Real Homes of Genius: Today we Salute you Santa Monica. Examining 5 Adjacent Homes for Peak Prices and Foreclosures.

Today we are going to have a special Real Homes of Genius where we are going to examine five adjacent homes on a tiny block in Santa Monica.  For readers outside of Southern California Santa Monica is one of the few prime cities located in the large county of Los Angeles.  88 cities and 10,000,000 people and we probably have 1 million or so trying to squeeze themselves into these few tiny locations.  Why is that?  Prestige and the belief that you can make insane profits because you live in an area that is immune to bubble prices.  This is the type of logic that ran rampant through the bubble days.  In fact, in one report we stated that out of 270 zip codes only 8 have seen a year over year increase.  Santa Monica had one of these zip codes.  But this little block in Santa Monica isn’t the prime 90402.  This is the 90405.

You need to remember that Southern California was the epicenter of this housing and credit bubble that is now rippling throughout the world.  Many folks think that areas like this are immune to the housing bubble.  They are not.  When bubbles pop like this one in California there is a slow progression of which properties drop first.  I’ve put together a chart breaking down 5 steps of how prices correct during a massive housing bubble:

chart.jpg

As you can see from the chart, the first area to be impacted is non-prime lower income areas.  We have already seen weakness here since last year.  The next area is semi-prime area where the bulk of the population live.  Nicer starter homes are in these areas.  The third phase is upper middle class areas which seemed immune but are now correcting as well as good jobs are being lost.  The prime areas of course are the last to be hit and this little area we will be looking at falls under category 4.  These are good areas simply by the fact they fall within close proximity to category 5 areas.  These areas are the crème de la crème and are the last to see challenges.  You can think of Ed McMahon’s home in Beverly Hills as one of these properties.

In this article, we are going to look at 5 adjacent homes in the 90402 area code and see what really went on in this block in prime city Los Angeles County.  First, let us take an aerial view of our block:

santamonica1.jpg

So this should give you a good idea of the area we are looking at.  The first home we are going to look at is home A:

Home A – 1,033 Square Feet

Santa Monica Home

Some Specs:

3 Beds

1 Bath

1,033 square feet

Lot 3,100

Built in 1953

This first home was built in 1953.  If we are to look at the Zestimate of the home we get:

Zestimate

We get a price of $795,000 yet this home is not for sale.  Let us take a look at the sales history on this place:

Sale History

08/23/2005: $951,500

12/29/2004: $820,000

06/30/2003: $653,000

Even though this place isn’t for sale, it sure has sold many times in the last few years.  Look at the gains in price for the 3 years above.  I imagine when the home sold in 2003 someone made out with a nice profit.  The next person in a little over a year made a cool $167,000.  Not to be out done, the other seller in 2005 made out with $131,500 in 9 months!  Is there any wonder why Santa Monica was the place to be.  A 1953 1,033 square foot home selling for close to $1 million in 2005.  Now you know why the world economy is coming to a crashing halt.

Home B – 937 Square Feet

Santa Monica Home

Some Specs:

2 Beds

1 Bath

937 square feet

Lot 3,123

Built in 1924

This home was built prior to the Great Depression and is only 937 square feet.  This home is also the only home of the 5 that is in foreclosure.  The current listing price is $860,000 although it has only been on the market for 50+ days.  Let us look at some of the history to see why this place is now in foreclosure:

Sale History

03/03/2003: $634,000

09/21/2000: $433,636

05/14/1999: $300,000

The current housing bubble started a decade ago so the 1999 sales price gives you almost a good starting point to the bubble mania.  The home sold one year later in 2000 for a $133,636 profit.  Less than 3 years later, the home sold for a $200,364.  Think about this folks.  Simply by looking at this, someone can illogically conclude that real estate in this area would be going up by $100,000 per year.  The current Zestimate is $883,500 for a 937 square foot home.  Do you really think it has that value given the current economic malaise California is facing?  Another home with artifacts and a historical timeline of the California bubble.  If this was even just one year ago, this home would have never seen the light of day of foreclosure (refer back to the above chart and read category 4).
Home C – 750 Square Feet

Santa Monica Home C

Some Specs:

2 Beds

1 Bath

750 Square Feet

Lot 3,123

Built in 1923

Here we have another home that was built prior to the Great Depression.  This home isn’t for sale.  But what does the Zestimate tell us?  It looks like we get a price of $829,500 for a 750 square foot home!  What a great bargain in the 90405.  Sales history doesn’t tell us much here:

Sale History

05/30/2002: $530,000

You need to wonder, if this home were to sell in this current market how much would it fetch?

Home D – Multi-Family

The next place is a multi-family property.  We are told there are 2 beds and 4 baths on 2,076 square feet.  The lot size is 3,123 and was built in 1923.  It is hard to tell when this place was constructed into a multi-family property but it makes you wonder if the other 3 homes with comparable lot sizes, is looking to become something like this.

Let us assume you buy home B at $860,000.  We’ll assume you put 10 percent down although with today’s market climate for investment properties you’d probably need 20 percent:

10 percent down:  $86,000

7% Investment property loan 30-year fixed PITI:      $6,044

Let us say you buy this lot with the purpose of turning it into an investment property.  Let us say you are able to squeeze in 3 full units each with 1 bedroom and 1 bath on this lot.  How much can you get for this area?

Santa Monica Rent

For a 1 bedroom 1 bath apartment in this zip code you are looking at $1,550 as your median price.  So monthly rents will bring in $4,650.  You are already negative cash flowing and how much will it cost to construct and build the 3 units?  You are looking at a few hundred thousand dollars simply to get this project going.  You would have to squeeze in 4 apartments into this tiny lot but keep in mind the smaller the places (i.e., studios) the more your profit margin gets squeezed.  Ultimately, you can see why these deals are falling through now.

Home E – 1,100 Square Feet

Santa Monica Home E

“Home E” is for sale.  You are starting to get a better perspective of how these 5 properties are all interacting with one another.

Some Specs

2 beds

1 bath

1,100 square feet

Lot 3,123

Built in 1923

So this is yet another home built prior to the Great Depression.  This place has been for sale for 40+ days.  Let us look at the current Zestimate first:

Zestimate

So the Zestimate comes in at $870,500 which seems to be in line with the other Zestimates.  Let us look at the sales history:

Sale History

04/13/2004: $620,000

06/30/2003: $535,000

08/28/2002: $412,000

Another place that documents the housing bubble in California perfectly.  For 3 consecutive years, each subsequent seller came away with more or nearly $100,000 in gains.  Again, sellers and buyers must have thought that the 90405 zip code in Santa Monica somehow produced $100,000 yearly gains simply for owning a home.  Of course those days are completely over but what is the going sales price?

salee.jpg

Bwahahaha!  They are asking for $1.25 million on a 2 bedroom 1 bath home in the 90405 zip.  So basically, they are assuming that from the overly inflated price of 2004, that this home appreciated by $150,000 a year for 4 consecutive years!  Don’t they realize that only a few homes down, a slightly smaller home at 937 square feet is selling for $860,000?  Welcome to California!

Is there any doubt that the bubble is bursting?  We are moving methodically down the chart which we provided above.  No area will be immune to this bubble bursting.  All areas will see price declines.  That is why I have provided 10 solid and research based reasons as to why California will not see a bottom until May of 2011.  I have yet to see any empirical study showing why prices will bounce up anytime soon.

Today we salute you Santa Monica with our Real Homes of Genius Award.

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15 Responses to “Real Homes of Genius: Today we Salute you Santa Monica. Examining 5 Adjacent Homes for Peak Prices and Foreclosures.”

  • The bigger they are the harder they fall. Just look at history during the last RE busts in California. Why people think every time is different iand their area in immune reeks of DENIAL…

    Dr. HB, it’s funny you mention the 90405. According to Melissa Data, last August (YOY) showed Total Sales Volume (TSV) and Average Selling Prices (ASP) got pretty well hammered. Now this includes a combination of Condos and SFRs. But, still it measures the amount of Residential RE business getting funded. Sure Condos are taking big hits, but there are less and less SFRs closing escrow. What is important here, is the TREND. Definitely down.

    Here are the stats:

    Santa Monica 90405
    -31.4% (TSV) -25.1% (ASP)

    Double whammy on prices and volume ican’t be a good sign

    http://www.westsideremeltdown.blogspot.com

  • It’s generally recognized that the Great Depression started after the market crash in 1929….so it seems as though these homes were built in the boom of the “roaring twenties”…other than that…your insights are extremely enlightening…you seem to be right on. It scandalous that the main stream media ignores the realities you point out….keep goin’

  • Hi Dr. HousingBubble.

    Your 10 reasons support the idea that real estate will keep going down, but not why it would bottom in 2011. Why do you think it will bottom in 2011? The Credit Suisse graphs show Option Arm resets going out until the end of 2013. Baby boomers will start retiring in droves starting in 2014 (and presumably a good percentage of those will want to sell their second homes, investment houses, maybe even their primary residences in order to move to a more retirement friendly location), when housing went soft in 1998, it didn’t start to recover (in real terms) until 1995, when housing went soft in 1988, it didn’t start to recover (in real terms) until 1984, when housing went soft in 1925, it didn’t start to recover until 1934, when Japanese real estate went soft in 1989, it didn’t start to recover until, hmmm, maybe 2007. Why are you optimistic about 2011?

  • “Why are you optimistic about 2011?”

    I’m not necessarily optimistic regarding 2011, I’m simply saying that it looks like we will be awfully close to a bottom (meaning price bottom) by then. At this rate, we will be down 50 to 60 percent nearly across the board and we need to also factor in inflation for the real value of the price decline. In the last SoCal bubble, it took about 5 years from peak to bottom. This bubble is bursting much quicker than many anticipated because of the innovative loans we are now dealing with.

    In addition, once bottom is reached it is very likely we will move sideways for years similar to Japan. At a certain point, I would imagine that we may even overshoot to the bottom side. Many would argue that we have corrected aggressively already but they forget to remember how astronomical this bubble turned into. There hasn’t been much talk about looking at local area incomes to reflect price since many are still clinging to a model that will fade away slowly. When you start hearing incomes in relation to purchasing power for a home, then we will be close to a bottom.

  • Dr. HB,
    When you say we will be down 50 – 60% by May of 2011, do you mean from the peak median price, or what the prices are now?

  • Those homes are priced that way because the owners know that there is a chance that someone with $$$ who wants to live there will come along and pay. Moreover, the actions of the fed and the treasury are supporting what some see as astronomical prices by keeping rates down. Yes, prices seem high but I think what people have to realize is that a million dollars is NOT a lot of money anymore. Any determined schmo can save that amount with time and diligence. Intelligence and/or a good education help and lots of people have both! I am a perfect example: an average guy who made some good choices and who works hard. I will easily have this amount within a few years. It isn’t much! It gets you a dinky house and that’s all.

    There are a lot of people with a lot of money in the USA. Not everyone is deep in debt, just the noisy ones. Those with good cash flow and money in the bank don’t make good news. Most of them also keep their heads down. The guy with the BMW next door might be tens of thousands in debt and get interviewed when his house gets foreclosed upon but the other guy down the block with the used Hyundai – he’s the one with a two or three million net worth, and zero debt. No one notices him though. No one interviews him.

    You can read on my (not-so updated) blog that I save most of my income. I have a pretty decent amount banked (invested, etc) for my age but I worry about whether I will have enough to stop working as hard as I do. When I return to the USA, I want a nice house in a nice area with a very low crime rate and with mature landscaping (in other words, trees and grass). I expect that this house, today, costs $400,000 at least and if I wait won’t be getting any cheaper. There is a certain category of houses in some areas of US cities that didn’t skyrocket as they just didn’t change hands that much over the last 10 years. The owners sought to keep their taxes down by challenging the assessments and/or taking advantage of any abatement policies offered by their county or state. When they sell, they’ll understand what they have and price the house accordingly relative to what else is on the market. Plus, $400k – $500k+ isn’t a lot of money to them either and isn’t the bulk of their net worth by any stretch.

    One more thing: I’ve lived in many countries in the ‘developing world’ and most are hellholes compared to the comfortable living in the US. The wealthy in many of those places can’t leave fast enough to places like the USA and they’ll have millions when they arrive. They certainly won’t flaunt it. They’ll pay cash for their houses and to them, those prices are a bargain. You should see what I presently live in for $145,000 – you wouldn’t go near it. I paid cash.

    Sorry to ramble on but those houses, if they are in a nice area, aren’t priced as crazily as you may think. $800,000+ sounds like a lot but it just isn’t. You’ll need more than that to retire in the USA unless you know the welfare and SSI ropes well.

  • The simple fact is that you can not get those exotic loans (options ARMS, 2/28 plans, no money down, interest only) that Alan Greenspan recommended to banks to give in 2004 anymore. 99% of potential homeowners can only get a fixed rate home loan with documentation of income, 20% down, and with about a 35% of gross monthly income to pay the mortgage. Interest only loans will be only given to the super-rich. What is happening is that house prices will come back down to normal. When this is all done, the price of houses will be shockingly low compared to the bubble days. For example, most middle class homes will be about $300K range.

  • Yikes:

    I just walked into a open house rental on a house for rent in west la. A tiny little 3 bdrm 1.5 bath built probably in the late 40’s or early 50’s. The landlord is asking almost $4,000 a month with a straight face. I am waiting to buy because I am hoping that housing prices will fall into a ratio with rentals. But of course here in wacky west la it looks like the landlords are pushing the price of rentals with the current bubble prices of homes. Who in the hell can afford to live here anymore?

  • Home E already HAS an offter at 1.1million the agent is looking for something better. Don’t know where the idiots are coming from, but they just keep coming.

  • I agree with you Savemode. There is pent up demand for decent houses in certain areas and it doesn’t necessarily have to be down by the ocean. In an area I am looking at, the houses peaked at 625K three years ago. Now ,in the same area people are snapping up the houses for 500-550K and they still a little work. Of course in these areas, people who save money (sometimes different cultures) are buying them. The credit crunch areas like Santa Clarita or Corona will suffer further losses, for there, most folks are in debt up to their heads and possess that no-money-down mentality. Of course if there is a world-wide economic collapse we will have bigger problems to worry about than getting a good deal on a house.

  • I live at the beaches in San Diego. (south Mission Beach).

    Sales and prices slowed down slightly in 2007. This year they have stopped. One sale a month. This is a duplicate of what happen in 1991-1992.

    The prices in 1993 started falling a lot for the next three to four years. We were down 33% by 1996. While San Diego dropped 15%.

    When the prices start falling next year along the beaches and upper middle class homes in Southern California, it will be ugly. Option ARM will be a phrase that everybody will know by 2012.

  • Savemode has a point. The trend s/he describes may breed a new type of crap shoot/casino economy: do you have what it takes to attract the rare buyer who can afford to buy a house? I shared in another thread the item from the Contra Costa Times where one RealTor suggested that a bowl of oranges on the kitchen counter can be the magickal thingie that will get a buyer to put themselves in hock for decades. So I was thinking:
    ~
    You know how feng shui was so popular? Or that silly man Paul Ray with his “lifestyles of health and sustainability” “market research” (which mistook the macroeconomic trend of wasteful self-absorption for sustainability)? Doc, you have my permission to steal this idea and run with it. That is, a consultancy based on the Proven Ancient Methods of the Illuminati, Templars, Shaolin monks, and Goddess-Priestesses of Pleistocene Czrcesny-Bolshitt for SELLING YOUR HOUSE. The sky is the limit where superstition meets fear and greed, as the New Age and many major religions have amply proved.
    ~
    But seriously, isn’t this what urban consumerist market economies always have done–create settings or relationships where people transact money and desire/whim/fetish? At some level, things like houses are the least real parts of the equation for buyers and sellers.
    ~
    Real economic relationships are grounded in longer-term views and more local realities. Whimminess is constrained by the baleful glares of one’s neighbors, and the danger of disrupting relationships you may need later. Local economies are open to terrible abuses…but aren’t prone, I think, to global meltdown as are cash economies coupled with international supercomputers and statistical software.
    ~
    Though we do see in history that some forces can destroy the locally based economic model just as efficiently. E.g., bubonic plague.
    ~
    My dear father (who had 8th grade schooling and was one of the smartest people I ever knew) used to say, “Nothing is a guarantee of anything.” 🙂
    ~
    Anyway, reading this roundhouse solar plexus punch of a posting by DHB, I am in awe of the hundreds of millions of people who live in thousand-square-foot urban houses, and feel OK with that, apparently. I’d explode from angst no matter how many zeroes were on my house assessment. I’d feel that way living in the Cadillac Desert of SoCal in any case, given my physical condition (I need water to survive).
    ~
    rose

  • Savemode: you have been gone too long and are out of touch with reality on the ground here in the USA. One wonders which crony-driven industry and company you work for. You have yet to save $1 million but have already counted your chickens several years in advance and are talking to all of us like you already have it. The truth is that you are still just a wannabe US homeowner.

  • madoff has it made! his cell must be bigger than those bedrooms. even with a fellow buggerer in there with him, he must be living the life of spacious delight.

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