In the LA Mansion Market, Steep Discounts Are the New Normal

Brokers expected a drop-off this year. They didn’t anticipate what came next.

(Bloomberg) — Los Angeles is reeling from successive waves of labor strikes and budget shortfalls. Now, even the city’s rich are feeling the pinch: Its ultra-luxury housing market is subject to deep discounts, brokers say.

“This is how I’d sum it up,” says Marc Noah, a broker with Sotheby’s International Realty Beverly Hills. “Buyers feel that they can take advantage of sellers because of where the market is.”

In this year’s second quarter, median prices for luxury single-family homes fell more than 25% from the first quarter and are down more than 13% year over year, according to an Elliman report. In practical terms, that often means serious discounts.

In early August, a 19,000-square-foot, new-construction, “French chateau”-style mansion in Bel Air closed for $15.8 million, according to Zillow, well below its initial asking price of $27 million. Similarly, a Beverly Hills mansion whose decor was dubbed “Game of Thrones meets Harry Potter” sold in late July for a recorded $16.8 million, a steep drop from its original asking price of $22 million.

“It’s not robust,” says David Kramer, the president of Hilton & Hyland, of the mansion market. “But at the same time, it’s definitely picking up steam. I see it all over the city.”

Everyone in the industry expected sales to nosedive after April 1, when a transfer tax went into effect for the City of Los Angeles. Under the new rules, the seller must pay an additional 4% for transactions ranging from $5 million and $10 million. For house transactions exceeding $10 million, the rate is 5.5%. (Beverly Hills and Malibu, both independent cities, are exempt from the new rules.)

Those taxes were added to the extant .45% transfer tax, meaning that someone in Brentwood who sells their house for $20 million will now be on the hook for about $1.2 million.

“That was a long time coming, because everyone knew it was going to happen the year before,” says Jonathan Miller, the president and chief executive officer of the appraiser Miller Samuel. “Anybody who was thinking about buying or selling essentially poached from the future: Transactions that might have happened now, or next year, were crammed into that narrow window before April 1.”

Sure enough, in the months following that deadline, the market “dropped off the planet,” says Kramer. “The market was almost completely dead until about two months ago.”

Uneven Recovery

Now, brokers say, the recovery in the top of the residential market has been mixed. New signed contracts in April for houses in Los Angeles County priced above $5 million fell more than 63% year over year, according to a Douglas Elliman report, but leveled off by July. A total of 139 contracts were signed for $5 million or more that month, just 5% less compared to the prior year. 

Where the market goes from here, brokers say, is an open question with a series of potentially troubling answers. Not only are interest rates still high and the heightened transfer tax still in effect, but a proposed wildlife ordinance threatens to impact additions and renovations in Bel Air, the Hollywood Hills and elsewhere.

Brokers say the measure could permanently dampen a segment of the market that until recently was only going up. “There will be a lot fewer transactions in the high end,” says Kramer, “and a lot less construction in the high end.”

Lingering Resilience

It’s not all doom and gloom. Even if 2021’s cheap money and boom market are already a distant memory, rich people in Los Angeles are still, by and large, very rich. “The $10 million and up market is a shallow pool of buyers, but they have not been affected by the circumstances of the rest of the world,” says Rayni Williams, a co-founder of Williams and Williams Estates Group. “High interest rates aren’t changing their life.” 

Still, high rates might impact the final sales price. “You’re seeing changes to all-cash transactions,” says Kramer. “But at the same time, people paying cash don’t look to pay more than people who are financing. They’re saying: ‘I’m all cash, I want a discount,” he continues. “So you’re going to see a lower price as a result.”

Prices are thus down but hardly plummeting. The LA luxury market’s second quarter saw an average single family home sell for $17.9 million–down from the first quarter’s $19.5 million, but up 10% year over year.

A Tough Sell

Brokers unanimously agree on what it takes to sell a mansion in today’s climate: The buyer has to think they’re getting a deal.

Often, this means that the houses must feel special, Williams says. “The things you see over and over—modern white drywall box, not a lot of attention to detail and lacking quality? No one’s paying a premium,” she says. “Buyer expectations are for perceived, intrinsic value: things they know and feel they’re not getting pinched on.”

That can mean views, turnkey interiors and high-end amenities, but it also can mean something different to each buyer, leading to a striking amount of uncertainty. “Nothing makes sense in the high end,” says Noah. Subpar properties are finding buyers, “and then you see amazing homes—great value, priced well—just sitting there.”

–With assistance from John Gittelsohn.

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