The million-dollar question is whether or not the Los Angeles housing market has hit bottom. Since I am frequently asked this question by every one of my clients and friends I decided to take the time to compile my thoughts and answer the question as best I can.
First of all, any market bottom can only be recognized in hindsight. There is no indication of a bottom when you are at the bottom. However, the best instinctual indication would be your level of fear and the perception that the market is really bad and sure to get much worse. When you want to run with the herd you should strongly consider running against the herd. Feelings of absolute fear and greed are indicative of peaks and troughs in any market cycle.
An illustration of this retrospective theory dawned on me as I began to compile recent sale comparables for a new short sale listing I have on Crescent Heights in West Hollywood. By the way, this illustration will be a two for one because it not only demonstrates the aforementioned theory, but also explains how a listing agent sells the bank on a low-ball offer. For the most part, all short sale offers are below market or know one would wait 6 months to close on the sale. Now, back to my compilation of recent sales for Crescent Heights. I have an offer for $750,000 on a home that has not been updated since it was built. I know its low, but I have to work with whatever I can get because the bank will not start the short pay negotiation unless they have an offer. I search title and the MLS to discover that the most recent sales, within the last 3 months, have been above $750,000 and well into the $800,000 range. Granted these were not distressed properties (i.e. bank owned, short sales, etc.), but actual equity sellers. The comparable sales I really needed to show the bank were four to six months ago. These sales were distressed sales that fell into the range of $700,000 to $750,000. Does this indicate that the market bottom was four to six months ago? Since relevant sales in the scope of an appraisal can only be drawn from sales within the last three months my offer for $750,000 would be substantiated several months ago, but not necessarily today.
Nonetheless, I printed all these sales for the BPO (Broker Price Opinion) agent. For those of you that haven’t had the pleasure of dealing with short sales, a BPO is an informal appraisal in which a real estate agent is contracted by the bank to be their eyes and ears in determining the present value of their asset. This agent happened to be from Orange County, a real expert in West Hollywood real estate, right? He had the audacity to ask me if I had the property listed on the MLS because he couldn’t find it! How is he going to find the comparables if he can’t find the property in question? I had to tell him what MLS service to find the Crescent Heights listing on. This is why you print out the sale comparables you want them to use, because they may not be able to find them. Most of these BPO agents are from other counties and lack intimate knowledge of the market they are valuating.
Putting the shortcomings of the bank’s asset valuation process aside, the empirical evidence of my experience can conclude that the bottom in West Hollywood real estate priced less than one million dollars was in the first half of 2009. However, there will be random distress sales that will be viewed as amazing deals in hindsight. As long as the broader economy begins to heal and the popular belief is that the worst is behind us, the market will begin to rebound.
You did notice how I only vouched for the under a million market, right? The inefficiencies of the real estate market are less apparent in a marketplace that has a limited amount of transactions. The reason being is the million plus market has more capital reserves to withstand a downturn and relatively inexpensive financing is only available up to a loan amount of $729,500 in Los Angeles. Therefore, relative pricing is trending down towards equilibrium, the point at which supply and demand intersect.
In summary, I do believe the worst is behind us. The inefficiencies of the market have been shook out in the in the lower end of the market, but the upper end will experience more pain as long as the financing remains relatively expensive and inaccessible to the average buyer. In a broader sense, the buys in the upper end of the market will be amazing deals while the buys in the lower end of the market will be good deals. The important point to note is that all buyers will be getting a “deal” on any purchase they make no matter what the price is. The real benchmark in determining how good the purchase can only be seen in hindsight and is dependent upon how soon the buyer made the decision to run against the herd.
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