patrick.net

"One big intangible for immigrants might be that they get pushed around alot by landlords. So owning ends all that."

Why would that be the case? What kind of places are they renting?

I believe that some understanding of the law (and willingness to hire lawyers) is probably more helpful.

Owning does not end all hassles. It merely shifts them. Kind of like hedging. :)

Face Reality, I do realize that there are supply-side issues, which explain high prices in California. However, they do not explain why prices suddenly took a departure from its relationship with inflation and rental prices a few years ago.

if it means stopping a freeway to Bodega Bay!

I would go to Bodega Bay more often if there is a freeway. I have real issues driving on two-lane highways, which have much higher fatality risks. (Drivers seem to ignore double-yellow lines, and I do not drive an Escalade.)

Having been a teacher, “child bearing permits” sometimes make sense.

I know what you are talking about. :)

Jack, I have nothing against owning. However, one should buy only when the price is right and the time is right. There is no academic answer to what is right, but one must develop a feel in order to have any success.

You question now is "should he have rented instead of owned?"

Hindsight is always 20/20, if not 20/15.

I just wanted to add my two cents for those of us who live outside the BA. (I believe it was Face Reality who wanted to know why someone who didn't live in the BA would be interested in the discussion).

I personnally believe that the Sacto region is going to be hugely affected by whatever happens in the BA. If there is a softening of the BA market, I do think that many commuters who live out here are going to want to move closer in. But, I do think it would take a dip in prices to make this happen. If our prices slip first, then people out here may not be able to afford a move back to the BA. I'm not leaning on statistics to support my thinking, I just personnally know a lot of commuters who are tired of leaving for work in the dark, and returning home in the dark. The fact that there are so many commuters does make an argument that people really do see ownership as more important than free time, and other intangibles that might keep them renting in the BA. The question is, in the long run, are the sacrifices worth it?

Having been a teacher, “child bearing permits” sometimes make sense.

I know what you are talking about. :-)

I'll "third" that! I worked as a H.S. teacher in L.A. for 3 1/2 years. Some of the family/home life situations of the kids were pretty horrendous.

Face Reality, why are people using NAAVLPs in the Bay Area if there is so much wealth to be poured into real estates. Shouldn't they be buying homes with cash?

Harm
High school in L.A. Yikes.

They want to make it hard and scary for you to get there so you will decide to go to Lost Vegas instead! And look at the pristene desert full of zero lot lines.

Lost Vegas has much better food than Bodega Bay. It is very hot though. Hotter than Sacramento.

Also, Face Reality, when wealthy people invest in real estate, they usually do not flood the rental market with more units. Who wants to deal with us damned dirty renters? :)

Jack, you have no kids? Are you talking about kids kids or goat kids? :)

Harm
High school in L.A. Yikes.

I should have said "working-class suburb in the S.G. Valley" It really wasn't all that bad --media plays it up as MUCH worse than reality. I didn't have to dodge bullets or anything. ;-)

Jack
Many teachers I know have no children. Personally, like the kids, find the parents difficult.

If many people were really abusing loans, then you’d see a lot more foreclosures. I know you think these will be coming, but that’s like saying the crash is coming. There are no signs of either one of these events.

Not if the value of the home is steady and the banks remain liberal. People can always take out home equity loans to make mortgage payments. There were some talks in the media earlier regarding this practice.

Face Reality, I cannot prove beyond reasonable doubt that you are wrong. I do not have moral certainty about my position. But neither can you prove me wrong. This is why we have agreed to disagree.

If many people were really abusing loans, then you’d see a lot more foreclosures. I know you think these will be coming, but that’s like saying the crash is coming. There are no signs of either one of these events.

Face, are you trying to drive through the rear-view mirror again? Foreclosures are a trailing indicator --not a leading one. Takes time to default & go through foreclosure. The leading indicators will likely be falling M-M & Y-Y sales volume, then a gradual leveling off of prices.

Face Reality, if I were to buy a house now, I would probably take out an IO loan and attempt to pay it off in 15-20 years. The fact that you and I are willing to do the right that does not mean that most people will not misuse such products.

Jack
You're good! You manage to work those intangibles in veeery subtle like. ;)
Actually, I'm kind of on your side intangible wise. I think people are going to move back to the BA from here in large part to intangibles like time commuting, time away from family and just sheer exhaustion.

Yes, but what’s the reason to think that there are so many people who misuse these loans? Do you have any indication of this or is it just a theory?

Many of my friends are using these creative products (IO/ARM) to maximize leverage. Some are buying homes with 6X or 7X their annual income with very little down payment. (My friends are quite diverse in terms of background)

I see nothing but a shortage of housing in the rear-view mirror, the windshield, and the side windows.

This comment from Ben's blog is a good response:

"run and buy or you will be priced out forever, there is a housing shortage you know.. we don't have enough houses for everybody to own three, the supply is only enough to own two. "

My husband see's this a lot (his company handles many things financial). One guy just took out a $250,000 loan on $35,000 income. No down payment. How the loan was justified, I just don't know.

Ok, but there are no indicators - leading, trailing, or otherwise. I see nothing but a shortage of housing in the rear-view mirror, the windshield, and the side windows.

:-) Where's "TWIT" when I need him?
I know there are some among the Posse who think the crash is imminent, but I'm not so sure. Again, I think it MIGHT peak as early as this year, but it could go for another year or two. The $400 billion in IO ARMs adjusting next year, followed by $1 Trillion in each of the next two may well be the trigger(s). I don't see the Bubble surviving past 2007, but just my opinion...

"Do you have any statistics about how many houses here are owned by people who own more than one house in the area, or is this yet another theory?"

Conservative statistics indicate that more than 40% of home purchases are not for primary residences.

Also, several of my friends own multiple homes. One couple that I know owns 6-7 properties. They use IO loans or NAAVLPs to provide leverage.

I don’t see the Bubble surviving past 2007, but just my opinion…

The $1 trillion adjusting in 2007 is unprecedented. I just don't see how we can just cruise merrily along as we have when so many people are likely to be hit very hard...

if rates stay low, they can re set those loans!

LIBOR is going up by the day. I do not see how they are going to refinance those ARMs without a higher payment. BTW, refinancing NAAVLPs require higher home values because balances actually go up. Even a flat market will cause hardship.

if rates stay low, they can re set those loans!

Aaaah, Jack makes his rebuttal just as he's leaving, a man who likes the last word.

Question for the rest of you knowledgable ones. How long are rates likely to stay this low? Have rates ever been this low this long historically? Lots of housing bulls make this argument, but with the short term rates being hiked and all this talk about the yield curve (which I still don't fully understand) there seems to be a lot of doubt that rates can stay this low much longer. Certainly they will have to go up sometime, even if later than most think this will happen.

How long are rates likely to stay this low? Have rates ever been this low this long historically?

I think rates will be relatively low because of deflation threats and realities. Without income growth, any future inflation will behave like taxation.

IMHO, higher rates are not required to burst the bubble. They will help though. :)

BTW, deflation will be caused by globalization. Inflation will come from global competition for commodities. We are living in interest times.

Thanks Peter

One question though, why so much concern about the yield curve? I read an article by William H. Gross (bond guru extrodinaire) and he goes on about basis points, but it's so esoteric to me that I still don't have a firm grasp on it.

My understanding is that the financial industry borrows short term and lends long term. When the yield curve flattens, the profit margin will shrink because the difference between short term rate and long term rate has decreased.

The industry can respond by taking more risk in order to lend at a higher rate or by seeking to improve borrower quality. Neither is good for the real estate market.

Peter P

Now, why couldn't Mr. Gross put it in simple English like that. Thanks again. I'm gonna follow Jack and sign off.
Night all.

Looks like Peter beat me to it, but here's a WSJ article that explains the yield curve in non-guru terms:

"House of Cards? If Rates Don't Kill the Boom, What Will?"
tinyurl.com/dbko8

HARM, my explanation may be incomplete. Please feel free to offer yours too. :)

Harm
Interesting article. The one thing that baffles me is that with the flattening of the yield curve, we should see tighter lending standards right? But so far the lending continues to be extreemely loose. Is this because the banks just continue to flip all the loans to fannie & co.? With the profit margin so lean it doesn't makes sense to me, unless the banks are just going for a large volume of loans to make money and damn the long term risk.

With the profit margin so lean it doesn’t makes sense to me, unless the banks are just going for a large volume of loans to make money and damn the long term risk.

BINGO! SactoQt, I thought you said you didn't understand this yield curve business --sounds like you've got a good handle on it to me ;-).

My guess is another reason that standards are staying loose is pure competition --if everyone else (especially online lenders) are doing it, how can banks/S&Ls afford not to? Another factor is the "you first" syndrome. No one wants to be the first lender to tighten standards and possibly get blamed for "triggering" a crash. I think they're playing a wait-and-see with regards to the Fed, Congress and long-term interest rates.

Remember NAAVLPeeps you do not own anything, you are owned.

Very true, negative amortization means that one will owe more and more. It is worse than renting, which is on par with interest only. :)

This whole "rear-view mirror/side windows - leading/trailing indicators - tea leaves" sub-thread got me thinking. A lot of the time we're arguing from different viewpoints because we pay attention to different evidence/indicators. Sometimes we see the same indicators, but come to completely different conclusions about them.

I think this topic deserves it's own thread, therefore...
"I See Debt People"

Harm

The 'you first' syndrome you mention seems all too likely. Scary when you think about it, the banks are essentially playing russian roulette with the economy.

...the banks are essentially playing russian roulette with the economy

Yup. "Chicken" sounds even more like it.