October 3, 2006

Number Of ‘Cost Burdened’ Grows Sharply: Census Bureau

The Census Bureau has a report out. “The burden of housing costs in nearly every part of the country grew sharply from 2000 to 2005, according to new Census Bureau data. The numbers vividly illustrate the impact, often distributed unevenly, of the crushing combination of escalating real estate prices and largely stagnant incomes.”

“‘Housing prices have gone up much more than incomes have,’ said Christopher Jones, vice president for research at the Regional Plan Association in New York City. ‘Clearly, you can’t sustain that sort of imbalance over the long run. There’s only so long that housing prices can go up without sustained increases in income to support them.’”

“In Clifton, N.J., the percentage of mortgage holders spending at least 50 percent of their income on housing rose to 27 percent in 2005 from 12 percent in 2000, a 134 percent rise. In New Britain, Conn., the group paying at least 30 percent more than doubled, rising to 57 percent of people with mortgages, up from 27 percent.”

From New Jersey.com. “People’s pocketbooks didn’t benefit from the boom. Between 2000 and 2005, median household income fell by an average of 13 percent in Passaic County, when adjusting for inflation. Nationally, incomes dropped by 2.8 percent during the same period. But they still bought homes. The number of new mortgages in Passaic County increased by more than two-thirds between 2000 and 2005.”

“Many turned to exotic mortgages in order to afford their home. New Jersey had one of the highest concentrations of these nontraditional mortgages, according to a federal Government Accountability Office report. ‘These people were totally taken advantage of by programs that weren’t for them,’ said Jenna Triano of a West Paterson company that assists those on the brink of foreclosure.”

“Income ratios have also been stretched. Whereas lenders have traditionally advised clients that their monthly mortgage payment shouldn’t exceed 36 percent of gross income, some lenders have pushed that to more than 60 percent, Wendi Nastasi said. ‘Every day there’s more and more foreclosures being filed,’ said Charles Barbarow, a Totowa-based Realtor.”

The Chicago Tribune. “A growing number of Chicago-area residents who spend more than a third of their gross income on housing, crossing a traditional threshold of affordability, according to a new U.S. Census Bureau report.”

“For Maria Salvedra and her husband, a soaring property tax bill, included in their mortgage payment as part of an escrow agreement–drove housing costs beyond 60 percent of their monthly income. ‘We are thinking of getting rid of the house and renting somewhere else,’ said Salvedra.”

“Janet Smith, a University of Illinois at Chicago demographer, said more people have been signing on to mortgage loans they can’t really afford. ‘There are people who are paying four or five times their [annual] income,’ for a home, Smith said. Alternative loan packages, such as interest-only loans, allowed people to qualify for much-more-expensive homes than traditional guidelines would have, she said.”

The Sun Sentinel. “One in five Palm Beach County homeowners last year spent at least half their monthly gross household income on housing, according to census figures released today. That’s up sharply from 2000, when about one in every eight homeowners spent half of their monthly income on such costs.”

‘”I’ve had to tighten my belt. We don’t go out much,’ said retiree Ed Fuller, who bought his house west of West Palm Beach three years ago. Fuller has a $2,200 monthly mortgage payment, about $100 more than his monthly income. He draws from his 401(k) account to make ends meet, but knows that money will dry up before his mortgage is paid off.”

“Ed Kessner of Kessner Financial Inc. in Boca Raton said federal guidelines of devoting between 28 percent and 36 percent of income to housing costs are passé. ‘Most of the lenders I’m working with are allowing people to go up to 40 percent, 45 percent and even up to 50 percent if they’ve got good credit,’ Kessner said.”

“Oregon homeowners are spending a greater amount of their income for housing than at the start of the decade, according to Census Bureau data. ‘People are willing to bet more of their incomes on housing if they think that housing prices will rise,’ said Portland economist Joe Cortright, adding that people bought for ‘offensive’ and ‘defensive’ during the housing boom that followed the dot-com crash.”

“‘It’s offensive if you think, ‘Hey, I’m going to be able to sell this and make money at some point,’ Cortright said. ‘The other thing is defensive: I don’t really want to buy now but I better buy now before prices rise any more.’”

The Contra Costa Times. “The Bay Area is home to some of the nation’s highest housing values, a higher percentage of them are stretching to afford a home here than in most of the rest of the country, new census figures show. In Pleasanton, which the Census Bureau recently ranked as having the wealthiest households among cities of 65,000 or more, nearly 43 percent of homeowners were paying what the federal government considers too much for their housing.”

“Families who pay more than 30 percent of their income on housing are considered ‘cost burdened’ by the federal government.”

“Lenders and real estate experts said home buyers in the Bay Area are used to paying more for housing than home buyers elsewhere. They ‘are going to make the lifestyle change necessary to own a home, which may mean that 50 percent of their income goes to their mortgage. … (They) don’t go out to dinner, they don’t go shopping anymore. It’s about changing their lifestyle,’ said Andrea Lanier, a mortgage broker in San Mateo.”

The Modesto Bee. “Anna Coley said her family is in their dream home now: a new $505,000 five-bedroom house with 2,833 square feet bought this year in northeast Modesto. ‘It is a struggle, and money is tight,’ Coley said. She and her husband pay $2,325 monthly for mortgage, property taxes and insurance, plus hundreds more for electricity, gas, water and sewer. ‘We could move to Texas or Arizona and live for a lot less, but we want to live here.’”




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222 Comments »

Comment by Ben Jones
2006-10-03 09:37:12

‘Martin bought her corner lot house 15 years ago, and her mortgage payment seemed manageable at the time. But she eventually re-financed to pay for repairs and remodeling. She put stucco on the walls, remodeled the kitchen and enclosed the garage. Then insurance rates started to climb. Now, her $1,500 mortgage payment eats up more than half her monthly income as a real estate paralegal. ‘I stay home a lot,’ said Martin. ‘We don’t go out for lunch. We don’t drive a lot.’

‘To earn more money, she went back to school to pursue a title license for real estate transactions. ‘I’m trying to get into a pattern of making more money,’ she said.’

From the Contra Costa link:

‘Michael Singer bought into a duplex in Oakland in March of 2005, his first home purchase. The research scientist said he pays more than 30 percent of his income for his home, and that it impacts his overall budget. His home costs leave him no extra money for savings. ‘It’s pretty tight,’ Singer said.’

‘But Singer sees his share of his tenancy-in-common as a savings plan. He hopes to sell next year and buy a bigger place of his own. ‘I basically transferred my savings money into home equity, and I’m hoping to reap the benefits of that,’ he said.’

Comment by santacruzsux
2006-10-03 10:01:28

‘But Singer sees his share of his tenancy-in-common as a savings plan. He hopes to sell next year and buy a bigger place of his own. ‘I basically transferred my savings money into home equity, and I’m hoping to reap the benefits of that,’ he said.’

So that’s what happenened to cause the savings rate in this country to go zero and sometimes negative in the last few years! A house is not a savings account in this financial environment. Blaaarrggh!

Comment by IL_NC_IN_CA
2006-10-03 12:50:02

I think this is spot on. Anecdotally, I’ve heard the same thing from friends in a dozen states - there’s no pattern - it’s the same in red, blue, east, west, midwest etc states.

 
Comment by GH
2006-10-03 14:18:51

This seems almost designed as a vast money transfer from the middle class to ?? Once the value is all gone from wence it came, what will be left?

 
Comment by Paul in Jax
2006-10-03 15:56:38

A house is not a savings account in any financial environment. Methinks still a lot of lessons to be re-learned, pseudo-knowledge to be undone.

 
 
Comment by joesixpack
2006-10-03 10:56:51

‘I basically transferred my savings money into home equity, and I’m hoping to reap the benefits of that,’ he said.’

As my grandmother used to say, “if you hope in one hand and poop in the other, which hand do yo think will fill up first.”

Comment by IL_NC_IN_CA
2006-10-03 12:50:34

:)

 
 
Comment by ddinoc
2006-10-03 13:36:49

“Martin bought her corner lot house 15 years ago, and her mortgage payment seemed manageable at the time. But she eventually re-financed to pay for repairs and remodeling. She put stucco on the walls, remodeled the kitchen and enclosed the garage. Then insurance rates started to climb. Now, her $1,500 mortgage payment eats up more than half her monthly income as a real estate paralegal.”

Stupid, stupid, stupid! When she bought in 1991, interest rates were in the high 8% to high 9% range. If she’d done a better job managing her finances (an emergency fund for those unexpected repairs? Resisted remodeling unless she had the cash to pay for it?), she could have refinanced her mortgage in the past few years (NO cash out) at a rate in the low 5%’s and be paying much less than her original payment. If she’s old enough to have owned her home for 15 years, she’s old enough to be needing to prepare for retirement. The way things look now, she could be a slave to the house for the rest of her life.

 
 
Comment by lunarpark
2006-10-03 09:45:18

“Anna Coley said her family is in their dream home now: a new $505,000 five-bedroom house with 2,833 square feet bought this year in northeast Modesto. ‘We could move to Texas or Arizona and live for a lot less, but we want to live here.’”

I would move to Texas, Arizona, just about anywhere, before I would live in Modesto - especially with a mortgage on a $505k house.

Dream home + Modesto, does not compute.

Comment by txchick57
2006-10-03 09:47:08

I find that story obscene. Look at these people. They can’t be even 30 years old, low end jobs and a half million dollar house. I get so disgusted when I read stuff like this. I know lawyers twice their age who never spent that much for a house and wouldn’t dream of it.

Comment by Craven Moorehead
2006-10-03 09:56:05

Like, it’s a new paradigm, dude!

 
Comment by lunarpark
2006-10-03 10:02:18

One of the girls in my office bought a house in Modesto last year. If I remember correctly, the house was around $400k. She and her husband have two young children and a combined income that is easily under $90k. They had very little down payment money. Modesto is a 90 mile commute from where we work. I do not understand these people. But she is a very proud “home owner.” Meh.

Comment by Reuven
2006-10-03 10:19:48

I guess because I grew up in NYC, I don’t have this mentality. I’d be happier with an apartment 5 minutes from work. How much stuff does a person need? Nothing is worth spending 3 hours in the car each day commuting.

And, not having a car (I didn’t in NY) or a yard to keep up is like a feeling of FREEDOM!

I could walk from my apartment to the subway station…go to JFK, hop on a plane, and go anywhere without worrying about parking or mowing my lawn, etc.

If I needed a car to take me elsewhere, I’d take the subway to the Path train, go to NJ and rent one.

With our house in Sunnyvale, when both of us are away, we have to hire someone to drive by the house and make sure mail, packages, etc, get cleaned up (we have a slot, but there’s overflow…), and make sure the house is in tact, etc.

In NY, I had the building super get my mail (for a small gratuity) and keep it in a box for me until I got back.

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Comment by Bill in Phoenix
2006-10-03 10:58:50

“I guess because I grew up in NYC, I don’t have this mentality. I’d be happier with an apartment 5 minutes from work. How much stuff does a person need? Nothing is worth spending 3 hours in the car each day commuting.

And, not having a car (I didn’t in NY) or a yard to keep up is like a feeling of FREEDOM! ”

You got that right! I’m soured on materialism. I think what made it was looking at all these vehicles 2 times, perhaps 3 times the cost of what I paid for mine, driven by people half my age with incomes a fraction of my income. I get my joys from being free and unemcumbered - kind of contradicts my extreme capitalist (Austrian economics) viewpoints though. It makes me laugh when I drive past these people, that I can buy a new Porsche 911 with cash if I was idiotic enough.

 
Comment by Lex
2006-10-03 11:10:37

I lived in Manhattan, too. The current cost of the conveniences mentioned is about $1000 a square foot.

 
Comment by Jaz
2006-10-03 11:53:23

And, not having a car (I didn’t in NY) or a yard to keep up is like a feeling of FREEDOM!

Stop being so cruel to us all. Wasn’t it Orwell who described a regime in which “Slavery is freedom”? Yes, it seems like owning so much stuff in America really means the stuff owns us. OTOH, I wouldn’t go so far as to say that having no attachments at all (particularly social) is freedom, either.

 
Comment by spike66
2006-10-03 14:32:29

Hey, I live in Manhattan, in the west 80s near the park. Could never afford to buy here, but I’m a happy rent-stabilized tenant, and my rent is less than the maintenance alone on apts. on my street. Folks like me loved the town and stayed here when it was going down the tubes–this is our reward.

 
Comment by fiat lux
2006-10-03 21:48:21

After 6 miserable years in San Francisco (which you think would be a good place to live but we hated the cold and the fog), we moved to the downtown area of an older suburb and are much happier.

NYC it’s not, but we get at least some of the benefits of city living. I can walk to an excellent grocery store, over a dozen restaurants, my dentist, a Caltrain stop, and 2 health clubs (among other amenities). We only need 1 car; hubby bikes to work.

Overall it’s great, although to be sure, I still miss my native NYC. You can take the girl out of the city but you can’t take the city out of the girl…..

 
 
Comment by glorgau
2006-10-03 12:20:35

It all comes down to what my Uncle used to tell me:

You want to own the house, not have the house own you.

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Comment by Sammy Schadenfreude
2006-10-03 18:42:55

Or as Tyler Durden said, The things you own, end up owning you.

 
 
Comment by robin
2006-10-03 23:56:04

Modesto = Modest but OMIGOD overpriced.
Nice people, way over-priced.

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Comment by BanteringBear
2006-10-03 10:26:18

I agree with you tx. These sorts of tales are nauseating. These people have no business in that home, nor does anyone else who needed a suicide loan for their not so humble abode. Funny how countless poor people ended up in their “dream home” during this bubble. The lenders deserve to lose money. I have never taken pleasure in others pain, but I am finding it hard not to smile in my not so comfortable rental as these people go down in flames. Serves them right.

Comment by Andy
2006-10-03 11:11:39

Ideally, I’d like to see the people that don’t qualify for homes go back to renting (but without having to pay off their debt for eternity) and I’d like to see the lenders totally take it up the arse on this one for allowing this whole thing to get going with toxic loans. Of course dismantling of the Fed would be nice too. I’d also like to see the loan originators, real estate agents, everyone at the Fed, have to personally get off their asses do hard labor dismantling these effing eyesores they helped crate and return the land to the way it was pre-bubble. That’s my Miss America dream for the planet. They can work on curing AIDS and cancer during their off-hours and weekends too.

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Comment by waaahoo
2006-10-03 11:21:35

Why is it that every cash-strapped person I meet has a dog?

This couple could probably save 100 bucks a month just cutting out dogfood.

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Comment by MazNJ
2006-10-03 11:40:05

I’ll disagree on this one. I’ve had several dogs in my life and currently cats due to my work schedule, and cutting out the dog would not save me 100 bucks. If anything, having the dog/cat saves me money by enticing me to sit out back and throw a ball to it or in the case of cats jiggle a stick with a string and a toy on it and stay home and eat in rather than go out and do something most likely more expensive. Probably saves on phone bills too as I can complain to the dog/cat about the other people in the house rather than call some people up (please no jokes about the sanity, people. yes, they can’t understand crap but it still generally feels as if you’re getting it off your chest by telling them and heck, they’re good listeners ;). Then again, I’m not cash-strapped, so who knows.

 
Comment by feepness
2006-10-03 11:42:00

I know.

I love hearing about the people who say “well, a small place won’t work for us because we have two large dogs.”

How about “two large dogs not working for you” instead?

 
Comment by txchick57
2006-10-03 11:45:48

There were plenty of times in my younger days when I went without eating or ate crap to pay vet bills or feed the dogs. Unfortunately, as a rescuer, I see the other end of this when these losers can’t afford to pay for anything, and then the dog ends up as our problem.

 
Comment by waaahoo
2006-10-03 11:51:31

No problem with dogs, cats or other critters it’s the cash-strapped owners that mystify me.

I could easily carry a few large pets but there is no possible way that I would be able to give them the time they really need.

 
Comment by BanteringBear
2006-10-03 11:54:42

My dog brings me more happiness than anything money could buy. I spend roughly $50 to $75 dollars per month feeding him (sometimes a little more as he gets real beef, chicken, and fish in addition to his kibble).

 
Comment by sw
2006-10-03 12:15:04

Yes, a dog can definitely be part of an active, rewarding, frugal lifestyle. I think that is why cash-strapped (budget conscious?) people often have them.

 
Comment by spike66
2006-10-03 14:27:53

Dogs are great–a loving dog will get you out of the house, makes it easy to meet people, and will console you when things are lousy. So, skip the gym membership, the shrink and the bar scene…

 
Comment by We Rent!
2006-10-03 16:28:48

My chinchilla costs about 3 bucks a month on food and bedding - and has twice the personality of all of your dogs put together. :mrgreen:

 
Comment by Pismobear
2006-10-03 16:40:26

Au contrair; my large dog has a back pack and carries my beer when I hike into the Forks of the Kern for some c&r fly fishing. She also carries her dog food, biscuits,blanket and water dish. Enjoy NYC, not for me.

 
Comment by Gather No Moss
2006-10-03 17:02:26

My Dad says that in the 70’s downturn on LI, he noticed an increase in the number of stray dogs. He thinks a lot of people simply abandoned them/kicked them out/stopped feeding them - whatever - when they could no longer afford to. We also had quite a few empty homes in the rich neighborhood next to our middle-class one.

 
Comment by robin
2006-10-03 22:32:24

Always had dogs growing up - no kids now and feel it is unfair to the animal if left alone for most of the day. Love them more than the selfish urge to have them at our convenience and compromise their quality of life in the process.

 
 
Comment by Reuven
2006-10-03 14:42:46

Some people are poor because of unforseen hardships, physical limitations, etc.

Others are poor because of stupidity. There’s no help for folks like that. You could give them a check for $1Million and it would be completly gone in a year. The people who buy things they can’t afford are in this category.

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Comment by dwr
2006-10-03 10:08:08

Agreed. Modesto, Bakersfield, et al. technically are within the boundaries of the state of California, but they ain’t California.

Comment by moqui
2006-10-03 10:46:09

yup. I spent a week in modesto one night.

 
Comment by Desert Dweller
2006-10-03 12:10:01

When you think of it, most of California ain’t California, you know?

Comment by sw
2006-10-03 12:16:35

No, pretty much just the central valley..

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Comment by dwr
2006-10-03 13:13:02

Sorry, what I meant was, most people think of California as beaches and nice weather, not Modesto or Bakersfield or virtually uninhabitable areas.

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Comment by MacAttack
2006-10-03 10:35:22

Yeah… there was a song about it… “oh, Lord, stuck in Lodi again…” I ran into this problem 12 years ago. I moved to Portland instead.

 
Comment by MacAttack
2006-10-03 10:39:38

“Oh Lord, stuck in Lodi again…” - Creedence Clearwater Revival

Comment by AE Newman
2006-10-03 11:57:04

posted

 
Comment by AE Newman
2006-10-03 11:58:49

posted “Oh Lord, stuck in Lodi again…”

“I rode in on a greyhound and will walking out if I go….” CCR

 
 
Comment by lalaland
2006-10-03 11:08:28

Also what does not compute is that monthly payment — the mortgage, taxes and insurance on a $505K house equals $2325? Oh wait, unless that mortage of theirs is haz-mat toxic.

Comment by AHinOH
2006-10-03 11:51:34

Yeah, I was sitting here, thinking, “wait a minute, they bought a house that costs almost ten times what I paid for mine, and yet their payment is only a little more than four times what I pay?”

I know I wasn’t a business major, but even I can smell what’s wrong with that deal!

 
Comment by Desert Dweller
2006-10-03 12:13:56

On my last mortgage I had a payment (PITI + homeowner’s) of $1,056 on a mortgage balance of about $143,000 (30 yr fixed @5.625). $2325 on 505,000?????? WTF???

 
Comment by IL_NC_IN_CA
2006-10-03 13:04:57

Yes, if you back it out (assuming $600/year insurance), their current interest rate is 2%.

 
 
Comment by JR
2006-10-03 11:12:56

Yes and $505,000 on $2300/month does not compute either. Taxes $483/mon, Insur $75/mon, and 6% interest on $404,000 (assume 20% down, or is that possible?) using a 30-year amort is $2422. So the PITI is nearly $3,000/month.

Comment by hd74man
2006-10-03 11:32:40

Whereas lenders have traditionally advised clients that their monthly mortgage payment shouldn’t exceed 36 percent of gross income…

All the numbers are fudged…The ratio’s I also got from a lender were 28% debt for house 33% gross-all debt combined.

The new paradigm…Falling income-rising house expenses.

This burgeoning housing expense will insidioously crush discretionary income sectors like entertainment, restaurants, and tourism.

Comment by Paul in Jax
2006-10-03 16:09:23

My mom (in her early 80s) said the old standard was that a house shouldn’t exceed 2 X yearly income. How d’ya like them apples?

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Comment by Andy
2006-10-04 03:45:20

That’s what I based my house purchase on. I made $43k 10 years ago, bought a house for $93K. Financed about $88.5 so that’s pretty much spot on 2x. I’m definitely comfortable with that decision. Still am. Now I make about double and switched to a 15 yr loan 4 years ago. It’s very comfortable. At the time the loan people approved me up to $143k. I thought they were insane. Even what I was paying didn’t leave a whole lot left every month. Maybe $700 extra per month plus my tax return which I guess isn’t bad when you’re only pulling down $2,600/month. Still, I didn’t have a new car at the time and kept my old cars running and fixed them myself. Rarely bought new stuff. I’m still frugal though.

 
 
 
Comment by Thomas
2006-10-03 13:04:07

If the borrower has a high enough income, the property taxes and insurance costs are mostly offset by the residential mortgage deduction savings. In California, if your household income is over about $110,000, your marginal combined tax rate is 40%. So you only have to count 60% of the property taxes, and the 40% of interest you get back offsets that and the insurance, with a few bucks left over.

That said, even with the tax adjustments, the ownership payment is close to twice the prevailing rental payment.

Comment by FED Up
2006-10-05 13:10:29

When does the AMT kick & thus the tax savings not as great?

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Comment by Bubblewatcher
2006-10-03 11:21:36

For $1200, they could have rented:
http://sfbay.craigslist.org/eby/apa/212706827.html
But I guess they’d rather forego the books, the movies, the meals out, the childcare, the magazines, the travel, the clothes…etc., etc., etc. It’s really appalling.

 
Comment by Rich
2006-10-03 12:57:22

$505K Mortgage for $2325/mo!!
The real cost of that note PITI would be around $4,000/mo.
They obviously bought into a death loan and their payments will soon grow to well north of $5,000/mo and rise with rates.

THATS NO DREA!!! ITS A NIGHTMARE!

Comment by Backstage
2006-10-03 13:50:34

The term Death Mortgage would seem to be a little redundant. Mortgage Etymology:

from O.Fr. morgage (13c.), mort gaige, lit. “dead pledge”, from mort “dead” + gage “pledge;”. O.Fr. mort is from V.L. *mortus “dead,” from L. mortuus, pp. of mori “to die” (see mortal).

 
 
 
Comment by Andy
2006-10-03 09:50:25

would $2,325/month cover a traditional loan for a $505k house. I’m guessing not. I don’t know what taxes are out there, but that just sounds like a toxic loan. These people better enjoy it because they won’t be living there long.

Comment by Craven Moorehead
2006-10-03 09:55:10

Definitely a toxic loan. SO dreamy.

 
Comment by implosion
2006-10-03 09:58:05

That’s what I thought as well, and they’re already stretched: ‘It is a struggle, and money is tight,’ Coley said.

Comment by dwr
2006-10-03 10:10:39

And I wonder how quickly they’ll mail in the keys when the house down the street sells for $400K?

 
 
Comment by Uncle Git
2006-10-03 10:13:53

That’s going to be a $4000 - $4500 monthly nugget once the I/O period adjusts on their loan.

No way are they going to stay in that house more than 3 or 5 years or whatever their adjustment deadline is.

Comment by Andy
2006-10-03 11:17:27

How did people get so short-sighted. This is their effing dream, and yet it’s going to reset in 3 years. Kind of reminds me of this dream I had the other night, I was about to bend over Elizabeth Hurley and pull her panties down and then the effing alarm clock went off. Sucks to because it was one of those dreams where you realize you’re dreaming so you can basically take control of the dream. I forget what’s it’s called, but it can be practiced. I recommend it. But back to our house dreamer. What kind of dream house can it be if they only plan on staying there 3 years, unless of course they don’t know they have a time-bomb loan.

Comment by Reuven
2006-10-03 12:20:22

At my age, I dream about cupcakes!

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Comment by Paul in Jax
2006-10-03 16:22:47

OT - Andy - I think the alarm clock went off and then you started “dreaming backwards.” Realized that you were in a dream and so created a desirable scenario. All happened in a second. Never would have happened if the alarm clock didn’t go off in the first place. You probably have an alarm clock that isn’t too loud and pauses between noise. Hard to get what you want in life or dreams, isn’t it - will the after-life be better?

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Comment by lainvestorgirl
2006-10-03 12:57:29

Maybe they made a big down payment? Not likely.

 
 
Comment by NoVa Sideliner
2006-10-03 10:19:12

would $2,325/month cover a traditional loan for a $505k house. I’m guessing not.

25% down, 5.625% fixed rate for 30 years. Yep. But what are the chances this couple had $100k+ to put down on the house plus closing costs? It’s possible, if that wealthy young teacher and her hubby bought when interest rates were low.

Oh wait, that calculation I made does NOT include property taxes and insurance. Oh my, definitely points to “toxic loan”. Let’s send the reporter back in a year or two to see if that house is theirs - or the bank’s.

Comment by Craven Moorehead
2006-10-03 10:32:09

They didn’t buy when rates were that low. According to county records, they bought the house in June of this year from Centex. 100% guaranteed that this is some crazy toxic loan.

Comment by NoVa Sideliner
2006-10-03 12:03:17

Centex? Toxic loan! You’re dead right, Craven!

My bet is that this is one of the builder-subsidised loans where the interest rate is bought down substantially (basically a discount of some $10k’s on the purchase, if you run the amortization schedule to compare). That’s not a problem in itself — but what *is* a problem is that most of these are stair-step payments as each year goes by. OUCH!

Here in the DC area, the builders were running specials with mortgages like this: 3.99% first year, 4.99% next year, 5.99% from then on. Not too bad a deal if you got a good price on the house as well (and need a house), but you better not be qualifying for it based on the temporary 3.99% rate. I fear that many buyers do that, though. :(

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Comment by Andy
2006-10-03 11:21:20

NOT. That’s just the mortgage on $400k. You forgot taxes, insurance, etc… Not only that, jumbo loans are higher interest.

 
Comment by sw
2006-10-03 12:19:46

My parents currently make a payment of about $400/mo on a $650K condo. They bought twenty years ago. The average includes tons of people that bought pre-bubble.

Comment by BanteringBear
2006-10-03 13:33:27

That is what is so funny about this bubble. In the neighborhood where I grew up, if you bought 6 years ago with 20% down on a 30 year fixed, your mortgage is around $1000 per month. Nowadays, you have people paying close to $3500 for the exact same house. Yikes.

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Comment by Andy
2006-10-04 03:50:27

My next door neighbor (who’s a real buttmunch by the way) pays about $1800/month on a 30 year loan whereas I’m paying $1,183 on a 15 yr note. If he had a 15 yr it’s have to be about $2200/month I’d guess. And all that difference occurred in the span of 5 years. Something ain’t right with that. Just glad I’m the one paying less.

 
 
 
 
Comment by Thomas
2006-10-03 15:37:03

30-year amortizing loan at 6.25% on $500,000 would be about $3,125/mo.

 
 
Comment by WT Economist
2006-10-03 09:50:48

“Income ratios have also been stretched. Whereas lenders have traditionally advised clients that their monthly mortgage payment shouldn’t exceed 36 percent of gross income, some lenders have pushed that to more than 60 percent.”

That’s sad, and the nub of the problem. I think even 36 percent is an overstatement — wasn’t it 25 percent and then 30 percent?

Perhaps the extra six percent is what lenders will be able to get buyers to pay, after the mother of all workouts.

Comment by Sobay
2006-10-03 10:08:15

- Between 2000 and 2005, median household income fell by an average of 13 percent in Passaic County, when adjusting for inflation.
- Nationally, incomes DROPPED by 2.8 percent during the same period. But they still bought homes

- Here in So Cal many of my friends have not had a raise in years.
Consumer spending is a joke….it has to be on credit or simply not paying there bills. Many folks that I work with refi-ed and bought LOTS OF TOYS>

 
Comment by sc3
2006-10-03 10:21:28

I don’t know how people do it. I can’t imagine going over 36%. I have 15yr mortgage and I spend about 25% of my gross on mortgage. After 401k, health insurance, tax, etc. not much is left over. They must be eating peanut butter and ramen noodle everyday. Life is much more than mortgage payment.

Comment by Rich
2006-10-03 22:52:54

peanut butter is expensive!

Taco bell hot sauce pacs and rice, that was a staple for me in my youth.

Comment by Hal F. Wit
2006-10-04 06:25:13

Macaroni and cheese with tuna mixed right in. It’s an acquired taste..

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Comment by DinOR
2006-10-03 10:22:36

WT Econ.

“and the nub of the problem”

I couldn’t agree more! If say for instance cars (not houses) were “appreciating” should we be loaning out 50/60 % of income on auto loans? Of course not. It’s ridiculous. This strikes me as “who gets to the consumer first”! When I was in the service any town outside of the base had bars, tattoo parlors and other ahem…..services and of course on payday every shop was angling to get into your wallet first! Of course the shop owners at the far end of the “strip” were pawn shops! Funny how that all works out isn’t it?

Comment by BanteringBear
2006-10-03 10:45:44

I read an article within the last three months about pawn shops and how well they are doing. More and more are cropping up each month.

Comment by Melissa
2006-10-03 11:45:15

I’m looking into becoming a bankruptcy paralegal.

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Comment by hd74man
2006-10-03 11:51:21

For all those of you wouldn’t knuckle under and pay a $3.5 to $5k premium over MSRP for a new Harley the last 4 years, you will see loads of used TC88’s comin’ on the market at fire-sale prices for the next 5 months.

The “HD in every garage” lemmings will need that $385.00 bike payment to partially cover for their ARM re-set.

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Comment by BanteringBear
2006-10-03 12:09:57

Funny you mention that as I was checking out used hog listings online last night. Seems a lot of folks are trying to unload them. It seems to me, that they may be a hard sell given the price and the competition.

 
Comment by Paul in Jax
2006-10-03 16:35:15

I just sold an old BMW M/C last week - was surprised at the interest and got asking price. Harley is weird - this stock has buried the bears over the last 10 years, with barely a hiccup during the stock market implosion. Currently sells at 18 X earnings - if those are peak earnings it is a screaming short, but they have managed to maintain incredible pricing power. M/C retail prices have really performed well over the past 5 years. Hard to understand -the average Harley buyer seems to be so vulnerable, but they keep soldiering on.

 
 
Comment by Hoz
2006-10-03 12:14:30

BB, I think that was really old news. The economics of a pawn shop are 1) take in item 2) collect interest on item when redeemed and 3) if not redeemed sell item. In a viable economy, when 1, 2 & 3 are working pawn shops do extremely well. In the current economy, people are not going into pawnshops to redeem nor going in to buy. Pawnshops are accumulating inventory and are now subject to the same problems affecting any retailer. I made a lot of money in the last year in a pawn shop stock - IMHO not a safe place to put money.

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Comment by fiat lux
2006-10-03 21:54:44

These days, pawn shops can sell on eBay what they can’t sell locally, which gives them a bit more ability to move inventory.

 
 
Comment by Backstage
2006-10-03 14:30:18

In a former life I did a lot of theatrical touring. I visited a lot of towns large and small. You could always tell the health of a town by the number of pawn shops. More shops, poorer town.

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Comment by SunsetBeachGuy
2006-10-03 10:44:32

IIRC:

28% for housing debt service
36% for all debt service

Comment by CA renter
2006-10-03 23:40:54

Yep, Except I remember a 33% back-end ratio. Not sure if they bumped this number to 36% recently and then called it the front-end ratio.

IMO, it should be 28% front-end with PITI payments — MAXIMUM. Whoever is paying 36% of gross on housing payments alone will be bankrupt within two years (unless they make well over $180K).

 
 
Comment by AHinOH
2006-10-03 11:57:00

It seemed like, when I was working for a housing non-profit, that 36 percent was the total debt the bank wanted you to carry to qualify for a mortgage.

That was back in the stone ages, though, when there was this thing called “credit-worthiness”.

 
 
Comment by Getstucco
2006-10-03 09:56:03

“In Clifton, N.J., the percentage of mortgage holders spending at least 50 percent of their income on housing rose to 27 percent in 2005 from 12 percent in 2000, a 134 percent rise. In New Britain, Conn., the group paying at least 30 percent more than doubled, rising to 57 percent of people with mortgages, up from 27 percent.”

This is a sad consequence of the Great McMansion Scam:

1) Totally abolish lending standards and innovate new loan products in order to allow households to leverage themselves beyond all reasonable probability of ever being able to repay the debt.

2) Build and heavily market vast tracts of supersized McMansions.

3) Goose the demand for McMansions to unsustainable levels by encouraging everyone to buy the biggest house they can “afford” in order to enjoy the “wealth effect” made possible by ever-rising prices.

4) Take the money and run when the Ponzi scheme is on the brink of collapse.

Comment by Hoz
2006-10-03 10:22:42

Hey aren’t salepeople wonderful! Selling 5400 sq ft to some mope that can only make the payments if they’re Negam’d. And then these mopes get the heating bill, cooling bill, tax bill, HOA increase, special assessment and its not their fault - so lets get the government to help them out - these poor borrowers deserve our protection. And who cares if the sad consequence is a further deterioration of our standard of living. 2 people working to live in financial servitude for the rest of their life. Damn Greed.

Comment by Getstucco
2006-10-03 10:27:15

When everyone is doing it, choices become limited. I would gladly trade supersizing for less space and better quality of life, but all I see in every direction I look are McMansions spreading out across the landscape to the distant horizon.

Comment by MacAttack
2006-10-03 10:38:48

Um… EXISTING homes?
The size of the average new house doubled between 1970 and 1995, but there are usually smaller homes around.

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Comment by Ozarkian from Saratoga, CA
2006-10-03 11:01:56

The problem here in my small town is the existing homes have not been maintained, probably because people’s incomes are so low. An existing house requires a big cash infusion to make it “livable” and I’m not talking about granite counter tops but rather insulation, roofing, HVAC systems, etc. So the choice is a tack McMansion surrounded by others, or a fixer-upper older home surrounded by unfixed fixer-uppers.

 
Comment by Backstage
2006-10-03 14:36:28

Ozark, We used the same argument when we bought a new spec home in a development. The place was so crappy that after just 2 years we were doing a lot of fix up. After 8 years the place was going downhill fast. Not maintenance stuff, but basic fixes because of poor construction.

Several homes has to have dormers replaced after 6-years because of water damage.

That was one of the reasons we are now (happy) renters.

Just because it’s new does not mean it will be trouble free or chepaer to maintain.

 
Comment by Ozarkian from Saratoga, CA
2006-10-03 17:25:46

Good point!!!

 
 
 
 
Comment by M.B.A.
2006-10-03 14:17:42

New Britain is not where the yuppies want to live - it is mainly blue collar. really

Comment by implosion
2006-10-04 00:10:53

Yeah, it was even in the 60’s when I lived there in my early to mid-teen years.

 
 
 
Comment by NoVa Sideliner
2006-10-03 09:57:40

Anyone watching the goofball at http://www.iamfacingforeclosure.com? Apologies if this was mentioned recently, but I’ve been offline a couple of days and haven’t got toime to catch up. Wow the guy is in deep doo doo as we know, but he STILL can’t quite get past the “Me, it’s all about ME!” phase.

He wants to get short sales for his underwater properties. Fair enough, even if he’s dreaming. So he’s composed a letter to his screwed lenders, with the help of his friends on the web. Excerpt follows:

“I am currently looking for full-time employment. Please consider a short sale of my loan so I can avoid foreclosure, save my credit and have a chance to get back on my feet.”

Now is it just me having a bad attitude, or does the lender really not give a s–t about this scoundrel saving his own credit rating? If I were a lender being faced with losing money on a short sale, I’d probably be happy to see big black marks on his credit report!

Dear young man, you need to think about the people you snookered when you did these fraudulent deals. Maybe one or two might actually be foolish enough to give you mercy, but it’s more likely (though still a slim chance) that they could accept your offer — purely to save *themselves* hassle and further cost. Stop thinking about yourself and think about how they see it.

Maybe a better letter:

“I am currently looking for full-time employment. Please consider a short sale of my loan so we can resolve this quickly and avoid the expensive and time-consuming foreclosure process.”

Plain and simple, dear boy: What is in it for the BANK? That’s really how you have to put it. No more “Me, all about me” because I bet they couldn’t care less about how your personal situation unfolds later, just so long as you never do business with them again.

Comment by MacAttack
2006-10-03 10:47:15

Pardon me, but I can’t wait to see how his dealings with the IRS go when he gets the 1099. That may be the point at which young Casey feels reality slap him silly.

Comment by NoVa Sideliner
2006-10-03 12:05:05

…or wakes up in his cell on the first day of his mortgage fraud sentence and feels “reality” poking him… where? Yikes!

Comment by diogenes
2006-10-03 13:19:45

Perhaps he could get a job as a Congressional Page?

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Comment by implosion
2006-10-04 00:13:25

Probably too old.

 
 
 
 
Comment by Arizona Slim
2006-10-03 11:05:39

If I were an employer, I’d avoid this guy like the plague. And I’d advise anyone else who’s thinking of hiring him to do a thorough credit check first.

 
Comment by BanteringBear
2006-10-03 11:06:22

That kid is as annoying as they come. He is a perfet example of why we have this bubble. The more I read about these idiots and their multiple houses, the more I feel the government should impose a luxury tax on second homes. By making them a tax burden, it would eliminate the speculators, and protect prices so that honest, hard working people and families could afford a place to live.

Comment by Sammy Schadenfreude
2006-10-03 18:51:26

http://getdshirts.com/the_story.php

Dustin Diamond, the guy who played the nerd “Screech” on SAVED BY THE BELL, is trying to hawk t-shirts to save his house from foreclosure. Not sure how well it’s working out for him — looks like another child star cautionary tale.

 
 
Comment by Tortious
2006-10-03 11:16:46

What he needs is a valid passport and a lot of cash.

 
Comment by Carlsbad renter
2006-10-03 19:44:28

I heard short sales go on your credit report anyway. Banks agree to it so that they can avoid the extra cost of the foreclosure process and not have a REO on their hands (which in itself may lower what people are willing to pay for it).

 
 
Comment by salinasron
2006-10-03 10:00:11

“Anna Coley said her family is in their dream home now: a new $505,000 five-bedroom house with 2,833 square feet bought this year in northeast Modesto.”

Anna and her family have no taste along with no common sense. I’ll give them two years before the divorce word starts to appear in their household when she can’t go out and can’t shop for clothes. But maybe she’s like some up in this area like last saturday where I saw a young couple driving a BMW hit a yard sale for clothes.

Comment by dannll
2006-10-03 10:16:58

“Anna Coley said her family is in their dream home now: a new $505,000 five-bedroom house with 2,833 square feet bought this year in northeast Modesto.”

She’ll get real tired of peanut butter sandwiches for dinner and having watched a lot of young families go through this in the 80’s runup. Never could understand sacrificing all the good stuff in life for a house. I prefer a chance to travel, dine out once in a while or go to a hockey game (thank God hockey starts for real tomorrow). Too many things to enjoy to spend all my time and resources on an overpriced place to live.
Oh, and Anna, stay in shape for the inevitable return to the dating life…

 
Comment by Uncle Git
2006-10-03 10:19:14

Hey - I drive a BMW and have no problem shopping at dollar tree or yard sales - beer steins for $1 a pop sign me up !

My BMW however is 100% paid for :)

Comment by Arizona Slim
2006-10-03 11:07:06

Hey, Git, let’s see how little money we can spend on our next yard sale patrol! First one to spend over $5.00 total is a rotten egg!

Comment by hoz
2006-10-03 11:13:17

I spent $7.00 at garage sales last weekend - went over budget - but a great selection of mysteries and economics. :>(

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Comment by salinasron
2006-10-03 10:00:11

“Anna Coley said her family is in their dream home now: a new $505,000 five-bedroom house with 2,833 square feet bought this year in northeast Modesto.”

Anna and her family have no taste along with no common sense. I’ll give them two years before the divorce word starts to appear in their household when she can’t go out and can’t shop for clothes. But maybe she’s like some up in this area like last saturday where I saw a young couple driving a BMW hit a yard sale for clothes.

 
Comment by dwr
2006-10-03 10:06:29

“‘Housing prices have gone up much more than incomes have,’ said Christopher Jones, vice president for research at the Regional Plan Association in New York City.”

STOP THE PRESSES!

Comment by santacruzsux
2006-10-03 10:47:01

LOL! Hey Christopher Jones, I’m really tempted to wizz on an electric fence, what do you think may happen?

Comment by dwr
2006-10-03 10:54:54

I’m sure he wouldn’t have a reply until you did the act, at which point he’d say “My research concludes that it’s not a good idea to wizz on an electric fence.”

 
Comment by SunsetBeachGuy
2006-10-03 11:46:52

Hey, I saw that episode of Jackass.

It looked and sounded like it hurt pretty bad, worse than normal for their stunts.

Even the best case scenario outcome is ugly, but hey let’s try it anyway.

Comment by huggybear
2006-10-03 16:53:45

I thought wizzing on the electric fence was a reference to the Ren & Stimpy episode and song. Here’s the first verse:

When nature’s callin’
Don’t be stallin’
Use your common sense
Before you let it flow
Find a place to go
Just don’t whiz on the electric fence

http://tinyurl.com/lql92

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Comment by hd74man
2006-10-03 12:05:38

dwr-

LMAO!!!!!!!!!

 
 
Comment by flatffplan
2006-10-03 10:11:05

good thing we have 1000’s of gov workers w pensions coming to tell us what we knew 6 months ago
here’s a raise !

 
Comment by mrktMaven FL
2006-10-03 10:18:52

Another national statistic reaffirming my broader bearish economic sentiment; its going to get ugly before it gets better. Some economist actually believe this type of leverage is not going to affect consumer spending. Like the other knuclehead in the previous thread, some not all economists are way behind the curve; the sparkling evidence is right in front their eyes yet they can’t see it. Amazing…

 
Comment by Jason
2006-10-03 10:22:09

We could move to Texas or Arizona and live for a lot less, but we want to live here.”

Wow. We just left Orange County, California, and are on our way to Texas for just that reason. Now, someone can call me crazy for leaving “the OC”…. but Modesto???? No offense to the Modesto-ites here, but I can’t imagine pay half a million to live there. I can’t imagine paying half a million to live in most of OC either, which is why we have since left.

I guess some people will have to learn the hard way….

Comment by indiana jones
2006-10-03 10:54:29

This is just amusing that these people don’t equate cost of living as part of the desirability of living in an area. If you live in San Francisco but can only afford a cardboard box under the bridge, how desirable is that versus living in a mobile home in, say, Kentucky?

 
 
Comment by Bill
2006-10-03 10:26:13

I guess that when I was younger and buying my first house, I relied on the lender to tell me how much house I could afford—and fortunately the number was about 30% of income and fortunately, although my job did not pay well for about 10 years of postgraduate education, my pay did go up regularly. How is it that banks, supposedly conservative institutions, allow or even encourage people to pay as much as 50% of their gross income on housing?Probably most of these people are already carrying more debt than was typical in past decades. Even without an adjustible loan, these numbers will destroy many families. As home values go down, the idea of paying so much to “own our home” is going to seem like a big mistake very quickly.

Comment by Getstucco
2006-10-03 10:28:43

“I relied on the lender to tell me how much house I could afford…”

People are still doing this out of ignorance that the game has changed and the answer will automatically be a lie.

Comment by dwr
2006-10-03 10:32:49

I’ve had friends tell me “Everything is fine, because banks wouldn’t lend out this much money unless they knew people could pay it back.” That was around 2004, when I gave up trying to convince anyone of anything.

Comment by flatffplan
2006-10-03 10:51:57

hang in, by mid-2007
you’ll be right

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Comment by Reuven
2006-10-03 10:57:10

When we bought our house, we bought much less than the bank said we could “afford”. We basically laughed at what they suggested, because it was so stupid. Instead, we bought a small home in a nice neighborhood, and had it paid off in 15 years.

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Comment by AHinOH
2006-10-03 12:06:27

I visited a friend in LA last year who was considering an I/O loan because, and I quote “the housing market in Californi will always go up, so you can build equity as soon as you buy in.” I tried to disabuse her of this insanity, but she’s too young to remember the S&L debacle and high 1980s interest rates. What made her so certain that an I/O was a good idea? Why, her helpful co-workers AT THE BANK.

head–>desk

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Comment by Rancho Cal
2006-10-03 22:51:52

head->ass

 
 
 
 
Comment by hoz
2006-10-03 11:20:58

IMHO it may be, that subject to the following qualifications, a 50% DTI is OK
1) The loan must be a fixed rate
2) Total DTI cannot exceed 55%
3) All income is verified
4) All assets are verified
5) All employment is verified
6) Total gross monthly income is in excess of $8,000.00
(# 6 is so that the borrowers might have a life on something other than noodles and beans)

Comment by dwr
2006-10-03 11:23:28

In other words, it’s ok for about 1% of the people who currently have 50+% DTI burdens?

 
Comment by Desert Dweller
2006-10-03 13:11:58

Great post!

Your total income has a huge impact on how the percentages will affect you. For example, if you make 20k per month in gross income, spending 50% of gross on housing still leaves you w/ plenty of free cash,while if you only make 5k per month and spend 50% of gross on housing, obviously you’re getting squeezed.

Comment by Paul in Jax
2006-10-03 16:50:15

But, contrariwise, the *utility* of additional house space/amenities, etc. decline very rapidly beyond a certain point so that it makes very little sense for most wealthy people to spend huge percentages of income on a house.

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Comment by WaitingInOC
2006-10-03 13:48:13

I mostly agree, although I think that $8K/month is not enough when you consider taxes. At that rate, you will be paying close to 40% in taxes (at least here in CA - may be different in other states), leaving you with $4,800/month net and if your DTI is 50% of gross, that means $4,000/month in debt service, leaving only $800/month for all other expenses. Granted, you can pick up the interest deduction, but I still don’t think that will be enough to live on and have anything left for savings, emergencies, etc. In order to do 50% DTI, I think the gross monthly income should be in excess of $12,000, at a minimum. JMHO.

Comment by DaveBro in SonomaCo
2006-10-04 00:52:33

No, the 40% figure you use is a marginal rate — the effective rate is much lower (and still lower when you take the mortgage interest deduction, as you say).

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Comment by Observer
2006-10-03 10:37:10

Consumers being stretched to the limit and beyond, yet the Dow establishes an all-time new high. Do they really think the consumer is going to keep chugging away? I’m sorry but business spending isn’t going to make up for a decline in consumer spending. Our whole economy depends on the consumer.

Comment by santacruzsux
2006-10-03 10:49:23

Bow down to the Black Box. The Black Box is your friend. The Black Box holds all of your future hopes and dreams. Give the Black Box your money and all will be well. I love the Black Box.

Comment by Backstage
2006-10-03 14:50:54

A day with the black box is like a day on the farm
Every meal’s a banquet.
Every paycheck a fortune.
Every trade a parade.
I LOVE the blackbox

 
 
Comment by M.B.A.
2006-10-03 14:27:16

today the sucker’s rally continued

 
 
Comment by tom stone
2006-10-03 10:40:35

my favorite is when someone qualifies for the teaser rate at 50%,and it is a stated income loan.HL mencken would have had fun with this!

Comment by Thomas
2006-10-03 13:12:31

True. If you’re “stating” your income, why not just “state” it so as to make the DTI ratio 30% instead of 50%? It’s all made up anyway.

 
 
Comment by wmbz
2006-10-03 10:56:51

The retired Anheuser-Busch dispatcher has a $2,200 monthly mortgage payment, about $100 more than his monthly income. He draws from his 401(k) account to make ends meet, but knows that money will dry up before his mortgage is paid off.

“It’s terrible,” Fuller said. “I worry that I will have to move.”

Ed,Ed,Ed, Stop worring, you ARE going to have to move, may as well get to packing.

Comment by Andy
2006-10-03 11:39:03

That’s funny as hell.

Comment by SunsetBeachGuy
2006-10-03 11:48:46

ROTFLMAO

 
 
 
Comment by Joe Momma
2006-10-03 10:56:56

This is the perfect setup for a big recession. Catch everyone loaded with debt and then lay them off. And then we’ll have years and years of retiring boomers needing to liquidate which will put pressure on every asset class for a long time. The boomer effect in reverse.

I think the dollar is where you want to be. Seems really strange to say it, but for a long time the dollar was weaker and weaker due to real inflation pressure. Took more dollars to buy homes, metals, you name it. And that was caused by boomers bidding everything up.

Now the cycle reverses. Expect all asset classes to drop, including gold, real estate, collectibles, etc.

The best place to be in in dollars. It already is working fabulaously against real estate and gold. Fewer dollars buys more, and this will continue.

Remember, what is the one thing Americans have very little of? Cash. Not this BS credit lines. Plain old cash from savings. They have none and that is what is king.

JMHO

Comment by santacruzsux
2006-10-03 11:08:28

This country cannot handle that concept. If we have deflation on the level of the great depression we wouldn’t have enough body bags to keep up with the demand. Suicides, murders, riots and revolutions will be on that path. Of course wholesale slaughter is one way that you will get more dollars in fewer hands.

Comment by hoz
2006-10-03 11:22:46

I fear you are correct - I hope you are wrong.

Comment by SunsetBeachGuy
2006-10-03 11:50:11

Yep, better get a gun and some ammo.

I already have the food and water end reasonably covered.

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Comment by Hoz
2006-10-03 12:20:25

Smith and Wesson has done very well this year -and it is always nice to buy a stock when the board of directors are buying too. Thank you very much.

 
Comment by Liar-reah
2006-10-03 12:22:37

Here we go again - Americans, doomsday scenarios and guns/ammo

 
Comment by Pismobear
2006-10-03 17:46:05

Screw Smith and Wessen(ha), they’re owned by the Brits and want to kill the 2nd Amendment.

 
 
Comment by Joe Momma
2006-10-03 12:15:55

If you look at the trends and see where we have come from, I think it makes sense. Consider this.

When I went to Japan in 1985 one dollar got you 260 yen. Now you barely get 100 yen for the same dollar. The long-term trend in dollar weakness relative to most currencies has been going on for about 37 years. This trend started when the boomers came into their purchasing power years in the late 60’s and early 70’s. They used more debt, consumed more, and saved less than previous generations. This led to a lot more dollars chasing the same goods, leading to inflation of everything. Homes. Gold. Baseball cards. Everything except electronics, basically.

Moving forward, do you think boomers will continue to borrow more and more? Or are they likley to save more, once the housing bust and the reverse wealth effect take hold? If they save more, this economy is in deep trouble. Here are the signs to look for:

- Housing prices dropping
- Precious metals and other commodities prices dropping
- Dollar strengthening
- Borrowing dropping
- Banks offering higher interest rates as liquidity dries up
- Bankruptcy filings soaring
- Layoffs rising
- Inflation pressure dropping

You can make a strong argument that every one of these things is going on now or in the early stages. What we are seeing is a fundamental shift in behavior of a very large group of people. Gold bugs and dollar bears are in denial, but the trend is in place.

I would diversify my holdings, but a dollar centric portfolio will probably yield the best results long-term. It is the one thing boomers have very little of. Sure they have their credit lines, but this is not investment assets. They cannot use the money to get 5% on a CD. They can only spend it on other depreciating assets and consumables. Considering the weight of this debt on their balance sheets, it will be more and more painful to spend.

Yes, there could be a big crash, bank failure, etc. that might hurt the dollar, but it won’t help the other assets because borrowing will be harder to do in that environment. I think holding metals, commodities, real estate, etc. will be a very bad move for a long time.

Not trying to offend anyone. I have held metals and real estate for a long time but the party is over.

JMHO

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Comment by jag
2006-10-03 12:20:52

Why would banks raise rates to attract deposits? As demand for loans falls (and bank “standards” rise) the need for deposit growth doesn’t increase.

 
Comment by Joe Momma
2006-10-03 12:28:08

They need the liquidity to cover their losses on MBS.

 
 
 
Comment by hd74man
2006-10-03 12:11:20

Awright!-More burgeoning consensus on my AK-47 ownership theories! Just get the .223cal. Ragheads are gobblin’ up all the 7.62×39.

 
 
Comment by rent2home
2006-10-03 11:14:32

Only worry I have about this is that the foreigners are holding more dollars than we here.

Do we want them to pickup our homes and buildings and our 50 year old companies ( with all the technoogy) after selling us cheap plastics toys and stuffs at Walmart for the last 20 years?

I am worried Yes. Hopefully outof all the pain, one good thing will come out: Americans will not allow this country’s future to be sold away for cheap stuff today.

Comment by tj & the bear
2006-10-03 11:21:55

Foreigners are human, too — they’ll flee declining assets, not buy them. By the time they realize what they can buy with their dollar, Ben will have started inflating like crazy.

Comment by Liar-reah
2006-10-03 12:24:36

Ben cannot inflate without said Foreigners’ acquiesence. Nobody to buy bonds == no extra liquidity in the system
Of course, he could still print bills…

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Comment by DSmith
2006-10-03 16:40:01

Ben wouldn’t have to print dollar one for us to have massive inflation. All it would take would be for the foreigners who hold our dollars now to repatriate them back to America. All the dollars necessary have already been printed.

 
 
 
Comment by Peter T
2006-10-04 06:00:21

> Only worry I have about this is that the foreigners are holding more dollars than we here. Do we want them to pickup our homes and buildings and our 50 year old companies ( with all the technoogy) after selling us cheap plastics toys and stuffs at Walmart for the last 20 years?

Your analysis seems spot on. I don’t expect the Chinese to buy many houses in the US, but American companies with technology and a share in the world market will be attractive for outside buyers. Maybe IBM’s selling of their PC division to Chinese Levonov was only the first step, and Levonov will buy the rest of the company cheap in an upcoming recession in the US?

> Hopefully outof all the pain, one good thing will come out: Americans will not allow this country’s future to be sold away for cheap stuff today.

Americans are in debt, deep in debt. What choice do they have but to sell or to destroy their own economy in a hyperinflation?

 
 
Comment by tj & the bear
2006-10-03 11:19:56

Agreed… until Ben starts warming up his fleet of helicopters.

Comment by santacruzsux
2006-10-03 11:31:09

His timing better be impeccable.

 
 
Comment by fred hooper
2006-10-03 11:52:28

“Expect all asset classes to drop, including gold, real estate, collectibles, etc.”

Expect debt-financed (leveraged) assets to drop, as they have been the chief beneficiary of the credit expansion. Stocks (margin), real estate and automobiles (debt financed) will crash, along with the dollar.

“The best place to be in in dollars. It already is working fabulaously against real estate and gold. Fewer dollars buys more, and this will continue.”

Whew! Yeah, holding cash since 2000 instead of owning real estate and gold was a real winning strategy don’t you think?

Comment by Joe Momma
2006-10-03 12:18:06

Obviously the dollar was a bad play since 2000! But stop driving with your rear-view mirror.

These are forward looking statements.

Comment by fred hooper
2006-10-03 13:27:13

Forward looking statement: The dollar IS toast. Timing is the key to your game, up until the inevitable point in time when it’s game over.

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Comment by Desert Dweller
2006-10-03 13:18:57

It’s certainly been happening for the last few months. It’s weird, everyone on this blog seems to agree that housing prices will fall drastically. With my understanding of things the end result of a big drop in housing prices is deflation. Falling housing prices = recession = deflation, right?

 
Comment by Paul in Jax
2006-10-03 16:57:03

Joe M - I agree with you that the dollar is not such a bad place to hang out. I might want to diversify into yuan or HK dollars, but I have no interest in the Euro or the pound (both far more overvalued than the greenback). The $ has two things going for it that no other currency has (drum roll for the conspiracy theorist/America haters) : the US Constitution and the US military.

 
Comment by Peter T
2006-10-04 05:53:14

> we’ll have years and years of retiring boomers needing to liquidate which will put pressure on every asset class for a long time. (…) I think the dollar is where you want to be.

Your analysis seems correct except for leaving out the rest of the world outside the US. Sure, they will suffer, too, when the Arican consumer is tapped out and realizes it, but the large dollar holders outside the US will get less interested in holding the currency of an economy if it isn’t competitive anymore in the world market. Will the US be competitive?

> Expect all asset classes to drop, including gold, real estate, collectibles, etc.

China is hungry for oil, India loves gold - I would expect those asset prices to fall from their current peak values but not back to the levels of the 90s.

> Remember, what is the one thing Americans have very little of?

The Chinese and Japanese central banks have plenty of it, American cash that is.

 
 
Comment by tj & the bear
2006-10-03 11:01:02

Nationally, incomes dropped by 2.8 percent during the same period.

This is exactly why I say “1997 prices plus 3.5% appreciation” is a totally bogus starting point. How about “1997 prices minus depreciation”?

Comment by tj & the bear
2006-10-03 11:02:14

Ahem, I meant “1997 prices minus 2.8% depreciation.”

Comment by CA renter
2006-10-03 23:53:12

TJ,
I agree.

 
 
 
Comment by Outside_Aspen
2006-10-03 11:01:56

These articles point to the crux of the problem. People simply can no longer affort houses based traditional (and time tested) methods of judging affordability. These are the FUNDAMENTALS, okay? Housing costs cannot rise indefinately while real wages are stagnant or even retreating. Do you hear me DL and the rest of the so called ‘economists’ that continue to spew the same party line that the housing bubble is based on ‘fundamentals’?

Lets all remember too, that most people are not stretching incomes to buy or flip big fancy houses, as some around here imply. People cannot even afford a crap-box ’starter home’ any more. This is what will kill the RE market; the lack of first-time buyers who are stuck on the sidelines whatching in disbelief as their friends (etc) commit slow-moving economic suicide by getting into sketchy loans so they can ‘afford’ to purchase the crappiest of homes. I’m waitng this one out, but unfortunately this bubble comes at a time when I really want to buy so that I can landscape or otherwise customize my own home (rather than the landlord’s, which is what I have been doing for years). Consequently, I am really bitter and I know that I am not alone in that sentiment.

On the flipside of these articles, it will be funny (and tragic) to see the entire economy collapse once the consumer spending fueled by the bubble HELOCs (etc) finally runs out, which from the examples used in the articles, could be any day now……

By the way, a half-duplex bought in 2003 for $282,000 around here (30 miles from Aspen, CO) is now listing for $469,000. When will the bubble deflate already?

(long time lurker’s first comment)

Comment by Desert Dweller
2006-10-03 13:23:48

I’m with you Aspen. It looks like there’s a lot of air underneath the prices right now. Looks like it’s all downhill from here. Stay patient.

 
Comment by BanteringBear
2006-10-03 13:26:58

“By the way, a half-duplex bought in 2003 for $282,000 around here (30 miles from Aspen, CO) is now listing for $469,000. When will the bubble deflate already?”

I feel your pain. Here in Washington, listing prices have not even budged. This is going to take some time I am afraid.

Comment by M.B.A.
2006-10-03 14:38:27

no, it is just that the momentum has not picked up yet on the falling prices. You will not say this come February….. just wait

 
 
Comment by lalaland
2006-10-03 13:33:53

Be happy. The strict new federal guidelines on “nontraditional mortgages” went into effect last Friday (Sept. 29). They are effective immediately. Read more at http://www.occ.gov

 
Comment by JWM in SD
2006-10-03 14:57:32

Yes, the First Time buyer issue is what I always throw in the face of permabulls because they can’t argue against it very well. When there is 70% homeownership and the remaining 30% is effectively priced out (even with goofy loans), then there is a problem.

 
 
Comment by Sobay
2006-10-03 11:04:15

- ‘”I’ve had to tighten my belt. We don’t go out much,’ said retiree Ed Fuller, who bought his house west of West Palm Beach three years ago. Fuller has a $2,200 monthly mortgage payment, about $100 more than his monthly income. He draws from his 401(k) account to make ends meet, but knows that money will dry up before his mortgage is paid off.”

When I read this I almost threw up my lunch! Why would a RETIREE buy a home and pay 100.00 more per month than he recieves? The LIE never fails to amaze me - the ‘Never Ending Story.’

Comment by dwr
2006-10-03 11:09:43

why would a retiree have a mortgage…never mind, stupid question.

 
 
Comment by Roger H
2006-10-03 11:10:24

“Lenders and real estate experts said home buyers in the Bay Area are used to paying more for housing than home buyers elsewhere. They ‘are going to make the lifestyle change necessary to own a home, which may mean that 50 percent of their income goes to their mortgage. … (They) don’t go out to dinner, they don’t go shopping anymore. It’s about changing their lifestyle,’ said Andrea Lanier, a mortgage broker in San Mateo.”

Is that what house arrest feels like.

Comment by James Bednar
2006-10-03 11:24:09

Don’t worry, that won’t have any impact on the local economy.

Retailers, restaurants, etc. They won’t feel any pain, no job cutbacks either.

jb

 
Comment by SFC
2006-10-03 12:35:25

I haven’t spent more than a few days in California. Is it so great that it’s worth living there, even if they can never do anything but pay their house mortgage? I met a guy from CA in the airport recently, good job, who said that everyone he knows can only afford their homes with an interest only loan, and they all pay 40-50% of their salaries toward their home. If you can’t ever take the family out to eat, go out to the game and have a few beers with my friends, go on vacation, get nice things for the kids, or buy some toys for myself, why stay there?

Comment by dwr
2006-10-03 13:17:48

You’re describing recent history only.

Comment by M.B.A.
2006-10-03 14:41:28

SFO, SAN and LAX areas were always pricey compared with most other areas - they just got extra frothy this time

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Comment by dwr
2006-10-03 15:11:44

I believe the affordability index (before the CAR changed the way the index is computed) in LA was about 50% as recently as 2001.

 
 
 
Comment by IL_NC_IN_CA
2006-10-03 13:44:58

Maybe they like living in the Third World with a First World passport?

 
Comment by fiat lux
2006-10-03 22:09:34

Some of us rent. :)

Comment by robin
2006-10-04 01:06:09

Some us us scrimped and paid off the house but can never qualify to move up due to diminished income. We feel your pain, but we are stuck as well. We are grateful to have fairly stable taxes, but moving up is a lost dream. At least for now. Jobs don’t pay what they used to, comparatively, and we are , like you, in the market where there is no pension - only a paltry, inadequate IRA.

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Comment by David
2006-10-03 16:57:02

This isnt what its like in california at all. Everyone i know bought more than 2 years ago. They have lots of equity, and they are using it through, HELOC to the max

 
 
Comment by Brooklynite
2006-10-03 11:18:31

Apologize if this is posted already:

http://www.economy.com/home/products/housing/default.asp?src=hattp_economy

Linked from a story in the NYT/AP.

 
Comment by cactus
2006-10-03 11:27:29

http://biz.yahoo.com/ap/061003/metals_sector_snap.html?.v=1

Hmmmm a little deflation on its way ?

Comment by fred hooper
2006-10-03 12:05:15

Global slowdown coming. China’s growth crash to be on full display in summer olympics, Q3 2008. All commodities (except food) crash, pulling down gold and silver until lemmings finally figure out the difference between monetary and non-monetary metals. Helicopter drop saves builders, housing, and millions of FB’s, expect Dow 36,000 by Q4 2008, gold at $3000, and Iran begins rebuilding after “Shock and Awe, Part II”.

 
 
Comment by txchick57
2006-10-03 11:53:04

And while we’re snarking about the Modesto FB’s, what kind of idiot names their kid “Brooklyn?” Are they totally clueless that this poor dweeb will have to go through life with that name?

Of course, I could go on a whole riff about pretentious inhabitants of the lower 40% of the food chain and their baybee names. It’s almost as if they feel these names will somehow liberate their spawn from the mundane lives of their parents and give them “class.” The ones I particularly like are city names like Austin, or Tyler. Brooklyn is a new one. I’ve seen girls named Rhiannon (gee, way to date yourself, bubba) and Brandee (gawd). I would suggest Snotleigh or Tragedeigh myself.

Comment by Joe Schmoe
2006-10-03 12:24:06

LOL, so true. THE PWT crowd always has the most highfalutin’ baby names. “Brittany,” (you know, like England — classy!) “Morgan,” etc., etc.

Comment by Thomas
2006-10-03 13:17:49

That’s “Brittany” as in the province of northern France. (Populated, to be fair, by Celtic refugees fleeing the Saxon invasion of 5th-century Britain, but still.)

 
 
Comment by Jaz
2006-10-03 12:26:04

How about “Perth Amboy”?

Comment by jp
2006-10-03 14:16:33

Only in Jersey. And it’s still perverse.

 
 
Comment by Hoz
2006-10-03 12:26:18

I like regional/ state / vegetable names from my kids class - Dakota, Montana, Hickory, Hunter and Gunner. 14 kids in the class.

Comment by lalaland
2006-10-03 13:40:16

“I would suggest Snotleigh or Tragedeigh myself.”

Too funny. Just cut to the chase and name the kid Tragedeigh. I love it.

Comment by Thomas
2006-10-03 15:41:02

I saw a listing for a person named “LaTrina” once. Obviously neither parent was either in the military or Boy Scouts.

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Comment by jp
2006-10-03 14:17:56

And bonus points to txchick for invention of the verb ’snarking’.

 
Comment by Paul in Jax
2006-10-03 17:07:41

txchick - You are so right on on this one. Want to increase your retirement income by $1 million? Name your son John and your daughter Susan. It really is that simple.

Everything in life matters - everything - and topping the list is the name you give your child.

 
Comment by Backstage
2006-10-03 21:00:38

Bronx might work for a boy. Kinda he-mannish, don’t ya think.

 
Comment by FutureVulture
2006-10-03 23:18:55

I would suggest Snotleigh or Tragedeigh myself.

You skimmed right over the best name of all: “Spawn”

 
 
Comment by ed in texas
2006-10-03 11:59:36

“‘Every day there’s more and more foreclosures being filed,’ said Charles Barbarow, a Totowa-based Realtor.”

Now THERE’S a penetrating observation. (snark)

 
Comment by Arioch
2006-10-03 12:01:14

How in the world do these people afford houses & mortgages of 500k+? I for the life of me am completely stumped on this one.

I don’t mean the “i can afford the teaser rate period” mentality, but a real 30 yr fully amortized fixed rate 500k+ loan? That is a HUGE chunk of change every month.

For any hints on where stuff is headed, check out the “experts” and their view on things….

http://tinyurl.com/mj2gk

Comment by SFC
2006-10-03 12:45:08

The best thing about this blog for me was that it answered your question, one that my wife and I had been asking each other for years here in South Florida. Since we got our mortgage 10 years ago, when one had to put down 20%, and provide them with every document known to man in order to be approved, we had no idea about these exotic mortgages, teasers, no downpayment, stated income, etc. Now I know the answer —- they can’t.

 
Comment by M.B.A.
2006-10-03 14:46:22

not one buy…that says it all….

 
Comment by Backstage
2006-10-03 21:22:18

Hey Arioch,

Great link. Could you post the link for the insider buying page? That one must have been for selling only. That page just shows that no insider has bought stock in the past 12 months.

 
 
Comment by jmunnie
2006-10-03 12:08:47

Finally! I’ve been waiting for something to take the housing bubble from personal to political. Once people start hearing that housing is unaffordable/overpriced for renters AND buyers, and that it’s not just them in their little burgh but everyone around the country, people will start to see how they fit into the whole. And, I hope, start asking why the cost of living has skyrocketed…

Comment by dcrenter
2006-10-03 18:07:32

Me too. And how did this happen so quickly? Bizarre.

 
 
Comment by Backstage
2006-10-03 13:27:55

The order of words is so important. A year ago the sentence regarding Toxic loans would have been:

People have totally taken advantage of programs to get into a home.

Now the GAO says:

“These people were totally taken advantage of…”

 
Comment by IEFencesitter
2006-10-03 13:50:30

I grew up in the Central valley in Stockton and had family there, in Modesto and in Tracy. These places are complete crap compared to where I live now in SoCal. Most of the people are nice and down to earth, but there is a large contingent of white trash and minority gangs, etc. The crime rate is really high. Ten years ago my Dad’s 50’s style stucco home was worth a mere 70k, but then Bay Area commuters by the thousands (and their higher wages) came to these towns to live and buy/rent out the cheap homes, pushing prices skyhigh (relative to local income). No one I know up there makes more than 35-40k annually, yet a “decent” home costs 350k+. It has made homeownership impossible for the locals. There literally is nothing to do up there other than catch a movie, go bowling or see a concert. And you better damn well park in a well-lit area and be ‘packin in certain neighborhoods. I had my car broken into 5 times in high school alone (stereo stolen, etc). And I lived on the “good” side of town. What has happened in RE in these POS areas is completely insane.

 
Comment by rocketrob
2006-10-03 14:48:00

Does anyone remember the movie “Logan’s Run”, when the old man (Peter Usternough, sp) who lives in DC alone is asked by Logan why he lives in the capital building, and the old man says he just ran out of room in the other houses.

This is what I see in the future “To few people for too many houses”, you just move in to the next bigger vacant house.

Joe Momma - I agree- too many people shilling for gold, or stocks, or a lower dollar. So it only makes sense that the dollar will be king.

What crosses my mind, is how much hidden or unknown risk is inbedded in mundane stores of wealth such as money market funds, bank CD’s, brokerage account funds?

Comment by chilidoggg
2006-10-03 23:28:57

Jesus Christ!

Someone posted about Soilent Green last week.

Now Logan’s Run?

How long will it take a reference to “Zardoz”?

“You can actually DIE? You’re lucky - all of us are stuck in our insane mortgages…”

 
 
Comment by garcap
2006-10-03 17:50:17

“cost burdened” = “broke”

 
Comment by need 2 leave ca
2006-10-03 20:25:42

Don’t forget that Modesto (and rest of Central Valley) has a strong aroma of bovine fecal matter. It permeates your car when you drive through there. I got sick driving through that horrible smell. It is truly a bullshit lifestyle. And the commute is really HELL.

 
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