Current conversations about the residential real estate market focus on how much the market has changed from a year ago, and in some cases, just six months ago.
“We are normalizing.”
“Price growth is leveling-off.”
“The market is shifting.”
These are popular statements used by almost everyone (including myself) are, for the most part, true when focusing on specific local markets.
As you follow along with my blog, you’ve read the latest updates on quarterly numbers, affordability, and which pockets are seeing strength or weakness. After this week’s post, our South Bay real estate industry can add another statement to these conversations:
“Home prices are depreciating.”
This is not an alarmist post that ALL South Bay home values are depreciating – far from it. This is a post illustrating that home values are now, in fact, falling from their peaks in SELECT submarkets.
The submarket in focus is the Los Verdes neighborhood in Rancho Palos Verdes.
Los Verdes Submarket Summary
If you are unfamiliar with the submarket or recent history of Los Verdes, I urge you to read my April 2021 blog post: “Rancho Palos Verdes’ Los Verdes Submarket Prices Roaring Higher”.
Pre-pandemic, this marketplace, in the heart of Palos Verdes, was a sleepy area that was “too far away” for many buyers. As a result, it experienced muted growth over the years.
My blog post was a reaction to my astonishment of the demand and price growth in Los Verdes and it continued for another year with some amazing appreciation for the neighborhood.
Today, with the shifting winds in the home market, Los Verdes looks as if it might be one of the first South Bay home markets to feel the negative impact of surging interest rates and low affordability.
Clear Price Depreciation Last Week
There are many marketplaces that show when assets are rising or falling.
For instance, the stock market shows the value of equities in real-time. Used-car websites demonstrate value of cars with hundreds of sales of the same model, make, and year. Even eBay can show the value of products with multiple sales of ink cartridges, baseball cards, and baby cribs.
The same shares in a company can be sold repeatedly, there are thousands of copies of essentially the same car, and hundreds of the exact same rookie card. Those create exact comparable sales to easily derive a value to see where the market is going.
Unlike those marketplaces, real estate can be an inexact science since many homes have varying floor plans, conditions, locations, etc. That is why we use big data in quarterly increments to try to get an idea of market mechanics.
In Palos Verdes real estate and much of the Beach Cities, it is difficult to find exact comparable sales because most homes are unique, in various conditions, and location/topography can change the value immensely.
So, it is rare to find an exact comparable, let alone have two homes sell in a similar window of time to compare how a market is moving. But this week we are lucky to have that rare opportunity for an almost perfect comp.
In Los Verdes, we have two home sales with replica floor plans, almost identical condition, and on the same street – separated by closing just five months apart.
Let’s look at the first example that came to market in April and closed a month later:
- 5 beds, 3 baths, 2,513 sq. ft., 7987 sq. ft. lot
- Sold: $2,200,000 (May 2022)
This property was cleaned up nicely with painting and staging at a time when interest rates were beginning their march higher. In my opinion, this timed the market right at the top/end of the top which looks to have occurred between March and May of this year.
With an asking price of $1.975 million this home received multiple offers after a short weekend on the MLS and made a deal over asking at $2.2 million.
That was the value in May 2022. Now fast forward five months to present-day below:
- 5 beds, 3 baths, 2,513 sq. ft., 7,641 sq. ft. lot
- Sold: $1,985,000 (October 2022)
This listing debuted in August, just three months after the $2.2 million sale.
This home has the same build from the early 70s with the exact elevation, floor plan, and square footage down to the foot. Its condition was also essentially the same as the May sale.
These sellers did not get greedy – they listed at a very reasonable $2.195 million.
Instead of receiving multiple offers or at least a buyer believing it was a fair price, per the latest comp, it failed to attract interest.
Swiftly, after a mere 10 days on market, the seller cut the price by a whopping $200k to $1.995 million.
It made a deal five days later and eventually closed last week for $1.985 million.
If you are a home buyer or seller in the Los Verdes submarket – what more information do you need than this example? Two spitting image homes on the same street:
- May 2022: $2,200,000 value
- October 2022: $1,985,000 value
That is a plain and simple 10% drop in value.
Further Evidence from a Flip
If you need further evidence, there was a flip sale around this time confirming the top of the market in Los Verdes:
- 5 beds, 3 baths, 2,513 sq. ft., 7,965 sq. ft. lot
- Sold: $2,400,000 (June 2022)
A couple weeks after the $2.2 million sale in May, the above property was sold for $2.4 million which further confirmed market value at that time.
This home was another replica floor plan on the same street, except it was rehabilitated by a flipper and as a result, earned a premium of $200k in price. So one can take not only a $2.2 million comp but a $2.4 million comp that should have affirmed buyers’ confidence in a $2.2 million asking price five months later.
Instead, thanks to surging interest rates and a market shift, this made for a 10% discount.
The flipper acquired this home in November 2021 for a mere $1.56 million. By the look of the investment, they likely spent no more than $250k and likely a lot less than that. A profit spread of $500k to $600k on an easy short-term flip is too wide – another sign that perhaps Los Verdes home values had gotten ahead of themselves if the real estate winds began to shift.
It is rarely as simple as one comparable to make a market. That said, the market is shifting, interest rates are crushing affordability, and buyers have significantly more negotiating power than six months ago.
Two homes with the exact floor plan and size, in almost the same condition, and on the same street – it is hard to argue against a depreciating market when one goes for $2.2 million in May and the other goes for $1.985 million only five months later .
So at least in the Los Verdes submarket, the current economic headwinds indicate prices might be 10% lower than they were to start the year.
The South Bay market has been fascinating the past two years and with depreciating prices now a factor in select submarkets, it looks as though it will continue to hold our interest into the foreseeable future.
Stay tuned and I’ll continue to bring you the latest market happenings as they occur!
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