Address: 3019 Prospect - 90405
Details: 2 bed/1 bath 972 sq ft house, 7,500 sq ft lot, short sale
Description: Reminiscent of a European style Bed and breakfast, this house will charm you. 3019 Prospect is a very quaint 2 bedroom 1 bath classic home perched on the Sunset Park hillside - located on a street that is only 1 block long, Prospect is similar to a cul de sac. There are greenbelt vista views and a massive back yard. The lot is 7,500 square feet. This home is very light inside, with great windows, French doors opening to wood patio & steel kitchen counter tops. Walk to shops, parks, golf course, and only 13 blocks to the beach! Excellent Santa Monica Schools.
Previous Purchase: 10/14/04 - $780,000
Listing History: 5/20/10 - $785,000
SOLD: 7/21/10 - $775,000
This is a great example which shows prices in the late 2004 area. This was a short sale which went into escrow after 12 days on market. It is not surprising at all to see something like this sell quickly as it is a good way for someone to get into the single family market on a budget. Buy the shack now in a decent location with a good size lot, save up more reserves as your young family grows so that you can do a remodel, and all is well.
Let us imagine that a young buyer put 10% down on this purchase. Then use a 4.75% 30 year fixed mortgage for the remaining 90%. That interest rate is conservative, as conforming rates are actually a little lower.
The mortgage payment on its own comes to $3,640/month. Add on another 1.5% for property tax and some insurance and your total comes to about $4,600/month. Hell, round it up to $5,000/month...and if I'm not being conservative enough, notice that I'm not giving ANY tax break benefit on the interest.
I think this allows for a buyer to afford this making less than $200k/year. That would allow for a law associate at a top firm who is a few years into the job to afford this. Same for an associate at a top finance firm who has been working for a few years. You guys can make up your own minds, but dirt cheap interest rates are really stretching affordability and they make 2004 rollbacks appear somewhat "affordable". I think prices can certainly continue to creep down and I think they will...but I don't see prices gapping down by multiple "rollback years" with rates low and the economy stabilizing and growing. I'm aware some of you may strongly disagree and I'm ready to take the heat.
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Economy growing? From David Rosenberg...
ReplyDeleteThe suggestion that somehow generating 3% real GDP growth a year after a bottom is bullish ignores the deep the hole we are still trying to climb out of. Normally, two years after a recession starts, nominal GDP is up 16% and real GDP is up 7.5%. Currently, nominal GDP is up 1.1% while real GDP is down 1.5% from pre-recession peaks.
According to earlier White House projections, that $800 billion fiscal gorilla unveiled last year was supposed to pull down the unemployment rate to 7% by now. Instead, we are at 9.5%. In fact, it's really even worse than that, for if the participation rate had stayed constant at the April level, than unemployment rate would be 10.2% today.
What about jobless claims? They lead employment. Below 400k, you can have a bullish stance. Above 500k – the opposite, and recession risks rise materially. Well, that rise in the past week to 464k from 427k was even worse than it appears because the non-idling of auto plants this summer has given a temporary downward skew to the claims data – the underlying number is now closer to 475k. The upcoming seasonal factors that are "looking for" a decline are actually going to end up boosting the adjusted claims data and a test of 500k in the weeks ahead is a good bet.
What would that trigger?
Answer: more talk of a "double dip".
David Rosneberg (former Merrill Lynch economist, since fired) has been a noted BEAR for close to a decade. I would take his words with serious grains of salt.
ReplyDeleteRegardless of Rosie's bias, he is posting data. If you have contrary data, I'm all ears. I just don't see how the economy is going to recover any time soon when states and municipalities are being crushed by unsustainable levels of debt. Ex federal government QE and other incentives, the data would show things still stink. Once this intervention ends, the numbers will tell the sad truth -- that little has been done to fix a disabled economy.
ReplyDeleteWell the stock market is where it was 11 years ago and the housing market is where it was 6 years ago. Is it really so wrong that Rosie's been a bear for close to a decade? I think you have too much salt in your diet.
ReplyDeleteI think you're really stretching what most young lawyers can afford. $4k-$5k a month on housing is a ton, especially if, like most young lawyers, you also have student loan debt to pay, you decided to get yourself a BMW/Lexus like the other young lawyers, you're trying to actually put money in the 401k, etc.
ReplyDeleteCould it be done? Absolutely. But I know very few young lawyers paying more than $2500/month on housing, and most like being able to afford other perks like nice dinners, suits, and the occasional vacation. Throwing all your money into a small 2 bedroom is a tough sell, especially when $2500 rents a great apartment.
Moreover, most young lawyers don't actually make partner---their first 2-3 years at a firm end up being peak earning years. I'm sure a lot of other fields don't have this pyramid structure, but plenty do...
I tend to agree that we are nearing the end of prices falling because of (un)affordability -- enough people make $200K+ to keep plucking off houses that fall into the sub-$800K range (but I also agree that a $700K mortgage is tight for many (typically) conservative lawyers, especially when the house is unlikely to impress your big-law peers). However, I think there is and will continue to be a pancaking phenomenon where a lack of buyers in higher price ranges, say, the $1.5 million to $2 million bracket, pushes prices down for houses in the bracket below, and so on and so forth. The big problem is a lack of equity and move-up buyers -- when prices aren't going up it is damn hard for even high earning worker bees to save up a meaningful amount to get to that over $1 million level.
ReplyDeleteI actually went and looked at this house when it was for rent. The people who were renting it out(who I assume are the sellers) had inherited it. I believe they were trying to rent it for $3100. Although I really like the neighborhood the house was depressing. It would be hard to live in here as a young family. We have one child and I couldn't even imagine. The bathroom is very small and so are the closets. The kitchen was depressing and even the yard wasn't good for a young family. I think that you would have to do a bit of work to this place to even get to livability. I didn't even consider renting it.
ReplyDelete"when prices aren't going up it is damn hard for even high earning worker bees to save up a meaningful amount to get to that over $1 million level."
ReplyDeleteReally?
I am familiar with the Prospect property. Not a good comp for either Sunset Park or NOMO.
ReplyDeleteTeardown on elevated lot on a steep street (can't walk it too easily). Tiny house with 2 - 8' x 8' bedrooms and one bath you have to turn sideways to get into....a foreign family bought it for their son attending SMC....one person could live there...not a family!
Not a desirable Sunset Park street at all due to its location, proximity to Lincoln/airport flight path and Marine St.(throughfare), which has some of the worst housing stock in Sunset Park.
This would be in line with a location like the corner of 14th and Montana in the NOMO area....what would a teardown go for in that location?
""when prices aren't going up it is damn hard for even high earning worker bees to save up a meaningful amount to get to that over $1 million level."
ReplyDeleteReally?"
I would say "high earning worker bees" means making over $300K gross per household. This means, after 401K contributions (which I don't consider "savings" in this sense), a $300K household will bring in about $160K after taxes/pre-tax contributions. Most people don't save 10% of net, but even if we assume 20% of net that is $32K a year. After 9-ish years, you have $300K for a down payment, which means on a $1 million house you have a manageable for that income $700K mortgage with $4.5K monthly nut. But that is 9+ years to get 30% down at saving 20% of net -- 9 years is an eternity for most in the under 35 crowd, and saving 20% of net income is uncommon. So, yes, I would say that for most "high earning worker bees" who are currently renting, it is damn hard to save several hundred thousand from the ground up to put down on a $1M plus house.
How do you disagree?
Gus, I think many people save more as they make more (unless you're one of those professional athletes that seems to spend every dime and file for bankruptcy a few years after retiring). One can tweak your analysis to show a different picture...if you're say in your early 30s, making $300kish/household, motivated to save for a downpayment, I can certainly imagine saving $50k+ annually...that's still spending over $100k+ annually of after tax cash. That's hard to do...you can rent an apartment for $3k/mth and have plenty left over for cars, travel, dining out, shopping.
ReplyDeleteYou've probably also saved up some money before then so it's not like you're starting from scratch.
I actually think you can save $80k/yr and you may have already saved $100k+ so it's really 2 years or so...
I think this all depends on whether you have kids or not. If you have kids then tough but if not, then I think my analysis is closer to reality then spending $130k/yr after tax.
So I didn't get a chance to respond yet, but here goes:
ReplyDeleteEconomy -- Not as bad as everyone seems to make it out to be. But I'm not blindly describing it as "robust" or anything. I said the economy was "stabilizing and growing". It is a fact that the economy has stabilized and that growth is taking place. Positive GDP prints abound. Yes, if this were a "normal" recovery we should see much higher GDP and much more job growth. This is not a normal recovery. It is slow, choppy, painful still for many, but I think it is pretty obvious that it is a recovery in some form.
Many leading companies are reporting record profits right now. They are citing a slow, cautious, but ongoing recovery. Visibility remains generally poorer than what would be considered "normal". Unemployment is high and appears to be unlikely to come down quickly. Some type of additional shock could cause additional weakness or another recession -- but I don't think anyone can accurately predict the short term outcomes of either the economy or the stock market. Buffett can't do it, "Rosie" can't do it, the Fed can't do it. So from my perspective, the best thing to do is look at what companies are reporting in terms of earnings and sales growth and listen to what they say. They are not saying that things are falling, they are not saying the world is coming to an end. Many are reporting record profits with sales growth. M+A is heating up, dividends are being boosted, buybacks are coming back. Cyclical companies like Union Pacific Railroad and Intel just reported record profits. Just today, FedEx came out and boosted guidance as they cited improving conditions. UPS has said good things recently. So far this quarter, the S&P is poised to post yet another sequential increase in earnings.
Someone also cited the stock market being at the same price it was 10+ years ago and houses being at levels seen 6 years ago. To me, these are indications that valuations are much better now. Lower prices mean less risk as expected returns move inversely to the price you buy an asset at. Go look at any large cap stock. Earnings have generally doubled or more over the past ten years but prices are the same or lower. This reflects how OVERvalued they were back 10 years ago. Many now trade for low double digit multiples with dominant market positions and low double digit earnings growth. Yet, people are scared out of their minds and continue to pile into bonds at a record pace when yields are near record lows and they continue to sell out of stocks (see recent and all year long ICI fund flow data). Remember, you want to do the opposite of the crowd...
As for savings -- DWR and Steve have it right. You guys shouldn't expect a piece of real estate in such a sought after area as SM to fall into your lap without doing some hard work and making some sacrifices. I save an almost embarrassingly high percentage of income. And it is certainly true that as income rises, saving gets even easier if you have discipline...and then there is the uncomfortable fact that some buyers will be getting assistance from other sources (mom and dad). Without family assistance or equity from a previous piece of real estate you better redouble your savings efforts or else figure out if it is really worth the sacrifice to buy something here (and I'm not saying it is for everyone).
Actually to keep going with my hypothetical young buyer from the actual post...
ReplyDeleteLet's see how much that buyer could or should be saving in order to get into position to buy this house.
I said getting into this place could be done on an income of less than $200k. So in the few years leading up to the purchase, our young buyer (YB we'll call him or her). YB makes $200k/year and puts $15k away in 401k (I realize most don't do this but I'm trying to show it can be done). YB is well above the Roth IRA limits and won't get a deduction on a regular IRA contribution so we won't assume any IRA action. So we are down to $185k for YB. YB gets good benefits from work so pays very little in medical costs. They also have no kids and no credit card debt. They might have some student loan debt but it is fixed at a low rate and are likely to be paying it off in an accelerated fashion. Again, family might even help out...
YB pays $1,800 for a nice apartment or maybe pays $1,300 and has a roommate in a great 2 bedroom. Housing related expenses come to $2k/month. YB is not a profligate spender but they enjoy life, travel a bit, and eat high quality food. They spend $2k/month on all other expenses, bringing total spending to $4k. That gets YB to $48k of spending off of a yearly net (post 401k) of about $120k. That gives YB about $70k/year in savings.
So if they do that for two years they have $140k which would very comfortably get YB a 10%+ down payment and leave them cash for an emergency fund. They can then afford the house as I showed in the original post.
This takes patience and discipline but there are those rare birds out there. I am also ignoring the fact that someone who is young and making this kind of money likely has a decent chance of upward career (and salary) growth, which boosts the affordability considerably over the first few years post purchase.
AND I'm ignoring the fact that two of these YBs could get together and be a young married DINK family and then really afford something!
ReplyDeleteYes totally agreed...I was being conservative.
ReplyDeleteIf you are really DINKS making $300k/annually. You can probably save $100k annually if you really set your mind to it...e.g. spending about $5k/mth after tax. Rent 2 bdrm in West LA for $2k/mth...$3k for food, cars, travel still is not roughing it.
These days affordability is definitely an interesting equation.
The monthly mortgage payment on a max conforming loan of $729500 is $3642/mth of which $1k roughly is principal and $2600 is interest. On a $1m home, the property tax is about $1k before tax monthly.
So the total monthly payment is $4642/mth of which $1k is principal payment--so it's not really money out of your pocket (from a rent comparison standpoint) as it's going to principal.
So now you are paying $3642 monthly in pre-tax dollars. If you make $300k, you can probably deduct roughly 40% of that and you are paying $2200/month after tax.
I think what you can buy for $1m is much nicer than what you can rent for anywhere close to $2200/mth so the real question--as always--comes down to what you think the direction of the real estate market is and therefore the implications for the equity you are putting down.
I think those savings assumptions are optimistic. While the base amount seems reasonable for what I would consider day-to-day expenses, there are the non-recurring expenses that Steve and WarChest seem to have omitted -- long weekend trips to go skiing or to San Francisco, Vegas, Mexico, etc. $1000 - $2000 for a couple; annual or semi-annual trips to more exotic places, $3000 - $7000; upgrading/updating of furniture or wardrobe; birthday/wedding/baby presents; continuing education, cooking, musical instrument classes; unreimbursed medical expenses, professional courses, etc. These expenses add up over the year ($20K?), seriously cutting into annual savings. Also, when you bill 2500 (or more) hours a year, it is a grim life if you don't spend some money when you have a moment of time . . . .
ReplyDeleteBut more to the point, the hypothetical YB's you have proposed are the exception to the exception (e.g., of the class of 20 - 25 summer associates at O'Melveny or Latham, we're talking about the 2 or maybe 3 who drive an Accord and live in the small one-bedroom in West LA), and I question whether this relatively small group of people can be expected to support the entire low-end of the high-end Los Angeles real estate market (which is much bigger than just Santa Monica, lots of young yuppies want to live in Manhattan Beach, Hollywood Hills, etc.). Rather, YB sounds to me like all of the other justifications for why prices will continue to defy gravity like the hypothetical cash buyers who cashed out their 401k in favor of "hard" assets, the UCLA student with the rich Chinese parents, etc. -- I have no doubt these buyers exist, but can they support the entire market? Who knows, but while these people or stories existed in 2007, they didn't stop the decline then, and my money continues to be on the no . . . .
Gus,
ReplyDeleteWe are talking about couples that make approximately $300k combined income so the question is are there enough people who make $100k-$200k annually who are together as a household.
My feeling is that on the Westside there are plenty. Law associates are not the only people who can make this kind of money--in fact, it's probably the worst way to make this kind of money as the law associate is really just an apprentice providing leverage in the pyramid scheme for the partners who make the real money.
I think many mid-level corporate execs, good salespeople, entry level finance, young law associates, physicians, small business owners all fall into this category of people making $100k-$200k.
I think that as a couple with no kids it is easy to live a comfortable life spending $60k annually if you rent an apartment. If you want to spend more...let's say $80k or $100k it becomes a pretty nice life.
I know that you can rent a fairly nice 2 bedroom apartment for $2k/month in West LA. In fact, check the listings, you can actually rent a small house for less than $3k/month.
The long list of expenses you are pointing out are not realistic. I don't know who has time for all of your continuing education, cooking, exotic vactions, etc. let alone money. I hope you aren't being serious that people take exotic vacations that can cost $7k twice a year?
If you spend $3k/month after rent, you can live a life of going out to restaurants weekly, weekend trips now and then, and you can certainly afford a $200 wedding present now and then or a $100 birthday present. If you want to spend $6k/month after rent then you can certainly do a lot of what you are talking about.
It's about priorities. Many people who rent apartments and save down payments are more than happy to live with Ikea furniture and perhaps one or two pieces from a Crate & Barrel. I don't know anyone who rents who feels compelled to be constantly upgrading furniture--that seems crazy to me.
I obviously don't know who any of you are, and none of you know who I am, but Gus's description seems a lot more like the life I recognize me and my friends living than what everyone else is describing. This is not scientific, of course...
ReplyDeleteBut what would be scientific is average household savings rates. Right now, it's still only fluctuating around 5%. I can't find numbers broken down by income level, but there are hints in the literature that higher income actually LOWERS savings rates. Several of you are suggesting, instead, savings rates around 40% (sorry, but everyone else considers retirement savings part of savings... you can't just write this off). These sorts of figures are outrageous, and something that far out of line with known savings rates needs more than "this is what I think is possible after consulting nothing and no one."
Epsilon and Steve are right, Gus is playing with theoretical numbers that don't pan out in real life situations. You can theoretically live the way Gus is talking about, it's just that no one does, and no one that makes that kind of money would live with such deprivation. Not in the real world, and not when there are so many unaccounted for expenses--this year there was a $1000 gift check to a friend getting married, new snowboarding gear, a few weekend trips, an unreimbursed medical procedure, $2k for new tires and brakes on the car, etc. and I'm a pretty conservative person who does not have fancy new car payments or exotic expensive vacations. You'd have to be a pretty cheap, obnoxious person who packs his lunch to approach that savings level.
ReplyDeleteArti -- I think you have Gus and Steve backward; Steve is promoting numbers that don't pan out in real life. I think you and I are saying the same thing.
ReplyDeleteSteve -- That is not theory, I am speaking from experience. Every one of those expenses are something my wife and I paid for in the past year, with the exception of cooking classes (plenty of friends have though). And I am known among my friends as being on the conservative side with money (closer to cheap than spendthrift).
Well ok, if you guys all insist. I'm speaking from experience too, aren't we all? It's not like we're making this up. I think spending more than $100k in after tax money a year if you are making $300k annually is really living it up. It seems like living all for today. It's not like spending $100k annually is a tough life...think about what you are saying. Maybe the average American saves 5% a year or something but that's certainly nothing I ever aspired to.
ReplyDelete24 year old 3rd year analysts in investment banks can make $200k and they live it up--they go on exotic trips, drop hundreds if not thousands of dollars on bottle service at night clubs, buy expensive designer clothes & handbags, rent fancy apartments with healthclubs and patios for $5k/month, go out to expensive trendy restaurants every week, hire personal trainers, etc. But those are 24 year old kids. If you are a married couple seriously planning to buy a home and settle down how much do you need to spend to be happy?
So let's say you pay $2k for a 2bdrm apartment a month. Then what? So you lease two cars + gas & insurance total about $1k/mth. So now you are at $3k a month. You have cable, gas & electricity, cellphone bills maybe another $400/month. Food, including eating out about $1k/month. So now $4400/month.
Now you have $5500/month or $66k/yr of after tax money for beauty & healthcare, discretionary shopping, travel, gifts, etc. So what if you have a $1k gift to a friend, $2k for new tires & brakes, new snowboarding gear, a couple weekend trips...how much does all of that add up to? $10k? $20k?
As an aside, what kind of healthcare insurance do most professionals have? At least for people I know most of us aren't coming out of pocket for other than co-pays or if you want to go out of network, 20% up to a cap of a few k a year...even then you use pre-tax flex account money anyway for everything discretionary like glasses (which vision covers 1 pair a year anyway). Now if you're getting plastic surgery that's a different matter but I don't think any of us should be including that.
You guys must run in very different circles. So basically you guys are saying that if you make $300k a year you have to spend $130k or $10k after tax a month to have a life without deprivation?
Is that really what you guys are claiming? I don't know...I don't even know how to spend that kind of money if I rent an apartment, drive a Toyota Camry, and shop for groceries at Costco and eat out once a week or so.
i'm a steve (saver). but i sure know some gus's.
ReplyDeletei think that the hard thing for the gus's of the world is embodied in this line, which i always here from spenders out there...
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Also, when you bill 2500 (or more) hours a year, it is a grim life if you don't spend some money when you have a moment of time . . . .
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gus, i would say that the steves of the world don't think of it this way. the return that a true saver wants isn't scrimping, it's buying freedom and safety for tomorrow.
plus, we have a deep and abiding skepticism that many of the expenses that you describe are actually bringing purchasers much contentment. i'm not saying that they don't work for you, but they don't work for us.
i get more enjoyment from a $10 home-cooked meal than most $150 restaurant meals. i have never been on a $5K vacation outside of my honeymoon; i crash with friends. i have always bought my cars for cash, and drive them until they die. etc.
there are (quite?) a few of us ambitious professionals out here who are happy living as if we're academics. our metrics for saver-hood are different than yours.
"it's just that no one does"
ReplyDeleteArti, that's just like your comment that "no one is getting non-Fannie and Freddie mortgages"- I am proof that both of your statements are wrong.
Many of you might find it hard to save 10K per month because you succomb to peer pressure and can't be seen in a 10 year old car; but others of us are not so weak. And as Jonathan said, I am buying my freedom, one month at a time.
It's too much to say that no one does... certainly some people do. It's just that the vast majority doesn't, and when we're talking about housing costs, it's the vast majority that matters.
ReplyDeleteThere are a whole host of reasons why people don't save beyond a luxury lifestyle. Among the high-earners I know are those who choose to give a high percentage of their wealth to charity, those who are the first person in their family to have a good job, and so have upwards of $250k in student loan debt PLUS they support their family, those who save religiously---but would never put those savings into housing, because their primary motivation is to watch the number in their account grow higher---and just those who still live paycheck to paycheck because they want a new BMW every two years, take only international first class vacations, etc.
Again, all this is beside the point. We can all produce anecdotes, but the data says that very few people save at the rates some of you are suggesting. Congratulations that you do. It's your money, and if you think the best place for your hard-earned savings is the current housing market, good luck to you.
"when we're talking about housing costs, it's the vast majority that matters"
ReplyDelete35% of people will be renters forever, most people will only be able to afford 300K properties, so when we're talking about Santa Monica real estate, no you're absolutely wrong.
I wouldn't go as far as saying it's the vast majority that matters. It's the margin that matters. Most people are homeowners and will continue to homeowners. There will always be a certain segment of the population that also rents--especially students, young single adults, etc. It's on the margin that homes are listed for sale and buyers are interested or not. Home prices are set on the margin by supply and demand. Just as prices are set by supply and demand on the margin in every market--whether it is for securities, goods, etc.
ReplyDeleteIn a period when prices are down it is well known that there are fewer interested buyers but there are also fewer owners interested in selling. That isn't to say there aren't always people who feel they have to sell just as there are people who feel they have to buy. What we have seen is a spate of forced selling that really hit the higher end markets in late 2008 and early 2009. What we say is all of that excess inventory took prices down to 2004/2005 levels in order to absorb that inventory in the market.
I think a lot of the comments on this board completely underestimate the amount of wealth & income out there. Primarily it seems people are basing their understanding based on their own anecdotal evidence.
The issue with the direction of the Santa Monica housing market is not whether or not there is enough wealth and income to support housing prices--there absolutely are--if anyone does not believe it they are being naive in my opinion.
The question is what the supply of homes for sale will be and whether there will be more forced selling throug strategic defaults or otherwise. And whether demand will continue to be there as there was in the first half (once the near term tax bubble dip normalizes) or will fall off due wealth destruction from an economic crash, etc.
Right, so on the one hand we have data showing that incomes stayed flat while home prices in this area shot up 200% with nothing behind it but herd mentality and easy credit, and on the other hand anecdotal evidence that there is a lot of welthy people.
ReplyDeleteSomehow I think I will make my calculations on the former piece of data, and bet that with rents, incomes and populations being basically flat (less than 4%/yoy) over the period of time when prices magically went up, the price graph will eventually correct down until fundamentals support the prices again. SM will be merely very expensive compared to other areas, and not magically tripe what it was in 1999.
We have a good 15-20% down to go before that happens.
Arti,
ReplyDeleteI think everyone on this board thinks home prices are more likely to go down than up. That's why we are on this board. Most people who own don't really read these boards other than realtors perhaps...
I do disagree with the likelihood though of how much more homes can fall. I don't think 15-20% is out of the question but I don't think it's the most likely case...it really depends on your view of the economy which admittedly is a very difficult thing to predict these days.
I do think that picking timeframes is dangerous. I think part of what happened over the last 20-30 years is an increase in wealth, an increase in wealth inequality, and a shifting around of asset allocation. So I think being overly tied to just the average income to the average house is a dangerous way to analyze the housing market if you are serious about being accurate and not just trying to make a point.
I think you have to look at all asset classes together as I think everyone now realizes that even sitting in "cash" is not really "cash" given the complexities with commerical paper, FDIC bank insurance, quantitative easing, etc. Wealth has to be stored in one form or another, whether it is cash, securities, real estate, commodities, art, etc and the higher end you go the more allocation of wealth drives relative values of these assets.
Can you explain why you think SM prices are triple 1999? Maybe we are looking at different areas so I'm not saying you are wrong--it's just not what I'm seeing. I think prices are 2x-3x the bottom in the early 90s and about 2x the last peak about 20 years ago.
When I socialize with world-beaters, most live in the Palisades or NoMontana. 30 years ago I believe that these same people wanted to be in BH, Bel Air, or maybe Brentwood.
ReplyDeleteMy knowledge of world-beater behavior is the 1970s and 1980s is based on a pretty small N. Thoughts?
If this is on point, maybe this drives some of the increase that Arti is referencing?
DWR---totally out of context. This whole discussion is about the "vast majority" of high income professionals interested in starter homes in top locations. People that can only afford 300k homes are irrelevant to the discussion. The point is, even high earners don't save at the rates needed to amass $300,000 down payments in a reasonable time frame.
ReplyDeleteNo one is denying that there's a ton of wealth out there. All the bears are saying is that there was a ton of wealth out there in 2000 as well, but over a period when most assets showed little to no growth, or rose and came right back down, high-end LA housing grew exponentially, without yet surrendering many of those gains. Maybe you think the value of high-end LA housing has just permanently shifted---well, again, it's your money, and if you want to make that bet, good luck to you.
Epsilon,
ReplyDeleteI don't really understand your point. I think it should be clear that anyone making $300k a year can easily afford to buy a $1m home. Saying that they cannot is just getting to be ridiculous. Now they can certainly choose to live it up and spend $10k month after tax and not save much money. I think you have established that point.
Why you can't admit that $10k a month in after tax expenses is a choice and that spending say $8k a month is not deprivation is just totally not credible.
Spending $8k a month and saving $60k a year seems like a good balance.
Now I agree that spending $5k a month and saving $100k a year may not be the norm. But spending $5k a month after tax is not hardship by any stretch of the imagination.
If someone is saving $50k-100k annually coming up with $200k for a downpayment or $275k for a downpayment to get a conforming loan is just not a big stretch.
We can all discuss the direction of housing prices and we all realize it is difficult to predict and many positions are valid as there is no certain path.
But saying that a $300k income cannot easily afford a $1m home just doesn't compute for me at least.
I also just disagree that the level of wealth has not changed since 2000. Some people did make a ton of money in commercial & residential real estate. Some people made a ton of money on Wall Street. Some executives made a ton of money in stock options. Some people made a ton of money in emerging markets. That's what happens in bubbles...a few people make out big time at the expense of the general masses.
ReplyDeleteIsn't it obvious that wealth inequality expanded?
I don't understand your point that assets rose and came back down? Somebody posted that on another board that the stock market hasn't gone anywhere therefore no wealth was created?
It's called wealth transfer.
When some private equity firm buys a company and takes it public and sells out for a profit some mutual fund investor in middle America gets left holding the bag somewhere. Nevertheless, a number of people get rich in the meantime.
Also, what matters is the total value of assets and and the total value of all assets has expanded significantly since 2000...geez back then a number of the asset classes & securities to store wealth didn't even exist back then.
The stock market is only a measure of the marginal demand for equity securities. All you are saying when you say the stock market is at the same level is that the marginal demand for stocks and marginal supply of stocks is less attractive than some other asset classes. To say that is how you measure wealth creation seems very naive and simplistic.
Epsilon,
ReplyDeleteLook at the size of the fixed income markets today versus 2000? The syndicated bank loan market, the credit derivatives market, the structured finance markets all hardly really existed in any recognizable shape or form as they do today.
Do you think US investors had much money in BRIC equities back then?
How much exposure to real estate (domestic & international) did US investors have back then?
Lots of wealth was created since 2000...it doesn't seem to make any sense to me to debate that. Now certainly wealth generally fell from 2008-2009 and some of it has recovered from 2009-2010. Could it fall again? It could--that's a tough question. But to say that wealth is the same as it was in 2000...wow, that's wrong.
What is debatable is whether that wealth wants to own real estate in Santa Monica, what will happen to that wealth if the economy and the US implode, and therefore what that means for housing prices here.
Epsilon,
ReplyDeleteIt's not out of context, because you always refer to:
"but the data says that very few people save at the rates some of you are suggesting."
The only data you could possibly have is for EVERYONE in the whole country, and you've admitted as such. So you are the one pointing to data that doesn't translate to teh relevant segment, i.e. people wanting to buy SM real estate.
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ReplyDeleteSteve said,
ReplyDelete"I think it should be clear that anyone making $300k a year can easily afford to buy a $1m home."
Yes, but when those $300k earners look at what $1 million can buy them, all they see is absolute garbage in Santa Monica, for $1 mil it's tired, old tear-downs close to the SM airport or $1.4 mil for tired, old tear-downs north of Wilshire--that just 10 years ago were worth $450,000.
At the risk of sounding unscientific, I call BS. This junk is coming down.
"$1.4 mil for tired, old tear-downs north of Wilshire--that just 10 years ago were worth $450,000."
ReplyDeleteShow me one house North of Wilshire that sold for 450K in 2000 that sold for 1.4 in 2010.
I wish I had data showing specific savings rates for people earning over $200,000 a year. Alas, all I can find is general data, and some literature suggesting that savings rates decline at higher income levels.
ReplyDeleteThe point is, none of you have even TRIED to find data. You're just suggesting that 30-40% savings rates seems eminently reasonable. I haven't once said that it's impossible---just that it's not the norm. All any of you have demonstrated is the theoretical possibility of saving 30-40%, which no one here disputes. But unless you can show that most people earning $300k DO save at those levels, then you haven't shown how high-end, entry-level housing can be sustained at those price levels.
I'd like to take a stab at some savings estimates based on the numbers here which say that the net savings rate is 4.0% in May 2010. A definition of how this is calculated is here.
ReplyDeleteIn my search, I found this post which is written rather blithely but goes where I was going to go, and it's been published, must be full of verified facts.
Here would be my rough calc. Seems like the top 10% of earners make half the income in the country. Figure that the bottom 90% has a slight negative savings rate (say 3%) due to the presence of oldsters, folks who lost their job, etc. So on average, to get to our 4% the rich folks have to average 12% or so. This includes a lot of uber-rich who presumably screw the stats (i.e., it's not possible to spend any reasonable fraction of the $1B a hedge fund dude makes).
But still, it would seem reasonable to presume that the mean of savings for $300K earners is centered around 8-10%. This is a one tailed distribution; I am too tired to look at the tables, but it would be clear that a significant fraction (I'd bet 1 in 6) of $300K households would be over 20% in savings.
If I'm on point, both Steven and Epsilon are right. There aren't a whole lot of savers at 20%+ savings rate, but they're not rare birds either. If there is a significant life-cycle component to the savings rate (i.e., people save more as they're preparing to buy / upgrade a house), it could clearly drive it up somewhat, but it would seem hard to imagine that it would ever be more than a quarter of folks.
That said, my workup might be profoundly flawed because in most parts of the US $300K makes you rich. The COL here is higher. Before saying that, I note that if you go to the more awful parts of this country (say, St. Louis) you'll find that the "good" restaurants charge $35 an entree just like here. How the income rate supports it, I have no idea. But if I were making $300K in MO I suspect that I would have many of the same outlets to spend it on that are here.