Commercial Real Estate Crashing

It's not just the housing market that's taken a dive. Things have started going south in commercial real estate, too. Here's an excellent post by a Globe Street blogger about the crash that is slowly going on in commercial real estate: Slow Motion Crash.

I source a lot of off-market commercial deals for select investors, and I certainly have seen an increasing difficulty in getting deals done this year on the commercial side. The blogger points out that many sellers are still in that unrealistic expectations stage, where they're still trying to get top dollar for their properties at a time when buyers (if they're actually buying) are expecting to pay less. I would add that I'm seeing a general reluctance of many buyers to close deals in the midst of credit problems, financial market problems and a lagging economy. In fact, one of the buyers I know told me several months ago that they were simply going to take the year off (at least until the 4th Quarter). And beyond just a couple of bloggers, Wachovia earlier this month issue a negative report on the state of commercial real estate. Finally, here in L.A. (and elsewhere) we've got some commercial real estate companies already encountering serious troubles, including Meruelo Maddux and Maguire Properties among others. Yes, the economic malaise has indeed spread to commercial real estate

Is Flipping Time Here Again?

What a crazy thought!

How could anyone think of flipping in this horrible real estate market?

Well, in the past few weeks, two investors I work with have asked me to be on the lookout for possible houses to flip in the coming months. They are noticing something that I am noticing: There are some super-cheap houses being dumped on the market by lenders in neighborhoods where prices will never fall that low.

For example, in one neighborhood I watch closely -- where no home has sold in the last year for less than $925,000 -- one lender dumped a home on the market for around $650,000. It was promptly snatched up. The home was a cosmetic fixer.

There are others. If you buy one of these cheap homes and actually live in it for several years, buyers can walk into some serious equity even if the market continues to decline dramatically. Or you could try a flip. But in this market, flipping is a dangerous game.

In the flipping heydays, many people could overpay for a property, overpay for renovations and sell the property for less than it should sell for – and still make money. Nowdays, you can do everything right – and still lose money.

This is definitely not a flipper’s market. Just see what’s happened to the No. 1 celebrity flipper, Bravo TV’s Jeff Lewis.

But it can be done.

The greatest Mega-Mansion play

There was a great story in the L.A. Times this week about the contunied heavy pace of mega-masions being built in Bel-Air Beverly Hills and Homby Hills. The continued strength of the ultra-luxury market in Los Angeles is something that I've talked about repeatedly in this space in the last year as it's been noticed by myself and others that work with luxury homes.

If you missed it, here's my previous posts about this topic:

• The Real Story on Luxury Housing in L.A. -- Part 1
• The Real Story on Luxury Housing in L.A. -- Part 2
• Off-Market Mansions in L.A.
• L.A. Market for $10 million+ homes

Those of you who know me well know I've been working with an experienced mega-mansion builder to put together a mega-mansion development. We have targeted the land and planned out the development. It's an incredibly conceived project. But given the current economic environment, it's been difficult finding an additional equity partner even for an experienced developer.

That said, there are many ways for a possible JV partner to come into this project. It could be simply as an equity partner. Or it could be someone who simply wants to build one of these homes, but instead of building a home just for themselves, they can leverage the dollars they'd be putting into their own house into several others and make a substantial profit. Either way, it's an opportunity to be a part of the most incredible luxury housing projects in the city's history and invest in one of the only still-strong segments of the housing market.

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.

European buyers in L.A.

One of the trends we’ve seen lately – particularly with high-end properties – is increasing interest from foreigners in buying California real estate. In the last month alone, my office has been working with serious high-end buyers from Switzerland, England, Germany, Croatia and Greece. With the weak dollar, falling prices and many American buyers and investors keeping their money away from real estate, Europeans have sensed a buying opportunity. While many Americans are still waiting to see if the real estate market will still fall further in 2008 (and it might), buying now may be a smarter play for Europeans. Chances are that even if housing prices decline slightly more, they might not decline enough to compensate for the tremendous advantage the Euro has over the U.S. dollar right now. That means the Euro may buy you more now than it will 6 months or a year from now, even if prices decline. There’s no guarantee. But there’s also no denying that prime real estate in Los Angeles and elsewhere in California is at a deep discount for Europeans.

Scheduled Foreclosures – Where are the continuing problems in L.A.?

Back in January, I did a breakdown by zip code of where the foreclosures were happening – and where they weren’t. At that time, the numbers clearly showed that while many areas of Los Angeles were drowning in foreclosures, the area broadly defined as L.A.’s Westside was not hit as hard with foreclosures as other parts of Los Angeles. Since then, there’s been a number of reports talking about how the Westside has generally weathered the housing market decline better than elsewhere. This is not to say that the Westside has not seen declines. It has. In some areas, the declines have been significant. But overall, the drops in housing prices on the Westside have not been dramatic as elsewhere in Los Angeles.


So where are things going from here?

Well, we know that there are still plenty more mortgage resets coming yet this year. So we’re definitely not out of the woods yet. The nasty subprime resets peak later this year, so we may begin to see some relief later this year. But we also have many loan recasts of those nasty option ARM loans remaining. (Yuck!).

But still, these are likely to be more of a problem in some areas than others. The reason is that in some areas – like the Westside – where housing prices have held most of their ground, where there’s still a relatively low supply, and there’s still decent demand, it will be easier for people to get out of their predicaments by selling. You see, the prices and the foreclosures are symbiotic. So, we still need to look at foreclosures by neighborhood. And even though zip codes are too big of an area to truly be considered one neighborhood, it’s as close as we’ll get from the available data.

So this time I’ve decided to look forward a bit. The following are the numbers of scheduled foreclosure auctions between April 22^nd and May 22^nd for each zip code. The source is propertyshark.com:

SAN FERNANDO VALLEY

• Woodland Hills (91364, 91367) – 13
• Tarzana (91356) – 8
• Encino (91316, 91436) – 7
• North Hollywood (91601) – 5
• Sherman Oaks (91403, 91423) – 4
• Valley Village (91607) – 3
• Studio City (91604, 91602) – 1

LOS ANGELES

• West Hollywood (90046, 90069) – 12
• Echo Park (90026) – 4
• Silver Lake (90039) – 4
• Hollywood Hills (90068) – 2
• Miracle Mile (90036, 90048) -- 3
• Los Feliz (90027) – 1

PLATINUM TRIANGLE

• Beverly Hills (90210, 90211, 90212) – 2
• Brentwood (90049) -- 1
• Bel Air/Holmby Hills – 0

WESTSIDE

• Sawtelle/West L.A. (90025) – 1
• Westwood (90024) – 1
• Cheviot Hills/Rancho Park (90064) – 1
• Pacific Palisades (90272) – 0
• Venice (90291) – 0
• All of Santa Monica (90401, 90402, 90403, 90404, 90405) – 3

See what I mean. It’s not like this is La Puente (42), Inglewood (28), Norwalk (27) or West Covina (20).

Christopher featured in BusinessWeek

BusinessWeek recently did a special report on the state of luxury housing in the U.S. There were several articles in the report, and I was interviewed for and quoted in two of them.

Here are links to the full articles as well as the excerpts wherein I was quoted:

Where the Home Price Gaps Are Biggest

• Christopher Hain, a real estate agent with Ramsey-Shilling Associates in the Hollywood Hills, says homes of $10 million or more are in short supply in the Los Angeles area. In Beverly Hills, house prices at the lower end of the market—that is, $1 million or so—are much weaker than the top of the market, he says.

• "I'm working on three developments: $5 million homes in Brentwood, $6 million homes in Beverly Hills, and $27 million homes in Bel Air," he said. "Which one am I most confident in? The $27 million development. I know they're going to sell because there will be nothing compared to it."

How the Super-Rich Buy Homes

• A well-connected agent can find a buyer by calling another luxury agent or wealthy client interested in a great off-market listing with unique characteristics.

• "Lots of really good stuff, you don't even need to put on the market," says Christopher Hain, real estate agent with Hollywood Hills (Calif.)-based Ramsey-Shilling. "Agents facilitate the deal because it allows them to do both ends of the deal."

Duplex Mania!!!

The big news in local real estate today is that the federal Office of Federal Housing Enterprise Oversight (OFHEO) announced it has temporarily increased limits on conforming loans offered by government-sponsored enterprises, Fannie Mae and Freddie Mac. Conforming loans are those that the government will buy from lenders, so the interest rates are lower sometimes as much as a full percent lower.

Much has been made about how this can help a lot of homeowners and homebuyers in L.A. The old limit for a single family residence was $417,000 and now it’s been raised to $729,500 for L.A. County.

But I think this could be even bigger news in the best parts of town for duplexes, triplexes and fourplexes.

The old limits:

One-family	Two-family	Three-family	Four-family
$417,000.00	$533,850.00	$645,300.00	$801,950.00

The new limits:

One-family	Two-family	Three-family	Four-family
$729,750.00	$934,200.00	$1,129,250.00	$1,403,400.00

To understand futher why I think this is such a big deal for 2-4 units, you just have to do the math and look at the MLS.

If you’re the standard putting 20% down on a single family home, these loan limits allow you to buy a single-family home up to $912,187. But you still won’t be able to get a great home in a great part of town for that price.

However, if you get a duplex and put 20% down, you can afford $1,167,750. Can you get a great duplex in a great part of town for that. Absolutely! I can show you plenty of them right this minute.

And the same goes for triplexes at $1,411,562 and fourplexes at $1.754,250.

For now, these limits only apply to loans originated between July 1, 2007 and Dec. 31, 2008. It may or may not be extended beyond this year. But I can tell you for sure, if I was going to buy a duplex, triplex or fourplex and put at least 20% down, this sure would make me happy. And in fact, I sent this exact information out this afternoon before posting it here to two of my own clients who are looking to buy this type of property.

Is the Westside different?

Some others are starting to take notice of a trend that's becoming apparent with Westside L.A. real estate and that I began to chronicle in January. That is, Westside real estate is weathering the storm much better than the rest of L.A. This is not to say that things are totally rosy on the Westside. If you bought a condo in 2005, it's probably worth about the same as it was then. But the flood of foreclosures that's pulled down other parts of the city just hasn't hit the Westside.

Here's a recent post from the Sweet Digs blog: Is Real Estate Different in the Westside?

And here's the link to my original January posting that puts some solid numbers to this phenomenon: Tons of L.A. Foreclosures -- except on the Westside

Bottom Fishing in South Florida

No, when I say "bottom fishing in South Florida," I'm not talking about a nice charter boat in the gulf stream hunting for sea bass. '

I'm talking cheap condos!

Yes, the attractive South Florida condo market is overbuilt and like almost everywhere else has gone bust.

But the Wall Street Journal's online real estate pub has a great article about the new cottage industry this has spawned for snatching up discounted properties:

See: Florida Bust Spawns Vulture Culture

And if you're interested in getting into the South Florida market, I've got access to a few off-the market opportunities from builders that are trying to unload before they go bust.

Was the Fed bailout good for Los Angeles?

Wall Street cheered. Mortgage brokers’ phones started ringing again. And certainly, we real estate agents were dancing in the aisles this week when the Federal Reserve slashed interest rates ¾ of a point.

But was this good for Los Angeles?

Certainly, it’s good for my pocketbook. I’ll likely have some clients get off the fence and buy homes in the near future with interest rates falling. And buying this year is probably a good move. Prices have come down (dramatically in some parts of town). Inventory is high. Foreclosures are surging. And once again, money is cheaper.

But many are arguing whether loosening the flow of money is ultimately good for the Los Angeles economy:

• The L.A. Times says the U.S. isn’t taking its own economic advice. But unfortunately, their analysis fails to do any examination of the rate cut’s impact on the local economy.

• The eternal skeptic (and thanks for that), Dr. Housing Bubble suggests that we’re just delaying the pain. And they may be right.

But the reality is the pain will not be felt the same everywhere. Dr. Housing Bubble has done a great job of pointing out some of the ridiculous prices for real estate in the greater Los Angeles area. See Real Homes of Genius. But that’s just not the case in the most desirable areas – Santa Monica, Brentwood, West L.A., etc. Prices haven’t fallen dramatically. Money is now cheap again. And prices are likely to EVER fall dramatically.

The housing market will not recover in 2008. It’s almost a mathematical certainty. Too many homes for sale. Too many foreclosures. Too many adjustable rate mortgages re-setting. But come 2009 the number of subprime ARMs re-setting drops off dramatically. To think that the foreclosure flood will continue, you have to assume that more credit-worthy borrowers will also be defaulting like crazy. Yes, some will. But not at the same levels. And it’s probably even less likely to happen with the fed cutting interest rates. And it’s very unlikely that there will be a flood of foreclosures among credit-worthy borrowers in the highly desirable areas of Los Angeles where prices have not fallen dramatically. The result: Prices are still going to plummet in places like Reseda and El Monte. But not in places like Santa Monica. Nope. Nope. Nope. I just don’t see it happening.

Maybe I’m wrong. But I think the federal reserve is helping widen the Angeleno divide. Housing market pain for the have nots. Housing market gain for the haves.

Mexican housing booming

Here's an interesting story from CNN about the Mexican housing economy:

It's booming!!!

And the story predicts that it will continue to boom. This is good news as I know several developers who have projects underway south of the border. In fact, if you want to invest you should give me a call, because a few have had trouble with financing these past few months because a lot of people have (unjustly) been afraid of anything residential -- even in booming markets.

Handling Unpredictability

The market is very unpredictable right now. But here’s what I think.

The short answer is it depends on where you’re buying and how you’re financing your purchase.

Prices came down considerably in 2007. In some parts of L.A., we will probably see further price declines in 2008. The more desirable areas won't suffer as badly.

2008 will definitely be a good year to buy. The reason is that even if the home isn’t quite at the bottom, it’s close and sellers are still willing to deal. That means you can offer less on a lot of houses and get your house at rock bottom price. I just did this with a client in Woodland Hills. Even in this declining market, the house is worth much more than they paid.

Most experts are predicting a recovery in 2010. Some are predicting prices will start to go up again in 2009 and some are predicting it will still be a slow market.

The biggest question is the mortgage market. Right now, it’s still very tough to get a loan (although it's better than August). 100% financing is nearly impossible. Even 90% financing is tough to get for most buyers. Until the mortgage problems are solved, prices won’t start going up again. But once they are, people will start jumping back into the market because in many areas of L.A. prices have become very reasonable.

In 2008, the best times to buy will likely be the spring and fall. However, if you hear news that the loan situation is improving, you’ll want to buy because that will signal the beginning of the end of the declining market.

Of course, I can’t guarantee any of this. But this is what I think.

And here's what some others think: