patrick.net

However, people who over paid but live in their house might be able to ride it out. The same can’t be said for flippers.

Those who use ARMs may not be okay. Then there are always DDT people - death, divorce, transfer.

You could even go with DDDDT (Death, Divorced, Downsized, Disabled, Transferred).

My cousin brought a house in Fremont in 2005, 700K using 5/1 ARM. They put down 15%.

My question is: why didn't that put 5% down and use the 10% as a buffer?

70K can "burn" for a whole year in case aanything happens.

First there’s housing, which has caused a considerable amount of the new future generation of brilliant young minds to pack up and move, which many more will continue to do so for the midwest and southeast.

I can't speak to the SE, but the Midwest is *rapidly losing* talent; a trend not likely to reverse anytime soon. In places like Ohio, Indiana and Michigan there is great concern about brain drain. It doesn't matter how much house you can buy in Columbus, you still have to live in Columbus.

It doesn’t matter how much house you can buy in Columbus, you still have to live in Columbus.

But in California, they already passed a law to ban foie gras by 2012. What if they ban raw fish? What if they ban all meat and force everyone to become vegetarian?

But in California, they already passed a law to ban foie gras by 2012. What if they ban raw fish? What if they ban all meat and force everyone to become vegetarian?

There's a proverb that goes something like: "Enjoy your sushi wisely, from a reputable establishment; and never in Ohio".

Sure, it's legal there, but...

Allowing animal right activists to influence our culinary culture is a very evil thing to do.

There’s a proverb that goes something like: “Enjoy your sushi wisely, from a reputable establishment; and never in Ohio”.

At least you can mail-order sushi-grade seafood anywhere. :)

I think as Peter P mentioned the real question about burn rates is the portion of "burn" that is discretionary spending versus necessary spending.

I don't know how one would estimate that beyond real rough estimates involving income, tax position, mortgage position, and staple needs (based on family size).

My gut feel is that the burn rate is high, but much of it is discretionary spending. Not that this is really much of a saving grace either. Even if people can still "survive" post bust, the economy will take a huge hit as consumption levels drop. Probably true both nationally and locally.

Sorry, I get emotional when it comes to food. :)

Even if people can still “survive” post bust, the economy will take a huge hit as consumption levels drop. Probably true both nationally and locally.

Now, this implies that even though people can cutback on spending, but the drop in consumption will further depress the economy, reducing output and therefore income. The result is even less discretionary spending and perhaps higher loan delinquency.

They couldn’t, the lender wouldn’t offer them a loan without 15% down.

Wow, what kind of interest rate are they paying?

They couldn’t, the lender wouldn’t offer them a loan without 15% down.

Wow. How bad does your credit have to be these days to NOT be able to get guaranteed 110% financing on your California RE-ATM machine? Didn't their mtg broker offer them a an 80/20 or 80/10/10 picky-back financing option?

RE: Wow, what kind of interest rate are they paying?

Do they have really bad credit or do they need a large downpayment to lower the DTI ratio? People with the discipline to save up 15% usually have good credit.

My wayward brother had well over 20% to put on a condo in cincinnatti, all of it from inheritence, gifts and begging. He probably makes under 30K/year, most if it working various McJobs. You don't want to know how much they were willing to lend him, despite the fact he's defaulted on numerous private and student loans in the past. (Needless to say he's a fan of no-doc).

You don’t want to know how much they were willing to lend him, despite the fact he’s defaulted on numerous private and student loans in the past.

Let me guess... up to 1.5M and 125% LTV?

McJob workers can fog mirrors just as well as you and me, especially if they drink enough warm water.

Last summer Yahoo did a special on how much does it cost to live an "upper middle class lifestyle".

http://biz.yahoo.com/special/live05.html

It's an intresting read. For upper middle class, it assumes sending kids in private schools, having a BMW and Lexus, owning a second home etc etc. There have to be a LOT of things wrong in their analysis, as according to the article, one needs 370K per year AFTER taxes to support that lifestyle.

Does that give us any idea about the burn rate for discretionary spending ? Note that they assume 30 year fixed mortgage, and 20% downpayment.

Even if I assume the error margin is 50%, it still comes out to be 185K - and that is AFTER taxes. It's stil very high. Kind of scary.

The article does not say, people are spending that much. It just says, one would have to spend that much for the dream lifestyle. But given our national savings rate, the article may not be just about Mr and Mrs Fictional.

My basic understanding of "burn rate" has usually been in the context of say a bio-tech/tech start-up normally provided through seed money/IPO or gift from a foundation/society grant? The question then becomes how quickly will these guys in lab coats "burn through" the money before they need a bridge loan to continue their "important work" on toe nail fungus while playing video games and what not. I've pitched my share of these "winners" and they all come with a sense of entitlement. "I did R+D at Amgen damn it!" How does this apply to the HB? Oh. I get it!

Since subsidizing Mr. Specuvestor amateur forays into momentum investing is almost always a losing proposition (as are bio-tech start-ups) I'd say the burn rate is ZERO months. When you start out with neg. cash flow it usually only gets worse from there. If you disagree, then please sign up for my "Eye on Bio-Tech Start Ups" Newsletter!

I would contend that their socioeconomic strata are flawed. Quite a while ago I paraphrased some work on the current strata; I'll see if I can find it and repost it. In short, there is no "upper middle" class; in fact almost no "middle class" left at all. There are only (leaving out education and movement factors):

True Rich -- (strata stable, grows slowly with family legacy and some small new growth)
absolutely no income required to subside; legacy of wealth lasting for many generations

Near/Nouveaux Rich -- (strata tends to come and go quickly)
newly found wealth, but still require some income to subside; often lifestyle buoyed by leveraging wealth with debt. this strata tends to appear during early stages of major economic reforms, but shrinks over time as most fall back to lower strata consuming much of their wealth; very few climbing into true rich.

Middle Class -- (strata shrinking rapidly)
income absolutely required to subside, but has some wealth, and a buffer shielding loss of income. can withstand short shocks, but not long-term structural industry changes. has been a dying strata with widespread loss of manufacturing base and unionized labor contracts, replaced by working-class service economy workers.

Working Class -- (strata rapidly growing)
income absolutely required to subside without much real wealth or ability to withstand even short shocks to income stream. little chance of acquire wealth. often equivalently educated with middle class.

True Poor -- (strata stable/growing from downward mobility and family growth)
income is almost exclusively subsidized directly or indirectly. little chance of upward movement due to generational lack of education or family structure. no wealth or prospect of such. high incarceration and morbidity rates.

SFWoman,

No disrespect intended! But after awhile you're not sure if you are raising money for R+D or R+R. You know the drill. Why do these symposiums always take place in a warm sunny climate w/buffets and umbrella drinks? Someone has to do it!

Davis_renter Says:
> I recently had dinner with my former fiance. He bought his place…

After reading Davis renter's posts I thought "she" was a man...

> Apparently he’s been cashing out to support his live-in
> girlfriend’s lifestyle for the last 3 yrs.

Nothing will kill a guys cash flow faster than a "high maintenance girlfriend". I know for a fact the main reason my parents are worth many times more than most of their friends is that my Mom is the opposite of "high maintenance"...

We won’t see the real “burn rate” problem until the loans funded in the summer of 2003 (when the 10yr TS was under 3.5%) readjust. I know many people in SF that make around $200K (and really bring home barely $10K a month) who got loans from $1mm to $2mm the summer of 2003 with starter payments in the $3.0-$4.5K range. The burning will start when the 3.5% IO period ends and they go to a 6.5% rate at a 27 year am with payments going up to $6.5-$9.9K. They all think that they will either re-finance or sell and never thought about what will happen when the place they bought for $800 a sf is worth less…

I live in Studio City, CA. I sold my home in Aug.for a good price and am kickin back and renting for awhilein the same neighborhood. Just checked zillow and it said my neighborhood of choice( now $800 to 1.5 mil) jumped in price last week by $7,000. How can this be? I keep waiting for the drop! Idiot realtors keep trying to convince me to BUY. I must have STUPID written across my forehead! They keep saying the prices never drop...only go flat! I'm not a genX baby, I was caught in the last big drop in LA and know from experience what can happen!I want to wait acouple of years and then buy, cuz I like owning a home...but not for these prices! Do y'all think the fringe areas will go first? Or the most over inflated areas?

Randy H,

Over the years I think I've been a party to every strata you describe above with the exception of the True Rich and in no particular order. I submit to you sir that there are actually 3 distinct schools of thought when it comes to wealth in America. They are as follows from east to west:

East Coast:
Brahman, you can trace your family wealth back to the "whaling fleet" or at least rum-runners. Interest and dividends from the trust go towards paying life insurance premiums to ensure the next generations role of prominence and influence. Motto: If you were meant to be rich, it would have happened by now!

Mid-west.
It's all about work ethic, b/c frankly we don't have much else. Motto: If they tell to push a broom, PUSH A BROOM! Don't worry about it. By the time you're 65 you'll have a house that's paid for and "nice" retirement.

West Coast:
Go West young man! Since before the formation of the Bear Flag Republic folks of diverse and frankly questionable past have come here to seek their fortune! (Myself and the lesser known Larry Ellison included). Break the rules. Be a maverick, a loose cannon. Maybe you'll strike it rich and keep it. Maybe you'll hit the mother lode and blow it all in a card game. The important thing is that you did the best you could and had fun doing it! Here out west, we don't forget our heros. Even if they died broke we applaud their willingness to put it all on the line. Many of the places out here are named after men and women that died broke or terrible failures. Small matter. Let's all celebrate by making every Thursday, "Take a risk Thursday!"

SFWoman,

Thread started out w/burn rate. Most commonly applied to bio-techs and their extravagant R+D budgets? I've followed bio/pharma for years and it always seemed to me that their symposiums took place in exotic (and expensive locales). I thought it was appropriate b/c with the bio's, they break out the champagne first and THEN worry if they have a viable product! HB equivalant? "We're too busy celebrating our success to be bothered with the fact that we have no idea how to sell this!" Re-fi=bridge financing. Burn Rate? Who cares! Just as long as they keep throwing money at us. The FDA DISAPPROVES 90% of all applications.

(-) 80/10/10 "picky-back" financing option
(+) 80/10/10 "piggy-back" financing option

Sheesh, must've been drinking...

Randy H Says:

> Quite a while ago I paraphrased some work on the current strata;
> I’ll see if I can find it and repost it. In short, there is no “upper
> middle” class; in fact almost no “middle class” left at all. There
> are only (leaving out education and movement factors):

I have found that most people that fit in to the "True Rich" strata are the best educated and also work the hardest and continue to make far more than they spend year after year (even though they don't "have" to work at all)…

This is the "Upper Middle Class" that someone renamed to prove a point that "there is no upper middle class". I see a small number of this group move up to "True Rich" (the part of the group that works hard and continues to make far more than they spend and pass this work ethic on to their children who work hard, and get a good education) most of this group is happy to spend more than they make and just "appear" to be "True Rich" (these shallow people don't notice that their kids are stoned all the time as they spend tons of money and host parties trying to fit in with the True Rich).

There is a wide range of middle class from a working couple in SF that comes up short some months despite a $300K combined income to a family in the rural south that lives in a paid off home with a stay at home Mom and a Dad that makes $18K.

"Working Class" people are just Middle Class people that are too lazy to either work a little harder to make more money, learn a new skill to make more money, or move where the money they can earn will allow them to live a middle class lifestyle.

Unfortunately this is the fastest growing segment of the population since the government does nothing to discourage uneducated looser guys from getting uneducated looser girls pregnant and actually encourages the uneducated looser girls from getting pregnant by irresponsible guys since as soon as they get pregnant with no guy around the government will set them up in a rent free apartment where idiot looser guy #2 can crash with her and the kid hiding out from his previous "baby mommas" (when I managed HUD Section 8 Housing in collage the guys used to brag to me "what a great deal they had when they got to live with their girlfriend on welfare for free without working". My boss used to say that he didn't mind the welfare moms but he despised the looser guys they attracted who just hung out screwing them until they got pregnant again...

Countdown: 19 days until the Iranian Oil Bourse goes live.
Countdown: 22 days until the Fed stops reporting M3.

hate to rent,

Your "Job Fair" experience is so typical. Whatever the latest "buzzword" is bringing them in the door, that's what we're going with! It wasn't until a few years after the massive run-up in bio's that a doctor friend brought to my attention that there are just so many things that can go wrong with humans! So few diseases and so many researchers (pounding the pavement for research dollars). That's why we have drugs like Lamasil (for that unsightly yellow discoloration of toenails). Look away! I'm hideous!

waiting_for_the_fall,

Wait no more! We'll have to give you some input on your new screen name.

Your sister's burden? Your brother-in-laws joy! In keeping w/my bio-tech analogy why would he bother getting a job? I mean seriously. If every time I turned around some lender (investor) was ready, willing and able to provide me with more money based on further unrealized "potential" who needs a job! 100K in cc bills? So basically they're putting everything on plastic?

athena,

Not only does she provide excellent data she brings outstanding equity analysis as well! I mean it! You need to start getting paid for some of this work. You've described exactly what's wrong at Google with a candor you won't find at major wire houses. The way you've depicted this house of cards I should think that Randy H and Peter P can short this puppy with a new found confidence!

Btw, a good friend of mine told me just last night that his job w/major brokerage has about run it's course. He wrote mortgages for all of their retail brokers on the west coast. THEY ARE NO LONGER PAYING ON 2nd MORTGAGES! They only get paid on firsts! Last year 80% of his business came from new purchases. This year 30%! No more pay-out on 2nds, HELOC's and cash-out/consolidations! MB's are in a tail spin.

Hey SF woman,
Actually, I read an article in the Chronicle about a year ago that mentioned some of the same things pertaining to Drs in CA. There is actually a slight shortage because young MD's look at the cost of living, the 8 or more years they just spent in school, and realize that they're trading that for a crappy little house in somewhere CA. That VS a rather nice house anywhere else.
Real life example: had a friend from my church as a kid. She grew up, went to med school, moved with her husband to LA. Bought a house for 320k. Commuted 2 hours each way. Barely able to make the payments on the house. SO they moved to Atlanta. She makes the same there but they live in a gigantic house.

SFWoman,

We see those trends even here in Oregon. We quickly shift the blame to all of the "transplants" from CA. I have prospected many a MD in my time and it's been my experience that if your dad was a doctor and your grandfather was a doctor chances are you're doing pretty good. If you're the first in your family to get through medical school chances are they are dealing with lots of debt, some until their 40's and then some. I suppose that's why we have these overly generous DBP/DCP retirement plans that allow these practicioners to "sock away" as much as they can while they can!

OT, and cross-posted from Ben's blog, but I thought some people here might find it amusing.

“It’s amazing to me,” Baras said. “They expect more and they’re buying more. The first-time buyer, when I started in the business, they were willing to do a lot of fixing up, get a small house, build up some equity. Now, young people are looking for move-in condition. They are not prone to doing some work. They have to have a big bedroom, because maybe the furniture they already bought is huge. It’s a completely different buyer.”

That quote about first-time buyers is such BS. Look at houses of the Baby Boomers you know. How many of them were “fixer-uppers” at one time? Did any of the 40 and 50-somethings you know do ANY home improvements on their own homes more complicated than painting? I will tell you this — none of the homeowners at my office were out in the backyard with the chop saw 20 years ago. Nope, they bought homes that were in “move-in” conditon.

Also, hiring a contractor to fix something or build something does not count. We are talking about home improvements that you do YOURSELF.

I mean, when is the last time a Boomer whose home you were visiting proudly pointed out his garage workbench, or the downstairs bathroom he installed himself? I bet if you were to visit 100 homes in a typical middle or upper-middle class community, you’d find maybe 1-2 examples of this. Obviously, blue collar guys do this a lot more becuase they have the necessary skills.

Personally, my dream is to buy a house needing home improvements. If I have to replace some avacado green appliances, rip out some tacky shag carpeting, and rewire a light fixture that hasn’t worked in years, that’s more than fine by me. I enjoy working with my hands and would like to learn some basic plumbing/carpentry/etc. skills. The problem is, a house like that costs $700,000.

For today’s buyers, the “fixer-uppers” available generally have problems that can’t be fixed. For example, about a year ago I found a SFH for only $268,000 in the middle-class LA suburb of San Gabriel. 2BR/1ba, 900 sq ft. It needed a lot of work; the paint on the exterior was flaking off, and the front porch was sagging. Why didn’t I snap up this bargain, put in a little elbow grease, and turn that frog into a swan?

Because the railroad tracks ran right through the backyard, that’s why. I mean, they were literally 10 feet away. Also, two of the neighbors on the street collected scrap metal out of garbage cans for a living; their 30-year old pickups piled high with twisted metal were parked in the driveway. Three of the homes had pit bulls running around in the yard, untethered. The house we had come to see had a Realtor’s sign out front — and there was grafitti on the sign!! There was a man standing in a sleeveless shirt with prison tattoos and bugling muscles on the corner, who gave us a puzzled look when we drove by. Incidentally, the foregoing description is 100% accurate and has not been embellished in any way. It was just as I have described it.

Sure, I could have bought the house, put in grainte countertops and stainless steel appliances, and painted all of the walls in neutral colors — but there would still have been a lot of needed “fixing up” that I cannot do, unless I want to burn the surrounding neighborhood down and reroute the railroad tracks.

But hey, I guess I’m just a greedy first-time buyer who is picky and unwilling to put in the needed work, right?

After all, the Baby Boomers all live in houses that looked just like this one at one time — right?

If anyone gets the chance there was an hilarious link on Ben's Blog where someone had taken a camera to a Condo Open House in San Diego. I think it's the 5th. thread down. "Investors Edging for the Exits in Oregon" (which caught my eye naturally) and was it ever funny! I especially liked the comments and the ever so fake staging complete with a "hot chick" neighbor (in the empty condo across from you) that drunk sailors would be able to detect as bogus. I believe it's www.capitalstool.coms/index.php?showtopic=7644.

SQT,

Have you ever considered something along these lines? My wife and I have contemplated buying a place in rural OR and use it as a vacation home/for the kids/favor to clients for the next several years. Maybe even a mobile on acreage with a view/recreation? Then when we're ready to retire (not sure what I'd do) the place would be paid for? Who cares if we're renting in the meantime b/c it's the impact on your retirement (that we anyway) find to be the most important. This isn't to diminish child rearing years but they won't stay young for long, whereas I've already been old for a while.

"It seems that right now we’re at a sort of tipping point. A lot of people my age (mid-30’s) who are priced out seem poised to move out of state if this doesn’t turn around fairly soon."

We've tossed that idea around. Although with the fat salaries and low rents this place is really a renter's paradise. However if rents start rising and our salaries fall we're gone.

athena,

The Greek Goddes of not throwing away money foolishly! Bravo!

Google had traffic. Agreed I use GOOG all the time. If they went away tomorrow I'd be inconsolable (for about 10 minutes).

The only cold callers more aggressive than stockbrokers are adv. people. Pit Bulls I tell you. Why? B/c their services are the first to go! I also like the observation about "dancing with those that brung ya" as well.

For what it's worth, reposting the socioeconomic strata stuff from about 6 months ago. If I recall, this was based on 2-3 different references. It includes more about education and social factors which help to explain the differences in strata. This is true regardless of whether you're talking about CA, the Midwest or the Southeast, because it's all relative. It's more about which strata you're in, and how likely you are to stay there.

Note, strata are macro generalizations. Thare are always exceptions and exceptional people (unfortunately, in both directions).

---
[referring to the discussion that was ongoing about if one could move up]

It’s not impossible, just increasingly improbable. My wife and I both succeeded to move up, quite a lot actually (we both grew up pretty damned poor). But that was years ago when education was a great enabler of upwards mobility; it would have been harder much harder today.

I still think there are at least 4 classes, because you’ve left out the abject poor–a frighteningly quickly growing strata. The working-educated who have the ATM-houses aren’t the same as the New Orleans, in-the-projects poor. Of course, there’s no officially agreed upon classification, but most stuff I read tends to divide into these 4(5):

* The poor. Truely no wealth, often little or no secondary education, entirely dependent upon others for economic survival, usually the government. This group has little chance to gain education or skills from formal training due to early childhood neglect and failure to understand the process of education.

This class is growing.

* The working-class. Little or no wealth; any wealth is distressed or at severe risk of loss due to insufficient access to or understanding of insurance. This group lives paycheck-to-paycheck and can be moved down to the Poor by a single event such as a sickness of the primary provider.

This class is not growing or shrinking by some estimates. [Later stuff I've read indicates this class is indeed growing much more rapidly than the authors of the studies I was referring to; most socio-econ studies were from the 80s until recently.]

* The Educated (or educated-working class, or The Skilled Class). This group has some wealth, usually in the form of home equity, which is generally not distressed and is often insured. They are strongly deliniated from the lower classes by an education (University, trade school, etc.) which is generically applicable to many jobs. This group generally has 4-times or more the rate of health care coverage and property insurance. This group has little risk of falling to the Poor, and only slight risk of occassional dips into the working-class. This class can sustain moderate periods of reduced or no income without falling into poverty.

[Again, later studies have shown increased chance that an increasing number of this strata do permanently fall into the working-class]

This class, when summed with the next highest, is not growing.

(The “Rich” classes)
* The near-wealthy/sub-wealthy/”BoBo’s”/neveux rich. This group has often moved up from the Educated Class, usually within the most recent generation. It is a dispute whether this is attributable to quality of education, timing and location, or simply luck. This group has significant, usually growing wealth in the form of assets in addition to their primary home, often in the form of equity ownership, investments, or income-producing assets. Few in this group move up to the “True Rich”, and many consume much of their wealth within 2 generations, their children and grandchildren settling back into the Educated Class. This class can sustain significant periods of loss of income by liquidating assets–often equating to multiple years worth of viability.

This class, when summed with the previous is not growing.

*”True Rich”. Total financial independence. This group requires no income to exist economically. This class leaves long lasting wealth legacy, often esnuring that their families will maintain this level of existence for many generations. It is rare and often spectacular when there is downward mobility out of this strata.

This class is not growing.

I had the pleasure to hear from Andy Rachleff himself as to why Benchmark told Larry and Sergey to get lost. It was an interesting paradox. Benchmark turned their back on Google for all the right fundamental reasons, yet it was ultimately the worst investment decision they made since WebVan. The top reason Andy gave for not investing was that they neither had, nor were particularly interested in developing a revenue model.

Hey Randy,
Well I would wonder where the majority of the younger middle class exsists in this state. I can say that most friends of mine, in the early-30's bracket are educated, make decent salaries, yet fit inbetween the working and educated class, meaning that they cannot afford even the most basic level of equitable financial assets such as a home. This is in stark contrast to the generations before. So the model is flexible and time sensitive. And I still think the above model is vastly diffrent in any other part of the country. A drywall installer in GA can afford a house on a small salary- even by regional standards- VS the highly educated engineer in San Jose who cannot afford the same size of house making 4 times as much income.That same drywall guy wouldn't have a chance in CA, even if he made 3 times as much.

SFWoman,

Like Anna Nicole Smith?

SFWoman,

So true! That is why I tell ALL of my clients that re-marry later in life to make SURE that your children are cared for in the event of their demise. You may love your wife/husband but after you're gone, who are your kids to her/him? How do I know this?