Thursday, July 24, 2008

The Loser of Linden

Well, as I'm sure you know by now, the Deadbeat Homedebtor/Greedfaced Lender Bailout legislation is all but a done deal. I'm almost too depressed to comment about it. All I will say is that while I see the value in rescuing Frannie and Freddie, considering how the government has allowed them to become essentially the linchpin of the lending arena and how their dissolution would most assuredly cause market panic and a freeze in lending, I am disappointed that our representatives have embraced the idea of moral hazard as fiscal policy.

All this bill will succeed in doing is drawing out the housing crash longer than it needs to be; keeping responsible, hard-working people like me priced out of The American Dream(tm) and simultaneously rewarding stupid, uninformed, irresponsible behavior.

By the way, I lost $500 playing roulette last time I was in Vegas. The guy next to me, who told me he was an expert at betting, told me that after five reds in a row I was bound to hit black. Can I have my government bailout now?

Aaaaaaanyway, today's property is a prime example of someone who overpaid during the housing frenzy of 2005 and likely expects to be bailed out by you, me, and the rest of the American taxpayers.

Asking Price: $374,900
Year Built: 1987
Size: 2 beds, 2 baths, 1,064 sq. ft.
$/Sq. Ft.: $352
HOA Fine: $275
Purchase price: $490,000
Purchase date: 7/2005
MLS#: Y803235
On Redfin: 85 days
Down Payment: $74,980
Monthly Payment: $2,600
Income Requirement: $94,000
Description: Location, Location, Location! You can move in this TOP FLOOR Charmer. Located just seconds from the water in the East Village Arts District. Walking distance to many of Long Beach's best attractions. This unit offers an open floor plan, breakfast bar, IN-UNIT LAUNDRY, and Secured Parking. Enjoy the view from almost every room in the condo. Appraised in 2007 for 560,000. Seller has already bought another home and needs this one sold ASAP.

"Seller has already bought another home and needs this one sold ASAP." Oh really? That absurd price doesn't exactly scream ASAP.

And why mention what it appraised for in 2007? Has anything been proven more unreliable, useless, and fraud-derived than appraisals? That's like telling us what color the living room paint was in 1993--completely irrelevant.

Furthermore, if the $560,000 appraisal from a year ago meant anything as far as determining value, then why isn't today's asking price $560,000? After all, that's what the place is worth, right?


I suppose the intention is to make you think you're getting a smoking deal. If you know anybody stupid enough to have recently bought a home then I can virtually guarantee you heard some form of, "Dude, I only paid $500,000 for $600,000 house!"

Sure, that's one way to look at it.

The other way to look at it is DUMMY, YOU OVERPAID $500,000 FOR A $300,000 HOUSE.

I guess which way you choose to view the purchase makes the difference between sleeping at night and wearing adult diapers every time you crack open a newspaper.

The fact is, the last few years of "appreciation" were a dream. Sorry, doesn't count. Take your 2003/2004 price, lop off 10%, and you might have a shot at selling. And regardless of the bailout, the current market and lending conditions guarantee further carnage. Where will the Wheel of Disembowelment stop? 2002? 2001? 1998?

Just take this sucker. He paid an astounding $490,000 in 2005. Yes, that's right. With a kitchen like this:


Anyhow, his current asking price represents a 20% discount from his '05 purchase price. "Hey dude, I got a $490,000 place for $375,000!"

Not so fast, Drooly McDumbstain. Instead of working back from the unbelievably inflated 2005 price, let's work forward from the sales price before that.

Yep, in 1999 this "TOP FLOOR Charmer" sold for a whopping $177,000. I'll be charitable and apply a 5% annual appreciation since '99. That gives us a 2008 price of around $260,000.

Well that's weird. It looks like you just paid $375,000 for a $260,000 shoebox.

And what a glorious shoebox it is. I mean, it has views of Ocean Blvd:

Plenty of nearby foliage:

It has an indoor tree house loft entrance for the kids (B.Y.O.L.--The ladder is going with the seller):

A huge half-moon window that will be impossible to find coverings for:

And so much more. But there's a problem.

You see, there's some unwanted competition at this Location, location, location! Unit #408 in the same building is also trying to unload but he's not foolish enough to rely on appraisals from 2007 that may have a misplaced decimal point (come to think of it, I didn't see a dollar $ign next to the appraisal figure. It's possible they meant 560,000 Zimbabwean bank notes).

Other than not having a tree house like #508 (which just eats up precious square feet) they are identical. Right down to the same disgusting, all original kitchen:

And this seller (likely the bank) is wisely pricing to sell at $224,900. Another look at the pictures and it's clear that even at that seemingly cut-rate asking price, this claustrophobia capsule (the pictures make the ceilings look about five feet high) is still a bit overpriced. But you get an "A" for Assho--I MEAN, effort.

$225,000 would represent an annual appreciation of 2% since 2001, meaning somebody got the memo about pricing properties aggressively if you want a sale. Note: If #408 (which appears to need about 20 gallons of Formula 409) sells for current asking, that will represent an astounding 50% off the 2005 price.

And worst of all for the Loser of Linden in #508, a sale of #408 will quickly set the new comp for the entire building, dashing any hope whatsoever of avoiding foreclosure.

But hey, these are the people the government is "working to keep in their homes." That makes me feel so much better about rewarding him and other delusional gamblers for their utter failures so they can move on with absolutely no consequences or personal accountability.


  1. El Bee,

    I check your blog everyday, love the more frequent posts.

    I'm VERY bummed about this bail out. Now, as this will supposedly will help distressed homeowners, what's the real outcome? Will people that already can't pay for a home with the low interest teaser rates be able to afford an fully amortizing load? Are the lenders going to shave the principle? Would seem that to make the numbers work for many if not most local borrowers, it would require a significant reduction in principle.

    What the hell does this bailout really provide (other than a taxpayer fleecing)?

  2. Hi Anon,

    Sorry the posts are so sporadic, I truly wish I could post every day. I get antsy when it's been more than a few days, but I'd rather put up a quality post than filler posts just for the sake of posting.

    Anyhow, what does this all mean? Nobody truly knows, and even lawmakers concede this isn't going to fix the problem. They claim it will help 400,000 people at risk of foreclosure. That's not much within the context of the entire housing crash, and keep in mind that the 400k figure is from the same people who pay Halliburton $450 for a hammer.

    From what I understand, the lenders VOLUNTARILY knock 15% or so off the the at-risk borrowers' principal balance, then the government insures 90% of that loan, backed by taxpayer money. The borrower pays into an insurance fund every month, and if they sell after a few years for a profit, Uncle Sam gets his tribute.

    Considering that some 40% of loans that lenders "re-worked" last year are foreclosing anyway, it just reinforces that the problem is affordability and nothing else. And honestly, considering there is really no penalty for foreclosing (just read the FHA guidelines--they will give you a loan as long as your foreclosure wasn't in the last THREE years. That's it?!), don't you think people would rather walk away? Who wants to deal with all this paperwork just for the privledge of staying in a debt trap they now realize they overpaid for?

    If the powers that be would just let things correct on their own and prices became affordable, people would start buying again, prices would go up, and we're on the road to recovery.

    To answer your last question, this will provide nothing of substance to homeowners that I can see. The real goal of this bailout was to save Fannie and Freddie. The distressed borrowers and $4 Billion for cities to buy foreclosed properties is just window dressing.

    Unfortunately, there was no way we could let Fannie and Freddie fail. Nearly all lending would come to an abrupt halt and there aren't many who believe that's a good thing. I agree with the decision to bail them out from a larger economic perspective, but from a taxpayer viewpoint, I'm furious that they were allowed to get so big as a private/public company, all under the guise of being "backed" by you and me. They took insane risks because of that inherent guarantee, hence the moral hazard.

    Thanks for commenting. I really appreciate you checking in on lil' ol' RE/LBC.

  3. Thanks for the reply!
    I understand saving fannie/Freddie but...
    I'm still trying to work through the details in a vain attempt to understand.

    So, if some 50k/year guy bought a 500k home with 0 down, the lender will shave 15% off the note (75k), and refi at 425k? Then they'll shovel this onto the Fannie/Freddie turd pile?
    If I have this right, the borrower will still be underwater, unable to afford or sell, the lender gets the dog off his books and taxpayers get a kama sutra style 'anal probe'.

    Or will some sanity (HAHAHA) prevail and the 50k/year borrower NOT be able to refi to a still unaffordable amount? They'll just let it foreclose.

    It just seems to me that many people borrowed FAR too much the last few years. Homes, cars etc. There's no protecting the stupid.

    Thanks again and keep up the great, entertaining work.

  4. Will we have 400K new comps then?

  5. Hi JR,

    Actually, I think one of the primary goals of the housing bill is to make sure these 400k never become comps, thereby slowing down foreclosures (even if it's only a percentage of the total out there).

    Since these 400,000 loans will be "work outs" with the banks, the 15% lower comps never make it onto the MLS. This helps to maintain (inflated) values and stems the flow of more people going underwater and foreclosing due to constantly dropping comps.

    That's my own interpretation at least.

    To anon's point, the reason it's only 400,000 loans and not 4 million is because even the government understands that some people--no matter how much principal is hacked off--still won't be able to afford their house.

    Affordability is the disease, and this bailout is in no way the cure.