Our team is committed to continuing to serve all your real estate needs while incorporating safety protocols to protect all of our loved ones.
In addition, as your local real estate experts, we feel it’s our duty to give you, our valued client, all the information you need to better understand our local real estate market. Whether you’re buying or selling, we want to make sure you have the best, most pertinent information, so we’ve put together this monthly analysis breaking down specifics about the market.
As we all navigate this together, please don’t hesitate to reach out to us with any questions or concerns. We’re here to support you.
– Kevin Gueco, DRE #01461677
Welcome to our February newsletter. This month, we cover long-term trends in the United States, considering the ways in which history can inform our future. We also compare the 2020 and 2019 calendar years in our local area, using 2019 as a “normal” year to reflect upon 2020 trends.
We don’t want to jinx anything, but we may have turned the corner on the pandemic. New cases are declining after peaking in early January, and the United States is administering over 1 million vaccinations a day. Whether we are on the back side or not, COVID-19 will have lasting effects on how we live and work. In particular, the pandemic has substantially raised housing demand. Working from home, or at least working in non-office settings, is here to stay, and all-time-low mortgage rates have incentivized renters to enter the housing market because the cost of buying may be lower than renting. For these reasons, we suspect that demand will continue to remain high through 2021.
As we navigate an ever-changing economic landscape, we remain committed to providing you with the most up-to-date market information so you feel supported and informed in your buying and selling decisions.
In this month’s newsletter, we cover the following:
- Key Topics and Trends in February: We are entering 2021 with a low supply of houses and unseasonably high demand for the winter months. Mortgage rates are likely to remain at their current historic lows through 2021, making rising home prices more affordable and causing more buyers to enter the market. The homeownership rate is at a 10-year high.
- February Housing Market Updates: Single-family homes in the South Bay are showing the highest demand. The North Bay and West Side are facing a jump in new listings hitting the market, which has impacted prices.
Key Topics and Trends in February
This month, we are taking a step back from discussing short-term trends so that we can dive into secular trends (trends that are neither seasonal nor cyclical) to help us understand the current housing environment. We use three metrics in the chart below—the ratio of single-family home starts (new construction)/single-family homes sold, Months of Supply Inventory, and average 30-year fixed mortgage rates—as they all provide insight into supply and demand. The first two metrics indicate levels of supply and demand. The ratio of single-family home starts to new single-family homes sold indicates the level of production versus demand, while Months of Supply Inventory (MSI) reflects the number of months it would take for the current inventory of homes on the market to sell given the current sales pace. The third metric, average 30-year fixed mortgage rates, shows the cost of financing a home.
The early 1980s marked the highest mortgage rates in the United States—over 18%—as well as the secular decline in rates since that peak. During the 16-year period between 1980 and 1995, the ratio of housing starts to homes sold stayed fairly stable, which is ideal in terms of equilibrium in supply and demand. However, MSI began to shift lower around 1990, indicating that demand was increasing relative to supply. We saw a small peak in MSI in 1995, which declined until the housing bubble began to burst in 2005. During this period, mortgage rates experienced the steepest drop, with an approximately 11% decline. The difference in mortgage payment from 18% to 7% equates to about $10,000 per month in savings on a $1 million mortgage, making homes much more affordable.
This period contained an economic growth cycle. Demand for housing dramatically increased, while the housing-starts-to-new-homes-sold ratio declined and MSI decreased and held at around four months of supply. Credit lending standards during this 11-year period were extremely lax while mortgage rates continued to decline, which further increased demand. Home prices more than doubled from 2000 to 2005. This period marked the beginning of the housing market decline and home appreciation deceleration.
Typically, MSI and the housing-starts-to-new-homes-sold ratio track together, but from 2005 to 2010, they started to show an inverse relationship. MSI rose, while the ratio declined. This happened because, with the Great Recession, demand and new production dropped precipitously and didn’t rebound until 2012. After 2012, the housing recovery began, and we experienced another stable state with fairly steady supply and demand dynamics and consistently low mortgage rates.
During the pandemic and the resulting recession in 2020, mortgage rates fell further, and demand increased dramatically. MSI dropped sharply in 2020 due to high demand and dwindling supply. Mortgage rates have never been lower, which incentivizes more people to enter the market.
The significance of the buying frenzies from 1995 to 2005 and during 2020 is best reflected in the homeownership rate, which also shows the lingering effects of the housing bubble. Home prices started increasing again in 2012, but the homeownership rate declined until 2016. From 2016 to 2020, about half of the homeownership increase occurred in the second quarter of 2020 alone.
It’s difficult to overstate just how unique homebuying trends were in 2020. The homeownership rate increased 2.6% over a single quarter. For reference, out of 223 quarters, only three other quarters had a change above 1%. This was a gigantic jump.
Although we do not expect the same level of buying in 2021, the environment is right for sustained high demand. Supply remains low, and we anticipate a competitive landscape for buyers over the course of this year.
February Housing Market Updates for selected
Los Angeles areas
In this newsletter, we break down three luxury areas in Los Angeles as follows:
- North Beach: includes the Pacific Palisades, Santa Monica, and Venice
- West Side: includes Beverly Hills, Brentwood, West Hollywood, and Westwood
- South Bay: includes Hermosa, Manhattan Beach, and Redondo
In January, the median single-family home price decreased in the West Side and South Bay on a month-over-month basis, while North Beach prices rose. The South Bay median price decline was somewhat surprising to us, so we dug a little deeper. The vast majority of the time, median price is a better metric than average price; however, in January 2021, the homes sold in South Bay were meaningfully smaller by square foot than normal. Usually, the average home size is around 2,400 sqft, but in January, the average was around 2,000. We found that the price per square foot in the South Bay was the highest it’s been over the last two years.
Single-family home inventory grew much higher for North Beach and the West Side in 2020 relative to 2019, while South Bay trended similarly to 2019 (a “normal” year) in 2020. The unusual spike in inventory was short lived due to demand in the area. In the selected markets, inventory retracted as quickly as it increased and is now near last year’s levels. Single-family home inventory will likely decline further as we make our way through the winter months, since demand remains noticeably high.
Days on Market (DOM) declined slightly across the selected markets throughout 2020, spending less time on the market in January 2021 than they did in January 2020. As we will see, the pace of sales has contributed to the lower MSI over the past several months.
We can use MSI as a metric to judge whether the market favors buyers or sellers. The average MSI is three months in California (far lower than the national average of six months), which indicates a balanced market. An MSI lower than three means that buyers dominate the market, and there are relatively few sellers (i.e., it is a sellers’ market), while a higher MSI means there are more sellers than buyers (i.e., it is a buyers’ market). The MSI remains below three in the South Bay, highlighting the demand in the area. North Beach and West Side MSI rose to 7.4 months of supply in January, corresponding with the high level of new listings that came to market, favoring buyers.
In summary, the demand present in the select Los Angeles neighborhoods has kept home prices relatively stable. Inventory for single-family homes and condos will likely decline further this year, and fewer sellers will likely come to market, potentially lifting prices higher. Overall, the housing market has shown its resilience through the pandemic and remains one of the most valuable asset classes. The data show that housing has remained consistently strong through this period.
As always, we remain committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo.