How irrational were California real estate prices?

How irrational were California real estate prices? This irrational – the Pasadena shack in the picture sold for $522,000 in August, 2006. The local government was happy to play along with the fantasy since it meant more property tax money for them:

That’s one of Doctor Housing Bubble’s Real Homes of Genius. If you want to know how much trouble California is in read his article, 10 Reasons Why California is Years Away from a Housing Bottom.

We are going to find out how pervasive and extensive this fraud network is. To paraphrase Warren Buffet, the tide is going out and we are going to see who is swimming naked. Most of these loans fall under the Alt-A category and many lenders are deluded thinking these are much better than subprime loans. They are not. How many of these loans are out in California?

Total Alt-A loans as of June 2008: 688,975
Average Balance as of June 2008: $419,790 [* See note – LLJ]
Number with a prepayment penalty: 302,909
Number with a second lien at origination: 206,216 (these are most likely worth zero)
Number with interest only payment: 252,329
Number with negative amortization: 198,385
Percent with at least one late payment in last 12 months: 27%
Percent ARM loans: 70%
*Source: New York Fed

Think about those numbers for a second. This one point is enough to quell any bottom talk. Take a look at WaMu’s Option ARM portfolio, half of which is in California and you’ll realize that we haven’t even seen the start of this mess:

The world is in for a rough ride. The country is in for a rough ride. California is in for something even worse. Go read the Doctor.

* That $419,790 average is slightly higher than Fannie Mae’s 2008 limit of $417,000 for conforming single-family first mortgages.

5 Responses to How irrational were California real estate prices?

  1. Pingback: Pop! Why the Bubble Burst - Real Estate Investing

  2. DirtCrashr says:

    Is that all? In Pasadena? *Sniff* I thought it was a nice community? Must be right on the border with the dump Alta Dena.
    In Palo Alto it would have sold for more – they’re just gonna bulldoze it and build a $3.million place on it. It kinda looks like the house across from my Dad’s that they tore down and did just that. And it will sell, the market in parts of this place is very strong, it’s like living in Switzerland – there’s a lot of wealth captured here – I passed a Ferrari on El Camino at noon today. *Pfft* some wanker in it.

  3. persimmon says:

    My grandparents lived in San Marino, which borders Pasadena, and 20 years ago they were complaining about wealthy people buying homes near them, bulldozing the house, then building huge houses covering almost the entire lot. I assure you it was the lot, not the house, purchased in that transaction.

    The person who lived there probably moved there in the 1940s and paid something close to the assessed value, which was probably fixed by law, only to be reassessed when sold.

    I’m not arguing that $522k for a tiny lot is entirely rational, but you have to understand the context. California saw decades of influx of people and wealth, and its real estate market turned crazy, relatively speaking, a long time ago.

    I’m pretty sure most of the toxic mortgages out there are not in the old towns like Pasadena, but in more recently developed areas like Anaheim that were oak savannah and orange groves when the kids who grew up in that little house headed off to college.

    If you want an example of true irrationality, this article mentions a Mexican strawberry picker getting a loan for a $750,000 house. That probably happened somewhere on the outskirts of Stockton or Fresno, and the mortgage was immediately packaged into bonds and sold by a storefront lender who is still chuckling about it, poolside, somewhere in the Caribbean.

  4. What I can’t understand is how blatantly the was in on the whole mess.

    Look at the pretentiousness of it all. They were trying to write themselves a check with the assessed value (NOT a market value increase, mind you) increase. What was at stake for them?



  5. DirtCrashr says:

    Persimmon’s right – someone old died in ’05.
    The price/tax difference is a result of Prop-13 which holds that a person’s property can’t be ever increasingly assessed-upward by greedy County assessors in order to fund themselves and their developer friends. Back when it was passed, old people were getting booted out of their homes because assessed values had spiraled out of control by Counties eager to maximize their intake from each and every citizen (sorta what Barack is planning to do with our 401k’s, and what Kelo did on a national scale).
    The owner died or sold and the property was re-assessed with the big ratchet-up, to recover as much “lost” revenue as they (the County) can – to pay for Illegal Alien sensitivity training workshops and other unfunded Liberal mandates. Yes they DO write themselves a check – and that is/was one of the big problems with the zero-down mortgages, you still owed massive property tax on an un-owned piece of property like: 4082 Rivermark Pkwy Santa Clara, a 2/2.5 bath 1,437sq/ft Condo built in 2002 that sold in June (06/2008) for $658,000 – now asking $712,674.
    The “housing-bubble” is out in Stockton and the East Bay, or down Hollister – it’s elsewhere, not in Silicon Valley.