All posts by SavedbyGrace

Market Fundamentals

A financial bubble can be defined as the inflated, over-valued state of a market by unsustainable means. It is important to distinguish between what an asset is worth compared to its fundamental value.

A house is worth what a buyer is willing to pay for it. During the past few years, a typical single family home in Arcadia could be worth $1MM because people were willing to pay that dollar amount. On the other hand, its value is determined by its intrinsic offering – whether that is the shelter it provides or the cash flow it can generate. When I say “market fundamentals,” I am referring to the factors that contribute to its value, not worth.

It is important to define and understand market fundamentals because it helps illustrate the state of the market and how far away are we from the stable, historical trend. In this post we will take a deeper look at three big factors that are tied to proven fundamental values:

  • Comparable Rents

  • Income

  • Supply & Demand

Comparable Rents

Comparable rents are directly related to market fundamentals because it gives a baseline measurement of the value and worth of a property. Whether you rent or own your house, you have a place to live – that is its worth. Its value comes from how the rent and home prices are tied. If you are an investor, you have to rent it for more than it costs you to own it on a month to month basis.

After all, it makes no financial sense to purchase a home when you can rent it for a fraction of the cost, giving the renter a chance to invest the extra money in another financial market at a higher yield. Then again, most people buy property based on emotional, not financial justification. Contrary to popular belief stemming from the lies of the National Association of Realtors, real estate is generally a poor investment in terms of rate of return. We will have to discuss this another time.

Income

Incomes are directly tied to rents. That’s a fact. Why? Because most people pay rent with their salary/wages. Last I checked, there aren’t too many folks born with a golden spoon and just live life off daddy’s payroll. On top of that, have you ever heard of anyone applying for a $500,000 loan at the bank to pay rent? No. Rents are paid with after-tax, net, disposable income.

In my opinion, this is the single most important factor in market fundamentals. It’s at the very core of how much house one can afford to rent or buy. Interest rates are also important, but are secondary players since you don’t need a loan to rent a place.

Supply & Demand

As home prices go up and people realize that it’s cheaper to rent than to buy, the pool of buyers dwindle and supply of homes move up. When home prices drop back in line with the rental rates of comparable properties, the scale shifts and an increase in buyers join the market to absorb the supply of homes for sale. It’s basic supply and demand.

We can analyze it until we all turn blue in the face, but it all boils down to where to put the money. Spend it on an depreciating asset and strap yourself to the house because you can’t afford to do anything else? Or rent a comparable place for much less, invest the difference and add to the future-home-down-payment piggy bank? I think you know where I stand.

Arcadia home prices are falling and will continue to drop until it reaches its market fundamental value. This will take years.

$900,000 Dirt

300 E. Camino Real Ave.

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Directly from Redfin: “NOT A CORNER LOT. LOT SIZE 16082 SQ. FT. (86X187). THE HOUSE WAS DAMAGED BY A FIRE. ORIGINAL LOT SIZE WAS 91X187. THE OWNER WILL GRANT 5 FEET TO THE NEIGHBOR ON THE EAST IN AN EASEMENT OR A LOT ADJUSTMENT. PROPERTY SOLD FOR LAND VALUE ONLY. NO WARRANTY, IMPLIED OR EXPRESSED. NO TERMITE ON BOTH THE HOUSE AND THE GARAGE. PLEASE DO NOT ENTER THE HOUSE OR THE GARAGE.”

Asking Price $899,900 ::: Sq-ft 1264
Purchased Price $180,000 ::: Lot Size 16,082 sq-ft
Purchased Date 02/02/2000 ::: Beds 3
Days on Redfin 26 ::: Baths 1
$/Sq-ft $712 ::: Year Built 1918
20% Downpayment $179,980 ::: Area Santa Anita
Annual Income Required $224,975 ::: Type SFR
Est. Payment* $4550/month ::: MLS# A08000266

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

Why do so many realtards insist on writing their entire description in ALL CAPS? It’s very difficult to read and I feel like they’re screaming at me. What do they mean “OWNER WILL GRANT 5 FEET TO THE NEIGHBOR?” Five feet from where? Five feet along the entire east side of the house? Why would I want to do that? And who cares that there’s “NO TERMITE ON BOTH THE HOUSE AND THE GARAGE” because it’s a BBQ’d house anyways.

Since the house has fire damage and they’re selling it for land value only, they’re asking $899,900 for dirt. It’s for 16,082 sqft of dirt, but all you get is dirt. Actually no, you get dirt plus a burnt down house that you’ll have to pay to bulldoze before you can get a city permit to rebuild on the lot. Would you pay $899,900 for dirt when you can get a 2000 sqft house behind the lovely arboretum?

Don’t give me that bull about building PUDs or condos on that big 16,082 sqft lot to sell for a profit. Even if the property is zoned for that kind of development, the RE market is too dead to turn any kind of profit for the next several years. This looks like yet another case of complete separation between the asking price and market conditions. I don’t see a transaction at this price. How much would you pay for this property?

A Serious Affordability Issue

The Fed’s brilliant stimulus plans includes raising the conforming loan amount from $417k to upwards of over $700k depending on the area. Great, so the government’s idea to solve this massive credit crisis for its nation of debtors is to further encourage consumer spending and debt! The American people are swimming in debt and they certainly don’t need more of it. There is an affordability issue here and someone needs to tell the folks in Washington D.C. that we need LOWER housing prices, not higher ones.

According to HousingTracker.net, the folks in Los Angeles County spent 30% of their income on their mortgage payment in 1997 and that number grew to a whopping 63% by 2007! Most financial advisors don’t recommend spending more than 35% of one’s income on housing (buy or rent).

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To be conservative, one should buy a house priced at no more than 3 to 4 times their annual income. Ratios from 2.5X to 4X income is considered affordable, 4X to 5X income presents an affordability problem, 5X to 6X income is very unaffordable and 7X+ is financial ruin. Over the past few years, this ratio has been on the rise at an unsustainable rate from 4.4 all the way up to over 10!

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The data for Arcadia is not much different than that for all of LA county. Actually, it’s worse because the price-to-income ratio for Arcadia starts at 5.1 in 1999 and increases to over 11 by 2007. Can you imagine buying a house that costs over 11 times your annual income? Anyone who says prices are not going to come down and that the market is going to “rebound” anytime soon is a liar. Without a substantial increase in income, home prices are destined to decline back to sustainable values.

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It seems that there’s a lot data out there for LA County, but not much specifically on Arcadia. In the coming months, I plan to do more in-depth analyses on fundamental values, affordability and other measures of the market so if anyone has Arcadia specific data on median home prices and incomes for the past 10-20 years, I would appreciate it if you shared that with me.

So with that in mind, where do you think we are now? Denial, Fear, Depression, Panic, Capitulation or Desperation?

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Submit your vote for the poll on the right sidebar.

Live Flipper

10420 E. Live Oak Ave.

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This speculator-investor didn’t get the memo so I better spell it out for him again – the US housing market is dead. These people are either really greedy or really stupid. I can’t figure out which it is, but it’s probably a bit of both. This is a classic flip and my guess is this person watched too many HGTV shows like Flip-That-House and Property Ladder.

Asking Price $899,000 ::: Sq-ft 1746
Purchased Price $610,000 ::: Lot Size 10,530 sq-ft
Purchased Date 08/09/2007 ::: Beds 3
Days on Redfin 10 ::: Baths 3
$/Sq-ft $515 ::: Year Built 1940
20% Downpayment $179,800 ::: Area Live Oak
Annual Income Required $224,750 ::: Type SFR
Est. Payment* $4545/month ::: MLS# 22104087

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

This flipper bought the property just 5 months ago in August of 2007 for $610k. At that point, the market was already showing signs of serious issues and softening, yet this flipper was so inundated with greed that they proceeded with the flip anyways. From the looks of it, they updated the kitchen, bathroom and flooring. For a mere $899,00 they threw in some shutters as a bonus. If you made $250,000 annual income, would this be the kind of house you would want to live in?

While both the house and the lot is of good size, it’s located at the very south part of Arcadia near Temple City and El Monte. A house in that neighborhood doesn’t warrant the $899k asking price. In addition, they got lazy during the renovations because they didn’t even bother to get a permit for the bathroom addition. That makes me wonder what other corners they cut during construction.

Let’s take a look at their numbers.

Purchase Price: $610,000
Downpayment: $209,600
1st Mortgage: $400,400

Assumptions…
Monthly Payment w/30yr-fixed @5.5%: $2,273/month
Cost of Renovations: $50,000

I’m surprised to see this flipper put as much downpayment as he did when he could have probably gotten away with just 5%-10% down. Regardless, if he gets his asking price of $899,000 and taking into account the above assumptions, he stands to make $227,635 before paying capital gains tax. That’s equivalent to mind-boggling $45,527/month!

In this credit-crunched market, there are no more liar loans or 0% down. Assuming there’s a lender willing to do just 10% down, that would leave a mortgage of $809,100. With no more secondary mortgage market, that’s a jumbo loan at say 6.5% for someone with a great FICO score. That’s a monthly payment of $5,114 excluding insurance, taxes and maintenance.

How buyers out there have a 700+ FICO score, $90k cash for downpayment, documented income and can afford a $5,000 monthly mortgage payment? And how many buyers that qualify would want to buy this house? Not many, if any.

The Real Deal

26 E. Camino Real Ave.

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This is brand new construction that was completed in 2007 by an investor who was obviously looking to make some money. It’s a typical McMansion home complete with the ugly 1990s peachy, pink exterior wall color. The interior is actually quite nice with the open layout, big windows and tray ceilings. Unfortunately for this seller, those features won’t be enough to bring in the $2.78MM asking price. I saw this property on Redfin about 4 weeks ago, but it’s posted as a new listing so the realtor took the listing off and re-listed it to reset the days-on-market counter. It’s probably been sitting on the market for quite some time.

Asking Price $2,780,000 ::: Sq-ft 5733
Purchased Price $1,100,000 ::: Lot Size 0.49 acres
Purchased Date 9/28/2005 ::: Beds 6
Days on Redfin 1 ::: Baths 7
$/Sq-ft $484 ::: Year Built 2007
20% Downpayment $556,000 ::: Area Santa Anita
Annual Income Required $695,000 ::: Type SFR
Est. Payment* $14057/month ::: MLS# A08010983

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

I think this seller drank so much kool-aid during the boom that both he and his realtor are now completely separated from reality. This is suburbia town Arcadia – not Newport Beach, Brentwood or Beverly Hills. My guess is someone making $695k annual income who can afford over $14,000/month mortgage payments won’t chose to live in Arcadia. I for one would prefer a home in Newport so I can wake up to the Pacific Ocean. Even if a buyer preferred a suburbia community in the San Gabriel Valley, they would certainly choose San Marino over Arcadia.

Anyways, I didn’t post this listing only because its overpriced. The main thing I wanted to share with you is this property’s previous sale history. According to Redfin, this particular seller bought in 2005 for $1.1MM, but what’s more interesting are the five transactions before that.

Date Price Appreciation
9/28/2005 $1,100,000 16.4%/yr
9/10/2001 $595,000 >1000%/yr
8/15/2001 $325,000 -21.3%
1/19/1999 $602,000 -5.2%/yr
1/08/1993 $830,000 -1.5%/yr
1/02/1992 $842,727

As you can see, the previous house that stood on this property sold for $842,727 in 1992 during the initial decline of the previous bubble (which peaked around 1990). Over the next 9 years, it’s price reductions take off in a logarithmic fashion starting with -1.5%/yr between 1992 and 1993. Over the next 6 years, it would lose a 5.2% each year before coming to a sale in 1999 at $602k. From there, the market continues to plummet a whopping -21.3%/yr over the next 2.5 years to rock bottom in 2001. That makes a total decline of $517,727 or 61% off from peak to bottom.

OUCH.

But I thought real estate is always goes up and everyone wants to live in sunny southern California so prices would never drop here. What happened? Market correction happened. This is a wake up call for the sheeple to stop drinking the kool aid and face the facts. Arcadia home prices will fall and contrary to what the realtors say, it is not immune to the current market conditions. It wasn’t last time and it won’t be this time either.

:: SavedByGrace

31 Woodland or 31 Flavors?

31 Woodland Ln.

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The seller flipper at 31 Woodland Lane must be high on all 31 flavors of Baskin Robbins ice cream. The property has been on the market for 257 days and there’s no sign of any price reductions. It was previously purchased for $1.4MM just 13 months ago and the buyers want to make $324,980 for doing nothing. That’s the equivalent of making $25k/month!

Asking Price $1,724,980 ::: Sq-ft 3231
Purchased Price $1,400,00 ::: Lot Size 0.42 acres
Purchased Date 12/6/2006 ::: Beds 3
Days on Market 257 ::: Baths 3.5
$/Sq-ft $534 ::: Year Built 1948
20% Downpayment $344,996 ::: Area Santa Anita Oaks
Annual Income Required $431,245 ::: Type SFR
Est. Payment* $8722/month ::: MLS# 22091982

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

This is a gorgeous property located in the coveted Santa Anita Oaks area, but after almost 9 months on the market, there’s clearly no interested buyers at $534/sqft. It is highly unlikely that these folks will get their asking price in this kind of market. With much tighter lending standards and widespread news of the housing crisis, it would take a steep price reduction to get it sold. Besides, if I had $345,000 cash, I certainly wouldn’t use it as a downpayment on a depreciating asset.

I picked this house to profile because it depicts the naive mentality of buyers during the boom. This flipper put the house back on the market just 4 months after it was purchased hoping to make a quick buck. Regardless if he truly believed in forever double-digit appreciation or not, it was greed that sparked the flame. As of January 2008, he can either reduce the price and take a moderate loss or hang on and end up losing a lot more down the line.

As a side note, this is a beautiful house and in a sense captures why I love Arcadia. It isn’t one of those ugly McMansions, but a well design traditional ranch style home. Although its kitchen and bathrooms seem a bit dated, it has wonderful landscaping and curb appeal. Because of its size and location, it could be a million dollar home, but the market has clearly made a statement that it’s not worth $1.7MM. The flipper just doesn’t want to hear it.

:: SavedByGrace

The City of Arcadia

We can go in depth into why this isn’t Sierra Madre Housing Blog or Pasadena Housing Blog, but it’s simply because I live in the Arcadia area. I frequent its restaurants, use its roads, go to its parks and spend much of my time here so it’s convenient for me to scope out properties, keep up with the news and track local market trends.

And with that, I will provide some insight into the city which this blog is based on so readers from all over the world understand its economical, social, geographical and historical background.

Location

Arcadia is located in sunny southern California about 15 miles northeast of Downtown Los Angeles, nestled at the foothills of the San Gabriel Mountains. Its surrounding cities include Pasadena, Sierra Madre, San Marino, Temple City and Monrovia. Per the US Census Bureau, it has a total area of just under 29 sq-kilometers. It’s comprised of two zip codes: 91006 and 91007.

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History

Like all the cities in California, it used to be inhabited by Native American Indian tribes before the Spanish missionaries entered the picture. As they moved in, the Gabrielinos suffered both enslavement and exposure to deadly, new diseases. Shortly after, a large portion of the city today was sold to a wealthy Scottish immigrant, Hugo Reid, who held it for over 35 years before selling it to Lucky Baldwin in 1875.

It was Baldwin who brought in more business to the town, growing it to a population of 500 before the cities official incorporation in 1903. Many of today’s streets such has Baldwin Avenue and Santa Anita Ave (named after Baldwin’s daughter, Anita) stems from his heritage. Today, Arcadia is an upper-middle class suburban city with an estimated population of 57,000 people.

Economical

The city’s economy is largely supported by recreation and trade. The Santa Anita Race Track brings in substantial revenue through frequent horse races. The Westfield Mall (previously known as the Santa Anita Fashion Park) is a big shopping center in the area. It was recently expanded in 2005 and discussion for further expansion is underway to build the biggest retail mall in the county.

Aside from the two financial giants, Arcadia has a slew of small businesses in its downtown district, along with a handful of chain restaurants along Huntington Drive and a couple of corporate office buildings to bring in revenue for the city. The Methodist Hospital on Huntington Drive is also a contributor.

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Social

There are many parks in the city, but the most prominent one is the Arboretum and Botanic Garden. The area on which it resides and the park itself belongs not to Arcadia, but to the Los Angeles County when its 111 acres were handed over back in 1947. The Arboretum is home to the famous peacocks that roam the grounds and beautiful surrounding neighborhoods.

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It’s also home to the Ruth and Charles Gilb Historical Museum which documents the city’s heritage. Not far from the museum is Arcadia’s High school and public library, which was incorporated in 1920 and expanded throughout the years – including the renovations made in 1996. It consists of a new auditorium and over 160,000 items such has books, articles and tapes.

Demographics

Arcadia’s demographics was largely dominated by Caucasians until recently when many Asian families, particularly those of Chinese decent, moved into the area for its safe neighborhoods and good schools. Today, Arcadia is roughly 45% Caucasian, 45% Asian and 10% other. It’s hard to ignore the Asian community when its banks, restaurants, supermarkets and people have taken over many parts of the city.

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Arcadia is a great place to live. It has great schools for families with children and offers quiet, safe suburbia neighborhoods throughout. It has housing products for every budget – from apartments and condos to detached units and single family residences. The city has a rich history and great pride in the community. Its proximity to the foothill mountains and nearby powerhouse cities like Pasadena make Arcadia a highly desirable location.

:: SavedByGrace