[patientrenter]

Allan,

In my line of work, I have to think about possible future credit spreads. I’ve nudged us to benefit from a widening of credit spreads, so I am putting some money down on what you’re saying (about a more general credit contraction). But I have to admit it’s a gut instinct. What’s your thinking behind a spreading of credit tightening from mortgages to other loans? How do you see that playing out?

I agree also with your description of what the Fed is doing and why. But does that mean you think the Fed’s likely actions will help house prices?

Patient renter in OC

[patientrenter]

Allan,

In my line of work, I have to think about possible future credit spreads. I’ve nudged us to benefit from a widening of credit spreads, so I am putting some money down on what you’re saying (about a more general credit contraction). But I have to admit it’s a gut instinct. What’s your thinking behind a spreading of credit tightening from mortgages to other loans? How do you see that playing out?

I agree also with your description of what the Fed is doing and why. But does that mean you think the Fed’s likely actions will help house prices?

Patient renter in OC

[patientrenter]

Well, cyphire, some people find jg’s efforts to bring religion and/or politics into the real estate threads cute, others find it boorish. Clearly it’s intended to provoke. You are a little trout in the stream. He has selected bait that you can’t avoid or resist, and you keep getting hooked, and he continues to fish for the pleasure of getting you and others hooked. People fish forever if the fish keep biting, and they fish a long time after the fish have stopped biting, but eventually they get tired of it and quit baiting the hook if all the little fish are smart enough.

Patient renter in OC

[patientrenter]

Well, cyphire, some people find jg’s efforts to bring religion and/or politics into the real estate threads cute, others find it boorish. Clearly it’s intended to provoke. You are a little trout in the stream. He has selected bait that you can’t avoid or resist, and you keep getting hooked, and he continues to fish for the pleasure of getting you and others hooked. People fish forever if the fish keep biting, and they fish a long time after the fish have stopped biting, but eventually they get tired of it and quit baiting the hook if all the little fish are smart enough.

Patient renter in OC

[patientrenter]

LA_R, thanks for that. We got sales and price data for May from DataQuick a few weeks ago, published in the LA Times. I thought it showed 2,333 OC sales = 1,683 SFRs and 650 condos. This is different from the 2,675 number here. Do you know what the difference is, and why they’d be making an announcement now?

Patient renter in OC

[patientrenter]

LA_R, thanks for that. We got sales and price data for May from DataQuick a few weeks ago, published in the LA Times. I thought it showed 2,333 OC sales = 1,683 SFRs and 650 condos. This is different from the 2,675 number here. Do you know what the difference is, and why they’d be making an announcement now?

Patient renter in OC

[patientrenter]

Novice, I am not recession-proof myself, so I’m not really an expert on this, but I’ve though about it, so I’ll pass on my thoughts to you.

LIQUIDITY
In a recession, the prices of many assets tends to drop a lot. An example is stocks. Real estate tends to get hit by recession as well. Commodities too. People argue over what’s affected most and least. Obviously, money in the bank isn’t affected (except eventually by inflation). Anyway, if you have to sell those assets during the recession, you’ll lose a lot. So make sure that you don’t have to sell many of them. Most people do that by building a reserve fund in “liquid” assets like bank deposits that will cover their bills even if they lose their jobs, until they find a new job. Having two jobs, as you do, especially in different fields and industries, really helps a lot. Nursing is probably one of the safest occupations – we’re not going to allow people to die in a recession, they’ll just have to cut back on buying big new TVs.

DIVERSIFICATION
What else can you do besides avoiding forced liquidation of assets during the recession? Well, you can try to make sure that the future total value of your assets isn’t permanently impaired by the recession. After all, recessions do end, and you want the assets to be worth something then. That might not happen if you invested all your savings into one asset that got wiped out by the recession, like the stock of a company that goes bankrupt. So it’s a good idea to spread your savings over assets that are very different from each other. Then lots has to go wrong before you lose a big chunk the total value of your assets. I invest in a wide variety of stocks, spread fairly evenly over the world and many industries, including real estate. You have an investment in your home already, so you probably don’t need any more real estate assets. if you don’t want to research global stock markets, then you can buy a mutual fund that invests in a very broad worldwide basket of stocks. (Vanguard, Fidelity, Barclays, and many others are offered. Investment advisers can tell you more.)

If you do buy a global mutual fund, then you may want to do it in disciplined pre-planned fixed amounts per month over the next 2-5 years. That way you won’t kick yoursself if you buy all at once now and it turns out that was the market peak over the next 15 years.

INCOME
I am a 1-income household, working in private industry with no pension benefits, and over half my compensation is highly variable. Obviously, I am taking on high income risk. You are a 2-income household, at least one of you is in a very stable profession with good pension benefits, and most of your compensation is fixed in advance and doesn’t go up or down much. You’ve probably done as much as you need to reduce risk here.

Patient renter in OC

[patientrenter]

Novice, I am not recession-proof myself, so I’m not really an expert on this, but I’ve though about it, so I’ll pass on my thoughts to you.

LIQUIDITY
In a recession, the prices of many assets tends to drop a lot. An example is stocks. Real estate tends to get hit by recession as well. Commodities too. People argue over what’s affected most and least. Obviously, money in the bank isn’t affected (except eventually by inflation). Anyway, if you have to sell those assets during the recession, you’ll lose a lot. So make sure that you don’t have to sell many of them. Most people do that by building a reserve fund in “liquid” assets like bank deposits that will cover their bills even if they lose their jobs, until they find a new job. Having two jobs, as you do, especially in different fields and industries, really helps a lot. Nursing is probably one of the safest occupations – we’re not going to allow people to die in a recession, they’ll just have to cut back on buying big new TVs.

DIVERSIFICATION
What else can you do besides avoiding forced liquidation of assets during the recession? Well, you can try to make sure that the future total value of your assets isn’t permanently impaired by the recession. After all, recessions do end, and you want the assets to be worth something then. That might not happen if you invested all your savings into one asset that got wiped out by the recession, like the stock of a company that goes bankrupt. So it’s a good idea to spread your savings over assets that are very different from each other. Then lots has to go wrong before you lose a big chunk the total value of your assets. I invest in a wide variety of stocks, spread fairly evenly over the world and many industries, including real estate. You have an investment in your home already, so you probably don’t need any more real estate assets. if you don’t want to research global stock markets, then you can buy a mutual fund that invests in a very broad worldwide basket of stocks. (Vanguard, Fidelity, Barclays, and many others are offered. Investment advisers can tell you more.)

If you do buy a global mutual fund, then you may want to do it in disciplined pre-planned fixed amounts per month over the next 2-5 years. That way you won’t kick yoursself if you buy all at once now and it turns out that was the market peak over the next 15 years.

INCOME
I am a 1-income household, working in private industry with no pension benefits, and over half my compensation is highly variable. Obviously, I am taking on high income risk. You are a 2-income household, at least one of you is in a very stable profession with good pension benefits, and most of your compensation is fixed in advance and doesn’t go up or down much. You’ve probably done as much as you need to reduce risk here.

Patient renter in OC

[patientrenter]

JWM, Good info.

Do you know what makes this Mike Roberts scheme tick? (BTW, He’s a 10-year member of the board of the CAR.)

Here’s one scenario:

Owner bought for $100,000 way back. HELOC’d out $400,000 since. Home is worth less than $500,000, say $450,000. Owner can’t make payments, is on a tight pre-foreclosure deadline, and doesn’t want bankruptcy or short sale on credit record.

Buyer can afford the payments on the owner’s current loans. Buyer doesn’t declare much of his income to the IRS, but can’t get a liar, er, stated income, loan quickly enough. So buyer takes over some or all of the loan payments, may or may not move into the home, and negotiates a fraction of the (assumed) gain on sale 5 years from now.

There’s extra tax stuff that may or may not be dodgy and important.

It seems to depend on the buyer assuming the home will appreciate by enough to pay off the loan value and repay the buyer’s share of the loan payments, plus hefty interest. In other words, the buyer depends on the market rebounding in 5 years or less. So these buyers are the same people buying in 2006 on a flip mentality who wouldn’t qualify for a 2007 loan. The price they pay to get in in 2007 is taking on the loan amount instead of the lower market value.

I’m sure Mike Roberts isn’t too distressed that this prevents a short sale that would (a) lower comps and (b) soak up some of the limited demand from people who actually qualify for 2007 loans.

Long may the (now more ingenious) flipper-driven boom continue! [/sarcasm]

Patient renter in OC

[patientrenter]

JWM, Good info.

Do you know what makes this Mike Roberts scheme tick? (BTW, He’s a 10-year member of the board of the CAR.)

Here’s one scenario:

Owner bought for $100,000 way back. HELOC’d out $400,000 since. Home is worth less than $500,000, say $450,000. Owner can’t make payments, is on a tight pre-foreclosure deadline, and doesn’t want bankruptcy or short sale on credit record.

Buyer can afford the payments on the owner’s current loans. Buyer doesn’t declare much of his income to the IRS, but can’t get a liar, er, stated income, loan quickly enough. So buyer takes over some or all of the loan payments, may or may not move into the home, and negotiates a fraction of the (assumed) gain on sale 5 years from now.

There’s extra tax stuff that may or may not be dodgy and important.

It seems to depend on the buyer assuming the home will appreciate by enough to pay off the loan value and repay the buyer’s share of the loan payments, plus hefty interest. In other words, the buyer depends on the market rebounding in 5 years or less. So these buyers are the same people buying in 2006 on a flip mentality who wouldn’t qualify for a 2007 loan. The price they pay to get in in 2007 is taking on the loan amount instead of the lower market value.

I’m sure Mike Roberts isn’t too distressed that this prevents a short sale that would (a) lower comps and (b) soak up some of the limited demand from people who actually qualify for 2007 loans.

Long may the (now more ingenious) flipper-driven boom continue! [/sarcasm]

Patient renter in OC

[patientrenter]

JWM,

I suspect you meant “PR” not “PD”. PD is a dignified Coronado resident on this blog. Unfortunately, I don’t fit that description at all!

You are strongly convinced that prices will drop a lot. By 50%? 60%? Fair enough. Whatever it is, I’m just trying to tease out from you what your reasoning is, and that of others with similar opinions, by presenting some of the more obvious obstacles to that outcome. Why would I do that? Because I don’t know everything, and maybe something you know and share would help me make a better analysis and, ultimately, buying decision. That’s the alpha and omega of my agenda here.

Am I claiming that I am a superior paragon of rational analysis, then? No, I want to get the analysis right for my own sake, and I find I do that best when I set my emotions to the side. BTW, my emotions say that house prices are ridiculously high, driven there by loose credit that I hate because it rewards borrowers, especially ones who won’t pay if things go upside down, at the expense of savers like me, and I dearly hope for a drop of at least 50%, because then home prices would be – just barely – low enough for me to hold my nose and buy after 20 years of being priced out of the market where I live. My wish is that you or soemone else here will lay out a case that is so tight that I will have full faith in that 50%+ drop.

So cheer up, JWM, and don’t assume DaC or I are trying to pull the wool over your eyes. I have no motive and I’m not that smart! I gain only if prices drop, and the more the better. I don’t even mind a horrendous recession to get there. But until then I just want to see what the most likely outcomes are as clearly as possible, and fact- and reason-based exchange on this forum was a good way to improve my own insights on that.

Patient renter in OC

[patientrenter]

JWM,

I suspect you meant “PR” not “PD”. PD is a dignified Coronado resident on this blog. Unfortunately, I don’t fit that description at all!

You are strongly convinced that prices will drop a lot. By 50%? 60%? Fair enough. Whatever it is, I’m just trying to tease out from you what your reasoning is, and that of others with similar opinions, by presenting some of the more obvious obstacles to that outcome. Why would I do that? Because I don’t know everything, and maybe something you know and share would help me make a better analysis and, ultimately, buying decision. That’s the alpha and omega of my agenda here.

Am I claiming that I am a superior paragon of rational analysis, then? No, I want to get the analysis right for my own sake, and I find I do that best when I set my emotions to the side. BTW, my emotions say that house prices are ridiculously high, driven there by loose credit that I hate because it rewards borrowers, especially ones who won’t pay if things go upside down, at the expense of savers like me, and I dearly hope for a drop of at least 50%, because then home prices would be – just barely – low enough for me to hold my nose and buy after 20 years of being priced out of the market where I live. My wish is that you or soemone else here will lay out a case that is so tight that I will have full faith in that 50%+ drop.

So cheer up, JWM, and don’t assume DaC or I are trying to pull the wool over your eyes. I have no motive and I’m not that smart! I gain only if prices drop, and the more the better. I don’t even mind a horrendous recession to get there. But until then I just want to see what the most likely outcomes are as clearly as possible, and fact- and reason-based exchange on this forum was a good way to improve my own insights on that.

Patient renter in OC

[patientrenter]

Learning from history is great, and I love the historical perspective. Based on historical ratios of home prices to income, San Diego and LA and many other places seem overvalued. (I think the prices are ridiculous, myself.)

However, housing history isn’t restricted to California or even this country. My impression is that home prices in the UK, for example, are an even higher multiple of incomes than here the US. And the financial sector and economy there has adapted to this. Perhaps someone more knowledgeable than I can fill in the facts (price/income).

Here’s another challenge for someone who knows where to get data or credible studies: Did the ratio of US home prices to income permanently increase after the advent of government guarantees for mortgages (Fannie, Freddie, FHA…)? Will all the looseness in home loan underwriting of the last few years simply disappear completely, or is some of that also a permanent change?

Where is the Chinese central bank going to invest next month’s trade surplus dollars? Wherever that is, it will continue to depress all asset returns for the many yield-hungry US pension funds and other institutions who have to invest their next month’s cash flows also. Much ingenuity will be expended on creating reformed ‘solutions’ that cause home loans to still look like they yield more than Treasuries. And those funds still need those higher yields.

So the pressures on credit and therefore home prices are there and having some impact, but we still don’t have other factors kicking in, like a recession, or liquidity drying up, or a sharp collapse in the dollar, or high CPI numbers, or the Fed being tight, or a nuclear terrorist attack, or… If one or more of these happen, then the probability of a really major dip in home prices, back to historical averages, becomes high. Until then, we’re all just hoping and speculating (which is fun) while watching the emerging facts on the ground.

Patient renter in OC

[patientrenter]

Learning from history is great, and I love the historical perspective. Based on historical ratios of home prices to income, San Diego and LA and many other places seem overvalued. (I think the prices are ridiculous, myself.)

However, housing history isn’t restricted to California or even this country. My impression is that home prices in the UK, for example, are an even higher multiple of incomes than here the US. And the financial sector and economy there has adapted to this. Perhaps someone more knowledgeable than I can fill in the facts (price/income).

Here’s another challenge for someone who knows where to get data or credible studies: Did the ratio of US home prices to income permanently increase after the advent of government guarantees for mortgages (Fannie, Freddie, FHA…)? Will all the looseness in home loan underwriting of the last few years simply disappear completely, or is some of that also a permanent change?

Where is the Chinese central bank going to invest next month’s trade surplus dollars? Wherever that is, it will continue to depress all asset returns for the many yield-hungry US pension funds and other institutions who have to invest their next month’s cash flows also. Much ingenuity will be expended on creating reformed ‘solutions’ that cause home loans to still look like they yield more than Treasuries. And those funds still need those higher yields.

So the pressures on credit and therefore home prices are there and having some impact, but we still don’t have other factors kicking in, like a recession, or liquidity drying up, or a sharp collapse in the dollar, or high CPI numbers, or the Fed being tight, or a nuclear terrorist attack, or… If one or more of these happen, then the probability of a really major dip in home prices, back to historical averages, becomes high. Until then, we’re all just hoping and speculating (which is fun) while watching the emerging facts on the ground.

Patient renter in OC

[patientrenter]

Nancy-s,

I agree that a little blood will be extracted from flippers, just enough to keep most of ’em away for a few years. But buying an asset worth $1/2 million to several $million with just a few % of your own money at risk will always bring people back, since it’s a way to go from near-poverty to riches, and the worst that can happen is you go from poverty to poverty. If you’re dishonest and belligerent, then you don’t even have to go into poverty. I know people earning good incomes and with some savings who made their banks accept a lousy payoff in the last downturn, and they walked away free and clear. Now they own million-dollar homes they bought dirt-cheap right after. As long as lenders are dumb enough to allow this, it will continue.

JWM,

The scenario you describe as D. is what I was trying to express under A. In that scenario, prices go down with no government bailout and mortgage lenders take a big hit. At some point, if prices drop a lot, then even the homeowners who bought 10 years ago will get restless and call their congressman, and then B and/or C start to kick in.

Patient renter in OC

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