[Daniel]

About 1.2-1.3M, I guess. But I ain’t no “professional investor”, so take this with a grain of salt.

[Daniel]

Dear William,

Although I’m sorry for your situation, I have to say that, like many others here, I don’t think Pardee has done anything wrong. In my view, Pardee has simply decided to reduce the prices of their homes by about $75K (in today’s dollars). They could have done it in many different ways: simply reducing the list prices by $75K, or offering incentives worth the same amount, or offering to pay for Mello-Roos taxes, etc. $75K is $75K any way I look at it. You seem to feel otherwise. Would you have been more satisfied if they simply reduced the list prices by $75K?

Regarding the William Lyon example, they didn’t just do “the right thing”, they went well beyond that by giving previous buyers their money back. Should the market have gone up since Phase 1, I don’t believe they would have asked the previous buyers for more money, right?

I was in your shoes in 2005. I had signed up early for a Pardee development in San Diego, at a time when the interest lists were miles long. I was offered the “privilege” to buy a house, and even paid a $15K deposit to reserve it for 72 hours. When my 3 days were up, I politely declined to sign a contract, to the amazement of the sales team (they of course found another buyer down the list in the next 5 minutes). I could have very easily afforded the house, but I chose to walk out. You chose to stick with your purchase. I believe it’s only fair that we live with the consequences of the decisions we made.

Daniel

[Daniel]

It certainly looks like the lender is going to take a bath on this one. A textbook case of mortgage fraud, I would say. I would be quite surprised if the buyer made even the first payment on the mortgage.

[Daniel]

Perry, I think we disagree on this one. I actually believe that people will try to avoid foreclosure at all costs. The only exception I see would be vacant flipper houses. Those will be quickly abandoned. But I think that a regular homeowner in a bad loan will attempt to stave off foreclosure as much as they can (cutting down on consumption, renting rooms, etc). Whether they can pull it off or not is another story, but I think that they’ll try very hard. Homeownership has such a strong emotional and social component, people won’t let go without a fight.

[Daniel]

I vote for a small decline next year (less than 5%), folowed by relatively flat prices in 2008, and maybe 2009 as well. That would only make a 7%-10% nominal decline from top to bottom, but a roughly 20%-25% decline in real terms.

[Daniel]

“Will mortgage defaults lead to a depression?”

Answer: no.

Has anybody noticed that when the title of a topic or a paper is a question, the answer is almost always “No”? Sometimes the question is hard, and sometimes is easy. This is an easy one. Sometimes the question is truly dumb, like the one on the 9/11 topic. So dumb that it doesn’t even deserve an answer.

Oh, yeah, and since we’re talking about question-titled topics, I guess you know my answer to the “Can you say conspiracy in the housing market?” topic.

[Daniel]

“Both the index and the margin is spelled out in the loan.”

I was surprised to find out that I couldn’t find either the index or the margin on regular ARMs advertised on a major prime lender website. So we’re not even talking here about suicide loans, just plain vanilla ARMs at prevailing market rates. And not some fly-by-night mortgage broker, but a fairly reputable lender.

I read the fine print, I read everything, it simply wasn’t there. They only published the initial rate and the APR (these are required by law, I believe). I’m sure the final paperwork the borrower signs has all the details, but… come on! Is it so hard to write “6 month Libor + 1.75%”, or whatever it is? The index and the margin are the two most essential pieces of information on a loan, and somehow they “forgot” to post them.

[Daniel]

I do believe that at this point one can pick up low-end condos and rent them out cash-flow positive. That part of the market already got hit much harder than the SFR market, and the rents aren’t too bad. But I’m very skeptical that the same is possible with higher-end properties. I haven’t yet seen anything above $500K that could remotely be cash-flow positive.

[Daniel]

“Are we going to foot the bill for all these people when they ‘retire’?”

I’m afraid so, Lindi, I’m afraid so…Don’t know who’s the real loser here, Mr. Hertzberg who blew away all his equity, or me for having to pay for his retirement…

[Daniel]

SDrealtor,

I disagree to your disagreement (is this possible? :-). I do think people should run their personal finances like a business. But that doesn’t mean skimping on pleasures or being cheap. Quite the contrary. Consumption is consumption, and it costs money to have a good life. Perry’s example is actually very good: if it costs substantially less money to rent than to buy the SAME house (can’t emphasize SAME strong enough), then one should rent. If you want a car example, I can give you one: I would never buy a $30K car if I could rent the same car from Hertz for $150/month. Of course, car economics dictates that the actual rental rates are much higher, making buying the car the far better deal in real life.

Bottom line: consumption and investment are two different things. Housing is a very odd mix of the two, and one has to be very careful in separating them. That’s why it’s crucial to compare similar houses when making buy-vs-rent (i.e. investment) decisions.

[Daniel]

Davelj,

You know about the Case-Schiller index, right? This IS the “research outfit out there already doing this sort of statistical work on behalf of institutions (hedge funds, private equity, etc)”. It measures repeat sales, looks at home improvements, etc. Now, my opinion is that, although CS is sophisticated and it is the best we’ve got so far, it’s by no means perfect. I believe it doesn’t capture closing cost rebates, very common nowadays. And, like any index based on closed sales, it trails the market by one or two quarters.

However, I disagree with Powayseller that the index is way off. Of course, I know of San Diego sales that recently closed substantially below 2004 prices, but I also know of sales that closed substantially higher (in some cases, 25% higher). So I would hold off on making general statements about the SD market based on one’s personal observations. I would still trust more the CS index, partially flawed as it is.

[Daniel]

Powayseller,

Is it possible to do a rollover out of a 401(k) while still working for that employer and contributing to the 401(k) in question? I didn’t know that. I thought you could only do it after leaving that employer. Thanks for sharing this info. My wife has amassed a pretty substantial amount in her 401(k), and her plan choices are rather poor, so moving that money out to an IRA would be a good option for us. I’ll tell her to make inquiries at work.

[Daniel]

I have never heard of self-directed 401(k)s either.

[Daniel]

Powayseller,

With all due respect, I think you’re missing the point. I can only speak for myself (not the other D), but my offer to take one of those bets is not because I am a gambler, but precisely because of the opposite. I know a lopsided trade when I see one, and taking the other side of your bets makes perfect sense to me. Let me put it another way: if someone claimed that, by flipping a coin, I would get tails five times in a row, I would bet a very large sum of money against that outcome. This is not gambling, this is math.

That being said, I don’t actually believe that we’re going to enter a trade any time soon. My offer is just a way of saying that I believe your predictions have a very, very low probability of becoming true.

[Daniel]

Davelj,

Funny thing you proposed that trade. I actually thought (some time ago) about offering to take opposing bets to Powayseller’s, from the 50% nominal housing price drop to the S&P at 600 by next year. If you two agree to enter into such an arrangement, please let me know. I am willing to put up pretty good money against some of those predictions. And I’m sure it can be crafted as a perfectly legal contract, too.

Daniel

[Author]

Posts