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| Comment: From the Editor |
Fear and Trembling
Douglas McWhirter
11/01/2007
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Summer came late to Los Angeles this year. As the rest of the
country baked, Southern California’s coastal region remained delightfully cool,
insulated, if only temporarily, from the
sweltering heat that enervated inland areas. By the first week in September,
however, the mean season finally caught up with the city. Temperatures on the
Westside—typically lower because of the area’s proximity to the ocean—reached a
miserable 109 degrees, and local power providers warned of rolling blackouts and
the potential collapse of the power grid as air-conditioners droned continuously
day and night.
During these dog days of summer, Westside residents were also feeling a different kind of heat, one that had not made them perspire so much
since the early 1990s when race riots and the shuttering of Southern
California’s fabled aircraft industry sucker-punched the real estate market,
leaving prices suppressed for a decade.
In the second quarter of 2007, home prices in the Los Angeles
region fell 4.1 percent (nationally, that price decrease stood at 3.2 percent,
the worst decline, reported the Los
Angeles Times, in 20 years). In less-affluent
areas to the east and north—Riverside, San Bernardino, Bakersfield—foreclosure
signs sprang up like weeds. The stock market remained in permanent correction
mode and the Fed seemed to drag its feet in responding to the markets’
increasingly shrill demand for a rate cut.
All of this bad news began to take its toll. According to the
Spectrem Group, a Chicago-based research and consulting firm that specializes in
matters impacting America’s wealthiest citizens, by September the affluent were
feeling "pessimistic, expecting a diminishing of their housing assets and
overall wealth."
Yet in Beverly Hills, Manhattan Beach, Pacific Palisades,
Malibu and Santa Monica, housing prices, grossly inflated during the recent real
estate boom, remained relatively stable. In fact, certain neighborhoods saw
dramatic gains in sale prices. In the 12 months prior to July, Brentwood, one of
the Westside’s most fashionable communities, saw a 41.7 percent increase in real
estate prices, according to DataQuick, a San Diego–based real estate information
service. Sure, in many affluent areas homes remained on the market a bit longer
than usual, but for the most part, the Westside neighborhoods of Los Angeles
remained inured to the misery felt across the nation. Prices remained high, as
did demand. Perhaps these homeowners shouldn’t worry so much.
A number of economic and social factors are at play in
America’s great cities that now insulate affluent neighborhoods from real estate
downturns. The first is the phenomenon of the affluent citizen of the world.
Cities like Los Angeles are global destinations in a world economy. Capital
earned in Asia, Europe, Russia and the Middle East flows into high-end, urban
real estate markets, dulling their sensitivities to the vagaries of the local
economy. When living in Bel Air or Brentwood in Los Angeles, for example,
chances are you will have numerous neighbors who are not American citizens, but
keep homes in Southern California for financial and/or political reasons. This
same dynamic applies to New York, Paris and, most notably, London, where Russian
buyers have poured into Hyde Park, pushing already high prices even higher.
The second factor impacting the housing market is another type
of immigration that is fundamentally transforming the real estate terrain. As
poor immigrants flood into American cities, these metropolises are becoming
increasingly Balkanized, both ethnically and economically. Fifty years ago the
Westside of Los Angeles was just another middle-class area with a few expensive
neighborhoods. Today middle-and upper-income Angelenos have abandoned inland
neighborhoods to other groups, and have moved toward the beaches. The demand for
housing—in all areas of the city—has driven prices skyward. This demand will
only continue to increase.
In Southern California, the summer’s first heat wave broke
shortly after it started. The power grid survived with only a few neighborhoods
suffering a loss of service. Coincidentally, the pressure system in the skies
above the Southwest that drove up temperatures and frayed nerves dissipated
about the same time that talk of a more substantive rate cut by the Fed made
headlines.
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