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Here's something I pulled from this morning's SJ Merc article "Risky loans are a fixture of Valley home-sales boom" While I'm sure some of these stats include the flipper types, it looks like a lot more will "take it in the shorts".
"Consider these troubling statistics. More than half of Bay Area home buyers in the first quarter of this year took out risky interest-only loans that delay any repayment of principal for three to five years. Sixty percent took out piggyback loans, specially designed for borrowers putting less than 20 percent down. And one in five buyers in California spend more than half their household income pay on house-related payments. Traditionally, borrowers have been advised not to spend much more than a third of income on housing"
Wow, a thread on housing...what a novel idea. Isn't this the immigrant/politics blog??
Thanks for the new thread Surfer-X. I'll need to ponder the topic for awhile to come up with something...I'm feeling a bit rusty in the housing anecdote talk. ;)
we’ve gotten derailed with trivial crap.
I'd like to add: those who use specialized lingo in their posts should define what they mean (as succinctly as possible). Otherwise, you run the risk of losing non-specialists like myself with arcane finance/market terms. In contrast, I can read theCalculated Risk blog and usually comprehend the gist of the discussion.
http://tinyurl.com/b3kq4
Some chum for the frenzy (or further anecdotal evidence the end is neigh):
I received a solicitation from a contact this week regarding some comments on their "stealth" company. This is nothing new for me, however, what specifics were revealed caused me to nearly cough up my morning bagel. I can't copy/paste the actual text here because of blanket NDA, but I'll paraphrase:
These guys believe they've created a way to let homeowners "lock-in" gains in their homes, pull out cash now, and make no payments until they sell or transfer the home. This is nothing new, in my opinion. Just a balloon loan device. But, the twist is that it isn't a loan, it's a derivative stake against your equity, meaning that you essentially agree to sign over a most of your future equity gains/losses to them, and they give you the current valuation less debt less fees (it is unclear who/how current valuation occurs).
These guys believe that they will gain with either future RE increases or a sharp downturn, being that in the latter case they'll do massive business as people desperate to find liquidity but unable to take on further debt turn to them. I believe they think that they can resell or hold long these "home equity derivatives".
My biggest questions went unanswered. Does this consititute a lean on the property, and does it pass with the title? And, how is this different from debt from the homeowner's perspective? Perhaps one of you finance gurus could help me understand if this is an exotic option of sorts and how it could even work. Seems to me something like this, if allowed at all, could really muck up the RE market as more and more homes essentially become complicated rental leases because the equity volatility is beholden to these "equity instruments".
The parallel between the stock market bubble and the housing bubble is pretty amazing. The comparisons that can be made between this bubble/oil crisis are very similar to the 70's as well. It's interesting to see history repeat itself and at the same time surprising that so many people don't see the connection and the likely outcome.
I am really not hoping for some massive financial collapse, but I do think a lot of people are going to find themselves in a dire situation soon. The articles about illegal residents buying homes without any understanding of the financial consequences really illustrates how people will jump into something completely clueless about what they're getting themselves into; I guess we'll have a pretty good idea how much of the population did just that pretty soon.
What I especially have enjoyed is yet another round of swaggering asshats, aka, "kings of finance" that have confused luck with skill and education. When you've gotten so far from equilibrium as housing in California has, there just has to be pain to bring it back to the historical norms. "It's different this time" No, no it's not. Ahhhh the lure of easy money. I still chuckle when I think of the old ex in San Diego that has "bought" 3 condos on her 55K/year caltrans salary. The best thing about this is that her new chump b/f bought her original condo. Nice. I'd like to speak to her at the end of this year. I often wonder how one with such limited income deals with properties that are upside down each month. And, what happens to all the renters, aka "losers like me", when these asshats try to dump the properties? What happens if the house you live in goes to foreclosure? Bitter? Just a tad, I just really really hope that the fools that participated in this bullshit really get it hard in the culo, sans lube. Just tired of the swagger and then the crying when it doesn't work out.
At this point in the game, would baby boomers really be making a big splash in housing ? if they do wouldn’t it be selling their old house and going for a condo ?
Most stuff I've read expects the demographic effects of baby-boomers to cause an overall increase in consumption and decrease in savings. I haven't seen much on their direct effect on RE, but I suspect we'd see (macro) a net liquidation of equity as they consume their equity/savings, but a (micro) increase in demand for RE in specific regions/ranges--that is as they move to thier final end-game destinations. For my in-laws, this will be a nice double-wide in suburban Tampa, I'm sure; and they'll be cashing out about 350 acres of farmland in Ohio and Indiana (which doesn't buy much), and consuming the balance.
correction...my in-laws aren't boomers, per se, but Eisenhower/Silents (who think they won WWII even though they weren't 5 years old). I think the rest of my comments hold, though.
FNM is down again, it is almost testing the low of last week. Looks like the market has realized that it is no bargain after all.
I think the market is digesting the housing bubble every day. Very soon, we will see broad price reductions in homes.
(Not investment advice)
Sadly, I think most of the pilgrims venturing into 0 down i/o, o/a territory are first timers, the youngsters.
Yep. They are ARM'd to the teeth.
Property Report:
Corte Madera, currently listed at 1.15M
http://tinyurl.com/ao9pa
Been tracking this one since April, starting at 1.48. Has popped off and on MLS at least 3 times, at lower price, the last time they featured the price reduction in the listing.
I'd consider buying sub .9M, very seriously at .8M. Mainly because of the 2.2acres (about .5 buildable).
Selling agent called me today to find if I was "still interested" because the first and only offer just fell through. She said the buyer decided "to wait and see/got cold feet". I asked if they'd take a lowball offer, she said she still won't present any offers below 1.15, or owners fire her. Told her I'd "wait and see"...lol!
Problems are many: easements, including a paper road dissecting part of the property; out-of-code inlaw unit; unretained active slide, including one near house (would need some retaining walls, very expensive); and terrible main-floor layout, would need a master bedroom suite addition.
As to the house-sliding-down-the-hill, out-of-code seems to be a problem for existing houses in CA, that money would buy alot of land in the Midwest for the next boom. But then you might have to be a red fish.
As someone who grew up in the very rural, very agricultural Midwest, I have not the faintest desire to return there no matter how many acres I could buy. But that's just my personal choice. (Besides, such land never "boomed", it has even failed to match CPI growth for the past 20 years, at least where I grew up)
And the irony of a boomer decrying overpopulation doesn't escape me. Here's a couple of "the greatest's" accomplishments: winning WWII, surviving the Great Depression, but then again it's all a matter of relative comparison.
I asked if they’d take a lowball offer, she said she still won’t present any offers below 1.15, or owners fire her. Told her I’d “wait and seeâ€â€¦lol!
Nice...blame the realtor if it doesn't sell for over $1M. It's hard to get your medicine if you keep firing the physician. Btw, ample sqft, 1 acre buildable, and possibly $900K someday...perhaps things are looking up! :)
Sorry ya'll, trying to say on topic, I deleted all inflammatory boomer rants, including my own.
“I asked if they’d take a lowball offer, she said she still won’t present any offers below 1.15, or owners fire her.â€
She rather baby-sit a house that won't sell than be fired? Looks like someone prefers "water torture" to "drop hanging".
I’ll repost my rant on the neverendingtopic, SactoQT’s last one.
Yes, bring it to 800 please. Show the thread-bubblehead that there is no thread-bubble!
There clearly is no thread bubble. The increase in the number of comments stems from a chronic shortage of blogspace, coupled with historic low low prices on bandwidth, and a desire for the non-english speaking world to participate in english language conversations. So, if you analyze it, you will find that there is no thread-bubble, it's simple supply-side economics. Low supply/high demand equals a high amount of comments. One only need to look at the high demand for Java programmers, and webpage developers to see that blogspace is at a chronic shortage. The amount of comments can only go up, what you saw on this thread was an cleverly planned attack by the blog-bears, their doing so only reinforces that fact there is no thread-bubble.
I'm still hoping some of you finance/cap mkt experts and RE experts can comment on my first post near the top of this thread. I've been trying to figure these guys out for a couple days now (and they're still waiting for my comments on their idea).
She rather baby-sit a house that won’t sell than be fired? Looks like someone prefers “water torture†to “drop hangingâ€.
Sounds like a huge waste of time to me, unless the owners get realistic.
Btw, did I ever mention that last month some fool bought a 3 BR condo here for $990K?
Granted, it was waterfront--but everything was 30 years old--floors, cabinets, bathroom fixtures. Oh, butt-ugly too. That sale now seems especially crazy in light of that Corte Madera house for $1.15M. People should know better.
I’m still hoping some of you finance/cap mkt experts and RE experts can comment on my first post near the top of this thread. I’ve been trying to figure these guys out for a couple days now (and they’re still waiting for my comments on their idea).
I am an expert in pretending to be an expert when the true expert is not around. If that counts...
I think the scheme is probably a smaller scale OTC derivative contract between you and that "stealth" company. As in the case with all OTC contracts, there is considerable counter-party risk. In this case, this risk is large because their ability to offload market risk is severely limited.
I would not touch it with a 10-foot pole if they do not have a reasonable hedging strategy (which cannot possibly exist IMHO). If and when the RE market tanks, how can they fulfill their "guarantee"?
Btw, did I ever mention that last month some fool bought a 3 BR condo here for $990K?
There are 2BR non-waterfront condos in San Mateo that cost 2M+. We will see how this thing ends.
RE: stealth
It sounds like a scheme to capture possible housing price gains while taking no risks as a limited liability entity to me.
Just want to add, hedging strategies for that type of products may exist next year with the introduction of MACROs and CME housing futures.
If that were the case, the housing market in the US would be indistinguishable from that in Mexico, which has no MLS and no licensing for realtors.
I thought the main difference is the mortgage industry.
Not directly housing-related, but relevant nonetheless. Anyone ever heard of the "hindenberg omen?"
Quite a down day for markets today....
We all know what comes after Paul Von Hindenburg. It is not going to be pretty.
I think perhaps Mr.Up has the simplest explanation of their scheme. It's really a sale and repurchase as joint owners. So, the co-owning "stealth" company has a private agreement with the original owners regarding terms of payment for the cashed-out equity, etc. But, Peter points out that there is still massive counter-party risk because if this company ever went bye-bye, you'd be stuck as the remaining co-owner with the whole bag of obligations and (I think I'm right here), the residual claimants of "stealth" company would have claim on a portion of your home. Assuming this ever happened, you'd be forced to buy out the claimants portion of sell your home as a court mandate of "stealth's" bankruptcy.
What a terrible scheme! It's brilliantly devious and bound to attract lots of unwary people, I have no doubt! What a wonderful scheme! I wish I were a grifter.
Also, the "stealth" company will most likely go bye-bye exactly when you need it, namely a significant "market correction".
So let's start a bunch of these "stealth" jobs ourselves. If we can IPO them fast enough, we can create then a hedge fund that trades them short, wait for the correction and create our own money machine. Of course, we'll need to move to the Cayman Islands, but hey, who said you don't get something for nothing?
Of course, we’ll need to move to the Cayman Islands, but hey, who said you don’t get something for nothing?
No need to move ourselves. As a "foreign" entity, we will only need to fly to Toronto for the annual meeting just like LTCM.
I love Bill Gross. My husband brings home his articles for me to read (he gets them at work) and I always find them very informative-- I've learned a lot from them.
I have not read much Bill Gross before, but I will definitely do so in the future.
Buffett and Soros also offered great wisdom long ago.
Soros - reflexivity of the market, boom/bust cycles of credit
Buffett - dangers of OTC derivatives and risks they pose to the market
Pop!
Such investment advice is difficult because it is voodoo to time any market, the stock market being one of the worse. The fundamentals and technicals are right for a correction, but they have been before without correction and corrections have occurred outside of these indicators; so it's your gut feel in the end.
Simple diversification away from high beta funds should be sufficient to protect most people, I think. But remember, your 401k (for most of us here I assume) is a very long-term investment so year-on-year movements up and down are to be expected.
Beta: http://www.investopedia.com/terms/b/beta.asp
(taking an earlier request for definitions)
***not investment advice***
Simple diversification away from high beta funds should be sufficient to protect most people, I think. But remember, your 401k (for most of us here I assume) is a very long-term investment so year-on-year movements up and down are to be expected.
Also, remember dollar-cost averaging?
Bill Gross' article: he uses a 50% consumption rate for the 7% of all aggregate personal disposable income (total consumption) that is funded by people cashing out equity in their homes. This is _tremendously_ conservative. The consumption rate is much closer to 100%, probably well above 90% by any measure. Therefore you can extrapolate that his prediction of a 0.5 -1.0% hit to GDP would could be double that amount. I think he is dead on, but a bit optimistic about hoping for the 1-2% GDP growth soft landing scenario.
When the housing ATM'ing stops, recession is inevitable, IMO. A lot of economic restructuring has been delayed because of RE equity-driven consumption. By the way, this is why I believe economists are correct that building home equity is not investment activity, but savings activity. No capital is created or accumulated, only paper valuations which are ultimately consumed or saved elsewhere.
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Ok ya'll let’s just talk about housing. No other sideline non-value added crap, no "hot topics" or button pushers. There are quite a few of you with a ton to offer. For instance, from Jack I learned that all boomers aren't bad, just most of them :) . I think we all can learn from each other, but we've gotten derailed with trivial crap. Let’s get back on course. Any chatter overheard lately? Any anecdotes about housing to share? Any evidence of the greedy f*@ks taking it in the shorts? Do tell. And if you know of any good sushi in the BA or Central Coast, do tell also.
#housing