Los Angeles mansion owners, once keen on selling their grand properties, are now grappling with a market that’s less than favorable for sales. The trend is particularly evident in the city’s most opulent areas, where the challenges are two-fold: a new tax on luxury sales and a turbulent entertainment industry.
The “mansion tax,” officially known as Measure ULA, which went into effect on April 1, imposes a significant additional cost on the sale of high-value properties. Homes selling for over $5 million now have an additional 4% tax, and those above $10 million incur a 5.5% tax. This measure, aimed at funding affordable housing and homelessness prevention, has added a layer of complexity for those looking to sell luxury properties.
Michael Nourmand, president of Nourmand & Associates, highlighted the broad implications of the tax. He pointed out that the reduced number of transactions has a cascading effect, diminishing property tax revenue, which is a significant source of funding for public schools. The tax has also indirectly affected a range of professionals involved in property sales, including real estate agents, title companies, escrow companies, inspectors and contractors.
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As a response, many affluent homeowners are exploring the rental market as an alternative. The rental prices being sought are staggering, with some properties, like a nearly 13,000-square-foot mansion in Manhattan Beach, being offered for as much as $150,000 per month for periods no longer than 90 days. The trend is not just about revenue generation; it’s also a strategic move to maintain property value in a fluctuating market. The owner of the property, entrepreneur Rob DeSantis, commented on the decision, saying, "This is a hedge." He indicated no immediate plans to sell the property.
The rental market is not immune to challenges. Patrick Michael, founder and CEO of LA Estate Rentals, observed a surge in luxury rentals but noted, “I feel like everybody's in panic mode now,” as reported by Bloomberg. This sentiment is echoed across the luxury market, where sales have plummeted. “Home sales in L.A. were down 26.6% from January through September 2023 compared to the same period a year ago,” according to data from Miller Samuel Inc. and Douglas Elliman.
The recent Hollywood labor strikes have also played a role in the market downturn. Zach Goldsmith of The Agency real estate brokerage told Bloomberg, “Because of the strikes, that well dried up.” David Ambroz, a local landlord, expressed difficulties in finding renters during the strikes, impacting his own home search. Although the Writers Guild of America strike ended, the continued strike by industry actors means the full recovery of the market may take time.
In this environment, even the wealthiest property owners are reassessing their strategies. The high borrowing costs have led to a decrease in potential buyers, even in the luxury segment. While many multimillionaires are not dependent on traditional mortgage lending, the overall market conditions are causing a reevaluation of selling versus holding and renting properties.
Despite these challenges, there is still a belief in the long-term value of luxury real estate as an investment. The market’s current dynamics are seen as a temporary phase, with expectations of a future rebound as economic conditions stabilize and inventory levels adjust. This sentiment is echoed by the Institute for Luxury Home Marketing, which predicts a potential return of buyers and sellers in 2024 as the market conditions improve.
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