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Signs of Seller Capitulation in the Los Angeles Market: Is The Bust (Finally) Over?

According to Forbes.com and Radar Logic, a New York-based data provider, sales of non-distressed Los Angeles properties are up 6% from a year ago and now make up 58% of all transactions. The same article reports that L.A. houses were recently going for $236 a square foot on average, down 25% from March 2008. What do these statistics mean? Certainly, more sellers have given up on unrealistic price expectations. In financial markets, market capitulation is the “term is used to indicate the point in time when investors have decided to give up on trying to recapture lost gains . . .” and may signal a bottoming (if not rebounding) of the market if enough sellers join the capitulation party. Thus, Wall Street pundits spend a lot of time trying to decipher when the market has finally “capitulated” so they can go plowing back into equities. However, the problem is that no one really knows when the bottom has been reached: at least not until after the fact. Intriguingly, the Associated Press recently reported an upswing in prices in Northern California – is Southern California next? We suspect that, for the low-end properties in the San Fernando Valley, the bottom may already be in place. The reason we think this is that the rent to purchase price ratio (the equivelent to the price/earnings ratio or P/E ratio for stocks) is at the most attractive valuations in years. This fact, coupled with historically low interest rates, is driving a resurgence in demand in cheaper properties, and rightfully so.