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Straight Talk
Los Angeles Sees Increased Demand for Homes Priced Between $1M and $2M in February

From our company chief economist, Selma Hepp

Los Angeles Sees Increased Demand for Homes Priced Between $1M and $2M in February

Main Takeaways:

  • February sales activity was constrained by the lowest inventories in the previous two months since 2004, though homes priced between $1 million and $2 million saw sales increase by 9 percent 
  • Northeast and Downtown L.A. saw home sales surge, up by 35 percent from last February, largely driven by more sales of homes priced between $1 million and $2 million.
  • While affordable inventory continues to shrink, more homes are available above $2 million, especially in West Side communities.
  • Median home prices jumped by another 13 percent year over year, while affordable Eastside and Downtown L.A. saw as much as a 30 percent-plus increase in median prices. 
  • Buyer competition continues to intensify, with almost half of homes selling for more than asking price and receiving an average 6 percent premium. 
  • Homes in Northeast L.A. and the Platinum Triangle (greater Beverly Hills) received the highest premiums, 14 percent and 13 percent respectively. 
  • While higher-priced homes are maintaining their sales momentum, buyers are still strongly attracted to value and affordability. 
  • The number of homes under contract increased by 12 percent from last February, suggesting a strong spring homebuying season.


Detailed Analysis
While it is still too early in 2018 to tell what the spring homebuying season will bring, home sales activity this year started on a slightly slower note than in 2017. Overall sales in the first two months of 2018 in Los Angeles County are down about 10 percent from the year before, though the drop was primarily driven by fewer condominium sales, which fell by 12 percent. Single-family homes sales are on par with last year. Nevertheless, the decline in condominium sales follows last February’s peak, thus current levels are still in line with averages seen in the last four years. Taken together, home sales are in line with recent historical trends and do not yet suggest any significant impacts from tax changes, rising mortgage rates, and stock market volatility.

In February, the strong sales trend for homes priced between $1 million and $3 million, which started in 2017, continued, and February sales increased by 9 percent year over year. Sales of homes priced above $3 million were slower when compared with last February, with the decline coming from a few key areas with high-end homes, such as Beverly Hills and Malibu. West and East Valley communities picked up some of the slack, keeping the decline at only 7 percent. Overall, sales of all homes priced above $1 million continued to improve, with a 6 percent increase from last year.

Regionally, some neighborhoods continued to see home sales surge, particularly Northeast Los Angeles and Downtown Los Angeles where sales jumped by about 35 percent year over year. In contrast, areas on the West Side, the Hollywood Hills, as well as areas in and around Pasadena, saw home sales slow from last February. Table 1 summarizes total sales below and above $1 million and year-over-year changes.


Figure 1: February 2018 home sales by Los Angeles community
Source: Terradatum, Inc. from data provided by local MLSes, March 7, 2018.


The decline in sales was not, however, unexpected given the rapid decrease in inventory that started in mid-2017.  In February, inventory fell by 17 percent from last February.  Over the last year, annual inventory has declined on average by 8 percent, with a larger decrease in the last three months, averaging 17 percent. The number of homes for sale in the last two months reached the lowest level recorded since 2004. Unfortunately, affordable homes are disappearing at faster rate across Los Angeles. Neighborhoods on the West Side, as well as in greater Pasadena and East Valley communities, have seen drops in homes priced below $1 million of more than 40 percent from last February. Homes priced above $2 million saw some improvement over the last year, with about a 7 percent increase. Generally, the same neighborhoods that are losing affordable homes have gained higher-priced properties, especially those on the West Side and in the West Valley. Figure 2 and Figure 3 summarize the number of for-sale homes by price range in February. With the spring homebuying season around the corner, the continued decline in inventory may be the market's biggest Achilles' heel and will constrain any notable increases in sales.

Figure 2: February inventory by price range


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


Figure 3: February inventory by price range

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



The lack of inventory, and particularly affordable inventory, is putting strong pressure on home prices and prompted more competition among buyers. In February, the median home price across Los Angeles communities increased by 13 percent, and while some of growth resulted from an increase in higher-priced sales, homes priced below $1 million saw prices increase by 9 percent. Higher price ranges are difficult to track, as fewer transactions lead to a greater variation in data. Nevertheless, for the first two months of 2018, median prices of higher-priced homes remained relatively steady. Again, competition for homes in relatively affordable neighborhoods is driving median prices in the range of 30 percent-plus. The Eastside, which includes East L.A., Boyle and Lincoln Heights, and El Sereno, saw a 33 percent jump in median home prices. Downtown L.A. also saw a 35 hike in median prices. In contrast, Mid City, West Side, and Eastern cities (including Arcadia and Monrovia) experienced some price weakness. Again, wider price ranges among homes that sell in those areas could be driving median prices decreases. Certainly, price-per-square-foot data suggests that prices are holding steady.
The rate of median price growth suggests that buyers remain competitive despite some headwinds facing the housing market, such as rising mortgage rates, tax changes, and stock market volatility. Buyers were also more likely to engage in bidding wars when compared with last year. Overall, about 45 percent of homes sold for more than asking price, an increase from 34 percent last February. And while the most affordable price segment saw even more homes selling over the asking price, 53 percent, higher price ranges have seen a similar continual increase in the share of homes selling for premiums. Keep in mind, though, that the increase may be partially due to changing pricing strategies by real estate professionals, who may list homes slightly below market price in an effort to generate greater demand from buyers. Still, the share of overbids has increased across the entire Los Angeles region and across all price ranges. Figure 4 summarizes the share of homes that sold for more than asking price in February 2017 compared with February 2018. The increase was most notable in lower price ranges, however, all higher price ranges have seen an increase of 8 percent to 11 percent.

Figure 4: Share of homes that sold for more than asking price by price range, February 2017 and February 2018


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



Regionally, some neighborhoods have seen as much as 20 percentage points more homes selling over the asking price this year. Figure 5 and Figure 6 rank neighborhoods by share of homes selling over the asking price (note that the two charts have difference scales). In greater Pasadena neighborhoods, shares are twice as large as the share of overbids on the West Side. This certainly may be a function of different pricing strategies by real estate professionals. But again, all neighborhoods are seeing more bidding wars than last year.

Figure 5: Number of homes selling for more than asking price, February 2018


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


Figure 6: Number of homes selling for more than asking price, February 2018


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



Homes that sold for more than the asking price generally received 6 percent premiums, up from 5 percent premiums recorded last February. Homes in Northeast L.A. and the Platinum Triangle received the highest premiums – a respective 14 percent and 13 percent-- while Malibu ranked the lowest, averaging 3 percent premiums. And while premiums have not increased as notably considering how many more homes sell for more than asking price, Beverly Hills saw a notable jump from 2 percent to 11 percent, mostly driven by larger premiums obtained for homes priced between $1 million and $2 million. Northeast L.A. followed, with a 5-percentage-point increase in premiums.

Though it is difficult to separate the true increase in bidding wars from changing pricing strategies, higher absorption rates in Northeast L.A., Downtown L.A., Baldwin Hills, South L.A., Silicon Beach, and the East Valley suggest that buyer demand is strong and heightening further --  especially in more affordable areas. The number of homes under contract in February jumped by 12 percent from last February, also indicating a strong spring homebuying season.  

All told, those planning to buy a home in Los Angeles this spring will face strong competition. Continued strength in the local economy and robust job growth suggest that plenty of buyers remain. Nevertheless, with affordable inventory continually shrinking, buyers face increasingly fewer options. Affordability remains the key driver of local housing markets. At the same time, some improvement in higher-priced inventory coupled with wealth impacts from the financial markets and the tech industry suggest that sales activity for higher-priced homes will remain strong and likely to increase.  Lastly, the increase in mortgage rates may be a concern going forward, though the increases over the last month may still be too recent for the data to reflect. According to Freddie Mac’s latest Primary Mortgage Market Survey, 30-year, fixed-rate mortgages climbed to 4.44 percent as of March 15, 2018, which is still some of the highest rate since the spring of 2014, however down from the week before. But the rise in mortgage rates may be creating urgency among buyers. According to the Mortgage Bankers Association, the unadjusted Purchase Index increased 5 percent from last week and was 3 percent higher compared with the same week in 2017. Also, the recently enacted tax reforms will take some time for the data to reflect, though it may be a few years before the housing market sees the full impacts.

Selma hepp

Selma Hepp is the Chief Economist and Vice President of Business Intelligence for Pacific Union International. 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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