2008 October 30 | money blog

Real Homes of Genius: The Height of Insanity. Pico Rivera Home Taking Prices Back to 1995.

30 10 2008

Real Homes of Genius: The Height of Insanity. Pico Rivera Home Taking Prices Back to 1995.

Posted by: admin in Real-estate news

At this point seeing housing prices drop isn’t a shock. What should be a shock and revelation to everyone is the extent of the damage the bubble has caused in certain areas. This trauma can only be measured now that we are seeing foreclosures spring up and we are realizing what peak prices were paid […]
Related Posts:
■Real Homes of Genius: $438,000 for 816 square feet in Pico Rivera! Another Example of Manic SoCal Housing!
■Real Homes of Genius: Today we Salute you Pico Rivera. $300,000 for an 856 Square Foot Home with 5 Bedrooms?
■Real Homes of Genius: Today We Salute you Huntington Park. Tweedledum and Tweedledee of housing. $500,000 Homes in Wonderland.
■World Premier! Real Homes of Genius Video.
■Real Homes of Genius: Today we Salute you Westminster. $500,000 for 886 Square Feet of Orange County Goodness.

At this point seeing housing prices drop isn’t a shock. What should be a shock and revelation to everyone is the extent of the damage the bubble has caused in certain areas. This trauma can only be measured now that we are seeing foreclosures spring up and we are realizing what peak prices were paid for tiny homes that really did not deserve to be any where near the top price. No one will really uncover every single case of fraud during this epic boom. This kind of fraud is a crime of opportunity and criminals donned a suit and ripped off thousands of people only to do it once again. Now we are starting to hear stories about these same people changing shop and now becoming “foreclosure specialist” and taking more money of an already distraught populace. The FBI should go after these people and raid their bank accounts.

The Los Angeles housing market has been ripped to shreds with this housing debacle. There is simply no other way to describe the carnage. When you see prices falling 38% from their peak in one year you know something is changing drastically. No one has been left immune from this including once nighttime sidekick Ed McMahon and his Beverly Hills mansion. Today we are going to look at a home in a lower-income area in Los Angeles County. Today we salute you Pico Rivera with our Real Home of Genius Award.

Real Home of Genius - Peak Price

Pico Rivera is located southeast from the downtown of Los Angeles. Pico Rivera is your common working class L.A. city with 64,336 people calling the city home. The city was named after Pío Pico who was the last Californio governor of California. In 1982 Northrop Grumman purchased a former Ford plant. Years later in 1988 it was revealed that much of the work on the B-2 Spirit bomber was completed on the site. This location now has a WalMart and Lowes. How times have changed.

The current median price for a home in the city is $315,000 which is down 28.4% from a year ago. Even at these levels, it is still too high. The median household income for a family in the city is $41,564 according to the 2000 Census. Given that wages have remained stagnant for the region, I would imagine that not much has changed since then. After all, you go from replacing a Ford plant, to a Northrop Grumman plant, to a WalMart. This is a microcosm of what is occurring in places in Michigan except here in L.A. The only difference here is there a large enough population to keep the consumption going. That is until this bubble burst.

As I discussed in a previous article, the most someone should spend on a home is 3 times their gross income on a mortgage. Here is the simple equation again:

Now given this equation, if we are to take the median income family we would get the following:

$41,564 x 3 = $124,692 Pico Rivera median home price in sane world

So the current median price of $315,000 is still absurd and demonstrates a willingness of people to still over pay even in the current climate. Take a look at this home in the city that exemplifies this insanity:

This stunning 744 square foot home has 2 bedrooms and 1 bath. It was built in 1938 although the peak price would make you think it was last sold in 2038. The home has been on the market for 113 days with no action. Time to reduce the price a bit:

Price Reduced: 09/03/08 — $189,900 to $174,900

Nice movement. Let us take a picture of the backyard before we decide on whether this is a good deal:

The ad tells us “lot all dirt” which we can clearly see for ourselves. We are also told in the ad that this place has “high ceilings.” Oh yeah. You have to be high to believe that. At least they tell us in the ad that this is a major fixer. Take a look at the inside:

Again, are these photographs going to inspire us to buy? Before you start feeling sorry take a look at the sales history on this place:

06/13/2008: $169,400 *

12/12/2006: $425,000

02/03/1995: $105,000

The June line item is simply the lender taking this place back. Take a look at the peak price. $425,000 for a 744 square foot home in Pico Rivera! This 744 square foot home! Which lender made that absurd loan? Paulson should flat out reject the entire institution on the basis of this one bonehead decision. Really, an area with a median income slightly over $41,000 is seeing a 744 square foot home sell for $425,000. This wasn’t even two years ago. This home is the epitome of a Real Home of Genius.

You may be thinking that the price now makes sense. It doesn’t. Keep in mind that Northrop Grumman when it was working on the project employed an estimated 13,000 people. These were high paying jobs. Do you think someone working at WalMart or Lowes can afford a $174,900 home? Would they even want to buy this place?

As an investor, why would you even buy this place? Keep in mind a similar rental to this place would go for $950 a month even after the stunning 59% price discount or a loss of $250,100 in less than two years. The numbers at first glance seem appetizing. That is after you run the real figures:

Monthly Rent: $950

Principal and Interest: $978 (7.5% with 20% down investment property)

Taxes and Insurance: $182

Misc Expenses: $95

Monthly net loss: -$305 FAIL

Downpayment: $34,980

Mortgage Amount: $139,920

This home fails on every front. Today we salute you Pico Rivera with our Real Homes of Genius Award.

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Via [DrHousingBubble]

30 10 2008

Happy Halloween, Again.

Posted by: admin in mortgage industry

I posted this almost exactly a year ago. At that point people were calling for the bottom of this thing to be summer of ‘08. Well another year, and it’s still unfortunately apropos. I have a feeling it will be good for at least one more year. You?

Thanks as always to the great readers of this site that make it what it is. Thanks for reading, thanks for commenting, thanks for all of your email. It means a lot.

– Morgan

Source [blownmortgage]

Continue reading Chasing Value: Berkshire - you’re selling, I’m buying!

30 10 2008

Chasing Value: Berkshire - you’re selling, I’m buying!

Posted by: admin in Stocks Money News

Filed under: Rants and raves, General Electric (GE), Berkshire Hathaway (BRK.A), Goldman Sachs Group (GS), Chasing Value, Best Stocks for 2008

It was only seven weeks ago that I posted Chasing Value: Considering Berkshire Hathaway… again. At the time, Berkshire Hathaway (NYSE: BRK.B) was trading around $3,850 for the “B” shares.

Well, I think the time for consideration is over and this morning I placed a limit order for the stock. I think the time is right when stories like Berkshire Hathaway at Lowest Close Since Feb. 2007 and my colleague Peter Cohan’s Warren Buffett is not perfect are being trumpeted in the media.

For those who have followed “my pal Warren” Buffett for years, or even decades, these cautionary stories of him losing his edge are as silly as trying to predict where the DJIA will be on a given date. As for Peter suggesting that he was early buying into Goldman Sachs Group (NYSE: GS) or General Electric (NYSE: GE) three weeks ago, well my gosh, it has only been three weeks!

I understand that the prevailing wisdom seems to be running against the buy and hold approach. But three weeks is kind of short to be passing judgment, don’t you think? The DJIA is down 42% while Berkshire is only down 31% from its high of $5059.

Perhaps investors have punished the stock because GS and GE are down. Maybe it is because Berkshire has been buying up railroads and that strategy is less important with oil prices falling 55% since the summer high of $147 a barrel. It could also be because people have lost their minds — who knows?

Chasing Value: Berkshire - you’re selling, I’m buying! originally appeared on BloggingStocks on Tue, 28 Oct 2008 14:10:00 EST. Please see our terms for use of feeds.

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Continue reading Once again, Keynes holds the keys to economic recovery

30 10 2008

Once again, Keynes holds the keys to economic recovery

Posted by: admin in Stocks Money News

Filed under: Forecasts, Recession, Financial Crisis

These days, investors have to search far and wide to find positive data points, let alone a positive outlook, for the U.S. and global economies.

And, without question, the financial crisis and slowing global growth, combined with previously weak economic fundamentals in the U.S., are indeed formidable obstacles to any investor’s hope for optimism.

Still, perhaps the real the danger lies in not where we are but in denying where we can be, and that’s where John Maynard Keynes comes in.

For those unfamiliar, Keynes, along with Milton Friedman and Karl Marx, are the three major philosophers of modern economics.

In the United States, policy markers since 1981 have favored market absolutism, Friedman’s view, peppered by government intervention, Keynes’ view, when needed.

More recently, during the current decade, market absolutists appeared to have had free rein. Some of these market absolutists are now arguing that ‘the market should run its course’ and ‘recessions, even deep recessions, are an essential part of the business cycle,’ etc. Don’t believe any of it for a moment, Keynes would say.

Expansion is the normal condition

It was part of the genius of Keynes that he revealed to us that the natural state of the economy is expansion and that a downturn is “extraordinary imbecility.” Further, Keynes also reminds us that recessions, or economic downturns, are not necessarily self-correcting.

Keynes also believed that the market economy, in the form of mixed capitalism, could survive only if it earned the support of the public by raising living standards.

Once again, Keynes holds the keys to economic recovery originally appeared on BloggingStocks on Wed, 29 Oct 2008 15:20:00 EST. Please see our terms for use of feeds.

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Continue reading Insurance earnings to take bloody bath due to bad bets

30 10 2008

Insurance earnings to take bloody bath due to bad bets

Posted by: admin in Stocks Money News

Filed under: Aetna Inc (AET), MetLife Inc. (MET)

Three weeks ago, I highlighted the trouble in the insurance industry. The reason? Insurance companies get premiums and they invest them until it’s time to pay a claim. It’s a great business if the insurers can pick good investments. Regrettably, many insurers own more mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) than they have capital. So as they write down this toxic waste, the decline in their capital puts them at risk.

This comes to mind in considering the earnings of three insurers: Met Life (NYSE: MET), Prudential Financial (NYSE: PRU), and Aetna (NYSE: AET). Each of them have or will take a hit from lousy investments, here’s how:

MetLife expects its third-quarter operating earnings to range between $600 million and $675 million, or 83 cents to 93 cents per share; analysts expect it to make 88 cents when it reports later today. It could take charges between $1 billion and $6 billion on its asset portfolio, which could wipe out the majority of its $7 billion in excess reserves.
Prudential expects after-tax adjusted operating income for its financial services businesses to be in the range of $275 million to $375 million or $0.67 to $0.90 per share when it reports today, below the $1.72 a share analysts expected. And it is forecasting pre-tax charges of $115 million or $0.21 per share relating to investment results from fixed income and equity investment funds and $325 million to $375 million in impairment charges on holdings of securities issued by the now bankrupt companies like Lehman Brothers.
Aetna missed by a mile. It reported profit of $277.3 million, or 58 cents a share, compared with $496.7 million, or 95 cents last year; analysts expected it to earn $1.12 a share. A big reason for the miss was a capital-markets hit of 48 cents due to bad investments.

Insurance earnings to take bloody bath due to bad bets originally appeared on BloggingStocks on Wed, 29 Oct 2008 13:40:00 EST. Please see our terms for use of feeds.

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A Math Formula to Solve the Housing Market? Mathematically Determining how Much Home you can Afford.

30 10 2008

A Math Formula to Solve the Housing Market? Mathematically Determining how Much Home you can Afford.

Posted by: admin in Real-estate news

Figuring out housing prices isn’t rocket science. There is no need for a master’s degree in financial engineering to figure this out folks. Even as the housing market continues its downward slump, we are still at overpriced levels. Why? Well historically, housing as an investment only tracks with the nation’s inflation rate. That is until […]
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■Real Homes of Genius: $450,000 3/2 Home in Compton? Yes folks, Smoking Housing Bubble Peyote Will Make You See Things Like This!
■Are you a Debt Slave?
■Real Homes of Genius: Ed McMahon Decides to Lower Price on Beverly Hills Home by $1,900,000 This Week.

Figuring out housing prices isn’t rocket science. There is no need for a master’s degree in financial engineering to figure this out folks. Even as the housing market continues its downward slump, we are still at overpriced levels. Why? Well historically, housing as an investment only tracks with the nation’s inflation rate. That is until a bubble appears and people start getting the notion that this time is different. I’m going to give you a very straightforward math equation on determining how much home you can afford. This is the maximum price you can pay without putting yourself into financial jeopardy and maintaining a cushion:

Wait a minute. You mean to tell me that the ridiculously simple equation above is the solution to restoring sane housing prices? Pretty much. I’ll explain why this is in a second but you need to remember that for nearly a decade, we had no semblance of checks and balances. No documentation loans clearly went on no established ratios since you had the ability to make up your family financial balance sheet. Even with some documented toxic loans, lenders and Wall Street did not care and took the loans anyways.

Now why is the 3 times yearly gross income rule a good one? First, you need to remember that as a rule of thumb, you should try avoiding spending more than one-third of your monthly income on housing. If you want to find out how much a month you will be spending on your home, a quick way of figuring that out is this:

This is a quick rule of thumb. For example, if your mortgage amount is $100,000 you can expect to have monthly housing costs of $1,000. Many investors usually have these formulas in the back of their mind when determining a good value for a property. These costs include the following:
Principal

Interest

PMI

Insurance

Taxes

Maintenance

Upgrades

A big mistake made by buyers, realtors, and lenders during the bubble was the fixation on principal and interest only. In fact, some of the main selling points of interest only loans were the cheap monthly payment. Well that was only one cost of the above many items. Some of the most toxic pay option ARMs didn’t even include the full interest amount.

You may be thinking that this is too simple. Too straightforward and maybe, it belongs on some morning kid TV show. It is this simple however. And that is why people don’t like it. Sort of like losing weight. The formula for that is, eat less calories than you burn in a day and you will lose weight. Yet getting this discipline is the hard part, not the equation. What this tells us is housing prices have still a long way to go to adjust. I’ve put together on this chart below the U.S. median home price and also the U.S. median household income since 2000 to track the housing bubble. Just for kicks, I threw in the L.A. County median price to put one crazy bubble next to an amazingly insane out of this world bubble:

*Click to enlarge

As you can see from the chart above, U.S. median income for the past decade has remained stagnant. Yet home prices appreciated at an unprecedented pace. On the top of the chart, I quickly put the price-to-income ratio just to give you an idea of how high prices rose. Already in 2000, prices were at a 3.6 ratio, a little higher than we would like. Then all of a sudden, you have a non-stop growth to a ratio of 5.5! This was simply unsupportable. In addition, if you think that is bad, the peak price-to-income ratio in Los Angeles County hit above 11 at the height of the bubble. Meaning, the median home price in L.A. required the median household to spend 11 times their yearly income.

Now this would not be such an issue if incomes had kept pace, which clearly they did not. So it leads you to the question that if household incomes weren’t keeping pace, how did people manage to pay more for homes? In one word, credit.

The above chart goes to show a clear sign of what has occurred in this past bubble. More and more of a family’s income went to servicing current debt payments. When we consider the $700 billion bailout plan and one component of injecting capital into banks the primary reason again is to get credit going. This of course should lead you to question why we are trying to spur credit (debt) when debt is what got us into this mess in the first place? Nowhere do we see legislation trying to clamp down on stricter lending. In fact, the marketplace has suddenly tightened up and the government wants to loosen it up again.

The government has led the way in acquiring debt so you would expect similar behavior from the populace:

Total public debt has blasted through the $10 trillion mark and with the price tag of these bailouts, we can expect to see $11 and $12 trillion very soon. At a certain point you need to return to prudent lending standards yet at the moment, the government seems to want to return to the heyday of the housing bubble. We can’t go back since we have reached a critical inflexion point. That is, we cannot throw more debt at the problem and expect it to go away. That is why certain states like California will not see a housing bottom until 2011 or even deeper into the future.

Take a look at real median income produced by the Census Bureau:

What you’ll see is slowly growing household income, that is until this decade where income even dipped a bit. Of course, some of that growth also comes from the fact that we now have 2 workers per household which has increased since the 1950s.

Is the formula for housing prices really that simple? That is, 3 times gross household income is the maximum value of a home one can afford? It is. So if your household income is $100,000 you can buy as much as $300,000 worth of home. If you make $1,000,000, you can buy up to $3,000,000. Makes you wonder if we’ll ever see these ratios again.
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