More Californians find it harder to make ends meet
BY BRAD A. GREENBERG, Staff Writer
LA Daily News

Sergie Mendoza makes $60,000 a year customizing cars at a Canoga Park garage - an income that in most places would afford him a middle-class lifestyle.

Instead, Mendoza plans to move his wife and two children to a place where the American dream costs a lot less.

“We’re going to move out of here. We’re going to Florida,” said Mendoza, 34, who’s already sold his Northridge home. “It’s too hard to live here. Everything is too expensive. You can’t survive.”

Californians such as Mendoza are increasingly finding it harder to make ends meet, according to a Public Policy Institute of California report to be released today.

The study is also critical of the criteria for the federal poverty line, which is based on income and doesn’t take into account the cost of living in a specific region.

After adjusting for home prices, the percentage of Los Angeles County residents living below the poverty line increased from 15 percent to 18 percent, placing it among the 10 highest-poverty counties in the nation, the study found.

California’s ranking among the states and Washington, D.C., rose from 15th to third.

“We don’t have a realistic picture of how many families are struggling to make ends meet in California, which is particularly true in Los Angeles,” said Deborah Reed, the study’s author and director of the institute’s population program.

The study also attributed California’s hidden poverty to the nation’s largest immigrant population and to growing income inequality.

Incomes have fallen 4 percent for low-income families since 1969, while rising 16 percent for middle-class and 41 percent for upper-class families.

And what is average costs a lot more. In the past year, for instance, San Fernando Valley home prices soared 17 percent and apartment rents 9 percent.

In addition, the Los Angeles Department of Water and Power has proposed raising water rates 3.9 percent this year and 3.5 percent next.

Mayor Antonio Villaraigosa is pushing a 64 percent trash-fee hike.

And nobody needs to be told that gas prices - among the highest in the nation - are through the roof. The local average for unleaded is now $3.39.

“There are millions of people in L.A. County who are not affording the basic necessities to support their families. It’s obvious in the crisis we are seeing in housing and education and, of course, health care,” said Jessica Goodheart, co-director of research at the Los Angeles Alliance for a New Economy.

The federal government’s formula for calculating the poverty line - devised four decades ago by the Office of Management and Budget and used by the Census Bureau - is adjusted for inflation but doesn’t account for disparities in costs for utilities and real estate markets.

The poverty threshold for a family of four was $19,157 in 2004, the most recent year statistics were available. That year, landlords could charge low-income tenants $12,252 in Los Angeles, which experts say doesn’t go far in booming Southern California.

“Right there, if you are paying the fair-market rent, 64 percent of your income would go into that rent,” Reed said.

Needy Californians also are less able to qualify for anti-poverty programs, such as food stamps and Head Start, because their income is more than 80 percent above the poverty line.

For example, almost 2 million Californians participated in the federal Food Stamp Program last year, second only to Texas. But in New York, with a population little more than half of California’s 38 million, 1.75 million people received food stamps.

In Louisiana, which has a lower poverty ranking when adjusting for housing costs, 18 percent of the state got food stamps in 2005.

Today’s report is the latest to criticize the federal poverty line.

In 1995, the National Academy of Sciences recommended that the poverty-threshold formula take into account food, clothing, health care, housing and utilities.

“The saddest part to me is watching the young people have to work full time, go to school and every penny they make is going to cover their rent - nothing more,” said Toni Gorton, a Woodland Hills psychotherapist.

“I think we can kiss the middle class goodbye.”

LOS ANGELES - The entertainment industry, the housing market and retail face significant challenges in the coming years due to over-capacity and changing consumer buying patterns, according to a forecast released this week.

“Much of the challenges for Hollywood are due to changing business models, fractious unions and runaway production costs,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corporation, which commissioned the study.

The authors of the study, “2006-2007 Economic Forecast & Industry Outlook,” expressed concern about the housing market, seeing a modest decline in unit sales and the median price of homes. The study also noted that office and industrial vacancy rates are dropping.

“While the overall outlook for the region in 2006 is favorable, there are several things that we will need to monitor over the year,” Kyser said.

Issues that Kyser said must be addressed included the 4.5 percent rise in the national consumer price index in Southern California; opposition to a proposed state infrastructure bond issue that could help fund projects to ease traffic congestion; rural sprawl and tight land availability in urban areas.

Kyser said that “overall, Southern California will actually see steady growth in 2006 and through 2007.

“While there has been a tendency to look for bad economic news both nationally and locally, the reality is that both are at mid-economic cycle, with a lot of upward momentum,” he said.

But the forecast highlighted a looming challenge for governmental agencies in California. It noted that a recent ruling by the Federal Government Accounting Standards Board requires governments to determine pension fund shortfalls and retiree healthcare liabilities — and find a way to pay for them.

As a result of the ruling, there is fear that some agencies could face bankruptcy, according to the LAECD.

First-quarter home prices rise but at a calmer pace than last year. Buyers’ urgent desire to beat interest rate hikes fuels demand.
By Diane Wedner
Times Staff Writer

April 17, 2005

Reports of real estate’s decline have been greatly exaggerated, to paraphrase Mark Twain.

Southland home prices, especially in the entry-level market, continued to rise robustly during the first quarter of 2005, according to data released Thursday. Home appreciation at the higher end of the price spectrum is slowing compared with last year, but sales are still strong.

Although not on a par with the record-breaking pace of early 2004, the number of home sales across the board is “way above the norm,” said John Karevoll, chief analyst at DataQuick Information Systems, a La Jolla real estate research firm.

Sales of houses and condominiums in Southern California in January, February and March were down 3.3% compared with a year ago, but that still was the second-best first quarter in 17 years.

The median price of a home in Los Angeles County during the first quarter of 2005 was $428,000, up 18.6% from the same period a year ago, according to DataQuick. The median in Orange County was $554,000, up 17.1%.

The slight slowdown from last year’s 20%-plus rate of appreciation in median prices is welcome news, analysts say.

“The pace of appreciation was quite unsustainable in the middle of last year,” Karevoll said. “Right now it looks like we’re headed for a soft landing. No one will get hurt.”

In the million-dollar-plus range, which some experts view as a bellwether of the market as a whole, prices dipped in some areas late last year. Currently, those homes are appreciating again but not at the levels of the last two years, according to DataQuick. The high end is notoriously fickle, however. It can experience home-price depreciation for a few months, then shrug it off and bounce back.

Raphael Bostic, an economist with USC’s Lusk Center for Real Estate, conservatively estimates that home price appreciation could end up at 5% to 7% by year’s end.

The California Assn. of Realtors forecasts a more bullish 15% increase in home prices this year, while California sales are expected to drop 2.5%, said chief economist Leslie Appleton-Young.

“We’ll still see a strong season,” she said.

An array of easy-to-get mortgages, an intense demand for housing — especially at the entry level and in some move-up markets — and a sense of urgency to buy before interest rates climb higher have buyers still flocking to open houses, agents say. Creative financing options, such as negative-amortization loans, have helped even the most credit-challenged borrowers enter the real estate market.

“It’s amazing what’s going on,” said Syd Leibovitch, owner of Paramount Properties in Calabasas. “The population is increasing, there is limited new land to build on, so this may not change any time soon.”

The Inland Empire is leading the pack in price appreciation and home sales, with San Bernardino County posting a first-quarter median home price of $291,000, up 37.3% from the same period a year ago. It was the only county where sales were up for the quarter — by 2.3%. Riverside County saw price gains of 28.5%, although 1.8% fewer homes sold. The two-county area now accounts for a third of all Southland home sales.

The hottest Inland Empire locales for first-time buyers, said Mike Teer of Teer One Properties in Riverside, are Colton, Rialto and parts of San Bernardino, where buyers can find homes for under $300,000. Farther out, in Victorville and Hesperia, first-time buyers who may need to commute long distances can find four- or five-bedroom homes in 1,900 square feet starting at $250,000.

Not all are willing to live so far from their jobs, however. In Los Angeles County, some first-time and move-up buyers are finding less expensive homes in Highland Park, Inglewood, Culver City and Eagle Rock, said David Toyama, head of a Coldwell Banker real estate business in Eagle Rock.

Two of Toyama’s clients, independent TV producer Janet Martinez and her partner, Kate Johnston, a grant writer, wanted to move up from their Highland Park home, which they had bought for $145,000 in 1993. Although their home appreciated nicely in the interim, so did others in Highland Park, and they were priced out of the area.

They opted for Eagle Rock, where they bought a three- bedroom home with an office for $510,000. They sold their Highland Park house for $482,000, and they were able to put $350,000 down. They chose a “hybrid” mortgage, in which the interest rate is fixed for seven years, then turns adjustable. Their monthly payment is now about $800.

Martinez said they looked at about 70 homes online last year and, beginning in October, physically checked out 15 houses. They made three offers on homes they didn’t get before buying the Eagle Rock house in January.

“This market is so crazy and overpriced,” Martinez said. “You feel like you have to act now because there are five bids on every house. It’s easy to get caught in the whirlwind of making an offer because you’re afraid you’ll lose the house.”

The competition is even more intense in the San Fernando Valley. A Sherman Oaks tear-down in a prime location that was listed earlier this month for $750,000 had 54 offers. A client of Coldwell Banker agent Dan Drantch made an offer $110,000 over the asking price but was outbid.

A 750-square-foot house in Reseda recently sold for $25,000 over its $390,000 asking price, Calabasas agent Leibovitch said. First-time Valley buyers seeking bargains — that’s roughly in the $500,000 range — are purchasing in Sylmar, Mission Hills, Van Nuys and North Hollywood, he said.

The San Fernando and Santa Clarita valleys had only 2,455 single-family homes, condos and town houses listed for sale on Thursday, compared with 12,429 listings in May 1997, for example, before the rapid runup in prices, according to the Southland Regional Assn. of Realtors.

Many first-time buyers seeking homes in Orange County are instead purchasing in Los Angeles County. Homes in Norwalk, Bellflower, La Mirada and Whittier still are available for $400,000, said Barbara Kerr, a Fullerton Realty Executives agent. That no longer is the case in Irvine and Orange.

“Entry-level buyers are struggling to get in almost anywhere in Orange County,” Kerr said. “Ten years ago, I called Fullerton Orange County’s best-kept secret. Not anymore.”

Relaxed qualifications and a mountain of mortgage options allow many home seekers who wouldn’t have qualified in the past to buy a home.

One of the most popular loans today — and the one with the greatest potential for problems — is the adjustable rate, negative-amortization loan, said Mitch Ohlbaum, president of Legend Mortgage in Los Angeles.

These negative-amortization loans offer a first-month rate of 1%. The following month, the fully indexed interest rate — about 4.6% — goes into effect. At this point, borrowers can decide to make the larger payment or they can continue at the 1% rate, which keeps the monthly payment low. But that adds to their loan balance each month, eating away at their home equity.

“People are fixed on the cheapest payment they can get,” he said. “They don’t care about the risk.”

*

(BEGIN TEXT OF INFOBOX)

A risky option

How negative amortization works: On a $500,000 home purchase, a buyer puts down $50,000, takes a $400,000 first mortgage and a $50,000 second.

The first mortgage is a 30-year negative-amortization loan with an adjustable rate that starts at 1% and a $1,287 monthly payment. The second is a home-equity loan.

After one month, the 1% on the first rises to the fully indexed rate of 4.6% or more and the monthly payment increases $247 to $1,534, said Mitch Ohlbaum of Legend Mortgage.

The borrower can duck the higher monthly payment by tacking the higher interest rate costs — $2,964 the first year — on to the loan principal. As a result, the borrower ends up with a bigger loan than when the house was purchased.

*

(BEGIN TEXT OF INFOBOX)

First-quarter median prices

Figures are for sales of new and existing single-family homes and condominiums.

Median prices (in thousands)

County First-quarter First-quarter Percent

2005 2004 change

Los Angeles $428 $361 18.6%

Orange $554 $473 17.1%

San Diego $476 $411 15.8%

Riverside $370 $288 28.5%

San Bernardino $291 $212 37.3%

Ventura $525 $446 17.7%

Southern California $428 $357 19.9%

Source: DataQuick Information Systems

Echoing the dot-com boom, many middle- class investors are rushing into real estate.
By David Streitfeld
Times Staff Writer

March 27, 2005

SAN FRANCISCO — Chris Boome, an insurance agent in the suburb of Burlingame, doesn’t want to work the rest of his life. Who does? But at 58, Boome knows he hasn’t saved enough to retire.

So a few weeks ago, he revamped his retirement accounts. He sold most of the mutual fund shares and used the cash to buy an $83,500 chunk of land in the Nevada hills, a stretch of ground he had seen only in a photograph.

“This is more exciting than a mutual fund,” Boome said. “It feels safer too. You buy a piece of dirt, you feel you’ll always have a piece of dirt.”

The astounding rise in home values is enticing many middle-class Californians to bet on dirt, gambling their retirements that they can do better with property than with any other investment.

In the same way that the stock market’s apparently limitless ascent in the late 1990s seduced investors into buying shares in untested dot-coms, relentlessly rising house and land prices are spurring people to do things that used to be considered unusual — if not irresponsible.

They’re cashing in retirement funds, selling stock and taking out second mortgages. They’re pouring the money into real estate, often in distant states, often without seeing the property.

“Markets are ruled by either fear or greed,” said Robert Campbell, a San Diego investor who has written a book on timing the real estate market. “At the moment, it’s all about greed. Huge numbers of people are buying in at very high prices.”

Economists have been wondering for at least a year if real estate is in a manic phase that will end unhappily.

Federal Reserve Chairman Alan Greenspan, whose policy of low interest rates gets credit for launching the real estate boom, also has begun to fret. “I think we’re running into certain problems in certain localized areas,” he told a congressional hearing last month.

Some speculators have already been burned in Las Vegas, until recently the hottest market in the country. But for most investors everywhere else, any risks are outweighed by the potential rewards.

“People who did this five years ago aren’t working today,” Boome said.

Like just about every longtime homeowner in California, he’s already made a bundle on real estate, at least on paper. Boome estimated his three-bedroom San Carlos home increased in value last year by $140,000 — about what he and his wife, Sharon, a nurse, made at their jobs. In the super-charged Bay Area housing market, their home is worth at least $1.2 million.

If one property seriously boosts your net worth, investors have concluded, a handful could make you downright rich.

The number of homes bought not as primary or secondary residences but solely for investment jumped 50% in the last four years, according to the San Francisco research firm LoanPerformance. They made up 8.65% of all prime mortgages in 2004, the company said.

The National Assn. of Realtors contends the total is higher. About a quarter of home purchases in 2004 — 1.8 million — were made by people intent on becoming landlords, the association’s surveys show.

Lenders are so eager to provide funding that it’s easy to do a deal with a down payment of only 5%. If the house increases in value by 5%, you’ve doubled your investment. Many homes in California, the Northeast and Florida have increased by more than 20% annually for the last three years, a run-up with few historical precedents.

New investors like Boome realize they’re coming to the party late but feel they have little choice. The stock market has been lackluster. Salaries are stagnant. The debate over Social Security has heightened Americans’ worries about how to support themselves during retirement. And even those million-dollar houses are often less valuable to their owners than they may appear. Second mortgages and home equity loans have taken away large slices.

“Every time I took money out of the house, I should have invested it,” Boome said ruefully. “But I used it to go on vacation or buy a car.”\

*

The Price of Proximity

Traditionally, people invested in real estate near where they lived. That way they could inspect the purchase and keep an eye on the tenants. For most Californians, proximity is no longer affordable. Houses in the coastal cities are so expensive that it’s very difficult to charge enough rent to cover the monthly mortgage payment.

That’s led to an explosion of buying in the Central Valley. When investments are calculated as a percentage of all purchases, the biggest market in the country is Redding, according to LoanPerformance.

Investors bought nearly one in five Redding homes sold in 2004. Not far behind were Merced, Visalia, San Luis Obispo, Chico, Fresno and Bakersfield.

“I looked in Merced and realized I was three years too late,” Boome said.

That pushed him over the border to Nevada.

“Friends, Internet sites, articles I read — they all kept saying, Reno, Reno, Reno. You think of Reno, you think of desert. But it’s growing a lot, no question.”

The Boomes visited the Virginia Highlands, a hilly, largely undeveloped area south of Reno. They stopped to ask a couple walking their dog a few questions. The woman was a real estate agent. Boome promptly signed on as a client.

He bought his 10 acres on the strength of his favorable impression of the area, his agent’s recommendation and a photograph she provided. “It was a great deal,” he said.

Complicated too. The rules for buying real estate with an investment retirement account are stringent: The purchase must be made through a specialized administrator, and it must be transacted with all cash. A week ago, the paperwork was done. He went to visit his dirt.

It wasn’t quite the way he imagined. “It was steeper. And there’s a lot of rocks. Big rocks.” He’s having a local builder look at the land before the deal is irrevocable.

If this is a setback, it hasn’t dented Boome’s enthusiasm.

“It could be worth nothing, but I’m willing to bet it’s going to work out,” he said. “I’ve got a good feeling.”

Other California investors are going much farther than Nevada — and using different strategies to come up with the down payments.

“Five years ago, I was like everyone else, trying to get rich on stocks. I thought real estate was for the wealthy,” said Darryl Wortham, a software engineer with Cisco Systems.

The San Jose maker of computer networking gear was one of the great stocks of the 1990s, making millionaires of its early employees. Wortham joined the company in mid-1999. That was too late for the boom but just in time for the bust.

“My biggest block of Cisco stock options is underwater,” he said, meaning they’ll be worth money only if the stock rises substantially. “Lord knows when I’ll see anything from it.”

Last fall, the 38-year-old Wortham cashed in some of his viable options and sold company stock he had bought through an employee purchase plan. He then joined an Internet investment group and bought three houses. All are in Georgia, all cost less than $200,000, all were bought with 5% down.

The engineer has seen two out of the three but intends to keep his distance from all of them. He doesn’t want to hear about busted plumbing from 3,000 miles away. An agency handles the tenants.

“Who wants to drive by every week and look at a property and manage it?” he asked. “I already have a job.”

The ranks of investors like Wortham and Boome have more than tripled in five years, according to the National Assn. of Realtors. In 1999, 20% of the second home buyers surveyed by the association said they were doing it for investment purposes. By 2002, it was 37%; by last year, 64%.

David Holoboff, a programmer for the Hollywood website Filmstew.com, bought a house five years ago near Bob Hope Airport in Burbank for $230,000, sold it last year for $405,000 and immediately bought a new place in Burbank for $569,000. It was recently appraised at $675,000.

Emboldened, Holoboff was browsing the Internet when he happened on a website that listed mobile home parks for sale. By the end of the night, he decided to buy a park in central Texas for a sum he described as “less than a condo in Burbank.” The deal will be finalized in May.

“A mobile home park is like an apartment building, but better. You can get additional rent without having to build additional units,” said Holoboff, 36. “I just have to fill the park up.”

He hasn’t visited the park yet but has studied the owner’s photographs and talked to city officials about the site’s viability. Meanwhile, he bought two homes in Atlanta for about $100,000 each, paying only 3% down.

Since Holoboff and his wife, Karma, have few other investments, the real estate is being paid for with $100,000 in equity taken out of their house. This has increased their monthly payments by $440 but that feels a worthwhile price.

“This is so insanely simple. I didn’t have to attend a seminar. I didn’t have to read a book,” he said.

*

Enter, the Salesmen

The only thing better than making a lot of money is doing so effortlessly. A variety of middlemen have sprung up to relieve real estate novices of the burden of doing anything besides forking over a wad of cash.

They’ll find the property. Suggest a mortgage lender. Arrange for a management company to find tenants. And repeat, over and over and over, what a smart thing it is to be doing this.

Mile High Capital Group, a Denver firm, has been making repeated forays to California to sell duplexes it plans to build in Colorado, Florida and North Carolina. Presentations in San Francisco in January and Los Angeles in February drew about 400 people each, some simply curious, others brandishing checks.

On the stage, the Mile High speakers sell the idea of real estate. “I’m telling you, from the bottom of my heart, you gotta do this,” Chief Executive Rick Dryer exhorted the crowd at the San Francisco convention center.

The firm’s sales pitch is that it has done extensive research to determine which communities will be experiencing substantial growth, which will lead to a brisk demand for rental housing.

One of Mile High’s developments is in Fort Lupton, north of Denver. “Few areas in the U.S. afford you to go skiing one day and golfing the next,” a company brochure explains with enthusiastic if idiosyncratic English.

At the side of the room, representatives of the mortgage brokers Investment Property Funding offered counsel. In the rear, Mile High representatives unfurled scale drawings of their new neighborhoods. People could mark off the duplex they wanted, provided they were willing to immediately fork over 5% of the price, which was usually $330,000. They won’t see the finished product for as long as two years — an eternity for investors.

There are other hurdles. One potential investor asked why the Florida duplexes, located northwest of Orlando, were described as bringing the owners less than $30 a month after mortgage payments and other expenses — hardly worth bothering about.

“If you buy in Florida,” said sales director Andrew Eikenberg, “you’re really betting on appreciation.”

That investor walked away, convinced the bet was unwise.

Those who bought had more faith: that their project will be finished, that the communities in which they’re located will become vibrant, that tenants will be plentiful and eager to pay enough rent to allow investors to recoup their costs.

And if any of these things don’t come true? The contract states quite clearly: The buyer assumes all risk, and the 5% down payment is not refundable.

“Maybe I’m naïve,” said Massoud Balbas, a Laguna Niguel computer consultant who attended the L.A. presentation, “but I thought [the speakers] were genuine.”

Balbas bought a lot of tech stocks in the late ’90s, an experience that left him unhappy. “I had no idea what I was doing. I put everything in one basket. Real estate is different. People are always going to need homes.”

His own home has ascended in value from $400,000 to $1 million. That makes the Colorado duplex he agreed to buy from Mile High look inexpensive. Balbas, 60, has never been to Colorado and said he had no plans to go anytime soon.

*

Not-So-Happy Endings

One sign a boom is peaking is that prices have risen so much it appears perfectly natural and inevitable that they will keep doing so. Believing the game has only winners, new investors pile in.

It was against this backdrop that Kim Kaul bought a house last summer in Las Vegas.

By traditional criteria, Kaul, a 36-year-old San Diego homemaker, was an unlikely player in the real estate investment game. She and her husband, Michael, who worked for his father’s auto-wrecking yard, are of modest means, with four young children and a rented apartment.

This was part of the appeal, of course. In San Diego last year, it was impossible not to talk about real estate, as prices rose 25%. Las Vegas was even more feverish and had the lure of a much lower entry price. So when Kaul saw a posting on the Internet bulletin board Craig’s List by a man selling a contract to buy a new Vegas house, she got in touch.

The seller said he had contracted with Pulte Homes in June to buy a three-bedroom house in the suburb of Henderson for $425,000 but that his financing had fallen through. He sold the contract to Kaul in August for $8,500, money she took out of the family’s meager savings. Her new investment, which she bought with no money down, was appraised at $460,000. An agent told Kaul she would be able to sell in six months for a $100,000 profit. In a market where prices had gone up by 50% in the previous 12 months, that appeared reasonable.

Instead, on Oct. 1, the Vegas market caught a chill. In the face of weakening demand, Pulte cut prices. More than 500 would-be investors fled, abandoning their deposits rather than taking possession of something whose value might decline further. The speculators’ party was over.

For Kaul, whose model could now be had for $335,000, it was too late. She had closed on her purchase.

During the fall, she was hopeful or maybe just unwilling to see reality. She found a tenant, who pays $1,250 a month. But her mortgage was $3,000.

When her husband lost his job, the situation became dire. The couple paid the January mortgage with borrowed money, then gave up. Their lender is in the early stages of foreclosure, a process that will ruin their credit rating.

Kaul is chastened but still believes in real estate: “I’m sure the market’s going to pick up, but I can’t hold out that long. This is kind of a bummer.”

*

As real estate prices have increased, so have the number of homes bought not as primary residences but solely for investment.

Most popular areas for investment, ranked as a percentage of all homes bought solely for investment in 2004 Redding, Calif. 19.08%
Medford-Ashland, Ore. 18.78%
San Luis Obispo-Atascadero-Paso Robles 18.20%
Visalia*, Calif. 17.98%
Merced, Calif. 17.53%
Chico-Paradise, Calif. 17.52%
Fresno 17.48%
Tallahassee, Fla. 16.78%
Bakersfield 16.56%
Reno 16.18%
*Also includes Tulare and Porterville.

The median rises 17% to $414,000 in January, the smallest year-over-year gain since June 2003. Slowdown may not last.
By Annette Haddad
Times Staff Writer

February 10, 2005

For the first time in 19 months, the year-over-year rate of housing appreciation in Los Angeles County has dropped below 20%, statistics released Wednesday showed.

The median price in the county in January rose 17% to $414,000, according to DataQuick Information Systems, a La Jolla real estate research firm.

It was the slimmest increase since June 2003, putting the county’s median price where it stood seven months ago, after hitting an all-time high in December at $418,000. The median is the point at which half of new and resold homes and condos sold for more, half for less.

The January numbers don’t necessarily suggest that prices have finally hit a plateau.

“We’re in for a slower rate of appreciation,” said John Karevoll, DataQuick’s chief analyst. He predicted the appreciation rate in L.A. County would be “closer to 10% than 20″ by the end of the year.

“The big question is: Will there be a soft landing?” he said. “Right now, the soft-landing scenario is the most likely as we get appreciation rates back down to sustainable levels.”

The number of homes sold last month fell 5% to 7,633 from a year earlier. That was off the January peak reached in 1989, when 9,615 sales were recorded, but far above the January low of 4,524 in 1992.

Because January historically is among the least active months for buying and selling homes, the statistics may not signal any lasting trend, Karevoll said. DataQuick’s numbers include every recorded escrow closing for the period and reflect transactions that were opened 30 to 60 days before.

Persistently low mortgage rates, a limited supply of dwellings and steady demand are keeping Los Angeles’ housing market humming, albeit at a more measured tempo than last year. (Long-term interest rates sank even further Wednesday, when the benchmark 10-year Treasury note’s yield fell below 4% for the first time since late October.)

A year ago, L.A. was in the midst of a housing whirlwind. Few homes were available for sale, and demand was strong because mortgage rates were at 40-year lows. The activity became so frenzied that prospective buyers were bidding up prices on properties at a pace not seen since the late 1980s.

The flurry continued through the spring. By summer, homeowners wishing to cash out were rushing to plant “for sale” signs. The supply of homes ballooned, giving buyers not only more selection but more opportunity to negotiate the price.

By mid-summer, prices began to soften, a phenomenon that appeared to continue into the fall, said G.U. Krueger, an economist at real estate firm IHP Capital Partners. January’s data seem relatively weaker because they “reflect the deals made six weeks ago or longer — at the tail end of that softening,” Krueger said.

Sensing that the froth was coming off, a growing number of homeowners retreated from the marketplace in recent months, shrinking the supply of for-sale homes.

The California Assn. of Realtors’ unsold inventory index for Los Angeles County, which measures how long it would take to sell all of the homes on the market at the current rate of sales, stood at 2.6 months in December, the latest month available. That was up from 1.1 months in December 2003 but down from August’s 6.1-month supply.

The change in inventory levels suggests that “there are more realistic sellers asking realistic prices, and buyers recognize that,” said Patrick Veling, president of market research firm Real Data Strategies. That phenomenon probably will keep the rate of price appreciation in the low teens by year’s end, he said.

But if inventories remain low, prices could go higher as demand picks up after winter ends.

“When you see a bull market such as this, it generally doesn’t stop and dip,” said Anthony Hsieh, president of LendingTree Inc., a division of IAC Corp. “If there is any momentum, it will go up again. But there’s no guarantee of that.”

“The next major test,” he said, “will be in the spring.”

by Kathryn Maese

The hunger for Downtown housing combined with the specter of increased hotel competition in the area has sparked a unique trend: At least four area hotels are considering converting all or part of their properties into condominiums or apartments. Some would provide residents with traditional hotel amenities like room service.

However a group of labor and government figures are balking at the move, and are taking steps to stop a process they say could cost the city thousands of jobs and hotel rooms. The issue has heated up recently as the City Council’s Planning and Land Use Committee is studying a plan to implement a six-month moratorium on all such conversions. A vote is expected in the coming weeks.

Among the hotels considering the switch to housing are the 188-room Hilton Checkers at 535 S. Grand Ave., the 1,400-room Westin Bonaventure at 404 S. Figueroa St., the 205-room Holiday Inn at 750 Garland Ave., and the 300-room Best Western Mayfair at 1256 W. Seventh St. The Hyatt Regency at 711 S. Hope St., which is currently for sale, has also been cited as a candidate. Outside Downtown, the St. Regis in Century City and the Furama Hotel near Los Angeles International Airport are both turning to condos.

Though the trend has taken root in Boston, Manhattan and the South Beach section of Miami, Los Angeles has come late to the game. Real estate experts predict interest will increase as aging or rundown hotels are targeted for development, and as hotel owners seek to shore up lagging convention and tourism business by converting a portion of their rooms.

“It’s sparking people’s interest because we’re in the middle of a condo upswing,” said Benjamin Reznik, a land use attorney whose firm Jeffrey, Mangles, Butler & Marmaro will host a condo-hotel conference in Palm Springs next month. “There’s an appetite in Los Angeles and a high demand to try and ride that wave. These will largely appeal to a combination of corporate clients who don’t come into town frequently or people who just see this as a good investment.”

Reznik said a moratorium on further conversions would be unwarranted. “There is no crisis here in the city,” Reznik said. “Converting them makes more economic sense and will enhance the city’s economic interest.”

Carol Schatz, president and chief executive of the Central City Association and the Downtown Center Business Improvement District, said the city should be concerned not just about the loss of union jobs, but overall economic growth.

“When you adaptively reuse a hotel, it creates construction jobs, provides jobs for the people who continue to serve residents, creates property taxes and increases the assessed value of the property,” Schatz said. “We’re dealing with a housing supply issue that we have long maintained has been a problem at every level.”

Preparing for Competition

Conversions appeal because of the profit potential. Industry officials say hotel owners can earn 15% to 40% more per square foot than with traditional condos, when combined with built-in amenities such as housekeeping, maintenance and room service. Hotelier Peter Zen said that option could help his 1,400-room Westin Bonaventure hotel.

Zen said he is worried that a proposed 1,200-room Convention Center hotel next to Staples Center would sap business from the Bonaventure and other Downtown hotels. He said that he might convert a portion of the Bonaventure into for-sale housing.

“Business is definitely slow,” Zen said. “We have never exceeded 60% in occupancy, so we are looking at ways to reach an adequate return for our money.”

Chicago-based Falor Companies, which specializes in purchasing existing hotels and converting them to condos, plans to transform the Hilton Checkers by April, according to the company’s website. Falor didn’t return a call for comment.

Most troubling to opponents of the practice are hotels that convert entirely to residential. The condo-hotel trend in New York City has led to a decrease of more than 6,000 regular hotel rooms, according to Daniel Lesser, senior managing director of Cushman & Wakefield’s hospitality group. Entities such as the Plaza, the Mayflower and the Empire have gone completely condo.

In Downtown, the 1960s-era Holiday Inn in City West is leaving the hotel business. Newport Beach-based owner MKT Community Development is turning the six-story structure into 205 studio apartments with plans to open in March.

The concept will be similar to a condo hotel in that the developer is considering providing hotel-like amenities such as room service, a restaurant, a salon and even a bartender who can pour a martini for a resident who’s had a long day. About 85% of the apartments will be priced at $1,200 a month, though some will cost up to $2,000.

“It will have a hybrid hotel and residential complex feel,” said leasing manager Stephen Shapleigh. “We want it to be a place for people on-the-go, or bi-coastal people who fly in to L.A. seven to 10 days a month and don’t want to pay hotel rates. So they can come home and cook a meal as they would be able to do in a residential complex.”

The Mayfair hotel on Figueroa Street will be converted into traditional condos. Craig Lawson, a land use consultant at Craig Lawson & Co., is moving forward with the entitlement package.

“We’ve seen several cases in which older hotel buildings are being proposed for conversion to residential units,” Lawson said. “It’s only being considered by those hotels that aren’t renting enough rooms to make it financially viable.”

Jobs and Tax Revenue

Critics see a different reality. Councilman Martin Ludlow, who proposed the moratorium, has said the plan would cost the city 2,000 hotel rooms - or 5% of the total stock - in addition to 1,000 jobs and revenue generated from the 14% hotel bed tax.

The Los Angeles Alliance for a New Economy (LAANE), which opposes the conversions, said the rebounding tourism industry is becoming strong enough to sustain hotels and jobs as it returns to peak 2000 levels.

“The City Council is talking about spending a fair amount of money to support a Convention Center hotel,” said James Elmendorf, a senior policy analyst for LAANE. “So there’s a recognition that we need more hotel rooms to attract and build tourism. When you lose hotel rooms, you go backward. You’re also talking about losing $8-$10 million in annual tax revenue, which means fewer funds for services.”

Councilman Ed Reyes, who chairs the PLUM Committee, said he expects a report from the city’s Chief Legislative Analyst and the City Administrative Officer by late next month detailing the impact of the trend on city coffers, tourism and legal issues.

“On the one hand we want to ask how do we preserve property rights while preserving hotels,” Reyes said. “Whether this is an overreaction is the question we want to find out. But as you start peeling back the onion, things get more complicated.”

The December median for L.A. County rises 21.2% to $418,000 from a year earlier, but the pace of sales slows.
By Annette Haddad
Times Staff Writer

January 18, 2005

Home prices in Los Angeles and Orange counties set records yet again in December, though the pace of sales slowed as the supply of available houses dwindled, data released Monday showed.

The median price in Los Angeles County rose 21.2% to $418,000 from a year earlier but was essentially flat from the month before. In Orange County, the December median gained 18% to $551,000 and was up less than 2% from November’s $541,000, according to real estate firm DataQuick Information Systems.

For the full year, the price trends were similar. Both counties saw their median prices rise 24%, which was above the 20% rate of appreciation in 2003. The median is the point at which half of all houses and condominiums sold for more and half for less.

As for sales in December, the number of transactions year over year slipped 7.4% to 10,242 in Los Angeles County and dropped 10.2% to 4,214 in Orange County, DataQuick said.

For 2004, sales for all types of homes decreased 3.3% in L.A. County and 11.5% in Orange County.

“What this shows is that the sales numbers are off their peaks,” said John Karevoll, DataQuick’s chief analyst. “I’m not sure what more than that it means.”

Indeed, getting a handle on Southern California real estate trends hasn’t been easy lately.

“This market,” said Los Angeles real estate agent Brian Moore, “has been like riding a wild horse.”

Last year began with less than a month’s worth of homes available and prices appreciating at 25% year over year in L.A. and Orange counties. With high demand and limited supply, prices continued to hit records; by spring, Orange County’s median price had sprinted past the half-million-dollar mark.

Then in the second quarter, sales began to slow somewhat as mortgage rates crept higher.

At the same time, sensing a possible peak in pricing power, a growing number of homeowners rushed to plant “for sale” signs on their lawns in the hope of cashing out at top dollar.

By fall, the stock of homes had swelled to a 3.5-month supply, giving buyers more choices and more leverage at the negotiating table. That in turn prompted some sellers to pull their listings, and inventories shriveled.

At the end of December, inventory in Los Angeles and Orange counties stood at a 2.75-month supply as the average number of days on the market shrank to 41, down from a peak of 56 in the fall, according to Real Data Strategies, a Brea-based firm that analyzes regional real estate listings on a seasonally adjusted basis.

“What is interesting is that in 2004 people thought the bottom had fallen out,” said Patrick Veling, Real Data Strategies’ president. “That certainly did not come to pass.”

If anything, Veling said, prospective buyers who decided to wait for prices to fall might be out of luck. He predicts 18 more months of a hardy housing market, with prices rising albeit at a slower pace by 10% to 14% year over year but still above the rate of inflation.

“There’s a greater sense of normalcy in the market,” Veling said, “but I see it going nowhere but up.”

That’s worrisome to some experts. As prices increase, fewer house hunters can afford to buy, which is evident in the slowing pace of sales, said broker Jim Joseph, owner of Century 21 Grisham Joseph in Whittier.

Interest rates have ticked higher, putting pressure on the mortgage market. Combined with higher prices, Joseph said, those factors are causing “head wind that has taken buyers out of the market.”

Elsewhere in Southern California, the median home price in San Diego County was $491,000 in December, a 21.2% increase from December 2003, and was flat from the previous month, DataQuick reported. Sales fell 12% to 4,807.

For the full year, San Diego’s median increased 21% and sales rose 2.3% from 2003. Data for Riverside and San Bernardino counties are expected today.

DataQuick’s numbers comprise all recorded transactions in a given period and aren’t seasonally adjusted.