Real Homes of Genius: Today we Salute you Torrance. $575,000 in this Housing Market?

What a gorgeous day in Southern California. It was a mild day with a touch of fall permeating through the morning marine layer. It is becoming evident that some people believe this wonderful climate is reason enough to ask for bizarre and economically devoid prices. 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. Alas, this story like all Shakespearean dramas seems to have a tragic ending and the foreshadowing is already darker than a full eclipse. You might have noticed on the right hand column a weekly short-sale and inventory count. An emerging trend is brewing. 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. But there will be two backhanded retorts to this premature excitement in October. First, the percent of short-sales coming on the market is staggering. Next, we are going to have the 3^rd quarter foreclosure numbers sometime in the middle of the month and they will be brutal. How do we know? Just take a look at this article on mortgage resets, price-to-income ratios, and the list of Real Homes of Genius. And speaking of Real Homes of Genius, let us take a look at a short-sale home to highlight the current market. Today we salute you Torrance with our Real Home of Genius award.

In California, we have beach cities and then we surrogate beach cities. Torrance is considered a middle class area here in Southern California. Nothing outrageously glamorous or anything that would cause you to lose bodily functions over. Today we are going to look at what 95 percent of the country would consider a starter home. This home is 1,106 square feet with 3 bedrooms and 2 baths. 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. When you read the ad you realize that this place is fully “landscaped” and has “sprinklers.” Looking at the lawn, we are glad the sprinklers are working. 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? How about $575,000. Entering the fall and winter selling season at peak price, I’m not sure how much action this home is going to get.

Now before you rush out to call your agent, let us take a look at the sales history of this home. As an aside, folks even a few years ago did not have quick access to previous sales history as we do now. A rudimentary breakdown of the numbers puts things into perspective quickly without running to your local clerk’s office. This simple caveat as it becomes more mainstream will change the way people value homes. So without further interruptions let us run the numbers:

Sale History

08/14/2006: $575,000

01/11/2006: $450,000

08/15/2003: $255,000

07/21/1994: $110,000

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. I’m realizing after talking to certain sellers that there is psychologically some mental block on realistically evaluating your own property. 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.” 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. And renting is the equivalent to flushing your money down a porcelain toilet.” From 1994 to 2003, a period of 9 years this place had an annual average percent gain of approximately 9.8 percent. Not a bad track record for a decade. But let us take a look at the price gain from 2003 to 2006. In this timeframe, the price went from $255,000 to $450,000, a nominal gain of $195,000. During these 2.5 years the average annual percent gain was get this, approximately 32.9 percent! Bwahaha! Oh wait, it gets better. On the next time frame from 2006 to 2006, we see the price jump from $450,000 to $575,000. 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. Since we didn’t go one year before trading hands, what does the percent gain work out to? 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! So for 4 consecutive years this home had annual gains of 30 percent. In four years this home has increased in value by an amazing $320,000.

People must be making a boat load of money in this area right? It is always sobering to look at the area demographics. Let us take a look at some numbers pertinent to this area:

Average Household Income: $63,377

So let us assume the average household was to purchase this home. How would their budget look like?

PITI: $3,968 - with $28,750 (5 percent) down and current jumbo rates

Net Income: $4,188 - filing in California as married with 2 exemptions

So this family has a net disposable income of $220 after paying their mortgage principal, interest, taxes, and insurance. 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.

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

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Real Homes of Genius: Today we Salute you Bell. 551 Square feet for $349,999. No Bubble Here.

The market has gone completely bipolar. A few weeks ago, the market was tanking and practically every day, we were hearing about one after another lending institution collapsing. Now, we are riding the stock market to prosperity once again thanks to the Federal Reserve and easy money (you can use these interchangeably). Even though we still hear about lending institutions tanking this is already baked into the market since data doesn’t matter anymore. This past week was full of pyrotechnic housing fireworks. Let us recap the week:

Fed drops funds rate to 4.75

Stock market soars like an eagle on methamphetamines

Dollar index falls below key support levels

Gold shining at 27 year highs

Oil prices keep chugging along

And guess what happened to the 10 year Treasury note?:

It actually went up! 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. Do you now get that they are simply bailing out Wall Street and hedge funds? Take a look at the stock market and you should get a clear idea who has gained the most benefit. They have a massive impact and influence on direction but this doesn’t always hold true. Fears of a falling dollar, inflation, and rocketing commodities had a larger impact on the direction of rates. And LIBOR rates that most adjustable rate mortgages track is still holding strong. We aren’t having a 30 year conventional fixed mortgage crises; we are having an exotic banana republic mortgage credit debacle. Thanks Ben for that .5 cut which does very little for 9+ percent subprime loans! Making lending standards more lax at this juncture may not get you into MENSA so let us take a look at a case example. Today we salute you Bell with our Real Home of Genius Award.

Today’s home is one of the smallest Real Homes of Genius ever featured coming in at an eye-popping 551 square feet. This 1 bedroom 1 bath home is the envy of the neighborhood. Who said you couldn’t have a white picket fence in Los Angeles County? This place can be your's for only $349,999. Make sure you mention to your broker that you are looking for the Bernanke Special since it’ll save you $100 a month. What was this home initially listed for?

Price Reduced: 09/13/07 -- $370,000 to $349,999

A $20,001 discount is not a bad incentive. 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. 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. I’m not buying a $100,000 boat but show me one at $99,999 and then we are talking. What does the sales history on this place tell us?

Sale History

10/26/2005: $299,500

12/30/1998: $78,100

06/29/1998: $95,970

Say what? 5 figures in Los Angeles County and within the past 10 years? This place had an 18 percent decline in 1998. This 18 percent decline amounted to $17,870. We already got that discount in a few weeks plus a few extra dollars; we’ll need those extra dollars for higher energy costs. Do you realize that this home went up by a multiple of 4 in 9 years according to the current sales price? Somehow I doubt incomes went up by this margin. Let us assume that they sell this home at the current price:

$349,999 – six percent commission of $20,999 = $329,000. 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. Again, this is assuming they sell it at their current price. Let us take a look at the neighborhood information:

Average/Household: $41,464

Median Rent Price: $900

So let us say that a hypothetical family in this area was to buy this place. Let us run their monthly budget:

PITI: $2,465 (5 percent down and 30 year fixed mortgage)

Monthly Net Income: $2,868 (filing as married with 2 exemptions)

So this family is left with $403 of disposable income each month. They are spending an unbelievable 85 percent of their income on housing. 401k? Forget it. Roth IRAs? If there is money after food. Do you see why this makes no sense? No investor would purchase this place since they would be negative cash-flowing by $1,565 a month. I know that here in California finding cash flowing properties is like finding a leprechaun. Even so, the number of investment properties bought in California has exploded over the past seven years. This was the flipping, mortgage-equity-withdrawal, and other people’s money (OPM) crowd. Apparently, this mantra is straight from the Fed because they have no respect for your American dollar and are using this OPM strategy. Too bad the other people are you and your family. Now that we are seeing depreciation in California, who do you think will buy these homes? Income ratios do not make sense so families in the immediate area are very unlikely to buy these places. Investors will not buy unless they want to feed an alligator property with no appreciation. Could it be that we have been living in a major Ponzi bubble here in Southern California and the game has now stopped? No amount of rate dropping will change the above facts.

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

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Real Homes of Genius: Today we Salute you Pasadena. $87,000 off in 2 Months for 937 Square Feet.

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. Too bad this won’t do much for banana republic loans in the wonderful sunny state of California. 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. But for now, let us party with Bacardi and extend a warm welcome to Ben Bernanke and the Fed. In addition, this won’t do much for the Real Homes of Genius inventory that is piling on like warm pancakes. 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. I know many of you feel a gut disappointment with the Fed. You were hoping that they would do the right thing but realized that they are part of the credit machine. Don’t worry yourself too much. Many people think this credit crunch is an interest rate dilemma but as our Real Home of Genius today shows, this is a pricing problem. Today we salute you Pasadena with our Real Home of Genius award.

This inspiring 2 bedroom 1 bath home will put your green Bermuda lawn to shame. Who needs grass when you have fortified concrete with wild weeds growing out of it? This place spanning out over a whopping 937 square feet will be a sure hit with friends and family. 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. The mortgage shenanigans of yesteryear are now finished according to our friend Big Ben. Let us take a look at the sales history on this home:

Sale History

03/06/2007: $507,000

02/25/1987: $75,909

Someone is trying to unload this property really quickly. At the current price, they are taking a $57,000 hit without the 6 percent commission. This was a flip gone bad as you can see from the pricing action:

Price Reduced: 07/09/07 -- $537,000 to $450,000

With the first price, someone felt that they would be able to get out of this market with no skin. Let us run the initial calculation ($537,000 - $32,220 = $504,780). The $32,220 is 6 percent if you are wondering. In fact, you can almost derive from these numbers that the person went with a zero down mortgage. How can you arrive at this conclusion? The sales cost minus the commission cost bares an uncanny resemblance to the purchase price in March of this year. This is a new trend. Unfortunate buyers that came to the party too late and are trying to hand off the home to another would be flipper. But guess what? The game is over. Keep in mind you were still able to get your hands on a fantastic supercharged wonderland exotic mortgage in March of this year. In fact, Countrywide was ramping up its subprime outfit and even talking about 50 year mortgages as late as May of this year. Now they are saying "no subprime for you!" How quick things change. You may say, “I feel sorry for this buyer.” Here is the poetic justice, these buyers can hand the keys over just in time for the bailout forgiveness and face no tax consequences. 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. The stigma is gone when a large part of society has faced a similar circumstance.

So how low can this place go? Well considering that this place would rent for $1,500 tops, it is still a bit on the expensive side. But hey, your $450,000 mortgage just got a boost in the interest rate of .5 percent. That is if the market responds to the injected liquidity and the LIBOR acts accordingly. But even if it does, this place would not make sense as an investment. Let us run the numbers as a prospective investor. Currently for investment properties if you have good credit, you can get a mortgage with 5 percent down for approximately 7 percent. So let us assume that we buy this place for 5 percent down with a 7 percent 30 year note:

5 percent = $22,500

PITI = $3,312 (30 year fixed at 7 percent for investment property).

The monthly payment will be $3,312 and we are receiving in rents $1,500. That means we are negative cash-flowing by a whopping $1,812 a month. And appreciation is gone for at least a few years. The only benefit is in tax relief but this is equivalent to spending $1 and getting 2 quarters back. If you desperately need tax relief why not buy a cash-flowing property out of state? 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). Only at that price point would rental market growth, market stagnation, and the headache of being a landlord make any financial sense. As you can see, 100 percent of investors are going to rule this place out. You can’t flip properties as the pricing trend is down.

Many in California, as myself, are disappointed with the Fed but this doesn’t change the fact that prices will plummet in California. We are already seeing this. If many of the rogue investors were forced to mark-to-market their portfolios, there would be absolute chaos. So in a way, I can understand that the Fed is trying it’s best to avert disaster. After all, why would they drop .5 basis points if they were only moderately concerned about the data they were seeing? 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.

Today we salute you Pasadena with our Real Homes of Genius award.

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

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

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

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

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

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

Sale History

02/21/2007: $23,600

01/19/2006: $640,000

08/24/2005: $542,500

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

Average/Household: $75,523

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Real Homes of Genius: Today we Salute you Paramount. 768 Square Feet for $324,900. Buy, Withdraw, Sell, Foreclose. The Cycle of Life.

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. 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. American Home Mortgage also used this last minute end of the week heroics when they announced they would be holding back on their dividend. We know how that story goes. Many folks in lower to moderate priced areas throughout this country are scratching their heads wondering why things are deteriorating over night. 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? Oh, let us count the 768 ways. Today we salute you Paramount with our Real Home of Genius Award.

Flipping ain’t an easy job and someone has to do it. This spectacular 2 bedroom 1 bath home is what we call in Los Angeles, posh living. With 768 square feet, you’ll be wondering what to do with all the extra space. In fact, we are told that this place has an “open kitchen that flows into the living room.” 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. This place according to the ad is a “fixer” so you can mold this place into your ideal dream home. The price tag? Only $324,900 or $423 per square foot. Look at the bright side, this place now qualifies for FHA financing. Are you sold? Well let us look at the previous sales data:

Sale History:

05/10/2006: $415,000

09/19/2005: $47,000

03/30/2005: $340,000

This is where you see the symptoms of the housing mess we are currently living in by jumping into the trenches. First, the home was artificially high in 2005 for the area. Then, 6 months after the purchase we have the fabled housing ATM machine being used for mortgage equity withdrawals. These folks probably realized that they bit off more than they could chew so what do they do? They simply listed a price that would cover the mess, sort of like sweeping dirt under the rug. Don’t think this is the case? Let us do the math:

Since they probably went zero down with some sort of banana republic financing the math works out as follows: Mortgage #1 ($340,000) + Mortgage #2 ($47,000) + 6 percent selling cost ($24,900) = $411,900

Hey, this figure is really close to the sales price in 2006, what a shocker. 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. In this example, these folks actually made a few thousand dollars even though they were digging deeper and deeper into debt. They had the benefit of being at the right place at the right time. This isn’t the case for the buyer in 2006. Some lending institution thought it would be a brilliant idea to lend $415,000 for a home that would rent for $1,100. Does this make sense? Of course not. You don’t need your Ph.D. in Finance to know this deal is not going to work. In fact, let us take a look at the neighborhood statistics:

Average Annual Household Income: $48,991

Let us run the hypothetical numbers of the average family in this neighborhood buying this home with conventional financing:

Monthly Net Income: $3,324 (Filing Married with 2 Exemptions for Federal and State).

PITI: $2,864 (5 percent down payment of $20,750, 95 percent LTV)

So this family has monthly disposable income of $460 for a 768 square foot home built in the Great Depression! What about automobile costs? Food? Healthcare? After all, they are only spending a mind numbing 86 percent of their net income on their home! And we aren’t including maintenance cost such as gardening, trash, and other fees that sneak up on property owners. Is it any surprise foreclosures are exploding in California? Who in their right mind didn’t see a disaster like this coming? Now, the home is priced at $324,900 or $90,100 less. 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). And why would a real estate investor buy this place? They would be negative cash flowing by $1,236 in a market where prices are trending downward. Is it becoming apparent why this housing market needs to correct and this is no minor bump in the road? Do you still think that a bail out is a smart idea? 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. Unless incomes in the area increase by 100 percent, prices will adjust lower now that lenders are being forced to use more conventional financing. In other words, prices have to reflect the income reality of the people in the immediate area. And reality is so passé after living in a fantasy world of easy credit and hyper speculation.

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

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

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

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

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

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

Sale History

10/04/2002: $430,000

12/24/1998: $275,000

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

	5 Percent Increase	Current Sales	Difference
1998	$275,000.00	$275,000.00	base year
1999	$288,750.00