As October came to a spectacular end, the housing market is still in severe distress. You would think that all the massive government intervention would at least do something in regards to stabilizing prices but unfortunately for Uncle Sam, prices are determined by local area incomes and fundamental factors. The massive economic intervention which has taken the form of billions in capital injections to banks has yet to see massive purchases of toxic mortgages. You may be asking yourself like the diligent citizen that you are, what are some local area factors in determining household prices:

(a) Household incomes

(b) Neighborhood safety



(c) Schools

(d) Employment outlook

When you look at the above 4 items, you quickly realize that the government intervention does nothing to address any of these. First, pumping money into banks will not increase the household income of families. Next, neighborhood safety or quality of life issues will have minimum impacts based on this massive bailout. Many schools derive their income from local property taxes so a declining market hurts their budgets. And finally, the market intervention does nothing to the overall employment outlook unless you are one of the few banks that can go to the U.S. Treasury and get a government sponsored corporate welfare check.

Banks are hoarding the money because in order for them to make loans, they need a qualified populace. The government can scream all they want but responsible lenders, the few that are out there don’t want to give money with no standards and return to the genesis of this economic crisis. One of the new measures is massive loan modifications. But in the world of unintended consequences, many borrowers don’t want their loans modified! Why? It is hard to determine how many people bought homes with the idea they were going to flip the property for a nice sum of cash. They may have no intention of staying in the place. IndyMac Bank, now under the auspices of the FDIC is trying a massive loan modification program. There’s only one significant catch. People aren’t responding! Bwahahaha!

“(L.A. Times) But of the 35,000 seriously delinquent IndyMac customers who were sent letters about the possibility of such modifications, more than half have yet to be heard from, officials said this week.”

And this isn’t for lack of incentives either:

(a) Reducing the borrower’s interest rate to 3%.

(b) Extending the loan terms to 40 years.

(c) Waive a portion of the interest on the mortgage.

Where do I sign up? I’d like to put some my investment properties under these terms. Unfortunately, I pay on time and have not been late so I guess that excludes me. If you own your home and pay on time, wouldn’t you like similar terms to the above? Those numbers look like a beautiful coastal sunset yet some people have their eyes closed. Yet the government is saying sorry, you are prudent and responsible and unlike aspiring flippers or Wall Street gamblers you did not take unwarranted risks therefore you get to sit back and watch your money be squandered.

Therein lies the rub. The government is operating under the impression that people will “do the right thing” and fight to stay in their homes. However, many of these people flat out lied on their loan applications with the help of mortgage lenders, both complicit to varying degrees, and entered into the deal together. Even back on June 1st of 2007 I reported that there was a survey that found that 50% of stated income loans had incomes with 50% or more of their household income inflated. This had nothing to do with some government mandate forcing poor people to buy homes. This in fact was greed on many levels. Therefore, you have a massive amount of no documentation loans that from day one started on false pretenses and included both poor and rich alike. If the loan started out on a massive lie, who is to say what the intention of these folks is? Maybe the borrower was a suburban couple who watched too much HGTV and thought they could flip a home. Heck, each week we saw a new group of aspiring flippers on shows like Flip this House and most of the time they were middle to upper class folks. If they got in way over their heads, why would they want to stay in that home even on generous terms?

You also have to think like a shady person. Lying on a mortgage application is flat out fraud. Now, IndyMac Bank which is under the FDIC, a government backed institution is trying to get a hold of you shady borrower. You know you lied and committed fraud and now you’re getting a government letter? Hmmm, guess how a few of the borrowers are going to respond? They’d rather let the home foreclose and be gone. The government’s premise is that fraud isn’t as rampant as I think it is. After all, much of the fraud can only be seen after the fact. That is why it is fraud! There isn’t a housing fraud data bureau. Yet anyone with an ounce of common sense could see what was going on. Especially in places like California where IndyMac made a large amount of loans fraud was the case and not the exception.

In this article, we are going to look at 7 of the hardest hit areas in the country and also give you 7 home examples that put this housing bubble into a nationwide perspective. Some readers think that only California and Florida had delusional and greedy people. Too bad greed is a global human vice. Today we salute you America with our Real Homes of Genius Award.

A Real Country of Genius

First, we will be going by the Case-Shiller metro areas. This monthly report is one of the most widely used housing health indicators since it tracks same home sales over a period of time. Unlike most reports that look at monthly sales and then the current monthly price, this report tracks the same home over time. Some have been critiquing the median prices as an overall indicator of market health but even looking at other measures, the housing market is very unhealthy and in need of help. Let us look at an excellent graph put together by Calculated Risk:

*Source: Calculated Risk

From this list, we will be looking at the following areas:

(1) Phoenix Arizona

(2) Las Vegas

(3) Miami

(4) San Diego

(5) Los Angeles

(6) San Francisco

(7) Detroit

It is stunning to see that the top 5 declining areas have seen prices decline from their peak by over 30% and in 2 cases, by over 35% . All 7 areas above have seen prices decline by 25%.

Let us now look at each individual area and give you an example of what kind of insanity took place during the height of the housing bubble.

Area #1 – Phoenix, Arizona

Decline from peak: -36.3%

Peak reached on: June 2006

Peak sale price on home: June 2005 for $340,000

Current list price: $189,900

Phoenix Arizona is the epitome of the housing bubble. Builder after builder erected enormous McMansions thinking this housing bubble would last forever. In few other states can you find this many oversized McMansions that are selling now at fire sale prices. The Inland Empire in Southern California is a touch of Arizona for those who never ventured out of the state.

The above home was built in 2004, has 4 bedrooms and 2 baths, sits on 2,190 square feet and as you can see from the picture is a good sized home. This home is currently foreclosed and selling 44% below the peak price. Only one small and tiny problem. The employment situation in Phoenix is poor. This of course is dragging the housing market down while many McMansions sit empty. Prices are coming down hard and until the fundamental factors improve, this will continue to be the case.

Area #2 – Las Vegas, Nevada

Decline from peak: -35.8%

Peak reached on: August 2006

Peak sale price on home: October 2006 for $315,000

Current list price: $172,900

Las Vegas, the neighbor of Arizona always has a flavor for the get rich quick dream. Why keep gambling inside of air conditioned casinos when you can easily gamble on McMansions galore? Many people left the penny slots to go flipping in sin city.

The above home has 4 bedrooms, 2 baths, and sits on 1,890 square feet. Built in 2004 (see a pattern here) this is a nice place. But again, the major caveat is employment! The local household income is $67,000 so the peak price of $315,000 never ever made any sense. It put the home to income ratio at 4.7. The current income to home price ratio is now at 2.5 which makes a bit more sense. As I discussed previously, the simple equation in determining a suitable price for a home that you can afford is:

I’d like to point out that the equation above should reflect the actual mortgage balance. That is, do not get a home loan that is more than 3 times your income. So if that is the case, is the home above a deal? Doubtful. You need to remember that we are now working in reality and we have to go with things beyond the price. The economy in Las Vegas isn’t exactly booming. Energy costs are still high and you have to factor that in since AC will cost you a good sum for over half the year. What we are now coming to realize is that buying a home requires a patient and thoughtful process. This in fact is the biggest purchase most people will ever make.

Area #3 – Miami, Florida

Decline from peak: -34.6%

Peak reached on: December 2006

Peak sale price: March 2006 for $165,000

Current list price: $29,900

This my friends, is the biggest single percent price decline I have seen on any home. The price decline from the peak is a stunning 81.8%! Where the Phoenix and Las Vegas homes were nice McMansions in the middle of the desert, here we have a true Real Home of Genius in Miami. If you think someone made one delusional move in paying that peak price just look at the sales history:

03/25/2006: $165,000

12/29/2003: $113,000

11/07/2003: $74,000

This home is a 3 bedroom and 1 bath home. It is 1,174 square feet and features the new patented Garbage Can 2.0 photography:

The household income of the area is slightly over $30,000 so the current price may or may not be a bargain depending if safety and good schools are a concern for you. As an investor, who knows how the vacancy rates are in this area. 3 times this home sold at inflated prices and there was no justification for those $100,000+ sales.

Florida and California had shacks selling for absurd prices as well. Aren’t you happy that your tax dollars are going to bailout lenders that actually gave out money on these places? The next 3 areas are all in the sunny state of California.

Area #4 – San Diego, Calfiornia

Decline from peak: -32.7%

Peak reached on: November 2005

Peak sale price: April 2007 for $430,000

Current list price: $199,900

When this housing market reaches a bottom in the long future (California won’t see a bottom until May of 2011 and I’ll give you 10 reasons) the nominal amount of money lost will come disproportionately high from one state, California. People bought up homes in the inner city, outer city, the valley, mountains, and anywhere with a California address. It was complete and utter insanity reminiscent of the 1920s Florida housing bubble that included trustworthy characters like Charles Ponzi who sold “prime Florida property.” Where have we heard that language before?

This home is located in Chula Vista, a city in San Diego County. San Diego was one of the first counties to reach a price peak. It was the canary in the coalmine. This home above is down an eye popping and gut busting 53% in slightly over a year but this isn’t uncommon given that the entire region is down nearly 40% from the peak reached last year.

This home has 4 bedrooms and 2 baths and is 1,508 square feet. Built in 1953, it is actually newer since some homes in California were built during the Great Depression. It has been on the MLS for 96 days even after having the price reduced to this level. Why? Well the average household income in the area makes $60,000 so the recent price reduction on 10/20 may cause some eyes to look here since it puts it near that 3 times income ratio. Yet this house needs work:

You’ll have to factor in whether you want to spend the time to get this place ready to go. And that is another minor item. During the boom, it wasn’t uncommon for banks to also give you additional funds for you to fix a place up. If the bank didn’t help just take a cash advance on your credit card. Now, let us say a home will require an additional $20,000 in work you will need that plus a 10 to 15 percent down payment. Even with these slight standards, the market is drying up. People are broke. That is why they needed easy credit in the first place!

Area #5 – Los Angeles, California

Decline from peak: -30.9%

Peak reached on: September 2006

Peak sale price: December 2005 for $305,500

Current list price: $85,000

I’ve been hearing some absurd pundits blaming lower income folks for causing this economic calamity. What a shock that they don’t blame lenders who were “professionals” and had a fiduciary responsibility for making boneheaded loans. Last time I checked, lower income families weren’t investing in credit default swaps or jumping into high yield bonds. This is a red herring and a distraction.

In fact, who cares if lenders made bad loans in these areas right? I wouldn’t care if say, IndyMac Bank, wanted to make loans to people with no ability to ever repay them. I do care when the government (aka you) gets involved to bail them out. That is then a major issue. That is why I am adamant that many lenders should still fail or be forced to write down mortgages to current appraised values if they want government help. If it forces some institutions to collapse, so be it. They never belonged here anyways. Some are also wanting to blame Fannie Mae and Freddie Mac for this entire mess. They miss one tiny fact however. They weren’t the biggest players in the toxic market! As of November 2007, Fannie Mae had $57.9 billion in subprime loans. Not a small number at all. As of 2006, $600 billion in subprime loans were originated. These were originated by many aggressive mortgage outfits like New Century Financial, Countrywide, and Ameriquest trying to satisfy the appetite of Wall Street firms looking for mortgage backed securities and a method of allowing side bets in derivatives based on the housing market. Plus, you have an even larger Alt-A market that catered to middle/upper class candidates who frankly, decided to speculate in the market. The credit default swap market is over $50 trillion in value. There are over $10 trillion in residential mortgages in the United States. Let us blame the approximately $1 trillion subprime market (much of which has already foreclosed) for all the ills of our economy.

This above home is truly a Real Home of Genius. Whichever lender made this loan should be banned from the government TARP program. This home is 756 square feet with 2 bedrooms and 1 bath. From the peak sale price this home is now down 72.1%. This home is located in Compton and I put together a montage of the current foreclosed homes on the market:

(click for a clearer picture)

California was truly a wonderland for this decade.

Area #6 – San Francisco, California

Decline from peak: -30.6%

Peak reached on: May 2006

Peak sale price: April 2004 for $400,000

Current list price: $214,900

It is hard to imagine an area that had a bigger housing bubble than Southern California but leave it to our neighbors in Northern California to beat us out. Our next home takes us to East Palo Alto. For those of you from the area, you will know that unlike Palo Alto, the east side doesn’t carry a heavy premium.

This 760 square foot home with 2 beds and 1 bath sold at the peak price of $400,000. The current list price is at $214,900. As you can see it isn’t hard to find homes in California that are 50% or more off from their peak sale price.

Only time will tell if we are approaching a bottom but from my assessment and looking at fundamental market conditions, we have a few years before hitting a trough. Doubt it? Take a long and hard look at these homes once more.

Area #7 – Detroit, Michigan

Decline from peak: -27.2%

Peak reached on: December 2005

Peak sale price: March 2007 for $65,000

Current list price: $100

Okay, it only took me a few hours to find a larger percent decline than our Miami home. This above “home” is now off 99.8% off its peak value! It is practically being given away. Detroit is actually facing a fundamental collapse in their economy. This has more to do not with bubble prices but simply a purely economic driven price decline. If you need any more convincing this is a good deal:

I’m not exactly counting 4 bedrooms here. What are you going to do with this? It is going to cost you a ton of cash to knock the place down. You have taxes as well. What about the rental market (if there is one) here? I’d like to see some of the HGTV folks be sent here on a boot camp 2 month mission to see what they can do with this place. I doubt granite counter tops would do the thing here.

This is a global problem. You have now seen 7 major areas and homes that sold for absurd prices. Sometimes it helps to put a face to the actual problem. Hopefully this will solidify how bad an idea it is for this bailout to pay face value for any mortgages. Transparency is going to be so vital that money isn’t squandered into the abyss. If this were a crime case (which it may become) these examples would probably convince the jury to sentence many lenders to a lethal injection of no-capital.

Today we salute you America with our Real Home of Genius Award.

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