After a long, not so sunny summer, I settled down long enough to share my thoughts again on the state of the market. A very interesting bifurcation has formed between high end and entry level homes in the southbay. For those of you who watch the Strand market closely, the "bubble" has clearly deflated. Burst would be a more accurate description. While many of my peers jokingly point the finger (hopefully not the middle one!) my way after my 716 Strand sale in January, I need to remind them that I represented the BUYER and claim no responsibility for the 5 million dollar drop from the prior comp on the 600 block (14mm vs 9.3mm). Both of these were dirt sales and yes, we bought ours for roughly 2/3 of the prior 2 sales.
The Strand market, particularly on the south end of town had simply run way too far, way too fast. A number of Strand properties sat without buyers as sellers had simply gotten over optimistic. We just happened to be there when the first shoe dropped. Since then, a number of price cuts by those who live in reality have resulted in a readjustment of Strand comps. Several sales have taken place since that affirm our transaction was not an anomaly, but a reset. A healthy reset.
Giving credit where credit is due, my well respected friend and fellow agent/developer Rob Friedman made a comment at that time that has come to past. He predicted that the Strand adjustment would work its way to the rest of the Sand Section. High end real estate price corrections start at, well, the high end (that would be the Strand) and work their way back. Once Strand properties could be had for such bargains as 9-11mm for dirt (so cheap I know), what then do we value walk street dirt at? Note: I use lot value as a mode of comparing apples to apples since every home is unique. As Rob and I both agreed, a high end slump ensued and Sand Section inventory has swelled to 60 at the time of this letter as opposed to 35 last years.
So why do I still have frustrated home buyers coming to me with stories of losing out against 10 other offers time and time again on entry level homes? Before I answer that question, I have to interject my standard response, which is quite honestly true....
"...Well I am glad you have chosen me to represent you because as much as you hate bidding wars, you will only have to endure one more!"
Back to the question at hand (sorry Snoop) Why ARE there bidding wars in one segment of the market and sluggish sales in another? There are probably several reasons. First, many doubters are finally realizing that burning rent money and sitting on cash with no return makes no financial sense. Second, banks are lending more freely now as the memory of the crash fades. Loath to say, I have even seen stated income loans making a comeback. Yet another take, demographics are coming into play. With a swell of millennials looking for a first time home and boomers looking to downsize, it only makes sense to see the high end contract while the low(er) end surges.
Since I have made prognosticating my business for the last 30+ years, I may as well keep the trend in-tact. Interest rates will STILL remain low. At least through the first half of 2018. An unpopular, if not non-existent opinion, I know. However, check my previous blogs. All last year I predicted mortgage rates would remain low despite the federal reserve hiking short term rates. Not only did they barely budge on the upside, the 10-year treasury has been falling precipitously all summer. This will continue to stoke the flames of the condo and entry level home market. There will be more price cutting in the 2.5mm-15mm segment over the next 6 months. Too much inventory will force sellers to come to terms with this reality. The low end will remain strong, but will taper soon as price points just above add to the inventory. And for a non-real estate bonus call....equity markets, which I have been feverishly bullish on, will likely see a notable correction soon. This may shake the confidence of some home buyers. Geopolitical risk, a potential government shutdown looming, and a bull market that has been in place longer than average are being brushed off by investors. This type of complacency generally leads to some sort of shock to the markets. And, well...it's almost October, a notoriously bad month for markets.
I will, as always, end on a positive note. As I have stressed time and again, there may not be such thing as a sure thing (I know, death and taxes), but the next closest thing is beach real estate. They aren't making more of it. If you own it, and you are in it for the long haul, next year doesn't really matter much. Nor does the state of the market now because in 10 years, 20 years, we will all look back and say, if only I could go back and buy more. Given that, I hope my "state of the market" was worth a muse, as I truly believe it doesn't matter that much what happens in the short run. We are so fortunate to call the South bay our home. Prayers go out to Texas and Florida and Mexico. Be well and have a great Indian Summer, the best time of year!
Bob Sievers, former Wall Street hedge fund manager, and Warren Dow, President/CEO of DIGS, discuss the state of the Manhattan Beach Strand real estate market, now and into the future.
El Porto is On Fire While the Strand is Falling Into the Sea!
Few may realize that just within our little (?) town, each section has its own trends and cycles. Demographics, building trends, and price points play a large part. Areas of our city can boom while others are experiencing mean reversion (analyst speak for declining prices) Nothing could contrast this more than looking at El Porto duplex trends vs South Strand. To do so, we need to back up just a bit.
Following the 2009 trough, Strand prices on the south end of town literally exploded while El Porto Strand nearly stood still. As Manhattan Beach has continually become a “brand” city, (much to the chagrin of some of our long-time residents), the big money scooped up the AAA properties. This created a bit of a mini-bubble on ultra-high end properties. Lot value for a standard 3500 square foot lot south of the pier topped out at about 14-15 million, while El Porto Strand dirt has held steady at roughly 6 million.
What has many developers and realtors scratching their collective heads is how a 600 block Strand property could go for 14.5 million last year, only to see 716 Strand close for 9.3 million on Jan 13 of this year. I know this because I represented the buyer on the latter. Granted, there is a bathroom on the beach just north of said property, yet my clients were not bothered by it one bit. Even if you knock off a million or so due to the bathroom, how can one explain another 4 million dollar decrease in value? Amazing negotiating skills?! Ok maybe a little but….It seems the air may have just left the balloon.
Strand inventory has been building quite markedly in recent months. The reality is that there was some irrational exuberance in the stampede to buy these properties. Most Strand sellers, and there are plenty, are unwilling to admit that asking prices need to come down to match what others are selling for. Time will tell if my purchase was an outlier or the new comp to compete with.
Now let’s take a quick peak at El Porto duplexes. Last Spring, I purchased a fixer for 1.6 million and resold it for 1.83 million. Only months before that, I sold a turnkey SFR for a client on 40th Street for 1.6 million (175k above asking). A few heads turned when I paid the same price for my flip in such short order. However, there are two duplexes now in escrow here will close another 10% to those prices. In six months! While I cannot discuss the exact prices publically until they close to protect the sellers, rest assured, El Porto comps are exploding. Unlike Strand properties, there is next to NO inventory here in our neighborhood, despite a softening in the rental markets.
The bottom line is that real estate is TRULY local! More so than people realize. Here is a snapshot of the health of MB sub-markets.
MB Strand- high inventory per norm (8 including a new one today), no turnover
Sand Section < 3mm excluding El Porto- low inventory (7), high turnover
Sand Section > 3mm high end- moderate inventory (16), low turnover COOLER with highest the price points COLD.
El Porto- next to no inventory (2), high turnover
Tree Section-moderate inventory (22) decent turnover
MB Village- low inventory (2) fast turnover
Hill Section-moderate inventory (10) decent turnover
East MB-moderate to lower inventory, decent turnover
Donald Trump. President elect. It doesn't matter whether that makes you want to do back flips or go curl up in a corner, sober investors deal in reality. That is the reality. After decades on Wall Street as a trader, deal maker, real estate investor and market prognosticator, as shocking as it may seem, I have an opinion. As a matter of fact, I have conviction. Allow me to share.
First, let's make sense out of what we see as of today, 8 days post-election. Starting with stocks and bonds (interest rates) this makes PERFECT sense. Maybe for validation or maybe just to say "I told you so", I will point to my personal Facebook page post the night of the election. Here is word for word excerpt: "I have been trading for 30 years. I am telling anyone who cares, you can buy stocks with both hands tomorrow with when they open -900..." Understand that stock futures were trading down 800 at the time of the post (9:53 pm). In the comments section I also predicted the market would see new highs. Feel free to friend me and read the whole post for yourself.
The market of course we now know, reversed and went to new highs. What is curious to some, but certainly not a surprise to me, is the selloff in the bond market. In other words, interest rates have risen somewhat rapidly. While the "sky is falling" crowd is as premature in calling death to the housing market as Time Magazine was by printing their now infamous cover, I will, with conviction, explain why they are dead wrong.
Isn't the fed supposed to raise rates?
The fed has been dying to bring rates off the zero line for years. They have been fearful of creating bubbles and disjointed markets that can have very negative lasting effects. Zero rate environments are dangerous as they encourage too much risk taking and punish savers. Their dilemma was that they could not hike rates back to a normalized level without risking stifling the tepid and fragile economy.
Post Trump, stocks are rallying and interest rates are rising. This phenomenon is rare. However, what this price action is telling us is that the markets now believe the economy can withstand a moderate rise in rates without coming off the tracks. Lower taxes and more spending may make deficit watchers squirm, but as the economy goes, it is a one-two punch that will likely stimulate GDP to a level that will enable the fed will act swiftly.
Rates are going up. Expect a 30 yr. fixed to be in the 4-4.5% range next year. As I love making predictions, I give the odds of a fed hike at the next meeting 100%. I wouldn't even be shocked to see a 1/2 point move. 2017 will see 2 or 3 more, notwithstanding a slowdown in economic growth. It is called normalization and it is a good thing. A strong economy is generally a big positive for stocks and real estate. With the 10 year yield now at 2.20 (vs 1.50 mid-summer), one could expect to pay a bit more for a home mortgage.
That's going to hurt housing right??
WRONG. As banks are finally able to make a decent spread (the reason bank stocks are rallying), coupled with less regulation, more loans will be extended. Guess what that means? More qualified home buyers. While the average monthly payment will clearly rise by a moderate margin, there will be more buyers to bid on the still historically low inventory (although up from last year).
So what if this turns into an inflationary spiral???
First, highly unlikely in the short term anyway. There is far too much slack in the economy to make a strong case for hyper-inflation. The rest of the planet is still battling DEflation. But just for yucks, let's say it happens. What do you want to own when the value of cash declines? Answer, hard assets. So all the gold bugs are getting ready for the party, and not to say they are wrong. Gold would fare well in that scenario. But one must remember, you can't live in a bar of gold. You can't rent a bar of gold and you can't put your new Christmas Tree in one either. The case for housing is strong. While we likely won't repeat the hyper post-low gains of the last few years, I would rather have my money there than just about anywhere.