One thing is clear. The media is no longer shy about exposing the housing boondoggle. We can easily fall into the category of looking at all the macro information and forget about one simple fact regarding the housing market, the house itself! There is talk about the subprime debacle, credit crunch, mortgage fraud, foreclosures, and banana republic financing. Like all bubbles, at a certain point prices become so disconnected from the underlying asset that it becomes a speculative shark feeding frenzy. There is a surreal feel to what is currently going on in the current market. We have Countrywide employees (at least they claim to be) posting on multiple housing bubble blogs, we have an infamous 25 year old flipper back blogging and gearing up to appear on Dr. Phil, and we have insiders dumping stocks like you wouldn’t believe. Ironically, here is the Dr. Phil episode information, Sick and Tired of Spouse Chasing Million Dollar Idea. Even last night, I was scanning the tube and I fell upon a show regarding a middle aged couple facing divorce. The couple meets with an accountant to go over their financial situation. “So how much do you have?” the accountant asked the couple. “We have about $500 in an IRA we haven’t contributed to in 10 years and $48,000 in credit card debt.” The accountant taken aback asked how many credit cards they had. “33 credit cards” was the response with no sense of shame and a blasé attitude that is rather common in our hyper-spending era. I thought the accountant’s eyes were about to bulge out when they were fighting over the equity in their home. Note to self, since one of the primary reasons for divorce is financial and some of these people have no equity, will this increase or decrease the divorce rate? Even during the Great Depression, certain couples stuck it out simply because there were no other options and they were forced to make due with what they had, including putting up with a partner they weren’t happy with. This housing market will have societal and economic implications. With that said, let us take a look at our 43^rd Real Home of Genius. Today we salute you Hawthorne with our Real Home of Genius Award.

Today’s specimen is a 1,254 architectural masterpiece with 3 bedrooms 2 baths that was built in 1923. When we talk about the Great Depression, we are talking from experience here. This place is a REO, meaning the bank is now a “motivated seller.” And get this, the seller is actually willing to pay 3 percent toward closing costs! Talk about a different world. Last year, you were lucky if you got a free orange plastic cup for closing on a home. Again we are seeing a fascinating display in yellow, green, and dirt landscaping here. Why not Photoshop the grass green? A cheap intro marketing class or photography course at your local community college should be a prerequisite for future agents. I know you are itching for the price and have your phone on speed dial to schedule an appointment. This place is all your’s for the rock bottom price of $520,000. This is an absolute steal when we look at the sales data:

Sales History

01/30/2006: $625,000

08/31/2005: $565,000

I thought homes in Los Angeles County only went up? Someone made out like a bandit in 2005. But then again, they probably used this phantom equity to purchase another inflated hyper priced LA home with a stuntman mortgage. You may be wondering, “what the hell is a stuntman mortgage doc?” Stuntmen are hired for doing daring things that most actors wouldn’t dream of doing. Hence the name of people taking on exotic financing as “stuntmen” since they are jumping into something that even housing insiders aren’t willing to do. Just look at Mozilo’s inside trading action. Since he isn’t doing his own stunts, I wonder who is? Someone in 2005 sold this home at an inflated price but then comes a flipper, who makes $60,000 in 5 months! At that rate, you are making 6 figures by flipping homes like Angus McDonalds burgers and probably with less effort. The last person came to the party too late. Now the bank owns this place and guess what? No one is coming to the party since the credit Kool-Aid bowl is now empty. Take a look at the pricing action on this place:

Price Reduced:

10/03/07 — $546,000 to $520,000

They waited for the housing summer Easter bunny and it didn’t appear. We are seeing this over and over with inexperienced investors. I talked about the seasonal nature of housing in a previous article. Fall and winter are the absolute worst times to sell a home. And guess what? We are in the early stages of fall. So this home is now off by a whopping $105,000 from its peak price in 2006. Again looking at these peak prices for reference is like asking Barry Bonds if steroid use is acceptable in the MLB. What do you think the response will be? That is why we are seeing housing pundits in an absolute denial stage because they are using yesteryear bubble prices as their current reference price points. For nearly a decade, hardly any sales pitch for housing included income in local areas. Now we are seeing the government imposing these rules and companies suddenly policing their policies. Ass-backwards as this may be, this is the current trajectory of our current housing policy and recipe for pulling the market out of the dumps. Sorry folks, the only way this is going to improve is by a steep drop and we are already seeing this. This steep drop isn’t a wishful thinking analysis (unlike housing pundits who use Saint Joseph to hope for price jumps, which in my view is the wrong thing to be praying for if you are praying) this is based on inventory, income, and credit market analysis. You know, the things that make the world of economics function. So what is the average income for a family in this area?

Average/Household: $49,247

Let us assume this hypothetical family is to purchase this home at the current price. What does their budget look like?

PITI: $3,827 (assuming a $26,000 down payment)

Net Monthly Take Home Pay: $3,340 (filing as a married couple with 2 exemptions)

So this family is running a monthly household budget deficit of $487! Which brings us back to the previous couple that was facing divorce with the 33 credit cards. Is it any wonder that they only had $500 in their IRA and the main economical contention of their divorce is the equity in their home? Again, the assumption from these people is wrong since they are using yesteryear prices in today’s housing market. We also find the willingness of people to go into stuntman mortgages simply because there is this primordial need to be a homeowner. The housing industry has done a fantastic job of blasting into our heads that you are less than if you do not own a home. Since I own multiple homes does that make me multiple times better than someone that only has a deed to one place or rents? Of course not. But seeing mainstream shows such as Dr. Phil and the unbelievable lack of financial sense from many people, is it any wonder we are in the housing and credit mess we are in? Is their a patron saint of financial responsibility?