5640 Hallowell Ave.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

“THIS IS YOUR LUCKY DAY!! THIS GREAT BUY IS BACK ON THE MARKET DUE TO AN UNQUALIFIED BUYER!!” $619k for a dated 2bed/2bath. Who’s the lucky one? You tell me.

This is probably happening all over the place, but most realtors don’t advertise that on their listing. Buyers are not only unwilling to pay more than they think a place is worth, but many are now unable to do so because they can longer easily finance large sums of money. If you think about it, the bubble was fueled by the bidding up of prices through the means of cheap loans. Now that those are removed from the system, buyers are no longer able to sustain the insane market of the yesteryears.

This house was purchased back in 1985 and is likely paid off by now. That is both good and bad. Good thing is that the seller is not in any dire circumstance to sell because they’re either not making any mortgage payments and/or the payments are very low. The bad thing is that because they have all the time in the world, they’ll be less willing to settle for a quick sale. Holding out for that ideal price may cost sellers a lot of money, especially in this down market.

If you take the 1985 purchase price and apply a 4% annual compounded appreciation, this property would be valued at $305,675 right now. Since nearby 2bed/2bath properties only cost $1,975/month to rent, this property is still over-priced. If you apply the general rent-saver gross rent multiplier of 160 to the equivalent rental cost, this property should be priced around $1,975 x 160 = $316,000. That is fairly close to the $305k noted above.

So you tell me who’s the lucky one. The knife-catcher who was prevented (by the bank) from buying this house or the future knife-catcher who will buy this home for $619,000? I think we all know the answer.

1233 S. 6th Ave.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Another day, another REO in Arcadia. Today’s property is situated on the eastern edge of the city, close to Monrovia and is located in the back of a duplex. The previous owners bought in the summer of 2005 and lost a bundle. Public records show a first loan of $1,050,000 and a second of $149,800 on a $1.5MM purchase. That leaves a downpayment of just over $300k. The bursting of this bubble will undoubtedly hurt.

If they get their asking price, the bank with the big loan will not lose money, but the secondary mortgage lender will lose over $100k and the seller will lose their entire $300k downpayment. That’s what happens when you buy an overpriced property at the height of the bubble.

Sales History
11/09/1988 $300,000
08/14/1990 $698,000
07/15/2005 $1,500,o00
03/21/2008 $1,023,000

The 1990 knife-catcher was able to sit out the previous downturn to find an even bigger knife-catcher 15 years later to buy the place for more than double what they paid. Less than 3 years after that, the bank took the property back to the tune of a $477,000 price reduction. That’s -13.3%/yr…now that’s a comp killer.

Its neighbor 2 houses north of this one has been sitting on the market for almost 5 months with multiple price reductions. Oddly enough, they recently increased the asking price. I don’t understand the mentality, but it doesn’t look like it’s doing the trick.

Neighbor’s Listing Price History
12/12/2007 $1,850,000
12/18/2007 $1,392,000 (-$458k)
02/29/2008 $940,000 (-$452k)
03/09/2008 $1,200,000 (+$260k)

It’s been about 1.5 months since the price increase and it’s still sitting on the market. I think we’re due for another price change reduction soon. They were on the right track with the $458K + $452K = $910k reduction from December of 07 to February of 08, but took a turn for the worse when they pushed it back up to $1.2MM. Looks like these two properties are going to drag each other down along with the rest of the neighborhood comps.

140 W. Foothill Blvd.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Because of the previous community profiles, I’ve been profiling homes in the northern part of Arcadia for the past few weeks. During the weekend I had made up my mind to start moving south a bit to capture other parts of the city, but I couldn’t pass up on this pre-foreclosure short sale I came across today.

This property is on a busy street bordering the Highland Oaks community and is just a few blocks away from the house up for auction TheArcadian posted the other day. Distressed properties are often the first to go under and this is no exception. Public records show a first loan of $640k and a secondary mortgage for the remaining $160k giving us another 100% financing deal gone wrong. At some point you start to wonder how many of these bad loans the lenders can absorb before they get thrown under the bus.

Sales History
05/17/1988 – $275,000
07/17/1998 – $295,000
06/09/2003 – $312,500
04/14/2006 – $770,000
08/23/2006 – $800,000 ($30K HELOC?)
12/23/2007 – $25,000

It’s great when I can find a listing that has a full sales history going back 20+ years because it shows how a particular home fared in the past. To me, the first two numbers speak volumes. Over the course of 10 years this house appreciated a whopping 0.7%/yr. That is actually a loss when you account for the 3-4% annual inflation. That period started near the top of the previous cycle (late 80s) and ended around the bottom of the downturn (late 90s). This property actually recovered fairly well by 1998 to allow the owner to somewhat breakeven (minus property tax and maintenance of course).

The current asking price of $770,000 is a stated short sale to be approved by the lender. The owners are desperately trying to let go of the property before it goes into foreclosure. Given the previous sale price, the lenders might actually let this one slide – assuming they can find a knife-catcher. Since the market in 1998 was pre-bubble mania and prices were stable, let’s use that as a baseline. If I apply the following annual appreciation rates, the property would be valued as listed below.

3%/yr $394,455
4%/yr $436,672
5%/yr $480,524

Personally I don’t like the location of a property on such a busy street and wouldn’t pay $770,000 for it. Given the large lot size, this listing isn’t as outrageous as some others we have profiled, but it’s still overpriced. Would you pay $770,000 to bail out this distressed homedebtor?

1511 Hyland Ave.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Many often wonder if the high end of the market is immune from the market downturn. So far, subprime has done its share of damage to California and as expected, it hasn’t affected certain markets much. Subprime isn’t really a problem in Arcadia. In markets such as these, Alt-A & even prime ARMs (as well as other option loans) are the thorns in this area. Today’s property is a REO up in the Highlands.

Purchase History
Date 01/07/2005
$1,500,000
Date 01/15/2003
$700,000

Asking Price April 2008
1,698,800

I see activity on both 3/14/05 (2 months after purchase) and 8/17/06 (1 1/2 years from purchase), but the price information is only listed as N/A. For the asking price to be $198,800 above the previous sale price the seller must have pulled some serious cash out from a HELOC since January of 2005. There were some major renovations made to the property which probably means it was a failed flip.

If the sellers used a 2/28 ARM, the loan would have reset in Q1 of 2007. That’s precisely when the credit crunch started to rear its ugly head and the flippers probably stopped paying a few months thereafter. The foreclosure process can take a long time. It can take anywhere from 9 months to a year from the time the owner stops paying their mortgage payment till the day the property gets re-listed for sale by the bank.

Since both high and low end markets experienced enormous gains during the boom due to unjustified speculation, both will likely incur a similar correction back to a sustainable market. The participation in HELOC abuse is not contained within certain market segments. Condominium and townhome owners were just as eager to tape into their equity as SFR owners. This was evident in the widespread use of “free money” during recent years as homedebtors were enabled by greedy bankers to refinance themselves into oblivion.

The bank will lose money if the cannot sell the property for what they paid a couple years ago. With home prices tumbling all across the nation, I find it hard to believe they can find a sucker to buy this for $1.7MM. The sale in 2003 went for just $700,000. That seller made out with a whopping 47%/yr appreciation when the property was sold for $1.5MM 2 years later. Now if that isn’t a massive bubble, I don’t know what is.

Since 2003 was already well into the bubble, I would venture to say that this property would drop back down to 2003-2004 prices in a few years when the correction draws close to the bottom. It’s a nice house, but not $1.7MM nice.

2035 Highland Oaks Dr.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

“THIS DESIRABLE “HIGHLAND OAKS” SINGLE STORY, W/ OVER 2800 SQ FT, HOME HAS BEEN MAINTAINED TO PERFECTION. THIS CLASS HOME HAS BEEN COMPLETELY & TASTFULLY UPGRADED.” That’s funny, the kitchen still looks pretty dated to me.

Purchase Price $600,000
Purchase Date 07/14/1989
Loan $400,000
Downpayment $200,000
HELOC Amount $322,700
HELOC Data 04/14/2003

The seller bought during the height of the previous bubble for $600k and was able to sit out the downturn because he put down 33% downpayment. In addition to that, interest rates dropped as the bubble correction continued so he could have refinanced to lower their monthly payments. The future knife-catching buyer of this same property won’t be as lucky as his predecessor. Interest rates are on the rise and we’re still nowhere near the bottom of this housing mess.

From 1989/1990, LA county home prices dropped 20% over the course of 7 years. Assuming this house followed the same pattern, it would have been worth around $480k in 1997. Applying a 3%, 4% and 5% annual appreciation to the $480k price over the last 11 years will place this property’s current value at $665k, $739k and $821k, respectively.

Of course, we can’t just sit here and pretend there wasn’t a bubble. The bubble was massive and perhaps they could have commanded $1.35MM back in the heydays, but according to DataQuick – prices of SFRs in zip code 91006 took a -33.2% tumble in March 2008 from March 2007. Take that amount off of the asking price and you’ll end up at $901,800. For something that would be valued at around $739k in a normal market, it’s still over-priced.

Do you think this is the bottom? Will prices continue to fall or is that it? If you think Arcadia will only lose 20-30% of it’s price from peak values, then you should run out and buy a place right now. However, if you’re like me and think the upcoming Alt-A loan resets, foreclosures, weak economy and increasing inventory will further depress prices, then sit back and enjoy the show for another couple of years. This property’s seller is looking for a knife-catcher. Will one bubble buyer takeover for another?

2164 Canyon Dr.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

A view from above – that’s what this property offers. It’s a spectacular view and I’m sure the sellers enjoy it, but they should really take a step back and take a look around the current real estate market. This is a classic case of how buying at the wrong time can really hurt you. Apparently having to take on two mortgages at over a million dollars didn’t deter these folks from buying. I wonder if they bought because they assumed they would be “priced out forever” if they didn’t.

Purchase Price $1,180,000
Purchase Date 09/01/2006
1st Loan $944,000
2nd Loan $118,000
Downpayment $118,000 (10%)

The conditions in which someone can comfortably afford this home is outrageous. How many people/families can put down $280k cash downpayment, have an annual gross income of $350k and afford monthly mortgage payments of over $7,000 excluding insurance, taxes and maintenance? I personally only know of one family who can afford a house at this price, but I may just be running in the wrong circle of acquaintances.

I include those values on each property profile to provide some perspective on how realistic these prices are once you remove the contributing factors to the housing bubble. People were able “afford” crazy bubble prices when there was a secondary mortgage market to lend out cheap money at artificially low interest rates. They were also able to get away with lying on their application about their income in order to secure the required loan(s). On top of that, buyers weren’t even required to bring the traditional 20% admission fee. When you combine all of the above with greed, it becomes the Grand Canyon of bubbles.

Now that all the dust has settled and banks realize people can’t honor the contracts they’ve signed and repay the adjusted mortgage payments, the market forces are reacting to make those necessary adjustments. Without the avenues by which to purchase this home for cheap, the market value of property will drop to sustainable levels.

This is a nice home with a huge lot up in the hills with a view, but that doesn’t justify the outrageous $657/sqft asking price. The sellers bought on the high in late summer of 2006 and hoped for the double-digit appreciation to continue. Now that the market turned sour, they are looking to get out and are demanding to make $135k after 6% commission. Buyers who can actually afford a $1.4MM home are expecting more than this property has to offer and others who are looking for a home of this caliber are turned away by the asking price. No wonder it’s been on the market for 125 days!

Here’s some mid-week humor…

1844 Anita Crest Dr.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Sometimes I wonder if a seller is serious about selling their property. Even after being on the market for 4 months, they have refused to lower the asking price. What are they waiting for? Do they think they simply haven’t come across a buyer who likes their home? There’s a buyer for every home in every market – at the right price. Apparently, $900,000 is not the right price for this particular property.

Purchase Price $615,454
Purchase Date 12/11/2003
Loan $462,000
Downpayment $153,454 (25%)

With other 3 bedroom SFRs like this and this in the north Arcadia area renting for $3000/month, this property is overpriced. If someone puts down the $180k 20% downpayment, the monthly payment is still 50% more than the comparable rentals in the area.

$900,000 asking price / $3,000 rental comparison = 300 GRM

By extension, if you assume the 300 gross rent multiplier is 50% more than the “right” GRM for a desirable such as the Highlands, that would mean that the appropriate GRM in that neighborhood is a 200. Of course, there’s no hard rule on the use of the gross rent multiplier, but I would say that 200 sounds about right. Rent-savers and investors probably won’t jump in until we reach GRMs of 150-180.

The previous purchase in 1993 was at $362,000. That was about halfway through the 1990s real estate correction which lasted a total of 7 years. This property most likely dipped down to the low $300k in the mid-90s and the made its way back up to the million dollar mark during this recent bubble. How much this home will eventually sell for is anyone guess. If they don’t lower their asking price, buyers will simply overlook the property and the owners will end up chasing down the market like so many others we have seen.

Perhaps they should read about how to sell a house in this market.