About a month ago I wrote about two foreclosed McMansions: one in Downers Grove, Illinois (a western suburb of Chicago) and one in Alexandria, Virginia (a suburb of Washington DC.)

Neither one has sold but both have been reduced.

1710 Maple Street, Downers Grove

Originally listed for $979,000 in 2005
Reduced to $712,900 by August 2007
Reduced again to $682,900 in September 2007

5997 Crown Royal Drive, Alexandria

Originally listed in August 2007 for $985,000
Reduced to $945,000

How long will it take these homes to sell? And how low will their prices ultimately go? We’ll see. The bank holding the Downers Grove house is, obviously, more aggressive with pricing right now than the one in Alexandria but the Downers Grove house has also been on the market a much longer time (over two years in total.)

All the housing talk right now is about the subprime homebuyers who could barely afford their homes and are now facing foreclosure or about how homebuyers can no longer even get loans.

The subprime buyers (or those who simply took out 100% financing loans) are seen as those who were first time homebuyers who were simply trying to get into the game. This New York Times article on Stockton California’s plight is what the mainstream media has been writing about in the last few days.

A sun-baked city of about 285,000 some 90 miles east of San Francisco, Stockton has seen its population swell over the last decade as commuters have continued to push away from the bay in search of more affordable houses. Average single-family houses here can still be had for $350,000.

Stockton is NOT what you think of when you think of the California dream. It is largely agricultural and doesn’t have the jobs to support high priced housing.

It’s not surprising, then, that Stockton’s homeowners are in financial trouble. From the article:

While hundreds of thousands of people nationwide are being affected by troubles in the lending market, Stockton has the highest foreclosure rate of any city in the country, according to RealtyTrac, a real estate data firm.

The story, then, is that poor little Joe Schmoe, with no financial experience and little income, got in over his head.

Only the problems go deeper than that. If you poke around in some of the richest counties in America, you will see the foreclosure demon alive and well there as well.

Let’s first examine one example in the suburbs of Washington DC.

The DC area has been in a boom for the last 10 years. It is glowing from all the new construction, the new ballpark, gentrification of urban neighborhoods, condos, Starbucks, Whole Foods…you name it and DC is doing it. The prices have also skyrocketed. When I lived in Arlington, Virginia in 1994, you could buy a cute 1940s bungalow for $125,000. The same house would sell for $700,000 or more today.

The price boom has spread from DC to Arlington to the far-out suburbs (even to suburbs two hours away.) Alexandria, Virginia also benefitted. Old Town was spruced up. The Highway 1 corridor saw new condos. And McMansion houses flourished. The $1 million, 6 bedroom brick colonial became pretty common place.

Such was the story of 5997 Crown Royal Drive in Alexandria (zip code 22310.) Only minutes from the Van Dorn metro stop, it was one of three new construction brick colonial houses to be built in 2005 on that stretch of Crown Royal Drive. I don’t have the original listing price in 2005, but tipsters say it sold for over $1.1 million and Zillow lists its value at $1.2 million today.

Here is the lovely Alexandria McMansion:

Yes, the landscaping leaves something to be desired.

The house is now listed for $985,000. The listing from Coldwell Banker says the following:

Very spacious colonial with many rooms: den, library, recreation room, family room, sitting room, separate dining room, 6 bedrooms, sitting room, 2 car garage on 1/4 acre in prime location. Brazilian cherry floors on main level. Fixer upper. Some damage. Sold “as is”.

I wondered, just what could be the “damage” on a house that is only two years old? Water damage? Or something in the original construction?

I e-mailed the agent and asked her what the “damage” was. She was nice enough to respond. She told me that the kitchen had some appliances and cabinets removed. Same with the bathrooms.

It could only mean one thing. Foreclosure.

I asked her if it was bank owned.

She replied that it was.

Bought in 2005 for over a million dollars. Two years later, weeds are growing in the front yard and the kitchen cabinets are missing.

Let’s look at example #2.

This second McMansion is a seven bedroom, 3.5 bath house in Downers Grove, Illinois, which is a very nice and somewhat expensive suburb west of Chicago. The bubble wasn’t supposed to have struck here, but prices have nearly doubled in only three years in Downers Grove and other nearby suburbs.

Here is a picture of the Downers Grove custom built McMansion which is only a few years old:
It has been on the market for over two years. It was originally listed for sale in May 2005 for $979,000. Has been for sale ever since- with numerous price reductions.

Somewhere in the last few months, the bank took it. The house was last for sale in December of 2006 for $825,000 before being pulled. It reappeared in May 2007 for $768,900.

The bank is being aggressive now. They have reduced several times over the summer. Just recently, they reduced from $743,900 to $712,900.

The house has essentially seen a 30% reduction and it isn’t sold yet.

The real story going forward is how over-extended even the upper middle class is. Those pundits on tv who believe that the mortgage mess will be “contained” to the lower class and lower middle class who simply wanted to get into their first home are wrong.

These are but two houses in very nice suburbs. Both are empty. One has been stripped of its appliances and cabinets. The other has seen a 30% cut in price.

Watch the McMansions. They really tell the tale of how big the credit finance bubble has become. Their fate will determine the future of the housing bust and the US economy.