Sunday, November 30, 2008

A 10-Year Plan

Lately I've noticed the bottom-calling is growing in fervor and frequency, and real estate "professionals" are becoming more aggressive with their optimism.

In fact, just today my cousin sent me a newsletter from an Orange County Realtor (yep, totally unbiased source) claiming buyers waiting for a bottom in houses below $350,000 have "already missed it" and "under $250,000 there is actually a shortage of good houses to buy!"

His primary justification for his sunny outlook seems to be that sales are up from last year and certain distressed properties are garnering multiple offers.

One more time, for the kids in the back eating Elmer's glue: If a home is priced correctly, it will sell quickly.


This isn’t mapping the human genome, people. It’s a pretty simple concept.

And what this used house salesman failed to acknowledge is that an increase in homes selling at bargain bin prices does not constitute a bottom. In fact, it is an ominous sign of just how powerful distressed properties are relative to the overall housing picture, and how the (still) incredible amount of foreclosures will guarantee further downward pressure on prices. Record number of foreclosures = no bottom in sight.

Which brings us to today's property. I have a feeling a knife catcher, believing the bottom is nigh, will swoop on this bento box of a condo in the next few weeks. Yes, it’s still overpriced according to fundamentals, size and location, but the initial asking price is somewhat reasonable and demonstrates a willingness to accept reality. Sellers who price realistically and are willing to deal typically find sellers.

Again, duh.

Address: 514 Obispo Ave #C, 90814
Asking Price: $262,000
Size: 2 beds, 1 baths, 818 sq. ft. (built in 1979)
$/Sq. Ft.: $320
HOA Fee: $225
MLS#: P666269
On Redfin: 5 days
Income Requirement (3.5X): $75,000
Down Payment: $52,400
Monthly Payment: $1,700
Description: This is a darling top floor, front 2 bedroom unit that has been remodeled and ready for a buyer to move in. This unit is bright with tons of light, vaulted ceilings, balcony off the dining area, big living room with fireplace and a fantastic detached double car garage. Excellent opportunity for your fist time buyers! Pet friendly building where most of units are owner-occupied.

[UPDATE: Reader DAve pointed out something I missed in the listing description. Did you catch it? "Fist time" buyer. LOL! That's a pretty apt description for the buying experience in this economic environment.]

This place was purchased for $289,000 in October 2004, and is now priced $27,000 (nearly 10%) less than that just four years later. If this condo sells for today’s asking price, the loss to the loanowner after commissions will be $42,000. Not a terrible loss compared to most of the carnage we’ve seen, but still pretty vicious.

Notably, this property is priced firmly in 2003 territory. Six months ago, practically the only properties moving were priced in the ’03 zone. But is that enough in this brutal, ever-worsening economic environ? Or will places like this cross the border into 2002-istan to nab a sale? And what are the chances they dip into 2001 pricing?

But let’s say you’re like most knife catchers out there and you don’t give a damn about being underwater for the next few years. 2001? 1996? Who cares?! You’re buying it to live in, not to check the median home price every week, right?

You’re tired of renting, you want a place you can paint any color you want (I highly recommend a neutral color in the kitchen--yeef!) and you believe the bottom is here so you're not concerned about depreciation.

You want a place to call your own, Realtors in the know are telling you the bottom has already been reached, and you want to make a move on this condo. Then let’s pencil this thing out!

Your monthly nut, including principal, interest, taxes, insurance, and HOA, is about $1,700 a month. That’s a lot of money for one person, but you are building equity and will benefit from a tax refund (which will largely be eaten up by ancillary ownership costs, but still).

Maybe you can rent out a room to help offset that mortgage payment. The good news is there are two garage spots. The bad news is you’re sharing a miniaturized 818 square feet and a bathroom with a roommate. But additional income, even at the cost of privacy and enjoyment of your new (used) apartment, is money in the bank after all.

It’s also a good thing you don’t care about crunching the Rent vs. Buy numbers. If you did, some nearby rentals might bum you out. For example, there’s a 2 bedroom with hardwoods, a bit closer to the ocean (383 Obispo), asking $1,450 a month.

There’s also a 2 bedroom /1 bath about five blocks closer to the ocean (3109 Corto) asking $1,100.

But forget all that!

Remember: building equity, tax benefits, painting whatever color you want, roof over your head, bottom is here.

Maybe the bottom callers are right and we should stop treating our largest single investment as, um, an investment, and look at it as shelter instead. According to the bottom-calling Realtor’s newsletter, buyers should start also thinking long-term, like 5-10 years, when it comes to a home purchase. And he's right.

Of course, he forgot to mention that people buying today have no choice but to think 10 years into the future.

This is because after another year or two of continued depreciation, followed a few years of little to no appreciation, a decade is about when buyers of this condo could conceivably break even after sales commissions. And if ten years from now there is strong demand for tiny condos with one bathroom, today's buyers might even make enough to move up to a detached home.

I, like many Realtors, strongly encourage the future buyer of this apartment to adopt a 10-year mindset--but not just financially. I want you to think lifestyle.

In your mind I want you to imagine sharing 818 square feet and a bathroom with your future wife every single day for the next 10 years. And I assume you’ll want to start a family within the next 5-10 years too, so I want you to imagine, in perfect detail, the fun and excitement of raising a family in this condo.

Yep, just imagine all the fun you’ll have living here for the next decade! There’s no yard, so forget about all that boring upkeep. Just get your kid some goggles and tell him your non-matching black oven is the Death Star! Fun!

There’s no balcony, so you’ll spend every single waking moment in extremely close quarters with those you love most and never get tired of! Isn’t that great?

Plus, with shared walls, you’ll have an incredible sense of community. Why, I’m sure you’ll love living above and adjacent to nine other units for the next decade.

Wait, where are you going? And why are you running?! Sir, we haven't finished filling out your mortgage application! Come back! PLEASE!!!1!


  1. <...buyers waiting for a bottom in houses below $350,000 have "already missed it" and "under $250,000 there is actually a shortage of good houses to buy!">

    Don't panic. There are plenty of $400.000 - $500.000 houses rotting on the market to fill up the $250.000 - $350.000 vacuum in the near future. Obviously the so called real estate professionals can be right; they know something I don't (and it makes me nerveous). Next year a large pool of first time home buyers with $125.000+ income and 750+ FICO score going to sweep the $400.000 - $500.000 market...


  2. "There are plenty of $400.000 - $500.000 houses rotting on the market to fill up the $250.000 - $350.000 vacuum in the near future."

    That's what I was thinking. I understand the the logic of the Realtor's opinion: The low end of the market, which has absorbed the most severe equity punishment, doesn't have much more to give.

    But what happens when a "new" low end is created from all the "prime" properties purchased with Liar Loans and Option ARMs?

    It's weird that people think "it can't go any lower" just because. There is no economic or fundamental evidence of a bottom in LB, but people just want so believe so badly.

    As soon as San Diego, which was among the first to inflate (and subsequently crash), shows strong signs of bottoming out, I'll know we're about a year from a bottom in LB.

  3. I disagree that the $250k-$350k doesn't have a lot left to give. those are decidedly the lower third of the housing stock, and should be affordable to the median income households. since the median household income is $50k, that means 3x-4x, so $150-$250k is the target.

    Really, how many households who make $125k, would be happy living in north long beach or stanton? this is the upper third of the income ladder, and they are going to want and get a nicer area of LB or huntington.

    Look out below!


  4. You all missed the LBC truth in advertising award winner for 2008:

    "fist-time buyer"

    got to gives credit where credit is due!!!