A Housing Bubble Or A ‘Big Piggy Bank’?
The Contra Costa Times looks at some reports on borrowing in California. “Instead of building a nest egg for retirement, a growing number of homeowners are putting themselves in a debt trap. Economists and investment advisers say that more Americans are relying on their homes as their primary asset for retirement.”
“Two new studies confirm the trend. One, by the Securities Industry Association, found that the declining savings rate in America in recent years has coincided with an increase in mortgage debt. Another study, by a San Francisco-based economist with the Federal Reserve Bank, found that the level of property-debt burden, compared with income, has risen in recent years.”
“The reasoning goes something like this: Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.”
“‘People are making the mistake of thinking they live inside a big piggy bank,’ said Libby Mihalka, president of Altamont Capital. ‘They don’t realize it can all snowball out of control very quickly. Their house is not an ATM.’”
“‘This is a form of financial insanity,’ said Frank Fernandez, chief economist with the Securities Industry Association. ‘You are digging yourselves deeper into debt using an asset that could decline in value.’”
“This phenomenon extends to the East Bay. One individual, who is in his late 40s, has refinanced his primary residence seven times in six years, each time at a higher level of debt. ‘He has all the latest goodies and toys,’ said John Valentine of Valentine Capital Management. ‘He uses it for other investments. He just keeps increasing the mortgage. The debt-to-equity ratio on his house is at the maximum level.’”
“From 2004 to 2005, a year when the American savings rate turned negative, the mortgage debt on homes increased 15 percent to reach $1.14 trillion, the SIA found. ‘People started saving less in the late 1990s during the stock-market bubble,’ Fernandez said. ‘I suspected the same thing was occurring with regard to the housing bubble, and that is what appears to be happening. As the value of your financial assets increases, people save less money.’”
“The trend to tap equity seems especially prevalent in the East Bay. ‘Among my East Bay clients, I often see a person’s retirement plan and equity in their home comprise well over 90 percent of their net worth,’ Valentine said. ‘Among Peninsula clients, it’s only about 50 percent.’”
“Mihalka says the financial pressures will catch up to more people. She recounts the stories of two clients: One couple in their 30s, each with a good income, decided to buy their dream home in Pleasanton. They mortgaged themselves to the hilt with an interest-only loan. But they also became saddled with dramatically higher property taxes, which forced them to begin paying the dreaded alternative minimum tax. ‘They are cash-poor,’ Mihalka said.”
“Another couple in their 50s had begun to spend beyond their means. They took out a line of credit on their home and used it to buy a car and take a vacation. Now it looks as if they could be stuck with big mortgage payments in retirement.”
From the Daily Pilot. “The number of defaults on Newport-Mesa home loans jumped dramatically in the second quarter of the year compared to 2005, a rise some experts say could be the result of the sluggish real estate market. According to DataQuick, in Newport Beach the number of defaults skyrocketed, showing a 118% jump from the periods in 2005 to 2006. The number of defaults in Costa Mesa went up more than 50%.”
“‘The real story is not just the number of defaults going crazy, but the number of properties that are actually making it to auction, and that has increased dramatically,’ said Kurt DeMeire, CEO of a Huntington Beach corporation that researches and processes foreclosures.”
“In today’s market, more homes are making it to auction and going back to the lender because the home no longer has equity, DeMeire said. ‘Most people think it’s just junkie properties that go into foreclosure,’ he said. ‘Every neighborhood in the county has foreclosures every day.’”
“Keith Cotarelo, president of Signature Loan Group, said he expects to see more bank-owned homes after the auction process is complete. ‘Personally I think you’re going to see a lot more bank-owned properties, and in turn they will have to change some of the lending practices,’ he said. ‘I see it coming around to eliminating some products.’”
“In particular, Cotarelo said, the practice of 100% financing has hurt homeowners in the long run.”
“‘A lot of them have been caught in the crux of creative financing and the reality of what the rates have done. A lot of lenders selling the product were not explaining it very well,’ he said.”
“‘This is a form of financial insanity,’ said Frank Fernandez, chief economist with the Securities Industry Association. ‘You are digging yourselves deeper into debt using an asset that could decline in value.’”
Insanity in individuals is the exception; but in peoples, groups, nations and epochs, it is the rule.
- Friederich Nietzsche -
And so it goes for financial manias. Unfortunately, I suspect that those of us who did not cash out our potential retirement savings through the housing ATM machine will be somehow forced by some government bailout scheme to make those who did whole…
i have yet to read in this blog discussions of who are we really going to bail out. or, who will get the bulk of the bail out. i don’t think it will be the FB but the financial institutions who fed this beast. in that case, don’t even bother opposing it, you’ll not win.
The Federal Reserve is a privately held corporation with mebership reserved to banks that deposit reserves with the Fed. IMHO there is a possibility for hyperinflation perhaps the Fed really wishes this since it might eliminate the FB/wall Street/ Bank fiasco. The US has already asked to have medicare/medicaid/social security removed from the Federal budget as unfunded liabilities in order to comply with GAAP (last years budget was a joke with the accountants unwilling to sign because of the 47 trillion in unfunded Liabilities). Get used to the idea of no social security or to paraphrase Alan Greenspan when asked about Social Security in testimony before the Senate; I can guarantee payment of social security, I cannot guarantee that it will buy anything. The Fed and the government are not in fiscal health to bail out anyone.
Yeah, I just loved that comment. Of course, so many Americans think “oh oh, unfunded liability”, but never see that the easy way is to raise taxes. For example, the Canadian Pension Plan was horribly underfunded, and the MSM went crazy over it. One day, the government said “you want us to do something about it? Okay, we will,” and they raised the contributions 50%. Now it’s fully funded. Yeah, your tax bill may go up, but if you cut from military expenditures, you could easily manage. Same with universal healthcare (no drug benefit plan) - everyone’s covered, at one third of the cost. As long as your priorities remain as they are, your future is unsustainable. Want a different outcome? Adopt new priorities.
I don’t mean to preach, but I’m doing a good job of it! LOL.
Yeah right. I can open a universal ice cream store where everybody gets ice cream at one third the cost.
The Canadian heathcare plan doesn’t work any better then a free market system. They just use “time” as a rationing device, whereas we use money. Other places use quality.
I dont think we see govt intervention unless something sudden happens. The govt is most likely to respond if a bunch of people realize they are fu–ed at the same time and their is a “crisis” or if a bunched of financial institutions all tank together. Probably just more taxcuts for the top 1% in hopes they will spend thier vast fortunes on consumer goods and bring life back to China’s economy.
You can open that shop where everyone gets ice cream at 1/3rd the cost. Catch is you only have 1 flavour and the cones are stale..
A much better model is the French system.
Not in the US, our social spending dwarfs our military spending, and that’s not counting social security (which is accounted for separatly).
The US has several big problems with health care the leading being we are letting Canada and Western Europe free ride on most of our drug development costs, second the structure of insurance and concern about legal liability creates a huge amount of wasted efficiency paper pushing.
Shifting the burden to an indirect system through the government might solve the second problem but not the first.
Aren’t the MBS’s held by foreigners (Chinese/Japanese)? Why would US taxpayers agree to bail them out?
if we will never need to borrow from them or need them to trade with us, we can even say, you bet we will not honor those debts.
Who says the US taxpayers have to agree on anything? The ruling elite will decide, and we’ll be stuck with the bill. You don’t think it’s still government “by the people, for the people,” do you?
They don’t hold that many, they’ve just been buying most of the recent ones. Banks and pension funds own the majority of MBS (and Treasury debt too). See the discussion on second order derivatives.
What an excellent quote: “Insanity in individuals is the exception; but in peoples, groups, nations and epochs, it is the rule.”
Thanks for that…it is now saved in my quote file…
It was not as much insanity as working the system..I personally know two Eastbay owners who told me long ago they were riding this rollercoaster for all it’s worth. They were sucking the equity out as much as possible, their house in Mexico is almost paid off ,and adios when the SHTF !…”Aint America great’
I heard of others who just using credit cards pulled out $ 100,000 and went back to their third world country to retire as that is a lot of money back there. Is the USA a great country or what ?
isn’t that what anti-immigrants want, to get rid of the latter? unfortunately, there will always be costs to pay.
The plan to rationally milk the system for all it is worth, then abscond has to be the rare case. Most Americans just simply don’t have a clue that there is anything odd about their homes earning a third income which exceeds either mom’s or dad’s.
Oh yeah, they just love the gringos down in Old Mexico. When these twits get kidnapped for ransom, you can bet their relatives will go whining to the U.S. government about it.
“Science may be cumulative , but love , war, and finance are cyclical”.
>
From each according to his thrift; To each according to his greed.
know what the historical level of home equity extraction is? 0. ZERO.
last year it was $450B. it will likely undershoot the mean (a positive net savings rate) before it reverts to 0. ZERO.
wow, that’s a relief. so starting soon folks will be paying down their morts.
yeah, soon. in about 10 years, when we reach the real bottom.
flat, your skepticism about reverting to 0 yearly equity extraction is well placed. the absurdity of such a notion only emphasizes how abnormal a situation we are in. and i do think it will take at least several years before virtually all MEW is stanched. but it will be. as equity disappears with the continued drop in prices.
“One, by the Securities Industry Association, found that the declining savings rate in America in recent years has coincided with an increase in mortgage debt.”
What a remarkable coincidence!
yeah, big coincidence. but that gaping bottomless hole of MEW is where all the bodies are all hidden in this credit bubble.
In other news, 2+2 found to equal 4!
and dog bites man!
And house sucks owner’s bank account dry!
“Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.”
Let’s get this straight: Homeowners are funding their SUV, BMW, and expensive vacation purposes out of the magic of home equity ATM cashout withdrawals. And their homes are going up so rapidly in value that not only is the home a perpetual source of luxury consumption spending, but it will outstrip the higher debt levels piled on through refinancing seven times every six years or so to provide for a comfortable retirement. So I guess I see the logic — why bother saving when homes are such a great and reliable source of current and future spending money?
scratch “purposes”, insert “purchases” (sorry, my edit button is not working today…)
Why save when interest being paid was less than 1% not that long ago ? People go where the yield is and that happened to be Real Estate, now CD’s are starting to look pretty good in comparison now that housing is falling.
People also ignore the downside risk associated with chasing yield during the course of a conundrum.
Please expand on this.
One way to chase yield during the conundrum would have been to buy a home in LA and watch its market value soar into the stratosphere. If homes went up in value by 20% per year forever, then an LA homeowner could afford to take 10% cashout financing each year until age 65 to pay for Hawaii vacations, BMWs, LV gambling binges, what have you, and still have 10% per year to add to the eventual big cashout equity withdrawal when he retires and moves from LA to Phoenix.
In a risk-free world, this might be possible. In the real world, there is a risk that eight straight years of free money to any sap lucky enough to own a home will be followed by a protracted period of price deceleration to bring home prices back into line with fundamentals.
What percent actually took out a cashout refinance? I know I didn’t.
It must be fairly high; I recall seeing annual figures like $600b in spending (5%+ of GDP?) out of home equity extraction.
You might find some hints in the details of the report linked below. (Check out the Figure 3 on p. 16, Ratios of Gross and Net Equity Extraction to Disposable Income).
http://www.federalreserve.gov/pubs/feds/2005/200541/200541pap.pdf
does it matter what the percentage is? this is debt which will need to be repaid *soon*. that is like pulling that payment amount from economic activity.
Of course it matters. Looks like about 11% to me. Significant, but not crushing. Gives perspective, especially those waiting on the sidelines. I am not one of them, but I am perenially curious. Thanks GS! -
Homeowners are funding their SUV, BMW,
You left out Hummer & Escalade.
Think lenders are wising up? Think again…
This from Doug Noland at Prudent Bear:
“For the week,…Real Estate loans increased $1.7 billion. Real Estate loans have expanded at a 12.4% rate year-to-date and were up 11.2% during the past 52 weeks.”
“‘People are making the mistake of thinking they live inside a big piggy bank,’ said Libby Mihalka, president of Altamont Capital. ‘They don’t realize it can all snowball out of control very quickly. Their house is not an ATM.’”
WTF? Greenspan’s created this mess, causing the price to put a roof over your head to double in 4 years. This debacle is on his head-and those of the various fed housing & banking oversight committees.
People are only reacting to the financial situation they created.
But it’s still a situation of that a recent financial mind gathering in London determined.
The US is an economic “has-been” with 67.5 trillion in unfunded pension and various entitlement pay-outs due the boomers.
So eat, drink, and be merry for tomorrow we all die.
“Mihalka says the financial pressures will catch up to more people. She recounts the stories of two clients: One couple in their 30s, each with a good income, decided to buy their dream home in Pleasanton. They mortgaged themselves to the hilt with an interest-only loan. But they also became saddled with dramatically higher property taxes, which forced them to begin paying the dreaded alternative minimum tax. ‘They are cash-poor,’ Mihalka said.”
But they have their “Dream House” why would they want to go out to eat, travel, or have discretionary income ?
Why should we have everything that we DREAM of?
Is there anything that we can NOT have?
Sick mind-set !!!
And one of the saddest things about folks who irresponsibly pursue these “dreams” is that they aren’t really their own dreams… They’ve been conditioned into thinking that certain material pursuits will make them happy.
When you really quiet down and listen to *your own* dreams, you tend to find them shockingly unlike whatever the Jones’ next door are doing.
and probably don’t involve as much money.
“hen you really quiet down and listen to *your own* dreams, you tend to find them shockingly unlike whatever the Jones’ next door are doing.”
…which inevitably gets you branded as a freak.
Not that that’s a bad thing…
Said another way:
“Trying to meet non-monetary needs through monetary means.”
why not? the problem is not the dreams but the means used to achieve those dreams.
I’ve been wondering about how the AMT would affect FBs. Under the AMT, you can’t deduct property taxes or HELOC interest (basically, any interest on principal in excess of the original purchase price - so HELOCs, cash-out re-fis, etc., unless the excess amount was used to remodel or upgrade the house). So, how many people are being bitten by the AMT? How many don’t even know it (because they haven’t done the calculations, or haven’t done them properly)? How long until the IRS comes knocking on their doors?
I’m glad you brought that up because it reminds of an issue that is now on the back burner; eliminating the mortgage interest deduction. IMO, the biggest reason it was proposed was to offset the elimination of the AMT. Many thousands of folks in high income states like California are due to fall into the AMT every year. It will be interesting to see how this plays out in Washington.
i think it would be difficult for anyone in Congress to support eliminating the mortgage interest deduction and still get re-elected.
i’ve mentioned to a couple people that a treasury committee and charles grassley had recently recommended that the mortgage interest deduction be repealed. they get this look of horror and denial on their face. (kinda like the reactions you get when you first explain to someone about the housing bubble)
They want the interest deducted, and their property tax frozen and grandfathered. A great subsidy for those who don’t need it.
A great subsidy for those who don’t need it.
And for that matter, don’t deserve it either. The mortgage interest deduction is essentially a forced wealth transfer from non-homeowners to homeowners. Which means it’s just theft, made possible because the homeowners have more political pull. Of course our citizens think gifts can be created out of thin air, otherwise the non-homeowners would be screaming much louder.
“A forced wealth transfer from non-homeowners to homeowners?” That’s a poor characterization. A tax break that allows people to pay less tax is not a forced wealth transfer especially since the government obviously is not cutting back expenditures evidenced by the enormous benefit. The decrease in government revenue MAY be pawning the debt onto a later point in time, but it’s not a wealth redistribution from non-homeowners to homeowners.
The mortgage interest deduction might not be the greatest thing and has partially led to the current destructive bubble (which has consequently placed people in the position of choosing between paying outrageous and unjustified home prices through suicide loans or simply choosing not to buy). The deduction was originally meant to encourage home ownership for a greater number of people, but as an unintended consequence flippers looked at the tax break as part of an easy money investment strategy and the mania ensued. The original idea of getting people out from under the thumb of (greedy, unscrupulous, and wealthy) landlords ended up instead also feeding this asset bubble.
I’d be for eliminating the deduction, if it was done over a very long period of time. I think it would be too much of a change to implement all at once, unless tax rates were lowered to help offset its elimination.
The following is just a little crazy idle ranting…I’d like to see all deductions and credits eliminated and instead have a very low tax rate on 100% of income. It seems to me that by doing this, the tax code would be simplified (sorry TurboTax and HRBlock) and no one could “shelter” income. Even better, get rid of all income and payroll taxes and have some sort of consumption tax, that way everyone pays.
A consumption tax would be nice but then we’d have a huge underground that paid no taxes. And we still need to have verified income to use for loans, etc. Probably a compromise would be a very minimal income tax along with a reasonable consumption tax. You need both.
I’ll buy that. I’m just looking for some way to get a system that reduces the bullcrap in the tax code.
There is no reason that taxes have to be the means of verifying taxes. There are other methods.
Pen, something like a VAT?
“And for that matter, don’t deserve it either. The mortgage interest deduction is essentially a forced wealth transfer from non-homeowners to homeowners. ”
The same could be said for ANY tax benefit. You got kids? Well, I don’t, so the tax break you got for the extra personal exemption amounts basically stole from me.
you must be kidding, right? i have kids, and i am still paying taxes. so, how am i getting your taxes?
I have three kids and pay a lot of tax. I am paying full amount of their college tuition because we make too much to qualify for financial aid. My kids taxes will pay for my retirement and I guess yours as well.lol
“you must be kidding, right? i have kids, and i am still paying taxes. so, how am i getting your taxes? ”
‘Cause your federal income tax obligation would be higher if you didn’t have children.
The point I’m trying to make is that any tax benefit, or deduction, ALWAYS benefits a certain class at the theoritical expense of another.
It WOULD effect them if they actually did their taxes correctly. But my guess is that people primarily lump HELOC interest into their base mortgage deduction. I sure hope the IRS comes-a-callin’. I’m tired of following the rules to my detriment as I’m making up for all those who don’t.
“Keith Cotarelo, president of Signature Loan Group, said he expects to see more bank-owned homes after the auction process is complete. ‘Personally I think you’re going to see a lot more bank-owned properties, and in turn they will have to change some of the lending practices,’ he said. ‘I see it coming around to eliminating some products.’”
Anyone with savings and a credit rating worth protecting is advised to avoid buying until this prediction comes to pass.
Right on Getstucco . I think it’s already starting . Some reports of appraisals getting more conservative .
“The trend to tap equity seems especially prevalent in the East Bay. ‘Among my East Bay clients, I often see a person’s retirement plan and equity in their home comprise well over 90 percent of their net worth,’ Valentine said. ‘Among Peninsula clients, it’s only about 50 percent.’”
Even 50% is too much!
The problem with that 50% of net worth in the home is that given the debt level assumed to purchase it and its concentration in a single, lumpy, undiversified, costly asset, its presence in the household portfolio hardly represents optimal diversification.
Sadly, it will all end in another depression. I see no way out of this entire debt mess. The entire debt (national, state, county, and local, in addition to business, corporate, and family) is staggering. Add to that all the entitlements at every level in this country and you have some serious shiat going to happen. I can’t remember the site, but there is a very well researched site, that has all this data and it is scary what the feds are on the hook for, something to the tune of $50 trillion+, yes 50 trillion, when social security and medicare/caid is included. Bottom line is that you can only run an economy (no matter what level, see above) for so long before there is nothing left to fuel it with. Also, for all the HELOC saps, as we hava all said before on this site equity is something every property owner says he/she has, but in reality only gets when said proprty is sold. No cash in hand, no real equity. Just numbers on a comp.
But what do you do with the cash then? This has been a popular topic on this blog but I’m still unsure. Right now my cash is parked mostly in short term stuff — Schwab Advantage, bonds — and large cap equities. Any suggestions welcome.
Excellent point. Because cash is also something whose value is flexible. Especially right now, as foreign central banks are beginning to question whether or not they want to be so exposed to the USD.
AAA Short term muni’s are a good bet (as you said), but there are also some interesting options in foreign currency COD’s (www.everbank.com) and then there’s always gold and silver. Of those two, silver definitely is the more interesting play right now. With the introduction of the silver ETF (stock: SLV) world silver markets are getting tighter than they’ve been in history. Silver is trading far, far below its historical mean.
And then after that there’s Oil. Like land, ‘they’re not making any more of it’. And mideast instability looks like its not going away any time soon. (I especially like Canadian oil b/c its safe from all that craziness).
That’s a good point Soho, There is a deficit in Silver,and even some strange things happening there…Someone took posseion of 4 mil oz.’s? last week ( I think that was the amount ) Anyway there is definately a real deficit. Beside 3x the amount of physical being traded on paper…Too the moon Alice !
>>better get while you can…
Hasn’t silver been very valuable in the past for photography? Hasn’t the change to digital photography seriously impacted the demand?
I vote for silver, the WSJ had a big article on the use of silver in medical devices. With the decreased effectiveness of antibiotics, medical device manufactures are impregnating everything with silver to prevent infections. Silver impregnated foley catheters are now the standard in most hospitals. Microorganisms don’t like silver.
I vote for silver, the WSJ had a big article on the use of silver in medical devices. With the decreased effectiveness of antibiotics, medical device manufactures are impregnating everything with silver to prevent infections. Silver impregnated foley catheters are now the standard in most hospitals. Microorganisms don’t like silver.
Buffett just reported that he bought shares of Johnson & Johnson and sold out his shares of Outback Steakhouse and The Gap. Looks like he just shifted out of consumer discretionaries into consumer staples. Telling, don’t ya think?
But what do you do with the cash then? This has been a popular topic on this blog but I’m still unsure. Right now my cash is parked mostly in cash — Schwab Advantage, bonds — and large cap equities. Any suggestions welcome.
Try some closed end bond funds–BGT, for example, has a yield of almost 8%
3 month t bills are state tax free and about 5%. Not bad.
I am certain Bernanke and company have a plan in place to avoid a depression; I will wait and see if it works rather than spread gloomy prognostications…
Getstucco, I understand your point of view. I just don’t see how you can keep running everything on a charge account. At some point in time the bill comes due. Interestingly enough, the wife was watching, I think it was MSNBC, at about 5 or 6 Pacific time and the usual baby doll reporter was talking about national debt. She stated that within 7 years, I think it was 7 I only saw about 1 minute of the segment, the government would be paying more than 1/2 of the entire budget to service the debt. That’s scary because at that point you have reached the point of no return, unless drastic measures, like 70% tax rates, are put into effect.
any idea how japan is paying their debts? the last I read it was about 120% of their GDP.
“I just don’t see how you can keep running everything on a charge account.”
I agree you cannot do this forever, but I have been surprised to learn over the course of my adult life that you can do this for a surprisingly long time…
Canada in 1993 had the highest debt ratio. They were paying about 25% of the budget servicing debt. Income taxes were really high (45% combined provincial and federal). Spending cuts were the key. Public work force was trimmed to the tune of 40%, pay freezes across the board (some of the military were delivering pizzas to make ends meet). Welfare in Ontario was cut by 33% (from $1500 per monts to $1000), welfare rolls went down 50%, as it made more sense to have a job. Lower interest rates helped, too.
Unfortunately Bush brought fiscal irresponsibility to extreme, throwing money left and right (see Katrina episode). Lots of waste to be cut, including military, state employees + corporate welfare.
“I agree you cannot do this forever, but I have been surprised to learn over the course of my adult life that you can do this for a surprisingly long time…”
You are right you can, and the US has done it for decades.
That is coming to an end.
To keep charging, you need to have a lender who will keep lending. Japan and China have been the willing lenders.
I doubt US can continue to attract foreign investment once recession starts. US must still pay back all the debt of last several decades, but cannot borrow any more.
Japan & China, even if they want cannot loan more money to the US, because the US consumer is no longer buying their products. This is the consumer spending derived from house ATM. This is 70% of US Economy.
This is what will turn the coming recession into a depression.
China & Japan may be left holding the bag of over a trillion USD worthless treasury paper.
And MBS/ABS when the issuers go belly up.
Of the 64.8 billion dollar trade deficit last month 15 billion was with China. Chinas enormous reserves are the result of accepting dollar payment from anywhere. China is buying gold, silver, oil fields (africa), plantations (Brazil) etc. I guess I want to be buying whatever China buys and selling whatever China sells.
there is one solution other than depression, high inflation for a long time.
The Weimar solution?
High inflation means a weak dollar. A weak dollar makes imports more expensive. We import just about everything in the US. Higher prices can cause a recession.
Since we’re all pretty much in agreement that a recession is coming it’d be interesting to see an “Inflation vs. Deflation” debate here.
See the vicious cycle? Inflation–>high commodity prices–>weak dollar–>high import prices–>more inflation–>high interest rates. Then, loss of consumer confidence and spending—>contraction of credit–>inability to stimulate through rate cuts–>weak dollar–>deflation.
weak dollar doesn’t equal deflation, a weak dollar equals INFLATION.
weak dollar also means higher export, lower import.
This is a flawed argument. US companies own the subsidies abroad that make the profits when US consumers buy products at higher prices when the dollar is weak. The repatriated money strengthens the US economy (by allowing companies to invest and increase the number and quality of jobs). This is why globalization works.
s/subsidies/subsidiaries/
Not again
never forget that the US is still a manufacturing powerhouse. we will probably start producing stuff here, again.
Let’s see, same machine for the production line.
Pay $5.50/hr here.
Pay $1.00/hr in China.
The powerhouse is moving the machine oversea.
OT: I happen to work for a manufacturing company based in the US with factories in the US, Canada, and Mexico. They are very profitable even though their labor base is domestic and significantly more expensive than “Overseas”.
They make up for it in productivity improvements/automation, planning, and product/market differentiation. Also, our customers wouldn’t/couldn’t wait for product produced in China and shipped… the lag is too long. (This is more of an issue now when many middle tiered supply chains are trying to reduce their own inventory)This is why the whole arguement of offshoring manufacturing is crap. It is the easy way out for management to “reduce costs” and stay competitive.
If management instead spent time improving efficiency(lean manufacturing, value added automation), finding markets where product quality, timeliness, and customer service mattered more and were a differentiator, we can and do compete globally.
Ask Nissan, Toyota, and Hyundai why they don’t just build cars in China or Dell or any number of manufacturing companies. If the US wants to survive economically it needs to innovate and stay 2 steps ahead of the competition, not play follow the leader. My two cents…
Just in Time!
it is scary what the feds are on the hook for, something to the tune of $50 trillion+, yes 50 trillion, when social security and medicare/caid is included.
$$$67.5 trillion according to the financial think-tank advisors in London.
Funny how quick the perception changes tho. That headline at top of front page of local little Daily Pilot nearly knocked me off the tiki bar this morning, i almost spilled coffee… like first actual shots fired after months/years of boot camp or something.
“‘People are making the mistake of thinking they live inside a big piggy bank,’ said Libby Mihalka, president of Altamont Capital. ‘They don’t realize it can all snowball out of control very quickly. Their house is not an ATM.’”
——————————————————————————
Yeah Libby, and I bet Altamont Capital was educating the buyers of their products about this risk last year and the year before that (NOT!).
I love it how all these groups are now coming out of the woodwork to issue their CYA’s. Where were they 2-3 years ago?
“Keith Cotarelo, president of Signature Loan Group, said…the practice of 100% financing has hurt homeowners in the long run.”
“‘A lot of them have been caught in the crux of creative financing and the reality of what the rates have done. A lot of lenders selling the product were not explaining it very well,’ he said.”
I wonder how well Signature Loan Group exlained it to their customers? Sounds like more fingerpointing.
CYA time is here…
Well, like this ending should be a big surprise to people? The magical ATM genie is going to come flying out of BB or Greenspam’s ass to buy their overinflated house at $3 M when these major homedebtors in California want to retire?
i’m not going to argue whether house prices over time will rise, fall or flatten. we do enough of that here, but if one is looking at a house to fund a sizable portion of their retirement, you’re breaking the first rule of investing, diversification. with so much tied into one asset class you’re exposing yourself to far greater risk.
but if one is looking at a house to fund a sizable portion of their retirement, you’re breaking the first rule of investing, diversification. with so much tied into one asset class you’re exposing yourself to far greater risk.
5 years ago very few people had thought about it, it just happened.
Historically this was not the case (except for bubblequake zones like SF and LA), because the price appreciation on homes was low, stable, and predictable. In the past eight years, runaway price inflation has turned housing into a high-risk gamble.
The other nor’easter to this perfect storm. In my office one leading-edge boomer is planning on selling his house, banking the proceeds and waiting for the price drop. He owns his house outright, and is quite wiling to sell it at a major discount. Why not? He has major equity (maybe 80% of current value above original purchase price) and can undercut anyone who bought in the last 10 years. Multiply him by millions - and the die is cast for a brutal price drop.
i know exactly how he feels. i’ve subtracted $250K from the value of my very cool pad — i like where i live, and wouldn’t trade it for anything — and don’t lose a wink of sleep. paid in full in 1983.
A little common sense in the media? It sounds almost surreal, after what we’ve been hearing the last few years. Almost like it was some kind of new way of thinking.
I used to do some borrowers appraisals 4 or 5 times. They were chronic refinancers. The greedy shiftless loan originators kept on calling people they had refinanced before and told them need any additional cash for a vacation or car and the stupid borrowers would not care about the additional debt they were taking on (talk about short sighted) plus they would be in year 28 of a 30 year and go back to 30 on the refi. It worked for a while when values were going up but not no more. My fax is quite, sometimes I go over to see if it is still plugged in.
My brother is a ‘Subprime’ Broker and has put together another 10 loans to go to docs in the last two weeks. Like he said to me yesterday….in my line of work business is ‘always good’.
One would think the mortgage brokers are getting more competitive than ever with the slowdown in business.
Apparently, not so. I have 2 friends in the mortgage biz and they said they are trying to make MORE commission on each deal because the deals are fewer now. In other words, bend over Mr. borrower so I can make the payments on my hummers.
Interesting stories from a local real estate attorney - this is a few of the calls he has received in the last week:
1. Homeowner is buying a home from McMillian homes and the homes is worth less than the amount from the homeowners contract. They want out the deal. Apparantly the homes are now for sale for $50k less than the contract signed several months back. The homeowner is pissed and wants to find a way out of the deal. (I assumed that the builders lowered the price on all homes not closed??)
2. Two individuals have called and are pissed off at a local Washington Mutual Loan Officer who put them into Option Arms. Now the payments are getting to expensive AND THEY WERE NOT AWARE OF what they signed. The LO told the customer at the signing dont worry about the payment increase we will work with you, your home will go up in value and you can refinance with no penalties. The atty called the local branch manager and she said “we have received several complaints on this LO and we will discipline him, however, the contract supercedes any comments he makes!”
“we have received several complaints on this LO and we will discipline him, however, the contract supercedes any comments he makes!”
Bwahahaha. Of course. These GF’s are going to get a lesson in both economics and contract law…at considerable expense, naturually.
Depends. Fraudulent inducement would negate negate any contract claim that the lender had. And since the LO is an agent of the lender, the lender cannot easily brush off misconduct by the LO. I’m not saying this happened in this instance, since it could well be that the borrowers didn’t exercise sufficient diligence in reading what they were signing. But fraud by the LO would likely negate the contract.
I stated here several months back that builders would start to get difficult on contract cancellations and it looks like it’s coming true. Of course there is a way out of the deal - default on the contract and forfeit the deposit plus win a chance that the builders might sue you for the decline in value.
“default on the contract and forfeit the deposit plus win a chance that the builders might sue you for the decline in value.”
I doubt the second part of this, aren’t most deposits considered “liquidated damages”? Or can you be sued for specific performance as well? I guess it depends on the contract.
“I doubt the second part of this, aren’t most deposits considered “liquidated damages”? Or can you be sued for specific performance as well? I guess it depends on the contract. ”
Most contracts reserve all remedies available to the builder.
Why should the owner worry about losing $50,000 on the value of his home? Even if it drops, it will go back up someday!!
(This is the logic I’ve been hearing from people too numerous to mention for the last few years who think I’m crazy sitting on the sidelines as a renter. HELLO, If it drops and returns to the same level, you still paid it in the first place. It is as though none of these people realize that, other than home equity, it takes most people several to infinity years to save $50,000.)
But they’re right…eventually it will go back up…and then some. Some will weather the storm nicely…they aren’t thr FBs we speak of.
well, what do i care if i can pay for it and it is my dream house.
“the contract supercedes any comments he makes!”
Damn integration clauses.
JTS Communities just undercut all the recently closed home buyers in the Estates at Lincoln Crossing (Sacramento area), dropping prices $100,000 to $200,000 on homes of $600,000 to $800,000. They waited for all the current deals to close before they cut prices. Very ugly. 168 homes, about 120 closed at full price, now 48 or so are setting a new standard 25% UNDER the purchase price of a few months ago. 90% of the homes were purchased by investors. Some will be underwater for years, feeding neg cash flow, some will walk away and let them foreclose. The place looks like a Twilight Zone ghost town. All these sold homes, perfect lawns, but no occupants. See http://sacrealstats.blogspot.com/2006/07/report-on-estates-at-lincoln-crossing.html
for the intitial scoop from a month ago at SacRealStats Blog. It is not pretty in Sacramento. 10-15% price reductions since Sept. 2005. And much more to come. 18,000 listings surpasses 13,500 record in 1992.
I am finding that the builders in Tampa area want to play ball and are willing to work with the signed but not closed contracts to lower prices to get them to sign - 25% discounts common. They are willing to take the hit to move out the inventory - strictly a good business decision for them, even if it screws the comps for the earlier sales. There used to be a saying “Let the buyer beware”. Those who bought at the height last year will have to eat it, and I don’t think there is any legal recourse for them. These builders will lead the market down to try to ensue their own survival and let the market take it where it may. They are in business to build houses (and give mortgages) and make money. As has been said here before, they will continue to do this in any way they can.
“‘This is a form of financial insanity,’ said Frank Fernandez, chief economist with the Securities Industry Association. ‘You are digging yourselves deeper into debt using an asset that could decline in value.’”
Oh great, now you tell me! Thanks Frank, you #%*hole!
HAAAAAAAAA!!!!!!!!!!!
Frank .. it’s all YOUR fault.
“Above all, don’t lose the house. Sell your car, sell your boat, but do all you can to hang on to the primary residence that has your hard-earned equity in it.”
Yes, all the mortgage slaves should be able to sell the cars they use to get to work and that will save them. Good thinking.
“hard-earned equity”…that’s funny.
The ‘hard-earned equity’ (money used to pay down principle)represents what - 15/20% of total book ‘equity’ in housing today? you’re right - funny.
robert campbell is convinced that bb will trim the rates eventually. but he also sees the long-term coming down as well. (i’m following a thread at sdcia)
my crystal ball may not be working as well as his and the fed may eventually ease up. but i picture an inverse reaction to happen to bond yields if bb eases, which would put upward pressure on long term yields.
so which would be the greater of two evils for property owners:
higher overnight rates, or higher long-term rates, with each wiping out a different segment of the market.
Doesn’t matter what BB does with rates. The housing bubble is toast. When the foreclosures hit the long rates will go up, if you can even get a loan.
Thank you for pointing this out. What a lot of people fail to understand is that the fed is NOT omnipotent. Once default start rising (as they are now, rapidly) and once loan losses start hurting MBS investors and banks holding junk loan paper (coming soon to a secondary market theatre near you!), you can bet those end investors will FORCE the primary lenders to tighten standards. I’ve posted about this on my blog recently (citing a recent report from FICC). Long story short, risky loan rates may very well go UP even if the Fed cuts risk-free short-term rates. The net effect is tighter credit, no more free money mortgages, and a second-round decline in home prices/home buying. Just think back to what happened in 2000-2002 to the junk bond/corporate lending market. Once the telecoms started defaulting on their loans, Wall Street wanted nothing to do with them (and banks wouldn’t lend anyone anything) DESPITE a massive rate cutting campaign by the Federal Reserve.
I read a post of yours earlier. Well done. It seems we share a common outlook for the financial markets going forward. I’ll try to stop by again.
I think the first thing that will happen is that the 20% 2nd DOT loans will dry up completely (or almost completely), forcing down payments upon buyers again, driving sales down, inventories up, prices down, and further defaults. Then, we’ll see 1st DOT lenders need to tighten as well.
With respect to yield curve, if you believe in reversion to the mean (which I do), you should expect a normalization of the yield curve. This means that a combination of long term rates going up and/or short term rates coming down is on its way. The big question is which if the three scenarios is most likely.
I think that long rates will move up and short rates will come down. I’d be surprised if we are sitting here at the same time next year and the 10-year is at less than 6%.
Rental Watch,
I agree 100%.
Anyone care to guess when the credit tightening will begin? I plan on a refi in March 07 (to avoid prepayment penalty), but I am starting to get nervous after reading this blog every day. I’d rather pay the damn penalty than try to refi when no one wants to lend.
Get an appraisal now, that will be your biggest obstacle. There was an anecdotal on this blog this past weekend about a guy in St Petersburg FL who tried to refi his $290,000 house(he thought), but the bank appraiser said it was only worth $187,000. Of course if his mortgage is less than 80% of that-$146,600 then he has no problem.
“‘The real story is not just the number of defaults going crazy, but the number of properties that are actually making it to auction, and that has increased dramatically,’ said Kurt DeMeire, CEO of a Huntington Beach corporation that researches and processes foreclosures.”
I’ve said it before this is what matters when it comes to foreclosures. When they start coming back in numbers above the historic norm then we will be in a buyers market when lenders control the market not the sellers.
I agree with you, however, you must admit the tide has definitely turned. A local realtor had an ad in Sunday’s paper as the local Coldwell Banker REO specialists. She had 5 homes listed, ALL WERE PRICED WAY TOO HIGH!
Oh, it’s way too early to even consider R.E.O.’s. the R.E.O. Managers seats across America haven’t even gotten warm yet.
And I do agree the tide has turned.
Last time around the REO’s sat on the books of the local banks and were treated like lepers. Bank regulators, Board of Directors, shareholders,etc.. all wanted them off the books at any price. I was too poor then to afford anything - All I could do was watch the big fish and medium fish buy stuff for 50-60 cents on the dollar.
Not sure if this same scenario will play out this time. Most loans are not held by the 100-500 million dollar S&L’s anymore. I assume that the Countrywides of the world will have large REO departments which will work with only the very big fish $$$’s ?
There will be plenty for the little fish. The mechanics may have changed but the end result has not. Even if the big fish buy large pools of non-performing paper for 10 cents on the dollar in order for them to realize profit they are going to have to sell the assets. There is no benefit to holding. If they buy for 10 cents and sell for 50 or 60 cents the gain realized far out performs holding and renting.
What ever happened to the concept of paying off a house for retirement . The whole idea was that after 30 years of payments you would retire around that time without worry of a mortgage payment . Is that a old fashion idea ? It’s almost like forced savings .Wasn’t that why the interest write off was given on a home ,to promote home ownership ?
does anyone else think the historic yearly average of home equity extraction (balanced by mortgage payoff) — will ever again be 0? ZERO??? i do not see why this is impossible, or even unlikely, as compared with the bubble atm attitude that has ruled.
all sorts of means will be revisted once the world’s biggest statistical anomaly dies off: boomers.
Wiz-
That’s old fashioned, I happen too like old fashion. I had a client a few years back when the interest only and option-arm mania was in full frenzy. He asked for a 10 yr interest only. I asked him why he said that he had at least 30 more working years left and he would worry about paying his off house later. In fact he thought it was a big waste of money to pay off a house. After further discussion I was told by this guy he would rather spend that extra money savings for ski trips and he didn’t really care if he paid it off. He’d let his kids worry about it. After he dies.
In some circles they call that new math. But that’s what a lot of the younger generation coming into their own think.
itulip.com link to chart predicting eventual reversion to mean (0!) for home equity extraction. i wasn’t being original….
equity extraction reversion to 0:
http://www.itulip.com/housingbubblecorrection.htm
We have no kids, but we have extended family. We do not spend lavishly. We are old fashioned. Bad us? Should we spoil ourselves just because we have no progeny? Would be nice to give some $ to charities that will make the world better . ‘Ya think??
Forced saving’s, huh? In a few years we wish we had had more of it. I owe 4 years of true equity payments on my place, and I can think of nothing moe freeing than zero mortgage payments. When I want to travel, I’ll spend those payments as I like. Gee. Such a simple idea. Somebody ought to talk it up.
The idea that the home ownership tax write-off was created to encourage home ownership is a myth. Initially interest on all debts was tax deductible because it was a cost of doing business, and there was no income tax. When the U.S. government realized it was subsidizing consumer debt, it proceeded to eliminate most interest deductions. Home mortgage deductions were one of the few that survived.
The aggregate level of consumer debt is high, but not necessarily unmanageable. That does not mean there won’t be lots of defaults, but overall the economy may survive the current debt levels fine.
Over the last 50 years debt has risen steadily, and the economy has survived. I don’t think we have found the natural “top” for what consumers can take.
Turning towards housing, I think the 100% financing is scary as it could make markets more volatile. When we tried 90% financing in the 1920’s on the stock market, it did not work out so well.
Getting back to my deflation ideas, if people knew their house would ultimately be worth less 30 years from now (in nominal dollars) consumers would probably borrow less for their houses, but they may borrow morn in other areas.
I argue that debt is not evil, it is a form of capital. It is way of funding new business activities, and a way of providing an “averaging” of income over a persons life time. I think the economy will take on more debt over time, and that this is not necessarily unhealthy.
Oliver
The problem is, historically wages have increased as well. However, in the past few years, wages for the majority of Americans have been stagnant. Further, outsourcing and increased automation have eliminated a number of jobs altogether. Without wage growth and regular income flow, debt service is not sustainable.
I guess I argue that debt growth as a percentage of household income has increased.
It seems reasonable that when debt load exceeds 100% of income we have an unsustainable situation. But we are nowhere close to this yet.
Is 50% of income spent servicing debt to high? It is not clear to me that it is. I think many people would have found 15% of aggregate income being spent on debt inconceivable 50 years ago, but here we are, and no one blinks an eye.
It appears that after the 1970’s we (Americans) stagnated in how much money they spent for housing. From 1900 - 1970’s we spent less on housing over time (in real terms). This link makes for interesting reading.
http://www.bls.gov/opub/uscs/home.htm
Isn’t high debt load a problem unless (1) personal income can be expected to significantly ramp up in the latter part of one’s career, and/or (2) inflation “erases” debt over time (which would also presumably make it a lower percentage of income)? Also, doesn’t debt become a problem far before it reaches 100% of income (i.e., you have a problem with debt when it consumes so much of your income that you can’t pay rent or buy food, much less save for your retirement)? I don’t understand theories on debt management at all, but my sense is that relatively younger people (e.g., in their 30s) are taking on levels of debt that won’t be easy to manage. I appreciate insights on this. At some point when I take on a mortgage, I’m going to have to decide what level of debt I’m comfortable with.
That’s why God invented bankruptcy.
Dear Mr. Curmudgeon,
The data series in the link I posted above shows how “essential” living expenses have changed over the last 100 years. At the turn of the 1900’s people spent nearly all of their income on food and shelter. By 1960’s only 50% was spent on “essentials” and these things were much nicer than what existed in 1900.
After the 1970’s we decided to spend more of our money on housing. Partly that reflects the trend of moving to bigger houses, with many bathrooms, but partly that reflects the belief that houses are a great investment.
A number that is thrown around quite a bit, is houses should go up about 1% faster than inflation over the long haul. I believe this number was derived by looking at east coast housing markets over the last 100 years.
Interestingly research in Europe has shown house prices may have deflated about 1% a year over the last 300 years in real terms.
So what does this mean. In both cases housing over the long haul has not been a great investment. They have been good to folks who bought with fixed rate mortgages and then lived through high inflation, because their debt disappeared, but in real terms their gain has not been good.
So how much debt to take? I can tell you my view, which is well outside of the norm. I don’t view buying a house as an investment, I view it as hobby. I would buy (or build) a house that I really want to live in. This is a truly bizarre concept for most people I talk to, but then I can’t understand how they can stand to live in the standard $hitboxes they buy.
So if you take my philosophy, spend as much as you would feel comfortable for a hobby. Remember it is a hobby that saves rent, but has expenses and taxes.
I hope that helps.
Oliver
Slightly off topic, but I heard an interesting number the other day, that 55% of credit card users pay off their credit cards to $0 every month. Strangely, I expected a smaller number, but 45% of the population carrying 15%+ credit card debt on a monthly basis is a scary thing.
Which illustrates the problem with looking averages, like: the average American household has $10,000 in credit card debt. This debt is highly concentrated in a few households with staggering amounts of debt.
Hey folks. First time poster. I am a 32yo DC-area working man and for the last few years, I’ve been saying to myself (and my family and friends ad naseum), “This just doesn’t make any sense. How can an ugly 2-bedroom rambler be worth 10 times my income?” Well, thanks to blogs like this one, now I know that I’m not crazy after all; it’s the real estate market that is crazy.
Anyway, I wanted to do a couple things with this post:
1) Say thank you to all who post their insight and opinions here. Consider this one potential FB who has been steered clear thanks to you all. Also, of course, big thanks to Ben for starting and maintaining this here site. A tremendous resource, and much more educational and timely than any local paper or national news network. The blog revolution is just hitting its stride.
2) Okay, so let’s say a major stock market correction is in the offing. What to do with my 401k, which is 75% large domestic stocks–including some in manufacturing and housing (like Countrywide)? Is there any sense in transfering my 401k out of stock funds (and lose 4% on deferred loads) into bond funds to avoid the crash…and then buy back in after it happens? Or are bonds gonna tank too? International funds a better bet over the next 3-5 years? Better enough to make up for 4% transaction costs? I’m a looong way from retirement so maybe I should just ride it out, but I’m a little spooked at some of the predictions I see being made here and elsewhere. Any investment advisor Web sites to learn from? It’s like I know the train is coming, but I don’t know which direction to jump off the tracks.
3) And lastly, I just wanted to report that here in Silver Spring, MD (suburb of DC) the condos are still going up fast and furious. I can see unfinished frames out my office window. Currently (and for the foreseeable future) I’m renting for $1000/month. Glad I won’t be holding a $300k mortgage on a $200k condo when the bubble is completely deflated.
(If this post belongs in a different thread, sorry. I can re-post elsewhere if I need to. Thanks!)
I’ve stopped funding my 401K stock selections in favor of simply building a large cash postion in a 401K MMF and waiting for the potential drop to occcur. I will at some point start transferring the cash into my stock funds but that will be pretty far off in the future is my guess.
I also liquidated my 401k and the rest of my stocks 6 months ago in to a mmf…You cant time the market, but if it smells/looks like a turd…
Most of my retirement accounts can not go short (but I have bear funds in a Roth).
My retirement accounts are mostly cash with some foriegn and energy. We may get a bond signal before the Fed starts loosening again.
I am making good money on buying puts on housing related companies, especially builders. The housing bubble account was up 20% last week, about $100k. I think that there is a good chance for another major down leg on the builders and lenders during the next 6 weeks as sales and earnings continue to deteriorate.
what is an mmf - money market fund?
how does that work? do you take a penalty by cashing out?
I am going 50% PIMCO bonds and 20% international funds, isn’t that a decent hedge? Any advice appreciated. I got $54k already from my 2 years of 401k savings.
Don’t try to time the market without a system. Buy Ben Stein’s book, “Yes, You Can Time The Market”. Or there are many others. Educate yourself, don’t make big financial decisions based only on what you read here.
There are some funds that your 401K may be able to invest. The funds that I invested in and that are suitable for MY needs are USERX, UCPIX, MERKX. I do not care if I make money on the funds as long as I do not lose. As I stated these funds are suitable for me, they are probably not suitable for anyone else. There are an incredible number of ETF’s that are bearish.
Difficult to time the stock market. Does your 401K offer Bond funds? Or money market funds? Taking half out of stock market and going into a bond fund might make sense now. Bonds typically do well in recessions. I think it looks like a recession but I might be wrong.
In my 401k, I just liquidated my underperforming bond fund and put the $ into MMKT. Bonds are skitterish now, will drop with another rate hike, and be very afraid of another rate hike for the near-term foreseeable future. Doubled the yield, but will probably put some $ into state-tax free bonds or treasuries after the FED’s next move.
To Fiver: My 401ks and IRAs are all in stock mutual funds. About 20% of which is international. I am 47. I don’t anticipate retiring before 67. There has been no 20 year period since 1926 when the broad market finished lower at the end of the period than at the beginning.
As for my non-retirement part of my investing, I invest verrrry conservatively, as if the sky is going to fall. T-bills, savings bonds, municipal bonds, money market, gold, and platinum.
Thanks to all for the advice. I’ll look into some of these suggestions.
Unfortunately, my 401k program does not offer a MMT. There are a couple bond funds available, but they have been performing terribly for the last few years. Of course, maybe that means it is time to get in on them!
If you’re a government employee, get all of your TSP money out of the bond fund: It is heavily invested in Mortgage Backed Securities.
Wizard, I would like to know the same thing. I bought this place in 2000 put 15% down because that’s all I could scrape up. Interest was 8 % then I refied in 2003 for 5.75% took nothing out just wanted a lower payment plus put 10K on the principal to get out the PMI racket (I HATE THAT PMI Stuff it is salt on the wound!). Now for the reason for this post; most folks I know said I was nuts for NOT getting money out at refi, I think not, then or now. Same folks said I was a nut to put the 10K into the principal, again I think it was the right thing to do. The same folks and others think I am totally insane for paying an extra 500 a month to the principal of the loan. My reasoning for doing all of this is I WANT TO HAVE NO MORTGAGE PAYMENT AT ALL, NONE!
When I asked these people what I should have done with the money they said, ” Buy investment property” as the No.1 thing to do. Next was remodel, the last one, those in the know said to do was go on vacation! My reply to all of this was when, I pay more on the mortgage it is the same as saving money because I OWE LESS. If I were to save the money in a CD or other type it Will Not make even close to 5.75% (until this year). Some people got it but others tried to make me believe the stupidest thing I ever heard that, ” debt is wealth” At one point in the conversations we both had the “deer in the headlights look” Me with debt is wealth and them with my money is working harder for me by having me owe less.
I still don’t know if there is a right or wrong these ways of thinking but I do know I Hate making that payment. I also know I am less than 70 payments away from NOT HAVING TO MAKE ANOTHER ONE!
And then comes the bad part. All of your equity-to-debt friends will find your mortgage-less respondibility unbearable. Some will surely be out on their ears, and some will be paying off debts that crush them slowly into fine powder. You will be whole, but I fear like me, without some of those former friends. And it’s already starting to happen.
Turnoutthelights,
Those former “friends” were not really friends. You’re better off without them.
If you hang on to these friends you may want to purchase a sleeper sofa.
Fl to Pa, you are doing the right thing…Nothing has changed. You should strive to pay off your mortgage.
Paying off your mortgage means no interest rate tax deduction. What bracket does that put you in? I’d rather have a rainy day fund and 50% equity in my house, then to give away in taxes what I saved by paying off the mortgage.
The only time that analysis makes sense is if your mortgage deduction actually moves the bracket that you are in significantly. You either pay the money to the bank, or the government–frankly I don’t care if my money goes to the government and not Countrywide.
If you have a home free and clear, you have your “rainy day fund” in form of the home equity that you have, you can borrow money against your home at any time–I can’t think of such a tightened lending market where you couldn’t borrow 50% of your home’s value in a very short timeframe.
With 50% equity and a 50% “rainy day fund”, you are essentially paying every month for the benefit of having instant liquidity, rather than liquidity in the time it takes to document a mortgage. In normal times, after-tax interest earned on your “rainy day fund” will be less than the after-tax cost of your mortgage (the reason you are paying for your “rainy day fund”).
The tax deduction does not make you money, it only reduces the ammount of money you lose on the interest. If your income tax rate is 33% or so, then you’re really paying 4% on your 6% mortgage. But you’re still PAYING 4%.
What grush said! People who think the mortgage interest tax deduction gives them a net gain shouldn’t even be signing mortgages - they don’t understand enough about finance.
My home’s been paid off for several years now - there’s Nothing Like It. I own a 1600 sq. ft. condo (bought it from original buyers, not from the developer, all units owned by folks who want to live in a condo, not flippers) in Mpls./St. Paul area and my monthly housing costs would be covered by one week’s unemployment check - I’m more secure by far than I would be with a mortgage or as a renter.
And I have a no-cost line of credit on the place that I never plan on using, but it’s there if there’s a real emergency of some kind.
I like your mindset–when I look down my Quicken accounts, I only have one red account–my one credit card that I pay off on a monthly basis. Really, the only time that having mortgage debt makes sense is if you have VERY good opportunities to earn significantly more than your interest rate in an investment.
Even then, I would argue that the peace of mind knowing that you have no mortgage payment might be worth the return you could earn for essentially leveraging your investments. I’m personally planning on buying with 20% down and a 15-year fixed rate loan–I’d love to have no mortgage.
Agreed. Remember though, if you borrow money to invest, you’re accepting the risk of the investment plus the risk of borrowing to get the return on the investment minus the cost of borrowing. That means that you’re accepting a much higher risk for a much lower return than the rest of the market values that investment at.
Generally agreed. That’s leverage for you. I would amend your statement a bit though. You are not getting a “much lower return than the rest of the market values that investment at”. For investing $0 (the bank is investing it, essentially), you are earning significant returns, if the investment(s) are successful. It’s leverage–more risk on the downside, more reward on the upside. That’s the basic characteristic of leverage.
If you have significant opportunities, and lots of them, the investment diversification available may make sense to slow the repayment of your mortgage. But at the end of the day, it’s a personal decision based on how risk averse you are. I’m pretty risk averse, so I’m going to have less debt . . .
FLtoPA ….I always like to pay down mortgages faster than the regular schedule because I just don’t like debt .I just wish we had more people in America that thought like you . That’s a great position to be in only having 70 payments. I know a number of people who do not have mortgages and they are really enjoying retirement because of it . I guess it all boils down to what makes you feel comfortable .
I did the same, but started with an ARM and a 10% second from the owners’ family (owner died.) First goal was to pay off second; next eliminate PMI. Done in the first two years; after that just extra payments chasing the rates down. With the third refinance, it was so much easier to pay at 6.675 than almost 10%
Paid off the 30-year loan in 17 years.
I hate to be the bearer of bad news but there is one thing that could solve most of this financial mess that we are in. If our current administration would allow the 4.5 trillion dollars earmarked for the US treasury to enter the treasury this could save any major shocks to the economy. IMHO I think most of this is planned not to save the internet bubble’s poping, but it was created with malicious intent to further transfer wealth from mid levels of society up to the top with asset price declines.
These price declines may come from two macro events as I see it.
1. Now that the Japanese Carry trade is grinding to a halt, the liquidity markets will freeze up after a few more BOJ hikes. Can we say over time that were all Fukui-ed (I love that guy). This is the current source of American asset price appreciation. The BOJ already showed their willingness to test the liquidity limits this may by curbing bankreserves higher, and that was the real cause of the worldwide stock market plummet over the past few months. (Look for more of these big plummets as hindenburg signals were popping up all over the place in May and June.) YOu can already see the money comming uot of the US bond market as the 10 year was up to 5.00 yield today from 4.96 on fri. Even when the Israel and Lebannon skirmish starts up again next week, don’t look for people to run back to the dollar for saftey. Long Yields had their hiccup, but now they are really going up as the feds stopped rasing rates, and everyone is crying inflation. This scenerio is close to becomming true, and then Zingo its Volker like tightening from here on out.
2. Is the money entrusted by Regean to Ambassador Leo E. Wanta from destabilizing the Russian Ruble in the 80’s. This 27 trillion if withdrawn from the international conglomerate of banks that received it through illegal diversionary techniques by setting up false companies and trusts by the last 3 administrations will cause a major liquidity freeze in the international markets. The 27 trillion is not the real problem. If anyone who knows a bit about fractional reserve banking, you will soon realize that our banking system which is set up more like an options market will collapse on itsself because an estimated 500-700 trillion dollars in (fractional reserve dollar) loans will have to be recalled due to the mother of all margin calls as these banks wont have nearly enough to cover their reserves.
It will surely be an intersting rest of the year.
Oh yeah and the Iranian Oil Bourse is due to open in September. This combined with the major dollar overhang in Japan, China, and Saudi Arabia, may cause massive Weinmar like inflation as dollars are repatiraited back to the US as thee countries dont want to hold depreciating dollars. Even Italy announced that they are moving 10% of their reserves out of the Dollar.
AYE AYE AYE que paos con esto pais. I dont know but I need to go eat mas maiz because it will all be turned to ethanol soon and there will be none to eat hahahaha
Just get out of debt and save somthing. May not be dollars, Euros, or FIAT at all, but you’ll want somthing instead of debt.
good luck
Don’t worry about the Iranian Oil Bourse. You guys stopped the Iraqi Oil Bourse, and you guys can stop this one too.
27 trillion? that is a lot of money, nobody even noticed, being sloshed around the world.
IMHO I think most of this is planned not to save the internet bubble’s poping, but it was created with malicious intent to further transfer wealth from mid levels of society up to the top with asset price declines.
additionally, it’s a perfect opportunity to eviscerate the federal social safety net the republicans have hated since fdr. grover norquist may get his wish afterall: “My goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub.”
Maybe, but these are the types of results when our currency is countroled by a bunch of private bankers, under the guise of working for the “FED”eral government. I always wondered why they called them the FED…………….oh well, maybe someone will tell us, but for now let them wreck the whole housing market..
Ja & Linda,
“Even Italy announced that they are moving 10% of their reserves out of the Dollar.”
Actually it was just stated they had rotated out by 25% ! after saying publically 10%…
..and yes, the goal is to squash the minions down to a worldwide wage level ,while dismembering the SS, pension systems we have in place…Perhaps even the whole Dollar peg. We have trillions in Gold,and would be an ineteresting turn if the dollar went away while a hard backed currency arose? …why stop at a Euro. they are planning for a world currency as I see the future. Got gold?
If we were to peg gold to our dollar debt - our gold reserves would have to be worth $14,000/ounce. TANSTAAFL
Before they pegged the dollar to gold they would confiscate it. This government is a crime family.
I’m curious as to how you arrived at this figure. Which money supply did you use? M0?M1?
What do we say to counter those who say a HELOC or Refi is good because you can write it off on your taxes?
How do we respond to that argument. If you are disciplined enough to not spend, then it sounds great, especially if you plan on paying it of faster, but what happens when you see that credit card with no limit and pull it out again and again. Now you are right back to where you started and you still havent paid down the Heloc.
I guess you just pile on more debt… or that’s what they are doing.
If we do hit massive inflation, borrowing all the way to the eyeballs on 30 year fixed loans is the correct thing to do.
Place the money into something that will withstand inflation pretty well. Hey presto in 20 years you will have made out fine.
Oliver
Just an FYI, you cant deduct all of the interest you pay when you refi if it wasn’t to substantially improve your home. This deduction amount is limited partially by the FMV of your home. So if someone refi’s and then their home declines in value below the refi amount, the deduction is limited. I believe that this is an area that is going to be ripe for the IRS to audit in the coming few years. There has been a lot of guidance and commenting by the IRS on this subject (meaning that the IRS doesn’t wnat people to be able to later say that they didn’t know, when the deduction is disallowed and penalties and interest are assessed for underpayment of tax).
And most people don’t realize that the deduction is limited because most tax preparers dont do the calculation, they just “assume” the interest is entirely deductible. As well, most lenders dont reveal that bit of info, if they even have been in the business long enough to know about it.
“he expects to see more bank-owned homes after the auction process is complete. ‘Personally I think you’re going to see a lot more bank-owned properties’”
I just came from my local bank and they have a wall with local houses that have been reposesed and they are trying to sell.
Do they have a website address?
(I’d like to see all deductions and credits eliminated and instead have a very low tax rate on 100% of income. It seems to me that by ding this, the tax code would be simplified )
The did this, for the most part, in 1986. And immediately went back to creating more deals. And there are more deals in every boom, higher rates in every bust. Property taxes and sales taxes are not better than the income tax, at least here in New York, the Vampire State.
oh, I agree it wouldn’t work, because the govt would always give in to the special interests, lobbies, etc.
What I meant was, I’d like to see it without the reinstatement of other taxes/fees, etc.
It just bugs me to know that people are working off the books, doing side jobs, etc.
I noticed this trend lately.
1) Houses are listed for less then were purchased
2) Houses are listed for less then 06 assessment.
3) Days on market have exceeded 6 months
4) Personal property included in purchase price
5) There are 55,000+ properties on the market in Massachusetts (single,multi & condo’s)
It’s getting ugly in the bay state plus the tunnels are killing people.
I’m glad Ben put up this topic. I’ve been posting information like this on AOL message boards for the past two years, that people were counting on real estate for their retirement instead of 401ks and had an awefully low amount of money in 401ks, on the average. It’s all their fault. They are greedy and trying to sell to a greater fool, bail out, and laugh at the fool for being a sucker. I’m hoping real estate prices in San Diego, LA, Las Vegas, Phoenix, Florida, New Jersey, and all the other bubble places return to the 1999 levels.
“financial insanity”
We all know it. The only question is whether, in the wake of mass destruction we’re about to see in the consumer debt implosion, Congress will actually try to reform the system to prevent such insanity that deeply hurts our country in the future or listen to the FNMA and Mortgage industry lobbyists who are $chmoozing Members daily.
Don’t bother. It’s all coming to an end in 8 days.
http://worldnetdaily.com/news/article.asp?ARTICLE_ID=51445
Let us hope the kid gloves treatment by Bush (a fellow religionist) toward Islam are removed and we grant Iranians their wish to put them in heaven. Let us turn them to vapor.
Well, that is a little harsh…
Is it just me, or am I the only one who thinks this “truce” or “ceasefire” or whatever it is that they are calling it, is worth less than the paper it was printed on?
Like, really, what is the incentive for the Israelis to stop? For Hezbollah? And why are the Lebanese returning to their homes? I’m not saying we should break out the popcorn and settle in for a good show, but I do believe this ain’t over…
Whatever country vaporizes others legitimizes its own eventual vaporization.
Not unless that, which is vaporized, finances world terror for years (Hezbollah) and has a rogue leader and is going after the nuclear bomb. If you cannot see any difference between the United States and countries such as Iran and Syria, you have a serious problem. It’s a liberal disease called cultural relativism.
There’s a difference, but the US is far from guiltless, and has a long history of oppressing others abroad through direct military force and through the actions of puppet dictators (e.g. Shah of Iran, who the CIA placed in power after helping to overthrow a democratically elected govt). There are good reasons why many people hate the US, and it’s not because they “hate freedom and democracy.”
Current US foreign policy seems to be predicated on the premise that no country has the right to arm itself against an attack by the US - a curious and morally bankrupt position.
If you agree that the world has now become a tripartite oligopoly, name the players!
i don’t know any americans worried about japan getting the bomb. do you???
“Whatever country vaporizes others legitimizes its own eventual vaporization.”
then you should continue renting for the duration. it won’t be that long, i’m afraid.
sounds like the rapture crowd.
“sounds like the rapture crowd.”
ok. you can choose: the rapture crowd or the martyr crowd. i choose the one with the least restrictive dress code.
Crash,
I posted that on another thread yesterday. Did you pick that up on Glenn Beck’s site? He’s a howl!
I also want to know why the Dearborn, Michigan rally didn’t make the press? Just the fact that they won’t cover it makes you feel manipulated and wondering WTH is going on.
Over the last 5 years, I invested a lot of money in tax avoidance schemes, including municipal bonds. I diversified in different tax avoidance schemes, figuring that some of them may be closed, while others will still be lucrative. I have the realistic opinion that there is a bigger voting bloc of people who want others to provide for them or to fix other people’s mistakes. I figure my taxes will still go up, and we will see once again the maximum tax rate go up to the confiscatory 70%. After all, this is the road to serfdom, as Hayek coined. I don’t recommend sudden moves by you all out there, since you may be vulnerable to the next bubble. I do recommend investing in several areas: precious metals, long term individual value stocks paying dividends, T-bills, municipal bonds, and savings bonds. America has become an ugly country of irresponsible people (in general) - of course I don’t mean you all here who read this. Call me bitter, but I think I’m right. We have a small percentage of the world population but hog up a great deal of the resources and waste them. No wonder the rest of the world hates us. No, I don’t hate America, I love America, for the minarchist past, before people got infected with the socialist disease. I voted Libertarian since I was old enough to vote in 1979, I even held a minor political office and was the campaign manager of a state legislature candidate. I tried to persuade people to stop being pigs at the trough of taxpayer money and gave up after several years. Gave it my best shot but I had to look out for number one and provide for myself. If I lost my job today, I would not apply for unemployment benefits. I have enough $ to last me 8 years without a job.
soon hilary care will be here and we’ll be the EU !
W spent it all,but the socialist health/welfare folks will demend their “share” in 08
“Another couple in their 50s had begun to spend beyond their means…”
Why not? Living beyond one’s means is now the American Dream.
The old Dream–work hard, it’ll pay off–petered out in the 70s. Decline began there with the end of the post-war boom, advanced through the massive deficit spending of the Vietnam war and continued with the wrenching structural changes in the post-industrial economy.
Since then, one mania after another: the merger mania of the 80s, the stock bubble of the 90s, the 00’s housing bubble.
The result is a hideously transformed society in which a mutant underclass is armed to the teeth, a pathological white middle class props itself up with equity vampirism, and a ruthless oligarchy finds even the record wealth creation of the 90s insufficient to its appetites. Our largest national employer is Wal-Mart, a company whose full-time employees in some states require welfare and over whose doors should be raised the words Arbeit Macht Frei.
All this at the worst possible moment as oil prices soar, our debts mount, an unsustainable war drags on, crises in medicare and pensions loom, and our good will is everywhere spent.
The crash will come and be Spielbergian in its FX. Last time the remedy was called the New Deal. What will be the euphemism for socialism next time when it is desperately sought by a society unable or unwilling to understand that capitalism is a means, not an end?
Nice to hear the variety of thoughts and opinions…….but, in the end, there is no solution for this mess. Sometimes you’re better tearing the old house down and starting anew, rather than trying to fix it. Who knows what this will morph into. I do know that change, extreme and necessary change, is usually only implemented when all options are exausted. We’re there.
what do you mean? break apart this country and system. then start all over again?
There is such a thing as “original intent”. Our current government bears little resemblance to that which was originally envisioned.
I’m all for the Carolinas seceding.
There’s always been a lot of advertisements for mortgages and home equity loans (i.e. people wanting to lend you money against your home). That’s fine.
However, there seems to have been a significant uptick in advertisers peddling mortgages as investments. They imply that you can make 12-14%, or even as much as 24% “without the risk of the stock market”. (Yeah right. Just “with the risk of bad 2nd and 3rd home loans”.)
Anyhoo, am I alone in thinking this is a little spooky? They keep selling mortgages in the sense of loaning money to people, and then they turn around and try to sell the titles to people. Hey, if the investments were so great, why are they peddling them to radio listeners?
It seems the secondary market might be getting weak if they are resorting to radio spots to push these loans!
I hope to hear/see some of these ads. It would definitely mean the secondary market is about to implode, IMHO. Good to hear!
I bet they are selling junk mortgages as fast as they can.
Always follow the money. What will do the most harm to the most people. An old commodity broker axium.
Since 70% of the US owns homes, they have an asset that will do well in inflation. Yet savings are -1.5%, so very few people have cash. Hmmm.
Maybe cash will be “Queen for a day”- ( a late 50’s show ).
The logical expectation is to have the most people lose the most amount amount of money is deflation. Just look at all the toys everyone “owns”. Think of all the pension plans with “REITS”, all the insurance companies with all the real estate. Banks with almost no reserves. It’s the perfect storm.
What frightens me is some minor seemingly small event may very well create a cascading “financial” failure.
Oh well, my thoughts seem to fit perfect to the ending of these postings.
I did a search for the word “trillion” and did not see it used in this context, so forgive me if it’s already been asked as I didn’t have time to read the whole thread yet.
“…the mortgage debt on homes increased 15 percent to reach $1.14 trillion, the SIA found.”
How does this compare to the numbers we always see quoted about a trillion dollars a year in ARMs being recasted? Are they saying the total loan value of all mortgages in the US is only $1.14 trillion? How can these two “facts” jibe?
That is a typo. More like $10 trillion.
Thanks, and I like your philosophy.
“Mihalka says the financial pressures will catch up to more people. She recounts the stories of two clients: One couple in their 30s, each with a good income, decided to buy their dream home in Pleasanton. They mortgaged themselves to the hilt with an interest-only loan. But they also became saddled with dramatically higher property taxes, which forced them to begin paying the dreaded alternative minimum tax. ‘They are cash-poor,’ Mihalka said.”
Actually, they’re simply poor! (Not “cash poor”). Maybe even piss-poor!
If you spend more than you make, and have no savings, you’re poor! And of course, with the i/o loan they’re simply renting their house. (And even if they weren’t, only a Fool considers his primary home to be part of his “net worth.”)
And how can you have a dream home in Pleasanton? Let me guess–they have a 2 hour commute each day for some bay area job. If they weren’t so in love with their ticky-tacky house, they’d realize their quality-of-live would be better if they rented near where they work and had a short commute.
(No sour grapes here, I own my home in Sunnyvale.)