The great big ATM

[BikeRider]

I found this latest listing on ocfliptrack and it just shows how homeowners have used their homes as an ATM. What exactly is someone thinking when they extract that much money from their home? Do they not think they will have to pay it back? Are they really that stupid to think that rates will not go up? It just blows my mind. What the heck did they do with all that money? And finally, what in the heck makes that home worth so much more than what they originally paid? The home is actually OLDER and potentially in worse condition. Homes break down just like cars, but for some reason a home keeps going up in value. For that matter, you can take a car and totally replace every part of it and make it just like new (much more so than you can a home), but someone would never think of paying you the new cost or MORE than the new cost. I find it strange really. A friend is selling a home and is about to close. But the septic failed inspection and I used my backhoe to fix it for them. The main cast iron pipe exiting the septic tank was clogged, rusted and collapsed. Not a fun job, but I busted out the old cast iron pipe, replaced the T and main pipe with new PVC. It makes you realize that someone buying a 30 year old home is getting OLD stuff. Some of it nearly worn out, but out of sight. I could see the place needing a new system in the near future. Yet, the buyer has just paid MORE than original cost for a 30 year old septic system. That seems stupid.

http://www.ocfliptrack.blogspot.com/

[barnaby33]

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

[PerryChase]

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.

[blahblahblah]

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…

[no_such_reality]

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

Sounds like a deal to me.

[surveyor]

“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.

[blahblahblah]

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?

[(former)FormerSanDiegan]

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.

[PerryChase]

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.

[BikeRider]

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?

[sdrealtor]

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.

[sddreaming]

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.

[powayseller]

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.

[Raybyrnes]

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.

[powayseller]

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.

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