Learn to Fish Or You’re Fucked

Posted in Financial Literacy, Just the Facts with tags , , , , , on November 5, 2009 by marcitz
Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. 
                                                                                                                                                   – Chinese Proverb

In dealing with the housing crisis or even the larger economic crisis two things have been happening.  The government has been throwing money at the problem and now they are throwing regulations at the problem.  Let me first start off by saying that this is not a post about whether either of those is right or wrong (both are probably right to some degree).   This is about the fact that that won’t actually protect people from the next big bubble in which everyone, blinded by greed and ignorance, will get suckered again.    That’s because the next bubble is all about something that isn’t covered by regulation.  It won’t be housing, it will be something else (my bet is on “green” stocks in about 2017 or Gold 9 months from next Tuesday).  In short the government is giving everyone a fish in terms of regulation, they are not teaching us how to fish in the form of education.

Don’t believe me?  Well lets see how well governments have prevented bubbles from reoccurring in the past.   To do that check out these stories and articles:

Well those books go so far back that maybe they were just stupid in the dark ages.  Fine lets go more recently to America where we have brilliant financial minds, computers and Jimmy Dean Sausage-on-a-Stick.

So three bubbles and three new sets of regulations and someone still found another bubble that wasn’t covered by the previous regulations (as they have been doing for 800 years, long before computers or Jimmy Dean).  One can argue that the regulations at least prevented the bubble happening in the same area but alas another bubble still happened.

What this means is that the government really should be teaching the American public HOW TO FISH or at least how to smell something that’s fishy because in the end there will be another bubble, followed by another set of regulations, followed by another bubble.  Regulations always arrive to late so you, the indivdual, have to survive on your wits for a bit.

Up until now, however, have you heard anyone in Congress talk about introducing financial literacy into the schools? NO!   Are we worried people won’t be interested?  Au contraire mon frere as you can check out the most popular class at Wellesley which teaches the basics of personal finance.

Is the government producing and distributing basic facts on making large financial decisions to the public? NO!   Maybe they just don’t want to draw attention to how many kids graduate public school and can’t read.

So in short if you don’t get yourself educated you are completely screwed when the next bubble comes along.  If you don’t believe me remember I’ve got 800 years of history, 2 Harvard economics professors (one a Nobel prize nominee), the former chief economist for Bear Stearns (she got out long before “that” happened), and a 24 pack of Jimmy Dean Sausage-on-a-Stick on my side.

And to make sure I end on a depressing note I’m not even sure regulation can prevent the same type of bubble from happening again.  In 1997 the FDIC published a study called “History of the Eighties – Lessons for the Future” in which you can find this little gem: 

Third, the banking problems of the 80s and 90s came primarily, but not exclusively, from unsound real estate lending.  It is instructive to note that the real estate boom and lending fiasco appears to have started in the United States.

…Excess real estate lending, powered by rapidly rising rents and prices, rapidly occured worldwide.  But more than anything else, real esate lending became the fashion, the ‘new’ banking idea of the times.

So PLEASE President Obama, take us to the nearest lake or stream and show us how to cast an economic line as we shouldn’t be the ones taking the bait.  Sure spend some time on regulation but more (or at least some) time on EDUCATION.   The best I can do in the short term is send you to an excellent site called the Khan Academy (look under the “Finance” or “Credit Crisis“ section) which has some great educational videos.

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Why Higher Prices are a Bad Sign

Posted in Just the Facts with tags , , , , , on October 11, 2009 by marcitz

In the San Francisco Chronicle this week there was an article that tried to find a positive sign of a housing recovery from the fact that house listing prices had started to rise.  The article did point out that this was strange given that all other stats (selling price, # of sales, and price per square foot) had been falling at the same time.  Still the general consensus was that a good thing was happening and I quote “this optimism is a trend for the area…”  Try again…

What is really going on here is quite a bad sign and represents the last ditch efforts of sellers to deal with increasing buyer negotiating power (and proof that they finally accept the switch to a “buyers market”).   Specifically sellers now know they will be forced to negotiate A LOT more than they thought up until now.  In fact they all have in their heads a percentage (much larger than before they adopted this strategy) of how much they will have to lower the price of their house to get the deal done and they believe that is an absolute.  As a result the only way to combat that is to raise the price so when the required and large discount happens you still can capture some upside.

Here is an example from the recession of 1980.  My father sold window coverings to bring in some money above his teaching salary.  Typically they are priced with 50% margin (so window blinds he lists for $100 cost him $50).  He carried sheets that had these list prices on them and his customers all knew what the margin was (most people assume 50% for most products regardless of the truth).  Then one day his distributor, during the economic downturn of the early 80s,  offered him some “60% markup sheets”.  Simply put these were the same list price sheets but they had a 60% margin built in.  So now the same blinds had a list price of $125.

The result?  Well without saying anything (because of the common market belief in a 50% margin) he could offer his customers 50% off (in theory offering the blinds “at cost”) making them extremely happy and more willing to buy even during that recession.  In reality he still got to pocket 10% ($12.50) margin and no one argued.  Afterall you can’t get something below cost can you?  This was also very believable to the customer because it was a recession so my father should just be happy to sell at cost just to keep his business around, if not profitable.

So that is what is going on here.  Sellers are increasing the implicit markup knowing they have to sell “at cost”.  In this case the “cost” is the minimum price at which the seller is willing to offload the house.  The “markup” is actually the percentage that they know they will have to reduce the price to move the sale given current market conditions.  Like the story above they just pad the “markup” so when that percentage comes off they get to preserve some margin.  Assuming this works.

Don’t get me wrong, when the market does truly recover of course listing prices will rise, justifiably.  The difference  here, however, is that none of the “true” stats (those that represent actual buyer behavior as opposed to seller aspirations and packaging) show this upward momentum.   Remember listing prices don’t actually mean anything.  In the world of economics (as opposed to the world of real estate fantasy) the true “market clearing price” of an object is what the buyer is willing to pay (and actually close the transaction) NOT at what price the seller is initially willing to sell.

So in the end this strategy is a form of seller capitulation and not market improvement.  Sellers now know they must discount heavily (not just a token amount) and are trying to preserve some minimal upside.  Strap in because this ride is a lot longer than most wish to believe.  To the 5 year old real estate optimists in the back seat “no honey, we’re not there yet, why don’t you nap some more.”

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Why Case-Shiller Is A Bit Fucked

Posted in Just the Facts with tags , , , , , , , on October 4, 2009 by marcitz

As the old Real Estate aphorism goes “Only 3 things matter – location, location, location”.  So the issue with relying on Case-Shiller (which has been “growing” for three months – yippity f-ing doodah!)  is that the “city” used for valuation is usually a multi-county location with each location being at a different stage in the price cycle.  The “San Francisco” area ranges from Pacific Heights to the Brentwood suburbs over 55 miles away.  Brentwood may have bottomed but it will take some time for the Silicon Valley and the “City by the Bay” to follow it into the abyss.  Oh and by-the-way Silicon Valley, typically considered Santa Clara county, is not actually in the index.

The recovery that Case-Shiller has been talking about is allowing the far out suburbs to mask further falls in the inner-core. The net result is, as Case-Shiller recovers, people closer to the namesake city buy too soon under the false pretense that their little pocket of the world has improved with the broader index.  Ironically those in the exurbs will now do better than those closer to the city named in the index.

How will prices in the inner core eventually fall into the abyss?  Simple migration.  The cheapest areas will draw from their neighbors (Brentwood from Dublin) lowering the prices for the neighbors as well (as Brentwood represents a “substitute” in classic economic parlance).  Those now lower price neighbors will then draw from their neighbors one step closer to the inner core (Dublin from Castro Valley) drawing down the prices there.  This will then continue  as such – Castro Valley from Fremont, Fremont from Mountain View and finally Mountain View from Palo Alto.  In the end nature abhors a pricing vacuum and one currently exits in the exurbs.  It will take some time before it really sucks here in Palo Alto.  But it will suck!

The net-net is the worst place to buy right now is anywhere near the city named in the index.   Oh and if your not actually in the index then purchase at your own risk.  You say you live in the “San Francisco” area but remember that it is a spiritual and not a statistical distinction according to Messrs. Case and Shiller.

To add to the scary (and highly varied picture) take a look at this chart which shows how wildly different the valuation story is WITHIN  the “San Francisco” area:

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

Also look at this analysis as why Palo Alto is in for a fall (albeit 2 years later) like Brentwood: http://invisiblerenters.com/2009/06/23/why-palo-alto-housing-will-fall-30-or-more/

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A New Measurement for House Price Declines

Posted in Just the Facts with tags , , , , on August 3, 2009 by marcitz

Given the severity of house price declines it only seems like it merits its own measurement as neither the English system (inches, feet, pounds, etc…) nor the Metric system (meters, kilometers, grams, etc…) can properly convey the magnitude of the fall.  For this I propose a new measurement called the Greenspan which measures the distance between the value of your house at the peak of the market and what it will measure at the bottom of the market (whenever that occurs).

Why call it the Greenspan?  Here are three very sound reasons:

  • “Green” is, of course, the symbol (in the US) of money and wealth.  For example “after the latest economic collapse I have a lot LESS green.”
  • “Span” measures distances and often LARGE ones (like bridges and the distance from one side of the Grand Canyon to the other).
  • “Greenspan” as in Alan Greenspan the person who is significantly responsible for this mess.  It it is time he is honored for his role in this.

As a baseline, a single Greenspan is a 25% fall in value from peak.  Given that the average US market will probably fall by as much as 2 Greenspans in total.  Certain markets (like Vallejo, California) could see a drop of 3 Greenspans.

Remember real estate is local so your Greenspans may vary. 

See how Palo Alto, California is due for AT LEAST a 1.2 Greenspan drop.

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Why Palo Alto Housing Will Fall 30% or More

Posted in Just the Facts with tags , , , , , , , , , , , , , on June 23, 2009 by marcitz

Green shoots, the recovery is here, houses are bottoming!

Not so fast!  Yes many areas may be reaching a bottom but that does not mean that all places have hit bottom.

For example it is believed that housing bubble ground zero locations like Vallejo, California have come close to a bottom.  Therefore, hot areas like Palo Alto, must also be similarly close to that bottom eventhough prices there have not fallen (on a percentage basis) nearly as much.

The typical explanation for the differential treatment is that Palo Alto is desireable and therefore immune to a large price decline. I would like to suggest that its not about “absolute” price but “relative” value.

Yes, a house in Palo Alto will ALWAYS be worth more than a house in Vallejo but I argue that the RATIO of house prices should remain close to constant. If Vallejo rises in value then Palo Alto will rise in value but if you divide the value of a house in Palo Alto by the value of a house in Vallejo the resulting number should, over the long term, be relatively the same. So that is what I did.

Using data from Zillow I took the sales price per square foot of houses in Palo Alto over the past 10 years (2000-present) and divided it by the same metric from Vallejo to plot the ratio. For extra credit I also calculated the ratio of Palo Alto to both Hayward and Mountain View.

Why Hayward and Mountain View? Simply put Hayward is a little closer in and a more rational commute (not many people would think you were NUTS to commute to the Silicon Valley/San Francisco job centers from there). I chose Mountain View because that is the, only slighly less desireable, southern neighbor to Palo Alto.

So here is a picture of what I found:

Price Per Sq Ft Ratios

What does this all mean?  Well let me state one other assumption and that is let’s assume the year 2000 was a ratonal year and that that ratio represents a normal premium of Palo Alto over the other cities.  (older data was not available from Zillow)

Lets divide the chart into 3 segments:

  • 2000-2001 – The “normal” period in which the ratios represent the typical balance.
  • 2002-2006 – The “bubble” in which all hell broke loose.
  • 2007-2009 – The “deflation” of the bubble. (NOTE most people agree that the bubble started deflating in 2006-2007 across the US.)

So in the “normal” period we see the ratios between Palo Alto and its neighbors staying relatively confined (maybe a 5-10% swing at most).  This is what you would expect.

Now if we look at the “bubble” period we see a relatively dramatic drop in the ratio which means that Vallejo and Hayward were gaining on Palo Alto.  Did they actually become more desirable?  Well traffic would go up (more people were moving there driving up those prices) so I would say “no”.  What it really means is that the bubble valuations hit Vallejo first.

Now if we look at the “deflation” period we see the ratio turning DRAMATICALLY in the other direction and well above the historical norm.  This means that either (or both) that deflation hit Vallejo first and the bubble hit Palo Alto second.

One might argue that this means Palo Alto is safe EXCEPT for the fact that the ratio has so dramatically outpaced where it was in the “normal” period in 2000-2001.   If it had returned to the levels of the normal period in 2000 then there would be nothing noteworthy here.  In fact Vallejo returned to almost the exact same price per square foot in 2009 that it was in 2000 where as Palo Alto was still almost double where it was in 2000 as shown here.

price comparison

So what would it take for this ratio to fall back into line (and deflation to hit Palo Alto second)?  Simply put, compared to Vallejo, Palo Alto prices would have to fall 39%.  Compared to Hayward they would have to fall 26%.  This of course assumes that Vallejo and Hayward have truly bottomed out which is probably not the case.  Assuming they have even the most conservative estimate pegs Palo Alto at a 26% fall.

Heck even compared to it’s neighbor Mountain View it would have to fall 11% to come into line with the historical ratio.

In short Palo Alto has some falling to do.  It just was late to both parties.

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Killing MORE Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , on May 4, 2009 by marcitz

So my last article on the myths of homeownership was so popular I decided to produce a sequel.  This is not so hard because there are so many.  Enjoy!

Myth #6 – Once you pay off your home you get to live in it for free

The theory goes you have 30 years of payments (lets assume you haven’t, like friends of mine, refinanced it over-and-over again pushing out the end of the loan).  After that you have no more payments.  With rent you will have payments every month forever.   The latter is true, the former notsomuch.  In fact there are many substantial ongoing payments you will encounter with your house including:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent both in its ongoing behavior and the fact that it can change and grow over time.  Here’s another thought to consider.  Property tax is a major source of school financing.  Given the “great recession” we are in (and will continue to be in for the next 2-5 years) other sources of funding are being cut making schools even more dependent on property taxes.  As school quality is a major contributor to housing values expect home owners to be extorted into paying increased property taxes to preserve their home values.
  • Maintenance also goes on forever and that is variable and unpredictable. So it also behaves like rent but much more violent in its swings.  I never got a bill from my landlord for $15,000.  As a homeowner its only a matter of time before you get that bill for a new roof ($15,000) or new pipes ($thousands).  Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.  Oh and if you live in New York City you are familiar with “maintenance payments” which are often substantial (in the thousands) and are paid monthly (like rent).

Myth #7 – At least your monthly payments are predictable and won’t go up like rent

Well this really depends on how you financed it. A very large percentage (and possibly the majority) of mortgages done in the past 8 years were adjustable-rate.   That could swing way above rent or way below depending on the interest rate environment.  Given the dramatically low interest rates that drove the housing bubble and there is really no where for your mortgage payment to go but up.  Combine this with the large amount of cash being pumped into the economy (which will lead to inflation) and you are looking at MASSIVE interest rate adjustment 2-5 years out meaning your “rent” is going to go up possibly 20-100% (my rent has never gone up more than 10% and that was during a boom and during a bust it actually went down).

So remember, homeowners and renters are not so different except for the massive loss in equity that ownership is currently providing. 

Please feel free to bust more housing myths in the comments section.

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Stripping GM for Parts?

Posted in Stories with tags , , , , , , , , on April 27, 2009 by marcitz

Rumor alert – Silicon Valley Billionaires and VCs eye GM for parts…

(Menlo Park, CA) Combine a moribund IPO, housing, and startup market with idle capital and a large asset-laden American institution like General Motors valued at ONLY $1.3 Billion dollars and you have a recipe for something interesting.  Rumors have started to float around the valley, an area populated by many people who could, themselves, buy GM out of their own bank accounts, that GM may make sense as an Icahn style break-up play with some technology leftover to add auto-innovation to the Silicon Valley start-up playbook.

Elon Musk, Chairman of electric car company Tesla Motors, could buy GM outright from his personal fortune but he doesn’t need to go it alone.  VCs sitting on large investment pools of unproductive capital (for which they have received strong criticism as of late) also are looking to do something. 

So what is the idea that is floating around?  Simply put GM, according to one back-of-the-envelope calculation,  has assets worth well over $12 billion in a combination of technology, patents, and raw materials.   A series of investors have toyed with the idea of a hostile takeover and an immediate Chapter 7 bankruptcy filing.   That would effectively eliminate all the debt and union contracts leaving just the assets.  At an estimated cost of $500 million for the filling, legal clean-up and unproductive asset sales added to the current market cap of $1.33 billion plus a 50% purchase premium the total bill is $2.5 Billion.  In just asset value that leads to an almost 500%  ROI on a very large investment base.  It has been at least 4 years since Silicon Valley has seen such a return and never on such a large investment base.

To add to the attractiveness of this deal is the fact that the engine of Silicon Valley could cherry-pick and parlay the technology/patent assets of GM into many start-ups that could truly unlock their value and return much more than the $10 billion the initial sell-off would provide.  Some estimates put the lifetime value of those assets used to seed start-ups at $50 billion.  All of this just requires some risk-taking and vision, two assets found in abundance in the valley.

 See more posts on the GM bailout.

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Killing the Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , , , , on April 16, 2009 by marcitz

Recently I read an article in The Economist that had many incorrect assumptions that shows just how far the myth of homeownership has permeated society.  Here are some of the common myths and corrections along with actual articles from other sources to back up the key points.

Myth #1  - Home ownership encourages “forced savings” because home owners have to pay off their mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

Myth #2 – The mortgage income tax deduction is good for homeowners.

ABSOLUTELEY NOT!  It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained, good means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays).

Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)

Myth #3 – Homeowners benefit from many social advantages.

Sorry but  there are NONE and actually some social disadvantages, including worse sex.  Study after study done as recently as last January show that there is practically NO social benefit of homeowning vs. renting.  In fact home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, less racist, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don’t believe me check out these links:

Recently published study by Wharton  (Its a long academic study but just read the first paragraph)

The American McDream from the San Francisco Chronicle (renters have better sex, too)

Understanding how Obama’s Plan Hurts 100 MILLION US Citizens from watchingmarcitz.com (this shows how home bailout programs have a dark underbelly)

How the Crash Will Reshape America from The Atlantic (why renting is actually the answer to the problem we now face)

The Advantages of Renting from National Public Radio

Myth #4 – The market is finally finding a bottom

Take a lesson from the movie Titanic. The ship has just temporarily stabilized before its violent rush to the bottom as shown here.

Myth #5 – Once you pay off your mortgage your house is free (rent goes on forever)

Not exactly:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent (including changing from time-to-time)
  • Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
  • Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.

See more myths in this follow-up post.

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Homeownership – So Many Chores, So Little Time

Posted in Stories with tags , , , , , , , , , , , , on April 15, 2009 by marcitz

See one of the problems with homelownership is that not only do you have to cover the mortgage but you also have to clean the roof, flush the pipes, paint the walls and, of course, you have to “Mow the Lawn”

Well at least that last part isn’t so bad…

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Rearranging Deck Chairs on the Peninsula

Posted in Stories with tags , , , , , , , , , , , , , , , , , , on March 29, 2009 by marcitz

With a good week on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.

To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic.  This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away.  Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom.  The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief.  Strike up the band!
 
 
Here is why we are in for that second more hellish ride straight to the bottom.  In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America. There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation).  We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up? 
 

Also as any real estate agent will tell you “location, location, location”.  Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula.  Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year.  Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median.  That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median).  Its only a matter of time before it finally hits here.

My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs.  This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010.  Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
 
Impossible you say?  Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble.  Really??  Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.

housing-vs-nasdaq1

Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market).  For a detailed analysis of these myths please point your browser here.

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Renters of the World UNITE!

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 1, 2009 by marcitz

Tell us a story about a Really Fucked Homeowner (RFHO)  (deadbeat neighbor, relative or something you read) who got in over their head and share it with others  so we can get rid of the pro homeowner bias in the United States.  Also please post this on other blogs and comments to articles. Read on to see why…

Homeownership is the “American Dream” – or is it YET another bubble?  I’m an invisible renter (politically, financially and socially all renters are) who decided it wasn’t part of my “American Dream” yet society continues to lionize the homeowner at the expense of the renter. 

How invisible are we?  When politicians says “lower house prices hurt us all” they forget the 100 million renters that they help.  Its time to wake up and realize that while homeownership is good for some its not good for all (same goes for high house prices) and public policy and perception needs to adapt to that harsh reality.   Oh and if homeownership is so great why not give renters a chance to try it out by letting prices fall to their natural level?

Why am I doing this?  Well to paraphrase Dean Vernon Wormer of Faber College – its time for someone to prick this bubble and that prick is ME! 

Welcome to ReallyFuckedHomeowner.com where we see the dark side of homeownership and the bright side to renting as an alternative lifestyle.    Please share your stories of a really fucked homeowner (RFHO) or feel free to rant about anti-renter government policies so we can get past anti-renter bias. 

Please NO names or specific addresses of the RFHOs.  Oh and don’t forget to let the government know how you feel.  Also please tell your renter friends (or even rational homeowner friends) about this site.

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RENTER ALERT – Stop the New York Times from Hurting You

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , , , , on March 6, 2009 by marcitz

Dear Invisible Renters,

The New York Times today published an editorial in which it supports a law winding its way though congress to force banks to cram-down (AKA reduce) the principle balances on home mortgages and we must stop it.  This is ridiculous for many reasons stated in a letter below you can send to key departments and people at the Times.  Addresses and a draft letter are below:

Dear New York Times,

Why are you making homes less affordable to 68% of your New York readers and neighbors, who are renters, by encouraging the cram-downs of mortgage principle?  This is bad for everyone in the long run:

  • For Renters this will hold housing at unrealistic and high levels longer making it impossible for us to become responsible homeowners if we so choose (feel free to continue renting anyway its a valid lifestyle choice no matter what society says)
  • For the New York Times - 68% of your New York City readership are renters and this action is an attack on the majority of your readers.
  • For the Economy  by keeping people in homes they can’t afford we’ll only prolong the agony as we have a continuous stream of higher than normal foreclosures over years as opposed to in one big (and yes painful) lump.  By getting it over quickly you will see buyers come back into the market because they know we’ve reached the real (not a weak unsustainable subsidized) bottom AND homes will be much more affordable.

Here are some other things you need to know:

  • Housing prices will continue to fall at least another 10-15 points (ask any economist).  So what does that mean if a house is reset to a lower level only to find its not the LOWEST level.  Will there be another cram down?  Won’t those people only default later (after having received the first, now unsuccessful cram-down) for the same reasons you are stating now?
  • Housing prices will get another kick in the pants in two years when interest rates have to start going up again (to combat inflation from all this money being printed and flushed down the economy) so this will only get worse and require more cram-downs. Remember people tell you to buy when interest rates are low so the flip side is…

Why trash contract law in this country to delay the inevitable. 

Thank you for listening

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Is Wells Fargo Playing Games? – Tell Us Your Scam Story…

Posted in Stories with tags , , , , , , , , , , on March 11, 2009 by marcitz

So talking to a friend the other day who is one of the lucky ones thanks, potentially, to some good old-fashioned game playing on the part of his mortgage appraiser.  Seems that he bought a house 3 years ago and was ready to refinance it so he called in Wells Fargo.  This is where it gets strange.

Apparently the only house that they could find to comp against his house for the appraisal was HIS house based on its purchase price from 3 years before.  What’s cool is that his house, even given all the stuff going on in the macro economy, hadn’t lost any value in the past three years based on that comp (neat trick!). 

Of course given the increase in houses on the market how is this possible that his house was the only comp they could use?  Afterall, not to far away there were many houses for sale (and many foreclosures) that were used as comps when he first bought his house (of course they weren’t in foreclosure then).  Turns out that Wells decided to “tighten-up” the radius from when he had bought his house 3 years before so, one might guess, the foreclosures wouldn’t be included in the appraisal and then they couldn’t give him the loan. (another neat trick!)

But why would they want to give him a loan that exceeded the true value of the house?  Well because (just like over the past few years) they weren’t going to keep it and if they didn’t get the appraisal they wouldn’t get the loan origination business.  Sure enough he said that they weren’t and that it was immediately going to Fannie Mae because he had a conforming loan. VOILA!

Well its nice to know in these crazy times that some things never change. 

So have you heard a recent story of financial “magic” (spelled “s-c-a-m”)?  If so please share it here because you, as a taxpayer, just bought my friends house.  He’s a responsible and talented guy and will make good on his loan but there are many out there that probably got the same treatment and may not be so responsible.

ARE YOU A RENTER - STOP  THEY NEW YORK TIMES FROM HURTING YOU

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Obama Administration Says NO to Bankruptcy Loan Modifications

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 15, 2009 by marcitz

So Congress has been trying to push a law that will allow bankruptcy judges to modify the terms of mortgages including reducing interest rates and “cramming-down” loan principal.  Many have opposed this because it violates contract law.  The highly justified fear is that if the government can just violate any contract at will then contracts of any kind (past, present or future) will no longer have any value.   Up until this morning the Obama administration has signaled that it supports these in-bankruptcy modifications.  That all changed on the Sunday morning talk show circuit when Larry Summers, head of President Obama’s National Economic Council, came out in strong defense of contract law.

According the the New York Times:

Mr. Summers, who also appeared on CBS’s “Face the Nation” suggested, however, that the government’s ability to require…scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts.”

Ok, now for a little truth telling.  Dr. Summers was actually talking about the bonuses being given to AIG employees but isn’t the sentiment the same?  After all, last time I checked a mortgage is a contract and by Dr. Summers own admission the government cannot “abrogate” them yet that is what congress wants to do. 

As an invisible renter I am sure you are thrilled because you want your shot to buy a house at a fair price and by NOT allowing in-bankruptcy loan modifications you will get your chance.  So please don’t forget to call and email Dr. Summers to thank him for his support of contract law (I just talked with his office) and for signaling that the Obama administration will now veto any in-bankruptcy loan modification legislation that Congress may propose.

Dr. Lawrence Summers  

Or is that not what he meant to say…

P.S.  See how the New York Times also seems to have come out against housing bailouts in this analysis of an article by Joe Nocera.

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