I realize that most Real Homes of Genius are featured in lower income areas, yet sellers still command $400,000+ for a run down home in a questionable neighborhood. Call it a symptom of bubbleland hallucinations in the mental asylum of the housing bubble. The purpose of these posts is to highlight the magnitude of the housing bubble when people still doubt we even had a bubble to begin with. Moreover, these calculations should give you an idea of how to run your own analysis and figure out the value of a home with financial facts (as opposed to bubble fiction). The housing bubble is a piece of the larger global credit bubble. Homes are overpriced in practically all of Southern California; from high crime areas to posh and prime neighborhoods. Like the couple that earned $130,000 a year, drove two Mercedes, and still lost their home I want to break the stereotype that only poor people lose their homes to foreclosure. Today we’ll feature a home in a middle-income suburb of Southern California. Today we salute you Lakewood with our Real Homes of Genius Award.

This enormous 816 square foot home has 2 bedrooms and 1 large bath to entertain guest. The agent tells us that the kitchen is completely remodeled with granite countertops. Granite countertops of course, are the ultimate status symbol of home prowess. Consider it the virility of a strong homeowner. Otherwise, you are ten steps down on the housing evolution ladder. This place also has “custom paint colors” like the low riders you see jumping on hydraulics on Figueroa Avenue. Absolutely riveting. This place is so hot, it has been on the market for 6 months. Too hot to touch. But let us dig into the history of what happened here.

This home is so great, that it sold twice in one year:

Sale History

08/31/2006: $500,000

03/17/2006: $489,000

The last buyer enjoyed the place so much they decided to hand it right back to the bank in 6 months. The bank, looking at sophisticated market analysis of the area decided to put the home back on the market for $500,000. This price was arrived at by the “latest greater fool theory” of appraisal or LGFT for short. Looking at the LGFT, the bank figured they would easily recoup their money. Forget about the subprime implosion or mounting inventory, they put on their rosy colored glasses and saw the market according to them. Here is the pricing action on this great home:

Price Reduced: 04/24/07 — $499,900 to $485,000
Price Reduced: 05/27/07 — $485,000 to $470,000
Price Reduced: 07/11/07 — $470,000 to $450,000
Price Reduced: 07/18/07 — $450,000 to $400,000

After a month on the market, the bank decided to reduce the price by $14,900. This certainly would generate some interest. May goes by and still no buyers. So the bank decides to lower the price by another $15,000. What is going on the bank wonders? This isn’t the housing market of 2001-2006. The bank decides that it will wait for the fabled summer housing Easter bunny before reducing prices again. Early July and no buyers are found for this place. The bank decides to get more aggressive and drops the price by $20,000. Nothing. Now something happens at this point. Either the bank is getting nervous about “bubble bursting” talk or is desperately ready to unload the home. Only a week after the $20,000 drop the bank goes down another $50,000! Holy crap! In one week this home went from $470,000 to $400,000. Now that is what I call pricing a home to sell.

As you’ll notice from the short sale count on this site, the number is growing daily. All of a sudden, risky interest-only-no-money-down-exotic loans are unavailable to customers. Someone will have to come in with 3 to 5 percent at a minimum to buy this place. Believe it or not, this minor adjustment to the mortgage market is enough to collapse the bubble. I’m not sure what constitutes a crash but losing a $100,000+ in 6 months is pretty significant. A 20 percent drop in 6 months is definitely a bubble bursting. This is a preview of things to come since we are only in the first stages of rate resets, growing inventory, declining prices, and tighter credit. Take a look at the market demographics for Lakewood:

Average Annual Household Income: $69,279

Median Mortgage Debt: $43,631

Median Net Worth: $47,348

What does the data above tell us? For one, the median mortgage debt is low meaning a bulk of the people that currently own homes in the city bought prior to this decade long bubblemania. Somehow I doubt the previous two buyers on this place came in with 10 or 20 percent down. Next, you’ll notice household income isn’t anywhere near the amount to support $500,000 homes. Since doing a monthly balance sheet is so useful (too bad many folks didn’t spend 10 minutes doing this before signing a mortgage) we’ll run the numbers here if we were to buy this Real Homes of Genius at the current $400,000 and earned the current median income of the area. Time to bust out the financial calculator and do some housing magic!

Monthly Gross Income: $5,773

Monthly Net Income: $4,526 (filing as married couple with 2 allowances)

Monthly Home Payment (PITI) = $2,817 (5% down and market rate of 6.5% on 30 year fixed)

Monthly Auto Fuel Cost: $350 (average for 2 vehicle households)

Monthly Auto Insurance: $120

Monthly Auto Payment: $500 (assuming modest car loans)

Monthly Food Budget: $400 (moderate shopping budget)

Monthly Disposable income: $339

Keep in mind we are not factoring in cell phone costs, utilities, cable, healthcare, and pretty much anything else you pay on a monthly basis. As you can see, even with the $100,000 reduction this home will still consume 62 percent of the family’s net income. Let us do a bit more research on the rental market for this area. After looking at rental data, the median rental rate for a 2 bedroom place in the 800 to 900 square foot range in Lakewood is $1,400; or 50 percent below the full mortgage, taxes, and insurance payment on this home should we purchase it. If this home is overpriced at $400,000 what in the world were people thinking buying it at $489,000 and $500,000?

When you run the numbers, you realize we are in some other twilight dimension of housing here in California. Keep in mind this home is massively “under priced” for this area which has a median home value of $505,000 according to the latest housing reports.

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