The past few years have been incredible for Palos Verdes home prices. Buyers fled to the suburbs during the Coronavirus pandemic making The Hill one of the hottest real estate pockets in all of Los Angeles, especially the prime submarkets.
One of those white-hot submarkets was the ever desirable Lunada Bay in Palos Verdes Estates.
Lunada Bay is hard not to love thanks to its little downtown, spacious property lots, and intoxicating blufftop views with hidden surf spots…even the beach boys sang about “Lunada Bay/P.V.” in their Surfin’ USA demo song (fun fact).
Now that the work-from-home, stay-at-home, do-everything-at-home days are behind us, along with mortgage rates more than doubling, Lunada Bay is coming back down to earth.
In this week’s blog, I am going to review some past sales at the top of the market in the first half of 2022 and compare them to the second half of 2022 to present.
I will focus on “Lower Lunada Bay” which is property west of Palos Verdes Drive West.
Top of the Market – New Construction
It is becoming clearer that the first half of 2022 was the top of the market in Palos Verdes.
Thanks to rates beginning their climb to start the year, it took a few months to work its effects into the marketplace. Depending on each local home market, most peak sales closed between January and June of 2022.
The best examples of the top sales in Lower Lunada Bay were two new/newer construction sales that both closed in March:
- 3,795 sq. ft., 5-beds/5-baths, 8,969 sq. ft. lot
- Sold: $4,250,000 (March 2022)
This was a spec construction home that sold just two years earlier (for $3,375,000) that received custom-designer upgrades. It was listed at $3.99 million, received multiple offers, and want for a quarter million higher.
- 4,050 sq. ft., 5-beds/5-baths, 9,127 sq. ft. lot
- Sold: $4,560,000 (March 2022)
In the same month, this spec home made a deal in two weeks at full asking price. It received a $310,000 premium to the Chelsea sale thanks to its additional square footage and ocean views, despite its location on busy Palos Verdes Drive West.
I start with these two sales as new construction typically sets the ceiling of value in local markets and dictates land value, along with smaller home sales.
Currently, there is a comparable 736 Cloyden Road, another spec sale, asking $4,730,000 which will be an important indicator of value for Lunada Bay in the coming months. We will watch it closely (the day of posting is went to escrow).
Top of the Market – Small Home
If you read one of my recent posts on East Manhattan Beach (East Manhattan Beach Residential Land Sales) or listened to my podcast with Joe Spierer, then you’ll know that we will use $450 to $650 per sq. ft. as a calculation to build new construction homes.
So if you take the above new construction sales, presumably at the top of the market, then land value should fall in the $1.8 to $2.2 million range to allow for $1.8 to $2.4-ish million of construction costs – depending on the quality, size, and ultimate cost.
This brings me to a small 1,600 sq. ft., 3-bedroom home on Chelsea Road that closed for a shocking $1,864 per sq. ft back in April.
- 1,636 sq. ft., 3-beds/2-baths, 11,221 sq. ft. lot
- Sold: $3,050,000 (April of 2022)
In my opinion, this sale represents the height of the Palos Verdes home price madness – right before interest rates cooled things down beginning in summer 2022.
While this home was nicely rehabbed, beautiful landscape & hardscape throughout, along with a pool on its oversized lot…ultimately, this home will be judged as a land value proposition 95% of the time…thanks to its tiny home and layout.
But not in this white-hot market of 2021 and early 2022.
Instead of selling at $2.2 million + a premium for the rehabbed house, pool, and updated hardscape…maybe $2.4 to $2.6 million…it sold for over $3 million.
This sale was a shock (at least to me) that soon proved to be unsustainable which I will show why in the section below.
The Path of Weakening Prices
After that sale, the second half of 2022 finally began feeling the effects from higher interest rates and a handful of sales perfectly demonstrated weakening prices.
I will share three examples…
- 2,225 sq. ft., 3-beds/2-baths, 9,785 sq. ft. lot
- Sold: $2,292,900 (August 2022)
While not nearly as updated as the $3,050,000 sale stated above, this is a massive $750,000 discount on the same block.
Not only is this more in-line with penciling if you chose to build brand new (with no profit), but this home was nearly 50% larger than the $3 million sale. One could rehab this home significantly and be in for less than $3 million and have a larger home, likely with 4-bedrooms.
This was the first shoe to drop in weakening prices. Onto the second…
- 2,301 sq. ft., 3-beds/2-baths, 8,933 sq. ft. lot
- Sold: $2,200,000 (September 2022)
Almost the same size home, but in the Margate pocket with small ocean views, this home sold just a month later at another $93,000 discount to the Chelsea sale.
And finally, example number three…
- 2,340 sq. ft., 4-beds/3-baths, 10,344 sq. ft. lot
- Sold: $1,825,000
While this is the weakest location, home layout, and condition – this home struggled out the gate with the preceding two sales really crushing its value. Beginning its listing at $2,459,000, this sale was forced to take on a massive discount of over $600,000.
These three sales really end the talk of any small home or fixer selling close to $3 million and proved to be a strong headwind the sale below in the next section of this post.
Latest Land Sale Take Big Discount
A new closing just this past week, and the source of this post topic, was a true tear-down land sale on Chelsea Road that is comparable to the above sales and a barometer for land prices to anyone looking to build new or spec out a home.
- 2,326 sq. ft., 3-beds/2-baths, 10,202 sq. ft. lot
- Asking $1,988,000
- Sold $1,707,000 (February 2023)
This was a shock, much like the $3 million Chelsea sale, but on the other side of the coin.
Rather than shocking at a high price, it was incredible to see a property make a deal in under a week and then sell at an almost $300,000 discount.
But when you look at the slide in prices in these types of homes in Lower Lunada Bay, then this deal actually makes sense.
Two sales over the summer in the $2.2 millions that were the same size and habitable, along with a $1.825 million sale with 4-bedrooms, far from tear-down condition…even with this prime location land value can be argued for a $1.7 million price based on similar comps and new construction sales.
Not to mention, if you work the numbers backwards and calculate $550 a square foot for 4,000 sq ft, then a buyer can pencil in $2.2 million to build + $1.7 million acquisition price.
If you are all-in around $4 million, you have comps on Chelsea and PV Drive in the $4.25 to $4.5 million realm. And even if prices slip in new construction valuations, you have a buffer of $250k to $500k in presumed equity creation.
I think what shocked me the most is how soft, or at least, back to reality the market has become.
A tiny home sale that should be land value + a slight premium sold for $3 million and a similarly located property goes for $1.7 million just 10 months later.
Wow – things change quickly.
It is incredible to see the price movement happening in Lunada Bay in less than a 12-month period. The market got a little ahead of itself when the 1,600 sq. ft. home sold for over $3 million, no matter how nice the property is.
To give you more perspective, the $1.7 million tear-down could undertake a massive remodel at $300 a sq. ft. which would equate to about $700,000 + throw in $200,000 for a pool and the new owner would be in the property for well under $3 million.
All in all, Lunada Bay is coming back down to earth.
Property in the low 2,000 sq. ft. range should be selling in the low $2 millions and land value should be closing for below $2 million based on the new construction comparable sales.
The action over the last 10 months is getting back to normal, sustainable levels, but it certainly is a decline from the very top of the market.
What’s most important is tracking new construction to see if it can hit that $4.25 to $4.5 million range to keep things constant – and it would actually be a win considering where interest rates are now.
The big test will be the 736 Cloyden Road listing and where that eventually closes.
For now, Lunada Bay is getting back to reality as is the case with the majority of the Palos Verdes Peninsula.