The State of Real Estate in Los Angeles
Curious things happen in strange time
Los Angeles didn’t need COVID to add fuel to its housing crisis, things were already going sideways before the pandemic happened.
The LA Metro area (covering Los Angeles and Orange counties) has long been suffering from sky high rental rates and ever increasing home prices. Amids a record exodus and very low new moves to the State, a decline in home sales, a great pickup in new single family and multi-family construction, historical low interest rates and new laws making it easier to obtain construction permits, home prices have risen 17% in 2021 compared to the prior year.
Population Decline
In the 3rd quarter, Los Angeles lost 34,000 residents in net migration. 59,000 people moved out of the city while 25,000 moved in. California lost a house seat in 2021 due to population growth decline, down to 52 for the first time in its 170 year history. The State’s population growth has been flat/declining since 2016.
Increasing Home Prices
Gov. Gavin Newsom promised 3.5 million new homes by 2025 to help with the crisis and control the prices. In September 2021, Senate Bill 9 was passed, it allows building up to 4 homes on lots that previously allowed only 1. New home construction has seen a rise in the second half of 2021 with 30,800 single family construction starts and 28,300 multi family starts for the year. These numbers are up 49% compared to the prior year. As of December 2021, the median home price in Los Angeles County was $826,500, up 17% while home sales went down 9.1% for the same period.
Orange county has seen a median price increase of 24.5% to $1.1825 million with home sales declining 19%. Other SoCal counties report similar numbers with home price increases between 21% and 14.9% and sales decreases of 6.4% to 11.3%.
Slow Construction
Although the new legislation helps build at a faster pace for cheaper, new home construction is slow and costs are on the rise. The pandemic has done it’s worst to the construction industry at a time when new homes are sorely needed. Some items like windows and doors take as long as 5 months to order, construction material costs are at all time highs and to top it all, local contractors are short handed, many construction workers have not returned to work.
Real Estate Price Forecast
Los Angeles has a very strong track record of real estate appreciation, it has historically performed in the top 10% best places to invest in the country. Despite the economic down trend and rising home prices, the demand is high and home inventories are low with most SoCal counties reporting 0.9 to 1.5 months in inventory. Forecasts predict Los Angeles home prices will rise 8% to 13% in 2022. This could bring the Los Angeles median home price over $900,000.
An Alternative Outcome
There are a lot of new factors to take into consideration. Even though Zillow and other real estate data giants see a continued increase in home prices and there is demand, let’s not forget Gov. Newsom’s ideal of 3.5 million new homes by 2025. By population ratio, Los Angeles Metro would have to add about 920,000 homes in the next 4 years or 230,000 homes a year. These numbers are significantly higher than the current home starts.
With alternative constructruction methods on the rise, new manufactured homes, tiny, container homes and the likes are seeing lower per square foot construction costs and faster turnarounds. These new type homes may pave a way to increase inventories and lower prices. Laxed zoning laws and the new density rules may also help. The government is pushing for more homes and lower prices, the people demand it and although circumstances haven’t been favorable for those changes, the market is being directed towards them.
Savvy investors will probably take advantage of the 4x density bonus and add more homes to their properties. People may get very creative regarding new home construction. Just as the second half of 2021 saw a push in new home starts (up 54%), 2022 may see an even bigger one. Home prices may very well end up going sideways by the end of the year.