This article from Sonoma got me thinking. Part of the answer to why this housing bubble has formed must reside in the increasingly short-term thinking of buyers and sellers. Vast numbers of people are taking out these hugely risky adjustable rate mortgages, with or without money down, in an environment where interest rates can only go up in the foreseeable future. Why do they do it? It does not seem prudent. Some claim it is because they only want to live in the purchased house for three or four years. Yet at the same time they speak of raising a family which, I can say from personal experience, requires more than three or four years. Have people always been so short-sighted or has the sheer unaffordability of California's houses (and those elsewhere) these days forced short-term thinking on people? To me, no matter how you look at it, anyone who buys a house with these terms is speculating, whether they intend it or not.
What is the cost to our society? To our community? And what happens to these people when prices come down? It seems arrogant to presume that the lessons of the past do not apply to the present, but if you think prices won't come down, then be prepared to explain why historical patterns no longer apply? Is it because "it is different this time" aka it's a "New Era," a "Brave New World"? Let's review some New Eras of the past. There was the "New Era" of the 1920s (technological innovations -- automobiles, electrification, vacuum machines, washing machines, radio, etc.); that ended badly and has been forever burned into our collective consciousness as The Great Depression. Then there was the "New Era" of the mid-1950s (victory in the Pacific and Europe was still a fresh memory, increasing peace as post-WWII tensions subsided, more technological innovation (e.g., television), the baby boom and the resultant spending, increased consumer credit, the announcement in 1961 of the intended moon landings); that ended badly too with the 1972 stock market crash. Then of course there was the "New Era" of the 1990s which we are still living through in some ways (development of the PC, the Internet, the breakup of the Soviet Union, the high-tech industry, cell phones, Alan Greenspan and his cheap money); we all should know how that one both ended (NASDAQ crash) and lives on (housing boom).
Well, that was some tangent.
Some choice quotes:
"During the mid- to late-'90s, home buyers in Sonoma County could sign their escrow papers with the smug feeling that at least they weren't paying Marin County prices. But with the median home price in Sonoma County having reached $616,000 as of September, that smug bubble has burst, though the housing bubble has not."
"Since, according to the Bay Area census, the median income of Sonoma County households ranges from $50,000 to $63,000, where are people coming up with the money to buy these $616,000 homes? They're not, exact-ly."
""Sixty-five to 70 percent of all the loans I do are interest-only options," says Daniel Barwick of Benchmark Lending in Santa Rosa."
"With interest-only loans, money paid monthly toward a mortgage does not reduce the principle owed, but it's a gamble that many new homeowners seem willing to take."
"According to Barwick, many homeowners opt for these loans because they intend to sell their homes in three to four years and are banking on their property value to increase exponentially; often, it is the only way they can afford a mortgage."
""Most people want the lowest payment possible, because they know their equity will grow," Barwick says. "I have some clients who actually live off the equity in their home. They refinance every three years and take out two to three hundred thousand and live on it.""
"But let's look at who gets priced out of the housing market: the teachers, policemen and other civic and civil employees who live here."
""People are being forced to buy houses way outside of their means because there are few alternatives," he says. "Who wants to be in debt for 30 years or spend a lifetime making house payments?""
""I was born in Marin and think of Sonoma County as my home. I can't imagine being an expatriate year-round. It seems somewhat unreal that I can't [afford to] stay here, but as a poet, and really an artist my entire life, I can't imagine paying a $2,000 to $3,000 mortgage during my last 20 years of great energy and creativity. This gives me great sadness. I was a naturalist for Pt. Reyes years ago and so much of my writing comes from the land here, is integrated here and born of it.""
"She shakes her head. "Never being able to settle here is devastating.""
And be sure to read on and check out the "creative" lengths people will go to feel like they "own" a house: helping to actually build it, shared housing (communing), land share (co-ownership), apartment condo conversions, really tiny "homes" (70 to 750 sq ft).
According to this article, price cuts of 20% are now commonplace in the East Coast housing market and analysts are saying that a "hard landing" (i.e., a crash) is far more likely. And foreclosures are up 35% It seems that they are entering a downward price spiral that will be difficult to reverse. Just a month or two ago it was all "oh, prices will soften and appreciation will only be the normal 5% or so...it will be a 'soft landing'". Is the East Coast a harbinger for the West Coast? How are their amygdalas doing I wonder?
This article made me shake my head and sigh. There are a ton of people out there "buying" houses using only IO or NegAm (or other "exotic") loans because it is the only way that they can afford to buy. Then they find out that their monthly payments skyrocketed after a year or so and now they can no longer afford their mortgage. So like any good American citizen these days, they call a lawyer and sue the lender.
A reader brought my attention to this article in the SF Chronicle. Here is an otherwise unremarkable person who has no job, no steady income, and yet who chose to go $2.3 million into mortgage debt, with an average negative cash flow of $10,000 per month. On paper she and her partner are very wealthy. In truth, they are dependent on debt extraction. This degree of leverage reminds me of the Long Term Capitol Management business model and we all know (or should know) how that ended (and those guys were all Ph.D.s for crying out loud!). But the thing is, this is not an isolated case; it is going on all around us. It is vigorously encouraged by the RE industry, lenders, the Fed (remember Greenspan touting the goodness of ARMs at one time?), "the Jones", and others. Here in Marin real estate investing is of epidemic proportions as it is something of a hobby and really has become our only industry.
This article from Sonoma got me thinking. Part of the answer to why this housing bubble has formed must reside in the increasingly short-term thinking of buyers and sellers. Vast numbers of people are taking out these hugely risky adjustable rate mortgages, with or without money down, in an environment where interest rates can only go up in the foreseeable future. Why do they do it? It does not seem prudent. Some claim it is because they only want to live in the purchased house for three or four years. Yet at the same time they speak of raising a family which, I can say from personal experience, requires more than three or four years. Have people always been so short-sighted or has the sheer unaffordability of California's houses (and those elsewhere) these days forced short-term thinking on people? To me, no matter how you look at it, anyone who buys a house with these terms is speculating, whether they intend it or not.
I have received a tremendous volume of email from readers of this blog. Thank you for all your kind words. I am so relieved that this blog provides some service to our community. Our COMMUNITY!