patrick.net

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.

You are from somewhere else, right? How could you not know that? That is hilarious!

I thought high credit card interest rate was a penalty for not paying off every month. I did not know that it was a design feature. :)

I'm with Peter. Feelings and instinct are going to play a role in the housing market because if people start to "feel" that it's a bad investment, they may start cashing out. It's like I've heard time and again, fear and greed have been big factors in all this. Last time I checked, you couldn't put a percentage on someone's fear or greed.

Jack - thanks, dude!

Nice to know that someone's paying attention to/appreciates the stats I post. Still hope to convert you to... is it really the "dark side"? I tend to think of us as Defenders of Truth & Enlightenment (hey --Face shouldn't be the only one allowed to get self-righteous now and then!).

If the Posse can save just one FTB from being pressured into a speculative bidding war, then (*sniff*) it was all worth it...

WOW.
In the last 2 days we've seen the return of THREE P-blog veterans from hiatus: East Bay Renter, Praetorian & Funda MENTAL.

Hope this is a trend....

"Prat, where have you been?"

I graduated in June and took a month off to play golf before I rejoined the grind.

To be honest, I'm a bit exhausted with the housing bubble discussion, since I was repeating the same arguments over and over again: Affordability, rent vs. buy, three standard deviations above normal appreciation, etc. At this point, it seems like what can be said has been said (with the exception of "How do I avoid the fallout" discussion, which I think begins and ends with "You don't.")

However, if HARM and peterp can bang the war drum this hard, who am I to not pull my part?

50% correction by the end of August. _smile_

Cheers,
prat

"50% correction by the end of August"

I want 50% correction in my golf score! My swing is getting worse by the week. Perhaps I should just quit golf.

"Steve Hilton, Meritage homes chief executive (was asked), 'How are investors affecting the Phoenix market? A: We have a very strong anti-investor policy. They raise the price of housing. They don't bring any value. They're parasites. They artificially make the prices go up, and they artificially inflate demand."

Wow. At least I am fine with non-lemmings speculators...

Prat, I think the housing bubble is beyond argument at this point. We are merely discussing the progress and its effects. :)

Jack, the effects of boomers is significant yet chaotic. But I think that realtors(tm) have over-estimated, intentionally, the positive effects of boomers on the housing market.

Fake P, housing speculation is legal and encouraged in this country. Why do you hate them more than I do?

Why would the realtors want to give too much credit to boomers for the state of the housing market?

I am not saying it is not true that they are doing that, I am just asking what they have to gain by making that claim?

They are not giving boomers credit. They are just throwing around the word "boomer" to instill fear into prospective buyers...

"Millions of boomers will move here, buy now or be priced-out forever."

tinyurl.com/bkecn

I'm having a lot of fun with this.

At current (low) interest rates, it's not cost effective to buy a house. (Not an advantage in 30 years). No suprise. So lets keep changing the numbers until it is.

We'll assume a tax bracket of 29%, 50k on hand, and 3% appreciation in rents and housing prices (an historically defendable figure). I also leave the 7% investment assumption in place, though that's certainly arguable.
This is my situation, btw.

Hmm -

$1350 rent $650k house. Nope. (My current rent on a 3-bedroom, and a comparable house in a transitional neighborhood.)

$1600 rent $600k house. Nope. (Market rate on a 3-bedroom house, and a slightly reduced house price.) Still no suprise.

$1800 rent $500k house. Suprisingly, still no. (Some rise in rent, much reduced house price.)

$1800 rent $480k house - break even after 12 years. Now we're talking.

Howabout if prices stay flat - how much does rent have to go up to start making housing purchases attractive?

$2400 rent $650k house - break even after 13 years.

So - which do people think is more likely to happen? Jack apparently thinks that rents will rise by 50%, since his comments above promote an inflationary scenario. I find it more likely that housing will fall by 30% or so. Time will tell who's right - it all comes down to whether we have an inflationary or deflationary scenario. Jack beleives in the inflationary scenario, and God knows there's evidence to support this - federal deficit, trade deficit, oil. I beleive in the deflationary scenario, and have evidence on my side as well - the coming massive layoffs in the housing sector, outsourcing, wage depression, oil.

All I know is, when I can break even after 15 years, I'm buying a home. And not before.

BTW - in housing, even a 20% drop *is* a bubble pop - it leaves everyone who purchased homes in the last couple years underwater in their mortgage - noone puts 20% down anymore in the bay area, unless they were already a homeowner trading up, or have stock money. This is why I initially didn't buy in the first place (when houses were $600k, instead of $700k now). I can take being 50k in debt, I've been before when I was young and stupid. I can't take being 100K or even more in debt though - that's a hole that you just can't dig out of with taking lunchbags to work and cutting corners. You're screwed.

Fake P, an underwater mortgage does incur net debt though, for those who care about their "net worth". The material impact is not much, I agree.

Jim D: Mortgage being underwater doesn’t mean you are in debt, because you are always in debt when you take up a mortgage. If you are financially sound and could afford the payments, there are no issues, just sit around and wait it out.

Unless of course, you HAVE to sell for some reason: extended illness, loss of job, recession, other costs of living rising relative to wages, etc. These are not unlikely/pessimistic assumptions. I saw them firsthand during the last housing bust in the early 90's. Oh, but "it's different this time". Sorry, I forgot...

One "intangible" benefit of renting: flexibility and non-commitment.

Intangibles do eventually amplify!

Underwater mortgages when you have a NAAVLP can be a big problem if interest rates don't allow you to refinance at a lower rate......

I just re-read Fake P's post, and he's right that if you can afford the payments waiting it out is the best option. I just wonder if the buyers with the creative loans will be able to afford it if a downturn is long and drawn out.

All index rates for NAAVLPs (MTA, COFI, LIBORs, etc) have been going up steadily. The thing is that such loans recast (new shorter amortization schedule with an inflated loan balance) every five year or less (if the negative amortization limit is reached).

I am still amazed at how complex NAAVLPs really are, with rate caps/floors here and there but this or that except conditions, conditions, and conditions.

Peter P

Only mortgage brokers and attorney's can decipher all the double-talk.

I have a question. In this area we have seen a tremendous amount of urban sprawl. I heard someone compare this to L.A. saying that So Cal went through the same thing during a past boom/bust cycle. Does anyone know anything about that? I think it could pertain to both the BA and here since a lot of the growth here was initiated by commuters from the BA.

SactoQt, urban sprawl may occurs towards the end of the boom because buyers are priced-out in core areas but they are willing to live further out just to grab something.

When the bust comes, many new homes will be left empty.

opnr, when the market is going up one can always come up with creative strategies.

But if the market really always goes up why would we spend time here blogging? I would be flipping 5 homes with NAAVLPs!

Hindsight is always 20/20. One can easily write a computer program that would have made millions in the past 5 years trading futures. Will it work going forward? It will surely make the brokers rich.

Rising wages? Where? I’m so jealous.

Fannie Mae economics department.

Herr Goebbels, Third Reich Secretary of Propaganda?

Some NAAVLPs use LIBOR to calculate the fully-indexed rate. Although the "introductory" rate is fixed at around 1.75%, a higher fully-indexed rate means that the rate of negative amortization would accelerate.

Things are so expensive that even 5/1 hybrids are unaffordable.

BTW, fast negative amortization would mean that it is easier for mortgages to go underwater.

How does negative amortization in a NAAVLP work?

Too complex for me to describe. Here is an URL:

http://tinyurl.com/ck8qq

So after the first 12 months are up, people are on the hook for more money than they bargained for? And after they make the new minimum payment for the next few eyars, they still have a big balance that is spread over a smaller number of years?

"You can always refinance."

"What if I cannot refinance?"

"You can always refinance as long as you have equity."

"But I thought it is a negative amortization loan."

"You will have equity if prices continue to go up."

"What if prices fall?"

"That is not going to happen."

The above conversation actually took place.

Jack, there are more purposes in talking about the bubble than convincing the unconvinced. Everyone is entitled to his/her opinion and we are not going to force it.

(Some people still do not believe that we have gone to the moon. I am not comparing you to them.)

We need to move on with our new understanding and do something about it. That is more important in my opinion.

ok

Are you talking about this comment?

Prat, I think the housing bubble is beyond argument at this point. We are merely discussing the progress and its effects.

That something is beyond argument does not necessarily mean that everyone here has agreed upon a conclusion, it merely means that it is not fruitful to continue the discussion. :)

(Some people still do not believe that we have gone to the moon. I am not comparing you to them.)

Lol..........still laughing....

I don't know why that struck me as so funny....

Jack

Quick question.
You said
"Yes some who took bad loans will get burned in a shakeout. Much more so in other areas than here."

Do you think fewer people took out bad loans in the BA (which I don't believe statistics will bear out), or that somehow residency in the BA makes one bulletproof to bad economics? I know the intangible arguments, the arguments that say there is more wealth concentrated in the BA etc. etc. But it still seems to me a bad loan is a bad loan regardless of where the home is. Even if the market just flattens in the BA all those NAAVLP's aren't going to look like such a bargain.

"I want 50% correction in my golf score! My swing is getting worse by the week. Perhaps I should just quit golf."

Don't quit. If you do that, the boomers have won. And the terrorists. And the real estate agents. And Fake P.

And we can't have that.

Cheerio,
prat

“I want 50% correction in my golf score! My swing is getting worse by the week. Perhaps I should just quit golf.”

To follow up, I have a suggestion: buy the Tour Tempo book, and then when you find which tempo suits your temperment, buy the Tour Tempo CD. It's not a miracle worker, but if you have a sound fundamental swing, it can really help.

What, this isn't the Bay Area Handicap Crash Continues blog?

Cheerio,
prat

What, this isn’t the Bay Area Handicap Crash Continues blog?

Handicap never crashes in the Bay Area.

"Handicap never crashes in the Bay Area."

There you have it. Peter P reveals himself as a shill for Big Golf Scores.

We've heard it all before:

"Handicaps never go down."
"You can curse your handicap, what can you do with a stock?"
"In this unsettled time, people want the comfort of a high handicap."
"Look at David Duval."

It's all bunk. If greenspan wasn't conspiring with Big Driver Makers to produce enormous clubs that spray balls every which way but forward, we wouldn't be in this mess. I, for one, advocate a return to the 475 yard par 5 and persimmon driver. Only when sanity and responsibility returns to the driver market will america be safe, once again, to pursue the american dream.

Really, Peter, I'm disappointed.

Cheers,
prat

"But in the BIG PICTURE, the Bay Area’s desireability trumps the power of the bad loans to cause a real “crash” here like it will in other places."

For me to poop on.

OK. I'm done. See you all in a month.

Cheers,
prat