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Old 05-14-2008, 03:53 PM
 
148 posts, read 435,858 times
Reputation: 122

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Quote:
Originally Posted by motoman View Post
What makes you think they are worth $1.5-$1.75MM tops? I am just curious.

Just doing some rough calculations, at $1.5MM, an owner, assuming they put 20% down, would have to rent out each unit for something like $2,500-$3,000 per month just to breakeven. Which means that anyone renting there needs to make $90,000+ in gross income. 3/1 rule.

What are rents in that area?

People underestimate what it costs to own a rental property. There is plenty on the internet about it. Odds are it isn't even worth the $1.5MM.
Hey Motoman, well said. I agree that you have to calculate very carefully as there are a lot more factors to consider than most people think about. That's why with my calculations based on market rates of rents in the areas for comparable units, it shaves 40% off these listings' current asking prices just to get into the upper limit of their value. I know all about the hidden costs for rental property. I was merely saying they'd need to come down right now to an asking price 40% off what they are currently asking before I would even begin entertaining the idea of negotiations. The prices are absurd. I see so many listings for these 900K to 1.2 million dollar shoeboxes...very cute, but tiny lots and tinier homes, they're realistically worth half that at best.

These areas have very high rents (Beverly Hills), BTW, so the 90K, 100K+ a year for renters is not out of the norm at all (plus in LA, I last read that renters are paying upwards of 45%+ of their gross income in rents...we have some of the highest rates in the nation...I know the 3/1 rule is ideal, same with buying a home, but the market rates compared to salaries make that a virtual impossibility here). Rents are very high in that area, 3K for a 2 bedroom is not surprising at all.

BTW I wish I had more rep points to give you for your response and subsequent comment (you too brinSM)...brilliantly stated.

Last edited by karkyco; 05-14-2008 at 04:13 PM..
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Old 05-14-2008, 04:10 PM
 
342 posts, read 1,761,052 times
Reputation: 241
Quote:
Originally Posted by mommabear2 View Post
Well... Alan Greenspan recently said that housing markets are expected to slide for two more quarters then we should see an increase (though probably modest increase). I'm no Alan Greenspan but I think it's a great time to buy if you can talk a lender into giving you money. The fruit is ripe for the picking and my husband and I are looking into buying another place. With so much inventory, you can probably snag a really good deal. Just my opinion though so take it with a grain of salt.
Don't waste your time listening to Alan Greenspan. He is the idiot that created this mess.
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Old 05-14-2008, 04:40 PM
 
148 posts, read 435,858 times
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Quote:
Originally Posted by motoman View Post
Prices will continue to drop until people can actually afford to buy. Right now, even though prices have dropped $100k plus in LA, the price-to-income ratio is still too high.

As an example, there was an article in the LA Times a week or so ago addressing price-to-income in San Bernadino-Riverside. The average from 1980 to 2000 was 3.7x. Meaning, on average, the median price of a house was 3.7x the median income. At the peak of the bubble that number was over 7x. Clearly not a sustainable situation. So from the peak, prices in San Bernadino-Riverside could reasonably be expected to fall by almost 50%. I don't know where they peaked there, or where they are now.

In LA, the median household income is about $60,000. If we assumed a 4x multiple, we could imply that the median home price should be around $240,000. The last I saw prices were still in the $350,000-$400,000 range. If you're making $60,000 per year, the absolute most you should be paying for a house is about $250,000. AT MOST!!!!!

So to buy a $350,000 house, you need to be making, at an absolute minimum, somewhere in the $85,000-$90,000 range, which is well above the median income for LA.

The California Assocation of Realtors says you can buy a $500,000 house with gross income of just $100,000 per year. Which may be true if you have $100,000 for a down payment (we all have $100,000 in cash lying around, don't we), no car payments, no credit card debt, no student loans, you don't save a dime for retirement, you have no major healthcare costs, and you live very frugally. Of course, that fits the description of eveyone in LA, doesn't it? In other words, the CAR is smoking crack.

Wait for another year or two. It will take at least that long for prices to bottom. This was a large bubble and it will not fully deflate overnight. Give it time. Don't be in a hurry. And remember that a $500,000, $400,000, even $300,000 house is not a bargain just because everyone else is ignorant enough to live above their means and pay that amount for a place to sleep.
I still dig this posting - it's so right on every level. But my newfound worry is all the foreign money coming in and buying up properties. Because the dollar is so deflated, these overseas investors are reportedly cherry picking the best properties or even picking them up, sight unseen, and paying cash.

I know the upper markets will take longer to drop, but they seem to be propping and shoring up these markets, buying any and all retail, commercial, income property in the prime areas, and a lot of the homes too. They are more willing to pay at or at least close to asking prices (i.e. overpay). It's the double edged sword or being in a global city/global economy. Great if you're selling (and your advertising can target your potential buyers overseas), bad if you're competing with these buyers.

BTW, someone on here, I can't seem to find the post now, posted that Citibank or Citigroup was going to be "dumping their REO properties" in a couple of days. Does anyone know anything about this?
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Old 05-14-2008, 06:28 PM
 
830 posts, read 2,618,931 times
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Deleted. Incorrect logic.

Last edited by motoman; 05-14-2008 at 06:39 PM.. Reason: Incorrect
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Old 05-14-2008, 06:32 PM
 
342 posts, read 1,761,052 times
Reputation: 241
Actually if the dollar rises and property values rise foreign investors will do very well.
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Old 05-14-2008, 06:32 PM
 
1,831 posts, read 4,865,328 times
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Quote:
Originally Posted by motoman View Post
In LA, the median household income is about $60,000. If we assumed a 4x multiple, we could imply that the median home price should be around $240,000. The last I saw prices were still in the $350,000-$400,000 range. If you're making $60,000 per year, the absolute most you should be paying for a house is about $250,000. AT MOST!!!!!
All of this is great in theory but, does anybody really believe that prices in LA are going to drop to $250,000? I don't. If you're waiting for that ... you'll be waiting forever.
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Old 05-14-2008, 06:35 PM
 
Location: southern california
57,828 posts, read 76,796,090 times
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i read your profile so as to give a good detailed answer, but its a blank. but yes it will go down again that is my best attempt at a generic response.
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Old 05-14-2008, 06:35 PM
 
1,831 posts, read 4,865,328 times
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Quote:
Originally Posted by motoman View Post
There isn't a single argument that supports current housing prices. They will continue to fall, and fall, and fall, until, again, people can actually afford them given their incomes.

Give it a couple more years.
It would be nice if you were right but ... you're not taking other factors into consideration.

California homes have always appreciated more than wages. Why? Because people have always been willing to pay more to live here.

Even during the Great Depression, prices depreciated 30 percent. What you're talking about is a lot more depreciation than that which may be possible, but not likely ...

Last edited by sheri257; 05-14-2008 at 07:17 PM..
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Old 05-14-2008, 07:34 PM
 
1,753 posts, read 6,215,131 times
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Just as a point of reference, I purchased my home in the early 90's prior to the last bubble burst. At the low, it dropped about 25% in value. Today, it's worth 3x what I paid for it and, so far (knock on wood), has not dropped in value based on comps. Could I sell it today for that? Possibly. Do I want to? No. Will it drop 25%+ in the next 18 months? No. That is, unless, we have an earthquake on the Newport/Inglewood fault at the magnitude of this week's China quake. But, even then, the masses will be looking to move to Cali after the rebuild since the next "Big One" would have already occurred.

People who have been in California for the past 5 years can afford the higher home prices because they have a combination of income and equity that enables them to "buy up." Those who purchase at the bottom of this bubble will be in that same position in 5-years. It wasn't any different when we bought our first home back in '86. Appreciation and salary increased enough for us to stretch just that little bit beyond our means to move up to a larger home.
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Old 05-14-2008, 07:43 PM
 
72 posts, read 125,079 times
Reputation: 138
I don't know, prices seem higher for what's on the market in my area than they were in 2005 when there was a RE feeding frenzy( and of course I bought my condo in 2006 at the tail of that). More crap on the market--ie grandma's house styling-- for more $$$ then it was 6 mos ago. What's up with THAT???
So in upscale areas, I'd say no to houses, yes to condos--because condos are generally more transient and have younger people in them, who can't afford what they bought.Condos in my area, Westwood, seem lower, but there's also less on the market and again its the crap.
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