patrick.net

sfbubblebuyer,

I'm not even sure any form of "re-appraisal" is required. Now I've never had one, but I believe it's a pre-determined amount that triggers a stepped up payment. The lender will only let you go so far in the neg. before an adjustment needs to be made to put you back on a 30 yr. amoritization. Which in our case is good news.

It shines above all the rest!

I'm not sure where Randy got his Shiller Graph, but that is the one I carry around in my wallet. I especially like it for the projections of previous cycles on the current one and the green line indicating "housing only keeps pace with inflation". Quite helpful when explaining to folks where the market is heading (and why).

DinOR,

I was just suggesting that you don't even have to be doing Neg Am. If you're just treading water with the interest only, or maybe even making principal payments, but your zipcode drops 20%, I BELIEVE the bank can reassess the value and trigger the ARM adjustment/fully amortized rate.

And let’s face it, how many ADD-afflicted Uh-merikans are going to listen to you rant on about the bubble-blowing Fed, Yen carry-trade, mortgaged-backed securities, or MLS cartel for the minimum 2-3 hours it would take you to explain them all? Good charts are your best ally in educating the clueless and stupid

While I agree completely with the value of charts, I think the tone of this is needlessly disparaging. I work with some extremely sharp and highly-educated people, who are far from being ADD-afflicted. Even they don't all know what a huge financial mess this is - not because they are dumb but mainly because it is too complex for a non-financial person to grasp.

Besides, there are layers upon layers of self-interested parties at every step (from your loan officer all the way through to the top of the Fed) whose livelihood depends on not telling you like it is - which makes it very difficult for people to easily understand the real value of what is being offered in exchange for their signature on the dotted line.

Basically, all I am saying is that it is not just the ADD afflicted numbnuts who don't get it. The whole system is so corrupted by self-serving parties, spin-doctors and con-artists that most people can't see clearly through the fog without putting in significant effort.

SP

@HARM, you should also include that Shiller Roller-Coaster video from youtube in your links.

Towards the last 20% of the ride, the colour gradually drained out of the face of every person I showed it to, including some who were still bullish on RE. I vote to call it the Shiller-Chiller (tm)

SP

Oh, and a while ago, someone posted a link to a 'heat-map' of the greater Los Angeles area during the previous bubble/bust years (like 1988-1995). It was a succession of maps, showing how the prices fell over the years. I don't remember where it was from, but it really painted a very graphic picture.

SP

I think the tone of this is needlessly disparaging.

Perhaps the "stupid" comment was out of line, but I really don't think 'ADD-afflicted' is a poor choice when it comes to describing your typical Joe Howmuchamonth. However, I agree that it does take a great deal perseverance and personal research and determination to cut through the REIC fog of war.

I would categorize your typical American homebuyer thusly:

--Uh-merikans (Google "Idiocracy"): Largest group by far, and most likely to be willfully resistant to and/or unable to learn anything new that counters their hallowed (and usually wrong) belief systems. Not really worth the bother, and unlikely to ever be "edumacated" by anything other than the School of Hard Knocks.

--Ignorant but teachable: Much smaller subset of basically intelligent but RE/economics uninformed people, who might be teachable if approached the right way, with facts, lots of patience and respect. These are the people SP was referring to.

--Perma-bulls and REIC trolls: Small subset of population who not only refuse to be schooled, but react violently to any facts that counter their worldview. In many cases, they are well aware of the validity of the bubble's existence and inevitable mean-reversion, but are compelled by their professions/income (employed in the REIC) to continue to spin lies and propaganda they know to be utterly false. Some are simply hyper-competitive people and enjoy the game of playing Devil's advocate/contrarian-for-contrarian's sake.

the Shiller-Chiller â„¢ - HA HA That's fantastic SP!

Roller coaster video on youtube:
http://www.youtube.com/watch?v=kUldGc06S3U

For those who think I might be a heartless, laissez-faire, no-regulation, anarchic capitalist, please review "The Limits of Caveat Emptor".

HARM, Thank you for the graphs. I like Shiller best: RE goes always up NOT. The MEW and equity graphs were new to me. When the MEW debt is repaid, there should be a negative effect on GDP. It would be interesting to know when the net effect of MEW goes from positive to negative. The equity graph is revealing about the "ownership society" of debtors. Do you know if there is a statistic of how many homeowners have at least 80% equity in their homes? People with less seem to be rather homedebtors than -owners. 80% is an arbitrary cut-off, of course, but this number plays an important role in the housing market (PMI, HELOC interest rates) that such a statistic might be available somewhere.

In the ARM reset chart, what is Agency ARM?

> what is Agency ARM?

I guess they are ARM mortages held by Fannie Mae or Freddie Mac, the "agencies".

I love the map of misery. CA sticks out like bright red sore thumb that it is.

Peter T, your post reminded me of one of Paul Kasriel's insights into MEW and home equity. According to his information, about one-third of Americans today own their homes entirely free of debt. Stats and graphs on equity extraction and equity percentages would have more clarity - and would look far worse - if they were to strip out households carrying no debt against the value of their homes.

I guess they are ARM mortages held by Fannie Mae or Freddie Mac, the “agencies”.

Exactly. "Agency" is an old-fashioned term referring to GSE (Government Sponsored Enterprises), specifically Fannie Mae, Freddie Mac and Ginnie Mae.

Peter T,

I don't know the exact distribution of mortgage debt, but according to CalculatedRisk, approx. 1/3rd of all homeowners own their homes free-and-clear and these people were included in that "average" equity figure (currently at a new low of 52.7%). Which also means that the other 2/3rds of homedebtors have on average much, much less equity than that. And of course, a substantial percentage now have NEGATIVE equity --especially here in the heart of NAAVLP country (CA).

http://calculatedrisk.blogspot.com/2007/06/percentage-of-household-equity-falls-to.html
http://www.bankrate.com/brm/news/Financial_Literacy/May07_home_equity_poll_results_a1.asp?caret=32a

Thanks, HARM, I see it was CR.

The figures I've seen are closer to 80% "average" equity ownership. The problem with these computations is that homes with no debt are not accurately included in the statistics at market value, whereas homes that are financed are expressed closer to market value.

In other words, the little old lady who owns the 1962 ranch outright is included at her purchase price of $28,000, not at the current market value of $650,000 of equity value.

So its quite likely the percentage of equity-to-value ownership is much higher than 50%.

But it's also then even more distorted when considering all the "others" HARM is talking about. I suspect they own very very little equity.

Not surprising. Just another example of the vastly disproportionate wealth-gap that has developed in the US. It's as if there are 2 classes of "home owner". Those who own a lot or all of a very valuable asset, and those who own little or negatively owe on a very valuable asset.

I like this graph showing historical house prices in san jose. I flash out the link when ever someone tells me Bay Area prices never go down.
http://www.viewfromsiliconvalley.com/id315.html

only thing from that chart thats missing is the prices after 2002. Does anyone have an updated version?

Ayyy...Say it aint so...the CEO of Ooga Labs wants to further inflate the Bay Area bubble by telling every recent engineering grad he knows to pack up and move here cuz the start-up environment, climate and social tolerance are just so awesome:

http://www.oogalabs.com/about.html

"Don't make my mistake!

So you're going to take a cube job with slow Microsoft, bureaucratic Oracle, or with some boring financial company?

C'mon! Do you want spend all of your life wearing modest habits of charcoal grey, driving your Volvo on the salty roads of the drab East Coast, paying 50% of your earnings to taxes, and hanging out with narrow minded people, congratulating yourselves on improving a feature of a widget of version 12.1b.4 of some software, or maybe improving the financial return of some rich bald dude in Greenwich, CT by 0.2% above the S&P Index?

Has no one taken you aside and said, "Wait! You're about to waste 10 years of your life figuring out the path you chose out of college is crap!"

No one did to me either when I went to Princeton, and it took me until I was 31 to get my ass out to San Francisco and do tech start ups. Don't make my mistake. Save yourself now. Even if you don't work for me. I mean it.

Out here, you think about the future. Out here, you are surrounded by colorful, dynamic technologists and entrepreneurs who are really making a difference, pushing the edge.

Most people think that working for a big or known company will give them good experience. That's kind of like saying learning to sit still for dental surgery is good experience. Sure, it's an experience, but there are life paths where you don't have to have dental surgery, or work for a big company, to have the best life. In fact, I would argue that you learn the wrong things working for a big company, and that it's actually not good experience. A good experience is when you really make something happen in the world. Big companies teach you how to work through layers of bureaucracy and how to solve problems in very risk-averse ways -- in short, how to make something happen in their organization. A big company is not the safe career choice. It's the risky choice. It risks your mind and your life.

Oh, and one more thing. Initially, your friends and family may not understand why you didn't take that "safe" cube-job with the company whose name they know, but in two years they will understand. They will love using the websites you build, and they will talk often with their friends about it. They will see you having a vibrant life, pushing the edge of what's happening, and they'll be proud to know you.

Take a few minutes and reconsider your first "starting point" out of college. It sets up a direction that takes some time to change. Aim yourself in the right direction. Again, you don't have to come to Ooga Labs, just get to the Bay Area and join a startup. You will never regret it."

The influx of tech talent into the Bay Area right now is real. The current housing bubble lagged the last great influx by a couple years. I remember when I moved here in 1996. Rentals were tough, but one could buy a house at an incredible price. We rented a house for 2 months until we bought a home for less than $1K/mo more in PITI, which we bought below asking price.

The *real* ridiculous house price explosion didn't happen until after the post dot-com exodus had already started.

The risk is that too many new people come before housing prices correct, forcing up all our rents. If you don't think rents can rise quickly, ask anyone who was living on a short-term lease circa 1998-99 how fast their rents increased. At one point we had 3 (maybe more) guys living out of our offices and one guy who bought a Winnebago to park in our back parking lot to live out of. All of these people would have done better to have bought a house, even at that point in the cycle.

"I remember when I moved here in 1996. Rentals were tough, but one could buy a house at an incredible price."

Ah...but things were very different just 11 years ago. Interest rates were higher and lending standards were much tighter. The "interest only" mortgage was still a dusty relic from the roaring 20s. Most other exotic financing instruments were unheard of. And...get this...just 11 short years ago, people were actually TURNED DOWN for mortgages.

Oh those were the days.....

tannenbaum Says:
the CEO of Ooga Labs wants to further inflate the Bay Area bubble by telling every recent engineering grad he knows to pack up and move here cuz the start-up environment, climate and social tolerance are just so awesome

Save that webpage. Don't just bookmark it, do a view-source and save it. Because a couple of years from now, it will be good for a laugh and oogalabs.com's website may no longer be around.

SP

Ah…but things were very different just 11 years ago. Interest rates were higher and lending standards were much tighter. The “interest only” mortgage was still a dusty relic from the roaring 20s. Most other exotic financing instruments were unheard of. And…get this…just 11 short years ago, people were actually TURNED DOWN for mortgages.

Oh those were the days…..

Well don't forget, September 11th happened - that changed everything. We had to save freedom and america by make sure that everyone who could breath could buy a home. Otherwise, the terrorists would've.

Disaster averted.

The risk is that too many new people come before housing prices correct, forcing up all our rents. If you don’t think rents can rise quickly, ask anyone who was living on a short-term lease circa 1998-99 how fast their rents increased. At one point we had 3 (maybe more) guys living out of our offices and one guy who bought a Winnebago to park in our back parking lot to live out of. All of these people would have done better to have bought a house, even at that point in the cycle.

I was here for that. That left an enduring scar in my mind that continues to encourage me to want to buy - fast.

I'm seeing it here in Mountain View/Sunnyvale - heck even the Penn. Rent is going up 6-7% around. Now granted they were ridiculously low in 2003 - but they're back to where they should be by now and then some.

I had (mistakenly) asked:
> Do you know if there is a statistic of how many homeowners have at least 80% equity in their homes?

I am interested not in the percentage of homeowners with 80% equity but with (at least) 20% equity. Below 20% equity, I would not consider them real owners but only aspiring ones.

To the "ownership" society: I am in favor of more people owning sizeable property (compared to their costs of living). To judge progress in that direction, however, I would like to exclude aspiring "owners" from those who actually do own. Getting excited about more people having a title to their house (e.g. 67% instead of 65%) is shallow. The number of homeowners with at least 20% equity and its change over the years would give a clearer picture of where we are headed.

i remember in 2000 the rents started to go up like crazy in bay area. i had 1bed apt for $1150/month and the new tenants were paying $1850/month. i also heard they come back down to $1000/month after the dot com bust.

>. I’m seeing it here in Mountain View/Sunnyvale - heck even the Penn. Rent is going up 6-7% around.

I am renting in Cupertino (95014), 2 bed, 1.5 bath. For last three years, rent has been going up 8%. As of now I am paying 2200.00 per month for 1050 square feet.

i thought working for start up was cool too & did work for one of them which went bust. currently working for little more stable company which is also a start up but a stable one. i didn't realize some of the benefits you get from big good companies until i talked to a friend. one guy recently retired after 25 years of service and just the retirement benefits pkg was a cool 1.5M

True in 1996 mortgages were much more traditional. However, "piggy back" loans were still quite common. People commonly used 2nd mortgages to meet the 20% downpayment needed to avoid PMI.

Rents are rising. No question in my mind. Too many people I know or work with are bitching about getting hit with 6%, 10%, 15% increases in the past year.

Even single-family-houses for rent are increasing. All the "theories" that the increasing supply of FB's trying to rent out their houses would hold down rents have proven faulty. When an equity-rich owner rents out the house at a reasonable price, it is descended upon like a rotting carcass and gone inside a week. All the rest are listed at a price that looks surprisingly exactly like the cost of a mortgage written around 2005.

sfbubblebuyer,

Oh, I wasn't really "throwing down the gauntlet" by any means. The only exposure I've had to these types of loans is from some breathless rookie from Quicken Loans gushing from a sales script! Trust me, if you labeled a 55 gal. drum "Toxic Waste" it requires no further investigation where I'm concerned.

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/07/12/BUGP3QUSH41.DTL&tsp=1%22

Bay Area defaults, auctions, repossessions nearly triple

"Subprime loans, which grew in popularity over the last two years" (from SFGate article)

Uh... you sure about "the last two years"? I'll give you a chance to re-think that and you can get back to me.

OT but equally funny is Patrick's video link to "Discover Kauai" (at the bottom). Sure, it's an island and the funny money loans that enabled unabated construction/speculation are going to appear more pronounced but sorry Mr. "Local" you're hardly the only victim of the housing bubble. Line forms to the rear and since you were admitted "The Union" last...

Other than hard-bitten, rust belt states with neg. pop. growth what DOES look/feel "pre-bubble"? (Certainly not Oregon).

SP

I have lots of friends that I would categorize as "not stupid" but when it comes to financial decision, their thought process is incomprehensible to me.

I know people who bought in despite having all the information at their fingertips that should have cautioned them to wait. But they got caught up in mania and they were thinking emotionally not logically. Now, of course, they have a mess on their hands.

My husband is seeing some interesting fallout too. He has a guy he knows through business contacts who is a mortgage broker. This guy took out a Neg Am loan and he's only paying half of what the amortized payment would be. The terms of the loan state that when it hits 115% of the original loan amount he'll have either pay it off in full or start making the amortized payments. This guy knowingly took out this loan. Every month approximately $2500 goes on the back end of the loan. Can you imagine? $30k a year getting tacked on to your home loan? It shouldn't take long for this thing to blow up in his face.

My husband mentioned this to another mortgage broker he knows and she told him Oh, mortgage brokers are the worst for taking out stupid loans.

Btw, anyone else get an email from Casey Serin?

Randy H:

Bay Area real estate was also "cheap" in 1996 not only because of tighter lending but because California was still coming off of its worst recession in memory. There was virtually no demand for California housing circa 1990-96. California real estate was higher in 1989 than it was in 1996 - a statement which pretty much holds true throughout the state (Bay Area included). Also, of course, salaries were lower and people didn't have the dot-com $$ yet.

I would dearly love to see a chart showing how the distribution of various mortgage types has changed over the last 30 years. Were negative amortization, 100% interest, 100% finance, no doc (et al) loans more or less prevalent at the peak of previous real-estate booms in the '60s, '70s, or '80s? I am NOT referring to sub-prime, per-se (althought that's interesting too).

I suspect that the degree to which people are using dodgier mortgages today than in past bubbles will be the biggest determining factor in how deep our current down-turn will go. Even areas that have seen little appreciation may experience severe price drops if the use of exotic financing has become prevalent.

Regarding rents, there was an interesting thread on rising rents over at www.seattlebubble.com. We discussed whether rising rents are actually an indicator that a real-estate market is topping and about ready to collapse (i.e. because more people decide to rent than buy, etc).

http://seattlebubble.com/viewtopic.php?t=454