patrick.net

Completely OT

EBGuy,

after three weeks of carrot in a row from Full Belly, now I start to comprehend what you meant by "cannot finish".

We managed to finish all our CSA veggies every week except the carrots, which are piling up quietly in a forgotten corner.

> Pleading poverty with and income of $250k — that’s just B.S.

I am not pleading poverty ...

I am very seriously considering buying a home which is not overpriced.
My view is for 750K I should able to afford a 3bed/2bath in a good school district. My house hold income is 250K but we will only count one income.
My credit score is near 800.

Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.

Many of these people will lose their properties in foreclosure and then stagger into bankruptcy under the weight of a sizable tax bill. While Congress has granted some tax relief to people who lose their primary homes, there is no such aid for those who fall behind on payments on a getaway condo in Las Vegas, a retirement home on the Florida coast or an old house that they are renting out for income.

Bankruptcy lawyers say they are seeing a wave of foreclosures among owners of second homes in such a position, owners who thought they had found sound advice for financial security.

Two years ago, Lilia Garcia and her husband, Jesus, bought their dream house in Linden, Calif., for $535,000 and financed it in part by taking out a bigger loan backed by their previous house in nearby Stockton. They decided to hang onto the Stockton house and rent it out, believing that it would more than pay for itself and could be sold years in the future to help pay for college for their two children.

May 30, 2008
Lose Homes, Pay More Tax
By JONATHAN GLATER
Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.

Many of these people will lose their properties in foreclosure and then stagger into bankruptcy under the weight of a sizable tax bill. While Congress has granted some tax relief to people who lose their primary homes, there is no such aid for those who fall behind on payments on a getaway condo in Las Vegas, a retirement home on the Florida coast or an old house that they are renting out for income.

Bankruptcy lawyers say they are seeing a wave of foreclosures among owners of second homes in such a position, owners who thought they had found sound advice for financial security.

Two years ago, Lilia Garcia and her husband, Jesus, bought their dream house in Linden, Calif., for $535,000 and financed it in part by taking out a bigger loan backed by their previous house in nearby Stockton. They decided to hang onto the Stockton house and rent it out, believing that it would more than pay for itself and could be sold years in the future to help pay for college for their two children.

“We wanted to make it an investment,” Ms. Garcia said. “I should’ve sold it.”

But the Garcias, who earn about $65,000 a year, fell behind on their payments after their tenant moved out and the interest rate on their mortgage rose, bringing their monthly payments on the rental home to nearly $2,700 a month, from less than $1,000. They view foreclosure as inevitable; they have not paid the mortgages on either house for months and now rent a home in Linden.

Then they discovered that they could expect a painful tax on the rental house.

Like many others, the Garcias borrowed more than their homes are now worth. The difference between the amount they borrowed and the rental home’s sale price in foreclosure will ultimately be considered taxable income as forgiven debt.

If the rental house sells for $160,000, which is about what they paid for it in 2003, they may still owe tax on $120,000 — the difference between the sale price and the $280,000 they borrowed against it over the years. That could mean a tax bill of more than $30,000.

“I just thought we would file for bankruptcy and everything would be clear. We’d start all over again,” said Ms. Garcia, who is a medical assistant in a doctor’s office in Stockton. Now she and her husband are waiting to see what price the house brings before seeking bankruptcy. “It’s bad.”

J. Scott Bovitz, a bankruptcy lawyer in Los Angeles, says the problem is widespread. “I’ve seen people not just buying properties to live in, they’re buying properties to become mini-Donald Trumps.”

Even if the condition of the economy generally improves, borrowers will face the double problem of foreclosure and then taxes, unless home prices begin to climb rapidly. And no one sees that as likely.

“My suspicion is most lawyers, even bankruptcy lawyers, aren’t focused on this issue,” said Charles Hastings, a bankruptcy lawyer in Stockton who is advising the Garcias on the tax ramifications.

Congress, deciding the tax impact was just too much for the nation’s already distressed homeowners, passed limited relief at the end of last year. Under the Mortgage Forgiveness Debt Relief Act, which is effective from Jan. 1, 2007, through Dec. 31, 2009, a homeowner does not have to pay tax on debt forgiven by a lender — if the loan is backed by the property the homeowner lives in.

The boom in real estate in recent years prompted a great many people — though no one seems to know exactly how many — to jump into the market with additional real estate. Some did so a few times, buying multiple properties with the hope of selling them for a quick profit. Several bankruptcy lawyers, who say they are busier than ever, compare the real estate frenzy of recent years to the California gold rush of the 1850s.

According to the National Association of Realtors, there are about 7.5 million vacation homes in the country, about 10 percent of the number of owner-occupied homes. According to the association, from 2002 to 2007, the number of vacation homes rose 18 percent, more than three times the growth in the number of owner-occupied homes and the growth in investor-owned units.

The financial distress wrought by ownership of second homes and investment properties is hard to quantify but significant, according to the association. It ripples through markets that have a lot of second homes as the full-time residents there find their home values falling in tandem.

While 60 percent of the foreclosures in Las Vegas last year involved properties held by nonresidents, in the first three months of this year the proportion has reversed: 60 percent involve owner-occupied houses, according to Applied Analysis, an economic and fiscal policy research firm in Nevada.

“Investors are easy in and easier out, and who’s left holding the bag are the individual homeowners,” said Jeremy Aguero, principal analyst at the company.

Buyers of second homes seem to have thought that if they did not borrow against these homes, they were wasting equity, said Cathleen C. Moran, a bankruptcy lawyer in Mountain View, Calif. “It comes from looking at your house as a piggy bank,” Ms. Moran said. People borrowed against homes without realizing that the debts would become “a bombshell that’s going to go off under you at some point,” she said.

For owners with a potential tax bill, there is one way to minimize the damage. Alan J. Fisher, a bankruptcy lawyer in Boca Raton, Fla., said that negotiating with a lender could prove beneficial. In one of his cases, he said, a lender agreed that foreclosure “fully satisfies all obligations under the loan.” With that statement, he hoped, there would be no outstanding unpaid debt reported by the bank that the Internal Revenue Service could treat as income.

But Mr. Fisher said he was not sure how the tactic would hold up in court. “I sure don’t want to be the one litigating it.”

A coworker of my wife works in financial services and is upside down in her home, owes $60K more on it than it's work, got a crazy ARM that is about to reset, and even with two very nice incomes is in trouble. This is a problem of national education. Virtually nothing of money management is taught to citizens. And our culture encourages overspending to keep up. If you lack the fancy goodies, you're a "loser". We're a nation of poseurs living above our means, where an honest living is for suckers. Even though my wife and I earn enough to bank 50% of what we take home, and will be set by the time I'm 50 y/o, I'm constantly prodded by family and others to do more with my life and earn more. A sick society is the problem. We watched a few too many episodes of dynasty in the 80's.

The Federal Trade Commission has announced a $600,000 settlement with several of the private investigators involved in a 2006 Hewlett-Packard spying case.

Four private investigators, Joseph Depante, his son Matthew Depante, Cassandra Selvage and Bryan Wagner, agreed to an injunction forbidding them from obtaining individuals' phone records without consent in addition to the financial settlement, according to the FTC announcement.

Matthew Depante and Bryan Wagner were defendants in the 2006 HP case. They allegedly obtained the personal phone records of several journalists and HP board members by "pretexting," falsely identifying themselves as the owner of a personal or cell phone and providing some personal information to the phone company to obtain the records of a particular phone number. The scandal led to the resignation of then HP Board of Directors Chairwoman Patricia Dunn.

The settlement was filed in a federal court in Florida.

The judgement comes just over a year after a judge dropped all charges against former Hewlett-Packard Co. board Chairwoman Patricia Dunn, who was accused of fraud in the boardroom spying scheme that rocked one of Silicon Valley's most respected companies.

Former HP ethics chief Kevin Hunsaker and two private investigators also avoided jail time after their lawyers entered no contest pleas to misdemeanor charges in Santa Clara County Superior Court.

All four defendants had initially been charged with felonies, including identity theft and fraud, for their roles in a scheme to unmask the source of boardroom leaks. Investigators' tactics included "pretexting," or pretending to be someone else, to obtain the calling records of directors, employees and journalists.

The original charges carried hefty fines and prison terms.

HP's investigation, which took place in 2005 and 2006, erupted into a national scandal after HP disclosed that detectives it had hired obtained the private phone records of directors, employees and journalists.

The case made a household word out of "pretexting," a shady tactic in which detectives use their targets' Social Security numbers to fool telephone companies into divulging their detailed call logs.

Dunn ordered the investigators to find the source of the leak after a board member gave company information to a reporter. But she said she didn't know the detectives would go to such extremes.

She resigned in September of 2006 at the height of the scandal.

My view is for 750K I should able to afford a 3bed/2bath in a good school district. My house hold income is 250K but we will only count one income.
My credit score is near 800.

In reality, the market does not care about your view.

Why don't you count only interest income, if you want to be so cautious?

>> In reality, the market does not care about your view.

Pointless statement ... everybody knows this.

and Peter P, please try to understand that there is NO MARKET in US. It is all manipulated.

The Federal Reserve engages in constant manipulation of the overnight funds market. They manipulate that market to keep the overnight interest rate at or near their target rate (the Federal Funds Target Rate). Aside from that our markets are driven by real trading activity - not manipulation.

Small pieces of a specific market can be manipulated for a short period of time, such as a specific stock (a classic example is a penny stock with small trading volume). There have been numerous instances of this, and there is probably some sliver of some market being manipulated at any given time. However, it is financial suicide to try to manipulate any of the larger markets for any sustainable period. And when someone does try this they lose a fortune because they must bet against the natural market to push the prices to an artificial level (up or down). When they stop their manipulation the market price goes back to normal and they are left sitting on huge paper loses.

Manipulation is generally insignificant to the broader market.

"It will not be until AFTER interest rates have been
raised substantially and then begin to reduce again
will we see another substantial increase in the value
of real estate in the US."

Not true. Home prices rise in times of rising or falling interest rates. Interest rates are a secondary factor in home price increases.

If interest rates are so important then why do home prices go up rapidly in some places while holding flat or even falling in others at the same time? The interest rates were the same but the price movement was dramatically different.

Like all markets, housing prices are driven by the relative balance between supply and demand. Currenly the supply is excessive relative to demand. It will take a while to clear the excess supply. Lower interest rates will influence this but not drive it.

When the market was rising demand was temporarily increased by many people who bought on a speculative basis. Many did not care what the interest rate would be because they believed the rising prices would more than offset the interest cost. If they thought they could cover the cash flow for a couple years before hitting the jackpot they were in.

I'd like to get some comments on long-term Bay Area trends. From my perspective many employers are starting to react to the fact that future population growth from the fortress can only go east or south. I think they see the reality that to get affordable labor they have to relocate from the fortress. Working in commercial real estate I've seen numerous examples of peninsula companies signing or looking to sign leases in the East Bay. Take for example the solar industry that appears to be a key industry in the Bay Area's future. Where do you think all these companies are setting up shop?

# skibum Says:
I’ve come to the conclusion, which I know others have made before, that prices in the Fortress are not coming down until there are major job losses in the tech industry. Those job losses will be inevitable (normal business cycle, etc.), but even with the overall recession picking up steam, I don’t see a real effect here for another 1-2 years.

I think that is pretty much understood, at least on this forum.

We let go of 18 contractors in my team in March. Only 4 of them are still in the area - the rest of them moved out to jobs outside the bay area (based on what I see from linkedIn).

PermaRenter,

>Virtually nothing of money management is taught to citizens.

Are you joking? Of course one cannot teach impressionable children that there are whole industries out there that exist mainly to fleece them of their money, and that the buyer had better beware. Teaching this would be heretic and "anti-business". There is no bigger sin in the US than being "anti-business", in case you hadn't noticed. Also, we cannot teach anyone that regulation (yes, regulation, the R-word) exists mainly to control how Wall St plays with Other People's Money. That would be Co*munism, and we all know how bad THAT is .

Ouch - anyone notice the spike in 30 year Jumbos now at 7.21%

http://www.bankrate.com/

In Chicago, that is a purchase with loan amount above standard conforming of 417k (no increase here like the coasts in the recent bail out bills!).

http://www.fanniemae.com/aboutfm/loanlimits.jhtml

Zepher says:
Interest rates are a secondary factor in home price increases.

Possibly. But the availability of credit may have a more pronounced effect. House prices may not be driven down by a 1%-2% rate increase, but I believe higher downpayments and outright credit denials will noticeably help push priced down. A left shift, if you will, in the demand curve.

Virtually nothing of money management is taught to citizens

I remember taking a "Time Value of Money" lesson in an 8th grade econ class. But even if such courses were competently and widely taught, would it matter?

People already know that paying $500 over twelve months at an easy credit store for a $300-at-Wal-Mart item is foolish. Same with waiting all night outside an Apple store to overpay for an I-Phone. Ditto the 7 year auto loan, maintaining a credit card balance, and generally spending more than one earns.

Teaching kids finance is a good idea, but I think the real issue is financial disipline. Gotta break them out of the "take it home today" habit.

I would not angrily denounce "society" for any individual or collective lack of judgment. You will need to prepare your kids to live in "society," where they will face pressure not just to overextend, but to smoke, drink, do drugs, and put out.

Teaching kids finance is a good idea, but I think the real issue is financial disipline. Gotta break them out of the “take it home today” habit

Why? We need willing consumers to help grow our economy. I am against teaching those who are not interested in learning.

Best evidence of global warming yet:

http://tinyurl.com/3qbae4

Best evidence of global warming yet

LOL!! Either proof of global warming or of better waxing techniques.

Paul says;

Ouch - anyone notice the spike in 30 year Jumbos now at 7.21%

Encouraging. Let's hope the "spike" is just the start of a trend up.

I for one - living off the interest on savings - could sure appreciate some more "Volkeresque" interest rates right around now. How about setting a floor under those interest rates set by the Fed - maybe CPI + 2%? :?

How about setting a floor under those interest rates set by the Fed - maybe CPI + 2%?

No. Then they will find a way to revise the CPI all the way down to 0%.

The Merc is such a joke. Hard to be sympathetic for the first two famililes in the story.

http://www.mercurynews.com/ci_9444900

cb :

The Merc story rhymes with what I have been saying ad nauseum.

Even in these Fortress areas, these high salaried people have stretched thin. Earning so much money - over 200K a year - should let one sleep peacefully. But that doesn't happen when you buy a 1M+ home. If not that then you became a slave to a home that you don't really like.

Unlike many people here who think job recession is necessary for prices to go down, I have argued that higher interest rates would be enough too. But so far neither has happened. So the debate is yet to be settled. But we already are seeing effects of tighter credit conditions even in Fortress. Overbidding is almost absent - unless the house was deliberately priced low to start that.

I have to admit my total surprise - people are still buying at these prices in Cupertino - a market I closely watch. Still willing to give up so much quality of life and future savings for an unshaken belief that prices will not go down here. And still not realizing that even if prices hold steady, the real cost of owning will actually leave them poorer when they need the money most.

The negative effects of this bubble are so long term that they are beyond the horizon for most people to see.

>> Even in these Fortress areas, these high salaried people have stretched thin. Earning so much money - over 200K a year - should let one sleep peacefully. But that doesn’t happen when you buy a 1M+ home.

This is exactly what I said before .... We are earning 250K and priced out of Cupertino housing SCAM .... renter in ZIP code 95014 (Garden Gate School)

"Unlike many people here who think job recession is necessary for prices to go down, I have argued that higher interest rates would be enough too."

I totally agree with this.

People will continue to buy when they feel more comfortable to buy than not to buy. The fear of inflation may as well balance out the cost of higher interest rate.

Job fear is entirely different.

>> People will continue to buy when they feel more comfortable to buy than not to buy.

Let them go to hell ..... adios amigos ....

Jus saw a used condo opposite Cupertino Library ... list price 999K.

The Merc story is a joke because the first family stretched thin to buy a 1200 s.f. cottage in Menlo Park which likely costs over 1M. The second couple chose to become a single income earner because one of them started a new company to try to strike it rich. Cry me a river really.

I would never send my kids to a Cupertino school even if I don't have to pay a mortgage. There are many alternatives; for example, many areas that has good K-8 school has less of a school premium. You can just live there and pay 4 years of private school and saved a bundle.

My wife has a co-worker who sent her kid to Harker for kindergarten and complained that they have no money (no sh*t when kindergarten costs over 20K), when I lived in Canada, I remembered all the private school kids were pretty rich, there aren't many working/middle class families that send their kids to private schools.

I just bought a one year old used car so I asked a guy who I used in the past to come out to detail the car, he was boasting how he just bought a house in Menlo Park for over 1M but it was only 1200 sq. ft.

Also, if you make 250K for a household, why not rent, you will be pocketing some serious change each month.

@OO

The auto loan rates are really low. For certain types of cars (BMW, Infiniti), you can get rates from 1.9 to less than 5%. I belonged to the HP credit union (where I worked many moons ago), they promised loans rates like 4.75% for 60 months. Live a little and get out of the Asian stereotype of Camry's and Accords :)

I wish Toyota would make a 2-ton car with aluminum space frame. :(

Cartels generally die off. Indonesia - home of Royal Dutch Shell Ltd. - has had enough and has pulled out of OPEC.

www.msnbc.msn.com/id/24856026/

StuckInBA,

The negative effects of this bubble are so long term that they are beyond the horizon for most people to see.

This is a very key point that I believe will take on a much larger significance when historians look back upon this period. Combine a general ignorance of personal finance in the majority of the population with a planning horizon set so far into the future that it shakes loose even those with a rudimentary grasp, and I'm not surprised with the stories that are hitting the headlines these days. When I pointed out to my wife we that could settle in an 1860 sf St. Tropez home in the south of France for the same amount many far more pedestrian metropolitan US cities' realtors are claiming is fair value for tract homes or shoddily-built recent construction "custom luxury homes", she readily agreed with me to start looking outside of the US for a permanent home as it is apparent to me now that the US monetary leadership will attempt to save the REIC at the expense of the currency and wealth of the nation. Even with the infamous tax loads of these offshore locations, preliminary analysis indicates to me that we would pay roughly the same, for a better value; there are many aspects I don't like about France, but for a 2-3X difference in what I would expect to pay in the US for the same cachet, I'm finding I might be willing to overlook those undesirable issues.

Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic ... The April total works out to about one in seven previously occupied homes available for sale nationwide.

... By cutting prices, lenders have managed to increase sales of such homes sharply in recent months in some cities hit hard by foreclosures ... Mark Zandi, chief economist at Moody's Economy.com, forecasts that the inventory of REO homes won't peak before the end of 2009.
...
The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers.

The lenders were slow to reduce prices at first, apparently hoping for "better market conditions". Now some lenders are getting aggressive as they realize that holding REOs means even greater losses as prices continue to fall.

From anecdotal evidence, it appears the lenders are being aggressive on pricing at the low end, but are still reluctant to discount mid to higher priced homes. This will probably change as the REOs continue to pile up at the banks.

Price expecatations go a long way in setting prices.

That little piece in hte Merc is showing people what it is like to count on 250k combined income to buy what was intended to be a tract home near a major emplyment center back in the 50s when it was built.

Back then there was no where near the kind of pressure on families just to meet their housing needs as there are today.

Even I these boards I am stunned by people saying, "I expect to pay $750k for my home in San Jose."

Ummm, no.

Change those expecations.

The sacrifice to spend that kind of money on a home should mean a premium home in a premium location. The standard should not be dual income just to cover expenses.

Only New York matches the low quality it the high prices of the Bay Area, and the finance job sector had to overpay its emplyees to do it. And the wheels have come off that bus. Leakage to Wall Street is stemmed and Manhatten shouldbe poised for a flop.

Even if the Bay Area is 'special'. I think that the outlaying areas can be at least as special as the penninsual proper. Indisty should migrate to cheaper areas, even if we do not see the flight to Colordao and Arizona as we have seen previously.

If a couple makes $300K and finds it hard to survive in BA, there's something wrong with that couple, not with BA. If they just pay rent, they can easily find a $3K place that is worth over a mil in asking price. Then, they can sock away a substantial portion of their income even if they go Whole Foods, imported car, European vacations etc all the way.

If a couple makes $300K and finds it hard to survive in BA, there’s something wrong with that couple, not with BA.

Even with 300K, one cannot comfortably afford a "regular" house (1.2M) in a decent area.

Moreover, Bay Area is quite ugly for the price. It is not Left Bank. It is not Lake Geneva. Mind you.

If they just pay rent, they can easily find a $3K place that is worth over a mil in asking price.

How? Perhaps a 1M contractor's special? ;)

A nicer 2/2 apartment in Mountain View with good amenities will cost $3200/month.

We are paying less, but our rental has flimsy everything. Besides, it is on a busy street and with underpowered air-conditioning.