patrick.net

Not much has been said so far about the effects of REFINANCING or HELOCs on the borrower's no-recourse/anti-deficiency standing. As I recall, when s/he refinances, the borrower generally loses the no-recourse protection --even in CA. Is this assumption wrong?

As DinOR likes to say, when you refi your house, you are essentially "re-buying" it. Since at least the clear majority of CA mortgagors have refi'd at least once in the past 10 years (some estimates put it as high as 90%), this means most CA mortgagors no longer have this protection. Also, the debts from any cash-outs and HELOCs remain even after foreclosure. So, basically, most CA FBs will have to file for BK, unless the banks don't feel they are worth pursuing (due to lack of assets, which is likely for most).

Is this about right?

From what I gather reading OO, FAB, Randy H and those with direct experience, the 2nd lender’s claim gets wiped out when the first mortgage-holder takes back the property (either as DOT or the less common “judicial foreclosure”)?

To clarify, I meant "the 2nd lender’s claim gets wiped out when the first mortgage-holder takes back the property IF the auction sale does not bring in enough money to satisfy BOTH loans." Obviously, if the auction sale generates enough $$, both lenders get made whole.

Harm, right on both posts. Refis, and HELOCS are recourse loans, just like a car loan.

I love the pissed off wife stories. I read a story a couple of days ago about some guy in Germany how chainsawed his house in half and took his half away on a forklift.

who...sorry typo

I cite my data here. The last time FAB and I had this argument he failed to produce contrary data. That ownership is more expensive than renting in equilibrium is widely accepted and well established. FAB may be implementing his own form of hedonics.

Home Ownership Costs compared to Renting, 1975 - 2005, HSBC. Method is real price adjusted for inflation, including holding cost and real value of future debt service costs (rounded, you can pull significant digits from the spreadsheet):

[MSAD = San Francisco-San Mateo-Redwood City]
1975: 0.9
1976: 1.1
1977: 1.2
1978: 1.3
1979: 1.7
1980: 2.1
1981: 2.4
1982: 2.1
1983: 1.9
1984: 2.0
1985: 1.9
1986: 1.4
1987: 1.6
1988: 1.8
1989: 2.1
1990: 2.1
1991: 1.8
1992: 1.6
1993: 1.4
1994: 1.5
1995: 1.4
1996: 1.5
1997: 1.5
1998: 1.6
1999: 1.6
2000: 1.7
2001: 1.6
2002: 1.5
2003: 1.4
2004: 1.7
2005: 2.3
(2006): 3.1

[MSAD = Cleveland-Elyria-Mentor, OH]
1975: 1.0
1976: 1.0
1977: 1.1
1978: 1.3
1979: 1.4
1980: 1.5
1981: 1.6
1982: 1.4
1983: 1.2
1984: 1.3
1985: 1.2
1986: 0.8
1987: 0.9
1988: 1.0
1989: 1.2
1990: 1.2
1991: 1.0
1992 .. 2005: 0.9-1.0

Hello Kitty,

You're kidding, right? 20, 50K underwater and they walked? In that case I can't blame you for having a jaundiced view.

And now I have to tread VERY carefully.

Since it's been a decade-long + all out MEW orgy many of us may have lost sight that when something, anything falls out of fashion in CA... it falls HARD! Given HK's summation of his experiences in the mid 90's I'm doubling down on my "renting snobbery" position! :)

Looking for "way below" figures... Even Gary IN isn't "way" below 1.0.

[MSAD = Atlanta-Sandy Springs-Marietta, GA]
1975: 1.1
1981: 1.7
1985: 1.3
1989: 1.0
1993: 0.8
1997: 0.8
2000: 0.9
2005: 1.0

[MSAD = Gary IN]
1979: 1.3
1983: 1.7
1985: 1.1
1987: 0.7
1993: 0.7
1997: 0.9
1999: 0.7
2003: 0.7
2005: 0.8

Toledo: bottom 0.7 in 1985, 1993. Avergae 0.8 after 1984, 1.3 before.

Detroit-Livonia-Dearborn: bottom 0.7 1976-77. peak 1.3 1981. post 1984 average is 0.7. post 200 average 1.0.

Chicago-Naperville-Joliet: 0.9 1975, 1.5 1985, avg. 1.2

Mobile: 1.5 1984, 0.9 1993, avg. 1.0

Pittsburgh: 0.8 1985, 1.2 1981, avg. 0.9

Youngstown-Warren-Boardman: 0.9 1985, 0.6 1993, avg. 0.7

Ok, there we have one I'd call "way" below 1.0, at 0.7 post 1985. That is Youngstown OH. I didn't go through every MSAD. But my point is made, I trust.

http://www.dqnews.com/RRBay0307.shtm

Bay Area DQ numbers are out.

Randy,
Thanks for the data - interesting stuff as always.

One thing I notice is that for the SF numbers, the ratio "normalizes" to what looks to me like the historical average within 5 years from 1981 -> 1986, and it does so in 3 years from 1989 -> 1992.

I wonder what time frame it will take this time around? Or is it "different" this time? :)

From the DQ release:

"But we're also seeing the aftereffects of the historic housing boom of recent years. Some people were motivated by fear - fear of being priced out of the market, missing out on a 'great investment' or a great mortgage rate. They rushed to buy sooner than they otherwise would have, and that stole demand from today. It's tough to quantify, but we think it helps explain the slowdown."

Fear of being priced out, sigh.

That ownership is more expensive than renting in equilibrium is widely accepted and well established.
Haven't we already been around this mulberry bush a couple of times? Randy's HSBC data is aggregate for an area. FAB is talking about like to like comparisons (renting the SAME house versus buying it). Both are useful for showing how out of wack the market is.

I had a big heap of housing price/income charts on my blog about a month ago:

http://www.burbed.com/2007/02/16/how-the-bay-area-caused-home-prices-to-go-up-nationally/

SQT,

No offense, but a MB is the LAST guy I would go to for an opinion on that! Or opinion... period. These guys/gals (for the most part) have skill sets that are slightly by above your avg. P/T bank teller and need constant direction. They regularly lean on the expertise of the title company and/or anyone they can stop in the hallway.

eburbed,

Shoot me a line, DUDE! :)

EBGuy,

True, except that there already exist quite well refined like-to-like aggregate data in the form of the Case-Shiller Index. Comparing CSI to aggregate real rents still produces right around 1.0-1.2 for "less prime" and 1.5 for "prime" parts of the country (where CSI is tracked). CSI does show a pronounced period of widespread less-than-1.0, which occurred during WWII. The HSBC data is 1975- so it doesn't include the Depression and War. I accept that things are based on reasonably different fundamentals in the "post-post war transitionary period"

Picking samples out of realtor.com is useless and misleading unless FAB is willing to apply statistical rigor to that sampling, and present the data to us in aggregate with methods & descriptive figures.

Randy H,

StuckinBA and myself are erecting a shrine to "Saint Shiller" so no need to sell US on the validity of his data! Good man. That isn't to say that I dismiss FAB's version in an off-hand fashion either. Afterall his direct involvement goes back to around 1975 as well.

Thank you Randy.

Let me use my own apartment in downtown Boston as an example (if I may be so bold).

Rent = $2400/month

Sale price = $700,000 (my estimate)

P+I = $4200/mo (approximate 30 fixed, neglects downpayment)
T = $600/mo property tax - $1200/mo interest deduction
I = $200/month

PITI = $3600

Ratio = 1.6

I can then comparing this to the historical values for Boston from your HSBC chart?

sorry, PITI = $3800, ratio = 1.6

(we rent this place by the way, couldn't afford to buy it)

It's good that "it's different here" in the Bay Area because otherwise this chart would scare me...

Oh ... interesting sentence in DQ's release.

adjusted for inflation, current payments are 14.2 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 9.9 percent below the current cycle's peak last June.

Are they admitting that there is a cycle (as in up-down vs a plateau) and last June was a peak ? Meaning we are past the peak ... meaning price are declining ?

>Shoot me a line, DUDE!

Huh? If you want to contact me - my email address is on the front of my blog.

It’s good that “it’s different here” in the Bay Area because otherwise this chart would scare me…

Only 56%?

I wish it had been higher.

I just saw that Hilary Clinton, the pro-choice neocon, has a plan for helping people who have gotten in over their heads with their mortgages. What the exact plan is...well, I'm sure they aren't finished with their polls yet.

She also has a plan to get us out of Iraq by leaving large numbers of troops in Iraq to 'hunt Al-Queda and protect Israel'.

Does this woman do polls and then come up with policy the minutes the poll comes in? Gee, some people are against the war, and some people are for it and I'm being lobbied by PACs to stay hawkish, so we'll leave Iraq by staying there. No one will notice I'm sure. And hmmm, people seem a bit spooked by their debt, we'll have to talk about that a bit....

I am not even pro-choice.

Hello Kitty,

Even in 1996, 20k was NOT that big a deal!

I guess the way some people "win" is that if they *can't win.... well then they just don't play! I know "I" always take a special shine to "those" kinds of "winners"! Man, the slightest headwind and they're throwing in the towel?

Okay folks, here is how HSBC gets their rent data and adjusts it in an attempt to compare the "same" 3 bedroom rental to a 3 bedroom house. Personally, I think they spit out a good metric for a region (as in -- if the ratio is within historical norms, time to start thinking about buying). I feel less confident about applying the ratio to an individual home/apartment (like Boston Transplant is trying to do above).

From:
HSBC Global Research
A Froth-Finding Mission: Detecting US housing bubbles
Appendix C
Adjusting for bedroom size
Because we utilized the HUD’s rent-data for two bedroom units, we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised the level of all rents by 30%.
Adjusting for utilities
Since the HUD’s data are estimates of gross rents, which include the cost of utilities, we also needed to make an adjustment in order to only reflect the
shelter component of the rent costs. We reduced the level of rents by 10% to strip out the utilities component of gross rents.

DinOR, I am handling Shiller's beatification process (please let me know if he appears in the waterspot on your ceiling :-) )

SQT,

Funny! Any MB that comes out on the other side of this after 2 or 3 or 5 years of sucking it up can THEN tell me they're a MB! Thus far they've had nothing but the wind at their backs and fair sailing.

Short sale? Foreclosure? Rent2Own? I hate to say it but I see very little distinction there. It's just various stages of gangrene. Uh.... does it smell like "almond"? MEDIC!

The SF Chronicle had a pretty good article on non/recourse loans. Not sure it really clears up the refi issue.

A recourse loan generally means the borrower is personally liable for repayment. If the lender takes over the house that is worth less than the debt, the lender can go after the borrower's other assets to pay the difference.
A home equity loan or line of credit is a recourse loan. So are consumer loans secured by your house.
In most instances, if you refinance your house, the new loan is a recourse loan, says Michael Pfeifer, a real estate attorney with Pfeifer & Reynolds.
However, Roger Bernhardt, a professor at Golden Gate University School of Law, says there is no California case law that definitively establishes this as fact.
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/06/05/BUGG5D3FNS1.DTL

EBGuy,

Well.... yes, YES! Now that you mention it there does appear to be a scruffy beard and dominant brow!

SFW,

Wonkette can be priceless! The comment by "Your Future Landlord" about keeping enough in the kitty for "crime scene cleaners" (after FB blows their brains out in desperation) well..

Well, Greenspan the mouth, is still talking. Now he is saying the subprime market problems will spill over to the economy. He hasn't admitted his part in this fiasco . He has no shame.

Now AG feels the need to chime in about the subprime meltdown:

http://money.cnn.com/2007/03/15/news/economy/greenspan_subprime.reut/index.htm?postversion=2007031515

BOCA RATON, Fla. (Reuters) -- Former Federal Reserve Chairman Alan Greenspan said Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.

Separately, a survey found that most economic forecasters think subprime woes will spill over into the broader mortgage market, adding that they expect a corresponding fall in home prices in 2007, The Wall Street Journal reported on its Web site Thursday afternoon.

Property managers will bankrupt you so dont think thats viable from CA.

Are property managers that evil?

I was always intrigued by rental properties as a business, but I don't have any handyman skills.

@Boston Transplant,

As EBGuy stated, be very careful when doing direct comparisons between aggregate data (macro) and specific instances (micro). The trick is matching the house you're trying to compare to the method for aggregation -- that is, whatever their "averaging" to. The HSBC is far too macro to do a very specific comparison. I was using it merely to defend my statement that by and large ownership is historically always more expensive than renting, from as a purely financial analysis.

One thing you left out in your comparison equation was holding-cost risk for ownership. You need to discount the risk such that renting is lower risk-reward and ownership is higher risk-reward, because owning an asset called a house is not risk free, and is more risky than renting. Similarly, you forfeit capital gains in excess of risk-free returns by renting. (As we discussed in the last thread, you could also carefully engineer a portfolio in which you invest your saved-PITI over rent that roughly mimics the return and volatility of housing prices. Good luck with that.)

Let me use my own apartment in downtown Boston as an example (if I may be so bold).

Rent = $2400/month

Sale price = $700,000 (my estimate)

P+I = $4200/mo (approximate 30 fixed, neglects downpayment)
T = $600/mo property tax - $1200/mo interest deduction
I = $200/month

PITI = $3600

Ratio = 1.6

I can then comparing this to the historical values for Boston from your HSBC chart?

HelloKitty,

I agree with your analyses, including the Prop 13 one. Note to everyone, this is *not* going to turn into YAP13T (yet another prop13 thread) ...

The real rent yields in the inverted own-to-rent areas are very low, or even negative in some cases (like rural Indiana). The reason is these areas, even though rents are higher than ownership costs, are afflicted with regionally depressed incomes and a regional inflation phenomena (these areas fail to inflate along with the rest of the country, effectively weakening their purchasing power compared to ours).

As to rental yields, this implies much larger scales of operations to create profitability, because many things are priced nationally, not regionally. And thus the higher rents as a factor rental property ownership being comparatively more expensive (even while it is absolutely less expensive).

And residential rental businesses don't scale well, as a general rule of thumb. It is possible to do it in certain areas like big cities, but there is no way to pull it off in rural Indiana -- it's not worth the cost of scale and you'll never be able to attract quality management for what you'd be able to pay them to run the business. Of course, never say never. Someone could ostensibly create a "Wal-mart of rentals" business and spread it across Wal-mart country.

If someone here has a couple billion sitting around they're looking to put to work, I'll even volunteer to move somewhere like Evansville to head the thing up. $2bn ought to be a reasonable seed round.

$2bn ought to be a reasonable seed round.

Can't you buy like the whole state for $4B?

No, the big race track is kinda pricey. But that's kind of the point. You'd have to buy a reasonable chunk of the housing stock to gain enough market power to make such an operation worth while at scale. But like I said, Wal-mart did it in retail when no one thought such was practical. Never say never.

Randy H Says:

> I cite my data here. The last time FAB and I had this argument
> he failed to produce contrary data. That ownership is more
> expensive than renting in equilibrium is widely accepted and
> well established. FAB may be implementing his own form
> of hedonics.

Then EBGuy Says:

> Haven’t we already been around this mulberry bush a couple
> of times? Randy’s HSBC data is aggregate for an area.
> FAB is talking about like to like comparisons (renting the
> SAME house versus buying it). Both are useful for showing
> how out of wack the market is.

I forgot that we debated this data set before and I now agree with Randy that the multiple of renting in the Tenderloin vs. buying on Nob Hill or renting in Shoreview vs, buying in San Mateo Park or renting in North Fair Oaks vs. Buying in Emerald Hills will be well above 1.0

Since there is no accurate source of “average” or “median” home rents HSBC “utilized the HUD’s rent-data for two bedroom units (AKA Apartments), we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised the level of all rents by 30%.”

P.S. I just went to the link and the HSBC data includes a lot more than just PITI in the “cost” of owning that push the multiple even higher…