Simon says: "How Much Pain is the Real Estate Market Really In?"

Simon says: "How Much Pain is the Real Estate Market Really In?"

It's been a while since I wrote a piece for this paper. The primary reason is that I have wanted to produce an article that had some insight into our changing market—this hasn't been easy. So many people on the street have a story about what is happening, and me, who lives and breathes the real estate business here on the Westside, is still not sure what is going on.

Inventory is not bloated by any means. It is difficult to find quality properties in almost every category. Historically, prices rarely drop without a glut of real estate for sale. We don't have that right now.

A reduced, but decent number of buyers are more or less actively looking for properties, with a heavy dose of hesitation. This seems to be inspired by the expectation that prices will fall, even though they are holding pretty steady right now. The local Multiple Listing Service shows properties selling for an average of 96.3% YTD below asking in Brentwood and 94.45% YTD in Santa Monica. This hesitation is evident in all but the most affluent reaches of our already very expensive location.

My sophisticated buyer clients aren't worried about the market. They expect a drop in values in the Southland, but nothing over 15%. In the better areas like Santa Monica, closer to 5-8%, and this only in certain types of property, for a limited period of time. They are buying and entering into escrow on fine quality properties at decent prices, knowing that if they get something they like now, the future risk is negligible enough to move forward.

Real estate isn't like Copper or Milk. Copper from India and from Indiana is basically the same stuff. Real Estate is different. If you are looking for something special, it's good to look for it when there is less competition. For example, if you are looking for a deal, you can get a condo on a mediocre street, with lots of traffic noise right now for about 10-15% less than you would have paid for it before. If you want something special, you'll pay 3% less than you would have had to eight months prior. If you want a 5 million dollar house North of Montana, you're paying the same price it's been all year. If you wait, maybe and only maybe, a similar property will be 10% less at it's most extreme dip, but maybe you won't be there to buy it.

An accomplished Real Estate Developer client of mine reminded me this weekend that our industry is a bottom up business. People typically purchase more expensive properties as they progress through their lifetimes. Meaning, if the people at the bottom price ranges aren't buying, the upward price mobility of our industry is threatened. The liberal lending practices of years past produced an excellent opportunity for people to get into the market. Now, the banks are tempering their risk, and making it a little harder for people to get loans. This threatens entry-level properties more than any other type, real estate that is under $700,000. How much, no one knows, no matter how brilliant they think they are.

From my experiences at open houses, I have seen a lot of buyers who think Sellers are in this state of desperation and financial hardship. They believe the dramatic national news stories and apply them directly to their locality. None of my five sellers are in any sort of drastic financial situation. They are selling for the reasons people have always wanted to sell. This is the same for my associates, no one has a notable sum of people on the brink of bankruptcy.

If I was to say everything is going to be good in the coming months, I'd be as bad as the people in the media saying the market is in a tsunami. My best advice is to get your own independent view on things, a view that serves your needs best. Look at data, listen to what is happening on the street, not the television, and make decisions that are going to be right for you.



Simon Salloom is a local Santa Monica and Brentwood based REALTOR with Coldwell Banker. His web-site is www.SantaMonicaSimon.com

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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