Sunday, November 4, 2007

High-end financing?

Updated with loan info - thanks, Phillip. From all of our recent conversation about the upper end of 90402, here's a question: Following is a list of all ten properties in 90402 that sold for over $4M so far in 2007, according to the Assessor. They generally sold pretty fast and only one had a price reduction. Sale price varied above and below asking.

My question is, how were they financed (did we touch on this before?)? Were jumbos central, or did they just write checks? For someone with access to loan records, could you post how much was financed, and, if available, what loan type? (For privacy, no owner names, please.)

1221 Georgina, 5 bed/6.5 bath, SP=$5.6M, SD=8/10/07, LP=$5.895M, 70% fixed loan
522 21st Place, 6/5.5, $5.2M, 3/21/07, $4.995M, 48% var.
333 20th, 5/6.5, $5.1M, 6/5/07, $5.095M, 69% var.
524 19th, 5/4.5, $5.058M, 6/29/07, $4.895M, 79% fixed
645 Adelaide, 5/6, $5.0M, 8/14/07, $5.895M, 60% var.
1228 San Vicente, 5/5.5, $4.989M, 5/11/07, $4.989M, 50% var.
235 Georgina, 5/6, $4.95M, 6/12/07, $4.995M (red. from $5.395M), 30% var.
635 20th, 4/5.5, $4.6M, 3/29/07, $4.795M, 65% var.
1107 Carlyle, 7/7, $4.5M, 7/26/07, $4.688M, 75% var.
210 23rd, 6/5.5, $4.35M, 3/21/07, $4.575M, 80% var.

So neither all-cash deals nor zero-down, and mostly variable rates. This says even the high end will be sensitive to loan rates and availability. (Although if pushed, perhaps they could have put in more cash?)


Anonymous said...

I for one agree completely.

If these high end homes were sold with very low deposits and jumbo ARM's then it is a bad sign for the future of 90402 prices.

If on the other hand most of these were sold by someone just writing a check, it is a good sign for 90402 prices.

Let's get the facts.

I guess if you look at this board, you can break the debate about the 90402 in to two parts

(1) How many people are there who have all cash are happy to pay $5 million for a house?

(2) Of this population, what % want the 90402 vs. all the other choices that are available.

We have a healthy diversity of opinion

Some of the bears say that there aren't a lot of people with the $5 million cash. Other bears say that there are plenty of such people, but they would prefer some neighborhood other than the 90402. Make no mistake, there are two totally separate ways to be bearish on the 90402.

The BULLS on 90402 can only be right if TWO things happen - plenty of people with $5 mil to spend AND AT THE SAME TIME those people with $5 mil like the 90402 better than anywhere else.

seems like the bulls have a higher hurdle than the bears, logically

WarChestSM said...

Back on 9/13 on your "not selling in sunset park" post we discussed this issue of financing.

210 23rd from "anon"

Here's an example, 210 23rd which sold for $4.35MM. The buyer bought in Malibu around 2000 at around 1.2MM and now has these mortgages on 210 23rd:


Type of Mortgage: ADJUSTABLE RATE

Loan Amount: $ 2,600,000

Rate: 5.75 %

Term: 4/1/2037



Lender Type: BANK

Loan Amount: $ 880,000


Due Date: 3/15/2047

So much for 50% down on that one.

And then 635 20th from "DWR"

Ask and you shall receive (FYI, you and Westside Bubble should get together and get a subscription to Lexis, it is far and away the best tool I use):



Lender Type: BANK

Loan Amount: $ 3,000,000


Type of Financing: FIXED RATE

Interest Rate: 6.87 %

Due Date: 4/1/2037



Lender Type: BANK

Loan Amount: $ 680,000


Type of Financing: VARIABLE RATE

Rate Change: MONTHLY

So from these two examples, it looks like the argument of someone paying with 100% cash is unlikely to hold up. However, most of these people should be able to use the leverage to their advantage (even with no tax advantage over the $1 million mark) because interest rates are so low so it may make sense to borrow as much as possible and invest in other places.

dan said...

Not sure I agree with this methodology. I am a bit bearish on 90402, but not because I think the people there can't afford it.

If I were buying one year ago, even if I had the cash, I'd take a mortgage for as much as possible. Maybe an Option ARM at that. And, unlike the people who were doing it so they could barely squeeze into a home, it would be rational...


If I got a teaser rate and was paying <6%, I'm pretty confident that I could beat that on investments. Especially since the interest on the first $1M would be a tax deduction.

I'd be pretty confident I could refinance when the rates reset (or, worst case, just pay cash).

So, why do I think 90402 will come down (a little)?

Pretty simple: If prices go down in the valley, the marginal buyer in LA is going to say "Wow, that's enough better--I'll move to the valley". Eventually, the buyer in Sunset Park moves to West LA, and all of a sudden 90405 costs enough less than 90402 that I'll take a look (or at least the marginal buyer will). Right now, the price premium for 02 is worth it for people with kids. But if prices drop elsewhere, it may not.

You never know people's true financial situation, but let's just say there are no NINJA loans in 90402.

Anonymous said...

Let's say you are 100% correct 0 what is the price drop from today

that is under your scenario the house in 90402 that sells today for five mil - what does that same house sell for after the effect you talk about kicks in

Westside Bubble said...

Thanks for finding those two, WarChestSM.

Let's say you are 100% correct 0 what is the price drop from today

I find it persuasive that the 1990s drop north-of-Montana tracked the Case-Shiller LA-OC index so closely (10/27 post). It must be the arbitrage that Dan described, keeping prices proportional (which I've also noticed between different SM neighborhoods over time).

How much? My 9/4 post matching income growth to Case-Shiller for LA suggested around 40%. I refined it 9/18 for Santa Monica median income. I'll do some more with it.

dan said...

To be honest, I have no idea.

My complete guess is that the effect will about about 50% of the drop of other places. So, if the greater westside drops 20%, 90402 might drop 10% (bringing a $5 place to around $4.5).

I do think there's an effect where, giving a larger variance in income (I forget exactly what the equiv of StdDev in a Pareto dist is called) places that collect the very tops of the tails will go up disproportionately. So, I'd expect 90402 to be a lot less affected than other areas (and, in the long-term rise significantly). But in the short-to-medium term, I think this arbitrage will play out.

Anonymous said...

I respect what you are saying

but what do you mean by "long term"

i mean how many years is the long term

What i am trying to say is- if someone plunks down 5 mil for a house in the 90402 today, how much will that house sell for five years from today - is it 4, 5, or 6 mil ?

What are you saying? when does the long term kick in

Phillip said...

Seems that all have been financed and all but two are variable loans. IMO down payments on these properties will be at risk for the next 4-7 years. (street, loan amount, lender, loan type) per quick check on dataquick.

Georgina: 3.92M (BofA - fixed)

21st Pl.: 2.50.M (First Capital - variable)

20th: 3.50M (Union Bank - variable)

19th: 4.0M (Union Bank - fixed)

Adelaide: 3.0M (WaMu - variable)

San Vicente: 2.49M (Americorp - variable)

Georgina 1.495M (Ing bank -variable)

645 20th: 3.0M (countrywide - variable)

Carlyle: 3.375M (union bank - variable)

23rd: 2.6M (wells fargo - varaible) plus 880k 2nd

dan said...

Hey anon,

Wish I knew--I'm too young to have been through many RE cycles before, so I don't have a great sense. My industry is cyclical though, so I'm acutely aware that you can lose your shirt by jumping in at the wrong time and that timing the market is amazingly difficult.

All I know is that:

1) Prices do seem to be coming down now, and I think will for at least the next several months.

2) Here in SM, they're only falling very slowly.

3) That I'd bet prices are higher in 10 years due to longer-term demographics. (In particular, see Virginia Postrel's recent articles on building permits)

Between a few months and ten years, I don't know what the curve will look like.

I currently enough cash to buy a house in SM sitting in very low-risk investments while I rent. I'll see how the market plays out and see where things stand in six months.

The westside re market is illiquid enough that you can't get a good sense looking day-to-day. Thankfully westside gives us graphs over the year timeframe.

NeedleBrain said...

These are good points.

Remember leverage is fine if you overall are risk and beta* adjusted and have sufficient assets. Some assets return inversely proportional to RE, the "Beta" moves in the opposite direction.

However, if you read more below, I think that the Betas of the income of the people who buy in 90402 likely all are proportional to 90402 RE asset prices, meaning that likely the buyers' income will decrease at the same time that 90402 prices decrease, ( and vice versa) such that you have a vicious circle that is already starting, albeit slowly. Typical Bubble stuff. In these cases, they may deflate a bit instead of exploding. How ever once it starts, it means significant losses either way.

The loans on the properties are interesting, but really I imagine that it is the income that drives a purchase here. If you have the assets, you buy elsewhere because you do not really need to be in town and commute to a job. But if you have a good high income from a job in Los Angeles, 90402 is a better bet at $2 to $5 million. It is basically an aggrandized commuter town with decent not spectacular public schools with a tolerant social liberal structure. But a town that depends on earnings, and jobs, not assets or the super rich.

In other words, I think that if you see financial trouble related to local industries from, for example a downturn in the writers' strike, or professional and small business specific to the Los Angeles area (China importing, 'international law', etc), then you will see the demand for the higher end properties, and the financing of the 90402 properties become much dicer. Once the income gets more uncertain, the financing gets more uncertain, the lenders require a higher down payment, and the vicious circle accelerates.

In this blog, 90402 is a focus, but there are many nice areas to live nearby, such as the Rivera of Pacific Palisades, parts of Bel Air and Brentwood, where you can actually have a pool and land at the same time for the same amount. To many people with money or a good income, 90402 is a transitional area of professionals, not really a wealthy person's area. The lots are too small, especially if you have more than 2 kids.

Beta: A quantitative measure of the volatility of a given asset, relative to the overall market, usually the S&P 500. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.

Westside Bubble said...

I added the loan percentages and comments to the main post. Thanks, Phillip!

Price_Stout said...

Wow, this is a great post.

Most important sign of bubbliciousness is these people taking HUGE mortgages and taking on the interest rate risk as well. Of course, you can't tell from the title co. what kind of ARM, and getting a 10/1 ARM is probably a more rationale choice even that a FRM, but if any of these have short fixed periods, that's just pure insanity.

We've had a flat yield curve all year people!!!!

Anonymous said...

my opinion is this doesn't prove anything. one reason why people who can afford to buy these homes might be taking on ARMs is that they are "getting paid" to make a bet on interest rates based on the discount of the ARM vs. fixed. they could be taking mortgages out to manage liquidity (e.g. if you are worth $10m do you really want to put $5m cash into a home or put down $2m and take out a low cost $3m loan). if interest rates rise (they would have to rise above their cost of capital)--they could always choose to pay off the loan if they cannot find more attractive returns in their investment portfolio.

tony almonte said...

please help me with the math....what are the monthly costs of these loans at average rates and the additional monthly taxes.
what salary do these borrowers need at 28% of gross income, etc?
I think your answer lies there....these folks make a ton of cash each year and while the monthly outlay is big, and maybe a significant portion of their take home, they still have plently left to live their sweet life.

Anonymous said...

Thanks for your comments - i agree with most of them

however, let's focus on quality of life.

Needlebrain posted the following
(let me be clear i am not calling him a needlebrain rather that is his username)

there are many nice areas to live nearby, such as the Rivera of Pacific Palisades, parts of Bel Air and Brentwood, where you can actually have a pool and land at the same time for the same amount

I think that different people value different things in a house.
If you live in the Riviera or Bel Air, and your kids are 13, 14, 15 you have a lifestyle where you have to drive your kids everywhere. That is a real negative. If you live in the 90402 you have the lifestyle advantage of being able to let your kids walk down to Montana -

My guess would be that living in the 90402, if you have kids in that age range, you have a somewhat easier lifestyle and have less driving duty.

Do others agree with this - does the pedestrian lifestyle in the 90402 justify the premium? i mean basically in the 90402 you pay 2 million bucks for a vacant lot that is 7500 square feet and in parts of Riviera or Bel Air you pay 2 million bucks for a lot that is often twice the size.

forget about the trajectory of prices - let's say 90402 lots will fall 25% to 1.5 mil and Bel air will also fall 25% to 1.5 mil -

the issue is not the price, the issue is do people agree that the lifestyle of having sidewalks makes life easier for parents ?

can this explain why the price per square foot in the 90402 is 2x the price in some wonderful areas w/o sidewalks?

ed wood said...

Anon November 5, 2007 7:14 AM - you make a good point. Convenience to shopping, dining and entertainment is a big plus. Also, 90402 is a low fire danger area compared to Bel Air, Brentwood and the Palisades.

Anonymous said...

Let's hear the comments of others.

Forget for a minute about whether you think prices on West side will go up or down - just think about the spread between 90402 and the nice areas with no sidewalks.

if the lots in 90402 are half the size of the lots in the nice areas w no sidewalks, and today the 90402 lots sell the same as the ones with no sidewalks therfore the price per square foot of dirt is 2x in the 90402 - will that relationship stay constant

I mean, the areas with no sidewalks have the advantage of privacy and space

90402 has the advantage of proximity to things and sidewalks and lower fire risk

Remember that a few months ago kids coming out of a 90402 house were shot in one of the silly disputes that teenagers sometimes have

Someone paranoid about being shot might want to choose the non sidewalk areas to be safer from shooting. Someone paranoid about fire might choose the 90402. (Both of these people might be neurotic, i am not defending either of their sets of fears)

in other words, how will pricing evolve in 90402 vs the nice areas with no sidewalks?

Let's hear both sides.

Anonymous said...

I doubt there are many parents in the Riviera driving their kids to SM, as most of them have nannies to drive them, or they hang around the village causing trouble (PP is well known for having the worst kids on the Westside). Look at all of the graffiti and "incidents", most recently the homemade pipe bomb that was thrown in to an open window at Village Books by local kids.

Anonymous said...

A piece of land in the 90402 sells for the same price as a piece of land twice the size in the riviera or some other nice places with no sidewalks.

What is it that drives this price difference?
Is it the often shorter commute from the 90402? The proximity to shops and restaurants? the sidewalks?

if you are looking purely at price per square foot of dirt, the 90402 is clearly the most expensive area in the whole Los Angeles area (excluding areas within a quarter mile of the beach, which have their own pricing logic)

Again, put aside the issue of a bubble. if you are a pessimist, assume that all expensive areas are cut in half. that still leaves 90402 as most expensive per square foot.

Why is that ?

Anonymous said...

Good schools (Elementary at least), clean air, low crime, low fire risk (as someone else mentioned), close to dining, entertainment, shopping, and the beach. warchestsm has documented the "reverse commute" on his blog, where if you live in SM most of the traffic is flowing in the opposite direction during rush hours. There is something to be said about sidewalks providing more of a connected neighborhood where people can walk their dogs and interact with each other.

Anonymous said...

A recession is on the horizon and financial institutions don't have any money. Using an electron microscope to view 90402 in this context makes about as much sense as using an electron microscope to treat a patient who has just been shot.

The patient is going to die. Gasoline and petroleum products are headed through the roof. The credit spigot has been shut off.

And this is only the beginning.

Anonymous said...

These houses were purchased with 30-40% down and the mortgage interest rates are, historically speaking, low.

There are plenty of people in LA with incomes that can support 25k mortgages.

The fact that they didn't pay cash is irrelevant. They have other things in which to invest - the stock market is on fire, so why commit cash to a building that is either flat or declining in value.

Anonymous said...

90402 is nice but not worth the premium. Have you ever tried to get from 15th and Montana to the 10 Fwy? It takes between 20 and 45 minutes just to get the freeway! Try going to Staples for a 7pm show/event on a Friday. You'd have to leave at 3:30 to be sure to get there.

Cheviot Hills/Rancho park are much better than 90402 and 90405. There is almost no traffic through those neighborhoods since all the streets are non-parallel. That's where I'm buying when a nice 3bedroom house is under $1M.

Anonymous said...

It is very tough to find a lender that will allow a fixed rate loan for a loan amount over 2 million. Most lenders don't want to take on the risk of holding that big of a note for when rates likely increase in the future.

sexy said...