CASE STUDY: 24yr old lied to get 2.2 million in loans
I have been saying for a long time that anybody can get a loan. I have told you that there is a lot of crap going on in the mortgage industry. I saw the credit reports, the 1003’s, the income figures, etc. and was amazed at the loans people were able to get. The thing is, I was looking at numbers on paper…I did not deal with the actual borrowers, only brokers. I ‘knew’ there were shenanigans going on, but I can’t give you the details better than an individual who was DOING the shenanigans. That is why I am going to give you Casey Serin…and let you hear his story. www.iamfacingforeclosure.com
Seems 24 year-old Casey got himself into 2.2 MILLION in mortgage debt…and is about to foreclose on 5 houses.
Here is part of how he ‘did it’. The sad thing is….none of this surprises me. I will go into more detail later.why he is facing foreclosure:
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What happened? Why am I facing foreclosure? Basically, I bit off more than I could chew.
Here is the long story.
I started investing full-time in January of this year. This is after going to numerous real estate investing seminars, reading books and learning from other investors for the past 2 years. Made a few successful deals on the side and was anxious to go full-time. I quit my website programming job and went all out!
In the last 6 months I bought 7 houses in 4 different states, mostly with the help of 100% LTV stated income (liar’s) loans. Most are fixers. I was going to rehab and flip each one within a month or so. Buying was easy, but man was I in for a surprise (or a lesson?).
I grossly underestimated everything. The money it would take to find contractors, run a rehab job, and resell quickly. Add the cost of doing out of state deals. I was not prepared for the huge travel expenses to manage the deals.
I messed up the local deals too. First I didn’t calculate all my costs correctly. Second, the lack of construction experience got me in trouble. The contractors took advantage of me. The first crew on the Modesto deal dragged me out for 6 month and never finished. The worst part is I paid them all of the money.
I did NOT have a solid exit strategy. I thought I would just wing it. You see, I become a “motivated” buyer. The kind they warned us in the seminars NOT to be. They told us to play it safe and start with wholesaling. But NO! I thought I can skip the basics and take a shortcut to the big profits NOW!
Yes, I did buy some of the houses at a discount enough to make a profit. However, I juiced up all of the equity on most of them right away by getting cash at close. So every time I bought one there was a “CHA-CHING” sound and my bank account got fatter. This gave me a false sense of profit and kept me going.
Well, everything went wrong. The rehabs were way behind schedule and grossly over budget. I was too busy flying around the country visiting each job. No time to manage details. I couldn’t sell the houses fast enough. I did sell one in Albuquerque on a round-robin auction. But I got stuck with the rest.
The holding costs on 6 houses is what started killing me. Paying about 15,000 per month in mortgage payments and utilities can really drain ones’ reserves. All the cash I pulled out at close is now gone. And the houses are not selling fast enough to keep me afloat.
As the last resort I went for one more cash-at-close deal. It’s another builder lease-back house in New Mexico from the same builder. The builder and I have become friends and we structured a pretty good deal. I told him I will close with no problems.
I went to get financing figuring I will get it just like before. However, this time my credit score took a dive because of all the maxed-out credit cards. I still pressed on and tried different loan programs and loan brokers. Finally I find the right program and was set to close. A few days before the close the bank denies the loan. Why?
They Googled me! Its ironic/funny/embarrassing. They found one of my early blogs where I was talking about flipping houses. It was pretty hard to find too. It was supposed to be hidden from the search engines.
Flipping (or quick turn investing) is not bad or illegal. What’s bad is applying for an owner-occupant loan but having no intention to live in the house. I have been doing this for most of the deals in order to get better rates and/or 100% financing. It’s actually pretty common and many mortgage brokers will encourage you to do it (along with stated income loans). But it’s plain lying! So the bank denied the loan.
That was the last straw.
Since that deal fell through I started falling behind on payments on all the mortgages. I ran out of money to finish the rehabs. No money to even buy groceries.
I may have to get back to a full-time job just so I can pay basic bills. I AM grateful to at least have my web development skills to fall back on. Or I may do some wholesaling or help other investors to make a little money.
It’s embarrassing to talk about this. Yes it’s my fault and I deserve the consequences. It sure is a tough way to learn though. This will teach me to be more responsible and play smart next time.
I started this foreclosure blog in order to talk about my experience. Hopefully this will help you if you’re in the same situation or know somebody who is.
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I could go on and on about this situation, but I will keep it brief for now. This kid screwed up HUGE! He lied to get loans. He lied about income. He lied about owner occupancy. He wanted to get rich quick. At least this kid is standing tall and admitting his wrongdoings…for that I give him credit. He isn’t grabbing a lawyer and trying to blame everybody but himself for his situation (yet…anyway). He is taking personal responsibility for his mistakes. But just because you take personal responsibility doesn’t mean the consequences of your actions are waved. There should be no free-pass for Casey, or any of the people in similar situations. They deserve exactly what they have coming to them, and there should be NO taxpayer funded bailout of ANY kind.
Spend some time on Casey’s blog and read about his situation. He is NOT the only person that did such things, or that is in such ‘trouble’. Use it as a REAL WORLD example of what happened during this housing bubble.
AND PLEASE…keep the comments civil on my blog and his. Give your honest opinion and criticism, but keep the vulgarity out of it.
I look forward to the comments on this one. I will be active in the comments, and possibly even editing this post to address certain issues. There is just sooooo much I could say, but it is getting late.
Stay tuned….there will be many more stories like this popping up!
SoCalMtgGuy
September 22nd, 2006 04:18
hello from germany,
wow!
it is really amazing. the guys over here in germany still have problems to believe what is/was going on in the us.
our lendingstandarts are as high as they have been 1990.
one of our biggest banks just increased their reserves for bad loans (300 mio €/ 385 mio$). that after zero pricerunup in the last decade and restrictive lending.
makes you wonder what kind of trouble is brewing for the us banks when they have to adjust their vale from their security.
i know that a big piece of loans was sold to the secoundarymarket but their reserves for this kind of action are at historic lows.
http://www.immobilienblasen.blogspot.com/
September 22nd, 2006 06:21
Just shows you how easy it is to get loans.He took a big gamble and now he is screwed as a lot of other folks will be. Get rich quick schemes always fail. consistent hard work over time will bring wealth.
September 22nd, 2006 06:37
SoCal,
If this dude kills his site because of the attention, txchick57 over on Ben’s blog has the details saved.
September 22nd, 2006 07:04
How realistic is it that he could go to prison? I mean this is fraud right?
September 22nd, 2006 07:13
For better or worse (better for the housing market’s much needed correction, but worse for Casey), if he had started this is 2001 or 2002 he would either
1) have a bunch of money in the bank and stopped (not likely)
2) continued to leverage himself on bigger and more expensive properties so that he would be in 18 million dollars of debt today as the real-estate market continues its inevitable correction
Yes, timing is everything. Personally, I don’t like the role “flippers” have had in the pyramid scheme we call the real estate market, but I cannot blame them for their role. They wanted to make money, and I know most people do not stop and think about how their actions are going to impact the economy as a whole (people don’t even vote because they believe they are insignificant). So I personally believe most people got caught up in the “herd mentality” of the pyramid scheme. Vast numbers of people forgot that if it sounds too good to be true, it probably is.
Honestly, I cannot believe the post at: http://iamfacingforeclosure.com/1/why-i-am-facing-foreclosure/
“Investing is supposed to be done on newly build single family homes”
WHAT IS WRONG WITH PEOPLE? THE PYRAMID PARTY IS OVER. OMG. I THINK PEOPLE ARE SO ARROGANT TO BELIEVE THAT CASEY’S FAILURE HAD NOTHING TO DO WITH TIMING. MANY BELIEVE THEY CAN STILL MAKE MONEY FLIPPING PROPERTIES.
No, Casey’s situation is not uncommon, and unfortunately many people got addicted and didn’t stop; they continued to increase their paper “net worth” via leveraging and lying, and a 10% or 20% correction is going to level them. The current stagnant market is all it’s going to take for many.
Let’s get back to the basics. I never had the stomach for so much risk. I knew people who were making a lot of money in real estate during the boom years while I was purchasing fixer-upper, multi-family properties which produced positive cash flow. I knowingly missed a lot of opportunities to flip properties and make a quick buck. I often questioned my sanity or moxie, but ultimately it just didn’t feel right. Honestly, these high-flying investors gave me crap for being so conservative while their idea of being conservative was to only flip 3-5 properties at a time. In 20-30 years my properties will be paid off and I will be comfortable, although not rich in my retirement -with an inflation-adjusted revenue stream.
As my wife once pointed out to me, “our grandparents would be proud”. Hard work, a level head, and patience will prevail. (But it sure would have been cool to be making all that quick money during the real estate boom like everyone else
)
By the way, my advice to the young folks out there: Never, ever, ever, ever, ever, ever buy a house or condo until you are financially comfortable. Buy a duplex, triplex, or four-plex and live in one unit while renting the others out. (4 units and under are still “residential” properties).
That’s my 2 cents…
September 22nd, 2006 07:14
Not realistic unless someone wants to make an example out of him. There will be many much bigger crooks in this story.
HOWEVER, he better come clean on his bankruptcy schedules and since he lied on his mortgage applications, if the lenders decide to break it off on him, they can file dischargeability actions for their debts (deficiencies after foreclosure). I sure as hell would, especially since you can see he’s already angling to try to make money off this debacle through his blog and STILL is trying to sucker other “investors” into working with him. This little ***Ktard needs to spend a few years WORKING for a living. What is wrong with people now? 24 years old and he thinks he should be rich already?
September 22nd, 2006 07:54
After reading this and reading about Pinnacle in Atlanta, I really think the market has been moved much more than anyone anticipates by flippers and this will revert. Looking at historical trends and population growth per a report on cepr.net, we are far above in volume of sales, created by high velocity of sales via flippers (buy and sell), which may have given the illusion of price gains which then create an image of high growth, driving non-flippers into the market and bid-up process and so on and so forth… ahh well.
September 22nd, 2006 08:19
We were always asking “Who are BUYING these houses?” Well, we’ve got our answer. This guy is small potatoes with 5-6 houses. You know there is a lot more people with 8, 10 or even 12+ houses in their get rich quick scheme.
What, there are over 300 million people in the US, right?
We can safely say there are probably about 500,000 people (.1% of the population) like Casey –> flipping and trying to “get rich” with property.
500,000 (.1% of the population of the US) x 5 (houses) = 2,500,000 houses empty — being held by flippers, yet the market has very little BUYERS at the prices the flippers will accept.
If these people are as unskilled, unknowledgeble as this guy, then we are in a world of hurt with the potential of over 2 million homes in foreclosure, on the market at the same time.
Now, we have a clear idea of how and why there are tens of thousands of homes for sale in places like Phoenix and Miami and Southern California. Now, we know that the potential a “flood” of properties is imminent.
Now we know that there wasn’t alot of “families” gaining home ownership — there were alot of flippers LYING that they were families. LYING about their occupancy.
So, that statistic of 70% of the population are homeowners . . . is not a good statistic at all. In fact, we now know it’s a fallacy. This guy owns 5 houses, one he is living in. But the paperwork says his primary residence is in 5 places.
I wonder how many houses that are “primary residences” are actually NOT. Perhaps 2,000,000? 3,000,000? Won’t finding out that these weren’t primary residences bring down the homeowner statistic considerably? Hmmm.
September 22nd, 2006 09:52
I found his site yesterday and was just astonished. I read every word. I’m a forgiving sort (although I despise his ilk), and I don’t think he deserves jail time, but boy is he waving a red flag. If I were in management at Countrywide, I’d be concerned about this dude showing up in depositions at the future shareholder lawsuits, and I’d be very anxious to make an example of him.
If the mainstream media picks up his story, he’s toast.
September 22nd, 2006 10:57
“If the mainstream media picks up his story, he’s toast.”
I would like the media or someone to verify that his story is real and accurate. I admit, it does look pretty convincing after reading the site.
Real Estate Seminars:
I have never known anyone to benefit from seminars, except the people who run them.
September 22nd, 2006 12:31
I found this when I googled him:
http://ablebuyer.com/
September 22nd, 2006 12:58
Mr. Vincent,
The thing is, I saw the same stuff going on ALL the time. The whole ‘owner occupancy’ thing is a joke. It is one thing when you are moving up in property in the same area…but this guy was all over the map!
That is another way we used to catch people when I was underwriting. If they were moving to a ‘new’ area, then essentially they had ‘no’ employment history there. We would need to see letters from companies showing transfers. The ’self-employed’ people were turned down depending on their line of work. Some businesses you can do from anywhere, and others like a ‘hairstylist’ is going to take a hit on their income by moving to another state (for the most part…takes time to get new clients).
My point is, this COULD be fake…but I doubt it. And even if it is fake, that doesn’t mean that what happened is inconcievable…because many that have been in the industry are not really surprised by this.
Thanks!
SoCalMtgGuy
September 22nd, 2006 13:10
SoCal, oh, I totally agree that what he states in his blog is conceivable. I have been hearing about the cr*p that has been going on since 2001 from those on the inside.
I just have a sneaking suspicion that he is now trying to turn his blog into a business. But thats just me, I don’t trust too many people.
Anyway, yes, I think I understand the point you are making is that what we are hearing from him is a story that will be played out over and over again by others in the coming months and years.
September 22nd, 2006 13:56
Exactly!
I specifically remember one loan where the person had 15 houses! They had neg-ams and I/O on all of the properties. All were at about 90% LTV. I laughed when I saw the loan application. The broker says “but they have about 1.x million in equity”. That isn’t the problem…it’s the 10 million in debt…and the fact that the borrower is an ‘investor’. Sure, they were getting about 20k a month in rental ‘income’, but that didn’t cover the mortgages.
I have no idea what happened to that borrower. I certainly wasn’t going to do the loan.
I have another friend that has 5 properties in AZ and 1-2 in San Diego. They haven’t worked a real job since they started becoming a ‘real estate investor’ about 2 years ago. Saw them a few weeks ago…were getting a little worried. Was trying to sell one of the places because they ‘needed’ money.
Oh well…
Stay tuned
SoCalMtgGuy
September 22nd, 2006 15:41
So why are MBS investors still taking the risk? Are the interest rates on inflated income/fictitious income loans high enough to cover the coming defaults? Are they assuming that the originators will have to take them back due to the rampant fraud? Or are they relying on “diversity” in the loan pools to soak up the mess from the loans that are non-performing? I just don’t get why rates are still so low when *everyone* gives a nod and a wink when a stated income, NINA, or NISA loan comes through. *SHEESH*
September 22nd, 2006 15:51
After reading that blog, I am completely convinced that this guy set the blog up in order to turn this into a business.
Give it 6 months, maybe less, and he’ll publish an e-book on “You’ve Been Foreclosed, Now What?” for $24.99. Next, he’ll announce that ‘due to the overwhelming response’ to the e-book, he will be doing one-on-one consulting so that people can get even more help from him. Next, it will be a series of seminars on ‘how to survive and thrive in a busted RE market’ or somesuch. And so on and so on.
September 22nd, 2006 16:22
I can’t see how the underwriter who approved these loan(s) could keep his/her job after this clown is foreclosed on. When an underwriter reviews a file to approve, the decison should be based on three factors, the borrower’s ability to repay, borrower’s willingness to repay, and the collateral. He wants to buy a home with 100% financing, but you don’t verify to see if he has the income to handle the loan payment? He also states he specifically bought fixer uppers? A property that needs a lot of work done, mortgage companies used to frown on these type of homes because they were concerned that the loan went bad, then they had to foot the bill for the repairs. Even if this guy only bought one property and he did live in it, the lender agreed to give this guy 100% financing on a loan he didn’t demonstrate he had the means to pay back and a property that needed repairs. You figure each loan was $440,000 each, I know this is 2006 and inflation in all, but that is still a lot of freakin’ money! If I am an MBS purchaser, I don’t know how I could accept a loan from any company that underwrites their own files on a stated income or limited documentation type of product. I’m sure guy is the tip of the iceberg. I will be interesting to see the changes that occur as a result of all the losses on these type of deals.
September 22nd, 2006 17:20
Easy, because the standards are that low!
An underwriter ‘underwrites’ to the standards set by the loan program.
Again…EVERYBODY wants to get paid!!!
The underwrites get paid more when loans FUND…the account exec gets paid more when the loan FUNDS…same for the broker, the title rep, the realtor, and all of these peoples managers. Eveybody, on all fronts wants to close loans and make money…after all, nobody gets hurt in RE, it only goes UP!
It goes back to my post a long time ago where I said people are driving forward looking through the rear-view mirror. “I don’t see that I’m driving off the road into a tree, because all I see out the back window is nice paved road.” The mortgage industry did the same thing…they kept finding ways to ‘help people’ get loans because they were not seeing the defaults…YET!!
Stay tuned…this is JUST the beginning!
SoCalMtgGuy
September 22nd, 2006 17:44
I’ve heard that some mortgage companies pay their underwriters bonuses for approving more deals. Isn’t this a conflict of interest? What happens to the underwriter who refuses to rubber stamp deals he/she knows that make no sense even though they meet “the investor guidelines”? Does he/she get paid less money than the U/W who looks the other way and closes more loans? If I were an subprime/alt-A MBS investor, I would demand that loans be underwritten by a 3rd party not affiliated with the lender. I just saw a loan approved for a senior citizen that was a 40 year 2 year fixed loan, 100% financed, cash out refinance for $152,000. I doubt very much the borrower has the income to handle that payment, especially when the ARM resets in two years. This person unknowingly has entered FB land. But like you said, everyone has to get paid from the LO, UW, manager, processor, title co, appraiser, state, and county. Just because this loan makes no sense for the borrower or the investors who hold this paper long term is inconsequential.
September 22nd, 2006 18:59
It is not so much a bonus for underwriting more deals…it is usually for the group…a team…region…a territory. If the ‘group’ hits their number, everybody gets a bonus.
I will go into more detail later…
SoCalMtgGuy
September 22nd, 2006 19:21
Ha!! I am doing two no-doc pay option arms right now. Can you believe that, a true no-doc pay option arm? You’re right socal, the underwriters just underwrite the guidelines on the specific program. By the way, I fully explain the loans to the borrowers so they understand them, but they still want them. Pay option arms have really become popular. Good for specific situations or in rapidly appreciating markets, don’t know if I would get one now…
September 22nd, 2006 19:21
I got one of my friends doing what this guy is doing in (nyc) and lately he seems to be hurting. I feel sorry a bit because
this seemed like a path to wealth for a lot of people pyramid properties and gains. Once forclosures start the banks will begin to unload the loans and the spiral will begin just two years left.
September 22nd, 2006 19:41
You know I’ve been the biggest supporter of the bubble theory, sometimes to the point of being ostricized (spelling?) in my own office. Hmm, they aint ostricizing now!!
September 22nd, 2006 20:04
Great new site posted on the BubbleTracking blog
http://thisoldhouseflip.blogspot.com/
September 22nd, 2006 20:19
This story tells us 2 very important facts:
1- ALL the players (the not-so-bright-RE-investors/gamblers, brokers and loan officers) involved in these kind of senseless deals are (hopefully) not just plain CRAZY, so it has to be that their downside risks is fairly limited, i.e. THEY ARE PLAYING WITH OTHER PEOPLE’S MONEY.
2- Due to the EXCESSES highlighted by the situation of this 24yr old liar with no steady job but with 7 loans totaling $2.2million, it is clear that we will see a massive increase in the foreclosure rate much SOONER that most people anticipate. 2007 is going to be FORECLOSURE YEAR because these fools can not even stay afloat for 2-3 months in this market!!!
September 22nd, 2006 20:27
Let’s say you are one of the tenant on one of house this guy. You are renting the place at a steep discount waiting to buy the place at a 40% discount. How does a house in a situation like this loose 40% after the bank get the keys back? And where do you live and how much rent increase are you facing in the meantime while the process unfold?
This is the missing link that all BUBBLE SITTERS have to explain?
September 22nd, 2006 21:40
other side:
that last post wasn’t really yours, was it? just some real estate agent imposter with English as a second language, no? how can the same person say 2007 will be year of foreclosure, and then ridicule “bubble sitters.” maybe that last post was Smilin’ Larry in disguise — it sounds like his sort of half-coherent gibberish.
September 22nd, 2006 22:24
Okay. I know this may be slightly outside of your territory SoCal, but I’ve seen NOTHING about this on any of the blogs and am hoping that you can shed some light.
Perusing the local classifieds, I’m seeing all these ads that say stuff like “I lend for RE investment”.
Lately, I’ve been checking in on the flipper blogs and have seen references to kids that are lending to other kids. It’s like they’re setting up their own personal banks to lend money to other flippers to invest in RE- sometimes at really high interest rates- like upwards of 11%.
There’s a flipper blog http://shaunsre.blogspot.com where he mentions www.prosper.com has just started a program where a bunch of people “join” and agree to bail each other out if one has trouble making a loan payment.
Anybody know anything about this?
I feel like there’s an “underworld” of lending happening and am just curious about it.
September 23rd, 2006 03:09
I’m a Prosper lender in the ITulip lending group (Indexarb username) and I’ve seen plenty of what you’re talking about. Usually when someone posts a loan (a borrower) it takes 10 days to 2 weeks to be fully funded (even if the borrower has perfect credit, low DTI, etc.) because then they’re haggling over the interest rate. I have also noticed that virtually none of the bad credit loans are being funded anymore EXCEPT some of the “real estate investor” ones and those are sometimes 100% funded right after they are posted, sometimes with just one bidder. That means that someone is bailing someone else out.
It doesn’t matter. None of them are going to be able to keep this up much longer. There are forums on Prosper too and another forum where you can see how many of the loans go bad. I’ve stopped even looking at the listings, they are so ridiculous. I wouldn’t lend most of those people a nickel and expect to ever see it again. Talk about an confederation of life’s losers looking for yet another bailout . . .
I have given a few bucks to a couple of people I saw on there. I paid one person’s vet bill for their cat. Other than that, haven’t seen many I’d do business with.
September 23rd, 2006 05:33
theotherside–Don’t forget the pension and mutual fund managers who are buying MBSs. They’re also members of club OPM.
September 23rd, 2006 05:42
I agree, prison time is unlikely. He might spend a little time in jail depending on whether he can come up with bail…. This guy hasn’t really realized how much trouble he’s in. He should happily go into foreclosure and HOPE that the lender gives him forgiveness and a 1099. I don’t think that he realized that where he is now bankrupcy PROTECTION is a good thing. However since his loans were obtained fraudulently, his creditors would have a good case that they are not dischargable. His best chance is that his creditors would rather he go away quietly (too late for that really) than take him into court to seize whatever assets he does have. Let’s face it, furniture, clothes, and the $68 he has in his checking account aren’t making ANYONE whole.
September 23rd, 2006 06:16
“Let’s say you are one of the tenant on one of house this guy. You are renting the place at a steep discount waiting to buy the place at a 40% discount. How does a house in a situation like this loose 40% after the bank get the keys back? And where do you live and how much rent increase are you facing in the meantime while the process unfold?
This is the missing link that all BUBBLE SITTERS have to explain?”
Hmmm, all these new homes sitting unoccupied now. And you think rents are going to increase dramatically, screwing us JBR’s??? Bawahahahahahaahahahahahahahah.
September 23rd, 2006 07:29
Hi All,
Saw an ad by these guys. Who are they?
http://www.monumentalfunds.com/
September 23rd, 2006 11:33
http://realestate.msn.com/Rentals/Article.aspx?cp-documentid=797247
The hottest markets
The three priciest rental markets were, as expected, in the markets with the biggest hurdles to new construction: New York City, San Francisco and Los Angeles.
In Los Angeles, rents climbed 6.5% to $1,586 in the second quarter on an average occupancy of 97.5%.
Rents in already-steep San Francisco, where 97.4% of the apartments were occupied, climbed another 8.8% in the quarter to an average of $1,947, and will almost certainly surpass the $2,000 mark later this year, to rival the tech bubble peak of $2,100 in late 2000.
But the most expensive place for rents was still New York, where 97.1% of the apartments were occupied, at an average monthly rent of $2,469, according to real estate data firm REIS Inc. (M/PF does not track New York City.)
Some of the biggest increases in rents came in areas where the gap between renting and buying was largest, such as San Jose, Calif., and Phoenix, and the major markets in Florida. Experts blame the tight market in Florida on condo conversions, which took thousands of apartment units off the market.
Some exceptions to rising rents
Rents aren’t rising everywhere, of course. Landlords in Greensboro, N.C.; Fort Worth, Texas; and Detroit lowered rents in the second quarter, as occupancy remained flat on a lackluster economy. Rents and occupancy also remained flat in San Antonio, where more apartments had been built in recent years.
But the biggest wild cards in the rental market, experts say, are areas such as Las Vegas, Miami and Fort Lauderdale, Fla. Here, investors snapped up condo conversions for quick resale, only to see the market stagnate.
These units are slowly being added to the rental stock in many markets as their owners find they can’t make a profit by selling. This trend could pick up steam, as condo projects started during the housing boom are put up for lease instead.
While no one is projecting rent cuts, Willett says, in some markets “It’s not outside the range of possibilities.”
September 23rd, 2006 12:14
GREGG
Setting aside the typos and BUSHISMS in my post #26…
I CHALLENGE you (or any bubble sitters) to ARTICULATE a step-by-step process that leads to one of the 100% FINANCED, soon to be FORECLOSED properties of the fool in the story above, to be sold at a 40% discount AND resulting in much lower monthly mortgage payments for the lucky buyer!!!
WHO TAKES THE LOSS? The bank, the MBSs holder or the government? Obviously the guy does not even have $30 on his account to bring cash to the table.
If it is the BANK, how much of a hit can they take before crying for a government-bail-out plan? And will government involvement not result in price stabilization by removing the panic factor among banks and incentives for fire sales?
If it is the MBSs holder, how long will it take before they start demanding much higher risk premiums? And how does this translate into future mortgage rates?
If the crash results in a recession, will it not lead to the FEDs lowering rates, thereby bailing out all the FBs currently unable to afford their resetting ARM?
I believe that most bubble sitters will not be able TO TIME this crash especially if it is so widespread that it results in a recession. If you prefer an historical context, do you know a lot of people who made a lot of money in the tech bubble crash of 2001-2003?
September 23rd, 2006 12:42
“Makes me feel like I’m doing something illegal”. Hey, you are doing something illegal. Just like everyone else who drove the market through the roof. You see, fraud and real estate are synonymous. Most agents will blatantly admit it and laugh about it!! If it weren’t for fraud, the real estate industry (appraisal industry too) would cease to exist.
September 23rd, 2006 12:56
other side:
first let me start off by apologizing. i really thought someone was writing in your name and now i see it was you. i was NOT trying to be snide or sarcastic to you. i just didn’t see how the same person could so clearly understand the coming foreclosure wave and not think prices would be dropping.
i’ll try to accept your challenge, on your terms. i have two pieces of evidence to offer you. they are called SUPPLY and DEMAND and i’m sure you are well acquainted with them. you speak in your example of the Nasdaq bubble. Well, take one of the classic bubble stocks: JDS Unipahase. It peaked at around $150 a share i think. Now it’s $2.17. As people saw that the price of it was headed south, they wanted out, all at once. So PRICES FELL DRASTICALLY.
I’m sure you’ll mention the “but you can’t live in a stock” cliche. well, you also can’t live in a house that you’re not living in. as evidenced by the 24-year-old investor du jour, many of the houses bought that last five years were bought as “investments.” highly speculative investments. and with the tech stocks people had margin requirements and margin calls that acted as somewhat of a break on the rise and thus the drop. most of these idiots who speculated in housing did it 100 percent with OPM. think of leverage as a see saw, OtherSide, and the more leverage that sends one end up, the quicker it’s going to come down.
i’m not saying prices are going to drop 40 percent in a month. but if they dropped 40 percent over a few years, you wouldn’t call that a crash? come on. you need to do some research. google “robert shiller” and “yale” and “housing.” then you can learn that this was the biggest housing bubble in the history of the united states of america. in japan when their housing bubble popped, prices fell 50 percent and stayed down 50 percent for TWENTY years. And since you like to use the Nasdaq as an exampe, it fell from a bit over 5,000 to a bit over 1,000 (80 PERCENT DROP) before reaching the 2200 area where it sits today (STILL DOWN 60 PERCENT FROM PEAK FIVE YEARS LATER.) you say, “i don’t know a lot of people who made a lot of money in the tech bubble crash.” well, that’s because you run with the “get rich quick” crowd, not the patietnt long-term wise investor crowd. I’ll only give you one example. Corning (ticker GLW) bottomed at about $1.10 a share i think. now it’s about $24 share. maybe you don’t consider a TWO THOUSAND PERCENT GAIN to be making money but i do.
you need to do more research and look at historical charts and see that real estate diverged from wages and rents and mean historical averages somewhere between 1998 and 2,000 depending on whose research you look at. that’s where we’re headed. you can shout till your red in the face and make your weak arguments but it’s not going to change a thing. did i mention that the Nasdaq (you’re favorite tool of comparison) is still down 60 percent from its peak.
one thing you are right about — people can not time a bottom, except by luck. but you can say, okay, prices have fallen 60 percent from the top and are now at somewhat “reasonable” levels so i can buy with a 20 percent down, 30 year fixed and have payments i know i can cover. well, then sure you run a risk it wasn’t the bottom, but if you like your new home and you’re going to stay there, suck it up, and you’ll eventually see some gains one day.
people always point to the fortunes made in real estate as proof that it’s a great investment. well, of course it can be, but i don’t think many of the smart investors were buying too much residential real estate the past few years. it was the morons and wildmen — the same people who bought JDSU at $150.
best of luck to you.
September 23rd, 2006 14:49
Just to clarify, as far as I am concerned, a “BUBBLE SITTERS” is someone who recently sold their primary house, hoping to buy something similar at a discount in the next 2-3 years.
And my point about MARKET TIMING is that if you bought your house before 2003 with a fixed mortgage, it is very unlikely that you can successful lower your monthly payment by selling at the ‘peak’ and buying back at a ‘bottom’. That is why I am asking anyone of you out there to give me step-by-step process that leads to much lower monthly mortgage payments?
1- People always mention SUPPLY and DEMAND. Yes, OVERSUPPLY leads to LOWER PRICES. JOB LOSSES also do lead to LOWER PRICES. But the evidence points to builders drastically cutting back on production.
http://news.yahoo.com/s/nm/economy_housing_dc;_ylt=AmPNP7m.orwxNhCnYjIH9cOz1g4B;_ylu=X3oDMTBiMW04NW9mBHNlYwMlJVRPUCUl
http://news.yahoo.com/s/ap/economy;_ylt=AkSMKUe3TPZPOGWah9OF__XqxQcB;_ylu=X3oDMTBiMW04NW9mBHNlYwMlJVRPUCUl
2- A FB does not have the cash needed to sell at a 30-40% loss or to rent a loss for a long period of time. So if you are renting from a FB and your rent covers only a fraction of the mortgage expenses of your owner, be prepared to be on the streets sooner than you expect (2007!) when the house is foreclosed. The article I posted in my post #34 shows that rents are going up at the same time as prices are dropping.
http://realestate.msn.com/Rentals/Article.aspx?cp-documentid=797247
3- In the absence of oversupply, you must have AS MANY HOUSES FOR SALES AS BUBBLE SITTERS, so inventory on ZipRealty does not tell you much about future prices. First because the FBs among these candidate sellers can not afford to sell at a loss. And then because many of these candidate sellers are not FB’s but candidate “bubble sitters” trying to “cash out before it is to late and rent for a while”.
4- When you look at historical prices, don’t forget to also look at monthly PITI & mortgage amount or at least adjust for interest rate. If you don’t you are not comparing apples to apples.
5- Going back to your example on JDSU or my example on the Nasdaq. My question is:
Do you know many people you owned the stock at $125, but yet manage to make money (by ’shorting’) WHILE the stock went from $125 to $2?? And for each person who made money from $2 to $25, how many lost money from $5 to $2 after buying for what they thought was a bottom?
Conclusion:
“being a bubble sitters to buy back a the bottom” is like “buying gold because of weak $” or “buying condos to flip”. You have too many people playing the same game for it to be profitable.
September 23rd, 2006 14:57
WASHINGTON (Reuters) - The pace of U.S. home building fell more sharply than expected in August as builders broke ground on new homes at the slowest rate since April 2003, a government report showed on Tuesday. The Commerce Department said U.S. housing starts fell 6.0 percent n August to an annual pace of 1.665 million units, compared to a downwardly revised 1.772 million in July.
WASHINGTON (AP) - A closely watched gauge of future economic activity slipped for a second straight month, a performance viewed as signaling a slowdown but not an outright recession…Economists said the country should be able to avoid an outright recession as long as employment growth does not deteriorate. A second report Thursday showed the number of newly laid off people filing claims for unemployment benefits rose by 7,000 last week to 318,000.
Analysts said this was close to the levels seen in recent weeks and indicated no significant rise in layoffs. Firms have trimmed hiring plans in the face of this year’s slowdown but so far have not resorted to firing workers.
September 23rd, 2006 15:13
Other Side
Let’s say I bought a home for $950,000 two years ago and I can still get 1.3 for it today. (this is true in my neighborhood in l.a. — where the house in the example fetched 1.4 last august) Well, if I can get 1.3 million now and I think that these same homes will be available for $600,000 to 700,000 in a few years, you don’t think i could make money by pocketing the 1.3, taking the tax-free profit of $350,000 and putting that down as a 50 -60 percent down payment on the same home in a few years? interest rates would have to double for that not to be possible.
September 23rd, 2006 16:02
We looked at a similar situation a few weeks ago on this site.
If you sell at $1.3m, you end up with $319,000 paper profit (6% closing costs).
1- If you buy back at $700,000 and it is close to the bottom, then you are one of the lucky one.
2- But if after you buy at a 45% discount, the market keeps sliding to $500,000 (hey it happened in Japan) then, you LOST almost 2/3 of the $319,000 profits.
3- And if the prices stabilizes at 1,1m after a 20% decline because other bubble sitters can’t wait to get back in, then your new mortgage (assuming 2% transfer tax) is $1,100,000*1.02-319,000 = $803,000 as opposed to $950,000. If the rates just a little higher than they were 2yr, this will not result in drastic lower monthly payments…
Conclusions: your $319,000 profit is just a PAPER PROFIT until you buy-back a similar house and that’s the KEY point about market timing.
September 23rd, 2006 16:55
This is all very fascinating. In my humble opinion, both Gregg and “the otherside” have valid points. My wife and I are “bubble sitters”. We are paying $850 a month in rent for a house that is currently for sale with an asking price of $220,000. I may have bit of a different perspective as I am a licensed RE agent although that is not and never has been my primary occupation.
I am a civil engineer (not yet licensed but intend to beat the odds and pass my PE on the first try in October) so I am keenly aware of not only the RE sales markets but also the land development markets in sunny Arizona. One thing most folks are not aware of is that there are a heck of a lot of new homes that will be coming online in the next 2 years. It will be very hard for developers to walk away from their investments once they have spent hundreds of thousands of dollars on engineering, entitlement, utility infrastructure, etc. Over the last few years builders and developers did not cooperate with RE brokers because they did not have to so many of the new listings in the MLS are due to this new level of cooperation and not necessarily because there is a mad rush to hit the exits. Also, the developers tend to have a very healthy profit margin built into their investment so a market correction will not likely wreck their day. Of course if it goes very badly, then I guess they could take a bath but keep in mind that many of them have made large profits over the last several years and it would probably boil down to a few bad lumps after many years of tremendous successes.
Regarding the volatility of markets, it does not matter if it is the RE market or the DJIA. Some people buy low and sell high and others buy high and sell low. On the macro scale, money trades hands but wealth is not created nor is it destroyed; it is simply transferred. I am just writing all of this on the fly but I think it is pretty simple and straight forward.
How do you decide what is “low” and what is “high”?
If you look at historical ratios, this will provide you with a hint. I prefer to use gold as a base but you could certainly use dollars, yen, etc. for comparison.
How many ounces of silver does it take to buy an ounce of gold (about 52)? How many barrels of oil (about 9.8)? How many ounces of gold does it take to buy the DOW 30? Relatively speaking, ratios such as these will tell you what is priced “low” and what is priced “high”.
It is easy to fly off on a tangent but another primary point I wanted to make is that I sold my house and am now working for a developer who is 24 years old. He owns the company. I looked up his name through the local county assessor website and he owns (or is a partial owner of) 36 properties. Is he going to make money or lose money? He is certainly of a much higher caliber than the 24 year old that this article is about. He has a lot to gain and has a well thought out plan but I have no idea what his financing looks like. I don’t know how much real equity he has or if he has re-fi’d every property just to buy two or three more. I do know that my last home is now in escrow (for a tidy profit), that all the ratios say that RE is way overpriced and my new place is a rental since it is the only thing that makes sense in my world. I could have bought an apartment complex if I wanted to but the numbers don’t pencil out.
My big fear is that the government will monetize the hell out of everything so the sheeple won’t realize such a tremendous shock. If houses and other assets only “appear” to correct 20% but the number of U.S. dollars in circulation increases by 50% then the math will be a lot more gut wrenching but folks will have very little idea that all of their investments have been devalued accordingly. But of course that means inflation and lots of it which translates into sky high interest rates which translates into the whole dang economy screeching on the brakes because nobody will want to lend anybody a dime.
Interest rates are (or at least should be) set by taking three factors into consideration 1) recovery of funds due to inflation i.e. time value of money and 2) risk- the chances that the borrower will lose his job, his life, etc. and 3) some amount of profit. The craziness that has ocurred over the last several years basically disregarded these laws and the economy will suffer dearly for them in the future. When interest rates did not even account for the rate of inflation, much less items 2 and 3, the economy was bound to get distorted all to hell.
So now what happens? As interest rates rise, defaults will rise which will increase the risk factors substantially and cut into profits. This will force rates to push a little higher. As inflation increases, future interest rates will have to take that into account.
Also, keep in mind that there are many cool headed people out there that have low interest, fixed rate mortgages (I was one of them). If interest rates continue to increase, somebody will still be acting as the lender to all the fine folks with low interest, fixed rate loans. This means that they will have to charge the next guy even more interest to make up for the older lower rate paper they are servicing.
Thanks for letting me borrow the old soap box for a while. It’s been fun.
September 23rd, 2006 19:37
It is NOT about buying at the ‘bottom’.
It is about buying when the numbers make a LOT more sense.
That is the problem…you are looking at this like a stock, and many more people just want a place to live at a reasonable price.
There is a major disconnect between what you can rent a place for, and what it would cost to buy it. It is not about timing the bottom, and then getting massive appreciation on the way back up.
Creative financing and stated income has allowed people to stretch their income and buy houses that they normally would NOT have been able to afford. These people had to get ARMs to get these houses, and they will all adjust at some point.
I don’t have time right now to counter all the points made on this thread. Needless to say, some are valid, and some are very flawed. More later…
SoCalMtgGuy
September 23rd, 2006 21:57
There are plenty of people like this kid who saw real estate as easy money. There are more who just overextended on their home purchase. Quite a few kept digging deeper by pulling out all their equity. Across the board all owners, regardless of when they bought, are fighting to make their tax payments on their newly appreciated property. Everybody is starting to lose that good feeling about real estate. A drop in interest rates isn’t going to save this decline. Loans will reset, eventually they’ll run out of ways to finance the monthly payment, having max out the cards and tapped all their family and friends. Tax rates may decline but the number on the check will keep going up. I think it is a given that Congress will impose limits on the use of “exotic” loans for residential buyers once the teary-eyed FBs appear on CNN.
With all this, buyers will be slow to take the plunge. Without the exotic loans, the cost of entry for new buyers will be steep and may cause more of a price reset than anything else. Eventually buyers will return but “owners” will have to hang on for a good while to see the upswing. They “owners” will have to find the cash to cover adjusted payments and increased taxes for quite a few years. That cash will have to come out of work income as the “home ATM” will be out of order.
Question: Without the “exotic” loans, how much of a price adjustment will be required for buyers to be able to afford homes on conventional terms?
September 24th, 2006 08:52
SoCalMtgGuy says
“It is about buying when the numbers make a LOT more sense.”
And I say (ONLY REGARDING people tempted to sell close to the top now and buy close to the bottom in 2-3 years)
“if you bought before 2003 (or 2001 depending on where you live) it is very likely that
1) you did not use an “exotic loan” and
2) your price was okay and you can afford your mortgage payments.
So DON’T TRY to be a “BUBBLE SITTER” because the strategy of “selling close to the top and buying close to the bottom” will most likely not result in much lower mortgage payments.
The reason is that when you “sell now at the TOP” you profit IS NOT what you get now MINUS what you paid a few years ago.
Your profit WILL BE what your old mortgage costs were MINUS your future rentalcosts and your future mortgage costs (when you buy back) OVER the reminder of the term of your old mortgage. We went through this on this site a few weeks ago.
September 24th, 2006 08:53
civilsid says
“We are paying $850 a month in rent for a house that is currently for sale with an asking price of $220,000.”
And I say
“Either your landlord mortgage costs are close to $850 because he bought a long time ago for a low price (possible) or he makes so much money that he can and will subsidize your rent for many years to come (not likely) or he is simply a FB and he will default sooner than you think (2007!) AND you will no longer be paying $850 rent…”.
The bank (not in the renting business) will ask you or any other bubble sitters to buy the house. At a discount (clearly) but do you really expect them to offer you a 40% discount (in 2007) when your FB landlord defaults? Can they take such a loss on a scale big enough (to fulfill the dreams of the huge number of bubble sitters out there) without crying for government intervention to stabilize things?
September 24th, 2006 08:54
Gregg says
“One thing you are right about — people can not time a bottom, except by luck. but you can say, okay, prices have fallen 60 percent from the top and are now at somewhat “reasonable” levels so i can buy with a 20 percent down, 30 year fixed and have payments i know i can cover. well, then sure you run a risk it wasn’t the bottom, but if you like your new home and you’re going to stay there, suck it up, and you’ll eventually see some gains one day.”
I says
“ok, but if you bought for a decent price before 2003 (or 2001), you can afford your payments, you like your home and you are going to stay there, suck it up, and you will eventually see some gains one day.”
Bubble sitters and good-old-prudent owners are in the same boat. If you are an owner and are upside down, your best option is to default and mail back the keys. If you are a bubble sitter, you will buy back but, it is likely that you will have a wrong timing. So you too have a good likelihood of being upside down. And then your best option is to default and yada yada…
September 24th, 2006 10:37
Question from Nikolai:
Without the “exotic” loans, how much of a price adjustment will be required for buyers to be able to afford homes on conventional terms?
That is a great question because it will clarify my position.
1- I am saying that the prices seen in 2003, 2004 and 2005 are clearly not sustainable SO prices will clearly go down.
2- BUT I am also saying that prices will likely STABILIZE around levels resulting in mortgage payments being SIMILAR to what people with conventional mortgages were paying before the crazy run-up of 2003-2006 (or 2001-2006 depending on where you live).
3- Moreover, IF you are currently paying what people with conventional mortgages were paying before the crazy run-up of 2003-2006 (because you bought before 2003), you will loose all the funny paper profit (equity) that you saw after 2003 but not much more.
4- Finally, IF you are currently paying what people with conventional mortgages were paying before the crazy run-up of 2003-2006 (because you bought before 2003), you can try to sell and become a “bubble sitters”. But this strategy will likely fail to result in much lower mortgage payments than what you were paying on your pre-2003 purchase.
Conclusions:
The key numbers to monitor are
a- Historical monthly PITI relative to incomes.
b- New home building numbers to access potential oversupply of new homes
c- Future interest rates and risk premiums
d- Regulation making it more difficult (than before 2003) for people to buy homes WITH TRADIONAL MORTGAGES. Regulations on exotic mortgages do not fall in this category.
Conclusion:
This is not like the stock bubble because if prices fall too drastically, the owners will not assume the loss, but default and the bank is on the hook.
If like this 24yr old jobless fool you owe $2m to the bank, you don’t have a problem but the bank as a problem.
And if the banks have a BIG ENOUGH problem, then the banks don’t have a problem but the politicians, and congress do….
September 24th, 2006 12:15
otherside,
get outdoors and enjoy some fresh air!
September 24th, 2006 16:27
And if the banks have a BIG ENOUGH problem, then the banks don’t have a problem but the politicians, and congress do….
So this is supposed to mean that ‘there is no problem’ and that we should all buy some real estate properties right now? because the mortgage payments won’t be different in the future??
This is not like the stock bubble because if prices fall too drastically, the owners will not assume the loss, but default and the bank is on the hook.
I agree. This is worse than the stock market bubble in that trillions of dollars are at stake and that the depression that results from a collapse in real estate prices over the next few years could make the 1930’s depression look like a picnic..
September 24th, 2006 19:55
Otherside makes statements that make it appear that “bubble sitters” can not have a reasonable expectation of making out like a bandit during the RE decline that is upon us and picking up momentum.
I would recommend to the folks that have read this far to grab two books that have differing slants on home ownership. The first is One Up On Wall Street (by Peter Lynch) and the other is Rich Dad Poor Dad (by Robert Kiyosaki). Lynch argues that your home is your greatest asset and Kiyosaki argues that your home is a liability (to you) and an asset (to your bank).
It goes without saying that everybody needs to live somewhere and if you are going to sit tight for a long while and you have a reasonable mortgage (or none at all!) that will not keep you up at night then I wouldn’t change a thing.
My approach is definitely unique and would not recommend it to others. My approach works for me; and so far I am very pleased with the results.
I moved to Arizona from New York and one major difference is that the taxes will eat you alive in New York. You can buy property in AZ and hold it for an indefinite period of time without the taxes being a significant factor- at least for now anyways.
When I moved to AZ, I bought 20 acres of property near a large pending development that very few people knew about. Yes, I had inside information not available to the public but the point is that I bought low- what is low? The property I bought cost me $500 an acre and the owner financed it at 10% with $2,000 down. I closed escrow in December of ‘04. The listing had been active on the MLS for over 700 days. Nobody wanted it.
My intention was to put a new manufactured home on that land and hang out while the new golf course and development grew up around me for the next several years. It was my way of having a low cost mortgage payment and a sound investment at the same time. As I made plans to build (or more accurately “roll in”) my new home, I fould another listing on the MLS. A 2004 model manufactured home on 12 acres of land that had been active for about 200 days (that nobody wanted). I put in an offer and eventually ended up closing escrow in the middle of September of ‘05 for a final sale price of $133,500. This was about the same cost of bringing in a comparable home onto my 20 acre property so I saw it as a better deal because of 2 reasons- First off, there were no construction headaches; all I had to do was pack my stuff and move. Second, I got an additional 12 acres of land for no additional cost. This became ny new primary residence and the 20 vacant acres was no big deal because the payments were low and the taxes were about $20 a month.
I did sell the 20 acres for an obscene amount of money (relatively speaking) but I did not sell at the “top of the market” because the buyer was running a double escrow and ended up flipping it on the same day for an additional profit (but not as obscene!).
Here is how I run the math for profitability as a “bubble sitter”. Listen up, my young grasshopper…
Bought house for $133,500 with 10% down and a fixed rate mortgage at 5.885% for 15 years. When the principle was paid down an additional 10% (with 80% outstanding), our mortgage would be reduced to 5.51% because we would save an additional 3/8 of a point when we could ditch the mortgage insurance. It pays to read the fine print!
So, even having bought a new home in September of ‘05, we were able to get a payment of $1120 a month fixed for 180 months. I think the key was having the 10% to put down and having the flexibility to live wherever I could find a good deal.
When most people buy a home, it is an emotional decision. This is one reason the way I choose to live will not fit in with other people’s perspectives. I can live in a big home or a small home, in town or out in the boondocks, but it will be well below the average market value! I don’t care what the school system is like or what the view is like, etc. With several thousand properties on the market, some are below market value and some are above. I only need to find one good deal to prosper.
That house I bought on the 12 acres is currently in escrow for a sale price of $229,900. I have already received $10k which is hard (non-refundable). Worst case scenario, I keep the house and make an extra $10,000 this year. Best case scenario, escrow closes as anticipated and I will net approx. $75,000 after the costs of closing and some improvements that I paid for.
Now I rent. There are a lot of rentals available. The biggest reason is that many people that intended to “flip” or otherwise sell their home need some sort of revenue stream to help feed the alligator (house owns them more than they own the house). This will definitely help to delay foreclosures an extra year or two or more. Don’t assume the whole housing boom to wash out in 1-2 years and then return to an orderly annual increase in appreciation that is long term typical. Then again, I am just another prognosticator…
So, let me continue with the math lesson. I now have a rent payment of $850 a month. I was paying $1200 a month on my mortgage (with about an extra $80 a month going to principle). I now live within walking distance from my office which saves me a lot of money and I know most people don’t have that option but it is a benefit I could not ignore.
My rental agreement is good through the end of ‘06 and is month-to-month after that. Of course, the landlord may tell me my rent will be going up when his mortgage adjusts but how much of an increase will he realistically think he can pass on to me? If his mortgage jumps up even $300 a month, he may have more trouble than he can handle. If he tries to hit me with some sort of lame $50 increase, I might just pay it or I could play hardball and tell him I will leave if he raises the rent. If I leave and the house sits empty even one month over a $50 increase then it will take an additional 17 months just to break even ($850 rent/$50 increase = 17 months to recoup) and I don’t think he can afford to let it sit empty for a month or God forbid 2 or 3. I could probably even negotiate a rent reduction but I’m not a jerk and do not wish these hard times on anyone.
So, the math says that I now have $75,000 tax free dollars net from the sale of my previous residence (I consulted with an accountant so please feel free to look that up, I did). This is actual cash in my pocket which I can use for my next downpayment. Additionally, I lived in my home for 11 months. The math here assumes that I lived there for that time for FREE. No rent payment, no mortgage payment. Actually paying me to move in, live there, and leave when the markets were favorable.
Of course my life is simple. My wife and I do not have kids. We don’t have to worry about school systems or jobs since we can most likely get hired anywhere at anytime as she has an advanced degree and I have my engineering degree. I watch the multiple listing service somewhat regularly and feel confident that I can get a better than average deal (for that time) no matter what the season is or what the economy is like.
So since I’ve been able to make a long story longer, I take my $75,000 and put that down on a home comparable to my last home and my mortgage payment will probably be around $6 to $800 a month which is, ironically enough, less than I am paying in rent today…and I will once again be building my own equity and I will be able to get a better interest rate since my down payment will be higher.
Will my $75,000 go very far in urban California. No, but that is not my speed and not where I want to live. If I made my decision to live there, I suspect that the numbers would be the same but scaled up by a factor of 3.
If the other side wants to get some fantastic outdoor weather / relaxation / fresh air, I can certainly find you a significantly better than average deal in Sunny Arizona!
September 24th, 2006 20:31
Great conversation.
From the appraisal side of the industry we’re seeing it as a house of cards. In So Cal if you want to live in a decent neighborhood in an average house and send your kids to public schools without them getting knifed you’re currently in the $700,000 range. If you happen to have $140,000 (20%) laying around your monthly payment on a $560,000 loan (fixed 30 yr) is in the high 3 thousand to low 4 thousand a month range. Add in utilities, taxes, insurance, etc. and you need yearly income in the 125k range to make things work. There are a lot of good paying jobs in SO CAL but not enough to sustain these prices that were pushed up by entry level buyers/amateur investors. These people never would have qualified in past markets. During this run up the ones that really baffled me were the “buyers” agents. I’ve done over 1000 appraisals in the last 5 years and have not met one that was working for his/her client. They were only working for their 2-3% commision and were in bed with the selling agent most of the time. With the continuing evolution of the internet and other information sources I am hoping that real estate agents will go the way of Fotomats. By the way most of the appraisals we are doing currently are REO’s and refi’s of real estate industry people’s houses as they sink under their Mercedes (when they should be in a Toyota) and 1.2M house (when they should’ve stayed in the $600k) payments. It couldn’t happen to nicer bunch of folks!
September 24th, 2006 21:42
SOCAL appraiser knows exactly what I am talking about!
There are a lot of wealthy people in SoCal…but the real wealthy people are not buying the 800k-1.2million dollar tract homes that are a dime a dozen.
It is people making 50-70k that are stretching like you wouldn’t imagine to ‘afford’ these starter tract homes. Sure, some of these are 2 person households, but even then, 3500-5500 a month is a lot of money JUST for the mortgage and housing costs.
Then you have the real estate people (agents, brokers, title reps, etc.) who were making a lot of money and could ‘afford’ these homes based on 6-36 months of past history, but ‘assumed’ the good times would continue on for a long time.
Think about it…a 6000 a month mortgage isn’t that big of a deal when you are making 20k+ a month. Many lenders would take 6 and/or 12 months bank statements to qualify for a loan.
Lots of people in the RE industry could show they were making great money for 6-12 months. Even if you had to ’state’ your income, most lenders would believe it, because ‘everybody’ in RE is making lots of money.
Many just never planned on the sales pace slowing down 25-40% overnight. This effects realtors, brokers, title reps, and everybody else in the RE chain.
And SOCALappraiser isn’t kidding about the people drowing in their mercedes car payments. Lots of RE people driving very nice cars…and financing them like everything else. I know people that had car payments OVER $1500 a month on Mercedes 500SL’s. Add that to a mortgage…and you NEED to clear at least 15-20k a month to keep things working.
Over the next 12-24 months…we will see who kept the pace…and who didn’t.
Stay tuned…
SoCalMtgGuy
September 24th, 2006 22:42
Theotherside,
And if the prices stabilizes at 1,1m after a 20% decline because other bubble sitters can’t wait to get back in, then your new mortgage (assuming 2% transfer tax) is $1,100,000*1.02-319,000 = $803,000 as opposed to $950,000. If the rates just a little higher than they were 2yr, this will not result in drastic lower monthly payments…
This is a valid argument if the 20% decline is instantaneous. But what if it takes 2 years? Or longer, as has happened in Japan?
During that period you have $319K earning interest instead of $950K paying interest. Even with a 5.5% mortgage rate we’re talking about $70K per year difference, plus (assuming we’re in California) at least another $10K or so insurance and property tax. Call it $80K in cashflow.
Mortgage interest deductions and rent will of course operate in the opposite direction, but I would guess you would still have at least $40K a year surplus from the sell-n-wait strategy.
September 25th, 2006 09:31
“theotherside
Yes, OVERSUPPLY leads to LOWER PRICES. JOB LOSSES also do lead to LOWER PRICES. But the evidence points to builders drastically cutting back on production.”
However, there *is* currently an over supply, and builders are not *stopping* production:
“Lennar CEO keeps building despite cooling housing market”
http://www.miami.com/mld/miamiherald/15587141.htm
“Lennar has ‘’decided to continue producing whether there is a buyer or not,'’ wrote Stephen East, analyst with Susquehanna Financial”
September 25th, 2006 09:45
“And if the prices stabilizes at 1,1m after a 20% decline because other bubble sitters can’t wait to get back in”
And that assumption is at the crux of things, isn’t it. Prices go down ‘only’ 15%-20%, the stabalize or go up, then it might make sense to hold on.
However, if prices tank 30%, 40%, and even (gasp!) 50%, then you’d have to agree that it might make sense to sell and buy back later. Along with the price difference, you also earn interest on your cash while you “sit”, and you will probably reduce your monthly cash outlay (possibly as much as 50%!) on housing while you sit and rent.
Is it risky? Yes, who knows where prices will go? However, keeping a house during a declining market is just as much a “bet” as selling it is.
September 25th, 2006 10:05
I may be a bastard but I DO NOT feel sorry for this guy at all. As terrible as the lenders are giving people like this all the rope they need to financially hang themselves is it is he who tied the noose strung himself from the gallows.
September 25th, 2006 11:10
Casey has shut down his website, maybe he has talked with a lawyer afterall, if he can afford one.
I know we in the mortgage business have a lot of disclosures we have to give borrowers. I would add one more to the list. There should be a form for borrowers going the stated income route, have them and the loan officer sign the form with jargon indicating it is illegal to lie about your income to obtain financing, and it is illegal to encourage a borrower to overstate their income to qualify for a loan they otherwise would not. I know the 1003 has some verbage on it, but it doesn’t deal specifically with stated income. I’m sure it would be glossed over like most disclosures are, but at least it would be in writing that they knew they didn’t know it was illegal to overstate their income.
September 25th, 2006 12:56
Here is an old post of mine in which we work out the math with the positive and very constructive feedback of people on the board…
August 12th, 2006 12:37
QUESTION:
HOW MUCH of a crash (in %) people trying to TIME this market needs to make money?
EXAMPLE:
Buy in 2004 a house for $500,000, with $100,000 down and 5.75%. Tax-hoa-insurance $7,000/yr. $1,000/yr maintenance. Total payment = $3,000/month
Personal tax rate 25%, inflation rate 3%, T-bill rate 3.9% for cash flow investment (5.22% gross and 25% tax).
After seeing an all-time high of $750,000 in late 2005, you decide to play the “Bubble sitting game”. Put the house on the market at $730,000 in 2006 and get a low-ball offer at $670,000.
Sell in 2006 for $670,000 with 4.5% realtor fees, $10,000 closing costs. Rent at $2000/month in 2007, $2060/month in 2008 and $2,122/month in 2009 (3% inflation). Invest the proceed @ T-bill rate 3.9% for cash flow investment (5.22% gross and 25% tax).
Buy in 2009 with $20,000 closing costs. Mortgage rate at 7% for a 25yr mortgage.
BOTTOM LINE:
A- in 2009, you BUY BACK at $590,000 (12% drop from sale price, 22% from all time high) ===> you break even, ie $3,000/month for the remaining 25yr.
B- in 2009, you BUY BACK at $545000 (19% drop from sale price, 27% from all time high) ===> your new total payment is $2,666/month (you save $334 or 11%) for the remaining 25yr.
C- in 2009, you BUY BACK at $500,000 (25% drop from sale price, 33% from all time high) ===> your new total payment is $2,348/month (you save $652 or 22%) for the remaining 25yr.
CALCULATIONS:
1- in 2006, mtg balance is $389,405
2- total buying and selling costs are $60,150 (back-and forth fees+ realtor fees)
3- net proceed is $220,445 in 2006 and $247,256 after 3yr at 3.9%
4- save 28,443-$24,000=$4,443 in housing costs in 2007, invest at 3.9% for 2 yr and get $4796 in 2009 (28,443 = total yearly payment – principal – tax write-off)
5- save $28,528-$24,720=$3,808 in housing costs in 2008, invest at 3.9% for 1 yr and get $3957 in 2009
6- save $28,618.25-$25,462=$3,157 in housing costs in 2009
7- TOTAL CASH available for down payment on a 25yr mtg at 7% in 2009 is $259,165
September 25th, 2006 13:31
I don’t know about you guys, but i don’t think Other-Side is going to sell his house now and then wait around for the market to crater.
September 25th, 2006 13:41
From the www.iamfacingforeclosure.com website. View page source:
!–
September 24, 2006.
This blog was the WRONG kind of exposure. I APOLOGIZE to my friends, family, associates and especially EVERYONE WHO HELPED ME with my real estate transactions.
I DO NOT BLAME ANYBODY for ANYTHING and take full responsibility.
What started as an honest desire to share my experience turned into something dangerous - playing with fire. After talking to a business associate this morning I realized I went TOO far and shared TOO much. I turned something small into a big exaggerated mess. Others were telling me this too, but I wasn’t getting it. Now I crossed the line. I misused my ambition.
I have damaged my reputation and I have damaged many good relationships through this. I never meant to hurt anyone. So to stop any further damage I am shutting down and laying low.
I am sorry.
September 25th, 2006 13:42
theotherside,
Thank you for your contrarian analyis on September 23rd, 2006 12:14 - contrarian to overly bearish assumptions on housing.
My view on bubble-sitting is (and was): If you are a homeowner planning to relocate or downsizing in the next years, sell your house now and rent for the next years. If you relocate now, rent for the next years and buy afterwards. I still think that is valid advice, even if selling now becomes more and more difficult.
You wrote:
> ARTICULATE a step-by-step process (…) resulting in much lower monthly mortgage payments for the lucky buyer!
> WHO TAKES THE LOSS? The bank, the MBSs holder or the government?
All of the above.
- The bank is first on the hook for mortgages with buy-back guarantees.
- The government’s FDIC takes over folded banks and the house ends up in a government trust. I’ve read that those trusts contributed to lower house prices in the first half of the 90s. At minimum, they prevent expectations of rising prices.
- The MBSs will loose money on mortgages that are not bought back by the originator. This will lead to higher underwriting standards in the future, shutting out many people from getting their money through a mortgage. If the buyer, however, has excellent credit and sufficient income, the MBS will still supply him with money, for better returns than on treasuries.
Regards,
Peter
October 2nd, 2006 12:08
The lenders could have prevented this but starting today, it will apparently be vastly easier to catch this kind of fraud.
http://www.reitactics.com/New_Income_Verification_Tool
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