I’m sure many of you already read the article about The Real Estate Prayer Luncheon in
There are 5 major failures with the current housing market. There are more, but 5 large items that need to be addressed immediately since they will impact the market in the next few months. Anyone buying a home in this market is tempting fate; it is reminiscent of the woman who stuck her arm in a Siberian tiger’s cage and had it ripped from the socket. Nature does what it will always do. And housing economics and bubble psychology will always do what it always does. All market indicators are blinking red. By reviewing MLS data, nearly every large metro market in the
Major Foreclosures Will Hurt the Public
Losing your home royally sucks. I’m not sure if we can find anything positive about foreclosures. It hurts families. It also displaces families and forces new inventory on the market via REOs. Sometimes foreclosures happen because a person loses a job or a family emergency. In usual housing markets, this was the majority of cases. Now, the majority of foreclosures are due to buying more than you can afford. Are you going to feel sorry about the person that bought a $700,000 home on a $14,000 a year income only to realize that maybe $6,000 a month is too much when you net $1,000? Maybe the blame should fall a little bit on the agent hungry for their commission check wouldn't you think? Even a back of the napkin calculation will show you this wouldn't work.
The demise of many sub-prime outlets is justified. They created their undoing for instant gratification and fast money. Easy come, easy go. When I worked as an agent, I would constantly hit heads with brokers that laughed about creative financing they were able to pull on buyers. I would look at financial statements and shake my head as buyers fudged numbers encouraged by brokers to get into overpriced homes. “Don’t worry, banks never check especially if we go stated income. All we need is your signature here stating you make $100,000.” I would hear statements like this constantly and this was a few years ago. God only knows what has been going on in the shady underbelly of housing since I left the industry. Oh yeah, we are already seeing what is going on. Ridiculous loans on massively overpriced homes with folks unable to afford the monthly payment.
Now foreclosures also hurt the market because it adds further inventory to a market that is reaching epic numbers. Prices are falling in many regions already. Many in
So we have plenty of data showing that many zip codes in
And notice of defaults are up a record 148% statewide. What this means is more foreclosures coming online in the next few months and growing inventory further pushing the median price down. And this isn’t just for
Mortgage Debt Largest Debt in the
Consumer spending makes up 70% of the $13.7 trillion dollar US economy. Mortgage debt has increased at a radical pace due to underwriting standards and the lax monetary policy taken by the Federal Reserve. Take a look below at the growth of mortgage debt in the
You’ll notice that in a matter of 5 years, we practically doubled the outstanding amount of mortgage debt. Mortgage debt outstanding rivals the amount of consumer spending that makes up 70% of our economy. Now you can understand why a spook in the mortgage market will send the market into a tailspin. The interesting thing to note is that as mortgage debt increases each year by double-digit figures, according to our government plutocrats we are facing very minor inflation. Too bad for most middle-class Americans, housing payments are the largest line-item payment each month. Oh yeah, and based on ridiculous hedonics used at the Bureau of Labor and Statistics, we are facing moderate 3 to 4 percent inflation according to the Ministry of Truth. Keep in mind they use owner’s equivalent of rent, take out energy and food prices, and pretty much anything useful for a daily life. As a consolation they’ll adjust for electronics since we buy computers and HDTVs on a weekly basis. Good job government.
We know how scared the market is right now. Remember long ago (in March 2007) with the sub-prime implosion and the stock market dropping 400+ points in one day? Fears of mortgage implosions sent the market down hard. The market recovered quickly because all the talking head pundits would have you believe that it was contained principally to the sub-prime market. They also discussed in great detail the legend of the summer housing easter bunny and how the market will come roaring back. Summer is here and no bouncing bunnies are to be found. We now have Bear Sterns issuing warnings about Merrill Lynch pulling assets out of a mortgage hedge fund that made idiotic bets. Bear Sterns and Merrill Lynch are not New Century Financial. This is as prime as it gets. Bear is throwing money to keep this afloat because it is a major embarrassment to their asset management. The market got hit once again and bad money is chasing more bad money to keep the party going a little bit longer.
Keep in mind that we are only entering the first stages of trillions of dollars in mortgage resets. Nothing is contained. The main question everyone should be asking is can the American public sustain monthly payment jumps while real estate prices fall? If the answer is no, how long can the market withstand jumping resets and foreclosures before a panic arises? Ronald Reagan had one thing right when he said a “Recession is when a neighbor loses his job. Depression is when you lose yours.”
Public Infatuation with all Things Real Estate
Never has the industrial world been so infatuated with real estate. Turn on your television and you’ll see shows such as Flip this House and Extreme Makeover. If you are up passed 1am or stay home on a weekday from 10-2pm, you’ll see infomercials with tanned Hawaiian shirt wearing gurus showing you how no money down is the key to financial success. Robert Allen actually was a pioneer of the no money down technique. The funny thing is that his ideas were geared toward sophisticated investors that were able to get sellers to buy/create notes, assume mortgages, and find short-term carry over loans. Not easy at all for anyone that has tried it. Reading his books, I learned a lot but it was not simple like the title implied. Fast forward to now. No money down is institutionalized. Forget no money down, we have lenders giving you cash-back at closing! By the way, cash back at closing is illegal but so is lying on a mortgage application but apparently what is illegal in one area of justice, is perfectly okay in another.
Then we have the boom of Home Depot and Lowes. Stores that cater to the housing infatuation. Ceramic tiles, granite countertops, pseudo-rock pool fountains, stainless steel stovetops, and everything that would arouse a housing enthusiast. These things don’t come cheap. They are expensive and for practical purposes, don’t do anything else than visually make your home look better; a boob job for your house or a tummy tuck for your condo. But wages haven’t increased in relation to other cost of living items. How can Americans afford this? Come in American Express and Visa to the rescue. Americans carry an amazing amount of credit card debt. Debt that usually has rates of 20%+ and has so many penalties, you’d think you were at a Detroit Red Wings hockey game. Yet home prices kept climbing and Americans needed more credit for their growing consumption appetite. Welcome home equity withdrawals.
*Source: The EconomistTo keep up with the hunger of spending, folks decided to slap a virtual Diebold ATM to their house, and start pumping out equity at amazing rates. The sun was bright again and grass was greener on your
Redefining Failure and Success
We’ve all heard about the 25 year old mortgage broker making $15,000 a month. Or the 22 year old agent with a high school diploma raking in six-figures a year simply for showing houses. We’ve also heard about a 24 year old investor that went $2.2 million in debt with an income of less than $40,000 a year. The theme? Getting rich quick isn’t enough. Getting rich young became the new standard. Forget about education because school is for elites who care about issues surrounding the world. Street knowledge and the love for the almighty dollar became the new Mammon.
We obviously live in a capitalist society. Yet this ideal breaks down when you have a system flooding the market with easy credit and encourages frivolous and downright idiotic spending. The public subsidizes this spending on the back of false inflation numbers and a higher cost of living. Think this isn't the case? Go to Europe and see how far your dollar goes. You have a market telling you that saving is pointless. Why save when bank rates are giving you 1% and real estate is making you 20%? Interesting to note that historically real estate trends with inflation, which we already mentioned by the government's own data, is hovering around 3 to 4 percent. So if we are to use logical thinking, this would imply that either inflation is amazingly understated or housing is incredibly overpriced. I knew basic college logic and philosophy would come in handy at some point in life.
But I have a news flash for you. Failure is wealth. Amazingly, we have folks to be proven bad at what they do, claiming to be experts! They are passing on their real estate horror stories as a method of investing. Call it what it is. An idiot with a fascinating story garnering massive attention and creating a social epidemic; like Paris Hilton going to jail. But no way can you call these people gurus or investors. Last time I looked at a dictionary investing meant making money, not losing it. To go further with this,
You should be a guru too! Your voice has as much weight as others. Here is the recipe for success. Do everything possible to fail; gamble, cheat, commit fraud, and smoke weed because we all love a good joint. If you can, do these things all at once. I haven’t had any luck combining all four but maybe you can succeed where I failed. Then, make it all public. Get the paparazzi to follow you or chronicle it online. Don’t commit crimes that’ll put you away for life, that’ll defeat the purpose. Mortgage fraud seems to be okay so go for that one. Then, decide to write a book and ride the gravy train to Tuscany. See! And you wonder why I’m writing a book? It is the key to riches in this country baby!
Destroying the Middle Class Psychology
Hard to believe we are only entering the first stage of this bubble. Bubbles follow a systematic pattern. Below you can see the typical cycle of any bubble:
*Source: Real Estate Decline
Currently we are between denial and fear. You still have your delusional sellers pining for yesteryear prices but a market with growing inventory from builders and REOs is quickly changing the pace of things. As far as bubbles are documented, data going back to the 1600s, this pattern is typical and rarely fails to follow through. Timing is always an issue but the stages seem to hold true.
So what does this do to the middle-class? What is the middle-class after all? We always hear political pundits using this term. Well in terms of median income for the
*Source: CNN Money
And 70% of all households own their home. Keep in mind that the net worth statistics include a large portion of equity in home. So even though the numbers may look high, it is because we are in a nationally distorted housing market. So you can see that a national decline in housing will impact a large portion of Americans. I’m fascinated with the 70% number. 70% of our economy is based on consumption and 70% of Americans own their home. Coincidence? I think not. What say you dear public?
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60 Comments:
It pretty much is immoral how good your blog is...
Bravo! Very well written. Excellent graphs. The only thing wrong with it is that it isn't on the front page of the LA Times and USA Today!
I appreciated your thoughtful summary.
I am a real estate appraiser and have seen several boom and bust cycles. However, I have never seen anything like this one. I don't think the average person really understands where we are heading. Right now, approximately 80% of my business is foreclosure appraisals and a expect that percentage will increase. It's a shame the lemmings have been misled to the cliff of insovency just to make a buck. (mortgage brokers). Good luck to those who thought the increase in home values would go on into infinity.
Nice post Doctor!
You are right about the high end still selling. A nice home with good curb appeal and the inside done up nice will sell at the "lunatic" pricing.
I am talking about homes in the 800k range in the San Gabriel Valley(Alhambra, San Gabriel, Walnut, Diamond Bar etc). I don't know where these people are getting the income to pay for this, though I would love to know what type of financing was used. And lets not forget property taxes and upkeep.
Most buying now will be added to the foreclosed heap in a few years I suppose. Or maybe not...I just dont know what to make of this.
Time will tell.
I had the most dishaertening conversation today. I'm a banking industry regulator and very few people i know have any idea of what I do. I ran into a casual aquaintance today. he proceeded to tell me of the two homes he was having built in Tucson and how he was going to make a killing on them. Here's the poop; this turd is a wire twister for aliving. No talent, simply pulls wires through conduit. he makes 36k a year max. He has 700k tied up in two loser houses. he said, 'no big deal, if it fails I didn't put any money down' How can you even begin to punish someone like this? Yout ake away his wealth, income or pride, he has none. Some bank somewhere is going to get shtooped and he's one of millions. Who in the world told a human mule [his job absically. Mules are just too big to get into the workspace] that he can invest? I have LOADS of inside info and I don't invest in housing! I heate them all. A strong word, but damn, how stupid can your average mule be? My only hope is that they drive rates up to 15% or so. I made a killing during the Carter years by paying attention, I sure plan on doing it again
I too am an appraiser. It never fails to amaze me how borrowers don't even have the money to pay my appraisal fee (therefore I have huge surcharges for COE payment). You know, you can serve 20 years in prison and then go be a mortgage broker, I have dealt with characters I cannot even begin to describe. However, the biggest tragedy of all in regards to appraising is the rise of these so called AMC's Appraisal Management Companies, and they service some HUGE banks. Is it really ok that Countrywide OWNS Landsafe, an AMC? Is that really appropriate? One big AMC, who will remain nameless, only asks that you fill out a form so they can send you discount work. They do NOT even ask for a sample/ demo appraisal, can you imagine? It is the appraiser who really sees the underside of this toilet industry.
Yeah, a quite excellent read: I think it's your best essay yet!
I like how you tie the cultural fascination with photogenic losers (like CS and PH) who fail so spectacularly, and then attempt to monetize their 'nada' notoriety afterwards (I see Casey supposedly has been offered $100k for his blog! If so, he should create 22 websites and sell them: at least he'd break even on the $2.2 Mil he's lost).
Of course, Paris is famous for absolutely nothing, except her family name (i.e. nepotism). In this day and age, who knew nepotism and royal lineage mattered? Who cares if you have no talent or skills, just as long as you have a famous pedigree? Can you say Bush?
@@@@
Just one comment on a typo: isn't that supposed to be Horatio Alger (not Alder)?
"Keep in mind that the net worth statistics include a large portion of equity in home. "
Why only a "large portion of equity in home"?
I thought the networth excludes any portion of equity in primary home. Can you double check this point?
Mr Vincent said:
Most buying now will be added to the foreclosed heap in a few years I suppose. Or maybe not...I just dont know what to make of this.
Time will tell.
Time HAS told. Only look at the real estate rush in South Florida in the 1920's, and we had all the same ingredients: speculative buyers using leveraged funds, thinking that the real estate frenzy could go on forever.
You had shady buyers who simply were greedy (not brilliant financial managers), who felt they were geniuses when the road to success simply boiled down to being at the right place at the right time.
Many of the mansions in Florida were palacial, costing millions of dollars. Amazing, when you realize these amounts did NOT correct for inflation! We're talking about $2.5 Mil in 1920's dollars!!
After the market crash/depression, prices were maybe 2-5% of what the peak buyers paid. Easy come, easy go. Prices remained depressed, taking maybe 50-60 years to slowly appreciate.
Here's some very interesting reading for those who don't recall the history. As the old saying goes, those who forget history are bound to repeat it.
Rags to riches real estate developer in the 1920's:
http://tinyurl.com/ytr8lk
Anatomy (postmortem) of a real estate crash:
http://tinyurl.com/2ahh9j
An article from the SSA's employee's newsletter (1979), explaining how we could NOT have another depression:
http://tinyurl.com/yoog36
Love the article's conclusion:
What had caused the Crash? The
main reason was excessive specula-
tion. People were able to buy stocks on as much as 90 percent margin (which meant that they only had to pay 10 percent of the stock’s value).
The market was also subject to a
great deal of insider manipulation,
pyramid schemes, etc., which added
to the instability of the market.
Another reason for the Crash was
the psychology of the market. The
bull market had prospered in wild
dreams, while the bear market that
followed was consumed by its own
nightmares. Selling led to more selling, and the process fed upon itself.
The causes of the Great Depres-
sion of the 1930s included the wipe-out of individual savings and business profits in the Crash, the rapid drop in production that followed, and the banking crisis mentioned above.
Most economists believe that we
will never have another Great De-
pression. Paul Samuelson, in his
basic text, Economics, states that
“economic science knows how to
use monetary and fiscal policy to
keep any recession that breaks out
from snowballing into a lasting
chronic slump.”
Federal regulatory agencies such
as the Securities and Exchange
Commission (SEC), the Federal
Trade Commission (FTC), and the
Federal Deposit Insurance Corpora-
tion (FDIC) have the authority to
combat excessive speculation and
unsound business and banking prac-
tices. The FDIC also assures savers
that they will get their money back
if federally regulated financial institutions fail.
Samuelson and other economists
cite certain built-in stabilizers in the economy as preventing any depression. These stabilizers are Government payments that increase during recessions when unemployment increases.
Social security, welfare payments,
and unemployment compensation
are the three main automatic sta-
bilizers. Nonautomatic stabilizers-
that is, those requiring legislative action, such as lowered taxes and public works projects- could also be used to prevent a recession from turning into a depression.
We may have economic crises in
the future, but another Great De-
pression is as unlikely as another
era like the Roaring Twenties.
Wow, comforting to know that we'll never see anything like the Roaring Twenties, huh?
Anon 4:14 & Matthew,
The sheeple were led to the slaughter. Take some expert witness education. This thing is going to get really really ugly. Do all the review work you can, even though the fees sometimes suck, its been my pleasure to turn in all the skippy boys n girls I can. I actually saw on the OREA website that one of my scummy compatriots had his license revoked. That said, if they revoked it I know that OREA had a lot more in his file than my cherry picked appraisal of his with falsified closing doc #'s.
COD at the door, for anyone you don't know and for those you do do 14 and 28 day terms with increasing fees.
Cheers and assume crash positions!
Someone needs to investigate the massive fraud being done by new home builders and their mortgage company off-shoots (so called in house lenders).
We all seem to forget that when you buy a new house the UPGRADES are included into the mortgage, gone are the times when you had to come with at least 10-50% money down on upgrades like flooring, appliances, blinds and shutters and such. Now, even the dumbest home buyer with 80/20 loans, zero down, adjustable balloon can add almost $100,000 in worthless “upgrades” to their “castle”.
I have several examples in my immediate neighborhood and know these people. Not a pot to piss in but managed to add $90,000 in paved drive ways, disgusting bronze ceiling fans, rubbed kitchen cabinets, bronze fixtures, pool...and so on. I know that this was all rolled into their stupid mortgage. Your guess where they will end up in couple of years, back in the trailer park where they belong, and our idiotic politicians want to bail this kind of human garbage out! These people are not unedjucated, master degrees and good jobs but completely caught up in the “I deserve it” frenzy.
One prime example: base prise 440k, after a spending spree the mortage deed is 750k, and of course the usual zero doen and liar stuff like that, just appeard in the foreclosure listings!
Nobody wants to know about this, I wrote a letter to HUD, I called state agencies and so on. Nobody cares.
Hooray for Dr. HB!
One of your best posts. Fitting that it should begin with the REIC players assembling in FLORIDA to pray for the RE market not to crash any more!
I, like a few on this blog, profited from this insanity by buying a new house in San Diego in 1999 and selling in 2005 for quite a windfall. I had no idea during most of it what was driving up prices to insane levels. Too bad, too, because I really liked that house...but I had bought it to sell.
I found the reference to Bear Stearns intriguing. I've been wondering who was gonna get stuck holding this hot potato bag called MBS's and CDO'o. One tale I heard Friday was that Merrill Lynch is coming with a band-aid bailout of 3.2 billion (for a fee, of course) and selling the package to whom? Teacher's retirement trusts. Yep, you heard right. I saw a quote from a North Carolina "Trustee" saying "Merrill assures us we are getting quite a discount." Uh, huh.
I was around for the S&L blowup of the late 80's and early 90's and it got pretty ugly then. This time around, it looks to me like it's gonna run a lot longer and deeper.
Again, great post.
Turdly said:
Who in the world told a human mule [his job absically. Mules are just too big to get into the workspace] that he can invest? I have LOADS of inside info and I don't invest in housing! I heate them all. A strong word, but damn, how stupid can your average mule be?
So suppose you told everyone what YOUR secrets to investing are? It actually might benefit YOU, but SOMEONE (the latecomers) would be screwed by following the trend at the wrong time.
It's official now: we have entered an economic era of "Ponzinomics", where a series of get-rich and pyramid scheme have been normalized as acceptable for the common citizen, as this is their only chance. Are you good at Texas Hold' Em, per chance? Then head to Vegas, and see what you can make of it....
What is a real estate agent, a mortgage/stock broker, except the 21st Century's equivalent of a carpet bagger or riverboat gambler? Sure, the "uniform" has been updated, but the modus operandi is basically the same: these are people who attempt to separate you from your money in the name of helping you and your family.
You asked who told the brokers, agents, etc, that it was OK to let the average Joe become a big-whig investor? Sounds familiar, like 1929, where elevator operators and shoe-shine boys were passing on stock tips, heavily over-leveraged on stocks? Look at China, where the average person is selling their bicycle to play the stock market now! A bubble? What do YOU think?
As far as who encouraged it, I'd say the Feds, the Fed Chair, right up to the President said that it was not only acceptable for people to game the system; they actually ENCOURAGED it by lowering borrowing costs to nil, imposing windfall tax exemptions on capital gains, etc.
The public was basically told that rampant speculation on stock market and housing was the new norm, and here we are AFTER it goes awry. How could it NOT go bad? Hasn't history told anyone that market manias end poorly, EXCEPT those who set up the pyramid scheme themselves who are at the TOP of the pyramid? Do you think the NAR didn't make TONS of money here? OR the banks who pushed mortgages down everyone's throat, well past sustainability? Of course they did....
U.S. citizens were basically told that "it's every man for themselves" when they soberly realized that the government programs mentioned in that article from 1979 (e.g. Social Security, Medicare, etc.) were going to collapse, and the message was that sheeple will need to cover themselves, by hook or by crook.
As usual, many will be ruined financially, but many will profit from the misfortune and ignorance of others. In other words, this coming era will be business as usual, only on a less subtle basis, as there's no concern to cover the corruption nowadays.
'Conspicuous consumption' was the rule during the Roaring 20's and Roaring 90's, and 'conspicuous corruption' signals the tail-end of that phase. We were there 4 years ago, IMO.
Great comments from the appraisers, and I so badly want to talk with one of these honest appraisers, to get the lowdown on everything that is wrong in the appraisal industry. Could you email me at schberkland@sbcglobal.net?
Yes, it's the homes that are NOT selling that are causing the median to rise.
The junk doesn't sell, so it sits and sits. The beautiful ones sell, keeping the median up.
That brings up another question: how low do you have to price the junk to get it to sell. And further, how low would the median be if all homes were marked to market?
Just one point:
The large entities that have gamed the system for their own advantage have pillaged the country, while the regulators (FDIC and SEC; heck, that includes the Border Patrol and INS) who are SUPPOSED to protect the country for the sake of the common good have turned their backs on their duties, at the order of the Oval Office. All parties have completely LOST their sense of patriotism, IMO, and have sold the United States of America out to the highest bid, under the color of authority. The country has been co-opted, and there's nothing left but the shouting.
Why do citizens refrain from vandalism, or robbing banks? I think many do so, since they realize they might go to jail for it, but many refrain since they fundamentally realize it's WRONG, and not good for the greater good. Some remember their civics lessons, and know that such personal excesses and greed will DAMAGE and HARM our country.
Problem is, many of the large multi-national conglomerates now have NO allegiance to ANY country, and they pledge allegiance to the stock holders, not any country. Paying taxes to any country is laughable: the goal is to minimize taxes, NOT to pay their fair share Ever would why corporations like Halliburton and Exxon operate out of Dubai? Hmmm....
And people wonder what fueled the growth of communism and socialism in the 1930's and 1940's? Perhaps it was the unregulated rampant greed and corruption on the part of a small group of individuals?
The more things change, the more it seems we're living in a re-run of a bad episode of history.
Doctor,
Incredible summation of where we are today. Can you imagine, what the landscape will look like in 6 months? The picture I get is a snowball getting bigger and bigger until it has reached bottom. Unfortunately, it is about 1/20th of the way down the mountain.
The longer this farce goes on, the greater chances we could see GD2 (Great Depression #2)......
@bob from brooklyn,
Cheers to you on the east coast.
@anon 4:14,
Can you see this article in a mainstream paper like the Wall Street Journal? Their biggest backers are the people who created derivatives and are pumping the system. Of course they may pay lip service to the market but they know who pays their bottom line. Never bite the hand that feeds you.
@anon 7:47,
Drop me an e-mail. Love to get the perspective from someone with appraisal history in the market.
@mr vincent,
Most people do understate the price in keeping up a house. Repairs, taxes, and insurance come to mind. And you can rest assured that foreclosures and REOs only have one way to go and that is up. Someone just turned out the lights in California.
@turdly,
Shoeshine boy giving you tips in the housing industry? I think you bring up a great point that literally everyone was given access to this credit bubble. Drop me an e-mail.
@matthew,
I’m going to put together an insiders post and it seems many have great information regarding the market. Drop me an e-mail.
@adam,
Great commentary. Thanks for looking out, updated. Interesting regarding our fascination with lovable losers. Or even notorious losers that we hate. Either way, dropping a name or a brand gets you far with many circles. Dolce you say? Gucci? What about all these McMansion with every upgrade you can imagine?
The interconnected nature of this credit bubble is key here. We have a form of corporate welfare and our government is running under the guise of a plutocracy. That is financial resources are being aggregated in the hands of a few at the cost of the majority. People remain content because they have the illusion of wealth. You think you own that house or car? Miss one payment and find out how much ownership you really have. If we are so wealthy, why are we actually poorer than the previous generation adjusting for inflation? Why is our dollar falling so precipitously?
Could it be because of irresponsible lending that is going on? I hate to draw the parallel here, but look at the Japan land bubble collapse of last decade. I know we aren’t Japan and they aren’t making anymore land, but there are tremendous amounts of similarities. And then we have bankruptcy laws favoring the issuers of credit cards. Very easily, they can control the spigot of credit and be more diligent on who they lend credit to. Why don’t they do this? Because these customers give them the largest profit margin. Think about it, once you claim bankruptcy, with new legislation passed in October of 2005 you now have to wait a longer period before filing. So companies know they’re going to get there’s from these people that are addicted (slaves) to credit. No where to run except living the life of an American Express serf.
@anon 10:44,
These stats are accurate. You can check for yourself at www.census.gov which considers equity in home as part of your net worth. Net worth is assets – liabilities and equity for what its worth, is considered an asset. Excluding equity the numbers would drop significantly.
@socalappraiser,
The roaches scurry when the light is put on them. I’m pleased to see smart and ethical appraisers come to arms about this. Drop me an e-mail.
@anon 6:49,
The problem is, many of the so-called regulators are just as bad as those providing irresponsible credit products. The government radically under funds the OFHEO. Housing is practically the lifeblood of the American economy and you would think that the OFHEO would garner more support. They don’t. But look at the IRS. The government is going to get theirs no matter what. When you buy a home of your own builders, agents, brokers, Wall Street, government, and everyone wins. The small caveat is you are covered in debt.
Glad to see you write a letter to HUD. I would recommend calling or sending a letter to your local Congressmen letting them know how frustrated you are with their lack of enforcement. You can find your local Congress person Here
@covered,
Glad to hear you got out in time. It had to come to a pinnacle and praying for another real estate revival pretty much sums it all up. This is much more pervasive than the S&L crises. Everyone to a certain extent will feel the impact of this bubble bursting.
@schahrzad,
You need to remember banks are not landlords. They will unload REOs at any price the market will bear. This, in my opinion, is the final piece needed to bring the market down. Fitting and somehow poetically just since these are the same geniuses who funded a person with a massive mortgage knowing full well they wouldn’t be able to afford the payment down the line. What do they care? Ship off to Wall Street, cut it up in mortgage back securities, and feed the beast for decent yields.
@ben franklin,
A quote of Benjamin Franklin comes to mind:
“He does not possess wealth; it possesses him”
Debt is not wealth. And another quote from the great Mr. Franklin:
“It is the eye of other people that ruin us. If I were blind I would want, neither fine clothes, fine houses or fine furniture.”
Great insight. And this is 250+ years ago. You might as well take some of his insight into economics, politics, and human nature and place them in 2007. As Mark Twain once said, “history doesn't repeat itself - at best it sometimes rhymes.”
Wow, after reading "Dr. Housing Bubble" and his fellows "doomers" comments, it's hard to even think of a smile about today's world. It's probably true that there are some significant short term difficulties that will need to be over come in the housing market, but the long term prospects are excellent for those that seize the opportunity to buy now and can hold for 5 years and longer.
As to who to blame, I think those individuals who made the decision to buy were probably over the age of 21. As to sub prime mortgages, no doubt there were abuses, but they allowed 2 million people to have a chance at owning their own home that would never have had that opportunity. By the way, many of those loans are still current. Lenders are taking steps to reset the loans to lessen the blow on the borrower. You will see lenders take proactive steps as they certainly do not want to own homes nor can they afford to have these bad loans on their books. By 2009 this will be substantially behind us.
Cool, I am under age 35 and have a net worth significantly higher than my peers and zero debt. YAY!
Great post, Dr. HB. At least you did not rip off a well known fiction book like our foreclosure buddy did with his "book".
Scott wrote:
As to sub prime mortgages, no doubt there were abuses, but they allowed 2 million people to have a chance at owning their own home that would never have had that opportunity.
Two questions for you:
(1) Why couldn't 2 million people afford homes? What was the cause?
(2) Why should 2 million people be able to afford homes that far exceed their earning potential?
There is a problem with both of these statements. The apologist spirit of your post toward the real estate market and lenders seems a tad biased (and unrealistic).
Banks are NOT unloading at any price. They are holding on for top dollar. I just got an email from a short sale listing agent - Countrywide is refusing offers on two different homes that are just 5% below appraisal. Instead, they will spend the extra money and go to auction, which will cost them more, no?
Just go through the MLS, and see how many REOs are on the MLS, and how long they've been on the market.
I think builders are the most realistic right now. They are the ones who must sell.
Countrywide is just the servicer, so who knows what their ultimate goal even is?
The whole thing is very confusing, because we often don't know who the decision maker is on these defaulted loans.
Under the Pooling and Servicing Agreement, the servicer MUST protect the investor collateral - perhaps that is why they are not selling at reasonable prices. If the offer is below appraisal, the servicer is not interested, from the stories I have heard.
Also, the lenders can sit on hundreds of homes for years, if they want. In the 1980s American Savings spun off their homes to a holding company. My friend managed 560 of those homes for several years, until the market turned around. They refused to sell while the market was down.
@scott,
You said…
“It's probably true that there are some significant short term difficulties that will need to be over come in the housing market, but the long term prospects are excellent for those that seize the opportunity to buy now and can hold for 5 years and longer.”
So are you actually recommending that people buy right now at current prices? And this 5 year number sounds familiar. Something about 2012 is special. Oh yeah, it is the Mayan calendar end-date. Is it because the world will reset and all past debts will be erased? And you’re calling us doomsdayers? Fascinating.
Actually, I’ve seen this 5 year figure come up often. Pretty much from all the propaganda being sent to my home from multiple housing agencies especially the new National Association of Realtors’ party line. So what will keep the market afloat and keep real estate chugging along until 2012? Some evidence will be nice.
You also mention that by 2009, all this will be behind us. Why 2009? Any thoughts on 2020?
@socalwatcher,
Under 35 with no debt? Living in California? Congratulations. Honestly, you must be in a select group of people that can claim this. Each year it is harder not to go on without getting into debt. FICO scores are now used for discounts on car insurance. So you’re at a disadvantage if you have no credit. Goes to show that credit is becoming a larger part of our lives.
@anon 4:26,
I’m curious to the answer/evidence to those questions as well…
@schahrzad,
I think California is behind the national curve by a few years. We really are in a surreal environment. For anyone that travels to the middle of the country or even certain areas of the east coast, $500,000 is incomprehensible. Whenever I talk to people in other states and explain our situation, a quizzical look takes over their face. It just doesn’t compute. And bank REOs and builders are slashing prices in other states and cities like Detroit, Las Vegas, Miami, Fort Lauderdale, Indianapolis, and Denver deals are to be found. Again, REO was not in the California lexicon until early 2007. Short-sale conjured up visions of long lines at Macy’s. Practically any home in California would sell during the foreclosure process up until 2007 (need we point out the examples?). We’re entering stage one of a very long and drawn out real estate trough.
The S&L crises ultimately cost the country $150 billion. Currently we are seeing resets of $1 trillion a year staged for the next few years. The mortgage market in the U.S. is now worth $12 trillion+ dollars. I’m not sure how useful comparing the S&L crises is to our current mortgage and credit bubble aside from the fact of issues of irresponsible lending. One is an off-shore current while the other is a category 5 hurricane coming to shore very soon. It is vastly larger and affects a larger portion of society. According to the Bureau of Economic Analysis, from 1980 to 1989 12% of all employment growth was attributed to the real estate industry. This is during the S&L crises mind you. Now? From 2000 to 2006 29% of employment growth is attributed to real estate. There are some additional factors to consider:
1. Negative savings rate
2. Massive mortgage equity withdrawals via HELOC and Home Loans
3. Mortgage Backed Securities and Collateralized Debt Obligations
4. Global Credit Bubble – From London to Sydney to Los Angeles
It is a brave new world we are approaching. I’ve made a guess that Q4of2007 and Q1of2008 will see the first major shifts in the real estate market for California. Why? Because we still have delusional sellers, banks, builders, in California thinking that July and August will somehow inject a new sense of optimism in the market. Inventory is at record highs. Prices are no longer going up. And market psychology is starting to break like countless previous bubbles in history. Once you realize there is no greater fool the cards start collapsing. Not tomorrow or next week but over the next few years. I hate to bring the memo, but the rest of the country is already up on the news that real estate is so passé (at least at the prices in California).
I’m sure many of you already read the article about The Real Estate Prayer Luncheon in Florida where a group of hopeful agents prayed that the housing slump will end.
Great article. The people at the prayer meeting are being pathetic. I wonder what "their" God would say about greed. Maybe they should not stray from their 'Our Father's and 'Hail Mary's. If they were real Christians, they would be praying for/helping the "poor" fellow who can not afford to buy their custom built shacks at their greedy mansion prices.
The other thing is their lust for wealth and the gluttony of living high on their home based ATM's.
When these prodigals return to Daddy gov't for a hand out, there will be no more fatted cattle to slaughter.
The overleveraged are no longer the home flippers but the flipees.
Yep, did anyone notice today's Daily Bulletin. In the Real Estate section, they don't even list Alta Loma because nothing sold. In Rancho Cucamonga, the number of homes closed this week over 600k = zero.
So, umm, I just don't see how this is going to "be largely behind us" any time in the foreseeable future.
I would like to own my own home, but I'm going to sign another lease on my rental and continue to gain wealth. I think I'll
"seize the opportunity" to rent right now. I just don't know how long I'll rent, maybe into 2009 or 2010. My biggest risk right now is my landlord losing his property!
wow, the median net worth chart is really sad (for the future of america) I'm turning 33 in July, and my networth is more then 2x then the 55-64 range, yet I'm living in a modest 1bd room apt in northern cali.
Socking away 2/3 of my income waiting for the inevitable crash to buy my dream home. I make pretty average salary as an engineer but I've been good at managing my money while still enjoying life, going out with friends/dates and traveling when I can.
"It is a brave new world we are approaching. I’ve made a guess that Q4of2007 and Q1of2008 will see the first major shifts in the real estate market for California. Why? Because we still have delusional sellers, banks, builders, in California thinking that July and August will somehow inject a new sense of optimism in the market. Inventory is at record highs. Prices are no longer going up. And market psychology is starting to break like countless previous bubbles in history. Once you realize there is no greater fool the cards start collapsing. Not tomorrow or next week but over the next few years. I hate to bring the memo, but the rest of the country is already up on the news that real estate is so passé (at least at the prices in California)."
Dr. HB, you raise an interesting issue that I have, and I would appreciate any advice you or your readers might have. I have a wife and two small kids, and an income of 125K. We have been renting, but our place is going to be converted to condos by 7/1/08, so we gotta move in the medium term (no interest in buying this roach motel).
There is a gigantic emotional pull towards trying to buy a place. We are tired of renting high priced hovels in the San Fernando Valley, with the prospect of parochial school tutition in the future b/c of substandard public schools. Our kids need a good place to grow up, and it seems that in the SFV there is only room for the very rich and the poor, the middle class be damned.
My questions:
Is buying in the first half of 2008 too early? Suicidally early, or just "haven't gotten as cheap as it could get but it's okay"? I plan on only buying a house that I can afford to buy via a 30-year fixed. Plus, we are hoping to get a place in a new development (townhome), so perhaps the builders are already feeling the pinch and are much further down the line in cutting prices? We figure to stay there for at three to four years. Too short a stay?
I'd like to hear your thoughts on whether buying even in 2008 would be tantamount to slitting my own financial throat in the long run.
THANKS FOR HELPING US MAKE AN INFORMED DECISION!
Interesting comments. I have a different approach to the housing/credit crisis. I rent! I save 100% of my net income after I maximmize my 401K and other tax deferred investments. My wife does similarly but we only invest/save 65-70% of aftertax income. We eat beans and rice and pay cash for everything. No credit cards and NO debt. we also have NO FICO scores. So theoreticlaly we are dead beadbeats. Ha! We do all the frugal stuff, and what keeps us going is not the putrid LOW interest we get on our conservative investments, but the knowledge that bankers, and others are not getting to touch our money. Here is my rhetorical question. If I go to a bank to get any measily loan (even if I back it with CD or other deposit) They know what I am worth but the want to stick it to me hard with extremely high interest. Knowoing this all I want to do is share in these obscene profits. They won't have anything to do with it. WHY DON'T THEY want my money? All I want is a decent interest rate. No, I have to chase interest rates from these thieves. Cut me in on the action? No!I speculate that savers would pop up all over the place if banks paid any decent interest rates. If banks were only allowed to loan what was on deposit, we would all be happy. No, the banks are greedy and lie. FICO scores only show the tenedency of a DEBTOR to repay a debt. I am not a debtor. I have sold several houses a;llpaid as agreed, but never on my credit reports do to over 7 years. I think FICO is a scam to get higher rates for mortgage companies. And they are in on it. I am saving and watching and laughing. Just pay me some interest.
Just like the people who bought because everyone was doing it, buy now because no one is.
SELL WHEN IT IS THE TIME TO BUY
BUY WHEN EVERYONE IS SELLING
Economics 101
I am glad I have the degree. I expect all the sheeps to now attack.
Jen... Jen... Jen...
No one buys right now because the prices are insanely high... we are not sheeps and we have college degrees... why should a person buy now when he can wait for the prices to drop. I agree with what you said, for most situations you would be correct.. however, we're in a bubble now Jen... do you understand ? bubble...
Isn't the US government protecting you against (1) Loss of dollar's value?
(2) Inflation ?
You were sleeping and your house price doubled. Inflation increased right, but why complain? you have double( or will have at some point) the money.
Accept that money has lost value. Price of Cheese and milk doubled.
After all housing price increase is a good thing.
Jen,
Go buy now. Let us know how your bankruptcy is going about a year from now. That rule may work in the stock market, but has a while to go before it works in real estate. The illiquid nature of RE means that you gotta buy at the right time and wait. That time has a while to come.
Where did you get buy this "degree" from?
"In Rancho Cucamonga, the number of homes closed this week over 600k = zero."
I have been keeping an eye on that area for a while now.
Things look like they have frozen like ice cube in terms of activity.
The RC has a very large number of listings in all price ranges. Its really a good place to observe what happens when a real estate bubble starts bursting.
Everyone seems to complain about the lack of individual savings. I like to keep my liquid assets in I Bonds. In March 2006, they were paying 6.74% so I bought $120K (60 k max each person per year). Between Nov 2005 and March 2006, The Treasury sold over 4 billion dollars of I bonds. The greedy banks didn't like depositors pulling their savings out of lousy 3% interest accounts, so they pressured the government to reduce the interest rates on I bonds. On April 1 2006, I Bond interest plummeted from 6.74 to 3 %. This was NOT reported in the press. How did this happen? Pressure from the banks. They want ALL the money. Banks want to make 50K loans to the homeless with zero assets, but don't want to pay depositors interest on deposits. Then banks whine when illegals using phoney names, no job, no assets and no Social Security Numbers buy $500,000 110% mortgage loans and drive away from the loan, with the 10% "cash back" they got from the loan! And they try to stick us with that dumb underwriting decision? Very predictable. The banks are asking for more government regulation. How did we get here? Banks should only be allowed to loan money that they have on deposits, not the 20:1 ratio they are using now. Presently, banks are part of the reason the Mint keeps printing money and our dollar keeps getting weaker to the Euro. Its time to tighten up monetary policies. If our government wanted people to save they would start increasing interest on the I Bonds. If we can afford a 500 Billion dollar military "confrontation" in Iraq, we can afford to pay decent interest on I Bonds which will encourage citizens to save. Increased saving help us all. People will save, you just have to give them a little encouragement. $ 4 Billion in I Bonds were sold in 6 months! We can do it again. If the interest goes up reasonably next Nov 1, I'll buy another 120K. By the way, I AM A RENTER with NO debt. I have not been a debtor for years, and I have NO FICO scores. If I want, I can pay cash for a house. Not me, I'm waiting for prices to get back to $110/sq foot. I AM NOT IN HURRY. Besides I like the 3,000 sq foot house for which I pay 1,000 month rent!! If prices don't reach the lowest level I want, I'll keep saving and investing. I will not part with my hard earned bucks unless I HAVE VALUE. $500,000 k for a 50 year old "crap box" with more termites than wood is NOT a good deal. I don't care what Realtors say - I say go get a REAL job. BTW I just pulled out of ALL investments having to do with insurance (insurance is too closely tied to banks). I made my money on this sector, and its time to get out. Watch and you shall see. I predicted all of this back in 1999, and no one would listen. I am reminded of what actor Robert Duvall said in "Apocolypse Now" "I love the smell of foreclosures in the morning"!
I saved a financial life this weekend. I actually got through to someone. Instead of hanging on to a loser rental, I convinced them to do a 'real' analasys of what their rental was.
Silly Realtor daughter had told them to hang on to it for 10 more years as they would probably get 10k more for it then. I told them that it was an $80 dollar per month difference and they would have to put up with renters for another 10 years, plus mantainance etc. They listed the house today and not with the daughter. They are bailing ASAP and putting it all in a 5.5% CD. Finally someone got it. 5.5% guaranteed is worth a LOT of piece of mind. I simply showed them some of your past graphs, spoke to them as a disinterested expert and told them this;
'If your daughter was the best agent that her boss ever trained, did everything the boss said, and was hugely successfull, then guess what? She learned everything that was taught to her. But here's the problem, if the boss is a dumbass, he trained another PERFECT DUMBASS. She doesn't know she's a dumbass, because a dumbass has heaped praise upon her for good work.'.
They got it the first time. The daughter wasn't intentionally misleading them, she was parroting what she had heared as gospel.
Realtors can't be 100% blamed for their inane stupidity. I truly believe only problem with them is the Realtor cult makes aquirring peripheral knowledge a sin. Any of you remember Amway and Shaklee? Realtor is the same cult, same pyramid, same people believing....
It's not what you know that counts toward intellect, it's your ability to absorb and process the fringe of what you don't know that makes you educatable.
Dr. Bubble... your quote "We’ve all heard about the 25 year old mortgage broker making $15,000 a month. Or the 22 year old agent with a high school diploma raking in six-figures a year simply for showing houses".
Do you know where he is now? I do... I just bought a pair of shoes at the mall yesterday.. He sold them to me.
All,
I was contacted by Talk of the Nation, a show on NPR to discuss the issue of "should I buy today?" Unfortunately, they must have contacted several other housing bloggers and I was a few minutes too late and another blogger beat me to it. Either way, I encourage you to listen in today at noon: NPR Talk of The Nation
It'll be interesting to see which blogger they put on the air. Glad to see more of the media reaching out to different sources for housing news. Given that many people are questioning buying right now, I think this may provide some useful information.
OMG....classic! The hubby just forwarded this to me from Salon.com:
No One Wants To Buy A Home. Whose Fault Is It?
At the end of May, 4.43 million "existing homes" were available for sale in the United States . That's the largest such number ever recorded. At May's existing home sales rate, it would take 8.9 months to burn off the excess inventory. That's the highest figure for "months of supply" since 1992, at the tail end of the last big housing downturn.
The immediate import of the numbers is unarguable. The median sales price for existing homes has declined for ten straight months and will continue to do so. This is good news for buyers still waiting in the wings, but may not be the best tidings for the larger economy.
But what about those would-be buyers, cautiously watching the carnage from the sideline?
Lawrence Yun, the staff economist for the National Association of Realtors who has replaced our favorite whipping boy, David Lereah, as the Man Who Must Be Quoted in all stories about the real estate market, complained that the housing market was "under performing," given what he considered the general overall health of the economy.
"Psychological factors," he said, explained buyer reluctance to jump into the market at the present time.
How Yun and his ilk are able to cite "psychological factors" as the reason for anything is an exercise in tautological meaninglessness that continues to baffle How the World Works. If you're going to blame consumer psychology when the market is headed down, then in all fairness you should blame it when the market is going up. But, back in the go-go days, we never heard anyone from the National Association of Realtors say anything along the lines of: "The real estate market over performed this month, as home buyers, irrationally convinced that home prices would continue to appreciate beyond all rhyme or reason, stepped up their splurging on new and existing homes, rashly confident that they would be able to sell their purchases at a 25 percent markup in just one year."
Psychological factors are always in play, whether a market is going up or down. We've been giving Yun a chance to establish some street cred, but with each whine about buyer psychology, our willingness to give him the benefit of the doubt takes another hit.
-- Andrew Leonard, Salon.com
All of your comments have merit except for the fact that owning a home was first and foremost not intended as an investmnent, but as a place to live, to raise a family, and call your own instead of having to deal with a landlord who could move you out. You could build equity over time, maybe pass it on to your family.
It sounds like most of you don't own a home for whatever reason. Those 2 million folks that wanted a home of their own were willing to take the chance to get their foot in the door.
You also forget that while real estate is "local", we are now a world economy that is not immune from whatever is going on in the rest of the world. US real estate looks "cheap" to foriegn investors, especially when taken in the context that the dollar has fallen in value against many of the world's currencies. There has not been any real appreciation for the last couple of years in the US because of the dollar's decline in value.
Why 2009? Because my guess is as good as anyones. However, you can chart this through many cycles and see that all of the bad news is out now. Is anyone saying anything positive about real estate? Nothing goes up forever, but nothing goes down forever either. With interest rates rising, those people waiting for prices to drop before they buy, a rise in interest rates will negate most price declines as far affordabilty goes, do the math. As Will Rogers said about real estate "They aint making any more of it".
Real estate is so much about a network, which takes time to develop. I think if you're new to buying property to start small and begin with friends or family to engage deals.
Overall, I'm wondering how much lower the market can go and if it's a good time for a savvy buyer to come in and buy property. But again, I think it's key to buy in areas you know or have family and friends. I grew up in Idaho and now live in the Bay area, but have been thinking about buying property outside of Boise.
It's really fun reading this blog. So many people just like my family: We like living in So. Cal. for the most part. We love the weather here on Christmas Day. We have kids that need a backyard. We have kids that need a good education. Daily we struggle with questions regarding housing, private vs public schools, and weather or now we want to sacrifice nice family vacations/memories just so WE can pick what color the walls are painted.
Both my wife and I work very hard and will gross about 300K this year. We are renting and don't feel like we will EVER be able to afford a decent house where we want to live in the IE.
I'm renting, dumping as much money as I can into 401K and other investments. I love Jim Cramer (Mad Money TV show on CNBC) and he has helped me learn some of the basics of the markets. And he has helped me make a few thousand dollars over the past few years.
I empathize with you if you are a frustrated potential buyer like me. Yes, psychology plays a HUGE role in real estate, but so SHOULD common sense. Common sense dictates that we rent now and for the next year at least, until the inevitable occurs.
Yes, my household makes a good amount of money, but I don't feel like I can afford one of the new houses in North Rancho Cucamonga. I drove up there yesterday and looked at some of the housing that exists. I also looked at some of the people that live there. I can't help but wonder how the heck they were able to afford their million dollar home. I also can't help but wonder how many of them will have the same address in 2008.
Dr. HB. If you ever are interviewed on the air, let us know when it will be broadcast in the evening. Would like to hear what you have to say.
@ scott:
1. Those "two million" suckers trying to put "their foot in the door" were suckers playing a con game. Real estate brokers and agents played the part of the con men and abandoned their fiduciary duties--which they have, mind you, there's this bullshit sentiment that all the burden rests with the sucker even though the agent is legally obligated not to make shit loans that to the best of his professional knowledge and experience will fail--and pimped loans. Alan Greenspan pimped loans; Bush talked about an "ownership society": you had the Fed and the gov't playing the part of the shill in this Three Card Monty. There was a nation-wide project to sell RE loans, with government support, creating a serious lesson in financial hazards. Those people signing loans they could never repay weren't "taking a risk," they and their brokers were dumping toxic waste to turn some quick property and money.
2. A house *is* an investment--more specificially, it is a vehicle for wealth preservation. The problem is that for the past six years they've been treated in many areas as speculative vehicles, and hence rates have risen at 10-20% in some areas, well and above the 300-year national trend of 6%. However, money *invested* in an index fund (which is a pretty safe investment) returns at 9% over the long-term. It's not as safe as owning but it'll compound significantly more and securities are just as transferable as a home. Keep in mind that you can get 5% on cash right now, and it's a hell of a lot easier to buy something with cash than with a house!
Every single bubble always returns to the trend, and right now, prices *are* stagnating. The tables are turning, but it will be months before buying makes sense. Dr. HoBub here has documented this well, what with sellers posting ridiculous prices, some more than 100% what you'd expect for normal appreciation.
Once sellers' moods sour--and they have not--then buy, and buy with both hands.
I also don't believe "all the bad news is out there" yet. Bear Sterns just got hit with a five billion dollar margin call over "financial toxic waste" laregely from housing debt related notes. This is going to get bad.
On the other hand, your call about US real estate having appeal to foreign investors with the fall in the USD is a good call. But you could also say the same about GM automobiles, Boeing planes, and munitions.
3. "They aren't making more land" but you know what they could make? High density affordable urban housing, if the goddamn community boards and zoning regulators would back the fuck off and let developers exercise their property rights.
Scott wrote:
As to sub prime mortgages, no doubt there were abuses, but they allowed 2 million people to have a chance at owning their own home that would never have had that opportunity.
Pure BS.
For one, the problem is not the FICO score or credit-worthiness of the buyer, as much as it was the investment DEVICES and TERMS that these buyers were offered.
Prime buyers can use I/O loans as easily as a sub-prime or alt-A buyer can, and were offered the same "zero down" and "stated income" loans as anyone else. Brokers were spiffed to offer such devices to EVERY buyer, getting greater kick-backs for it; many prime borrowers were upsold into these devices, too, for the same reason. So let's get THAT straight: it wasn't the buyer per se.
But I guess it all depends on how loosely you want to define what "a chance" at owning a home is.
If you think it includes putting a migrant lettuce picker (who earns $15k a year) into a $750k home, with zero down (and I/O) payments, where the monthly 'nut' is already stretching their budget, then I'd have to argue there's no chance of "free and clear" ownership in the future for them.
Ever heard of saving $ for a rainy day? How are they going to make it, hoping NOTHING goes awry in the next 30 years?
And unfortunately, it's NOT an isolated incident: I've seen MANY more examples where buyers are pushed to their limit, EVEN WITH the exotic mortgage devices.
Well, duh! That WAS the intent of such loan devices: they were called "affordability" loans, as a Classic example of Orwellian double-speak.
These devices actually ALLOWED prices to CONTINUE to ramp higher and higher, as a means to supposedly address the lack of affordability. Of course, the problem is such devices only FUELED the fire of rising prices, allowing them to drive up higher and higher!
Prices and loan terms are NOT isolated; in this bubble, it wasn't interest rates that effected affordability, but the TERMS of such loans.
So Mr. Lettuce Picker buys a house with a speculative loan device in 2006. Such buyers are simply "bag holders", providing the real estate agent and mortgage broker a last opportunity to earn THEIR fat commission off a dying market. The "straw" buyer, whether he understands it or not, is also providing the seller with an opportunity to bail out of a hyper-inflated market at peak, and now the seller is converting the artifically-inflated run-up in price into cold-hard cash so he can be declared as one 'winner' in the Great Housing Bubble of 2000-2006.
The straw buyer is the classic 'greater fool', clueless that they're paying for the privilege of holding a stinking bag of poo, watching the real estate market prices decline in the following years. Hopefully they're learning an expensive lesson first-hand that real estate prices can and DO correct, sometimes kicking in with a vengeance.
I'd say the warning that prices ran UP so quick SHOULD'VE given some buyers cause to consider the same might occur in REVERSE, too. Haven't these people ever been to the ocean, witnessing that tides go both in AND out? They didn't notice the sun rises AND sets?
But anyway, let's go easy on the "allowing Americans to buy their own homes" hyperbole (at least on this site: this site is not frequented by those who just fell off the turnip truck!).
I doubt anyone here falls for such rhetoric, as simply living in an over-priced home for a few months while making minimal (I/O or option ARM) payments does not begin to constitute "buying" a home. The buyer has less chance of EVER owning the home "free and clear", and telling them it does is a complete travesty of the real meaning of the phrase, "home ownership".
Even the Mortgage Banker's Association admits that TRUE "free and clear" homeownership is not "almost 70%" (as is so often hear bandied about), but is about 33%.
From John Robbin's testimony before Congress this year:
"More than a third of all homeowners own their homes free and clear of any lien. Of the remaining two-thirds of homeowners who do have mortgages, three-quarters have fixed rate mortgages. Only one quarter of these borrowers, or about a sixth of all homeowners, have adjustable rate mortgages (ARMs)."
Translated, 16% of homes you see on a given street are being bought with some form of a speculative loan (ARM). However, realize this is NOT the case in high-cost bubble areas like California or Florida: in some areas of these bubble areas, the percentage is MUCH higher, more like 50%. Why? Well, duh: prices are higher, and people use these loans to get in.
FWIW, for those familiar with buying stocks, many of these mortgage "divestment devices" are more analogous to buying stocks on spec.
I saw one description of controlling (notice I didn't use the word "purchasing") a house with a 'zero-down' I/O mortgage as obtaining a stock with a 'put' option: some cynically refer to these types of home loans as "put ARMs'. Very analogous, IMO.
Going into a home with a 'put' option is essentially gambling that it will appreciate: the buyer could then gamble without needing to use any of their OWN money. If it appreciates, then fine. If it fails to appreciate, they just walk away, losing only the I/O payments they've mailed in to cover rent (which can be LESS than rent).
So they mail the keys back to the lender, since they have no "skin in the game". So what about damaged credit? In case you haven't noticed, one's FICO or credit score means nothing nowadays.
So if you think of it in those terms, and don't try to delude yourself with thinking anyone's "owning" the home, but simply "gambling" with it, then it helps explain how the mentality of today's "home buyer" is truly unprecedented and why we're in the current mess we're in.
Of course, one cause of the Great Depression was because many people who had no business gambling on Wall Street were able to do so, with easy credit and buying stocks on puts. Then when values starting sliding, many investors paniced, and the sell-off began.
So now we have a housing market crash underway, with average people gambling with not just ONE $500k house, but with 6-8 houses (talk about leverage!) How can this NOT end badly? Unless the 'winners' are willing to put their money back into circulation, how can the economy NOT slow? The same greed that fueled the investment on the way up will ultimately kill the market once it reverses.
So who's going to cover all that FAKE money that was created and lost?
Jen is correct:
"SELL WHEN IT IS THE TIME TO BUY
BUY WHEN EVERYONE IS SELLING"
But, if you are buying now, you are violating your own rule.
Buy when everyone is truly selling. Haven't you read the statistics everywhere? No one is selling. There are countless listings, but almost no one is actually selling because their houses are not properly priced to generate a sale.
Wait until sales pick up before even thinking about buying - that will mean that prices have dropped closer to equilibrium.
Speaking of things that are illegal, it's also illegal to steal graphics from the Economist, like your graph of housing and personal income.
Sorry, that's the "Withdrawal Symptoms" graph that's stolen.
Yeah, there probably should have been a credit given if the graphs were lifted from somewhere else.
I still really, really like this blog, though.
Anon 339PM
Seriously...dont be such a JACKASS!
Something tells me that you are either a realtor or banker that is suffering tremendously from the recent housing correction. Are you upset that you actually will have to work instead of lie to earn a living?
Great post Dr.
Nope, not a real estate agent, not losing money on any houses, not a jackass either.
The graphic and analysis behind it are stolen from the Economist magazine. He didn't even include an attribution--not that that would make it okay (also against the Economist's terms of use and copyright), but it would at least show that he was using it in good faith. He has ads on his blog, so he is using someone else's work for his own commercial gain.
I'm not sure how pointing that out makes me a jackass.
@make mine a bubble,
Excellent post. I enjoy the ability to use psychological references to the market going down but not attributing the same factors to paying 25% over a fair market value. Are these people trained mental health professionals? Consumer psychology to these pundits only works when it fits their criteria of the world.
@scott,
Thank you for your comments. You said:
“There has not been any real appreciation for the last couple of years in the US because of the dollar's decline in value. Why 2009? Because my guess is as good as anyones. However, you can chart this through many cycles and see that all of the bad news is out now. Is anyone saying anything positive about real estate? Nothing goes up forever, but nothing goes down forever either.”
No appreciation in the US? We must be living in two different worlds. And the dollar has declined but I don't see Europeans buying up Real Estate in Lawndale or South Gage. Is anyone saying anything positive about real estate? You are. And so am I. That is whenever, it is fairly priced. It is not at the moment. What does that archaic term mean? It means when the population of the immediate area has an income to support the current price of a home without using suicidal exotic loans. Like you say, nothing goes up forever. You’re already calling a bottom when we’ve barely reached the peak.
Your quote about Will Rogers is slightly off, he actually said “Buy land. They ain't making any more of the stuff.” Thankfully with modern technology, you can see that there is plenty of land open even in California. Take a look:
No land open here
Need we take a look at Oklahoma, Kansas, or even Arizona? There is plenty of land. If people are willing to pay $500,000 with a 30 year fixed for a 500 square foot box, they should go right ahead. Does it make sense? No. And now we have more transparency in the industry. With sites like Zillow, ZipRealty, and Redfin most consumers can investigate a house on their own. The MLS isn’t so secretive as it once was. It’ll go the way of travel agents. A few select will remain but information is power and armed with these things, people can judge for themselves if we are running out of land.
@john,
It think what you are talking about is building community. Some people have large families and want to stay in a certain area. Others, are so busy working two jobs to make the mortgage, that they don’t have time to build a community or even see friends and family. I’ve notice that in California it is more prevalent than in many states I’ve traveled to. But California has the earning potential for professionals so people do stay here. It is a juggle.
Anon 11:17,
Appreciate the response. You should be able to find some solid deals next year in RC. In addition, with your family income you are in the drivers seat especially if you can save 10 to 20 percent. It’ll put you in a major negotiating position when buying your first place. Common sense isn’t so common right now is it?
@bear cave,
I agree that housing in the last few years HAS been used as an investment vehicle. Not only an investment but a rapid investment in speculation. And your comment regarding high density affordable housing is exactly right. California doesn’t need more housing. It needs more affordable housing. Just look at the median income of the state.
@adam,
Great point about those really owning their home free and clear. What does homeownership really mean? A family paying back $400,000 over 30 years dumping 60 to 70 percent of their disposable income in housing? How is that for pressure? Now say these folks lose their job during a recession and the market is going down? Not exactly a true sense of ownership. If anything, you’ll carry that albatross around your neck.
@anon 12:45,
Puts a person in a Catch-22 doesn’t it. Either you are living in a dream world or a doomsayer. Doesn’t seem like we have a middle ground in this country anymore. Maybe a house is just too damn expensive and even if prices decline significantly, the world will still turn and the sun will still rise. How’s that for a dichotomy?
@anon 3:39,
Here are the 3 images from where they were referenced:
CNN Money
Real Estate Decline
The Economist
These images include data that is public knowledge and the picture is actually used from Federal Reserve data. You are wrong about the net worth chart by the way, it is from CNN Money. In addition, all this data is public knowledge. Unless you are a copyright attorney, here are a few guidelines regarding internet image usage:
: Whether you need to obtain permission from the copyright holder depends on whether your use falls within the "fair use" exception to the copyright law. The law identifies four factors to be considered in making this determination:
• the nature of the use (not for profit educational uses are favored),
• the nature of the work being copied (creative works receive more protection than factual works and new reporting),
• the amount of the work (e.g. journal article, photograph, illustration) copied (fair use usually involves the copying of a small portion of the original works; under certain exceptional circumstances the entire work can be copied under "fair use";
• and the impact on the potential market for the original work (courts treat this as the most important factor - if your use will result in a reduction in sales of the original, it is unlikely to be found to be a fair use). This is a fact-specific case-by-case analysis.
I will make sure to put a source on each picture on my main post. I’ll run this by with a few attorneys. Does any attorney have a definite answer regarding this?
@anon 4:19 and 5:04,
Thank for the comments. I’ll update the main post to reflect this since it seems fair to credit the source - I'm sure most readers realized that the images were not used as a representation of my own work. Otherwise every blogger out there is stealing images left and right. I've seen some of my images on other sites and that is fine.
All,
Interesting things this bubble is bringing up isn't it? People getting pretty defensive about certain things while they could careless about billions of dollars being squandered away via irresponsible credit and lending. Some folks would rather the public be dumbed down and live in the dark. After all, if you can keep someone from going into foreclosure with some basic finance and advice, I'm sure the public would agree this is for the overall good.
But such is the society we live in. A litigious society where a woman trying to commit suicide on a NY subway station actually sued and won because the train injured her. You mean laying on the tracks was going to hurt you? Hence we see labels on irons say, "do not iron with clothes on body."
Somehow the reason I think this blog strikes a cord with many (not all obviously) is because the middle is being squeezed like a turnip. Our voices aren't being represented in the mainstream media. We either have Pollyanna agents promising the world or slanted statistics by a government funded by a strong real estate industry. Where is the sanity and the use of good judgment?
this is an interesting blog. it would be great if we could get some housing bulls to explain their rationales for why housing prices won't go down in socal. those i know cite limited available land in oc and la counties, a rising population and a tight labor market. They say demand is outstripping supply and socal is a wealthy place. So, as long as people have jobs and are willing to put a high percentage of their income to a home payment, or buy a house with friends or other family members, then prices will stay high. any thoughts? will all of us middle classers be forced to move to the IE or out of state? what would the lack of affordable housing mean for the california economy?
To Scott- Get out your calculator. Why should anyone pay $300/ sq foot for an OLD house (1930) made of wood, when you can build a new house with all amenities and meets the latest codes for electric and plumbing for no more than $110/ sq foot!. Hey, why don't you write me a check for $250/sq foot and I can have a builder have it ready for you in 6 months. I get to keep the difference of $140/sq foot. Okay? It is absolutely brainless to buy ticky tacky crap fro three times what it costs to build the ticky tacky crap. I just came back from a trip to Texas where I found NEW beautiful custom homes with all the amentiies with a view lot, nice neighborhoiod for less than any price in Los Angeles for a pile of crap that wasn't fit to park my car in. Don't listen to Realtors- THEY ARE LOSERS and are not interested in anything but separating you from your money. I know a lot of General Contractors who will build for almost cost just to jeep busy building. WAKE UP - the get rick quick fairy tale IS OVER.
See below for the Economist terms and conditions. They do not allow you to reproduce, transmit, or use for commercial purpose any of their content. Their recourse would be to block you from their site.
Legally, the "Fair Use" concept is intended to let people use small portions of copyrighted material for the purpose of reviewing the material or for satire/parody, etc. (neither of which describes your use)
Non-commercial use is given more leeway--yours is not non-commercial, as you profit from ads on your site.
The information used for the analysis may be public domain, but the analysis itself--and certainly the graphic--is not. A great deal of research and analysis may have gone into that chart. I didn't look for the source data, but it may be difficult to find and/or difficult to massage into shape to be used as it was in that article.
As for whether people realize they aren't your graphs, note the 2nd comment (anonymous 4:14 pm June 23) "Bravo! Very well written. Excellent graphs." That person seems not to have realized that they are lifted from someone else's work.
Your argument that all bloggers use other's work without attribution is just silly. I just read a similar argument on iamfacingforeclosure.com justifying the decision to lie about income on a "liar's loan" mortgage application. Not that the two infringements are at ALL comparable in degree, but both are silly arguments.
I find it puzzling that you and anonymous 5:04 assume I have some sort of vested interest in keeping people from learning about real estate finance. You have absolutely no idea who I am or what I do for a living--or what my politics are. (BTW, I am Anonymous 3:39, 3:40, and 5:31) I am not a mortgage broker or real estate agent (nor is anyone in my family); I don't own any real estate, nor have I ever made or lost any money in real estate (unless you count the REIT mutual fund I have in my 401K).
Enough of the conspiracy theories, kids! Just cite your damned sources. Sheesh.
From the Economist website: "Terms and Conditions" (edited for pertinent points, not in a way that changes any meanings)
__________________________
2. Use of Economist Content
You may retrieve and display the Economist Content on a computer screen or (if expressly authorised) mobile telephone, print individual pages on paper (but not photocopy them) and store such pages in electronic form on your mobile telephone for your personal, non-commercial use. Except as expressly set out above, you may not reproduce, modify or in any way commercially exploit any of the Content.
In particular, but without limiting the general application of the restrictions contained in the preceding sentence, you may not do any of the following without prior written permission from The Economist:
1. reproduce or store in or transmit to any other web site, newsgroup, mailing list, electronic bulletin board, server or other storage device connected to a network . . . all or any part of the Economist Content, or
2. modify, publish, transmit, participate in the transfer or sale of, reproduce, create derivative works from, distribute, perform, display, or in any way exploit all or any part of the Economist Content . . . without the prior written consent of The Economist,
. . .
Any use of the Economist Content not specifically permitted above is expressly prohibited.
_____________
Realty FUN. I am so tired of lying cheating RE people that I have a new hobby. I ask for assistance to visit "open Houses". Ahh Fun. I lead them on and on, talk money let them see some of my financials to let them know I am super qualified. When they start salivating and kissing my A@@ I ask them why they haven't bought the property. They look dumbfounded. Well, If I were you I would buy it, why didn't you? They choke gag and don't want me to leave hoping that I will buy their lies. I leave them a telephone number of another idiot salesman and an email address to nowhere. Its fun to flash a lot of cash during the meetings! Yes they are tempted again to believe their own crap. A few weeks later I call them and tell them I found another house for 100K lower in a nicer neighborhood. That makes them put the pressure on their sellers to get realistic. AND it makes them realize that they are the losers they are afraid of being. I like to drop a few hints like the Robert Allen seminar I went to, and read the new book "the Secret" where I "wished" for my dream house and found it...why don't you try to "wish" for your next house? HA ! I love to drive these idiots crazy! I am renting and love to watch these greed merchants squirm. I know that they only average 4-5 sales a year and I want them to feel terrible and waste their time! LOSER! ha ha Go drive you Cadillac to the unemployment office! I'll pay rent while you choke on you mortgage payments.
@ Dr. HoBub: The Economist might send you a cease-and-desist letter, but they can't send you a cease-and-desist letter if you were to, say, plug their numbers into excel and make a graph and somehow attribute the source. Or outsource that task to someone on Mechanical Turk for 75 cents.
When I call housing an "investment," I mean that in the sense that you're dumping a lot of money for the long-run so do it wisely and in an informed matter to ensure that you do actually perserve the equity dropped into it, rather than trying to be turning money out of it on another episode of "Flip That House". I mean, god bless you if you could pull that Casey Serin crap off successfully, but all Ponzi schemes leave someone holding the bag at the end and if you look around the table and don't know who the sucker is, it's you.
It would be fine to even maybe lose money *after adjusting sale price for inflation* **if** renting was as or more expensive, but sadly for a nation of credit-card-saddled morons, it's not. I'm just preaching to the choir.
@anon 11:25--I remember the rice and beans days. But you save 100% of your net? Are you one of those dumpster-diving "Freegans" and also have a 401k, because that would make you my hero (except for the part about Jim Kramer).
Ooooo...the lenders are getting desperate for some fresh blood and one of them sent me this URGENT email titled "Housing Facts You Cannot Ignore!"
I can't believe they can use depreciating home values, tightening credit standards and rising inventory as an argument to buy NOW???
Ummm...Joe 6-Pack must be more of a jack@ss than we thought - or more broke and panicked than we thought - if this tact actually works with some people:
________
Dear Valued Client,
When inflation fears recently led central banks in New Zealand and Europe to suddenly increase their short-term interest rates, the repercussions were immediate. Interest rates soared around the globe - especially in the US.
According to the Chicago Tribune, mortgage interest rates have reached their highest levels in nearly a year! In fact, Freddie Mac recently reported the fifth consecutive week of rate increases across the board since May 15th!
If you or someone you know is considering a new home purchase or refinance in the next 12 months, I urge you to investigate all available options now instead of waiting any longer.
Yes, it's true. Mortgage interest rates are currently under 7.00%, but they may not remain there for long. As history has demonstrated, a rapid rise in interest rates is sometimes a precursor to even higher rates in the coming months. In 1993, interest rates on a 30-year fixed rate mortgage jumped from 6.69% to 8.23% in just five months. With this latest surge in interest rates, can you really afford to wait any longer?
Remember, mortgage rates are based on mortgage-backed securities, which investors buy and sell like stocks on the stock market. If returns are more attractive in other countries and other markets, investors and their capital will follow - and rates will likely increase. It's that simple. Combine this with the present turmoil of the post sub-prime housing market, and it really does make sense to at least consider all of your available options now.
Honestly, if this sudden surge in interest rates was the only sign of a changing market, I wouldn't waste your time. But, growing concern about inflation and how the Federal Reserve might respond, combined with increases in housing inventories, decreases in home values in many neighborhoods, and the tightening of credit standards and guidelines is just too much evidence to ignore.
While no one can predict exactly what will happen, including me, experts in the bond arena have expressed concerns that rates will continue to increase throughout the rest of the year. Some believe that the Federal Reserve will be forced to raise interest rates prior to year's end. This would increase interest rates for existing Home Equity loans, credit card loans, and potentially existing ARMs. Find out how these and other changes could affect your financial situation.
If we have not spoken yet, please contact me as soon as possible. I will provide you with a Free, No Cost Analysis of how I can improve your financial position today and save you from a potential increase in monthly payments.
_________
I smell desperation,
MMAB
Excellent blog! Dead-on - thanks for putting everything I've been telling friends and family for many months into a neat 'middle class' vocabulary. They will all (hopefully) be reading this soon!
To Bear cave, I checked the solar (free) calculator and found I was wrong. Yes, I put every PENNY I earn (including can recycling) in an interest account or in a conservative NO LOAD investment. My wife actually saves over 75 % of her net and she does the same, collect cans, bottles, etc. (We do have to worry about AMT) I will quit my "main" job as soon as we start getting close to it. That may be in a month or so. Its funny we spend so much time saving, I forget about what we have. Last week I found $15,000 worth of deposits sitting around that I was too cheap to mail (postage stamps are too expensive and the postal service sucks hind booty). No we are not Freegans because WE DO NOT embrace community ( We couldn't give a shit), generosity ( go help yourself), social concern ( only if we can get the Mexicans -illegal aliens out of my town), freedom (YES) , cooperation (hell NO), and sharing (NEVER I would be the first to splash mud on a homeless - I have to work for an asshole- so should they). We are not in opposition to a society based on materialism, moral apathy, competition, conformity, and greed. We don't care. I just don't want Suzie Orman types (BS'ers) getting a penny of any of my money. We just HATE liars, con artists, salesmen, Realtors, CNN, ABC, NBC, CBS, CBN, Bankers, Credit card companies, lawyers, junk mail, SPAM, Bill Gates, Microsoft, politicans, political parties, bean counters, the NAR, preachers, evangelists, hypocrites, illegal aliens, homeless, and whiners. Oh I forget feminazis, feministas, Oprah, Rosie, Bernanke, and Hillary Clinton are also included. WE do LOVE the SAVAGE nation with Michael Savage. Our biggest pleasure is when some smug asshole tries to talk "money" with us and they show off their "toys". We encourage them to spend more, since it only takes away power from them! Last year I encouraged on asshole to "show off" by buying himself a new Viper-custom painted - Later it somehow got scratched by a shopping cart? and the whole front clip went ??? I don't think it looks so good now? Ha It ruined his YEAR! Trash our cars? - who cares? They only eat ARAB gas and cost us insurance - sdcrew cars. OH WE LOVE KRAMER- I'd VOTE FOR HIM FOR PRESIDENT- along with George Costanza as Secretary of State!
We pay cash and GET the BEST deals on everything. Food shopping (no other shopping - I get toilet paper for free - I like mine with George W's face on it. Last month I bought 70 pounds of bacon because I got it at only 68cents /pound ( Bacon is not my favorite- but I am a MEATATARIAN- IF its red and bloody YUMMO---I like to piss off the Vegans. Today, I bought 3 gallons of fresh (not frozen) Florida orange juice for 33 cents/gal. Three pounds of carrots for 78 cents. I get my fresh roasted Arabica beans for $25 / 120 pounds. NO, we are not optimists, but we HAVE FREEDOM...REAL FREEDOM. I can tell anyone -including my asshole boss to go to hell. I just did, after sucking every penny I could out of 401 K contributions of $15,500 the first few months this year. I found a 5 dollar mistake and warned him I would sue. They sent me $2,800 to shut up! YESS! I do not give a shit! I have three jobs and my wife has three jobs. I try to keep the "in go" going and the "out go" only to us. I JUST DONT WANT THE ASSHOLES to make a profit on it nor touch it! I saw a politician spewing pucky on TV about the "illegal alien bailout -amnesty bill". I immediately called his office and told HIM, if I ever found he supported that bill in any way, I would imnmediately donate big bucks into anyone who opposed him. They listened...they really did! Damn politicians. I have done some muckraking in my day. Several big names- OUT GET A REAL JOB. AND QUIT COSTING ME MONEY! They pissed me off! Thats what we live for ---> FREEDOM from BS.
What's going on with the real estate market is only one part of the larger picture.
Because of rampant GREED, corruption, corporations doing anything and everything to increase the bottom line for "shareholders" and HUGE CEO compensation packages .... the U.S. is in a downward freefall.
The hard cold reality is life is only going to get uglier. Most americans are preoccupied with celebrity nonsense, shopping and what's on T.V. Oh well. Enjoy the good things while they last !!!!
You got all the info in there for sure. Can't think of anything to add besides a link to a similar report with a little bit of a spin. I think i now i have my PhD in the housing market.
Home Sales Report: What’s Left?
-Cheers!
Adam Said
Going into a home with a 'put' option is essentially gambling that it will appreciate: the buyer could then gamble without needing to use any of their OWN money. If it appreciates, then fine. If it fails to appreciate, they just walk away, losing only the I/O payments they've mailed in to cover rent (which can be LESS than rent).
So they mail the keys back to the lender, since they have no "skin in the game". So what about damaged credit? In case you haven't noticed, one's FICO or credit score means nothing nowadays
I think a lot of these speculators are going to find out the hard way that it is not that easy to walk away as the IRS will come after them for the difference between their purchase & the REO sale that they speculator will be 1099'd on.
The IRS will quickly garnish any legitimate (ie reported) wages. If these people couldn't do a simple cost benefit analysis in the first place I doubt many are going to run the numbers to find out what is more painful in the short and long term.
Depending on their tax bracket an original 500K purchase price REO'd at 400k will result in a 100k 1099; think they've got 20K to 35K plus the possible interest and penalties laying around to feed Uncle Sam (and we all know how much that obese bastard eats)? In a case like that a short sale might be a less painful option in the long term.
"and this too shall pass"
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