Thursday, February 4, 2010

Tardy to the Party

ADDRESS: 1720 East 2ND St #5, 90802
ASKING PRICE: $350,000
SQ. FT.: 667
$/SQ. FT.: $525
MLS#: 09-408895
ON REDFIN: 93 days
HOA: $177
INCOME REQUIREMENT: $100,000 (3.5x income)
DESCRIPTION: This small complex is perfect for those who like to enjoy a beach life style. .. .just two short blocks from the water. Excellent unit for a single person or a couple seeking a good and affordable life at the beach. Please do not disturb tenants. Submit all offers subject to interior inspection.

There were many losers in the Great Housing Bubble. Whether driven by greed, materialism, ignorance or a basic desire to attain a better life without working for it (that, I would argue, is the real "American Dream"), the bloodied, battered victims (and “victims” alike) are scattered about the landscape, a grim reminder of the past due bill for unchecked avarice, reckless lending policies, and easy, greasy money.

However, there were also some certifiable winners. Those that watched their “value” skyrocket during the bubble and wisely (or just by dumb luck) sold before the crash made out like bandits. Vast fortunes were created out of thin air, with bank accounts suddenly bloated beyond imagination thanks to simply living in a house.

Those who got in before the bubble, avoided the terminally seductive clarion calls to refinance or take out lines of credit against their newfound equity, and sold right before the crash are to be applauded for playing the game to perfection.

Today’s seller got the first part right, but failed miserably at the crucial “getting out in time” part. You see, he got in before the true insanity of the bubble got underway, but is about two years too late to the profit party.

And judging by his absurd listing price of $350,000, he is operating under the misguided belief that he’s one of the winners deserving of his six-figure profit margin--despite the fact that the market has crumbled like Lindsay Lohan's willpower at a coke party.

In 2003, homeboy slapped down $147,000 for this rental property and watched his equity rocket up like a Death Valley thermometer. And for some reason, three months ago he suddenly decided now would be an ideal time to cash in on his richly deserved bubble money.

But apparently he’s been in a drug-induced coma during the last two years when everyone’s perceived bubble equity was largely erased. So, here he is in the middle of the worst housing crash known to man, fully expecting to more than double his investment.

Good luck with that, Gomer.

I guess he hasn’t noticed that most Long Beach properties are selling at 2003/2004 prices. And I guess he failed to realize that his asking price per square foot of $525 is DOUBLE the going rate in this neighborhood. And I guess it slipped his sharp observational skills that other than one Ocean Blvd. unit, his is the most expensive apartment in the area by a long shot.

Although it is clear to everyone (but him) that this idiot won't fulfil his dreams of an unearned windfall, it's worth taking a look at a few people who knew how to play the game:

Nov 03, 2009 - Listed $350,000
Jun 12, 2003 - Sold $147,000 (39.2%/yr)
Feb 21, 2003 - Sold $133,000 (21.0%/yr)
May 06, 1997 - Sold $44,000 (5.5%/yr)
Aug 04, 1989 - Sold $29,000

Although he sold way too early, the 1997-2003 owner probably (and wisely) thought something was fishy about 21% annual appreciation and took the money and ran. Well done. It’s always better to be two years early than two years too late.

Hell, just ask today’s seller.

Although he clearly doesn’t realize it, our delusional seller is overpriced by more than $150,000. I mean, the appraisal attached to his tax bill is only $190,800 . Even if the bedrooms and baths were doubled, he still wouldn’t be able to get $350K in this market. That ship has sailed (and sunk), captain.

Check out the sold comps:

1604 E 2nd St Unit 1C
Sold on Jan 08, 2010 0.07 miles
1 bd / 1 ba
777 Sq. Ft.

1535 E Ocean Blvd #10
Sold on Dec 03, 2009 0.14 miles
1 bd / 1 ba
752 Sq. Ft.

1728 East 3RD St #5
Sold on Nov 30, 2009 0.16 miles
1 bd / 1 ba
705 Sq. Ft.

1750 East OCEAN Blvd #108
Sold on Dec 04, 2009 0.17 miles
1 bd / 1 ba
689 Sq. Ft.

1750 E Ocean Blvd #303
Sold on Sep 25, 2009 0.17 miles
1 bd / 1 ba
632 Sq. Ft.

1750 East OCEAN Blvd #1102
Sold on Dec 30, 2009 0.17 miles
1 bd / 1 ba
632 Sq. Ft.

Even properties smack dab on Ocean Boulevard aren't getting this kind of money! What is this toolbox thinking?!

During the bubble, people quickly became accustomed to tiny, outdated, run-down $350,000 condos and were made to believe that price was "about right" for what a single person should spend on housing. Nobody stopped to think about the fact that $350,000, although nothing compared to the $600,000-$800,000 for detached homes (which is perhaps the psychological reason for perceiving properties costing TEN TIMES the median income as "affordable"), is actually a hell of a lot of money.

So much money, in fact, that the aforementioned single person would need to pull in $100,000 per year to reasonably afford the payments. Even if you stretch to 4x income, that individual still needs to pull in $87,500 per year (which is more than twice the typical household income!) and make no significant retirement contributions/savings and have zero credit card debt, student loan obligations, car payments, or unforseen emergencies.

Friends, that is unsustainable.

But don't ask me, just look around you at the cratering real estate market. The reason why we've seen such dramatic declines in home values is precisely because these kinds of prices for tiny shitbox apartments are U-N-A-F-F-O-R-D-A-B-L-E and always have been, regardless of what real estate shills, commission-heads, and toxic loan alchemists would lead you to believe.

The myth that these prices were "the new normal" and "here to stay (so just get used to it or be priced out forever, loser!)" has been exposed as the fraud it truly is, and what we are witnessing is a wholly predictable return to fundamentals.

Back to the property at hand. Given the abject impossibility of getting such a redonkulous wishing price, his seven years of equity, and the likelihood the monthly rent income covers his payment, I think he’s much better off removing it from the MLS and continuing to rent it out. Unless he refinanced or took out crazy loans against it, he'll be able to weather the rent-deflation storm.

That's a rare position to be in this day and age, and something worth hanging on to.


  1. Government salaries are a big reason people can afford these units.
    see Mish's global economic analysis website, which shows BART salaries in the San Francisco area.
    With only a HIGH SCHOOL degree, you can make $100,000. as a station agent( which consists of handing out schedules and reading newspapers)

  2. That is an excellent point, Anon. The insane rise in public sector wages is a major enabler of higher home prices. Private sector wages have been flat.

    With that in mind, I'm trying to get a handle on the future of California life. With bond ratings worse than Greece, there are only so many ways to fix our severe financial problems in the state.

    We've already seen increases in fees (don't call them taxes!) and cuts in services, and I have a feeling those once "untouchable" golden government salaries are next up to bat.

    And when more of people's disposable income goes to higher federal and state taxes, assorted fees, and gov't-mandated increases in gov't workers' pension/healthcare contributions--not to mention the continuing gov't layoffs--there is going to be a lot less money to spend on housing.

    Who knows. The number of federal employees just hit a record, so maybe we'll just make everyone a state employee, pay the same bloated salaries, and call it a day.

  3. Wow, class is in session!

    That was a WEALTH of good real estate basics being taught there El Bee, and I thank you for it. It's been almost a year now, of me reading your blog, and I am so much the wiser for it.

    Couple things -

    Regarding Frisco, Mayor Gavin Newsome was on the O'Reilly factor touting what a great job they had done, and that somehow things aren't as bad as they seem, with the junk bond rating and the billions of debt.

    Peculiarly, O'Reilly for once seemed impotent and ill-equipped to call him out on his lack of reality.

    And regarding this hood, this is one of the most over-valued areas in Long Beach. People be tryna tout this area as though life would be so great, because you could experience the "beach life" everyday.

    Well anyone who drives through that area, and comes away feeling exuberant, is smoking crack.

    These blocks are dingy, ugly, over-developed, over-crowded, and the parking????

    But yeah, you can take a 20 minute hike to the beach....

    Well guess what, I can hop in my car and be there in 5, I have a much bigger place, on a less crowded street, at a much cheaper price, and I can actually leave at night and be able to park my car upon my return, without driving around for an hour.

    Someone should slap this guy, for listing a cracker box less then 700 square feet for 350K.

    But then again, there's so many suckers out there...

    Oh yeah, and Long Beach is hardly a "beach life" that I think is all that astounding.

    I'm sorry peeps, cause I love my city and all, but let's be realistic.. unless you're on the bike path, the rest of the beach isn't anything much.

    If you're on Ocean with a view, ok. But other than that, "living the beach life" seems ridiculous to me. But hey that's just me.

    The area around Ocean Blvd just doesn't seem anything like Manhattan or Redondo, in the slightest.

    I'm not an expert as to why, but the developing plan would be the first thing I'd point to.

  4. Mike,

    Agreed. And with these prices, the "beach life" really translates to the debt-slave-life.

  5. WOW. A bit OT, but interesting rant material.

    Well nothing will change as long as politicians have unrestricted access to other people's $$ (via taxes or borrowing against the future).

    The fact that public employees for the most part have skated through this economic disaster is very telling. This is not a personal attack on those employees, but rather a snipe at the government for not recognizing that they've bled the golden goose dry. There ain't no more cash.

  6. SR,

    There's plenty of cash. At some point, Timmah is just going to have to redirect the open spigot at the Bureau of Engraving and Printing away from the banks and direct it to the states.

    Holy Crap, the website for Bureau of Engraving and Printing is ..

  7. Carl,

    Thanks...By 'No more cash' I was referring to we taxpayers. The cash that's being printed will be paid back by the future generations.

    I hate to sound all tin-foily but I completely agree that the country's best interests are taking a back seat to protecting the few at the top. Cash should be pointing in hte direction were it will help. Propping up failed institutions isnot the way. To 'fix' capitalism we must allow failure.