Is LA’s Housing Bubble Surging Or Is It A Myth?



Given the mind-boggling financial crisis that happened in 2008, most people now tread very lightly when it comes to real estate investments. After all, the housing market bubble is one of the main reasons for the economic downturn that happened a decade ago. Thus, it should come as no surprise that investors are now very aware of the prices and keep a constant watch on median home values. In Los Angeles, however, this might be exaggerated to a point where myths are slowly clouding people’s judgments.

Current State

Undoubtedly, the housing market in Los Angeles is experiencing some growth. The prices have been slowly rising to a point where many investors believe that there is another bubble. Although their fears may turn out to be true, it is important to understand what one should know when analyzing a potential crisis.

First, it is essential to look at the current state of the real estate ventures. Given the popularity of Los Angeles, one of the main reasons for the increasing prices is the huge demand. Connecting that to the basic laws of supply and demand will explain why the prices are rising. After all, if a lot of people want to buy the same thing, the seller will have to narrow down the buyers by raising prices. Hence where the growing median home values in Los Angeles are coming from.

Historical Data

In 2007, the market crashed right after reaching some of the highest median home values ever. Since the numbers are slowly starting to remind people of that period, investors believe that another bubble is inevitable. The problem, however, is that their opinion is based on short-term data. Yes, if one only looks at the previous ten years, they may believe that these home prices in LA indicate a market bubble.

What they are failing to see, however, is the long-term perspective. Throughout the history, the home values around the United States have been on an upward-curving slope. Meaning, they sometimes go up and then come down. They always, however, grow in the long-run. For instance, the home value a century ago was nowhere near what it was fifty years ago or today. This is because there is a repetitive pattern of growth. For the Los Angeles market, that means that the current prices actually may indicate another historical increase.

Remaining Mindful

Even though everything mentioned indicates that a potential housing bubble in LA is a myth, remaining mindful is necessary. At this moment, the median home price goes north of $916,000. Just looking at the price, it indeed does raise some eyebrows because it beats most other markets in the nation. To that end, it is necessary that real estate investors pay close attention to how things play out in the upcoming months. If the price continues rising above everyone’s belief, another close analysis will be needed.

Ultimately, if the price ends up falling in the short-run, such result could indicate that a housing bubble indeed existed. Until that happens, however, investors should focus on locating lucrative opportunities and not worrying about potential crashes that are mostly based on myths.

Los Angeles Real Estate Market Continues Record-Breaking Surge

The Southern California real estate market is stronger than ever, so much so that the ongoing surge pushed median home prices in the region to $505,000. It has been more than 10 years since the last time the Southern California real estate market achieved such lofty heights, so much so that the previous high actually predate the recession. Fortunately, the economic conditions that crashed the market — and made the median home prices of a decade ago so unsustainable — do not exist today.

Several of the geographic areas comprising the Southern California real estate market are exceptionally healthy, with Los Angeles County and Orange County exceeding the previous peak in median home price by significant margins. In Los Angeles, the median home price of $575,000 represented an increase of 9.5 percent over the previous year and easily outperformed the pre-recession mark of $550,000. Orange County posted an 11 percent increase in the median home price with an average of $710,000, well over the $645,000 the area boasted back in 2007.

With a greater level of economic stability on the both the local and national level, there is far greater confidence in real estate markets across the United States. In 2007, the increase in home prices was a product of the risky lending practices that ultimately sent the economy into a tailspin. More than a decade later, rising home prices can be attributed to a stronger, more sustainable economy committed to learning from and preventing the disastrous mistakes made in the past.

Of course, the rise in the median home price in Southern California has created several complications that must be addressed sooner rather than later. When costs rise, accessibility to affordable housing is sure to become an issue. Given the short supply of homes — not to mention the influx of Californians displaced by the wildfires in the northern part of the state — legislators are already taking action to ensure the availability of affordable housing throughout the Southern California region.

There is also some concern that the strength of the real estate market is discouraging out-of-state workers from accepting job offers that require relocation, and many have noted that job growth has indeed slowed statewide. With the goal of attracting new workers while also encouraging current residents to remain, lawmakers have worked quickly to pass several bills addressing the housing shortage, particularly with regard to the shortage of affordable housing options.

Given the present rate of state and national economic growth, most economists agree that the solutions enacted by state lawmakers should not impede the health of the real estate market in Southern California. As a result, the majority of analysts expect that the Los Angeles region will again be one of the nation’s top real estate investment and development performers in 2018.

Chinese Investment in Downtown Los Angeles

Chinese investment has spurred a construction boom in downtown Los Angeles, says a recent report by the Los Angeles Times, funding massive building projects on a scale that promises to reshape the city’s skyline. Chinese real estate companies have poured billions into the city in recent years, with seven of the last 18 largest deals in downtown LA since 2014 involving Chinese developers.

As of now, three of the four largest developments in downtown LA are being led by Chinese companies. Chinese real estate behemoth Greenland is overseeing the construction of a $1 billion “city within a city,” aptly named Metropolis, on a 6-acre plot of land purchased for $150 million. When completed in 2018, Metropolis will constitute the largest mixed-use development on the west coast, replete with three towers, 70,000 square feet of retail space, 1,500 residential units priced between $500,000 and $6.9 million, along with an 18-story hotel and shopping complex.

Another $1 billion mixed-use project is being funded by Oceanwide Holdings, a Beijing-based developer, on a 4.6-acre parcel across the street from the Staples Center that it purchased for $174.8 million. Due to be completed in 2018, Oceanwide Plaza will feature 170,000 square feet of retail space, a luxury hotel, and two residential towers.

Such developments are part and parcel of a trend of increasing Chinese investment in the US, which has continued unabated since 2010. Forbes reports that 62.5%, or $10.6 billion of the $17 billion the Chinese spent on overseas real estate in the first five months of this year went to the US, particularly on the west coast. Offices and hotels were the most popular asset classes, comprising 92% of Chinese outbound real estate investment.

Chinese buyers have been the top purchasers of US real estate for the past four years, according to a survey this year by the National Association of Realtors, far outpacing other foreign investors.

As confidence in the slowing Chinese economy and local real estate market wanes, Chinese investors have poured billions into US real estate as a means of diversifying their assets. An uncertain political climate and an aggressive anti-corruption drive have also left Chinese business elites scrambling to cache their money in stable offshore markets while turning a profit.

“For those real-estate investors that do get money out, developing new buildings is a main focus, given that it offers far higher returns but also more risk than buying existing buildings,” said the Wall Street Journal.

Beyond larger returns, splashy and massive developments also serve the function of raising the profile and prestige of Chinese real estate companies that are paying large premiums to showcase their brands in the US.


The Metropolis: DTLA

7.12.2016 | The Metropolis – Rusty Tweed team

Multifamily units in Downtown LA (DTLA) have tripled over the past 15 years. There are another 22,000 proposed or under construction. One of the most high profile new projects is the $1B Metropolis.

The Metropolis

For decades, developers have tried to turn the six-acre Metropolis site into more than just parking lots. Greenland Holding Group has succeeded where others have failed largely because it has a direct line to millions of potential buyers in mainland China. Pin Tai, president of Cathay Bank, said “their target customer is probably 30 percent Chinese investors.” Chinese buyers are attractive as 70 percent of them pay all-cash. It’s important to lock these buyers in first as following the financial crisis. Most banks demand up to half a building to be under contract before they will approve a mortgage.

According to Greenland USA director Ryan Aubry, the Chinese development firm was drawn to LA because it is a city in transition. It’s therefore perceived as a destination to invest in.

Metropolis is expected to be a boost for the surrounding area. It will include the 18-story Hotel Indigo, in addition to ground-level restaurants and stores. Low-level studios begin at the $600,000 mark. Top floor two-bedrooms go for over $2 million.

 The Metropolis - Rusty Tweed team
Metropolis rendering

“Everything you could really want is here,” said Michael Altneu, vice president of marketing at Douglas Elliman Development Marketing, which is handling the building’s listings. “There’s a yoga studio with a mediation garden and a dog park with a bathing station.”

Over 1,500 condos will be added to Los Angeles’ scarce housing market by the time, Metropolis’ three towers are complete sometime in 2018 . The average condo price in downtown LA hit a new high: $803 a square foot, according to the Mark Company. Metropolis is the first of three-mega developments owned by Chinese companies to be built downtown over the next few years.

References for The Metropolis – Rusty Tweed team:

Low Vacancy Rates in LA Creating Housing Shortage

7.11.2016 | Low Vacancy Rates in LA – Rusty Tweed Team

What are the causes of the Housing Shortage in LA?

Blame for the difficulty of finding an apartment in LA and rising rents is often leveled at the new housing developments. New developments are particularly springing up in Downtown LA, Hollywood and Koreatown. Rents climb as new tenants arrive. However, rent has increased citywide, including in areas with extremely limited new development such as Beverly Hills and Venice. The answer, as in other major cities such as Boston, New York and San Francisco, is in fact the low vacancy rate citywide.

According to the LA Times, “the correlation between prices and vacancies [in 20 of the largest U.S. cities] is four times stronger than the correlation between prices and new development”.

Experts agree that a 5% vacancy rate is the tipping point for the power dynamic between landlord and tenant. Above 5%, landlords need to offer lower rents or incentives to be competitive. Lower than 5%, landlords know that there will be a wealth of other takers. Reports from the USC Lusk Center for Real Estate indicate that multifamily vacancies in LA have been below 5% for the last five years.

Los Angeles is the furthest behind in terms of population growth. In 2015, LA’s vacancy rate averaged 3.1%. The city needs new market-rate housing to combat the problem. According to LA Times journalist Shane Phillips, “it must be complemented with policies that more effectively incentivize creation of sufficient affordable housing and additional resources to support lower-income residents.”

Downtown LA’s Multifamily Developments

Over the past 15 years, the total of new multifamily units in Downtown LA (DTLA) has tripled. An additional 22,000 units are either under construction or in the proposal stages.

Low Vacancy Rates in LA - Rusty Tweed Team

The projects under development downtown vary from brand new developments to adaptive reuse buildings. Some of the most hyped new projects include Greenland USA’s $1B Metropolis building, Trammell Crow’s La Plaza Cultura and Trumark Urban’s Ten50 S Grand. ICO Group’s Broadway Lofts is a case study in adaptive reuse following their repositioning of the over 100 year old Bumiller Building.

However, there is still a critical shortage in units and there is  certainly space for more players.

References for Low Vacancy Rates in LA – Rusty Tweed Team: