Real Homes of Genius: Foreclosing to the Bottom. Today we Salute Compton with a Stunning 71 Percent One Year Decline.

29 08 2008

Real Homes of Genius: Foreclosing to the Bottom. Today we Salute Compton with a Stunning 71 Percent One Year Decline.

Posted by: admin in Real-estate news

Some readers harbor doubts that homes in Los Angeles County have actually been falling by 40 percent on a year over year basis. NASCAR has nothing on the speed in which housing prices are falling in Southern California so it is understandable that people would be skeptical about prices crashing. Many of the bottom callers […]
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Some readers harbor doubts that homes in Los Angeles County have actually been falling by 40 percent on a year over year basis. NASCAR has nothing on the speed in which housing prices are falling in Southern California so it is understandable that people would be skeptical about prices crashing. Many of the bottom callers or housing bears really have little sense beyond what they read in the newspapers regarding many niches in the Southern California markets. Growing up in Southern California especially in Los Angeles and Orange counties, I’ve had the unique ability to visit the majority of cities (and still visit them today). We do live in an extremely diverse metropolis. Yet this perspective has also allowed me to become a more entrenched housing bear since some neighborhoods that boomed up to $500,000 were selling for $150,000 a few years prior. This would to a certain extent make sense if incomes had kept pace but to the contrary incomes actually fell behind inflation.

Today’s Real Home of Genius must take the cake for the fastest percent drop ever. I’ve seen some intense price drops but nothing like this. When we get to the featured home of the day, you are going to see a home that has dropped 71 percent in one year! Stunning example of what was produced by this housing mania.

For the past decade there has been a tectonic shift in how people perceive a home. A home for the most part meant stability and security. Regardless of what occurred around you there was always the security that your home was your refuge. The 30-year fixed mortgage as boring and blasé as it may seem, served a purpose to blunt our human nature. You could always rely on your monthly home payment. It would be fixed from payment 1 until payment 360. The stability was there since your home was simply a forced savings account and a place to stay. It meant for many, a place to grow your roots and become involved in your local community. After all, if you were planning on staying in an area for sometime you wanted it to be safe and had a vested interest in what went on in the immediate area.

Throwing in the buffet of mortgage products which we have seen has completely shifted this paradigm on its head. That is why this housing correction is unlike anything in our historical past. The stability of a home was no longer there. By default an adjustable rate mortgage is not stable. It is volatile and moves with interest rates. Interest only and option ARM mortgages added a speculative flavor to the volatility. The home was no longer a place where you could rest comfortably with a fixed payment. It was an investment to obsess over and compare notes with your neighbors to see how much equity you built up over the previous year. This equity also spurred the consumption binge and the race with the Joneses. Stability, the ultimate security of being a home owner was stripped out of the equation for many recent buyers.

The market, that of Wall Street and lenders unfortunately over estimated how many people would want to keep their homes once these speculative wheels were attached to homes. They were using models from the historical past when rates were fixed with mortgages. Any of you that live in Southern California and have traveled to a few cities realizes how many people view their home as an investment. It is no longer a place of stability but a place to refinance, refurbish, and flip. Many lenders are going to get a brutal wake up call with the $300 billion in pay option ARMs in the state. To a certain extent, I understand why lenders don’t want to admit the glaring problems which these loans will bring to the market. They have nothing to say. Some readers have asked “why don’t you offer solutions” yet the only solution I can offer is to implement safe guards so a bubble like this doesn’t ever happen again in the future. What is done is done. The market will have to painfully work its way through these problems. Our Governor is realizing that sometimes you have to make hard choices and can’t have everything that you want.

So with that, let us now take a look at today’s Real Home of Genius. Today we salute you Compton with our Real Home of Genius Award.

The Dash to the Bottom

This home is 500 square feet and was built at the end of the Great Depression in 1939. It has one spacious bedroom and 1 large bathroom. As we are told in the ad that there is room to “add” which you may need to do if you need more space than 500 square feet. Again, is it really that difficult to move the garbage bin before taking a picture? So what is the sales history on this place? Let us take a look:

Sale History

07/21/2008: $235,060 *

09/27/2007: $340,000

*Potential lender take back

I really have to sit in amazement at that sales price that occurred last year in September. Which institution wrote that mortgage? This happened even after the August credit crunch. Some have been under the impression that after the credit crunch in August, that all of a sudden bad financial housing moves had ceased to plague the market. In fact, the above is simply an example that horrible lending is still occurring. The entry for July of 2008 looks more like a lender taking the place back. Yet that September 2007 purchase price of $340,000 is a real deal.

So what is this home now selling for? How about $97,900. That is right folks, this home “depreciated” 71% in 11 months. This simply drives the point home at how horrific the mortgage industry really has become. Keep in mind the $340,000 loan was made 11 months ago! This isn’t a loan that was made in 2005 or 2006 at the peak of insanity but after the credit crisis hit. The good news is that the current price may actually make sense for someone since the payment would work out to something like:

PITI: $720/per month 30-year fixed at 6.5%

When homes start going for 5 figures in Los Angeles County, you can rest assured some people are paying attention. And guess what this one home sale will do to future comps? You can now see how we are entering the so-called race to the bottom. Let us look at more data:

Average Household Income: $50,409

Net income/per month: $3,223

Home payment to income ratio: 22%

Now we’re talking. Who would have thought that the only way we would be seeing affordable housing in Southern California is after an epic housing bubble? You may be thinking that this one home is a major exception but I did a quick query in Compton and found 42 homes listed below $150,000.

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

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