May 24, 2007

Real Homes of Genius: Special Edition, Lifestyles of the Poor and Notorious. 10 Southern California Homes that Prove a Gargantuan Housing Bubble.


I’ve been blogging about the housing bubble since September of 2006. During the initial months, I was receiving 50 to 60 hits a day. Now in a few short months, we are reaching an audience of thousands a day. Suddenly 90% of articles in the mainstream media are negative about the housing bubble. We have folks making chump change being able to find access to millions of dollars in credit simply because they have a pulse and are able to fog the mirror on their leased Lexus. Even though I’ve featured over 24 homes in Real Homes of Genius, I still get people in the delusional state thinking that there is no housing bubble. Dr. Housing Bubble, you cherry pick homes and what does that prove?” they say in a condescending manner. Aside from the fact that the median value of homes is outrageously priced in every county in Southern California (and the median is derived from an aggregate of homes) I’m simply making the story more tangible for the readers who still have doubts.


To quell these doubts, I spent a few hours picking two homes in each of 5 major counties in Southern California to highlight the magnitude of this bubble. After all, If I’m able to find 10 homes in Wonderland in a few hours how many more out there exist? Today we have a special Real Homes of Genius, today we salute you Southern California with our Real Homes of Genius Award.

Riverside County

#10 – Riverside

Price: $209,000

Sqaure Feet: 768

Median Rent in Area: $700

Our first home takes us to Riverside proper. This beautiful 3 bedroom mansion is a fixer-upper and a handy man special. Once you dump $100,000 in renovations, you can expect a whopping rental income of $700 a month even though your monthly payment will run somewhere in the neighborhood of $2,000. Talk about cash flow! Initially this home was priced at $295,000 but so many people were stopping by, they decided to knock off nearly $100,000 because it was too fantastic. Maybe in a few more months, they’ll bring it down by another $100,000.

#9 – Perris

Price: $234,900

Square Feet: 850

Median Rent in Area: $695

Why live in Paris France when you can live in Perris California! This is how the rich and famous live. This wonderful 850 square foot home is inspired by the architectural genius of Da Vinci and you can tell by looking at the picture above. This home is designed to entertain that pesky and picky buyer out there who wants everything but is on a $300,000 or less budget. The so called champagne taste with a beer income. Even though your monthly payment will range from $2,100 you will be able to rent it out for a whopping $695. No wonder why Donald Trump is so rich. Real estate investing is easy. Where do we sign up?

San Bernadino County

#8 – Fontana

Price: $273,900

Square Feet: 728

Median Rent in Area: $725

Our next home takes us to Fontana in the heart of San Bernardino County. This place is bank owned and the upkeep is impeccable as you can tell from the picture above. The lawn hasn’t been mowed in ages but hey, we are talking Southern California here and money grows on trees (and lawns for that matter). This 728 square foot beauty is banked owned and ready for you to invest in. Even though the bank is holding onto appraisals from 2005 and is desperately hoping yesteryear will come again, we are crossing our fingers for the Easter Bunny to arrive. This place will carry a monthly nut of about $2,500 but you’ll be raking in the cold hard green at $725 a month. Another cash flow property for you! We’re quickly on our way to becoming real estate moguls...

#7 – Victorville

Price: $190,000

Square Feet: 860

Media Rent in Area: $550

Alert! This place is so hot we had to get James Bond to take a snap shot of this place via telescopic camera. This gorgeous 860 square foot home is amazing in one of the hottest (literally) areas of Southern California. As you can see from the picture, you may have a lot of vacant land (desert) next to you but hey, this is for potential growth here! Think big! Don't let the neg-head housing bears bring you down to reality. It is much funner in made up world, trust me. Even though you’ll pay $1,500 a month in taxes and fees, you can rent it out for $550 a month. The bank will love you with your maximum cash flow strategies.

San Diego County

#6 – Chula Vista

Price: $295,000 - $350,000

Square Feet: N/A

Median Rent in Area: $818

Here we see a wonderful pricing tactic found only in high priced metro areas, the range. We give you a range that is open to a 20% negotiation value and you give us an offer. The seller of this place tells us that this place is “not for the faint of heart” because this magnificent lawn will knock your socks off and maybe give you a coronary explosion. By the look of this place and the lot, we can speculate that it is 800+ square feet. Your monthly nut will be from $2,400 to $2,700, we’ll give you a range as well, and you will cash flow with $818 a month in rent. Going down South makes a whole lot of sense eh?

#5 – National City

Price: $299,900

Square Feet: 432

Median Rent in Area: $820

If you’re the patriotic sort, what better place to live than National City? We have this wonderful sprawling 432 square foot palace at $299,900. Like the car ads you see for $9,999.99, this place is designed to attract the sub-$300,000 buyers. When we look at the median rent in the area we see that a place like this with $50,000 in renovations will go for $820 a month. Maybe I should write a book like Robert Kiyosaki because with all these positive cash-flow properties, 24 hours in a day simply isn’t enough!

Orange County

#4 – Anaheim

Price: $459,900

Square Feet: 850

Median Rent in Area: $995

Home of Disneyland and Mickey Mouse. Also home to interesting depth of field photography. This gorgeous half-a-million dollar home rests beautifully on 850 square feet. Even though your mortgage will run you $3,500 a month, you can rent this place out for $995. Go out and refinance your home equity and put a down payment on this place now! This investment opportunity will not last.

#3 – Santa Ana

Price: $435,000

Square Feet: 910

Median Rent in Area: $945

All these fantastic deals are making me itchy to call my mortgage broker! I’m sure you’re getting juiced up to purchase each of these homes. This next beauty is nestled in Santa Ana. At 910 square feet it is one of the larger homes we are featuring. When we analyze the income of folks in the area, they are pulling in slightly below $50,000 per year for family income. The monthly payment on this place will be around $3,500 so that’ll eat up about 90% of their net income. Who cares about debt ratios when you can use leverage to make it happen! Time to act since this place is not only in SoCal, but in the OC.

Los Angeles County

#2 – Huntington Park

Price: $359,000

Square Feet: 669

Median Rent in Area: $950

There is no other place like Huntington Park. Easily confused with Huntington Beach, this area in Los Angeles has a lot of potential. I’ve featured a couple of places in a previous Real Homes of Genius in this area, but this 669 square foot dream home is for the ages. Even though you’ll be paying about $2,800 a month in carrying costs, you will be able to recoup that by renting this place out for $950 a month. Business is good my friends!

#1 – Compton

Price: $279,000

Square Feet: 639

Median Rent in Area: $800


Our final home brings us to Compton California. Above we have a wonderful 639 square foot home for $279,000. This magnificent place is under $300,000, in Southern California, and therefore you should buy it. Philosophy and logic will prove this out in any theorem. This place is a must for any savvy real estate investor. Yes, your carrying cost will be about $2,300 a month but you’ll be renting it out for $800. I see many light bulbs turning on and all you potential investors are making a beeline to your agents office. This one won’t last folks!

Conclusion

Archimedes of Syracuse, the mathematician and engineer from Southern Italy figured if you could give him enough leverage, he alone could move the entire world. I know with enough credit leverage, you’ll find a way to purchase all the above properties. And the exciting thing is that you’ll find enough hungry brokers willing to finance you on all these properties. All you need to do is try. If you don’t try, you are guaranteed to fail but if you make a serious and wholehearted attempt, you will succeed beyond your wildest dreams. Yes the numbers don’t work out exactly to your advantage but finance and real estate evaluation is for sissy pansies who have no guts to take a risk in real estate. Even though I invest out of state in properties that cash-flow positively, maybe I’m missing something with the negative cash-flow game here in my home town. It is time to take advantage of this spectacular time in history. From the Southern tip of Chula Vista, to the desert city of Victorville, to the OC, and finally coming back to Compton California we have plenty of deals to go around.

Today we Salute you Southern California with the Real Homes of Genius Award.


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15 Comments:

Make Mine A Bubble said...

A month or two ago, I contacted some loan officers to see what my family could qualify for...and they've been pestering me non-stop ever since.

Out of all the "fazza gazza" salespeople, one LO has actually been very cool, surprisingly honest, and just an all-around great guy. Color me shocked!

Anyway, he emailed me this morning saying rates have started jumping and I should try to lock-in my rate as soon as possible, to not get screwed. He was very cool about it, not trying to sell me.

So I decided I should be honest with him, and sent him the following email:

Dear Loan Officer,

Thank you so much for the info! I really appreciate your candor.

We are furiously looking for a home, but everything right now is priced WAY TOO HIGH in our area. And this is for small, modest, starter-home fixers...which technically people with our income SHOULD be able to afford. Right?

But it's like the sellers still haven't accepted reality that their homes won't sell for the same price as two years ago. Or, they've HELOC'ed and refied all the equity out of their homes, so they can't afford to negotiate until the bank ends up taking the house and throwing an auction.

Inventories in our area are climbing toward a record high...but buyers aren't touching anything. I went to two open houses this past weekend. We were the only ones who showed in the half-hour we spent in each house. The realtors looked really bored, but in both cases said the sellers were "firm" on their asking price, with a defeated shrug.

Sellers don't yet realize that since subprime has gone bust, first-time homebuyers are only able to afford standard, 30-year fixed - but qualifying for MUCH lower amounts than in years past. Plus, they now have to have a down-payment.

The tension from the standoff is palpable. Having rates go up is just going to screw the "won't budge on price" sellers even more...as more and more homebuyers are priced out of the market.

I don't mean to sound callous, but maybe rates rising and things getting worse is exactly what we need. If we can't afford to buy anything without a 30% price cut, how can anyone else?

We continue to furiously look for a home (because, despite the crazy market, we have a growing family and actually NEED a house) but I'm starting to think it will take much longer than we originally thought. I would love to lock in a low rate tomorrow, but not if it means leveraging my family's financial future on a ridiculously-priced house that will lose value over the next 5 years.

I'll keep you posted...thanks again.

- MMAB

starve_the_beast said...

You said it all, MMAB!

starve_the_beast said...

I went to a few open houses in Highland Park a while back - they were literally next door to each other. The houses were very similar, but one was priced $90K more than the other. Guess which one is still on the market.

Dr Housing Bubble said...

MMAB,

The stalemate you speak of will not go away until the dark clouds of winter set on the real estate shenanigans. See, sellers still believe that somehow this summer will spell certain relief and that the bubble is over. All the rhetoric is such that "nationally" the housing bubble is hitting a bottom. But looking at California we have yet to see any significant declines. We are atypical of the nation.

You should run the numbers and if you can, wait it out. Why not save up for a few more months? Why rush at the point where we are starting to go off the cliff?

Thanks for keeping us posted.

starve the beast,

This is the massive dissonance in the current market. Soon all sellers will get the message that the ball is no longer in their court.

bear cave said...

Man, with these mortgages I could totally get a sweet seminar tour deal with Robert Kiyosaki. Who needs positive cash flow when you can give a motivational speech to literally tens of people and maybe even get a 5 minute spot on the local news? Why have money in the bank when you can have all the other benefits of success so much easier?

@ MMAB: the longer you're renting, the more you'll have saved and a CD appreciates at the same rate as a home, and frankly if you are a good value investor (or a really lucky speculator) you'll have beat all the "homeowners" in spades after they finally pay that damn mortgage. It's a sad state of affaris where having a "Home ATM", refinancing to use the equity to pay off debt, then running back up in 9000 credit debt again is the rule, and it's a shame those people believe they have got more status, but in another ten years or so we're all going to laugh at them. That, or they'll still be laughing at us and the "interest" we earn on "investment" (words that will be hard for them to pronounce)

@ All: I understand that SoCal is still an above-average bubble. Here on the East Coast, we had DC "owners" crying to the Post over how they couldn't find renters for their $400k mortgages which had lost 25% of their value and they were "forced" to live in the place themselves, so prices have already fallen there where it is *almost* possible to get above negative cash flow on rent. But here in NY (NYC, Jersey, Long Island, Connecticut) homes are priced still at tremendous rates--prices in Manhattan have been dropping but at a meager few points a year. New one-bedroom flats in Williamsburg sell for half a million, old ones sell for 300, and row houses and sometimes even just 30X100 lots go for a million. In my mind, you've essentially got two supply and demand curves--one is the renter's and the other is the buyer's. These are becoming enclaves of the rich--when you have people earning 50 a year living or receiving support from their parents, well, something strange is happening at a social level.

Anonymous said...

MMAB -

I know the pressure of wanting a house. But seriously, with a growing family, you might actually find that renting a nice larger apartment is actually going to give you the peace of mind you need.

Owning a house, unless it is a brand new house, is always a lot more work than renting. I know, I've owned a few houses and I can tell you it is a never-ending series of weekend projects to keep that baby in shape.

Once you have kids, you will have no time left to make sure the plumbing still works, the roof is intact, the bugs aren't growing in the walls and your electricity isn't shorting in some random spot.

You may be lamenting your fate right now but I can assure you that things are actually working for the best. While you may feel you have less space, you will end up with these bonuses:

1. You will spend far less time cleaning/vacuuming/dusting. More time for your wife and kids, more free time for you.

2. You will NEVER have to worry about what happens when an earthquake comes and damages your house, cuts off your water main or damages the street that connects to your cul-de-sac.

3. If a convicted sex-offender moves into your street, you can pick up and leave and keep your sanity.

All of these bonuses are NOT afforded to home owners, even those who can afford their mortgages.

There is a reason the richest people in the world rent their townhouses. They don't have time to spend being the butler and facilities manager of the very building they live in. That's a full time job, and the reason most buildings pay a facilities manager. Don't sign up for that job if you're embarking on another, more crucial one - child rearer.

Anonymous said...

Are these prices for real? I thought S. Florida was bad, where I was renting a $400,000 house for $1,800.

Make Mine A Bubble said...

Thanks, all, for your comments and advice!

In truth, we are waiting until next Spring to SERIOUSLY consider buying. Those of you who read this blog regularly, saw that we had put a low-ball offer in on a home. But we actually pulled the offer when we realized that the street the home was on was slated to become a major thoroughfair (transformed from a quiet residential street). Oops! Not happening...it pays to do your research!

I only approached the loan officers because, in the changing mortgage environment, I wanted to see what we COULD qualify for. It's tough to know with the regulations always changing. I want to stay current on our options.

So the minimum amount of time we're waiting will be a year. Still, I'm out there looking. If we find a seller willing to entertain a SERIOUS low-ball offer (like, 30% off asking price) we might buy.

I know all the arguments for not buying...upkeep, spending the weekends fixing up the house...make total sense! But the homes in our area are RENTING for the same price it would take to just pay a mortgage. All those FBers trying to become landlords. If I'm going to put time and money into home upkeep, I'd like to get some appreciation for it.

Couple that with the fact that the specific area where we're looking has LARGE lots (so we can eventually add on or rebuild) in a gritty up-and-coming area (where prices are still low) less that 3 miles from the beach (location, location, location!)...and we'll probably just live there for 25-years, pay off the mortgage and retire with no home payments. Enjoying the ocean breezes all the way!

I feel like it's a good move if we're planning on being "lifers" in that area. But in the shorter term, renting is definitely the way to go. We're just running out of room with one kidlet (and hopefully, another on the way, soon) in a two-bedroom townhome.

Wish us luck! And thanks again for all the sound advice!

- MMAB

Anonymous said...

Hmmm, not sure what the point of this blog was.

http://www.realestatewebmasters.com/blogs/james-boyer/morristown-real-estate.html

Dave said...

Hello,
I just got a new site through real estate web design they told me it takes time to gain rankings or even be listed on the search engines. Is that true? Please advise.
Thanks

Piko said...

Wow!! Excellent blog post! I'll definitely mention in our next podcast!!

Andrew
http://www.InvestorReviewPodcast.com

Anonymous said...

This commentary is hysterical!!!!! I love your comments on the featured homes for sale. On a serious note. The hosuing market is insane. I would never pay the prices people are asking. I have a friend who paid $100,000 for a one bedroom condo in hollywood thirteen years ago. He could now sell for about $600,000 and the rent on the unit would be about $2,000 a month. I know thirteen years is a long time but the current rates are still outrageous. It is infuriating.

Pete Maughan said...

Hey what are your thoughts on our site Real Estate Compete. Sellers get to choose between competing realtors based on commission, experience, and other factors. So the agents get more good homes to represent, and the sellers get the choice of paying lower or higher commissions based on quality of the realtor.

Anonymous said...

MMAB
I was in your shoes during the last big bubble peak in CA circa 1986-1991. Prices declined until about 1997, we waited the whole thing out in a rent controled Santa Monica apartment (sweet) - we had saved big down payment and were in perfect position to buy, and we statred looking as the prices started to turn around in '96. I suddenly got a job offer elswhere in the US and we ended moving and buying at the bottom in another market (now a big bubble as well). My take is you have to wait for at least two more years.
My buy signal would be several months of INCREASING volume and increased YoY prices. You don't want to ride this down. I had friends who took checks to the closing when the sold in CA in 1995 in Orange County. There is a lot of down cycle still ahead.

Jens said...

Mmmmm, what beats me is how somebody so knowlegdeable about the housing market can oversee that the price of a house is not only a function of the discounted summed-up rental returns minus (transaction) costs etc. but also of the discounted expected sales price. And for those believing in a continuing price increase, it is only rational to invest more than the sum of expected rent. This is not to say that you didn't pick excellent examples for excesses in the market. You did. And made a very funny presentation. Thank you for that.