Wednesday, August 01, 2007

The Blame Game Begins and Buyers are Front and Center

So I'm back from vacation. What did I miss? Oh, more sad stories about housing-crazed dolts losing their Bay Area POSs to foreclosure.

This sad sap (Jeff Hahn) is leaving the Bay Area for Los Angeles because he is on the brink of losing his house to foreclosure. I'm sorry, but if you pay a stupid price for a house, believe all that realtor/agent crap about 'housing always goes up', 'it's never a better time to buy', 'we're immune/special', listen to what your self-proclaimed-RE-genius friends/family say, etc. you deserve to lose your house as far as I am concerned. Just because someone is willing to lend you the money for a ludicrously priced house doesn't mean it is actually a good idea to pay that insane price. No sympathy from me. Sorry all you Jeff Hahns of the world, but you and people like you are the problem. If it weren't for dopes falling for the RE industry's self-serving hype and paying stupid prices for houses, this housing bubble would never have left the runway. The buck starts with the buyer.
To many people in the affluent Bay Area, losing a home to foreclosure sounds like a Depression-era relic or a Rust Belt phenomenon. But in recent months, the Bay Area has proven to be home to numerous victims of the subprime loan debacle.

Just like elsewhere in the country, people here with tarnished credit or limited funds bought houses that proved to be beyond their means.

Jeff Hahn bought the house, a nicely laid-out decade-old four-bedroom Colonial in a neighborhood of classic two-story homes, three years ago for $495,000. Later that year, he met Vanessa, they fell in love and started a family.

'When I first bought the house, everything was too good to be true,’ Jeff recalled. ‘No money down, instantly gaining $10,000 in equity. Written in very small print was that the loan will adjust in two years. Everybody I talked to said it would only be a (minimal) increase.’

Instead his two loans, initially totaling $2,200 a month, hit $3,700 last September. Several loans fell through for various technicalities. By the time a new loan finally came through in March, not only had the subprime mess caused banks to tighten their lending standards, but the home’s value had dipped.

Jeff had borrowed against the home’s equity to pay off some bills…start his business (and) to cover closing costs for the new $570,000 loan. The 40-year fixed-rate loan, at an interest rate of 10.5 percent, carries monthly payments of $5,000.

Why did Hahn accept a loan with higher monthly payments? ‘I was using credit cards to subsidize the payments’ on the existing mortgage, he said. ‘I was about to miss a payment. My lender said, ‘Take the loan, because it will save your credit, that’s the first issue. Then you can sell the house.’

The Hahns have not made any payments on the loan since it was funded in March. ‘Honestly, I gave up once (monthly payments) hit $5,000,’ Jeff Hahn said.

The Hahns put their house on the market, only to discover that real estate prices were spiraling downward in their area. Their house, which had been appraised for $630,000 in January, was now worth less. They started out listing it at $575,000, and now have dropped the price to $555,000.

So far, the Hahns haven’t received any offers. ‘My neighbor is selling his house for $505,000,’ Hahn said. ‘My Realtor wants me to drop my price another 100 grand.’

Jeff Hahn said he is bitter about his experience with home ownership.
Sorry Jeff, but like the lottery, housing prices of late have been nothing more than a graduated tax on stupidity.

Here's an article that puts the blame squarely on the shoulders of all the stupid buyers out there (emphasis mine):
Wells Fargo Bank has become the latest of the big name banks to join the ranks of born-again mortgage lenders, folks who’ve seen the light, embraced the truth and vowed to go forth and sin no more.

The sin, of course, is the wink and a nod lending that put people in homes who should have stayed in apartments or who put people in too much home for the income of the family.

Mortgage lenders have to take on the sober banker image of an earlier time. And borrowers have got to stop believing that just because they want something, they deserve it. Oh, and they might actually read the fine print.

An interest-only loan, more than 40 percent of the new paper being written in this county at one point, really means you’re only renting the money, not buying the house. Take one of those loans today and it means you’re really stupid.
And BusinessWeek hits the nail on the head (unfortunately, only in the last paragraph -- sigh):
But don't expect the lenders to castigate homeowners for taking on too much risk. "It's tremendously un-PC to say this, but this entire circle of blame starts with individual borrowers who wanted more for less, wanted it big, and wanted it now," says Mason. "They got greedy."
Well, there it is, bloggers like me who aren't afraid to place the blame where it belongs are "un-PC". Yeah, well:
"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

-- Arthur Schopenhauer (German philosopher [1788 - 1860])
And since I am on the subject of quotes, how about some of my favorite investment quotes (not that I think houses should be treated as investments (far from it), but I know I am in the minority on this point) the truth of which we are being reminded more and more each passing day:
"Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang."

-- John Kenneth Galbraith

"The scariest phrase in investing? 'It’s different this time'. Scarier still is when people start acting on that conceit."

-- Justin Lahart

"You can lose a lot of money by selling too late. So can you make a lot by selling too early. A simple investment formula, based on effluents and body fluids: Be a seller when money is coming out the wazoo; be a buyer when blood is running in the street."

-- The Daily Reckoning

"To make money, you have to be greedy when everyone else is fearful and fearful when everyone else is greedy."

-- Warren Buffett

"When everyone thinks the same thing, no one is thinking."

-- Old traders' adage

"What you see depends on what you have seen."

-- Bill Bonner

13 Comments:

Blogger W.C. Varones said...

Welcome back!

Aug 2, 2007, 12:06:00 AM  
Blogger mountainwatcher said...

Hey Marinite

Thanks for the great post!

I agree that stupid buyers are at least 50% responsible for this mess.

FYI, Google is making it very hard to post here.
Each time I have to sign in to their site to be able to leave a message here.

I suspect this might account for low posting traffic.
They have made it a royal pain to leave a message.

Aug 2, 2007, 1:05:00 AM  
Blogger marinite2 said...

I know, Google is so lame. I have to go through the same nonsense.

Yes, the blame can be spread around among many (lenders, bankers, realtors/agents, Greenie and the Fed, Congress asleep at the wheel, etc.) but the bulk of it IMO is on the buyers' shoulders.

Hey, anyone catch the Warren Carriero (that Marin realtor I blogged about way back when...if anyone remembers) interview on some Bay Area radio talk show yesterday? Apparently, the show is hosted by two guys and the name of the show is their names. A friend of mine heard it and apparently Warren got absolutely roasted for being Lereah-like, uber-optimistic given the negative facts of the Bay Area RE markets. If you have a link please email it to me. Thanks.

Aug 2, 2007, 5:48:00 PM  
Blogger Lisa said...

Welcome back Marinite:

I think buyers and lenders are equally responsible. Yes, buyers were greedy and stupid, but without voodoo financing, prices could never have reached these levels.

I think it's really interesting that the press has become really, really negative on RE lately. No one is saying this will be quick. More and more stories are emerging about people so far over their heads it's just insane. Perhaps by 2008. people will see this mess for what it is. No more crap about fundamentals or they're not making any more land or blah, blah, blah.

I read today that Wells Fargo is disengaging from the AltA mortgage business. The noose just got a little tighter.

Aug 2, 2007, 9:01:00 PM  
Blogger Holland said...

This is the lastest news released tonight:

HOME-MORTGAGE LENDERS are cutting off credit or raising rates for more Americans, extending well beyond the subprime market. 10:24 p.m.

"Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records.

This worsening credit crunch threatens to put further pressure on the housing market, where prices are flat to declining in much of the country. ... "

Does it mean that the lending industry is tightening the credit and doing the job for the Fed? What will FOMC do next week?

Aug 2, 2007, 10:20:00 PM  
Blogger Holland said...

This comment has been removed by a blog administrator.

Aug 2, 2007, 10:21:00 PM  
Blogger Lance said...

Yeah, there will always be those who don't know what they're getting themselves into. Did you read the part about his getting himself in trouble with credit cards too? It doesn't sound like the problem was with his buying a house ... His problem is much larger than that. Luckily he had a house to help bail him out ... otherwise he'd already have bad credit from the overdrawn credit cards. Buying that house was probably the only smart thing he did. He'll be fine in the end 'cause he owns property. Now, if he were a renter ... I wouldn't have much hope for him. Anyone still renting after the large appreciation we've had over the last decade has really missed the boat ... All they can do now is try to dig themselves out ... and hope credit doesn't get cut off for them like it has for other non-financially responsible people.

Aug 3, 2007, 12:20:00 PM  
Blogger marinite2 said...

lance,

Nice spin. And I really like how you equate renting with "non-financially responsible".

Aug 3, 2007, 1:24:00 PM  
Blogger Lance said...

marinite2, Of course you're correct about the "non-financially responsible" comment being incorrect. I guess I was saying it tongue in cheek. But honestly, I don't think the rest of my argument is spin. This guy really does have problems far beyond his mortgage problems. And there will always be people like that. You really can't blame the housing market for what this guy has gotten himself into. If it wasn't this problem, he'd find another problem. So, in a way, blogging this guy as a "poster child" for what is happening out there, is in and of itself "spin" ... Wouldn't you agree?

Aug 3, 2007, 1:46:00 PM  
Blogger marinite2 said...

So, in a way, blogging this guy as a "poster child" for what is happening out there, is in and of itself "spin" ... Wouldn't you agree?

How so? He is just one of many to choose from...one of many thousands in California. He is just the "poster child" du jour of the day that the Chronicle decided to focus on (maybe you should take it up with them?). Tomorrow it will be someone else. And in fact, I have posted on other such individuals in the past.

But the point is not to vignette this one person but to remind us of the downside human cost of this housing bubble (remember that a primary motivation for this blog since the beginning was to argue that this housing bubble was a bad thing, not just that it would end badly, and so documenting some of that is par for the course) and who is ultimately responsible for it. Responsibility rests on the shoulders of many for certain but the bulk of it rests on buyer's shoulders (IMO) for paying ludicrous amounts simply because a means was provided (ala the "given the rope to hang oneself" line of reasoning).

And how unusual do you think this person really is? We hear all the time now of such people and it is likely to only get worse. Further, we hear quite often of how baby boomers are such poor savers and who are relying on asset appreciation to fund their retirement. Not all of course, but many if not most. Some would say that not saving and relying on asset appreciation is a form of "financial irresponsibility".

Aug 3, 2007, 2:16:00 PM  
Blogger Lance said...

Marinite,

Asset appreciation is a form of savings. When one puts money away in a bank account or buys bonds or stocks or whatever, they are counting on those assets to appreciate over time in the form of compounded interest or compounded earnings.

However, I do agree with the gist of what you I think you are saying .. and that is that one's house shouldn't be viewed as one's "savings instrument" for old age. I think the objective should be to lower one's housing expenses over the longrun. I.e., a home is an expense and not an investment. Now, we may disagree as to whether longterm or not those who bought in the last decade have minimized their housing costs (vs. renting and waiting for prices to drop substantially), but I think we can agree that a house is not an investment. And I think most reasonable homeowners know that ... just not the flippers or the financial fiasco mentioned in the article who doesn't seem to have a clue as to finances.

Aug 3, 2007, 7:23:00 PM  
Blogger fiat lux said...

Welcome back.
I liked the quote collection.

Aug 5, 2007, 4:03:00 PM  
Blogger Matthew said...

I've still got a lot of unpacking to do and such from my trip, but wanted to let you know Marinite that I'm back in town and ready to rumble again.. thanks again for all your work in keeping this blog up..

Who's to blame? Well, there has been sooooo much sleaze, lying and greed in Real Estate over the past 5 or so years, that there is plenty of blame to go around...

Buyers? well, for sure.. just for reasons you and everyone has noted..

However, I still put the bulk of the blame on those who profited the most and those in the positions of responsibility to prevent this from happening.. Sir Allen remains public enemy #1 along with his Wall Street sleaze banking and hedge fund buds... Then, there are the sleaze brokers and lenders (eg Crisp and crowd).. and finally, there are the RE agents and all their collective hype and bullshit... much of which they probably have no idea what it all means or the impact of the bubble given the lack of professional standards and ethics in their business..

I'd like to see them all suffer half as much as the average joe will be suffering over the next 3-4 years (or some the rest of their lives) because of this ridiculous bubble.. they can kiss my backside..

30-40% price cuts in Marin and 50+% cuts elsewhere, when all the blaming, lying, cheating and crying and finally bleeding is said and done.. yes, it's happening... and thank bloody god it is, so we can wrestle and take our communities back from the sleazy RE machine..

Oh yes, it is also happening in those other bastions of RE capitalism... raw land and commercial RE... yup, those two areas are getting hammered as well.. in fact, they are getting hammered more in some places than residential RE, just as I knew they would... I shorted Duke RE at 43 just before my trip because of the sleaze and BS in commercial RE and knowing many of those high end leases were for sleazy mortgage companies who are now out of business...

Matt

Aug 7, 2007, 11:19:00 AM  

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