Sunday, February 17, 2008

Avg. List Prices -- What does it all mean?

I've received about a dozen emails asking why real estate listings for Sherman Oaks don't feel that different despite the fact that the newspapers are reporting dramatic drops in average listing prices over the past five months.

The short answer is that list prices don't tell you much about home values. You need to look at local sales prices per square foot if you want to see the change in home values over time.

Basically, if I wanted to totally skew the list-price statistics, I could get all my friends in Sherman Oaks to list their houses for sale at $5M (even though the homes are each worth $1M). Suddenly, the average list price for Sherman Oaks would skyrocket. Yay! Listing prices are going up! Houses are worth more! Or are they? Not if my friends can't sell their houses for that price. And they can't.

So now all my friends lower their price by $2M. Their homes are for sale at $3M each and the average list prices for Sherman Oaks falls 40%! WOW! Have values dropped 40%? Nope. If nobody was buying at $5M, they were never worth $5M to begin with. It's a phantom loss.

And that's exactly what happened. Let's look at this real life example:

4702 HALBRENT AVENUE, Sherman Oaks, CA 91403
MLS #: F1735558

Bedrooms: 3
Baths: 2
Square Feet: 1,967
Lot Size: 7,800 Sq. Ft.
Year Built: 1941
Listing Date: 09/17/07
On Market: 153 days
Last Sale: 04/23/86
Sales Price: $226,000
Zestimate $924,000
Price Reduced: 10/05/07 -- $959k to $899k
Price Reduced: 10/30/07 -- $899k to $875k
Price Reduced: 11/26/07 -- $875k to $849k
Price Reduced: 01/03/08 -- $849k to $799k
Price Reduced: 02/16/08 -- $799k to $775k

As an initial matter, shame on the agent for letting this homeowner list at $959k in September '07. Seriously. Let me tell you how egregious this is. Just a few doors down at 4706 Halbrent a very similar house sat on the market for almost a year before it finally sold in April '07 at $810k (we don't know how much of that sales price was "cash back at close" so the true sales price could've been lower). And that was BEFORE the mortgage meltdown . How does anybody in their right mind think a similar sized house, on the same street, on a virtually identical lot, will sell for $149k more in the wake of the mortgage meltdown? Ridiculous.

So there's our first problem: figuring out what the real value of this home was when it was listed. Based on comps, and having viewed all the homes for sale in the area at that time, this house could have fetched maybe $430/sq.ft. (about $850k, and I'm being generous) when it was listed in September '07. Sure, it's in a great little neighborhood, but it's right on the border. It's just around the corner from busy Sepulveda. Also, the house doesn't have a lot of emotional appeal. It's a bland house that's had obvious after-thought additions slapped on haphazardly. (See image at right that illustrates the various roof lines as you proceed through the home).

Next, we need to figure out how much of a decrease in demand/value there's been in the past five months. In the wake of the mortgage meltdown, speculation completely dried up. I figure that speculators were willing to spend 10 to 15% more than real buyers (i.e. people who were looking for a primary residence to actually live in). So, let's figure this house dropped about 13% -- just from the speculators closing up shop -- which takes this house from $850k to about $740k over the last five months. Don't get me wrong, 13% is still a heck of a lot -- but it's a material difference from the 20% drop you would calculate based on the original list price of $959k.

But is $740k even the value of this house? The current owner paid $226k back in 1986. Adjusted for inflation, that would be approximately $450k today. Let's not forget that $450k still a lot of money. You'd need a household income between $150k and $200k, and a $90k down payment in the bank, to afford that. All things considered, I'd say this house should sell for about $350/sq.ft. (or $689k).

  • List price: $775k
  • There's no way it's worth less than $725k
  • I'm with Kate: $689k
  • The adjusted for inflation price: $450k
  • What the owner paid in 1986: $226k


Anonymous said...

One of the problems in LA is the denial by the real estate agents. Some of these guys still think the market is ok, and current prices, even as overpriced as they are seem to be normal. Lowering prices by many of these guys will also reduce their commissions, so in addition to loses by the sellers, you will have loses all the way up the food chain. Until there is "capitulation" and everyone in the real-estate chain realizes prices are just not going up, we will see quicker price drops by the sellers trying to get out while they still can. I know people who think they can sell for a profit on a condo they bought 7 months ago.

The volume of sales is just not there to support these prices, nor is the funding, nor are the incomes.

James said...

Hi Kate:

Thanks for taking the time to post this. I've been scratching my head about this.

Anonymous said...

Hello Katy,

Me thinks we are heading to 2002 prices before seeing 2006 prices again.

Agree with the first anon above. How many people have 700+k to spend on a house today? If someone does have that sort of means, would they use all that credit and money on a 65 year old handy-man house like this?

My wife and I could afford it, but we wouldn't. Not for this.

Anonymous said...

Anytime you hear from a real estate agent, their pitch is always, "Now is the time to buy!" This is true whether they say this 4 years ago or today. They are either delusional or just trying to cover their own @$$ and make a sale.

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