Home Buyers’ Shock : Single-Family House Prices Going Through the Roof

So you want to live on the Palos Verdes Peninsula. But the least expensive single-family home for sale there is $515,000.

What about Manhattan Beach? A two-bedroom house on busy Rosecrans Avenue is $325,000, and houses more typically range from $400,000 to $600,000. Here in this, the most expensive of South Bay’s three beach cities, the highest priced house for sale is a new five-bedroom, ocean-view dwelling in the hill section, for $1.4 million. To get a house on the strand would cost close to $2 million, but none are for sale now. How about the Hollywood Riviera area, between south Redondo Beach and the Palos Verdes Peninsula? $379,000 to $799,000. Hermosa Beach? $265,000 to $1.3 million.

Westchester? $245,000 to $595,000. Lomita, $220,000 to $484,000. Torrance, $215,000 to $849,500. Lawndale, $214,500 to $278,000. San Pedro, $179,000 to $735,000.

Carson? $129,900 to $285,000. Wilmington, $117,000 to $285,000. Inglewood, $110,000 to $339,000.

Not a single house in the South Bay is listed under $100,000, according to current Multiple Listing Service prices provided by the Torrance and Marina del Rey offices of Merrill Lynch Realty.

In the South Bay, the $100,000 single-family home is a thing of the past, say real estate professionals throughout the area.

“Vacant lots in the South Bay are selling for more than that,” said Bill Johnson of Bill Johnson & Associates ERA Realty in Gardena.

Many prospective buyers suffer from price shock, said agent Bridget Walsh.

“When buyers, especially first-time buyers, confront this market, they go through a process not unlike that which a person goes through in response to a catastrophic illness--denial, then anger, and finally acceptance,” said Walsh of Merrill Lynch’s Marina del Rey office. “The two-bedroom, one-bath place they couldn’t live with six months ago becomes the two-bedroom, one-bath they would be happy to buy.”

Highest on Coast

Generally speaking, prices are highest in the beach cities and on the Palos Verdes Peninsula, decreasing gradually as one goes north and east.

The lower-priced houses in the South Bay are most probably found in Inglewood, Carson, Lennox and Wilmington, where smaller, older houses are priced as low as $110,000 to $150,000, local agents said.

In Hawthorne, Lawndale and Gardena, two-bedroom, one-bath “starter homes” range from $190,000 to $220,000, whereas in Hermosa Beach and El Segundo, houses probably start at about $300,000, according to agents in those areas.

Because of such prices, the South Bay is becoming primarily a market for the repeat home buyer.

“People who want to own a glorious home someday have to start with a little home and start building some equity,” Walsh said.

Upward-spiraling housing prices are a fact of life in Southern California, particularly in the more sought-after areas like the South Bay, according to real estate professionals.

In Los Angeles County, the median resale price of a single-family home was $210,029 in March, up 28.9% from the previous March, according to the California Assn. of Realtors. That leap in housing prices far outpaced a 4.6% rise in the Los Angeles Consumer Price Index for the same period, association analysts noted.

Home prices in the South Bay generally kept pace with the price increases countywide, with some areas here posting even higher percentage gains, said Joel Singer, chief economist for the California Assn. of Realtors. The South Bay “remains a very desirable” place because of its thriving economy and proximity to the ocean, he said.

The South Bay’s strong and diversified economy creates a tremendous demand for housing here, said Frank E. Hotchkiss, director of regional strategic planning for the Southern California Assn. of Governments (SCAG).

The Santa Monica Bay region, from the Palos Verdes Peninsula to Pacific Palisades, has a higher ratio of jobs-to-housing than all of the Southern California areas that SCAG studies except one, downtown Los Angeles, he said.

Beaches and Cleaner Air

Area real estate agents said that the South Bay attracts buyers because of its miles of beaches, mild climate and relatively clean air.

Although the demand is strong, the housing supply is controlled by local zoning and density restrictions, and by the amount of land available for residential development, agents and analysts said.

A South Bay-wide survey conducted by Very Important Properties, a real estate company based on the Palos Verdes Peninsula, showed that in many South Bay neighborhoods, the average sale prices for single-family homes increased 20% to 30% in 1988 over 1987. The neighborhood with the greatest increase in average sale price--51.5%--was the Margate area of Palos Verdes Estates, the VIP survey showed.

Overall, the VIP survey of several thousand 1988 transactions showed a 25% increase in sale prices over 1987.

Economist Michael Salkin, a senior vice president at First Interstate Bank, said he expects home prices statewide to continue going up.

Although it is possible California home prices could flatten out at some point in the 1990s, as they did between 1983 and 1984, he said, in the long run prices probably will keep going up. “We are betting that houses will continue to increase in price, and increase at a rate in excess of overall inflation.”

So you want to buy in the South Bay?

Although ever-increasing prices may put a glow in the cheeks of those who already own a house here, it is harrowing for prospective buyers, especially those entering the market for the first time.

Only about 16% of Los Angeles County households could afford the median-priced $210,029 home in March, according to figures from the California Assn. of Realtors. Lenders generally say it is not safe for a borrower to spend more than about a third of gross income on housing costs, though the exact cutoff varies.

With a 20% down payment, it would take an annual income of $68,444 to qualify for a loan to buy such a house, CAR analysts said. This assumes a 9.96% interest rate, the national average of fixed and adjustable rate loans calculated by the Federal Home Loan Bank Board. It also follows the guidelines of many lenders who say a buyer should spend no more than 30% of gross income on the mortgage payment, analysts said.

And as mortgage interest rates inch up, to between 11% and 12% for 30-year, fixed-rate loans now offered by Southern California lenders, more prospective buyers are not qualifying, according to real estate analysts, bankers and local agents. Increasingly, buyers are using adjustable rate loans, which typically start out at a lower interest rate, to become eligible to buy a home, they said.

As a rule of thumb, according to Hawthorne Savings loan officer Jacquelyn A. Palmquist, lenders figure that a buyer should spend no more than 36% of gross income on monthly mortgage payments (including taxes and insurance) and for other indebtedness that cannot be paid off within 10 months, such as a five-year car loan. No more than 28% should be for the mortgage payment (including taxes and insurance), she said.

$50,000 Income

Using that 28% guideline, an applicant with a $50,000 income--$4,167 a month--could qualify for payments of up to $1,167 (including taxes and insurance), Palmquist said. That would limit an applicant to a $100,000 fixed-rate loan at 12% interest, she said. With a current adjustable rate at 9 1/2%, this buyer could qualify for a $122,000 loan, she said.

Usually, it takes two incomes to qualify to buy a house today, said Douglas J. Herbst, vice president and chief financial officer of Hawthorne Savings & Loan Assn.

Not only are middle-income buyers being edged out, but so are higher-income buyers who simply may not be able to scrape up the large sums needed for a down payment.

Lucille B. Hoyt of Ladera Realty said that, for most would-be buyers, it is impossible to save money faster than property appreciates. “You can’t save that kind of money,” she said. “It is better to get into the housing market, if you can.”

The South Bay housing market can be a shock to yuppies who are accustomed to being able to buy practically anything they want, said Mike Collins, a vice president of the South Bay Board of Realtors and agent for Shorewood Realtors in Hermosa Beach.

“Here’s the scenario,” Collins said, “you’ve got somebody college educated, successfully placed in their job, living at the Marina or the beach, driving a great yuppie car. The tax man tells him he’s got to buy something.”

But at today’s prices in the South Bay, that “something” may be a modest house or condominium, Collins said, especially along the coast.

Prices are daunting even in the more affordable coastal cities like El Segundo, which is next to Los Angeles International Airport in a commercial and industrial area.

$300,000 ‘Rock Bottom’

The “rock bottom” price for a house there is $300,000, according to Collins and other agents. With a 20% down payment of $60,000, a $240,000 adjustable rate mortgage at 9 1/2% interest would cost about $2,312 a month, including taxes and insurance, Collins said. Because the payment should be no more than about one-third the buyer’s monthly income, it would take an income of about 7,000 a month, or $84,000 a year, to qualify, Collins said. By contrast, the average household income in El Segundo in 1988 was $43,880, according to the Donnelley Demographics database.

Prospective buyers often have been living in a more spacious and luxurious apartment than the home they will be able to afford to buy, Collins said. “It’s a very humbling experience.”

“I tell couples that once they buy a home, it’ll be a couple of years before they can start going out to dinner again,” said Betty Ryan, owner of Anderson Ryan Realty Co. in Hermosa Beach. Budgeting is tough in the first year of ownership, before the tax benefits of deductible mortgage interest are realized, she said.

Historically, trying to wait out housing price increases has not worked.

Housing prices have far outpaced increases in income statewide, according to First Interstate’s Salkin. “In 1988, personal income rose an estimated 8% in California, against a rise in the price of the median home of 18.6%,” he said. “In general, the gap between income and home prices is widest in the coastal markets, where prices have escalated most rapidly.”

And because prices have increased so much more rapidly than incomes, many South Bay residents would not be able to qualify for the loan it would take to buy their own homes today, several agents observed. And others find they are unable to move back after moving out of the area.

One couple who sold their Palos Verdes Peninsula home for $430,000 when they moved to the East Coast in 1984 were stunned to learn that to buy back that same house today would cost nearly $900,000, according to Ernie Richardson of the Palos Verdes-area office of Coldwell Banker Residential Real Estate.

There are plenty of compromises being made.

Often novice buyers start out hunting for a home in their favorite beach city or amid the casual affluence of the Palos Verdes Peninsula, but realize they must settle for a less glamorous address, a longer commute, smaller quarters, or a condominium instead of a house.

Ian and Ann Grant, a professional couple with a combined income of $100,000, felt they were in a good position to buy when they went house-hunting in the South Bay earlier this year. But after they took one look at a 1,000-square-foot pad in Manhattan Beach, priced at $400,000, they decided instead to buy a spacious three-level townhouse with a pool and tennis courts in Woodland Hills.

The Grants said they opted for newer quarters and more space, and the price in the Valley was right--$255,000. As a trade-off for the more luxurious accommodations, Grant said, he is willing to tackle the commute to his job at Los Angeles International Airport.

Van Scott, a 24-year-old Los Angeles school teacher with an annual income of $23,000, hunted for a house in Inglewood for months. “I’ve looked at every house for sale in this neighborhood,” said Scott during one recent expedition.

He hoped to get a roommate to help him make the payments on a $121,500 house, but after his bid was accepted he backed out, deciding that buying a small apartment building would be a more affordable investment. With financial help from his parents, Scott is buying a four-unit building as a first step into the housing market.

Less Costly Areas

House-hunting is not necessarily a hopeless quest, if a buyer is willing to look in less costly areas of the South Bay, agents said.

“If you can’t afford to buy in Torrance, you can come to Carson, Lawndale and Hawthorne,” said Jack Salling of Nuway Realty in Carson. Buyers can get a three-bedroom, one-bath home for $140,000 in Carson, he said. That is no small sum, he acknowledged, but “affordable has become a relative term.”

Johnson, a past president of the Gardena Board of Realtors, said brokers call from West Los Angeles and other places “looking for more affordable houses for their buyers.” A house that would cost $180,000 in Gardena would cost as much as $245,000 in northern Torrance and as much as $310,000 in south Torrance, he said.

In some parts of Gardena, Johnson said, a house may cost as little as $150,000, but prices also range much higher. A brand-new 2,000-square-foot home right alongside the Harbor Freeway recently sold for a whopping $293,000, he said.

The base price for a two-bedroom, one-bath starter house in Hawthorne and Lawndale is about $200,000, according to Woody McCain and D. Paul Clark of Clark Realty in Hawthorne.

The least expensive home listed in Lennox, which generally is viewed as the least costly area of the South Bay, is $115,000, said Clark, a state director of the California Assn. of Realtors.

Wilmington Pleases

Wilmington is another area where home prices may be within the reach.

“Even the people who say, ‘Wilmington . . . yuck,’ are surprised” when they see some of the tidy neighborhoods Wilmington has to offer, said Laura Warren of All American Realty. A 2,600-square-foot residence in the most desirable area of Wilmington, near Banning Park, would be priced from $225,000 to $235,000, whereas a similar home in San Pedro would be $450,000 to $500,000, she said.

“A first-time buyer wouldn’t have an ice cube’s chance in hell in San Pedro, but in Wilmington they do,” she said. House prices in Wilmington start at about $135,000, she said.

Warren, who grew up in Wilmington, cheerfully noted that the local ambiance includes junkyard dogs and defunct oil wells, plus the popular ‘50s era Margo and Manny’s Coffee Shop, a local hangout on East Pacific Coast Highway.

Wilmington, which suffered an economic nose dive with the closure of the Catalina Island ship terminal in the early 1970s, is now undergoing a renewal in the commercial, industrial and residential areas, according to Chamber of Commerce Director Lois Denzin. Businesses are being given tax and insurance rate incentives to move there, and, in an atmosphere of growing civic pride, residents are sprucing up their homes, she said.

Another choice for those who cannot buy their dream house on the beach are condominiums and townhomes, which may provide buyers a lower-cost method of home ownership, agents suggested. Prices range widely, from $100,000 for a condo in Inglewood to $600,000 or $700,000 for a townhome on the strand in Manhattan Beach.

As a rule, agents said, condominiums and townhomes do not appreciate as fast as single-family homes, but they offer first-time buyers a less expensive way to get into the market.

“It is important to make the first step,” said Annette Graw, an agent with South Bay Brokers Inc. of Manhattan Beach, and a spokeswoman for the California Assn. of Realtors. “It may not be your dream house, but it’s a steppingstone.”

The South Bay is increasingly the province of repeat home buyers.

“The classic first-time buyer is a rare animal in the South Bay,” said Andre Prassinos of Merrill Lynch in Marina del Rey. Prices are so high that a buyer here typically needs an inheritance, a gift from the family or the proceeds from the sale of a previous house to qualify, he said.

Agents who specialize in the Palos Verdes Peninsula area, for example, say that almost all buyers there have the equity from the sale of a previous home or homes to offset the cost of buying on the peninsula.

Buyers who could not otherwise get into the market can borrow the down payment from an investor, who usually is repaid within a few years when the buyer refinances or sells the property, according to Michael and Charlene O’Neil, a husband-and-wife sales team for Very Important Properties. He also teaches real estate investment courses at Harbor College.

“We believe in ‘sweat equity,’ where you buy a place, doll it up and turn it around for sale in one to three years,” he said, adding that this has worked for them.

The O’Neils said they paid $15,000 for their first house in 1963, borrowing the down payment from an investor and paying it back a few years later. Built in 1905, the Hermosa Beach cottage was definitely a fixer-upper, they said. The O’Neils renovated the old house and sold it a few years later for $35,000. Today, they estimate its market value at $400,000. At present, the O’Neils live in a spacious home in Rancho Palos Verdes. The property has a tennis court, horses, four paddocks and a riding ring.

“Buying a home is your best bet for estate-building and accumulation of wealth,” said Michael O’Neil. “Everything (in the South Bay) is appreciating,” his wife added. “Everything.”

Agents Say Don’t Wait

Some who can afford to buy a house today may be so dismayed by South Bay prices that they plan to hold out until prices drop to a more reasonable level, agents said.

Local agents said that in recent weeks, the escalation of housing prices has slowed a bit as interest rates have gone up from roughly 9% for a 30-year fixed-rate loan in early 1987 to more than 11% today. But area housing prices probably will not take a big tumble, according to bankers, agents and analysts.

Home prices did level out in the early 1980s, when the prime rate reached 20%, but prices practically never drop below the previous sale price, said Bruce Short of Bruce Short Century 21 Realty in Torrance.

Owners of some high-priced properties had to reduce their prices to find a buyer in that period of extraordinarily high interest rates, he said, but even in bad times, on the typical three-bedroom, two-bath home in Torrance, Redondo or Carson, he said, “the market hasn’t gone down at all.”

If a buyer is hesitant, Short said, he should ask: “If I wait, and prices go up, will I still be able to buy?” In most cases, he said, the answer is: “Probably not.”

HOUSING PRICES IN THE SOUTH BAY

These median resale prices for single-family homes in Los Angeles and Orange counties are based on a sample of prices from 17 local real estate boards. Figures do not include new housing or condominiums. For comparison purposes, the rise in the Greater Los Angeles Consumer Price Index from March 1988 to March 1989, when Los Angeles County housing prices rose 28.9%, was 4.6%.

L.A. County % chg Orange County % chg March 1987 $139,522 March 1987 $162,110 March 1988 $162,945 16.8% March 1988 $191,191 17.9% March 1989 $210,029 28.9% March 1989 $238,807 24.9%

SOURCE: California Assn. of Realtors

A TRW Real Estate Market Information survey of sales prices registered at the Los Angeles County Assessor’s Office reports average prices of new and existing homes, both single-family and condominiums. Because the sales prices include condos, prices are lower than those reported by the California Assn. of Realtors, and individual figures may be skewed by what priced homes dominated sales that month. According to TRW, 2,110 single-family homes and condominiums were sold throughout the South Bay in March 1989. TRW breaks the South Bay into four study areas:

SOUTH BAY AVERAGE

% chg March 88 $228,905 March 89 $253,628 10.8%

Inglewood, Hawthorne, Lawndale and Westchester

% chg March 88 $373,127 March 89 $370,430 -0.7%

Gardena-Torrance

% chg March 88 $196,397 March 89 $223,034 13.6%

El Segundo, the beach cities--Manhattan, Hermosa and Redondo--and the Palos Verdes Peninsula

% chg March 88 227,719 March 89 260,974 14.6%

San Pedro, Wilmington, Lomita, Harbor City, Carson

% chg March 88 $152,984 March 89 $198,452 29.7%

TRW figures for other areas in Los Angeles County:

Pasadena-Altadena-South Pasadena-San Marino, La Canada/Flintridge-Sierra Madre, Arcadia

% chg March 88 $147,788 March 89 $176,733 19.6%

Van Nuys-North Hollywood

% chg March 88 $259,585 March 89 $284,728 9.7%

Beverly Hills-Pacific Palisades-Brentwood-Westwood

% chg March 88 $195,404 March 89 $215,466 10.3%

SOURCE: TRW Real Estate Market Information

Very Important Properties, a Palos Verdes Peninsula real estate firm, surveyed several South Bay multiple listing services and the Los Angeles County Assessor’s Office to determine average sale prices for existing single-family properties. Overall, the VIP report showed a 25% increase in 1988 South Bay sale prices over 1987 prices, with some “hot spots” where sale prices increased dramatically over the previous year. VIP said the hot spots could simply reflect the sale of mostly higher-priced properties, and not necessarily reflect property values for the entire community. Areas that showed some of the highest average sale prices and biggest percentage increases for single-family homes were:

1988 price % chg from 1987 Rolling Hills $1.1 million 1.2% Margate $878,714 51.5% West Palos Verdes Estates $551,470 40.8% West Manhattan Beach $475,615 25% East Manhattan Beach $421,854 27.5% West Hermosa Beach $408,504 34.7% Hollywood Riviera $402,168 29.4% Palos Verdes Peninsula $635,000 26%

SOURCE: Very Important Properties