This enormous 816 square foot home has 2 bedrooms and 1 large bath to entertain guest. The agent tells us that the kitchen is completely remodeled with granite countertops. Granite countertops of course, are the ultimate status symbol of home prowess. Consider it the virility of a strong homeowner. Otherwise, you are ten steps down on the housing evolution ladder. This place also has “custom paint colors” like the low riders you see jumping on hydraulics on
This home is so great, that it sold twice in one year:
08/31/2006: $500,000
03/17/2006: $489,000
The last buyer enjoyed the place so much they decided to hand it right back to the bank in 6 months. The bank, looking at sophisticated market analysis of the area decided to put the home back on the market for $500,000. This price was arrived at by the “latest greater fool theory” of appraisal or LGFT for short. Looking at the LGFT, the bank figured they would easily recoup their money. Forget about the subprime implosion or mounting inventory, they put on their rosy colored glasses and saw the market according to them. Here is the pricing action on this great home:
Price Reduced: 04/24/07 -- $499,900 to $485,000
Price Reduced: 05/27/07 -- $485,000 to $470,000
Price Reduced: 07/11/07 -- $470,000 to $450,000
Price Reduced: 07/18/07 -- $450,000 to $400,000
After a month on the market, the bank decided to reduce the price by $14,900. This certainly would generate some interest. May goes by and still no buyers. So the bank decides to lower the price by another $15,000. What is going on the bank wonders? This isn’t the housing market of 2001-2006. The bank decides that it will wait for the fabled summer housing Easter bunny before reducing prices again. Early July and no buyers are found for this place. The bank decides to get more aggressive and drops the price by $20,000. Nothing. Now something happens at this point. Either the bank is getting nervous about “bubble bursting” talk or is desperately ready to unload the home. Only a week after the $20,000 drop the bank goes down another $50,000! Holy crap! In one week this home went from $470,000 to $400,000. Now that is what I call pricing a home to sell.
As you’ll notice from the short sale count on this site, the number is growing daily. All of a sudden, risky interest-only-no-money-down-exotic loans are unavailable to customers. Someone will have to come in with 3 to 5 percent at a minimum to buy this place. Believe it or not, this minor adjustment to the mortgage market is enough to collapse the bubble. I’m not sure what constitutes a crash but losing a $100,000+ in 6 months is pretty significant. A 20 percent drop in 6 months is definitely a bubble bursting. This is a preview of things to come since we are only in the first stages of rate resets, growing inventory, declining prices, and tighter credit. Take a look at the market demographics for
Average Annual Household Income: $69,279
Median Mortgage Debt: $43,631
Median Net Worth: $47,348
What does the data above tell us? For one, the median mortgage debt is low meaning a bulk of the people that currently own homes in the city bought prior to this decade long bubblemania. Somehow I doubt the previous two buyers on this place came in with 10 or 20 percent down. Next, you’ll notice household income isn’t anywhere near the amount to support $500,000 homes. Since doing a monthly balance sheet is so useful (too bad many folks didn’t spend 10 minutes doing this before signing a mortgage) we’ll run the numbers here if we were to buy this Real Homes of Genius at the current $400,000 and earned the current median income of the area. Time to bust out the financial calculator and do some housing magic!
Monthly Gross Income: $5,773
Monthly Net Income: $4,526 (filing as married couple with 2 allowances)
Monthly Home Payment (PITI) = $2,817 (5% down and market rate of 6.5% on 30 year fixed)
Monthly Auto Fuel Cost: $350 (average for 2 vehicle households)
Monthly Auto Insurance: $120
Monthly Auto Payment: $500 (assuming modest car loans)
Monthly Food Budget: $400 (moderate shopping budget)
Monthly Disposable income: $339
Keep in mind we are not factoring in cell phone costs, utilities, cable, healthcare, and pretty much anything else you pay on a monthly basis. As you can see, even with the $100,000 reduction this home will still consume 62 percent of the family’s net income. Let us do a bit more research on the rental market for this area. After looking at rental data, the median rental rate for a 2 bedroom place in the 800 to 900 square foot range in
When you run the numbers, you realize we are in some other twilight dimension of housing here in California. Keep in mind this home is massively “under priced” for this area which has a median home value of $505,000 according to the latest housing reports.
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17 Comments:
Amazing. and the LGFT sounds like Al Bundy's Bigger Idiot Theory. Same principle.
This summer we will hit a Minsky Moment.
Always love reading your financial calculations, your 'back of the envelope' calculations pretty much agree with mine each time. I actually sold a 'Real Home of Genius' a few years ago. I bought the thing as a modest income property back in 2000 before the bubble really heated up. I was making a net return before taxes of 14% on my 20% down payment each year (I eventually got the rents up to making 22%). In 3 and a half short years, suddenly a guy wants to buy the home for than more double what I paid for it. I enjoyed the income stream, but, when one is offered such a payoff, I took it -- I literally thought I won the lottery, but, I never buy lottery tickets, go figure. Besides, managing a property in New York is running the Gambit. There are numerous deadbeat tenants out there, and judges and housing agencies (i.e. Department of Housing Preservation and Development), the have an unveiled animosity towards landlords.
At any rate, I also did the back of the envelope calculations for what this guy who was buying it from me would be facing and as the deal was structured. He was going to end up having a negative cash flow of $1100 each month, for the mere privilege of providing housing to hostile tenants and dealing with the government-zombies that want to manage NYC housing. I thought he was either he's a saint or a fool. To be nice, let's call him a saint.
At any rate, I have never bothered to get back into real-estate, and in fact have been renting since then, as it's simply far cheaper.
What is actually amusing, is the guy who bought my place in late 2003, could have probably even made $200K or so if he sold in 2005. And of course, even though I grossed nearly 300K on the sale thinking this is an insane bubble, the bubble naysayers say I'm stupid for selling too early and loosing that $200K -- go figure.
At any rate, just a little anecdote about my participation in a 'real home of genius'.
-mrfnuts
PS: Dr. HB, let me congratulate you for being quoted by one of my favorite columnists last week...the famous 'Mogambo Guru'.
http://dailyreckoning.com/Writers/
Mogambo/DREssays/MG071107.html
Wow, a real blog of genius! Home equity, retirement & the middle class? Look out below - this baby's gonna blow!
http://www.youtube.com/watch?v=QqkbHV3C9L4
Beatiful job Dr. Housing bubble. Keep the news rolling. This will not be the last time we hear about someone getting hammered in the Real Estate market.
Visit my blog:
http://housingtsunami.com/blog
Can we get an address on the properties listed? I would like to look them up on Zillow. After all if Zillow says they are worth 500k, then it must be true. :)
What we are finally starting to see is cracks in middle to upper priced homes. Yes, the data still shows that these homes are resilient and holding on to their price gains. But for how long? Now that the cards are on the table, and everyone is aware that housing will be in for a tough ride, how low will the market go? I’m surprised no one challenged Countrywide’s statement and massive loss in revenue for solutions or projections. Even though they paid lip service to a declining market, they quickly jumped onto the Pollyanna rhetoric of “but in 2009 we’ll be back up!” The point being, no one really has a clear idea of how low the market will go. As you can see from this example, some banks are willing to drop 20 percent in a few months; and we are barely in the first stages of this housing bear market.
How low do you think it can go?
This is not a criticism, but aren't we supposed to take into account "appreciation" and tax advantages of ownership in the rent v. buy calculation. Given a holding period of 5 years, I don't know what the appreciation would be for the house or the rents, but it would make sense to take estimates into account.
Of course the central point is the same. California is crazy and has been so for some time.
you make a good point regarding rent v. own comparisons, but i think dhb's point is that appreciation for the next 5 years is likely to be negative or, at best, flat.
100K in six months is more than a problem it is a crisis. I checked the price of the hous accross from a friend of mine. It has done the same ting down here in San Diego. It started at 525K and now it is down to "a value range" of 440-475. Oh...It still isn't selling. Ive been telling people for the last few years that the average person can't afford a 500k house. Lets just say that I was looked at like I had 3 heads. Its one thing to take an ARM if you can afford the loan at the standard 30 year rate. However these idiots let "used house salesmen" (Realtors) and "using enablers" (mortgage brokers) convince them that they should get a loan at a teaser rate that they could only afford (even at that rate) in the best circumstances. The world is now falling down around the buyers, used house salsmen and using enablers and they can't believe it. "It's will turn around mid summer" that was from a used house salesman in a TV interview. Mid summer? It's freakin July. I'll just rent for less than half of what it costs to buy and with no risk from people who profit from seperating me from my money. The one thing that helps me sleep is that used house salesmen don't get paid when they aren't selling. LOL
My wife and I are renting in the IE. Our rent payment is equivalent to a mortgage payment on an about 650000 house including taxes and insurance. We can't find a house that we like at 650000. Therefore we rent and we have a household income of 300K annually. I'm amazed at the kind of debt people who make less than me get themselves into. If I really can't "afford" a 500K house, how can others??? It is just too much of our monthly net after we save for retirement.
Used house salesman is one of the best phrases that I've read lately, thanks!
I looked at a house in upland on the market for just over a million dollars, just for fun. We liked the backyard but the house was smallish. The owner asked another couple that was looking at it "what do you think of the price?" The guy gave a lame answer like "well it depends on who you ask." Actually the seller said it is priced at the appraisal done 3 months ago. Ha! Everyone knows (or should know) that the appraisal industry has lost every shred of credibility that it once might have earned. It is a sham. You expect ME to buy YOUR house based on an appraisal?? Ok, I guess I must be retarded so I'll make you an offer... HUH? The only offers that should be made on houses in this market should be reasonable... unfortunately to make an offer 200K less than asking seems unreasonable. Well, might I remind you that in 1999 a 1400 sq ft entry level home in Rancho Cucamonga sold for less than 200K? If I would have told you then that they would be listed now for 500K would you have thought that was "unreasonable"?? Of course you would have? You would have thought I was delirious!
The local paper "daily bulletin" had an un-enlightened article in it today about housing quoting some nutcase that buyers and sellers are equally comfortable waiting this out and that our upcoming population boom will take care of all the problems. Really?
Some talking holes have been visiting the legal dope dispensery in Claremont... and it ain't for cancer pain treatment...
wow, some body know,2+2 is 4 not 22.
I love my math teacher.How guys afford 3000 payment with 2000 per month salary, beats me.Exotic is fun in vegas, not in home.
lets wait,when real housing price sets in in real tome coming soon.
Musnbny - Hit it right on the head. I lay in bed at night wondering how people do it. I have a household income of about $300k and we really have to think about the idea of buying anything for more than $600k. With homes in my area (West Los Angeles - 90066) selling for well over $1MM, I just don't know how people do it. My rent is $2,500/month - which is quite a bit less than what I would spend on a mortgage, but I have a horrible time thinking I should just "do it".
Sigh, I need a support group (AA anyone?) to keep me on the narrow. Keep me away from putting the Real Estate 2007 Noose around my neck.
Here's a RHG located in the South Bay - doesn't everyone want to live at the beach?
http://tinyurl.com/3ynygq
MLS#S935980
Sales History
Date - Price - Appreciation
10/10/2006 - $800,000 - 16.2%/yr
06/06/1996 - $169,000 - -46.0%/yr
09/25/1995 - $260,000 - -8.1%/yr
01/14/1994 - $300,000
--
Heres another RHG...
MLS#: S489104
8445 NORWALK BLVD
Whittier, CA 90606
Sold 9/22/2000 $153,000
Sold 7/13/2004 $335,000
For sale today $229,500 (!)
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