I know many of you must be feeling overwhelmed with all the hard-hitting housing data from recent weeks. The sky isn’t falling, but home prices are. Foreclosures and short-sales are hitting the market daily and adding up like an abacus. I’ve decided that it was time to get our feet placed solidly back into reality with another fantastic and spectacular deal here in sunny Southern California. Today we salute Buena Park with our Real Homes of Genius Award.
If you are not familiar with short-sales don’t worry, soon you’ll be reading and hearing many mainstream articles discussing this growing phenomenon. A short-sale, for the sake of simplicity, is selling a home at a loss. Typically, this happens when a seller needs to unload the home but finds that their mortgage(s) has put them underwater. Unlike the Fed, the IRS isn’t one to give bailouts so sellers still need to pony up even after a short-sale is executed. You may be wondering why you haven’t heard much about short-sales in the last few years. For one, a rapidly appreciating market as we have here in Southern California masked a lot of financial irresponsibility. For example, someone bought a home for $350,000 but after 2 years, was unable to pay the mortgage; the mortgage may have adjusted or simply the carrying cost started weighing on the owner. Either way the owner is feeling the pressure to sell. They appraise the home and find out it is now worth $510,000. Instead of dealing with a bad purchase, they are given a nice cashier check for all their woes. With such rapid housing price growth, the market hid the fact that many people were unable to afford the home that they bought. But what happens when appreciation disappears? This is were we discuss the Buena Park home.
This majestic 717 square foot home includes 2 bedrooms and 1 full bath. The fresco color gives you the feeling that you are in a Monet painting. Supreme Scream isn’t only a ride at Knott’s Berry Farm, but also your reaction when you realize you bought at the top. Let us take a look at the sales history of the home:
What are we to make of this? Well for one, the purchase of the home was only five months ago. At the sale price in March, this gorgeous home fetched a whopping $711 per square foot! No bubble here. The current price is $465,000. So already in five short months, we have a reduction of $45,000. Not bad for waiting a few months to purchase a home.
But the magnitude of the bubble is highlighted even further when we look at the neighborhood data. Let us dig deeper in the anatomy of this microcosm of the housing market:
Average Household Income: $57,022
Monthly Net Pay: $3,811 (filing as a married couple with 2 federal exemptions)
Monthly PITI: $3,066 (Assuming 10 percent down and 30 year fixed at a generous 6.27 percent)
So what does this added information tell us? A family buying this home putting down $46,500 (what it dropped in 5 months) is looking at spending a whopping 80 percent of their net pay on housing. Talk about crazy ratios. If it is overpriced at $465,000 what were people thinking at $510,000? The only logical explanation is we are in a bouncing bubble. What does a comparable rental go for in the area? The median 2 bedroom 1 bath rental goes for $1,425. Owning this home will cost you twice as much as renting a similar home. In economics, we call this the substitution effect; if something is too expensive and there is a respectable alternative, many people will flock to the lower priced item. With tighter credit standards, the substitution is already happening by force since people in the local area cannot qualify to purchase a home. In addition, no investor would buy this place. Think about it. Your carrying cost is $3,066 and your monthly rental income is $1,425. You are in the red for $1,641. You don’t need to be Rene Descartes to figure out that the math doesn’t work on this one.
With all the chatter regarding the subprime debacle, Fed intervention, and collapsing mortgage operations why isn’t the mainstream media stating the obvious? Incomes in many metro areas do not justify the current prices and hence the market is viciously correcting. In other words, massive credit speculation allowed people to buy more than they could afford.
Today we salute you Buena Park with our Real Homes of Genius Award.
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