patrick.net

HARM, IO makes sense if you have an irregular income flow or if you want extra safety just in case money is tight for one month. In either cases, discipline to pay down the mortgage whenver possible is essential. I still maintain that most poeple use these loans to get into homes that they cannot otherwise afford.

It makes no sense according to your formulas, so instead of insisting that the formula will eventually prevail, just admit that it is NOT prevailing, and perhaps look to some other reason (like wealthy parents?) as to why the formula is not working. Because it is not.

I stand by my analysis. The market, especially with asset prices, is not always right. One must not find reasons to justify anormalies.

I just think that people sense that inflation is in the offing, and may be acting accordingly. ANTICIPATING.

Want to start a "leveraged inflation fund"? We may be able to make a killing. ;)

KG, I won't worry too much about the 10-YR note. LIBORs are going up by the day. All the funny loans will see higher rates.

The only exception is Option ARM, which locks introductory rate at 1.75%, although accrued interest (negatice amartization) will accumulate faster because of the higher benchmark rate.

KG, Jack is probably not a fool. We like him all right. :)

The problem is that the burden of proof regarding the existence of an asset bubble is upon us. If one is unwilling to believe that a speculative bubble has been the driving force of house prices, "wealthy parents" is a much better argument then "they are not making any more land" indeed.

Wow
Make some comment about some boomers buying homes for their kids....
Funny thing. The people I was thinking about are HEAVILY leveraged in RE right now. They made some money and are now convinced that RE is a long-term can't lose deal. What's really interesting, is if you ask them what they do, they don't even mention RE because of all the flak they are getting these days.
As far as the rapid increase in IO's are concerned, I don't think for a second that people are using these loans just because they're a good deal right now. 30 year fixed rates are about as good as it gets so there is no reason to take out an NAAVLP unless you are reaching beyond your means IMHO.

Face Reality
I knew you were going to say that. The only reason to take an IO or ARM is if you expect rates to stay low and that the value on the house is going to go up. If IO's and ARMs were the end-all beat-all of loans, then we would have seen this huge proliferation much sooner. The fact is we didn't see an explosion of these kind of loans until housing prices shot well beyond what is rational in relation to incomes and rents. If 30 year loans were such a bad deal, then why did so many people refinance their homes with the lower 30 years rates rather than just go with the NAAVLP's? I'm sure plenty of homeowners did refianance with these loans, but I think mostly it's new home purchases that are generating the run-up in numbers.

These types of loans weren’t used as widely before because they weren’t as widely available as they are now.

I am well aware of this fact. But I guess I am one of the few who look at a house as a long term investment. I don't want to buy the house unless I can REALLY afford it. Also, ask yourself why the banks are making these loans so availiable to the public at large (especially the sub-prime lending). Is this because the banks, bless-their-hearts, have our best interests at heart? Of course not. The banks can flip the loan to Fannie & co. and let someone else take the risk. The banks don't hold the majority of the loans and they don't have the vested interest in making sure the borrowers default. NAAVLP's require a lot of assumptions to make sense in my book. You assume rates stay low and home go up. But what if they don't?

Face Reality:
If I know I’m going to sell an asset in a year and get, say, $200K for it, I would take a 1-year ARM for $200K because I know I can pay that much within a year, so why would I go with the higher interest rate of a 30-year loan?

First off, if you buy with the specific intention to sell in a year for profit you are a speculator/flipper by definition. Thanks for supporting the Bubble argument. ;-) This is a far cry from Peter's "irregular income" motivation.

Second, how do you "know" you're going to get $200K in one year? That may actually be close to the average appreciation for bigger BA houses over the past few years, but again, rear-view mirror driving. If prices plateau, or even decline, then what?

oops! gotta watch my typing. The bank's don't have a vested interest in making sure borrowers DON'T default. :oops:

HARM-
Is it not possible to get ten year IO loans, or even longer?

Yes, Jack, I'd agree it is possible, but the large majority of IO borrowers are not getting the IO/teaser rate period for that long. I don't have the exact figures (anyone, anyone...?), but the $400 billion in IOs set to adjust in 2006, and the additional $Trillion each in 2007 & 2008 gives you some idea.

When I was in Japan, only 2 years into their 14 year housing decline btw, home loans were 3 generations in length.

Face Reality

You are a piece of work aren't you? My husband is a financial consultant who see's more people with inheritances, stocks, businesses etc. etc. than most people I know. His partnership has over 60 years experience in the business looking out for many many wealthy folks who nearly lost their a$$es in the dot.com bust and would have had not people who knew how to look at the market paid attention to the BIIIG signs right in front of their faces. We are not over-extended, we have a comfortable six-figure income. We're just not into stupid risks.

Face Reality
I also notice you get increasingly hostile when your arguments aren't holding up.

Face Reality
We talk about this all the time. The fact is, many many people are taking out loans for homes they can't afford. He sees it every day. You would not believe how many people he has to try to bail out of financial ruin because they see their homes as ATM's because of all the creative financing out there. Also, you talk about unknown's in a persons financial situation, such as inheritences, gifts and so on. Well, he's also sees a lot of other unforseen events like divorces, injuries, and job losses that just cripple people. Most people really do live paycheck to paycheck and all it takes is one unforseen event to bring down their personal house of cards. You think you repeat yourself, try talking to someone who thinks they know more than their investment counselor and who wants to take out a lease on their second car which will bring their montly payments to $2,000 month, just in car payments! Seen it happen.

And no, the people who were paying $2,000 mo in car payments couldn't afford it. They just wanted what they wanted and didn't think twice about the consequences. But I'm sure they were the exception rather than the rule, I'm sure no one else in this housing market is buying on emotion rather than logic.

One more tea leave...

I had a chat with a real estate agent who was trying to sell a house. We got into some frank conversations about investments and such. He said that he will definitely stay away from mortgage/financial businesses because people are leveraged to the eyeballs. He is backing up his views with his experience, and I doubt that he wanted us to stay away from buying.

Face Reality, your views are well respected here and I certainly enjoy chatting with you. :)

I think we should be clear about assumptions that we have agreed to disagree, otherwise we will run into endless hostile arguments even though both of our reasonaings are valid.

"I really think a lot of the posters here have absolutely no clue about managing wealth and assets."

Face Reality, this is a bad generalization, don't you think? Managing money is a really fun thing to do. I think many posters do have interest in the subject.

“I really think a lot of the posters here have absolutely no clue about managing wealth and assets.”

This is, of course, high-handed arrogance. One wonders why, if this place is packed with such financial simpletons, Face keeps coming back. I'm sure there are plenty of places throughout the net where more intelligent and subtle thinkers and managers of money can exchange ideas...

As usual: tinyurl.com/bkecn

Cheers,
prat

I really think a lot of the posters here have absolutely no clue about managing wealth and assets. They just look at the world around them with gaping eyes not understanding why things are the way they are. It’s too painful to admit ignorance or lack of initiative, so the solution is to say that everything is a bubble and it’s going to crash and destroy all those folks who are out there actually doing things and being successful.

Ahhh... the "jealous, bitter ignorant renter" rant.
I see Face has run out of self-serving statistics and arguments, so now must resort to ad hominem attacks.

Prat, where have you been?

I thought you really have been kidnapped by those helicopter money commandos.

SactoQt Says:

Face Reality
I also notice you get increasingly hostile when your arguments aren’t holding up.

I second that!

Peter P Says:

Face Reality, your views are well respected here and I certainly enjoy chatting with you

Yes, when he sticks to FACTS and RATIONAL arguments.

Face Reality, how do you propose to push for more supply? I am with you here.

it’s one of the wealthiest and most desirable areas in the country

Desirable? Perhaps. But the Bay Area is quite far from being the wealthiest.

There seems to be this idea that if certain people are wealthy, then they couldn't possibly be over-extended. But having a spouse in the financial sector I hear about, and know many wealthy individuals. And you know what? The more money people have, the more they spend. The average joe who's feeling flush splurges on an Escalade. The wealthy buy ferrari's and yachts. Of course, not all wealthy people spend like crazy. Some wealthy folks save, just like some middle class folks save. But, at the risk of repeating myself, lets not forget that home equity might be at an all time high, but savings is at a virtual all time low.

But, at the risk of repeating myself, lets not forget that home equity might be at an all time high, but savings is at a virtual all time low.

I thought home equity as a percentage of loan value is at an all time low nationwide.

One does not have to be a spender to over-extend, if you count over-leveraging in investments as over-extending.

I actually think that saving is ineffective if it is not backed by a sound investment strategy.

I thought home equity as a percentage of loan value is at an all time low nationwide.

You know Peter, I just don't know about that one. Anyone else?

And you're right, saving alone is not enough, but people right now are primarily "investing" in RE.

I thought home equity as a percentage of loan value is at an all time low nationwide.

You know Peter, I just don’t know about that one. Anyone else?

ASK AND YE SHALL RECEIVE!
Behold...

A House of Cards: Refinancing The American Dream
tinyurl.com/cpkr8

"Households cashed out $333 billion worth of equity from homes between 2001 and 2003, the beginning of the refinancing boom--levels three times higher than any period since Freddie Mac started tracking the data in 1993.

A majority of households that refinanced between 2001 and 2003 used cash equity from their homes to cover living expenses and pay down credit card debt, further eroding their home's cash value, which many families rely on for economic security.

Between 1973 and 2004, homeowners' equity actually fell -- from 68.3 percent to 55 percent. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s."

Jack

I don't think the boomer generation as an influence can be underestimated. There are those in the business of predicting the stock market that believe as more and more boomers reach retirement, they will shift their money from real estate and like investments back into the stock market and cause a huge bull market for a few years. After that they predict there will then be a prolonged bear market at the boomers start dying off and fewer investments are added. Whether you believe these kinds of predictions or not, one has to notice that many financial experts believe that the boomer generation moves markets. They have before.

Americans own less of their homes today than they did in the 1970s and early 1980s

Bottom line, most new home-buyers (notice I do not use the term "home-owners") are not those cash-flush, market savvy financial geniuses that Face & Co. WISH they were.

They do in fact overwhelmingly tend to fall into the following categories: (a) Speculators/flippers
(b) Panicked FTBs who feel pressured into bidding wars against (a)

Jack
KG was totally out of line for calling you a fool. There are books out there with titles like "DOW 36,000" that have premises based in VERY large part on what they think the boomer generation is going to do. KG only looked at one part of one argument and made a judgement. I may not always agree with you :D, but I think your arguments are thoughtful and based on a lot more experience than many of the rest of us have.

I may not always agree with you , but I think your arguments are thoughtful and based on a lot more experience than many of the rest of us have.

Here, here. Jack, you and the Posse may not always see eye-to-eye, but you are always a gentleman.

Jack Says:
I myself have paid down credit card debt with a home equity line of credit at one time or another. Yet my monthly payment is sensible. Even small. Could it be that you are painting with a broad brush again?

I read somewhere (lord only knows where with all the links on this site) that many many people who pay off credit card debt with equity loans rapidly run the debt up again.

I myself have paid down credit card debt with a home equity line of credit at one time or another. Yet my monthly payment is sensible.

Jack, actually you may surprised to know I think paying down credit card debt with a HELOC is generally a GOOD idea. Why not replace a high-interest loan with a low-interest loan? That's not the part that worries me --it's the share who use it to "cover living expenses". Unfortunately, the article didn't break it down by %.

Especially if one doesnt just run up the cards again afterwords…

Until a few years ago I actually thought that one must pay off the credit card balance every month.

Peter P
And here I thought you knew everything.....;)

Unfortunately, the article didn’t break it down by %.

I just remembered this link is only a summary of the full article:
tinyurl.com/cpkr8

Scan the PDF, and it does break it down (sort of):

Repayment of other debts: 51%
Home Improvements: 43%
Consumer Expenditures: 25%
Stock Market, Real Estate or Taxes: 22%
(percentages add up to more than 100% because the refi loan could have been used for multiple pruposes)

Depending upon what "home improvements" mean, this doesn't look quite as bad as the summary piece indicates.

Wonder if 60-inch flat screen TV counts as home improvement or consumer expenditures. ;)

Just when I'm about to concede that all those Billion$ in recent HELOCs and cash-out refis may not be such a bad thing after all, I remember that the overall U.S. consumer debt burden is higher than it's ever been. FDIC (Federal Deposit Insurance Co.) numbers:

tinyurl.com/9m7bb

So, SactoQt was right. For the most part, people who pay off their credit card debts with HELOCs/cash-out refis tend to rapidly run up the debt again. :-(

Jack, intangibles are important too. This is why your views are highly valuable. Facts alone will get you nowhere in the financial market because millions possess the same facts.

Perhaps we should talk about feels and instincts next.