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By Dr. Housing Bubble | 22 September 2007
The market has gone completely bipolar. A few weeks ago, the market was tanking and practically every day, we were hearing about one after another lending institution collapsing. Now, we are riding the stock market to prosperity once again thanks to the Federal Reserve and easy money (you can use these interchangeably). Even though we still hear about lending institutions tanking this is already baked into the market since data doesn’t matter anymore. This past week was full of pyrotechnic housing fireworks. Let us recap the week:
- Fed drops Funds rate to 4.75; Discount rate to 5.25%
- Stock market soars like an eagle on methamphetamines
- Dollar index falls [well] below key support levels, to historic lows
- Gold shining at 27 year highs
- Oil prices keep chugging along
And guess what happened to the 10 year Treasury note?:
Click Here, or on the image, to see a larger, undistorted image.
It actually went up! I’m not sure why so many in the housing industry think that the Fed has some kind of direct impact on the direction of long-term interest rates. Do you now get that they are simply bailing out Wall Street and hedge funds? Take a look at the stock market and you should get a clear idea who has gained the most benefit. The Feds have a massive impact and influence on direction, but this doesn’t always hold true. Fears of a falling dollar, inflation, and rocketing commodities had a larger impact on the direction of rates. And the LIBOR rates that most adjustable rate mortgages track is still holding strong. We aren’t having a 30 year conventional fixed mortgage crises; we are having an exotic banana republic mortgage credit debacle. Thanks Ben for that 0.5% cut which does so very little for 9+ percent subprime loans! Making lending standards more lax at this juncture may not get you into MENSA, so let us take a look at a case example.
Today we salute you Bell, California with our Real Home of Genius Award.
Today’s home is one of the smallest Real Homes of Genius ever featured coming in at an eye-popping 551 square feet. This 1 bedroom 1 bath home is the envy of the neighborhood. Who said you couldn’t have a white picket fence in Los Angeles County? This place can be your's for only $349,999. Make sure you mention to your broker that you are looking for the Bernanke Special since it’ll save you $100 a month. What was this home initially listed for?
Price Reduced: 09/13/07 — $370,000 to $349,999
A $20,001 discount is not a bad incentive. Indeed, I would not have looked any further if it had been $20,002, but I’m a fan of one dollar bills with that great green portrait of Mr. Washington. In fact, I’m hearing that in a few years they’ll be collectibles since they’ll stop printing them and only dish out bills in denominations of $10 or more. I’m not buying any $100,000 boat, but show me one at $99,999 and then we are talking. What does the sales history on this place tell us?
Sale History
10/26/2005: $299,500
12/30/1998: $78,100
06/29/1998: $95,970
Say what? 5 figures in Los Angeles County and within the past 10 years? This place had an 18 percent decline in 1998. This 18 percent decline amounted to $17,870. We already got that discount in a few weeks plus a few extra dollars; we’ll need those extra dollars for higher energy costs. Do you realize that this home went up by a multiple of 4 in 9 years according to the current sales price? Somehow I doubt incomes went up by this margin. Let us assume that they sell this home at the current price:
$349,999 less a six percent commission of $20,999 = $329,000. A profit of nearly $30,000 (with ROI = infinite, assuming no money down) in one year if they stay in the home until the end of October and pay no capital gains tax. Again, this is assuming they sell it at their current price. Let us take a look at the neighborhood information:
Average/Household: $41,464
Median Rent Price: $900
So let us say that a hypothetical family in this area was to buy this place. Let us run their monthly budget:
PITI: $2,465 (5 percent down and 30 year fixed mortgage)
Monthly Net Income: $2,868 (filing as married with 2 exemptions)
So this family is left with $403 of disposable income each month. They are spending an unbelievable 85 percent of their income on housing. 401k? Forget it. Roth IRAs? If there is money after food. Do you see why this makes no sense? No investor would purchase this place since they would be negative cash-flowing by $1,565 a month. I know that here in California finding postitive cash flowing properties is like finding a leprechaun. Even so, the number of "investment" properties bought in California has exploded over the past seven years. This was the flipping, mortgage-equity-withdrawal with other-people’s-money (OPM) kind of crowd.
Apparently, this mantra is straight from the Fed, because they too have little respect for your American dollar and are using this OPM strategy. Too bad those other people are you and your family. Now that we are seeing depreciation in California, who do you think will buy these homes? Income ratios do not make sense so families in the immediate area are very unlikely to buy these places. Investors will not buy unless they want to feed an alligator property with no appreciation [[or even any potential for appreciation: normxxx]]. Could it be that we have been living in a major Ponzi bubble here in Southern California and the game has now stopped? No amount of rate dropping will change the above facts.
Today we salute you Bell with our Real Homes of Genius Award.
Normxxx
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
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