September 13, 2007

Real Homes of Genius: Today we Salute you Downey. $100,000 off in 3 Months.

We’ve all heard about the reluctance of sellers to lower their prices even with the onslaught of negative housing news. Well today, we have a bank owned property that has no problem with dropping prices and dropping them fast. You may wonder why the median price in Los Angeles County is so outrageously high. Some out of state folks just assume everyone in this county of 10,000,000 people is making $200,000 a year and has no problem paying $547,500 for a starter home. Well we are quickly realizing as the tide pulls out that many recent homeowners bought places with convoluted mortgages that would make the Louisiana Purchase read like a kid’s book. In a previous post, we discussed that it is very easy for some families to fall into the debt trap. And the primordial need to own one’s place in America is so deep seated that some families will pay anything for having their name on the deed even if prices make absolutely no sense. So today per a reader’s request, we will examine the city of Downey. Today we Salute you Downey, with our Real Homes of Genius Award.

This home is a nice sized 3 bedroom home with 2 baths. Something that you would consider as a starter home in many parts of the country. So what is the price tag? $300,000? Nope. $400,000? Close. $500,000? Let us give it to you straight. The price of this home was initially listed at a whopping $727,500! This works out to $553 per square foot for a home that is listed at 1,315 square feet. This home is nearly 60 years old and is in a middle class area of Los Angeles. This isn’t a prime location like Santa Monica or Manhattan Beach. You are not overlooking the Pacific Ocean or nestling the hills in Pasadena. So why are they listing the home at 3 quarters of a million dollars? Welcome to Wonderland USA. We’ve already seen many homes get knocked down in price in Southern California. Very little is moving in lower to middle class neighborhoods even with price drops. Sales last month dropped a whopping 50 percent year-over-year in the region.

Let us take a look at the massive pricing action on this bank owned home:

Price Reduced: 06/01/07 -- $727,500 to $686,800
Price Reduced: 07/13/07 -- $686,800 to $652,500
Price Reduced: 09/02/07 -- $652,500 to $619,875

In the span of 3 months, this home is lowered by $107,625, or $37,875 per month. Now think about this for one second. Did this property actually lose $107,625 over the summer? Of course not. This again is the pie in the sky dreaming of banks trying to unload properties looking at yesteryear appraisals. Let us take a look at the sales history:

Sale History

02/21/2007: $23,600

01/19/2006: $640,000

08/24/2005: $542,500

We are quickly approaching the 2005 sales price. The 2006 sales price is absurd. Again, we are seeing the famed mortgage equity withdrawal action going on here with the $23,600 2nd taken out earlier this year. Assuming this home was purchased in 2006 with zero down, some lenders are probably out to the tune of $663,600. Yet people in Los Angeles make incomes to support this price right? Well let us look at the average household income for this immediate area:

Average/Household: $75,523

Keep in mind this income level is important because these are the people that will be buying these homes in the future. Let us humor the current lower sales price and run the numbers:

PITI: $4,367 - with 5 percent down ($30,993) and current jumbo rates on a 30 year fixed

Monthly Net Income: $4,904 (filing as married with 2 exemptions)

So this family is left with a disposable income of $537 after the housing payment. We haven't factored any other monthly revolving costs. They are only spending 89 percent of their net income on servicing their home. Everyone should take a look at the new rules being proposed by the FHASecure Act. Here is a piece from the CNN article:

It used to be you couldn't refinance into an FHA loan if you'd been delinquent in your payments for any reason. But with the FHASecure Act, delinquent homeowners qualify for an FHA-insured refi if they have:

  • A history of on-time payments for at least six months before their loans reset to higher rates
  • Interest rates scheduled to reset between June 2005 and December 2009
  • 3 percent equity in their home, or the cash equivalent
  • A sustained history of employment
  • Sufficient income to make their FHA-insured mortgage payment and all other obligations

Wow. Many folks in California are currently underwater. Meaning they have negative equity. Since most people in the last few years went 0, 3, or 5 percent down, that equity is now lost. Does that mean they don’t qualify? And what do they mean sufficient income? Does that mean they can have housing payments up to 99.9 percent of their net income and still qualify? Reading these guidelines, it seems like 100 percent of California isn’t going to participate in this bailout party. Here is another gem from the article:

The FHA will still insist that lenders verify borrowers' income and ensure that their total debt payments don't exceed 43 percent of their income or that their mortgage payment won't exceed 31 percent of income. If those ratios are exceeded, the lender must explain how the homeowner can compensate for that.

Say what? It is like building a home from the roof to the concrete foundation. It is all backwards. So now, they are going to actually verify income? In addition, look at those ratios in comparison to the scenarios we keep running. California is on its own here. Looking at many of these short-sales and pre-foreclosures, income ratios are no where in the hemisphere of the proposed legislation. Kevin Depew over Minyanville [hat tip exit] puts out a terrific daily post called the 5 Things You Need to Know. In the post, he talks about an article in the WSJ that encourages the Fed to drop 100 basis points. The logic of the op-ed piece? According to the article, this is how a Fed rate cut will help the economy:

“"[B]y stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages."

Kevin does highlight other important bubble antics in the post and I recommend you read it if you have not done so. As you can see from the above perma-bull argument, we are now in some sort of claptrap; try to follow this convoluted logic, now that people are acknowledging a credit bubble the solution for all of this is for the Fed to cut rates and thus encourage further debt spending? What a fantastic plan! But wait, isn't massive speculation in housing and the credit markets the reason we are experiencing this credit crunch? Why doesn’t the Fed just drop rates to 0 and be done with the dollar? They want to institutionalize a new paradigm of credit induced spending. No one seems to notice that oil is at an all time high and gold is at multi-decade highs. I wonder if inflation has anything to do with it? Not according to the data gatekeepers.

The last article generated a lot of buzz and polarized readers. The data used was pulled from the Census Bureau, Edmunds, and other public sources. It wasn't made up as some readers thought; you can verify the data yourself. The minutia is besides the point. The main message of the article was to highlight some reasons people go into major debt especially in high priced metro areas. Some readers from other states saw this as typical overspending by Californians and said, "what does this have to do with me?" Quite a bit. Many mortgage, construction, finance, and retail sectors that are getting impacted are located in multiple states throughout this country. And with 36,457,549 people or 12.17 percent of the entire US population, California has a large impact on many neighboring states (look at Nevada and Arizona for immediate results). Some folks jumped to the conclusion that everyone spends like this and this was the prototypical household budget; not everyone spends like this, but many do. And yes, not all debt is bad. For example, using a mortgage to buy a rental property that cash flows. This is good debt. Buying a $50,000 car that depreciates once you leave the lot is bad debt. Paying for a top rated university education, good debt. Buying a Real Home of Genius, bad debt. You get the point.

Many factors are converging to pop this housing bubble especially in California. This Real Home of Genius demonstrates that many banks are going to get aggressive in their price-cutting to move inventory. We can coin this as the post-summer housing blues. Since summer is typically the strongest selling season and many sellers figured they would have a time horizon from June to September, we are now going to see a rush to unload short-sales and REOs during the worst selling seasons, fall and winter. Compound that with the current credit crunch, peyote induced housing prices, and growing inventory and you have a recipe for a housing bear market. Many sellers may be oblivious to all that is going on around them. I doubt the majority of folks spend their time scouring housing reports and digging into government data to time the housing market. Even though the majority of the population gets their housing knowledge from mainstream outlets, banks and lenders have a better overall picture of what is going to happen (after all, these are the people that will now need to unload massive amounts of inventory). Why do you think major housing lenders are trimming down to a barebones model? They are gearing up for survival mode. And this particular home isn’t an exception so get ready for some aggressive pricing moves in the next few months which will knock the median prices even lower. I already went on record saying that each Southern California County will have a negative year-over-year median price according to DataQuick by the end of the year. How can the outcome be any different?

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

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SethmeisterG said...

Where do you find data for median incomes (sorry if this is an FAQ). The only income data I can find is from the 2000 Census. Thanks.

Exit said...

You're welcome, Doc. I sent Depew an email about your blog, too, and he responded quite quickly that he's going to check it out.

Remember the trickle down theory? What happens to the car dealers, high-end restaurants, South Coast Plaza boutiques, excursions to wine country and trips to Cabo, etc. etc., as all the formerly high-paying RE and lending jobs get ash-canned?

Recession, at the least.

I have some seriously interesing current data from south OC RE market, contact me to figure out a way to get it to you.

judicious1 said...

This downturn will be so fast and severe it will make your head spin. We've never had a runup in housing built on such weak financing. A few years from now we'll be back to 2003 prices in SoCal...across the board.

Boogiemoe said...

I think that the median income number is skewed by the fact that Downey has a high concentration of realtors and lenders living there. I sold a lot of local advertising in that area, and I cannot tell you how many rags to riches stories I heard directly from the realtors I sold to and indirectly from the business people I met who had more than one relative who was a realtor or a lender and made 6 figures in their first year in business. It makes total sense that downey would be outrageously over priced, because many of the home owners are realtors from Huntington Park, Southgate, Paramount, and bellflower real estate/mortgage offices. They know the buy, sell, refi, forclose game better than anyone. I would bet that the Downey home was either owned by a realtor or the owner had a realtor for a close friend who showed him the way.

Downey is known as the Hispanic Beverly Hills, and you won't find more BMW 750LIs and fully loaded Hummers anywhere. A lot these were purchased by HELOCS, and many are owned or leased by the realtors and lenders who reside in town there. All of the people in that town are soaring high off of the housing hubba rock. This Real Home of Genius does demonstrate that the party is over, and the come down is going to painful.

Andrew said...


I was the one that requested Downey and I have lived here my entire life. There's over 110k people in Downey and I doubt realtors make up a large enough portion of the population to skew things much. What probably does skew things is that there are pretty big disparities between different parts of town. South Downey is an older part of town with older homes and lower incomes. Northeast Downey on the other hand has incomes and homes to rival the nice parts of Pasadena. Night and day between two parts of the same city.

Another thing Downey has been going through is "mansionization". I'm not sure if this is happening in other cities, but someone will buy a house, tear it down (except for one wall so it is still a remodel I guess), build a big square mansion on as much of the lot as possible and then try to sell it for a million plus. Problem is nobody can afford the houses and the big square eyesores sit empty. Anybody else experience this near them?

Zach said...

Hi All,

For those interested, I Found a good site that has a lot of statistical data on cities and zip codes.


speedingpullet said...

@ Andrew re: new McMansions

Sadly, its not only Downey. A lot of the charming,
sub-2000 sq ft bunglaows - that attracted people to Santa Monica in the first place - have been torn down and 'Persian Palaces' of incredible opulence (and lack of taste) have been erected in thier place. Of course, it being an SM zipcode, you can then ask anything over $2 million for it, irrespective of lot size...

....and from my observations the same type of thing is happening in the south SFV in places like Encino and Sherman Oaks - a lot of mid-century ranch SFRs of around 2000 sq ft (perfectly adequate for a family of less than 15 people) are being torn down to make way for 'villas' so large that they almost touch the lot line on all 4 sides.

The thought being 'more house, higher listing price', without taking into consideration that all the neighbours are doing it too.

There's parts of the Encino hills and Tarzana where it is literally impossible to find a house under 3000 sq ft.

Such a pity, as many of these newer houses are F.U.G.L.Y, ridiculously ostentatious and badly made.

For the love of all things holy, stop doing it and leave some housing stock for those of us who don't live in a Tribe and don't want to blow $1,000s a year on heating/cooling a load of empty space.

Lionel said...

speedingpullet, we may have had this very same conversation before: I had to come to Seattle to find a California craftsman to live in. Sad. Santa Monica, particularly North of Montana, used to be cute; now it's dominated by ugly, lot-size crap-boxes.

speedingpullet said...

lionel - LOL!

I'm nothing if not consistent. It chaps my hide on a daily basis.

Sigi said...
This comment has been removed by the author.
Sigi said...

Dear Dr. HB,

Thank you for educating 'us' (the masses) about the important economic lesson unfolding before our eyes. You're doing a great service!

It would be great if you could do some projections/analyses for some of the more 'sought-after' neighborhoods in LA (i.e., Santa Monica, Venice, Culver City, West LA, Pasadena, Sherman Oaks etc.).


Bernardo Aito said...

Hi all,

if you have any idea of what will the FED do on September, 18th on the light of the recent market turmoil, feel free to leave your vote on my blog's poll at:



Dr Housing Bubble said...

Some schadenfreude for everyone [hat tip HousingPanic]. From rags to riches:

David M. Crisp 25 president, Crisp & Cole Real Estate, Bakersfield, Calif.,

In four years, Crisp has gone from waiting tables to being president of his own real estate company, which he launched this year. He’s also opened his own loan company and production outfit, which creates the 30-minute television shows he uses to promote his listings. Crisp’s team, which includes seven unlicensed assistants and eight sales associates, was responsible for $95 million in sales and 355 transactions in 2004. Crisp attributes his success in part to his partnership with Carl Cole, CRS®, GRI, whom he met when both were working as salespeople at Kyle Carter Real Estate. “He believed in me from day one,” Crisp says of his partner, who is 22 years his senior, “I wouldn’t be where I am without him.”

Bling is the thing: Crisp insists that his salespeople wear professional attire and be well-groomed. He buys luxury automobiles for his salespeople and has flown clients in private jets to view properties. “Image is key in this market,” he says. “Clients want to feel important and be with a real estate professional who’s successful.”

Sky-high goals: One of Crisp’s long-term goals is to build Crisp and Cole Tower, a 12-story, 500-unit condominium building. He also wants to fund the construction of a new building for his church.
6/1/2005 over at


Crisp & Cole's businesses & homes raided by FBI

The FBI is saying little about the raids at the homes and businesses of the once prominent real estate duo Crisp & Cole.

The FBI began raiding 13 locations about 7 a.m. this morning. Special Agent Steve Dupre works in the FBI office in Sacramento. He says the search warrants were served with the following agencies participating: Bakersfield Police Department, Kern County Sheriff's Department, the Internal Revenue Service, and the California Department of Real Estate.

Today's raids come as the California Department of Real Estate has a number of serious accusations against the once, high profile Bakersfield real estate team, Crisp & Cole. The DRE says it was an investigation, quote, "several months" in the making. The realtors could have their licenses suspended or even revoked.

9/12/2007 over at Fox in Bakersfield

Megan said...

The Calif Assoc of Realtors has got to be having collective heart failure right now. I have never, ever understood their insane commission structure anyway. Who decided that and why have seller's been putting up with it all this time?

Megan said...

Whoops, sellers, not seller's

AnnS said...


Start with the US census here:

Enter the town and state. When the page loads with the data, check the tabs at the top –most places in CA have one for 2000 and 2005 or 2006.

The one for Downey is 2006 data.®=null%3Anull&_keyword=&_industry=

Remember that data is reported in 2006 but generally reflects the prior year.

A state agency may have more current data reported in 2007 for 2006 income. The states report the median incomes of their areas to the US Census annually.

mrfnuts said...

A bit off topic, but, yesterday I had the privilege of meeting the one Presidential Candidate that would not support a bail out for the banks and speculators, as now Bush has caved into this very special interest. In fact he is probably the only candidate that would encourage the congress to pass legislation to dismantle the Federal Reserve.

This is obviously an endorsement for Ron Paul in 2008, but, as this is generally a forum of fiscally responsible individuals, I figured some of you would have heard of him and been interested in knowing of someone who actually met him -- wonderful man in person, as he is in public.

thamnosma said...

Folks, definitely check out this column over at

It's all about Anthony Mozilo of Countrywide in Washington today getting his bailout money. It's titled "Mr. Mozilo goes to Washington". I'll try to post the link below, but this message board cuts off the -h-t-m or h-t-m-l at the end of anything I try to paste. Or at least it's done so in the past...maybe it'll work today.

andrew said...

I am so glad that even at this stage most of US in US are making sense in numbers.Been discussing this since 2002 and nobody will believe me. I make top 1-2% salary but stayed out of mad rush. I knew this is all bogus,sale pitches being promoted by self egocentric people who want to make more in cut. Boy I am right,I am sure sooner than later people will realize their mistake. Just every city, in open house just visit you will laugh. some houses are old carpet, old window panes, kitchen cabinet infact nothing changes ever since housse was built in 1950-60 and price for 3/2 in 700,000. Some have spent 20,000 in kitchen, with cheap wood panel, may be granite tops but I ask myself if I do it with some body cheaper will cost no more than 30,000. Price for 3/2 home now is 800,000 and change.
story look too familiar to many I am sure. In gold rush even dirt will sell, but now I guess real house will sell for price it should be.
Some people will lose homes, but that was like rented home with interest only payment better than living in apartment for some folks.
I am not sure who are buying the homes in CA who are out there providing some numbers to keep median deviated to skewed level.
Houses at higher end are for people who wear armani suites and money for them is just numbers. But folks like us who pay and count on post tax dollars is really hard earned and difficult to waste.
I am wondering can we run a blogg with whereabout of people who bought home recently and see how they managed to pay and have guts to money for the house which will sell half the price in next may be few months if fed s and banks follow the guideline.

jomama11 said...

Dr.HB, here's one of the first articles I've ever seen in the mainstream media that actually starts to discuss the underlying problem. Unsustainable increase in home prices versus wages. Could people finally be figuring it out?

jomama11 said...


The Duchess of Calcutta said...

jomama11: I think that's been the problem in a lot of non-bubble areas. Here in the Midwest, excluding major metropolitan areas, we didn't experience what I'd call a "boom" -- but prices went up while wages barely moved, or even decreased, and unemployment skyrocketed.

A lot of people going into foreclosure these days probably would've been fine even after their ARMs reset, if they still had their jobs. As for those who never should have bought houses in the first place, a lot of them were barely making their rent when the lenders got ahold of them -- it doesn't take a high mortgage payment to sink you when you're barely afloat in the first place.

Lenders in the Detroit area, as I understand it, are currently being investigated for routing customers into subprime loans when they were prime-eligible and for lying to refinance customers about the terms and risks. There's no way Detroit prices ever boomed in the Californian fashion, but enough paycuts and layoffs will produce the same effect.

I wish there were a Midwestern housing blog, but I guess things aren't as flashy around here. We're just kind of poor and feckless.

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al said...

Yes, Omar, we all approve of DrHB's "good written" articles. The hotel looks a little turd-ish, by the way.

DrHB, there is a gated townhome community just built in Bellflower three months ago, 1200-1600 sq. ft., $460,000-$560,000. There's an open house every weekend. Last night I drove by and saw only one light on in the entire complex. Maybe it was the kitchen light... someone crying over their new granite countertop, perhaps.

AnnS said...

This might be a silly question but what on earth are those dark blobs floating above the roof of that house???!!

Duchess of Calcutta:

Most of lower Michigan has the default problem because of job losses.

Up here on the "Gold Coast of Michigan", we definitely and asolutely had an enormous bubble with the 2nd home buyers.

I'm watching in fascination as they are defaulting on their $350,000, $500,000, $750,000 and even $1,700,000 toys.

Our foreclosure rate has gone up 533% since the ARMs started to reset.

The lenders taking the hit are not the local banks who are used by the locals but instead are Countrywide, First Century, WaMu and all the other flight-by-night lose-as-a-goose-on-credit operators.

The real estate listings are up 450 - 600% and the homes for sale are over 94% expensive 2nd homes.

Crazed said...

Hi Dr HB,

You might like this one.

$750k 4/2 800 sq ft.

I saw Maxed Out. I can only shake my head at the government.

aka crazed in Glendale.

The Duchess of Calcutta said...

anns: Wow, I didn't know it was that bad. I mean, it's lovely country up there, but I didn't think they'd gotten into million-dollar mansions.

I wonder how many of those 2nd-home owners are Michigan permanent residents, and how many are from out-of-state? I have my suspicions about those weirdos from Illinois. :)

Mark said...

Great article Dr. Bubble -

Howewer the insanity is not just happening here - have a look at these houses in Ireland and remember to add 30% becuase of the exchange rate...

Also average earning in Ireland are about same as the US - plus no sun

anadon said...

I'm a 15 year resident of Downtown Los Angeles. When discussing real estate here, the 800 pound gorilla in the room is immigration--especially in Downey.

Immigrants inexperienced in financial matters become fodder for the sub prime lending herd and subsequently bid up prices in areas of decay (probably paradise to them). As these pockets of decay expand, areas consistent with the American lifestyle contract--less supply-- more demand--and prices in desirable areas skyrocket. This phenomenon also significantly skews median pricing data (if measurable at all).

With the low income immigrant population exploding, a decline in the American population in Los Angeles County, and bargain basement prices further enticing residents to move to other parts of the country, it's basic arithmetic.

Obviously, current pricing trends are no way near sustainable.

This crisis is not alone caused by immigrants, but if one considers the downward pressures on the lower and middle classes, which they belong to, and to challenges that accompany their condition, Downey and it's surrounding cities could vie for the designation "the belly of the beast".

thamnosma said...

I'm monitoring a Beazer project under construction on Foothill Boulevard in Claremont.

This ugly POS "townhouse" complex is probably 1/3 done. A few units are ready, the sales office building is open and the other buildings are in various stages of construction, from foundation to finishing off.

Yesterday after lunch I noticed little activity, just some workers toward the rear of the complex apparently working on some "finishing up" units. No one was working on any of the other structures.

Could just have been a light day or an early Friday off. However, my curiosity is up on whether they will actually complete the project. If there is any more seriously bad news on Wall Street for these guys, maybe not.

It's being built on the last leftovers of a large citrus orchard. Of cousre, we don't need food anymore, just granite counter tops.

steve said...

Very good article. I have been pondering on how much of a price decline house price will be for California? I read an article one time and it mentioned that the UCLA School of Business/Economy (Anderson) was saying that house price in the LA area is about 40% over value. Would house price pull back 40% from peek (around 9/05)? I do agree with them due to the fact that Southern California did experienced about a 30% price pull back from 1990 to 1994 and the price appreciation run was smaller back then.

Any thought and comment?

The Not Quite Crunchy Parent said...

Peter Viles over at The LA Times picked up this post and a commenter lleft a good question that has yet to be answered..any thoughts?

Are we sure banks are holding all these REOs? In the era of mortgage-backed securities and CDOs, who is actually ending up with these properties? The servicing companies? From what I can remember, during the last peak in foreclosure activity, all REO properties were marked down aggressively because they were held by banks under Federal regulations to move non-performing assets off their balance sheets within a fixed time frame, but that was in an era when most mortgage loans were made with a bank's own money. Today that's certainly not the case when the majority of loans, even those made by major banks, were/are being resold after origination.

Could it be that the entities holding some or all of these REOs are not under similar regulations to move non-performing assets and therefore can hold them for longer periods of time?

Lost Cause said...

I humbly nominate this home for a Real Home of Genius Award.

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