South Bay Luxury Homes Activity Update – 5/10

May 14, 2010

Another month has passed us by.  In the exclusive world of super luxury homes priced over $10 million, we have actually seen an increase in the number of homes that surpass this threshold from a month ago.  The new number of homes available on the market today stands at 15.  The increase comes from a home in Palos Verdes Estates that has had an upward adjustment in asking price.

This is perplexing given that the total number of homes sold in the entire South Bay for more than $10 million remains fewer than a dozen and we are coming off of a brutal credit market retraction.

Of the 15 homes on the market, eight are on the strand in Manhattan Beach and Hermosa Beach.  There are now four homes located in Palos Verdes Estates, two in Rolling Hills, and one in Rancho Palos Verdes.  The average home has been listed for over four months.

I will continue to track the progress of these homes in light of the current market conditions.


South Bay Homes Market Update for Week of 5/2/2010

May 7, 2010

The market appears to be holding steady.  The number of new listings for this past week, at 68, is the same as the prior week.  The total number of active listings stands at 767, down from 780 the previous week.  Closed sales jumped up to 61 from 39, though new escrows actually tapered off to 64.  There are now 405 homes in escrow.  Given the lack of change in year-to-date median prices over the last few weeks, I will skip the calculation this week and revisit this next week.

The least expensive closed sale for the period was a two bedroom condo on Camino Real in Redondo Beach.  It was significantly below the most expensive sale which turns out to have been $7.334 million for a strand home in Manhattan Beach (right next door to the one that I used to own).  My old neighbors had owned it for about 12 years.  It had a total of just under 4,400 sq. ft. of living space.

Distressed sales backed down from eight to four this last week.  This does not include the three probate sales.

Only two of the 61 closed sales were of new homes.  It will probably remain this low for the next few months or longer.

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Finding the Once-in-a-Lifetime Opportunity in Manhattan Beach Real Estate

May 2, 2010

This was written in early March and at the time I made the decision not to publish it.  The comments on spec homes near the end of the article might be of interest…

I was flipping through several pages of real estate ads this weekend and noticed the word opportunity more than a few times. It’s no secret that many realtors have a unique gift when it comes to the use of superlatives or other engaging, if not ambiguous, language in their descriptions of properties.  Nonetheless, seeing the word opportunity used the many ways that it was made me curious.

One online dictionary defines opportunity as a good chance for advancement or progress. This sounds great to me, especially because it has such a positive feel to it. Of course, it could mean so many things to different people, that the choice to use this word could end up being appropriate, if not clever. On the other hand, it can also be a classic example of over-selling.

For someone leasing a home or apartment, the prospect of buying their own place may very well represent an opportunity for several reasons. These include pride of ownership, having an investment that may actually appreciate over time, having property tax and mortgage interest tax deductions, building up equity over time even in the absence of appreciation, the possibility of being able to borrow money with a tax-deductible home equity line of credit or loan, and a potential capital gain exclusion upon the sale of the home. The list goes on, but these could be considered unambiguous opportunities for certain types of buyers.

Other examples of opportunities may be connected to location. It could be school district, sense of prestige, proximity to beaches or towns, views, and so on. Perhaps it could also be downsizing, upsizing, or better security. These all represent compelling opportunities for someone considering the purchase of a home.

So given this context, there are no doubt countless opportunities of different types available to Manhattan Beach homebuyers. In fact, one agent has a listing that purports to be the “once-in-a-lifetime opportunity” home being sought out here.  You can’t beat that.

Another use of the word opportunity that I saw pumped the great investment or value opportunity for a few select homes. One ad I saw read “owner/user opportunity”, though I’m not exactly sure what this means. Historically, from an investment value perspective, this would have been true regardless of the purchase price.  For example, everything purchased in Manhattan Beach back in 2000 has appreciated sharply, in spite of the recent correction of the past few years.

The median sales price for all home types here back then was under $800,000. Last year, it was close to $1.4 million. Clearly, over this particular time frame, homes as an investment class have done quite well. Will this happen again on a moving forward basis? Are there some properties that are, in fact, better opportunities than others today? In fact, how would one know a property is a better value opportunity, that is, one that could provide a higher rate of return if the home were also considered an investment vehicle?

The first of these questions is a bit difficult to answer given the uncertainty of the real estate and capital markets. There may be, however, ways to answer the other questions. This subject requires deeper treatment than can be provided here, but at a high level, there are a number of metrics that might provide clues to whether a home is a value opportunity or not when these metrics are viewed collectively.

One of the key steps would be to review recent sales data for truly comparable properties.

This may sound obvious, but it’s incredible what types of comparisons are made to support listing prices or appraisals. Homes in the same neighborhood with similar lot sizes, views, other features and possibly even age, would be relevant. It would also be better to compare homes with similar lot sizes and views or beach access, for example. Likewise, it may not be helpful to look at homes that were sold more than six months earlier as well. This is far from an exact science, but looking at a number of metrics for comparable homes could highlight properties at that are priced on the high side or that might be a value opportunity.

An extreme form of the value opportunity is the spec purchase, where the home is built with the intention of knocking down the existing home, building a newer and larger home, and then putting the new home up for sale.  There used to be a time when many properties were bought on spec, but this trend slowed down considerably when home prices started falling off a few years ago. My guess would be that this may continue to drop off for a while.

In 2009, there were 172 single family homes sold in Manhattan Beach west of PCH, 32 of which were newly built. The new or relatively new homes sold at a median price of $2.38 million vs. $1.48 million for the existing homes. They had on average about 4,000 sq ft of living space compared to 2,500 sq ft for the other homes. If we assume the carrying costs for the properties were $100,000 and the average cost to build the homes was $300 per sq ft or $1.2 million, we have a total investment approaching $2.8 million. This exceeds the value that the new homes eventually sold for this past year. This is a very crude calculation, but serves to highlight a key challenge with spec building in the west part of Manhattan Beach today.

So will you be the lucky buyer of the once-in-a-lifetime property here or one of the many homebuyers who find opportunity of one kind or another in Manhattan Beach? You are probably on the sidelines if you build or develop spec homes for investment purposes, otherwise, there are any number of chances for advancement and/or progress.

South Bay Homes Market Update for Week of 4/25/2010

April 30, 2010

Another week has passed and we seem to be settling in to a pattern here with respect to South Bay real estate activity.  The number of new listings for the week climbed slightly to 68 and is continuing to exceed the 50 home threshold we straddled at the beginning of the year.  The total number of homes of all types for sale is just shy of 780.  There were 39 closed escrows this past week and an additional 73 new escrows opened.  The total number of homes in escrow is 432, up from 418 the prior week.

The median prices for the year-to-date for both this year and last year did not shift from last week.  For this year, the median sales price is holding steady at $850,000.  Last year it was cruising along at $800,000 on 409 sales.  The number of sales this year thus far is 616.  We are still well below historic sales levels, but we have clearly moved past the brutal performance of the market last year.

The least expensive sale for this past week was a loft in Rancho Palos Verdes, with a modest 431 sq ft of living space, which sold for $200,000.  The most expensive sale was also in Rancho Palos Verdes, specifically in the West Palos Verdes area.  It is a five bedroom home with 4,300 sq ft of living space and it sold for $2.8 million.

The number of distressed sales, those classified as being either bank-owned sales or short pay sales, took a breather a couple of weeks ago, but bounced back up this past week.  Of the 39 closed sales for the period, eight of the homes were in one of these categories.

The number of new homes sold also appears to be maintaining a hiatus.  Only one of the recent 39 sales was built within the last 18 months.  spec building took a big hit in 2008 and early 2009, but there are signs that a rebound may be in effect.

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South Bay Homes Market Update for Week of 4/18/10

April 25, 2010

What a difference a week can make.  Last week I noted that 11 of the 45 closed sales of all home types in the South Bay could be classified as distressed.  This week the number dropped to two out of the 37 closed sales.  This is encouraging news, though it is clearly too early to classify this as a trend.  The number of closings is down slightly from last week as is the number of new sales.  There are currently 418 homes in escrow with the addition of 75 new sales.  A total of 64 homes were put on the market this past week and, after adjusting for sales, the current inventory stands at 763 homes of all types.

For the year-to-date through 4/22/10, there have been 568 sales with a median sales price of $850,000.  Contrast this with the 365 closed sales for the same time frame last year when the median sales price was $800,000.  This represents a more than 50 percent increase in the number of sales over last year and a 6.25 percent gain in price.  At this point, it seems safe to say that the slide in sales and price has stopped and that we are, in fact, experiencing a modest spurt.

The least expensive closed sale last week was a two bedroom condo on Artesia Blvd. in Redondo Beach that sold for $393,000.  On 9th St, in the sand section of Manhattan Beach, there was a 2,650 sq ft home that sold for $2.72 million, making it the most expensive closing of the week.  Given the age of this home, at over 50 years, it is likely this home will be scraped and then replaced with a new one.

Of the 80 closed sales this month thus far, only three were built in 2009 or this year.  The amount of spec building that we have seen here in the past has definitely cooled off so far in 2010.

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Short Pay Sales Increasing in the South Bay

April 22, 2010

It’s common these days to read the news and see an article or two on the significant rise of foreclosures and short pay sales.  There has been evidence of a clear upward trend in most communities across the country.  The South Bay has experienced an increase in the number of these types of sales, as well as a modest increase in the percentage of these sales with respect to all closed sales.  During the first quarter of last year, 37 sales were characterized as being short pay, bank-owned (REO), or foreclosures.  For the first quarter of this year, the number of these distressed sales increased by a surprising 83 percent to 68.  The percentage of these types of sales with respect to all sales climbed from 13 percent to 16 percent year-to-year.  What is particularly worthy of note is that regardless of the growth in the sale of distressed properties, the median sales price for homes has actually risen.

The three beach cities of Manhattan Beach, Hermosa Beach, and Redondo Beach accounted for 22 of the 37 distressed sales back in the first few months of 2009.  This past quarter, they were the source of 40 of the 68 distressed sales, which turns out to be about the same percentage of the total both years.

Of the 37 distressed sales in the first quarter of 2009, it appears that only one was priced above $1.5 million.  This year that number jumped to five for a total percentage of seven percent of the distressed sales.  We are not seeing a significant amount of this type of activity for the higher-priced homes, though there does appear to be an increase underway.

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Another Strand Home Bites the Dust

April 19, 2010

It’s been about six years in the making.  Perhaps watching the home just two doors away get torn down and then replaced with a stunning 8,000 sq ft manse was incentive enough.  Or maybe it’s the $15.9 million price tag for this new home (shown to the left in the photo below).  Whatever the reason, the home at 2806 The Strand in Hermosa Beach has been retired.  It appears to have been owned by an investment holding company all this time.  The actual purchase price is unknown, but the most expensive sale in Hermosa that year was $4.85 million for a home one block away on the strand, though on a slightly larger lot.  There may be some small amount of risk in pumping a lot of money in to the property to transform it, but my guess is that if this is a spec build, the return on investment will be staggering.

Hermosa Strand Home

It turns out that the lot at 2806 and the lot of the home near completion are exactly the same size.  The $15.9 million home somehow squeezes 8,000 sq ft into this lot.  If we assume a generous build-out cost of $400 per sq ft, the total investment jumps to about $8 million before carrying costs.  Property taxes for 15 months, assuming this is how long it takes to build the home, would total $75,000 or so.  Other payments may total over $300,000 during this time.  At most, we’re now up to $8.5 million.

Hermosa Avenue Home

One of the reasons that I am so fascinated by homes on the strand, is that it truly is difficult to predict how well they will do on the market.  It’s too bad you can’t really put a value on potential, otherwise, this home would generate a return of several million dollars to the seller.  At this time there are eight homes on the Manhattan Beach and on the Hermosa Beach strands for sale that are priced over $10 million, with another seven listed there below this threshold.  This is a lot of inventory, especially at a time when borrowing even a million dollars can be tough, let alone several million.

Interestingly, there have only been at most a dozen or so sales of homes in the entire South Bay, including all of Palos Verdes, for over $10 million. That’s not very many over the past 10 or 15 years.  Given that it can be difficult raising cash to do these purchases and that to date there hasn’t been overwhelming demand for these homes, maybe the decision to tear down our subject home as part of an investment strategy may not be so obvious after all.

Our economy is no longer in a recession and the DJIA has topped 11,000 for the first time in a long time.  Perhaps this will stimulate demand for the high end beach homes.  Clearly there’s plenty of supply.  Now we just need the buyers…

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