June 05, 2007

Real Homes of Genius: Today we Salute you Lawndale. $529,900 to $454,900 in 2 Months. Breaking the Speed Limit of Cost Cutting!

Today we Salute Lawndale with our Real Homes of Genius Award. Let us become familiar with an acronym that we will be hearing about for years to come, REO. That is, Real Estate Owned. This means a property that goes back to the mortgage company or bank after an unsuccessful foreclosure process. As we can see from this exhibit, we have financial institutions deciding that they will jump in the river of denial with many current sellers. As in Shakespeare’s A Midsummer Night’s Dream, we have a bunch of nut jobs running around the forest wanting things they cannot have. Hermia refuses to marry the man her father has chosen and runs off with her lover Lysander to elope. I am not going to turn this into a literary analysis but suffice it to say that we have a play with many people running around in a drug induced Wonderland. Does this sound familiar? Can you think of another environment where people are delusional about their expectations?

Whatever happened to the “summer bounce” or the “spring bloom” that many housing pundits had promised? Can it be that the piper has finally played his last tune? Let us look at this 1,437 square foot home with 3 bedrooms and 3 baths. When you envision lifestyles of the rich and famous doesn’t this spectacular home come to mind? Like swimming in the public pool, this aqua colored trophy is set to entertain. The borrower converted the garage into a family den. Ergo it is worth nearly half a million dollars. Logic is a blast isn't it?

When we talk about foreign cars going from zero to sixty we get a sense of thrill in our gut. Red Ferrari Enzo’s that hum like exotic birds only to be crashed by Eddie Griffin for a charity event promoting Redline; a film funded by the now infamous Quick Loan Funding high roller, Daniel Sadek. The film was a bomb and apparently, his company is following the same fate as the Ferrari. Let us dig deeper into the history of this home:

Sale History

02/16/2007: $438,847

11/29/2004: $465,000
09/09/2002: $216,000

What do we have here? Can it be possible that we are back to 2004 prices? Like Wal-Mart, we’re rolling back the prices apparently. Blasphemy you say! How can an architectural masterpiece like this be worth any less than the peak price? Well let us take a look at rental rates in the immediate area:

We find that the median rent in the area is $2,200. Moreover, the monthly carrying cost for this place, at the current asking price is approximately $3,500. So a difference of $1,300 a month. Banks unlike sellers do not have the luxury of holding onto property for eternity until reality meets their hallucinations. Let us see what a motivated seller looks like in full action:

Price Reduced: 04/03/07 -- $529,900 to $499,900
Price Reduced: 04/25/07 -- $499,900 to $491,900
Price Reduced: 05/23/07 -- $491,900 to $454,900

Now we’re talking! In two months we have a $75,000 discount not including the sacred 6% agent commission. Why would you buy now when the momentum is clearly on the downside? Foreclosures may be the X-Factor in breaking the stalemate we’ve been in for countless months. The bank is not a property manager. They are not Robert Kiyosaki looking to rehab the place and flip-it to showboat on HGTV. They need to unload a costly asset from their books as soon as humanely possible. California carrying costs are not Ohio carrying costs. That is, each home the bank now owns has the weight of Atlas carrying the world. They unload now or bleed fast. Let us take a look at current foreclosure rates in Southern California:

California Statewide

2006 Q1 Notices of Default: 18,856

2007 Q1 Notices of Default: 46,760

That is a whopping increase of 148%. With inventories rising and pending sales dropping, the market is quickly becoming a buyers market. But why listen to the facts? Go out and buy this house because this price won’t last! Contrary to reason, trends, and everything rational this house makes perfect economic sense.

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

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Anonymous said...

Dr. Housing Bubble: I love reading your posts. Hilarious. Keep up the good work.

Anonymous said...

Dr. Housing Bubble, would it be unreasonable for me to guess that prices will be rock bottom in around 2012/2013 in the Inland Empire... or do you think it's gonna be much sooner than that ? thanks...

Anonymous said...

What tool bought this place in Feb and didn't see what was ahead? STILL tried to make 100k. I love to see 'em burn.

Dr Housing Bubble said...

@anon 10:11,

Thank you. Now don't go out and buy this place.

@anon 11:31,

This is an interesting thing here. By looking at the data, we may not see a bottom for a very long time. However, if you look at REOs such as this one, we see discounts of 15% in two months. I'm sure you'll be able to negotiate further in a few months. Yet higher priced homes will move and low sales will keep median prices high for the foreseeable future. Hence Rome will burn without the data reflecting it.

@anon 7:25,

Unfortunately every home buyer in California in the last few years is a speculator whether they acknowledge it or not. Some made out like bandits and some will get hurt. This wasn't a sound investment based on tried historical data but gumption and a maverick belief thinking SoCal was somehow exempt from the laws of economics.

Anonymous said...

Thanks, dr housing!

Yeah, I never thought of it like that, but you have a point. The last foolios I worked with that were looking for an 800k or so house(moveup buyers) around 2004/2005, were definately of the mindset that they were making an appreciating investment. 2 new babies so they *had* to have a bigger house, and wanted to get in because the market was only going higher. Maybe they'll be fine.

My coworker with the half million apartment-condo conversion in a crap part of SM, maybe not. A friend with a half mil condo in HB(not in a great area), I think he's looking at a loss as well. He was all smiles when the condo went "up in value" 25k between starting escrow and signing the paperwork.

I wonder if he'll even tell me what he gets for it when he sells.

But what do I know, I'm a bitterLArenter, priced out of the market forever, but watching the interest on my cash reserves compound daily :)

Home Value Hunter said...

Seems to me that people don't like to think about the fact that real estate is like any other stock - it's going to go up and down over the years.

So the seller decreased his asking price by about $75,000 or so huh? And in 2 months time. That's crazy.

But still, sellers need to be more realistic - too many are still holding out for that big ol' listing price when they really just need to bite the big one, drop the price down a couple grand and start over again with the next house.

Really, across the nation home value medians seem to be staying steady or dropping. Here's hoping when I'm ready to invest in a home, I get this kind of low listing prices and low mortgage rates!

Dr Housing Bubble said...

@anon 8:57,

You’re doing the smart thing. Those that bought have a stronger negotiating hand than first time buyers. But here’s the caveat. Anyone buying right now shouldn’t expect to sell in 3 to 5 years. Equity may or may not be there in that timeframe. So you better be sure your first home is one you’ll stay put in. And what can a first time buyer purchase with $500,000? Not much as you have seen. Of course you know intuitively that this cannot last and it won’t.

Save your money, read up on a few real estate investing books, and ready yourself when the time is right. Like buying stocks, timing is everything. I know it is hard for many not to be bitter especially if they are more conservative in their brand of investing. Again, I recommend buying property where it makes sense, whether that is in California or Idaho.

@home value hunter,

California median home price is $597,640. Nation median home price is about $211,500. We are talking about a difference of $385,340. I’ve talked about this bubble and how it is localized to high priced metro areas predominantly on the coastal regions. Other parts of the nation are wondering what all the fuss is about.

In regards to low mortgage rates, it shouldn’t matter as long as price-to-rent ratios make sense. The rate can be 15% but if it makes economic sense, then buy. The misnomer of low interest rates is that it has artificially inflated asset prices. Would you buy a Pinto on a 10 year note at a low interest rate for $100 a month? People have become so focused on the monthly nut that they forget the bigger picture. Advertisers are keen on this. Everything you see is “$39.99 a month for unlimited minutes” or “$49.99 for the all inclusive sports package” and the public does a quick calculation in the back of their mind if they can squeeze that into their monthly expenses. Wouldn’t you think twice if they said “$480 a year…” or “600 per year for…”; context is everything and semantics have a powerful psychological effect on the public.

Renter_IE said...

Dr. Housing Bubble

I have been posting as anon for a while now. Finally decided to created an account. Anyways, you seem to be very good at responding to my questions and I THANK YOU for that. So, here's another one: prices in the Inland Empire has been increased by over 300% over the last 10 years. I know incomes do not justify these prices. Do you think we will eve see 2000/2001 prices again in the IE. Thanks a bunch

Renter_IE said...

Just so those of you that don't live in the Inland Empire know, sellers are still asking OVER and ABOVE Zillow's values even though the advertisement says that "priced to sell" or "owner desperates". In Riverside, Corona, and the surrounding areas, you can purchase a brand new, bigger house, with a bigger lot, for less money than buying through these sellers. I don't think these "owners" realize it but the home buiders are very smart and have been dropping prices to move their units. On the other hand, the private sellers are hoping for the "summer bounce". hahahaha

Renter_IE said...

I am sick of hearing the Fed says that "without factoring the cost of housing and gasoline, inflation is very moderate". Hello... housing and gas prices are REAL costs, and yet they won't include these things... what the heck.. lol

Anonymous said...


I agree with you renter_IE inflation is tame as long as you live at home with your parents, and don't drive or eat. Otherwise you are basically screw-d.

I also want to say this is one of the better housing blogs Dr. I just wish I lived there to fully enjoy it. Colorado Springs real estate is insane but you guys have access to some really good drugs to pay those prices.

Anyway we have had a good 80% run up here in the last 8 years and you can now see cracks in the stucco. I sold last year and now rent for 1/350 of 2005 list. One of the local realtrolls here was saying he was seeing a signs of a bottom in April and a likely return to normal levels by July. Sales here were down basically 14% yoy in March, 15% yoy in April, and 18% yoy in May. inventories are at record highs by number but not by percentage.

Anyway I better quit wasting money on rent and get out there and pay twice as much to own. All I hear from the sheople is how I am throwing money away on rent.

Hang on and don't rush in renter_ IE I don't know how far or fast houses will fall but they will fall. Time is on our side and so are low rents.

Take care everyone and thanks again Dr. for a great blog

Real Vapid Bimbos of OC said...

Last I checked, the IE had no shortage of land. The builders will keep building and if seller wants to sell, they'll match the builder's price with a slight, if any, premium for being in closer or having a landscaped yard.

That is of course, what happened with the RHG, doesn't happen to every 5th house on the block, which courtesy of some of the investment scams seems to be a real possibility in some neighborhoods.

What's a Bank REO office going to do when they have more than one REO on a block in the same town? Or better, they look down the block, over a block and see REOs for sale by their five biggest competitors.

Anonymous said...

Posting as Renter_IE

I think the prices in the IE are not well justified for several reasons:
1. Like the last person's post says, there's no shortage of lands in the IE. There are empty lots everywhere. Thousands of acres are available in Riverside County
2. Incomes out here are not that high, not even over $55k per year
3. Home prices increased more than three times over the last 9-10 years.
4. We have a HUGE BUBBLE

Yet, people are still doing Refi. to purchase big SUV's... toys.. and such. I mean, they live way beyong their means (spending money that they do not really have). Better yet, they would bet their lives that prices will keep going up and that they would be able to buy anything in the future. I mean, they expect their houses to generate more income than their jobs. You guys see where I am going.
And of course they people think that renters are dumb. "why throw money on rent when you can buy and take advantage of the instant equity?" Even as we speak, there are idiots out there that are still buying... And then we have TV programs like the HGTV. They tell story of "flip that house". There's a guy on there who made over $200 k and still complained... Oh My God... I have rarely seen they cover the stories of those that are loosing money ( the majority of their fans are homeowners?)
Yet, the Fed is not willing to raise interest rates to help with inflation. They don't want to hurt the housing industry that helped fuel the American economy. We're spending more than we make... way more... for the first time since the Great Depression. lol... anyways... I'll keep on renting and wait for the opportunity.

Catherine said...

As someone who has worked in Mortgage banking for 19 years, I enjoyed your blog very much.
People forget that much of the money coming in to fund the loans was foreign and much of it has dried up for now.
I see more issues with people and their personal credit - carrying outrageous student loans and revolving debt. No one seems to want to talk about people living the life they want via charge cards, which ads to the burden of making todays mortgage payments.
I won't even go into the car loans for the cars they drive. I've also seen couples carrying car payments adding up to $1200.00 a month. My parents purchased used cars for cash until my brother and I were in high school.
Thanks for a great read.
Catherine, the redhead

Dr Housing Bubble said...


Thanks for registering. I always find it helpful when people use a name or even a pseudo-name when posting. Helps the flow of communication. In terms of seeing 2000/2001 prices I highly doubt that. Even though we have seen tremendous appreciation, prices are notoriously sticky on the downside. However, the likelihood of you finding a deal increases each month. Last year, finding a fairly priced home was like searching for a needle in a haystack. Now with REOs, you may have a stronger negotiating position. Summer of 2008 will be a vastly different environment and it will be a stronger buyers market in my opinion. I attribute this to resetting rates and the further scheduled reset of $1 trillion in loans. The housing pundits want you to believe it is a buyer’s market right now because they are desperate to keep the party going. No commission if you don’t sell something. We are a long way from bottom. However, as you have seen with some of these homes, bottom will come to some much more quickly.

And I’ve discussed Zillow before. In a nutshell, they are good in areas where appreciation is moderate (i.e., Midwest). In rapidly increasing markets, they use recent sales which take up to 2 to 3 months to register with public tax records and are major lagging indicators. So you are driving forward looking in the rear view mirror. As you can see in Southern California, they are showing peak prices when clearly the market has changed. If they truly factor pending sales, market sentiment, mortgage accessibility, I would imagine Zestimates would be much lower. But they can only use previous tax data and comps in the area. Otherwise their guess is as good as yours. Good for pulling up data and factual stats; not very good in determining the price of your home in the future.

@anon 8:45,

Appreciate you reading the site. We all need housing. Rent is providing a roof over your head. You are getting a service. When you go to a movie and pay $10, you get the pleasure of enjoyment. You don’t “own” the movie but you pay for the utility of the service. Same thing with housing. It is a forced savings account if you own. And you don’t truly “own” the place until you pay off the mortgage. Most people have their major assets locked up in housing because they don’t have the discipline to save diligently in the stock market or other investment vehicle. Why would you chase 6% returns when you can get 15% returns? Again this takes an ability to discern what is a good and bad investment. Housing in the past has been a slow solid investment. Only in the past few years have we seen such massive growth nationally.

Like a stock, homes hold an underlying price-to-rent ratio like a stocks P/E. Yes, a house isn’t a stock; you can’t live in a Google share but come on, we can still use similar parallels. Good luck on your investing.

@real vapid bimbos of OC,

You are absolutely right. We have a lot of desert in California. Have you taken the 5 up North? Or what about the 15 East? There is no shortage of land. Somehow these desert cities got swept up in the California shenanigans and benefited from a halo effect. When we talk about prime land we normally look at proximity to the ocean or certain areas such as Newport or Santa Monica. Last time I checked the IE had a nice drive to your local beach.

@anon 10:48,

Refinance is the name of the game and that has kept this economy afloat. Now with mortgage equity withdrawals (MEW) falling so are disposable income sectors. Even big daddy Ben said inflationary pressures are still present (aka no rate cut). And a .25 rate cut is going to do nothing for a $400,000 mortgage setting to reset. And all these people turning profits from each refinance will find a dry and arid environment. And all these shows like Flip this House play into the collective cultural mentality that real estate never falls. We have Donald Trump rich via real estate. We have Robert Kiyosaki, a top selling author, preaching the bible of housing. And housing is a good investment but they water it down so much so it is edible by the public. Buy a home for $300,000 and flip it for $350,000 – see how easy it is? But what about appraisals, contractors, agents, brokers, title companies, insurance, and other variables you have to factor in. Not so sexy anymore.

@Catherine the Redhead,

Nice to have folks from the industry here. $1,200 a month for car payments a month isn’t atypical. You have a couple driving a Lexus and BMW leased and there you go. I had a person tell me this: “We need to take another vacations so we’re going to refinance again. Then next year, we need a pool so we’ll just refinance again.” The underlying view is this – equity builds up, tap it out, equity builds up, withdraw. The money is meant to be spent. We all know numerous examples like this especially if we work in a business environment. But true wealth, as highlighted in the Millionaire Next Door, usually doesn’t take the projected form of conspicuous consumption. Great to see a diverse readership.


Dr. Housing Bubble

Renter_IE said...

I totally agree with you Dr. Housing Bubble. Just because we have some negoiation power does not mean that this is the time to buy. can't wait to see what has been stored for us this winter.

Renter_IE said...


The amazing thing is that there are people out there that buy nice cars, boats, and other things but they cannot make the monthly payment without tapping into the so-called equity of their homes. In my opinion, the concept of equity is misunderstood by some people. This money is not yours until you sell the home (and where will you live ?), if you refinaced and pull out the cash, it's a loan that you must repay... I tried to explain this to my coworker and she went crazy. lol

graphrix said...

As always a great post.

The NOD numbers should be higher this quarter despite the tax refund month of April that slowed down. My guestimate for OC is 982 for May and I will say it could be off plus or minus 50 but usually it is more like 25.

I saw a foreclosure 603 12th street 92648 sell at the auction for $783k when it sold in 2005 for $980k. A nice 20% nominal drop and this week there is another one on 12th street up at teh auction.

Anonymous said...

Local blowhard. Had to share:


Anonymous said...

Sorry about the hinky link.
Here it is in all its idiotic glory:

Tom Elias (Blowhard)
Daily Breeze
7 June, 2007

Yes, there have been small declines in some relatively overbuilt parts of this state. But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat.

By Tom Elias

It happens every year about the same time pitchers and catchers report to Florida and Arizona for the start of spring training: "For sale" signs pop up all around California like toadstools after a heavy rain.

And this year, there was good news and bad news in the springtime for both buyers and sellers.

First, the bad news. The intense boom of the 1995-2005 decade has plainly petered out. Anyone who buys a California home and expects to make a 20 percent profit in less than one year - the same kind of expectation fostered by the dot-com stock balloon of the late 1990s - is in for a serious disappointment. In the most heavily populated parts of the state, there will still be profits, but they will be in a more normal range, about 4 percent or 5 percent per year.

That is also the good news. For while the rest of America, places like Miami, Denver, Houston, Phoenix, Boston, Washington, D.C., and other boom markets of the last 10 years are suffering declines, that's not true in most of California.

Yes, there have been small declines in some relatively overbuilt parts of this state. In the third quarter of last year, home prices in Orange County dropped by 0.8 percent - less than 1 percent - from the previous year. In Sacramento, the drop was about 3.5 percent and in San Diego County approximately 2.1 percent.

But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat. That's also true in places that are built out, with little hope for new housing that isn't constructed on the sites of previously existing homes.

Examples of these phenomena are Seattle, with a 14.6 percent price rise during last year's third quarter and the Inland Empire area including Riverside, San Bernardino and Ontario. Prices there were stable, even as the number of houses and condominiums sold was down. Reason: Many people who expected to make a quick profit pulled homes from the market when they realized windfalls weren't coming.

In the Los Angeles-Long Beach market, buyers paid 5.2 percent more this spring than a year earlier, and in San Francisco they paid an average of 3.8 percent more.

None of these positive numbers will blow investors away. But they ought to be comforting to recent homebuyers who paid top dollar and worried they might lose equity they saved for years to create.

In fact, price increases have slowed gradually for most of the past year all over California, but the state has been spared any precipitous drop. It's one thing not to be making windfall profits. But it's no disaster when prices remain fairly stable while wages and salaries gradually catch up with prices that have risen sharply for about 10 years. That kind of pause can even be constructive, as it both allows a new cadre of homebuyers time to save up the down payments that can get them into the market.

It's also a familiar part of the California real estate cycle. Booms in California generally last eight to 10 years, followed by leveling-off periods of about four or five years.

Immigration is the reason this state rarely experiences true busts after its booms. The more people pile into California, the greater the demand for housing. Demand begins at the bottom of the price scale, but when owners of the cheapest housing sell to newcomers at a profit, they suddenly gain the ability to move up to a new level. This propels the homeowners from whom they buy yet another step up the ladder.

Anonymous said...

Wow... Oh My God... was the guy being serious ????????????

The North Coast said...

Dear Dr. Housing Bubble,

I enjoy your blog immensely. The writing is witty, elegant, and absolutely to the point.

Don't think we don't have a bubble out here in the midwest. We do, even though it isn't as insane as in your neck of the woods only because the lending was not quite as crazy. Here, we will only write some minimum wage worker for a $300K condo, not a $750K house. People are more inately conservative here, but that has not kept the moderate-priced housing from becoming really overpriced relative to local incomes.

However, if you compare Chicago prices of 1999 with those of 2005,or even 2003,the runup is insane. Prices have even tripled in select neighborhoods, notably those that are "gentrifying" or "up and coming", however you want to put it. Now, these are not absolute slums like those you show us in SoCal, but they are still "marginal" with above average crime and bad schools. What saves them is truly beautiful old housing stock. There are hundreds of really lovely 20s vintage courtyard buildings and six flats that anyone would want to preserve.

But they are still overpriced in terms of what the target buyers for these rehabs and good intact vintages are able and willing to pay, including me. Figure that the max debt:income ratio for a 30 year fixed is 3X, in other words, a sensible buyer should not have a mortgage more than 3X her income, and that's only if there is no car payment or significant card debt. By that yardstick, this stuff is overpriced, and is now falling fast, though not fast enough for this bitter renter. Most of the places bought in this city in the past 5 years are on "creative" loans, about 80% adjustable loans, even though there are fewer IO and reverse amo loans than in SoCal.

Even in Ohio or Michigan, the prices are way higher than they should be, even though I'm sure they looks like gifts to people in CA. You can buy a spectacular vintage 3 bed 2 bath condo in Shaker Heights, a top tier suburb of Cleveland, and it has herringbone parquet and exquisite millwork and high ceilings, for $144K. You couldn't touch such a place for less than $400K in Chicago. So why doesn't it sell?
Because you can't make a living in Ohio, or Michigan, right now. So, relative to the means of the local population, the prices there are obscenely high.

The housing "bezzle" is a nationwide bomb set to blow. One economist quoted last year in THE ECONOMIST estimated that it would take up to 10 years for housing prices in the U.S. and the salaries of buyers to be back in parity.