Weekend Topic Suggestions
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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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Will the real Ben Bernanke please stand up!
Does anyone have read on what Ben Bernanke
is all about?
Is he really serious about fighting inflation
and loose credit or is he in reality a cagey
poker player?
Yesterday, the FOMC raised the federal funds
rate 25 bps.
Personally, as many others on this forum, I was
hoping that a 50 bps bump would be voted in.
Based on my read of the FOMC statement, the Fed
is starting to get nervous about further rate
increases.
Am I mis-interpreting?
How will all this affect housing?
Are (short term) rates high enough
to deflate the bubble?
Rates are and have been high enough for a while to burst this bubble. People cannot afford the houses there in, and you won’t believe the calls we’ve been recieving lately from stressed out borrowers. I’m reading below that some of you folks are having your doubts. Go back and review your fundamentals. This is unsustainable. Last week I suggested the topic of reviewing the “basics” that show the evidence is overwhelming that we are in for historic correction. Below someone made the comment on “back-patting” and “rah-rahing”. OK, let’s just keep it to the facts then. Let’s break this thing down this weekend, folks. I think that most of us could use a little refresher, and for those that might find this blog over the weekend, perhaps an eye-opener.
By the way, though the US FED may be drawing close to the end of it’s “tightening, global rate increases have just begun. The end of this credit cycle is at hand. These are dangerous times to be “jumping into the game.”
It would be tragic if the greatest fools end up being bubble believers who capitulate at the 11th hour.
dwr, you said that well. Wait… again, I predict little price drops in the summer… but starting this fall and going through 2007 and 2008…
The shear number of GF’s at my work staggers me… and I work in a field where people are fiscally conservative by nature! Some coworkers watch the fed as their 2nd’s adjust *monthly* and its pinching them.
Neil
IMO, once it starts it’s going to happen like an avalanche. It is different this time.
I don’t think it will avalanche, except for the new home builders. People will be too paralyzed to act for at least another year. The home builders can greatly undercut the old home prices and will be the impetus that causes the decline.
that’s assuming people have the option of doing nothing for another year.
It’s the people who *have* to sell who will be the only ones selling. They will be the ones who trigger the avalanche. Time will flush them out.
Yes, and the real question is, how many of them will there be? IMO, there will be far too many for there to be gradual price declines. Time will tell.
Were you expecting anything else to mark the top?
Yes, I expected people with 500 FICO scores buying $1 million homes to mark the top, not people who thought prices were too high in 2003 throwing in the towel when prices were 100% higher.
Uh, people with 500 scores have been buying million dollar homes, sometimes more than one.
Uh, I know.
Just checking…..
I should reprhase that, were you expecting anything else to mark the beginning of the crash. They aways start when the last and strongest bears capitulate. (Same thing is true on the upside). It’s time to buy when the automatic millionare guy says housing is a terrible investment and renting is the key to wealth.
If necessary, I will be the last and strongest bear. I will never capitulate until buying a home once again pencils out as an investment.
If necessary, I will be the last and strongest bear.
What exactly does that mean? If necessary?
Are you taking one for the team? A martyr?
nnvmtgbrkr
Yes, I am having my doubts. Yesterday I recieved an email from my brother who lives in Mt. View, California. A co-worker of his, with less than a six figure income, just closed on a $987,000, 1300 sq. ft. 50 year old tract home. The home was purchased with a I/O loan with a very small down. Fundamentals are important but what about the unquantifiable human behavior factor and continuing lending practices that appear to defy all reason?
And you don’t think his idiotic purchase isn’t going to come back and bite him? You should have just answered your own doubts when you understood what your friends co-worker did. Do the math my friend. If he just did this recently, his I/O payment is somewhere around $5,000. Now add taxes and insurance and your closing in on $6,000. Now, you say your friends co-worker makes under 100K? Tell you what, I’ll give him 99K just for laughs. That’s $8250 per month pre-tax against his $6000 house payment. Do I need to go on here?
Oh, and this is just my opinion, purchasing a home with an I/O loan that you have no future plans of paying down is NOT homeownership!
Lots of these I/O loan buyers are either
1) really stupid, or
2) have very, very high subjective discount rates, or
3) are way smarter than most of the posters here, as they foresee some kind of too-big-to-fail bailout on the way for the collective mass of suicide loans which we posters did not envision.
Does anyone foresee a realistic chance of scenario number 3)? Because if there is a realistic chance, then maybe we had all better go out and buy ourselves a $1m home with an I/O loan, ASAP…
Or get large bonuses and pay off principal once or twice a year.
Once you fully convince yourself that the bailout will happen, and buy yourself a $1m home with a voodoo suicide loan, the last bear capitualtion event (LBCE) will happen, and prices will immediately collapse.
“Or get large bonuses and pay off principal once or twice a year.”
Oh, right, thanks for the reminder that these I/O ARMs are only used by wealthy business owners, venture capitalists, or other high earners with volatile earnings streams…
You’re welcome for the reminder. But to be clear it is used by the wealthy and the less wealthy alike.
And to be clear on my end, I don’t believe the use by the wealthy goes very far to explaining the runup in prices of working class or middle class housing in coastal California (e.g., San Diego, with our median income between $60 and $70K) to levels where the only people buying are ARMed and dangerous.
Absolutely, Joe! The 70% or so of all CA home buyers last year who used I/O ARMs were obviously ALL wealthy business owners or venture capitalists. Despite the fact that in the years preceding the boom, such people accounted for only 2-3% of all mortgage. There are just a lot MORE of these people now and they’re the ones that happen to be buying up nearly all the homes for sale. None of these I/O ARM borrowers could possibly be low-income people taking on suicide loans because it’s the only way to “squeeze into” that monthly payment.
Thanks for setting us straight!
So your stats show that 97-98% of all IO purchasers are low income people?
Did you just quote that out of nowhere?
Check my post below where I reference the rah-rahing on this board. I’m as much a believer of lower prices coming from lack of affordability/credit bubble/etc., but shouldn’t we be prudent and ask ourselves what if it doesn’t happen?
That’s not what I was saying Joe. During the pre-bubble era (prior to 2000 or so –depends on what date you arbitrarily set for the bubble’s beginning), I/O ARMs only accounted for 2-3% or so of all new mortgages. Now we come along to 2005, where –accrding to PIMCO– they now account for 82% of all mortgages originated in CA (oh, and btw, you see I actually UNDER-estimated the total % !):
http://www.ocregister.com/ocregister/money/housing/article_902994.php
“But Scott Simon, who oversees the mortgage team at Pimco, the Newport Beach bond investment house, worried that 82 percent of the mortgages taken out last year were interest-only loans and that most of those homes haven’t seen much price appreciation.”
There is *no way* that 82% of all CA buyers last year were volatile income-stream VC millionaires.
I totally understand your point. There are definitely more IO loans, but you left out this paragraph previous to yours–>
He cited a recent Wells Fargo Bank survey of its interest-only loans, which showed that three-quarters of the borrowers were paying principal. In other words, they could afford to pay more than the minimum payment.
IOs recast when you pay down principal which is why many lawyers, doctors, wall st. pros, consultants and those making over 200k+ like them. Just pointing out the other side.
There are wealthy people who would rather not tie up all their equity in a house. If a small business owners can make 25-35% ROI by investing capital in their biz then why not borrow as much as you can from the bank at 6.5-7%?
Damn Italics!
Arggh!
Hey HARM, I appreciate you not just saying “Suzanne researched this…”
I just want to open up some discussions on the other side. I know some others on the board just want to believe what they believe, IMO they are as bad as the perma-bull side which thinks it is different this time.
Got to get back to my work now…
Joe,
If you’re just playing “devil’s advocate” herre, then fair enough. To answer your point, I’ve seen other stats that contradict that Wells Fargo quote, though I’d have to do some digging to find them. The answer might be somewhere in this report (warning: 33 page PDF), but I’m not sure:
http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf
Joe,
Here’s more info on that survey:
**17% of ARM holders in the survey are paying fully amortized payments on their I/O loans.** I’m not sure if the additional 8% are pre-paying or just making larger principal payments. The rest are just sending in the occasional payment toward principal.
**Bold is mine**
“As part of a national survey of more than 1,300 home owners in August, respondents were asked about their financial behaviors and attitudes regarding interest-only loans, the housing market and retirement planning.
Industry observers were quick to note that the survey’s sample size might be too small to extrapolate widespread behavior on interest-only loans, with just 8 percent of borrowers in the survey holding interest-only mortgages. Many of these loans were probably made recently — too soon to see how they’ll season over a few years.
The Wells Fargo Second Annual Survey of American Homeowners found that of the 8 percent of homeowners with interest-only real estate-secured accounts, 73 percent majority pay both the principal and interest at least some of the time. Of that 73 percent, 23 percent pay the principal in addition to interest all of the time while an additional 8 percent make principal payments as well as interest payments outside of the standard payment schedule.
But one-fourth pay only the interest. These behaviors were consistent across both age and income.”
http://www.bizjournals.com/portland/stories/2005/10/24/daily9.html?from_rss=1
Obviously, the international community has no respect for the Fed’s ability to control inflation. The dollar is tanking, gold is up over 3% and will continue to rise. The Fed is well aware that inflation is currently running at 7% “Soft economic numbers and high inflation are being nonsensically spun as “conflicting data.” An inflationary recession is in play, and there is little the Administration or the Fed can do about it. The pabulum fed to the investing public — that a weak economy means low inflation and interest rates — cannot work in the current environment. ” http://tinyurl.com/hkkhn
“# Inflationary pressures have been ignored for a very long time because they did not make it through to the government’s “core inflation” statistics. The Fed relied on globalization to contain inflation.
# The consumer is far more interest rate sensitive than ever before. Just about everything is bought on credit now. Bernanke’s predecessor Greenspan loved this “efficient” consumer. The problem is that this efficient consumer has to cut back much more sharply when faced with higher interest rates (or shocks, such as losing a job).” http://tinyurl.com/pzn9u
And just to refresh all you youngsters memories: “”We have seen security prices soar out of sight of earnings, brokers’ loans swell till they absorb a third of the banking resources of the country, and the blind pools of ancient days return and multiply by endless crossing and pyramiding as the investment trusts of today. Banks merge and emerge in chains, trailing trusts and holding companies, while industrial corporations pay dividends not by producing goods but by buying each others’ stocks and by borrowing and lending everybody’s money in the market. But of all these things can anyone say with surety what they signify, whether they are safe and sound, or what they are leading to? We do not even know, or cannot agree, whether inflation exists, what it means, or how it shall be measured.
“In face of the ignorance, uncertainty, and irrationality that surround every aspect of the “new era,” it were wisdom for business to keep its feet firmly on the ground and assume for the present that the principles that prevailed through the long business past still govern the stability and success of business today.”
Business Week - September 7, 1929
IMHO this is the beginning of the World Wide Asset Bubble collapse. In fact the more interesting action will be next week with the quarterly redemption numbers from the Hedge funds released. Yesterdays and todays stock market action is quarterly adjustment of portfolios.
Great post. Let’s keep more like it coming.
Hoz –
IMHO the World Wide Asset Bubble collapse began on October 19, 1987, but capitulation was successfully forestalled for 19 years by the world’s greatest bubble blower.
GS maybe. I’ll have to review the available funds vs debt structure and will get back to you.
Meanwhile this just came out.
Hedge funds lose this year’s gains in a month of turmoil
FT
http://tinyurl.com/naymh
I hope they sink so far that the term “hedge fund” is relegated to the historical lexicon.
P.S. It must be hard to justify those high hedge fund management fees when you can’t beat the return on a bank CD.
LOL!
‘The fact so many funds were hit in the same way highlights what some see as a worrying trend towards a herd mentality. Jane Buchan, managing director of hedge fund investor Pacific Alternative Asset Management, said: “The phenomenon of serial correlation in hedge funds returns is distressing.”‘
This serial correlation is the black swan which will end the conundrum. It shows up across the board in US stock market movements as well — the main signal in significant price moves explains upwards of 90% of the variance in the high-frequency price changes of almost any individual company stock that I have looked at for over a year now. This is a very bad sign, as it means that fundamental considerations have been overtaken by gambling strategies. Gambling can only produce oversized gains for so many periods before the collective mass of new entrants completely obliterates any arbitrage opportunities and sinks the whole market in one massively correlated crash.
1987 was just the beginning. Many things developed since then not due to AG, but because of other macroeconomic, regulatory, and geopolitical reasons.
Don’t blame everything on AG. AG didn’t create derivative explosion, nor the dot-coms, he didn’t open sweatshops in Asia and Latin America, he didn’t destroy the USSR, didn’t deregulate the S&L and junk bonds, didn’t drop dollar.
He is a product of the Friedman’s monetarism, actually we all are, since we put so much naive faith in the Fed’s ability to govern the ecomony with one crude hammer of interest rates. We are all to blame.
I agree, Max. But I still claim that AG used bubbles to help keep the asset markets bubbling up in defiance of fundamental reality…
I agree with you GS that we have been and are a Bubble Economy. The only thing we export are Dollars.
Not so. We have been actively exporting our jobs and manufacturing base for some time now, and provide the higher education which is enabling our Asian competitors to become self-sufficient and less dependent on our participation in the global economic loop. I believe we also export a fair amount of military hardware; I am not sure of the magnitude of this trade, but I believe it is significant.
Hoz –
I almost forgot, we have also exported massive amounts of our home equity to China, in exchange for cheap manufactured junk that piles up in our garages or offsite storage. It is not clear at the end of the day whether China will be able to collect on its “investment”, or in other words, whether the collateral that backs up all those MBS is really worth anywhere near the face value of the paper.
“whether the collateral that backs up all those MBS is really worth anywhere near the face value of the paper. ”
Always enjoy hearing your analysis, Get Stucco. Care to expound on the above?
So long as we are on the subject of asset bubble collapse, I am curious whether anyone else beside me foresees a mean reversion in AAPL’s stock later this year comparable to its collapse in the tech stock bust (TxChick — is this one on your short target list?). That big spike last year followed by the beginnings of a steep plunge suggest something like this may be underway, but it seems as though the fall has recently been arrested in mid-air.
Maybe the price will level off to a permanently high plateau this time around, instead of crashing to the floor like last time — after all, it is Apple, and Apple is “different” by definition…
http://tinyurl.com/s8k5b
I shorted it in the aftermarket yesterday when the news came out. Target is 45.
Are you willing to divulge your expiration date? And your best guess for when you will close your position?
Thx,
GS
Hoz-
You know those top 10 lists of people you’d like to be seated next to at a dinner party? I can’t tell you the # of posts you’ve done that make me think I’d put you on that list…..I’d really love to know who you are.
The gold market has rejected the null hypothesis that Bernanke will back up recent hawkish statements from Fed governors for the alternative hypothesis that he will soon, or has already, morphed into “Helicopter Ben.” I guess it does not help that the Plunge Protection Team has arrested a crash in progress for the second straight day in a a row…
http://www.marketwatch.com/tools/marketsummary/default.asp?siteid=mktw
I know that some posters here dismiss the Plunge Protection Team idea as a conspiracy theory, and I honestly have no way of testing the theory myself, but conventional analysts are scratching their heads in puzzlement about yesterday’s rally on the Fed’s open acknowledgment of a slowing economy…
http://tinyurl.com/rf7qu
No big fish really trades on the news. It’s perfectly OK for the market to move in counterintuitive ways, since this is the very purpose of the market - to shake out weak traders. Various other reasons exist - bull-bear wars, m&a arbitrage, program trades/rebalances, squeezes, etc.
If you expect the market to follow the news you’ll be disappointed. It appies throughout the world.
Your various other reasons all seem rather superficial to me, and there was a time not long ago when news mattered much more than it does now. The other puzzle are those periods when volatility just seems to mysteriously get snuffed out — like somebody threw a bucket of water on the price movements that a market with many individual traders would be expected to generate. Like today — you see a big move in the DJIA give way to a mysterious reversion to a flat line. Very conundrumish, and unsustainable, in my view…
GS - I have been following the markets for years. I do not recall a single year (maybe 1978) where the summer season actually benefitted a professional trader. The summer season aka the silly season is moved on lower volume with a lot greater risk. Most serious traders are gone from May to November, the risk/reward ratio is least favorable. From May to November the goal is to preserve capital. I am in 1 fund USERX, looking at another Fund MERKX and eschew Bonds and Bills. I am also invested in Gold as I have said before. IMHO we are in for a wild ride. Cautionary Note to all - What is suitable for my investment strategy is probably not suitable for any or all - talk to your investment advisor - There are some excellent ones.
“The summer season aka the silly season is moved on lower volume with a lot greater risk. Most serious traders are gone from May to November, the risk/reward ratio is least favorable.”
Interesting — sounds like this could be an ongoing condition sustained by a self-fulfilling belief.
And as opposed to many others - I hate picking an individual stock to short (unless I am going to sell PUTS against the stock- I rarely buy PUTS). If I feel that the Market is going to fall as in May then for me I buy UCPIX - which is almost always a very short term trade. There are a lot of Ultra bear funds available. See above cautionary note.
Getstucco,
all I want to say is short-term market moves never make sense, because that’s where the big fish gets its food. If we could trade on the news, we’d all became billionaires.
Don’t forget that the market is a warzone.
Spot on, Max. What’s worse, individual investors are in no-man’s land.
GS,
FWIW, I was going to buy index calls the day before the meeting (didn’t, because I’m too cautious). IMO, it was a given that the market would rally if the Fed raised by 25 bps instead of 50, which was certainly a possibility. The slowing economy is a given, IMO, as far as Wall Street is really concerned. They’re just playing the old “one and done” nonsense since the Fed started raising rates in 2004.
Let’s really hope BB squeezes the juice out of this credit bubble. He has a job most of us would NEVER want. I actually have a lot of sympathy for him, as everybody will blame him for the slowdown, instead of blaming Greenspan (and friends) for the surging expansion of credit/debt which has been going on for far too long.
How about:
Mortgage Rate Predictions For January 1st, 2007
grim
I’m already giving myself a little pat on the back for the prediction of a 7% 30yr rate by July. All of my LO’s thought I was crazy last winter. I think we’ll hover between 7.0%-7.5% for remainder of the year, but cracking 8% wouldn’t surprise me.
Why does this matter? Doesn’t everyone buy with I/O ARMs these days? In fact, other than the super-rich, can anyone in California coastal communities conceivably buy with a 30yr fixed? (The only case that comes to mind is those who bring equity from the sale of another house in bubble land.)
Excellant point, but where it’s at at any given time does seem to have it’s psychological effect. I agree with you, though. One of my LO’s made a comment the other day about the 30yr, and my response was to ask her when was the last time she did a 30yr fixed purchase. She just kind of stared at me a few moment.
This is why I have focused on the 1-year ARM interest rate as my leading explanation for the age-old question at the start of a real estate crash, “Where have all the buyers gone?”
Bankrate.com shows the 1-year ARM rate was 3.57%; today it stands at 5.48%, and I am pretty sure the Fed’s rate hike yesterday will drive this still higher. Assuming the same monthly payment, this implies a loss in the home purchase budget for the marginal buyer using a suicide loan over 1-year has been
(1-3.57/5.48) X 100% = 35%.
How about a topic that tries to find reasons why the real estate market will NOT crash by 30-40% in some areas (and I don’t mean it will crash more)
I’ve been reading this blog since March 05, but lately I find there is all too much back-patting and rah-rahing. Having confirmation bias can be an expensive thing if you’re wrong.
Don’t we owe it to ourselves to find reasons why (in the off chance) the market will just stay level and only have real drops in prices (due to inflation) not substantial nominal haircuts?
Good point. Both the countries I am most familiar with (Australia where I live, and the UK where most of my relatives live) seem to have dodged the bullet (for now ;)).
Always good to have a contrarian viewpoint. Keeps us on our toes. (and as I’ve been posting lately, homes are selling like hotcakes right now in my zip code, much to my amazement)
I would argue that 2 mechanisms for keeping home prices up (or rising) ARE often bandied about on this board:
1) if we get true wage growth (which can of course really raise home prices)
2) inflation (which can raise/hold nominal but not true housing values)
Clouseau
1) if we get true wage growth (which can of course really raise home prices)
Doesn’t appear to be happening at least for now. Here is an
excerpt from today’s MarketWatch.com
Consumer prices increased 0.4% in May, according to the personal consumption expenditure price index. Core prices - which strip out food and energy costs - increased 0.2% in May.
2) inflation (which can raise/hold nominal but not true housing values)
This one has me very worried. Please refer to my topic
listed above
“Will the real Ben Bernanke please stand up!”
Sorry.. should read..
Consumers earned and spent 0.4% more in May, but inflation took away most of the gains, the Commerce Department said Friday.
I’m curious, what is your ZIP Code? The only Zip Codes that I see selling like “hot cakes”, at least in Southern California are the very poor/gang infested areas. The nicer areas are falling on their faces with sales figures not seen since 1999 and 2000.
I’m curious too. Where is this so called “hot cake” area. I’ve been watching the whole Western region very closely and have no idea where this could be.
I think he posted the other day about homes selling in Minnesota.
Yep:
Minneapolis MN, Zip code 55409 and 55410 and some 55408 too. (the area collectiely known as “uptown” but is really “East Lake Calhoun” and “East Lake Harriet”
High end is zipping off the shelves ($1 million plus). (the high high stuff that’s over $3 Mill isn’t going so fast). Medium stuff is going strong too ($400k to $800k), but I’m not sure the sale prices relative to last year. (haven’t checked)
Low priced stuff (under 400k) is not in my neighborhood, so not sure.
I’ll try to gather some data this weekend about addresses and stuff.
My thinking is very unscientific, just by counting the #s of “sold” signs up and down the avenues in my ‘hood. And by talking to my Realtor (a very good friend), who pulled down 1/2 a mill in commissions last month.
clouseau
On the contra-contrarian viewpoint wrt to your general vicinity, Clouseau, I’ve got a coworker who lives in the Lake Harriet area. Of his own accord (not knowing I’ve the slightest interest in the RE market) he showed up at my desk this week with printouts of house listings in his area that have sat on the market for nearly a year. His point? He’s been following the market in that area ’cause he’s renting, and he can’t get over the outrageous prices being asked for fairly ordinary homes. He was just looking for someone else to validate his sense that these homes are greatly overpriced and that’s why they’re languishing on the market. He got an earful from me, you betcha.
Afterwards, he and I talked about the RE market in the Twin Cities (Minnesota) metro area overall. I’ve noticed recently that several homes in my area have sold. BUT - three homes currently for sale had previously had ’sold’ signs on them, which eventually came down and were replaced with ‘Back on market - price reduced” signs.
However, the most significant change I can report is something I have never seen in this part of the Twin Cities before, and I’ve lived here my whole life: ‘For Rent’ signs are blooming in the yards of single-family homes like dandelions. Some yards sport simultaneous ‘For Sale’ and ‘For Rent’ signs.
These are not neighborhoods where rentals are the norm. For example, in my immediate neighborhood we’ve only ever had two homes that are rental units, and (sorry, bitter renters) the neighbors have always looked askance at them for that reason. These are neighborhoods where many/most of the homeowners still live, who built these homes themselves (or with the help of a contractor) back in the 50s and 60s. That’s why seeing homes around here for rent is so startling. I am assuming these are homes purchased recently by FB’s, who have had no luck selling them and are now trying to rent them.
By the way, we’ve also had quite a few FSBOs around here who finally gave up and took their homes off the market altogether. And did I mention seeing several homes that sold last year or the year before, that are now back on the market? I’m betting ARM resets are the probable cause. Oh, and one home on my street was sold quick and quiet in a pre-foreclosure to a flipper, who started work on it and has now apparently abandoned it. There’s been a dumpster and a pile of rubble in the driveway for weeks now, and no sign of activity. Bad flipper!
THIS IS THE CONTRARIAN VIEWPOINT!
……..oh, and how the hell do you figure we could possibly get true wage growth!
That was my personal experience from the early 80’s to the mid 90’s. No crash in prices, but stagnant prices until wage increases and inflation helped the market “catch up”.
I have noticed that Austrailia and the UK home prices have come to a soft landing. Is this scenario that is being played out in both those countries relevant to the United States housing market. Greenspan mentioned this relationship in a speech a few weeks ago.
Good topic. I am sure some areas won’t crash. However - I am in S.Florida and it is crashing!
If by some areas you mean middle America, than I might agree. Areas where a 10% decline amounts to about $15,000. Sure, I’ll give you that.
Well what defines a crash? We’ve seen articles about places like western PA or Ohio where housing has gone up like from $75,000 to $125,000 and people are priced out. Don’t they deserve a correction, too? If they get the ~25-30% correction I feel that EVERY area needs/deserves (if not more), they’re down to $88-94,000. So just because their -25% price “adjustment” equals only ~$30K rather than hundreds of thousands of dollars, does that mean it isn’t a “crash”?
Really, I think the fun is over. Some people got rich, lots got (or will get) somewhat hosed, and many got priced out. But game over. Time for the next phase and that has to be price reductions/increased affordability/CONVENTIONAL financing.
“Time for the next phase” ……….good point. When hasn’t RE been cyclical? I think that a lot fail to stop and consider this. The tide comes in, the tide goes out. Find a historical graph and prove it to yourself if your not a believer.
(damn, I’m a postin’ fool this morning. Too much friggin’ coffee!)
Could the cost of oil keep urban housing prices high while the suburbs get hit with the 30% decline.
Buyers willing to pay a high premium to live in a place where they can get rid of their car and weekly trips to the gas pump.
IMHO initially yes, but a few years down the road the urban housing areas should start collapsing. I asked the same question of Marin County because it is an exurb of San Francisco with no local industrial base and thought its prices would be in the lead crash. If oil goes to $150/barrel in the next few years then I would expect the rural markets to keep collapsing (including popular 2nd home locations).
I was thinking along these same lines, but herein lies the rub: oil prices are sensitive to demand. If we have an economic downturn which affects not only goods importation but domestic consumption, I think we could have a short term energy price drop. With that said, I’ve been trying to get a handle on the realities of worldwide peak oil, so, for me, the jury is still out.
The risk risk (IMHO) is inflation (aka Zimbabwe) - I like Mish’s definition of Inflation http://tinyurl.com/msno7
#7 Price targeting by the FED is doomed to failure because a representative basket of goods and services can not be created, because prices can not properly be measured, and because price targeting puts the cart before the horse.”
IMHO inflation is rampant and oil is the only “true currency” . With a 40% devaluation of the dollar possible (IMHO - LIKELY), oil will be $150/barrel. How this plays out will be the subject of myriads of future dissertations.
For the energy illiterate, the world’s currency is OIL.
No ifs and or buts, agriculture is dependent on it, distribution is dependent on it, manufacturing is dependent on it it pervades every single aspect of modern life in the US.
Ergo, it is important to be long oil as a hedge against your gas and home heating bills. Buy XOM, BP, IYE, etc.
If one believes this is a bubble, then economics 101 says we must see a return to the mean. This could happen by a price decline. OR it could happen by prices staying neutral for a long period (say 7-10 years) and inflation bringing them back in line.
No 30%-40% decline. Just no flat price for a long time.
S & P’s prediction that US Treasury Bonds will be BBB by 2020 (hat tip to John Law). Reference is in thread #967, I can’t cut and paste on this PC.
Sorry, that should have been thread # 966 (the one on the global bubble). Level 1 comment at 10:23.
how about some discussion of the ideas where large businesses in places like LA are relocating and selling their buildings for housing. Also Magjic Moutain selling out to developers. If the businesses and entertainment places sell out to housing, at what point would people not have any work, places to go for entertainment, or affarod all of the new available housing.
That’s a great topic. My brother moved his business from Anaheim to the midwest because of the cost of warehouse space. In Anaheim the warehouse rent was $7K/month, in the midwest he could buy a larger warehouse for $100K. Since his business is all mail-order and his employees were also willing to move, it was an easy decision despite his never living or working anywhere but the LA area.
I would be interested to hear from people who left California for the midwest and if they are happy with the decision to move or plan to move back once prices improve.
An overall topic of people who left CA and went somewhere else would be interesting. I left CA 6 months ago, now live in the Ozarks.
Hey former Saratoga, Where in the Ozarks are you located? I’m in the Theodosia/Bull Shoals area and was wondering what you are seeing in your area?
I moved from Mission Viejo California to Ringgold Georgia where the entire county has a population of 55,000. Best move I ever made! I was raised in Chicago, moved to Seattle Washington,to Portland Oregon then to California; Santa Barbara, Huntington Beach and finally Mission Viejo. I spent the last 18 years in California and I really thought I was happy. Having been in Georgia for 8 months now, I realize I wasn’t happy at all and I had no internal peace. Here I have a peace I didn’t know was possible. People here are intelligent, gracious, open. Like the Ozarks, there is a natural beauty that isn’t contrived, or manufactured as it is in California. Housing costs are a 3rd the price of California with an acre or more of land instead of a 6000 square foot lot. Cost of gas is a dollar less per gallon. Food a 1/3 less. Everything is less. My water bill in Georgia is $15.00 per month, in California it ran $60.00. My electricity costs about 10% less here. Everything is electric in my new house so I’m saving an additional $60.00 a month in the gas bill I used to have in California. The two things I miss about California are: 1. The fact that you can have your windows open 24/7 350 days out of the year. I really miss that. I also miss the ethnic diversity in restaurants. I crave Persian, Indian and Tai food at this point. On the flip side of the food issue though, there is nothing like having enough land and good soil to grow a garden. I’ve fully embraced this Georgia tradition. It is very gratifying eating greenbeans from outside your backdoor instead of from Trader Joes. Or watching your cherry tomatoe plants yield a 1000 tomatoes. I truly never knew that life could be this good, this peaceful, this fullfilling. For the record, I’m not a 65 year old retiree. I’m a 45 year old woman, who owned a very successful company in California and I am an AMP’d personality. A definate type “A”. There is life “outside” of California and once you discover that, you realize that life “inside” California wasn’t so good after all.
Sorry runningonfull, I grew up in that little town. You are just getting to know something about the area. Wait a couple of years, check back in.
As you are just outside Chattanooga, study the politics there when you get a chance. Those folks can teach NY, LA, etc a few things about what dirt in politics really is all about. Many years ago Bookie Turner was the police commissioner of Chattanooga. He earned that nickname thru FBI raids and grand jury indictments. AND HE WAS RE-ELECTED. After his problems became public knowledge.
And then there is that great sheriff of Ringgold of years gone by - JD Stewart. Ask some locals about that guy. Prince of a fellow he was. Use to be if you rode thru that town after dark (and not a native of it), you were open season for him and his extortionist traffic tickets. The rule back then was if driving thru Ringgold stop at the traffic lights. Red or green stop, they could (and did) turn from one color to the other in about 1/4th of a second.
And the schools. Football factories would be a better word for them. They were so bad at one point the University there (in Chattanooga) refused to accept most local graduates.
Hope you aren’t a liberal or even moderate D or R. If so, leave now or don’t tell anyone. That place is conservative to the right of Hitler. Even the Pat Robertsons and Jerry Falwells of the religious groups are considered far far to the left and too liberal.
Chattanooga (and by default all surrounding surburban areas) has no future. NONE. Many years ago it was a well known manufacturing city. But Dupont, Combustion, Dow, the old Peerless, American Lava (3M), etc are all gone. It is now a large metro area, the locals trying to make money giving each other haircuts and beauty treatments. Plus rooking folks like you to move there.
If I were to move back to that area, no way would it be Ringgold. More likely N Chattanooga, Hixon, around Chickamauga dam, Lookout mountain.
best move i ever made. kingman az. no gang bangers, just a few meth labs.
I’m about to leave California for the midwest. I would be interested to hear from other people who have done the same. We have been unable to buy a house in California, but I am hoping we can buy something where we’re moving. I’m worried though because I don’t know if prices there are also inflated. My perspective on pricing is very distorted after living in SoCal for 7 years.
Depends where in the Midwest. Most places have little to no bubble. However, my mom runs a title company in rural Indiana and she says she has seen some really loony I/O loans come through the pipe. I don’t think Indiana/Ohio/Kentucky/Tennessee will have significant price declines. On the other hand, don’t expect real estate prices to go up more than 1-2% a year…ever. Buy a house only if it’s cheaper than renting and do not base your house valuation on ever getting an equity return on your “investment.”
Tulsa OK. Seems we can buy for the same price as renting. just don’t want to lose value on something.
I left CA in 1999 (moved from SD to Mpls), but I kept my SD condo until March 2005. I used to go back to CA every month, but now I only go back 3 times a year
I love Mpls.
Pros:
-both I and wife make far more $$$ here than we did in SD, and I make more than we could make in SF (she could make more in SF)
-it is beautiful here, super green in the summer
-I love the parks, lakes, bike trails
-I love the accessibility of everything. Unlike in CA, where -you have stuff to do- IF you can get a ticket
-There are lots of great restaraunts for me to go to
-the COL is so much cheaper. EVERYTHING is cheaper. Housing, food, parking, opera, sports, concerts, everything
-I love the arts here. Much better arts scene here than in SF or SD or LA IMO.
-Mpls seems to have a great mix between urban and parks/greenery, something CA doesn’t really have, except in the uber rich areas like Marin or La Jolla.
-it may not be too racially diverse (but it has a very quickly growing immigrant population from Africa, SE asia, and Latin America), but it is very tolerant of diversity, and a lof of ethnic things to do.
Negatives:
-winter. It’s brutal. not much snow, but can get very cold. (down to the 20’s in day, singles overnight… RARELY it can go negative, but that might be a day or two per year)
-No ocean. (we do have a lot of lakes here, and Lake Superior IS huge, but it’s not the crashing ocean)
The winter is a big negative> But my quality of life is so much better here in every single way except the winter. We talk about going back sometimes, but then we look at how far our quality of life would drop, so I doubt I’ll ever move back unless something seriously changes.
At some point the winters will push me out… but by that time I’ll be semi retired and will probably move somewhere warm and cheap, to relax with my family every day and wear flip flops. Can’t do that in CA with a $1 Million mortgage.
Great post Inspector. We took an early retirement and moved from Thousand Oaks Ca to where we grew up in Iowa. Although our kids loved it in Iowa, they could not think of any reason to stay there. They all now go to college here in the SW. I agree with you on the winters. We have followed the kids to the Phoenix area where we are renting until we know what we want to do. Our son lives in SD and is stuggling with the COL. Phoenix is a small town version of Southern Ca. We would like to see grand kids grow up instead of living half way across the country from them as we did while we were working.
As a family we loved spending time in Mammoth Lakes and were lucky enough to have purchased a place there before prices went through the roof. We have it in a rental program which pays all costs and will soon be mortgage free. We want our grand kids to enjoy this place as well. We learned that the midwest was not for us.
I moved to Altus Oklahoma and then Terre Haute Indiana (both for jobs) before moving back to San Diego for grad school and a new profession. Altus, pop 25,000 was a little small for me - mainly because the nearest mall was an hour away. Terre Haute was better and I had the most beautiful 110 year old Victorian. I got a lot of “why are you here?’s” in Altus. The mindset that Californians need to party constantly and that we all have exotic lifestyles is very ingrained. My idea of a good time is having three or four friends over for cards or games. Whoo Hooo!
Excitement I am not.
I am very disappointed by what San Diego has become. Crowded, rude, overpriced, fast paced and LA sprawling. I could care less about living here except that I am deeply dependent on my business support groups I have built. What great people small business owners are!! So I really don’t want to leave. But come December 2007 I will have decisions to make. If home prices have not come down enough that I can afford my dream home (which is pretty modest) I will move someplace more reasonable the following year. However, with all my business resources in place I am hoping I will be able to afford a nice home. If not, my experience has been that people are the same pretty much all over the world (I have traveled a lot) and I can get along anywhere.
I guess my overly verbose point is that moving out of state really depends on you. People in the Midwest are great. And this is from a flaming liberal who is not religious (which is a problem in the smaller town - people are very nice to you but so much of the social scene is church based (and I mean church not Temple or Mosque) that it gets a little lonely if you aren’t part of it.) Weather and climate might be considerations as well as your overall reception as a West Coast emigrant. There are parts of the US that are not very happy with Californians. Also, what do you like to do? If you love to surf Kansas is a bad move. If you are a huge partier and hang out at clubs, think about larger cities not smaller towns. Are you happy anywhere – or do you tend to be miserable anywhere? Those feelings will follow through.
If you do move to a slower/smaller area just smile and be kind. Some places you have to be born there to really fit it, but kindness is always rewarded. Also, you may want to look for more liberal areas (even if you not “liberal” moving from CA to someplace in the deep south and seeing racial slurs used commonly may be more startling than you think) as well as areas that other people from your state have moved to. (BTW I am a social liberal and a fiscal conservative. Most places I’ve been label you by your social beliefs since “conservatives” don’t seem to worry about spending nowadays. Actually, I’m a Goldwater conservative but no one seems to know what that means anymore.)
I will warn you moving cross country is not fun!
But it may be worth it.
Oh Gawd. That was way tooooooo long.
Short version: When you travel are you able to go with the flow or do you get upset/tense when things don’t go perfectly. If you adapt well traveling moving is probably a good idea. If you get upset when things are not as you envisioned you may want to stay put. Neither way is bad - but it reflects you and change and people who adapt well to change do better with radical moves. If you don’t - great you know yourself!
“If you adapt well traveling moving is probably a good idea. If you get upset when things are not as you envisioned you may want to stay put.”
San Diego Bear- OT, but…sometimes when you go to a place that is not you, you grow incredibly. Sometimes that growth is just what you needed. The change may be painful but as in U2’s lyrics in “Yahweh” from How to Dismantle An Atomic Bomb…”Always pain before a child is born.”
I totally agree Upstater! But I still think that people who aren’t very adjustable need to think seriously about moving out of the tried and true. I can be happy anywhere but know many people who have to have certain things exactly. I can’t change them. If these people had moved to a little town in Oklahoma they would have been suicidal. I’m just saying “know yourself.”
auger-inn — I’m halfway between Springfield and Joplin on 44 in MO.
There was an article just the other day about San Diego biotechs not even bothering to interview or recruit from out-of-state because of housing prices.
Even in 1987, the San Diego law firms interviewing at UT Law School had a hard sell because of house prices. 20 years ago. People like us would move out there and after about two years of realizing you could never afford to buy anything decent, they’d leave.
San Diego law firms have always paid crap wages.
“San Diego comes from the German ‘San Diego’ which means ‘whale’s v-gina.’
-Ron Burgundy
How about ideas for stock and option investing based on the assumptons of a coming recession and housing downturn?
I’ve made good money on puts on the builders and still have many long term positions. Richard Suttmeier has recently had several articles posted on Realmoney.com (subscription) listing region banks which exceede FDIC guidlines for real estate loans. These include NYB (New York), CORS (Chicago bank specializing in funding condos in hot markets), RF (southern bank that is buying out a Florida bank; both meet the overextended guidelines), BBX (southern Florida bank growing very fast and recently fined 10 M on money laundering issues). There are others. I chose these because they all have stock options. Most (exception CORS) have cheap options (low implied volatility). My strategy wil be to buy in the money Dec 06 options and out of the money Jan 08 leaps on the companies with leaps. This should give plenty of time for the bubble to either pop or deflate.
Most of these bank stocks have already decline during the past two months, but they will go a long ways further, especially with more fed tightening and bad loans. All of the popped up on Friday, so now or next week may present good entry points.
I’m with Bill. I know the more conservative of you are all about CDs for parking your cash. But we’re still young and looking to build our downpayment money at a faster rate.
The last few weeks were pretty horrible to our stock account but we knew there was risk involved. I’d like to know what people are thinking for the next year or 2.
Hoping to Buy in 08
The Hopper
http://www.BuyMoreHouses.com
You might want to try playing the downside as well or hedge your long positions using the new ETF products which give leverage as well without the margin risk to you. Profunds Advisors. They have Dow, QQQQ and S&P long and short. Again, I do not think that now is the time to be shorting anything but time will tell if that’s a right call or not.
I just have to laugh at this. Where you were you 2-3 months ago when it was low hanging fruit to short. The market has priced in anything you read in the popular press. The trick now is to let things retrace and then whack them. I think the S&P can make a new high this summer which will be the REAL shorting opportunity, but opinions are always subject to change based on what’s happening at the moment.
I agree only with “opinions are always subject to change based on what’s happening at the moment.” IMHO US dollar denonminated securities highs reached in June will not be this high again in years.
You aren’t cynical enough. This volatility spike caught a bunch of hedge funds too short vols and they panicked and brought it in too high. Lots of stories in the naked city
I think the braintrust has decreed that volatility has broken out from the 3 year trading range and they want to get long now, but not at the recent prices. I would not be shocked by a double top or marginal new high this summer but would throw every blessed dime I have at it on the short side.
Think globally instead of regionally, follow the money and the lack of inflow into the US markets as well as forced liquidations in the UK hedge markets does not bode well for future equity appreciation. How many hedge fund investors are cashing out today will determine the market direction (investors in hedge funds are allowed to cash out at the end of the quarter - if they are allowed to cash out at all!)
That end-of-quarter-only cashout rule is going to really bite when it is clear going forward that the hedge fund industry is undergoing a shakeout!
I left California for a much lower cost area, and absolutely no regrets about it. Finding many other CA folks have moved herek with no intention to ever return.
I left California for a much lower cost area, and absolutely no regrets about it. Finding many other CA folks have moved herek with no intention to ever return.
what’s the price level in your hood ?
22151 N VA is back to may 2005
For all the renters out there who chose to sell (or not buy) at bubble prices:
What are you doing with money you save by renting rather than owning?
Ratholing it for index puts in August
Giving a good piece of it away. Me and Warren. LOL. It feels good to do it.
I’m ratholing it, too, but finding that my “spartan” lifestyle is really no less satisfying than homeownership, which came with a lot of hassles and unanticipated expenses.
Watching the market soften while I rent adds to the fun.
i have it in a moneymarket account with state farm bank. 4.4% fdic insured, checks and atm card. paid monthly
Emigrant Direct, 4.80% right now. Contemplated some 1yr CD’s at 5.xx% but held off thinking the Fed might have boosted rates higher than they did. Also keep enough in a CD (4.xx%) at a local bank so I don’t have to pay their rapacious monthly fee to keep an account/safe-box there.
I am paying off all my debt. You would not believe how debt-ridden most of my generation is. Car payments, maxing out credit cards… I find people my age (mid-20’s) have no financial discipline. I used to not have any discipline either, and I got myself into a huge hole of credit card debt. Right now I’m paying it down. As far as investments go, I run my own business, which is doing well, so I just pay myself a small salary. My goal is to have my credit cards paid off before the end of the year… and my larger goal is to help educate my generation about financial discipline! (I talked a 23-year-old friend of mine out of buying a $36,000 car recently… his salary is $40K/year and his bank had “pre-approved” him for a $36K car loan…WTF? Financial institutions are totally corrupt.) I convinced him to buy a $10,500 used car instead (same make/model as the new one he wanted), which he is happy with… and the payment is significantly cheaper too!
NICE! Like your style, Slash…
slash,
so true about our generation. most of my friends are in debt of at least 8K and are already living paycheck to paycheck making the minimum payments. it hurts me to see that. i (25 years old) have about 20K cash (3 month cd at 3.7 paid monthly…so i have some liquidity) and 45K in stocks (kinda freakin me out right now). i have loaned money to three of my friends already interest free to help them with their debt. i rent a room for 400 a month and make 70K per year with no debt at all (both cars paid off and no credit debt). the moral of the story, our generation is pretty dumb with money.
everyone else, any advice on better investments for my modest savings heading into a potential downturn)
Good for you!!! Finally someone who sees what this is all about. It takes many people far too long to figure out what you have. In fact many folks simply never get it. It is simple. Do not spend more than you earn. Save at least 10% and never trust your financial future to someone who is selling you something.
Treasury bills for now. CA income tax is so high that the savings really ups the yield.
Setting aside all the financial issues for a moment, what are the environmental and cultural negatives of second homes, and to some extent, flippers? If everyone could afford a second home all the best places in the country would be housing developments instead of cute little villages where you go for a few days vacation.
Interesting, I don’t think that this one will get much traction here.
But from a sustainability point of view the bubble has been disastrous.
It is also deeply ironic that humans cannot restrain themselves in a housing bubble so it is highly unlikely that humans will restrain any problematic excessive consumption.
I have so many thoughts on this I could fill up ten threads. But people already think I’m a bitch for being disgusted at people ripping up terrain and shaving hillsides to build crap for people who shouldn’t be here.
Do I sound like the female iteration of the Lingus now? LOL. Where is that boy by the way?
I think a small number of posters are interested but the topic is too polarizing for Ben’s blog.
I think Lingus was banned and Robert Cote has toned down on this topic as well.
I say let sleeping dogs lie, even though I would like to see where people knowledgable about the credit/housing bubble land on this issue.
I miss Lingus! He was always good for a NIMBY rant.
Second home craze = urban sprawl run amock = environmental disaster on the urban fringe (IMHO, of course…)
I was just playing around with my mortgage payment calculator and saw some sobering numbers. Mortgage rates have just hit 7.00 for a 30 year fixed. Several years ago, they were 5.00%. What’s the difference?
Its amazing;
At a payment of $2,000/mo at 5% you can get a mortgage
for $492,897
At 7.00%, you can only get $366,853, which is a
$126,000 difference.
To get $492,000 at 7%, the payment would be $2,833. $800/mo difference!!!!!!
Prices gotta come down. The current market pricing
reflects the old interest rates. The same $600,000 house will now cost you $800 more/month than it did in 2004 when the rates were at 5%
Don’t forget the taxes on that $600K home are an additional $625 mo or more if it is a newer home
I posted this before as a reply, but I want to put it here as a topic.
Here are two charts of interest and mortgage rates for the last 30-40 years.
http://mortgage-x.com/images/graph/tx408.gif
http://www.agecon.purdue.edu/academic/agec217/deboer/graphs/intratels.JPG
I don’t agree with the idea that rates are still at “historic lows”. I think the unprecedented high rates of the early 80s were an anomaly. It is a statistical out-lier and if we remove it we see that 7% is about average for mortgages.
With that in mind this is no longer a “Great Buying Opportunity”!
And the idea that the mortgage rate justifies the bubble prices doesn’t hold up.
Good thoughts, ed.
As well, if you look at US interest rates over the last 200 hundred years, you can easily see that the early 80’s were most definitely an anomaly.
“Great buying opportunities” exist when the monthly outlay is comparable to, or perhaps a small premium to (depending on location and personal desires), the cost of renting.
How about a discussion on what the realtor cheerleaders will do to keep this party going long after the madness should stop . Will the realtors be liable for false inducement to purchase or sell real estate in the final analysis ?
Realtor: the Fed’s going to start cutting in January so only four more rate hikes if you get into an ARM right now. Real Estate always goes up when the Fed starts cutting.
So you think realtors will sell based on the Feds cutting the interest rates after January ? It’s hard for me to believe that people can be this stupid .Why do people believe people that have cards in the game ?
Spot gasoline prices are up 20 cents over the last week. If that isn’t inflation, I don’t know what is. It appears that Ben may let prices go to $4/gallon rather then really allow things to cool back down. If he starts cutting rates in January, I’m looking for $1,000 gold soon thereafter.
Gold $1200 by November, 2006
This is kind of academic but I would be interested in how math illiteracy contributed to this situation. Does anyone read the note before they sign it and understand the difference between principal and interest, between an ARM rate of 3.75% and “up to a maximum” of 8.xx% (i.e what does this mean in dollar terms)? Anyone ever look up LIBOR before signing to see what exactly is controlling your ARM’s interest rate?
I don’t know how many offers I have received for home equity and personal loans that only give the monthly payment and not the interest rate. Sometimes the interest rate can be found in small print–it must be a law that interest rates are disclosed, but maybe it’s not necessary on the initial advertisement.
Nearly all car ads are based on monthly payments. Do people just not consider the total cost? It seems that many people also do not realize (at least not very clearly) that their loans will reset at higher rates. It just seems like common sense to get out a loan calculator and run through a variety of scenarios when borrowing money.
I’ve been tracking eight new condos nextdoor. They were bought with 1 yr adjustables. Now that the loans are adjusting, the rate they are paying is equal to the 30 yr fixed. I’m watching to see if any refinance for fixed loans. I’m looking for some indication that the borrowers are understanding how their payments work at all and if they are going to take any action.
FL Renter-
Waaay up here in Washington State, the home of one of the highest “educated” populations in the country (hmm), I assure you, a good portion of our clients do not understand what they are signing and how their terms (ARMS) adjust. And yes, ARM’s are still king. Except they are now fixed for 10 yrs out.
Question for all:
The 10 year fixed ARM is the new mantra for some of the mortgage brokers I’m talking with. Could there be a smaller correction 10 years from now as those loans start to adjust?
And with all the 2,3,5,7,and 10 year loans each year maybe we’ll never see RE go up again as each adjustment leads to a new round of foreclosures!
SD RE Bear,
I think this is a very, very important topic. It’s why I think it will be an extremely long slide. We will likely see many waves as various-dated ARM resets hit. It could take 10+ years to reach bottom, IMHO. It really depends on the credit markets. Will we have some kind of systemic event, which will speed things along nicely? Or will we see money flooding the system as various CBs try to prop up all the credit-driven asset bubbles, because allowing the credit markets to contract would likely cause a worldwide depression?
I posted on this once before. I (jokingly) blamed poor math teachers for this whole mess. But what I meant, essentially, is the same thing you are saying - people who can’t (or are too lazy to) do their own math/budgeting.
Does anyone read the note before they sign it [...]?
Yes, as a matter of fact, I did indeed look it up when we last refinanced to a 5/1 ARM. The mortgage was based on the (at the time very low) Treasury 1 Year CMT, and the actual rate when the mortgage starts adjusting is/will be 2.50% above that figure. Not only did we check the historic ranges for that index, but we also verified that those and the caps and limits in the mortgage document we signed were indeed the same as was represented to us earlier. Due diligence, as they say.
Oh, but on top of that, before committing, I sat down and created a long, tedious, and very detailed spreadsheet that detailed the actual differences in principal paydown, allowed for various interest rate scenarios, and took tax consequences into consideration. That was just to make sure that the worst case (mortgage adjusting to 10% and staying there for years) was still manageable.
My friends though I was completely insane to do all that work.
Does anyone read the note before they sign it…
I have owned (made payments on) three houses (renting now) and I have to say that I never gave the paperwork much attention. I assumed that because I was getting VA loans that it had to be “legal”.
After reading this blog for a month, I’ve got to say that I will insist on reading every page of everything before I ever sign a note again!
Tangentially, I think a lot of people are/were like me - the realtor says it’s okay, the title company says it’s okay, the bank says it’s okay, so you sign and you get your home (or your ATV, boat, Hummer, whatever). I think that’s the dominant mindset behind this whole madness.
MjM
Hi FLRenter,
I am NOT attacking you, but you must be making a funny. You want people to do the math (fuzzy math, slick arithemetic). That’s really funny. Let’s face it most people in the US have to take out a “tip card” to figure the tip on a $20 check at the local bar. Forget about LIBOR, most FBs will think thats a new hip VODKA…
Have a good one…
Pen
The thing I don’t understand are those people who buy a new home without selling their old place. Not meaning those buying a vac place on the beach but rather those who can only afford one house payment. And yet, they think that their old place will sell in 3-4 weeks (and at the absolute ultimate peak, at that).
A very likely financial disaster in the making that just doesn’t have to be.
It’s just more of the “want it now” and refusal to delay gratification at all.
Dropped by an open house in Newton, MA a few weeks ago. The house has already been on the market for two months. There was one price reduction with the original broker. When listing expired, the seller signed on with another broker with a lower price. The new broker was so confident, the listing sheet mentioned offers will be reviewed on Sunday night (after the first open house.) Well the house is still on the market. The seller must have been overwhelmed with offers and is still reviewing them. Hehehehehehehehe…
Having been in a career that required relocating fairly often, I am aware of how difficult it is to find the right property. Good properties are snatched up quickly even in difficult markets if priced fairly. We have always sold before we purchased a house but you are then limited to what is available at the time. I understand why people take the risk of buying their dream home before selling thier current one.
We have always sold before we purchased a house but you are then limited to what is available at the time.
In a rising market what you describe make sense, but in a declining market the opposite of what you suggest must be done - sell first to get higher profit, and wait as long as you can to buy cheaper.
“he thing I don’t understand are those people who buy a new home without selling their old place. Not meaning those buying a vac place on the beach but rather those who can only afford one house payment. And yet, they think that their old place will sell in 3-4
weeks (and at the absolute ultimate peak, at that).”
You wouldn’t be talking about people like this, would you?
http://baltimorehousing.blogspot.com/2006/06/find-of-day.html
Lets all go out and visit our local high-rise condo complexs and ask about sales rates in the last 3 months. In San Diego I have found sales have stagnated over the last 3 months. How prevelant is that trend?
My topic suggestion:
Why does the general population believe that high housing prices are good?
How did these myth come to be believed?
What are the most effective arguments that point out the fallacy of this belief?
Really good topic idea. I woud be most interested
in responses to this topic.
Here is a informal log (in no particular order of importance),
that I have been keeping of discussion points (derived from
this blog) of how the housing bubble came into being:
a) Plain old fear and greed.
b) Immense pressure to live
unsustainable lifestyles in
order to gain social acceptance.
http://30kmillionaires.com/
“Beneath it all is typically a lack of self esteem.
It makes them feel better to make you feel bad.”
c) Overwhelming ‘nesting instinct’ pressure
from wives / girlfriends.
d) A culture of instant gratification,
gotta-have-it-now.
e) A pervasive addiction to ‘financial
crack cocaine’ (AKA debt / cheap money).
f) An amazing (appalling?) lack of basic
financial / math skills by
the general population.
g) A belief that we live in an entitlement
society (government pays for anything
we can’t afford).
h) The phenomena of ‘Cognitive dissonance’,
a term used by psychologists to describe
how individuals attempt to resolve
conflicting pieces of information..
i) how many people don’t realize that their
biggest and most valuable asset is their name
— a name in good (credit) standing.
Yet, without much thought, many squander that
very valuable asset and may never get it back.
Why does the general population believe that high housing prices are good?
Not so much as high, but rising. Easy to create “wealth” by holding an asset-based investment.
Kinda like why people like rising stock market. Until it stops rising, and then suddenly nobody like the high prices.
How about a discussion on the 1,300 condos being built in downtown Escondido? (from today’s SD Union-Trib)
I’ve heard it all now.
BTW the story below the Escondido article was about the City of Vista fighting a lady opening the “Deja Vu Love Boutique”.
“We’re not adult,” she said. “We’re going to be a high-end lingerie store.”
You guessed it, she’s a realtor.
1,300 condos in Escondido? WTF!
The four horsemen of the apocalypse are coming around the bend and they look pissed!
So today I’m reading the local (Australian) financial paper, and there’s an article about a big developer that’s just “snared a major development parcel in Denver”.
Their stated strategy is to build “mixed-use communities” (which sounds like condo’s over retail/commercial to me), and in particular “to target high population-growth states such as Colorado, Florida and Arizona”.
Quote from the CEO: “I can see us having a very big US residential business.”
Go to http://www.lendlease.com.au and look at the announcement for 29th June. That’s the business intelligence the big bucks get you.
I don’t know whether to laugh or cry.
A little note: FEMA has been ordered by the House to stop subsidizing flood insurance on second homes and vacation homes. This will probably double premiums at least and possibly make it impossible to get flood insurance on these properties. This will lead to Bank’s banking away from these types of loans.
I wonder if Congress realizes the consequences of this act.
I think that Congressional staffers do.
Just another stealthy way to undermine the foundation of the housing bubble.
The times they are a changing…..
http://realtytimes.com/rtcpages/20060630_contingencies.htm
“A Washington, D.C. area seller writes that he has “drastically lowered” his price, has a great agent and is “very realistic about the market,” but that he’s turned down two contingent contracts with unrealistic buyers. Having lowered the price to 30 percent below appraised value, the two contracts have both been contingent on the buyer selling his or her home first before completing the sale.
In further discussion, both buyers, according to this seller, are very unrealistic about the value of their own homes, and want to put them on the market way overpriced.
“They think my house is a great deal because I have lowered my price,” Tired Seller writes. “Then they write a contract based on the equity they ‘assume’ they have in their home. They want to list it way overpriced … . My plan is to just keep lowering the price until it sells. Any advice?”
I was curious about the mortgage application index numbers the Mortgage Bankers Ass. puts out every week. I wondered if it was possible to detect patterns of tightening credit by changes in the rate of accepting or denying loans. So I asked them, but it turns out they don’t collect that information. The government, however, does collect that information, in its efforts to prevent discriminatory lending. Of course, we know that lending has become very loose,old-fashioned credit standards have almost disappeared, but I wondered if it were possible to measure how much change there really was. So I downloaded some data for the years 1999-2004 (the 2005 HMDA reports are not available yet). The numbers I was looking at were for purchase loans for 1-4 family houses, broken down by income levels (given as a percentage of the mean income in each census tract area):
1999:
Goodness, Mooph…
What did you find?
Here’s an interesting thought from an editorial I was reading. Can a pause in rates be the final blow to the housing market?…….
“Another major problem is that the housing bubble has finally burst. Thus far it has only produced a slow leak, but by next year the air will be rushing out with gale force winds. Because the loss of paper wealth and the purchasing power associated with it could potentially produce a recession, some argue that the Fed should pause. Ironically, one of the only remaining props in the housing market is the belief that the Fed will keep raising rates, which pushes remaining home buyers to buy before mortgage rates move up. However, once the general perception is that the Fed is done, this last remaining prop will be gone.”
Interesting. I know in our area realtors advertise to “buy now while rates are low”.
For the rest of the editorial: http://financialsense.com/fsu/editorials/schiff/2006/0629.html
That or their dovish comments are aimed at jawboning the long end up so as to avoid the inverted yield curve.
I just do not see any pause in the rate increases.
1) The Fed has never lied in their FOMC statements since 1978 (Volker)
2) Yesterdays Fed statement “…Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.” http://tinyurl.com/rhueh
3) The US needs to borrow 2.7 Billion every day to pay bills.
4) Japan is coming off ZIRP.
5) China is buying gold.
6) the ECB is worried about inflation and is raising rates.
7) Russia becomes fully convertible July 1, 2006 - The Ruble has become a “Hard Currency” and has gotten rid of its dollar reserves.
In summary - I expect a 0.500% Fed Fund increase Aug 8 with increases every time the ECB/Japan raise their rate. Failing to raise rates is tantamount to allowing a run on the dollar. And with 3 trillion dollars abroad, I don’t think it would be stoppable. Think 1920’s Germany.
crap. I’ll have to repost.
These are the numbers I meant to post:
1999:
Well, just never mind then.
Maybe you should just write your findings (perhaps you have these in some type of table format and it’s breaking…)
All right, just imagine this is formatted readably. For those earning less than 50% of the median income (in each census tract area), the percentages of loan applications denied is: 1999, 43%, 2000, 43%, 2001, 37%, 2002, 29%, 2003, 25%, 2004, 29%. For those earning 50-79%, the percentages are 1999, 28%, 2000, 27%, 2001, 22%, 2002, 16%, 2003, 16%, 2004, 18%. For those earning 80-99%, 1999, 21%, 2000, 20%, 2001, 16%, 2002, 12%, 2003, 13%, 2004, 15%. For those earning 100-119%, 1999, 16%, 2000, 16%, 2001, 12%, 2002, 10%, 2003, 11%, 2004, 11%. For 120+%, it’s about 8-10% for all years.
For 1999-2002, the total number of applications is about 5 million per year. 2003 is 6 million, and 2004 is 8 million. So even though decline rates go up a little again in 04, the number of loans given out still rises overall.
This is just a tiny drop of a big data pool. But at a quick glance it does seem to clearly support all of the anecdotal evidence for saying that there have been a lot of loans, on the order of hundreds of thousands at least, that would not have passed muster under old standards.
Thank you for your research! It does seem to show that standards have been tightening up since 2004. Let’s hope it really continues.
There is a radio ad running in San Diego promising to help you “find a mate” It goes on to explain how knowing your credit score can help you get a new car or boat. After describing a few loan products, the salesman says “a new condo could make you IRRESISTABLE!”