Sunday, March 23, 2008

Manhattan Beach, CA: Starter Home?... No Thanks!





There is a curious phenomena happening in Manhattan Beach real estate... the demise of the starter home. Let me be a bit clearer. Starter homes are not disappearing physically; it is the concept of the starter home as part of a real estate plan that has changed.

Before 2002 buyers were still looking for a little starter home they could buy... put in a bit of sweat equity... hold for 5-7 years and then either refinance and keep as a rental, remodel, add a small addition, tear down and rebuild or sell. This was the game plan for first time buyers to get into the Manhattan Beach, Hermosa Beach, Redondo Beach or El Segundo real estate market.

The buyers who followed this plan in the past are now deemed lucky as they own a little rental and a larger home or built a new home and have a relatively small mortgage compared to their neighbors. It wasn't luck but rather a good game plan along with some work.

As I have one of these little starter homes listed for sale... 3612 Poinsettia...(current price $849,000). It is a solid little home with copper plumbing, a newer roof and a lovely yard... but it needs a new kitchen and bath. I've had an opportunity to speak with a number of buyers in the under $1 million range. As I continue to get similar information from most of those who visit my open house I'm thinking that times have changed in the last 7 or so years. Surprisingly it's not so much about price as it is a change in the fundamental views of buyers.

I suspect that two things have happened. The first is that many first time buyers are working so many hours and days that they really have no time to paint, learn to lay tile or any of the other little fix-it things buyers used to do on the week-end. Then there are a number of buyers who just don't want to do any work on a house. They would rather buy a remodeled home in a less desirable location then have to upgrade a little home in a great location at a similar price. Too many of today's buyers are forgetting the major mantra of smart real estate buying... location.. location.. location. You can always add a bath or fix a kitchen.. it's impossible to move the location..

The second thing that I believe has happened is that little homes are no longer desirable as a first step in a buyer's real estate plans for owning a home in Manhattan Beach or any Beach City. Over the last 6 years builders have swept up many of these little homes deeming the to be tear downs, dozers or scrapers which implied the house had little to zero value. Buyers have come to look at these homes in the same way. Today's buyer often believes that a starter home should be three bedrooms, 2 + baths and have been upgraded.... anything less is a scraper.

Below is a list of all the homes( townhomes/condos are not included) currently for sale in Manhattan Beach under $1,000,000. They have all been on the market for a number of months. Since March 1, 2008... 29 homes have gone into escrow... only one was a starter home.

Manhattan Beach: Starter Homes under $1,000,000 (click on graphs to enlarge)




Manhattan Beach: Pending Sales since March 1, 2008









Prices have softened in the last two years. Many of these homes while not in "A" locations are in nice neighborhoods. With the new conforming loan limits a buyer should be able to purchase
one of these homes with 20% down and a conforming rate first TD. You may have to do a little work but in 5 years you could find yourself as one of the lucky people who bought at a good price.

23 comments:

Anonymous said...

The lack of motivation comes from, I think, the fact that paying almost 1M, (Certainly that after necessary "fixes" for a starter!) and buying in a declining market, is almost impossible for many to wrap their arms around. And as you say, a home that amy very well be deemed a "scraper" begs the question: Why would anyone in this very uncertain economic environment risk that much for so little. Much better to wait till the air clears and prices settle and make a rational, calm buying decision. Any decision to buy at this time, in my opinion, is risky...1M for a starter just 10 short years ago would have been considered insane for a starter!
1M not too long ago was considered a fortune who's investment in real estate would afford a mansion. Fundamentals are seriously disconnected and people are finally realizing 1M is still an awful lot of dough and too much to be throwing away on a starter shack in a seriously depressed market!

Kaye Thomas said...

Anonymous 12:00,
I do think price plays a role..and certainly the econmy has an influence... but I also think buyers have changed a bit in the last few years.

10 years ago an entry buyer in MB had an income of $100,000-$150,000 and looked at homes between $450,000 and $550,000. Today the entry income is about $200,000-$250,000 with entry homes priced from around $800,000 to oughly $995,000.. percentage wise not a huge difference from income and prices 10 years ago. The interest rates 10 years ago were running 7.5%-8.5 % which is significantly higher then today's rates.

Fear about prices may be a factor for some but the people who are truly thinking of buying don't appear to be unduly worried about declining prices. The ones who are concerned about prices are not looking to buy at this time. They are out of the market.

Anonymous said...

Acutally, my husband and I are exactly the kind of buyers you describe not seeing many of now. We're in the market for a fixer under a million dollars (looking here and in some areas of PVE) that we can put some time/energy/money into to build equity over the next 5 to 7 years. In this market, we feel comfortable only buying something that has obvious value-adding potential. But, it has to be something that has enough room for us to be comfortable for at least a few years (as we're expecting our first baby this fall and plan to have lots of family visiting/helping, that means 3 bedrooms), and that is in a solid location. We've talked about your Poinsettia listing, but are too concerned about whether anything that close to Rosecrans will be marketable in the future, even if we do fix it up.

Anonymous said...

There is also a significant headwind against the notion of starter homes provided by builders who are willing and able to bid up the price of such homes.

If a starter home buyer manages to outbid a builder and put in the requisite maintenance and improvements they will end up with a very expensive beach cottage (ie, small but lots of charm) which must now compete with a home of newer vintage (much larger, but not new).

Anonymous said...

Why would I want to buy your POS house when I can rent a similar unit for half or less the monthly price and retain my down payment?

With housing prices heading down, no amount of sweat equity is going to save me from a decade or more of negative equity. Clearly, I do better by saving my money and waiting.

Kaye Thomas said...

Anonymous 8:59,
There are a lot of concerns to weigh when looking at a property. I'm guessing you are having a difficult time finding a 3 bedroom in your price range west of Sepulveda.. as so many of these homes were only 2 bedrooms. There were built as housing for Vets returning from WWII... people lived in much smaller places then..

Poinsettia is close to Rosecrans which is why it is priced where it is.. and that is certainly something you will always need to take into consideration.

Kaye Thomas said...

Anonymous 9:55,

Normally you are right.. but now builders appear to be out of the equation other then prime property in Hill or Sand section. There is a window of opportunity here for entry level buyers that we haven't seen in awhile..You can buy an entry home without having to bid against builders.

You have to decide whether or not this is the right time for you to buy.

Kaye Thomas said...

Anonymous 10:04,
Perhaps you will do better renting and waiting but as I noted in my answer to Anonymous 9:55 builders are out of the market at this time as they deal with a backlog of inventory.

However this situation won't last long. This house was sold to a builder who walked a week before closing as he had too much inventory. Eventually builders will be back and bidding up prices on these types of homes. It's a matter of when not if they return to the market.

Anonymous said...

Thank you, Kaye, for the interesting post. I may be a potential buyer similar to anonymous 8:59, but wouldn't consider the Poinsetta house for a different reason: We don't mind a small home, but my husband will not even look at anything without a two-car garage. (or at least the potential to build a two-car garage--if the Poinsetta home were on an alley street we might be interested.)

We like El Segundo but the lower-priced homes there seem to have location issues or other problems beyond what we're willing to tackle. (The rare homes with potential in El Segundo seem to sell very quickly.) The PV area is nice but too far for us to commute.

For us, Westchester seems to be the best choice. There are a lot of nicer homes available there, at prices that actually leave something left over for renovations.

I think your starter buyers are just looking in places other than Manhattan Beach. Most people to can afford to buy in MB at current prices tend to think they have already "made it" and probably want the house to match.

Anonymous said...

Kaye, you are hawking a 2-bdr, 1-ba home as a starter that is almost at ~850-K.

Using 3-4 X income, you would need a "starter" family making 212-283-K per year.

Good luck with that.

Price on this as a "starter" home is just embarassing and will not fly.

It did kind of make sense to sell at that price as a tear-down, but a "starter" family pulling in that kind of bread is just going to hold their noses.

Now if this was 450-K, it might start making sense, although I will tell you that people outside of Los Angeles would laugh themselves silly about what idiots we are to waste all our money on mortgage.

By the way, I have two kids. I rent a 2,400 square foot house on a much larger lot for much less than the morgage would be on this houuse.

I would say I am poster child for a "starter house", but the fact is that you can rent much, much better than this for much less money.

Kaye Thomas said...

Anonymous 11:43,
Thanks for another perspective.. I like Westchester.. but the problem there is Westchester is part of LA City School District. For many potential buyers the trade off in price vs private school fees has them returning to the South Bay.

There are a number of places in the South Bay other then MB where you can purchase more and still have good local schools. El Segundo is lovely you just need to find the right spot. Jefferson School in North RB has high SAT scores as do Madison and Lincoln. In South RB Alta Vista is very good and Hermosa has top scores for their elementary schools.

West High area of Torrance is also very nice... but a bit inland.

Most people to can afford to buy in MB at current prices tend to think they have already "made it" and probably want the house to match.

I agree...

Kaye Thomas said...

Anonymous 12:41,

All depends on your view.. for you renting makes sense but not for everyone.

The entry level buyer in MB is making about what you noted. If you are making less then you are probably looking in other cities.

$450,000 was the price 10 years ago.. and many thought it was too high then.. using your same arguments.

Anonymous said...

The days of paying that much money for a dump are over. I don't care
where it is located. The simple truth is the price is going to have to come way down on these types of homes.

Anonymous said...

Hi Kaye, I can find plenty of houses that were ~400-500 in the 1998 time frame that were much better than this housek, including the 2,400 sq ft house that I live in. So I don't think saying "450-K 10 years ago" is a useful data point for this 2-bedroom 1-bath house.

So my point is that you are going to have to find one of the very few people that find value in a 2-bedroom, 1-bath.

Or someone that thinks it has potential. Most people want 3-bedroom, 2-bath in a starter home these days. To expand that to the 3-bedroom, 2-bath, what is the delta in price? If it is 200-K (I don't know), is there a house in trees listed for 1.15-M which would serve as a substitute? That would have more value to me than purchasing this house.

Who else would buy it? My guess is that this property is most suitable as a teardown or a rental. As a rental, I would guess this house would pull in ~2,400/month. Certainly does not come close to cash-flowing at 850-K....doesn't cash flow at 450-K, either.

Kaye Thomas said...

Anonymous 2:19 and Anonymous 4:28,
Don't know if you are the same person or two different posters...The nice thing about real estate is that everyone has an opinion and that opinion is what determines whether you choose to buy a property or rent a property. There is no right or wrong here.. just an opinion.

Below are sales from the MLS from 1998 in the tree section.



S141393 03/19/1998 3604 Laurel Manhattan Beac 800 2 1.00 1948 $395,000

S143471 04/30/1998 3412 Elm Manhattan Beac 846 2 1.00 1950 $399,000

S151635 10/02/1998 1308 Walnut Manhattan Beac 913 2 1.00 $400,000

S152087 10/15/1998 733 35Th Manhattan Beac 800 2 1.00 1949 $405,000

S145639 07/23/1998 2304 Oak Manhattan Beac 1,124 2 1.00 1946 $419,000

S145260 05/28/1998 3108 Pacific Manhattan Beac 794 2 1.00 1952 $420,000

S154054 12/10/1998 1605 Elm Manhattan Beac 794 2 1.00 1952 $420,000

S153108 11/08/1998 1409 Oak Manhattan Beac 1,100 2 2.00 1924 $430,000

S145327 06/05/1998 2619 Laurel Manhattan Beac 880 2 1.00 1953 $445,500

S139991 02/12/1998 2205 Walnut Manhattan Beac 975 2 1.00 1951 $455,000

S149047 09/01/1998 2600 N Poinsettia Manhattan Beac 866 2 1.00 1952 $455,000

S153878 11/24/1998 1312 Elm Manhattan Beac 1,068 2 1.00 1951 $456,000

S149006 09/30/1998 632 30Th Manhattan Beac 1,139 2 1.00 1947 $470,000

S146630 08/18/1998 3409 Maple Manhattan Beac 1,256 2 2.00 1950 $489,000

Anonymous said...

Kaye

This is anon 2:19. My point is when prices come down you will be able to use the term starter home again and make the sell. My first apartment in college was nicer than this house that is priced at nearly 1M. These prices are crazy and sellers are going to have to wake up and accept that. It will be interesting to see what the final sale price is. Good luck.

Anonymous said...

c'mon kaye, put the square footage. I'll be happy to find you some walkstreet houses in the same time frame for about the same price if you like.

Kaye Thomas said...

Anonymous 8:21,
Yes it will be interesting to see what the final price is.. but it's not just my listing.. if you look at the list there are a number of homes in East MB.

One of the things we will find out is how much of the lower market has been driven by builders buying to build new homes.

Kaye Thomas said...

Anonymous 8:39,
Now you know I would show square feet....
Sq ft is right after Manhattan beac in the properties.. EX:

#1 is 800 sqft
#2 is 846 sqft
#3 is 913 sqft
#4 is 800 sqft
#5 is 1124 sqft
#6 is 794 sqft

I highlighted/copy and pasted so it was not as clear as it could be..

Anonymous said...

hi kaye,

long time reader here. i think anon 8:28 was talking about lot size...that is what is missing to really do a comparison.
i think it is great that you are discussing this as i think topic shines the light on what is going on in the market.
i am curious as to who the starter home buyers that make 250Kish are? are they the same people who bought 10 years ago? it seems to me the profile of this buyer had more money ten years ago than the original buyers you mentioned. correct me if i'm wrong, but i don't think the buyers' salaries doubled in that time.
now don't get me wrong, i love living at the beach, as most people here do and will pay a premium for it. i also love the south bay and have lived in manhattan beach, hermosa, and redondo beach. i even went to mira costa high school. i just don't think, as lovely & wonderful as manhattan beach is, that it is an international destination like beverly hills, bel air, and malibu where people will run over each other to buy any piece of land so they can say they live there. i know so many people who's lives revolve around that beverly hills address. mb does not have world class shopping & restaurants. it does have decent public schools, some beautiful houses, nice streets, and laid back people. i just think people are now looking for value than "just let me buy a house! anything will do".
also, as a first time buyer, i think there is a limit to "location, location, location appreciation". what i mean to say is, if i see that the seller bought this house in 2005 for $450K (just making up this figure) & is selling for $850K and has not done one thing to upgrade the house besides paint & stage it, i think that is a little greedy. unless we are talking about a unique house (noted architect, special architecture). as a business owner and manufacturer i believe in "what the market will bear" as well so i don't fault sellers for "trying to get top dollar". however, in my business, if someone comes to the market with a dress made of organic silk no one else has the can get top dollar. when everyone else finds that silk and floods the market with new dresses, the original dress is not as valuable. do we try to create spin to keep the original dresses price inflated? sure. do we sometimes lower the price of the dress to match where the market is going. yes, and we have built in margins so we are still making money-just like some of these sellers that paid
450K for their homes and are now selling them for a reduced price of 850K. do we sometimes sell the dresses at a break even or loss? sure, we need to get rid of the inventory & create some cash flow. do we say "oh my goodness! what is wrong with these buyers? they don't want to pay these high silk prices anymore-I can't get my 300%markup (in clothing you'd be lucky to get 60%)anymore. there must be something wrong with these people that they are not seeing the value in these dresses!" not really. we just move on. if people see value in something and it is affordable to them and makes sense, it will sell.
i have to respectfully disagree with you and point out the problem that no one really wants to address and that is the "value" of these homes have declined and are no longer seen as affordable in any sense of the word.
i welcome your comments!

Thanks

Kaye Thomas said...

Anonymous 1:18 am,
You raise some interesting points which I will attempt to answer..
As to lot sq ft .. these are all typical Tree section lots. With the change over to the new MLS.. there isn't a stat report any longer that seems to cover everything as the other system did.. that said I will get the info and post it later today.

A typical starter home buyer in MB is usually married and both work. One could be an engineer and the other spouse an attorney, or own their own business, work in the entertainment industry, work in a Wall Street related business.. lots of choices.

10 years ago.. again usually a married couple but typically one of the spouses may have taught school or worked in City or state government related employment and the other at one of the aerospace companies or in the computer field. The occupations of starter buyers in MB have definitely changed along with their income levels. The reality is that a salary of $200,000 usually means you may be buying a townhome in North or South RB rather then a home in MB.

The fact is that location, location, location is still a major factor in making a real estate decision. Long time residents of the Beach Cities may be fine with any of our little communities but there are a lot of people who will only live in MB. They will rent if they either can't afford to buy or choose not to buy at this time.

The demographics of the South Bay are changing and no where is that more evident then in Manhattan Beach. There was a front page article in the LA Times yesterday about Malibu Rentals for $150,000 a Month .. Toward the end of the article there was a question posed about possible changes in laws governing big parties by the Malibu City Council. The South Bay Beach Cities were noted as the probable destination of the big company parties if they had problems throwing client parties.

They might find more problems then anticipated should these bashes try and relocate to our towns but the fact that we are the next logical place for the rich and famous to meet and greet should give us all a little pause.

Our quaint little beach towns are changing. Trying or hoping to buy a home at the price levels of 10 years ago just isn't going to happen. Real Estate prices have definitely softened in the last two years but they haven't crashed and are not likely to do so. We are not recession proof but neither are we facing the housing crash found in the Inland Empire.

What that means is that if you make $xxxx and want to buy then you may have to decide whether you would rather have a larger newer townhome in either Hermosa, North or South Redondo or settle for one of these smaller homes or a bit larger townhome in MB at a similar price.

I'm not sure that the "value" of these homes has changed that much on a percentage basis. What may have changed is the "value" of the income people are making. The truth is that $200,000 just isn't that much money anymore in the LA area. In North Carolina... yes.... In MB.. not so much.

Anonymous said...

Only a real estate agent could come up with that!!

Anonymous said...

Kaye, I think you need to get out more to get a little broader perspective. 200-K is a LOT in Los Angeles. Check out MB median incomes with it's bi-modal distribution.....200-K is a DECENT amount in MB.

Prices got out of whack with incomes across the entire country, simple as that.

There is not a loan problem right now (standards are tightening back up to where they should be), but rather a price problem.

These lower-end houses are very inflated in price, the builders are not buying them anymore as teardowns (which should be a sign that they expect a big decline). They don't cashflow, so no sane landlord would buy them.

That probably leaves pre-kid couples (maybe late twenties), or maybe couples that don't plan on ever having kids. Pre-kid couples are at the lower end of the spectrum for salary, and there are not that many older no-kid couples.

I submit that if you want to price Poinsetta to sell, you'd better figure out the demographic that wants to buy it and how much they make.