Wednesday, January 30, 2008

Good "Invstmnts"

Today’s property is a lesson in pure, unadulterated ignorance. Ignorance so powerful that it can shield an owner from uncomfortable truths and painful market realities.

During the last few years, real estate was viewed as an investment, in the traditional sense that it was something that paid regular dividends in the form of appreciation. At the height of the madness, it was believed by many that double-digit appreciation would keep going and renters would be "priced out forever."

“This is a new paradigm,” they said. People got themselves into tricky, dangerous loans to buy properties way beyond their means, spent money on frivolous consumer goods, and racked up enormous debt, all under the auspices that values would continue to increase and they could “just refinance later" or "pull more equity out" to pay for the house, nice cars, and vacations.

This worked out just fine for many homedebtors, especially those who bought early enough to capitalize on years of rapid appreciation. As long as prices kept going up, their "investment" was safe and they could keep spending. That is, of course, until the music stopped and values began their violent, dizzying descent back to earth. Now the hungry overdue notices are knocking on the door, and there isn’t anything left in the cupboards to feed them.

I’ve noticed the housing bulls, realtors firmly in denial, and assorted trolls have stopped commenting on this site. I have a feeling it is because they have finally accepted the veracity of my message: An inevitable return to fundamentals in pricing, lending, and basic economics is underway and it will be painful for many people who gambled on the promise of a perpetually appreciating asset.

With the help of the mainstream media (better late than never, guys) and especially a mind-blowing 60 Minutes segment about the growing social acceptability of walking away from moral and financial obligations (because their house “is worth less than we paid, so why bother?”), it is finally hitting those financially dependent on the truth being withheld from the public that the housing party, as they knew it, is over.

And other than a nasty hangover, a missing ATM card, a trashed, un-staged living room, and sporadic memories of that once-in-a-lifetime Ponzi Scheme…there isn’t much to show for it.

But don't trust me. Crack open a newspaper. Today's financial sector news is dismal. I mean absolutely brutal. Particularly for Los Angeles and Long Beach.

As most of you know, the Fed chairman just cut the key interest rate another half a percent. This, coming off the heels of a .75% rate cut just a matter of days ago. The Fed hopes that if mortgage interest rates are low enough, people like me with down payment money and healthy FICO scores who were smart enough to question the insanity of the housing bubble, will suddenly forget that houses are still overpriced and stake their bets on a declining housing market.

But this plan is painfully shortsighted and is tantamount to swatting flies but neglecting to clean up the dog turd.

I say this because the Fed could manipulate the key rate to the point where a 30-year-fixed rate is 1%, but prices would still be unaffordable and inconsistent with basic investing fundamentals.

Look at it this way: A bank could give you a 10-year, 0% interest car loan, but that still doesn’t mean you can suddenly afford the monthly payment on a Lamborghini Murcielago Reventon.

And that’s how far housing fundamentals are out of whack: Dodge Nitros with cloth interiors are now priced like exotic supercars.

Today I want to focus on what it means to ignore market fundamentals and overwhelmingly negative economic indicators and put a house on the market. This seller has clearly not been reading the newspapers. This poor sap believes that their “investment” performed better than any other investment vehicle on the planet combined…to the tune of more than 35% PER YEAR since 2002! Forget stocks and hedge funds—this person has the secret to building wealth!

Address: 5585 East Pacific Coast HWY #228, 90804
Asking Price: $254,900
Size: 1 beds, 1 baths, 597 sq. ft. (Yikes!)
Year Built: 1970
$/Sq. Ft.: $427
Purchase price: $256,500
Purchase date: 5/2005
MLS#: R705785
On Redfin: 245 days (This one won’t last!)
Description: No Short Sales hassle on this one! Close in 30 days! Luxury complex and turn-key unit. Balcony faces courtyard, very quiet. Unit is close to stairs, elevator, laudry, trash chute and assigned secure subterranean prking. Complex has pool, gym, tennis/basketball courts, security entrance w/ intercom. Perfect 4 invstmnt or owner occ. Walk to Long Beach State, VA center, & Ralphs Shopping Center. 1 mi to 405, 605 and 22 freeways.

Let me get this straight. Your realtor has 245 days to tweak and refine your listing, and yet we potential buyers still have to suffer through “laudry” “prking” and “invstmnt.”

They must really hate vowels.

But set aside the spelling errors for a second…I want you to take in this statement: “Perfect 4 invstmnt or owner occ.”

If that was true, wouldn’t this “owner occ” be interested in keeping their solid, positive cash-flowing “invstmnt” for themselves? Maybe they just want to take their real estate riches and move up to a bigger place. At less than 600 square feet, that’s very likely.

Just for the heck of it, let's run the numbers to see how honest that "Perfect 4 invstmnt" claim is:

Down Payment: At 10%, we're talking $25,490.

Monthly Payment: Financing the remaining $229,410 at 6% (given the recent rate cuts, I’ll make an assumption on the interest rate) would leave you with an approximate monthly payment (including association dues, property taxes, and homeowners insurance--but not maintenance costs on this 40-year-old virgin) of $1900. There's no way this place rents for more than $1100 a month (I went apartment shopping last weekend, trust me on this). So that means your "invstmnt" is costing you $800 in negative cashflow per month. Last I checked bleeding hundred dollar bills from your rectum is a poor investment.

Income Requirement: Assuming a 4x income calculation, the annual household income required to realistically afford this love shack would be around $65,000. I’m being extremely generous when I say this is a not a median home. Other than the amenities of the condo complex, the reality is that this place is:
  1. Unbelievably small (dorm rooms at CSULB are palatial compared to this place),

  2. Completely without upgrades (save a countertop of undetermined material),

  3. Chock full of ancient fixtures (check out those doorknobs! Keeping it original, keeping it real), and,

  4. Stocked with terribly outdated appliances.
Not only is this not a median home by size, amenities, or price (remember, the median price in Long Beach is around $500,000), it’s a bottom of the barrel, entry level, sub-median property.

The reason I bring this up is to make a very important point: At this price, even this dingy, tiny, depressing sub-median place is out of reach for the actual median homebuyer in 90804.


The median income for this area is $35,063, meaning not even a hardworking couple bringing in an income higher than half of all of Long Beach residents in this area can afford to live here. Roll that around in your noggin for a minute: This dump is actually TOO NICE for your average working couple.

And Lord have mercy if that couple has kids. Maybe they can set up bunk beds in that fancy gym?

But let's say you believe this place is worth "stretching" the budget and you want to become the "owner/occ." I strongly recommend living by yourself, as you will be cohabitating directly on top of your better half. I don’t even know if there’s enough room for a pet.

Oh, I take that back:

Hi puppy!

I’m dying to know how strong the dog excrement smell is in this place. Keep those windows open during the Open House!

Please note the enormous, brand new flat-screen TV that is too big for the tiny, otherwise filthy, shabbily decorated refrigerator box of a room. This is a testament to the greed, fiscal foolishness, and warped priorities of many homebuyers during the last few years. What do you want to bet there’s a leased C-Class in the parking garage?

And on top of the pet odors, there's a red cigarette lighter on the table next to the couch. I'm sure it's for lighting candles. Right.

What a sty.

Unless there has suddenly been a huge demand for dirty 600 square foot 1 bed/1 baths in Long Beach, there is no way to explain the mentality behind the pricing of this pill box, other than a disturbed individual blinded by avarice and the staunch refusal to admit they made an unwise financial decision.

This individual purchased their linen closet in 2005, right at the peak of wacky financing and real estate hype, for $256,500. If they get their asking price today, after sales commissions they would lose around $15,000. Seems to me they just want to get out for as close to break-even as possible.

Considering some of the losses I’ve seen lately, $15,000 isn't horrendous. But it's still a loss on something touted as a "Perfect" investment. Not a great investment for them at $256,500, but surely a great investment for you at 254,900, right?

Clearly if this person is suicidal enough to try to sell in this brutal, rapidly declining market, they are under significant financial pressure and desperate to get out from underneath it. They are obviously hoping a “greater fool” will come along to bail them out so they can lick their wounds and go back to renting, where they now realize is where they belong.

But there’s one big, hairy, unrelenting problem: This POS has been on the market for 245 days.
The people have spoken. And there message is: Prices are tumbling around you, and if you really want to get out of this, it's going to cost you much more than $15,000. But this seller just isn't listening and the price remains.

And there’s another voice trying to explain the writing on the wall to the seller: The haunting voice of the pre-bubble price. In 2002, before the loosey-goosey lending standards took hold, this matchbox sold for a whopping $96,000. Now, I’m not saying that this place will revert to 2002 prices (although it’s already sitting unsold at below the 2005 price. Next it'll sit at the 2004 price, then maybe 2003, then...) but it’s safe to say that much of the gains between ’02 and ’05 will be eaten up on the way down to a realistic selling price.

So, instead of assuming prices will return to '02 levels, let's instead take the optimistic approach and factor in an extremely generous 7% average annual increase during the last six years. That would leave us with a 2008 value of around $150,000. Throw that number into the magic 4x income calculator and…well I’ll be damned: That would put this place in the affordability range of the median couple. Outside of fraud or an even dumberer "invstr," I don't see this place selling for much more than $160,000. That price would meet economic fundamentals and provide parity with rent prices--which as we all know by now is the only time to buy.

Psssst. Hey seller. Reality is on line ready to take this call?

Monday, January 28, 2008

Required Reading

IrvineRenter over at The Irvine Housing Blog has a concise, well-worded post about Speculation vs. Investment.

I strongly recommend taking a few mintues out of your day to read it.

Sunday, January 27, 2008

Hide and Seek: UPDATE

You may remember my suspicion a certain listing agent was playing MLS peek-a-boo with his unoccupied condos in this post.

Well, my suspicion has now turned to grim, mildly-nauseating confirmation.

As you will recall, a week ago the properties listed were: Units #5, #10, #17, and #18. While browsing through Redfin today, I noticed #5 has been pulled and Units #9 and #24 have been put in its place (at 3 and 4 days on the market, respectively).

Transparent, crass, desperate...just a few words that can be used to describe this sort of manipulation.

I guess it's possible that the owners of #9 and #24 recently sold and the properties have suddenly, unexpectedly re-entered the marketplace. It's also possible that Elvis is a line cook at The Yard House, but would you wager money on it?

Plus, it's the same listing agent and the same description. You, sir, are busted.

I'm calling this sort of tomfoolery out for what it is: a clear attempt to mislead potential buyers about the fact that this complex has at least 7 units sitting unoccupied. That's more than 30% of the entire complex dead empty!

I'll keep checking on it, in the hopes of tallying just how much trouble this bag holder is really in. I sense that after another six months of this real estate whack-a-mole horsesh*t and associated monthly carrying-cost bloodletting, these properties will either be rented out or priced at around $270,000.

Either way, the fools who bought right when this place came onto market are going to be upset--and upside down.

You know what more upset and upside down homeowners paying top dollar for rapidly depreciating assets means? More unoccupied properties as owners walk away or foreclose.

Thursday, January 24, 2008

Temerity, Grit, and Possibly Brain Damage

By the way, quick shout out to Redfin. Not only is this invaluable research tool shedding light on the housing insanity we’ve just experienced in California and nationwide, but, like rings on a tree stump, it can tell you a lot about individual properties and their owners.

This Redfin listing tells us that temerity, grit and possibly brain damage are the three essential elements required to continue on the disastrous path this poor seller has chosen.

Address: 2236 San Vicente Ave, 90815
Must Be a Really Good Weed Dealer Next Door Price: $645,000
Size: 4 beds, 2 baths, 1506 sq. ft. (built in 1953)
$/Sq. Ft.: $428
Purchase price: $585,000
Purchase date: 10/2005
MLS#: P527330
On Redfin: 548 days (!)
Description: Beautifully Remodeled Los Altos Home, Upgraded Dual Pane Windows & Elec. Service, Polished Hardwd Floors, New Custom Paint in/out, New Fixtures, Upgraded Base Molding, New Kitchen-Maple Cabinets-Stone Counters-Appliances-Recessed Lighting-Tile Flooring, Newly Remodeled Bathrooms, 4th Bdrm is Familyrm/Office OWN Entrance used for Separate Guest Quarters, Copper Plumb, Patio area, Laundry Rm, Newer Roof, Room to Add-on. .. EASY TO SHOW NOW. .. Seller may consider lease option call for terms. .. Sellers May Consider Renting/Lease' See remarkes & /or Call For Informaton.

Forget about the spelling errors and misguided abbreviations, check out the Days on Market! You read that right, folks: 548 days.

Well over a year and a half rotting on the MLS, sticking to their delusional guns about the value of their bomb shelter of a house.

Interestingly, most of the sellers in this area are also asking peak-o-the-bubble prices for their tiny working-class homes. I guess being in lock-step solidarity with their equally delusional neighbors allows them to justify insulating themselves from reality, and makes them comfortable with a block full of 180+ day listings.

Admittedly, I don’t know much about the area other than the median income is $71,686, it’s adjacent to schools and CSULB, and smog-huffing distance from the 405. For all I know it’s the landlocked, freeway-close Naples, but I highly doubt it.

The high median income certainly indicates house prices in his zip code would be higher, so I will do some more investigating. However, it doesn’t take intimate familiarity with the neighborhood to conclude this particular shoebox is ridiculously overpriced. Days on Market trumps all.

I mean, what is this seller thinking?

“Don’t worry, fellas. 548 days on the market don’t mean nothin’. This neighborhood is special. The only reason we all ain't sold yet is because this lil' time-warp slice of Pleasantville is such a well kept secret. Why, I reckon it takes a real sophisticated individ'ule to find this little Eden on a map. But I got a feelin’ this year is our year!”

If not, there’s always 2011.

You have to give him credit though. According to the listing he was generous enough to reduce his original asking price of $719,000. Sweet Lord, that’s the funniest thing I’ve heard since Jessica Alba demanded to be taken seriously as an actress.

By the way, he gave himself a $65,000 haircut and still no takers. What does that tell you?

Sigh, it's almost too depressing but let’s crunch the numbers:

Down Payment: (10%) $64,500.
Monthly Payment: $4,100.
Income Requirement: $161,250.

We already established that the median income for this area is more than 70 Large per year, which is high compared to most parts of Long Beach. However, even at that high income, a majority of buyers STILL can’t afford this blast from the past. Not to mention the new sucker--er, buyer will have to qualify for a jumbo loan. Unless of course, they have $220,000 in their sock drawer.

And given that we’re approaching the two-year anniversary, the few people who could actually qualify for a loan on this little slice of heaven have voted with their wallets.

My spidey senses tell me this seller got caught up in the speculative bubble, believed the horsesh*t about “Real Estate Always Going Up”tm and bought a run-down house at the peak with the hopes of fixing it up and flipping it for a hefty profit. I don’t see how you can look at the property information and conclude otherwise.

Plus, he bought in October 2005 and tried to sell in the summer of ’06. Sounds to me like a flipper with disastrous timing got caught holding the bag.

If this seller gets his asking price, after commissions he will make a profit of about $21,000. But, judging by the looks of the rudimentary “upgrades,” I’d say he put in almost exactly $21,000 fixing this bread box up.

I'm not a contractor, so how do I know this? Do you wonder why he hasn’t moved the price lower than $645,000 since that hilarious $719,000 attempted money grab? He wants to cover his costs and get the f**k out of dodge:

$585,000 - Purchase Price:
$38,700 - 6% Commission:

$21,300 - Renovations
$645,000 - Asking Price (Wow! Magic!)

I hate to be the one to tell him this, but the odds of him getting out at break even are about as good as me pooping gold bricks.

And then there’s the backup plan:

“Seller may consider lease option call for terms. .. Sellers May Consider Renting/Lease' See remarkes & /or Call For Informaton.”

By the way, what’s an “Informaton”? Some kind of automated real estate kiosk at the mall?

According to Craigslist, to rent a comparable home in Los Altos, it will run you about $2,200 a month. That means our seller would bleed cash to the tune of $1800 a month. If he does that for another 548 days, he stands to lose more than $30,000.

Seems to me he should save himself the hassle, price this brick top competitively, and never try his hand at real estate flipping again. But someone with this much temerity, grit, and possibly brain damage surely knows what he’s doing.

Tuesday, January 22, 2008

Love Thy Neighbor

Today’s featured properties illustrate a growing phenomenon in the real estate world: Comp Killers.

When one property on the same street or in the same condo complex sells for a price significantly higher or lower than nearby properties, it sets a new “comp,” or comparable value for the area. A comp is one of the tools realtors, appraisers, lenders, and (hopefully) buyers use to determine the value of a specific property.

Comps are great when prices are going up because if you bought for $500,000 and a neighbor sells a similar house for $550,000 the next week, the new value for neighborhood
properties is $50,000 more than what you paid. Sweet, right? Instant equity!

However, in a declining market (which even the most delusional real estate bulls agree we are in currently) comps can be extremely dangerous. For example, if you buy a place for $500,000 and a house on your block, similar in size and amenities, sells for $400,000—that’s the new comp for your property. And if your asking price is much higher than the last comp, your house is overpriced and is virtually guaranteed to rot on the market.

When neighborhood values drop, suddenly homeowners realize they are struggling to pay a mortgage on a place that is worth considerably less than what they (over)paid for it. When this happens, an owner becomes “upside-down” on their house and many (especially those who put nothing down) are tempted to just mail their keys back to the bank and walk away. And sometimes life simply happens: Divorce, illness, and unemployment can cause the owner to fall behind on payments and eventually result in a foreclosure.

Whatever the circumstances, that property goes back to the bank. Banks don’t like these properties to sit on their books for too long, so it’s in their best interest to minimize losses and just get rid of them. (One way of ensuring properties don’t get on the books is a “short sale.” This is when a bank allows the owner to sell the house to someone else for less than the value of the mortgage. The bank takes a loss but the house stays off their books. The seller loses their down payment and equity and searches for an apartment).

The bank has a lot more money than the other neighborhood sellers, so they can afford to ask much lower prices. A bank only cares about their bottom line and couldn’t give two sh*ts about your neighboring rat-trap condo that’s been sitting on the market for 180 days. They need to get as much of their money back as possible, even if it means setting a new low for neighborhood comps.

And sometimes, sellers who need to get out due to relocation, divorce, retirement, etc. will set an asking price much lower to get ahead of the competition and ensure a quicker sale. Or sometimes certain sellers have owned for a long time and therefore have enough equity to absord a lower asking price.

Regardless of why certain sellers set lower asking prices, you can imagine a next door neighbor trying to sell a nearly identical property wouldn't be too thrilled with someone trying to set lower comps. Here is our first property:

Address: 533 Walnut Ave. # 13
Wishing Price: $439,000
Size: 2 beds, 2 baths, 1463 sq. ft. (built in 1990)
$/Sq. Ft.: $309
Purchase price: $330,000
Purchase date: 1/2005
MLS#: P958415
On Redfin: 66 days
Required Down Payment: $43,900
Required Monthly Payment: $3,000
Required Income: $109,750


Realtors have certain “codes” to embellish amenities when describing houses. For example, “CUSTOM BLINDS” sounds pretty good and implies some money has been invested. Plantation shutters are a great example of custom blinds that add value.

But take a look at the pictures. If digging through a bin of pre-fab mini-blinds at Wal-Mart and selecting your window size is considered “custom,” then lots of people are wearing “custom underwear.”

Codes are one thing, but straight up lying is another. “COMPLETELY REMODELED”? Are they selling to people with no eyeballs? One quick look at the kitchen reveals there’s nothing “complete” about this supposed remodel.

Floors: Old ass, dirty looking tile.
Counters: That ain’t granite—that’s the white tile garbage that came with it in 1990.
Cabinets: Nothing special.
Lighting: That overhead fluorescent monstrosity is horrendously outdated and clearly demonstrates this place has barely been touched in 18 years of existence.

They must mean “COMPLETELY REMODELED EXCEPT FOR THE KITCHEN.” So let’s look at the bathrooms, shall we?

Well, I guess they didn’t complete the bathrooms either. Check out the original white countertops and cheap lighting! Yikes!
Other than cherry hardwood floors, new tile in one bathroom (come on, pal. How about a little effort?), and a new stove and microwave, this place is all original, baby. Maybe that’s the marketing position they should have taken.

Anyhow, if a brief glance at some low-resolution pictures can expose this seller as a delusional optimist at best and a fraudulent liar at worst, let’s look at some other details of the listing to figure out the motives behind their insane asking price.

What immediately stands out is that this seller purchased this “all original” condo in 2005, just as the market was starting to peak. They paid $330,000 three years ago, which is a decent price considering the hot market, but are now asking for $439,000 in a declining market.

If they get asking price, that’s about $36,000 appreciation per year of ownership. Shoot, why work when your house can bring in more than the annual median income?

Since we’ve already established there are no significant upgrades to this 90s classic, return on investment can’t be the motive. That only leaves one possible impetus behind this attempted money grab: Greed. Pure and simple avarice.

Or maybe, as the listing indicates, this truly is “THE NICEST HOME IN WALNUT VILLAS.”

I wonder what this property a few doors down has to say about that?

Address: 533 Walnut Ave. # 8
Asking Price: #399,000
Size: 2 beds, 2 baths, 1463 sq. ft. (built in 1990)
$/Sq. Ft.: $281
Purchase price: $415,000
Purchase date: 9/0/2005
MLS#: P608968
On Redfin: 76 days
Required Down Payment: $39,900
Required Monthly Payment: $2,700
Required Income: $99,750
Description: INCREDIBLE VALUE!!! Charming townhome featuring an open & spacious floorplan, a light & bright kitchen adjacent to the dining and living room w/ newer stainless steel appliances, & a charming breakfast nook. Living room offers a cozy fireplace & a private patio for entertaining. Spacious master bedroom w/ walk-in closet, private balcony, & large bathroom w/ dual sinks. All bedrooms have vaulted ceilings. Inside laundry, lots of storage space, EXTRA storage room, plus 2 car ATTACHED garage.

A two car “ATTACHED” garage? As in, attached to the home so as to provide direct access? If that’s true, it’s a significant advantage over #13. Bathroom cabinets aside, this place looks to be nearly identical to the first, yet this one doesn’t make the laughable claim of being “COMPLETELY REMODELED.” Hmmmm…

Not to mention this property is asking $40,000 less for a nearly identical product. Can you say, comp killer?

Here is where it gets interesting. This second unit was purchased eight months after Unit #13 for $415,000 (wow, 85 Grand more than #13 paid in just 9 months! Either #13 was an absolute dump, or the price bubble was out of control that summer). Assuming #8 gets their asking price, this seller stands to lose nearly $40,000! Ouch!

The fact is, this second property will not sell for $399,000. The original asking price for #8 was $429,000—a clear attempt to break even—and no bites. They chopped another $30,000 but as the basic calculations show, it's still overpriced.

But just for fun, let’s suppose #8 sells for $399,000. Like magic, the new comp for the building would now be $399,000. That means, the owner of #13, who has been languishing on the market with his wishing price, will have to slash his price by another $15,000 instantly if he hopes to sell.

Or, let’s think about the more realistic scenario: Unit #8, who seems to be more in touch with reality (or is simply more desperate to get out), keeps dropping his asking price faster than Britney Spears' chances of gaining full custody. What will get this place sold? Another $20,000, $30,000, $50,000?

Either way, Unit #13 will have no choice but to lower his price accordingly. This is called “chasing the bottom down” and when one neighbor attempts to undercut everyone else in the neighborhood, you can imagine conversations at the mailbox are a little tense.

So not only will these two sellers compete with each other in the building, they will have to compete with all of the neighborhood comps, foreclosures, and short sales as well.

Right now the real estate market is in a psychological stand-off.

Sellers refuse to accept that the property they paid top dollar for just years earlier is now worth 10, 20, or 30% less.

Buyers refuse to buy because of the widespread perception “prices will come down” and won’t pay inflated prices that don’t meet economic fundamentals—regardless of what some sucker paid 24 months ago.

But eventually the buyers will win. It’s becoming increasingly more common to read articles about sellers who rejected what they viewed as “bottom-feeding” offers, only to capitulate to reality a year or two later and accept less than the “offensive” low-ball offer.

When the market was hot, buyers were told, “You don’t want to get priced out forever.” Now that the market is collapsing, sellers are waking up to the prospect of being “priced in forever.”

You could criticize both sides for their stubbornness, but unfortunately for sellers, the broader economic factors at play will force a psychological change from Denial to one of Acceptance, whether they like it or not.

Article: Stunning Jump in California Foreclosures

"Foreclosure activity is closely tied to a decline in home values," DataQuick President Marshall Prentice said in a statement. "With today's depreciation, an increasing number of homeowners find themselves owing more on a property than its market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move."

Once these foreclosed properties hit the lenders' books, the clock starts on getting them off those books. The bank couldn't care less about destroying neighborhood comps--they only care about minimizing losses.

So what's going to happen to property values once this enormous influx of bargain properties comes onto market and adds to an already overwhelming supply of homes?











And what's going to happen to already struggling owners who suddenly find themselves underwater, and can't refinance to a lower payment because creative lending isn't available and they owe way more than their house is worth?

More foreclosures.

Folks, it's going to be a nasty, nasty ride.

Sunday, January 20, 2008

A New Price Per Square Foot Record!

The only reasonable reaction to today’s first property is: WTF?

This seller is asking $4.5 million in Alamitos Beach. Now, the property is brand spanking new from the ground up and is right on the sand, which is rare and quite impressive. There is absolutely no doubt the location of this house justifies a hefty price premium.

But $1,406 per square foot?!

This property was purchased exactly three years ago for $930,000. My first thought was, Wow, to demand that kind of appreciation the builder must be installing 24 karat gold toilets, diamond roof shingles, and throwing in 10 years of butler service. However, according to the description that’s not the case. This seller, with no pictures of the interior, believes the eight pictures of sand is enough to reel you in. That must be some awfully special sand.

Address: 1724 Bluff Pl, 90802
Smoking The Good Stuff Price: $4,500,000
Size: 4 beds, 4 baths, 3200 sq. ft. (built in 2007)
$/Sq. Ft.: $1,406
Purchase price: $930,000
Purchase date: 1/0/2005
MLS#: P606179
On Redfin: 93 days
Description: This is an incredible opportunity to live in Paradise, on the Sand, Beachfront w/ 180 degree unobstructed Panoramic Ocean views of: The Belmont Pier, Catalina Is, The Queen Mary. This ultra-exclusive Custom Home will be an uncompromised Tuscan style, Elegant, Spacious, Exquisite & Unique. Builder will Customize it now to include your every wish. Estimated time of completion March 2008.Features include: Oceanfront decks, Patios, Roof Deck, Custom Kitchen, Formal Dining/Living room, Family room, 3 Fireplaces,

And…AND? They left us hanging at the end! What else? Such a cliff hanger. They were finally going to reveal the justification for their stratospheric asking price, and were tragically cut off. Now we’ll never know.

P.S. The Title Case is so annoying.

A question: if the builder is planning to customize to the future buyer’s “every wish,” does that mean they have stopped construction until they find said buyer? After all, if they complete construction in March and eventually find a buyer who wants the place customized to his every desire in April, wouldn’t they have to tear things out to do it?

The dictionary defines custom as, “Made specially for individual customers.”

I understand the appeal of the word “custom” in a sales situation, but if there is no customer to customize for, then according to whom is this custom? Customized to the builder’s preferences I guess. I hope he has taste. My point is, without a customer, I’m not quite sure you can call a nearly-completed house a “Custom Home.”

I’m not even going to crunch the numbers because a quick look at nearby properties on the sand reveals just how insanely overpriced this place is. By the way, this property just missed being the highest priced listing in Long Beach (two properties in Belmont Shore beat them to it). Maybe next time!

Instead of showing you the amazing properties you can get in Orange County or LA for this kind of money, I’m going to compare and contrast this property with other Long Beach listings.

Address: 27 65th Place, 90803
Asking Price: $2,195,000
$Size: 4 beds, 3.5 baths, 4,000 sq. ft. (built in 2007)
$/Sq. Ft.: $549
Purchase price: N/A
Purchase date: N/A
MLS#: P612093
On Redfin: 50 days
Description: Brand New Custom Mediterrean-Style Home. 3 Story- 4 Bedroom 3.5 Baths, approx. 4000 sqft. (n. t. ) with beautiful panoramic ocean views from master suite. Some of the features include-elevator, family room w/ wet bar, oversized double garage, barbecue deck, two balconies, 10' island kitchen w/ viking appliances, granite counters, walk in pantry, wine cooler, master suite w/ views, fireplace, jacuzzi style tub, seperate shower and large walk in closet. So much more!! Call Agent.

Mediterrean”? “Seperate”?

Could you imagine a realtor, not even professional enough to run spell check on their computer, demanding a 6% commission (for this place, we’re talking $131,700)? Not being a perfect speller is forgivable; failing to proofread a $2 million house listing is not.

Anyhow, this “Brand New Custom” property is in a very exclusive area on the peninsula and is bigger than Bluff Place, at 4,000 square feet. Man, that’s a big place. Plus, it's half the price!

And this one is actually completed so they can show you pictures of the interior. Pretty freaking impressive if you ask me. This is a really nice house, and at this price it actually seems competitive.

Oh, and thanks for the photo of the wires hanging out of the wall. Phew. Wasn’t sure if this $2 million house had cable.

Yes, yes, it’s not EXACTLY comparable to Bluff Place because it’s not ON the sand, but as you can see by the photos, a four year old could throw a softball from the balcony and hit it. Plus, they’re not exactly comparable because 65th Place has 800 MORE SQUARE FEET—the size of a decent studio apartment—than Bluff Place.

The more I think about it, 65th Place is a pretty good deal for the location.

I guess the question is: Are the “on the sand” bragging rights in Alamitos Beach enough to justify more than doubling the price of this larger Belmont Shore property?

Let’s assume that being on the beach, rather than being 30 feet from it, DOES justify a doubling of price per square foot. And within that context, let’s look at this peninsula property right on the sand:

Address: 6700 East Bay Shore Walk, 90803
Asking Price: $4,490,000
Size: 3 beds, 5 baths (really?), 5,657 sq. ft. (built in 1991)
$/Sq. Ft.: $794
Purchase price: N/A
Purchase date: N/A
MLS#: P610547
On Redfin: 63 days
Description: Gorgeous Bayside Peninsula, Tri-Level Home on the Sand with stunning Panoramic views, luxury living space provides 1 master suite, 2 junior suites, 5 plus baths, 3 car garage with ground floor elevator access. Entry level features approx. 1400 sq. ft. of finished multiple use space, ie additional bedrooms, mother in law space or office. Spacious rooms, Brazilian cherry wood flooring, dramatic entry and balconies are on each level. Perfect for gracious living and entertaining.

I pride myself on living “graciously,” so this place is perfect! By the way, can I get a ruling on the inclusion of "Naples" in these Belmont Shore listings?

So remember, being on the sand justifies a doubling of the price per square foot. Hmm…At “only” $794 per square foot, I guess this seller didn’t get the memo. Maybe sand on the bay side isn’t as valuable as sand on the beach side? Damn, I better get down to Alamitos Beach with some buckets. There’s gold in them bluffs!

At 5,657 square feet, this place is a monster! Now, this house is not brand new (17 years old) or “custom” like the Alamitos Beach property, but it’s nearly twice the size and is completely isolated from the negative aspects of downtown.

This, just like all real estate, comes down to location and personal preference. I could show you a 10,000 square foot estate sitting on 20 acres in Montana for the same price, but that doesn’t mean you’d buy it. Hence the phrase, “All real estate is local.”

So here are three local properties, each unique in their own ways.
  1. A brand new smaller one in Alamitos Beach--on the beach.

  2. A brand new larger one on the peninsula--spitting distance from the beach.

  3. And an older, MONSTROUS one on the peninsula--on bayside sand.

As a future Long Beach buyer, I want to know everything possible about the city, specifically the pros and cons of each 'hood. To that extent, it would be great if one of our many realtor readers explained the very different pricing mentalities of each of these properties, and if Alamitos Beach is more desirable than Belmont Shore/Naples in the eyes of most LB residents? That would be news to me..

$1,406 per square foot for 1724 Bluff is pure fantasy and possibly drug-fuelled, especially when compared to $794 psf for 6700 Bay Shore Walk and $549 psf for 27 65th Place. But am I missing something about the Bluff property? Or is someone just smoking the really good stuff in Alamitos Beach?

Saturday, January 19, 2008

Housing 101

According to DataQuick, Long Beach had the third highest number of sales for November 2007 in all of Los Angeles County. That’s very impressive, and could demonstrate Long Beach really is immune from the surrounding housing meltdown, as some on this blog have intimated.

And the fact that the median home price only dropped 1 percent (to $505,000) between 2006 and 2007, is strong evidence supporting that.

However, although the run-up of property values (fueled by a now non-existent easy-money lending binge) was not as severe in LB as surrounding counties, the current state and national economic factors will virtually guarantee further downward pressure on Long Beach housing prices. Here is why I believe that:


Do you know why landlords in Alamitos Heights don’t charge $4,000 a month for a 1 bed/1 bath?

Because the local income in Alamitos Heights wouldn’t be able to support that rent.

And unless wages went up dramatically, or all area landlords suddenly increased rents by 300%, that studio apartment would sit unoccupied until the price came down to a level supported by local wages.

If monthly rents are too high for a majority of the residents, demand drops like an anvil, and landlords lord over empty units. Once rent drops to a level sustained by local wages, demand goes back up, supply diminishes, and we hit a happy medium until the next cycle begins. Landlords are conscious of this balancing act, and have determined that the generally accepted supply/demand sweet spot for rent is around 25 to 30% of the area’s median monthly income.

The median gross household income in Long Beach is around $43,000, meaning a monthly income of $3583. Median rent for the city is about $855 according to Well what do you know? $855 monthly rent is almost EXACTLY 25% of monthly income!

Smart folks, those landlords.

The same economic principle applies to buying a home. If the median income earner has to spend 50%, 60% or 70% of their paycheck on a mortgage, they would be overwhelmed trying to pay other bills and stay financially solvent--especially given the inflationary factors at play (how much did your fill-up cost last week compared to last year?).

So, if the median buyer can rent a home for half the cost of a mortgage (and substantially increase his discretionary income and quality of life) the choice is obvious. He’s going to rent. And so are his friends.

Some may say “pride of ownership” and the stigma of renting are intangible factors making “stretching” a housing budget worthwhile. Fair point. The desire to "own" something and build equity are strong emotional factors, and is something I am willing to "stretch" in order to achieve.

But stretching to the point that there is not enough money left over for car payments, gas, utilities, oil changes, hair cuts, entertainment, maintenance, health care, clothing, groceries, car insurance, etc. is not a sustainable financial situation. Just ask the millions of former homeowners who “stretched” into a home they couldn’t afford and were foreclosed on. My guess is a majority would have much rather had the “renter” stigma than losing their house, down payments, and credit scores.

As you can see, there has to be a healthy relationship between wages and housing prices, just as there is a direct correlation between wages and rent prices.


The size, location, and quality of a rental are directly limited by how much money you earn. After all, if you can’t come up with a Belmont Shore rent payment every month, you simply won’t be a Belmont shore renter.

The same is true of buying a home. If your monthly income can’t cover a Beverly Hills mortgage, you won’t be buying 90210 property.

However, during the last six years or so, that rule changed. We saw the growing implementation of “creative” loans using ticking-time-bomb rate resets and interest-only schemes that restricted equity building. These loans kept the monthly payment low and allowed people who would have otherwise not been able to afford a house suddenly buy a home at 6x, 8x, and even 10x their income. The traditional measure for a sound housing investment is 3x or 4x annual income.

The only thing preventing all of us from driving Ferrari Enzos is finding a lender offering 55-year, interest-only loans. An underemployed circus monkey could afford anything if the financing is creative enough.

With foreclosures at an all time high, we all know how those negative-amortizing, interest-only loans turned out.

Most of those creative loan products that allowed otherwise financially unqualified people to enter the market or "move up" are now unavailable, and when you add economic factors like layoffs, increased jumbo (defined as $417,000 or more) loan rates, rising foreclosures, short sales negatively affecting comps, and signs of a recession…prices will come down even further in LB than the cuts we’ve already seen.

And by the way, with jumbo loans now out of reach for many people, how would a median family be able to buy a median home? Without access to a jumbo, they would have to cough up a down payment of $88,001.

Well what do you know?

An $88,001 down payment is juuuuuust shy of 20% on a $505,000 home. Twenty percent used to be the standard down payment for a home loan to protect lenders and ensure owners had enough “skin in the game” to prevent walk-aways during hard times. Given the ass-kicking lenders and banks are currently taking and the rising housing inventory rotting on their books, twenty percent is likely the standard to which lenders will soon return. When that happens, even more of the buyer pool will evaporate.


Another traditional lending standard was providing loans ONLY if the monthly mortgage payment (including principle, insurance, taxes, HOA, etc.) did not exceed roughly 28% of monthly income.

Here’s an example of a typical “median plus” buyer in Long Beach:

Annual Pre-tax Income = $50,000 / Divided by 12 = $4,166 per month income

$4,166 Monthly Income x .28 = $1,166 allowed for housing expense

In other words, if your monthly pre-tax income is $4,166 per month but you want to buy a $275,000 home requiring a $2,000 monthly mortgage…NO LOAN FOR YOU. The reason lenders did this is because they, who are much smarter than you or I, figured out that 28% was the “magic number” where families could buy a home and still afford to live without sustaining on Mac ‘n Cheese or defaulting on the loan.

Pretty smart. But some lenders forgot about why that number was so “magic” and why some people are destined to be renters forever. Banks and lenders, in competition with each other to claim their piece of the rapidly accelerating real estate cash cow, veered from this lending standard and approved much larger loans to unqualified people which, 10 years ago, would have gotten a broker instantly fired.

So, as droves of people are foreclosed upon and the government scrambles to bail them out, lenders (at least the ones that are still in business) are returning to more conservative lending practices focused on larger down payments and realistic debt-to-income ratios.

What does a return to traditional lending standards mean for Mr. and Mrs. Median Buyer? It means at these astronomical median prices, they aren’t qualified to buy.

When they and their median neighbors are locked out of median homes due to lending restrictions, there simply will not be enough buyers to snap up an increasing supply of homes. Increase in supply = decrease in demand.

What does a return to traditional lending standards mean for Mr. and Mrs. Property Seller? It means at these prices, they don't have many people to sell to and demand is dwindling.

And the only way to solve that is to do what our Alamitos Heights landlord would do when his apartment fails to find a renter at $4,000 a month: lower the price to meet local incomes.

Without creative lending practices, Long Beach’s median home price of $505,000 cannot be sustained by the median income of $43,000. Period. That means prices will come down, and will continue to do so until a realistic middle ground is reached.


Does all of this indicate right now is an unwise time to buy? Yes and No.

Yes, it is unwise because as you can see by my basic calculations, Long Beach housing prices are still very inflated when compared to local rents and median incomes. As we have hopefully learned by now, when you can purchase a home for around the same cost as renting it—YOU SHOULD DO IT. That has always been the traditional measure of a sound real estate investment, and always will be. We have many price reductions and rent increases (already underway) to go before that equilibrium returns.

Conversely, now IS a good time to buy because the housing bull in me says incredibly low mortgage interest rates (and FED Chairman Bernanke’s virtual guarantee that he will drop the key rate even further) is a very enticing incentive. If you lock in to a 30-year-fixed at 5.5%, you will be sitting pretty in a few years as rates climb back up to combat inflation.


What happens when those rates do inevitably rise to fight inflation? A person with even the loosest grasp of economics will tell you higher rates negatively impact prices. That means your and your neighbors' property values will decline even further.

The fact is, the FED lowering interest rates does not tackle the basic economic problem: If the median buyer cannot afford the median home, a few hundred dollars in interest savings per month will not make it so.

Plus, the fact that homes aren’t selling well despite conforming 30-year fixed rates at 5.5% and jumbos at 6.5% means houses are still overpriced. This is why prices are falling, and why I suspect they will continue to do so.

Friday, January 18, 2008

Hide and Seek

Today's property is a great example of a poorly timed condo conversion. When the market was red hot and appreciation was in the double digits, credit was easy to come by even if a buyer had spotty credit and/or little or nothing to put down. Because Long Beach doesn’t have the raw land to construct a lot of new buildings, there were a lot of apartment-to-condo conversion projects to meet the newfound demand.

It got to the point where there was so much competition, nearly every place I looked at had granite counter tops, crown molding, and vinyl windows—it was practically the standard. But, as those of us who read the newspaper now know, those halcyon days of appreciation and insane up-bidding are dead as a doornail.

So, I’m featuring this property to highlight how rampant speculation can definitely pay, but only when you watch the signs on the horizon and time it correctly. Otherwise you get caught holding the bag, and with unoccupied units that’s a scary position to be in.

Address: 1055 Orizaba AVE #5, 90804
Asking Price: $310,000
Size: 2 beds, 1 baths, 787 sq. ft. (built in 1988)
$/Sq. Ft.: $394 (!)
Purchase price: N/A
Purchase date: N/A
MLS#: P597408
On Redfin: 7 days (Get it while it’s hot!)
Description: Contemporary building offers large open floor plans & private balconies. Recent renovation includes new hardwood & travertine floors, carpeted bedrooms, new dual-pane windows, all new cabinetry, granite counters, stainless appliances, inside laundry and secure parking. Ready for you to move in!! Some photos are of furnished models and not the actual unit, but are similar in details. This is a must see!! Appliances including washer/dryer & refrigerator included!

This is a very well-written description. Kudos! A few too many exclamation points, but nicely done.

I actually looked at these apartments—errr, condominiums this summer. My analysis follows:

The Good:

  • The materials used are very good. Nice granite, tiles, fixtures, paint schemes, hardwoods, appliances, and most units come with a washer and dryer. It’s an attractive building on a somewhat appealing street.
  • There is gated parking with a very nice brick courtyard in the middle of the complex. I found this to be a really nice touch and an example of builders who were taking this project seriously.
  • The balconies on most units are huge. Definitely a plus. The front balconies look out to an elementary school’s basketball court, but they are still a selling point.
  • It’s juuuuuuust close enough to the fantastic Rose Park neighborhood to justify highlighting its proximity (which they did not). A missed opportunity to glom onto the appeal of that neighborhood.
  • At $310,000, it represents a significant (to the tune of 40 Large, if I recall correctly) price reduction. It shows they have capitulated to the overwhelming evidence that prices have a long way to go in this area of Long Beach. Those price cuts also signify an agent serious about selling, which demonstrates they, unlike many others, have an understanding of the economic factors at play.

The Bad:

  • There are a lot of units in this building (23) and most of us know that apartment living, especially in big complexes, increases the odds of bad neighbors. Perhaps a resident can share their experiences on this blog.
  • It’s directly across the street from a school. If you work at home (or are a sex offender) this could be a pretty miserable existence, but the good news is that after school lets out and the kids are all gone, there probably isn’t much street traffic.
  • While the materials are good, the craftsmanship did not appear to be that great for the price. Uneven spots in the floors (the area leading from the bathroom in two units was raised, as if a cat was buried underneath) and other details were worrisome.
  • Only one bathroom in this unit, which you should keep in mind if you are planning to rent out a room to offset the mortgage payment. Not a deal breaker though.

The Ugly:

  • Even though it's tiny (787 square feet), at $394 per square foot they’re dreaming. Sorry, Charlie, that’s Huntington Beach money.
  • It appears as if the listing agent keeps playing hide-and-seek with the properties. I’ve been watching this property for a while, and it seems as if units are listed, then taken off the market and promptly re-listed, giving the impression these units have not been dwindling on the market for more than 6 months (around the time I last visited the property). It’s possible the agent wants to cover up the fact that there are still numerous unoccupied units in this building so he just takes unit #100 off the market and puts #200 in its place until it grows old on the MLS, then shuffles #100 back in to show low days on market. Maybe not. Either way, there have been unoccupied units here for at least 180 days.
  • This is past 10th Street, which in my opinion is no-man’s land. My friend and I were told by a realtor to ride our bikes (a favorite past time in LB if you’re in the right area) to a property just 3 blocks west of this one, and on the way it felt like we were transported to a 3rd world country. Bars on many windows, run-down properties, music blaring from different residences, junker cars, what appeared to be Section 8 housing…it was awful. So awful, in fact, we felt extremely unsafe and promptly returned home a bit shell-shocked.
  • You need to shell out $200 a month in HOA fees. I’ll remind you that $2,400 per year is not deductible and is on top of maintenance, taxes, insurance, and possibly mortgage insurance if you’re only putting down 10%. $200 is pretty standard fare for a condo, but you have to analyze every aspect of purchasing this place (HOA, price, # of units, proximity to a school, size) within the context that to many people, this is not a very desirable neighborhood. From that perspective, $310,000--considering the drawbacks-- seems a little steep.

I won’t elaborate on the negative experience with the realtor, because I believe he was simply overwhelmed by the harsh realities of the housing situation and was under considerable pressure to close some deals. It is worth noting he was sincere, knowledgeable, and very friendly.

These are going from “Ridiculously Overpriced” to just “Overpriced.” However, after crunching the numbers it becomes clear these units will play MLS-peek-a-boo with no sale for a while. As the seller is now painfully aware, significant price reductions are in order to sell less desirable properties in this market, and almost $400 per square foot is fantasy pricing.

Keep in mind the median/median plus buyer, who until recently would have been able to buy this place thanks to loose lending standards and creative loans, is no longer a viable homeowner candidate. The nothing-down loans are gone, baby, gone, as are many of the interest-only variety. Unless a buyer has near-flawless credit, a significant down payment, and a healthy debt to income ratio, there are very few loan products available that would make this place affordable to the median/median+ buyer.

Here are the numbers:

Down Payment: A 10% down payment would run $31,000. Totally attainable.

Monthly Payment: Financing the remaining $279,000 at 6.5% would leave an approximate monthly payment (including property taxes, HOA fees, and homeowners insurance) of $2300. There’s no way you could rent this unit out to cover the PMIT, which is the traditional measure of a solid real estate investment (check out the comment from Hangenindaghetto in the “Why Buy In Orange County…” post about her friends who relocated for work, and were forced to sell instead of keeping their home as an investment property), but if you factor in the tax benefit of say, $500 a month, this place starts to make more financial sense (again, if you wish to live in this neighborhood).

Income Requirement: Assuming a 4x income calculation, the annual household income required to buy this unit would be $77,500. The median income for the area is roughly $35,000 per year. You’d be a Rockefeller in this neighborhood!

Again, price reductions are a positive sign they are serious about selling. However, until those magic buyers materialize, perhaps bank will decide to rent some units out in an attempt to slow the monthly bloodletting. That won’t make the owners who bought at the peak very happy, but at least the building won’t have so many unoccupied units.

UPDATE: In the time it took me to write this entry, Unit #18 suddenly popped up on the market. Unit #18 is a 1 bedroom loft with roughly the same square footage.

Looks like I might be right about the re-listing peek-a-boo. It's supposedly been there for only 6 days (as of now we have #5, #10, #17, and #18), but judging by the fact there were many unsold units as much as 6 months ago, I hardly believe this is the first time it has been on the market.

I’ll keep an eye on this building and keep you updated.

Wednesday, January 16, 2008

New Hate Mail

From newquest:

Are you really a Long Beach native? I ask this because your claim that it is not such a good time to purchase there shows to anyone with a brain that you really have no idea what your [sic] are talking about. Your ignorance of the market place combined with your arrogance vis-à-vis the “commission earners” tell me that you probably are not a sales person and just another employee of some firm that has to pay you to blog because their business model is failing massively in this market while the seasoned and traditional brokers are actually prospering and growing! Having a 9 to 5 job is probably a good thing for someone like you but remember that everything that you are writing is putting you deeper and deeper in a hole. Your [sic] building a case against yourself with every post you write.

My Response:

Again with the gross assumptions and personal attacks. The last bastion of someone on the wrong side of a debate.

For the record, I write these posts on my own time.

I’m still waiting for the housing bulls posting rude comments on this site to address the issues at hand—the featured properties—and explain how buying a property according to market fundamentals is a bad idea. Trying to discredit the messenger instead of confronting the message is an obvious sign of someone afraid to debate the facts.

Although I strongly disagree, I honor your opinion that now is a fantastic time to purchase a home. My respect for your opinion is evidenced by my decision to post your invective comment in its entirety. However, I’m mature and civil enough to spare you personal insults.

In response to your position that now is a great time to buy, nearly every property I’ve featured here has dropped its price…to no avail. What does that tell you? A reasonable person would conclude home values ARE DECLINING, and unless you enjoy paying full price for an asset that will depreciate the day you buy it, that means it is most assuredly a bad time to buy.

I would like to point out some recent media coverage of the ongoing housing mess:

"Prospering and growing" eh? Wells Fargo and Citigroup sure seem pretty "seasoned and traditional" to me and I can't remember rampant layoffs ever being considered "prospering."

Those took me about 55 seconds to find. I look forward to your supporting evidence demonstrating I (and Forbes) am wrong in concluding housing in Long Beach is in for a nasty spill.

Frankly, it’s AMAZING to me how much of a threat returning to simple investment fundamentals is to some of you! If I’m such a discredited source of information, or have “no idea what [I’m] talking about,” then why are you spending time here bothering to insult someone digging "a deeper and deeper" hole for themselves? Seems to me if my opinion is "ignorant," then someone like you who claims to be in possession of a stronger understanding of the market would have more productive things to do.

If the information and investing principles I discuss here are unsound, then please feel free to challenge them and explain how $450+ per square foot at 1533 East Broadway makes any kind of financial sense. As a prospective buyer, I want to be convinced.

I’m waiting.

Further, if now is such a great time to buy, as an expert like yourself suggested, then the numbers should speak for themselves right? Are prices going up in most areas of LB, are lending standards loosening, is there a positive outlook for the local and national economy, are there low days on market?

I look forward to you posting these figures in support of your claims.

Or, if that takes too much energy, please just dismiss my “misinformed” opinions entirely and erase my blog out of your Favorites. I sense the reason you are here venting your anger is because I’ve struck a very sensitive nerve, and deep down you know the fundamentals don't lie. And judging by your failure to disprove my evaluations, and decision to instead resort to insults, I sense you’re actually quite concerned about the implications of an informed home-buying public and are lashing out at me for daring to present a different viewpoint.

The condescending “you don’t know anything, leave this to the experts” attitude from the bulls posting here is exactly why I started this site. Armed with expanding media coverage, numerous informed housing blogs, and alternative property listing sites, buyers have never had more avenues to evaluate for themselves what’s really going on and to hear from unbiased sources with ZERO financial stake in the repression or sharing of information.

I respect those who work on commission and I'm not denigrating them whatsoever. I'm simply stating the obvious: someone whose livelihood depends on whether they can get someone else to buy something is clearly not an unbiased source.

You imply a person who is not in sales or real estate is not qualified to have data-supported opinions about the real estate market. By that logic, are people who are “just another employee of some firm” or not "a sales person" qualified to purchase a home?

I didn’t start this site to make enemies; I started it to spur discussion. But clearly not many of you are interested in the latter.

I do not claim that this site is the bible of real estate investing, or that my current analysis will apply to the future (when the market finally returns to fundamentals, I will purchase LB property and delete this blog). However, I strongly assert that home buyers, including me, need to encounter information and perspectives from ALL SIDES and process it for themselves before making the largest single investment of their lifetime.

Do you disagree with that statement?

Tuesday, January 15, 2008

Glory Daze

Today’s featured property is a real find. Are you sick of married life? Stressed out with raising kids? Dying a slow, boring death at your dead end job? If so, you have an opportunity to re-live your college glory days “Old School” style.

That’s right, your very own fraternity house! In fact, the seller is so confident you want to hearken back to your Frank The Tank days, he didn’t even bother to stage the place! Well, except for the rear parking lot. Look at what kids are driving these days: Cadillac CTS with rims, BMWs…instead of selling the place, they should have jacked up the rent!

Address: 745 Elm, 90813
Asking Price: $569,000
$Size: 5 beds, 2 baths, 2,082 sq. ft. (built in 1907)
$/Sq. Ft.: $273
$Purchase price: $117,000
$Purchase date: 1990
MLS#: P597408
On Redfin: 138 days
Description: * * * FIXER * * * or, * * * BUILDABLE LOT * * * Excellent opportunity. Presently used as a fraternity house! Just a block south of St. Mary's Hospital on a huge lot (50 X 150). Zoned PD-29 (which has residental R4 standards). This home is a major fixer; see the pictures.

A very honest listing, although I don’t see how they had much choice. The pictures speak for themselves.

Full disclosure, I actually lived in this house during college. I don’t want to hurt my fellow frater’s chances of a sale, but at 138 days on market I doubt I can do much harm. In fact, maybe this post will provide some publicity and catch the eye of a savvy investor!

I haven’t lived there for more than a decade, but it looks likethose years were ROUGH. ¾ of the staircase’s wooden slats have been kicked/punched out and that kitchen looks pretty revolting.

This is most assuredly not a "FIXER" unless you've got A LOT of time and money to burn. The best bet is to take advantage of that R-4 and build some decent rental units.

Let's look at the financial implications of fixing it up and living in it:

Down Payment: A 10% down payment would run you $56,900.

Monthly Payment: Financing the remaining $512,100 at 6.5% would leave you with an approximate monthly payment (including property taxes and homeowners insurance) of $3800. Now, the bedrooms provide significant rental opportunities, so you could bring that monthly nut down a bit. However, I would guess the new owner needs a minimum investment of $50,000 to $75,000 to make it livable/rentable (see photos).

Income Requirement: Assuming a 4x income calculation, the annual household income required to buy this "fix it or f**k" it house would be $142,250 (plus the cash to make it inhabitable). Do you think anyone in his or her right mind making that kind of money would live in this place? Probably not, so this place is clearly cut out for an investor looking to raze it and build some rentals.

As I recall, this house was purchased just as the bottom fell out of the LB real estate market in the late 80s/early 90s. Now, I don’t proclaim to be smart enough to time the market exactly, but given this seller’s attempt to sell a house like this--in this market—I wonder if market timing is really their thing.

However, if you look at the sales history, a purchase price of $117,000 would yield a nice little return on investment if sold for asking price today. Instead of being a landlord to wild college students, the owner probably just wants to get out of it and park the proceeds in a less volatile investment vehicle. Makes perfect sense, given the economic environment.

But, considering $100,000 has already been lopped from the original asking price with no takers, a sale at this price seems highly unlikely. What are construction costs per square foot these days? $100? $135? You’d be paying at least $375 per square foot just for the privilege of tearing this thing down and building apartments.

Razing an old decrepit home and constructing a nice house or some rental units can be a smart investment—IN A NICE, UPCOMING NEIGHBORHOOD. This, I’m afraid, is not one of those neighborhoods. In fact, during my tenure, gunshots, car vandalism (the fact that quite a few cars are now parked behind a gate in the back yard tells me street parking still isn’t a good idea), homeless, and even car fires (!) were yin to cheap rent’s yang. I drove by for old time’s sake a few months ago and not much has changed.

Plus, considering the median income is $23,493 a year and 88% of properties in this zip are rentals, there would be an awful lot of dirt cheap competition (A quick search turned up a 3 bedroom/1 bath a few blocks west renting for $1500 a month). Not a great investment property at this price.

It’s sad that these college kids won’t have a fraternity house anymore (man, those were some good times), but if any alumni want to get together to relive the glory days, now is their chance. Just be sure to disinfect the Jacuzzi first.

Monday, January 14, 2008

Irvine Prices in Long Beach

Why buy in Orange County when you can pay Irvine prices right here in Long Beach? Now, I realize within the context of the massive housing bubble we just experienced, $545,000 doesn't make many people flinch. But, I want you to really think about that sum. Almost $600,000. More than HALF A MILLION DOLLARS.

Now, I want you close your eyes. Think about the house you would want to live in for that insane amount of money. Probably fairly big, lots of room to have your parents and friends over. Nice appliances, great neighborhood, decent schools. You've worked extremely hard and sacrificed a lot to save up the $54,900 down payment, and possibly put yourself through grad school to land a job paying the required $136,000 annual salary.

Now open your eyes. Is this what you imagined?

Address: 1533 E. Broadway, 90802
Wishing Price: $545,000
Size: 2 beds, 2 baths, 1200 sq. ft. (built in 1918)
$/Sq. Ft.: $454 (!)
Purchase price: N/A
Purchase date: N/A
MLS#: R704655
On Redfin: 260 days

Description: Buy, LEASE or LEASE TO OWN! OWNER WILL CARRY BACK with the right deal!All new windows, skylights, tile roof, new cooper plumbing, new electrical - this is a NEW HOUSE. Great back yard and patio too! This home has a 'dual land use' - check with city, but the commercial zoning allows you to operate a business such as Hair & Nails, Accouting/Tax Prep, Real Estate, Food Service, Etc. .. This is a wonderful home located in the heart of Alamitos Beach. (MOVIE AVAIL. On this Property)

Where do I begin? By the way, I know real estate agents and they are bright, hardworking people, but this type of listing makes me wonder if there are any standards at all for this line of work anymore. In fact, this listing is so bad, I'm going to pick it apart line by line:


All new windows, skylights, tile roof, new cooper plumbing, new electrical - this is a NEW HOUSE. A roof ain't cheap, and new windows definitely add serious value. I'm not sure what "cooper" plumbing is, but it doesn't sound like a good thing. "This is a NEW HOUSE"...just make sure to disregard the 1918 build date. Move along, nothing to see here.

Great back yard and patio too! Are those Christmas lights hanging from the roof? The back yard is a decent selling point, actually. Seems they should have spent more time staging it.

This home has a 'dual land use' - check with city, but the commercial zoning allows you to operate a business such as Hair & Nails, Accouting/Tax Prep, Real Estate, Food Service, Etc. .. Awesome! Yet another property with a sizable "benefit" in addition to the considerable pride of ownership. I've never heard of "Accouting" but it's never too late for a career change. Food Service, eh? If the parking wasn't so horrendous in this area, I could open a Wendy's.

This is a wonderful home located in the heart of Alamitos Beach. UPDATE: There has been some debate on this blog about the actual borders of Alamitos Beach/Belmont Heights/Alamitos Heights, but I am of the opinion that sometimes listing agents will throw the name in of a more appealing neighborhood to benefit from the better connotations of that higher-valued area. For example, this listing,

shouting distance from the featured property, lists "Belmont Heights/Alamitos Heights." But wait, didn't the seller of the first property claim it's in the heart of "Alamitos BEACH"--the more appealing neighborhood? Case and point. From what I see, the Heights area is improving, but generally, especially as the area creeps closer to downtown, it's not a place I feel safe walking down the street at night, and I certainly wouldn't park my car on the street.

(MOVIE AVAIL. On this Property) Huh?

The pictures are odd. It seems like a decent (if unbelievably overpriced) house. Nice hardwoods, decent cabinets and appliances (but awful hardware and too much Ikea furniture to qualify as a decent staging effort), yet they feature a crap-filled attic and strangely none of the bathrooms. For a supposedly "NEW HOME," doesn't it strike you as a little suspicious that no bathrooms are pictured?

With no sales data, I can only guess this is a flipper who watched too many TLC shows and got himself into a financial catastrophe he didn't anticipate. The monthly carrying costs on this place are more than $3,500. Do you think that sounds like a reasonable monthly rent? No? Then I'd surmise there's a hefty negative cash flow on this property. I'd love to find out what the flipper's--I mean, seller's, proposed lease rates are.

At $454 per square foot and 260 days on market, this thing isn't going anywhere. Sometimes I get the feeling owners just aren't serious about selling. I don't care how close you are to Belmont Heights, in this zip code the median household income is $30,353. This house is probably slightly above median considering the minor updates, but even if the median income were $50,000 a year, this thing wouldn't be priced more than $250,000.

That means this little buddy will need at least a 50% price reduction to make anything close to financial sense. That would put it at $208 per square foot. That may sound dramatic, but consider it's a big deal when Irvine and to some extent Huntington Beach drop below $300 per square foot. I love Long Beach, but if I could get a condo in a nice area of Orange County for less than a 90-year-old stucco box in a questionable LB neighborhood, there is no question where I'd live.

Quickly, here is a comparable property in Irvine with an asking price of 549,000.

It's a 2 bed, 2 bath in a clean, safe area. It still may sound expensive for 1,100 square feet, but consider the $82,000 median Irvine income has a more realistic chance of supporting the price, as opposed to the Long Beach property.

Sure, I guess you can't open a nail salon in the back of the Irvine place, but this comparison clearly illustrates the informational/psychological barriers at work in Long Beach, and the inability to understand how the ensuing real estate deflation in nicer, more desireable surrounding areas will absolutely punish Long Beach prices.

Rent vs. Own

Quite a productive day of writing. I feature one house then I stumble upon another piece of information that reminds me of something else.

For example, when researching comparable rents for another post, I found a 2 bed, 2 bath rental in downtown Long Beach for $1,500. Decent rent. Later, when skimming through Redfin, I noticed a place for sale in the same building as the rental. What a perfect opportunity to discuss the supposed advantages to purchasing a condo in this "buyer's market."

First, the condo for sale:

Address: 1187 East 3rd St. #103, 90802

Asking Price: $260,000

Size: 1 beds, 1 baths, 778 sq. ft. (built in 1969)

$/Sq. Ft.: $334

Purchase price: $60,000

Purchase date: 6/3/1994

MLS#: R800186

On Redfin: 8 days

Description: Rarely on market, Whitley Bay one bedroom condo - very spacious. Gated complex with parking space in gated garage. Walking distance to beach. Close to downtown area with great entertainment and restaurants. Close to the Blue Line and other public transportation. Fantastic square footage for a one bedroom unit. Nice sized rooms. Lot's of potential!!!

Unneccesary apostrophe, meet excessive exclamation points: "Lot's of potential!!!"

"Potential," by the way, is realtor-speak for "absolute sh*thole."

Also, my favorite realtor language of all time is "this won't last!!!!!!11!!" The statement "rarely on market" is in the same ball park. Makes the place seem exclusive, doesn't it? Or, if you're really skeptical, that statement means it's practically a retirement community and the reason they don't come on the market very often is because the residents are on fixed incomes.

Down Payment: $26,000.

Monthly Payment: $ 2030 ($1810 + 220 HOA fees)

Income Requirement: $65,000/yr.

* * * * * * * *

And now the rental in the same building:

Address: 1187 East 3rd St., 90802
Asking Rent: $1,500
Size: 2 beds, 2 baths, ??? sq. ft. (built in 1969)
Description: This wonderful 2 bedroom 2 bathroom aprtment has an expanded kitchen with peninsula which is great for entertaining. It also has a private balcony. There is a very nice common area patio and gated parking for one car plus storage.

Down Payment: $1,500
Monthly Payment: $1,500

Well, that's pretty close, right? $1,500 to rent it, or just $500 more per month to buy it. I'd say we're pretty close to a healthy buy vs. rent ratio, no?

Oops! The rental is for a two bedroom, two bath.

So not only do you pay $500 less per month for an extra bedroom and bath (and the square footage that comes with it), but you have the opportunity to split the rent with a roomate--an option not available if you buy that tiny studio. So, factoring a roomie situation, you just saved yourself $1,250 a month by living in a bigger place that you are not tied to for the next 30 years.

Not to mention, you could have socked away that $26,000 in a 5% E*Trade savings account yielding 5%. That's $1,300 a year, my friend. Not much, but it sure beats dumpint it into a 780 square foot "investment" that will bleed cash to the tune of $500+ a month for the forseeable future.