What do you think about this? When it happens?

As loan terms lengthen from 40, 50, 100, 1000 years they essentially become “interest only” fixed-rate loans. Obviously fixed rate is crucial but I don’t think there is anything inherently wrong with interest only. A fixed percentage of my after-tax paycheck is invested every month. I could either use this money to pay off principle on a loan or I could put it in a mutual fund.

If my mutual fund makes more than my mortgage rate (historically pretty common), OR if my marginal tax rate is higher than the Capital Gains tax rate (common for most homeowmners) OR simply because my taxes are deferred until I sell my shares yet my interest deduction is immediate (ie presuming some inflation, present value of the future taxes is less) I will be better to invest my money than pay off a mortgage.

Using loans to discipline people into saving, by investing in mortgage principle, is certainly a valid argument but I think that may obscure the very real financial merits to 40+ year loans.

Nothing can save the market now from the bursting of the credit bubble that was caused by people only focusing on the payment.

Click here for inspiration.

1/1/05, 248 downtown condos for sale — 9/21/05, 513

[Note, the above link disappeared after showing condos for sale topping out at 528. Here is another site dedicated to tracking housing, though it doesn’t go as far back.]

[Note on note: Thanks to Lew Breeze for pointing out that he does have his information still available here.]

We’re running about 20 minutes late for our landing in San Diego. We apologize for the delay but there are currently massive headwinds for all flights incoming to the San Diego area due to the deflation of the housing bubble. There will also be some chop from high winds escaping the massive high-pressure sales zone. This turbulence is only made worse as the hot air spewed out of the mouths of realtors meets the cold, harsh wind of reality. That and the major draft differential on the freeways as 5 and 15 North are packed with cars, while the Southbound lanes — towards San Diego — are entirely unoccupied.

If you look out of the left side of the plane as we approach the airport you can see the downtown area of San Diego. Despite appearances, that is NOT a fungus growing on the city. Those are merely “For Sale”, “For Rent”, and “Open House” signs. Once our aircraft gets low enough you will be able to make out the tattered remains of the giant sign advertising “Luxury Downtown Condos, from the mid $600,000s”. Yes, that’s right folks, even though the sign is now quite faded, you can still make out the price that is three times the current value of a downtown condo! It is a shame the building it was on was never completed either, a bit of an eyesore, what with the first five stories mostly complete and the upper portion mostly a skeleton… but investors won’t touch this area anymore, and construction companies, from owners to workmen, refer to San Diego as “San Die-gone”. Incidentally, with it’s easy street access from the abandoned scaffolding, the exposed tenth floor of this particular building is commonly known as “Speculator’s Leap”. Someone should probably board that up, but then again… naaaaah….

To the right of the aircraft you’ll be able to see Ditech Park, home of the San Diego Padres. Though it won’t be called Ditech Park for much longer, as the name will be auctioned off in the bankruptcy proceedings for the now defunct company. Real estate does happen to be the focus of one remaining growing San Diego industry however… prosecuting criminal real estate and mortgage fraud that is! Starving construction companies are vying desparately for state money to build the new prisons that are going to be needed for these people. Hmmm, I guess they really are going to be set for life…

Finally, please do not be alarmed by the whining sound which will increase in volume as we descend. This is not, I repeat, NOT a mechanical problem. It is merely the wailing of thousands of condo owners in their own private purgatory. They wish to leave, but they owe far more than they can get for the space between their four concrete walls. Ironically, every time one of them does give up the ghost and just make a runner for it, leaving an empty foreclosed condo, it lowers the value of their property, but actually raises their homeowner’s association fees. If the association can even collect them, that is. The worn carpet and burned out bulbs in the lobbies of most of these buildings is a testament to that!

Well ladies and gentlemen, thank for flying with us today, we know you have a choice when you travel (though not when you fly as Southwest is the only remaining carrier still serving the San Diego area…) Looking about the cabin you can see that, as usual, the incoming flight to San Diego is mostly empty. However our outbound flight, also as usual, will be full (and impatient), so please check to make sure you have all your belongings and we thank you for being ready to exit the plane quickly…

… so I can get the hell out of this Godforsaken city. Man, nice weather, but everyone here is just so depressed you know. Used to be a fun place, but downtown is dead now, dead. No one feels like partying and I guess there isn’t any money left to party with now that the funny money dried up. But hey, did I tell you what my friend’s brother’s Uncle’s former roommate made a bundle of money investing in? I lost my entire IRA/401K in the dot-com thing and my wife and I had to declare bankruptcy last year after our two I/O ARMs expired and adjusted up… can you believe that bad luck?! Anyways this should be able to make everything back… and more! It seems he….

Oh crap, this thing still on? It is? Godam~click

http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2006/03/10/carollloyd.DTL

Friday, March 10, 2006 (SF Gate)
Home Sweet Cash Cow/How our houses are financing our lives
By Carol Lloyd, Special to SF Gate

The phone rings as I’m making dinner. Could be my contractor, who
wants
another fat check written from my equity-line checkbook. Could be the
mortgage broker getting back to me about new refinancing.

“Hello,” says a syrupy recorded voice. “Our records show you may be
available for a new mortgage with monthly payments at only 1 percent
and
another $100,000 cash out with no documentation …”

Lately, our lives seem to be inundated with mortgages of various
kinds,
and we’re taking advantage of them in droves. Last year, homeowners
extracted some $600 billion in equity from their homes through
refinancing
and equity lines.

But those are mere numbers. That I too have succumbed to this
mortgage
mania shows just how far it has seeped into the American psyche. I
always
considered myself a fiscal conservative. Credit cards get paid off to
zero
each month. Can’t afford it? Don’t buy it.

How did I change?

A decade ago, I remember my mother telling me that after nearly 20
years
of residing in their home, which my father had designed and built for
about $75,000, my parents had a mortgage of over $500,000.

“What happened?” I asked my mother disapprovingly.

She waved my concerns aside. “This house is a bank,” she said.
“We’ll
never pay it off.”

A bank? After that, I could never think about our lives in quite the
same
light. My parents were self-made. They were from poor, working-class
families with five and eight siblings, and had put themselves through
college, worked hard, and never got a dime from any parent or
grandparent,
dead or alive.

But suddenly I realized that their college educations and hard work
might
not have been enough to cover certain … luxuries. Like trips to
Europe
or my tuition at a private high school or my mother’s painting habit
that
sometimes took time away from her more lucrative work.

Now, I saw that our flexibility, creativity and cultural privileges
were
in part due to the reality of late 20th century coastal California real
estate and my parents’ willingness to bet the farm on the future. Our
house — a two-bedroom, redwood cathedral perched on a hillside at the
mouth of Carmel Valley — was a creative feat, a family home and the
very
embodiment of my parent’s lifelong collaboration. But its rising value
also made it something else: a financial instrument.

Traditionally, money “taken out of one’s house” has been used to
finance
home-renovation projects. But according to an informal survey, more and
more people are approaching their homes as their own private bank, with
the equity line or refinancing serving myriad purposes. Some people use
it
to ride out difficult times during health crises and periods of
unemployment. Others take advantage of its tax deductions (you can
write
off the interest), using it to consolidate credit card debts, pay for
college tuition for their children and finance new cars.

Maggie Vaughn of San Francisco used her equity line to get herself
off the
credit card merry-go-round by using the money to pay them off all at
once.
“I was throwing all my cash at [my credit cards] to pay them off, and
therefore had very little cash to spend and would often end up using
the
cards again,” she explained. “Now, it’s great! I pay cash for
everything
and do not charge anything and can even save money now.”

And because equity loans are flexible — you only pay for what you
spend
– one loan can be used to attack several financial issues over a
period
of time. Marcus Pun of Oakland is considering getting a new equity line
to
pay off his credit card debt (used to foot the bill for his daughter’s
private school tuition), to pay for living expenses during a slowdown
in
work, to pay for remodeling his house to rent or resell it, to attend
technical classes and to take his first real vacation in 14 years.

Although most people I heard from are using equity lines as a
lesser-of-two-evils debt (better this than a credit card or a new car
payment), some intrepid souls are tapping equity as a source of
investment
capital.

Lynn Ruth Miller, who bought her Pacifica home for $97,000 in 1985,
is
living on the equity from her house and investing part of that money to
get earned income. “I could not survive if I didn’t do that because my
fixed income is $720-plus a month,” she wrote. “Because of the rise in
property values I am living very comfortably and could not possibly pay
my
bills otherwise.”

Some even factor the monthly payments of the equity line into the
equation. My mortgage broker, Michael Simmons, once had a client who
took
out a $500,000 equity line to pay for her elderly mother’s home care
and
the monthly payments of the equity line itself. When I implied that
this
was nutty, he begged to differ. “It was a perfect use of the equity
line,”
he said. “It’s more flexible than a reverse mortgage and doesn’t
involve
the equity sharing.”

Indeed, equity lines — although they can be abused — offer
homeowners
loans with tax-deductible interest that non-homeowners just don’t have.
After decades of massive appreciation, most longtime homeowners have
very
different financial pictures than their non-property-owning
counterparts.
Equity lines of credit are also being used as a way for parents to
ensure
that their children enjoy similar privileges.

Geoff Caldwell of San Francisco, used an equity line to avoid
expensive
dormitory fees, by buying a house for his daughter to live in during
college.

Edward Malouf of Novato funded a condo for his son. “We paid all
cash for
it, and our son made every payment, as agreed,” he explained. “Because
of
this, we allowed him to keep the appreciation when he sold the condo,
so
he could buy a larger, three-bedroom one.”

Equity lines and second mortgages haven’t always played such an
integral
role in American life. In the old days, taking out a second mortgage or
an
equity line had a certain stigma attached.

“It meant you were the sort of person who couldn’t pay your bills —
that
you were living above your means,” Simmons explained. But over the past
20
years, he’s seen things change. “Taking out an equity line has become
common, prudent, easy.”

Indeed, treating the home as a bank has grown naturally out of a sea
change in our attitudes about debt. Once, credit cards also carried a
stigma; now they are ubiquitous in all classes of society. As more and
more people began to pay exorbitant credit card interest rates, equity
lines — with their relatively low interest rates — suddenly looked
downright practical.

“When rates were down around 4 percent,” Simmons said, “if you were
in a
30 or 40 percent tax bracket and could deduct interest payments, it was
almost like free money.”

Now, we’ve become gamblers with our homes. With the rise of equity
lines,
40-year mortgages, second-home loans and constant refinancing, it’s
obvious homeowners are counting on real estate prices continuing to
rise.

“For our parent’s generation the goal was to buy a home, pay it off
and
retire, owning your home free and clear,” Simmons said. “Now, most
people’s goal is to buy a home that you can afford, live in it for a
while
until it appreciates, then buy something more expensive, live in it for
a
while and wait for it to appreciate, and so on. Then finally sell and
buy
something smaller free and clear for retirement. People look at their
homes as a tool, a vehicle, an investment. ”

This has in some ways changed our very notion of home. Home
ownership
isn’t a road to dominion but a temporary investment you can enjoy.

“I think most people see their homes as somewhat transitory, and
they’re
almost resigned about it,” said Simmons. “Say you have a house that’s
worth $1.3 million. Is it a reasonable expectation that you’ll ever pay
it
off? Probably not. The most people hope for is that someday they’ll
sell
it for a profit or leave it to the kids, who might have to sell it but
will maybe make a little money.”

But now the days of free money are long gone. Last year, the Fed
raised
interest rates 13 times, and my own equity line has jumped almost two
points in six months.

As the short-term interest rates rise, people may begin to be less
cavalier about home equity funny money. But the mortgage industry has
sold
the benign idea of refinancing and equity lines to the American
homeowner,
and it will take more than interest-rate hikes to change that cozy
perception. It’s going to take falling home prices, rising rates and
the
next fiscal crisis.

Ten years ago I was horrified by my parent’s use of our family home
as a
source of cash, but now I see things differently. Would it have been
better to have paid off the house and lived mortgage free? Maybe. But
going that route would surely have meant curtailing their choices
earlier
– never giving their kids college tuition, or working extremely long
hours, or having to get corporate jobs instead of working for
themselves.

In hindsight, treating our house like a bank worked wonders. But
that
doesn’t mean the nation following in their footsteps will experience
the
same real estate magic. After all, my parents were lucky enough to be
homeowners during the longest period of economic expansion with the
most
explosive real estate growth. I can’t say the next generation of
homeowners should expect the same — though I too have bet the farm on
it.

Carol Lloyd is currently at work on a book about Bay Area real estate.
She
teaches a class on buying your first home in the Bay Area, and another
class based on her best-selling career counseling book for creative
people, “Creating a Life Worth Living.” For more information, email her
at
surreal@sfgate.com.

What I posted were the words of my loan officer/neighbor. Her logic makes perfect sense, but only while prices keep rising. At some point, the gig is up!