Thursday, December 4, 2008

Downtown Dive-Bombing

Back from Atlanta, ready to blog!

You know, the most rewarding part about the housing collapse is the demise of some of the most ill-conceived conventional wisdom we were bombarded with (often with a quite condescending tone) for years.

For example, during the bubble, buyers and sellers gladly accepted the premise that small, entry-level condos in so-so areas were “worth” $350,000. As absurd as that would have sounded in, say 2002, by 2005, it suddenly became Truth. They said some form of "That's just what condos cost now." Any disagreement or suggestion these “values” were seriously misaligned with fundamentals or common sense was widely ridiculed.

In conjunction with their blind acceptance of REIC (Real Estate Industrial Complex) lies of “a new paradigm” of economics to support such prices indefinitely, hardly anybody expressed concern that $350,000 was in some cases EIGHT TIMES the median household income! Insanely, this substantial 350k sum wasn’t even referring to a starter house for a family with two incomes—this was for a sub-1000 foot apartment!

Another related misconception was believing $300 per square foot was a reasonable figure. Maybe it just seemed like a nice, round number, but you wouldn’t believe the static I used to encounter in 2007 when I predicted Long Beach would soon see sub-$250 per square foot.

Blasphemy! Bitter renter! Priced-out punter!

Browsing through Long Beach properties, it’s inescapably clear that we crossed the $300 per square foot psychological barrier long ago. Anyone still snowing themselves into believing $300/square is a valid measure of today’s condo values is sadly mistaken.

Today’s featured property should serve as a warning to sellers and real estate professionals who are still clinging to conventional wisdom from the bubble. These widely discredited beliefs (“Subprime is contained,” “California is different,” “Long Beach has old money,” "Home values never go down," "You can always refinance," “They’re not building any more land,” and recently, "It can't go any lower," and "The bottom is here" etc.) are dead and gone—no matter how badly some need them to remain true.

This should also serve as a warning shot fired over the bow of those who believe their street is "immune" from the activity in downtown and this won’t affect prices in their "special" neighborhood.

Address: 838 Pine Ave #118, 90803
Asking Price: $230,000
Size: 2 beds, 2 baths, 930 sq. ft. (built in 1998)
$/Sq. Ft.: $247
HOA Fee: $200
Purchase price: N/A
Purchase date: N/A
MLS#: I08105550
On Redfin: 135 days
Down Payment: $46,000
Monthly Payment: $ 1,500 (calculated with 6% interest rate in light of the government’s temporary success in lowering rates)
Income Requirement: $65,000
Description: Beautiful condo with hardwood floors and granite countertops. Seller will leave furniture for buyer if they like. This is a short sale-subject to lender's discretion on commission, terms, and conditions. Very secure building. Unit features two tandem parking spaces. Rooftop has amazing views of the ocean and the city. Very close to the hot, urban night life of Long Beach. This is the ideal location! Great home for anyone-starter home, a nice area to retire to or do the city living!

What we have here is a smallish, newer-construction condo with two parking spots, in-unit laundry, air conditioning, granite counters, hardwoods, a balcony, and a comparatively reasonable HOA fee…asking $247 per square foot.

Uh oh, sellers. This doesn't bode well for you.

A $1,500 total monthly payment is awfully close to equivalent rent, and if you could find a renter willing to live this far from the ocean you’d be in pretty good shape.

The “short sales don’t count” people will say this price will likely not be approved by the lender. Ultimately, they may be correct.


When this property appeared on the market in July, the asking price was $400,000, or $430 per square foot. The seller, like so many fools still desperately clinging to stupid beliefs about home values based on nothing more than wishful thinking and irrelevant philosophies from the bubble days, learned a very harsh lesson. And now it's begging for a sale after 43% in discounts.

My feeling is that a year from now, we will view $250 per square as we regard $300+ per square foot today: a quaint, but long forgotten relic of the past. Like Playboy bunnies with pubic hair or shoes with zippers on the side.

Two years from now, as we approach the bottom in Southern California, we could very well feel the same nostalgia about $200 per square foot in desirable areas of Long Beach. Don’t believe me?

What if I told you we already shot below that threshold last month in some LB zip codes? That’s right, in 90813 (the zip of this downtown condo) the square foot price dipped below $200 last month!

And there’s no end in sight for the price declines. There is just too much inventory on the market, and even more waiting in the wings for "things to get better." If you haven’t already sold your place, it is more than likely too late. Those calling a mulligan on 2008 and hanging their hat on a recovery in 2009 are, well, fucked.

It’s difficult enough to compete with distressed properties in today’s environment, but what happens when banks undercut nearby sellers by $100,000 like this one did?

To quote Clubber Lang in Rocky III:


Rest assured the government will do everything in its power to reduce the pain and artificially inflate home prices, but it can’t inflate incomes. Now that voodoo lending to any mammal with a pulse is no longer here to propagate rampant speculation, home values are determined strictly by what lenders are willing to lend.

And now that the high from snorting lines of powdered Housing Kool-Aid has worn off, lenders and government entities of only resort (Fannie and Freddie) are reverting to that old standby for determining loan worthiness: Income.

With the economy bleeding jobs like an anemic with a shotgun wound, qualifying income has become much more elusive. Regardless of government intervention in the credit markets and interest rate policy, employment (i.e. income) will ultimately determine how bad this housing crash gets and how quickly we can begin our recovery.

Unless the government brings back zero-down, interest-only Option ARMs or creates high-paying jobs out of thin air, their efforts will be in vain and will only result in a further delay of the necessary--and inevitable--return to fundamentals.


  1. oy, what a turd.

    is #118 on the ground floor? nice street noise?

    Is the sole interior shot that stairway? subtract 100sf from that very generous 930, and you get a very small 2/2! why not other interior shots?

    $1500 +$200 HOA (how long will it stay this low?) doesn't sound like such a bargain.


  2. Freedom (Alex?),

    "oy, what a turd" LOL!

    There are ZERO interior shots (that staircase belongs to the lobby I'm pretty sure), which always sets alarm bells off, but with hardwoods, granite and construction within the last decade, my guess is that it's in decent shape. Maybe the rent-free livin' seller won't let the bank in to take photos?

    My $1,500 calculation actually INCLUDES the HOA! On paper it's starting to make sense if the bank agrees to that price. But it's far from the ocean, which makes me think it will aggressively overshoot rent vs. buy at some point.

    Good point about the HOA--I have to imagine HOAs are hurting for cash in this foreclosure-happy environment. I'm also wondering if property taxes will go up in light of California's budget woes.

    This condo is no prize but it has more going for it than most of the dumps I feature (asking way more). To me this condo represents the future for nicer areas of Long Beach.

    Going to be an interesting winter...