Address: 1532 Berkeley #7 - 90404Details: 2 bed/2 bath 924 sq ft condo, 1971 building, $190/month HOA, REO
Description: REO/ Lender Owned! Reduced $20,000! Updated Corner upper rear end unit with carport parking under it, and only one side shared wall with other unit. Excellent condition unit with balcony, hardwood floor. It is easy to be shown anytime.
Previous Purchase: 9/12/05 - $553,000
Listing History: 12/1/09 - $474,900
Reduced down to - $439,900
SOLD: 3/30/10 - $435,000
This is a pretty substantial rollback. It is $118,000 less than the 2005 price (a 21% discount). However, since this unit appreciated at greater than 20%/year over the 2001-2005 period, it appears to be only a mid 2004 rollback or so.
For those asking about the possibility of prices rolling back to 2001 values, we just so happen to have a previous purchase on this property which took place on 8/16/01 for $257,000.
To get there on a nominal basis, we would need another 41% decline. The chance of that happening is almost zero in my opinion. However, if we use a 3% inflation rate on the 2001 price and compound it over 8.5 years, we get to an inflation adjusted 2001 rollback target of about $330,000 which is about $100k less than what this just sold for. In my opinion, it is highly unlikely that we will see another six figures of depreciation on this unit. This unit could fall in value some more over the next few years, but I think a lot of the depreciation has been taken care of already. Much of the savings you might expect to get on this unit if you were to buy it a year or two down the line might be wiped out by higher mortgage rates (assuming you are financing and not paying in cash).
"Much of the savings you might expect to get on this unit if you were to buy it a year or two down the line might be wiped out by higher mortgage rates"
ReplyDeleteRegardless of where rates are, a $100k fall is $100k, and all your equity, lost.
You are then stuck in the house. If you had to move, your savings(down payment) is gone. And lets not forget higher property taxes. I'd rather pay a higher interest rate, and pay less in absolute price and taxes. Years later when rates go back down (rates are cyclical, too!) I'd refinance. In the interim, my down payment is safer.
If you take a loan at 80% value = 348000. 30 year fixed at 5.25% = $1922/month. Then you have fees and prop taxes, but also the interest deduction. This is close to rental parity for this area. I personally would not do it, especially for such a mediocre unit that you might have to live in for years, but I can see why they did.
ReplyDeleteI agree with blahblah...I would much rather have a lower price, than a lower interest rate when I buy something. Focusing on the monthly payment rather than the price is foolish whether you are buying a microwave, a car or a place to live. Higher mortgage rates wiping out savings on the monthly payment is based on the assumption that you are going to take out a mortgage and that you are going to pay it off over 30 years.
ReplyDeleteI agree with Elian that it is close to rental price if you factor out that 20% down-payment and what else you could do with it, but vacancy rates are at very high levels (as is unemployment rates)and rents are still falling.
I really don't see any reason why a place like this wouldn't fall another 40%. It may take a few years, but there is definitely some down-side risk in the economy still. And considering that the inflation of the last 10 years was based on a massive credit bubble that is deflating, why factor in 3% inflation every year?
Look, I have ALWAYS said that the most ideal time to buy would be after rates had been super high for a while...you would then bring in your large down payment and finance the rest at a high rate which you can then always refinance later when rates fall. Meanwhile you would get low property values because the high rates destroy values (of real estate, stocks, bonds, etc...basically most financial assets).
ReplyDeleteBut we aren't in a high interest rate environment. We are in quite the opposite. And if you want to sit here and wait for rates to skyrocket before buying then you might never pull the trigger.
I try to think in probability bands or something like that. I think the most likely thing to happen is that rates will modestly rise over the next few years. Even if I am right about the value of this unit declining modestly over a few years, you are likely going to be buying with an interest rate which is higher. If rates spike and this thing falls $100k then my whole argument is null...but I don't think this has $100k downside even if rates rise by a fair margin.
As for property taxes being higher if you buy at a high level...you can always appeal to have them lowered by using comps. Often the assessor will do it automatically.
Maybe I wasn't being clear initially and/or maybe I'm still not making sense...I think in long time frames and I think as someone who would buy and hold for a long time. I have never had any debt and I don't ever think about buying something on a "payment mentality" but you have to realize that most do (especially in this segment of the market where you just slap down 3% and get a FHA loan...). My thinking is for a slow rise in interest rates which helps keep values in check (if not providing outright downward pressure on them). I would love to buy with high rates but I just don't see it happening anytime soon. If you can find a deep rollback on something that works for you right now I don't see a ton of downside as you will be getting an essentially subsidized mortgage rate + government money thrown at you. If you don't find something you like at a great price then sit back and I think values fall a bit (but not a ton) and I think you will buy with a higher mortgage rate.
I think those of you who think this will go down another 40% are going to be pretty wrong unless the economy really tanks again and/or we see a huge rate spike. I think there is a greater chance of overall upside surprise than a 40% downside surprise.
I like hard numbers:
ReplyDeleteIf prices roll back to 2001 then-
$330000 x 80% = $264000
30 year fixed at 5.25% = $1458 / month
You could argue the details of interest, etc, but this is way under market rent. There are many vacancies in Santa Monica, but list at this price and it will rent in one day.
I strongly feel that condo prices should be directly linked to market equivalent rent for apartments. Houses are more difficult to find exact equivalents for, but condo/apartments are quite similar and easily comparable.
Therefore, SM rents would have to drop 5-10% 2 years in a row to justify a $100k price drop.
However, if the city of LA and California go bankrupt, which no longer seems farfetched, then who knows....
I don't think anybody believes prices will fall another 40% if rates remain where they are. However, if you don't think rates are going up, you're kidding yourself. If rates go up to 8%, which was basically the average rate of the 1990s (http://mortgage-x.com/general/historical_rates.asp), there's some chance you hit 2001 prices.
ReplyDeleteHi Tom. I'm Tom on this blog too. I hope we don't write something the other disagrees with.
ReplyDeleteMy bad, blogspot told me the first one did not post.
ReplyDeleteTom,
The fed is not going to be able to raise rates for a long, long time. See the example of Japan for the last 20 years after their own housing bust.
I agree that rental comparisons are the most relevant valuation, but to make the comparison fair, you have to assume 100% financed. Otherwise you get into an added debate about the opportunity cost of not investing the 20% down. Even so, this thing does seem fairly valued based on current interest rates.
ReplyDeleteThe interest rate question is incredibly tricky, though, as it's a huge part of all the money the government is throwing at housing, and when it will end is a huge unknown. At the historical average of 8%, the monthly mortgage payment alone on this place is $3200. Assuming this is worth about $2000/month as a rental, you're looking at a long-term historical value around $270,000. Frankly, I don't have a lot of insight into which interest rate model is fairer; since an investor can lock in 5.25% right now, this thing probably does cash flow at the current price, and if you only need 3% down, there's minimal capital risk...
By the same token, the price is historically unrealistic, because the government subsidies will end.
Also, while I agree that the Fed will need to keep the Funds and Discount rates low, these rates do not control 30 year mortgage rates. I am less convinced that the Fed will be able to hold down 30 year rates much longer; the main mechanism for that was "quantitative easing" through purchases of 10 and 30 year T-bills... which has now ended.
ReplyDeleteI'm not sure even the economic cognoscenti have a clear enough crystal ball to know what the bond markets will do with 30 year interest rates over the medium-term.
One final thought: if you consider price-to-income, instead of price-to-rent, prices in Santa Monica are still way off. The Santa Monica government lists median income for 2009 at $79,300. The long-term national average price-to-income ratio for housing is 3.5; you can be generous and say "Santa Monica is different" and pretend this should be 4, or even 5, but we still seem a long way away.
ReplyDeleteThere are three kinds of readers of this blog: the merely curious, those who are dependent on bubble prices (often realtors or those who bought the "buy now or be priced-out forever hype"), and those who are patiently waiting, renting, building up their warchest and sitting on the fence, waiting for prices to drop further, knowing that while some people are eager to buy today at $x, so they can lock in 5%, we'll happily wait and buy tomorrow, with our additional cash savings, at 80% of x.
ReplyDeleteI agree with a lot of what Epsilon is saying. There are a lot of different factors to take into consideration. There is also a difference between evaluating based on investment potential and evaluating based on "I'm going to live here." And of course the long-term vs. short-term potential. Short-term, of course it would be a drastic prediction that this place (or similar) will drop by 40%. Price elasticity, government backstops and the illiquid nature of real-estate alone will prevent that in the short-term. In the long-term though, is it such a drastic prediction? Is it any less believable that this could happen than say the 30% per year appreciation over 5-6 years that we just experienced? What if this property lost 5-10%/year for the next 8-10 years?
ReplyDeleteI'm not trying to predict anything here or say something is a good deal or bad deal or talk anyone into or out of buying or selling. (What do I know?!) And I don't care too much one way or the other except that economics interests me, but taking into consideration the local, national and world economies at the moment, I don't find this outside of the realm of reason.