The past year has been a wild one for many markets.
While the weekly focus here is the South Bay residential real estate market, I do pride myself on following the equity and bond markets.
The stock market, of course, is a huge store of wealth for buyers and sellers in the South Bay which, in turn, affects confidence and drives capital for real estate.
Significantly bigger than the equity markets, the bond market is absolutely massive. It acts as another store of wealth, income, and obviously greatly influences mortgage rates via long-term Treasuries and actual rates via mortgage-backed securities.
In order for me to feel like a well-rounded adviser to my clients, not only do I need to study real estate intensely, but also, I need to understand and keep up with the equity and bond markets.
For this week’s blog, I have tried to come up with a metaphor for the equity/bond market behavior over the past few weeks and compare it to how things might shake out in real estate. It could be a complete flop if you do not watch all three markets, but I want to give it a whirl.
Stock and Bond Market Happenings
Since the Federal Reserve stepped into markets to provide liquidity during the early innings of the Coronavirus pandemic, the stock market has made a roaring V-shaped recovery. Additionally, the bond market has rallied sending rates to all-time lows.
The rally was led by high-flying tech stocks with secular growth stories, and they soared to jaw-dropping valuations. A couple months ago, stock market traders began speaking about the economy re-opening thanks to vaccines and money shifting from growth stocks into value stocks (which had underperformed the market).
That rotation slowly started to happen, and just a few weeks ago, it was accelerated thanks to bond yields rising. As interest rates rise, tech stocks sold off and value stocks began to outperform its high-growth counterpart (although tech has tried to rally this week).
While Tesla and Paypal were the darlings of the stock market for most of the past six months, stocks like Chevron and JP Morgan Chase came to life as rates began to rise.
How does this compare to real estate, metaphorically speaking?
Single-family homes have been the high-flying growth stocks and they are still all the rage. But, if the economy re-opens or mortgage rates begin to rise significantly, condos are the value stocks that are set to benefit.
If you want to “trade” the real estate market and get in front of the rotation before it starts, I think condos and certain townhomes will be your best bet.
Real Estate Growth & Value Plays
Single-family homes have represented the growth stocks en vogue as evidenced through past blogs like last week’s post titled, “A Glimpse into the Meteoric Home Price Gains in Palos Verdes” and last year’s post titled, “2020 South Bay Home Numbers Give Clarity to Unprecedented Market.”
Buyers are having to look at past comps and not only exceed those prices, but know where the higher pending sales are going to close, and then go even higher than those homes currently in escrow.
We are seeing clients get priced out of single-family home markets and head to new, more affordable areas only to find that all the competition has headed that way as well.
Somewhat forgotten are large condo complexes where the uneasiness of close spaces next to neighbors with the Coronavirus still exist. These assets have underperformed and are poised for a comeback as we re-open thanks to vaccinations. Soon, their affordability may become too hard to deny.
Take for instance the Beachside Condominium Complex in Hermosa Beach…
Back in 2017, I sold clients’ condo for a complex record high:
- 447 Herondo Street #206, Hermosa Beach
- 2 beds, 2 baths, 1,398 sq. ft.
- Sold Price: $852,500
Three years later at the start of the Coronavirus, the unit directly below sold with almost no appreciation from my sale three years ago:
- 447 Herondo Street, #106, Hermosa Beach
- 2 beds, 2 baths, 1,398 sq. ft.
- Sold Price: $870,000
Just a $17,500 gain three years later is pretty poor performance, not to mention interest rates were collapsing to offer buyers 10% more purchasing power. Well, those condo value plays are not going to last too much longer, as evidenced by this following sale in December in the complex:
- 447 Herondo Street, #205, Hermosa Beach
- 2 beds, 2 baths, 1,658 sq. ft.
- Sold Price: $1,050,000
That is a big jump, even if the unit is 250 sq ft larger. Additionally, this new property one floor below came to market last week and the seller is asking for even more:
- 447 Herondo Street, #104, Hermosa Beach
- 2 beds, 2 baths, 1,639 sq. ft.
- Asking Price: $1,195,000
This price is going to be really tough to land, especially with a tenant in place until 2022 (per the agents notes). However, these are Sand Section beach condos that are always going to be the first to recover and are demonstrating how other condos, as value plays, could leap once we re-open.
Sticking with the Hermosa theme, take a look at some condos sales and a listing in East Hermosa on Prospect Avenue…
This new listing is one to think about, which has been lingering on the market…not much lingers these days:
- 2411 Prospect Avenue #126, Hermosa Beach
- 2 beds, 2 baths, 856 sq. ft.
- Asking Price: $675,000
For context, here is a pending sale and two sales from 2019 and 2020 below, respectively:
- 2411 Prospect Avenue #205, Hermosa Beach
- 2 beds, 2 baths, 923 sq. ft.
- Pending Price: $690,000
- 2411 Prospect Avenue #216, Hermosa Beach
- 2 beds, 2 baths, 944 sq. ft.
- Sold Price: $628,000
- 2411 Prospect Avenue #117, Hermosa Beach
- 2 beds, 2 baths, 941 sq. ft.
- Sold Price: $675,000
Obviously, prices are a bit higher than the $628,000 sale in 2019, but you can see how prices have not taken off just yet like the sand section condos. There is value here and can a lingering listing be negotiate down farther? Could it maybe get even closer to the 2019 sale price of $628k?
This is the type of value play that might benefit from a rotation from single-family homes into condos as the vaccine re-openings begin to take hold.
Do not get me wrong, the example above is far from a sure bet and it takes stones to jump into an asset that has underperformed and is hated by the market. But, if you “get it right,” the payoff can be really nice just like we have seen with value stocks in the stock market presently. The gains have been amazing.
There are more condo deals like this throughout the South Bay. Go have fun with it! You might be surprised at how these value plays might dry up in the next six months, and you’ll be disappointed you didn’t make your move today.
And, finally… This week I have a new listing, and it is the growth of all growth stocks. A tall & skinny in North Redondo’s Golden Hills.
If you are not familiar with the meteoric price run in Golden Hills over the past decade, then please check out my post from two weeks ago titled: “North Redondo Tall & Skinny Home Price Growth Remains Unstoppable.”
- 1145 Stanford Avenue, Redondo Beach
- 3 beds, 3 baths, 2,000 sq. ft., 2,507 sq. ft. lot
- Asking Price: $1,349,000
This gorgeous home is move-in ready and located in one of the hottest single-family home markets in the entire South Bay. It is lovely and will be sold in a week…so get to it while you can!