Cost of Moving Up Keeps Many From Selling Homes

Steve Friedman knew it was time to bring in an architect.

For two years, Friedman and his wife, Eden, had been looking for a bigger house in their area, knowing they could sell their residence in Rancho Palos Verdes for close to double what they paid five years ago.

Yet after they did the math, Friedman said, moving up didn’t pencil out, even with the expected windfall. Any gain would be quickly absorbed by the purchase of a larger home, he realized. And their property tax bill would nearly triple, saddling them with a five-figure payment every year.

So the Friedmans decided to add on to their house instead.

“To spend roughly 50% of a mortgage payment on taxes is unfathomable to me,” said Friedman, an executive at a website marketing agency. “So now our decision is how to best maximize the space we have.”

Friedman is like many Southern Californians who could make a bundle by selling their homes. But rather than cash in, they are staying put.

These decisions not to sell are a key reason local housing prices continue to climb through the roof. While buyer demand continues unabated, the supply of homes for sale remains tight.

“There are a million bubble theorists, but the bottom line is: If no one is interested in selling, you’re not going to have a market going down,” said Michael Davin, executive vice president of South Bay-based real estate brokerage CataList Homes Inc.

The inventory of properties for sale in Southern California is near record lows. The supply of existing single-family detached homes on the market stood at about three months’ worth in May, according to RealData Strategies, a Brea-based consulting firm. That was only slightly above the 2.5 months’ supply available this time last year. A normal supply of homes is six months, meaning it would take that long to sell all the homes on the market at the current rate.

The tightened supply comes after a spurt of homes on the market last summer and fall, when prospective sellers hurriedly planted “For Sale” signs on their lawns in a mad dash to cash out at what many perceived was the top of the market.

The sudden swelling of inventories caused prices to start leveling off almost immediately, as interested buyers drove harder bargains. By some accounts, supply had swelled to five months’ worth.

But by late fall, many sellers “pulled in their horns because they didn’t get the price they wanted,” said G.U. Krueger, an economist at IHP Capital Partners, an Irvine-based real estate investment firm.

Prices resumed their upward trajectory -- albeit at a slower pace -- and most of those likely sellers haven’t returned to the market.

This “no sell” phenomenon, which is impossible to quantify, may be a function of the market cycle. The region’s housing market has been on a torrid streak for five years running. Last year alone, Southern California’s median price rose 23% from the year before.

Those homeowners willing to leave the area or downsize to smaller, less expensive homes probably have already done so, said Raphael Bostic, an associate professor at USC’s School of Policy, Planning and Development.

“Now, you are left with a set of people who are looking to sell but also have to live in the area and therefore have to buy in the same area where they’re selling,” Bostic said. “That’s a different market sentiment.”

Another reason for inventories staying so thin, figures Robert Kleinhenz, senior economist at the California Assn. of Realtors, is that with persistently low mortgage rates, the pool of buyers has expanded.

“So the prospects of a home to be snatched up is probably better now,” Kleinhenz said.

That helps explain why the pace of home sales has stayed strong. April had the second-largest number of sales for any April in Southern California since 1988, according to DataQuick Information Systems.

Indeed, around Southern California, it remains a seller’s market. Reports abound of properties receiving multiple offers, usually above asking price.

But lately the mood of would-be sellers has gone from “I can make a killing” to “If I sell, where would I go?”

James Joseph, owner of a Century 21 realty franchise in Whittier, calls it the “golden jail” of homeownership. Even though they are sitting on a ton of equity, “a lot of people aren’t selling ... because they can’t afford to move up,” he said.

If a single Californian who has lived in her home at least two of the last five years sells her house, she gets to keep the first $250,000 of gain free of income tax, but any amount above that will be taxed. (For a couple, the tax-free amount is $500,000.) In addition, if she decides to buy another home, she would have to pay annual property tax equal to at least 1% of the assessed value, which in nearly all cases is the purchase price.

So, if she buys a median-priced home in Southern California, which today is about $450,000, she will be on the hook for at least $4,500 in yearly property taxes. (The median is the price at which half of all homes sell for more and half for less.)

It’s not just higher taxes and higher prices that are persuading many homeowners to sit it out. Brokers’ commissions, escrow fees and other closing costs also are based on a percentage of a home’s sale price. So as prices rise, so do the costs associated with the transaction.

“You really have to want to move to move,” said Davin of CataList Homes.

Los Angeles bankruptcy attorney Ian Landsberg would be more than happy to collect on his fast-mounting equity gains. He bought a $1.5-million home in Tarzana last year that these days he estimates is worth about $2 million. But because of the costs involved in selling, plus a likely capital-gains hit, he’s sitting tight.

“My house might have gone up in value, but it’s not as if other houses haven’t been affected too,” he said. “You’ll be paying more no matter what.”

That’s why real estate agent Brian Moore has advised some of his homeowner clients not to sell.

“A lot of times it just doesn’t make sense,” said Moore, who specializes in the Mount Washington area of Los Angeles, a middle-class neighborhood north of downtown that recently recorded its first $1-million home sale.

But even when the numbers add up, Moore said, “the hardest part is finding a replacement house.” Many sellers “don’t want to risk putting their house on the market unless they can afford to buy the new house” first.

The no-sell trend is happening in other U.S. markets too. Supply is tight in many of the nation’s hottest markets, such as Florida and parts of the Northeast and Southwest. Nationwide, the inventory of homes for resale is about a four-month supply, below the six months’ worth that the real estate industry considers adequate to keep sellers and buyers in balance.

Putting extra pressure on the local housing supply are homeowners such as Cheryl and Robert Lacarriere, who are looking to keep their existing home as income property while upgrading to a bigger residence.

The Lacarrieres own a five-bedroom home in Fullerton but are in the market for another in the same neighborhood that offers more privacy. If they find a property they like, they will move and lease out their current home, which they bought in 1997 for about $260,000. Today, comparable homes in their neighborhood are selling for $850,000 to $900,000.

Just the fees alone, Robert Lacarriere figured, would cost him about $50,000 if he sold.

“As long as I could keep this house and rent it, I would move,” said Robert Lacarriere, a self-employed financial consultant.

Meanwhile, contractors are in the midst of a boom, thanks to homeowners such as Steve Friedman.

The total valuation of residential alterations and additions for which permits were issued in Southern California last year was $2.6 billion, according to the Construction Industry Research Board. That was a 16% increase over 2003. A large portion of that is attributable to renovations by people who have owned their homes for some time, as opposed to improvements on newly bought fixer-uppers.

Friedman, his wife and their two kids enjoy their 1,600-square-foot house, which is in a highly rated school district. The only problem is its size. But by spending about $200 a square foot, he estimates, he can add a fourth bedroom and possibly a library or den.

“It’s important to me,” he said, “not to be house-poor.”