Monthly Archives: March 2008

The Data Does Not Lie

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Most bubble blog readers know that the housing correction will be severe, but I sense that the average Joe still does not quite understand the magnitude of the consequences caused by this Great Ponzi Scheme. The mainstream media is partially to blame for their cheer-leading headlines and quotations from the National Association of Realtors’ (NAR) misleading reports, but it is the homedebtors’ natural reactions of denial and hope that brings mixed feelings to the market.

I spoke to a homeowner last week about the housing crisis and she told me that she’s not worried because once we get all the subprime lending out of the system, everything will revert back to normal and “be okay.” My breakfast almost ended up all over my keyboard and monitor. I cannot say this enough – the problem is much bigger than just subprime loans. Tomorrow, we will be at #16 of this now infamous Credit Suisse chart. As you can see, we still have a long way to go.

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This isn’t the first housing bubble we’ve come across and I hear many people comparing this bubble with that from the 80s and 70s boom. While history doesn’t always dictate the future, it gives us a good basis of comparison. There’s no exaggeration when I say that we’re making our way through a bubble of epic proportions. It’s not a joke; this is history in the making.

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Remember how the NAR always says that “every market is different” in those malicious tv commercials? Well, there is actually some truth to that. Some markets, like California, Nevada, Arizona and Florida are in fact different – they’re especially bad when it comes to the percentage of new and refinanced mortgages with option payments. It’s no wonder these states enjoyed the biggest run-up and will soon experience the biggest correction, as compared to other parts of the country.

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California is in it for a rough one and Los Angeles is no exception. During the boom, we saw homes that doubled in price over just a few years with the bidding frenzy feeding off the people’s greed and ignorance. Now that the fountain of kool-aid has stopped flowing, many are left to wonder how the correction will play out. This is a projection based on the Case-Shiller Indices and according to this chart, the end of the correction is sometime in 2011 or 2012. We are currently at about 225 on the index.
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Yesterday, TheArcadian reported the numbers at the national, state and city level. Nothing in the data suggests that we’re “turning around” or “at the bottom.” During the boom, many laughed and scoffed at me like I was a mad woman when I entertained the possibility of home prices crashing 35-50% from the peak. All the bulls and wishful homedebtors should put away their hopes of a rebounding 2008. February’s report shows that Arcadia’s sales volume is down 28% and its median home price down 20.6%, both year-over-year.

We’re not even halfway through the correction yet and all of a sudden, 35% off the peak doesn’t sound so crazy after all.

Inventory & Market Report – 3/29/08

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Zip Codes: 91006, 91007market_icon.jpg

Current Market Listings as of March 29th, 2008*
Properties for Sale: 234 (-11)
Median Listing Price: $775,000 (+0)

Weekly Foreclosure Update*
Properties in Foreclosure: 19 (+2)
Properties in Pre-Foreclosure: 64 (-1)
*+/- is compared to previous week’s data.

Last February’s housing numbers are reporting nothing but negative news. Let’s start on the national level:

National Housing Data
Bloomberg is reporting that “Home prices in 20 U.S. metropolitan areas fell in January by the most on record.” After 13 straight months of falling prices, the S&P/Case-Shiller home-price index has dropped 10.7% since January of this year.

California
At the state level, California fared no better as DataQuick reported that February home sales were the slowest ever on record. “Sales were up 7.1 percent from 19,145 in January and down 34.3 percent from 31,228 for February last year.”

Arcadia Housing Data
Although Arcadia is a great city to live in, it is not immune to this housing crisis we are facing. So here are the numbers:

Number of homes sold
Quarter-ending February 2008: 121
Quarter-ending February 2007: 168

Home sales in Arcadia are down 28% from last year.

Median price of homes sold
February 2008: $647,000
February 2007: $815,000

Arcadia’s median home price is down $168,000 or -20.61% from last year.

Property and foreclosure numbers obtained from U.S. Census, ZipRealty, Trulia, Yahoo Real Estate and Foreclosure.com. Market listings and price data obtained from DataQuick News.

On the Hunt

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1025 W. Huntington Dr. #K

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Asking Price $228,000 ::: Sq-ft 1,160
Purchased Price $200,000 ::: Lot Size 2,117
Purchased Date 10/28/2005 ::: Beds 3
Days on Redfin 25 ::: Baths 2
$/Sq-ft $197 ::: Year Built 1968
20% Downpayment $45,600 ::: Area Huntington
Income Required $57,000/yr ::: Type Condo
Est. Payment* $1,153/month ::: MLS# W08032144

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

This is the cheapest property on the market in Arcadia today. At $228,000 and $197/sqft it looks like a steal, but looks can be deceiving. The $1,153/month mortgage payment is very affordable; admittedly you’d have to put down $45k, but it’s not an outrageous amount. Then I look at the description to find out that you have to pay a mind-boggling $780/month to lease the land. In addition to that, there’s a $184/month HOA fee that bumps the monthly carrying costs to $2,117 excluding taxes, insurance, maintenance etc. For that price you can rent a 3bed/2bath SFR and still have $167 leftover to pay for the utilities. It’s also the equivalent of buying a $380k property with the same $45k downpayment at the same interest rate.

Sales History

Date Price  
Aug 14, 1996 $55,000  
Jul 17, 2000 $152,000  
Sep 07, 2000 $145,000  
May 21, 2004 $200,000  
Oct 28, 2005 $220,000  

This was purchased on the high in 2005 and these sellers are still listing it above their purchase price. Obviously they didn’t read my letter in yesterday’s post. There must be something magical in “breaking even” on a bad investment. The psychological impact of it is so great that many choose to ignore the facts and live in their own alternate world until they’re forced back into reality. By then, it’s usually too late.

To top it all off, this is an awful property. I can’t find one redeeming quality that would make me want to buy it. It’s on a big street with heavy traffic and has a non-permitted addition. It’s also fairly small and dated with just one parking spot. Even as a renter, I wouldn’t want to live there.

Remember, this actually isn’t the cheapest property on the market today. The horrific $780/month lease for the land coupled with the homeowners association fee effectively puts this condo at about $380k. These sellers are on a hunt to find a knife-catcher to bail them out so beware. Don’t be fooled.

Have a great weekend :)

Dear Homedebtors…

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After doing property profiles on AHB day in and day out, it has come to my attention that most sellers are still overpricing their property for sale. As a potential buyer, I would like to share something with them. Perhaps they are still in denial and believe that buyers are willing (and/or able) to meet them at their sky-high prices. If that’s the case, this should clear things up. If I spoke to a seller today – this is what I would say to them.

Dear Sellers,

I am writing to you on behalf of myself and many other prospective buyers regarding the current housing market. This is not an attempt to mock or ridicule you for your past actions, but rather a letter to inform you of our thoughts as it relates to the buying and selling of real estate today. Surely I cannot force you to read this letter anymore than you can force me to buy your house, but it is to your benefit to at least hear what I have to say. Whether you agree or disagree with me is another story.

There’s no roundabout way to put it so let’s just get to the point. If you are serious about selling your property – price it to sell. If your property has been on the market for more than a month, then it is not priced to sell. Period. The market price is what we, the buyers, are willing to bid regardless of where you set your asking price. If you set the right price, then someone will put in an offer for it – even in a down market like we’re in today.

Think of yourself as a buyer. When you bought the property you’re currently trying to sell, what did you consider? Did you buy it because the current owner said it was worth the asking price? No, I didn’t think so. You bid whatever you thought the property was worth at the time. It’s the same with the potential buyers looking at your property today. Unfortunately for you, most buyers today think the market (especially here in California) is wildly inflated and subject to a steep correction for months or years to come.

That being said, there are still some people who are in the market to buy right now. They just don’t like the asking prices. Generally speaking, these people are not trying to offend you with their lowball offers; instead they’re just trying to compensate for the reduction in home values they expect in the foreseeable future. Wouldn’t you do the same if you were on the other side of the fence? Be honest with yourself. Denial is not a solution and can be devastating to your finances.

Instead of chasing down the market with small, mediocre price reductions every few months I suggest you reduce the asking price today. Not tomorrow, or next week or next month – today. Everyday your house sits on the market unsold is another day you have to swallow carrying costs and maintenance fees. In addition, you also risk losing even more money as the neighborhood comps drag you deeper into the red. The outlook does not look good. With sales volume falling off a cliff and prices starting to slide even in the more desirable areas, buyers are more cautious than ever about entering the market. Your buyer pool will shrink as the housing correction continues and the decline in home prices will be the only factor that will bring buyers back into the market.

If you think things are going to “turn around” or “pick up in the spring” then you’re hanging on a very thin thread. It doesn’t matter what you think. Buyers don’t care what you think your house is worth or what your realtor/neighbor/wife/dog thinks its worth, nor do they care that you need the money to get out at “breakeven” or to pay off that HELOC. They also don’t care what you banked your whole retirement on this property or that you overpaid and looking for someone to bail you out. It doesn’t matter to them. All they see is an overpriced house they’re might not even like that much.

Again, if you’re serious about selling your property – reduce the price. Buyers don’t have to buy, but many sellers have to sell. We have all the time in the world, but you don’t. If you did, you wouldn’t be selling right now. Wouldn’t you rather just rip off the band-aid than to peel it off slowly? Either way, it’s coming off. How it’s done is up to you.

Yours,
SBG

Still Singing?

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905 Singing Wood Dr.

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Asking Price $3,450,000 ::: Sq-ft 4,711
Purchased Price $2,400,000??? ::: Lot Size 0.89 acre
Purchased Date 02/17/2006 ::: Beds 4
Days on Redfin 146 ::: Baths 5
$/Sq-ft $732 ::: Year Built 1966
20% Downpayment $690,000 ::: Area Santa Anita Oak
Income Required $862,500/yr ::: Type SFR
Est. Payment* $17,443/month ::: MLS# 22101527

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

I couldn’t find a previous sales price for this house, but it showed a transaction on 2/17/2006. According to the property tax it paid in 2007, it’s was probably purchased for around $2.4MM. Zillow currently has its “zestimate” for this property at $2.3MM.

As a comparison, it’s neighbor 945 Singing Wood (3 doors down with 25,000 sqft more land and an extra bedroom) sold on 11/08/07 – again price not shown (what’s going on with that?). Zillow shows a sale at $1.45MM seven years ago on 09/14/01 and has estimated values based on property taxes paid of $1.5MM, $1.57MM, $1.57MM and $1.60MM in 2004-2007. That’s a lot of numbers; let’s break this down.

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The current seller wants $732/sqft or $3.45MM for this property. That’s down $265,000 from last November, but still insanely overpriced. This is a gorgeous property with an exceptional layout in an upscale community, but that doesn’t justify the ridiculous price.

A 20% downpayment for this asking price is about the same as many people’s entire home value. On top of that, I don’t know of too many people who can afford the $20k+/month carrying cost. Surely this isn’t just any normal home so it’s not for the average joe or middle class family, but don’t you think $3,450,000 is a little steep? We’re not along the coastline or in Beverly Hills – this is suburbia.

Obviously it was marketed for the high end buyer since they went all out with the professional photography and staging. Aside from the sky-high asking price, it’s a pretty good listing. Not that I can afford this now (or ever), but if I could I’d gladly pay up to $1.90MM for this beautiful house today. If it ever sells, I’ll give an update on the actual sales price.

Footing the Bill on Foothill

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1031 W. Foothill Blvd.

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Asking Price $1,998,000 ::: Sq-ft 3,754
Purchased Price $1,700,000 ::: Lot Size 44,100 (1 acre)
Purchased Date 07/26/2005 ::: Beds 4
Days on Redfin 156 ::: Baths 4.25
$/Sq-ft $532 ::: Year Built 1956
20% Downpayment $399,600 ::: Area Santa Anita Oak
Income Required $499,500/yr ::: Type SFR
Est. Payment* $10,102/month ::: MLS# 22100417

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

I had noted the large lots in this community in the profile on Monday and this property clearly exemplifies that feature with a full acre of land. Sure this is in an older neighborhood, but that’s almost unheard of in Los Angeles. You can fit an entire cluster of those new detached condos on there.

Purchase Date 07/26/2005
Purchase Price $1,700,000
Loan Amount $1,190,000
Downpayment $510,000

This seller put half a million dollars of his own money into this house and thus the bank will not be taking part in the losses. I doubt this property will go below $1.19MM. The seller on the other hand may very well lose a significant part of the $510k downpayment. A price drop down to the Dec 2004 selling price would leave the seller with a 40% loss on their downpayment plus the carrying costs for the 32 months of ownership. OUCH.

Listing Price History
10/29/2007 $2,100,000
02/06/2008 $1,998,000

These folks tried to make $400,000 in 27 months; that’s the equivalent of almost $15k per month. After being on the market for some time, the price has been reduced $102,000 or 4.9% of the original asking price. This sounds like a kool-aid concoction mixed with two shots of greed and served on denial. Don’t get me wrong, it’s a beautiful property, but do the sellers really think they’ll find a knife-catcher at this price? Apparently they haven’t found one yet after 5 months.

Since the original purchase was in 2005, they probably got a great rate on their loan. If it’s adjustable, they may be facing steep resets and want out. Either way, they don’t want to foot the bill for this estate anymore. Including property tax, maintenance and insurance, carrying costs could easily be over $10k/month.

Affordability aside, what would you be willing to pay for this property today?

High on Hyland

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1537 Hyland Ave.

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Asking Price $1,250,000 ::: Sq-ft 2,567
Purchased Price $1,158,000 ::: Lot Size 10,880
Purchased Date 02/13/2007 ::: Beds 4
Days on Redfin 78 ::: Baths 3
$/Sq-ft $487 ::: Year Built 1948
20% Downpayment $250,000 ::: Area Santa Anita Oak
Income Required $312,500/yr ::: Type SFR
Est. Payment* $6,320/month ::: MLS# A08002615

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

“note, tenant occupied, lease up 7/31/08, currently leasing for $4,300/mo. can make offer subject to inspection, try longer escrow and take over lease for a few months or close on 7/31/08.”

This property has been on the market for 2.5 months and still has 4 months left on the current lease to the tenant. That means that the owner listed the property for sale a full half a year before the lease is up. The seller must be very anxious about the market to do that. It seems like neither the seller nor many of us here think that home prices will rebound in the coming summer – hence the sale.

I wasn’t able to obtain loan information for this particular property, but it was purchased about a year ago for $1,158,000 just as the subprime blowout started to hit the fan. It’s currently renting for $4300/month. I love finding rental rates because it gives me a direct rent vs. buy comparison.

GRM
$1,250,000 / $4300 = 290

I often use the GRM of 180 as a baseline comparison. Some have questioned my use of this arbitrary number to determine house value and I do agree this isn’t the most accurate way to go about it, but it gives a quick gut-check of the numbers. Applying the 180 gross-rent multiplier to the monthly rental rate would yield the following:

$4300 x 180 =$774,000

That’s $476,000 or 38% less than the current asking price. Just to put things in perspective, the difference alone is enough to buy out homes in most other parts of the country. I don’t know about you, but half a million dollars is a lot of money!

Are you wondering how appropriate is it to use this 180 multiplier? Let’s evaluate that. This exact home was sold for $600,000 in 4th quarter of 2000. That was before the crazy boom began so it’s a good starting point to use since the market was fairly stable at the time. If the bubble didn’t exist and I apply a 3% inflation premium to the previous purchase price, the house would be worth $760,062 in October of 2008.

$600,000 x [(1.03)^(2008-2000)] = $760,062

That’s very close to the value of the house calculated with the 180 GRM ($774,000). Does that mean that prices will fall 30-40% or more as the bubble deflates? I can’t say for sure, no one can. Do I think it’s likely to happen? Probably. What I can say for sure is that we’ll hear Lawrence Yun and the NAR call bottom many, many more times before the real bottom actually forms. I’m tired of hearing their lies, but they will continue on their campaign as I will continue mine. I have faith in my readers that they can distinguish the truth from the lies.