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Old 09-24-2009, 05:37 PM
 
49 posts, read 200,009 times
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Given where the residential market sits today, where are views on the issue of renting a home vs purchasing a home. I have read alot of blogs over the past few months where people are writing that they will never put equity into a home in Los Angeles, too risky, who knows when the market will return or whether there will be any significant appreciation in the next 10 years, etc.

Especially in the affluent west side neighborhoods, the pricing, even for 2-income professional families, is out of reach.

Where do you think pricing should return to (i.e. how far back in years do we need to go to where pricing/sales will stabilize and we will start seeing some of this inventory moving)? Most blogs I have read seem to think prices need to revert back to 2001/2002 levels to be normal again.

Regarding the buy vs. rent debate, take a $1M home, for example. Figure 20% down, carrying an $800K mortgage at 7%, P&I = $5,300 per month. Another $12,000 per year in property taxes, so $1,000 a month on average, plus insurance, etc. So you could easily be between $6,500-$7,000 per month when it's all said and done.

If the same home is available for, say $4,000 per month in rent, you are saving $2,500-$3,000 per month, or $30-36K a year. You could roll that cash into something earning 3-5%, rather than risk your $200K equity investment being worth $150K in 2-3 years.

Just curious how others view the choice.
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Old 09-24-2009, 05:54 PM
 
Location: Las Flores, Orange County, CA
26,338 posts, read 93,480,540 times
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Quote:
Originally Posted by egold70 View Post

Where do you think pricing should return to

What arguments are there that housing prices won't be affected by the affordability of buyers? Equilibrium housing prices need to be inline what people can afford to pay based on their incomes, interest rates, and down payments. Right now interest rates are pretty low and there is a lot of rigidity in lending practices.

So, in the target neighborhoods in West LA, what are the median incomes? Is there any reason that most homes there shouldn't be worth more than three or four times that amount?

You can map zip codes here:

Click for a Zip Code Boundary Map.

You can get an idea of median income of those zip codes here:

Moderator cut: link removed, linking to competitor sites is not allowed

For fun, I picked Mar Vista 90066. Median Income $45K.

The average three+ bedroom home in that zip sold for $745K in the past 3 months:

Redfin

I'm sure there are all sorts of reasons why there is such a discrepancy, and people more knowledgeable in real estate than I will probably chime in, but I think it is safe to say, housing prices (there) have a long way to fall.

Last edited by Yac; 09-29-2009 at 06:43 AM..
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Old 09-24-2009, 06:01 PM
 
Location: Las Flores, Orange County, CA
26,338 posts, read 93,480,540 times
Reputation: 17827
Quote:
Originally Posted by egold70 View Post

Regarding the buy vs. rent debate, take a $1M home, for example. Figure 20% down, carrying an $800K mortgage at 7%, P&I = $5,300 per month. Another $12,000 per year in property taxes, so $1,000 a month on average, plus insurance, etc. So you could easily be between $6,500-$7,000 per month when it's all said and done.

If the same home is available for, say $4,000 per month in rent, you are saving $2,500-$3,000 per month, or $30-36K a year. You could roll that cash into something earning 3-5%, rather than risk your $200K equity investment being worth $150K in 2-3 years.
Your analysis is fine as long as the data you are quoting are realistic.
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Old 09-24-2009, 06:22 PM
 
49 posts, read 200,009 times
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I think it really depends on the neighborhood. For example, during the bubble, even dumpy little 900 SF houses in Mar Vista or Culver City were selling for astronomical prices. These areas were on fringe, they benefited from the overall housing craze and really shot up in "value". Never mind that these areas weren't historically affluent or even safe......

The first neighborhoods to experience waves of foreclosures and value deterioration were these fringe areas. Culver, Mar Vista, Palms, etc. A home that sold for $900k 3 years ago might have gone FC and is now available for $600k....and probably still needs to drop a bit more before it becomes stabilized.

That does not or should not mean that homes in the Palisades or north of Montana in Santa Monica are going to be "affordable" anytime soon, or ever. If a given home in one of those neighborhoods sold for $3M 3-4 years ago, maybe it's "corrected/stabilized" value is $2M....but anyone expecting those homes to be selling for $1M or less, it will never happen. Same goes for Bel Air or Beverly Hills. Regardless of the crazy inflation we experienced from 2002-2007, certain neighborhoods will always be affordable only to those who are extremely wealthy.

Using your Mar Vista example, a $45K median income should mean the average home price should be under $200k, right? I don't see that ever happening. In Detroit, maybe. Never in Los Angeles.
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Old 09-24-2009, 07:33 PM
 
Location: Seattle
1,369 posts, read 3,300,620 times
Reputation: 1499
Quote:
Originally Posted by egold70 View Post
Where do you think pricing should return to (i.e. how far back in years do we need to go to where pricing/sales will stabilize and we will start seeing some of this inventory moving)? Most blogs I have read seem to think prices need to revert back to 2001/2002 levels to be normal again.

Regarding the buy vs. rent debate, take a $1M home, for example. Figure 20% down, carrying an $800K mortgage at 7%, P&I = $5,300 per month. Another $12,000 per year in property taxes, so $1,000 a month on average, plus insurance, etc. So you could easily be between $6,500-$7,000 per month when it's all said and done.

If the same home is available for, say $4,000 per month in rent, you are saving $2,500-$3,000 per month, or $30-36K a year. You could roll that cash into something earning 3-5%, rather than risk your $200K equity investment being worth $150K in 2-3 years.

Just curious how others view the choice.
Renting is clearly the best choice given the market conditions. Buying a SFR at today's prices is stupid (IMO) if you can rent way cheaper. Not only are you burning money month in and month out, you're putting a large portion of your net worth at risk by putting a lot of money down and attaching yourself to a large liability for an asset that may depreciate for many years to come. If you put 20% down and the house value drops 10%, you've lost 50% of your cash investment in the house. That is a LOT of risk...way way riskier than just putting money in the stock market.

Renting and buying should be a similar cost - it is not - so rent. How long it takes depends on market conditions. Buy when it makes sense based on the cost to own vs cost to rent.
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Old 09-24-2009, 09:16 PM
 
Location: Las Flores, Orange County, CA
26,338 posts, read 93,480,540 times
Reputation: 17827
Quote:
Originally Posted by egold70 View Post
Using your Mar Vista example, a $45K median income should mean the average home price should be under $200k, right?
I don't see it going that low either. (What did those $750K homes sell for in 1997? Maybe $250K to $300K?)

I just wonder how a community that medians $45K or $60K or even double that at $90K can have homes over $400K.
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Old 09-24-2009, 09:47 PM
 
Location: South Bay
7,226 posts, read 22,116,059 times
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using the median income in mar vista is skewing your analysis. remember that a large portion of mar vista is low income rental, people that will never be able to buy homes in the area. i think that people who will be buying homes in mar vista were either renting homes in the area or are coming from apartments in areas with much higher incomes (ie. santa monica or brentwood).
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Old 09-25-2009, 02:00 AM
 
4,536 posts, read 10,588,859 times
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Rents on the westside in many cases are 1/3 to 1/2 of what a monthly mortgage payment would be.

I can't imagine buying anywhere on the westside right now.

Same thing in much of SFV since rents dropped pretty drastically. 4 years ago, the only house for rent at $1500 a month was in Arleta, Pacoima, or Panorama City. Now there are houses for rent at that price in Tarzana, Van Nuys, Sun Valley, North Hollywood(the crap areas), and Lake Balboa as well.
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Old 09-25-2009, 02:28 AM
 
1,297 posts, read 5,496,055 times
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I read and hear west la will take it's hit in 2010-2013 when a substantial % of interest only loans are scheduled to re-set. This was based on the those graphs the financial institutions and mortgage/consulting co's put out.

I read an interview where the default rate on interest only loans are at a 1-2% level with prime mortgages. With that, once these household mortgages re-set, there will be a notable increase in supply to avoid default and that should lower prices.

Time will tell. I did very recently note a westside home that sold for 4.8mill about 3 years ago is listing for 4.5mill. I would suspect it will go for the high 3mill range now unless it sits for a long while. That's not much of a drop though considering he bought at the top.
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Old 09-25-2009, 07:14 AM
 
9,725 posts, read 15,119,822 times
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If you compare West LA prices to Florida prices, there are some good deals in the West LA area, particularly among properties in the $2 million + range.

It's the low end properties that haven't fallen enough yet.
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