Los Angeles Real Estate and Economic Forecast to 2020
FROM OUR COMPANY CHIEF ECONOMIST, SELMA HEPP
On Nov. 29, Pacific Union held its first annual Los Angeles Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting in order to project market activity through 2020. Below are some key, high-level takeaways from the live event. To watch the full one-hour presentation, click here.
Both short-term and medium-term, most housing markets across the country remain at low to normal risk.
- Mortgage rates are projected to grow by about 80 basis points by 2020, increasing annually at about a 20 basis-point pace.
- The Los Angeles housing market is currently at normal risk, with some potential increase over the next couple of years.
- The Los Angeles economy continues to grow solidly, with all job sectors except motion picture and sound recording showing positive year-over-year growth. Specific occupations in this sector include actors, audio- and video-equipment technicians, cashiers, motion-picture projectionists, producers, and directors, whose average annual wage is around $96,000.
- Nevertheless, income groups with higher relative increases in employment over the last year have been those making between $140,000 and $200,000, which has boded well for the local economy and housing market.
- The Los Angeles economy has also benefited from solid stock-market gains of large, local, publicly traded companies by market cap. For example, Bank of America, Boeing, Activision Blizzard, and CBRE Group have all seen year-over-year increases in stock values of more than 50 percent.
- Proposed tax changes could significantly reduce future homebuyers’ deductions, making it more expensive to own. Also, the proposed changes could further disincentivize current homeowners from selling, thus exacerbating the region’s inventory shortage. According to an analysis by the Fisher Center for Real Estate & Urban Economics, the elimination of state and local income-tax deductions would cost middle- and high-income Californians an additional $37.9 billion in taxes (at a 35 percent federal tax rate), which translates to a 2 percent to 3 percent decrease in economic activity in California.
- This year saw more strong home price growth in California. In Los Angeles, the median home price increase averaged 8 percent year to date through September 2017.
- An analysis of individual Los Angeles communities shows that there is continual variation in home price fluctuations. Changes are driven by local conditions and relationship to prices in neighboring communities, but most importantly by jobs and income growth.
In segmenting the markets by median home price changes, we use four categories: normal, double-digit, heated, and slowing:
Normal (up to 10 percent median price growth):
While the majority of Los Angeles markets fall into this category, lower single-digit percent median price growth was more evident across South Valley neighborhoods such as Van Nuys, Calabasas, Arcadia, and Sherman Oaks. Higher single-digit percent growth was seen in areas adjacent to central Los Angeles, such as Culver City, Studio City, and Highland Park, but also in more affordable communities on the eastern side of the metro area. Santa Monica, West Hollywood, and Pasadena posted solid 5 percent to 6 percent median price growth. These relatively higher-priced areas saw normalization in appreciation from last year, when median prices increased by 19 percent in Calabasas, 16 percent in Malibu, and 13 percent in West Hollywood. Median homes prices in areas with growth up to 10 percent averaged about $640,000.
Double-Digit (10 percent to 20 percent median growth):
Somewhat contrary to expectation, higher appreciation was seen in relatively more expensive neighborhoods, where median prices averaged about $820,000. Many of these markets are again adjacent to central, desirable Los Angeles neighborhoods but offer a slight affordability differential, including Compton, Inglewood, Toluca Lake, North Hollywood, Valley Glen, and East Los Angeles. This range also includes neighborhoods that have solidly benefited from the Silicon Beach tech influx, such as Manhattan Beach and Venice. Pacific Palisades also enjoyed double-digit percent price increases.
Heated (20 percent-plus median price growth):
Zip codes in Playa Vista -- also popular with Silicon Beach workers -- South Pasadena, and Beverly Hills were among the few in the Los Angeles metro area to see price appreciation of more than 20 percent. Those three cities’ median price averaged about $1.5 million year to date, with Beverly Hills at $2.8 million. A few neighborhoods in South Los Angeles also posted median price gains of more than 20 percent.
Slowing (median price decline to flat):
Neighborhoods where prices lost steam over the last year averaged a median price of about $943,000. Many saw strong appreciation in the year prior and have now experienced a pause in buyer enthusiasm, including Westlake Village, Rolling Hills, and El Segundo, where price growth exceeded 20 percent in 2016. On the other hand, San Marino, where Chinese buyers drove demand in 2016, is now seeing a pause due to China’s amended restrictions on capital outflows.
- Affordability and access to transportation continue to drive differences in home price appreciation. The highest appreciation was seen in markets where job growth with higher-income jobs led the local economy. Overall, homebuyers have experienced heightened competition, with more homes selling over the asking price — 42 percent versus 38 percent last year. Areas where more than six in 10 homes sold for above asking price include South Pasadena, Culver City, and East Los Angeles. Fewer homes sold over the asking price in areas such as Malibu, Calabasas, and Beverly Hills.
- Condominium prices in Los Angeles for newly constructed units continued to firm up, with October prices up 6 percent year over year to $795 per square foot. Resale pricing was also up solidly by 31 percent to $732 per square foot. Following the influx of new construction over the last couple of years, such inventory was down by 30 percent in October on an annual basis, with about 400 units currently on the market. Absorption has remained steady, averaging 14 units per month over the last year. Going forward, there are about 12,000 units currently under construction; however, the development pipeline is heavily weighted with for-rent projects instead of for-sale condominiums. Slow growth in condominium construction should ensure solid price growth in 2018.
- From 2018 to 2020, home prices are projected to increase by 13 percent in Los Angeles, with most of the growth occurring in the next year.
- Lastly, the panel agreed that prices will level off through 2020 rather than decline as they did following the housing crisis a decade ago. Nevertheless, unexpected changes to housing supply and demand or job and income growth would destabilize the housing market and lead to a different outcome.
Selma Hepp is the Chief Economist and Vice President of Business Intelligence for Pacific Union and John Aaroe Group. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.