Los Angeles, CA: -17.5% Return on investment (2011)

Los Angeles is a market segment area that is in serious distress, and is likely to experience continued difficulties before a recovery is in sight.  The state of California is currently in the midst of a far-reaching budget crisis that is likely to result in dramatic cuts to many public services.  The public pension fund is estimated to be $500 billion dollars under-funded[1], which will require either tax increases, benefit cuts, or both.

With a relatively high percentage of its population depending on government services, Los Angeles is particularly vulnerable to cuts in the state budget.  In addition to this, the tax and regulatory environment are extremely burdensome, which is expected to result in many businesses moving out of southern California.  With the 2010 election, seeing the current political power structure held intact, we expect to see no significant changes in public policy for California until it is too late for those policies to have a significant impact.

Val

ues were temporarily stabilized in 2009 by the government subsidy for first time homebuyers, but continued their regression to fundamentals in 2010 as the subsidies ended and the poor market fundamentals become exposed.  Los Angeles represents a generally poor market for long-term investment, due to its price volatility and low rents relative to market prices.  Currently, approximately 60% of listings in Los Angeles are foreclosures[2].

As 2011 unfolds, we are expecting to see the Los Angeles area resume a modest growth trajectory as values creep up from the expected bottom.  For investors who capture this expected value increase, a net positive return on investment is possible, but may prove difficult to capture since the negative cash flows must be supported on a continual basis while the value appreciation is only captured when the property is re-financed or sold.  For income property investors, Los Angeles is fool’s gold.

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