Los Angeles Business Journal

Homed In on High Prices

Spate of multimillion-dollar sales offers welcome evidence that local market is bouncing back. By Stephen Shapiro Monday, March 11, 2013

So here we are. President Barack Obama has been inaugurated to a second term, the fiscal cliff is temporarily averted, interest rates remain at historic lows and the foreclosure rate is diminishing rapidly.

For the universal real estate community, these are all indicators of where the real estate market is and where it’s headed. But in Los Angeles, we are not in the universal real estate community. We have a specific marketplace in a world-class, desirable location. It’s relatively easy to provide an outlook as to what our market looks like now, but where it is headed is more of an experienced prediction.

I am encouraged that for the first time in many years, there is definite optimism in our market. In the past 60 days there have been four sales in Malibu alone that have each exceeded $35 million (for $75 million, $41 million, $37.5 million and $36.5 million). This has never happened before, let alone during a sluggish economy.

This is great news, even for buyers who don’t have the means for this type of purchase. It should give everyone a sense of security to know that knowledgeable and well-heeled buyers feel it is safe to make such a massive investment.

Those huge Malibu sales were all second homes. Most significant sales in our overall marketing area involved a pool of sellers whose motivation was financial need, death, downsizing or moving away from the region. The net result is that inventory has shrunk and the seller who doesn’t have a motivation to sell is likely to ask a higher price resulting in greater equity return and thus more cash to buy a more expensive home.

‘Priced right’

The flats of Beverly Hills are very strong with multiple buyers placing offers on homes that are priced right. The same is true for Bel Air, Brentwood, Pacific Palisades and Santa Monica. The key words here are “priced right.” Homes that are aggressively overpriced are either not selling or sitting on the market until the seller agrees to a reduction.

There are far too many examples of homes listed for double their ultimate sales price. Oftentimes, these homes are on the market for one to two years before selling at a price much lower than if they had been correctly priced to begin with. The reason: Overpriced houses get stale with a presumption of fault if they don’t sell in a reasonable period.

When do we officially declare that we have a good market? Understand that when this starts and the pendulum moves in the upward direction – as has already begun to happen – that swing will last for an extended period of time. Historically, these swings last upward of five years in each direction. According to Bloomberg, sales of homes in California over $5 million increased to 697 units last year, up from 491 in 2011. That’s an increase of almost 42 percent. As for homes in the $4 million-$5 million range, 460 units sold in 2012, a 62 percent increase from 2011’s total of 344 units.

Despite this reality, I won’t officially declare this to be a good and growing market until sellers begin to trade up. That means, for example, homeowners selling a $5 million house and buying a $7.5 million house. For the most part, we’re not there yet.

The pendulum has started to swing and the force of that swing will result in a positive effect for the residential real estate market.

Stephen Shapiro is chairman of Westside Estate Agency and has worked in the L.A. real estate market for more than 35 years.