How much of the turmoil in the real estate market could have been avoided if prices had just been allowed to fall in a HAMPless, TARPless, FHB-tax-creditless alt.universe? A fable, before I head out for Sunday afternoon looky-loos:
The great artist Drew Friedman comes across a piece of history: a March 1962 check in the amount of $1.38, made out to RCA Record Club by one Joe DeRita, better known as "Curly Joe," the sixth and final Stooge.
Normal people may ask what records Curly Joe was buying – and was he paying the regular club prices or a special introductory offer?
Others may wonder how much that $1.38 would come to in today's Monopoly money ($9.84).
Truly normal people may not care at all.
But I want to know what became of Curly Joe's North Hollywood home, listed on the check as 10611 Moorpark St. Apparently it was, in the great L.A. County tradition, transformed at some point from a single-family home into a five-unit dingbat. The current structure was built in 1990. It does not appear to be on the market right now. Here's the current information from Realtor.com:
Let's take a closer look at that Financial History.
On October 10, 2003, the five-unit building was sold for $250,000. We can presume that this sale price, ten years after De Rita's death, had absorbed whatever Stooge-multiplier could be applied. According to the National Association of Realtors, the price of the building increased 373 percent in five years, to weigh in at $932,701 in 2008. According to NAR, it has lost virtually no value since the bubble burst.
Is this possible? Federal Reserve Chairman Ben Bernanke, in this 2003 address to the Japan Society of Monetary Economics, suggested targeting post-deflation prices by plugging in previous price figures to an arbitrary rate of inflation:
What I have in mind is that the Bank of Japan would announce its intention to restore the price level (as measured by some standard index of prices, such as the consumer price index excluding fresh food) to the value it would have reached if, instead of the deflation of the past five years, a moderate inflation of, say, 1 percent per year had occurred. (I choose 1 percent to allow for the measurement bias issue noted above, and because a slightly positive average rate of inflation reduces the risk of future episodes of sustained deflation.)
The idea that a central planner could make a price with any kind of accuracy using the above formula seems fanciful to me, but Bernanke's complete 2003 speech is worth reading for an eerily complete catalogue of the gimmicks he is now using against the American people. Anyway, plugging $250,000 into a CPI calculator – i.e., trying to imagine a counterfactual in which other things are equal and the growth of Los Angeles and California have kept pace with the rest of the country (in fact they've been down relative to national rates of population and economic growth) we still get only $303,623.64.
Clearly, Realtor.com is using a formula that's just out of whack and needs tinkering, so maybe we shouldn't read too much into these numbers. (Though these mathematical snafus are important. A few years ago agents were complaining that they couldn't shed REO property because unbearably high asking prices were being set by numbers-crunching software in overseas back offices. Presumably this has been worked out since then.) But note that the estimated price actually did come down – by one-fifth of one percent – in 2010. So these numbers actually have been revisited by some intelligence human, artificial or alien. Is there a better example of this big, dopey country's confidence in the downward-stickiness of real estate prices?
Put it another way: There are five units in the building. North Hollywood is not exactly booming, and this does not appear to be a premium property, but let's be generous and say you could fill all five units at an average of $1,100 each. At this price, that income would just barely cover or fall short of your monthly payment on a 30-year fixed-rate mortgage.
If it were just Curly Joe's old place, it might not be worth notice. But let's not kid ourselves. When Bernanke makes monetary policy, he's basing it on data not too different from this. This level of delusion on house prices, five years after the great deleveraging began, is still widespread. Last week I got yelled at by an agent who was showing a house directly across the street from another house that was asking $400,000 less. Keep that in mind next time you hear about the house in Detroit that sold for $3,500. The real estate market is still sick because real estate is still wildly overpriced in this great land.