Don't Say the B-Word

Investors Downplay a Housing Bubble, Though Some Expect A Market Cooling

by Kathryn Maese

With the Downtown market as hot as ever, local sellers, developers, agents and even speculators seem to be ignoring the word that is casting a shadow over much of the nation's housing market. They simply have no fear that a Downtown "bubble" will soon burst.

For Downtown, the b-word is "build." The spree has remained strong since last year, even spreading into new territory such as the Industrial District east of Alameda Street where warehouses and old factories are being converted. Other under-construction projects, such as the Alexan Savoy in Little Tokyo, are shifting from apartments to condos even before they open, as developers see a chance to vastly increase revenues.

Throughout Downtown, 19,535 units are under construction, permitted, in planning stages or under consideration (a project in development that has not filed paperwork with the city), according to the Downtown Center Business Improvement District. That translates to 29,302 people moving to Downtown between now and 2009.

At the end of August real estate listing service MLS showed 33 Downtown condos for sale, down from 43 in July. "There are 10 fewer condos on the market than there were a little over a month ago,".  Prices also hit a new high, averaging $520 a square foot, up 16% over the same time last year, according to data from Condosource, a real estate brokerage firm that tracks the Downtown for-sale market. In some cases, multiple offers continue to push up prices.

"There's a bit of slowing, but Downtown is a specialty market and is a bit insulated [from market trends]. I've still had people coming in to see the unit for the last seven days."  An unexpected twist is that the appetite for Downtown living is also increasing the worth of units in many older condo buildings, particularly on Bunker Hill. In fact, property values there have seen the steepest increases: At Promenade West, built in 1981, the price per square foot has spiked 31% from $423 last year to $555 this year. At the Skyline, a 23-year-old South Park complex, residents have seen a 24% increase to $519, according to Condosource.

Troy Soumis, the firm's president, said there is a growing sense, particularly among skeptical Westsiders, that the Downtown boom has staying power and validity. New amenities such as the Broadway Bar are generating interest, and commitments from major chain restaurants including the Daily Grill and Roy's bode well for attracting big
name retail tenants.

"I don't buy into the idea of a bubble because the majority of people are first time home buyers who look at Downtown as their primary residence," Soumis said. "If the majority of buyers are prospecting and renting their units then you've got problems. But I think about 80% live here."

Facing the Flippers

While prospectors may be in the minority, a new trend is original owners selling their still shiny units. Condosource found there were 89 condominium and loft re-sales in the first eight months of the year, an increase from 40 in the same period in 2005.

To discourage investors from flipping properties for a quick profit, many developers have added clauses that prohibit the sale of a unit for six months to a year after purchase. At the 280-unit Barry's Lofts at Fifth and Broadway, for example, buyers earlier this year were selling their units the day after closing escrow and making as much as $100,000.  The developer upped the prices by $50,000 and nearly half who had reservations pulled out.

Still, for first-time homebuyers looking to stay a while, Downtown condos can be considered a relatively affordable way to break into the market. The median price of a single-family home in L.A. County is $543,890, according to the California Association of Realtors.

Peter Johnson and his fiancee have reserved a condo at the Eastern Columbia Lofts, which is scheduled to open early next year. Though he said he sees Downtown as a good investment, he is taking a long-term approach to his property's appreciation."We were looking for a starter home, [with] two bedrooms or one bedroom and an office,
within the metropolitan area," he said. "A house with equivalent amenities would have cost us about $150,000 more than our unit in the Eastern Columbia. A condo Downtown made the most sense. We were also excited by the possibility of being a part of the redevelopment in Downtown."

The San Diego Effect

Although expectations of a local real estate price slowdown have continued through years of double digit increases, experts now think that a leveling off is coming. Economists at the USC Lusk Center for Real Estate recently predicted that housing prices will continue to appreciate in major markets such as Los Angeles, though at a much more modest 2% to 8% for the rest of the year.

"A pricing bubble occurs when we have an asset and the price soars dramatically upwards, turns at the top and falls suddenly, sometimes to the same level it starts from," said Dr. Dolores Conway, director of the Casden Real Estate Economics Forecast at the Lusk Center. "But these adjustments are very rare, unless we have a major economic shock that would yield job losses. Even then prices drop over a period of years, not months."

What lends credence to these predictions are trends in other home markets. Once sizzling San Diego, which underwent a similar transformation in its downtown, has seen condo prices cool rapidly over the last six months. Homes that once sold in a matter of days or even hours are languishing for weeks or longer.

Some real estate observers say it's just a matter of time before the Downtown Los Angeles market feels a shift. Indeed, Condosource statistics indicate the San Diego effect could be migrating north. The firm found that last month, it took an average of 39 days for a condo to sell in Downtown, a week longer than the 32-day time frame in 2004.

Contact Kathryn Maese at kathryn@downtownnews.com.
9/12/2005
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