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ParticipantI believe the tool that would work best for you is a gross rent multiplier (GRM). The reason I say that is because working with a GRM is a lot easier to do than trying to work with an overall rate – aka “cap rate”. In order to even use an overall rate, you have to analyze the income stream down to its net income level, which means coming up with fixed and variable expense ratios.
A GRM only requires you to figure out the market rents for a property, which for a single family residence is hard enough.
At the bottom of the last cycle, GRMs were running as low as 120, meaning the properties were selling for 120 times their monthly rent; or 10x their annual gross. The typical range was about 140-150 or so, depending on the area. Now the bottom of the last cycle represented an extreme low point at which the pricing trends were undervalued relative to the long term trendlines for population, wages and pricing.
At peak, pricing resulted in GRMs topping out in the 350 -370 (!!) ranges for those residential properties that would typically be rented. That’s obviously more than double the low point, and is yet another indication why the relationship between rents/prices will eventually correct.
I think that if you can wait until prices drop to result in a GRM of 175 or below you’ll be a lot closer to what a property will be worth relative to the long term trend that will extend beyond any individual cycle. BTW, the difference between 150 and 175 is substantial: $2,000/month x 150 = $300,000; $2,000/month x 175 = $350,000.
It’ll be interesting to see if rents contract at the same time prices are correcting. So far they haven’t.
ParticipantThere’s a difference between giving a break to a borrower for their domicile vs. giving an investor a break. They always break out the widows and orphans and the poor when they want to out a human face on the downsides of east credit. That’s not so east to do with flippers.
Of course, Donald Trump is a flipper, too, and he doesn’t seem to have much trouble getting sympathy from his lenders.
ParticipantI think the reason for the crash is the distortion caused by outside influences other than wages and population trends. I know there’s a lot of talk about it all being the fault of easy credit, but I think the easy credit only exacerbated what was already happening as a result of the owner-users competing with investors for that finite supply of listings.
Take away the artificial stimulus caused by the investors and the mechanism whereby a lot of otherwise completely unqualified buyers were able to satisfy their desire to purchase, and we find a market that is forced to seek a retrun to the equilibrium between supply and the owner-users.
The current downswing started before subprime went belly up. It started soon after the investors abandoned their positions, and that happened as a result of the pricing getting so distorted that not even the liar loans could make them work. Substandard lending going down has only removed the other artificial leg of this stool.
I don’t think the eventual outcome would have changed even if substandard lending had stayed in place. It would just take longer. Substandard lending was still going strong in 2006 but that didn’t stop the declines that occurred then. The investors had already left the building, and they won’t be coming back until they see room for short term profits sufficient to justify the risks of speculation.
ParticipantThe NCC areas aren’t going to show as much decline this soon because, like areas such as Scripps and Pt. Loma, a lot of these people consider these to be destination areas.
Nevertheless, it’s hard to predict a trend off a single month’s worth of data. The premise in comparing the medians of any two periods is that we assume that the composition of both datasets are similar. Sometimes thats a reasonable assumption, other times not.
If you look at the first 4 months of 2006 vs. 2007 for all of Carlsbad you’ll see 315 sales in 2006 vs 295 sales in 2007, which comes down to a 7% DECREASE in sales volume. Not equal to the county average, but not exactly stable, either.
If you break the sales data down by price it becomes apparent that the two groups of data have different composition, too. Out of the 315 sales in 2006, 48 of them (15%) were $1,000,000 or higher. But of the 295 sales so far in 2007, 71 sales (24%) are in excess of $1,000,000. Obviously, the higher the number of high-dollar sales, the higher the resulting median of those sales.
Just something to think about.
ParticipantMy wife’s oldest sister and her family live on Louisianna, south of University. They’ve always got stories that make me glad I don’t live there.
The gentrification wave moving over from Hillcrest and University Heights will eventually make its way through Northpark, though. It just isn’t far enough along right now to make it this time.
ParticipantWhat? -15% off of the 2006 numbers isn’t enough of a drop in volume for you? C’mon. 2007 is shaping up to be the worst year for sales volumes since 1996. The foreclosures will just add to that pressure. If the NOT trends continue the resulting REO resales 6 months from now will already comprise 25% or more of the sales. Think what that will do for pricing.
MLS only shows what the realty agents sell through the MLS. It won’t show the transactions that aren’t really sales, like interfamily or foreclosure transactions.
ParticipantYou’re going to get excited over a $25,000 difference in offers? You can easily make that up with concessions.
I would tell you if this was an outrageous price, but from looking at the sales in the area I can definitely see where the seller is coming from. The photos depict a very nice kitchen remodel and back yard improvements. Its true that there is a pretty big range of pricing in the area but the lower priced homes don’t appear to be as nice.
Did you check out the closed sale at 1811 Friedrick? Same side of the street and a similar sized house. Not quite as much curb appeal if the photos are an indication. Somewhat inferior kitchen. It just closed at $550k. It’s definitely a comp any appraiser would be looking at.
Counteroffers are made to be countered. If you’re serious about the house try going to $560k and see what happens.
ParticipantUpdate:
As of Noon 05/09/2007, the MLS is reporting 2,223 sales for April 2007. This comes in almost exactly at 15% fewer sales than reported in the MLS during the same period of 2006.
For the first 4 months of the year, this region is down by about 15% when compared to 2006. Maybe it’s just me, but I’m just not seeing a rally in progress.
ParticipantAnother factor is the retail, office and industrial developers are still going strong. My brother-in-law just transitioned from working for a residential developer to a commercial developer. He’s a construction supervisor.
Those markets entered into the upswing 3 or 4 years after residential got going, so those developers are lagging on slowing down to meet the demand. Office and industrial vacancies are going to go through the roof before these guys stop building. That’ll lead to lower rents and subsequently to lower pricing. I fully expect the commercial sectors to unravel a lot faster than the residential sectors.
ParticipantGenerally speaking, a 1990 purchase was underwater here for 6 or 7 years and didn’t break even again until 1997 or so. Really, it was probably later than that after accounting for the effects of inflation on the dollar. A 1990 dollar was worth more at the time than a 1996 dollar.
Those buyers didn’t have to book their losses so some of them probably didn’t think of themselves as losers, but those losses were there during the mid-90s whether they booked them or not. The ended up okay since then, but only because they stuck with a loser until the market turned. They all would have been a lot farther ahead had they made their purchases in 1995 or 1996.
And therein lies “the point”. You make your money when you buy, not when you sell; and buying at a high point of a known cycle is no way to call yourself a genius or to get ahead. If money is the thing, those 1990 dollars could have been put to much better use, just the same as the 2006 dollars could – for the most part – have been put to better use than buying RE.
If a buyer doesn’t care about the money that’s fine. We should not be characterizing those purchases in terms of financial acumen but instead attribute it to them fulfilling their emotional needs. This here’s America, it doesn’t always have to be about the money.
As for bloodbaths, I wouldn’t have expected Kensington to be a big loser yet. On a geographic basis and all other things being equal a declining price trend will work its way from the outskirts in toward the employment centers, and (locally) from the east to the west. The reverse is true for increasing markets. Kensington is still close to employment so it’s day will come a little later than someplace like Escondido or San Marcos or Chula Vista. That doesn’t mean it won’t happen or that when it does decline that decline won’t make up for lost time. We’re just not there yet, that’s all.
If we assume the aftermath of the unprecedented spike that preceded it won’t have equally unprecedented consequences – and that is an assumption that may prove unfounded – then a person who buys now might indeed recover their position at some point in the future. But I wouldn’t say that the prospects of merely recovering their position after 5 or 6 years (and paying extra for their housing during the process) would economically justify a purchase right now given the current market conditions.
If it is about the money, then wishful thinking shouldn’t be part of your equation. In either direction.
ParticipantIt’s kind of hard to tell what happened. The 2004 sale doesn’t show up in the MLS so there’s no way to know what condition it was in at that time.
Not counting carrying costs a $681k sale price just barely breaks even after the costs of sale. Unless the seller spent money on repairs or upgrades in the interim – which is probably only a 50-50 proposition at most – they probably only lost about $65,000 in the difference between the PITI resulting from their ARMS and the market rents.
$65,000 isn’t much money. Most people can clear that in 6 months. Maybe a little longer.
ParticipantIndividual buyer and sellers make individual decisions, and those decisions aren’t always equally well informed or rational. Sometimes people get a good deal, sometimes they enter into a bad deal. Sometimes the true nature of the transaction isn’t being disclosed.
What we do is to seek out the predominant trend and rank the subject in that trend. In the case of a mortgage transaction, the value of the property acts as collateral for the loan, so a lender (theoretically) wants to avoid overencumbering a property by inadvertently loaning more than it’s worth. Hence their use of an appraisal to make that decision.
In truth a lender isn’t supposed to care what any individual buyer thinks a property is worth because individual buyers are not assumed to be adequately informed/motivated. However, we do assume that buyers as a group are adequately informed, which is why we seek evidence from multiple transactions that would demonstrate that dominant trend.
How a faulty appraisal enables a bad deal is usually the result of one or more lies told by an appraiser in the appraisal report. About 95% of “bad appraisals” can be objectively demonstrated to be bad by disproving factual errors or mistatements about the attributes of either the subject property, the properties used as comparables, or whether those properties really do rank among the “most recent, similar and proximate sales” as is certified in the appraisal report. It’s rare for an appraiser to use incorrect methodology in the analysis, and it would be just about impossible for an appraiser’s opinion to be unreasonable if they’re otherwise being honest about the facts in their assignment.
Columnists like Robert Bruss like to tell their readers that appraisers sometimes “miss” relevant sales data as a result of laziness or stupidity. He’s a very biased and poorly informed guy to be giving advice about appraisals.
The truth is that (around here, anyways) it takes a lot less time and effort to find the most similar sales and conclude to the reasonable value than it does to find sales that can be misrepresented and distorted into looking like the most similar sales for the purposes of getting the higher value. Easier to tell the truth than to tell the lie and get away with it.
ParticipantThe $1.8 is just the base price – there are options and upgrades to consider after that.
Magnolia Estates (Barratt’s portion of Bressi Ranch) has 4,500 – 6,000 SqFt tract homes on 15,000+ lots starting at $1.8 and up, and they overlook a canyon and future park, not the runway takeoff end of Palomar Airport Road.
Of course, Barratt isn’t having much luck at Bressi. They’re only selling about 1 unit a month there, if that. Just up the hill in Bressi, Lennar’s equivalent to these homes were selling at about $1.3 out the door, and that’s with all the overpriced options.
Fuurther south, off of Poinsettia, the Bay Collection has similar sized homes and lots and the most recent sales there are in the $1,100,000 – $1,300,000 ranges. I’d buy there before I’d even consider this location.
That is, I buy there if I thought any subdivision home in Carlsbad was worth (to me) in excess of $800,000 over the long term.
ParticipantShe offered you the house because she thought you’d pay more than the market value for it.
Stick around – LV prices may eventually retreat back to 2002 prices.
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