patrick.net

RE: ARM payment reset

We might have over-estimated the effect of the rate reset. People got into these 3/1 or 5/1 3 or 5 years ago and they still have equity (those who have already refinanced have later reset dates). They can still refinance now and use the cash to pay for their mortgages for a while. This will be their next move.

As a result, they will not all suddenly foreclose. There will be NO sudden crash. However, the refinanced cash will eventually exhaust and foreclosure rate may still climb steadily over the next five years, putting pressure on the market.

NOT INVESTMENT ADVICE

The true indication of the insanity of the nomad specuvestor/rolling bubble phenomenon is that these places described (ID, OH, MT) have no real foreseeable economic growth potential. OH is the poster child for the rust belt; ID has amazing natural beauty if you're willing to live alongside isolationist white supremecists. MT is a bit more interesting, though. Bozeman is this enclave of crunchy, outdoor-freak, trust fund types mixed with mega-billionaires with their 1000 acre ranches that they visit once a year. The rest of MT, though, is large and empty. Trust me - I looked seriously at a job there.

KurtS,

We see that same brand of logic in the Portland area as well. Everyone curses Californians (but at the same time hope to sell their home to one). Preferably one that is wealthy and yet at the same time challenged with basic math? Typical of the have your cake and eat too crowd. By coincidence I was going through RE transactions for Marion Cty. OR and only noticed about (3) sales to ridiculously wealthy CA's year to date. I think in 2 of the 3 sales they looked to be family members. The reason this is significant is that we are supposed to be the "Carmel of Oregon"? Our realtwhores are indoctrinated from day one to blame ALL CA's ALL the time for all of our affordability issues that apparently are of our own making. Is this true for other areas?

Peter P Says:

We might have over-estimated the effect of the rate reset. People got into these 3/1 or 5/1 3 or 5 years ago and they still have equity (those who have already refinanced have later reset dates). They can still refinance now and use the cash to pay for their mortgages for a while. This will be their next move.

Two things you're not accounting for: first, depending on how low a rate these FB's obtained, it may be financially untenable to refinance to a higher rate now, before their ARM's reset. Second, they may have already refinanced out equity to the point where they have none left, particularly if assessments come in flat or depreciating over the next several years. It all depends on the proportion of people who did one or both of the above moves already; we already know the denominator: the huge fraction of recent mortgages that are "exotic."

Either way, this is turning out to be very interesting to watch as it unfolds.

skibum,

Back in 1999 we took everybody up to Priest Lake, ID and rented a houseboat. Nice boat, great area, no jobs. A few months ago the NYT ran an article about an "undiscovered" area in eastern Oregon called Joseph. Now I'll admit it is real pretty but since the article ran local realtors have been swamped with calls from as far away as Conneticut for crissakes! Talk about a rolling bubble! How often would somebody from CT be able to come out here? How would they get there? Land on the lake with a bush pilot in a float plane?

Two things you’re not accounting for: first, depending on how low a rate these FB’s obtained, it may be financially untenable to refinance to a higher rate now, before their ARM’s reset.

If they take a cash-out refinance just to pay for the mortgage, they can "afford" any payment size. They can use the cash to delay foreclosure for many months. (50K can pay a 3K mortgage for almost 16 months!)

Second, they may have already refinanced out equity to the point where they have none left, particularly if assessments come in flat or depreciating over the next several years.

As I have said, if they have already refinanced recently, they will have a later reset date. I do not expect fireworks in 2006 or 2007 due to ARM resets. We may even see a resurgence of the refinancing industry. Of course, new regulations can put an end to all these.

I had read that according to Bankrate.com that over half of the mortgages in the country are under 2 years old. Seems the re-fi mania peaked by 2004 and purchases peaked by mid 2005 so while they may have a "little" more time I don't see how it will help FB much. Trust me, there will be plenty of other fires they will have to put out and won't really consider swaping to a fixed until they're in the 11th hour. It's just the nature of being a "homeowner".

@Peter P,

"They can use the cash to delay foreclosure for many months. (50K can pay a 3K mortgage for almost 16 months!)"

Right! And it's worse than that, because typically someone will be short only part of their higher mortgage payment. Let's say their household income can support all but $500 of their payment -- in that hypothetical, $50k will delay the day of reckoning for 100 months.

It's time to pack it up, kids. We've lost this one.

DinOR,
Yes, I'm often pissed off at the NYT for outing cool places to the masses. Often what happens is that the place of interest ends up mobbed by New York area people. The most recent example that comes to mind is at the Ferry Pier Market in SF: They ran a piece about one of the restaurants, Boulets Larder, which is excellent, but there are plenty of other excellent places there. As a result, that place has been mobbed the last couple of times we went there.

It’s time to pack it up, kids. We’ve lost this one.

I agree. The ARM reset will be anti-climatic. The nature of human psychology, greed and fear will bring down the market. The impending ARM reset may give some psychological push though.

Ahhh, but how many home-debtors do you know who can bank $50k and only use it to pay on the mortgage? How long do you think it would take before they say, “we can just take half of it and put in granite countertops and stainless steel appliances. We won’t need the rest of that money, after all it only goes up and we’ll have tons more equity in a few years…”

True.

$50K = $10K for refinancing costs + $35K new car + $5K for mortgage

Paying your credit card bills with credit cards will work for a while but if these FB's FURTHER dig themselves in debt they will owe add'l for the "equity" they borrowed (assuming there IS any to draw against). We've all played this game to some extent in our lives (I know I've robbed Peter to pay Paul) and it is a temp. fix at best. How can it be that someone this deep in denial is all of a sudden going to find the discipline to pull this levitating act off?

I know I’ve robbed Peter to pay Paul

What did Mary say?

If they take a cash-out refinance just to pay for the mortgage, they can “afford” any payment size. They can use the cash to delay foreclosure for many months. (50K can pay a 3K mortgage for almost 16 months!)

This assumes the FB has enough equity to be able to refinance and cash out in a flat or depreciating market. Also, the home-occupier FB is one thing, but the large number of specuvestors who used these loans as leverage to obtain properties without much equity and are carrying a negative balance sheet month-to-month will have a much harder time navigating this path.

Data Quick numbers are out for So Cal:

http://www.dqnews.com/RRSCA0606.shtm

San Diego, dang.

"...specuvestors devour the 2005 Bordeaux futures market (for those of you unfamiliar with wine, it’s rising in price as fast as SoCal housing)"

Another "bubble" I'm seeing is the amount of land converted to wine grape production. It's anybody's guess how this will play out, given the level of production/competition within California and from overseas. If Sonoma and Napa counties face more competition, how will that affect their local land prices? And if consumer wine consumption flattens (or drops), how will this affect many coastal wine economies?

How can it be that someone this deep in denial is all of a sudden going to find the discipline to pull this levitating act off?

Mortgage brokers will impose some "discipline" on them.

In the New Ekkkonomy, Joe and Sally Clockpuncher are the rook and bishop on the chessboard. The house, by FAR a higher producer than the two paycheck-earners, is both the king and the queen rolled into one super-powerful piece.

This is similar to when women entered the workforce en masse. With each household suddenly enjoying more disposable income, then "disposed" of it by engaging each other in bidding wars over the same commodities that they were buying before. In exercise in futility, and a net loss for everyone.

Now, similarly, those with houses are doing the same thing. Houses are being used as weapons to compete. However, if you don't have a house, you simply cannot compete unless you can get a crazy loan. Then, you're in the game.

I think the sad truth is that those of us in the Renter camp have fallen too far behind to catch up. It's like being eight laps down at the Daytona 500 -- no matter how fast you can get your car, how many fast pit stops you have, and no matter how many caution flags you capitalize on, you're never going to catch up to the lead lap cars.

Plan B: Leave the Bay Area or keep renting. Either is fine with me.

the large number of specuvestors who used these loans as leverage to obtain properties without much equity and are carrying a negative balance sheet month-to-month will have a much harder time navigating this path.

Maybe.

One thing though: when Phoenix and other speculative areas crumble, those Cali locusts will have tough choices.

Peter P Says:

What did Mary say?

Keeping with the biblical theme (Bubble Buddy, where are you?) Peter P should now be called our Doubting Thomas. Just when the bubble is at the inflection point, he is injecting reservations left and right. BTW, that would probably make Surfer-X our John the Baptist...

Red Whine Says:

"...It’s time to pack it up, kids. We’ve lost this one."

Exactly!

Oh, man. But what does it REALLY mean?

Sure, I know, it means that sh-t's gonna hit the fan. There's going to be some major reshuffling of the deck. Is it an inflationary shuffle, a deflationary shuffle, a stagflationary shuffle, or just more Three Card Monte, shuck and jive bullsh-t?

You can't reshuffle the refinance, equity extraction deck forever!

WTF is coming down the pike? A missile from North Korea? A world war starting in Iran? A deppression?

I guess anything is better than perpetual, ponzi scheme, financial Musical Chairs.

Will someone please just pull the fricken' plug and get it over with already.

Who's gonna be the first to take the plunge and take his Platinum Visa to Vegas and go down in a blaze of glory!

Anticipation of death is worse than death itself. Somebody do SOMETHING!

Goddamn...

Under this scenario, it seems prices may moderate and slide a bit but no crash and certainly no 35% plus drops.

We may still see 35% crash for condos in sub-prime areas. I have abandoned the "crash" outlook for SFHs in desirable locations.

Plan C: Move to San Diego in a few years.

skibum,

Oh agreed! Think Ashland, OR. Same thing happens every time Money Mag prints up their 10 best places to retire or Conde Naste runs a piece on the Maldives or wherever. Ruinous I tell you! Look at all the foreigners affected by the Tsunami (and during Christmas no less!) People from all over the world converging on 4 star hotels in a beach town that didn't have electricity 10 years ago? Rock stars, models, celebs. The movie "The Beach" was quite revealing to me b/c I've spent much of life looking for it, finding it, then having to look on in horror as it becomes transformed. No Sir Surfer X, I didn't rent the the movie b/c I fantasize about having a "cuddle" with Leonardo!

Keeping with the biblical theme

Huh? I was thinking about Peter Paul and Mary.

Peter P Says:

Huh? I was thinking about Peter Paul and Mary.

But the original idiom does indeed refer to the Apostles.

@ Michael Holliday,

"Who’s gonna be the first to take the plunge and take his Platinum Visa to Vegas and go down in a blaze of glory!"

I've already started. In the past, I've always maxed out my 401k. I've now stopped. I've started spending this money. I'm going to a Bordeaux tasting tonight that was $250 per ticket. I saw Les Miserables for $100 a head three nights ago.

Robert Kiyosaki is right: "Savers are losers."

Ignore the CPI -- it's bullshit. Every dollar that you save will have 60 cents of spending power by next year. Spend it like it's going out of style -- because IT IS.

"WTF is coming down the pike? A missile from North Korea? A world war starting in Iran? A deppression?

I guess anything is better than perpetual, ponzi scheme, financial Musical Chairs.

Will someone please just pull the fricken’ plug and get it over with already."

You're right. I saw the horrific news about those two troops this morning, and for the first time I didn't even care -- I thought, "You know what? The New Ekkkonomy is destroying America far faster than any terrorist group could EVER hope to do it." I honestly no longer care if they win or lose.

The movie “The Beach” was quite revealing to me b/c I’ve spent much of life looking for it, finding it, then having to look on in horror as it becomes transformed. No Sir Surfer X, I didn’t rent the the movie b/c I fantasize about having a “cuddle” with Leonardo!

Oh, but I would most definitely "cuddle" with Kate Bosworth in "Blue Crush"...

Much of the "Re-set Issue" being a non-factor hinges on one other important factor.

Occupants. If upwards of 40% of the homes sold in 2005 were to investors (with their constant companion the NAAVLP) how much serious effort is going to go into salvaging those "homes"?

Red Whine,

Have faith. I really don't think things are so doom-and-gloom. Even people on this board can be too short-sighted at times. The correction is already underway and picking up momentum. Besides, you can't on the one hand bemoan being priced out forever while on the other hand predicting economic and political armageddon. The two scenarios are pretty much mutually exclusive.

"the trick is to find a great job that replaces current Bay Area salary."

Yes, I know what you mean.

Uh I think that fact that the bubble seems to need "fresh meat" in far flung places should be telling us something. It's exhuasted it's fuel supply and needs to move on or it will die. Boise Bubble? C'mon.

Once it's pushed the envelope completely beyond what even crooked appraisers are willing to pencil in it has to expand out b/c as long as the promise of free/cheap/easy money lives it can survive. When there's a bubble in Cairo, IL we'll have ruined the entire country.

*All of the "Blue Crush" girls were cute. Yes even Michelle (one more for the road) Rodriguez.

Condos in subprime areas, no thanks Pete. If I can’t buy a SFH in a nice to decent area for 35% plus off then I’m not interested.

Do not count on a 35% _nominal_ reduction. It may still happen though, I do not know.

Skibum,

"I really don’t think things are so doom-and-gloom."

As long as one believes that the death of the middle class in just five years is "no big deal", then you're absolutely right.

"The correction is already underway and picking up momentum."

Prices are still rising. Rising inventories have yet to have any effect on prices. Correction, my ass.

"you can’t on the one hand bemoan being priced out forever while on the other hand predicting economic and political armageddon. The two scenarios are pretty much mutually exclusive."

Besides the fact that no one said that, it makes no sense standing on its own.

Priced out forever? Yes. I'm not predicting any kind of armageddon. Nobody here said that. I'm saying I don't care if armageddon comes. I'll be priced out of the rental market within five years if it keeps appreciating at the current pace. My wife won't leave town because her entire extended family lives here. So when we can't afford rent (could be more than five years, but probably not much more), she moves back in with her parents, and I file for divorce and leave town.

Home ownership is not the "American Dream". It's a weapon of mass destruction against the middle class. If you would have told me in 2000 that making a solid middle class income, having no debt, and six digit savings could STILL cause you to fail your family and become financially insolvent through the devaluation of your savings and wages, I would have stopped saving and started spending then. Spend it or lose it kids, because it won't buy you anything tomorrow.

I hope the working class take to the streets and start torching condos. THAT would be justice.

Prices are still rising. Rising inventories have yet to have any effect on prices. Correction, my ass.

MEDIAN prices are still rising. Rising inventories have yet to have any effect on MEDIAN prices.

There are so many homes to choose from now.

If you would have told me in 2000 that making a solid middle class income, having no debt, and six digit savings could STILL cause you to fail your family and become financially insolvent through the devaluation of your savings and wages, I would have stopped saving and started spending then.

I could have told you that. Too bad this board was not around back then.

There are literally millions of millionaires (excluding primary residence) in this country. There are tens of thousands of families with at least 1M of liquid net worth in the Bay Area. A 6-digit saving account means shit if it is not growing as quickly as other people's investment.

Do not just spend it or save it. Invest it. Increase your understanding of the world. Improve your relationship with God.

DinOR Says:

> Back in 1999 we took everybody up to Priest Lake, ID and
> rented a houseboat. Nice boat, great area, no jobs. A
> few months ago the NYT ran an article about an “undiscovered”
> area in eastern Oregon called Joseph. Now I’ll admit it is real
> pretty but since the article ran local realtors have been
> swamped with calls from as far away as Conneticut for
> crissakes! Talk about a rolling bubble! How often would
> somebody from CT be able to come out here? How would
> they get there?

The people that bought on the West Shore of Lake Tahoe in the 50’s, the North Shore of Lake Tahoe in the 60’s, Vail in the 70’s, Aspen in the 80’s and Sun Valley in the 90’s all made millions so people who can’t afford to buy in Tahoe, the big CO resort areas or Sun Valley are looking for the hot new place (where property will soon be selling for millions of dollars since resort/vacation real estate always goes up)…

SQT,

Well there you have it, when you're getting RE inv. advice from your hair dresser that's usually time to roll the credits!

Michael Holliday said the "Anticipation of death is worse than death itself"?

Well when you're dead you're dead. No more problems. When your mortgage goes up 20/30/35% it's death by a thousand cuts. Knowing it is following you around with the clock running in a declining market (and FICO) have got to be awful!

We're on the right side of this equation.

Home ownership is not the “American Dream”. It’s a weapon of mass destruction against the middle class.

This strikes me as too conspiratorial for my personal comfort. If anything, the American middle class has conspired against themselves. Who told them to buy oversized homes, fill it with crap they can't afford, and become willing pawns in this housing pyramid scheme? I suspect consumption has become a distraction from issues we need to face. America has victimized itself, and sooner or later it will need to come to grips with that.