Dreaming of 1997 – 80 Percent Price Decline in Compton

Pink homes usually go hand and hand with Malibu Barbie.  Here is a great home for your Malibu lifestyle on a beer budget.  This home has taken this housing bubble on the dance floor and performed every move imaginable including the price decline tango.  Looking at the sale and price history, we can only imagine the stories it has to tell us.  This home is a foreclosure, one of the many thousands in California, and is listed as having 2 bedrooms and 1 bath.  It is 817 square feet and is now going for 124 days on the market.  I know, what a shocker.  Let us look at the wonderful pricing history over the past 124 days:

Price Reduced: 01/08/09 — $144,900 to $139,900
Price Reduced: 01/21/09 — $139,900 to $114,900
Price Reduced: 02/12/09 — $114,900 to $109,800
Price Reduced: 02/24/09 — $109,800 to $74,800
Price Reduced: 04/06/09 — $69,800 to $64,800

This totally makes all the sense in the world.  Let us list this home for $144,900 in January only to drop the price to $64,800 in April (a reduction of 55 percent).  One important thing people need to ask is why in the world would you list the home for $144,900 in the first place?  Is that the amount of the first mortgage?  Only the seller can know for sure.  However, dropping the price like this tells us the state of the current housing market.  Is there no Barbie looking for this home?  Heck, your PI payment on this place will come out to be around $350!  Car payments are bigger than that.

You may be saying to yourself, “okay, they mispriced the foreclosure.  So what?  What does this have to do with showing us the history of the housing bubble?”  Oh, you have no idea!  Let us look at the sales history with a bit of running commentary:

Sale History

09/02/2008: $184,800 < Lender taking place back.

01/26/2006: $312,000 < What the heck?  $312,000 for this place?  Bwahahahaha!  Whichever bank made this loan should be taken by the FDIC immediately.

02/10/2003: $138,000 < Nice little jump here for a few months.  Bubble picking up steam.

08/30/2002: $85,000 < Whoops.  That only lasted a few months.

01/03/2002: $104,682 < Hey, this home actually appreciated!

11/13/1997: $93,000 < Get the price back up and ready to go.

07/30/1997: $41,000 < A 50% drop in the pre-bubble?  Oh yes, these things do happen.

03/27/1997: $85,000 < Pre-bubble days

That pretty much sums it up right there.  The lender who made that 2006 loan needs to be taken into receivership ASAP.  How do you make a $312,000 loan on this place?!  If the home sells for the current price it is an 80 percent loss from the peak and puts us back to the early 1990s price range.

Garbage Can Photography Version 3.0

I’ve been baffled by this garbage can photography marketing technique.  Maybe I skipped class that day when they were discussing Waste Management techniques in selling real estate.  Some agents have e-mailed me about other Real Homes of Genius saying, “I’m not getting out of my car to take a picture in this neighborhood.”  Well, you are working for a commission and now it means doing some leg work…like moving the trash can from the lawn before you snap a picture!  And believe it or not, $70,000 is still a good amount of money for millions of Americans.

This home is another foreclosure.  This home is “sold as is” which is always a great sign of a quality product.  This is a 2 bedroom 1 bath home with a gigantic 546 square feet.  How do you get 2 bedrooms in 546 square feet?  Math wizards please enlighten us.

This home has been on the market for 78 days and has already seen one price reduction:

Price Reduced: 04/02/09 — $79,900 to $69,900

A $10,000 drop is 12 percent for a home in this price range.  That is a big deal.  Aside from the great garbage bins (I count 4 in the picture) you would wonder why in the world a lender would put loans on this place of:

Sold (12/23/2008): $185,066 < Home taken back by lender

Again the question is which lender made this loan of $185,066?  Incredible.  Don’t you feel excited that you are bailing out institutions that made these kind of loans?  According to the U.S. Treasury this home loan is a “legacy asset” instead of toxic waste.  In addition, through the public private investment program, the American taxpayer will be the proud recipient of many of these loans including those garbage cans.  I’m sure many of you are just itching to buy these homes!  Oh, and they happened to take the picture on a rainy Southern California day!  We have approximately 10 days out of 365 where it is raining and they decide to take a picture with garbage cans and rain!  They are really doing their absolute best to market this place.  Don’t try to sell this home so fast!

We’ll Beat Any Advertised Price or Your Mattress is Freeee!

Those comedians at the U.S. Treasury and Federal Reserve are going in complete circles as to the best approach of tackling this problem.  Money for Bank of America?  Goldman Sachs?  JP Morgan?  Wells Fargo?  AIG?  So many choices!  Why give out trillions to your crony banking buddies when all you need to do is give a free mattress with every home purchase?  Now with this home, we get a nice combination.  Not only do we get Garbage Can Photography 2.0 but we also get Mattress Photography 1.0.

This is a larger home.  4 bedrooms and 2 baths and is listed at 1,314 square feet.  It has been on the market for 126 days.  Let us see the pricing action again:

Price Reduced: 02/04/09 — $169,900 to $159,900
Price Reduced: 02/24/09 — $159,900 to $139,900
Price Reduced: 04/01/09 — $139,900 to $114,900

Great price right?  Small caveat. The stinking unemployment rate in California is 11.2 percent!   Have you taken a look at Detroit home prices?  There is a reason why some homes are priced at very low levels.  Unemployment does not help in boosting prices.  And this is one key point I want to drive home to all the bottom dwellers.  Until you stabilize the employment situation, you can focus all you want on mortgages and cheap credit but what use is that when people are struggling to find employment?  You’re going to make your mortgage payment with a $300 weekly unemployment check?  I’ve seen various sources talking about job growth during the housing bubble decade here in California and estimates from 40 to 50 percent of all job growth can be attributed to housing, finance, and industries tied to the real estate market.  With that said, it is important to look at places like Compton since it is good to have an idea of what we have been purchasing through bailouts of the banks and Wall Street.  I think I answered my question as to why banks aren’t dolling the homes up.  With all these bailouts given to any bank, why fix a home when the government is gearing up to buy them as is?

Today we salute you Compton 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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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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One of the main reasons central banks came about was the idea of the lender of last resort.  That is, when banks stop lending who would be there to step in to fill the void?  Ben Bernanke has pretty much put to rest any notion that the Fed is not only the lender of last resort but of first, second, and third resort.  How much action is Bernanke taking with the markets?  Let us take a look at a couple of charts:

*Click for a sharper image

These two charts do a good job summing up the current situation.  The Federal Reserve is running out of arrows in its quiver.  We have already reached 0 percent with the lowest term treasuries.  In addition, banks are borrowing like mad already matching the $700 billion TARP amount through other mechanisms.  The Federal Reserve has over $2 trillion on its balance sheets yet they continually deny the American public the ability to look inside its books.  As the revered Madoff once said this is, “basically, a giant Ponzi scheme.”

I have to find some humor in that depository institutions are exchanging questionable assets for treasuries while at the same time we are injecting capital into them via the $700 billion TARP plan.  Isn’t this like a double bailout?  First, we already know that the assets they are exchanging are questionable.  Why?  If they weren’t questionable they would be trading them on the open market.  The reason banks are still not lending to one another is because they know how corrupt their balance sheet is and what would make them suspect their neighboring bank would be any different?  Early in the week, I heard Steve Forbes on the KNX Business Hour saying the government should suspend mark-to-market.  I bet he would like that.  How about we suspend any stock tickers from showing low bids?

Every once in awhile I see a home that shocks me in a certain way.  Maybe the agent forgot to move the unsightly garbage can before taking the picture of the home.  Or maybe the agent wanted to take a picture with two cars parked on the lawn.  Sometimes it does make you wonder.  But today we get a home where we say, “okay.  Are you trying even just a tiny bit here?”  Today we salute you Riverside with our Real Home of Genius Award.

Waiting for the 2009 Bailout

At first glance, we see that the home is boarded up and the grass has the foreclosure yellow we have grown accustomed to here in Southern California.  Riverside is part of the Inland Empire which has been decimated by the housing bubble bursting.  The median price for Riverside County is now $230,000 down a stunning 35% in one year.

The above home was brought to my attention by another shocked reader to the site.  Given that we have covered nearly 100 Real Homes of Genius here in Southern California, it takes a lot to shock me with a home.  Gutted homes.  Steel pipes on the lawn.  Big garbage can taking up half the picture of the home.  Torn up lawns.  You wonder if people are trying.  Well in this case, it is taken to another level.

This home has 4 beds and 2 baths sitting on 1,954 square feet.  A good sized home.  Looking at the above picture, it appears to be in decent condition.  The current zip code for the home above is down 42% in one year to a median price of $225,000.  This home is lender owned but this picture will shock you so be forewarned:

Bwahahahaha!  I went ahead and pixilated out the picture but I think you know what is behind the blur.  I kid you not, this is from an actual listing.  Now seriously, what in the world is the purpose of this?  Going back to the beginning of the article, I hold firm that some lenders simply want the government to pop in and bail them out.  Not help them overcome their economic problems but to take them over like some form of Soviet state planning.  Why else would you post a picture like this?  Maybe you think come 2009 we are going to get a blanket bailout.

So let us now look at some data:

Current Price:              $170,900

Previous sales history

02/14/2006:     $435,000

04/05/2005:     $332,000

Okay, so the current price tells me they want this place to sell but that picture tells me they don’t.  This isn’t like selling a $50 item on eBay and maybe someone just got lazy and took a really bad picture with an old cell phone presenting the item in a bad light.  We are talking about $170,900 here.  Maybe this home is a statement piece.  I think someone may have found the bottom of the housing market here.

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

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We saw this error or bias played out many times.  I would speak to people during the peak and get responses like, “all those other people paid too much and are stupid with getting a fixed mortgage.  But see, we are smart because we got an option ARM and are going to sell it off in 3 years at a nice profit.”  After all, this belief is central to any mania especially in a speculative bubble.  People want to believe that an endless pot of gold is at the end of every rainbow and don’t want to think about a greedy penny pinching leprechaun who is ready to take their credit cards away.

This error is now in full formation here in California.  I am amazed at those in prime areas who still feel they are somehow immune to this global calamity.  Here is a newsflash, you are not immune.  The progression of the bubble went something like this:

(a)  Early birds:  Got in the game from the ground level.  Saw the potential, made good profits.

(b)  Early bird specials:  Lenders and Wall Street felt a niche was emerging.  Play off the biggest pipe dream in America.  That of homeownership.

(c)  Snake oil salesmen:  Who is going to promote this to the masses in an easy to read book or downloadable Podcast?  Simple, an entire industry elevated these people to rock star status even though many of them did not understand the entire economic scope of the bubble.

(d)  Going mainstream:  The masses believe real estate never goes down.  The media saturates the airwaves usually bringing on snake oil salesmen to prime the pump.  Now, not only does real estate only go up it goes up big.  The bubble inflates exponentially.

(e)  Manic rush:  Everyone races in.  Mortgage equity withdrawals.  Flipping by amateurs is not only done, but has a television show dedicated to it.  Real estate is now romantic like stocks during the 1920s.

(f)  Pull up your pants, the crack is showing:  Cracks start showing up in the system.  Sales begin to decline.  Anyone who brings this up is a party destroyer.  Off to the forest!  The vast majority now have a stake in the game and have a hard time (fundamental attribution bias) of separating cause and effect.  Plus, who wants to ruin a party?

(g)  Game breaks open:  The floodgates open and now the battle is whether the decline is temporary or permanent.  The camps start separating out.  One by one some regain their sanity.  Yet many cling strongly to this delusion since they are so heavily vested.  The mainstream media starts making an attempt to offer balanced coverage

(h)  Three strikes and your out:  Game over.  It is widely recognized how stupid and idiotic it was to get into this bubble.  $500,000 for a Real Home of Genius shack?  Not me!  I bought a 1,000 square foot home in a prime area!  It’ll never happen to me but my sympathy to everyone else.

(i)  The revelation and despair:  We are in this moment.  Now, people are seeing the writing on the wall.  It slowly starts out as a shadow but quickly fills in with a bright red color.  Many are going to find the writing not pleasing.

This for the most part is how the bubble unraveled over this decade.  In the moment, much of what I discussed even 3 years ago seemed out of the mainstream.  Now, it seems like common sense.  Try telling that to people during the lead up to the Great Depression or our current economic malaise.

Fannie Mae and Freddie Mac, otherwise known as Tweedle Dee and Tweedle Dum announced that they are going to do a massive loan modification program.  The details are preliminary and I’ll do a much more in depth report on a future article but suffice it to say these are the details:

(1)  Modify mortgages for those 90 days late

(2)  Extend mortgages to 40 years

(3)  Lower mortgage payment to 38% of the borrower’s annual income

(4)  Lower rates to as low as 3%

(5)  Need to make 3 consecutive payments in order to be permanent

This thing is fraught with so many problems.  First, it is geared to the uber toxic mortgage markets of California and Florida that account for well over $300 billion of the $500 billion Pay Option ARM market.  In addition, they mention that this money will come not from the $700 billion TARP program.  Which means more money from tax payers.  Although most of the problem loans come from California and Florida, it looks like many loans will not qualify for this program.  Of course Sheila Bair at the FDIC wants access to TARP cash to bailout toxic mortgages.  Not subprime mortgages but Alt-A yuppie mortgages on California McMansions.  I’ll leave it on this final note but don’t you think this is going to induce certain borrowers to purposely miss three payments?  There are many people on the edge who are being prudent and making their home payments but barely.  Now isn’t this a large enough incentive to stop paying and get this great deal?  Frankly, I want to sign up and put some of my mortgages in here!  Unfortunately, for the majority of prudent mortgage holders who pay on time your only parting gift is the good feeling that you are helping Wall Street banks and lenders stay afloat for making horrible mortgages.

Let us now move on to a delusional home in a prime area here in California, Pasadena.  Today we salute you Pasadena with our Real Home of Genius Award.

Home Roses in Pasadena

Pasadena California is a city with 133,936 people in the Los Angeles County area.  It is one of the nicer areas in the county known for hosting the Rose Bowl football game and also the famous Tournament of Roses Parade.  Pasadena is also home to Caltech which is one of the most prestigious institutions in the world.  So the city definitely has a lot going for it.  And it also has a deep well of delusion.

The median income for the city is $86,523 which is relatively high for any city in the United States.  The median household income in the United States is slightly over $46,000 but will probably drop given the current economic collapse.

This above home is 1,200 square feet and has 3 bedrooms and 1 bath.  This “gorgeous” home has been sitting on the market for 285 days which you would think would give someone a hint.  It may be a good idea to invest $50 bucks with a gardner to also cut the grass:

You would think that someone would understand that these kind of homes are simply not moving in the market.  This would have been the perfect example that we would have seen showing up on Flip this House.  But now, the lenders are flipping out.  We really need to have more truth in advertising here.  The ad tells us, that the home has been “lovingly and completely gutted and now stand as good-to-go exterior shells ready for your creative touch, or byob (bring your own bulldozer) large lot, school in close proximity spectacular mountain views.”  Want to see what “lovingly” gutted looks like:

If that is how people gut a home with love how in the world would a home look like if it was gutted with indifference?  And what is this BYOB?  Bring your own bulldozer?  Oh funny.  Good one.  Nice chuckle but I ain’t buying.  And apparently everyone else feels the same way.  Let us look at the magical pricing action on this BYOB home in Pasadena:

Price Reduced: 04/09/08 — $479,000 to $450,000
Price Reduced: 04/26/08 — $450,000 to $375,000
Price Reduced: 05/01/08 — $375,000 to $360,000
Price Reduced: 05/24/08 — $360,000 to $279,000
Price Reduced: 06/22/08 — $279,000 to $249,000
Price Reduced: 07/17/08 — $249,000 to $239,000
Price Reduced: 10/24/08 — $239,000 to $219,000
Price Increased: 11/03/08 — $219,000 to $230,000

The first thing you should realize is that someone actually thought this place was going to move at $479,000.  Take a look at those pictures one more time.  This place is not worth that.  They listed the place in January and wallowed 3 months in delusion before they made any price concessions.  Once April hit, the price reductions came fast and furious.  You know the irony here?  If they would have listed the price at say $300,000 in January some sucker would have paid it at that time.  Now, they are chasing the bottom.  In fact, Zillow has this home listed at $199,000:

So what did this home sell for in the mania of the bubble?

Sale History

08/23/2006: $522,000

That is a stunning 61% price dive in a so-called prime area.  Now, we will enter into the next phase of the delusion which is the California housing market.  You’ll have folks telling you, “yeah, well of course.  This home is in poor quality.  But my place is nice and in good condition therefore it will stay high.”  Here’s a quick lesson for those of you who don’t invest in real estate.  Building a home is cheap and getting cheaper.  Has anyone been following the commodity markets?  Out of work construction workers are seeing their wages depressed because of the flood in the market.  In some areas of the country, you can buy a brand new home for $80,000 to $100,000.  I’m talking about brand new 1,400 square foot homes with faux granite countertops, all brick, garage, nice lot, and fireplace.  Plus, they are brand new.  Why are they so cheap?  Land is basically free.

In California, the delusional sun god worshippers thought they had found the most exquisite plot of land in the world.  For a time, enough Kool-Aid drinkers believed that which led to someone willing to pay $522,000 for this “home” in Pasadena.  In addition, there were enough lenders smoking peyote who actually thought making a loan at this level was smart.  Don’t believe me?  Take a look at the assessed value:

Welcome to the absurd bubble era.  The home was never worth much.  Heck, take a look at it.  Land, land, land as the cult would say.  But now as it turns out, it does matter what home you have on the land.  The lower assessment before the 2006 peak mania buy simply reflects California’s backward way of assessing home values.  The state was complicit as well.  They loved assessing homes at higher values.  More money into their coffers.  And if you haven’t noticed, we are now in a $11.2 billion deficit only 6 weeks after the longest stalled budget passed in our state history.  Property tax revenue will go lower after many decide to forgo their tax payments for next year trying to qualify for the above freebie loan program from Fannie Mae and Freddie Mac.  Now assume you “BYOB” and knock this home down.  In effect, you are stating the home value is zero since you will need to construct a new home on this lot.  Now what is the true value of this land?  That is the new question we are trying to figure out.

One thing is certain, land isn’t worth a damn if you can’t cash flow as an investor.  The current $199,000 price is basically saying the plot of land is worth $199,000.  Do you think it is worth that much?  If you construct a modest home it will cost you roughly $200,000 in California.  Is this worth $400,000?  Maybe.  But you’ll have to wait and have the funding ready to build the home.

If you decide to buy this place bring your bulldozer but also bring some booze since you are going to need it in the long months ahead.  Today we salute you Pasadena with our Real Homes of Genius Award.

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