patrick.net

I am eagerly looking forward to 100-year mortgage in Bay Area soon.

How is a 100-year loan cheaper than an interest-only loan?

When the market crashes credit will tighten up by itself.

Quick fact: I was pre-qualified for a 40-year loan just for the fun of it. The loan officer asked me how much I wanted to get approved for! That was nearly 9 months ago though.

Honestly, I doubt a 50-year loan can save much over a 30-year loan. Perhaps SoCal at anotherfuckedborrower will have more insight.

"Perhaps SoCal at anotherfuckedborrower will have more insight. "
Yes, he ran the #'s in a post a while back:
I think the conclusion was that the bottom of the barrel's been harvested already with the IO/ARM/neg-am, etc., which are cheaper monthlies compared to long-term fixed mortgages.

anotherfuckedborrower.blogspot.com/2005/12/40yr-mortgageis-it-for-you.html

That just about says it all, sports fans. The old statistics the gloom and doomsayers harp about are a poor reflection of the real state of the new economy.

This economy is growing. Innovation is all around. Money is being made. January just saw the highest number of new home starts in 32 years. It’s a great time to be an American.--ScottC

a) Economists have been using adjusted statistics for quite some time; well before the dot-com bust.

b) New Housing Starts are an "old economy" indicator, so they prove nothing if you buy the "new economy" argument.

c) If you really want to gain insight into how economic measures work, might I suggest reading something a bit more informed than BusinessWeek.

Thursday's Financial Times had a few articles regarding how financial markets have already largely priced a real-estate correction in.

Most mortgages are refinanced after only a few years. People tend to take some cash out when they refinance. Accordingly, their prior payments to principal end up back in their pockets, with no debt reduction accomplished. Given these common practices it is almost irrelevant whether people borrow with 30 year, 50 year or interest only loans.

Of course, the negative amortization loans (such as payment option loans) are another story entirely.

DinOr,

One should seek to own a home debt-free by retirement. Debt is a good financial tool if used properly. If the funds borrowed from your home equity are invested with a responsible plan it is better to have more debt and more investment opportunity. When one has more sophisticated financial strategies (and a higher risk tolerance), being debt-free is actually not good financial management. However, most people are unable to resist the temptation to spend the money rather than invest it - so becoming debt-free is the better strategy for the typical household.

I was once debt-free on my home after many years of paying extra toward principal. However, beginning in 1998, I began borrowing against my home and rentals to buy more rental properties. In early March of 2003, with the Dow at about 7300, I borrowed to the max against my home equity to buy stock (I was not in the stock market during the decline of the preceding few years). The markets have moved very favorably for my positions. My higher risk strategy that has played out very nicely... so far.

The economy has performed much better than most people realize. The record housing starts are evidence of this performance. However, housing starts lag the economy. When the slowdown arrives the record levels of building will create a large glut of new houses. Builder margins are high so they can easily lower prices to dump their inventory. We are already seeing incentives in some places. Inventory is already growing rapidly, but generally is not yet above normal balanced market levels.

A favorable wind has been at our back for a long time. But now the wind is coming from an approaching storm. That storm will likely overtake us by the end of this year.

I see half a year of good times (and fast sailing) including rising stock prices before the turning point is reached. Then I expect things will slow as the year ends, and a recession is likely in 2007.

Real estate has already slowed, and will slow further once the economy loses its momentum. The slowing real estate markets will add to the economic slowdown, leading to a typical recession. The recession will cause further pain. I expect a strong recovery in the economy by 2008. I expect the residential real estate markets to bottom by 2009, and recover thereafter.

Randy H: You noted that "Thursday’s Financial Times had a few articles regarding how financial markets have already largely priced a real-estate correction in."

The financial markets had also largely priced in a real estate correction back in 2002 as well. They were VERY wrong then. I believe the correction is real this time - but I was a still a bullish real estate buyer in 2002 and 2003.

When it comes to predicting market turns, the majority is usually wrong.

Zephyr,

I wasn't intending to imply that markets accurately forecast future events. Only that professional investors, hedge funds, et al don't share ScottC's Business Week inspired prognosticating.

Exporting countries rely on countries to buy their goods. If we cannot buy, they eat the big one. Their currencies will die a horrible death.

US M3 LOOKS TAME COMPARED TO CHINA’S

February 14 – Bloomberg (Lee Spears): “China’s money supply expanded at the fastest pace in two years in January, exceeding the central bank’s official target for an eighth straight month. M2…grew 19.2 percent from a year earlier to 30.4 trillion yuan ($3.8 trillion) after expanding 17.6 percent in December, the People’s Bank of China said…”

And for the record, I agree with your opinion regarding the economy. I think there is undeniable evidence that the US economy has been quite healthy the past few years. This has largely been because of both strong fundamentals and widespread economic restructuring. The gloom and doom many people are drawn towards is a direct effect of this restructuring, which causes many casualties, but is good for the aggregate economy.

The question now is how the divergence in observed prices of real-assets, residential RE being the largest portion, will regress to mean theoretical prices. Observed prices *always* regress towards mean theoretical prices except when there has been a shift in the underlying fundamentals, of which there is little evidence today. I am ambivalent as to whether prices will correct as a sharp crash, or as a "soft landing". There seems to be some evidence of a soft landing scenario, which would mean that nearly everyone loses on a personal level, but the economy as a whole wins.

The problems with the "knowledge worker" economy stuff is that there is little evidence to support the "theory". Few deny that we are in the latter stages of a move towards a services-based economy, but the knowledge economy proponents are talking about something even more significant. By far most US GDP comes from agriculture, manufacturing, and local services. Even if we assumed that *all* new GDP *growth* came from knowledge work, it would take over a century of restructuring for it to become a primary GDP driver. We also lack a very serious fundamental for a knowledge economy: a coherent, established, quality, mandatory education system. You can't have an economy built upon knowledge work when your college graduates can't read at an 8th grade level, let alone figure out basic algebra or analytical geometry.

Higher housing start can only mean higher housing prices. There is no housing bubble!

Oops, wrong thread.

Fewlesh,

Las Vegas is an example of how rising wealth leads to rising excess.

Don't count your bubbles until they're popped. Latest FHFB stats. Average Sales price by Metro area.

http://www.fhfb.gov/GetFile.aspx?FileID=4437

San Jose-San Francisco-Oakland CA*

4th Qtr '04.........568.9
3rd Qtr '05.........649.3
4th Qtr '05.........679.9

I was told that the negative savings rate was simply money earned vs. money spent within the US and doesn’t take into account unearned income.

This is true, but there is still dissaving occurring. It isn't a big problem unless it persists for too long. In fact, occassional low/negative savings is what spares the US economy from secular deflation ala Japan. Savings rates in the US are volatile, much more so than Japan or Europe.

But I have never seen so many ugly people congregated in one place in my life. It is the weirdest place I have ever been in my life.

Totally off-topic op-ed: I passed through that place on a recent climbing trip to Red Rock. Agreed: it's a temple to consumption, or one could say: Sartre's No Exit meets Mall of America. Quite a menagerie of characters.

BW is such a laughable magazine that I stopped subscription years ago, the only good business magazines that don't spin words or try to make Americans feel good about our messed up situation are Barron's and Economist (oh, they are British, must be schadenfreude at work).

BW is such a laughable magazine that I stopped subscription years ago

--Who does takes that rag seriously? Yet, there's just enough buzzwords and CW for the average half-baked exec to sit a little taller in their chair. Creds to my ex-employer; they do mediocrity so well. :twisted:

You want investment advice? The Marin IJ published these great quotes by the President of the Marin Assc. of Realtors. This was yesterday's front page article:

------------------------------------------------------------

Kathy Schlegel, president of the Marin Association of Realtors, said the numbers indicate softening of the market and a return to "more normal rates of growth."

"Over the last few years, real estate has been like a train racing down the track making it difficult for buyers to hop on," Schlegel said. "Over the last few months, the train has slowed down and is coming into the station. Now is the time for buyers to think about hopping on because the train will go forward with prices continuing to increase over the long term."

"Now is the time when home ownership is still a lucrative investment with less risk of loss of appreciation compared to other investments," Schlegel said. "In Marin County, we do not have a lot of extra space for growth and when you don't have new homes being built, the value of the homes in the county still retain their worth."

-------------------

She said this in a month where sales were down like 22% and the Median price was flat year over year. I read this and wondered if the Realtor association paid to get that quote printed - kind of like an infomercial - perhaps it should go back with the "open house" section? This kind of stuff does lend credibility to Patrick's opinion on the media having their hand in all this...

I like how when you see commentary on stocks these days how papers say 'this person does not currently own Home Depot stock'. It seems like the Marin IJ needs to start printing disclaimers if they are going to quote parties that have a financial interest in driving real estate transactions - especially when they are giving investment advice of real estate being better than all other investment catagories!

I am getting mixed signals. Just talked to a friend who is looking for a home up in the Peninsula, he said inventory is going down while buying is up, and many seller raised price after their houses have been sitting for the last few months. Anyone from the Peninsula?

I see sellers cutting price down in South/West valley and nice homes are seeling ok. But overall, there is no excessive inventory or bidding war either, undesirable homes just sit and sit even after price reductions.

It seems like the Marin IJ needs to start printing disclaimers if they are going to quote parties that have a financial interest in driving real estate transactions

Newspapers and magazines' income comes solely from advertisement. Even when the market is turning for the worst, they don't want to offend and chase away the Realtors, who are (and will continue to be) their main sponsors.

I'd say the media should take some guts and ditch that defensive attitude. When the bubble bursts, and there are many homes on sale, Realtors will need the media to list their listings anyway. Sooner or later, the media will figure that out, and we'll have the fair and balanced news once again, maybe not on Fox, but on real estates in general.

many seller raised price after their houses have been sitting for the last few months

The question is would that make those houses move sooner? If not, then it's possible sellers are trying to change their strategies, and resort to the used car sale tactic: raising the price so high, even the bravest bargain hunter can only negotiate down to a price that's still 10% higher than what the seller wants.

I'm looking at a townhome in the South Bay that actually went up from $858k to $956k. 45 days have gone by, and no one bites the bait.

Actually I was told that only homes below 1M on the Peninsula seems to be moving. 1M is the psychological barrier, anything above that seems to be sitting forever. Some listings were pulled without getting sold.

Perhaps these are the long-time owners who would like to cash out at the top, they don't really have a need to sell, if they can get that price, fine, if not, they just stay.

I have no mortgage. Does this mean that if I had a mortgage, I would essentially be unable to deduct the interest?

I believe your mortgage is deductible under AMT. However, property tax is not deductible. Furthermore, if you make a lot of money, you may be hit by itemized deduction phaseout.

NOT TAX ADVICE

I'm hit by AMT, too, and so are some other colleagues of mine. Yes, that means you wouldn't get to deduct your mortgage interest. I do have a house in Houston, Texas, and yes, I couldn't deduct that money.

I think the government is letting more people getting hit by AMT so that they can make a point, and get their measures to abolish the AMT pass Congress.

Since abolishing the AMT means the government will have to get back the money somehow, if you read the news, the plan is to limit mortgage interest deduction to the first $300,000 owed. I say go for it! It'll deflate this stupid housing bubble in the coasts faster, and we can solve that pesky AMT problem once and for all.

It looks to me that everyone making six-figure salaries will get hit by AMT this year.

I have a suggestion for topic, flipper properties.

Here is one
http://www.mlslistings.com/common/properties/propertyDetail.asp?open=0&page=1&mls_number=608171&type=property&name=

Checked on Zillow, purchased in Oct 2005 for 1,495,000
Asking now for 1,630,000, comparables around him sold for 1.1-1.2M.

Buyers beware, make sure this guy lose his shirt. He is a flipper and he has a carrying cost, if you really want this home, buy at no higher than 1M.

Zillow is useful for digging up previous transactions, giving you an idea how much the current owner paid for his place. Information is power. If someone bought a home at 1.495M 4 months ago and wants out now, you know you are in a better position to nail him hard.

I believe your mortgage is deductible under AMT

Actually, no. I looked at my Turbo Tax summary, and it did wipe out my Houston mortgage interest.

I plan to settle down in the Bay Area, but with such an imbalance housing market, I'm sure if I can do that ever. That's why I still keep my Houston house, just in case I have to go back :-)

I’m sure if I can do that ever.
Make it "not sure".

Yes, that means you wouldn’t get to deduct your mortgage interest. I do have a house in Houston, Texas, and yes, I couldn’t deduct that money.

Are you sure? IRS has a clarification here:

http://tinyurl.com/anpmf

However, with AMT, mortgage interest deduction will reduce your tax by your AMT rate, not your ordinary tax marginal rate. So AMT does hurt.

Certain mortgage interest -- Interest on loans used to build, buy, or improve your principal residence is permitted under the AMT. Mortgage interest used for any other purpose -- such as a home equity loan -- is not allowed.

http://www.tiaa-cref.org/siteline/popups/amt_notallowed.html

Your Houston house is not your primary residence, so mortgage interest there may not be deductible under AMT.

I think there will be further disappointments from flippers when they learn that mortgage interest on their investment properties are not deductible under AMT. :)

Since abolishing the AMT means the government will have to get back the money somehow, if you read the news, the plan is to limit mortgage interest deduction to the first $300,000 owed. I say go for it! It’ll deflate this stupid housing bubble in the coasts faster, and we can solve that pesky AMT problem once and for all.

Tax reform, banzai!

I think Peter P is right. From reading the IRS publication, primary mortgage interest can be deductible under AMT after all. I'll have to revise my tax form. It's a good thing I haven't submitted it yet. I think I'll need professional help this year :-)

You can claim if you have one mortgage on your primary residence (second one disallowed, HELOC disallowed), no mortgage interest deduction for vacation home (I believe). If you own a home and did not occupy it fully (up to definition), you MAY be able to claim deduction.

The two parts that will kill long-time realty investors are:
1) no deduction for interest on mortgage for investment properties
2) no deduction for property tax

So high-income earners really should stay away from property flipping, taking advantage of the long-term capital gains by investing in stocks and mutual funds is a much better idea. Capital gains tax rate is the same under AMT.

Scott C.,

Man you are really cool. When I grow up I want to be cool and happy like you.

ScottC says, "This economy is growing. Innovation is all around. Money is being made. January just saw the highest number of new home starts in 32 years. It’s a great time to be an American."

Talk about flawed statistics! Don't rely on headlines - always get the whole story behind the numbers. Read 'Seasonally Mal-Adjusted' by Morgan Stanley's Head Global Economist Steven Roach for an interesting insight into that housing starts number...

http://tinyurl.com/dv5j

The Financial Times? Please. I had to subscribe to FT for an economics course I took several years ago. I read it, and I let my subscription expire. I didn’t read anything in FT that impressed me, then or online now.

I almost pity you people, perpetual pessimists you are. But I’m to busy working, making money, having fun, and making love to care. --ScottC

So many statements in your diatribe are false that it's hardly worth responding. I never attacked Bernake, thinking him quite capable of the job before him. He is a neo-classic economist, and many accomplished, credentialed, more experienced economists disagree with him--quite a few with Nobel designations. You do know, ScottC, that he was 2nd choice for the job don't you? Perhaps if you'd actually read FT, WSJ or Economist you'd know who was the first pick and why he turned down the post.

And if you cannot find anything worth while in the FT then that speaks more to your failures, not theirs. Somehow it doesn't suprise me that you mistake free-market libertarians with progressives. Perhaps it is the fact that both camps are capable of open minded debate and exchange that confounds you so.

On second thought, don't change a thing. It will be better for the rest of us if you just blindly march on in your self-made dystopia while the FTC and DoJ remove the anticompetitve barriers that your industry has created protecting your undeserved profits and opening you up to the true face of free market competition that the rest of us face on a daily basis.

(I think at some point I'm going to parse the past threads and compile a tome of all ScottC's self-contridictions, ignorant misstatements, and factual errors. I remind others that it is he who incites these arguments because it is *always* he who resorts to attacks ad hominem and non sequiturs when he can't defend his position factually.)

On why food and energy are omitted from CPI:

I agree that *for an individual*, the CPI isn't very useful because essentials are left out, like food and energy.

But the problem is that CPI has morphed into an aggregate indicator used to index inflation for things like pensions, labor contracts, and government obligations. There was a legitimate issue with including inelastic/sticky things along with elastic/non-sticky things. There was another problem with "supply chain" effect.

The problem is that we've overloaded CPI with multiple meanings today. There are better indicators to use personally, though, which an easy Google search will reveal.