|Purchased Price||$1,158,000||:::||Lot Size||10,880|
|Days on Redfin||78||:::||Baths||3|
|20% Downpayment||$250,000||:::||Area||Santa Anita Oak|
*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.
$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.
24 thoughts on “High on Hyland”
it would be great if those homes in the Santa Anita Oaks area come down below $1M. i mean, a 30yr fixed on a $700k+ mortgage is no joke, but it would provide a reasonable value to high end homes. it would also probably help indicate that there are nice homes around the $500k price point, hopefully in the Peacock Village area, since that area is relatively cheaper and still has some of the same great features of the Oaks area.
..on a side note, will San Marino ever come down this far in price?? just thought i’d throw that out there.
“will San Marino ever come down…?”
There are 4 stages of Realtor denial. From my conversations will Realtors I know, we have reached stage 3.
1)Housing prices only go up.
2)They can’t drop in Southern California.
3)They may drop in low income areas, but the rich areas will
4)Ok, even rich areas can fall: Now is a great time to buy.
San Marino home prices will come down, but they will still be out of reach for the average family. The housing crash doesn’t change the fact that it’s a highly desirable neighborhood with giant lots.
I agree. From the ones I have spoken to, we are in stage 3 right now. When will we reach stage 4?
I think it might take 6-18 months for stage 4 to happen. If you want an example of why, take a look at Manhattan Beach Confidential and look at the permabulls patting themselves on the back and trashing the “renters” who will never be able to buy into the “prestigious” fraternity that is Manhattan Beach. Most of them look at the highly desirable properties and see a modest increase, but fail to look the stagnating sales, falling prices, and frequent de-lists.
While I agree that the house is clearly and dramatically overpriced, over the past half-century, the national average annual appreciation rate for a single-family home has been about 4 to 5 percent, according to FreddieMac and a number of other sources.
There are a number of non-NAR Kool-Aid drinking reasons why the “natural” rate of home price appreciation in LA over that measurement period is likely non-trivially above the national average, including greater than average economic and population growth, zoning and building regulatory schemes that make it costly and time-consuming to add to competitive housing stock, absence of transit choices that allow suburban expansion much past Monrovia for professionals, etc.
As a near-future buyer, I’m hoping and expecting that prices will take a precipitous tumble, but I have no confidence that prices will revert to a GRM of 180 any time soon (at least absent a prolonged and painful recession– something at least as bad as the early 90s, which, remember, hit SoCal unusually hard because of the region’s heavy emphasis on defense-related industries).
All in, a fair price for this house is probably around $900K – $950K. That’s still more than a $200K loss for the seller.
Lastly, we should all remember that, given the falling value of the dollar and the increase in the inflation rate over the past year or so, “real” home prices have been taking a hit even without big changes in nominal selling prices.
I agree that LA/OC’s rate of home price appreciation could very well be more than 3% because of the reasons you listed. However, I maintain my position that home prices (and rental rates) and determined by local income. I don’t know if LA income increases 4-5% annually, it very well could.
4%/yr = $821,141 (34% less than current asking price)
5%/yr = $886,473 (29% less than current asking price)
I’m not saying that prices will revert to 180 GRM anytime soon (although that would be nice haha). I do think that we will be in a painful recession – one far worse than the 90s. If that one was related to the defense-related industries, then that gives even more reason why this credit bubble, which affects everyone, will be much worse.
Market price is what buyers are willing to pay now. $900k-$950k is what you’re willing to pay so today, but that may change come March 2009, 2010 or 2011. Today’s Case Shiller report showed LA prices down 16.5% YOY.
listing agent said that seller turn down two strong offers (960K and 980K). I guess seller wants above the magic $1000K.
i am 99% sure that LA incomes do not increase at 4-5% per year. Cost of living in LA goes up by that much, but salaries sure don’t. If you know of a company that pays that much, let me know who to send my resume to. haha
AClover – you’ve been to a lot of houses and know a lot of insider information. May I ask what is your profession? You sound like a realtor and I would love to have one on this board.
Not to quibble, but it’s supply and demand, right? Income is just one facet of demand (access to and cost of credit, weather, future job prospects, schools, crime, etc.), and doesn’t speak at all to supply. What you’ve seen in LA over the past couple decades is above-average income growth, plus various factors that have made housing more scarce– above-average population growth, artificial (zoning, master community plans) constraints on new supply and transportation infrastructure issues that limit the supply of competitive product in the farther suburbs. All of that points toward an above-average “natural” rate of housing price appreciation over that period.
As for the depth, length and magnitude of the recession.. that’s anybody’s guess. But there’s no particular reason to think that LA will be especially hard hit. Certainly nothing like the early 90s– remember, SoCal took three years longer than the rest of the nation to pull out of that slump. The folks over at the Anderson School put it thusly a few days ago while forecasting anemic, but non-recessionary economic output in California for 2008: “UCLA Anderson Forecast Economists Ryan Ratcliff and Jerry Nickelsburg look back at the California economy since World War II and make two conclusions. First, the U.S. and California economies move together: there has never been a recession in California without a national recession. Second, the California recessions have twice been amplified and extended by long-lasting structural adjustments – the Southern California aerospace contraction in 1990 and the Northern California tech bust in 2001. The recession-only downturns have been sharp-but-short contractions driven by temporary job losses in manufacturing and construction. These recessions typically last less than a year, but both the aerospace and the tech adjustments took more than half-a-dozen years to complete.”
This short squib in LA Observed sums up the situation on the SoCal economy rather nicely, and raises another point– losing your home because you lost your job is a helluva lot worse for the economy than losing it because you got in over your head. People who walk from houses will become renters. People who didn’t buy foolishly will become buyers at long last. And the idiots who bought CDOs and credit default swaps (and these folks are literally all over the globe) on wildly over-valued real estate assets will bear most of the ultimate losses.
LAObserved article: http://www.laobserved.com/biz/2008/03/ucla_says_no_recessi.php
Thanks for pointing that out. You’re right in that income is just one facet of the equation, but I think it has a stronger effect than say supply and demand. Mortgages must be paid with net disposable income, regardless of supply & demand.
I’m a Bruin myself, but I’ll also be the first to say that the UCLA Anderson folks have lost some credibility in what they’ve said since Thornberg left. I didn’t say CA will be in a recession without one nationally – we’ll have one nationally so I agree with Anderson on the point that CA economy moves with the national one.
The 90s recession was driven by job-loss in certain sectors and this time it’s a different sector. Instead of aerospace engineers we have the realtors, construction workers, appraisers, brokers, loan analysts etc. I’m not saying that this alone will be the cause of a recession, but the lack of consumer spending due to housing woes and credit crunch will certainly add to it. And that is not confined to any one industry, but to everyone who lives on borrowed money.
That article says “…much of LA has more established residential areas with less exposure to the sour real estate market.” I disagree. While our homes prices will hold better than Phoenix and Las Vegas, it will still suffer a bigger loss than most other states. Did you see today’s Case Shiller report? Also, CA has the most new and refinanced homes into Option loans along with the highest foreclosure rate. https://www.arcadiahousingblog.com/wp-content/uploads/2008/01/miserymap_thumb.jpg If anything, we have more exposure to the sour RE market, not less.
Wow, congrats if you made it this far into the thread 🙂 Thanks for your input IB!
However, a lot of our economy depends on consumer spending which, in recent years, was fueled by the housing bubble with HELOCs, flips and option refinancing. What will happen to consumer spending when there is no more money to milk out of the house?
No argument here that prices in SoCal will fall precipitously– but only because they rose so precipitously during the boom. I did see the Case-Schiller index, and I expect that this time next year we’ll see a very similar report, and that ultimately we’ll see nominal losses of at least 35% from the 2006 peak, and real losses at 45% or more. Basically, home prices won’t stabilize until they revert to prices implied by the “natural” appreciation rate since the last time prices were rational in SoCal. And there’s a non-trivial chance that we’ll overshoot on the downside much as we did on the upside.
But as a relatively near-term buyer (latest would be mid-2009) with a long-term outlook for my next home, I’m not particularly interested in trying to call a market bottom. Once I see prices get back down to something approximating “fair,” I’m going to jump back in. To me, “fair” is significantly north of a GRM of 180 for all the reasons I’ve articulated in prior posts. Moreover, my modestly optimistic belief that the diversity of the SoCal economy will blunt the impact of the coming recession makes me skeptical that we’ll have the kind of economic dislocation that could lead to a true depression in housing values, which I would define as prices dropping substantially below “fair” value (i.e., the situation in which we found ourselves in 1995).
As for my modest faith in the LA economy– the two industries that will bear the brunt of the coming recession are real estate and financial services. Most of the jobs that will be lost in real estate have already been lost (see, Irvine). The financial sector jobs are being lost literally right now, but SoCal’s exposure is nothing compared to that of NYC, Chicago and SF.
This is all, admittedly, pretty squishy– it’s not like I have graphs and regressions to back any of this up– but my gut is telling me that early 2003 price-levels are the bottom, and that we’ll get there in late 2010.
May your helpful blog live long enough to point back to this post and make a liar of me if/when future history proves me wrong.
Well said! If you buy within your means and don’t buy as an investment, it doesn’t really matter what the GRM is. May I ask about the reasons behind the mid-2009 deadline to buy?
No one knows for sure what will happen as things unfold so all we can do is speculate. Thank you for the discussion. Sounds weird, but I enjoyed it. 🙂
I am an engineer with 15+ years working experience. I am actively hunting for a house in Arcadia and plan to buy one before August since my children need to enroll before school starts. All info I got regarding to those properties are from my agent since we were interested in those properties, but not satisfied with the listing price though:-)
Yay for engineers!
Goodluck on the house hunt 🙂 If you don’t find something you like, you can always rent a house or condo in the Arcadia school district. That will get your kids in school and give you more time to look for that special property at the right price.
I tend to like 180 as a GRM, because in less desirable and lower COLA cities, the GRM is more like 100.
I guess this recession will be short and mild as the fed is again lowering the interest rate. Hopefully this time banks invest the cheap money wisely so that it won’t flow into the equity market.
Just had a kid and figure we’ll be busting at the seams if we’re lucky enough to have another sometime in 2009. In other words, the usual. But for that, I’d probably wait until 2010.
I’ve enjoyed the discussion as well. Keep up the good work. Just because I don’t always agree doesn’t mean I’m not a fan…
What are COLA cities?
I tend to think of GRM 100 being what cash flow investors are willing to pay. Rent savers likely jump in much sooner than that.
Congrats on the little one 🙂
COLA = cost of living adjustment. I was just thinking rents tend to be higher in places like LA than in “flyover territory” (a term which I’d never heard until I moved to CA — not used as much on the east coast). But the reason I thought I’d mention it is that my buddy in Indiana is thinking about selling his condo since he’s moving out of state, and he considered renting it at around 115 GRM, but probably won’t do it.
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