Dr. Housing Bubble
Real Homes of Genius: Today we Salute you Cerritos. All 88 Los Angeles County Cities Overpriced.
Posted: 31 Aug 2007 05:14 PM CDT
What an interesting week. As Rome burns and the political syndicates offer every possible option of bailing out the rouge gamblers and maverick flippers, they fail once again to highlight the nucleus of this bubble. Forget that the Bush Administration is offering a bailout plan even after he said they would do nothing last week. Pay no attention to the Fed with their implied wink-wink posturing that they will lower rates. So what. Homes are so overpriced in nearly every metro area in the country that they can drop rates to 0 and it still won’t make sense to buy because prices are out of line with local household incomes. Would you like to buy a beat up Ford Pinto for $30,000 simply because the interest rate is 0 percent? Apparently this is happening with all these Real Homes of Genius we are seeing. You may think that we are grabbing at low hanging fruit. But these homes are priced from $300,000 to $500,000+ in lower to middle income areas. Last time I checked, $500,000 was no low hanging fruit. So as the media is doing a Pavlovian response to an implied bailout, the fact is nothing can bail out an overpriced home by someone that simply cannot afford the payments. And to show you this, we are going to include higher priced homes in Los Angeles County to drive home the point that in EACH of the 88 cities in our county, prices do not make any economic sense. Today we will shine our flashlight on Cerritos. A middle to upper-middle class area in Los Angeles County. It is with great honor that we salute you Cerritos, with today’s Real Home of Genius.
Today’s home is what one would expect as a starter home for a professional family in Los Angeles County. A safe area, good schools, and a place one would probably like to raise a family. This home is over 2,000+ square feet, has 4 bedrooms and 3 bathrooms. Nothing spectacular. So what was this home initially listed for? Well someone actually thought that we were still in 2006 and listed this place for $778,000. Apparently there are no takers at this price. Let us take a look at the pricing action on this home:
Price Reduced: 08/02/07 -- $778,000 to $759,000
Price Reduced: 08/17/07 -- $759,000 to $739,900
Clearly not many people were biting at $778,000, or looking at it from another perspective, $200,000 away from $1 freaking million dollars! This is a four bedroom home in a middle to upper-middle class neighborhood. This isn’t Atherton or Beverly Hills. Before you shed a tear for this seller and bring out the violin, let us take a look at the previous sales history on this home:
Sale History
10/04/2002: $430,000
12/24/1998: $275,000
So even at the current sales price, these sellers are looking to come away with a $300,000 profit in 5 years. Since real estate over the long-term has followed in line with inflation, how would the price for this home look like if we followed a 5 percent annual increase starting in 1998?
5 Percent Increase
Current Sales
Difference
1998
$275,000.00
$275,000.00
base year
1999
$288,750.00
2000
$303,187.50
2001
$318,346.88
2002
$334,264.22
$430,000.00
$95,736.00
2003
$350,977.43
2004
$368,526.30
2005
$386,952.62
2006
$406,300.25
2007
$426,615.26
$739,000.00
$312,385.00
So already with the sale in 2002, using 1998 as our base year the home at a 5 percent inflation rate is over the baseline by $95,736. Keep in mind the government data police are constantly telling us inflation is at 3 or 4 percent so we are being overly generous with 5 percent. If we continue with the trend, once we reach our current date of TODAY, we are now off by $312,385. Almost double what the inflation adjusted price should be. So this is back of the napkin math Dr. Housing Bubble; I’m sure people in Cerritos make $300,000 per year to justify these prices. Well let us take a look at the current average annual household income:
Average household income: $89,391
Not bad. A lot better then the $50,000 average we find for other Real Homes of Genius areas. But let us run a hypothetical scenario of a current family making the average income buying this home:
Monthly Net Income After Taxes: $5,603 (Filing as married with 2 exemptions)
PITI: $5,193 (10 percent down and current jumbo rates)
So this family is left with $410 disposable income each month. Bwahaha! Absurd. It is such a joke that these financial institutions, politicians, and other renegade zealots of housing are trying to keep this game going. Tax breaks for short-sales. Subprime support. GSEs being able to refinance mortgages into current FHA products. Are you kidding me? This may help people with subprime loans in areas where home prices are $250,000 or less. People can’t afford homes at current prices in Los Angeles without voodoo mortgages. The only way this game will keep going is if the subprime market opens up again. Now who is going to finance these high-wire mortgages? Doesn’t seem like Wall Street wants anymore. The government can only do so much with FHA loans and besides; the Fed has already stated they won’t lift caps. So that pretty much puts a plug on California since the entire region is jumbo-exotic-mortgage territory. Notice how politicians aren’t talking about bailing out people in Florida or California specifically? They are casting a wide enough net and when you dig into the details, the train is still coming. All these bandaids are simply that, a patch on a bigger problem.
They can jawbone all they want with Pollyanna projections and we’ll keep on showing how overpriced and absurd this market is and why foreclosures are exponentially growing. I’m keeping my eye on short-sales and foreclosures and each week, the numbers are consistently going up. The party is over and as much as they want this game to go on, nothing short of sucking the last drop of energy out of the dollar (which they may do since they don't care about fiscal responsibility obviously) will rescue this defunct mission. Housing is going to stay in a bear market for years in California. Why? Because like Bob Parker would say, the price isn’t right.
Today we salute you Cerritos with our Real Home of Genius Award. |
