BSGCORP
01-08-2008, 01:06 PM
How to survive the bust
In 2002, the median price of a single-family home in Los Angeles was $270,000 and the median homeowner's income was $65,000. With a $50,000 down payment, the annual cost of that house (taxes, insurance and payment on a 30-year fixed-rate conventional mortgage) would add up to about 33% of the median household's income -- just under the 35% mark that the Federal Housing Administration calls the upper limit of "affordable."
By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled speculation fueled by unparalleled access to mortgage capital. But median income rose a paltry 15%. So today that same set of costs come to 60% of gross income.
That might be a manageable burden when home prices are rising at double-digit rates, creating new equity that can be accessed to support spending -- but not when prices are flat and the home-equity ATM is closed.
There are "experts" out there who once preached that there was no bubble; they now preach that all real estate is local and that prices in your neighborhood won't be affected by foreclosures and price declines elsewhere.
The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.
2008 is the year when gravity will reassert itself. You should be adjusting your expectations of your home's value so that it's correctly aligned with market realities. And when making important financial decisions today, be realistic and factor those declines in.
Investors can still make money -- good money -- in a contracting market, but it requires that you not simply follow the herd. I think it is safe to say that in the coming year, a few basic principles for real estate investment will hold true:
Know your market. The more you know, the less likely you are to get caught up in someone else's fervor -- or someone else's panic.
The market won't rescue you from a bad investment. If you're buying an income property like an apartment building, buy it for today's net cash flow. If you're buying a home, plan on living in it for at least five years.
Add value. Real estate is not a passive investment, though you would never know it from the way some landlords behave. Improving your properties and the neighborhood is the best way to protect yourself from the ups and downs of the market. There is never a glut of great buildings in great neighborhoods.
Breathe. This too shall pass.
Imagine a scene on "Little House on the Prairie" in which Merlin Olsen says to Michael Landon, "Howdy, Charles! Heard locusts are fixin' to attack your wheat crop and you might lose the farm. Alright, well, see ya. Say hello to Half-Pint and whatever the blind one's name is."
Sorry, you can't imagine this because Merlin Olsen had something called empathy. And to get through the current real estate situation, we're going to need to take a page from his book.
Memo to everyone who didn't buy a house in the last four years: Please stop talking about the housing crisis in front of those of us who did. We're too busy to listen. We're trying to figure out how we're going to send our kids to school, or if we're ever going to be able to retire.
And if you must talk about it, could you please at least pretend it doesn't make you happy? Last weekend I was at a party, and a fellow guest spouted cheerfully: "Housing prices are going to crash, and all those rich jerks are going to be screwed." I'm certainly not rich. I'm probably not a jerk. If I am indeed screwed, I would prefer that whoever brings this to my attention does so with less obvious relish. I would rather hear someone assess my risk of cancer and, truly, it would be about as appropriate.
Look, I get it. If I didn't own a home, I might feel similarly. But I hope that before opening my mouth, I would think: What would Merlin Olsen say?
Nobody knows what is going to happen. Contrary to prophecy, historical cycles or headlines, there are no guarantees and too many variables. So for real estate agents, 2008 is going to be a year of strategy.
According to MLS data, for example, the high-end market in L.A. -- houses that cost $5 million or more, my area of expertise -- is still strong. Closed transactions of $5 million and above across the Westside are up 12% year-to-date in 2007. The price per square foot is up too, by $36.
Fortunately, we also live in a city with worldwide appeal. Many of the high-end buyers I see are arriving from overseas with loads of cash; a tight mortgage market is no issue. If you're selling, your brokerage better have an international presence. But whether you're investing, unloading or brokering deals, in 2008 there's no free lunch.
Los Angeles is a city of beautiful residential architecture -- and constant threats against it. Nothing is certain in historic preservation, but the pace of building and bulldozing usually slows during a downturn, simply because there is less construction money available. In 2008, perhaps Los Angeles can pause to consider the true value of the city's historic homes.
But it isn't just houses. Countless Spanish Revival courtyard apartments; Venice's mid-century Lincoln Place; the small, Richard Neutra-designed building in North Hollywood -- all these do more than give shelter. They embody our history and, if done well, provide inspirational places for living.
With a break in the rush to build luxury condos, perhaps we take a closer look at what we have, and find creative ways to use existing multifamily structures to provide quality housing at reasonable prices.
The fear of foreclosure leaking down from the foothills and the valleys hasn't yet risen to panic in my piece of L.A. flatland. Our tract units -- thrown up 40 to 50 years ago -- can still be mined for just a little more debt. And out here, where the desert meets the crab grass, debt and fear dominate.
If no one talks of flipping seven-figure houses anymore, it may be time to talk of other values. The L.A. sellscape never made much room for those pleasures that took longer to appreciate than the three-year move-to-move cycle.
In 2008, the housing mantra will remain "location, location, location," but you may be located in your place longer than you expected (if you're able to make the mortgage). Maybe this is an opportunity, not to "shelter in place" until the credit firestorm passes but a chance to settle our restlessness, to savor the local.
Home has always been hard for Angelenos to define, except as a collection of dissatisfactions prompting the next move. When there are no more illusions about finding the perfect place, maybe we can begin to perfect places that are ours. Plant a garden. Become a regular any place we can walk to. Or make some other brave promise of continuity. And fall in love with what we already have.
In 2002, the median price of a single-family home in Los Angeles was $270,000 and the median homeowner's income was $65,000. With a $50,000 down payment, the annual cost of that house (taxes, insurance and payment on a 30-year fixed-rate conventional mortgage) would add up to about 33% of the median household's income -- just under the 35% mark that the Federal Housing Administration calls the upper limit of "affordable."
By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled speculation fueled by unparalleled access to mortgage capital. But median income rose a paltry 15%. So today that same set of costs come to 60% of gross income.
That might be a manageable burden when home prices are rising at double-digit rates, creating new equity that can be accessed to support spending -- but not when prices are flat and the home-equity ATM is closed.
There are "experts" out there who once preached that there was no bubble; they now preach that all real estate is local and that prices in your neighborhood won't be affected by foreclosures and price declines elsewhere.
The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.
2008 is the year when gravity will reassert itself. You should be adjusting your expectations of your home's value so that it's correctly aligned with market realities. And when making important financial decisions today, be realistic and factor those declines in.
Investors can still make money -- good money -- in a contracting market, but it requires that you not simply follow the herd. I think it is safe to say that in the coming year, a few basic principles for real estate investment will hold true:
Know your market. The more you know, the less likely you are to get caught up in someone else's fervor -- or someone else's panic.
The market won't rescue you from a bad investment. If you're buying an income property like an apartment building, buy it for today's net cash flow. If you're buying a home, plan on living in it for at least five years.
Add value. Real estate is not a passive investment, though you would never know it from the way some landlords behave. Improving your properties and the neighborhood is the best way to protect yourself from the ups and downs of the market. There is never a glut of great buildings in great neighborhoods.
Breathe. This too shall pass.
Imagine a scene on "Little House on the Prairie" in which Merlin Olsen says to Michael Landon, "Howdy, Charles! Heard locusts are fixin' to attack your wheat crop and you might lose the farm. Alright, well, see ya. Say hello to Half-Pint and whatever the blind one's name is."
Sorry, you can't imagine this because Merlin Olsen had something called empathy. And to get through the current real estate situation, we're going to need to take a page from his book.
Memo to everyone who didn't buy a house in the last four years: Please stop talking about the housing crisis in front of those of us who did. We're too busy to listen. We're trying to figure out how we're going to send our kids to school, or if we're ever going to be able to retire.
And if you must talk about it, could you please at least pretend it doesn't make you happy? Last weekend I was at a party, and a fellow guest spouted cheerfully: "Housing prices are going to crash, and all those rich jerks are going to be screwed." I'm certainly not rich. I'm probably not a jerk. If I am indeed screwed, I would prefer that whoever brings this to my attention does so with less obvious relish. I would rather hear someone assess my risk of cancer and, truly, it would be about as appropriate.
Look, I get it. If I didn't own a home, I might feel similarly. But I hope that before opening my mouth, I would think: What would Merlin Olsen say?
Nobody knows what is going to happen. Contrary to prophecy, historical cycles or headlines, there are no guarantees and too many variables. So for real estate agents, 2008 is going to be a year of strategy.
According to MLS data, for example, the high-end market in L.A. -- houses that cost $5 million or more, my area of expertise -- is still strong. Closed transactions of $5 million and above across the Westside are up 12% year-to-date in 2007. The price per square foot is up too, by $36.
Fortunately, we also live in a city with worldwide appeal. Many of the high-end buyers I see are arriving from overseas with loads of cash; a tight mortgage market is no issue. If you're selling, your brokerage better have an international presence. But whether you're investing, unloading or brokering deals, in 2008 there's no free lunch.
Los Angeles is a city of beautiful residential architecture -- and constant threats against it. Nothing is certain in historic preservation, but the pace of building and bulldozing usually slows during a downturn, simply because there is less construction money available. In 2008, perhaps Los Angeles can pause to consider the true value of the city's historic homes.
But it isn't just houses. Countless Spanish Revival courtyard apartments; Venice's mid-century Lincoln Place; the small, Richard Neutra-designed building in North Hollywood -- all these do more than give shelter. They embody our history and, if done well, provide inspirational places for living.
With a break in the rush to build luxury condos, perhaps we take a closer look at what we have, and find creative ways to use existing multifamily structures to provide quality housing at reasonable prices.
The fear of foreclosure leaking down from the foothills and the valleys hasn't yet risen to panic in my piece of L.A. flatland. Our tract units -- thrown up 40 to 50 years ago -- can still be mined for just a little more debt. And out here, where the desert meets the crab grass, debt and fear dominate.
If no one talks of flipping seven-figure houses anymore, it may be time to talk of other values. The L.A. sellscape never made much room for those pleasures that took longer to appreciate than the three-year move-to-move cycle.
In 2008, the housing mantra will remain "location, location, location," but you may be located in your place longer than you expected (if you're able to make the mortgage). Maybe this is an opportunity, not to "shelter in place" until the credit firestorm passes but a chance to settle our restlessness, to savor the local.
Home has always been hard for Angelenos to define, except as a collection of dissatisfactions prompting the next move. When there are no more illusions about finding the perfect place, maybe we can begin to perfect places that are ours. Plant a garden. Become a regular any place we can walk to. Or make some other brave promise of continuity. And fall in love with what we already have.