who recently bought homes are optimistic about their decision. Of the people under 33 who have recently bought a home, 87 percent consider it a good financial investment. Once again there will be a “push pull” factor of the Millennials wanting to buy their first home vs. the financial ability to do so, and given their numbers, that could have a huge impact on the future of the real estate market. The fact is that currently prices are climbing faster than their earning power!

20 percent of that age group  has had to put off a home purchase while saving for a down payment. Of that group, 56 percent said student loan debt was the biggest obstacle. About 26 percent had help saving for a down payment in the
form of a gift from a relative or friends.  Student debt continues to be an obstacle among the 34-48 age groups, but takes a back seat to credit card debt.

Nationally, millennial homebuyers were, on the average, 29 years old with a median income of $73,600.  They tend to purchase older homes  with an average of 1800 square feet and costing $180,000. 

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My World and Welcome to It
A few weeks ago, I sent some letters out to owners of specific properties in both Bel Air Crest and Mountaingate looking for properties for three specific clients.  As a property owner myself, I always get those letters “I have a buyer for your house”… so I was not sure what kind of reaction I would get from my letters, and have been very pleasantly surprised by the reaction and hopefully will be able to place these clients in some properties that will work for them.  In the mean time, I have just listed a wonderful home for lease for $16,000 in Mountaingate.  My client has spent the last number of months working on the house, replacing a good portion of the house and it shows!  It looks like a luxury suite in a hotel and the reaction has been very strong.  I am also listing for sale another lovely 2/2.5 plus den in Mountaingate with golf course views. This property too has been “done”, and we might have a client for it before it actually goes into the multiple listing.  If you have any real estate needs or questions or know someone who does, please do not hesitate to get in touch with me. I would love to speak with you.