Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Friday, March 10, 2006

Home Debtor Mantra... "Its on the house!"

True Story on SFGate

"Last year, homeowners extracted some $600 billion in equity from their homes through refinancing and equity lines."

"But those are mere numbers. That I too have succumbed to this mortgage mania shows just how far it has seeped into the American psyche. I always considered myself a fiscal conservative. Credit cards get paid off to zero each month. Can't afford it? Don't buy it.
How did I change? "

"A decade ago, I remember my mother telling me that after nearly 20 years of residing in their home, which my father had designed and built for about $75,000, my parents had a mortgage of over $500,000."

"What happened?" I asked my mother disapprovingly.
She waved my concerns aside. "This house is a bank," she said. "We'll never pay it off."
A bank?

"After that, I could never think about our lives in quite the same light. My parents were self-made. They were from poor, working-class families with five and eight siblings, and had put themselves through college, worked hard, and never got a dime from any parent or grandparent, dead or alive."

"But suddenly I realized that their college educations and hard work might not have been enough to cover certain ... luxuries."

"Traditionally, money "taken out of one's house" has been used to finance home-renovation projects. But according to an informal survey, more and more people are approaching their homes as their own private bank, with the equity line or refinancing serving myriad purposes."

"Maggie Vaughn of San Francisco used her equity line to get herself off the credit card merry-go-round by using the money to pay them off all at once."

"Marcus Pun of Oakland is considering getting a new equity line to pay off his credit card debt (used to foot the bill for his daughter's private school tuition), to pay for living expenses during a slowdown in work, to pay for remodeling his house to rent or resell it, to attend technical classes and to take his first real vacation in 14 years."

"Lynn Ruth Miller, who bought her Pacifica home for $97,000 in 1985, is living on the equity from her house and investing part of that money to get earned income."

"I could not survive if I didn't do that because my fixed income is $720-plus a month," she wrote. "Because of the rise in property values I am living very comfortably and could not possibly pay my bills otherwise."

"Some even factor the monthly payments of the equity line into the equation. My mortgage broker, Michael Simmons, once had a client who took out a $500,000 equity line to pay for her elderly mother's home care and the monthly payments of the equity line itself."

"Geoff Caldwell of San Francisco, used an equity line to avoid expensive dormitory fees, by buying a house for his daughter to live in during college."

Edward Malouf of Novato funded a condo for his son. "We paid all cash for it, and our son made every payment, as agreed," he explained. "Because of this, we allowed him to keep the appreciation when he sold the condo, so he could buy a larger, three-bedroom one."

"Equity lines and second mortgages haven't always played such an integral role in American life. In the old days, taking out a second mortgage or an equity line had a certain stigma attached.
"It meant you were the sort of person who couldn't pay your bills -- that you were living above your means," Simmons explained. But over the past 20 years, he's seen things change."

No, actually it still means that you are the kind of person who is living above your means. The difference is you may not be the kind of person who cannot pay your bills... but if you live like this... it likely means you are the kind of person who feels entitled to have someone ELSE to pay your bills. You add them to your tab and they are handed to the next fool in your debt, debt, who's got the debt relay game... and you justify it.

Kind of like a reverse pyramid scheme now that I think about it. Instead of the person at the top making all the money and the people at the bottom doing all the work... the people at the top of the homedebtor pyramid scheme are spending all the money... and the last fool on the mortgage train gets the biggest pile of debt disguised as a market priced house. It is NOT market priced. It is debt priced.

"Indeed, treating the home as a bank has grown naturally out of a sea change in our attitudes about debt."

Right... the attitude now is "I can spend all I want and get someone else to be responsible for the debt! Hey... buy that Escalade, buy that Hummer, Let's go to Europe. Its on the house!!! "

"Now, we've become gamblers with our homes. With the rise of equity lines, 40-year mortgages, second-home loans and constant refinancing, it's obvious homeowners are counting on real estate prices continuing to rise."

Now what happens to these people when they try to unload their pile of debt with a roof on a bigger fool when the fools catch on and refuse to play the debt hand off?

think about this for a second.

These posers finance the lifestyle they have become accustomed to by putting it all on the house... and big fool buyer comes along and pays for it. When the fools catch on that the house price isn't actually a reflection of its value in the market, but merely a reflection of the spending habits of the previous owner... how long before THAT reality repulses the buyer? What happens to the overspending fools living under a mountain of debt they never intend to pay off then?

"Last year, the Fed raised interest rates 13 times, and my own equity line has jumped almost two points in six months.

As the short-term interest rates rise, people may begin to be less cavalier about home equity funny money."

Oh and just think about how happy the new owners of your debt with a roof will be when they are burdened with the payments for the lifestyle you enjoyed. Do you think there will be a backlash against the whole darn industry then? You think buyers will keep lining up to take your debt hand off when the reality hits them?

"Ten years ago I was horrified by my parent's use of our family home as a source of cash, but now I see things differently. Would it have been better to have paid off the house and lived mortgage free? Maybe. But going that route would surely have meant curtailing their choices earlier -- never giving their kids college tuition, or working extremely long hours, or having to get corporate jobs instead of working for themselves.

In hindsight, treating our house like a bank worked wonders."

Frightening. Truly Frightening. Welcome to the Land of Hubris and Entitlement.


At 3/10/2006 04:05:00 PM , Blogger marin_explorer said...

When the fools catch on that the house price isn't actually a reflection of its value in the market, but merely a reflection of the spending habits of the previous long before THAT reality repulses the buyer? What happens to the overspending fools living under a mountain of debt they never intend to pay off then?

That's an interesting way to look at current home appreciation--not just driven by anticipation to "flip" with high returns, but a way to spend those "equity" gains here and now. In a way, homeowners are selling an account that's believed to provide a quickly growing supply of money to the next "house consumer". And yes: it could get very ugly for some homedebtors.

At 3/10/2006 04:17:00 PM , Blogger Athena said...

Its like selling someone your maxed out credit card!

Hi.. I have reached my credit limit... want to buy my credit card?

only they are doing it with a house. Credit cards don't have the kind of limits that come with HELOCs and Refi mortgages.

This really IS what is happening. The home price gains were ill gotten indeed... and the buyer hasn't simply been making an investment in a house... they are with open arms welcoming someone ELSE's debt and banking that they can add to the bill and before handing it off to another sucker.

sucker's game. This IS not investment... this is a debtor's pyramid scheme.

At 3/10/2006 04:47:00 PM , Blogger Marinite said...

Great post athena. This is a unique way to look at things and something that should be made publically known. And it shows how short-sighted and hedonistic our society has become. When you remove fiscal inhibitory processes gluttony is not too far behind.

At 3/10/2006 05:06:00 PM , Blogger moonvalley said...

interesting thing I heard today about these inflated home prices and crazy loans. We were having lunch with a couple of frineds who'd driven up from SF for a visit. It seems they were trying to buy a new slightly larger house last year, after sellling their house.
They made an offer on a 1.2 million dollar house, 70 % down in cash. They were outbid by a couple who put no money down but offered the seller 50k more. Evidently they used a IO loan..either way, they fronted no money. Our friends were very frustrated, but hey, give these bozos another year, they may get that house yet.

At 3/10/2006 05:16:00 PM , Blogger Athena said...

It used to be that people who ran up so much debt and never had any intention of paying it off- filed for bankruptcy and their credit score was affected for years...

now they run up as much as they possibly can and simply slap a FOR SALE sign on their debtbox and they MAKE money on it.

And there really are idiots out there shopping for someone else's debt.


That is like a cat scratching through another cat's litter box thinking there is something good to find buried there.

I want to get a bull horn and yell: Dear big fat fool... you aren't buying a house. You aren't making an investment. You are buying that guy who handed you the keys and a mortgage a hummer, a boat, an escalade, you put their kids through college, and bought their wife an upgraded piece of bling.

this hog like sense of entitlement is the only reason real estate has gone up in such horrifying numbers... it isn't a reflection of prosperity of a community. It is not a reflection of a booming economy, or job growth, or anything fundamental to the economy... it is nothing but slapping a price on the lifestyle your neighbor mortgaged himself into... I think the big fat fools should start looking at it for what it is...

At 3/11/2006 10:10:00 AM , Blogger Bubbletracker said...

This is an absolutely brilliant post. Reverse pyramid is a fresh, new way to look at what's going on, and why. From a conceptual standpoint, this is just fabulous.


At 3/11/2006 10:24:00 AM , Blogger moonvalley said...

Its like selling someone your maxed out credit card!
Hi.. I have reached my credit limit... want to buy my credit card?
only they are doing it with a house.

Yes, I should have mentioned earlier that the idea of buying someones' maxed out credit card is the perfect analogy

At 3/11/2006 01:18:00 PM , Blogger Athena said...

Right... if your neighbor offered you the prime opportunity to get into a great investment and buy his maxed out credit card... so that you too in time after making payments for a while will be able to enjoy using would KNOW this guy is a flipping parasite shister.

But he spends his house up to the limit, and wants you the lucky bozo to take on the price of his lifestyle and it is an investment? You can't lose? You mean HE didn't lose. He put everything he owns on the house... packed up his flat screen, drove off in his escalade that he now owns free and clear... and YOU the lucky bozo buyer own the payments for all his bling. Classic.

Its too bad that being stupid isn't physically painful.

At 3/11/2006 05:19:00 PM , Anonymous Gary Anderson said...

It is a fact that I had a large family and raised 4 kids. It was a very difficult thing to do. One is an MBA and is smart enough not to buy right now. What happened to me is that I did finance things through my house. I was always sent loan offers, and the really dishonest thing was that the appraisers were cheating. I should have maxed out loans way before I did. I realized that I needed to sell my house to move since my wife had San Joaquin Valley fever, a spore disease. When I went to sell I found out what the real value of the house was, and I was upside down! It is one thing to take a loan offer, but it is quite another to realize that my loan is being approved because the appraiser is a frauder. That is making things much worse. Anyway, I rent now and have a better lifestyle thanI had before, and my kids are adults, woo hoo!!!

At 3/11/2006 06:36:00 PM , Blogger Athena said...

Good for you Gary for having it better now! ...and not to mention raising a kid with critical thinking skills.

Just think... we have more than a mere pocketful of people who are about to see the real value of their debt boxes.

The appraiser issue is a huge one. I know personally several people who went into the appraisal industry in the last handful of years... they say themselves that it is an old boy network of epic proportions complete with backroom price fixing that is real hard to prove... all in an effort to keep prices inflated, patting backs and knowing with a wink and a smile the numbers they need to hit. Just like the real estate mantra, each new appraisal is supposed to go up...

For how long is what I want to know? For how long is it reasonable to hold that opinion?

At 3/11/2006 07:58:00 PM , Blogger Rainman18 said...

KBTC interrupts this blog to bring you the following educational program.

Howdy boys and girls! Guess who’s back?! It’s me! Your old pal Bubbles the Clown with another fun filled show!

On today’s episode we’re gonna talk about The Mortgage Lenders! Do you know who The Mortgage Lenders are? You got it! They’re the folks who loaned over a half million dollars to hairdressers making $20,000 a year so they could buy one bedroom condos. Yikes! And they work at such fun sounding places too, like ‘The Lending Tree’. Do you know what A Lending Tree is kids? That’s right! That’s the tree where all your Mommies and Daddies are gonna hang from after they realize that they’re ruined! Oops! And The Mortgage Lenders are the wacky bunch that gave them the rope to do it. Silly Lenders! Would you like to hear a song Bubbles wrote about The Mortgage Lenders? Yea! Okay here we go! Sing along kids!

“Ya Burn and Surely”

Give us any chance, we’ll take it.
Can’t afford a loan? We’ll fake it.
Just wait until your rate balloons.
Screwin’ ya our way.

Nice to see you, welcome back now!
Home loans are re-fi crack now.
Your many purchase dreams come true.
Screwin’ ya our way.

That house that you can’t buy.
Did you hear the word impossible?
Our crime? There’s no stopping us!
We’re gonna do it!

On the mark, in pen, just sign now.
Grab your ankles, soon you’ll know how.
We’re gonna hear your screams next June.
You’re gonna lose it! Someday, yes someday.
We know it seems real cruel.
Can’t refuse it, dumb play, you dumb prey.
Lent to extremes, you fool…
You see, you’re screwed!

Did you like that song boys and girls? Hurray! What’s that? What does ‘grab your ankles’ mean? Well kids, that’s what adults do when something really, really bad is about to happen! It reminds Bubbles of the time when the zany benefit show he did at the state prison went horribly wrong. Who could have guessed the inmates would get so mad about a gag water-squirting flower? Yikes! And you thought Bubbles walked funny ‘cuz of these big floppy shoes!

Okay kids, that’s all the fun we have time for today! Now put away that sad face! Bubbles will see you all next time with another fun filled show! Until then remember: Bubbles the Clown is FUN! Housing bubbles are icky!

A rainman18production 2006 copyright

At 3/11/2006 08:21:00 PM , Blogger Marinite said...

Well THAT was different.

At 3/11/2006 08:32:00 PM , Blogger Athena said...

bahahaha... rainman thank you! I had just worked up a post highlighting your creativity when I saw this! :-)


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