Dr. Housing Bubble Blog

July 29th, 2010

Real City of Genius – The Westside of Los Angeles. Three short sales in Palms, Santa Monica, and Culver City. $100k to $300k in discounts in prime Southern California locations. Short sales still too expensive even with large discounts

I think it is time that we revisit the West Side of Los Angeles. This area receives probably the most coverage in real estate circles even though 529,000 of the 10 million people in Los Angeles County live there. Glamour attracts attention. But within the Westside, there are many overpriced homes and areas. It is hard to convince people that their 700 square foot box isn’t worth $700,000 but that is due to years of HGTV and other housing love programming that has slanted perspectives on the actual value of real estate. You can’t blame the sellers, because who wouldn’t want to squeeze every penny out of their sale? You can blame the banks and government backed loans since we are all now shouldering the horrible bets made from years ago. If the banks were lending their own money, then who could begrudge them? Yet banks are the middlemen in lending out FHA insured loans, Fannie Mae, and Freddie Mac paper that we now carry through a taxpayer bailout.

Let us bring our attention to the Westside of Los Angeles. Today we salute Palms, Santa Monica, and Culver City with our Real City of Genius Award:

Source: Wikipedia

Even within this niche area, there is a wide variance of properties. The halo effect permeates to other cities from the big movers. Maybe breathing in the Beverly Hills air gets to other surrounding cities at least when it comes to valuing real estate. These mid-tier markets within a prime area are the next, I believe, place that will face price adjustments. Even with all evidence pointing to this with massive amounts of shadow inventory building because people can’t afford to pay their mortgage, there is still a lot of doubt as to the extent of the price correction. There is definitely a trend of more short sales making it to market. Everyone by now has an understanding of a short sale (the lender agrees to sell a home for less than the mortgage balance) and the impact it has on the market. Yet short sales are now part of the SoCal real estate market especially in prime locations.

I was meeting with a colleague, good guy but definitely a perma-bull on housing so you can imagine the conversation, but he is actually looking to jump back into Westside real estate. His impression is that since prices haven’t fallen drastically in this disastrous climate, then nothing will jolt values later on. However, the collapse of prices at the higher end is merely in the first stages. The process is sequential and fluid; just because it hasn’t corrected doesn’t mean it won’t.

Let us look at our first short sale example.

Short Sale #1 – Palms, Mar Vista

12844 GREENE AVE, Palms – Mar Vista, CA 90066

Listing Details

Listing price: $495,000

Last sold (6/1/2007): $655,000

Current difference: -$160,000

Beds: 2

Baths: 1

Square feet: 972

Built: 1952

On market for: 90 days

The above property is located in the Palms, Mar Vista area of Los Angeles. A nice area and certainly a good place for a starter home for a young professional family. But prices are very much disconnected from fundamentals. Look at the above home. It is listed at 972 square feet and supposedly has a sale pending. However, we are still talking about close to $500,000 for 972 square feet. Now this is a big discount from the $655,000 peak sales price back in 2007. So we are definitely seeing more movement with banks being more aggressive on certain homes in terms of taking lower offers. But again, these are typically the lower priced homes in each area. There are many higher priced homes with missed payments that are simply sitting in the shadow inventory.

Short Sale #2 – Santa Monica

2712 6TH ST, Santa Monica, CA 90405

Listing Details

Listing price: $850,000

Last sold (12/6/2006): $1,155,000

Current difference: -$305,000

Beds: 3

Baths: 2

Square feet: 1,064

Built: 1914

On market for: 27 days

It’s easy to be a millionaire when you don’t count your liabilities. Just because you “own” a million dollar home doesn’t make you a millionaire. The above Santa Monica home is listed for sale at $850,000. It is 1,064 feet with 3 bedrooms and 2 baths. At one point, it did sell for $1,155,000 in 2006. Can prices fall in prime locations? Absolutely. And to most, a $300,000 haircut in 4 years is a significant deal. Still think the Westside is immune to the correction?

Short Sale #3– Culver City

4178 CENTER STREET, Culver City, CA 90232

Listing Details

Listing price: $600,000

Last sold (12/2/2005): $850,000

Current difference: -$250,000

Beds: 3

Baths: 2

Square feet: 1,918

Built: 1950

I’ve covered Culver City many times before and the above is a typical short sale in the area. This home was bought back in 2005, half a decade ago, for $850,000 and is now listed for sale at $600,000. It is listed at 1,918 square feet with 3 bedrooms and 2 baths. We still have people willing to pay at these levels but only with the right lending. For this home, let us run the numbers assuming a 10% down payment:

Sale price: $600,000

Down payment: $60,000

Mortgage PITI: $3,606

Is this a good deal? At the lower end you will need a household income of $175,000 to $200,000 a year to purchase this place. The Westside is already showing major cracks in housing values. $100k to $300k discounts are large for most people, even those in the Westside.

On a side note, I’ve added a new forum where people can discuss the specifics of certain areas so make sure to check it out.

Today we salute the Westside of Los Angeles with our Real City of Genius Award.

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Posted in: California Love, banking, california-equity-giants, debt, housing-2010, market analysis, real city of genius, short sale report, southern-california-housing

July 27th, 2010

Banks cherry picking individual foreclosures that show up on the MLS in Culver City and Pasadena with proof: Southern California lenders pushing out properties in Culver City with an average price tag of $300,000. Median sale price for city is $600,000. Shadow inventory average price is $443,000 with loans at an average of $552,000. 141,000 homes in Southern California are distressed yet MLS only reflects 83,000 total properties.

Party like its 1999. The U.S. homeownership rate is now down to levels last seen in 1999. In essence, every effort to push homeownership rates upwards with absurd Wall Street gimmicks (the entire toxic mortgage disaster) but also the government backed implosions of Fannie Mae and Freddie Mac have basically been one giant waste of time and money for the public (many became filthy rich). Why? These efforts focused on quick and easy money at the expense of long-term sustainability. For many decades, we were doing well with large down payments and the vanilla flavored 30 year fixed mortgage. It is no coincidence that the entire game collapsed when Wall Street lobbyist bought out government plutocrats and turned our entire economy into one giant housing casino. Southern California is still very much in a housing bubble phase. Prices even today are disconnected from market fundamentals. Inventory is still growing and the shadow inventory figures remain elevated. Why? The government took a bazooka of easy money, tax credit gimmicks, and other financial shenanigans to hide the fact that people don’t have stronger wages to support current prices. We went into bubble 2.0 here in SoCal in many areas. That bubble will burst.

Inventory in Southern California is still growing:

Source: MLS

Now this growth in the MLS inventory is only in the subset of properties that the public can see. The bulk of properties are sitting hidden in bank balance sheets and are part of the shadow inventory. I wanted to show you how big of a difference this discrepancy can become when you include these additional properties:

Source: MLS, MBA

The above chart is looking at MLS and MBA data for the entire state. For Southern California, the actual breakdown of distressed properties looks like this:

The above chart is probably one of the most telling in regards to where things stand today. Over 140,000 properties in Southern California have at least a notice of default, are scheduled for auction, or are now bank owned. The amount of these properties that show up on the MLS is sparse. We are seeing virtually a 2 to 1 ratio here. For every one property on the MLS we will likely find two properties being distressed. In mid-tier areas, it is higher as we will show.

Let us run an experiment to test this out. We’ve covered Culver City and Pasadena many times in the past so let us use those two areas here again.

MLS Pasadena

Total Listed: 678

Short sales: 71

Foreclosures: 44

Total distressed: 115

Foreclosure Data Pasadena

NODs: 225

Scheduled for Auction or Bank Owned: 400

Total distressed: 625

For Pasadena, for every one listed foreclosure or short sale, you can be assured that there are 5 other properties sitting in the depths of a bank balance sheet. Keep in mind this is for a highly desirable area. But if you look at the data closely it wouldn’t appear that way:

Let us run this data now for Culver City:

MLS Culver City

Total Listed: 148

Short sales: 25

Foreclosures: 7

Total distressed: 32

Foreclosure Data Culver City

NODs: 74

Scheduled for Auction or Bank Owned: 98

Total distressed: 172

Well what do you know? It turns out that the numbers look nearly the same in Culver City. For every one distressed property on the MLS, you have 5 others hidden in some bank balance sheet. Now when I look at this data what I see is a façade in Southern California real estate. Prices in these areas are still extremely high relative to household incomes. Unless you go out there and buy with an Alt-A or option ARM (no longer available) you will have to show a decent income. But let us dig deeper a bit. How much are those foreclosures selling for in Culver City versus what is off the balance sheet?

This is incredibly important. Banks are listing (what appears) the bottom barrel homes here. The average listed foreclosure price for Culver City is $330,000. This is interesting given the median sale price for Culver City in zip code 90230 is $605,000 and in 90232 is $775,000. Seems like a tiny bit of a discrepancy don’t you think?

I decided to jump deep into the data for this area and pulled up 19 bank owned homes in the area. This is where you actually see bank behavior stand out. The “estimated value” of the 19 bank owned homes in Culver City are $443,281 and the average estimated loan balance on each place is $552,159. These places are massively underwater yet banks seen to be cherry picking which homes they funnel out to the MLS. So right now you see a trickle at the bottom end but make no mistake, the bigger suckers are only a few months away and are already falling massively behind on payments. Banks are basically trying to avoid facing the music and realizing the reality that these properties are overpriced (people can’t even keep up with their payments). Does any of this data look like a healthy market?

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