Real estate agents active in Los Angeles are familiar with the area’s sizzling real estate market — a trend that shows no signs of stopping. Recent market data suggests February home prices saw a notable 14.6% rise from a year earlier, citing an increase of the dubious median sales price to $590,000.
Curiously, the data also claims housing inventory in LA increased by 10.3% in February 2016 from the prior year.
According to the report, upward housing trends were reflected prominently in listing prices in the Westside of LA, including Santa Monica and Culver City, where homes were listed for about 25% more than the prior year. Meanwhile, the Eastside proved to be a competitive market as the median sales price increased 20%, with almost half of homes selling for greater than the listing price.
Tiered pricing: the fuller picture
The median numbers cited by most news sources is only moderately enlightening, the swill of data. At its best, analyzing the median sales price provides a loose general idea of pricing trends in the LA area. At its worst, the number is downright misleading. In either case, it is certainly not an accurate or thorough portrayal of LA’s housing market.
The median sales price reflects changes across multiple price ranges, homogenized from lower-priced starter homes all the way up to multi-million dollar estates. The end result is mathematical alchemy in action.
When considered independent of other data, the median price creates the illusion of a falling or rising market when properties at either end of the pricing spectrum are trending up or down in contrast, dragging down or elevating the median price with it.
To better understand home prices in LA and beyond, a look at the Standard & Poor’s/Case-Shiller home price index specifically shows the disparity between low-, middle- and high-tier sales fluctuations.
Evaluating tiered pricing in LA is particularly useful. Reflective of homeowner wealth, tiered pricing displays relative price movement rather than generalization by a phantom dollar amount — a necessary distinction known to all seasoned professionals for an area with such radically varied pricing.
When factoring in changes across tiers, recent data show LA home prices jumped nearly 7% in February from the prior year. A closer look at the structure shows prices increased:
- 6% for high-tier homes (properties valued over $737,662);
- 7% for mid-tier homes (properties between $481,718 and $737,662); and
- 10% for low-tier homes (properties under $481,718).
Low-tier property prices continued to increase at a far faster pace than other tiers, consistent with LA pricing trends since 2013. This pricing movement is reminiscent of the pricing bubble of the mid-2000s. Thus, expect prices to slip in 2017, following a slowdown in sales volume later in 2016. LA prices will later return to their upward trajectory, likely by 2019.
What other factors will shape the contours of LA’s housing market? Job growth, increasing buyer purchasing power and a rise in residential development. These accumulated economic factors will deeply influence the oscillating arc of LA home prices in the coming years. The growing job market, expected to fully recover in 2018, recent staggered minimum wage increases and rising wage inflation suggest many homebuyers will be better prepared to purchase a home if not at higher prices.
Meanwhile, an increase in multi-family residential construction — to the extent seen by those who control zoning — will help meet the high demand from LA’s rising population and alleviate the inflated real estate market.