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Invitation to Financial Suicide


 invite response                
2008 Jan 1, 12:15pm   34,945 views  341 comments

by Patrick   ➕follow (55)   💰tip   ignore  

Found by reader Larry, when cleaning out the garage of his rental place:

invitation

#housing

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1   Malcolm   2008 Jan 1, 12:43pm  

Owners get these letters all the time.

2   StuckInBA   2008 Jan 1, 12:49pm  

Malcom,

Thanks for your reply on BPO in last thread. I did not read the link before replying automatically and in any case I wasn't aware of Broker Price Opinion.

3   Malcolm   2008 Jan 1, 1:08pm  

Happy to help.

4   anonymous   2008 Jan 1, 1:48pm  

Yep owners get those constantly. Renters get them once in a while just in case there might be a homedebtor living at 123 Fake Street Unit #123 lol.

Constant hucksterism......

Oh those "People Are Smart" ads drive me up the wall. They must be running them 8 times an hour on all the major channels, how much must that cost? I love the hidden-in-plain-sight messages though, like the house sitting there then catching fire and the loan rate heading for the clouds, or the magician/illusionist with his pants falling down.

"People Are Morons" lol

5   anonymous   2008 Jan 1, 1:48pm  

Of course as I type, there's an ad for "Car Title Loans" right here just above the text entry box...... still, if it earns Patrick a few bucks......

6   StuckInBA   2008 Jan 1, 2:09pm  

Kind of related to this thread.

Herb Greenberg posting comments from a mortgage industry insider.
http://tinyurl.com/2ota6e

This was posted Dec 6th, so many might have read it and may have been discussed here. In case you haven't, it's definitely worth a read. For most of the Patrick.net regulars, 90% of the content is already known. So I will give some interesting snippets here.

But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

That was definitely a new insight for me. Refi and increase your credit score. Neat.

Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. ..... 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

This is also a WOW. I was aware of the Option ARM mess, but these numbers are - WOW. Is Bay Area one of those affluent areas ? ;-)

The last 2 paragraphs are gems. This is to all those who believe in the tremendous wealth of 2-income techies to support the economic fundamentals of RE prices in Holy Land of Bay Area.

In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Anyone care to offer a rebuttal for the last para ?

7   OO   2008 Jan 1, 2:26pm  

Ok, here goes the rebuttal.

There are about 2.5M households in the Bay Area, top 10% would make them 250K households, a huge number. Of course some of them have already bought a home, so let me assume that 1/4 of that number have not bought a home yet, leaving us close to 62,500 households (you can challenge this assumption later).

Where will they buy? Pretty much Pac Heights, Marina in SF, coastal Marin, Western foothills in SM and SC, plus very select spots in East Bay. Now, how many houses do you think are offered for sale in these select areas? I bet it is less than 10,000 a year, I know Palo Alto has only 700-800 houses for sale in a good year, places like Tiburon and Atherton could have only 100 each year.

Therefore, unless these $175K+ double-income households become single-income or no-income, price in these plush neighborhoods will hold. Whether Palo Alto will see a price decline is almost completely dependent on the job market, especially that of the higher end.

8   StuckInBA   2008 Jan 1, 2:49pm  

OO,

Interesting rebuttal. I have always had a different opinion than you about the importance of income. To me, mortgage rates are far more important to this unraveling. Bay Area prices are dropping even in desirable areas - WITHOUT any major job losses.

The great employment situation happily coexisting with low long term rates is an aberration. Typically strong employment results in inflationary pressures and higher interest rates. 30yr FRM over 8% was not too long ago. What will that do to this market ? This run-up was due to easy credit and it will reverse due to lack of it. Without any change in job market.

Coming back to your points - the number 1/4 sounds way too high to me based on my acquaintances. I do not know a single family with 2 incomes that has yet to buy. Heck, I am the only retarded one in all my friend circles who is still renting.

Also the inventory situation is likely to change on the upside, and drastically so. The posh neighborhoods you mention are in a different league than the typical 175K would think of buying. In this demography, the desirable areas are Cupertino, Sunnyvale, Evergreen, Pleasanton, San Ramon etc. These will fare far worse than Marina, Saratoga etc.

Till now I was completely wrong about the psychology. The typical BA techie has been very slow to accept the existence of this mega-bubble. Although that has changed, no one knows how drastic and fast the change would be. Would buyers suddenly freeze and become defensive and risk averse ? I would hope so, but won't bet a dime on it.

9   onewebsite   2008 Jan 1, 2:50pm  

One thing I thought was almost funny and ironic is that
the letter reads as pacific mortgage group

and the google ad at the bottom of this page for me was for
First Pacific Mortgage

I'm sure different companies, but if it would have been the same, it would have been pretty funny.

10   HelloKitty   2008 Jan 1, 3:37pm  

I had a 20 something co-worker in 2005 swear to me his 1% interest rate mortgage on his condo-vestment was fixed 30 years - at $400 a month!. I said, no way- its a teaser check the note... he didnt.

6 weeks later I hear him on the phone getting refi quotes from the cube next door. His rate adjusted. And the mortgage broker was 'like a family friend and woudnt lie to him' he said....

It took about 2 years to get tired of swaping dot-com paper millioinaire never cashed in and now broke stories. So probably a good year left in RE bubble-bust stories.

11   SP   2008 Jan 1, 4:38pm  

StuckInBA said:
Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Anyone care to offer a rebuttal for the last para ?

This is generally true of most of the Bay Area, except fortress areas. You will need a combination of job losses and tight credit to break them. Job losses are an essential catalyst for two main reasons:
1. to force people to put houses on the market when they lose one or both of their family's incomes
2. to scare the knife-catchers away - insecurity about their own jobs will prevent the dual-income techies from taking the plunge

What _is_ the norm for two-income techie engineers? 2007 salary/bonus have shot-up in large corporations - but I have no idea if my sample set is representative. On the engineering side, I have found 2xHaHa to 2.5xHaHa is fairly common. IT seems to be a little bit less.

If this is widespread, then we will need _at least_ a 2001 style job-loss to prevent these idiots from grasping at the southbound knife.

12   SP   2008 Jan 1, 4:39pm  

2xHaHa to 2.5xHaHa

By that, I mean combined gross income and bonus, not individual.

13   OO   2008 Jan 1, 5:09pm  

Please remind us again what a HaHa is, $150K or $175K? Your sample sounds a bit too high, that means $300K-350K, which pretty much requires both earners to be in more senior positions. Usually there's a stronger earner and a weaker, sort of like $150+$80K combination rather than 2xHaHa.

14   apostasy   2008 Jan 1, 11:36pm  

@OO

One HaHa = $150K USD.

Getting data to support your rebuttal is amazingly difficult. What we really need is decile household income for the Bay Area, though even quintile segmentation could do in a pinch. There is a for-pay 2002 decile salary survey available, the overview of which does confirm that to hit the $175K per annum gross income figure with two W-2 earners, both have to be quite senior in a company hierarchy. Pretty much one earner has to be at least middle management and the other in senior management.

One way to analyze the rebuttal is to look at national income figures, for which quintile figures are available, and then decide how much of an adjustment to apply for the Bay Area. By this measure, the top 25% reported about $168K in mean household income, and thus your rebuttal would seem to hold water.

15   DinOR   2008 Jan 1, 11:51pm  

Over the New Year I was helping my son-in-law gravel the driveway and rip-out this ridiculous... "platform" thing in the garage. It was *not fun. The previous owner used construction adhesive and 4" staples every 2".

Since every other project we'd done there was basically un-doing the process of a diseased mind I was confident there would be no gems to be found. I was wrong. Still rolled up in a rubber band was a June, 6 1969 "Oregonian-Statesman". We've had to let it dry out to investigate further but obviously every article on the front page concerned then Pres. Nixon and the Viet Nam war. (Evidently the owner's dog hit it there?)

Ahem, Larry's "find" is no less historically significant! While barely 2 years old (where housing is concerned) it might as well have been from 1969! I don't have any idea how many times in the last 4-5 years I've said: FICO Doesn't Matter! Especially when you can simply "re-fi your way to a new you!"

Let's all have a great '08!

DinOR

16   Richmond   2008 Jan 2, 12:15am  

In the past, and I'm talking about three to four decades, the bay area had a huge scope of employment. We had a strong mix of tech., service, and industry, both heavy and light. The incomes required to afford a living here are weighted to one side or the other, tech, medicine, some service. The majority of people do not fall into those catagories yet we are priced at a mid six figure standard. It will be interestig to see how this plays out without the "Funky Money" loans.
In a thread some time ago, someone said something to the effect of,"the numbers have been high for so long, they're the norm". Very interesting statement, I thought. As obscene as the high prices are to me, the possibility of low prices are to them. We each have our own reality and time will dictate the one that gains a footing, sort of a mob rules market.
If lending practices are truly pulled back to the point that the borrowers can actually pay back the loan, I feel prices will go south somewhat. What I think we will see first is a re-establishment of socio-economic boundries. We will maintain very high pricing in areas that deserve it relating to views, access, ability to pay, proximities, etc. The rest will be priced for the masses.
I overheard someone say, "If you are going to just get by, there are much cheaper places to just get by". Places with good schools, roads in good repair, etc.. I hear of more and more people beginning to search for those places.
I wonder how it will all turn out?

17   PermaRenter   2008 Jan 2, 12:19am  

>> I do not know a single family with 2 incomes that has yet to buy.

Our household income is near 200K. We rent in Cupertino (95014) ....

18   DennisN   2008 Jan 2, 1:02am  

0.50% is not the interest rate. It is a payment rate that may result in negative amortization.

Where did this "may" come from? Isn't the correct term "certainly will"?

19   PermaRenter   2008 Jan 2, 1:15am  

Predictions for 2008 ...

1. Lots More Pain for Housing

2. The Dollar Will Continue to Go Down

3. It Will Be a Bad Year for U.S. Equities

4. Short-Term Interest Rates Will Go Much Lower

5. Energy Prices Will Continue to Rise

6. Gold and Silver Will Continue to Rise

7. Economic Growth will Turn Negative, Consumption will Decline

8. Reported Inflation will Remain Contained

9. Job Growth Will Turn Negative by Year-End

10. Hillary or Barack will Win the Election

20   DennisN   2008 Jan 2, 2:24am  

Idaho has split the primary dates. Democrat primary on 5 February: GOP primary on 27 May. I wonder if I can re-register and vote in both of them?

21   DennisN   2008 Jan 2, 2:40am  

I just checked....Idaho doesn't register voters by party affiliation! So I'm already good-to-go voting in both. Is Joe Biden still in the race?

22   Peter P   2008 Jan 2, 3:07am  

Gold price is now above $850.

Perhaps getting a loan is not financial suicide after all.

23   Peter P   2008 Jan 2, 3:12am  

I think saving in fiat currencies is financial suicide.

What is the best way to invest in platinum?

Not investment advice

24   OO   2008 Jan 2, 3:13am  

Gold price getting above $850 has nothing to do with housing price. If history were to repeat itself, housing price will stay flat for many years, just like the 70s.

However, on the other hand, we will be seeing $6 gas, $7 one-gallon milk (non-organic) and $10 bread very soon.

The current oil price has not been reflected in the retail gas price yet, when that happens, credit card loans will have to grow again - people are already funding their gasoline expenses with credit card.

25   OO   2008 Jan 2, 3:14am  

Peter P

You can buy physical platinum at Perth Mint. You can search my previous posts on how to hold physical PM using Perth Mint.

26   Malcolm   2008 Jan 2, 3:15am  

My 2008 predictions

1. Yes, horrible year for house debtors.
2. Very painful recesson and overall slowdown.
3. With that, explosion in unemployment.
4. Good things come from this because oil prices and inflation pressures will fall.
5. This relieves pressure on the dollar and precious metals will also fall as money gains more spending power. It takes the same amount of gold to buy a house, if it takes less dollars to buy a house, less dollars buy the same amount of gold.

27   Malcolm   2008 Jan 2, 3:18am  

Peter P, If it hits $900 I'm selling the rest of mine. I have about 5 ounces left. I've been slowly selling it off.

28   Malcolm   2008 Jan 2, 3:20am  

Gold is the new bubble but like housing I'm happy to sell to someone with a different point of view.

29   OO   2008 Jan 2, 3:21am  

Malcolm,

your scenario sounds too fast forward, this will be a much more prolonged process than you think because all the current stakeholders will do whatever they can to prevent the inevitable from happening.

Give it at least another 5 years for your scenario to happen. Oil addiction takes a long time to break, especially in a country with almost no public transport infrastructure. Anywhere on the west coast, if you want to hold down a job, you need to drive, and driving consumes 60% of US-imported oil. From 2003 to now, the per capita oil consumption in the US, after the oil price tripled, has shown no decline.

30   OO   2008 Jan 2, 3:23am  

Malcolm,

it's exactly your attitude towards gold that says that the run is far from over. When I see the whole world reaching a consensus that it will definitely break $xxx, and Cramer jumping up and down saying everyone MUST buy gold on Mad Money, then I will cash out.

31   PermaRenter   2008 Jan 2, 3:25am  

Gold Futures Top $860 an Ounce on Weak Dollar, Record-Setting Crude Oil Futures Prices

NEW YORK (AP) -- Gold prices topped $860 an ounce Wednesday as a weak U.S. dollar coupled with a record-setting push to $100 oil spurred demand for the precious metal.
Other commodities also climbed, further boosted by an influx of money into the market at the start of the new year.

An ounce of gold for February delivery jumped $23.50 to $861.50 an ounce on the New York Mercantile Exchange after hitting $864.90 earlier in the session. The spike surpassed gold's recent high of $850, but still fell short of its all-time high of $875 an ounce set in 1980.

The surge in oil prices helped boost the price of gold as investors shifted resources to the precious metal, often seen as a safe haven against inflation and political uncertainty.

"I think there's a chance it could hit $890 in the next two weeks," said Tom Pawlicki, a precious metal analyst and energy analyst at Man Financial Inc. "Oil's definitely playing a part."

Before Wednesday's jump, gold ended the year up almost 32 percent.

32   PermaRenter   2008 Jan 2, 3:30am  

More teens are borrowing money to go to college -- and they're borrowing more than ever. Students graduating with some of the lowest average debt in 2006 attended some of the priciest private colleges, while those with some of the highest average debt graduated from historically black colleges and universities. That seems backward, but Princeton University graduates leave school with the lowest average debt -- $4,965, according to a new report by the Project on Student Debt (at projectonstudentdebt.org/files/pub/State_by_State_report_FINAL.pdf).

33   OO   2008 Jan 2, 3:34am  

Princeton is a very caring school, just like Caltech. I know good friends both both schools who are just from middle class families but were able to have their tuition covered mostly by grants (need-based), and both of them graduated with almost no debt.

34   Malcolm   2008 Jan 2, 3:35am  

OO, it reaches a point where yes that $1,000 magic limit translates to a meager ROI. A $50 move at $800 or $900 per ounce isn't as exciting as a $50 move at $400 or $500. It could reach $1,000 but then the downside risk starts overtaking the upside potential. If everyone believes $1,000 is the top would it ever reach $1,000?

35   Malcolm   2008 Jan 2, 3:37am  

OK, my really annoying ad....
Robert Wagner touting the reverse mortgage "I know it sounds to good to be true"
Whaaa? How is a bank making a killing off a very safe investment by giving a conservative amount of money which tranlsates to very costly money too good to be true?

36   Steveoh   2008 Jan 2, 3:42am  

Gold is the new bubble...

Really? I wonder.
It seems more a shift of resources in order to preserve wealth, than a disconnect from market fundamentals, right now.

What would indicate a gold bubble?

37   OO   2008 Jan 2, 3:43am  

It will go far above $1000.

Adjusted for inflation, the historical high of $850 should be at least $1,700 2008 dollar. See, nominal value is a moving target, it depends on what the real inflation (discounter) is.

Commodity boom lasts a median period of 16 years throughout history. It's because commodity boom (and the inflation induced by commodity boom) reflects the ultimate supply demand imbalance that takes time to adjust. And market always overshoots. I will sit back and relax for a few years before thinking about what's next to invest.

What is the downside risk? You see Bernanke raising interest rate to 18.5% like Volcker? We are not even done with interest rate cutting yet. Wake me up when Fed rate reaches 1% and somehow we need to start raising interest, if we reach that point.

38   Malcolm   2008 Jan 2, 3:46am  

OO, as far as the pace, just read your other post. Yes my opinion is the downturn has reached the breaking point. I used to think people here had unrealistic expectations on how quickly housing would drop. They would get frustrated, why are sellers holding out....etc. I've said to many, well, most people can hold out for at least a 6 months to a year so there is a built in delay to the inevitable. The price drops when it is sold at the lower price though the market is ahead. I believe now though the economy will crash in the next 2 quarters and the slowdown in demand will be reflected in a lowering of oil prices. Of course there are variables like the emerging markets continuing the demand but the US slowing down has to impact China's factories. I have said for a couple of years that most people here are on the same page but the variable is the timing. It is really hard to precisely predict whether a trend line will be steep and short or shallow and longer.

39   Malcolm   2008 Jan 2, 3:52am  

Guys, I just got a call from Sandipe from Pacific Mortgage. I told him I would relay his message that Pacific Mortgage no longer sends those types of flyers out and hasn't since 2006. I emailed them after seeing that Dennis was correct, and that it is clearly a deceptive ad since they did use the words .5% rate in the body only to clarify the APR in the fine print. It is false because it doesn't say the payment is calculated on .5% and when you use the word rate referring to a loan it means the rate interest is calculated. My email contained a warning that I may forward it to DRE for investigation as a consumer complaint. I suspect they have already been scolded for sending those out.

40   GammaRaze   2008 Jan 2, 3:54am  

Sell gold when your morons neighbors all brag about the gold that they recently bought and how it will only go up in value.

Hold on to it till then.

So far, I haven't seen any indication from bendover ben that he would actually take steps to strengthen the dollar. Dollar will drop more and gold will rise more.

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