Revisiting a friendly bubble in Culver City – A median home price of $680,000 and typical household income of $66,000. An example of a $300,000 pending price cut and the hidden impact of home equity loans.

The median price for a California home is now at a two year high.  Two years ago, a nice little push came from the First Time Home Buyer tax credit and today we have incredibly low interest rates ushering a mini boom.  Sales are positive for the summer and the engineering of the housing market is providing a platform to unload shadow inventory at a methodical pace.  Yet some are mistaking this duct tape approach to slowing the market down as some sort of launching pad of the next buying binge.  That is not the case.  Even if we look at prime communities we realize that home sales are moving but demand is heavy at the low to mid-range.  We have followed Culver City carefully and would like to examine the current market dynamics.  You are still seeing a healthy amount of distressed properties coupled with discounting that is mixed in with plenty of leverage courtesy of low interest rates.

The starter Westside home

Culver City is a desirable mid-tier market.  I pulled distressed data from three years ago to compare with the current market:
culver city distressed inventory

The big decline has occurred with notice of defaults.  However this shift has been replaced by a jump in short sales.  For example, out of the 100 or so MLS listed properties 21 are short sales.  Some of these sellers might want to exit and do not show up in the distressed pipeline.  It is an interesting shift but speaks to the reality that banks are realizing this summer is a good time to unload properties onto the market especially with these more expensive distressed homes.

One observation about those record low interest rates for a state like California.  With major deficits, the low interest rate is encouraging folks to purchase.  Because rates are so low and people can buy much more home with a 3.5 percent mortgage rate than say with a 7 percent rate, the underlying asset price is pushed up.  With Prop 13 keeping a lid on tax rates, this is actually pushing up assessed values for property tax collections when a home is purchased at a much higher value.

Back to Culver City, you are still seeing major price correction happening even in this booming summer with low controlled inventory, low interest rates, and buyers jumping in.  Take a look at this example:

culver city home 1

4072 Globe Ave Culver City, CA 90230        

3 bedroom, 2 bathroom, 1,380 square feet, Single Family   

Nothing really special about this home.  It was built in 1944 during World War II and is listed at 1,380 square feet.  It has been on the MLS for 207 days and currently has a pending offer at the list price of $399,000.  The ad on the property is straight and to the point:

“Incredible Opportunity to Stop paying Rent and Own this very Bright and Light property located in a high demand of Culver City. You must see this one!!!!”

Of course as the over 11 million negative equity homeowners in the US now painfully realize is that you switch from paying rent to a landlord to paying rent to the bank.  Is this a good price?  Someone clearly thinks it is.  Yet the current price is a far departure for what it sold back in 2005:

culver city price history

This home sold for $634,000 back in the mania days.  Looking at foreclosure data, it looks to have a second of over $79,000 bringing total debt on this place to over $700,000 (notice how second mortgages don’t show up on sales history thus making the price decline seem smaller than it really is in the Case Shiller data).  This home is really falling from $700,000+ in loans but the Case Shiller data will start the decline from $634,000.  So a $399,000 price must seem like a gem for anyone buying out in Culver City with those dramatically low interest rates.  This is a price cut occurring right now.  Yet one thing folks are missing is that they are likely going to stay put for 7 to 10 years before thinking about moving and buying a bigger home.  The property ladder game has been part of the SoCal psyche since the 1970s.  Are these buyers happy to stay put in this home for over a decade or do they really see this as a starter home where they will sell and use the newfound equity for that bigger home in Culver City?

If we are looking out into the future, 10 years out, it is unlikely rates will be this low.  Will future buyers have access to cheap capital similar to today’s rates?  What about the FHA insured loan pool?  This product has kept the market humming in SoCal for the last few years making up 1 out of 3 mortgage originations.  Only last month did we see mortgage insurance soar for these loans because FHA loans are defaulting in large numbers.  What if this product morphs and requires even a modest 10 percent down?  These are all very likely and modest scenarios.

Culver City has a median price of $513,000 for 90230 and $680,000 for 90232.  The adjusted gross income for a household in 90230 is $63,000 and for 90232 it is $66,000.  Interestingly enough over half the people in the city can’t even afford a starter home in their own city.  So what do they do?  They use generous affordability metrics and leverage up to the max.

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36 Responses to “Revisiting a friendly bubble in Culver City – A median home price of $680,000 and typical household income of $66,000. An example of a $300,000 pending price cut and the hidden impact of home equity loans.”

  • That house seems like a good deal until you realize your backyard is the 405. Wow. I can’t believe they even build houses that close to such a high traffic interstate.

    Seriously the living room must be 50 feet from the cars on the 405.

    Also, that lot sure as hell doesn’t look like 6k sq.ft (listed by redfin). It’s got a weird fence next to it cutting the property into a triangle with no backyard. Even at half that price you couldn’t convince me to live there…how on earth someone paid $640k for it at some point is beyond me. What a stupid, stupid mess.

    • The 405 was built after this house. My dad use to race his Triumph Bonneville on the unfinished sections of the highway in the late fifties through the sixties.

      http://en.wikipedia.org/wiki/Interstate_405_(California)

    • There is a sound wall at the freeway and with 405 mostly backed up, you really don’t hear the noise. However, I am not saying living next to a freeway is anything special with the concentration of pollutants from vehicles.

      • ernst blofeld

        Except Globe Ave in Culver City is sandwiched between the 405 freeway and Sepulveda Boulevard. Those of us who live in the area avoid the 405 and Sepulveda unless there is absolutely no other alternative. Sepulveda Boulevard is one of the most heavily congested surface streets in the area.

  • “If we are looking out into the future, 10 years out, it is unlikely rates will be this low.”

    I don’t think you will have to look any where near that far. Due to the drought, all the major grain crops are breaking out to all time highs, or close to it.

    In the short term, this could actually help Obama, in a weird sort of way. Grain prices are going up so fast that cattle , chicken, and pig farmers/ranchers are being forced to reduce the size of their herds, just to avoid bankruptcy from super high feed costs. This will actually cause meat prices to drop a little, temporarily, as animals are slaughtered.

    But once that phase is over, in a few months, certainly by the end of the year, both meat and all other food prices will be going up even faster than they already are.

    I think it is 50/50 chance that the fed will be forced to raise interest rates in the coming year, to deal with the escalating consumer price inflation.

    • If the Fed raised the interest rates, it would immediately bankrupt USA. Interest payments on the national debt and annual operating deficit of over 1 trillion dollars would skyrocket. Also the reason for commodity price inflation is due to the massive money printing and borrowing. We will witness a hyperinflationary depression if not already.

    • Interest rates will be low for 20 years, for the reason stated above. The US can’t service it’s debt with higher rates, period.

      There are other scenarios. The US could collapse like Europe, although unlikely. We have our own printing press. Another scenario, after 20+ years, we could theoretically pay our debt off as pensions are no longer offered in the public sector. SOMEDAY, the burden will be lifted. How long? 20 years? 25 years? Who knows.

    • Rate for the US will never go up in your lifetime. Why am I so bold?
      Because all of the wealth of the 1%’s is fiat. But not all fiat are equal, but all fiats are false. Ergo, WTSHTF the only safe place to be is in the US Bond lifeboat. The nations of people in steerage will swamp the other ones.

  • The end of 3.5% down payments would mean the end of many,many markets, not just SoCal.

  • I’ll say it since nobody else wants to (don’t kill the messenger, please): rates will not be going up in this country any time soon. My guess is that ZIRP is the order of the day from here on out. I can think of absolutely zero scenario where a higher rate environment would benefit TPTB or their special interests.

    • Then, it would follow that we will have a stalled economy from here on out as well. I can think of no senario that there could be artificially low interest rates over the long unless the demand for capital is very low. Otherwise, there would be an oversupply of money which would cause inflation which would put upward pressure on interest rates. Anticipated inflation is one of the components of interest. Not saying that I disagree, just reminding you of the ramifications of your statement…

      • Bernanke already told you that the rate will stay low till 2014. Who says inflation will go up? CPI takes out food, and energy prices, and will stay low as long as Bernanke wants. Low rate benefits the banks nd the government as you know. Unless the current system is gone completely, which will not be the case no matter what everyone says, the way the system works will be the same. Printing money and gradual inflation is the only way to get out of this mess.
        In the next a couple of years, the deposit in the bank will get negative yield. In another word, we will pay the banks to hold our money. It’s probably time to think of a way to get a safe in the house to stash cash or bury the cash in the backyard. At least that way you don’t need to pay the banks to hold your money.

      • Bernanke is not afraid of inflation despite all of the money he has printed and all of the quantitative easing he has done by buying valueless assets from the banks. He is afraid of deflation. If consumer spending slows further and the housing rebound deflates, housing values would start down again. If buyers ever reach the point where they think it is better to wait before buying, then deflation becomes a self-fulfilling prophecy. Then our economy looks more and more like Japan’s did 20 years ago and we end up with a two decade cycle before the housing market comes back. Why do you think the Banks have let their inventory leak onto the market so slowly? And, they have tried to be very secretive about what they have?

        The prospective buyer in Culver City is a fool. If you assume 10% costs of sale, that house has to appreciate by that figure before they see their first dollar. That’s not a gamble I’m willing to take, especially when there are mid- and high-level markets (especially in So-Cal) that have not completely cycled through the end of this bubble. Even if the low-end has truly bottomed, which I doubt when such a high percentage of new FHA loans (the lender of necessity) are defaulting.

  • I took a view of that house and it frankly it looks horrible: No back yard and instead of that you have semi-abandoned small shop (Black Box retailer and other half empty by Google pics) with gratings on the windows. To other direction you have Great Wall of concrete sound barrier to 405 and yet another direction neighbouring house in less than 10 feet away (if the pics on Google give realistic dimensions).

    Yet a Range Rover and some domestic car on the driveway.

    Just living in a condo but with all the costs of owning a house.

    To me it looks like the lot has originally been almost square (6k sq. ft.) and then some previous owner has sold a chunk of that to the adjacent shop, to be used as a parking lot. I’d really be interested to see what is the official shape of this lot (county records) and has it any resemblance to the current shape & size. I can bet it’s not 6k sq. ft. now, like A said earlier. (Rough estimate from the pics: 4k)

    It would so easy to forget to mention such minor details to officials, wouldn’t it?

  • i live in 90232. i pay $1280 for a 1 bedroom apartment as do many of my coworkers. we work at a software company and everyone makes $100k+. and all of us are not dumb enough to buy a place.

    im figuring i can wait 5 years or whatever it’ll take. funny thing is us software people get harassed every single day to interview for jobs. its gotta be the most bizarro job market place ever, given it was horrible to be in this field just 6-7 years ago.

    • I’ve noticed that 100K (or just a little over) represents something of a remunerative sweet spot that keeps the working/professional classes quiet and more readily willing to surrender their sovereignty. Maybe because on paper, that extra digit appears as a quantum leap — despite real commodity inflation eroding those nominal gains away. 100 just looks and sounds good and it triggers some gland in our brain to start squirting out just enough of the good stuff that we tend to overlook the obvious sleight-of-hand going on around us…”at least I got mine…so who cares…”

      • i gotta say i really don’t give a rats ass about everyone around me. they made their choices… the tech job market was near death when i got out of college 8-9 years ago due to the dot com bubble. and everyone else was celebrating their house values going up and making money flipping houses in 05/06 i didn’t get in on that party

        and now it turns around, and im supposed to care that people with a boat / mortgage / 3 kids they just had to have, and a dog are having to cut back? hell no.

        and yeah 100k is a number. but its a number most people will never see. it still illustrates a point, the smart people are the ones who are saving their money and they are the ones who make enough to maybe “afford” to buy a place. so the market is either flippers or broke ass people on fhfa.

      • Yeah, Hans, maybe if everyone was cut from the same rotten bolt as the ones you profiled, I would agree — f-them all. Besides, I wasn’t suggesting you go around buying the world a Coke. However, not everyone is a POS. Someday, you’ll be on the ragged edge. I assure you. The more cocky you are, the more likely it is. You personal downfall may be material or emotional in nature, but every dog has it’s proverbial day, and you will have yours — maybe more than one. For yours and other misguided misanthrope’s sake, I hope that ‘everyone’ doesn’t take a page from your book and tell you to ESAD.

        Anyway, the point was, as soon as everyone breaks six figures, they seem instantly chuffed with themselves when really, they’ve just been marketed to with an extra zero that doesn’t really mean much in real buying terms; a nominal figure designed to distract the American workforce from the real diminishing returns which are the order of the day from here on out. It’s just enough $$ to shut the peons up and keep them thinking, “hey, I’m doing better than that bunch of slobs over there and I’m that much closer to being part of the club!” You’re not.

        And by the way, if you know which butts to kiss you can break six figures; if you can stomach being a no-talent sales twat you can make six figures.

  • Seriously, Dr., you should Google map the houses you profile. They tend to be in the worst possible locations and may not reflect the true high prices here in LA. But thanks for your efforts!

  • houses away from the 405 what are the home selling for? higher? lower? maybe this is a low end sale, not that i care but as they say apples to apples.

  • I lived on Barrington Avenue, near the freeway and there is more than just great walls and sounds of traffic. Often times I would wake up with dry eyes and scratchy throat from the exhaust emission. Further the dust and particle factor is higher in some places near freeways – lots of dust and dirt floating in the air. Many of the houses I see on the mls are within a block of a freeway. I personally will not purchase a home unless it is 2 long blocks from the freeway.

  • Shriveled Raisin

    Taking a few steps back….

    Another title for this blog could easily be: “The financialization of the housing market”

    subtext: And its glaring inconsistencies and horrific side effects

    http://en.wikipedia.org/wiki/Financialization

    Long story short, the profits (relative, absolute) of financial firms greatly increased in the 1980s with the purposeful destruction of both manufacturing jobs through off-shoring and overt warfare on unions, as well as of course Reagan-era trickle down economics and massive tax cuts on capital gains; these profit levels were maintained through intra-sector consolidation and technological and “product innovation” (i.e., derivatives) advances, and also the looting of Soviet state assets in the 1990s. By the year 2000, the banksters finally achieved a long-fought for goal: the overturn of the Glass-Steagal Act.

    From then on, it was a foregone conclusion that the US housing market would be looted in the same way union jobs and Soviet state assets were looted. The question most bloggers ask is the wrong one, namely, “Why don’t housing prices make sense or correlate with income? What’s going on?” A much better question should be to ask “What can I do as an individual to ensure that the profits of predatory financial capital remain glaringly high, and their relative power increases domestically and beyond at my expense?”

    I know! I know! Facilitate a housing bubble by buying into the idea that the housing market is “free” and that the way to become wealthy is to go into debt. Embrace libertarian and anti-union propaganda and complain about the special privileges of imperfect but also insignificant government bureaucrats. Refuse to make connections between your overlords and their fronts that work on commission – real estate agents and brokers, politicians, Keynesian economists, so-called free trade advocates, etc. Cultivate a hatred of historical memory and refuse to remember that the US functioned just fine for nearly 200 years with a gold standard and massively restricted use of consumer credit debt, as well as virtually mandatory 20% or more down payments, as well as state-sponsored protection of key industrial sectors.

    Yes, there are of course glaring inconsistencies in the housing market! That is by design – it is how you, as a peon, can do your part to decrease your relative power internally with respect to financial firms, and also restrict your freedom and rights – large scale outright ownership of property restricts government and central banker control and of course the obverse also. Remove the government-guaranteed 3.5% down FHA loans and ZIRP and not only do bankster profits decrease (markets will no longer be overtly manipulated and the winks at key times will thus have less value), but the student loan and consumer credit bubbles may burst, b/c people will realize there are no jobs available and profits are so highly centralized. Thus, these policies will continue for the indefinite future until the value of the dollar (and thus US debts) can be inflated away.

    Let’s try to make some connections between one top-down bankster policy and the others to get an understanding of how we can best do our part to maintain their living standards.

    • Ernst Blofeld

      Nobody held a gun to anyone’s head and told them to take out a HELOC to finance that vacation in Cancun or the granite countertops or the BMW.

      Only in America can you borrow several hundred thousand dollars, not pay it back, and still be a victim.

  • There are 77 homes for sale in 90230. There are 592 banked-owned homes in 90230. 592! That’s not even counting pre-foreclosures or hopelessly delinquent borrowers. Housing bottom? Er…what?

    http://www.realtytrac.com – if you want to check out the data for yourself.

  • Ernst Blofeld

    I suspect a big part of the drop in inventory is the result of people who are far, far underwater taking their houses off the market. In the last year some of the CA neighborhoods I’ve been following have seen their inventory drop, but prices are continuing to fall as well. The owners can make payments but are so far underwater they can’t think of selling. The only houses for sale are distressed, and the banks are manipulating that number.

  • The cost of a lot in Culver City must be outrageous, because that house isn’t worth, nor would it cost anywhere near the asking price of $399,000 to build a brand new one just like it.

  • “So what do they do.” Don’t buy the house, and get the hell out of Culver City. That’s what they should do.

  • “Is this a good price.” Sure it’s a good price if your the realtor selling it. For anyone thinking of buying it from the realtor it’s a terrible price, and anyone thinking of buying it for that price would have to be out of their mind to even consider doing it.

  • …Also, keep in mind…anything that can be done with a keyboard can and will be outsourced.

  • I am getting the feeling this year that the true consequences of buying a house today may not be felt for 10+ years. The Gov is can kicking far better than anyone expected, and honestly they are the shot callers so…

    We know interest rates will stay low for a decade, if not more.

    Laying in bed at night, it’s starting to make more sense just to jump in and risk it. What is there to lose? Renting anyway? I could see the point of living in a house 10 years and enjoying it, and who knows by then, there will probably be some other socialistic program to save the day.

    I don’t advocate socialism. But I start to see the heart attack signs by older folks who “fight to keep status quo” but when in the history of the world had status quo remained forever? How many empires have we had? Eventually you have to think about your own life, yeah it may not be the way you want it, or wanted to do it, or the way your grandpa did it, but what choice do we have?

  • Wow- did anyone look at the street view? The four homes next to it have been leveled, and there are signs (can’t read them) from the city on the fence.

    There’s something going on here that can’t be explained with home values alone.

  • Personally I like the one at 3342 Mcmanus Ave. with an asking price of only $649,000 the best. It’s the one where the present owners are using the driveway to the detached two stall garage in the back for a patio also. The one where the kids slide next to the detached two stall garage with the driveway/patio combination ( priceless) is worth more than the house itself. The one where there’s a full sidewalk leading out to the detached two stall garage with the driveway/patio combination (priceless), and little concrete blocks with grass in between them leading up to the front door. The one with the 8′ wide dining room (maybe). It’s the one where the property tax is only about $665.23 a month and the insurance is only around $179 a month, which is only $15 less than my entire monthly house payment, property tax, and insurance combined. The one that’s sitting on only 0.11 of an acre. That one. My house, which is 44×26 has oak cabinets, oak woodwork, Anderson casement window walls, a 24×24′ two stall attached garage, a full basement, sits on a 78×110′ lot, only cost $80,000, and quite frankly is worth ten times that piece of crap going for $649,000. What the heck is going on out there besides paying around $1,900,000(as close as I can figure they are) an acre for land to build houses on, which is only about 170 times more than they’re paying for prime farmland (best in the world actually) in north central Iowa where I live. I could build a brand new house just like the one at 3342 Mcmanus Ave. for around $160,000 tommorow, with no problem by the way. Somebody making $66,000 a year can’t afford the property tax and insurance out there let alone the mortgage either. Kent Thompson, a retired housing contractor from North Central Iowa.

  • All I know is that with my yearly income of 64,000, single and with no kids, the prospects of purchasing a home in LA are slim to none. Never in my wildest dreams did I expect real estate inflation to get so out of whack that a cr*ppy home would be valued at half a million dollars and you’d be looking at a “starter.”

    Well maybe I could purchase a home but I’d surely loose it because there is no way I could realistically pay the mortgage, property taxes, bills, food, and the myriad of issues that can result from owning a home.

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