57 Responses to “Don’t worry about the 50 year mortgage…it isn’t going to save things”

1. SF-TK guy
   February 23rd, 2006 01:53
   1

   Are those NPV numbers? What would they look like at NPV assuming historical inflation rates? I’m curious because a payment made 90 years from now is pretty small in NPV terms.

2. Larry Littlefield
   February 23rd, 2006 05:42
   2

   I believe our government is borrowing on an option-arm, infinate mortgage duration, stated income basis on all of our behalfs every day,

3. kbr7171
   February 23rd, 2006 06:18
   3

   THERE’S PORN ON GOOGLE?! Damn you Al Gore for feeding my addiction!

4. Robert Coté
   February 23rd, 2006 06:28
   4

   It’s just another name for I/O loans. No one actually intends to hold one of these for 40 or 50 years. What’s the average before moving, 7 years?

5. Larry Littlefield
   February 23rd, 2006 06:37
   5

   (It’s just another name for I/O loans. No one actually intends to hold one of these for 40 or 50 years. What’s the average before moving, 7 years?)

   Perhaps its the NY perspective but to me it doesn’t make sense to buy if you are not going to be staying in a community. You might as well rent if things are that temporary. If you know you are going to leave, a house really is an investment, not a home.

   Here in NY we have sky-high transaction costs. Unlike in most of the country, the 6% broker fee includes nothing but showing the house. Everything else is separate, including all the paperwork. And, there massive double taxes on the seller (real estate transfer tax) and the buyer (mortgage recording tax). These taxes have created a windfall to get NY out of the hole after 9/11.

   Moreover, with a massive job market available by subway, one really can plan to stay in one neighborhood even as one changes jobs, rather than the reverse.

   Finally, any house you buy here in Brooklyn is going to need massive work. Mine was built in 1915. Living through that once is hell, twice is inconceivable.

   So the mindset is very different here. You buy the house your are going to stay in. If you want rental income, you buy a 2-3 family home (the vast majority, my one-family is an exception) rather than investing in a condo or another house. Perhaps this may save us relative to the serial ownership markets.

6. arizonadude
   February 23rd, 2006 06:48
   6

   Just another way to keep the bubble from exploding. A cheap payment is all people want. You are going to take it in arrears on interest over the long haul. If prices fall and people are trapped from selling at a profit and have to carry loan for awhile they are going to wish they had done a fixed rate loan. The shady lending is all based on the prices not falling. It’s going to sucker in a lot of people who are desperate who will end up homeless.

7. jaman
   February 23rd, 2006 07:15
   7

   Most conforming 40 year loan out there now are .125% to .25% higher in rate, making the payments very close. The rated bumped up .25%, the 40 year is higher!!! I don’t know why you would choose a 40 year fixed over a 30 year fixed.

8. Danielle
   February 23rd, 2006 07:53
   8

   In Europe you can find long term mortgages but the houses last as long as the mortgage without huge maintenance budgets.

9. SoCalMtgGuy
   February 23rd, 2006 08:15
   9

   I just made an addition to the post as far as ‘rate adds’ are concerned.

   I wasn’t going to include it, but after reading some of the comments and e-mails, I decided it would be a good thing.

   I usually try to keep it simple and ‘err’ on the side of showing how much the creative products can ‘help’. Even by using the same rates for the programs, I think most will see you are giving up a lot in the long term to not get much more today. There is even less benefit ‘today’ when you make the adds to the rate.

   SoCalMtgGuy

10. Privatebanker
    February 23rd, 2006 08:20
    10

    We’re getting closer and closer to looking like Japan. This is an obvious cry for a last gasp hope to keep this “bubble” from popping. If you have to go in to debt for 40 - 50 years just to buy a home, you really shouldn’t be buying in the first place. It’s essentially an interest only loan because the amortization between principal & interest is lopsided. You really aren’t building any equity, not to mention falling real estate prices means you’ve just locked yourself into a home that you may have to live in for the rest of your life!

11. onesleepingbear
    February 23rd, 2006 08:53
    11

    can you publish te data in 150 year an 200 year loans-
    i wanna make sure there available so I know that people will be able to afford the home i bought on speculation.

12. Betamax
    February 23rd, 2006 09:11
    12

    Haven’t all the idiots bought already?

13. peterbob
    February 23rd, 2006 09:46
    13

    A fifty year mortgage may make sense if the interest rate is low enough. Right now, a lot of people can’t believe that the 30yr Treasury rates are so low, given the Medicare and SS budget problems that will hit in the next few decades. If markets are ignoring future interest rate increases, then today’s long interest rates may turn out to be a bargain in a few decades. For example, a person may be paying 5% mortgage in a few decades when the current mortgages may be 18%. And, they may be paying 5% mortgage when short term rates are 8%. That’s what happened with my parents around 1980, when they were earning 8% on their checking accounts, and felt no need to quickly pay off their 5% mortgage.

    But this assumes that the fifty year mortgage also has very low rates, and it assumes that the market is not making good predictions about future interest rates.

14. alittlereasonplease?
    February 23rd, 2006 10:17
    14

    I’m glad everybody is so ready to pat themselves on the back about the “idiots” who would buy in this market, the “idiots” who would take out a 40-yr mortgage, and all those people who are only interested in “reducing their payment by a few hundred dollars.”

    SoCalMtgGuy says “In the long run it costs $400,020 or 46% more to do the 50 year mortgage than the 30 year mortgage.”

    arizonadude says “Just another way to keep the bubble from exploding. A cheap payment is all people want. You are going to take it in arrears on interest over the long haul.”

    privatebanker says “This is an obvious cry for a last gasp hope to keep this “bubble” from popping. If you have to go in to debt for 40 - 50 years just to buy a home, you really shouldn’t be buying in the first place.”

    That’s only true in an alternate universe were there are no interest deductions for mortgages, and you can’t earn any profits on your savings either.

    Let’s pretend there’s one buyer out there with a brain. What’s wrong with going into debt for 50 years to buy a home? You are deducting the interest, and not everybody who takes out a 50-yr loan is doing it to reduce their payment by $100.

    If you have the discipline to save, and you can earn more than 5% on your money, you should take out a 100 or 1000 year loan if somebody offers it. You are deducting the interest, so your actual borrowing cost is much less than 6% or 7%, and if you’re saving that $100 instead of spending it on boats and cars, you’re coming out ahead. Your savings will grow faster than your debt.

    I’m amazed that a “private banker” can make comments like those above without pointing out that sometimes it makes a lot of sense to borrow for longer.

    I’m not trying to argue that there isn’t a bubble, or that some people use loans irresponsibly. I’m trying to argue that if you get to caught up in thinking that everybody buying today is an over-extended idiot making a huge mistake, then you’re guilty of the same thing you’re accusing others of: bad judgement. You can buy a house when prices are high and time may still prove that to have been a good decision. As I’ve written in another post, trying to time your entry into the market is not the way to go. SoCalMtgGuy gives the advice not to buy unless you can comfortably afford it. I agree with that 100%. But I disagree with the perspective that the current housing market is made up completely of irrational buyers, thus there’s bound to be an enormous collapse.

    As an example of my point, I’ve refuted the claim that 40-yr loans are inherently bad. They’re not, any more than I/O loans are. And they’re not designed to “extend the bubble” even longer, they’re designed to make money for a bank. That bank has to do the job of making sure that the buyer isn’t over-extending, and many banks will make a ton of bad loans and thus lose money. But I guarantee there are also banks out there making I/O loans and ARM loans that will still turn a profit, suggesting that there are still reasonable people buying homes, even today.

    FINAL NOTE: I’m not in the home business, the mortage business or the banking business. I’m not trying to defend dumb lenders. I’m just trying to provide some counterpoint to a one-sided blog that hasn’t done a good job of playing devil’s advocate with the issues at hand.

15. Ted
    February 23rd, 2006 10:32
    15

    We don’t need to “argue” that buyers are overextended. Every day that stats come out that paint a pretty clear picture. Zero savings. Enough said.

16. Ted
    February 23rd, 2006 10:33
    16

    Sorry, I have to add one more: Zero down payments.

17. trakz
    February 23rd, 2006 10:45
    17

    Haven’t all the idiots bought already?

    No… they are just renting from the bank! IO/ARM!

18. peterbob
    February 23rd, 2006 11:01
    18

    alittlereasonplease?

    If you have the discipline to save, and you can earn more than 5% on your money, you should take out a 100 or 1000 year loan if somebody offers it. You are deducting the interest, so your actual borrowing cost is much less than 6% or 7%, and if you’re saving that $100 instead of spending it on boats and cars, you’re coming out ahead. Your savings will grow faster than your debt.

    Yes, if you are earning more after taxes on your savings that paying on your borrowing, it makes sense to take out a mortgage and put funds into savings. It all depends on the interest rates, however. Even though I just brought up this very point, it is usually the case that the short term rate (savings) is lower than the long term rate (mortgage).

    …I’m trying to argue that if you get to caught up in thinking that everybody buying today is an over-extended idiot making a huge mistake…You can buy a house when prices are high and time may still prove that to have been a good decision…But I disagree with the perspective that the current housing market is made up completely of irrational buyers, thus there’s bound to be an enormous collapse.

    Sounds like someone just bought themselves a shinny new house!

    Still, price appreciation/depreciation must be part of the decision! Even if short term rates are low and it makes sense to borrow long (as discussed above) it may be the case that ALL of these gains are wiped out by a capital loss. I agree that’s it’s impossible to figure out investor behavior (or to know that we are truly in a bubble in the first place). But things are just so out of whack right now, that prices would need to come down 30% in some markets. A lot of people think that this is very likely to happen. If you don’t, then by all means, “buy.”

19. Robert Coté
    February 23rd, 2006 11:12
    19

    alittlereasonplease?

    Let me guess, you’ve bought in the last three years with something other than a 20% down fixed?

    That’s only true in an alternate universe were there are no interest deductions for mortgages, and you can’t earn any profits on your savings either.

    The HMID only applies to your tax rate and is limited by the AMT.

    What’s wrong with going into debt for 50 years to buy a home? You are deducting the interest, and not everybody who takes out a 50-yr loan is doing it to reduce their payment by $100.

    No, bad math. You are deducting anywhere from 31.5%-0% of the interest. I’d guess for most around 19%.

    If you have the discipline to save,

    IF you have the discipline to save AND the income then you don’t get a 40-50 year mortgage. You get the 20% down 30yr fixed for lower fees AND lower interest.

    and you can earn more than 5% on your money,

    No, if you can earn more than your mortgage rate. Got some FIVES to offer us? Bring it on.

    … I’ve refuted the claim that 40-yr loans are inherently bad. They’re not, any more than I/O loans are.

    Your opinion is noted and given the weight it deserves based upon the proof you offer.

20. Fewlesh
    February 23rd, 2006 11:13
    20

    alittlereasonplease,

    actually there is a very good reason to use a 40-50, 100 year ,I/O fixed mortgage.

    If you can guarantee that inflation will be upticking at the same interest rate, you’ve right. You are esentially renting your money for free.

    It is what the BOJ japan did to prop up their RE bubble and avoid deflation. It is also one of the major reasons why their economy has been stagnant for the last 15 years! It took 15 years for inflation to tick up and bring everyone out of their underwater mortages.

    It’s also leads to a carry trade: borrow at effectively negative interest rates, and aquire assets that are appreciating larger than the interest rate. Or if it is a scare resource, you can borrow and crowd out the resource, increasing prices, fuelling the carry trade.

    Right now its a crap shoot whether Heli Ben will inflate us out, or crank the interest rates and crunch this party. Until then, I’m going to wait till my polit-bureau central bankers determine whether I’m going to be a debt slave or not.

    Fewlesh.

21. SoCalMtgGuy
    February 23rd, 2006 11:20
    21

    Let’s see here. Property in many areas are at historically low ‘affordability rates’. Most people don’t make enough to afford a home because the payments are ‘too high’. The banks introduce ways to keep payments ‘lower’…and you think they are doing this so people can save and invest? Last time I checked, we are at a negative savings rate. Yeah, I know, not everything is ‘figured into’ that statistic, but the fact that we have only had negative savings on a annual basis 2 times (I think) before, I’d say the stat carries ’some weight’.

    I have said plenty of times before…every single loan out there has a purpose for educated or sophisticated borrowers.

    Yes, while the money is cheap, it makes sense for certain ’sophisticated’ people to use debt if they are getting higher returns elsewhere.

    I know there is a tax benefit for writing off mortgage interest, but there are a million different scenarios for this, and it isn’t always the ‘big savings’ that people think (think AMT).

    If you are trying to tell me that the ’subprime’ market is made up more people that are trying to take on longer term mortgages so they can ’save’ the difference and invest it, I think you need to spend some time in the industry before you make that conclusion.

    Property in many areas is at historically low affordability rates. Banks will try anything to ‘keep the payment low’ so they can ‘do more business’. But that doesn’t always translate into making money: http://thehousingbubbleblog.com/?p=152 You can check out the 2-3 stories that link from there.

    You said: “If you have the discipline to save…”

    Well, most don’t, and aren’t…and with property costs where they are in many areas, there is not much left to save in the first place.

    You said: “I’m amazed that a “private banker” can make comments like those above without pointing out that sometimes it makes a lot of sense to borrow for longer.”

    In very few situations does it make sense for most people to take on a 50 year mortgage so they can save and invest the difference and have a slightly large interest deduction. I’m giving info that pertains to a wide variety of people…I’m not going to focus on a possible situation that applies to a select group of people. Besides, the true ’sophisticated’ borrowers know their financial situations well enough, and crunch their own numbers.

    I think we see eye-to-eye on most things with regards to purchasing property when one can ‘afford’ it. I also know that the situation isn’t all or none…I just know that the majority of what I see, is NOT people taking lower payments to save and invest the difference. If you had been in the industry for a while, you might see things differently, that is why I do this blog. But don’t take just my word for it. Check out the forums…there are appraisers, escrow officers, loan officers, and brokers there they see many of the same things I do.

    SoCalMtgGuy

22. alittlereasonplease?
    February 23rd, 2006 11:37
    22

    Actually, I’ve been a renter for about 3 years with no intent to buy any time soon. I’m earning a pretty good rate of return on my savings and I’m not willing to pay the opportunity cost lost on my down payment. If I did buy though, it would be with the smallest down payment and longest loan terms I could find, making me just another “idiot.” (Even so, I would only buy a house I could conservatively afford with any loan.)

    BTW Peterbob, how did you reference my comments in italics within your message?

    I agree that savings rates are low, but I think there are fairly safe ways to earn better rates of return than tax-discounted mortgage rates. Peterbob’s message above was the first one in the thread that actually tried to show the flip side of the coin. He posted at the same time I did, otherwise I would have mentioned that I found his points valid and very worthwhile.

    The real thrust of my message was more directed at the idea that it just *has* to be a mistake to buy now. I don’t actually think prices “need” to come down, even in hyper-active markets like San Diego. They may be likely to come down, but there are other scenarios where prices just hover or don’t come down for several years. I’d even mention that they could rise further in the short term; not a likely outcome but certainly within the realm of possibility.

    I know that affordability is at all time lows, and variable rate loans are at all time highs. That was also true in 2005 and most of 2004, yet buyers saw some appreciation. If prices came down 20%, some of the 2004 buyers would still be breaking even.

    If I had to bet, I’d bet on prices coming down. But if I wanted to buy, I’d be shopping now and just making sure I got a very good price relative to comps. That means being patient, finding a motivated seller, and not getting caught up in the emotional game. If I could comfortably stomach a paper loss should the worst case scenario play out, I wouldn’t try to time my entry until after some future collapse. The problem is you might be waiting 1, 2 or 5 years, and even then it might not happen. Financial markets have been know to surprise even the very smartest analysts; they don’t always behave as the indicators suggest they should.

23. SoCalMtgGuy
    February 23rd, 2006 11:49
    23

    alittlereasonplease,

    I have said nothing about ‘timing the market’ on this blog. I have suggest waiting a bit to see what happens. I think the risk/reward for waiting a bit could be an excellent payoff.

    I think we can all agree that the 20% appreciation days are over for now. So what if I wait 6-12 months and the house I want appreciates 3%. That 7-15k in appreciation is mostly negated by the money I saved by continuing to rent.

    But what if there are some price reductions, and I save 50k or more by waiting?

    Again, it is all up to the INDIVIDUAL…and their financial situation.

    I already know several people that are upside down on their property. They are hoping the ’spring pick up’ will save them. I know one guy who is upside down on 2 condos.

    He bought one for the low 300’s, but right now a unit has been sitting on the market for a while in the high 290’s. Remember, he needs to sell at 4-6% higher to ‘break even’ with conservative transaction costs being figured in.

    But again…MOST people cannot afford property right now in the high priced areas! I have talked to quite a few people that said “I couldn’t afford my house today”. Then they say, “I wouldn’t pay that for my house today anyway”.

    With 17,000+ homes for sale in San Diego and about 30-50 more added every day, I think waiting right now is the smart choice for MOST people.

    BTW, where are you located?

    SoCalMtgGuy

24. alittlereasonplease?
    February 23rd, 2006 12:05
    24

    Directing a response to Robert Cote:

    Rob said “Let me guess, you’ve bought in the last three years with something other than a 20% down fixed?”

    Not everybody is trying to rationalize their choices by posting. My purpose was to present a counter argument, not try to make myself feel better. I’m a happy renter for the time being.

    Rob said “No, bad math. You are deducting anywhere from 31.5%-0% of the interest. I’d guess for most around 19%.”

    I didn’t perform any math. I said “you can deduct your interest”. There was no implication that you could deduct all of it. But any deduction whatsoever, between 1% - 31%, reduces the effective interest rate.

    Rob said “IF you have the discipline to save AND the income then you don’t get a 40-50 year mortgage. You get the 20% down 30yr fixed for lower fees AND lower interest.”

    You’ve constructed a straw man around my post. I never said anything about putting down more or less than 20%. In a later post I did say I’d put down the min possible, but I had forgotten about MI. Even so, I would be inclined to take out a 50 yr loan and put down 20%. I’d pay the extra .25 interest for the delta in earnings. But I’m not everybody.

    Rob said “No, if you can earn more than your mortgage rate. Got some FIVES to offer us? Bring it on.”

    I wasn’t making guarantees, I was proposing analternate viewpoint. I personally believe I can exceed 5% safely and consistently, and I suspect I’m not the only one.

    You’ve picked apart my example about a 40-yr mortgage while ignoring my over arching point. The mortgage example was intended to show that a rationale buy decision is possible even in today’s market, and if it is in the minority.

    I was envisioning a reader who is thinking about buying but is persuaded by the rhetoric and one-sidedness that they absolutely should wait. I’m saying that waiting may or may not prove to be smart, and that trying to time your purchase is a very difficult game. My attempt to defend a 40 year mortgage was simply a claim that a rationale and conservative thinker might still buy and even use a “scary” loan product to do so. Of course, maybe I’m not conservative or rationale, but then the whole point is moot anyway.

25. alittlereasonplease?
    February 23rd, 2006 12:13
    25

    SoCalMtgGuy,

    Again, I’m not trying to refute your points or argue with your logic. I’m only trying to present a couter-perspective.

    Yes, you do say that every loan has it’s place. No, you don’t say to try to time the market.

    My fear is that, when the entire thread and site are taken as a whole, it amounts to a large message that “BUYING NOW IS BEGGING FOR TROUBLE”, even if you don’t say that explicitly. It’s certainly implied by many of the follow up responses.

    I’m not trying to disprove your logic, and I think you’re providing a valuable service to buyers by showing them the risks. I just felt it would be useful to state a somewhat different perspective about the market, which I still think conforms with the “rationale and conservative” approach that you’re advocating.

    I live in NoCal, my area went through the phenomenon a few years ago that yours is going through now, but the correction has been mild at best (at least so far).

26. OCobserver
    February 23rd, 2006 12:28
    26

    Currently 50 fix rate is ~ 6.5% - 7%.

    If one is able to invest the money with a rate of return higher than the borrowing cost (6.5%-7%), then long mortgate makes sense.

    However, if the money is in a CD or fund that earns 6% while paying 6.5%-7% interest rate is not wise. Historically, S&P 500 return has been ~ 6%

27. Ted
    February 23rd, 2006 12:30
    27

    Buying now is begging for trouble. You’d have to be brain-dead, never read a history book, or added numbers together.

28. SoCalMtgGuy
    February 23rd, 2006 12:32
    28

    Again, don’t take the reader comments and think that it is necessairly my position. (I don’t think you are doing that BTW).

    In regards to NorCal, that is a slightly different type situation. You had lots of people with lots of money after the .com boom. Sure, property took somewhat of a hit when that ended, but the ensuing mortgage boom minimized the effect of the correction.

    I don’t have a crystal ball…nobody does. I have my opinions on where I think things are headed. I think the next 24 months will be crucial. Most of these mortgage products are untested in the long term, and certainly on this large of scale.

    Besides, I look at it that I am providing the ‘alternative’ view to things. If people want the ‘buy’ rationale there are a million places they can get that. I’m all for buying, even at the top of the market, IF you realize what you are getting into. If people are aware of the full picture, and choose to buy, then great.

    But for myself and many of the other people who are not in a position to buy at ‘any cost’…I think I have made a pretty decent factual argument for waiting to see how things pan out.

    Personally, I’m not waiting for the bottom…and besides, you will only know it’s the bottom AFTER you have passed it. Same goes for the top…you only know what the top was, after you ‘missed’ or passed it. I’m waiting until things make more financial sense. We have just had the largest RE bull market ever…doesn’t hurt to wait and see if ‘just maybe’ things correct a little bit.

    I will pay a premium to own a place in SoCal I plan on living in for years, but not 2-3 times rent to do it…and not with a funny money loan. Besides, I don’t do will with financial stress. I don’t need a big monthly mortgage payment to ‘motivate me’ to work.

    SoCalMtgGuy

29. Ted
    February 23rd, 2006 12:44
    29

    The only people capable “investing” at higher rates of return are large institutional investors who have the “greenspan put” to guarantee their profligacy will be underwritten should they end up disasterously on the wrong side of a trade that threatens the “stability” of the markets. Since we no longer adhere to the risk theory of profit, the imbalances will show up somewhere. Place your bets.

30. alittlereasonplease?
    February 23rd, 2006 12:47
    30

    Ted says “Buying now is begging for trouble. You’d have to be brain-dead, never read a history book, or added numbers together.”

    This is actually the type of message I’m responding to, more than anything SoCalMtgGuy has written.

    Ted, you’re very lucky to have such a powerful crystal ball at your disposal. I suggest, since you’re confidence level seems to be 100%, that you go sell short all those equities and commodities that have to crash when the RE market comes down. Since there’s no risk that the market goes up, it’s like free money.

    Meanwhile those of us who think that, as the history books suggest, the future might actually be uncertain, will refrain from making any claims that could come back and bite us in the ass.

31. Ted
    February 23rd, 2006 13:05
    31

    I worked at a pseudo-dot com (ie, a very large old economy business that was creating a “tracking stock” for it’s internet properties.) I sat through many meetings with MORONS who had all the anwers. I said at one particularly optimistic meeting, have you guys ever heard of the Tulip Mania, the South Sea Bubble. Blank stares. The world is full of stupid people who always have the answer. And the answer is UP, buy now, UP, UP and AWAY

32. LAMoneyGuy
    February 23rd, 2006 13:15
    32

    Just this morning on CNBC I saw a DiTech Funding commercial advertising 125% of your home’s value loans! Not exactly what you were talking about, but similar issues. I want to buy a place just so I can take out a 125% LTV, 40 year I/O Neg Am Option ARM!

    Wow, wouldn’t that be a doozy!

33. alittlereasonplease?
    February 23rd, 2006 13:20
    33

    I’m not disputing that tulipmania, south sea bubble and .com fever existed and won’t happen again. Popular delusions will always be with us, mad crowds will always exist.

    I’m claiming that it’s often hard to know when your in the midst of such, and when it will end. With tulips and south sea, there was not much underpinning to the investments. At least in real estate, you’re purchasing something with intrinsic value, and the question is just “how much”?

    Time could prove that this market wasn’t a bubble at all. Several of the .com stocks really will change the world. My objective is to never be so complacent as to say that something is “obviously” going to happen next, because once you do that you’re making the same mistake as the tulip buyers, just on the flip side of the coin.

    I wouldn’t be willing to bet on an RE bubble deflation, I see it as just one of many possible scenarios that could play out. My posts are intended in that light also, kind of a “nothing is ever as obvious as it seems” devil’s advocate.

34. LAMoneyGuy
    February 23rd, 2006 13:30
    34

    “Several of the .com stocks really will change the world.”

    True, and they are the survivors. In the peak of the market in the 1920s, there were over 100 auto makers publicly traded (and overpriced). Like the internet, the product that they put would was revolutionary, but the values were out of whack.

    Find me a .com that did not lose significant value from peak through the end of 2002. To that end, find me a .com stock that is at it’s March 2000 value.

    I’m not going to “bet” on RE bubble deflation, it’s really just about analyzing risk. I’m not going to lay down any new bets in this high risk market.

35. Anonymous
    February 23rd, 2006 14:22
    35

    If you really want to buy a house…it doesn’t hurt to wait like SoCalMtgGuy said. Especially when you are planning to purchase an over inflated asset. We are not talking about a 5K plasma tv or even a 60K sports car….we are talking well over 300K for a pieace of property that is probably cost $155K two years ago. Dude.. just use your common sense that’s all… and be honest (most people can’t afford the median price house unless they use those exotic loans)… also do your dd…see all those inventory spiking?? Like the previous thread reads, “IT’S THE INVENTORY STUPID!”

36. In At the Rise
    February 23rd, 2006 14:48
    36

    As SOCal has said in the past, IF your income supports it AND you can secure a fixed rate, then knock yourself out and buy a home NOW. Just keep in my mind YOU MAY be buying at the peak and you MAY be upside down in the next 2 years or so. Again the tired cliche..no one has a crystal ball but you never know what will happen.

37. Xofruitcake
    February 23rd, 2006 16:59
    37

    alittlereasonplease?, I would beg to differ on the 40/50 yrs mortgage. It sound really good on paper if someone can borrow 6-7% and make 10% a year. Except in practice, only very few people can do it consistently for a long period of time. And those who can do it already retire since they are good in their investment. Furthermore, you are taking on a payment that last 40 to 50 years. How do one know that they would have jobs that consistently able to pay for these mortgage without any problem over this period of time? The longer the mortgage, the more probability that one get layoff or have a period of time that they lost thier income for a while. In retirement planning, there is something call Monte Carlo simulation. It is essentially taking into account that market fluctuate widely (+20% one year and -25% next year) over the years. Borrowing money thinking that you can make more is a proposition that most people can’t do and risky to their financial health. It is true that no one can predict the future. But all the signs (high inventory, slower sales, price reduction, HB incentive) are pointing to price reduction. If you cannot count on appreciation, what is the hurry to buy now giving rent is so much cheaper now?

38. iron56
    February 23rd, 2006 17:32
    38

    The real thrust of my message was more directed at the idea that it just *has* to be a mistake to buy now. I don’t actually think prices “need” to come down, even in hyper-active markets like San Diego. They may be likely to come down, but there are other scenarios where prices just hover or don’t come down for several years. I’d even mention that they could rise further in the short term; not a likely outcome but certainly within the realm of possibility.

    The race is not always to the swift, nor the battle to the strong–but that’s the way to bet.

    Saying the “future is uncertain” doesn’t mean that some outcomes aren’t a lot more likely than others. And a rational actor acts accordingly.

39. mtnrunner2
    February 23rd, 2006 17:53
    39

    Here it is, a little devil’s advocate to spice things up. A little reason? How about this:

    I don’t know where you can earn 6%, so you? So it’s probably rare to find someone who gets the longest term for a mortgage and invests the difference. Second, who would invest the difference? Our savings rate is negative, so there isn’t much saving going on.

    If all our FBs were getting these option ARMs so they could invest the difference, our savings rate would be sky high!

    The proliferation of no doc and stated income is a tell-tale sign that folks are in over their heads. If they were such good investors, they’d go for the documented loan and get the lower rate, right? You have to pay a little extra to get that no doc loan. They’re going no-doc because they are having to lie about their income to get a loan.

    Why are 80% of loans adjustable rate? An astute investor wouldn’t risk taking such a risky loan. If they are really astute, they would switch into a fixed rate loan as soon as rates go up.

    If our Devil’s Advocate were right, we would see massive hiring in mortgage companies, as all astute ARM holders are rushing to purchase fixed rate mortgages instead.

    But instead, we see layoffs. Because there are no astute ARM holders, only ignorant poor ARM holders. They either don’t know how high their ARMs will adjust, or they can’t afford the higher fixed rate.

    In any case, the market has peaked, and prices have softened. I sold my house in December, and was offered, by two buyers, 5% below a VERY competitive listing price.

    Regarding the challenge to sell short: you can do so with the risk of getting a short squeeze and losing your entire investment. That’s what happens when other short holders have to sell to cover a rising stock, which then exacerbates the rise, and forces everyone else who is short, to sell. LEND has 50% of it stock held as short. Although I expect their stock to plunge eventually, I wouldn’t short it, risking losing all my money in the short squeeze. So playing shorts is very risky. The safest bet: sell your house (as I did), put the proceeds in a safe investment (CDs) and invest in companies which prosper during a recession. My husband used to work at U-Haul; they did best during recessions - more people moved and used their storage facilities. I don’t know why, though.

    A little reason: folks are getting the lowest rate loan they can afford, with no regard for the consequences: possibility of doubling their payments, losing their home.

    Oh, and did I mention the 5 pre foreclosures of people I know? Check RealtyTrac.com, wow ! It’s hitting people in what I thought were secure lifestyles…

40. Larry Littlefield
    February 23rd, 2006 18:07
    40

    (My fear is that, when the entire thread and site are taken as a whole, it amounts to a large message that “BUYING NOW IS BEGGING FOR TROUBLE”, even if you don’t say that explicitly. It’s certainly implied by many of the follow up responses._

    OK, I’ll say I agree: BUYING NOW IS BEGGING FOR TROUBLE in much of the country. Not all of it. I’d look to markets where there hasn’t been an excessive run-up of either prices relative to income or home construction relative to population growth, where affordability remains decent, and where employment growth is (even slightly) positive. There you can buy. Elsewhere? I wouldn’t.

41. Ted
    February 23rd, 2006 18:43
    41

    Let’s not forget the latest CPI report real hourly/weekly earnings FELL. Yes, FELL. Fractionally, but fell none-the-less. So stick that in your crack-smoking bubble equations. Real estate only goes up, real wages go down. Hey this one is easier than the “New Economy” beacause it’s the “No Economny”.

42. alittlereasonplease?
    February 23rd, 2006 19:07
    42

    I must be a really terrible writer, so much of what I’ve tried to say has been misconstrued. Before I pour out another rant, let me spell out what I’m *not* trying to say:

    - I’m not trying to say that people aren’t using creative financing to overextend

    - I’m not trying to say that the current situation isn’t a bubble and that prices are going to go up

    - I’m not trying to say that everybody can do better by borrowing for 50 years and investing the difference

    - I’m not trying to say that people will save the difference, or that it’s easy to earn above 5% safely

    - I’m not trying to say that historic affordability, savings, large down payments, etc are not at all time highs

    What I am trying to say is that nothing is *black and white*. Just as there exist people for whom a 50-yr loan with 1% down is a smart, conservative move (maybe not many, but there are), there also exist good reasons why the market is not going to conform to all the myriad of expectations everybody has.

    Maybe it will crash. Iron56 suggests that the “crash outcome” is a lot more likely than other outcomes. That may be true.

    But using the same predictors, you could also have drawn the same conclusion two years ago, when all the same indicators were breaking new highs back then. If somebody defied the evidence of an “obvious crash” and bought anyway in ‘04, they haven’t regretted the decision so far. I am not willing to predict that “this time will be different”, that buyers in 2005 will have regrets.

    I agree with the sentiment of being more cautious, and of understanding that there are strong potential drags on prices. What I disagree with is the idea that you can simply wait for the obvious crash and dance in with your 70-cents-on-the-dollar offers. You might be able to, you might not. On average, attempts to time your entry in the stock market and the housing market have historically been much more a matter of luck than a matter of correctly reading the tea leaves.

43. Nikolai
    February 23rd, 2006 19:22
    43

    I moved to Honolulu about 6 months before the Japanese money dried up in 1990. Only no one really knew it happened at that time for a couple of years. At the time the slowing market was thought to be a bump in the road. The news ran stories about the Japanese taking out 100 year loans. They dwelt on how these loans were putting their grandkids in debt.

    Within a year, brand new luxury high rises were remaining empty. I remember one new construction that just stopped and they filled in the hole. It was still a vacant lot 7 years later.

    What I’m reading here sounds awful familiar.

    It’s been stated that most people will sell in 7 or so years rather than pay the house off. If that’s the case, if your buying you should really be concerned with what the house value might be in 7 years. If your going to have to sell, you could end up being forced to take the loss. If your going to keep the house for life, you have less to worry about, as long as you can make the payments you’ll have a house and you’ll never realize the loss.

    At some point, real estate prices or wages will have to rationalize. On the broad scale, houses and wages must be comparable or else there is no liquidity in the market. It seems on this blog, the consensus is that prices will come down before wages inflate. Besides, an increase in wages would cause inflation, which would erode the real value from the house price run up.

44. Ted
    February 23rd, 2006 20:38
    44

    This is no lie, I had dinner at a Chinese restuarant in Westminster tonight. My fortune: “The best prophet of the future is the past.”

45. mtnrunner2
    February 23rd, 2006 21:27
    45

    Alittlereason - Those who predicted the bubble were right, but off in their timing. Now that prices have softened, actually declined, we know the peak has passed. When I sold my house, I struggled so much with whether I was being unethical to my buyers; I knew that they were the greater fools left holding the bag.

    The good thing about selling a house vs. selling a stock, is that housing prices are sticky on the way down, so you can wait for the top to pass and still make a ton of money. You can pass the top for 6 months, 1 year and still make money. The top was last August. I closed escrow in January, and lost only 5%.

    Why did I sell? Because of the data of past SD housing prices (see piggington.com) compared to incomes, and seeing that our current runup is a bubble about twice as large as the other two we had since 1970. I sold my brand new house, to cash out. Anyone who buys now is going to lose equity. Personally, I don’t see any reason to buy a house in SD in the next few years. Unless of course you can afford to lose a few hundred thousand dollars, and not care. The more prudent action is to rent until we see where this market is headed. Anyone who buys now is a FH (F*d Homeowner). Of course, there are people who buy brand new cars, knowing they lose 1/3 of their value in the first 2 years, and don’t mind, because they love that feeling of having a new car. I just don’t think it’s financially prudent.

46. Jim Brubaker
    February 23rd, 2006 21:34
    46

    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.

    You can turn a 20 into a 15 year loan with two extra payments a year.

    The concept of the 50 year loan, is admitting that children can run our world if we let them

47. tj & the bear
    February 23rd, 2006 22:26
    47

    alittlereasonplease:

    What I am trying to say is that nothing is *black and white*.

    So, you’re basically arguing for the sake of argument?

    A few years ago I would’ve agreed with you. However, your perspective is as narrow as mine once was. NBD. 99% of the population hasn’t even come this far, so you’re still ahead in general.

    Step back and take a wider view. Go way beyond just housing in the U.S. towards a world-wide, macro-economic view spanning the past century, not just the past decade. You’ll find this is in fact a classic bubble, and yet it’s only the biggest manifestation of a global credit bubble. You’ll also find that the bull (stock) market of the last two decades was a historical aberration fostered by unprecedented liquidity, and that consistently earning 5% returns will be tough in the future.

    The reason mortgages required great credit, 20% down, 80% LTV, 28% of gross income for PITI and 32% max DTI for most of the 20th century is because that is what most people can realistically afford and banks can safely lend. To think otherwise is to believe “this time it’s different”, and we all know how that works out.

48. alittlereasonplease?
    February 24th, 2006 07:23
    48

    mtnrunner writes “Those who predicted the bubble were right, but off in their timing”

    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.

49. Sane Homeowner
    February 24th, 2006 12:13
    49

    Alittlereasonplease?,

    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.

50. azsun
    February 24th, 2006 13:14
    50

    To add to the circular debate. I understand littlereasonplease?’s points that he is trying to offer a contrary point of view and appreciate it. Sometimes everyone here is so sure of the pessimistic outcome that we refuse to look at the alternatives.

    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.

51. athena
    February 24th, 2006 22:11
    51

    50 yr. loan seems like nothing more than legalized mutual consent extortion.

52. B. Durbin
    February 24th, 2006 22:20
    52

    Everybody pile on!

    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.

53. tj & the bear
    February 24th, 2006 22:55
    53

    alittlereasonplease?,

    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.

54. alittlereasonplease?
    February 25th, 2006 15:24
    54

    TJ said “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?”

    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.

55. jonny6
    February 18th, 2007 04:11
    55

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57. Earnings Before Interest, Depreciation And Amortization
    October 10th, 2007 11:43
    57

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