What Happens When the Bohemians Leave Bohemia?

Over the past decade of "prosperity", up-and-coming enclaves such as Eagle Rock in Los Angeles and the Lower East Side in Manhattan gained residents -- and coffee shops, restaurants and design stores.

In Eagle Rock, the new bourgeouis bohemians ("bo-bo"s) arrived, flush with web start-up capital, screenwriting lucre and steady paychecks from architecture gigs. The median sale price of a home in Eagle Rock rose from $260,000 in 2000 to $620,000 in 2005

Derelict buildings gained eager new tenants with "big ideas" for retail. Old-school businesses such as car repair shops were replaced by hip new eateries and purveyors of design and antiques.

But, alas, the economy has soured and the wave of gentrification seems to have receded. The neighborhood has reverted to being its quiet, modest and often, charming, self. Maybe it reminds people why they moved there in the first place. [Source]

Jamie Adner

West Hollywood Gets More Mixed-Use Projects

Attention those who enjoyed the deli counter at Jons or a drive-thru burger at Carl's Jr -- these two venerable La Brea institutions may soon be gone, each replaced by a large mixed-use project.

A 6-story, 187-unit apartment building with 70,359 square feet of retail space will be built at the Jons site, at the southeast corner of Fountain and LaBrea (rendering above). The open sky of the big parking lot will be replaced by a large block of a building. A similar project by the same developer will rise on LaBrea close to Santa Monica at the Carl’s Jr site.

The developers are wisely constructing rental units since there are too many over-priced condos for sale and coming to market in the next few years. Renters will appreciate the central location and the retail, restaurants and nightspots close by (West Hollywood Gateway, Formosa Café, Jones…). The area is noisy and urban -- a great place to be renting, but not an ideal place to own.

These two new developments, along with the Movietown Plaza development at the Trader Joe's site at Poinsettia and Santa Monica, are bringing high-density living to the east side of West Hollywood. The city is gaining a Manhattan-type flavor: low-rise living, culture and entertainment at one's fingertips.

Updated 10/14/11: Curbed LA reports that the Movietown Plaza development site is up for sale and will not go forward in its current incarnation because of unaligned goals among development partners Casden Properties, AIMCO and Cerebrus LP.  What will happen to this shuttered, dormant retail complex?

For those whose driving mantra was "take Fountain" to get across town -- you may find that Willoughby is your new (secret) corridor.

Updated 5/18/09: Curbed LA reports that the plans for the mixed use project at 7141 Santa Monica Boulevard are on hold, rescuing, for now, the Faith Plating Building, one of Frank Gehry's early projects.

Where's the Million Dollar Market Heading?

(click chart for more detail)

Where's the market heading? Are sales picking up or are they slowing down? This chart attempts to give a snapshot of one market, an aggregate of four Los Angeles neighborhoods:

• Sunset Strip - Hollywood Hills West (Area 3)
• West Hollywood Area (Area 10)
• Beverly Center - Miracle Mile (Area 19)
• Hancock Park - Wilshire (Area 18)

This market is neither the Westside nor the East side, but covers a swath smack in the middle of Los Angeles. The median sale price in this area was $1.10 million in January 2008, declining 8.3% to $1.00 million in January 2009. It's neither REO-land nor ultra-luxury territory, but captures the under $1 million and over $1 million market.

Here's the way to look at this chart. If the 12-month moving average (green) trends above the annualized 3-month moving average (pink), sales are declining and the market is "slowing down". If the 12-month moving average trends below the annualized 3-month moving average, sales are increasing, and the market is "picking up".

2008 was a mixed bag. From April - October, sales were in an uptrend. During the rest of the year, sales were in a downtrend.

For the first six months of 2008, sales were above the end of 2007 levels following the first credit crisis in September 2007. The uptrend that began in January 2008 (improving 'confidence' in the market) continued through June 2008, and then reversed.

The December 2008 and January 2009 datapoints reflect the economic wipeout of September and October of 2008. All signs are that this market is still decelerating. No huge surprise. (Consider that as of yesterday, the S & P 500 index was down 25.3% since the beginning of the year!)

Two trends are apparent from this chart: 1) the consistent overall slowing of the market -- a 29% decline in sales volume from January 2008 to January 2009, and; 2) the consistent volatility of the market, which speeds up and slows down, and like, the equities market, consistently surprises us with its unpredictable course.

Jamie Adner

$8,000 Home Purchase Tax-Credit Explained

Now that Congress has fixed the crucial flaw in last year's home-purchase tax credit, who will be able to make use of the new and improved version? And what about timing: How long do buyers have to find a house and close the deal to qualify?

These are just two of the flurry of questions surrounding the $8,000 housing credit for 2009 authorized in the sprawling, $789-billion stimulus plan.

In formulating the final terms of the bill, congressional negotiators added $500 to last year's $7,500 credit and eliminated the repayment requirement from the 2009 version.

Unfortunately, qualified buyers who closed in 2008 will not reap the benefits of the 2009 amendments. They're stuck with the old model, and will have to pay back the credit -- more correctly an interest-free loan from the government -- over the coming 15 years.

So, only buyers who close between Jan. 1 and Dec. 1 of this year may qualify for the new, no-repay credit. But they'll still have to pass most of the eligibility tests imposed under the 2008 program.

For example, they must be "first-time" buyers under the 2008 definition: Either you've never owned a house before, or you haven't owned or co-owned one during the three years preceding the date you close on your 2009 purchase.

Carefully planning the timing of your closing could be worth thousands of dollars to you. [More]

The final version of the home-purchase tax credit is an improvement over the 2008 $7,500 credit-you-pay-back-to-the-IRS (which feels more like a gift and clawback) but will not provide the stimulus of the original proposed Senate Bill that gave any buyer a $15,000 credit.

In high-cost areas such as Los Angeles, the bill will have a muted effect. But in the half of the country where homes are priced less than $175,000 (the median US home price in February 2009), the $8,000 credit amounts to a significant buyer incentive and could boost sales by qualified first-time buyers.

LA Times: 20% of Los Angeles County Receive Public Aid

One in five Los Angeles County residents -- nearly 2.2 million people -- are receiving public assistance payments or benefits, a level county officials say will rise significantly over the coming months as the fallout from the recession continues. [Source]

In case anyone thought the economy was going to turn around soon, consider the jarring fact that one in five in Los Angeles County is receiving public assistance. By current measures, this recession is already a lot worse than the recessions of earlier this decade and in the early nineties.

In the coming months, taxpaying Californians will be hit by increases in sales tax, increases in vehicle registration fees and other levies and cutbacks.

Local real estate is entering the "overshoot" phase of its decline because the economic foundation of the region is withering.

The fragile state of California has led to the inevitable hand-wringing and proclamation that the Golden State has reached its zenith, and like a mature industry, is in its decline.

From its agriculture, to its politics and budget woes, to its high unemployment rate, the State is portrayed as far from the land of dreams. (Except for Oscar Day!) The Wall Street Journal and USA Today ran stories this weekend about dystopian California -- home of foreclosures, bankrupt municipalities and high unemployment.

But we have a secret. The state has always thrived because of its innovation. In the shadows, in a garage in Van Nuys or Torrance, someone is crafting the 'next big thing.' Just like the Internet, we didn't know it was there until it arrived.

Dream a little dream, California.

Jamie Adner

Beijing Builds It ... They Don't Come

For locals who are distressed about the queasy state of the US real estate market, be glad we're not in the quandary of Beijing, where the scope of speculative building was unparalleled in the world.

By one account, 500 million square feet of commercial real estate was developed there since 2006 -- more than all the office space in Manhattan. Nearly 20% of this commercial space is vacant, and it would take 14 years to absorb at the brisk pace of leasing from 2004 - 2006.

Real estate development in China is different from that in the West, since there is no private ownership of land. The Chinese government will end up holding the bad debt for properties that cannot be leased.

Nearly all the grand structures of the 2008 Summer Olympics -- including the Bird's Nest main stadium -- have found little use post-games.

Luxury housing developments, where units are priced at $800,000 -- in a country where the average salary is less than $6,000 per year -- are going unsold.

Occupancy in Beijing's hotels -- many of which are newly constructed luxury buildings -- is said to be 10 - 30%. Even during the Olympic games, occupancy is reported to have been only 67% because of Beijing's stringent visa and travel requirements.

And in other news, the International Herald Tribune reports that sales of international second homes are tanking.

It's a small world, after all. And we're all in this mess together.

Jamie Adner

A Tale of Two Markets: Under $1 Million Bounce, Over $1 Million Fumble

The percentage of homes listed at $1 million and above that are under contract in the Sunset Strip - Hollywood Hills West, West Hollywood, Beverly Center - Miracle Mile and Hancock Park - Wilshire areas has fallen to 4% – one in 25 homes.

18 - 24 months ago, 13 – 15% of homes in these areas were in contract – approximately one in 7 homes. At that time, jumbo mortgage rates and downpayment requirements were low, loan underwriting was lax and borrowers could rely on “stated” not “fully documented” income.

The current glacial market for properties priced $1 million and over in these areas is reflected in the months supply of inventory, which has risen from 4 – 6 months to 20 – 24 months over the past two years.

This trend will likely worsen as buyers are impacted by lay-offs and cutbacks in employment, high jumbo mortgage rates, and stringent loan underwriting requirements. Buyers have also been blind-sided by the economic crisis and are feeling less wealthy than they did one year ago.


The bright spot in the Sunset Strip - Hollywood Hills West, West Hollywood, Beverly Center-Miracle Mile and Hancock Park-Wilshire areas is that properties under $1 million are selling, and the market is picking up.

During the past 18 months, the market slackened from 3 – 6 months of inventory to 8 – 13 months of inventory, a much smaller drop-off than for higher priced properties in these areas. Based on January’s sales, there was only six months of inventory, a far cry from the 22 months of inventory for the over $1 million market.

Jamie Adner

Commercial Property Values Fall Nationwide

Commercial real estate prices in the U.S. dropped by almost 15% in 2008, more than home prices, with fourth-quarter depreciation the greatest in the national apartment market, Moody's Investors Service said Thursday.

The price decline eliminated the gains seen in 2006 and 2007 and returned values to 2005 levels, according to the Moody's/REAL commercial property price indexes. Prices fell 2.2% in December from November.

Commercial values are now down more than 16% from their peak in October 2007. The deepening recession is causing tenants to cut jobs and vacate space, bringing down building incomes, while the credit freeze is making it difficult to finance purchases.

Commercial real estate prices fell more than home prices last year.

Apartment prices fell 11.5% in the fourth quarter, according to Moody's. Even in the Western U.S., where prices held up better than the country as a whole, apartment prices fell 9% in the quarter and more than 16% for the year, Moody's said. [Source]


The fall in commercial property values is a lagging indicator to the general economy, suggesting the commercial market will have accelerated price declines going forward.

Renewal of leases on office and industrial properties will subside as employment and profits drop off. Those leases that are renewed will be at lower rates.

Other businesses will downsize, subleasing space, or leasing different properties at lower rates.

The retail sector will be hit hard by the double-whammy of horrendous sales at brick-and-mortar stores and increased online sales as consumers migrate to the Internet for their shopping.


The multi-family sector is expected to hold up the best among the asset classes, as record home vacancies from foreclosed properties contribute to decreased vacancy rates in multi-family buildings.

However, rents are softening in many major metropolitan areas (Los Angeles and New York included), leading to declining returns for many multi-family investors.

An unanticipated side-effect of this miserable economy is that renters are moving in with family members or roommates (or sadly, onto the streets) as income drops – often unexpectedly and precipitously.

This has led to increased vacancies – and rental concessions on the part of many landlords.

Jamie Adner

LA Times: "Home Values Sink to '02 Level"

The real estate coverage in the LA Times skews to the hyperbolic (exuberant during the boom days, nihilistic during the present clime), but there were some relevant facts in today's report that home values in the five-county Southland had fallen to 2002 levels.

• when compared to income, home prices are now below their historical average
• the SoCal median home price in January 2009 was $250,000 -- 40% lower than in January 2008
• Los Angeles County's median home price in January 2009 was $300,000 -- down 35% from a the same month a year ago
• 60% of January 2009 sales were foreclosures
• the local housing market is in the "overshoot" phase of its decline, "when a mid-priced home sells for less than it typically would based on median incomes"

Despite the gloom associated with declining asset values, there's a lot of positive news in this report.

It's the best market in almost ten years for first-time home buyers. They have a vast choice of properties, and with interest rates at historical lows, they can buy them on the best terms. Homes are more affordable than the historic norm.

With so many foreclosed homes changing hands, neighborhoods will not deteriorate from the presence of vacant properties, but will be rejuvenated by new owners who will stay put because they can make their monthly payments.

Homeowners who don't have to sell should not be ruffled by this flux in asset prices. Yes, they have less equity in their homes, but their return on their asset will be determined at the time of sale, not during this downturn.

The most positive aspect of this article is that the real estate market is on the road to normalcy. Home prices are falling in line with incomes. Mortgages and property tax for first-time home buyers will be affordable. Foreclosed homes are selling. And loans that are being written are done under stringent new guidelines so the debacle of the bubble years will not be repeated.

Normalcy is not the same recovery. Home prices will continue to fall as we move through this economic quagmire. But every day there are deals to be had by new exuberant buyers who can fulfill their dream -- with a monthly nut they can afford.

Jamie Adner

Freddie and Fannie Raise Fees Effective April 1

Fannie Mae and Freddie Mac are increasing their mandatory fees and toughening credit score and down payment rules as of April 1.

Under Fannie's and Freddie's new guidelines, even applicants who assumed that their FICO scores would get them favorable rates will be charged more unless they can come up with down payments of 30% or higher. For example, a buyer with a FICO score of 699 who can bring a down payment of about 25% to the table will now get hit with a 1.5% "delivery" fee at closing under the new guidelines.

A buyer with a FICO score between 700 and 720 will pay an extra three-quarters of a point. Even someone with a 739 FICO -- once considered a platinum guarantee of the best rates available -- will get dinged with a quarter-point add-on.

Applicants who seek to buy a condominium and cannot come up with a 25% down payment will be hit with a three-quarter point add-on penalty, no matter how high their credit score, simply because they are not buying a traditional detached, stand-alone home. [Source]

Fannie and Freddie are no longer the quasi-governmental organizations of yore -- prior to the financial meltdown in September. These institutions are now under federal regulators and are attempting to price the risk of default into the new loans they back.

On the one hand, since the most creditworthy buyers are getting loans -- baskets of these high-quality loans can be sold on the secondary market, freeing up credit. No more toxic debt, this is Grade-A American government-backed debt.

On the other hand, buyers of condos and 2 - 4 unit properties seem to be targeted disproportionately with huge fees. In discussion with other brokers, I've heard of several condo deals falling apart because of these add-ons.

For buyers who have average or below credit, or who are buying a condo or 2 -4 unit residential property, these extra fees will largely neutralize the $8,000 tax credit which was intended as stimulus.

We're returning to a time when those who pose the least risk are rewarded for their financial responsibility. That's good. But now the market must process these new fees, which will only force down prices even more.

Jamie Adner
www.adnergroup.com

Los Angeles Conforming Loan Limit Raised to $729,750

The Economic Stimulus Package being signed today by President Obama contains a provision that will help local buyers -- the conforming loan limit will be raised to $729,750 from the current $625,500. These "junior jumbo" loans, in the $417,000 - $729,750 (for single family homes), have slightly higher rates than the under-$417,000 conforming loans, but much lower rates than the the over $729,750 jumbo loans, that have rates hovering near 7%. This conforming loan limit increase will also help many homeowners refinance their loans. The rates of these "junior jumbos" are in the 5 - 5.75% range, depending on the buyer's credit and the type of property being purchased.

$8,000 First-Time Buyer Credit Part of Stimulus Package

There's a nice windfall for some homebuyers in the economic stimulus bill awaiting President Obama's signature on Tuesday. First-time buyers can claim a credit worth $8,000 - or 10% of the home's value, whichever is less - on their 2008 or 2009 taxes.

A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill - the amount of withholding they paid during the year plus anything extra they had to pony up when they filed their returns - was less than that amount.

To qualify for the credit, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as "first time" buyer. They must also live in the house for at least three years, or they will be obligated to pay back the credit.

Additionally, there are income restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)

Applying for the credit will be easy - or at least as easy as doing your income taxes. Just claim it on your return. No other forms or papers have to be filed. Taxpayers who have already completed their returns can file amended returns for 2008 to claim the credit.[Source]

The final version of the tax credit for homebuyers is a watered-down version of the House proposal to give any buyer a $15,000 tax credit. This proposal is not intended to investors, but for bona-fide "middle class" homebuyers. Of course, an $8,000 tax credit is only a fraction of the price of a Los Angeles starter home. Nevertheless, an $8,000 credit is better than no credit at all. The $15,000 credit for any buyer could have risked creating speculation (and abuse) that would ultimately be to the long-term detriment of the fragile, recovering real estate market.

Jamie Adner
http://www.adnergroup.com/

Los Angeles Industrial Property Market Under Pressure

As the regional economy continues to sputter, vacancy rates are beginning to climb at warehouses and distribution centers for industrial goods. After years of high occupancy and rapid construction of cargo hubs, immense spaces are now standing empty. Nearly all of these warehouses and shipping hubs are located in San Bernardino and Riverside counties, where a long-running industrial real estate boom is finally starting to go bust.

More centrally located industrial properties in Los Angeles and Orange counties are also beginning to feel the pinch, although the modest increases in vacancy rates are still considered healthy by industry standards. Many of those properties are rented to small entrepreneurs who are hunkered down but so far toughing out the economic downturn.

Industrial property construction is always rare in Los Angeles County, where it's hard to find land to build on. A 400,000-square-foot building under construction in Commerce is the only one of its size being built in a market with 700 million square feet of existing space, said Cushman & Wakefield's McMillan.

With the market softening, many Los Angeles landlords are sweetening their offers to tenants by paying more for their interior improvements and giving them a few months' free rent if they sign a lease.

Competition among investors to buy industrial properties has dropped dramatically because investment financing is hard to come by. Fortune 1000 companies these days treat real estate more like a just-in-time commodity that they acquire and shed to suit economic times, Frankel.

For all the current hardships, boosters say the Inland Empire industrial market is well positioned for a comeback when the economy improves, perhaps by 2010, because of its low-priced housing, ample workforce and desirable location for international shipping. [Source]



The Los Angeles Times' recent article points to the downward pricing pressure on warehouse and other industrial spaces in the Los Angeles area. As far as the central Los Angeles area is concerned (within 10 miles of the axis from downtown LA to LAX), there is little risk of over-building since the area is so space-constrained and there remains little vacant land in commercially zoned areas.

On the leasing side, there is downward pricing pressure on rents. On the sales side, many building owners are pricing their buildings well above the market. These buildings often remain vacant for months (or even years) since there is a general lack of demand for this product type. The question is whether industrial property owners will go into default, and what these owners will do when attempting to refinance their loans that are maturing in this era of limited credit.

Jamie Adner

www.adnergroup.com

Santa Monica Market Round-Up: January 2009

Santa Monica (Area 14):

Single Family Market. Again, we see how slow a prime market has become: four homes closed in January 2009 in Santa Monica. Sale prices were $2.5m, $1.9m, $1.2m and $895K.

A “fabulous California Cape Cod with legal 2nd unit/guest house” at 4th Court and California Ave sold for a cool $1.88 million (see photo above). That’s 23% above the property’s $1.53 million sale in September 2002.

Through the course of the boom-to-bust price cycle over the past six-odd years annual property price appreciation in the most stable markets has reverted to the annual 3 – 4% historical mean. The double digit increases of the recent gogo-years have been followed by huge price drops, bringing homes back in line with affordability and earning power.

Sales volume is way down. The number of single family homes that sold in January in Santa Monica in the previous four years was: 11 (2008), 21 (2007), 12 (2006) and 19 (2005). 16 single family listings expired January 2009. The market is at a virtual standstill – and only the most motivated sellers are closing deals.

Condo Market. 15 condos sold in Santa Monica during January 2009. The median sale price in January 2009 was $635,000. However, 47% of sales were $520,000 or less.

The barrier to entry to this coastal city has been lowered, and first-time buyers are able to get the best deals in years. (Consider that for 2007, the median sale price of a condo in Santa Monica was $780,000.)

The vast majority of what is selling is the vintage 1980 and earlier ‘B’ product, and not the spiffy, new, contemporary (over-priced) condos, townhomes and lofts.

If the price is over $800,000, Seller beware, there won't be a lot of interest. Over-priced new developments don’t build sales momentum. In this down-market, these units will be ignored and will languish for months. Dealer incentives will be forthcoming.

Jamie Adner
www.adnergroup.com

West Hollywood Income Property Market Round-Up: 4th Quarter 2008

West Hollywood Vicinity (Area 10): In the final three months of 2008 only three income properties sold in West Hollywood. Two of the sales occurred in a brisk six days or fewer. The fastest-selling was 1001 N La Jolla Avenue, a fully-rehabbed Rudolf Schindler two-unit property with an owner's main house (pictured above). It sold in two days, for $1,330,000, close to the asking price. Another duplex, 718 N La Jolla Avenue, 1,426 sq ft, with side-by-side units, sold in 6 days for the asking price of $699,000. The third 4th quarter sale was a three-unit property at 1015 N Orange Grove Avenue -- barely over 1,000 sq ft, on a large 7,549 sq ft lot -- which sold in 200 days for $900,000 (original asking price $1,349,000).

The two quick sales demonstrate how even in this down-market, a pedigreed, trophy property and a well-priced, well-located, owner-user type duplex are still much sought after. The N Orange Grove Avenue sale shows how buyers are not taking the bait for over-priced properties -- only when the price settles down to earth, to market value, will they "bite".

What is also relevant is what did not sell during the 4th quarter of 2008: 21 West Hollywood listings expired in the final three months of the year. During the heated market of the previous several years, property valuations got pushed up to stratospheric heights and list prices became completely divorced from cap rates and the actual earning power of buildings. This is a time of reckoning, and all the over-priced, over-valued properties will stagnate on the market unless the sellers demonstrate they mean business and price their properties with today's valuations, not yesterday's, in mind.

Jamie Adner
www.adnergroup.com

Los Feliz Market Round-Up: January 2009

Los Feliz (Area 22) – Single Family Homes: The liquidity crisis has had a noticeable impact on the Los Feliz single family home market, as evidenced by the drop-off in sales – and selling price point – in January 2009.

Only seven Los Feliz sales closed in January 2009. Three of these homes sold for over $1 million, while the remaining four sold for $701,000 and less. Two of these sales were REOs.

(Los Feliz is a non-homogeneous market. Home prices in the Los Feliz MLS area skew to the high end (hills north of Los Feliz Boulevard) and the low end (Franklin Hills, Atwater Village and Interstate 5-adjacent areas.)

The drop-off in single-family home sales in January 2009 was precipitous when compared to the number of January sales in previous years: 13 (2008), 15 (2007), 12 (2006) and 24 (2005). The $701,000 median sale price in Los Feliz for January 2009 was also substantially lower than in January of previous years: $940,000 (2008), $855,000 (2007), $808,000 (2006) and $900,000 (2005).

The highest priced sale in January 2009 was $1,550,000– 4060 Farnmouth Drive, a 3,255 sq ft Spanish home on a 6,833 sq ft lot in the Los Feliz hills adjacent to Griffith Park. This updated walled Spanish villa has 180 degree views from Glendale to the ocean.

The pricing history of this property illustrates how the perception of “value” has changed in recent months. In the sunny days of May 2008, the home was initially listed at $2,195,000. With price reductions and no sale after 6 months, the home was re-listed with a new agent at $1,699,000, eventually going into contract 45 days later and selling for $150,000 less than the asking price. The sale price was 29% lower than the original asking price.

In spite of January’s weak figures, looking back three months we see that life goes on in Los Feliz. While the nation has been in the grips of a full-blown economic crisis, high-end homes are still trading hands in Los Feliz.

In the past 90 days, four homes sold between $2 and 3 million and 11 homes sold between $1 and 2 million. The majority of properties listed are still not selling (there were 39 sales and 47 expired listings), but many transactions are going forward.

Jamie Adner
www.adnergroup.com

Notes on Short Sales

Buyers are more and more frequently hearing that a particular property is in “short sale." A "short sale" – frequently also called a “short payoff” – is a sale in which the amount owed on a property is greater than proceeds from the sale of a property. (Take the example where the loans on a house are $500,000 and the sale of the same house nets only $400,000.)

The bank does not have to accept the diminished pay-off amount – their alternative is to foreclose upon a property. The benefit for the lender is that the property is sold to another buyer – they do not bear the foreclosure expense, and the home is not taken into the bank’s (burgeoning) inventory as an REO (“real estate owned” – i.e., a property owned by the bank).

The benefit for the borrower is that the short sale is less damaging to their credit report than a foreclosure, and relieves the debt that the borrower could not afford to repay.

The short sale will appear on the borrower's credit report as a negative mark for seven years. In order to salvage their credit, a borrower, in his or her negotiations with the bank, can attempt to negotiate the reporting of the short sale to the credit rating agencies.

As an alternative, homeowners who can no longer afford to pay (or desire to pay) their outsized mortgages may do “mortgage modification” or a “loan workout” in which the terms (and possibly even the principal) is renegotiated with the bank. The obvious benefits are more favorable loan terms and lessened damage to the borrower’s credit history.

The tax implications for a “short sale” have diminished dramatically with federal legislation introduced in 2007 that largely has waived taxation of cancelled mortgage debt on a primary residence.

Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by President Bush on December 20, 2007, Internal Revenue Code §108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income.

If you are considering a short sale on a property, consult a qualified accountant to discuss its tax implications, which may vary from state to state and case to case.

For buyers, short sales tend to be the most complex and frustrating transactions. The complexity is due to the fact that the 1st (and possibly 2nd) mortgage holder(s) must agree to a smaller payoff amount than the loans they hold. Multiple negotiations must take place to get all parties to agree to the lessened loan payoff amounts.

Because banks are deluged paperwork, these negotiations may drag on for several months. (On the other hand, REO sales are straightforward and typically close in 30 days, like ordinary sales.) Even worse, a signed sales contract may be voided by the bank at any point during the escrow period, for instance if a higher offer is submitted by another buyer.

In cases where sellers are underwater, a short sale can provide sellers an amazing “out” where the bank picks up the loss on the property rather than the borrower.

It is unclear whether this is ethically correct – common wisdom is that when a buyer borrows money, it is intended to be repaid in full. The reality is, if a property is “underwater” the bank often has little or no collateral for their loan, and a short sale is better for the bottom line than a foreclosure.

Jamie Adner
www.adnergroup.com

Sunset Strip - Hollywood Hills West Market Round-Up: January 2009

Sunset Strip / Hollywood Hills West (Area 3): Although many markets in LA are gloomy, with withering sales volume and REOs galore, the houses in the eternally hip hills above Sunset Boulevard from Doheny to LaBrea are still selling, driven by buyers with cash reserves, unruffled by the liquidity crisis.

13 houses closed in Sunset Strip / Hollywood West in January 2009. The three highest priced sales are all in the Bird Streets / Sunset Plaza Drive areas. The top sales were $3.0 million (9010 Hopen Place), $2.0 million (1458 Blue Jay Way) and $1.5 million (1462 Rising Glen Road). Ironically, the two top sales are both complete gut-and-remodel opportunities.

Five of the sales in January 2009 were for $1,000,000 or less (one a short sale, another, an REO). The fact that buyers are willing to spend $2 - 3 million on a house during these dire days shows that the bottom indeed has not fallen out of the market.

But neither is the market brisk. Many homes are not selling – 48 listings expired in the Sunset Strip/ Hollywood Hills West area during the month of January. Only one house in five put on the market in this area results in a sale. Either owners will have to reduce their prices to sell -- or wait until sunnier times.

The 13 sales in January 2009 in Sunset Strip / Hollywood Hills West did not vary much from the number of sales during January last year (14). These figures are a significant drop-off from the sales volume in January during the boom years of 2005 - 2007: 28 (2007), 28 (2006), 29 (2005). The median sale price in January 2009 was $1,075,000, which, although low, is not much of a departure from the (erratic) median sale price which varied from a low of $1,150,000 (2005) to a high of $2,060,000 (2008) over the past four years.

Jamie Adner
www.adnergroup.com

Breaking News: Fed to Modify Underwater Mortgages

"A cornerstone of the economic recovery plan that President Barack Obama is expected to unveil Monday will be modifying problem mortgages.

In a nod to Main Street over Wall Street, sources familiar with the plan say Treasury Secretary Tim Geithner plans to allocate almost half of the remaining $350 billion in funds from the Trouble Asset Relief Program to the so-called "Mo Mod," or mortgage modification, platform.

The "Mo Mod" program works by structuring a new mortgage that more accurately reflects a home's worth so that a troubled borrower no longer owes more on their home than the property is worth.

The process then enables a lender to pool these new mortgages together into securities that reflect more accurately a home's value, which makes them less risky for investors.

But it will also bail out borrowers who helped trigger the housing crisis by taking out loans they were unable to pay back from the outset, something that has drawn criticism because it effectively rewards the bad behavior of rogue borrowers and lenders.

Stopping the slide in housing prices is a priority for the Obama administration, which is also considering providing government guarantees for home loans that have been modified by their servicers in order to stem a surge of foreclosures that's hammering property values.

The "Mo Mod" plan comes as a record 19 million US houses stood empty at the end of 2008, and, according to real-estate Web site Zillow.com, US homeowners lost a record $3.3 trillion in equity last year.

About one-third of owners whose home values drop 20 percent or more below their loan principal will "hand the keys back to the bank," said Norm Miller, director of real estate programs for the School of Business Administration at the University of San Diego.

"When you're underwater and prices continue to fall, you tend to walk," Miller said in an interview. "It's a downward spiral that's tough to stop because it feeds on itself. Foreclosures encourage other foreclosures and falling prices discourage buying." [Source]

Senate Votes $15,000 Tax Credit for Buyers

"The Senate voted yesterday to expand the economic stimulus package with a tax credit for homebuyers of up to $15,000. This tax credit, unlike others proposed previously, is a real tax credit, as long as it is claimed within two years. There is no automatic recapture of this money unless the buyer sells the property within two years of purchasing it. The National Association of Homebuilders (NAHB) also confirms that there are no qualifying criteria for receiving the credit and any homebuyer is eligible for it, whether he or she is buying a single-family or multifamily property."

- Multi-housing News, February 5, 2009

www.adnergroup.com

West Hollywood Market Round-Up: January 2009

West Hollywood Vicinity (Area 10):

Single Family Market. In a dramatic illustration of how slow the market truly is, only two (!) houses sold in January 2009 in West Hollywood. One sale was 8723 Rosewood Avenue (see photo above) – new construction, contemporary design, with pool – 2,780 sq ft on a 5,175 sq ft lot –selling for $2,375,000 in only 17 days ($120,000 less than the asking price). The other was a bank-owned property (no surprise) – a 5 br, 4 ba house at 927 N Vista Street that sold for $775,000.

In stark contrast, the number of single family homes that sold in January in West Hollywood during the previous four years was: 4 (2008), 12 (2007), 11 (2006) and 12 (2005). Again, the unavailability of loans over $625,000 is causing the West Hollywood single family market to go into a virtual freeze. Unless loans become more available, prices will inevitably have to fall further.

Condo Market. The West Hollywood condo market did not fare much better. 13 condos sold in West Hollywood in January 2009, a significant decline from the sales volume in January during the four previous years: 28 (2007), 16 (2006), 30 (2005) and 39 (2004). The median price of sales in January 2009 was an astonishingly low $425,000. Consider that for the past two years, the median sale price for a condo in West Hollywood has been $620,000.

The highest priced sale was 1050 N Edinburgh, a 2,411 sq ft 3 br, 3 ba penthouse – with an original list price of $1,350,000 – closing at $950,000 after 321 agonizing days on the market. Six out of 13 of the condo sales for West Hollywood in January were for less than $400,000, again illustrating that the bulk of all activity is at the low end of the market.

What is alarming is that new construction of all stripes is not selling. The Milano (1248 N. Laurel Ave.) still has six out of 16 units, including two penthouses, still on the market after more than 18 months. Ditto for 721 Westmount Drive, that has 11 out of 16 units still on the market after 11 months on the market. For new construction in West Hollywood, developers do not seem to be dropping their prices below the $800,000 threshold – and prefer to let the units languish as the economy deteriorates. Look for prices on the chopping block in the upcoming months.

Jamie Adner
www.adnergroup.com

Silver Lake / Echo Park Market Round-Up: January 2009

Silver Lake/Echo Park (Area 21): 17 houses closed in Silver Lake / Echo Park in January 2009. Only two of these homes sold for over $1 million, while seven were priced less than $400,000 – six of them foreclosures. The skewing of prices to the low end reveals how the tight jumbo loan market is and how sales of bank-owned properties (with motivated sellers and buyers eager to get ‘deals’) are ‘making the market’.

In January 2008 only 11 houses closed in Silver Lake / Echo Park, three selling for more than $1 million, the lowest sale price $499,000. The median sale price in January 2008 was $705,000. The median sale priced in January 2009 was $580,000. The drop in median price shows how much sales activity is at the lower end.

The highest priced sale in January 2009 was $1.36 million – 2101 Redcliff, a 2,343 sq ft Spanish house in the Ivanhoe School District with 360 degree views. Originally priced at $1,895,000, the house sold after 124 days for $533,000 less than the original asking price.

On the low end, two REOs, 219 N Bixel Street (south of the 101 Freeway) and 2221 Effie Street (at Glendale Boulevard) both sold for $150,000. The average days on market (DOM) for January 2009 sales was 44. The average $/sq foot for January 2009 sales was $398/sq ft. This $/sq ft figure is down from $500+ sq/ft of previous years.

So much of the sales activity in Silver Lake / Echo Park is foreclosures, the $/sq ft statistic becomes almost meaningless, except to reveal the vast quantity of bank-owned properties (and short sales) working their way through the system.

Jamie Adner
www.adnergroup.com

"Fear Not" Santa Monica, Beverly Hills and Malibu

Well-heeled Westside Angelenos were awakened this morning with dire headlines about their local real estate market. On their doorsteps, denizens of this high-end market read the grim LA Times headline: "Westside Housing Goes South."

The story goes -- as real estate prices plummeted in far-flung SoCal regions -- conversations at Santa Monica sushi bars and Beverly Hills steak houses concerned only multiple offers and escalating prices.

No longer, says the local Paper of record. The article reports that home prices "in Beverly Hills, Santa Monica and Malibu ... finally tanked at the end of the year, losing between 26% and 30% of their value in just a few months".

Now, before spitting out their mouthfuls of hamachi-shisho leaf roll or petit filet mignon sauce homard, Westsiders should take a deep breath and analyze the truth behind the numbers.

The Los Angeles Times' statistics determine the 'median' by sorting the sales in a given period by price and picking the middle value. The true "median" home price would involve assessing the value of every property in that market and selecting the middle value.

Let's analyze the stats of a fictional Santa Monica real estate market. In 1st quarter 2007, in a "hotter" real estate market with loans of all values being underwritten, there were 7 sales at the following prices:

- $8 million

- $6 million

- $3 million

- $2.5 million

- $2 million
- $1.8 million
- $1.4 million

Median home price: $2.5 million.

In the 4th quarter 2008, the market has cooled substantially. Loans of over $625,000 are in the 7+% range -- and are only obtainable with fully-documented income (how many Westsiders are 'salaried' employees?) With the ongoing "worst financial crisis since the Great Depression", only the most motivated buyers are buying (the speculators are gone). There are only 5 sales that quarter at the following prices:

$6 million

$2.5 million

$1.5 million

$1.2 million
$1 million

The headlines read: "Santa Monica median price tumbles 40%. Sales volume plummets 29%"

What's happening is that sellers at the high end are not selling (most are not motivated to do so, why sell in a time like this?) Buyers who can benefit from low-interest (jumbo-conforming) loans are buying at the lowest end of the price range.

The truth is, buyers are still clamoring to purchase any property in Santa Monica. First-time buyers or "move-up" buyers from less pricey neighborhoods are fulfilling their dreams and moving into this community during this down market.

"Move up" buyers in the $1.5 million+ range can't get loans and are staying put -- for now.

Individual homes have not declined 40% in value. Sale prices have skewed to the lower end. The Los Angeles Times is making the alleged "26%" to "30%" declines sound like the S & P rout -- creating (false) news and contributing to the vogue of financial fear and panic.

Granted, some Westsiders may find themselves in distress after recent stock market gyrations. Some may be forced to sell, and yes, their homes will sell at lower prices.

The stats generated by the Los Angeles Times, the Case-Schiller Index, etc. need to be examined in greater detail before being taken as mantra. Real estate is hyper-local, and local values must be analyzed hyper-critically.

Jamie Adner
http://www.adnergroup.com/

4 Things You Need to Know to Get Pre-Approved for a Home Loan: FICO, Loan Limits and Beyond

The constantly shifting tectonics of the financial world have created a home loan market that has been upended. Volatility is an understatement: mortgage rates fluctuate and are updated to loan brokers three and four times daily. The good news is that interest rates in are the lowest they've been in nearly forty years.

The goal is to learn how to take advantage of these low rates. The popular media has given the impression no banks are giving loans. Not true. But buyers and those refinancing will face the scrutiny of banks. Here are four steps to prepare you for obtaining a loan and obtaining the best rates.

1. Know your FICO Score:

The higher your FICO score, the lower your mortgage rate. Your FICO score (short for Fair Isaacs Corporation, the most widely used credit score model) is determined by a cryptic algorithm by the mysterious Big Three credit rating agencies -- Experian, TransUnion and Equifax. The range for FICO scores is 300 - 850 or 900. In general, a FICO score above 720 will make you eligible for the best rates. Buyers with lower credit scores can get loans -- just at higher rates.

The government has mandated that you can get a FREE copy of your credit report at AnnualCreditReport.com (you will have to pay only to get your FICO score). A FICO high score is more critical than ever when applying for loans. If you are planning on buying (or refinancing) even many months from now, review your credit report and take care of any items that need attention.

Advice: Everyone should annually review their credit report to make sure it is consistent with your financial activity. Also prevent identity theft by verifying your report.

2. Assemble Your Downpayment:

Assess how much cash you have that can be used to purchase a property. If funds are going to be borrowed, consult your sources and discuss loan terms for the downpayment. If stocks or other securities are going to be liquidated for the purchase, identify them and make a plan to generate cash.

If you have less than 20% downpayment, you will typically pay mortgage insurance on the property (PMI = private mortgage insurance). Amounts vary, but it could add a couple of hundred dollars per month to your "nut". FHA (FHA = Federal Housing Authority = government-backed) loans allow you to put down as little as 5%. Even if you don't have a signifcant downpayment, a home purchase may still be an option.

Advice: The greater the downpayment, the better the loan terms. Analyze your finances and evaluate how much money you can afford to allocate to a downpayment leaving you enough reserves for an emergency.

3. Understand Loan Limits:

There are 3 basic categories that determine loan rates in California ($ amounts for single family homes/condos are below):

Conforming -- Under $417,000 -- Best rates -- a few weeks ago, these were in the 5.0% range (updated 1/26/10).

Jumbo-conforming -- $417,001 - $729,750 -- about .5% higher rate than conforming loans

Over $729,750 -- Jumbo loans -- the rates are up to 1.5% higher than jumbo-conforming rates

For 2 - 4 unit properties, jumbo-conforming loan limit: (updated 1/26/10)

2 Units -- $934,200

3 Units -- $1,129,250

4 Units -- $1,403,400

Advice: Understand the "moving levers" of loans. "Discount points" means a percentage of the loan the Buyer/Refinancer must pay to obtain a loan -- one "point" = 1% of the loan. 5/1 loan means fixed for five years, then adjusting every year afterwards. "Fully amortized loan" means payments include interest and principal and over the course of the loan term (e.g., 30 years) the loan will be paid off in full. If you don't know financial terms, ask your lender!

4. Get a Pre-qualification Letter:

Go to a mortgage broker or another lender (your bank or credit union) and have them review your finances to see how much you will qualify for. Mortgage brokers shop from a number of available loan programs on the market and tend to get better rates than banks (that are selling only their loan products.) In this market, experience matters, entrust yourself who a professional who knows how to close a deal.

Advice: Get recommendations and find an experienced lender. Have them review your finances and find out how much a bank will lend you. Discuss how you can lock a rate to purchase a home or investment property.

New York Times: "Credit Scores: What You Need to Know"