The real estate market has been in a tailspin since the end of 2007. You would think that 4 years of turmoil would bring back some sort of normalcy to market forces, and certainly would indicate favor for the real estate "buy-side" transaction, be it either a potential buyer or tenant. But oh, how out-of touch and in denial those folks are! Either from using the house like an ATM, buying the "dream home" at the height of the market, listening to the idiotic Realtor commercials telling people that these past 3 years have been the "best time to buy," or investing in an over-leveraged REIT or commercial property venture and expecting a nearly 10% return when rents have only fallen in the last 3 years.
Let's take Long Beach for example. It's been the latest area of real estate analysis for me personally, as this is where I'm looking to relocate. Forget the fact that both my wife and I have degrees in higher education (the wife even has a doctorate) and that it is a complete head-scratcher as to why a married couple making a comfortable six figure household income can't afford to buy an SFR with a yard. Not something huge even, just a 3x2 of maybe 1,400-1,600sqft in a neighborhood that I'm not going to get shot at.
Instead, let's focus on the obvious. Even though HOA fees for condos are absolutely absurd in most desirable areas of Southern California, prices are almost in the ballpark of what would equate to a reasonable housing payment (I say housing to include P&I, taxes, insurance, and HOA fees), meaning approximately $2,000 for a 2-3 bedroom with at least 2 bathrooms and at least 1,200sqft. As the price of a condo will be affected in direct proportion to the HOA fees, let's explore as to why they are so damn ridiculous these days.
First and foremost, HOA fees are elevated to unreasonable levels due to the sheer cost of the projects that they undertook during the housing bubble that bred so much greed. Land prices became inflated, and prices for construction materials were elevated. Add $ to the new condo project, and a higher $ amount to reach the % threshold promised to investors. On top of that, many of the REITS and commercial property ventures assumed that by adding "luxury amenities" that they could see a premium to their return. Granite countertops, overdone common areas, in-house fitness centers and poolside amenities were used to justify even more exorbitant prices. There were two things wrong with this strategy; the overdone common areas have gotten extremely little to no use, rendering their value questionable, and many former 'luxury' items such as granite countertops are no longer scarce enough to warrant price premiums. Add to that the fact tha the REITS funded the properties with as high of a leverage as possible (typically 70% LTV) and have historically been complete failures when it comes to projecting upkeep costs to maintain as reserves, and it's not hard to see why REITS like Archstone are still trying to charge $2,000/month for a plain vanilla 2x2.
Not that the land-lease REITS are any better. For instance, HOA fees along Ocean Blvd. are all $700/month+. I suppose I can understand that amount for the residents on the top few floors with ocean views, but for the rest, the residents are paying for the land owners' poor investment decisions. Still, even though HOA dues are $600/month at the Promenade, prices for 3x3 condos in the building have come down close enough that a total housing payment would be about $2,200. Note to Archstone: I belive that your claim of 94% occupancy to be a bold-faced lie, solely based on the prior calculation alone. And there are a few other 2 and 3 bedroom places available in Bluff Heights and Belmont Heights that are also in the $300,000's....and this is near the beach, people! So, prices are slowly coming back to reality-- enough for someone like me, who's sick of paying rent, to take notice.
But the sellers....oh, the sellers. Let's take one of the Promenade units for example. It originally sold in Feb 2008 for 285K. Perfectly reasonable. It sold in May 2008 for 505K (I'd like to meet that idiot and laugh). It has since been listed in early 2011 and been slightly reduced on a regular basis ever since. Now, I'd be happy to pay more than 285K for this place, but one absolutely cannot ignore that original sale price and can almost be certain that the value will dip very close to that original price before the real estate market truly hits bottom. That's right; no matter how much white noise you've heard on the news or read on the internets, the housing market has not yet bottomed. In fact, it will not reach bottom until interest rates have been rising for a good 3-6 months and investors can properly assess Cap rates on multi-family and SFR markets.
So in summation, sellers be ready to make some more concessions, because as the prices fall on condos, that will permeate to SFR's and then to multi-family rentals. Take your hit now and let the buyer dictate at which point they are ready to assume the further market losses. Today's market value won't be tomorrow's, so don't think the ball is in your court just becasue you hold the asset.
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