4 Reasons Why You Should Rent

June 12, 2008 TheArcadian 4 Comments

When I was younger (and dumber) I used to think that renting was for poorer folks. My parents hammered into me the belief that renting was equivalent to throwing money away every month. Fortunately, college taught me that it was necessary to challenge everything I’ve learned as a child and realize that many things in life aren’t black and white. Can renting be a waste of money? Yes, but it doesn’t mean that’s always the case.

Putting the current inflated prices aside for a moment, let’s take a look at 4 reasons why MSN Real Estate says you should consider renting:

1. Renting can save money

At the very minimum you’ll be shelling out PITI for your home. That is:

Principal
Interest
Tax
Insurance

That doesn’t include property maintenance like upkeeping the yard, paint, plumbing, ect… When you rent, most people just make one monthly payment and that’s it.

2. Homeowners’ tax deductions are overstated

According to research quoted by MSN, “… half of homeowners don’t get a break, because even with mortgage interest and property taxes, their total deductions do not exceed the standard federal tax deduction ($10,900 for couples and $5,450 for singles)”.

For these folks, it’s like spending $100 to save $20. They’re better off saving the difference and investing it.

3. More options are available to renters

This is a no-brainer. Renters have a limitless supply of apartments, condos and empty homes to choose from. Even for a larger family it is possible to rent cheaper than it is to own.

4. Renting gives you flexibility

This point is dependent on your current situation. For the up and coming young professional, you’re better off renting and saving for a few years than to buy a small condo. Who knows how fast you will outgrow it?

Depending on how much you can save, families with children may be better off settling now since moving is a hassle.

My #5 reason why you should rent right now?

Property prices are declining, foreclosures are picking up and even with a sizable down payment, renting is still cheaper that owning. Don’t worry, you’re not going to miss the bottom because unlike stocks, real estate takes years to go anywhere. The bottom will be 2-3 years of flat prices and even investors will be crying doom and gloom.

That is when you know it’s time to buy.

Property Profiles

Breaking Even on Altura Rd.

June 11, 2008 TheArcadian 6 Comments

300 N. Altura Rd.
Arcadia, CA 91007

Asking Price	$1,399,000	:::	Sq-ft	2,366
Purchased Price	$1,399,000	:::	Lot Size	13,680sf
Purchased Date	10/16/2007	:::	Beds	4
Days on Redfin	1	:::	Baths	4
$/Sq-ft	$591	:::	Year Built	1951
20% Downpayment	$279,800	:::	Area	Peacock Village
Income Required	$349,750	:::	Type	SFR
Est. Payment*	$7,073/month	:::	MLS#	892063244

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

This is a For Sale by Owner listing (FSBO). Seeing as how the listing price is exactly what the seller bought it for 8 months earlier, I’m not surprised. With agent commissions costing up to 6%, can you afford to lose $83,940 over 8 months?

The listing description is even more intersting:

ASSUMABLE LOAN AT 5.375%% INTEREST ONLY FOR 9.5 YEARS; $3050/MO!! Exquisite and spacious Lower Rancho family home is on a quiet, tree-lined street in one of …

As an added incentive, you can take over the seller’s 10-year Interest Only mortgage. While I don’t think this type of mortgage is necessarily bad, it’s just a reflection of what buyers would do to “afford” a million dollar home.

This property is located in the Peacock Village community and despite the lack of photos, I’d be surprised if it wasn’t a nice home. But is it worth $1,399,000? I pulled up comparable properties also located on Altura Rd.

500 N. Altura Rd.
2,670sf
15,978sf lot
Purchased in 1987 for $418,000

400 N. Altura Rd.
2,685sf
16,220sf lot
Purchased in 1987 for $350,000

Applying the standard appreciation table, we get the following:

$418,000 after 21 years:

3% $777,603
4% $952,525
5% $1,164,532
6% $1,421,017

$350,000 after 21 years:

3% $651,103
4% $797,568
5% $975,086
6% $1,189,847

Both of these homes are a bit bigger than our current property so if it was worth $350,000 in 1987, I would have to apply a 7% annual appreciation on it to break the $1,400,000 value.

Property Profiles

Updated on Hyland REO

June 10, 2008 TheArcadian 4 Comments

*** Update on 1511 Hyland Ave. ***

We profiled this property back on April 21st. At the time, it was an REO listing for nearly $1,700,000 ($485/sf). Now it is back on the market with an updated pricing of $1,580,000 ($451/sf) and a modified description:

No mention of REO status
New photos
Properly staged for viewing
Description with proper spelling, grammar and NO ANNOYING CAPITALIZATIONS.

Although it’s still overpriced, $120,000 off the original asking price is a small start (-7%). Another $300,000 decline and we’re looking at a 25% peak-to-bottom price correction. We’re nearly a third of the way there and this housing crisis will play out at least another 3-4 years. This will always be a $1MM+ home but nothing about it would compel me to spend over $1.5MM for it.

Although the new photographs are impressive, a drive-by shot isn’t as inspiring.

I must give props to the new listing agent. It has a proper description, professional photos and tastefully staged. I would have no problem with paying my agent a 3% commission if he/she did all this work for me.

***Old Post Below***

1511 Hyland Ave.

Asking Price	$1,698,800	:::	Sq-ft	3,504
Purchased Price	$1,500,000	:::	Lot Size	0.27 acres
Purchased Date	01/07/2005	:::	Beds	6
Days on Redfin	4	:::	Baths	4
$/Sq-ft	$485	:::	Year Built	1948
20% Downpayment	$339,760	:::	Area	Highlands
Income Required	$424,700/yr	:::	Type	SFR
Est. Payment*	$8,589/month	:::	MLS#	A08056374

*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.

Misc. Post

$2.5MM Home for Rent

June 9, 2008 TheArcadian 13 Comments

In addition to tracking home listings in Arcadia, I also try to stay updated in the rental market. My usual sources are the following:

Rentals.com
Apartments.com
Craigslist
Newspaper Classifieds

This weekend I came across a new site: oodle.com. Their property rental section somehow pulls listings from several other sites and aggregates them into a searchable database. I decided to give it a test-run to see what the largest and most expensive rental in Arcadia currently is.

Magnificant Brand New $2.5 Million Dollar Home

$3,500
5 Bed
4.5 Bth
5,000 Sq. Feet

Property Description

~Save money by living in this beautiful home while it’s for sale.

Stunning brand new Tuscan influenced home with many extras.

Would you bother renting a house if the owner told you it was listed on the market and at anytime you’d have to move out after a 30 days notice?

If this home really is listed for $2,500,000, then it is definitely cheaper to rent it for $3,500. Your typical mortgage on this fella would be $12,640,! I would really like to know the history behind this property. Was a it new construction that won’t sell or a failed flip? Unfortunately, we weren’t able to find the listing on Redfin. Perhaps you guys will have better luck at hunting down the address?

Inventory

Inventory & Market Report – 6/7/08

June 8, 2008 TheArcadian

Zip Codes: 91006, 91007

Current Market Listings as of June 7th, 2008*
Properties for Sale: 224 (-19)
Median Listing Price: $759,900 (1.32%)

Weekly Foreclosure Update*
Properties in Foreclosure: 27(+2)
Properties in Pre-Foreclosure: 66 (-9)
*+/- is compared to previous week’s data.

Property and foreclosure numbers obtained from U.S. Census, ZipRealty, Trulia, Yahoo Real Estate and Foreclosure.com. Market listings and price data obtained from DataQuick News.

News

3 steps to a housing crash

June 7, 2008 TheArcadian 5 Comments

Somebody told me today that it’s time to buy a home soon because the next housing bubble is right around the corner. Oh dears…

My sources from Wall Street are saying that we got at least 5 years to go before any significant recovery of real estate can even be considered. First time buyers, making up for nearly 30% of the buyer’s market, have been priced out and a major correction throughout the U.S. is inevitable. Even public builders like KB Homes are starting to realize what this market needs: AFFORDABLE HOUSING.

Downsizing the American Home – CNN Money

Another article from USA Today is full of quotes that can be used to highlight the housing crisis we are facing.

While there’s still a plentiful pipeline of home buyers looking to make a deal, finding one willing to make a split-second decision to buy and pay whatever it takes to get in the door is no longer a lock, real estate agents say.

This one applies to Arcadia:

Part of the problem, Baker says, is that today’s sellers are pricing their homes based on what comparable homes went for six months ago and tacking on an extra 10%. That formula, he says, is too aggressive.

Bubble theory proponents say it will end badly, with sharp price declines and intense financial pain like that investors suffered after the tech stock bubble burst in 2000. But for that to occur, it would take a dramatic rise in interest rates or a major shock to local economies resulting in steep job losses,

Let’s see – It would take 3 things for the market to crash:

Rise in interest rates
Shock to the economy
Leading to… steep job losses

This article on MarketWatch covers all 3 scenarios:

Wall Street is betting 2 to 1 that Feds will increase rates.
Today, oil made its largest one-day jump ever to $139/barrel.
The unemployment rate is reporting its largest increase since 1975.

I am normally a very optimistic person but there is nothing to convince me that this housing and credit crisis is going to blow over anytime soon.

Here’s to a happy weekend to all you readers.

Analysis

A Peak and 2 Bottoms

June 6, 2008 TheArcadian 5 Comments

Most people give me a crazed look when I tell them home prices in Arcadia will drop another 25-30% over the next 3 years. Why is that so hard to believe when values doubled and nearly tripled over the course of 4 years? A housing bubble consists of 3 points: a peak and two bottoms.

Have we hit the second bottom yet?

Over the course of this housing downturn, I’ve personally met friends and associates who are all at different stages of the home buying process:

1) Renter Savers
These people may or may not have money for a downpayment. They understand how bad the market is and rent because it’s cheaper. This group of renters are living below their means and save a good portion of their monthly income.

2) The Clueless
These guys have very little money and absolutely clueless regarding what it takes to buy a home. Therefore, they rent and have no idea as to how bad this housing crisis is because it seemingly doesn’t affect them.

3) Would-be Knife Catchers
I am most worried about this group of friends. They are just starting to realize how much money homeowners made off real estate over the last 5 years and are eager to jump into the market. They view real estate as a great investment and renting as a “waste of money”. Many of them are excited over all the REO auctions popping up throughout Southern California and are eager to land a smashing deal.

In addition, these individuals all seem to know a Realtor or prominent financial guru who encourages them to buy now because we’ve hit bottom. I tell them we have a few more years of double digit price reductions to go and they shrug me off.

For those in Group 1, they’re in a good position. After this whole crisis blows over, those with cash-on-hand will have no shortage of affordable homes to choose from. Even if interest rates skyrocket, home prices will fall even further and a sizable downpayment increases your buying power.

For Group 2 folks, I’ll sum up the housing bubble in 7 points:

Late 1990’s – The tech boom crashes and everyone wants a safe investment: Real estate!

2000 thru 2003 – Fed lowers interest rates and increases home buying.

2003 – Sales weaken so lenders push for more interest-only (IO) and adjustable rate mortgages (ARMs).

2003 thru 2005 – Housing prices double and nearly triple throughout the country. East and West coasts become investment flipping hot spots and we get:

Media hype
A buying frenzy
Investors flood the market
Developers overbuild
…and 1 out of ever 4 adults becomes a real estate agent. [sarcasm]

2005 thru 2006 – Mainstream media acknowledges that we’re in a “bubble” but the Feds, Wall Street and National Association of Realtors is resistant to the news.

2007 – Show’s over as the secondary lending market collapses overnight and eventually giants like Countrywide, Washington Mutual and Citibank get hammered. Sales volume and prices begin dropping at record levels.

2008 – We see no stabilization in prices and definitely no bottom in site. The crisis makes it way into Los Angeles and all but a handful of cities show resistance to the trend. Sorry, Arcadia isn’t one of them.

Arcadia Housing Blog