A Trade-Up Market for Home Buyers
Just a couple of years ago, Northridge broker Wendy Furth knocked on doors and targeted the one lively segment of the real estate market: lower-priced houses for first-time buyers, many of them immigrants.
These days Furth’s pager beeps every 15 minutes, and the calls come mostly from longtime homeowners flush with rising equity and stock market gains. Many of them are relocating from Northern California and out of state. They all want to move up, she says--way up.
“People aren’t blinking at $300,000 to $500,000 properties, not at all,” said the 44-year-old Fred Sands broker, zipping from one prime San Fernando Valley neighborhood to another in her silver Lincoln Continental. “It’s like everything’s on sale. It’s wild.”
The shift in action--from foreclosures and starter homes to pricey houses favored by trade-up buyers--signifies just how much Southern California’s housing market has roared back to life after several years of deep slumber.
The resurgence of trade-up or repeat buyers has added vigor to the Southland real estate market, especially in places like the Westside and south Orange County, where sharp price hikes also have raised some concerns. And it is spurring large-scale migration of older homeowners, in the process remaking certain communities where longtime residents reluctantly stayed put as they waited to reclaim equity lost in the recession.
“The trade-up market is what’s been missing,” said G.U. Krueger, economist at the California Assn. of Realtors, whose surveys show that repeat buyers are now snatching 57% of Southern California’s houses being sold, up from a low of 45% during the downturn. “This is setting up a chain reaction of buyers and sellers moving up the housing ladder, boosting prices and increasing sales.”
Migration into economically vibrant Southern California is pushing the trend. So are demographics; baby boomers are entering their peak earning years, and with children in tow they are seeking out communities with better public schools and amenities. Meanwhile, many older residents, encouraged by the new tax exemption on property gains, are selling and cashing out now before another downturn comes. That is adding to the supply of available trade-up houses, which nonetheless is failing to keep up with the pent-up, burgeoning demand.
Baby boomers Wayne and Coryne Craparo had been wanting to move up from their skinny Redondo Beach house for about two years, ever since their older child started kicking the soccer ball out of the bathroom-size backyard into the neighbor’s lot. But the couple held on, hoping to see the value of their two-story, three-bedroom house climb back to the $363,000 they paid in mid-1991.
About three months ago, they put their house up for sale. Eight days and three bids later, it fetched $369,000. That equity, plus healthy returns from investments in the stock market, enabled the Craparos to make a significant move up--to a big L-shaped house on a 12,500-square-foot lot on the Palos Verdes Peninsula, with a huge yard and a view of the ocean cusp. For $535,000, they figure they got a bargain.
“I’m thrilled to death, I really am,” said Wayne Craparo, 44, a home-furnishings salesman. “We’re in our backyard almost every night, relaxing and watching the kids play.”
For all the jubilant moves, however, there are growing worries that the trade-up market may soon become overheated, just as in the late 1980s when people moved up at a feverish pace, often for speculative purposes. That is why higher-priced houses fell the hardest during the recession, their values plunging by a third or more from the peak at the start of the decade.
In the current recovery, high-end houses are once again showing the sharpest price gains. But this time, the push isn’t coming from speculators--not yet anyway. Rather, analysts say, it’s from a lot of families like the Craparos, who are plucking the fruits of California’s economic revival and the unprecedented bull stock market to make a long-desired trade up.
The result: In Los Angeles County, houses priced at $400,000 and up--which constitute the top 10% of the market--have generally recovered all of the equity lost during the recession, according to real estate research firm Experian RES in Anaheim.
But that’s not the case for less expensive houses in the county. An average house in Los Angeles County cost $236,900 in early 1991, and that home today would be valued at about 18% less, according to Experian. That equity shortfall is much higher in the Inland Empire’s lagging housing market.
In Orange County, however, average house prices have just about returned to their late 1990 peak levels. One major reason: “It’s largely a move-up market,” said Experian economist Nima Nattagh.
Indeed, a typical house in Orange County costs about $250,000, and that is the median price of repeat buyer homes in Southern California. Many people have been clamoring to move to Orange County, drawn by its strong high-tech economy, reputation for better schools and higher quality of life.
That has dramatically boosted Orange County’s home ownership rate in the last two years, to 65% from 59% in 1995, according to the Census Bureau. Overall, home ownership in California and the nation has been boosted by low interest rates and government loan programs designed for first-time buyers. But the ownership rate in Los Angeles County has slipped in the last couple of years to 48% last year, falling further behind the national rate of 64% for all metro areas.
The figure for Los Angeles County reflects the higher proportion of lower-income households. But some say it also points to how hard it has become for some families to move up because prices have appreciated quickly in some of the most popular trade-up areas.
Kathleen and William Cheyne swallowed a loss of $17,500 on the sale of their Covina house because they wanted to move to La Verne and saw housing prices in that newer area rising weekly. About two weeks ago, the Cheynes bought a bank-repossessed property there for $326,000, after five potential buyers bid up the price from the $319,000 listed.
“I think I could turn around and sell it for $340,000 while it’s in escrow,” said their broker, Marty Rodriguez, a Century 21 agent.
The Cheynes, who are in their early 30s and have two children, were fortunate because they had squirreled away another down payment, through savings and investments. But others aren’t so lucky.
“We have a number of clients who were shopping in Orange County while in escrow, and they missed out on opportunities because they saw substantial increases in just weeks,” said Bob Bishop, a Riverside broker who is president of the Inland Valley Assn. of Realtors. Some of them gave up and went as close to the county and their jobs there as they could by moving to Corona or Chino Hills. “They’re getting squeezed out,” he said.
Competition for move-up houses is growing more intense because demand is outstripping supply. Unlike the booming ‘80s, inventory is shrinking because developers have been very slow to build new homes, which traditionally account for about one-sixth of all housing sales and are generally move-up properties.
Demand, on the other hand, is bursting because there are so many more buyers. More people are now moving into Southern California than are leaving, and many of the newcomers are eyeing the same communities as locals.
Cerritos is a favorite among Asians, said Howard Kim, a broker who moved there about a decade ago. Today, he sees many Korean Americans trying to follow his move-up path: from renting in Koreatown, to owning a townhouse in west Cerritos, before trading up to a single-family house near well-regarded Cerritos and Whitney high schools in the eastern part of town.
Trouble is, Kim said, many Chinese Americans, including new immigrants, are vying for the same $350,000-and-up properties in Cerritos. “The Chinese from Taiwan and Hong Kong, they have plenty of cash flow. Some of them buy all-cash,” said Kim, an agent at Tiffany-Mulhearn Realtors.
Adding to the line of trade-up buyers are new arrivals from other states and from the Bay Area, who are much more likely to be repeat or trade-up buyers. An analysis for The Times by the California Assn. of Realtors shows that out-of-state buyers accounted for more than 10% of all transactions in Southern California last year, up from the 3%-5% range during the recession years.
Separate reports from moving companies also indicate that many more families from Northern California are moving to Southern California than are going the other way. U-Haul, for example, says that based on thousands of moves between January and mid-June this year, about 6% more households from Northern California migrated to Southern California than the other way around--a dramatic reversal from previous years.
Analysts attribute that to a host of factors, including the magnetic appeal of Southern California’s entertainment and multimedia industries and its much-improved image. And, of course, many Bay Area homeowners have had a windfall from that region’s booming--some would say bubble--real estate market.
“I think people are seizing the opportunity to trade up in Southern California,” said Charles King, a consultant in San Francisco who tracks statewide labor rates and other indicators for the consulting firm William M. Mercer Inc.
Longtime Bay Area residents David and Harriet Hood and their 4-month-old baby, Adam, arrived last week in their new home in Granada Hills--a spacious five-bedroom, 3 1/2-bath house for which they paid $350,000.
The couple last month sold a two-bedroom condo in San Mateo for $225,000, realizing an equity gain of about $35,000. The Hoods say they would have made the move regardless of that sale. Both of their incomes have gone up handsomely in recent years, as she did year 2000 programming work and he started a computer technical support practice of his own.
Still, David Hood, 30, said the equity from the condo sale “clinched it.” He aspires to be an actor, but the couple also knew that they could get more house for their money in Southern California.
After seeing 27 houses in the San Fernando Valley, they settled on a house in a quaint neighborhood of Granada Hills. “It’s beautiful, it’s gorgeous,” he said, adding that the seller, an older divorced woman, moved to Santa Barbara.
Brokers say many so-called “empty nesters,” older divorcees, widows or couples who live alone, are now selling their houses and moving largely to smaller, more manageable places.
“Demographics are changing the Westside,” said Tim Corliss, a longtime Westside broker who specializes in seniors. Corliss estimated that people 55 years and older own about 20% of the houses in Santa Monica. Now, he said, they are cashing out, moving into the desert, central California and up along the coast. This year, of course, there is the added incentive under the new tax law that allows a homeowner to avoid paying federal taxes on up to $250,000 in profits on the sale of a house.
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Buyer Snapshot
Comparing Southern California home purchases for 1997:
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First-time buyer Repeat buyer Median price $165,000 $250,000 Median age 32 45 Median household income $50,000 $90,000 Percent minority 42% 18%
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Note: Age is for head of household
Source: California Assn. of Realtors
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Moving Up
After falling off during the recession, move-up home buying is on the rebound as the Southland real estate market recovers.
Percentage of home buyers who are moving up
1997: 57.3%
Source: California Assn. of Realtors
