Real Homes of Genius: End of $1 Million Home in Pasadena and the Extinction of Mortgage Equity Withdrawals.

21 01 2008

Real Homes of Genius: End of $1 Million Home in Pasadena and the Extinction of Mortgage Equity Withdrawals.

Posted by: in Real-estate news

While the administration decides if they should send you your $800 rebate in a paper or plastic envelope, world markets took incredibly large hits today. Hong Kong’s Hang Seng index plunged 5.5%, its biggest drop since 9/11. Take a look at the worldwide market snapshot:

Now what do you think the world is saying about this so called stimulus package announced last week? I think many are starting to realize that all the jawboning going around is simply that, a lot of air with no substance. They sense that below it all, something deeper is happening. Take a look at the S&P chart:

We have broken major support levels so you can expect two things. Either the market rallies back up or it drops even further until it finds a bottom. Now with further banks and lenders getting ready to announce at the end of the month, I would expect even further declines across markets. Over in the United Kingdom the battered mortgage lender Northern Rock skyrocketed 46 percent on speculation that it may be nationalized. Although this is good news for the lender the FTSE-100 fell 5.5% as well. I guess all this talk about bailing out companies and printing free money are not having the impact they once had. After all, giving more credit to companies that exploited credit and created this bubble is a primary reason why we are entering into this slump. The markets are realizing that much of this is a sham and even though politicians keep talking about the economy they still fail to address what got us here.

If anything, many are still in denial and still want to help the perpetrators with bailouts instead of getting the Justice Department ready for subpoenas and indictments. I call this what it is, a major white collar crime on the markets of the global economy. If you are to rob a bank, the most you will get away with is potentially $50,000. You will get caught and face multiple years in prison. However, you can fabricate a few loans in a couple of months, put people into financial danger foregoing all fiduciary responsibility and not only get away with $50,000, you’d also be free to do it again over and over. This is not free market capitalism but criminal activity. Until politicians can admit this openly expect more band aids while the market trends lower and lower. Why is it in the hands of politicians? We are now moving toward fiscal stimulus which of course the administration will never admit is needed since they believe the dogma that tax cuts for the uber rich are the mantle to all financial security. Good luck getting them to admit any wrong doing ever.

Real Home of Genius Pasadena Style

A million dollars used to be a lot of money. Now it is enough for a few Whoppers at Burger King and a side order of fries. The dollar has taken major hits over the decade. Even in light of Southern California prices going down, as we examined the double-digit declines of each County in SoCal, there are still folks thinking that they can sell starter homes at peak bubble prices. If anyone has any doubt that California prices were buoyed up by jumbo-banana-republic-stuntman-NINJA-alchemy mortgages, take a look at this chart put out by the OFHEO only a few days ago:

Are you thinking what I’m thinking? That’s great because I’ve always wondered how they got so many nice colors into this pretty looking chart. Oh, and take a look at the insane amount of jumbo loans in California! 49.1 percent of the entire market in the first half of 2007. What this means is that any talk of raising caps is basically a one way meal ticket for California. But you say, all these loans are safe products so we have nothing to worry about. Let us take a look at the toxic sludge here:

Basically when folks go into jumbo territory they are going into wonderland mortgage product territory. And these are the one’s purchased by enterprises so you can imagine how the secondary market looks with who knows what in the portfolio of many lenders and banks. I think you get the idea. Raising caps is not going to do anything except set the ground for another bubble but to be honest, folks are maxed out and credit is tight so unless you can get a traditional 30 year jumbo, you can kiss Pay Option ARMS and Interest Only loans good bye.

It always helps to see the bubble unfold with Real Homes of Genius. Today’s example highlights so many things that went wrong with the bubble. Mortgage equity withdrawals, flippers, and absurd prices. Today’s home takes us to the beautiful city of Pasadena:

This nice 3 bedroom home sits on 1,500+ square feet. It was built in the 1950s and has a lot of curb appeal. For those of you not in the area, Pasadena is a very nice Los Angeles County city. This city is so nice, that this home is still selling at $1 million even in today’s cracking housing market. Let us first take a look at the sales history:

Sale History

06/11/2007: $1,100,000

06/08/2007: $110,000

08/02/2006: $870,000

09/24/2003: $595,000

12/15/1999: $317,500

Can you tell where the bubble started? Hint it starts with a 19 and ends with a 99. You may notice the 2007 $110,000 but that is simply a second mortgage equity withdrawal for who in the world knows. We can safely assume that this money was spent elsewhere fueling the US consumer economy. No rising prices equals no mortgage equity withdrawals. The person that bought in 2006 made out nicely at the peak. They first bought it for $870,000 and took out $110,000 in equity pushing their balance up to $980,000. Suck out $100k and put it on the market and bam, sell it for $1.1 million. See how easy it is to become ultra rich in real estate? All those Flip this House and Property Ladder shows were right. Fast forward only a year and seven months and where are we at? We are looking at a potential short sale for $1,000,000. This home is selling for $645/per square foot. Simply by looking at the history you can see how many times this bubble was milked for. First we have a sale in 2003 netting over $278,000. Next we have a sale in 2006 netting $275,000. Next we have the sale in 2007 bringing in $120,000. This was money used to remodel, take trips, buy cars, spend on consumer goods, and fuel the consumer economy of the US. This went on for a decade. Now we are reaching the stark realization that this will not go on forever. This home is the perfect example of how dependent our economy was on real estate. Each sale fed a real estate agent, mortgage broker, bank, title company and potentially construction workers for any remodels. All this ends with the credit bubble bursting.

Welcome to 2008. We are entering a new era. Our $14 billion dollar short fall in California must be faced head on but we have much more deeper problems in the state. When the Governator talks about releasing 50,000 inmates to solve the fiscal problems of the state you know this party is over and the criminals are now running the place.

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

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