We already mentioned that Fremont is drowning in its own vomitous loans with a loan shark’s payback, but New Century seems to be hanging on if only by its teeth:
New Century Financial of Irvine said today Barclays Bank agreed to release it from an obligation to take back $900 million in loans.
In return, New Century agreed to give up rights to any loans funded with money from Barclays, and to turn over servicing rights on the loans to a third party approved by Barclays.
The embattled subprime lender expects to lose $46 million on the deal.
Still, the agreement could significantly reduce New Century’s obligations to creditors. It previously reported that investment banks and other creditors are demanding it take back up to $8.7 billion in loans for failing to meet certain funding covenants.
I have mentioned that I work near a New Century servicing center in Orange County. It likely employs about 300 people (based on the number of cars there). Giving up a significant portion of its servicing rights is chewing off the arm to escape… but 900 Million is a lot of money. Good for them. Not so good for the OC job economy. All part of the Spring Smackdown.
You have to love how ruthless these big corporations are. Barclays just extorted $46,000,000 from New Century. There is no other way to see it than extortion: “give us this servicing business, or we will crush your company and take the business anyway.” Kick ‘em while their down. Couldn’t happen to a nicer bunch.
Why is that so ruthless? They effectively loaned NEW a lot of money. It may not work out in Barclay’s favor anyway, so bending them over a barrel is the natural thing to do.
Hey Chuck,
I have a serious question. I read the papers and posts on web sites such as this and hear the alarm bells ringing over the impending demise of sub prime lenders. Foreclosure rates are exploding and bubble is about to pop on the real estate market. Real estate prices are about to go into the tank with drops of as much as 30% to 50%.
News yesterday was that Fremont is going to take a $140 million hit on a package of sub prime loans they were selling off. That’s a lot of money but it’s only a 4% discount on the value of the loans. Considering that they’ve already made money up front in fees, points and loans payments, this doesn’t sound too serious.
More importantly is the fact that there are buyers out there who are willing to pick up billions of dollars worth of sub prime loan portfolios at 96 cents on the dollar.
My question is this –
1. If things are really so bad why would companies be investing billions of dollars to pick up these sub prime loan packages? They didn’t accumulate these billions of dollars by being idiots.
2. This 4% or 5% discount on the loan packages doesn’t seem like much. If this looming crisis was really so bad wouldn’t the discount be greater?
I’d love to hear your thoughts.
OK,
Here goes (and this is a pathetic attempt at explaining some things I don’t fully understand myself) … first off, 4% is a lot of money on a loan. It might not sound like much to normal folk, but that’s a lot of moolah in the fixed income derivative world. A LOT. You have to remember that 4B is the nominal Net Present Value of the loan. (I believe they must mark to market based on prevailing interest rates – not sure, and provide reasonable loan loss reserves)
When you consider that Fremont only likely kept the cream of the crop of loans in their portfolio, you begin to understand why it was still a fire sale.
Let’s assume that these are cream of the crop prime loans they kept. Worst case scenarios is that they have 10% foreclosure rate (WW3 breaks out in the hedge fund’s mind). That means that 400M goes into foreclosure. Typically, banks recover (after expenses) between 70 and 85% of the original value, or 120M loss (maximum assumption). Keep in mind that Fremont has ALREADY kept loan loss reserves for these loans, and that this 140M is in EXCESS of the existing loan loss reserves. Let’s assume that they only have 50M set aside for these losses. That means that the hedge fund just walked away from the deal 70M (190-120) richer in basically one day.
Still, you may ask yourself, why does this matter? If interest rates go up, they’re on the losing end of this because they can’t resell them on the market without losing money themselves, especially if there is a broader credit crunch.
Basically, I can only speculate that the hedge fund believes 2 things:
1. There will be a recession and rates will be lower in the future, although this is a widely held belief. But, not necessarily mine. In this case, the loans will be worth MORE.
2. There will be no broad credit crunch because the FED will step in to provide liquidity where needed.
It’s probably a calculated risk, and easy to do with OPM (other people’s money). If I had 4B lying around, I might consider it too. Of course, I wouldn’t be running this blog either.
Hmmmmm.
Aren’t you supporting my point that the real estate meltdown’s not that bad? If WW3 is 10% of the worst subprime loans going to foreclosure, I think that number of properties is absorbable. Sub prime loans were what, 10% to 20% of the loans last year. If 10% go bad thats only 1% to 2% of the whole pie.
I find lots of people waiting in the wings to buy homes. If prices come down 10% a lot of people are going to jump in and stabablize prices. Then people who bought two yeaars ago will still have enough equity to refi or sell without going upside down.
What’s wrong with my theory?
I was going to try to give a short answer to your question, but the full argument can be found here:
http://www.irvinehousingblog.c.....ng-market/
The basic problem with your theory is twofold: 1. (Supply) There will be many, many more foreclosures than you think. This problem is not limited to sub-prime, 2. (Demand) There will not be a lot of people entering the market if prices drop 10%.
You will see a number of buyers who missed the rally but still believe in the illusion of continual appreciation. These are the buyers you are thinking about. They will get flattened by the huge increase in foreclosures. The bottom will not be found until prices drop to their rental equivalent value.
Yeah, you misread my comments. They only kept prime for themselves. The most toxic stuff got sold off already.
In a credit crunch, only those with cash can buy houses. I know tons of people that would love to buy a house, but can’t because they haven’t got any savings. FHA loans won’t save them because the limits are woefully low.
Our homeownership level is the highest it has been on record, nearly 10% above trendline.
Could new owners step in and replace them? Absolutely, in fact, that’s central to anyone’s argument. Houses will not sit vacant, but rather get sold off to the highest bidder.
However, if those currenlty sitting on the sidelines couldn’t afford the houses before, what makes them able to afford them without prices coming down?
I also don’t think you’ll see a single-year crash. It will take time, and often prices are “sticky” on the way down. But, they also tend to overshoot the downside. The last time we had house price inflation like we do today (1920′s), it took 70 years for housing prices nationwide to exceed inflation. I’m not saying it will take that long, but it could.
Most importantly, there appears to be some sort of “sweet spot” with respect to affordability and ownership. Go outside of these limits, and bad things happen to lots of people.
I wonder if one of the poeple laid off was the guy who said that in retrospect it might not have been the best idea to park his convertible red Ferrari right out in front of New Century’s office doors.
Jimbo said:
The bottom will not be found until prices drop to their rental equivalent value.
And the sick part to all of this is that the rents can drop in a recession as well.
…
This may be a long way down and potentially a lot more than a price drop of just ’50%’ to bring the Price to Rent ratio back in line.
Looking for advice. Thinking about buying some new/existing downtown san diego condo inventory at a discount. Looking for a blow out price on new product. Nice area, quality finishes, large units.
Any thoughts on WW3 values /sq. ft.?
My gratitude for your efforts.
Price per sq ft is difficult because the best we can do is average… but there is no such thing as an “average” home.
Larger homes have lower price /sq ft, and smaller places have higher price/ sq ft. Condos can have meager or outsized association fees. Any of these can affect total cost of ownership.
Basically, if your after-tax cost of buying a place is lower than your rent, then buy. Noone knows what’s going to happen with interest rates or their job, so it’s all a crapshoot anyway, it seems. If you plan on staying in a place for a long time (more than 20 years), it may or may not make sense for you to wait. For everyone else, we’re likely to have at least 3 more years of falling prices if not more. If there’s no recession, I’d say we have 6 to 10 years of flat to down pricing.
There is no magic bullet.
Chuck Ponzi
Chucky,
You didn’t read my message. I’m an investor looking to buy LOTS OF UNITS at a discount. I’m not looking to occupy the units myself. I own 1000s of units around the country. Looking to add inventory in this market b/c it’s very weak and I’m looking for opinions on where the bottom is- $600/$500/$400/sq. ft. To give you a sense, new condos have been selling for over $900/sq. ft. in many locations in 2006.
Any opinions from the locals?
First – Chuck, sorry for the shameless plug.
iInvest,
If you need a broker for your deals in California, my company splits our commissions with buyers. Most of the investors I work with are happy to pick up an extra 1.5% to 2% on each deal they do.
http://www.wehelpubuy.com
Yes, of course my liege,
Please forgive my previous insolence.
Perhaps if my master’s query were a bit more specific, my answer could be a bit more specific.
San Diego is a big place. WW3 pricing in National City is going to be different than in La Jolla or El Cajon.
Most people would pay me for this kind of research, by the way.
Bigshots like to talk big, playing their trump card in their first hand. Rainmakers typically wait until a strategically necessary moment to do so. Which one are you?
I deal directly with the developer but thanks for the offer. I don’t engage in the retail market. It’s purely a suckers play.
>Most people would pay me for this kind of research, by the way.Bigshots like to talk big, playing their trump card in their first hand. Rainmakers typically wait until a strategically necessary moment to do so. Which one are you?
save your ego-driven rants for another crowd. I’m here to make number, not impress. my question was specific- DOWNTOWN SAN DIEGO CONDOS PRICES. What’s your opinion on the bottom.
Believe me, San Diego ISN’T a big place at all. That’s the first thing that struck me about the market. It’s a TINY area and there aren’t that many projects under development although there are too many slated for development. I want to where you (anyone for that matter) see an attractive ‘can’t lose’ entry point to buy existing inventory from a developer. It surely won’t get to a point where market rent yields positive leverage due to intrinsic benefits of homeownership- ie a $500,000 condo may rent for only $2,500/month and still be a bargain given replacement costs and comparable costs in the area. This is new product we’re talking about, not conversions or older condos. I can just as easily purchase this info from market research firm but seeing as you purport to be just a maven on the over-exuberance of this socal real estate I figured you (or anyone here) would be able to provide more realistic (pessimistic?) data that the market analysts who get compensated by the developers.
Advice is appreciated.
wow. You are rude and dense.
“It surely won’t get to a point where market rent yields positive leverage due to intrinsic benefits of homeownership”
Yes, it will, particularly with the condos. Any big money player would wait until the properties had positive cash flow before entering the market and buying large numbers of units. Speculative betting on appreciation is the “suckers play” you referenced earlier. Buying cashflow is prudent investing — I assumed you knew that until I read the statement above.
If you really want to value these condos. Run your cashflow model on today’s rental rates with no inflation. When the housing recession is in full swing, rents will flatten. The condo renting for $2,500 you referred to is probably worth about $250,000, maybe a little more if interest rates remain low. As you can see, they are very overpriced. If you want to buy them at $400,000 betting on the return of rapid appreciation, go for it. A wiser developer will cash you out when the market hits $250,000 and you are broke. Basically, no large investors will be buying these products in these markets in the next 2 or 3 years.
Is that pessimistic enough for you?
I understand how an investor will not purchase until the cash flow is there. Prices won’t continue to go down that far so that they exactly equal rental rates. The reason I say this is that basically people believe in home ownership. They don’t want to rent, people want to own. It will always be more expensive to own than it is to rent.
My opinion of the bottom? I don’t think you’ll really pay attention, but I’ll give it anyway.
After know-nothings have blown their wads and bought, and there is noone else to buy, we still have probably 2 more down years and 3 more flat ones afterwards. There is no dollar value associated with that. If you want me to give you a specific opinion on a specific area, my standard consulting fee is $175/hr.
You won’t get bottom prices now, end of story. That’s part of the irrational market we’re in, no matter how desperate a seller may/may not be, there are just too many foolish buyers running around with millions or tens of millions, or whatever they pretend they have and not a clue where the market is headed. Whatever price you get will set the place for the next round of negotiations for the next fellow. It does not pay to jump in quickly; that’s why they call it “catching a falling knife”.
It amazes me that anyone with money is even thinking of real estate right now; there are too many other opportunities that have lower risk and higher reward potentials.
I saw some condo crap in downtown SD recently that had a cap rate of 2.5%, and that is being generous. It was a money-losing condo project, but touted as “one of the best values around”. Indeed. They were assuming 100% occupancy when average occupancy in the area is somewhere between 70 and 85% in a raging market.
I can tell you’ve never been Downtown San Diego. Anyone who tells you it’s small must be comparing it to Toronto or something. Overbuilt is more like it. We’ve got some several years of absorbtion just on the market right now, and that includes wholesale. Take any price you see and divide it by half and then half again, and you’ll be talking about reasonable prices.
Chuck.
BTW, learn how to click on the “reply to this comment” link when answering.
Anyone get the idea some kid living in his mother’s basement is here acting like he’s Donald Trump?
Thanks Chucky. That was far more helpful that your previous post. I have been to SD recently in fact. Not overly impressive imo. I’m comparing SD to places like Chi/Mia/Tor/Van where there are dozens more cranes in the sky. I’m interested to learn that you believe there is so much inventory out there. The housing analysts say only a couple thousand new units in the pipeline over the next 36 months. Not a whole lot for a city of over 2,000,000 and growing but is worthwhile learning your opinions.
fyi to you and the rest though- when it comes to a person’s home the property’s cap rate is not as relevant as if it were an investment. I’m not when you purchased your first home you didn’t necessarily make the calculation of what it would rent for in relation to the cost. Rather, there are other variables at play. A pure real estate investment such as an apartment building would be analyzed based on the projected return but that is not my goal is that case- though it is with others. Here in SD I see blood on the streets and I’m just looking to do some bottom fishing. While units are STILL selling for $900s/sq. ft. in the BOSA bldgs I find it hard to imagine that picking up suites at $300-$400/sq. ft. in other similar buildings in town is such a risky proposition but as stated I’m willing to convinced otherwise.
“I’m not when you purchased your first home you didn’t necessarily make the calculation of what it would rent for in relation to the cost.”
I did, and I will next time as well.
rarely will a SFH’s market rent – expenses cover the cost of capital. Even before most market started to run away there was always a premium associated with home ownership due to many benefits of ownership- ie % deduction, the ability to make improvements, protection from escalating rents, tenure of residency, nuclear-family residence, etc.
Historically these symbiotic have always commanded a premium over rental living.
With all the talk about bubble crash, lower sales volumes, sub prime loan troubles, etc, I haven’t seen significant price drops on existing homes that are being sold in Rancho Cucamonga. I do buy in to the theories discussed by most of the intelligent posters here. But, anyone else seeing anything different when looking at RC? The number of homes from 500-800K on the market is increasing by about 15 homes per week, but the 3000+ sq foot homes are still selling >800K, albeit only one home in that range closes per week or two. I would have expected asking prices to drop more than they have. Even the corporate held properties are holding on their asking prices. So… um… when is this crash going to happen?
When the ARMS recast and reset which is later this year. However, if you’re expecting a “stock market” type crash then you will be dissappointed.
This really cracks me up. The MSM starts reporting on the bubble blogs recently because of the subprime implosion and now we have A-Holes coming on here expecting free advice. Pay for the research or go pound sand you pretentious douche bag, but don’t extolling permabull nonsense and expect to get free advice.
Get Lost.
Great responses Chuck. We need to continue to educate the public.
These newbies to the real estate demise still shock me because I forget sometimes how many people can’t see what’s right in front of them.
Additionally, I also surprised by the sheer number of people already looking to be a bottom fisher. People this downturn has just begun! It will not play out in just 12 months despite what the MSM reports. Here in CA the trough is more likely 8 – 15 years away. Yes you read that correctly.
Alright enough ranting, keep up the great work Mr. Ponzi.
Owner of thebubblebuster.com
How can you expect things to bottom out in 8 to 15 years? I would expect population growth alone in those years to prop up demand substantially and keep prices high and out of reach of many.
JW,
I assure I’ve been active in housing blogs longer than you. On other sites data is freely shared. It’s the validity of the info that is in question. I share the pullback sentiment espoused here but the gravity of the decline certainly cannot match the doomsday scenarios described above. Such predictions appears to emanate more from petty jealousy than sound financial reasoning. Facts are facts however.
In case anyone is interested I’ve located this blog, FOR FREE:
http://sandiegomarketmonitor.blogspot.com/
Oh please, you have no idea how long I’ve been monitoring the bubble blogs. I was one of the original members of the Piggington blog back in early ’05.
It won’t be as bad as the doomsayers here say it will? You just gave yourself away my friend. You really have no clue do you?
Nice attitude JWM. I’m sure it takes you far in life. Consider removing your ego from the equation once in a while. It might serve you better in the long term.
It’s kept me from buying an overpriced stuccobox and funding the early retirement of some SoCal douche bag thereby saving me from losing 100s of thousands of dollars in future earnings. So yeah, it’s served me quite well thank you.
The real estate spammers are here.
OK Iinvest. Good luck with your thousands of holdings in real estate.
The bubble is bursting and soon you will be living in your car. You can get free net acess in local libraries.
California has some nice beachfront parks to sleep in.
Please feel free to double down on your heavy speculative bet.
A guy that is really looking and has thousands of holdings (which nobody on here believes) could make some guesses in their sleep.
The rule of 150~200 applies here.
If you don’t know what that is take you spamming ass off the blog.
not here looking for a fights kids. my port. is not new. been in the business for decades. leverage is extremely low. always fishing for bargains. if you could buy new downtown sd condos for $300 p.s.f. would ya? if you had the cash that is. that’s really my question.
save your judgments for your therapy sessions. i’m here to profit and i trust you’re goal is the same.
More or less.
Assuming you have 200K average value for properties…
Thousands of properties would mean your assets are around 200 million dollars.
If they were cash flow positive that would be a monthly income upwards of 500K per month.
Odd how many guys you run in to on the net that have hundreds of millions.
My simple answer.
If you could get condo’s downtown at 300 sq ft it might be marginal at best.
You can go to rent.com and see a lot of 2500$ per month for a 3/2 place in the general area (Downtown will be a good bit more) Given the general size that works out to be around 360K price tag at 300 sq ft.
That is close to the 10times yearly rent @300K. So that would be pretty close to cash flow positive IF the rents stay this high. A loser but not a disaster.
So, the thumbnail analysis says something like 250$/sq ft is more reasonable as in investment. A good investment would be more in the 200$/sq ft range.
The multipliers are different if you are talking about home vs an investment property. You can talk about a 15x yearly rent multiplier if it is for your own place.
You can also do the quick and dirty median income calculations for affordability in the area. Too big of a house for area income=white elephant.
as follow up:
consider that someone with an open mind towards opportunity just MIGHT consider polling a blog for info IN ADDITION to purchasing expensive housing market reports. the more opinions you hear the better informed yours becomes.
sd is a nice city. i wouldn’t want to be developing anything new there but surely even the most bearish of you would consider a purchase at the right price.
Yes, but 300sqft???
my question is whether anyone here believes that purchasing a new condo for $300 p.s.f in a desirable downtown location is good value. that’s what I’m trying to determine and I do appreciate your input.
That would be 300K for a 1000 sq ft condo in downtown SD. Not a good deal in my opinion when you’re talking about a glorified apartment.
Also note median income is something like 65K ish down there.
So, a 300+K condo is getting in to white elephant area
How many young couples want to live in a busy downtown area?
Great counterpoints JWM and LAEF2! My argument is simply that the $300 p.s.f. units are currently listed (and selling?) for $600 p.s.f. so that would mean a 50% discount. On that basis is it not an attractive price?
iInvest,
Save your breath. You’ll never get naysayers like LAEF2 or JWM to admit that ANY real estate is a good deal. They are so bitter about missing out on this run that all they can do is hope every one else gets screwed and sink to their level.
There are plenty of money making opportunities out there in real estate and there always will be. Guys like us will make money in any market.
The run up was done two years ago idiot. Anyone who bought in the past two years with 100% financing is toast. Yeah, I’m real bitter while I save 2k a month and earn 5.20% risk free interest on my future down payment while suckers are out there renting money from the bank and taking the asset risks. Get over it already, the housing party is over in SoCal.
“while I save 2k a month and earn 5.20% risk free interest on my future down payment”
downpayment on what? a condo? if so what do YOU consider an attractive entry point. C’mon, gun to your head & you gotta buy NOW but you can’t overpay.
Name your price for a shiny new 1,000 square foot downtown condo in a nice building.
Iinvest
I’ll give you 150K for it tomorrow, but that would only marginally be as good as my other current investments.
Personally, I can tolerate risk, but I had better be getting 25% return minimum per year. I’ve averaged about that the past few years in the stock market.
Good investors know that the money is made on the buy side, not the sell side. Timing is everything. Don’t get greedy.
I’d venture a guess that many who read this will be happy to execute a buy when it makes sense. It is a myth that renting is always cheaper than buying. That wasn’t the case when I bought my first place at the beginning of 2000, it most definitely was cheaper to buy (after taxes).
Good investing means taking risks, but taking risk just for risk’s sake is literally putting a gun to your head and pulling the trigger… it might misfire this time and save you, but there’s no guarantee for next time.
wise words chuck p. i concur that the broad equities markets have yielded far superior risk-adjusted returns from the comfort of your living room- or even your local coffee house courtesy of ubiquitous wi-fi- to the unsustainable rally in condos.
HOWEVER, I’m attempting to seize a buying opp as you’ve suggested. Timing is in fact the key. Success is when opportunity meet preparation, correct? So, I’m trying to figure out how to steal some units and you’re trying to show me the way. But at $150 p.s.f. you won’t find many opportunities in new downtown SD condo inventory imo. In fact, I’d venture to guess that you won’t find too many opportunities at $300.
Quick and dirty calc please- a 1,000 sq. ft. 2 bed/bath w/ 2 parking spaces rents for about $2,500/month correct? Tell me please what you imagine the operating costs would be?
Here are your expenses:
TAXES _____________
HOA _____________
UTILITIES COSTS _____________
MAINTENANCE RESERVE__________
VACANCY/BAD DEBT ALLOWANCE_________
PROPERTY MANAGEMENT FEE____________
Fill in the blank with an honest estimate and I’ll tell you what an attractive price for that unit is imho.
Taxes: Depends on the purchase price due to Prop 13. (assume 1.25%)
HOA: Varies widely. High-rises are usually like 600-800/month (you can rent these out for $2500/month). 3 story walk-ups are more like 150-300/month (rents are usually 1600 to 2100/month depending on exact location and amenities w/in walking distance)
Utilities: 200-300/month depending on the building (tenants typically pay these in Socal)
Maintenance reserve: 2500/yr
Vacancy Reserves: 15% of gross rents
Prop. Management: 10% of gross rents
also forgotten: Lessor’s Insurance: running about 150/month
Assuming the unreasonable (you’ll never in the current market get a downtown SD condo for 300/sq ft) Your fixed costs will be 1300/month before your PI payment. In this market, you’ll not get that price unless for a 3 story walk-up, and then your rents are going to be much, much lower than you’re estimating. You can rent a 3 bedroom detatched 1600sq ft w/ 2 car garage with all the trimmings (pergraniteel) in La Jolla for less than 2500.
Like I said, I can’t imagine anyone that can do back-of-napkin math would even consider buying right now. It just doesn’t make any sense unless you’re rolling over 1031 exchanges and have to buy SOMETHING. Better look out of state in that case.
Not sure why your looking into Southern CA its a time bomb. If you really have this much money your a lot better off investing into Texas or Illinois where prices have not bubbled. What your looking for is someone that overextended with a toxic loan on rental property. It will go for fire sale prices well below break even rental rates since nobody has the money to invest.
Bubble areas are places you buy into when the dead are no longer stinking the air but have become bleached bones. It will be a long time before the bubble areas are worthy of investment.
But in middle America you have plenty of people over their heads with no one to bail them out its not that they are that deep its simply no one will come to their rescue.
SOCAL has it all- diverse economy, strong net population growth, ideal climate, unbeatable amenities & relatively strong barriers to entry. Long term it is a very desirable place to own property. Just not at $800 p.s.f.
You had better check your statistics on that population growth thingie. We have had net outmigration for the past 2 years.
Chuck
Evil Opt,
I am going to enjoy watching the leverage happen on the way down.
Yeah, I’d have liked to have jumped in back in 01 and sold in 04 with huge gains.
But I am not bitter about it. I heard similar spiels and sounds from people that were paper millionares durring the dot.com and telecom bubble too.
They also got slaughtered on the way down. Fancy houses gone. Fancy cars gone. Some ended up on the street.
I said 300 sq ft was marginal. I stand with that. There will certainly be good points where real estate is an decent investment.
Right now is not that point. Real estate busts and cycles can be long drawn out and painful events.
I think historically the values in real estate are only a nominal hedge against inflation. Unless you get a bargin. A bargin would be cash flow positive as a rental; and less than 10x yearly rent.
When I first looked in to this blog and others I was trying to understand what I was seeing in the housing market. My understanding has transformed over time that we are looking at a credit bubble. Since that point I have been attempting to figure out the best defensive strategies for the comming (potential) crisis.
Anyhow, the debt exaustion looks really clear to me now. The big sign that we have unservicable levels of debt are the I/O or Neg Am loans. Basically the prices over inflated SO much that people can’t buy without slowly sinking or inability to service the principle on the loans.
A condo? F-U you arrogant prick.
I already have my 20% down and the majority of my assets in equities in hedged positions (collar trades). I just don’t want to add anymore $ to the stock market right now since I don’t think the downturn is over yet. So, I put what I save by renting into T-Bills for the time being.
So at what price level you DO think it would be a good entry point to buy a downtown condo for value? Surely you must think that a condo is a good investment at SOME price level.
The simple rule of 150 (or 200); If the price is less than 150 times the monthly rent than its probably a good buy.
There is a lot of wiggle in the numbers though.
Good location and you can stretch to 200.
I don’t think downtown San Diego is a great location. Some DINKs might like that spot. A significant portion of the gay community might like that. So, its a small section of the market. Similar for lofts in downtown LA. What do you think the schools are like there? Total crap.
Problem with the rule is its a general guide. Location is critical. Comparisons are always a bit tricky.
About desirability… California has nice geographic features but the premiums are loony. Water is cold, budgets/taxes are in trouble, Mexicans are bringing the corruption and gangs with them…
So, you could make a similar arguement that things are much nicer in Mexico, Florida, Carolina’s…
Also have to factor in the employment situation. If you go over to pigginton it notes most of the income growth was related ot the real estate boom. As that goes away median income will drop and leverage rents downward (or people will move and deal with slightly less perfect weather).
Also note the only nice property in SoCal is really close to the water. Within 10 miles at best. The rest of the land is desert. Lots of those people will give up for ghost and leave the state. That can further rachet things down.
What I am trying to be clear with is, yeah, its different here. its also different everywhere else. Less crime, nice parks, good schools, less homesless…. The premium isn’t as big as you are thinking.
What I’m telling you is that I don’t care what a condo costs right now. Ask me that question in 2009 after the rest of the subprimers and alt-a mortgage lenders have imploded already.
There are multiple years of resets in the works. Like a tsunami it may not be the first wave that kills you. There are huge numbers in 07-08 and ramping up again in 2010-2012… The 2010-2012 wave is still building unlike the crest that formed in 07-08.
Whew.
This is going to burn everyone. I guess I’m pretty fortunate that I will be going in debt free and some decent amount of cash. Other family members have paid off houses, good investments and cash… diversified portfolios.
mls shows under 500 condos for sale downtown and industry figures show under 2,000 completions over the next several years.
Is that really so much product for a growing city of 2,000,000 to absorb? Perhaps not at the current avg of $600 p.s.f. but knock 25% off and we’re down to $450 p.s.f. Surely 300 p.s.f. isn’t so tough to stomach.
btw- your 150-200 rule is pure BROKER TALK. I’m telling you as someone with 1,000s of units that the proper way to evaluate an apartment investment is to do a complete discounted cash flow method and to account for all known and foreseeable expenses. An acceptable rate of return today is probably in the 7%-9% range.
Looking a realtor.com; Lots of stuff in the city of San Diego (not downtown)already priced under 300$/ft^2.
So, if you are buying in bulk and have the $$$ then I’d try for under 200$/ft^2
I have not visited any of these areas or properties so it would be a lot more research before I’d invest.
I’d rather wait this out and invest in gld, oil and options for now.
Probably be under 200$/ft^2 soon.
Invest…
I completely agree with you. When you think about it in terms of just how many people there are out there and then you consider how much inventory is on the market or about to come on the market, it makes sense to think that the inventory can be absorbed. I don’t argue that their won’t be a price correction, I absolutely agree that there will be one. But with the population that we have, and to have 1 that is growing and thus a growing demand for places to live, demand will continue to prop up real estate prices in the future. According to the US census, the population grown in Riverside County was 481,000. That is a lot of people who need a home or eventually will probably try to purchase a home.
I think the people who believe there will be “extreme price drops” are waiting for something that will never happen. There will be price drops, but not like some people on this site think at least in my opinion anyways.
**that is 481,000 from the year 2000 until 2006.
Here is the link:
http://www.census.gov/Press-Re.....09756.html
oh good heavens; we are back to basics with this.
Reading through this thread, I get the impression you are talking to a box of rocks. First, Chuck answered his question, then I answered his question, then you answered his question, and he didn’t hear any of the three of us. Either that or he did not like what we had to say. I gave up about 30 responses ago. You have more patience than I do.
It appears the shorthand 150 / 200 rule is too simple. Perhaps you should run a full discounted cash flow analysis on the San Diego condo market and post it for free. You’ll end up in the same place, but why do a simple analysis to see the situation is hopeless when a far more time consuming analysis can also be done?
Yes, yes, we all know, Riverside County is different.
Remind us all again why it’s desirable?
Remind us again how much land is available?
Remind us again, what the economy is built on?
Just checking to see if you’ve done your homework, or just enjoy cherry-picking statistics that suit your own personal opinion?
iInvest,
I’m not sure where you are from, but that population of 2 million is spread out over a very wide area. You can leave the border driving north on the I-5 and still be in San Diego an hour later. (With traffic 2 to 3 hours later.) Yes downtown SD is relatively small, but that’s because no one lives there nor do they want to.
I’m currently looking for a new place to rent and downtown at $2500 per month for a 2/2 is overpriced. There are nicer places within a $10 – $20 cab ride of downtown where I could rent a SFR for that amout. With few exception, rents in San Diego for 2/2′s are under $2k.
Some things you need to know about San Diego:
1. Downtown is an after thought for San Diego desireability. Here is a short list of more desireable, and cheeper, locals: Hillcrest, North Park, Mission Hills, Old Town, Point Loma, Solona Beach, Encinitas, Cardiff, Carlsbad, etc.
2. Lack of parking (i.e. Downtown SD) is a major drawback for anyone living in California. Who cares if you have parking when your friends never come over because they can’t park for less than $20?
3. Too close to Chula Vista (i.e Chula Juana), National City (Nasty City) and other Third Worldized locals.
In short, sure I would live in downtown for the right price, but I would not stay there more than a year before finding more social digs.
“According to the US census, the population grown in Riverside County was 481,000. That is a lot of people who need a home or eventually will probably try to purchase a home.”
OH YES. And most of the people out here in Riversippi make 80k and up to support the 500 to 800k homes ..NOT!!!!! I live here , I know!! My neighborhood is made up of blue collar workers making 40k. Most involved in the home business (and yes peddling loans I consider blue collar). Theres no way in hell these people making 40k shold be buying 400k homes. Get real douchebag.
You are forgetting that many of the people who already live here have equity. When it comes time to purchase their next property they will have a sizeable down payment. It isn’t as if every home owner in Riverside County is a FTHB. And just for your information, because the prices you quoted show that you don’t know what you are talking about, the average price of a home in Riverside County is just over $400,000.
Just because there are new developments going for 600,000 or 700,000 doesn’t mean that the majority of homes are that expensive.
I own a home in Riversippi than you very much . So I know what the hell I am talking about.
BTW, Every single friken person I have had a conversation about RE has admiited to hitting that cash-out refi on the home several times. So there goes your fallacy about everyone in the IE has tons of equity. Not so Skippy. Open your eyes dimwit and stop drinking the kool-aid. Our area is screwed BIG TIME.
“I think the people who believe there will be “extreme price drops” are waiting for something that will never happen.”
Chris come back here in 1 year and we will see who was right! I will be here along withe the rest of the ‘chicken littles’ . And this is coming from me, an Inland Empire home owner who is realistic. HAHHAHAAHHAHAHA.
Hey Smugbastard,
I’ll absolutely will come back in a year when we haven’t seen huge price declines and you guys will all be saying the same thing…”oh keep waiting, the worst is yet to come…” so it won’t accomplish much. You guys will be on your soap box forever.
However I do have a questions for you. If you whole heartedly believe real estate prices to fall so much in Riverside…why aren’t you selling NOW so that you can rent for a year or two and then pick up the same home you sold at 50% of what you sold it for?
Seems to me that would be the wise thing to do if YOU really do believe this is what we are all in for?
*Note: remember what I’m saying when I say huge price declines. My belief is a drop in prices of 10 to 15%. Chuck and others think much much greater percentage drops in home price.