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The South Bay is Crowded at the Top

Following my recent post Ultra-High Priced South Bay Real Estate, today I plan to touch on more South Bay high-end luxury homes before we move into the thick of spring selling season. My reasoning? I believe we are at an inflection point for the high-end market here in the South Bay. It is important for my readers (even ones on a home buying budget) to know what is going on in this sector of the home market because high-end homes can be a leading indicator for the broader market and certainly a significant driver.

If you receive my quarterly newsletter then you know I have been highlighting the glut of inventory on The Strand. A lot of Strand homes are over-priced and even well-priced Strand homes are sitting because buyers simply just do not want them right now.

Research

Over the last few weeks, as I have explored inventory off The Strand, I have been shocked by bold listings offered at record ask prices, some still under construction, listings with hundreds of days on market, and a multitude of options for wealthy buyers. Yuck.

I conducted an “eyeball test,” so to speak, and scanned through high-end offerings to see if anything looked compelling. The answer was a resounding “no,” and I think that is the same reflection of wealthy buyer’s opinions.

Do you think wealthy individuals became wealthy by making poor buying decisions? The economics (i.e. inventory, days on market, record ask prices) point out that the run is probably slowing at the high-end portion of the market.

Inventory and Sales

If you take all inventory on the MLS from Manhattan Beach to the Palos Verdes Peninsula priced at $5 million and above, we currently have 52 homes on the market. In the last year, there have been 41 sales at $5 million or higher.

Now many of my readers know that six months’ worth of inventory is considered a market at equilibrium. Under six months and you have what is considered a sellers’ market, and over six months is considered a buyers’ market.

If you take active inventory and sales over the past month, here is what you get…

41 sales over the last 12 months = 3.42 sales per month

52 active properties today / 3.42 sale per month = 15.20 months’ worth of inventory. WOW!

Now, The Strand is an anomaly and contributes significant inventory to the high-end market. If we were to throw out the 14 Strand homes on the market currently, would that help? The answer is no. That still only drops $5 million or higher to 11.11 month’s worth of inventory!

Most can agree that the high end is a bit fickle and tends to have larger inventories than normal due to fewer buyers and really having to wait for the perfect buyer. Sellers also typically have wealth and staying power to be patient and wait for their price. In that case, let’s not only eliminate Strand properties but let’s just throw out 20% of inventory assuming they are crazy over-priced listings. Even factoring out The Strand and supposed outliers, the months of inventory still point to a buyers’ market with 8.89 months of inventory.

Conclusion

Still not convinced that we are at an inflection point? Consider there were another 83 listings that expired, canceled, or withdrew their listing after being on the MLS over the past year. That is more than double all the sales in the last 365 days.

By my view, homes priced over $5 million need a big spring selling season to clear inventory and improve sales. This will boost the confidence of wealthy home owners and buyers knowing they have real estate assets that can still grow in the near term. If not, look out for some price pain.

No doubt in my mind the high-end part of the market is at a potential tipping point. Keep a close eye on the market this spring to see where things go!

*As of 2/8/2017 when data was pulled when writing