Kate watches, waits and fears a falling knife

Kate is back, still blogging, still looking for the future home of Mr. Kate. This week she explains her current strategy and tells us about the houses she has her eye on. Enjoy:

One of the most common questions I get asked is: "Why haven't you bought a house yet?" The answer to that question changed dramatically since I began my search.  At first, it was because the listings in my target neighborhoods and price range were few and far between and (luckily!) I ended up on the losing end of several bidding wars, as you know from one of my earlier posts.

Eventually, people urged me to expand my search area to include neighborhoods north of the 101 where bidding wars were not as common.  So, in June, I went looking in an area called Fashion Square.  Fashion Square is bound by Hazeltine and Woodman, Magnolia and Riverside, and is named after the adjacent Westfield  Shopping Center. 

I figured these homes had to be more affordable than homes south of the 101, as they were not in the hills and not walking distance to Ventura Boulevard's restaurants and boutiques.  But they weren't.  As of June 30, there were 11 homes in this neighborhood listed for sale between $800k and $900k (remember, these are mid-century tract houses we're talking about).  I couldn't believe people were paying that much for these homes, so I decided to watch and see who would pony up. 

After two months (that's two months of watching these listings, many of these homes have been listed in excess of four months), how many of those original 11 listings do you think sold?  Well, one definitely sold.  As detailed below, it was an REO that sold for nearly $400k less than its previous recorded sale.  One went inactive, and no sale data is available so it seems to have merely expired.  Four of the 11 are still priced between $800k and $900k, but two of them have seen at least 8% reductions.  And the remaining five have been reduced below $800k.  (In fairness, a couple of other homes in this neighborhood came on the market in July and then went inactive, but here again no sale data is available for them and they were not part of the original 11 listings).

Read on below: Kate gets specific about the houses she's monitoring, and the price reductions she's tracking.

Bidding wars are not a problem these days, so why don't I scoop up one of these listings? Because I'm genuinely afraid of catching the proverbial falling knife. If these homes have dropped approximately 8% already, how much farther will they fall after the holidays?   A few months ago, these reduced numbers seemed like a pipe dream, and now it's happening so fast it's scary.  Sure, interest rates appear to be on the rise, but that doesn't scare me as much as being stuck with a negative equity house.

STILL LISTED BETWEEN $800k-$900k:

04/06/07:
13512 Addison St.
Price Reduced: 05/24/07 -- $899k to $885k
Price Reduced: 06/05/07 -- $885k to $875k
Price Reduced: 06/26/07 -- $875k to $850k
Price Reduced: 08/02/07 -- $850k to $825k (8.23% down)

04/12/07:
4937 Woodman Ave.
Price Reduced: 04/17/07 -- $900k to $849.95k
Price Reduced: 05/31/07 -- $849,95k to $800k (11.11% down)

05/01/07:
5124 Sunnyslope Ave. ($855k)

05/30/07
5057 Stern Ave. ($899k)

REDUCED BELOW $800k:

04/11/07:
14007 Morrison St.
Price Reduced: 08/20/07 -- $820k to $779k (down 5.00%)

05/15/07:
4917 Woodman Ave.
Price Reduced: 06/18/07 -- $869k to $849k
Price Reduced: 07/18/07 -- $849k to $799k (8.06% down)
*This home is now also available for lease at $3k/month

05/31/07:
4918 Ranchito Ave.
Price Reduced: 07/18/07 -- $825k to $775k (6.06% down)

05/31/07:
14019 Huston St.
Price Reduced: 06/27/07 -- $819k to $799k
Price Reduced: 07/12/07 -- $799k to $779k
Price Reduced: 07/26/07 -- $779k to $759k
Price Reduced: 07/31/07 -- $759k to $749k (8.55% down)

06/05/07:
13739 Hartsook St.
Price Reduced: 07/06/07 -- $825k to $775k
Price Reduced: 08/14/07 -- $775k to $759k (8.00% down).
*This is the infamous cash-back-at-close house.  It's still available!

OFF MARKET:

05/07/07:
13454 Otsego Ave. ($830k)
*Inactive; no sale recorded.

06/04/07:
13952 Hartsook St.
*This REO sold after 50 D.O.M. at $880k in July 2007. The prior sale was in January 2006 for $1.2M.

Thanks, Kate.
Comments? Thoughts? Insights? Be respectful. You know who we're talking to.

Comments

[blah_to_you]

That's a switch. On her blog she was defending the higher prices she thinks (thought?) southern California commanded "...as long as the sun keeps shining and jobs stay plentiful....".

The valley girl still has some growing-up to do, and LA area homes have a long, long way to fall yet. The disaster has not really begun yet.

[longdriver]

Prices of home is SoCal should be higher than the average US price. They always have been (well as far back as I can remember...30 years or so). But what has happened in the last 6 or 7 years is just crazy. You values have been artificially inflated by easy money, flippers and greedy sellers. Many home buyers lost any sense they had when they dreamed about homes doubling in value in 2 years. Their eyes glazed over with greed and they would do just about anything to get into a house. There is no reason to believe the prices will stay at their current orbital levels without the support from the flippers with the easy money. Greedy sellers alone cannot keep the prices up. If a home owner wants to sell the prices will have to reflect what people can pay. Banks are no longer going to make loans that are 10x your income. Homes are just another commodity and as such they are subject to wild price swings. They went up 300% for no reason they can come back down again (and probably will). Anyone who bought in the late 80's knows this. They said the same things back then that they are saying now. The prices did not drop this fast back then though. It took 4 or 5 years in that bust for prices to come back to normal levels. Looks like this one is moving at least twice as fast.

[Toby]

Kate,

I can't say this enough, if you buy a house in the next two years, you will be upside down for a VERY long time.

Believe me, I sat on the Beach upside down for 9 years. A house with a backyard, less than a 100 yards away from the ocean. And I still had negative equity for 9 years (if you want to see the Zillow, we can talk...it's pretty disturbing when you look at the 10 year).

Don't get me wrong. It was the Beach...if I had to be stuck ANYWHERE in the world...I couldn't think of a better place.

But still, if I only have one piece of advice to someone about it, I'd say "DON'T DO IT!" It sucks and it's twice as expensive.

[Dr. JwB]

I know you are sick of this advice, but given my incredible education (wink wink), I think you should advise you to . . .

. . . wait for the knife to fall to the floor. Then give it a good kick, and listen to the sound of it clattering across the tiles. Then pick it up.

Wait one year. I seem to recall that you or Mr. Kate are sick and tired of condo life, so why not rent a house for a year? Test drive one of these 800K+ valley homes, save some bucks every month, and then buy. I know moving is a pain, but if you really cant stand the condo, lock in a nice low rental price for one year! If you save 1K per month, that's just more for your down payment (or for fancy appliances).

[CD]

Kate, Do not buy, just enjoy driving around knowing all the homes you see will be 50 cents on the dollar by the end of 2008. One must start a discussion on " Recovery" what recovery? that was the Koolaid word the real estate agents were offering us this year ....There are bigger forces at work here than a real estate agent's positive thinking. Save your hard earned cash, rent and wait, you will not regret it. Big recession coming ahead, no way to avoid it. You are on top of the game right now, do not drink that Koolaid girl !

[just_rent]

I'm tired of hearing about Kate's home finding issues... what is the reason for her obsession with owning (in this market, aka paying higher rent to a bank than a landlord could ask). instead of $6,000/month on a 30 yr fixed $900K+ mortgage (which may be a conservative estimate), plus PTI, she should take $4,000 a month and rent a new(er) townhouse in Santa Monica, which is a much more desirable an area in terms of climate, schools and culture than some backwater in the Valley. Then she can take another $1,000/month and lease a new BMW convertible and really live the life. Oh, which still leaves her with over $1,000 more per month to save and invest than she would have had with the mortgage.... remember folks - you don't buy a depreciating asset and that's exactly what residential real estate is these days.

[Joseph]

"One of the most common questions I get asked is: "Why haven't you bought a house yet?" "

Wow, I would have expected the opposite: "Why haven't you formally postponed your house-hunting yet"? Seriously, I think it's clear that we're in a much too volatile stage here for anyone to commit to a home purchase if it's not absolutely necessary. Unless you have 3+ screaming kids to shelter, why not rent an apartment? Or just rent a house? But hey, if you want to juggle knives, it will at least be an interesting read.

[Kathy]

I would agree with blah's comment; the Valley has a long way to go. This is just the beginning.

Kate, have you considered just shelving your search for a few months to see how the tea leaves look after this August credit meltdown? Seems like a lot of time spent searching if you're now thinking it might be a bad time to buy.

[Mark]

I'm totally with you, Kate. I've come close to buying something during the last few months, but my self-preservation instinct keeps kicking in. I'm completely ready to settle into something, but the idea of financially stretching to buy a house, only to see it immediately decline in value is too much to handle.

Just ignore the woman-haters who post here, Kate. What miserable lives they must have.

[brettdl]

I would love to see a story about the people who bought these tract homes for $800,000 to $1.2 million in the first place. I wonder how they feel now even if they can afford the payments? It would be interesting to get their perspective.

[JR]

Blah_to_you,
What do you mean she "still has some growing up to do?" Please enlighten the readers of this blog of your great wisdom; though I doubt many would attribute condescension with wisdom. Personally, I find KITV's struggle to find a home to buy to be interesting and informative. That she has exposed her own changing emotions and opinions along the way is a perfect metaphor for the general sentiment toward the housing market in SoCal and the country. Not to mention, her blogs read much better than comments written by those who were "right all along."

JR

[jane fears the falling knife with you, Kate]

have been looking on the west side, and the same phenomenon is taking place there. these places have so much paper on them, they won't be selling at trustee's sales. so banks will get them back, and maybe not yet, but soon, they will want to unload. and that's the time to buy. my guess is a 30-40% decrease from jan. 2007 prices. if prices have tripled since 2000, that's actually a conservative estimate.

[Steve Reynolds]

Good job Kate,

I like this side of you much better that the "I don't like this, Kate", that is some great analysis. Right now the government has established an artificial ceiling of $417000 for housing anything over this, you no longer are paying a 6% mortgage, now you're up around 9.5%. You really need big money to get over this ceiling. PMI is now mainstream if you don't have the $80,000 for your Fred Mac/Fan Mae 20%. Spoke to one of my RE professors yesterday, she is gearing up to what she calls "some shopping and not at the mall". I think what you are going to see is large amounts of real estate priced to try and get it under that $417000 level, the other alternative is if Countrywide and its friends can convince the Feds to raise their purchase levels. I don't see that happening, I think too much light is shed on that play and that would clearly be seen as a bailout, not to mention the inflation worries. Bottom line, too much leverage in the market, dollar need to regain its strength.

[Monkey In Chief]

Kate should take a break from looking for a house to buy. The last LA price decline in the early 1990's took about 2 years to bottom out and then prices stayed flat for over 6 years. No reason to be in a rush. Crashes in any asset market don't quickly rebound and residential housing is one of the slowest markets there is for prices to adjust in either direction.

I have theory about market tops and bottoms. The top is when the even the most pessimistic bears have given up and say prices may keep rising indefinitely. The bottom is when even the most optimistic bulls say the market will never recover to its last peak.

We still have a long way to go to a housing market bottom.

[Mo's mom]

Good Job Kate. I would not buy anything anytime soon. With the banks making it harder to qualify or refinance alot of these overpriced (yes, they are overpriced) homes are going to become bargains. I have been watching in the OC for the last year and am so very thankful I did not buy anything. Now I look at homes that are considerably cheaper than less than a year ago. Heck, even the new properties are giving substantial discounts.

And to think, people said that property only appreciates in California.

[Jeff]

I appreciate Kate's regular postings. I'm in the same boat and realy like seeing her perspective, when I agree and even when I don't.

[TrojanDLA]

You are so right to be afraid of the falling knife, Kate. A downward pricing pressures to keep in mind:
1. Foreclosures are on the rise throughout the Southland; this can only force prices down as bank owned properties litter the LA Basin.
2. Rising interest rates for jumbo loans means nobody else is buying. So you may be intentionally waiting on the sidelines, but a whole lot of other buyers have no choice but to wait until prices drop low enough to match the 8-9% interest rates we're seeing for jumbo loans. Less buyers = housing surplus.

[War ChestSM]

Kate,

Nice to see that you are starting to see what many (myself included) have been talking about for quite a while. I have always maintained that while it is great to track and get educated about the market, buying anytime soon seems to be a financial kiss of death. These cycles take years to play out. Right now, LA is just in the inventory building stage where the first foreclosures are just starting to come onto market. Pricing pressure is the next phase and we are starting it right now.

As you saw on my blog, I showed how one such foreclosure can kill the comps. I also updated because one of the places that should have been "killed" is actually listing their property for $150K MORE than the foreclosure price...and there is other competition on the block. As a seller, you don't want to compete with lots of listings and foreclosures. What this also shows is that many people who bought recently are starting to become concerned and may be trying to just "break even" and get out. Many don't have the ability to drop prices...until it is too late and they are forced.

As a potential buyer, you want to build up your capital while waiting for pricing wars to take place between sellers.

Not to be too pretentious, but if Santa Monica is showing distress, it can likely be said that most parts of the valley (and other LA areas) should be suffering similar or even worse fates currently and in the very near future.

Most of us work too hard for our money to just let a few $100 grand slip away as a result of buying a few quarters or years too early. Again, please be patient and stay tuned.

[Pat]

What is the justification for declaring only Hawaii, Alaska, Guam, and the Virgin Islands high cost areas for Fannie Mae? California clearly belongs on that list.

[Steve Reynolds]

Pat I'm curious, which investors do you want to force to buy these higher loan amounts if you declare California a "high cost area"?

[problemWithcaring]

Whatever you think about Kate, she *is* cautious and she has helped other women - like me - to use caution when contemplating participation in the Southern Cali housing market. Finding her Blog was huge blessing to me and though I don’t agree with everything she says - or WHY she says it - nothing irritates me like all of this patriarchal advice in these comments, given to her as if you all are doing her some really big favor. “Educating” the little lady. Helping her to “grow up.”

Yet meanwhile, much of this "good advice," she already knows, fully understands and has been posting about in her Blog for quite sometime now. She was in the market to buy a house, did some research and, whether "formally postponed" or operating in serious caution -- her house-hunting is still *HER* house hunting – not what you and your old wife went through in the eighties.

Enough with the patronizing advice already.

[Bob]

People should buy houses as places to LIVE. Inventory is up and prices are falling so you can once again take your time... look for value...play hardball with offers...have an inspeciton...negoiate credits. So, if you want a HOME...and do all the right steps...put 20% down and expect to live in your house for the next 8-10 years then now is a fine time to buy. If you want a quick 20% investment payback then run to Vegas and put your money on a roulette wheel.

[jefa]

Hi Kate,

I'm in the same exact situation than you, though I am looking at a higher price point. My advice? Pick the price you can afford, and then pick the place you most desire and when you see the exact house you want at that price, go ahead and get it.

That is what I am going to do, and I expect I will see that house come down to my price point in a year. And if it doesn't? Then I'll rent or stay in the condo I'm in. And if it comes sooner? Then I'll go ahead and do it, and if I'm upside down for 9 years it doesn't matter, because I'm planning on staying in that house forever.

This is going to sound trite, but purchase a house with the same good sense you would use to purchase a computer. Don't buy it until you need it, but when you do need/want to purchase, only purchase what you want and for what you can afford. Everything else is moot.

People lose trying to time the market on the way up, and lose trying to time the market on the way down.

And if you really want to save money (3-6%) write directly to the owners of the houses you love and ask them if they are going to sell. I don't know why I haven't gotten around to doing this.. it really is a good idea.

[John T Watts]

Keep shopping Kate. Then at least you will know when the bottom is reached. If one were to decide to wait and just rent, it would be awfully easy to become interested in other subjects and simply miss the perfect point in time to buy. When the bottom is finally reached, no one knows how fast prices might rise again.

[Kate]

All:

Thanks for the advice. We will continue renting for a while longer but we will stay where we are. The trouble and expense of moving to a new rental just doesn't seem worth it.

Mr. Watts:

At this point, we are definitely in shop-only mode. I doubt I'll be able to exactly time the bottom of the market but I feel pretty confident in saying that the market has only just begun coming down.