Real Homes of Genius: Today we Salute you Huntington Beach. If you Walk Away, you Still Have the Ocean.
It is no surprise that many lower price areas are taking the brunt of this market correction especially in many cities in Southern California. However, not much has been examined between the synergy of employment linked to real estate and housing values. It was a symbiotic relationship that fed off each other. As the market trends pushed prices lower, the next train to leave the station is jobs that were dependent on ever rising home prices and a larger volume of sales. The churn and burn economy. This of course isn’t something new to this current era of economic prosperity and won’t be the last time that we witness such mob euphoria. Yet California is uniquely positioned that it will face to a large extent, some of the worst that will come with this housing led recession. It lived by the real estate, it will suffer by the real estate. To iterate on this point, let us examine a series that CNN Money is now doing looking at individuals and how the current economic downturn is impacting their lives. This story about a mortgage banker in San Clemente California literally has a piece of each facet that has caused this massive bubble and why things have changed so quickly:
“Surf teacher and retail clerk, 62, San Clemente, CA
I was a mortgage banker for about 20 years and while it had always been a bit of a rollercoaster ride, it also had some added perks in that I set my own schedules. This gave me time for what I really love to do: Surf.
As I watched the bubble getting thinner and thinner and bigger and bigger, I tried to position myself to survive what I thought would be a short-term correction.
First rates went up. Not much, but just enough to stop my business cold. First ones to go of course were the small brokers like myself who could not continue to spend more and more money to capture less and less business.”
A couple of misconceptions to begin with. First, the bubble didn’t burst (at least he acknowledges there was a bubble) because rates crept up (they are still at historical lows) but because prices became so out of line with local area incomes, that any tightening of the secondary credit market was enough to push the entire state of California to lose 20 percent off its median peak price in one year. Next, there was a false assumption that this was going to be a short-term correction. Now you must see some irony in this when he admits there is a bubble and expects a slow down turn. By definition bubbles burst. But back to the subject at hand, we had an unprecedented decade long bubble in real estate and those in the industry expect prices to run back up after what, a one year decline? This simple one page article gives you keen insight into why this bubble lasted longer and why it will have a much longer and more profound psychological impact. If you were to watch the mainstream media, you would think that dropping prices were somehow unlawful and everything should be done to prop inflated prices. They don’t have the guts to come out in a strong statement and say, “until prices reflect local area incomes, housing will continue to decline.” In previous downturns, a declining sector in the economy usually had immediate impacts in employment numbers but not this time:
“During that period I ran up about $35,000 in debt, mostly credit card. It didn’t seem like much at the time, to try and sustain what I thought was a short downturn that turned into a long-term bad market. Make that a catastrophically bad market that is far worse then anything I have seen before and getting worse.”
Once again, we get this belief that good times can last for a decade and bad times are expected to come and go in less than 12 months. To highlight the point even further, this person without credit would have been out of the industry and looking for something else much quicker without access to credit. Instead, he was speculating with his credit card assuming that good times would be around the corner. How is this different from buying a beleaguered mortgage stock and expecting it to jump up in double-digits again? I understand on an economical level why he ran-up his credit card debt to stay afloat, but how many others kept using their credit card or home equity line as a bridge loan to ride out the “short term correction?” This is the next shoe to fall. If this wasn’t enough, we also see that his son went into foreclosure during this time but more importantly, we get a peek into the psychology of why housing prices went to the epic levels that they did:
“Then my son’s house, which I co-signed for, went into foreclosure. Not really his fault, he was in the same business and his went down as well. At that point I made a decision that since my credit was gone anyway and I was really incapable of paying even the minimum payment on the debt, that I had little to lose and I just walked away. I don’t feel good about it. If I can, when I can, I’ll work on paying it back, but at this point I don’t care much.
Now I am a clerk at a very well run food store part time at night, and I’m teaching surfing when I can. It barely is survival money, but I’ve discovered that sometimes that is quite okay actually.
Failure can be enlightening.”
As you can see, this brief one year decline has cost his son’s home, job, his job, and conversely has lessened the tax base for the state. All this is interconnected and nothing operates in a silo although some would like to believe it does in their ivory tower. It was a house of cards built on real estate and California was the ultimate foundation. A few reports out show that WaMu and Countrywide have roughly 40 to 50 percent of their mortgage portfolios in California. I’m not sure if the lesson was learned here with the story. The industry that gave this banker his life blood, credit when times were good is now relegated to a low list priority on his personal list. Whether he pays it back or not, he cares very little as he tells us. Really interesting perspective that I’m sure many behavioral economist are going to be digging into during the next few years. Walking away is passé, the new hot thing is surfing away from your debt. If you’re going to leave your debt behind, leave it in style. Now speaking of waves and surf, let us now look at today’s Real Home of Genius in Huntington Beach.
Real Home of Genius – At Least You’ll Always Have the Weather
This home in Huntington Beach is getting a quick lesson in mark to market reality. This is a 3 bedroom 2 bathroom home that sits on slightly over 1,400 square feet. This could be considered a starter home for a working professional couple. Yet according to the ad, this is a great short sale deal from the bank because they have agreed to a lower price than what it had previously been listed at. Again, this is the logic many investment banks are using with their debt and assuming that somehow when the short term kinks work out, that they’ll be able to liquidate their crap onto other unsuspecting chaps. The game may be up. I say may since it looks like the government is inching closer to assuming many bad loans just like during the Great Depression. This can prop the market up for a longer time.
So first, let us take a look at the pricing action on this home:
Price Increased: 11/14/07 — $590,000 to $619,000
Price Reduced: 11/28/07 — $619,000 to $595,000
Price Reduced: 12/20/07 — $595,000 to $565,000
Price Reduced: 12/26/07 — $565,000 to $515,000
Price Increased: 12/31/07 — $515,000 to $565,000
Price Reduced: 03/10/08 — $565,000 to $515,000
You really have to wonder what is going on here. We have a range of $619,000 to the current $515,000. Of course probably to the bank or the current seller, this is a “real” loss of $104,000 but in reality nothing is a gain or loss until you realize it in the actual sale of the property and close escrow. Otherwise, you are speculating like the investment banks assuming the best but in reality, the actual market value is operating at a different level. Let us look at the sales history here:
Sale History
02/21/2002: $349,000
So even if it sold at $515,000 this is still a gain of $166,000 in six years or a yearly increase of $27,666 (ominous). Not bad at all. Yet the ad lists this place as a short sale so there may be an additional mortgage on this place aside from the first one. Now what is the current Zestimate of this place?
You have to wonder if some of the investment banks use similar estimates as well. And don’t fool yourself, Wall Street wants you to believe that all the financial engineering in the world is somehow going to trump human behavior. Just remember that financial engineering is what made Real Homes of Genius possible.
This above place isn’t exactly beach front property either. So what we are now seeing is the progression of areas that are considered “prime” seeing major corrections. This particular zipcode in Huntington Beach has a median sale price of $523,000 which is down 18 percent from a year ago and sales are down by 27 percent. Meaning, that last year the median price in this area was $637,000 and I’m sure, that is where that $619,000 price came from.
Either way, many people are going to realize that life will go on with tighter credit. Yet if they try to hold onto artifacts of credit and using credit cards or home equity lines as some sort of life lines, they will be sorely disappointed. No need to worry, prices will fall but you can always enjoy the surf.
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16 Responses to “Real Homes of Genius: Today we Salute you Huntington Beach. If you Walk Away, you Still Have the Ocean.”
Doc- I read that article, too, on the CNN/Money site, and was dumbfounded. All these folks with purported sad stories- leveraged in debt, still sending kids to private school, people who lost building spec homes, people putting tuition debt on credit cards, etc. WTF, what are they thinking? And the tone of the article is that the reader is supposed to be sympathetic. And granted, in some of these cases, a modicum of sympathy is appropriate. But what I took away from the article, was that the stage was being set for massive walk aways from debt, since the press is starting to subliminally giving a green light to this kind of action. And, in a way, you can’t blame these folks, since the Feds have just further massively subsidized Wall Street, the home of the 100 million a year players paying only capital gain rates on their incomes, at the expense of the what’s left of the middle class. David Cay Johnston Pulitzer Prize winner and business journalist for the New York Times, has written two great books- Free Lunch and Perfectly Legal, both brilliant discussions on the tax system and who is most favored. BTW, I talked to two very successful high end CPA’s who both confirmed Johnston’s exposes. What amazes me is that Wall Street screams laissez faire when times are good, and are first at the govmint trough when their machinations go bad.
Play some Spencer Davis music and give me that retirement pitchman telling me 50 is the new 40 but sheesh, not even a TV ad can make you believe “62 is the new 22!” To be back on the beach where Annette and Frankie were stuffing
wild bikinis 45 years ago is the tragic aspect of the real estate bubble. We might all want to relive our youth but not in the sense of having a 22 year old’s income when we are 62! I hope he is still married and his wife is doing better than he otherwise I can hear the Doors song The END playing as he paddles off into the sunset.
Guilty! I was one that got caught up in the mania. Refinanced with subprime, no tax escrow, cash out and credit cards to keep my home hoping things were going to dramatically turn around. At the end of the line I crashed and burned. Right now those retirement ads look like a real pipe dream to me. I accept the consequences of my actions. This mess has caused me to deepen my faith, and enabled me to understand the psychology of those in the middle of this storm. I try to help when I can.
I have been through something like this, and in the first stages of recovery, all you want to do is survive. A decent little apartment, a reliable paycheck no matter how small.
When you gradually recover your nerve and your wits, you set about rebuilding upon a more solid foundation. But I’m a deal younger than this guy, and that was ten years ago.
Like him, though, I see that a big paycheck isn’t everything, especially if it entails high risk and liability. From a financial planner’s viewpoint, the moderate check you can count on is much better than the big payday that only happens now and then and is always offset by periods of starvation, like now.
What’s sad is that this guy has so little time to recover, and he realizes that. I detect deep demoralization and resignation.There’s no time left at his age to qualify as a schoolteacher or firefighter or government clerk or police officer. He’s way past the point where he could go back to school and train for another profession- you wouldn’t borrow college money at his age. At his age, there is only so much he can do and he is coming to terms with that as best he can. Worse, it is not easy to start in a new field when you are over age 60, especially in a recession that looks to be deepening.
Best for him to avoid all reminders of the past and people who say things like “Gee, don’t ya feel bad that you didn’t save more money?” or “God, how do you SURVIVE on that kinda money” or “Geez, you must hate your life now”.
Best just to chin up, work his current job with as much enthusiasm as he can muster, and find ways to enjoy life that don’t depend on spending big bucks. This guy strikes me as being spiritually more elevated than most people, for a different type of guy might grab a weapon and “go postal” over the destruction of his life and hopes.
Bob, I lost big on Calpine stock. It can happen. I thought decency and fairplay would win after Dynegy and Enron bilked California customers out of billions during the Grey Davis brownouts. I thought $55 per mw hour was a fair price.
Well, Calpine thought so too. Sometimes the hustlers and the swindlers are right. In fact they maybe more right than not.
The real problem is we’ve built up an economy of poker players instead of card counters. Where you can ante up as a ‘naked short’ and screw the hell out of a man who bets the odds. The investor puts up a dollar of of real money and the speculator uses your shares and borrowed money to rip you off. That the swindle operates at the loan officer’s desk is a tragedy but there it is.
I might have thought I was more informed than others when I bet on Calpine but if the rules of the game are rigged you won’t come out ahead. Now I do unto others as they did unto me. It’s not pleasant but I’ve gotten my money back.
California real estate is not only overpriced, overtaxed, and over hyped, the homes are 70’s style, quite in need of updating (many are tear downs at best) and the infrastructure getting to and from is completely shot. Cracked sidewalks, streets in need of re-surfacing, power lines dangling willy-nilly,etc. One gets the feeling of being tired, worn out and in need of fresh everything. Really, some of these neighborhood are blights on the countryside and should be bulldozed. Check out any $350,000 and under home for sell in Oceanside and see how many have a built in microwave or plumbing you would even consider showering in. I mean the bar isn’t set very high there yet people kill off the best years of their lives paying for an overpriced mortgage and commuting I don’t know how many miles to get the money to do so. Prices there have to come down much more, and then the actual finished product has to be something you would at least feel good about walking across the floors barefooted. Where’s the class? Take away the weather, and all you really have is expensive fixers, potholes and a beautiful ocean.
This guy is representative of more of the US than I would care to think of. What in the hell was he thinking? No contingency planning, none, nada. Plan for the worst, keep lots of dry powder, and work and pray for the best…but always have a “strategic reserve”. I grew up on a farm (Currituck County, NC), raised pigs, chickens, chopped cotton for $0.40 per hour, picked tomatoes, irish potatoes, etc. I worked two jobs at the university to make ends meet…got up at 5:00 AM to work in the student dining hall, went to classes and after classes worked giving astronomy shows at the Morehead Planetarium. When I graduated from UNC at Chapel Hill, I was living in my car (57 MG Midget…two seats) and taking showers in the student dorms. I graduated in chemistry and after landing my first job, I saved, saved, saved. My 6 x 8 ft room was $40/month and I limited my food gas and entertainment to 2.50/day. I invested and saved some more never eating my seed corn. Since I didn’t get married till much later, no child support or alimony. I retired two months ago, live in a million dollar house in Chapel Hill, travel a lot, and have quite a bit of strategic reserve. Thank G_d my parents told me about the depression. Like the good book says save up during the seven fat years for the seven lean years. This guys will have problems starting over but young people need to differentiate between their “needs” and “wants”!
62 years old and seemingly has no savings, no long-term plan, no safety net. Whatever, duuuuuuude. To each his own, I guess.
(1) I was gossipping with my local banker from a small ultra-conservative bank (they can’t spell A-D-J-U-S-T-A-B-L-E or O-P-T-I-O-N A-R-M let alone figure out how to make such a loan.) Having thrashed out all the actions and proposals out there about rasing loan amounts, getting Freddie/Fannie/FHA in on the act, HOPENow and everything else he looked at me and said “It doesn’t matter, It won’t change anything. People still can NOT qualify for mortgages at the prices out there. Nothing will make any difference except for prices to come down.
(2) Diogenes – don’t pat your self on the baack too hard – you might cause yourself an injury. In a lot of ways, you got LUCKY. Your spouse didn’t announce that she was bored with her life, wanted a divorce, was taking the kid and you got to pay. You didn’t get caught in a corporate RIF in you 40s or 50s – and the job market is, and has been for decades, brutal for anyone over 40 and impossible if over 50. (Sounds like the guy in the article went into being an independent broker around age 41-42 so you do have to wonder what he did before he turned to the self-employment route.) You didn’t get hit serious or permanent illness that was more than insurance would cover or ending up unable to even buy insurance because of a pre-existing condition while stilneeding medical care or that cost you large junks of income or caused you to be considered “not a good fit” for a job (code pharase for ‘we don’t want disabled or someone with health problems.) You GOT LUCKY – everything went right for you. No job losses, no major or catastrophic illnesses, no divorce…..
This country has spent 60 years singing and dancing, and now the time has come to reckon with our collective childishness and improvidence.
I’m not THAT much better than everyone else- had I saved more, I would not have been tempted to enter a speculative, gambler-type industry (stocks &bonds) to begin with, and would have spared myself fifteen years of misery and financial instability. I spent 20 years being torn between envy for the “grasshopper” highfliers who seemed to be making out so well and living gaudy high-end lifestyles by borrowing and spending, and admiration for the “ants” who plodded along in ordinary jobs yet somehow managed to have no debt and a nice house owned outright by the age of 40.
There’s no question who the winners are.
Now I’m much older, with way less money than I need to retire on, and very little time to make up the shortfall.
We baby boomers were raised by parents who themselves constituted the first generation ever to live on debt and everlasting expansion of the economy. They taught us that “now things are different”, that somehow the human species, at least in this country, had found a way to defeat the law of gravity.
The inflationary 70s taught us even more destructive lessons- that savings is for schmucks and that you better buy it now while you can afford it. I remember my “savings account” that was a year’s supply of food staples and toiletries.
Well, now we are falling to earth and it appears we will stay there for a long, long time, especially in light of Peak Oil and the gruesome implications of that. For in the 1930s, we had Want Amidst Plenty. We had a relatively small population and vast untapped supplies of natural resources- oil, water, metals, arrable land.
But now we are overpopulated and our resources are tapped, and we have huge generation of people on the eve of old age who have absolutely nothing to fall back on.
We would have been much better off if the Post WW2 era, with its reckless spending and expansion, had never happened.
I am only forty, but just talking to washed up developers from the early 80’s and seeing the housing correction in the late 80’s in California, I knew that these heady days would not last. Me, I bought a humble home six years ago for 175,000. Refused to build that Mcmansion upgrade that all my neighbors bought into, refused to take out the equity in my home for a pool, an SUV, or a trip to euro disneyland, and I refused to speculate (and I could have) in the real estate merry-go-round of buy and flip. Now? House paid for this year..in full, over 75,000 in home improvements paid for in cash. No credit card debts, no car payments, gold and silver holdings, cash and my middle finger extended to all the “system” that perpetuates debt slavery!
You’ve crashed and burned. Assets and liabilities zero. Find cheap housing and steady check. Lesson learned, live with in your means. In 2 or 3 years when a house in the OC is 300 to 350k put 5 to 10% down. I’m 44 and doing ok, but that plan would put me at 47. By 60 I’d have something to put on my asset side. Housing will drop till the people who screwed up can afford to buy again, minus the Wolf stove and fancy kitchen counter top (which is going to be the time stamp of this era, like cottage cheese ceiling were of the past).
Couldn’t agree with you more. I’m over 50 and have gone from working in an IT department prior to the tech bust to doing tech support via phone. I’ve yet to make as much per hour as I have been able to make on UNEMPLOYMENT from the previous job. I’ve seen way too many experienced people who have been pushed down into low paying jobs, with no way to use their experience and certainly no way to fund retirement. I don’t have a lot of sympathy for this guy, but do understand why he is stuck in a low paying job now. That’s all he can get.
I was just looking at the title history of a house I just inherited. In the chain of title the sale to my benefactor was below what the seller paid for it. Meaning it was last old at a loss – 20 years ago. Could it be that the 5 years of record increased values, and the longer distance between today and the last value correction has just caused more people to forget the late 80s and early 90s? Also, since that time, NAR and US govt has been pushing ownership, so more people got involved in ownership than renting. With the media pushing being “rich and famous” on more tv stations than any 40 year old person grew up with; and with more “stuff” available online than any library ever had; the new social goal of riches and wealth on the runway or by flipping has gotten more press than the cycles of business and the realities of realty. (Hey, that sounds like a blog headline.)
I have some observations from my neighborhood in west LA near Beverly Hills and wondering if anyone could answer some questions.
First, lots of homes for sale but no sign out front except for Sunday. Is this a strategy to hide the fact that there is a lot of supply or are most home buyers savvy enough to look on zillow or other sites?
Second, homes have a sold sign out front that says “in escrow” but weeks later, the house if for sale again. Did buyer not qualify at the last minute or is it shady dealing by the bank and/or realtor?
Third, homes in my neighborhood have always been pricy, but 900K for a tiny 1 bed, 1 bath 70 year old starter house is outrageous. By contrast, my in laws live in a huge house in upscale Marin County, CA that cost less.
Lastly, most of the homeowners in my hood are 50+, will we see a huge tide of homes for sale in the upcoming decades due to aging population?
PS I am a renter and got a good deal but rents for this area have risen 60% over 5 years. Does that seem like a lot to anyone else?
Age discrimination is rampant in IT. Technology companies would rather badger the government to allow more H1B visas than hire anyone over 40, and they’ve created the myth of a shortage of “qualified workers” to make their case. This is one of the big flaws in the idea that everyone should just work longer to get around the unaffordability of retirement — what if no one will employ you?
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