patrick.net

I told you guys this last summer and I will say it again: governent does not care about renters who wan tlowe rhouse prices. You can keep starting these thrads complaining about high house prices and bail outs until you are blue in the face, and it won't make a darn difference. All 3 presidential candidates support bail outs, so you have absolutely no chance of succeeeding in your agenda.

Alpine
just because they say they support something doesn't mean they actually understand that support the same way you do.

easy example: Barry and Hillary both claim to be against NAFTA. Do you think either of them is about to re-negotiate any of it?
Another one: the current prez says he wants to fight global warming. Do you see Al Gore jumping up and down with joy?

Regardin articles in the media advocating lower house prices, here's one from a major monthly.

http://tnr.com/politics/story.html?id=2da0e8b4-78f3-47ce-8e76-91931b677e9c&p=1

A sample paragraph:

"Those who support government intervention maintain that falling home prices are a danger. But a danger to whom? Falling prices would allow new buyers to purchase homes they could genuinely afford, and existing borrowers who are able to make payments would continue to build equity in their homes. People would also have less incentive to frequently flip from one home to another, and thus they would deepen and lengthen their ties and obligations to their communities. Falling prices might even allow a return to the increasingly rare single-income household, thus allowing one parent to tend to the needs of the family's children. Besides which, in our drive to spur home ownership, we have stigmatized renting. Renting has real economic value--especially for that portion of the workforce that needs to remain mobile in order to find employment--yet investment in rental properties has been minimal for decades.

Oh finally ! A housing bull has arrived at Patrick.net !! Alpine the Realist, the (in)famous Zillow poster wants to irritate the Patrick.netizens.

You are right, Alpine, the Govt does not care about renters. The problem is, it does not care even about loanowners. Kindly explain to us how the bailout is helping any sort of common man - renter or loanowners ?

Did you benefit from the Bear Sterns bailout ? Are they specifically marking the tax paid by homedebtors and NOT using them for bailouts ?

The unfortunate and sad reality is, the housing bubble and and its aftermath is not going to help anyone except a very small circle. Neither the debtors nor the renters are going to benefit from it.

Because you don’t understand what “interest” is. It is not a penalty. It is a forward prediction about the time value of money in the context of risks and inflation.

In a sense, our interest-based economy not only "predicts" inflation, it also *ensures* it. Without an ever-expanding balloon of credit (and money supply), the economy cannot "grow". Debt that actually gets paid off is considered "bad" in our system because it reduces the money supply (fractional reserve's money multiplier in reverse).

Default risk, OTH, is something that could easily be addressed through collateral alone. Anyone remember the days of 20% down? Not too many "YouWalkAway.com"ers back then, unless there was a true catastrophe (Depression).

I have to admit, I'm starting to seriously wonder why it is that we assume that very long-term interest-based financing is the *only* way to make large purchases, such as a house. What did people do before the 30-year mortgage (~60 years ago), or before modern mortgages period? How about pay-as-you-go D-I-Y (strawbale, cordwood or kit houses), or some other type of installment plan lending? You make interest-free installment payments on principal alone, and the bank/lender gets to share in any profits when you eventually sell. Sort of like Islamic banking, or contractum trinius in old Europe.

Being in debt is bad. That is my personal finance opinion. People might disagree.

However, I am even more convinced that debt is not wealth. It is definitely not money. Especially in a fractional reserve system where leverage "creates" more money to lend as debt and that debt is counted as more wealth to leverage further and so on.

Well, let's see. If someone has an ARM that is about to re-set, and the government forces the bank to freeze it for 5 years, that helps them. I have a fixed rate loan, but the bail out benefits me as it prevents foreclosures and keeps houses off the market. And I also live right outside of NYC, so I would imagine that the Bear Stearns bailout would have some sort of affect on the housing market here... although it was probabaly very small.

Because sharing in profits on principal for complex services would be terribly inefficient and worse than just paying for the capital you borrowed.

Equity and debt aren't that different. If you float equity, someone "lends" you money for one set of rights. If you take debt someone lends you money for a different set of rights. The debt holder gets to take back assets if you fail, but they also risk you paying off the loan and being free of them without their having any say in the matter. The equity owner gets to benefit from appreciation of your assets, but suffers if they drop in value. He also gets nuthin if you fail (in 99.9% of cases). But he holds a handcuff over the guy who issued him the equity, because he doesn't ever have to sell (for normal equity), and can command whatever price he sees fit if you ever wish to be free of him.

I can buy back my debt at a known cost. That is worth something quantifiable. I cannot buy back my equity at a known cost. Ask any small company which took a ton of equity to launch, but then becomes mildly cash-flow positive with a nice, happy but slow growth rate whether they'd rather have taken debt instead of floating equity. They are slaves to their equity masters.

I'd much rather buy a large asset using debt. Always. Sure, I'd rather have enough cash in reserve to pay it off on-demand. But that is a separate issue as to whether debt is "bad" or not in its own right. Just imagine how f'd up house prices would be if instead banks used the methods of those guys (who I won't advertise) in SF that "buy shares" in your home ie., true equity. I have every reason to believe that would be 5x worse than the debt fiasco.

They are slaves to their equity masters.

Randy,

Do retail stockholders really hold the reigns of power over publicly traded companies today? Seems to be the exact opposite, given excessive CEO compensation.

I'm not saying there are "zero* instances where borrowing makes more sense. However, where raising large amounts of capital and spreading risk is concerned, common public stock seems a little better --or "fairer" (however you choose to define that. If the company/enterprise earns a profit, everyone gets a dividend. If it loses, everyone's stock goes down. Better than the "heads I win, tails you lose" usurious casino-style of mortgage lending we've seen over the past several years.

Of course, the house one lives in is not really an "investment", nor is it (barring some illicit uses) a "business". For the borrower, it is really a consumable and liability --and should be treated as such.

Is that really Peter Tiemann's blog, Apline? He's usually much more reasonable than to write something like "Answer to Housing Doomers Conspiracy Theories". That's just silly. Even he wouldn't say that objective financial math is a "conspiracy theory".

Man, the extremism on both sides is just going further and further and further. Before long renters will all be living-dead vampires and housing-purchase-pushers will all be a cabal of evil, enslaving alien bankers.

For some reason my previous comment got swallowed up in moderation, and I no longer have the right to approve it.

Randy,

I guess it comes down to a matter of use, as you say. Problem is, most people are willing to perpetually take on more and more debt, while banksters (gambling with OPM) seem to be perpetually willing to let them do it. The old self-limiting mechanisms of collateral (down-payments) and default/foreclosure appears to have broken down.

Down-payments, PITI and full-documentation are no longer required because lenders are gambling with OPM, and take their profits long before the borrower defaults. These same lenders contribute so heavily to Con-gress that politicians would rather take bailout money from responsible people (or borrow heavily against future taxpayers) than allow reckless lenders to fail in large numbers.

In the end, trees can't grow to the sky, and I know things will eventually sort themselves out. But, in the short run, I'm stuck between delusional, whiny FBs and powerful, moneyed lenders. So... I rent.

Americans in WashDC are not armed by law, that might be a reason for the surge. Only bad guys have weapons in DC.

Maybe the bad guys are having a surge now in anticipation of a USSC ruling against their "interests" this June in the Heller case. :) Starting in a few months, there may be a lot more dead burglars in the District.

Does anyone know ASL? What's the guy pictured above saying?

Being in debt is bad.

Debt is morally neutral.

FYI: There was an open house just down the street from me (an undisclosed location in Contra Costa) and the seller wanted $499k for a 1700sft 3Bdm 2ba townhouse in a middle income neighborhood that could rent for ~$1800 max (I just moved and personally viewed many similar rentals in this area, so am quite confident in my estimate).

This represents 278X monthly rent, or roughly 9x area median HH incomes.

We are a loooong way from the bottom in NCAL, people.

Debt is morally neutral.

Not according to the Bible or Koran. ;-)

We are a loooong way from the bottom in NCAL, people.

I blame Randy and his stickiness propaganda. If he'd only kept his mouth shut, this think wouild've been over by now...

We are a loooong way from the bottom in NCAL, people.

Indeed.

What you say in numbers, I can also see that in another unscientific approach. In people around me, I hear cries of "Oh it cannot fall any more" and "It's a steal at that price" etc. And not to forget, "Not in this area".

Pessimism has certainly increased over last 2 months, and at a surprising speed. The BSC news shook quite a few people.

RandyH, you are arguing from a somewhat pedantic position of defending the manner in which debt *should* be used - applied judiciously towards an enterprise in a manner where the debt can be reasonably serviced and retired. You are perfectly correct, of course...

...but the situation you are describing is a far cry from the way debt has been (ab)used in recent years, and the extremely perverse attitude that this government "Of the banksters, By the banksters and For the banksters" has towards debt - namely pitchforking more debt to prevent past debt from defaulting. That is a vortex from which it is difficult to get out.

Well, let’s see. If someone has an ARM that is about to re-set, and the government forces the bank to freeze it for 5 years, that helps them.

And if the Govt forces someone to buy the house from the FB at double the purchase price it helps the FB. And if the Govt forces the lender to write-off the entire loan and hand over the title to the FB, then it helps them. Etc. I hope you get the idea.

Let me know when the rate freeze actually happens.

And I also live right outside of NYC, so I would imagine that the Bear Stearns bailout would have some sort of affect on the housing market here… although it was probabaly very small.

You mean the pink slips at BSC and on Wall Street are actually helping your housing prices to not fall ? You are one heck of a realist.

Dude, whenever you realize that Govt has no concern for people who do not make large donations, you will be better off.

Okay, jumped the gun on hectoring Randy without reading the rest of the discussion... sorry :-)

Not that Randy needs any help, but his point is valid: debt for investment is a positive. The US was a debtor nation for a great deal of its history; the debt was used to build productive enterprises which increased the overall economy. We've all benefitted from that.

Some debt is pure consumption: a vacation to Italy yeilds very little future value. If my preference is to consume now and do without later, AND I understand that's what I'm doing, well, that's OK.

Where many individuals (not here) have gotten confused is using debt to fund what they think is investment where in fact it is consumption: pergraniteel (tm) is a perfect example.

Debt is neutral, it just depends what one does with it.

And Randy, thanks for the reminder that we live in an M 'n' M world

Yes Randy, that is Peter's blog. I gave him most of the links for the articles he has on the home page. It isn't much, but we are working towards building it up.

HARM said:
the seller wanted $499k for a 1700sft 3Bdm 2ba townhouse in a middle income neighborhood that could rent for ~$1800 max
In some other cases, prices have seemed to come down faster. A friend just bought a brand new 1,500+ sqft townhouse for $500k in north san jose. He put a sizable down and got a very good loan at

sorry for the repost. last one somehow got truncated.

HARM said:
the seller wanted $499k for a 1700sft 3Bdm 2ba townhouse in a middle income neighborhood that could rent for ~$1800 max

In some other cases, prices have seemed to come down faster. A friend just bought a brand new 1,500+ sqft townhouse for $500k in north san jose. He put a sizable down and got a very good loan at

at less than 6 percent. So his PITI is little over $3K, just about $500 more than rent. Sellers of similar townhouses but 10 years older are still asking for $600K. So I see that the builder is adapting faster to the market condition than those sellers in denial are.

When people in Manhattan tell you that a broom closet costs $800,000, they REALLY mean it:

http://www.nytimes.com/2008/04/20/realestate/20deal1.html?ref=realestate

How about this surfer-x classic:

Now, I am become Debt, the destroyer of wallets.

"Criminals are jimmying locks, kicking in front doors, breaking through roof hatches and skylights, and sometimes even sawing security bars off windows to get into houses and businesses, police said. They are hauling off computers, flat-screen televisions, jewelry, digital media players and other items, which they then sell."

Criminals in DC are doing much worse things than that. They are stealing taxpyer money and using it to give large tax breaks to oil companies and the wealthiest 1%. However, to be fair, we do not call these people "criminals." We refer to the as "Senators" and "Congressmen."

Debt is neutral. For most people that have a small business, debt is a requirement to both start and operate their business. It is needed for capital investments and to fill holes in cash flow. Debt allows a company to operate smoothly and efficiently. Abuse of debt of course can sink a business. Surprisingly debt can in and of itsself make you money. I used to borrow money on a line of credit in order to take substantial early payment discounts. Available credit is also a requirement to, as they say, "grow the economy". This is one reason why the recession could be very deep and long, banks have money they just won't lend it. This squeeze should provide an opportunity for those with cash and or blemish free credit to prosper. All that said there is a sweet freedom in not having debt or a debt that you can pay off at will. On the housing side in CA. it would seem to me that the only people who made good use of debt were the flippers who got out in time, good for themselves that is. Everyone else who bought in the last few years is screwed.

HARM says: I have to admit, I’m starting to seriously wonder why it is that we assume that very long-term interest-based financing is the *only* way to make large purchases, such as a house. What did people do before the 30-year mortgage (~60 years ago), or before modern mortgages period? How about pay-as-you-go D-I-Y (strawbale, cordwood or kit houses), or some other type of installment plan lending?

Well HARM, so here's the thing. The options you just mentioned are all self-built structures. There's only so much you can do with a modest house constructed by your own hard work. You don't need a 30 or 40-year mortgage to go that path, but modest is passe. Americans need luxury. Actually, Americans deserve luxury. We also need homeowners associations to safeguard the conformity and sanctity of a mutually-assured luxurious environment. None of that hick strawbale nonsense in my carefully cul-de-sac'ed subdivision.

If we truly looked at green building techniques, I'm sure we could build homes that are 3-5x more energy efficient, use half the water and cost 2-3x less to construct. But people would have to stop making homes a pissing match with their neighbors... and that's completely against the "middle crass" (sic) culture. Far better to have granite tile countertops and a low-end Mercedes, because God knows, if you can mimic the rich, you must almost be rich, right? And that makes you superior to Dick and Jane.

Although I hear they're putting in a hot tub with Spanish tile surround. Mustn't let the Joneses catch up! Maybe a stamped concrete patio could extend my lead...

FAB, Jimbo, BAI, et al:

Colorado State University is at the center of Fort Collins. The Old Town (1900-1935) extends primarily to the east and north of the university. Old Town is a really eclectic mix of homes and businesses, which is one reason why I like it.

You could say that homes around campus held their value, but that doesn't necessarily capture the whole picture. The really nice homes on locally "famous" streets like Mountain Avenue are prestigious places to live. Many of these homes have belonged to wealther folks since their very construction. You're never going to rent a classic Victorian or Foursquare to college students. But I believe that these homes experienced price inflation during the bubble. A 2500 sq.ft. nice brick or wood home will run from $300K-$500K, with occasional very large and beautiful properties going in the $600K-$800K range. My favorite gorgeous house (and far beyond my price range) is this classic brick foursquare at 202 E. Elizabeth Street, which is barely two blocks away from the University. Prices have come down at least 10% since the highs, and possibly more depending on the property.

There are also older homes that serve as student rentals, typically from 1000-1500 sq.ft. and built circa 1920-1935. These tend to be on the streets closest to the University, and have usually been student rentals for decades. There is an area south and slightly west of the university that was built in the immediate post-WWII era; these are also largely student rentals. Upkeep can be poor---dead lawns, collapsing porches, wall/door damage---these places have been used hard.

During the bubble, prices on these rental properties had disconnected from rents. Houses that rented for $1200/month were advertised for $300-350K+. Clearly people were gunning for future appreciation, because your rental fee won't cover PITI or damages. Presently I'm seeing a floor come in around the appropriate PITI @ 6% plus maybe 10-15%, which is much less of a disconnect. I've also seen significant foreclosures on "permanent rentals", leading me to believe that the noveau landlords with shallow pockets were speculating on appreciation or just didn't understand the operating costs of a rental property. However, when banks list these houses for -10% or more below market value, they get all-cash offers from professional landlords within a week.

Other areas of town have been hit much harder. The 80525 area code is miles from the university and a technology-heavy area. When big employers like HP, Intel and AMD had waves of layoffs, the house prices were dragged 10% lower. Right now they seem to be in an uncomfortable state of low sales turnover and climbing inventory. This is a target zone for me, as it's within 1-2 miles of work, and I like to walk. But I also don't care for the white suburban vibe and cookie-cutter atmosphere. I like the University and Old Town, which have a funky vibe and a much better nightlife.

I've also found this 1938 art deco house quite fascinating, but it has nowhere near the appeal of the foursquare.

Nice post, OP. Goes right to the absurdity of the situation.

Randy H: "You don’t understand what 'interest' is. It is not a penalty. It is a forward prediction about the time value of money in the context of risks and inflation."

Codswollop. It's profiteering without producing anything. It's sitting behind a mahogany desk rubbing two dollars together and making twenty. That's what it is today, in this world, with the organized criminal activity (considered "business as usual") known as "fractional banking."

Anything resembling reasonable interest for the hoi polloi was left behind long ago, when it once was actually associated with tangible wealth--not endlessly creating debt out of debt out of debt out of debt, like some lounge-lizard magician pulling multicolored dime-store silks out of his nose. Or out of some cavity.

Debt in today's world is slavery to a system utterly corrupt and baseless at its core. That's why the Fed's printing presses are using ink measured by the ton.

TOB,

That *is* cool. I wonder these are landlord rent numbers or renter rent numbers :)

denriddy

Thanks for the morning chuckle. I'm heartened to see that the extremist element on the other side is alive and well. As is always the case, the truth lies in the moderate middle.

Brand Says:

> FAB, Jimbo, BAI, et al: Colorado State University is
> at the center of Fort Collins. The Old Town (1900-1935)
> extends primarily to the east and north of the university.
> Old Town is a really eclectic mix of homes and businesses,
> which is one reason why I like it.

I was on the ski team in college so I spent more time in CO than most kids from CA and I’ve always liked Fort Collins (but Boulder would be my first choice for a CO “College Town” investment).

I was close to Fort Collins when I drove from Denver to a friend’s ranch outside Greeley last summer and the bubble homes popping up in both Loveland and Greeley reminded me of the CA Central Valley bubble towns (and I predict big drops in value).

> I’ve also seen significant foreclosures on “permanent
> rentals”, leading me to believe that the noveau landlords
> with shallow pockets were speculating on appreciation
> or just didn’t understand the operating costs of a rental
> property.

Unless you make a big down payment “and” manage the home yourself “and” are able to make most repairs yourself you will most likely have a huge negative cash flow every year on a rental home (if you are local and want to spend a lot of time learning about management, maintenance and tax laws you should be able to get some after tax cash flow with a decent size down payment).

The key to making money in college area real estate is to buy a nice looking well located property that the kids of rich parents want to rent. You then get the parents to co-sign on all the leases (you can get money out of rich parents, but will not see a penny if the three young people with no jobs just move out some night or thrash the place at the end of the lease)…

denriddy Says:

> That’s what it is today, in this world, with the
> organized criminal activity (considered “business
> as usual”) known as “fractional banking.”

Do these criminals fly around in black helicopters?

Brand thanks for the insights on Ft Collins. I can't help but notice that what you consider crazy price (rightly so I'm sure) is starter home pricing here. I could never wrap my mind around that big a differential (of course I am an idiot).

I know people in the Bay Area make a bit more than people in Ft Collins, but not that much more. WTF?