April 22, 2007

Real Homes of Genius: Today we Salute Inglewood. Bought in 1970 for $20,000 now selling for $397,400.

What is $400,000 worth to you? A Ferrari? Maybe. Or probably a nice cabin up in the Sierras? Well what if I was to tell you that it would buy you a 779 square foot jewel in Inglewood? Now before you speed dial your agent, today we are saluting Inglewood with our Real Homes of Genius award. I find it hard to believe that after all the drama occurring in the housing market sellers still feel they can ask for inflated bubbleland prices of yesteryear. This home has been on the market for 50 days and was originally listed at $439,000. So this seller has already given you the prospective buyer a $41,600 discount. Isn’t that fantastic? Why not wait another 50 days and maybe you’ll get a $50,000 discount.

I’m not sure what is going on with Southern California real estate. We know we are in a bubble, there is no question about this. Now that subprime lending is out, who and why are people buying these places? Let us run a check list that most buyers should have before buying a place:

1. When was the home built? This home was built in 1941 and cost the original owner $20,000.

2. What is the median rent in the area? $1,100

3. Is the area safe? Only true Los Angeles natives can tell you about that one.

4. How are the schools? Well if you are looking for the lowest ranked schools in the nation this is the place for you!

5. What is the median family income in the area? $53,000/year

So 0 for 5. Can anyone make an argument as to why this home is valued at $400,000? I find that the only argument any housing pundits are making is that “it’s in Los Angeles” or “that is what the market will pay for it.” Well if those are the only arguments you can make about purchasing a home in these areas you will be hard pressed to defend your outrageous purchase once this bubble pops. Most out of state people don’t have any idea of inner city Southern California and the dynamics of mortgage fraud, scrupulous lending, and the extent to which this bubble has become. Many that live in the area and have some basic idea of finance, look at these places and can only shake their heads in dismay. This turquoise gem is one of many.

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


Anonymous said...

Has anyone ever considered the potential impact of falsely-inflated housing costs on corporations? To bring in necessary talent, if companies are forced to increase salaries that potentially allow families to enter an area, would this not be a direct impact on them?

Kevin said...

Hey Anon,

On that same note, what about the lose of corporate earnings? Less consumer discretionary spending, potential higher interest rates, government bailout resulting in higher inflation, bad hiring due to inability to relocate new employees, higher OH costs due to inflated salaries to match inflated house prices, etc...

Looks like the entire economic system will be impacted just like when oil prices jumped to $70/barrel a year ago and consumer spending all but ceased. Their will be less spending on dinning out, airline tickets, vacations, new cars, tools & accessories, etc... so this will decrease orders for Boeing 747's and such. Declining jobs, layoffs, and more outsourcing since we cost to damn much to employee. A steady economic policy which promotes "true" growth is the only policy which benefits a nation. Doesn't look we have one here.

homepage: http://bubblemore.blogspot.com

Ben Franklin said...

Do you have any idea how much it must've cost to have lead-lined walls installed to protect the residents from stray bullets? Can we assume this place had such 'amenities' installed, as you're going to wish you had it in this neighborhood?

As far as the costs to employers, California has experienced a 'brain drain' as even people who've graduated with advanced degrees that offers prospects for strong careers (doctors, lawyers, etc) have decided to leave the area, due to the higher cost of living in the area. These are not stupid people, but those who decide that it's not worth sacrificing one's future to pay for the unofficial "Southern California tax".

So what's left? When you erode the middle-class, there's basically only the ultra-wealthy (often retirees) on one end, and a large lower-class who work to support them in low-wage jobs.

Look no further than Santa Barbara to see what happens when this trend continues: workers cannot live in the town, but have to commute daily. The city of Santa Barbara is worried, as they realize many employees cannot afford to live in the town; they're worried about what will happen if there's an emergency in the area and workers can't get in to help with an emergency response.

speedingpullet said...

Just for fun, i calculated what a $20K house bought in 1970 would be 'worth' today....

I have a spreadsheet that calulates 5% compound interest per annum ( a generous amount taken over time), and gives an estimate of a house's value based on previous selling prices.

This little gem is would cost the princely sum of $121,628 in today's money, from a starting point of 1970, with a 5% compound interest increase p.a.

So, only 256% overvalued...peanuts ;-)

IrvineRenter said...

This one is in the running for the ugliest house you have found to date.

Mr Vincent said...

Prop Desc: Probate auction! Property is offered as-is. Call agent for details.

Here's how I would write it up: Yo peeps, what up? Wanna live life like CJ from San Andreas? Stop pretending and live it like a real gangsta! This area is just wat ur looking for: Meth lab friendly, drive-bys nightly. Wear the right colors and u get immediate membership in the local gang. Seller will give a case of "cop killer" bullets at COE for full offer.

Dr Housing Bubble said...


Great comments. $121,628 at 5% growth? Sounds about right. Although the likelihood of hitting that price point anytime soon is highly unlikely.

In regards to employment in the region, folks are bailing out. The middle class will not tolerate this and are leaving with their professional degrees. What you have is a culture that is suddenly beginning to look very 3rd worldish; the uber-elite and the larger service class meeting their needs.

Irvinerenter, you'd be happy to know that some blogger is thinking we want this misery to happen or get a kick out of people failing. Some of these real estate housing heads bought in 1996 - 2006 and have never witnessed a real estate down market. They feel their realm of knowledge consist of only the decade they have lived through. They mistake luck with intelligence and profit with financial prudence. Personally, the reason that I post Real Homes of Genius is because it is absolutely laughable the price of homes and hopefully folks that read this blog take heed and don't purchase into a bursting market. The key is prevention. I'm not sure if people heed the bombastic pulpit lecturing of saving and being financially responsible. But seeing these homes, I think most people have a common sense compass and realize something is terribly awry.

The sad part about this all is many minority agents and brokers are peddling this crap to their own. I've seen it many times. While I was in the industry they would play on the dreams of those less educated, (even though they are tools themselves) and put people into the riskiest loans I have ever seen and this is years ago. I can only imagine the shenanigans that have occurred in the last three years.

People will do what they will always do. There is an adage that banks lend money to people that least need it. In the last few years this is the furthest thing from the truth.

lendingmaestro said...

Nice house.

People might not realize that a good % of people in OC work directly in Real Estate/Financing, except Santa Ana(teh guesthouse of OC). That's why values have not plummeted yet int he OC. Many people have a hand in their own transaction.

The affordability index should make you shudder.

I read a great article on how the bubble will affect the illegal immigrant workforce, as housing suffers. We'll probably see increases in crime as migrant workers lose their jobs in construction

HousingBlogwatch said...

Subprime assault on southern California
By Matthew Garrahan

Published: April 20 2007 22:52 | Last updated: April 20 2007 22:52

Far away from the sun-kissed beaches and palm trees that make up southern California’s idyllic coastline, trouble is brewing in the Inland Empire.

Two years ago the sprawling arid region that lies to the east of Los Angeles was one of California’s property hot spots.

House buyers priced out of expensive Orange County and the more affluent neighbourhoods of Los Angeles poured into towns such as Riverside, Moreno Valley and Perris. Limited housing stock and a relatively benign regulatory environment attracted developers, who built scores of new homes.

For a while, the Inland Empire rode the coat-tails of the California housing bubble as buyers, many of whom had limited financial means, took out subprime mortgages with low “teaser” rates.

But with the subprime sector collapsing, the area is facing a looming crisis, with an increasing number of homeowners delinquent, or failing to make payments on their loans. Delinquency often leads to mortgage foreclosure, or the repossession of the house by the lender.

“It used to be that we would get one call a month from someone needing help [about mortgage foreclosure],” says Vilma Mercado, home ownership centres manager with the Neighbourhood Housing Service of the Inland Empire, which promotes home ownership. “Now we’re getting close to 50.”

It is easy to see why towns in the region appeal to property buyers. In Moreno Valley, in the heart of Riverside County, residential streets are laid out in a grid system of predominantly low-rise homes, well maintained with large gardens and quiet, safe streets.

Riverside County appears to have been most badly hit by the subprime collapse, with mortgage defaults in the first three months of the year up 168 per cent on the same period of 2006, according to DataQuick.

Several factors have contributed to the region’s problems. “There’s a lot of predatory lending going on,” says Gary Aguilar, vice-president of counselling services at Springboard, a national service for people struggling with debt, which is based in Riverside. “I heard of one homeowner going through a divorce who ended up with a $115,000 [£57,410] mortgage on a $45,000 home.”

When property prices were rising, buyers did not want to miss out, he says. “Everyone was jumping on board to buy a home. The majority of people did whatever they could do to have the American Dream and purchased homes they just couldn’t afford.”

Ms Mercado says many buyers were not adequately prepared. “A lot of people moved into these areas thinking they were more affordable, but didn’t understand what they were getting into.” The increase in foreclosures in the region, she adds, is “absolutely overwhelming”.

Almost two years ago Sonya Mcphearson and her husband moved from Los Angeles to San Bernadino, where they bought a six-bedroom house for $480,000. Ms Mcphearson works in a hospital in Los Angeles 70 miles away. She commutes by train but stays with her sister during the week to save money. Her husband is a truck driver.

Ms Mcphearson says that the couple were unaware they had taken out an adjustable rate mortgage. “Our payments went up and we couldn’t afford to pay. Now we’re three months behind and we’ve been told we have to leave. I don’t know what we’re going to do.”

Refinancing the mortgage is not an option. The Inland Empire was one of the last parts of California to experience dramatic house price inflation, with the price of property in some towns doubling in five years.

But last year the number of newly built houses coming on to the market reached its highest level in two decades. Prices fell and many of the buyers who had taken out subprime mortgages found themselves trapped. They could no longer rely on the equity in their homes to refinance their loans.

“Anything can turn that has doubled in five years,” says Dr Christopher Cagan, director of research and analytics at First American Real Estate Solutions, which tracks real estate sales. Meanwhile, the Inland Empire “ran out of new buyers” which exacerbated the problem.

“What we have [in the Inland Empire] is an explosion of building and an explosion of generous lending. There was no single villain: this was a market phenomenon characterised by 30 years of [house price] growth with very few defaults. There is no one person or company to point to,” he adds.

This has not stopped the California Department of Justice from pressing on with an investigation into predatory lending. It is unlikely that action will be taken imminently, though, as the state has been examining the issue for almost five years.

Further, the US Supreme Court appears to have curtailed California’s ambitions with a ruling this week that limits the power of individual states to regulate lending practices.

However, any action that California or the federal government takes to resolve the subprime collapse is likely to come too late for the people currently facing foreclosure in the Inland Empire.

The increase in foreclosures has “come on strongly and quickly and none of us anticipated it”, says Ms Mercado. “And it is nowhere near ending.”

IrvineRenter said...

"I'm not sure if people heed the bombastic pulpit lecturing of saving and being financially responsible."

Perhaps not, but financial irresponsibility has gone on so long, and gotten so bad, I don't think many of the populous even know the difference. I may be preaching to the choir, but hopefully someone, somewhere makes a different decision.

Real Homes of Genius certainly does graphically illustrate the insanity of this bubble. It reaches you on a guttural level. You are faced with a conundrum you cannot ignore: how can these prices make sense for these houses? I wonder how many make the next logical step and wonder how today's prices make sense for any house?

It is not as dramatic, but I get the same feeling when I see a studio condo in Irvine going for $500,000. WTF? People have to drink lots of kool-aid to feel those prices are right.

I hope I don't come off as bombastic. I try to relate common sense people have forgotten (or perhaps never learned). I haven't always been a paragon of financial virtue, but I suppose there are none so faithful as the converted.

Dr Housing Bubble said...


I wasn't implying that you were bombastic at all. But some contrarians come off as a bit preachy. Many from the real estate syndicate actually use this as a weapon against prospective buyers. "Look how out of touch they are" or "if you would have bought in 2003, you'd be rich now." And frankly, they are right on a very short-sided viewpoint.

I think we live in a society where we want quick fixes for everything. Hence, as a housing bear trying to reach his audience I want folks to get it that we are in a world class bubble. If you want to buy a house in an overpriced suburb go ahead, what do I care? The reason this housing market is so out of whack is because Joe and Susie public bought this whole easy money hook line and sinker.

What can we do? Continue blogging. There are thousands of real estate blogs out there now. I remember before I started blogging, there was a handful of housing blogs and they were stigmatized even for mentioning the "b" word. Now folks land on this blog via Goolge by searching for:

"Housing bust 2007"
"Southern California price decline"
"real estate bubble"
"housing bubble"

I find it humorous how some housing pundits think that we've already hit the bottom because a handful of subprime lenders have bit the dust. Its like saying winter is over in late December.

Anonymous said...

The RHoG are funny, sad, frightening, and a few other things, but don't forget that in NYC (particularly), you get the same (tiny) space for the same (ridiculous) price, MINUS the two-foot border of patchy grass.

If all the RHoG were stacked up, you would have what on the east coast is known as a "luxury" co-op.

And it's the same demographics--celebrities and college kids surrounded by unhappy poor and working class...Good Times !!!