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:
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:
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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