California Day Dreaming Homes For $750,000

This "California Dreaming", foreclosed home, was purchased for $750,000 in December 2004 with what appears to have been only $25,000 down. You may find it in San Francisco at 126 Chester Avenue where the bank had to take it back in November of 2008, white picket fence and all. Back on the market and asking $447,000 in 2009. With a sale for $360,000 in March of 1999, a sale at asking would represent average annual appreciation (CAGR) of 2.1% over the past ten years, but a 40% drop in value over the past five.

The accountant in me looks at these two homes and says only a fool would pay $750,000 for these properties. And only another fool would loan $700,000 on a 40 to 60 year old home that would be lucky to sell for $125,000 in the Detroit Michigan area. Why not just tear the property down and build a new home, fools?

I bought a new SAAB Turbo CD sedan in 1992. Fantastick car. I kept my baby for 17 years, putting a new engine in it in 2001. I spend thousands over the years to maintain it in excellent running condition. Yet, at the end of the day it was still 17 years old. No auto dealer was willing to give more than a $1,000 trade in value for a Car who's replacement value would be $41,000 today. So, why is it buyers and bankers think a 60 year old home in a declining area should keep rising in value forever?

By my standards these old homes are still over-valued, given their 50-60 year old economic life. Putting expensive fixtures and remodeling into one of these old timers, doesn't change the 60 year old wiring and structure or location.


This "California Day Dreaming" foreclosed home was Purchased for $720,000 in September 2005, the bidding for 399 Leland Avenue in San Francisco opened at $306,000 and generated one bid. It sold for $306,000.01 which represents a 57% haircut from its previous sale price, but also average annual appreciation of 2.4% since its sale for $240,000 in 1999 for this single-family. Again to complete the 2005 $720,000 purchase it took two fools. A buyer and a banker, both fools, for paying such an outrageous price.Details for both homes and other area "deals".

Financial Charts and Graphs are often cold and lifeless. But a picture, as they say, is worth a thousand words.

Twenty five years ago during the 80's great American real-estate bust I drove down to the San Francisco Bay Area to bid on some Lake Tahoe time share properties. I had skied Lake Tahoe and fell in love with the area. So, after staying at a new resort that had been built on the side of a mountain I attended sales presentations. The offer sounded reasonable but hearing of some owner foreclosed property auctions in the Bay Area I decided to check it out while on vacation. I easily purchased a unit at the Tahoe resort for 60 cents on the dollar. I never thought the price was a steal, I thought it was a reasonable. Still own it, plus a few more. For business I had the good fortune of attending conferences in San Francisco Bay and LA areas during the 80's and 90's. Absolutely loved that area too.

So, I became familiar with California real-estate prices. But it wasn't until 2005 when I watch a news report on the CA real-estate boom, that I realized just how big the tulip blub mania had gotten. If you show me a new suburban CA home for $1.8 million I have no idea if that is or is not reasonable. I'd need an area real-estate advisor to know. And new commercial real-estate is another story. Even after a bust you still have a new building not a 100 year old home restoration money pit. But when I saw 1,100 sq. ft. two bed room, one bath room homes built just after WWII, which sold for maybe $25,000, now being sold for $750,000 in 2005, I knew the buying frenzy had reached the point of madness.

The finance guy inside me could understand the Wall Street financial engineering and the Treasuries low interest rate policy funding the speculation. But Wall Street and Greenspan was not mandating you had to buy a pig for the price of a triple-crown stallion horse price.

The accounting guy in me still cannot figure out why people want to take an old home built in the 1920's to 1940's for $10,000 to $25,000 and refurbish them with fixtures made for a million dollar home. Sure fixer-upper homes requiring limited expendentures make great values. But when you feel the need to put $150,000 into something that looks worth $100,000...stop. It's time to tear down the old and build new!

Why weren't more bankers and appraisers screaming this is economic madness?

Below is a $550,000 4 Bedroom 3.5 Bath 3,780 sq. ft. home in a more reasonable priced mid-western town. Listing

See New Home Sales Hit Historic Bottom In First QTR. 2009.

Below is an old refurbished Detroit Mansion for $149,000
NEW LOWER PRICE. Exquisite Boston Edison home. Beautifully maintained and featuring 3natural fireplaces, gleaming hardwood floors, and very large room sizes. Elegant foyer with graceful stairway leading up featuring stained glass stairwindow. Potential for 5th (12 x 18) bedroom attached to 4th. Completely finished 3rd floor with separate forced air heating and new windows. Newer Boiler. Pre-appl req'd. Alarm. Short Sale.

"California Dreaming" This my friends is the real deal.

Failure To Collect Leaves Taxpaper With More Bills

The FDIC And Member Banks (Not Taxpayers) Are Responible For Insurance Fund Losses

The FDIC was created by Congress with the 1933 Banking Act to protect bank depositors after the severe financial crises of the early 1930s and officially opened for business Jan. 1, 1934. The agency now insures deposits up to $250,000. Legislation passed by the Congress on February 1, 2006, merged separate insurance funds for banks and thrifts into a single Deposit Insurance Fund.

The FDIC was put in place to protect the depositors, not the banks. FDIC is a insurance organization where member banks pay premiums for the right to wear the FDIC label. No one I know has an interest in putting money into a Non-FDIC insured bank. If you are a banker who wishes to grow your business and profits you need FDIC on your door.

In short the Banking industry should be responible for their decisions and the FDIC insurance reserves. Lots of bright minds have pointed this problem out over many years e.g. The Wharton Financial Institutions Center issued a whitepaper in 2002.

The Last Real-Estate and Banking Party Bar Tab Cost Taxpayers $125 Billion

The ultimate cost of the S &L crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the US government—that is, the US taxpayer, either directly or through charges on their savings and loan accounts. Why did the taxpayer get left holding the bag? Simple, not enough FDIC premiums were charged for the risk the S&L's were taking in leveraging up on a real-estate boom.

Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 to prevent taxpayers from getting stuck paying the bar tab for the banking and real-estate industries parties, again.

Congress Passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991.

This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls and Banks posing greater risk to the FDIC Insurance Fund. This historic piece of legislation empowered the FDIC to charge members premiums linked to risk.

A 1996 report by accomplished economist Frederic Mishkin a longtime friend and research partner of Fed Chairman Ben Bernanke reaffirms the need for the FDICIA stating the provisions were designed to serve two basic purposes: 1) to recapitalize the Bank Insurance Fund of the FDIC and 2) to reform the deposit insurance and bank regulatory system so that taxpayer losses would be minimized.

The United States General Accounting Office (GOA) issued a report in November 1996 entitled Bank and Thrift Regulation. The very first sentence of the executive summary states, "The thrift and banking crisis of the 1980s caused deposit insurance fund losses estimated at over $125 billion. One of the many factors contributing to the size of the federal losses was weakness in federal regulatory oversight".

As Austin Powers would say, "Deja Vu Two Baby!"

Now take a guess as to what the FDIC and Congress choose to do during the economic boom years of 1996-2006? The biggest reasons for our FDIC reserve shortage is because most banks paid no premiums from 1996 to 2006. Yes, it's a little reported fact that they paid no insurance premiums for 10 years.

Not one private insurance company would stop charging premiums on your auto, homeowners, health, or life insurance for 10 years -----simply because you had no losses. Does some one need to have a Ph.D. in Insurance and Risk to know that's not prudent?

Yet, James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse," he said. Anyone else wondering what value economist add? Can we export economist to china?

The rising bank losses mean that the FDIC's ratio of deposit insurance funds (DIF) to our bank deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%. Said another way, the goal was to only have about 1.5 cents in the rainy day fund and we have only zero cents.

Failure To Collect Premiums For 10 Years May Leave Taxpayers Paying Another Bill

The FDIC and congress concluded years ago that only 1.25% in FDIC reserves were needed to maintain the financial soundness of the fund. So, when the Deposit Insurance Fund (DIF) reached the magic number during the boom years, bankers (didn't want to pay) and regulators saw no advantage to having 2.5% in reserve. But between 1996 to 2006 bankers were jumping into the real-estate boom leveraging up their money lending practice. The S&L crisis became a distant memory.

I will not blame any President, Party or Federal Reserve Chairman for this crisis. They, like us, have a vested interest in America too. Still, I'd expect Greenspan and Bernacke, two Ph.D.s in economics, along with the over 100+ Ph.D.s working on the Federal Reserve staff, to be smart enough to connect-the-dots. Purhaps a few were two busy flipping homes to notice. No wonder Dean Baker, a fellow Ph.D. in economics, is endorsing the bill to audit the Federal Reserve policies, Baker wrote last week, "The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed's disastrous policies". Other economist and financial experts outside the Washington D.C. belt-way raised flags to congress ahead of the Freddie Mac and Fannie Mae debacle. All one needed to do was watch tv to know we were in a real-estate bubble.

Our FDIC Chairman Warned Congress in 2001...No Action

Now FDIC Chairwoman, Sheila Bair, has already testified that the agency's failure to collect premiums from most banks for years was surprising to her and a concern. As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of people within the banking industry. "That is five years of very healthy good times in banking that could have been used to build up the reserve," she said.

I'm hearing on average, each failure costs the FDIC nearly 30% of a bank's assets.

Now-Needy FDIC Collected Little Premiums for 10 years

The Coming Deposit Insurance Bailout

FDIC May Need Special Fees

FDIC, Banking & Real-Estate Deja Vu Two

click on graphics to enlarge

It took eight years from the start of the Savings & Loan crisis in the 80's and 90's to reach a peak in bank failures from the last real-estate boom turned bust. Let's hope we are not in for 6 more years of large quantities of bank failures. Mr. Bill Isaac JD who headed the Federal Deposit Insurance Corporation during the banking crisis of the 1980s said he doubts we'll come close to the volume of failures of the S&L crisis. Still, history is repeating its self. It's like a domino effect. First it effects the largest financial institutions leveraged to real-estate sales through the mortgage securitization and derivatives markets. Next came large Insurance companies and regional banks with large investments in real-estate and related loans. Now it's smaller state banks effect by commercial real-estate construction loans.

One single common denominator jumps out...real-estate. Yes, REAL-ESTATE SPECULATION fueled by historic low interest rates, easy credit, little money down and excessive value appraisals.

Real-Estate Implodes, Banks Fall and FDIC Funds Nose Dive

At the tail end of the Savings & Loan (S&L) debacle L. William Seidman, former chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation, stated,"The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending".

In May of 1991 the Los Angeles Times reported, "The FDIC faces problems with the bank insurance fund expected to be insolvent by the end of the fiscal year. The House and Senate banking committees have passed separate bills providing $70 billion in temporary borrowing authority for the fund, with the money to be repaid by premiums from the banking industry. Seidman's replacement at the FDIC will run the fund at a time of great uncertainty for the banking industry, during a depression in commercial real estate that threatens the solvency of many banks".

For years after the 80's and 90's Savings & Loan financial crisis had ended hundreds to thousands of Articles, Whitepapers and Books were written on what created the problem and what was needed to prevent a future meltdown. To insure we learn from our past mistakes the FDIC has web pages listing FDIC reference books deticated to the S&L crisis memory.

Congress Passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991.

This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls and Banks posing greater risk to the FDIC Insurance Fund. This historic piece of legislation empowered the FDIC to charge members premiums linked to risk.

A 1996 report by accomplished economist Frederic Mishkin a longtime friend and research partner of Fed Chairman Ben Bernanke reaffirms the need for the FDICIA stating the provisions were designed to serve two basic purposes: 1) to recapitalize the Bank Insurance Fund of the FDIC and 2) to reform the deposit insurance and bank regulatory system so that taxpayer losses would be minimized.

The United States General Accounting Office (GOA) issued a report in November 1996 entitled Bank and Thrift Regulation. The very first sentence of the executive summary states, "The thrift and banking crisis of the 1980s caused deposit insurance fund losses estimated at over $125 billion. One of the many factors contributing to the size of the federal losses was weakness in federal regulatory oversight".