Address: 924 15th #2 - 90403Details: 3 bed/3 bath 1,774 sq ft townhouse, 1979 building, $230/month HOA
Description: Fabulous 3 Bedroom/3 Bath Townhouse+Den with sun porch/possible 4th Bedroom! Quiet private 15th Street! Living room w/plantation shutters, recessed lighting, Spanish pavers, gas fireplace. Large entertaining space. Large master suite w/soaring ceiling, 5 windows & walk-in California closet. Washer/dryer in unit. Private 2-car garage w/direct entry to security building. Great storage. Central Heat/Air. Low HOD $230. Close to Montana. Best school district.
Previous Purchase: 10/19/92 - $388,500
Listing History: 9/10/09 - $950,000
SOLD: 2/2/10 - $892,000
It has been a bit over 17 years since this unit last sold. It does not appear to be upgraded so it is basically an apples to apples situation. Looking back at the last cycle, I don't think real estate had bottomed in late 1992 but it was certainly down from the peak of its past cycle.
Using a compound annual growth rate of 5%, you get a value very close to the current sales price. Small changes in annual growth rates have big impacts when compounded over many years (ask the original Buffett partnership investors)...
My fair value compound rate that I have been using is 4%/year which is composed of 3% for inflation and 1% extra. Using a 4% rate, we get a current fair value of $760k which is 14.8% lower than the current sales price. I don't know if we will ever get to that type of value in nominal terms, but it is a far cry from the 30%+ drops in value which you were exposed to if you bought at the peak of the bubble.
I agree this is not a "steal" by any means, and there is some (but limited) downside exposure as the Bubble is still correcting in Santa Monica . . . but this townhouse would still have sold for over $1 million at the top of the bubble.
ReplyDeleteWhen the second shoe drops on housing later this year though, we're in for Part II of the Bubble correction. There's a good 10-20% down to go, depending on the area.
Agreed; with all the 3 bedroom townhomes (that currently seem to be in shadow inventory, although I don't have the inclination to check) that were offered in 90403 in the $1.2 range in 2008 and 2009, this seems reasonable.
ReplyDeleteStill, what would this rent for? That's still the only valuation metric that means much to me. Could this thing get over $4000 a month as a rental?
Can someone explain the meaning of "Shadow Inventory"
ReplyDeleteCan someone explain the meaning of "Shadow Inventory"
ReplyDeleteAll charts show that notices of default, i.e. people not paying mortgages and therefore on the way to losing the home, is sky-high and keeps going higher. Yet foreclosure numbers are flat. Thus, there is a "gap" between the gigantic amount of non-performing assets (be they the physical asset of the mortgage-backed security) and what is actually listed as a foreclosure right now.
The reasons for this gap are myriad--basically the banks don't want to unload for accounting reasons (hiding losses and deferring the write-downs on the books) and the local and federal governments are doing the exact same thing on a macro level with foreclosure moratoria, changes to accounting rules that incentivize banks to withhold inventory, etc.
The net result is a huge backlog of homes that are occupied by people who haven't paid their mortgage in months, yet they're not being foreclosed on, PLUS a lot of homes that are actually empty and/or repossessed by the bank, but are not being listed for sale for a variety of reasons. This big number of unlisted, uncounted homes to be foreclosed is the "shadow inventory".
As you can see there are many definitions of the term, and I'm leaving out many more. For example, a home flipper deeply underwater on the mortgage and listing his home for a fantasy price is, in my opinion, also shadow inventory (or a Zombie listing as I call them) because it's a foreclosure waiting to happen.
The main point is that the government and the banks are all following the "extend and pretend" policy, hiding losses and deferring the painful correction by delaying the inevitable. This is simply creating a huge backlog of inventory that at some point will have to come on line, and this will hugely increase supply of homes at exactly the wrong time given all the other support being withdrawn later this year (perfect storm coming).
Arti, thank you for answering my question. I remember seeing some of your comments in the old Redfin real estate blog. During those days, CLAW refused to share some of their information (lot size, year built, etc). You were one of the few people looking in the Westside.
ReplyDeleteSpeaking of shadow inventory, I was highly amused to see 825 Berkeley raise their price $200K. It's an unfinished house that's been on the market for almost a year. I'm guessing at this point, there may be enough weather damage to the frame that it may be a teardown.
ReplyDeleteArti is correct about the shadow inventory and its causes. I disagree with him that there will be any change in the "extend and pretend" policy anytime soon. It could last indefinitely until everything sort of eases off gradually and the inventory can be assimilated without too much pain. This means a long period of fairly constant prices. The government is fully capable of doing this as shown by its handling of social security and medicare. The banks will be happy to go along.
ReplyDeleteI have to respectfully agree with Tom and disagree with Arti. Arti has been calling for another big crash for well over a year. His reasoning changes every few months, alt-a correction, foreclosures & short sales, shadow inventory. I think he just wants things to fall so he looks at the market through a narrow view that suits his doom and gloom message, which has been wrong for over a year now.
ReplyDeleteFor every shadow inventory worry there are many counteracting forces that need to be taken into account. Not the least of which is continual government intervention. There are also some that talk about the banks rating areas and slowly leaking their inventory on the market in those prime areas to keep prices from plummeting. This allows them to make the most possible on inventory in desirable, highly rated areas.