Everyone is freaking out about expensive homes in Los Angeles.
Most articles about L.A. real estate use misleading data and discourage people from buying.
Owning a home in Los Angeles is one of the easiest ways to become a millionaire.
A 60-year study reveals exactly how strong the real estate market is in L.A.
Two weeks ago, the New York Times came out with an article about the housing crisis here in CA: "The Cost of a Hot Economy in California: A Severe Housing Crisis."
While I agree with the authors that it is challenging to buy an affordable home in Los Angeles, it's really nothing new--and actually the message is pretty misleading. Over the past couple years, I have read countless articles comparing the average or median price in L.A. compared to the rest of the country, or how much a home costs compared to average household income in Los Angeles.
Let's face it: People love to read bad news. Maybe they don't feel as alone when they know everyone is struggling, I don't know. But if you look hard enough, you're guaranteed to find bad news everywhere.
Let's look at the most common examples (excuses) people have been using about Los Angeles real estate:
The cost of real estate in Los Angeles is double compared to the rest of the country.
This makes it seem as though there's nothing special about living in L.A., doesn't it? If it's all the same, you might as well pack up and move to Dallas. Of course it's more expensive to live here than just about anywhere else in the country.
If you didn't see the value of living here, you would be crazy to stay. Just for fun, check out what homes cost in any other major city around the world, and you'll see that Los Angeles real estate is a STEAL even at these prices.
The high cost of a home compared to low household income.
I'm an MBA, so I love playing with numbers. They always tell a story. Here's everyone's favorite argument about household income: Average sales prices increase by 10% in one year and household income increases by 3%. It looks like everyone is losing ground, right?
Obviously I have a few problems with this:
Problem 1. Los Angeles is not your normal city with normal people living in it. It's a global icon, which means we have the richest people on Planet Earth buying homes here. (Perfect example: Angelina Jolie just paid more than $24 million for the Cecil B. DeMille estate in Los Feliz... not because she's a collector of fine homes, but because she was tired of living out of her suitcase and needed a big home for her family in a private area.)
Problem 2. Even if this city was normal (which it's not)... this statistic assumes that every single household is CONSTANTLY in the market to buy a new home. Forget moving to a new house every 5-7 years, what about buying a new home every single year? Doesn't happen. And, this also assumes everyone in L.A. is a homeowner. Nowhere in any market in the U.S. is EVERYONE a homeowner--nor does everyone want to be.
Problem 3. Most of the "low incomes" that can't afford to buy, are ALREADY homeowners! Let me say that a different way… A large majority of existing homeowners today could not afford to buy their own house at current market prices. This sounds crazy, but it's my favorite thing about Los Angeles real estate. Let me elaborate:
Thanks to compound interest, your home has a better chance of earning more wealth for you than you could all by yourself. That's why Einstein called it the 8th Wonder of the World.
Here's a perfect example: Let's say you are saving for a 20% down payment. You have 10% saved already, but want a full 20% so you can avoid mortgage insurance (which is much easier to avoid today, by the way). Based on how much you can save each month, it's going to take you 24 months at your current pace to get to 20%... and let's assume home values are appreciating at 10% each year.
The Math: By the time 24 months have gone by, you would have your full 20%. Unfortunately, the whole time you've been saving, values have been going up too, and your 20% down payment is only worth 16% today. It will take you another 11 months to catch up to the full 20% of today's prices. And by that time, values have gone up again, so you're still short. It's been 35 months now, and you're at 18%... getting closer! See the problem with waiting?
Work Smarter, Not Harder
Let's say you bought the house three years earlier with the 10% you had saved already instead of waiting 3+ years to save 20%. If you bought that home three years ago at $1 million, today it's worth $1,332,000. Based on your down payment and paying down your loan amount, you would have $482,000 in equity. Much more than 20%, mind you. But if you waited until you had the full 20%, not only did you pay 33% more for the same home, but you only have $266,000 in equity (almost half).
Moral of the Story: Leverage the market because you will NEVER catch up to the rising real estate prices on your own... even if you can't afford the $1 million home, buy what you CAN afford TODAY… $800,000, $600,000, $400,000, whatever the price is... just buy something (as long as you can afford it), and let your home do the heavy lifting for you.
Most writers covering Los Angeles real estate see problems when they should be seeing opportunities and telling the rest of the city about it. So allow me:
A 60-Year Study
And, even if we do see another bubble in the next 2-3 years, history has told us to keep your head down and power through. Nothing has been more resilient than the L.A. real estate market. Over the last 60 years in most neighborhoods across L.A., home values have increased at a rate of 7% each year on average.
Through hot markets, cold markets, bubbles, booms, recessions, and crashes... 7% appreciation. The rest of the country would be ecstatic with that kind of long-term appreciation...
In L.A., we do that standing on our heads.