But let me tell you something.  There might be a bottom in the bottom of the housing market.  Take a look at areas like the Inland Empire:

San Bernardino and Riverside Counties are both seeing prices going back nearly a decade.  In these areas, you might find some solid bargains.  But look at the other counties.  People are using the massive drop and correction at the lower rung to justify stagnant or slightly declining prices in more prime locations.  And it is clear why we are seeing what we are seeing.  The Case Shiller Index has now seen two months of data pointing upward:

Nationwide the housing market has been pummeled.  Nationwide from peak to trough the market has fallen 33 percent.  The issue was always overpriced homes financed by slick Willy so it is no surprise that with lower prices, homes are selling.  Plus, incentives like the homebuyer tax credit have brought people off the sidelines.  This is what Calculated Risk had to say about the Case Shiller Data:

“Unlike with the unemployment rate (worse than both scenarios), house prices are performing better (from the perspective of the banks) than the stress test scenarios. I believe there will be further price declines later this year, because I think the Case-Shiller seasonal adjustment is insufficient, and because I expect the first-time home buyer frenzy to slow just as more distressed supply comes on the market – even if an extension to the tax credit is passed.”

Same thing with cash for clunkers.  You get a burst of activity but then what?  Also, let us break out the Case-Shiller Data for a few major California MSAs:

The three areas are Los Angeles/Orange, San Francisco, and San Diego.  All showed a slight uptick.  Does this warrant bottom calling?  In terms of sales we probably are there.  But the problem is people generalize the overall trend to their little niche markets in Pasadena, Palms, Culver City, and suddenly the bottom is in with these areas even though the major force pulling the trend is lower priced home sales in other areas.

It has been some time since I pulled up this chart but it warrants a look given the current climate:

*Source:  CAR and Census

You ultimately need a job to buy a home.  You need a strong household income to buy in prime areas many that are plagued with Alt-A and option ARM loans. The above chart clearly depicts the housing bubble.  You can tell that around 1996 the California home price took off and didn’t look back.  More importantly, the price-to-income ratio exploded during this time as well.  At the peak, the P/E of California housing was approximately 10!  Currently it is closer to 4.76 with statewide data.  This is in line with data from 1980 through 2000 where the ratio averaged 4.64.  So we are at the bottom then?  Not so fast.  You need to remember the bulk of the sales have occurred at the lower end (look at the chart above showing the Southern California counties) and you will realize which areas still need to fall lower.  This is also why the data looks more in line with historical standards.

I would also argue that California for 20 years has been living in two bubbles.  First with technology and now with real estate.  That 4.64 might be inflated.  Our 11.9 percent unemployment rate is the highest since World War II.  California has a stunning budget deficit.  The bottom is certainly not in for some regions of the market and California is one of them.  Would you like to see an Alt-A example?  Let us give you a concrete example of what is going on.

Culver City:  Mid-tier Over Priced

This home is a 2 bedroom and 1 bath home on a stunning 652 square feet of space.  Yes, 652 square feet is correct.  This home is in an area which is full of Alt-A and option ARM loans, Culver City.  When we pull up tax data, it looks like the last recorded sale occurred in 1974 for $14,000.  Not a bad deal.  But that is the last time this home saw prudence because it was housing ATM time with exotic mortgages:

The last first lien recorded is for $497,000.  The current owner had a NOD recorded in April for $7,023 with the NTS filed in July.  Now this seems to be a more typical case.  3 months after the NOD a NTS was filed.  Assuming the NOD was filed 3 months after the first missed payment (which might be accurate given the lower balance of $7,023) this is a more common path.  So this is listed on the MLS as a short sale.  Let us see what kind of generous offer the lenders are offering:

List Price: $489,000

Oh really!  So let me get this straight, the last recorded first lien is for $497,000 and this home is now being sold for $489,000?  Well thank you very much for that 1.6 percent discount in the most gigantic bubble state in the country.  See folks, the entire global economy came close to Great Depression 2.0 and all we get is a 1 percent discount in Culver City.  It would appear that the housing correction only applied to every other market except the mid-tier.  In fact, let us completely forget about the correction and what got us to this point.  You would think that some people in California would have learned their lesson but many are ready to jump back in to swim with the housing bubble cult.  652 square feet for almost $500,000.  Real Home of Genius style.

Let me show you how the lower tier gets things done.  Let us look at Temecula.

Temecula:  Lower-tier Priced Right

Riverside County has taken it between the eyes with this housing bubble bursting.  With employment and housing prices, the Inland Empire is trying to find its footing. This home was built near the peak in 2004 and is 2,204 square feet with 4 bedrooms and 2 baths.  A nice sized place as you can see.  Let us look at some sales history here:

07/29/2004:        $400,500

Sold at peak for $400,500.  But let us show you how the lower end gets things done.  What is the current list price for the short sale?

List Price: $150,000

Now that is how you move inventory.  A 62 percent discount will definitely get your attention.  If you are in this area and have a stable job, why not buy a place like this?  Might be cheaper than renting with all the money the government is throwing at homebuyers.  But the Culver City home?  Over priced for a 652 square foot home in distress.  1 percent discount or 62 percent discount?  This is how California is moving inventory.

And that is why this happened last month:

Culver City homes sold: 22

Temecula homes sold:   209

Today we salute you Culver City and Temecula with our Real Homes of Genius Award.

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The advertising world is catching on.  I’m sure many of you have seen the Dominoes commercial in which someone tells the audience that they don’t need any stinking bailout like Wall Street folks but they’re going to give you on Main Street a bailout through better pizza prices. A slap to Wall Street and cheap pizza?  Talk about a winning combination.  Other advertisements have also highlighted the recession in different perspectives.  Jet Blue runs an ad where CEOs who have fallen from grace now need to learn how to fly on commercial airlines with all the regular people:

*Click on image to watch video

So some companies have taken a more comedic angle.  Other companies have even harkened the dark days of the depression.  This one minute ad from All-State called “Back to the Basics” drives the point home clearly:

The point of this ad?  Time to focus on what matters and that includes family and security – preferable without spending tons of money.  They even mention their history of starting during the Great Depression.  Contrast these current ads with some that were run during the boom time.  Like this very popular Century 21 clip:

This 30 second clip basically shows a guy receiving a browbeating about buying a home.  In the background, a realtor attentively listens given a commission is riding on the sale.  The underlying message of this ad is buying a home is a no lose proposition.  I can only imagine how many times this sad scenario occurred in America during the bubble.  Watching this ad drives shivers down my spine.

Or what about this great ad from Countrywide where you can combine practically every piece of debt you have into one loan.  Fantastic idea!

An advertisement by its structure has a desired reaction on an audience.  The Domino ad for you to buy pizza.  The Jet Blue ad to make you fly.  That All-State ad to make you feel secure with an insurance company.  The Century 21 to buy a home.  The Countrywide ad to consolidate your 4 toxic loans into one nicely packaged toxic loan.  They all had their method of achieving their results.  But the current ads reflect a more cautious, more reserved, less wealthy, and more concerned population.  A price conscious society that no longer believes in many of the bull market mantras.  A new generation will emerge from these ashes and will never forget this economic calamity just like the generation that lived through the Great Depression.

To a large extent, Wall Street and Washington for a decade have missed many key points.  The average American did not participate in the boom in real terms.  Many are now worse off pre-bubble.  Wages have been stagnant for over a decade and now over $11 trillion has been wiped off the balance sheet of Americans.  This kind of real wealth destruction etches long lasting scars.  Many of you have seen the graph of household debt which combines mortgage debt (the largest line item) and also revolving debt (through credit cards, student loans, and auto loans).  But what you may not have seen is a graph showing how quickly debt is contracting in the market for the average consumer:

As you can see from the chart above, this is the steepest year over year contraction in household debt on record.  Given that much of the last decade could have been described as the pseudo prosperity decade, now with debt being extinguished from the system more and more Americans need to save to buy goods.  Hence these ads are a reflection of this new found reality.  Now an issue with the new public and private program with the U.S. Treasury backed by FDIC non-recourse loans is the assumption that the last decade did see real wealth gains.  The flaw in their bet, which by the way is 93 percent financed on the taxpayer dime if they are wrong, is the current market pricing of toxic assets is low only because of the fear in the market.  This is incorrect.  The gains for the last decade in large part where fueled by a massive global debt bubble.  The concern in the market is well founded.  Those gains are gone and never coming back.  The bubble was so massive and lasted so long that people are slowly awaking to this reality.

As I had discussed in a previous post, nearly 50 percent of American households are one paycheck away from falling behind on their financial obligations.  What do you think this does to consumer confidence?  It crushes it:

Consumer sentiment is at record lows matching those from the early 1980s.  The reality is we are not going back to the good old days anytime soon.  And they really weren’t that good for many if you stripped away the massive debt.  Now that the masquerade of debt is withdrawing, we realize how phony much of the “prosperity” really was.

We also recently found out that credit card companies have pulled 8 million credit cards from consumers’ hands. Lines are being cut down to the tune of $320 billion.  In a society with 13 million Americans unemployed and 9 million working part-time but wanting full-time work, consumption making up 70 percent of our GDP is going to take a direct hit.

Psychologically consumers will not buy big ticket items if they have misgivings regarding their future.  With the rise in unemployment many more Americans are going to be more cautious buying these items in the future.  And this recession is deep enough and wide enough in reach that many will no longer believe the mantra that “real estate is the best investment” or “stocks always go up in the long run.”  If you look at the Great Depression and invested at the peak, it would take you nearly 25 years to get back to your initial point:

And many recent newspaper outlets have suffered as well because of the drop in advertising revenue.  Many of the large print newspapers have cut back severely and many have gone under.  So it is important to pay attention to these sentiment indicators because they reflect what Americans are going through.  Consumption is down.  Excessive consumption is being looked at with disgust as many saw with the outrage over the AIG bonuses.  Yet this isn’t something new.  This anger toward prestige occurred during the Great Depression as well:

“The Depression sharply lowered the prestige of businessmen.  The worst sufferers were the bankers and brokers, who found themselves translated from objects of veneration into objects of public derision and distrust – the distrust being sharply increased by the evidences of financial skullduggery which came out in successive congressional investigation.  But even business executives in general sank in the public regard to a point from which it would take them a long time to recover; and in this decline the conscientious and public-spirited suffered along with the predatory.”

Frederick Lewis Allen presents the scene of the 1930s yet we can directly apply this to our current climate.  The Jet Blue and Dominoes ads merely reflect this new disgust and mistrust of Wall Street and the pinstriped suit crowd.  Take heed of these signs.  Advertisements are only reflecting the public sentiment.  In fact, many of your favorite sitcoms have now had episodes were part of the major theme revolved around how bad the economy is.  Heck, even the Simpsons made light of this when Homer’s annual Mardi Gras party comes home to roost after financing the celebrations on home equity lines of credit:

The recession has gone viral.

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This economic crisis has been building over 3 decades with the last ten years being the apex of crony capitalism.   You would think that we would learn our lessons and are still rubbing the fresh blue and purple bruises from this given we are still in the path of the economic hurricane.  Nope.  Instead, we go for the low hanging fruit and pick off the country scapegoat, the American automakers to feed the masses some red meat.  What about Ken Lewis of Bank of America or Vikram Pandit of Citigroup?  The amount of money they have received from the government would make the loans to the automakers look like a bill from a night out by the firm at a local Manhattan bar.

The double standard is alive and well.  Who is going to argue about ousting the CEO of GM?  That was an easy call and most would concur with the move.  And enough with this “…but the government is getting involved and that is scary!”  Yeah, that is what happens when you come begging for government money.  You don’t want to be told what to do?  Easy.  Don’t ask or touch any government (aka taxpayer) funds.  My only suggestion is this political capital and energy should be directed at the main culprits of this economic and global calamity, Wall Street and the banking system.  Simon Johnson, a former chief economist of the International Monetary Fund gives us a taste of how sausage is made and it confirms much of our beliefs in The Quiet Coup published in The Atlantic.  It is a lengthy read but well worth your time.

So back to our topic of the new toxic loan breeding ground.  What got us into this mess is an entire system designed to be corrupt and full of short sighted workers only looking out for their own good while putting the majority of the population at risk.  Leveraging the future for a short term fix. Finance, at least in an ideal sense should be nothing more than a tool to keep the real economy growing and expanding at a sustainable level.  A method of allocating resources to the best uses.  In the system that is crashing finance was seen as part of the “real” economy and became much too big where now, the real economy is imploding.  Someone once told me, “there are a few rotten apples in the barrel.”  I responded, “not only are most of the apples rotten, the barrel itself is being gnawed away by termites.”  Most people now see this is the case with the edifice of our financial system crashing and burning in a horrific spectacle.  After the subprime and alternative mortgage world imploded, the government has now stepped in to be the uber player in the mortgage markets making up for much of the lost volume from the questionable mortgage sector.  The funny thing is many of those toxic mortgage dealers went ahead and got trained in FHA and government loans and now work pumping out government toxic waste:

The demand for FHA loan processors has skyrocketed.  At least we know someone in the sausage factory is hiring!  The reason is that many FHA loans require only 3 to 5 percent down.  As I have discussed in a previous article regarding Seller Funded Down payment Assistance Programs, this has taken the place of many of those no money down loans.  So yes, maybe adjustable rate mortgages are out and no-doc loans are out but knowing that those with no skin in the game default at higher rates, why in the world would we continue pushing programs like this?  The private sector did an abysmal job for a decade with these loans.  Why are we now going to take this and apply this to government backed loans?  It simply does not make sense.  And right on time FHA insured loans are skyrocketing:

“(WSJ) Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier.

A spokesman for the FHA said 7.5% of FHA loans were “seriously delinquent” at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.

Since the collapse of the subprime mortgage market in 2007, most home loans for people who can’t afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home’s value.

The FHA’s share of the U.S. mortgage market soared to nearly a third of loans originated in last year’s fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA’s reserves prove inadequate to cover default losses.”

This would be funny if it weren’t real.  I remember a few months ago when I berated these loans a few comments popped up saying, “well government loans have historically low default rates!”  Of course.  You should parse that statement with “the government HAD low default rates…” sort of like “housing prices NEVER go down.”  Well they didn’t in large moves until this crisis.  The rules are now different.  Don’t take my word for this.  Let us look at the hard facts:

*Click for sharper image

In 2004, FHA and VA insured loans only made up 4.6 percent of the entire mortgage origination market of $2.9 trillion.  In 2008?  FHA and VA insured loans now make up 16 percent!  In 2009 it is expected to make up 25 percent!  1 out of every 4 loans in 2009 will be insured by the FHA or VA.  And we are thinking that 3 percent down is sufficient?  Didn’t this housing bubble teach us something?  The problem once again is this notion that you can somehow go around those boring conventional standards like a 20 percent down payment, modest debt to income ratios, and 30 year fixed mortgages.  You can’t!  Why?  Because we have a bunch of unethical people running the system looking out for number one and would reinflate this bubble again if they had the chance.  And guess what?  Many are getting this chance.  $291 billion in FHA and VA insured loans last year.  Default rate now soaring.  Didn’t see that coming right?

And if you think the mentality from the industry is any different take a look at the idea of one VP at Union Bank interviewed on 3/30/2009 by the OC Register:

“Q. How does one qualify for the special program?
A. Cole said to be eligible borrowers must have household income that equals up to 80 percent of the median income for their area – that would be in the range of $57,000 to $67,000 for Orange County. Those earning more could also qualify if the property they are buying is in a Census tract with 80 percent median income compared to the county. Also, borrowers must not have a serious delinquency in the past 24 months.

He also said lenders usually only want 38 percent of the borrower’s income going to household payments, including the mortgage, taxes and insurance. But Union Bank will go as high as 42 or 43 percent.

Q. Your company says the lower-income program isn’t a subprime program. What’s the difference?
A. “There are two major differences. First of all, subprime lending by its very nature means people who have established bad credit.”

Cole said subprime borrowers haven’t paid their bills on time nor have a high level of debt to their income, or both. He also said subprime loans have large payment jumps, hefty fees and higher interest rates. None of those factors are true of Union Bank’s loans to lower income borrowers, he said.

Q. With subprime gone have you seen an increase in demand?
A. “We have seen demand increase. I think the biggest increase in the marketplace in general is in FHA and VHA loans. But, yes, we have seen a surge in new applications.”

Q. How about stated income? Do you ever allow borrowers to just say what they earn?
A. “Not currently.”

I love that last statement.  “Not currently.”  And this is someone who is supposedly arguing that they are careful in their lending practices.  It is amazing to me, that many on Wall Street now assume that without those pesky Pay Option ARMs and Alt-A loans that somehow, any 30 year loan is now okay.  With the California unemployment rate at 10.5% and growing even a fixed rate is too much for someone without a job.  Push their PITI to 43 percent of their income and you are asking for trouble.  And that is what we are getting with these higher default rates.  Freaking amazing.

HUD, which is now picking up a growing number of foreclosed FHA and VA insured backed properties is realizing that they are now part of the toxic asset world.  Take a look at some of the HUD owned properties in the Inland Empire here in Southern California:

So this is their idea of making the market healthier?  Giving loans to people that will default in a few months or a couple of years?  Renting is freaking okay!  Home ownership isn’t a damn right!  What the government needs to focus on if it is intent on pumping trillions into making the economy better is job creation!  You know how many jobs you can create with $1 trillion?  The infuriating premise goes back to Bear Stearns in the spring of 2008 where we started hearing that glorious mantra, “…we would have systemic failure.”  Then we had Fannie Mae and Freddie Mac, Lehman Brothers, AIG, and all the other poor souls that were too big to fail.  And here is the main joke of it all.  If these “too big” to fail institutions simply made too big of bets, then what do you think happens when the government suddenly backs these up?  What we are doing is now putting the risk of our entire country for these companies.  There is no assurance the government will be able to back up these loans without decimating our currency with mega-deficits running as far as the eye can see.  Just look at the FHA and VA insured loans that are making up a bigger and bigger portion of the mortgage market.  Many of the former subprime and toxic lenders now work pumping these loans out.  Do you suddenly think they became ethical over night?

The reason it is so important to be vigilant regarding the mortgage market is its sheer size:

The government is increasingly becoming the only game in town.  Unlike some of the PPIP participants that’ll be able unload toxic waste to taxpayers, these government backed loans are already ours since Fannie Mae and Freddie Mac for all purposes are nationalized.  What happens when these properties default as we are seeing?  And the problem is these agencies are projecting Pollyanna scenarios:

Wrong on GDP and already wrong on unemployment.  Those are two gigantic economic indicators and here we are 3 months after this forecast was made and they are off base.  And this is the kind of data they are using to project loss ratios for FHA and VA insured loans.  These are the new subprime loans.  It is no surprise default rates are soaring.  You bring in the crew from the previous mortgage disaster, repackage it, and then you assume things will be better just because you aren’t using horrific Pay Option ARMs or other absurd bubble mania products?  Glad to know we have learned our lesson well from the biggest economic mess since the Great Depression!

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The market is on a major run.  You have to give credit where credit is due.  The S&P 500 is up an astonishing 17.4 percent from the low only reached on March 9th which is incredible.  Just to give you a perspective on how ferocious this jump is, the median annual return for the S&P 500 since 1988 is 10.88 percent.  We’ve nearly doubled that in less than 2 weeks.  That is the extent of volatility in our market.  Yet make no mistake that this rally has been fueled because of the speed of the fall and a rush by those feeling that this was the bottom.  Even after this run up, the S&P 500 is still off by 50 percent from its peak.  The U.S. Treasury and Federal Reserve are doing everything they can to siphon off money into the financial sector of this country including a push to redo mark to market accounting by ripping off the U.S. taxpayer.  It is now clearer why Bank of America and Citigroup mentioned that they would be turning a profit in the first quarter of 2009.

Some of the most vicious bear market rallies occurred during the Great Depression.  When you have fallen so fast even a slight glimmer of light looks like a beaming ray of sunshine.  Given how much money has been pumped into the system, it should be no surprise that we will see movements in the markets.  Trillions of dollars are floating in the system but where are they landing?  That is yet to be determined (aside from bonuses and capital to insolvent banks).
In bear market rallies any news that isn’t bad is seen as warranting a massive rally.  Take for example the unexpected jump in housing starts.  The media was playing this up like some gigantic move.  Keep in mind housing starts have fallen at rates last seen in the Great Depression so a move up is expected.  Let us see this massive move on a chart shall we?

Did you catch that?  Let me go ahead and zoom in for you to show you this market moving data:

Some reporters like to spin data.  On a percentage basis, it was a nice bump but look at the above charts.  The jump was largely anchored in multiple unit housing starts.  That is, apartments and places for rent!  This is like having a panic attack of happiness because Citigroup moved up 40+ percent in one day even though it translated to a 40-cent move.  I wouldn’t read too much into this data.  Even if we see mild and sustain growth here, the market has been so viciously pounded that it will take years for it to get out.  How much lower can we go any how?  It wasn’t like we were expecting it to hit zero.  Single-family starts are still off by 80 percent from their peak levels.

The Southern California numbers were released earlier this week and prices are still moving lower:

The median Southern California home is now at $250,000 and for the first time since the bubble has burst, Los Angeles County has cracked into the $200,000 range coming in at $299,000.  This is significant since L.A. County is the most populated county in the region with 10,000,000 people living here.  If you look at the chart, you’ll notice that both San Diego and Orange County perked up a tiny bit.  I will say this again that there are many bottom callers rushing to buy right now thinking that this is the bottom.  It is not.  California will bottom out sometime in 2011 given all the regional and market factors affecting our market.  But like those rushing back into the stock market for another beating, they will realize within a few months that structural problems are still largely present.  Unemployment in the state is at 10.1 percent and rising.  Home prices are still out of sync with local family incomes.  Yet people still having the taste of those peak bubble prices look at a $400,000 home in a once $700,000 area and think “wow, $300,000 off!”  Just because an asset has fallen dramatically in value does not make it worth buying.

As I discussed in detail in a previous post, the state is now back only a few weeks after a major budget passed and is anticipating another $8 billion gap.  This is becoming a comedy of errors and is based yet again on Pollyanna projections.  Look, there will be a point when it will make sense to buy in California.  In fact, there are many states in the country where it does make sense to buy today.  So we are not anti-buying homes.  Yet as I have been saying for years, prices do not make sense based on the following reasons:

a.  Local family incomes

b.  Employment projections

c.  Neighborhood factors

d.  Quality of homes

e.  Schools and education

Normally, these are factors that all interplay in creating a price for a home.  It is astounding how simplistic the current system is in arriving at a home’s value.  In essence, they take 3 similar homes sold in the neighborhood and find an average square foot price and arrive at a price for the home for sale.  Normally, they will tweak a bit for additional amenities but that is the extent of the pricing model.  Well you can see the flaw with that model especially in a bubble.  If homes are selling at bubble prices then you taking 3 bubble priced homes will only give you a 4^th bubble priced home.  There are more nuanced ways of home valuations and we will eventually get there.  Yet we are not there yet.  Right now we have a rush to buy from investors and bottom callers because prices have fallen so dramatically.  Prices falling by 50 percent will get your attention.  Yet they are still over priced based on historical and more conservative pricing assumptions.  If you buy right now the only reason to do so is because prices have fallen so quickly.  That is it.  Don’t try to justify that it is because they are now “cheap” and it is a good deal.  Prices will continue to fall.

Many are somehow thinking that we are once again in the glory days of the California housing mania.  Let us take a look at Southern California home sales and prices:

As you can see, we have yet to broach the 25,000 sales per month reached in 2006 when it was the last leg of the Southern California housing bubble.  And once again, we are coming off massive lows so any movement up will look gigantic from the lows in 2008.  Yet keep in mind for last month, 56 percent of all homes sold were foreclosure resales.  So we are still seeing many bargain shoppers and investors picking up homes thinking this is the bottom.  Given that you need to come in with 10, 15, and sometimes 20 percent down to buy a home, it is a bad move because without a doubt, home prices will fall by at least another 10 percent in the region.  And the next leg down is the collapse of the middle to upper income areas.  If we look at San Bernardino and Riverside counties, we can already find homes for $100,000.  So those areas are getting close to their bottom.  Yet we have prime and semi-prime areas that are still resistant because there is a significant amount of money on the sidelines and many are simply deciding to jump in.  How much money is on the sidelines?

We have not seen this much money on the sidelines in a generation.  So there is money out there to buy especially since many people are freaked out by the casino nature of our stock markets.  In fact, real estate is now looking like a conservative investment compared to some stocks.  If you are buying right now in California you should plan on staying in your home for 7 to 10 years because there will be another push to lower prices once the Option ARM and Alt-A loans come to confession en masse.  It is nearly impossible for the government to bailout these loans with a straight face but given the suspension of mark to market coming online soon, we can bet that we are going to have our own lost generation just like Japan.  Keep in mind one of the large fundamental problems Japan had was that it did not come to terms with bad assets and did not put to rest insolvent institutions.  So the new novel approach is to get the bad assets off the books and onto the U.S. taxpayer.  How does that solve the problem?  The assets are still bad yet now the cost has shifted completely to the taxpayer.  With the push to suspend mark to market, we are virtually assuring ourselves a lost decade.  Are you going to trust the earnings of Bank of America, Citigroup, Goldman Sachs, and other financial institutions in the first quarter of 2009 now that we know that they can value long-term assets however they please?  Wouldn’t we all love that power!  Heck, I think all of us would like to think that our 5-year-old cars are worth the amount we paid for them off the dealer lot but if we tried to sell them on the market, good luck getting that price.

All I can offer you is caution in this bear market rally.  It would be one thing if we were rallying on awesome and fantastic earnings and the unemployment at 4 percent.  That is not the case.  Unemployment is rising and earnings for the first quarter will be dismal even with the alchemy of suspending mark to market.  It is a sham and I think most Americans have opened their eyes sufficiently to see the massive contradictions embedded in the system.  Just take a look at the money pulled out of the markets above.  Some are jumping back into the markets but be forewarned, there is much more to go before we hit the true bottom.

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So it looks like we have support at 666 which of course is interesting to say the least.  The market shot up bouncing off resistance like a basketball.  The Dow was up 5.8%, the S&P 500 up 6.37%, and the Nasdaq shot up 7.07%.  It would be one thing if this bounce was precipitated by good news but it wasn’t.  It was purely a technical bear market rally.  Plus, throwing the book at Bernard Madoff probably helped a bit as a catharsis but there are higher criminals out in the markets operating.  I know the pundits are salivating and we may in fact have a run up for some time but it will not occur because the fundamentals of the economy are sound.  In fact, even after this historic rally the markets are down for 2009 by:

Dow:                     21%

S&P 500:              20%

Nasdaq:               13%

Today’s home is another piece of evidence why the California housing market will not be bottoming out until 2011.  This home is located in Inglewood California [hat tip HG] and includes a new variation of marketing.  The new technique is called shopping cart technology version 2.0.  Why would someone use such a technique?  Think about the psychological implication of this for buyers; there is a deep connection of a shopping cart and buying stuff!  Today we salute you Inglewood with our Real Homes of Genius Award.

Inglewood – Real Estate and Google Come Together

I’m always curious as to why people take pictures like this when they are selling something “worth” hundreds of thousands of dollars.  In other Real Homes of Genius we have seen people leaving trash cans on their lawn as if this was a symbolic gesture or garden gnome.  Yet I had not seen a home with a shopping cart in the real estate ads I have looked through.  There is always a first for everything.

This home is 832 square feet with 2 bedrooms and 1 bath.  The ad tells us that this is a “tear down” and that it is being sold “as-is.”  You would think that if you were trying to sell a home like this you would at least remove the shopping cart from the picture but hey, this is California and anything can sell including homes with shopping carts parked on the front lawn.  Or was that the mantra for 2005?

Nothing highlights the decline in prices in Inglewood like this chart:

According to the above chart, the peak reached in Inglewood was $508,000 which is downright nutty.  I went ahead and pulled up the zip code data and the median price for last month was $365,000 which tells us nothing since the sample size is one home being sold.  There is no sales history on the place so the angle here is that this place is being sold for the land.  So what is the asking price?

$250,000

That is right.  $250,000 for an 832 square foot home in Inglewood.  And people think the bottom is here.  We have yet to factor in the ominous wave of Option ARMs and Alt-A loans that’ll be hitting the market in 2009 through 2012.  And thanks to Google Street View technology, we can get an idea of what we are buying here for $250,000:

Now this gives you a much better perspective right?  You can see that this home is situated right next to an alley.  You can also see all the additional amenities that you will get when you buy this place.  Let us get another perspective of the neighborhood:

As you can tell, one side of the street is full of apartments.  So to buy this place to live in would seem extremely expensive.  But let us put on our investor hats and see what we can come up with.  We are told in the ad you can possible build “10 units” but are then told to check with the city so who really knows.  Let us just assume that we will be building four units on the lot.

First, let us do some searching on local area rents:

Okay, we are simply doing a quick check here and it looks like we can build 1 bedroom places and rent them out at approximately $800 per month.  So in total, we will be receiving $3,200 in cash flow simply from the rents assuming we manage the properties ourselves and have them occupied at all times.

But that is only one side of the equation.  You need to remember that given how tight the credit markets are right now, you will need to go in with 30% down for investment properties:

$250,000 x 30% = $75,000 down payment

And this merely gets us the property.  How much to tear down the home?  Also, how much is it going to cost to build each unit?  We are talking hundreds of thousands more.  You think it is hard to get a loan for an investment property?  Try getting a loan for demolishing and building more housing especially in California!

So even on the home alone, you will be carrying a mortgage of $175,000 probably at 7% or higher since it will be an investment property loan.  Let us do the math on this note alone:

PITI:  $1,424

And that is simply the cost to buy the home as is with doing nothing and going down with $75,000.  Try factoring in the building cost and everything else and that $3,200 is gone.  10-units?  If that is the case you are talking about years down the road before you turn a profit.

So instead of listening to those pundits telling you we are at a bottom, just do the math and you’ll realize we are still far away from any bottom at least here in California.

Today we salute you Inglewood with our Real Homes of Genius Award.

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