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

[jk]

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

How can you profit from a mortgage? The prices that Shiller uses are not net of interest expense. $22,000 was the median price but no one paid that. If you bought the home 20% down ($2000) and financed the rest with a 4.5% fixed rate 30 year mortgage you spent $44,731 for the home over 30 years, including $15,831 in interest. In 1995 you received $21,000 1955 dollars for a home you paid $44,731 on for the first 30 years. Inflation was higher than the 4.5% mortgage interest rate for much of those 30 years, so less income was consumed on housing than if you'd instead paid rent that increased with inflation. However, maintenance and taxes increased with inflation and continued to even after the mortgage was repaid. Plug it all into a spreadsheet and you'll find that buying a home is more economical than renting for 40 years, but compared to the returns on money in the S&P 500 over the same period, a home purchase cannot qualify as an "investment" nor can the mortgage, unless the mortgage was invested in the S&P 500 or some other asset that returned more than $4.5% per year instead of the home.

i'll clarify and narrow my statement. you profit from a fixed rate mortgage IF you finance-- just prior to, or early in, a period of inflation-- an asset which nominally tracks inflation. the asset holds real value, while the liability shrinks to insignificance. this was the experience of millions of homeowners who bought their homes approximately 1970, and held at least 10 years. the homes did not quite keep up with inflation, but almost. the mortgages turned into jokes.

you can profit on either side of a balance sheet: your asset need not grow in value if your liability disappears.

tell me fred: if someone offered you a multi-decade 4% fixed-rate loan right now [even without deductibility of the interest], which you could invest as you see fit, in precious metals, mlp's, oil properties, whatever, would you bite? 5-10 years from now, when you examined your balance sheet in REAL terms, do you think your profits would be confined to the asset side of the ledger?

i keep making this point because i think it is valuable for readers here to be educated in the idea that they need to watch both sides of the ledger, and that the simple notion of just paying everything off so that the liability side disappears, is not the only rational approach. this idea is not for everyone; but that doesn't mean it is for no one. the banks certainly know this; it's why they're so happy to take essentially free money from the fed. they don't need huge underlying returns if they can lever everything up with money at 10bps. why do you think msft, with many billions in the bank, just floated a long term bond?

this approach is especially relevant for those of us who already own homes, have no intention of moving, and have the choice to pay off debt or refi. it also applies for those inclined to buy a commercial property with an income stream which tracks inflation. this latter case has some risks, but also a big upside if long term fixed rate financing is available.



ps your calculation is wrong because you count all the mortgage principle and interest payments as 1955 dollars, while in fact they are made over the course of 30 years, during which their real value shrank markedly.

[flintlock]

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

Buy a house as a place to live and put the rest of your money into something else. The idea of a home as an investment is pure, unadulterated bullshit.

Hooray for speaking the truth! I get tired of hearing people talk about pure speculation as an investment.

Through my business I have known a lot of "investors" in residential RE. For the last 15 years or so all I heard was how it was a "no-brainer" , risk free, way to riches. Now most of them are bankrupt or at the very least living very stressful lives. What most were playing was a ponzi scheme, not an investment scheme. To me, investing is putting up money towards some venture in return for a share of the profits at some point in the future. But with most RE investors, they put up very little if any, and borrowed most of the money in a hope that a naturally depreciating structure would somehow become worth more, and that it would pay for itself. I find this more akin to gambling than investing. The success of those selling this idea was a direct result of playing on the tendency of humans to want to get SOMETHING FOR NOTHING. No expertise. No effort. Just sit back and count the money. In my experience very few things in life ever work this way for long. Markets don't work this way.

What really pisses me off is that now those of us who didn't gamble on the RE bubble are expected to sit by while banks are bailed out for lending money to irresponsible RE investors. Many of whom were nothing but slumlords. These amatuers didn't know jack diddly about the true cost of owning a home. They bought 40 year old homes at the end of their useful lives, then when the roof needed repair, or the septic tank failed, their "zero cash down/cash flow pays for it all" strategy fell right on its face.

If a lot of people actually knew how to calculate ROI when they brag about some of their "investments", they'd shut up. If you count all the true costs, most barely break even. Everyone needs a place to live. Buying a home can be a good way of holding down the cost over the long term. But I'd look at it like cost containment rather than an investment. It just seem a very risky and troublesome way to make money. Now that the US economy is stagnant, anyone looking to invest in RE is fighting upstream against the current. It can probably still be done, but the odds are not good. There are just better ways to actually invest imo.

[jpatter666]

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

Hooray for speaking the truth! I get tired of hearing people talk about pure speculation as an investment.

Through my business I have known a lot of "investors" in residential RE. For the last 15 years or so all I heard was how it was a "no-brainer" , risk free, way to riches. Now most of them are bankrupt or at the very least living very stressful lives. What most were playing was a ponzi scheme, not an investment scheme. To me, investing is putting up money towards some venture in return for a share of the profits at some point in the future. But with most RE investors, they put up very little if any, and borrowed most of the money in a hope that a naturally depreciating structure would somehow become worth more, and that it would pay for itself. I find this more akin to gambling than investing. The success of those selling this idea was a direct result of playing on the tendency of humans to want to get SOMETHING FOR NOTHING. No expertise. No effort. Just sit back and count the money. In my experience very few things in life ever work this way for long. Markets don't work this way.

What really pisses me off is that now those of us who didn't gamble on the RE bubble are expected to sit by while banks are bailed out for lending money to irresponsible RE investors. Many of whom were nothing but slumlords. These amatuers didn't know jack diddly about the true cost of owning a home. They bought 40 year old homes at the end of their useful lives, then when the roof needed repair, or the septic tank failed, their "zero cash down/cash flow pays for it all" strategy fell right on its face.

If a lot of people actually knew how to calculate ROI when they brag about some of their "investments", they'd shut up. If you count all the true costs, most barely break even. Everyone needs a place to live. Buying a home can be a good way of holding down the cost over the long term. But I'd look at it like cost containment rather than an investment. It just seem a very risky and troublesome way to make money. Now that the US economy is stagnant, anyone looking to invest in RE is fighting upstream against the current. It can probably still be done, but the odds are not good. There are just better ways to actually invest imo.

This I agree with. For my own circumstance, FRED, I freely admit I did well. Bought in 1997, just before the boom had it's first signs of life in DC. I did a 15 year mortgage which cut the total interest payments in half.

And now, nearing the end I couldn't rent a single bedroom apartment in this area for what I'm paying on the mortgage (and nearly all of that is principal now). In a year, I'm done. It's certainly done better for me than putting it in the market for those years!

There *are* times when it's a decent time to buy -- the last ten years haven't been one. You have to run the numbers correctly and judge your own situation.

[photoncounter]

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

As to offense, when someone asks what country I'm in, as if I forgot to emigrate with all my marbles, or accuses me of advocating real estate as the next great bubble to invest in, yeah, no offense taken. I've got to stop reading into things. I don't know when I became so paranoid.

I think you misread:

Don't know what county your in. Guesstimating price of $160,000, rent of $1500.

[Jay]

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

This I agree with. For my own circumstance, FRED, I freely admit I did well. Bought in 1997, just before the boom had it's first signs of life in DC. I did a 15 year mortgage which cut the total interest payments in half.

And now, nearing the end I couldn't rent a single bedroom apartment in this area for what I'm paying on the mortgage (and nearly all of that is principal now). In a year, I'm done. It's certainly done better for me than putting it in the market for those years!

There *are* times when it's a decent time to buy -- the last ten years haven't been one. You have to run the numbers correctly and judge your own situation.

I bought a huge condo in mid 2004. 5% down interest only, and leveraged out the wazoo. I had finished residency fairly recently and was ready for the excitment of the big city. I knew NOTHING about finance or economics. I had a bunch of friends of friends who were real estate agents and they convinced me that buying would be the best investment of my life. They all had places in our building and many of them lived like heathens. If you can think it, it was going on. My girlfriend at the time thought I was nuts but I bought it anyway because it was what everyone was doing. After I bought it, I decided it might be a good idea to figure out what this interest rate thing was all about. I started reading. I got a bit nervous. I read itulip right when it came back online, probably the same day. I sold in mid 2006, which was the best financial decision of my life. I can tell you well the difference between speculation and investment now, and that condo was NO investment. Oh, and I learned what an interest rate was too...

Ending up here has made me a much wiser person in a million ways. (And wealthier.)

[housingcrashsurvivor]

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

I think you misread:

Thank you. I see that now. I can only imagine that I got skittish from that other accusatory juxtaposition. Sorry Don for misreading you.

[don]

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

Thank you. I see that now. I can only imagine that I got skittish from that other accusatory juxtaposition. Sorry Don for misreading you.

No problemo. I used Broward/Palm Beach for my extrapolations.

[Slimprofits]

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

Sorry Folks, The Put-Back Apocalypse Ain't Gonna Happen
Friday, 15 Oct 2010 | 11:21 AM ET
By: John Carney
Senior Editor, CNBC.com

You should probably be a buyer of Bank of America right now.

I never thought I’d find myself typing those words. I’ve been a huge critic of Bank of Americafor years. I'm bearish on the financial supermarket model. I don't think the acquisition of Merrill Lynch is working out. I still don't understand the logic of buying Countrywide.

But Bank of America's recent decline—down almost 10% this week—is driven by fears that the bank could be hit with huge liabilities for faulty mortgage pools. And I’m pretty sure that is not going to happen.

Why not?

Because the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights. Not when there’s an easy fix available that won’t cost taxpayers a dime.

Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.

There’s a big difference between the financial crisis of 2008 and the new crisis. In 2008, banks were destabilized by the growing realization that they were over-exposed to the real estate market. Huge portions of their balance sheets were committed to mortgage-linked investments that were no longer generating the expected revenues or producing losses. That was a problem of economics that could only be solved by recapitalizing banks or letting some of the biggest banks in the U.S. fail.

The put-back crisis is not driven by economics. It is driven by legal rights. And there’s simply zero probability that the politicians in Washington are going to let Bank of America or Citigroup or JP Morgan Chase fail because of a legal issue.

So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.

[LargoWinch]

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

So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.
[/INDENT]

Carney is not breaking any new grounds here...

He forget to mentions the resulting effect: USDX @ 40, Gold @ $2,500 and Crude @ $200+ etc.

[housingcrashsurvivor]

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

No problemo. I used Broward/Palm Beach for my extrapolations.

Thank you.

I was a long-time resident of south Florida, mainly for family. Enjoying my new lower cost location. Health insurance for same policy now 23% less. Insurance on two houses here less than on one house there, etc. Hopefully none of my new neighbors will notice the homesteaded tax savings I've ported or they'll be forming a lynch mob.

[ER59]

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

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...

Coolhand,
I am looking at a whole life insurance as a long term investment, can you provide a link or the name of that WSJ article?
Thanks

[coolhand]

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

Coolhand,
I am looking at a whole life insurance as a long term investment, can you provide a link or the name of that WSJ article?
Thanks

ER59 - here's the name of the article - it was from the 10/3/10 edition of WSJ. I have Northwestern Mutual Life & have found them to be an outstanding company to work with, would highly recommend tracking down an NML agent if you are interested in this. Best of Luck

Shift to Wealthier Clientele Puts Life Insurers in a Bind

[ER59]

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

Thank you

[don]

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

One take on JP Morgan's Foreclosure Pipeline:

On JP Morgan’s Foreclosure Pipeline: Not Only Is It Packed Tight, It Is Progressively Getting Much Worse As The Time To Foreclosure Extends AND the Delinquency Rate Continues to Climb At The Same Time That Real Economic Housing Sales Value Is At An All Time Low As Well – and Getting Worse!!!

Future Losses Are Mounting at an Incredible Pace Yet JPM is reducing provisions due to improving credit metrics. See JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and JP Morgan’s Analysts Agree with BoomBustBlog Research on the State of JPM (a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call Statements

JP Morgan’s average delinquency at foreclosure is 448 days (with Florida and New York having a record 678 days and 792 days of delinquency at foreclosure). Average delinquency for the industry is about 478 days and is increasing consistently since the start of the crisis. During 2009 the average days from delinquent to foreclosure process was 223 days while as of August 2010 average days from delinquent to foreclosure process is 478 days. A very important, yet often under appreciated fact is that although serious delinquencies are still climbing, the lengthening of foreclosure process has resulted in these loans still being classified as delinquent. The difference between delinquency rates and foreclosure rates has increased to 5.3% (9.8% delinquency rate vs 4.6% foreclosure rate) in August 2010 from 3.6% in March 2002 (5.1% delinquency rate vs 1.5% foreclosure rate). As the difference between delinquencies and foreclosure rates normalizes, and shadow inventory overhang moves to further depress real estate prices, real estate related write-downs could further balloon. So, you see, the marginal improvements in credit metrics that JP Morgan’s management has used to justify the releasing of provisions (which also just so happened to have padded a weak quarter of accounting earnings) is really kicking the can of reckoning down the road…

Add to this the difficulty in getting rid of the properties once they are foreclosed upon and you will find that the big banks such as JP Morgan (or after looking at these numbers, particularly JPM (although I suspect BAC and certain others are worse off) will become the nations largest distressed residential housing REITs!!!

http://boombustblog.com/reggie-middl...tive-exposure/

[karim0028]

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

One take on JP Morgan's Foreclosure Pipeline:

On JP Morgan’s Foreclosure Pipeline: Not Only Is It Packed Tight, It Is Progressively Getting Much Worse As The Time To Foreclosure Extends AND the Delinquency Rate Continues to Climb At The Same Time That Real Economic Housing Sales Value Is At An All Time Low As Well – and Getting Worse!!!

Future Losses Are Mounting at an Incredible Pace Yet JPM is reducing provisions due to improving credit metrics. See JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and JP Morgan’s Analysts Agree with BoomBustBlog Research on the State of JPM (a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call Statements

JP Morgan’s average delinquency at foreclosure is 448 days (with Florida and New York having a record 678 days and 792 days of delinquency at foreclosure). Average delinquency for the industry is about 478 days and is increasing consistently since the start of the crisis. During 2009 the average days from delinquent to foreclosure process was 223 days while as of August 2010 average days from delinquent to foreclosure process is 478 days. A very important, yet often under appreciated fact is that although serious delinquencies are still climbing, the lengthening of foreclosure process has resulted in these loans still being classified as delinquent. The difference between delinquency rates and foreclosure rates has increased to 5.3% (9.8% delinquency rate vs 4.6% foreclosure rate) in August 2010 from 3.6% in March 2002 (5.1% delinquency rate vs 1.5% foreclosure rate). As the difference between delinquencies and foreclosure rates normalizes, and shadow inventory overhang moves to further depress real estate prices, real estate related write-downs could further balloon. So, you see, the marginal improvements in credit metrics that JP Morgan’s management has used to justify the releasing of provisions (which also just so happened to have padded a weak quarter of accounting earnings) is really kicking the can of reckoning down the road…

Add to this the difficulty in getting rid of the properties once they are foreclosed upon and you will find that the big banks such as JP Morgan (or after looking at these numbers, particularly JPM (although I suspect BAC and certain others are worse off) will become the nations largest distressed residential housing REITs!!!

http://boombustblog.com/reggie-middl...tive-exposure/

Yup, 2015-2018 would be a full 7-10 years from bubble pop, sounds about right.... And that is just to bottom out. Probably another 5-10 years at the bottom then "to the moon alice....." About a generation folks....