It's FB Friday
I know, I know, it's been a while since we got to look at some of the future Donald Trump's that are planning on making an easy fortune in the real estate market. So far in 2006 I have yet to look at a full doc loan. Not that I'm looking at a ton of loans right now anyway, but come on already. Actually, there was one loan that the broker (newbie) thought could go full doc. The problem came when I asked about the DTI (debt to income ratio). I think the broker thought DTI was a new model of Volkswagon or something. Needless to say...that loan was going full doc about as fast as I'm going to rush out and buy some condo conversions this weekend.Try this one on for size. Borrower has a mortgage balance in the mid-high 600k range. They have an appraisal that is a few months old, that uses even older comps, and they need to keep the value in the mid 800k range to get enough cash out at 90% LTV. The borrower needs to go stated, and get as much cash out as possible. So, we have stated income, an appraisal that is going to get whacked faster than somebody that crosses the Soprano family, and a FICO that is hovering around the high 500's low 600's. Oh, did I mention they have a few mortgage lates the past year?!?!? OOPS!!! I can't and won't be able to help this person. But you can bet that somebody will give it a shot, especially with a "large" loan amount like that. I just hope that loan doesn't end up packaged in the MBS in your retirement account....
This will be a short one. Borrower with a FICO in the 530-540 range wants to do a stated, non-owner occupied, purchase, of a 4-unit complex, in the $650k range. Yeah, I laughed too when I got off the phone, and you thought Wedding Crashers coming to DVD this week was going to be the funniest thing you were gonna see. I honestly don't think there is a lender that will make that loan, so that is a good thing.
That is about it for any really good scenarios. The rest are your run-of-the-mill stated deals. Nothing special, nothing new, just business as usual. I'm not the only one seeing this out there. Even some of the other Account Executives and brokers are beginning to scratch their heads at the loans people are trying to get.
And finally...a question for your accountant:
Since I used stated income on my loan application, can I use stated income on my taxes???
disclaimer: after reading some of the replies, that is NOT a question I heard from anybody. Just something to think about in the new era of "stating" everything financial (income, reserves, rental income, etc.) when it comes to getting a loan.
Sorry...I'm not in the mood to sugar-coat the financial stupidity that is/has been going on with this "credit bubble".
Have a great weekend!!!!
SoCalMtgGuy
posted by SoCalMtgGuy at 5:47 PM
78 Comments:
I enjoy your blog & funny stories which make me feel good about my boring 20yr fixed mortgage. Your joke at the end got me wondering though. If folks state that they earn 3 or 4 times more than they actually do for the purpose of getting the loan, won't the IRS want to be paid taxes on this "stated income"? So if one of these folks needs to file for bankruptcy protection because they lied on their loan and couldn't meet the payments, are they not setting themselves up for some sort of fraud suit or the need to pay back taxes on this stated income if they don't fess up to the lie?
"Since I used stated income on my loan application, can I use stated income on my taxes???"
Whoa, is that really something somebody asked you?
To cathy: I'm not an accountant but here's my two cents: On the one hand, putting a fake "stated income" on their tax form certainly seems like "perjury" or whatever they remind you about on the signature line. Plus they'd have to pay tax on it. There's nothing but downside.
I'd bet that they would soon decide (or be told) that just one lie to the mortgage company is enough. What's the worst that can happen, that the mortgage company will make them sell their house? Nope, as long as they are making their payments the mortgage company won't care, that's my bet.
But, but it's only fair! After all the lender provides them with an "estimated" monthly payments for the first 6mos-1yr so why not give an "estimated" income as well?
Anonymous, I think SoCalMtgGuy was joking about the stated income, with the idea being that you'd state on your income tax that you made significantly less than you did, in order to pay significantly less taxes.
Cathy does ask an interesting question, though. If someone is filing for bankruptcy, though, I don't sense the IRS 'going for blood,' and just overlooking their lie on the mortgage doc. After all, the IRS is in the business of collecting money, and it's not cost effective to spend too many resources on those who can't pay what they owe.
The IRS would probably do better in going after the loan-granting companies for accepting documentation that contained blatant lies about income. They're the ones with the money. Don't know the legal basis for doing it, but I imagine the IRS and the FBI together could think of one.
Actually, your tax return IS stated income. The only difference is that your tax return is subject to audit, fines, and criminal charges, but a no-doc loan isn't.
Scott is correct.
I WAS NOT asked that by anybody. Just throwing it out there to "show" how dumb stated income sounds.
He is right that people would "state" a lower income to pay less taxes.
But, can you imagine the surprise on people's faces if the IRS taxed them on the income they "used" to get their loans.
Again, stated income loans have a place for people with hard to document income, and that are putting money down. Other than that, it is a scam. We'll see how it all turns out.
SoCalMtgGuy
Just... just.... how do these people sleep at night? It obviously isn't on a giant pile of money with lots of beautiful women.
Just... just.... how do these people sleep at night?
They mutter affirmations in the bathroom mirror.
There is a HUGE market in Get Rich Through Passive Income books since 2001 or so, and that's just the tip of the iceberg, since there's way, way more of that genre on the Web than in print. It's truly amazing to view. But you have thousands of people cultivating a can-do attitude and going for maximum leverage because they're Pursuing a Dream. Read the Rich Dad, Poor Dad forum if you don't believe me (and if your stomach can stand it). There's a bulge in the population that's scared enough to believe that Having a Dream over-rides the laws of economics (and probably physics as well).
One thing I find amazing is how these folks let things go to such an extreme prior to acting on it.
Many of these "up against the wall" FB (ie: The couple in the previous story) paint themselves into a corner, and don't stop to see they are in a negative situation.
In a situation where expenses exceed income (pretty easy to figure out) the decision arrives "hey honey, we have to sell the house".
You don't make that decision with zero in the bank, maxed cards and the power company outfront doing a disconnect.
You need to pout some makeup on that pig (doll the place up so it can compete in the market). This includes cleaning rugs (steam cleaning), possibly paint inside walls (get that new paint smell), touch up drywall if needed, clean the entire yard up. You need to reduce clutter. This means rent a storage unit, rent a truck and haul stuff out of the house to make it look bigger and roomier (less of your crap so they can imagine their crap in the house).
You have to get your house ready for walk throughs (hide your prescriptions, jewelry etc...).
All this takes time and money.
Above all, you have to look at the average time properties sit on the market, and then double that for a worst case scenario. Now have that liquidity reserve & income to cover that time period.
You need to add all of that up, and compare it to your cashflow / reserves.
That gives you your panic factor. If you don't have the runway to cover the pig while it's on the market (and doll it up, store your crap etc..), you need to make adjustments (ie: less "fishing" on the opening price). Evaluate the recent comps, price yourself accordingly (need to sell fast? Get under recent comps if you can without getting upside down).
You can then go in having a plan of when and how much to adjust your asking price etc... Have dates set on adjustments, watch everyone else's listings daily etc...
They are too late for a "save play" strategy. They should have been on the market in Nov, under everyone elses price and tried to catch a 1031 exchange (provided inventories are not through the roof).
What amazes me is that these people seem to be "suddenly suprised" that ends don't meet. That should only occur during layoffs and other catastrophes. They should see this coming at least a year in advance. Then when they decide to act, they don't have the financial juice in the tank to actually pull through the process of selling. They don't stop to consider that selling a house can cost money upfront (when the market is not on crack cocaine).
Hell, I'm no RE guy. I am just a simply shmuck who actually lives in his house. I don't know the world about RE, but I know common sense.
Every month I do a budget (incoming/outgoing) at the start of the month. Nothing fancy, just an excel sheet which adds up the bills and subtracts income. I then project 6, 12 & 24 months as rough ballparks. No big number crunching, they are estimates and tell me the household financial trend. Takes about an hour a month.
I wonder how many others do that.
Arioch:
I completely agree with every single thing you said. But it doesn't even require sitting down for an hour to figure out that you're underwater.
Take your monthly income. You should have it memorized by now. Subtract your mortgage and usualy taxes and fees (in my case, I just subtract my rent), and this is your money that you have to survive on for one month. This calculation can be done in your head in a few seconds.
Now, make a very very rough estimate of bills you have to pay... Power, Phone, Internet, TV. Just make it 500 dollars to be on the safe side.
Subtract again. The money left over is how much money you need to feed and clothe yourself and get you from point A to point B.
Now subtract how much money you spend to get from point A to point B. This includes bus fares, car payments, oil change, gas money. You should already have a good idea about how much this is a month. If not, you're already starting to have problems pal.
Okay. Now what's left over? Money to feed yourself, and unexpected accidents. If you don't have enough money left in your hands to pay off the minimum balance on your credit card as well as a *significant* part of the principal (I'm thinking 20% to be generous, but it should be 50%-100% if you're smart).
If at the end of 5 minutes of mental calculation, you can't make that minimum payment plus a few hundred bucks, you're really f***ed pally! NOW YOU REALLY NEED TO SIT DOWN FOR AN HOUR TO FIGURE OUT THIS GAME OF LIFE.
See, and this is where the problem lies. Everybody is in denial and doesn't WANT to come to the realization that they're f***ed. And so they buy themselves a new cellphone and plasma TV to feel better about it.
Sorry I'm just really bitter at hearing about some other people's financial situations.
Is the "stated income" loan the same as the "non-verified income" loan that my husband and I got 10 years ago.
In our case, we had spotty work history (I was a temp at the time) but we had a big downpayment.
vespabelle
A no-doc loan is different than a stated loan. You aren't telling the bank anything.
I have no problem with those loans WHEN the borrower is coming in with 30-40% down. The rationale is that if they have that much cash on the line, they WILL make their payments.
The problem is that today, you can do no doc loans to 90 and 100% of the value of the property.
Again, I don't have a problem with no-doc and stated loans the way they were INTENDED to be used. The problem is that loose lending standards now allow people to use these loans with NO 'skin' in the game. They will "state" their income, make some big fat appreciation, sell, and move on to the next property...or retire. Or at least that has been the "plan" the past few years. We'll see what happens these next 24 months.
By no means does a no-doc or stated loan mean somebody is an FB.
I acutally recommended a stated loan/verified assets to a friend a little while back. They have had their own business for over 30 years, and it would be hard to show enough "income" to the individual because they were using the corporate structure correctly, and running most expenses through the company instead of the individual. THAT is a textbook case of why stated income existed in the first place. Plus the fact they were putting money down, getting a 30-yr fixed, and had enough cash in reserves to buy the home for cash if they had wanted.
SoCalMtgGuy
Heres a scenario: What if one spouse makes more 3 times as much as the other but the other has the high FICO? Would it be a scam to have the spouse with the high FICO apply with SI alone to get the better rate? I mean, as long as they can afford the loan. I think stated income works here no?
Goodie, a chance for the tax guy to chime in...
IRS has much better income verification than the mortgage industry, but doesn't get it all i.e. underground industries.
Some more food for thought:
How many flippers do you think are going to have a rough time coming up with the cash to pay their taxes this year? Or next? Short term capital gains are taxed at ordinary income rates(25, 28, 33 or 35% depending on their marginal rate)and long term capital gains are at 15%. My guess they are using a section 1031 like-kind exchange (hence always having to acquire new property-now in TX) to defer their taxes. Notice I said defer the taxes, which means they will have a carryover basis in the orginal property they sold years ago in the new property they have aquired this year. At some point in the future all the flippers will have to cash out and they will have a hefty tax bill to pay, provided they get out before the inveitable correction. If they lose their shirt, capital losses are deductible only to the extent of capital gains plus ordinary income up to $3,000. Ouch.
I also bet they will try to use the primary residence, two year, no capital gain exception for all their property. The service should really be looking into abuse in this area b/c I bet it is rampant. I also think there is abuse in groups of people "sharing" the mortgage interest deduction.
Finally, rental property is a passive activity. Passive losses can only offset passive gains. So if our new RE tycoons decide to rent out their dot-condo at a loss, they won't be able to deduct those losses to the extent of their passive gains from other rental property. I think this is why most condo flippers leave their units unoccupied b/c the property taxes on a rental unit would be just one of many expenses that would offset the rental income, which in today's market would most likely generate a passive loss. However, property taxes can be deducted as an itemized deduction of the property is not a rental.
Nonetheless, I've been hearing lots of bad tax advise from real estate folks (no surprise there) so I would expect this to be part of the senate hearings prior to the Shelby-Dodd Mortgage Industry Reform Act of 2008.
Ok.....I have yet to buy a home. I am waiting it out (St.Paul/Minneapolis market at least 24% overvalued). I am curious what "full doc loan" means? Could someone help me out?
OrlandoCPA said...
Finally, rental property is a passive activity.
"Can be" passive, not "is" passive.
Investment advice or tax advisement on a blog is worth far less than the purchase price and I include me.
Question (from a real estate/business/financial naif):
You describe:
"Borrower with a FICO in the 530-540 range wants to do a stated, non-owner occupied, purchase, of a 4-unit complex, in the $650k range."
So this guy wants to be an absentee landlord. Leaving aside all the other reasons to be sceptical about it, does his intention have much bearing on whether the loan is worth issuing? Do you assume that the desire to be a landlord makes him more of a risk?
Do you assume that the desire to be a landlord makes him more of a risk?
Two different issues here. Being an absentee landlord is a double negative. Higher prices, less oversight. Being a landlord is a single negative only because most underestimate expenses and overestimate income. The last is interesting. When you lose a renter once every two years you'd be lucky to lose only 1 months' rent, 4%. Likely 2 months AND update costs, say 10% overestimation of cash flow.
Things have changed over the last 20 years. No longer is it about always employable doctors or scientists or lawyers investing long term, today we have elements of pure speculation.
anon 11:05
If you were to buy a 2-4 unit place and LIVE there, would you take better care of it, than if you didn't live there?
Also, most of the time (until recently) you could not borrow 100% on a non-owner occupied property. That is basically the bank taking all the risk, and the borrower getting the appreciation/rental income (if there is any). What happens if things go down hill? the borrower has NO skin in the game financially, and doesn't live there.
SoCalMtgGuy
"Can be" passive, not "is" passive.
Your right, I was just trying to keep it simple. I guess I should have considered that a lot of people are now in the rental "biz" now and would meet the active criteria.
No tax advise in that post, just thoughts.
Whatever happened to living below your means?
I live in northern california. My wife and I make around $10k a month after taxes. While all our friends went out and bought these huge mcmansions. We got a modestly priced (by nocal standards) home and we are paying about $1900 a month on mortgage.
anon,
when did you buy your home? I'm not as familiar with the NorCal market, but I have a hard time believing you can buy anything up there today and get a mortgage of 1900 without putting a lot down, or using "exotic" financing.
Living beneath your means isn't cool...where have you been ;)
SoCalMtgGuy
Bought the house at the end of 2003 right before the housing market took off. The house we bought was actually on the market for a couple of months. Put 40% down.
yes I know, I'm an idiot.
Anon 11:36:
Some people just want to have a home REALLY REALLY REALLY REALLY REALLY REALLY badly. I don't understand it. I'm happy renting. I don't have to pay property tax, mow a lawn, or worry about paying for roofing repairs. If there's a leak in the roof and that damages my personal property I can sue. That's not even taking into account that renting in Chicago is cheaper than paying mortgage in a similar property. Eventually when prices are SANE I will buy. So tell me, who is getting the better deal?
anon,
You are NOT an idiot in my book....but you aren't a "carolton sheet's" poster-boy either. I'm sure you can live with that ;)
Hindsight is 20/20
Best of luck to you!!
SoCalMtgGuy
At least in nocal, people need to realize that the housing market only recently started moving up. The RE market up here between 2000 and end of 2003 was pretty much flat to down.
And I'm not attributing my purchase to skill, in fact it was all luck. We just had our first baby and we need a bigger place. As the saying goes, sometimes its better to be lucky than good.
I love this blog....it has been a favorite to read. But I occasionally have some questions:
So far in 2006 I have yet to look at a full doc loan. Not that I'm looking at a ton of loans right now anyway, but come on already. Actually, there was one loan that the broker (newbie) thought could go full doc.
Ok...some please explain to me what a "full doc" loan is. I have been renting during the price runnup, and honestly know very little. I have been reading all I can, but I do not understand the terminology of "full doc." Someone help....please?
Cannon Fodder...
Full doc is short for "Full documentation".
This is W2's and YTD paystub (year to date). You can also use tax returns and go full doc as well, but in most cases it is W2's and Paystubs.
I hope that clears it up for you.
SoCalMtgGuy
A friend of mine who just bought a new McMansion in NorCal did it with a 10-year I/O "no negative amortization" loan.
Do they really offer 10-year I/O loans?? This seems crazy. He says he can't lose on the deal because the principal owed on the house will never go up. I thought the point of a mortgage was to eventually get the principle down to zero?
Hmmm, I guess that's not the savvy investor's way to look at it because real estate ALWAYS GOES UP.
I'm in the same boat as anonymous in NorCal. The hubby and I too bought a SFH not too long ago [relatively speaking] in NorCal and our mortgage is about $1750. As you can imagine, the only way it's this low is we put a HEFTY downpayment [over 60%]. The money for the down came because we were very, very lucky our old home appreciated so much that we could move from a crap school district [some schools tagged "No Child Left Behind"] to a high performing area. Yes, yes I know some will argue why didn't we put our appreciation money from the old home into a bank account, rent for a while, and then wait until we could buy another home for cheap. Well, if you have two big dogs and an infant, it ain't such a breeze...Bottom line: I hold no illusions that I'm some kind of financial genius. I just lucked out in buying a property pre-bubble and could use that to move into a better home/neighborhood we intend to live in for a long while. P.S. SoCalMgtGuy, your blog ROCKS!!!
Yeah I'm also another renting 'loser'. I live in a very nice complex with heated pool and jacuzzi year round, off street safe parking in a ritzy area, and I can walk to my bank, a convenience store and more than 6 very nice restaurants.
I live a mile away from work so I could even walk there if I so desired.
I have no car payment, make around $4k a month post tax on a bad month, max out my retirement accounts, and pay $800 a month to rent.
I don't have to cut grass and spend the weekends doing some home repair. Instead I'm fishing or bike riding. And my friends think I'm nuts for not owning a house.
To last Anon,
Hey everyone has differnet wants and needs. You like low maintenace and to be close to places, others take pride in ownership and like to have a nice yard for their kids to run around on.
I had that same attitude like you before: I make $$, I dont need to own a home, yada yada. All I can say now is ..why didnt I do this sooner. The one thing while renting you will never see aprreciation and its benefits.
btw..This is is not a pissing contest on who is smarter, renters or owners, so I wish people would stop boasting of how much smarter you are for renting or owning. It's all about timing, yours will come when you too will want to take that homeowner leap.Just like marriage or having kids.
"I then project 6, 12 & 24 months as rough ballparks. No big number crunching, they are estimates and tell me the household financial trend. Takes about an hour a month.
I wonder how many others do that."
/raises hand, me, me, I do that! My one girlfriend says I run my finances like a corporation and laughs at me. Oh the irony considering she's in an adjustable mortgage that is drowning her. I told her to sell now (San Jose, CA) but she doesn't believe prices will go down here. She says, "How can they?" Told me she's waiting for "big money on appreciation" in the Spring and then she might sell.
SCMG - did you see the ECR news? 440 layoffs. looks like Shabi might have to cut his $4 million annual salary.
Last anon,
I went from owning to renting, and I'm enjoying it. It is partly because it is a better neighborhood, partly less responsibility, and partly cheaper (and it is still a house).
I basically took my appreciation and am running. Outlook for 2006-2009 doesn't look appealing for homeownership.
yup.
Doesn't surprise me at all. I know where myself and the other major "players" are on loans. There was a time that Encore was 50-125 bps better than all of us a few months back. Of course you will have volume if your rates at that much lower than everybody else...but how are you going to sell those loans for a profit with such a low/no return.
Encore is also the company whose "niche" is to price off of the highest of the 3 with no add to the rate. The industry standard is the middle of 3 or lower of 2. Some will use the high fico, but with an add to the rate.
SoCalMtgGuy
Out at the peak said...
"Outlook for 2006-2009 doesn't look appealing for homeownership."
Got greedy and cashed out huh :-)
My buddy cashed out and rented but is concerned that rates have rised and if they continue and prices also (prob wont) he wont be able to afford same house he sold. Tempting but too risky for my blood.
But..That's a pretty broad statement you made though. Should rephrase it to outlook not good for exotic mortgage owners and flippers. People who got a nice fixed, pre 2004 price and plan to stay there for a while to call it a home and not an ATM will ride it out. I got my 5.375, 30yr fixed, 1990 home for 227k inn 2003 and I couldnt care less. The market could come down tonight and I will be sleeping like my newborn.
Good luck amigo
One of our tenants (I'm a landlord) asked me to complete a rental history for her mortgage application. She'd rented from us for three years... we'd had to file for eviction twice and she'd been 30-days+ late more than five times in addition to the eviction proceedings. (She did manage to come up with the money before the hearings, so we let her keep on.) Anyway, I filled out the form (truthfully) and faxed it off to the mortgage company. Day and a half later, I get an irate phone call from the tenant, who says the mortgage person told her to ask us to revise the stuff we put on the form and I was like "Revise how? Are you telling me that you weren't late with the rent x number of times in three years? Are you denying that we filed on you twice for eviction in order to convince you to come up with the rent money? 'Cause we have records of all that stuff..." and she was like "Well, no, but the mortgage lady said you could maybe put it more favorably." So I said "More favorably how? It's not a matter of opinion, here. I answered the questions the form asked. I don't see how I could answer them otherwise. Are you asking me to lie for you?" *sigh* She said I was stupid and hung up. She rented from us for four more months, got a mortgage from some other company, and is now a happy homeowner. Huzzah.
When does it stop? It has to stop, doesn't it? At some point, don't lenders and investors think: "Gee, maybe I should check to make sure this guy REALLY can pay me back the $950k that I am lending him on his 2 bedroom 1 bath 1,000 square foot box in West LA?"
Chinese investors, offshore hedgefunds, pension funds???? Who is ending up with this paper and what are they thinking?
Are they thinking, he give us more of these loans, we love em, we can't get enough of the risk? We have sooo much money to lose, don't worry about it, pile it on!
Hey, forget signatures, lets just do handshake deals, we can send you some briefcases full of cash, no problem!
Where is it coming from, really?
Ferromancer said...
" Just... just.... how do these people sleep at night?"
In my experience people with nothing to lose are always the most aggresive people in this game! People are all aggresive in poker when they play with fake money but turn very risk averse as soon as they put their own buck on the line.
So the class of people who would borrow to the hilt and leverage to the max was always there. Previously no one would give them money for speculation. This is what has changed these days.
Lucky here too. Me 'n the wife bought our first home in sunny OC in late 2003. I was convinced I overpaid and was to be financially ruined shortly thereafter.
I was wrong. Sold in June 2005, and bought a bigger place in the same neighborhood (we now have kids). I didn't put 60% down, but still in the mid six figures. Again convinced I overpaid, only to watch 3 other homes sell in my new tract for 25%+ more than I paid in the next 6 months.
I doubt that sticks. But, my house could go lose 40% by tomorrow, and - like another poster - I'd sleep just like my little baby girl.
I'm not planning on selling, am at around 60% LTV, give or take. Oh, and I actually spend less than I make. Given what I've been reading, apparently those of us who do are on the verge of extinction.
Why is it so hard for people to live w/in their means, whatever that maybe? Or, is the fact I understand that simple fact the reason why my FICO score is over 780?
When does it stop? It has to stop, doesn't it?
What's been happening is no different than when venture capitalists threw money at any web-based dot.com, or merchants bought tulip futures, or people lined up to buy South Sea stock.
Just when it seems like it will go on forever, it does stop. Abruptly. And there will be much wailing and gnashing of teeth.
Arioch: One thing I find amazing is how these folks let things go to such an extreme prior to acting on it.
People just don't do the math, or they bought all the Tony Robbins tapes and believe that they can have it all now and make the money to pay for it later, when they become self-actualized and awaken the giant within.
It's going to be a hard lesson that people can't achieve everything they want just by wanting it.
Question for the 3 anonymous posters who have high LTVs, by either buying early, putting a lot down:
If you sell, you could make so much money, perhaps double the money in your retirement account, retire early, whatever. What keeps you in your house? Why wouldn't you want to cash out your equity why it is still there?
That's what we are doing: selling our custom home, just completed 4 months ago, as we realized the severity of this bubble.
I thought everyone who realized we have a bubble would want to cash out. Just interested, why not?
SoCalMtgGuy: I posted this question last night, but it didn't get through. ??
My ltv is about 9%, my p & i is $437
a month. Why would I want to move?
To "cash out"? A house like mine 700k, but I have to live somewhere and I like where I live. I don't want to pay more in property taxes either.
For me real estate whether an investment or home is a LONG term investment. I bought in 1987 and I wouldn't have bought at the 2003 levels, let alone these levels.
My ltv is about 20%, my p & i is $1321
a month. Why would I want to move?
To "cash out"? A house like mine 1300k, but I have to live somewhere and I like where I live. I don't want to pay more in property taxes either. Currently $240/mo to move sideways, $1100/mo.
For me real estate whether an investment or home is a LONG term investment. I bought in 1995 and I wouldn't have bought at the 2000 levels, let alone these levels.
Was that a snide remark Robert Cote?
I was serious, buy a piece of property you like and hold on to it.
It also helps to not overpay!
I think people don't realize how high the transaction costs are to buy/sell
or refi annually.
Not a snide remark at all. I was echoing your comments and agreeing. I changed the number to my situation to show you weren't alone.
The problem is we blog about the recent madness. Let's say 1/2 of each of the last 3 years are stupid transactions. That's about 11 million FBs but still only 8% of the houses out there.
In addition to The Millionaire Next Door, I recommend Your Money or Your Life. (I've been with the program since 2003). The userbase over at www.simpleliving.net is another comforting bit of sanity.
mtnrunner2: Your thought processes sound like those of a flipper.
Just because you have something worth money (perhaps a house?), does not mean you ought to sell it to get your hands on the cash. It really depends on the individual's circumstances and comfort level how much of their net worth should be in cash, assets, or investments.
The old school of economic thought (of which I am a member) is that you should own your house outright by the time you retire. And perhaps these people are close or already there, and have other financial resources in addition to equity in their houses. I would certainly hope so...
If you are old enough (perhaps you aren't), you'll have read horror stories of elderly people being forced from their apartments/houses when their landlords kept jacking their rents up during the inflationary '70s.
It's a scenario that we're likely to see played out again in the near future. Inflation is not as benign as the (massively adjusted)CPI numbers state.
The FED has been putting the $ printing press into hyperdrive to inflate the money supply - that will make it easy to pay down that $8 trillion debt with monopoly money. The bad thing is that makes *real assets* (like a barrel of oil, a bag of concrete, or gold) cost more worthless monopoly $.
If you happen to be a renter when the landlord's paying $5/gallon for 87 octane, guess what will happen to your rent every 6 months? Been there, done that.
There's nothing wrong with owning your own cave, even if the other cavemen think it's worth all the clams they can find ;)
My .03
mtnrunner2,
I have a home, recently appraised at $285,000. I owe $90,000. The economist in ma says to cash out. But I have two small children who have never lived anywhere else. I know that the two biggest predictors of how well a child does in school are: 1) whether or not thier parents stay married, and 2) How often they move.
I have enough money in the bank to pay off my mortgage. I like where I live.
I am doing what makes me happy, and I think that I do so in a sustainable and responsible manner.
I really don't care if the value falls to zero.
I hope this helps you to understand.
speaking of The Donald..what did I find in my mailbox this evening but two VIP "absolutely free valued at $149.00" tickets to his "Celebrity Conference"...The Donlad wants to show me how to become rich through real estate just like him, how to lower my tax bills, how to buy real estate for up to 50% below value, his 21 money making secrets..and finally how to protect 100% of my assets from lawsuits,leins, Bks or even a divorce..at leastthat last is something he really knows about!
My husband got one of these invites too, wonderhow many suckers are gonna show up?
mntrunner2,
I've often wondered the same thing. Personally, I would opt to sell, invest the cash, and rent a house for a couple years until I see a bargain that I'd like to move in to. But then again I'm single, don't have kids, and I've not been a homeowner yet so I'm sort of looking at it from the other side.
But I have asked the same question of my friends and family who have seen their homes' equity grow so fast, and none of them are willing to sell right now either. The reasons vary depending on their situation.
To summarize:
Parents: 0% LTV (own the house), lived there for 32 years and love the neighborhood and the house, so you could say for them it's emotional attachment.
Brother: 40% LTV, doesn't want to move the kids at that age (7 and 11). Even if they can stay in the same school he believes it's better for them to stay at least until they're high school age.
Friend #1: 60% LTV, won't sell because he is convinced that home prices are going to continue to go up. He wants to wait until it's up another 30-35% before he sells in the next year or two. Very bold.
Friend #2: 75% LTV, doesn't want to sell because he says "moving is a pain in the @$$". He's also in it for the long run so doesn't mind riding the ups and downs.
I guess everyone's situation is different. Only time will tell if they believe that they had made the right decision to stay put.
This summer we decided to sell our coastal Calif. rental property we've owned for 15 yrs. We sold because of the insane run-up, but also because it's in an unincorporated area and the CSD formed to put in a sewer is in chaos, with lawsuits, gov't fines, and the prospect of $200+/mo. sewer bills. Buyer put down exactly $3k on a $500k sale.
We were going to 1031 into other properties, but dealing w/ tenants, even w/ a property manager, was a PITA. We couldn't buy in CA and looked hard in Tucson. We called two property managers there (this was last spring) and they said the market was saturated and we'd have high vacancy rates, turnover, and never get more that $1k/mo. rent.
So we took the tax hit, and most people think we're nuts. While I don't relish writing big checks to Bush and Arnie, I did like writing a big check and using the profits to refinance our primary res to a 15-yr. fixed. We pre-pay (always have) and our house payment is now smaller than our car payment. We're about 85%LTV (for now anyway) and have no intention of selling what we consider our home rather than an investment vehicle. But then we don't churn our brokerage an retirement accts. either. It's a very good feeling.
I think people looking for a housing crash will be dissappointed. I think housing will correct but not crash.
Sentiment is all wrong for a crash. Just about everybody is looking for a housing crash.
Crashes only happen when nobody is looking for them.
When tech crashed in 2000, absolutely nobody believed it and everybody was expecting a recovery.
With housing, just about everybody is saying the top in is and we crash.
Of course even in a correction, the late comers, speculators, etc will get killed, but that always happens.
Anonymous said
"Crashes only happen when nobody is looking for them. When tech crashed in 2000, absolutely nobody believed it and everybody was expecting a recovery."
Actually, I foresaw the tech crash, and did not buy any tech stocks, but kept adding to my index funds during the entire runup. Having read investing books and studied finance, I knew that any stock with a PE ratio greater than 15 would correct, and that a stock is a piece of a company. Why would you pay money for a company that is not earning any money. You buy a stock to buy a piece of future earnings. Having explained all that to a myriad of people made no difference: they all believed this time is different. You only need common sense and the history to show you that all bubbles correct. Check out www.piggington.com, and his data on the SD market. No opinions, only data. If this market corrects back to the mean, it means a 50% correction. That's what I'm betting on.
In the meantime, I'd love to hear more stories of why people who believe in a correction choose to stay in their homes. It's obvious why those who don't believe in it would choose to do so.
SiliconValleyRenter - your friend doesn't mind riding the ups and downs. Does he realize we may never see this same kind of runup in our lifetime? This is the biggest runup in the history of the world - it is worldwide. Also, what is the problem w/ moving the kids? In SD, you can get rentals in any neighborhood, even in the most exclusive. There are probably rentals in his neighborhood.
I think people just don't like moving, perhaps they have a community relationship with the neighbors, or they've owned their home so long, their mortgage is much less than the rent would be. It's very interesting, the reasons people give. But in our lifetime, we may never have another opportunity to double the money in our retirement account with just a weeks' work (listing, cleaning for showings, and moving and unpacking). That's pretty easy money, if you can just let go of the attachment to a house.
Socal:
I see Businessweek's hotproperty blog referred to your blog in one of it's online articles.
http://www.businessweek.com/the_thread/hotproperty/index.html
CONGRATS!
I live in a 1950's ranch in central Phoenix, with about 50% LTV. Most of the equity is appreciation from the past two years.
I bought the house because I wanted a house. At the time I thought I was overpaying. this year I seriously considered selling and renting, but I spend a lot of time working in my dirt. I like doing that, and I can afford it.
I refinanced to a 15 year mortgage last year, and I am now within sight of actual ownership (as opposed to paying 98% interest each month). I did not necessarily expect this, but I find that being within sight of actual ownership is somewhat of a quantum event in terms of evaluating home investment outcomes.
I do not argue with people who are cashing out and renting. It is probably the smartest thing to do right now (although risky in its own way, especially for people who like stability). However, I do not think this particular investment runup is necessarily the only chance we will see in our lifetimes to increase personal capital base.
Instead of cashing out, I am shorting homebuilders and lenders as a hedge against declining home prices. I think there is a pretty good chance I will make money on the paper investments and also get to keep my house.
Final word - don't have too much faith in cash. Asset markets are likely to get even stupider over the next few years, and people who put all their money in US dollars may one day be in as much trouble as people who put all their dollars in leveraged, overpriced real estate today.
You people are disgusting. You're trying maneuver and angle yourselves for quick gains. I hope those of you who sold your house and are now shorting the home builders get screwed.
mtnrunner2
Interesting question you've posed here.
Husband and I sold our California home with 35% LTV and moved to the east coast where we bought a less expensive home. It was a tremendous upheaval and extremely stressful for our entire family. While we are happy now and are realizing the financial benefits of our decision to leave, it was a roller coaster of a year.
We're aiming for financial freedom in a way that doesn't put our family through an emotional wringer again, so we're staying put and taking great pleasure in knowing that we will own our house outright before our oldest hits high school and long before retirement.
I appreciate your comments about attachment to things, and I'm sorry to read that you lost your home to fire. It certainly would drive the point home that it's dangerous to wrap up too much of ourselves in what belongs to us.
That said, I don't wish to be a vagabond. I like the security of knowing that we will own this house in just a few years.
Furthermore, because we have planned well, I know that we can buy this house without depriving ourselves of adequate insurance and retirement contributions.
Just my two cents.
Hi mtnrunner2,
Long post, for which I apologize in advance. I didn't call you a flipper, just said that your thought processes seemed to follow that line of thought...
I'm very sorry for your loss. I've thought about that subject a number of times, and can't even beging to imagine how it feels... like the loss of a child, there can't be true empathy unless you've experienced it for yourself.
Let me first explain that I come from the school of hard economic knocks. I've been through several recessions, workforce downsizings, a period of very high inflation and a couple of stupid asset bubbles where everyone thought they were f*cking rich without ever doing a thing to actually *earn* it. I've been upside down in a house, too. Stuck there with no savings, a big mortgage payment, in a job that I hated. And I couldn't leave, because I didn't have a wad of $ to bring to closing. Hard knocks.
Outright ownership of a home at retirement (I'm in my mid-40's) is about being in *control* of my economic destiny. It's not about attachment. I have no emotional attachment to this house... in fact I hate it!
It's an oversized, underinsulated mid 80's POS. Due to ahem, 'deferred maintenance' by previous owners, it takes a lot of my spare cash, and my even more valuable free time to keep up with. I wish that I lived in a newer, smaller POS with lower maintenance, landscape, and HVAC costs. I've had better neighbors, too :)
Have I thought about selling it and renting until housing falls off the cliffs onto the pointy rocks below? Heck yes I have. A lot, in fact...
But I'm also in a similar situation
to albrt. I'm 3 yrs into a 15 yr fixed at 4%. I don't expect *ever again* to have the opportunity to get a mortgage this cheap.
Another point, I'm a trailing boomer - so I expect to receive *no* social security benefits. That's right - If I get reduced benefits, I'll be very gratified, but I *expect* nothing. So I am preparing for that expectation.
They'll certainly be having 'means testing' whenever I'm old enough to collect benefits. So if you were stupid enough (as I am) to set aside money for your retirement, they won't be returning the SS wages that they've taken.
Where was I? Oh yeah... the POS house. It's a place to sleep that (when it's paid for) nobody can sell from underneath you, or raise the rent on. *That is important* - especially when you're retired on a fixed income!!!
Could I sell at these astronomical values, rent for a while, and then go bottom-fishing in two years? Sure I could - and I've considered it. BTW I'm probably 30-40% LTV, depending on the stupidity at a given moment.
But I also have a family to consider. There's huge emotional turmoil and expenses that go with buying, selling and moving. I don't know how to put a price on that, but in my wife's case, it's huge. How much is a marriage worth? How important is it for a child to have consistency in their life? A couple hundred thousand bucks? Or is it priceless? I don't know...
My plans have always been about how to support myself when I'm no longer able to work... very long term. I don't really see this transient wealth effect that we call the housing bubble as affecting that plan, is all...
As someone else said, having money in cash isn't always what it seems. I remember when prices on *everything* would go up from one week to the next. I remember federal wage/price freezes. You can 'take a profit' and inflation will take it all away. Keep that in mind over the next few years. Inflation won't touch your home, but it will *ruin* your savings account, and the stock market may not even keep up (as it isn't).
The long term plan for retirement: Pay it off! That eliminates my biggest cash drain and gives me a low fixed rather than large and variable housing expense.
When it's time to retire, sell it and pay cash for something smaller and more useful. In a place with a crappy economy and no jobs. That'll keep my fixed $ worth more. Preferably a place near some good fishing ;)
Set aside any leftover cash from the home sale to pay for the medical coverage that the government will no longer be ble to afford.
Think about this: When you retire, and are no longer contributing to society's bottom line, don't expect society to contribute to yours. If you can't afford to help yourself, neither can anyone else. They're trying to pay their own bills and can't afford to pay yours too.
We're all just human tools, to be used up and discarded as soon as we wear out or break. The sooner you understand and prepare for that day, the better off you will be.
To answer your questions though: Is someone who sells their primary residence to realize the profit a flipper? No. Absolutely not. There's nothing wrong with selling something you own for a profit! That ain't flipping, that's making money :)
Flipping is buying RE short term, knowing that there are huge expenses involved, expecting that an inflated sales value x months later will offset your expenses.
Do I mind if my home loses $500k of value? Hmmmm... Well, no. To my mind, the price of the house only reflects the devaluation of the $. So it's worth two $100 monopoly bills instead of one. Next week it's only worth one $100 monopoly bill. Big deal. What if I have a handful of monopoly money, but *no house*??? That's bad.
Am I worried that if I rent, that rent prices would rise? Yes. Long term, I *guarantee* that renting will absorb any short-term profit. What sounds like a lot of cash right now may not seem like so much in twenty years. Don't underestimate inflation. The FED fears it, with good reason. Maybe I played too much monopoly as a kid, (or had to live in rentals too much as a kid) but in the *long* run, renting will kill you and lead to economic ruin.
To me, a house is a little bit like a savings account. You slowly deposit your money there, and when it's paid for, then you start getting the returns (i.e. a place to live with no mortgage payment).
My question for you is this: If I sold my house (took every dime of my money out of 'savings', so to speak) and had a wad of monopoly money in my hot little hand, what should I do with that money? Put it in the bank earning interest at 4%? Four percent by the way is way less than acutal inflation, so that's a loser vis-a-vis net worth.
I already have *a lot* of money in retirement funds, which are going nowhere fast... absolutely pathetic returns. Should I put even *more* money in there?
Should I speculate in the market? Perhaps an index fund? Have you seen the 5 yr returns on index funds? Buy gold? Oil stocks? More RE?
I'm not bashing you at all! I'm bashing our economy, the government, and the idea that you can get rich without working for it. I'm just explaining my views and personal situation, and asking you to ponder a few of these points.
Best wishes,
Spud
OOPS! Posted to the wrong thread!
Anon 7:21 am
Why are you angry at people shorting stocks of home builders, or at people who are selling their homes to realize the equity?
I do not like posts which gloat about the demise of the industry, like people who say "burn", etc. That is just so unkind.
I hope that those who read these blogs, who are in the real estate business, will position themselves to survive during the downturn.
From your post, I surmise you are in the real estate industry. Perhaps your skills would translate well into another industry. Perhaps you will be one of the 50% that survives.
mtnrunner2:
I responded originally to your question about cashing out.
My house pymt is $437 a month!!!!!
Rent for this house would be 2k a month, I shudder to think what a payment would be to buy it at current prices.
I'm 50, I intend to pay this house off in the next five years. I am also self employed, I want to work less.
I also expect to get screwed after a lifetime of having 15.3% of my earnings confiscated by the social security scam.
This home is a very nice home, if I sold, I'd have to pay the selling transaction costs and capital gains.
I have absolutely no reason to want to move from this extremely nice neighborhood. Also, investing the money elsewhere is looking dicey to me!
However, anyone who doesn't mind moving, or has a good reason to move and wants to cash out, more power to them.
SoCal,
It is fire sale time in South Carolina. Coming to neighborhood near you.
Please read this article with this headline:
Lenders lost on Laurel Woods
Mortgage woes seen nationally
http://www.myrtlebeachonline.com/mld/myrtlebeachonline/13577280.htm
active link to above comment. My daughter is showing me HTML she learned from neopets. Very good basic guide there.
Forclosures
My old boss got greedy and cashed out his L.A. shack. He, his wife and 2 small kids packed up with the little fortune and moved to east coast. Once he got there realized that prices were as high or higher. Now living with a relative until the market 'crashes'. Now you tell me, what kind of lifestyle is that for kids??? If he doesnt make it over there, he wont afford the same house he left behind. My uncle did the same stunt in the 90s. Cashed out and head for AZ. Bought a house there, stripped the equity, got into some crazy loans (neg.amort, etc). He had to let it go. Now he lives in a mobile home and his daughters in another next to his.
To Anon @ 1/6 3:31 pm:
"btw..This is is not a pissing contest on who is smarter, renters or owners, so I wish people would stop boasting of how much smarter you are for renting or owning. It's all about timing, yours will come when you too will want to take that homeowner leap.Just like marriage or having kids."
I'm the anon you wrote this reply to. You are absoltely right and I was not insinutating that I'm smarter than home buyers. The point I was making is that, right now, renting is what is right for me. I plan to move across the county in the next few months. (of course I've been planning that for 4 years now!).
What I'm tired of is the seemingly universal thought that anyone who rents is either 1) too stupid to know to buy a house or 2) can't afford it which goes back to 1
I don't think that's true. If I planned on staying in the area I live now for the next 30 years I'd buy a house now and ride out any storms. That is simply not the case. I will pay a premium for the mobility to quit my job and take a new one in Timbuktu tomorrow. There is a premium for everything, and losing some paper appreciation (that I think will eventually be lost anyways) is a cost I'm willing to bear.
That said I wish you the best of luck.
Let me add to the last post that renting also doesn't hurt when my monthly rent costs are 1/2 of the costs of ownership. Never mind the additional costs associated with gasoline (which are great considering I Have a gas guzzler), insurance, and time spent in traffic.
Anon 6:33
Doesn't sound like either party did their homework before jumping. We moved east earlier this year, and we're coming out way ahead. Much better schools, closer to family, and we'll have the house paid off 15 years earlier than if we'd stayed. Sometimes it is smart to cash out and move on. All depends on your particular situation.
Er, that should have been 15%LTV in my post.
mtnrunner2:
You pose a great question. Why would anyone stay in a house if they know the market is going to head far south.
I'm one of those folks myself.
I bought my place priced at the normal rate of inflation for he area (ie: got it way way under market, snapped up a distressed situation).
If I was single I would have sold it by now and be in a rental.
But I have the wife, kid, dogs, cats and lots of crap. Moving would suck badly, and my mortgage is below the price to rent this place. Dropped a big bag of cash on it and went fixed rate when rates were low (everyone said I was nuts to do this).
But I'm kind of out in left field, I live in my house. It's not an ATM or anything else like that. I can take a 45% correction today and still be money ahead (profit wise).
I view it as a zero percent savings account. If I get what I paid for it one day, I'll still be pleased as I got that Sched A deduction for the duration, which knocks down my AGI. The savings is the rate before/after AGI adjustment applied to income(not the interest payment on the Sched A, many people don't realize that).
Renting is not a "negative" in my view, nor is owning. It is a matter of having foresight and being level headed and doing what is best for ones needs and strategy. Both can be quite negative if performed ineffectively, and right now too many people have been ineffective homeowners. The downside is that they will mess things up for everyone, not just themselves.
If they simply shot themselves in the foot and went broke, it wouldn't annoy me. However there seems to be a critical mass of them who will drag down the economy for the rest of us (renters & owners) who did not participate in the stupidity.
On the bright side, we'll be able to get great deals on Escalades with giant plasma TV's in every headrest and a granite countertop dashboard, spinner wheels and enough crome to sink a ship. Personally I don't want one, even when the repo man is selling them for pennies.
I just read this on Yahoo..
Enjoy...
"Prices are not expected to go up as much this year and, according to analysts, could fall in some markets. That would make some homeowners feel less wealthy and more cautious in their spending, economists say.
"2006 is going to be a wake-up year for many homeowners," said Greg McBride, senior financial analyst at Bankrate.com.
"Consumers have been using their house as an ATM. That is going to diminish considerably over the next several years" as the housing market slows, he said.
The Federal Reserve is expected to continue bump up interest rates this year. But central bank officials have suggested that the end of a nearly two-year rate-raising campaign may not be far off.
The Fed in December lifted a key short-term interest rate, known as the federal funds rate, to 4.25 percent; that's the highest rate in 4 1/2 years.
The funds rate, the interest that banks charge each other on overnight loans, affects other interest rates.
"The Fed's action last month meant that the prime lending rate — for certain credit cards, home equity lines of credit and other loans — rose to 7.25 percent. That also was the highest rate in 4 1/2 years."
"Many economists believe the funds rate will climb to 4.75 percent this year, which would push up the prime rate to 7.75 percent. Others predict the funds rate will go to 5.50 percent this year, leaving the prime rate at 8.50 percent."
"Against a backdrop of rising interest rates, analysts suggest that would-be home buyers and other borrowers lock in loans with a fixed rates, versus a variable rate, sooner rather than later."
"Rates on 30-year, fixed rate mortgages, now at 6.21 percent, could top 7 percent by year's end, according to some economists' projections."
Mestizo
for those who are cashing out and renting in the local market where they live, I'd say you are taking a big risk. all your selling fees, cap gains, etc. can shrink your cash quickly. then when you go to buy again you have all the closing costs etc...
could work out, but seems a bit risky. i know several people in Orange Co CA who did this 3-4 years ago and have little hope of getting into the market (in the near future - we'll see over the next 2 years if things really drop steep or just slightly).
Now for those who cash out and move inland from the coasts, they are the ones who are really taking advantage as they are buying their homes in cash.
note: i do see a market drop in CA and elsewhere, but hard to say crash with certainty...
mtnrunner 2 -
You asked about why I'm not selling, even though I "know" of lost paper gains ahead.
First reason: Tax shelter. I have a relatively high income, and I really don't feel like donating to the Feds more than I have to. And, yes, I ran the numbers. If I rented a home comparable to the one I own, I'm writing a check for about $1k/month to the Feds.
Second reason: Emotional. Silly as it sounds, I like owning my home. Just because you - or others on this board - don't share that preference doesn't make me, you, or anyone else right or wrong. It just means we have different preferences, just like some prefer a Ford and others a Chevy.
Third reason: Paper losses are just that - paper. It really isn't a loss any more than the housing appreciation was profit. It is only a loss or a gain if you sell. And, should I lose 40% of my home's value, all I really lost was paper gains. I'm not losing sleep over that.
Fourth reason: Time horizon. Sure, my house can lose value this year. But what about the next? And the next? Housing does not always go up, but it also does not always go down. I'm only 30 years old. Chances are high that, if I can manage to dodge enough Mack and Peterbilt trucks, I'll probably see another bull housing market in my lifetime.
Fifth reason: My family. My wife and I love our neighborhood and our friends are here. Our little girl knows this place as her home, and her little friends all live around us as well. We have one of the best school districts in the state of CA, and my little one's headed to a Blue Ribbon school when she's of school age. I'm not at all interested in uprooting my family just because I want to "cash out" some money. My house is not an investment, and I do not treat it as such.
I don't disagree with your move at all. Actually sounds completely rational given what happened (fire, etc). I'm just saying that one size does not fit all. Everyone has so many different variables to put into their own equations.
In reading this blog, 2 things I want to comment on:
1. Stated income being anything but real/actual income is FRAUD.
2. Not moving because you don't want to uproot your family is one thing, but saying you don't consider you home an investment is very short-sighted...how many single investments do you own with dollar values as high as your house? You must have some portfolio!
Post a Comment
<< Home