Will the Los Angeles Housing Market Crash or Correct Itself?

Will the Los Angeles Housing Market Crash or Correct Itself?

It’s common sense that everyone who wants to buy a house wants to make sure that they are getting the absolute best price possible.
Especially, when it comes to Southern California where real estate isn’t cheap. As a general rule, people always want to pay as little as they can, but what about when it’s time to sell and get a return on that large investment?
It’s really important that we talk about two major points that often a lot of people overlook. In the haste and rush of signing the paperwork and moving into your dream house, many homeowners don’t think about cycles and price corrections.

Cycles Are Natural

Life is fairly cyclical. We see this in everything we do. From our parents taking care of us to us taking care of them in their later years, everything is constantly evolving. The financial market (and the housing market) is no exception.

Market Uncertainty is not the Same as a Cycle

Think back to the most recent election, for a moment. If you remember during that time prices dropped a bit temporarily and those who took advantage of the market during that period picked up some very good deals.
This was an example of a time when there was uncertainty in the market. It was brought about by changing world conditions and global leadership changes. This was not an example of a true cycle, this was an example of uncertainty. That’s what most people get wrong.
Instead of being the end of a cycle, this was an example of a moment in time where people were skeptical about the future and some people were able to pick up some good deals as a result. Fear and or uncertainty motivated the market to create better deals.
So if uncertainty leads to better deals, how can you make sure that you are able to capitalize on these great deals when they do come around? And how can you know that you are in the right place at the right time?
The answer is learning how to time out the cycles.

Your Anxiety Leads to Better Deals for Others

Anxiety in the market is actually brought on by people’s perceptions of what the market will do. More precisely, people think that the market is going to go down, and this is what causes a slowdown in the economy and what gives the ability for buyers to pick up deals. This is not always the case and many times the economy is what causes a drop. But in many instances like now, it’s all about fear and anxiety on the buyer’s part.
It’s interesting that fear and anxiety and even people themselves can cause the market to slow down, rather than the actual economic situation. Look at our economy right now, we are actually in a very good place. There should be no reason for prices to drop aside from people’s nervousness.

Price Corrections Influence the Market

Because of some of these astronomical prices, people fear that we are at the end of the cycle. Houses that are 5000 ft.² overlooking the Sunset strip should not be selling for $30 million. This is just factual. We have so many overpriced houses that during this time prices will drop on these individual properties.
This is where the conversation about price corrections comes in. When properties are priced too high, and the economy is good we see these corrections happening. This is a natural effect of the market.
Again, keep in mind this is just my opinion. No one actually knows what will happen, but my prediction is that overpriced $12 million houses listed today will sell for closer to $10 million.
However, the homes that are priced correctly and are not owned by sellers that are totally out of their league, will do just fine because these homes will be recognized as bargains even though they are nothing more than just priced intelligently and accurately!
I often have this debate with folks that say to me that when the overpriced homes that are $15 million drops to $12 million, that this will create a domino effect and cause homes that are priced correctly to also drop.
I disagree with this. I think the accurately priced homes will stay priced where they are because they were always priced well and I think the $15 million home that was priced wrongly will drop to $10 million because it never was worth $15 million, to begin with.
The most important thing to realize though is this. The sellers of these properties, many of whom are developers, will be cash-strapped and unable to buy other things. These developers will want to get these properties off the books.
The good news for these developers however is that they are still going to make money. Remember that a lot of these developers bought these properties three or four years ago in a lower market and got them for a song and a dance in comparison. They got them for a lot less money than market value today. So even though their margin might not be as great as they had hoped, they are still going to make money. But the point is they want to turn these properties so they are cash-flush again and can move onto the next project.

Illiquidity is a Factor in the Market

There is a problem with illiquidity right now. Many people have a lot of debt. So because of this high amount of illiquidity, things are a little soft right now. When these properties are sold, the developers will be liquid again and this will stimulate purchases again.
If you are smart and understand the cycles and the economy you can always pick up a good deal, but you have to be smart and not be too greedy. If you are greedy and wait, sometimes you will miss your time window. You have to act when the market is on your side. However, if you are a seller and you are smart and you are not greedy, you will price your property appropriately and get it sold for top dollar. But if you do what most sellers do and you overprice your property for a third more than it was ever worth, you will surely sell it for ten to fifteen percent under its value.
Remember the longer a property sits on the market, it grows stale. I’ve worked with enough clients to know that everyone believes that their home is worth more than it really is. But don’t feel bad I am guilty of the same thing, the only difference is when I sell my homes I don’t let my emotions get ahold of me and price them for more than they are worth. Also, it helps that I am married and my husband can talk sense into me.

The Market Will Correct Itself

The biggest thing to remember here is that the market will always correct itself. It ebbs and flows, and you need to remember that cycles occur naturally. Right now, people believe we are at the end of a cycle. Because of this, there are deals to be made!
If you are waiting because you think there is going to be huge bargains in the future and a huge price correction, you are better off playing the game right now because you have uncertainty on the side of sellers. And when people are uncertain they don’t play as hardball in negotiations.
Keep your eyes on the overpriced properties and keep your fingers on the pulse on the ones that are priced well. But at the end of the day remember one thing (and this is the most important advice I could ever give you)...
Buy the best that you can afford that you like!
And remember one other thing: if you overpaid a little bit or underpaid a little right now it’s going to make ZERO difference in your life when you sell this house in 10, 20, or 30 years, or when your kids sell it for you are dead.
If you buy a home for $6 million right now and it is worth $18 million in 30 years from now, it’s going to make zero difference if you could’ve bought the house for $5.8 million or $5.9 million instead of $6 million.
Do you catch my drift?
BUY WHAT MAKES YOU HAPPY and forget about saving a buck here or there. At the end of the day, I promise you will come out ahead!
Someone once told me that there’s always another deal around the corner, but there’s not always another house that’s perfect for you and your family.

Work With Josh

Josh Flagg is one of the world's most successful real estate agents and has helped hundreds of buyers find their dream home in Los Angeles and Beverly Hills, resulting in over $3 Billion of closed real estate transactions.

Follow Us