Why Leases Continue to Dominate the Palisades Market

By MICHAEL EDLEN | Special to the Palisadian-Post

The Current Situation

Take a close look at what has been happening in the world of real estate around the Palisades for the last year or more. There were almost 20% fewer homes sold than we experienced in 2022, whereas there were more than a 40% greater number of homes leased than in 2022. Moreover, there are now twice as many homes for lease than there are homes for sale in Pacific Palisades.

Some Key Questions and Issues

This is a huge difference. How can we explain such divergences? What changes will need to occur for the market to shift back in the more balanced direction it used to be?

Are we experiencing a market that now favors buyers, since the local price levels are a bit lower than they were in 2022? That seems unlikely. Even at the lower rate of sales, the number of homes available for purchase would have to more than double from what they are as of the beginning of 2024 for us to have a market we could define as being in balance between sellers and buyers.

The median Palisades lease price is now about $10,000 per month, which is 5% lower than a year earlier. Can we expect lease prices to continue to be lower, due to the much larger inventory than we had last year? This too may be unlikely, since the market demand for leases has continued to be so great.

Some of The Answers

The answers lie in the various factors that have limited the number of homes available for potential well-qualified buyers to purchase here for the last eight years.

On the buyer’s side, inventory shortages had resulted in an increasing number of multiple offers, and almost every month we saw prices increase as a result. Gradually the higher prices dampened sales until the latter part of 2020, when the government measures to increase economic activity also accelerated the rate of home price increases. Inventory was bought up faster than new listings became available, which led to the frenzy of purchases in 2022.

Buyers today face the twofold challenge of prices being significantly higher and at the same time that interest rates are about twice as high as they had been for a brief period. Thus, many of them have leased rather than purchased in order to live in the Palisades.

On the seller’s side, four factors are keeping the inventory of homes far below where historically would have been expected.

Capital gains taxes are increasingly greater as the market prices continue to increase. Many long-time owners have chosen to remain in place rather than move to what might be a better quality of life, in order to preserve family equity.

Although many long-time owners do not have loans on their homes, most of those who do have refinanced at the historic low interest rates of 2021-23. They feel frozen in place by the much lower monthly rates, which would be lost if they sold their home to buy another.

Continuing advances in mental and physical health care have enabled people to choose to remain in their homes for much longer than was the case years ago.

Many families are financially able to move elsewhere and obtain high monthly income from the strong leasing market.

What Changes Have to Take Place?

If interest rates do moderate through 2024, which is widely anticipated, more buyers will be able to afford homes at the higher prices. This in turn might encourage more current owners to sell and move elsewhere, using the lower cost of money to purchase. Also, the higher sale prices attainable may lead to some owners recognizing that a buyer would essentially be paying for a chunk of the capital gains taxes, and thus a lower cost of selling.

Over a longer period, of course the usual reasons for homes becoming available will continue to increase. Job transfers, divorces, health and age-related situations, etc., might equal the increase in buying pressure as the millennial generation has growing family needs that lead to a greater demand for housing.

What will remain unknown for quite a while is whether the leasing market will have another cycle of significant price correction or if the appeal to living in the Palisades leads to prices reaching even higher price levels despite the monthly costs.

Michael Edlen has tracked statistics and analyzed local pricing trends for more than 35 years. He can be reached for a private, complimentary consultation at 310-600-7422 or michael@edlenteam.com.