Rent vs. Own

Quite a productive day of writing. I feature one house then I stumble upon another piece of information that reminds me of something else.

For example, when researching comparable rents for another post, I found a 2 bed, 2 bath rental in downtown Long Beach for $1,500. Decent rent. Later, when skimming through Redfin, I noticed a place for sale in the same building as the rental. What a perfect opportunity to discuss the supposed advantages to purchasing a condo in this "buyer's market."

First, the condo for sale:

Address: 1187 East 3rd St. #103, 90802

Asking Price: $260,000

Size: 1 beds, 1 baths, 778 sq. ft. (built in 1969)

$/Sq. Ft.: $334

Purchase price: $60,000

Purchase date: 6/3/1994

MLS#: R800186

On Redfin: 8 days

Description: Rarely on market, Whitley Bay one bedroom condo - very spacious. Gated complex with parking space in gated garage. Walking distance to beach. Close to downtown area with great entertainment and restaurants. Close to the Blue Line and other public transportation. Fantastic square footage for a one bedroom unit. Nice sized rooms. Lot's of potential!!!

Unneccesary apostrophe, meet excessive exclamation points: "Lot's of potential!!!"

"Potential," by the way, is realtor-speak for "absolute sh*thole."

Also, my favorite realtor language of all time is "this won't last!!!!!!11!!" The statement "rarely on market" is in the same ball park. Makes the place seem exclusive, doesn't it? Or, if you're really skeptical, that statement means it's practically a retirement community and the reason they don't come on the market very often is because the residents are on fixed incomes.

Down Payment: $26,000.

Monthly Payment: $ 2030 ($1810 + 220 HOA fees)

Income Requirement: $65,000/yr.

* * * * * * * *

And now the rental in the same building:

Address: 1187 East 3rd St., 90802
Asking Rent: $1,500
Size: 2 beds, 2 baths, ??? sq. ft. (built in 1969)
Description: This wonderful 2 bedroom 2 bathroom aprtment has an expanded kitchen with peninsula which is great for entertaining. It also has a private balcony. There is a very nice common area patio and gated parking for one car plus storage.

Down Payment: $1,500
Monthly Payment: $1,500

Well, that's pretty close, right? $1,500 to rent it, or just $500 more per month to buy it. I'd say we're pretty close to a healthy buy vs. rent ratio, no?

Oops! The rental is for a two bedroom, two bath.

So not only do you pay $500 less per month for an extra bedroom and bath (and the square footage that comes with it), but you have the opportunity to split the rent with a roomate--an option not available if you buy that tiny studio. So, factoring a roomie situation, you just saved yourself $1,250 a month by living in a bigger place that you are not tied to for the next 30 years.

Not to mention, you could have socked away that $26,000 in a 5% E*Trade savings account yielding 5%. That's $1,300 a year, my friend. Not much, but it sure beats dumpint it into a 780 square foot "investment" that will bleed cash to the tune of $500+ a month for the forseeable future.

The Other Long Beach

Long Beach is one of those cities that goes from nice to 3rd World in a matter of two blocks. Belmont Shore and Naples are well-insulated from this phenomenon, but as the (ever-expanding) boundaries of Belmont Heights creep west into Alamitos Heights and especially into Downtown Long Beach and north past 7th St. (and most definitely past 10th St.), it can get downright scary without much warning.

To some extent, it's actually kind of endearing. One of the things I enjoy about Long Beach is that it has a little bit of a "real" city mixed in with nice, isolated, relatively clean areas with healthy property values and hard working people. The nicer areas are close enough to the gritty, lower-income areas as to lend the entire city an air of "culture" and "arsty" appeal. In Belmont Heights, between 4th and Broadway, south of Cherry, for example, is what's considered the "Art District," with vintage clothing stores, cool coffee shops, proximity to the beach, and unique little restaurants and bars.

Contrast that with, say, Irvine. Primarily chain restaurants, so clean as to be sterile, and zero creativity/artistry around. Just as Irvine appeals to families who value schools, low-crime, and planned communities, parts of Long Beach appeal to people like me who value coastal activities, housing affordability, less emphasis on materialism, and a modicum of culture.

However, in Long Beach it can very quickly go from "gritty" and "artsy" to "run-down" and "ghetto." To some people, ghetto is an offensive word. To those people I say: grow up.

In this context, ghetto, as defined by the Urban Dictionary, means: "An impoverished, neglected, or otherwise disadvantaged residential area of a city, usually troubled by a disproportionately large amount of crime." To characterize the bad areas of downtown as anything else is disingenous.

Today's featured property is an example of a ghetto house in a ghetto neighborhood with absolutely no idea what's happening in the real estate world.

















Address: 1040 North Virginia CT, 90813

Asking Price: $375,000
Size: 3(?) Beds, 1 bath
Sq. Ft.: 700
$/Sq. Ft.: $536
Year Built: 1904
MLS#: P562143
On Redfin: 326 days
Description: Small but cute and very well maintained. Title indicates 3 bedrooms but 2 bedrooms were made into 1 by knocking down in-between wall. Alley access. Quiet area close to downtown. Perfect for first time buyers.

















Quick observations:

• Coming up on its first year anniversary for Days on Market! Congratulations!


• And a belated Happy 100th birthday to the house!


• At least they were honest about it being "small." Of course, I don't think "small" begins to describe how tight 3 beds and 1 bath squeezed into 700 square feet is. Yikes.


• Oh, never mind. Even though the title indicates 3 bedrooms, a little elbow grease and we've got one really big one! How much would you like to bet that little Home Depot moment wasn't permitted and isn't exactly what inspectors would call "legal"?


• Couldn't they bother getting the people (workers?) out of the picture first? A for effort, buddy. Plus, how cramped is that street where they have to take the picture from the alley?


• Bars on the windows. For $375,000. Good luck with that! I could tell you this house was in Tijuana and you'd never question it.


• Check out the "carport." Yeef! This is getting too easy.


• "Perfect for first time buyers." I see this fairly often, and from what I gather it translates from Realtorese to English as such: "Even a broke ass like you can afford it." However, this is priced at $375,000. Not exactly a smoking deal for new families or first time buyers. With that said...

Let's crunch some numbers!

Down Payment: 10% down on this black-barred beauty would run you $37,500. Easily attainable. But so are pubic lice. Any takers?

Monthly Payment: Financing the remaining $337,500 at 6.5% would leave you with an approximate monthly payment (including property taxes and homeowners insurance) of $2500. Again, doable. But so is Chyna Doll. Any takers?

Income Requirement: Assuming a 4x income calculation, the annual household income required to buy this albatross would be $93,750. Now here is where it gets interesting. Median annual income in the area is $71,028. Okay, so that median household income person (I would say median family, but there's no way more than one person can live comfortably in 700 square feet) might have to stretch a bit to experience the pride and joy of being a homeowner...but that's not the point. When market fundamentals are healthy, the median income should be able to afford the median house. I don't know where you grew up, but there's no way this thing could be considered a median residence. This is a low-income, borderline poverty level residence no matter how you slice it.

However, according to the listing description, this home is perfect for me. I'm a first time buyer and I can scrape together that down and monthly payment. I want nothing more to be a homeowner, and the National Association of Realtors tells me now is a great time to buy and being a renter is a scarlet letter, so maybe I should jump in.

Well, just for kicks, let's check out what that negative stigma of renting looks like compared to purchasing this little emerald gem:

A comparable house a few blocks away (which looks much nicer) is renting for $1500 a month. Description: "2 bedroom house 1 bath house for rent 1st and last month or prorate your move in. carport, new carpet, newer bathroom tile and kitchen nice, well kept house in long beach/signal hill area. Section 8 OK."

By my simple calculations, to live in essentially the same shady area, I would save a whopping $1,000 a month. So where exactly is the advantage to buying? Factor in maintenance costs on a 100-year-old house (and we haven't even seen the inside) and your monthly savings would be substantially higher.

Again, here is an example of a seller completely ignorant of what's happening in the real estate world and the economy. Remember, it was less than a decade ago that it actually made sense to buy as opposed to renting. When your monthly mortgage payment (principal, insurance, taxes factoring in tax benefits) was close to local rents, that was the time to buy. Now that the ability for people (who in a normal world would never be have a shot at becoming homeowners) to get cheap, easy money is gone, housing prices have to return to levels where the median household income can sustain a monthly payment.

Until that happens, this place will rot.

Prediction: In two years, you will be able to buy this exercise in idiocy for $180,000.

**UPDATE: A commenter just informed me that this beauty is actually IN an alley. So when the description highlights the "alley access" what they really mean is you're smack dab in the middle of it.

Neglected on Nieto

I absolutely love Belmont Shore. It is an affluent area with nice people and a great community vibe, it feels relatively safe at night, 2nd Street has great shopping, restaurants and bars, and someday I will own a house in The Shore.

However, just like any desirable community, there are drawbacks. For one, properties are tiny. Some would say that's the price you pay for living in such an in-demand area and they would be correct. Personally, it's a concession I'm willing to make to live in the area.

Two, parking is horrendous. If you get home late at night on the weekend, I hope you're not wearing heels because you're going to hoof it from your parking spot (assuming you're lucky enough to unearth one) for blocks and blocks and blocks. As with most beach communities, properties with a garage and/or driveway are a hot commodity.

Which brings us to our next drawback: property values in Belmont Shore have been, and will continue to be, extremely expensive.

I featured this property because of its time on the market. Despite an expected premium in this 'hood, apparently prospective buyers are voting with their wallets and nobody's biting. According to Redfin, 204 Nieto has been on the market for 328 days. What are you supposed to give for a one year anniversary? Stationery? Does a lowball offer written on my agent's letterhead count?

Anyhow, as some people threw in the towel and pulled their properties off the market (ostensibly because they expect a return to bubble prices), this seller persevered and kept on searching for that buyer. You have to respect that kind of temerity.














Address: 204 Nieto, 90803
Asking Price: $829,000
Size: 4 beds, 3 baths, 1502 sq. ft. (built in 1915)
$/Sq. Ft.: $552
Purchase price: $879,000
Purchase date: 12/6/2005
MLS#: P561637
On Redfin: 328 days
Description: Live in the Heart of Prestigious Belmont Shore! 2nd Street's Unique Shops, Restaurants and Coffee Shops are Steps Away! Enjoy a Short Stroll to the Beach to Watch the Sunset. This is a Beautiful Craftsman Home w/ Hardwood Floors and has been Completely Updated. Best of all you Benefit from the Extra Income the One Bedroom Rental Unit brings in every Month. This Home is Georgous and a Must See!!

A few notes about the listing:

• What's Up With The Title Case?
• This "Georgous" house has not been "Completely Updated." Not even close. I see hardwood floors, but I also spy cheap bathroom fixtures and shower curtains (Really? Shower curtains? In an $800,000+ house?!).
• According to the realtor, the best part is "you benefit" from becoming a landlord! Just what I've always wanted to do after buying a nearly one million dollar house! And believe me, you're going to need that extra income.

Here's why...

Down Payment: A 10% down payment would run you $82,900. Gulp.

Monthly Payment: Financing the remaining $746,100 at 6.5% would leave you with an approximate monthly payment (including property taxes and homeowners insurance) of $5500. Factor in the tax refund and the "benefit" of being a landlord, and you're at approximately $4,000 per month.

Not insane if you're pulling in six figures, but what if, God forbid, something happened (divorce, illness, etc.) and you had to rent your home out? I'll be generous and say you could rent the main property out for $2,300 a month. Add the additional income from landlordin' the back house, and you're at around $3,300 a month. At a minimum, you are at a negative monthly cashflow of -700 bones. That my friends, is what you call a poorly performing investment.

Income Requirement: Assuming a 4x income calculation, the annual household income required to afford this little buddy would be in excess of $200,000 per year (by the way, median household in this area is $71,028/year). Do you imagine a couple making multiple six-figures is looking for a tiny house with flimsy closet doors leading to the master bedroom? Ah, I nearly forgot this is "Prestigious Belmont Shores."

According to the past sales information (which can be woefully inaccurate), this property was purchased for $879,000 in 2005. That's a $50,000 haircut in two years. Ouch! Assuming 6% in realtor commissions, and making the preposterous assumption this place sells at the current asking price, this seller actually stands to lose nearly $100,000.

Upon closer inspection of the sales data, it gets more interesting. The sale previous to the '05 sale (at the peak of the housing bubble) was for $165,000 in 2001. Typo? Could be. Perhaps the place was a termite-infested dump in '01 and they pumped some money into fixing it up over the years. However, I don't see any significant upgrades to justify that kind of rampant appreciation.

What does it tell you about the confidence in their "Completely Updated" claim, when they are afraid to even post a picture of the kitchen? Maybe they're withholding their best pictures from us to ensure a "wow factor" when you see the property for yourself.

Either way, this seller expects you to believe this property appreciated more than 40% per year for the last seven years. Not effing likely.

Seems to me this poor soul bought at the peak, clearly under the influence of the mantra "real estate never goes down," and is looking for a greater fool to jump in and ride the depreciation wave down for them.

Without a doubt, this "Prestigious" neighborhood is very close to the beach and therefore will ALWAYS command a price premium. However, the days of 20% yearly appreciation (let alone 40%) are over and buyers who didn't get caught up in the hype of the recent housing bubble are far too educated, informed, and skeptical to pay 800k plus for this cute, but incredibly unimpressive beach bungalow.

But I don't want to discourage this seller from fighting the good fight. Seller, don't worry, I'm sure that magical buyer will materialize. Don't get down on yourself as the anniversary candles are lit, and whatever you do, don't lower the price. The only thing those 300+ days on the market mean is that your price is totally reasonable, but prospective buyers have yet to realize Long Beach is special and immune to the laws of supply and demand, restrictive lending standards, and housing bubbles.

First Blood

The first featured property on this site is 307 Roswell in the Belmont Heights area of Long Beach.

This is a prime example of a severely overpriced house and a realtor who simply doesn't get it. This spacious abode, spanning an impressive 1200 square feet, is asking $700 per square foot. At first I thought it was a typo, but no, the seller in fact believes they can get that monstrous sum for a cramped, non-upgraded, 86-year-old house.













Get a load of that old-school stove! I guess we won't be cooking a turkey at this place for Thanksgiving. I love that "Coffee" painted on the wall. Do you suppose they have "Urine" painted over the bathroom door?














Here is the raw data:

Address: 307 Roswell Ave., 90814
Wishing Price: $879,000
Size: 2 beds, 2 baths, 1256 sq. ft. (built in 1922)
$/Sq. Ft.: $700
Purchase price: $699,000
Purchase date: 3/3/2005
MLS#: S513050
On Redfin: 58 days
Description: This is a must see! Light & Ocean Air fill this charming Belmont Heights home. Living room has a beautiful new fireplace. Roomy formal dining room. Den/office leads to a private & peaceful large deck. Master has dual closets & sitting area. Bath has a deep soaking tub. Wood flooring, new ceiling fans, smooth ceilings, fresh paint inside & out, tons of storage. Yard has enough room to entertain without a lot of maintenance. Walk to beach, 2nd street and numerous attractions.

A few observations...

The Good:

• That deck is awesome! That is a feature I'm definitely interested in.
• It's a nice house in a prime area of Belmont Heights. Although people get carried away with where Belmont Heights begins and ends (much like a Texan Congressman gerrymandering his constituency), this is truly Belmont Heights and deserves a price premium because of it.
• The description is concise, well-written, and a true anomaly.
  

The Bad:

• Non-upgraded kitchen and bathroom counter tops, old appliances (realtor would probably describe them as "retro"), tiny rooms, and half-assed bathroom updates. In this market, you need more than flat screen TVs (not included) and hardwood floors to compete.
  

The Hideous:

• Check out the "tile" shower curtain. Yikes.
• I can live without granite counter tops, but blue particle board? No thanks.

Now, let's talk money. Based on their wishing--er, asking price of $879,000 (by the way, does this look like a near-million dollar house to you?), here are the financial implications of purchasing this home. I will be making some assumptions, so bear with me:

Down Payment: A 10% down payment* would run you $87,900. How many people do you know with nearly 90 grand in the bank? I'll bet not many.

Monthly Payment: Financing the remaining $791,100 at 6.5% would leave you with an approximate monthly payment (including property taxes, homeowners insurance, etc.) of $5,884.
Income Requirement: Assuming a 4x income calculation**, the annual household income required to buy this albatross would be $219, 750. You read that right. Do you really think a family (and with 1200 square feet, it's gotta be a very small family), pulling in that kind of loot classifies this place as their dream house?

The median household income for this zip code is around $49,073. You could argue this is not a median property, but could you argue it's a luxury property commanding 5 Large a month and 18x median income? I suspect there are simply not enough buyers at anywhere near the required income.

So, as you can see, some sellers in Long Beach are largely oblivious to the crashing housing markets around them. You could argue that all real estate is local and Long Beach is immune to the real estate declines in surrounding cities, but that's 1) Complete horsesh*t, and 2) If Long Beach is viewed as a "less expensive" alternative to Orange County, then lower prices in OC most definitely affect Long Beach, which has more crime, lower incomes, and less family appeal than OC.

At this price, this property will sit.

And sit.

And I will provide updates as they come.

*Many believe that the credit crunch we are experiencing and the upcoming lending institution write-downs (not to mention the near-bankruptcy of Countrywide due to issuing reckless zero-down, interest only, and other sub-prime loans) will make a return to 20% down payments the new standard. I don't take such a bearish stance, but I do believe 10% downs will be the absolute floor. The lenders learned their lesson with not ensuring buyers had a financial motive to stay in the house during hard times, and 0%/5% down payments won't return for many years.

**During the bubble--and nobody except those on commission are arguing there wasn't one--income multipliers were 5x, 6x, and more depending on how easy the money was to obtain. Those days are long gone, as banks realize putting people into loans they won't realistically be able to repay (without living on Top Ramen and working three jobs) is a bad idea.

Uncharted Territory

After reading informative, entertaining real estate blogs such as the Irvine Housing Blog and South OC Tracker, I discovered that there wasn’t anything dedicated to the city I wanted to live in: Long Beach, CA.

I graduated from CSULB and lived in LB--in nice neighborhoods and terrible neighborhoods--for years. My time living in LB were some of the best years of my life. Although I work in Orange County, I fully intend to buy property here in Long Beach.

For those of you that don’t know, Long Beach, CA is right between Los Angeles and Orange County. It has been known as a “less expensive” choice to LA and (especially) OC, and offers close access to freeways to make commuting alternative in the face of inflated housing costs in those areas. However, if you search real estate listing websites, you’ll quickly notice that Long Beach real estate is no longer “cheap” by comparison. In fact, although rents are still reasonable compared to LA and OC, housing prices still remain inflated and in some cases delusional, despite clear evidence of a severe housing downturn.

As far as I know, there are few blogs or information sources (just check out the Long Beach Press-Telegram's Real Estate section online. Now compare it to the OC Register's site) intended to help people understand the intricacies of the Long Beach market and comprehend the challenges posed to sellers, speculators who got in at the peak, and prospective buyers during the upcoming years.

As a consequence, many people I talk to really seem to have no idea what’s going on around them, and what is likely in store as no (or low) money down and non-conforming loans (those more than $417,000) disappear, high down payment requirements return, and buyers evaporate.

As I browse Redfin, it becomes readily apparent that Long Beach residents are oblivious to what’s happening in Orange, Riverside, and San Diego counties, as asking prices in Long Beach are in some cases far higher than nicer properties in vaunted communities such as Irvine, Tustin, and Huntington Beach. I love Long Beach, but it doesn’t have the schools, low crime, clean streets, jobs, or incomes of Orange County. Realtors and loan brokers on commission might tell you now is a great time to buy, but the unbiased fundamental economic factors say we're in for a rude awakening similar to the 90s.

So, this website is intended to discuss the housing situation in Long Beach and to help people, including myself, understand the severity of the upcoming changes in the real estate landscape and ensure their biggest single financial investment is a sound one.