Nov042013

Ten highest rated housing markets in West Los Angeles County

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One of the functions of this blog is to provide timely housing market information to buyer and sellers. Until recently, I could only provide good data and analysis for Orange County, but I’ve recently expanded my coverage area to include Los Angeles, Ventura, Riverside, and San Bernardino counties.

If you’ve been reading this blog for a while, you will recognize the standard data analysis techniques and presentations in today’s post. Since all housing markets in Southern California are related, some of this analysis may be redundant, but there are significant differences between these markets that are worth exploring. I intend to do more of these posts covering other aspects of the housing market in the coverage area.

The purpose of the reports I publish are to answer a basic question every house hunter faces: where should you look for a home. Many people already know exactly where they want to live; however, many others are open to a variety of locations within a geography close to work, schools, shopping, friends, and family. Finding a good deal in a relatively undervalued market has been difficult or impossible to determine in the past. No longer. The OCHN housing market reports provide detailed analysis of every city and many zip codes within the SoCal market to help buyers narrow their search or perhaps widen it to include areas they may not have previously considered.

Further, I am very close to launching a major upgrade to the website. I have worked for several months on a custom search system that incorporates the cost of ownership calculations and market analysis you see here on a daily basis. Instead of my one-off property analysis for daily profiles, the new system automatically calculates the cost of ownership and many other variables for every property on the MLS. This opens up several new methods of searching for properties available nowhere else.

Financial concerns are not the only criteria people use in searching for a new neighborhood, so in addition to the proprietary financial analysis, the new system also provides details on schools, shopping, and other community features. This new system should be ready for launch very soon. Stay tuned.

Los Angeles County Housing Market

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 recent interest rate spike has quickly lowered the affordability ceiling, but recent declines in mortgage rates over the last 30 days will help push the market a little higher.

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.

Buyers should be rightfully concerned about forming another housing bubble. The current rate of price appreciation exceeds even the bubble rally of 2004! If the market wasn’t undervalued based on the relationship between the cost of ownership and the cost of rent, I would be raising the alarm bells about another bubble. That’s the value of good data. Price increases alone don’t tell the whole story.

The decline in affordability is mirrored by a strong increase in the cost of ownership. The market went from dramatically undervalued to fairly valued in a very short period of time.

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.

The rate of rent increase is healthy, but relatively low by LA standards.

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.

There is still investment opportunity in Los Angeles County, but rising prices has made these opportunities less numerous, and they are only found now in marginal markets. That being said, the opportunities are still there for a careful investor.

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.

Ten highest rated markets

The ten best markets in West Los Angeles County have little in common. Rancho Pals Verdes is a premium neighborhood while Carson and North Hills are discount neighborhoods. What these neighborhoods all have in common is that the recovery has not driven prices up too high there relative to rents. I believe each of these markets will recover further until they are no longer undervalued.

Five lowest rated markets

Like Orange County, the five lowest rates markets do all have something in common: they are on the coast. My rating system doesn’t like these communities not just because they cost far more than rental parity. Being inflated relative to rent didn’t stop Rancho Palos Verdes from getting on the bargain list. The communities below are not just inflated relative to rent, they are inflated relative to their historic relationship to rent. In other words, they are overvalued even by their own standard.

Can these markets get even more overvalued. Sure. These markets tend to attract more cash buyers, and they aren’t constrained by financing. Further, the 1% has done very will over the last 25 years, so perhaps these communities will sustain a greater level of price inflation as the very rich store their wealth here. Buying in these neighborhoods is a macro bet on the continued prosperity of the top 1%. Right now, that looks like a good bet, but if tax laws change, or if the 1% find better places to put their money, these values may not stay quite so inflated.

Two minutes you will enjoy…

[raw_html_snippet id=”newsletter”]

[idx-listing mlsnumber=”NP13223047″]

346 ORANGE BLOSSOM #152 Irvine, CA 92618

$279,900 …….. Asking Price
$168,000 ………. Purchase Price
9/3/2002 ………. Purchase Date

$111,900 ………. Gross Gain (Loss)
($22,392) ………… Commissions and Costs at 8%
============================================
$89,508 ………. Net Gain (Loss)
============================================
66.6% ………. Gross Percent Change
53.3% ………. Net Percent Change
4.6% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$279,900 …….. Asking Price
$9,797 ………… 3.5% Down FHA Financing
4.15% …………. Mortgage Interest Rate
30 ……………… Number of Years
$270,104 …….. Mortgage
$87,009 ………. Income Requirement

$1,313 ………… Monthly Mortgage Payment
$243 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$58 ………… Homeowners Insurance at 0.25%
$304 ………… Private Mortgage Insurance
$330 ………… Homeowners Association Fees
============================================
$2,248 ………. Monthly Cash Outlays

($183) ………. Tax Savings
($379) ………. Principal Amortization
$14 ………….. Opportunity Cost of Down Payment
$55 ………….. Maintenance and Replacement Reserves
============================================
$1,755 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$4,299 ………… Furnishing and Move-In Costs at 1% + $1,500
$4,299 ………… Closing Costs at 1% + $1,500
$2,701 ………… Interest Points at 1%
$9,797 ………… Down Payment
============================================
$21,096 ………. Total Cash Costs
$26,900 ………. Emergency Cash Reserves
============================================
$47,996 ………. Total Savings Needed
[raw_html_snippet id=”property”]