Real Homes of Genius: Today we Salute you Compton. Once, Twice, Three times a Short Sale.

Once again the ministry of truth tells us that inflation is tame so long as you don’t eat or drive which makes for a fascinating Wall Street spectacle. At this point, it has become an utter joke trying to rely on the BLS data for inflation numbers. Practically speaking they are making it up as they go along. For a better frame of reference and your own sanity, it is better to simply grab the pulse of your surroundings and arrive at your own conclusions. After all, sometimes the best way to see how the weather is going to be is to stick your head out your own front door. California has now reached another disturbing point where 1,000 foreclosed homes were auctioned off each day in April:

“California’s foreclosure crisis passed another ominous milestone in April, when more than 1,000 foreclosed homes were auctioned off every weekday at courthouses across the state, the auction tracking firm ForeclosureRadar reported today.

The April total of foreclosure sales at auction — 22,838 for the state — represents a jump of 44% over March totals and the highest level ever in California, ForeclosureRadar reports.”

Not exactly a report to be happy about. But what happens? The market rallies because inflation is contained in a delusional world where people don’t eat, don’t need fuel, and somehow only live in prime areas. Is it any wonder why people are so furious?

Today we’ll be looking at another short sale home in Southern California which only demonstrates how absurd this housing bubble was and still is. Today we salute you Compton with our Real Homes of Genius Award.

Third Time’s the Charm in Compton

compton.jpg

Today’s home takes us to one of the 88 cities in Los Angeles County. This Compton home is 828 square feet and has 3 bedrooms and 1 bath. How you get 3 bedrooms in 828 square feet may be the real story here but let us move on and look at some more details here. The home was built in 1954 and has an exotic blend of carpet and linoleum floor coverings. Clearly the HGTV crew has been given pointers here. Before you start feeling bad if you are not from California, after all the median home price across the country is hovering around $190,000 to $200,000, let us take a look at the sales history of this home:

Sale History

12/22/2005: $310,000

09/30/2004: $235,000

11/05/2003: $110,000

How this home sold for $235,000 and then $310,000 only one year later is beyond me. What happened in 2005 that made this home jump up by $75,000? Maybe it was the lime trim because I heard there is a shortage on that color. Or even more, what happened in 2004 that pushed this home up in value by $124,000? This home doubled in price in 10 months! I guess the person that bought in 2004 and sold in 2005 was only trying to repeat the magic Southern California recipe. The person in 2005 was probably looking to sell for $500,000 but the magical chair game of housing ended rather abruptly. Now the Ponzi scheme is unraveling at the seams revealing the sand castle of finance built on our Pacific Coast beaches.

Now the interesting thing about this home is that it was listed less than a month ago. A new emerging trend is sellers and lenders are no longer throwing out an absurd pie in the sky price and do the housing cha-cha where they cut the price every week as if they were doing you a big favor. This house was put on the market for $175,000. We are now quickly approaching the price of 2003 in a reverse appreciation situation (otherwise known as depreciation although they probably have banned that word in California real estate for the past decade).

So is this a good deal? Well now that we have to rely on actual data and local area incomes, let us suppose a local family was to purchase this place. Let us run the numbers:

Local household average income: $46,000

Rental Price for a Similar Size home: $900 to $1,000

Principal and Interest: $944 (Fixed 30 year at 6% with $17,500 down)

Taxes and Insurance: Approximately $200 per month

After tax savings and given the current rental rates, this may not be a bad offer. But again, this is the issue with only looking at the data and not knowing the dynamics of Southern California. Even with the current price (which is almost half off from the 2005 price) is still a tough economic one strictly on fundamentals. What if the economy in California starts deteriorating further? Will rents not also follow suit and go lower in certain areas?  As an investor this makes no sense since you’ll be negative cash flowing.

Either way, when you look under the hood of some of the homes in Southern California, you realize that billions of dollars are going to be washed away once we mark to market these homes.

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

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12 Responses to “Real Homes of Genius: Today we Salute you Compton. Once, Twice, Three times a Short Sale.”

  • Sold my 1B/1Bath condo in Huntington Beach for $265K in May ’03. That person sold it a year and half later for 420K. Now its upgraded and going unsold for 339K.

  • It’s not a bad deal at all if you want to live in Compton, which most people don’t. Unfortunately, rents have not been going down but rather up:

    http://www.latimes.com/business/la-fi-rents17apr17,1,4915147.story

    So I don’t know that I’d count on rents going down just because we happen to be in a recession.

  • It almost doesn’t matter what the economy does– you’re still gonna get shot in Compton!

  • Fundementals? For crying outloud!
    Forget about fundementals like “avg income”, rental comps, and all that. Pay attention instead to the REAL fundementals…the one’s that your life depends on: Like the BARS on the door, the BARS around the property and the location location location in COMPTON! When you see fundementals like that, you don’t get out the calculator, you run for your life!
    Why on earth anyone would actually PAY to live in an area not much different than say, the interior of Folsom prison, is so incomprehensible to me. I don’t care if the place is just $175 dollars and 8,280 square foot! With a house like this, who needs a realtor? Worry instead about getting a good mortician.

  • Still not a good deal because of the neighborhood. And you’d have to pour a bunch of money into it to make it livable.

  • I’d pay a $100K to allow me to get the hell out of Compton!

  • Um, yeah – one important detail: unless you are a Blood or a Crip and plan on dealing crack through a hole in the back door you probably don’t WANT TO LIVE IN COMPTON!!!!

  • Indeed that a very modest architecturally undistinguished home in Compton can be offered at $175,000 owes much to the Community Reinvestment Act that requires banks to make financing available to sellers and buyers in such neighborhoods. Absent that mandated financing no sane lender is going to make a loan on such properties. This CRA mandated financing has, ironically, pushed up the value on properties that otherwise would have little or no value at all. Absent such financing a seller would have to self finance or a buyer would have to come up with cash either of which would cause such property to sink to its true market value. This has actually caused the speculative subprime boom in slum housing in such cities as Cleveland that has now turned to bust. See the BBC article here: http://news.bbc.co.uk/2/hi/business/7070935.stm

  • Even Johnny Cash would be afraid to do a show up at that place. This place shouldn’t be worth more than 100,000$ due to the area it is in. Compton is on the depreciation fast lane and quickly turning into Detroit.

  • Rising rents are a natural part of the cycle, as people who didn’t buy AND those squeezed out are in the market simultaneously. Soon a lot of places that aren’t appreciating will turn over to rentals to generate some cash and rents will plummet as well.

  • location location location. Those who took time to purchase in a good locale within L.A. will ride out the storm fine (aka; places like, burbank, calabasas, tuluca lake, and so forth).

  • Maybe the home was going for so much because Easy E used to live there.

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