Home Loan Defaults Skyrocketing in San Diego County

From today's The Union-Tribune comes an article titled Home loan defaults skyrocket in county. The number of actual foreclosures in February 2007 is the highest since 1996, although San Diego county's default rate is not among the highest in the state. Out of California's 58 counties, San Diego county ranks 17th among the states, with San Joaquin county holding the dubious rank of #1.

The DataQuick figures, assembled by ZIP code, show high concentrations of distressed properties in newly built South County communities such as Otay Ranch and among condo conversion complexes countywide. In both cases, buyers stretched their finances to purchase a home and then saw values fall, making it impossible for them refinance into more affordable loans.

The area with the highest local default rate this year was San Ysidro ZIP code 92173, with a rate of 10.79 per 1,000 homes. Default activity for January and February ranked San Ysidro 15th among 1,100 ZIP codes statewide having 1,000 or more homes.

This chart shows the number of default notices and foreclosures over the past 12 years or so.

The Widening Income Gap

Anytime I read a statistic that says, "Metric X hasn't been this (largesmallhighlowetc.) since the years before the Great Depression," I start worrying. For example, the average savings rate - which is negative, by the way - is at its lowest levels since the Great Depression. Similarly, a new study reports that the incomes of the top 1% and of the top 10% of Americans are receiving their largest shares of the GDP since 1928.

From The New York Times's article Income Gap Is Widening, Data Shows:

Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows. The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

...

The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.
The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

Now, I am a capitalist and am not pro-wealth distribution, but I do think that a society has trouble functioning justly (and efficiently) if income distribution is too skewed. Part of the reason capitalism works is because those in lower socioeconomic positions honestly believe that they can better their position through hard work, industry, and ingenuity. But if the wealth gap grows too big, I worry that those on the lower and middle rungs will adopt a, "Screw it" mentality, figuring either that their are stuck in their position in life (and, then, why bust your butt?) or that the only way to success is through fame, the lottery, or some other flash in the pan that is based primarily on luck and does not encourage the aforementioned qualities.

Let me close with a completely unrelated comment: I have recently discovered - and highly recommend - Calculated Risk, which is an interesting and well-written blog from mortgage industry insiders. Of particular interest are entries dissecting the math and economics behind common mortgage concepts, like PMI, Neg-Am Loans, and mortgage servicing.

Subprime Mortgage Market in Flames

Have I got a good deal for you - a home mortgage loan fixed at 1%! Yes, that's right, fixed at 1%. And the best part is, you can pay what you want each month. Want to put more down one month? Go ahead! Want to pay less? That's OK, too. Remember, just because you're not paying down the principle, doesn't mean the house is not increasing in value!

Sound familiar? This is the sort of filth that's been spewing out of the subprime mortgage industry for the past several years. It's particularly bad on AM radio.

There are only so many loans that can be written for "credit challenged" individuals buying obscenely overpriced real estate with little to nothing down before the house of cards collapses. We're starting to see that collapse in the subprime market. BusinessWeek has a good article published recently titled, Why Subprime Lenders Are In Trouble, which comes on the heels of many mortgage companies reporting troubles within their subprime departments.

The reasons for the subprime mortgage market's troubles are not surprising. As the housing boom grew in the first third of the decade, mortgage business grew apace. But as rates started climbing, sales started declining, and prices grew stagnant, the margins thinned and the growth during the boom times became overgrowth dragging down the bottom line. Also, these companies ditched traditional risk evaluations. Why not dole out a NINA 100% LTV loan to a credit risk? After all, it's about keeping volume up and closing deals, we'll worry about whether the application's stated income really is legit later. Such head in the sand mentality works when the market is booming, but quickly crumbles once the boom turns into bust.

The big question is how much of this malaise will seep into the prime mortgage market. Being an RE bear, I would be surprised if the prime market isn't hit hard. Too many loans were given out to buy "investment" properties, with little to no down and little to no income or asset verification. The rest of this decade will be an interesting one for the RE market. How far will prices slip? How long before there's any kind of sustainable rebound in sales or price? How will counties and cities deal with budgets that fall short because of the decline in property and RE-related taxes? How many construction workers, mortgage brokers, and RE agents will be looking for new jobs? Interesting times!

I Need My Casey Serin Fix

I admit it, I'm a Casey Serin junkie. I've been reading his blog, IAmFacingForeclosure.com religiously, amazed at the train wreck that is Casey's finances and perplexed by his thought processes, rationale, and "business acumen."

Sadly, when going to get my fix today, visiting his site resulted in an auto-redirect to http://gator25.hostgator.com/suspended.page/, which displayed the message:

This Account Has Been Suspended Please contact the billing/support department as soon as possible.


I naturally figured it was a billing issue, seeing as Casey is admittedly $2.2 million in debt. So I contacted support to see what the bill was, considering to pony up the $$$ to get the site back online. (That's how bad this addiction of mine is. Scary.) Anywho, they said it was not a billing issue, but an "abuse" issue. My guess is that a "Casey hater" has launched some sort of Denial of Service attack on the site, if that's what they mean by abuse. Or maybe "abuse" means that Casey has grotesquely overstepped his bandwidth limits. I dunno, I just hope Casey's site is back online sooner than later!!

More on the Mortgage Deduction Myth

A short while back I wrote a blog entry on the Mortgage Deduction Myth, which is commonly noted as a benefit of ownership vs. renting. Alert reader Brian Adair wrote in with some great feedback:

"You wrote about someone who deducts $6,000 from their taxes each year because that's what they pay in mortgage interest.

I think we're on the same page, but I want to point out that you've forgotten to mention that, if you don't have mortgage interest and don't have enough other tax deductible expense, you still get a standard deduction - about $5,300 if you're single, about $10,600 if you're married.

So that $6,000 in mortgage interest replaces the standard deduction you would've gotten anyway. In effect, you only get to deduct an extra $700 ($6,000 - $5,300) if you're single. If you're married, you're better off taking the standard deduction ($10,600 > $6,000) and the mortgage interest saves you nothing!

Now, you'll probably have other deductions like charitable donations and state income tax that you can deduct from your federal taxes, but my point is that not all that mortgage interest is actually being deducted - only the mortgage interest that is in excess of your standard deduction.

It makes the whole mortgage deduction argument even more ridiculous."

Good point, Brian, thanks for sharing.

A Video That Sums Up the Interest Only Conundrum

It's a shame the majority of people think short term rather than long term. The best path to success is to be able to make a sound long-term plan and execute the steps needed to reach it.

The Mortgage Deduction Myth

Picture this: you and I have a mutual friend Tito, who you happen to owe $100. I approach you and offer the following transaction: "I have talked to Tito, to whom you owe $100. If you give me $100, Tito has agreed that he will forgive 35% of your debt! That means you'll only owe Tito $65!"

Would you take this "deal?" It's clear that it's in no one's interest but mine. I get $100. Tito only gets $65. And you? You are now in debt $165 instead of just $100! Yet that's what the mortgage deducation is, in a nutshell. Pay a bank $X dollars in interest and the government will forgive a fraction of that as your IRS debt.

Here's a concrete example: Joe has a $100,000 house with a 6% interest mortgage, making his annual mortgage payment $6,000. (This is rough estimates, since mortgages front-load the interest, but the point still is valid.) Moreover, Joe earns $50,000 per year at his job. Now, Joe faithfully sends his bank $500 a month of interest (plus some principal). When filling out his taxes at the end of the year, Joe gets to deduct $6,000 from his income, meaning he pays taxes on $44,000 (instead of $50,000). Imagine Joe's in the 28% tax bracket - with his tax deducation, Joe would (very roughly) pay $12,320 in taxes. If he didn't have the tax deduction, Joe would have had to pay $14,000 in taxes. Joe saved $1,680!!

But just how did Joe save that tax money? Let's break down the two transactions:

	Amount Paid to Bank	Amount Paid to IRS	Total
With mortgage	$6,000	$12,320	$18,320
With no mortgage	$0	$14,000	$14,000

With a mortgage, Joe's out of pocket expenses for the year were over $18,000. Without a mortgage, Joe was out just $14,000. Doesn't this seem like common sense? Yet many people incorrectly think of a mortgage as some savvy tax move that saves them untold thousands each year. In personal finance, the words "debt" (a mortgage) and "smart move" never, ever go together.

Of course most folks can't afford to buy a house outright, especially with today's overinflated prices. If you have to take out a mortgage, get the shortest term mortgage you can afford so as to reduce the total time until payoff and reduce the total amount of interest paid. Furthermore, lock into a fixed rate instrument (as interest rates have no where to go but up in the forseeable future) and put down as large a down payment as you can.

Don't get flamboozled by the mortgage deduction myth. You are better off having as small a mortgage with as short a payoff time as possible, regardless of what financial experts (mostly lenders, bankers, and realtors) will tell you.

An Upside to this Bubble Madness

My wife and I live in Pacific Beach, a beach community in San Diego that has (over the past 20 years or so) been an attractive locale for 20 somethings. The downside of living in such a community is that the main commerce stretch is primarily bars, tatoo parlors, and clothing stores, and there's a bit of noise, especially on the weekends and even moreso in the summer months. These "quality of life" things are no big deal when you're single and 24, but as you get older, settle down, plan on starting a family, you really question rather you want to raise kids in such a place.

There are two demographics that live in PB, for the most part - 20 somethings and elderly folks (60 years old+, people who, I imagine raised their families here back when PB was more of a family-oriented community). I saw a census data chart of PB from 2000 a couple years back that showed the population by age. There was a very small number of people aged 0-20, a huge spike of people from 20-30, virtually no one from 30-50, then a more subdued spike from 50-60 with a long tail from 60 onwards. Most people, as the data showed, move here in their 20s, have a blast, get married, want to start a family, and move out to the burbs or to La Jolla or to Bay Park or somewhere else, where the schools are better, there's fewer nightclubs, and less noise.

Since both my wife and I really like this community (save for those few "quality of life" issues I noted before), we've always pined for PB to grow with us. For those 20 somethings who used to move out, to stay with their young families. To turn this town, over the next 10-20 years, from one that caters to 20 somethings to one that caters to young families. To improve the schools. To make it quieter at night, to replace some of the bars and tatoo parlors with family-oriented shops - TCBYs and education toy stores, perhaps. :-)

But to achieve such change, you need people who are willing to be trailblazers, who are willing to stick it out in PB and affect change. We often worried that there would never be such a community of pioneers, or never enough, to affect change. However, we're starting to see more strollers out and about. More couples walking around with the wife pregnant. The only question is, Will they stay or will they flee to the burbs?

I'm leaning toward them staying, and not because of choice, but because of circumstance, because of the Bubble. Yes, back in 2000 when I first moved to PB, it seemed that most every 20 something rented (there aren't many standard apartment complexes here, per se, but many, many condos - it's a beach community, after all). That makes sense, what 23 year old buys a house? But with the real estate bubble, with easy credit, with everyone telling the 20 somethings out there, "Buy now or be priced out forever!" many bought. Being young and foolish and without enough life experience or money, many bought with zero down. Or with Interest Only Loans.

So now we have a bunch of homeowners. If the Bubble were still "on" they could just sell and move to the burbs, right? And that's likely what they'd do... IF the Bubble were still on. But it's no longer on. Inventory and DOM are skyrocketing; sales are plummeting. That $400,000 condo you bought two years ago when you got married is not moving for over $425,000. Whoops. So they stay, because they don't want to sell for a loss and, if they do, they can't afford to buy a place in the burbs. So just sit pat. Hope the adjustable mortgage doesn't go too high, and raise your family here. And while you're here, let's turn this town into a more family-friendly town.

Anecdotally, this transformation is starting to happen - I wonder if the bubble is helping this along as much as I'm assuming, or if that's just a pipe dream. Each time I walk the dog I see one or two strollers, whereas two years ago I would hardly see any. Right now there are two different babies crying that I can hear from my office. Two years ago, the couples in my complex or the neighboring one moved out before their babies were born, before they started their families. (In fact, I bought our condo from a couple where the wife was 6 months pregnant.)

This Bubble has and will cause a lot of pain, so I'm all for looking for any silver lining available... :-)

A Quote for the Day

Part of what has fueled this housing bubble has been the allure of "easy money" by speculators hoping to flip or buy, hold, then sell properties to cash in on the appreciation. While I have no qualms about capitalism, or buying an asset at one price and selling it at a higher one, too often the reasons one pursues real estate is the dream of "passive income." To make money while you sleep, to earn your keep doing nothing, so to speak. And it's to those "investors" this quote is dedicated to:

The darkest hour of a man's life is when he sits down to plan how to get money without earning it.
-- Horace Greeley

People with the "passive income" mentality are simply trying to get rich quick without any work, sweat, or effort. And those are the people who put in the least amount of research, time, or forethought into their endeavors. And they will be the ones who get squashed first and most furiously as the housing bubble unravels. Those who seek easy riches usually find poverty instead.

Economics Roundtable: The California Economy -- Housing Boom or Bubble?

First off, sorry for the looooooooooooong absence in posting, work has been incredibly time consuming and, unfortunately, I don't see much of a letup until mid-summer at the earliest. But enough bellyaching, what I'd rather share is a very interesting (and free!) video you can watch over at Google Video - Economics Roundtable: The California Economy -- Housing Boom or Bubble?

The video is a talk presented by Christopher Thornburg, a senior economist at the UCLA Anderson School of Management. Christopher is a great presenter and provides an entertaining and informative one hour talk on the state of the economy and the housing bubble, especially as it related to California. The talk is packed full of alarming statistics and charts, showing how California's real estate market has defied rational logic.

Christopher also looks at the changing landscape in California's workforce. Since the recession in the early 90s, California has had a net loss of managerial and "decision maker"-type jobs. The employment sectors that have enjoyed the largest gains have been, in this order:

1. Construction
2. Financial services (mortgage brokers, banks, creditors, etc.)
3. Retail

It's a workforce that's ready to build your house, help you finance it, and help you fill it with assorted crap. Problem is, what's going to happen to these jobs as the housing bubble shakes out? And what effect will rising unemployment have on an already perilous housing market? (Historically, housing prices track employment levels much more closely than any other metric.)

Christopher also dispels the myth that housing is an investment. While it has been a great investment in the past decade due to this irrational runup in real estate, historically, when adjusting for inflation, a house doesn't exhibit any appreciation. It's sole economic benefit is the fact that you have a place to live. In this vein, Christopher showed a chart that showed the average national housing price since the 1960s, adjusted for inflation. It's ranged between $90,000 and $110,000 in a fairly cyclic pattern over the years until 2000. Today the average national housing price exceeds $160,000. Eep.

Also examined is the ratio of houses to families, which is at a historical all-time high (if I recall correctly, there's 2.6 houses per family in the US). Clearly, there's no housing shortage. Just look at the San Diego skyline and its mass of empty condo highrises for further proof. Near the end of the talk, Christopher shares his housing bubble prediction - at least another year of stagnant prices and then... who knows? Historically, housing price declines follow after a year of the increase in inventory and decrease in sales volume... patterns we've been seeing for several months now.

For more great commentary from Christopher Thornburg, see this interview: Housing Boom or Bubble?, from August 2005.

It's Here

I apologize for not blogging in quite some time (since late January), but work has been very busy and this blog is more of a hobby and something that, unfortunately, comes pretty low on the list of priorities. The lack of postings have not been for want of material - the bubble is clearly starting to "hiss" all around us. Inventory around the country is at the highest levels it's been at in years (if not ever). San Diego fast approaching an all-time inventory record.

Yet even with swelling inventory prices are still staying a bit firm.... for now. The media's really started picking up on the bubble talk over the past couple of months, interest rates are poised to rise, and the market is flooded with supply. It's only a matter of time before those ARMs reset, before sellers become more motivated, before lending standards tighten up to a point where it takes a little bit more than a fictional, no-doc income to land a half million dollar loan.

The only downside of an illiquid bubble is that it takes so long to play out. But that's probably good, because I don't have the time currently to track it as closely as I like. But come this summer my schedule should lighten up a bit... until then it will probably be sporadic postings at best.

In closing I'm still confident that prices will eventually retreat significantly (25%? 35%?) between now and the end of the decade. I'm hoping it happens sooner than later, but I wouldn't be surprised if we're looking at a long, slow, and painful decline. Perhaps not a decline in absolute dollars, but if housing holds steady (or declines slightly) for several years (a la Japan), the real value decreases as inflation slowly eats away at the sluggish price. But this is how it should be - why should housing "value" double every two to three years? What constitutes that value? Just speculation and cheap, cheap money. But both of those factors are quickly dying so we should hopefully see a return to normalcy that doesn't undercut or do any more damage to the economy of peoples' livelihoods than is needed to right this ship.

Cold Calls - Things MUST Be Getting Bad Out There

More than two years ago I met some colleagues for lunch at a deli up in North County. I remember that day because, while we were ordering lunch we exchanged business cards. And there, on the counter, was a fishbowl with a note from Prudential saying that we could "win a free lunch" if our business card was selected from the fishbowl in some sort of drawing. Usually I never give out my information in that manner, because I know there's no raffle. Instead, the realtors will simply pull out a handful of business cards, find ones they like, call you and essentially "treat" you and some friends to lunch, during which they'll try to sell you their services.

However, I remember this event so clearly because the colleagues I met threw theirs in and encouraged me to do the same, so I threw mine in to, later lamenting it because I didn't want to get a call from a realtor trying to sell me. (I already get enough telemarketers pestering me throughout the day!) Of course, this event took place a couple years back when we were at the height of the real estate bubble, so, not surprisingly, I never did get a call from this Prudential realtor because business must have been so good he didn't need to stoop to cold calls.

Well, things have changed, because yesterday I got a call from a realtor from Prudential who was excited to inform me that my business card had been drawn from a contest at the same deli I had put my business card in two years ago! (That was, actually, the only time I had visited that deli, seeing as I am rarely north of San Diego.) Yes, things must be so slow now that this poor realtor's best lead is to cold call a guy whose business card was left two years ago. If that doesn't hammer home the current housing bubble state here in San Diego, I don't know what does.

North County Times Article on Housing Bubble Blogs

Over at the North County Times newspaper (a newspaper serving northern San Diego county), journalist Andrew Kleske has a piece deriding the myriad of blogs out there that have been discussing the housing bubble: Housing Bubbles and the Websites that Love Them. Upon hearing about this article at The Housing Bubble Blog, I was expecting a good discussion on blogs, their role in reporting news since big media appears to be dropping the ball, and the different opinions and zeal among bloggers. (After all, for every housing bubble doom and gloom blog, there's a blog by a real estate "investor" who's more than happy to brag about his returns.) Sadly this article was a disappointing op-ed piece that basically attempts to equate the housing bubble blogs with doomsayers that want nothing more than to see you sell your home. Mr. Kleske's final statement reiterates his thesis: "When it comes down to it, folks have to make their own predictions, using sites like www.realtor.com or this paper's own www.ncthomes.com to check prices or inventory or sites such as www.domania.com to see recent comparable sales prices."

Are bubble sites doom and gloom? If you read the comments at various housing bubble blogs some sure do sound a bit over the top in their predictions of the dire consequences, but most, in my opinion, have very interesting, well-researched commentary and insight. Bubbles are not sustainable, and anyone who thinks that those who claim so are being overzealous in their doom and gloom needs to take an Econ101 class. And we are starting to see the slowdown, but even Mr. Kleske isn't worried: "Driving through my neighborhood one might get the notion that some Love Canal-style industrial accident or unearthly science fiction events had occurred in the vicinity due to the volume of "For Sale" signs popping up in the past few weeks. ... But if folks were to pay attention and look more closely, they might notice something else appearing atop all those For Sale signs, such as smaller plaques that read "In Escrow," "Sale Pending" or even "Sold." And all of the selling neighbors I talked to weren't fleeing in fright, they were moving up to a bigger home.No, the homes aren't selling as quickly as they have in the past, but they are selling, which implies that for every seller who believes there is a housing bubble, there are buyers who either disagree or don't care."

I did a bit of research on Andrew Kleske (courtesy of Google). If you read a bit about him, you'll see that he's a long-time journalist and business analyst and "is a lecturer in the University of California, San Diego Department of Communications, teaching basic and Internet journalism." For someone who's supposedly well-versed in "Internet journalism," he sure does not seem to understand the benefits and democratization of information and reporting that blogs afford. (Or maybe he does realize this and is fearful for his own job security?) His article also indicates that he isn't aware of basic blog issues (like how Google AdSense works), nor does it look like he did much research before authoring his article. For example, many of the blogs he references in his article haven't been updated in several months, and he seems to think that http://thehousingbubble.blogspot.com/ and http://thehousingbubble2.blogspot.com/ are two separate sites, when in fact they are both Ben's sites, the http://thehousingbubble2.blogspot.com/ coming about due to technical difficulties with the first one.

Is Big Media Biased or Lazy?

Over the past several years we've heard the same winded comments from big media regarding the housing bubble, namely that real estate prices are headed up, up, up! Even over the past six months, when there's been a clear slowdown in the marketplace, big media still trouts out, looks on camera, says (with a straight face), "Is the Housing Boom about to Bust? Let's ask some real estate agents!"

Yes, it's that silly. Over on Another F@cked Borrower, SoCalMtgGuy shares San Diego 10 PM News's savvy as they brought on some experts who claimed NOW WAS THE TIME TO BUY. And earlier, in this blog, I talked about a These Days radio show on KPBS that was rather disappointing, as the two guests were both real estate-related professionals and made the standard Oohs and Ahhs about the industry such salesmen tend to make about their field.

There are news sources that are more level headed and don't pitch the hype, such as The Economist. Each region, too, seems to have their own more responsible news outlet, one that is less heard, but is intelligent enough to not question salesmen on the strengths or weaknesses of the salesmens' industries. In San Diego, it's The Voice of San Diego, which has an entire section dedicated to the housing mess. The good news is that The Voice provides a more balanced view than any of the traditional news outlets.

All of this begs the question, why are news media outlets so happy to bring on mouthpieces who are more than happy to hype up their market? I can only think of two possible reasons:

1. Laziness - after all, we're usually talking about a 500-word column, or three-minute piece on the news. Why spend the effort doing the research, asking the critical questions, and so on, when it's so much easier to just bring on someone who's more than happy to be there, and let them fill your airtime, or help fill your article with quotes?
2. Bias - with the boom in the housing sector traditional media has fared well with ads from realtors, mortgage brokers, lenders, and builders. Don't bite the hand that feeds you!

Whatever it is, it's disappointing to see or read such news reports and think that there are people out there who haven't done their own research and are believing the comments about the industry by its own insiders. Fortunately less biased news is available, but it requires a bit more of a search.

Blasts from the Past

Back in the .com madness, the talking heads on television were saying that Things Were Different. We had entered a New Economy and the old rules of economics no longer applied. Kind of like what realtors have been spouting over the past several years:

• We're running out of land!
• Home prices always go up!
• A home is the best invest you'll ever make!
• It's different this time, with baby boomers and low interest rates and blah blah blah
  

These types of statements are proclaimed by those profiting from any bubble. I'm certain that in the 1840s there were plenty of sources extolling the endless supply of gold in California, just ripe for the taking!

Things aren't different, of course, they never are. The laws of economics are pretty static, I'm afraid. This isn't the first housing bubble this nation has experienced, and the bursting of our current bubble won't be the first bursting either. In fact, this isn't the first time people have discussed real estate bubbles and bursts on the ol' Internet. Sorry Ben, but while the concept of a blog may be something new, the idea behind sharing this information online is old hat. (That being said, Ben's blog does provide many valuable bits of information and discussions.)

Just take a peak back through the old USENET archives, which you can do through Google Group's Advanced Search. Enter the search terms, like real estate investing, and specify a date range (say, around 1990 when the last real estate bubble graced our markets), and you'll find a slew of interesting posts, concerns, ideas, and articles. Here are a few random tidbits I pulled from a few searches back in the archive:

Housing prices going down in Silicon Valley (October 24, 1990)
Some properties in posh San Francisco neighborhoods have lost at least $100K each in value over the last six months, according to a twice-a-year survey by Coldwell Banker. Depreciation is 15 to 20% since April. ... The Southern California homebuilding unit of CalFed Inc. cut prices on $300,000 to $400,000 homes by 10% to 20% and surveys indicate expensive homes throughout the state are being cut by similar amounts. Fears of large-scale defaults by residential builders and homeowners have dropped the stocks of the biggest banks and thrifts in the state by 40% to 88%. "There's real hysteria here, like I've never seen," says Joseph Jolson, an S&L analyst.

Real Estate News Summary, Part 7 (November 21, 1990)
Builder advertises: $50,000 Price Reduction! Executive homes in San
Jose's Blossom Hill area from only $325,000. ... The soft real estate market spread from luxury and middle-priced properties to include three of the Peninsula's more affordable cities during the past 6 months, according to a new survey by Coldwell Banker Residential Services. Residential real estate in Daly City, San Bruno, and South San Francisco depreciated from 5% to 13.5% since May 1990. ... The University of Michigan reports that formerly strong real estate sites in California, such as Anaheim, Orange County, San Francisco, and Los Angeles now lead the list of the nation's riskiest real estate markets.

Hrm, it all sounds eerily familiar...

The image below shows some of the largest real estate busts in the past, and is taken from the CNN/Money article, Real Estate: When Booms Go Bust.

Looking at the Mortgage Interest Tax Deduction

When listing the benefits of home ownership, one of the most often cited "benefits" is that of the mortgage interest tax deduction. In the United States, individuals that itemize deductions on their tax return can include the interest payments for mortgages on their primary residence. This tax savings, many claim, is just one of the untold reasons why YOU NEED TO BUY A HOME TODAY!!!!1!1!!!!1!! In fact, some people are remiss to pay off their mortgage (and instead use their home like an ATM, refinancing to fund vacations, home improvements, pay bills, and so on) in part because they do not want to lose this precious deduction.

While any reduction of tax burden is nice, realize that this benefit is only seen if you itemize your deductions. The tax code provides a standard deduction for non-itemized returns (the amount varies on the year and the filer's marital status; for married couples it's near $10,000). Therefore, it only makes sense to itemize your deductions if they exceed this threshold. Deductions can come in the form of charitable giving, business expenses for the self-employed, alimony and child support, various educational expenses, and so on. While there are a number of deductions that might make it worthwhile to itemize, the plain fact of the matter is that many do not, meaning that they do not see any benefit from the mortgage interest tax deduction. (For example, if your annual mortgage interest is less than the standard deduction, and you have no other deductions, there's no benefit to itemizing.)

And even if you do itemize, you're still paying more than if you more quickly paid down your mortgage. For example, imagine that you paid $10,000 of interest per year to the mortgage company. You get to deduct that $10,000 from your stated income, meaning that if you made $70,000, you can now pay taxes on just $60,000. If you are in the 30% tax bracket, you just saved 30% of $10,000, or $3,000. However, you had to pay $10,000 to save that $3,000, meaning that you're down $7,000. Granted, being down $7,000 is better than being down $10,000, but the point is that the mortgage interest tax deduction is NOT free money and is NOT some wise investment move.

In my opinion, the wise move is to aggressively pay down your mortgage so that, sooner than later, you're paying $0 in interest payments to the bank. Granted, you'll be losing $3,000 in tax savings from when you were paying $10,000, but I'd rather lose $3,000 for free than have to pay the bank $10,000 in order to save that $3,000.

I/O & Option ARMs, Condos, and San Diego

Recently the O.C. Register held a real estate panel with the end result being not so surprising: the panelists were bullish. From the article:

Gary Watts, an economist and broker in Mission Viejo, was the panel member most bullish on Orange County. He said home prices will shoot up 15 percent next year. Walter Hahn, a consultant and real estate economist in Irvine, said the county should keep seeing double-digit gains in home prices until the next recession.

The O.C. Register's The Morning Eye blog posted some of the panelists' comments that
seemed more grounded in reality. In particular, Scott Simon's comments were most level-headed (and, at the same time, a bit scary):

Also, (Orange County) is the hub of creative credit in the world with New Century, Ameriquest, Option One, everybody’s here.

(As home prices rose, buyers) couldn’t afford the house anymore. You want the house and suddenly New Century or someone is saying, "Well, take an interest-only loan. Instead of paying the principal, you only have to pay the interest." Then you say, "I can’t afford the house now" and they say, "Don’t even pay the interest. Let’s negatively amortize the loan."

The really negative sign for us is the fact that, last year, 82 percent of the purchase loans in the state of California -- Orange County being representative -- were either interest-only or negatively amortizing loans. We view that not as an economic choice people were making, just simply an I-can’t-afford-the-house choice.

Eep. I've talked about option ARMs before, and how they are a recipe for financial ruin, and how San Diego county led the nation in the highest percentage of interest-only loans in 2004, but I didn't realize that 82 percent of all loans in California were of one of these two varieties of "evil" loans. Scott Simon continues on with his discussion:

Raphael Bostic, USC: You are saying that some places you’re expecting, on aggregate, to go negative?

Simon: Well, it’s very unusual for them not to.

Bostic: So which places do you think?

Simon: Places that specifically worry us? San Diego worries us.

Bostic: Particularly in the condo market. I agree with that.

Simon: San Diego earliest went to the affordability product, interest-only mortgages most heavily, earliest. Biggest number of investors, earliest. And it’s probably just further along in the cycle.

Ah, good ol' San Diego, another fine distinction for my fair city... I hope San Diego is the first to crash and that prices quickly return to levels where ordinary people can afford houses without perilous loan products. It saddens me that my neighbors are becoming the f@cked borrowers SoCalMtgGuy talks about. (Ex: a coworker who bought a condo about 16 months ago using a 1-year fixed ARM, and is now having to "cut back" his lifestyle because of his increased mortgage costs...)

Another F@CKed Borrower

Have you seen Another F*CKed Borrower? It's a blog from a mortgage "insider" and, among other things, details real-life borrowers and examines the lending process from the lender's perspective. What's doubly neat is that the blog's author, SoCalMtgGuy, is also from San Diego, so there are a number of discussions on local real estate/borrowers.

Be sure to check out the blog entry, Let's play "Should I buy... or wait?" It's a look at whether or not a reader who is considering buying now would be better off making his purchase or holding off and continuing to rent. SoCalMtgGuy does a great job dissecting the issues and concerns at hand. The answer is not too hard to arrive at, though, seeing as we're at the top of the market now, the reader is renting for a great price, and the reader's rental is currently larger and in a better part of town than the home he's looking at.

Will the reader listen to SoCalMtgGuy's advice and hold off on buying? Or will house fever push good judgement aside? I hope the reader lets the blogosphere know!

Stopped by an Open House Today

My wife and I stopped by an open house today for a condo conversion project that's been under the works for over a year. (My wife walks past the project each day on her way to work, so she was interested in perusing the open house.) Prior to the conversion, the place was a typical late 1970s/early 1980s apartment complex, which seem quite numerous around our neighborhood.

The open house had a half dozen realtors there, showing three of the 30 or so units. There was also some live music, a soloist strumming some Mexican guitar music. The units had been improved nicely, with new paint, kitchens, hardwood floors, granite countertops, free wifi, new plumbing, new fixtures, etc., etc. All in all, a nice job, they've spent a lot of time and energy on the project as a whole, as evidenced by my wife's daily walk to work.

While the conversion was nice, there were a few problems that would definitely sour me:

• The location
• The price per sq. ft.
• The layout/age of the building

First off, the project was located one block from the road in town littered with bars and tatoo parlors, and three blocks from the beach, cramed between two other apartment complexes and a busy alley. To put it another way, you weren't going to get any sleep during the weekends, especially in the summer months. (My wife and I live on a cul-de-sac street, and we still get enough noise, especially in the summer, to wake me usually at least once a night during the weekends.)

The prices started in the low $300s for the 450 sq. ft. efficiency unit on street level.
That's close to $750 per square foot. And the efficiency we toured was right on the street level with its back window facing the alley (meaning that across the alley are the backs of the bars that are open to 2:00 AM each night). The largest units available were one bedroom and neared 1,000 sq. ft., although I'm not sure what their prices were.

Finally, the conversion, while well done, was on an older building. Walking around the units the floorboards creeked much like my parent's home that was built in the 70s. Not necessarily the sign of defective construction or termites or whatnot, but it's kind of unsettling to be dropping that kind of money for a seemingly "new" place. It's important to keep in mind that you're really buying a renovated interior of an old apartment complex.

This was one of dozens of open houses in the neighborhood. On our walk there, we passed the sign flippers for the conversion that's offering a free car if you buy a condo. I assumed we wouldn't see any potential buyers, but while we were touring the open houses we saw five or six others checking out the open units as well.

How Can They Say These Things in Good Conscience?

Lydia Puller's article on the Bay Area Business Women website is titled Should You Buy Before the Housing Bubble Bursts? That's kind of like asking, "Should you pay retail before the sale begins next week?" Um, sure, I guess, if you like spending more than needed. What's odd about this piece of trash article is that the oxymoronic title indicates that there is a housing bubble, but then Ms. Puller quickly comments:

There will always be a demand for housing and in the past 10 years real estate has grown at a rate of 10 percent per year. ... According to the National Association of Realtors, home prices are in no danger of falling. The housing market, nationally and in California, is expected to remain strong. The market may slow down and level off and even Alan Greenspan of the Federal Reserve Board says the market will inevitably simmer down — but the housing bubble will not burst, property prices will not go down 10-20 percent, and the sky is not falling.

Ah, so the NAR says home prices are in no danger of falling... kind of like how that used car salesman tells me a quality '96 Mecury Sable will be the best 'investment' I can make for my automotive future. What's a bit sickening is that in this article Ms. Puller does not identify herself as a real-estate agent, but this is obvious by her rhetoric and her choice to ignore reality. In fact, a quick Google search on "Lydia Puller" returns as the #1 hit LydiaPuller.com, which indicates that Ms. Puller is an agent with Alain Pinel Realtors.

Take a moment to read the article, and I think you'll have either one of two possible reactions (if not both, one after the other). You may just kind of laugh this garbage off, figuring that a realtor is really just a salesman and a salesman will say whatever they need to make the sale. But you may also start to feel disgust. How can Ms. Pullman make these statements? The article talks about buying multiple rental properties and it being pitched to first-time homebuyers and single women/mothers. Isn't this an unconscionable sales pitch to make, in a sense? Yeah, yeah, caveat emptor, but I still think karma frowns on people who are pimping an overpriced and risky "investment" to a group of people who are least likely to be able to afford it.