The Mortgage Bust Goes On

[cj001f]

I agree with SC here.

 

I have been very successful over the last seven years doing exactly as he outlines. I made a clear plan and followed it. I made adjustments along the way as necessary--shifting with the market as it changed. It is possible for the mere mortal to do well with a little bit of planning, a good dose of dicipline, and a hell of a lot of luck.

 

That by no means negates JayB's point - which is it isn't always possible to make a profit. The assumption I see many under 40 operating on is that Real Estate always appreciates - and the only people that lose money are those who made poor choices. In the face of a region wide RE decline, you are fucked.

 

Furthermore, if it weren't for the massive wealth accumulation by the very wealthy, the economy as a whole may well have been screwed by the underlying structural weaknesses. There's a mixed blessing if ever.

[Mr_Phil]

Substitute today for '99 and "investment property" for "tech stock".

[JayB]

I'd extend the "not ideal" classification to a considerably broader segment of the population than myself, but whatever.

 

On to another subject. Pardon me for this digression, which will no doubt seem a tad churlish coming on the heels of your well-wishes, but your comments here suggest that you are involved in attempts to invest in real estate to turn a profit. This seems to be profoundly incongruous with your oft-stated beliefs, your innermost convictions about the nature of right and wrong, and hardly a necessary activity given the range and scope of the opportunities that this country provides to sustain oneself. I'm hardly a paragon of uprightness myself, and there aren't many folks who are able to cruise through life without compromising their ideals in some fashion or another from time to time, but I really can't imagine earning my income by voluntarily engaging in activities - every single day - that were a complete contravention of my most deeply rooted principles. Am I completely off base here, or is this something that you have to contend with?

 

If your interest was sincere, you wouldn't seem so churlish.

 

I'm quite sincere. Have I misread you somehow, or is this something that you actually have to wrestle with?

[archenemy]

I agree with SC here.

 

I have been very successful over the last seven years doing exactly as he outlines. I made a clear plan and followed it. I made adjustments along the way as necessary--shifting with the market as it changed. It is possible for the mere mortal to do well with a little bit of planning, a good dose of dicipline, and a hell of a lot of luck.

 

That by no means negates JayB's point - which is it isn't always possible to make a profit. The assumption I see many under 40 operating on is that Real Estate always appreciates - and the only people that lose money are those who made poor choices. In the face of a region wide RE decline, you are fucked.

 

Furthermore, if it weren't for the massive wealth accumulation by the very wealthy, the economy as a whole may well have been screwed by the underlying structural weaknesses. There's a mixed blessing if ever.

 

I was not negating JayB's point. I was agreeing with SC.

I am no Econ Ph.D; but with a Master's in Business I can say that I understand the very basic concept of business cycles. There are many people like me (folks who have an understanding that lala land of only making money and not risking losing it) doing the same thing, and some of us will do well. Some won't. There is never any guarentee for anything financial--no matter what anyone tells you.

 

I've noticed in discussions with folks that those who think the market only goes up are those who haven't purchased investment property. Anyone have a different experience with this?

[archenemy]

Substitute today for '99 and "investment property" for "tech stock".

Yes, the same thought, discipline, planning applies. Funny enough, I made the seed money for real estate through stocks. When things were good, I sold---because nothing good lasts forever. It doesn't take a genius.

Edited December 22, 2006 by archenemy

[tomtom]

and for those calling for an overhaul of the current lending system, what would your recommendations be? I personally like the options available, and came about due to demand. you all wouldn't like the feds over-regulating and over-reaching, would you?

There are quite a few other elements of the real estate business that need to be cleaned up so that market participants have accurate information. The buying/selling, and appraisal processes are especially flawed and rife with massive conflicts of interest, but thats another topic.

 

Ka-ching!

 

The New York attorney general accused an appraisal company yesterday of inflating the value of homes under pressure from Washington Mutual, one of the nation’s largest mortgage lenders.

http://www.nytimes.com/2007/11/02/business/02appraise.html?_r=1&ref=business&oref=slogin

 

 

[JayB]

and for those calling for an overhaul of the current lending system, what would your recommendations be? I personally like the options available, and came about due to demand. you all wouldn't like the feds over-regulating and over-reaching, would you?

There are quite a few other elements of the real estate business that need to be cleaned up so that market participants have accurate information. The buying/selling, and appraisal processes are especially flawed and rife with massive conflicts of interest, but thats another topic.

 

Ka-ching!

 

The New York attorney general accused an appraisal company yesterday of inflating the value of homes under pressure from Washington Mutual, one of the nation’s largest mortgage lenders.

http://www.nytimes.com/2007/11/02/business/02appraise.html?_r=1&ref=business&oref=slogin

 

 

http://bp3.blogger.com/_pMscxxELHEg/RxzD0s_7EYI/AAAAAAAABB4/ljDSXZhMG3o/s1600-h/IMFresets.jpg

 

Worth clicking on the second link for an overview of what's ahead for ALT-A and Option-ARM loans.

 

IMF Report

 

 

[Peter_Puget]

Jayb -

 

You moving back here?

 

I think you over play the whole sub-prime thing. So I ask as a practical matter what should I do to profit from the coming crash? (or has the crash already happened.) what shouldn't I avoid.

 

I guess give me an example of a good investment and a bad investment as you read the situation.

[JayB]

Yeah - but not permanently until the spring of '09, and won't be looking to buy any sooner than mid-to-late 2010, at the earliest. If the tax-adjusted rent-vs-mortgage differential is significant enough, the target date will be adjusted back accordingly. Housing is an expense that I hope to minimize within certain space/neighborhod parameters - that's it. If the tax-adjusted cost of owning reaches par with renting something the same size in the same neighborhood, and the rest of the cards are in order, then things may change.

 

Profiting from the housing market? Who knows. I heard of people in some markets selling their homes from investors at current market prices, then signing multi-year contracts to lease the homes back from them at prevailing rates determined by a neutral third party, and granting the new lessors right of first refusal if the new owner decided that he/she/they wanted to sell. Doubt anyone would go for that kind of a deal anymore, but perhaps. Doesn't look like there's a futures market for residential real-estate in Seattle yet.

 

IMO the primary impact of the subprime "issue" will be a significant reduction in investor's appetite for securities constructed from or containing non-traditional mortgages, which will translate into tighter lending standards on the retail side. This will probably have an effect on who can get a loan, and for how much, which will probably act to temper future price increases, at the very least. This may also have an effect on market psychology, which - in combination with incredibly lax lending standards - is what has driven the majority of the real appreciation since ~01-02 IMO. Foreclosures and REO sales by banks may have some impact on inventory/prices in some areas as well.

 

It's entirely possible that home values in some areas will continue appreciating, or appreciate at increasing rates - but on balance I think that the distribution of probabilities is such that the number of places where this will occur will not be terribly numerous.

 

None of this really matters if you are living in a home that you like, have a mortgage that you can afford, and don't need to sell. If a particular individual's prime motive for owning a home is near-term financial gain, then their situation is likely rather different. Ditto for folks who HELOC'd or cash-out-refied their way into the 100% LTV category or higher in 05-06.

 

[JayB]

"Citigroup CEO

Plans to Resign

As Losses Grow

Board Plans Meeting

With Prince on Sunday;

SEC Queries Accounting

By ROBIN SIDEL, MONICA LANGLEY and GREGORY ZUCKERMAN

November 3, 2007

 

Citigroup Inc. Chief Executive Charles Prince is planning to resign at a board meeting Sunday, according to people familiar with the situation, as the bank faces big new losses from distressed mortgage assets."

 

http://online.wsj.com/article/SB119403363814780742.html?mod=hpp_us_whats_news

 

Thankfully the odds of he and Stan O' Neil facing foreclosure are rather low.

 

 

[archenemy]

I can't wait til the housing market crashes. I've been saving up and resisting buying anything until the fools and their homes are parted.

Forclosure may become one of my favorite F-words.

[whirlwind]

your evil but i like the way you think

[Peter_Puget]

Jayb -

 

You're just describing a basic business cycle. I am somewhat confused by what you think the significance is. Let's wager $50 toward a pub club: I "buy" a home in modesto (very high foreclosure rate) and you could invest a similar amount in another investment and when you get back we see who has the greatest return. We hold our "investments" until your get back to Seattle. The guy with the lowest ROI buys the first round at your first or second Seatle pub club. ($50.00 max) If Modesto is a bad location, let's say I get my choice of a house a block or two from me. We can work out the details. For example instead of real estate I could invest in a company in a business similar to say Citigroup. I would even be willing to buy a house in Modesto in 2005 for my investment.

[JayB]

I'll do you one better. How about if my "investment" is a US treasury money fund (VMPXX), and your investment is the Case-Shiller-Weiss Index for Seattle between today's date and the same date next year? $50 sounds fine with me.

[chucK]

[cj001f]

OMFG PETER! I CAN CHERRY PICK ASSETS IN ONE CLASS AND THEY'LL OUTPERFORM UNDERPERFORMING ASSETS IN ANOTHER!

 

I knew you were a stupid arrogant cocksucker, thanks for proving it

[olyclimber]

I'll bet all takers that my flow is thicker than yours.

[Peter_Puget]

Ok Jay you can invest in Treasury Fund and I'll buy a house in Seattle - I'll reach financially (I'll try for a Jumbo Loan!) How does that sound? I'll hold the house until you get back and we can estimate the FMV (Zillow?) when you get back. We can use an actual sale in Seattle for my starting valuation. Why don't I restrict my choices to +-10% of the average Seattle house price?

Edited November 3, 2007 by Peter_Puget

[JayB]

There's a bit of a distinction between a particular house and the housing market, but I'll be willing to split the difference and stake 50% of the bet on whatever house you choose, and 50% on the housing market as defined by the CSW index for Seattle.

 

I think that the point that you are making by insisting on a single-home is a fair one, since you buy a home, not the market - but I think that it's also fair to include the sum of all such transactions into the analysis when attempting to evaluate the condition of the market. I'd also be happy to stake $50 on the single home, and $50 on the market via CSW, and stipulate that in the event of a "tie," we both pay $50 and kick in for $100 worth of free beer at the first Pub Club after Nov 1 of '08. Loser (wrong on both counts) kicks in $100, the pain of which can be offset by drinking as much of the beer as possible oneself.

 

I also don't think that Zillow is especially accurate:

 

http://online.wsj.com/public/article/SB117142055516708035-O6WPplch_duU0zq_zhjQaI19vIg_20080214.html?mod=rss_free

 

but it may be the only tool available. Unfortunately, I don't think that there's a metric out there that doesn't include valuations derived from refis (which are especially rife with appraisal fraud - appraiser plays ball and hits the magic number, broker gets commission, homeowner gets cash-in-hand), which accounts for bundling closing costs into the sales price, builder incentives, etc.

 

I also think it's reasonable to look at real vs nominal returns, so I'll compute the real return on the money market account (less taxes on dividends and inflation), and you include commissions and closing costs, interest, insurance, taxes, maintenance, net cost remodels/upgrades (what you pay for the new kitchen vs standard calcs that determine the effect of the said kitchen on resale value) and inflation in your calculations on the minus side of the ledger, and any tax savings that you derive from acquisition on the plus side of the ledger.

 

If you accept the bet - we can make this post a sticky in the cc.com events forum, so folks will have plenty of advance notice of the free beer. In the event that I end up leaving the country for a few months before Nov 1 of '08, I'll hand over two fifties for someone to keep in escrow (I nominate Porter), and if I lose on both counts there's the beer money. If I win on both counts you fork over the $100 beer tab at the next Pub Club, and I get my money back upon my return.