Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Saturday, April 29, 2006

Housing Bubble = Pyramid Scheme ... Again

Ben over at the Housing Bubble Blog had a snippet from the NY Times:

"The New York Times has this on public awareness."

“A pyramid scheme is a foolproof way to make money, until it isn’t. What is the breaking point? Probably about the time some spoilsport whispers ‘pyramid scheme,’ and there’s a mad dash for the exits.”

“Echoes of housing prices? Not exactly. Still, an almost pyramid-like frenzy has engulfed some areas in recent years, with buyers convinced that within months they will find someone who will pay even more for them.”

“If there are whispers of a ‘housing bubble’..most people still haven’t heard them. As recently as a year ago, Gallup (found) just 23 percent of Americans were even moderately familiar with the term. In the latest survey, that jumped to 40 percent.”

“24 percent now say that a bubble is likely within a year..only 7 percent expect it in their own backyard.”

Below is an encore of a post I made last month regarding how the housing bubble is just that... a pyramid scheme. The NY Times wouldn't really call me a "spoilsport" now would they?

Also, perhaps the New York Times might be interested in a poll that was taken recently: (also posted on this blog and at Ben's place)

"And from a survey of lenders in the US. “Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States - and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter’s Phoenix Management ‘Lending Climate in America’ Survey.”

“A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country.

‘In the minds of lenders, the housing bubble has moved from ‘Loch Ness monster’ myth status to an economic reality that could have a significant, negative impact on the lives of many Americans,’ said Michael E. Jacoby.”

“‘A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent, and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent.”

(Reprint of past story Called: 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 4/29/2006 07:21:00 PM , Anonymous tom stone said...

athena,now we have 50 year mortgages!!!! MUCH more flexibility.WHEEEEEEE!we're all RICH...a chicken in every pot and a hummer with a chinese made dreamcatcher in EVERY garage.(so the repo man can't get it)SWEET,SWEET,SWEET baby lereah,THANK YOU!

At 4/29/2006 07:28:00 PM , Blogger Athena said...

Tom... are we going to live long enough to pay off a 50 yr. mortgage?

Seriously, is there an age cap on who can take out a 50 yr. mortgage?

I mean, wouldn't you think there would be?

Also, when people are accumulating as much debt as is all the rage now... how soon before the heart attacks are on the rise?

At 4/29/2006 07:38:00 PM , Blogger Out at the peak said...

At Japan's peak, they introduced longer term mortgages. History is likely repeating.

At 4/29/2006 07:46:00 PM , Blogger Out at the peak said...

Banks lend out reverse mortgages so that they can take the property upon the owners' death. The LTV is usually low because of the costs associated with a trustee sale/REO.

They could justify 50 year loans if they believe that the LTV after the owners' death will be favorable.

At 4/30/2006 04:27:00 PM , Anonymous tom stone said...

no athena there is no age cap,it soothes those who fear i/o loans,of course most 50 year loans are variable,or fixed to variable...i think the spiel is afford more home and not a risky i/o loan...these loans are for stupid/desperate people only so there is a large market.

At 4/30/2006 08:44:00 PM , Blogger Athena said...

eek... so is there a provision that upon the owner's death the house reverts to the bank? Or is the loan assumable? Do the banks ever expect these loans to get paid off? Or is it simply an affordability product?

At 5/01/2006 09:39:00 AM , Anonymous tom stone said...

it is simply an affordability product,and of course quite profitable for the bank,run the numbers and it looks remarkably like an i/o loan for the first 20 years,no it is not is a sucker loan,pure and simple,although if fixed for the first 10 years there can be less risk of default.can be.depending.good luck.

At 5/01/2006 10:10:00 AM , Blogger Athena said...

wow... sounds like the only people who should be in that loan product is someone who is planning on staying in their home for a long time... or banking on a market with big equity jumps since they will have no equity from payments.


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