August 31, 2007

Real Homes of Genius: Today we Salute you Cerritos. All 88 Los Angeles County Cities Overpriced.

What an interesting week. As Rome burns and the political syndicates offer every possible option of bailing out the rouge gamblers and maverick flippers, they fail once again to highlight the nucleus of this bubble. Forget that the Bush Administration is offering a bailout plan even after he said they would do nothing last week. Pay no attention to the Fed with their implied wink-wink posturing that they will lower rates. So what. Homes are so overpriced in nearly every metro area in the country that they can drop rates to 0 and it still won’t make sense to buy because prices are out of line with local household incomes. Would you like to buy a beat up Ford Pinto for $30,000 simply because the interest rate is 0 percent? Apparently this is happening with all these Real Homes of Genius we are seeing. You may think that we are grabbing at low hanging fruit. But these homes are priced from $300,000 to $500,000+ in lower to middle income areas. Last time I checked, $500,000 was no low hanging fruit. So as the media is doing a Pavlovian response to an implied bailout, the fact is nothing can bail out an overpriced home by someone that simply cannot afford the payments. And to show you this, we are going to include higher priced homes in Los Angeles County to drive home the point that in EACH of the 88 cities in our county, prices do not make any economic sense. Today we will shine our flashlight on Cerritos. A middle to upper-middle class area in Los Angeles County. It is with great honor that we salute you Cerritos, with today’s Real Home of Genius.

Today’s home is what one would expect as a starter home for a professional family in Los Angeles County. A safe area, good schools, and a place one would probably like to raise a family. This home is over 2,000+ square feet, has 4 bedrooms and 3 bathrooms. Nothing spectacular. So what was this home initially listed for? Well someone actually thought that we were still in 2006 and listed this place for $778,000. Apparently there are no takers at this price. Let us take a look at the pricing action on this home:

Price Reduced: 08/02/07 -- $778,000 to $759,000
Price Reduced: 08/17/07 -- $759,000 to $739,900

Clearly not many people were biting at $778,000, or looking at it from another perspective, $200,000 away from $1 freaking million dollars! This is a four bedroom home in a middle to upper-middle class neighborhood. This isn’t Atherton or Beverly Hills. Before you shed a tear for this seller and bring out the violin, let us take a look at the previous sales history on this home:

Sale History

10/04/2002: $430,000

12/24/1998: $275,000

So even at the current sales price, these sellers are looking to come away with a $300,000 profit in 5 years. Since real estate over the long-term has followed in line with inflation, how would the price for this home look like if we followed a 5 percent annual increase starting in 1998?

5 Percent Increase

Current Sales





base year























So already with the sale in 2002, using 1998 as our base year the home at a 5 percent inflation rate is over the baseline by $95,736. Keep in mind the government data police are constantly telling us inflation is at 3 or 4 percent so we are being overly generous with 5 percent. If we continue with the trend, once we reach our current date of TODAY, we are now off by $312,385. Almost double what the inflation adjusted price should be. So this is back of the napkin math Dr. Housing Bubble; I’m sure people in Cerritos make $300,000 per year to justify these prices. Well let us take a look at the current average annual household income:

Average household income: $89,391

Not bad. A lot better then the $50,000 average we find for other Real Homes of Genius areas. But let us run a hypothetical scenario of a current family making the average income buying this home:

Monthly Net Income After Taxes: $5,603 (Filing as married with 2 exemptions)

PITI: $5,193 (10 percent down and current jumbo rates)

So this family is left with $410 disposable income each month. Bwahaha! Absurd. It is such a joke that these financial institutions, politicians, and other renegade zealots of housing are trying to keep this game going. Tax breaks for short-sales. Subprime support. GSEs being able to refinance mortgages into current FHA products. Are you kidding me? This may help people with subprime loans in areas where home prices are $250,000 or less. People can’t afford homes at current prices in Los Angeles without voodoo mortgages. The only way this game will keep going is if the subprime market opens up again. Now who is going to finance these high-wire mortgages? Doesn’t seem like Wall Street wants anymore. The government can only do so much with FHA loans and besides; the Fed has already stated they won’t lift caps. So that pretty much puts a plug on California since the entire region is jumbo-exotic-mortgage territory. Notice how politicians aren’t talking about bailing out people in Florida or California specifically? They are casting a wide enough net and when you dig into the details, the train is still coming. All these bandaids are simply that, a patch on a bigger problem.

They can jawbone all they want with Pollyanna projections and we’ll keep on showing how overpriced and absurd this market is and why foreclosures are exponentially growing. I’m keeping my eye on short-sales and foreclosures and each week, the numbers are consistently going up. The party is over and as much as they want this game to go on, nothing short of sucking the last drop of energy out of the dollar (which they may do since they don't care about fiscal responsibility obviously) will rescue this defunct mission. Housing is going to stay in a bear market for years in California. Why? Because like Bob Barker would say, the price isn’t right.

Today we salute you Cerritos with our Real Home of Genius Award.

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Mr.Mortgage said...

FHA Plan:Bring a water gun to fight a fire.

The North Coast said...

I am absolutely enraged at the Bush's bailout proposals.

We have CNBC going in our office all day, and the brainless optimism and cheerleeding on that show is sickening enough.

However, when the bailout discussion, which I listened to with one ear, was being discussed, I heard ONE phrase repeated, say, in just these words, that"

"election considerations will come ahead of moral hazard",

No kidding. Forget about any considerations of intrinsic fairness and justice.

Forget, even, about whether or not these various types of direct and indirect props to the bloated housing market can even accomplish what they are intended to. We know they won't and that, if anything, they will push this country that much closer to total insolvancy.

We don't know yet just exactly what will be done. All the proposals are more or less unpalatable. All of them involve flooding the markets with more liquidity, which is like trying to cure addiction by giving the addict more of the addictive substance.

The pandering politicians will turn this place into another Perron-era Argentina or Weimer Germany.

This poor, stupid, illiterate, piggish Clown Country has absolutely had it.

I was looking forward to buying at a reasonable price, but now I'm just scared.

eestiseebimull said...

Great post Dr., as always!

In your opinion, how the recent decisions by the FED will affect the dollar? Inflation is a given, but what does it really mean for a regular person? How do you think the savings will be affected? I believe if the FED will keep trying to keep the housing prices at the level they are now, hyperinflation is risk. What is your opinion on this subject? Any resources on this subject will be very much appreciated.

Thank you!

stups said...

thanks for showcasing these types of homes as well. :-) really like the inflation-price chart, such a clear explanation!

Dr Housing Bubble said...


Remember when subprime was supposedly contained in a neatly packaged silo with a bow-tie? This is what the Fed was saying a few months ago. This is what they said today:

"The financial turbulence we have seen had its immediate origins in the problems in the subprime mortgage market, but the effects have been felt in the broader mortgage market and in financial markets more generally, with potential consequences for the performance of the overall economy," Bernanke said.

Another reason not to trust these yahoos. If they missed the boat only a few months ago, do you really think they have a handle on the situation now?

Renter_IE said...

Dear North Coast.. If you read my last couple of posts, then you know that I feel exactly the way you do. I have no idea what your financial situation is, but I can tell you all of these helps that the Fed are giving to "save" the market are hurting people like me. Unlike some people, I earn just above median imcome, a recent college grad. I did almost everything right. I do not finance my car. My girls and I both have decent entry level jobs that pay in the $40k's... We managed to save $40k so far and hope that we can purchase a home in the next couple of years... not in Newport Beach... just in the Inland Empire (we'll need to spend 2 hours everyday commuting) If Bush bails out these folks and home prices stay high, we will never be able to buy... or want to buy... insane..

joanne said...

I'm rather alarmed now too. Our wise leaders may have gotten us into a situation in which there is no easy way out - Depression on one side and hyperinflation on the other. But I fear hyperinflation more, because it's more likely to happen whatever the Fed's choices, and because it's more likely to be the Fed's choice.

The housing bubble is like Iraq, theres no good way out anymore, we should never have gotten in. Oh what a tangled web we weave when first we lower interest rates below the rate of inflation!

I watch in dread, from the not quite safety of my rented walls.

boristhewet said...

I totally agree that the condo and housing market in big cities like Los Angeles is in for atleast a few years of mayhem. What really gets my goat, though is real estate investment scams like that charge thousands and promise people can make millions from their homes part time without ever having to look at or see the properrties or without any experience. Here is a great article on this scam and full of great tips and links of where to go to get your money back if you get taken. It is a absolute must read for anyone in real estate investing!:

Bestbraindrain article on real estate investment scams

B. Smithey

Steve said...

My advice for those living in a bubble... Unless you bought a house when prices were reasonable and can ride it out, GET OUT.. LEAVE...

Move out of California. Go someplace with a reasonable cost of living. If everyone between the ages of 25-35 woke up and realized that they simply can't have a high qualify of life and can never hope to retire given the cost of living, there would be a mass exodus.

For all we know this is already happening.. I bet U-Haul has some interesting statistics in their databases. Once Calif. is reduced to 3 old guys that have paid for houses, the cost of living might be reasonable.

Dr Housing Bubble said...

Okay everyone. I feel better. The HUD Secretary said that he feels they caught this thing "just in time" and that we will have a "soft landing." Big thanks H.U.D. He said if this thing would have gone into 2007/2008 we may have had larger problems. I guess 2007 doesn't start for this guy until after Labor Day. Watch your tax dollars at work:

CNBC HUD Secretary

Renter_IE said...

I totally understand how you feel. We are going to face crazy inflation... and the Fed has little power to change it. Let's face one fact guys: if the economy tanks, a democrat might be elected as president in 2008. And Bush does not want this. The value of the dollar will continue to go down and we will have less and less purchasing power. What I am fearful of is that although there are plenty of houses out there, the only ones can buy are people from other country. Some young kid from France's gonna but a condo in Miami with his allowances... sad...

Unlike some people, I cannot move out of California... My job is tied to here and only here. And frankly, being an Asian American, Californians are not as racist against me as folks from other states... I can't move to Salt Lake city and expected to be treated equally... just my point of view...

thamnosma said...

I don't agree with everything the author says in the link below, but I'm quite scared that I think he is far more accurate than anyone on CNBC.

To renter IE:

First, did you get the line about the kid from France buying the Florida condo from Peter Schiff?

Also, please do NOT make assumptions about how Americans treat Asians across the country as you are simply wrong. Asians, as well as people from many many other countries, are assimilating just fine, thank you, throughout the US. Do not simply believe Hollywood or news media portrayals.

You can move to Chicago, St. Louis, Madison, Wisconsin, Tulsa, Oklahoma or many other places and enjoy your life.

thamnosma said...

Sorry, the link was bad:

thamnosma said...

last time, apologies. When I copy the link into this dysfunctional message board, the program deletes the required .-h-t-m-l at the end. Dashes added to fool message board program.

Or just go to lots of good articles there anyway

Dr Housing Bubble said...


You have to check out this thread regarding the major bailout talk today. Just goes to show how disconnected our current politicians are with the people on the street:

MSNBC Real estate message board:

Question: Should the federal government bail out subprime mortgage borrowers?

2,500+ Messages and 99.9% do not support the bailout.

KTLA also did a brief poll:


Question: Do you think the government should do more to help homeowners keep their houses?

So the government is pushing bailout talks for who? Clearly it isn't for the people on the street. They no longer carry the voice of America but a select few. It is becoming more and more a plutocracy. The media would want you to believe there is ample support for a bailout when most people are adamant about any free handouts.

Renter_IE said...


I did hear about "the kid from France buying condo in Miami" on TV... but I can't remember who said it.
Anyhow, what makes you think that I was assuming about racism in America toward Asians??? I am Asian, I know how it feels like. So PLEASE do not tell me what to think or believe. I have been in many parts of the country and have witnessed many things... Are you Chinese or Japanese?? They usually ask that.... hahahah.. lol... and they would call me "Oriental"... last time I checked, I'm not a "food". I can't believe that racism does not excist in this country. I mean... Oh My God.... lol... Asians can't drive... lol..No racism in this wonderful country.. no no no.

Renter_IE said...

"Asians, as well as people from many many other countries, are assimilating just fine, thank you, throughout the US" said the wise one from this post

hehehe.. well, hence the KKK... folks calling me name like "Chink" and "Jap"
And why do we have to "assimilate" into the American culture? We have our own.
Well... what do I know... the wise one knows best... Good God... I mean... What the hell...

The North Coast said...

Dear Renter_IE,

My situation is similar to yours. I'm a moderate-income salaried person in the financial industry, and it has taken my years to recover from a bad business reversal.

All I want is a nice 4 room 1 bed condo in a vintage bldg. on the lakefront of Chicago, at a price reasonably related to my income. Possible 5 years ago, were it not for the business situation. By the time I had money to buy, the prices had ratched out of my reach.

We are not talking a fancy neighborhood- it is a very beautiful and charming area with some "problems" here and there with crime and gangs, and lousy schools. Figure private school tuition into the price of that charming, quirky house on the tree-lined street. Yet a rundown house with 2000 sq ft around here is priced at $600K. A one bed apt at $160K, that sold 6 years ago for around $100K. A studio condo you could pick up for $60K 6 years ago now wants $110K.

These units are languishing on the market, often for 500 days or more. If your place sits on the market with no lookers, even, for nearly 2 years, could it be overpriced?

Yet, while I don't buy because I want a fixed for no more than 2.5X my income, I am paying, by the degradation of our currency, to keep this bubble market aloft at prices that are not related to the incomes of the local market, regardless of income.

All Bush's measures will do is further degrade our currency, decimate our buying power- notice what is happening to food prices already?-and help more people buy more houses they can't afford, at the expense of people like me who have been sidelined for years awaiting homes AND mortgages that make sense.

K said...

If average resident got a mythical 0% APR, 100% Loan, did not have insurance and paid no real estate tax, their payment would still be $2,463 per month.
They would still only take home 56% of their income after taxes and house payment. I my opinion, it is still not affordable at 0 percent interest.

Huell Howser said...

Another excellent post Dr. HB

Steve said...

Another serious issue is that folks want problems fixed on their terms.
I want a nice house, but I can't move away from here. The one skill that I have is so specialized and I am incapable of performing any other tasks that it would be impossible for me to work anywhere else in the United States.

Also I have racist opinions about American's that I don't know. The local American's accept me, but I know that other American's are bad people and will hate me.

Given that my one skill (remember I have an inability to perform any other tasks) pays $X per year, the house that I want should cost no more than 2.5X that price.
Supply and demand is simple. The more people that leave California to achieve a better life, the better it will be for the folks that stay.

If your on this board, you are probably not very happy with the current state of things, so why not leave the situation?

"Leave California for a better quality of life!!"

Could be a new ad campaign.

Lionel said...

steve, I left LA for Seattle three months ago. It was as if the proverbial weight had lifted from my back. I went from struggling to maintain an OK existence to being perfectly content. For under $1700 on the westside (sorry, would never move to the valley), there was nothing remotely palatable to rent; here in Seattle (which is not a cheap city BTW) I am able to rent a beautiful craftsman house in a terrific neighborhood. It took an extraordinary amount of effort to relocate as it required losing about a year of grad school in switching to UW, but (so far) my wife and I have no regrets at all (although, we do miss our friends and family in LA).

Yes, I know the weather gets worse.

Anonymous said...

I have a question for Dr. HB and all. There are news articles all over the web which are saying that analysts are showing housing prices depreciating for the first time in 50 years or since we started officially keeping track of house prices in this country. What do they mean by this? This seems contrary to our own experience here in California for the last 20 years. We have seen lots op appreciation and depreciation. After all, didn't the housing prices steadily decline throughout most of the 90s until 97 or so? Do you have any answers on this?

Thanks in advance.

Lionel said...

boogie, I think they're saying that housing across the country will be depreciating for the first time. Housing in the past might have declined rapidly, say, in CA, but the rest of the country might have been flat or appreciating slightly, which would negate the lower pricing in CA. Plus, considering that inflation inflates housing prices as it does everything else, it takes a pretty serious drop to bring down housing prices across the board.

Son of Brock Landers said...

@Dr HB, great post, and you are right about the Plutocracy. Bailing out homeowners really bails out the people to whom the homeowners owe money. I'd rather see an overhaul of the housing finance system. That's the problem, we rarely address the cause of a problem (the system), instead just address the symptomns.

I think you just nailed a major problem with the Net. It is wonderful info is shared, and unheard opinions can be expressed and spread. There's also a downside. A financial bull can read Bull sites and think everything is fine and this is overblown. A market Bear can read market bear sites and think the world is ending. You check the same sites all the time and you start to only see that perspective. Kind of cocoons people.

One thing I like about Dr HB is he stresses how the housing bubble differs by location. I was just at a financial industry conference, and we spent 1/4 of the key session on housing/mortgages. My company had not invested at all in subprime & little in MBS/ABS. thank god. One thing I think Dr HB has noted, and it was discussed at the conference, was the fact that adjustable mortgages regardless of borrower type have seen a large increase in foreclosures. Fixed rate mortgages have not exhibited the same behavior. It's not going to be a soft landing, but it is not going to be the end of the world.

mikey said...

Again I offer a revered mental curtsey in the direction of the Doc. Long may his keyboard click.

Lionel said...

Dr HB, I'd like to add my thanks for your frequent and illuminating posts. More than other sites, yours has been committed to displaying the excesses of the lower end of the spectrum and that, for me, has been ennormously helpful in understanding the scope of the bubble. On the high end, one can dismiss the high prices by alluding to the vast number of rich people in SoCal. You see the cars, the industry jobs; of course there are enough rich people to buy these exorbitantly priced houses! Your spotlight on the lower end has wiped away these illusions.

Thank you.

AnnS said...

Boogiemoejackson –

The ‘official’ numbers from the Feds do not include anything that bought of sold for over $417,000. They only track mortgages that can be funded through FHA, Fannie and Freddie.

When houses prices are tracked AND adjusted for inflation, you can see that they have risen and fallen all over the country over the years.

In my area - far from the urban locations, we are seeing:

(1) a 4% foreclosure rate, and
(2) a 29% drop in prices

(all those 2nd homeowners and those who speculated betting on selling to a 2nd hoome buyer.)

on the sidelines said...

Steve said...

Another serious issue is that folks want problems fixed on their terms.


I don't think wanting housing prices to return to reasonable levels is wanting problems fixed on terms. If you didn't think the housing market was in a bubble you wouldn't be on this blog. Your overly simplistic suggestion to simply move out of state is just that, overly simplistic. It doesn't in any way help the housing market as a whole. California, especially SoCal is and has been where people come from all over this country. They come for the weather. They come for the fame and fortune of the movie/TV industry. Who knows why else they come, but they do and they will keep coming.

I was born here. I work in an industry that does not exist anywhere else. All of my family is here. Could I move out of the state? It wouldn't be impossible. But what is the incentive? To buy a house in a town where I can't find a job in an industry I have been working in for almost 20 years for probably less than half of what I'm earning now, several hours from anyone in my family. Wow - that sounds like a great plan... That will fix the bubble in SoCal.

Terri said...

While I have to agree on the overall ridiculousness of housing prices, I do have to point out the reason that Cerritos has such a premium attached (like Beverly Hills and Bel Air) is the quality of the schools. If you are an ambitious parent, you will pay ANYTHING to get into the district so that your kids has the chance to go to Whitney HS.

nesNYC said...

Thanks for the chart Dr. HB! This is something I knew existed but never really had the numbers in front of me.

I knew way back in the 90's that rents were waaaay outta wack with incomes but people were happy to just get friends to share apts. with as roomates.

I live in Brooklyn NY and I used to blame the people that put up with those rents and shared housing to be the cause of high rents. But later, I figured out that housing prices, flippers and financing that enabled them are more to blame.

The sad part about it is that Americans as a whole don't know who to fight so we end up fighting each other. We are a divided and fully a conquered people.

SethmeisterG said...

Umm... That's Bob Barker, not Bob Parker.

DoryO said...

Steve said...

Another serious issue is that folks want problems fixed on their terms.

On the Sidelines said...

I don't think wanting housing prices to return to reasonable levels is wanting problems fixed on terms.

"Sidelines" then goes on to support Steve's real point which is that we don't really want to give up anything to have a better financial future. There's always some excuse for why we're going to play this no-win housing cost game to the end.

Think back 100 or 200 years.

What did our immigrant ancestors do when faced with this type of situation? Piss and moan and do nothing? ("The market for piano tuners is terrible in the Oklahoma Territory and I hear the Sioux are a bunch of anti-Irish racists. And I was born here. So I'm staying here famine or no famine!")

Did they suffer an intolerable situation until they ended up in the poorhouse or starved? No! They went somewhere new to start a new life. It wasn't easy. There was hardship, loneliness, violence, disease and bigotry. Did they worry about whether they could bring the family pet? Hell, they planned to sell, milk or butcher the family "pet" if need be.

We are an awfully spoiled bunch of whiners today. But then, our forefathers didn't have the easy credit that we do. If they had maybe it would have been "The Spacious 5B 3.5Ba House on the Prairie" for the Ingalls family.