With housing, there are only two positions in which someone can be. You own or you rent. That is it. The fascinating market dynamics are making people ask whether this is the bottom and should they jump into the market to buy. From the beginning, this question should not be approached […]
Related Posts:
■Real Homes of Genius: Culver City Pricing Dysfunction! Prices all Over the 405.
■Real Homes of Genius: Today we Salute Inglewood. Bought in 1970 for $20,000 now selling for $397,400.
■Real Homes of Genius: Today we Salute Culver City. Flipping Homes in Today’s California Housing Market.
■Housing Rehab: 2 Step Program - Real Homes of Genius: Today we Salute you Burbank. $626,000 Short Sale.
■The Rent vs. Buying Dilemma: Mortgages the Southern California Way. 3 Factors to look at: Increase Rental Prices, Housing Price Declines, and Tighter Credit Markets.
With housing, there are only two positions in which someone can be. You own or you rent. That is it. The fascinating market dynamics are making people ask whether this is the bottom and should they jump into the market to buy. From the beginning, this question should not be approached as a gut reaction to take a nosedive into the market. I know the temptation is there especially with the marketing and familial pressure many face to become homeowners. Just because prices have fallen dramatically does not mean they will stop here. You should always do a market analysis on the area you are planning to purchase in. In today’s article we are going to look at a prime area in Los Angeles County, Culver City and run a market analysis and determine whether it is a good time to buy.
Yesterday, the closely followed Case-Shiller Index was released and showed that the housing market was still correcting. The media headlines were pretty standard highlighting the continued pressure downward in housing prices and also, the major drops in California, Florida, Arizona, and Nevada. Yet simply saying everyone is down does not really highlight the nature of housing prices. Let us take a quick look at the data for four cities just to demonstrate this:
I went ahead and highlighted the peaks for four metro areas:
Phoenix-AZ: Peak June 2006
Los Angeles-CA: Peak September 2006
San Diego-CA: Peak November 2005
San Francisco-CA: Peak May 2006
So as you easily see from the data, there is some divergence in when prices hit their apex. In fact, San Diego hit its peak almost one year prior to Los Angeles. Another key point in the data is to see how high prices got in relation to historical measures. Even though San Francisco has a higher median price than Los Angeles, the bubble in Los Angeles is still larger. In fact, if we are to assume the base 100 number in the Case-Shiller Index Los Angeles still has 50 percent more to decline and is still in the biggest bubble of the four sample areas.
Given the massive correction is now a good time to buy? After all, from the peaks mentioned above we are now off by:
Phoenix-AZ: -29%
Los Angeles-CA: -26%
San Diego-CA: -27.8%
San Francisco-CA: -24.6%
Those are sizeable numbers and would make people think, “is this a good time to buy given the quick correction?” It would seem many housing pundits have seized upon this psychological doubt and are trying to play on this desire. Yet buying something just because it has fallen drastically makes no sense. This is the same inane logic from people buying homes simply because they were going up. You can look at all the Real Homes of Genius in the state and figure out that people did buy anything at any price to have a piece of this epic housing bubble.
I wrote a rent versus buying article in October of 2007:
The Rent vs. Buying Dilemma
This is a piece of the article that still holds relevance today and we are going to modify it given the drastic change in such a short time:
“The credit markets were self correcting until the Fed decided to jump in and give the implication that they were the lender of last resort. Now the implication is that we will have a bailout and the market is rejoicing. Yet looking at the mortgage reset charts and mortgage equity withdrawals, it is clear we are only entering the first stage of a multiyear housing bear market bailout or no bailout. And when we look at Real Homes of Genius, we understand that fraud and outright speculation will come crashing down. You must ask yourself that a large proportion of our population was involved to some extent in producing products that provided no socio-economic benefit to our society. 2/28 loans? Option ARMS? Need we dig into more data of people making $9 hour being put into loans with the assumption they are making $157,000?
The only people benefiting from these loans were Wall Street and the lenders. No one else. Initially the claim was these people now have the pride of homeownership but what a crock that was. Lenders will continue to tighten since risk is now perceived in the market. This will make it more difficult for people to refinance, purchase discretionary items, and in general will put a pause on the consumer spending which greases the wheels of the American economy. We talked about debt being seen as the new form of money. But all this is changing. And Americans with a negative savings rate will have a hard time doing a paradigm shift in which lenders will require a down payment. Even a miniscule down payment like 5 percent will bring the market to a screeching halt. Everything is borrowed.
No one has a crystal ball into the future. Even Alan Greenspan didn’t see the subprime mess coming (or at least he would like us to believe that). Big Ben even in May of this year talked about the subprime market being contained in a “silo.” And of course we have the heads of housing lenders and builders making fools of themselves by making outlandish predictions that are now being verified in the arena of reality as false. Save up, run the numbers, and the time will come to buy. But right now, against the propaganda machine of the housing industry, this is not the time to buy a home.”
All that nearly a year later still holds true. You have to put yourself back into the time machine for fall of last year when people were still espousing the temporary nature of the drop! In fact, prices in many California areas were down but not in historical proportions like today.
Today we are going to examine in detail a decision to buy in Culver City California. Culver City is a prime Los Angeles location. This is one of those areas that supposedly if the idea of prime areas being insulated would hold up, should not be falling. Culver City is located west from downtown Los Angeles and is just south of Beverly Hills:
For those not from Los Angeles County it is hard to believe how diverse the 88 cities are in this massively populated county. Even on this map, you can see that a little more south from Culver City is Inglewood and prices in that area are a world apart. So you can see the price progression as follows:
Inglewood
Culver City
Beverly Hills
So we are going to assume that you are in Los Angeles County and are making a reasonable amount of money and are ready to buy in today’s market. What would the reasons be for not buying even in a prime area?
Reason #1 Not to buy - Rent vs Buy Ratios Still Off
This should be a major consideration in buying. First, let us look at the median priced home in our sample zip code:
Culver City (90230) - $710,000 (down 7% from last year)
Median Price Per Square Foot: $598
Median sized home (1,187 feet from data above)
Already we know that this area is in fact holding up better than the county in general which is down 26%. But is that reason enough to buy a place here? For the last few years people bought not necessarily for the underlying ratios because of the implied appreciation. So for example, say we bought a place for $500,000 in Culver City a few years ago with zero down and sold the place at the current price of $710,000. That is a massive quick profit in a short time. Yet that appreciation is now gone. Now, we have to look at rent versus buying ratios to see what kind of difference really exists.
So let us see what 1,187 feet square foot homes would lease for in Culver City. The median rent for a 3 bedroom home in the 90230 is $2,950. Take a look at this place I quickly found on Craigslist for $1,500 a month:
Again, this one place is an anomaly but you can find deals anywhere. The more likely price range is $3,000 for a starter home.
So now that we have a better idea of the price, let us run the numbers between renting and owning:
Income tax rate: 28%
Price of home: $710,000
Down payment: $35,500 (5%)
Interest Rate: 6.5% 30 year fixed
Monthly rent payment: $3,000
PITI: $5,530
Initial tax savings: $1,200
Initial principal reduction: $661
Net house payment: $4,330
Each month, you are paying a true premium of $1,330 to own a place in Culver City. Even if we are to assume that 2 percent appreciation for the next few years (which of course we are looking at more realistically depreciation) your purchase will not break even for 13 years.
Keep in mind that $1,330 is being invested elsewhere. In fact, here is another faulty piece of logic that was spouted during the boom time. That PITI payment is what you have to pay each month. You have to have $5,530 handy assuming you have your insurance and taxes escrowed. Given that conservative ratios tell us that you should not spend more than one-third of your income on your actual housing payment, you would need an income of $200,000 or higher to make this purchase fall within those guidelines. The tax break comes after you do your taxes. That is the faulty assumption. When we look at the net house payment and how people squeezed into homes with 60, 70, or even 80 percent of income going to their PITI any slight movement is going to put them out of their homes.
This is exactly what is happening. To buy right now gives you only a razor thin buffer to protect yourself. The way this bubble is bursting, there will be a time when the net house payment will be equal to the monthly rent payment. In this example above, if rents stay at $3,000 the median income price for a home in the 90230 area code will hit $500,000. This seems reasonable given the market dynamics. So why would you overpay $200,000 right now?
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Related Posts:
■Real Homes of Genius: Culver City Pricing Dysfunction! Prices all Over the 405.
■Real Homes of Genius: Today we Salute Inglewood. Bought in 1970 for $20,000 now selling for $397,400.
■Real Homes of Genius: Today we Salute Culver City. Flipping Homes in Today’s California Housing Market.
■Housing Rehab: 2 Step Program - Real Homes of Genius: Today we Salute you Burbank. $626,000 Short Sale.
■The Rent vs. Buying Dilemma: Mortgages the Southern California Way. 3 Factors to look at: Increase Rental Prices, Housing Price Declines, and Tighter Credit Markets.
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