Real Homes of Genius: Half-Off Sale in Lynwood California and the Distance Theory of Investing.

18 03 2008

Real Homes of Genius: Half-Off Sale in Lynwood California and the Distance Theory of Investing.

Posted by: in Real-estate news

During this weekend as the Bear Stearns saga was unfolding, CNBC did an unusual thing and switched over to their world feed as the global markets opened on Sunday night. Ironically the scheduled show was American Greed but why not just show world markets busting into a Pavlovian response speculating on a Fed move, either way the title of the supplanted show seemed appropriate for the live feed. The JP Morgan joint venture with the Fed was sure to cause a stir in the markets so the Fed also added a .25 cut for the discount window just for good measure.

It seems to have stopped the market from roiling downward early in the week. One thing struck me from the world CNBC feed aside from them being better straight shooters than our counterparts (aka Jim Cramer saying “don’t sell Bear!”) was how little they really know about the magnitude of the problem from the trenches. They are simply relying on what is on their books and extrapolating this data onto future projections assuming their risk models are correct. Have they ever been to Oakland? Will they ever set foot in Detroit? Maybe a trip to Compton or Huntington Park might make them think twice about jumping back into the credit markets? What about empty condos in Florida? I’m sure these analyst really have an idea of whats truly going on. Oh yeah, and many of these areas have employment contracting.

The reason I bring this up is not to denigrate any of these cities but these so-called experts, kept reiterating that this is the bottom and prices on certain areas will be recovering soon! The only way things can recover is if foreclosures abate and home prices bottom, which they are not. In addition, these so-called low income areas had median selling prices of $400 to $500 thousand during the boom times in California. How is a half million dollar home a “poor” home? The sheer amount and volume of bad loans out there is incredible, many which have not been marked to market. Once the reality sinks in that areas that are immense such as California and Florida show no semblance of recovery, the other shoe will drop. We are only roiling from subprime issues but just wait until Alt-A and the option ARM waves start hitting in full force.

It is easy to get caught up in the Bear Stearns debacle and the Fed throwing the dollar under the bus, but let us remind the world once again why and how this bubble went into another dimension. Remember everyone, we are talking about $13 trillion in mortgage debt here. Today we salute you Lynwood with our Real Home of Genius Award.

Real Home of Genius - Lynwood CA

Today’s home takes us to Lynwood California. This 597 square foot home has 1 bedroom and 1 bathroom. You also get a garage large enough for a Vespa. Not only will you be able to have 1 full bedroom to your self, but you also get a back door free of charge:

*Click and gaze at the epicenter of option ARM and subprime land.

Now before you run out and go dialing on your iPhone to your agent, you may want to understand the dynamics of this housing market and area. The market is tanking. In these areas in Southern California the bottom has completely fallen out like the ride Supreme Scream at Knotts Berry Farm. But how many places offer you a back door? Come on people! We are hitting bottom and now Boom Boom has lowered rates again and if all things go bad, you can always take your mortgage to the discount window for some freshly printed Treasurys. Good times.

You may say, what’s the big deal? What is the current market price of this place? The current listing price is $224,900. And look how close you are to Beverly Hills! This is the massive delusion that folks that aren’t from the region keep on missing. Just because you are in Los Angeles County does not imply that you are in a good area. Like any large metropolis, the working classes need a place to live and usually it is near by their work. What we have is a lack of affordable housing here in California. Now with gas going through the roof, if you are to work minimum wage which many in Los Angeles County do, that additional 20 percent in fuel costs really eats at your bottom line. Given many of these people won’t buy these homes but who will? Investors? The income won’t even cover your principal and interest let alone other costs in being a landlord. A flipper? Who are you going to flip to? Let us take a look at the sales history here:

Sale History

01/23/2008: $288,000

01/30/2007: $395,000

This place is now bank owned so the price in January was essentially the bank taking the place onto its books. This is what we call mark to market. In one year, this place has “lost”, assuming there was something there to begin with, $170,100 in nominal value or 43 percent. Weren’t all these predictions telling us that 20 to 30 percent drops over four years were the ultimate bottom? This place got marked down like Bear Stearns did, fast and furious. Nothing sticky about this correction. We are seeing this more and more on a daily basis. Even at $224,900 this place is still overvalued since a 500 square foot apartment would run you about $700 to $800 a month. The local area income for a household is $47,000 so you can imagine what a budget like that can afford. The entire United States is being marked to market. There are more Real Home of Genius popping up in Southern California. Take a look at the following table:

County	Median price Feb 2007	Median Price Feb 2008	Yearly Decline
Los Angeles	$528,000	$460,000	-12.9%
Orange	$620,000	$520,000	-16.1%
Riverside	$410,000	$325,000	-20.7%
San Bernardino	$368,750	$290,000	-21.4%
San Diego	$480,000	$415,000	-13.5%
Ventura	$584,000	$445,000	-23.8%
Southern California	$495,000	$408,000	-17.6%

You may think that we are cherry picking but I assure you, there are plenty of homes hitting the market that are ridiculously overpriced. The first shoe to drop of course was in lower to middle class income areas since the income base is first hurt here. But even now, prime location are starting to come under fire. Frankly, I believe that this will be the larger and more pervasive psychological break for the market. It is one thing when we hear about fraud or an area in Michigan that has homeowners in subprime mortgages struggling to make a payment on a $125,000 mortgage. Yet what about those that got into jumbo option ARM mortgages at say $500,000 to $700,000 in so-called prime areas in Southern California? People are quickly going to find out how much real income people have in this large metropolis.

The stark reality is that even with a slight down tick, we are already on the verge of a statewide collapse. As we wrote about the California budget: California Budget Woes: Balance the Budget by Gambling and Letting Inmates Out! We are in uncharted territory here. Of course a large part of our economy was based on a perpetual housing shell game. That is, you buy a home, an agent gets a cut, a broker gets his percent, the title company gets there fee, the escrow company gets paid, and finally the seller gets a check. Then you load up your home with granite countertops (big jump for Home Depot) and put in a flat screen plasma (Best Buy says thanks!). And given we have an aversion to savings as a culture, which lowering rates only reinforces more spending, all this extra money was pumped into consumer spending thus keeping us in this vicious feedback loop. Now that the game has gone into reverse, people are realizing that their personal ATM machine is now malfunctioning. We still have subprime mortgages resetting each month at the rate of $35 to $45 billion a month all the way until early 2009! Then we’ll have our second wave of option ARMs hitting in late 2009 through 2011. Unless housing settles down, which it will not, we are going to see how exposed a debt society can unravel.

I’ll do my own favorite pundit impersonation and say “don’t buy housing NOW!!!”

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

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