What is a bubble?

Definition: An asset bubble is when the price of an asset, such as housing, stocks or ​gold, become over-inflated. Prices rise quickly over a short period. They are not supported by an underlying demand for the product itself. It’s a bubble when investors bid up the price beyond any real sustainable value. These price spikes often occur when investors all flock to a particular asset class, such as the stock market, real estate or commodities.

Such a bubble is also called asset inflation.

Is Los Angeles real estate in a bubble? If we look at the definition let’s see if it fits the defined definition:

  1. Prices rise quickly over a short time? Yes. The data I found from the California Association of Realtors only goes back to 1990 but it shows that from 1990-1998ish home prices generally languished. You didn’t get rich from selling your home. You probably bought because it was cheaper or better to own, plus there’s a significant tax advantage.
  2. They are not supported by underlying demand? Demand means people are looking for a place to live. Not a home to flip, not a home to rent out, not a home to AirBnb.
  3. Have investors bid up the value beyond real sustainable value? Let me see a show of hands that really believe in their heart of hearts that the piece of shit tiny homes changing hands in El Segundo for one million US dollars are really worth a million dollars? Alex and Bill put your hands down!

existingsales

So what happened in the late 90s? Remember the tech bubble? You could throw a dart at the Nasdaq 100 and double your money. Cicso, Yahoo, Netscape, AOL…..You could do no wrong. People all of a sudden were making real money investing. None of this mamby-shmamby ~7% per year and be happy. They were doubling and tripling their money.  I know a guy who was the head of sales for Netscape when it went public. His life changed in a few hours. He never had to work an honest day in his life.

What do people do with excess money and the winnings they didn’t have to work 40 hours to attain? They spend it….which causes inflation. When too much deman is chasing the same goods prices rise.  Now people are making money when they sell their home because their is a pool of people with a lot of extra money to spend. The seller takes their proceeds and buy a bigger home and the cycle continues. Then there’s a psychological factor. FOMO. The Fear Of Missing Out. Which attracts more buyers, it attracts investors, and flippers and new business models that have nothing to do with finding a home to raise your family in.

But this time it’s different! “Last time it was about phony mortgages and teaser loans”….But was it? A recent study by the National Bureau of Economic Research pointed to the fact that it wasn’t bad mortgages but flippers/investors that caused the subprime crisis. Because when you think about it, the crazy, easy mortgages was a business model aimed at capitalizing on the appetite of investors and in-turn the FOMO people.

If it walks like a duck, quacks like a duck….

How does it pop? How violent of a pop will it be? Will it hurt?  That remains to be seen. Grab your bucket of popcorn, sit back and watch. Keep an eye on the Bitcoin “investors”… I too participated in the bitcoin bonanza. I bought around $700 (yes and not it’s $7640) and sold at $300 because it was just a bet that was not paying off. I had no conviction that Bitcoin was an amazing investment opportunity. It was a bet that it would be worth more in the future than what I paid. Was I wrong? It doesn’t matter. I lost over 50% of my money in a short time frame and I cut my losses. Because it could have easily gone to $0.

bitcoin

 

 

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Are you one of “them”

Most of Us Live Paycheck-to-Paycheck.

According to this survey, 56 percent of us can barely save $100 per month. All things considered, when you break it all down, most of us are just one misfortune away from financial oblivion.

The survey says 78% of american’s are living paycheck to paycheck. Add the financial stress of living in Southern California and I imagine the figure for Los Angeles is closer to 85%.

Credit is a wonderful thing and it allows us to not feel like we are living to paycheck. But like the article mentions it only takes one big calamity for things to get squirly. I’ve seen it firsthand when high-earners lose their job. If the stars aren’t aligned it can take a very long time to find the next $300k/year job. How long do you think a person like that can last without income? Think they have six months ($150k) in savings?  Do you think getting rid of the expensive cable bill, cutting Netflix and not eating out is going to make a dent in their monthly budget. No. They are a few months away from disaster.

This won’t end well for a lot of people.

 

New listings and updates for El Segundo

Someone paid $949k for a 936 sqft 2/1 on a 3500 sqft lot. 501 Eucalyptus Dr is another scary canary. This is probably the most expensive property, on a cost per square foot of land basis,  in all of El Segundo.  Some back of the envelope math says by current building code the home and hardscape (including patios and driveways) can’t exceed ~1,470 square feet.  303 E Mariposa is an example of someone bumping into those restrictions. They’ve taken a tiny house and made it an expensive small house.

509 Eucalyptus got a bit of a haircut. Lynn O’Neil reduced the price from $1.55 mil to $1.5 mil. Funny the Redfin estimate is only $1.47 mil.

Alex Abad’s overpriced ugly green house at 719 Maryland St. gets a haircut from an exorbitant $1.3 mil to $1.25 mil. This is another accident waiting to happen. 981 sqft priced at $1273/sqft. Maybe Alex is trying to take the most expensive award away from Bill Ruane’s Eucalyptus sale.

Alex’s listing at 517 Eucalyptus Dr got a haircut a few weeks ago from $1.65 to $1.56 mil.  This listing is now priced at $648/sqft and was built in 2004. Notice the gross disparity from the homes in the $1m range. This house is half the price on a price per square foot as the one on Maryland.

Scott Nicol hits the market with a renovated 3/3 at 1506 E Maple Ave.  at 1548 sqft it’s priced at $1.35 mil.  

That translates to $872 sqft and it’s on a 9335 sqft lot. A builder’s dream. I think at that price it’s too out of reach for a flipper to risk it, but for someone looking in the $1.6 range there’s potential. I caught some commentary on ESP where the owner talked about outgrowing the 1500 sqft house and that they couldn’t afford bigger in town so they are leaving El Segundo.  They bought in 2012 for $715k and even with their recent renovation costs they should see a healthy return.

And if you want to protect your life savings a tiny 760 sqft 3/1  just came up for rent on Loma Vista for $3200. Holy shit!  Tiny, ridiculously close to the airport and the tenant looks to be responsible for paying for the gardener. Talk about being bent over. But you know what this overpriced rental guarantees, you won’t have to put down a quarter of a million dollars.

This would be the end

Owning a home could cost more under GOP tax plan, especially if you live in L.A.

Under current law, homeowners can deduct interest paid on as much as $1 million in mortgage debt. Republicans would allow that to remain for existing loans, but for new purchases, owners would be able to deduct only the interest paid on the first $500,000…

…The halving of the mortgage interest deduction will not only hit some home buyers directly, but it also could create an incentive for existing homeowners to stay in their house and not move up in the market. That would potentially restrict both the supply and demand, leading to a slowdown in sales.

I’m not sure if this could pass but if it did it would be the death knell to the real estate market we know. If you take away 50-75% of the tax deduction a homeowner receives and the rent to buy ratio is so heavily skewed to rent – NO ONE WILL EVER SELL THEIR HOME.

I haven’t a clue what it would do to prices. I imagine there would be a rush for people sitting on the sidelines to buy something. All of a sudden that condo with the crazy neighbors and the kids running above you doesn’t look so bad. Hawthorne starts to look more appealing…

It’s lonely at the top

According to zillow there are 13 single family homes for sale in El Segundo. I also saw a Jim Marak sign the other day on a home I didn’t recognize so I imagine with all the real estate fishing expeditions there are 2-3 more. Of the 13 on Zillow nine are at least $1.4 mil. A $1.4 mil will take about $300k in down payment, closing costs and any initial improvements plus a ~$6750 PMIT for 30 years. Up the amount to $1.8 mil and you need $360K for a 20% down and $9k/month to pay your taxes and mortgage. Who are these people? Or the better question is what kind of funny math and slight of hand are people doing to get banks to loan them more than they qualify?

Currently there is no place for anyone in the middle class to buy a home worth living in. By southern california middle class standards I’m talking household incomes in the $150-$225k range.  A household with a $240k income with nominal expenses and debts (car payments) should only qualify for a home in the $1.3 mil range. Yet we have all these listings for people that should be making $300k+.

We’ll see how long these people can hold out. Who’s carrying the note for Gina’s $3 mil dream? How long can they hold out in hopes that some Manhattan Beach family decides that El Segundo is good enough?

Regardless as long as people are getting bent over, real estate agents are laughing all the way to the bank.

 

Wanna see where your income sits in the scheme of 2014 numbers?

http://www.pewresearch.org/fact-tank/2016/05/11/are-you-in-the-american-middle-class/

This is starting to freak me out

Just like the stock market the real estate market seems unstoppable. Ever increasing prices, everyone cheering the boom, portfolios and 401ks hitting new highs every single day…

Home-Price Gains in 20 Cities Picked Up in August

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The latest report is that many cities are priced higher than they were in 2006 and there is no stopping the train. We see it here in El Segundo. Those in search of “affordable” homes in the million dollar range are getting bent over. They are being sold over-priced crap and being told to be grateful for it. The latest POS house at 654 W Sycamore sold for a mind boggling $1.236 mil for an ugly, old, poorly landscaped tiny home. 1171 sqft built in 1950 with not even a sign of any home depot upgrades. 

This is not normal. And As much as everyone wants to keep whistling in the dark and hoping the market doesn’t correct they are wrong.

What scares me more is both the bond and stock markets. Because changing the direction of the real estate market will take many months. Many, many, many months. But one day we can wake up and see the stock market down 10-20%

 

The Amazon effect

I figure with Amazon’s stock up $128 today it might be worth a look at the effect Amazon has had on Seattle as well as the ramifications of Amazon.

WaPo did a nice write up on all the cities bending over backwards to give amazon money. With so many cities and states in or near pension crisis and little to no money to fix their own infrastructure it’s amazing (and disgusting) how quick they are to give away tax breaks in the hopes that their bribery will lead to a trickle down effect created by Amazon bringing employment to town.  But along with the economics and vitality brought by Amazon and a bunch of well-paid employees with stock options are real estate inflation and gentrification (sound familiar?).

 

What would happen if Amazon brought 50,000 workers to your city? Ask Seattle.

Seattle is one of the most expensive places in the United States to live, forcing lower-income residents to move to far-off suburbs. The city and surrounding King County declared a state of emergency in 2015 over homelessness.

Since then, the problem has worsened. Rents in King County have more than doubled in the past 20 yearsand gone up 65 percent since 2009.

This Seattle Times Article described their housing predicament as well.

Seattle’s crazy housing market: Answers to your questions on record-high rent, zooming home prices and more

Right now, Seattle’s median house price is $730,000. If prices keep growing at the current rate (13 percent per year), the typical house here will be $1 million in 2020, and will get to $2 million in 2026. That just doesn’t seem sustainable. God I hope it’s not sustainable.

In the last half-decade, home prices have grown 4x faster than pay in King County.

 

New listings and updates in El Segundo

I have to admit that I’m surprised that 905 Hillcrest hasn’t sold yet. In fact it boggles my mind why some overpriced homes listed by the local cabal of agents have sold yet Hillcrest still stands? Maybe some collusion among the local agents? Maybe Russian involvement?

Another overpriced Alex Abad listing gets a haircut. 719 Maryland was reduced a measly $50k from a grossly overpriced $1.25 mil. What a jackass. He loves the community so much he wants to price 90% of it’s residents out.

Not that I would recommend ANYONE live on West Acacia, but there’s a big home for rent priced at $4100. 4/3 2400 sqft for $4100/month. Know what a $4100 payment would qualify you on a loan basis? About $600k in home.  Want to know how far east you have to go to buy a decent home for $600k? Just east of Hawthorne Blvd.  Good luck with that. I hear the schools are excellent.

Currently on zillow there are 12 SFH for sale with an averag list price of $1.69 million.  If you take away Gina’s $3 mil fantasy the average drops to $1.59 mil. Of the 12 the cheapest is $1.2 mil.

Even though this feels like the norm, and every jackass real estate agent wants to tell you you better buy now; THIS IS NOT NORMAL. Whether you remember or not, we’ve been here before and even though the circumstances were different, it didn’t end well.

 

Another week another $1.8 mil home

The first-time home buyer and those of us that used to be able to use our home equity to step up to a nicer or bigger home are getting screwed.  We have no options. There is nothing worth buying. Because the step-up crew can’t afford to let go of their equity only to buy an overpriced home that will increase their mortgage by 1.5-2x they are staying put or renting out the home. That makes a low inventory problem worse for everyone looking for a home under $1.3 mil.

Buyers looking for homes in that range are making stupid financial decisions and buying ugly, crappy, tiny homes because they fear they will miss out.  Someone just paid $1.1 mil to buy a 2/1 on a 3000sqft lot! It all sounds like monopoly money because it’s the sign of the times, but when you think about what a million dollars can do this purchase is outright asinine.

What we are left with is an ample inventory of homes over $1.5 mil.  Know what it takes to qualify for a $1.5 mil home?  An income of ~$400k. Think of your neighbors; out of 10 families how many are pulling in that much money?  Wanna buy a $1.8 mil home? You’ll need to be making half a million dollars a year.

This week we have another McMansion for sale at $1.9 mil. This gaudy monstrosity is brought to you by Darren Pujalet. 5/4 4500 sqft priced at $420/sqft.  It looks like it was new construction in 2011 when it sold for $1.25 mil. Let that sink in, this big-ass ugly house once sold for $1.25 mil.  Six years later and its value has increased 50%? Get the fuck outta hear.

So despite the cabal of agents trying to make El Segundo the next Manhattan Beach think about people that make a half a mil a year and what their options are.

Don’t gamble with your life savings.