I received this question from one of my readers about why home prices in the South Bay and particularly Manhattan Beach continue to remain so high.  With their permission I decided to answere the question in a post...

The Question:

I've been reading your blog for a while now. I have a burning misunderstanding about the South Bay market. Fundamentally it has to do with the price curve I see on Zillow when I look at the last 10 years of prices here. The HUGE increase in the slope through the early 2000's is the key. If one looks at the slope of that price curve, for say 90266, over the last 20 years it seems that housing prices went up slowly and steadily. There were big peaks and valleys but the curve always came back to where it would've been had the peaks and valleys never happened. Until recently. Now prices have sort of stabilized around here it seems. But, they haven't crashed and they are no where even close to near what they "should" be according to that curve. Case in point, although a unique house near the beach is 220 19th street. I saw it as open on the MBC blog that I also read. So, I thought I'd reproduce it here and get your thoughts on it. My wife and I are in medicine but are currently on the sidelines but we watch the MLS. Here's the comment I posted, do you have any thoughts?:

***This post made me say, "Whaaaaaaaaaaaaat?" when I read about 220 19th going for $3.1M more than it was purchased for in 2001. So they bought it for $2M and are selling for $5M.I missed the right time to buy a few years ago and so put my money aside to wait. Everybody says that the market is down and aside from the Freddie and Fanny stuff yesterday, that its not going to crash here in the south bay. When a house goes up in price 2.4 times what it was 7 years ago... are we really saying this is reasonable and sustainable prices! Isn't M.B. still in a huge bubble?

My Answer:

I think some of the major reasons for this phenomenon are:

1. The Beach Cities make up a relatively small area. Unlike many major metropolitan areas there are no unsafe parts of town. We may make local jokes about life east of Sepulveda or North Redondo but the fact is property values are high in all the Beach Cities.

2. There has been a change in the demographics in Manhattan Beach and the other South Bay Beach Cities over the last few years. It used to be that you lived at the beach until you became successful in your field or got married or a combination of both and then moved somewhere more "family" oriented like Palos Verdes. That changed in the late 70s as more of us who had moved here as "singles" decided we loved the beach and wanted to continue living near the beach.

3. Each city has its own school system. This drew a number of folks with money who had been living on the Westside into our area. The public schools in our cities were far better then those on the Westside served by LA City Schools. A lot of parents decided that paying a little more for a home was a better deal then paying for private school tuition.

4. The 2000 stock market crash... The dot.com bust scared investors. Many of them decided they wanted a tangible asset as opposed to an intangible one. You may laugh now, but investors liked the idea of something solid like real estate after the dot.com debacle. Real estate in the South Bay looked great for a number of reasons.... location...who doesnt want to live by the beach, no rent control and rents on the high side. A number of those with big bucks figured out that there is only so much ocean front and ocean view property...so they bought it and prices shot up. These investors had money and often paid cash and are probably not in financial trouble.

These little Beach Cities that had been home to middle management engineers and teachers saw an influx of folks with major financial resources. After the collapse of the aerospace industry during the early 90s, a number of companies begin to relocate to the South Bay as office space was cheap. Soon all those office buildings on Sepulveda and Rosecrans were filled with companies that had little to do with aerospace. With the addition of Raleigh Studios, the Beach Cities became more and more popular. 20 years ago hardly anyone knew where Manhattan Beach was or cared. Now they give out weather reports for Manhattan Beach along with downtown LA on the nightly news. Manhattan Beach has become one of the in places to live for those in the know.

The mid-management person from TRW has been replaced by the managing partner of a downtown law firm, a CEO of a Fortune 500 company or other high income individual. Property may only be "worth" what someone is willing to pay... but the Beach Cities seem to have a number of people who are willing to pay some pretty steep prices for these properties. When you have buyers who will pay large amounts of cash for property in a specific community; then that community will trend toward more stable values over the long run. In the last 10 years we have seen a higher number of people who are not only willing to pay $XXX for certain properties but are paying in cash. The percentage doesnt have to be huge just visible to be effective. These types of owners tend to be very stable and are not as affected by the ups and down that hit the rest of the population.

This doesnt mean carte blanche for every home or homeowner in Manhattan Beach or the other Beach Cities; but it does mean that values are probably going to be "above normal" permanently. The phenomenon is often referred to as "the path of affluent migration". At this point in time the Beach Cities seem to be smack in the middle of that path...even in this lousy real estate market. We probably will see prices drop a bit more but I doubt it will be catastrophic unless the entire country goes into a massive recession. East of Sepulveda will always be worth less the west of Sepulveda. Walk street and Sand section homes near downtown in the 100-200 block will be worth more then homes east of Highland. Strand properties will continue to be a very hot item no matter what happens to the overall housing market. Market forces will certainly affect us...just not as much as other areas. We arent immune we just seem to get by a bit better.

In answer to your question... I dont know if 220 19th St. will get one offer, 10 offers or no offers at the asking price. That will depend on whether or not potential buyers find it to be of value at the asking price. I do know that 19th is a great street, the location is close to downtown and the house is lovely. In this case location and condition may well trump concerns about what the home sold for a few years ago. Heres something else to consider... the person who might be willing to fork over that kind of money may see the $5M price as a bargain if the property fits his/her needs.

Finally, it may be that Manhattan Beach has permanently changed from an affordable little beach town to a very Pricey Beach Town. Its quite possible that Manhattan Beach is going to wind up like many other areas where affordability will rise beyond the level of the average buyer. I suspect most coastal cities in Southern California are in fact headed in that direction. As a beach rat from way back, I hate to see this happening and will miss the old beach town atmosphere I grew up with.

So whats the answer for people who want to buy in Manhattan Beach? Im guessing that a number of buyers are going to have to adjust their expectations. Your first house might not be in Manhattan Beach. You might find yourself in Hermosa, Redondo or El Segundo. You might have to settle for a smaller house if you must live in Manhattan Beach. This is what buyers did 15-20 years ago. They bought a small house and upgraded it when they had more resources. Then again, you may choose to rent rather then buy a home. There are a lot of choices open to you.

I dont know if I have completely answered your question but it cant be because my answer isnt long enough......LOL