patrick.net

Peter P,

I may stir up some fur here but I think interest only loan with a reasonable rate-lock period is a pretty good instrument to engineer such custom amortization table.

You are technically correct; but the only guy I know who did this and I would personally qualify as "knowing what he's doing" was a bond trader who works at Pimco.

For mortal men, it is not advisable. I think you have to match durations, which gets into all kinds of bond math and forward rate kind of junk. But, if you're up to the task, you can gain advantage from IO loans.

Again, lots of rich folks' have wealth managers to engineer such instruments for them, even though they have the cash to just buy stuff outright. Why buy stuff with your money when the bank will pay you to buy it with theirs? (The answer to that rhetorical is sadly because the Fed is paying the bank to pay the rich guys to pay the wealth managers, and who pays the Fed? Mr. Everyday does with inflation.)

But a Corolla is a bit light and small...

Fuel efficiency is overrated. Gas is so cheap in America that it does not matter anyway. We should be more concerned about safety (among big SUVs).

Maybe I should stop looking and just be happy with my jeep.

How about the Toyota FJ Crusier? It looks very nice in blue.

I like drum brakes, they last longer.

Huh? I just need the safest possible equipment.

The article by A. Gary Shilling in Forbes.com on 666 entitled, Implosion.

http://www.forbes.com/forbes/2006/0619/168_print.html

You want the truth? You can't handle the truth!

The price correction in real estate will make your head spin.

I need better mpg and a little more space….Basically a small wagon will do just fine.

How about a subaru?

Happy 06/06/06. Good night!

06/06/06? keep a close eye on george bush.... especially see if his eyes start glowing or changing to black or similar... ditto for wolfy, cheney, ricey, rummy, rovey, mclellan, ... one of them's gotta be the anti-christ...

does anyone know anything about hybrid-powered minibus offerings in the states, most likely from toyota or similar?

well, i got through 6/6/6 16 hours ahead of you, and nothing to report -- just a little rain over the city, and the reservoir needs filling anyhow...

Randy H,

I tend to side w/Peter P on his application of an IO Loan. Not that I necessarily advocate their use by less sophisticated investors but used as originally designed they can be quite effective. I've run "hypos" with even modest returns and the longer your rate lock the better the scenario. Well sadly the mortgage brokers contorted the whole application by giving the IO "broader appeal" and it's now a total mess. I'm sorry I missed much of that discussion but it was way past me bedtime. There are credible firms out there that for no out of pocket expense to the client apply some pretty nifty software to your overall debt picture and are typically able to knock 1/2 to 2/3rds off of the time you will be in debt. They simply take stock of your debt scenario (college loans, auto, cc, home etc.) create a reserve account to pay some of your bills early reducing your int. expense. Typically the "program" starts with the smaller revolving accounts, pays them down then off, moves to the auto loans with the additional capital from the now paid off charge cards. And so on and so on until your house is paid off in 12-15 years (in many cases less) and you are now free to fund your retirement and John Haverty will see 59 1/2 and many more debt free birthdays. You could probably do this for yourself but the proprietary software just makes it so much easier. It's not rocket science guys.

Newbietobayarea,
It's funny that you mention how much you really, really want a house here in Cal, moving from TX, when in fact about half the people I know want to LEAVE Ca for TX! Perhaps if enough of us leave cali, you'll get your wish sooner than later.

The Federal government has assumed obligatons it cannot meet in the form of wealth redistribution schemes called Soc Sec and Medi-whatever along with AFDC, HUD, Dept Ed, on and on.

hmm, that's a shame, the govt here is in the black, but has universal free healthcare, nearly free universal university education, and unemployment and disability benefits with no cut-off period -- on similar tax levels to the US. where's all your tax dollars going? oh, maybe 'defence'...military hardware is expensive...

TX is "ok" - i love austin, but thats about it. houston and dallas are hot and miserable for half the year with not much to do (outdoors wise). but you can have a nice house and reasonable life there.

in BA, the job market is more diversified, ppl more cultured (for the most part) and its beautiful. i also liked seattle but the rain is enough for us not to move there, but this year's rain in the BA seemed very Seattle-ish. who knows global warming?

well some of the properties i have been looking at have been priced about 8% off of its price last year. The one thing I find interesting, in an economy of rising interest rates, most asset classes would file (just like stock market did yesterday). However debt laden, fixed interest homeowners are hedged against interest rate increases (even if its for 4 yrs of 5 yrs). Lets assume that the last two years were the most frothy, even the debtors of two years ago still have a few years before their interest rate resets. this to me seems that it will keep nominal prices flat, while raising real prices for those of us that don't have hundreds of thousands of cash for a downpayment. For myself and wife, recent college grads, it will take years and years to save enough money for a downpayment to hedge fast rising interest rates, pricing us out of the market even if nominal rates don't. Perhaps the real way to do it is to have the homeseller carry-back the 20% downpayment at a sub-market interest rate.

in either case, the home market may be slowing but it will take a while to change. Even a 2 - 3% appreciation is still hard to match by personally saving - for most ppl, its their entire annual savings. I am not bullish on a bear market. I am not bullish on a bull market either. I just don't see homeowners forced to lower homeprices for several years - and during that time 1) anything can happen and 2) ppl like me will continue to be priced out, which always begs to ask the question - just WHO is buying houses anyone if ppl with incomes close to 200k can barely afford to buy here

RC,

Forgot to mention that I have been saving for several years. What I meant to say that without totally ruining quality of life, its hard to save when your salary is X and the house value is 4x (or even 5 or 6x). Appreciation/inflation to the 4x is such are larger number than what you can save, that it seems that you cannot catch up.

I am not one who believes ppl should purchase outside their means - I think a home 4x income is reasonable. I also think hedging interest with downpayment makes the most sense, but as explained above it can be an elusive target.

on the brightside, i am renting a $900k property for $2300 - let the owner's pay me to live in their place, not a bad deal

newbietobayarea,
Indeed, the area is "nice" in many ways. I'm a Tennesee native and have lived here for 7 years. I grew up around good-ole- boys who would stop to help you change a tire or anything else for that matter, even if you didn't know them. The food was somewhat over-fried and fatty, but it sure was good after mowing in 90 degree heat, and jumping into a lake sure was great too. We had a huge yard( 13 acres) with a big field me and the neighbors played football in.
Moving out here, I found the change refreshing and new. The job market is indeed good... but everyone else ALSO has a similiar job, and the Pay hasn't budged in years. The weather is indeed terrific.. but 2 years in a row we surpassed my home state in rainfall. I almost went ape this year and hope we aren't in for a long period of these kinds if winters.
I guess what I'm saying is that of the many people I've met who've been here as long as I have and came from somewhere else, we've sort of made some conclusions. Yes- the area is nice, but at what cost do you have to pay to be amoungst those who can afford to stay? How much are YOU willing to spend? 600k? 700k? 800k? over a million? and- how about schools? Are you willing to send Jr to one of the worst schools systems in the country or fork out another 50-60k for private schools? What about taxes.. Do you want to spend 30% of your paycheck in taxes that show no proof of actually doing anything?
The alternative is weather that can be hot, cold, or rainy on a more regular basis, more strip malls, and perhaps people that like to drink Budweiser and watch monster truck shows. So at least for me it has come down to this: A neverending stream of crushing expense in order to stay in an area that has good sushi, concentrated sunshine, and coastal towns with shishi little coffee shops, or... Guys that like to watch Monster trucks, drive to Wal-mart for Motor oil, and occasional weather patterns that prevent picnics.
The later of the 2 for some reason is sounding better and better all the time, but maybe I've been here too long and away from there long enough to forget the "pain" of living there.

George,

At about 5:00am Pacific the S+P 500 Futures were up about 1.20 (and you just knew it couldn't last). I'd heard that DL is basically pleading with BB not to raise rates any further! Something about a few markets being "interest rate sensitive and vulnerable". A few markets? Well, whatever. I have been short the S+P but may have to close out shorting the dollar if this "insane talk" of another 1/4 point hike persists! The nerve!

WW2,

Yep its all about priorities and perspectives. The grass is always greener -- at least places like London are far more expensive than BA. To be fair, the BA should be compared to other same class cities like NYC, Paris, Tokyo, London, Singapore, etc.

Interestingly, read an article about how RE in India & China is taking off as well. India is having some of its lowest interest rates in a long time... and with IBM planning on investing another $6B over there AND them holding their investor/analyst conference in India (the first time it has ever been outside the US for IBM), maybe we should not invest here - keep renting here and invest in RE over there. It seems all the news is about China and India these days. And if companies liKe IBM are even moving their analyst conferences there, what portent is that for the US?

Perhaps we should get our head out of the sand and acknowledge the rest of the world... Pretty soon we may be all saying "Yes, Mr. Patel" or "Yes, Mrs. Chang"... :-) not that it bothers me, ppl in Asia have a right to be successful. If they do it through education and beat us fairly, they deserve the prize.

DL on his knees begging BB not to raise rates any more. Which particular markets are "interest rate sensitive". Do you mean like the 78% of "homedebtors" in CA that went ARM last year? Or the top 25 RE markets or the country at large? Probably just meant San Diego.

newbietobayarea,
The whole asian rennaisance is something that many in the BA are only too painfully aware of. Reason being is that the only reason people get paid those big wages here is because of the tech industry. I'm sure that there are some nervous folks out there who fully realize that the fact that China has over 700,000 engineers graduating every year means those high wages in california will eventually become an achile's heel. I can't think of a more vulnurable position to be in that the BA is now getting into, which is a job market that costs more that 60% more than the next closest state, and 100 times more than anywhere in Asia. A company that tries to compete against a Chinese R & D firm in 5 years will lose every time, and the first priority will be getting rid of the jobs. Adios high paying jobs!
That's one more reason I'm eyeing other regions of the country. While not neccesarily true now, I am putting my bets on the cheaper parts of the country for future development and good job markets. There's already tons of outside investment coming into these regions, they don't have sticky development, environmental laws, or high business tax. The writing to me at least seems on the wall, and if timed right, the prospect is a nice area with good schools, a growing job market, and affordable housing. It's a gamble and one that could go sour. But I don't see how buying an overpriced house is better, especially when what I think will happen to the BA economy will happen in the next decade.

WW2,

Good points. Instead of off-shoring, I am all for cloneshoring... make an army of clones and have them do all the work!

Seriously though, the BA and the rest of the country have one advantage over the world - that is the US attracts the best and brightest. But ridiculous immigration laws (thank you GW) are making it more attractive for Asians that want to emmigrate to want to go to Australia, UK or Canada instead.

I do think wthere will be some labor moving to other parts of the countries - but having the intellectual assets in place will still make Cali competitive, but more specialized. I say keep immigration policy open and offer tax benefits to companies to keep R&D here. Use the same weapons others are. And most importantly stop graduating English and Liberal Arts majors by the gazillions, focus on what the wolrd has said is important - math & science. That is a job for the parents... one I think the Indian and Chinese parents seem to understand much better than anyone else. In the long run, its the nerds that rule...

DinOR,

We are in agreement with IO loans, not disagreement. My point was that mere mortals probably should not attempt to do-it-yourself what the software you are talking about will do unerringly. It is "rocket science" for most people if you try to do it yourself.

But I am a big believer in financial engineering, and I agree IO loans have been perverted and given an unfairly bad name because of the bubble and unscrupulous lenders.

RC,

27% of CPI called Owners Equivalent Rent which has said that for the past half decade the price of housing has remained flat.

Not necessarily disagreeing with you but just wondering, what NIA methodology would you propose to be more accurate? After all, OER is a NIA mechanism, and one which is consistent across 18 of the 20 largest world economies, only excluding Japan and UK. And, the UK does a direct home-price to debt (imputed equity) measure which they add to aggregate savings, and which is widely believed to be far less accurate of a metric than OER (because of all the nastiness involved in matching debt terms).

Robert Cote'

My sentiments exactly. Had this thing stopped at a point just shy of completely and utterly insane we could have made do with a minor correction (10-20%) and gone on about our lives. That time has come and gone and now it's going to be painful. Lerah is clearly on the defensive now and he very obviously flailing for someone to blame. Why not Ben? Again though any assertion that int. rates and int. rates alone were the catalyst for the bubble strike me as odd. While many other factors were at play to create the bubble we only need one to burst it.

newbietobayarea,
The intellectual argument is a fairly classic one that is an effort to segregate California from the rest of the country due to the perception that it is somehow the chosen state where the highly intelligent, creative, and gifted people migrate to. I've been studying the shifting changes across the country, and all you have to do is look at some basis facts.
Clear Channel, CNN, Sprint, Alltel, HSN, HGTV,CMT, Food Network, DIY, Cingular, TX Intruments, Datasouth, NASCAR, and the zillion other non-Californian companies are some of the biggest, most sucessful companies in the country. The majority are in the SE and midwest. Surely you noticed many I mentioned were from TX.I Can't think of many recent companies of note in Cali.
I agree- there are smart people here. But there are also smart people in the "the other" parts of the country. Having a : everybody is smarter N gifted in Cali" is somewhat unhealthy for the state because not only is it somewhat outdated, but continues on with the perception that it casts onto the rest of the country, which is that Californians are obnoxious.I find it obnoxious also. Nobody in my family is uneducated, and most of my friends still there can easily do the same work people in this state do. They'll do it even cheaper for that matter. So the argument that California is expensive because all the smart people are drawn like flies here is kind of silly in my humble opinion.
If the cost of living standards that we now argue about on countless blogs just like this one become the new standard, then you can bet your boots that the smart people will be on their way out, leaving an older, richer, and otherwise less useful population behind. That's my 2 cents. Not to add fuel to the fire or anything. Again- just throwing my opinion into the hat.

Randy H,

Right. I know a number of the guys on State Street in Boston (CFA's and CFP's) and they were using IO's and buying high yield funds with the difference. Even if they wind up flat or neg. equity in their home they've had 5 or 7 years of dollar cost averaging and an 8%+ yield working in their favor. At that point they'll determine if they want to bring that liquidity to the closing or just hang yet another for sale sign.

The software programs out there are just incredible! They can tell you the exact day the consumer will be out of debt. The other side of the "hypo" is that with this new found disposable income folks can really "max out" all of their retirement and college funding options. I wish they had this stuff around when I was younger. But the important part is that it works almost as well for people that are even in their 50's. For folks in their 60's it means that there will be more equity in the financial legacy you leave behind.

WW2,

Good points. I should clarify by saying that CA has a built-up center of intelleectual minds and infrastructure that give it certain advantages. By no means does mean no where else does this exist. But increasingly areas of specialization are emerging. Example: Italy for design and food; TX for telecom and logistics; CA for high tech and biotech; and so on...

DiNOR,

That makes sense. The real risk of IO, is using the amount that would be toward principle as either non-discretionary expense or flat out spending it - not keeping to for buying equity at a later point

newbietobayarea,

Please remember, a lot of these guys/gals are MBA's that carry several higher designations as well on top of making 300/400K per year. Then again they are in Boston and I couldn't park my car for what I rent here in Oregon! These folks get all kinds of bonuses etc. but if you'll recall MA was one of the very first markets to show "cracks in the foundation".

I really hate to admit this (because I've been on the other side of the equation) but even if they are upside down at the time their rate lock expires it can still be a good move. The lender has taken all of the risk, you've carved out an 8% return and HAVE liquidity! Had you been paying on an amoritizing loan very little if any of the pricipal would have been paid down (if at all) and you wouldn't have ANY liquidity! What happens next? Well I'll leave that up to you.

My conclusion?Keep your old car until it’s totally trashed, which these days is around 20 years.If you do get something, Buy something used and off the radar of the car-chic.

Buying used is good... but I still want the latest safety features like pre-collision and blindspot radar.

Is PeterP still shorting TOL?
The buillder stocks are taking a hit.
tinyurl.com/qyjlr

No. Too bad.

SQT,

The bomb! I couldn't believe it. We're #7 folks so we try harder! While it will undoubtedly make a hysterical thread I'm gonna go one better. Have you noticed how quickly Hollywood turns real life events into a movie of the week? We can beat them to the punch. A complete "made for TV" script on standby and at the ready to deliver to material starved studio head honchos before the actual events have taken place! I mean seriously, what can Lereah or anyone do at this point to put the steering wheel back on the column. Libel? Truthfully, is anyone THAT worried? I think I have a "working title".

HOW ONE MAN BUILT THE PROMISE OF EARLY RETIREMENT AND EASY MONEY:

(And bankrupted a nation)

The David Lereah Story:

Oh sure we'll do all the obligatory "early years" stuff where young David learns his first scam by offering to cut lawns for blind widows by just running the lawn mower at full throttle (with the parking brake set) while raiding the neighbors freezer for popsicles. We'll have enough "filler" material to keep us in production shooting until the actual crash event takes place and by that time the script will be fairly polished. I've heard you can "hawk" your script on the entertainment message boards while in pre-production so what are we waiting for!

It’s tough for me to stomach that an “economy” car costs 20k. Yikes.

Get a late 90's Lexus LS400.

This is why I’m hoping the economy implodes. At least my car won’t look out of place anymore.

I do want to be driving the worst car in a neighborhood. This is actually a semi-requirement when we finally buy.

SQT,

He is the man of the hour!

But that's the weird thing about RE. There really isn't anything resembling accountablility. He'll probably get fired but given the way that Realtors TM operate under what statute would he be prosecuted? David told a nation to go out and buy all the house your lenders will let you! But he didn't tell any one individual specifically. I don't even know how much success any of us would have with a local realtor that cooked the appraisal, got a kick back from the mortgage broker and slept in the same bed with the seller?

SQT,

Yeah, there have been some storm clouds gathering on that front and my guess is that much of the blame (rightly or wrongly) will be shifted to the mortgage brokers. The realtor handled the transaction BUT the broker handled the money end. Is it fair, is it right? I don't know. There is so much blame to go around there's enough for everybody! I have no idea what kind of an advance DL got for his books. What would rub me the wrong way is that I was wrong. So wrong. I hate being wrong more than being broke! DL probably isn't "wired" that way though.

Just make sure you take advantage of the great outdoors and take a walk down Market and Castro just to broaden your experience. If you’re really headed out of here, you might as well leave with some interesting stories.

Methinks FRIFY and I share an existentialist streak.

Ray W,

Good read. The only important disagreement I can find is the statement

"The day will come when it costs less to buy than it does to rent."

That is bad advice, and those who follow its implications strictly will never buy even when they probably should consider doing so.

Rents seldom exceed ownership holding costs, and really haven't since WWII except for in very specific areas affected by secular localized deflation (like the Rust-Belt or depopulating farmlands).

I don't think the BA will go the way of Detroit, but for this argument it doesn't matter if I am right or wrong about that. If the BA doesn't go the way of Detroit, then rent will not be lower than holding costs; if it does then you almost certainly won't want to own a home here anyway.

*rent will not be HIGHER than holding costs