Watch This Bargain Fly Off The Market *Update 2*

I last featured 927 25th in late February.

Listing History: 2/5/12 - $1,295,000

SOLD: 3/23/12 - $1,420,000

Here's what I said when I first featured this property:

Any way you slice it, the current asking price of $1.3mm would represent a rollback well into 2003. That is much deeper than almost any rollback I have seen in this area. And this property is in a prime location on a nice big lot, just begging for someone to develop it or come do a major remodel. Remember, the actual house here is basically worthless, its the land that matters...I will be very surprised if this sells for asking or below. I think the sellers are being smart and listing at a very attractive price and I'm sure they will have a number of bidders who will have to pay well above list price to get this property. Let the multiple offers fly!

About what I expected. Although I wonder if a spec will go up...There are already two zombies on that side of the 900 block. Here's hoping a real person was the buyer.

What's Going On? Watch San Diego For Clues

There is a great blog which has been covering San Diego real estate for a really long time. It's called Piggington and is run by Rich Toscano. Rich nailed the bubble and I recommend people check out his "Bubble Primer" presentations. He collects a ton of data and then puts it all together into data driven presentations where he looks at many different housing related metrics (inventory, sales rates, price/income, price/rent, etc). You can see his old presentations where he nailed the coming decline. Then you can see the more recent presentation where he is more positive and shows why housing is bottoming.

Rich is also one of the numerous housing bloggers who has recently purchased a house for himself.

But what I really like about the blog is the forum that is used by readers to discuss various topics of interest. San Diego was a leading market on the way down (it rolled over early along with other hard hit areas) and thus I'm especially interested to see what is going on there as the market stabilizes and recovers. So what are readers there saying nowadays?

8 years later it happened: we bought a home - Now, in late 2011, with employment feeling a bit more solid, with the available economic indicators pointing North, with the record low interest rates, and the fact that in our price range, the mortgage payment would be similar to our current rental rate, we got serious about looking for a home. One thing became apparent immediately after we started looking: it may be a "buyer's market" officially, but competition is just as heavy as it was in 2006. Many of the property showings that we went to, had offers being presented basically on the spot. Many of our offers became "back up offers" on short sales because we were too late to in at the front of the line. The properties that were sitting for relatively longer periods of time had definite issues with them - illegal additions, unpermitted work, etc. Also, the pickings were slim. Inventory would dry up every other week (no new listings in our area of interest).

We finally got an offer accepted on a short-sale which had its previous accepted offer fall through from another buyer.

Weekly Inventory Report - More of the same. Inventory keeps dropping at a time of year it should be increasing. Its worse than the numbers show also. I know that I have full price all cash offers sitting on properties (equity sale not distressed) that are stting in active and should be pending. I have offers on short sales still sitting in active also. Not much chance for downward pressure on prices with these conditions.

Many New Pigglords- Why? - It's inflation-protected (rents will go up with inflation), cash-flowing, relatively safe, and, as gravy, has the potential for appreciation, especially since we're buying near (we hope, we think) the low point in this real estate cycle.

So there you have it. Many readers are buying (or have already bought in the last year or two), inventory is low, and savvy market watchers who were previously bearish are now fired up about buying investment properties. Remember, these folks don't really represent what I would call a consensus view. Many are long term bubble watchers who avoided buying near the peak. They were as bearish as could be and are now fighting the conventional wisdom once again. This is the right way to operate in my view. Lean against the crowd and understand where you are in the cycle.

So Stubborn...Enjoying Those Holding Costs? *Update 1*

I last featured 2619 Washington back in September 2011. This house has been on and off the market a handful of times. It is a nice house and I don't think it would have any trouble selling if the sellers would just list it for a little lower price.

The last listing in July 2011 started out at $1,895,000 but then they reduced the price down to $1,829,000 before the listing expired.

Now, they are back again.

Current Listing: 3/15/12 - $1,795,000

I think they are still too high as this is not much of a price cut. The sellers have demonstrated that they are very stubborn in the past and with this small decrease in asking price they seem to be signaling to the market that they are still likely to be stubborn and inflexible. However, I would say that they no doubt have a better shot of selling this place now than they have in the past. It is spring selling season and there still isn't a ton of inventory. Interest rates are still super low and the stock market is at new, multi-year highs. And here we've got a lower asking price. So we'll see. They should just list it a little lower or show more room once they start getting bids below the current ask.

WarchestSM Buys a House

I bought a house. This shouldn't come as much of a surprise to regular readers. I have been much more upbeat on housing (and the economy) for some time now.

I started this blog back in August 2007 because I was tired of hearing so many people say "it's different here, prices can't go down in Santa Monica/the west side". Back then it was hard to find a lot of distress to feature on the blog. I had to start by looking at crappy one bedroom condos in non-prime locations. But not too long after the blog got started it became more apparent that things were really going to unravel. I think I did a good job of recognizing the inevitability of price declines, even in the most desirable areas of Santa Monica.

However, I think I was wrong alongside just about everyone else in thinking that prices would dip more than the 20-25% that they did at the bottom. I don't recall forecasting declines of 50% but I do remember thinking declines of about 1/3 seemed likely.

I did however do a great job of recognizing the extreme cheapness of many asset classes in late October 2008 when I said debt (high yield, investment grade, convertibles, bank debt, etc) and many equities would be better investments than Santa Monica real estate at that point:
If you are an investor right now looking to put capital to work, I would suggest that there are a lot of more attractive opportunities out in the world than still overpriced SM real estate. Bank debt, high yield bonds, and investment grade bonds are all trading at record wide spreads. Convertible bonds are trading at record cheap to theoretical levels. And yes, even stocks (at least some) appear to be "cheap" as you can find a plethora of names trading through tangible book value and near cash levels that have been absolutely ravaged by forced selling, margin calls, record hedge fund redemptions, record mutual fund redemptions, etc. - October 2008

I think I was mostly wrong in 2009 when I kept thinking that any temporary stability in the housing market would be short lived. Prices basically bottomed in Q1 or Q2 of 2009 but I didn't turn more positive until late that year. Looking back, I did start highlighting some "better values" in mid and late 2009 but I was wrong to be passive and think it was just a temporary stabilization. In late 2009 I also mentioned that activity on well located 2005 rollback properties was brisk and that there was a lot of demand out there. Finally, on January 3rd, 2010 I said the following:
We are now entering the "2010-2012" time period where I have been thinking that buying property is going to make sense in Santa Monica. The trick of course is to do your homework and not overpay like the people currently buying 2006 priced merchandise. I think prices will generally stay flat at best over the next few years but most likely decline somewhat...so there is no rush to buy something that isn't priced attractively. - January 2010

So ultimately I think I got most of the big picture stuff right but I also didn't turn positive enough early enough. But here we are today, almost 25% of the way through year 3 of my "2010-2012" window for buying. I still don't think there should be some kind of crazy urgency to buy, but I feel more strongly than ever that the "wait for prices to come down" game is absolutely over. I derive this confidence from the fact that many properties are at or near rental parity, the economy is growing and improving, and supply of real estate is down dramatically.

But what really matters is your own situation. My job is stable and my family and friends are here on the west side. I bought a house which is pretty conservatively at rental parity although in reality I think it is even cheaper than renting. Throughout the last year or so of serious searching, I found out that high quality, well located properties will generate a ton of interest if they are priced right. It doesn't matter if its raining and the listing pops up on a holiday weekend. There is stiff competition for the good stuff and I see no reason why that will change. So I think you need to emotionally prepare yourself to face competition along with a limited amount of inventory. I wish I could have just woken up and gone to a bunch of high quality open houses and picked something...but the reality is you will have to wait and wait until a fresh listing hits the MLS. Of course, all the other families are waiting, stacking more cash, and doing the same thing. Nothing really prepares you for this dynamic. I bid on several houses. I was "too low" in one less competitive situation where the seller was asking way too much. In another situation I was one of a handful of buyers trying to pay full offer price (we all tried to lift the offer at once)...multiple rounds of bidding ensued and I was quickly blown out of the water. Then, finally, the right opportunity presented itself and everything worked out.

I'm not ending the blog and I'm not (yet) making any major changes. I think I may take things in a different direction eventually but for now it will be business as usual. I just got an e-mail from Redfin which mentioned all the bubble bloggers who have bought properties recently. I actually did a post not long ago when Rich at Piggington (San Diego blog) announced his own purchase. Well, I guess you can add me to the list now.

It's easy to speculate endlessly about things on the internet...but after running the numbers myself and being involved in the market for some time, I've put my money where my mouth is. I don't know if prices will rise much at all over the intermediate term but I think it is pretty likely that we will look back and see that buying a quality property in 2012 wasn't a bad thing at all.

The Principal Of Owning - (rent vs own cost analysis)

Here's how I like to look at the rent vs own relationship.

Let's assume a purchase price of $650,000 and no down payment. Assuming no down payment means that you are essentially factoring in an opportunity cost on your actual down payment equal to the interest rate on your loan (which is actually conservative because all that cash you have in the bank is making way less than 4%).

PITI stands for Principal, Interest, Taxes, Insurance

Principal = $940

Interest = $2,170 (4% mortgage rate)

Taxes = $650

Insurance = $50

Total = $3,810

The problem with comparing this number to rents is that when you rent you don't pay and principal. You walk away with nothing when you are done. So I have always said that you need to take principal out of the equation when doing the comparison (thus, you are essentially modeling for an interest only mortgage). This brings the monthly total to $2,870.

But Warchest, what about all those sweet tax benefits?! I actually get a little less excited than most on this subject. Higher earners are going to be hit with AMT, you pay less interest over time as your loan amortizes, and you will probably put down a decent amount of money on the property so its not like you will be paying interest on the full purchase price. To be a little more conservative, I would model in a rough tax benefit of 15% of the interest and property tax amount. That brings the total monthly amount down to $2,450.

You then need to add in some amount for maintenance and if you are in a condo you need to add in HOA fees. I think a fairly conservative maintenance number brings the net monthly total to $3,000. With condos, your maintenance will be a lot lower but will be offset with HOA fees. Either way, I think you are in the $3,000/month net cost ballpark using conservative assumptions across the board. This is the number to use when comparing the cost of owning to renting.

I'm renting in 90403 and have a handful of friends doing the same. I know people renting nice one bedrooms in the $2,000/month range. I know someone renting a less nice 2 bedroom place for a little north of $2,000/month and I know someone renting a nicer (but not super high end) 2 bedroom for $3,000/month. The MLS shows crappy 2 bedroom condos in the $500k range but most decent places seem to be right around $650k. Higher end stuff in the $700s and $800s for townhouses built a little more recently or remodeled. All in, I still see rents pretty close to net ownership costs and that historically has meant that it is a good time to buy.

*Note that you can even have a slightly lower ownership cost if you are willing to assign a lower opportunity cost to your down payment. This compounds if you are putting down a bigger percentage of the purchase price. You may also think my 15% tax benefit is too low. Also, you can get mortgages a little under 4% right now. So I think my way of looking at things here is on the more conservative side.

Clean This Up Already! *Update 4*

I've been featuring 310 22nd for a while now. I last featured it in January of this year.

To refresh, this is a foreclosure which has been sitting around for a long time. It is 5 bed/ 6 bath 6,505 sq ft house.

Previous Purchase: 8/19/03 - $2,650,000

SOLD: 3/5/12 - $2,717,000

At first glance this might look like a lot of house for a small amount of money. You may also get excited by a late 2003/early 2004 rollback. But I think there may be a little more to this story. I remember a comment a while ago about a mold issue or something. I don't think we have all the facts here, but I'm glad to see this property get cleaned up. It sat on JP Morgan's balance sheet for too long...

90403 Entry Level Solid Demand = Stable Prices *Update 1*

I recently featured 2919 Washington back in early February. It is a tear down or near tear down quality house on a 6,000 sq ft lot. You can go back to my original post where I show some comps which help lay out just how stable prices are...hell, they might even be rising a bit.

I suggested that this would sell near list price since it went into escrow so quickly.

It was listed for $1.325mm and ended up selling for full asking price.

It should now be beyond obvious to just about anyone willing to objectively look at facts that high quality properties are holding pretty firm. It should also be pretty clear that the market has pretty much bottomed. This is a great thing because now you can actually go back to looking at real estate without worrying about losing a bunch of money. Don't worry, I'm not a real estate agent and I don't work in a real estate related field. I'm just an observer who is calling it like I see it.

I don't see material price increases coming soon but in illiquid markets you only get price increases when offers get lifted. This listing is a perfect example of that. The sellers put the property up at what I originally said looked to be a slightly aggressive level, but given the lack of inventory and the high quality location, a buyer came along and lifted the offer. If we see a bunch more of this then we could think about calling this a somewhat rising market. I don't think we are there yet but you can go ahead and ignore this firmness at your own peril.

Loss Aversion

Address: 2436 Washington - 90403

Details: 4 bed/3 bath 2,408 sq ft house on a 5,280 sq ft lot

Description: Contemporary Casual Coastal Living At Its Finest In Santa Monica On A Picturesque Tree-Lined Street Just Off Montana Offers The Perfect Family Home and Neighborhood w a Bright Open Layout Adjoining the Gourmet Kitchen, Formal Dining Room, Breakfast Nook and Family Den All Together w Designer Touches and Natural Light Flooding In Through the Gorgeous Multi-Pane Windows From The Home's North-West Corner Exposure. Venture Upstairs To Discover The Sumptuous Master Suite w Walk-In Closet and Private Master Bath Bathed In Sunlight. This Home Boasts the Franklin Elementary School District and is Just Two Blocks from Douglas Park and A Short Walk To The Brentwood Country Mart!

Previous Purchase: 9/10/04 - $1,890,000

Listing History: 2/27/12 - $1,995,000

If they get their asking price they will basically break even after commission. One of my sources in this area doesn't think they will. Despite the fact that the house is nice, the rooms are small and it's a lot of house put onto a smaller lot. The house itself is pretty close to the sidewalk (and street) as a result. But I know how much some of you love Ficus trees and there are a whole bunch of them on Chelsea. Just think how lovely it will be when you are getting no afternoon or early evening light thanks to the thick Ficus trees which line the west side of this house.

I don't however think this asking price is crazy high. The location isn't bad and if they cut the price (or if you bid them down), you will be getting a late 2004 rollback. I feel like there should be good support a bit below their September 2004 purchase price. So this is a game of the sellers hoping someone pays up a bit so they can avoid walking away with much of an after transaction cost loss. I don't have a strong opinion on this...But then I heard they had a BBQ at the open house this past weekend. No need to have all that hoopla if your property is properly priced. We'll see what happens.

Full Circle on Yale

Address: 1018 Yale - 90403

Details: new ugly spec house on a 7,900 sq ft lot

Description: New Construction! 5 BD/7BA. Enter thru formal foyer leading to formal living room with skylight and fabulous stone fireplace. Hardwood floors & moldings throughout. Formal dining room. Gourmet kitchen with Viking appliances, granite counters and breakfast area. Family room opens to both an interior courtyard/patio & an outdoor pit, on a stone patio. Guest quarters on main floor. 4 bedroom suites upstairs with custom closets and a large bonus area great for a library, den or office with a powder room. Breathtaking master with a loft, stone fireplace, his/hers walk-in closets, stunning bathroom and balcony. Changing room and bath in back.

Previous Purchase: 8/4/08 - $1,337,500

Listing History: 10/26/11 - $3,295,000

SOLD: 3/1/12 - $3,185,000

This is a full circle situation as I featured the tear-down that existed at this location on the blog way back as the bubble was bursting. Someone bought it in December 2007 for $1,375,000 and they subsequently listed it in mid-2008 for a crazy high price "with plans". They had to cut and cut but finally found another willing spec house player to buy it from them in August 2008 for a little below what they had paid. The August 2008 buyers went ahead and built an ugly monstrosity which just sold for nearly $3.2mm. I don't love this location because this street is busier and I HATE those damn trees that line the street (and sadly so many other streets in Santa Monica). Very poor foresight by the committee that approved planting those all over the city. They destroy all the sidewalks, provide way too much shade (i.e. dark gloomy streets) and drop those stupid berries all over the place. They should all be ripped up...but good luck with that. A few fringe players with loud mouths are so concerned with "saving the trees". OK, rant off.

The Auto Bull Market Continues

The graphs above are of course from my favorite economics blog Calculated Risk.

Today marked the monthly release of new car sales and the numbers surprised to the upside by a good amount. Analysts were forecasting a SAAR (seasonally adjusted annual rate) of 14.0 million but the number came in at 15.1 million for February. You can see from these graphs that we have climbed a great deal from the lows and that recent readings seem to suggest an increase in sales rate.

I've been thinking that I have seen more and more new cars on the road over the past few months. I've also noticed a corresponding uptick in older cars with for sale signs on them. I have a spreadsheet which looks at gas price forecasts and the annual cost of owning an older, less fuel efficient car vs buying a newer, more efficient car. I myself was recently the owner of a crummy old car and given where gas prices are, combined with upcoming maintenance, it was a no brainer to buy a new car.

I think the bottom line is that people are starting to spend more money as they feel better about their jobs and their savings/investments (stock market at multi-year highs). People delayed consumption for a few years and are now seeing that especially with higher gas prices, the case for a new, more fuel efficient car is compelling.