Wednesday, April 22, 2009

Talk About Crappy Timing

So, remember in 2007 when the worst in the housing "correction" was supposedly behind us? Ah, those were the days. Treasury Secretary Paulson came out in April and said subprime wouldn't spread to other parts of the economy, specifically stating:

"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.

Um. Oops?

In 2007 we also had commission-driven real estate "professionals" buying into that Pollyanna bullshit and slinging nasty comments on this blog, venomously ridiculing my attempts to educate people about the truth and warn them about the housing crash already underway.

Sadly, based on advice from real estate "experts," many people in 2007 bought overpriced properties because, according to those with a vested financial interest to say so, "Now is a great time to buy" just as values were starting to fall. And the results for many 2007 buyers will be disastrous.

And even those who manage to scrimp and save and rent out rooms to just barely hang on to their houses will have to live with the heinous fact that they could re-purchase the very same home for half of what they paid years earlier.

Now, to be fair to the people who timed the bubble so poorly, you can't call the peak of a bubble until quite a while after it happens. BUT, it didn't take a real estate "pro" to figure out that $429,000 ($411 per square foot) for a two bedroom apartment on a busy street a mile from the ocean made absolutely no financial sense.

Fast forward to Spring 2009, and it's so abundantly clear how wrong everybody was--except those who were paying attention. But don't ask me. Ask this poor guy with quite possibly the worst timing imaginable:

Address: 384 Redondo Ave #401, 90804
Asking Price: $429,900
Year Built: 1987
Size: 2 beds, 2 baths, 1,044 sq. ft.
$/Sq. Ft.: $412
HOA Fee: $260
Purchase price: $429,000
Purchase date: 1/2007
MLS#: P661433
On Redfin: 186 days
Down Payment: $86,000
Monthly Payment: $2,400
Income Requirement: $123,000
Description: One of a kind designer penthouse just a short walk to the ocean.No common walls.Soaring 17ft high vaulted ceilings.Newer complex was built as a condominium not a converted apartment building.Incredible views toward the ocean, sun sets & city lights views.Remodled kitchen & bathrooms.New egenered wood floors. Washer & dryer in unit.Warm & cozy fireplace.Large walk-in closets and lots of storage.Two parking spaces with storage.



So, how long have you lived in this country? English lessons going well?


There's no two ways about it. Here's why:

He can't afford the monthly payments. This is obvious. Why else would they be selling for a loss during an era of unprecedented housing deflation?

He can't rent it out. This place would be lucky to rent for $1,650 per month. This one, also a penthouse, closer to the beach, is asking (asking, mind you) $1,750. The nearly $800 monthly bloodletting would kill them, amounting to a minimum loss of nearly $10,000 per year.

He can't lower the price. He bought at the peak (actually, the market was already on the way down by early 2007) and tried to sell it a year and nine months later for $10,000 more than he paid. After five months with no luck, in March of this year the price was reduced to $429,000 ($900 less than the January 2007 sales price). Worst of all, even if he could find a knife catcher to bail him out at this ridiculous asking price, it would result in a loss of $26,000 just in commissions. So, basically this is already a short sale, and any further price reductions would be catastrophic to his financial future.

So, here are the options:

1. Rent it out and let the difference between carrying costs and rent slowly destroy your financial lives.

2. Or, mail back the keys tonight.

That's it.

It sucks, but that's the choice you have to make, pal.

Yes, I guess you could technically try to short sell it. But, let's be frank; the minimum loss to the bank will be $110,000, and that's assuming it acted immediately to slash the price 25% to bring it closer in line with reality. It's very unlikely that's going to happen.

The 2000 sales price was $186,500 and I have no doubt it will approach--and possibly reach--that value again once this bubble is done with its slow, excruciating implosion.

I almost feel sorry for this guy because it's obvious he took a lot of pride in this place. Sure, he Tuscan-/Tao-ized the thing within an inch of its life, but it doesn't appear he was some flipper looking to make a quick buck. Instead, it just looks like a professional dude who succumbed to the "real estate is always goes up" pressure and got way in over his head.

It's a shame. But it's life. Hell, with inside laundry and no common walls, I would definitely be interested in this place. But, unlike this guy, I'd only buy it at a price that I could comfortably afford. And it will get to that price.

Finally, via CalculatedRisk, we read that California Mortgage Defaults Jump to Record High, highlighted by this little nugget:

A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it's 4.6 percent - a percentage that's likely to rise significantly during the rest of this year.

And today's property will add to that number.

1 comment:

  1. I live in the area, on my boat.
    When I see how frigging much these cramped, crowded and costly places go for, I am SO glad I never sprung for real estate.
    What a joke!