Buyers Taking Advantage of Softening But Not Crashing Market

Interest rates may not go down for a while, and buyers are taking advantage of the softening market before it begins to head up again. 

Some buyers are waiting it out, seeing if the market will implode like it's 2009. But that doesn't seem to be happening while supply remains tight. 

I don't know anyone who is giving up their 30-year fixed 2.5% interest rate anytime soon. 

State of the Market - Crash Looming?

We're half way through the year, pandemic still going, stocks are up, real estate is still buoyant, cost of goods increasing every day. These are chaotic and unstable things going on, but one fact remains, which is that people need places to live. And as the job market continues to pick up, people are moving around, upsizing, downsizing, and changing their surroundings. 

So the big questions:

1. Is there a bubble? - YES. Of course this is a bubble. Multiple offers. Love letters to sellers. As-is. All cash. 

2. Will there be a crash? - PROBABLY. But most likely, it will be a small correction rather than a crash, and it might be a miniscule. WHEN? Likely in 2-3 years. Once all the buyers who accelerated their buying timelines have gone, those who come out to sell will find that there's less demand out there. This will result in some price corrections. But again, I don't see it being big enough to matter in a place like LA. 

3. Hold or sell? - Hold if you've got 5-8 years to hold on. Sell if you're needing to unleash in the next 1-2 years. 

4.  Buy or wait? - If you have a downpayment, buy. Inflation is killing your savings and interest rates are so low, it's practically free money. Only wait if you don't have enough down or you're not prequalified. Otherwise, diversify your investments with stocks, a property, and maybe some crypto if you're risk tolerant.

Some Of Us Are Wishing For a Bubble

This is crazy, but I've heard more homeowners and renters wish for a bubble lately. Yes, even homeowners. (Note: these are the same folks who bought in the crash and will do it again every time--I know I would).

When things crashed, there were many jumping ship, and just as many were clamoring to scoop up one, two or more properties. It sounds like crazy speculation but really, it's logic. These same properties at the crash were selling for crazy low prices such as $200-400k. Previously they sold for double those numbers. When you know that demand for these homes were there at double the price, why wouldn't you buy that property when it's half the price?

That's the past, and with no real bubble in sight for the next 2-3 years, prices are high. Some say it's unsustainably high, but that's all relative. Our friends in NY and London and SF are laughing at LA prices because they are so "low." In fact, folks from these cities are buying a second home in LA.

So what hope is there when inventory is low and prices are high and you want an investment property or a first home because renting sucks?

Two things:

1. You have to take advantage of the still very low interest rates

2. You have to give up the fantasy of buying a 3+2 in Silverlake or a 2000sf loft in DTLA for $600k.

Hot areas that are half dumpy but cleaning up:

1. Frogtown
2. Atwater Village
3. Glassell Park
4. El Sereno
5. West Adams
6. Leimert Park
7. Lincoln Heights
8. Garvanza
9. Hermon

Areas that people say are hot but will probably take 10+ years to see ROI:

1. Boyle Heights
2. East LA
3. Inglewood
4. Compton
5. Cypress Park (Some parts)

Areas that are so hot, it's over:

1. Echo Park
2. Mt. Washington
3. Montecito Heights
4. Highland Park

Are We In A Bubble?

What a crazy time in real estate--again. Prices are high, inventory is low, people with cash are buying left and right, open houses on good homes are a zoo and bidding wars are still happening.

What's the difference between now and 2007? A lot.

1. Inventory is very, very low. Sellers aren't selling. That's a lot of why good properties in good areas are mobbed by buyers who are ready to go.

2. Rents are super high. Unlike the last time, when rents were very low, right now, rents are super high. LA is having affordability issues. (Well, not compared to NY and SF). More renters are in the buying market because they are sick of paying skyrocketing rents.

3. Interest rates are still low, and while lending is getting more creative again, it's still hella conservative compared to the last time. I remember when I refinanced my place in 2006, and they basically didn't ask for any paperwork except a bank statement and property tax info. The appraiser didn't even come out to the property--they just did it using the MLS and google maps. Things have changed.

That said, it's important to know that the days of buying low and selling high within 1 or 2 years are pretty much gone. If you're buying now, the only way to gain substantial equity is to buy and hold for 5-7 years, or buy a fixer and do some rehabbing to add value. Example: My client just bought a Culver City adjacent dump for about 5k. Recent solds on the same street are $1Mill. With real estate, what you do and when you do it are very key.

Why DTLA is So Hot

The real estate situation in downtown these days can be summed up in two ways: Homeowners are thrilled at the rising prices and buyers are frustrated at the rising prices. Many are wondering when the prices will go down. In my opinion, prices won't go down because prices are similar to the prices in 2007. The same condo bought in 2007 is still around the same price now, if not a bit higher. It's as if prices have stood still for nearly a decade. Now, if you bought in the golden window of 2010-2012 like I advised most of my buyer clients to do (as well as myself), and you still own that property (myself included), then you killed it.

So why is DTLA showing signs of bigger increases than other parts of LA? A few reasons:

1. DTLA is still way more affordable than the Westside. $2500 per month in downtown will get you a highrise condo with a pool, spa, front desk security, parking, and dog run. In the Westside, the same price will get you a 3-story late 60s walkup with carpets and a 90s kitchen.

2. DTLA condos have character. You get a lot more character in a historic former bank building that is designated with the Mills Act than with a 70s aluminum-windowed box. Where else in L.A. can you find such a high concentration of historic buildings?

3. DTLA walkability & transportation. With markets (including Whole Foods), bars, restaurants and shopping centers springing up all around, it's getting easier and taking less time to stroll over to run errands and just enjoy nightlife without thinking of the drive home. Uber and Lyft is highly concentrated in DTLA, and costs about $6 to get from any point within downtown. Plus the Metro will take you straight to Santa Monica soon--it already goes to Culver City and Hollywood!

4. DTLA is just beginning. You know when investors from New York and San Francisco start to snatch things up, things are happening. Savvy investors have seen areas like SoHo, Brooklyn, SoMa go from blight to some of the most expensive real estate in the world. And they are buying up trophy buildings and attracting a new type of retail and commercial clientele. The Ace Hotel is a prime example. Soon after you had Acne, APC, Oak, Aesop and Tanner Goods follow.

5. DTLA and rent control. Investors, this is for you. The fact that so many people spend their hard earned money on a duplex that generates what's essentially 1980s income is beyond me. Because nearly all residential property in DTLA was developed into residential housing well after 1978, rent control rules don't apply. This makes downtown a very nice place to invest.

Can You Believe, Prices Haven't Risen in 8 Years?

Here's the reality: prices have risen since 2010. A lot. Then why are so many people clamoring to buy homes, often overbidding?

Because we're barely starting to match 2007 prices. So, look at it this way: prices have not gone up in about 8 years. The price people paid in 2007 is actually more than what people are paying now, which is why some people are still holding on until prices rise even more.