Straight Talk
Los Angeles housing markets end 2017 with a bang, promising a solid 2018

From our company chief economist, Selma Hepp

Executive Summary

The year 2017 ended on a solid note for Los Angeles housing markets. 

  • Annual home sales activity:
    - Total sales increased by 1 percent in 2017 compared with 2016.
    - The largest increases in sales were seen in Downtown L.A., the Hollywood Hills, Silicon Beach, and Beverly Hills.
    - The largest decreases in sales were recorded in the North Valley, the Foothills, West L.A., and Malibu. 
  • Annual home sales activity by price range:
    - Sales of homes priced below $1 million fell by 5 percent, while sales of higher-priced homes jumped in 2017. The strongest increase in sales was for homes priced above $3 million – up 22 percent.
    - While sales of homes priced above $1 million increased in most areas, Silicon Beach saw a relatively higher increase than other neighborhoods. 
  • Inventory:
    - Supply continued its multiyear declining trend, with the inventory of homes priced below $1 million dropping at the fastest rate - down by 21 percent from December 2016 and 27 percent from December 2015.
    - The inventory of homes across all price ranges was lower at the end of 2017 than in the previous year. 
  • Median home prices:
    - The median price in 2017 increased by 8 percent from the year before.
    - In six Los Angeles neighborhoods, median prices jumped by double-digit percent rates from 2016 levels, with the largest gain of 17 percent in Beverly Hills/Holmby Hills/Bel-Air, followed by a 15 percent increase in South L.A.
    -The lowest annual appreciation was in Foothill communities, where home prices remained relatively flat. 
  • Market Competition:
    - Buyer competition intensified in 2017, with more homes selling over the asking price and at a faster rate. Affordable communities saw more competition among buyers and more homes sell over the asking price
    - Homes sold in an average of 36 days, 10 days faster than in the fourth quarter of 2016.
    - Home sold faster in South L.A., Eastern communities, and Pasadena and surrounding areas.

Overall Trends
The year 2017 was another solid one for Los Angeles housing markets, with most neighborhoods showing higher sales activity than in the year prior and all seeing home prices continuing to rise. At the end of 2017, the median home price in the 20 Los Angeles communities in which Pacific Union International mostly operates reached $855,000, an 8 percent increase from the year before. At the same time, buyer competition intensified throughout the year, while the inventory of for-sale homes continued its multiyear decline. As a result, the same number of buyers were competing for fewer properties, and more homes sold above the asking price than in 2016. 

Home Sales Trends
Overall 2017 activity in Los Angeles remained on par with 2016, with only a 1 percent increase in sales. However, some communities did have a busier year than in 2016. For example, Downtown L.A. saw about 20 percent more sales. Also, Hollywood Hills, Silicon Beach, and Beverly Hills stood out with higher sales activity. On the other hand, neighborhoods in the North Valley, the Foothills, West L.A., and Malibu areas saw some slowing in sales from the year before. Furthermore, changes in sales activity also depended on price range. Generally, sales of homes priced below $1 million fell by 5 percent across Los Angeles, while higher-priced homes saw more sales. Regionally, the largest increase was for homes priced above $3 million, which were up by 22 percent, followed by a 15 percent increase in homes priced between $2 million and $3 million, and an 11 percent increase of homes priced between $1 million and $2 million. Figure 1 and Figure 2 summarize changes across 20 Los Angeles communities. The charts show changes in sales activity by three price-range tiers: below $1 million, between $1 million and $2 million, and above $2 million. Some of the chart bars show notable pickups in sales, such as a 150 percent increase in sales of homes priced between $1 million and $2 million in the North Valley. That 150 percent gain represents an increase from 16 units to 40 units, so keep in mind that some large percent changes may be due to relatively low levels of sales that appear much larger in percentage terms.

Figure 1: 2017 vs 2016 change in home sales by price range

Source: Terradatum, Inc. from data provided by local MLSes, Jan. 7, 2018.

A decline in sales of homes priced below $1 million persisted across all communities and reflected the relatively faster decline in the availability of lower-priced homes. Downtown L.A. was the only area where lower-priced homes gained momentum despite the similar shrinking inventory conditions. And while higher-priced home sales gained momentum in 2017, there were still some communities that did not see an increase in sales of homes priced between $1 million and $2 million, namely Beverly Hills/Holmby Hills/Bel-Air, some Westside areas, and Foothill communities. In these areas, however, the issue was mostly a lack of inventory in that price range, which fell at a faster year-over-year pace than in other communities. Lastly, sales of homes priced above $2 million flourished in 2017 across Los Angeles, except in two areas – neighborhoods south of Interstate 210 and the West Valley. The relative increase was largest in Downtown L.A., followed by Silicon Beach. Downtown L.A. benefited from some new high-end developments, while Silicon Beach gained from its thriving tech industry and the incubation of ensuing new wealth. Neighborhoods south of Interstate 210, where sales of homes priced above $2 million dropped by 37 percent, saw a decline in demand from Chinese buyers, who in previous years drove a large share of that market. Since capital controls were put in place in 2016, demand from Chinese buyers has fallen considerably.

Figure 2: 2017 vs 2016 change in home sales by price range

Source: Terradatum, Inc. from data provided by local MLSes, Jan. 7, 2018.

Inventory Trends
While the decline in sales can be attributed to either fewer buyers in the market or fewer homes for sale, 2017 was undoubtedly characterized by the latter. Rapidly declining inventory has been a trend over the last few years, though there was a remarkably faster decrease seen over the last year. Figure 3 illustrates inventory trends over the last five years by price range. In December, the lowest-priced inventory was 21 percent below that month's 2016 levels, 27 percent below 2015 levels, and 37 percent below 2014 levels. Higher price ranges, while growing at a double-digit percent year-over-year rate in 2016, also showed a continual decline in 2017. But again, while higher-priced inventory saw a continual year-over-year decline, the lower price range fell at double the pace. Also, it is interesting to note the large decline across all price ranges evident at the end of 2017. While it may be hard to identify all the reasons for the sharp drop-off in inventory levels, uncertainty over the tax reform has certainly contributed to sellers hesitating to list their homes. As we discussed in our analysis of the impact of tax reform on California home buyers and sellers, some of the provisions further disincentivize existing homeowners from selling their properties and potentially facing higher tax bills. 

Figure 3: Number of homes for sale by price range, entire TheMLS data

Source: TheMLS, Jan. 19, 2018 

Market Demand Trends
Taken together, fewer homes for sale, along with strong demand from buyers, has led to considerably more competition in the market. At the end of 2017, homes sold almost two weeks faster than they did the year before. The median number of days that homes spent on the market averaged 36 days in the last quarter of 2017, compared with 46 days during the same period in 2016. While Malibu and other beach communities saw the number of days on the market fall from an average of 108 to 66, they remained the areas where homes took the longest to sell. Homes sold at the fastest rate in South L.A. -- within two weeks. Following were areas surrounding Pasadena such as south of Interstate 210, eastern cities, and Northeast L.A., where homes generally sold in a month. Properties in all other areas, especially on the Westside, sold in about 40 to 50 days. Figure 4 summarizes a few market-demand indicators that reflect increased levels of competitiveness when compared with last year. The first column shows median days on market in the last quarter of 2017. The second column shows the median days on market in the fourth quarter of 2016. The third column shows the percent of homes that sold over the asking price in the last quarter of 2017, while the fourth column shows the share of homes that sold over the asking price in the fourth quarter 2016. 

Figure 4: Days on market and percentage of homes that sold over asking price by Los Angeles community

Source: Terradatum, Inc. from data provided by local MLSes, Jan. 7, 2018. 

Home Prices Trends
Lastly, with heightened demand and an insufficient availability of homes for sales, prices across Los Angeles communities continued to surge in 2017. Figure 5 summarizes December 2017 median home prices in 20 Los Angeles communities and the year-over-year change in median prices. Dots that are higher on the chart suggest a greater rate of median home price increase. Beverly Hills/Holmby Hills/Bel-Air saw the highest rates of median price growth, at around 25 percent. However, keep in mind that there was an increase in sales of higher-priced homes in 2017, which pushed up the median price. Otherwise, relatively more affordable communities adjacent to higher-priced areas, such as South L.A. and Midtown L.A./Baldwin Hills, experienced higher rates of median price growth in 2017. 

Figure 5: Median home prices by Los Angeles community, December 2017

Source: Terradatum, Inc. from data provided by local MLSes, Jan. 7, 2018.

In summary, with Los Angeles housing markets ending 2017 on a strong note, it is still too early to tell how much the tax reform will impact consumer sentiment and buyer demand. The trend of falling inventory is likely to persist, if not worsen, further challenging potential homebuyers. Nevertheless, exceptional job growth in California at the end of 2017, coupled with growing incomes and favorable demographic trends, will ensure that there will be plenty of buyers in 2018.

Selma Hepp is the Chief Economist and Vice President of Business Intelligence for Compass. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

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