The Bubble has Burst

[vash]

my girlfriend's cousin just dropped 1.4mil on a home in san fran. there was still some minor bidding going on. personally, i am getting tired of it here, maybe it is time to check out the pacific northwest, colorado, or maybe new mexico. enough is enough, UNCLE! i am tired of not affording schit!

[CamB]

Originally posted by techweenie
Cam, that little place might bring $12-1400 a month.

There is no way that 1200-1400 a month (14-17k pa) is a sustainable rental yield - it is 3%.

Sooner or later, that has to return to 5% plus, or the rent has to go up.

And the rent won't go up that far because the people who have to rent won't pay. There is only so far this relationship can stretch.

The Economist looks at the relationships of rent/house prices and rent/income, and as far as I am concerned this is the only logical way of looking at it over time. Eventually housing has to reflect the same fundamentals as every other asset class - what income it can earn.

[techweenie]

Cam, what happened about a year and a half ago is that the West LA rental market sagged, since everyone who could buy a house did buy a house. The market is back, now.

I don't know about you Kisis, but us Angelenos pay 1.3% property tax per year, so there's another $500 a month 'load' on the cost of providing that space as a rental.

LA's rental market is way out of sync because so many people have paid off their rentals 20-30 years ago.

[dd74]

Did you guys read the front page story in the LA Times this last Sunday: the place now to live is Buffalo, Wyoming. Hmmm...my mother-in-law is from Buffalo, WYO. She says it's sleepier than hell there. Sounds great to me, actually.

[Moneyguy1]

I can see a future where there will be a lot of Californians with interest only mortgages and other such gimmiks that will NEVER be able to retire.

I'll stick with my all brick 2400 square foot hacienda with its quarter acre lot and mountain views thank you very much with $1450 in annual taxes.

Cam, you are absolutely correct. IF the rental property cannot generate at least what holding a mortgage would generate, then it is a financial loser. Something is severely out of whack on the left coast.

[turbo6bar]

Investors in CA have resorted to buying properties based upon appreciation, and not cash flow. Held long-term, they can still be great investments. The only problem is holding during the down times. I would not like to wear those shoes.

Agree with you on the 30 yr fixed vs. ARM, Moneyguy1. On a $165k mortage, the principal and interest is around $1000/month. An ARM is around $825/month and is a sure bet to go up in the next few years.

pwd72s, I used to be high on the stock market. My senior year in college was 1999. I told everyone I would be a full-time stock market investor. After all, with all the baby boomers investing and tech stocks earning 20-30% year, I could retire in 10-15 years or better. The times have certainly changed. The stock market is no dud, but it's not the high flyer it once was. Also, like real estate now, there are lemmings who continue to believe there is no bubble. If there indeed are investors who buy, hold for appreciation, and resell, it is NOT a good sign. Speculation is rarely a good sign.
Jürgen

[lendaddy]

I think I asked this before, but don't remember a response. Is there a vehicle for shorting the Cali real estate market? I mean can you sell REIT's short? Is there a better way to leverage a downward play on this? Just curious.

[turbo6bar]

Originally posted by lendaddy
I think I asked this before, but don't remember a response. Is there a vehicle for shorting the Cali real estate market? I mean can you sell REIT's short? Is there a better way to leverage a downward play on this? Just curious.

Home builder stocks, Mortgage/lenders, but you'll obviously see some dilution of the stock if the company is diversified outside CA. Don't know how you can leverage a downside. You could always wait until the bottom hits, and then buy???

[lendaddy]

There has to be a balance in the system, I would be willing to risk a few K's on a drop here.

[on-ramp]

one word:

FORECLOSURES.

can't wait.

[techweenie]

Originally posted by on-ramp
one word:

FORECLOSURES.

can't wait.

Thatt's a good observation, Mr Ramp.

During this 'boom' of the past X years in So Cal, foreclosure rates have been unusually high. When the folks who have leveraged themselves with interest only loans start dealing with rate bumps, property tax bills and the normal expenses of home ownership, there will be increased opportunities in foreclosures.

I'm gonna have to learn how to get foreclosure info without subscribing to one of the many services...

[turbo6bar]

Originally posted by techweenie

I'm gonna have to learn how to get foreclosure info without subscribing to one of the many services...

Don't subscribe to the online foreclosure services. It's a waste of money. Two big sources for foreclousures are HUD and VA. www.hud.gov for HUD. There's a link for VA on the HUD web site. The other source is bank-owned properties. You can get lists of these properties from some bank home pages, or find the bigger lenders in your area and contact them for a list of properties (REOs). Generally, HUD and VA don't like to discount their properties much (say 8-10% off asking), but banks are more liberal with their policies (in fact some would say they're irrational). However, irrationality can mean big savings.

If you're willing to do some legwork, it might pay big money. Just be aware that there are lots of players in the game, and the title "foreclosure" does not equate to "good buy."
good luck, jurgen

[Moneyguy1]

Of course, you could get all the info you need to make millions in real estate with "no money down from Carlton what's his name *****s?

Yeah, sure.

Better yet, write a book about it and let others play and lose. That's the only sure way to riches in real estate. Unless you were born with megamillions that is....

[widebody911]

Originally posted by turbo6bar
Investors in CA have resorted to buying properties based upon appreciation, and not cash flow.

There's a guy here at work who does PC support. He just bought a $700k house, leapfrogging from his last one and going a little deeper into the hole on the way up.

Ug.

I paid $172k for my house; 4br, 2ba on 1/3 acre, and I thought I was getting bent over at the time. For all I know, it's worth $900k, but now that I'm almost done with my shop, they only way I'll be leaving is in a pine box.

[dd74]

Originally posted by widebody911
I paid $172k for my house; 4br, 2ba on 1/3 acre, and I thought I was getting bent over at the time. For all I know, it's worth $900k, but now that I'm almost done with my shop, they only way I'll be leaving is in a pine box.

Damn! That's a steal up north.

[mikester]

Originally posted by techweenie
Bob: many buyers of million dollar properties are 'trading up' from $750K properties in El Lay. But $750K properties aren't necessarily luxury homes.

Take a look at this little bitty thing on half a Venice lot (you have to enter fromt he alley) probably 60 x 45 feet. A half million bucks.

http://guests.themls.com/photos_addl.cfm?mls=04-078746&p_type=0&addr=2416%20WALNUT%20AVE

Down the street in a very nasty neighborhood, is a full-sized house on a 'normal' 4300 square foot lot needing total rehab for only $780K.

Wacky.

Venice is either a really bad example or a really good one.

Venice is going through serious pains as a community right now with their socialist, homeless loving, artist loving population and the new yuppies who want to move in and turn it into another Manhattan Beach.

Recently (January this year) my wife and I sold our Condo in Santa Monica. It was a one bedroom maybe 750 sq ft second floor right off ocean park, about 14 blocks from the beach. It was a nice little pad that she originally paid a little over $100k for. We put it on the market in Dec '03 and it didn't sell until Feb '04. We sold it for just over $300k. In that entire time there were no more than 3 similar units on the market in that area and the entire time we were almost the lowest priced. Our realtor had told us originally that it would sell within days. Of course that didn't happen and I never believed her but my wife did I think (they are friends - a truely bad idea). So anyway, I'm not saying things are good or bad but I do think they are on the path to normalizing.

I honestly don't think that in the decent neighborhoods we can expect a dramatic fall but what seems to be happening is that the yuppies are buying in the more affordable neighborhoods like central LA and Silver lake and turning them up - those neighborhoods go up in price accordingly. The existing neighborhoods are in slightly less demand then and of course prices go down.

It's just a matter of time.

I'm no expert by the way - not even on the internet.

[Moneyguy1]

The "trading up" is, to some degree, understandable. However, while some are trading, those entering are more or less "shut out" if I understand what is going on (and I am not so sure I do).

[dd74]

I wonder how much those enormous Victorians are going for in the Adams District near Downtown L.A. Those homes are incredible, and very historical. The neighborhood though...

About ten or fifteen years ago, there was a big yuppie push there. I always thought it was suicide for Joe and Mary Westsider to buy in an area wrought with gang-bangers.

[CamB]

Yeah, we have property taxes (we call it rates) - I actually don't know how much it is, but I believe it is around 1% or so.

Jurgen - house prices can't appreciate at supernormal rates for ever --> there are some areas which will do so (because of location, basically), but overall the meat and potatoes of housing, especially when viewed in aggregate, isn't going to increase by more than a percent or two above inflation, or approximately the level of economic growth.

It can't - otherwise people can't afford to live there (there is only so much that people can spare as a percentage of income).

However, I reckon that in a longer term, there is scope for value to be added as lower density is replaced by higher density.

[nostatic]

Originally posted by dd74
I wonder how much those enormous Victorians are going for in the Adams District near Downtown L.A. Those homes are incredible, and very historical. The neighborhood though...

About ten or fifteen years ago, there was a big yuppie push there. I always thought it was suicide for Joe and Mary Westsider to buy in an area wrought with gang-bangers.

hey, I work there (actually we are in a former mansion on Adams).

There hasn't been much of a regentrification. But about 6 houses down from us a 3 story victorian came on the market. It is sandwiched inbetween two apartments buildings, and had been used for offices. $1.1M. But it was 3 story, had some "orignal charm", and about 5K sq ft.