Monday, October 19, 2009

Westside Sweet Spot ?

A number of readers have been commenting on multiple offers in Mar Vista, Culver City and West LA for houses priced in the $700,000 - $900,000 range. Above that range, sales drop off precipitously due to the lack of move-up buyers. The reason being, some may have the initial down payment, are getting the $729,000 conforming loan (which banks can sell to Uncle Sam), and are taking advantage of the $8,000 tax credit scheduled to end in November. Throw in impatient buyers, and there's your temporary sweet spot. However, what is the potential downside risk compared with the potential upside risk of your down payment? And how would your mortgage, taxes, insurance and maintenance payment compare with renting an equivalent property? Not to mention, the opportunity cost you lose, by not investing that down payment elsewhere. The housing mess still has a ways to go my friends.

Let's look at the big picture for a moment. We see a substantial decline in sales volume from 2008 to 2009. Keep in mind 2008 was hardly a banner year for real estate. Our beloved MLS published these statistics over the weekend in the LA Times:

Single-Family Homes - SALES VOLUME - % Change
(YTD) Year to Date (September) 2009 vs 2008

$3,954,000 (2008)
$1,340,000 (2009)
-$2,614,000 (-66.11%)

$153,652,525 (2008)
$91,059,600 (2009)
-$62,592,925 (-40.74%)

$60,452,000 (2008)
$36,836,867 (2009)
$23,615,133 (-39.6%)

$445,558,325 (2008)
$289,248,000 (2009)
-$156,310,325 (-35.08%)

$205,619,333 (2008)
$135,232,000 (2009)
-$98,289,551 (-34.23%)

$185,236,938 (2008)
$132,475,400 (2009)
-$52,761,538 (-28.48%)

$348,559,386 (2008)
$250,309,835 (2009)
-$98,289,551 (-28.20%)

$169,192,186 (2008)
$122,798,275 (2009)
-$46,393,911 (-27.42%)

$177,203,000 (2008)
$133,293,685 (2009)
-$43,909,315 (-24.78%)

$416,067,522 (2008)
$316,172,330 (2009)
$-99,895,192 (-24.01%)

$27,016,600 (2008)
$20,595,000 (2009)
$-6,421,600 (-23.77%)

$454,723,597 (2008)
$349,596,775 (2009)
-$105,126,822 (-23.12%)

$123,962,900 (2008)
$97,027,824 (2009)
-$26,935,076 (-21.73%)

Definite downward trend here. Throw in more record foreclosures and this "sweet spot" looks pretty sour.


Anonymous said...

A realtor showed me an REO the other day. Just a house. Kind of a wreck, but not awful. Something I'd be comfortable renting, or buying... cheap... but never putting my lifetime earnings into. The price was in the life-time earnings range. Here's what I think: it's still the bubble. No sane person would ever pay that kind of money for a house like that unless they a. thought they would make a killing in the next upswing, or b. feared they would get priced out. Without these two motives, it would be senseless to buy instead of just renting. And those motives are classic bubble psychology in action.

Can those of you who see these prices as stable and at a kind of "bottom," honestly hold that you're not looking through those bubble glasses?

Obviously, you may be right... and we'll find out one way or the other in time... but just don't see it.


Anonymous said...

Dog Walker,

At the beginning of this year I bought into the theory that the Westside housing market would decrease rapidly and dramatically by the middle of 2009. This, of course, didn't happen. The market did, however, decrease in price overall and for many of us entered the sweet zone for Westside home prices: 600-650K.

Mr. Mortgage's video clips, Dr. Housing Bubble, and LS2009 were very convincing. I appreciate all they did and continue to do, but I, like many professionals, wanted to move my family into our home- a home that we could build up and customize to our needs, and live in for many, many years.

The fact is that none of the theorists gave much credence to the large number of professionals who find it reasonable to pay a 3500/month mortgage or more. They also down-played housing speculators, who buy REO/Short sales and/or buggered entry-level homes, burn up a Home Depot credit card, and re-list the house 6 months later for 100K more than they bought it for.

Among other things, such as government interventions (i.e. fed keeping rates low, tax credit, end of year rush to buy for tax purposes, etc.) these two factors are keeping the Westside from the predicted prices.

I am still making offers below asking prices. We have done several this way and all have been rejected. In every case, there have been multiple offers and the homes have gone into escrow shortly after being listed. This is in CC/MV, and homes with a maximum list price of 675K. Also, we have NOT ever looked at or considered a home next to the freeway(s) or on busy streets. In short, we are bidding on nice SFR homes, with minimum upgrades in nice neighborhoods that are, on average, listed for 650K. They are selling like hot cakes.

I'm not sure what "bubble glasses" are, but, if you mean that people think they will make a killing over the next 5 years on their newly purchased starter home, then I do not think that is the case.

In our recent experiences, we have met other home buyers, and most have been similar to us. They are working professionals, i.e. doctors, lawyers, entertainment, sales, etc., who have money from a previous home sale, who have been waiting for a sweet price point. Most have families.

They are moving on with their lives, and do not see homes as a hot investment. In fact, many are willing to accept flat or minor negative equity over the short-term to get their lives back on track.

Anyways, sorry for the length of the post. Just trying to give you some perspective.

Anonymous said...

My 2 cents as follows:

(i) With the FHA only requiring 3.5% down, and the FED keeping rates low, people will be willing to jump into these 700K homes. I don't think it's prudent, b/c when rates rise (because they certainly will at some point) the value of the home will decrease, and folks will still lose equity. That said, with low rates and no skin in the game (i.e. 3.5% down), people will buy -- that's why this inventory is moving.

(ii) On the other hand, the $1.4M to $2.5M and greater area is tanking and will continue to do so. Banks aren't like the FHA, and they are no longer granting jumbos without a major down payment. Plus forget about option arms, stated income, etc. Buyers in this price range tend to be more "principal" focused (esp. given the required down payments) than "rate" focused, which is the only way to prudently think about such a large investment. Thus, folks are standing on the sideline, and with few exceptions, this inventory is moving way, way slower.

Anonymous said...

anonymous 9:12 am...I could not say it in better. I am thankful that i read these blogs in 2006 and sat on the sidelines for 2-3 years (thank you Westside REmeltdown!) These blogs had great statistics and information (facts) on why prices would fall...but now i hear more theory or speculation than actual number-crunching scientific analysis of the westside market. I don't know if prices will fall that much more. if we find the right house at a good price we'll take the risk. Of the 20+ couples/families that i know personally who own homes on the westside, none of them are defaulting. is there proof of a next wave of foreclosures, or is that still speculation?

Jon H said...

If I had to guess, 99% of people buying starter homes on the Westside (not in SM, but in other lower cost areas) who are spending about 650K would echo these sentiments.

I am in the same boat: we are getting on with our lives/homes and we are buying for 10 years plus (min) before thinking about moving.

Anonymous said...

I tend to agree: It seems absurd to imagine speculators persisting, and I'm not seeing buyers who truly see a bottom now either. The optimistic are simply hopeful that values will hold over time, and the pragmatic are willing to bet that the remaining downside will mitigated over time.

Anonymous said...

for some reason, i just don't see attorneys and doctors especially ones with families settling for 650k-700k starter homes with only one bath room in CC/MV.

Anonymous said...

I don't have hard data, but I recently looked at and and was amazed at the higher value homes in higher end Westside areas (90402, 90049, 90210) that are receiving Notices of Default and are being foreclosed. I had looked six months ago and don't recall seeing nearly that many.

Anonymous said...

Anonymous 5:43 PM:

That's exactly my point. I didn't spend ten years in graduate school and internships, but I did spend 20 years nursing and tending a modest windfall that came to me in my early 20's. I just don't see how a person who has made that kind of investment over time would settle for the kind of junk heap you can get for that "sweet spot" of $650k.

Of course, there are plenty of posters here who find themselves in that camp... but I suspect they represent a small number, even including "everyone [they] know."

And Anonymous 9:12 AM... what about the fear of getting priced out? Maybe people are beginning to believe they won't make a killing in the next five years... but aren't you worried that if you don't buy now you'll get shafted by the next run-up? [I know I am. I'm terrified of it.] If you could factor out that concern, would you still want to pay that price when you can rent for less?

I'm not eagerly waiting for prices to fall. It's just that my investment experience and my gut sense of value are telling me we're still in a crazy place.

People are saying that if you want to stay in the home for the long term, you'll be okay. Do you -- young professionals with families -- truly see yourselves living in that $650k rental shack for the next fifteen years? And if you do... what about the opportunity cost on your downpayments and all that interest your giving the bank? When people say it'll be okay in the long term... I think they're assuming continuing appreciation in SOCAL like the past thirty years. In the long term, with that assumption, you WOULD be okay... but again, do the math. How many of us know someone who bought a house for $30K or so in the seventies and are now looking at 2,000% appreciation? THEY were okay in the long term, for sure. But that is NOT sustainable going forward. There isn't enough money in the world. At some point, these geometric curves have to level off.

Again... maybe I'm wrong. And anyway, time will tell.


Anonymous said...

Sorry to bust your bubble but the vast majority of doctors do not make more than 200K per year, particularly when they are starting out. In Culver City, in the Vet's Park area, there are a lot of young families where one parent is a doctor. I personally know 2 couples where both parents have an MD. The same holds true for many young lawyers.

So yes, they are buying in CC/MV. I know b/c I am one of them.

Anonymous said...

Anon 9:12 amen to that! In hindsight, it appears that Mr. Mortgage, etc, sold us a bill of goods.

For example, it looks like we are now at the beginning of the peak of the vaunted "option arm TSUNAMI that will UNLEASH its full WRATH AND FURY onto the westside market DRIVING PRICES BACK INTO THE STONEAGE'!!!

In hindsight, this extreme hyperbole we were fed in the early days of the bubble now seems so hollow!

Anonymous said...

"Can those of you who see these prices as stable and at a kind of "bottom," honestly hold that you're not looking through those bubble glasses?"

Dog walker. Unfortunately, yes. I could see this as bottom. The issue is not what you and I and what other sitters think XYZ should go for. Its what the market thinks. The market is speaking and we just dont like what its saying.

When you said, "No sane person would ever pay that kind of money for a house like that", it makes me think of Antiques Roadshow. How many times have you watched where some weird antique mudehar pottery sells for $10,000 and you think "thats crazy - I could get one that looks just like it at target for $10 - those people are idiots".

Unfortunately, it matters not what you and I think a house is worth - it matters what the buyers in that market think, and obviously, they think its worth alot more than you and I are willing to pay. Junk loans are gone. Anticipation of future gains are gone. In a word, all the things that made it a "bubble" are gone.

Years from now, when the next bubble starts (say 2040 or so), people are going to look back on the case shiller and median home price graphs for LA and think "SEE - Westisde is not immune - it crashed in 2009 - it will crash again now." Little will they know that strange little pockets of antique mudejar pottery will ooze away a scant few % of gains but otherwise be immune to the LA basin carnage taking place all around them.

Anonymous said...

I guess the Westside really is different...

Anonymous said...

Yep, that data from the antiques roadshow really proves it!

Anonymous said...

Anonymous 1:12PM:

I get you. Your argument about the market speaking is pretty strong. However, what was the market "saying" in 2006? What was the NASDAQ "saying" in 2000? What's that quote? Was it Graham who said, "In the short term, the market is a voting machine; in the long term, it's a weighing machine."

I'm interested in financial survival (the protection and growth of accumulated savings) over the long term.

My argument is that this is a THIN market. Even though sales activity has been up -- slightly -- it's still way down in those little mudejar pottery pocket-neighborhoods you're talking about. Plus, aren't those exceptionally desired spots still FROZEN? Aren't those the $1,000,000+ areas? How can they be said to be immune? Why aren't the places selling? Isn't it because buyers don't have the jack to meet sellers expecations... and WON'T in the foreseeable future? Surely the DESIRE to live in those areas hasn't diminished, right? What will the "market clearing" prices look like? We don't know.

Anonymous 11:06AM:

The government has been throwing everything and the kitchen sink at the market to keep it alive, the foreclosure process has been gummed up to the point of imobility, bankers are colluding with regulators and legislators to hide losses... and yet... foreclosures keep piling up. At some point, they're going to hit the market. THEN we'll know what the price will be, but we don't know now. I just don't like the odds right now.

Do you have $650K? Are you going to/would you put it at risk in this market so you can/could live in a dilapidated bungalow in a neighborhood with a smoking crater for a school and a reputation for gang activity?


Anonymous said...

If true...that the people buying right now are professionals who are buying starter homes at 3-4x income, then there is a VERY limited supply of that type of buyer.

If no one has noticed, the number of NOD issued in the low end west side areas is far greater than the actual number of foreclosures. So even a relatively small demand will result in "bidding wars" because the supply is being manipulated.

Investors aren't a factor. Who takes on a mortgage payment that is 50-100% greater than rent?

So the thing becomes...what happens when supply increases, the market segment decreases(because the relatively small demand already purchased), and interest rates go up...all at the same time?

Anonymous said...

New poster here. My wife and I are what you would call young professionals....making around $350k a year with $500k in savings/investments. There's no way we are buying right now in CC/Mar Vista. We'll continue to rent for another year or two so that we can buy something we will actually want to live in for the long term. We love our rental and wouldn't downgrade just to own. We're in no rush.

Anonymous said...

I've got a condo that has appreciated quite a bit over the last 10+ years. I would love to be one of those "move-up" buyers but I am still very skeptical of the market right now. Waiting on the sidelines...

Anonymous said...

You know I sit here reading this and find myself nodding my head in agreement with Anon @ 9:12 and others with similar perspectives.

The irony is 2 years ago, I would have been on this blog assailing anyone with that type of thinking as being stuck in fantasyland. I too was suckered in by the "carnage" view of the westside market.

WHen asked why I wasnt buying, I told many a family member that westside prices would drop 40% across the board. They of course all disagreed with me, telling me I was delusional. I am now going to be eating some serious crow when I do buy.

I will continue to wait as I see no chance that prices are going up, but this has been one of the more disappointing and (frankly) embarassing experiences of my life.

I was so sure it (the big crash) was going to happen - SO sure. In my head, I was going to have my pick of the litter - I was going to be the one setting terms of sale. Never did I imagine I would be fighting with several other waiters for the few scraps that are thrown our way. It just wasnt supposed to be like this...

Anonymous said...

So where is LateSummer2009 with comments and/or re-affirmation of his core premise in light of this thread and overall trends that are running contrary to his point of view???

Anonymous said...

Hes busy changing his name to LateSummer 2010 and recruiting a new crop of true believers to drink his doom-aid...

Anonymous said...

"Hes busy changing his name to LateSummer 2010 and recruiting a new crop of true believers to drink his doom-aid..."

LOL! If you really want to laugh, go back in time to the posts in 2007 - he was giddy in ancipation and had a new crop of true believers whipped up into a frenzy.

Heres a real gem:

"I personally believe the latest speculative bubble is due to unravel much faster than most people think. By the end of the next selling season ( Summer of 2008 ) you will see declines of 45% in Santa Monica off of it's peak in August of 05'."

Posted by Latesummer2008 on March 7, 2007

speedingpullet said...

Wow, way to go - diss the guy on his own blog, anon 9.24 ;-)

I realize that its not in the average American's DNA to wait for anything, but you're all declaring it over before its over.

Everyone is happy with referring to Japan's' Lost Decade' without actually considering it was a lost decade - ie 10-plus years of slowly declining prices.

Y'all are throwing in the towel and declaring it All Over, when we've only seen prices decline for the last two years or so.

Patience grasshoppers. Just because its not plummeting doesn't mean its not declining slowly and steadily.

greengroovymom said...

You have to watch this...How to buy a bank owned home....hilarious!

Billy1 said...

I do not think you can fault LateSummer for his predictions. I believe they were soundly based on economic principles. He could not have anticipated that the banks would pretty much shut down their foreclosure process for a year. Come february 2010 I think we will finally see more significant downward movement of prices. By that time we may begin to see some of the shadow inventory finally hit the market along with some people selling quickly in the face of loan resets and an exhausted pool of solid buyers (those people with steady jobs and good down payments who frankly got tired of waiting and jumped into bidding wars on 1400sf MV houses this summer and fall).

Jon H said...

I can't fault anyone for posting their opinions online. LS2009 and others were just enjoying their freedom of expression, and I appreciated their efforts to substantiate their theories with data.

Predictions are educated guesses, and many times even the most scientific predictions do not come true (see the recent review of cancer screening, a form of prediction; its accuracy and usefulness differs tremendously across types of cancer).

Home prices in the Westside housing market, a unique beast indeed, may soften even more,or not. No one has a model that can capture information from an endless supply of economic and social indicators we would need to really drive this prediction engine.

I have seen first hand the thirst abroad for Westside Los Angeles property, as well as the purchasing muscle of local professionals. I really underestimated these factors but now, after being outbid on several homes, I realize that this area is unique. I'm not sure that people on this message board realize the extent of investment clubs abroad- even in global regions suffering from the current global recession- focus on Westside real estate. It is mind boggling, and it is like homes on the Westside are seen as less risky investments than US bonds, etc.

After reviewing a lot of information and posts written by LS2009, I do think that he is biased to be always pointing to the fictional giant and apocalyptic real estate correction on the Westside. I'm not sure why- perhaps he is troubled by the unaffordability of property in SM/CC/MV/other areas? (I wouldn't disagree). It is not for me to analyze his motives, and, to restate my appreciation for his efforts, he always uses data to backup his perspective.

I like to call myself a "capitulator" b/c I tired of endless speculation with little direct evidence supporting the theories. As did my family.

One really powerful thing about LS2009 and others' work is the deeper understanding of the risk of property ownership, and the risk vs. reward evaluation that should be part of the informed home buyer's process.

Anonymous said...

That's very well said, Jon H...
the westside seems a mystery to all. my wife and I make almost $300,000/year together, and still we have not been able to get into any starter home on the west side. we're looking for a year and are constantly outbid, for prices we think are not worth it. I bet you'll see a big spike in sales volume this month - it has been an incredible month of homes moving quickly. not sure why, but we're a bit discouraged at this point and will wait and hope it might come down more....

Anonymous said...

all you who think we have leveled off on the westside are going to be very dissapointed and are stepping in front of a freight train if u are stepping in and buying now. Government support can only go one for so long and eventually the banks are going to have to sell the hundreds of thousands of homes they now have in their shadow inventory..have some discpipline and wake up

Anonymous said...

I agree and I think prices on the West Side are going to fall hard from here. That being said, my wife has numerous friends who are "desperate and hungry" to move North of Montana. Some of them have already sold their houses in other parts of the west side ( at nice inflated prices) and are waiting on the sidelines ready to buy North of Montana. Can you provide some coverage of the number of foreclosures that are going to come North of Montana in the next six months? That is key

Latesummer2009 said...

Don't shoot the messenger. All I have done is report data that's available to the public. Everyone has to make their own decision and everyones' situation is different. I don't have a crystal ball, I just look at trends and numbers, then try to hypothesize what the data tells me. Obviously, there are always variables that can change. The government is helping the banks regulate the number of foreclosures that hit the market. This is obvious if you look at the number of NODs that are steadily increasing. The problem I see is similar to water collecting behind a dam. As more and more water piles up, sooner or later it breaks with an even bigger flood.

A few questions I have are:

1)What happens when Gubbamint can't float the bill anymore?

2) Are there really jobs being created that support these prices at current levels?

3)Why are all market levels over $900,000 still tanking?

INMHO we are far from being over this financial crisis. Nothing has changed that precipitated the massive real estate bubble. If anything, the financial industry has been rewarded for it's bad behavior (Moral Hazard). Plus we still have the same people in charge of the money (Summers and Geitner)that got us into this mess.

The way I see it, some are getting impatient after only 2 years of a real estate bust. (Seven years is the average cycle) With the govt doing everything it can, the housing industry is still on life support. All it has done is extend the timeline for declines on the Westside.

Once again, everyone needs to ask themselves, what are the advantages and disadvantages of buying versus renting, given the current economic climate? And most of all, what does the next ten years in your particular job market look like? Chances are, you will be living in that house at least that long, if you decide to buy it.

Anonymous said...

Well said Late summer.

Looks like the banks are dripping out a few reos on the west side today (OK the third one is not technically on the west side, it is in Sherman Oaks but South of the blvd). I believe the timing is choreographed to the public sentiment that the market is strong right now. I wonder if the banks have a mathematical model about how many REO's they can release in each neighborhood based on ongoing market conditions. Very interesting.

Anonymous said...

This is great - any sense as to when the banks will start selling REOs North of Montana?

Tom said...

All of the comments are very interesting and well thought out. I'm glad I don't have to make the decisions that most posters do. In general, west side housing has always been overpriced as compared to what one would expect. I never have been able to figure out why. The foreign investment club info is interesting news, but can't be large enough to account for it,

Bottom line is that if you need a place to live and want to be on the west side, you might as well buy now and hold as long as possible. Prices are down quite a bit, even if they might go down even further. It's kind of like buying a used car after the first buyer took the big depreciation hit.

Anonymous said...

I am a happy renter. The folks buying are (in my estimation) over-valuing the "I own it benefits" and ignoring how much nicer a place they can rent or the money they can save (and in most cases BOTH)! This is a cultural issue that cannot easily be broken, and may never. If that is the case, then I will rent and rent (much nicer places then the "owners" can imagine or improve), and put money into investments. They would rather have a new Yugo than get a 20,000 mile used Mercedes. What can one say about that? What would Warren Buffet do?

Anonymous said...

Some of you folks have serious impulse control issues.

It's very simple - if you can find a property and a mortgage that is 3x - 4x your income AND you don't mind loosing much of your down payment over the next few years (2,3,5, whatevs) then buy.

That said, few properties in the Westside are near the 3x-4x income ratio for the neighborhood, so they're not really affordable. Historically, they have been at that ratio - what magic occurred over the last 8-10 years to make the income to housing ration 8x or 10x become reasonable or affordable? There is no magic.


Anonymous said...

there is a good article on CNN money called "Home Prices:about to get much cheaper" - they say
"Home values in the nation's second largest city, Los Angeles, have fallen 43.3% since June 2006 to a median of $313,000. They are expected to dive another 20.2% over by June 2010, and then start to climb in 2011"
It's an article about the nation, not neighborhoods...but I will say, having been to many open homes in the $800,000 range in Mar vista and culver, something does not feel right - with the people who seem to be stretching to get into these homes, and with the agents who are smugly telling everyone how quickly these homes (that have not been updated for 25+ years) are selling.

Crash Burn said...

Just judging by the amount of unemployed or idle real estate agents who have nothing better to do than to make anonymous posts about how the West Side Real estate marked has "bottomed out", "hit the sweet spot", "really is different", just takes a "doctor married to a lawyer" with a big inheritance in order to afford a starter home next to the projects, I would estimate that Westside housing prices have a lot further to go down. When you start looking at things like "data" then you really start to worry.

I think it is unfortunate that there is so much unemployment going on, but can't help but think your time could be used more productively.

I think LateSummer 2009 was an OK guess, just a guess, no one know how this is going to play out. Maybe they'll start graduating 5,000,000 doctors a year from now on who will all want to live in the West side of LA and prices won't fall.

Anonymous said...

"When you start looking at things like "data" then you really start to worry."

Thats why we ignore case shiller on this site...