Southern California is bracing for a historical mortgage, credit, and equity downturn. As we’ve mentioned about the oncoming credit storm, the forth quarter of the year simply had too much momentum to stop this silver train from derailing. The housing atmosphere was setup for this perfect storm. Even in the face of medically precise liquidity injections by the Fed, rate cuts, banks making absurd bailout funds, and the government subsidizing bad lending we are now realizing that the scope of this problem is much more profound. Important news for the week is now every county in Southern California is negative on a year on year basis according to DataQuick. The small caveat of course is Los Angeles County, but we are only off by $6,000 which is an amount that wouldn’t even cover 1 square foot in the mind of many sellers. We will reach 100 percent negative median prices by the end of the year as predicted. Right on cue, certain counties are taking the brunt of the storm. Riverside County is now down 10 percent for the year and San Bernardino is down 11 percent. Amazingly, the resilient Orange County market is down 9.5 percent with a drop of $60,000 from last year.

That is one piece of the news. Next, we have super special prime lender Thornburg Mortgage announcing major losses in the third quarter. Why is this important? Well even in the face of the August credit beat down, Thornburg was implying that they were still okay since they only dealt with ultra prime clients therefore should have a stronger chance at confronting the overall market which was correcting only with the leper colony of subprime outfits. The big news of course is that even this prime lender could not avoid getting sucked into a massive market jumping in and now they are part of the overall gang. Welcome onboard. Next, we have NovaStart Financial getting information from the NYSE about a move to delist the stock. Not exactly a vote of confidence for both these companies and both stocks are taking a financial beating. And then we have the big daddy Washington Mutual joining the club by announcing their 3^rd quarter results which again, are nothing to cheer about. So what is the point of this pity party? Essentially all players in this credit game are getting hammered and we have yet to see anything in terms of a major correction. Also, foreclosures and short sales are spiking so all the billions of liquidity injected, all the new regulations, and every other Band-Aid really isn’t helping the person on the street. It is buying time for some of the large players but it isn’t helping those facing foreclosure. You can only imagine what is going to happen in the typically slow selling seasons of fall and winter. Not only that, we get the lowest cost of living adjustment in Social Security in four years since according to the ministry of truth, we have no inflation! Instead of Lindsey Lohan in rehab, we need to send Fed members to make sure they aren’t drinking something. Since it seems that people lose touch to the assets that actually back up the renegade mortgages, let us examine another case study in the twilight zone. Today we salute you Burbank with our Real Homes of Genius.

This 1,387 square foot home is nestled in the gorgeous city of Burbank. Home to many companies such as ABC, The WB, and Nickelodeon this place is reflective of the entertainment universe of Southern California. So this magnificent posh mansion is perfect for any of you aspiring directors and folks that want to enter into the thirty mile zone. This place has 3 bedrooms and 2 baths. A nice place which in many parts of the country, one would consider a starter home. So how much for this starter home? How about $626,500. This home was initially listed at $646,500 but is now a REO foreclosure therefore a drop of $20,000 should generate some interest. This place has an updated kitchen since it was built in 1947. Hence the reasoning for the $626,500 price. Let us take a trip down memory lane on this place. What do we find when we pull up the previous sales history?

Sale History

06/15/2007: $611,665

12/20/2000: $369,000

07/28/2000: $254,000

With all the negative housing news coming out about mortgaged back securities, mezzanine tranches, structured investment vehicles, and every concoction of mortgage rhetoric, it is easy for someone to throw up their arms and give up to what is unfolding. But it is rather simple and the law of parsimony applies here as well. That is, sometimes the simplest explanation is the best. This home is incredibly overpriced! It really is that simple. The housing complex has berated anyone that sat on the fence and now their economic faux pas is coming home to roost. Their economic logic only applied to a perpetual bubble that has completely burst and is spewing its toxic waste onto the entire economy. Anyone buying right now is coming to the party extremely late and better brace themselves for more significant price drops. Take a look at the above sales data. This home even in 2000, sold for $115,000 more in a matter of 5 months. Then, we see an increase of $242,665 in a matter of 6 years with no significant repairs or modifications. To break it down further, this home went up $40,444 a year simply by it being here in Southern California. Think of how absurd that is! KTLA ran a report last night that the median family income for people living in Los Angeles is $52,000. So by simply living in this home or many other banana republic homes in the state, you earned more money then an entire household working 52 weeks out of the entire year. The person working contributed to the economy. What about this house that simply sat on the market? Do you see how this game got completely out of hand? I’ve written over 160 essays breaking down the intricacies of the market but this is so blatantly obvious, all we need to do is look at the price and the income of those in the area. So what is the household income for those in this area?

Average Household Income: $80,391

This is much higher than the typical family in Los Angeles since the area is considered middle to upper middle class. So let us assume this family was to purchase this “starter” home:

PITI: $4,611 (Assuming $31,325 down payment)

Net Take Home Pay: $5,163 (Filing as married in California with 2 exemptions)

So this family, simply covering their housing cost is left with $552 as disposable income. What about healthcare? What about automobile costs? What about food? Care to add to the 401(k)? And what is the median rent in this area? How about $2,400 per month. I broke these numbers down even further in the article called the rent versus buy dilemma. What we find is that the wisest financial move you can make in today’s market is to rent. Anyone buying right now will be throwing every cent of their income at their housing payment unless they have a six figure down payment, which is highly unlikely given our negative savings rate. It looks like Southern California is entering an extended trip in housing rehab.

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