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
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:
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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