California Real Estate Market Sidelines

David Clark
Highland ParkDavid Clark

Before I became focused on my home ownership goals and building wealth through real estate I would press the button for concert tickets, hotel accommodations beyond my income means, and dine at places with items I couldn’t pronounce on the menu all in pursuit of apparently making my landlord richer. In a nutshell I wasn’t even meeting my goal of home ownership half-way. I wasn’t working with a trusted lender to be pre-approved, reducing my debt, and my credit was average. On the weekends it was an endless barrage of open houses, window shopping and daydreams.

Real Estate Myths

One of the great myths of investing in real estate is the idea that a home needs to have accelerated appreciation. I can’t remember the last time I bought a standard car off the lot and started calculating when it would appreciate. Like a car a home is a depreciating asset. Which in easier terms means it’s actually a liability as you owe the amount you financed to your lender who helped you secure it. That being said, if your home never goes up in value, and it sells for the identical amount that you paid for it you would still have all of the equity that you paid into it to move into another property.

Financial Investing Myths

This financial misinformation is similar to those that “invest” in stocks based on price movements and news and not look at investing in small pieces of companies. Simply stated, do you think that the company and its products or services will be in demand years from now? Is there a solid management to execute the goals and vision of the company? If you think that you will make a quick dollar on an investment app cherry picking the next great stock appreciation or new IPO you might be right! Statistically the odds are stacked so far against you as a retail investor that it’s like bobbing for apples with a blindfold on. And what is your opportunity cost? What are your financial net reserves? What are your short and long term financial goals and why? If you just whispered that the reason is because you don’t want to work then you have less of a relationship and knowledge of what money can provide you than you thought. If your goal is financial independence, providing for elder parents, and building a small foundation to provide educational resources to children, it's clearer that you at least have a goal. The quickest but by no means answer is right over your head. Yes, the ceiling, the roof, owning a piece of America to see less landlord and more skies.

Your Future, Your Money

Purchasing and financing your mortgage through a conventional bank loan is about depositing money into your future. Your new landlord is bank X and you will own your home in X years. For some of you out there you might be wearing the same clothing style as you did 5 or 10 years ago. For myself I don’t have the thrift store vintage nightclub look that I pretended made the ladies swoon. Today my mindset is on building my clients wealth and I do it in jeans and a polo, all else is ancillary. Why I bring up this tangent is the illusion that home ownership has to be forever, and it's a dream home or nothing at all. Do you buy the shiniest and most expensive stocks too? This idea is a landlord's dream, as they take an average of 30% of your income in rent here in LA County and turn it into their own fortune.

Los Angeles Rental Trends

About two-thirds of residents rent their homes here in L.A County, a proportion which is higher than the national average, but in line with other big coastal cities. With so many people renting, supply tends to be low—the city’s vacancy rate was only 5.1% in March 2020. The lower the vacancy rate, the higher prices can climb for available apartments: New York and San Francisco, the cities with the nation’s lowest vacancy rates, also have the highest rents. Low vacancy and high demand mean that average rent in Los Angeles is high compared to the rest of the country. As of January 2020, apartments in LA rented for an average of $2,545, almost double the $1,463 nationwide average. Even in LA LA Land with all its extraordinary amenities and cultural richness it all distills down to market demand.

Demand & Supply

The value of residential real estate is affected by demand pure and simple in a free market economy. In the last few years we have seen demand excelerate based on still historically low interest and subsequent mortgage rates, new loan programs, and covid related incentives for first time home buyers to grab a piece of the American dream which has fueled home ownership. People outgrew their homes and the experiment of telecommuting became a stable business footprint across the country as a direct result of the pandemic.

Real Estate Advisor Market Experience

As a real estate advisor in Los Angeles I often overhear casual conversations which include the phrases “market correction” or waiting for the housing market to “cool off,’ before some individuals want to purchase a home. I hear the anguish when they speak of there being 50 plus offers on homes in high demand areas and we and our agent couldn’t compete, it’s just not fair.” There is no fair in life, there is either winning or losing, and nobody can escape what the free market determines when there are multiple offers on a home based on demand where that price will land. The quickest way to get your offer seen is to work with someone who wants you in escrow, not you as a friend. To get your offer seen one must ask the question: What does the seller want, and can we meet those terms?

When my client can’t meet the terms I am 100% transparent and realistic, it is essential. We modify our plan, either looking just outside certain areas, or taking a closer look at the weight that each of the boxes holds. Can we live without the pool so that the kids can have stability and a safer neighborhood?.

But real estate has always been one of but by no means the only great hedge for inflation, and the equity market or stock market as it’s more commonly referred is not the housing market, nor is the stock market the economy.

Waiting for the Market to Cool Down

The waiting game or cool off illusion doesn’t get any easier. During this period as mortgage rates continue to rise the home that you could have bought last week is going to cost you significantly more based on accelerated mortgage rates. I see so many homes continue to slide under the radar in popular areas of North East Los Angeles. The shiny homes with all the offers and buzz shine brighter than the property that needs a little work. But when you change the way you look at things the things you look at change.

Sharks aren’t Fish

There are those sharks out in the ocean that are waiting for supply to increase or dilapidated properties to reveal themselves, even land if it has the right zip code and zonage. These are cash buyers that have every single duck in a row, not to be compared with first time buyers financing their mortgage or those with homes looking to leverage and finance another as a long term means to have cash flow and build generational wealth. You can’t compare sharks to fish with either a valid or sound argument.

What about Buyers Remorse?

Nobody, including myself, wants buyers' remorse, by finally getting your offer accepted and feeling like you paid too much. Do you ever get that on eBay and feel sick in the stomach for weeks? All this over $10 or $20? Me too! Between an appraisal, assuming your mortgage is financed and all of the comparables and positive externalities built into your acquisition line up are you paying too much? Paying too much doesn't seem to stop investments in the stock market with over valuation nearing 25%. The S&P 500 is overvalued by every valuation metric measured. While the market can remain irrational for a long time, it cannot sustain record valuations forever.

Short & Long Term Goals

What comes to mind for me is what do your short and long term financial goals look like? What are you comfortable with in your payment after principle, interest, tax, and insurance (PITI) and don’t forget homeowners association fees (HOA’s). There are more and more opportunities through local Credit Unions and even big box banks to help you with your initial down payment. While a 20% down payment was once the standard, the median is now 12% for many homebuyers.

And Their Off!

Make no mistake that purchasing a home is very much like an auction, there is an opening bid or teaser price which usually reflects 10-15% less than the value appraised or comparable of the home. If you were listing your home would you like 100 or 500 eyeballs to see it? When there are more people interested in your home there is more talk, buzz and excitement, there is a reason that fresh cut flowers are in every room and not a single detail is usually overlooked. Residential real estate is an emotional rollercoaster, and yes even for us agents though we remove ourselves from the sensory overload. When the dust settles there are still only 4 or 5 real buyers eager to get through the finish line. Our goal is to get your offer seen and to have as much knowledge of the terms and price that the seller is looking for.

Bigger Picture

What is of importance to see is the bigger picture of the housing correction myth, the real correction is examining the logic and correcting the behavior that leads to getting further from your goals and dream of home ownership. If your looking to time the housing market, meaning you'll finally come out of hibernation and release yourself from the bondage of your lease if you guess right which very few can you'd still have thrown your money away. Take a $2000 per month rent you have been paying for 7 years next to a property that you purchased with a principle, interest, tax, and insurance at the same monthly payment. After 84 weeks multiplied by that $2000 comes to $168,000. If the market "crashes" and plummets by an incredible 20% your only going to lose $70,000. If you would have rented the entire time you would have thrown away $168,000 dollars. That is why the investment in real estate is one of the most important decisions you can make for your long term wealth. Lastly keep the Starbucks, lose the vacation as you continue to focus on your initial down payment. Take a small step towards your goal each and every day. Find a real estate brokerage and advisor that you connect with based on their experience, knowledge, and personal values, remembering this is one of the most important financial transactions you will ever make, and maybe that a friend of your friends Cousin who just got licensed and works as a full time insurance agent might not give you a 7 day a week focus. I'd love the opportunity to earn your business, and help you build generational wealth and design a life that you want to live through financial independence. Reach out anytime and share your thoughts and experience in this Los Angeles real estate market with me. Let me hold your coffee why I hand you the keys to your new home.

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A passion for California history, writing, architectural preservation, and extensive sales background drew me into becoming a residential real estate advisor. Above all else service to the communities I live in and explore.

Los Angeles County, CA

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