Tuesday, January 19, 2010

ARMs Race Is All But Over Now

The proliferation of ARMs (Adjustable Rate Mortgages) is just about dead. According to Dataquick, these loans averaged over 51% of all purchases in Southern California since 2000. In December of 2009 the amount of purchase loans that were ARMs was 4.6%. Obviously these loans fueled the housing bubble that we just experienced. In addition, Jumbo Loans ($417,00+) which averaged nearly 40% before the credit crunch, averaged only 16.7% of purchases last month.
Most of the sales ocurring now are first time buyers or all cash investors. In outlying communities, people are snapping up properties at a 50% discount. With the Westside down 20-30%, it may seem like a good value, but is still overpriced, compared to other areas that have fully corrected. With fully documented loans now and the virtual elimination of ARMs, the fuel behind the Westside real estate boom is gone. Sure , there are a few affluent buyers out there getting good deals with tough negotiationsl. However, compared to the amount of inventory listed and in the shadows, it will be awhile before we work through the overhang of homes on the Westside through short sales and foreclosures.

What is the risk in waiting a couple years, compared to getting up to 20% off? Without liar loans and ARMs, it might be the difference between losing your down payment or not.


Anonymous said...


You run a spectacular blog. Thank you for your good work.

I think that interest in the 90402 among your readers has permanently declined. And I don't think it is coming back.

Here is my theory. Back when you started blogging, just about every one of your readers knew that we were in a bubble and knew that house prices would fall.

No one knew how far they would fall. Huge numbers of the people reading your blog looked at their incomes and legitimately thought that after the bubble deflated they would be able to afford to buy in the flats of the 90402.

So a lot of the discussion of the 90402 on your blog was written by people who thought that perhaps one day in the future they could buy in the flats of the 90402.

Well due to a combination of factors, most of your readers who thought that they might be able to afford the flats of the 90402 have thrown in the towel on ever being able to live there.

Many of your readers have seen their incomes fall faster than prices in the 90402 have fallen.

Bottom line - If 70% of your readers a few years ago thought they should follow the market in the flats of the 90402, today a much smaller % of your readers want to follow that neighborhood.

People who read your blog have given up on the flats of the 90402. They are focused on other neighborhoods.

So I don't think you will ever get enough traffic to justify this separate blog focused on the 90402. I think you should fold it back in to the main blog

Also note that SM distress has lost most of its audience since banning anon comments. I think you have an opportunity to pick up readers from that blog. Just post a few times there saying that anon comments are welcome on your blog and many of the readers of SM distress will come over here (they will still check SM distress but they will do their discussing over here)

just my humble opinion. Take it for what it is worth.

Anonymous said...

True, true.

And yes Westside still horribly over priced everywhere you look.

Anonymous said...

Well not everyone is looking on the 90402, I've been looking in the 90064 and 90025 for two years...

Anonymous said...

Fold 90402 blog in to this main blog

you can buy a old two bedroom house in Sunset Park today for 700 thousand. That same exact house in the 90402 will cost 1.5 million. Same age same size same every thing.

90402 is too expensive for most of the readers of this blog

Anonymous said...

Better solution - talk about the following zip codes (that range in price, including ones as high or higher than 90402):


Anonymous said...

My question is when and how will the shadown inventory be released?

Anonymous said...

The shadow inventory seems to be getting absorbed by the rental market - drive around the 90402 and see how many houses have successfully found renters at 14 thousand a month.

Check it out and report back

Anonymous said...

I too, ended up renting out my big fat house to cover the mortgage. Buyers are being cautious, sellers are needing the money to cover expenses....works out well.

Anonymous said...

What I am seeing is a 5% gross yearly rental yield

A house in the 90402 that would sell today for 3.0 is renting for $150 thousand a year

A house in the 90402 that would sell today for 2.0 is renting for $100 thousand a year

I have heard that in other neighborhoods the rental yield is higher but this is the 90402.

Anyone see the same thing

Anonymous said...

The rental figures here are nonsense. I'm renting out a house that "someone" (i.e., real estate agents) thinks is $2 million for $4,500 per month. Too many real estate agents on this blog!

Anonymous said...

Same on leasing rates: try $6,000 per month ($72,000 per year) for a house that sold in 2007 for $2.5mm.

Anonymous said...

The rents are just not that high. Everyone I know who is renting out a house who bought in the last 5-6 years is renting it out at a monthly loss. Renters have the flexibility to drive harder bargains and pay no more than necessary.

Anonymous said...

What should a 4 bedroom/ 2 bath house in GRS rent for? This is an old house, painted but not remodeled, with a nice yard and about 1700 sq.ft.of interior space.
So many of the price discussions about 90402 relate to the rent/purchase price ratio, but I'm not sure where rents are today.

Anonymous said...

What should a 4 bedroom/ 2 bath house in GRS rent for? This is an old house, painted but not remodeled, with a nice yard and about 1700 sq.ft.of interior space.
So many of the price discussions about 90402 relate to the rent/purchase price ratio, but I'm not sure where rents are today.

Anonymous said...

"LS2009 said...With fully documented loans now and the virtual elimination of ARMs, the fuel behind the Westside real estate boom is gone."

And yet, even without that fuel, buyers keep showing up and the high prices remain...

Anonymous said...

I rent a house for $5k in SM, currently listed for 1.3m

Anonymous said...

Case shiller went up yet again - do we not discuss that sort of unpleasant reality here?

Anonymous said...

Case Shiller went up, but only because the mid and high end is capitulating. When the higher end properties get sold, they bring the average up. The market continues to crater. Just look at the increase in NOD's, bankruptcies, etc. The rate of increases are amazing in absolute terms, and on a percentage basis are astonishing.

Anonymous said...

Uhh no - high end of CS index also rose. Good try though. Any other ideas?

Anonymous said...

Actually, if things are not seasonally adjusted, the index went down. Why dispute with reality? Look at the bankruptcies, notice of defaults, etc. There is ho hope for the housing market.

Anonymous said...

Manhattan prices were up in December. $1200 a sq foot is the average condo price

You are talking 1200 * 3000 or 3.6 million dollars for a three thousand sq foot condo in Manhattan vs only 2.7 million for a 3000 sq foot house in Franklin 90402

Where would you rather live?

Anonymous said...

I would rather live in Manhattan if my job was in NYC and live in Franklin if my job is in LA.

Anonymous said...

People still buying the higher priced places in 90402 aren't trolling these blogs or are worried about the prices. I have a close friend buying in 90402. They have put in offers on at least 4 really nice houses. Every house they tried to buy had multiple offers.

With 2, 3 or 4 buyers for each house it sounds like 90402 is still going strong. Shadow inventory would need to double or triple the quality home inventory to stop these multiple bids.

In every RE downturn there are locations that are less affected. Its looking like 90402 may be one of those small pockets that could only see small declines.

Jimmer said...

"What is the risk in waiting a couple years, compared to getting up to 20% off?"

Some risk waiting a couple years if 90402 continues to hold like it has the last 2.5 years while everywhere else crashed.

Interest rates rise to 8 - 10+%, inflation devalues your buying power while 90402 owners continue to hold on to their properties. Your money will buy less and prices on the homes will not drop as fast as the buying power of your dollar. That's the risk of waiting 2-3 years before trying to buy a home in certain parts of LA.

Anyone that lived through the '80s know what inflation does to your buying power. It doesn't drive home prices into the ground as much as it drives some people into less home.

If you can barely afford 90402 today you will not be able to afford to buy there in 3 years. Not necessarily because of appreciation but because of inflation and interest rates.

Anonymous said...

If interest rates go up, price goes down. Combine that, because interest rates are going up, with the option arm's beginning to recast, the CA depression, and the baby boomers selling off (or their children), and it's all crumbling -- including 90402. Just like Japan, where prices are still going down. Now is not the time to buy except for maybe in the lowest tier. I don't understand why some here refuse to accept the fate of the housing market. Not objective enough I suppose.

Anonymous said...

Redfin 90402 and see what's happening to prices. They're going down.

Anonymous said...

"Uhh no - high end of CS index also rose. Good try though. Any other ideas?"

Uhh, duh, CS "high end" is below the LOW END in West LA, never mind 90402. CS is not directly relevant for high end LA housing.

Anonymous said...

The people here have intense emotions - there are some people that sunk their life's savings in to a down payment on house N of Montana - if prices fall from here they are wiped out - their retirement is gone, they can't send their kids to college.

I mean, everyone talks about the no money down loans, but that is not what happened North of Montana - North of Montana you had people putting down 500, 700 thousand in cold hard cash as a deposit.

So yes, when everyone on this blog talks with delight and pleasure about houses North of Montana down big, know that there are people being wiped out by those price declines you crow about.

There are good people on both sides of this issue. We all know plenty of people whose spouses are desperate and hungry to own North of Montana - these people are cheering every price decline. But there are also people who lose their life savings when prices decline.

Anonymous said...

500 thousand and 700 thousand dollar down payments were a common event in the 90402. Look it up

Anonymous said...

Last time I checked, there are consequences to our actions. People who make bad decisions in investments or real-estate should loose their money, that's how the system works. Sad but true! Notice how I make the distinction between investments and residential real-estate. If you treat your home as a home, who cares how much the appraisal falls, but if you look at it as an investment vehicle, then fare is fare. On a side note, I think there is more price decline on the way for these price ranges. Here is an interesting quote I read off of Santa Monica Distress Blog:
Also, if you missed it last time, the agent on this property left a comment on the blog which I've reproduced below:

Great discussion. I am the agent for this property. One of my clients brought this discussion to my attention. Let me clear the air. To all those who believe the westside market is tanking, you are correct. Once rates went back over 5%, the next 20% drop began. You can see it in the eyes of the buyers. This property is a short sale (see private remarks in MLS). We had to start at $799,000 to show the banks that we gave it a shot at a value, where a short sale would not be needed. Each price reduction and time on market continues to help us make a case to the lenders that we have done everything necessary to make them as much money back as possible. We finally have a few offers, after the reduction to $699,000. Counters are going out tomorrow. Whomever wins the bid, I can now stand strong against the bank to approve the short sale and accepted price, as this may be their last shot to sell the property. The second will get wiped out here AND the first will need to share the pain. No one is winning here, but with this scenario it was the strategy we needed document. You would not believe how naïve the banks are when it comes to approving these short sales. Again, we needed to prove to the banks that the market has shifted, even though they will tell us the property is worth more...now I feel we have taken that discussion off the table. If they do not accept the winning bid, then I wish the banks good luck... Time is money!

Anonymous said...
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Anonymous said...
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Anonymous said...

Ugh - remove the ponzi scheme pitches please. Let's get back to discussing our options. Right now all of us can either buy something that is move in ready, or we can buy a teardown, rip it down and then build new.

OK if you want to rip it down and build new, Everyone here seems to be saying that it will cost $400 a square foot for basic no frills construction, and that $400 a square foot includes the hard costs and the soft costs. So a basic nothing special 4000 sq foot job in Santa Monica is 1.6 million, a basic no frills 2500 sq foot job is 1.0 million

Two ways to try to build a new house -

The first way is to try to save money by being your own general contractor and supervising each of hte subs yourself.

The second way is to hire a design build firm that already has done more than 20 homes North of Montana.

Obviously the first way is crazy for a newbie. Cross it off the list for someone with no experience -

My question is with regard to the second way. My understanding is that there are a number of design build firms that have a long track record of getting things done in the 90402. In the bubble, many of them got in to the business of doing specs, and in the early to mid part of the bubble, the spec builders put 400 thousand bucks in profit in their pocket each time they did a spec house.

So in the early to mid bubble these design build firms wouldn't talk to me about a custom build project cause they were making so much money elsewhere.

Today, there is no financing at all available for these guys to do spec homes. They are desperate for any work at all to let them keep their teams together.

If I come to these experienced design build firms and show them that I have 1.0 million in cash (and need no loan) and I show them that I own the land, and show them that I am not going to drive them crazy with lots of customization requests, my understanding is that there ARE some high quality design build firms that will do the entire 2500 sq foot job for 1.0 million all-in. It won't be bespoke quality, it will be builder quality, with basic fixtures and finishes, but if I pay 1.0 million they can get the job done, simply because they have already done dozens of the standard 4200 sq foot 90402 jobs.

Again, I am a newbie and I know that the people on this board have done this plenty of times already. I am not stupid enough to think that I can do this by myself - not stupid enough to think option one is viable. I am simply asking if my scenario two is realistic if I pick the right design build firm.

If I am mistaken I want to hear it. Don't hold anything back - give it to me straight.

Anonymous said...

"But there are also people who lose their life savings when prices decline."

That would be a shame, but I am sure they did not think about or feel sorry for those who did not feel comfortable enough to overpay like they did or afford a $3mm house I feel bad for those who lose jobs or health, or hit some other unexpected bump in the road (by the way, losing a job at some point during a 30-yr mortgage should be EXPECTED, no?), not for the 80% of the ones who got greedy and never could afford their homes and save for retirement at the same time.

In reality, this result for someone in this spot means one or more of the following:

A. they could not actually afford to be North of Montana, so they were greedy or foolish;

B. Almost certainly they saw prices rising and thought they should get some of that money;

C. They definitely would not be sharing any of the upside with those who did not do what they did (buy expensive homes in an expensive market);

D. If they had kept the $700,000 in the stock market instead of putting it into the housing market (just a different investment!!) they would probably be down 35% on that money today, and 55% at the bottom in March 2009 on that money;


E. They made a bet, just as everyone does -- they should not be pitied, because they had choices; and, finally,

F. If these poor buyers actually could afford $3mm for a house between 2004-2007, they SHOULD have plenty of other money to pay for food, shelter and their children's educations. If not, they should not have played.

Of the group north of Montana who put everything they had into the house, and does not have income to grow more savings, I would suggest that they were

(1) not very sharp -- 10%

(2) unlucky -- 10%

(3) greedy and overly confident - 80%

In each case they will be lucky enough to have lived the good life for a while and give the house back to the bank.

Anonymous said...

Newbie on housebuilding:

You can get the house guys to do it for $300 per square foot OR LESS. I know a guy who did a custom house for $1.1mm and 5,000 square feet. That $400 included (a) 2005 profit, (b) 2005 lumber prices, (c) customizing and high end everything, and (d) a frenzied marketplace.

In 2010, prices on all the ingredients are down, as is business. There is no reason you can't get 5,000 sq. feet done for $1.1mm, and this is a high end property.


Anonymous said...

a) Where is this 5000 sqft for $1.1mm building costs located?

b) Customizing means a completely custom home created by archetect not some prepackaged blueprints? High end everything means marble floors and so on? Trying to get an idea of what your idea of "customizing and high end everything." For $400/sqft I have a feeling your idea of custom & high end is not many people's idea of high end. No way could you get custom & high end built in 90402 for $300/sqft today (not including land).

The other anon was closer figuring $400/sqft on basic no frills construction. The only way he'll know for sure is talking to a reputable builder for the area.

Please report back with what you are told. Don't forget to add at least 20% to whatever you are quoted in time and money. That will be the real price and length of the project.

Anonymous said...

Everyone here knows that certain places in California make it easy to build. In those places you can slap up 5 thousand square feet cheaply

Everyone here knows that in the 90402 the government makes it really hard.

Anyone here know what the cost to build is today, Jan 2010?

I mean if someone owns an empty lot just like the flat lot at 22nd and Georgina, Just begging for a house, and doesn't want to mess with anything expensive like excavating shoring, anything difficult but just wants the basic simple normal no frills 90402 house put up, how much does it cost all in

If you hire a great builder

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

No one can give you the number. Anyone throwing out a number is talkng out their rear. Costs will vary from builder to builder and vary based on what someone views as basic.

Find 3 reputable builders working on projects in the area of your land. Ask them to give you estimates.

Getting numbers off a blog is going not going to get you anywhere. Do you want a kid in his mom's basement giving you the number you keep asking for or do you want an estimate froma builder?

Anonymous said...

It'll cost you 1 to 1.5 million for the basics not including the land. If the lot needs excavating or shoring you will need to do it. No getting around it to save money. It'll never pass the Santa Monica inspectors without proper preparation. Building code is very strict in Santa Monica. Expect to be forced to do lots of things building in Santa Monica that most other cities don't require.

Why buy a great lot and build a no frills house? You'll get more for your money building a nice place that fits in with the neighborhood inside and out. A no frills house in 90402 will sell as a fixer upper even if its a couple years old. Just look at the differences in resale prices between fixer uppers and nice move-in ready places in 90402. Don't build no frills in 90402 just to live in 90402. That's a bad use of money.

Anonymous said...

The 90402 is a loction that plenty of people want to live in. Period.

90402 holding up while the B+ locations are not. Check out Pacific Palisades. 17723 Calle De Palermo - three quarters of an acre of flat land in the palisades, with a beutiful pool, spa, and guest house - and owner is desperate for 1.9 million and can't get it.

Bottom line, 90402 beats the palisades. You will be shocked by the price spread

Anonymous said...

Above Anon, is that a justification for building a no frills house in 90402 or just your thoughts on 90402?

Anonymous said...

"b) Customizing means a completely custom home created by archetect not some prepackaged blueprints? High end everything means marble floors and so on? Trying to get an idea of what your idea of "customizing and high end everything." For $400/sqft I have a feeling your idea of custom & high end is not many people's idea of high end. No way could you get custom & high end built in 90402 for $300/sqft today (not including land)."

Anon Jan 30 10:06 am --

Answers to above -

-- the house I am referencing was done absolutely custom from scratch, with architect, and with the owner choosing layout of the floorplan, etc. Not Pre-packaged in any way. Sorry, strike one.

- "high end" does not mean marble floors across anything other than an entryway. If you think that having marble floors is "higher end", well, while that may cost a bit more money, we don't have the same taste (I am being polite). To me, high end means higher end fixtures, solid wood doors, top quality flooring, landscaping and surfaces, cabinetry, etc.

- The 5,000 square foot for $1.1mm was NOT in 90403. By the way, that is $220 per square foot -- not even the $300 you scoff at. It was in a very expensive neighborhood in LA County with homes going for $2mm-$3mm. If it helps you conceptualize where such homes have been built for much less by legitimate builders, let's call the neighborhood Calabasas or San Marino (it is neither). So, given the claims that it is more expensive to build in SM, can you please name one or two specific code examples (assuming a typical 90403 flat lot) in SM that are so unusual and unique that they would cost $500,000 to $1,000,000 more than in another town to build the same 5,000 square foot house? That seems ludicrous, sorry.

Anonymous said...

12:18 Anon...oh, how naive you are...spoken like a true newbie in SM...

Bldg code examples? How about stricter codes for foundation and shoring (psi of concrete pour and overly huge footings), structural supports similar to commercial or greater, tighter specs for sheer walls, roofs, etc. How much time do u have??? I could go on and on.....

I just built a brand new house and I was on site for 2+ hours a day as the owner....I saw it all.

Not to mention the lag between inspections and the frustration of one inspector saying something needed to be ripped out and redone, and the other saying it needed to be another way. No consensus in the bldg dept. either among the inspectors. That cost us months of drag time.

It was a nightmare and I had an experienced SM contractor, who get this...used to WORK at SM Bldg and Safety! And an experienced SM architect who is on the ARB board in the city!!!

That, coupled with the tough planning codes of bldg setbacks, height,sq. footage lot coverage, average natural grade crap, random and cruel parking requirements (couldn't even use the old curb cut/ garage location to access parking which changed the whole building design...)

Suffice it to say, Santa Monica is anti-development. Period. They would be pleased as punch if we all bought old crappy homes and landmarked them as historic resources so no one could ever tear down a thing.....

Anonymous said...

The bottom was last march. If you are still waiting you Amy as well buy in Valencia because you are jus being cheap. The westside at 50% off is a bargain. If you are still waiting for cheaper then you are shopping in the wrong area.

Anonymous said...

I'm building a house in manhattan beach right now. I can tell you your estimates are all off. the only real way to find out is to get your feet wet and jump in. But if you are still waiting you will never find out and it will be too late. I call that dumb money. The fact is that right now labor is cheap, materials are cheap and you can nab an awsome contractor builder architect that would normally not even work for anyone cheap enough to be reading this blog to build you your home.