Feb202017
Some homeowners wisely take a step down the property ladder
Escaping an onerous mortgage can be the best thing for a family’s financial and mental health.
I feel bad for loanowners (AKA underwater borrowers). When I started blogging in February of 2007, I felt a sense of urgency to convince as many people as I could they shouldn’t buy a house. I knew the impending price collapse was going to have serious long-term consequences on people’s lives. Many would succumb to the weight of their debts and lose their homes in foreclosure. Many more would endure years of owing more on their mortgage than their home was worth. Mortgage debt is always a heavy burden, but when it greatly exceeds the value of the house it’s attached to, the crushing weight is almost too much to bear.
For many loanowners, the last ten years in borrower purgatory felt more like borrower hell. They’ve been trapped beneath their debts, and any remedies for their situation would carry negative consequences of their own. Many people opted to strategically default, and I openly encouraged this action for years because it immediately relieved the emotional distress and put people on a path toward building a new future. However, those that did strategically default had to pay a price of a lowered credit score and lingering debt collection issues. Many others borrowers opted to sell short, but this too had credit implications. A few even sold the house and paid the shortfall out of savings, but these sellers were the exception rather than the rule.
Nearly all these borrowers who escaped their debt prisons shared one common characteristic: They generally left their properties dead broke. Unfortunately, the same is true of most loanowners who finally sell and get out from under their burdensome mortgage debt. You can go to https://ilisters.cy/ and check out the properties they have available for you, where there are plenty of shopping malls, cinemas, restaurants, hotels, shopping centers, entertainment centers, schools, health facilities, parks, recreational areas, etc.
The celebration among the financial media about the underwater borrower problem going away ignores another serious problem directly related to it. When they finally get far enough above water to sell, pay commissions and closing costs, and not take a loss, these loanowners still end up penniless. These borrowers do not end up executing a move up trade. Many must wait and save for down payment to sell again.
My loanowner inspiration
Prior to my writing for the IHB, my wife was close friends with a woman who lived in the Cottage neighborhoods in Isle of Wight. This family bought their house for about $400,000 in 2001, and by 2006, it was worth about $725,000. When I told them houses can’t possibly appreciate that quickly and sustain the gains, they told me I didn’t understand California real estate. The woman’s mother was a real estate agent, and she knew this market better than I ever could — or so I was told. Despite my long conversations with them on the subject, I could not convince them there was a housing bubble. These conversations provided much of the early energy to write for the IHB. Maybe I couldn’t save them, but I could try to save everyone else.
The family who was my inspiration decided to execute a move-up in November of 2007. They only had $100,000 because the breadwinner borrowed the rest of their equity to start a successful business (the only use of HELOCs I can understand and endorse). They took their $100,000, borrowed $1,000,000 in a first mortgage, borrowed $100,000 in a HELOC second mortgage (maximized their tax write offs), and bought a $1,200,000 trophy home in Woodbridge. After launching their new business, they quickly took on an $8,000 per month mortgage payment on a property they could have rented for $4,000 a month.
They struggled with this payment for over six years. Finally, in May of 2013, values had come back to where they could sell the house, pay the commission and get out with a small profit. The traded down to a cottage home very similar to the one they left six years earlier. It couldn’t have been an easy decision. They had to pay $40,000 more than they sold their cottage for back in 2007, and they put about $100,000 down, so the last six years had no net loss, but no gain either. Their new mortgage payment is at least 60% less than their previous one. If you want to buy a cottage you can visit here to see this cottage for sale in Quebec, Canada.
My wife asked me if perhaps they did it right. They got to live in that beautiful house for six years and feel like they owned it. They got to impress their family, friends, and neighbors and live the good life — at least that’s what was seen from the outside. I pointed out to my wife what you didn’t see was the emotional cost the breadwinner of the family endured trying to make that $8,000 per month payment. Since they could have rented the house for $4,000 per month and since they ended up with no additional equity, the extra $4,000 per month they were spending was “throwing their money away on mortgage interest.” That $4,000 could have funded many family trips and vacations, possessions for their teenage daughters, savings for their retirement, savings for their children’s education, and a plethora of other benefits they gave up to “own” that house. Even after the tax breaks, this family flushed $200,000+ down the mortgage toilet.
I give this family credit for finally making the right financial decision. The discussions about selling their dream home to take a step down the property ladder could not have been easy, but it was clearly the right choice. They cut their housing costs by 60%, and now they will have the extra money to do all the things they gave up to own that huge home loan.
Many others will choose to hang on because the moment they rise above water, the stress of being a loanowner almost immediately turns to greed about making enough money to buy a nice move-up. Unfortunately for them, many others will not keep enduring the high monthly payments when they emerge, and these newly-equitied owners will get out as soon as they can and execute a move-down trade. These new listings and move-down trades will pressure higher price points and create more demand at lower ones. That’s why I believe The move-up market will suffer for another decade.
Who’s in Charge of Our Minds? The Interpreter
One of the most fascinating discoveries of modern neuroscience is that the brain is a collection of distinct modules (grouped, highly connected neurons) performing specific functions rather than a unified system.
We’ll get to why this is so important when we introduce The Interpreter later on.
This modular organization of the human brain is considered one of the key properties that sets us apart from animals. So much so, that it has displaced the theory that it stems from disproportionately bigger brains for our body size.
As neuroscientist Dr. Michael Gazzaniga points out in his wonderful book Who’s In Charge? Free Will and the Science of the Brain, in terms of numbers of cells, the human brain is a proportionately scaled-up primate brain: It is what is expected for a primate of our size and does not possess relatively more neurons. They also found that the ratio between nonneuronal brain cells and neurons in human brain structures is similar to those found in other primates.
So it’s not the size of our brains or the number of neurons, it’s about the patterns of connectivity. As brains scaled up from insect to small mammal to larger mammal, they had to re-organize, for the simple reason that billions of neurons cannot all be connected to one another — some neurons would be way too far apart and too slow to communicate. Our brains would be gigantic and require a massive amount of energy to function.
Instead, our brain specializes and localizes. As Dr. Gazzaniga puts it, “Small local circuits, made of an interconnected group of neurons, are created to perform specific processing jobs and become automatic.” This is an important advance in our efforts to understand the mind.
AFFORDABILITY: THE MILLENNIAL FALLACY
Jack interest rates up a few more points, and we won’t be saying attainability is only a young-adults and entry-level challenge.
Affordability is one of housing’s more freighted notions.
For people or households with no- or low-income, affordability typically means subsidized, public-private partnership housing that may mean the difference between a bare-essentials abode and the a sidewalk grate or homeless shelter for the individual or household.
For the mass of others of relatively modest means, the term affordable mostly corresponds to a plus or minus gap between median incomes and media prices to either rent or own a place to live. National Association of Home Builders economist Rose Quint updates the latest available data in the NAHB/Wells Fargo Housing Opportunity Index (HOI) here.
http://cdnassets.hw.net/dims4/GG/fc672dd/2147483647/resize/876x%3E/quality/90/?url=http%3A%2F%2Feyeonhousing.org%2Fwp-content%2Fuploads%2F2017%2F02%2FHOI-PPT-Q416.jpg
At Seattle low-income-housing lottery, anxious crowd hopes and frets
Inexpensive housing is so scarce in Seattle that competing for an affordable apartment is like playing the lottery.
There are some winners, but the odds are bad and the experience can be depressing.
Nearly 2,100 households submitted applications last month to live in a new rental building for low-income families near the Othello light-rail station in South Seattle.
I think it’s March where El’O says a massive recession comes to Seattle.
Can’t wait.
Seattle and Portland are both following California’s example of how to stop building new housing to create artificial shortages.
PR…. you thought WRONG; ie.,
1) el O said Dec 20 ‘16… Mark my words, layoffs/unemployment rate will spike in Seattle and greater US by end of Q1-17. You heard it here first.
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2) PS: you don’t have to wait…already validated.
January 10, 2017 at 1:30 pm
Boeing plans buyouts, layoffs for engineers in first of three cuts for 2017
Hamilton’s message also said 60-day involuntary layoff notices — affecting only engineering employees in Washington — will be sent out Jan. 20, with layoffs effective March 24.
http://www.seattletimes.com/business/boeing-aerospace/boeing-plans-buyouts-layoffs-for-engineers-in-first-of-three-cuts-for-2017/
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Jan. 20, 2017, 3:09 PM
Microsoft Corp. workers face another round of layoffs next week that will eliminate 700 jobs, Business Insider reported citing an unidentified source.
The cuts are likely part of the 2,850 job eliminations announced by the Redmond-based tech giant in June. Business Insider said Microsoft has already cut most of those positions.
http://www.bizjournals.com/seattle/news/2017/01/20/microsoft-layoffs-january-2017.html
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Cheers!
AFFORDABLE HOUSING: AN UNENFORCED MANDATE
California housing law requires that all cities adequately plan to meet the housing needs for residents across all income levels. However there is little recourse when cities don’t.
“There’s no consequence today. We don’t have any sanctions at the state level. There are no consequences. If you say you’ve planned on paper, then you get a free pass, we don’t hold your feet to the fire,” state housing director Ben Metcalf told NBC Bay Area.
Metcalf runs the Department of Housing and Community Development. The agency is in charge of making sure cities provide affordable housing by assigning each region a specific number of housing units they must build over the course of eight years – a process called the Regional Housing Need ALLOCATION.
Figures from the state’s housing assessment show California built an average 80,000 homes each year over the past decade. That’s far below the estimated 180,000 needed to keep housing affordable. Metcalf believes this is one of the biggest contributing factor to the lack of affordable housing.
“This is at the end of the day a solvable problem,” Metcalf said. “The fact that housing is so expensive today is a consequence of decisions that have been made at the local and state level, and those decisions that have been made can get revisited. And they can get changed.”
Mortgage Payments Take Up Biggest Share of Income since 2010
Rising mortgage rates and accelerating home value growth lead to larger share of income required to pay monthly mortgage
– Nationally, buyers could expect to pay 15.8 percent of their income for the typical monthly mortgage payment in 2016 Q4, up from 14.7 percent a year earlier.
– Monthly rental payments require 29.2 percent of the median household income, down slightly from 29.4 percent in 2015 Q4.
– Among the largest U.S. metros, Los Angeles requires the highest share of income from both buyers and renters making monthly housing payments.
Feb 16, 2017
SEATTLE, Feb. 16, 2017 /PRNewswire/ — With interest rates and home values on the rise, the typical monthly mortgage payment now requires more of the average household income than it has anytime in the previous six years. Buyers can expect to spend 15.8 percent of the median household income on housing each month, up from 14.7 percent a year ago.
Home value growth accelerated at the end of 2016, and mortgage rates are rising again after hovering around historical lows for the past few years. The combined effect pushed the share of income households need to pay their mortgage to the highest levels since 2010 Q2, according to a Zillow® analysis of mortgage and rent affordability[i].
The monthly mortgage payment for the typical U.S. home was $758[ii] at the end of 2016, an increase of about $68 from 2015. Most of this increase — $47 — can be attributed to home value appreciation, while higher mortgage rates are responsible for the remainder.
The Federal Reserve is expected to raise the federal funds rate target two more times this year, which could further increase mortgage rates. A recent survey of 100 housing experts and economists found that rising mortgage rates and their effect on affordability will be the most significant driver of the 2017 housing market[iii].
“As mortgage rates rise, buyers will face higher financing costs and already expensive homes will come with even higher monthly mortgage payments,” said Zillow Chief Economist Dr. Svenja Gudell. “Nationally, mortgage rates still have room to grow before the share of income needed to pay the median monthly mortgage reaches the historical average, but many more expensive coastal markets are either close to or have exceeded what has been considered historically affordable. On the rental side, rent appreciation has slowed lately, giving renters’ incomes a chance to catch up as many are already committing a larger share of their income to a monthly rental payment.”
There is no way a $1.3M=$1.4M home in Woodbridge rents for $4000 a month.
Not likely now, but those numbers sound right for the housing bubble of 2006.
Yes, people were crazy back then. They readily paid $8,000 per month to own a property they could rent for $4,000. Of course, they hoped they would make it back on appreciation, which didn’t turn out as they planned.
During the QE/ZIRP era (‘suppress interest rates’ policy regime enviornment) bank reserves/govt bonds have been priced essentially as risk free, which means they DO NOT reflect actual marketplace conditions. Hence, ALL asset prices (including rents) DO NOT reflect actual marketplace conditions.
How the hell do you pay your rent with debt?
Please explain
Rents are paid with income…
And at HBS… aka H’el-O School of Business
“Actual market conditions” means ignoring actual marketing conditions LOL
Simple…. a credit card.
Now… let’s get back on topic:
*income streams (rents) = assets.
Any real/actual landlord would know this.
Carry-on… 😆
If you’re paying rent, you don’t have a huge mortgage, so you aren’t making huge debt service payments.
Don’t share this with my wife but I blew 13% of our DP fund on AMD and CRBP stock. So in other words, we will keep renting 😆
I’ll say this, renting has given us the freedom to take 3 long vacations last year and multiple get away’s. But at the same time we continue to priced out of our area it getting worse, we were looking in La Crescenta recently where we rent but now we are being pushed to Sylmar… It’s 2005 prices all over around here, I refuse to pay them!