Introducing: MB Market Update

Over at our new sister site, Manhattan Beach Market Update, you'll find the first raft of data capturing the current state of the real estate market in Manhattan Beach – west of Sepulveda.

It should be easy for MBC readers to navigate back and forth to the Market Update pages, which are really just a subsection of MBC.

The first updates, current as of 3/27/07, and broken into Hill, Sand and Tree Sections, are discussed in detail in the first major blog entry at the Market Update pages.

On Second Thought, Let's Flip It

It's summer 2006. You've just bought a lovely home in the Tree Section, in sight of both Pacific School and American Martyrs church. You move in.

And yet, just a few months later, you get the itch.

Should we move again?

Is this really the perfect home in the perfect location?

In the news they say the real estate market is strong. Let's see if we can sell!

And so, just 7 months after hanging up your suits and arranging your glassware, you put your house up for sale.

It's 758 14th St., part of a very nice and unusual (for MB) planned development of 20-odd homes (townhomes actually).

You paid about $1.7m, but maybe you can get $2m now, with all the talk of a reinvigorated market.

(Technically, the purchase was $1.695m and the listing began at $1.990m.)

As MBC shall often repeat: Best of luck to all sellers. Maybe your lives changed overnight, and selling is necessary.

And yet, please don't expect bodacious profits after less than a year.

Flippers are defined elsewhere, officially and statistically, as folks who own a home less than 6 mos. You've avoided the definition but not the appearance of being flippers. Do you, also, need a calendar?

Builder Rethinking Dubious Lot?

If you drive into or out of town via Highland Ave., you are probably familiar with one of Manhattan Beach's worst developable lots.

At the corner of Highland and 45th, on the southwest corner, sits a trapezoidal postage stamp. (Described by one source as 28 x 45, 1280 sq. ft.) The current construction under way there has prompted a few snickers from MBC, and we just know we're not alone.

The problem begins with location, but just saying that doesn't convey the extent of the problem. The lot, 4419 Highland Ave., is six feet from Highland, one of our busiest and most clogged roadways at rush hour, with a view to the south of a gas station, and to the east of the refinery tank farm and massive power lines from the generation plant nearby. (To see those, you'll have to look over the traffic whizzing by, or chugging by in idle, depending on the hour.)

To be fair, to the south and the west you also have an ocean view. You will see ocean behind the gas station and the power line towers down there.

The house previously located there was a forlorn blue shack smaller than some refrigerators in our neighborhood. The lot went up for sale in Feb. 2005 via a handwritten sign on the garage. By Aug. '05, it had sold for $730k.

For almost 18 months, the original house sat there, untouched. Evidently, a lot of planning was under way.

Construction began in February 2007. At this writing you'll find a concrete foundation and two giant iron girders sticking straight up. (Are they swaying in the breeze, or is that an illusion?) You have to wonder what is being built, and for whom.

Wonder no more! All the gory details are here, on a website built just to tout this glorious beach-home-to-be. Would you believe this is slated to be 1900 sq. ft.? (Note the projected sale price: $1.650m.)

Maybe you're bullish on this project. Maybe you love the location ("steps to beach!"). Maybe, having examined the detailed blueprints available on the website, you are wowed by the vision and imagination shown for this house, and you must have it.

If so, a craigslist opportunity has presented itself:

Manhattan Beach - Great Deal 200K in Equity

Reply to: hous-301724093@craigslist.org
Date: 2007-03-27, 9:07PM PDT

Wholesale price for Builders, Investors or early bird buyers ...This home is
under construction. Plans are approved, contract with contractor is in place,
foundation should be complete soon.

Price for Land, Survey, Plan check fees, Permits, Approved Design,
Demolition, Grading, Utility hook-up, Retaining walls and foudation is
$1,089,520

The balance of the construction contract is $309,980.

$1,399,500 to complete. Comps are in the $1.6 million to $1.7 million range.

View comps and plans at www.4419HighlandAvenue.com

3 BD
3.5 Baths
over 1900 square feet
ocean view
walk to the beach(1 1/2 blocks)

Does this seem strange to you at all?

The ad touts $200k in "equity" being offered up in the deal. But that's hardly "equity," it's speculation. Well, who's complaining?

First question: Is this builder bailing? You've come this far, and you're going to sell midway for the meager profit of $370k?

Second question: Is there a fool with money to bail out the builder?

Third question: Is there really a buyer for this house at $1.6m-$1.9m?

Fourth question, actually the first question: Was this really such a good idea?!?

What's Up with 864 12th Ct.?

MBC notes a new listing today that is a frequent flier on the MLS.

Charming house, quiet Tree Section location, and already bought & sold three times in less than five years.

The sellers are hoping you'll pay $1.549m for this 3br/2ba, 1,500 sq. ft. cottage. They sort of need that price or close to it, since they paid $1.469m in August 2005 – at the peak of the boom.

Before that, the house sold in August 2004 for $1.150m, and for $850k in August 2002.

This house is like a metaphor for the flipping madness of 2001-05.

Did the house really become $620,000 more valuable in those three years (Aug. '02-Aug. '05)?!? The record says yes – that's what the market would bear.

Two sellers each gained $300,000 as the reward for holding the property 1-2 years. (And who knows what profits went to the folks who sold it for $850k in 2002... they were probably thinking the madness was due to end soon.)

Now, is the house worth $700,000 more today than it was in August 2002? That's a big question.

The listing touts extensive remodeling:

The home has been totally remodeled with new windows with plantation shutters, recessed lighting, crown molding, wainscoating, hardwood floors and new carpeting. The kitchen is remodeled with stainless appliances and breakfast bar.

But who do you suppose did that work? The current sellers have had the house for 18 months. If they paid for all that, then a sale near $1.5m could leave them at a deficit. They have to pay Realtor commissions and capital gains tax, because they didn't hang around for 2 full years.

MBC would bet that the expensive work was done before Aug. 2005, when these folks moved in. Those were some smart flippers back before. If the work was done by the '02-'04 owners, they even got their $300k tax-free because they held the property 4 days longer than 2 years. Congrats!

But these sellers now really need their price, and will probably hold out a while insisting on their price if they don't get a quick sale. Anything could happen... we'll watch.

It's Spring, Now Will There Be a Bounce?

Our very tentative Winter has given way, officially today, to Spring.

That means it's time to watch for the "spring bounce" in the Manhattan Beach real estate market.

In the coming days, MBC will post some data from the past year to illustrate the rough sledding we've had. Lots of sellers got haircuts last year. What's in store this year? Price increases?

MBC will also try to feature a few snapshots of data along the way of listing and sales activity in the area.

As we prepare for our bounce, MBC notes this unfortunate turn of sentiment by the Fed:

Jan. 31, 2007, meeting notes: "[S]ome tentative signs of stabilization have appeared in the housing market."

March 21, 2007, meeting notes: "[T]he adjustment in the housing sector is ongoing."

MBC translation: In January, it looked like maybe things would settle out and be OK. By March, more of us were saying "uh-oh."

But remember, they were looking at the national housing market, and all real estate is local!

Loan 'Reset' Calendar - Trouble in 2-3 Years

It seems generally agreed that today's troubles in the sub-prime lending area were triggered by two factors: declining home prices and lousy lending standards.

Flat or declining prices closed off the "escape route" of refinancing for many buyers whose payments were ready to "reset," meaning the expiration of a low "teaser" rate of 1% to 4% and/or the end of an interest-only or neg-am period.

When the payments jumped, many stopped making payments outright. About 30 seconds later, 40-plus sub-prime lenders went out of business.

(Today's vivid illustration: Two weeks before Opening Day, the Texas Rangers have dropped Ameriquest from the name of their baseball stadium. In a fitting irony, the lender signed a 30-year deal in 2004, but now could no longer make the payments.)

Trouble in the sub-prime area should continue for many months to come, if we look at the dollar volume of sub-prime loans facing reset. (This chart [click to enlarge] is sourced to Credit Suisse, and comes courtesy of a poster at Mortgage Lender Implode-o-Meter. MBC has made no independent effort to confirm it, or judge its scope.)


How does the sub-prime flameout affect Manhattan Beach? Instinctively most people will say there is zero or limited impact. There are no sub-prime buyers in town, you might hear – this is just a different market segment. And the counterargument is that prices everywhere will be negatively impacted, because rot at the "bottom" of the market invariably drags prices at the top, too, with fewer first-time buyers and move-up buyers able to enter the market. This debate sounds a bit indirect and esoteric, however, and it could take years to settle it.

MBC is wondering about another factor: Loan resets on those million-dollar mortgages held by Manhattan Beach homeowners.

All over town, people who bought (or refied) in the last 4-5 years are sitting on adjustable-rate loans with 3- and 5-year "rate lock" periods and interest-only periods. (In MB, these are more likely to be "Alt-A" type or "prime" ARMs, similar in form to many of the subprime loans now going bad.) These "affordability products" were absolutely vital to allowing regular old upper-mid families to buy in during the boom.

Here's the problem. Often, the rate lock and I/O period on these loans will end simultaneously. If you're still holding the loan, you're in a for a payment shock. The only question is how bad it will be.

People who worried about these payment shocks after taking the loans simply told themselves they could always refinance and reset the clock with a new 3- or 5-year I/O period. But if home prices continue flattening or declining, maybe no refi is possible. Your LTV ratio might have gotten worse since you bought.

The next step for the homeowner in this situation is one of three things: 1) Pay the higher payment, perhaps $1,500-$3,000 more per month; 2) Stop making payments and skid along to foreclosure; 3) Sell if you can. It is obvious that more "must-sell" inventory would drag prices down in MB even in the absence of any other factors.

If we're going to see this effect in MB, the chart above suggests that the problems really start about 26-30 months from now (March-June 2009). That's when "prime ARM" resets start to swell. Over the next year or so after, if we're making the right assumptions here, the impact of the resets on homeowners translates into more sellers in trouble and willing to deal.

No less an authority than Alan Greenspan said just last week that all of these sub-prime problems would "disappear" if home prices simply went up 10%. But wishes aren't fishes. If prices don't go up, a downward trend could accelerate in 2-3 years even in our lovely, luxury beach hamlet.

Note that this discussion ignores the issue of short sales. We don't have short sales in Manhattan Beach!

Coming attraction

Frequently I pass this lovely new construction. As you read this, it seems the builders are wiping off the last bits of dust and getting ready to put the house on the market.

The house is innovative, stunning and completely unique on its block. Indeed it's a Strand-worthy design.

Something that adds to its inherent modernist beauty is the way the designer tucked the garage away so you have a covered carport. This breaks up face of the house to emphasize the upper living areas. You almost have to look up and take in the whole tower.

From inside, you probably have some ocean peeks from those rounded front windows. Almost certainly from upstairs. And since so much thought went into the design of the building, here's hoping that inside, the whole place is tricked out with all the best materials, appliances, etc.

Now that we've said all the good things we feel, it's time for MBC's reality check. This home is not on the Strand. It's on Manhattan Beach Blvd., near Pacific Ave. And this is a rather drastic case of over-improvement for the block. Most people will enjoy this lovely house at 40 MPH.

And consider the neighboring homes -- many of them lookalike 60s boxes, many of them rentals, all of them caked in black soot from vehicle exhaust.

If this house (725 Manhattan Beach Blvd.) comes to market, pricing will be interesting. We'll track it. (Sales records show a purchase 3 years ago, March '04, for $779k.)

How do you weigh all the factors? Construction: Big upside. Location: Eeeeeeeegh. Depending on size, this is probably a $3m+ house. Location has to be a 20-30% drag, though.

One way or another, someone is going to pay a ton of money to live in a landmark home in a dubious location. That's MB.

A $1.3m 'Starter Home'

In a way, I hate to pick on one listing. But I was struck silly reading the language pitching a 1,200 sq. ft. 3br/2ba bungalow at 3521 Elm listed at $1,279,000.

The listing begins: "The perfect Tree section starter!"

(Sigh.) A "starter home" for $1.3 million. So many questions.

How did we get here? Why is this considered normal? And, though it is surely the case that a "starter" like this did, at one point, command $1.3m in this area, is that still true?

Somebody might walk right up and pay the list price, or list -5% ($1.2m), and all the realtors and active buyers will nod their heads and say, yes, it's still ON, and we'll all just continue like normal... Or that might not happen, and these sellers may hang around a while and take $1m when the deal finally gets done. (They paid $685k in 2001, so don't cry for them.)

As I said, it's not fair to pick on this one house. There are perhaps a dozen homes in the price range west of Sepulveda that qualify as "starters," but they aren't being pitched that way. It's the honesty of the language here that causes MBC to single out the Elm listing.

Zillow, which usually seems to guess high in MB, says this one is worth $1.180m, or $100k less. A neighbor, at 3613 Elm, quite recently got $1.180m (exactly) for a fixer with 1,300 more square feet (2,500 total). In fact, for about this price -- more or less -- you can lock into much larger, nicer, better-located homes all over MB west of Sepulveda.

MBC is not a big fan of Elm. The block in question qualifies only technically as the Tree Section. Parts of Elm are quite nice (esp. between Ardmore & Marine), but here the phrases "steps to Sepulveda" and "steps to Rosecrans" ring out. You are otherwise isolated, you might have a view of the Chevron refinery, and you'll be driving wherever you go.

To pay $1.2-$1.3m to live in a tiny house here seems like a desperation move. Here's betting that today, in 2007, with lending standards tightening and some real churning in the marketplace, nobody pays that for this particular "starter."


-----------------------------
UPDATE: March 19 - 12 days after going on the market, the listing price was reduced $40k to $1.239m. Sort of a bogus drop.

Bringing Cash to Closing?

Here at MBC we don't wish anyone ill will. If you want to, or have to, sell your house, we hope for the best for you in your situation.

We might mock the dreamers, those who seek excess fortunes for nothing, but then, dreamers are always mocked.

Sometimes people have to sell and it just doesn't work. Take this house on 17th St. for example.


This was a large, somewhat typical East Manhattan mega-mansion. 5br/3.5ba, 3,500 sq. feet, flowing kitchen w/ granite, smooth stucco, OK, by now you know the drill.

Purchased in April 2005 for $1,675,000.

Put up for sale in April 2006 for $2,075,000.

Who sells a house a year after moving in? Let's assume this was not a flip, but someone who got transferred. Taking that new job meant leaving home, but a $400,000 profit would have been nice, eh? (Taxable because it was < 2 yrs.)

This one really did not work out.

The list price dropped over and over throughout last summer and fall. The house was vacant shortly after it went on the market. The agents re-listed it fresh and new a few times (an annoying new convention in the market) and brought the price down to $1.699m.

It finally sold, closing Jan. 2007 for $1,650,000.

That's $25k less on the face of it than the purchase price in April '05. Now deduct commissions (near $100k) plus carrying costs for 9+ months after the owners moved out. The sellers lost a lot of money on this house, and might well have needed to bring a check to escrow.

We wish you well in your new job. Back in your old hometown, your experience is a cautionary tale.

I waited 6 months, now give me $300k

There was a time, you see, when people could buy a house, maybe fix it up and maybe not, then put it back on the market and gain $200k, $300k or more in 6 months.

History will show that was 2002-2005.

Some people believe that time is now.

Example: A small duplex on Manhattan Beach Blvd.

Purchased August 2006 for $1,495,000.

For sale now for $1,875,000 (list date 1/31/07).

To be fair to the flippers, they tricked it out inside. Listing says "completely refurb in 2006" and features: "Remodeled kitchen w/gaggeneau appliances, wok burner, deep fry, convec oven, wine cooler & granite/tile counters." No pics of the interior, tho.

Is this house worth $1.9 million?

Location is a problem. Its beachy, cottagey, old-Manhattan feel is sort of ruined by the large buildings on either side of it, and the choking traffic. It's right near the intersection at Valley/Ardmore. Your view from that front deck/patio is of the cars lined up at the red light.

Livability is a problem. It is two 2br/2ba units. You imagine someone is expected to make this a full-blown investment, in which case both rentals must cover a mega mortgage, or you live in half and rent out half. As the owner/landlord, you get a crap location ("steps from downtown," true, but watch your steps!), a small home and tenants for $1.9 million.

Maybe these sellers know something, or maybe they need a calendar.

Price INCREASES in a Declining Market

This blog begins with the following premise:

HOME PRICES ARE DROPPING IN MANHATTAN BEACH.

The good old days are over. A gigantic rally ended in late 2005. We coasted through parts of 2006, with some sellers getting their prices, and lots more watching their houses sit for months and months, ultimately accepting 15% or more off their initial asking prices. (There are exceptions. Some people got their asking prices and some people simply never sold at all.)




So why, I ask, are brand-new listings RAISING their prices? Two recent examples from the Tree Section:

#1 is 2305 Pine Ave. - a 3br/2ba house, 2,000 sq ft, a charming remodeled 1950 cottage. (First photo above.) So charming, in fact, that the sellers raised their price from $1,495,122 to $1,595,122 just eight days after hitting the market (list date 2/21/07). It seems anyone who missed it in the first week was expected to pay a penalty.

#2 is 2507 Valley Dr. - a newer (2004) 4br/3ba house w/ 2,850 sq ft. (Second pic.) This was a steal at $1,999,999, the price it held for four days. You snooze, you lose - since March 13, it's now $2,099,000.

That is two separate $100k increases. In a slow (but not dead) market in which most sellers are taking less.

Both homes have their challenges, and don't look like quick movers in today's market. Are the sudden price increases supposed to add a sense of urgency?!?

Presently I shall troll for other examples and track the fates of these sellers and this tactic. But we are skeptical here at MBC, where we can recall two things from recent years:

First, in the runup (2001-05), buyers often paid more than list price, but prices generally were not raised on listings.

Second, in the last 9-12 months, price cuts of $100k-$300k have been the rule, not the exception.