In California, we have beach cities and then we surrogate beach cities. Torrance is considered a middle class area here in Southern California. Nothing outrageously glamorous or anything that would cause you to lose bodily functions over. Today we are going to look at what 95 percent of the country would consider a starter home. This home is 1,106 square feet with 3 bedrooms and 2 baths. You would think folks would cut their grass before putting a home up for listing but hey, this is California and vegetation is the next big thing. When you read the ad you realize that this place is fully “landscaped” and has “sprinklers.” Looking at the lawn, we are glad the sprinklers are working. In the midst of the current housing market malaise and the overall reluctance of buyers, what would your guess be as to the current price? How about $575,000. Entering the fall and winter selling season at peak price, I’m not sure how much action this home is going to get.
Now before you rush out to call your agent, let us take a look at the sales history of this home. As an aside, folks even a few years ago did not have quick access to previous sales history as we do now. A rudimentary breakdown of the numbers puts things into perspective quickly without running to your local clerk’s office. This simple caveat as it becomes more mainstream will change the way people value homes. So without further interruptions let us run the numbers:
Some of you may be surprised to see such numbers but I have seen this more than I would like to admit and am no longer shocked. I’m realizing after talking to certain sellers that there is psychologically some mental block on realistically evaluating your own property. You can run the numbers hypothetically to a non-owner and they will objectively say “oh yeah, that price doesn’t make sense considering stalling appreciation and the area income base.” But once they become owners a switch goes off in the noggin and we suddenly hear, “well you need to realize that over the long-run, real estate always goes up. And renting is the equivalent to flushing your money down a porcelain toilet.” From 1994 to 2003, a period of 9 years this place had an annual average percent gain of approximately 9.8 percent. Not a bad track record for a decade. But let us take a look at the price gain from 2003 to 2006. In this timeframe, the price went from $255,000 to $450,000, a nominal gain of $195,000. During these 2.5 years the average annual percent gain was get this, approximately 32.9 percent! Bwahaha! Oh wait, it gets better. On the next time frame from 2006 to 2006, we see the price jump from $450,000 to $575,000. This is a nominal gain of $125,000 in 7 months or if you want to look at it another way, the actual total sales price of this same home in 1994. Since we didn’t go one year before trading hands, what does the percent gain work out to? This number should cement in your psyche why we are in a historical bubble; the percent gain over 7 months equates to approximately 28 percent! So for 4 consecutive years this home had annual gains of 30 percent. In four years this home has increased in value by an amazing $320,000.
People must be making a boat load of money in this area right? It is always sobering to look at the area demographics. Let us take a look at some numbers pertinent to this area:
Average Household Income: $63,377
So let us assume the average household was to purchase this home. How would their budget look like?
PITI: $3,968 - with $28,750 (5 percent) down and current jumbo rates
Net Income: $4,188 - filing in California as married with 2 exemptions
So this family has a net disposable income of $220 after paying their mortgage principal, interest, taxes, and insurance. No wonder why folks in California went interest only or with option ARMS since it was the only way they were going to squeeze into these absurd prices without eating mac and cheese and a steady diet of tortillas and cheap beer.
Today we salute you Torrance with our Real Home of Genius Award.
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