The median sales price is a reasonable measure of property values in a market; however, (1) the S&P/Case-Shiller Home Price Index is superior for tracking relative price change and market price direction, and (2) cost per-square-foot is superior for determining what was obtained for the money spent.

Irvine Home Address … 99 Alberti Aisle 320 Irvine, CA 92614
Resale Home Price …… $239,900

And the years rolled slowly past
And I found myself alone
Surrounded by strangers I thought were my friends
I found myself further and further from my home
And I guess I lost my way
There were oh so many roads
I was living to run and running to live
Never worried about paying or even how much I owed

Against the wind
A little something against the wind
I found myself seeking shelter
Against the wind

Against The Wind — Bob Seger

The median sales prices does not give any indication of what was obtained for the money spent. Median prices may be flat while people are either getting more for their money or settling for less. Also, the median sales price when charted over time occasionally gives false signals when prices appear to be moving on one direction when the prices of individual properties in the market are moving another. To deal with these problems with the median, alternate measures of pricing are used.

Cost Per-Square-Foot

Many data reporting services measure, record, and report the average
sales cost on a per-square-foot basis to address the problem of
evaluating what buyers are getting for their money. For instance, in a
declining market if people start buying much larger homes at the limit
of affordability, the generic median sales price would remain
unchanged, but since buyers are getting much larger homes for the same
money, the average cost per-square-foot would decline accordingly. This
makes the average cost per-square-foot a superior measure for capturing
qualitative changes in house prices; however, this method of
measurement does not capture the relative quality of the square footage
purchased, only the price paid for it. High quality finishes may
justify a higher price per square foot. There is no way to objectively
evaluate the impact finish quality has on home prices. The main
problems with using the average cost per-square-foot to measure price
is that it does not provide a number comparable to sales prices since
it has been divided by square feet, and it is not widely measured and
reported.

S&P/Case-Shiller Home Price Index

To address some of the weaknesses of the generic median sales price
as a measure of market value, Karl Case and Robert Shiller developed
the Case-Shiller indices for measuring market trends. This index
measures the change in price of repeat sales. It solves the dilemma of
pricing like-kind properties–almost. Although these indices capture the
price movements of individual properties far better than the generic
median sales price, it does not take into account value added through
renovation and improvement. To address this issue, the index gives less
weight to extreme price changes assuming the outlier is a significant
renovation. However, if there is a market-wide renovation of
properties, as was the case in many markets during the Great Housing
Bubble; this will cause a distortion in the index.

National S&P/Case-Shiller Home Price Index, 1987-2007

The other weaknesses
of the Case Shiller indices concern how and where it is reported. Since
it is an index of relative price change rather than a direct measure of
price, the index is reported as an arbitrary number based on a baseline
date; therefore, the numbers are not useful for evaluating current
pricing. The index is also confined to 20 large metropolitan areas
around the United States. The large geographical coverage areas are
required to obtain enough repeat sales to construct a smooth index. The
broad yet limited geographical coverage fails to capture price changes
in smaller markets. Also, since the Case-Shiller index is a measure of
changes in prices of sales of the same home, it does not include any
newly constructed homes. No measure is perfect, but the Case-Shiller
index is the best at measuring historic movements in pricing because
its methodology is focused on repeat sales of the same property.

Los Angeles S&P/Case-Shiller Index, 1987-2007

{book}

The Great Housing Bubble was an asset bubble of unprecedented
proportions. Between 2000 and 2006, home prices increased 45%
nationally, and in California home prices increased 135%. [iv] Had this
amazing price increase coincided with a period of high inflation, it
may not have been indicative of a price bubble, merely the general
increase in prices of all goods and services; however, inflation was
low during this period. The inflation adjusted price increases
nationwide were 23% and in California it was 100%. There was no great
improvement in the quality of houses justifying the higher prices.
Although some homeowners made cosmetic improvements, the vast majority
of homes were unchanged during this period, and many deteriorated with
age. Resale homes did not undergo any form of manufacturing process
where value was added to the final product. There was little real
wealth created during the bubble, just a temporary exaggeration of
value.

Irvine Home Address … 99 Alberti Aisle 320 Irvine, CA 92614

Resale Home Price … $239,900

Income Requirement ……. $44,154
Downpayment Needed … $47,980

Home Purchase Price … $255,000
Home Purchase Date …. 10/29/2003

Net Gain (Loss) ………. $(29,494)
Percent Change ………. -5.9%
Annual Appreciation … -1.0%

Monthly Mortgage Payment … $1,030
Monthly Cash Outlays ………… $1,410
Monthly Cost of Ownership … $1,070

Redfin Property Details for 99 Alberti Aisle 320 Irvine, CA 92614

Beds 1
Baths 1 bath
Size 728 sq ft
($330 / sq ft)
Lot Size n/a
Year Built 1989
Days on Market 1
Listing Updated 10/8/2009
MLS Number P706322
Property Type Condominium, Residential
Community Westpark
Tract Ti

According to the listing agent, this listing is a bank owned (foreclosed) property.

Bright, one bedroom one bath, lower unit in great location. Kitchen has tile counters, wood/laminate cabinets and breakfast bar; spacious living room with window shutters; bedroom with walk-in closet; bathroom has tile flooring and fiberglass shower enclosure; washer/dryer connections located at front courtyard closet. Great for individual, new couple or investor. Close to schools and shopping centers.

Today’s featured property is a 2003 rollback. It was originally purchased with 100% financing on 10/29/2003. The owners later expanded their $51,000 second mortgage by opening a $271,200 HELOC and a $67,800 HELOC. Their total property debt was $543,000, and mortgage equity withdrawal was $339,000. The lender is actually losing about $350,000.

The people who bought in The Plaza are taking full advantage of their Scholarship to the School of Hard Knocks.

Asking Price: $702,900
Address: 8089 Scholarship Irvine, CA 92612

Run and tell all of the angels
This could take all night
Think I need a devil to help me
Get things right

Im looking to the sky to save me
Looking for a sign of life
Looking for something help me burn out bright

Learn To Fly — Foo Fighters

Looking to the sky to save the values in the towers on Jamboree? I don’t think there will be pennies from Heaven — dollars from Washington maybe — but the market for these units will continue to crumble. I first documented the problems in The Plaza in the post, School of Hard Knocks.

The owner of today’s featured property is learning a tough lesson as well. When the foreclosure went through, he lost his $295,600 downpayment. That must have hurt.

Just Say Nothing?

When I wrote last Friday’s post Good Karma, it was astutely pointed out that for every buyer I saved I made life more difficult for a seller. This is true. In my defence, I note that the seller already made their decision when they bought previously. The decision to sell is about mitigating consequences. It is the buyer who is agreeing to take on the consequences of the decision anew, and they deserve good information to make that decision.

Does educating buyers to consequences make it good and right to sellers? It works for me. I will let you decide for yourself. Isn’t choosing to say nothing and failing to help when you can an action for which you must answer to yourself?

The astute observation points to a deeper issue; what should the Cassandra’s of this world do? The School of Hard Knocks is expensive education. Would you dissuade buyers if you thought they were making a mistake?

I received the following from an anonymous reader:

Hello IHB,

I’m a renter in the Bay Area. One of my coworkers recently announced he was going to buy a condo. It’s a new building, just recently thrown up, and he announced he was purchasing a unit, 1300 sq ft, a one car garage and a patio big enough for 2 chairs and no bbq allowed (but it’s got granite and stainless!) for the low low price of $400K.

I lived in this neighborhood for 2 years until last May. It’s awful. the 7-11 across the street routinely has vagrants drinking and sleeping in the parking lot. There is a light rail track that constantly stops traffic. And, as it turns out, the condo building is across the street from a halfway house where the state of California releases mentally challenged inmates that cannot be reintroduced directly into the community. The police used my driveway twice to conduct searches of cars they pulled over because they knew that we were not violent criminals and felt safe about using our space. My neighbor was attacked in broad daylight and his truck was stolen. Someone pulled a gun on my other neighbor at 7:30 AM, but then ran away, and the police assured us it was a mistake and the gang bangers had the wrong house (Oh, you mean they could have accidentally come to my house?)

My point/ question is, that when someone announces that they’re going to be homeowners, and especially first time homeowners, everyone oohs and aahs and congratulates and smiles. I was the only one who did not. I asked a coworker if it’s proper for me to pull him aside and think long and hard and tell him my experiences in that neighborhood. Everyone, including my mother, told me that would be rude and that it’s absolutely not my place to do so.

Anyway, on the day they signed the papers, they discovered the halfway house for mental inmates, which was buried in flowery language somewhere in the CC&R’s, and their second night their garage was broken into and all of my coworker’s prized musical instruments and lots of personal effects like good winter jackets, etc. were stolen.

I have also had other friends buy pointless, horrible property in other places and one has chosen foreclosure and walked away to live with her parents, destroying her and her husband’s credit for years after the condo they bought for $450 was appraised in the low 200s. Another is having their marriage dissolve after the wife nagged the husband into buying a house in a highly overinflated area at the peak, where the house has lost 50% of its value.

When is it proper for someone to speak up and stop the madness? Had I had the balls to tell my coworker not to buy there, I might be an a-hole raining on his parade, but he wouldn’t have lost $10K in musical instruments and be living across from a minimum security psych ward. Was I wrong not to speak up, put a fake smile on and congratulate?

How would you deal with this situation?

Asking Price: $702,900

Income Requirement: $133,078
Downpayment Needed: $140,580

Purchase Price: $1,182,000
Purchase Date: 2/28/2007

Gain (Loss) after 6% Commission: -$521,274
Percent Change: -40.5%
Annualized Return: -16%

Address: 8089 Scholarship Irvine, CA 92612

Beds: 2
Baths: 3
Sq. Ft.: 1,790
$/Sq. Ft.: $393
Lot Size: –
Property Type: Condominium
Style: Other
Stories: 1
Floor: 8
View: City Lights, Mountain, Panoramic
Year Built: 2007
Community: Airport Area
County: Orange
MLS#: S588594
Source: SoCalMLS
Status: Active
On Redfin: 3 day

Super mountain, city lights and horizon views! Corner unit featuring a grand foyer and gallery. The kitchen has granite countertops, Viking appliances and beautiful cabinets. Floor to ceiling windows and wrap around balcony. Wood flooring throughout most of the unit, carpeting in the bedrooms. Fireplace in the living room. The building has a lobby entrance, two pools, jacuzzi, conference room, gym and more. On-site management.

They didn’t waste much time foreclosing on this guy.

Foreclosure Record
Recording Date: 04/17/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000189064

Foreclosure Record
Recording Date: 12/26/2008
Document Type: Notice of Default
Document #: 2008000590159

It looks like he gave up about a year ago. It must have been tough to accept that he lost almost $300,000 in 18 months.