July 17, 2008

"Winners" and "Losers"

(c) copyright View from Silicon Valley, 2008.  All rights reserved.



The daily gyrations in the stock market lead to a lot of talk about "winners" and "losers."  On a daily, and daily-changing, basis the "winners" become "losers" and the "losers" become "winners."

Our weekend visits to a prospective rental house led to our own definition of "winners" and "losers."

The house we considered renting is in a recently-built part of town.  The good news is the houses are all in good shape.  Unlike a LOT of neighborhoods, houses occupied by renters and/or 1968 (or even 1958!) buyers do not stand out.  If there is downside to this condition is the houses all looking pretty similar.  There are worse insults you can make about a neighborhood (trust me!) so we're damning it with faint insults?

While waiting for the owners, we noticed a "for sale" sign three doors down.  Seeing a red-hot chance to do a little market research, I picked up a flier and slipped it into the car before going into the rental.

To give you a feel for what we discovered, let's start with the "for sale" house.  It's 2,459 square feet on two stories, listed at $850K ($346 per square foot).

Alert readers may notice this is right at 50% off the median price in our current zip code.  A Zestimate of $873K, suggests their asking price is in-line, or even a little discount, to the market price.  Why are we screwing around with renting when we could buy this house???

(Editor's note: for discussion purposes,  we equate the Zestimate as the "value" of a given house.  When the day comes to spend our own money we will, or course, accept no such convention.  ;=)

We later discovered the house last sold 3/24/04 at $785K ($319 /square foot).  As of today, Zillow shows it's been on the market 47 days.  The real "news" here is the $850K list price minus 6% real estate commission leaves a net price to the seller $799K.

In other words, if the seller closes a deal at list price (a dubious prospect on day 47), they net $14K after nearly four years of ownership.  That's a 1.78% gain --total-- over four years!

Better still, Zillow's price chart shows $1.03M in ~September, 2007.  In other words, the "value" dropped nearly $15K per month for 10 straight months!  The most recent 30-day change was a $30K decline.

OK, so maybe we won't rush out to buy this house after all...

Getting back to our original theme, surely this house is the "loser," right?

Looking at house #2, it's 2,810 square feet on two stories with an estimated value of $953K ($339 per square foot).  House #2 is 14% larger and the "value" is 9% higher.  It sold within a week of house #1 at $870K ($310 per square foot).

The "value" on this house shows up as $953,000.  House #2 is "worth" $83K more than the purchase price, a gain of 9.5% over those same four years.  That's not exactly earth-shattering but roughly five times the gain on house #1.  Surely house #2 is the winner, right?

Not so fast, bunky!

If you drill down into house #2, you find the current owners bought the house in October, 2005 for $1.072M.  In other words, the current owners paid a $200K+ mark-up after barely 18 months.  Based on the improvements the bag holders (err, current owners) claim, the flippers (err, original owners) did nothing to "earn" their equity except sit back and ride the bubble.

Armed with these details, we now see the current owners are underwater by nearly $120K.  Guessing they spent $30K on their "African hardwood" and new carpets and various gew gaws, we figure they are $150K underwater.

As an aside, we always ask, "Why are you renting the place out?"  It emerged the lady of the house had just accepted a job outside the area.  The husband's situation was a little sketchy but it sounded like he was laid off by a large company which has famously laid off, or spun off, employees several times in recent years.

In other words, they're underwater, can't sell it for what they paid and are forced to move out of the area to start getting some income coming in.

Conclusion:  Looking at the "values," you might make House #2 the winner, since it held up better than House #1.

After you get more data, it might be tempting to say House #1 is the "winner" since they seem to have a chance to get out at something close to "even."

We submit the are no "winners" in this area's current real estate market.  There are only "losers" and "losers."

We further submit there will be "losers" and "losers" in more and more local markets over the next couple years.