The Calm Before the Storm for Playa Vista Real Estate
Is this the calm before the storm?
Late fall and winter 2017 has been one of the slowest stretches in memory for Playa Vista real estate listings. As of today, December 19th there have been four new MLS listings (condo and single family) since November 1st and with the holidays coming, it is unlikely there will be many more this year. Ten new listings per month is about average, so this 80% reduction seems to be more than coincidental and far more extreme than simply a seasonal trend. Why has resale listing activity reached almost a standstill at a time that has seemingly never been better for sellers? Here are some reasons why.
Affordability. This is the biggest reason people are staying put. Average prices in Playa Vista have nearly doubled in the past 6 years and some resales have exceeded 100% appreciation from distressed purchase prices. To get into a larger home that would be a big enough upgrade to be worth moving to, a typical homeowner who purchased a property in Playa Vista at that time would not just need to increase their current payment slightly, they would need to triple or quadruple it. For instance, if one paid $500K for a 2 bedroom, 2 bathroom, 1,300 SF condo 5 years ago, they are now looking at roughly $1.5M to move to a 2,200 SF townhouse. Surprisingly, tripling your tax basis and doubling your mortgage payment (even with rolling equity gains into the new purchase) is not a popular idea.
The Google Effect. Since the announcement of Google’s purchase of the land containing the Howard Hughes airplane hanger in late 2014, home prices have skyrocketed with the expectation of thousands of highly compensated employees and their families moving to the area. With the new SoCal Google headquarters expected to open soon, sometime in 2018, many owners and especially investors are holding onto their property awaiting this new wave of demand, expecting to cash out investments or, if a resident, presumably move elsewhere. While this seems obvious, waiting for a long-known micro event to change an efficient market, especially in the 7th year of an appreciation cycle, is a questionable theory for a number of reasons that I will go into in my next blog post. Whether this actually results in further price gains from employees working nearby remains to be seen, but it is quite a popular philosophy and reason why inventory is currently so low.
Nowhere to Go Combined with Expectation of Continued Appreciation. Some homeowners are actually willing to triple or quadruple their taxes and double or triple their mortgage payments to buy a larger home in the community, but are hesitant to list because they are not confident they will find a place (or be able to acquire one) where they would be willing to move. Most people in this position are using the equity in their current property in order to afford the next one. Market conditions make it difficult, if not impossible, to get an offer accepted on a contingent sale, so listing one’s home first (that will likely sell quickly) is usually necessary. Doing so requires a large leap of faith and executing this requires some luck is really threading the needle. Renting temporarily until it is possible to acquire the “dream home” and moving twice is often the reality, however the expectation of continued appreciation creates fear that the buyer will be priced out of the market when they finally do find, and are in position to have the offer accepted, on the home they want. The fact that most of the new construction in Phase II has already been sold and what remains is well over $2M leaves little few backup plans.
All of these reasons plus a little bit of seasonality explain the current phenomenon, however they are likely to all flip at once. Once Google arrives, supply will arrive from investors who have been waiting for this to occur. More supply leads to more options for buyers, which leads to more supply from homeowners getting off the fence, and then potentially some, albeit probably minimal, relief in affordability. By next year we could be shifting to more of a buyer’s market or at the very least equilibrium that should bring more transactions to the heart of Silicon Beach.