The South Bay of Los Angeles in its broadest definition includes all cities south of the 105 freeway and places west of Long Beach. It includes places like Manhattan Beach, Hermosa Beach, and today’s Real Home of Genius city Redondo Beach. Now I know today people are jumping up left and right like a kid juiced up on sugary drinks because existing home sales have increased. This headline is plastered all over the mainstream media. But did you also know that the median sales price fell 15.1 percent last year to the current median sale price of $178,400? Oh, and distressed sales accounted for 31 percent of all existing homes sold. What you should get from this is simple. Cheaper prices will drive sales even with conventional 30 year mortgages. It’s all about price.

Nationwide it is likely we have bottomed in terms of sales. But as we have discussed many times there will be two bottoms and one of those may have been reached:

The other bottom comes in the form of price and that still has a way to go. The shadow inventory will keep pressure on housing prices especially in shady regions like California. There seems to be a growing divide in terms of how things are now going to play out. Some are arguing that the Alt-A and option ARM products are a tiny event and those waiting for a second flood of foreclosures will be surprised. Their argument is banks will simply keep these homes off their books and will slowly trickle inventory into the market like some form of intravenous medicine drip. They may be right but so much shadow inventory is building that at a certain point, something will have to give. The only thing we can do at this point is look at the data and try to come up with an estimate of where we are heading.

My take on why something will have to give is this. In Southern California we concluded that there were 40,000 REO properties in the dark shadows. These are homes with no mortgage payment coming in. As we all know, many of these notes are chopped up like hamburger and are beholden to various contractual agreements with investors. Do you think investors are happy receiving no income stream? My take is many of these banks are playing financial brinkmanship and are trying to hold their breath long enough to dump this stuff off to the government (aka public) and the public private investment program (PPIP) is one of those vehicles to perform this transaction. In fact, that is why I have heard numerous stories of people not getting a notice of default from 6 to 12 months! We already know that foreclosures are at record highs and rising:

The assumption that banks can hold this stuff indefinitely is wrong for a variety of reasons including banks have extremely low capital. This will drain them further. But they can’t sell because they will collapse since the market is moving with cheaper prices (i.e., see Friday’s existing home sales). If we allow this to go on we have learned absolutely nothing from Japan and will repeat a lost decade here in the U.S. And the proof is already occurring! If we leave it up to the banks to determine policy, they would hold this stuff off forever while coming back to the government cheese each and every year until this is all worked out. As you can see on a nationwide basis, if you set the price right people will buy. Yet banks have no incentive to sell because they will implode as they should. Even now, as the FDIC reaches a breaking point with its reserve insurance fees are going higher across the board and good banks are now subsidizing weak and irresponsible banks. This story I’m sure is sounding very familiar to most of you.

At a certain point, there will need to be transparency in this market. Just because it happens doesn’t mean they will flood the market with these properties but the public will be flooded with data. Some think that the argument means that one day, a banking CEO is going to say, “hey, today is a nice sunny day. I’m going to put 6,000 REOs on the MLS before I go eat some tacos.” It doesn’t work that way. But you can’t have no cash flow from properties and hold them off indefinitely. That is how banks imploded in the first place! The cash flow ran out. People stopped paying.

Now assume the government assumes all the Alt-A and option ARM products on to their books. Then what? All you did was shifted the risk. You still have over valued assets and the only thing that happened is you passed the hot potato to the public. At a certain point there will need to be price discovery. You can only have price discovery by putting these homes on the market. Otherwise you follow Japan down the path of a lost decade because you will have these zombie banks and loans just eating tax brains forever. Yes, I know we aren’t like Japan because we don’t save, we aren’t homogenous, and every other pretext. But we are like them in this regard if this is the path we follow. Is there a different result if a Japanese and American man jump off the Grand Canyon?

Let us now focus on our overpriced home. Today we salute you Redondo Beach with our Real Home of Genius Award.

Redondo Beach – 668 Square Feet 1 Bedroom Home for $539,000? Is this 2006?

The South Bay is one of those regions where people think nothing can happen to housing prices. They assume every city is somehow Manhattan Beach or Rancho Palos Verdes. They are not. Redondo Beach is one of those areas. Depending on which zip code of the two you focus on, Redondo Beach is either doing well or contracting:

90277: Median Price ($989,000) Up 16.4% year over year

90278: Median Price ($686,00) Down 7.7% year over year

Our home today is in the 90277 zip code. If you are wondering what a million dollar neighborhood looks like in an inflated market, this is a perfect example. But before I dig deeper into the data on this home, I want to focus on the monthly nut phenomenon. This also helps to explain why people were so willing to take on Alt-A and option ARM loans even though the principal was simply a ridiculous amount. What people are missing is that the monthly Southern California buyer is now taking on a monthly mortgage amount that is now resembling the average amount from a decade ago! Did you get? The average monthly nut now looks like the monthly nut from 2000. Let us look at two sample months and what you will see is a clear indication of where we are heading:

This chart probably tells you everything you need to know. Riverside and San Bernardino Counties, the Inland Empire, are now at prices that date back one decade. If you are buying in these areas, you probably will find good deals. However, if you look at the other counties they are still largely overpriced. Los Angeles is up 58% from a decade ago, OC is up 47%, and the other counties of San Diego and Ventura are overpriced as well. Yet if we look at the total sales for the region, we are virtually at the same point as in October of 2000. And the irony is the typical monthly payment is now even with that from 10 years ago. So something has to give here. Either prices in the higher priced regions decline to meet the monthly nut or the monthly payment will have to jump. And just take a look at what Southern Californians were taking out on a monthly average during the bubble:

At the height of the insanity, Southern Californians were taking out an average $2,500 mortgage payment. No taxes, insurance, or maintenance either. Just your principal and interest (assuming you paid interest which many didn’t on option ARMs). Now that we are actually checking for income and using debt-to-income ratios people can’t afford gigantic mortgages. Remember during this decade incomes have been stagnant. And now, if you didn’t notice on Friday California released the unemployment rate and in another stunner, the unemployment rate jumped up to another record of 11.9 percent putting the U-6 rate over 22 percent:

Hard to buy a home without an income. But this home in Redondo Beach brings back memories of those 500 square foot shacks going for $500,000. This home has a housing bubble history like you wouldn’t believe. Let us look at what a 668 square foot home can do during a bubble:

Sales History

3/31/2000: $273,000

7/20/2006: $680,000

12/23/2008: $431,000

And the current list price is get this…$539,000! Bwahahahahaha! Someone is trying to flip in California even with an unemployment rate of approximately 12 percent and housing imploding! Real Home of Genius quality indeed. I love this part in the ad:

“Sunny property surrounded by million dollar homes. Perfect second home, first home or private home. Walk to the beach, shopping and restaurants. It is darling, very special and can grow.”

Surrounded by “million” dollar homes? Let us take a look:

Zillow doesn’t seem to think so and their pricing algorithm has been generous in California. That $1.3 million home is 4 bedrooms and 3 baths on 2,614 square feet by the way, in Redondo Beach. You are at least six blocks away from the beach. Let us look at some of the pricing action here:

Price Reduced: 06/11/09 — $569,900 to $550,000

Price Reduced: 07/29/09 — $550,000 to $539,000

Now think about this. $539,000 for a 1 bedroom 668 square foot home that was originally built in 1920! Before the Great Depression! One thing is for sure, your monthly nut is going to be much more than the current average of $1,180 for Southern California.

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

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