patrick.net

"The problem is that the banks still aren’t there yet. They’re getting there, but so far they’re not fully absorbing the market reality and dropping prices of their inventory (or the value of preventing foreclosures with shorts)."

One fun part of this whole thing for me is watching the banks squirm. Now that their own risk models have changed, their inability to offer lower interest rates to borrowers is decreasing the value of their exploding inventory of houses.

I love circles.

Fuzzy Math,

I'm trying to figure it out too? The only case I can make for that is a senior on a reverse mortgage. Even then just b/c you've paid off the loan doesn't necessarily mean it's the right approach.

Other measures could/should have been taken.

But once I do, it becomes my life mission to pay it off.

Why? If you have a low-interest fixed-rate loan, there is really no reason not to delay paying it off.

Debt is a form of leverage. It is just a tool. There is nothing scary about it.

Stigmatizing debt is no better than worshiping debt.

24″ rims aside I’m starting to think that using HELOC cash for any thing other than “my roof was leaking” or “my kid was facing a death sentence for drug smuggling in Malaysia” is pretty much indefensible.

I wonder how much HELOC was involved in foreign real estate investment. Home prices in British Columbia are surreal.

A nice-ish condo in Victoria now costs CAD $2.5M.

"Why? If you have a low-interest fixed-rate loan, there is really no reason not to delay paying it off."

To me Peter, a low-interest loan is

Peter P,

I can kind of agree with that but I think you'll agree there's a difference between using margin on a trade, owning a leveraged ETF and owing more than you can EVER possibly re-pay?

Here's the way "I've" come to look at things:

If you're... gosh I don't know, FIFTY years old and you plan on working another 10 years and you make 100K per year that's $1 mil. right? Maybe when you're younger you don't think about so much but when that's the extent of your REMAINING earning potential you had better start looking at how that $1 mil. is going to be spent.

If you're of a mind that RE will continue to appreciate (fat chance) then by all means "borrow as much money as you can get your hands on!". However if you believe as most here do that it will be down to flat for some time to come, well then your earning potential is better adjudicated elsewhere.

In short, you've got a mil. left. (How do you want to play this, kid?)

DinOR, perhaps the homedebtors thought they could cry-baby out of this mess. :)

The scary thing is, they might be right.

Now that everybody in bubble party is getting some kind of bailout, can people watching party get some kind of bailout too? like a check for missing on the party?

!! LOL!!

My understanding is that the most recent legislation being kicked around atop the Hill is that there really isn't an FB Clause at all?

All kinds of goodies for the REIC but no relief for those actually in foreclosure. Did I hear that right?

Though I don’t mind being non-anonymous, I’m not sure I’m prepared to tell everyone where I might end up living.
Hey, I am just trying to figure out if I need to bring my swim trunks to the housewarming party. We are invited... right? ;-)

"A nice-ish condo in Victoria now costs CAD $2.5M."

Yep, freakin' insane. Let's see how long that keeps up...people on Van Isle think foreigners, etc. will keep prices propped--sound familiar?

I see lots of stupid overbuilding on the island, but mostly "vacation properties" and not rentals needed by a good 80% of those who actually work there (ie. not retirees) Even N. in Nanaimo, which is essentially a lumber industry town, prices are hugely inflated too. Not just home prices but rentals are steep. Most likely because development has focused mainly on vacation housing--not terribly responsible planning, imo. Btw--everyone in Nanaimo got excited when there were rumors that Barbara Streisand would build a condo complex there...but this is a lumber town!

The irony is that there's been so much vacation property development going on, that there's now a large surplus of those rentals, forcing those "investors" in Vancouver and Victoria to price-to-market at dare-I-say, far below their PITI. Case in point is a the 2BR townhouse I've rented right on the best beach N. of Victoria for $1200/mo. 2BR, 1300 sqft, nicely appointed with hardwood, large step-in jacuzzi, marble floors, etc. It's only a few years old, so I'd be surprised the owners are breaking even. LOL

I think the prices on the island against fundamentals are even further displaced than SFBay.

So yeah...would be cool to do a S.Bay thing in Los Gatos.

DinOR :

Long time ago when I started reading this blog, you had made a post very similar to one you made today. I loved it and remember it vividly. I would like to highlight it this one for lurkers as well.

If you’re… gosh I don’t know, FIFTY years old and you plan on working another 10 years and you make 100K per year that’s $1 mil. right? Maybe when you’re younger you don’t think about so much but when that’s the extent of your REMAINING earning potential you had better start looking at how that $1 mil. is going to be spent.

Lurkers, please read the above paragraph again and again till it sinks in and you get it.

And ask yourself this question : If you are nearing "that" age, are your investments working for you ? Or you are working for your "investments" - which includes primary residence for some people ?

I think the prices on the island against fundamentals are even further displaced than SFBay.

Absolutely. Vancouver is nice, but it is not Monte Carlo. LOL!

Let's see how the Vanhousing bubble can hold air with our "subprime" mess.

KurtS,

When we look back and see how much of our resources have been devoted to "vacation homes" it'll turn our stomachs. Especially when you consider that building material prices had reached insane highs even before Katrina.

How silly are these upscale places going to look when they're rented out to bike gangs?

StuckInBA,

Thanks, sometimes that feels like broadcasting a radio beam out into space waiting for a response? (It's always on, but is anyone listening?) The math is pretty much the same if you're younger but it just doesn't carry the same sense of urgency.

If you're 50 years old and make 50k a year you'll have 500k to work with. If your mortgage is 750k... you may want to take a step back. I think a lot of people are doing that now.

It's even worse than what DinOR says.

I was 52 and making a HAHA. But that broke down in my case to roughly $50K for taxes, $50K for living expenses, and $50K for savings. Note: most people don't save that much.

So I would have reached early 60's with maybe another $500K. Big whoop.

I had wanted to move up from my tiny Cambrian Park house to something nice in, say, Campbell. But in 2005 that would be moving from a paid-off $600K house to a $Million+ house, with a mortgage balance upwards of $400K. Had I done this, I would have reached my 60's with a house worth "maybe" $Million+ paid off but with few other savings. Those numbers just didn't add up to anything but nonsense.

So I bailed and moved someplace cheap. I now have a nice new paid-off house and the better part of $Million in cash and stocks. True, inflation and a battered dollar worry me but I'm in much better shape than had I "upgraded" in SJ.

"Note: most people don't save that much"

No they do not. Had more BA people taken that route Boise would be a much more crowded place! Then the question is... why is it so easy to say "yes" to a nice house and so hard to say "yes" to saving?

Oh a house is just like a "savings account" r-i-g-h-t..? I suppose a lot of folks in the BA (and elsewhere) are finding out that's not exactly written in stone now aren't they!?

All I'm saying is, as long as we're aware there are consequences then I'm fine with it. But please don't come cry'n to us when you're upside down in your house w/ negligible savings and limited work years left. This is basic stuff.

When we look back and see how much of our resources have been devoted to “vacation homes” it’ll turn our stomachs.

No kidding. I live in a small university town of 15000 people. When i came here like 8 years back, houses i saw were very old. Now, many of them have given way for expensive condos. Mostly as 2nd home or who knows 10th home for speculators. The median income for the town is around 28K and median price is around 280K. One of my friend started a restraunt here last year and he couldn't get a bid from any of the developers in town to get his interiors done. They were making so much money, they didn't even want to look at 150k work.

Another concept for people to wrap their heads around.

There's a big difference between being able to qualify for a mortgage, and actually being able to afford it.

Here's an interesting note from NRO on the fact that the liberals can't complain about the Fed since they are the ones who wanted one.

http://article.nationalreview.com/?q=NDNmMWFlMTZmNDdiYzRkZTk5NjY2ZTY0YWExYjNkMjY=

sa,

Good point. With all that's been wasted on homes that barely see two weeks a year of actual use I'd forgotten about all the misallocated labor? All just to feed someones' vanity.

O.K I just came up with the definition of a vacation home!

"If you can't pee off the back porch without getting complaints, it ain't a vacation home, alright?" (It's a trophy home)

Enough already!

two weeks sounds just about right. 6-8 football games.

The fact the market continues to rise on bad news just amazes me.

Here is my prediction:

In 6 weeks time (May 21) the Dow will drop below 11,500.
By years end it will drop Below 10,000.

FED has been coming comes up with something, everytime DOW is around 12K. I don't know why they are so aggressive with equity prices.

Just today:

Google laying off 300.

ATA Airlines Bankrupt and shut, more airlines to follow.

CIT Group, one of the largest private student lenders, announces it is stopping student lending as of today.

Mortgage Rates creeping up, at 5.88% 30 FRM today.

Story in Reuters about homes being worth less than their copper pipes.

Fed players indicated a Bear collapse would have led to total finanical system meltdown.

Employment report expectations dismal, anticipated increase to 5% unemployed.

And yet, the stock market is climbing. Some might argue ugly has already been priced in; as transparency and unknowns become knowns confidence flows back in. I don't think so.

I completely agree Duke, we will be well below 10,000 Dow by end calendar year. Unless of course christmas season 2008 saves us all! The next holiday should be one for the books. Figure another 20% minimum median national RE price decline, another 15% off the stock market, maybe another 10% USD currency drop thrown in.

Public is already "reeling" from the whammy of equity and housing decline to date, along with soaring prices. Imagine what folks will be feeling when we finally hit those bottom numbers. Yikes.

We are witnessing nothing less than the most drastic standing of living decline in US history.

I don’t know why they are so aggressive with equity prices.

To avoid cascading margin calls. All types of portfolios have been used as collateral. So a rapid decline in the value of the collateral can start a vicious circle pretty soon. For the same reason, Bernanke is appealing Congress to do something to stop the decline in house prices.

This is the problem with asset bubbles and their destruction.

SIBA,

When things were blowing up in housing, fed came out and said things were contained. What i am trying to understand was, it didn't appear that fed was panicking when housing was deflating. They have been very agressive when the results started to show up in equities. If they understood the problem correctly, it should have been other way around.

US is the world's 4th largest exporter of rice, after Thailand, Vietnam, India. However, recently Vietnam has put a ban on rice export due to shortage of supply internally, and India is having a serious crop failure.

The US ranks only 4th in rice export not because of supply constraints but because of competition from the other exporters. Most of the American rice is grown in California. If we don't have wacky weather leading to crop failure like India and Vietnam, this could be a very profitable year for American rice farmers because they can essentially charge whatever they want.

Just after the 30% rice hike about a week ago, there will be another co-ordinated 30% price hike on rice in China next month.

Maybe we should stop thinking about buying a home, and pay more attention to Williamson Act land that is not being utilized for agriculture. Perhaps I can hire a few Latinos to grow rice for me :-)

NVR,

Dow may not end up much lower because the massive printing action is about to start.

You ain't seen nothing yet when it comes to inflation. So far we are able to export our USD overseas, particularly to developing countries in Asia that are exchanging their work and raw materials for work, and eventually, food. When that link breaks, all the USD will come home to roost, plus the helicopter action of the Congress, not BB alone. So far it is only the beginning of monetary reflation, not at full scale yet. When we get to fiscal stimulus, that will be one hell of a reflationary effort.

I keep telling you, all we need do is band together with Canada, Brazil, Argentina, and Australia and form "OFEC" - the organization of food exporting countries.

Maybe we should stop thinking about buying a home, and pay more attention to Williamson Act land that is not being utilized for agriculture.

Good idea. I doubt grains are easy to grow in small scales though.

Perhaps I can hire a few Latinos to grow rice for me

Guest worker program is essential!

You ain’t seen nothing yet when it comes to inflation.

I am still not sure if the correction in gold price has completed. :(

I keep telling you, all we need do is band together with Canada, Brazil, Argentina, and Australia and form “OFEC” - the organization of food exporting countries.

I love that idea.

But how can the OFEC export food to non-OFEC countries without oil?

Rice is still going strong:

http://quotes.ino.com/chart/?s=CBOT_RR.K08&v=d6

Again, futures investing is very risky.

easy, load those empty tankers with food for the trip home.

Yes! We will offer them a Food-for-Oil program. :)

OFEC could simply dictate some fractional parity between a barrel of oil and a bushel of wheat. Any tin-pot dictator we don't like....let them eat oil.

let them eat oil

LOL!

Oil is the new cake! :lol:

Working out a fractional parity between oil and wheat could take several forms AND it would de-couple any fiat currency effects.

For example, say a barrel of oil is X gallons and Y pounds. A bushel of wheat is W gallons and Z pounds. We could set fractional parity as A (X/W) or as B (Y/Z). And if anyone complains, we could point out that crude oil REALLY MEANS crude oil, as opposed to the finished product of wheat. Crude oil is pulled out of the ground for free after extraction costs. Wheat on the other hand requires BLUE GOLD (R), lots of farm labor, and processing along with the intellectual property value of the wheat strains.

Working out a fractional parity between oil and wheat could take several forms AND it would de-couple any fiat currency effects.

Free Market can work that out in fractions of a second.

What "free market"? Last time I checked we didn't have such a thing.

Too bad. :(