The Real Story Behind the Los Angeles County 6.6% Median Price Increase

Today's LA Times reported that sales have sunk to a nine year low.  For those who have been watching the real estate market this is no surprise.  Perhaps more surprising is the fact that the median price continued to rise 6.6% on a year over year basis despite this decline in sales.  What other good can you think of that can suffer a massive decline in sales, but still increase its price?  It seems to defy the laws of supply and demand, doesn't it?

Well, in fact, it does defy the laws of supply, but that's another discussion.  What I wanted to point out here is how the county-wide median prices may be misleading, especially for a county the size of Los Angeles.  Let's face it, Los Angeles is as economically diverse a county as you will find anywhere, with cities and pockets of communities having vastly different cultures and economic conditions.

So, I dug deeper into the median numbers and came up with something pretty interesting.

Another LA times article a couple of days ago listed the ten communities (by zip code) with the highest rate of appreciation and the ten communities with the lowest (most negative) rate of appreciation.  Here's the list:

			% change	Median	% change
		Number of	from	price	from
Area	ZIP Code	homes sold	year ago	(thousands)	year ago
L.A.	90061	63	+1.6%	$407	+31.3%
L.A.	90003	135	-10.6	420	+31.3
Compton	90222	108	+13.7	385	+28.3
L.A.	90011	105	+9.4	410	+28.1
Compton	90220	144	+21.0	400	+26.8
L.A.	90037	60	+5.3	445	+26.2
L.A.	90063	51	-10.5	395	+25.8
L.A.	90018	54	-19.4	525	+25.0
L.A./View Park/	90043	122	+1.7	550	+25.0
Windsor Hills
L.A./Watts	90002	143	-0.7	385	+25.0
Woodland Hills	91364	120	-13.7	787	-0.1
Claremont	91711	108	-12.2	583	-0.4
West Hollywood	90046	64	-28.9	1,095	-0.5
Arcadia	91006	85	-19.8	714	-2.6
Glendale	91208	57	-9.5	815	-2.7
Manhattan Beach	90266	108	-19.4	1,450	-3.3
Agoura Hills	91301	65	-47.2	820	-4.1
Palos Verdes Pen.	90274	74	-32.1	1,400	-4.9
L.A./Rancho Park	90064	51	-34.6	895	-6.6
Torrance	90501	69	-5.5	560	-7.4

If you know Los Angeles, you likely noticed the same thing that jumped out at me.  Even if you don't know Los Angeles, look closely at the numbers.  The wealthier, higher income communities with higher median home prices are the ones that had negative year over year rates of appreciation.  In other words, houses went down in the rich neighborhoods.  The poorer neighborhoods, on the other hand, continued massive price escalation.

I prepared some additional numbers on this spreadsheet.  I also pulled some numbers from www.city-data.com.  This is a pretty incredible site.  You can search by city name or zip code and get demographics on the area.  I included average income and % of housing that is rented vs. owner occupied.  I encourage you to open the spreadsheet to see the numbers for yourself, but I'll give you the gist.

For the ten areas with the highest real estate price appreciation, the average increase was 27.28%, the median price was $432,200, the average median (not redundant, they report median, and this is the average of the medians) household income was $26,735.  Also the percent of all residential housing in these communities that is rented is 55.27%.  More than half of the houses/apartments that you pass in these areas is being rented.

For the ten areas with the lowest real estate price appreciation (biggest losses), the average loss was -3.26%, the median price was $911,900, the average median household income was $72,779 and 35.22% of housing was rented.

The income data is from 1999 and the % rental is from 2000.  The findings are rather shocking.  It tells me that the lower economic neighborhoods are still buying like crazy and the wealthier neighborhoods have stopped buying.  The median home price in Los Angeles County may have increased, but it is the lower income communities that is driving this.

Call me classist, or even worst racist, but the harsh reality is that the lower income, lower economic, typically minority communities do not have as much personal finance or basic economics education.

This is a frightening reality as I see it.  While the income figures are seven years old, nationwide wage growth has been fairly stagnant over the last several years.  So, while the incomes may be higher today, not significantly.  The price of the median home in the higher income neighborhoods is 12.5 times earnings.  Again, it may be lower because the income figure is old, but still it is way above historical standards.  However, the price of the median home in the ten lower income communities is 16 times income!  These communities are getting in way over their heads.  I'm afraid the only explanation for the continued price escalation is purchases using risky financing such as Interest Only and Negative Amortization loans.

I have posted before about my impression of the Southern California Housing Market.  I have avoided using the word bubble, but I see no other description that is fitting.  I am not looking forward to the difficult economic times that the bursting (or even soft landing) of this bubble will likely bring.  Sorry to be so doom and gloom.  I don't consider it my style, but I think I'm just being realistic.

Comments

[frugal]

This is the phenomenon at the terminal stage of a bubble. The least wanted properties are going up the fastest.
Read my trackback article for details.

[Foobarista]

I'd figure it's speculators chasing "deals" in increasingly marginal areas. The rich areas are too expensive for speculators to go after...

[Max Stats]

What's amazing to me is that this is a **huge** story and that major media hasn't picked up on it. You better believe that after all these people are bankrupt the LA Times will be there to record their tears.

This will be one of the defining stories of the decade.

[C2A]

I'm inclined to agree with Foorbarista. I also think people with incomes higher than the median for those areas, are moving into the lower income areas beacuse it is what they can afford without strain. I think the makeup of these areas will show drastic change in the next census.

Good information and links.

[mark]

Intersting, but... I just went to city-data.com and yeah - it is an interesting website, but it's most revent data appears to have been from 6 years ago. At least on the zipcodes I looked at (zips for home and work) it was that old.

Wouldn't skew your numbers a lot, considering the price increase from '99 to '06?

[lamoneyguy]

Hmm... interesting. I'm not sure C2A and Foobarista are saying the same thing. Foobarista seems to imply that speculators continue to run prices in lower priced neighborhoods. C2A is saying that higher incomes are moving into formerly lower income areas.

I don't think I agree with C2A's assessment. Foobarista's take is more believable to me. However, it is my opinion that the former renters in these areas are rushing into the market, hoping to buy while prices are still skyrocketing.

Mark, the city-data.com data is old, but it is the relative data that is important here. The difference between the incomes and the owner occ:renter ratios. The price:income ratios are obviously out of date, but the demographic data is still relevant.