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August 5, 2006 at 11:45 AM in reply to: San Diego lender allows 50% debt ratio on stated income loans #30807DanielParticipant
Yeah, I wish we had more lenders posting here. We have good inside info on the realtor biz, as there are several of them pretty active on this site (thanks, all!), but no so much info on the mortgage biz.
I have been reading the site you suggest, and it’s very interesting. But lately the host has been busy doing other things, and the posts are few and far between.
August 5, 2006 at 1:46 AM in reply to: Risky Investment Ideas or “Don’t risk your home equity shorting stocks” #30775DanielParticipantPowayseller,
I have no short position whatsoever at this point. The reason is that my view on the economy differs markedly from yours. I believe that there is risk of a recession, but won’t be as bad as you predict. My mouth (and a little of my money) is to go overweight on defensive stocks (I see that we both like Berkshire). Things like consumer staples, health care, etc. I figure that I won’t get killed if things get really ugly, and I also have some upside if the market decides to rally.
However, the vast majority of my positions are market neutral, in arbitrage trades. This has been pretty good lately, with all the M&A activity around. But this implies very high turnover, and use of margin strategies to boost returns. You pretty much becone a trader and start running your own little hedge fund if you decide to do this. I don’t really think it’s suitable for everyone.
As for homebuilders, lenders, energy stocks, etc, my policy is not to touch any “hot” stock (neither buy nor short-sell). I simply feel that I lack the necessary expertise to make an informed choice. Whatever I don’t understand, I stay out of.
Finally, in the hope of clearing this up once and for all, I DO NOT ACTUALLY RECOMMEND THOSE 5 IDEAS. Those are appropriate if, and ONLY if, you’re convinced of a big crash (and I’m not).
August 5, 2006 at 1:02 AM in reply to: San Diego lender allows 50% debt ratio on stated income loans #30771DanielParticipantThanks for posting that, Powayseller. Regarding stated income loans, I have had a nagging question for a long time. So I am asking anybody in the mortgage biz who happens to be reading this blog: given that a recent comparison of (a) IRS returns to (b) stated income on mortgage applications showed large and systematic discrepancies, what percentage of buyers lied on the loan application, and what percentage lied on their tax return?
The quick answer is that everyone lied on their mortgage application, in order to qualify. However, I’m not so sure that this is always the case. There are big tax cheats out there, I’m sure, and “stated income” could be their entry ticket into a house.
So, if there is any mortgage broker reading this, what is your experience? Do you mostly see middle-class folks who whisper to you “I need to go no-doc, I can’t get the loan otherwise”, or do you see shady characters (drug dealers come to mind) who seem to have the dough but no way to prove it?
My guess is that most fall into the first category, but it would be nice to get an expert opinion.
Thanks,
DanielDanielParticipantKristine,
I beg to differ. Zk’s post was very polite and considerate. Perhaps the gender comment was not the best idea, but it was far from “totally inappropriate”, in my opinion. And he/she balanced that remark with a similar comment about men (“getting into catfights with PS”, or something of that sort). I didn’t feel the least bit offended by it.
Speaking of inappropriate comments, I think Powayseller still owes those insulted an apology (and no, I’m not one of them). It is the mature and adult thing to do.
Daniel
DanielParticipantMy suggestions were somewhat tongue-in-cheek. I am certainly not following any one of them. But super-bears probably should.
August 4, 2006 at 12:51 PM in reply to: Risky Investment Ideas or “Don’t risk your home equity shorting stocks” #30697DanielParticipantPowayseller,
As you no doubt realized, my 5 suggestions were half serious, half tongue-in-cheek. They should be considered only by investors absolutely certain of the coming crash. You sort of fit that profile.
On a more serious note, I think your asset allocation is just fine, given your view of the world (although I would stay away from gold, but, as I said it before, that’s just me). You may also want to take a position in Berkshire; they’re sitting on a pile of cash, and waiting to deploy it. They should come out of a recession rather well, actually.
DanielParticipantbmarum,
I have long recommended people read the following financial report on the US housing bubble:
http://neweconomist.blogs.com/new_economist/files/HSBC_frothfindingmission.pdf
In my opinion, it is the best paper out there, bar none. Imagine Rich’s bubble primer, but 110 pages long. Full of graphs, charts, and models. It is very good. There is a lot about rents in there.
And regarding the rental market, I totally agree. It tends to diverge in the short term from the housing market, as demand shifts from one to another, but the two track each other extremely well over the long term.
DanielParticipantSorry for the double post. I don’t know what happened.
To continue my thoughts about “reverting to the mean”, I will give a simple example: P/E ratio for stocks were in the high single digits and low teens throughout the 80s. During the great stock bubble, average P/E ratios went to well over 30 (even higher for many tech stocks). After the bubble burst, P/E ratios came down, but stabilized to the mid and high teens, which is somewhat higher than before. “Higher plateau”? No. Lower long-term interest rates today compared to the 80s justify higher P/E ratios. It did revert to the mean after all. You just have to be careful how you define the mean.
DanielParticipantWell, I don’t think it will be different this time if you use the correct valuation methods. SD housing may be 100% overvalued on a price/income basis, but this is a very rough metric that doesn’t take into account long-term interest rates and rents. If long-term interest rates go back to where they were in the 80s, then yes, price/income ratios will go back to that “historical” average, which would be a 50% haircut from present values. But if long-term interest rates stay pretty much where they are, we’ll see a much smaller drop.
Let’s just say that nobody can predict long-term rates, so making either assumption is dangerous.
A better metric is the ratio of present value of future homeowner costs to rents. This shows (I’ll try to put together a plot later) that SD housing is well above trend, but not by 100%. Maybe by 30-40% (the result depends on what rent inflation you forecast), which means that house prices need “only” drop about 25% to get back to tre trend line. They may of course overshoot, but that’s another story.
So my argument is that SD housing prices will revert to the mean, as the bears correctly say. But some of them are just looking at the wrong mean.
DanielParticipantWell, I don’t think it will be different this time if you use the correct valuation methods. SD housing may be 100% overvalued on a price/income basis, but this is a very rough metric that doesn’t take into account long-term interest rates and rents. If long-term interest rates go back to where they were in the 80s, then yes, price/income ratios will go back to that “historical” average, which would be a 50% haircut from present values. But if long-term interest rates stay pretty much where they are, we’ll see a much smaller drop.
Let’s just say that nobody can predict long-term rates, so making either assumption is dangerous.
A better metric is the ratio of present value of future homeowner costs to rents. This shows (I’ll try to put together a plot later) that SD housing is well above trend, but not by 100%. Maybe by 30-40% (the result depends on what rent inflation you forecast), which means that house prices need “only” drop about 25% to get back to tre trend line. They may of course overshoot, but that’s another story.
So my argument is that SD housing prices will revert to the mean, as the bears correctly say. But some of them are just looking at the wrong mean.
DanielParticipantPowayseller,
One more thing: I’m not being sarcastic with my investment recommendations. If I held such a deep bearish belief (as you apparently do) regarding the economy, I would certainly take those 5 positions. If you’re truly sure of your economic forecast, I say put your money where your mouth is. You can do most of those trades at online brokers such as E*Trade or Ameritrade, but you’ll need a specialized broker for the CME and interest rate futures.
DanielParticipant“Take me seriously. This is my last warning. I am done wasting my time on fools like you!
One last thing. sdrealtor is a rude arrogant asshole. Goodbye docteur, thick in denial about his Carmel Valley home losing 50% of value. Goodbye sduuuuude and your silly comments.”
Powayseller, that’s totally out of line. I hope you’ll see that and apologize to those in question.
Regarding future investments, I’m amazed that you need to discuss that. Since you KNOW that SD housing will drop hard, and that we’ll have a deep recession, you should find it very easy to park your money:
1. Take the short side on CME San Diego housing futures, that’s a first no brainer.
2. Short the stock market indexes (either SPY or the cubes, they’ll all drop like stones in the upcoming recession).
3. For more bang-for-the-buck, take the short side on S&P E-mini futures. This is the same as #2, but with a lot more leverage.
4. Buy some out-of-the-money puts on the builders, as they’ll certainly go under.
5. Since you also KNOW that long-term rates are low and will certainly go up, profit from that knowledge in the interest rate futures market.Most of these trades will return in excess of 1,000% if your forecast of a housing market crash and deep recession proves correct. Since you seem very certain of your predictive powers, I really don’t see why you’re wasting your time asking us these questions, when the answers are so obvious.
DanielParticipantYeah, kind of the same here. I signed a 2-year lease last year (to forestall rent increases), so I have plenty of time to look until Fall 2007. Even then it will probably be too early. I thought about renting in Pacific Highlands Ranch, though, to get a feel for those houses. But only Santa Barbara had a couple of rentals when I checked them out last year, and those were too large for me.
DanielParticipantMaybe we should take a poll to see how many on this forum are looking at Pardee homes in CV (Arabella, Santa Rosa, Soleil, Derby Hill, Saratoga, etc). I’m one.
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