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Heh, I guess my notes could be taken that way but I’m really not that sensitive, and I don’t really feel personally attacked. I’m also not a conceited blowhard try to fluff my feathers, really! My alias, granted, was a poor choice of words; I popped it in when it seemed to me that all the blog entries were going to extremes in predicting a “bubble” to the point of not allowing for any other alternative.

I still think that some of my points were misunderstood, based on the responses, but I’m not one to take it personally. If I was really offended, I wouldn’t be spending the time writing in the first place; obviously I’m here because I’m enjoying myself.

I responded to you sarcastically; that seems like the only possible response to somebody who unilaterally declares my perspective narrow and at the same time implies that he can see much more broadly. Your ad hominem approach doesn’t seem to conform to your request that we “be prepared to support our discussion with facts”.

BD said “Wait a few months and see. Given the historically low affordability of the market, it is unlikely that you will be further priced out than you already are.”

That’s a very reasonable approach. Another reasonable approach is to shop continuously but be excessively picky for now. The problem I see with the “wait a few months” idea is that it is possible that it won’t be clear when the right time to jump in has arrived.

Athena said “50 yr. loan seems like nothing more than legalized mutual consent extortion.”

It’s not extortion, any more than a 30-yr loan is extortion. Why does extending the term make it a swindle? Wouldn’t that mean that anything other than 0% financing represents some degree of extortion?

Granted, people can use the loan product in a pessimal manner, and end up getting far the worst of it. But the market’s role is to offer products to meet a wide variety of needs; from there it’s caveat emptor. For example, a smart way to use a 50-yr loan might be to make payments as if it’s a 20-yr loan, but have the flexibility of reducing your payment when it makes sense. If you’ve got the discipline, and you don’t pay a large premium for the 50-yr loan, you’ve lost little by going that route. The fact that most people won’t use it that way is a reflection on them, not on the loan.

Azsun said “All of this discussion about 40 yr and 50 yr loans and investing the difference, etc … assumes that everything is great. There is an inherent risk in assuming a large debt, the longer the term the more risk.”

All true, and true of a 30-yr loan as well. Actually, I might suggest that if you’re borrowing responsibly within your means, you have more flexibility with the 50-yr product, as I outlined above. All debt represents risk, that’s a given.

Also keep in mind that the risk falls off as time goes on, such that a 50-yr loan is not twice as risky as a 25-yr loan. Not even close. Inflation and the time-value of money take care of this; the payment on the 50-yr loan will represent a much smaller relative financial obligation as time goes on.

I wouldn’t try to make the case that everybody should take out a 50-yr loan, but I do believe it has it’s place in the financial world, and that it’s not legalized theft.

Sane Homeowner said: “I will also go so far as to say I agree completely that no one can call the top until after it passes and would even say that there are bargains to be had in any market. Your profits are made when you buy, not when you sell.
HOWEVER, I happen to believe there is a preponderance of evidence that leads me to believe that in certain parts of the country, unless you have the money to afford a home without drastically overextending yourself, you REALLY have to look hard for a house that will make you money by purchasing it today.”

That is a balanced statement, and I agree 100%. By playing devil’s advocate and stating the alternate case, I wasn’t trying to persuade that people *should* buy now. I was trying to show that it wasn’t necessarily and illogical thing to do. Obviously with your impressions, you’d be inclined to wait, and I wouldn’t try to persuade you not to.

Sane Homewoner said “The only real issue I have with your comments are your belief that you can SAFELY and easily average a return of greater than 5% ad infinitum.”

Well, I didn’t say “easily”, but I did say “consistently.” I do believe that I can, but only because I do this full time. I generally seek to leverage myself as much as I can at debt rates that mortgages offer. I don’t extend myself to the point where a financial system shock would bust me, but I take advantage of low cost debt to expand my investment reach. I held myself out as an example of when a I/O or highly leveraged loan might make sense, mainly because I didn’t have any other first-hand examples to draw from.

In any case, I hope these posts aren’t taken contentiously. I’m not sitting hear yelling at my monitor about all the dissenting opinions; I just wanted to insert a caution that people shouldn’t interpret the many facts and opinions here as evidence that market timing is an easy game to play.

Geez, are you sensitive! May I just point out that your alias itself could be taken as condescendingly suggesting that you are the sole voice of reason here? Everyone (including the blogger himself) has attempted to respond reasonably to you, yet you choose to interpret nearly everything as a personal attack. Lighten up a little and maybe you’ll enjoy the ride.

We’re all willing to debate alternate outcomes — such topics are hugely popular. Throw your ideas into the ring, but be prepared to support them with facts.

p.s.: FTR, I’m in the so-called depression camp. I’ve learned way more these past few years than I ever wanted to know, and it scares the hell out of me.

My comment on the situation is that we are at a point in the market where a form of Pascal’s wager is not a bad idea. Wait a few months and see. Given the historically low affordability of the market, it is unlikely that you will be further priced out than you already are.

If the market goes south, you can buy at a better price. If the market continues strong, or gets stronger, then you have a few more months’ worth of savings— and if you’re any good at all, those savings will be larger than the price jump.

Wait and see. Wait and save.

That said: the post about Monte carlo simulations (something I know a little about) sparked a thought. All of this discussion about 40 yr and 50 yr loans and investing the difference, etc … assumes that everything is great. There is an inherent risk in assuming a large debt, the longer the term the more risk. A lot of good and bad stuff can happen over 50 yrs, by assuming 50 yrs of liability you are betting that none of the negative stuff eclipses your ability to service that debt or destroys the underlying asset.

You have to look at the potential and probabilities of continuously making more n your maney than your loan terms, that the underlying asset doesn’t decrease in value, that you never loose your job or income, etc… . It gets even more complex when you look at combined effects of all of this stuff. This is exactly what burned LTCM, they never looked what would happen if you stressed their business model with a sudden shift in exchange rates.

SoCalMtgGuy’s point that lots of these newer loan products have never been stress tested is very valid and somewhere between scary and terrifying given the amount of money tied up in them. Does anyone know what happens to MBSs and the associated derivatives if interest rates suddenly go up to 8%, 10%, 12%? If the dollar devalues by 30% in one month or appreciates by 30% in a month? If the default rate for a MBS deviates from the nominal by 2%, 5%, 10%, 20% ? Where are the breaking points? Are there any things out of left field that could only maybe but not probally happen which break everything? (Think Russian loan default and LTCM). Some sharp analysts somewhere have to have run this stuff.

By and large appreciate you putting yourself out on an island and taking a counter argument. I have thought to myself while reading the comments over the past few months that this site (and blogs in general) has a way of eliciting a herd mentality about a real estate bubble. I wouldn’t worry a bit if people disagree with you. I think some people are being a little harsh in responding to you, but agree that a dialogue featuring differing opinions can be a good way to learn.

I will also go so far as to say I agree completely that no one can call the top until after it passes and would even say that there are bargains to be had in any market. Your profits are made when you buy, not when you sell.

HOWEVER, I happen to believe there is a preponderance of evidence that leads me to believe that in certain parts of the country, unless you have the money to afford a home without drastically overextending yourself, you REALLY have to look hard for a house that will make you money by purchasing it today.

The only real issue I have with your comments are your belief that you can SAFELY and easily average a return of greater than 5% ad infinitum. (your words were, “I personally believe I can exceed 5% safely and consistently, and I suspect I’m not the only one.”)

I don’t think you realize how much risk there is in the financial system at any time, bubble or no bubble. I would be delighted to make 5% SAFELY and consistently, but know how stacked the deck is against me. Now I have made and believe I can continue to make well in excess of 5% each year ON AVERAGE, but not without taking a lot of risk.

Right now, the financial markets are not charging much of a risk premium on virtually any investment as junk bonds trade in close proximity to government bonds and blue-chip stocks continue to underperform small and especially mid-cap stocks. International and Emerging Market mutual funds have just seen nearly a record level of inflows in January as the “me too!” crowd rushes to cash in on last year’s returns. There is a great deal of risk in the financial markets now and to think that you can safely earn more than the growth rate of the GDP in investments is at best foolish. That statement is not meant to insult you but rather have you rethink how “safe” your investments truly are. What you may really mean is, because of your risk tolerance, you are very comfortable putting your money at risk and have enough confidence in your abilities to earn a return consistently in excess of 5%. If you can, you are better and smarter than virtually any investor, professional or otherwise, out there. Congratulations and I will send you my money to manage.

Well, it’s arguable whether that can be considered being right. But I agree that the stock bubble did have a dramatic outcome, as many had predicted. At other times in history, the outcome wasn’t quite so dramatic.

Jim writes “Nobody ever mentions that the 20 year loan makes the most sense (but not at these prices) The 30 year loan is a Banker’s hustle–a dumb people loan”

Come on Jim, please extend this logic to it’s natural conclusion. “Nobody ever mentions that paying cash makes the most sense, and a 20-yr loan is a banker’s hustle - a dumb people loan.” sheesh, talk about a complete misunderstanding of finance.

TJ writes “So, you’re basically arguing for the sake of argument?”

If you’d like to cast my posts in the worst light, sure that’s what I’m doing. Aren’t you doing the same thing by replying?

I’m not really arguing per se. If you’ll notice I’m not trying to directly dispute anybody’s claims about the housing market, with the exception of one. I think that it’s irresponsible to write things that suggest that this game is easy to win by just waiting, or that we’ve ‘clearly just passed the top’ and it’s nothing but down from here. That’s the entire gist of my message, all the belligerent replies nonwithstanding.

TJ then graciously added “A few years ago I would’ve agreed with you. However, your perspective is as narrow as mine once was.”

I don’t know why I’d bother to reply to someone with such clear intellectual superiority, there’s obviously nothing I could say that you wouldn’t already know.

Since I haven’t made any claims here except one: “it’s not easy and predictable to say how the current market situation will unwind”, I’m very impressed that you are perceptive enough to not only be able to infer my entire perspective, but to also know that it’s narrow. I guess there’s no point in making my case further, there’s a new omniscient writer around who will be happy to tell folks exactly what’s what.