Los Angeles South Bay Beach Cities Housing Bubble: Welcome to my neighborhood!

Welcome to My Neighborhood!
(circa Winter 2005)

The Bubblefication of an unsuspecting Southern California suburb, going on for YEARS (since the mid-to-late 90's)

Older, smaller "value" houses have been torn down at a high rate over the last decade, replaced by newer, "high tech" condominiums ranging in size from 2000 to over 3500 square feet, having almost no yard, with top asking prices touching $1.2 million (late 2005). For the price, this neighborhood is just about the worst value in the country.

You are invited to tour my neighborhood and see the bubblefication for yourselves.

My neighborhood is a homey, relatively quiet community just south of LAX in Southern California. Within a few miles of the beach, the community blossomed and grew after World War II to house the families of those who worked at such aviation, electronic, defense, and high-tech icons of the region such as Northrop, TRW, Air Force Space and Missiles Center, and Xerox. At that time, families dwelled in smallish houses, perhaps 1000 square feet, set on a lot with plenty of room for trees, gardens, and kids to play outside.

Real estate in California has historically been pricey relative to the rest of the nation. Buyers have paid a premium for the blissful sunshine and dry climate here in Southern California. Traumatic singular events tend to be quickly forgotten, like the Long Beach (1933), Sylmar (1971), Whittier Narrows (1987), Landers (1992), and Northridge (1994) earthquakes, or the raging fires that occur as a consequence of the Santa Ana winds that whip through the region and the flammable brush in the mountain areas, or even the heavy rains that produce mud slides that have been known to slide coastal homes down cliffs. People have forgotten the financial disasters around here too, such as the slide in real estate prices in the early '90s and the bankruptcy of Orange County.

For many decades, California population has undergone extreme growth,and Los Angeles County has participated in this explosive growth. Although it leveled off somewhat in the 90's, the signs of growth are still there. The gridlock on the 405 freeway each afternoon and evening is now the norm rather than the exception. The LAX area is steeped in a constant rush hour. Having lost a lot of productive time sitting in that traffic, I've wondered if the sunshine premium makes it worth the prices people pay for housing here. Sure, there must be some benefit to not being knee deep in snow all winter and not having the winter heating bills of Montana, but taking over an hour (sometimes two, if by bus) to travel 15 miles nightly seems to be as much a productivity drag as having to scrape ice off a windshield every morning. Has that sunshine premium reached a point where it is unjustifiable?

Over the last decade, the neighborhood has been undergoing a rather sad bubblefication process that has not only been destroying its post-war charm, but that I fear could wreak financial destruction on the unsuspecting buying into this bubble. For a solid decade older style houses have been steadily disappearing. Their lots now contain two-on-a-lot or three-on-a-lot condominiums (we call them bubbleminiums), or even more recently, single family mansions. Some of the newer condominiums are as much as 3500 square feet, a far cry from the more frugal 1000 square foot homes of yesteryear. Prices on bubble homes in the mid-2000 square feet range are in the mid to high $700,000, with the highest end solidly in the $1 million price range. Some asking prices are touching $1.4 million.

Bubblefication has hidden what has happened to people like my former landlords. The herd believes that real estate "always goes up", but this is not true. In 1989 and 1990, I briefly rented a room in a rather nice condominium a few streets away from the apartment where I live now. (At that time, I was renting across the street from the penitentiary-style apartment building in the photo.) The condo is the middle of three units, 2000 square feet, 3 bed/2.5 bath. The owners paid about $324,000 for it in late 1989. In 1998, that unit sold for $275,000. If they could have waited they could have sold for much more; the latest sale out of that complex was in September of 2003 for $529,000. I have no idea if my former landlords came out ahead with the rent collected over nine years, but they nevertheless sold at a $46,000 loss, if my data source is accurate.

Just who is at fault here for bubblefication? The federal government? Mortgage lenders? Local governments? Builders? Realtors? Homebuyers? In my humble opinion, they all share in the blame.

Our taxation system has been designed to reward spenders and punish savers for decades. Combine that with a Federal Reserve that believes that the answer to every economic crisis is to throw credit at it and lower interest rates, which is what happened after stocks crashed in 2000 and we entered a recession. All that cheap and easy credit sloshing around had to go someplace!

By choosing to permit what the builders build, without any regard for the long-term consequences of destroying a substantial ecoenvironment of grass, trees, and greenery and replacing it with lots of concrete, local city governments have given their endorsement of bubblefication. From the looks of things around here I suspect that they have given their endorsement so that they can assess properties at higher values, collect more property taxes, and find worthless projects to spend money on.

What is being built around here is a disgrace. This is California, where we're supposed to be green and environmentally conscious and into sustainable energy. Yet not one single new house built around here has solar paneling! If any area of the country was made for taking advantage of solar energy, it is southern California. If there are any solar panels around here it is because the owners of older homes have had them installed. As if in a contest to see how much energy they can consume, these newer houses are outfitted to burn lots of incandescent bulbs. The builders and realtors don't bother putting in compact florescent bulbs at sale time. I don't know for certain, but the monthly cost to light and heat one of these bubbleminiums probably comes close to matching what I pay in my share of monthly rent! We don't see high quality construction around here very often with a mind toward sustainability and ecofriendliness. This has probably been my chief complaint about bubblefication.

Most realtors are turning out to be no better than stockbrokers. Remember the likes of Jack Grubman and Henry Blodget, recommending stocks like Enron and WorldCom? Stockbrokers will never tell you that it is a bad time to buy stocks, and realtors will never tell you that it is a terrible time to buy a home.

Well these truly guilty parties cannot take all the blame. The homebuyer, for sure, by being so quick to buy these overpriced bubbles, shares some of the blame. Sure, some homebuyers probably feel they have had no choice but to buy something around here, if they wanted to be reasonably close to work and not have to spend their lives commuting, and that's understandable. But if every homebuyer around here over the last 10 years had complained loudly to their realtor and to the local builders about the utter lack of energy conservation and ecofriendliness in the construction, maybe builders and local governments would have gotten the message a long time ago. Why don't homebuyers care???

And how about those flippers? With the Learning Annex offering a course called Buy it, Fix it, Flip it!, who can resist?!?
What I have learned over the years is that bubblefication has almost nothing to do with long-term community sustainability and long-term quality of life for the residents; those who get sucked into the bubble have forgotten what good value is all about. It's sort of like the "boiling frog" scenario. Even now, as I write this, all is not well in the neighboring bubble city Manhattan Beach. Senior citizens, some of them lifelong Manhattan Beach residents, are getting rent increases in non-profit housing and they plain can't afford them. They've got lots of sympathy but it's doubtful the rent increases will magically go away. And right now there is a raging debate over undergrounding the overhead wiring, because a lot of people don't want to or cannot cough up the $40,000 per residence assessment to get it done. It's a lovely idea, but even few house-wealthy people have an easy $40,000 lying around in a bank waiting to be spent.

On the right of this picture, there's a van parked in a driveway, with trash and cardboard boxes heaped in front of it. The occupants of the bubble houses on the left get to view that mess. Those bubbles on the left were going for probably $400,000+ in early 2002.

Late in 2001 I took a look at one new condo bubble with an asking price of $599,000. It was a rear unit, and from the rear windows was a view of an entire back yard of somebody's junk, making this place in the picture look like Martha Stewart takes care of it!

Look at all that gorgeous concrete! In early 2001, but according to data in domania.com, this place sold for $499,000. These are 3-story units.

This is what is sitting across the street from the that $500K condo. We've seen far worse (they of the cardboard trash), but is this a $500K view?

This is not a thorough analysis, but back in mid-2001, I scraped data out of domania.com for my neighborhood and thought I'd check the year-over-year (YOY) price changes on 2, 3, 4, and 5 bedroom homes. From the graph, it looks like the bubble was starting to "warm up" as early as 1998 and 1999. The yellow line from 1998 to 1999 shows a huge leap for 4 bedroom homes (from about 7.5% YOY to 25% YOY), and the white line from 2000 to 2001 shows a similar leap for 5 bedroom homes. There was some zigzagging going on, showing declines in %YOY gains, but not actual declines. There has not been any actual decline in home prices around here since 1995.

Here's another graph showing the average price of homes sold in my north Redondo Beach neighborhood between 1995 and 2002. As you may recall, the Southern California real estate market had a bad downturn in the early '90s, then bottomed around 1995. The evidence is here. (However, there is relatively little data from the years before 1995 compared to the years after.) And prices have been marching upward steadily, almost crazily, since. Smaller condominiums that were around $200,000 at that time now have asking prices over $500,000.

With another 4.5 years of bubble behind us, can you imagine what the data from mid-2001 up to now (late 2005) now shows? (shudder)

Over the coming weeks and months I'll be posting examples of very current for-sale listings, along with any relevant price history of the property that I can scrape up. I invite you to watch this spectacle with me. This is not a new bubble, it took off after the local market bottomed in 1995. Are we witnessing the beach bubble's last days?

Welcome to my bubble watch! Until then, stay safe and sane.