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SHTF,
do you mind leaving an email here, because I have some questions regarding the biz that you are in, would really appreciate your input.
Back to the housing front, Ben has lived up to his reputation. However, a rate pause is not going to save the bubble, it is just going to prolong it, so that everyone suffers longer.
Even without further rate hikes, people are still not going to be able to afford houses 8-10x their income. Such a pause is going to give a false hope to the FBs, which means, they will hang on to underwater propertiesl until they have absolutely exhausted ALL their personal financial resources. That's how people get into more and more negative zones in their housing equity.
Too bad that this will be a drawn-out process. God bless CA.
DinOR:
Thanks. If I'm right, then I will be the only bidder at a probate sale of nice spanish style 2 bedroom sometime around 2012 or so... So I'm ready for a long wait.
I forgot one more signal that the bust has reached a bottom: most of the Patrick.net readers will have capitulated and bought in around 20-30% off of peak prices (but still 20-30% above where they could buy in 2012). Patrick.net will become much less popular than the many new homedebtor victimology blogs which should be flourishing by then...
George,
we will have a hard landing, the result is almost out of the hands of the Fed.
However, Fed can decide whether we have a fast forward hard landing or a slow-motion hard landing. Looks like we are opting for the latter.
HeadSet
2006 Aug 8, 7:11am
OO says,
"However, Fed can decide whether we have a fast forward hard landing or a slow-motion hard landing. Looks like we are opting for the latter."
Damn, What's a vulture to do? I do want to wait that long to pick through the string of FB carcasses.
Glen,
It's more than academic and concerns ALL of us! The longer we continue to permit the irresponsible notion that the housing madness and affordability issues didn't really arise until 04 possibly 05 the longer our stay in the asylum.
Realtors (TM) would be only too happy to offer up 2005 as a sacrificial lamb to get the volume pumped up again. (So would those that bought from them in 04). What we need is to get the right version out to the broadest audience possible.
SHTF,
Your post about living in office was funny. Though I think the pain threshold for American workers will fall way below that. If things get that desperate, Chapter 13 or torching their house will be much less painful.
What we need is to get the right version out to the broadest audience possible.
The message will get out eventually. People will gradually remember that homes *depreciate* over time. For a while, people will continue to try to justify the fundamentals. Years after the tech bubble crashed, people still claim, for some reason, that tech stocks should trade at higher multiples than the market as a whole depsite the fact that many tech stocks are not fast growers and some are highly cyclical. Slowly, painfully, these stocks have sunken back to more normal levels. Today, ORCL, MSFT and CSCO can be had for around 20x earnings. YHOO, EBAY and AMZN for about 30-35x earnings. Still overpriced, but not as outrageously so.
Similarly, owners will continue to insist that people pay a premium for California housing stock because "everyone wants to live here." This argument will carry considerably less sway as the zeitgeist transitions over the next several years from euphoric elation to depressed desperation.
For those of us who lived in CA in the early '90s, you know what I'm talking about. Every other story in the newspaper was about base closings, downsizing, earthquakes, gangs, crime, traffic, smog, etc... Scapegoating became popular as the "Three Strikes" law and Prop 187 passed by large margins. Storefronts were abandoned and lawns were overgrown. And the recession of the early '90s was mild compared to what is coming. This time, it is going to get ugly.
Compare that to the current climate. The mood is a lot different. Everyone is decorating their home with stylish paint jobs, pergo, granite, koi ponds, landscaping, etc... The chatter is all about "urban renewal" and California's wonderful, diverse population and its wonderful, diversified and "recession-proof" economy. The home equity ATM is open for business with many exciting gifts--vacations, cars, plastic surgery, private school for the kids and various and sundry doo-dads.
The slow, painful, grinding slowdown has started. But it will take quite a while to play out, IMO.
Glen,
That's it! People are forgetting the actual purpose of their homes as places to live. The current prices are based on totally unrealistic future expectations of "flip" or "usage" values.
It's really sad for the strapped buyers with 8-10X annual salary mortgage. They're buying on the assumption that they can sell for at least the present day value. They bought with no awareness of how to deal with their situation if the market goes south 25 or 10 or even 5%. In fact, they must have inflation (to decrease the debt to wage ratio) or asset appreciation (so they can afford to pay realtors and closing costs) just to stay above water.
Astrid said:
That’s it! People are forgetting the actual purpose of their homes as places to live. The current prices are based on totally unrealistic future expectations of “flip†or “usage†values.
True. And the flip side of that coin is that people ignore the opportunity cost of sinking their incomes into a slowly depreciating asset. It annoys me when people say "sure, the market may go down for a few years, but it always comes back!" What if it takes 10 years from peak to trough back up to the old peak?
In my case, I have calculated that I could buy a condo comparable to my current apartment for an extra $1,000/month or so, including taxes, insurance and HOA, but not counting any principal repayment. If I am able to invest this money at 7%, my after tax return after 10 years would be around $160K. Plus, if I play my cards right, I will be able to save another big chunk of money by finally buying a house when prices have dropped off significantly. So my net gain could easily exceed $300K. I think I'll wait.
Allah,
The more indebted the population, the more popular the inflationary monetary policy.
"True. And the flip side of that coin is that people ignore the opportunity cost of sinking their incomes into a slowly depreciating asset."
It's not just income either. Being strapped for cash means they have a much harder time in the meanwhile to change career paths or move or have kids. Their carrying cost and negative equity makes them economically fragile. They're stretched so thin they can't afford to havve anything bad happen to them like losing a job or getting a divorce.
"The more indebted the population, the more popular the inflationary monetary policy."
But what about seniors, would politicians really risk rousing their anger?
astrid :
There is a story in US News print edition featured people who were hoping for a rate hike. Predictable. People who are in/near retirement who have fixed income investments. Yes, boomers !
Now boomers are our new friends ;-)
Randy H
2006 Aug 8, 9:10am
Seniors are one of the last remaining groups in America that have their incomes indexed to inflation. This is another reason why I don't generally buy the CPI-fraud arguments. But, even if they are true, then this will be a self-correcting problem as Seniors demand ever increasing inflation relief.
You are onto something. People on fixed incomes are usually the first and often the only groups to really detect and feel inflation on an intuitive level. The other big group are poor people on government assistance or minimum wage workers (which includes a large number of workers who effectively have their wages "pegged" to the minimum wage, in that they earn a certain fixed percent over MW). Unfortunately for that group, they have no political voice or power.
Maybe Seniors will create a SPI (Senior Price Index) so that they can have their cake and eat ours too.
SPI (Senior Price Index)
Good God, don't give AARP any ideas! Then they'll also have to create a BPI.
Maybe Seniors will create a SPI (Senior Price Index) so that they can have their cake and eat ours too.
SPI:
5% = Canes and orthopedic shoes
5% = Leisure suits at Penney's
15% = Geritol, arthritis meds and Centrum "Silver"
15% = brunch buffet at the Golden Nugget
20% = Winnebago (including gas)
40% = Owner's equivalent rent at Senior Village
what about riverboatel fees and annual cruises and medications that start with V and C? :)
I think medical expenses will be a lot more than 15% of the budget. Those co-payments can really add up, especially for people with diabetes, high blood pressure, and other chronic health conditions.
You may want to substitute brunch buffets for dogfood, leisure suits for Salvation Army mumus, and camping out in their grandkid's room for living at Senior Village -- just to make up the difference.
Man, my hideous grammar!
The third paragraph of the last post should read:
You may want to substitute dogfood for brunch buffets, Salvation Army mumus (cause then you don't need to pay for underwear in addition to adult diapers) for leisure suits, and camping out in their grandkid’s room for living at Senior Village — just to make up the difference.
Anyways, I feel dirty, I'm being so mean to a bunch of hypothetical old people.
astrid :
Anyways, I feel dirty, I’m being so mean to a bunch of hypothetical old people.
You need to watch more Seinfeld. :-)
15% = brunch buffet at the Golden Nugget
Hmmm… don’t forget the small, but volatile gratuity sector.
14.999999999 = brunch buffet at the Golden Nugget
00.000000001 = Tips & gratuity
You forgot:
Senior discount = priceless!!
I think we should all have a foreclosure pool, like a football pool. Draw up some boxes with all the states in them and when the end of the year comes, the state with the most foreclosures wins. We can also have a bonus, whoever bids closest to the highest amount of foreclosures gets bonus money. I think that would be a good way to end this year. What do you guys think?
That depends on how much everyone is willing to spend. This can also be done by city. That will allow a whole lotta boxes.
Option 4 -
Try to Rent it.
Before you accept any rental price increase, use this to check what's available in your neighborhood at your current rent. You should be able to ask for a rent freeze or minimum increase if you want to be friendly about it. At my price, in my neighborhood, inventory looks better than when I rented my current place.
Then check out the $2250+ range and laugh at the FBs. I'd argue that both the volatility and the increased mean in Patrick's graphs is due to the long upper tail from desperate borrowers
Where does all our tax dollars go in California?
This should fit the bill:
http://www.ebudget.ca.gov/BudgetSummary/SUM/1249561.html
Oh, and of course “dem damn illegals†and “evil teacher’s unions†;-).
Holy cow - we spend a lot on prisons!
I just noticed that in 2001, the DOJ reported that CA was spending $25k per inmate. With almost as many state inmates as there are in CT+ME+MA+NH+NY+NJ+PA+RI+VT combined, you'd think we could buy in bulk and save.
(CA: 163,965. Northeast: 172,925)
George,
I'm not quite sure how I feel about this new level of candor. It's as if the "meeting of the minds" rifled through all of their available options to find a culprit and decided that Mr. Flipper would have to take the fall.
Flipper as fall guy serves multiple purposes. Firstly we can shuffle the escalating cost of housing (hence property taxes) on their speculative greed. Secondly the fact that you can't sell the overpriced sh@tbox we just sold you is directly attributable Mr. Flipper's desperate situation. As is the wave of defaults and foreclosures.
"The resulting excess supply has exacerbated the drop in consumer confidence"
This is more bassackwards logic we keep getting from the RE Cartel!
Oh and again with the total focus on 2004/2005! Sheesh! I suppose up to that point everything was on a healthy path?
Please make a tax deductible contribution to the patrick.net "The Bubble Did Not Start in 2004" Foundation! Thank you for your support.
As far as the excess supply "exacerbating the drop in consumer confidence" that's another way of saying the Housing ATM is Out Of Order!
"but it isn't entirely inaccurate"
Oh, agreed. It's difficult to seperate the two, no question. What I took exception to was the notion that this ALL falls squarely on the shoulder of Joe McFlipper and this ALL took place in a period of 18-24 months. My wife works for a huge publicly traded company that makes custom medical devices and home security systems and like 3 out of 5 employees have at least one "investment" property. Several have upwards of 5!
I have to agree with Randy H (usually a good idea) that the tech wreck and housing bubble have more differences than similarities but one trait the aftermaths will share is, after the implosion it will become hard to find people that were flippers! In the 90's daytraders were a dime a dozen but post derailment touting it became outright silly. After 2001 the only ones I could find were those "that dabbled occasionally and got out before the sell off"! Saying you were a flipper by 2007 will look equally dense.
George and DinOR,
Looks like the lending industry (at least Countrywide) got together with the HB's to tow the party line. From the WSJ:
Angelo R. Mozilo, chief executive of Countrywide Financial Corp., the U.S.'s biggest home-mortgage lender, rarely misses a chance to remind people that he has been in the business for more than 50 years. Now he has a sobering message for investors about the near-term outlook for housing and mortgages: Buckle your seat belts.
"I've never seen a soft landing in 53 years," Mr. Mozilo told analysts in a conference call last month.
Nice.
It's always good to be prepared - and to know what to do in a difficult situation. Here are some helpful tips:
"why did your firm loan money to anyone and everyone right up to the 11th hour?"
Cuz he is not lending out his own money?
I have to agree with Randy H (usually a good idea) that the tech wreck and housing bubble have more differences than similarities but one trait the aftermaths will share is, after the implosion it will become hard to find people that were flippers!
I dunno, really -- maybe they have more similarities than difference -- obviously not in proportional magnitude of correction, but in the greed factor, the 'dont' miss out, get on the gravy train, it's the next big thing' attitude, the way investors are always trying to ferret out maximum returns from anything, the easy money aspect, the illogic and mass psychology of following the herd and not doing due diligence checks on the investments, etc.
but, yes, it's usually a good idea to agree with randy ;)
Zephyr Says:
It’s always good to be prepared - and to know what to do in a difficult situation. Here are some helpful tips:
http://www.franksemails.com/misc/things-you-should-know.pdf
Now that's funny s#*t!
astrid,
Oh I'm sure of it! It's just one of those things that dawns on you as hit submit. Had it been his $$$ things would have certainly worked out differently! Good point.
Randy H
2006 Aug 9, 2:10am
I am such a contrarian that if I find everyone agreeing with me I'll disagree with myself. lol
« First « Previous Comments 67 - 106 of 224 Next » Last » Search these comments
If there's one thing that distinguishes your average Patrick.net blogger from your typical robotic SDCIA.com perma-bull, it's the ability to consider your opponent's P.O.V. and to see things from others' perspectives. This thread is dedicated to this proposition. I want you to put yourself into the mind of a F@cked Borrower.
Peter P has already suggested this concept --in jest-- with his thread, "A cry for help". I would like this one to be approached from a more serious mindset. Image for a moment that you --as our hapless friend from the SDCIA-- find yourself saddled with 14 underwater properties, all bought on margin with exotic financing, and are now unable to make the ARM-reset payments on your night manager's salary from Taco Bell. Never mind that you could have avoided your unsavory predicament by merely applying a modicum of logic, some cursory market research and a dash of high school math to the dubious principle of "it always goes up". It's too late for regret now --you let your greed get the best of you, and so here you are. You now have a "diversified" portfolio of 14 equity-negative properties in different states, and all of them are heading in one direction: down.
So, let's assume you've gotten past the denial, anger, bargaining and depression stages, and have picked yourself up off the floor (after spending several days there whimpering in the fetal position). You've finally reached "acceptance" and are ready to rationally assess your sorry situation with cold, hard-eyed reason, and you must determine a course of action before events progress to the point where your creditors begin making all your decisions for you.
At this point, you have basically three options, none of them particularly good from your P.O.V. Which one do you take?
1. Confront your creditors (MBS shareholders) and request permission to start making "short sales" (i.e., selling the property for less than the amount owed).
This option has a number of attractive advantages, particularly the ability to avoid bankruptcy and/or liens and legal actions against you, as well as the ability to be quickly rid of those 14 "equity alligators" before they eat your alive. If your creditors agree to this, it amounts to a non-BK debt forgiveness, and you will not owe any money after the sales.
It also carries a few drawbacks: (a) Exactly whom do you negotiate with? Your loans got bundled up as MBSs and sold off before the ink even dried. Do you call Fannie Mae, Fredie Mac, the Bank of China, Fidelity, Vanguard, CalPERS --other? (b) Your creditors will undoubtedly require you to bring your entire life savings to the closing table in order to minimize their own losses. Of course, being a reckless speculator who used other people's borrowed money, you're not likely to have much anyhow, so no biggie. But there's another drawback: (c) your creditors will have to report the amount forgiven to the IRS as "cancelled debt", which will be taxable as income. Given your 14 underwater properties, this amount may be quite large. Bailing on your creditors? Relatively easy. Bailing on Uncle Sam? Not so easy.
2. Leave 14 sets of keys on 14 granite kitchen counters and walk away.
Pros: Perhaps your creditors will eventually realize you have no money, no reasonable chance of paying off the debts, and just write them off and leave you alone. To borrow a phrase from J. Paul Getty, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.†Even better, if all of your mortgages are "firsts" (no refi's) and you live in a non-recourse state (CA), then your creditors basically have to eat the loans. You'll still be on the hook for tax on the cancelled debt, however.
Cons: Aside from trying to sue you for any current assets and garnish your future earnings (assuming any of your mortgages were refis/recourse loans), your creditors may also try to intercept your tax refunds, ruin your credit (ha-ha, I know --like you care!) and generally harass you and try to make your life miserable.
3. File for Chapter 7 bankruptcy.
Pros: Means a "clean start" no more debts, and no tax liabilities --if you can get it.
Cons: Thanks to the new creditor-friendly Bankruptcy "reform" law, you have to qualify for means-testing and prove you did not commit fraud to obtain the loans in the first place. Uh-oh. That last part could really bite you in the a$$. How much did you inflate your Taco Bell night manager's salary to get those 14 $0-down NAAVLPs? Don't remember? Better consult with an attorney first. If you can't qualify for a Chapter 7 under the new rules, then your only option is to file for Chapter 13 (repayment plan --not good) or reconsider options #1 & 2.
Discuss, enjoy...
HARM
#housing