Much has been said about the Inland Empire of Southern California. In fact, the Inland Empire is the largest region in Southern California and includes cities such as Ontario, Temecula, Riverside, and San Bernardino. Riverside and San Bernardino Counties have over 4 million people combined. We also know that this area of Southern California is overbuilt and is facing the wrath of the housing downturn harder than many areas. There are many who once said that Southern California would never be overbuilt and for many years, this seemed to be the case. However, for those that do not live here in Southern California, this is a massive concrete jungle and a commute from one county to another can take up to two to three hours depending on the ever present variable of traffic congestion. Yet many folks in the pursuit of the elite housing ownership club and real estate propaganda guidance, decided that they would tolerate large commutes for owning a piece of land regardless of the mortgage they would have to support. Some just wanted a place for their family. Others were infected with the disease of Flip this House neurosis (FTHN) and Property Ladder delusion (PLD) and thought anyone can make tens of thousands simply by buying a piece of property, slapping on some paint, a touch of Feng Shui, and next thing you know your bank account will be drinking from the easy cash fountain. As we discussed in the previous article, every county in Southern California is now negative year over year. San Bernardino and Riverside have been the hardest hit counties declining 9.6 percent and 15.1 percent on a year over year basis. To highlight the magnitude of this once in a lifetime South Sea California Bubble, today we salute you Riverside with our Real Homes of Genius Award.
Today’s home takes us to the city of Riverside California. What was once only in the realm of housing legend, we are now seeing homes selling for $200,000 in the mythical place called Southern California. Housing pundits once pondered stories over fireside chats about, get this, homes selling for $200,000 and if you were lucky, you may spot the ever illusive $100,000 home. Sometimes legends become reality. This 980 square foot McMansion has 2 bedrooms and 1 bathroom. Taking a look at the picture we are seeing the beautiful technique of the Feng Shui yellow lawn. Talk about the Midas touch! We also see an amazing technique of photography called “make this house look bigger than it is” which has been employed on many other Real Homes of Genius. This place is bank owned and ready to sell.
Let us take a look at some pricing action on this home:
Price Reduced: 10/09/07 — $279,900 to $249,900
Price Reduced: 11/14/07 — $249,900 to $209,900
So where is the 40 percent discount? Well already, since the home was listed in ancient October, it has dropped 25 percent in one month! This just goes to show that banks are truly motivated sellers. Even if current sellers suffer from FTHN or PLD, banks do not and need to move inventory fast. They realize that no ceramic tiles or free tickets to Hawaii are going to sell a home except rock bottom price. Plus, they’ve been backhanded by Wall Street and no one wants to buy stuntman mortgage products that are so dangerous, you will need a helmet before signing the final page of your escrow document. Another beautiful thing about transparency is that it is very easy to see what a place like this sold for so no current seller can snow you over. Also, historians will be going through property tax and sales records and writing about people in Southern California with anthropological rhetoric such as, “once upon a time, people thought it would make sense to put all their disposable income into shelter.” Let us pretend that we are historians and let us dig up the sales history on this home:
Sale History
08/08/2006: $350,000
04/10/2003: $125,000
We all realize that this bubble is popping and for all the housing pundits that think this is a minor bump in the road to perpetual housing heaven, take a look at the sales history on this home. First, the person that sold in 2003 sold at a reasonable price pre bubble mania. In a short three years this home nearly tripled in value and as you can see from the picture and size of the home, not much was added or done to justify this price. This is what happens in bubbles. Prices disconnect from any fundamental rules or economic laws and prices go up matching the greed and irresponsibility of many involved. So here is where we start approaching our near 50 percent discount in Southern California. And this is a discount in only one year! From the peak of $350,000 to the current price of $209,900 this home is now selling for 40 percent off. A discount of over $140,000. Now I know some of you have e-mailed me how it is impossible for prices to fall by 50 percent. Well here is a 40 percent drop in one year. Does this apply to every region over the country? Of course not. As you know, I invest out of state in properties that cash flow. In fact, there are many places that have stayed relatively immune from the housing bust. Do I think housing will tank 90 percent? Absolutely not! I’ve never said this. With over 180+ articles I’ve been beating the “housing should reflect local incomes and rental/lease rates” drum for over a year. That is why when I get e-mails from people looking to buy and they argue that sellers still don’t want to drop prices, just wait or go and take a look at bank owned homes. This is where the true deals are at. It took me less than an hour to find a place that was 40 percent off. I’m shocked that some housing pundits still want to believe that housing will be back in its glory days. Upton Sinclair had it right when he said, “it is difficult to get a man to understand something when his salary depends upon his not understanding it.” Plus, prices aren’t going anywhere except down so there is no pressure to buy. We are now entering into a true buyer’s market.
Amazingly when you look at comps in this area or estimates for this place, we get a range of $300,000 to $350,000. This is the problem of using recent sales as a comparison tool because this is a lagging indicator. In a nutshell, most homes are valued by what recent homes in the area have sold for. You can divided the price by square foot and compare it to your current home (plus or minus upgrades) and you should arrive at your price. Well you see the error in this pricing mechanism. If all homes in the area that sold were sold at bubble prices that means that you are using inflated values to value your current place. So how do you value homes in declining markets? Simple. You use local area incomes and lease/rental rates. I know most housing pundits hate using these historical rules because by default, this will slash prices by double digits in many parts of this country but that is what is necessary. Whether they want to do it or not as you can see from this example, banks will lead the way because the REO inventory is only in the first stage and they need to unload homes as quickly as possible to make room for incoming homes. Think we are at the bottom? Take a look at these two charts and you’ll realize we are nowhere close to bottom. The silver lining in all this housing mess is that finally home prices will reflect local area incomes and provide families the opportunity to buy homes without taking on financially irresponsible loans. It will also instill the virtue of saving since no money down deals will slowly start to disappear as credit becomes tighter and tighter. Want to buy a home? You’ll need to strap down and save. Anthropologist studying the past call this buying what you can afford.
Today we salute you Riverside, with our Real Home of Genius Award.
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