Real Homes of Genius Flashback: Looking back at Lakewood California. $105,000 Loss.
Inquiring minds have been asking, where do Real Homes of Genius go when they get their wings? Now that we know that many people that are losing their homes are not the poor family in a $150,000 home struggling to make ends meet, but a would be speculator who is now underwater, we understand that somewhere along the line someone is going to pay for this bubble. The question really is where in the world does the inflated housing buck stop? Report after report from credible sources (unlike some lowly blogger) are now openly discussing nationwide price drops of 25 to 30 percent. The mainstream media is now running with this housing crash phenomenon but why are they still painting with the sub-prime brush? This is much larger than sub-prime and until we start hearing, “every home in virtually every area needs to be prepared for depreciation” we know that we still have a long way to go down.
Yet there is a silver lining. Many people are now finding “bargains” even here in Southern California, the birth place of Real Homes of Genius and stuntman mortgages.I’ve gotten request by readers to go back into the time machine and find out what happened to homes we have featured. The reason I have refrained from doing this is for the simple fact that the majority of these homes simply did not sell. They were pulled off the market or are now back as an REO to the lender. Now out of the 58+ homes we have featured only a handful have sold. Let us now go back to a time when the credit crunch was only a figment of our imagination. A time when sub-prime loans grazed and a period in our bubble history where credit flowed like the rivers of Brazil. We will now go back to July of 2007. Today we salute you Lakewood with our Real Homes of Genius Award.
Real Homes of Genius – The Circle of Life.
You may recall this home in Lakewood California. In fact, this was one of the first few homes that we saw losing $100,000 in a matter of one year. This is a large amount given the actual sales price of the home:
Previous Sales History:
08/31/2006: $500,000
03/17/2006: $489,000
This enormous 816 square foot 2 bedroom 1 bath home sold at one point for half a million in an area that is middle class. If you want to see what will happen to thousands of homes in many of the 88 cities of Los Angeles, this is a preview. The fact that this home sold at $500,000 is simply an astonishing piece of information. The next fascinating thought that runs across your mind is who in their right mind would lend that much money on a home that is 816 square feet!? If you want to see how the credit crunch impacted prices let us take a look at what happened in 2007 when they were trying to sell the home:
Price Reduced: 04/24/07 — $499,900 to $485,000
Price Reduced: 05/27/07 — $485,000 to $470,000
Price Reduced: 07/11/07 — $470,000 to $450,000
Price Reduced: 07/18/07 — $450,000 to $400,000
Price Increased: 08/09/07 — $400,000 to $430,000
Many of you are now wondering, why would someone increase the price by $30,000 right when the credit crunch was hitting? Frankly I do not know but the home did sell and not at that housing MLS gymnastic move. Let us look at the final price:
Sale History
01/18/2008: $395,000
So there you have it, a place that sold for $500,000 only 1 year and 4 months ago just sold for $395,000. A 21 percent drop in an amazingly short time. What you will see is many people are unwilling to struggle with a back breaking mortgage for a home that they can rent for $1,700 to $1,900. We can safely assume that this home was a foreclosure given the timeframe of how things transpired. The foreclosure process will take anywhere from 4 to 6 months here in California and that coincides with the late August purchase in 2006 to the short sale in April of 2007. In fact, I have been hearing stories were lenders simply are not paying attention and owners are staying longer in their homes payment free! It ended up taking 9 months on the market with a reduction of $105,000 to get this thing sold. You also need to factor in the sales commission, holding cost for the lender, and administrative cost. This is what is happening to countless Real Homes of Genius and other homes throughout Southern California.
With the post in July of last year, we had a comment posted by someone that highlights the general hesitation of those sitting on the fence:
“This is not a criticism, but aren’t we supposed to take into account “appreciation” and tax advantages of ownership in the rent v. buy calculation. Given a holding period of 5 years, I don’t know what the appreciation would be for the house or the rents, but it would make sense to take estimates into account.
Of course the central point is the same. California is crazy and has been so for some time.”
Now we know that buying a home in the current market is actually a risk in itself. Just like those buying in the previous years were speculating on price pops, now folks have to determine the break point of how much a home will depreciate. This is a major caveat on the current market fluctuation. Remember that historically housing tracks inflation. As hard as this may be for some people to realize or swallow especially here in California, this time is not any different. Things will revert and areas with higher bubble appreciation will fall harder. This is only one example of many. And we are in a modern era where we are daily hearing about intentional foreclosure where the psychology of current owners is very different. Simply put, some people are screwing lenders back with no hesitation.
As you receive your stimulus check in the mail in the upcoming months, think about where exactly the money is coming from. We are now entering a Real Government of Genius.
Today we salute you Lakewood with our Real Homes of Genius Award.
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19 Responses to “Real Homes of Genius Flashback: Looking back at Lakewood California. $105,000 Loss.”
Examining the home on historical data . What would be your best guess to how much this very small home would be worth. I realize that there are many variables out there but the cost to own this with taxes and home owners insurance must still be 2200 dollars a month.
Even a sale price of $395,000 for that dump tells me we still have a looooong way to fall. $485 per square foot for that? YGTBSM.
I’m with Bob.
Actually, I’d say that house is still overpriced by about 70% or so, and that’s being conservative (by my standards, but what do I know). If it was a big lot or something I could see it falling less, but that picture almost makes me claustrophobic. This is just a foreshadowing of what is to come in LA. Markets elsewhere in socal have already seen 50% drops and more, and those are on much nicer houses in much nicer areas.
Love the entries as always, Dr. HB. Once this whole housing mess is over with I’m going to have to find something else interesting to read.
The senate just passed the ‘stimulus’ bill. Wonderful… I guess the banks come out smelling like a rose once again.
I would be interested to see what this house sells for next year. After the new FB realizes he lost both hands and half an arm catching this falling knife.
As for the increased limits I seem to remember the GSEs don’t do NINJA,neg am,75% of income loans. Therefore it is a big nothing. Expect to see the market up 500 points tomorrow just the same. Homebuilders will double I get to redo my PUTs for Housing Bust 2 Rise of the Option ARM.
Story line just as FBs and HBs thought they had been saved by Mighty Bernacke and Supreme Ruler of The Universe George W Bush. Out of nowhere Option ARM loans forclose in record numbers and houses fall even further.
We are truly screwed!!!!!!!!
“As you receive your stimulus check in the mail in the upcoming months, think about where exactly the money is coming from.”
No check for me and the Mrs…$350K+ household income, $1100 per month for RENT! That’s right..working hard and saving for the 40% off sale.
I’m in total agreement with Bob & Genius… this house is still over-valued… Lakewood is nice but nothing special. It is not a Beach community or “Beverly Hills Adjacent”… it is closer to Paramount & Compton than any desirable zipcode. Plus, there is gathering evidence that rents may be declining so carrying cost of over $2K is unsupportable.
Let us run the numbers even further. As many of you are now aware, it is nearly impossible to find zero down mortgages. My assumption is that the recent buyer went with a conforming loan (under $417,000) for this place and had to come in with either 5 to 10 percent down. Let us assume for the sake of simplicity, that the buyer came in with $19,750 (5%). The current monthly PITI works out to be $2,954 at a 6% rate. Closing costs will run anywhere from $4,000 to $8,000 depending on the lender. Places such as BofA now offer first time home buyers a no-fee mortgage but these programs may not last should margins get tighter. So already you see that we are easily requiring an incoming buyer to have $23,000 to $27,000 in liquid assets to put down. And this is with very lenient buying requirements.
A similar sized home in this immediate area would rent for approximately $1,700. Your payment after tax savings works out to be roughly $2,400. Now let us run the renting scenario out 5 years if you actually sock away that $700 a month plus the initial $19,750 at a 5% annual rate of return:
After one year (2009) value of investment: $29,266
After two years (2010) value of investment: $39,333
After three years (2011) value of investment: $49,982
After four years (2012) value of investment: $61,246
After five years value (2013) of investment: $73,163
Now where are we at in 2013 with our mortgage?
2013 Mortgage Balance: $341,000
Assuming that $395,000 is still the price in 5 years, we’ve built up $54,000 in home equity (including our initial $19,750 down payment). Does this scenario sound far fetched? Think again and only look at the 90s here in Southern California. We had a very stagnant market for about 10 years and this current bubble is in another galaxy compared to that one. Buying isn’t always the smartest choice. A fair price based on current rents and market valuations would be $220,000 to $265,000 depending on your housing outlook. Now we are seeing people run the numbers before buying and this isn’t factoring the contracting California economy.
What are your thoughts on this analysis?
I agree with the above posts. What a rip off at 395K! I am seeing houses in nice areas of Westminster and other over priced OC cities where houses like- 3 BD , 2BA, 6500sq, 1400 sq. listed for 400k and not selling! The same houses that were going for 600K two years ago! 50% down across the board would be nice 🙂 Dave
Great analysis Dr. That doesn’t even take into account that his “real” tax savings attributable to the purchase of this home is even less, since the government essentially gives you a fairly generous as married filing jointly anyhow. Its only the excess over that floor that representa real savings attributable to the home purchase deduction.
Really enjoy your analysis. Dead right, and the pain in Miami is going to get so much worse with 50 condo buildings all coming on line this year. I hope to get a 600k condo for 300k and walk to work.Keep writing!!
Check out this place. 350+ days on the market. And the price fluctuations are off the chart. What are they thinking?
http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=P561587&page=4&property_type=MFR&mls=mls_so_cal&cKey=gzp6547l&source=SOCALMLS
DRHB
The analysis above is essentially what we were taught in college (cal state – late 80’s) in my “Real Estate Investment” class. In my case studies, I’d assume 3 scenarios, worst case, best case, and most likely case. We’d also consider vacancy factor, and maintenance. Just real variables which reasonable values were chosen. Bottom line, the semester’s lesson was that real estate is esentially bad investment. The ROI was never more than 11%, assuming over 20% equity growth during holding period for best case scenarios. The oppertunity cost, concluded that potential returns were better in stocks and bonds. At the time wasnt convinced one way or the other, I just wanted a passing grade.
I watched in amazement as local prices skyrocketed, and many freinds took the risks, made tons of money. I enjoyed driving their cars that cost more than my house, & water skiing behind their boats. I just didnt have the balls to jump-in (read risk-adverse) I couldnt believe the climb continued for long as it did, it was so steep, that in my view, it went exactly twice as long as I thought it would. Tough pill to swallow, when you see those with inferior inteligence making $$$. I know some dear friends (dumb) are in a world of hurt now, as they were fully leveraged. I wish I would have jumped-in, then jumped out then I’d be surfing instead of working today.
keep watching that house…it wouldnt surprise me if it went back into foreclosure a year or two from now the way this thing is going…
an excellent post from Minyanville. RHOG prices will get propped up by the ‘stimulus package’ increase in conforming rates… until they crash later with taxpayers holding the bag.
http://www.minyanville.com/articles/MER-MCO-BSC-fre-fnm/index/a/15848
surfaddict,
Sometimes intelligence can be a detriment because the ones who say “screw it!” and jump in reap the biggest rewards. Too bad many don’t know when to walk away from the table.
“Fortune favors the bold”
@All,
The short sale report for the week is up:
http://www.doctorhousingbubble.com/forum/viewtopic.php?p=410#410
Anybody who buys a house in Lakewood for 395,000$ should be considered a Knife Catcher. Lakewood is a middle-class neigborhood with some areas that make Compton & Watts look more desireable. Anyways did you guys hear about the BOFA story where they are raising credit card rates on most customers for no reason: http://www.businessweek.com/bwdaily/dnflash/content/feb2008/db2008026_105146.htm?ref=patrick.net#
BOFA is getting desperate!!!! If you own a BOFA credit card it is a must read.
Dr;
I’d probably use an after-tax return on the investment of 3.5% just to make it a fair fight…not that it does anything but nibble on the size of the delta at the margins.
I don’t see PMI mentioned in your analysis…under the new guidelines MGIC put on the street this week, anything over a 90% LTV loan requires a 680 FICO in a “restricted market,” which MGIC defines as the entire state of CA (and all of NV, FL, AZ as well). PMI for this loan is a cool $300/month.
How big, I ask myself, is the pool of potential buyers that have all the bona-fides to swing this loan–$20K in actual savings, an income of $98,000 with less than $650/mo in other debt service, a 680 FICO, and burning desire to live in a crack house. That swelling population of would-be buyers must be that pent-up demand Larry Yun keeps referring to.
What is the address of this place? I live in 90712, and it doesn’t look like any of the models of the Lakewood Mutuals. Any address or link to address?
Well here we are in September and all of the people who have worked very hard to buy a home are losing money everyday because of bad lenders and the “want
a be’s” who could not afford their subprime loans but just could not wait like the rest of us to buy a home even if it was at a inflated price.
Have another clue for you. These subprimers have no equity and their homes and some of these home will fall apart because they have no money to put back into it. We have subprimer neighbors in our home in the 90712 zip code of Lakewood and they put up an ugly industrial looking electrical meter with all of the ugly pipes exposed right next to our property. They will not paint it or do any
landscaping to make it look better. They could not afford to do it right and it was done by an unlicensed person yet the city gave permits for this eyesore and won’t make them do anything to make it look better. This ugly mess sits adjacent to our driveway and can be seen clearly from the street.
Yes this is what we get for paying our bills on time, for putting so much money and time in our home and being decent people.
Get with it City of Lakewood….this is not a trailer park!
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