Real Homes of Genius: Culver City Pricing Dysfunction! Prices all Over the 405.
Recently I’ve started seeing an interesting tactic used by agents trying to move stagnant properties. The tactic is rather simple and uses techniques suitable for selling grilled cheese sandwiches with spiritual images on eBay. Folks are now pricing homes in the $150,000 to $299,000 price range to create bidding wars. This tactic worked fantastic during the boom times and inflated prices even over local area market prices. Suddenly buying that home becomes a contest to see who could out bid the other (this happens on a consistent basis on eBay where some bidders end up paying more for a used item they could have bought brand new for less).Another fascinating method of selling your home is willing away your entire estate. From the article:
“When the housing market slows, some home sellers drop their asking price. Others give buyers allowances to cover the cost of upgrades or offer help with financing.
Bob and Ricki Husick came up with a more creative twist: Whoever buys their four-bedroom, 31/2-bath home on Fountain Hills Drive in Pine would get their money back after the Husicks die.
Not only that, but if the buyers are willing to care for the Husicks in their old age, they could also inherit the Husicks’ retirement home in Arizona for a total estate now worth about $500,000. The couple has no heirs.”
Now that is creative financing. Either way, we are starting to see deals that speak of a slowing housing market. In fact, these are your typical hard deals that you will find in Robert Allen’s Nothing Down books. Interesting times in California.
Let us move on to our Real Home of Genius. Today’s home is located in Culver City and has a case of schizophrenic pricing. Today we salute you Culver City with our Real Home of Genius.
First, we take a look at the price on Zillow.com.
So we get a clear price of $775,000 for a 3 bedroom 2 bath home in a nice city of Los Angeles County. But wait, what is this? Looking at the MLS information we get contradictory information:
Say what? We have a $75,000 price discrepancy. Then we get a Zestimate of $740,000. We’re shooting fish in a barrel here folks. Take your pick, something is going to give. Clearly you can see that even pricing a home in the current market is more of an art than a science. What is the price history on this house?
Sale History
01/31/2001: $320,000
We have a whopping 142 or 118 percent increase in less than 7 years depending on where the dart falls on the pricing range. This home has gained $60,000+ each year for 7 consecutive years. Now what economic fundamentals justify such an absurd appreciation aside from being in a soapy, shiny, and ever popping bubble? I’m sure you are thinking, “but yes, everyone in this particular city is making $250,000+ a year so it is chump change for them.†Again, let us take a look at the income for this city:
Average Household Income: $71,203
Now let us run a hypothetical here and assume this family was to purchase this home for the lower range of $700,000:
PITI: $5,153 (Assuming a $35,000 down payment and current jumbo rates)
Net Monthly Income: $4,650 (Filing as a married couple with 2 exemptions)
So this family is actually running a $503 deficit each month. Clearly this is not doable. In fact, a couple earning $150,000 a year will spend 60 percent of their net income on their housing payment each month. Again, you can see how disconnected prices are from any semblance of reality.
Today we salute you Culver City with our Real Home of Genius Award.
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20 Responses to “Real Homes of Genius: Culver City Pricing Dysfunction! Prices all Over the 405.”
I wholeheartedly agree with this article. I am constantly amazed at the general psychology, most appropriately referred to as the E-Bay mentality. What people have paid, and even continue to pay (for houses), has no basis in reality, other than the fact that someone last year paid that much for a particular house. I do not see a bottom to this roller coaster until (no earlier than) the Spring of 2010. Even then, the housing market won’t be back to double-digit increases. It will only return to some normal level of housing values, keeping pace with inflation, as a place to live – not a speculative investment – for a long time to come (many, many years).
Thank you for you blog…I enjoy reading your observations. Forget fundamentals…this is California and the only fundamental we need to know is it cost more to live here because it is perfect. Except for last night when the Calavares fault reminded us here in the Bay Area it’s here, it’s active and it’s dangerous…
Have a great day and keep up the good work…
Yes, the ebay tactic you describe above is starting to show up more. Like we saw on 60 min. it doesn’t aways works. Unless people are stupid and apply the “ebay effect” to buying a house this is not going to fool anybody. Price your house correctly and it will sell.
I still remember selling 10$ backpacks on ebay and geting $50+ for them. That was great.
I’m often wary of what any numbers I read about actually mean. For instance, average housing price goes up because no one is buying any of the lower priced houses on the market. So when you quote the average household income, does that include renters or just home owners? And people living in the area don’t buy homes, they just borrow on them. So what is the average income of the people who bought the last 50 homes in the area? And what’s the average income of the top 10% of home owners, not renters in the area?
I have a better Real Homes of Genius for you.
A friend of mine bought this about 6 months ago in Culver City.
3 beds, 1.0 baths, 1,131 sq ft;
Recently Sold: $725,000
No sales information prior to 2004, but Zillow estimates the house would have sold for about $270,000 (give or take $10K) in 2003. My friend kept telling what a great deal he got…
He snagged a zero-down fixed before the recent market issues, and is a lawyer, so will probabl be able to make payments w/o a problem, but I still can’t believe that anyone would pay $725K for a 1,130 sqft shack with ONE bathroom.
I’m confused: Obviously THIS couple would not be buying THIS house if they only had 35K for a downpayment. But if the median income in that neighborhood is 71K then there are others there with much higher incomes/equity who could afford it. Presumably the number of houses for sale in Culver City is a tiny fraction of the number of houses in Culver City, many of them occupied by people with lowish incomes and no intention of moving. The more accurate number would be the incomes and equity portfolios of actual buyers. Furthermore, isn’t Culver City gentrifying rapidly? This means that many buyers with high incomes are coming in from the outside to live in this newly desirable part of town
Just read an interesting piece on how creative the CPI calculations have become [http://www.shadowstats.com/cgi-bin/sgs/article/id=343]. I wonder if these 60k annual hikes are non-inflationary because of hedonics–the increased pleasure of living in a 500k, 560k home, etc.
Maybe the precipitating prices can be used to moderate the true CPI again, after all, housing prices are coming down…
@Herd and @Interested
I think you bring up very salient points about statistical citations, on all sides of the conversation. Home “buyers” or renters actively in the market constitute a fraction of the total populace, and new entrants into a specific marketplace frequently ‘migrate’ from elsewhere, bringing their own non-statistically-included income with them. Thus, there is no “uniform” buyer.
This smaller subset is again statistically unlikely to match up to the larger resident populace, partly for the reasons Interested brings up (residents with no intention of moving) and partly because people PRESENTLY actively looking at 700k properties likely have higher incomes than the median. I make this presumption because they are, in fact, looking at houses in this price point, so to risk assuming, these lookers believe or in fact have been qualified for a purchase point in this price range. (There is bound to be a set of lookers who haven’t paid attention and don’t realize the magic loan bus has departed but they’ll find out soon enough, of course.)
In essence, as Doc has noted elsewhere, prices are set at the margins – by those properties actually for sale, which do sell. But the facts: that there is not uniformity in the buying populace (but that this buying populace has a higher than median income), that every home does not sell for an average or median price (some areas are more desirable than others), and that a certain population has removed themselves from the buying segment either because they already own or have no desire to buy, means that it is unreliable to give too much credence to statistical norms when trying to predict how much prices will move in any given market.
That said – there is still a significant disconnect between 2005-2006 peak prices and general ‘affordability’. Goldman Sachs of course is self-serving with their Oct 21 report, but the waves of future inventory ready to hit the market indicate prices will drop substantially from the peak.
Question:
The photo of the grey house at the front of this article …. where exactly is it? It looks exactly like a house I used to rent?
Thanks for all the great info!
Cheers,
Sigi
Thanks great article, but check your math: +100 percent increase doubles the original price; +200 percent increase triples the original price, etc., so 320K to 775K would be just more than +100 percent. Disregard if I’m mis-reading your price history info.
Interested:
To pay for this place (not including taxes and insurace) would take at minimum a $125,000 income with 50% of gross going to the mortgage.
It takes an income of $206,000 to pay for it so that the mortgage does not exceed 30% of gross.
In Culver City roughly 12.6% of the population have an income of $123000 and up or about 2100 households.
Only 3.1% of the Culver City households have an income that is $200000 or more – or about 513 houeholds.
Anyone who thinks that any average house in West LA, Santa Monica, or Culver City is actually worth any more than 320K deserves what they get in the end. No average house is worth more than 320K, on a good day.
Dr. HB – I respect what you are trying to prove and I AGREE that homes are way over priced compared to their true value. However, I completely disagree with your model which compares average home price to average area income. In many of your articles you talk about how in LA, only 47% of people are homeowners. Therefore, obviously the MAJORITY of people are not in the buyers market. Yet your median income statistic is for ALL people whether they are buyers or not. You wouldn’t say the AVERAGE yacht is overpriced because the AVERAGE person cannot afford to buy one. The average yacht is only overpriced if it is not affordable to the average yacht buyer. I’ve tried to get this point across to you before and I wish you would listen because I love your blog and making a more accurate model that used the average income of only people in the pool of buyers would carry much more weight even if it concluded that homes are less overpriced then your current crude model implies.
I work in this area and it’s not as desirable as one might think. Bad Schools. Massive congestion, and traffic. High Crime 5 mile radius. Lot’s of Sex offenders living in the area. On top of the ridiculous payments people in this area have to pay an additikonal $1,000-$2000 for private schools. This means they often have to work overtime to make ends meet. Instead of 3 hrs. overtime I’d rather spend an additional 45 Minutes on the freeway. Is the easy commute really worth paying ridiculous prices like this? NO! I’ll take the extra commute every time thank you.
Hey, I resemble that! I’m a long time resident of this good old town and really like it, except for the growing traffic. By the way, how is that horrendous development Playa Vista going to impact traffic on Jefferson and the 405 on ramp? Scary thought. Culver City has its good and bad parts of town like any other city in the LA metro area. Parts of the town are very low crime with a strong police presence; other parts particularly bordering LA are higher in crime and seedier. I make less than $100k and agree that this city is far too overpriced even with Sony Studios in the center of town. Whatever happened to a decent life for the middle class because this used to be a clean, safe, friendly middle class neighborhood.
In response to your post(RayW):
Wasn’t that perfect to live in California before 2001 when prices where more realistic and half of what they are now?
Or it is more perfect now, in 2007 and everything is justified !? What is your justification? How can that be? People just realized that Cal is a place to be?
I appreciate the thoughtful comments. The point of these posts is that only a very tiny subset of the market is able to purchase these homes. Since only a small fraction of people can buy these places, the exotic mortgage market boomed to make up for the lack of income. This correlation is absolutely clear. If it weren’t the case and incomes and fundamentals supported the market, why wouldn’t prices continue up since rates are at multi decade lows still?
I understand that the median family isn’t likely to buy this place. But who is then? Someone posted that only 12 percent of Culver City households make $125,000 a year or more. Even using this number and conservative budget ratios, this home is still overpriced since it is nearly 7 times yearly earnings.
Comparing homes to buying a yacht is not appropriate in my opinion even in prime areas. 70 percent of the US population owns a home. What percent own a yacht? Or a Rolex for that matter? So looking at the 12 percent that are the target population, clearly this home is still vastly overpriced. And how else can we get a specific subset since trying to categorize someone as a “potential†buyer is simply an art in a bubble? If we break it down to the individuals that earn a specific income, that is the 12 percent (and what if they want to buy in Manhattan Beach, Rancho PV, or Hermosa Beach) then we still arrive at the same point. Housing is incredibly overpriced and will need to adjust downward.
And it is correct that the majority of folks in LA County are renters. With the yacht comparison, you either own a yacht or you don’t. There isn’t a substitute. With housing there is. You can lease or you can own. In the end, you get a very similar utility. So the other factors come into play such as income, tax benefits, and desire to own. However, if the numbers get out of line you have the ability to rent or the market forces will price people out. This is where we are at. I would imagine many people on this blog want to own in a metro area be it Los Angeles or somewhere else. If they don’t own, they are renting. If someone doesn’t own a yacht, the direct implication means they simply do not have one and aren’t in the market. That is why measuring the actual concrete number should derive from income, price, and market conditions. Otherwise we’d be looking at a tiny sliver of the population which does nothing in terms of giving us insight into future trends. After all, we had people making $50,000 buying $600,000 homes only recently.
hey saps! come up to the oregon coast, where 700k will buy you a 2500 sf NEW house on a clean lake. you also get clean air,good schools,low crime and no work. unless you are in the med or casino industry. divide your yearly take in gross wages in (KALIFORNEA) by the amount of time you spend and taxes you spend for nothing, and most likely youll find you are underwater with you house payment and your job too. left KA in ’89 and went back to visit my home town in ’77. spent two days there. looked like it snowed there in june by all the crap in the median strips. even tho you cant afford that glorious lifestyle, at least keep your garbage in your car.
the solution to the housing price bubble is to bring back subprime, undoc loans and open the border for more borrowers to take advantage of.
Just rent. Cheaper. Property taxes for nothing. Chasing never-ending repairs due to shoddy american crapsmanship. Massive interest payment to corrupt banks, HOA dues that always increase, commissions to realturds, decreasing property values, dwindling tax “benefits” etc….renting is far better for many IF done right (investing-reinvesting all the money saved from “buying” a home–diligently getting a place in a low-crime, middle class area-not falling for the LALA land of posers trying to impress strangers with rented cars, shell games with credit cards, or joker “drs” who buy 1.6 million bungalos (sp) in Santa Monica–not fit for a lawn mower, yet the wage slaves “rich” (doctors) fall for these over-priced dumps time after time due to ignorance and stupidity and keeping up with other imbeciles/wannabes. No money downs, 3-5% down, Good luck to all.
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