My friend Tom Johnson is one of the shrewdest people I know, a smart investor, and very good with money. We've discussed the RE bubble quite a bit, while following and speculating in the torrid bear equities market.
Tom has spent some time digging around in the data-porn of Zillow, combing through the wreckage of Las Vegas, and he sends us these notes.
Of course, no post in Deflation Land is complete without a pic, and Tom didn't provide any. So I'm including the final, climactic photo from my Easter walk in the rain to Everett. Enjoy!
How bad is it in Las Vegas?
Let’s look at the micro, instead of the macro.
Right now, the magic number seems to be $150,000. That’s what it takes to sell a house in Vegas. Let’s look at a typical house for sale for that price in Henderson, Nevada, perhaps the nicest part of the valley.
122 BOYSENBERRY LN - $149,900
This was likely just reduced, as Zillow lists the property for sale at $179,500.
The house is now bank owned, and the sale history goes like this: $73,350 in ’98, $220,000 in ’06, $189,385 in ’07 when the bank took posession. Zillow puts the peak value of the house at $260,000 or so, in March of ’06 (approx.) so the previous owners bought very close to the top. For whatever reason, the bank now owns the house.
Now let’s look at the neighborhood.
The house immediately to the north sold in ’06 for $208,500. In ’98, it sold for $107,000. Let’s use that as a baseline: let’s assume that in ’98 the house was worth 30% more, and it is today. That puts the value today at $217,500, not too far off of the Zillow guess of $230,000.
Let’s look at the house to the south. It’s on a smaller lot. It sold for $92,500 in ’98, which agrees with the quick assessment. If the house to the north is worth $150,000 then their house must be worth less than that. Let’s assume it’s worth the same - $150,000.
Zillow says it’s worth $219,500, or 46% higher than it’s likely worth.
Let’s look at the next house down, the same size lot. Zillow thinks this one is worth $199,000. It last sold for $245,000 in 2006, at the peak. So the owners are underwater. The question is, how much?
Assuming the same price as the houses for sale on the block, we can figure that they are approximately $95,000 underwater on the house, not the $46,000 that Zillow suggests.
Let’s look at the next one – sold in ’05 for $250,000. Zillow thinks it’s worth 207,500. So again, according to Zillow, underwater by 42,500. According to the market, closer to $100,000.
The next one – sold for $112,000 in ’99. So, of the 5 houses we’ve looked at so far, this is only the 2nd that has positive equity. Figure it is also worth around $150,000.
At the end of the block, we see another listed from Windermere at $150,000. It too was listed for sale at $184,900 and didn’t sell. Sold in ’06 for $250,000.
So on this single block, we have positive equity of about $90,000 and negative equity of around $400,000.
Much of this debt hasn’t been reflected in the official numbers, and with the January sales hitting Zillow, their estimates are reflective of those dire numbers (down almost 20% January year-on-year.)
That is to say, the decline from January to March, in my estimation, has equalled that of the decline so far, in absolute terms. In percentage terms, it’s EVEN HIGHER.
It’s getting worse, not better in Las Vegas. How low can it go?
Keep in mind, that these two houses were listed at higher prices for two months (since January) at prices at least 10% lower than Zillow’s estimates. And they didn’t sell. So at the very least, the Zillow estimates for Las Vegas right now are 10% too high for two months ago. Look at a map, and calculate the lost equity that isn’t reflected in owners’ hearts and minds, and then ask what they will feel when their $220,000 suburban house reverts back to a value of $150,000 or less. What happens then? Will people be more or less likely to pay off loans that were taken out at the peak?
All of this bad debt has yet to be written off. It’s coming.
Let’s look at the micro, instead of the macro.
Right now, the magic number seems to be $150,000. That’s what it takes to sell a house in Vegas. Let’s look at a typical house for sale for that price in Henderson, Nevada, perhaps the nicest part of the valley.
122 BOYSENBERRY LN - $149,900
This was likely just reduced, as Zillow lists the property for sale at $179,500.
The house is now bank owned, and the sale history goes like this: $73,350 in ’98, $220,000 in ’06, $189,385 in ’07 when the bank took posession. Zillow puts the peak value of the house at $260,000 or so, in March of ’06 (approx.) so the previous owners bought very close to the top. For whatever reason, the bank now owns the house.
Now let’s look at the neighborhood.
The house immediately to the north sold in ’06 for $208,500. In ’98, it sold for $107,000. Let’s use that as a baseline: let’s assume that in ’98 the house was worth 30% more, and it is today. That puts the value today at $217,500, not too far off of the Zillow guess of $230,000.
Let’s look at the house to the south. It’s on a smaller lot. It sold for $92,500 in ’98, which agrees with the quick assessment. If the house to the north is worth $150,000 then their house must be worth less than that. Let’s assume it’s worth the same - $150,000.
Zillow says it’s worth $219,500, or 46% higher than it’s likely worth.
Let’s look at the next house down, the same size lot. Zillow thinks this one is worth $199,000. It last sold for $245,000 in 2006, at the peak. So the owners are underwater. The question is, how much?
Assuming the same price as the houses for sale on the block, we can figure that they are approximately $95,000 underwater on the house, not the $46,000 that Zillow suggests.
Let’s look at the next one – sold in ’05 for $250,000. Zillow thinks it’s worth 207,500. So again, according to Zillow, underwater by 42,500. According to the market, closer to $100,000.
The next one – sold for $112,000 in ’99. So, of the 5 houses we’ve looked at so far, this is only the 2nd that has positive equity. Figure it is also worth around $150,000.
At the end of the block, we see another listed from Windermere at $150,000. It too was listed for sale at $184,900 and didn’t sell. Sold in ’06 for $250,000.
So on this single block, we have positive equity of about $90,000 and negative equity of around $400,000.
Much of this debt hasn’t been reflected in the official numbers, and with the January sales hitting Zillow, their estimates are reflective of those dire numbers (down almost 20% January year-on-year.)
That is to say, the decline from January to March, in my estimation, has equalled that of the decline so far, in absolute terms. In percentage terms, it’s EVEN HIGHER.
It’s getting worse, not better in Las Vegas. How low can it go?
Keep in mind, that these two houses were listed at higher prices for two months (since January) at prices at least 10% lower than Zillow’s estimates. And they didn’t sell. So at the very least, the Zillow estimates for Las Vegas right now are 10% too high for two months ago. Look at a map, and calculate the lost equity that isn’t reflected in owners’ hearts and minds, and then ask what they will feel when their $220,000 suburban house reverts back to a value of $150,000 or less. What happens then? Will people be more or less likely to pay off loans that were taken out at the peak?
All of this bad debt has yet to be written off. It’s coming.
1 comment:
Just a little comment from Sacramento ... My recent experience with Zillow shows Zillow including the foreclosure sale from the borrower to the bank, as "a sale." Because the "price" for this sale is what is owed to the bank, the number is much higher than the market price. Assuming that Zillow uses this "sale" as a comp, it would explain to me why Zillow's Sacramento "values" are so much greater than the current market prices.
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