September 30, 2007

Real Homes of Genius: Today we Salute you Torrance. $575,000 in this Housing Market?

What a gorgeous day in Southern California. It was a mild day with a touch of fall permeating through the morning marine layer. It is becoming evident that some people believe this wonderful climate is reason enough to ask for bizarre and economically devoid prices. Some sellers still seem to think that Johnny Subprime is around the corner, eager to jump on an overpriced 50 year old home simply to obtain the proverbial Mr. Homeowner label. Alas, this story like all Shakespearean dramas seems to have a tragic ending and the foreshadowing is already darker than a full eclipse. You might have noticed on the right hand column a weekly short-sale and inventory count. An emerging trend is brewing. We are reaching a critical mass of inventory and I am sure housing pundits are going to run with this like a child eager to show his parents their first A in fractions. But there will be two backhanded retorts to this premature excitement in October. First, the percent of short-sales coming on the market is staggering. Next, we are going to have the 3rd quarter foreclosure numbers sometime in the middle of the month and they will be brutal. How do we know? Just take a look at this article on mortgage resets, price-to-income ratios, and the list of Real Homes of Genius. And speaking of Real Homes of Genius, let us take a look at a short-sale home to highlight the current market. Today we salute you Torrance with our Real Home of Genius award.

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:

Sale History

08/14/2006: $575,000

01/11/2006: $450,000

08/15/2003: $255,000

07/21/1994: $110,000

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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Dragant said...

Why are the futures trading on the Case-Shiller only predicting a 15% decline for LA by 2010? Based on houses such as these, will the decline not be more severe?

The North Coast said...

Dear Dr, this house would NOT be considered a "starter" house by 95% of the population.

This house would be considered Unfit For Human Habitation by about 85% of the population. I hope the interior is better than the exterior.

Before I started reading your blog, I assumed that such prices for such substard dwellings was based on the value of the lot upzoned for a 40 story luxury condo tower. I thought, ahhhhhh, they are "gentrifying" these neighborhoods and tearing everything down to build luxury stuff. It's hard to believe real people are pledging real money to buy this stuff.

But, then, it's not real money, is it?

The North Coast said...

Excuse me, I meant to say "substandard" not "sustard".

I type too fast for this lame old computer.

JimAtLaw said...

Good Q Dragant, and a few answers to which the good doctor may add more.

First, many people are predicting a long, slow crawl to the bottom over 5 years or more, bottoming in 2012 or later, rather than a plunge to the bottom. This is historically how it tends to happen - prices are generally "sticky" on the way down. We'll see how accurate that is this time, but remember that the ARM resets chart still has a lot of your Alt-A and Prime crowd resetting over the course of 2010-2012.

Second, you have to add inflation to that number, so even at the government's significantly understated inflation numbers, and even if the 15% number were right, your 15% from '07 to '10 becomes at least 25% in real terms, and that's on top of what we've already lost.

Lastly, consider how price measurements are represented here as well - people are saying now that prices have only fallen a couple of percentage points when we know that huge "incentives" render that a complete fiction, and many places have already seen double digit hits in reported price as well (go check out Bubble Markets Inventory Tracking for examples). I don't think the C-S index is immune from this problem, but would be curious to hear from someone who knows more about their methodology.

no_such_reality said...

Sadly, the place is probably worth about $150-180K at bottom.

That 2003 price should have been the cycle peak price if not already above it.

speedingpullet said...

Using my trusty spreadsheet calculator - the place is worth $207, 421.
That's the 1994 price, plus 5% appreciation per annum.

I'd offfer $210K, as I'm a generous soul, and watch them have an aneurism. Hehehe...... ;-)

andrew said...

astonished I am at the way housing is gone. Who is would be buyer for all the houses on market if we have 30 year non sub prime loans. I am sure none. So all these investors and bank owned homes will sell for the affordable prices which mean price reduction of atleast 60%. This is pure math, no speculation based on complex math.
Just a reminder. With 6% interest you pay 1,000,000 for 500,000 dollar home you bought over 30 years. So it is like losing money in housig untill or unless you pay it earlier and gold rush happen in place you live. I have not taken into account money put in home for repair, property tax etc. So Can somebody tell me why we donot lose money in homes.

Veronica Lodge said...

RE: $575 thousand, 1106 square foot Torrance home.

There are no more sub-prime borrowers to compete against each other in a bidding frenzy. This house will just sit and sit, until it becomes a short sale or foreclosure.

No Realtwhore will waste time and gas showing overpriced houses when there are hundreds of others nearby which are much cheaper.

The game is over and the last few year's worth of phony equity will quickly vanish.


formul8 said...

That is a MAX $175K house.

$575K in this market climate (or any market)is absolutely insane.

A moderately employed sit-com actor can't even afford this dump.

Lost Cause said...

Yet this house is probably worth $800k in Venice or Santa Monica.

Mr.Mortgage said...

CNBC's Maria Bartiromo/Bill Maher Housing Bubble Video

Here is a clip from Real Time with Bill Maher which aired Friday September 28th. I have never heard the housing slump sound or look this good.