Real estate roundtable 2010
Four of the South Bay’s most successful Realtors weigh in on home prices, interest rates and the economy.
As 2010 winds down, real estate prices are being anxiously watched, and not just by Realtors. Real estate brought the economy down three years ago. Now, there is hope that real estate will lead a recovery in 2011. Investment Advisor Stuart Chaussee recently spoke to four of the South Bay’s most successful Realtors:
Sandra Sanders is the founder and Broker/Owner of Re/Max Palos Verdes Realty. She is also the CEO of Peninsula Escrow and recently acquired Re/Max All Cities (formerly Re/Max Beach Cities). She is a member of the Re/Max International Hall of Fame.
Steve Watts and his wife Ceci are an established team with 30 years of combined real estate experience. They are among the top 1 percent of residential agents nationwide and have been named Top Team at Re/Max Palos Verdes for the past several years.
Chris Adlam is a principal at Peninsula Sotheby’s International Realty. He has been selling real estate for 23 years.
Raju Chhabria has been Shorewood Realtors number one agent since 1994. He was ranked seventh in the country in residential real estate sales by the Wall Street Journal for 2008 and has over $2 billion in lifetime sales.
In August and September we were closing $30 to $50 million in sales per week… Somebody out there is selling real estate. – Sandra Sanders
Chaussee: Sandra, tell us where we are relative to this time last year?
Sanders: On the Palos Verdes Peninsula we are slightly ahead of where we were last year at this time, as far as sales activity. Transactions are up in all of the South Bay. There are not as many foreclosures and there are more short sales. On the Peninsula, we have a lot of pent-up demand and inventory is down relative to this time last year.
Chaussee: You did say off the Hill there are more transactions this year, right?
Sanders: Yes. There were 150 more transactions this year compared to 2009 at our Re/Max All Cities offices. Our PV Peninsula business is about the same as last year, as far as transactions. But as far as our company is concerned, in PV, I think it is actually a little bit less. We will do over $2 billion in sales this year, even though our new All City offices were only added in April.
We did about $1.7 billion last year. But we did add six All City offices this year for nine months — so that helps.
I announced at our meetings in August and September of this year that we were closing $30 to $50 million in sales per week. I wanted the agents to know that somebody out there is selling real estate.
Chaussee: Last year you mentioned that your number of agents had come down from 500 at the peak to 400. What about now?
Sanders: With the additional offices we have about 600.
Chaussee: Are agents still getting out of the business?
Sanders: Yes. It’s because the market has been down for so long. If the market is down two years, agents can survive. Just about when they are going to give up, houses start selling again. But, it’s been a long time, a long time. Good brokers are trying to encourage their agents who aren’t doing well. If they do work every day, invariably, they will start selling properties. We’ve recently opened a short-sale department because short sales are difficult for a lot of agents. (A short sale is a sale at a price that is less than the property’s loan.)
Chaussee: Are there a lot of short sales on the Peninsula?
Chaussee: What about off the Peninsula?
Sanders: Both. There are a lot of short sales, but not a lot relative to the number of total transactions. I would say in Palos Verdes we have had maybe 45 short sales this year and maybe a thousand off the Peninsula. As a percentage of all sales, on the Peninsula it is less than 5 percent or so and off the Peninsula maybe 10 percent. Lenders want to help the poor homeowner in a lot of cases.
Chaussee: Do you think there are a lot of homeowners in the South Bay who are waiting to sell their homes at a little better price and get out from under the debt? If so, do you think there will be pent-up demand on the sell side for years to come?
Sanders: I’m sure there are people just waiting to get out. But also many people who want to sell want to “move up.” So, I think you’ll have both buyers and sellers active in the market going forward — just more activity in general. There are a lot of people who would like to change their homes — move up or down, but they are scared.
Often you need the buyer from off the Hill to move here. That allows the Peninsula homeowner who sold to that buyer to move up.
Chaussee: Is that happening now?
Sanders: Not as much as we want it to. Still, I think the homeowners on the Peninsula generally had a lot of equity going into this decline and they are conservative. They might feel like they can get a better deal on that pricier home even if they have lost money on their own lower-priced home. So, when the market goes up, and we think eventually it will, you want to have more money in the market at that time, obviously. I think it is probably a very good time to buy, right now.
Chaussee: Has there been appreciation at the very high end in the South Bay? How has the $5 million home done in the past year?
Sanders: I think prices have gone down a little bit, at all levels of the market. However, I don’t think we’re going down any more. Of course we don’t know for sure, but I personally feel that things are going to get better. Everyone wants to see improvement — the government is helping as much as it can. People are really tired of the economy being so bad and are ready to do something. Of course, it is a matter of confidence. If we can see an improvement in confidence, that will improve the market.
Adlam: Realistically, who wants to buy a property if everyone thinks it is going to get worse? So confidence plays a big part in the market. Buyers in general want to feel confident. We have low interest rates and low inventory so it is an encouraging sign in my eyes.
Sanders: When people realize it is at the bottom it will have already started back up. I think things are going to be better in 2011.
Chaussee: Are you hiring new agents now?
Sanders: “New” agents? No. Agents with experience who are coming over from other firms? Yes.
In 2006, the average marketing time was 10 to 12 days. Now, it’s upwards of 90 days. – Steve Watts
Chaussee: Steve, what is your take on the market?
Watts: I will reference the entire Palos Verdes Peninsula in answering that question. The market has continued to slide in value, but not significantly and certainly not as bad as in 2008. But, I believe the market, going forward, still has some “fat” left in it. I can break it down into three price sectors: below $1 million, $1 million to around $2 million, and $3 million and up. Of those three sectors, the fastest growing price range on the Hill has been below $1 million. There has been almost a 250 percent increase in activity from 2007 to 2010. Overall, from 2009 to 2010 we are up about 20 percent in sales.
I completely agree with Sandra that there is tremendous pent-up demand. Interest rates are great and it’s easier to get a loan today, but the lenders are more difficult as far as the ratios they are looking at to qualify. FICO scores have to be higher and your reserves stronger, but you can definitely get a $2 million first mortgage — it is available. The banks are making those loans.
Chaussee: In those three price tranches you mentioned, have homes appreciated or depreciated in value?
Watts: The range from $1 million to $3 million has been very stable the past year. Something else to consider is that three years ago there were ten sales above $5 million in Palos Verdes. This year there was one sale above $5 million. Last year there were five sales above $5 million.
Chaussee: How has the entry-level priced home done this year on the Peninsula?
Watts: I think it has decreased probably 5 percent to 7 percent. Those homes were in the $1.2 to $1.3 level or more, when the market peaked.
Chaussee: So, Steve, you think that we are off from the highs of a few years ago by 25 percent or slightly more?
Watts: Yes. But again, some homes may be off 35 percent to 40 percent but a house in a prime location on the bluffs, for example, may only be down 10 percent. A great example is a property we just closed. They bought in 2005 for $4.4 million and we are closing escrow at $3.75 million. A great property will hold its value, I think, going forward, because there is a lot of pent-up demand and the low interest rates will help drive the market too.
Chaussee: What do you think the market will give homeowners looking out over the next year or two?
Watts: I think we will have the same amount of activity and transactions will be high. I think we will see some slight softening in values. At the low end, below $1 million, we may not see any price decrease at all.
Chaussee: What if you had a prospective buyer who was willing to rent for a year or two before buying? Are they better off waiting or buying now?
Watts: That’s the million dollar question. That is how people think. You cannot make every home purchase based on “Am I getting a great value, or not?” If the home fits the criteria you want for you and your family, a lot of times it makes sense. One thing to consider is that interest rates will probably rise. I believe interest rates will absolutely rise. Right now they are 4.25 percent on a 30-year loan, these are still near all-time lows.
A lot of times we can negotiate future prices for a buyer. If someone is asking $1.2 million and we think it will only be worth $1.1 million a year from now, and the seller agrees to that price and wants to move on, the buyer secures the $1.1 million price and perhaps in a year it is actually worth $1.1 million also. So, we can negotiate future value anyway.
Chaussee: I think we can call that a “buyer’s market.”
Chaussee: How long does it take to sell a home now?
Watts: To give you some perspective, in our very strong market in 2006, the average marketing time was 10 to 12 days. Now, it’s upwards of 90 days. Close to 90 percent of every home that now sells has a price reduction in it, from the first list price. Some of them might have two or three price reductions.
If it is priced correctly we will see multiple offers. That is why I believe we are still in a very good real estate market. We will hit upwards of 500 homes sold this year on the Peninsula. Last year there were 430 sold. So there is a tremendous amount of activity. And, we are very low in regards to inventory right now. We are at something like 210 homes on the market right now. At this time last year we were probably around 325 homes for sale.
Sanders: This year, for some reason, many sellers have taken their homes off the market. I don’t know if it’s the holidays or what but we have definitely seen a recent drop in inventory.
Adlam: Right now there are 201 single-family homes for sale on the Peninsula.
Chaussee: It’s not because they are hoping that prices will improve and then they can put their homes back on the market?
Sanders: Surely they don’t believe prices will improve that fast.
Watts: I think there are some potential sellers who believe that, but I think as they start to look at the entire economic environment – interest rates, potential tax changes, capital gains issues – there is so much instability right now it is hard to find the bottom and the legs on this thing.
I think that five or ten years from now we will look back and say that right now was an incredible time to buy real estate. – Chris Adlam
Chaussee: Chris, what is your take on the market? Do you think prices have bottomed out for good and we are now set to improve?
Adlam: Yes. My personal opinion is that we are at a soft bottom. It’s bouncing along the bottom. I put together some statistics and they show that sales are up from last year, but the average price per square foot of a home is exactly the same. It’s $492 per square foot right now and that’s exactly where we were at this time last year. Again, that’s for the average sale on the Peninsula. When you break it down by city, take Palos Verdes Estates, for example, the average price per square foot is $560 per square foot — same as last year. Rolling Hills is actually down. It’s gone from $630 to $604 per square foot.
As far as sales numbers, everything is up relative to 2009. In RPV, PVE and RH — all sales are up relative to last year.
Chaussee: Do you agree with Steve in regards to how far we have dropped from the peak?
Adlam: Yes, probably a 25 percent to 30 percent decline from the peak. But, as he mentioned, there are certain homes that have held their value much better than others.
Chaussee: I know you have quite a few listings. What do your sellers want in regards to price and how do you price a property?
Adlam: It varies. As Steve mentioned, 80 percent to 90 percent of homes on the market have had price reductions. The statistics show that those homes, once their prices hit the so-called correct price, the sellers get about 96 percent of their asking price.
Chaussee: How long does it take that seller to wake up?
Sanders: It depends on the agent.
Watts: We tell them three weeks. If we don’t have strong activity within three weeks, then we need to look at the price again.
Chaussee: You may reduce the price that quickly?
Adlam: I just did that recently. Remember, it’s not an exact science. Each home is unique and it is up to the seller. It is their product.
Chaussee: Who are your buyers? Are they from the Peninsula?
Adlam: They are from the Peninsula, off the Peninsula, they are all over.
Chaussee: If one of your buyers makes a purchase now and asks you what they should expect, as far as price appreciation going forward, what would you tell them?
Adlam: My answer is I think the market is going up. I’m a “glass-half-full” guy anyway, but I think that five or ten years from now we will look back and say that right now was an incredible time to buy real estate. We’ll look back and say that interest rates were very low and the market was depressed.
Sanders: Chris just bought and he’s a very conservative guy.
Adlam: That’s right. I did just buy a house.
Chaussee: So, you don’t have any fear that prices are going to drop further from your buy point?
Adlam: I didn’t look at the purchase, first and foremost, as an investment, although it certainly is an investment. I looked at it as a place my family was going to live.
Chaussee: How is the rental market doing?
Adlam: The rental market is somewhat slow, but the rents have been basically stable in the last year or so. What I will say is that the investors or people who are considered the “smart money” are out there buying. I think Raju can attest to this. There is one investor in the South Bay, and we will call him “smart money” — he has bought 12 homes. He obviously has a lot of money.
For someone who has a lot of money, who can buy what he wants, when he wants it – well, he is doing it right now. For me, that indicates we are real close to the bottom in this market.
The Manhattan Hill section is on fire. – Raju Chhabria
Chaussee: Raju, last year you mentioned that you thought the high-end home, $5 million and up, would possibly appreciate by 20 percent this year. Did it happen?
Chhabria: No, we haven’t seen it. I think I am off by six months.
The reality is there is no inventory. Last year, around October and November, I cleaned out maybe five or six of them. I have clients who are looking for something special that will excite them, but the inventory is just not there. There is nobody building new homes here and even if you wanted to buy land to build (again, for something very special), you would have to spend $3 million. There is really no good land available. There is inventory, but just not anything like what I had a year ago — especially in Palos Verdes Estates. Still, there are buyers out there. In October and now November, I sold 15 homes, so there are a lot of buyers in the market. I actually have three or four buyers right now who are looking for something to buy but haven’t found it yet.
Chaussee: Is your clientele still mostly Chinese at the high end?
Chhabria: It’s a mix. Still a lot of Chinese, yes.
And you’re going to see even more demand from China. More of them are coming over here. They have houses in China, and perhaps a house here, too, because they are sending their kids to school here and they would therefore like to invest in property here. This month I anticipate probably a half dozen new buyers coming in.
Chaussee: What would happen if the Chinese economy imploded?
Chhabria: It would have a huge impact. It would impact the high end the most but I don’t think the lower end market would be that hurt. The lower end has a lot of demand.
Chaussee: What about the Beach Cities?
Chhabria: The really high end doesn’t exist. I’m talking about $8 million and up. I have a few listings that have been on the market for two years and no buyers have surfaced. They are all looking for a deal – they want the $8 million home for $5 million. And, the sellers don’t want to give in because they can afford to wait. On the other hand, there have been four sales in Manhattan Beach on The Strand, all for dirt value between $6 to $9 million. The Hill section is on fire. There have been four sales that went for land value of over $4 million — four of them. The Tree section is also moving. I had had two listings for under $2 million recently and they were both gone within a week. But, if you go over $2 million, they may sit on the market for three or four months and then the sellers have to lower the price. The Beach Cities have a lot more speculative buyers than the Peninsula. One of the problems is the banks are not loaning to the more speculative buyers. I think that will change, but it hasn’t yet. Even to me they won’t loan right now.
Chaussee: Where do you think the best opportunities are right now for investment purposes?
Chhabria: I think for the entire area it is a great time to buy – absolutely the best time to buy. Potentially the market could come down another 5 percent. But most of the market is stable, particularly in the $2 million range and under. If interest rates go up you could potentially see a decline in price, but if you lock in a 30-year loan at 4 percent or 5 percent, you don’t have to worry about where the market is. I also think this is a great time to buy income property. If you have the appetite for apartment or commercial properties it is a great time to buy. All of Hawthorne Boulevard got cleaned out. All the properties that were in distress have been sold. But, unless you put 50 percent down in today’s market, you cannot break even. So, if you say I want to invest $2 million and I want to get a return of 7 percent it is not there – not possible.
Chaussee: Still, you think that high-end property, to go back to my first question, will appreciate nicely next year. Is that also going to be the case for the lower end?
Chhabria: I also think the lower end will do well because there are a lot more buyers.
Chaussee: How much appreciation might today’s buyer see out over the next five years, averaged annually?
Chhabria: Let me give you a conservative number. I don’t think we will see much appreciation this next year, but the year after that maybe a couple percent. In three to five years, total appreciation might be 25 percent or so.
Chaussee: Why the lag?
Chhabria: I think we will have cleaned out everything and the economy will finally be getting better. People will be making good money again. There is a new generation that needs housing, too. Look at our schools – they are all busting with kids. They need more space and that new generation needs a place to live too and everybody wants to be in the South Bay. There is a lot of money coming into the South Bay. I am showing properties every single day so there are a lot of buyers. Having said that, Rolling Hills, for some reason, has been a sleeper. Anything under $3 million in Rolling Hills will go really fast because there is not much inventory, but above that price the property just sits there.
Chaussee: How have Manhattan Beach, Hermosa and Redondo done relative to Palos Verdes from the peak a few years back?
Chhabria: I think it was about the same decline. In the Tree section of Manhattan Beach homes that were selling for $2.3 million or so now sell for $1.8 or $1.9 million. So, close to a 20 percent decline. What I anticipate is that the Manhattan Beach market will definitely have quick appreciation. I just think the demand will be there.
The opinions of the participants in this Roundtable discussion are their own and not those of the companies they represent. Under no circumstances does the information in this column represent investment advice. Stuart Chaussee is a Palos Verdes-based fee-only Registered Investment Advisor. He is the author of three financial books, including the award-winning Advanced Portfolio Management; Strategies for the Affluent. He is also a former contributing writer for the TheStreet.com. He welcomes your feedback and can be reached through www.preservingwealth.com or email him directly at firstname.lastname@example.org. Pen