Lots of good comments on the prior post about the 955 N. Vista sale. As a blogger, it's always interesting to see what really gets people's interest, so the blog can be more closely aligned with them.
Since the magical question is, "Where will things ultimately settle?", your humble blogger will make an attempt to put forth his position. As always, I welcome criticism, debate, and thrown tomatoes ...
Here's a point-by-point analysis of why $700k for a small SFR that needs work, in an OK but certainly not the nicest, area of WeHo, is still too high.
1. Requires $140k down.
In our fantasy world of celebreality and everyone on the streets of the Westside seemingly driving Range Rovers, $140k may seem like peanuts. But, especially given the general market downturn over the past year, it's even a larger sum. And yes, I know that some people may be "on the sidelines" and might have stayed out of the markets, but are they really going to plunk down their $140k for a property like this?
2. The Income Issue.
Some people like to use the "3x income" rule of thumb when discussing property afffordablity. I tend to be a little more flexible and look at a 30% DTI ratio. Using the average of those two calculations for a $700k property brings you to an income of $200k to support the purchase. Again, I know in our little Westside world there are "a lot" of people making $200k+. But, that's still a significant income, which puts you in the top 5% of households. OK, you say, but on the Westside that only puts you in the top [insert a number that may be closer to 20%]. Might be true - I still tend to think a lot of incomes are overstated - but does this property even scream "top 20%"?
3. The Condo Alternative
One commenter mentioned this. The drop in condo pricing is seeming to accelerate. A fair amount of new construction hitting the market, which, unless we have an extremely strong economic rebound in the next 12 months, will need to drop prices further. For this size of property, I think couples/small families will have a lot of options in the condo market. And yes, I know that HOA dues aren't deductible, but neither is the expense to have someone mow your (albeit tiny) lawn.
4. The Inflation Issue
I'm no economist, but am a believer in reversion to the mean. With mortgage rates around 5.5% currently for conforming loans (assuming excellent credit and 20% down), the pre-tax monthly on $700k (including taxes) is $3900. If rates move up a percent, which would still be low historically, the purchase price would need to adjust to $640,000 for the same monthly payment. If you believe in greater inflation, adjust accordingly.
With all that said, I'm not sure the buyer on the Vista property got a terrible deal. Depending on how much work the house still needs, your after-tax monthly nut is probably somewhere around $3500. I think you can rent for less in this market, but if you like a property, it's not the worst time to be looking ... as long as you plan to be there for at least the next 7-10 years.
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2 comments:
2 things:
1) It's true lots of people in LA make $200K+. That was never the issue. The central issue is whether *enough* people make the kind of incomes to support the number of homes for sale at current prices. I don't think many rational people would argue against a "No" on this one.
2) On a related note, lots of neighborhoods in LA are "million dollar neighborhoods". There are probably 2 dozen or more of them. They weren't all million-dollar neighborhoods before the bubble, and they're not likely to be for much longer. See point #1 for the reason why.
Reference - million $ neighborhoods in LA: Santa Monica, Beverly Hills, Westwood, Brentwood, Palisades, Malibu, Sherman Oaks, Bel Air, Studio City, Toluca Lake, Encino, Tarzana, Calabasas, Pasadena, San Marino, West Hollywood, Hollywood Hills, West LA, Beverly Center, Hancock Park, and that's just what comes to mind now. No, they will not ALL be million-dollar neighborhoods when this is over. They will for the most part be what they were before. Some will be truly elite, but most will be upper middle class aspirational in the $600-$800 range for the standard house.
Keep going: there are the South Bay neighborhoods like Hermosa, Manhattan and Redondo Beach and the whole Palos Verdes peninsula. There's Naples and Belmont Shore in Long Beach. And there are Los Feliz, Moreno Highlands (Silverlake) and Baldwin Hills (though the numerous foreclosures may have pulled Baldwin Hills out of this league by now).
My rule of thumb is that a million dollar neighborhood has reasonably moderate crime and either crashing waves or fantastic views. Anything else with those prices is bubble-land. Someday, as the inevitable Manhattanization of the Wilshire Corridor portion of Los Angeles (the strip between the Hollywood Hills down to about Olympic or Pico, running west from downtown LA to Santa Monica) proceeds, a third million dollar neighborhood type will be the super convenient urban enclave. But we're not nearly far enough down the Manhattanization road for that yet.
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