The Ultimate Home Buyers Guide. 6 Critical Sites for Researching Your Next Home.

My sentiments regarding the current housing market are very clear. Do not buy in overpriced metropolitan areas. However, there are many of you out there that are ready to buy and plan on staying in a place for multiple years. If you have already committed to taking this plunge, there are a few absolute must websites that you will need to checkout before signing those closing documents. Let us begin with our top six sites:

#1 – www.zillow.com

Although Zillow may not be the most accurate tool for researching homes in tanking markets, it is an absolute must for any real estate buyer. Prior to Zillow, you would need to go to an individual County archives or website to research and dig up previous sales data. With Zillow, all you need is an address and a zip code. In addition, you can view recent sales in the neighborhood and price accordingly. A good measure is finding out the average price per square foot. Not all homes have previous sales data because owners may have bought before accurate records were available. In all my investing and researching I have found that Zillow goes back to 1992 with pretty good accuracy. There is also a “make me move” feature which current owners can name their price on moving; if anything it is amazing to see delusional pipe dream prices.

#2 – www.trulia.com

Another excellent site that can give you information regarding a specific community. Is this community hot? What is the median price for 90210? What is the average sales price in said community? Trulia is a great resource that allows you to view “heat maps” of certain regions. This is useful in seeing whether a community is isolated in appreciation growth or is common to the region. The color coding and mapping make this a must for visual folks who tire out by looking at Census data and rather see a mapped out representation of that data.

#3 - www.realtor.com

What is this? I’m actually recommending a realtor website? Well yes because the MLS is still primarily in the domain of a few folks and you need this information to make accurate assessments of a piece of real estate. One of the best features is searching for rentals via the zipcode function. If anything, the rental market should reflect a semblance of the price you are willing to pay for the home. Search first with homes for sale and then for rentals. Since pretty much most homes are reflected here you’ll get a good idea of what price you should expect to pay and also whether the market is overpriced.

#4 – www.craigslist.com

Craigslist is a fabulous site. I’ve found great deals on absolutely everything here. From rentals in foreign countries to great sporting tickets. But this is also a fantastic place to get real estate information. Just like realtor.com you can search for rentals and homes for sale. If anything, take this information as a quick slice of the market. Many investors post their rentals on here so you can gage by the language of the post whether the market is hot or not. In cold markets you may see wording such as “no deposit” or “free months rent.” These are key insights into a market you may be unfamiliar with. In addition you get a slice of the market that is hardcore for sale by owner. These folks don’t want to deal with traditional avenues of marketing their property and go straight to the consumer, you.

#5 – Google Maps

Do you ever wonder if you’re buying near power lines? Maybe a nuclear plant is in your backyard. Maybe your home is next to the 5 freeway. How would you know by simply looking at a snapshot of the house from the front. Google Maps is an amazing tool that you’ve probably used multiple times. It is amazing how many people I know that didn’t realize they were buying a property near a jail, freeway, school, etc. There is no reason for you not to know this. In addition, you can download Google Earth for your desktop and attach specific filters that highlight businesses, museums, and other key artifacts. There is no reason you shouldn’t spend a few hours looking at the geography of the area you are putting $500,000 on.

#6 – Census.gov

How much do people earn in a certain area? What is the crime rate? Do most people in this neighborhood have high school degrees? What is the vacancy rate? You’ll be surprised how much information you can find at the Census website. I’m a firm believer that the people that inhabit the area have a lot to do with long-term appreciation and rental cash-flow if you are an investor. It only takes a few hours but you can get a full understanding of the area you are going into. I’m not saying become and geographic systems expert but at least what you are buying into. You can even get net migration figures for areas. Amazing what is available to you online for free.

In conclusion I would say that these are 6 key sites in researching your future purchase. This goes without saying that you should also hire a competent inspector and get an unbiased appraisal. Have a real estate attorney look over your closing documents. If only a larger portion of folks buying homes took their mortgage papers to real estate attorneys we wouldn’t be in the mess we are in.

My sentiments on housing still remain; do not buy in high priced areas. This goes for pretty much all of Southern and Northern California. If you feel the itch to buy and have a comfortable down payment lock it into a 1 year CD. If you still have that itch in April of 2008 go for it and drop your money into the home after careful research. Afterall, where is that home going that you are in such a rush? They’re not making any more land but they’re not making anymore Beta machines either.

Housing Premonition: When You Knew it in Your Gut That Housing is Overpriced.

As we enter the peak political posturing season we are seeing that the subprime debacle may have some teeth with Joe and Susie public. Senator Dodd, who seems to be taking the lead on this economic juggernaut, had this to say regarding the subprime fallout today:

"we need answers very quickly."

He also mentioned that regulators “have been asleep at the switch” and need to enforce the regulations already on the books. This is all well and good but these are things that many bears have been discussing for years and now they need answers quickly? How quickly? By November of 2008 sounds good I would think.

The Chatter Begins

If anything, I’m glad a few politicians are shedding light on this monstrous train that is barreling down to main street USA. But when the talk shifts to bailing folks out that is where I put my foot down. In addition the connotation of all this chatter is that somehow we’ve seen the worse of the subprime implosion. Need I remind folks that the first week in March 2007 was when we had the subprime meltdown spread into Wall Street? Didn’t hear too much complaining in 2004, 2005, or 2006 when even a 102 year old man was able to get a 25 year mortgage. Maybe he can refinance when he is 120 into a 50 year mortgage. This credit bubble epidemic is global and as such will have far reaching ramifications.

Wall Street is Owned by Housing

Notice how intertwined Wall Street has become to housing? Last week sales moderately went up and Wall Street reacted with a positive jump. Yesterday further housing reports show that the market is weakening, today Lennar projects lowered revenues, and the market is down nearly 100 points. Amazing how all the pundits talk about the massively diverse US economy and housing being a tiny sliver of it, so any housing impact will be a drop in the bucket according to their reasoning. This will not happen when consumers, the bulk being the middle class, have most of their net worth tied up directly into housing. The perception of lower housing prices and tighter access on credit does not bode well for a credit addicted American public. Don’t take my word for it. Now that we are set to have $1 trillion in loans reset this year, a pace of approximately $100 billion a month, we are definitely at the behest of the housing market. Taking a play out of the book of the permabull camp we’ve heard such things as “housing never goes down” or “if it goes down it is only temporary” and this had been the case for seven decades. However, we’ve had a national median drop in price; only the first time since 1933 has this ever occurred. No longer is this bubble localized or even tiny in the scope of its impact. Considering that the entire US mortgage market is $6.5 trillion we have a big elephant in the room that is finally being given some attention. The US Mortgage market is larger than the US Treasury market for some perspective. Keep in mind when the NASDAQ fell it lost $9.3 trillion. But again, when we discuss the large scope of the mortgage market we see it spreading into every sector because 98 percent of the population either owns or rents. Not everyone was a dot-com junky and we all know how that played out.


Malcolm Gladwell and Snap Judgments

I’ve been reading Malcolm Gladwell’s book Blink and find amazing correlations to what is occurring in the housing market. The Getty was fooled in the 1980s into purchasing an ancient Kouros (Greek sculptures) because expert scientist were looking too much at the data and not at the overall historical context of the item. Art experts had a gut reaction when they saw the sculpture and knew immediately that something was funny about it. It conjured up a repulsive reaction even though they couldn’t put their finger on it. Was it that it was too perfect? Too great of a find? It was hard for these experts to articulate their feelings but after two years it turns out that they were right, the Getty had been fooled. The ten second visual response was accurate and the 14 months of expert analysis was wrong.

Now what does this have to do with housing? In the beginning a few years ago, many housing bears knew something was going on and we weren’t exactly sure what it was – maybe it was a confluence of many factors but we knew something was up. In the infancy of this bubble we were pushed to the fringe. We would try to explain to our friends and families that something about Collateralized Debt Obligations didn’t sit well with us. We couldn’t justify a 600 square foot home for $300,000 in a bad part of town. And each year, sure as the sun rises, the house would appreciate another 20 percent. We were left with our gut feeling of something being wrong and these folks looked at housing bears as from another planet because at that moment, we were wrong. Any investor will understand how to objectively view an investment no matter what it is. A car company will need a steady income stream and solid leadership. A strong newspaper will need to balance solid editorials with a staff of writers who can simplify complex issues into a front page article. These are givens. But as a society we sometimes dig too deep into the data and forget the overall picture; in this case many bears missed the fact that housing psychology + low regulations + behavioral economics led the way to this housing bubble we are currently in. As we were swimming in our data folks jumped into the game.

We need data all the time but the market doesn’t. However at the end data and facts will win. They always do. There may be a temporary glitch but overall things revert to a steady drumbeat. We need to trust our gut, just like those folks who saw the fake Kourous and knew something was wrong, and believe in our data. Sometimes snap judgments have a profound impact and we should learn to trust them; for example many looking at a condo costing $450,000 knew deep down that something was wrong. Now the facts back that assumption up. I hate to boil it down to common sense but never let these expert pundits guide you off a cliff; just look at yesterday’s housing data and how off these expert economist were. They are economist and not psychologist or computer scientist. Each of us are fallible to other areas of expertise but we need to realize that housing spans into countless areas. Now looking back at many housing bear articles we can chime in and say we had Nostradamus type insight but deep down even our gut was saying “maybe it is different this time, maybe debt is the new gold standard.” At that moment we need to have the courage to go against the grain and stick with our expertise. We live in a country of 70 percent homeowners, I’m included. But this time the homeowners, lenders, agents, and real estate complex all got it wrong. The bill is forth coming.

Real Homes of Genius: Today we Salute you Santa Ana. 498 Square Feet for $440,000, What a Deal!

Today we salute the smallest home ever on Real Homes of Genius. This home spanning out on 498 square feet is located in the gem of Orange County, Santa Ana. Not only does this house convey the essence of living large, but you get two bedrooms and one full bath! Just because they can list this place with a straight face at that price I will take my hat off. The agent states that this place is small but cozy. I think he got that quote directly from a prisoner at Guantanamo Bay. And at $440,000 we are talking about the bargain of the century. You are paying $893/sq.ft on this place because we are talking about the OC here.

But you need to have vision to be something in this world. Look at the picture above. You have all that space to your right hand side via the alley. Imagine what else you can do. You can convert this place into a drive through restaurant and make big money. Cash flow baby! How do I know you can make big money? Well our fruitful agent also tells us that this owner is “very motivated” to sell the place. Well, okay! Time to call New Century Financial and make a deal. Whoops, just did but no one on the other side picked up. Well let us see what other information we can gather on this home since we are so ready to bounce on this place.

Previous sales data reveals:

Sale History
12/15/2004: $323,000

Wow. So in two years we are talking about a tax free gain of $117,000. Not bad at all. Or let us reframe this and say living in this house made the owner $58,500 per year. This is fantabulous since the median income here is $48,200. Again, why work when you can live in your house and outpace all of your neighbors? Making money is as easy as living in your opulent mansion with all the amenities that a sub-500 square foot home can bring.

Today we salute you Santa Ana with our Real Homes of Genius Award.

The Plague of Housing: Why we Will Feel and Be Poorer Because of the Housing Bust.

“You may require payment from a foreigner, but you must cancel any debt your brother owes you.”

Deuteronomy 15:3

Well it appears that Senator Dodd is taking a page right out of the bible. With the recent congressional hearings there is sudden talk about a bailout for many homeowners who over extended themselves. Every financial institution, news outlet, and citizen is wondering how bad will this housing bubble pop. Keep in mind that only a year ago there was serious doubt that a housing bubble even existed. Any housing bear was seen as wearing a tin-foil hat and running around proclaiming concentric circles appeared in the corn fields last night. But now that we are on the verge of having $1 trillion in mortgages reset this year, the only question that remains is how bad is this going to get? Are locusts clouds going to infest the 405 and 10 freeways? This biblical fire and brimstone talk is fun!

One Trillion is A Lot of Bling-Bling

Keep in mind that the subprime market used to represent a very small portion of the market until the last three years. We always hear pundits talking about “well subprime mortgages ALWAYS existed and housing was always fine.” Well yes, but that was before everyone on Wall Street went nutty for Collateralized Debt Obligations. In 2005 and 2006 $1.2 trillion in subprime mortgages were originated, over 21% of the entire mortgage market. Here is a rough breakdown of the share subprime used to comprise of the entire mortgage market:

1994-1998 – Approximately 2 to 4 percent of the total mortgage market
1998 – 2003 – Approximately 5 to 7 percent
2004 – Approximately 13%
2005 and 2006 – Approximately 21%
*source Inside Mortgage Finance

And what 21% means for two years is $1.2 trillion in risky mortgage debt. Now do you understand why the bloodbath has occurred in the subprime market? Not only that, but keep in mind that we have about 21 months where $20 to $30 billion of these notes will be resetting. We’ve just set this train on its tracks and no one is going to get in its way. So what options are available? Refinancing is out of the question because most of these folks couldn’t afford the place with conventional financing. Selling may not work either because many of these people have zero to negative equity and would need to short-sell the house. Holding out? How long can this last when many of these payments will reset and increase payments by 40 to 60 percent. Homeowners will get to choose their poison. Wall Street is like a cougar waiting to bounce on any sign of good news regarding housing because they have so much skin in the game; the Fed kept rates steady therefore Wall Street cheered. Today housing sales modestly went up (although median fell for another consecutive month) and the market cheered. Now looking at the above data, do you think a 3% jump in sales is going to stop this debacle?


More Bills Equals Less Discretionary Income

Now I know what you are saying, “Dr. Housing Bubble, you are such a neg-head permabear. Why are you trying to make me sad?” Yes, I’m the life of any party. Can you imagine spoiling the fun at a cocktail party talking about CDOs and massive resets with folks that made a mint flipping? No worries, I’m happy to collect my funds from shorting the herd and investing against the grain. Bulls make money, bears make money, and pigs get slaughtered.

But let us run a quick hypothetical. From the above analysis we know that many of these folks will try to pony up and make the new higher payments. So if John and Mary Debthead currently have a payment of $1,500 and there payment goes up to $2,000, where does that $500 go in the economy? Instead of John and Mary buying another disposable DVD player they are now facing a squeeze on their discretionary income. This is known as the reverse wealth effect. If you have a fixed payment such as housing eating up a larger portion of your monthly bill you must forgo something.

Now this leads us to the much touted fact that 70% of our economy depends on consumer spending. And considering that our savings rate is negative we do a damn good job spending every penny we got. So even a slight jump of $500 a month on a housing payment, the ramifications millions of times over is large. And we know many folks are facing resets of $1,000 to $2,000 a month.

A simplified equation can look like:

Rates reset = More Money to Home = Less Money on Consumer Goods = Contraction in the Economy

I loved it when Professors would explain stuff like this. It makes such perfect sense and all us in the bear camp saw this subprime “surprise” way in the past.

Bend it Like the Foreigners

Even though my above equation isn’t exactly E=mc squared there is a lot of truth in it. And there is another equation that we will be hearing a lot about:

We buy foreign goods = they buy our bonds = We get goods while they build a trade surplus

Simple right? So how does this look in our society? Just go to Wal-Mart and marvel at the amazing stuff we spend our discretionary money on. Now imagine what will happen to all this stuff when payments jump. You can’t buy something with money you don’t have. And considering the average American has close to $9,000 in credit card debt many are already financially strapped. Remember the market “crash” we had a few weeks ago? Why did this happen? Well one of the main reasons was talk of credit tightening. We’ve gotten to the point in the game were the only way to keep this going is by making money more abundant. But this creates inflation and ties the Feds hands because in order to keep housing going they need to drop rates. But the CPI and PPI, which are horrible indicators anyways, are still showing signs of inflation. Well of course it is! That is exactly what happens when you print too much money. And now we have a mortgage time bomb that will go off at a calculating pace while we head into a recession. Mark these words, there is nothing that will keep us from a recession. The plague is set in stone and the bush is burning, read these things for what they are.

Real Homes of Genius: Today we Salute you Compton. $321,000 for 594 Square Feet! Can You Really Get Two Bedrooms Into That Space?

The REOs are hitting the market and we have a wonderful example in Compton California, the place of great schools and family security. When you think of a home with a white picket fence and Lassie running around doesn’t it conjure up images of Compton? Well today we have a flip or sub-prime that went bad and now the bank has to unload it. But lucky for the bank they have a magnificent mansion, at 594 square feet with 2 bedrooms and 1 bath, you'll have plenty of room to entertain so I'm sure bidders are fighting left and right for this place. As you can see from the picture through the steel fence, there appears to be a garage but the only thing I imagine fitting in there is a Toyota Echo or a Kawasaki motorcycle. Don’t you feel like we are taking a stroll down Rodeo Drive?

The home was originally listed at $330,000 but recently was lowered to $321,000. Maybe this is a fair price considering the previous sales data. Well let us take a look:

Sale History & Tax Info Sale History

02/15/2007: $283,500
05/10/2006: $338,000
09/23/2004: $197,000

In this game of life, we have one winner (the owner in 2004), and two losers the seller in 2006 and the bank who apparently thinks they can get peak 2006 prices. We in bubblelandia know that this ain’t going to happen. No Greenpoint, DiTech, or New Century to fund your housing lunacy. Amazing how the bank using their infinite wisdom looked at previous sales data and figured it would get the peak price simply because someone purchased this home in the past for the same amount. Nope. This place if you go on Craigslist would rent for $975 to $1050 a month. And considering appreciation is going down for the immediate future why in the world would you buy this place at that price? Even the $197,000 seems overpriced for this area and this home. From an investors standpoint this makes no sense at all. But what is the typical family income in the area?

Income
Median Mortgage Debt: $35,094
Average/Household: $45,265
Per Capita: $11,534

At $45,000 median household income people are netting $2,400 to $2,600 a month. Let us run the numbers for a mortgage with 20% down on this place:

Principle and Interest on a 30 year fixed at 6.25% = $1,581.16
Taxes = $333 per month
Downpayment = $64,200

Total Monthly Payment = $1,914

So this family would be spending 73 to 80 percent of their income on housing; and this is considering that they have $64,200 to put down. Oh yes, we housing bears were off base for calling Southern California a housing bubble.

Today we salute you Compton with our Real Homs of Genius Award.

Real Homes of Genius: Today we Salute you Pacoima. Zillow says $457,000 but Listed at $225,000?

Real Homes of Genius: Today we Salute you Pacoima. Zillow says $457,000 but Listed at $225,000? Who Would Have thought 770 Square Feet Would Cause Such a Discrepancy!

It is official. No one knows what the hell is going on with prices in Southern California housing. Why? I present to you exhibit number one in the up and coming city of Pacoima. Today we salute a wonderful 2 bedroom 1 bath home sprawling over 770 square feet of luscious terrain. This place is so magnificent that you can park your entourage of vehicles on the lawn. The place was originally listed at $250,000 but is currently reduced to $225,000. What! $200,000 homes in Southern California? Yes, I know what you are saying, “but Dr. Housing Bubble, this is Southern California, the chosen land and homes do not sell for under $300,000, this is written.” Although what I am presenting may seem like housing blasphemy Zillow is still living in the Wonderland of what use to be Southern California Circa 2005. Let us take a look at what Zillow expects this property to sell for:



Wow, off by $232,000. Bwahahah! Zillow is off the amount of the home. Maybe they need to tweak their algorithm a bit for prime cities like Pacoima and Compton. Let us dig into tax records and see what this house sold for in the past:

Sale History

01/21/1998: $133,370
05/10/1993: $133,000

Damn! Approximately five years and we have a whopping $370 price increase. I’m sure when they sold in 1998 they figured the $370 would be for the security (read fence) they installed for your automobiles. Crazy crazy California. Again if you are to listen to the pundits, you would be overpaying thousands of hard earned dollars in locations where the family median income is barely $40,000 a year. I can only imagine how many out of state investors loaded up on California properties simply because they were listed in California.

Today we salute you Pacoima with our Real Homes of Genius Award. You are so brilliant you defy the massive mathematical power crunching abilities of our friends at Zillow.

$640 Billion in Sub-prime Loans Originated. $386 Billion in Alt-A Loans Originated. $1.026 Trillion in Loans at Risk? Priceless.

The L.A. Times issued a cover story regarding the New Century Debacle this Sunday. Yes, it was a smaller story on the bottom left hand side of the newspaper but it did make the cover. The story was well written and talked about top producing employees spending time at a castle in Ireland while the company collapses. Fiddling away as Nero burns Rome. Not only that, but the story parallels the weird black multistory building that New Century occupies in Irvine California next to a defunct savings and loan giant that no longer reigns. I guess Irvine is turning out to be a hub for high risk permabull empire building via wildly risky loans. If we want to take tabs, how much is at risk this year? Many believe that the sub-prime debacle will be contained in a silo and will not have an effect on the overall market. I disagree with this Pollyanna version and wishful thinking that will only add more fuel to the bubble while it takes its last breath during the 11th hour. Let us break down what is at stake:




Digging Deeper into the Numbers

Estimates coming out from the permabull camp state that 7.65% of sub-prime loans are at risk for default while only 1.25% of Alt-A loans are at risk. When looking deeper in Inside Mortgage Finance, an industry publication, we see that in terms of tracking data on sub-prime and Alt-A loans the data is vague. Considering that many loans are stated income I'm not sure how they arrived at their optimistic numbers. Stated income means made up; a recent study by the Los Angeles Times demonstrated that 80% of folks on stated income lied about their income. Of these folks, 60% overstated their income by 50%! Yet again, we realize how distorted the mainstream media is because no one wants to hear "hey, you now have to save up to buy a home!" Why is saving to buy a home important? It demonstrates two principle things of a prospective buyer. One, you are diligent enough to save for something you want (showing your ability to forgo credit for one or two years). And second, it demonstrates financial prudence. The last few years we have dropped kicked financial prudence through the uprights and have flooded the market with instant gratification liquidity. How can we be expected to save for a down payment when our savings rate is negative?

How Much Money is Now Lost Because of Sub-prime?

The general market hasn't felt the pain of the sub-prime implosion because mainly hedge funds have loaded up in these risky plays. However, mutual funds being rather safe from any collateral damage, will begin facing some pain when the rates start resetting and the larger players realize they will need to unload bad debt and overpriced McMansions in a market with no liquidity. Let us take a few top sub-prime operators and run the numbers to see how painful their kick to the groin was:



You notice the trend? Even though in terms of getting hammered IndyMac is still doing okay, they are the largest Alt-A player out there. But look how much market cap was lost by them simply being caught up in the sub-prime rage? Let us not forget the top dogs Freddie and Fannie Mae with a combined market cap of close to $100 billion. This crap will travel all the way to the top and New Century and Fremont are simply the first to get guillotined in this credit orgy we've been living through. Wall Street is rallying today but this is a dead cat rebound. Listen to the permabull housing heads at your own peril. Phoenix just hit a record inventory at 56,000. Some areas in Florida have dropped 20% year-over-year. Southern California is still in wonderland housing rehab but go ahead and jump into a Real Homes of Genius place at 600 square feet for $475,000. Your monthly payment will be approximately $4,000 since you can't go stated-income-suicide-negative-amortization for 1% but hey, you'll get one bedroom and one bath all to yourself. You don't need anything larger since your mortgage will fill up any empty space.

Real Homes of Genius: Today we Salute you Stanton.

Real Homes of Genius: Today we Salute you Stanton. We Know Crack is Prevalent in our Society When You Can Buy a 680 square foot home for $138,000 in 2000 and Expect $475,000 in 2007.



Take a minute to do the following; put both of your hands on your mahogany desktop, slowly push yourself away from your cubicle, and take a nice walk outside of your building. Inhale deeply. Do you smell that? Yes my friends, that is the smell of delusion and grandeur that many current sellers have in Southern California. Today we Salute Stanton with our Real Homes of Genius Award. The above 680 square foot palace is something akin to what Saddam’s palace was like, except this place is in Orange County and 20,000 square feet smaller.

Do you notice the beautiful yellow fire hydrant and how it blends in naturally with the yellow dead grass? This type of home would bring a tear to the editors at Architecture Journal Weekly for its magnificence. What else do you get for $475,000? Well you get one bedroom and one bath because when you are this rich you want to keep your family close, preferably at an arms distance in one room. Two bedrooms? Not in this village of the bourgeois elite.

Let us take a look at the current sales action:

Price Reduced: 03/13/07 -- $499,000 to $475,000

Okay, maybe this home was purchased for $300,000 seven years ago correct? Well let us find out:

Sales History: 10/30/2000: $138,000

Wow, they expect to net a profit of $337,000. Or $48,000 a year, more than the median family income in the area. Again why would you want to work when you can live in your mansion and make bank without lifting a finger; I actually feel some Persian kings rolling in their graves.

Today we Salute you Stanton with our Real Homes of Genius Award.

New Century Financial Now Has A Market Cap of $92 Million and Owes $8 Billion. Now That is Leverage Baby!

No one can blame New Century Financial for not practicing what it preaches. As of Monday, the market cap of New Century (NEW) is now down to $92 Million after dropping another 48% during the trading day. The news only got worse as the day went treading along. The revelation that many creditors such as Bank of America and Citigroup are ready to collect their debts and essentially pulled a margin call on NEW sent the stock even lower. A company spokeperson stated the following about paying its obligations to lenders:

“We ain’t got the dough right now but come back tomorrow and we’ll hook you up with a subprime loan baby!”

The Debacle

In what has to be the most amazing no-doc-suicide-negative-amortization-zero-down-one-percent loan ever, NEW was able to leverage a company worth $92 million into $8.4 billion of debts. This from a CNN article posted today:

“Irvine, Calif.-based New Century said that all of its own lenders are cutting off financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations, which could reach $8.4 billion. The company's market value has shriveled to only $178 million.”

The market value was $178 million before it fell another 50 percent today when trading resumed. This implosion isn’t a shock but the key players involved is:

“The company's SEC filing could shake up the financial sector. It mentioned financing agreements with many top Wall Street firms, including Morgan Stanley (Charts), Citigroup (Charts), Barclays Bank (Charts), Bank of America (Charts), and Credit Suisse First Boston Mortgage Capital, a unit of Credit Suisse Group (Charts), as well as the mortgage arm of Goldman Sachs (Charts).”

The permabull argument that the subprime implosion would be contained to the high-risk sector is now going mute. Look at the list above. Does this list look like low-key players? Now that BofA and Citigroup are about to break some knees and bust some heads over at NEW do you think this won’t spread like a flu virus? If you were owed $8 billion would you let that slide as if a granny cut you off on the 405 freeway? Somehow, I don’t feel that Goldman Sachs and Barclays are in the business of handing out charity.

The Saga

I’ve talked about the NEW debacle in many posts for the last month. So if this still sounds like a company you would want to work for, they are still hiring:


In addition, I was browsing through their 2005 company statement (since the 2006 isn’t out even though KPMG has audited the company) and you can see where the fun begins in this Ponzi scheme. Take a look at the below:



Two major things I want to point out that were non-existent in 2004 but reared their head in 2005 (and who knows what this looks like in 2006). First, we have the emergence of the 40-year mortgage. Why anyone would get a 40-year mortgage is beyond me since the monthly nut payment pretty much stays the same compared to a 30-year traditional mortgage. The other item I draw your attention to with my amazing MS Paint skills is the starting of interest-only mortgages. The combination of these two speculation vehicles essentially converts any homeowner into an investor whether they actively acknowledge it or not.

What happens when the price of your home goes down? What will happen if we see year-on-year negative returns? Take a look at NEW stock and you’ll find out; it is a house of cards built to collapse and keep in mind we have yet to see an actual serious correction in the housing market. All the pundits seem to think that 8 months of slow appreciation is a true correction. No, a true housing correction is year-over-year of negative housing news, depreciation, and a sentiment that housing is no longer an investment. The amount of real estate investing books, late night infomercials, and mainstream media pundits still touting real estate gives us a litmus test that the market is still saturated and needs to be purged.

Let us not forget that there are other subprime players and billions of dollars at stake. This is merely the beginning and if I were you I would listen to Scooby Doo.

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And again, make sure you are cautious and careful about the way you approach buying any real estate in today's market. It is important to be safe rather than sorry.

Real Homes of Genius: Today We Salute you Huntington Park. Tweedledum and Tweedledee of housing. $500,000 Homes in Wonderland.

$500,000 Homes in a Neighborhood of Folks Making $41,404 a Year!






Today we have a special Real Homes of Genius post. Two homes, months on the market, prices dropping, and rates tightening up. Let us call them Tweedledum and Tweedledee. We ask you, the hypothetical home sellers and agent, what would you do? Would you lower the price? Maybe throw in a few incentives? Not on Real Homes of Genius! We actually notice an interesting tactic being used on these homes; first we have the home listed as follows:

Tweedledum (1,493 square feet 4/2)
Price Reduced: 02/01/07 -- $539,900 to $529,900
Price Increased: 02/24/07 -- $529,900 to $539,900

The next example is listed as follows:

Tweedledee (784 square feet 2/1)
Price Reduced: 01/30/07 -- $429,900 to $425,000
Price Increased: 02/16/07 -- $425,000 to $429,000

Now I know you, the bubblehead intelligentsia is saying, why in the world would someone do this? Let us dig further into Tweedledee and find more answers by querying previous sold data:

Sale History
03/02/2006: $375,000
10/06/2004: $246,000
09/04/2001: $142,727

Wow, these sellers still think they can net a profit? So this home went up $54,000 since last March? Why work when the price increase in your home is more than folks in your neighborhood net in a year. Let us look into Tweedledum:

Sale History
05/11/2006: $410,000
05/12/2003: $252,000
05/19/1994: $16,000

Bwahahah! There are flippers in Huntington Park of all places! These people want to net $129,000 in 8 months! If we were to look even further, why wouldn’t I be surprised to see the first loan holder as New Century Financial and the second being nestled by Fremont? And what is up with the knock down and then increasing the price? Do they really think that because an e-mail will be sent out to realtors and onlookers of a price decrease that people will jump into this? There is no economically justifiable reason for these prices.

I would dig deeper but my hands are already full of waste and the smell is making me nauseous. Today we salute you Huntington Park with our Real Homes of Genius award.

Housing Bloggers Unite: The Housing Blogger Network (HBN) has Started.

While the National Association of Realtors is devising a strategy and game plan for the upcoming fall in housing prices, those in the housing blogger circuit seem to be growing and at a furious rate. Each day there is a new housing bubble blog popping up. While there still remains perma-bull housing webrings there is no unifying support network for housing bubble bloggers. The mainstream media is now acknowledging not only a bubble, but that in fact the bubble has burst. I’ve created a button for all housing bloggers to put on their website as an acknowledgement and a sign of unity that no, we are not delusional but we join a growing global army of folks that realize housing prices are out of whack with economic fundamentals and that the majority of Americans will no longer stand for it.

What Does the Housing Blogger Network (HBN) Stand For?

Our mission is of economic and financial prudence.

We are not anti-housing or apocalyptic soothsayers of the future, but realist that believe housing will adjust and revert to a historical mean.

We believe that housing needs to reflect the incomes of those living in the immediate area.

We believe that easy access to credit and negligence of those offering loans inflated the housing sector.

We are against exotic and ridiculous financing offered to minimum wage works so they can purchase $400,000 mega mansions or 800 square foot boxes in California.

We vow to continue blogging in 2007 and 2008 to offer guidance to newcomers that are just having their eyes open to the housing bubble.

We understand that housing is an emotional and economic issue and that buying a home is not always based on what is economically right, but also the psychology of the current market.

We take an oath against giving in to the propaganda machine that all debt is good and that all debt equals freedom.

What Do I need to Do to Join?

Simply put the below button on your website. You do not need to link it to anywhere. This is your button. If you would like to add additional statements to the mission please do so, this is YOUR mission; this is a living document that we will continually update.

NEW Century Down 70% After it Announces it is Under Investigation by Federal Regulators: If You Listened, I Would Have Made You Money!

Nothing kills a stock quicker than getting the Feds involved. Welcome to the implosion of the subprime market. Like I mentioned on:

2/12 – Did You Feel That? Housing Just Hit The Third Rail

And

2/23 True American Idol: Subprime Mortgage Lenders Send off a Blast Heard Around the World.

We’ve seen the direct implosion of New Century Financial coming for at least one-month. Most housing bears knew to short these stocks including Fremont and NovaStar that are also getting rocked to the ground today. The major thing that is hitting the newswires today is that Federal authorities will now be getting involved in this mess (hear Enron anyone?). Of course anyone realizes that when:

1. You sell overpriced homes.
2. Leveraged to the hilt on the backs of subprime borrowers.
3. These borrowers default.
4. You get the loans kicked back to you.
5. Try selling overpriced homes on overpriced mortgages in a quickly decling market.

And all this equals disaster. That is why NEW fell an unprecedented 63% today; in the last month this stock has gone from a price point of 30 to currently 5 (I’m sure it will go lower since this company is pretty much toast). This is what NEW had to say:

“The lender disclosed Friday that it is the subject of a federal criminal probe into its accounting and trading in its securities. New Century also said that if it is unable to obtain waivers from its lenders or locate new funding its auditors could publicly question its ability to continue in business.”

Whoops! Looks like NEW was going no-doc on their accounting practices. And this is a major deal since they are [were] the third largest subprime lender in the United States. The only question that remains is will this subprime market crash spillover into other sectors of the housing market.

Not only that, but the need to confess is important and you should read this confession from someone in the Subprime trenches over at NEW:

"So let me begin in 2003 when my wife Jeanine and I both went to work at New Century as Wholesale Account Executives. Jeanine had been in subprime wholesale since its inception and I was coming from a 15 year background in conventional retail lending. What led us to New Century was a sordid story in itself. Our transition began before New Century when Jeanine had been sexually harrassed and subsequently mistreated by management at BNC Mortgage in Irvine. At that time we were forced to retain a high profile attorney who wanted desperately to pursue the case. Financially there was a lot at stake. Jeanine’s income at the time was well over a quarter of a million dollars per year and growing.

The culture at BNC was one of ‘you’ve got to party with the managers’ in order to get anywhere with the company. Their annual sales conference was of course in Las Vegas, no spouses allowed. Pictures of managers in jacuzzis with strippers and accounts of infidelity among married managers and female subordinates followed every event. BNC on a whole was a sexually predatory environment to say the least. As a matter of fact, and no BNC employee at the time will dispute this, BNC’s top rep, female, with disgustingly huge boobs, tiny waste, an easy 8 on a 10 scale and who came to work at the company with absolutely no lending background became the top rep overnight by sleeping with management - and not just one manager, but many."

Read the rest at:

Confessions of a Subprime Casualty

Need we say more?

Real Homes of Genius: Today we Salute you Baldwin Park. When you Only Need to Show Concrete to Sell at $400,000+.

The ad reads like a Dostoevsky novel, “new concrete entry” and all the amenities that come with a wonderful drive way. If a picture is worth a thousand words, the picture above must be worth 400 pictures because these folks are trying to unload a 814 square foot home for $395,000. They initially listed the place for $413,000 but it doesn’t seem that folks felt that a drive way was worth $18,000; actually you can pick up a few good workers at Home Depot, concrete, and a mixer, for about $2,000 but why do the math?

Not only does the ad have a wonderful front picture, we realize that this is an “awesome” property according to the ad since this is perfect for a first time buyer (read first time newbie). They do say a sucker is born every minute and we do have a lot of minutes in a day. For those of you who do not know about Baldwin Park let me give you some hard data:

Median Household income: $52,900
Population: 80,345
Average net worth: $38,493
Median Mortgage Debt: $37,782

Well after buying this home, you’ll put yourself in the top 1% of mortgage debt for the city. This place isn’t “exactly” a prime Los Angeles location. Either way, this is another unbelievable example of what is going on in Southern California. Inventory is rising, prices are dropping, and some folks still think we are in 2005.

Today we salute you Baldwin Park with our Real Homes of Genius Award.