Saturday, March 11, 2006

Paying for Other People's Lifestyles

She really is a goddess. Athena of the Sonoma Housing Bubble blog has a fresh way of looking at the current housing mess that we find ourselves in -- a reverse Ponzi scheme:
Instead of the person at the top making all the money and the people at the bottom doing all the work... the people at the top of the homedebtor pyramid scheme are spending all the money... and the last fool on the mortgage train gets the biggest pile of debt disguised as a market priced house. It is NOT market priced. It is debt priced.
She then points out that people are using their houses like ATMs, extracting equity to pay for things that they cannot afford...paying for a lifestyle they cannot afford. Then, they put their house on the market which in effect is an attempt to lure some bigger fool to buy their house and thereby pay for the lifestyle that they, the seller, have come to expect and which they could never afford in the first place:
These posers finance the lifestyle they have become accustomed to by putting it all on the house... and big fool buyer comes along and pays for it. When the fools catch on that the house price isn't actually a reflection of its value in the market, but merely a reflection of the spending habits of the previous owner... how long before THAT reality repulses the buyer? What happens to the overspending fools living under a mountain of debt they never intend to pay off then?

Oh and just think about how happy the new owners of your debt with a roof will be when they are burdened with the payments for the lifestyle you enjoyed. Do you think there will be a backlash against the whole darn industry then? You think buyers will keep lining up to take your debt hand off when the reality hits them?
Like she said, it's as if people are maxing out their credit cards and then selling them on eBay to the highest bidder. "And there really are idiots out there shopping for someone else's debt. Appalling".
this hog like sense of entitlement is the only reason real estate has gone up in such horrifying numbers... it isn't a reflection of prosperity of a community. It is not a reflection of a booming economy, or job growth, or anything fundamental to the economy... it is nothing but slapping a price on the lifestyle your neighbor mortgaged himself into... I think the big fat fools should start looking at it for what it is...
Appalling indeed.

So all you potential Marin buyers out there (or anywhere else for that matter): are you a sucker? How do you feel about financing someone else's lifestyle that they could not afford in the first place? Do such people deserve to be rewarded for living beyond their means? Wouldn't it be nice if such people were held accountable for their debt? Well you, buyer, have that power: always insist on a 15% minimum price reduction on whatever house you want to buy. Given the current across-the-board weakness in the markets this is quite doable. Not only will you get the house for less, but the seller may very well have to actually pay for their lifestyle.

Keep it up Athena!


Blogger Athena said...

Do such people deserve to be rewarded for living beyond their means?

This is EXACTLY it Marinite! THAT is the heart and soul of what the real estate bubble is about.

The idjits proclaiming "get in before you are priced out" "buy buy buy""real estate only goes up""they aren't making more land""you can't lose"

Are doing exactly that... they are working themselves into a foolish spending frenzy that is build on nothing more than rewarding people for living high on the hog.

I mean LOOK at this... Just last year alone... 2005 American's withdrew $600 BILLION in equity. They bought plasma big screen flat screen tvs. They bought granite counter tops. They put the Escalade on the house. They put the suburban on the house. They put their vacations on the house, the kids' braces, the college education, the upgraded bling for the wife lamenting her old ring didn't stop traffic.

People have SPENT their houses... yet people were LINING up to put a bid on their debts. People got into bidding wars in some areas... please please please let me spend MORE than the asking price for your lifestyle that you have enjoyed!!! Please please please accept MY offer so I can shoehorn myself into your debt. I am so glad you have a boat, a hummer, an escalade and private school for your kids... I am so excited to eat peanut butter and jelly and top ramen and squeeze my self silly to make the payments on the debt you racked up. Maybe if I'm lucky and pay more than 50% of MY income in a couple years I can squeeze a hummer out of this house too!!!! Please please please accept my offer!!!! Oh Oh Oh... pick me, pick me, pick me!!!

LOL... you know, when I go to Las Vegas I hear toilets flushing every time someone pulls the lever for the slot machines too. I just have a knack for noticing when people are flushing money down the toilet.

But seriously, $600 BILLION dollars has been spent LAST year alone with people living BEYOND their means... and promoting this gamey real estate bubble just doesn't pass the smell test.

If your neighbor wanted to sell you his maxed out credit card so he could go get a new one to max out you would call him CRAZY for even offering you something so lame... talk about irresponsible parasitic scammer.

but your neighbor spends his house silly and offers it to you when he has spent practically ALL of its equity... and you JUMP at the chance?


Wait... what's that sound? I think I hear the buyer's theme song playing.... "Oh.. if I only had a brain..."

ps. Oh and that goddess thing... my goodness but how a girl never tires of hearing such things! :-)

Mar 11, 2006, 1:11:00 PM  
Anonymous Anonymous said...

I once saw a tiny frog jump in to a fountain that was being drained.

He got caught in the flow and ended up as a carcass in a dry drain.

I thought, "How could he jump in to this obviously collapsing environment?"

Mar 12, 2006, 1:34:00 AM  
Blogger Marinite said...

"How could he jump in to this obviously collapsing environment?"

Yes, but there are and have been so very many other frogs saying only that things are great and it will only get better and that that fountain is Paradise and everyfrog wants to live there.

Mar 12, 2006, 9:02:00 AM  
Anonymous Anonymous said...

They bought plasma big screen flat screen tvs. They bought granite counter tops. They put the Escalade on the house. They put the suburban on the house. They put their vacations on the house, the kids' braces, the college education, the upgraded bling for the wife lamenting her old ring didn't stop traffic.

Athena, where are you getting these "statistics" from? You don't actually know how people are spending that $600b, right? It is a pretty sweeping generalization to assume it is all being spent on bling and not something more substantive like the following:
-An MBA, which would raise you personal income, allowing you to more than cover the loan -- money which might otherwise have been a student loan which you might otherwise have borrowed from the federal government
-Your own business or franchise (which I considered doing with my $180k lines of credit at one point -- decided I did not really want to run a Quizno's in the end)
-Buying an investment property (which is what I did spend my HELOC on)
-Repairing or improving hour own home (and we know how many PoS' there are out there) which would raise its value.

This is just pure hypothesis on your part, right? Or are you checking people's receipts and validating those purchases against their HELOC withdrawals?

Mar 12, 2006, 11:09:00 AM  
Anonymous Anonymous said...

"Buying an investment property (which is what I did spend my HELOC on)"

Out of curiosity, how does that actually work?
Does the interest paid reduce one's taxable income?
Not to mention, if you borrow at 7%, what sort of appreciation or rent do you need to make this worthwhile? I suppose I should crunch the numbers, but the prospects look a bit daunting.

Mar 12, 2006, 12:21:00 PM  
Anonymous Anonymous said...

The view from silicon valley newletter just did a brief note on the falacy of an MBA as a good "investment". It is really just branded debt. Smart and hard working people don't need such gimmics.

Mar 12, 2006, 1:59:00 PM  
Anonymous Anonymous said...


The interest rate on the HELOC is at 7%, as you correctly guessed, but the first is actually seller-financed 5-1/8% with 90% LTV which is(was) impossible to get through conventional means (as an investor). So, of the $396 selling price, 40k came out of my HELOC. However, I ploughed another 20k into it to make it habitable. It rents for $1500. In the interests of full disclosure, it breaks down like this:

$360 (2nd)
$420 (tax)
$310 (HO dues)

Total is $2652 - $1500 is a $1150 monthly deficit, of which Uncle Sam and the state give me back roughly a third.

Clearly, it doesn't cash flow, but it is manageable. I was the beneficiary of a 170% gain on my Novato condo from 1997 until last year so even with the new debt, I still have a 40% equity cushion between the two properties.

Athena, I have no doubt that some people are living beyond their means using money borrowed from their homes, and I know someone who just bought a new Land Rover from the proceeds of their refi. However, the articles you cite (and I admit I didn't follow the links, just read your post) do not seem to give any indication of the %age of debt used for consumption as opposed to investment, average equity cushions of all homes in the US or other assets that borrowers might be able to sell in a crunch (401(k)'s, stocks, savings accounts, trust funds, whatever). It just doesn't give any indication how much distress there is out there.

I am not saying that prices here in Marin (or the Bay Area) are not overpriced -- they absolutely are. But my theory (and marinite has discussed this topic before) has more to do with speculation and psychology (low rates, multiple offers, not wanting to be left behind, etc.) than it does with the sheer amount of debt Americans are carrying.

Also I fail to see your point about the debt level driving the prices. The aforementioned condo was paid off in full by the previous owner -- it was still a $400k condo, similar to the prices of everything else in the complex at the time. Can you explain this further? I really don't understand your point.

Mar 12, 2006, 3:58:00 PM  
Blogger Athena said...

Rejunkie... my statistics... look at the auto sales stats. Look at the price ranges for the auto sales stats. An escalade... a 50k kind of vehicle... do a yahoo search and you can find all sorts of information on how many SUV's have been sold since the funny money days began.

The bling stories... I apologize, those are anecdotal... but i have now heard so many of them that I stopped counting LAST year.

The things you have spent on I am sorry to say are the exception to mass behavior. The majority of consumers spent on their lifestyle and didn't leverage their new found money to get themselves in a better position or actually invest the money and make it work for itself. That is great that you did. That is exactly what a smart consumer would do when given the opportunity to borrow cheap money- make the most of it and get ahead of it. But consumer mindset says something different. It says spend today, refinance again tomorrow.

here is a test... if the majority of the masses refinancing the hell out of their debt boxes are like you... there will be no trouble ahead. Foreclosures won't climb, and there will be no major slowdown in retail sales, and we won't see any financial institutions rocked, and there will be no lender reform because nobody will have abused the cheap money opportunity.

If we see those things... its a pretty good bet that the average bear is not as wise as you are about $$

Mar 12, 2006, 6:31:00 PM  
Blogger Athena said...

ah as for the debt pricing... the properties that were paid off did not drive the prices up. The ability to buy and refi cheaply in unison is what drove the prices up. More buyers were willing to take advantage of the cheap money- and in numbers that were above the number of houses on the market. So the timing had everything to do with it- and that changed the market. People refied and continued to refi and some may have been smart with their money and others were not... and still others turned to flipping. The refi values is one of the biggest things that kept the prices going up much more than just the pent up demand brought on by cheap money.

Where do I get this...? Two really close friends are appraisers and another a home inspector that works with an appraiser.. the stories have been adding up all over the place. One had been working in several different counties... Sonoma, Sacramento, Santa Barbara, another on the peninsula and the other in So. Cal... the stories are all the same and it is from the horses mouth that values no longer are based upon the location, the economy, the job outlook and the condition of the property. The biggest factor is what else sold in that neighborhood and what are the appraisals then coming in at and then those appraisals are leveraged for the refis... it is a circular system that is feeding on itself.

I posted some snippets from the SFGATE the other day... several true stories that so far I haven't found to be totally unique. In fact you are the first person I have run into (albeit on the blogsphere) that actually has spent home equity wisely. Wish I knew more like that... if I did, I wouldn't be so convinced we are headed for trouble... and pissed about it.

Mar 12, 2006, 6:39:00 PM  
Anonymous Anonymous said...

that values no longer are based upon the location, the economy, the job outlook and the condition of the property. The biggest factor is what else sold in that neighborhood and what are the appraisals then coming in at and then those appraisals are leveraged for the refis... it is a circular system that is feeding on itself.

This is the only thing that I have heard that makes these prices make any sense at all. The rest is a bunch of whacks on this blog trying to apologise and make excuses for them probably because they have a personal stake in seeing these prices continue. Thankyou athena as what you describe is the only thing that makes these crazy prices overthe last 2-3 years make any sense at all.

Mar 12, 2006, 7:37:00 PM  
Blogger Athena said...

also... it doesn't take a rocket scientist to make the correlations between where $ is coming from and where it is going.

You can look at local tax base records to see how much $ was spent by industry for your counties. You can look up your county job data. You can look up your county household, average and per captia incomes. You can look up data on # of mortgages and homes sold, and extrapolate the refi % into dollars...

OR... you could do something even simpler- and remember that we have hit a sub-zero savings rate.

If you took away the real estate contribution to the GDP since 2001 there would have been just about zero growth... so GDP has been mainly on borrowed money then spent in the retail & auto sectors...

So housing prices went through the roof a long time ago... in my county alone less than 7% of households... that is combined incomes could afford a median priced home in the county. That report was based on a median price in the county being $614k

Median price has gone up about 80k. In sonoma the median price was above 700k at last report... so even fewer households could afford a home.

There has been little job growth- especially in my county. The number of jobs that paid well has plummeted and been replaced with service sector jobs... and according to news reports the retail sectors and auto sectors aren't reporting a major slowdown yet...

So look at the prices of homes... look at the number of refi's and look at where the money is being spent... and look at the negative number that represents our savings rate...

Does this sound like we have a lot of prudent penny wise consumers?

Like I said... it doesn't take a rocket scientist, but since I do happen to work for one of the best data groups in the world... if I have to I can probably pull together a lot of numbers. But then again... one would have to be comotose to not notice the obvious numbers right in front of us every day. Do you drive? What are people driving? Do you know why I have to have butt loads of auto insurance? Because nobody drives a $15k car anymore. They drive $50k cars, 60k cars, 75k cars... and if I hit one I have to be prepared to pay for the damn thing. Thankfully it hasn't happened... but sheesh... really? I need to pull more detailed stats than even the lazy news media reports every day?

Mar 12, 2006, 10:47:00 PM  
Blogger Athena said...

here's just a few numbers:

U.S. households took on debt at the fastest pace in 20 years in 2005, fueled by a housing boom that boosted their net worth to a record $52.1 trillion, the Federal Reserve said Thursday.

The Fed's quarterly flow of funds report shows the explosion of debt in the U.S. economy continued in 2005, with net savings in the economy falling below 1% of gross domestic product for the first time on record.

Led by a surge in mortgage borrowing, U.S. households' debt increased 11.7% to record $11.5 trillion in 2005, the fastest growth since 1985, the Fed said.

Now... there has been little job growth. Little wage growth. The only thing rising are housing prices and debt all the way around, and savings is declining.

look at the retail sectors that were the benefactors since 2001.

here's more on the mortgage debt

On a dollar basis, household mortgage debt increased by a near record $290.6 Billion in the 4th quarter. The last 8 quarters (billions increase in household mortgages, Includes loans made under home equity lines of credit):

q1 2004: $190.4
q2 2004: $211.1
q3 2004: $277.1
q4 2004: $232.9
q1 2005: $184.5
q2 2005: $277.9
q3 2005: $314.1
q4 2005: $290.6

again... this was not money spent in the economy from income gains... this was borrowed money continuously cycling up and out into the housing prices, and into the retail/auto sectors.

Most people were not going back to school and getting MBA's and most people weren't buying actual investment properties.

Mar 12, 2006, 11:10:00 PM  
Blogger Marinite said...

But then again... one would have to be comotose to not notice the obvious numbers right in front of us every day

Either that or in denial.

Sometimes it is like talking to a brick wall.

Mar 13, 2006, 9:11:00 AM  
Blogger Athena said...

well marinite, I think the brick walls of this financial chithouse will come down... and I for one, will have no problem at all with saying those words to each brick that falls: "I told you so!"

Mar 13, 2006, 9:48:00 AM  
Blogger Marinite said...

Be careful Athena, someone is going to come along and accuse you of the latest buzzword -- Schadenfreude (it used to be "bitter renter" but now it's this).

Mar 13, 2006, 1:53:00 PM  
Blogger Wickedheart said...


It's JEALOUS bitter renter.

Mar 13, 2006, 3:58:00 PM  

Post a Comment

<< Home

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.