Real Homes of Genius: Today we Salute You East Los Angeles. $395,000 for 780 Square Feet.

As a scientific society our view on art has been somewhat marginalized in place of more scholarly and practical pursuits. The Internet and medical advances come to mind readily. Hence during the Renaissance, a high value and prestige was bestowed on realism and art depicting life as it truly is. With modern art, the average person does not see the beauty because it is not practical. After all, how can a splatter of paint make sense? But Los Angeles housing? Ah yes, there is no subjectivity here! It is beautiful as a Rembrandt painting and this is an absolute truth like the laws of thermodynamics. Today we salute you East Los Angeles with our Real Homes of Genius Award.

Let us first take a look at the sales history of this home.
Sale History

10/06/2000: $145,000
04/26/1995: $129,000
10/27/1994: $118,340

As you can see, in 6 years this house appreciated a whopping $26,000 from 1994 to 2000. However, with the new housing renaissance this house appreciated (supposedly) $250,000 in seven years! It is the new housing field of aesthetic sunny housingnomics. A field basing the price of your home completely on the amount of sun you receive in a year and the temperature averaged out over a ratio. This is very complicated to understand but suffice it to say this place has a high sunny/temperature ratio. Or to break it down even further, $35,700 per year in an area where the median income is $45,000. We once again see that working a 9 to 5 is for unintelligent folks because why work when you can sit at home and let appreciation pay for your TiVo and DirectTV.

What would this home rent for in this elite area of Los Angeles? Well let us take a look below:



So the median rent in this area is $1,085 and your carrying cost on this place will be about $2,700 a month. Another cash-flow property in the heart of Los Angeles! And this is accurate because like an art curator, Zillow tells us this property is safely valued at $409,000 so we are actually getting a deal here.

Today we Salute you East Los Angeles with our Real Homes of Genius Award.

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Summer and Housing in the Garden of Eden. 3 Reasons Why Housing Will Soar This Summer!

“Public opinion is a permeating influence, and it exacts obedience to itself; it requires us to think other men's thoughts, to speak other men's words, to follow other men's habits.”
-Walter Bagehot

As spring enters its final days and May kisses us goodbye, the air smells of summer. The warmth of the sun caressing your face, the smell of salt at the beach, and sellers getting ready for the Battle of Housing Waterloo. The moment of truth has arrived. Will housing show continued resilience and live eternally in the Garden of Eden? Or will the housing bears be vindicated as inventory numbers begin to pile on top of one another like an Ultimate Fighting Championship? When I say housing will soar I am using this term like Stephen Colbert and referring to housing soaring like the Hindenburg. Let me give you another three reasons why all of us are jumping into this hydrogen powered housing bonanza only to come down in a fiery mess.

#1 – California does not Follow National Trends






We often hear George W. Bush talk about the incredible homeownership rate of this country. 70% of the nation’s households own their home. Aside from the fact that this was created by firing off the canons of credit onto the battleship of homeowners via mortgages, then yes we did increase the homeownership rate. However this trend didn’t make it west enough to reach California. As you can see from the above graph, only 57% of households in California own their homes; a far cry from the 70% touted by the nation. In addition, when we hear the rhetoric regarding lack of housing and “no more land” pundits, we must point out that we are in desperate need of affordable housing and I’m not talking about Real Homes of Genius homes. We need high density housing in urban areas to support the growing number of immigrant families and working class citizens. From looking at Census data we see that the middle class is leaving California in droves. Now why would folks want to leave the Garden of Eden?

Nice graph we got here. Again we see that California does not follow national housing trends. So all this talk about housing bottoming out we are hearing from the NAR, it is directed more on a national scale. And as so many housing pundits are apt to tell us, real estate is local. With that said, California is in a bubble so magnificent that David Copperfield would have a hard time figuring it out. The data above stops out near the peak of housing which was summer of 2005. Now the question is, will folks be able to restrain their spending when the economy tightens up? From previous recession data, the answer is a resilient no because of the Duesenberry Effect.

California is also different because people are less likely to use a down payment:



You would think that in a state with stratospheric high housing prices people would have incomes to match. In the past, housing in normal economic cycles would follow with income; that is if we had a recession housing would go down. In good times, housing would boom. You can take a look at the below chart and look at national housing figures to reconcile that this is true:


How dependent are we on housing for our economic stability?

#2 – Strange Bedfellows – Housing and Housing Employment


In past decades, real estate comprised approximately 10% of all employee additions. A hefty sum. However, since 2000 real estate has contributed to a whooping 29% of all employee additions. So with that said, what will happen when the demand for housing falls as it is right now? More importantly, what will housing builders build when the demand for housing is decreasing? And now, that we are seeing massive drops in mortgage equity withdrawals, what will Home Depot and Lowe’s do when home owners find out that they no longer can get a HELOC at 7%? We’ve already seen what happens to mortgage brokers in the subprime industry now that Wall Street has gorged itself full on mortgage backed securities.

#3 – I’ve Got Credit Coming out of my Ears!



Since income didn’t drive this housing bubble what did? Ask Mr. Alan Greenspan. Last time we saw a flood like this Noah was building an ark; but no ark will save us from this massive river of credit liquidity. No dam can stop this oncoming onslaught of credit payments. Many people will drown simply on the interest of their credit orgy. This will affect the entire economy. We’ve all heard of the concept of six degrees of separation; well in housing only one degree separates us from the cascading wave of credit resets.

As you can see from the above, this year alone $1 trillion in mortgages will reset. This will be the case many years to come. We’ve only hit the first wave this year and we are already seeing the fractures of this mess; folks earning minimum wage jumping into almost a million dollars in debt. That sounds like a problem to me. If you are netting $3,000 and your home payment is $4,000, something in my gut tells me this will not last forever. But we are great savers right? I mean we have enough saved up to weather this storm…right?


Well unless the Fed drops rates again we are in for some serious hurt. Yet at this point, the Fed can drop rates to 0% and housing will still be overpriced. You can put lipstick on a pig but it is still a pig. The subprime debacle influences the entire housing environment because it adds inventory in a market already flooded with homes. In addition, each REO is a motivated seller. And motivated sellers are willing to drop prices unlike our delusional homeowners thinking 2005 prices are still here and their 500 square foot box is worth $329,000.

The Garden of Eden is a beautiful mystical place that lives in the primordial consciousness of our society. It is a place we all envision as perfect. Even though many sellers are living in this Eden, no one has told them that Eden was built via a no-doc negative amortization mortgage set to reset very soon. Maybe we can use the apple tree as collateral for a second?

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Real Homes of Genius: Special Edition, Lifestyles of the Poor and Notorious. 10 Southern California Homes that Prove a Gargantuan Housing Bubble.

I’ve been blogging about the housing bubble since September of 2006. During the initial months, I was receiving 50 to 60 hits a day. Now in a few short months, we are reaching an audience of thousands a day. Suddenly 90% of articles in the mainstream media are negative about the housing bubble. We have folks making chump change being able to find access to millions of dollars in credit simply because they have a pulse and are able to fog the mirror on their leased Lexus. Even though I’ve featured over 24 homes in Real Homes of Genius, I still get people in the delusional state thinking that there is no housing bubble. “Dr. Housing Bubble, you cherry pick homes and what does that prove?” they say in a condescending manner. Aside from the fact that the median value of homes is outrageously priced in every county in Southern California (and the median is derived from an aggregate of homes) I’m simply making the story more tangible for the readers who still have doubts.

To quell these doubts, I spent a few hours picking two homes in each of 5 major counties in Southern California to highlight the magnitude of this bubble. After all, If I’m able to find 10 homes in Wonderland in a few hours how many more out there exist? Today we have a special Real Homes of Genius, today we salute you Southern California with our Real Homes of Genius Award.

Riverside County

#10 – Riverside

Price: $209,000

Sqaure Feet: 768

Median Rent in Area: $700

Our first home takes us to Riverside proper. This beautiful 3 bedroom mansion is a fixer-upper and a handy man special. Once you dump $100,000 in renovations, you can expect a whopping rental income of $700 a month even though your monthly payment will run somewhere in the neighborhood of $2,000. Talk about cash flow! Initially this home was priced at $295,000 but so many people were stopping by, they decided to knock off nearly $100,000 because it was too fantastic. Maybe in a few more months, they’ll bring it down by another $100,000.

#9 – Perris

Price: $234,900

Square Feet: 850

Median Rent in Area: $695

Why live in Paris France when you can live in Perris California! This is how the rich and famous live. This wonderful 850 square foot home is inspired by the architectural genius of Da Vinci and you can tell by looking at the picture above. This home is designed to entertain that pesky and picky buyer out there who wants everything but is on a $300,000 or less budget. The so called champagne taste with a beer income. Even though your monthly payment will range from $2,100 you will be able to rent it out for a whopping $695. No wonder why Donald Trump is so rich. Real estate investing is easy. Where do we sign up?

San Bernadino County

#8 – Fontana

Price: $273,900

Square Feet: 728

Median Rent in Area: $725

Our next home takes us to Fontana in the heart of San Bernardino County. This place is bank owned and the upkeep is impeccable as you can tell from the picture above. The lawn hasn’t been mowed in ages but hey, we are talking Southern California here and money grows on trees (and lawns for that matter). This 728 square foot beauty is banked owned and ready for you to invest in. Even though the bank is holding onto appraisals from 2005 and is desperately hoping yesteryear will come again, we are crossing our fingers for the Easter Bunny to arrive. This place will carry a monthly nut of about $2,500 but you’ll be raking in the cold hard green at $725 a month. Another cash flow property for you! We’re quickly on our way to becoming real estate moguls...

#7 – Victorville

Price: $190,000

Square Feet: 860

Media Rent in Area: $550

Alert! This place is so hot we had to get James Bond to take a snap shot of this place via telescopic camera. This gorgeous 860 square foot home is amazing in one of the hottest (literally) areas of Southern California. As you can see from the picture, you may have a lot of vacant land (desert) next to you but hey, this is for potential growth here! Think big! Don't let the neg-head housing bears bring you down to reality. It is much funner in made up world, trust me. Even though you’ll pay $1,500 a month in taxes and fees, you can rent it out for $550 a month. The bank will love you with your maximum cash flow strategies.

San Diego County

#6 – Chula Vista

Price: $295,000 - $350,000

Square Feet: N/A

Median Rent in Area: $818

Here we see a wonderful pricing tactic found only in high priced metro areas, the range. We give you a range that is open to a 20% negotiation value and you give us an offer. The seller of this place tells us that this place is “not for the faint of heart” because this magnificent lawn will knock your socks off and maybe give you a coronary explosion. By the look of this place and the lot, we can speculate that it is 800+ square feet. Your monthly nut will be from $2,400 to $2,700, we’ll give you a range as well, and you will cash flow with $818 a month in rent. Going down South makes a whole lot of sense eh?

#5 – National City

Price: $299,900

Square Feet: 432

Median Rent in Area: $820

If you’re the patriotic sort, what better place to live than National City? We have this wonderful sprawling 432 square foot palace at $299,900. Like the car ads you see for $9,999.99, this place is designed to attract the sub-$300,000 buyers. When we look at the median rent in the area we see that a place like this with $50,000 in renovations will go for $820 a month. Maybe I should write a book like Robert Kiyosaki because with all these positive cash-flow properties, 24 hours in a day simply isn’t enough!

Orange County

#4 – Anaheim

Price: $459,900

Square Feet: 850

Median Rent in Area: $995

Home of Disneyland and Mickey Mouse. Also home to interesting depth of field photography. This gorgeous half-a-million dollar home rests beautifully on 850 square feet. Even though your mortgage will run you $3,500 a month, you can rent this place out for $995. Go out and refinance your home equity and put a down payment on this place now! This investment opportunity will not last.

#3 – Santa Ana

Price: $435,000

Square Feet: 910

Median Rent in Area: $945

All these fantastic deals are making me itchy to call my mortgage broker! I’m sure you’re getting juiced up to purchase each of these homes. This next beauty is nestled in Santa Ana. At 910 square feet it is one of the larger homes we are featuring. When we analyze the income of folks in the area, they are pulling in slightly below $50,000 per year for family income. The monthly payment on this place will be around $3,500 so that’ll eat up about 90% of their net income. Who cares about debt ratios when you can use leverage to make it happen! Time to act since this place is not only in SoCal, but in the OC.

Los Angeles County

#2 – Huntington Park

Price: $359,000

Square Feet: 669

Median Rent in Area: $950

There is no other place like Huntington Park. Easily confused with Huntington Beach, this area in Los Angeles has a lot of potential. I’ve featured a couple of places in a previous Real Homes of Genius in this area, but this 669 square foot dream home is for the ages. Even though you’ll be paying about $2,800 a month in carrying costs, you will be able to recoup that by renting this place out for $950 a month. Business is good my friends!

#1 – Compton

Price: $279,000

Square Feet: 639

Median Rent in Area: $800

Our final home brings us to Compton California. Above we have a wonderful 639 square foot home for $279,000. This magnificent place is under $300,000, in Southern California, and therefore you should buy it. Philosophy and logic will prove this out in any theorem. This place is a must for any savvy real estate investor. Yes, your carrying cost will be about $2,300 a month but you’ll be renting it out for $800. I see many light bulbs turning on and all you potential investors are making a beeline to your agents office. This one won’t last folks!

Conclusion

Archimedes of Syracuse, the mathematician and engineer from Southern Italy figured if you could give him enough leverage, he alone could move the entire world. I know with enough credit leverage, you’ll find a way to purchase all the above properties. And the exciting thing is that you’ll find enough hungry brokers willing to finance you on all these properties. All you need to do is try. If you don’t try, you are guaranteed to fail but if you make a serious and wholehearted attempt, you will succeed beyond your wildest dreams. Yes the numbers don’t work out exactly to your advantage but finance and real estate evaluation is for sissy pansies who have no guts to take a risk in real estate. Even though I invest out of state in properties that cash-flow positively, maybe I’m missing something with the negative cash-flow game here in my home town. It is time to take advantage of this spectacular time in history. From the Southern tip of Chula Vista, to the desert city of Victorville, to the OC, and finally coming back to Compton California we have plenty of deals to go around.

Today we Salute you Southern California with the Real Homes of Genius Award.

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Housing Corruption and Greed: The Broken Windows Theory and Fundamental Attribution Error.

Have you ever wondered why many mortgage brokers and real estate agents try to hard sell you on a property or a unique mortgage? Those with dogmatic views usually try to convince themselves as much as they try to convince other people; they have a vested interest in believing that nothing negative can ever happen to real estate. And with this, you create a business culture where anything goes and financial prudence is thrown out the window. And speaking of windows, this brings us to the Broken Window Theory and how it applies to the current housing market.

The Broken Window Theory Applied to Housing

George Kelling and Catherine Coles, both criminologist studying petty crimes in urban areas found that fixing minor public nuances like broken windows and graffiti greatly helped to eliminate larger crimes. They argue that the perception of broken windows and graffiti for example, lead people to believe that the area is unkempt and thus opens the opportunity for criminals to commit even graver crimes. The psychology to this principle is simple yet profound. The environment has an unbelievable influence on how people react. With cleaned up environments they found that the “gateways” for crime were eliminated and thus fighting petty crime such as broken windows is very important in the overall health of the area. It is important because it creates the impression of law and order.

This is absolutely important and has many parallels to the current housing market. The broken window in the housing market is the credit bubble and the direct relationship with mortgages. With the credit bubble, the environment was shaped to support progressively more risky mortgages. Even though the Fed and government would like you to believe that they did not encourage the housing bubble they did. Consider the Fed as the local governance of a community that actively let graffiti and broken windows prevail only to be in shock when they realized crime went up in the progressive years. How can you blame a broken window for more serious crime they ask? And with this, those at the bottom of the pyramid got the implicit message that it was okay to lend money out on risky terms because they had the okay from those at the top. Again, never will you see the Fed openly admit to this blessing but their actions speak louder than words. They essentially let the environment go, like a controlled experiment in a lab, and now are seeing the fruits of their irresponsible actions.

Many want to assign the blame to those at the lower rungs. Make the buyers, sellers, agents, and brokers pay. But what about the government who receives fatter checks from properties that are appraising higher? Or what about the Fed who is still able to claim low inflation and a stable economy? The broken windows of mortgage fraud and credit keep growing with no stop. The L.A. Times has written two articles highlighting that 50% of all stated income loans had incomes overstated by at least 50%. What does this mean? A family making $50,000 a year was all of a sudden making $80,000 to fit into that negative amortization loan. That is fraud fueled by a lax environment.

Fundamental Attribution Error

People tend to underestimate the power of environment. This goes against the grain of the rugged individual so many Americans believe in. It comes off as blasphemy to blame anyone else except yourself. On a recent survey, 90% of all drivers felt they drive better than average. This is the crux of the fundamental attribution error. And how this relates to housing is rather interesting. We are starting to see arguments on many housing blogs and the mainstream media about who is to blame regarding this housing debacle? Is it the lending industry for creating risky loans. Is it the realtor organizations for pushing buyers into homes they could hardly afford? Is it the Fed for flooding the markets with cheap credit? Or is it the buyers for signing on the dotted line? I think blame is never a black and white argument. Usually all parties have something to gain in a bubble. After all, without the signature of the buyer the home would never sell. Yet without the easy credit of the Fed, there would be no discussion of risky mortgages and the mass appeal it currently has.

We are now hearing horror stories coming out from organizations like New Century Financial. The environment seems like a frat party gone bad and scenes from Wall Street come to mind. Some whistleblowers are quoted as saying that they felt “pressured” or “coerced” to join into the herd mentality or else. Again, their rhetoric highlights the power of environment over the individual. Many would like to believe nature has no impact on how we interact with the world. This is false. If the Fed had never injected easy credit into the market the bubble would not be where it is today. The Fed and the Mortgage Backed Securities (MBS) market created an appetite where these vices would be fed. No longer are we grounded on any economic theory or can we use real estate valuation tools because we are in a bubble; and by definition a bubble cannot be defined by rational tools. But don’t be fooled by only blaming unscrupulous agents, brokers, or naive buyers; the blame needs to filter up to those that created the filthy environment where the broken windows of housing were ignored.

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Real Homes of Genius: Today we Salute Los Angeles. $349,000 for 464 Sqaure Feet and a Fixer Upper.

As I scour through the gray dark fields of fallen angels, otherwise known as Real Homes of Genius, it just dawned on me that I haven’t featured the city itself, the City of Angels. Today we Salute Los Angeles with the Real Homes of Genius Award. This is a perfect example of delusion mixed in with a bit of hyperbole. Couple this with a magnificent housing bubble and we have a recipe for ridiculous housing prices. This 464 square foot 1 bedroom 1 bath home, if you can call it that, is being sold for $349,000. When the seller states that this place has “deferred maintenance” I expect all of you readers to open up laughing as if we were on a poorly written sitcom and the canned laughter sign is going off. This is a probate sale therefore the sellers are in a position of power to negotiate especially with a gem like this. And when they say this is in an “upcoming neighborhood” it is like the Captain saying the Titanic hit a minor bump in the water but the trip will continue. I’m not sure what impresses me more, the fact that they can post something like this with a straight face or the fact that these people aren’t put into a psychiatric ward for hallucinations. Something is rotten in the state of Denmark.

Let us humor this listing and believe that the worth is in the land. What are rentals going for in this area? Let us take a look:

So the median rent is $1,185 and they are asking $349,000? Apparently the upcoming renaissance has deferred appreciation of two decades. Even assuming you bought this place, how much money would you need to put into it to renovate the place? Oh yeah, it is only deferred maintenance so a can of ivory paint and new windows is all we need. Come on. This place looks like Uday and Qusay after the friendly confrontation with U.S. troops – they needed deferred maintenance after that encounter as well.

What does this example, like the many other fine specimens we have shown tell us about the current state of housing? They tell us many things including one need not smoke crack to be out of their mind. In addition, we are starting to hear horror stories of low waged workers partying it up like Donald Trump. I showed this place to a fellow colleague who is completely removed from all of the housing shenanigans and his first gut impression was correct when he blurted out, “what the hell is that?!”

“John that is $349,000 worth of L.A. Housing,” as I responded and a quizzical look took over his face. His innate primordial millisecond response was, “Why would someone pay that much for THAT?” I leave that question for all you dear readers to answer.

Today we Salute you Los Angeles, with our Real Homes of Genius Award.

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Why Did the Housing Phenomenon Spread? 3 Key Reasons for a Social Epidemic: Housing Connectors; Mavens; and Salespeople.

We can learn a lot from the social sciences especially in analyzing the current housing bubble. Many may see very little connection between housing and social science but behavioral economics and marketing have much to do and say regarding our current environment. This is particularly relevant in analyzing the current housing market because we are in a bubble; and by definition something in a bubble does not follow conventional rules. First, we must ask ourselves how can a relatively stable investment such as housing, become the topic de jour in all investing circles for the past 7 years. Next, we need to ask why housing became such an overnight phenomenon and spread like a blistering hot wildfire. Not only did housing spread into every imaginable aspect of the American psyche, it also contributed to 30% of all employment since the start of the millennium.

In examining the housing bubble we need to acknowledge that certain people have a better understanding of the economics behind the housing market. Even though practically 100% of the population lives or rents a home, a very slim proportion actually understand the dynamics of the housing market enough to spread the gospel of housing wealth. From Malcom Gladwell’s principles and other sources of behavioral economics we realize that three principles players exist in spreading any social epidemic; and do not kid yourself because we are in an epidemic of biblical proportions. The key players are the housing connectors, the housing mavens, and the housing salespeople.

Housing Connectors

In every society we have key people who are massively connected in the community. They know everyone. From congressmen to doctors to your local supermarket manager. These people can spread information quickly because they have access to the ears of those who will listen. You can look at the massive growth in MySpace for example. Otherwise a very small and obscure website, a few techies spread the word to key people on college campuses and all of a sudden millions in the population have their face plastered on the internet for the public to see.

Those in the housing community known as the housing connectors are the hedge funds, the mortgage back security markets, and the Federal Reserve. The hedge funds played a massive role because they created a market in which trading mortgage backed securities (MBS) was possible. Not only was it possible it was profitable and in a world with low returns, hot money was seeking better yields. Then we have the Federal Reserve dropping rates after the September attacks:

If you recall, we did have a very brief recession that was stifled by an absolutely irresponsible monetary policy that created multiple bubbles that we are now dealing with. The Federal Reserve not only dropped key interest rates, they encouraged folks to take riskier mortgages. Remember Alan Greenspan talking about ARMs? Good job AG, make a bubble before you hit the public speaking circuit. He would leave you to believe that this did not increase the amount of money flowing to risky mortgages. Take a look at the chart below:

The key thing to remember here is the access these connectors have to the public. They are the tip of the pyramid and have a podium to the public. When Alan Greenspan encouraged riskier mortgages he was essentially giving the MBS market a blessing that exotic mortgages were okay. Once this message was processed, Fannie Mae and Freddie Mac felt as if they had a government safety net protecting them in case anything would collapse; otherwise known as a lender of last resort label.

The problem with this logic is of course that encouraging unmitigated debt spending would cause inflation and even worse, the bubble we are currently in. Then we have Bush ushering in the patriotic movement that spending was as American as apple pie. What happens to the savings rate?