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Inside the mind of a homedebtor

By Peter P   2006 Jan 24, 11:54am   2 links   12,005 views   139 comments   watch (0)   quote      

Now just imagine that you are a homedebtor... you have recently spent 700K on a crappy walk-up condo... you have a 80/20 mortgage with an "interest only" feature... recent comps indicate that it is "worth" 5% less than your purchase price... inventory appears to be piling up... what is going through your mind right now?


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100   Zephyr     2006 Jan 26, 2:12pm  ↑ like   ↓ dislike   quote    


While flippers do have a disproportionate affect on the market, they are a small percentage of the buyers and owners. There are a ton of legitimate buyers of second homes, and there are enough buyers of rental properties to enable 30% of the population to rent from these landlords. Most are not flippers. Flippers buy and then sell inside a matter of months – often without even getting a tenant. In addition, just consider the math – if the average duration of ownership for a home is seven years, then flippers could only be a tiny percentage of the total. Try the math…

Assume that the world were half flippers and half long-term owners, and all the long-term owners held for 20 years while the flippers continuously bought and held for three months. During a 20 year period the long-term owners would each have owned one home, while the flippers would have each owned (and sold) 80 homes for a total of 81 homes owned. The average duration of ownership would be just under six months (40 years of ownership divided by 81 homes owned). However, the average duration is about seven years.

So you see it is mathematically impossible for the number of flippers to be anything close to half of the market for any length of time. In fact, the math only works using a tiny percentage on a long-term basis, or as is really the case, a modest percentage on a short-term basis.

Soon the flippers will all be gone. Some rich and some flat broke. They (or a new crop) will reappear when the market nears its next cycle peak many years from now. I have been through four real estate cycles during my adult life. The flippers have been there for every peak, doing essentially the same things each cycle.

101   Zephyr     2006 Jan 26, 2:33pm  ↑ like   ↓ dislike   quote    

San Francisco RENTER,

No, I have no affiliation with Zephyr Real Estate or any other real estate entity (nor am I affiliated with the Amtrak Coastal Zephyr or the Zephyr automobile). Zephyr is just a name that sounded fun and does reflect my pattern of posting activity – I am here like the wind for a while and then I am gone for a while. BTW, a Zephyr is a mild wind from the sea – not hot air from the desert… that would be a Santa Ana.

In fact, other than owning rental properties, I have no affiliation with any entity that provides any real estate services or products. I am in the financial services sector and provide capital to other to financial services businesses that have opportunities that exceed their existing capital. We provide off balance sheet capital backing – (for a price).

102   HARM     2006 Jan 26, 4:27pm  ↑ like   ↓ dislike   quote    

Zephyr, yes I concede that short-term flippers/speculators never constitute anywhere close to an outright majority of all homeowners in any given RE market. However, as you noted, they "do have a disproportionate affect on the market".

Since the percentage of RE turnover in any given year is generally in single digits, they can (and do) constitute a sizeable chunk or even a majority of new buyers during bubble/bull market peaks, as I'm sure you'll agree. Since recent sales (comps) are used to determine median price, appraisal value, tax assessments, etc., it's no stretch to say that flippers can have a large impact on RE prices during such periods.

Interesting long-run take on gold, and some good points. I still wouldn't rule out having a small % in a portfolio as an inflation hedge, though (however you want to calculate "inflation" these days --not about to reopen that can 'o worns ;-) ). As you noted, it's previous peak cooincided (no surprise) with the peak year of double-digit inflation in the U.S., to which thankfully, Volcker put an end.

103   HARM     2006 Jan 26, 4:29pm  ↑ like   ↓ dislike   quote    

Posted before I read FogHorn's response --he beat me to the punch!

104   Michael Holliday     2006 Jan 26, 10:40pm  ↑ like   ↓ dislike   quote    

Dr.Strangelove Says:

"Not trimmed nearly as lean as you, but let me tell you, I feel COMPLETELY LIBERATED! Some books kept for research (job related), one couch, one dresser, computer etc., but really got rid of a lot of that crap, you know…”am I really going to ever wear that friggin’ shirt again? No,”…GONE."

You've inspired me.

I've got to get rid of a lot of sh-t.

I'm going to do it now.


105   Peter P   78/78 = 100% civil   2006 Jan 27, 4:25am  ↑ like   ↓ dislike (1)   quote    

There’s a lot of satisfaction in getting rid of clutter.

Also a lot of grief in having spent so much on useless junk.

106   surfer-x     2006 Jan 27, 5:43am  ↑ like   ↓ dislike   quote    

Zephyr, I am not super-savvy investor, just a scientist trying to get along and have a decent time. Can you offer some suggestions on the following? I have about 42K in student loan debt from my PhD, it is at 3.75% fixed (Thanks Uncle Sam), I have the cash to pay it off, but to me it seems that I'll never get money this cheap again. As stated prior, not a super-savvy investor. The idea of being completely debt free is appealing but the rate is so low I don't think it makes much sense. Any other super-savvy finance types feel free to comment also. Trolls piss off.

107   Peter P   78/78 = 100% civil   2006 Jan 27, 5:48am  ↑ like   ↓ dislike (1)   quote    

I am not Zephyr, nor am I nearly as sophisticated, but I do not let my wife pay off her student loan.

What is the point of paying off a loan if you are paying quite a bit less than the T-Bill rate?

108   surfer-x     2006 Jan 27, 5:50am  ↑ like   ↓ dislike   quote    

Peter P, that's what I think, now should I put the money in a safe investment, like T-bills CD etc and use the interest it generates to pay the loan interest?

109   Peter P   78/78 = 100% civil   2006 Jan 27, 7:07am  ↑ like   ↓ dislike (1)   quote    

Peter P, that’s what I think, now should I put the money in a safe investment, like T-bills CD etc and use the interest it generates to pay the loan interest?

That is up to you. The main advantage is liquidity. It is always good to have cash available.

110   Peter P   78/78 = 100% civil   2006 Jan 27, 10:15am  ↑ like   ↓ dislike (1)   quote    

If not, then pay off the loan, your losing money.

I will even give a bit premium to having money on hand. If you need cash for whatever reason, you may not be able to get a loan right away.

111   Peter P   78/78 = 100% civil   2006 Jan 27, 10:19am  ↑ like   ↓ dislike (1)   quote    

surfer-x, is your student loan tax deductible?

112   Peter P   78/78 = 100% civil   2006 Jan 27, 10:45am  ↑ like   ↓ dislike   quote    

Personally I hate owing anyone money, unless I can qualify a good investment a that make sense for me.

I hate owing people money but I love owing banks money if I have enough cash to cover the obligation and the cost of carrying the debt is small or negative. :)

Credit is available only to those who have wants but no needs. When I really need money in the future, no one will be extending credit to me.

I agree this is a personal decision.

113   Michael Holliday     2006 Jan 27, 10:48am  ↑ like   ↓ dislike   quote    

Seatledude great words of wisdom!

The most liberating feeling I can relate to is when I left the Army after my enlistment was over at Ft. Bragg, North Carolina back in '89.

I got rid of a lot of shit but kept my big, pimp stereo & Klipsch speakers.

Even after liquidating a bunch of shit from my barracks & locker, my little Ford Tempo was still stacked from floor to ceiling with stuff.

All of my friends that left Ft. Bragg, to either get out of the military after their enlistment was over or move to another military post, gave the old FU two middle finger salute to Uncle Sam.

I flew off the base giving the salute and didn't rest until I hit Oklahoma, some 1,000+ miles later.

Man, what a feeling of liberation, of hard-won freedom!

That GI Bill college fund money sure went a long way on the weekends spent up at Harrahs, Tahoe during my undergrad years at San Jose State.

Damn, those were the days!

114   OO     2006 Jan 27, 12:19pm  ↑ like   ↓ dislike   quote    


if I can borrow money and lock down at 3.75%, I will max out the borrowing and convert to non-USD assets, and pay off as USD becomes worthless.

So it really depends on what you are doing with your cash. If you are stashing it away in CD, then pay off your loan. If you are investing, hell no.

115   Zephyr     2006 Jan 27, 1:24pm  ↑ like   ↓ dislike   quote    


Keep the loan and invest the money that you would use to pay it off with.

3.75% fixed is very cheap money. Even the highest rated borrower in the world is paying more than that now. If I could borrow at that fixed rate I would literally borrow every penny that the lender would be willing to lend to me, and reinvest it in 10 year treasuries or other AAA fixed rate instruments paying more than 3.75%. I would borrow $billions if they would lend it to me. 1% of a $billion is $10 million… every year. Locked in! With no risk as long as everything is in the same currency.

Do not bet on currency swings unless you think you are a better investor than Warren Buffet. So far he has lost $billions betting against the US Dollar.

However, if you will just spend the money on relatively useless stuff, then you should probably pay off the debt instead.

116   Zephyr     2006 Jan 27, 1:34pm  ↑ like   ↓ dislike   quote    


My comments above were intended as a no risk baseline. With a mix of Treasurys and other AAA credits you should be able to yield about 5% with no real risk. However, if you want to take some real risk your choices expand considerably.

117   Peter P   78/78 = 100% civil   2006 Jan 27, 2:43pm  ↑ like   ↓ dislike (1)   quote    

Do not bet on currency swings unless you think you are a better investor than Warren Buffet. So far he has lost $billions betting against the US Dollar.

Long term success in sepculation does not depend much on the short term success in a few trades though.

118   OO     2006 Jan 27, 2:59pm  ↑ like   ↓ dislike   quote    

USD is just inherently weak in all fundamentals. I may lose (paper loss anyway) in the short term, I know very well I will come out ahead by not staying in USD-denominated asset.

Btw, Buffet is still firm on his negative outlook on USD, just a bad trade that is all. I am not speculating, I am investing, against USD, that is.

119   surfer-x     2006 Jan 27, 3:17pm  ↑ like   ↓ dislike   quote    

Zephyr, thanks man! :) nope not a spender at all, I buy most if not all my shit second hand. I have a nice stereo, bought piece meal on ebay, only purchased because my other one was 12 years old and dying. Appreciate the info.

120   surfer-x     2006 Jan 27, 3:19pm  ↑ like   ↓ dislike   quote    

Peter P, the interest is now deductable, my wife doesn't work. Otherwise Uncle Sam would be using the exit port as a mud flap.

121   Peter P   78/78 = 100% civil   2006 Jan 27, 3:30pm  ↑ like   ↓ dislike (1)   quote    

Peter P, the interest is now deductable, my wife doesn’t work. Otherwise Uncle Sam would be using the exit port as a mud flap.

I would definitely keep the loan at least for now then. :)


122   Zephyr     2006 Jan 27, 3:47pm  ↑ like   ↓ dislike   quote    

Peter P,

I agree that long term success does not depend on short-term success in a few trades. However, Buffet has been losing big on his bet for two years now.

When the Euro was new it fell to about $0.80 and I expected it to recover and further appreciate as it gained market share as a reserve currency. Our low interest rates for a while pounded the dollar down, bringing the Euro to $1.33 or so. This was more than I expected and as it approached $1.33 I expected a correction on the wave of interest rate increases. It has done this and now I expect very little change this year, but I do think the Euro will gain on the dollar in 2007.

I agree that the USD is fundamentally deteriorating. It has been for decades. However, most other currencies also have weak fundamentals. It is the relative strength that drives the exchange rates.

123   surfer-x     2006 Jan 27, 3:48pm  ↑ like   ↓ dislike   quote    

When the Euro was new it fell to about $0.80

I went to Germany when this happened, it was when they just switched over. I was shocked on how cheap everything was, imagine my shock when it doubled. Dusseldorf rocks!

124   Peter P   78/78 = 100% civil   2006 Jan 27, 3:52pm  ↑ like   ↓ dislike (1)   quote    

However, most other currencies also have weak fundamentals. It is the relative strength that drives the exchange rates.

Very true.

125   Peter P   78/78 = 100% civil   2006 Jan 27, 3:58pm  ↑ like   ↓ dislike (1)   quote    

What if Heli Ben fails to keep interest rate at or above the "neutral" level? What will that do to the greenback?

126   Zephyr     2006 Jan 27, 4:04pm  ↑ like   ↓ dislike   quote    

I have never “invested” in gold or foreign currencies because I have not been willing to make bets that are pure speculation. I only invest in assets that produce income. I don’t like bets where something has to happen in the short-run that is unexpected by the market and favorable to my position. Betting on gold or currencies is this kind of bet.

127   Zephyr     2006 Jan 27, 4:07pm  ↑ like   ↓ dislike   quote    

Peter P, If that involves a lower interest rate, then I would expect the USD to decline.

128   Peter P   78/78 = 100% civil   2006 Jan 27, 4:13pm  ↑ like   ↓ dislike (1)   quote    

I only invest in assets that produce income.

Some currency trades, like Yen carry, do produce "income" (interest rate differential) though.

129   Peter P   78/78 = 100% civil   2006 Jan 27, 4:17pm  ↑ like   ↓ dislike (1)   quote    

Zephyr, we have much to learn from you. Thanks for being here.

130   Zephyr     2006 Jan 27, 4:37pm  ↑ like   ↓ dislike   quote    

If you are investing in foreign assets that generate income then the foreign exchange exposure is just an overlay - a risk that must be considered. ...could help or hurt. However, I am reluctant to buy an asset for the foreign exchange overlay. Too me it is too much like buying something you don't really want but you expect a nice rebate.

131   Peter P   78/78 = 100% civil   2006 Jan 28, 3:06am  ↑ like   ↓ dislike (1)   quote    

Too me it is too much like buying something you don’t really want but you expect a nice rebate.

LOL very true.

132   Peter P   78/78 = 100% civil   2006 Jan 30, 4:50am  ↑ like   ↓ dislike (1)   quote    

Is this also newly acquired liquidity readily diminishing or is this the true tipping point of insanity?

More like insanity.

Go, go, go, said the bird: human kind
Cannot bear very much reality.
Time past and time future
What might have been and what has been
Point to one end, which is always present


133   surfer-x     2006 Jan 30, 6:02am  ↑ like   ↓ dislike   quote    

newsfreak, the zero sum game? So basically they are suing to get their deposits back? If it's free money, I'm all in, what with missing the last two rounds of free money and all.

134   surfer-x     2006 Jan 30, 6:05am  ↑ like   ↓ dislike   quote    

Ahhh, but if you put nothing down, and just basically agreed to buy the condo for 500K, got yourself a NAAVLP, and as part of your real estate empire super savvy finance wizardry, flipping was on the horizon, then you wouldn't be zero sum, you would be signing your name and collecting 100K in imagined equity. I want some imagined equity. You see Judge I bought the condo to flip and real estate only goes up, therefore they owe me 100K.

135   surfer-x     2006 Jan 30, 10:08am  ↑ like   ↓ dislike   quote    

True den of imagined equity?

136   HARM     2006 Jan 30, 4:52pm  ↑ like   ↓ dislike   quote    

den of equity

Wow. newsfreak, I'm floored --that's borderline genius.

137   losstotheworld     2006 Feb 1, 4:10pm  ↑ like   ↓ dislike   quote    

Intersting read about brokeback mountain

138   FormerAptBroker     2006 Apr 22, 2:15pm  ↑ like   ↓ dislike   quote    

astrid Says:

> FAB, I wouldn’t say going profanity free or
> pesticide free is CSR, it’s just giving the customers
> what they want."

Do you really think that the "customers" (the people that actually buy gangster rap CDs) really want them profanity free?? Or that the "customers" (working class people who shop at a typical grocery store produce section) want to pay Whole Foods aka "Whole Paycheck" prices and spend a days pay just to make a salad??

> I do think you’re shortchanging the earnestness
> and enthusiasm of a lot of organizations.

Over the years I have not seen many people that won't sell out... They don't get a pot of cash and have to shut up, they get to feel important and are usually "hired" to work on their issue and get pushed away from actually doing anything (Willie Brown does this better than anyone in history)...

> I don’t agree with their premise, but I don’t doubt their
> earnestness. After all, those PETA idiots can’t in it for
> the money or for the popularity.

Many of the PETA people are just nuts (many people don't know this but "activist" is actually a synonym for "insane" so when you hear anyone self identify as an "activist" you know ahead of time that they are insane, "and" did not have anyone pay attention to them as a child) plus every protest has at least a handful of young guys who just want to get laid...

139   cbminfo     2007 Oct 16, 11:46pm  ↑ like (1)   ↓ dislike   quote    

You have a better chance of seeing Halley's comet in 2062 than for all your dreams to line up to be a home owner on your terms.

1st half price home.. Only if the lands on a bombing range, or middle of a superfund cleanup site.
Over the past 232 years since the land was stolen from the indians, it's price has done nothing but go up. It isn't going down.

The economy for home prices has mirrored this rise in price.

So a half price home isn't going to happen without very low standards. FWIW: Here in my area, there was a crack house and a chicken coop. Both priced at $50,000.00 Neither one was worth $5.00.
And it definitely wasn't the land that made it worth those prices.
The chicken coop couldn't control chickens.

Then you have the obvious currently happening. Homes being foreclosed on left & right.. Ripe for your 50% buyout you say.. Not.. Though some may sell at a loss to avoid the stigma of a foreclosure. So far it hasn't reached the panic status to provide half price homes yet.

Then you have to weigh in the human crooks manipulating the housing market now. 'Flipping', crooked bankers, and mortgage providers. Why this magnanimous gesture of billions of dollars from the banks with no pressure from the gov't to bail out this current disaster ?

Simple.. Even though our gov't can't find a seriously wounded elephant in Central park after a snowstorm when it comes to the IRS.
It wouldn't take magic or much digging to count the number of crooks or their scams in the current housing market to make a bad situation even worse.

1 small example: Miss, or be late on ANY payment on ANY credit card, for ANY amount.
This is reported to anyone doing credit with you. Those livable payments you've been scraping by with are now DOUBLED because you didn't read the small print on those credit apps over the past 20 years.
And now not being able to afford the doubled payments, you really are in trouble and missing more payments with those payments doubling..

This right here [chasing the loan sharks out of the credit business] would do more to get the U.S. back on it's feet than any single law they can pass. Not going to happen. The bankers own congess. And they don't want the gov't digging into how they're destroying the country.

Whole lotta talk about the homeless. But no one's doing anything to change it but putting them in jails, and chasing them out of town.

But why should you buy a house despite all the above instead of rent.. Let's go with just a single month of rent vs own.

1st month, tv said you pay $2000+ a month rent.
You can get a nice home for that kind of payments.

At the end of the single month of owning vs renting.
What do you have to show for the $2000+
1 rent = a paid rent slip showing you stuck $2000+ in someones pocket.
2 Own = $2000.00 in YOUR POCKET toward NO MORE monthly housing payments.

Even a 2nd grader that can do simple math could see the advantage of OWNING that $2000+ vs giving it away to someone else every month.

And while you are buying, you can keep on waiting for that half price home, and if it ever does appear, if you can sell your current home for $1.00 more than you paid, you've made a profit.
But try and get someone to cash in those rent slips for you.. Not going to happen. Even paper isn't worth enough in recycling to make those rent slips worth anything.

You're throwing away more than $2000 a month. No wonder you're riding a bicycle. And it has nothing to do with gas prices. You can't afford anything by lining other peoples pockets with your money.

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