Tuesday, February 21, 2006

Housing and mortgage...random thoughts

I have been out of town and pretty busy the past few days...so I don't have time to hammer out one of my long posts, so here are some random thoughts and impressions on the housing bubble, real estate, mortgages...among other things.

- At 11:31 PM on Monday night, there are: There are 16,981 active homes in San Diego, CA. per ziprealty. At what time this week (give day and time), do you think that San Diego will go over 17,000 properties? I would do Orange County, but ziprealty hasn't split OC/LA up...so the number sits at over 72,000. I'm going to say Tuesday at 3pm, we will go over 17,000.

- I was 'out and about' quite a bit this long weekend. Made it down to the Gaslamp in San Diego. On one corner there were 4 sign 'spinners' peddling condos. I saw 2-3 others on various downtown corners. Has anybody ever bought a condo because of one of these guys? Maybe it's just me, but a condo starting at 300k is not an 'impulse purchase'. If somebody was spinning a sign for a $2.50 slice of pizza, I think it might work. Condo's....not working for me. Not to mention the fact there is a real estate office on every block, and condo's going up all over "East Village". Even if I did want to buy a condo....those signs are merely pointing me in the direction of about 10 places where I could 'buy' one.

- Why is there a silent ‘T’ in the word MORTGAGE???? (let me clarify…this is more of a ‘joke’ than a real question. Back in a training class a while ago, the instructor asked if there were any questions…somebody raised their hand, and asked that question. It was much funnier if you were there.) Thanks to all the people who e-mailed me, or posted the correct answer about the french origins of the word.

- Read this piece of work that was e-mailed to me by a broker. I think they got the roles reversed....what do you think?!?!?

CONTRARY TO POPULAR BELIEFIT PAYS TO BE A CONTRARIAN. Sir John Templeton was known as the Dean of Investing, and he was a classic contrarian. Mr. Templeton said to buy when things looked most pessimistic and sell when the masses felt most optimistic and his attitude paid off. He began his Wall Street career in 1937, created many of the worlds largest and most successful international investment funds, and is now a full time philanthropist at age 92.

Some recent examples - stocks were on fire in 2000 and almost everyone was buying, but the market went the opposite direction from the herd. And now over the past four years the media has warned of a housing bubble, but home prices have done very well across the country; rewarding those who bought. With Housing Starts numbers coming out with a bang this past week and the report being higher than expected, it is a clear indication that the demand for housing is still strong. So, what about all this housing bubble hype?

Well, if Joe Kennedy father of former President John F. Kennedy were still alive, it is pretty clear that he would agree and say that the hype is clearly just that, hype. If we could ask this legendary contrarian and one of the most successful businessmen in history what he would do given the current Housing Starts number and all the bubble hype being published by the media, Mr. Kennedy would probably runnot walkbut run to a local real estate office and invest in real estate.

Let's take a look at why Mr. Kennedy would probably feel so strongly about purchasing a home. Joe Kennedy attended Harvard College and became a highly successful entrepreneur with an eye for value. He multiplied his fortune through stock speculation and did so by investing with a very contrarian mindset. In the early to mid 1920s the majority of the population was reluctant to invest in the stock market. However, Mr. Kennedy became an expert in dealing with a stock market that was unregulated and even opened his own investment company during the bull market of the 1920s. Joe clearly saw an opportunity and with his keen eye for value, invested in the stock market. By being smart, going against the grain of the majority, and not buying into fear, he bought with confidence and made millions by doing so.

But one day, his local shoeshine boy gave him a tip on a stock to buy. Mr. Kennedy immediately cashed out his multi-million dollar gains and got out of the market. He realized that if the market were so oversaturated that even the shoeshine boys were giving out stock tips, it was time to get out. And thats exactly what he did, just months before the stock market crash in 1929. Looking back, Mr. Kennedy based his investments on facts and statistics, not on fear and hype.

And when the housing bubble hype began four years ago, many individuals refused to base their decisions on hypeand have seen sizeable gains with their real estate investments. On the other hand, those who put off purchasing real estate based on the fear induced by the media most probably regret their decision. If you have been putting off the purchase of your dream home, dont base your decision on fear and hype, meet with your trusted mortgage professional and get the facts about your local real estate market.

Uh...maybe I missed something, but I thought the popular opinion was that you "can't lose" with real estate? I had no idea the media has been saying there was a housing bubble for the past 4 years. Heck, the stories are JUST starting to roll in over on Ben's blog. Remember, the media is a lagging indicator...and many brokers will say anything to get a commission. The fundamentals in this story are correct, but they are having an identity crisis and they got their roles mixed up. The contrary people would be 'selling' into all the 'buying' frenzy.

I know there is quite a bit of e-mail for me in my inbox, just bear with me, and I will get replies out. The forums are doing excellent! We hit the 200 member barrier! There are almost 150 topics and 900 posts! Lots of good info in there. If things are slow on the blog, be sure to check out the forums. Comments, feedback, and donations ;) are always welcome and appreciated!

I look forward to the comments on this one. Don't forget to make your guess on San Diego going over 17,000 properties!
I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...

...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!



Anonymous Anonymous said...

The T is silent because it is from the french word mort (dead) and the french do not pronounce the ending consonant.

gage = pledge

meaning: dead pledge

2/21/2006 4:06 AM  
Blogger SoCalMtgGuy said...

I have caught pieces of Dr 90210, but like you, I have heard nothing about the housing situation.


2/21/2006 9:11 AM  
Anonymous Anonymous said...

I've scanned through a fair amount of this blog's history, as well as the thread about "the math of buy vs. wait".

My impression is that there is a fair amount of invective, fuzzy thinking and irrationality mixed in with the good advice and valuable data around here.

Disclaimer first: I sold my home in NoCal a few years ago because I had outgrown it, and have been renting since with the intention of re-entering the market when circumstances cooperate. Thus, I am mostly in agreement with the idea that real estate *could* see a correction, and is unlikely to accelerate from here.

BUT, these facts do not in my mind indicate that one should "absolutely, positively" defer a purchase that is within one's means and represents a home that the buyer intends to occupy for a long time.

Yes, there are many overextended homeowners right now. Yes, there is a possible (maybe probable) ARM squeeze pending. Yes, there were an unconscionable amount of spec buying, flipping and other silly games over the last few years.

Even so, telling somebody to wait "just one or two years" before buying amounts to attempting to time the market. As a professional equity investor, I find that advice very troubling.

One possible scenario is that we see a massive price correction in real estate. This would likely stem from a full-economy recession. Another possibility is that housing prices flutter in a tight trading range for the next 5 years, while inflation and salaries catch up. A third possibility is that houses actually *appreciate* a little more for 5 - 8 years, and there's a correction at that time.

If a buyer can afford a home without being forced to engage in "creative financing", if the home represents a home that the buyer would be happy in for a long time, and if the buyer can comfortably say that he/she wouldn't regret the purchase even if the economy tanked and they were laid off, there's really not a good reason to hope for a price decline next year. You may get it, you may not.

Just a few considerations that I haven't seen mentioned, although granted I haven't read everything here:

- when comparing renting with buying, don't forget to account for the opportunity cost of your down payment. If you put $40k down, you're forgoing the annual interest of anywhere from $2-4k, depending on your investment returns.
- with home ownership in SoCal, you bear the risk of natural disasters (i.e. earthquakes) that your landlord bears when you rent
- Plan on spending about .5-1% of your home purchase price each year in maintanance and improvements

- if you buy now and the housing market doesn't change for 3 years, you have reducing your mortgage obligation by 3 years over buying in the future
- consider the intangibles as if they were tangible; if buying a house represents an improvement in your quality of life (which can be true even buying a house that's not as nice as the one you rent), give that improvement a dollar value. How much is it worth to you? That's an asset that you're acquiring with your home purchase.
- consider how likely it is that your landlord needs you to leave your rental, and how big of a disruption that might be (esp with kids)
- the people selling today have all read the articles and heard the stories about the "real estate bubble". They may have some irrationality themselves as a result, which works to your advantage. Find a motivated seller in a house that is visually unappealing but could be fixed up, and you might actually be able to make a bargain purchase, even at today's prices

In my opinion, the current market is one in in which a buyer should be largely more picky. Prices are probably more likely to be flat or down than up. But as I'm attempting to spell out here, that logic isn't enough to make waiting an "obvious choice". Financial markets, housing included, are just not that easy to exploit.

Take your time and buy the house that doesn't feel like a compromise to your lifestyle and needs. Offer low. Finance conservatively.

Waiting for one - four (or who knows how many) years) when you could comfortably buy now amounts to trying to time the market, and though it hasn't been said much on this blog, that is a game that can be lost.

Even though I personally believe that prices are ahead of themselves right now, I would still buy a house today if it represented the home I wanted for the next 10+ years and I could conservatively afford it.

2/21/2006 10:46 AM  
Blogger SoCalMtgGuy said...


I plainly make the point that if you can AFFORD a fixed rate mortgage, and plan to stay a while, then go ahead and buy if that is your choice.

The thing is, a home purchase IS outside the means of most people without the use of creative financing. Even the California Association of Realtors stats show that the median income falls 70k a year short of affording the median priced home.

I have never said: "absolutely, positively" defer a purchase that is within one's means and represents a home that the buyer intends to occupy for a long time.

If somebody plans to stay, and can afford it, then go for it. Just realize that prices might go down. If you are prepared for that, then do it. I know there are lots of people with lots of money out there...they are just not the majority.

Ca affordability falls between 5-18% depending on the area and the data set used.

Sorry, but incomes are not going to grow at the rate that housing grew at to 'catch up'. Maybe for certain individuals, but not across the board.

Sorry, housing prices are already coming down. There will not be another 5-8 years of appreciation. We have stretched the payment of the 'average borrower' to the max. The rent vs. own equation is so far out of whack in many markets, you think it is going to get even more out of whack for 5-8 more years?!?!??!

you said: Waiting for one - four (or who knows how many) years) when you could comfortably buy now amounts to trying to time the market, and though it hasn't been said much on this blog, that is a game that can be lost.

Nope...it has nothing to do with timing the market. That is buying when you can AFFORD IT!!! We are saying the same things, but you are COMPLETELY missing the point that most people cannot buy a home without creative financing!!!!!

82% of the people who got a purchase loan in CA from Nov 2004 to Nov 2005 used Interest only or neg am. What do you have to say about that!?!?!??! That is not a few people!!! and that is completely in line with the 'affordability' numbers that the CAR puts out. Only about 5-10% of the people in this state can get a 30yr fixed on the median home price today.

I think you should read more of my posts and get a better handle of where I am coming from. Especially the posts from December on. Lots of links to information, as well as math behind the decisions.

Thanks for reading my blog...and feel free to e-mail me any other questions/comments if you wish.


2/21/2006 12:19 PM  
Anonymous Anonymous said...

My note was not directed purely at your advice, far more at the self-congratulatory crowd blaring "prices are going to drop 30%" with apparant certainty. Some are posting here on your blog. I find that to be bad advice, and that's where my post is directed.

But to respond to some of your responses:

YOU: "Sorry, but incomes are not going to grow at the rate that housing grew at to 'catch up'."

No they're not. By saying "catch up", I didn't mean to imply they would grow to the same extent. I meant to imply that the gap would narrow, which would reduce the liklihood of a bubble pop.

YOU: "Sorry, housing prices are already coming down. There will not be another 5-8 years of appreciation."

You say this as if you know that this is the start of a big trend downward. Recall people saying the same things around '98 and '99 about the stock market, which defied expectations for another year or more. (In that case, the correction was dramatic. There are no guarantees that a housing correction would be as dramatic.)

YOU: "The rent vs. own equation is so far out of whack in many markets, you think it is going to get even more out of whack for 5-8 more years?!?!??!"

No, I don't personally think so, but I'm not willing to rule out that possibility completely. Likewise, as more buyers defer buying, rent prices might increase to close the disparity.

YOU: "We are saying the same things, but you are COMPLETELY missing the point that most people cannot buy a home without creative financing!!!!!"

Why do you think I'm missing that point? My advice agrees with yours on this score. But I'm attempting to dispute the claims of many posters that amount to "DO NOT BUY NOW" without qualifying affordability or anything.

YOU: "82% of the people who got a purchase loan in CA from Nov 2004 to Nov 2005 used Interest only or neg am. What do you have to say about that!?!?!??!"

First, I don't think you need to yell to make your point :-)
Second, I would say that most of them, but not all, are probably making a big mistake. As a professional investor, I would choose an Interest Only loan for a purchase as well, but I would still buy a house I can afford and not use the loan to make the house affordable.

Even though their mortgage decision was probably a mistake, not all mistakes are punished. You are making an argument that these things all point to inflated housing prices, I'm not arguing with that. I'm only trying to make the additional point that inflated prices alone do not make the buy vs. rent decision a complete no-brainer. The advice you gave to the person on the buy/rent thread was for somebody who *could* afford the home they were looking at. Your advice had some elements that hinted at trying to time the market. Other people on the thread said things that were very explicitly attempts to "wait for better prices because they're definetly coming soon." Most of my comments are directed at that mentality, not at your advice to "only buy what you can afford."

2/21/2006 12:46 PM  
Blogger SoCalMtgGuy said...

Sounds good...

Just don't confuse comments from readers with what I say. I think we are saying the same things...but from what I have seen the past few years being in the industry, this will come undone. Some of the stated 100%ers will make it, many will not when the ARM adjusts.

About the people that could afford the house. Let's be honest, starting a family and rationalizing that you will be happy raising a family in an 800+ sqft house for 10 years is a tough decision to make at this time. Especially when you consider the fact that house was probably less than half of what it is today about 3-5 years ago.

If people were using fixed rate mortgages, we would NOT have seen this boom.

I completely agree with you about I/O and other mortgages. I have said several times before, these loans ALL have their place for RESPONSIBLE people. If you are a sophisticated person who is managing cash flow or working other investments, then a neg-am is perfect. It is not the right loan so you can 'afford' getting into a home.

I think we pretty much see eye-to-eye on things. The problem is that getting a fixed rate mortgage and staying a while are the 'old paradigm' of home buying.

San Diego led the country on the way up....watch San Diego as an indication of what is going to happen. About to cross 17,000 homes on the MLS (it was about 2900-3000 18-20 months ago).

I don't want people to get into financial trouble because they were competing with another home-buyer that was using a stated neg-am loan.

All and all, from the data I have read, and the things I have seen the past few years, I think the top has passed, and it is going to be interesting to see how it all pans out. With the cost of owning by using a fixed rate mortgage at such a premium over renting, I think waiting is not a bad thing at all. If we pretty much agree that property is not going to go up in double digit percentages going forward, why not wait? The savings of renting make up for the equity gain if there were a small increase. Just my opinion on things....

Thanks for the comments and for stopping by!


2/21/2006 1:21 PM  
Anonymous Anonymous said...

Wow, I am really impressed w/ the writing of "Anonymous #1".

Such clear, level headed, practical, realistic, unbiased logic.

"Anonymous #1", I'd like to hear your investment strategies. Do you post your trading opinions and/or activity anywhere?

Perhaps you can go on the forum here, and write a little about your thoughts on the markets?

2/21/2006 8:39 PM  
Anonymous Anonymous said...

Does anyone have any comments on the Sacramento housing market? It seems prices have pretty much stagnated here with a little to the down side. What is amazing to me is how prices can remain so high given the average incomes here and the number of new homes being built. My house buying strategy here is wait for the prices to come down using rent as a metric. When it makes financial sense to buy when compared to the costs of rent (accounting for tax deductions, interest lost on down payment, maintenance, and assuming 0% appreciation), I will buy. I don't consider this market timing, but rather market pricing. I think the goal here is to keep as much money we earn and earn the maximum amount on what we keep. Givin every thing we know now it seems the probabilities are greater towards a price decline then continued appreciation. Any comments?

2/21/2006 10:07 PM  
Blogger SoCalMtgGuy said...


Check out the FORUMS that I have linked at the top of the site.

Under the California boards, you will see a board for the major areas in California. Post your question there, and you will probably get a better response.


2/21/2006 10:44 PM  
Anonymous Anonymous said...

Anonymous #1 here. Thank you for the compliment.

I'm not all that interested in discussing my investment ideas here. It would be hugely time consuming, and besides I do it for a living so sharing too much is counter-productive, and sharing not enough is like holding back. That's no fun either.

In general, I think my approach is very common sense and in keeping with the way the time-honored investors have always looked at the markets.

I try not to succumb to emotion, no matter how volatile or bizarre things get. I try to maintain the attitude that there is an absolute fair value that underlies all the hype, and ignore things like current prices, the media, the realtors and panic mongers, to just objectively decide what I think "fair" is.

I think that even though a home purchase is a hugely life-changing event, the best way to make the decision is completely dispassionately. Save the passion for after you've moved in. When I bought my first home, I made low offers and failed 3 times. In all three cases, I thought I totally loved the house, and I could have got each one by compromising my stance a little bit. On the fourth try I got the house I wanted, and the first three I lost didn't seem like such great losses. I like to think that if the fourth attempt failed, and then the bubble took prices out of reach for me, I would have avoided buying altogether. Who knows.

The only way I know to buy a house dispassionately is to use comps, instinct, advice and other sources to decide a fair price, and then refuse to pay over that price regardless of whether 300 other people are beating down the door with over-offers. If this means you can't buy for years and years, so be it. If that's an unacceptable outcome, than what you're really saying is that the house is worth more to you than your fair price assessment, for other reasons (unrelated to the investment value.) In that case, figure out how much more you're willing to pay for those other things. Be honest with yourself, you're paying a premium to get into a home. Nothing wrong with that, but recognize that you're making a worst investment as the trade-off for the other things you desire.

Overall, my stock and my home decisions attempt to ignore fear, greed, love and hate. I don't always succeed, but it's a perspective worth striving for.

2/21/2006 10:56 PM  
Anonymous Anonymous said...

Anonymous #1. Can you email me at junkaccount2000@hotmail.com ?

I am not concerned w/ real estate, (I own my apt. outright, and will be staying put) but would like to get in contact w/ a few more people to discuss active trading.

I think I have the same practical, emotionless investing style you do.

* Vanguard Funds
* Index Funds
* Sector rotation
* John Bogle's "% bonds = your age"
* Using moving averages and RSI for entry points. (Buy low)

2/22/2006 4:16 PM  

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