Nov252013

West LA’s most desirable places to live

What makes a city a desirable place to live? Is it history, culture, climate, the “vibe,” or is it something more tangible that can be weighed or measured? We could readily compile a short list of quaint or fashionable communities and argue about their subjective qualities. Publications trying to be hip or trendy do this periodically. But in the end, these articles make people feel good about living in one place or another, but they settle nothing.

So how can we carefully measure desirability in a way that allows comparisons between one community and another? Do we take a poll and tally the results? Such an effort might reveal which cities have the most fervent admirers because those would be who bothered to answer the poll questions, but what we would end up with is an aggregation of people’s opinions, hardly something we would find a reliable indicator of desirability.

People put their money where their desire is

I believe the most accurate measure of a place’s desirability is comparing how much people spend to live there. People may say they prefer Santa Monica to Venice in polls, but when people vote with their pocketbook, their opinions carry real weight, sometimes a extravagantly burdensome weight.

If we quantify how much people spend to live in an area, we effectively measure desirability. We can use several financial measures such as median sale price, dollars-per-square-foot, or rent. Some of these measures reveal more than others. The table below ranks the major cities in West LA by the median resale price and monthly cost of ownership. The reason to use this measure is simple: People will only pay a princely sum to own property if the area is regally desirable. By this measure, Beverly Hills leads the way.

In my opinion, this measure doesn’t tell the full story. Beverly Hills sports the highest resale price, but one of the lowest dollars-per-square-foot measures of the major desirable cities. People are buying in Beverly Hills because they want the big yard and house. However, if we examine the beach towns listed just below (Pacific Palisades, Malibu, Manhattan Beach, and Venice), we see people are willing to pay much more money for much less space. In fact, they pay 40% to 50% more for the same square footage. People who live in those communities value location and climate over size and opulence.

Another problem with measuring by the cost of ownership and resale prices is that people will often buy real estate for reasons having little to do with the desirability of actually living in a given location. Many foreign investors buy a Beverly Hills mansions or a Malibu beachfront cottages as investments. Many of these investors don’t live there. So how do we eliminate the investment factor and look purely at desirability as a place to live? We look only at rents.

If people spend heavenly sums to live in an area with no hope of making that money back by timing the real estate market, then that place must be special. Rent is pure consumption. People will only consume what they find desirable, so ranking cities by the highest rents is arguably the best measure of desirability of a given city. On that measure, Venice reigns supreme.

So is Venice the most desirable city in West LA? I don’t know. All cities on the list below are great places to live, but people renting in Venice spend over $4,000 a month for this privilege. For that kind of money, it better be great.

Los Angeles County Housing Market Update

The house price rally in Los Angeles County has been even stronger than Orange County. In the last year, the market when from extremely undervalued to just slightly undervalued, and the price increase has been extraordinary.

As with other markets in Southern California, it will be difficult for lenders to fully reflate the housing bubble in Los Angeles County because the ceiling of affordability has already been reached. Perhaps with the all-cash investor share now exceeding 50%, prices may push through this ceiling — at least temporarily. Eventually, those all-cash investors will need a financed buyer to sell to, and if they push up prices too high, they will need to discount it for a financed buyer to take them out of the trade.

The rate of price increase actually picked up in 2013. My data uses a moving average, so the dramatic increases from March through June are still showing up as rising prices now. These readings will level off over the next several months as recent readings are no longer climbing. Based on the $/SF measure of value, a measurement not influenced much by the change in product mix, LA County is up an astonishing 41.8% over the last year.

Rent increases have been steady but moderate, most likely due to the increasing stock of rental homes and apartments entering the market. High house prices will put further pressure on rents as people who want to live in the area and can’t afford to buy have no option other than to rent. When you compare the rate of rental increase of 2.5% to the rate of home price appreciation of 41.8%, any arguments about fundamentals driving this rally appear rather silly.

I find this chart of the historical cost of ownership and rents very revealing. The housing bubbles are obvious, and the stable period between the bubbles establishes a clear base value. The overshoot to the downside also stands out. We are not back at fair value for the Los Angeles County Market.

The chart below is a measure of relative over- or under-valuation. As you can see, we are returning to fair value very quickly.

Like Orange County, Los Angeles County had one period in the mid 90s when market ratings were good, and the recent undervalued conditions prompted the market rating to issue a strong buy signal. Although the market is not as good as it was, it’s still a very good time to buy in Los Angeles County.

Loaning someone money who doubled their original mortgage is a bad idea

The former owners of today’s featured property were Ponzis who timed the market well. They bought this property at the bottom of the last housing recession, and they rode the equity wave of the housing bubble squandering as they went. What started out as a $288,000 mortgage debt in 1998 ballooned to a income-draining $750,000 by 2005. $472,000 over 7 years is a healthy rate of HELOC abuse.

If you knew these borrowers irresponsibly HELOCed themselves so profusely, if they sobbed to you about their dire need for more HELOC crack, would you give them money? Ostensibly, it would be a loan, but your likelihood of repayment absent a foreclosure looks bleak. Well, someone made that decision and loaned them $25,000. They promptly quit paying the mortgage and squatted for four years until the bank finally foreclosed. Perhaps they paid back the private-party lender during that time. Four years of payment-free living provides some resources, but if I were to venture a guess, I suspect the friend got nothing.

[idx-listing mlsnumber=”OC13235880″]

30732 CALLE BARBOSA Laguna Niguel, CA 92677

$729,900 …….. Asking Price
$360,000 ………. Purchase Price
7/22/1998 ………. Purchase Date

$369,900 ………. Gross Gain (Loss)
($58,392) ………… Commissions and Costs at 8%
============================================
$311,508 ………. Net Gain (Loss)
============================================
102.8% ………. Gross Percent Change
86.5% ………. Net Percent Change
4.5% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$729,900 …….. Asking Price
$145,980 ………… 20% Down Conventional
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$583,920 …….. Mortgage
$146,646 ………. Income Requirement

$2,914 ………… Monthly Mortgage Payment
$633 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$152 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$90 ………… Homeowners Association Fees
============================================
$3,788 ………. Monthly Cash Outlays

($685) ………. Tax Savings
($787) ………. Principal Amortization
$233 ………….. Opportunity Cost of Down Payment
$111 ………….. Maintenance and Replacement Reserves
============================================
$2,660 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$8,799 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,799 ………… Closing Costs at 1% + $1,500
$5,839 ………… Interest Points at 1%
$145,980 ………… Down Payment
============================================
$169,417 ………. Total Cash Costs
$40,700 ………. Emergency Cash Reserves
============================================
$210,117 ………. Total Savings Needed
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