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?

1 comment:

  1. 5585 East Pacific Coast sold for $125,000 on 2010-03-15