patrick.net

Malcom,

So true. My buddy tells me that something like 97% of the people that file a BK to avoid a foreclosure.... wind up getting foreclosed any damn way! Of course his take is, any money you paid out to an atty. is money that could have went toward keeping your lender happy!

One other thing I wasn't sure about was he said let's say you're 10K behind on your payments? And you have 9K in your 401K, rather than give the lender the full 9K (and continue to struggle being delinquent) often he can negotiate on your behalf and get them to take say $2,500. That way when he structures the "work-out" they would still have a little liquidity to keep the lender at bay until they straighten out their financial issues.

Hello Kitty, does that sound right?

Boston Transplant

There are many reasons that holding-cost of ownership (we usually abbreviate as PITI, but also includes a risk factor) is usually about 50%-70% higher than renting, and some factors are cultural and differ among countries.

Financially, the only real justifications (see end of last thread) come down to leverage, tax shelter, prepayment option, and savings-account effect (building up equity). These financial factors do not apply to renting, only to owning (there are other factors on the rental side which partially offset some of these).

But all the financial factors probably only justify (and I don't have a 30 page thesis to support this, just my reasoned opinion) about a 1.2-1.3 ratio.

I believe most of the difference is "personal utility", cultural and psychological. Many people have rational reasons for wanting to own versus renting, even at a premium. The US has a very strong cultural bias towards owning, and there are all kinds of sociology and socioeconomic models and arguments this invokes -- we have at least one regular here who works in this area academically. And finally, in the context of the culture, a large number of people become emotionally tied to home ownership, especially as they become more affluent and/or turn from 1st generation to latter generation immigrants. "The American Dream" at a macro and micro level, if you will.

Sometimes the ration inverts. This is not a normal circumstance, and generally doesn't persist for longer than a few years except in secularly depressed areas. Much of the worst afflicted rust belt, for example currently has ratios around 1.0 - 1.1, which isn't even inverted but many people blame for the degeneration of stability of entire towns. A few places currently have truly inverted ratios (last I looked was actually late last year). Some areas of Detroit, Gary Indiana, East St. Louis are industrial examples. Rural southern Indiana is a non-rust belt example. In these areas renting is more expensive than owning, largely because there is a premium placed on flexibility/transience. Few who find themselves living in these areas are willing to invest in ownership and/or cannot afford to do so. Similarly, landlords who own property they rent out in these areas demand a stiff premium for the risk they are taking by owning property in long-term a depressed region. Aside, I read a study a few months back that also showed people in inverted ownership-to-rent regions actually pay a much _higher_ portion of their income to housing than other regions. This was attributed to depressed incomes + inflated rental prices, sort of a 1-2 punch for people stuck in "poverty traps" (which is what Easterly calls these types of regions that get stuck in positive feedback loops of regional depression).

"DinOR Says:

March 15th, 2007 at 8:53 am
Malcom,So true. My buddy tells me that something like 97% of the people that file a BK to avoid a foreclosure…. wind up getting foreclosed any damn way! Of course his take is, any money you paid out to an atty. is money that could have went toward keeping your lender happy!"

That's because in the end it comes down to individual character. These types of people just can't bring themselves to pay their bills. Like you said, some people horde savings when they could pay off bills. I'll never figure out someone who would rather pay 18% on a small credit card bill, rather than tap their nestegg making 6%.
A BK to avoid foreclosure is just a stall tactic sometimes. I'm seeing it second hand from some investors (lender side) that I know. Their attroneys say the same thing, the FB is only gaining about 3 months before the inevitable. Just because you can keep your house during a BK, you still have to pay the trust deed(mortgage for lack of a better word). People think that gets discharged, you actually have to reaffirm it during a BK or else it is just an asset for which the trustee has a secuirty interest in, and they'll just snatch it right then.

Randy H Says:

> There are many reasons that holding-cost of ownership
> (we usually abbreviate as PITI, but also includes a risk
> factor) is usually about 50%-70% higher than renting…

Other than the last few years (the Real Estate Bubble) and on the early 80’s (the Interest Rate Bubble) the cost of PITI (on a 80% or lower LTV loan) has been lower than rent for almost every home in the US. In the 60’s, 70’s and 80’s every rental home (with a down payment over 15%) my Dad bought in the Bay Area was cash flow positive from day one…

> Sometimes the ration inverts. This is not a normal circumstance,
> and generally doesn’t persist for longer than a few years except
> in secularly depressed areas. Much of the worst afflicted rust belt,
> for example currently has ratios around 1.0 - 1.1,

In the rust belt the ratio is WAY UNDER 1.0. I just went to realtor.com and found 259 homes in Flint, MI for $10K or less (yes homes for under ten thousand dollars). The PITI on an $8K loan will only be $50 a month far less than renting. I know a guy who has a brother in the Detroit area with over 50 rental homes that he buys for $25-50K on average and rents them about double the PITI on average…

P.S. High end real estate has always had a ratio of rent to PITI well above 1.0 so if we are talking about Belvedere, Ross and prime Mill Valley homes the ratio will probably never get below 1.0, but I have friends that own average homes in Sausalito, Mill Valley and San Rafael that had PITI payments that were lower than the rent they were paying for similar homes in the 90’s…

Will you also have 2nd mortgage people/HELOC’s trying to come after you as the buyer as they have a previous claim? I can’t imagine 2nd mortgages in CA are just going to let it be when that 2nd mortgage could conceivably be $100,000 - $200,000 in some cases?

This is an excellent question.

From what I gather reading OO, FAB, Randy H and those with direct experience, the 2nd lender's claim gets wiped out when the first mortgage-holder takes back the property (either as DOT or the less common “judicial foreclosure”)? Basically, they have no (or very limited) legal recourse to a deficiency judgment, unless they can claim fraud or some such. Is this about right?

High end real estate is definitely the exception. You would not rent out a mansion, nor are you likely to be able to rent one. We are talking about generic housing. There is a whole different asset class between normal houses now including McMansions, and the Neverland Ranch. The super super rich buy homes as a status symbol or a lifetime acheivment. If anyone on this board buys a house as a status symbol and it makes poor financial sense then they won't deserve any pity.

They have none, that is the risk of making a 2nd TD. That is why the rates are higher.

One thing to clarify, if at the sale auction there are proceeds exceeding the loan being foreclosed on, those excess proceeds do trickle down the food chain, and if there is enough, the FB will actually get a check. Once everything is said and done, everyone downstream has to live with it.

Malcom,

Right you are sir! The "record" according to my friend is 4 years of delinquent house payments. Rumor has it that it was the C.O.P ex-wife in Toledo. Man, that's a whole lotta bitterness! (I'm sure one or both parties could have afforded "some" kind of arrangement?)

What remains to be seen is w/so many filing for BK/short-sale/foreclosure will the system go into overload? I understand this is a very labor intensive process.

Not much has been said so far about the effects of REFINANCING or HELOCs on the borrower's no-recourse/anti-deficiency standing. As I recall, when s/he refinances, the borrower generally loses the no-recourse protection --even in CA. Is this assumption wrong?

As DinOR likes to say, when you refi your house, you are essentially "re-buying" it. Since at least the clear majority of CA mortgagors have refi'd at least once in the past 10 years (some estimates put it as high as 90%), this means most CA mortgagors no longer have this protection. Also, the debts from any cash-outs and HELOCs remain even after foreclosure. So, basically, most CA FBs will have to file for BK, unless the banks don't feel they are worth pursuing (due to lack of assets, which is likely for most).

Is this about right?

From what I gather reading OO, FAB, Randy H and those with direct experience, the 2nd lender’s claim gets wiped out when the first mortgage-holder takes back the property (either as DOT or the less common “judicial foreclosure”)?

To clarify, I meant "the 2nd lender’s claim gets wiped out when the first mortgage-holder takes back the property IF the auction sale does not bring in enough money to satisfy BOTH loans." Obviously, if the auction sale generates enough $$, both lenders get made whole.

Harm, right on both posts. Refis, and HELOCS are recourse loans, just like a car loan.

I love the pissed off wife stories. I read a story a couple of days ago about some guy in Germany how chainsawed his house in half and took his half away on a forklift.

who...sorry typo

I cite my data here. The last time FAB and I had this argument he failed to produce contrary data. That ownership is more expensive than renting in equilibrium is widely accepted and well established. FAB may be implementing his own form of hedonics.

Home Ownership Costs compared to Renting, 1975 - 2005, HSBC. Method is real price adjusted for inflation, including holding cost and real value of future debt service costs (rounded, you can pull significant digits from the spreadsheet):

[MSAD = San Francisco-San Mateo-Redwood City]
1975: 0.9
1976: 1.1
1977: 1.2
1978: 1.3
1979: 1.7
1980: 2.1
1981: 2.4
1982: 2.1
1983: 1.9
1984: 2.0
1985: 1.9
1986: 1.4
1987: 1.6
1988: 1.8
1989: 2.1
1990: 2.1
1991: 1.8
1992: 1.6
1993: 1.4
1994: 1.5
1995: 1.4
1996: 1.5
1997: 1.5
1998: 1.6
1999: 1.6
2000: 1.7
2001: 1.6
2002: 1.5
2003: 1.4
2004: 1.7
2005: 2.3
(2006): 3.1

[MSAD = Cleveland-Elyria-Mentor, OH]
1975: 1.0
1976: 1.0
1977: 1.1
1978: 1.3
1979: 1.4
1980: 1.5
1981: 1.6
1982: 1.4
1983: 1.2
1984: 1.3
1985: 1.2
1986: 0.8
1987: 0.9
1988: 1.0
1989: 1.2
1990: 1.2
1991: 1.0
1992 .. 2005: 0.9-1.0

Hello Kitty,

You're kidding, right? 20, 50K underwater and they walked? In that case I can't blame you for having a jaundiced view.

And now I have to tread VERY carefully.

Since it's been a decade-long + all out MEW orgy many of us may have lost sight that when something, anything falls out of fashion in CA... it falls HARD! Given HK's summation of his experiences in the mid 90's I'm doubling down on my "renting snobbery" position! :)

Looking for "way below" figures... Even Gary IN isn't "way" below 1.0.

[MSAD = Atlanta-Sandy Springs-Marietta, GA]
1975: 1.1
1981: 1.7
1985: 1.3
1989: 1.0
1993: 0.8
1997: 0.8
2000: 0.9
2005: 1.0

[MSAD = Gary IN]
1979: 1.3
1983: 1.7
1985: 1.1
1987: 0.7
1993: 0.7
1997: 0.9
1999: 0.7
2003: 0.7
2005: 0.8

Toledo: bottom 0.7 in 1985, 1993. Avergae 0.8 after 1984, 1.3 before.

Detroit-Livonia-Dearborn: bottom 0.7 1976-77. peak 1.3 1981. post 1984 average is 0.7. post 200 average 1.0.

Chicago-Naperville-Joliet: 0.9 1975, 1.5 1985, avg. 1.2

Mobile: 1.5 1984, 0.9 1993, avg. 1.0

Pittsburgh: 0.8 1985, 1.2 1981, avg. 0.9

Youngstown-Warren-Boardman: 0.9 1985, 0.6 1993, avg. 0.7

Ok, there we have one I'd call "way" below 1.0, at 0.7 post 1985. That is Youngstown OH. I didn't go through every MSAD. But my point is made, I trust.

http://www.dqnews.com/RRBay0307.shtm

Bay Area DQ numbers are out.

Randy,
Thanks for the data - interesting stuff as always.

One thing I notice is that for the SF numbers, the ratio "normalizes" to what looks to me like the historical average within 5 years from 1981 -> 1986, and it does so in 3 years from 1989 -> 1992.

I wonder what time frame it will take this time around? Or is it "different" this time? :)

From the DQ release:

"But we're also seeing the aftereffects of the historic housing boom of recent years. Some people were motivated by fear - fear of being priced out of the market, missing out on a 'great investment' or a great mortgage rate. They rushed to buy sooner than they otherwise would have, and that stole demand from today. It's tough to quantify, but we think it helps explain the slowdown."

Fear of being priced out, sigh.

That ownership is more expensive than renting in equilibrium is widely accepted and well established.
Haven't we already been around this mulberry bush a couple of times? Randy's HSBC data is aggregate for an area. FAB is talking about like to like comparisons (renting the SAME house versus buying it). Both are useful for showing how out of wack the market is.

I had a big heap of housing price/income charts on my blog about a month ago:

http://www.burbed.com/2007/02/16/how-the-bay-area-caused-home-prices-to-go-up-nationally/

SQT,

No offense, but a MB is the LAST guy I would go to for an opinion on that! Or opinion... period. These guys/gals (for the most part) have skill sets that are slightly by above your avg. P/T bank teller and need constant direction. They regularly lean on the expertise of the title company and/or anyone they can stop in the hallway.

eburbed,

Shoot me a line, DUDE! :)

EBGuy,

True, except that there already exist quite well refined like-to-like aggregate data in the form of the Case-Shiller Index. Comparing CSI to aggregate real rents still produces right around 1.0-1.2 for "less prime" and 1.5 for "prime" parts of the country (where CSI is tracked). CSI does show a pronounced period of widespread less-than-1.0, which occurred during WWII. The HSBC data is 1975- so it doesn't include the Depression and War. I accept that things are based on reasonably different fundamentals in the "post-post war transitionary period"

Picking samples out of realtor.com is useless and misleading unless FAB is willing to apply statistical rigor to that sampling, and present the data to us in aggregate with methods & descriptive figures.

Randy H,

StuckinBA and myself are erecting a shrine to "Saint Shiller" so no need to sell US on the validity of his data! Good man. That isn't to say that I dismiss FAB's version in an off-hand fashion either. Afterall his direct involvement goes back to around 1975 as well.

Thank you Randy.

Let me use my own apartment in downtown Boston as an example (if I may be so bold).

Rent = $2400/month

Sale price = $700,000 (my estimate)

P+I = $4200/mo (approximate 30 fixed, neglects downpayment)
T = $600/mo property tax - $1200/mo interest deduction
I = $200/month

PITI = $3600

Ratio = 1.6

I can then comparing this to the historical values for Boston from your HSBC chart?

sorry, PITI = $3800, ratio = 1.6

(we rent this place by the way, couldn't afford to buy it)

It's good that "it's different here" in the Bay Area because otherwise this chart would scare me...

Oh ... interesting sentence in DQ's release.

adjusted for inflation, current payments are 14.2 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 9.9 percent below the current cycle's peak last June.

Are they admitting that there is a cycle (as in up-down vs a plateau) and last June was a peak ? Meaning we are past the peak ... meaning price are declining ?

>Shoot me a line, DUDE!

Huh? If you want to contact me - my email address is on the front of my blog.

It’s good that “it’s different here” in the Bay Area because otherwise this chart would scare me…

Only 56%?

I wish it had been higher.

I just saw that Hilary Clinton, the pro-choice neocon, has a plan for helping people who have gotten in over their heads with their mortgages. What the exact plan is...well, I'm sure they aren't finished with their polls yet.

She also has a plan to get us out of Iraq by leaving large numbers of troops in Iraq to 'hunt Al-Queda and protect Israel'.

Does this woman do polls and then come up with policy the minutes the poll comes in? Gee, some people are against the war, and some people are for it and I'm being lobbied by PACs to stay hawkish, so we'll leave Iraq by staying there. No one will notice I'm sure. And hmmm, people seem a bit spooked by their debt, we'll have to talk about that a bit....

I am not even pro-choice.

Hello Kitty,

Even in 1996, 20k was NOT that big a deal!

I guess the way some people "win" is that if they *can't win.... well then they just don't play! I know "I" always take a special shine to "those" kinds of "winners"! Man, the slightest headwind and they're throwing in the towel?

Okay folks, here is how HSBC gets their rent data and adjusts it in an attempt to compare the "same" 3 bedroom rental to a 3 bedroom house. Personally, I think they spit out a good metric for a region (as in -- if the ratio is within historical norms, time to start thinking about buying). I feel less confident about applying the ratio to an individual home/apartment (like Boston Transplant is trying to do above).

From:
HSBC Global Research
A Froth-Finding Mission: Detecting US housing bubbles
Appendix C
Adjusting for bedroom size
Because we utilized the HUD’s rent-data for two bedroom units, we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised the level of all rents by 30%.
Adjusting for utilities
Since the HUD’s data are estimates of gross rents, which include the cost of utilities, we also needed to make an adjustment in order to only reflect the
shelter component of the rent costs. We reduced the level of rents by 10% to strip out the utilities component of gross rents.

DinOR, I am handling Shiller's beatification process (please let me know if he appears in the waterspot on your ceiling :-) )

SQT,

Funny! Any MB that comes out on the other side of this after 2 or 3 or 5 years of sucking it up can THEN tell me they're a MB! Thus far they've had nothing but the wind at their backs and fair sailing.

Short sale? Foreclosure? Rent2Own? I hate to say it but I see very little distinction there. It's just various stages of gangrene. Uh.... does it smell like "almond"? MEDIC!

The SF Chronicle had a pretty good article on non/recourse loans. Not sure it really clears up the refi issue.

A recourse loan generally means the borrower is personally liable for repayment. If the lender takes over the house that is worth less than the debt, the lender can go after the borrower's other assets to pay the difference.
A home equity loan or line of credit is a recourse loan. So are consumer loans secured by your house.
In most instances, if you refinance your house, the new loan is a recourse loan, says Michael Pfeifer, a real estate attorney with Pfeifer & Reynolds.
However, Roger Bernhardt, a professor at Golden Gate University School of Law, says there is no California case law that definitively establishes this as fact.
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/06/05/BUGG5D3FNS1.DTL

EBGuy,

Well.... yes, YES! Now that you mention it there does appear to be a scruffy beard and dominant brow!