The new 50 Year Mortage

[cowboy]

On Yahoo Finance, there is an article stating that a new 50 year loan has emerged in California. Here is the link to the article:
http://biz.yahoo.com/brn/060427/18804.html

I would be interested to hear how people here think this will affect those with arms coming due in the near future. This new loan may give those folks a way out. Also, how do you think these loans will affect the housing market in years to come?

[contentrenter]

How on earth is a 50 year mortgage any different from renting?

[contentrenter]

I guess I just don’t understand why anyone would want a 50 year loan. I’m 35; don’t mean to be a pessiment, but odds are good I’d be dead before I could pay a 50 year mortgage off. Why would I rent a small house from the bank for 50 years instead of renting a large house from someone else? The only two things I can think of are (1) leaving something for the kids (which I don’t have) and (2) never being forced to move. I think I’d rather have the extra 1000 sqare feet.

[cowboy]

I agree with Rich. The only thing people care about is their monthly payment. I believe most people feel they never will pay their homes off, nor do they want to. I think most people see their California home as an investment more than anything. Get in at any cost, make tons of money on the way up (it never goes down), and then just before retirement dump the place at huge profits. They then move out of Cali with their fortunes and live happily ever after.

This 50 year loan and the housing market is sounding more and more like Japan. They had 100 year loans. Look at where the housing market in Japan is today….

I think the inevitable will come, its just all these creative loans will push that day further out.

[CharlieG]

Indeed. We’ve become addicted to homeownership as a pure investment vehicle. And values can never go down, right? A 20% annual gain is assumed; a 20% loss is absolutely inconceivable. Yesterday the New York Times finally used the phrase I’ve been saying for a couple years: pyramid scheme. Ouch.

[powayseller]

In Sell Now, John Talbott devotes an entire chapter to housing as a Ponzi scheme. Ponzi schemes are pyramid schemes in which early investors are paid extraordinary returns on their capital, supplied by later investors, and nothing productive is ever invested in. Because housing markets and values are so poorly understood by the people buying them, it is perfectly suited for a Ponzi scheme.

“Homeowners won’t like to hear this, but their naivete about investment valuation in general plays right in line with the Ponzis. A simple review of the reasons many people give for the housing boom, such as those presented in chapter 5 [population growth, higher incomes, increased construction costs, strong economy, supply/demand] demonstrates that they have very little knowledge about how markets really work or what the real historical price data show. Most homeowners do no more pricing or valuation analysis than asking what their bank will lend them, or what a similar property sold for across the street. If markets can go completely Ponzi on you, then depending on market-based appraisals is self-defeating….

The timing of this housing bubble also couldn’t be better for a Ponzi scheme. We live in a casino society in which profits are being created with great risk but not much hard physical effort….

The central question, and the key difference between a casino economy and a healthy productive economy, is whether anything of real value is being created in the process…If all we are doing [in the housing market] is shuffling assets back and forth, it is hard to argue that any great value is being created…A great deal of our investment capital is gonig to increasing consumption to the detriment of real, meaningful, productive investment….

Rather than learning their lesson when the Internet stocks crashed, people seemed thrilled to move to the housing market to continue their money shuffling ways….

At some level Ponzi schemes have to be corrupt. If you are trying to sell to a greater fool before the market crashes, with no regad for how he recovers his investment, you are part of the moral problem [that’s me, powayseller]. If you are a real estate professional who is pushing a personal profit agenda rather than providing the best advice to your clients, you are a part of the moral problem….[He also holds accountable regulators who don’t crack down on the GSEs, Congress, Fed, FDIC, lenders]

[The Midwestern states are] more grounded, more skeptical, more conservative. Such qualities usually don’t play well to a Ponzi scheme promoter….

Market economists do their analysis a disservice if they totally ignore the possible behavioral effects of herdlike investing. If sellers and homebuilders are realizing extraordinary profits, buyers must be paying extraordinary prices. If they are hoping for greater fools to pay even higher prices in the future they may get caught in the deceitful web of Ponzi.”

[Anonymous]

I’ve forgotten the “recipe for a bubble” that I learned in business school, but certainly some of the conditions were:

a) Investments that were difficult for investors to understand.
b) The invention of new metrics to justify the value increases. Remeber, this is a new paradigm.
c) Ample liquidity.
d) Active Promoters.
e) Evidence of gains achieved by recent investors.
f) Overconfident buyers.

SD housing market certainly has all of these.

[Anonymous]

I find this post interesting especially the ” Investments that were difficult for investors to understand.” This is kind of the acid test for me. Whenever I find myself in an investment that just does not make any sense, or a trade (my business) that is acting strangely, I just get out and re-evaluate.

2000 was a wierd year for me for the above stated reason. Here I was someone who was a trader, and had studied the markets tirelessly for years. Yet, friends who knew nothing were making more money trading than I was by doing all the things that I knew were wrong. Doubling down on losers, buying IPO’s at the market on the openings. Buying at 3 or 4 standard deviations above prior prices. Buying stocks in companies that made no money, and never would!

I just shook my head, and finally got to the point where Jan.1 2000 I just went to 100% cash in all of my stock accounts. I had reached a point where I was so overwhelmed with a complete lack of understanding of what was happening at all. For 1999 I remember to this day, that I only made 25 trades for the year in stocks. All 25 were profitable, yet something was wrong. At times I felt like a complete idiot. How in the world could I have not made more than I had during that time? This was my business! I am really more of a futures trader than stocks, but it is still in my realm, and I do have a decent sized stock trading account.

However, I never for a moment got to the point where I told people I thought it would continue. Too many real estate people have sold their souls doing this. I do not know if they are caught in the buzz, or if they are being disengenous, probably some of each. Maybe they realize what is ahead and just want to maximize what they have at hand before it begins, who knows?

I knew there had never been a time like that in my life where there was such a large disconnect between value and price, and I just got scared, so I went flat. I did manage to buy the 2 day period of that 1,000 point DOW rally getting out at the close on the 2nd day, and that was the only long side trade I made. I was lucky with that, as the market really rolled over the very next day. I did not know the drop would be of that magnitude, but I did sidestep the WHOLE THING, actually profiting some by shorting on the balance of the drop.

I see ABSOLUTELY NO DIFFERENCE AT ALL between that period of time, and where we are now in real estate. I would argue that in fact this is a larger disconnect that will cause more problems when it unwinds. There is evidence out there every day that shows this unwinding is beginning to occur. It will take some time, but so did the stock drop. It did not occur overnight, it really took more than 2 years to hit the low.

These cliches that get tossed around about “sticky on the way down” etc.. where do these people come up with this stuff, tupperware parties? We need to have a party after it is all said and done. Each guest has to wear a t-shirt with a different real estate cliche on it. I am claiming the rights to “it is different this time.”

[powayseller]

You’re definitely a trendsetter, Rich. Your writings predate those of Talbott, I think. He just happened to have the time to write a book. People’s lack of understanding of pricing homes is a big contributor.

As far as the stickiness comment from Chris, we can see that homeowners are reluctant to lower their prices to a level to meet current demand. It’s the homeowner ego that prevents his good decision making. He holds the belief that “I can’t sell my house for less than my neighbor”, and he holds on to get his paper profit, thinking that paper profits are real. Thus, it is basically the homeowner’s lack of understanding of markets, and supply/demand that make him list his house too high, and hold on to that high price, and turn down reasonable offers, and this causes the delay of prices dropping.

[Anonymous]

We cannot analyze an illiquid asset in terms of it’s stickiness in a matter of days. When the slide starts in earnest which will probably be the second half of this year, we will see how sticky they are. I have studied times of panic for so long I would hate to know how many hours I have into it. It is probably into the years actually.

When we start seeing 100k drops in asking prices that will dispel the stickiness myth in my mind. I just do not buy that theory, but what do I know. I am a stupid futures trader, not a home expert by any means! LOL!

Alot of people were afraid to dump their Lucent stock as it fell off a cliff with JDSU. They ultimately did at much lower levels. This will be the same.

Poway, I love the intensity with which you study things. You will probably understand that COT report better than I do in no time at all.

[Jim Brubaker]

I agree with you Rich, the investment companies, mortgage companies, banks etc are holding up this house of cards. Whats holding it up should collapse first, and from there it will be quick.

The baby boomers are going to take it in the shorts–pun intended.

[Anonymous]

(1) You cannot refinance your rental and use the equity for debt consolidation, buying investment properties, etc etc.
(2) You cannot leave your rental to a family member to take advantage of equity (gained not through payment reduction but market appreciation)
(3) You cannot take rent as a tax deduction, mortgage paid interest is tax deductible.
and so on……

[uncle_git]

Personally I think the speed at which the market is turning is a telling sign of how fast it’s going to fall. I’m pretty bearinsh – but I’ve been surprised at how quickly inventory has built and how fast people’s opinions are changing on the topic of housing.

The 50 year isn’t really going to help – the payment will still be substantially higher than the I/O ARM that people are already struggling with – and the longer people put off getting into a fixed the higher the pain – for some it’s already way too late – foreclosure is inevitable – they just don’t know it yet.

[lostkitty]

I’ll take the “Soft-landing” t-shirt for the party. No thanks on the “Never Goes Down” t-shirt… no one would talk to me.

[SDbear]

SoCalMtgGuy has a good post with numbers on this topic. I’m sure many have seen it, but for others who have’nt
http://anotherfuckedborrower.blogspot.com/2005/12/40yr-mortgageis-it-for-you.html

[Author]

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