Details: 2 bed/1.5 bath 1,267 sq ft house, 5,060 sq ft lot, "extensively remodeled"
Previous Purchase: 1/17/03 - $742,000
Listing History: 6/8/10 - $1,329,000
SOLD: 8/20/10 - $1,260,000
When I featured it I said "I think if you were to cut 10% off of this and come to about $1.2mm you would generate a lot of interest".
No doubt some more interest would have been there as they didn't need to reduce the price down that far to find the bid. Also, for those who might just look at the prices here and think this is a huge jump from 2003, there is a remodel adjustment that you need to make. While I do not believe this purchase price to be very attractive and I think prices will go down in the future, I still don't see an imminent collapse on the horizon. Remember our exercises in affordability.
Considering that houses/condos seem to keep selling in the 2004/2005 range in Santa Monica, is there really reason to believe that another drop is coming here?
ReplyDeleteThe reasons I have seen posed for a further drop:
1. Comparisons to past housing boom/bust cycles
2. General economic instability
3. Rent/Own cost ratios
4. An increase in interest rates
Numbers 1 and 2 seem speculative, especially when taking general ideas and applying them to a specific situation such as Santa Monica. Number 3 is of course a factor, but in the properties I've seen sold, it doesn't look like this ratio is totally out of whack in the majority of cases. Number 4 is important, but I don't imagine any significant rate hikes in the near future.
Is there something I'm missing? Prices seem pretty stable over the past year or even two, is there really evidence that this stability isn't going to hold?
1. Not at all speculative. Over the long term, housing prices track inflation. For as long as prices have been recorded, although prices have swung well above this level, they've always corrected back down. In fact, in past busts, they've always fallen below this level. In the IE, they already have this time; in most of the rest of LA, they're still not that close. No one has ever made a convincing argument to me why Santa Monica is different.
ReplyDeletehttp://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
2. Also not at all speculative. The stimulus is expiring, and 2nd quarter growth was only 1.3%, well below the 2.5% needed just to maintain current employment levels. The economy is well below capacity, the trade deficit is growing again, and no one has suggested a plausible source of growth in the short- or medium- term in LA or the US more generally.
3. Not just rent/own, but price/income and price/rent all seem relevant.
The hard part for most people, I think, in seeing the further drop is that because mortgage rates are at the lowest levels in history, monthly payments have started to seem reasonable. Yet price/income is still way off. I posted Santa Monica income in the previous chart; even with the big spike from 2005-2007, however, you still end up in a place where someone making the median income can't afford a studio apartment. In fact, a few weeks back, people on here were straining to justify the price of a starter home by pointing out that someone making 3-4 times the median income could afford the place with a 40% savings rate. The median Santa Monica income isn't close to being able to afford the median Santa Monica home, and the median LA County income isn't close to being able to afford the median LA County home. The historical average for price/rent is 16.0 in LA. Price/income is around 4. Run the numbers---we're no where near that, despite declining wages, rising unemployment, and no obvious source of growth.
http://money.cnn.com/magazines/fortune/price_rent_ratios/
4. I agree that there are no significant rate hikes in the near future. No source of growth or a decline in unemployment either, though, which is why a continual grind down seems most likely. And I've admitted, if you can stay in a place for the full 30 (or 15) years, especially if you can get a low-down payment mortgage, buying at an inflated price isn't a big deal, because the monthly payment is the main issue. If you're like the average person, and will move in 5-7 years, I'd be very wary. Also, google "Option ARM mortgage recast" some time and look through the data. Even without interest rates rising, a lot of mortgages are going to reset to much higher payments over the next 2 years. This will be a shock even if mortgage rates stay low.
Those who don't study history are doomed to repeat it. Here's a look at the (much smaller) 1990s bubble. Most interesting are the stories 2-3 years into the bubble, when, much like now, a lot of people started insisting it was over.
http://rntl.net/history_of_a_housing_bubble.htm
http://www.calculatedriskblog.com/2007/12/los-angeles-real-house-prices.html
Make your own decisions. As a corporate lawyer and renter, I don't have a dog in this fight. I think many of you are foolish to think the worst is over, but that's your right.
"The median Santa Monica income isn't close to being able to afford the median Santa Monica home, and the median LA County income isn't close to being able to afford the median LA County home."
ReplyDeleteThis seems like the best/hardest piece of direct evidence. And by that I mean, with most of the other claims (in either direction) there's a case to be made on either side, and even then the relationship is not always DIRECT (though I suppose GDP is fairly directly correlated).
I wonder if there was a corresponding ebb and flow with median incomes related to median home prices in previous boom/bust cycles -- maybe this has been studied already.
With respect to Santa Monica...there are more renters here than owners and much of the rental stock is under rent control. This might skew the median income stats because you have a fairly significant percentage of the population that isn't subject to normal market forces...maybe I'm overstating rent control's power.
ReplyDeleteThat's a good point, rent control is a curveball that would be tough to account for. Although, it's important to consider that while rent control brings down the avg/median income, it probably also brings down housing prices, at least to some degree.
ReplyDelete