patrick.net

OK, excuse me for my ignorance, can anyone tell me why I/O loans have to reset? Can't they pay I/O loans forever? Is it mandatory that the borrowers have to refinance? Why if they keep paying their interest?

Sorry for the question list since I never bothered to look at this option anyway. I always thought you could just pay I/O till eternity.

Owneroccupier,

Oh that's right, rub it in! No, I don't feel bad at all. I'm all about the "sweet spot" of the move. My oldest daughter graduated HS in 2003 and we knew we would have to help support her in school so there were personal issues as well. Not the least of which was that everyone loved the old house but what do you think your chances are of getting a teen-age daughter to spend her Saturday afternoon on a riding lawnmower? Everyone loved the Christmas lights but was no where to be found when it was time to put them up. I'm not AS bitter about it but it became a one man show and the girls were becoming young ladies with their own interests (sports, boys etc.) and painting gutters wasn't on their agenda.

Owneroccupier,

Good question! I suppose that the only reason I/O's and ARM's re-set is so they can re-sell the loans in the secondary market. It gives the appearance that the borrower has at least some design to ultimately repay the loan otherwise it's just like renting. Hey wait a minute, it is like renting.

1.8 mil in 06 from 550K in 04? What's the matter? Don't you like Amurika? A 227% return in under 2 years? Why would we grudge anyone that? Afterall, they did take the trash out and did some weeding!

Mr. curious,

speaking from experience, the last nail on the coffin has to be a stock market event, that is how the RE fate was sealed in Japan and Hong Kong. Otherwise, the sheep's attention won't be secured. Stock market loss is the biggest wake-up call.

What I predict will happen is the implosion of either of the GSEs, Freddie Mac or FNM, or some BIG REIT fund going under, sending the tremor to the whole sector. GSEs don't have to go under, but they have to be distressed enough that a government bailout is absolutely necessary to treat them as a going concern.

When that happens, the sheep sellers will slash price left and right, sending the price of homes spiraling down.

I recently looked up some new developments in the fringe of the valley, many new homes of almost exactly the same lot size, home size and location are selling at 100K-200K less than the 5-year old homes. While the homebuilders are aggressively unloading, the individual sellers obviously haven't gotten the memo yet.

Mr. Curious,

"we ain't there yet"

I agree, but we're close. There's a growing consensus in the media that this is awfully big to be swept under the carpet. The funny thing is that the pain started in places that seemed the least bubble prone. Defaults in Ohio? Appraisal scam in Kansas City? Appreciation was tame in these areas when compared to CA. What will happen re-fi's are no longer a viable answer there?

DinOR,

further questions.

What about those people who are on 30-year, 15-year ARM loans? These people are not categorized into the reset right? We've had the traditional ARM for years right? In fact, most of Europe and Oz, Canada are on ARM.

So the only resets required are those that don't pay down their principal? As long as you pay down your principal, you don't need to reset?

So I/O loans or negative am loans cannot be packaged off to the MBS market and passed on to the next sucker? Does it mean those who issue these exotic loans will have to be the bagholders?

Thanks.

Owneroccupier,

Good questions. I don't portray myself as an expert in the mortgage underwriting process but part of the appeal of buying ARM's in the secondary is that they DO re-set. This provides a hedge to the investor going forward. Many of these have Pre-payment penalties which also protect the lender and investor. My understanding is that that about 500 bil. will re-set this year. As I've said before, hauling GSE exec's out on the carpet will not help MBS shareholders (although it may make them FEEL better) it will not provide relief. All ARM's have provisions that allow the lender to change rates and ultimately payments as in "adjustable". There are new legitimate firms out there that actually help folks with debt/micro management issues like getting their credit cards paid down, then they wittle away at you auto loans and then focus on pre-paying your mortgage off in 8 to 12 years instead of 30 or God forbid 40. They are not that popular and I don't understand why. I guess when you can buy a home on "04" for 550K and sell it in "06" 1.8 mil who needs a financial advisor?

SF Woman,

Points well taken. Not long back Harm coined a phrase about GSE's that just about summed it up.

Privatize Profits
Socialize Risks

Says it all for me!

”finding the bearded woman in your bed and she is having your baby.”

OK, I'm going to need some more coffee this morning. I'm having flashbacks to that morning I woke up in Cleveland with no idea how I got there.

Owneroccupier,

Just a final thought. If we must buy MBS, then we should at least look at "seasoned" MBS. Most people that are in the 28th year of a 30 year mortgage are not going to default. It's always possible but normally their equity carries the day. It's really leverage on top of leverage with much of the MBS ETF's though b/c the new loans are done w/little or no down and then the use the portfolio to buy even more loans! Some as much as 35%. We're just not being adequately compensated here!

NIA

Mr Curious,

not necessarily that far out. What happened in the RE busts that I have seen is, the bubble reached new height precisely because of the participation of flippers/investors and excess credit. So typically at the top, half of the new buyers are flippers. Flippers are not married to anything except for the profit, so if the comps drop, they will be fighting for the exit.

The first 15% loss in Re value comes fairly rapidly due to the exit of these non-occupiers. Then we will be in a holding pattern for a couple of years while the job loss, as you pointed out, impact the crowd. However, the two examples that I watched up close and personal were Tokyo and HK, two cities with enormous savings and frankly, more average affluence than the deeply indebted Americans.

When Tokyo bubble popped, an average Japanese household (if my memory is correct) held a total savings of around 450K USD, the number of HK people with more than 125K in savings (excluding home) was something like 150K out of a population of 6.5M. How much savings other than homes do you think an average Bay Area household has? Therefore, it takes much less time for the crash to play out in the US, IMHO.

Mr. Curious,

"will hold out for much longer"

That "holding out" has been the subject of much debate here. Those w/equity will try to salvage it. Those w/out equity may try to salvage their dignity. I can say from experience that there are times when it can be a far better thing to admit defeat early and walk away. For those of us that are "internally motivated" we always assume that we are the problem. We're not working hard enough, we're not putting in enough overtime! We should quit whinning and get a third job etc. Sometimes when we "hold out" we only make matters worse b/c some situations (like a stock market crash) are much bigger than our own motivation.

Not Parental Advice

Also, there is a huge difference in expenditure structure, and I think this idea is worthy of further probe by economists.

In Tokyo and HK, most people rely on public transportation, which is a big saver, not only in total cost, but in cashflow. Gas, insurance, the car itself, more often than not account for a very big part of the household expenditure in the US, and you can hardly make any cut there! Not the case in Asia. The beauty of relying on public transportation is you pay as you go, you spend $5 each day, as opposed to spending $600 on car payments and insurance at the beginning of each month regardless of usage! So the cashflow situation of an American household is rather ugly when it comes to transportation costs.

Now, during the recession, what are the areas that you can cut back? I remembered seeing a BW article last Nov that American consumers started to put gasoline on credit card bills, because they don't have enough cashflow to buy gas! So how stretched we already are! And if you live on the west coast, the only way for you to get to work is by driving, while in Tokyo, the company pays for transportation!! Transportation renumeration is a part of standard package in Japanese salary structure. In HK, you have so many choices of public transportation so you really get to choose how much you want to spend.

Therefore, I totally disagree that there is much space for the Americans to "save up". Because we already have so much credit card debt, and we have a fixed expenditure structure, there is not really much room for cutting back. The fall will be rather swift.

A plausible set of reasoning, in my opinion, as to why most non-speculator owner occupiers will opt to hold out even well past the obvious point of no return:

http://gsbwww.uchicago.edu/fac/richard.thaler/research/MentalAccounting.pdf

Put simply, people are pre-programmed to think in non-optimizing terms. The best example is "found money". Most people, if they find $500 by surprise, will tag that money as "free", and tend to frivolously risk or spend it, instead of incorporating it into their overall "rational strategy".

The same applies to home equity. Very much a gambler's curse. I'm holding on until I at least break even, kind of thing.

Bazerman also has some good insights about larger scale group psychology (like institutional failures) in the first book listed here:

http://www.people.hbs.edu/mbazerman/

George,

completely agree. But what is more mystifying is, who are frigging idiots buying them??? Who? Which fund? Why? Why would any fund/investor in the sane mind be buying FNM/FRE at this point??? And why won't the investors be unloading like there's no tomorrow with these two bagholders??

Obviously someone with a very strong heart, perhaps as strong as Ben Bernanke himself?

SFWoman,

The Bible Belt runs deep in that area, and right through all of N Kentucky, S Ohio, S Indiana and S Illinois. When I was a kid public school teachers used to seperate the Catholics from the Good Christians in grade school classrooms; and I'm talking about the early 80s, not the early 50s. The local "liberal college" (which is a Quaker college, lol) where I went to HS in Souther Ohio published a survey a couple years ago that found that the KKK was more well respected within the County than such controversial entities as public school science teachers, "Wall Street Bankers", computer programmers (the study covered a period of Y2K scare), the UN, and J K Rowling.

Randy....
The state with the largest number of KKK chapters is California. Just thought you would find that intresting.And this is Circa 2006.. not the 50's.

George,

Not delisting fannie and freddie really ticked me off. Where's the motivation for all the firms that report in a timely manner? Absolutely right. Had it been anyone else the normal process would have taken place. But RE is special.

It is rather shocking that with a northern California focused blog no astrologer has popped up. Maybe they read the stars and not blogs for their real estate scoop?

Yes, a bit shocking.

I prophecize that real estate will tank in SF in the next two years. And I don’t mind. I’ll look less affluent on paper, but is my city house or country house going to provide less shelter or fun gardening if it is “worth” 40% less?

Very true. However, for many people, a house is the only "ticket" to what they see as wealth.

11.5 years ago I paid about 25% for my property of what it would sell for today. Bubble!

Although your conclusion is correct, the reasoning is not necessarily sufficient. There can be fundamentally sound scenarios in which housing prices increase rapidly. For example, a place who is experiencing high wage growth. However, in these scenarios, rent would also rise rapidly. This is not what we are seeing here.

I still think that GSEs should be re-chartered. They should do nothing other than providing liquidity through trading. At MOST, they should act as a housing related hedge hund with access to insider information.

They should do nothing to distort the market. They should not buy loans that are unlikely to perform.

more well respected .. than ... the UN

I have no respect for the UN. What have they done for humanity lately? They only do pointless things like banning Caspian caviar export. They are unable to mitigate human suffering anywhere. They are not even a paper tiger.

Their NY HQ should be converted into condos.

The state with the largest number of KKK chapters is California. Just thought you would find that intresting.And this is Circa 2006.. not the 50’s.

This is an artifact of absolute numbers. CA comes no where near per-capita chapters or membership. I'll agree that such ultra-right blight as the KKK and Aryan Nation are rising pretty much everywhere. But places like Clinton County, Ohio have an order of magnitude higher membership participation per capita than any CA county. Google New Vienna (pronounced Veeanna by locals), Ohio if you're interested in learning more about just how pervasive the KKK and AN are in this area. I grew up a few miles from there.

I have no respect for the UN.

Me either, but I don't put them on a moral equivalency with the KKK.

Me either, but I don’t put them on a moral equivalency with the KKK.

The UN is morally irrelevant. However, on the other hand, all forms hatred are pointless and counter-productive. And I am speaking as a "crime-hater".

Davis renter,
You and SFwoman are intelligent people, as seen on this forum. I'm not trying to be condescending, but I don't understand this fear that seems to imenenate from people sometimes from Californians and other non-native southerners that somehow, someway, if you move or visit that region that suddenly malicious demons will come out and get you.
The real question here is can you live somewhere that has people that think diffrently than yourself. I'll admit that for the first year of me living here in the Bay Area, I found it both refreshing and scary at first for the same reasons that you and SFwoman seem to show concerns for, which is that people here are somewhat diffrent here than other places. I got used to it, and know all the little local and regional intrests and attitude towards various things. I have aclimated and accepted this change, and while there are people who disagree with me, I don't see how this could be diffrent than someone doing the opposite and moving from CA to NC,TN, or somewhere else besides the Bay Area. Again- it is totally up to you. All I can say is that there will not be anyone in these other regions who will try to force you to do anything you don't want to. You'll find a refreshing change from Ca in an affordable lifestyle, less people to clog up the freeways, better schools, and so forth. You'll also find christians who follow a faith that they brought with them from Europe hundreds of years ago, who believe that the church and community are one. You'll also find Jews, Hindus, and buddhists, aetheists, and the whole gamut of what the US has to offer. You may not find what you are used to in California, but you will find something diffrent, including the people. Perhaps people in some areas, even in CA cannot grasp diversity, which again I think is too generalized to categorize. It isn't our jobs to convince them to be any diffrent than who they are and what they believe as it isn't theirs to project their beliefs onto you. You'll find that MOST people are good, decent, respectful people. It's too bad that a few rotten apples have to be used to define the average.

But I also hate rats, cockroaches, and imitation crab.

But I also hate rats, cockroaches, and imitation crab.

Your right. I hate people with bad grammer on the internets to. Its a real pet peeve of mine. Their annoying.

When that happens, how will stocks handle it? Will consumer spending start a steady decline as well? That could be precursor to the tumble we are projecting.

I think it is the precursor to a long downtrend in consumer sentiment. I'd be careful about trying to correlate stocks to this, however. Stocks are very liquid, and moved by a lot of forces unrelated to consumer sentiment (although the consumer is a major factor).

I think the consumer purchasing downslide will be the most devastating part of the RE bubble pop. This will have national effects on everyone, regardless of whether their local RE market declines.

OK. A lot of good posts/topics here.
Nomad
The most popular question to newcomers in N.Carolina, for me, was"so, what church do ya go ta?" I know they were being friendly, just making conversation, but I agree with SF Woman. Religion is very personal to me. I actually believe that those who are most vocal about it , are also the most judgmental. In other words...walk the walk instead of talk the talk. In my family we have a word for it....

hypachristian

Also, when I stopped at a neighborhood convenience store and asked where the teens hang out(concern for my only child who is 13) the guy who couldn't have been over 22 said"Have ya joined a church yet?"Again, very neighborly...but not for me.

Also, I may be naive, but I believe just alot of media coverage will serve to deflate that bubble. Sheeple believe what's on TV.If it's on TV then it must be true! So if the TV finally admits prices are declining, it will inspire fear which will cause further declines. Finally...

And here is more information on those pesky economic fundamentals I go on and on about:
http://tinyurl.com/qhxjq

If you are willing to treat rising RE prices as a form of inflation, then apply inflation expectation theories like Adaptive Expectations and Inflation Inertia (Phillips Curve aggregate supply stuff) and Wage Rigidity/Structural Unemployment, that article seems not only plausible but consequential.

***Disclaimer, not econometrically tested***

I stopped by the "overvalued" blog and I gotta say the guy is funny. People from all across the U.S send in ridiculously priced PoS listing photos and this guy does commentary on them. Very funny!

I must admit though I did break one of his rules. That is to NOT visit open houses! No matter how much fun this might be to jerk some realt-whore around for 1/2 an hour with absolutely no intention of buying it gives them the sense that there is some market activity. I agree. From now on I think I'll just park out front with the Mrs. and laugh hysterically and when the come out to see if you are a viable prospect just slowly roll away. Of course laughing all the while.

SFWoman,

rest assured we will all pay for the greed and stupidity of the RE flippers and subprime lenders. When Fed bails out GSEs, REITs, pension funds, or whatever financial institutions that are deemed too important to fail with manufactured money off their printing press, we will pay our fair share of "inflation tax".

Taking suggestions for a new thread...

Fannie/Freddie Bail-out/re-structuring? Careful what you wish for, will only those w/considerable resources be able to "cash in" at the bottom? Can mortgage lenders get along fine w/out Fannie? What would the lending landscape look like without them? Who cares?

New Thread:

Fiscal Exposures, Debt; and the threat of Another Huge Bail-out?

Thanks to George and DinOR.

Owneroccupier Says:

"One house down my block is trying to sell for 1.8M, and I looked it up on zillow, the owner paid for 550K in 2004. Speaking of bubble!!"

God almighty!

Owneroccupier Says:

"One house down my block is trying to sell for 1.8M, and I looked it up on zillow, the owner paid for 550K in 2004. Speaking of bubble!!"

God almighty!

Does anyone have a link to the "overvalued" site mentioned previously? Sounds like a hoot!

Aryan Nation - You got to be kidding me.
http://www.dictionary.net/aryan
Stupid white American's in prison dont have anything better to do. Geez.

I have a cousin who is a Lesbian in Atlanta. An Aunt who is an atheist and best friends with a lesbian black couple in Memphis. My immediate family and I are not particularly religious and live in a very rural part of the state.In all that time, I have NEVER had anyone tell me what to believe, how to act, where to go to school, or that what I believed was wrong. Needless to say, I was never persecuted for me beliefs. Nor did I openly proclaim my beliefs on others. I, like yourself take me convictions very privately, as most people should do.

Ironically, I have had PLENTY of people here in the Bay area tell me how WRONG I am, as in how wrong the people in general that carry my drawl are.

nomadtoons2 / SF Woman,

I have to chime in here, as a Californian who has both lived in the South and often visits family, who are spread all across the "Bible Belt" (KY, AL, NC, GA). Thirteen years ago, at the urging of my family (and thanks to an almost complete lack of jobs in recessionary CA), I relocated to Atlanta along with my future wife. I'll grant you I went there with a considerable amount of trepidation. While many in my family are either Southerners, or long-time transplants, I was a native Californian with very little direct experience with that part of the country until that time.

Living nearly two years around Atlanta opened my eyes on a number of fronts. Firstly, I agree with nomadtoons2 that not all Southerners are sheet-wearing, Bible-thumping racists out to proselytize everyone they come into contact with. OTH, there are quite a few of these types around, and the dominant culture is far more WASP/Christian/Bible-centric than other parts of the U.S., for better or for worse. Fyi, Stone Mountain, GA (not far from where I lived) is one of the birthplaces of the Klan. As a non-religious type myself, I can certainly empathize with SF Woman in feeling like an "outsider".

While I never experienced direct racism myself (as a very white guy), my wife --who is hispanic-- did. I saw her apply for many jobs, get called up for interviews (she has no accent, and her maiden name sounds Italian), just to show up, watch the friendly expressions turn to ice, and be told "no thanks". Even I got hit with the occasional anti-Yankee, "you're not from around here", and "Californicator", etc. It took a while for either of us to find decent employment, despite having a bit of help from my family. To keep things in perspective, we eventually did develop a network of friends, some of whom were Southerners, while others were transplants like ourselves. In the end, we moved back, mainly due to better job opportunities for me (at that time) in IT, not mainly because of prejudice/cultural reasons.

I have also seen/experienced the kind of arrogant lefty self-righteousness in the Bay Area that nomadtoons2 describes, though I would take care to distinguish it from the more extreme, violent kind of bigotry that still (unfortunately) permeates much of small town life in the deep South. I have never heard of anyone having a pentagram burned on their front lawn for not worshipping Wicca or voting for Nader, for example. While not entirely reflective of the current situation, it’s important to keep in mind that not all horror stories about Southern racism are complete fabrications, and there is still a good measure of it around. This is why many from “blue states” are reluctant to move to the Bible Belt region.