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Thursday, August 27, 2009
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82 comments:
The fate of CA $10k for new homes
Will this presage the impact of the end of the $8k?
He noted the state government stopped taking applications for the $10,000 new-home credit at the beginning of July.
"Activity stopped as quickly as it started, which is bad news for housing and the broader economy," Rivinius said.
...
"Permits for single-family homes totaled 2,045, down 29 percent from June when builders pulled permits for 2,864 units, the highest monthly tally since July of last year," the group said in its statement.
(14% decrease overall including non SF units)
So, the comparison point is a 30% drop in demand. I'll take the over. Specifically I predict that IF the $8k is not extended the drop in number of closed transactions for the highest three months prior to November in the under $400k market in FFX County compared to a three month average of January,February and March will be more than 30%. Now, I do have seasonality working in my favor on this as well, and I don't think the IF part of that statement will come to pass. So, I'll go further, IF the $8k is extended for another year with no changes in eligibility, transactions under $400k in FFX county will still drop at least 15% on a three month average basis. UNLESS, the low-tier of CS in the DC area drops to under 140 and the middle-tier drops below 150.
Bold. Which means I'm probably wrong.
Toll Brother's quarterly report
The facts are negative but the outlook is positive...
"The company /quotes/comstock/13*!tol/quotes/nls/tol (TOL 22.52, -0.62, -2.69%) reported a fiscal third-quarter net loss of $472.3 million, or $2.93 a share, compared with a loss of $29.3 million, or 18 cents a share, in the same period the previous year. The latest quarter's results included deferred tax asset valuation allowances of $439.4 million, and write-downs of $115 million.
Revenue dropped 42% from the year-earlier quarter to $461.4 million as the home-construction business continues to get squeezed by the recession.
...
"We believe declining cancellations and more solid demand indicate that the housing market is stabilizing," said Toll.
But their not issuing an earnings outlook. So, the known knowns are terrible, and the unknown hopes are good, but not good enough to hold your breath for.
Sounds like an L to me. (or a U)
Jeremy,
The wife and I drove there today. The grass was not mowed and the house appeared empty. We turned around in the driveway and did not like trying to get back onto Fox Mill.
You beat me to it. I was going to caution against getting a home fronting a major road. Fox Mill is not as major as say Chain Bridge Road but major enough to be concerned for the reasons you listed (children in front yard, getting out of driveway, etc.)
On a side note, there are a lot of beautiful homes in that part of Fairfax County -- near Stuart Mill, Fox Mill, Hunter Mill, Waples Mill, Vale Road, Lawyers Road. And it's very scenic and feels a little like you are in the country. But the downside is part of the reason for that scenic nature is that the homes are (in some sense) far from "civilization." Many of them it would be a 10-15 minute ride just to get to Rt 123, 50, I-66, and the Vienna Metro station. It's a tradeoff I often debate in my head because it's very tempting to live in that area but I worry I'd regret it every day I drove somewhere.
Calculated Risk on the state of the FDIC.
An important read. My takeaway is that for now, the "Accrued assessment income from the regular and the special assessment increased the fund by $9.1 billion" is not quite enough to cover the "$11.6 billion increase in loss provisions for bank failures." but it's close.
The DIF’s reserve ratio was 0.22 percent on June 30, 2009, down from 0.27 percent at March 31, 2009, and 1.01 percent one year ago. The June figure is the lowest reserve ratio for the combined bank and thrift insurance fund since March 31, 1993, when the reserve ratio was 0.06 percent.
The additional assessments are certainly onerous on a banking sector that's bleeding money as it is, but I think the current level is sustainable, and may be enough to last the FDIC until the recovery turns things around. The big "ifs" are commercial real estate, and how quickly the banks start making profits off new performing loans on newly affordable houses. The one-time losses are fine, so long as a new better income stream starts soon.
However, if the FDIC DIF starts going negative, there is the treasury backstop.
Others may see things in a more dire light. I see no reason to panic, yet. I do see, however a great motivation to keep the $8k going, because we need these buyers now more than we need them in the future. The banks need these profits now. A 10% drop in prices later won't cause all the current buyers to walk, let it happen later if it happens at all.
TBW,
It's a trade off I'm definitely willing to make. At first my wife was concerned because she grew up off Vale Rd. near West Ox, and didn't like the idea of being that person who spent her entire life where she happened to grow up. She's gotten over that as we've been house hunting a while now and the houses we both agree on seem to be in the areas you mentioned. She is firm about being in a neighborhood though, so I'll have to let this unique house go I think.
Jeremy
I don't know about now, but there were a slew of ones just like it built at the same time, so keep an eye out, and keep in mind how good they look when all the wood is allowed to glow, and the lightness is enhanced with white walls.
Do a Redfin search by year built on your target area, that should bring them up.
Cara,
I have zero worries about the FDIC. Just a curiosity if it will be saved by bank assessments or a taxpayer bailout. (It sounds like you feel similarly)
If the FDIC failed we would have complete and utter chaos. Probably EVERY bank would fail as there would be bank runs.
I can't imagine them doing TARP and then letting the FDIC fall apart over a couple billion dollars.
tbw,
Agreed.
I do think making banks more profitable is part of the necessary solution however. It's the only sustainable solution, actually. Higher assessments are self-defeating and treasury money is just a loan.
They're going to need to be more pro-active on the CRE side than they were on the RE side. Namely underwater projects need to be allowed to get new financing when their short-term loans are up, so long as they prove the ability to repay the loans, regardless of collateral. This needs to happen. We need a hope for mall-owners, preferably one that's more effective than hope for homeowners.
I'm so not kidding.
I'm wondering if anyone might be able to tell what is going on in this situation. I thought that when an option-ARM recast, even if the interest rate is lower, the payment would go up because at some point you have to start paying off the principal. And how does anyone get a 3 or 2.5 interest rate on a mortgage? I think there are some details missing.
I also think it's interesting that a 64-year-old retiree has "no interest in paying off his house." Is he just planning to pass on that debt to his kids?
Amid the wreckage, though, option ARMs have been a boon for some borrowers. Gary Kopff, 64, a retired financial manager, took an option ARM on his Washington home in 2006, increasing his balance to $1.2 million from $800,000. Mr. Kopff chose the minimum payments so that all of his payments were interest, allowing him the greatest tax deduction, and because he had no desire to pay off his home.
But a surprising thing happened. His rate went down.
Mr. Kopff’s rate is tied to a figure called the London interbank offered rate, or Libor, a measure of the rates banks charge one another to borrow money. As the 30-day Libor fell to less than one half of 1 percent, the rate on Mr. Kopff’s loan fell below 3 percent.
Now, though he is still making only the minimum payments, he is actually paying down his balance.
“In 2009 I found out I have a 2.5 percent mortgage,” Mr. Kopff said. “That’s not onerous by any standards.”
But even for Mr. Kopff, the future has some storm clouds. Interest rates are rising again. When he took out the loan, he planned to refinance into a 30-year fixed mortgage before the reset, but now few banks are refinancing loans his size.
“I’m better off than a great deal of mortgage holders,” he said. “But what looks like a good deal today may not look so good in a few years.”
Article
Anon412,
someone wrote up a good explanation of this somewhere online....
But basically Libor is at 0. So if his loan is Libor + 2.5 (totally reasonable teaser start when libor was up at 2), then yes, he could have a 2.5% mortgage rate.
What happens is, his loan has not recast yet. But there's still a minimum payment that was set by his initial interest rate. So, regardless of the fact that his new interest rate is less than his old one, he keeps paying the old interest amount, which means that that 0.5% difference (yearly) is now going towards principal. This will delay indefinitely the date at which the loan will actually recast (which happens at 110% of the original loan amount, or 10 years out, whichever comes first, just chose typical numbers).
I'm going to see if I can find that reference...
Cara, you are exactly right on what you said yesterday--ever since gas was at $4 I have said they should have put in a tax that KEEPS it at $4 even if oil gets cheaper.
However, two problems with that I never solved--
1) it would have made the current downturn even more painful
2) gas stations set the retail price, not the government, so how can you make sure the money flows into taxes and not to gas station profits? If no one has to compete on price, they'll all just set to $4 and pocket the margin.
MAYBE you could set the tax based on past oil prices versus what the gas price was then--if oil gets down to $70, what was gas price the last time it was at $70, add tax to get to $4. But that seems like a pretty crude mechanism (sorry for the pun.)
The Federal Reserve explanation of ARMs is pretty darn good but not what I was looking for...
Downturn Dims Prospects Even at Top Law Schools
Meshell and I have touched upon this but perhaps people might take us more seriously now that the NYT has certified it's happening.
The DC area has more lawyers per capita than any other part of the country. So we are seeing fewer new lawyers coming here (lowering demand for rentals in DC and inner suburbs), worried lawyers with jobs (many possibly delaying a home purchase because of that), and lawyers losing their jobs (which if they did not have an ample rainy day fund equals foreclosure).
And so far Obama has not fulfilled Robert's promise of 100,000 new federal gov't lawyer jobs in the DC area.
Thanks Cara, your explanation makes sense. Still crazy though, that this 64-year-old guy is basically renting a million dollar home... and people pay him for advice on how to manage their money? I'm curious as to what his payment is.
Scott,
I don't know. But Spain already does it, as do many other countries so it must be possible. You will also need to index the price somehow to allow it to go up from $4 eventually.
Research into how effective it has been in other countries, and the abuses it has caused would definitely be a necessary prudent step before deciding implementation. That's the great thing about trailing the rest of the civilized world, we can learn from their mistakes. :)
Anon412,
Yeah, I found that one statement, " I don't intend to pay off the loan" ummm, distasteful???
I don't need to start a rant though.
Yeah, and also choosing his payment based on what will maximize his tax deduction. That, with the pictures of he and his wife lounging around in the backyard of their million dollar home... it just rubbed me the wrong way.
tbw,
After he lost his job as a television reporter two years ago, Derek Fanciullo considered law school, thinking it was a historically sure bet. He took out “a ferocious amount of debt,” he said — $210,000, to be exact — and enrolled last September in the School of Law at New York University.
“It was thought to be this green pasture of stability, a more comfortable life,” said Mr. Fanciullo, who had heard that 90 percent of N.Y.U. law graduates land jobs at firms, and counted on that to repay his loans. “It was almost written in stone that you’ll end up in a law firm, almost like a birthright.”
Ah, yes, whenever something is a sure winner.... Prices can only go up...
Good find on the story.
Re: the NY Times article. A friend just sent me this. It is hysterical (if not downright sad).
Big Debt, Small Law
tbw, yeah I saw that story also. The article went into this a little bit, but hopefully the good that might come from this is a restructuring of the way that law firms do business -- hiring 2 years in advance, billable hours, crazy salaries and hours.
I also worry about all the people who have $200,000 in debt that they're just never going to be able to pay off and wonder if that will have to be the next bailout. And whether law schools will be able to continue charging such high tuition.
I know someone that has six month LIBOR + 2.25%.
And so far Obama has not fulfilled Robert's promise of 100,000 new federal gov't lawyer jobs in the DC area.
Why not just say 1M, 2M, 10M? I feel like I don't even need to post anymore. Take whatever TBW says I am going to say and divide by 10.
Robert,
Okay, I'll amend my statement.
And so far Obama has not fulfilled Robert's promise of 10,000 new federal gov't lawyer jobs in the DC area.
I don't think we have even seen 15-20 new lawyer positions during 2009. No agency is on a hiring binge. Many are hiring fewer experienced lawyers than their websites note as the annual average (perhaps because older gov't workers are waiting for their TSP and non-TSP mutual funds to recover?)
Scott-
Gasoline trades on several exchanges. The government could put a tax on it so that this price was always ~$3, which would make the gas we buy close to $4, because it costs about a dollar to ship it, pay for expenses at a gas station, and let them make a small profit.
On the exchange there is effectively a clearing mechanism, because a certain number of people need to sell and need to buy so it would be harder for them to manipulate it.
More forewarning on how the $8k incentive is going to leave a mark:
CR cash-for clunkers "cannabalizing" future sales.
It now appears that sales in August were at about a 16 million SAAR (auto sales for August will be released next week).
This follows an 11.22 million SAAR in July. The Cash-for-clunkers program started on July 24th.
If sales in September are 11% below June - that would put sales at under 9 million SAAR - the lowest sales for this cycle, and perhaps at the lowest rate since the early '70s. Of course the program just ended, but it will be interesting to see how much Cash-for-Clunkers cannibalized future sales.
Patience grasshoppers.
Robert,
Why It's So Hard to Find a Job Right Now"Why It's So Hard to Find a Job Right Now
If I recall correctly, you said we should not look so much at firings as hirings. Well, looks to me that we are going to have an even slower recovery this time around as the hiring rate is well below what it was after the 2001 recession.
Today there are 5.7 unemployed workers for every nonfarm job opening, she notes. That's more than twice the high from the 2001 recession, even though, let's remember, the rate of firings these days is not markedly higher.
Unfortunately, sounds like a slow recovery.
comments on this McLean contemporary home ?
I know the recession is the main culprit but perhaps is it possible that cars break down less so people don't feel the need to buy a new car as often? Especially (generalization warning) since foreign cars break less than American cars and more and more Americans are buying Honda, Nissan, et al?
Totally anecdotal, but I will just say my family grew up buying one of the American brands and we needed a lot more maintenance work than we have as we all have switched to one of the major Japanese brands.
I have never needed any serious work done on my current car and it's getting long in the tooth. I suspect had I bought an American brand I would be itching to get a new car since it would probably need a new engine by now.
tbw,
I think it's more like, most people in good times buy a new car every 7-10 years whether they need it or not. Given that almost all cars are fine for 15 or more, and even major repairs cost less than 4 months of car payments, people have a lot of leeway in when they buy a new car. It's a classic discretionary purchase.
For Scott/Cara,
Deficit Without Bush
Taking away Bush's tax cuts and Iraq War the 2019 deficit would be around 50% of GDP levels (Reagan era) and not 70% levels. And the article notes that does not include the cost of Medicare Part D.
So I guess the $9T projected deficit is mostly Bush's fault. Hence $9T does not incorporate the mammoth federal gov't Robert projects but instead a lot of mismanagement on Bush's part.
So that makes me even more confident that belt tightening is in order because I can't imagine Obama pursuing spending policies that would push the deficit above the already scary number of 77% GDP.
Also Bush/Greenspan created a lot of this mess by leaving the Fed Funds rate way too low from 2003-06 or so. And underregulating mortgage providers, banks, etc which led to all these crazy loans being pushed.
MM,
That looks exactly like the TH I grew up in but with a 20 foot yard between you and the next TH!
I like the shape of the kitchen and the counter they chose, but just painting the cabinets and slapping on a new counter is the cheap way to go. (Not that this isn't exactly my own plan). I like the black counter master vanity. But the place has no pizazz. It is contemporary but it's contemporary, blah. No open split-level stairs, no lofts, no excitement, just good solid workable space with a 70's mind-frame.
The price is mind-boggling, but I have no familiarity with McLean.
RE: comments on this McLean contemporary home.
I think the dining room chairs are very nice.
MM,
I could never get past the ugly exterior. So many homes in this area are ugly on the outside but good on the inside.
MM,
It does have the virtue of being the cheapest style house in the nieghborhood.
But bought in 2003 for $562k, put in at most $30k? in countertops, flooring and vanities, and they're asking for $750k, or ~$150k in pure profit? (sorry, "appreciation"). Ummm, I'd say a fair price is to take the remodeling onto their purchase and then give 4% to get fair 2004 prices, and see what that gives,
Oh $616k.
Ah, I think they used this same formula, and they'd like 4% every year since purchase, that's give exactly $749k. Yup, sorry, the bubble started back in 2000 or earlier, we need to claw back some of those gains too. So no post-2004 gains for you. Thanks for trying.
From Megan McArdle a great connection between health and real estate. I love it:
The American Heart Association has apparently issued new guidelines on sugar, urging everyone to cut their intake to 9 teaspoons a day, or a little more than one 12-ounce coke.
I'm not sure what to make of this. Pretty clearly, almost no one is going to cut their sugar intake that far, except people who already have cut their sugar intake. I suspect that the American Heart Association is hoping for some sort of anchoring effect: people hearing they should cut their sugar intake to 9 teaspo0ns will maybe bring it down to 18 or 27.
But I think that anchoring only works when people actually have to participate. When people have the option of ignoring you, making your goal too extreme may actually decrease its effectiveness.
You can think of it in terms of the real estate market. Sellers often insist on listing their house at an inflated price, on the off chance that someone will bite, and to enhance their bargaining position. But often it just means that buyers don't bother to look. Buyers can make the same mistake, lowballing their offer only to have the sellers conclude that they are not serious and refuse to negotiate.
On a side note the bolded paragraph gives a good reason for why realtors are not bothering with unrealistic sellers. It harms their realistic sellers who have fewer buyers touring the homes as people (like me) sit it out until most sellers are realistic (since unrealistic sellers do not negotiate.)
tbw,
Ah using the current real estate connondrum as a metaphor. How timely.
Actually I think most people have no idea where they are getting all that sugar from so most people think they personally are already close to that goal, and so won't view it in such a harsh light.
It's kind of like how the sub-5.5% interest rates make today's prices look close to being reasonable, when really they've got tons of added sugar in them....
I had no idea that a 12-ounce coke contained 9 (!) teaspoons of sugar. I bet the average American doesn't know that either.
But then again, I don't drink any soda at all (not even diet).
housebuyer---
On your gas tax plan, okey doke! Make it so! (For one thing, I haven't owned a car since 2003, and feel that America's love of and addiction to cars will eventually be seen as a key factor in the destruction of our economy--and this problem is growing in the developing world too.)
tbw--
Thanks for the Bush deficit info! I was just listening to Alan Greenspan's book, talking about the 1983 soc sec reform and the Reagan Revolution of deep cuts (cancelled out by tax cuts and defense spending). Seems like we'd need Republican's to come in and do that, my Dems probably wouldn't; but neither did the Bush/Rove/GOP have any recent interest in balancing the budget, they would just Charge It.
Paka,
Good for you on the soda, I try to avoid soda as much as I can, although not entirely. I try to drink Poland Spring flavored fizzy water or Perrier with meals and regular water for rehydration, sometimes WEAKLY flavored with fruit juice. But I still get sugar calories from brownies, cookies, Starburst, etc that I can't seem to say no to.
MM,
It's now under contract. Was it under contract this morning, and I just didn't notice?
Do you think we have lurkers stealing our real estate ideas? Do you think my talking about Burke has actually impacted Burke sales? I mean Burke has been way busier than anywhere else that I can tell. Maybe I am the partially to blame for my own angst?
Hmmmmm.... I doubt it, just because this blog doesn't even come up in google unless you use the word bubble...
Scott,
I didn't give up soda b/c of the sugar--I stopped drinking it because it's a migraine trigger for me. I haven't had any soda in 18 months now, and I don't miss it at all. I certainly get my sugar fix from other places, though!
Cara,
You are totally responsible for any increased activity in Burke. In fact, you've hyped it up for me so much that I'm abandoning any ideas of buying in Arlington and am writing up a contract on a cute little townhouse in your favorite subdivision right now at a crazy asking price (the kitchen remodel & HW floors are worth at least $75k, dontcha think?).
:-)
paKa
Glad I don't drink soda either, otherwise that'd be a spit-take.
(trying hard not to laugh out loud)
(the lawyer followup find was excellent too)
Link
Link
Robert,
You post this in case anyone doubted that the current buying frenzy is financed on the back of zero-down loans?
from the link in your link
"Zero Interest and No Payments for the
First 12 Months for the second mortgage
Recent economic recovery legislation has created a tax credit incentive for firsttime
homebuyers. VHDA’s Homebuyer Tax Credit Plus loan lets borrowers take
advantage of the federal First-time Homebuyer Tax Credit to finance down payment
and closing costs up to 5% of the sales price, using a second mortgage.
The second mortgage helps cover the down payment and closing costs,
with zero interest and no payments for the first 12 months."
so, yes Virginia, there is a Santa Claus.
What's your take-away?
Well, paka, still good for you for finding your trigger and solving it. I know someone who spent years trying to figure it out.
My biggest problem is, most places, like Subway, only have full sugar soda, diet soda (not much better habit-wise IMO), super sweet "juices", plain water (which is boring with a meal) and iced tea (never liked the stuff.)
Most places never have perrier or other fizzy water, or Vitamin Water (half the sugar) or Vitamin Water 10 (even less sugar.)
So I stock my fizzy choices at home and lug them to work for lunches.
I often find real soda (Sprite, Coke) tastes like heavy syrup to me now!
Scott,
It's one of many triggers, unfortunately! I'll have a sip of soda every once in a while, and it grosses me out so much that I'm not even tempted to have another sip--very syrupy!
I hear ya on the lack of non-sugary beverages. I wish sparkling water were more widely available here like it is in Europe. Have you tried the Propel vitamin water powder packets? They are a lot easier to carry around than having to lug a bottle to work every day.
Cara,
Exactly. They are still bringing nothing to the table.
This link says that you can pay the $8k back over 29 years. Thus keeping the $8k for
PDF Link
Pay off the second mortgage over 29 years — and save the Tax Credit to pay for
future emergencies, make home improvements or pay off/pay down existing debt.
It's not something I follow, but I was a little surprised.
contrarian,
RE: Ruth Buzzi
That is either over my head, or almost irrelevant. I can't figure out which.
Anon412, here's a different way of looking at that 64-year-old's situation.
When he dies, his kids aren't responsible for paying off his debts, even if an agent can't sell his house. If his will says they inherit the house, they can refuse the inheritance, if they don't want it or don't think they can sell it, and have no obligations. But more likely, his agent probably will be able to sell the house for more than he owes; i.e., he will likely have at least some equity at the time of death. Let's say the house is worth $1.1 mill at that time and he has as little as $100K in equity; that will cover the costs of the sale and the kids incur no costs.
A second part of this perspective is the opportunity cost of money put into the house vs. elsewhere. If he could invest the $500K that another homeowner might have put down on that home (giving him/her a reduced mortgage compared to our guy) and coud get a reasonable return of 6-8% annually, he may well have been ahead to do what he's doing. For the past 6 months, and for most of the past except the 2 years before that, this was very likely.
If this 64-year-old invests wisely and is not unlucky, his kids could get a bigger inheritance than they would have gotten had he sunk the money in the house. I'll leave the taxes and other complexities out of it, since this guy may be shrewd enough to find tax-sheltered investments.
I'm not arguing for or against this strategy. But there is very definitely a way that it could work out better than trying to pay off a house quickly. I say this as someone who did just the opposite, because I am not such a great investor.
I should have added that if that 64-year-old spends the money on vacations, fine wine, golf, etc., instead of paying down the mortgage OR investing it wisely, then he's living on the edge AND his kids may not get much of an inheritance, but not everyone has kids or feels that the kids are entitled to a big inheritance, especially if he's already set them all up with trust funds. But that's another story altogether...
Contrarian,
RE: Depression
I've made the point about California being the housing market to watch wrt the $8k housing incentive extension or expansion. I've been ridiculed for that, but seems your article helps my case.
RE: Deflation
The graph looks bad, but I have no idea wtf "Real GDP and Deflator y/y%." is or means.
My son is a high school teacher and not a guidance counselor but his students talk to him about careers. For years he has been telling them to go into science (but not computer science), math and medical related fields such as pharmacology, inhalation therapy, physcial therapy and nutrition. The students who return with the best job security have gone into those fields. He said that 3 of the new teachers at the school this year had been lawyers who lost their jobs and could not get anything else. They are entering at the bottom of the payscale but are happy to have jobs. Before I retired from my medical practice, my earnings from the first 5 months of the year went to pay my malpractice insurance. I attribute this to the surplus of lawyers who have to be kept busy suing people. I was never sued, but I saw how lawyers could tie good doctors up in knots for things that were the patient's fault. But the lawyer could get a little something for the patient and a big something for themselves. I don't like all of Obama's health care plan, but if it can get the bad lawyers out of health care, it will be a good outcome.
Ace, yeah, that does make sense. But on the other hand I think there is some value to the security of owning your home outright and not having a mortgage when you're in your 60's, even if you could get a better return with your money somewhere else. Also, if I understand these ARMS correctly, you can't really keep paying just the interest indefinately -- at some point he's gonna have to start paying off the principal if he wants to keep living in the house.
That also makes sense about what would happen if kids inherited an underwater house -- they don't have to pay off the debt if they don't accept the inheritance. If the estate had say, $1 million in cash and a house that's $200,000 underwater, I'm guessing if they're going to take the cash they'd have to pay up to the bank the difference between what's owed and the sale price, though, right?
"Robert said...The graph looks bad, but I have no idea wtf "Real GDP and Deflator y/y%." is or means."
Dont need to understand. All you need to know is it came from contrarian, who cites whoever seems most doomish at the moment. Be it now imprisoned liar Hal turner or this guy -- Hugh Hewitt -- a far right member of the cristian coalition who clearly will do or say anything to impugn Obama.
But hey as long as they dispense doom-aid at the trough, Contrarian will be right there to lap it up, glug, glug, glug...
Anon412, good question in your 2nd pgh.; maybe an attorney on the board can answer. As a non-attorney who doesn't understand all the ins and outs of the latest legislation protecting underwater owners, my guess would be that the estate (not the kids) would have similar options that a living owner would have.
Regarding your first pgh., my comparisons are based on the assumption that the guy has more than sufficient income to pay a standard mortgage for the house, as well as assets that could be used. In other words, the investment strategy I described is not available for the person who really cannot afford a million dollar house; it is for the person who can, but has choices as to whether to put assets in place 1 vs. place 2.
And, our guy is already paying on the principal (and may have 20% or more down - the article doesn't say IIRC), because he is making the same monthly payment required under the original terms, but because the interest rate has dropped, some of the payment has gone to principal. He may have to pay more in the future depending on the terms of his ARM but again, if he has enough income to have qualified for a 30 year fixed, for example, he should be able to afford it. And if it's hard to do that from his current monthly income, then he can always pull $ out of the wise investments (e.g., he'll likely keep some in a money market fund) I am requiring him to make in order for this strategy to work.
This is a riskier strategy than paying the house down, because as we all have seen, home prices may tank, an untimely death may occur, prudent investments go south because of fraud or mismanagement of Wall Street, the economy may tank, etc. But it also has the potential for higher reward, a higher disposable income in retirement AND an opportunity to leave more to the kids if you want to.
Ace, yeah, it's likely that he's not in great financial peril if he was able to afford an expensive home in the first place. And it might be working out well for him to have a low interest rate and have money freed up for other purposes. But it's hard to determine a lot of details from the article -- as in, did he buy or just refinance in 2006, and either way did he leave any equity in the house at that point? And even though he's started to pay off the principal now that the rate went down, the principal has probably grown since 2006 while the value of the house has fallen. So when the loan does recast, the payment will end up being higher than it would have been had he taken out a 30-year fixed, possibly a lot higher depending on where rates are. And it might not be possible for him to refinance if he's more than 5% or 10% underwater. But I suppose if he has other assets (and one would hope he does) then he could just make a payment toward the principal in order to be able to refinance.
"Contrarian said...don't forget to mention Prechter, who says, "The Depression is Young"
Ahh yes, the high priest Prechter. Want to know why I love the internet? Unlike earlier generations who fell for his unbridled pessimism, I can see his permabearishness stays with him through all his life.
It looks like one of his biggest flaws is to not know when to distinguish between bear market and real rallies. As I have pointed out many times, here he is in 1989 calling for the dow to hit a low of 400 and for the US to go into a devastating depression in either 1989 or 1990. We all know how that turned out....
http://www.nytimes.com/1989/02/06/business/market-place-2-theorists-split-on-elliott-wave.html
Even better, here he is 1993 STILL CALLING for the same cataclysm (dow to bottom at 400) that did not happen in 1989, 1990, 1991, or 1992!!!!
http://articles.latimes.com/1993-06-11/business/fi-2172_1_stock-market-cycles
We all know how that one turned out too...
BTW -- heres my favorite quote from that new article:
"David Allman, Prechter's research director at the newsletter's Gainesville, Ga., offices, admits that Prechter's followers have sacrificed potentially large returns by staying out of the market since late 1987. "Our opinion is that we're (seeing) a major top in the market, but it has taken substantially longer than we thought," he concedes. Being wrong--or at least early--has cost Prechter: His newsletter subscribers now number 4,500, down from 20,000 at his 1980s peak"
Wow 75% of his readership realized he was a false prophet and abandoned him. Yet 25% remained, drinking his doom from the trough, glug glug glug...
Seems to me, his entire business model seems to be getting people to pay the fee to sign up for his newsletter and other doom-related projects. Tell me Contrarian, were you one of those 25%, or did you sign up once he rose to prominence this time round. We know you have a spotty history checking out the veracity of those you believe in (a, la hal turner)
How long have you been glug glug glugging from Prechter's doom-aid fountain?
Scott/paKa,
I often find real soda (Sprite, Coke) tastes like heavy syrup to me now!
Unfortunately I still drink plenty of diet soda so I have not yet learned to find it gross. I do recall trying a sugary cereal after years of not eating it and wondering how I ever liked it as a kid. I always drank skim milk as far back as I can remember so I've always found anything but skim gross tasting which has confused people who like 2% or higher. I am just like yuck that makes it taste worse. :) Although I still like to use butter go figure.
Robert,
Shoddy argument on the part of Joel Kotkin.
To be sure, the capital region has been growing fat on the rest of America for decades, but its staggering success amid the recession is remarkable. Take unemployment: Although the district itself has relatively high rates, unemployment in Virginia and Maryland--where most government-related workers live--has remained around 7% while the nation's rate approaches 10%.
The issue is not what the current unemployment rate is but how much it has grown during the recession. Since VA and MD had very low unemployment rates pre-recession they would have had to lose MORE jobs than the average state to end up at the national rate of 10%.
BLS Unemployment Stats
Scroll down to the YoY rates. Virginia's unemployment rate increased 2.9% between July 2008 and July 2009 and Maryland's increased 2.9% as well during that time period. That sounds good but look at how many states did better or tied VA/MD:
Alaska (1.6%), Arkansas (2.4%), Colorado (2.9%), Connecticut (2.0%), Iowa (2.4%), Minnesota (2.7%), Mississippi (2.4%), Montana (2.2%), Nebraska (1.6%), New Mexico (2.8%), North Dakota (0.9%), Oklahoma (2.6%), South Dakota (1.9%), Utah (2.6%), Vermont (2.2%).
That's FIFTEEN states doing better than or the same as VA and MD. Add in the states 0.1-0.2% above us Hawaii (3.0%), Kansas (3.1%), Louisiana (3.0%), Maine (3.0%), New Hampshire (3.0%), Pennsylvania (3.1%), and Texas (3.0%) and you get to 22 states about the same or better off than VA and MD.
That means only about half the states are doing meaningfully worse than VA or MD and plenty are doing much better than us during the recession.
As for the rest of the column, he just makes a lot of accusations about the OBama administration but never points to anything specific it has done or will do. You are just trotting out yet another Republican or libertarian (Kotkin's current think tanks and previous jobs appear to all be with conservative or libertarian organizations) who is trying to scare us into thinking Obama is going to nationalize everything. In reality, there are no new federal statutes that have expanded the reach of DOT, EPA, DOE, etc. Those agencies providing grants to state and local gov'ts is nothing new.
From now on I'm not going to respond to any more Robert articles about how big Obama will make the federal gov't unless it's from a non-Republican/conservative/libertarian. I'm tired of responding to the latest nonsense Robert heard on Rush Limbaugh about how big the federal gov't is going to get.
All Obama has proposed so far was a new Consumer Protection Financial Agency. I'm pretty confident if that is created the number of new jobs there will pale in comparison to the amount of new jobs Bush created by establishing the Department of Homeland Security and the increase in employees of all the subagencies in DHS. As well as all the money spent on DOD, defense contractors, etc to fight the Wars in Afghanistan and Iraq.
reecon,
He said that 3 of the new teachers at the school this year had been lawyers who lost their jobs and could not get anything else. They are entering at the bottom of the payscale but are happy to have jobs.
Does your son work at a private school? Or public school desperate for teachers? I know some lawyers considering becoming teachers but usually all the certification roadblocks discourages them since for most of the jobs they would need to get an education degree. I would think it's hard to teach in any of the local school districts (minus DC) without a traditional education degree since there is a lot of demand to teach in this area's suburbs. But I may be wrong.
I attribute this to the surplus of lawyers who have to be kept busy suing people.
Most lawyers do not do medical malpractice lawsuits -- probably fewer than 1% of lawyers sue doctors. It's a niche practice and not something you would just pick up if you were unemployed or not busy with your other work. Just like doctors pick a specialty so too do lawyers.
contrarian: I didn't know that was from Laugh-In. I always thought it was Henry Rollin's spiel from the live "Who's got the 10 1/2?"
"Contrarian said...I have been in agreement with Prechter since the day his position conformed with reality."
Holy crap! That was when his predictions which (to his credit) correctly called the 1980s bull market. So you mean to tell me you, (just like him) has been out of the market since 1987 1988???
And to think, not only have you missed the massive runup between 1988 and now (notwithstanding that latest massive drop ending March 09), you have been paying to be one of those glug glug glugging from his trough of doom for 20 years now???
His kids are out of college now, so you can stop paying their tuition.
It is actually very hard to successfully sue doctors for malpractice in Virginia. It is one of the toughest states for recovering against a physician.
Slate article on the "medical malpractice myth":
http://www.slate.com/id/2145400/
My understanding was that insurers jack up malpractice rates b/c they can--not that malpractice rates were logically linked in any way with actual likelihood of being sued.
Scott-
We love "fizzy" water here too. My daughter will only drink water or "fizzy".
Most places have a little tab on the soda fountain for plain "water" and another tab that just says "soda"--that's just plain fizzy (or soda) water. Its a little lever underneath the regular soda spout.
Forgot to mention, there is something gross about that guy who never plans on paying off his mortgage. Is it the self-satisfied smirk? He is the type to lease a car and transfer credit card balances around to different zero percent cards.
I wonder about the kind of person who would agree to let the NYT write about their finances and basically let the whole world scrutinize their choices. (This guy is defending himself in the comments.) I would be so mortified.
TBW,
Back up the truck. You just posted this earlier today:
Link
Obviously a left-wing hatchet job. But, that's fine. I don't have a problem with that. I think this board would be pretty boring if we excluded any writer with a left or right leaning political bias. It's fine to point it out, if you think it's true. I don't know Joel Kotkin from Santa Clause.
You tripped him up on the unemployment rate. It is relative and DC is not doing as well as North Dakota. Again, I've said a better measure is the total numbers of jobs lost or total area wide income gains or declines is the best when we are talking about housing. Still, North Dakota would probably top that list as well.
In reality, there are no new federal statutes that have expanded the reach of DOT, EPA, DOE, etc. Those agencies providing grants to state and local gov'ts is nothing new.
I've asked this before, but you've never answered: do you consider the $787B stimulus package an expansion of government? Or, because it is short-term, you don't count it.
I know cap and trade is not a statute, but how can you not see this as an expansion of government? And what do you call what's going on at Treasury?
All Obama has proposed so far was a new Consumer Protection Financial Agency.
You certainly didn't mean to use the word "proposed" here, did you? ALL he has proposed? Good greif, read his $3.55T budget. He's proposing all kinds of stuff.
Robert,
I'm not saying you cannot post whatever you want from whoever you want. I am just saying you keep acting like "everyone" is saying Obama will expand the gov't enormously and I'm pointing out that "everyone" seems to be conservatives and libertarians. I think you will find moderates and liberals think he will slightly increase spending or reprioritize certain federal programs over others (and liberals/progressives think he's not expanding it enough.)
I've asked this before, but you've never answered: do you consider the $787B stimulus package an expansion of government? Or, because it is short-term, you don't count it.
From what I understand it is a series of temporary measures. It's possible some measures will become permanent sure. However, I don't see anything in ARRA that expands the size of the federal bureaucracy in Washington, DC.
http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009
What in there is significantly increasing the size of the federal workforce in DC? The tax cuts are not bringing more workers, the health, education, unemployment, food stamp, welfare, infrastructure, energy, HUD expenditures go to the various states/localities.
I think you see $3 billion to the National Science Foundation and think all that money will be spent at HQ in Ballston. That money is being distributed to universities across the country in research grants. Not to hire 1000 new people in Ballston.
I'm sure included in all that money are a few new positions in DC but probably no more than 50. That's not going to bring VA and MD back down to 4% unemployment rates.
You find me some article showing hard data (not speculating!) about how many DC area workers were hired because of ARRA and I'll listen. If you can find me some proof that it's the insane numbers you predict, I'm all ears. I just don't see any agency conducting a hiring binge.
Frankly, if they ever plan to do a hiring binge in the next four years it's a travesty they are not doing it now. Now is the time they will get the highest quality of applicants with the private sector dead. In a few years when the economy is strong again the gov't will not get as many strong applications given the salary gap.
Robert,
Good greif, read his $3.55T budget. He's proposing all kinds of stuff.
So in other words your argument is that his FY 2010 budget (with appropriations bills likely not actually passed until next winter or spring) will result in a lot of new hires -- presumably given the time lag of vacancy announcements, interviews, and other red tape new hires summer 2010.
I agree there will be some new jobs after FY 2010 but as noted above we have perhaps almost 10 months or so before those actually exist and are filled. I also do not think whatever number those are will offset private sector losses meaning we will probably need the FY 2011 and maybe even FY 2012 to pull a little weight in recovering our local economy (and I'm assuming the local private sector recovers as well during that time period).
So once again I see this as a longer process than you do. I don't think you can point to a substantial number of new DC jobs from TARP, AARA, or FY 2009. Maybe if every or almost every month between now and December 2009 we see the local unemployment rate decrease I'll consider it.
Robert,
"I've made the point about California being the housing market to watch wrt the $8k housing incentive extension or expansion. I've been ridiculed for that, but seems your article helps my case."
Hey, that was my idea! Actually who knows, we may have come to it independently.
The only thing about CA, is that most of the market there is still so expensive that the $8k doesn't do a whole lot. It's bifurcating drastically, such that the truly affordable stuff is moving (and foreclosing) like hotcakes, but the more expensive markets are their own beast. If CA truly had that much influence then we'd definitely get the $15k for everybody. However, I think CA will have to do that on its own just like it did the $10k for new construction. Too bad they're bankrupt.
Anyone who's 64 and owns a house worth more than 1.2 million probably has a trust set up.
The beneficiaries of the trust only get money out of it once the debts of the trust are paid off. What I don't know is if one can hold the house in a trust without holding other assets there or having the trust be the beneficiary of other retirement accounts, thereby separating the house debts from the other assets. What I do know is that the mortgage company is informed of how the title is held.
Debts of the trust are debts of the trust not of the beneficiaries.
The maximum time for which you can pay a non-fully amortizing amount on an option-ARM is usually no longer than 10 years. And often if it's 10 years, there's a balloon payment to be made before starting the normal amoritization. But at least it's not contrarion's friend with the 30 year balloon loan...
Robert,
(re VA monetizing the $8k into a 29 year 2nd)
Indeed. I was surprised by both the method of monetization and the generosity of the terms. I couldn't find what the income limit is, but it may be underneath the full $150k for couples (I would hope....). Also a 5.25% loan for 95% LTV was amazingly low.
It's a mini-bubble, same conditions as the last bubble just with the government as the credit-pusher rather than sub-prime and Alt-A lenders. At least this one should be "contained" to the lowest tier. Not that low-income folks need to deal with the fallout from another bubble bursting... Sigh.
Tiredbubblewatcher and Meshell: My son teaches at Osbourn Park High School in Manassas. George Mason has a program for people who want to switch careers and become teachers. It was intended for people leaving the military at a relatively young age who want to become teachers but it has grown. These 3 lawyers and other teachers have come through that program. It takes about 18 months to get a teaching certification. Bob Smith who had been the superintendent of Arlington schools is now involved in that program at George Mason and is a big proponent of getting people with other experience into high schools, in particular. I am 73 and my obstetrics and gynecology practice was in DC where you have a lot of high risk pregnancies from young women or those in bad health because of drugs, diabetes and obesity. Of course, I know that malpractice is a small subset of what lawyers do, but they do prey on people with high risk deliveries and the DC legal system is very sympathetic to them because if there are no awards to the mother, the cost of care will fall on the city. If you talk to any obstetrician in DC, you will find they have the same high rate of malpractice insurance. The insurance companies put DC in a separate risk pool and that is why the rates are so high. My solution was to retire at 66 and do volunteer work.
Oh, Reecon, yes, I agree, DC is a totally different scene than VA for med mal.
The whole birthing system in our country is so screwed up, its ridiculous. Why should OBs be the fallback pockets for a lifetime of health expenses for a sick child? That should be society's burden. (Of course, I also think that OBs should focus on high-risk patients and leave the low-risk moms and babies to midwives, but that's a whole different topic :) .
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