real estate question... zee?... anyone?

[snakehead]

while buying a home is an excellent investment in most areas, what about los angeles, where prices are ridiculously high? can the market continue to go up, or is there a ceiling? how likely is a crash?

also, will the lower priced (less than $500,000) properties increase at faster or slower pace than the higher priced homes?

[GeorgeF]

You might try these resources:
www.johntreed.com (http://www.johntreed.com) and www.inman.com (http://www.inman.com) (Bob Bruss) are good sources for realestate info.

"while buying a home is an excellent investment in most areas"

Most of the US is empty or filled with decaying industrial towns. People have lost alot of money in places like Buffalo and Rochester NY. Real estate gives the impression of being a great investment as:
1) you tend only to go to popular places so you only see occupied buildings and well tended lawns. Rochester was once a really nice place (Kodak world HQ), it is not a nice place now.
2) people tend to brag about real estate success. people tend not to talk about that foreclosure they had 5 yrs ago.

[squiffy]

This is a very important and specific question that we should at least try to address. If you want to invest successfully in real estate, you have to study the history of specific markets, their booms an busts. If you have extra time, also study Brittany Spears's or Pamela Anderson's busts. But real estate busts are good too.

I was just in Borders killing time before watching Lord of the Rings.

Came across a great book by John Rubino entitled How to Profit from the Coming Real Estate Bust. I would highly recommend it.

He analyzes several real estate booms and busts and this book is a good starting point for this issue.

(I don't own shares in any bookstores and have no connection with this author. Seriously.)

Anyway he notes that in the early 1980's there was a huge boom in LA/S Cal. real estate because of increases in DEFENSE SPENDING under Reagan. I think this is probably correct. One trigger for a real estate boom is job growth. Increases in defense and aerospace spending hugely benefitting S. Cal. companies. People flocked to the region and started to rent and buy homes with their high paying jobs. As real estate started to skyrocket people bought second and third homes on speculation because everyone thought the boom would continue ad infinitem.

Then eventually, for some reason, defense spending started to decline, perhaps because of the fall of the Berlin Wall and the decline of the Soviet Union, and a consequent decrease in U.S. Defense spending.

Well, subsequently aerospace and defense companies started huge layoffs and smaller companies were acquired by larger ones in a huge consolidation.

So in the early 1990's you saw a huge bust in LA real estate.

I remember I was living there at the time and lost my job at a law firm and ended up moving out to Dallas Texas to work for a large law firm there, where I bought a home in PLano.

My friend who was a lawyer at the same firm came back to LA about the same time I did. Just after the recession real estate prices were still rock bottom and he bought a couple of condos and made a killing.

I forget how much of a discount he got. But it was unbelievable. I will email him and ask him again. He told me the numbers, but this was 5-10 years ago that we talked about it. So I don't remember the exact numbers.

Anyway, in addition to the national economy, and interest rates, the key is job growth and population growth in a particular area.

Fresno is an area that is hopping right now. Not sure why. A lot of it is people cashing out of expensive real estate in LA and SFO and retiring here to Fresno. But I still don't fully understand this phenomenon as there is no huge industry here that is expanding. The largest employer is Fresno Unified School District, which doesn't inspire me with hope for the future.

So to predict the future of real estate in LA, we need to understand the state of the local economy. What are the main industries, who are the major employers. What are the economic prospects for those industries.

In Dallas it was high tech, banking, and American Airlines, Frito Lay, EDS, Nortel Networks, Texas Instruments, etc. Lots of companies pursuing cheaper land for headquarters and cheaper housing for employees.

I have other books and points on this topic and will supplement my response with additional thoughts as time permits.

(Again, I am not trying to sell books. But just want to promote some serious and indepth discussion on these topics. If you really want to understand something you need to read some books and magazines in the area. So I hope people will recommend specific articles, studies, and books, so that we can all benefit.)

[Ray Zee]

in the more desirable areas the market will continue up. but maybe with big bumps along the way. if its your personal house and it drops in value for a few years you still get to live in it and find no change in anything. when it goes back up same situation. only matters when you sell. so with your own house you get benefits rather than just investment. plus you get tax writeoffs which you dont get from rent. and the chance for a big score if things go well. l.a. and other big cities will have fluctuations of 20 or 30 % in value. you have to live with that.
smaller priced places follow the general market in rises and falls. they have to despite what some will tell you. otherwise there would be a gap in prices somewhere.
best buys are always houses on commercial land. and places with a view. and average houses in nice areas of town.
in l.a. i would try to get near marina del ray, manhattan beach or hunington beach if i could. just for the fine living conditions.

[squiffy]

My impression is that typically the super high end luxury homes are the first to slow down or tank if interest rates increase or if the economy slows. It stands to reason because the payment on on $1 million home is going to be much much worse if the interest rate climbs from 5% to 8%, than the payment on a $300K home.

And in absolute and percentage terms, the number of buyers who can afford a $1 million home in Brentwood or Bel Aire (actually they are probabaly $2 and up) is going to be smaller.

If you do a search of the LA times or SF Chronicle website for real estate news, you will see tons of article regarding the low interest rate home buying boom of the past few years, and a lot of talk over the past year of high end home sales slowing down.

Demand is not limitless. People can eat 10 hamburgers. But after you buy one or two houses, most people are gonna slow down even if the economy is great or interest rates are super low.

So assuming 95% of people who want to work are working and only 5% are unemployed, many of the people who want to buy a home may have already bought it because interest rates were low. They aren't necessarily going to run out and buy another 2-3 homes, just because the economy is now improving.

And as interest rates increase home-buying should gradually slow and home prices should decline a bit. There may be some upward pressure on home buying, if the economy improves, if there is job growth in LA and if those people can afford to buy homes in LA and don't already have one.

It's a very complicated equation. Even if you are good at numbers, there is generally too much data or the data is not accurate enough to make a firm prediction.

When things get complicated, I think you should step back and try to keep things simple and stick to what you can figure out.

Think of homes as a commodity subject to supply and demand pressures. Look at population growth and job growth, look at home price trends by specific zip codes.

Study the history of real estate prices in the LA Times, which breaks down average and median home prices by zip code. This info is from dataquick. I will try to post their website.

If the typical recession lasts one year, once the economy slows down, you may wish to wait a year, then buy stocks at or near the bottom. This is an approximation. Some recessions are shorter than 1 year. Some are longer, but it helps to have some kind of statistical average and then add or subtract time based on factors that may indicate the severity of the recession.

The 911 scare, collapse of the airlines, and war against Iraq clearly combined to make this a longer than normal recession.

So back to real estate. You need to look at job growth in major industries. Population growth. And interest rates.

Was this homebuying mainly LA natives moving up to bigger houses and LA renters buying for the first time due to lower interest rates. Have most of the people who wanted to buy already bought?

If so, then as interest rates increase and since home prices are high, buying will slow.

If there is incredible job growth and population growth and tons of new employees moving in from far away, then maybe home buying will continue in spite of higher interest rates.

Most people would agree that Real Estate like so many other industries, is cyclical.

If the typical real estate boom lasts 5 years before hitting its peak, then drops for 5 years before hitting its trough, then maybe you need to be careful if home sales have been booming for 4.5 years already. You may have more boom left, but you may be heading for a bust. Again, it is a complicated EQUATION. And it is not clear that any computer or quant could make an accurate calculation, let alone justify the number they give you.

Another factor which may make the boom sustainable is the behavior of builders. If builders are being more conservative and not building many extra homes on spec, and are only starting on construction for homes they have already sold, this gives you a lot more confidence that the good times are sustainable, at least for another year.

One problem that happens when a boom sometimes becomes a bubble is that too many people are buying second and third homes to speculate and too many builders are building unsold homes to speculate. This floods the market with too much supply.

So you have to try to quantify supply and quantify demand and understand the forces that are producing those curves as well as the quality and sustainability of those curves.

Easier said than done.

[Ray Zee]

very good squiffy and true. but the good thing about a home is that you get to live in it. so we are talking about buying a home. for general real estate investing, it is like the stock market. you need to do your own due diligence.
when any of the price ranges start to tank that is the time to expect more downside in the market. but you have to factor in if the interest rates go up and prices come down you may still have higher payments by buying at the lower price. so waiting can be a loser as well.

[squiffy]

In the book Investing in Real Estate by Andrew McLean and Gary W. Eldred, they mention this fascinating point.

What I found especially interesting was the parallel to the Dogs of the Dow approach. As a general rule, the biggest gains among Dow stocks in a particular year typically come from some of the biggest losers from the prior year, prior two years, or prior three years.

This makes a lot of sense as DOW stocks are basically solid stocks that typically stay on top for 10, 20, 30 years or more before fading out or going bankrupt.

So if they have a bad year or two, it is not surprising that they should recover. And as soon as they have some positive earnings, they have such a strong reputation, name recognition, and publicity, that everyone jumps back on the bankwagon.

Well, McLean and Eldred mention the same kind of phenomenon among the value of properties in various zip codes in the LA area.

Beverly Hills or Bel Aire may be hot for 3-5 years (or however long a typical cycle may last). Then that zip code will drop for several years. In the meantime, Watts or Glendale or some other neighborhood may be very very low for three years, then climb while Beverly Hills is dropping.

I don't think they draw the parallel to stocks. But this phenomenon struck me right away as a similar type of phenomenon. Though different forces may be at work.

Their explanation, if I recall correctly, is that when people start buying, they are going to looks for affordable and undervalued properties. And so the hot zip code will keep rotating around.

A good basic real estate book worth reading. And an interesting, though once you really think about it, not a surprising phenomenon.

[bad beetz]

starter priced homes don't crash. More people every year, same land. they just go up. In the worst of years they give up small amounts relative to other things.

You can't go wrong with California real estate.

Higher end homes can fluctuate with volatility.

[Wildbill]

That isn't necessarily true. I think a lot of the "starter" priced stuff in CA gets its valuation determined by bigger trends. Obviously employment and wages matter, but also by the gentrification issues or decline of areas. If you buy a starter home in an area going bad, you will likely lose some value. If you buy a starter in an area on the upswing you will gain quite a bit. The top end is more in tune with the economy, the lower end is more in tune with the status and location you are dealing with. Since the state has had nothing but big appreciation in all 4 big metro areas, this makes it appear that starter homes are incredible investments. The appreciation has made it so that many more areas have gone good rather than bad, but I would suspect at some point this little noticed trend will turn at least neutral, if not downward. I remember some friends of my family that had terrible luck in the 70s and 80s. They bought in Long Beach and the area got swallowed up by approaching gangs. They lost some, but got out for safety. They went into Santa Ana and the area just got downgraded by crime and poor immigrants moving in. They finally got out and went to Fresno and got beaten up by the same thing. Every time they were buying modestly, they kept losing out and couldn't afford to do much else and every time it didn't work out. In the last 10 years almost every bad area has gotten better due to gentrification, high prices elsewhere, and a pretty decent job market up until 2001. The cycle seems ripe for an accompanying downturn as things start settling out.

[Ray Zee]

never buy in areas that are so called going down. it is easy to find areas on the fringe of higher priced ones where the better homes will have to migrate to. just have to look hard.
the reason starter homes dont go down as much as the high end stuff is that the starter homes are priced closer to building costs. so there is a downward inflexability to their prices. also the very high end stuff has alot of blue sky built into the price. by that i mean things like a good view or near the beach or landscaping. these things get hammered when the market gets tight. but also go up the fastest when things are roaring.
but overall there cannot be too much disparity in prices between classes of property because that would leave a gap somewhere that wasnt filled.

[bad beetz]

[ QUOTE ]
The top end is more in tune with the economy, the lower end is more in tune with the status and location you are dealing with.

[/ QUOTE ]

I agree

[ QUOTE ]
They bought in Long Beach and the area got swallowed up by approaching gangs.

[/ QUOTE ]

This is why you want your agent to be an experienced professional who knows his/her stuff cold in his area.

[adios]

"This is why you want your agent to be an experienced professional who knows his/her stuff cold in his area. "

Hope this doesn't sound too dumb. If you're moving to a new area and want to buy a home to live in what would you recommend as far as making sure that you are working with an experienced professional.

[Ray Zee]

do your own investigating. a real estate person is interested in selling you something just like a car salesman. they make a commision and are not really working in your best interests at all. they do want you to be happy but that is about all in general.
all areas have the multiple listings on a website somewhere. and those real estate pubs you see in the little stands are listings. you can drive around looking at places till you get a good feel for the areas. if new to an area why buy until you spend alot of time investigating where you want to be. no one knows better than you.

[bad beetz]

very simple. Interview them. They have to sell their service to you. If they can't interview another. Get a top producer, they'll have records to show you.

Make sure they're dressed professionally and that you can develop a rapport with them. You don't want to work with someone you don't like.

[bad beetz]

agents who belong to the board of realtors are bound by a code of ethics. All agents, board members or not, have a fiduciary interest to their clients. They have to act in your best interest or they lose their license.

Granted, that doesn't stop a lot of them, but there are some who geniunely will act in your best interest. You have to interview quite a bit of them to find one.

[Ulysses]

FWIW, one nice thing about starter homes in reasonable neighborhoods ($500-800k type stuff here in the Bay Area depending on the neighborhood) is that there's always a market for this stuff and it never drops a whole bunch. So you have the flexibility to get out without taking a bath if you want to move or whatever.

On the flip side, people who buy, say $1.5M/2M+ places here may well have a great long-term investment (because they are often highly desired locations w/ very limited availability), but if they decide to get out in the short term they might be subject to some pretty big fluctuations.

Something to think about if you're not committed to the place for a somewhat long time.