Happy New Year!
We want wish everyone in the South Bay and beyond, along with our loyal weekly readers a prosperous coming 2021.
Excitement and inspiration are inherent to begin each year. I, for one, am fired up to bring you more content in different ways to help serve you in your South Bay real estate endeavors. This year we are ramping up the podcast and we will be filming sound bites to share on Instagram. And, who knows, there may even be a YouTube page for the podcast in the works.
Please send me your burning questions and topics you would like covered, and I can go into much further detail on them in the podcast.
That said, you can continue to expect weekly blog posts from me, and as always, I am kicking off 2021 with my “fearless predictions” for South Bay real estate and the greater Los Angeles area.
But, before we start, let me recap some of last year.
If you remember at the end of 2019 heading into 2020, median prices were struggling.
To end 2019, median prices were down across the board:
- Manhattan Beach was down
- Hermosa Beach was down
- Redondo Beach was down
- Palos Verdes 90274 was down
- Palos Verdes 90275 was down
The numbers were disappointing to finish 2019; however, the beginning of 2020 saw a ton of strength in our local markets. Not only was the stock market roaring to all-time highs in February, but our real estate market was doing well too.
In March, the stock market dropped like a falling knife as stay-at-home orders were issued towards the end of the month. As a result, pending home sales in our local real estate market began to fall precipitously.
In April, normally our strongest period for home sales locally, we saw pending sales collapse between 75% and 80% across the board by the beach and on the Palos Verdes peninsula.
Just a couple months later in June, we saw our local markets reverse course amidst incredible buyer demand and low interest rates/stimulus from The Fed and Congress. The rest of the year can be characterized as a strong surge higher, as we saw statewide median prices climb close to 10%.
From the end of 2019 through the end of 2020, it was about as volatile as we have ever seen. There were highs, lows, scary times, and downright euphoric times throughout the past 12 or so months.
Today, we sit at record high prices with record low interest rates. And, trying to predict the future is about as hard as it gets.
But, where is the fun in not trying?
My 2021 Fearless Predictions
- South Bay home prices continue surge in the first half of 2021.
- The “coming” foreclosure wave will be a non-event.
- Condos/Townhomes outperform in the second half of 2021.
- Income properties and apartment buildings are primed for growth.
- Long-Term Bet: The beginning of suburb growth, but cities are far from dead.
South Bay Home Price Surge in First Half of 2021
The California median home price increased close to 10% across the state. We saw areas throughout the South Bay surge even higher in some cases.
That trend will not change in the first half of 2021.
Expect home prices to climb another 5% just in the first six month of the year.
We can attribute the strength mainly to all-time low interest rates, and out-of-control Coronavirus cases hitting Los Angeles county.
According to First Tuesday Journal’s Monthly Statistical Update, fixed rate mortgages are a full percentage point below from a year earlier. According to their calculations, the drop in rates translates to a 10% increase in buyer purchasing power. There is your 10% jump in prices right there.
Historically low interest rates have not only propped up housing, but also increased its value.
In theory, the statewide jump in prices can be attributed to a drop in interest rates alone. If you pair that with surging Coronavirus cases throughout L.A. County, Buyers will continue to seek homes with more space. With vaccine delays and life not “back to normal” until the fall, this surging momentum in prices will continue through the first half of 2021.
The Beach and Palos Verdes generally have an array of buyers who are professionals that can work from home. These high-net-worth borrowers are seeing their borrowing rates around 2%. That is close to “free” money.
As a result, our South Bay single-family home markets are “off to the races” and will continue that momentum through June with ease.
“Coming” Foreclosure Wave Fails to Materialize
Foreclosure moratoria were enacted throughout the country because of the Coronavirus pandemic.
Just from a Federal perspective, that foreclosure moratorium expires on January 31st, 2021 for Fannie Mae and Freddie Mac mortgages, while FHA and VA loan moratoriums expire on February 28th, 2021.
California counties and local cities may choose to extend protections if the Federal government fails to do so.
So, what does this all mean for potential foreclosures?
Generally speaking, it takes about six months to begin and end a typical foreclosure action in the state of California. Foreclosures (or trustee’s sales as they are called) would not begin taking place until August at the earliest. With delays and extensions, it will likely take much longer.
If you do believe that in August we will begin seeing foreclosures, Wall Street, local wealthy investors, and liquidity provided by The Fed will have countless buyers ready and willing to purchase foreclosures.
The money is there, and any foreclosures will be a blip on the radar and gobbled up by huge demand. With the Great Recession and foreclosure crisis still fresh in people’s minds, they will incorrectly assume this potential wave of foreclosures will damage the market.
It will be a non-event. So you can forget about a scary foreclosure wave.
Perhaps there will be a few sales at slightly discounted prices to all-cash investors, but hardly a market mover here in the South Bay, and throughout Greater Los Angeles.
Condos/Townhomes Outperform in Second Half of 2021
The surge in median home prices was mainly thanks to single-family homes in our new pandemic world. Condos and townhomes underperformed in 2020 for obvious reasons.
But, don’t be fooled…there is real value in these asset-types compared to single-family homes as they have lagged.
With historically low interest rates, condos and townhomes are a coiled spring that have not benefited from the housing run up. Look for buyers to favor condos and townhomes with their newfound buying power and people will begin to flock to the affordability of condos and townhomes.
Once the Coronavirus is in the rear-view mirror and the vaccine is rolled out to the masses, buyers will get comfortable with sharing walls and hallways again with their neighbors.
During the second half of 2021 we will see these assets take off.
Income/Apartment Buildings Benefit from Low Rates
Income properties and apartment buildings work a lot like bonds. When interest rates fall, their value goes up.
If you can buy an apartment building at a 5% return, then you can borrow at 4% and still make a nice spread.
If interest rates fall, you will be able to buy an apartment building at a 4% return and still cover your borrowing costs at 3%.
Let me show a very brief example…
- $50,000 cash flow / 5% return = $1,000,000 building value
- $50,000 cash flow / 4% return = $1,250,000 building value
Historically low interest rates will affect income properties and apartment building in an incredibly positive way.
The Coronavirus, however, has not delayed that positive rate stimulus and therein lies the opportunity.
Due to renters affected by the pandemic and eviction freezes at the courts, banks have been unwilling to lend to income/apartment investors because of increased risk of lost rent.
Although interest rates are lower, income properties have not been able to benefit just yet.
That will change in 2021 as we return to normal. Rates will be low, banks will begin to lend on apartments again, and cash flow property will be a juicy opportunity. If you can get in front of this trend ASAP, you can watch your building’s value increase as low rates drive values much higher.
Long-Term Bet: Beginning of Suburb Growth; Cities Far from Dead
According to some tech experts, many have said that the Coronavirus has pushed e-commerce habits forward by as much as ten years. In a way, I believe this will influence real estate habits as well.
The Coronavirus put a new premium on space, backyards, and further illustrated that working from home long-term is possible.
This trend will not fall off easily.
Pair that with Millennials starting to form families in a big way, along with them now being the largest home buyer population, the suburbs will be back to a major growth trend.
If you look my old blog post “Best Performing Markets of the Decade,” areas of Palos Verdes lagged in the decade. While Manhattan Beach and affordable areas of Redondo will continue to do well, do not expect Palos Verdes to underperform in the next 10 years like they did previously. If anything, expect the opposite.
Family formation, Coronavirus trends, and autonomous cars will drive the Palos Verdes market in a big way over the next decade.
All that said, the rise of the suburbs does not mean the death of city.
Actually, quite the contrary!
Cities have flourished for thousands of years and are in the DNA of us humans. I believe technology companies still believe in physical office space, and when the coast is clear from the Coronavirus, gentrifying areas of Los Angeles will continue its climb higher. Tech will move back in to the city and their workers will follow.
The energy of cities is here to stay for the young and old alike. Greater Los Angeles is positioned well as the entertainment city of the world, a tech haven, and the “de facto capital of the Pacific Rim” (coined by former USC President, Steven B. Sample) when it comes to our ports and location.
Long term, our real estate markets will thrive thanks to the Southland’s unique positioning.
As you can see, I am very confident about real estate in 2021 and over the very long-term.
But believe me, our markets do not come without risks. Please be sure to subscribe to the weekly blog as I watch interest rates, affordability and how our market reacts to the economy in real time.
While interest rates have made homes more affordable, it has created risks to the market if they change course and begin climbing. As affordability approaches some of the lowest levels in years, it is a risk that could come to fruition and derail the market in 2022 and 2023.
For now, I believe we have all clear on homes in the first half. Condos/townhomes and income property/apartment building investments will begin to do very well in the second half and outperform in a big way.
Wishing you all the best in the new year, and I will see you next week.