The Housing Bubble

And watch the dollars go back into the stock market…

It has been a while since we had a rush on emerging markets equities. Mexico went down back in… was it 1994? We are due for something along those lines. Maybe Dubai will market oil futures on a retail level.

“a while since we had a rush on emerging markets” ?????

Where you been? Emerging markets were the hotest ticket for years, they’ve crashed, and working off their dead cat bounce now.

Please write your representives NOW and plant the idea in their head that a bailout for over-leveraged homeowners is a BAD IDEA.

In Silocon valley, Anna F. Eshoo actually wanted to bail out folks who went bust on dot-com stock options (who were subject to AMT on worthless shares). That made me SICK to my STOMACH.

I’m sick and tired of being a respnsible citizen and paying $$$ to bail out EDUCATED, MIDDLE CLASS folks who want to get something for nothing.

Pardons, Mister Tax Justice Guy, but if you want things to be evened out then you might work to have that done with the tax code in a straightforward way instead of with the underhanded hidden tax increase that is the AMT. There is no great pool of support for the AMT, it is just a symptom of the tax code breaking apart under its own weight.

The AMT is a secondary tax system that can force an individual to pay taxes on money not yet realized. Why should someone whose options are worthless have to pay huge taxes on them? Why should someone who was raped on the job by a boss and wins a court battle be unable to deduct her lawyer’s fee and thus end up paying more in taxes than she received after expenses? Why should anyone pay a tax on a tax? Which is exactly what AMT does when you lose your property tax deduction.

I don’t agree with any bailout for greedy buyers, but the AMT is a bad idea especially as the loopholes it was created to fight in the late 60’s have all been closed.

“(who were subject to AMT on worthless shares).” Please tell how paying taxes on money you did not get is EVER fair?

The paradigm case of someone screwed by AMT on dot-com stock options is somebody awarded incentive stock options at $1/share who exercises when the stock price is $100/share, and then holds them until they’re back to $1/share. They get hit for $99/share of AMT because of the value of the stock at the time they acquire it, and still owe tax on that income even though the value has been subsequently lost. But how is that not the result of their own failure to sell? They’ll get most of the AMT tax back from the capital loss when they do sell.

I agree that AMT is nasty and ridiculous and should be abolished, but this particular argument isn’t really a good one against it–you can have exactly the same circumstance today with restricted stock units (RSUs) and regular (non-AMT) tax, if you’re granted RSUs worth $100/share and hold them until they drop to $1/share.

Yeah but even though we were founded as a “republic,” a social democracy is what we have. Democracy is two wolves and a sheep voting on what’s for lunch. The wolves are home owners / ARMs payers, etc. Taxpayers will bail out the FB’s. America today is about NOT taking responsibility for your own thoughts and actions. All murderers are pleading insanity and getting away with it. Or blaming a poor childhood. That’s America, whether you agree or disagree. We’ve become a flabby (not just physically, but mentally) nation of wussies.

I agree with the general gist of what you’re saying about our nation’s plague-like lack of personal responsibility. But any housing sector bail-out will be for the banks and lenders — not for individual FBs. That’s why the bankruptcy laws were shored up last year — our politicians might act like idiots, but they’re shrewd (if not exactly smart). They’ve got some sense of what will likely go down here. And they’ve got the law and the regulators on their side. We live in a corporatist republic, more than anything. I don’t see how any “taxpayer bail-out” of voluntary debt by private citizens could possibly happen. It simply has no precedence.

It was the financial services lobbyists who were shrewd, the politicians just did what they were told. The lobbyists knew what would go down and had to get some laws enacted quick to cover their ass-ets. I don’t think the politicos had a clue, just taking orders like the paid thugs they are. It’s kind of like rape, when you think about it. The politicos are needed to hold down, tie the hands and spread the legs of the public so the corporations can gang bang away. I’m sorry if this post is offensive but that’s the way I see it. I understand if it has to be deleted.

Corporatist republic, I like that term.

Actually, there is. During the Great Depression, in addition to “bank holidays” which were declared by politicians to help bail out banks who were suffering from runs, there was the original Bankruptcy Act of 1933 which attempted to halt all farm foreclosures nationwide for a period of five years. This created serious liquidity crises for banks.

My sympathies to both of you. One strategy to consider: Cutting losses now?

BTW, I nearly bought in 2004. However, every time I included lost interest, I couldn’t convince myself to stop renting. It took me a while to convince the spouse that renting was like free money.

Granted I had a very unpopular assumption: I assumed interest rates were going to recover, and that the prices of assets that depended on interest rates were inversely related to those rates. If things had stayed the same, I would have been screwed. Who knows? I may still be. We haven’t had significant declines yet (measured against 2004).

Where are these folks located? Are we sure there is a nationwide bubble? If they live in Cleveland, OH is it really necessary to cut their losses now? They weren’t in it to flip their home. If they had every intention of living in their home for the next 10 years then why stress. If you can afford your home and you were conservative in your purchase, then don’t sweat it.

Ex Californian, Not every person who bought their homes over the last few years are fools. Those that bought in Florida, Az, CA, MA….(major bubble areas) should have raised their eyebrows a little and questioned whether things were a little out of hand…. with that said, the timing of someone being relocated, being in the market for a new home…. can’t be helped. Not to mention the sharks out there convincing you that you should buy now before you are priced out forever.

However, If you bought in a highly elevated bubble area, then yes, I do think you are a fool. I am not the sharpest tool in the shed, but I did my homework in Florida and refused to pay someone double for a house. I knew construction costs didn’t double…. Something was out of whack. I took one economics class in college and did learn that the law of supply and demand as well as what goes up must come down……effects all markets including real estate. Thus my friend, if I was able to see it, then anyone doing their homework could see it.

If you did purchase conservatively, then start saving for a rainy day. If you are at risk of losing your job, then maybe you shouldn’t have bought a house to begin with. Maybe you should start paying PMI, even if you put 20% down.

At the end of the day, I do not feel sorry for anyone purchasing highly elevated prices for homes in 2004, but most especially 2005. If you bought in an elevated area, my question for you is WHAT WERE YOU THINKING??????????????

I’m in the Twin Cities. Not super-bubbly, but prices have risen over the past five years quite a bit.

And I’m lame- I actually bought at the very beginning of ‘06, not ‘05. (Sometimes I swear I forget what year it is!) Since we got a good deal (like I said earlier, we paid basically what the house sold for in ‘03) and we’re in it for the long haul with a mortgage only $200 more than our rent was, at a fixed-rate, I’m not planning on cutting my losses anytime soon.

My only concern is that if we were to lose our jobs or have to relocate and had to sell in this market, we’d have a problem.

Twin Cities? Fixed-rate mortgage only $200 over rent? How much down? If traditional figures, then I’d say relax - provided you don’t work in a volatile industry with regards to staffing.

Just my $0.02.

“Maybe you should start paying PMI, even if you put 20% down. ”

PMI covers the lender, not the borrower.

“I didn’t know there was a nationwide bubble”

There wasn’t. If you’re in Indianapolis or Houston, or much of “flyover” country, there wasn’t a huge run-up.

“If you are at risk of losing your job, then maybe you shouldn’t have bought a house to begin with.”

Being an employee is always risky. In my business, one big contract can mean hiring (or laying off) thousands of people. Buying conservatively for the long-term makes a lot of sense.

I’ve never had to have PMI insurance so I don’t know much about it. I do know that everytime we close on a home, we get the calls and letters trying to sell us PMI. It was always presented as insurance in case of illness or job loss. My mistake.

I didn’t say “I didn’t know there was a nationwide bubble”. I said “Are we sure there is a nationwide bubble”. I figured as you said that many parts of the country are not experiencing a bubble. I can only speak of my neck of the woods and what I read about on this blog.

“Buying conservatively for the long term makes a lot of sense”. My sentiments as well. However, if you can’t cover six months or more of your expenses if you have a job loss, then I believe you have no business buying a home!

There will be new jobs in the downturn…such as mortgage fraud investigators, bk attorneys, credit consolidation specialists, etc.

I think an interesting topic would be whether towns that reassessed at inflated real estate prices and, thus, raised property taxes accordingly will once again reassess after the crash… Thoughts?

A popular misconception of reassessment activity is that it raises taxes when in fact it doesn’t. Although practices differ from state to state, the real property tax is typically a tax of last resort, with the rate calculated by dividing the levy amount (to be raised in rp taxes) by the total assessed value (sum of the assessments in the municipality). If the result of a reassessment is increased assessments, then the tax rate would decrease proportionately assuming that the levy remains constant. Reassessment doesn’t raise the levy amount; it redistributes it. Levies increase when government spends more, or when other sources of revenue decrease.

In New York State, it is unconstitutional to assess property for more than its market value. If property values decrease, then assessments should decrease as well. In that event, tax rates would simply increase; I’m not sure that’s the response that you wanted to hear.

well, I just viewed a home yesterday and there was no reality between its assessment and market value.

The last guy to buy it thought he could rip up the carpets and refinish them and resell for a good profit. As I walked through the house, I saw that the wood floors were water damaged, burned, dry rotted, etc… The carpet upstairs was in terrible shape because it had become detached from the floor. The realtor told me that the home wasn’t insulated but some people try to blow insulation into the walls– but it could settle down and be useless.

The city valued this property at $184,000 with yearly taxes of $2009.

I should also note: the crime rate in that part of Minneapolis is 10%!

At the end of the day, I decided my $540/monthly apartment was a bargin because I was sure that the “automatically reassessed value,” of the property, would only go up. If a person actually saw the property, they would certainly override the computer’s estimation.

Any nonconforming loan made in the last three years is almost surely on a tight credit watch. Of course LTVs of 60% or lower are not going to get fast tracked into foreclosure. It is in the lenders best interests to give you a chance and catch up and pay the penalties and fees. That’s big bucks, free money to them. Rather it is all the leveraged cr@p out there that’ll be agressively pursued. The lenders have got to be scared that there won’t be any equity left if they tarry. Two missed payments, one tax arears and the costs of foreclosure and the two months of holding a house with necessary insurance, security and sales expenses plus the price reduction necessary to move the property quickly can easily eat even a 20% equity cushion. How many suicide borrowers have anything close to that?

Mmm… I think there’s a little more room in those numbers, at least in NOVA. Average price here is some $600k. Twenty percent of that is $120k. At 6% per year on the $480k financed, that’s $28,800.00 in interest on the loan, or $2,400.00 per month. Even including real estate taxes, legal costs, publication costs, there’s still plenty of room for manuver… unless there’s a big drop in the market.

Just don’t let Randy H find out that you think there just might be something to my “crazy” theory that prices won’t be sticky this time.

Yep, and then there’s the subordinated debt problem. 2nd trust deed holders will probably cover their positions (sounds like options trading!) buy buying the 1st. Instead of a nice bank the FBs will have an agressive subprime holding their paper. These people are gonna want you out of their house but fast. How does last Thursday sound? Locksmiths and Sherrifs deputies moonlighting are gonna be in great demand.

Robert Cote,

Again, that is something that I hadn’t stopped to consider! For those already on an 80/20 with exactly let’s see…..ZIP in equity they will have ZIP leverage when it comes to negotiating with the lenders! I guess this is the downside of “not having any skin in the game”. Btw, I’ve learned a lot from Randy and he runs a great site in his own right but I’m totally befuddled with his “sticky” defense as well. In a normal downturn, sure I can see that but what we’ve gone through over the last 5+ years has been anything but.

How can the second holders afford to buy out the first? That’s a lot of cash. I assume their motivation is to place themselves in position to be able to initiate foreclosure at the first sign of trouble.

Correct, although second trust lenders seem to be using the simple alternative of bidding at the first trust sale more and more. This drives up the bid to protect their interest. I have also seen a number of them trying to buy the Note on the first trust at a discount rather than paying full price or buying subject to.

BTW, most prudent lenders include a clause in their deed of trust which essentially states that a default in the first trust is a default in the second trust. This prevents borrowers from paying the first trust one month, bringing the second trust current the next while the first goes unpaid, and so on. That tactic is far more common than you might think. The clause also permits the second trust to engage in a “race to the courthouse steps” where they will be notified of a first trust foreclosure, rush their own foreclosure to get title, then deal with the first, usually by reinstating the first trust. This way, they don’t need to buy the whole first trust, they merely need to cure the arrearages. They also don’t need to accept a reinstatement from the borrower unless the borrower also cures the first trust arrearage at the same time. This is much more cost-effective for seconds.

I have some friends who are starting to purchase second trust deeds so that they can then purchase the first when the borrower goes into default. I think they are nuts to do it right now, but they won’t listen to me. Anyway, they are not going to be very nice when it comes to getting the borrower out. Hell, they don’t even know the law. I think they are in over their heads, but they are convinced it is their path to riches. Who knows maybe it is, I could be wrong.

There are many many variables to consider when buying paper. I’ve purchased 4th position (OOS) that was as good as gold. I tend to agree with LA Notary at this point, since most 2nd position paper created in the last 5-7 years is probably very high risk. I would never buy paper unless 1) I fully expected to paid under the terms of the note and 2) I’m able to protect my position and take the property, and in a worst case scenario, able to recoup all of my investment and anticipated profit. Trying to “buy” property in that manner is insane and gets into scumbag territory.

Just have to add my two cents here - changing jobs for raises is not good advice for the masses. Those who change jobs frequently simply work themselves up to their level of incompetence more quickly - and then will find themselves simply unemployable unless they take pay cuts. In my position, I toss out all resumes of those who do not show a minimum of 3 to 5 years per job - they are not worth my investment if they are not stable enough to stay at a job and really learn a profession, plus they are more than likely greatly overpaid.

I agree with Civil. We do the same thing, or at least view them with an extremely critical eye. I’m one the second newest emplyee in my section and I’ve been here 8 years. This place rewards loyalty and it’s like a family here. Places like this are out there and if you’re not in one, should find one and change jobs.

Fire Burn .pdf
http://www.firstamres.com/pdf/Cagan_FireBurn_1104.pdf

Which is irrelevant today, since all productivity increases of the past five years have gone to corporate profits and executive conpensation–none of it to workers.

Exactly! Productivity has been exploding while wages have remained stagnant and corporate executives and ivory tower economists alike seem to think that this is a positive thing and can be expected to remain stable. HA! The stage is set for massive wage inflation which will get completely out of control once the Boomers begin to retire in large numbers over the next three to five years.

I work for the government an recieve a 5% raise every year. If wages inflate the bubble will not last long because people like me will have money to pay for those expensive houses. That is why wage inflation is bad for everyone except thouse who made bad decisions and bought at the top of the market.

Nominal wage inflation that’s not based on productivity would drive an inflation spiral — if people have more dollars, they spend them. More dollars chasing the same amount of goods drives prices up. Ultimately, nobody wins — we just all end up paying $8 for a Big Mac. Productivity gains are how real wages go up relative to real prices. There are two ways to do that — work harder, or work smarter.

And pray tell what is the downside to lower density?

3 miles to the store to buy a bottle of milk

3 miles to the store to buy a bottle of milk

And I repeat; pray tell what is the downside to lower density?

If affluent or wealthy and can afford future personal transportation (e.g., plug-in hybrid, etc…), no problem. If middle or working class and strapped out on fuel and heating/AC and mortgage costs…you get to walk or ride a bike a lot, really a lot. And perhaps you are dead financially; mail the keys in.

The question then becomes, why would I buy in such a place for even 10c on the dollar? Sounds like a slum of 2015…

Dems… like… less individual freedom.

Not been watching the news since the Bush cadre came to town?

“They like high gas prices.”

oh come on. stop with the conspiracy theories.

“{Dems} like high gas prices.”

oh come on. stop with the conspiracy theories.

Oh come on. It isn’t a conspiracy, it is a platform tenet.

Robert is right, at least about me: I would like higher gas prices due to a gradually increased tax on gas while the income tax is decreased for lowest incomes, i.e. not me. That would curb consumption and leave more of the gas money here instead of Arabia.

Hell, Car & Driver likes high gas prices, and they’re a fairly libertarian rag. Raise gas prices, and consumers demand more efficient vehicles. The free market then goes about solving the problem.

I’d rather have $4 gas than CAFE standards.

bruin, you posted a non sequitur.

Actually, at least in some cities, those have been converted back into SFH and are now high end neighborhoods again. 1890s-1940s neighborhoods have a better chance of retaining value than most (with some exceptions) 1990s-00s cookie cutter subdivisions 20 miles out.

BOARDING HOUSES! Kipper, I think you are on to something here. Omigod, that’s making me laugh. That will be the next trend, selling ROOMS in houses. With extra fees if you want to use the bathroom, or kitchen. Can’t you just see someone opening the refrigerator and screaming about “Who ate my tomatoes?” Seriously, it’s gotten so bad around here, that I recently saw an ad on Craigslist for someone renting a BED in St. Pete for $350.00!!! I swear, there’s no other way to characterize this housing bubble than “mass insanity”.

Is someone will pay me $350 a month, they can sleep in my bed and I’ll happily take the floor.

LOL, Moman!

He owns like 14 other properties in the inland empire…some middle eastern guy