The resumption of spec development will be the catalyst for increased real estate activity and appreciation
by Dennis Moloney
Despite many who advised that “it’s different here,” it turned out that the Manhattan Beach real estate market was not immune to the nationwide downturn in home values.
The well documented collapse of the secondary markets for residential mortgages eventually worked its way into even the wealthiest marketplaces. By the time Fannie and Freddie collapsed in the summer of 2008, inventories of spec new homes were near an all time highs in Manhattan Beach. The record prices of 2007 and early 2008 began to give ground. The perfect storm of inventory peaking at the same time the jumbo loan market evaporated, augmented by a plummeting stock market and general economic turbulence, finally resulted in the malady spreading to our shores in late 2008.
During the six month span covering the 4th quarter of 2008 and the 1st quarter of 2009, sales volume for high end homes ($1.5M+) in Manhattan Beach dropped to a level not seen since the months following September 11, 2001.
As the spec inventory burned off, most of the local market hit bottom in 2009. Interestingly the four major submarkets (Sand Section, Hill Section, Tree Section and East Manhattan) did not move together. The Sand Section was the last to fall and is already showing the strongest signs of recovery. This is partially attributable to the fact that Manhattan Beach has become a top choice for people looking for second home in Southern California and these buyers usually end up buying in the Sand Section.
2010 was a year of mixed signals. While we were told we were officially out of the recession, unemployment remained sky high and growth was slow. We witnessed contentious midterm elections and a federal tax compromise while economists debated the possibilities of a “double dip” recession.
Against this backdrop, the local market began to stabilize during the first quarter. The first half of 2010 witnessed the strongest sales volume we have seen in our market since the summer of 2008. The second half of 2010 didn’t quite measure up to the first half, though it’s hard to be sure what to attribute this to. Foreclosures have had a negligible affect locally, although short sales are still being sought. There’s no arguing that homebuyer tax credits motivated some buyers to make purchases in the first half of the year and mortgage rates rose at year end, but I believe those were not the most significant contributors to a slowdown in sales activity.
I believe the market malaise in the second half of 2010 was chiefly attributable to a lack of good quality inventory. This is the result of the combination of no newly constructed homes coming on the market, and the fact that many existing homeowners simply aren’t interested in selling with prices at their current levels.
As we start off 2011, people involved in the Manhattan Beach residential real estate market are optimistic. After a couple years of declining values and lower sales volume, attitudes are buoyed by the rebounding stock market, improving consumer confidence, and relatively low interest rates. Homes are selling and those priced correctly are selling quickly due to a general lack of inventory.
The biggest stumbling block we face locally is the fact that there are literally no new spec homes in the pipeline. The resumption of spec development will be the catalyst that will lead to increased activity throughout our markets. I believe any significant appreciation in the next year is predicated on this happening. When new development activity finally regains momentum, builders will begin redefining both ends of the price spectrum. Just as “lot value” purchases establishes the support level for the bottom end, new home sales establish and expand the values at the top of our market.
The upper end of the housing food chain has basically disappeared for now. This is a troubling factor because of the synergistic effect these sales have historically played in our market. Presently, move-up buyers have nothing to move up to. This leaves would be new home buyers the options of staying put or purchasing land and developing their own homes, an option most frequently pursued at the highest end of the market. As you drive the streets of Manhattan Beach you still see a significant amount of new construction, but it is chiefly by owners who intend to occupy these homes. For example, if you take a quick stroll down Ocean Drive, you’ll see four major, new homes underway on The Strand (with valuations upon completion in the $10 million to $20 million range), and a half dozen more in the 100 block of the walkstreets (which will all be worth $5 million to $6 million upon completion). These properties however will not be coming to market. They are all being developed by the people who intended to occupy them.
The resumption of a significant amount of spec development is predicated on developers regaining confidence in the market, as well as on the return of lenders willing to finance spec development. The biggest player locally was seized by the FDIC in 2009 and no one has stepped up to fill that void, yet. Some players will emerge before long because with the equity positions required, these are actually very low risk loans in our marketplace
So while the cycle of redevelopment has yielded to market forces and paused for awhile, the fundamentals remain strong. Pent up demand is accumulating for well conceived, new homes. Manhattan Beach is still the number one choice for people who want to live at the beach while working in the traditional LA business centers. Our climate, neighborhoods, small town atmosphere and diverse housing stock are all huge draws. Our public schools are outstanding and are supported by a community that raised over $4 million in private donations last year, alone. The shops and restaurants in downtown continue to upgrade and improve and have made the “walk to town” location the most frequently heard refrain among our ever present house hunters.
Look for strong demand this year for well priced homes. Prime locations like The Strand, walkstreet and ocean view Hill Section properties will be in short supply and aggressively sought. Homebuilders will start replenishing the market with new homes, initially in the Tree Section and Sand Section. Volume will expand and prices will rise as these homes come to market.
While its human nature to want to time the market, it’s an in-exact science at best. If you’ve been thinking about when the right time will be to start looking more seriously at making a move, you could do a lot worse than starting now.
 Dennis Moloney is the owner of Moloney Development, and is a licensed real estate agent affiliated with Shorewood Realtors, Manhattan Beach.
