Supply and Demand Issues and Implications for Playa Vista Buyers and Sellers

The title of this post seems like the title for a dissertation.   There is certainly plenty to write on the subject, however this will be a synopsis of the issues as I realize this blog post is meant to be interesting as well as informative.

As you may know, there was a higher percentage of distressed properties in Playa Vista between 2008 and 2011 versus comparable Westside areas due largely to the fact the area was newer with owners not having the chance to establish long-term equity in their properties.  This was exacerbated by the low down payment loan options available during the primary sales period between 2003 and 2006 with many marginally qualified buyers with little or no skin in the game being given loans with dubious underwriting standards.  This essentially gave thousands of buyers put options on these properties and when the market fell, the option to continue to own a less valuable property was frequently not taken.  As distress was a larger problem in Playa Vista, the market fell more dramatically than most comparable areas, prices were left lower than they should be (as determined by the market), and with great deals plentiful and new demand drivers such as Playa Vista Elementary School and the approval of Phase II combined with increased consumer confidence and miniscule interest rates, the flood gates opened.

Today, it is clear to see that prices have increased in Playa Vista 10-15% YTD and the only remaining inventory is overpriced by another 10-15% above that.  Buyers are purchasing properties listed at 1-2% above market value or bidding up lower priced listings to that level.  Affordability, while still high, is gradually shrinking.  Would-be sellers see that prices are increasing, so it seems a good strategy to wait a little longer as they expect equity to return making selling more palatable or a move-up purchase attainable.  Those seeking the latter are discouraged to sell at this time due to the minimal options available to move to.

What happens next?  The likely scenario is that this last for a while.  Prices will continue to creep up at about 1% per month until a.) Interest rates increase significantly, b.) Affordability drops to the point where reduced competition ceases to drive up prices, c.) There is another economic setback reducing the confidence in housing, d.) Phase II housing creates supply to match demand, allowing move-up buyers to find move-up options, thus creating more supply in the original phase as well.   Any and all of this can be immediately thrown out the window with the occurence of a major environmental, policy, or economic event.

If nothing like this happens, my prediction is that this does not get much easier for buyers until 2014 as interest rates are expected to remain low until at least then and the first new for sale housing in Phase II will not be ready until then.   If home prices increase approximately 1% per month until the summer of 2014, a $500K property today will be worth approximately $600K then.  After that, expect the market to plateau for a while or at least segment initially with phase I dipping slightly and phase II properties trading at a noticeable premium.  For buyers, this means buy now if you can because we are not done with this leg up and interest rates like this are unlikely to last 2 more years, although expect high competition and minimal selection.  For sellers, now and the next 18 months remains a good time to sell because you can dictate terms of the sale.  There is little risk to selling now, but the longer you wait the higher the probability of an outlier event changing market conditions.  If possible, don’t wait until phase II for-sale residential comes out because prices in Phase I will likely sag and market times will be longer due to increased supply at that time.