tag:blogger.com,1999:blog-351900612024-03-07T01:00:24.412-08:00Doctor Housing Bubble BlogDr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.comBlogger153125tag:blogger.com,1999:blog-35190061.post-69008174886301086662007-11-12T13:31:00.000-08:002007-11-12T16:40:14.518-08:00Happy 1 Year Anniversary Doctor Housing Bubble! Introducing the new Website www.doctorhousingbubble.com<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://www.doctorhousingbubble.com/"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6_zyVAqflh8j7L4RiO36vVFDsLpkAKzVFP5rM3xLbTZq8J_und4zbV0cs9Wh_3CDrqGCM5QOInm79MbETBmIZyWgHvTI1GAh5oyg7soQ_kfMF2YuYoSMbGC4mCRriW8Sg_4sQfQ/s400/10012007-drhb.png" alt="" id="BLOGGER_PHOTO_ID_5116468780507254578" border="0" /></a><br /><div class="KonaBody"><b style=""><o:p></o:p></b><br /><p class="MsoNormal">Hard to believe that we have been posting for one year. <span style=""> </span>With over 150 posts, many multiple pages long, I realized that we have outgrown the Blogger site.<span style=""> </span>In fact, we have written over 300 pages worth of housing analysis regarding foreclosures, housing psychology, and the intricacies of the current housing market. <span style=""> </span>We have a wonderful and insightful community and I wanted to setup a site where communication will be much better and provide a place for a community to grow. <span style=""> </span>I believe that we are only entering the first stages of a multi-year housing bear market. <span style=""> </span>And since our friend Ben Bernanke is slamming the dollar, I decided to celebrate our 1 year anniversary by rolling out a new site by spending my now depreciated dollars because in a year, I may need to use a wheel barrel to purchase this same website.<span style=""> </span>This weekend I was working away setting up the new website at <a href="http://www.doctorhousingbubble.com/">www.doctorhousingbubble.com</a> and making sure everything was up and working.<span style=""> </span>Over at the new site, <a href="http://www.doctorhousingbubble.com/">www.doctorhousingbubble.com</a> we have the following new items:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal" style="margin-left: 42pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><!--[endif]-->I’ve added a search feature to make it easier to search through our 150+ articles.</p> <p class="MsoNormal" style="margin-left: 42pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><!--[endif]-->I’ve added a <a href="http://www.doctorhousingbubble.com/forum">forum</a> which should be great for conversations that require more than a simple comment section.</p> <p class="MsoNormal" style="margin-left: 42pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><!--[endif]-->The posts are now easier to browse through via the archives section.</p> <p class="MsoNormal" style="margin-left: 42pt; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><!--[endif]-->I will be doing a weekly short-sale update.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Come take a look at the new site and let me know what you think. <span style=""> </span>We will keep up this Blogger site for the meantime but will be adding new posts to the new site.<span style=""> </span>But if you could please update your bookmarks to <a href="http://www.doctorhousingbubble.com/">www.doctorhousingbubble.com</a>, that would be great.<span style=""> </span>If you are subscribed via Feedburner you do not need to do anything since we will update that information for you.<span style=""> </span>What started out as a hobby has morphed into a fun and diverse community with over 160,000+ unique visitors a month.<span style=""> </span>Thanks for making this a wonderful community and I look forward to posting new articles. <span style=""> </span>I look forward to seeing all of you at the new site! <span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.comtag:blogger.com,1999:blog-35190061.post-675893115253024172007-09-30T00:52:00.001-07:002007-09-30T00:55:03.703-07:00Real Homes of Genius: Today we Salute you Torrance. $575,000 in this Housing Market?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzh-zLVuFoG3BjITzjSwF8sAbSpYSofNOyTAcd7RXZ9hcFvkSXeMG-T698fxHRH0iPbKZXCx9uqyWz0ltHV9nB1nuaN4-Z9f1Cb7IXg28kHd6QEjxc38wmHBURvWkcgpZaGqu2gA/s1600-h/torrance.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzh-zLVuFoG3BjITzjSwF8sAbSpYSofNOyTAcd7RXZ9hcFvkSXeMG-T698fxHRH0iPbKZXCx9uqyWz0ltHV9nB1nuaN4-Z9f1Cb7IXg28kHd6QEjxc38wmHBURvWkcgpZaGqu2gA/s400/torrance.jpg" alt="" id="BLOGGER_PHOTO_ID_5115902566378688274" border="0" /></a><br /><div class="KonaBody">What a gorgeous day in Southern California.<span style=""> </span>It was a mild day with a touch of fall permeating through the morning marine layer.<span style=""> </span>It is becoming evident that some people believe this wonderful climate is reason enough to ask for bizarre and economically devoid prices.<span style=""> </span>Some sellers still seem to think that Johnny Subprime is around the corner, eager to jump on an overpriced 50 year old home simply to obtain the proverbial Mr. Homeowner label.<span style=""> </span>Alas, this story like all Shakespearean dramas seems to have a tragic ending and the foreshadowing is already darker than a full eclipse.<span style=""> </span>You might have noticed on the right hand column a weekly short-sale and inventory count.<span style=""> </span>An emerging trend is brewing.<span style=""> </span>We are reaching a critical mass of inventory and I am sure housing pundits are going to run with this like a child eager to show his parents their first A in fractions.<span style=""> </span>But there will be two backhanded retorts to this premature excitement in October.<span style=""> </span>First, the percent of short-sales coming on the market is staggering.<span style=""> </span>Next, we are going to have the 3<sup>rd</sup> quarter foreclosure numbers sometime in the middle of the month and they will be brutal.<span style=""> </span>How do we know?<span style=""> </span>Just take a look at this article on <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/2007/09/press-zero-for-reset-are-we-out-of.html">mortgage resets</a>, <a href="http://drhousingbubble.blogspot.com/2007/09/invisible-mortgage-hand-analysis-of.html">price-to-income ratios</a>, and the list of <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a>.<span style=""> </span></span>And speaking of <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a>, let us take a look at a short-sale home to highlight the current market.<span style=""> </span>Today we salute you Torrance with our <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius award. <span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></a></span><span style=""> </span> <p class="MsoNormal">In California, we have beach cities and then we surrogate beach cities.<span style=""> </span>Torrance is considered a middle class area here in Southern California.<span style=""> </span>Nothing outrageously glamorous or anything that would cause you to lose bodily functions over.<span style=""> </span>Today we are going to look at what 95 percent of the country would consider a starter home.<span style=""> </span>This home is 1,106 square feet with 3 bedrooms and 2 baths.<span style=""> </span>You would think folks would cut their grass before putting a home up for listing but hey, this is California and vegetation is the next big thing.<span style=""> </span>When you read the ad you realize that this place is fully “landscaped” and has “sprinklers.”<span style=""> </span>Looking at the lawn, we are glad the sprinklers are working.<span style=""> </span>In the midst of the current housing market malaise and the overall reluctance of buyers, what would your guess be as to the current price?<span style=""> </span>How about $575,000.<span style=""> </span>Entering the fall and winter selling season at peak price, I’m not sure how much action this home is going to get.<span style=""> </span><span style=""> </span><br /><br />Now before you rush out to call your agent, let us take a look at the sales history of this home. <span style=""> </span>As an aside, folks even a few years ago did not have quick access to previous sales history as we do now.<span style=""> </span>A rudimentary breakdown of the numbers puts things into perspective quickly without running to your local clerk’s office.<span style=""> </span>This simple caveat as it becomes more mainstream will change the way people value homes.<span style=""> </span>So without further interruptions let us run the numbers:</p> <p class="MsoNormal">Sale History </p> <p class="MsoNormal">08/14/2006: $575,000 </p> <p class="MsoNormal">01/11/2006: $450,000 </p> <p class="MsoNormal">08/15/2003: $255,000 </p> <p class="MsoNormal">07/21/1994: $110,000 </p> <p class="MsoNormal">Some of you may be surprised to see such numbers but I have seen this more than I would like to admit and am no longer shocked.<span style=""> </span>I’m realizing after talking to certain sellers that there is psychologically some mental block on realistically evaluating your own property.<span style=""> </span>You can run the numbers hypothetically to a non-owner and they will objectively say “oh yeah, that price doesn’t make sense considering stalling appreciation and the area income base.”<span style=""> </span>But once they become owners a switch goes off in the noggin and we suddenly hear, “well you need to realize that over the long-run, real estate always goes up.<span style=""> </span>And renting is the equivalent to flushing your money down a porcelain toilet.”<span style=""> </span>From 1994 to 2003, a period of 9 years this place had an annual average percent gain of approximately 9.8 percent.<span style=""> </span>Not a bad track record for a decade.<span style=""> </span>But let us take a look at the price gain from 2003 to 2006.<span style=""> </span>In this timeframe, the price went from $255,000 to $450,000, a nominal gain of $195,000.<span style=""> </span>During these 2.5 years the average annual percent gain was get this, approximately 32.9 percent!<span style=""> </span>Bwahaha!<span style=""> </span>Oh wait, it gets better.<span style=""> </span>On the next time frame from 2006 to 2006, we see the price jump from $450,000 to $575,000.<span style=""> </span>This is a nominal gain of $125,000 in 7 months or if you want to look at it another way, the actual total sales price of this same home in 1994.<span style=""> </span>Since we didn’t go one year before trading hands, what does the percent gain work out to?<span style=""> </span>This number should cement in your psyche why we are in a historical bubble; the percent gain over 7 months equates to approximately 28 percent!<span style=""> </span>So for 4 consecutive years this home had annual gains of 30 percent.<span style=""> </span>In four years this home has increased in value by an amazing $320,000.<span style=""> </span></p> <p class="MsoNormal">People must be making a boat load of money in this area right?<span style=""> </span>It is always sobering to look at the area demographics.<span style=""> </span>Let us take a look at some numbers pertinent to this area:</p> <p class="MsoNormal">Average Household Income:<span style=""> </span><span style=""> </span><b style="">$63,377</b></p> <p class="MsoNormal">So let us assume the average household was to purchase this home.<span style=""> </span>How would their budget look like?</p> <p class="MsoNormal">PITI: <span style=""> </span><span style=""> </span><span style=""> </span>$3,968<span style=""> </span><span style=""> </span>- with $28,750 (5 percent) down and current jumbo rates </p> <p class="MsoNormal">Net Income:<span style=""> </span>$4,188<span style=""> </span>- filing in California as married with 2 exemptions</p> <p class="MsoNormal">So this family has a net disposable income of $220 after paying their mortgage principal, interest, taxes, and insurance.<span style=""> </span>No wonder why folks in California went interest only or with option ARMS since it was the only way they were going to squeeze into these absurd prices without eating mac and cheese and a steady diet of tortillas and cheap beer.</p> <p class="MsoNormal">Today we salute you Torrance with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius Award</a>. <span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com11tag:blogger.com,1999:blog-35190061.post-37814019987968305942007-09-27T13:50:00.000-07:002007-09-27T17:16:28.909-07:00Please Ignore the Inventory Behind the Curtain: Lenders and Agents now Holding Open Houses Together.<div class="KonaBody"><b style=""><o:p></o:p></b>Great things come in pairs. <span style=""> </span>We have Amos and Andy, Siegfried and <st1:city st="on"><st1:place st="on">Roy</st1:place></st1:city>, and now Countrywide and your local real estate agent?<span style=""> </span>We really have to examine why this tactic is being taken.<span style=""> </span>Keep in mind that we’ve been in a hyper reality of housing for the past decade.<span style=""> </span>The problem with those in the housing complex is that they are living with an inflated perspective of a reality based housing market.<span style=""> </span>The market is simply adjusting to market fundamentals.<span style=""> </span>Sadly, many are grasping at an industry that is entering a fierce bear market.<span style=""> </span>It turns out that easy credit, human nature, and greed are powerful forces.<span style=""> </span>In fact, the money movers figured out a method of tapping into one of <st1:country-region st="on"><st1:place st="on">America</st1:place></st1:country-region>’s deepest primordial desires, that of owning a piece of land and property.<span style=""> </span>They figured if you could monetize something with a powerful emotional component many people would pay to play no matter what.<span style=""> </span>It worked.<span style=""> </span> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Even before the peyote induced housing bubble, American’s as a whole had most of their store of wealth in housing.<span style=""> </span>After Credit Mania™ came out like an Ultimate Fighting Championship, more and more American’s saw their home as a store of wealth and figured out that hey, what is the use of idle equity?<span style=""> </span>Why not tap it out via mortgage equity withdrawals?<span style=""> </span>Refinance, spend, let equity build up, and repeat the process.<span style=""> </span>It was the perfect combination and allowed the American economy to avoid a prolong recession.<span style=""> </span>Our savings rate went negative during this glorious housing golden era.<span style=""> </span>The only problem is this “healthy” economy was fueled by easy credit and not production of new industries.<span style=""> </span>With the technology bubble of the 90s, even though it went into another dimension as well, we are still left with remnants of fiber optic lines, better information technology, and this will serve our society for the better in the long run. Flipping and trading houses like baseball cards?<span style=""> </span>Well once this bubble subsides not much will be left except a credit hangover.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">The New Tag Team of Housing<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">If you haven’t read the story here is the<a href="http://money.cnn.com/news/newsfeeds/articles/prnewswire/LATU055A25092007-1.htm"> link</a>.<span style=""> </span>What is now happening is even homes that go into contract are falling through the cracks.<span style=""> </span>You only need to look at the sales contracts that fall through from the large home builders and you will get a good sense of the current housing market.<span style=""> </span>In fact, many folks go home and get a nice case of buyer’s remorse.<span style=""> </span>The mortgage market is tanking.<span style=""> </span>Record amounts of debt.<span style=""> </span>Open any newspaper and even a housing novice will realize buying right now may not be the best bet.<span style=""> </span>So imagine a couple going to an open house, finding a place they like, and going home to run the numbers only to see that they will not be able to afford the place without “creative” [read speculation] financing.<span style=""> </span>They turn on the television and hear about the tanking credit markets and the mortgage market fallout.<span style=""> </span>They decide to wait out the market.<span style=""> </span>Aside from the subprime mortgage G-men, we no longer have a secret group of people buying homes with exotic financing hoping to flip.<span style=""> </span>So what if we could lend to these people before they left the open house?<span style=""> </span>From the article:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">"With housing prices lower in many parts of the country and still-low interest rates, we are clearly in a buyer's market," said Dan Hanson, managing director of Countrywide Home Loans. "Our hope is to make it easy for people who've been on the sidelines to go out, look at open houses, and understand their home loan options."<span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Housing prices that are trending lower and low interest rates do not equal a buyer’s market. <span style=""> </span>We’ve already examined the <a href="http://drhousingbubble.blogspot.com/2007/06/putting-home-sellers-on-couch.html">selling stalemate</a> in the current market.<span style=""> </span>Sellers do not want to lower home prices because they have an inflated view of what they should be getting.<span style=""> </span>In basic economics the price of a product is what the market will support.<span style=""> </span>Sales are radically down because people don’t want to buy at current prices.<span style=""> </span>Instead of realizing that this is the new status quo, sellers and the housing complex are trying each and every way to come up with absurd products that make no financial sense.<span style=""> </span>They make sense for their commissions and keeping the butter churning, but it makes no sense for a current buyer.<span style=""> </span>Why would you buy right now if you know next year prices would be cheaper?<span style=""> </span>You don’t.<span style=""> </span>This bubble psychology is what got us into this mortgage credit mess as well.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">People saw that housing went up year-over-year and figured they had to jump in.<span style=""> </span>For a few years they were right.<span style=""> </span>Even a broken clock is right twice a day.<span style=""> </span>Economic fundamentals didn’t push the market up but mass psychology did.<span style=""> </span>Folks went into massive debt with adjustable rate mortgages simply to own a piece of the <st1:country-region st="on"><st1:place st="on">America</st1:place></st1:country-region> dream.<span style=""> </span>Here in <st1:state st="on"><st1:place st="on">California</st1:place></st1:state>, many areas saw price gains of $100,000 year-over-year; in some cases yearly price gains were higher than annual household income.<span style=""> </span>How is that supportable in the long run?<span style=""> </span>Clearly it isn’t.<span style=""> </span>We aren’t talking about a home in the <st1:place st="on">Midwest</st1:place> that jumped from $100,000 to $110,000 while the area income is $42,000.<span style=""> </span>We are talking about homes that jumped from $350,000 to $450,000 in one year and area incomes are approximately $50,000.<span style=""> </span>I know most people in the <st1:country-region st="on">United States</st1:country-region> have a hard time wrapping their brain around bubble areas but take a look at some of the <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a> here in <st1:place st="on">Southern California</st1:place> and you’ll get a better idea.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style="">Missing the Bulls-eye<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Keep in mind that Countrywide even as late as May of this year was expanding its subprime mortgage outfit and talking about <a href="http://latimesblogs.latimes.com/laland/2007/05/report_countryw.html">50-year loans</a>. <span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year.<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">With that said, let us take another look at what is being said today:</p> <p><i style="">"We're pleased to assist our local real estate professionals, and we encourage buyers to work with an expert who is seasoned in helping buyers with the home purchase transaction," said Hanson.”<o:p></o:p></i></p> <p>Seasoned?<span style=""> </span>You mean with a company that was expanding their subprime unit only a few months before the current implosion? <span style=""> </span>Why would anyone take a 50 year mortgage when rates are at all time lows? <span style=""> </span>Is this your definition of seasoned?<span style=""> </span>Well let us continue forward in the magical world of mortgage Oz:<o:p></o:p></p> <p><i style="">“It has always been Countrywide's mission to provide optimal mortgage solutions for each homebuyer's needs and financial situation, and it is Countrywide's continuing commitment to help find the most appropriate mortgage solution for every qualified buyer.”<o:p></o:p></i></p> <p>Here was the option list for the last 7 years:<span style=""> </span>adjustable rate mortgage, option ARM mortgage, reverse mortgage, 2/28 mortgages, and maybe a 30 year conventional mortgage.<span style=""> </span>Keep in mind that with absurd ratings of the mortgage backed securities market premiums were better on the riskier mortgages so guess what was pushed by lenders?<span style=""> </span>And now these same people are the gurus of financial prudence?<span style=""> </span>Scotch please!<span style=""> </span>Dissecting the article you can tell someone is well groomed in the art of PR.<span style=""> </span>When they say most “appropriate mortgage solution” the implication is that there is a mortgage product for you.<span style=""> </span>Take this a step further and you will see that they are still trying to push people into houses while the market is entering the first stages of a bear cycle.<span style=""> </span>You’ll love this:</p> <p><i style="">“Through the America's Open House campaign, Countrywide hopes to encourage buyers to do their house hunting with a clear understanding of how much they can afford and what types of financing options are available to them.” <o:p></o:p></i></p> <p>So now after 7 years theses mortgage companies think that it is important to look at your income.<span style=""> </span>You can imagine how one of these sessions will go:<span style=""> </span></p> <p><span style="font-weight: bold;">Buyer:</span><span style=""> </span>“Yeah, we have an annual household income of $60,000, what do you think we can afford?”<br /><span style="font-weight: bold;"> Housing Tag Team:</span><span style=""><span style="font-weight: bold;"> </span> </span>“Well according to my modified housing algorithm, you qualify for a $700,000 mortgage.”<span style=""> </span><br /><span style="font-weight: bold;"> Buyer: </span>“I’ve heard that the credit markets are getting tighter and housing prices are going lower.<span style=""> </span>Is this correct?”<br /><span style="font-weight: bold;"> Housing Tag Team:</span><span style=""><span style="font-weight: bold;"> </span> </span>“Nonsense!<span style=""> </span>There is never a better time to buy then right now.<span style=""> </span>In fact, if you can put down 5 percent today before you walk out of this 500 square foot home, we will make you the proud owners of this place?<span style=""> </span>How does that sound?”<br /><span style="font-weight: bold;"> Buyer:</span><span style=""> </span>“I’m not sure.<span style=""> </span>It sounds like we will be out of our range.”<br /><span style="font-weight: bold;"> Housing Tag Team:</span><span style=""> </span>“Listen.<span style=""> </span>If you sign right now we will throw in an additional granite countertop and 42” plasma.<span style=""> </span>You don’t even need to go to the bank!<span style=""> </span>That is the benefit of the Housing Tag Team (HTT).”<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style="">Housing tied at Hip to Healthy Economy<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">In that past decades, real estate contributed about <a href="http://drhousingbubble.blogspot.com/2007/04/americas-codependence-on-housing-30-of.html">10 to 12 percent</a> of all added job growth. <span style=""> </span>However, in the last decade real estate related jobs are now pushing closer to 30 percent of the entire job output.<span style=""> </span>So of course the economy is healthy.<span style=""> </span>Real estate has been fueled by a massive credit bubble thus leading to job growth and spending.<span style=""> </span>But this circular logic has a fallacy that I’m sure many of you see.<span style=""> </span>If housing hits a road block and slows down, guess what happens to a large portion of our employment sector?<span style=""> </span>The economy is predicated on continuous housing appreciation; not normal appreciation that tracks with inflation but debt fueled home equity line of credit type of expansion.<span style=""> </span>When you pull the curtains back on your new house, make sure you send the wizard a nice tag team hello.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com19tag:blogger.com,1999:blog-35190061.post-25154090639263020162007-09-25T08:04:00.000-07:002007-09-25T08:04:39.535-07:00Press Zero for Reset: Are we out of the Subprime Mess?<b style=""><o:p></o:p></b>Before the subprime issues, there were many articles and research papers highlighting the impending challenge the mortgage market would face once rates started their inevitable reset descent.<span style=""> </span>Two camps emerged; one believed that the subprime market would be contained while the other camp saw it as the tip of something much larger.<span style=""> </span>There is no point in rehashing which side won this debate since it is already clear.<span style=""> </span>The next step is to focus on a market analysis and assess the current situation.<span style=""> </span>Recently, we haven’t seen much analysis in this area because it is a foregone conclusion that many subprime loans are resetting and this is causing a profound market impact beyond the subprime sector.<span style=""> </span>But what does the future potentially hold?<span style=""> </span>There is a great article that was published in the <a href="http://blogs.ocregister.com/mortgage/archives/2007/06/bofa_analyst_mortgage_correcti_1.html">O.C. Register talking to a BofA analyst, Robert Lacoursiere</a> discussing the future of the mortgage correction.<span style=""> </span>The chart provided on the site provides a disturbing picture: <div class="KonaBody"><p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shapetype id="_x0000_t75" coordsize="21600,21600" spt="75" preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"> <v:f eqn="sum @0 1 0"> <v:f eqn="sum 0 0 @1"> <v:f eqn="prod @2 1 2"> <v:f eqn="prod @3 21600 pixelWidth"> <v:f eqn="prod @3 21600 pixelHeight"> <v:f eqn="sum @0 0 1"> <v:f eqn="prod @6 1 2"> <v:f eqn="prod @7 21600 pixelWidth"> <v:f eqn="sum @8 21600 0"> <v:f eqn="prod @7 21600 pixelHeight"> <v:f eqn="sum @10 21600 0"> </v:f> <v:path extrusionok="f" gradientshapeok="t" connecttype="rect"> <o:lock ext="edit" aspectratio="t"> </o:lock><v:shape id="_x0000_i1025" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5C%5CTemp%5Cmsohtml1%5C01%5Cclip_image001.gif" title="resetbigchart"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAlQegJnfmmRFCbQXLE8bbmnSxiHHP-jyYtYpWOj51Tt3mO3eUUjLx1aEaAwusMNichEq9z70xRkmu08rE2fSKSWSSv2Y8MmoRTTuJMzcxPX9U6G6KX5A7tYxScFnXDwT4wdyVSQ/s1600-h/resetbigchart.gif"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAlQegJnfmmRFCbQXLE8bbmnSxiHHP-jyYtYpWOj51Tt3mO3eUUjLx1aEaAwusMNichEq9z70xRkmu08rE2fSKSWSSv2Y8MmoRTTuJMzcxPX9U6G6KX5A7tYxScFnXDwT4wdyVSQ/s400/resetbigchart.gif" alt="" id="BLOGGER_PHOTO_ID_5113827667677990594" border="0" /></a></v:shape></v:path></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:formulas></v:stroke></v:shapetype></p> <p class="MsoNormal"><st1:personname st="on"><i style="">*</i></st1:personname><i style="">Soucre:<span style=""> </span>O.C. Register<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">From past articles and projections, we already knew that September through December of 2007 would see the largest number of subprime resets.<span style=""> We've seen a couple of reports putting monthly rate resets in the range of $50 billion to over $100 billion. </span>This is important because it will be a litmus test on the resiliency of the housing market.<span style=""> </span>It is clear that many lenders and financial institutions are buckling even with the current environment.<span style=""> </span>A few other things will place additional strain on the market including third quarter results that unfortunately, will reflect a slow and underwhelming summer housing market.<span style=""> </span>This coupled with growing inventory, stalling appreciation, and the massive wave of resets will make it very difficult for housing prices not to depreciate.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Option One – Refinance<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">According to DataQuick, during the first half of the year over 43.4 percent of loans in <st1:place st="on">Southern California</st1:place> were jumbo loans.<span style=""> </span>Jumbo loans are home mortgages that go above $417,000. <span style=""> </span>The typical monthly payment buyers committed to was $2,421.<span style=""> </span>Sellers facing reset issues have the option of refinancing into a fixed rate mortgage.<span style=""> </span>Thanks to a low interest rate environment, rates are still hovering at all time lows.<span style=""> </span>Unfortunately, many home owners are unable to refinance even into reasonable conventional loans because they stretched into their current home.<span style=""> </span>If we take a look at notice of defaults (NODs) in <st1:place st="on">Southern California</st1:place>, we are seeing an exponential jump:<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shape id="_x0000_i1026" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5CTemp%5Cmsohtml1%5C01%5Cclip_image002.png" title="canod-July2007"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVUKAJ6zq7vJrycaDMKeAGsrjPDlkgAd2sjR5K5U13pOSBfuB86fshbXsnb654IVNXLNtizBsriFLacItrbQX9wbbecGVLf-7amTcX801G211FcjV-Y97uVbbroshyphenhyphen48EMSz8DsQ/s1600-h/canod-July2007.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVUKAJ6zq7vJrycaDMKeAGsrjPDlkgAd2sjR5K5U13pOSBfuB86fshbXsnb654IVNXLNtizBsriFLacItrbQX9wbbecGVLf-7amTcX801G211FcjV-Y97uVbbroshyphenhyphen48EMSz8DsQ/s400/canod-July2007.png" alt="" id="BLOGGER_PHOTO_ID_5113827878131388114" border="0" /></a></v:shape></p> <p class="MsoNormal">The illuminating thing of this data is that many of these NODs are turning into foreclosures.<span style=""> </span>This is a phenomenon absent in the previous decade of the housing boom.<span style=""> </span>Sellers facing trouble were bailed out by a rising market and rapid appreciation.<span style=""> </span>There was no need to refinance aside from taking out money or lowering a higher previous rate.<span style=""> </span>Those sellers that desperately wanted to stay in their home, used creative methods such as tapping into a home equity line of credit and bought extra time for paying off their current mortgage.<span style=""> </span>The burden has now shifted since the mortgage markets are tightening their belts and appreciation is stagnant.<span style=""> </span>In fact, this is the first year of serious market issues in <st1:place st="on">Southern California</st1:place> in over 10 years.<span style=""> </span>The refinance option may not be a viable choice for many home owners that have a subprime loan and are facing a reset in the next few months.<span style=""> </span>That is why many housing bears cautioned that these loans had a biased toward continued appreciation and no insurance in case the housing market started losing any steam.<span style=""> </span></p> <p class="MsoNormal"><i style=""><br />Option Two – Sell<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Last month sales volume fell over <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/2007/09/when-housing-clock-stops-ticking-why.html">50 percent in Los Angeles</a></span> on a year-over-year basis.<span style=""> </span>The last option of hope for many home owners in trouble was selling.<span style=""> </span>In fact, many sellers were able to unload their homes before their rate reset and profited nicely.<span style=""> </span>This went on for multiple years.<span style=""> </span>In a bubble, rational behavior and fundamentals seem to take a backseat.<span style=""> </span>Even staunch opponents of housing started singing a different tune.<span style=""> </span>It is almost a historical prerequisite that once a bubble forms and is in full stride, rhetoric regarding a “new era” creep into the mainstream lexicon.<span style=""> </span>Selling is becoming a challenge in the current market because of market depreciation, increased inventory, and buyer psychology.<span style=""> </span>Another characteristic of any bubble is irrational logic guiding fundamental economic decisions.<span style=""> </span>There was really no reason for housing prices to run up the way they did with no income support, population growth numbers that didn’t instigate amazing jumps, and renovations that didn’t reflect hundreds of thousands of dollars in price premiums.<span style=""> </span>In addition, buyers are no longer fighting for the one home on the block.<span style=""> </span>Any person living in <st1:place st="on">Southern California</st1:place> need only get in their car for a weekend drive and cruise the local streets.<span style=""> </span>Without fail you will find one or two homes for sale within your field of vision. The growing number of foreclosures doesn't help:</p><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN_6MtoqPuoqTMOXHLAXTjScb4CY_rWb35JZRrZU4M4J3eicPIzVKcUV9hJueVw8HAQ4TZ2xNbptnnISyolBUBkUpuhveCVgq2djYQpokZHCwazKmp6Lh0L1ED3k8El4uI7D1zGA/s1600-h/chartforeclosures.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgN_6MtoqPuoqTMOXHLAXTjScb4CY_rWb35JZRrZU4M4J3eicPIzVKcUV9hJueVw8HAQ4TZ2xNbptnnISyolBUBkUpuhveCVgq2djYQpokZHCwazKmp6Lh0L1ED3k8El4uI7D1zGA/s400/chartforeclosures.jpg" alt="" id="BLOGGER_PHOTO_ID_5113828608275828466" border="0" /></a><p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Sellers are also competing with short-sales and foreclosures.<span style=""> </span>The worst time to negotiate is when you are hostage to spiraling debt.<span style=""> </span>Many of these sellers have no choice but to sell.<span style=""> </span>Life goes on and things such as divorce, employment disruptions, or crushing debt payments are enough reason to move out.<span style=""> </span>At a recent <a href="http://about.countrywide.com/presentations/docs/BofA%20ARM%20Presentation%20FINAL%20slides%20for%20webcast.pdf">presentation by Countrywide</a>, they announced that the number one reason for people facing foreclosure was “curtailment of income” at 58.3 percent of all causes.<span style=""> </span>The second leading cause?<span style=""> </span>Medical or illness coming in at 13.2 percent.<span style=""> </span>This paints a contrasting view to the current reports that employment and income is strong and healthy.<span style=""> </span>We need to start examining leading indicators such as building permits, insurance claims, and the money supply because this will tell us where we are heading.<span style=""> </span>Looking at lagging indicators such as the unemployment rate only tell us where we have been.<span style=""> </span>They are both important but clearly we are at a <a href="http://drhousingbubble.blogspot.com/2007/05/housing-tipping-point-3-factors-that.html">tipping point</a> of market data not reflecting market reality.<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style="">Option Three – Foreclosure <span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">It goes without saying that most people do not want to lose their home through foreclosure.<span style=""> </span>It is a financially and emotionally stressful life event.<span style=""> </span>100 percent of people do not want to lose money.<span style=""> </span>Yet looking at the exploding number of foreclosures, it is becoming more apparent that the country debt load is becoming too much to handle.<span style=""> </span>Keep in mind that we have never witnessed a time in history of such extraordinary national real estate appreciation.<span style=""> </span>We had previous regional housing bubbles such as the <a href="http://drhousingbubble.blogspot.com/2007/09/florida-housing-1920s-redux-history.html">Florida housing boom</a> during the 1920s.<span style=""> </span>In addition, our unemployment rate is relatively low and inflation according to government statistics is still under control.<span style=""> </span>We examined this in a previous article and highlighted that in modern day society, avoiding debt is nearly <a href="http://drhousingbubble.blogspot.com/2007/09/invisible-mortgage-hand-analysis-of.html">impossible for most working class Americans</a>.<span style=""> </span>The cost of education, healthcare, housing, food, and energy have all gone up dramatically in the last decade.<span style=""> </span>Let us take a look at the national mortgage debt load for the entire country:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shape id="_x0000_i1027" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5C%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C01%5Cclip_image004.jpg" title="mortgagedebt"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWsQs4ety68jma2QvAT08fcvBpNy6PfCAv59k7EmRz0rk7-hJZq3GTQcLyfwNcnzCjZPwJxNmjePjTwjQz1sl2Iz7giZ2PXlQ636ekQChUNIXLodOSuRCHopodHng4jGoBawYpmA/s1600-h/mortgagedebt.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWsQs4ety68jma2QvAT08fcvBpNy6PfCAv59k7EmRz0rk7-hJZq3GTQcLyfwNcnzCjZPwJxNmjePjTwjQz1sl2Iz7giZ2PXlQ636ekQChUNIXLodOSuRCHopodHng4jGoBawYpmA/s400/mortgagedebt.jpg" alt="" id="BLOGGER_PHOTO_ID_5113827994095505122" border="0" /></a><span style=""> </span></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">As you can see from the above chart mortgage debt has tripled from 1992.<span style=""> </span>It went from approximately $4 trillion to about $12 trillion in the current market.<span style=""> </span>You can also see the inflexion point at roughly 1999.<span style=""> </span>It is hard to imagine that such a booming economy with relatively low unemployment is facing the debt struggles that we are facing.<span style=""> </span>One of the main reasons is that employment in the <a href="http://drhousingbubble.blogspot.com/2007/04/americas-codependence-on-housing-30-of.html">housing sector has boomed in the last decade</a>.<span style=""> </span>It goes without saying that a slower housing market will equal unemployment for those in the housing industry. </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Solutions<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Policy makers are providing their solutions to this mortgage crises.<span style=""> </span>Initially what started as a subprime problem is now spilling over into multiple sectors.<span style=""> </span>This has the potential of pushing the economy into recession and more and more economist are chiming in with future odds.<span style=""> </span>What are some of the current solutions on the plate?<br /><br /><st1:personname st="on"><i style="">*</i></st1:personname><i style="">Tax forgiveness for those in foreclosure<o:p></o:p></i></p> <p class="MsoNormal"><st1:personname st="on"><i style="">*</i></st1:personname><i style="">Lowering the Fed Funds Rate trying to make credit products more attractive<o:p></o:p></i></p> <p class="MsoNormal"><st1:personname st="on"><i style="">*</i></st1:personname><i style="">Increasing loan caps through government sponsored entities (GSEs)<o:p></o:p></i></p> <p class="MsoNormal"><st1:personname st="on"><i style="">*</i></st1:personname><i style="">Funding for credit counseling<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">These solutions may help but they only put a bandaid on the overall broken housing market.<span style=""> </span>In a politically charged environment with so much at stake next year, both sides of the political spectrum are treading water carefully.<span style=""> </span>No one wants to be seen as the party that didn’t help suffering home owners.<span style=""> </span>Bernanke is a student of the Great Depression and realizes that history doesn’t bode well for a Fed and government that doesn’t act swiftly.<span style=""> </span>Even though they publicly echo fears of inflation, policy moves and data point toward a more permeating fear of deflation. <span style=""> </span>I truly believe Americans do not want to see their fellow citizens fail and suffer.<span style=""> </span>In fact, I believe most Americans have a strong work ethic and hold that people that sacrifice and work diligently should be rewarded.<span style=""> </span>What frustrates most Americans is a game where the uber-wealthy are given corporate welfare when times are tough but poorer Americans by these same groups are seen as not being able to pull themselves up from their own bootstraps.<span style=""> </span>The solution to this, even though people do not want to hear this, is a market correction.<span style=""> </span>This means that local income levels and the new tighter credit standards will dictate future housing prices.<span style=""> </span>In some areas this means 10 percent drops while in others this can reach 50 percent or higher.<span style=""> </span>Will this happen?<span style=""> </span>The data is already pointing toward this.<span style=""> </span>Even if property drops 30 percent over 5 years, combined with inflation adjustments this is close to a 50 percent drop.<span style=""> </span><a href="http://drhousingbubble.blogspot.com/2007/09/when-housing-clock-stops-ticking-why.html">Some areas in Los Angeles</a> are already seeing 20 percent adjustments year-over-year.<span style=""> </span><br /><br />By looking at the reset charts, we realize that the housing correction still has a long way to go.<span style=""> </span>What will happen in the next year through policy and market sentiment will set the tone for the next decade of housing in <st1:country-region st="on"><st1:place st="on">America</st1:place></st1:country-region>.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com18tag:blogger.com,1999:blog-35190061.post-68001241263723427432007-09-22T00:00:00.000-07:002007-09-22T09:44:50.351-07:00Real Homes of Genius: Today we Salute you Bell. 551 Square feet for $349,999. No Bubble Here.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy18feavYugIQMTRPETlRMYvHqXwsS3fYLw_2DG4HkeyZQFtngJAvWimDOJ-DisQrMnmUA7lIzl8XE8GQYOzK2XkdQ5bQvK6Jwf0a126o3vh9Hd_bp-T61w3QZQIWyQ98VJhLu1w/s1600-h/bell.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy18feavYugIQMTRPETlRMYvHqXwsS3fYLw_2DG4HkeyZQFtngJAvWimDOJ-DisQrMnmUA7lIzl8XE8GQYOzK2XkdQ5bQvK6Jwf0a126o3vh9Hd_bp-T61w3QZQIWyQ98VJhLu1w/s400/bell.jpg" alt="" id="BLOGGER_PHOTO_ID_5112918977152208546" border="0" /></a><br /><div class="KonaBody">The market has gone completely bipolar.<span style=""> </span>A few weeks ago, the market was tanking and practically every day, we were hearing about one after another lending institution collapsing.<span style=""> </span>Now, we are riding the stock market to prosperity once again thanks to the Federal Reserve and easy money (you can use these interchangeably).<span style=""> </span>Even though we still hear about lending institutions tanking this is already baked into the market since data doesn’t matter anymore.<span style=""> </span>This past week was full of pyrotechnic housing fireworks.<span style=""> </span>Let us recap the week: <p class="MsoNormal"><i style="">Fed drops funds rate to 4.75<o:p></o:p></i></p> <p class="MsoNormal"><i style="">Stock market soars like an eagle on methamphetamines <o:p></o:p></i></p> <p class="MsoNormal"><i style="">Dollar index falls below key support levels<o:p></o:p></i></p> <p class="MsoNormal"><i style="">Gold shining at 27 year highs<o:p></o:p></i></p> <p class="MsoNormal"><i style="">Oil prices keep chugging along<o:p></o:p></i></p> <p class="MsoNormal">And guess what happened to the 10 year Treasury note?:</p> <p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiherSTstdG54mKk8dkAkOXcjorO9AoLhK0wpjmmrlJHfmYOiAvDADSIYB8crP-WQpAFhKMuTsbpdb6lV7CFLrpg6ey-STsas1NKSzlDSH1W4atd8knQCODISiH4HSFlRHKUOWlBA/s1600-h/10yr.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiherSTstdG54mKk8dkAkOXcjorO9AoLhK0wpjmmrlJHfmYOiAvDADSIYB8crP-WQpAFhKMuTsbpdb6lV7CFLrpg6ey-STsas1NKSzlDSH1W4atd8knQCODISiH4HSFlRHKUOWlBA/s400/10yr.jpg" alt="" id="BLOGGER_PHOTO_ID_5112919063051554482" border="0" /></a></p> <p class="MsoNormal">It actually went up!<span style=""> </span>I’m not sure why so many in the housing industry think that the Fed has some kind of direct impact on the direction of long-term interest rates.<span style=""> </span>Do you now get that they are simply bailing out Wall Street and hedge funds?<span style=""> </span>Take a look at the stock market and you should get a clear idea who has gained the most benefit.<span style=""> </span>They have a massive impact and influence on direction but this doesn’t always hold true.<span style=""> </span>Fears of a falling dollar, inflation, and rocketing commodities had a larger impact on the direction of rates.<span style=""> </span>And LIBOR rates that most adjustable rate mortgages track is still holding strong.<span style=""> </span>We aren’t having a 30 year conventional fixed mortgage crises; we are having an exotic banana republic mortgage credit debacle.<span style=""> </span>Thanks Ben for that .5 cut which does very little for 9+ percent subprime loans!<span style=""> </span>Making lending standards more lax at this juncture may not get you into MENSA so let us take a look at a case example.<span style=""> </span>Today we salute you Bell with our <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius Award</a></span>.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Today’s home is one of the smallest <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a></span> ever featured coming in at an eye-popping 551 square feet.<span style=""> </span>This 1 bedroom 1 bath home is the envy of the neighborhood.<span style=""> </span>Who said you couldn’t have a white picket fence in Los Angeles County? <span style=""> </span>This place can be your's for only $349,999.<span style=""> </span>Make sure you mention to your broker that you are looking for the Bernanke Special since it’ll save you $100 a month.<span style=""> </span>What was this home initially listed for?</p> <p class="MsoNormal">Price Reduced: 09/13/07 -- $370,000 to $349,999</p> <p class="MsoNormal">A $20,001 discount is not a bad incentive.<span style=""> </span>I would not have looked any further if it was $20,000, but I’m a fan of one dollar bills with that great green portrait of Mr. Washington.<span style=""> </span>In fact, I’m hearing that in a few years they’ll be collectibles since they’ll stop printing them and only dish out bills in denominations of $10 or more.<span style=""> </span><span style=""> </span>I’m not buying a $100,000 boat but show me one at $99,999 and then we are talking.<span style=""> </span>What does the sales history on this place tell us?<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Sale History </p> <p class="MsoNormal"><b style="">10/26/2005: $299,500 <o:p></o:p></b></p> <p class="MsoNormal"><b style="">12/30/1998: $78,100 <o:p></o:p></b></p> <p class="MsoNormal"><b style="">06/29/1998: $95,970<o:p></o:p></b></p> <p class="MsoNormal">Say what?<span style=""> </span>5 figures in Los Angeles County and within the past 10 years?<span style=""> </span>This place had an 18 percent decline in 1998.<span style=""> </span>This 18 percent decline amounted to $17,870.<span style=""> </span>We already got that discount in a few weeks plus a few extra dollars; we’ll need those extra dollars for higher energy costs.<span style=""> </span>Do you realize that this home went up by a multiple of 4 in 9 years according to the current sales price?<span style=""> </span>Somehow I doubt incomes went up by this margin.<span style=""> </span>Let us assume that they sell this home at the current price:</p> <p class="MsoNormal">$349,999 – six percent commission of $20,999 = $329,000.<span style=""> </span>A profit of nearly $30,000 if they stay in the home until the end of October and pay no capital gains tax on their profit.<span style=""> </span>Again, this is assuming they sell it at their current price.<span style=""> </span>Let us take a look at the neighborhood information:</p> <p class="MsoNormal">Average/Household:<span style=""> </span> <b style=""><u>$41,464</u></b><span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Median Rent Price:<span style=""> </span><b style=""><u>$900</u></b></p> <p class="MsoNormal">So let us say that a hypothetical family in this area was to buy this place.<span style=""> </span>Let us run their monthly budget:</p> <p class="MsoNormal">PITI:<span style=""> </span>$2,465 (5 percent down and 30 year fixed mortgage)</p> <p class="MsoNormal">Monthly Net Income:<span style=""> </span>$2,868 (filing as married with 2 exemptions)</p> <p class="MsoNormal">So this family is left with <b style="">$403</b> of disposable income each month.<span style=""> </span>They are spending an unbelievable 85 percent of their income on housing.<span style=""> </span>401k?<span style=""> </span>Forget it.<span style=""> </span>Roth IRAs?<span style=""> </span>If there is money after food.<span style=""> </span>Do you see why this makes no sense?<span style=""> </span>No investor would purchase this place since they would be negative cash-flowing by $1,565 a month.<span style=""> </span>I know that here in California finding cash flowing properties is like finding a leprechaun.<span style=""> </span>Even so, the number of investment properties bought in California has exploded over the past seven years.<span style=""> </span>This was the flipping, mortgage-equity-withdrawal, and other people’s money (OPM) crowd.<span style=""> </span>Apparently, this mantra is straight from the Fed because they have no respect for your American dollar and are using this OPM strategy.<span style=""> </span>Too bad the other people are you and your family.<span style=""> </span>Now that we are seeing depreciation in California, who do you think will buy these homes?<span style=""> </span>Income ratios do not make sense so families in the immediate area are very unlikely to buy these places.<span style=""> </span>Investors will not buy unless they want to feed an alligator property with no appreciation.<span style=""> </span>Could it be that we have been living in a major <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/2006/10/ponzi-financing-house-that-credit.html">Ponzi bubble</a></span> here in Southern California and the game has now stopped?<span style=""> </span>No amount of rate dropping will change the above facts.<span style=""> </span><br /><br />Today we salute you Bell with our <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius Award</a>.</span> <span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com19tag:blogger.com,1999:blog-35190061.post-89384454717455670772007-09-20T10:15:00.000-07:002007-09-20T10:21:40.152-07:00Operation Destroy the Dollar: H.R. 1852 Objective Number One – Bailout the Lenders.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbA3FW_DvopTPX99VNlpi7TbKv5rjF7Hp5tIvhE62qw7zWAikxwjPkHptvTGB_MlZ8hCkNLzipDD-09Vw7m3aHfZO7T9wlpnk2hkVJ5roUCRDA1wqJaeFONDBIK5vruMlOJvb7bQ/s1600-h/billcolor.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbA3FW_DvopTPX99VNlpi7TbKv5rjF7Hp5tIvhE62qw7zWAikxwjPkHptvTGB_MlZ8hCkNLzipDD-09Vw7m3aHfZO7T9wlpnk2hkVJ5roUCRDA1wqJaeFONDBIK5vruMlOJvb7bQ/s400/billcolor.jpg" alt="" id="BLOGGER_PHOTO_ID_5112337425782161826" border="0" /></a><br /><div class="KonaBody"><b style=""><o:p></o:p></b>You can tell it is an election year when political operatives try to pander to every single group with no long-term thought process of the implications of instant gratification.<span style=""> </span>Maybe that is why the United States on a personal level, has a <a href="http://drhousingbubble.blogspot.com/2007/07/housing-and-age-of-affluence.html"><span style="color:blue;">negative savings rate</span></a>.<span style=""> </span>How can the government encourage people to save and be prudent when they do the complete opposite?<span style=""> </span>Let us take a look at the winners with this newfound ease in lending: <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Home Loans:</i><span style=""> </span>Winner because they become cheaper</p> <p class="MsoNormal"><i style="">Auto Loans:</i><span style=""> </span>Winner because payments will be lower</p> <p class="MsoNormal"><i style="">Credit Cards:</i><span style=""> </span>Winner since your APR just dropped from 18 percent to 16 percent<br /><i style="">Lenders:</i><span style=""> </span>Winner since they are given a lifeline to do more loans</p> <p class="MsoNormal"><i style="">Savings Account:</i><span style=""> </span>Losers since your interest rate is lower than inflation</p> <p class="MsoNormal"><i style="">Dollar:</i><span style=""> </span>Loser as you can clearly see by the drop below the 80 support level</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Pretty basic right?<span style=""> </span>But if you think about the deeper ramifications of the decision it shines the light on an eerie part of our economy.<span style=""> </span>The only way we can keep this game going is by making savings unattractive to the masses and encourage spending at all cost.<span style=""> </span>Many investors realize the game is up and are diversifying out into foreign currencies, stock, and everything else that will benefit from a falling dollar.<span style=""> </span>Many are doing short-term call options and figure they can make a profit on these pseudo bull runs.<span style=""> </span>This does not help the massive majority of Americans.<span style=""> </span>How is this good for our country in the long run?<span style=""> </span>Today we will take a look at an absurd piece of legislation that passed the house, H.R. 1852.<span style=""> </span>I will translate the key points for you into blunt language and what it means to you and our country.<span style=""> </span>Take a look at this press release issued a few days ago from the <a href="http://www.house.gov/apps/list/press/financialsvcs_dem/press0918072.shtml">House Committee on Financial Services</a>:<span style=""> </span></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><i style=""><span style="font-family:Symbol;">·</span><span style=""> </span><strong>Lower Down Payments</strong>. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment. <o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Translation?<span style=""> </span>We are going to institutionalize subprime lending!<span style=""> </span>Forget about the tried and tested 10 and 20 percent down payments of yesteryear.<span style=""> </span>We are overhauling the system to remove down payments.<span style=""> </span>After all, we have a hard enough time saving anything month-over-month so how can we expect people to save a few thousand dollars?<span style=""> </span>So instead of requiring this archaic “saving” that is so passé, we are going to allow people, assuming they can make the monthly payment, to purchase homes even if the prices go beyond financially prudent ratios.<span style=""> </span>Down payments exist for a reason.<span style=""> </span>They show that a prospective buyer has the ability to tighten their belt and manage their finances for a few years to purchase a home; normally this is achieved by foregoing spending on other discretionary items.<span style=""> </span>But you can have your cake and eat it too in the mortgage world!<span style=""> </span>Debt is saving in this apparently brave new world.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style=""><span style="font-family:Symbol;">·</span><span style=""> </span><strong>Housing Counseling</strong>. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments. <o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Do we really need housing counseling?<span style=""> </span>I can imagine one of these sessions:</p> <p class="MsoNormal"><br /><i style="">Counselor:</i><span style=""> </span>“Can you tell me about your current situation?”<br /><i style="">Supbrime Borrower:</i><span style=""> </span>“Ok.<span style=""> </span>Someone from one of those now bankrupt lenders gave me this great 1.25% teaser loan and told me it wouldn’t reset for a long time.<span style=""> </span>I didn’t read the note because hey, I trusted him since he was in a nicely ironed suit.<span style=""> </span>When he said long time I thought he meant 10 years, not 2 years.<span style=""> </span>Now my payment went from $1,250 a month to $2,200.<span style=""> </span>What can I do?<span style=""> </span>I barely was able to afford it even with the crazy teaser rate?”</p> <p class="MsoNormal"><i style="">Counselor:</i><span style=""> </span>“Damn.<span style=""> </span>Looks like you need to increase your income by adding an all <st1:country-region st="on"><st1:place st="on">America</st1:place></st1:country-region> 2<sup>nd</sup> or 3<sup>rd</sup> job.<span style=""> </span>Another option is to go into foreclosure since the market price on your home is now less then the mortgage balance.<span style=""> </span>Oh hold on a second…I’m getting a fax from our blessed government. [pause to get fax]<span style=""> </span>Hey!<span style=""> </span>Good news.<span style=""> </span>We can refinance you into another loan with another teaser rate since the government is now subsidizing these loans.”</p> <p class="MsoNormal"><i style="">Subprime:</i><span style=""> </span>“Great!<span style=""> </span>Because I was looking at this other home that I would like to flip…”<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The folks that need “counseling” are the lenders and the policy makers for thinking this is a good long-term strategy.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style=""><span style="font-family:Symbol;">·</span><span style=""> </span><strong>Subprime borrowers</strong>. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.<br />Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans. <o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Higher risk but qualified borrowers?<span style=""> </span>Bwahaha!<span style=""> </span>You couldn’t write more Orwellian language.<span style=""> </span>Could it be that they are high risk because maybe they can’t afford the home?<span style=""> </span>This is like saying that a person is perfectly suitable for working at the drug enforcement agency so long as his cocaine and heroine addiction doesn’t rear its ugly head while raiding a drug house.<span style=""> </span>As we are seeing, it is unethical to give someone that doesn’t have their financial house in a row $100s of thousands of dollars in the form of a mortgage only to have them lose their house later on.<span style=""> </span>That is why we have [had] lending standards.<span style=""> </span>When lenders had to hold the notes they actually vetted the loans with higher scrutiny because a foreclosure would hurt their books.<span style=""> </span>Now we have this moral hazard where we are encouraging irresponsible lending.<span style=""> </span>This doesn’t help the homeowner.<span style=""> </span>This is horrible classical conditioning on a mass scale.<span style=""> </span>What we are telling people is credit doesn’t matter, saving is irrelevant, and bad financial moves will have a bailout from the government.<span style=""> </span>Does this make sense?<span style=""> </span></p> <p class="MsoNormal"><br />Then the reverse mortgage portion is just classic.<span style=""> </span>You can see the light bulb over these congressmen go off.<span style=""> </span>“Next year is so important.<span style=""> </span>Older voters are an important constituency group.”<span style=""> </span>Since Social Security is peanuts and the cost of living adjustments are based on ministry of truth data, they only see marginal increases.<span style=""> </span>The majority don’t have adequate savings but what do they have?<span style=""> </span>Over inflated home equity!<span style=""> </span>How about we slap on another virtual ATM and drain all their savings so instead of the equity going on to their children or grandchildren, it will go to the good old government.<span style=""> </span>Amazing planning here.<span style=""> </span>Let us keep reading.<span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style=""><span style="font-family:Symbol;">·</span><span style=""> </span><strong>Multifamily Loans</strong>. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities. <o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">You really need to put on your doublespeak reading glasses for this one.<span style=""> </span>So they want to raise FHA multifamily loan limits to encourage affordable housing?<span style=""> </span>They are basically forcing prices to go up.<span style=""> </span>If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more affordable housing.<span style=""> </span>But this legislation assumes that current housing bubble prices are justified and are trying to institutionalize them under the guise of good public policy.<span style=""> </span>What we need is less legislation and more open market competition.<span style=""> </span>Think about it.<span style=""> </span>If you have two companies and materials are being driven down because of competition and efficiencies, then the company that can provide lower priced goods to the market will win.<span style=""> </span>That means lower priced homes and more sales.<span style=""> </span>Did you notice how Hovnanian had no problem attracting buyers when it slashed prices by $100,000?<span style=""> </span>But here, we have this big government mentality and you’ve seen the ridiculous budgets where toilets cost $2,000 and pens go for $30 each.<span style=""> </span>Do you really think these companies compete when they know they have a locked in price?<span style=""> </span>Why do you think communism failed so miserably?<span style=""> </span>And the language is scary.<span style=""> </span>What do they mean “fully fund construction costs” in <a href="http://drhousingbubble.blogspot.com/2007/05/summer-and-housing-in-garden-of-eden-3.html">bubble areas</a>?<span style=""> </span>They call them more expensive areas instead of overpriced bubble metro areas fueled by rancid loans but I think the PR folks removed that language.<span style=""> </span>This is a blank check.<span style=""> </span>Make sure you contact your representatives in both houses and contact the White House to veto this.<span style=""> </span>Maybe Bush will dust off the pen and use it for once.<span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style=""><span style="font-family:Symbol;">·</span><span style=""> </span><strong>Affordable Housing Fund</strong>. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury. <o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">You don’t need the affordable housing fund if you relax zoning rules, stop bailing out lenders, and make these folks accountable for their actions.<span style=""> </span>They are trying to seal high prices into the system as a paradigm shift.<span style=""> </span>These folks want you to believe that higher prices are just a thing of the modern day as opposed to being fueled by exotic funky lending and mass greed.<span style=""> </span></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style=""><span style="font-family:Symbol;">·</span><span style=""> </span><strong>Higher Loan Limits</strong>. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">This is the one that is getting everyone worked up.<span style=""> </span>How is raising loan caps going to help the family on main street <st1:country-region st="on"><st1:place st="on">USA</st1:place></st1:country-region> by pushing limits over $500,000?<span style=""> </span>I thought the median price was somewhere around $225,000 for most Americans?<span style=""> </span>Oh!<span style=""> </span>I forgot.<span style=""> </span>Lenders make their most profits from overpriced bubble metro areas therefore we should ask our <a href="http://drhousingbubble.blogspot.com/2007/06/comparative-analysis-of-3-us-cities.html">brothers and sisters</a> in Wyoming, Montana, Arkansas, and every other non-bubble state to contribute to their mass greed.<span style=""> </span>Make no mistake.<span style=""> </span>This bill is 95 percent for the housing industry.<span style=""> </span>It will not help you or your family if you are facing foreclosure.<span style=""> </span>They will use the 1 or 2 examples to get media heart bleeding and lenders going into crying moments (did you see that Youtube video of the guy pleading for Brittany?); it’ll be something to that effect but everything is garbled up in this translation.<span style=""> </span>Pandering at its finest.<span style=""> </span>How is someone in a high priced area with a $400,000 or $500,000 mortgage with a family income of <a href="http://drhousingbubble.blogspot.com/2007/05/yearly-income-14000-purchase-of-house.html">$50,000 going</a> to get help if the main problem is a pricing and income issues?<span style=""> </span>Unless they want to give everyone a 50 percent mandatory raise, I’m not sure how this helps anyone except lenders on the large part by washing their hands clean ala Pontius Pilate of unethical and corrupt mortgage products?<span style=""> </span></p> <p class="MsoNormal"><br /><i style="">Doublespeak:<span style=""> </span>Helping Minorities Pad our Bottom-line<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Someone once told me that getting married is easy, staying married is the hard part.<span style=""> </span>During a presentation, one of the nation’s mortgage lending leader reiterated their goal of helping minorities to own homes.<span style=""> </span>The government always throws this PC statement out.<span style=""> </span>The last few years these lenders have done the most damage to minorities.<span style=""> </span>Guess who are the folks who are losing their homes because of subprime lending in the largest numbers?<span style=""> </span>These greedy lenders didn’t care about folks’ long-term well being, they only cared about putting people into homes and getting their nice commission cuts.<span style=""> </span>So what if 1, 2, or 3 years down the road the family drowns in their own debt service?<span style=""> </span>Setting people up for failure is not the American way.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The fact that many are subprime meant they couldn’t afford homes to begin with.<span style=""> </span>Simple way to avoid this mess from the start.<span style=""> </span>If people want to buy homes why is it so bad to ask that they save a minimal down payment?<span style=""> </span>You know why?<span style=""> </span>Because this slows the real estate complex down.<span style=""> </span>During this time people aren’t buying, selling, refinancing, busting out home equity lines of credit and all things where the housing Ponzi Scheme gets their <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html">money from</a>.<span style=""> </span>To use this “we are helping minorities” line is arrogant and absurd.<span style=""> </span>Why don’t they address the real reason that of massive inequities in pay for minority groups?<span style=""> </span>Oh!<span style=""> </span>We can’t talk about<span style="color:blue;"> <a href="http://drhousingbubble.blogspot.com/2007/07/housing-and-age-of-affluence.html">income</a></span> because that is taboo.<span style=""> </span>Yet they are okay with putting people into ticking time bombs.<span style=""> </span>A good senator and representative, for example, in voting for a war should always ask themselves if they would send their own child to a conflict.<span style=""> </span>In the case of lending, a good lender should be required to ask, “would I loan this person money if it came out of my own bank account?”<span style=""> </span>Guess what your answer would be?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com43tag:blogger.com,1999:blog-35190061.post-72644689181960509202007-09-19T18:12:00.000-07:002007-09-19T10:59:22.204-07:00Real Homes of Genius: Today we Salute you Pasadena. $87,000 off in 2 Months for 937 Square Feet.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWV9WGwHo2Rjt4zbkPZfm5OqNBSA0CxvYx3OxEwPU46cwhzb26GoW42WefWfMU862N5H9lyN5yYlZMPeVQXVTlREk-_0LVp8p9NvtWef0L3f-YSh0RU2qT8VKTxmURsxn_157Jow/s1600-h/pasadena.png"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWV9WGwHo2Rjt4zbkPZfm5OqNBSA0CxvYx3OxEwPU46cwhzb26GoW42WefWfMU862N5H9lyN5yYlZMPeVQXVTlREk-_0LVp8p9NvtWef0L3f-YSh0RU2qT8VKTxmURsxn_157Jow/s400/pasadena.png" alt="" id="BLOGGER_PHOTO_ID_5111718220347097490" border="0" /></a><br /><div class="KonaBody"><b style=""><o:p></o:p></b>As the dollar goes sledding down below levels that even a Victoria’s Secret bra couldn’t support, the market rejoiced at the Fed’s rate cut.<span style=""> </span>Too bad this won’t do much for banana republic loans in the wonderful sunny state of <st1:state st="on"><st1:place st="on">California</st1:place></st1:state>.<span style=""> </span>Since most of us are paid in dollars, freely purchase things in dollars, and usually use the greenback, a declining dollar really isn’t a good thing for the long-term.<span style=""> </span>But for now, let us party with Bacardi and extend a warm welcome to Ben Bernanke and the Fed.<span style=""> </span>In addition, this won’t do much for the <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Homes of Genius</span></a> inventory that is piling on like warm pancakes.<span style=""> </span>October will see the largest amount of rate resets at a mind-boggling $50 billion; and yes, those rate resets are dollar denominated unless you plan on paying your mortgage with Euros or Yen.<span style=""> </span>I know many of you feel a gut disappointment with the Fed.<span style=""> </span>You were hoping that they would do the right thing but realized that they are part of the credit machine.<span style=""> </span>Don’t worry yourself too much.<span style=""> </span>Many people think this credit crunch is an interest rate dilemma but as our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Home of Genius</span></a> today shows, this is a pricing problem.<span style=""> </span>Today we salute you <st1:place st="on"><st1:city st="on">Pasadena</st1:city></st1:place> with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Home of Genius</span></a> award.<span style=""> </span> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">This inspiring 2 bedroom 1 bath home will put your green <st1:place st="on">Bermuda</st1:place> lawn to shame.<span style=""> </span>Who needs grass when you have fortified concrete with wild weeds growing out of it?<span style=""> </span>This place spanning out over a whopping 937 square feet will be a sure hit with friends and family.<span style=""> </span>And for the rock bottom price of $450,000, you’ll be the first in Pasadena to buy a sub 1,000 square foot home that doesn’t run half a million dollars.<span style=""> </span>The mortgage shenanigans of yesteryear are now finished according to our friend Big Ben.<span style=""> </span>Let us take a look at the sales history on this home:<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal">03/06/2007: $507,000 </p> <p class="MsoNormal">02/25/1987: $75,909</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Someone is trying to unload this property really quickly.<span style=""> </span>At the current price, they are taking a $57,000 hit without the <a href="http://drhousingbubble.blogspot.com/2007/09/sacred-commission-3-reasons-why.html"><span style="color:blue;">6 percent commission</span></a>.<span style=""> </span>This was a flip gone bad as you can see from the pricing action:<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Price Reduced: 07/09/07 -- $537,000 to $450,000</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">With the first price, someone felt that they would be able to get out of this market with no skin.<span style=""> </span>Let us run the initial calculation ($537,000 - $32,220 = $504,780).<span style=""> </span>The $32,220 is 6 percent if you are wondering.<span style=""> </span>In fact, you can almost derive from these numbers that the person went with a zero down mortgage.<span style=""> </span>How can you arrive at this conclusion?<span style=""> </span>The sales cost minus the commission cost bares an uncanny resemblance to the purchase price in March of this year.<span style=""> </span>This is a new trend.<span style=""> </span>Unfortunate buyers that came to the party too late and are trying to hand off the home to another would be flipper.<span style=""> </span>But guess what?<span style=""> </span>The game is over.<span style=""> </span>Keep in mind you were still able to get your hands on a fantastic supercharged wonderland exotic mortgage in March of this year.<span style=""> </span>In fact, Countrywide was ramping up its subprime outfit and even talking about 50 year mortgages as late as <a href="http://latimesblogs.latimes.com/laland/2007/05/report_countryw.html"><span style="color:blue;">May of this year</span></a>.<span style=""> Now they are saying "no subprime for you!" How quick things change. </span>You may say, “I feel sorry for this buyer.”<span style=""> </span>Here is the poetic justice, these buyers can hand the keys over just in time for the bailout forgiveness and face no tax consequences.<span style=""> </span>The only ding they will have is a foreclosure on their credit history but after the next few years, having a foreclosure will be in like having a divorce.<span style=""> </span>The stigma is gone when a large part of society has faced a similar circumstance. </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">So how low can this place go?<span style=""> </span>Well considering that this place would rent for $1,500 tops, it is still a bit on the expensive side.<span style=""> </span>But hey, your $450,000 mortgage just got a boost in the interest rate of .5 percent.<span style=""> </span>That is if the market responds to the injected liquidity and the LIBOR acts accordingly.<span style=""> </span>But even if it does, this place would not make sense as an investment.<span style=""> </span>Let us run the numbers as a prospective investor.<span style=""> </span>Currently for investment properties if you have good credit, you can get a mortgage with 5 percent down for approximately 7 percent.<span style=""> </span>So let us assume that we buy this place for 5 percent down with a 7 percent 30 year note:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">5 percent = $22,500</p> <p class="MsoNormal">PITI =<span style=""> </span>$3,312 (30 year fixed at 7 percent for investment property).<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The monthly payment will be $3,312 and we are receiving in rents $1,500.<span style=""> </span>That means we are negative cash-flowing by a whopping $1,812 a month.<span style=""> </span>And appreciation is gone for at least a few years.<span style=""> </span>The only benefit is in tax relief but this is equivalent to spending $1 and getting 2 quarters back.<span style=""> </span>If you desperately need tax relief why not buy a cash-flowing property out of state?<span style=""> </span>This property has an intrinsic value of $225,000 to $275,000 tops from an investor standpoint (and this is being extremely generous because of the city).<span style=""> </span>Only at that price point would rental market growth, market stagnation, and the headache of being a landlord make any financial sense.<span style=""> </span>As you can see, 100 percent of investors are going to rule this place out.<span style=""> </span>You can’t flip properties as the pricing trend is down.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Many in <st1:state st="on">California</st1:state>, as myself, are disappointed with the Fed but this doesn’t change the fact that prices will plummet in <st1:state st="on"><st1:place st="on">California</st1:place></st1:state>.<span style=""> </span>We are already seeing this.<span style=""> </span>If many of the rogue investors were forced to mark-to-market their portfolios, there would be absolute chaos.<span style=""> </span>So in a way, I can understand that the Fed is trying it’s best to avert disaster.<span style=""> </span>After all, why would they drop .5 basis points if they were only moderately concerned about the data they were seeing?<span style=""> </span>They talk to folks and they have a front row seat to the private equity firms and their portfolios must look like a stew of mortgage excrement for them to drop rates as deep as they did.<span style=""> </span><br /><br />Today we salute you <st1:place st="on"><st1:city st="on">Pasadena</st1:city></st1:place> with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Homes of Genius</span></a> award.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com5tag:blogger.com,1999:blog-35190061.post-22691576192881490312007-09-18T06:00:00.000-07:002007-09-18T08:18:32.480-07:00The Sacred Commission: 3 Reasons Why Commissions Will Come Down.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_dWL1Y5Bi76Rslb5MvjfBAPmKe5XvxEB6TmLoIBZqGVyUPC_NF32T4iBQsEhV8Iaq9R0LZiuI_OtVc51MQg-ki4vBqF1Z7fKwLQEjNi23ieXlz_pK8mAfncaps8Fnx5IuNSdULA/s1600-h/6.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_dWL1Y5Bi76Rslb5MvjfBAPmKe5XvxEB6TmLoIBZqGVyUPC_NF32T4iBQsEhV8Iaq9R0LZiuI_OtVc51MQg-ki4vBqF1Z7fKwLQEjNi23ieXlz_pK8mAfncaps8Fnx5IuNSdULA/s400/6.jpg" alt="" id="BLOGGER_PHOTO_ID_5110934070195505042" border="0" /></a><br /><div class="KonaBody"> <p class="MsoNormal">During the housing boom, agents and mortgage brokers have done extremely well.<span style=""> </span>In fact, word spread so quickly that we have seen large increases in the number of people making career shifts into the housing industry.<span style=""> </span>From 1989 to 2001, the membership numbers for National Association of Realtors was around 800,000.<span style=""> </span>However, from 2002 to 2007 we see a dramatic and steady increase to approximately 1.4 million active members.<span style=""> </span>Why the sudden increase when for over a decade, membership numbers stayed relatively stable?<span style=""> </span>Welcome to the world of basic economics.<span style=""> </span>The fact that money was to be made in the industry and low barriers for entry, many folks decided to roll the dice and take a chance with real estate.<span style=""> </span>Simple supply and demand.<span style=""> </span>In addition, with a booming market and lending standards so low that you can smell the floor, selling homes and lending money seemed to be a no brainer.<span style=""> </span>Prices kept going up in double-digit sprints and many in the industry saw this as a locked in yearly wage increase.<span style=""> </span>After all, if your income derives on the underlying asset price and the price keeps going up, it is by default that you will make more money since you are paid a percentage of what a home would sell for.<span style=""> </span>This was all fueled by easy credit in <a href="http://drhousingbubble.blogspot.com/2007/09/invisible-mortgage-hand-analysis-of.html">every aspect of life</a>.<span style=""> </span>For 7 years it seemed that housing would go up ad infinitum.<span style=""> </span><span style=""> </span> </p><p class="MsoNormal">The housing market is now entering the first stages of a multi-year bear market.<span style=""> </span>2007 has seen the loss of 155+ lending institutions.<span style=""> </span>Over 100,000 individuals have lost their lending related jobs.<span style=""> </span>Many entering neophytes are victims of poor timing.<span style=""> </span>They read and listened to the housing bull books and seminars 7 years too late.<span style=""> </span>Many seasoned agents and brokers realize that housing ebbs and flows.<span style=""> </span>These housing veterans have sufficient contacts to weather the storm and will try to hold the fort down during these down times.<span style=""> </span>From my experience in the industry and simply looking at the wage earnings for agents, it is apparent that he Pareto Principle holds true for this industry. <span style=""> </span><a href="http://en.wikipedia.org/wiki/Vilfredo_Pareto">Vilfredo Pareto</a>, an Italian civil engineer, observed that 80 percent of the wealth in Italy was owned by 20 percent of the population.<span style=""> </span>How does this apply to agents?<span style=""> </span>In the case of superstar selling agents, it is the case that 80 percent of the sales happen via 20 percent of the top producing sellers.<span style=""> </span>They have deep contact lists and other attributes that make them successful.<span style=""> </span>When you look at the median earnings of real estate agents in the U.S., you’d be surprised by what you find.<span style=""> </span>A good agent is someone that can sell a home when no one else is able to do so.<span style=""> </span>See, the last few years even amateurs were able to sell homes and oversights were masked by a booming housing market.<span style=""> </span>Sort of like venture capitalist throwing money at any prospective company with a dot com in its name during the raging tech boom.<span style=""> </span></p> <p class="MsoNormal">Capitalism is a great thing if you let it run its course without government intervention.<span style=""> </span>For example, now that the housing market is slowing down many companies are falling flat on their faces for running poor businesses. <span style=""> </span>The 155+ lenders that have imploded this year are victims of inefficient business models and the market is taking care of them.<span style=""> </span>After all, these companies were raking in money during the boom times.<span style=""> </span>Good businesses are built with diversification to weather multiple storms.<span style=""> </span>Take a look at Proctor and Gamble and General Electric.<span style=""> </span>During the good times, they ventured into other businesses that allowed them to have a buffer should one industry sector falter.<span style=""> </span>Many of the lenders that are now defunct saw returns too appetizing in the housing industry.<span style=""> </span><span style=""> </span>Instead of going into more conservative ventures with their revenues or build war chests, they decideded to reinvest into a business model that was unsupportable. </p> <p class="MsoNormal">The internet is now a ubiquitous part of life in the U.S.<span style=""> </span>Everyone uses Google to search for answers.<span style=""> </span>If you don’t know the answer to a complex question, you can go to Google and find not only one response but probably a few thousand.<span style=""> </span>Information is power.<span style=""> </span>Even in the 90s, buying a home was a challenge because you didn’t have access to all the important pieces of information.<span style=""> </span>If you wanted previous sales data, you would need to go to the clerks office or pay a title company to dig up the information.<span style=""> </span>Most people never bothered to look at previous tax records.<span style=""> </span>And finding comparable sales?<span style=""> </span>The only viable source was the MLS which was under lock and key by the housing industry.<span style=""> </span>Now with the advent of Zillow, ZipRealty, Redfin, HelpUSell, and other do it yourself services information on homes is no longer hard to find.<span style=""> </span>The <span style="font-style: italic;">LA Times</span> had a great article this Sunday about selling your home with different services.<span style=""> </span>Do you want to know the previous sales price?<span style=""> </span>This will be easy to find.<span style=""> </span>What about comparable sales?<span style=""> </span>Not only can you get this information but you will have it nicely displayed via a satellite hybrid image that you can sort out.<span style=""> </span>And the best thing is most of these services are free or cost a small price.<span style=""> </span>And in a market where 6 percent can mean the difference between you breaking even or going into a short-sale, many folks are opting to use discount services or doing it themselves.<br /><br />So why will commissions drop?<span style=""> </span>Here are three further reasons for the inevitable drop in commissions:<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">Misnomer:<span style=""> </span>Only the Seller Pays the Fee<o:p></o:p></i></p> <p class="MsoNormal">You always here this argument thrown out.<span style=""> </span>Buyers shouldn’t hesitate in using an agent because it is the seller that pays the fee.<span style=""> </span>The way the process is currently setup, the seller pays the typical 5 to 6 percent commission fee and should a buyer’s agent bring a worthy customer, will get a cut of the percent.<span style=""> </span>This can be anywhere from 2.5 to 3 percent.<span style=""> </span>So why is this a misconception?<span style=""> </span>Like a stock that pays a dividend, the market already factors this into the price.<span style=""> </span>You aren’t really getting the service for free because the underlying price is inflated to reflect this market standard.<span style=""> </span>But as standards shift, say commissions go to a lower rate or flat fees, the price of the home will reflect the difference.<span style=""> </span>We are already seeing this here in California where market pressure and multiple options are giving consumers different choices.<span style=""> </span>And sellers that went 0, 3, or 5 percent down realize that 6 percent may be their entire equity, are willing to find creative ways to sell a home.<span style=""> </span>Keep in mind in a hot market where the median price for Los Angeles County is $550,000, 6 percent is $33,000.<span style=""> </span>As a seller, you may think twice about paying this especially in a tighter market.<span style=""> </span></p> <p class="MsoNormal">This priced in model happens in many financial instruments.<span style=""> </span>If you look at options that are nearing a dividend pay date, the market has already priced this into the premium.<span style=""> </span>So you really aren’t getting a good deal even though this is a sort of slight of hand financial gain.<span style=""> </span>And many professionals will argue that you can’t get the service that they can provide at a lower cost.<span style=""> </span>This may be true depending on the person you hire.<span style=""> </span>But look at the professional Hovnanian Enterprises cutting prices in their <i style=""><a href="http://money.cnn.com/news/newsfeeds/articles/apwire/D8RKPP881.htm">Deal of a Century</a></i> campaign to unload homes.<span style=""> </span>In some cases, these professionals are lowering prices by $100,000.<span style=""> </span>Now that will get your attention.<span style=""> </span>And these homes are new units so you don’t really need to worry about wear and tear and in many cases, these builders are now offering financing to move inventory.<span style=""> </span>You can see why a downward market will put pressures on commissions.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">Access to Information:<span style=""> </span>MLS, Competition, Down Market<o:p></o:p></i></p> <p class="MsoNormal">Have you used Zillow?<span style=""> </span>Know about Craigslist?<span style=""> </span>Ever browsed homes on ZipRealty?<span style=""> </span>Then you are benefiting from the competition brought on by the industry.<span style=""> </span>Many of these companies realize that you can make money from other venues such as advertising and taking a lower fee and making it up on volume.<span style=""> </span>They realize that a small piece of $550,000 is enough money to invest millions of dollars into new business models.<span style=""> </span>In addition, the competition is now fierce since sales are dropping and credit is tight, so now your option may be limited to a few qualified buyers that are absolutely determined to buy right now.<span style=""> </span>A good agent is now earning his money trying to sell a home.<span style=""> </span>No longer are multiple offers coming in like the good days.<span style=""> </span>The market is now different.<span style=""> </span>Many new industry folks are unable to deal with a down housing market and are going into this as a trial by fire.<span style=""> </span>This is their first experience with a down market.<span style=""> </span>And the last 7 years were a complete anomaly so anyone thinking we will be back to that is hoping for a <i style="">deal of a century</i> that will not come again for another century.<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal">It is easy to find information on comparable home sales.<span style=""> </span>You can easily access previous sale prices.<span style=""> </span>These companies at the vanguard are finding that many buyers and sellers are willing to get their hands dirty if that means they will save $20,000 to $80,000.<span style=""> </span>I always get a kick out when the rebuttal is, “well I wouldn’t expect to pilot a plane just because it is cheaper.”<span style=""> </span>Flying a plane is not like selling a house.<span style=""> </span>Doing heart surgery is not the same as showing an open house.<span style=""> </span>There is a clear difference.<span style=""> </span>Will it require work if you decide to do it?<span style=""> </span>Of course. <span style=""> </span>Just like owning a rental property.<span style=""> </span>You will have issues come up but that is why you are rewarded financially.<span style=""> </span>Otherwise, everyone would be doing it.<span style=""> </span>Even savvy attorneys, title companies, and discount brokers are capitalizing on this market.<span style=""> </span>If you are too lazy to review sales on Zillow or ZipRealty, drive around and see a few comparable homes, and read one of the thousands of real estate books out there then yes, maybe you should fork over your money to an expert.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">Cost of Housing:<span style=""> </span>People Will get Dirty for Tens of Thousands<o:p></o:p></i></p> <p class="MsoNormal">When you are selling a $100,000 home in a slow market with few buyers, agents do earn every penny for their hard work if they bring a qualified buyer and the deal closes.<span style=""> </span>Many agents across the US are not in prime areas and the percentage is not that much in nominal terms.<span style=""> </span>But in the last few years, if you managed to get a listing in SoCal all you needed to do was list it in the MLS (if that) for $600,000 in a decent area and you would get multiple offers.<span style=""> </span>In fact, sellers even put into their listings “sold as is” expecting buyers to put up or shut up.<span style=""> </span>And guess what?<span style=""> </span>Homes sold without inspections many times.<span style=""> </span>Lenders couldn’t careless since banana republic mortgages were being bought by investors.<span style=""> </span>So the sellers were in absolute control.<span style=""> </span>It was the best sellers market in decades.<span style=""> </span>It’ll be interesting to see how those in the housing industry that haven’t seen a downturn will react to this market shift (remember the jump of 600,000 NAR members since the boom?).<span style=""> </span>Many of course are calling for a bailout and corporate welfare but this has little chance of making any impact in California or other high priced areas where prices are disconnected from the reality umbilical cord.<span style=""> </span></p> <p class="MsoNormal">Many sellers that bought in 2004, 2005, 2006, and even 2007 that are looking to sell are quickly realizing that 6 percent is a big deal especially if they are swimming underwater.<span style=""> </span>Any smart agent realizes that in slow markets quality buyers must be courted with lower prices and this may include rebates.<span style=""> </span>No amount of marketing or savvy advertising will make a lender fund a buyer; you may have a willing buyer but if they don’t get financed, the deal is going nowhere.<span style=""> </span>The market is changing and to be honest, those in housing will have to revert to old school ways of doing things.<span style=""> </span>Adding repairs and sprucing up houses to catch a now dwindling amount of buyers.<span style=""> </span>Throwing in discounts if possible.<span style=""> </span>More aggressive marketing directed to bringing in qualified buyers (take note on Hovnanian advertising approach).<span style=""> </span>And no, we are not even remotely close to a bottom.<span style=""> </span>We had a 7 year housing bull market and only in late 2006, did we shift into a slower housing bear market.<span style=""> </span>Heck, Los Angeles County returned back to its historical median record price of <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/2007/09/when-housing-clock-stops-ticking-why.html">$550,000 last month</a></span> so we haven’t seen a correction here.<span style=""> </span>Expect this to last 3 to 4 years.<span style=""> </span>Moreover, these new services are built to cater to price conscious buyers and sellers; in down markets with tighter credit, nothing is more precious than price. <span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com18tag:blogger.com,1999:blog-35190061.post-359625797346200342007-09-15T10:23:00.000-07:002007-09-16T00:45:11.243-07:00When the Housing Clock Stops Ticking: Why the Median Price is Going up While Sales are Going down.<b style=""><o:p></o:p></b> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal">If you haven’t noticed, <st1:city st="on"><st1:place st="on">Los Angeles</st1:place></st1:city> returned to its previous median record price of $550,000 last month.<span style=""> </span>Before you scratch your head in dismay, let us take a look at what is really happening.<span style=""> </span>As you know, higher priced homes are still moving while lower priced homes are stagnant thus skewing the numbers.<span style=""> </span>If a home doesn’t sell, it doesn’t show up in the data. Similar to taking an immensely hard mathematics course where half the class drops out, but those that remain push grades higher.<span style=""> </span>When calculating the final overall class performance the statistics show the best of the best and those that stuck the course out, but what of the students that dropped out? Well as you can see from the <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a> </span>examples, prices are coming down.<span style=""> </span>So what do we make of this seemingly contradictory information?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">The Sales Cycle<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><!--[if gte vml 1]><v:shapetype id="_x0000_t75" coordsize="21600,21600" spt="75" preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"> <v:f eqn="sum @0 1 0"> <v:f eqn="sum 0 0 @1"> <v:f eqn="prod @2 1 2"> <v:f eqn="prod @3 21600 pixelWidth"> <v:f eqn="prod @3 21600 pixelHeight"> <v:f eqn="sum @0 0 1"> <v:f eqn="prod @6 1 2"> <v:f eqn="prod @7 21600 pixelWidth"> <v:f eqn="sum @8 21600 0"> <v:f eqn="prod @7 21600 pixelHeight"> <v:f eqn="sum @10 21600 0"> </v:formulas> <v:path extrusionok="f" gradientshapeok="t" connecttype="rect"> <o:lock ext="edit" aspectratio="t"> </v:shapetype><v:shape id="_x0000_i1025" type="#_x0000_t75" style="'width:431.25pt;"> <v:imagedata src="file:///C:\DOCUME~1\Temp\msohtml1\01\clip_image001.jpg" title="salesLA"> </v:shape><![endif]--><!--[if !vml]--><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioB5DmoPxmPp3R635ufGD6WPPGtUG29vavYiSnOvo1gc3ZGR5VaT-t9DlDGLTGrsgI2O_KrkzR7khKfSqBOO1fgcMTycwsTZjBdYjOAAsYIAS3Jbwclv4sNQC9BgdqT79uCVRZ5g/s1600-h/salesLA.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 412px; height: 281px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioB5DmoPxmPp3R635ufGD6WPPGtUG29vavYiSnOvo1gc3ZGR5VaT-t9DlDGLTGrsgI2O_KrkzR7khKfSqBOO1fgcMTycwsTZjBdYjOAAsYIAS3Jbwclv4sNQC9BgdqT79uCVRZ5g/s400/salesLA.jpg" alt="" id="BLOGGER_PHOTO_ID_5110187549044885378" border="0" /></a><!--[endif]--></p> <p class="MsoNormal">This chart shows sales for <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place> over the past 7 years.<span style=""> </span>As I point out in the above chart, each January and February we hit a trough because of the slower selling brought on by fall and winter.<span style=""> </span>This has been the case for each consecutive year since 2000 and is actually part of the normal housing cycle.<span style=""> </span>But what do we have here appearing in summer of 2007?<span style=""> </span>It appears that we have hit a trough 5 months early.<span style=""> </span>In fact, summer sales numbers are looking more like seasonal sales numbers of winter.<span style=""> </span>This chart is also telling because it shows a consistent pattern over time.<span style=""> </span>Those that don’t believe in housing cycles are spinning in their chair wondering what happened this summer.<span style=""> </span>Normally a strong spring and summer selling season allows for the lower numbers in the fall and winter.<span style=""> </span>This will not happen this year.<span style=""> </span>Unless of course we see a radical jump in sales in the next few months.<span style=""> </span>This data is also a good indicator of where we are heading.<span style=""> </span>Keep in mind the data reported is from sales that close after escrow.<span style=""> </span>This data can lag 1 to 2 months.<span style=""> </span>So what we are currently seeing in the actual finalized recorded sales is probably from July to early August.<span style=""> </span>Well of course the mortgage blow out just occurred and credit standards are much tighter since then.<span style=""> </span>So guess what this will do for sales at the slowest time of the year?<span style=""> </span>Either way, this is a much necessary correction and that is why any housing pundits thinking we are going to have some bounce back in the next few months is simply hallucinating and not following the trend.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">I’ve been getting some e-mails about timing the market.<span style=""> </span>There are many ways to valuate housing prices.<span style=""> </span>As we <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/2007/08/3-methods-of-real-estate-valuation-for.html">previously discussed</a></span> with 3 housing valuation methods, every city in <st1:place st="on">Southern California</st1:place> is overpriced.<span style=""> </span>If you haven’t noticed the media is now using the terms “housing slump” and “credit crunch” as if they’ve been talking about it for years.<span style=""> </span>Too bad even as late as January and February of this year, they were still carrying the housing banner.<span style=""> </span>Using rhetoric such as “booming” and “amazing” when talking about housing.<span style=""> </span>I’ve seen a few articles pointing out that housing bears have unfairly criticized the media as this <a href="http://www.newyorker.com/online/2007/09/03/070903on_onlineonly_surowiecki">New Yorker</a> online piece.<span style=""> </span>Since they link up to a few places including our site, I feel it is important to state why I have been critical of the mainstream media in the past.<span style=""> </span>Clearly, they are now carrying the housing bear flag and there is no problem finding populist information outlets dissecting the housing market.<span style=""> </span>My main issue was during the boom, they kept giving air time to raging housing bulls that have led us into this current market.<span style=""> </span><a href="http://www.cepr.net/index.php?option=com_content&task=view&id=1266&Itemid=8">Dean Baker’s</a> recent study does a great job researching the entire housing bubble and also pointing out that media airtime in the past few years has not been fair and balanced.<span style=""> </span>I recommend you read the entire paper as a primer to this housing bubble.<span style=""> </span>But here is some of the data found regarding media citations:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Media Citations (New York Times and <st1:state st="on"><st1:place st="on">Washington</st1:place></st1:state> Post) on the Housing Market, 2005-2006</p> <p class="MsoNormal"><o:p> </o:p></p> <table class="MsoTableGrid" style="border: medium none ; border-collapse: collapse;" border="1" cellpadding="0" cellspacing="0"> <tbody><tr style=""> <td style="border: 1pt solid windowtext; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal"><b style="">Bulls<o:p></o:p></b></p> </td> <td style="border-style: solid solid solid none; border-color: windowtext windowtext windowtext -moz-use-text-color; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal"><b style="">Citations <o:p></o:p></b></p> </td> </tr> <tr style=""> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">David Lereah, NAR</p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">1796</p> </td> </tr> <tr style=""> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">Doug Duncan, Mortgage Bankers Association</p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">397</p> </td> </tr> <tr style="height: 6.75pt;"> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal">David Seiders, National Association of Homebuilders</p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal">652</p> </td> </tr> <tr style="height: 6.75pt;"> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal"><b style="">Total<o:p></o:p></b></p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal"><b style="">2845<o:p></o:p></b></p> </td> </tr> </tbody></table> <p class="MsoNormal"><o:p> </o:p></p> <table class="MsoTableGrid" style="border: medium none ; border-collapse: collapse;" border="1" cellpadding="0" cellspacing="0"> <tbody><tr style=""> <td style="border: 1pt solid windowtext; padding: 0in 5.4pt; width: 2.05in; font-weight: bold;" valign="top" width="197"> <p class="MsoNormal">Bears</p> </td> <td style="border-style: solid solid solid none; border-color: windowtext windowtext windowtext -moz-use-text-color; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in; font-weight: bold;" valign="top" width="197"> <p class="MsoNormal">Total</p> </td> </tr> <tr style=""> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">Robert Schiller, <st1:place st="on"><st1:placename st="on">Yale</st1:placename> <st1:placetype st="on">University</st1:placetype></st1:place> </p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">516</p> </td> </tr> <tr style=""> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">Edward Leamer, UCLA</p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in;" valign="top" width="197"> <p class="MsoNormal">88</p> </td> </tr> <tr style="height: 6.75pt;"> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal">Dean Baker, Center for Economic Policy Research </p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal">248</p> </td> </tr> <tr style="height: 6.75pt;"> <td style="border-style: none solid solid; border-color: -moz-use-text-color windowtext windowtext; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal"><b style="">Total <o:p></o:p></b></p> </td> <td style="border-style: none solid solid none; border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 2.05in; height: 6.75pt;" valign="top" width="197"> <p class="MsoNormal"><b style="">852<br /><o:p></o:p></b></p> </td> </tr> </tbody></table> <p class="MsoNormal">*source: Dean Baker, <i style="">Midsummer Meltdown</i> August 2007</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">And regarding the New Yorker, I do agree with the author that many journalists are now scrambling to be first in line to disseminate housing information to the public.<span style=""> </span>In fairness, the media reports what is happening yesterday, today, and tomorrow.<span style=""> </span>Historian and prognosticators they are not.<span style=""> </span><br /><br /><i style="">Case and Point:<span style=""> </span>High Priced Area and Low Priced Area<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Back to the median housing price analysis, clearly housing sales have fallen off a cliff.<span style=""> </span>In fact, <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place> saw a 50 percent year-over-year drop in sales last month.<span style=""> </span>Not exactly stellar numbers.<span style=""> </span>Multiple converging factors combined to create a perfect stew of housing stagnation.<span style=""> </span>For one, the credit markets are now tighter and sub-prime is now a thing of the past.<span style=""> </span>Also, appreciation is now gone.<span style=""> </span>So folks are deciding on holding off on buying homes especially with a sudden onslaught of negative media coverage.<span style=""> </span>And something specific to <st1:state st="on"><st1:place st="on">California</st1:place></st1:state>, August of 2005 saw the largest origination of adjustable rate mortgages at a whopping 70+ percent of all mortgages originated.<span style=""> </span>Guess what was hot?<span style=""> </span>2/28 mortgages.<span style=""> </span>And what was last month?<span style=""> </span>That’s right, 2 years and now these people are facing larger payments with mortgages amortizing on different schedules.<span style=""> </span>In addition, they no longer have the option of refinancing because this will push payments higher and the reason they took out these exotic loans is to squeeze into an overpriced home.<span style=""> </span>Now why would they go for a higher payment even if they could?<span style=""> </span>As I discussed back in July housing has hit its <a href="http://drhousingbubble.blogspot.com/2007/07/housing-minsky-moment-3-factors-prime.html">Minsky Moment</a>. </p> <p class="MsoNormal"><br />Let us take at a few case examples for last month to show how higher priced areas are moving up while lower priced areas are getting hit.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Higher Priced Areas Moving Up:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Agoura Hills with a median of $975,000 is up 18.9 percent year-over-year.</p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Arcadia</st1:city></st1:place> with a median of $752,000 is up 19.3 percent year-over-year.</p> <p class="MsoNormal"><st1:city st="on"><st1:place st="on">Hermosa Beach</st1:place></st1:city> with a median of $1,255,000 is up 15.6 percent year-over-year.</p> <p class="MsoNormal">La Canada Flintridge with a median of $1,455,000 is up 7.4 percent year-over-year</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Wow!<span style=""> </span>The housing party is still going strong.<span style=""> </span>Why look at data when all <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/2007/08/dissecting-county-of-10000000-people.html">10,000,000 folks</a> </span>in <st1:place st="on"><st1:city st="on">Los Angeles</st1:city></st1:place> live in these areas.<span style=""> </span>Let us take a look at some lower to middle priced areas:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Artesia with a median of $370,000 is down 26 percent year-over-year.</p> <p class="MsoNormal"><st1:city st="on"><st1:place st="on">Baldwin Park</st1:place></st1:city> with a median of $400,000 is down 11.1 percent year-over-year.</p> <p class="MsoNormal"><st1:city st="on"><st1:place st="on">El Monte</st1:place></st1:city> (South) - with a median of $381,00 is down 20.3 percent year-over-year.</p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Montebello</st1:city></st1:place> – with a median of $535,000 is down 10,8 percent year-over-year</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">You clearly see the pattern and why the median price is skewed higher.<span style=""> </span>For one, more sales are happening in the higher priced areas so they have a larger subset.<span style=""> </span>Sales in lower areas are facing intense drops in sales and downward pricing action.<span style=""> </span>Could this be because many of the past buyers bought with sub-prime loans that are no longer available?<span style=""> </span>I doubt anyone in Palos Verdes would avoid buying their dream home because of a lack of sub-prime loans.<span style=""> </span>An interesting thing to note is middle class neighborhoods are facing a stagnant market with prices trending down slowly but sales having a sudden stop.<span style=""> </span>I expect that we will see the lower end get hammered first as it currently is and then have the middle areas tip over as well.<span style=""> </span>The higher priced areas will be the last to adjust.<span style=""> </span><br /><br />How low will we go?<span style=""> </span><span style=""> </span><span style=""> </span></p><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com23tag:blogger.com,1999:blog-35190061.post-44413203083007926322007-09-13T06:00:00.000-07:002007-09-13T00:00:56.369-07:00Real Homes of Genius: Today we Salute you Downey. $100,000 off in 3 Months.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLefMz4uwnmckakF8o8aApQtCoZjYHXzrPu3oRu-uvQOfb7FxtsM73fjbLK1ckb5XLXurXJkBQdW_honSIOtPWZiF9tExvGXtw0cE40wYtFE7VL5lnPYtJXMc5ADqPmrarV8U7yg/s1600-h/rh.JPG"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLefMz4uwnmckakF8o8aApQtCoZjYHXzrPu3oRu-uvQOfb7FxtsM73fjbLK1ckb5XLXurXJkBQdW_honSIOtPWZiF9tExvGXtw0cE40wYtFE7VL5lnPYtJXMc5ADqPmrarV8U7yg/s400/rh.JPG" alt="" id="BLOGGER_PHOTO_ID_5109392819075363458" border="0" /></a><br /><p class="MsoNormal" style="line-height: normal;"><span style="">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<span style="color: rgb(0, 112, 192);"> <a href="http://drhousingbubble.blogspot.com/2007/09/invisible-mortgage-hand-analysis-of.html">post</a></span>, 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 <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius Award</a>.</span> <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">This home is a nice sized 3 bedroom home with 2 baths.<span style=""> </span>Something that you would consider as a starter home in many parts of the country.<span style=""> </span>So what is the price tag?<span style=""> </span>$300,000?<span style=""> </span>Nope.<span style=""> </span>$400,000?<span style=""> </span>Close.<span style=""> </span>$500,000? Let us give it to you straight.<span style=""> </span>The price of this home was initially listed at a whopping $727,500!<span style=""> </span>This works out to $553 per square foot for a home that is listed at 1,315 square feet.<span style=""> </span>This home is nearly 60 years old and is in a middle class area of Los Angeles.<span style=""> </span>This isn’t a prime location like Santa Monica or Manhattan Beach.<span style=""> </span>You are not overlooking the Pacific Ocean or nestling the hills in Pasadena.<span style=""> </span>So why are they listing the home at 3 quarters of a million dollars?<span style=""> </span>Welcome to Wonderland USA.<span style=""> </span>We’ve already seen many homes get knocked down in price in Southern California.<span style=""> </span>Very little is moving in lower to middle class neighborhoods even with price drops.<span style=""> </span>Sales last month dropped a whopping <a href="http://la.curbed.com/archives/2007/09/bloody_hell_hom.php">50 percent</a> year-over-year in the region.<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Let us take a look at the massive pricing action on this bank owned home:<span style=""> </span><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><b><span style="">Price Reduced:</span></b><b><span style=""> 06/01/07 -- $727,500 to $686,800</span></b><span style=""><br /><b><span style="color:green;">Price Reduced:</span> 07/13/07 -- $686,800 to $652,500</b><br /><b><span style="color:green;">Price Reduced:</span> 09/02/07 -- $652,500 to $619,875<o:p></o:p></b></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">In the span of 3 months, this home is lowered by $107,625, or $37,875 per month.<span style=""> </span>Now think about this for one second.<span style=""> </span>Did this property actually lose $107,625 over the summer?<span style=""> </span>Of course not.<span style=""> </span>This again is the pie in the sky dreaming of banks trying to unload properties looking at yesteryear appraisals.<span style=""> </span>Let us take a look at the sales history:<span style=""> </span></span><span style=""><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Sale History<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">02/21/2007: $23,600 <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">01/19/2006: $640,000 <o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">08/24/2005: $542,500<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">We are quickly approaching the 2005 sales price.<span style=""> </span>The 2006 sales price is absurd.<span style=""> </span>Again, we are seeing the famed <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html">mortgage equity withdrawal</a></span> action going on here with the $23,600 2<sup>nd</sup> taken out earlier this year.<span style=""> </span>Assuming this home was purchased in 2006 with zero down, some lenders are probably out to the tune of $663,600.<span style=""> </span>Yet people in Los Angeles make incomes to support this price right?<span style=""> </span>Well let us look at the average household income for this immediate area:<span style=""> </span><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Average/Household: <span style="font-style: italic;">$75,523</span><o:p></o:p></span></p> <p class="MsoNormal">Keep in mind this income level is important because these are the people that will be buying these homes in the future.<span style=""> </span>Let us humor the current lower sales price and run the numbers:</p> <p class="MsoNormal">PITI:<span style=""> </span>$4,367 - with 5 percent down ($30,993) <span style=""> </span>and current jumbo rates on a 30 year fixed</p> <p class="MsoNormal">Monthly Net Income: <span style=""> </span><span style=""> </span>$4,904 (filing as married with 2 exemptions)</p> <p class="MsoNormal">So this family is left with a disposable income of $537 after the housing payment. We haven't factored any other monthly revolving costs.<span style=""> </span>They are only spending 89 percent of their net income on servicing their home.<span style=""> </span>Everyone should take a look at the new rules being proposed by the <a href="http://money.cnn.com/2007/09/12/real_estate/refi_rescue_status_check/index.htm?postversion=2007091212">FHASecure Act</a>.<span style=""> </span>Here is a piece from the CNN article:</p> <p class="MsoNormal" style="line-height: normal;"><i style=""><span style="">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:<o:p></o:p></span></i></p> <ul type="disc"><li class="MsoNormal" style="line-height: normal;"><i style=""><span style="">A history of on-time payments for at least six months <span style="">before</span> their loans reset to higher rates<o:p></o:p></span></i></li><li class="MsoNormal" style="line-height: normal;"><i style=""><span style="">Interest rates scheduled to reset between June 2005 and December 2009<o:p></o:p></span></i></li><li class="MsoNormal" style="line-height: normal;"><b style=""><i style=""><span style="">3 percent equity in their home</span></i></b><i style=""><span style="">, or the cash equivalent<o:p></o:p></span></i></li><li class="MsoNormal" style="line-height: normal;"><i style=""><span style="">A sustained history of employment<o:p></o:p></span></i></li><li class="MsoNormal" style="line-height: normal;"><b style=""><i style=""><span style="">Sufficient income</span></i></b><i style=""><span style=""> to make their FHA-insured mortgage payment and all other obligations<o:p></o:p></span></i></li></ul> <p class="MsoNormal" style="line-height: normal;"><span style="">Wow.<span style=""> </span>Many folks in California are currently underwater.<span style=""> </span>Meaning they have negative equity.<span style=""> </span>Since most people in the last few years went 0, 3, or 5 percent down, that equity is now lost.<span style=""> </span>Does that mean they don’t qualify?<span style=""> </span>And what do they mean sufficient income?<span style=""> </span>Does that mean they can have housing payments up to 99.9 percent of their net income and still qualify?<span style=""> </span>Reading these guidelines, it seems like 100 percent of California isn’t going to participate in this bailout party.<span style=""> </span>Here is another gem from the article:<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><i style="">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.</i><i style=""><span style=""><span style=""> </span><o:p></o:p></span></i></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Say what?<span style=""> </span>It is like building a home from the roof to the concrete foundation.<span style=""> </span>It is all backwards.<span style=""> </span>So now, they are going to actually verify income?<span style=""> </span>In addition, look at those ratios in comparison to the scenarios we keep running.<span style=""> </span>California is on its own here.<span style=""> </span>Looking at many of these short-sales and pre-foreclosures, income ratios are no where in the hemisphere of the proposed legislation.<span style=""> </span>Kevin Depew over Minyanville [hat tip exit] puts out a terrific daily post called the <a href="http://www.minyanville.com/articles/Fed-TOL-housing-Bernanke-savings/index/a/14078">5 Things You Need to Know</a>.<span style=""> </span>In the post, he talks about an article in the WSJ that encourages the Fed to drop 100 basis points.<span style=""> </span>The logic of the op-ed piece?<span style=""> </span>According to the article, this is how a Fed rate cut will help the economy:<o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><i style=""><span style="">“"[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." <span style=""> </span><span style=""> </span><o:p></o:p></span></i></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Kevin does highlight other important bubble antics in the post and I recommend you read it if you have not done so.<span style=""> </span>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?<span style=""> </span>What a fantastic plan! But wait, isn't massive speculation in housing and the credit markets the reason we are experiencing this credit crunch?<span style=""> </span>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.<span style=""> </span>I wonder if <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/2007/09/invisible-mortgage-hand-analysis-of.html">inflation</a></span> has anything to do with it?<span style=""> </span>Not according to the <a href="http://www.bls.gov/cpi/">data gatekeepers</a>.</span></p><p class="MsoNormal" style="line-height: normal;">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.<br /><span style=""><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Many factors are converging to pop this housing bubble especially in California.<span style=""> </span>This <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius demonstrates</a></span> that many banks are going to get aggressive in their price-cutting to move inventory.<span style=""> </span>We can coin this as the post-summer housing blues.<span style=""> </span>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.<span style=""> </span>Many sellers may be oblivious to all that is going on around them.<span style=""> </span>I doubt the majority of folks spend their time scouring housing reports and digging into government data to time the housing market.<span style=""> </span>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).<span style=""> </span>Why do you think major housing lenders are trimming down to a barebones model?<span style=""> </span>They are gearing up for survival mode.<span style=""> </span>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.<span style=""> </span>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?</span></p><p class="MsoNormal" style="line-height: normal;"> <br /><span style=""><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="">Today we salute you Downey with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius Award</a>.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><o:p></o:p></span></p><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com31tag:blogger.com,1999:blog-35190061.post-55067592869183968642007-09-11T09:00:00.000-07:002007-09-12T20:25:15.097-07:00The Invisible Mortgage Hand: Analysis of a Society That Forces You Into Debt.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDETZOi5cXi4hkdFNBPR5pl7rynDTysUr7wMdMFKZHDK7I8qPNk4u5IkuDAmReYvcngQdYCucvCPx8A6q8oPyayS-VJgpO65XFIDCleVwOaoe8dR9B49Kql-aIt1MX_hTpifGkAQ/s1600-h/invisiblehand.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDETZOi5cXi4hkdFNBPR5pl7rynDTysUr7wMdMFKZHDK7I8qPNk4u5IkuDAmReYvcngQdYCucvCPx8A6q8oPyayS-VJgpO65XFIDCleVwOaoe8dR9B49Kql-aIt1MX_hTpifGkAQ/s400/invisiblehand.jpg" alt="" id="BLOGGER_PHOTO_ID_5108297196763766562" border="0" /></a><br /><div class="KonaBody"> <p class="MsoNormal">The Ministry of Truth, otherwise known at the Bureau of Labor and Statistics, tells us that inflation is low to moderate.<span style=""> </span>In fact, inflation is so low all you need to do is purchase 10-year Treasury notes and you’ll be fine. But we do have inflation and this is apparent in the credit markets.<span style=""> </span>We live in a society were folks are forced to go into debt.<span style=""> </span>Instead of addressing our negative savings rate, corporate America decides to create credit products that will put you <a href="http://drhousingbubble.blogspot.com/2007/07/foreclosure-story-how-does-process-look.html">even further in debt</a>.<span style=""> </span>They use the machines of marketing to subtly make you feel that having 10 credit cards, student loan debt, and steroid induced mortgages is okay.<span style=""> </span>In fact, if you don’t have these products you are some loser flunky that simply doesn’t understand success 2.0 in this country.<span style=""> </span>I’m sure many of you have seen the current spin of advertising.<span style=""> </span>Have you seen the commercials where anyone paying with cash at the mall, fast food store, or ball game is seen as some slow scumbag?<span style=""> </span>The subconscious message is this, “hey, you are a lowlife if you carry infectious cash, pay with a credit card and GET IN LINE!”<span style=""> </span>So what if you want to pay with cash.<span style=""> </span>In fact, you should get kudos for doing this since it demonstrates that you are paying with real world money instead of mortgaging your future for a cup of espresso.<br /><br />We are going to examine how our society by default forces people into debt.<span style=""> </span>We are going to look at credit scores and why there is pressure to maintain a high 3 digit number.<span style=""> </span>80 percent of millionaires in this country have a college degree so we will look at the cost of going to college.<span style=""> </span>Many people live out in the boondocks and commute to work so we’ll examine our driving culture.<span style=""> </span>Most people eat and don’t live off air, so we’ll dig into our eating cost.<span style=""> </span>And most of us need to live somewhere so we’ll take a look at housing cost.<span style=""> </span></p> <p class="MsoNormal"><i style="">The Good Character Factory, Credit Scores<o:p></o:p></i></p> <p class="MsoNormal">Most people realize that they need to have good credit.<span style=""> </span>In a society run by information gathering and data mining, most of what you do can be tracked.<span style=""> </span>Many insurance companies will use your credit score in determining your insurance rates.<span style=""> </span>Some employers will run your credit as a method of determining your character.<span style=""> </span>They can easily call references and ask you to submit official documentation but 3 digits are a much better representation of who you are.<span style=""> </span>In fact, folks are sometimes penalized for canceling credit cards because their debt ratios fall lower than they would like.<span style=""> </span>You aren’t carrying around enough credit insurance.<span style=""> </span>And if you are looking for a rental property, your credit score may determine whether you get the place you want.<span style=""> </span>Relying on one single measure for character judgment is as useful as examining GPA for financial success.<span style=""> </span>They are both important but relying on one single measure for all the important financial things in life is dangerous.<span style=""> </span>There are technically 3 items in measuring credit worthiness; character, capacity, and collateral.<span style=""> </span>In today’s market fogging a vanity mirror means you are credit worthy.<span style=""> </span></p> <p class="MsoNormal">Then we have the opposite extreme with the <a href="http://drhousingbubble.blogspot.com/2007/08/global-housing-bubble-international.html">subprime debacle</a>.<span style=""> </span>Even though folks have horrendous FICO scores that looked more like baseball batting averages, mortgage lenders decided it would be prudent to issue out $500,000 exotic mortgages.<span style=""> </span>In this case, greed is more powerful than a credit rating.<span style=""> </span>And now these companies are surprised that someone with a $40,000 annual income doesn’t have the character to pay back a $4,000 monthly mortgage payment.<span style=""> </span>Maybe people should of thought of that instead of churning higher commission cuts. Believe it or not, getting credit is still not that hard even with all the talk about a tightening market. If you doubt this just take a look at all the spam in your e-mail box.<span style=""> Or you can see that credit card companies are still offering low rates in your snail mail. </span>Credit scores also impact the interest rate on your auto, home, and credit cards and over a lifetime, this can add up to hundreds of thousands of dollars.<span style=""> </span>And don’t think we haven’t had any historical warning.<span style=""> </span>Let us take a look at some famous credit quotes:</p> <p class="MsoNormal"><i style=""><span style="line-height: 115%;">Neither a borrower nor a lender be,<br />For loan oft loses both itself and friend,<br />And borrowing dulls the edge of husbandry.<br />William Shakespeare (Hamlet 1:3)</span><span style=""> </span><span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><i style=""><span style="line-height: 115%;">One of the greatest disservices you can do a man is to lend him money that he can't pay back. Jesse Holman Jones</span><o:p></o:p></i></p> <p class="MsoNormal">Lending money to someone that can’t pay is wrong on so many fronts.<span style=""> </span>We can yell personal responsibility but never in our history have people been able to have access to so much credit with such little repercussions for lenders and borrowers.<span style=""> </span>Lenders are now screaming for a handout.<span style=""> </span>Why don’t we audit their underwriting standards and see if the people that got these absurd loans had sufficient income and good credit since they are so married to these tools?<span style=""> </span>In fact, the government can amend their bailout corporate welfare by stipulating that only loans that met historical underwriting standards of 28 to 33 percent income to housing ratios and solid credit histories will be eligible for a bailout.<span style=""> </span>In this credit bubble, character, capacity, and collateral were all thrown out the window.<span style=""> </span></p> <p class="MsoNormal"><i style="">Education Just Got More Expensive<o:p></o:p></i></p> <p class="MsoNormal">The <a href="http://www.latimes.com/business/la-fi-collegetrek9sep09,1,2134140.story?coll=la-headlines-business&ctrack=1&cset=true">LA Times</a> has a great story about families wrestling with the college price tag.<span style=""> </span>Amazingly, some private institutions annual fees cost more than the median income of the American family.<span style=""> </span>So what to do?<span style=""> </span>Go into debt or forego a college education (which we already mentioned that 80 percent of millionaires have a college degree).<span style=""> </span>They have a fantastic chart breaking down the numbers for a 4 year degree.<span style=""> </span>I’ll summarize the annual cost here which include tuition, housing, books, and transportation:</p> <p class="MsoNormal">Georgetown:<span style=""> </span><span style=""> </span>$51,290<span style=""> </span>(Private 4 year)</p> <p class="MsoNormal">UCLA:<span style=""> </span><span style=""> </span> <span style=""> </span>$23,301<span style=""> </span>(Public<span style=""> </span>4 year)</p> <p class="MsoNormal">Cal State Long Beach:<span style=""> </span><span style=""> </span>$17,228<span style=""> </span>(Public 4 year)</p> <p class="MsoNormal">Pasadena City College:<span style=""> </span><span style=""> </span>$13,776<span style=""> </span>(Community College)</p> <p class="MsoNormal">A student graduating from Georgetown paying down $20,000 a year, will end up borrowing $140,996.<span style=""> </span>If they want to pay off their student loan in 10 years they will need to fork over $1,711 a month assuming 8% student loan rates.<span style=""> </span>Now assume this student goes to Georgetown and comes out making $50,000 per year.<span style=""> </span>Chances are many of these people will want to go further and pursue graduate school.<span style=""> </span>Many top law and business schools will cost $50,000 per year.<span style=""> </span>So we add another $150,000 in debt unless they have someone to help with these payments.<span style=""> </span></p> <p class="MsoNormal">As you can see, many future undergraduates will come out with amazingly high student debt.<span style=""> </span>We’re not talking about $10,000 or $15,000.<span style=""> </span>We are talking about mortgage level debt.<span style=""> </span>And what if they want to buy a home?<span style=""> </span>More debt!<span style=""> </span>Debt, debt, debt.<span style=""> </span>Its as if we are programming the future of America with this mentality that to get ahead, you are forced to go into debt.<span style=""> </span>And for many students that come from lower to middle class families they have no choice.<span style=""> </span>Well they do have a choice, either forego college or sign away for loans.<span style=""> </span>The LA Times article also breaks the misconception of many parents sending kids to public 4 year institutions.<span style=""> </span>Even though it is cheaper, competition is stiff and class sizes may not be as accommodating as a private school.<span style=""> </span>It is a hard challenge and I don’t envy parents of today sending their kids off to school.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">What is The Median National Income?<o:p></o:p></i></p> <p class="MsoNormal">The median family income for US households is $46,326.<span style=""> </span>How in the world will the median family (which means half fall below and half fall above) near the median be able to send their children to college without saddling up debt?<span style=""> </span>As you can see our society is almost completely based on credit.<span style=""> </span>For those that don’t have wealth reserves, you must bite the bullet and take student loan debt, mortgage debt, and credit card debt.<span style=""> </span>Of course, you shouldn’t spend beyond your means.<span style=""> </span>But even if you have a distaste for credit you still need a strong credit score for better mortgage rates, lower insurance premiums, and sometimes a nosy employer.<br /><br />But something doesn’t seem right with the median family income.<span style=""> </span>How can it be that the annual price of college looms over the annual family median income?<span style=""> </span>Many stories are hitting the newswires about students graduating and struggling to manage their debt.<span style=""> </span>Many turn to using credit cards to stay afloat.<span style=""> </span>And the vicious cycle of debt goes on and on.<span style=""> </span>To breakdown the numbers further on income, I wrote an article on<a href="http://drhousingbubble.blogspot.com/2007/07/housing-and-age-of-affluence.html"> <span style="color: rgb(0, 112, 192);">affluence in America</span></a>.<span style=""> </span>Here are some stats breaking down the numbers further:</p> <p class="MsoNormal">Household income (overall percent of US households over):<o:p></o:p></p> <p class="MsoNormal">Percent of Households over:<o:p></o:p></p> <p class="MsoNormal">$65,000 34.72%<o:p></o:p></p> <p class="MsoNormal">$80,000 25.6%<o:p></o:p></p> <p class="MsoNormal">$91,705 20.0%<o:p></o:p></p> <p class="MsoNormal">$100,000 17.8%<o:p></o:p></p> <p class="MsoNormal">$118,200 10%<o:p></o:p></p> <p class="MsoNormal">$166,200 5%<o:p></o:p></p> <p class="MsoNormal">$200,000 2.67%<o:p></o:p></p> <p class="MsoNormal">$250,000 1.5%<o:p></o:p></p> <p class="MsoNormal">$1,600,000 0.12%<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Even families making $100,000 a year, only 17.8 percent of all US households, will still have a challenge sending their kids to a 4 year private college.<span style=""> </span>And most people want the best for their kids so they are not likely to scrimp in this arena.<span style=""> </span>This isn’t a choice between a Camry and a Hummer, this is your child’s future.<span style=""> </span>And here is a nice caveat, student loan debt is <a href="http://bankruptcy.lawyers.com/Student-Loans-In-Bankruptcy.html">not wiped out</a> by bankruptcy.<span style=""> </span>And now imagine this hypothetical family sending a child off to college and carrying a $400,000 mortgage on a home.<span style=""> </span>Do you think folks in these <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(0, 112, 192);">Real Homes of Genius</span></a> even have the income to support their home loan?<span style=""> </span>Too much credit floating around.<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style=""><span style=""> </span>4 Wheels of Credit<o:p></o:p></i></p> <p class="MsoNormal">We are a car loving society.<span style=""> </span>So many car makes and models exist that you can assign each letter of the alphabet and still have remaining vehicles unnamed.<span style=""> </span>Driving around on the freeways, you would think that hardly any person drives a car older then 3 years.<span style=""> </span>But what is the average cost for all this?<span style=""> </span>According to Edmunds the average car loan in 2003 is $23,801.<span style=""> </span>And according to this same survey the average monthly payment is $447.<span style=""> </span>This isn’t factoring insurance and fuel cost.<span style=""> </span>Insurance cost can easily be $1,200+ year for a new car and fuel cost can be $150 to $250 per month.<span style=""> </span>And unless you live in New York City or relatively close to your work, public transportation is not an option unless you want to spend extra hours.<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">Do we Really Need to Eat?<o:p></o:p></i></p> <p class="MsoNormal">You rarely hear about the monthly cost of eating.<span style=""> </span>But let us take a look at some data put out by Claritas regarding yearly eating habits for California families:</p> <p class="MsoNormal">Cereal:<span style=""> </span>$342</p> <p class="MsoNormal">Bakery products:<span style=""> </span>$667</p> <p class="MsoNormal">Seafood:<span style=""> </span>$170</p> <p class="MsoNormal">Meat:<span style=""> </span>$1,286</p> <p class="MsoNormal">Fruits and Vegetables:<span style=""> </span>$915</p> <p class="MsoNormal">Juices:<span style=""> </span>$229</p> <p class="MsoNormal">Sugar and other sweets:<span style=""> </span>$427</p> <p class="MsoNormal">Fats and oils:<span style=""> </span>$64</p> <p class="MsoNormal">Nonalcholic beverages:<span style=""> </span>$703</p> <p class="MsoNormal">Prepared foods:<span style=""> </span>1,252</p> <p class="MsoNormal">Fresh mild and cream:<span style=""> </span>$179</p> <p class="MsoNormal">Eggs:<span style=""> </span>$103</p> <p class="MsoNormal">Other Dairy products:<span style=""> </span>$436</p> <p class="MsoNormal">Annual cost:<span style=""> </span>$6,773</p> <p class="MsoNormal">Keep in mind this doesn’t factor in dining out.<span style=""> </span>According to Restaurant.org:</p> <p class="MsoNormal"><i style="">“Consumers with a household income of $75,000 or more eat an average of 4.9 commercially prepared meals per week, compared with 3.2 meals for those with an income of less than $15,000. Close to two-thirds of individuals with a household income of $75,000 or more report eating at least one commercially prepared lunch per week, compared with one out of five consumers with an income of less than $15,000.”<o:p></o:p></i></p> <p class="MsoNormal">So clearly the more you make the more you eat out.<span style=""> </span>If you eat at a restaurant once a week with your family, it can easily cost you $50 with gratuity.<span style=""> </span>So that is an added $200 per month on the lower end.</p> <p class="MsoNormal"><i style="">Putting It All Together <o:p></o:p></i></p> <p class="MsoNormal">And how can we forget the median cost for a single family residential home in <a href="http://drhousingbubble.blogspot.com/2007/08/dissecting-county-of-10000000-people.html"><span style="color: rgb(0, 112, 192);">Los Angeles County</span></a>.<span style=""> </span>Even though the bubble is bursting, the median price for a <a href="http://drhousingbubble.blogspot.com/2007/08/dissecting-county-of-10000000-people.html"><span style="color: rgb(0, 112, 192);">SFR in LA County</span></a> still sits at $547,500.<span style=""> </span>So let us run a hypothetical budget using all these expenses from college, car, eating, and a mortgage payment.<span style=""> </span>Let us assume that we buy the median home, send our kid to college and offer them $20,000 per year, have 2 average cars in our household, and eat the average amount of food.<span style=""> </span>How will our budget look?</p> <p class="MsoNormal"><b style=""><u>Monthly Budget<o:p></o:p></u></b></p> <p class="MsoNormal">PITI:<span style=""> </span><span style=""> </span><span style=""> </span>$4,100 (Putting down $54,750 on $547,500 and using current jumbo rates on a $492,750.00 mortgage - 30 year fixed conventional financing)</p> <p class="MsoNormal">Auto Loan Cost:<span style=""> </span>$894 (2 cars with each carrying a $447 monthly loan).</p> <p class="MsoNormal">Auto Insurance Cost:<span style=""> </span>$160<span style=""> </span>(2 cars full coverage) </p> <p class="MsoNormal">Fuel Cost:<span style=""> </span>$300 (assuming that we only use $150 per vehicle)</p> <p class="MsoNormal">Food Budget:<span style=""> </span>$564</p> <p class="MsoNormal">Dining Out:<span style=""> </span>$200</p> <p class="MsoNormal">College Support:<span style=""> </span>$1,667 (Providing our kid $20,000 a year support to attend a 4 year private school)<span style=""> </span> </p> <p class="MsoNormal">Utilities:<span style=""> </span>$120 (includes Gas, Electric, and basic phone service)</p> <p class="MsoNormal">Credit Card Service Debt:<span style=""> </span>$168 (According to Bankrate, average household credit card debt of $8,400)</p> <p class="MsoNormal">Health care cost:<span style=""> </span>$575 (Lower approximation for a family of four full coverage, according to The National Coalition on Health Care.)<span style=""> </span></p> <p class="MsoNormal"><b style="">Total Monthly Expenses:<span style=""> </span>$8,748 or $104,976 annually.<o:p></o:p></b></p> <p class="MsoNormal">Is it any wonder that we are in a massive credit bubble?<span style=""> </span>Helps us understand why we have a negative national savings rate.<span style=""> </span>And I am hard pressed to believe that the above looks like low to moderate inflation.<span style=""> </span>The game is rigged and forces everyone to go into some sort of debt.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">How do these numbers compare to your household budget?</p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com57tag:blogger.com,1999:blog-35190061.post-24101643921401112292007-09-08T00:19:00.000-07:002007-09-08T12:54:42.279-07:00Real Homes of Genius: Today we Salute you Paramount. 768 Square Feet for $324,900. Buy, Withdraw, Sell, Foreclose. The Cycle of Life.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSGxfw2YW5hCUuqnoPIsqRZcLHZSP_vP3070A_EBf7rOW_RKLUuYceB2_gEvKOdtBSRLn_KaqeJ-J8WBR7H18jyW9oR98impiB2rzbBM_KTkuDg3C2Dmz4U4d2_7gD_lNjqfCNgQ/s1600-h/para.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSGxfw2YW5hCUuqnoPIsqRZcLHZSP_vP3070A_EBf7rOW_RKLUuYceB2_gEvKOdtBSRLn_KaqeJ-J8WBR7H18jyW9oR98impiB2rzbBM_KTkuDg3C2Dmz4U4d2_7gD_lNjqfCNgQ/s400/para.jpg" alt="" id="BLOGGER_PHOTO_ID_5107729887418539794" border="0" /></a><br /><div class="KonaBody">Countrywide took what seems to be am emerging trend from the playbook of public relation spinning and market damage control for many housing related companies.<span style=""> </span>On Friday, after the stock market had closed and took a beating because projections for 110,000 added jobs turned out to be a net loss of 4,000 (the first loss in 4 years), Countrywide waited until the market was closed and released a statement that it is looking at cutting 10,000 to 12,000 people from its workforce in the coming months.<span style=""> </span>American Home Mortgage also used this last minute end of the week heroics when they announced they would be holding back on their dividend.<span style=""> </span>We know how that story <a href="http://finance.google.com/finance?q=NYSE%3AAHM">goes</a>. <span style=""> </span>Many folks in lower to moderate priced areas throughout this country are scratching their heads wondering why things are deteriorating over night.<span style=""> </span>They hear about derivates, collateralized debt obligations, hedge funds, foreclosures, private equity firms, and wonder how can a simple thing like a home, turn into the beacon of mass speculation guiding us head on into a recession?<span style=""> </span>Oh, let us count the 768 ways.<span style=""> </span>Today we salute you Paramount with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(0, 112, 192);">Real Home of Genius Award</span>.</a><span style=""> </span><span style=""> </span><span style=""> </span> <p class="MsoNormal">Flipping ain’t an easy job and someone has to do it.<span style=""> </span>This spectacular 2 bedroom 1 bath home is what we call in Los Angeles, posh living.<span style=""> </span>With 768 square feet, you’ll be wondering what to do with all the extra space.<span style=""> </span>In fact, we are told that this place has an “open kitchen that flows into the living room.”<span style=""> </span>I’m not sure if that means you’ll be able to watch TV in your recliner while reaching over to open the refrigerator to grab a beer, all without getting up.<span style=""> </span>This place according to the ad is a “fixer” so you can mold this place into your ideal dream home.<span style=""> </span>The price tag?<span style=""> </span>Only $324,900 or $423 per square foot.<span style=""> </span>Look at the bright side, this place now qualifies for FHA financing.<span style=""> </span>Are you sold?<span style=""> </span>Well let us look at the previous sales data:</p> <p class="MsoNormal">Sale History:<o:p></o:p></p> <p class="MsoNormal">05/10/2006: <span style=""> </span>$415,000<o:p></o:p></p> <p class="MsoNormal">09/19/2005: <span style=""> </span>$47,000<o:p></o:p></p> <p class="MsoNormal">03/30/2005: <span style=""> </span>$340,000<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal">This is where you see the symptoms of the housing mess we are currently living in by jumping into the trenches.<span style=""> </span>First, the home was artificially high in 2005 for the area.<span style=""> </span>Then, 6 months after the purchase we have the fabled housing ATM machine being used for <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color: rgb(0, 112, 192);">mortgage equity withdrawals</span></a>.<span style=""> </span>These folks probably realized that they bit off more than they could chew so what do they do?<span style=""> </span>They simply listed a price that would cover the mess, sort of like sweeping dirt under the rug.<span style=""> </span>Don’t think this is the case?<span style=""> </span>Let us do the math:</p> <p class="MsoNormal">Since they probably went zero down with some sort of banana republic financing the math works out as follows:<span style=""> </span>Mortgage #1 ($340,000) + Mortgage #2 ($47,000) + 6 percent selling cost ($24,900) = <span style=""> </span>$411,900</p> <p class="MsoNormal">Hey, this figure is really close to the sales price in 2006, what a shocker.<span style=""> </span>Since we were living in Wonderland and people simply priced homes at whatever they needed to get out of their chaos, this tactic worked in a bubblicious environment.<span style=""> </span>In this example, these folks actually made a few thousand dollars even though they were digging deeper and deeper into debt. <span style=""> </span>They had the benefit of being at the right place at the right time.<span style=""> </span>This isn’t the case for the buyer in 2006.<span style=""> </span>Some lending institution thought it would be a brilliant idea to lend $415,000 for a home that would rent for $1,100.<span style=""> </span>Does this make sense?<span style=""> </span>Of course not.<span style=""> </span>You don’t need your Ph.D. in Finance to know this deal is not going to work.<span style=""> </span>In fact, let us take a look at the neighborhood statistics:</p> <p class="MsoNormal">Average Annual Household Income:<span style=""> </span> <b style="">$48,991</b></p> <p class="MsoNormal">Let us run the hypothetical numbers of the average family in this neighborhood buying this home with conventional financing:</p> <p class="MsoNormal">Monthly Net Income:<span style=""> </span><b style="">$3,324</b> (Filing Married with 2 Exemptions for Federal and State).</p> <p class="MsoNormal">PITI:<span style=""> </span><b style="">$2,864</b> (5 percent down payment of $20,750, 95 percent LTV)</p> <p class="MsoNormal">So this family has monthly disposable income of $460 for a 768 square foot home built in the <a href="http://drhousingbubble.blogspot.com/2007/08/3-reasons-why-this-credit-bubble-is.html"><span style="color: rgb(0, 112, 192);">Great Depression</span></a>!<span style=""> </span>What about automobile costs?<span style=""> </span>Food?<span style=""> </span>Healthcare?<span style=""> </span>After all, they are only spending a mind numbing 86 percent of their net income on their home!<span style=""> </span>And we aren’t including maintenance cost such as gardening, trash, and other fees that sneak up on property owners.<span style=""> </span>Is it any surprise foreclosures are exploding in California?<span style=""> </span>Who in their right mind didn’t see a disaster like this coming?<span style=""> </span>Now, the home is priced at $324,900 or $90,100 less.<span style=""> </span>This is a whopping 21.7 percent decrease in one year, and that is assuming it sells for the current price which is doubtful because someone can rent a similar place for $1,100 as opposed to carrying a nut of $2,336 (at the current price).<span style=""> </span>And why would a real estate investor buy this place?<span style=""> </span>They would be negative cash flowing by $1,236 in a market where prices are trending downward.<span style=""> </span>Is it becoming apparent why this housing market needs to correct and this is no minor bump in the road?<span style=""> </span>Do you still think that a bail out is a smart idea?<span style=""> </span>If it isn’t obvious that prices need to drop in certain areas by 40 to 50 percent then we may consider investing in an introductory finance course.<span style=""> </span>Unless incomes in the area increase by 100 percent, prices will adjust lower now that lenders are being forced to use more conventional financing.<span style=""> </span>In other words, prices have to reflect the income reality of the people in the immediate area.<span style=""> </span>And reality is so passé after living in a fantasy world of easy credit and hyper speculation.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Today we salute you Paramount with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(0, 112, 192);">Real Homes of Genius Award</span>.</a></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com20tag:blogger.com,1999:blog-35190061.post-74964867719247678042007-09-06T06:00:00.000-07:002007-09-05T23:03:29.690-07:00Florida Housing 1920s Redux: History repeating in Florida and Lessons from the Roaring 20s.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk9wjdJiR_M59NhgpaNSfhM-lN2V2Zf7fHgWJOHI5LtrPDjPK6DXzwa5TydFAhAg8vpXSjeYyICDcUxIqhPdzWETsT05xNiQLIfGQ1kH6U1cWbvl76_udU9ZlRICuW4_E2EH6Yhw/s1600-h/crane.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk9wjdJiR_M59NhgpaNSfhM-lN2V2Zf7fHgWJOHI5LtrPDjPK6DXzwa5TydFAhAg8vpXSjeYyICDcUxIqhPdzWETsT05xNiQLIfGQ1kH6U1cWbvl76_udU9ZlRICuW4_E2EH6Yhw/s400/crane.jpg" alt="" id="BLOGGER_PHOTO_ID_5106067584751132418" border="0" /></a><br /><div class="KonaBody">History has a mysterious way of creeping up on those that fail to study it.<span style=""> </span>Somehow, with all the talking heads going crazy, you would think this housing market has no parallel in history.<span style=""> </span>When you hear that the national median home price has never gone down there is always the caveat of “since the Great Depression.”<span style=""> </span>I’ve written 3 articles about the Great Depression (<span style="color: rgb(31, 73, 125);"><a href="http://drhousingbubble.blogspot.com/2007/08/personal-story-by-lawyer-from-previous.html">letter from a lawyer</a>,</span><a href="http://drhousingbubble.blogspot.com/2007/08/lessons-from-great-depression-letter.html"> <span style="color: rgb(0, 176, 240);">letter from a president of a bank</span></a>, and<span style="color: rgb(0, 112, 192);"> <a href="http://drhousingbubble.blogspot.com/2007/08/3-reasons-why-this-credit-bubble-is.html">3 main reasons why this bubble is worse</a></span>) highlighting eerie similarities of this credit bubble to the Roaring 20s.<span style=""> </span>Keep in mind during the 1920s the nation was engulfed with Coolidge prosperity and all things business were here to stay.<span style=""> </span>In fact, today we are going to examine a few paragraphs from an amazing book by Frederick Lewis Allen called <i style="">Only Yesterday </i>written in 1931<i style=""> </i>which examines the decade of the 1920s in great detail.<span style=""> A reader of this blog recommended this book sometime ago and I'm glad I had the chance to read this in depth analysis of the 1920s from an author with an uncanny ability to retell history. </span>Dispute it all you want but there is a chapter in the book called <span style="font-style: italic;">Home, Sweet Florida</span> that if one didn’t see the date, could be published in the Miami Herald dated 2007. <p class="MsoNormal">Let us compare and contrast the past with our current housing debacle:<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">“There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925. The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage. The shirt-sleeved crowds hurrying to and fro under the widely advertised Florida sun talked of binders and options and water-frontages and hundred thousand-dollar profits; the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion. The warm air vibrated with the clatter of riveters, for the steel skeletons of skyscrapers were rising to give Miami a skyline appropriate to its metropolitan destiny. Motor-busses roared down Flagler Street, carrying "prospects" on free trips to watch dredges and steam-shovels converting the outlying mangrove swamps and the sandbars of the Bay of Biscayne into gorgeous Venetian cities for the American homemakers and pleasure-seekers of the future. The Dixie Highway was clogged with automobiles from every part of the country; a traveler caught in a traffic jam counted the license-plates of eighteen state among the sedans and flivvers waiting in line. Hotels were overcrowded. People were sleeping wherever they could lay their heads, in station waiting- rooms or in automobiles. The railroads had been forced to place an embargo on imperishable freight in order to avert the danger of famine; building materials were now being imported by water and the harbor bristled with shipping. Fresh vegetables were a rarity, the public utilities of the city were trying desperately to meet the suddenly multiplied demand for electricity and gas and telephone service, and there were recurrent shortages of ice.”<o:p></o:p></i></p> <p class="MsoNormal">So first we must realize that real estate frenzies have occurred in the past.<span style=""> </span>In addition, the idea of people waiting to bid on property not currently built occurred during the 1920s in Florida.<span style=""> </span>And all those high-rise condos waiting to come online in 2008 or 2009?<span style=""> </span>Florida again seems to be ground zero of the real estate frenzy.<span style=""> </span>Even the out of town investors going zero down on a mortgage for a property that isn’t even built is something that happened long ago.<span style=""> </span>Reminds many people of the multiple license plates in Arizona a few years ago of people extending their credit to buy a pre-fab construction only to flip it a few months down the road.<span style=""> </span>Like any boom, this didn’t happen overnight back then either.<span style=""> </span>What events led to Florida being the prime location?<span style=""> </span>Let us take a look:</p> <p class="MsoNormal"><i style="">“For this amazing boom, which had gradually been gathering headway for several years but had not become sensational until 1924, there were a number of causes. Let us list them categorically.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">1. First of all, of course, the climate-Florida's unanswerable argument.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">2. The accessibility of the state to the populous cities of the Northeast-an advantage which Southern California could not well deny.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">3. The automobile, which was rapidly making America into a nation of nomads; teaching all manner of men and women to explore their country, and enabling even the small farmer, the summer-boarding-house keeper, and the garage man to pack their families into flivvers and tour southward from auto-camp to auto-camp for a winter of sunny leisure.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">4. The abounding confidence engendered by Coolidge Prosperity, which persuaded the four-thousand-dollar-a-year salesman that in some magical way he too might tomorrow be able to buy a fine house and all the good things of earth.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">5. A paradoxical, widespread, but only half-acknowledged revolt against the very urbanization and industrialization of the country, the very concentration upon work, the very routine and smoke and congestion and twentieth- century standardization of living upon which Coolidge Prosperity was based. These things might bring the American businessman money, but to spend it he longed to escape from them-into the free sunshine of the remembered countryside, into the easy-going life and beauty of the European past, into some never-never land which combined American sport and comfort with Latin glamour-a Venice equipped with bathtubs and electric iceboxes, a Seville provided with three eighteen-hole golf courses.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">6. The example of Southern California, which had advertised its climate at the top of its lungs and had prospered by so doing: why, argued the Floridians, couldn't Florida do likewise?<o:p></o:p></i></p> <p class="MsoNormal"><i style="">7. And finally, another result of Coolidge Prosperity: not only did John Jones expect that presently he might be able to afford a house at Boca Raton and a vacation-time of tarpon-fishing or polo, but he also was fed on stories of bold business enterprise and sudden wealth until he was ready to believe that the craziest real-estate development might be the gold-mine which would work this miracle for him.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">Crazy real-estate developments? But were they crazy? By 1925 few of them looked so any longer. The men whose fantastic projects had seemed in 1923 to be evidences of megalomania were now coining millions: by the pragmatic test they were not madmen but-as the advertisements put it- inspired dreamers. Coral Gables, Hollywood-by-the-Sea, Miami Beach, Davis Islands-there they stood: mere patterns on a blue-print no longer, but actual cities of brick and concrete and stucco; unfinished, to be sure, but growing with amazing speed, while prospects stood in line to buy and every square foot within their limits leaped in price.”<o:p></o:p></i></p> <p class="MsoNormal">Did someone write this yesterday? The book title is still accurate even though 1931 is a distant memory.<span style=""> </span>The same arguments used in 1925 are being used in the current marketplace regarding housing.<span style=""> </span>First, the main argument for Florida and Southern California is the weather.<span style=""> </span>We’ve dubbed it the sunshine tax.<span style=""> </span>So this argument for pumping ludicrous mortgages isn’t something new. <span style=""> </span>Next, we have the argument of proximity to locations and centers of employment.<span style=""> </span>Another argument used by many housing pundits pushing these overpriced units.<span style=""> </span>None of these things changed (after all we still have the sun) and this is nearly 100 years ago.<span style=""> </span>Subdivide and conquer seems to be the mantra in real estate booms.<span style=""> </span>The author makes a unique point about the primal desire for families to reunite with a more tranquil life at the cost of working like a maniac to afford the mortgage on a home in an urban area.<span style=""> </span>A Catch-22 that many families in 2007 are facing.<span style=""> </span>And the marketing and advertising tactics haven’t changed.<span style=""> </span>Have you seen the current ads for Florida housing?<span style=""> </span>“Your home with the tranquility of Venice” or “Come escape to your own private Paris.”<span style=""> </span>What they are implying is that your subdivided cookie cutter home is somehow similar to condensed apartment style living from Europe.<span style=""> </span>Last time I checked not many Parisians or Italians had 2 car garages to support monster Hummers and Expeditions.<span style=""> </span>So this yearning for European style tranquility is highly misplaced because even Europeans do not live this way.<span style=""> </span>But the underlying implication is “you too can get away from the stressful congested freeways and 12 hour work days in the city” at least for a few hours in your private palace even though you have to work like a maniac to afford your exotic-high-flying-zero-down mortgage.<span style=""> </span>But did people get caught up in the frenzy like this current boom?</p> <p class="MsoNormal"><i style="">“Yes, the public bought. By 1925 they were buying anything, anywhere, so long as it was in Florida. One had only to announce a new development, be it honest or fraudulent, be it on the Atlantic Ocean or deep in the wasteland of the interior, to set people scrambling for house lots. "Manhattan Estates" was advertised as being "not more than three fourths of a mile from the prosperous and fast-growing city of Nettie"; there was no such city as Nettie, the name being that of an abandoned turpentine camp, yet people bought. Investigators of the claims made for "Melbourne Gardens" tried to find the place, found themselves driving along a trail "through prairie muck land, with a few trees and small clumps of palmetto," and were hopelessly mired in the mud three miles short of their destination. But still the public bought, here and elsewhere, blindly, trustingly-natives of Florida, visitors to Florida, and good citizens of Ohio and Massachusetts and Wisconsin who had never been near Florida but made out their checks for lots in what they were told was to be "another Coral Gables" or was "next to the right of way of the new railroad" or was to be a "twenty-million-dollar city." The stories of prodigious profits made in Florida land were sufficient bait. A lot in the business center of Miami Beach had sold for $800 in the early days of the development and had resold for $150,000 in 1924. For a strip of land in Palm Beach a New York lawyer had been offered $240,000 some eight or ten years before the boom; in 1923 he finally accepted $800,000 for it; the next year the strip of land was broken up into building lots and disposed of at an aggregate price of $1,500,000; and in 1925 there were those who claimed that its value had risen to $4,000,000. A poor woman who had bought a piece of land near Miami in 1896 for $25 was able to sell it in 1925 for $150,000. Such tales were legion; every visitor to the Gold Coast could pick them up by the dozen; and many if not most of them were quite true-though the profits were largely on paper. No wonder the rush for Florida land justified the current anecdote of a native saying to a visitor, "Want to buy a lot?" and the visitor at once replying, "Sold."<span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal">Greed has an interesting way of coming back into the mainstream.<span style=""> </span>As the author points out, even places that were 15, 20, or 30 miles away from the prime locations were selling like crazy simply because the real estate tornado frenzy brought these places into the fold.<span style=""> </span>Think of the<span style="color: rgb(0, 112, 192);"> <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a>,</span> the Inland Empire, Arizona, Nevada, and Florida.<span style=""> </span>One need only look at the current headlines of current Florida housing to find similar parallels from the above.<span style=""> </span>Why are housing pundits so quick to dismiss history without taking a critical eye of what happened in the past?<span style=""> </span>Do they somehow think they are above the narrative of history?<span style=""> </span>Is this time really different?<span style=""> </span>They want you to believe that they have found the new calculus of housing success.<span style=""> </span>Well as you are seeing, this bust is playing out exactly like it did almost 100 years ago. <span style=""> </span>To continue with the chapter, it appears that speculation was rampant just like it was during our boom:</p> <p class="MsoNormal"><i style="">“Speculation was easy-and quick. No long delays while titles were being investigated and deeds recorded; such tiresome formalities were postponed. The prevalent method of sale was thus described by Walter C. Hill of the Retail Credit Company of Atlanta in the Inspection Report issued by his concern: "Lots are bought from blueprints. They look better that way .... Around Miami, subdivisions, except the very large ones, are often sold out the first day of sale. Advertisements appear describing the location, extent, special features, and approximate price of the lots. Reservations are accepted. This requires a check for 10 per cent of the price of the lot the buyer expects to select. On the first day of sale, at the promoter's office in town, the reservations are called out in order, and the buyer steps up and, from a beautifully drawn blueprint, with lots and dimensions and prices clearly shown, selects a lot or lots, gets a receipt in the form of a `binder' describing it, and has the thrill of seeing `Sold' stamped in the blue-lined square which represents his lot, a space usually fifty by a hundred feet of Florida soil or swamp. There are instances where these first-day sales have gone into several millions of dollars. And the prices! ... Inside lots from $8,000 to $20,000. Water-front lots from $15,000 to $25,000. Seashore lots from $20,000 to $75,000. And these are not in Miami. They are miles out-ten miles out, fifteen miles out, and thirty miles out."<o:p></o:p></i></p> <p class="MsoNormal">Wait.<span style=""> </span>Did they say people needed 10 percent down?<span style=""> </span>We out did the speculative bubble of the 1920s since we cut out that measly 10 percent down and went zero down and sometimes people got cash-back at closing!<span style=""> </span>This reminds one of sales even in Orange County California where new subdivisions sold out the first day.<span style=""> </span>People waited in line for days to get on a list for the chance to purchase a home at a hyper inflated price.<span style=""> </span>Looking back people must feel that they were waiting in line to be punched in the face by Mike Tyson.<span style=""> </span>And what about the metal cranes covering the Florida skyline?<span style=""> </span>Many of these units won’t hit the market until 2008 and 2009 at the peak of the bubble decline.<span style=""> </span>Fascinating how greed can overtake an entire population.<span style=""> </span>And lets be honest, how many of these people actually had visions of buying a Miami condo to live and raise a family for an entire generation?<span style=""> </span>I would venture that the percent can be counted on one hand.<span style=""> </span>What kind of rhetoric was used to pump these new paradise resorts?<span style=""> </span>Let us take a look:</p> <p class="MsoNormal"><i style="">“Steadily, during that feverish summer and autumn of 1925, the hatching of new plans for vast developments continued. A great many of them, apparently, were intended to be occupied by what the advertisers of Miami Beach called "America's wealthiest sportsmen, devotees of yachting and the other expensive sports," and the advertisers of Boca Raton called "the world of international wealth that dominates finance and industry . . . that sets fashions . . . the world of large affairs, smart society and leisured ease." Few of those in the land-rush seemed to question whether there would be enough devotees of yachting and men and women of leisured ease to go round.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">Everywhere vast new hotels, apartment houses, casinos were being projected. At the height of the fury of building a visitor to West Palm Beach noticed a large vacant lot almost completely covered with bath- tubs. The tubs had apparently been there some time; the crates which surrounded them were well weathered. The lot, he was informed, was to be the site of "One of the most magnificent apartment buildings in the South"-but the freight embargo had held up the contractor's building material and only the bathtubs had arrived! Throughout Florida re- sounded the slogans and hyperboles of boundless confidence. The advertising columns shrieked with them, those swollen advertising columns which enabled the Miami Daily News, one day in the summer of 1925, to print an issue of 504 pages, the largest in newspaper history, and enabled the Miami Herald to carry a larger volume of advertising in 1925 than any paper anywhere had ever before carried in a year. Miami was not only "The Wonder City," it was also "The Fair White Goddess of Cities," "The World's Playground," and "The City Invincible." Fort Lauderdale became "The Tropical Wonderland," Orlando "The City Beautiful," and Sanford "The City Substantial."<span style=""> </span><span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal">Location, location, location.<span style=""> </span>Speculation, speculation, speculation.<span style=""> </span>I was going through this weekend’s <i style="">LA Times</i> and an inordinate amount of space is given to real estate advertisements.<span style=""> </span>In fact, most of the ads are housing related.<span style=""> </span>For example, you have your multiple electronic stores telling you how to fill up every nook in cranny of your place with 60 inch plasma TVs and state of the art refrigerators that make ice out of thin air.<span style=""> </span>All for 0 percent financing over 24 months.<span style=""> </span>And then we have all the ads about majestic beds and sofas that are fit for King Tut himself.<span style=""> </span>Even the King didn’t have access to American Express!<span style=""> </span>And then we have the housing ads.<span style=""> </span>I was looking at some condo ads in Florida and you would think that you are buying the most fantastic, stupendous, amazing, fabulous, and gorgeous 1,200 square foot piece of land in the entire universe.<span style=""> </span>You may want to buy stock in Thesaurus publishers with the amount of adjectives these advertising and marketing agency use for housing.<span style=""> </span>With the benefit of foresight, we know how the bubble of the 1920s ended but we are still uncertain how this current market will unfold.<span style=""> </span>As humans, we like hearing things in a narrative form.<span style=""> </span>If A happens then B happens which obviously leads to C happening.<span style=""> </span>We are terrible at constructing real-time narratives because we are living the moment and have a hard time stepping back and examining the landscape from a bird’s eye view.<span style=""> Call it existential living. </span>For the sake of forecasting, how did the 1920s Florida housing market end and can we learn anything from it?</p> <p class="MsoNormal"><i style="">“Perhaps the boom was due for a "healthy breathing-time…<o:p></o:p></i></p> <p class="MsoNormal"><i style="">As a matter of fact, it was due for a good deal more than that. It began obviously to collapse in the spring and summer of 1926. People who held binders and had failed to get rid of them were defaulting right and left on their payments. One man who had sold acreage early in 1925 for twelve dollars an acre, and had cursed himself for his stupidity when it was resold later in the year for seventeen dollars, and then thirty dollars, and finally sixty dollars an acre, was surprised a year or two afterward to find that the entire series of subsequent purchases was in default, that he could not recover the money still due him, and that his only redress was to take his land back again. There were cases in which the land not only came back to the original owner, but came back burdened with taxes and assessments which amounted to more than the cash he had received for it; and furthermore he found his land blighted with a half-completed development.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">Just as it began to be clear that a wholesale deflation was inevitable, two hurricanes showed what a Soothing Tropic Wind could do when it got a running start from the West Indies.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">No malevolent Providence bent upon the teaching of humility could have struck with a more precise aim than the second and worst of these Florida hurricanes. It concentrated upon the exact region where the boom had been noisiest and most hysterical-the region about Miami. Hitting the Gold Coast early in the morning of September 18, 1926, it piled the waters of Biscayne Bay into the lovely Venetian developments, deposited a five-masted steel schooner high in the street at Coral Gables, tossed big steam yachts upon the avenues of Miami, picked up trees, lumber, pipes, tiles, debris, and even small automobiles and sent them crashing into the houses, ripped the roofs off thousands of jerry-built cottages and villas, almost wiped out the town of Moore Haven on Lake Okeechobee, and left behind it some four hundred dead, sixty-three hundred injured, and fifty thousand homeless. Valiantly the Floridians insisted that the damage was not irreparable; so valiantly, in fact, that the head of the American Red Cross, John Barton Payne, was quoted as charging that the officials of the state had "practically destroyed" the national Red Cross campaign for relief of the homeless. Mayor Romfh of Miami declared that he saw no reason "why this city should not entertain her winter visitors the coming season as comfortably as in past seasons." But the Soothing Tropic Wind had had its revenge; it had destroyed the remnants of the Florida boom.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">By 1927, according to Homer B. Vanderblue, most of the elaborate real-estate offices on Flagler Street in Miami were either closed or practically empty; the Davis Islands project, "bankrupt and unfinished," had been taken over by a syndicate organized by Stone & Webster; and many Florida cities, including Miami, were having difficulty collecting their taxes. By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side- walks, where grass and palmetto take the place of homes that were to be .... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death." In 1928 there were thirty-one bank failures in Florida; in 1929 there were fifty-seven; in both of these years the liabilities of the failed banks reached greater totals than were recorded for any other state in the Union. The Mediterranean fruitfly added to the gravity of the local economic situation in 1929 by ravaging the citrus crop. Bank clearings for Miami, which had climbed sensationally to over a billion dollars in 1925, marched sadly downhill again:<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><span style=""> </span>1925.............................$1,066,528,000<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><span style=""> </span>1926................................632,867,000<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><span style=""> </span>1927................................260,039,000<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><span style=""> </span><span style=""> </span>1928................................143,364,000<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><span style=""> </span>1929................................142,316,000<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style="">And those were the very years when elsewhere in the country prosperity was triumphant! By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">The cheerful custom of incorporating real-estate developments as "cities" and financing the construction of all manner of improvements with "tax-free municipal bonds," as well as the custom on the part of development corporations of issuing real-estate bonds secured by new structures located in the boom territory, were showing weaknesses unimagined by the inspired dreamers of 1925. Most of the millions piled up in paper profits had melted away, many of the millions sunk in developments had been sunk for good and all, the vast inverted pyramid of credit had toppled to earth, and the lesson of the economic falsity of a scheme of land values based upon grandiose plans, preposterous expectations, and hot air had been taught in a long agony of deflation.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">For comfort there were only a few saving facts to cling to. Florida still had her climate, her natural resources. The people of Florida still had energy and determination, and having recovered from their debauch of hope, were learning from the relentless discipline of events. Not all Northerners who had moved to Florida in the days of plenty had departed in the days of adversity. Far from it: the census of 1930, in fact, gave Florida an increase in population of over 50 per cent since 1920-a larger increase than that of any other state except California-and showed that in the same interval Miami had grown by nearly 400 per cent. Florida still had a future; there was no doubt of that, sharp as the pains of enforced postponement were. Nor, for that matter, were the people of Florida alone blameworthy for the insanity of 1925. They, perhaps, had done most of the shouting, but the hysteria which had centered in their state had been a national hysteria, enormously increased by the influx of outlanders intent upon making easy money”. <span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><span style=""> </span>And so the boom ended in a spectacular fashion.<span style=""> </span>The peak hit in 1925 and steadily declined through the Great Depression.<span style=""> </span>And as the author points out, this was during a time when the country was supposedly prospering.<span style=""> </span>Doesn’t this remind you of the current administration touting our record low unemployment rate and record high home ownership rate?<span style=""> </span>You would think we are in the apex of financial success with a minor bump in housing.<span style=""> </span>But markets in Florida and California are hitting massive defaults.<span style=""> </span>Keep in mind we are only in stage one of this housing bear market.<span style=""> </span>Looking at the past as a reference, we know that there will be pain in the next few years.<span style=""> </span>Even if Bush and others are pushing for income relief on debt forgiveness, this means society will carry the burden.<span style=""> </span>After all, if someone bought a $500,000 home and it was foreclosed and sold for $450,000 – shouldn’t the lender and buyer shoulder some responsibility? We will be heading down this moral hazard road for months. <br /></p><p class="MsoNormal">Even looking at current default rates in Southern California, many people in default have loans that are 2 years or younger. Now either the lender did a horrible job looking at the buyer's financial situation in which they should be liable, or a buyer speculated either knowingly or unknowingly. I have empathy for a family that was conned from an FHA fixed mortgage into a $200,000 subprime mortgage at 10 percent with prepayment penalties. No reason for this except higher commissions. But a person buying a $500,000 home trying to flip it for $600,000? See why I have an issue raising the caps? Most people think the money will evaporate like some sort of Vegas magic act.<span style=""> </span>Yet the public as a whole, even those who didn’t participate in this speculating frenzy, will be on the hook if no one directly involved is willing to shoulder the responsibility of gambling [speculating] in a housing bubble.<span style=""> </span>How about the lender, home owner, and the Wall Street players shoulder some of the debt forgiveness instead of asking for a government handout? Why isn't anyone going after the MBS market or the hedge funds? After all, some one did buy these exotic mortgages. So what are some other viable solutions? Lenders can modify terms on 30 year mortgages and extend the duration or drop rates; yet this would suppose that buyers actually bought homes to live in for the longterm.<span style=""> </span>Speculate together, pay together. If you can cut through the green tangled vines of bail out rhetoric, the bottom line is someone isn't happy because the music stopped and they are left standing with no chair.<br /></p><p class="MsoNormal">Back to the Florida boom and bust, it would be wrong to think that the real estate fever in the 1920s was only specific to Florida.<span style=""> </span>Other cities had similar booms as well:</p> <p class="MsoNormal"><i style="">“The final phase of the real-estate boom of the nineteen-twenties centered in the cities themselves. To picture what happened to the American skyline during those years, compare a 1920 airplane view of almost any large city with one taken in 1930. There is scarcely a city which does not show a bright new cluster of skyscrapers at its center. The tower building mania reached its climax in New York-since towers in the metropolis are a potent advertisement-and particularly in the Grand Central district of New York. Here the building boom attained immense proportions, coming to its peak of intensity in 1928. New pinnacles shot into the air forty stories, fifty stories, and more; between 1918 and 1930 the amount of space available for office use in large modern buildings in that district was multiplied approximately by ten. In a photograph of uptown New York taken from the neighborhood of the East River early in 1931, the twenty most conspicuous structures were all products of the Post-war Decade. The tallest two of all, to be sure, were not completed until after the panic of 1929; by the time the splendid shining tower of the Empire State Building stood clear of scaffolding there were apple salesmen shivering on the curbstone below. Yet it was none the less a monument to the abounding confidence of the days in which it was conceived.<o:p></o:p></i></p> <p class="MsoNormal"><i style="">The confidence had been excessive. Skyscrapers had been overproduced. In the spring of 1931 it was reliably stated that some 17 per cent of the space in the big office buildings of the Grand Central district, and some 40 per cent of that in the big office buildings of the Plaza district farther uptown, were not bringing in a return; owners of new skyscrapers were inveigling business concerns into occupying vacant floors by offering them space rent-free for a period or by assuming their leases in other buildings; and financiers were shaking their heads over the precarious condition of many realty investments in New York. The metropolis, too, had a future, but speculative enthusiasm had carried it upward a little too fast.”<o:p></o:p></i></p> <p class="MsoNormal">Compare this to the current metal cranes that stand up like a Brontosaur head in the middle of many metro cities.<span style=""> </span>You see them in San Diego, Miami, and Orange County.<span style=""> </span>Take a plane over Arizona and Nevada and you’ll see a jigsaw of subdivided land and spectacular urban sprawl.<span style=""> </span>Are we growing this fast?<span style=""> </span>Looking at population statistics it doesn’t seem that the building is in proportion to our growing demand for housing; we may have overbuilt a tad bit.<span style=""> </span>Considering that many baby-boomers are looking to downsize, many homes should be coming online in the next 5 to 10 years simply because of the natural occurrence in the shift of demographics. Many will downsize and retire to less urban areas, thus creating more inventory.<br /></p><p class="MsoNormal">A question many are wondering is "will there be another bubble after this one?"<span style=""> </span>Considering we went from a technology bubble to a housing bubble, I think we’ve had enough for two decades.<span style=""> </span>The <a href="http://drhousingbubble.blogspot.com/2007/09/real-cost-of-picket-white-fence-3.html"><span style="color: rgb(0, 112, 192);">cost of owning a home in certain areas</span></a>, as many families are realizing, comes at too high of a cost.<span style=""> </span>A society can only prosper so long via debt spending.<span style=""> </span>So what happened after the boom in Florida?</p> <p class="MsoNormal"><i style="">“After the Florida hurricane, real-estate speculation lost most of its interest for the ordinary man and woman. Few of them were much concerned, except as householders or as spectators, with the building of suburban developments or of forty-story experiments in modernist architecture. Yet the national speculative fever which had turned their eyes and their cash to the Florida Gold Coast in 1925 was not chilled; it was merely checked. Florida house-lots were a bad bet? Very well, then, said a public still enthralled by the radiant possibilities of Coolidge Prosperity: what else was there to bet on? Before long a new wave of popular speculation was accumulating momentum. Not in real-estate this time; in something quite different. The focus of speculative infection shifted from Flagler Street, Miami, to Broad and Wall Streets, New York. The Big Bull Market was getting under way.” <span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><span style=""> </span>Maybe we will finally see the decade long obsession with real estate go away.<span style=""> </span>However after the boom in the 1920s, people decided to go back and gamble on US Steel, General Electric, General Motors, Woolworth, and Radio. Keep in mind that the economy didn’t shift gears over night.<span style=""> </span>From the peak in <a href="http://drhousingbubble.blogspot.com/2007/08/3-reasons-why-this-credit-bubble-is.html"><span style="color: rgb(0, 112, 192);">September of 1929</span></a> it took approximately 3 years to hit bottom in 1932.<span style=""> </span>Will we have another Great Depression?<span style=""> </span>Probably not since there are many other factors in our current economy that are vastly different.<span style=""> </span>However, a recession and a deep one at that, is almost a foregone conclusion.<span style=""> </span></p> <p class="MsoNormal">I highly recommend that you read <i style="">Only Yesterday</i> by Frederick Lewis Allen because it’ll give you a fascinating and enlightening view of the 1920s and how an important defining time for America still impacts us today. We will always have booms and busts, otherwise known by a nicer name, the business cycle. <span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com36tag:blogger.com,1999:blog-35190061.post-77329673001008031022007-09-02T12:25:00.001-07:002007-09-02T12:59:35.135-07:00The Real Cost of a Picket White Fence: 3 Housing Factors to Think About; Prices set at the margin, income discrepancies, and bubble euphoria.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnxcPAfajj__bJOv3XvX3Eexop3Tia1vQTHnt1ZMMCC12ylkFte0YdJaCbYbYUkUfEZVU-d5mj0PEZgaxnHqZhK0E_bmh9ULlB3N47QLExnPrQAaKhOZ-fWs7YCbhCLP1scFW0KQ/s1600-h/picketfence.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnxcPAfajj__bJOv3XvX3Eexop3Tia1vQTHnt1ZMMCC12ylkFte0YdJaCbYbYUkUfEZVU-d5mj0PEZgaxnHqZhK0E_bmh9ULlB3N47QLExnPrQAaKhOZ-fWs7YCbhCLP1scFW0KQ/s400/picketfence.jpg" alt="" id="BLOGGER_PHOTO_ID_5105690946184044274" border="0" /></a><br />After drinking water out of the bailout fire hydrant, I think most people are scrambling to get an idea of what is happening.<span style=""> </span>An issue placed on the back burner by many politicians is suddenly garnering massive media playtime.<span style=""> </span>Amazingly, Americans in a large percentage are against any bailout talks or consideration.<span style=""> </span>The nationwide MSNBC and a local station KTLA ran unscientific polls asking the questions, “do you support a government bailout for the mortgage industry?”<span style=""> </span>The answer was a resounding NO.<span style=""> </span>In fact, from a brief review of these polls 95 percent of Americans are against any form of corporate welfare.<span style=""> </span>They realize that deep down this is only a ploy for the government to subsidize maverick hedge funds, Wall Street circus acts, renegade brokers, and Vegas inspired buyer gambling. They want you to believe that they are doing it for the person on the street. How are they going to help out expensive counties such as Los Angeles where the median home price is $547,000? And what about those that have been foreclosed or are being foreclosed on? Don't they deserve a retroactive bailout? Come to think of it, why don't they give me money I invested in tech stocks back in 1999 that was wiped out since these companies had P/E ratios higher than Barry Bonds' batting average. Or the money I lost in Vegas two months ago on blackjack (I suspect that the dealer was a former hedge fund manager since he asked if I wanted margin and wanted to flip a home in Henderson). <span style=""> </span>A decade of conspicuous housing consumption has left the nation hanging on a thread looking for more bubbles to fuel their credit addiction.<span style=""> </span>What other highflying act will allow American consumers, a large part of the economy, to continue their spending marathon?<span style=""> </span>We’ve already seen that <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color: rgb(0, 112, 192);">mortgage equity withdrawals</span></a> had a lot to do with bolstering the economy over the past years.<span style=""> </span>Unfortunately you can’t tap into your home equity line of credit if you are swimming underwater Jacque Cousteau style.<span style=""> </span>See, like any <a href="http://drhousingbubble.blogspot.com/2006/10/ponzi-financing-house-that-credit.html"><span style="color: rgb(0, 112, 192);">Ponzi Scheme</span></a>, those that get in early do well on the backs of those that come in late.<span style=""> </span>And like any good <a href="http://drhousingbubble.blogspot.com/2006/10/ponzi-financing-house-that-credit.html"><span style="color: rgb(0, 112, 192);">Ponzi Scheme</span></a> those coming in at the end are left holding the manure filled bag of worthless mortgage backed securities; it turns out a 600 square foot <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(0, 112, 192);">Real Home of Genius</span></a> isn’t really worth $500,000.<div class="KonaBody"><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span> <p class="MsoNormal">Then we have the fear mongering by the politicians and the media.<span style=""> </span>The new line that I’m hearing dished out is “<i style="">well you wouldn’t want your entire neighborhood full of foreclosures eh?”<span style=""> </span></i>Instead of drop kicking my monitor Jackie Chan style at this completely stupid and moronic assertion, I will show you that at any given time, only a very small percentage of all housing units are up for sale.<span style=""> </span>So why all the brouhaha?<span style=""> </span>Because housing prices are set at the margin; meaning, homes are priced by the units that are currently sitting on the market.<span style=""> </span>And the fact of the matter is we’ve been operating on a one-trick pony economy where housing has kept us out of any recession and has provided the fuel to keep this SUV of spending going forward.<span style=""> </span>But now that housing is depreciating we are realizing that yes, this economy is based on housing.<span style=""> </span>Otherwise, who really cares that housing prices are trending downward?<span style=""> </span>If we are such a diverse economy this one tiny sector shouldn’t mean so much; but it does because of the massive credit bubble we are living in.<span style=""> </span></p> <p class="MsoNormal">So today we will examine 3 new factors that you should keep in the back of your mind since I have a feeling this housing mess won’t go away anytime soon.<span style=""> </span>First, home prices are set at the margin so we will examine the actual numbers.<span style=""> </span>Since politicians and the media like churning information and creating a fear cycle we will carefully look at housing supply in relation to units being sold.<span style=""> </span>And again, anyone following this housing bubble isn’t surprised.<span style=""> </span>In fact, it was predicted here a very long time ago.<span style=""> </span>You may be saying, “but I feel safe because daddy Bernanke is here to save the day, he saw this coming.”<span style=""> </span>Let us take a trip down memory lane:</p> <p class="MsoNormal"><span class="articlecontent"><i style="">"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"</i> Ben Bernanke Quote to Congress' Joint Economic Committee. <span style=""> </span><b style=""><u>March 2007</u></b><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal"><i style=""><span style=""> </span>“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,”</i> Bernanke said in <b style=""><u>May 2007.</u></b><span style=""> </span></p> <p class="MsoNormal"><i style="">“In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.”</i> –<b style=""><u>August 31</u></b> Ben Bernanke</p> <p class="MsoNormal">Wrong, wrong, and now you get it.<span style=""> </span>Even the last statement is misleading because how did we go from “fundamental factors” being okay in May to “weakness in housing” in August?<span style=""> </span>So given that the Fed Chairman didn’t see this coming even as early as May of this year, do you have confidence that these other yahoo politicians have the right policy decision in mind?<span style=""> </span>We can discuss other policy mistakes regarding the current administration but that would require much more than this housing blog.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">The second factor we will look at is income discrepancies.<span style=""> </span>Current home prices are not in line with current family incomes.<span style=""> </span>Unless you think making <a href="http://drhousingbubble.blogspot.com/2007/05/yearly-income-14000-purchase-of-house.html"><span style="color: rgb(0, 112, 192);">$14,000 and buying a $720,000 home</span></a> is perfectly fine and makes economic sense.<span style=""> </span>Finally we will examine the current market panic.<span style=""> </span>Bubbles burst in typical fashion (see <a href="http://drhousingbubble.blogspot.com/2007/04/manias-panics-and-crashes-2007-first.html">Manias, Panics, and Crashes</a>) and this credit bubble will pop in the same way.<span style=""> </span>We can pull the Band-Aid off fast or continue the absurd policies and allow for more guerilla mortgage products to enter the market.</p> <p class="MsoNormal"><i style="">Prices set at the margins<o:p></o:p></i></p> <p class="MsoNormal">At any given point in time there is only a small fraction of homes on the market for sale.<span style=""> </span>Drive down any street of the 88 cities in Los Angeles and you will see homes for sale, but not many.<span style=""> </span>Unless you are driving in some home builder subdivision in Arizona or a condo high-rise in Florida, the majority of this country isn’t selling each and every single home on the block.<span style=""> </span>But the media now has this fear mongering idea that if the market corrects, every person is going to be bumming cigarettes under the San Gabriel River.<span style=""> </span>So instead of their verbal attacks on the public let us take a look at the actual numbers for Southern California:</p> <p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgsywMhJ8p83V61jTiBEORA0lvAnxbTu3XowWKIhxMZFx3Z5nRUvhLmUYsdPj5oMDhv5nhcwCYwFzc95n_tt3AKQp7v22IYXB8zcp11XTr1s3C3v9q-prqYBCkAYkoC5iF4tGcMw/s1600-h/SoCalHousingUnits.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgsywMhJ8p83V61jTiBEORA0lvAnxbTu3XowWKIhxMZFx3Z5nRUvhLmUYsdPj5oMDhv5nhcwCYwFzc95n_tt3AKQp7v22IYXB8zcp11XTr1s3C3v9q-prqYBCkAYkoC5iF4tGcMw/s400/SoCalHousingUnits.jpg" alt="" id="BLOGGER_PHOTO_ID_5105690357773524706" border="0" /></a></p> <p class="MsoNormal">*Data Source:<span style=""> </span>Census.gov</p> <p class="MsoNormal">There are approximately 6,000,000 housing units in Southern California.<span style=""> </span>Keep in mind this includes apartments, rentals, and owner occupied homes.<span style=""> </span>Now how many homes are for sale as of today in SoCal?<span style=""> </span>How about 139,689 or to make it more tangible, only 2.33 percent of all available housing units in the area.<span style=""> </span>Doesn’t seem like the entire neighborhood is going to hell in a hand basket as the media would like us to believe.<span style=""> </span>And keep in mind that we are seeing record foreclosures and inventory here in Southern California and as of today, we are still only seeing 2.33 percent of all available units on the market for sale.<span style=""> </span>See, not everyone bought into this housing bubble.<span style=""> </span>Some people decided to rent.<span style=""> </span>As I’ve pointed out the majority of households in <a href="http://drhousingbubble.blogspot.com/2007/08/dissecting-county-of-10000000-people.html"><span style="color: rgb(0, 112, 192);">Los Angeles County</span></a> rent.<span style=""> </span>Some people decided that they would rather save their money and wait the market out. Some are simply going to rent because they unfortunately cannot afford a home. This idea that everyone should own their home is dangerous and has also led us into this mortgage market debacle. If you are unable to buy a home without a shady zero down mortgage maybe you should wait until you can buy a home with more conventional financing.<span style=""> </span>Others, bought before this entire bubble game started.<span style=""> </span>So they are still sitting pretty on equity and have no plans of selling.<span style=""> </span>There are also approximately 20 percent of people in Los Angeles that own their homes outright; many of these people are retired or nearing retirement and have no vision of flipping their homes.<span style=""> </span>So the battle comes down to those that want to buy and those that want to sell right <span style="font-weight: bold;">now</span>.<span style=""> </span>It looks like more and more people are wanting to sell and less and less people want to buy (or at least buy at current market prices).<span style=""> </span>And why would you buy right now with prices decreasing each and every day?<span style=""> </span>In addition, the prospect of you flipping and turning a profit now is as likely as finding Michael Vick at a PETA fundraiser as an honorary member.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><i style="">Show me the Income!<o:p></o:p></i></p> <p class="MsoNormal">Again the media likes to believe that everyone is earning $300,000 so a $547,000 median home price isn’t so far fetched.<span style=""> </span>I’ve discussed this <span style="color: rgb(0, 112, 192);">affluent façade</span> in a previous article but let us take a quick look at income statistics for this country:</p> <p class="MsoNormal"><b>Household income (overall percent of US households over):</b></p> <p class="MsoNormal"><i><u>Income Percent of Households over:</u></i> </p> <p class="MsoNormal">$65,000 34.72%</p> <p class="MsoNormal">$80,000 25.6%</p> <p class="MsoNormal">$91,705 20.0%</p> <p class="MsoNormal"><b>$100,000 17.8% </b></p> <p class="MsoNormal">$118,200 10%</p> <p class="MsoNormal">$166,200 5%</p> <p class="MsoNormal">$200,000 2.67%</p> <p class="MsoNormal">$250,000 1.5%</p> <p class="MsoNormal">$1,600,000 0.12%</p> <p class="MsoNormal">So what does this tell us?<span style=""> </span>In order for a family to comfortably afford a median priced home in Los Angeles County they would need to make $200,000.<span style=""> </span>As you can see from the above data, only 2.67% of all households make this much.<span style=""> </span>And I doubt any family making $200,000 will want to buy a <span style="color: rgb(0, 112, 192);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius</a> </span>as they would probably prefer to rent in a better neighborhood and invest the massive difference they are saving from buying a home.<span style=""> </span>Are there tax benefits to owning?<span style=""> </span>Of course.<span style=""> </span>Many housing pundits want to use some voodoo economics to make you think spending $1 so you can get two quarters back is smart math.<span style=""> </span>If you really need a tax break buy a rental property in a non-bubble city; you’ll get cash-flow, the benefit of owning real estate, and the feeling of owning a home if that is something that you desperately need.<span style=""> </span>With all this talk, isn’t it fascinating that the media doesn’t state the obvious?<span style=""> </span>That homes are massively overpriced!<span style=""> </span>Incomes cannot support current prices without using mythical fantasy world exotic mortgages that seem to be a thing of yesteryear.<span style=""> </span>2/28 mortgages, option ARMS, negative amortization, stated (liar) income loans, and all variations of these dubious mortgages will come under the congressional microscope in months to come, just watch.<span style=""> </span></p> <p class="MsoNormal"><i style="">Smoking the Housing Bubble Peace Pipe<o:p></o:p></i></p> <p class="MsoNormal">We’ve been living in a housing obsessed society.<span style=""> </span>In fact, I’ll be happy in a few years where you will be able to go to a party and not have to listen to some wannabe Trump talk about his recent flip in the Valley and how he pocketed $50,000.<span style=""> </span>The hardest part listening to this hogwash is knowing that they are part of this speculation bust that we are now seeing; deep down anyone that has a basic idea of finance and economics knew that this couldn’t go on forever. And here it stops in Q3 of 2007. In fact, I haven’t heard much of this talk in the last year.<span style=""> </span>Yet in this housing bubble decade we have seen the media eat up the housing game and carry the party line.<span style=""> </span>Take a look at some of the shows that have made the air in recent years:</p> <p class="MsoNormal">Property Ladder</p> <p class="MsoNormal">Discovery Home's "Flip That House" </p> <p class="MsoNormal">A&E's "Flip This House,"<br /></p><p class="MsoNormal">HGTV's "Bought and Sold," </p> <p class="MsoNormal">Bravo's "Flipping Out" </p> <p class="MsoNormal">TLC's "Real Estate Pros." </p> <p class="MsoNormal">The Apprentice</p> <p class="MsoNormal">And the list goes on.<span style=""> </span>Everyone suddenly had housing religion.<span style=""> </span>But the good thing about bubbles is after the pop, slowly the talk dissipates.<span style=""> </span>Remember the technology bubble?<span style=""> </span>For years this was all the talk and anything with a dot com was worth putting your entire retirement funds into.<span style=""> </span>How much talk have we had about these once high flying companies after 2001?<span style=""> </span>Not much.<span style=""> </span>I think by 2009 we’ll be more concerned about cleaning up the mess of 2 back-to-back bubbles, that is if we don’t see another bubble after this one. And yes, housing is very different from stocks. But what do you think funded this game? Mortgage backed securities. Where did these MBS trade? Hopefully you realize that not everything is linear but following the interconnectedness of this credit bubble you can understand why we are truly in an epic once in a lifetime housing bubble. <span style=""> </span></p> <p class="MsoNormal">Do you think politicians and the media are handling this housing bubble burst correctly?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com32tag:blogger.com,1999:blog-35190061.post-64242581340839282492007-08-31T15:00:00.001-07:002007-09-05T14:17:26.657-07:00Real Homes of Genius: Today we Salute you Cerritos. All 88 Los Angeles County Cities Overpriced.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8DzST9xTboi1WFD5gRdCcNCJtoB03uO2t_LfjB23EfVlkMdEnZlafMAS0vMkq7EEiNKf5phhK9h5BpGrfORtVDN-o87DLxnjKSFOs-nHGPkP6khUgPJDbyUaWB0NwWye_JMXb7Q/s1600-h/cerritos.png"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8DzST9xTboi1WFD5gRdCcNCJtoB03uO2t_LfjB23EfVlkMdEnZlafMAS0vMkq7EEiNKf5phhK9h5BpGrfORtVDN-o87DLxnjKSFOs-nHGPkP6khUgPJDbyUaWB0NwWye_JMXb7Q/s400/cerritos.png" alt="" id="BLOGGER_PHOTO_ID_5104988100555857618" border="0" /></a><br /><div class="KonaBody"><b style=""><o:p></o:p></b>What an interesting week.<span style=""> </span>As <st1:city st="on"><st1:place st="on">Rome</st1:place></st1:city> 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.<span style=""> </span>Forget that the Bush Administration is offering a bailout plan even after he said they would do nothing last week.<span style=""> </span>Pay no attention to the Fed with their implied wink-wink posturing that they will lower rates.<span style=""> </span>So what.<span style=""> </span>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.<span style=""> </span>Would you like to buy a beat up Ford Pinto for $30,000 simply because the interest rate is 0 percent?<span style=""> </span>Apparently this is happening with all these <span style="color: rgb(51, 102, 255);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius</a> </span>we are seeing.<span style=""> </span>You may think that we are grabbing at low hanging fruit.<span style=""> </span>But these homes are priced from $300,000 to $500,000+ in lower to middle income areas.<span style=""> </span>Last time I checked, $500,000 was no low hanging fruit.<span style=""> </span>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.<span style=""> </span>And to show you this, we are going to include higher priced homes in <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place> to drive home the point that in EACH of the 88 cities in our county, prices do not make any economic sense.<span style=""> </span>Today we will shine our flashlight on <st1:city st="on"><st1:place st="on">Cerritos</st1:place></st1:city>.<span style=""> </span>A middle to upper-middle class area in <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>It is with great honor that we salute you <st1:place st="on"><st1:city st="on">Cerritos</st1:city></st1:place>, with today’s <span style="color: rgb(51, 102, 255);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius</a>.<span style=""> </span><o:p></o:p></span> <p class="MsoNormal"><span style="color: rgb(51, 102, 255);"><o:p> </o:p></span></p> <p class="MsoNormal">Today’s home is what one would expect as a starter home for a professional family in <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>A safe area, good schools, and a place one would probably like to raise a family.<span style=""> </span>This home is over 2,000+ square feet, has 4 bedrooms and 3 bathrooms.<span style=""> </span>Nothing spectacular.<span style=""> </span>So what was this home initially listed for?<span style=""> </span>Well someone actually thought that we were still in 2006 and listed this place for $778,000.<span style=""> </span>Apparently there are no takers at this price.<span style=""> </span>Let us take a look at the pricing action on this home:</p> <p class="MsoNormal"><span style="color: rgb(51, 102, 255);"><o:p> </o:p></span></p> <p class="MsoNormal"><b><span style="color:green;">Price Reduced:</span> 08/02/07 -- $778,000 to $759,000</b><br /><b><span style="color:green;">Price Reduced:</span> 08/17/07 -- $759,000 to $739,900<o:p></o:p></b></p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><span style="">Clearly not many people were biting at $778,000, or looking at it from another perspective, $200,000 away from $1 freaking million dollars!<span style=""> </span>This is a four bedroom home in a middle to upper-middle class neighborhood.<span style=""> </span>This isn’t Atherton or <st1:city st="on"><st1:place st="on">Beverly Hills</st1:place></st1:city>.<span style=""> </span>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:<o:p></o:p></span></p> <p class="MsoNormal"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal"><st1:city st="on"><st1:place st="on">Sale</st1:place></st1:city> History </p> <p class="MsoNormal">10/04/2002: $430,000 </p> <p class="MsoNormal">12/24/1998: $275,000<span style=""><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><span style="">So even at the current sales price, these sellers are looking to come away with a $300,000 profit in 5 years.<span style=""> </span>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? <!--[if !supportLineBreakNewLine]--> <!--[endif]--><o:p></o:p></span></p> <table class="MsoNormalTable" style="width: 276.4pt; margin-left: 5.4pt; border-collapse: collapse;" border="0" cellpadding="0" cellspacing="0" width="369"> <tbody><tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" ><o:p> </o:p></span></p> <br /></td> <td style="padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal"><b><span style=";font-family:Arial;font-size:10;" >5 Percent Increase<o:p></o:p></span></b></p> </td> <td style="padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><b><span style=";font-family:Arial;font-size:10;" >Current Sales<o:p></o:p></span></b></p> </td> <td style="padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><b><span style=";font-family:Arial;font-size:10;" >Difference<o:p></o:p></span></b></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >1998<o:p></o:p></span></p> </td> <td style="border: 1pt solid windowtext; padding: 0in 5.4pt; background: rgb(255, 204, 153) none repeat scroll 0% 50%; width: 96.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$275,000.00<o:p></o:p></span></p> </td> <td style="border-style: solid solid solid none; padding: 0in 5.4pt; background: rgb(255, 204, 153) none repeat scroll 0% 50%; width: 71.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$275,000.00<o:p></o:p></span></p> </td> <td style="border-style: solid solid solid none; padding: 0in 5.4pt; background: rgb(255, 204, 153) none repeat scroll 0% 50%; width: 59.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" >base year<o:p></o:p></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >1999<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$288,750.00<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2000<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$303,187.50<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2001<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$318,346.88<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2002<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; background: rgb(255, 255, 153) none repeat scroll 0% 50%; width: 96.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$334,264.22<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; background: rgb(255, 255, 153) none repeat scroll 0% 50%; width: 71.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$430,000.00<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; background: rgb(255, 255, 153) none repeat scroll 0% 50%; width: 59.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$95,736.00<o:p></o:p></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2003<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$350,977.43<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2004<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$368,526.30<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2005<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$386,952.62<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2006<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; width: 96.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$406,300.25<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 71.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; width: 59.8pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:10;" > <o:p></o:p></span></p> <br /></td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0in 5.4pt; width: 48pt; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="64"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >2007<o:p></o:p></span></p> </td> <td style="border-style: none solid solid; padding: 0in 5.4pt; background: rgb(204, 255, 255) none repeat scroll 0% 50%; width: 96.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="129"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$426,615.26<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; background: rgb(204, 255, 255) none repeat scroll 0% 50%; width: 71.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="96"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$739,000.00<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0in 5.4pt; background: rgb(204, 255, 255) none repeat scroll 0% 50%; width: 59.8pt; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial; height: 12.75pt;" nowrap="nowrap" valign="bottom" width="80"> <p class="MsoNormal" style="text-align: right;" align="right"><span style=";font-family:Arial;font-size:10;" >$312,385.00<o:p></o:p></span></p> </td> </tr> </tbody></table> <p class="MsoNormal"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal"><span style="">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.<span style=""> </span>If we continue with the trend, once we reach our current date of TODAY, we are now off by $312,385.<span style=""> </span>Almost double what the inflation adjusted price should be.<span style=""> </span>So this is back of the napkin math Dr. Housing Bubble; I’m sure people in <st1:city st="on"><st1:place st="on">Cerritos</st1:place></st1:city> make $300,000 per year to justify these prices.<span style=""> </span>Well let us take a look at the current average annual household income: <span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal"><span style=""><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal">Average household income:<span style="font-weight: bold;"> </span><span style="font-weight: bold;">$89,391</span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Not bad.<span style=""> </span>A lot better then the $50,000 average we find for other <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(51, 102, 255);">Real Homes of Genius</span></a> areas.<span style=""> </span>But let us run a hypothetical scenario of a current family making the average income buying this home:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Monthly Net Income After Taxes:<span style=""> </span>$5,603 (Filing as married with 2 exemptions)</p> <p class="MsoNormal">PITI:<span style=""> </span>$5,193 (10 percent down and current jumbo rates)</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">So this family is left with <span style="font-weight: bold;">$410</span> disposable income each month.<span style=""> </span>Bwahaha!<span style=""> </span>Absurd.<span style=""> </span>It is such a joke that these financial institutions, politicians, and other renegade zealots of housing are trying to keep this game going.<span style=""> </span>Tax breaks for short-sales.<span style=""> </span>Subprime support.<span style=""> </span>GSEs being able to refinance mortgages into current FHA products.<span style=""> </span>Are you kidding me? This may help people with subprime loans in areas where home prices are $250,000 or less.<span style=""> </span>People can’t afford homes at current prices in <st1:city st="on"><st1:place st="on">Los Angeles</st1:place></st1:city> without voodoo mortgages.<span style=""> </span>The only way this game will keep going is if the subprime market opens up again.<span style=""> </span>Now who is going to finance these high-wire mortgages?<span style=""> </span>Doesn’t seem like Wall Street wants anymore.<span style=""> </span>The government can only do so much with FHA loans and besides; the Fed has already stated they won’t lift caps.<span style=""> </span>So that pretty much puts a plug on <st1:state st="on"><st1:place st="on">California</st1:place></st1:state> since the entire region is jumbo-exotic-mortgage territory.<span style=""> </span>Notice how politicians aren’t talking about bailing out people in <st1:state st="on">Florida</st1:state> or <st1:state st="on"><st1:place st="on">California</st1:place></st1:state> specifically?<span style=""> </span>They are casting a wide enough net and when you dig into the details, the train is still coming.<span style=""> </span>All these bandaids are simply that, a patch on a bigger problem.<span style=""> </span><br /><br />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.<span style=""> </span>I’m keeping my eye on short-sales and foreclosures and each week, the numbers are consistently going up.<span style=""> </span>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.<span style=""> </span>Housing is going to stay in a bear market for years in <st1:state st="on"><st1:place st="on">California</st1:place></st1:state>.<span style=""> </span>Why?<span style=""> </span>Because like Bob Barker would say, the price isn’t right.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Today we salute you <st1:place st="on"><st1:city st="on">Cerritos</st1:city></st1:place> with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(51, 102, 255);">Real Home of Genius Award</span></a>. <span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com32tag:blogger.com,1999:blog-35190061.post-63255068798200073882007-08-30T07:00:00.000-07:002007-08-30T07:29:52.194-07:00Pride and Prejudice: Examining the Psychology of Those in the Housing Industry.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDvqXvrC_1WJfah7EWDc0X6MiQLwHLQ5mP5R1NmX5ZYDC_gUdZ3U1MKpHTMvBgbVwo4FRrvNdfBWpswz4ZMviLX_ghH90f9YeRvkFgVBmfpgLHyd780_-5iFFUkDwZd91EziJDKg/s1600-h/pp.jpeg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDvqXvrC_1WJfah7EWDc0X6MiQLwHLQ5mP5R1NmX5ZYDC_gUdZ3U1MKpHTMvBgbVwo4FRrvNdfBWpswz4ZMviLX_ghH90f9YeRvkFgVBmfpgLHyd780_-5iFFUkDwZd91EziJDKg/s400/pp.jpeg" alt="" id="BLOGGER_PHOTO_ID_5104197328357187266" border="0" /></a><br /><div class="KonaBody"><i style="">“It is difficult to get a man to understand something when his job depends on not understanding it.”<span style=""> </span><o:p></o:p></i> <p class="MsoNormal" style="text-indent: 0.5in;">-Upton Sinclair</p> <p class="MsoNormal">It is hard to be objective when your job depends on seeing things a certain way.<span style=""> </span>Many people have a hard time accepting mistakes and would rather lament and lash out at others that contradict their view of the world.<span style=""> </span>I remember posting in a housing forum 2 years ago the same analysis I’ve presented many times here on the blog.<span style=""> </span>Those in the housing industry would dismiss the bubble argument as holding no merit and would simply pull out a nice upward trending chart, and point to the current median price.<span style=""> </span>They were right.<span style=""> </span>All the numbers pointed to incredible appreciation, quick sales, and no signs of stopping.<span style=""> </span>My view was income in many areas simply did not support the current growth of the market.<span style=""> </span>The only way the market was being supported was via exotic financing and bubble psychology.<span style=""> </span>In a bubble market, psychology and perception is just as important as economic fundamentals.<span style=""> </span>So people in the housing industry didn’t have to say much.<span style=""> </span>Here are a few quotes from the former head of the National Association of Realtors during this time:</p> <p class="MsoNormal" style="line-height: normal;"><b><i><span style="">March 2005</span></i></b><i><span style="">: " I believe that in years to come historians will see the beginning of the twenty-first century as the "golden age" of real estate. And I want to persuade you to take advantage of this historic opportunity. " </span></i><span style=""><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><i><span style="">Source: Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments will Climb Through the End of the Decade-And How To Profit From Them" March 2005, p4. Author David Lereah</span></i><span style=""><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><b><i><span style="">September 2006:</span></i></b><i><span style=""> "With a general background of growing population and favorable affordability conditions, home sales are staying at very healthy levels," said Lereah. "As a result, we'll continue to see above-normal home price appreciation for the foreseeable future."</span></i><span style=""><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><b><i><span style="">Source: <a href="http://www.salon.com/tech/htww/2006/09/19/lereah_watch/index.html">Chicken Little's revenge, Salon</a> </span></i></b><span style=""><o:p></o:p></span></p> <p class="MsoNormal">I talked about the psychology of a housing bull in a <a href="http://drhousingbubble.blogspot.com/2007/08/greater-expectations-quotes-and.html"><span style="color: rgb(79, 129, 189);">previous article</span></a>.<span style=""> </span>The above quotes demonstrate a common view of many in the industry.<span style=""> </span>One of these beliefs is housing will always go up.<span style=""> </span>This is not true as we are seeing year over year drops in many locations.<span style=""> </span>In some cases, these drops are large bringing down the price of a home by tens of thousands of dollars [see <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(79, 129, 189);">Real Homes of Genius</span></a>].<span style=""> </span>In addition, as I pointed out in the Los Angeles County <a href="http://drhousingbubble.blogspot.com/2007/08/dissecting-county-of-10000000-people.html"><span style="color: rgb(79, 129, 189);">demographics article</span></a>, population hasn’t exploded to the extent to justify 20+ percent gains for three consecutive years.<span style=""> </span>Again, the chart is still used by many in the industry and they are right since last month Los Angeles hit another record median price in housing prices here in Los Angeles.<span style=""> </span>But they are driving forward looking in their rearview mirror.<br /><br />Now that the market is demanding economic fundamentals, the man behind the curtain isn’t so strong as we once thought.<span style=""> </span>The unstoppable real estate juggernaut turns out to have an Achilles heel.<span style=""> </span>Those subprime loans were actually a lot more shaky and weak than many had predicted.<span style=""> </span>And this bubble bursting isn’t contained to only the lower nether realm of mortgages, it is also impacting the untouchable prime loans.<span style=""> </span>Since late 2006 over 142 mortgage operations have closed shop.<span style=""> </span>The year over year price appreciation predictions by housing bulls in late 2006 is no longer used as an argument.<span style=""> </span>And this time when they hold up the chart you can see uncertainty in their eyes.<span style=""> </span>After all, what does a mortgage broker care if the median is high if he is no longer in business?<span style=""> </span>Or why would an agent be happy with a $700,000 home if he doesn’t have any clients to drive around?<span style=""> </span><br /><br />The argument has psychologically shifted.<span style=""> </span>There is no need to talk in obscure forums regarding the housing bubble.<span style=""> </span>The mainstream media is now carrying the baton.<span style=""> </span>Now the argument of many in the industry is one in which they are blaming all the negative press for popping the bubble.<span style=""> </span>“Income is rising, population growth is occurring, and housing is still strong.”<span style=""> </span>Or so they would like you to believe.<span style=""> </span>Tell that to the tens of thousands of former mortgage workers.<span style=""> </span>And this argument seems more of a self pacifying defense mechanism of convincing themselves that somehow the market will be back to its old tricks again.<span style=""> </span>Deep down they pine for yesteryear when you could get Funky your mangy dog a $450,000 mortgage and move him into a 500 square foot home with no co-signer.<span style=""> </span></p> <p class="MsoNormal">Common sense isn’t so common as the adage goes.<span style=""> </span>Why is this?<span style=""> </span>We all know exercising and eating healthy is paramount in your long-term well-being but why do so few Americans do it?<span style=""> </span>In fact, according to the American Obesity Association 127 million adults in the US are overweight with 60 million categorized as obese.<span style=""> </span>Maybe it isn’t so easy.<span style=""> </span>After all, exercising and eating healthy requires commitment, a desire to better your body, and a belief that keeping yourself in peak shape will benefit you throughout your life.<span style=""> </span>Yet we live in an instant gratification world.<span style=""> </span>Depending on your current condition, it may take you six months to get into good shape but only after working out multiple times a week and eating a healthy diet.<span style=""> </span>When we see infomercials we always here “lose weight NOW!” or “lose 30 pounds in 3 weeks!”<span style=""> </span>The psychology here is that people want solutions quick and fast for something that needs to be looked at as a long-term lifestyle commitment.<span style=""> </span></p> <p class="MsoNormal">Okay Dr. Housing Bubble, what does being overweight have to do with housing?<span style=""> </span>Aside from believing that staying in physical shape should be a top priority for everyone, the psychology behind the numbers speaks to the get rich quick mentality of the last seven years in real estate.<span style=""> </span>Real estate is a great long-term investment.<span style=""> </span>In fact, owning rental properties is part of my balanced portfolio.<span style=""> </span>But you buy it at prices that make sense.<span style=""> </span>Otherwise, it is like the expensive treadmill that so many people buy and later becomes a towel hanger with cobwebs.<span style=""> </span>If you are smart, you’d just pick up the weekly classifieds and buy one at a deep discount from someone who overpaid from the start.<span style=""> </span>There are a few ways to get rich quick:<span style=""> </span>Hit the Lottery, inherit some money from a rich family member, invent something unique and sell it, or steal it.<span style=""> </span>Other forms of getting rich take time like slowly building your business, going into a profession that’ll pay off long-term, and investing wisely.<span style=""> </span>Even though some of the data is old, I recommend people read the <i style="">Millionaire Next Door. </i>It’ll give you a good idea of the difference between being wealthy and making a lot of money.<span style=""> </span>Unfortunately, I know some brokers who made money hand over fist during the good times and now, are struggling to pay their lease on their brand new Mercedes.<span style=""> </span>I detailed how a <a href="http://drhousingbubble.blogspot.com/2007/07/foreclosure-story-how-does-process-look.html"><span style="color: rgb(79, 129, 189);">high earning couple</span></a> with no financial plan can go from rich to struggling in one year.</p> <p class="MsoNormal">We have all faced circumstances in life where our pride is at hand.<span style=""> </span>It is hard to let go of something you fully believe in, even if you may be wrong.<span style=""> </span>You may be wondering where any economic analysis or data is in this article.<span style=""> </span>There isn’t any.<span style=""> </span>Bubbles don’t follow economical rules.<span style=""> </span>They rely just as strongly on market perception and psychology.<span style=""> </span>By the time people get out of the euphoria and start examining the market with a critical eye economic fundamentals are no where to be found.<span style=""> </span>You may want to read the article on <span style="color: rgb(79, 129, 189);"><a href="http://drhousingbubble.blogspot.com/2007/04/manias-panics-and-crashes-2007-first.html">Manias, Panics, and Crashes</a>.<span style=""> </span></span>Bubbles expand because of greed and pop because of fear.<span style=""> </span>Too much greed and fear is never good in a society.<span style=""> </span>Even after the Crash in October 1929, people in early 1930 still thought the market would rebound.<span style=""> </span>But the market slowly went downward hitting a bottom on July 8, 1932.<span style=""> </span>A plunge of 90 percent from its peak high in September 1929.<span style=""> </span>It took the market 25 years before the Dow Jones ever saw the peak of September 1929. <span style=""> </span>I’m not sure we’ve even seen the major capitulation point yet.<span style=""> </span>Was it the subprime collapse?<span style=""> </span>The hedge fund issues?<span style=""> </span>Liquidity problems?<span style=""> </span>We won’t be able to have an exact apex until 2 or 3 years out as to the exact moment the market gave way.<span style=""> </span>And bottoms take a few years to play out after a bubble collapses.<span style=""> </span>If you don’t think we are in a bubble you can read the article over at TIME Magazine with the title, <i style=""><a href="http://www.time.com/time/magazine/article/0,9171,1655723,00.html">Your House is Worth Less? Good</a> . </i>They are finally acknowledging that what we’ve lived through is a bubble. <span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Many in the industry that still do not get it, are wanting the Fed or some other form of government intervention.<span style=""> </span>During the boom times, they wanted the government to be hands off and not enforce even the smallest regulations.<span style=""> </span>Yet now with times shifting they want the Fed to jump in with an orange rescue jacket.<span style=""> </span>This is what we call cognitive dissonance.<span style=""> </span>According to <a href="http://en.wikipedia.org/wiki/Cognitive_dissonance">Wikipedia</a>:</p> <p class="MsoNormal">“Cognitive dissonance is a psychological term describing the uncomfortable tension that may result from having two conflicting thoughts at the same time, or from engaging in behavior that conflicts with one's beliefs, or from experiencing apparently conflicting phenomena.”</p> <p class="MsoNormal">I know how most of you feel about a bailout and I’m glad we share the same sentiments.<span style=""> </span>If there isn’t a bailout for those losing their home there shouldn’t be one for lenders who irresponsibly gave money to everyone and anyone.<span style=""> </span>Senator Dodd’s proposal is absurd regarding lifting caps on mortgages.<span style=""> </span>The last thing we need to do is prolong the bursting of the bubble and waste more taxpayers money.<span style=""> </span>Politicians seem to be throwing out ideas and seeing what sticks.<span style=""> </span>Some city politician wanted to give $10,000 to each family facing foreclosure here in California.<span style=""> </span>Which would only help for a few months and then what?<span style=""> </span>I haven’t heard any idea that I liked until this morning when presidential candidate Barack Obama unveiled his bailout plan:</p> <p><i style="">“Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate.<o:p></o:p></i></p> <p><i style=""><a href="http://www.ft.com/cms/s/0/9fd5e4de-558e-11dc-b971-0000779fd2ac.html">The proposal</a> is among the most radical yet from a leading Democrat and comes as Washington tries to respond to a growing wave of foreclosures and a crisis in credit markets.”<span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p><span style=""><span style="font-family:georgia;">I’ve thrown around this idea in the comment section of this blog and other forums. I was wondering when someone in the public eye would have the guts to put something on the table like this. Whatever you may think, this is the way to approach this issue. Why should you, a financially prudent person that didn’t participate in this credit orgy be forced to subsidize someone’s speculation? And don’t feel sorry for those in the industry because the housing complex has sufficient money to throw at lobbyist in Washington to keep the party going. Instead of lobbying, they can start the foundation called Bail Out America (BOA), not to be confused with BofA, and open up their check books. If they really care about the family on the street, they will not feel so bad about bailing out the folks that got them rich in the first place. It’ll be an interesting 2008. </span><o:p></o:p></span></p> <p class="MsoNormal"><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><br /></p> </div><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com21tag:blogger.com,1999:blog-35190061.post-31356918888944017052007-08-28T06:00:00.000-07:002007-08-28T06:34:36.908-07:00Dissecting a County of 10,000,000 People: The Housing Demographics of Los Angeles.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsCB2aGiQPOVLLp92jL_hWsnjHqq8DHgjh2QA5Ru8c59ZyVXHBupHZtloNhniaMPmT9Nt3z8ku9N9u3dboujq3EiBe_8rbzWOoTStGkARbpbeeANmnWg1T_3gpFaU6DBKq60M6Qg/s1600-h/LA.png"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsCB2aGiQPOVLLp92jL_hWsnjHqq8DHgjh2QA5Ru8c59ZyVXHBupHZtloNhniaMPmT9Nt3z8ku9N9u3dboujq3EiBe_8rbzWOoTStGkARbpbeeANmnWg1T_3gpFaU6DBKq60M6Qg/s400/LA.png" alt="" id="BLOGGER_PHOTO_ID_5103498949494988466" border="0" /></a><br />As we reach a record 16 year high of inventory, the biggest supply since 1991 we are starting to realize that housing was fueled by easy credit.<span style=""> </span>If housing wasn’t fueled by easy credit and went up because of rising incomes and demand as many in the housing industry proclaimed, then why in a few short months has stopping subprime lending and Alt-A loans brought the entire market to a screeching halt?<span style=""> </span>It is becoming more apparent that lax lending standards and easy credit were the fuel that kept this fire burning even though the wood was turning into ash. We were running on fumes.<span style=""> </span>The only thing that would keep this boom going is less restrictive standards and I’m not sure how much lower we can go without our money turning multiple colors and becoming a real game of Monopoly.<span style=""> </span>Unbelievably those in the housing industry and politicians are calling for weaker standards.<span style=""> </span>Here is a list of some of their ideas: <div class="KonaBody"><p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal" style="margin-left: 48pt; text-indent: -0.25in;"><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><i style="">Increase mortgage caps from $417,000.</i><span style=""> </span>Since anything above this is considered jumbo many in the industry want these caps higher because areas such as <st1:state st="on"><st1:place st="on">California</st1:place></st1:state>, have inflated houses way above $417,000.</p> <p class="MsoNormal" style="margin-left: 48pt; text-indent: -0.25in;"><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><i style="">Dropping the Fed Funds rate.</i><span style=""> </span>The Fed has already dropped the discount rate.</p> <p class="MsoNormal" style="margin-left: 48pt; text-indent: -0.25in;"><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><i style="">Bail Out Funds.</i><span style=""> </span>A local official is looking to create a multi-million dollar bail out fund for families in foreclosure.<span style=""> </span>The preliminary information seeks to give struggling families $10,000 in assistance.<span style=""> </span>$10,000 will buy a family maybe 4 months at current <st1:place st="on"><st1:state st="on">California</st1:state></st1:place> prices.</p> <p class="MsoNormal" style="margin-left: 48pt; text-indent: -0.25in;"><span style="font-family:Symbol;"><span style="">·<span style=""> </span></span></span><i style="">Bring the Government Into the Subprime Arena:</i><span style=""> </span>This is one of the absurd propositions and a perfect example of corporate welfare.<span style=""> </span>Wall Street is no longer buying these risky loans.<span style=""> </span>Instead of learning the lesson that maybe there was some irrational exuberance in the credit markets many are now calling on the government to back these loans. </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">These “solutions” miss the boat completely because homes are simply not worth what people paid for them.<span style=""> </span>Plain and simple.<span style=""> </span>Incomes could not support market prices without the crutch of exotic banana republic loan products.<span style=""> </span>The loans almost by default encouraged flipping and a nomad culture of moving up into larger homes.<span style=""> </span>There is really no purpose for a 2/28 loan or many of the other mortgage products that flew into the market.<span style=""> </span>Many will argue otherwise that this is for the sophisticated investor.<span style=""> </span>Maybe.<span style=""> </span>But it wasn’t used this way.<span style=""> </span>See, the underlying message of a 30 year fixed conventional mortgage implies that you are looking to stay in your home for a few years.<span style=""> </span>If the market goes up, then you sell and move on.<span style=""> </span>You didn’t have a ticking time bomb forcing your next move with an invisible hand.<span style=""> </span>If the market went down and wallowed in the dumps for a few years, at least you knew your payment was fixed.<span style=""> </span>Now many are facing down the barrel of a locked and loaded mortgage ready to reset in the face of a depreciating market.<span style=""> </span>Whether they knew it or not, they’ve suddenly become speculators and are witnessing a margin call.<span style=""> </span>Either pay more cash to stay or sell.<span style=""> </span>And many of these loans had 3 year prepayment penalties.<span style=""> </span>Basically these products only made sense to those earning higher commissions and hungry investors chasing higher yields.<br /><br />With this as our back drop, I wanted to dig into the demographic facts of <st1:city st="on"><st1:place st="on">Los Angeles</st1:place></st1:city>.<span style=""> </span>I’ve already discussed that <a href="http://drhousingbubble.blogspot.com/2007/07/history-of-los-angeles-county-housing.html"><st1:city st="on"><st1:place st="on"><span style="color: rgb(51, 102, 255);">Los Angeles</span></st1:place></st1:city><span style="color: rgb(51, 102, 255);"> is a county with a renting majority</span></a>.<span style=""> </span>But I wanted to find out how much change has occurred over the last few years.<span style=""> </span>I’ve reviewed four years of data from the Census data sets regarding housing and economic data pertaining to <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>Has population boomed?<span style=""> </span>What is the overall cost between renting and owning?<span style=""> </span>Did people really go haywire with <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color: rgb(51, 102, 255);">mortgage equity withdrawals</span></a>?<span style=""> </span>These are a few of the questions we will seek to answer.<br /><br /><st1:place st="on"><st1:placename st="on"><i style="">Los Angeles</i></st1:placename><i style=""> <st1:placetype st="on">County</st1:placetype></i></st1:place><i style=""> Population and Income</i><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shapetype id="_x0000_t75" coordsize="21600,21600" spt="75" preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"> <v:f eqn="sum @0 1 0"> <v:f eqn="sum 0 0 @1"> <v:f eqn="prod @2 1 2"> <v:f eqn="prod @3 21600 pixelWidth"> <v:f eqn="prod @3 21600 pixelHeight"> <v:f eqn="sum @0 0 1"> <v:f eqn="prod @6 1 2"> <v:f eqn="prod @7 21600 pixelWidth"> <v:f eqn="sum @8 21600 0"> <v:f eqn="prod @7 21600 pixelHeight"> <v:f eqn="sum @10 21600 0"> </v:f> <v:path extrusionok="f" gradientshapeok="t" connecttype="rect"> <o:lock ext="edit" aspectratio="t"> </o:lock><v:shape id="_x0000_i1025" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image001.png" title="LA_pop_2002-2005"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhrUWQBR_7qXysWNCdcR9hOIi5laKIgyljYQV0IlmlpwX2dUCqUi-NkOC9ht1CdAok8sWoTXTPx9VWjLC81zVds8gdtwcpGAwVgifrhW8aPiOiqLPls46kzCISOFgs5F3H1-uciQ/s1600-h/LA_pop_2002-2005.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhrUWQBR_7qXysWNCdcR9hOIi5laKIgyljYQV0IlmlpwX2dUCqUi-NkOC9ht1CdAok8sWoTXTPx9VWjLC81zVds8gdtwcpGAwVgifrhW8aPiOiqLPls46kzCISOFgs5F3H1-uciQ/s400/LA_pop_2002-2005.png" alt="" id="BLOGGER_PHOTO_ID_5103488615803674194" border="0" /></a></v:shape></v:path></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:formulas></v:stroke></v:shapetype></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Argument #1 – Housing has boomed because of population growth. </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">First, as you can see from the above chart the population of <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place> hasn’t exploded into another dimension.<span style=""> </span>In fact, it dropped in 2005.<span style=""> </span>The data set doesn't include 2006 and 2007 numbers but we can estimate numbers have stayed relatively the same.<span style=""> </span>Even if they have gone up, there are studies showing a net migration out of middle-class families from the state.<span style=""> </span>The numbers balance out because lower-waged workers filled the gap.<span style=""> </span>But are these the people pushing up the market prices?<span style=""> </span>Let us take a look at the median family income for the same data set:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shape id="_x0000_i1026" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image003.png" title="medianfamilyincome-2002-2005"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCWdYPpjZfq2h0tJE9n6x7I0uQW8QuowivNHgnUx42hCIV_9tPKUzR1ebBnudAmsSc-gySq1WKQPiFGEVQMUvW8d52hegbPZ0ha6w0b304DtQgWacXek1GCL3errk4c5J5khsBvQ/s1600-h/medianfamilyincome-2002-2005.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCWdYPpjZfq2h0tJE9n6x7I0uQW8QuowivNHgnUx42hCIV_9tPKUzR1ebBnudAmsSc-gySq1WKQPiFGEVQMUvW8d52hegbPZ0ha6w0b304DtQgWacXek1GCL3errk4c5J5khsBvQ/s400/medianfamilyincome-2002-2005.png" alt="" id="BLOGGER_PHOTO_ID_5103488796192300642" border="0" /></a><span style=""> </span></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Argument #2 – Income growth is in direct proportion to housing appreciation.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Clearly income growth is not the reason for housing growth.<span style=""> </span>Even with the big jump in 2005, the median family income only increased by 5.5 percent.<span style=""> </span>The previous three years saw stagnant wage growth.<span style=""> </span>However, during this same time period we find the following data for housing prices in <st1:place st="on">Southern California</st1:place>:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Median LA County Home Price:<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">2002: <span style=""> </span>$266,000<span style=""> </span>(July 2002)<span style=""> </span>YoY Increase:<span style=""> </span>15.1 percent</p> <p class="MsoNormal">2003:<span style=""> </span>$328,000<span style=""> </span><span style=""> </span>(July 2003)<span style=""> </span>YoY Increase:<span style=""> </span>23.3 percent</p> <p class="MsoNormal">2004:<span style=""> </span>$406,000<span style=""> </span>(July 2004)<span style=""> </span>YoY Increase:<span style=""> </span>23.8 percent</p> <p class="MsoNormal">2005:<span style=""> </span>$488,000<span style=""> </span>(July 2005)<span style=""> </span>YoY Increase:<span style=""> </span>20.2 percent</p> <p class="MsoNormal">2006:<span style=""> </span>$520,000<span style=""> </span>(July 2006)<span style=""> </span>YoY Increase:<span style=""> </span>6.6 percent</p> <p class="MsoNormal">2007:<span style=""> </span>$547,500<span style=""> </span>(July 2007)<span style=""> </span>YoY Increase:<span style=""> </span>5.3 percent</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Doesn’t exactly coincide with the data we are finding does it?<span style=""> </span>In fact, we had three years of consecutive 20+ percent annual price gains!<span style=""> </span>The annual housing price gains amounted to more than the annual family median income in the county for 3 years.<span style=""> </span>Why work when you can live in your home and make more money than your job?</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Looking at Owners vs. Renters<span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><v:shape id="_x0000_i1027" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5COCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image005.png" title="owner-vs-renter"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDbDaF8oxcD83rD62kqVmgft9oN7bWwy0JcJTG6xpHEV-ibR-VAq97YmO1LK7xg_BmDeEMRgTmlJJi6JkOeKXGyxKaEcV8MrKgTPj4E4Poq3M0CPtWhplMvW9O0dw1Gwbk8iH3cw/s1600-h/owner-vs-renter.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDbDaF8oxcD83rD62kqVmgft9oN7bWwy0JcJTG6xpHEV-ibR-VAq97YmO1LK7xg_BmDeEMRgTmlJJi6JkOeKXGyxKaEcV8MrKgTPj4E4Poq3M0CPtWhplMvW9O0dw1Gwbk8iH3cw/s400/owner-vs-renter.png" alt="" id="BLOGGER_PHOTO_ID_5103489719610269298" border="0" /></a></v:shape></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Argument #3 – 70 percent of people own their homes in the <st1:country-region st="on"><st1:place st="on">United States</st1:place></st1:country-region>.</p> <p class="MsoNormal"><br />The caveat to the above argument is that this statistic doesn’t apply to <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>10,000,000 people live in a micro world that bucks the trend of the nation. <span style=""> </span>As you can see from the above data, not once in the four years from 2002-2005 did owner occupied units ever take over renter occupied units.<span style=""> </span>Even at the peak of buying in 2004 with every imaginable toxic loan flying around like the monkeys in the Wizard of Oz, renters still held a majority over owners.<span style=""> </span>People also argued that a large number of those that owned had absolutely no mortgage.<span style=""> </span>Let us take a look at the data:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shape id="_x0000_i1028" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image007.png" title="la-mortgage-no-mortgage"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBBG5MWuH24UL8bSpQ_EDmVB5ERwBNDoJc95pr7WMs3O2KK_PsucCK70si40Doy4GWIKo7ZIgXFCbQVq6E7NvdQZK78Q0XXc4emO2GzVYI1YbuiHNXPOaaVBEUq2jh9dS-DnofIQ/s1600-h/la-mortgage-no-mortgage.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBBG5MWuH24UL8bSpQ_EDmVB5ERwBNDoJc95pr7WMs3O2KK_PsucCK70si40Doy4GWIKo7ZIgXFCbQVq6E7NvdQZK78Q0XXc4emO2GzVYI1YbuiHNXPOaaVBEUq2jh9dS-DnofIQ/s400/la-mortgage-no-mortgage.png" alt="" id="BLOGGER_PHOTO_ID_5103489874229091970" border="0" /></a><span style=""> </span></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><span style=""> </span>Argument #4 – Many people own their home with no mortgage.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Clearly those without a mortgage are a very small subset of the market.<span style=""> </span>In fact 4 out 5 owner occupied homes do carry a mortgage in <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>And the interesting thing to note above is the nice jump of non-mortgaged homes to mortgaged homes from 2003 to 2004.<span style=""> </span>Clearly this had something to do with the <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color: rgb(51, 102, 255);">mortgage equity withdrawal</span></a> mania.<span style=""> </span>So the housing industry would like you to believe that many people own their home outright here in <st1:place st="on">Southern California</st1:place>.<span style=""> </span>They are wrong on two fronts.<span style=""> </span>First, as we clearly see from the data the majority of the 10,000,000 residents live in renting households.<span style=""> </span>Second, approximately 80 percent of people that own their home carry one or more mortgages.<span style=""> </span>What is the difference between owning and renting? </p><p class="MsoNormal"><v:shape id="_x0000_i1029" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1LOCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image009.png" title="owner-vs-renter-monthly-costs"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghknhsWvIYi3TCvdfhyphenhyphenLotEiUvuBt1jLFCxazgo490dsdkcGWEE5tqbNyAWjLH2mvhWlP4HFwlQ2Pqb4Yr5zeUKjuL6qzO_zTPlrlutE7GF2OdCQn5udM9BHLkB4h-gjdtq6boGA/s1600-h/owner-vs-renter-monthly-costs.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghknhsWvIYi3TCvdfhyphenhyphenLotEiUvuBt1jLFCxazgo490dsdkcGWEE5tqbNyAWjLH2mvhWlP4HFwlQ2Pqb4Yr5zeUKjuL6qzO_zTPlrlutE7GF2OdCQn5udM9BHLkB4h-gjdtq6boGA/s400/owner-vs-renter-monthly-costs.png" alt="" id="BLOGGER_PHOTO_ID_5103489990193208978" border="0" /></a><span style=""> </span></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Argument #5 – It is only slightly more expensive to own as opposed to renting.<br /><br />Again, for 2005 the monthly cost for a home owner was $1,919 while the median renter carried a monthly housing cost of $918.<span style=""> </span>Owning a home, as opposed to renting is 109 percent more expensive in <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>Of course owning a home is always going to be more expensive given maintenance cost, tax benefits, and the desire to own your proper place.<span style=""> </span>But something has seriously gotten out of whack here.<span style=""> </span>Keep in mind some in the housing industry would like to pinpoint data for <st1:city st="on">Beverly Hills</st1:city>, <st1:city st="on">Santa Monica</st1:city>, or other cities that clearly do not house the majority of the 10,000,000 residents of <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>.<span style=""> </span>Yet we have an overall median for the county of $547,500.<span style=""> </span><st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place> has 88 cities, all which are overpriced by any fundamental economic measures.<span style=""> </span>Not overpriced by 10 or 15 percent but we are looking at a bubble that has inflated prices by 50+ percent in many cities.<span style=""> </span>Let us revisit those home owners that own their home outright shall we?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shape id="_x0000_i1030" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image011.png" title="no-mortgage-data"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijJGv5Wiuc-IOpsXND2sc-Cw70lhhprEJKDW8Iowt6fTp24DjZerLgrhxJGBjFBWIYxrvh7pFMnAbviyvssYCQb9CZgulIRJybAETxe0Z7FeExw-HVXB4ISUTweL-5yEhNXwAhgQ/s1600-h/no-mortgage-data.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijJGv5Wiuc-IOpsXND2sc-Cw70lhhprEJKDW8Iowt6fTp24DjZerLgrhxJGBjFBWIYxrvh7pFMnAbviyvssYCQb9CZgulIRJybAETxe0Z7FeExw-HVXB4ISUTweL-5yEhNXwAhgQ/s400/no-mortgage-data.png" alt="" id="BLOGGER_PHOTO_ID_5103490106157325986" border="0" /></a></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><span style=""> </span></p> <p class="MsoNormal">Argument #6 – When you own your home outright, you no longer have to worry about any further payments.<br /><br />As you can see from above even the untouchables, those who have paid off their mortgages completely still have to pay something.<span style=""> </span>In fact, in 2005 with approximately a $400 median monthly payment, they are carrying half the amount of a median renter.<span style=""> </span>Given that this is a very tiny sliver of the market it is interesting to break some of the myths flying around <st1:city st="on"><st1:place st="on">Los Angeles</st1:place></st1:city>.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Conclusion<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">We’ve seen countless articles hitting the mainstream media regarding the mortgage debacle.<span style=""> </span>Yet the mainstream media paints in large strokes.<span style=""> </span>That is, it is hard for them to devote a 5 page in depth analysis on one specific market.<span style=""> </span>That is the implication behind broadcasting – you try to reach a broad audience.<span style=""> </span>However, when we examine the demographics under a magnifying class for <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place>, we realize that there is only one reason behind the current market prices and that is massive speculation in the form of a housing bubble.<span style=""> </span>Population, income, growth, and every other major fundamental factor does not offer an explanation for the current prices.<span style=""> </span>Take a minute and look at the below chart:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><v:shape id="_x0000_i1031" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1LOCALS%7E1%5CTemp%5Cmsohtml1%5C09%5Cclip_image013.png" title="LA-2000-2007medianprice"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqIkhoN93xq6JGI_WxahnMduvn9JppSjKjD_0SmNDKwpx20cglw4Sqsovk_sXJTzdw4hLzt6HaXXPXxdCSbgrceoPe96b-suvSipb79RSRJM9K0rZp-uUcZvNEiWhbSvvEQiveBQ/s1600-h/LA-2000-2007medianprice.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqIkhoN93xq6JGI_WxahnMduvn9JppSjKjD_0SmNDKwpx20cglw4Sqsovk_sXJTzdw4hLzt6HaXXPXxdCSbgrceoPe96b-suvSipb79RSRJM9K0rZp-uUcZvNEiWhbSvvEQiveBQ/s400/LA-2000-2007medianprice.png" alt="" id="BLOGGER_PHOTO_ID_5103488555674132034" border="0" /></a></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Do not make the mistake of seeing this as only an economic chart.<span style=""> </span>Behind this data, 7 years of dreams and hopes built on the back of real estate play out like a novel.<span style=""> </span>In this chart we see the birth of shows such as <i style="">Flip this House, Property Ladder, Flipping Out, Real Estate Pros, </i>and of course the <i style="">Apprentice</i> where 20 to 50 percent of the contestants made their small fortune in real estate depending on the season.<span style=""> </span>In the chart is also the story of new industries and high paying professions.<span style=""> </span>The number of California Real Estate Agents jumped in tandem with the above chart.<span style=""> </span>Mortgage brokers, construction, hedge funds, and all things real estate seemed invulnerable to any market woes.<span style=""> </span>This was an unstoppable train with an endless supply of steam.<span style=""> </span>As we sit at the apex, wondering how this decade long housing bull market will end, many have been conditioned to know only one thing about housing.<span style=""> </span>And that is real estate never goes down.<span style=""> </span>As this speculative game winds down, there is an eerie calm engulfing the market.<br /><br />Keep in mind the data we are digesting regarding sales and prices is still 1 to 2 months delayed since escrow filings and closing data lag the current market information we are seeing.<span style=""> </span>Which means data we are digesting today was immune to the recent ugly stick beating the mortgage market underwent.<span style=""> </span>Logically it follows that any future data will be worse because of the now dwindling credit markets.<span style=""> </span>If we are to revert to market fundamentals, housing in <st1:place st="on"><st1:placename st="on">Los Angeles</st1:placename> <st1:placetype st="on">County</st1:placetype></st1:place> has a long way to go down.<span style=""> </span>I believe that running the numbers for <a href="http://drhousingbubble.blogspot.com/2007/08/special-edition-real-country-of-genius.html">Las Vegas, Phoenix, Miami, Boston, or Denver</a> would yield the same fundamental analysis, and that is housing is overpriced no matter how you dissect the data. <span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com22tag:blogger.com,1999:blog-35190061.post-91842631539827713582007-08-26T00:23:00.001-07:002007-08-26T00:31:08.030-07:00Real Homes of Genius: Today we Salute you Buena Park. 717 Square Feet for $465,000.<div style="text-align: left;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJWfPyN0jxOfXSVjEBJc9-6mXJn2mFaCrzXokzWSL5wTbZazsiRuCOYkF2ievVd0F99sscvqUw5JzC5Objow0BsuMRfAzGgirgR4Qs899qC1cLTUO4MwGYOQIeQahMrN0iOAqzbw/s1600-h/rhogbp.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJWfPyN0jxOfXSVjEBJc9-6mXJn2mFaCrzXokzWSL5wTbZazsiRuCOYkF2ievVd0F99sscvqUw5JzC5Objow0BsuMRfAzGgirgR4Qs899qC1cLTUO4MwGYOQIeQahMrN0iOAqzbw/s400/rhogbp.jpg" alt="" id="BLOGGER_PHOTO_ID_5102906630555196978" border="0" /></a><br /></div><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />I know many of you must be feeling overwhelmed with all the hard-hitting housing data from recent weeks.<span style=""> </span>The sky isn’t falling, but home prices are.<span style=""> </span>Foreclosures and short-sales are hitting the market daily and adding up like an abacus.<span style=""> </span>I’ve decided that it was time to get our feet placed solidly back into reality with another fantastic and spectacular deal here in sunny Southern California.<span style=""> </span>Today we salute Buena Park with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(79, 129, 189);">Real Homes of Genius Award.</span></a><span style=""> </span><div class="KonaBody"> <p class="MsoNormal">If you are not familiar with short-sales don’t worry, soon you’ll be reading and hearing many mainstream articles discussing this growing phenomenon.<span style=""> </span>A short-sale, for the sake of simplicity, is selling a home at a loss.<span style=""> </span>Typically, this happens when a seller needs to unload the home but finds that their mortgage(s) has put them underwater.<span style=""> </span>Unlike the Fed, the IRS isn’t one to give bailouts so sellers still need to pony up even after a short-sale is executed.<span style=""> </span>You may be wondering why you haven’t heard much about short-sales in the last few years.<span style=""> </span>For one, a rapidly appreciating market as we have here in Southern California masked a lot of financial irresponsibility.<span style=""> </span>For example, someone bought a home for $350,000 but after 2 years, was unable to pay the mortgage; the mortgage may have adjusted or simply the carrying cost started weighing on the owner.<span style=""> </span>Either way the owner is feeling the pressure to sell.<span style=""> </span>They appraise the home and find out it is now worth $510,000.<span style=""> </span>Instead of dealing with a bad purchase, they are given a nice cashier check for all their woes.<span style=""> </span>With such rapid housing price growth, the market hid the fact that many people were unable to afford the home that they bought.<span style=""> </span>But what happens when appreciation disappears?<span style=""> </span>This is were we discuss the Buena Park home.<br /><br />This majestic 717 square foot home includes 2 bedrooms and 1 full bath.<span style=""> </span>The fresco color gives you the feeling that you are in a Monet painting.<span style=""> </span>Supreme Scream isn’t only a ride at Knott’s Berry Farm, but also your reaction when you realize you bought at the top.<span style=""> </span>Let us take a look at the sales history of the home:</p> <p class="MsoNormal">Sale History </p> <p class="MsoNormal">03/08/2007: $510,000 </p> <p class="MsoNormal">05/05/1995: $110,000<span style=""> </span></p> <p class="MsoNormal">What are we to make of this?<span style=""> </span>Well for one, the purchase of the home was only five months ago.<span style=""> </span>At the sale price in March, this gorgeous home fetched a whopping $711 per square foot!<span style=""> </span>No bubble here.<span style=""> </span>The current price is $465,000.<span style=""> </span>So already in five short months, we have a reduction of $45,000.<span style=""> </span>Not bad for waiting a few months to purchase a home.<span style=""> </span></p> <p class="MsoNormal">But the magnitude of the bubble is highlighted even further when we look at the neighborhood data.<span style=""> </span>Let us dig deeper in the anatomy of this microcosm of the housing market:</p> <p class="MsoNormal">Average Household Income:<span style=""> </span><b style="">$57,022</b></p> <p class="MsoNormal">Monthly Net Pay:<span style=""> </span><b style="">$3,811</b> (filing as a married couple with 2 federal exemptions)<span style=""> </span></p> <p class="MsoNormal">Monthly PITI:<span style=""> </span><b style="">$3,066</b> (Assuming 10 percent down and 30 year fixed at a generous 6.27 percent)</p> <p class="MsoNormal">So what does this added information tell us?<span style=""> </span>A family buying this home putting down $46,500 (what it dropped in 5 months) is looking at spending a whopping 80 percent of their net pay on housing.<span style=""> </span>Talk about crazy ratios.<span style=""> </span>If it is overpriced at $465,000 what were people thinking at $510,000?<span style=""> </span>The only logical explanation is we are in a bouncing bubble.<span style=""> </span>What does a comparable rental go for in the area?<span style=""> </span>The median 2 bedroom 1 bath rental goes for $1,425.<span style=""> </span>Owning this home will cost you twice as much as renting a similar home.<span style=""> </span>In economics, we call this the substitution effect; if something is too expensive and there is a respectable alternative, many people will flock to the lower priced item.<span style=""> </span>With tighter credit standards, the substitution is already happening by force since people in the local area cannot qualify to purchase a home.<span style=""> </span>In addition, no investor would buy this place.<span style=""> </span>Think about it.<span style=""> </span>Your carrying cost is $3,066 and your monthly rental income is $1,425.<span style=""> </span>You are in the red for $1,641.<span style=""> </span>You don’t need to be Rene Descartes to figure out that the math doesn’t work on this one.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">With all the chatter regarding the subprime debacle, Fed intervention, and collapsing mortgage operations why isn’t the mainstream media stating the obvious?<span style=""> </span>Incomes in many metro areas do not justify the current prices and hence the market is viciously correcting.<span style=""> </span>In other words, massive credit speculation allowed people to buy more than they could afford. <!--[if !supportLineBreakNewLine]--> <!--[endif]--></p> <p class="MsoNormal">Today we salute you Buena Park with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(79, 129, 189);">Real Homes of Genius Award.</span></a></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com26tag:blogger.com,1999:blog-35190061.post-87511020840617836042007-08-23T00:50:00.000-07:002007-08-23T22:16:40.622-07:003 Reasons Why This Credit Bubble is worse than 1929. Precursors to a Recession: Complicit Fed, Population Involved, and Greater Dependence on Credit<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhB03uzvbft3AMA2f2w_vNxTQnjiH4EqYOddmkotCCGBjdj9BI8R_mU2wd4NmrSjvirpr3_X52SgXA2awNlEfhYm_YD-FuZv6WaXP4OQOO-R4NfTBUSCId83Bt05HzohLgMBlZ1vw/s1600-h/nyse.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhB03uzvbft3AMA2f2w_vNxTQnjiH4EqYOddmkotCCGBjdj9BI8R_mU2wd4NmrSjvirpr3_X52SgXA2awNlEfhYm_YD-FuZv6WaXP4OQOO-R4NfTBUSCId83Bt05HzohLgMBlZ1vw/s400/nyse.jpg" alt="" id="BLOGGER_PHOTO_ID_5101685631482486306" border="0" /></a><br />The market seems to have taken well to the liquidity injection by the Federal Reserve.<span style=""> </span>Since the past two weeks of subprime debacles and stock market woes, the market is slowly gaining a foothold.<span style=""> </span>Investors don’t seem to care that each day a few lending companies are collapsing and firing thousands of people.<span style=""> </span>Growing foreclosure numbers, housing prices depreciating, and consumer spending cut backs don’t seem to matter.<span style=""> </span>The sentiment is we will be back to good times in a matter of weeks.<span style=""> </span>Just to give you some idea of how quickly the market is turning take a look at the number of foreclosure filings in California:<br /><br /><br /><div class="KonaBody"><p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCdQoWW6klBk2bZVKtmzdeyIeABXaXvvxQjcUxs8YTRLvLeTLzZL_E9WtAxcW6ggzto_W3XcO_DPVrGpFslmv5KwE93Uf-q_j33aekXWckFwdkPasc5D8dZ7RwdylYZk49Fr4SVQ/s1600-h/chartforeclosures.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCdQoWW6klBk2bZVKtmzdeyIeABXaXvvxQjcUxs8YTRLvLeTLzZL_E9WtAxcW6ggzto_W3XcO_DPVrGpFslmv5KwE93Uf-q_j33aekXWckFwdkPasc5D8dZ7RwdylYZk49Fr4SVQ/s400/chartforeclosures.jpg" alt="" id="BLOGGER_PHOTO_ID_5101678699405270530" border="0" /></a></p> <p class="MsoNormal" style="text-align: center;" align="center"><span style=""><v:shapetype id="_x0000_t75" coordsize="21600,21600" spt="75" preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"> <v:f eqn="sum @0 1 0"> <v:f eqn="sum 0 0 @1"> <v:f eqn="prod @2 1 2"> <v:f eqn="prod @3 21600 pixelWidth"> <v:f eqn="prod @3 21600 pixelHeight"> <v:f eqn="sum @0 0 1"> <v:f eqn="prod @6 1 2"> <v:f eqn="prod @7 21600 pixelWidth"> <v:f eqn="sum @8 21600 0"> <v:f eqn="prod @7 21600 pixelHeight"> <v:f eqn="sum @10 21600 0"> </v:f> <v:path extrusionok="f" gradientshapeok="t" connecttype="rect"> <o:lock ext="edit" aspectratio="t"> </o:lock><v:shape id="Picture_x0020_0" spid="_x0000_i1026" type="#_x0000_t75" alt="chartforeclosures.jpg" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5CLOCALS%7E1%5CTemp%5Cmsohtmlclip1%5C01%5Cclip_image001.jpg"> </v:imagedata><img style="width: 147px; height: 18px;" src="file:///C:/LOCALS%7E1/Temp/msohtmlclip1/01/clip_image002.jpg" alt="chartforeclosures.jpg" shapes="Picture_x0020_0" /></v:shape></v:path></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:f></v:formulas></v:stroke></v:shapetype></span></p> <p class="MsoNormal">This is no small increase.<span style=""> </span>We are up nearly 300 percent in one year.<span style=""> </span>And since the data available does not have the current month of resets (which for California will be the largest) you can easily predict where the next data point will land.<span style=""> </span>So why is the market rallying?<span style=""> </span>There are multiple parallels to the false jump in stock market prices that occurred during March of 1929.<span style=""> </span>At this time, we actually had a Fed that was concerned regarding the booming market.<span style=""> </span>In fact, let us take a look at sentiment at the time:</p> <p class="MsoNormal"><i style="">“The tug-of-war between Washington and Wall Street reached its peak in late March of 1929.<span style=""> </span>The Federal Reserve took steps to limit how much banks could lend for buying stocks.<span style=""> </span>Interest rates doubled, which should have discouraged borrowing, “But people who dreamed of 100 percent profit in a week were not deterred by an interest rate of 20 percent a year,” President Hoover recalled.<span style=""> </span>“When the public becomes mad with greed and is rubbing the Aladdin’s lamp of sudden fortune, no little matter of interest rates is effective.”<span style=""> </span>Borrowing continued. “<o:p></o:p></i></p> <p class="MsoNormal">This quote from a very brief booked called <i style="">Six Days in October</i> by Karen Blumenthal, which ironically is for “<i style="">children over the age of 12</i>” seems like it may provide some insight into the current credit crunch.<span style=""> </span>Many books cover the Great Depression with opposing views and reasons for the decline.<span style=""> </span>But this event happened sufficiently long ago that we can look at it and take lessons from it from an objective stand point.<span style=""> </span>During the last few days in office, Calvin Coolidge was quoted as saying stocks were “cheap at current prices.”<span style=""> </span>Keep in mind that all this speculation ramped up in the last three years of the decade specifically 1927, 1928, and 1929.<span style=""> </span>Sort of like 2004, 2005, and 2006 with the subprime fiasco.<span style=""> </span>Again, the rhetoric during these times was of continued prosperity with little consideration of the massive debt being used to support the current market.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">As we hear about certain companies stepping in and the Fed offering support, we are reminded of the big players during the Great Depression that stepped in such as National City offering $25 million to brokers in March preventing a decline at the time.<span style=""> </span>So the market had 7 more months of breathing room.<span style=""> </span>The underlying fact still existed at the time as it does in 2007 that the underlying assets such as U.S. Steel, RCA, Westinghouse, and other companies were incredibly overpriced for what they were selling for.<span style=""> </span>Fundamentals were living in Wonderland.<span style=""> </span>Instead of stocks being over valued we now face massively overpriced houses in 2007.<span style=""> </span>Before I punch my fist through the monitor, yes I do realize that stocks and housing are very different pieces of investments.<span style=""> </span>How many times have we heard, “you can’t live in a stock” as if we were going to run off to the San Gabriel River and fabricate a makeshift home out of Google stock under the freeway overpass.<span style=""> </span>Yet there is comparisons that we can make.<span style=""> </span>Many people speculate through their homes.<span style=""> </span>Need we point out the cadre of players:<span style=""> </span>Flippers, Mortgage Brokers, Agents, Hedge Funds, Banks, Builders, Stock Investors, and pretty much everyone in this country.<span style=""> </span>A stark contrast from 1929; it is estimated that out of 121 million people, just 1.5 million to 3 million of them owned stock during the latter years of the 1920s.<span style=""> </span>How many Americans own their home in 2007?<span style=""> </span>How about 70 percent.<span style=""> </span>How many are living in an overpriced and inflated asset?<span style=""> </span>Probably everyone in most metropolitan areas.<span style=""> </span><br /><br />The issue occurs with the credit leverage of what has been going on.<span style=""> </span>Let us highlight a brief example.<span style=""> </span>Say Bill and Susie public decided to buy a starter home in Southern California for $400,000 in 2004.<span style=""> </span>Bill and Susie figured that they would flip this house in 1 or 2 years so it didn’t make sense to take on a 30 year mortgage.<span style=""> </span>They talk with their mortgage broker Jane, and she offers them a 2/28 mortgage with zero down.<span style=""> </span>Bill and Susie seemed shocked that they can control a $400,000 piece of real estate for nothing.<span style=""> </span>They purchase their home, live a comfortable life, and after 2 fantastic seasons of American Idol decide to sell their property.<span style=""> </span>Amazingly, Joe and Cindy public want to buy this same home for $600,000 in 2006.<span style=""> </span>After speaking with Jane the broker, Joe and Cindy plan on flipping the home in 1 or 2 years so they decide on going with a 2/28 mortgage as well.<span style=""> </span>Bill and Susie leave with a nice chunk of change after selling fees and since this is sunny California, they will not pay any capital gains taxes because they lived in the home for two years.<span style=""> </span>Sweet deal.<span style=""> </span>Now Joe and Cindy are licking their chops and “know” they’ll be able to sell the home in 2 years for $1 million at the current rate of appreciation.<span style=""> </span>However, they start hearing rumblings of a crashing market.<span style=""> </span>They get an appraiser to their home in summer of 2007 and find out their home is only worth $550,000.<span style=""> </span>They realize that they will not be able to make the payment once it resets since it will amortize over 28 years with a higher rate and will jump a whopping 75 percent.<span style=""> </span>So who made money here?<br /><br />Bill and Susie:<span style=""> </span>Approximately $200,000 profit.<span style=""> </span>Return on Investment?<span style=""> </span>Over 100 percent since they didn’t put down one penny.</p> <p class="MsoNormal">Joe and Cindy:<span style=""> </span>They are down over $50,000.<span style=""> </span>Return on Investment?<span style=""> </span>Nothing and in fact, they will owe a lot more money than if they had rented.<span style=""> </span><br /><br />Broker Jane:<span style=""> </span>Nice kick backs on each loan.</p> <p class="MsoNormal">Agents:<span style=""> </span>Nice cuts from each sale (and purchase) of the home. <span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Wall Street:<span style=""> </span>Amazing returns in Real Estate and Mortgage Backed Securities.</p> <p class="MsoNormal">Government:<span style=""> </span>Great returns on higher assessed property taxes and sales receipts.</p> <p class="MsoNormal">Consumer Outlets:<span style=""> </span>Amazing sales with mortgage equity withdrawals and the wealth effect making every American spending happy.<br /><br />So it seems we only have one loser when the game of musical chairs is over.<span style=""> </span>And that is the current owner of the property.<span style=""> </span>However, if what we are hearing from Fed and other central banks is true, this market has a little bit more steam in it because so many players are involved in making money from continually perpetuating this bubble.<span style=""> </span>Forget fundamentals and true asset values.<span style=""> </span>Who cares when everyone is making money.<span style=""> </span>This is why from a policy perspective, this credit bubble is much more widespread than the time just before October of 1929.<br /><br /><i style="">Complicit Fed</i></p><p class="MsoNormal">The Fed has already cut the discount rate and has done a few symbolic injections of liquidity into the market.<span style=""> </span>Yet they are still cautious.<span style=""> </span>As I was watching Senator Dodd talk about the bail out, he constantly mentioned that he was “pleased” that the Fed is willing to use any tools necessary to help this market.<span style=""> </span>However, he wasn’t "pleased" that the Treasury wasn’t so Pollyanna and didn’t want to lift certain caps for government secured mortgages.<span style=""> </span>As we’ve talked about, the Fed in the year leading up to the Great Depression radically increased rates to put a stop on the market.<span style=""> </span>In this case, we actually have a Fed that is willing to continue this market speculation.<span style=""> </span>We also have symbolic buys from certain large banks stepping in trying to assure the market that everything will be okay.<span style=""> </span>Seems familiar.<span style=""> </span>Yet looking at the raw numbers and looking at the fundamentals, no one is talking about a housing bubble.<span style=""> </span>Am I the only one wanting to drop kick the morning newscaster like Chuck Norris when they say, “the problem with this market is the subprime debacle.”<span style=""> </span>At this moment I pull out my megaphone, turn it on high and scream, “IT IS THE RIDICULOUS HOUSING PRICES YOU MORON” while dogs and birds scurry off my property. <span style=""> </span>Everyone suddenly wants to blame the mortgage company and lenders as the soul reason for this entire mess.<span style=""> </span>Since 2000, we’ve had countless players [see above] that made out like bandits in this market.<span style=""> </span>Why would they want to see a different market?<span style=""> </span><br /><br />The Fed is an independent agency.<span style=""> </span>At least that is what they would like us to believe.<span style=""> </span>Senator Dodd kept emphasizing this while giving the public an implicit wink that the Fed will do whatever the politicians tell it to do.<span style=""> </span>Can it be that someone wants to buoy this market up at least until the election is over in November of 2008?<span style=""> </span>Sadly, I’m not sure what could be done.<span style=""> </span>Thankfully the Treasury at the moment seems to be standing its ground.<span style=""> </span>I wouldn’t be surprised if in a month or so we turn on the television and see printing presses hand delivered to each lending institution.<span style=""> </span>This may seem far fetched but just a few months ago, you literally had an ATM machine attached to your home (if you owned it) and could create money out of thin air simply by writing a check to yourself.<span style=""> </span>$50,000 made out to me.<span style=""> </span>Yes!</p> <p class="MsoNormal"><i style="">Population Involved<o:p></o:p></i></p> <p class="MsoNormal">The parallels are very different this time as well.<span style=""> </span>A large part of the country is involved in this bubble.<span style=""> </span>Consumer sales will be hit when the market turns south.<span style=""> </span>If your business depends on people buying discretionary products from you, the oncoming recession will hurt you.<span style=""> </span>Anyone that worked for a subprime outfit is definitely at risk (if not gone already).<span style=""> </span>Construction and building is on the decline.<span style=""> </span>After all, why would you buy a depreciating asset at least in the short-term?<span style=""> </span>Financial institutions are having trouble.<span style=""> </span>Borrowing has gotten more expensive.<span style=""> </span>70 percent of the U.S. population owns their home.<span style=""> </span>When I say own, I mean that that many are on the deed or title as owner.<span style=""> </span>Some estimates point out that 30+ percent of Americans own their home straight out.<span style=""> </span>But for those that don’t, equity as a percentage of the value of the home has been on the decline.<span style=""> </span>This is a sobering fact considering that in no time in our country's recorded history have housing prices risen so drastically.<span style=""> </span>Can it be that many folks turned on the spigots and let the equity drain out of their homes?<span style=""> </span>Maybe.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal">Even those in the public sector will be hurt since local governments and municipalities depend largely on sales and property tax receipts.<span style=""> </span>The State Controller of California in August reported a projected short-fall of $787 million in total tax receipts; a big adjustment considering the projections were only issued in May of this year.<span style=""> </span>These are things that haven’t hit the mainstream media but will in the near future.<span style=""> </span></p> <p class="MsoNormal"><i style="">Great Dependence on Credit<o:p></o:p></i></p> <p class="MsoNormal">Think this country doesn’t have much mortgage debt outstanding?<span style=""> </span>Take a look at this chart I put together showing the increase of debt over the last 15 years:</p><p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-1N8JPdo7v7JZgYgGOzEdN_KLp6pTjOMMePBuqwU2eBaJnnf3Wh4cLj9-nm7wDnTcVMcGshjV4CIg2Uz5RF8xxSpVJDa2mrP5I_4tKnZAZglc_3PNfgepH0iz_X1E-r9Gy8wkdQ/s1600-h/mortgagedebt.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-1N8JPdo7v7JZgYgGOzEdN_KLp6pTjOMMePBuqwU2eBaJnnf3Wh4cLj9-nm7wDnTcVMcGshjV4CIg2Uz5RF8xxSpVJDa2mrP5I_4tKnZAZglc_3PNfgepH0iz_X1E-r9Gy8wkdQ/s400/mortgagedebt.jpg" alt="" id="BLOGGER_PHOTO_ID_5101678969988210194" border="0" /></a></p> <p class="MsoNormal"><span style=""><v:shape id="Picture_x0020_1" spid="_x0000_i1025" type="#_x0000_t75" alt="mortgagedebt.jpg" style=""> <v:imagedata src="file://sohtmlclip1%5C01%5Cclip_image003.jpg" title="mortgagedebt"> </v:imagedata><img style="width: 124px; height: 18px;" src="file://01/clip_image004.jpg" alt="mortgagedebt.jpg" shapes="Picture_x0020_1" /></v:shape></span></p> <p class="MsoNormal">We’ve nearly tripled the mortgage debt in 15 years.<span style=""> </span>Again this is as much a credit bubble as it is a housing bubble.<span style=""> </span>At the peak of this mayhem, in August of 2005 over 70+ percent of all loans in California were adjustable rate mortgages.<span style=""> </span>Of course this includes negative amortization, option ARMs, 2/28, interest only, and every other exotic mortgage product floating out in the market.<span style=""> </span>Our dependence on credit is amazing.<span style=""> </span>This partially comes from the fact that we as a nation have a negative savings rate.<span style=""> </span>I imagine it is hard to spend something you do not have but many credit card companies during this massive boom were more than willing to lend you the credit.<span style=""> </span>Where does this end?<span style=""> </span>I think we are already seeing the end.<span style=""> </span>I know we are in a bubble like no other when I get credit offers and refinancing offers from companies that no longer are in operation!<span style=""> </span>Maybe they should contact their direct mailers and let them know that they are no longer offering 0 percent for 12 months or 5 percent Home Equity lines.<span style=""> </span></p> <p class="MsoNormal">The parallels to the Great Depression are many.<span style=""> </span>I’ve highlighted two letters one from a <a href="http://drhousingbubble.blogspot.com/2007/08/personal-story-by-lawyer-from-previous.html"><span style="font-weight: bold;">lawyer</span></a> <b style=""><a href="http://drhousingbubble.blogspot.com/2007/08/personal-story-by-lawyer-from-previous.html">dealing with the fallout</a> </b>and another from a <a href="http://drhousingbubble.blogspot.com/2007/08/lessons-from-great-depression-letter.html"><b style="">banker giving his opinion on the market</b>.</a><span style=""> </span>Yet it doesn’t seem like we are willing to learn from the past.<span style=""> </span>In fact, it appears that from every branch of government we are more than willing to keep this thing going.<span style=""> </span>Don’t you find it ironic that big banks can go to Fed and get a discount while you can’t?<span style=""> </span>How does this liquidity help Joe and Cindy who are upside down by tens of thousands of dollars?<span style=""> </span>I guess in the end, someone needs to carry out the garbage.<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><span style=""> </span><span style=""></span><span style=""></span><span style=""></span><b style=""><o:p></o:p></b><br /></p> </div><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com39tag:blogger.com,1999:blog-35190061.post-15782232317214529882007-08-21T06:53:00.000-07:002007-08-21T06:53:45.415-07:00Triangulating Real Estate. 3 New Market Behaviors: Rewriting History, Falling Sales Receipts, and a Sort of Diverse Workforce.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGwspuDlPjhMHeFN3E-2kdiBqfz8eOynmRUy-962Wpo4mvOsp-mop8hNQF9SZiTJQRp8qFfclmo2evFHXvxY-eih5n6svtpE-yDs9KJegEOXX_5OXFZ4d-jjqpnyKGu8SNTkCFCw/s1600-h/game-over.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGwspuDlPjhMHeFN3E-2kdiBqfz8eOynmRUy-962Wpo4mvOsp-mop8hNQF9SZiTJQRp8qFfclmo2evFHXvxY-eih5n6svtpE-yDs9KJegEOXX_5OXFZ4d-jjqpnyKGu8SNTkCFCw/s400/game-over.jpg" alt="" id="BLOGGER_PHOTO_ID_5101029897350569458" border="0" /></a><b style=""><o:p></o:p></b>As I was cruising on the 405 this weekend fighting off the 93 degree humid weather, something was stickier than the air and that was the new message being spouted off over the airwaves pertaining to the housing market.<span style=""> </span>Like listening to a compulsive liar, at this point I am amused at what is being presented as investment advice.<span style=""> </span>The stock market seems pacified with the Fed’s actions even though foreclosures are going up by the hundreds each week and folks are scaling back their spending.<span style=""> </span>With this as our context, I was listening to so called “real estate experts” saying that now is the perfect time to buy.<span style=""> </span>Why?<span style=""> </span>Because the market is going down!<span style=""> </span>Yes folks, you heard right.<span style=""> </span>Since the market is tanking you should jump in.<span style=""> </span>Consider it like getting a 25 percent discount on your Titanic ticket after the ship hit the iceberg.<span style=""> </span>The logic (or lack thereof) goes as follows.<span style=""> </span>Since the market is going down, buyers now have the leverage in negotiations.<span style=""> </span>TRUE.<span style=""> </span>Since there is more inventory, you have more choice.<span style=""> </span>TRUE.<span style=""> </span>Therefore, you should buy a house.<span style=""> </span>Sounds good doesn’t it.<span style=""> </span>But what happens after you sign the papers and close escrow?<span style=""> </span>Does the market suddenly stop going down because you bought a home?<span style=""> </span>Are inventories projected to start declining anytime soon?<span style=""> </span>Do we really need to point out how intellectually sophisticated you need to be to buy a <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius</a></span> at this point?<div class="KonaBody"><span style=""> </span><span style=""> </span> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">So today we will examine what occurs at the pinnacle of a panic.<span style=""> </span>Amazing behavior occurs in times of distress.<span style=""> </span>Like the powerful <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/2007/08/personal-story-by-lawyer-from-previous.html">letter from the Depression</a>,</span> things can radically change when one lives in a helium-filled bubble.<span style=""> </span>The three new items we will examine are the rewriting of history by housing pundits, falling sales receipts, and a diverse workforce.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Rewriting the Past for a Better Tomorrow<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">We all remember the massive <a href="http://drhousingbubble.blogspot.com/2007/02/what-did-i-tell-you-if-butterfly.html">416 point drop of the DOW</a> back in late February.<span style=""> </span>Remember what caused it?<span style=""> </span>Well at this point, the subprime implosion was in its infancy at least in the eyes of the mainstream media.<span style=""> </span>The pundits jawboned and talked about the “silo effect” and how housing was much more diverse then a small insignificant subprime market.<span style=""> </span>Oh really?<span style=""> </span>Well the market bought this line of hog wash and went on back to its merry way of being in denial.<span style=""> </span>While subprime outfits were struggling to stay afloat, we have this following astonishing vote of confidence from Countrywide on May 14:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">“Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and <a href="http://latimesblogs.latimes.com/laland/2007/05/report_countryw.html">50-year-subprime loans</a>, and also said Countrywide plans to add 2,000 sales jobs this year.”<span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">So while the market was hitting a wall Countrywide decided to ramp up subprime loans.<span style=""> </span>Not only were these subprime, but 50 year mortgages!<span style=""> </span>Almost as an affront to the market, the implication seemed to be that the housing game will go on forever (at least for 50 years).<span style=""> </span>It was as if Countrywide was going against the grain and staking their claim on the subprime market.<span style=""> </span>Yet the problem with the current system is we’ve been living in a Ponzi Scheme.<span style=""> </span>I talked about the <a href="http://drhousingbubble.blogspot.com/2006/10/ponzi-financing-house-that-credit.html">Ponzi nature of the current housing market in October of 2006</a> even before any major subprime implosions hit the mainstream media.<span style=""> </span>Now we are seeing the bold move by Countrywide come to roost:</p> <p class="MsoNormal"><o:p> </o:p></p> <p><i style="">“<a href="http://money.cnn.com/2007/08/20/news/companies/countrywide_layoffs/index.htm?postversion=2007082006">LONDON (CNNMoney.com</a>) -- Troubled mortgage lender Countrywide Financial Corp. has started laying off employees in an effort to cut costs as it faces a credit crunch, according to a report published Monday.<o:p></o:p></i></p> <p><i style="">The <span style="">Wall Street Journal, c</span>iting an internal e-mail sent Friday to employees of Countrywide's Full Spectrum Lending unit, said the company has laid off workers in that division, which handles home loans rated between prime and subprime. The e-mail didn't detail the number of employees laid off, the report said.”<span style=""> </span><span style=""> </span><o:p></o:p></i></p> <p>Countrywide employs about 6,800 in this specific part of their business.<span style=""> </span>The question must be asked, why were they pushing 50 year mortgages and hiring more staff as recently as May of this year in their subprime outfit?<span style=""> </span>It definitely sounds like some folks are pining for the days of zero-down-no-interest-reverse-mortgage exotic loans.<span style=""> </span></p> <p><i style="">Falling Sales Receipts<o:p></o:p></i></p> <p>Americans love to spend.<span style=""> </span>Personal consumption makes up about two-thirds of our gross domestic product.<span style=""> </span>And with our negative savings rate, you can thank your Visa and Mastercard for your nice windfall.<span style=""> </span>Or like many others, you can thank the shiny ATM on the side of your house otherwise known as <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html">mortgage equity withdrawals</a>.<span style=""> </span>Not much data has been shed on this pressing issue.<span style=""> </span>However, the State Controller Office of California released figures that should indicate the future of the state.<span style=""> </span>The release shows that total tax receipts are down $787 million below revised figures issued in May.<span style=""> </span>I’m not sure why May was such a Pollyanna month?<span style=""> </span>We have Countrywide hiring 2,000 people and ridiculous sales receipt projections by the state.<span style=""> </span>Could it be that the industry was betting on the summer housing Easter bunny?<span style=""> </span>It is absurd to think this game could go on forever.<span style=""> </span>Leased $50,000 cars rolling off the lot.<span style=""> </span>$5,000 plasma TVs sold on 0 percent interest for 12 months.<span style=""> </span>Granite countertops.<span style=""> </span>Even a boob job is available in 24 monthly payments.<span style=""> </span>At a certain point the psychology of the <a href="http://drhousingbubble.blogspot.com/2007/05/housing-tipping-point-3-factors-that.html">market tips</a> and people realize debt is not wealth.<span style=""> </span>Even if they don’t realize this, unfortunately a foreclosure or an auto repossession will make this more realistic.</p> <p>Keep in mind that the state receives tremendous amounts of money via sales receipts and property tax payments.<span style=""> </span>Sales receipts you would think are easier to project.<span style=""> </span>Property taxes however follow a different calendar and we are going to be in for a rude awakening in 2008.<span style=""> </span>For one, folks are going to try to reassess their properties on a lower basis to lower their tax bill.<span style=""> </span>Many will not because they still want to believe the housing market will once again bounce to the sky.<span style=""> </span>Falling sales numbers will also hurt state projections.<span style=""> </span><st1:state st="on">California</st1:state> is just one example but many other states including <st1:state st="on">Florida</st1:state>, <st1:state st="on">Arizona</st1:state>, and <st1:place st="on"><st1:state st="on">Nevada</st1:state></st1:place> will have issues next year regarding dropping property tax receipts.<span style=""> </span></p> <p><i style="">A Diverse Real Estate Workforce<o:p></o:p></i></p> <p>If you haven’t noticed in the last two weeks, we are tremendously dependent on the housing complex.<span style=""> </span>It is estimated that as of the start of the millennium, nearly <a href="http://drhousingbubble.blogspot.com/2007/04/americas-codependence-on-housing-30-of.html">30 percent of all added employment</a> is related to the housing industry.<span style=""> </span>With the current housing market, how is this impacting the <st1:state st="on"><st1:place st="on">California</st1:place></st1:state> workforce?</p> <p><i style="">“The largest year-over job losses were in construction (12,000) and financial activities (7,000)--the sectors most directly influenced by conditions in the housing market. Construction's year-over loss was its largest since August 2002. In June 2007, year-over job losses in <st1:state st="on">California</st1:state>'s construction industry exceeded those of the entire <st1:country-region st="on"><st1:place st="on">U.S.</st1:place></st1:country-region> construction sector, which showed a year-over loss of 10,000 jobs. The <st1:state st="on"><st1:place st="on">California</st1:place></st1:state> financial activities sector's 7,000-job year-over loss was its largest since December 1995. In sharp contrast, the <st1:country-region st="on"><st1:place st="on">U.S.</st1:place></st1:country-region> financial activities sector showed a year-over gain of 117,000 jobs (1.4 percent) in June 2007. Manufacturing (5,900), and natural resources and mining (100) were the other <st1:place st="on"><st1:state st="on">California</st1:state></st1:place> industry sectors that lost jobs over the last year.”<o:p></o:p></i></p> <p><i style="">*Source:<span style=""> </span></i><a href="http://www.labormarketinfo.edd.ca.gov/article.asp?PAGEID=&SUBID=&ARTICLEID=679&SEGMENTID=2">California Employment Highlights for June 2007</a></p> <p>When we have such a dependency on housing for work and wealth, problems will occur when housing trends downward.<span style=""> </span>The last housing recession as most housing recessions, was inspired by drops in employment.<span style=""> </span>Oddly we are facing a housing led recession here; that is housing going down will force people out of housing related jobs which are normally high paying and this will lead to even lower housing prices and a vicious feedback loop is activated.<span style=""> </span>Will people cutback on their spending when times become tough?<span style=""> </span>Don’t bet on it if the <a href="http://drhousingbubble.blogspot.com/2007/04/irrational-housing-insiders-out-early.html">Duesenberry Effect</a> has anything to say about this.<span style=""> </span>Welcome to the new world order of housing.<span style=""> </span>The rules will be updated as we go along and history will surely remember this epic bubble.<span style=""> </span><span style=""> </span><i style=""><o:p></o:p></i></p> <p><o:p> </o:p></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com19tag:blogger.com,1999:blog-35190061.post-35716465455138681432007-08-18T18:37:00.001-07:002007-08-23T22:16:31.231-07:00Special Edition: Real Country of Genius: Today we Salute you America. Mortgage Implosions from Sea to Shining Sea.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5pi5xgKs77kZTYAN2E0lYf3nDbXHKbOrax98w7OmkkK60CCLd9umQ4jmKWsklsMzs0EcaUdtre-ybr5UPCv1TfJ9VLXIXptA6obO7eU6rVTeAESTiQBQqkTn1Tc_VeqMNfOGTfQ/s1600-h/AmerFlag.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5pi5xgKs77kZTYAN2E0lYf3nDbXHKbOrax98w7OmkkK60CCLd9umQ4jmKWsklsMzs0EcaUdtre-ybr5UPCv1TfJ9VLXIXptA6obO7eU6rVTeAESTiQBQqkTn1Tc_VeqMNfOGTfQ/s400/AmerFlag.jpg" alt="" id="BLOGGER_PHOTO_ID_5100222112786439634" border="0" /></a><br /><b style=""><o:p></o:p></b>In the last two weeks, the market has gone bipolar because of the credit market implosion.<span style=""> </span>It turns out that housing does carry a lot of influence even in the stock market.<span style=""> </span>Even after the Fed injection of credit heroine, the market is still down 10 percent from its peaks last month.<span style=""> </span>Most housing market pundits actually think we are turning around.<span style=""> </span>Suddenly we are in a recovering market because the Fed cut the discount rate by a few basis points.<span style=""> </span>So today, we are going to inject some of our own <i style="">reality</i> and do a special edition of <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Homes of Genius</span></a>.<span style=""> </span>Today we salute you <st1:place st="on"><st1:country-region st="on">America</st1:country-region></st1:place>, with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Country of Genius Award</a>.<div class="KonaBody"><span style="color:blue;"><span style=""> </span><span style=""> </span></span> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">It is important to understand that the nucleus of the housing bubble is born in large urban metropolitan areas.<span style=""> </span>You know, the areas where the bulk of Americans took out super crazy inflated mortgages?<span style=""> </span>We realize that certain areas in <st1:state st="on">Oklahoma</st1:state> or <st1:place st="on"><st1:state st="on">North Dakota</st1:state></st1:place> are fairly priced but the trillions of dollars in bad mortgage debt permeate from these over priced areas.<span style=""> </span>Today we will examine short sales and foreclosed homes in <st1:state st="on">Florida</st1:state>, <st1:state st="on">Arizona</st1:state>, <st1:city st="on">Washington</st1:city> <st1:state st="on">D.C.</st1:state>, <st1:state st="on">California</st1:state>, and <st1:state st="on"><st1:place st="on">Nevada</st1:place></st1:state>.<span style=""> </span>From sea to shining sea, buyers don’t seem to be biting anymore.<span style=""> </span>Like a fish attracted to a shiny metallic lure recent buyers don’t seem so attracted to granite countertops or faux marble Jacuzzis.<span style=""> </span>Even if they feel like a moth needing to dash toward the light, no longer are boiler room mortgage outfits there to feed their addiction.<span style=""> </span>Let us present the evidence:<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><b style="">#1 <st1:placetype st="on">Fort</st1:placetype> <st1:placename st="on">Meyers</st1:placename> - <st1:state st="on"><st1:place st="on">Florida</st1:place></st1:state><o:p></o:p></b></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifbxSdeoxjCji8_CXFzc8MicJEMq5-HoSfPYq6jp-tXXTARGtAflXiqAHgQZr6oXPZQb2GWENPXTKvroL1OQVL4C5KddkNF257Z9Ngmyv-VuEcx-cdE1WcGiS9pWvrebGbNCbbRw/s1600-h/1-florida-fortmeyers.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifbxSdeoxjCji8_CXFzc8MicJEMq5-HoSfPYq6jp-tXXTARGtAflXiqAHgQZr6oXPZQb2GWENPXTKvroL1OQVL4C5KddkNF257Z9Ngmyv-VuEcx-cdE1WcGiS9pWvrebGbNCbbRw/s400/1-florida-fortmeyers.jpg" alt="" id="BLOGGER_PHOTO_ID_5100219943827955074" border="0" /></a></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal">Our first gorgeous home is located in <st1:place st="on"><st1:city st="on">Fort Meyers</st1:city> <st1:state st="on">Florida</st1:state></st1:place>.<span style=""> </span>This massive home spans out over 1,072 square feet and includes 3 full bedrooms and 2 partial baths.<span style=""> </span>Take a look at the beautiful peach color.<span style=""> </span>I’m convinced!<span style=""> </span>No housing bubble.<span style=""> </span>The current price is $149,900.<span style=""> </span>Any person in a high priced metro area must be saying, <i style="">“how is this a <a href="http://http//drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Home of Genius</a>?<span style=""> </span>It is fairly priced.”<span style=""> </span></i>Well everything is relative isn’t it?<span style=""> </span>Let us take a look at the sales history: </p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal">04/27/2006: $190,000 </p> <p class="MsoNormal">03/01/1995: $48,900</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">So this home is off a whopping 21 percent in one year.<span style=""> </span>It is all about location, location, and location with real estate.<span style=""> </span>It doesn’t look like a soft landing for this fruit inspired home.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style="">#2 <st1:city st="on">Phoenix</st1:city> – <st1:state st="on"><st1:place st="on">Arizona</st1:place></st1:state><o:p></o:p></b></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmX1WRH0HKE8md1tSWo7VhOXpNDUj9ME2ltH5Uhk5E6gMtSqmdiIuMHOYyjb8VDc4nWg3RynWTnmEVyLU3rZi-lJKtdrqWlrH9A1zEeLAIaFu-ucgjBRlgKE4IrDkZdnsy6CsnCA/s1600-h/2-arizona.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmX1WRH0HKE8md1tSWo7VhOXpNDUj9ME2ltH5Uhk5E6gMtSqmdiIuMHOYyjb8VDc4nWg3RynWTnmEVyLU3rZi-lJKtdrqWlrH9A1zEeLAIaFu-ucgjBRlgKE4IrDkZdnsy6CsnCA/s400/2-arizona.jpg" alt="" id="BLOGGER_PHOTO_ID_5100220021137366418" border="0" /></a></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Our next home takes us from the tropical climate of <st1:state st="on">Florida</st1:state> in the east coast, all the way back to the dry arid desert of <st1:place st="on"><st1:city st="on">Phoenix</st1:city> <st1:state st="on">Arizona</st1:state></st1:place>.<span style=""> </span><st1:state st="on"><st1:place st="on">Arizona</st1:place></st1:state> is the center of the housing boom.<span style=""> </span>Builders came out in droves to erect McMansions in the middle of the sandy desert.<span style=""> </span>But this home defies the McMansion granite countertop standard.<span style=""> </span>Why go with a new home when you can have a tree covering up half of your property?<span style=""> </span>This 1,248 square foot 3 Bedroom 2 bath home is priced at $199,900.<span style=""> </span>Not a bad price.<span style=""> </span>But what is the sales history?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">12/01/2005: $282,000 </p> <p class="MsoNormal">07/05/2005: $153,000 </p> <p class="MsoNormal">01/30/2003: $106,000</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">This is a nice discount of $82,100 in two years.<span style=""> </span>If you want to be quantitatively driven, this place is down a whopping 29 percent.<span style=""> </span>I’m not sure what constitutes a crash but we are approaching it in many areas.<span style=""> </span>Does this look like a recovering market?<span style=""> </span>Let us move on.</p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><b style="">#3 <st1:city st="on">Las Vegas</st1:city> – <st1:state st="on"><st1:place st="on">Nevada</st1:place></st1:state><o:p></o:p></b></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> <p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQzLG4sjkZd4PfhGFCG70mRgELy3SZyEIp_-tf7doqh_1Z158_fMvYAVY733QXDEWvBBZ9exfSuQbsNBXmMh0AwkyvDh_rGA0s9lIOM0mtEip5xROdCRjxZzAlIIWNL4M9SUnyQw/s1600-h/3-lasVegas.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQzLG4sjkZd4PfhGFCG70mRgELy3SZyEIp_-tf7doqh_1Z158_fMvYAVY733QXDEWvBBZ9exfSuQbsNBXmMh0AwkyvDh_rGA0s9lIOM0mtEip5xROdCRjxZzAlIIWNL4M9SUnyQw/s400/3-lasVegas.jpg" alt="" id="BLOGGER_PHOTO_ID_5100220089856843170" border="0" /></a></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Sin city baby!<span style=""> </span>Flashing lights, all you can eat buffets, the sound of slot machines, and gambling.<span style=""> </span>This gambling also spilled over into the current housing arena and meshed well with the speculative credit bubble.<span style=""> </span>Our next home is actually a condominium but follows the same <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Homes of Genius</span></a> rules.<span style=""> </span>This condo has 3 bedrooms and 2 baths, and has plenty of space with 2,021 square feet.<span style=""> </span>Vegas has gotten expensive recently hasn’t it?<span style=""> </span>Well this place is currently priced at $650,000.<span style=""> </span>But what was the previous sales price?<span style=""> </span>Oh boy…<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">05/04/2006: $850,000</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">A $200,000 hit in one year.<span style=""> </span>Or a 23 percent discount.<span style=""> </span>I’m curious to know who held onto this note or what kind of mortgage backed portfolio held this beauty.<span style=""> </span>Again, I’m not sure how the Fed expects that giving lenders some breathing room is going to fix some of these over inflated areas.<span style=""> </span>Many folks decided to <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color:blue;">tap out their equity</span></a> and spend like drunken hyenas.<span style=""> </span>When you see toxic mortgages hitting multiple metro areas maybe it is time for a serious correction without government corporate welfare.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style="">#4 <st1:place st="on"><st1:city st="on">Washington</st1:city> <st1:state st="on">D.C.</st1:state></st1:place><o:p></o:p></b></p> <p class="MsoNormal"><v:shape id="_x0000_i1028" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C01%5Cclip_image006.jpg" title="4-DC"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiF7xoPrFaqsSW6qjQl5C670uDUBznBndKjwQP13pZPqbA85YTmsjB7gWAXnv8ukH5c53F-nJtib_ymJTkaweV5XBY6X5sKhfXG_Z-OY1IQDXFCoqADftAVL5DZnwaKaXtxCeRfSg/s1600-h/4-DC.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiF7xoPrFaqsSW6qjQl5C670uDUBznBndKjwQP13pZPqbA85YTmsjB7gWAXnv8ukH5c53F-nJtib_ymJTkaweV5XBY6X5sKhfXG_Z-OY1IQDXFCoqADftAVL5DZnwaKaXtxCeRfSg/s400/4-DC.jpg" alt="" id="BLOGGER_PHOTO_ID_5100220145691418034" border="0" /></a></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Welcome to the heart of the country, <st1:place st="on"><st1:city st="on">Washington</st1:city> <st1:state st="on">D.C.</st1:state></st1:place><span style=""> </span>A place of politics, the U.S. Treasury, and the most famous White House in the planet.<span style=""> </span>I wonder if the current administration took out a home equity line of credit on <st1:street st="on"><st1:address st="on">1600 Pennsylvania Avenue</st1:address></st1:street>.<span style=""> </span>But this place isn’t immune from the housing bubble.<span style=""> </span>This gorgeous home is nearly 100 years old.<span style=""> </span>This is a large 4 bedrooms and 3 baths home situated on 1,486 square feet.<span style=""> </span>The current price is $250,000, which seems like a bargain for such a large home.<span style=""> </span>What did this place sell for 2 years ago?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">06/21/2005: $360,000</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Another massive discount.<span style=""> </span>This place is selling for $110,000 below the previous sale price.<span style=""> </span>Or to give you another perspective, a 30 percent discount.<span style=""> </span>Now tell me again how injecting more liquidity in the market is going to help homes like this? </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style="">#5 <st1:city st="on">Compton</st1:city> – <st1:state st="on"><st1:place st="on">California</st1:place></st1:state><o:p></o:p></b></p> <p class="MsoNormal"><v:shape id="_x0000_i1029" type="#_x0000_t75" style=""> <v:imagedata src="file:///C:%5CDOCUME%7E1%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C01%5Cclip_image008.jpg" title="5-compton"> </v:imagedata><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglv3dcaaZrqiyhjjMrxWPn8lJVW5M2DUmL5Tu66jFOwu7ME0CEotqy71VQ5kA0k85mxKwwTai1G3khbt4RWamRBuLgB31noyxOZX2tLZr-w5ZMgNdUtm2zBZPEwL4cDtZzWeqtig/s1600-h/5-compton.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglv3dcaaZrqiyhjjMrxWPn8lJVW5M2DUmL5Tu66jFOwu7ME0CEotqy71VQ5kA0k85mxKwwTai1G3khbt4RWamRBuLgB31noyxOZX2tLZr-w5ZMgNdUtm2zBZPEwL4cDtZzWeqtig/s400/5-compton.jpg" alt="" id="BLOGGER_PHOTO_ID_5100220201525992898" border="0" /></a></v:shape></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Finally, we come back to the west coast once again and leave it to <st1:place st="on"><st1:state st="on">California</st1:state></st1:place> to have a flipper in this current market!<span style=""> </span>Not only a flipper, but a flipper in <st1:city st="on"><st1:place st="on">Compton</st1:place></st1:city>!<span style=""> </span>This massive 618 square foot home with 2 beds and 1 bath, is currently listed at $350,000.<span style=""> </span>Let us dig into the details of this place:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">07/26/2007: $230,000</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b><span style="color:green;">Price Increased:</span> 08/18/07 -- $299,000 to $350,000<o:p></o:p></b></p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><span style="">Some one picked up a property on the cheap and is trying to sell the place for a profit of $120,000.<span style=""> </span>Instead of lowering the price, these folks actually shot it up by $50,000.<span style=""> </span>You may be scratching your head but given that this home has only been on the market for 20+ days, they have yet to realize that the inventory here in <st1:place st="on">Southern California</st1:place> is growing exponentially.<span style=""> </span>They are using a different compass because every county in <st1:place st="on">Southern California</st1:place> is heading south.<span style=""> </span>Also, the summer selling season is coming to an end and the subprime market is now down and out.<span style=""> </span>The income for a family in this area is approximately $48,000 a year so the only way a local buyer would qualify is with a subprime loan.<span style=""> </span>The numbers do not work on this place as an investment property.<span style=""> </span>Appreciation is non-existent.<span style=""> </span>So I wonder who would buy this place.<span style=""> </span>Any guesses folks?<span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal"><span style="">Subprime.<span style=""> </span>2/28.<span style=""> </span>Interest only.<span style=""> </span>Option ARM mortgages.<span style=""> </span>REOs.<span style=""> </span>We’ve been talking about these topics for sometime now.<span style=""> </span>As these words hit the mainstream media it seems that folks want an instant solution to a multi-year problem.<span style=""> </span>Folks still want to tap their home like an American Express card and the housing syndicate is now telling folks that today is a good time to buy.<span style=""> </span>Their logic is if you do not buy now, interest rates may be higher next year and the market will price you out.<span style=""> </span>In addition, these above homes are hot commodities (some have been on the market for almost a year) that if you do not buy now, some renegade flipper will swoop underneath you and buy the home.<span style=""> </span>The only folks that can get fantastic terms right now are those with solid credit and some sort of down payment; go figure that people that have managed their finances wisely do not want to jump into these homes.<span style=""> </span>Could it be that the <a href="http://drhousingbubble.blogspot.com/2007/07/5-trillion-in-housing-wealth-gone.html"><span style="color:blue;">$5 trillion in pseudo housing</span></a> wealth is getting ready to disappear?<span style=""> </span>A more recent study by Dean Baker over at the <st1:place st="on"><st1:placetype st="on">Center</st1:placetype> of <st1:placename st="on">Economic</st1:placename></st1:place> and Policy Research puts the housing bubble wealth at $8 trillion.<span style=""> </span>How do they arrive at this figure?<span style=""> </span>100 years of data has housing trending with inflation and if we are to adjust back to historical models, we are overpriced by 50+ percent in many areas.<span style=""> </span>Seems hard to believe that we can drop by 50 percent but as you can see from digging into the market data, we are already dropping 20 to 30 percent.<span style=""> </span>Are you ready to buy? <o:p></o:p></span></p> <p class="MsoNormal"><span style=""><br />Today we Salute you <st1:place st="on"><st1:country-region st="on">America</st1:country-region></st1:place>, with our <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Country of Genius Award</span>.</a> <o:p></o:p></span></p> <p class="MsoNormal"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal"><span style="">Related Posts:<o:p></o:p></span></p> <p class="MsoNormal"><span style=""><o:p> </o:p></span></p> <p class="MsoNormal"><a href="http://drhousingbubble.blogspot.com/2007/05/real-homes-of-genius-specail-edition.html">Real Homes of Genius: Special Edition, Lifestyles of the Poor and Notorious. 10 Southern California Homes that Prove a Gargantuan Housing Bubble.</a> <i style=""><span style=""><o:p></o:p></span></i></p> <p class="MsoNormal"><a href="http://drhousingbubble.blogspot.com/2007/07/5-trillion-in-housing-wealth-gone.html">$5 Trillion in Housing Wealth Gone: The Impact of the Housing Bubble Bursting</a></p> <p class="MsoNormal"><a href="http://drhousingbubble.blogspot.com/2007/07/cost-of-mortgaged-suburbia-3-modern.html">The Cost of Mortgaged Suburbia: 3 Modern Housing Psychological Shifts</a> </p> <p class="MsoNormal"><a href="http://drhousingbubble.blogspot.com/2007/07/housing-and-age-of-affluence.html">Housing and the age of Affluence: Transforming the Definition of Income and Wealth</a> </p> <p class="MsoNormal"><a href="http://drhousingbubble.blogspot.com/2007/06/mortgages-101-rule-1-read-your-mortgage.html" phxha="0" mjijy="0">Mortgages 101: Rule #1, Read your Mortgage! Riding the Mortgage Default Wave.</a><br /></p><p class="MsoNormal"><a href="http://drhousingbubble.blogspot.com/2007/07/foreclosure-story-how-does-process-look.html">The Foreclosure Story: What does the Process Look Like?</a><br /><i style=""><span style=""><o:p></o:p></span></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style=""><o:p> </o:p></b></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com23tag:blogger.com,1999:blog-35190061.post-20017054345148666552007-08-16T06:00:00.000-07:002007-08-16T09:51:57.974-07:00Lessons From the Great Depression: A Letter from a former Banking President Discussing the Bubble.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGR8zTZMEXkPrKf5HfK1SJKGrwUm5BjN4EKhm4gLrwJAi1xEFjrgNOmBiFtHfxJ8ly_oybJW6JhKKS_QgfcKb45bWpywfFihF25_9zHIUKQnV75f8qx6h_0zgtH7bjZZeV-vzCYw/s1600-h/panicbutton.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGR8zTZMEXkPrKf5HfK1SJKGrwUm5BjN4EKhm4gLrwJAi1xEFjrgNOmBiFtHfxJ8ly_oybJW6JhKKS_QgfcKb45bWpywfFihF25_9zHIUKQnV75f8qx6h_0zgtH7bjZZeV-vzCYw/s400/panicbutton.jpg" alt="" id="BLOGGER_PHOTO_ID_5099086708116970866" border="0" /></a><br /><div class="KonaBody"><b style=""><o:p></o:p></b>As we hit record lows with the markets, it is clear that we are entering a correction phase.<span style=""> </span>With the incredible response we had to a <a href="http://drhousingbubble.blogspot.com/2007/08/personal-story-by-lawyer-from-previous.html"><span style="color: rgb(51, 102, 255);">personal letter from a lawyer</span></a> discussing in great deal, the failures of the previous Great Depression bubble we can see many parallels emerge to our current potential future.<span style=""> </span>For one, the wanton greed and disregard of financial prudence.<span style=""> </span>The inability to see beyond the current market and realize that history has a mischievous way of sneaking up on those who forget her. There is no longer a debate regarding the once fabled housing bubble.<span style=""> </span>We can all take off our tinfoil hats off and begin to construct a vision of the future in the midst of a collapsing housing market.<span style=""> </span>Today I’ll be posting an article that came out in the <i style="">Saturday Evening Post</i> in November of 1932 from a former bank president in <st1:state st="on"><st1:place st="on">New York</st1:place></st1:state>, three years after the crash, highlighting the economic situation of a post bubble world. This is an old article so I retyped the important paragraphs:<span style=""> </span> <p class="MsoNormal"><o:p> </o:p></p> <p style="font-style: italic;" class="MsoNormal">“If I draw illustrations from the banking field to indicate the limits to which the depression reached, it is only because I am writing about banks and not because the banks are the one glaring example marking the extent of the financial cataclysm.<span style=""> </span>The railroads, the insurance companies, the building-and-loan societies and mortgage companies would quite as well depict the situation.”</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The collective memories of many Americans believe and associate the Great Depression igniting from the heart of Wall Street.<span style=""> </span>However, it is clear that many industries built around financial imprudence also failed during the Great Depression.<span style=""> </span>Think of the many industries currently facing hard times with the housing decline:<span style=""> </span>insurance companies, mortgage lenders, hedge funds, the auto industry, home remodeling centers, and many other housing associated industries.<span style=""> </span>Can it be that for the past decade, we have been using the home as a center of economic prosperity?<span style=""> </span>Clearly it has helped to a certain extent with unparalleled amounts of <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color: rgb(51, 102, 255);">mortgage equity withdrawals</span>.</a><span style=""> </span>There are estimates from the FDIC that <a href="http://drhousingbubble.blogspot.com/2007/07/5-trillion-in-housing-wealth-gone.html"><span style="color: rgb(51, 102, 255);">$5 trillion in wealth has been directly linked to this housing boom</span>.</a><span style=""> </span>How much was really lost during the three years following the Crash?:<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p style="font-style: italic;" class="MsoNormal">“The decline in the price of bank stocks was only a minor phase of our debacle.<span style=""> </span>The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929, $89,668,276,854.<span style=""> </span>By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.”</p> <p class="MsoNormal"><o:p> </o:p></p> <p style="font-style: italic;" class="MsoNormal">“Stockholders had lost $74,000,000,000.<span style=""> </span>This figure is so large that not many minds can grasp it.<span style=""> </span>It is $616 for every one of us in <st1:country-region st="on"><st1:place st="on">America</st1:place></st1:country-region>.<span style=""> </span>It is, roughly, three times what we spent in fighting the World War.<span style=""> </span>The bursting of the South Sea Bubble concerned a single company.<span style=""> </span>In the bursting of the New York Stock Exchange bubble, the value of all stocks fell to 17 per cent of their September 1, 1929, price – almost as great a drop as the South Sea Company stock, with its fall to 13 per cent of its top price.<span style=""> </span>Remember that this calculation is not a selected example.<span style=""> </span>It is made from the average of all stocks listed on the Exchange.”</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">So $74 billion was lost.<span style=""> </span>A massive amount.<span style=""> </span>What would happen if say the $5 trillion in housing wealth would suddenly disappear?<span style=""> </span>Instead of bank failures we are now facing hedge fund debacles and everyday it appears that another mortgage outfit is closing shop.<span style=""> </span>Mortgage resets are hitting the market to the tune of $30 billion a month with our peak month hitting in October with $50 billion resetting.<span style=""> </span>We will not fall below the $30 billion monthly mark until September of 2008.<span style=""> </span>Most experts are now predicting a declining market until 2009 and these are optimistic projections. <span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p style="font-style: italic;" class="MsoNormal">“The South Sea Bubble wasn’t so much!<span style=""> </span>We have done pretty well in the way of bubbles in our own time.<span style=""> </span>All financial history shows no parallel to what we have been going through.<span style=""> </span>Never before, in this country or anywhere else, has there been such a general loss in “security” values.”</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Bubbles will always occur in profit driven systems because of human nature and bubbles will bust when they reach a <span style="color: rgb(51, 102, 255);"><a href="http://drhousingbubble.blogspot.com/2007/07/housing-minsky-moment-3-factors-prime.html">Minsky Moment</a>.</span><span style=""> </span>In addition, the <span style="color: rgb(51, 102, 255);"><a href="http://drhousingbubble.blogspot.com/2007/05/housing-tipping-point-3-factors-that.html">psychology at a certain point tips</a> </span>and the market no longer follows previous rules.<span style=""> </span>The system was built on consistently appreciating real estate and when this ended, it turns out that millions of people were swimming naked.<span style=""> </span>The only question now is how long will the market retrench. Unbelievably, those that pumped up the bubble are crying for compassion for the desolate homeowner now losing his home even though he is laughing all the way to the bank. Since he is partly responsible for the massive speculation, why doesn't he cut a check from his decade long bubble profits if he feels so bad? Instead, they want the entire nation to carry the burden of this massive credit orgy. If they truly believe in free market capitalism, then what is currently happening is the end result; the market is washing out all the excess from the system. Yet the Fed injecting liquidity amounts to corporate welfare and is only prolonging the inevitable decline. <span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><span style="font-style: italic;">“The decline in the quoted value of </span><st1:place style="font-style: italic;" st="on"><st1:state st="on">New York</st1:state></st1:place><span style="font-style: italic;"> listed stocks is only part of the story.</span><span style="font-style: italic;"> </span><span style="font-style: italic;">The total of real-estate mortgages in default, particularly mortgages on city property, is unexampled.</span><span style="font-style: italic;"> </span><span style="font-style: italic;">The value of real estate can no longer be accurately appraised, because the market for real estate has been practically paralyzed.”</span><span style=""> </span></p> <p class="MsoNormal"><br />We are already seeing this.<span style=""> </span>Many REO properties are simply sitting on the market and stubborn lenders and sellers are refusing to lower prices.<span style=""> </span>Buyers are refusing to buy or are unable to get loans.<span style=""> </span>It is a Catch-22 that is accelerating the market on a downward spiral.<span style=""> </span>People realize that housing is going down and are suddenly reluctant to buy.<span style=""> </span>The MBS market now seeing the intestines of their portfolios is realizing that some overpricing may have occurred.<span style=""> </span>I’m not sure if any of you have seen the new housing syndicate marketing angle (I caught a glimpse of this on late night infomercial happy television).<span style=""> </span>They are now pushing, get this, FHA loans!<span style=""> </span>Suddenly, the industry that pumped interest only, hybrid, reverse mortgage, 2/28 loans, stated income, and every other weird concoction of loans is coming home to the safest of the safe.<span style=""> </span>But the scary implication here is they are touting, “no need to worry here, these are government insured.”<span style=""> </span>Guess that means the American tax payer is going to bail out the housing industry.<span style=""> At least this is what the housing industry expects.<br /></span></p><p style="font-style: italic;" class="MsoNormal">“The loss of $74,000,000,000 in the value of <st1:state st="on"><st1:place st="on">New York</st1:place></st1:state> listed stocks is something more than a mere item of financial data.<span style=""> </span>Implicated in it are ten million cruel heartaches.<span style=""> </span>I am using “million” as an adjective, and making an understatement.<span style=""> </span>The laborious savings of an uncounted number of lifetimes have been swept away.<span style=""> </span>Prudent provisions for the future has been made to contrast unfavorably with the pleasures of spendthrift waste…”</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The real pain is in what happens on a micro level.<span style=""> </span>Like the couple <span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/2007/07/foreclosure-story-how-does-process-look.html">earning $130,000 a year that lost their home</a> </span>to foreclosure and is now facing hard times; these are the real stories behind the bursting bubble.<span style=""> </span>What is the psychological and financial impact of those put into 2/28 homes and are now facing foreclosure?<span style=""> </span>There is no financial benefit to the buyer for jumping into a 2/28 loan aside from squeezing into a home they cannot afford over the long run.<span style=""> </span>The only one benefiting from this is the mortgage broker who gets a stronger kick back for putting you into a risky loan and the agent from getting a commission check after escrow closes.<span style=""> What do they care? The loan is getting an extreme makeover on Wall Street and they'll never see it again. </span>The transparency legislation now being pushed is 7 years too late.<span style=""> </span>Wall Street has turned off the spigots earlier in the year.<span style=""> </span>Don’t worry about the large mortgage outfits, many top CEOs and executives actually sold out [<a href="http://money.cnn.com/2007/08/16/news/companies/countrywide/index.htm?postversion=2007081610">are in the process of selling out</a>] near the peak.<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p style="font-style: italic;" class="MsoNormal">“Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks.<span style=""> </span>Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse.<span style=""> </span>Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4835 insolvent banks.<span style=""> </span>Widespread communities were left with only the mattress as a safe depository, and with little to put into it.<span style=""> </span>People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or selected elsewhere, more than $1,500,000,000.”</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">We don't have to worry much about losing savings accounts considering Americans now have a negative savings rate. Try imagining you are now in 2009.<span style=""> </span>What do you think the sentiment of the American public will be when trials are going on regarding shady lending practices?<span style=""> </span>Many defunct companies are now getting their legal houses in order preparing for this.<span style=""> </span>Even with the previous scandals such as Enron, many folks saw this as something far and away since few even understood what Enron did or what laws they broke.<span style=""> </span>But everyone will understand the debacle of the housing industry because it hits every American.<span style=""> </span>It is a simple story of greed and financial negligence.<span style=""> </span>And one thing is certain, Americans do not like gambling with their homes unless they are winning.<span style=""> </span>Now that many are losing, they’ll be out for blood.<span style=""> </span>The Democrats are already taking aim and claiming it is the <a href="http://money.cnn.com/2007/08/09/real_estate/pols_play_subprime_blame_game/index.htm?postversion=2007081314">mortgage brokers fault</a> for putting us in this mess.<span style=""> </span>Of course there are other major players including the Fed, hedge funds, buyers/sellers, agents, appraisers, and flat out greed.<span style=""> </span><span style=""><br /></span></p> <p class="MsoNormal"><o:p> </o:p></p> <p style="font-style: italic;" class="MsoNormal">“This is a shameful and humiliating exhibition.<span style=""> </span>It is uniquely bad.<span style=""> </span>Across the border in <st1:country-region st="on"><st1:place st="on">Canada</st1:place></st1:country-region>, there was not a single bank failure during our period of depression, and one must go back to 1923 to find even a small one.<span style=""> </span>Nowhere else in the world at any time, were it a time of war, or of famine, or of disaster, has any other people recorded so many bank failures in a similar period as did we.<span style=""> </span>We were not experiencing a war, a famine or any other natural disaster.<span style=""> </span>All the economic tribulations we have undergone in the past three years have been man-made troubles, and Nature has continued to shower us with an easy abundance – more, indeed, than we have known how to distribute with economic wisdom.”</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">We are facing a healthy economy as well.<span style=""> </span>Unemployment is low.<span style=""> </span>Wages are holding steady.<span style=""> </span>GDP is still growing.<span style=""> Too bad most of this growth is heavily influenced by the credit bubble. </span>Like the former banking president states, this credit bubble mess is another "man made problem" as well.<span style=""> </span>Where this market will take us is anyone’s guess but I’ll leave you with the final paragraph of the article:<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><span style="font-style: italic;">“Human stupidity and cupidity were the taproots of this great financial disaster.</span><span style="font-style: italic;"> </span><span style="font-style: italic;">Those are evils which will always best us.</span><span style="font-style: italic;"> </span><span style="font-style: italic;">There have, however, been revealed faults and weaknesses in our banking and investment practices that account in part for the extreme nature of this experience.</span><span style="font-style: italic;"> </span><span style="font-style: italic;">Isn’t it about time that we began thoughtfully to examine some of the fundamentals of our banking and investment theories and methods?”</span><span style=""> </span></p> <p class="MsoNormal"><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com26tag:blogger.com,1999:blog-35190061.post-77378687028934298882007-08-14T10:46:00.000-07:002007-08-14T11:24:33.691-07:00Greater Expectations: Quotes and Psychology of a Modern Day Housing Bull.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnmIdExy1F24qEFapcq5yFxTGF-AbHfXj2jgtmImluea7vEGOnZZjM02ytw7q-SFiHDaPkxZyixO5ssLqUnRGV81SfR3KTxwleQKTwcRsDvdJXorfNiJLRUWIM8AyIWo5SM2428g/s1600-h/chicken_suit.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnmIdExy1F24qEFapcq5yFxTGF-AbHfXj2jgtmImluea7vEGOnZZjM02ytw7q-SFiHDaPkxZyixO5ssLqUnRGV81SfR3KTxwleQKTwcRsDvdJXorfNiJLRUWIM8AyIWo5SM2428g/s400/chicken_suit.jpg" alt="" id="BLOGGER_PHOTO_ID_5098614433198117378" border="0" /></a><br /><div class="KonaBody">John is a hard working middle-class man in a mixed blue collar and upcoming white collar neighborhood.<span style=""> </span>A vestige of old times when working class groups of families purchased homes before the mention of any housing bubble or subprime mortgage ever hit the CNBC newswires.<span style=""> </span>Now this neighborhood is experiencing a Renaissance that doesn’t include blue collar working class families.<span style=""> </span>“I wouldn’t be able to purchase my own home if I were to buy it right now,” echoes John as many families in this neighborhood feel the same sentiment.<span style=""> </span>The idea of using interest only mortgages or refinancing to tap into mortgage equity seem like a foreign language to his frugal and debt free way of life.<span style=""> </span>The only debt that he has, he proudly tells me, is the mortgage debt which he only has a few years left to pay off.<span style=""> </span>Welcome to a bygone era and the rhetoric of a past decade.<span style=""> </span>We are living in a time where the definition of “home” is radically shifting.<span style=""> </span>Take a look at some quotes from the ex-head honcho of the National Association of Realtors had to say over the past few years: <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style=""><i style="">March 2005</i></b><i style="">:<span style=""> </span>" I believe that in years to come historians will see the beginning of the twenty-first century as the "golden age" of real estate. And I want to persuade you to take advantage of this historic opportunity. "<span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style=""><span style="font-size:10;">Source:<span style=""> </span>Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments will Climb Through the End of the Decade-And How To Profit From Them" March 2005, p4. Author David Lereah<o:p></o:p></span></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">What made real estate so special in March of 2005?<span style=""> </span>Did it all of sudden become supernatural and have uncanny healing powers?<span style=""> </span>Nothing really changed except the fuel of a massive credit bubble and rhetoric like this was swallowed by buyers and sellers believing that they somehow found <st1:city st="on"><st1:place st="on">El Dorado</st1:place></st1:city> and an endless money pit in their home.<span style=""> </span>This language started many years ago but you can see even as of March of 2005, the psychology of many in the housing syndicate was such that housing was entering some kind of new era.<span style=""> </span>Remember the book DOW 30,000?<span style=""> </span>Maybe someone should write <i style="">500 Square Foot Box, $500,000.<span style=""> </span></i>Even the last sentence about “I want to persuade you…” echoes of a sales pitch for a speculative product.<span style=""> </span>There was no frame of economic reference aside from a tiny window of 2001 to 2005 that of course, made it seem that real estate was the hottest investment on the planet.<span style=""> </span>And it was.<span style=""> </span>But not anymore.<span style=""> </span>Like any speculative bubble, those that get in early and are able to time the peak make out like bandits.<span style=""> </span>Yet those that come late to the party have a hard time figuring out what happened.<span style=""> </span>Even as the market was clearly showing signs of bubblicious behavior, we get more absurd housing teeth gnashing.<span style=""> </span><span style=""> </span><i style=""><span style=""> </span></i><span style=""> </span></p> <p class="MsoNormal"><span style="font-size:10;"><o:p> </o:p></span></p> <p class="MsoNormal"><b style=""><i style="">August 2005:</i></b><i style=""><span style=""> </span>"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years. It's as if you had 500,000 dollar bills stuffed in your mattress."<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Source:<span style=""> </span>David Lereah quote, August 2005 <a href="http://www.latimes.com/business/la-fi-homedebt28aug28,0,6044251.story?coll=la-home-headlines">LA Times quote</a></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Say what?<span style=""> </span>So let me get this straight, if you paid off your mortgage you somehow have a problem managing your funds?<span style=""> </span>Of course, the assumption here is that you should use the money to buy more homes and flip them like the Ukrainian gymnastic team.<span style=""> </span>Maybe you should slap the virtual ATM of home equity lines and loans to the side of your house and turn on the shiny chrome spigot and let the equity ooze out.<span style=""> </span>And guess what?<span style=""> </span>People believed this and actually followed the lead of the housing syndicate.<span style=""> </span><span style="color:blue;"><a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html">Mortgage equity withdrawals</a> </span>became a new industry unto itself.<span style=""> </span>The problem with the statement above is that it isn’t completely financially prudent.<span style=""> </span>In fact, the better advice would be to sell a home in an overpriced area, rent, and ride the bubble down.<span style=""> </span>But no one in the housing industry would say this because if you would sell and wait for a few years that would mean that the following isn’t going on during your sabbatical from housing:<span style=""> </span>Sales go down, refinances drop, construction falls, home upgrades no longer happen, and anything else that lives on the butter churning housing industry.<span style=""> </span>Sell, upgrade, refinance, rinse and repeat seems to have stopped and as you may have currently noticed, the way housing goes so goes the world economy.<span style=""> </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style=""><i style="">April 2006:</i></b><i style=""><span style=""> </span>David Lereah, the Realtors' chief economist, said he was still looking for a gradual slowdown in housing that would result in a drop of around 6 percent in home sales this year and a slowing in price gains to around 6 percent, compared with the double-digit gains in prices in recent years.<o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal"><i style="">Source:<span style=""> </span><o:p></o:p></i><a href="http://www.sptimes.com/2006/04/26/Business/More_of_same__Home_sa.shtml"><st1:city st="on"><st1:place st="on"><i style="">St. Petersburg</i></st1:place></st1:city></a><i style=""><a href="http://www.sptimes.com/2006/04/26/Business/More_of_same__Home_sa.shtml"> Times, April 26, 2006</a><o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">This statement above highlights another fallacy in the housing syndicate logic.<span style=""> </span>Yes, real estate can appreciate by double-digit returns with no economic fundamentally sound reason however, the downside has a safety net of only single digit drops.<span style=""> </span>Think about the implication here for the consumer.<span style=""> </span>“Well, if I buy I have the potential of 20 percent returns but if the market goes down, I will only lose 5 percent for one year and then we’ll be back at double-digit returns.”<span style=""> </span>Hedge funds live off these analysis.<span style=""> </span>Risk assessment and running market assumptions on potential future scenarios.<span style=""> </span>Most consumers didn’t do either but bought with the unconscious belief that housing will go up drastically but the downside was very minimal.<span style=""> </span>Clearly, we are now seeing with some <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color:blue;">Real Homes of Genius </span></a>that homes can drop $100,000 in one year.<span style=""> </span>So if they are wrong about the downside what else were they wrong about?<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b style=""><i style="">September 2006:</i></b><i style=""><span style=""> </span></i><i style=""><span style=";font-family:Georgia;font-size:10;color:black;" lang="EN" >"With a general background of growing population and favorable affordability conditions, home sales are staying at very healthy levels," said Lereah. "As a result, we'll continue to see above-normal home price appreciation for the foreseeable future."<o:p></o:p></span></i></p> <p class="MsoNormal"><i style=""><span style=";font-family:Georgia;font-size:10;color:black;" lang="EN" ><o:p> </o:p></span></i></p> <p class="MsoNormal"><b><i style=""><span style=";font-family:Georgia;font-size:13;color:black;" lang="EN" >Source:<span style=""> </span><a href="http://www.salon.com/tech/htww/2006/09/19/lereah_watch/index.html">Chicken Little's revenge, Salon</a> </span></i></b> <!--[if !supportLineBreakNewLine]--> <!--[endif]--></p> <p class="MsoNormal">Strike three amigo.<span style=""> </span>We are now facing housing depreciation on a national level, the first time since the Great Depression.<span style=""> </span>He gave this opinion in the same month that <a href="http://www.bloomberg.com/apps/news?pid=20601109&sid=a4Naw1mqxCRw&refer=home">Bloomberg mentioned</a> this fact!<span style=""> </span>And it doesn’t seem like we are on track for a bounce back this summer with the mortgage market debacle.<span style=""> </span>So we’ve given them long enough with one year.<span style=""> </span>Clearly the Chief Economist is the figurehead for his industry, and as such he speaks for many in the industry.<span style=""> </span>I was listening to a local housing show on the weekends that discusses the real estate market and the host did an absolute 180.<span style=""> </span>All of sudden, he turned into a Democrat and started blaming mortgage brokers directly for the housing debacle.<span style=""> </span>“I can’t believe these brokers with subprime lending…” as he went off on his opportunistic CYA moment.<span style=""> </span>Keep in mind, a year ago this same person was echoing the benefits of adjustable rate mortgages and pumping housing like the next great invention.<span style=""> </span>Unbelievable.<span style=""> </span>But that is the psychology of a good sales person; once one market is dry make sure you are prepared to jump into the next market.<span style=""> </span>And this host was since he touted his incredible ability of refinancing and saving folks from foreclosure.<span style=""> </span>Still trying to churn the butter. And he had a broker call in and gave him a piece of his leveraged mind, <span style="font-style: italic;">"what you are doing is wrong. What we need is the Fed to drop rates. We didn't force people to sign." </span><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><br />No one forced anyone to sign but only a few years ago, anyone calling a housing bubble was labeled as a Chicken Little. Take a look at this PowerPoint from a big housing presentation calling any bubble believers Chicken Little back in October 2005:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><a href="http://photos1.blogger.com/blogger/1783/1012/1600/chickenlittle.jpg">Chicken Little Slide from Presentation</a> </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Many other quotes, information, and articles can be found at the once great site, <a href="http://davidlereahwatch.blogspot.com/">David Lereah Watch</a> that is no longer positing since the NAR has replaced Lereah with a new housing bull, Lawrence Yun.<span style=""> </span>These people are important because they are the Chief Economist to one of the, if not, most powerful housing associations in the nation.<span style=""> </span>The NAR has membership of over 1.2 million folks and the majority believe the party line.<span style=""> </span>They have large advertising and marketing campaigns that fund their industry.<span style=""> </span>In addition, these industries are some of largest contributors to both political parties.<span style=""> </span>Do you think they are looking out for you or Mr. John worrying about the risky new buyers coming into his neighborhood?<span style=""> </span></p> <p class="MsoNormal"><br />There is a great article in the Orange County Register that came out August 12 called <a href="http://www.ocregister.com/money/loans-camile-percent-1806121-subprime-loan">One street’s subprime struggle</a>.<span style=""> It talks about a block in Santa Ana that is the epitome of the subprime risky mortgage collapse. </span>There is one fantastic quote from one of the older owners who is almost done paying off his mortgage:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">“"I never sell. I never refinance," Zambrano said. "I don't take money out of my house to buy a car or take a vacation. I'm not stupid."<o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Don’t tell that to some folks in the housing syndicate.<span style=""> </span>They may think you have bad money management skills and will try to get you to slap a virtual American Express to the side of your home.<span style=""> </span>Maybe John has a point about being frugal and trying to manage his debt wisely.<span style=""> </span>Should we try to convince Mr. Zambrano about his poor money management ability and tell him about a wonderful HELOC that’ll fund a nice trip to <st1:place st="on">Europe</st1:place>?<span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com33tag:blogger.com,1999:blog-35190061.post-71599952754518547532007-08-12T00:30:00.001-07:002007-08-12T00:41:49.232-07:00Real Homes of Genius: Today we Salute you Arleta and Compton. Two Short-Sales for the Price of One.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3ELOmKtttELxHvk851M0yHLgJmJHprAeF9UBs1l3PoSnxh4p9SkP547TuhAJxW5BE8z8ZIY-Re1OUB_UNWFXpFoaYfqn8vmq5lm0-RbDJ6zE2bpDaqCFrAJqXPZhYpDuNEVMEHg/s1600-h/arleta.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3ELOmKtttELxHvk851M0yHLgJmJHprAeF9UBs1l3PoSnxh4p9SkP547TuhAJxW5BE8z8ZIY-Re1OUB_UNWFXpFoaYfqn8vmq5lm0-RbDJ6zE2bpDaqCFrAJqXPZhYpDuNEVMEHg/s400/arleta.jpg" alt="" id="BLOGGER_PHOTO_ID_5097713447843664354" border="0" /></a><br />I haven’t posted a <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(51, 102, 255);">Real Homes of Genius</span></a> for sometime because the credit markets were busy being hit with the reality stick and exploding like a birthday piñata.<span style=""> </span>Apparently, Wall Street got a few pictures of what was really stewing in their mortgaged backed portfolios and had a hard time justifying that a 600 square foot home was really worth $500,000 in the murder capital of the <st1:country-region st="on"><st1:place st="on">United States</st1:place></st1:country-region>.<span style=""> </span>Multiply this scenario thousands of times over in multiple metro areas and you have the current bubble bursting housing market.<span style=""> </span>They say a picture is worth a thousand words.<span style=""> </span>If that is the case, today’s article is worth $1 million plus a dictionary.<span style=""> </span>So today, we will look at two homes that garner the award-winning label of <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(51, 102, 255);">Real Homes of Genius</span>.</a><br /><div class="KonaBody"><p class="MsoNormal"><br />The first home is a spacious 1,045 square foot home in Arleta.<span style=""> </span>With 3 bedrooms and 2 baths, you’ll be wondering what to do with all the extra space.<span style=""> </span>Maybe you’ll rent out the extra room to cover the mortgage.<span style=""> </span>As you can see from the above picture, the gates are slightly ajar welcoming you into your future Taj Mahal.<span style=""> </span>This home is an architectural work of art because the garage is actually three-dimensional like a Rubik's Cube.<span style=""> </span>The assessor has this place listed as 2 bedrooms but what the hell, the garage is converted therefore it is 3 bedrooms.<span style=""> </span>It is a fixer upper according to the ad.<span style=""> </span>So how much is this home listed for?<span style=""> </span>A bargain at $449,000.<span style=""> </span>Even with all the fantastic housing news hitting the media, we still believe that <st1:place st="on">Southern California</st1:place> is immune to housing Armageddon.<span style=""> </span>This Arleta home is priced to sell because the bank is fair and wants to help you own a piece of the American Dream.<span style=""> </span>How many other folks realized the American Dream in this home?<span style=""> </span>How about 3 families in the last 3 years.<span style=""> </span>I guess the housing dream happens during the rapid eye movement segment of sleep in 2007.<span style=""> </span>Let us look at the sales history before the bank decided to be the 4<sup>th</sup> owner:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:place st="on"><st1:city st="on">Sale</st1:city></st1:place> History </p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">12/18/2006: $400,112 </p> <p class="MsoNormal">02/07/2006: $470,000 </p> <p class="MsoNormal">10/19/2004: $340,000<span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Didn’t you hear the news?<span style=""> </span>Reinforced steel gates are replacing the mental image of the wooden white picket fences as the ideal for a suburban home.<span style=""> </span>The bank, for some reason feels that this home is still worth a peak price.<span style=""> </span>What is the median income of a family in this area?<span style=""> </span>How about $52,673.<span style=""> </span>And you wonder why so many mortgages are going bad? Unlike Milli Vanilli, this housing decline is real.<span style=""> </span>Even <a href="http://drhousingbubble.blogspot.com/2007/07/foreclosure-story-how-does-process-look.html"><span style="color: rgb(51, 102, 255);">families making $130,000</span></a> are having a hard time staying out of foreclosure so you can imagine how this one became another unfortunate statistic.<span style=""> </span>These families are heading straight into bankruptcy court. How any lender got this past underwriting will be a question we will be hearing about many times over for the next few years.<br /></p><p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzW9bKuIKgCk8Lc1G15FncSjXfQXjdhhHbWP1G1xFjyZSdjrkCR4JLsMAIgKO_RYELsn9DJz6huOfDS2RTO3elCoigg0obyrhycF_gnArwxEPr-nUa-QV1L4obK34cmvWGOnXg2Q/s1600-h/compton.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzW9bKuIKgCk8Lc1G15FncSjXfQXjdhhHbWP1G1xFjyZSdjrkCR4JLsMAIgKO_RYELsn9DJz6huOfDS2RTO3elCoigg0obyrhycF_gnArwxEPr-nUa-QV1L4obK34cmvWGOnXg2Q/s400/compton.jpg" alt="" id="BLOGGER_PHOTO_ID_5097713542332944882" border="0" /></a></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The next home is a pink beauty in <st1:place st="on"><st1:city st="on">Compton</st1:city></st1:place>.<span style=""> </span>This 1,121 square foot home has 3 bedrooms and 1 bath.<span style=""> </span>According to the ad, this home needs some cosmetic work.<span style=""> </span>All you need is granite countertops and injections of Botox and you won’t be able to tell the difference between the <st1:city st="on"><st1:place st="on">Hamptons</st1:place></st1:city> and this place once you’re done hauling your orange Home Depot cart back to your palace.<span style=""> </span>How much for this piece of the American Dream?<span style=""> </span>How about $294,400!<span style=""> </span>This <a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius"><span style="color: rgb(51, 102, 255);">Real Homes of Genius</span></a> is different from the home in Arleta because this bank has been following the credit mayhem hitting the global markets.<span style=""> </span>How can you tell?<span style=""> </span>This place is priced to sell and sell fast.<span style=""> </span>With only 22 days on the market, the bank is not trying to put an absurd Wonderland price only to begin the weekly two-step of knocking prices down until some agent snatches up the MLS action.<span style=""> </span>Let us take a look at previous sales history:</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><st1:city st="on"><st1:place st="on">Sale</st1:place></st1:city> History </p> <p class="MsoNormal">05/23/2007: $342,493</p> <p class="MsoNormal">05/01/1990: $103,000<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">So already, the home is $48,093 under the previous sale price in May.<span style=""> </span>You’ve saved $24,000 each month simply because you are patient and a smart buyer.<span style=""> </span>To put it in a different perspective, any buyer waiting two additional months has saved the median annual income of families in this area.<br /><br />Do we really need hardcore derivate and credit analysis to give you a visual as to why the mortgage markets are imploding?<span style=""> </span>Do you need a picture of what subprime looks like?<span style=""> </span>This isn’t over pricing a home by 10 or even 20 percent.<span style=""> </span>We are talking about homes that are overpriced by 50 percent.<span style=""> </span>I can understand the difficulty for folks in the housing syndicate to come to terms with what is going on.<span style=""> </span>But this is the reality of the current situation.<span style=""> </span>Wall Street is now forced to go into the trenches of their toxic portfolios and unless they want to become property managers, they’ll need to unload these homes at whatever the market will bear.<span style=""> </span>Moreover, lenders from what I’ve heard are so stringent and playing hard ball these days, that they are actually looking at income statements and asking for 5 to even 10 percent down.<span style=""> </span>The humanity.<br /><br />Today we salute you Arleta and Compton with our <span style="color: rgb(51, 102, 255);"><a href="http://drhousingbubble.blogspot.com/search/label/real-homes-of-genius">Real Homes of Genius Award</a>.</span> <span style=""> </span><br /><o:p><br /></o:p></p> <p class="MsoNormal"><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog</a><span style="font-style: italic;"> to get updated housing commentary, analysis, and information.</span>Dr Housing Bubblehttp://www.blogger.com/profile/12407700951720008626noreply@blogger.com12tag:blogger.com,1999:blog-35190061.post-41525685536179996252007-08-09T14:47:00.000-07:002007-08-09T15:30:00.784-07:00Global Housing Bubble: International House of Subprime Lending.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0kwnH_tu02ds505IYo5ZtP-FzaHRqImeqNc-F61xFQVH7zYMVTjfcdxb7MD_YdPcJVco5xnnAJf9yCsnKJU2Ma4I3iQolpwsXRO8E6BdOxaILslNdheFqyWo2NQKMKhrwxiBUCQ/s1600-h/unplanned1.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0kwnH_tu02ds505IYo5ZtP-FzaHRqImeqNc-F61xFQVH7zYMVTjfcdxb7MD_YdPcJVco5xnnAJf9yCsnKJU2Ma4I3iQolpwsXRO8E6BdOxaILslNdheFqyWo2NQKMKhrwxiBUCQ/s400/unplanned1.jpg" alt="" id="BLOGGER_PHOTO_ID_5096823599339409858" border="0" /></a><br /><b style=""><o:p></o:p></b>It is becoming apparent that the subprime contagion is spreading into all areas of credit.<span style=""> </span>And not only is it spreading, it is hitting the entire planet.<span style=""> </span>This may sound like hyperbole, but news coming out regarding <st1:country-region st="on"><st1:place st="on">France</st1:place></st1:country-region>’s biggest bank, BNP Paribas freezing $2.2 billion in funding and the European Central Bank injecting $130.5 billion into the money markets may demonstrate that this bubble has no respect for borders.<span style=""> </span>The initial fear was rooted in the singular idea that the subprime mortgage collapse was contained in a nice and sanitary silo.<span style=""> </span>Credit will still be gushing down the road like a summer thunderstorm and housing prices grew into the stratosphere.<span style=""> </span>Now we are witnessing that this housing mayhem is no Rock of Gibraltar and is suddenly showing cracks.<span style=""> </span>After all, even AIG is setting aside money for higher subprime defaults.<span style=""> </span>So why is the process so slow and median prices remain stubbornly high?<span style=""> </span>There are many reasons for the slow decline but three that we will discuss in this article are scheduled mortgage resets, overly optimistic scenarios, and market psychology.<br /><div class="KonaBody"><p class="MsoNormal"><br /><i style="">The Revolving Reset Door</i><span style=""> </span><span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">For the last decade we’ve been obsessed with the housing market.<span style=""> </span>With new underwriting software, mainstream media shows, and the ability to tap home equity we became a nation fueled by housing appreciation.<span style=""> </span>Never have we had so much refinancing activity and <a href="http://drhousingbubble.blogspot.com/2007/07/mortgage-equity-withdrawal-syndrome-3rd.html"><span style="color:blue;">mortgage equity withdrawals</span></a> hitting the economy.<span style=""> </span>The perception that your home is an ATM and a virtual American Express card is something new.<span style=""> </span>Even in past housing bubbles, the money was made by flipping or assigning rights of the property to another person.<span style=""> </span>This bubble is in another dimension because with cash-out refinances and buying 2<sup>nd</sup> homes, home owners became on a microcosmic level mini banks.<span style=""> </span>They had the potential to lend money to themselves.<span style=""> </span>They assigned the ability to purchase 2<sup>nd</sup> homes via the leverage of their first home and the perceived equity.<span style=""> </span>Many folks are learning a hard lesson that the equity in your home isn’t yours until you sell and have the cashier check in your hand.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">The slow decline is happening because there is a systematic time bomb of mortgage resets waiting in the wing.<span style=""> </span>Like a jaguar stalking its prey, it is lingering in the corner ready to pounce.<span style=""> </span>How much is really resetting?<span style=""> </span>According to Credit Suisse, the biggest month of mortgage resets will be October 2007 where $50 billion loans will reset for the first time.<span style=""> </span>In addition, we are already in the full reset mode with $30 billion in loans resetting each month from now until September 2008.<span style=""> </span>You think it is bad now?<span style=""> </span>The market is still thriving a bit because summer does bring out buyers and sellers that really have no idea of the credit bubble working behind the scenes.<span style=""> </span>If anything, this is the absolute last leg of the housing market for a long time.<span style=""> </span>See, the Ponzi game could only last for so long.<span style=""> </span>With housing in major metro areas going up each year, it masked the financial naiveté of many buyers who got in trouble because they simply listed their home and actually made some money by selling in record time.<span style=""> </span>Or they played the refinancing musical chair game and bought time by giving themselves a short-term carry over loan.<span style=""> </span>However, this all ends when lending gets tighter and the lava like pace of the mortgage reset is creeping to you and there is nothing to do except watch.<span style=""> </span>How does this wave look like?<span style=""> </span>We’ve all seen this fantastic chart of mortgage rate resets from Credit Suisse (by the way, we are at number 7):</p> <p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1yOZ8cIDpRAf5yEe0eFh8-zy0CNAxoNxw1y1bvI_AvdsrvNtqKWX0jah184pRfF8ITzmUeRtmUdfBXjyL-_1NCmDqzumzCXrLiWNkjnkfE9PxnsOwzHSnvZ75Kwe1ftdzMLvWag/s1600-h/resetchart.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1yOZ8cIDpRAf5yEe0eFh8-zy0CNAxoNxw1y1bvI_AvdsrvNtqKWX0jah184pRfF8ITzmUeRtmUdfBXjyL-_1NCmDqzumzCXrLiWNkjnkfE9PxnsOwzHSnvZ75Kwe1ftdzMLvWag/s400/resetchart.png" alt="" id="BLOGGER_PHOTO_ID_5096822564252291506" border="0" /></a></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Overly Optimistic Scenarios <o:p></o:p></i></p> <p class="MsoNormal"><i style=""><o:p> </o:p></i></p> <p class="MsoNormal">Optimism is good.<span style=""> </span>In fact, it is better to be optimistic in your life.<span style=""> </span>It is healthy for you.<span style=""> </span>You may be thinking, “Dr. Housing Bubble is optimistic?<span style=""> </span>What is the world coming to!”<span style=""> </span>Indeed, you should be hopeful for the future but blind adherence to positive thinking will only lead you down a disastrous road.<span style=""> </span>Prudence must be exercised especially in the credit bubble we are living in.<span style=""> </span>However, in the last few years we’ve witnessed an entire syndicate of people hedging their entire lives and careers on the housing and credit industries.<span style=""> </span>Even the insurance companies and lenders have overly optimistic scenarios because they used faulty models of housing appreciation.<span style=""> </span>Let us run through an absurd model used by some subprime lenders.<span style=""> </span>They factored in a percentage of defaults, yet with these defaults they assumed that they would be able to unload the properties at market rates and recoup their losses!<span style=""> </span>Think about that for a second.<span style=""> </span>Even though they had assumption models predicting certain losses they were also factoring in the sale of the home at an optimistic sales price. What if the home doesn't sell?<span style=""> </span>They became flippers without even knowing it.<span style=""> </span>Somehow the belief of the new economy was built on managing and repackaging credit from now until the end of time.<span style=""> </span>Of course debt is not wealth.<span style=""> </span>But look around your immediate environment and you will see artifacts of the false gods of debt.<span style=""> </span>Leased cars.<span style=""> </span>Massive McMansions.<span style=""> </span>Multiple vacations a year to exotic locations.<span style=""> </span>All under the umbrealla of credit.<span style=""> </span>Our society drank the Kool-Aid and bought the line that debt is wealth.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Well the game could only go on so long.<span style=""> </span>With the massive consumerism of this culture being funded through foreign entities, there had to come a point where you reach a credit watershed event.<span style=""> </span>We’re not there yet.<span style=""> </span>I know many are calling the bottom but as you can see from the above chart, we are only shifting into the next stage.<span style=""> </span>In order to purge the market unfortunately, there will be a prolonged shift on the credit markets and how people perceive debt.<span style=""> </span>Foreclosures are rising but are not in crisis mode.<span style=""> </span>All this bail out talk is absurd because it doesn’t address the underlying economic neurosis.<span style=""> </span>I think I can best convey this point by giving a personal example.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">A very successful friend who is a business owner decided during the technology bubble days to invest $300,000 in technology stocks.<span style=""> </span>He got in one year before the bust.<span style=""> </span>He saw his portfolio jump to $340,000 in one year and I thought he was a genius even though the companies he picked had no projected earnings.<span style=""> </span>Well, the bubble burst and his portfolio dwindled to $60,000 in a matter of months.<span style=""> </span>Turns out a few of the companies had accounting “irregularities”; funny how they use words as if it were a digestive problem.<span style=""> </span>So what did he do?<span style=""> </span>He decided to hold onto these losers until they came back again!<span style=""> </span>“They’ll come back.<span style=""> </span>These are great companies.”<span style=""> </span>Indeed, the companies that survived were great but absurdly overpriced. They never came close to their peak prices even to this day.<span style=""> </span>So you would think he learned his lesson.<span style=""> </span>Fast forward a few years and now we are in the housing frenzy.<span style=""> </span>He decides that he will purchase rental properties in <st1:state st="on"><st1:place st="on">California</st1:place></st1:state> since housing is the new tech startup. Instead of venture capitalist and day traders we have mortgage brokers and warehouse lending operations fueling this fire.<span style=""> </span>He started buying a few years ago and now has a few properties that are negative cash flowing but they’ll go “up like crazy” according to his market analysis. <span style=""> </span>Many of his homes are now back down to 2005 and in some cases 2004 prices therefore giving him zero equity even with the ridiculous appreciation.<span style=""> </span>His response?<span style=""> </span>“It’ll come back again!”</p> <p class="MsoNormal"><br />Financially, his family is doing really well so it won’t impact him aside from taking a hit to the ego and a drop in his net worth.<span style=""> </span>But the underlying psychology behind this has no merit in economics.<span style=""> </span>Essentially, people jump from one bubble to another like folks that jump from one bad relationship to another.<span style=""> </span>At a certain point, you start to realize that maybe the problem isn’t the other people but potentially it is the person looking back at you in the mirror.<span style=""> </span>Unless the credit using public understands the nature of debt and how bubbles inflate and then bust, this endless cycle of bubbles will keep on occurring.<span style=""> </span>And from all financial literacy surveys I have seen, Americans need a major financial makeover.<span style=""> </span>The problem?<span style=""> </span>The so called gurus are dependent on the system as well.<span style=""> </span>From banks, home repair stores, electronic departments, credit card companies, and the housing syndicate these sectors rely on the continuance of the housing and credit bubble expanding.<span style=""> </span>After all, if you bought items with money you did have, why would you need credit?<span style=""> </span>Because of a FICO score?<span style=""> </span>Who owns FICO?<span style=""> </span>As you can see, the rabbit hole goes much deeper than most would like to admit.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><i style="">Market Psychology<span style=""> </span><o:p></o:p></i></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">It is interesting to hear certain media outlets say that housing will not pick up until 2009.<span style=""> </span>In fact, they stop short of saying housing will be a horrible investment for the next two years.<span style=""> </span>Try telling that to the person that just had their home foreclosed. Or the person that just saw a 50 percent increase in their housing payment.<span style=""> </span>Suddenly the eager lender who went stated income is hesitant to offer them a refinance or payment support.<span style=""> </span>When you hear talk about bailout why don’t they chase lenders that committed fraud and create a restitution fund from their earnings or profits?<span style=""> </span>Companies and banks that benefited the most with fraudulent loans should pay something back.<span style=""> </span>This way, those that actually managed their finances wisely won’t be taxed and subsidize this credit bonanza.<span style=""> </span>And even President Bush was questioned directly about the subprime debacle.<span style=""> </span>The reporter asked if a crisis in the housing markets existed and the President replied that everything was okay and we don’t need to worry about the market.<span style=""> </span>No bail out from his administration even though they got loads of money from housing Political Action Committees.<span style=""> </span>Maybe he got advice from the NAR which on a monthly basis adjusts their housing figures down.<span style=""> </span>It is now becoming a running joke that whatever the NAR states, subtract one from it.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">To a certain extent, I think folks are catching on that simply because you can charge something doesn’t mean you should actually buy it.<span style=""> </span>Just because I can “buy” a Ferrari tomorrow doesn’t mean I will.<span style=""> </span>Just because you can swim with sharks with T-Bone steaks tied around your neck probably doesn’t mean you should.<span style=""> </span>It is called using restraint and assessing your actual situation.<span style=""> </span>All it takes is a simple budget and a realistic assessment of the market.<span style=""> </span>Something that has been absent since 2000.<span style=""> </span>Like the <a href="http://drhousingbubble.blogspot.com/2007/08/personal-story-by-lawyer-from-previous.html"><span style="color:blue;">amazingly well written letter from a lawyer during the Great Depression</span></a>, from crash to an actual daily impact in the society took about 3 years.<span style=""> </span>I’m still in the camp that doesn’t think we’ve hit the “crash” point.<span style=""> </span>I’m thinking October will hit us hard for a couple of reasons.<span style=""> </span>First, the record month of rate resets will hit a psychological tipping point.<span style=""> </span>And second, we will have Q2 numbers coming out and housing companies (those that aren’t in bankruptcy) will be reporting more disappointing numbers.<span style=""> </span>This bubble went global and together, we will share in some of this pain.<span style=""> </span><br /><br />What are your prediction for the remainder of the year?<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span></p> </div><br /><br /><a href="http://feeds.feedburner.com/DrHousingBubble-HowILearnedToLoveSocal"><img src="http://img527.imageshack.us/img527/576/rsslc7ue5.jpg" />Did You Enjoy The Post? 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