patrick.net

The million $ question is, what % of BA homeowners is “such” people?

I have otherwise frugal friends that are holding 15 houses.

I have friends who kept their houses as rentals after trading up.

In At the Rise:

Joe Schmoe Says:

February 22nd, 2006 at 3:04 pm
Agree that At the Rise is in fairly decent shape. I might quibble over the amount that he would be able to rent the place out for, but the analysis is fairly sound.

not so fast.

What many people forget about is other costs outside of the normal monthly payment. For example:

1. Monthly Mortgage Payment is $1300
2. Taxes would be 1.25% of PP: $224/month
3. Minimum flood insurance: .15% of replacement (purchase) or $27/month
4. Maintenance and upkeep (usually about 2% per year of purchase price, or $4,300/year): $358/month

Total monthly cash outlay: $1910

After-tax benefit would be generally in the $1600/month range (but itemizing doesn't always pay off, so this is generous)

To think that an 1800 sq foot house would rent out for $2000 in the IE is not just a bit optimistic, it's not at all realistic. Just check CL. When I found my 4 Bd 2000sq ft house in prime Orange County (Laguna Niguel)last year, I looked at brand-new Corona homes that were 2600sq ft renting for $1750.

Here's a link to CL search for 3+BR in Riverside :

http://tinyurl.com/lc48j

Renters have a lot of power in the current market. I live in one of the best areas in Socal with a large yard in a larger 5 year old home with 15 minute commutes to Irvine for $2500; I doubt your rent would come anywhere close to what you currently think it will ... Best case scenario is that you might break even after all is considered; and you accept the risk of natural disasters. I remember a 7.6 out near Barstow late 1999. Double-whammy will be if the economy weakens and houses foreclose around you.

No offense intended, but you need to be your own worst critic when making sound financial decisions.

In the long run, you will probably be fine; but appreciation should not be the reason for buying; it is very possible that your price will look normal or slightly high in a few years.

BTW, Zillow has no clue. It says the house I live in is worth 524K, when a smaller 3BR house nextdoor just sold for 729K. It also says my wife's parents' house in Utah is worth 2.4M when it sold 1.5 years ago for 242K. Zillow is not at all accurate in any sense of the word. Simply put, nothing is right about their valuations. Until they sort out their problems; the only valid valuation is what someone else is willing to pay for it; and there are not that many buyers around anymore.

None of these, AFAIK, chose I/O mortgaes.

Most of my friends are using I/O or Option ARMs. They need these creative products to handle multiple mortgages.

I only know 1 friend who owns responsibly (large downpayment, 15 year loan)

DinOR, I hadn't heard that one. Still, his charts are pretty convincing. I said this b4, but it bears repeating. I recently re-read Peter Lynch's book, "Beating the Street". He was buying stocks with PEs like 5, 6, 7. We are NOT in a bull market given the tax incentivized baby boomer money chasing the market. How many 401Ks do you know that offer DBC or similar commodity fund? How about gold? The retail investor has definitely moved into resources, but that is necessary for any bull market. I'm just not hearing people like my mom talking about commodities. It hasn't reach anywhere near the level of mania. It has reached stage 2.

In other words, I don't know nothing about no "bad ju-ju", I just think that the world tends to move from one simple to follow investable long term trend to another. I think Tice (and others like John Mauldin) are spot on that we are in a secular bear. So if its not the S&P, if it's not housing post July, then what is it? What's the trend that fits all the data?

I humbly submit that the US and the dollar will decline while several large nations with enormous populations move inevitably towards indsutrialization and perhaps beyond. Brazil and China have a space program, after all.

It would not be unusual historically speaking for a challenger to leap frog us. Regardless, I don't think that the billions of people yearning to have a better life will do so without hydrocarbons, metals, and increasing political clout that their new economic status will bring them.

The European powers in the 19th century scoured the world for resources. We colonized the vast American continent to get the resources needed to become an industrial power. We even comitted genocide against the aborginal peoples and fought a war over it.

I don't think the Chinese or Indians are dummies. They will quietly secure the resources they need while simultaneously ridding themselves of the worthless paper they get for selling us crap.

I think that commodities are the inevitable beneficiary of these megatrends. The old addage about "Not seeing the forest for the trees" seems to be at work in every bull market. People don't get in because they tend to shy away from abstract conversations and "Philosophy". Most people reject vision, and so they miss the trend. Faggedabout history. Yet the world has seen this before.

I am beginning to think that analysts will look back at 2000 and say, "see, all you had to do was buy DBC, and leave it for 15 years. You would have made a fortune. And who couldn't see that one coming, with all that population coming into the flat world and all".

Sorry for the length, but I'm finding my conviction.

--DV

Peter P, steam Uni? Never tried. $anta Barbara uni is the best ahhhh, but the best uni is the uni that is served on Mr. Rights toiliet seat, now that's some good eats, and quite frankly as a maggot rentor I feel better knowing that Mr. Right's well heeled arse was near my Uni.

Chinese space program? From my experience which lead me to believe that the Chinese are just really interested in cheating, so why have a space program when you can just take Neil's picture, cut out his face, and put Pin Pins in place?

To BA Or Not To BA,

you fail to recognize one huge risk for most people up to their neck in debt: loss of job. And I have seen this scenario played out before in much more affluent places like Hong Kong.

I am also a first gen Asian immigrant, with friends who are making 6 figures income. For those who live responsibly (i.e. not leveraged till the edge), they will do fine. For those who do make 250K household income with 1M mortgage, fewer than 50K savings, if one spouse loses his/her job, they are in for a big shock. When it rains, it pours. Bad things tend to happen all at once. If you have a fixed mortgage payment of $4,000 plus property tax of $1,000, no matter how much you save in food, gas, your fixed running cost is $5K, end of story. The key here is the amount of debt.

Especially for those H1Bs who leveraged so much to get into a home, when the job market sours (and yeah, it will, when RE market turns south), they may not roll over their H1Bs and their green card application will be turned down. At that point, they will have to leave the US at whatever price they can get from their homes. I know of such H1Bs who thought it may be a good idea to buy because home values always go up, and in the "worst case scenario" that they can't stay, they can sell for a profit.

1st gen immigrants are the most vulnerable group in a downturn, and I won't count on this group to carry the market forward or hold back the tide. There are 1st gen immigrants that do quite well financially, but they have been here for over 10 years, bought a home long time ago. Those 1st gen who bought homes in the last 2-3 years are more likely to be wiped out, sadly.

George,

perhaps you should take your parents out for a ride. Do it in a RE boom ghost town, show them how many homes have broken ground and stay vacant. Seeing is believing.

Every time I come back from the East Bay seeing tons of inventory new and old in the market, I am convinced some parts of BA will go down 50% easy. If one is not picky about where to buy in BA, I say getting a home at 60% the current price in an OK neighborhood is highly achievable.

I only know 1 friend who owns responsibly (large downpayment, 15 year loan)

I have one friend who responsibly used IOs and ARMs to arbitrage rates. He's 30 fixed now paying on an 11 year schedule. Then again, he used to work on the Street and spent time in the MBS industry before finding honest work. Not the typical IO customer.

HARM said :
You have just proven the point that your sample is NOT representative of the typical CA buyer, 82% of whom in 2005 chose I/O or optio-ARMs (it was around 70% last year, if I remember correctly).

You are correct in pointing that out. I overlooked it. Do you know if the % for BA is in the same ballpark ?

Owneroc :
I agree with your loss of job scenario. I also mentioned it.

Thanks a lot for the discussion folks. Overall, no matter how the bubble plays out, I will be OK. In spite of the run ups in prices over last 3-4 years, I don't blame myself for "missing out". I was not willing to take on that kind of debt. When people tell me thay have enjoyed the ownership, and it was worth it even if they might have overpayed, I say to myself, good for them. I slept peacefully, without worrying about mortgage. I knew there was real risk, that I may be forever priced out, and I said so be it. If that's how one has to live in BA, then I will move out.

But it was then. Now after reading this blog, I feel so much better. Maybe, I won't have to move out of the BA :-)

Do you know if the % for BA is in the same ballpark ?

Not sure how the BA stacks up exactly, but I got that 82% I/O figure from this OC Register article that got the data from PIMCO:

http://www.ocregister.com/ocregister/money/housing/article_902994.php

A boomer^Tm came over tonight, I didn't invite him, he came with a friend. The boomer brought a dog, the dog was old, one might say he was a boomer dog. A boomer with a boomer dog. The first thing the boomer dog thought appropriate was taking a big 4 coil steamer on the lawn. When offered a treat the boomer dog would take a finger also. Oddly enough my wife's dog doesn't bite the finger and she cleans up the 2 coil steams the boston leaves on the lawn. Go figure. No bad dogs, just bad owners.

@Fewlesh,

Can we figure out what percentage went 100% IO, 100% Neg-am, and how many went 20% IO, 80% fixed, etc.

This is a good question, but short of obtaining data from a big lender or professional mortgage research company (which is usually proprietary & costs $$), I don't know where you'd find that out.

When the bank forcloses, can the homeowner drop the IO portion, and keep the fixed? or does the whole enchalada get liquidated?

I doubt the law allows the homedebtor to pick and choose which creditors to repay in event of foreclosure --in fact, bankruptcy laws explicity prohibit this. Exactly how the liquidation proceeds get distributed is another story. When people do "piggy-back" 80/20, 80/10/10 financing (1 or 2 extra loans to cover the lack of down-payment), the risk gets split somewhat. The primary, conforming mortgage (the first 80%) could possibly --as far as I know-- get repackaged and sold to/by Fannie/Freddie as AAA-tranch MBS paper. The higher-risk/interest non-conforming sub-prime would probably be sold as lower tranch private MBS/CDO paper. Who gets what % of the sale proceeds (after expenses) is beyond my area of expertise.

Any mortgage brokers or foreclosure experts out there who can enlighten us?

I rented a house last summer after I sold my place. One thing I was amazed to learn was how the realtors who do renting are also the 'loser' realtors. I guess there is no money in being a realtor that rents places around here - so you really have to work to try and rent a place. It is like the whole system is set up to discourage renting.

In at The Rise Says:

February 22nd, 2006 at 10:33 pm
John DOe
Chill Pill dude. I never said anywhere I intended to rent out my home. It is my primary residence. Someone asked for numbers, I threw them out there, and couple people concluded my ‘home owner’ situation is not bad. Thats it. I really could care less if the market comes crashing down tonight and I would sleep like my newborn. I got my low rate fixed on a nice home, my wife is extremely happy, who cares. you figures are correct as far as adding taxes,insurance my payment is about 1600 BUT I do have an income to support it, sorry to burst your bubble. So i got the income the fixed and the home. I twas all luck, I barely got in as my name says, at the rise. I totally understand the frustration of being outpriced of the market though.

Hey, man no offense. Perhaps I did not convey they demeanor of my original post; it was not intended to be argumentative, but rather informative to those who had concluded that it was a good buy without looking at the details. I am a former homeowner from the Valencia area. When we relocated to OC, prices were already too high when I sold (late summer '04) to make sense to buy back in; besides, my stock investments from the home proceeds have been much better than I had imagined; I will get rich off of my house after all, but not in the way that Mr. Lereah figures. However, much of that was luck; not skill on my part.

I only show my calculations to show that it's all about after tax costs including maintenance. (I know I spent at least 5K per year on just maintaining my home while I lived in it). I wasn't suggesting you had forgotten these things, but after being a renter again; I realize that many can have a much nicer house in a nicer area for much less than it costs to buy; and not have the danger of earthquakes hanging over them. I remember the Northridge shake-up and it was enough to make anyone think twice about homeownership.

I have no doubt and even hope that you are happy where you live. Having a family (no matter how hard it is) is one of the most rewarding experiences that cannot be equaled by something as unimportant as homeownership; however, that said, I know many here in the OC who have made that trade; a home instead of a family. In the end, material posessions cannot replace satisfaction in the home (regardless of whether that is an apartment or a mansion) with your family. I hope that part of the coming crash returns at least a portion of the people to their senses that material posessions do not bring happiness, and in excess can cause extreme unhappiness.

My greatest hope for you now is that you don't find yourself needing to sell in 3 to 4 years; sinc you could find yourself underwater if there are severe economic distress in your area. Still, the same could be said for any homeowner; having been one I don't wish any ire especially when most of it is actually hard work enough.

Good luck with your newborn; if it's your first, I am sure you are sleep deprived and glad you are in a home where you don't need to move. I am not so lucky.

John Doe

@Santaclara,

I think it's great that you were able to buy back in'02 before prices got too far out of whack with incomes/rents (early part of the Bubble). Remember, we're not ANTI-HOUSING here --just ANTI-BUBBLE.

I don't know that I'd recommend over 50% salary or working two jobs for everyone, though. If you're single and don't mind the extra hours, sure, but for married with children...?

It's great that you're able to enjoy the "intangible" benefits of ownership. And I gather you bought a SFR that's not part of a HOA, otherwise you would NOT be able to do the things you just mentioned --smart move. Condo & HOA "owners" really don't have much more in the way of freedom than renters do.

I would also caution against banking on all that "50% equity" being there a few years from now. I'm guessing you're basing that on CURRENT VALUATIONS, not repaid principal (?). Remember that, in an asset bubble's aftermath, newly acquired equity can readily disappear. ;-)