Real Homes of Genius: Today we Salute you Santa Monica. 929 Square Feet for $969,000. And You Thought the Bubble was Over.

06 08 2008

Real Homes of Genius: Today we Salute you Santa Monica. 929 Square Feet for $969,000. And You Thought the Bubble was Over.

Posted by: admin in Real-estate news

Before you ring the bell and signal the end of the California housing bubble, there are cities and properties that still defy the laws of economics. California has corrected hard. The velocity of the one year correction is unlike anything we have ever seen in the history of our housing market. Seeing prices drop by […]
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Part of the unintended consequences of foreclosure is many people are leaving pets behind. For a variety of reasons, many simply decide to pick up and go and let the pets fend on their own. The national media has been covering the story of Powder the 44-pound cat who is a victim of the foreclosure crisis:

Powder, initially named “Princes Chunk” was found wandering the streets in New Jersey after her owner gave the cat to a friend who was supposedly going to take the cat to a local shelter. As it turns out, Powder was left on her own roaming the streets (as much as she could move around). Of course with all the media coverage the cat will find a home.

In California another problem has been with foreclosed homes with pools that suddenly becoming breeding grounds for mosquitoes. In fact, local experts have recently attributed larger mosquito populations that correlate to the rise in foreclosures. One recent estimate puts 4,000 Los Angeles foreclosed homes with having a pool. Since the notice of default count is rising and many of these are simply foreclosures waiting to happen, we can expect many of these problems to occur in the future.

The notice of defaults usually meant a warning to sell the home. That normally was the case for years as the California housing market kept rising and rising and homeowners who bit off more than they could chew would simply offload the home into the market normally at a profit. With massive declining prices and many buyers going in with zero to very little down, any cushion of selling is completely gone. They are underwater on the mortgage usually by tens if not hundreds of thousands of dollars. Take a look at the notice of default chart:

The more disturbing trend is many of the NODs are now turning into foreclosures. Without a jump in home prices, we are virtually guaranteed another year of massively high foreclosures.

I did a recent report analyzing the 270 zip codes in Los Angeles County’s 88 cities and found that only 28 of those zip codes had a positive year over year increase in home prices. What we can see from the progression of price declines is that the last hold outs in prime areas are still holding hope that there status symbol will keep them above the rest. Today we are going to look at one of those zip codes in Santa Monica that is still up 28.9% on a year over year basis. That is correct, as the entire county of Los Angeles is down nearly 40% on a year over year basis, this hold out is still up 28.9%. Today we salute you Santa Monica with our Real Homes of Genius Award.

The Name Can Only Carry you so Far

Santa Monica

Today’s home takes us to the wonderful city of Santa Monica. Many people out of the state have a hard time understanding why Santa Monica carries such a heavy premium. First, it is an excellent location. Near the beach and centrally located to the entertainment zones in Los Angeles. It also carries the prestige of the 310 area code. This area code is desired because it carries the affluence of the West Side of Los Angeles that includes Beverly Hills and Malibu as well.

Yet more and more, simply having a home in said area code isn’t enough to command eye-popping prices. The above home is a perfect example. It is located in the 90405 zip code in Santa Monica that carries a median price of $1,625,000, an increase of 28.9% over the past year even given the current housing turmoil. Yet this house isn’t seeing much of that big gain. This 929 square foot home with 2 bedrooms and 1 bath was initially put on the market for $1,099,000 in May. Seems like a steep price tag for a place built in 1937 but apparently that doesn’t seem to matter.

After being on the market for over 2 months, they decided to lower the price by $130,000 in June. In 2 months did the price really drop $130,000 or is this just another example of the pie in sky anyone will pay whatever price because of the 310 area code mentality? The current price is now at $969,000. The ad seems to encourage the buyer to think about a “possible room for a pool” or about “double your living area” if you are not content with 929 square feet for nearly $1 million.

If we look at the sales history, someone is still poised to make a nice profit and that is something to be said given the current housing malaise:

Last sale and tax info

Sold 01/19/2007: $835,000

So if the home were to sell at the current price, we get the following:

$969,000 - $835,000 = $134,000 in profit in one year and seven months. That profit seems about as much as that $130,000 price reduction. Even though prices have been jumping in this zip code, sales have been falling. Another issue is many homes that recently sold in this area, even a few streets away have gone for $600 to $800 per square foot. At 929 square feet, this puts our math at:

929 x $600 = $557,400

929 x $800 = $743,200

The current price tag puts a $1,043 premium on this place and the market isn’t responding. We are left with a really stunning range of prices here and since sales are so few, only 3 in June of 2008 for this zip code, it is hard to say how things will play out on this home. Incomes are high in this area with an adjusted gross income of nearly $100,000 per tax return filed:

*Source: MelissaData

Given tax write-offs and other deductions, this income understates the actual true income of local households. So let us assume a person making $150,000 a year wants to purchase this place with 10% down. Let us run the numbers:

Purchase Price: $969,000

Down payment: $96,900

30 year fixed mortgage at 6.52% (PITI): $6,532/per month

Freddie Mac

Gross Income: $150,000 / per year

Net Income: $7,634 / per month

So with that said, over 85% of this person’s net take home pay is going to pay for housing. We are simply including the principal, interest, taxes, and insurance. What if the person wants to add that pool? What if they want to upgrade the kitchen? Granite countertops anyone? A remodel? Anyone that owns real estate knows that the PITI is only the beginning in expenses. As you can see even a person with a solid income would be shelling out too much for this home. In fact, given the current FHA standards this person wouldn’t even qualify for a loan on this place!

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

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