patrick.net

"50% correction by the end of August"

I want 50% correction in my golf score! My swing is getting worse by the week. Perhaps I should just quit golf.

"Steve Hilton, Meritage homes chief executive (was asked), 'How are investors affecting the Phoenix market? A: We have a very strong anti-investor policy. They raise the price of housing. They don't bring any value. They're parasites. They artificially make the prices go up, and they artificially inflate demand."

Wow. At least I am fine with non-lemmings speculators...

Prat, I think the housing bubble is beyond argument at this point. We are merely discussing the progress and its effects. :)

Jack, the effects of boomers is significant yet chaotic. But I think that realtors(tm) have over-estimated, intentionally, the positive effects of boomers on the housing market.

Fake P, housing speculation is legal and encouraged in this country. Why do you hate them more than I do?

Why would the realtors want to give too much credit to boomers for the state of the housing market?

I am not saying it is not true that they are doing that, I am just asking what they have to gain by making that claim?

They are not giving boomers credit. They are just throwing around the word "boomer" to instill fear into prospective buyers...

"Millions of boomers will move here, buy now or be priced-out forever."

tinyurl.com/bkecn

I'm having a lot of fun with this.

At current (low) interest rates, it's not cost effective to buy a house. (Not an advantage in 30 years). No suprise. So lets keep changing the numbers until it is.

We'll assume a tax bracket of 29%, 50k on hand, and 3% appreciation in rents and housing prices (an historically defendable figure). I also leave the 7% investment assumption in place, though that's certainly arguable.
This is my situation, btw.

Hmm -

$1350 rent $650k house. Nope. (My current rent on a 3-bedroom, and a comparable house in a transitional neighborhood.)

$1600 rent $600k house. Nope. (Market rate on a 3-bedroom house, and a slightly reduced house price.) Still no suprise.

$1800 rent $500k house. Suprisingly, still no. (Some rise in rent, much reduced house price.)

$1800 rent $480k house - break even after 12 years. Now we're talking.

Howabout if prices stay flat - how much does rent have to go up to start making housing purchases attractive?

$2400 rent $650k house - break even after 13 years.

So - which do people think is more likely to happen? Jack apparently thinks that rents will rise by 50%, since his comments above promote an inflationary scenario. I find it more likely that housing will fall by 30% or so. Time will tell who's right - it all comes down to whether we have an inflationary or deflationary scenario. Jack beleives in the inflationary scenario, and God knows there's evidence to support this - federal deficit, trade deficit, oil. I beleive in the deflationary scenario, and have evidence on my side as well - the coming massive layoffs in the housing sector, outsourcing, wage depression, oil.

All I know is, when I can break even after 15 years, I'm buying a home. And not before.

BTW - in housing, even a 20% drop *is* a bubble pop - it leaves everyone who purchased homes in the last couple years underwater in their mortgage - noone puts 20% down anymore in the bay area, unless they were already a homeowner trading up, or have stock money. This is why I initially didn't buy in the first place (when houses were $600k, instead of $700k now). I can take being 50k in debt, I've been before when I was young and stupid. I can't take being 100K or even more in debt though - that's a hole that you just can't dig out of with taking lunchbags to work and cutting corners. You're screwed.

Fake P, an underwater mortgage does incur net debt though, for those who care about their "net worth". The material impact is not much, I agree.

Jim D: Mortgage being underwater doesn’t mean you are in debt, because you are always in debt when you take up a mortgage. If you are financially sound and could afford the payments, there are no issues, just sit around and wait it out.

Unless of course, you HAVE to sell for some reason: extended illness, loss of job, recession, other costs of living rising relative to wages, etc. These are not unlikely/pessimistic assumptions. I saw them firsthand during the last housing bust in the early 90's. Oh, but "it's different this time". Sorry, I forgot...

One "intangible" benefit of renting: flexibility and non-commitment.

Intangibles do eventually amplify!

Underwater mortgages when you have a NAAVLP can be a big problem if interest rates don't allow you to refinance at a lower rate......

I just re-read Fake P's post, and he's right that if you can afford the payments waiting it out is the best option. I just wonder if the buyers with the creative loans will be able to afford it if a downturn is long and drawn out.

All index rates for NAAVLPs (MTA, COFI, LIBORs, etc) have been going up steadily. The thing is that such loans recast (new shorter amortization schedule with an inflated loan balance) every five year or less (if the negative amortization limit is reached).

I am still amazed at how complex NAAVLPs really are, with rate caps/floors here and there but this or that except conditions, conditions, and conditions.

Peter P

Only mortgage brokers and attorney's can decipher all the double-talk.

I have a question. In this area we have seen a tremendous amount of urban sprawl. I heard someone compare this to L.A. saying that So Cal went through the same thing during a past boom/bust cycle. Does anyone know anything about that? I think it could pertain to both the BA and here since a lot of the growth here was initiated by commuters from the BA.

SactoQt, urban sprawl may occurs towards the end of the boom because buyers are priced-out in core areas but they are willing to live further out just to grab something.

When the bust comes, many new homes will be left empty.

opnr, when the market is going up one can always come up with creative strategies.

But if the market really always goes up why would we spend time here blogging? I would be flipping 5 homes with NAAVLPs!

Hindsight is always 20/20. One can easily write a computer program that would have made millions in the past 5 years trading futures. Will it work going forward? It will surely make the brokers rich.

Rising wages? Where? I’m so jealous.

Fannie Mae economics department.

Herr Goebbels, Third Reich Secretary of Propaganda?

Some NAAVLPs use LIBOR to calculate the fully-indexed rate. Although the "introductory" rate is fixed at around 1.75%, a higher fully-indexed rate means that the rate of negative amortization would accelerate.

Things are so expensive that even 5/1 hybrids are unaffordable.

BTW, fast negative amortization would mean that it is easier for mortgages to go underwater.

How does negative amortization in a NAAVLP work?

Too complex for me to describe. Here is an URL:

http://tinyurl.com/ck8qq

So after the first 12 months are up, people are on the hook for more money than they bargained for? And after they make the new minimum payment for the next few eyars, they still have a big balance that is spread over a smaller number of years?

"You can always refinance."

"What if I cannot refinance?"

"You can always refinance as long as you have equity."

"But I thought it is a negative amortization loan."

"You will have equity if prices continue to go up."

"What if prices fall?"

"That is not going to happen."

The above conversation actually took place.

Jack, there are more purposes in talking about the bubble than convincing the unconvinced. Everyone is entitled to his/her opinion and we are not going to force it.

(Some people still do not believe that we have gone to the moon. I am not comparing you to them.)

We need to move on with our new understanding and do something about it. That is more important in my opinion.

ok

Are you talking about this comment?

Prat, I think the housing bubble is beyond argument at this point. We are merely discussing the progress and its effects.

That something is beyond argument does not necessarily mean that everyone here has agreed upon a conclusion, it merely means that it is not fruitful to continue the discussion. :)

(Some people still do not believe that we have gone to the moon. I am not comparing you to them.)

Lol..........still laughing....

I don't know why that struck me as so funny....

Jack

Quick question.
You said
"Yes some who took bad loans will get burned in a shakeout. Much more so in other areas than here."

Do you think fewer people took out bad loans in the BA (which I don't believe statistics will bear out), or that somehow residency in the BA makes one bulletproof to bad economics? I know the intangible arguments, the arguments that say there is more wealth concentrated in the BA etc. etc. But it still seems to me a bad loan is a bad loan regardless of where the home is. Even if the market just flattens in the BA all those NAAVLP's aren't going to look like such a bargain.

"I want 50% correction in my golf score! My swing is getting worse by the week. Perhaps I should just quit golf."

Don't quit. If you do that, the boomers have won. And the terrorists. And the real estate agents. And Fake P.

And we can't have that.

Cheerio,
prat

“I want 50% correction in my golf score! My swing is getting worse by the week. Perhaps I should just quit golf.”

To follow up, I have a suggestion: buy the Tour Tempo book, and then when you find which tempo suits your temperment, buy the Tour Tempo CD. It's not a miracle worker, but if you have a sound fundamental swing, it can really help.

What, this isn't the Bay Area Handicap Crash Continues blog?

Cheerio,
prat

What, this isn’t the Bay Area Handicap Crash Continues blog?

Handicap never crashes in the Bay Area.

"Handicap never crashes in the Bay Area."

There you have it. Peter P reveals himself as a shill for Big Golf Scores.

We've heard it all before:

"Handicaps never go down."
"You can curse your handicap, what can you do with a stock?"
"In this unsettled time, people want the comfort of a high handicap."
"Look at David Duval."

It's all bunk. If greenspan wasn't conspiring with Big Driver Makers to produce enormous clubs that spray balls every which way but forward, we wouldn't be in this mess. I, for one, advocate a return to the 475 yard par 5 and persimmon driver. Only when sanity and responsibility returns to the driver market will america be safe, once again, to pursue the american dream.

Really, Peter, I'm disappointed.

Cheers,
prat

"But in the BIG PICTURE, the Bay Area’s desireability trumps the power of the bad loans to cause a real “crash” here like it will in other places."

For me to poop on.

OK. I'm done. See you all in a month.

Cheers,
prat

TWIT,

Excellent!

"We're getting the band back together!"

So, since we've established beyond reasonable doubt for all rational men that Jack, Fake P and Face Reality are sand-poundingly wrong, and are probably covert fascist baby boomer real estate speculator aliens with very sharp and pointy fangs and clever little lying brains behind their narrow, red eyes... what else shall we discuss?

Did I mention that they eat babies? I'm not saying. I'm just saying. You may want to consider that when you read their postings.

Cheerio,
prat

"That was a short month Prat."

Some months are shorter than others. I'm an internet-time kind of guy.

Cheerio,
prat

A Hunting Fable

Once upon a time, there were three stalwart hunters: Face Reality, Fake P, and Jack. They were all experienced, confident and determined hunters who had many successful kills among them. One day, they decided to go hunting together in the Bay Area Wildlife Preserve.

They were all excellent trackers, who had long studied their game’s tendencies and habits, which for many years had paid off quite handsomely with many trophies. So, it came as no surprise that, before the morning was done, they had bagged an impressive number of smaller prey –mostly rabbits, grouse and raccoons. However, these kills (though more than enough to satisfy the average hunter) had only whetted their appetite for bigger, more challenging game, and so the Bullish Three (as they preferred to be known) pressed on.

Eventually, they came across a large clearing where a huge crowd of hunters was gathered. Most of these other hunters were rank amateurs, of the “weekend warrior” type –certainly not of the professional mettle of the Bullish Three. Nonetheless, despite their obvious lack of skill and experience, these novice hunters had managed to kill an even more impressive assortment of game than the Bullish Three. Some of them had even bagged elk and bison! Everywhere it seemed, big game was there for the taking, no matter how amateurish or clumsy the hunter.

The Bullish Three walked up to nearest game warden, who was so busy passing out new hunting licenses, he almost didn’t notice them. “What’s going on here?” the Three demanded. The warden briefly paused before the frenzied crowd of eager would-be hunters, turned to them and said, “It’s a Hunting Bonanza, boys! We’ve had good hunting seasons before, but I’ve never seen anything like this one! People who have never gone hunting before in their life are making out like seasoned Pros. It’s been going on like this now for five straight weeks, with no signs of slowing down. If anything, it’s been getting easier to make big kills, not harder.”

“This will not do!” resolved the Bullish Three, “If these fools can do this well, then by God we can do even better!” And so they charged off into the woods with renewed vigor and determination. Before long, Face Reality (expert tracker that he was) had spotted a set of larger-than-normal tracks. He pointed them out to Fake P and Jack. “I think we’re on to something, men!” he declared. “It looks like the tracks of a large adult grizzly to me!”

Fake P and Jack studied them carefully. “I agree they’re big, but those look more like elk tracks to me –probably a large bull elk,” said Fake P. Jack thought they looked more like bison tracks, but being the more modest of the three, politely offered, “Whatever it is, it’s gotta be huge!” All agreed this that was prey worthy of the Bullish Three. So off they went in hot pursuit…

About an hour later, the tracks were looking fresher, and the Three felt their Big Game must surely be near. Just then, they crossed paths with a large troop of Boy Scouts, being led by Scoutmaster Patrick. “Hi, fellas,” Patrick said amiably, “what’s up?” The Bullish Three briefly related their pursuit to him. Suddenly a hush fell upon the troop, and the scouts began exchanging nervous glances at one another. Patrick looked upon the tracks the Bullish Three were pursuing and considered what they had said. Finally, he spoke. “Guys, I don’t want to be the bearer of bad news here, but I feel it’s my duty to inform you that the path you are on is very dangerous. I’m no expert in hunting –camping is really my thing—but my experience in these woods (and my intuition) tells me that the path you’re on can only lead to disappointment, or even worse. I know the Hunting Bonanza seems like a sure thing, but I can assure you that hunting during times like these is very dangerous. There are far too many amateurs chasing big game out there, and the game wardens are handing out hunting licenses to practically anyone. Eventually, someone’s bound to get hurt. I can further explain my reasoning to you, if you’re willing to listen.”

The Bullish Three stood in stunned silence for a moment and then burst out laughing. They laughed so hard, they nearly lost their balance. “Ridiculous! What could a Scoutmaster possibly know about hunting!” exclaimed Face Reality. “Absurd!” agreed Fake P. Face Reality declared, “They’re probably just jealous of our success and intimidated by our great skill and reputations –jealous, bitter Campers!.” Jack offered a more diplomatic explanation. “They’re probably just inexperienced and don’t know any better, guys. They really seem sincere about believing we’re in danger –they’re just trying to do what they think is the right thing.” Face Reality shook his head in contempt and stormed off, back in pursuit of the Big Game. Fake P (still chuckling) followed close behind. Jack followed as well, though he looked noticeably less confident than before.

A while later, Jack spoke up. “Maybe we should stop and think about what they said. What if it turns out they’re right?” Face Reality sneered, “What –are you on their side now? Are you joining the jealous, bitter Campers?” “Not at all,” Jack replied, “but what if there’s some truth to the dangers the Scoutmaster spoke of?” Fake P, now having had more time to reflect on what Patrick had said, nodded in agreement. This apparent betrayal really set off Face Reality. “If you two L-O-S-E-R-S want to go join the Scouts, be my guest!” he roared. I’m going for the Big Game with or without you!” With that, he charged off, back in pursuit of the Big Game. Somewhat reluctantly, Jack and Fake P joined him, looking noticeably more worried.

By this time, it was late in the afternoon and it would not be long before nightfall would put an end to the hunt. Undaunted, Face Reality pointed to the tracks ahead of them and declared, “Look at that, boys! Those are brand-new tracks –we have to be getting close!” The Bullish Three continued to follow the tracks, and sure enough, before long they heard the low, rumbling sound of thunder coming towards them. “Sounds like a whole herd of buffalo!” Face Reality insisted. “There must be hundreds of them!” The sound of thunder grew ever louder, until it was clear that the Big Game was nearly upon them. “Gentlemen, ready your rifles and take aim!” demanded Face Reality. The Big Three took up their positions directly in the Big Game’s path.

Suddenly, a train ran over them.

A little off topic but it feels like time to add some levity to our rantings about houses.

The comment earlier:
(Some people still do not believe that we have gone to the moon. I am not comparing you to them.)

I've always wondered about this one as there are quite a few people who really don't believe the moon landing took place. There was someone from Nexus magazine (think it was the editor) who accosted Neil Armstrong yelling that he hadn't set foot on the moon but that they had used Robots instead. So...we couldn't get people to land on the moon in 1969 but we were advanced enough to create robots that could, AND they could jump and move around across the surface with pretty fluid motion. This seems *highly likely*.

Although now I think about it, if so many of us on this list are completely wrong about a bubble and the market keeps going up then we might be exiled to the island of cranky dillusional bloggers and have to spend our days arguing about the moon landing, while having tea with Elvis and the Tsar of Russian's children.

Lololololololololololo...gasp...lololololololol....hiccup.....lololololo....holding stomach...lolololololololol......tears....

...and thanks for the bedtime story HARM:)

Well…..That should just about put the final period on this blog.

Aaaaaaaaaaaaaaaaaaaaaaaw Mom, I want another story!