Thursday, May 21, 2009

Flush with Equity, Bursting with Hubris

Address: 4315 Broadway, 90803
Asking Price: $599,000
Year Built: 1922
Size: 2 beds, 1 bath, 1,254 sq. ft.
$/Sq. Ft.: $478
Purchase price: $375,000
Purchase date: 8/2001
MLS#: P641302
On Redfin: 345 days
Down Payment: $120,000
Monthly Payment: $3,200
Income Requirement: $171,000
Description: Rare affordable Spanish Belmont Heights single story home with nice rear yard. Close to Belmont Shore shopping, dining, beach with easy parking. Beautiful living-dining room area with hardwood floors, some newer double pane windows in living and bedroom, laundry room off kitchen, remodeled kitchen and bathroom. This is worth seeing.


Guess that depends on your definition of "affordable." A monthly payment of $3,200 requires an annual income of at least $171,000 to realistically afford this lil' buddy. Hmm...the median income in this zip is (a healthy) $78,405. Wow, you need to make 2.2 times more than the already pretty high median income to afford an average median property.

Plus, you've been collecting MLS cobwebs since last summer, so clearly your definition of "affordable" doesn't quite match that of potential buyers.

I love when realtors gush over “newer” improvements in a home. Hey, I’m selling my car with a “newer” tank of gas. I last filled it up three years ago then parked it, but I’m sure it’ll run like a champ.

Plus, there are only some “newer double pane windows.” Way to go, cheapass. Is there anything chintzier than mixing new windows with the old, tattered originals? I realize double-paned windows are expensive, but replace them all or don’t even bother.

And, sorry dude, but the last time that kitchen was “updated,” Jimmy Carter was kickin' it in the White House.

Hey Brit, how do you feel about those floors?

You’ll notice there are no photos of the “updated” bathroom. In a home with only one baƱo, it better damn well be impressive, and you'd better damn well include a photo of it. I have a feeling there’s a distinct reason why this place hasn’t sold in 345 days. It starts with B, ends with M, and isn’t Bacchanalianism.

But the bathroom isn’t the only reason this place is about to celebrate its one year anniversary on the MLS. Check out the cocksure, defiantly stubborn, I-am-a-real-estate-genius-and-entitled-to-my-bubble-equity pricing strategy:

Jun 09, 2008 - Listed $749,950
Aug 18, 2008 - Price Changed $724,950
Dec 04, 2008 - Price Changed $699,500
Mar 06, 2009 - Price Changed $674,000
Mar 30, 2009 - Price Changed $649,000
May 15, 2009 - Price Changed $599,000

By swooping up this place in ’01 for $375k, the seller has stacked up a ton of equity. So, really, it’s no surprise it's taken him so damn long to price this thing within 20 miles of reality. He clearly wants to squeeze out every drop of profit.

But at what cost?

Given the awesome neighborhood (which is clearly getting to his head), he probably could have found a buyer for $599,000 in June of 2008. Instead, his original asking price was an absolutely ludicrous $750,000 (almost $600 per square foot!) for this conspicuously non-upgraded shack!

And ever since this seller first graced the MLS with his "rare" presence, he’s been dicking around with pathetic 3% price reductions and leisurely chasing the market down. It was only recently that he dipped below the stratosphere.

The going price per square foot in this zip is about $430, so he’s getting there. But if I were him I wouldn’t take a gamble on this economy suddenly getting much better. I’d start getting aggressive and try to preserve the substantial equity before it all evaporates. Pal, you're still going to walk with a bunch of cash, so stop with the bull-headed greed and lock in those profits while you still can.

Yo, Chef Ramsay, what say you about those curtains?

I know housing bulls and Long Beach Dreamers like to say Belmont Heights is “immune” but the exact opposite is true. Yes, there are more established, equity-rich owners in the Heights compared to other 'hoods, but there are also a lot of wannabes who had to take out liar loans or could only afford the minimum payments on their Option ARMs to squeeze in there. The inevitable implosion of those loans and the resulting increase in distressed properties (although probably much smaller in number than most neighborhoods) is going to put significant downward pressure on prices.

Low-end properties are close to the bottom, but it’s the mid- to upper-tier properties like this one that are really going to be hurting for buyers in the upcoming months and years.

Why? Because the "move-up buyer" is practically extinct. Think about it. During the bubble, you bought a starter condo, lived in it for two years, then sold it for a big profit and rolled that money into a bigger place, maybe a small detached home. You lived there for a few years, sold it for a profit to another move-up buyer (who just sold his starter condo), and rolled that money into an even bigger house after selling your detached home to another move-up buyer. Wash, rinse, repeat.

The problem now is that older people on the verge of retirement (Baby Boomers are a huge demographic) typically no longer need the big homes in which they raised their kids and are likely to actually move down into smaller, cheaper homes and condos in the coming years.

And the first time buyers getting into starter condos now will continue lose value before we hit bottom, which will put them at a monstrous deficit when home values finally begin to slowly appreciate again (if homeowners are lucky, appreciation will track inflation for quite a while--but the days of 5, 10, or 20% annual appreciation are dead for generations).

Furthermore, wages have been stagnant for some time, which used to be the traditional mechanism of moving up before irrationally exuberant home appreciation took its place during the last few years. This means entry-level buyers are stuck and won’t be moving up into larger, more expensive, detached homes--in turn severely limiting the buyer pool for half-million-dollar-plus homes like this.

And I haven’t even mentioned the effect rising unemployment rates, tightening lending standards, and interest rates that can only go up from here will have on the viability of that ever-shrinking pool of move-up buyers.

On a personal note, I’m really excited about what’s going on in housing right now. I’m excited because the government’s attempts to re-inflate house prices will only make the bottom lower (although they will be successful in postponing the arrival of said bottom). That means that instead of being relegated to checking out apartments with outrageous HOA fines, at this rate I’ll be able to make my dreams of owning a detached home in a sweet neighborhood a reality. As we approach the bottom, starter homes will once again be starter homes (and not starter apartments) and I for one am really looking forward to it.

Plus, by not buying during the last few years at inflated prices, I’ve been able to save up massive amounts of cash, make some money investing (and preserve a good amount of my 401k by getting the hell out of the stock market last summer and into safer investments), and live an amazing (but within-my-means) lifestyle. Gotta enjoy life but keep low overheads, kids!

So by the time this bubble is done deflating, I’ll have even more cash stowed away, I’ll be able to afford a much nicer and bigger place, I’ll have plenty of money to update/furnish it, I'll be able to afford a home instead of an condo (don’t get me wrong--there are some nice condos out there, and I understand the appeal of not doing yard work, etc., but I've always wanted a house), and prices will be so reasonable that I’ll be able to continue traveling, driving fast cars, and enjoying meals out on the town and vacations with friends and family without being a slave to my house.

And so will you, my friends, as long as you're patient, nimble, and optimistic.

See, who says this blog never focuses positive news?


  1. Great post as usual el bee. We are in the same boat as you. Sure it is painful waiting on the sidelines, but not nearly as painful as it is to my friends who bought in and are watching their hard-earned equity melt away like the wicked witch of oz.

  2. Never commented before but have been reading your blog for some time now. Love it BTW, you were a fair part of my education before i bought my house. Even though i'm in a completely different market your advice carried over. Quick thought about this post tho. Don't you think that your point about the baby boomers downsizing will actually have the net result of driving prices up, possibly way up, on the "starter home" crop of homes due to increased competition and them being flush with equity, a sizable amount if they bought early, from selling their current homes... provided they can find a buyer?

  3. Good stuff. Even with a (first) child on the way my wife and I are quite content to stay in our 1 BR until the time is right. It's annoying that it's taking so long, but there's no way I'm making a move until the Option ARM carnage is in the rear view mirror.

    Unfortunately I have a friend who is determined to buy right now, because he has two (very young) kids and doesn't think his 2 BR / @ BA is big enough. I've made the case for him to wait, but I don't think it's going to work. In a way I hope he's denied as he'll save himself, as he'll only be putting about 5% down, but I've a feeling the greedy realtors will do all they can to make this happen.

    Keep spreading the work of how waiting a little while will allow you to have money for things other than a whopping great mortgage, like, oh I dunno, 401(k), college, other savings, and a vacation once in a while.


  4. Hi Brian,

    That is a very good point. In Long Beach, the condo:house ratio is much higher than a vast majority of cities, thanks in part to the massive influx of condo conversion permits during the bubble. So, even with a large demographic shift to smaller, cheaper properties, there will still be a decent amount of lower-end supply available.

    However, I think you're right--that demand shift could have the effect of driving prices up on the low end, which would logically result in higher prices for the middle.

    There are so many factors going into these things, so you never know, but the data hinting at a second wave of mid- to high-end foreclosures, and a return to lending based on actual incomes and massive downpayments, could leave a lot of the mid- and high-end sellers with a much smaller pool of potential buyers.

    The end of your comment is the big factor: "provided they can find a buyer." Smart buyers with lots of equity will give up a bit of bubble profit just to be rid of the thing and move on. There is still demand for nicely priced quality properties in great 'hoods. But sellers clinging to Kool-Aid dreams for too long might suddenly find themselves without many $200,000 per year families to buy their 2 bed/1 bath.

    Thanks for the insightful comment, and we hope to see more of them!

  5. Jason,

    Dude, with that little downpayment, your friend is going to be underwater by Christmas. Your friend is nuts. Tell him to rent a bigger place if square footage is so monumentally important! There are smoking rental deals out there! "Not enough space," in this great rental environment, is weak sauce as far as justifications to buy an overpriced house go.

    I have a friend who is feeling pressure to buy (he has a baby due in like a month) but even with college costs as high as they are, saving $20,000 by waiting will go a long way. Plus, kids can't tell if the roof over their heads is rented from a landlord or the mortgage money is rented through a bank.

    However, with little kids, I imagine moving would be a complete nightmare. So I understand it. And I understand the desire to establish "roots."

    But this is a very serious financial decision. Remember, in best case scenarios, forecasters are calling for at least another 15% decrease in California home values. On a $400,000 house, that's $60,000!

    That's a lot of money--all for exhibiting a little patience!

    But my friend is getting KILLED in taxes and the $8,000 tax credit is tough to pass up too. But even if tax breaks and tax credits add up to $20,000, he could actually end up losing way more than that in equity during the first few years of ownership.

    Ultimately, though, buying a home is an emotional decision. I get that. My emotions run high when it comes to my desire to own a home.

    And I would never begrudge someone for ignoring my advice and buying a house right now as long as 1) They absolutely love it, 2) They can easily afford it without putting their family's balance sheet in jeopardy, and 3) They're planning on being there for a long, long time.

  6. Thanks, El Bee. I'm going to talk to my friend one more time. I'd hate to see him get into financial jeopardy. He's stubborn though.

    To quote the late, great Mitch Hedberg. "Last week I helped my friend stay put. It's a lot easier than helping someone move. I just went over to his house and made sure that he did not start to load his shit into a truck.”

  7. I am hoping to have the case stashed away come 2011. Hell, if things crash in Long Beach, maybe I can use 50% of the investment account to pay off debt and the other 50% for a 20% down!!!!

    I just checked the house on Brittain (it's hard out here for a flip), and the price was REDUCED!!!!! Down from $649K to $624,900.

    And that god damn redfin chart (asking vs. sold ppf) is now INVERTED!!! The sold price per square foot is now greater than the list price. The force is strong with the 'tards in the 90808.

  8. I wish someone would visit the comments and explain just what the hell is going on with 90808's prices.

  9. Sheer reality distortion field going on here in the 90808 - I believe that the deflector array was realigned to boost power...
    I can't explain it either and frankly, we're losing patience here as well even though we're OK in a rental in the Ranchos for now.

  10. Careful what you wish for El Bee. You may securt another love letter.

  11. Yikesboy,

    It's easy to see why people are so easily convincing themselves to take the plunge. "Prices have come down, interest rates are low...AND I'M TIRED OF WAITING--THIS CRASH IS TAKING FOREVER!!"

  12. Carl,

    I feel securt in my analysis, so I welcome all love letters. And pie. Mmm...pie...

  13. el bee,
    Absolutely wife is a good example of the 'damn the torpedos' kind of thing where emotion takes over from financial reason. "I just want a damn house now!"...and I have to play the a-hole, holding the family back from what they all want ;-)
    Keep writing and exposing in your inimitable, barbed way my friend!


  14. another 90808 renter here....
    Why the spike?
    It's the "Green Shoots" y'allz!!
    "The bottom is IN"™ and "Happy Days are here again!"... etc

    Never underestimate the killer combo of the budding languor of Mother Earth in springtime and a good ole' .gov propaganda blitz.
    By June i fear, those shoots will have turned to sharts however and we will resume our regularly scheduled economic apocalypse.

    El Bee. It never occurred to me to ask B4 but are you a Realtor?

  15. i have a twin brother who bought North of 90808 about 3 mo. ago....also couldn't wait (he had a $600 a mo 2 bedroom in the kinda barrio of lakewood for 13 years!!)

    Me? I'm waitin' too. (good things come to those who wait ya know)
    And if i ever waver, well i just read a bit more of this....

  16. If El Bee is a realtor, I'd like to hire him/her!!!!

    (even though my current real estate agent is my mother)

  17. For the record, I am not a realtor. Are you kidding? With brutal honesty like this I'd be kicked out of the NAR in a heartbeat!