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April 26, 2006

Comments

Wonder how many had interest only mortgages, the new form of slot machine.

Sorry, didn't read below the fold.

hilzoy wrote: I haven't found a source for current national statistics on interest-only loans, but a bit of googling shows them making up a third of DC area mortgages, and 54% within the district itself.

As the rest of the post makes clear, this sentence isn't quite right. IOMs made up 54% of the mortgages made in DC IN 2005. They do not make up 54% of the total outstanding mortgages for DC.

As the IO period on IOMs tends to be five years, this will be a lagging crisis. The big hits won't come until 2009 and 2010, when the 31% (!) and 40+% (!!) of mortgages made in 2004 and 2005 need to be refinanced. Whichever party's president candidate wins in '08, she is likely to walk into a major financial/banking crisis. maybe we will have learned our lesson from the S&L debacle and have a better response, but i kinda doubt it.

My wife and I almost bought a few years ago, in Lorton, which is about 30 miles south of DC. We were prepared to get into a zero-down, 100%-financed mortgage (we were pre-approved by a lender) up to $240,000, which would have gotten us a 1,000 sq ft attached townhome with a 1+ hour commute. We decided not to do it, and despite paying north of $1,500/mo. for an apartment in Fairfax, I'm glad, because now we will have the opportunity to capitalize on some other schmuck's misfortune and bad judgement. (Ha ha. I'm kidding.)

My boss and his wife, on the other hand, DID get a IOM for a townhome in Arlington, which they paid more than $450,000 for two years ago. They are about to get massively screwed. Keeping in mind that they are both 30 years old, and she's a PhD who works in physical therapy. They will quickly find themselves unable to afford that house.

I've noticed houses staying on the market a lot longer in DC now; rather than having two dozen proposed contracts in 48 hours, I'm seeing them stay listed for 3-4 weeks, which in a market as fast-moving as this has been is an eternity. Some are even getting the little placards that say "Reduced," but not by much; townhomes down the street from my place are listed at $670,000.

Francis: you're right, of course; that's what I meant, but meant and said are two different things. Will correct. Thanks.

Add to all of the above the higher costs of necessities due to $3 per gallon gas, and the resulting increase in food prices, and this is going to get worse, not better as the year goes on. Good post.

Phil, one of the best ways to get an affordable house in a declining real estate market is to learn about REO (real estate owned [by the bank].) buying at a foreclosure auction frequently means overpaying, since the bank has nothing to lose by bidding the amount it is already owed. so you're essentially taking over the existing loan. but once the bank owns it, it wants to sell it. (empty houses are rarely productive assets.)

now, before mortgages were certificated (bundled with other mortgages and sold as a package), your local bank probably held the mortgage. no longer true. but as foreclosure rates go up, a savvy buyer could sniff out who is holding the asset and take it off their hands.

best of luck in profiting off someone else's misfortune. ;)

Median Price Declines ...Hale Stewart at BOPNews

3 Posts on YTD Stats ...Calculated Risk, mostly charts, maybe a dupe of some of hilzoy

Existing Home Sales ...Barry Rithholz cautions against premature conclusions

Krugman Academic Paper on the Dollar ...Mark Thoma is generous with his time, typing in long pieces. 33 pages, but not highly technical. My current favorite economic blog, Anne from DeLong and pgl from angrybear are frequent commenters. From Krugman:

"The case for believing that a dollar plunge will do great harm is much less secure. In the medium run, the economy can trade off lower domestic demand, mainly the result of a fall in real housing prices, for higher next exports, the result of dollar depreciation. Any economic contraction in the short run will be the result of differences in adjustment speeds, with the fall in domestic demand outpacing the rise in net exports. The United States in 2006 isn’t Argentina in 2001: although there is a very good case that the dollar will decline sharply, nothing in the data points to an Argentine-style economic implosion when that happens. Still, this probably won’t be fun."

My emphasis. I think the next numbers to watch are consumer confidence and retail sales. I don't know where Krugman sees unused capacity to boost net exports, US companies have been sitting on cash instead of building factories, but I should look around. He knows more than I. My feeling is that the "difference in adjustment speeds" will be worse than he expects, but I have predicted complete collapse in each of the last three years.

You seem to have missed a really big Domino in the chain of risks. Why are banks making such crazy loans to such weak buyers? Who holds these mortgages? Well shades of the Savings and Loan crisis of the Reagan era we have the MBS - Mortgage Backed Securities.

Bunches of mortgages are bundled together and sold in chunks (tranches). High risk gets higher interest and low risk tranches get lower interest.

By doing this the bank gets away from 60-70% of the loan - they sold it to "others". This may "Encourage" the bank to make riskier loans.

WHO holds these MBS ? They may turn up in in your retirement accounts...

House of Cards


Ah. This explains all those hundreds of mortage spams I get.

"WHO holds these MBS ? They may turn up in in your retirement accounts..."

Actually, some say China has been buying MBS, in the multi-billions worth.
Since China has some influence on the value of the dollar, it is a little insider trading and a little bit hedging. Provides internal and external incentives to not devalue the yuan.

I read a lot of this stuff, and it just flows through me without sticking. Partly because even for the experts it is just numbers and then guessing.

But I heard Bush emerged from the private meeting with Hu "ashen-faced."

A few bracing years of currency inflation would reduce the housing bubble and perhaps avoid mass foreclosures. I suspect that is the choice our monetary policymakers face -- allowing inflation to bring the real value of those mortgages down (while simultaneously threatening the fortunes of the moneyed classes) or letting the bubble pop as you have described.

At what point does China decide that it gains more from crashing the US economy than it loses?

May the local pet foreigner ask a dumb question? Are all your mortgages standard for 5 year interest rates?

Over here they vary from 'adapted per year' to '20 years steady'. Ours will have the same interest (4.1%) for the next 19 years and since market value currently is allready twice our mortgage I don't think the fact that half of the mortgage is interest only will be that risky.

May the local pet foreigner ask a dumb question? Are all your mortgages standard for 5 year interest rates?

No, they are not. We have a 15 year, fixed rate mortgage. We bought the house eight years ago, so we've made more than half of the payments. We also have the advantage of owning a duplex in a part of Minneapolis where houses can no longer be zoned that way; we're grandfathered in. Hence, we face little risk of seeing the value collapse, not that I expect prices in NE Mpls to crash anyway; condos along the river are a different story.

dutchmarbel,

There are literally dozens of types of mortgages out there, ranging from totally fixed rates to adjusting every year, and from amortizing (paying off the entire principal balance) over 15 years to negative amortization (where the payments do not keep up with interest charges, so the prinicpal balance grows each month). Earlier in my life, I bought a townhouse which I knew I would not be likely to live in for very long, and took out a 7-23 mortgage (where the loan starts amortizing as if it is a 30 year fixed rate mortgage, but after 7 years, the interest rate could adjust by up to 6%, and then be fixed for the remaining 23 years of the loan), figuring it was effectively a fixed rate loan for as long as I intended to live there, with slightly lower interest rate than a conventional fixed rate loan would have been. Now that I am in a house I expect to live in for years to come, I have a 30 year amortization fixed rate mortgage, which was historically the most prevalent type.

We have a 30-year fixed-rate mortgage that we're a few years ahead on; I'd guess that we have something like 22 years left.

I think our interest rate is 5.25%.

dutchmarbel: what dantheman said is right. Historically, most of our mortgages have been one of a few types: 30 year fixed loans, 30 year adjustable loans (where the interest rate can fluctuate), and some 15 year fixed loans, where the payment is higher (since you have to pay all the principal off in a shorter period), but the overall amount is much lower (since less time to accumulate interest payments.)

What's scary about these new loans is that while they make sense in some circumstances (e.g., when you know you're going to move within a few years, or when you are wealthy enough that it's not a risk, and want to have the extra money for other investments), people are taking them out just because they can't afford a normal loan, and they're counting on the housing market to keep rising fast enough that they'll be able to refinance before the higher payments start. If this does not happen, they will be in trouble.

I myself, being a financially cautious sort, have always had 30 year fixed loans. One of the downsides of moving is that I have to give up the 5% mortgage I had so carefully refinanced into. (New rate: 6.25%; not so bad.)

When I bought my first house, I had never before had any debt. I paid my credit card balances every month, and never had any reason to borrow money. Going from zero debt to (in my case) $140,000 of debt in a day was, for me, very scary.

I read something a while back that suggested a significant portion of the ARM and related loans will adjust for the first time in 2007/2008.

searching google I found this article that says more or less the same thing.

The article I read suggested the potential risk for the economy was pretty significant but not as nasty as what happened when S&L's went south.

I bought my house 3 1/2 years ago -- first house, though we had previously owned our apartment -- on a 30-year fixed rate mortgage with a fairly low interest rate and fairly large down payment (a bit less than a quarter of the house's price). Hoping that this prudence would insure me against the coming crash...

Going from zero debt to (in my case) $140,000 of debt in a day was, for me, very scary.

Yeah, it kind of terrifies me to be in hock to the tune of $200k. I've never been a zero-debt kind of guy, though; I've had debt since my first day of college. All of my non-mortgage debt is, currently, interest-free, so I've got that going for me. I think we're scheduled to cross the zero-debt line (outside of the mortgage) sometime in mid-autumn of this year.

Of course, our net worth is comfortably in the black, but having to pillage retirement savings to pay off debt isn't where we want to go.

Oh: this just in from Instapundit:

I think that a GOP disaster is now officially looming.

Slarti: The key quote from that link is this:

"Here's the kind of response that's getting from former GOP supporters: "Okay, real conservatives, Republicans, and libertarians, stay home. Just...stay home in 2006. Or - what the hell - vote for a Democrat. We have to wake up the Stupid Party, before it completely merges itself into the Republicrat Statist Party."

I think this message is going to be spread more and more as Republicans disturbed by where the leadership has driven them try to figure out how to regain control.

Yes, OT, but still important.

Despite the shaky news on housing, it has to be said the economy is way, way stronger than I ever would have thought possible at +$60/barrel oil. If it's a choice between recession and going into hock to the PRC, then I'm happy to give Premier Hu my plastic.

I'd expected the other shoe to drop about 3 years ago. I guess that's what one gets for listening to Stephen Roach and Ken Rosen.

"We have a 30-year fixed-rate mortgage that we're a few years ahead on; I'd guess that we have something like 22 years left.

I think our interest rate is 5.25%."

Ditto, although we refi'ed about two years ago. Guess we won't be moving anywhere soon.

"Yeah, it kind of terrifies me to be in hock to the tune of $200k."

Why? You've got tax deductability on the mortgage interest, so you're actually paying an actual nominal interest rate of ~4%, plus you have the economic benefit of being able to take a bunch of other deductions, because the mortgage interest. Factor in inflation and you're paying maybe 1-2% interest.

Here in the SF Bay Area, 200K mortgage debt is chump change. A 1950s era, 1,000 sq.ft. on our street is going for $850K. That sucker is *ugly* too. And our neighbourhood is touted as an "affordable" neighbourhood. I think we're the only people we know with a conforming mortgage.

"Of course, our net worth is comfortably in the black, but having to pillage retirement savings to pay off debt isn't where we want to go."

Y'know, it's strange that all this housing equity doesn't make one feel more secure, because it's irrelevant: you'll still have to live somewhere, and one doesn't want to move out an expensive area in case you never can afford to get back. In fact, in CA, with Prop 13, the rise in housing prices makes one less likely to move, 'cos you'll double or triple your property tax. Five years ago I might have thought about trading up: but not now.

Paul and I are about to retire and I am worried about what to do with my investments. I'm good at saving, but I have never made any money on the stock market (or lost it). We have paid for our house and have no mortage. Neither of us has any debt, but we're dinks so we have always been able to pay as we go. I just don't want to see my hardearned savings turn to dust. I am thinking abut just putting it all into the Federal Reserve. Naive and conservative investment policy, but when it comes to money, that's what I am.
It is very apparent to me that my part of the country is turning into a two tiered economy of them that has and them that think they have because they bought on credit. The second group is headed for some very hard times. i don't mean to imply any kind of superiority to them. It's easy for me to live the way I do because I have no kids and my parents paid my way through college years ago. This economy is a severe struggle for many people and credit cards are how they make up the difference between what they earn and what they need. It is definately a house of cards. People think we have a middle class in this country, but it's an illusion.

Why?

What happens if jobs become harder to find? We've gotten used to times of plenty. Probably these times of (relatively speaking) plenty are going to continue, but maybe not. It's the "maybe not" that worries me.

I've never been unemployed except by choice (and then only for a couple of weeks) since graduating from college, but it could happen.

In fact, in CA, with Prop 13, the rise in housing prices makes one less likely to move, 'cos you'll double or triple your property tax.

We actually have the same problem here in Florida. Property values have increased so much that if I sold my house and moved into my neighbor's house (which is pretty close to the same size, shape, and lot size as mine) I'd be paying well over six hundred a month in property tax; more than double what I pay now.

Which in turn is equivalent to the property pax I paid yearly in Alabama, just to give you a notion of the sticker-shock involved in the move here.

What happens if jobs become harder to find? We've gotten used to times of plenty. Probably these times of (relatively speaking) plenty are going to continue, but maybe not. It's the "maybe not" that worries me.
That's been something nagging me as well, Slarti. I'm a software developer who survived the 'internet implosion' of 2000, but only just barely. If timing had changed, I would've been left stranded on the west coast with no job, surrounded by people with twice my experience fighting for jobs that paid half what they'd gotten six months earlier.

My wife and I are carrying some moderate debt (recent wedding that we had to pay for most of, some school loans, a car, etc) but we made the decision to hold off on a house until we knew we could focus all of our debt-repaying energies on it. Diving into an interest-only loan or somesuch sounds appealing, but only until you think back and remember how things can be when times are hard for even a few months.

lily: look at triple-tax-free (federal,state, local) municipal bonds. but more importantly, contact an investment advisor.

dutchmarbel: up until 2004, the vast majority of mortgages (lending secured by residential real estate) were 30 yr fixed, 30 floating or 15 yr fixed or floating.

what's terrifying to us in the real estate business (i'm a land use lawyer) is the enormous percentage of interest-only loans made starting in 04. Anyone who took out one of those loans couldn't afford to make payments of principal at the time (because otherwise they'd have gotten a traditional mortgage). This means these people were (a) hoping for a very (ahem, VERY) significant increase in family income over the (usually) 5-year interest only period or (b) hoping to sell the house at the end of the IO period and capture the increase in equity (the "greater fool" theory).

California has very complex laws about what happens when you can't pay your mortgage. The simplest version says that, so long as you haven't refied, you can always just surrender the house to the bank and the bank cannot pursue you for the defiency between the value of the house and the value of the mortgage. Not all states have the same laws and i expect that many smart bankers are hiring real estate lawyers and financial analysts to figure out how to process defaults. (take the house / change the loan / take other assets / drive the borrower in bankruptcy, etc.)

Francis,

At an earlier stage in my career, I handled bank collections and foreclosure. The banks know what the laws concerning defaults and remedies are already, and as in the case of last year's bankruptcy code changes, have changed them to suit their itnerests.

I will add that many states are far less debtor-friendly than California. In Connecticut (where my first job out of law school was), there is a statutory remedy of "strict foreclosure", where if the lender can convince the court that the likely result of an auction would be insufficient to pay off all creditors, an auction will not be held, and the court will give title directly to the foreclosing creditor, subject only to prior liens. We tended to argue for this (and frequently got it) if the ratio of debt to appraised value was anything over 70% (meaning there was 30% equity after paying off all liens through ours).

Don't even get me started on Prop 13, one of the single stupidest bits of legislation ever. Chunks of my family live in LA. My grandmother lived, until her death, in a house she built on a bit of land she bought sometime in the 50s, on the border between Beverly Hills and LA. Needless to say, it became very, very valuable. Phil Spector lived next door, and all that. One of my cousins, by contrast, lived in a small house in a really bad neighborhood, as in: gang tags on the sidewalk, periodic shootings, and so forth. My cousin paid more in property taxes than my grandmother, since prop 13 prohibited property reassessments except at the time of sale.

Prop 13 also drove a lot of crazy land use decisions: since municipalities could not raise money via the property tax, but could do so via tiny additions to the sales tax, they were very eager to get car dealerships and other places where people buy very big ticket items (and thus pay lots of sales tax.)

I hate prop 13.

I have been saying for years that people who live in urban areas ought to be willing to pay for them via property taxes, especially since so many cities are either in or at risk of getting into the property tax death spiral: they need more money than surrounding areas, raise taxes, people who can afford to do so move out, the tax base shrinks, they have to raise taxes again... repeat until disaster strikes. When I move, I get to put my money where my mouth is, since Baltimore city taxes are a lot higher than Baltimore county, where I now live. I will be proud to support my local government.

Take that, Grover Norquist.

I've not despaired as much as bobmcmanus recently, but I share his skepticism about Krugman's belief that declining-dollar-driven export increases can offset declining-home-value-driven domestic consumption decreases.

For one thing, look at the comparative magnitudes. Consumer spending in the US is around two-thirds of the economy. Now, some of that is not really elastic, like food, heat, and nondiscretionary health care. But a big fraction of it is partially or totally discretionary, like cars, clothing, home improvement and furniture, travel and entertainment, and high-quality education -- the things that give us our "quality of life" but aren't truly necessary to it and so can be cut back. Much of this QoL spending has been financed by monetizing increases in real property values, and that well is rapidly running dry.

One also notes that the costs to average families of some of the really necessary items, e.g., energy and health care, have risen sharply recently and are likely to continue to do so. This is a real pinch for a lot of families, one that I think could manifest as a major "tipping point" in consumer spending.

And to counter this, we're going to increase our sales of ... soybeans? Boeings? "Mission: Impossible" sequels? By how many-fold?

Also, even if the macro numbers come close to balancing, the distributions are going to be wildly uneven. Even if Boeing and ADM triple their sales, how quickly is that going to trickle down to families with wage-earners in the non-export sector (including the roughly half of the economy that provides services rather than goods)?

People will hang on to their homes with their last fingernails. And banks are none too eager to foreclose, especially if values are declining. But I'm sure not putting a dime into real estate until at least a year from now, and possibly two. And I'm shifting more of my investments into non-dollar-denominated assets.

Could we have Clinton and Rubin back now, please?

What we have is not exactly Prop 13, but it's fairly close: we limit property tax growth to (IIRC) 4% per year.

As for your "urban areas" comment, hilzoy, there are people who have lived in Orange County (FL) around where I live for decades, since before Orlando could have been considered to be a city; their property values have just exploded. Is it your contention they ought to have their tax payments escalate when they're transitioning to fixed income? Just because a bunch of complete strangers thought it might be nice to move here?

As for me, I don't know what the right answer is. I think property taxes are problematic for just the reasons listed above, so I'm thinking that state income tax might be a more palatable alternative after all.

Could we have Clinton and Rubin back now, please?

Darn it. Right up to there I was about to say this is the first OW thread where I am in 100% agreement with both the main post and all the commenters :)

Seriously though – I have been expecting the bubble to burst for about 2 years. I live in an area where development has been rampant the last few years. Many of these projects are just coming online and units are just not selling. Meanwhile typical values have more than doubled over the last 4 years, just in time for a reassessment. So we have unsold new units priced out of most people’s range, people trying to sell or refi to take some money out, and a huge assessment increase that is going to push more people to want to sell.

Tick tick tick.

The bubble's deflating here in Orange County, and we'd been one of the hottest housing markets in the country.

The condo market is taking off, and I'm sure that means something. ISTR in Texas the condo market got hot just before all hell broke loose and foreclosures were keeping everyone busy for a while.

The number of people taking out interest only and other such mortgages for enormous sums boggles my imagination. Are most of them really rational actors? Or are they just living in the moment and for the moment?

Don't know how practical an option it is for most, but one way of getting a shiny new house without going the mortgage route at all is to build it over several years financed in part with a line of credit for example. This allows time for a lot of sweat equity to go into it and reduces costs a lot.

lily: look at triple-tax-free (federal,state, local) municipal bonds. but more importantly, contact an investment advisor.

Careful.

Before buying tax-free bonds be sure to calculate the tax you would pay on equivalently risky taxable bonds. The tax-free bonds pay lower rates, obviously, and a middle-income taxpayer will usually be better off just paying the tax.

This seems like an oportune time to pimp my friend's blog about home-buying, real estate and mortgages. It has a very rah rah, buying a home is great perspective, but he's a mortgage banker, so I think that's understandable.

He and I have had some serious arguments about the impending burstage of the housing bubble. He seems to think that there is no bubble at, at worst, there will be a softening of the market.

There's an important factor here that affected my own decision to get an AOM: much of the upper-middle class is now subject to Alternative Minimum Tax. Almost the only deduction most people can take on that is for realty payments. I don't need the market to keep rising -- as long as it doesn't actually crash before I sell, I still come out ahead of rental because of the tax savings. And if the price increases even a little between purchase and sale (i.e., any time between two years after purchase and the interest hike), I'm in good shape. That's not a bad gamble for many of us.

Which is not to say I don't literally lie awake nights worrying about a crash...

"I hate prop 13."

Ditto. Just a frickin' awful, awful, piece of legislation. As is most of the legislation from Propositions: you should save the proposition process for key issues of principle, not for ring-fencing X% of state spending on {insert media-friendly cause here), pushed by wall-to-wall mediaadvertisements of Cute Fluffy Bunnies supporting said proposition.

Hiram Johnson must be rolling in his grave with what the proposition process has become.

"What happens if jobs become harder to find? We've gotten used to times of plenty. Probably these times of (relatively speaking) plenty are going to continue, but maybe not."

I was terrified of buying also, 'cos my sister bought at the peak of the property market in the UK in the 1980s and it took her more than a decade to get out from negative equity.

Thankfully, the better half talked me into buying (she'd noted that for the few years before that rents had went up more than house prices, and so housing was due for rapid rise), which is good, because otherwise we'd be shafted and living in the Central Valley.

If you think about the microeconomics of it, if you're in an area with limited space for housing, then the amount that people are willing to cough up for housing payments should at least track growth in incomes. So, in the long-term, buying your house is a good investment. But I wouldn't bet on flipping it in two years right now.

If you've bought your house eight years ago, you're in good shape, and (holding a clearance as you do), you know the opportunities for your job to be offshored are minimal. So you've less cause for anxiety than others.

Slarti: "As for your "urban areas" comment, hilzoy, there are people who have lived in Orange County (FL) around where I live for decades, since before Orlando could have been considered to be a city; their property values have just exploded. Is it your contention they ought to have their tax payments escalate when they're transitioning to fixed income?"

Two answers. First, in the 'ought to be willing to pay for them' part of my comment, I meant something more like: should not try to dodge property taxes by leaving the city. (Since that just exacerbates the death spiral; and if you like your city, you should not contribute to its ruination.)

About rising valuations: I don't see much cure for it, other than, well, the bursting of the housing bubble. There has to be some basis for property taxes, and prop 13-like things just distort economic decisions while shrinking the tax base. (Or rather: they shrink the tax base, and thus lead to distorted decisions: people who would sell not selling because then their houses would be reassessed, towns giving huge incentives to car dealerships, etc.)

The one thing I think would help would be some way of encouraging mortgage lenders to tighten their eligibility criteria to some remotely sane point (so that they were not begging and pleading with people who are bad credit risks to please please take out a mortgage, trying to lure people in with interest-only loans they can't really afford, etc. There is a cost to this; whatever encourages lenders to act as though it's not risky should be changed.)

When people are encouraged to think that they can spend more than they really can, they bid up prices, which harms a lot of people, not least of them those whose taxes go up because their property values inflate.

USA: I bought my house five years ago, and it's approximately doubled in value.

I suppose one can think of property tax as just another market force, but it's one that can have unpleasant side effects. Imagine, hilzoy, that your grandmother's tax payments were not limited, and that she was therefore taxed out of her home by Prop 13.

If your point is that property values might not have grown absurdly without measures such as Prop 13, that may apply in places like California and Florida, but I'm not sure that there wouldn't be a great deal of damage either way. Since everyone that rents or owns pays property tax, though, why not circumvent the whole property-tax problem by tacking more onto the income tax rate?

Slarti: I agree that it's lousy; I'm just not sure I see an alternative. (And one hope would be that if everyone's rates could rise, no one's would rise as much as some people's do when other people's taxes are capped. I mean: if one has to cap people's taxes, at least do it on some remotely reasonable basis, like ability to pay. Not something moronic like whether they sold their house recently.)

I think eliminating property taxes entirely would be a mistake, but I'd be happy to see them reduced in favor of an income tax. The hitch would be whether the same government entities (municipalities) that tax property also tax income.

I suppose that the original rationale for having municipalities raise money via property taxes was that larger properties generally use more services.

I mean: my grandmother would have done worse without prop 13, but my cousin was not exactly thrilled with the situation as it was, in which her little house in the downright dangerous neighborhood was valued at more than my grandmother's quite delightful home in the Hollywood hills, nestled among the movie stars. Someone gains, someone loses; this is inevitable; but you can at least try to make it happen in something like a reasonable way.

Thanks everybody for the clear explanations. I didn't know that mortgage interest was tax deductable in the States too.

I've always been half a month-income short at the end of the month. The pattern started with pocketmoney but never got worse than half a month income in the red even when I made quite a good salary. When I first bought a house though.... pfffffft. Nightmares, especially since I bought it on my own - no partner to fall back on.

In the Netherlands the additional costs of buying an existing (= not newly build) house are approximately 10% in more or less obligitory costs. So people don't buy another one frivolously. Property tax is on the commune's estimate of the worth of your property and they revalue every two years (was 5 years, but they changed that recently due to the rapid price increases).

Mortgage interest is only deductable for the house you actually live in, 30 years max. and if you increase the mortgage the interest of that raise is only deductable if you use the money for your house.

We had more foreclosures too, so they recently made financial institutions more accountable for it. If people can't pay anymore they look at the banks that lend them all the money and may fine them.

I read somewhere that in 2007 roughly 20% of the total mortgage debt in the country will make some kind of adjustment. Mostly ARMs coming off of their intitial fixed rate, but still very worrying.

Our own mortgage is so pathetically tiny that we don't even qualify for the interest deduction--we're better off using the standard personal deductions. But here in rural Virginia it's not that hard to find a 700 square foot house for $60k.

I sold a 2300 sq ft house in rural Alabama (30 minute drive from Redstone Arsenal) on 10 acres for $150k, five years ago. It's probably still worth about the same amount.

"There has to be some basis for property taxes, and prop 13-like things just distort economic decisions while shrinking the tax base."

The solution to the prop 13 grandma problem isn't that hard. Make the prop-13 tax escalation restrictions apply only on primary residences. Right now rental properties and commercial properties also get the exemption. That doesn't make sense given the problem we are trying to avoid. (This is the same problem I have with Social Security as currently formulated. If you want to address a specific problem do so, don't pervert a whole system in doing so.) Furthermore, grandma eventually dies causing a transfer. Companies usually don't. In California right now there is a huge incentive to rent commercial property rather than sell it (even if other considerations would lead to the sale) because selling it causes such a steep markup in the tax rate.

there are people who have lived in Orange County (FL) around where I live for decades, since before Orlando could have been considered to be a city; their property values have just exploded. Is it your contention they ought to have their tax payments escalate when they're transitioning to fixed income? Just because a bunch of complete strangers thought it might be nice to move here?

I'm not sure I follow the compaint here. People live in a small town/rural area and property values and taxes are low. There is a big influx and property values rise. Should their taxes rise? Maybe. Presumably local government costs, or at least those funded by property tax, have risen, for some reason, proportionately more than the population, else property taxes wouldn't have to go up. So if you leave the old-timers alone the newcomers end up paying more than their share, don't they?

That said, I don't disagree that property taxes are not a wonderful way to raise revenue. In some places though, (Florida?) there is such visceral dislike of income tax that there may be little choice.

In California, a substantial amount of commercial real estate is held in single asset entities. instead of selling the asset, you sell the company.

The philosophical question presented by Prop. 13 [as applied to primary residences] is whether, and how much, we want to tax family wealth, as opposed to income, since the vast majority of people paying the tax will be doing so out of taxable income. I don't have a real good answer to that question.

I'm really uncomfortable with using value at acquisition date as the basis for computing property taxes. Even though the US Sup Ct disagreed, I think that this is a big Equal Protection problem.

If we are going to tax property, then I think that the appropriate method of granting relief to a tax burden that drives grandma from her house is to create a sliding scale of tax relief based on annual income and total wealth.

"In California, a substantial amount of commercial real estate is held in single asset entities. instead of selling the asset, you sell the company."

Right, but if you only have the Prop 13 exemption for a primary residence this isn't a way around the tax.

SH: the point I was apparently incoherently making is that under current law many income producing properties are never revalued since they're never sold. While we're busy sticking our feet into the third rail of California politics, we might as well have all income producing property [commercial, industrial, residential rental] revalued on a regular basis (say every 3-5 years).

Re prop 13 and city property taxes, IIRC, prop 13 initially was very limited in its scope. It was intended and drafted only for people -- mostly non-commercial agricultural landowners -- who had comparatively large tracts of land they acquired when it was remote and rural, and used as if it were still that way, but found themselves on the edges of rapidly expanding suburban and exurban residential areas, and thus had valuations (and taxes) that either ruined them or forced them to sell for development. But politics being what it is, its scope was rapidly expanded to, well, everybody, and thus began a long slow slide into financial desperation by, in particular, California counties.

I do think there is some case to be made for this type of remedial legislation. It's in the same vein as, e.g., assistance to workers whose industries are going away because of globalization, technology change, etc. It's assistance with transition due to forces beyond people's control -- sort of like disaster relief. The difficulty, of course, is keeping it limited in scope and duration -- keeping all the pigs' noses out of the trough. That clearly didn't work in the case of prop 13.

As to city property taxes, consider the well-studied problem of Washington, DC. It has all the standard problems of a city (caused at least in part by the fact that many people who don't live in the city nevertheless work, shop and play there, creating very high maintenance needs whose costs must be borne by city residents), but unlike every other city in the country, it has no state to make up the shortfall. The result has been continuing financial catastrophe.

One solution, considered and/or adopted to various degrees by various cities, is special taxation zones and special fees, intended to recover some of the costs imposed by non-residents from those non-residents. Examples include city wage taxes (New York, Philadelphia), transit zone taxes (Seattle IIRC, and perennially under consideration by San Francisco), and congestion fees (London).

At a certain point, I think it's neither fair nor realistic to expect city residents to support ALL the costs of maintaining a city. To the extent the city serves as a business, cultural, and entertainment hub, it has to recover at least some of its maintenance costs from those who benefit from its presence but don't live there.

bleh: "I think it's neither fair nor realistic to expect city residents to support ALL the costs of maintaining a city."

Agreed. In the meantime, however, I am going to smile as my property taxes shoot skyward. (Up once because I'm moving to the city; up again because in buying a new house, I'm forcing a reassessment, and both houses have appreciated a lot.)

In Seattle, the taxation structure has evolved - or devolved, depending on how you look at it - so that sales taxes pay for infrastructure (sports stadiums, transportation projects) and property taxes pay for social services (esp. education).

This division does make some sense. The sales tax is the tax non-residents who come into the city to use the amenities wind up paying. And property taxes are paid by residents, who are the ones using the city's social services.

Business owners complain a lot about B&O taxes - which presumably pay for business-associated services, including workers' comp - but I don't know if the taxes are really that burdensome, or are most burdensome to the small businesses that lack the clout to get the subsidies the major players get. That kind of situation is ridiculous: why give the biggest and best breaks to the companies that can afford to pull their weight, and which also use the state services the most? If it's unfair to require smaller businesses to comply with expensive mandates like ADA and health insurance, then it's also unfair to also expect them to take up the slack in taxation for the major players.

I would support a state personal income tax - but if, and only if, the sales tax was eliminated, including the "hidden" sales taxes charged by utilities. I would definitely support a state corporate income tax - if that meant eliminating the B&O tax. Unfortunately, what's likelier to wind up happening, is that the legislature will promise to "phase out" the taxes a state income tax should replace, and then never actually phase them out.

Call me a heartless bastard, but the problem of grannies owning homes that shoot up in value doesn't trouble me overmuch.

I live on Long Island. Every few months our local rag, Newsday, runs a story about Seniors being taxed out of their homes. I remember a year or so back that there was a story featuring this old woman who had lived in the same house for 30 years or so. The house was recently valued at about $750,000 and she was being "taxed out of her house".

Maybe it's a flaw in my moral character, but I have a hard time feeling sorry for someone sitting on an asset worth three-quarters of a million dollars who turns around and cries poverty. There are any number of solutions open for a person with such an asset, from reverse mortgages and home equity lines of credit to selling the home and renting an apartment with the interest.

I don't see why her tax burden should be shifted on to the rest of the community so that she could have the opportunity to pass this asset to her heirs.

For what it's worth, I anticipated similar doom-and-gloom back in the real-estate boomlet around 1980 or so, when balloon mortgages were the new great thing. I looked at the amount of leverage involved with typical new homebuyer mortgages (which multiplies both gains and losses), compared it with the amount of leverage in the late 1920's stock market, and asked "what happens when all these balloons start coming due?"

Well, 1929 did not repeat in the real estate market then, nor did it in the next cycle of boom-and-bust peaking in the late 80s. Prices did decline, and new homeowners who were forced to sell due to financial reverses got hammered, but a general free-fall panic never emerged. One reason is that unlike the 1929 stock market, homeowners can't be forced to sell just because their position has temporarily gone negative. Instead, homeowners who have a choice about timing pull their homes off the market during a dip, buffering the decline in demand by restricting the supply. Also, I suspect that the banks get somewhat more flexible about working with their better customers on refinancing during a dip, since the banks don't want to wind up with a lot of non-performing real estate either. And homeowners as a group seem to be pretty determined to make major sacrifices if necessary to hang onto their homes during a dip - the cases I've seen go into foreclosure were generally those where the homeowner had nothing left to give to the mortgage.

I'm certainly not saying that a RE crash can never happen, and I've been worried about what's holding up the current level of prices for some time now. But I'm not sure that interest-only loans bear a significantly higher risk than those 1980-era balloons. The first few years of a traditional 30-year fixed are mostly interest payments anyhow, so the difference between them (either in terms of how far the homeowner is stretching to qualify, or in terms of how much equity he or she has built up after a couple years of minimum payments) isn't likely to be all that great. I think it's a difference of degree, not kind.

Maybe it's a flaw in my moral character, but I have a hard time feeling sorry for someone sitting on an asset worth three-quarters of a million dollars who turns around and cries poverty.

Well, I think the point here is that the asset is "worth" three-quarters of a million not because its resident is wealthy, or indeed because of anything he or she did, but because of the actions of activities of other people beyond their control. And it happens at a time when these particular owners are often in a period of fixed or declining income.

I don't see why her tax burden should be shifted on to the rest of the community so that she could have the opportunity to pass this asset to her heirs.

Ah, so if everyone else decides they want to live where you do, you should have to move. Check. Something tells me you're not quite as big a fan of this philosophy when it's called "gentrification."

Well, 1929 did not repeat in the real estate market then, nor did it in the next cycle of boom-and-bust peaking in the late 80s.

Actually, it did repeat regionally back in the mid '80s. Texas.

Anecdote and confession, combined: I owned a house in Texas at the time, and I'd already relocated here. I couldn't sell the house. I couldn't rent the house, and I didn't make enough money to maintain two households while putting my girlfriend through college. After a couple of years, I simply called up the bank and told them to take the house, because I was defaulting. I did this without a lawyer, because I was stupid, but at least I was straight with them, and (hopefully) avoided a great deal of dodging, breaking promises, etc.

They foreclosed (after a time) and sold the house at auction. This is when I found out that PMI doesn't cover me. After doing some telephoning, I determined a couple of things:

1) The PMI company could come after me for the balance (which wouldn't have mattered, as I had less than nothing), and

2) There were so many other foreclosures with much larger costs to recover that it was likely they'd never get around to me to collect.

And they never did. It polluted my credit record for a time, but after it fell off and I paid off everything else early, I now have outstanding credit.

And re: grannies in appreciating houses, I agree with Phil. And I think what Chuchundra's willing to endure in the name of what he thinks is fair is more or less irrelevant to the plight of others who are not Chuchundra.

"Actually, it did repeat regionally back in the mid '80s. Texas."

As a Dallas area resident, a real analysis might be interesting. One note, with numbers out of my hat: in the 70s, thirty downtown skyscrapers built, since the crash, maybe three. Kinda heart-breaking, kinda weird. The worst crash was in commercial real-estate. After a bad spell, building started up again, somewhat smaller, north of downtown. The metroplex is ok.

But those scrapers still stand downtown, mostly empty, priced too high to compete, too expensive to destroy or write off. Japan is just now emerging from its recession after 15 years of underperforming assets. Real estate bubbles may not crash and burn, but can hurt for a long long time.

Maybe its a result of living in the NYC area, but I don't have much sympathy for Grandma either. If she's sitting on a 750,000 house, she's got a lot of options to help her pay that property tax, her fixed income is most likely going to grow, and she may not need to leave the house. There has to be an support/advocacy group for the recently enfranchised somewhere.

If your concern is sentimentality over a house, love people not places. If she doesn't want to leave the neighboorhood she grew old in, that neighboorhood doesn't even exist anymore. Plus ca change, plus c'est la chose différente.

Gentrification is a problem for renters, not so much for owners.

As to granny, I remain puzzled by what it is about rising real estate prices that makes the per capita cost of those things property taxes pay for rise. Of course inflation is one reason, but property values have risen much faster than inflation, and even if you want to shield some people from the effect, you can hardly claim that not doing so is wildly unjust.

What I suspect happens is that the burden shifts as relative property values change, so some homeowners get hit hard while others see reductions, or only small increases. The complaints, naturally enough, come from those who face large increases.

If this is accurate, then the somewhat random nature of the process is yet another argument against property tax.

....Well, 1929 did not repeat in the real estate market then, nor did it in the next cycle of boom-and-bust peaking in the late 80s.

..Actually, it did repeat regionally back in the mid '80s. Texas.

To clarify, my understanding of the 1929 crash is that there was a vicious cycle going in which each round of stock price declines lead to more margin calls that couldn't be met, which dumped more stock onto the market, driving the prices down further. When I say that 1929 didn't repeat in the real estate cycles I've lived through, I'm referring to the apparent absence of this kind of feedback, at least in any significant role.

I had thought that balloon mortgages in 1980 would serve the same role as margin accounts did in 1929: large numbers of people unable to refinance due to lower prices being forced to default, lowering prices further, and causing others to be unable to refinance, but apparently not so. New homeowners who were forced to sell during the decline did get hammered badly (and I'm sorry to hear that included Slart), but others were generally not forced to sell because of the decline. Until I understand what would be different this time, I'm reluctant to assume that interest-only mortgages will fuel a collapse that balloons failed to achieve in 1980, since I think the difference between them is only a difference of degree, not kind.

Of course, I'm not an expert on either housing or depression-era economics, and would welcome comments from those who are more knowledgeable in these areas.

There's lot's of brouhaha about interest-only mortgages today...mostly so that the press can have something to talk about and foreclosure investment data and training companies (which I am one) can keep investors hopeful that foreclosure investing profits and volume will see a resurgence.

The real news is that foreclosures (including REO's), and pre-foreclosures are still at record lows.

Although Americans have been spending more than they make in the past few months, properity has never been at the levels they're at today...a recent study cited 8.9 Million Household have a Million$+ net worth (not including thier home equity).

The mortgage industry churns mortgages every 7 years or so, and when the interest only products begin to adjust (DeutcheBank say about $1 Billion in 2007) it just give the mortgage lending industry the opportunity to come in and make more money through refinancing and cah-out refi's (which are beginning to pick up steam right now).

Don't get me started!

People have money, so they are investing in real estate and the stock market. Home prices are up and so is the stock market. Foreign investors are also pouring money into the U.S. right now.

Unless the Flow of Money dries up...or people lose their jobs in big numbers (which could happen regionally, i.e. Michigan) the stock market is going to do well and real estate prices, while not soaring, will probably hold, or even increase slightly.

What are we seeing now?
People who bought second homes betting on their present home selling are bailing out of newbuilds right now. Investors who put deposits on new builds, betting on appreciation, are bailing right now. Investors that got aggressive in the height of the market, either by buying too high or buying too many properties will need to move inventory. People who did Negative Amoritization loans could get into trouble, and folks that bought the second home and closed on it can't afford two mortgages.

My clients and I make money when mortgages go into default or foreclosure, and there are always deals to be had, but the jury's still out on whether interest only mortgages will have a significant impact on foreclosures...or whether it's just that (loan type non-withstanding) people, in their exhuberance, just bought More House than they could afford and when the economy tightens, they'll get in trouble!!

Thats why when your ARM comes up for the first adjustment you refinance out. Lots of people use interest only ARMs to improve their credit situation so they can get into reasonable low interest rate fixed financing. Besides the old notion of your home as a nest egg is laughable. With a 6% interest rate on a 30 yr loan you realize you are paying in MUCH MORE THAN 2x the worth of your home during that period. Wow, that sounds like a great investment to me.

Dear Sir/Madam:

My name is Donna Mackie and I work with Dan Bobinski at Leadership Development in Idaho and he is working with a client who needs the following information and the project has been assigned to me. HOORAY!

If you could either kindly provide me with this information or direct me to a resource(s) that would give me this information I would surely appreciate it!

1) How many homes go into foreclosure daily or monthly?
2) How many of these homes completely foreclose?
3) How many of these homes are sold to investors?
4) How many are reinstated by bringing payments current?

I need this information for California, Nevada, Arizona, Washington, Idaho, and if possible, the entire United States.

I would so much appreciate your help on this!

Donna Mackie
(208) 284-6114

Great article! Mortgage. Find best mortgage rate and mortgage calculator.

Now thats ironic.

Whats really funny is that I'm the one who had to pass the verifier.

Great article Obsidian Wings. The statistics are alarming and people should definitely take note.

I live in Texas, where the number of foreclosures is rising faster than any other state in the United States. There is one investment firm I know of that should stand do very well from the rise in foreclosures. The firm is World Class Capital Group (www.wccgaustin.com), and they are creating funds to acquire properties from owners facing foreclosure. They are acquiring properties at a fraction of the market value and are selecting properties in areas that are expected to see vast growth. I spoke with the fund manager at World Class Capital Group and he is a real sharp guy. Their investment philosophy is solid and they are going to be producing some incredible returns for their investors. What's even better is they have a low minimum investment of $25,000 which allows people such as myself to invest. Look into this firm, they are doing some amazing things.

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