Real Homes of Genius: Half-Off Sale in Lynwood California and the Distance Theory of Investing.
During this weekend as the Bear Stearns saga was unfolding, CNBC did an unusual thing and switched over to their world feed as the global markets opened on Sunday night. Ironically the scheduled show was American Greed but why not just show world markets busting into a Pavlovian response speculating on a Fed move, either way the title of the supplanted show seemed appropriate for the live feed. The JP Morgan joint venture with the Fed was sure to cause a stir in the markets so the Fed also added a .25 cut for the discount window just for good measure.
It seems to have stopped the market from roiling downward early in the week. One thing struck me from the world CNBC feed aside from them being better straight shooters than our counterparts (aka Jim Cramer saying “don’t sell Bear!”) was how little they really know about the magnitude of the problem from the trenches. They are simply relying on what is on their books and extrapolating this data onto future projections assuming their risk models are correct. Have they ever been to Oakland? Will they ever set foot in Detroit? Maybe a trip to Compton or Huntington Park might make them think twice about jumping back into the credit markets? What about empty condos in Florida? I’m sure these analyst really have an idea of whats truly going on. Oh yeah, and many of these areas have employment contracting.
The reason I bring this up is not to denigrate any of these cities but these so-called experts, kept reiterating that this is the bottom and prices on certain areas will be recovering soon! The only way things can recover is if foreclosures abate and home prices bottom, which they are not. In addition, these so-called low income areas had median selling prices of $400 to $500 thousand during the boom times in California. How is a half million dollar home a “poor” home? The sheer amount and volume of bad loans out there is incredible, many which have not been marked to market. Once the reality sinks in that areas that are immense such as California and Florida show no semblance of recovery, the other shoe will drop. We are only roiling from subprime issues but just wait until Alt-A and the option ARM waves start hitting in full force.
It is easy to get caught up in the Bear Stearns debacle and the Fed throwing the dollar under the bus, but let us remind the world once again why and how this bubble went into another dimension. Remember everyone, we are talking about $13 trillion in mortgage debt here. Today we salute you Lynwood with our Real Home of Genius Award.
Real Home of Genius – Lynwood CA
Today’s home takes us to Lynwood California. This 597 square foot home has 1 bedroom and 1 bathroom. You also get a garage large enough for a Vespa. Not only will you be able to have 1 full bedroom to your self, but you also get a back door free of charge:
*Click and gaze at the epicenter of option ARM and subprime land.
Now before you run out and go dialing on your iPhone to your agent, you may want to understand the dynamics of this housing market and area. The market is tanking. In these areas in Southern California the bottom has completely fallen out like the ride Supreme Scream at Knotts Berry Farm. But how many places offer you a back door? Come on people! We are hitting bottom and now Boom Boom has lowered rates again and if all things go bad, you can always take your mortgage to the discount window for some freshly printed Treasurys. Good times.
You may say, what’s the big deal? What is the current market price of this place? The current listing price is $224,900. And look how close you are to Beverly Hills! This is the massive delusion that folks that aren’t from the region keep on missing. Just because you are in Los Angeles County does not imply that you are in a good area. Like any large metropolis, the working classes need a place to live and usually it is near by their work. What we have is a lack of affordable housing here in California. Now with gas going through the roof, if you are to work minimum wage which many in Los Angeles County do, that additional 20 percent in fuel costs really eats at your bottom line. Given many of these people won’t buy these homes but who will? Investors? The income won’t even cover your principal and interest let alone other costs in being a landlord. A flipper? Who are you going to flip to? Let us take a look at the sales history here:
Sale History
01/23/2008: $288,000
01/30/2007: $395,000
This place is now bank owned so the price in January was essentially the bank taking the place onto its books. This is what we call mark to market. In one year, this place has “lost”, assuming there was something there to begin with, $170,100 in nominal value or 43 percent. Weren’t all these predictions telling us that 20 to 30 percent drops over four years were the ultimate bottom? This place got marked down like Bear Stearns did, fast and furious. Nothing sticky about this correction. We are seeing this more and more on a daily basis. Even at $224,900 this place is still overvalued since a 500 square foot apartment would run you about $700 to $800 a month. The local area income for a household is $47,000 so you can imagine what a budget like that can afford. The entire United States is being marked to market. There are more Real Home of Genius popping up in Southern California. Take a look at the following table:
| County | Median price Feb 2007 | Median Price Feb 2008 | Yearly Decline |
| Los Angeles | $528,000 | $460,000 | -12.9% |
| Orange | $620,000 | $520,000 | -16.1% |
| Riverside | $410,000 | $325,000 | -20.7% |
| San Bernardino | $368,750 | $290,000 | -21.4% |
| San Diego | $480,000 | $415,000 | -13.5% |
| Ventura | $584,000 | $445,000 | -23.8% |
| Southern California | $495,000 | $408,000 | -17.6% |
You may think that we are cherry picking but I assure you, there are plenty of homes hitting the market that are ridiculously overpriced. The first shoe to drop of course was in lower to middle class income areas since the income base is first hurt here. But even now, prime location are starting to come under fire. Frankly, I believe that this will be the larger and more pervasive psychological break for the market. It is one thing when we hear about fraud or an area in Michigan that has homeowners in subprime mortgages struggling to make a payment on a $125,000 mortgage. Yet what about those that got into jumbo option ARM mortgages at say $500,000 to $700,000 in so-called prime areas in Southern California? People are quickly going to find out how much real income people have in this large metropolis.
The stark reality is that even with a slight down tick, we are already on the verge of a statewide collapse. As we wrote about the California budget: California Budget Woes: Balance the Budget by Gambling and Letting Inmates Out! We are in uncharted territory here. Of course a large part of our economy was based on a perpetual housing shell game. That is, you buy a home, an agent gets a cut, a broker gets his percent, the title company gets there fee, the escrow company gets paid, and finally the seller gets a check. Then you load up your home with granite countertops (big jump for Home Depot) and put in a flat screen plasma (Best Buy says thanks!). And given we have an aversion to savings as a culture, which lowering rates only reinforces more spending, all this extra money was pumped into consumer spending thus keeping us in this vicious feedback loop. Now that the game has gone into reverse, people are realizing that their personal ATM machine is now malfunctioning. We still have subprime mortgages resetting each month at the rate of $35 to $45 billion a month all the way until early 2009! Then we’ll have our second wave of option ARMs hitting in late 2009 through 2011. Unless housing settles down, which it will not, we are going to see how exposed a debt society can unravel.
I’ll do my own favorite pundit impersonation and say “don’t buy housing NOW!!!”
Today we salute you Lynwood with our Real Home of Genius Award.
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22 Responses to “Real Homes of Genius: Half-Off Sale in Lynwood California and the Distance Theory of Investing.”
Or, don’t buy in California, Nevada, Florida, Michigan or other bubble markets. Your analysis has really helped me in evaluating my housing market and be able to make informed purchasing decisions. Thanks.
This looks like somebody bought 2 of those wooden shacks at Home Depot, duct taped them together, and beat them with a metal baseball bat until they looked like a crack house. No but on the serious topic, I loved the way Paulson was angered by a reporter who asked him if the Bear & Stearn’s bailout shows the american people that the Fed is more concerned with bailing out greedy corporations than people who are losing their homes. Prices in the lower-middle class areas are spiraling fast just as this RHG example shows. It’s just funny how people are still listing their 2 bedroom 1 bath 800sqft home for over 500,000$. I drove around a Downey neighborhood known for having huge homes (Dennis the Menace Park area). I was surprised to see the amount of For Sale and Open House signs in that area. I have never seen anything like it before. Looks like distressed homes are hitting the middle class neighborhoods faster than expected and proof that we are no where near the bottom.
Wow, only $224,900! Lessee, at 28% maximum mortgage payment to income with a 20% down payment, even the median income maker in CA ($53,629 in 2006) can just about afford this!
On the other hand, I’d like to not live in Lynwood to get a home that could be affordable. D:
I do not know how I came to start reading your blog as I live in central Illinois but I find it quite interesting. I just wonder where the “normal” houses are. The houses I see on your website look horrible and I can’t imagine living in them. I know you are making a point about, for instance, the house in this post and how much it costs and how overpriced it is. I live in a nice, older home that I bought in 1990 for $156,000 and put an addition on it in 1996 for $120,000. It is now 3200 square feet and has been valued on zillow.com at anywhere from $365,000 to $411,000 in recent months. It’s a nice house but no McMansion which go in this town for $600,000 to $800,000. It’s in a slightly diverse neighborhood in the middle of town with a good sized yard. I’m not going anywhere any time soon so the value at this point doesn’t really matter.
Sorry this has gotten so long but I am wondering what a house like mine there in Southern CA would go for and how the market is for that type of home. The only things I know about your real estate market are from your blog and watching The Real Housewives of the OC.
I literally wouldn’t pay $100K for that shithole in gangland. Almost $400K just one year ago??!?!?!? I guess there really is a lot of crack being dealt in that area.
Beam me up, Scotty.
Banks soared today. A sucker rally on Wall St. CFC over $5, Wamu over $10, Citi $20. I hope a lot of people took the opportunity to take the money and run, this could be the last chance. The Fed’s bag of tricks is running out and so is their bankroll. Not surprisingly many of the financial talking heads were saying the bottom has been reached, that blue skies are ahead. Time to put your money back into the financials. What has changed? Have mortgage delinquencies ceased? Property prices stopped falling? Home sales soared? Nothing has changed except the first big financial institutions body has been taken from the streets of Manhattan. Bear Stearns may have been an important
player in the deal making community of Wall St but it is a a dwarf compared to the big commercial banks and then there are Fannie Mae and Freddie Mac whose debt was actually a major portion of the assets that backed Bear Stearns
and the Carlysle hedge funds debt! All AAA stuff according the S&P yet when the margin calls were going out last week no one wanted this stuff. They wanted real money. What happens when Wamu, CFC or Citi have to dump billions of this stuff onto the market? We’re going to find out what it is really worth and that is when the crash will finally come.
The small (2 bedroom) but well repaired houses in decent neighborhoods still seem to be going for 500k and up (yes, the average for L.A. county is now down less than that, but includes places like the one shown above.
If you want a slightly bigger house (like the one you grew up in perhaps) it will be more than that, as will anywhere ritzy on the westside, by the beach etc.. But that’s just what I’ve seen from casual observation of housing prices.
@Liz
Check out Irvinehousingblog.com (a link on the Doc’s blogroll to the right of the articles.) He runs a very good daily commentary quite similar to RHG. Anyways, your 3200 s.f. house at say $400k value give you a price per square foot of $120. Similar homes in OC – and *please* don’t use a TV show as indicative of everyone here, though jesuscrispy knows (sorry!) that there are plenty of silicone silhouettes in this area – might go for from $350 to – gasp – $1000 per SF during the boom. Even at the low end, 350 x 3200 = $1,120,000. Nowadays, prices have dropped all the way to under $300 /sf, even under $200 /sf depending on locale. Still, at $200 / sf, that makes a similar sized modest house about $640k.
If you can rent said house for $4000 per month – not uncommon here – with a gross rent multiplier of 160, that makes the price about right.
I visited L.A. in 2005, wile there i saw my girlfriend’s aunt who lives in Long Beach near Lakewood. She told me that the houses in her neighborhood were selling for about $600,000. The houses were a bungalo style about 1,000 square feet, in her case the house has 1bedroom, 1 bath & a patio off the kitchen. As she put it “the land has more value than the houses built on it.” You think she may have a point?.
Let me give a bit more info about the area, it is in the flight path of LGB airport And is near both Lakewood Center Mall & Carson street. A nice area, but there is no reason why a house like what i discribed above should be any were near 600k at all. I wonder where prices are right now. Could you buy one with JetBlue’s reward points? LOL
By the way, for the sake of accuracy, Cramer didn’t say “don’t sell Bear”. He answered a question about removing one’s brokerage account from Bear and he said “no” saying that if that the brokerage business would likely be sold (and it was).
To be fair to Jim Cramer’s comment last week, the question he was answering was in regards to Bear’s liquidity and if the viewer should get his money out of Bear. The viewer wasn’t asking if he should sell stock he had in Bear.
I’m not particularly fond of Cramer, but think he’s being taken a little out of context.
I’d also like to add that I recently found this site and have enjoyed the posts. You’ve pulled together some interesting numbers and charts in a number of them. I live in Massachusetts and am wondering what sources are best for finding out the trends in a particular region?
“We are only roiling from subprime issues but just wait until Alt-A and the option ARM waves start hitting in full force.”
Hmmm,…. the Alt-A defaults ARE starting to hit. That was what crashed Carlyle last week. All supposedly (if one believes in the Easter Bunny and the ratings firms) AAA rated Alt-A in their portfolio – with, as I recall, a fairly nasty 15% default rate. High defaults, falling house prices made their lenders nervous and they called on the margin. Since Carlyle was leveraged something like 32::1, they couldn’t meet it. Down they went.
Here is a WaMu Alt-A pool with 92% of it rated Triple A with credit scores of 705ish. Of course only about 11.1% were full doc loans. Looks like the pool is about 96% LTV if I am reading it correctly. Guess that is cat’s whisker better than 100% LTV but not enough to carry any price drops.
http://bp1.blogger.com/_nSTO-vZpSgc/R8B-uKMbaBI/AAAAAAAACMM/EQgq9ZRd_oI/s1600-h/wm-alta-pool.png
Since 7/07, it has gone from a 90 day delinquency of .16% with 0 foreclosures and 0 defaults to a 90 day foreclsoure of 16.08%, 13.17% foreclosures and 1.83% REOs as of JANUARY 2008. GIven that was nearly 2 months ago, I doubt it looks any better.
Mish’s Global Economics Trends has all sorts of fun data – if you are in to dry-as-dust charts and graphs and econ/finance-speak. http://globaleconomicanalysis.blogspot.com/
@TIm – start here: http://thehousingbubbleblog.com/index.html Ben covers different areas of the country in different posts. Massachusetts getsa turn pretty much every week. There is a Boston-specfic website: http://www.bostonbubble.com/ There is a Massachusetts site (sort of) http://masshousemarket.blogspot.com/
Best thing to do is to learn the basic rules of pricing. (1) Income::price ratios which are (a) historically 2.8 – 3 times income in non-CA area or (b) assuming 10% down, not more than 28- 31% gross income for mortgage, taxes and insurance; and (2) price::ration which is the amount for which a place will rent must be at least equal to the mortgage, taxes and insurance – and ignore the mortgage ineterst deduction (only equal to your tax bracket rate x amount of interest paid) as that will be eaten up by maintanence. To see what the incomes are in the area, go to the US Census website and use the American Factfinder. Once you get to the data page for that area (its easy to get to – type in the zip or name in the Factfinder), click and expand the section named ‘Economic” It will give you income breakdowns. Use the median income for all households or the median income for the top 65% of households., (May need to do some math to figure it out.) As far as price::rent ratio, just check out the rental ads and run the mortgage costs (and don’t forget property taxes and insurance.) Rough guide on rent::price ratios in non-CA or NYC areas is 100-120 times monthly rent = purchase price.
I arise this morning to see that OFHEO is proposing to lower Fannie and Freddie’s capital requirements by 1/3 so they can take on more mortgage debt from distressed homeowners attempting to refi. At the same time the FED is urging commercial banks to beef up their capital, cut dividends and increase their loan loss reserves. This move to allow Fannie and Freddie to take on more marginal loans ( refinancing a subprime borrower into a conforming loan doesn’t make the loan prime) is dangerous to the Nth power. Fannie and Freddie are losing money now. Got that Congress, losing money. They should be restricting their in take of mortgages to only high quality property and borrowers not reaching out to take on high risk property and borrowers as we head into a recession. If unemployment rises to 6 or 7%, a not unreasonable level for a mild
recession, we are going to have 1 to 2 million more homeowners without the means to pay off their mortgage.
Knock me over with a feather! I just saw a house in Oceanside, CA for under 200K. And it doesn’t even appear to be a crack house, or missing important features such as walls:
List Price: $180,900 – $180,900
Bedrooms: 4
Full Baths: 2
Square Feet: 1,180
Lot Size: 6,534 Sq. Ft.
Year Built: 1973
Listing Date: 03/13/08
On Market: 6 days
MLS #: 081019484
Scott, good points.
A few weeks ago a poster had mentioned that we should not worry about the Freddie/Fannie re-fis because of their stringent requirements….to which the Dr. replied that this would very well change, making them the latest no money down lender. It appears that this is now happening. I still don’t understand how anyone making 50-60k per year should be given, or even considered for, a half-million plus mortgage. We have LOTS of those in in SoCal.
Maybe Rod Serling is pulling the strings on all of this because it sure seems like the Twilight Zone.
@Steve – the OFHEO did NOT ease or lower the standard for the borrower qualifications on loans which Fannie/Freddie may issue or purchase. Nothing has changed on the QUALITY of the loan or the borrower. They are still NOT going to be buying up NINJA option-ARMs with 0 down or loans where the buyer has a DTI of some ridiculous amount like 50 or 60% or more of gross income committed to mortgage payments.
What OFHEO did is lower the amount of capital that Fannie/Freddie have to be carrying in their reserve accounts. (Think of it as how many dollars in the bank they have in case they have to cover a mortgage gone bad. Old conservative rule for decades was that $1 in the vault created $10 to lend. Then it went $1 yields $20 in credit etc.) Liek all lenders, Fannie/Freddie are leveraged in the market – they borrow money which they turn around and lend. They pay off their loans with the money received from their borrowers. Now if Fannie/Freddie’s borowers (mortgage debtors) don’t pay the mortgage, Fannie/Freddie still have to pay the ones who lent them the money to make the loan. That comes out of capital reserves. If thousands upon thousands of Fannie/Freddie loans go bust, first the money comes out of capital to cover those loans and pay off Fannie/Freddie’s lenders. If they run out of capital reserves and still owe money to their lenders,that is where the taxpayers could be on the hook to make up the difference. right now Freddie and Fannie between them have $82 billion in reserves and owe $1 trillion to their lenders. (Leveraged a little over 1::12 – very conservative.)
OFHEO has lowered the capital resrve requirement because of the crisis in the banking system (Keep in mind that OFHEO had raised the capital requirement in 2004 because of accounting problems at Freddie & Fannie) OFHEO has reduced the capital reserve requirement back to pretty much where it was before 2004.
How will this affect the sinking-fast-investment banks and others holding all these motgage securities? What those financial insititutions in trouble need to do is clear some ‘assets’ such as mortgages off their books by selling them so they can increase their capital reserve. Problem is that none of the other private financial institutions want to buy them – the market is completely frozn wih respect to mortgage securities. Now the fastest way for those financial institutions to raise moeny is sell the mortgages. The ones they will get the best price for will be the strongest mortgages on their books – simply a fact of life in the marketplace that the better the quality, the higher the price. Freeing up money from the capital reserves of Fannie/Freddie allows them to buy up mortgages (and still only mortgages that meet the Fannie/Freddie lending standards as that hasn’t changed). That lets the banks, investment banks and other holders of these mortgages (call them Bank A) increase their capital reserves so they can pay the other banks (Bank B) who lent them money which Bank A in turn had lent out. By being able to sell off their higher priced assets (good mortgages) to Fannie/Freddie, it lets Bank A be able to cover the losses on the toxic mortgages in its portfolio and pay Bank B who lent it money which Bank A had lent on those mortgages.
Still no need to get all in a fluster about Fannie/Freddie buying up some 2/28 ARM with 0 down and No Doc where the buyer has an income of $50,000 and the loan is for $500,000.
Fannie/Freddie are STILL NOT doing ‘no doc’ 0 down loans. It isn’t happening and I still don’t see it happening (I stand by what I said) if for no other reason than the political fallout of bankrupting Fannie/Freddie and running up a trillion or two on the national debt would be horrendous. Fannie/Freddie could become the ‘nodoc’ lender of last resort but for that ever to happen the entire shadow financial market (investment banks, SIVs, hedge funs) would have had to completely collapse – and at that point it will make 1929 look like walk in the park.
Want to worry about something? Worry about the Fed Res accepting any mortgage securities as collateral (unprecedented) for loans to investments (unprecedented as they have NEVER been permitted to borrow from the Fed.) The Fed has commited close to have its reserves to lending to investments banks through the discount window and the special auction – and has accepted as collateral any and all mortage securities – toxic included – as collateral.
Volker is horrified and said that while there was no choice, regulation on investment banks is needed now and the Fed needs to be out of the middle of it.
I can remember the good old days/daze… when a gallon of gasoline only cost $3.18. This is going to make things tough for the next L.A. riots. And we definitely need another riot! L.A. should burn… and start over. Now where did I put that siphoning hose…
AnnScott,
THANKS! Great explanation. Much appreciated.
Steve – you are more than welcome. (And thanks for ignoring my endless typos. I have always been a lousy proofreader and worst typist – despite having learned 40 years ago but between (a) typing on this tiny space in eensy script and (2) having caused massive nerve damage to my shoulder/hand from a sports image so maybe I hit the key, maybe I don’t and typing with the laptop on my knees wearing bifocals…..yieeee. )
The collapse of Bear Sterns and the precarious stability of the investment banks, hedge funds and all the other shadow financial institutions (which are NOT regulated by the Federal government as are regular banks but which now have more importance in financial markets than regular banks) is scaring the bejesus out of those who understand what is going on. The turmoil is being caused by all these toxic mortgage securities they hold in their portfolios which is causing their lenders to panic and call on them for either more money upfront or more collateral – and they don’t have either and can’t get it by selling their assets because so much of them are the toxic mortgages.
You may want to listen to the interview with Paul Volker (retired Chrmn of the Fed Res and well-respected unlike Greenspan.) Charile ROse did a long interview with him on Tuesday – and Volker is very very very worried about a collapse of the financial system. http://www.charlierose.com/home
ahaah OMG! thats my friends house ALL YOU GUYS ARE MEAN! his family is bearly living and you guys are talking bad about the house…..
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