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Dislocations Beginning to Form in South Bay Home Market

Richard Haynes
Dislocations Beginning to Form in South Bay Home Market

Important Real Estate News

Good News: Forbearance Grows but Flattening

Mortgage forbearance plans continues to grow according to the Mortgage Bankers Association. There were about 4.1 million mortgages in forbearance between May 4 and May, 10 which is around 8.16% of all loans outstanding.

It is still growing, but if we can “flatten the curve” here and put an end to homeowners not being able to make payments, that is very positive news.

Good News: Rent Collections

According to the National Multifamily Housing Council’s Rent Payment Tracker, 87.7% of apartment households made a full or partial payment by May. That is an improvement from the April 13th numbers, where the number stood at 85%.

According to surveys by Nareit, industiral rent collection for REITs stood at 96%. Office rent collection stood at 92% and apartment collection were resilient at 95%.

All of that is great news. The one downside, as expected, was that retail REIT collections stood at 48%.

As I said a month ago, the distressed deals (if they come) will begin in retail real estate before any other sector.

Mixed News: Mortgage Applications

Nationally, the big positive news reported was that purchase loan applications surged higher and were down just 1.5% from last year. That is so much better than the past two months.

Statewide, California improved significantly on purchase applications and were 15.1% lower than when compared to last year. This is a lot better than the 35% we were seeing just a few weeks ago, but I hate to put cold water on this for our markets, 15% would be horrific drop in any other time.

It is good to see the trend getting better, but it is still bad in specific areas, including our home state.

Bad News: Unemployment Still Rising

Another 2.44 million initial unemployment filings last week, which puts us at 38.6 million initial claims since the pandemic started.

The continuing claims showed 25.07 million, which is much better than 38.6 million, but still the worst numbers ever since the Great Depression.

As much as unemployment claims are slowing, keep in mind that the biggest initial claims filed ever before the pandemic was far fewer than 1 million. We seem to be getting numb to the mind-boggling numbers. It is not good out there and unemployment is a housing value crusher.

Bad News: Optimistic National Home Data

There was a lot of positive news in the national news today…April sales fell 17.8%, but home prices hit a record high.

I fear this is misleading information to many. April prices will reflect many deals made in February and March, mostly before the pandemic. It is not an accurate reflection of prices.

Additionally, many outlets are using 12-month rolling averages for prices, which is about 10.5 months of pricing data pre-pandemic.

Inventory might be low nationally, but in Manhattan Beach for instance, we are seeing some of the highest inventory levels in nearly a decade even though prices are rising.

Throw out the national news optimism and focus on what is happening in your local market. In the South Bay, most of the data is not that positive and will take time to sort out. Be patient and tune out the noise.

Dislocations Forming

Now, I want to start by examining some May property sales that suggest some price dislocations in the marketplace.

Deals and price points are getting choppy.

Right now, it is all a little hazy, but this is how it works when there is uncertainty in the world. Also, this is how a real estate market finds where pricing should be. Let’s take a look at some closed sales throughout the South Bay that demonstrate the dislocations…

Hermosa Beach

Bullish Sale

A surprisingly strong sale (value in the land) occurred on an East Hermosa property with plans in place.

This property sold back in 2018 over asking by almost $300,000 at a closing price of $1,675,000.

In late February, the owner decided to list the lot for sale again with new construction plans in place at an asking price of $1.595 million.

That asking price would have been a loss from the start!

Whether or not it was a gutty strategy to attract multiple offers, the escrow ended up closing this month for $1.75 million. This was likely enough to cover the cost of the plans, but not the selling costs. But, not a bad hit to the bottom line if you ask me.

Although this went to escrow before the lock-down, it is a wonder that the escrow even held together. Building new construction is risky business, and even more so with a coming recession.

This is a great comp and a bullish sale for the East Hermosa market.

Bearish Sale

On the flip side, a more bearish sale occurred in East Hermosa.

This home was one of two spec home builds that sold in 2014.

Both 1272 and 1276 9th Street sold in May of 2014 at $1.85 million. Now, almost exactly six years later, one of them has sold for $2.1 million.

To start at a $2.699 million asking price in January 2020, cut to $2.349 million after the stay-at-home order was placed, and then sell at an additional $250,000 below that price might suggest a little bit of panic.

But, they got the deal done.

The owner made the decision to cut by almost $600,000 for a quick sale during the pandemic, which after selling costs was likely under a $150,000 gain.

That is pretty disappointing to earn less than an 8% return when owning a home for almost six years in one of the strongest economies we have seen.

This was a deal was inked during the pandemic and closed shortly after which is a bearish sign for the East Hermosa market…and I am sure the neighboring owner of the same spec home at 1272 9th Street is not too happy with the comp.

Palos Verdes Hill

Bullish Sale

Another bullish sale, although not fully executed during the stay-at-home order, is a record closing price in the Los Verdes area.

This ended up being the third highest sale in the Los Verdes sub-market, ever.

In fact, it would have been the second highest sale by $17,000 if the Coronavirus had not come into play.

This property was listed on March 5th and received multiple offers with a deal made on March 12th.

The original contract price is suspected around $2.1 million, but it was noted that the Seller made an $84,000 concession in escrow for “repairs.” I am not buying it with a home in that nice of condition. That is a COVID-19 discount to get the deal done especially for a home with such amazing views.

All in all, this sale was affected by the pandemic, but held in there to close at one of the highest prices of all time in the local Los Verdes neighborhood.

Bearish Sale

A few weeks ago, I wrote an April blog titled: “More Real Estate News and Notable South Bay Sales.”

The blog featured a Mira Catalina sale which officially closed this month to give us more clarity.

In the past blog, I compared this property to 3348 Corinna Drive. This very comparable property closed over a year ago and sold for $1.34 million. Please see the property details below to serve as a comp.

Deluna was the same home layout with fabulous views just like Corinna…and in an even better condition!

Deluna came to market priced aggressively and was listed below its past sale when it was clearly a better home, and thus attracting multiple offers.

Deluna Drive ended up going to escrow for $1.355 million, appropriately higher than Corinna, but only $15,000 higher. A very low premium considering Deluna’s condition was far superior.

Long story short, it ended up closing at just $1.305 million. Why?

According to the closing notes,…“Concessions: $50,000, various repairs & corrective work.”

Again, another code word for a COVID-19 discount.

And with that discount, Deluna an almost exact comp to Corinna and in much, much better condition sold at a $35,000 discount to a sale last year.

A very bearish sign for the local Mira Catalina market.

Manhattan Beach

Bullish Sale

Wow! What a sale.

Manhattan Village only has a handful of one-level, two bedroom homes that are remodeled on the golf course. But, this sale, is a surprise.

The highest ever Plan 5 home in The Village sold two years ago for $1.425 million at 36 Fairway Drive and was totally remodeled. 53 West Sausalito Circle blew that sale out of the water by almost $350,000.

That is a 1,450 square foot two bedroom, planned unit development (PUD) property, that east of Sepulveda with an HOA payment selling for $1,229 a square foot. Not cheap.

Much like some of the other bullish sales, this one was listed and made a deal before the stay-at-home order, but there were no “COVID-19 concessions” with this all-cash deal.

Bearish (or Bullish?) Sale

Now, this could be a bullish sale depending on how you look at it. And for some, it might be a demonstration of Manhattan Beach’s resilience.

Originally purchased in 2016 for $4.29 million, 2104 Flournoy just recently closed for $5.7 million.

This home, with some very high-end upgrades and a brand-name architect, came back to market asking an ambitious $6.995 million in January.

It quickly cut by $1 million in less than a month of being on the market.

The Sellers made a deal before the stay-at-home order but took another $300,000 discount before closing.

A $1.4 million gain (after four years) is nothing to scoff at amidst a pandemic and although the upgrades likely cost a pretty penny, they were probably more than covered.

But, to see a home chop its price so quickly leaves one to wonder if there were nerves on behalf of the Seller. On the flip side, you have to think that this is an excellent result to close in May in the current state of the economy and the expensive price tag in this location of the Tree Section.

I could be reaching either way on this one, but many will think this is bullish, while others might think this is bearish and could have sold at a lower price if the buyers had waited longer.

Redondo Beach

Bullish Sale or Bearish Sale?

Last but not least, are two home sales in Redondo Beach that sold for the same price but are in far different conditions. Take a look at the two homes below…

These properties are located in a unique section of South Redondo between P.V. Boulevard and Prospect Avenue. They are similar on location, livable size, bedrooms, and lot size.

However, one of them needs a complete redo and the other is in very livable condition.

They both sold at $1.2 million.

So, who was right and who was wrong?

Both deals were made after the stay-at-home order and both closed just recently this in May.

These are the inefficient sales you get amid uncertainty and a market that is trying to figure out pricing.

Someone made a mistake here. Get used to more of these confusing sales.

Conclusion

There you have it. Bullish and bearish sales throughout the South Bay.

With sales like these, I am still firmly in the camp of “wait and see.”

But, if you need to buy, then Buyers should be ruthless in their negotiations.

And if you need to sell, then Sellers need to hang firm and wait for the right offer.

Some pundits will point to strength and others will point to weakness. Eventually, one side will take over the momentum and the market will begin to head up or down.

We still need more time to pick a side.

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