How much worse will it (the real estate foreclosure crisis) get? Plenty

[LargoWinch]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

NINJA loan = NOTHING INVESTED (OR DOWN), NO REAL RATE OF INTEREST PAID, and NO JOB OR INCOME. ( I don't know what the letter "A" stands-for in NINJA, but I would be afraid to ask. )

N o
I ncome
N o
J ob [or]
A ssets

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

No way in hell is this done with yet.... I love how people look at Price to rent ratios like its some kind of god send... Prices in a fair and stable market can go by ratio's but bubble markets/rigged markets can go from overvalued to undervalued in a process that takes ~ 10-20years; due to mistrust, investor apathy, pain felt, etc... Take a look at any chart of historical bubbles, stocks, gold, interest rates, etc... What looks cheap now will get cheaper. It only seems cheap now bc interest rates are so low and money has little income value. When the interest rates shoot up we will see what RE's true value is.....

Not making a prediction, just looking at all the problems facing RE right now and making conclusions...

If for instance, interest rates shoot up (and one way or another they will) to 10% and your CD can yield 10%/annum on 100K that is 10K/yr hassle free (no rent collection, marketing, legal, vacancy, calls in the middle of the night, prop taxes, etc), how much can you rent that 200K house for? With unemployment still high my guess would still be around the same amount you can today (~1200)... If inflation is alot higher than the nominal interest rates then gold and silver will zoom up.

The famous last words of a dying investor - "i never thought it could go any lower"

Points taken though to clarify, I never said this can't go lower. I said "I understand that true bottom is just where ever that winds up being."

As to collecting rents. I'd only buy a property I can watch and walk to. I did have some a few hundred miles away but was not comfortable with that & sold. I can see some metal, but not all as I do not understand it. I don't trust banks nor this economy. I've zero control over any of that. I hate gambling. I've been in a casino just once in my life and that just to accompany family. I've taken myself out of early retirement and am back in school for my third time, now in my early 50s, investing in myself and preparing to start a third career, something in a helping field so I'll feel good about myself at the end of the day. That is all I trust. This rest of this world just scares me. Always did.

[karim0028]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

The question is; against what?

Gold and Silver.... You've still got at least 2x for gold and 2-3x for silver.... Also, in the 80's the bubble wasnt in RE, that could put you in uncharted territory this time around.

Quite frankly the only way i can think of RE is through interest rates bc its a leveraged asset, very few people can pay cash for a house.... If you pull out a calculator it just seems painfully obvious to me that if interest rates double housing will get slammed, unless we all get some serious pay hike.... And with wage arbitrage i just dont see how we can get large pay hikes; hence the lower standard of living.... The 70's and 80's had strong unions that negotiated pay hikes w/ inflation, who will do that this time around?

[karim0028]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Gold and Silver.... You've still got at least 2x for gold and 2-3x for silver.... Also, in the 80's the bubble wasnt in RE, that could put you in uncharted territory this time around.

Quite frankly the only way i can think of RE is through interest rates bc its a leveraged asset, very few people can pay cash for a house.... If you pull out a calculator it just seems painfully obvious to me that if interest rates double housing will get slammed, unless we all get some serious pay hike.... And with wage arbitrage i just dont see how we can get large pay hikes; hence the lower standard of living.... The 70's and 80's had strong unions that negotiated pay hikes w/ inflation, who will do that this time around?

Also, one thing to keep in perspective the bottom in the RE market in the 80's hit with the psuedo dollar crisis that took interest rates to 16%... We havent had that yet... All of the housing problems (housing falling 50%) thus far have been due to a stock and housing bubble, the dollar crisis is next. We are not there yet.

[c1ue]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

I'm still confused. Are you saying 3 to 1 should be the rent to price ratio or the income to price ratio?

In my new location, the price to income ratio was 2.56 in year 2000, when the interest rate was about 8%. All the graphs I see (many on Itulip) seem to show 2000 the year when things went nuts. So I thought utilizing that 2000 ratio at today's median household income would give me some indication as to where a median priced home might fairly sell, and having it show that the current median home price should be about 8% higher than today's market prices made me think it a relatively safe place to put money. Did I screw up (yet again)?

I can see in your example that if interest rates rise enough, existing homes could eventually go for less than replacement value. So maybe the entire country is Detroit? I really don't understand how all that works. People still have to have a home. Population will still grow. Construction of new homes will still set values based on material & labor costs. Maybe even land will start appreciating again? In any case, the land under my residence can be subdivided into three legal parcels, so at least maybe I'll have that if need be.

3 to 1 is the traditional price to income ratio for buying a home.

It also represents the traditional upper bound for rent prices. After all, rent above purchase price increasingly makes less sense.

In general, those who rent do so because they either have bad credit, don't have enough for a down payment, or don't want to commit to a mortgage due to mobile situations.

But the amount of rent is a function of income.

Thus rent is related to income, much as prices traditionally were.

Cap rates, of course, are another discussion. And the interest rates apply here as well.

A mortgage at 4.5% with a 6% cap rate seems great with interest rates of 1.5% or less, but the historical return on free cash is 7% (not inflation adjusted, mind you).

Thus the historical cap rate of 6% being barely acceptable was because the underlying assumption was that the property would rise in value.

On the other hand, if you have a situation where the property value can easily fall in value, cap rates need to be far higher to justify the risk.

Lastly as far as Y2K ratios go - depending on the area, there have been dramatic changes in income. Generally lower.

[Starving Steve]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

I'm still confused. Are you saying 3 to 1 should be the rent to price ratio or the income to price ratio?

In my new location, the price to income ratio was 2.56 in year 2000, when the interest rate was about 8%. All the graphs I see (many on Itulip) seem to show 2000 the year when things went nuts. So I thought utilizing that 2000 ratio at today's median household income would give me some indication as to where a median priced home might fairly sell, and having it show that the current median home price should be about 8% higher than today's market prices made me think it a relatively safe place to put money. Did I screw up (yet again)?

I can see in your example that if interest rates rise enough, existing homes could eventually go for less than replacement value. So maybe the entire country is Detroit? I really don't understand how all that works. People still have to have a home. Population will still grow. Construction of new homes will still set values based on material & labor costs. Maybe even land will start appreciating again? In any case, the land under my residence can be subdivided into three legal parcels, so at least maybe I'll have that if need be.

The way I see this Great Recession playing-out is that household size will go UP because kids will stay with mom and dad. People will live co-operatively. This means household formation goes DOWN. And a lower household-formation rate means LESS DEMAND for new housing. That might mean less construction, and maybe less demand for everything.

Detroit and the entire Great Lakes region might provide the model for the future, nationwide in the US, and in Canada too. Things might become so bad that people emigrate to other countries.

A drive through Silicon Valley at night shows me plenty about what the future might look like. Silicon Valley might be the next Detroit: empty freeways, darkness, somber people, criminal gangs, fear, falling real-estate prices, people moving-out, vacant homes, empty mansions, ghost towers, ghost manufacturing-plants, bankruptcy, stupid-thinking like "solar-paint to produce electric power", fuzzy-math, fuzzy-engineering, xenophobia, English-only, "buy American", dot.bombs, memories, a rich history, and some new hard realities.

At least, the Great Lakes region has abundant fresh-water and four dramatic seasons each year.

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

3 to 1 is the traditional price to income ratio for buying a home.

It also represents the traditional upper bound for rent prices. After all, rent above purchase price increasingly makes less sense.

In general, those who rent do so because they either have bad credit, don't have enough for a down payment, or don't want to commit to a mortgage due to mobile situations.

But the amount of rent is a function of income.

Thus rent is related to income, much as prices traditionally were.

Cap rates, of course, are another discussion. And the interest rates apply here as well.

A mortgage at 4.5% with a 6% cap rate seems great with interest rates of 1.5% or less, but the historical return on free cash is 7% (not inflation adjusted, mind you).

Thus the historical cap rate of 6% being barely acceptable was because the underlying assumption was that the property would rise in value.

On the other hand, if you have a situation where the property value can easily fall in value, cap rates need to be far higher to justify the risk.

Lastly as far as Y2K ratios go - depending on the area, there have been dramatic changes in income. Generally lower.

Man, I really do have a tough time grasping this. No wonder I'll be working till I drop.

Since I'm including in my reasoning my own house as I'm getting income from that and as I'd have to rent a place to live if I did not have two houses here, suppose I figure based on that. I've just looked up cap rate which seems to be annual net operating income divided by the cost or value. So when I add up what 12-months worth of rents I'd get if I wasn't living here, (in other words renting out both houses in their entirety, or paying rent to myself for the part of the one house I use), minus taxes (fudged a little because while living here I've got homestead protection) minus insurance on both houses, minus water on both, minus electric on the one house I live in, (both houses on private septic so minimal cost to that), minus, say $2k/year maintenance combined, minus town fee for renting the one house, divided by the cost of the houses plus improvements (not included my gardening money, spent not as investment but for fun), I seem to get a cap rate of 11%. Is it safe yet?

[coolhand]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

All owner-occupied housing is cash flow negative from day 1, & will be forever, even if you own it free & clear (taxes, upkeep, utilities). If you don't think housing is going to appreciate b/c rates can't go much lower & incomes aren't rising (I wouldn't argue), then IMO you should have a very good reason to own your home. B/c if you run a DCF on an asset that is negative cash flow from day 1 until day forever, I think you come up with a value less than $0. I never buy another tract home in a development - buy something w/some land that you can get some sort of asset yield (garden, solar panels, firewood, whatever.)

Separately - the baby boomers are probably a huge % of the people that own their homes free & clear. Having just lived thru this 3x in the last 12 months, they are starting to downsize, & they don't care what price they get for their homes, they need their cash out. This becomes especially true in the case of baby boomer deaths, when their kids get a $300k home owned free & clear, with a $600/month tax bill & $200/month in utilities taking a bite out of their ass every month they don't sell the house. There is about to be a tidal wave of very motivated sellers. If i was a boomer in a home i didn't love, i'd try to sell now to beat the rush, take my cash, & then go rent.

[Starving Steve]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

All owner-occupied housing is cash flow negative from day 1, & will be forever, even if you own it free & clear (taxes, upkeep, utilities). If you don't think housing is going to appreciate b/c rates can't go much lower & incomes aren't rising (I wouldn't argue), then IMO you should have a very good reason to own your home. B/c if you run a DCF on an asset that is negative cash flow from day 1 until day forever, I think you come up with a value less than $0. I never buy another tract home in a development - buy something w/some land that you can get some sort of asset yield (garden, solar panels, firewood, whatever.)

Separately - the baby boomers are probably a huge % of the people that own their homes free & clear. Having just lived thru this 3x in the last 12 months, they are starting to downsize, & they don't care what price they get for their homes, they need their cash out. This becomes especially true in the case of baby boomer deaths, when their kids get a $300k home owned free & clear, with a $600/month tax bill & $200/month in utilities taking a bite out of their ass every month they don't sell the house. There is about to be a tidal wave of very motivated sellers. If i was a boomer in a home i didn't love, i'd try to sell now to beat the rush, take my cash, & then go rent.

Two problems with cashing-out of a home: 1.) rents go up; and 2.) banks pay zero on savings. Or you could go into the stock market, but that is very risky. Most stoxx have gone down, and their dividends have gone down, too.

A lovely Great Recession, isn't it?

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

The way I see this Great Recession playing-out is that household size will go UP because kids will stay with mom and dad. People will live co-operatively. This means household formation goes DOWN. And a lower household formation rate means LESS DEMAND for new housing.

Detroit and the entire Great Lakes region provide the model for what is to come, nationwide in the US, and in Canada too. Things might become so bad that people emigrate to other countries.

A drive through Silicon Valley at night shows me plenty about what the future might look like. Silicon Valley might be the next Detroit: empty freeways, darkness, somber people, criminal gangs, fear, falling real-estate prices, people moving-out, vacant homes, empty mansions, bankruptcy, stupid-thinking like "solar-paint to produce electric power", fuzzy-math, fuzzy-engineering, xenophobia, English-only, "buy American", questionable worth, dot.bombs, and hard realities.

At least, the Great Lakes region has abundant fresh-water and four dramatic seasons each year.

Apparently you haven't met my charming, unemployed nephew, whom my brother will reluctantly yet gladly continue paying to keep in his own damned apartment.

I can see some kids living at home but without zero population growth, household formation may slow but I doubt it will stop. I suspect we might go back to what was normal when I was growing up and what my parents and grandparents knew. My brother might have his other young kids and aging father-in-law living with him now, but I don't see this country going back to 17th century saltbox housing.

photo credit: the great, all knowing & wonderful wiki.


Tommy:
We need more room.
Build an extension!
We'll all work together.
Spare no expense now.

(Mrs. Walker brings Sally from the bedroom. Tommy crosses to her)

Tommy :
Come to this house;
Be one of us.
Come into this house;
Be one of us.
Come to our house.
Come to me now!

[coolhand]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Depending on how old you are, I would tell you I have done two things (and I own my house, but its on some acreage w/woods) - i own precious metals, & I own several different whole life insurance policies at Northwestern Mutual. They are currently paying 6.5% dividends tax free. That dividend rate can move around, & i suspect it will over time, but they have been very good stewards of capital. So i have a barbell strategy. And NML is a mutual company, owned by policy holders, & bought $500mm of gold in June-09, so just in case we have a case of hyperinflation, there is some protection.

Further, if you don't need the money, you can sock away a lot of money into these policies (depending on the face value of the policy), where the $ grows tax free. Then, later on in life, you can "borrow" your own money back, & as long as you a) have enough in them & b) don't ever borrow too much, you never have to pay taxes on it b/c you are borrowing the $, not cashing it out...this shrinks your death benefit but it is basically a gigantic tax loophole being provided.

Further, life insurance is easy to borrow from any time, & is creditor-protected (they can take your house, car, etc., but never life insurance.) Downside is that fees are higher & that once you check in, you have to borrow, but borrowing is at a ~1% rate - a no brainer. Also, the younger & skinnier you are, the better this strategy works given time value of money & mortality tables...but it could work at any age, depending on your resources & your health.

There was a WSJ article about this a few weeks ago - one of the last great tax loopholes. Get in before they close it....they often grandfather those in ahead of any changes...

[aaron]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Study: 1.2 million households lost to recession
http://www.msnbc.msn.com/id/36231884...n_the_economy/

---------

[touchring]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

3 to 1 is the traditional price to income ratio for buying a home.

3 to 1 is an American dream.

If you look at Singapore, the average 1200 sq ft apartment costs around $500,000. Median working class household income is around $4000. So, it's a 10 to 1.

And China is even more ridiculous, the median household income in Beijing is probably no more than 100,000 RMB ($14,000) a year, and with apartment prices just a bit lower than Singapore, the ratio is over 30 to 1. So a typical Beijing couple will need devote 100% of their income to paying for the apartment (and this is assuming zero mortgage rate) for more than 30 years.

Even at the peak of the Californian real estate bubble, price to household income ratio for buying a home couldn't have exceeded 8 to 1, and at well over 30 to 1, here's what Stephen Roach got to say:

Stephen Roach Says There's No Chinese Property Bubble

http://www.businessinsider.com/steph...onsense-2010-6

So what ratio will define a Chinese property bubble? 100 to 1?

And if you wonder why the Chinese cannot let the currency appreciate, the official reason is employment, but real estate is the real reason, after a couple tens of million people have committed 30-40 years income to their new homes, a lot of them the children of government officials, if you let the bubble burst, guess what will happen? Mayhem.

[c1ue]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Man, I really do have a tough time grasping this. No wonder I'll be working till I drop.

Since I'm including in my reasoning my own house as I'm getting income from that and as I'd have to rent a place to live if I did not have two houses here, suppose I figure based on that. I've just looked up cap rate which seems to be annual net operating income divided by the cost or value. So when I add up what 12-months worth of rents I'd get if I wasn't living here, (in other words renting out both houses in their entirety, or paying rent to myself for the part of the one house I use), minus taxes (fudged a little because while living here I've got homestead protection) minus insurance on both houses, minus water on both, minus electric on the one house I live in, (both houses on private septic so minimal cost to that), minus, say $2k/year maintenance combined, minus town fee for renting the one house, divided by the cost of the houses plus improvements (not included my gardening money, spent not as investment but for fun), I seem to get a cap rate of 11%. Is it safe yet?

Your calculations are weird.

Cap rate is quite straightforward: monthly rent x 12 minus taxes, minus maintenance (1%/year typical), minus insurance divided by price.

If you get 11% cap rate, then that means the rent you would get is 15% or more of price. Quite impressive indeed.

The question then is why would any prospective tenant rent if buying the house is so much cheaper then renting.

7 years of rent would be equivalent to buying the house outriht.

If you look at Singapore, the average 1200 sq ft apartment costs around $500,000. Median working class household income is around $4000. So, it's a 10 to 1.

And China is even more ridiculous, the median household income in Beijing is probably no more than 100,000 RMB ($14,000) a year, and with apartment prices just a bit lower than Singapore, the ratio is over 30 to 1. So a typical Beijing couple will need devote 100% of their income to paying for the apartment (and this is assuming zero mortgage rate) for more than 30 years.

Both of your examples are based on unusual circumstances:

1) Singapore: While the average home may cost $500,000 - in reality the actual average rental cost for a family is quite a lot lower:

http://www.rentinsingapore.com/curre...l_market_rates

Location	HDB Whole Unit	Private Condo	Master Room	Common Room
Admiralty	1975.0	3925.0	758.0	476.0
Alexandra		3900.0
Aljunied		3533.0	1025.0	654.0
Ang Mo Kio	2071.0	3300.0	723.0	593.0
Ayer Rajah		2800.0
Balestier Road		2940.0	1050.0	780.0
Bedok	1875.0	3250.0	783.0	550.0
Bedok Reservoir		3500.0	666.0	550.0
Bishan	2033.0	3533.0	726.0	576.0
Boon Lay		3200.0	800.0	591.0
Buangkok	2000.0		1200.0	660.0
Bugis		4725.0		933.0

Note that 'whole units' denote what you and I might call an apartment, but I've seen firsthand larger numbers of people/whole families in master or even common rooms.

Secondly Singapore is a financial haven like Switzerland.

A large number of people such as Jim Rogers have either moved or bought homes in Singapore for tax shelter/expatriate reasons.

You could equally point to Switzerland as an exception to the rule, and again it would be due to other reasons than finance.

2) China: With little or no real estate property tax, and with a relatively naive and financially experienced population, the bubble is in full swing in China.

Even discounting the significant foreign buying as a proxy for yuan revaluation, the reality is that prices in the major cities in China are so high as to never be economically viable.

The lack of occupancy is a fine example: how exactly can you use prices in Beijing or Shanghai as a proxy when you have both vast numbers of cheaper properties which are occupied in many cases sitting right next to large numbers of very expensive properties which are empty?

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Your calculations are weird.

Cap rate is quite straightforward: monthly rent x 12 minus taxes, minus maintenance (1%/year typical), minus insurance divided by price.

If you get 11% cap rate, then that means the rent you would get is 15% or more of price. Quite impressive indeed.

The question then is why would any prospective tenant rent if buying the house is so much cheaper then renting.

7 years of rent would be equivalent to buying the house outriht.

Sorry about that. I'm neither accountant nor economist in practice, training nor until this mess forced my hand, even in familiarity. I've just tried to stay out of debt as I'd go about my merry way through life. So when considering expenses, I figured I might as well throw in the kitchen sink (which I happen to be replacing in both houses). I hate surprises as much as I hate gambling.

It seems what you don't know can hurt you and so I got hit hard in this crash, thinking I was safely invested and unware of bubbles. I'm relearning though late in life and in the game. I'm surviving and going with what I think I now know (until that's again proven wrong later, surprise!) but translated into a new paradigm such that even my own cardboard shelter should provide me an income stream and not just be my luxury.

"The question then is why would any prospective tenant rent if buying the house is so much cheaper then renting."

One of the reasons I bought here is the large & consistent renter base, being near one of the biggest universities in the country and having so many healthcare workers often too busy to deal with home ownership. Still, that's kind my point in describing this market. Maybe a lot is understandably fear, having seen what we just went through. Or the banks are not lending? Unemployment is high in the surrounding metro area but locally probably (I don't have the figures, just a feel) slightly better because of our recession resistant employment base of education and health care. I just don't know. Eveything I saw told me to buy. (Though I'm easily fooled, so don't go by that).

Per your previous post I've had a look at rent to income and also at mortgage costs.

Based on 2008 household income (the latest I could find for this immediate area) and current rental rates (based on what I see advertised from numerous sources), my pretty much median-for-the-area residence would rent for 0.286 x's income. The smaller house would rent for about 0.176 x's income. Though it might not likely rent to a median household, except a frugal one, & I'm making it nice enough to attract such tenancy.

Had I an 80%, 30-year note at the current mortgage rate of, say, 4.858% for what I paid for both houses plus my renovation costs, P&I for the kit & caboodle would be 84.5% of the rents collected on just the smaller house. About 2 years of rents from the smaller house will pay all my renovations (not including extravagant garden) to both. Letting a room in my home plus rent from the small house will repay all of my costs (purchase price plus renovations plus garden) in 12 years, just in time to consider retiring again, after another 2 years of school & another 10-year career. Life goes on.

Probably there are not a lot of deals like this but it does indicate what's out there. I'm pretty sure I can find another almost as good or at least good enough to offset the fear of catching a knife falling into oblivion.

PS. You guys are so much better at math than I.

re: "If you get 11% cap rate, then that means the rent you would get is 15% or more of price."

So I just did some cyphering...

Yes, when I take the rent I'd get for my residence (assuming I didn't live there) plus the rent I get on the little house and divide that by what I paid plus renovation costs, I get 0.15555555555etc.