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Residential Real Estate - 2003 and Beyond
A home is much more than an investment. It can provide comfort, a nest egg and a stepping stone to increasing wealth.
As long as rental rates remain high, interest rates low and the IRS allows capital gains exemptions and mortgage interest and property tax deductions, everyone should plan to become a homeowner.
Supply and demand determine the market value of any product, including real estate. This year’s wild and crazy market has many more buyers for entry-level and downsizing properties than there are for properties selling for more than $500,000. For that reason, sales prices for these properties have increased more than prices for more expensive properties.
If you already own a home under $500,000 and plan to sell and buy in the same general location and price range, it does not matter if prices are going up or down. What you make or lose on your home will be essentially the same proportion you save or spend on your purchase.
For more expensive homes, the appreciation percentage begins to diminish, especially since there are so many luxury homes over the $800,000 range in the Los Angeles, Orange County and Ventura areas. In slow markets, luxury homes lose a larger percentage of their value than less expensive homes.
Just as retail prices are generally higher during the holidays, more people buy homes between March and September than between October and February. Sellers tend to be more flexible during the slower months, so this is a great time of the year for Buyers to make their best deals.
When are housing prices going to level off? Is the bubble going to pop? Isn’t real estate cyclical? Will there be another downturn similar to the one in the 1990s? Should I sell now? Should I buy now?
Understanding the realities of the Los Angeles basin’s recent real estate history will provide you with the insight you need to plan your real estate moves for the next year.
Although our economy is experiencing a slow-down, the conditions are very different from those leading up to the previous recession. The downturn in the 1990’s was created by a series of events beginning in the 1980s’ when banks and insurance companies invested heavily in real estate without much interference from government regulators.
By the end of the 1980’s the office and retail markets were tremendously overbuilt with diminishing demand and huge vacancies. To attract and maintain tenants, landlords offered extremely low rates with months and months of free rent. Some owners began defaulting on their loans. By the end of 1988, lenders began closing down their commercial divisions and the commercial real estate market started grinding to a halt.
On November 9, 1989, the Berlin Wall came down and the Cold War effectively came to end. This impacted the huge San Fernando Valley-based defense industry as well as the peripheral businesses it supported.
By 1990, many people, unable to find new jobs at their previous income levels, found themselves overextended and began defaulting on their loans. Many left the Los Angeles area to look for work in other cities. Home foreclosures began to increase bringing property values down. This had a snowball effect on the market.
Iraq invaded Kuwait on August 2, 1990, and the U.S.-led coalition began Operation Desert Storm on January 17, 1991.
Then came what I call “The Four Plagues”: The Riots, Fires, Earthquakes and the Floods.
The L.A. Riots broke out the evening of the Rodney King verdict on April 29, 1992. Faith in the city was crushed, and foreign investors began unloading their properties. (Remember the huge amount of Japanese investments in the 1980’s?) Disillusioned Los Angelenos began moving out of the area. The demand for housing fell as people continued to lose their jobs or face economic uncertainty.
- February, 1992 The First El Nino floods
- November, 1993 Calabasas/Malibu fires
- January 17, 1994 Northridge Earthquake
- February, 1998 second El Nino floods. So. Calif. Declared a disaster area
There has been very little new entry and mid-level priced residential construction in L.A., Ventura and Orange counties since the 1990s; certainly not enough to keep up with the increased population of returning Californians, First-Time-Buyers, Empty- Nesters wanting to downsize, relocations from other states and foreign immigrants.
Unless a large number of new developments appear on the market, or large numbers of people start moving out of the area, home prices should continue at their current levels and real estate will remain a secure investment vehicle, as long as Buyers stay within their means. | 
