The Real Story on Luxury Housing in L.A. – Part 1

This week, news broke in The L.A. Times and across the country about the decline in values of luxury homes in California, specifically in Los Angeles, San Francisco and San Diego.

I wanted to look deeper into the numbers on this story because both myself and many of the luxury home agents I encounter still see a strong market at the upper end of the spectrum here in L.A.

I also want to emphasize that I’m not out to prove or disprove this story. I’m just trying to find out where the disconnect is. People who know me will tell you I am not the average “Realtor with Rose-Colored Glasses.” I’m the one who will tell you not to listen to the forecasts of the National Association of Realtors, because they’re always more optimistic than they should be. Perhaps, that’s my pragmatist background as a former newspaper journalist coming through. But my newspaper background also gives me insight into how news is created, which makes me equally skeptical when I see a story like this.

First of all, the genesis of the story was a report by First Republic Bank. You can read the First Republic press release by CLICKING HERE.

The study defined “luxury homes” as 3,000 to 6,000 square feet, three to six bedrooms, and three to six bathrooms. These “luxury homes” were located in Arcadia, Beverly Hills, Calabasas, La Canada Flintridge, Encino, Los Angeles, Malibu, Marina del Rey, North Hollywood, Pacific Palisades, Pasadena, Playa del Rey, Santa Monica, Studio City and the West Los Angeles enclaves of Bel Air, Brentwood and Westwood. And the average sale price of these “luxury homes” in Los Angeles was $2.35 million in the first quarter of 2008.

OK, right away, in looking at the study’s criteria anyone who is familiar with luxury homes in L.A. will quickly understand how these criteria are flawed. The criteria include many homes that simply would not be considered luxury. There are tons of 3-bedroom, 3,000 square foot houses in these areas that are not luxury homes, they are not attracting luxury buyers, and yes, their values are dropping tremendously. In this market, if you include smaller homes like that in an index that’s supposedly “luxury,” well, of course, the values are going to fall. Those are not luxury homes.

Secondly, let’s look at what is in the index in one relatively focused area – Beverly Hills, Bel Air, Brentwood. Let’s look at what sold in the first quarter that met the study’s criteria and sold for $2.35 million or less. There were six homes. Here are the links to the homes: 1, 2, 3, 4, 5, 6. These are all decent homes. However, they are not what people normally consider luxury in these parts of L.A. These are not mansions in Bel Air that would impress the Fresh Prince. This is not the Beverly Hills the Hillbillies dreamt of.

By contrast, there were 33 homes that met the study’s criteria and sold for more than $2.35 million. The point is that there clearly were homes that would not be considered “luxury” that pulled down the average sales number in the report.

Additionally, let’s look at sales of homes in the same areas that did not fall within the study’s criteria that I would consider “luxury.” There were at least 11 homes that sold in the first quarter that were more than 6,000 square feet in Beverly Hills, Bel Air and Brentwood alone. Here are the listings: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11. Are these not more indicative of what is considered “luxury” in this part of town? If you want further proof of how flawed the study's criteria is, consider that the home that the L.A. Times profiled when it wrote about the report didn't meet the report's criteria either: CLICK HERE

OK, I think I’ve established that the study has a flawed definition of "luxury." But what about the underlying question of whether there is a slowdown in the luxury housing market? Well, I’m going to address that in my next post.