Real Homes of Genius: Revisiting a Past Downey California Home. $305,000 Discount in 2 Years. $1.7 Trillion in California Equity Gone in One Year.

29 08 2008

Real Homes of Genius: Revisiting a Past Downey California Home. $305,000 Discount in 2 Years. $1.7 Trillion in California Equity Gone in One Year.

Posted by: admin in Real-estate news

People have sent a few e-mails wanting to know the eventual history and life story of past Real Homes of Genius. Given the current housing market in Southern California many of these homes were taken back by lenders and have been sold for significantly lower prices. The home that we’ll examine today takes us to […]
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People have sent a few e-mails wanting to know the eventual history and life story of past Real Homes of Genius. Given the current housing market in Southern California many of these homes were taken back by lenders and have been sold for significantly lower prices. The home that we’ll examine today takes us to Downey California and was featured in January of 2008; it was being sold at a $270,000 discount from the peak price at the time.This home sold for $905,000 in August of 2006 and sold for $600,000 in June of 2008. Such has been the nature of the current housing crisis and in California and why housing issues will continue to persist throughout the foreseeable future.

Before we examine the home in detail, let us go over a few key things that are happening in the current housing market. Foreclosures are still running at historical highs. Even though we saw a minor jump in sales for the July data for Southern California this information simply reflects the seasonal sales history of the spring and summer selling months. This chart which shows sales for Los Angeles County shows an up and down curve highlighting the peak spring and summer seasons and the troughs which hit in the fall and winter:

This minor jump has caused some to question whether we are approaching some form of lull in the current housing market. The general stock market rallied this week on the poetic and inspiring words from Fed Chief Ben Bernanke:

Since when has the Fed taken any action against inflation? The reasons prices may be coming down in the future is because of wealth destruction which is more characteristic of deflation. This is the same logic that is used about the housing market. Here is a sample list of how to address problems according to the Federal Reserve:

(1) - Deny any problems

(2) - Deny any problems further

(3) - Deny the problem even though problem is causing problems

(4) - Mention that you knew problem existed all this time and that problem is now being solved

(5) - What problem?

That is essentially how things have been operating at the Federal Reserve. Want some evidence? Take a look at some quotes from Ben Bernanke:

“House prices are unlikely to continue rising at current rates,” said Bernanke, who served on the Fed board from 2002 until June. However, he added, “a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.” October 2005 Source: Washington Post

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,“ Bernanke said in May of 2007 Source: Forbes

“Although we have seen improved functioning in some markets, the financial storm that reached gale force” last August “has not subsided,” Bernanke said August of 2008 Source: CBS MarketWatch

We went from not seeing housing prices falling, to thinking subprime mortgage issues would be contained, to “gale force” credit problems all within three years. Now that is what I call forecasting ability. California is seeing a stunning amount of equity destruction in the current housing market and most of it has occurred in the last year. How much equity has been destroyed in California?

The median peak home price for California during the height of the bubble was $597,640 reached in April of 2007. That is, half the homes sold went for below this and half above this. Let us first run some quick numbers:

Total Housing Units in California: 13,174,378

Homeownership Rate California: 56.9%

This is simply a quick back of the napkin exercise here. So if we want to know how many homes are owned in California we can figure this out:

13,174,378 x 56.9% = 7,496,221

We can then do a quick multiplication out of this with the median price:

7,496,221 x $597,640 = $4,480,041,518,440 (peak California real estate value)

This of course isn’t exact. The housing unit count is only for homes that are “owned” and doesn’t take into accounts apartments or other rental/lease housing. Keep in mind that certain estimates put the peak residential nationwide housing value at $24 trillion and given that California makes up 12.1 percent of the population and makes up 10.4 percent on all housing units this number gives us a ball park figure. The last estimate I saw showing relative housing wealth in the United States via the flow of funds information from the Federal Reserve puts this number at approximately $20 trillion. So $4 trillion in “housing equity” has evaporated.

Now that prices have fallen and the median price for California is $368,250 let us run the numbers again:

7,496,221 x $368,250 = $2,760,483,383,250 (current California real estate value)

If you’re wondering why people are feeling poorer in California it can be that approximately $1.7 trillion of housing wealth has gone up in smoke. Given that nationwide prices values have taken a hit by $4 trillion you can see how big of an impact California has on the overall housing market.

Keep in mind many people are not planning to sell. The numbers above are completely rough estimates but simply highlight a quick point that housing in California has taken a large hit and overall wealth destruction is high because of the magnitude of the destruction.

Now how does this wealth destruction look like in the real world? Let us take a trip down Real Homes of Genius memory lane.

$305,000 Discount in 2 Years

We featured the above 3 bedroom 2 bath home in Downey back in January of this year. At the time the home had been on the market for over 300+ days and no action had happened even with the major reductions:

Now before you go out and think that this was a great deal, let us look at the sales history:

Sale History

06/30/2008: $600,000

01/30/2008: $735,000 *

08/08/2006: $905,000

At the time I was suspicious about the price being jumped up so quickly given the lack of interest but what appears to have happened is that the home was taken back by the lender. This was a few weeks after our initial report in early January. Now knowing what we know and the quickly disintegrating market, the lender might have taken the place back simply to unload at a later date.

This home is 2,197 square feet and let us look at the current per square foot median price for this zip code:

Per square foot median price: $310

Median home sale price: $444,000 (down 26.3% from a year ago)

You might do a quick calculation per square feet and find that this is a “good deal”:

$310 x 2,197 = $681,070

A great deal at $600,000 if we go strictly by the math. Yet this may not be the case in an area where the median home price is $444,000. You need to remember one simple rule in buying homes. It is better to buy a small home in a very expensive neighborhood then having an expensive mansion in a lower priced area. This holds true for California since most of what you are paying for is the land and not the physical home. Think this isn’t the case? Look at the assessed value of the land versus the actual home for 2006 and 2007:

It is amazing that this home with an assessed land value of $125,733 in 2005 suddenly saw a jump to $648,100 in one year! That is, the land magically went up in value by $522,367 in one year. Welcome to California folks. So now that prices are correcting it is the land value that is getting hammered. After all, concrete, wood, windows, and all the other pieces that psychically build a home have either gone up in price or have stayed the same.

I’ll leave it up to you to judge whether that $600,000 price is a good deal. Today we salute you Downey with our Real Homes of Genius Award.

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