Westside weakness? One reader sees it

Look carefully at the photo, there is a quiz below.

One of the most popular topics on this blog is the debate over what will happen to prices in higher-cost neighborhoods.  To date, they have generally held their value better than greater Los Angeles, and have not suffered large numbers of foreclosures. That said, reader e-mail from "Someday the Ants Will Eat Grasshoppers":

"Your readers keep asking why the prices are holding up on the high end Westside properties. I’m not sure what they’re looking at, but I have been tracking prices in Westwood, lower Brentwood, Santa Monica (north of the 10), and Pacific Palisades every day for past 3 months. I look at every house for sale under $2M with 3 bedrooms or more, and I look every day. Really.

"Here are the relevant numbers (calculated from my daily Redfin downloads for those neighborhoods and that price range):
"The average number of listed homes dropping their asking price per day: 1.15
"The average size of any one price drop when it occurs: $53,090.90
"The average drop across all 50-60 properties meeting the search criteria per day: $1,017.58
"Ratio of new homes being listed to homes being sold: 3.48.

"So…Westside sellers are constantly dropping asking prices, and often in large amounts (the largest I saw since Feb was $400K). New properties are being listed for sale over three times more often than listed properties are selling. With asking prices for these sub $2M properties dropping about $1K per day, only the very rich would want to buy now. I mean, if you are in that market, that’s like putting $30K per month in your pocket just for waiting.

"People have observed that comps are not lowering. However, the average selling price is about $200K less than the average asking price in these neighborhoods right now. The comps are slow to decline simply because there are very few sales right now. No one (with good reason) seems to be buying. Eventually the transactions will happen, and the comps will adjust. Everyone needs to be patient, although frankly, I wish someone would buy now and then to help accelerate the lowering comps.

"I hope you run this story (or at least selected parts of it), because many of the high earners in your fan club get less attention, and certainly less sympathy, about the difficulty of getting into the market. They deserve to know that their lot will change, too, and their hard work and patience will pay off. Life is fair."

Thanks, Someday.
Now, as promised, the quiz. The house pictured is a 993-square foot, 3-bedroom, 1-bath in the 90405 ZIP code of Santa Monica.The current Zillow Zestimate is:
a) $599,000
b) $714,000
c) $805,000
d) $917,000
e) $1.06 million

Your thoughts? Guesses? Email story tips to peter.viles@latimes.com
Photo Credit: L.A. Times

Comments

[puckhead]

It doesn't matter how small and ugly the house is. The bigger question is how big the lot is and is it on a busy street. That cracker jack box is coming down and a McMansion will rise up from the ashes.

[TakeFive]

c) $805,000

Would have gone with d) $917,000, but the bars on the next door neighbor's windows brought the comps down a bit.

[Mmm... donuts]

Great posting and analysis, and I love your nic, "Someday the Ants Will Eat Grasshoppers".

[Kathy]

A 3 bedroom in 90405? My guess is (e); $1.06 m - can't imagine less in Santa Monica - not yet, anyway.

[Laker]

My answer is:
d) $917,000

The true value however is $250,000 for the land (location) and -$20,000 (because it will cost $20,000 to demolish this shack and recycle it)

[Joe]

We just lost in a bidding war in Culver City for a three bedroom, two bath house listed for $885,0000. We were told that there were nine bidders. This is not as desirable an area as SM or PP, but it does not seem like a buyers market to me.

[Arti]

Thank you Peter, thank you Someday. As someone who has been tortured by this question for months, it's so nice to read something so on-topic.

Now we can discuss our agreement/disagreement. I agree with Someday, and would add a couple more reasons for why the average prices on the westside *appear* to be holding up (other than the lack of sales).

One additional explanation is that the buyers there from 2004 on got prime, Option ARMS rather than the subprime 2/28s that you see now resetting in the marginal areas. Since those prime ARMS are neg amortization and don't reset for about 4 1/2 years, we are only now seeing westside resets from 2004.

Another explanation is that a lot of the recent sales are "flips", as speculators bail out first. Since they're flips, they tend to have just undergone a number of "improvements". That's why a lot of what's for sale now in the westside are SFRs purchased around 2005 and they have higher list prices than that peak not because of appreciation, but because the seller is a speculator who is trying to capture the cost of the value he put into the house. Hence, it looks like prices are still high or going up.

Please continue discussing, we need opinions on how bad it will get on the westside when the prime option AMRs start resetting now through 2010 (four and a half years from the 2004-2007 period), and how precipitous the fall will be.

[MyLessThanPrimeBeef]

My advice to the Santa Monica housing market is this: Get a good, thorough examination by a reputable doctor, un-diagnosed cancer is always fatal.

If you are sick, the worst you can do is to be in denial about that.

Get treatment early. Fact it, confront it. Just say your house is sick with 120% overvaluation. Don't pretend you can still climb Mt. Everest.

[AJ]

My answer: $599,000... which is more than 600 a square foot.
Still way too much money.
AJ

[JPG]

Joe,

That must have been one spectacular house to get nine bidders into a tizzy, especially at that price. Must be spotless and close to downtown??

I've been keeping an eye on Culver City listings for about a year now and, though my observations are far more anecdotal than the sharp analysis by Someday, I've seen definite softening in prices.

A year ago, my search criteria (under $900,000) almost never yielded anything with more than 3 bedrooms and a 5000 sq. ft. lot. Now I am regularly seeing 4 and 5 bedrooms, and even a 6 bedroom recently, and larger lots are more prevalent. I have also seen a lot of houses languishing on the market for months on end after multiple, often sizable price reductions - also seeing some short sales and bank-owned properties.

Granted, I haven't looked at any of these places, so maybe all these houses sitting on the market for months are dumps. But 2-3 years ago even dumps were eliciting bidding wars so in that sense things are better for buyers.

Quiz answer:
I'll go with $1.06 million, only because I think Zillow's zestimates are easily skewed by "comps" that aren't really comparable.

[Jason]

At the lowest end, with 20% down and 6.6% interest rate, I believe the necessary income to not exceed 28% DTI is something like $131K/yr. For a smaller size 3 bedroom with only one bathroom.

The answer could be A. and it'd still be too expensive to be reasonable, nice area or not.

[KateNonymous]

I think the e-mail misses the difference between getting into the market, and getting into the market in the neighborhood of your choice. It's a big, big difference, and for those of us who are having trouble doing the former, it's hard to have "sympathy" for those who are trying to do the latter.

Yes, it's frustrating to make a lot of money and be unable to buy in the neighborhood you expected to. But my husband and I together can't afford something comparable to the house my parents bought on one salary, and it was a modest house in what was then a safe but not amazing neighborhood. We can't afford that, but somehow I'm supposed to understand the plight of a rich person who can't quite afford Santa Monica?

[Keith]

As I've commented before, the listing prices of homes currently listed on Realtor.com for Hermosa Beach have had their listing prices cut as much as $600,000, and as much as 31%. And those houses haven't sold!

Anybody who thinks the Westside/Beach Areas are holding up should buy now, and they should offer Zillow prices. It would serve them right. A fool and his money....

[Cal]

Jason,

The 28% income limit is a relic to current udnerwriting, one I thought was true for a long time. I've read the docs on fannie mae saying 28/36 as kind of high level rule of thumb. But there are many Fannie/Freddie loans whose guidelines specifically allow 45% DTI.. back end ratio only no looking at front end. The new jumbos are a case in point.

FHA is at 31-33 for manual underwrites on their front end ratio.

So, unfortunately, the bank is not telling people willing to be very stupid with their money that they can't get a loan. And that doesn't appear to be changing anytime soon.

[jeaner]

I'm guessing a) $599,000.

A coworker of mine would probably guess b) $714,000. She and I had a very brief discussion about this yesterday-- she, too, has a small-ish house in the west side and thinks that her house is worth in the 700s and I was incredulous. (She's near the Santa Monica airport below the 10 not too far from Pico)

[speedlett]

KateNonymous --

"We can't afford that, but somehow I'm supposed to understand the plight of a rich person who can't quite afford Santa Monica?"

So you think that anyone who makes more money than you do has no right to complain about high housing prices -- and yet you do?

What would you say to the thousands of people in this city who make less money than you do, and who can't afford shelter at all?

No, I don't feel sorry for someone who can't afford to buy in Santa Monica -- but then I don't feel sorry for you, either.

[Valley Observer]

That dump sure isn't what "Westside" makes me think of. Was it built for workers at the Douglas factory at Cloverfield airport?

[peter m]

"Now, as promised, the quiz. The house pictured is a 993-square foot, 3-bedroom, 1-bath in the 90405 ZIP code of Santa Monica.The current Zillow Zestimate is:
a) $599,000
b) $714,000
c) $805,000
d) $917,000
e) $1.06 million"

Zillow always puts its zestimates $100,000 to 200,000 too high. They would have this POS property which is worth no more than 150,000 in any part of LA except the westside at $917,000. Zip 90405 is mostly middle class type post WWII 3/2,s 1000-1800 sq fts fancied up and expanded by their owners thru extensive remodels.
It is a good clean area but not hi-end posh, not an area of fancy mega mansions. Prices should be no more than $500,000 average based on incomes in this area, and that is where they will trend down , though it wiil be a slow bleed.

That Culver city home for $885,000 must have been an exceptional property in an exceptional area like the area around west LA college. Maybe a spruced up property as well. CC is a good clean area but not overly rich,:it is like SM 90405. It also has a relatively low supply of SFH's available for sale. Maybe the demand for quality CC SFH's exceeds the supply which keeps prices extortionately high.

SM and CC are mini-micro markets for well-off westsiders making $$200,000-$250,000 per household. As the recession deepens in CA and unemployment rachets up there wil be just a few laid off westsiders forced to sell at a loss and help lower the comps. U just need a few forced sales or foreclosures in a zip to lower comps for entire hood. These will start cropping up in volume due also to prime option arm resets starting summer 2008. Look for at least 10 % further declines across the board for entire westside by end of 2008. Another 10-15 % decline thru 2009.

[Geek Seek]

"We were told that there were nine bidders"

Can we get something straight once and for all? Is it legal for agents (or even sellers) to tell buyers that there are multiple bids on a house when there aren't? From what I understand, there is no confidentiality built into a standard purchase offer, so why not just ask to see the offers? I'm sure the others would mind having their "bid" used against themselves... but the point is... can any jackass agent just say "we have multiple offers," whether or not there really are?

My only experience with this was 10 years ago when we made an offer and the listing agent told us that there was an existing bid, and then offered to show us. My left eyebrow twitched a little. He actually handed it to me and pointed out the offered price, but he didn't point out to me something that I noticed on my own -- that it was about 4 months old.

So, can they GO TO JAIL for lying about multiple offers?

I'm quite sure that there are plenty of clowns willing to pay a million dollars for that slice of santa monica, however run down, so 9 offers in this case could very well be true, but are there real estate people still out there looking people straight in the eye and lying to them?

[War ChestSM]

Since you have brought up the subject of the westside, I think it would be appropriate for you to mention both Westside Bubble and the Santa Monica Distress Monitor (which I run).

In short, we have been featuring 2005 and even some 2004 rollbacks on condos. Most single family homes have softened significantly but the declines and losses aren't generally as dramatic (yet). We have shown plenty of speculators even in the high end area of 90402 and have shown many single family homes failing to sell - and thus have been put up for rent or removed from the market temporarily. The weakness has definitely made its way into the most "holy" of westside neighborhoods.

I have tried to e-mail you specific interesting situations which we have featured on the Distress Monitor but I have not seen them featured here. All the crazy lending ($0 down, sub prime, etc) and all the crazy and potentially fraudulent type of transactions took place en mass on the westside - we weren't different...just as highly and unsustainably leveraged as everyone else; with rampant speculation to boot!

There are MANY, many people who have vested interests in perpetuating the "westside is holding up/immune" mantra - but sadly for them, the truth comes out more and more every day.

[Cal]

Geek Seek,

The DRE requires "Honesty and Fair dealing" with any third party. But since all of the stuff is so secretive the chance anyone finding out about it is pretty much nil. As for going to jail, it would be fraud and you could get the purchase rescinded or the offer voided as a civil matter. It would be up to the local district attorney to act to get someone jailed and you'd have to have a pretty strong case and a pattern of abuse.

[Hank Venture]

Pete: This should have been two posts.

Someday: Great data, please keep us up to date!

[anonymous]

thanks warchest. i think of you & the sm distress monitor & west side bubble blog every time some guy like arti says -- and even less predjudiced posters have repeated the 'untouchable west side' myth. or at best they say 'besides condos' and the next week it's -- it's not tanking north of wilshire! then 'north of montana is holding up!' finally, 'they can't touch santa monica canyon'!! but as you've shown, inventory is growing all over samo and prices are degrading. thanks again.

[someday the ants will eat grasshoppers]

Hank,

I'll update these again in 3 months so we can see what's happening (if Pete will post it).

And thanks to those who feel the same way about envy as they do about greed. I hope real estate has not turned us all against one another.

Fairness above everything.

[KateNonymous]

As a matter of fact, speedlett, I have far more sympathy for people who can't afford housing than I do for myself. But then I didn't ask for your sympathy, which the e-mail did. Can rich people complain about high prices? Sure, why not? But asking for sympathy is a bit much, and it's not the same thing.

Believe me, I look around my crappy apartment and recognize that for most of the world, it's a palace. Certainly there are vast numbers of people who would say, "I'm not concerned about the guys who hang around out back, drinking and doing drugs--at least I've got a roof over our heads." Don't worry; I'm not looking for your sympathy. I'm just looking for somewhere else to live.