So what got us into this mess?

Real estate always goes up.

Land is running out.

Rich foreigners are pouring in by the boat load.

Real estate is a great investment.

So why in the world are we facing the largest housing and credit crisis in U.S. history?

The Culprits

Lenders started pushing sub-prime loans so people with bad credit and no down payment could afford to buy homes. Lenders such as Countrywide even scammed prime borrowers into taking out sub-prime loans. Why? Because back-end commissions were higher and Wall Street eagerly paid for these risky loans.

Artificial demand was created when otherwise unqualified borrowers began buying up houses left and right. There was no significant growth in income or even population. Million dollar homes were bought up by people making less than $100k a year on zero down, interest only, adjustable rate mortgages.

Wall Street somehow decided it was a good idea to securitized these sub-prime loans and sell them on the open market.

Builders decided to increase their home production even though there was no marketing data supporting the need for a significant increase in housing.

The Outcome

GreedGreedGreed. That’s what this housing bubble comes down to.

  • Lender such as Countrywide and New Century are wiped out.
  • Homeowners are losing their homes through rapidly increasing foreclosures.
  • Wall Street giants such as Bear Stearns, Citi and WAMU are in major distress.
  • Public builders such as KB Homes, Lennar and Centex are in a financial mess. Local builders are shutting down left and right.

Feel free to share this post with friends, family and coworkers the next time they ask, “So what got us into this mess?”

14 thoughts on “So what got us into this mess?”

  1. Per Redfin, total number of REO listed for sale in 91006, 91775, 91108, 91101, 91103, 91105, 91106, 91107, and 91011 are 7, total.

    I am sure many NODs are working their way thru the pipeline, but on a percentage basis, it will still not a very large amount in these areas. I live in one of these zips and have many friends and acquaintances all over and I can tell you that as I look at things on a street by street level, there is too much stability in these neighborhoods (most people here have owned homes since long before bubble, or were actually buying to live, and could afford it). There will be homes in distress, we did have some unqualified or investment buyers, but they will be far outnumbered by the stable households.

    IMHO, price declines are coming, I am sure, but not at such dramatic levels as more distressed areas. Believe me, I look forward to more affordable prices here in the SGV…things got out of control.

  2. oops…I forgot to add 91001. 8 are there…all in the west end of town. I would suspect lots of sub-prime garbage over there…also, flipper investors liked that area ’cause properties were a comparative bargain, and the area was “transitioning”…

  3. What you said is certainly true up to the moment. However, how this stable part of the housing market will hold up is yet too early to call.

    In fact, if you want to know current state of foreclosure, check this site out:,0.0642,0

    As shown, San Marino is the only area has cool color in terms of foreclosure less than 1 in 2500.

  4. thanks, george8, ‘precciate it!

    Yes, I agree with you, it is too early to tell where we will bottom…and I believe we are much closer to the top of our values than the bottom. It all still remains to be seen…

  5. I would certainly agree that the number of distressed homes make up only a small percentage of total homes in those areas. However, it only takes a small spike in foreclosures to drag the entire market down with it.

    Now if you were to get out of the San Gabriel Valley area and move East into the Inland Empire, it’s no exaggeration when I say it’s a bloodbath over there in terms of foreclosures and price corrections.

  6. My issue of trying to forecast price declines is that we are in uncharted territory.

    We have a record # of foreclosures, and are record # of impending # of foreclosures.

    We have a record # in the increase of vacancies

    We have the highest prices in Oil and Gas ever.

    We have the largest increase in the price of food ever.

    Lending standards will be the tightest they have been in 30 plus years, in an era of a negative savings rate.

    The state of California is the 3rd most unemployed state, and the rate is going up the fastest of any other state.

    You may point to my comments and say I am some nut job with a severe negative attitude, and you may be right. However, in my defense, we have never seen the scale and magnitude of this economic disaster. You may even try to dispute some of my claims, great.

    In the end it comes down to supply and demand. The record # of foreclosures is creating a massive supply of homes for sale, the tighter lending standards is limiting demand. Combine that with gas and food inflation and a shaky job market, and this pretty much insures that prices are going down.

    I figure 3x median income….

  7. “I figure 3x median income”

    missedthebubble …I agree that this is where we need to be in order to get in balance with the now tighter lending standards (which by the way, were normal just a mere 10 years ago when I bought my first house…!!!)

    I don’t think you are a nut job…but we also have to keep in mind that altho median prices may drop to 3xmedian income, people need to remember that when we are talking “median”, there are always those areas that are well above that median…ie, Pasadena vs. Canoga Park. It’s all relative…back when you could get a fabulous architectural home in Madison Hts for about $200,000, the ave median house in Canoga Park was about $50,000.

  8. I believe the approval of interest only loans and option loans to people with credit scores less than excellent created this mess.

    The mess could have been much worse. Most interest only loans resets are based on the 1 year LIBOR rate plus a margin of 2.25%. The European Central Bank pumped $500 billion in US dollars to their economy back in December 2007. Since then the 1 year LIBOR rate has dramatically fallen and any rate resets were at the same rate, but only good for 1 year and with principal added. Next year now, unless the world banks want to keep pumping money in the economy and risk runaway inflation (which itself is worse, high food and gas prices), the housing crash will really take a hit.

  9. Hi Arcadian,

    Great blog, I have your paged saved on my mobile phone, and look forward to reading new postings every morning.

    I think it’ll take some more economic downturn for prices to really come down. For example, this property you listed not long ago:

    1233 S. 6th Ave. Arcadia, CA

    This was a foreclosure piece. No one went to the foreclosure auction but as soon as the property came on the market, it was taken, probably at a pretty high price too.

    I fully agree w/you that prices are way to high, based on income or rent. But I think there are many buyers out there who made $ during the boom and are waiting to enter the market. Places like Arcadia is highly desirable for certain niche groups, such as Chinese immigrants, and thus demand will remain high. As long as demand is high, I think prices in Arcadia will remain high for a long time absence some drastic economic downturn.

  10. Hi TK Eng,

    Glad to have you as a reader!

    I agree that cities like Arcadia and South Pasadena will always command a premium when it comes to real estate prices. In addition to the wealthy immigrants, we have good schools, many amenities and even high traffic entertainment hubs (i.e. Santa Anita Mall, Old Town & the Race Track).

    Although that’s the case, the premium for Arcadia housing is still relative to its neighboring cities. Pre-bubble, a $500k condo here might cost you only $250-350k in a less desirable area. The problem we see is that the same property is currently listing upwards to $750k in Arcadia!

    As you said, demand is still there for housing and I fully expect buyers to jump into the market as prices decline. How much of a decline before this happens has yet to be seen.

  11. Good to hear from you Arcadian,

    Based on the daily Notices of Defaults (NOD) and Trustee Sales (TS) I see for east Los Angeles County on a daily basis, for desirable places like Arcadia, San Marino, and Pasadena, only about 10% of the people w/NODs end up with a notice of TS, and only about 10% or less of the homes in TS actually goes back to the bank. Given the fact that prices are still in stratosphere in Arcadia, I don’t think the default/foreclosure pressure has quite affected the Arcadia market as much as places like El Monte or La Puente, or even W. Covina-yet. When do you think the market pressures will get to the sellers in Arcadia? like I stated in my last post, properties listed below $300 per sq. ft.are still being snatched up quickly in this area.

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