The L.A. Times had a headline article in the Sunday Real Estate section called “Meet the Flockers.” The article implies that the current market is a combination of behavioral economics, speculation, and mass psychology. All of a sudden those loony-fringe housing blogs seem to have some credence in the mainstream media. The article simply goes on to state the obvious; sellers are holding to their guns while more and more buyers sit on the fence. Yet the main point is that it was a cover story with a picture of sheep! Did I say sheep? Yup, no where in the article do they talk about sheep being led to the slaughter but the implication was clearer than a sunny Southern California day. The article doesn’t highlight any Earth shattering stats or figures that we have not already heard but it does show a change in mainstream media sentiment. Since the year-on-year median home price have fallen 9.6 percent nationwide many are raising an eyebrow and finally taking notice; think of being at a party and seeing uncle Jim hitting the Vodka one too many times and falling over destroying the porcelain vase.
In the same real estate section yesterday, there was an ad from Quicken Loans with a headline stating “Refinance before your rate adjusts!” Too bad the ad was for an option ARM with negative amortization. But this again hits at the core of those clueless of things in finance. In the fine print they give the hypothetical scenario of a $300,000 loan:
Starting rate: $875
After 53 months: $1600
After 5 years: $2,400
Besides the fact that the rate doubles in less than five years and that the rate automatically fully amortizes after the loan grows 10 percent this is a great loan! I’m only giving quick numbers to demonstrate how ridiculous this has gotten. This ad is like me saying “hey, I’m sorry that they screwed you with that used car of yours, but I have a great Ford Pinto I would like to sell you.” It is the equivalent of you taking ten dollars from your left pocket and shifting it to your right pocket and feeling richer for it.
Many folks think that everyone is jumping in buy using exotic financing. To be honest, the only way to make the monthly payments manageable is exotic financing but this hasn’t always been the trend. Let us take a look at one zip code in Irvine, 92602. You can just as easily choose any zip code in Southern California since the same data will show up.
Assets & Debt/Household
Median Net Worth: $65,251
Average Net Worth: $210,958
Median Home Equity: $139,645
Median Mortgage Debt: $62,293
As you can see from the above data, the average household only has a median mortgage debt of $62,293. Keep in mind this is an area that is well beyond the average median of homes in most of Southern California. Any person that has purchased a home in the last three years is clearly beyond this median. The point being, many sheep have been led to the slaughter. The reset time bomb is set to go off in 2007. 2006 lemmings still had a chance to refinance because we were still riding the last wave of the housing binge party (as highlighted by that Quicken Loan offer/guillotine). But looking at the above stats provided by ZipRealty, we can clearly see that the last few years are atypical behavior. The above stats tell us that net worth and equity were built by having little debt and building up home equity. These sound like foreign recommendations in the current market but little by little sanity is shining through.