The Real Story on Luxury Housing in L.A. – Part 2

In Part 1, I looked at the flawed criteria of a recent report on luxury housing that showed price declines in L.A. “luxury housing.” I explained why the criteria in the study included many non-“luxury homes,” while excluding many true “luxury” homes.

The study was released by First Republic Bank, and the company’s press release almost seemed to acknowledge its flaws. The release quoted one L.A. agent explaining the discrepancy in the market:

• "The market is slow until about $4 million, but the moment you hit that threshold, there is consistent, pent-up demand," said Barry Sloane of Sotheby's International Realty in Beverly Hills. "The higher the price, the greater the demand, and the more sales there are. It's extraordinary."

So the authors of the study must have realized that they were really combining two separate markets – non-luxury and true luxury – into one report and calling it “luxury housing.” Unfortunately, however, the media reports did not examine, nor did they mention, the fact that the demand is still strong for true luxury housing.

OK, but is the basic premise of the report still true? Are luxury home prices slipping in L.A.? Obviously, Barry Sloane would probably say no. Other agents I’ve talked to say no. But are these agents’ anecdotal claims supported by more legitimate statistics?

I’m going to look at this several different ways to make sure we can see a trend. Also, I want to make sure we’re looking only at luxury.

First, I’m only looking at single-family homes in Beverly Hills, Bel-Air and Brentwood. No one can argue that’s luxury. And that’s the area I know best. The First Republic report included some questionably luxury areas (North Hollywood?).

Second, I really disliked including 3 bedrooms, and looking at the actual houses in the study, the 3-bedroom criteria in the First Republic area clearly led to non-luxury homes. So we’re starting at 4-bedrooms and we won’t limit it at 6-bedrooms like the First Republic report. Also we’ll look at both “4+ bedrooms” as well as the even more restrictive “4 beds, 4 baths, 4,000+ sq. ft” in the interest of trying to find a trend.

Finally, we’re going to look at sales prices as well as sales prices per square foot.

Drum roll please …

FIRST QUARTER 2008 -- Beverly Hills, Bel-Air and Brentwood

• 4 bedrooms or more

– 69 sales (-20%)

-- $ 4,745,057 avg. sales price (+6%)

-- $881/SF (+16%)

• 4 bedrooms or more, 4 baths or more, 4,000 sq. ft. or more

– 30 sales (-30%)

-- $6,156,463 average sales price (+23%)

-- $944/SF

FIRST QUARTER 2007 -- Beverly Hills, Bel-Air and Brentwood

• 4 bedrooms or more

– 86 sales

-- $4,462,446 average sales price

-- $760/SF

• 4 bedrooms or more, 4 baths or more, 4,000 sq. ft. or more

– 43 sales

-- $5,007,625

- $767/SF

As you can see from the data, while sales are actually down over the first quarter of last year, prices are up over last year no matter how you look at it. The source for this data was The Combined Los Angeles/Westside Multiple Listing Service.

This is not to say that luxury homes have not been unaffected by the decline in the housing market. They have been affected. But the bottom line is the more expensive, the less affected it’s been. The better the area, the less affected it’s been.

I think this squares with what I’m seeing and what most agents I talk to are seeing in the luxury market. Demand is strong. Yes, buyers are more hesitant and some things are taking a bit longer to sell. If you look at purchases that were made in March, there was a pause. And if you remember, this was a time of extreme turmoil in the financial markets – Bear Stearns collapsing, stock market bottoming – and people were spooked. But at the higher levels – the true luxury – in places like Beverly Hills, Bel Air and Brentwood, prices have not fallen to the extent you heard about in the media last week.

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.

Worst foreclosure areas in Los Angeles County

According to the people over at propertyshark.com, these were the areas in Los Angeles County with the most newly scheduled foreclosures as of May 1. Again, these are nowhere near the prime areas of town:

ZIP CODE	CITY	# OF NEW TRUSTEE SALES
93550	Palmdale	168
93535	Lancaster	158
93536	Quartz Hill	90
93534	Lancaster	88
93551	Leona Valley	84
91342	Los Angeles	83
91331	Los Angeles	81
91744	La Puente	70
93552	Palmdale	70
90650	Norwalk	63
90805	Long Beach	56
90044	Los Angeles	56
91402	Los Angeles	53
91706	Baldwin Park	50

This brings to mind the old nickname for Lancaster: “Land Disaster.”

Off-market commercial real estate

Many of you who read this blog may not know that I also work with commercial real estate -- particularly connecting investors with off-market commercial properties.

I've done more of this in 2008 with the slow housing market.

Because I know so many people in real esate and am an aggressive networker, I'm constantly aware of tons of off-market commercial properties. I've also worked to help developers find equity. And I've even helped developers put together projects.

I'm in touch with institutional investment companies, private equity firms and individual investors. On the flip side, I maintain a lenghty list of off-market deals I'm aware of all over the world.