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2020: South Bay/PV Real Estate Annual Report and Forecast

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Happy New Year and Happy New Decade!  It’s funny, when you look back 10 years, the real estate market was in a much different place than it is today.  Mortgage rates were around 5%, prices were declining, and foreclosures and short sales dominated the news.  It wasn’t until 2012 that we saw a local bottom in prices, but then home prices soared over 50% through the end of the decade.  To put it in numbers, we started the decade with a median price of $635,000 and closed at $945,500 – that’s 49% growth in 10 years! (58% growth if you bought at the bottom of the market!)  What’s the moral of the story?  South Bay real estate is something you buy and hold, and buy more of if you can!

South Bay real estate is something you buy and hold,
and buy more of if you can! 

Despite a slow first half of the year, 2019 was another year for the record books with the median price hitting an all-time high of $945,500 and the average price/foot topping out at $636/foot for the greater South Bay.  Closed sales were up 2.5% for the year mostly due to a busier than normal Fall.  Months supply closed out the year around 2 months worth of inventory – just above record lows.  Finally, it took on average 40 days to sell a home, or about 8 days longer than a year ago.

How did our 2019 Predictions Hold Up?  
In January of 2019 I called for stable interest rates, “price growth around 2-4%,” 5-7% price growth for homes under $1m, and rising inventory.  Well, interest rates actually dropped throughout 2019, so I was wrong there.  As far as rising inventory, we saw an increase of 8.3% during the past year – score one for the win column.  In terms of price growth, we had mixed results.  Prices for the overall market grew at a solid 6.2%, while homes priced over $2m were flat, and homes over $3m dropped on average 7% – I batted 1-for-2 in the pricing category. But the bright side of that story is this – the 4th quarter of 2019 ended with low inventory and strong buyer momentum.  This late surge in activity was the result of interest rates under 4%, reduced fears of an imminent recession, and pent up buyer demand.  With demand outpacing supply in the 4th quarter, we saw a return to bidding wars on well priced homes, and sellers adjusted prices on properties that had lingered on the market a while.   

2019 Summary

  • 2019 ended strong driven by low mortgage rates
  • Quality inventory was limited
  • Entry level homes were in short supply but demand remained strong
  • Higher end homes took longer to sell and on average sold for 97% of the asking price
  • Entry level prices rose while the high end was flat or depreciating  
  • Much of he remaining inventory is overpriced homes that appear “stale” to buyers

“[The economy] is continuing to grow at the same steady, uninspiring rate that has now become the benchmark of the longest expansion on record.” Christopher Thornberg, Beacon Economics

2020 – Building a Stronger Base – 2020 should look a lot like 2019
After 7 years of price growth it’s hard not to wonder “when will it end?”.  I spent the last few weeks reading through economic reports to get a feel for what economists predict for 2020.  Like 2019, the consensus is that the economy “is continuing to grow at the same steady, uninspiring rate that has now become the benchmark of the longest expansion on record.  More importantly, there is little sign of any collapsing imbalances or rapid shifts in aggregate demand that would presage economic issues in the year ahead,” according to Christopher Thornberg, Beacon Economics.  The Beaconomics report goes on to say with the recent drop in interest rates there are no indicators of trouble ahead in real estate, both for the entire US and California.  Here’s how things look for the economy and the South Bay real estate market.
  

  • The Economy is resilient – The US has now added new jobs for 110 straight months and unemployment is the lowest its been since 1969 (where were you in ‘69?).  Despite earlier fears of a recession in 2020, a recent survey of CFO’s by Deloitte Consulting reports that only 3% of CFOs “expect a true recession” in 2020.
  • Interest rates are historically low – Mortgage interest rates are expected to remain low.  No one wants to cool off the economy that has seen limited inflation.  Compared to the past real estate growth cycle, mortgage rates are 2 to 3 points lower now than they were in 2005 and 2006.  Low mortgage rates will continue to be a countermeasure to rising home values.
  • Quality Inventory is tight – Inventory has 2 stories – Entry Level and High End.  If you are selling a home at entry level prices, it remains a seller’s market.  In contrast, the high end is more of a buyer’s market.  Overall, with rates at or below 4%, it is still an excellent time to sell a home, but the key is to price it competitively.

Predictions for 2020

Here are our predictions for the coming year:

  • Low Interest Rates – Interest rates continue to drive the story.  Interest rates are expected to remain low as the fed takes a wait and see approach, or as one market prognosticator called it, “winging it.”  For now, that means stable mortgage interest rates.
  • Continued Growth From the Bottom Up – Entry level homes will see demand outpacing supply.  I expect to see home prices rise moderately with growth around 3-5%.  According to NAR Chief Economist Lawrence Yun “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.”
  • Price Pressure on the High End – Despite the growth at the entry level, the supply of homes on the high end will continue to be greater than the demand.  This will likely result in flat to slightly depreciating prices, especially over $3m.  As we get closer to the presidential election, expect things to slow down until we know if there will be a significant changes in Washington. 
  • Investment Opportunities – Recent changes to the Accessory Dwelling Unit (ADUs) laws in California is going to be a blessing if you are a real estate investor.  With each property essentially now being considered a triplex, the opportunity to create value by adding additional units to rental properties will translate to outstanding opportunities for real estate investors.

Areas to watch in 2020

  • Hermosa Hills and North Hermosa Beach
  • South Redondo SFRs
  • West and South Torrance
  • Palos Verdes Peninsula under $1.8m
  • San Pedro – Vista Del Oro, Palisades, and South Shores neighborhoods
  • Single family residences with room to add an ADU – Torrance and parts of Long Beach are two of my favorite areas.

Where to be cautious in 2020

  • Condo prices in the South Bay are at all time highs and may not be sustainable if there is a significant change in the economy.  The risk of assessments due to deferred maintenance and high HOA fees in poorly managed developments could negatively impact owners in harder times.
  • Watch out for project homes.  Construction costs are “through the roof” and larger homes in need of major updates could be risky unless you know what you are getting into and have a large budget.

Overall, I believe that 2020 and the next decade will continue to be favorable to those that own real estate.  With the right plan in place, you have great opportunities to build a legacy for your family.  

For those that made it this far….
Thank you for taking the time to read through the report. If you are wondering how the changing economy affects you and your real estate, please give me a call, I’m happy to help!  As always, thank you for your continued support!

Kyle

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