Simon says: "Let's look global and think local for a minute."
Simon says: "Let's look global and think local for a minute."
Let's take a global perspective to this whole Real Estate "Bubble" thing and zoom in on the Santa Monica and Brentwood neighborhoods.
A couple times a month a client of mine, from either another U.S. city or another country will exclaim, "Wow, I can't believe how affordable it is here!" Almost every week, I will hear a different client say, "my brother (or sister or parents) have a three thousand square foot home in North Carolina (or Idaho, or Texas etc.) on a half acre of land for three hundred thousand dollars." I then tell them that if that same property was here it would be worth around six million, mainly for the lot value. For a second they are a bit bummed out and then they go and buy an 1100 square foot two bedroom condominium for seven hundred thousand dollars. Location is what we sell when we sell real estate, this is what real estate is by it's very essence.
Real estate values from Seoul South Korea, San Francisco, New York City (Manhattan) all the way to London England make the price of housing in Los Angeles look like a bargain. From 2004-2005 the English real estate market looked like it was slowing down for good. Since 2006 the housing market in London, is on it's second upward swing, achieving dizzying new heights of remarkable house prices.
Researchers David Miles and Vladimir Pillonca of Morgan Stanley did a study of housing markets in Europe and America. What they wanted to do was to take into account the superficial factors such as speculation based on optimism about future property values or media based frenzy-- which lead to non- durable increases (or decreases) in value. Then they compare the appreciation to durable factors such as rising real incomes, population growth and declining interest rates. The percentage of value that increased due to non- durable factors subtracted by the percentage of durable factors, will effectively give one a good idea of where a countries real estate market may be headed. What many people may be surprised to find is that while in Belgium, Denmark, Britain, Greece, Spain and Sweden real house prices have risen disproportionately high compared to the durable factors, America's rise has been mostly due to durable factors. There are parts of the United States where values are not as durable or downright vulnerable, but overall it's been a pretty even-keeled ascent.
Now, I'm just a guy without an MBA and without reams of data. What I do is sell real estate for a living, and I have been doing so for the past seven years specifically in the Santa Monica and Brentwood area. I have unfortunately lost some first-time home buyers due to the new mortgage market. I have lost some buyers to the idea that prices will be coming down hard in the next six months-- I have been losing the same amount of people to this sort of thinking my entire career, so it's nothing new. The sad thing is that for most of them, sooner or later they get priced out of the market for good. All of these people end up renting instead of buying. If you don't own, you have to rent. With more people renting we have increases in rental values up in double-digits in the better parts of the city, far out-pacing the increases in home values.
At the same time, I have the same amount of real genuine home-buyers as I have always had. They are more pensive than before and there is nothing wrong with that. They hear a lot of reasons to be fearful but they want to live here. They don't want to rent. The prices of rentals, after the tax advantages of owning are pretty much neck and neck for condominium and townhouse properties. In the more desirable Westside neighborhoods, you'll probably pay 15-20% more to own than to rent after taxes. With a modest increase in values and a five year hold, a homeowner will effectively pay less to own than to rent. This would be what the two guys at Morgan Stanley would call a durable factor.
While the ratio of renting vs. owning doesn't apply to the single family homes in North Santa Monica and Brentwood, there are 9 million people in L.A. and the majority of them would be thrilled to live in one of these neighborhoods. There is a strong demand from people of means who make their fortunes in this city, and they aren't worried about the cost of rent vs. the cost of their four million dollar house. In fact, sales of properties 3 million dollars and higher have been one of the hottest parts of the market all year.
Perception brought on by the media and the ill informed can influence things in the short term, but the true influence on any market are the durable factors governed by the laws of supply and demand. Despite all of the people out there who are convinced they know, no one can tell you exactly what the future of our local real estate market can be. For our little beautiful part of the world it seems we have some friendly durable factors on our side, and that makes me happy.
Simon Salloom is a local Realtor who specialize in Santa Monica and Brentwood Real Estate. www.WestsideSimon.com
Let's take a global perspective to this whole Real Estate "Bubble" thing and zoom in on the Santa Monica and Brentwood neighborhoods.
A couple times a month a client of mine, from either another U.S. city or another country will exclaim, "Wow, I can't believe how affordable it is here!" Almost every week, I will hear a different client say, "my brother (or sister or parents) have a three thousand square foot home in North Carolina (or Idaho, or Texas etc.) on a half acre of land for three hundred thousand dollars." I then tell them that if that same property was here it would be worth around six million, mainly for the lot value. For a second they are a bit bummed out and then they go and buy an 1100 square foot two bedroom condominium for seven hundred thousand dollars. Location is what we sell when we sell real estate, this is what real estate is by it's very essence.
Real estate values from Seoul South Korea, San Francisco, New York City (Manhattan) all the way to London England make the price of housing in Los Angeles look like a bargain. From 2004-2005 the English real estate market looked like it was slowing down for good. Since 2006 the housing market in London, is on it's second upward swing, achieving dizzying new heights of remarkable house prices.
Researchers David Miles and Vladimir Pillonca of Morgan Stanley did a study of housing markets in Europe and America. What they wanted to do was to take into account the superficial factors such as speculation based on optimism about future property values or media based frenzy-- which lead to non- durable increases (or decreases) in value. Then they compare the appreciation to durable factors such as rising real incomes, population growth and declining interest rates. The percentage of value that increased due to non- durable factors subtracted by the percentage of durable factors, will effectively give one a good idea of where a countries real estate market may be headed. What many people may be surprised to find is that while in Belgium, Denmark, Britain, Greece, Spain and Sweden real house prices have risen disproportionately high compared to the durable factors, America's rise has been mostly due to durable factors. There are parts of the United States where values are not as durable or downright vulnerable, but overall it's been a pretty even-keeled ascent.
Now, I'm just a guy without an MBA and without reams of data. What I do is sell real estate for a living, and I have been doing so for the past seven years specifically in the Santa Monica and Brentwood area. I have unfortunately lost some first-time home buyers due to the new mortgage market. I have lost some buyers to the idea that prices will be coming down hard in the next six months-- I have been losing the same amount of people to this sort of thinking my entire career, so it's nothing new. The sad thing is that for most of them, sooner or later they get priced out of the market for good. All of these people end up renting instead of buying. If you don't own, you have to rent. With more people renting we have increases in rental values up in double-digits in the better parts of the city, far out-pacing the increases in home values.
At the same time, I have the same amount of real genuine home-buyers as I have always had. They are more pensive than before and there is nothing wrong with that. They hear a lot of reasons to be fearful but they want to live here. They don't want to rent. The prices of rentals, after the tax advantages of owning are pretty much neck and neck for condominium and townhouse properties. In the more desirable Westside neighborhoods, you'll probably pay 15-20% more to own than to rent after taxes. With a modest increase in values and a five year hold, a homeowner will effectively pay less to own than to rent. This would be what the two guys at Morgan Stanley would call a durable factor.
While the ratio of renting vs. owning doesn't apply to the single family homes in North Santa Monica and Brentwood, there are 9 million people in L.A. and the majority of them would be thrilled to live in one of these neighborhoods. There is a strong demand from people of means who make their fortunes in this city, and they aren't worried about the cost of rent vs. the cost of their four million dollar house. In fact, sales of properties 3 million dollars and higher have been one of the hottest parts of the market all year.
Perception brought on by the media and the ill informed can influence things in the short term, but the true influence on any market are the durable factors governed by the laws of supply and demand. Despite all of the people out there who are convinced they know, no one can tell you exactly what the future of our local real estate market can be. For our little beautiful part of the world it seems we have some friendly durable factors on our side, and that makes me happy.
Simon Salloom is a local Realtor who specialize in Santa Monica and Brentwood Real Estate. www.WestsideSimon.com
posted by Simon at
8:28 PM
12 Comments:
Sounds good dude but you really don’t explain what non durable factors are… Also, it might be good to talk about the early 90’s real estate market dump in relation to the durable factor of the huge decline in jobs because of the Defense cutbacks and how that impacted L.A. and home prices.
Good advice.
I mention two durable factors, media frenzy and speculative buying-- like what happened in fl and las vegas.
Good Work, Simon. It is very interesting and well thought out. Thanks for sending it. I would like to send it to the agents, but I would rather send it without your initial remarks. Can you send it to me as an attachment? Thanks, E
Thanks Simon. An interesting read!
Excellent article but clearly and simply defining durable seems to be
missing and that is important because durable is pivotal to interpreting
some of your facts.
This is much better than a "pretty good article." On top of being well written and personable it is an attractive article that draws you in and makes you want to meet the author. You can expect to be invited to speak at real estate related get together events. Well done!
Was this not sufficient?
"Then they compare the appreciation to durable factors such as rising real incomes, population growth and declining interest rates."
You are saying that rising real
> incomes, population growth and declining interest rates."
Are durable factors?
I have never heard of those.
More people, cheaper loans and higher incomes means increased demand and ability to pay more.
Speculative purchases in the hopes of increases in value as well as media speculation has an finite span of time when it can increase or decrease the value of properties. It's speculative/hopeful in nature but not based on the true laws of supply and demand.
Does this make sense?
Outstanding essay. You just might have a future in the
real estate game. I can hear your phone ringing off
the hook already. Keep up the good work.
An increase in income, cheaper loans and population increase are durable, meaning they are based on fundamental economic principles not perception. In other words, more people moving to LA every year is a true, durable factor that increases demand. If interest rates are lower than they used to be, then people can afford to pay more for real estate.
If interest rates go up a significant amount like 6.5 to 9 prcnt, then we will have a durable factor that has contributed, potentially, to a decrease in value.
If the media says the market is going to tank, citing no durable factors, then it's influence on people not buying is not one that can hold for very long, because the demand is there from population growth etc
THANKS AGAIN FOR THE EXPLANATION,....COOL.
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