San Diego Housing Bubble News and Analysis

The problem is we don't know why on the equity extraction. These people kept it together all through the madness till '05 then went off the rails. It could have been a medical problem or job loss, we just don't know. The only thing that is certain is that they were in for a penny, in for a pound.
Josh

As powayseller said, we should call it housing credit card (and not ATM) because it does have to be paid back.

I bet these guys used their equity to
1) buy a luxury gas guzler such as a Cadillac Escalade,
2) "invest" in other real estate.
3) help their children "invest" in real estate and "get started" in the big league.

I was up in Temecula last week and I was dumbfounded by all of the brand new, giant jacked-up monster pickups, behemoth SUVs, shiny new boats and trailers, RVs, BMWs, etc... All being driven by people in their 30s or early 40s, on a Thursday during working hours. It looked to me like there has been a lot of equity "liberated" up there...

Hmmm $500,000 for 5 years of a foreclosure on your record.

Sounds like a deal to me.

"invest"

Why the " " around invest? That's probably the best way to use equity.

I myself have used the equity to buy other properties, both in San Diego and in other locations not in California.

I know others who have used their equity to buy out their credit card debt and pay for medical bills. Yes, they will still have to pay it off, but at least they can use it to manage their debt.

As for why does a house (and all real estate for that matter) generally appreciate in price versus other assets, that is the value of real estate. It is a terrific vehicle for creating wealth.

Houses generally appreciate, huh? Here's a little anecdote from my own family. My father purchased his dream home in Texas in 1986 for $300K. It was a big, beautiful home in a quiet country setting, good school district, pool, custom fixtures. Nice house in a neighborhood of even nicer homes. He passed away a couple of years ago (2004) and my stepmom had to sell the place. It sold for $280K. That's a HUGE loss when adjusted for inflation. Also, he had put tens of thousands into the place for landscaping, updates, etc... But of course that's Texas, right? California homes are different, aren't they?

Is there is a difference between Texas and California Real Estate ?

Maybe the structures are not much different, but the price per square foot of a lot in CA is much different than the price per square foot in Texas.

If your father had purchased a home in 1986 for 300K in CA it would have been different. Probably at least $700K different !

SO, yeah, I'd say that Texas and CA are different.

I like to use quotes around invest because true investing means doing risk and cost vs. return analysis. Buying houses on a whim thinking that appreciation is a sure bet is not "investing."

I have no sympathy for people who "invested" in houses and are now loosing their shirts.

Sometimes when I drive someplace, I'd swing by and see the new developments. Even now, there are always people who are talking about "investing."

By the way, I own real estate, but I never thought about "investing" in anything that cost 3X rent to buy.

Well, I've visited California a few times and I have to say I wouldn't want to live out there. Of course everyone is entitled to their own opinion. I didn't like the traffic and the higher cost of living. I think the area is way over priced for what you get. It is kind of funny how people think they actually own something anyway. We're all just using stuff until we die. You take nothing with you. You can feel like you own your house, but you never really own it. You have to pay the government so that you can keep it. And then you die and someone else will own it. Are we all depressed now?

When I die, someone else will own it and one of my kids will enjoy raising their family there as much as I have. I own my home, I own the memories, I own the sense of security and I own the joy it has brought me. In my eyes that makes me a very wealthy person.

An interesting aside: Yesterday was a very very low tide so I took my son out to the tidepools in Carlsbad near Terra Mar. We walked past the home that recently sold for a record price in Carlsbad ($8.2M). It is spectacular and the view is phenomenal. I asked him if he would like to live there and be able to walk onto the beach. He said it was nice but that he loved his house and wouldnt want to live there. Sorry, I'm not depressed.

Where do you live BikeRider? I've lived in Michigan, NYC, San Diego, and now Ann Arbor, Michigan (again). For years I traveled extensively throughout the US. Now that I have kids of my own, I would love to live in San Diego again and experience it through the eyes of my non-jaded children. California may be expensive and have a lot of traffic, although nowhere near the traffic of NYC. DC, or Boston. Yet San Diego certainly has a lot going for it.

I guess ownership and living somewhere are separate issues. Here in Ann Arbor a decent house is $700,000 and the Pacific and decent weather is ~2700 miles away.

surveyor, when you roll credit card debt, auto loans, or medical bills into your mortgage, your are converting a short term debt into a 30 year loan, and paying 2-3 x interest on the debt because you are amortizing it over such a long time. Personally, I think that's a bad idea.

BikeRider is correct. We never really own our homes. sdrealtor, try not paying your mortgage for a few months, or skipping out on next year's tax bill, and you will realize the bank owns your home and the County owns the right to the land. Unless you paid off your home, it isn't yours at all.
The closest we can come to owning a home or car is when it is completely paid off. Anyone with a mortgage holds a deed to the home, but does not own the house itself.

In the upcoming recession, many of us on this forum could lose our jobs and our homes. We will then realize the transient nature of houses and material things.

In Switzerland, people don't usually own their homes either. It is customary to pay interest only, around 1-2%. I need to ask my family there on further details.

I hear this argument about extending the term of revolving debt but I believe you need to provide context to your argument. First, if a borrower can invest the difference between their current payments vs. the extended loan that helps to negate interest cost. Second, you have the obvious tax deduction. Third, there ar generally no prepayment penalties so there is nothing stopping an individual from paying their debt off in a shorter period of time.

My Father currently owns his home cash and has a federal pension. When he recently asked for ways he might improve his ROI I suggested looking into pulling out 250K from his home on a 15 Year fixed at 5%.The home is worth about 500K and he currently has another 750K in diversified assets. Over a 15 Year time horizen I am fairly confident that the Stock Market will easily beat the net after tax of the loan. There are lots of military officers in the San Diego area who share this same profile. There pensions are garanteed and have steady cash flow, Add a working spouse or a second job and these individuals can afford to take on some risk.

Like your father, many people have borrowed against their homes to buy stocks and investment property, as well as consumption items. This is risky. Roubini's historical review shows the S&P500 loses 28% on average in a recession, and this one is probably going to be much worse.

Borrowing against one's home to invest in declining asset that is declining (stock and home) is not wise, in my opinion. If your dad's house is worth $350K in 3 years, and his $250K in the stock market is worth $125K, he will be much worse off. Your idea seems a good one, but at the current economic time, it has a high probability of big losses. It may take 10 years or longer for our economy to recover from this housing bubble, which was a cover up for the tech stock bubble. We actually have two bubble fallouts whose results we have not yet absorbed. For that reason, I expect a long protracted recession. Why wouldn't your dad just sell his house - then the profits are true profit, not just debt, and they cannot be cut in half.

Ownership...

surveyor, when you roll credit card debt, auto loans, or medical bills into your mortgage, your are converting a short term debt into a 30 year loan, and paying 2-3 x interest on the debt because you are amortizing it over such a long time. Personally, I think that's a bad idea.

Thank you Captain Obvious! :-) But in certain circumstances, it is probably necessary to at least use some debt management, as opposed to just going into bankruptcy...

PS,
Sometimes I wonder whether you believe everything you write, are simply ignorant of the reality of things or are just simply trying to get a reaction from other Piggintons.

I own my home. The bank has a lien against it not an ownership interest. I can make them go away by writing a check whether they want to or not, they cant do the same to me. Taxes are a cost of ownership not an ownership interest.

If you mistreat your children, child services could take them away. Do you think the government owns your children?

Raybyrnes:

If your father is going to borrow money at 5% to make money,you need to make sure your investment makes a guaranteed return of at least 9% or more (5% for the loan plus 4% inflation). Do a wiki search for "cash on cash". Not a lot of people in the stock market are guaranteeing 9% returns nowadays. I really don't recommend taking equity out of a house in order to invest in the stock market. Way too much risk.

sddreaming, I live in Central Virginia. We have our nice (small) Blue Ridge mountains to the West and the Chesapeake Bay to the East. A little too much humidity for a couple of months a year, but hey, it is just a couple of months. I love to mountain bike and for serious riding I drive to the George Washington National Forest often (40 minutes from my house). Other hobbies include SCUBA, Rock Climbing (at Seneca Rocks WVa mostly), shooting, antique truck restoration. We own our home, which we bought new in 1997 for $155K (~2800 sq. ft. on 5 acres) after selling a smaller cape and upgrading. We don't owe anybody anything, which gives us great piece of mind.

Raybyrnes, As to drawing the equity out of my home and investing it, no thanks. Too risky for my tastes. The county just assessed our property at $330K, so there is some equity there. I want to know that I have a place to lay my head. The fact that we don't make payments to anyone leaves us with lots of income to use towards investing. And this crap about having a mortgage for a tax write off....it makes sense to pay a bank $10,000 in interest so that I don't have to pay the IRS ~$3,000 in taxes??? Now, let's see, if I didn't pay that interest, I have to pay the IRS taxes on that additional $10K, but wait, that means I have $7,000 IN MY POCKET. Hmmm, I'll take the money in my pocket. You can get the same tax write off by donating $10,000 to your church. You never hear any bank tell you to donate $10K to the church so you don't have to pay the IRS $3K now do you? But it is the same amount of money off of your taxable income, it just didn't go to a bank. But people keep thinking they have to keep buying a bigger and bigger house so that they can keep their tax deduction. And I guess they figure that the house will be worth more. But it isn't any income until you SELL IT. And you have to live some place. So either you downgrade, move to some cheaper area or do something so that the sale price leaves you with cash in your pocket. Our plan has been to just stay in the home we love and grow wealth some other way. Actually, more Americans could have piece of mind if they worked towards paying off their house and then they have a big chunk of money to use for investments each month, instead of being a slave to the lenders with a mortgage payment.

Bikerider, I love your post and could not agree more.

I was in somewhat similar situation a while ago - I had a house, appreciated a lot in value, but to me it was useless because I couldn't do anything with that equity unless I sold or refi'd it out.

After a lot of research I decided to put it into real estate, where the expected rate of return on your investment was a great deal higher than the interest rate to borrow was (cash on cash). Also, I made sure that the properties cash flowed and that it was a high enough cash flow so that it would eventually replace my salary.

Now, yes, I acknowledge this was risky. But it was a way of spreading my investments beyond the stock market, of which I was already maximizing. I've done my research and made some informed decisions. I've certainly tried to minimize risk several ways, such as not buying SFRs/condos, not buying in California, and by setting out a 15 year time frame for these investments.

So why am I working like a dog, "slave" to my mortgages, property taxes, and all that? Because my ultimate goal is to retire early and have financial security. The best analogy I can come up with is driving towards my retirement. The safe way is to drive 45 mph. It will take longer to get there, but it is safe. By making all my assets work for me (real estate, investments, my salary, taxes) in an efficient manner, I can push my speed up to 65 mph and get there faster.

Did I mention this is risky? Sure!

Do I recommend this for everybody? No! I thought it would be less work than it has proved to be.

Am I going to get slammed on by Powayseller and all the other real estate bears here? Sure!

(haha)

Still, America rewards hard work and sacrifice. America also rewards laziness but not as much. :-)

Once again, I respectfully disagree with your analysis. There have been periods of time far worse than now when naysayers like you have come out and said the sky is falling. Let's see, WW1, WW2, Vietnam, Black Monday, 9/11. If one takes a look at any 10 year period of time the probabilty of losing is next to 0. If on the other hand one elected to solely stay in a cash position you can guarantee the deteriation of your money due to inflation. Perhaps a more insightful hedge might be to take 250 K and rather than making investment over a month one might choose to take a positon of investing over a 3 year period. That could eliminate some of the noise of market timing. Hopefully we can agree to disagree

You might read my passage more clearly and see that taxes are only one factor to consider. A more careful examination of nborrowing focuses on the opportunity cost of capital. The tax write off simply creates a greater margin of safety. If you believe that not having payment is so great I encourage you to go buy a powerplant so that you don't have to worry about your electric biis. or a ca ble network to avoid the canble bills, while your at it you might consider buying farms for food so you don't ahve that sneaking up on you.

Regardless of how you cut it we hvae bills to pay on a monthly basis. The fact that you can borrow money on the cheap at a fixed rate is an incredible financial tool if you know how to use it. I recently traveled to Brazil where home loan rates are 50%. Credit cards are 100% and a good deal on a car is 35%. Let's face it the Bnaking system in the US is a fairly incredible system and for those who are smart creates an incredible avenue to crete wealth.

With respect to my father he sleeps well at night knowing that a federal pension is going to provide 7000 a month until the day he dies and half of that u ntil my mom dies so a couple graand a month is not something he had to worry about.

What kind of house in Ann Arbor costs $700,000?
I'd sell it and live in the country.

BikeRider, excellent points on the folly of the interest deduction, and the value of having a paid off home.

surveyor, if your properties provide cash, then you are in a good situation. I doubt rents will go down, so if you like owning real estate and the tenant is paying the mortgage, good for you. Another option is to sell that property and put that cash to use in 3-5 years when prices are lower. You may end up with twice as many cash-flow properties.

sdrealtor, the government does not own our children, and neither do we. People are not possessions.

Why do you say I am "ignorant" in describing the consequences of not making your mortgage or tax payments?

PS we copuld get into a huge existentialistic discussion of whether we own anything. That would be a waste of time. Owning proeprty means you have control over it, you have the right to sell it, you have the right to convey it to your heirs etc. The bank has a lien on a property but not an ownership in my house. As I said, I can write a check and unilaterally make them go away. They cant make me go away inlaterally.

It seems you got my point about children. The fact that something can be taken away under a given set of circumstance doesnt necessarily convey ownership.

As for the "ignorance" comment, I didnt call you "ignorant" it was one of 3 possible explanations I put forth for explaining you behavior. Personally, I subscribe to option 3.