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Posted by Brett Silver on October 17, 2013
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Whether the market is up, down, or sideways, there always seems to be a lack of good inventory in Santa Monica. The fact that low inventory is a constant in our real estate market through economic shift tells us that there is something different about Santa Monica’s micro market compared with the rest of California. How does our low

inventory affect prices and property values? What will the future hold after coming out of a dramatic bounce back as we see the first signs of creeping interest rates? We know one thing for certain – there will be a lack of good inventory.

Theoretically, there should be certain events in our economy that cause the number of houses for sale to increase significantly. When the economy took a sharp downturn in 2008 and the banks were in crisis, our city, state and country saw a huge increase in inventory. Prices tumbled, foreclosures and short sales became abundant, and the number of actual houses that were selling dropped dramatically. Loans were difficult to obtain and buyers and sellers could not agree on prices – we were in a standoff market. As more property owners fell on hard times, we saw inventory rise, but not sell, causing prices to come down.

Santa Monica real estate has had a different trajectory. Although we are not completely insulated from the effects of the macro economy, there are certain variables that protect Santa Monica real estate values, which buffer the effects that the rest of the city, state and country experienced. For the most part, we have an educated and sophisticated demographic. Even when loans were flowing and all you needed to get a mortgage was a pulse, buyers in Santa Monica didn’t go for teaser rates, negative amortizations, and other mortgage schemes that ultimately landed home owners in financial distress when the rates popped up after a year or two. When property prices dropped, even if a homeowner found themselves under water, they could still afford their monthly payments and wait out the downturn. This prevented “distress sales”

from flooding the market. We found people who would ordinarily put their house on the market for the usual reasons (relocation, divorce etc.) either stay put or lease out their houses in hopes of waiting out the bad market. This kept inventory low in a time were other areas were flooded listings and looming shadow inventory (houses that were poised to come on the market). Sure,

there were more houses available for sale in Santa Monica than we currently have, but none of the really great houses that typically fetch top dollar were for sale, and there was certainly not the inventory that others areas were experiencing.

As soon as the market began to improve, and mortgages were beginning to flow, we saw all those houses that had been sitting there with no action begin to sell. Prices improved and we saw sellers finally put their houses up for sale – and they sold – quickly. Santa Monica has a very limited amount of housing and an ever increasing demand. The population of Los Angeles in always increasing and as we see well funded international buyers moving into our city, they all seem to want to live in Los Angeles by the sea, aka Santa Monica.

Even as prices have reached and surpassed the height of 2006-2007, we still see buyers willing to pay the inflated prices. Homes in Santa Monica, especially the “great” houses, have been selling quickly, keeping inventory at an all time low. Recently, and before the economists predicted, interest rated have begun to rise. Initially, it would make sense that buyers would race to buy something before the rates get too high, but what will happen if and when the rates creep another point or two? That brings me to the next phenomena that we have experienced this year- all cash buyers! It seems that the majority of sales this year have been to all cash buyers. From where did they come and where did they get all that money? That’s a discussion for another time, but with all the cash out there, I don’t think a rise in interest rates will deter buyers or bring down prices in Santa Monica.

The bottom line is that Santa Monica has a sophisticated and well funded market place with an extremely limited supply of good upscale housing that will always be in great demand. These factors make for a resilient real estate micro market that beats to its own drum.

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