patrick.net

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. ;-)