Who Mourns for the Million-Dollar Starter Home?


You know what you almost never hear amid all the tsouris about the real estate collapse? That five years after the decline started, houses are still way overpriced, and that they continued to go up in price even while the so-called Great Recession was in full swing. 

Here's a little piece of paradise listed in an undistinguished part of Los Angeles that one Realtor® hopefully describes as "Beverlywood Vicinity." Asking $599,000, 3BR, 2BA, and as you can see, all you need to do is pry the boards off the windows to start making it your own TLC-enhanced home: 

1433 Hi Point Street, Los Angeles California, offered at $599,000

Now I just did a drive-by of this property, which has since been encased in a security fence and is located two doors down from another obviously vacant property. (There are a total of three properties for sale on this one-block stretch of Hi Point Street.) It has some attractive qualities – among them that it's one of a handful of single-family homes on a street of multi-unit eyesores. And I would not even have singled it out for fun-making but for this wonderful notation in the listing: 

"Bank owned. Sold for $1,265,000 in 2009." 

Do the math: 2009 was three years into the real estate decline. It was a full two years after former Treasury Secretary Henry Paulson expressed his panic at the possibility that house prices might be "distorted down" by lack of demand. It was at least one year into the "liquidity trap" that Nobel laureate Paul Krugman says the government needs to save us from. 

And yet at that time, some knucklehead was able to get about a million dollars in financing for a starter home. In due time this piece of shit loan to a piece of shit borrower for a piece of shit house in a piece of shit neighborhood turned to be, amazingly, a piece of shit. The knucklehead bailed on the numbskulls at the bank (who, we can only pray, were able to bail on the taxpayers). Now it's back on the market at a price that is still three times what it's worth. 

By now you're saying, "Blimey, Mr. Scrooge! Three times what it's worth? Where do you get that from?" 

Here's how: Through most of the postwar period, until the hyperinflation of real estate really got underway in the late 1980s, the median house price in the U.S.A. hovered between three and three and a half times the median household income. Then home prices began their long ascent to the mesosphere while incomes – though they were a mite less "stagnant" than the media would have you believe – did not come close to keeping up. So I say that 3X or 3.5X multiplier remains a handy yardstick. 

The median income in Los Angeles County, according to the U.S. Census Bureau, is $54,375. And that makes this a $190,312.50 house.

I am not claiming that this place will ultimately sell for $190,000, nor am I offering anybody house-hunting advice. I expect the closing price will be in the same ballpark with the price the bank is seeking.

But I've got my eye on a couple of baronial palaces less than a mile and half from this place, and those are asking $225,000 and below. Even L.A.'s religious belief in the power of a single north-south cross street to add $100,000 to your property value can't hold back the reality that the $200,000 starter home is on the rise and the million-dollar starter home is on the decline. 

To understand how far real estate prices still need to fall, you need to understand how they got distorted up in the first place. That means you should head down to your local newsstand, pick up the November issue of Reason (still a bargain at $3.95), and read Dean Stansel and Anthony Randazzo's indictment of the mortgage interest deduction "The Upper-Class Entitlement." In the meantime, here's a little peak at Federal Reserve Bank's Flow of Funds report [pdf] which nicely shows how crappy lending swept the real estate market before the correction (or at least the first stage of the correction) began. Note the highlighted home mortgage borrowing figures from 1998 through 2007: 

Mortgage borrowing only tripled in nine years. What's the big deal?

And keep in mind that these are the figures Fed Chairman Ben Bernanke was looking at when he declared, a year after the real estate peak, that "fundamental factors…support the demand for housing." As noted here last month, Bernanke's "twist" tactic for Quantitative Easing 3 is intended to bring down the rate on the 30-year mortgage and make this kind of stupid borrowing happen all over again. And right on cue, a major big-city newspaper is reporting that now's the time to buy.