Sunday, June 19, 2011

Introducing the 2009 Losers

To those of you who bought during the last few years because of a growing family, a desire to lock in a low interest rate for 30 years, newfound affordability, renter's fatigue, or you simply got tired of waiting, congratulations. Whatever the reasons, they were your reasons, and I sincerely hope you're enjoying home ownership.

But to those of you who believed economic "experts" and commission-hungry tea-leaf readers who proclaimed 2009 was "the bottom" and planned to sell in a few years for profit...


In addition to losers who bought during the bubble, I have documented quite a few 2008 buyers who purchased based on the false assumption that "the worst is over," and then faced total annihilation when they tried to unload just a few years later.

Well now I'm starting to see more 2009 buyers who believed all the bullshit about "the bottom" being in spring 2009 try to sell their "wise investments," only to learn that prices have fallen considerably since their supposed bottom.

Very few people think about it, but because of commissions every seller is 6% underwater from the outset. That means if they hope to break even, home values would have to increase by a minimum of 6% during their ownership. For 2009 buyers operating under the premise that the last two years provided those kinds of gains, they are about to learn a valuable, and painful, lesson about the dangers of listening to those financially dependent on home price increases, instead of common sense and simple math.

That's because home prices on average have dropped by 5.1% since 2009. Welcome to the (totally foreseeable) double dip.

1310 East OCEAN Blvd #803, Long Beach, CA 90802

1310 East OCEAN Blvd #803, Long Beach, CA 90802
SQ. FT.: 960
$/SQ. FT.: $448
VIEW: Catalina, City Lights, City, Coastline, Harbor, Marina, Ocean, Panoramic, Yes, White Water (Wait, it has a view of "Yes"?! Maybe this price isn't that bad after all)
COMMUNITY: Downtown Area/Alamitos Beach
MLS#: S660918
ON REDFIN: 19 days
DESCRIPTION: Sleek and sophisticated luxury high rise with spectacular Ocean views from every room. This home is right on the beach. Ocean views by day and city lights by night. You ll never tire of seeing gorgeous sunsets or graceful sailing ships. Stunning home with modern kitchen and bath. Lots of sunlight spills through the floor to ceiling windows. Open floor plan, great for entertaining. Spacious master bedroom suite with walk in closets. Let the sound of the waves lull you to sleep. There are many amenities including 24 hour concierge, Fitness room and community room, pool, spa, cabana, BBQ area and fire pit. Conveniently located to downtown, shopping, restaurants, parks, museums, theater, Queen Mary, Marina and more!

This fool bought in October 2009 for $420,000 (down from an original asking price of $450,000. He probably thought he was getting a smoking deal) and for whatever reason (oh, I don't know...maybe the obscene $740 HOA fine, the limitations of only one bedroom, or that he simply can't afford that monstrous monthly nut anymore) just 19 months later decided to lay his head on the chopping block--ERRR...put it on the market asking $30,000 more than he paid (anybody want to guess what the sales commissions are? Whoever said "around 30 Grand" wins a key chain).

He has since dropped the price to $430,000 in the hopes of that $10,000 cushion somewhat offseting what is sure to be a sizable hit to his finances...but things aren't looking good.

On a positive note, the views are astounding:
1310 East OCEAN Blvd #803, Long Beach, CA 90802

1310 East OCEAN Blvd #803, Long Beach, CA 90802

The interior looks largely untouched from the 1984 build date (the dead giveaway is the florescent overhead lights in the kitchen and those gnarly bathroom counters), but you're mostly paying for the view in these types of places anyway.
1310 East OCEAN Blvd #803, Long Beach, CA 90802

1310 East OCEAN Blvd #803, Long Beach, CA 90802

And more good news: There is a sold comp from a few months ago that sold for $475,000 (but if that comp really was indicative of fair market value, then why would our seller need to reduce his original $450,000 asking price? Hmmm).

And he's also undercutting his competition (another 2009 "bottom" buyer!) by $40,000, although that unit appears to be upgraded with granite, a new bathroom and plantation $hutters.

The overall point is that he's just $9,000 above his 2009 purchase price and there still doesn't appear to be any interest. Which means more price cuts. Which means he is about to be in a world of hurt.

Let's put it this way, with 10% down ($42,000), after $27,000 in commissions and $14,800 in HOA fees, all of that down payment money is now gone. POOF!

If he put 20% down (likely, given how panic-stricken 2009 was), he's now halfway through that money. And every additional price reduction just eats further and further into that former nest egg of his.

Sure, he'll have some equity after 19 months of payments, but not nearly enough to break even on this foolish purchase. The question is not if he will lose a great deal of money on this, but how bad the damage will be.

His biggest challenge will be finding a wealthy, single, retiree who is financially savvy enough to be able to afford this place, but dumb enough to believe there will not be better buying opportunities in the future. Yeah, good luck with that.

However, there are some who say there won't necessarily be any better deals in the future because all of the must-sell inventory has been washed out of the market, the Fed can keep interest rates low and banks can keep supply off the market for as long as it takes, thus keeping supply artificially restrained and prices from falling. And maybe they're right (of course, if they were then we would have never entered the double dip in the first place, but I digress).

Maybe the banks and Fannie/Freddie and FHA can indeed keep their massive pools of inventory off the market for years or decades and interest rates will hover under 5% for years to come (they've certainly pulled it off so far).
But suppose just for a moment that they can't pull it off. If interest rates rise by 1 or 2%, or supply increases by 15 or 20% -- or both -- what effect do you think that will have on prices? Until we are in a more normal market with real inventory and serious sellers, nobody -- and I mean NOBODY -- can be confident in their predictions of 2011 (or 2012, 2013, or 2014) being the true bottom (just like they were all wrong in '08, '09, and '10)

Here's the bottom line: If you are buying a place right now because you are confident you will be there for 10 years or longer and your finances and job are reasonably stable, then go for it. The Rent vs. Buy equation has become a no-brainer in most areas by now and these rates are incredible.

But if you think there's even a remote chance that you'll need to sell in the next few years, renting would be the most logical choice (if nothing else than for mobility's sake). Property values have likely seen the last of the big, gut-churning drops, but that is very different than a resumption of gains. And considering you'd be 6% underwater from day one, if you needed to sell in 2013 there's no way you'd get out for break even.

Yes, a home can be an investment, but it is also an expensive consumer good that must be viewed as a liability. If you don't believe me, why don't you ask the seller of this apartment which of the two he believes he bought.


  1. I just cannot fathom paying $740 per month for HOA fees (non-tax deductible, no less) on top of whatever the mortgage and taxes will cost on a tiny condo.
    When I owned a townhouse in NJ, it was a 2 bedroom, 2.5 bath, with loft making up a 3rd floor, in-unit laundry room, private patio, reserved parking. Values crept up over the years, but the HOA fee was $125 per month.

    This fee covered the following:
    Repair reserve fund
    Large pool
    Tennis courts
    Landscaping and snow removal

    We didn't have a Concierge, so there's that.

    So what the heck is $740 per month going toward??? The gym??


  2. A concierge probably makes about $100,000. in salary, overtime, and benefits.
    Add in a few maintaince / janitorial types, a front desk clerk, a securtiy guard, and a parking attendant, and you are there.

  3. After legitimate expenses, the residual from the $740 a month in HOA fees may be going into a reserve fund for future litigation against the HOA.

  4. first, I think you are being too kind to potential buyers LB. I'm still uber-bearing despite the fed holding up the game for the past few years. I think if you buy now in coastal CA, you are going to lose your 20% downpayment in the next three years.

    second, HOAs is high in these buildings due to all those things anonymous said, plus add in a few elevators, which are hella spensive to maintain and use lots of electricity. and external maintenance on a tall building, also hella spensive. Then remember that the doorman is really four dormen to cover the door 24/7/365.

    Happy 4th!


  5. FreedomCM,

    No one can tell when prices are going to "bottom out". I wouldn't buy at the current prices though.

  6. Good stuff to learn from, thanks.

    I wonder if there is an article, or maybe if you El Bee have done a specific blog, explaining how the banks can simply hold on to the inventory, and what the prospects/consequences of this could potentially be?

    BTW El Bee, my last deal fell out of escrow after 6 months. Long story, but I'm back on the market, and I have made several offers. Would love to get your opinion again if you have the time.

  7. Mike,

    Sorry to hear it fell out of escrow. I know how much you dug that place.

    But Long Beach is a big city, and although there is not a whole lot of real inventory right now, keep your head up and your eyes peeled. You'll find your property.

    As far as how banks can hang on to inventory, there are two things happening. One, banks are dragging their heels on foreclosing because once they do, they have to write down the house to its TRUE market value instead of the bullshit bubble prices that are written in their books. As I understand it, if they ever suspended "Mark to Fantasy" accounting and returned to the old days of "Mark to Market (Value)" then their capital ratios would get hammered and they'd essentially be revealed as bankrupt or insufficiently capitalized (cash to cushion against risk-adjusted losses). Plus, banks know that if they foreclose en masse and suddenly there is a bunch of discounted supply on the market, prices will take a dive...putting more of their customers underwater, making more foreclosures likely.

    The second thing banks are doing is sitting on inventory that they've already taken back. This one I don't really understand because they've already taken the hit to their balance sheet when they took it back at auction. It was valued at whatever the (much lower) auction price was. I don't see any advantage to this unless someone can point one out to me. All it does is create eyesore houses and hurts neighborhoods. But at least some cities are taking action:

    I think the issues with those abandoned, yet technically bank-owned properties, is that nobody knows who the hell owns the mortgage. Thanks to MERS and all the Mortgage-Backed Security slicing and dicing, it's really tough to figure out who actually has the right to sell the (now dilapidated, rotting) house.

  8. Wow thanks El Bee... That's a wealth of information, and it really clears things up for me. NOW I understand the why of what bank's motivations are.

    What I'm trippin on is how there is so little available.... I mean I understand not wanting to FLOOD the market, but why not at least release SOME inventory?!

    I just was looking at a condo that was pretty nice, and there were like half a dozen offers for it, and several of those were cash.... WTF?!

    I asked my mom/realtor, where are all these people coming from, who have 200K sitting around in cash?!

    Point being, if so many willing buyers are out there, why not release some inventory?!

    You are correct though, that there are some good deals to be had, if you look.... but it's been SUCH a struggle, because there are so many difficulties nowadays, trying to get things done.

    For example I found another condo I really liked, and my offer would have been accepted, because the only other offer was a lowball cash-investor offer. This was a short-sale, so the seller has now tried to roll with the lowball cash offer, because there is a lawsuit pending against the HOA.... and nowadays, lenders don't want to fund a loan, if there is a lawsuit pending against the building/hoa.

    We did some research, and found it wasn't a building defect lawsuit, but it was a completely frivolous liability lawsuit (elevator was overloaded with 20 people, fell one story, no one injured - didn't even spill their drinks, and a YEAR later, one guy decides he is going to try to sue to get paid... yeah thanks buddy, since you're such a loser, you just cost me a chance at my dream home).

    So after finding this out, we're trying to see if our lender will be ok with things, but this is just ONE example of all the difficulties involved these days, in getting an offer approved, and getting things all the way through escrow.

    And yeah, I really liked that other condo, but actually, I have spotted a specific area that I really like, and there are a few condos in this area that I actually like even better..... the only problem is trying to secure one of them.

    Hope all is well with you and yours.

  9. Hi El Bee, just a heads up that I sent you an email.... if you don't have time for it, no worries.

    I think I am currently experiencing the effects of this lack of inventory on the market. With the past three offers I've made, I've been beat out by "all cash" offers.

    I don't know where these people come from, who have 200K sitting around in cash, but I see that anytime something halfway decent comes on the market, there is a lot of competition.

    This sucks!