Having been remodeled and flipped for $712,000 in March 2001, the Westwood Park home at 165 Hazelwood Avenue returned to the market this past October in District 4 listed as a short sale for “$699,000,” and then reduced to $680,000 in March.
Yesterday, the sale of 165 Hazelwood closed escrow with a reported contract price of $709,000, officially “over asking” yet $3,000 under its year 2001 price.
∙ A Lost Decade Listing For 165 Hazelwood Over In Westwood Park [SocketSite]
∙ A Decade Over Decade Drop In District 4 For 165 Hazelwood Avenue [SocketSite]
Wow, just wow … I know I saw the bust coming but to see it in reality is always amazing.
Although I know this is by far not the “worst” story out there, I can’t imagine how I would feel about paying all that interest, taxes, and maintenance … thinking I had made the best financial decision of my life in 2006, 2007 … and than to watch it all get washed away and sell for a loss (not even accounting for 10 years of inflation).
bear or bull this whole housing bust sucks.
What’s astounding is that someone paid $712,000 for this in 2001 – that was pretty close to 1.75X or 2X rent. That would make sense only if one expected wild appreciation. The amazing thing is that actually happened (after a brief decline in 2002) for the next 5 years, but then it all reversed course. It was a short sale, so I expect that the 2001 buyer pulled lots of money out and thus ended up okay financially, with the public taking the hit.
The 2011 purchase price (after 28% CPI inflation) is STILL far out of line and makes sense only if one, again, expects wild appreciation, only this time it will be on the owner’s dime and not the public’s. With today’s low mortgage rates, this place makes sense at about $525,000 or a little less factoring in the risk of further declines. I’m betting that if this seller gets out in 2021 the result isn’t going to be much happier.
^What rent price are you using for that analysis?
bear or bull this whole housing bust sucks.”
Not for me it doesn’t. My wife and I will be looking for our first home next year.
What sucks is the way this housing bust raped normal unsophisticated local people who just wanted to get started with the family/home owner thing.
The rest caught up in it can go to hell.
^What rent price are you using for that analysis?”
Curious too. I don’t know how nice this house is inside and if it has nice amenities but I would think this could rent for about $3000?
moved into a similar home last year and pay 3k rent.
So roughly without thinking about this much:
4.8% interest rate, if you don’t account for the opportunity cost of you 20% down you are paying about 3K a month on a 700K value
figure the tax write off pays for the property taxes and insurance
What am I missing?
Yes, $3000/mo in 2011 sounds about right, about $2500/mo in 2001. This place is a bit dowdy but not terrible. I’m also factoring in prevailing rates, opportunity costs for the down payment, insurance, maintenance, and buy/sell transaction costs.
“Wow, just wow … I know I saw the bust coming but to see it in reality is always amazing.”
I don’t get why this is such a big deal. Is this really such a disasterous outcome? So the house was purchased in 2001 for $712,000. It sold 10 years later for $709,000. This is a fairly typical scenario for a lot of RE markets around the country…
AT
Are you accounting for the tax write off as well?
Not considering the opportunity cost of my down-payment I figure a home a little nicer and larger than this in a similar area with amenities that we need like laundry and a deck it would be a wash between 700-750K with the assumed rent of about $3500
Yes, I factored in the tax deduction – I just worked up round figures in my head so my post was only an estimate. Note that mortgage rates were about 7.25% (maybe a little higher for a jumbo) in Spring ’01.
“4.8% interest rate, if you don’t account for the opportunity cost of you 20% down you are paying about 3K a month on a 700K value”
But if you put 20% down your not paying for a $700K mortgage you’re paying for a $560K mortgage.
@sparky-this was a typo. I was accounting for the loan value of 560K
@ AT I am still not following how you would value a place at today’s rates that rents for $3000 at 540K
I am not sure how to account for the “opportunity cost” of a down payment but if a house appreciates at inflation with the leverage you have this could keep up other investments without leverage
Of course as we learned leverage works both ways and you can assume the home will still lose value in real terms
Still not convinced that paying 750K or so for a house that rents for $3500 isn’t a fair investment so long as you stay awhile
540k is equiavalent to a P/E of 15 of 3k rent per the posting last week.
15 for P/E is not (generally) the case in SF.
Even though I rent for 3k/month, I could not afford to buy the home I rent (assuming it would sell for 700k).
Zig, in addition to opportunity costs, add in insurance, maintenance, and buy/sell transaction costs – these add up – you’re at about rent parity at $525,000. I’m not assuming any housing inflation because that could go either way, especially over the next 5-7 years, and I don’t think that is a wise move in the rent/buy consideration. I don’t think it’s smart to buy unless you come out ahead – today – over renting. This is simple common sense just about everywhere in the world. As I noted above, IF you assume housing appreciation then the calculus changes, but we’ve seen that does not always work out so well.
For opportunity cost you have a few options. Using the 10-year Treasury rate at the time has the advantage that you could actually buy one, get the interest payments and have no risk over a typical 10-year tenancy.
Another option is to use historical rates of return for some mix of stocks and bonds you feel comfortable with. There’s risk because theres no guarantee that you’d get this rate of return but it would be the best forward looking estimator for that type of investment.
I recently linked to this Kansas City Fed paper that shows historical outcomes for different price/rent ratios with the down payment and other excess rental cash flow invested in stocks or bonds.
There data is backwards looking, but they have the bond breakeven running from $100-$700 in rent per $100,000k house price. Which for this house would correspond to rents from around $700t o $5,000. For stocks they show about $200-$900 corresponding to $1,400 to $6,400
http://www.kc.frb.org/publicat/econrev/pdf/10q4Rappaport.pdf
Using the 10-year Treasury rate at the time has the advantage that you could actually buy one, get the interest payments and have no risk over a typical 10-year tenancy.
This is also what I use.
A 10 year Treasury is as risk free return as you can get, and they are easy to purchase.
also, a 10 year Treasury is a pretty good duration match for the time that you have your money locked up in the house… (I believe the average length of home ownership is 7 years, or it was until recently).
” (I believe the average length of home ownership is 7 years, or it was until recently).”
The paper above sources the 7 year figure to NAR without specifying when the figure was calculated. And illustrates the difference between average tenancy for buyers and sellers.
The scale of the difference is most likely not relevant to anyone calculating opportunity costs.
“Ten years is a rough estimate of the average time that a household lives in a house after purchasing it. Generally accepted estimates on the expected stay of new home buyers do not exist. The average stay among home sellers is seven years (National Association of Realtors). But sellers are a self-selected group with a shorter- than-average expected duration of occupancy. Hence, the expected stay across all new buyers will be somewhat longer than seven years. A ten-year horizon represents a rounding up from the seller average stay to an easily recognized time horizon.”
are people taking into account the equity money they took out of this home?
there is no way this is a short sale on the original 2001 loan after 10 years of payments.
these people could have come out ahead and not suffeed a loss if took the money and ran.
“there is no way this is a short sale on the original 2001 loan after 10 years of payments.”
While I have no information about what happened in this specific case, it could easily be a short sale if it was an interest only or neg-am loan.
Even a fully amortizing loan if some payments were missed and fees and selling costs are considered.
It’s not necessarily a short sale on the original loan – could have used the ol’ home ATM and cashed out money on a refi or a second (and third and fourth).
This absolutely pencils out at $709K, assuming 20% down, a 4.75% 30 year fully amortizing note and the risk-free opportunity costs on the down payment at current 10 year yields. Your fully loaded (taxes, maintenance, insurance, mortgage) monthly out of pocket is around $4,400, which is around $3,100 tax affected. This rents for between $3,000 and $3,500 based upon current Craigslist offerings.
Even with 0% appreciation (which is absolutely possible) and no rent increase from a base of $3,000 (which is unlikely over 10 years), you end up ahead (albeit slightly) after ten years, even after accounting for selling commissions and transfer taxes.
The break even point is around 8 years of ownership based upon the aforementioned assumptions, slightly longer than the average hold suggested above.
CSInvestor, you’re overstating the monthly tax savings by about $400 even assuming someone in the top tax bracket would live here (and they likely would not). You don’t realize savings of marginal fed+state rates on the interest and property taxes. And you’re understating maintenance and insurance by a few hundred a month. You’re also ignoring the closing costs on the purchase and the $35,000+ selling costs, which add about another $400/mo over an 8-year hold.
Still come out behind by about $1000/mo at this purchase price – real money to most people. You could rent a really, really nice place with that $4000/mo. (and have the freedom to move if a new job comes up or the 1000 other things that can require a change).
Actually, I’m assuming around $40K in selling costs and $14K in closing costs. I’m also assuming a 1% maintenance rate and monthly insurance of $200/month, both of which should be a good estimate for this property. Finally, don’t forget AMT, which is likely to be in play for the purchaser of even a house as modest (by SF standards) as this and affects the tax calculation you mentioned above.
It’s definitely very close, which wasn’t the case when the original purchase was made in 2001.
“It’s definitely very close, which wasn’t the case when the original purchase was made in 2001.”
Note though that by using the 10 year rate you are comparing a low risk option (renting) with a higher risk option. In general you’d want the high risk option to be substantially better then the low risk one before choosing it.
Anyone know how much debt was on this place prior to its short sale? I hope for the owner’s sake he cash out refi’d early and often!
@tc_sf, I’ve made some pretty conservative assumptions that help address that risk. First, based upon current CL listings, you could argue that this could rent for $3,500 today. However, I took the low-end of the range above at $3,000 for today’s equivalent rent. Second, I also assumed that rent does NOT increase from a base of $3,000 over the ten year period, which isn’t realistic. Rents will rise during that period. Rents have risen over the last 10 years even if the nominal value (in purchase terms) of this property hasn’t. Third, I also assumed that the property will not appreciate at all during the period. As we can see, that happened during the last 10 year period, which was an anomaly based upon the last 50-60 years of housing data, but maybe it’ll happen again, so I played it conservatively.
In a more realistic scenario, if you take the midpoint of the above rent range as your starting point and increase rent by 1.5% per year (a pretty reasonable scenario since this isn’t subject to RC) and keep all of the other assumptions the same, you end up better by more than $500 per month over the ten year hold by purchasing, so you’re being compensated for the additional risk you’re taking. Is $500 per month enough compensation for the risk? That depends on the expected return of your down payment if you were to invest it elsewhere, but at current treasury rates, you would certainly earn less than that per month if you invested your down payment in 10 year t-bills.
Note that I have no dog in this hunt. I’m not the buyer, nor am I looking to purchase a property. But, buying vs. renting at least for this property is at least as good as it’s been at any point in the last 10 years even under some low case assumptions. I don’t think that’s the case for most properties in SF right now, but these metrics are clearly moving in the right direction with falling property values, low interest rates and rising rents. We’ll see if that continues.
the 2001 buyer pulled lots of money out and thus ended up okay financially, with the public taking the hit
People love this line, but it is false. The public is on the line for at most about 1/6th of the losses at most. The banks will have to pay the rest or write it off somehow, and will probably do so slowly over a period of a decade or more. This narrative may appear to be so desirable that it is worth lying about, but simply following the money shows it to be false. There is far more of this conjured capital than the government could possibly underwrite even if everyone wanted that.
I also don’t understand how the market correction is such a bad thing. People getting caught up in speculative frenzies is sad, but many didn’t participate in the bubble and can now buy as the high tide of the market ebbs. Buy what you can afford and want to live in and the amount you can lose is limited. This might keep you from buying during bubbles, but that is a good thing.
@ CSInvestor — There seems to be a wide gap in the estimates for the numbers, but my main point was that once you have good numbers if you use the risk free rate any alternative with risk need be substantially better then the risk free one.
One way to provide scale for this is to look at the average S&P growth of about 10% which over a 10 year period provides a roughly doubled expected outcome then a 3% growth. Now there is obviously great risk in this, but I believe that the worst S&P 10 year total return is on the order of -30%. And it does not seem infeasable that a homeowner could lose 30% or more of their DP over the same period.
Also, while the national prolonged drop in housing prices was unprecedented as you mention this is not the case for regional prices and particularly for a single individual house. The risk of a single stock is much greater then that of the whole market.
@Mole Man — As I mentioned above it is possible for this to be a short sale even without the homeowner having taken cash out. Even serial refinancing which rolls in closing costs or any pre-payment penalties and typically resets the amortization schedule can drastically slow equity accumulation.
Regarding who pays for the loss note that the current Fannie/Freddie bailout cost is in the high $100B’s and is projected to go into the $200B’s. TARP’s cost is $25B and shrinking.