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The Recent Market Drop

admin 0 comments 09.02.2018

After a few very interesting days in the markets, I got literally dozens of calls so I figured now would be a great time to post my observations.

Equity Markets:

After an 8000 point post election rally, stocks did something most people forgot they could do.  They went, dare I say it, down.  Down fast and hard.  The selloff was initiated last week by of all things, great news.  Friday the labor department reported job growth picked up steam and more importantly an increase in average wages.  On the surface, this would seem like a market friendly event.  However, in late stage recoveries, particularly one that has been fueled by impossibly low interest rates, wage growth is good for people, bad for equities, bonds, and real estate.  Simply put, when wages uptick, inflation is often soon to follow.  Yes folks, rates are finally going up and this time it is for real.  The 10 year treasury has traded up almost a full percentage from its lows last year, which if it wasn't coming from sub 2%, wouldn't be a big deal.  Friday's 666 point drop was entirely a result of an overstretched market getting a does of higher rates.  The Monday swoon however was almost entirely a result of a derivative product which I happened to be short.  Lucky or smart, doesn't matter I guess. I'll take it.  Regardless, the carnage we saw was tied to a couple exchange traded funds and notes that lost almost all their value.  To keep this from getting too technical, I will leave it there.  Call me if you are interested to hear more about it.

Interest Rates

The good news is that the derivatives risk has abated and markets have recovered.  The bad news is rates are going higher.  If you have followed my blogs in the past, you will know I have been very sanguine about rates over the last decade and discounted all the chatter about higher rates.  Until now.  An already accelerating economy just got several boosts in the form of tax cuts, repatriation of oversees funds, deregulation and a likely infrastructure bill.  Each of those are extremely stimulative. January's wage growth was no anomaly.  The era of ultra cheap money is drawing to a close.  Check that, has drawn to a close.   Given this, do not be surprised to see more stock market volatility as it digests the normalization of interest rates back to historic levels.    You can expect to see 30 year fixed rates in the 5s this year with a 10 year above 3%.  If you have a variable loan, I would suggest locking in a 30 year loan unless you plan on selling before your loan resets.

Real Estate

New tax laws should have a nominal effect on real estate demand, but are not likely to be a large risk to real estate values.  Far and away the biggest headwind will be higher rates.  Fortunately, inventory levels, even seasonally adjusted are extraordinarily low in the South Bay.   After micro-corrections in the Sand and Tree Sections, last year and the year before respectively, we have seen homes selling early this season that were unable to find buyers last year. This on it's own, bodes well for our local market this year.  As previously mentioned, interest rates will certainly be a headwind.  How much, depends, not necessarily on the absolute rates, but the rapidity at which they move.  Higher rates should loosen up a very tight income property market, so expect to have a bit more to choose from on that front.

Bitcoin

I won't spend too much time on this.  For those who follow me on Facebook, I sent a SELL warning in December when the price of 1 bitcoin was trading above 19,000.  Sometimes one just gets lucky, but that day happened to be the all time high.  It is presently trading around 7000 and my best advice is to steer clear.  Any money committed to this new "asset class" should be the same money you bring to Las Vegas if that is your thing.

Undergrounding

Well if you made it this far, you get to hear yet another non-news report fresh from the desk of Stephanie Katsouleas, Director of Public Works MB.  She has met with SCE on several occasions, most recently last Friday.  Not surprisingly, they are extremely slow getting the hard bid complete.  Both Frontier and Spectrum are still working with her to get firm numbers. I asked her to give me her best guess when we would have numbers and ballots. Her answer was "hopefully by fall".  Is it me or does the goal line just keep moving every time we are near?   To her defense, she is understaffed and the service providers are intentionally slow to move.  This will however happen this year barring any new developments.  Stay tuned.  Thanks for reading.

Fall 2017 Market Update

admin 0 comments 11.09.2017

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!

Manhattan Beach 2017 Market Trends

admin 0 comments 09.02.2017

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
COLD.

Sand Section < 3mm excluding El Porto- low inventory (7), high turnover
HOT

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
SMOKING HOT

Tree Section-moderate inventory (22) decent turnover
LUKE WARM 

MB Village- low inventory (2) fast turnover
VERY WARM

Hill Section-moderate inventory (10) decent turnover
COOL

East MB-moderate to lower inventory, decent turnover
LUKE WARM

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