Real Homes of Genius: Today we Salute you Huntington Beach. If you Walk Away, you Still Have the Ocean.
Posted by: in Real-estate newsIt is no surprise that many lower price areas are taking the brunt of this market correction especially in many cities in Southern California. However, not much has been examined between the synergy of employment linked to real estate and housing values. It was a symbiotic relationship that fed off each other. As the market trends pushed prices lower, the next train to leave the station is jobs that were dependent on ever rising home prices and a larger volume of sales. The churn and burn economy. This of course isn’t something new to this current era of economic prosperity and won’t be the last time that we witness such mob euphoria. Yet California is uniquely positioned that it will face to a large extent, some of the worst that will come with this housing led recession. It lived by the real estate, it will suffer by the real estate. To iterate on this point, let us examine a series that CNN Money is now doing looking at individuals and how the current economic downturn is impacting their lives. This story about a mortgage banker in San Clemente California literally has a piece of each facet that has caused this massive bubble and why things have changed so quickly:
“Surf teacher and retail clerk, 62, San Clemente, CA
I was a mortgage banker for about 20 years and while it had always been a bit of a rollercoaster ride, it also had some added perks in that I set my own schedules. This gave me time for what I really love to do: Surf.
As I watched the bubble getting thinner and thinner and bigger and bigger, I tried to position myself to survive what I thought would be a short-term correction.
First rates went up. Not much, but just enough to stop my business cold. First ones to go of course were the small brokers like myself who could not continue to spend more and more money to capture less and less business.”
A couple of misconceptions to begin with. First, the bubble didn’t burst (at least he acknowledges there was a bubble) because rates crept up (they are still at historical lows) but because prices became so out of line with local area incomes, that any tightening of the secondary credit market was enough to push the entire state of California to lose 20 percent off its median peak price in one year. Next, there was a false assumption that this was going to be a short-term correction. Now you must see some irony in this when he admits there is a bubble and expects a slow down turn. By definition bubbles burst. But back to the subject at hand, we had an unprecedented decade long bubble in real estate and those in the industry expect prices to run back up after what, a one year decline? This simple one page article gives you keen insight into why this bubble lasted longer and why it will have a much longer and more profound psychological impact. If you were to watch the mainstream media, you would think that dropping prices were somehow unlawful and everything should be done to prop inflated prices. They don’t have the guts to come out in a strong statement and say, “until prices reflect local area incomes, housing will continue to decline.” In previous downturns, a declining sector in the economy usually had immediate impacts in employment numbers but not this time:
“During that period I ran up about $35,000 in debt, mostly credit card. It didn’t seem like much at the time, to try and sustain what I thought was a short downturn that turned into a long-term bad market. Make that a catastrophically bad market that is far worse then anything I have seen before and getting worse.”
Once again, we get this belief that good times can last for a decade and bad times are expected to come and go in less than 12 months. To highlight the point even further, this person without credit would have been out of the industry and looking for something else much quicker without access to credit. Instead, he was speculating with his credit card assuming that good times would be around the corner. How is this different from buying a beleaguered mortgage stock and expecting it to jump up in double-digits again? I understand on an economical level why he ran-up his credit card debt to stay afloat, but how many others kept using their credit card or home equity line as a bridge loan to ride out the “short term correction?” This is the next shoe to fall. If this wasn’t enough, we also see that his son went into foreclosure during this time but more importantly, we get a peak into the psychology of why housing prices went to the epic levels that they did:
“Then my son’s house, which I co-signed for, went into foreclosure. Not really his fault, he was in the same business and his went down as well. At that point I made a decision that since my credit was gone anyway and I was really incapable of paying even the minimum payment on the debt, that I had little to lose and I just walked away. I don’t feel good about it. If I can, when I can, I’ll work on paying it back, but at this point I don’t care much.
Now I am a clerk at a very well run food store part time at night, and I’m teaching surfing when I can. It barely is survival money, but I’ve discovered that sometimes that is quite okay actually.
Failure can be enlightening.”
As you can see, this brief one year decline has cost his son’s home, job, his job, and conversely has lessened the tax base for the state. All this is interconnected and nothing operates in a silo although some would like to believe it does in their ivory tower. It was a house of cards built on real estate and California was the ultimate foundation. A few reports out show that WaMu and Countrywide have roughly 40 to 50 percent of their mortgage portfolios in California. I’m not sure if the lesson was learned here with the story. The industry that gave this banker his life blood, credit when times were good is now relegated to a low list priority on his personal list. Whether he pays it back or not, he cares very little as he tells us. Really interesting perspective that I’m sure many behavioral economist are going to be digging into during the next few years. Walking away is passé, the new hot thing is surfing away from your debt. If you’re going to leave your debt behind, leave it in style. Now speaking of waves and surf, let us now look at today’s Real Home of Genius in Huntington Beach.
Real Home of Genius - At Least You’ll Always Have the Weather
This home in Huntington Beach is getting a quick lesson in mark to market reality. This is a 3 bedroom 2 bathroom home that sits on slightly over 1,400 square feet. This could be considered a starter home for a working professional couple. Yet according to the ad, this is a great short sale deal from the bank because they have agreed to a lower price than what it had previously been listed at. Again, this is the logic many investment banks are using with their debt and assuming that somehow when the short term kinks work out, that they’ll be able to liquidate their crap onto other unsuspecting chaps. The game may be up. I say may since it looks like the government is inching closer to assuming many bad loans just like during the Great Depression. This can prop the market up for a longer time.
So first, let us take a look at the pricing action on this home:
Price Increased: 11/14/07 — $590,000 to $619,000
Price Reduced: 11/28/07 — $619,000 to $595,000
Price Reduced: 12/20/07 — $595,000 to $565,000
Price Reduced: 12/26/07 — $565,000 to $515,000
Price Increased: 12/31/07 — $515,000 to $565,000
Price Reduced: 03/10/08 — $565,000 to $515,000
You really have to wonder what is going on here. We have a range of $619,000 to the current $515,000. Of course probably to the bank or the current seller, this is a “real” loss of $104,000 but in reality nothing is a gain or loss until you realize it in the actual sale of the property and close escrow. Otherwise, you are speculating like the investment banks assuming the best but in reality, the actual market value is operating at a different level. Let us look at the sales history here:
Sale History
02/21/2002: $349,000
So even if it sold at $515,000 this is still a gain of $166,000 in six years or a yearly increase of $27,666 (ominous). Not bad at all. Yet the ad lists this place as a short sale so there may be an additional mortgage on this place aside from the first one. Now what is the current Zestimate of this place?
You have to wonder if some of the investment banks you similar estimates as well. And don’t fool yourself, Wall Street wants you to believe that all the financial engineering in the world is somehow going to trump human behavior. Just remember that financial engineering is what made Real Homes of Genius possible.
This above place isn’t exactly beach front property either. So what we are now seeing is the progression of areas that are considered “prime” seeing major corrections. This particular zipcode in Huntington Beach has a median sale price of $523,000 which is down 18 percent from a year ago and sales are down by 27 percent. Meaning, that last year the median price in this area was $637,000 and I’m sure, that is where that $619,000 price came from.
Either way, many people are going to realize that life will go on with tighter credit. Yet if they try to hold onto artifacts of credit and using credit cards or home equity lines as some sort of life lines, they will be sorely disappointed. No need to worry, prices will fall but you can always enjoy the surf.
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Related Posts:
■Real Homes of Genius: Today We Salute you Huntington Park. Tweedledum and Tweedledee of housing. $500,000 Homes in Wonderland.
■Real Homes of Genius: Today we Salute you Stanton.
■Real Homes of Genius: Today We Salute you Artesia. 626 Square Feet of Barbie Love for $360,000.
■Real Homes of Genius: Today we Salute you Huntington Park. Sold 3 Times in 4 Years.
■The Housing Wave of the Future: Two Main Mortgage Tsunamis.
Welcome to the 54th installment of The Wal-Mart Weekly, a column dedicated to bringing you insight, wit, facts, results, opinions, and just a bit of everything else when it comes down to a very hot topic these days: Wal-Mart.
Ted Allrich is the founder of 
By Mike Brewster, guest blogger.
