I have been accused of being “old school” because I never embraced the innovations in real estate finance that inflated the housing bubble. In 2006 preparing for home ownership only required finding a house and signing a few loan documents. It’s a lot more difficult today.

Now the old rules are back. Buyers today have to save for a down payment and make sure the payments are affordable. Since so many forgot the old ways, I felt it necessary to revisit these old methods to educate the next generation — and perhaps reeducate the old one.

People can adjust to whatever income and expenses they have if given a little time. Transitioning from renting to home ownership shouldn’t be a difficult adjustment if you follow a few simple guidelines for structuring your finances while you’re still renting. To make the adjustment, you need to carefully budget for saving for a down payment and making the house payment once you purchase. Fortunately, this is not as difficult as some imagine.

## PITI

The first task is to figure out how much you will have to spend each month when you own your home. Lenders don’t pity borrowers, but they are very concerned with an acronym called PITI. It is a formula they use to calculate the maximum monthly payment you can afford. PITI is short for principal, interest, taxes and insurance, but it also includes other known costs such as HOA dues and private mortgage insurance. When a lender calculates the maximum loan they will extend a borrower to buy a particular property, they start with the borrowers income and apply the maximum debt-to-income ratio, currently 31%. They take this number and divide it by 12 to come up with a maximum PITI.

For example, let’s say a borrower making \$100,000 per year wants to buy a home. The lender will allow them to put \$31,000 per year (\$100,000 x 0.31) or \$2,583 per month to cover PITI. This number is very important because it tells you how much you can expect to write checks for each month if you max out your loan (most do) to buy a home.

## Maximum loan balance

When lenders calculate your maximum allowable loan balance, they back out taxes (including Mello Roos), insurance, and HOA dues to calculate the remaining amount left over to cover the payment, which includes principal and interest. Generally, about 25% of PITI is consumed by taxes, insurance and other costs. Let’s assume \$583 is consumed for these backed-out items. The remaining \$2,000 is available to make a payment. From that, lenders use another formula that takes into account the interest rate to calculate the maximum loan balance.

If we stay with our example from above, a borrower making \$100,000 per year making a \$2,000 monthly payment can borrow \$440,000 using 20% down conventional financing or \$381,175 using FHA financing. The difference is caused by the lower payment due to the cost of FHA insurance.

For those of you who are interested, this formula is the present value formula. The following computes the maximum loan over a term of n months at a monthly interest rate of c. [If the quoted rate is 6%, for example, c is .06/12 or .005]. 360 periods is used.

Maximum Loan Balance = Payment × [(1 – (1 + c)-n) ÷ c]. The present value formula for Microsoft Excel is as follows:

P = PV(c, n, Payment)

Don’t worry, the lender will do this math for you.

## Rent and Savings

As a renter hoping to buy, you must adjust your lifestyle to fit within your PITI amount. Your current rent should be far enough below this figure to allow you to save money for your down payment. But how much below? What is a good guideline for determining the maximum rent you should be paying each month? This is an important question because if you base your selection of a rental based on the PITI of your ultimate cost of ownership, you will also become accustomed to living in the quality of home you will ultimately afford to purchase. Fortunately, there is a formula to figure this out.

I’ve run the cost of ownership calculations on thousands of properties. The monthly cost of ownership is generally 25% to 30% below PITI. This monthly cost of ownership relates to rental parity, the foundation of housing market values.

If you use that guideline, a renter making \$100,000 a year should be paying about \$1,900 in rent and saving about \$700 per month toward a down payment. That translates to a 23% rent-to-income ratio. Anyone with the discipline to live this way will be able to save for a down payment and comfortably transition to home ownership. Anyone who doesn’t have the discipline to live this way may not be cut out for home ownership.

From the above example, a \$440,000 conventional loan balance leaves a \$110,000 down payment to purchase a \$550,000 house. Notice that 3.6% interest rates allow borrowers to purchase at price-to-income ratios of 5.5. That’s very high by historic standards.

At \$700 per month, it will take 158 months to save the \$142,052 for a down payment. Thirteen years is a very long time. That’s why so many people opt for FHA financing with 3.5% down. At \$700 per month, it only takes 20 months, or just over a year and a half, to save the \$13,825 required to cover the FHA down payment on a \$395,000 property.

Did you notice the catch to using FHA financing? People who don’t have a 20% down payment have to settle for much less house on the same income. This is why the tradition of buying a starter home, waiting until it accrues 20% equity, then selling for a move-up is such a big part of our housing market.

## Interest rates and the rent-save ratio

The guideline I describe above, spending 23% of gross income on rent and saving 8% is based on our current 3.5% interest rate. This mirrors the ratio of interest and principal repayment within the loan payment. At low rates, prices are inflated, and more must be put toward savings to acquire a down payment. Fortunately, at very low interest rates, more of the payment goes toward principal than at higher rates. At 10% interest rates, a rent-save ratio of 28% toward rent and 3% toward savings will yield the same results. At higher interest rates, less of a monthly payment goes toward the principal repayment and more goes toward interest. Fortunately, at high interest rates, prices are not inflated, and it takes less savings to close the deal.

If we do see higher interest rates, which we ultimately will, part of the reason for pricing pressure on houses comes from the lower amount of financing, but another pressure is the down payment barrier. It’s very hard for most people to save in a high interest rate environment. With higher interest rates, their savings grow faster, but potential buyers also pay more interest on car loans, student loans, and credit cards.

## The bottom line

To prepare for home ownership, rent a property using 23% or less of your gross income. Save 8% of your gross income in a special down payment account you don’t raid for other lifestyle expenses or purchases. In less than two years, you will have the down payment to purchase a property comparable to your rental using FHA financing. With the discipline you gained from living within your means and saving for a down payment, you will succeed as a home owner and build equity through paying down a mortgage. You might even be rewarded by the appreciation fairies and complete a move-up once you have about 30% equity in your home and you can sell, cover the closing costs and still have 20% for a down payment on a nicer property.

## Eliminating every barrier

During the housing bubble, borrowers need a down payment as 100% financing was everywhere. Borrowers didn’t need a good FICO score as lenders were giving people loans 1 day out of bankruptcy. Borrowers didn’t even need a job or any assets. And borrowers didn’t need the income necessary to repay the loan as lenders allowed borrowers to state any income necessary to get the loan whether they actually made this money or not. In 2006, any renter could get an option ARM, buy a property, and pay the minimum payment and save money compared to the rental they were in. It’s a wonder every renter in the world didn’t buy.

Well, we all saw how that turned out. During the housing bubble, any qualification guideline served as a barrier to doing more deals, so lenders and investors eliminated them — all of them. As I noted above, in today’s real estate market, you actually have to save for a down payment, and you must have demonstrated enough fiscal responsibility to have a reasonable FICO score, usually 640 or better.Loan underwriting is supposed to sort the wheat from the chaff. The purpose of reviewing a borrowers past financial behavior is to prevent those who don’t have the discipline to consistently make payments from getting a loan they won’t repay.

• The former owner of today’s featured property was a Ponzi. He bought the property for \$411,000 on 7/14/2001 using a \$328,800 first mortgage and a \$82,200 down payment.
• On 3/29/2001 the obtained a \$40,000 HELOC.
• On 7/11/2002 he refinanced with a \$405,000 first mortgage.
• On 9/30/2002 he opened a \$62,000 HELOC.
• On 7/30/2003 he refinanced with a \$532,500 first mortgage.
• On 2/18/2004 he opened a \$60,000 HELOC
• On 8/11/2004 he obtained a \$153,000 HELOC.
• On 12/15/2000 he refinanced with a \$750,000 first mortgage.
• On 3/20/2006 he refinanced with a \$770,000 first mortgage.
• On 5/3/2006 he opened a \$92,500 HELOC.

He defaulted in late 2010 and squatted for two full years until the lender took the property back early this year. Since prices have risen so dramatically, the lender may recover the full value of the first mortgage at resale. Restricting inventory is paying off, assuming they keep these liquidations coming at a snails pace.

Wouldn't you be embarrassed to overpay by \$100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
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## Proprietary OC Housing News home purchase analysis

2412 ORANGE Ave Costa Mesa, CA 92627

\$411,000 ………. Purchase Price
2/14/2001 ………. Purchase Date

\$386,663 ………. Gross Gain (Loss)
(\$63,813) ………… Commissions and Costs at 8%
============================================
\$322,850 ………. Net Gain (Loss)
============================================
94.1% ………. Gross Percent Change
78.6% ………. Net Percent Change
5.4% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
\$159,533 ………… 20% Down Conventional
3.47% …………. Mortgage Interest Rate
30 ……………… Number of Years
\$638,130 …….. Mortgage
\$143,702 ………. Income Requirement

\$2,855 ………… Monthly Mortgage Payment
\$691 ………… Property Tax at 1.04%
\$0 ………… Mello Roos & Special Taxes
\$166 ………… Homeowners Insurance at 0.25%
\$0 ………… Private Mortgage Insurance
\$0 ………… Homeowners Association Fees
============================================
\$3,712 ………. Monthly Cash Outlays

(\$602) ………. Tax Savings
(\$1,010) ………. Principal Amortization
\$175 ………….. Opportunity Cost of Down Payment
\$219 ………….. Maintenance and Replacement Reserves
============================================
\$2,495 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
\$9,477 ………… Furnishing and Move-In Costs at 1% + \$1,500
\$9,477 ………… Closing Costs at 1% + \$1,500
\$6,381 ………… Interest Points at 1%
\$159,533 ………… Down Payment
============================================
\$184,867 ………. Total Cash Costs
\$38,200 ………. Emergency Cash Reserves
============================================
\$223,067 ………. Total Savings Needed

#### The property above is available for sale on the MLS.

Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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### 27 Responses to “Renter’s guide to preparing for home ownership”

1. You left out one other important element…

the Treasury bond will be priced into the financial model.

typically

T-bond prices up, home prices up
T-bond prices down, home prices down

The reason why it’s important is because when the time comes to sell, the trend isn’t always your friend.

• I wrote about that originally on the IHB in 2007, and I followed up on it last year here:

### Future loan terms determine future home prices

It’s one of the many reasons I don’t recommend people buy for appreciation. It likely won’t be there.

2. Since Mark Zandi at Moody’s is trying to get the head job at the GSEs, he is channeling the fantasies of bankers. His report says that an improved economy will keep the artificial house price rally going. Bankers are counting on this, but it likely won’t go as planned.

### Almost 40 percent of delinquent loans have been delinquent for three or more years

Home prices will increase over the next three years as the economy expands and servicers work through their distressed inventories, according to a report from Moody’s Analytics. However, the firm predicts rising prices will not be enough to offset anticipated rising loss severities.

Home prices will rise about 4.2 percent between the fourth quarter of last year and the fourth quarter of 2015, according to Moody’s. “Not only will several years of solid job and household growth help home values by the end of this period, housing markets throughout the nation will have worked off most of the remaining distressed inventory,” Moody’s said in its report.

Recent price gains have resulted from high affordability, soaring investor interest, and low inventories with declining foreclosure inventories playing a major role.

Moody’s predicts foreclosures will have less of a hold on home prices in years to come as “fundamentals that normally drive house prices” come back into play, including “job growth, demographics, affordability, and supply conditions.”

However, the transition from the current heavy foreclosure influence on prices will not happen overnight.

Distressed and foreclosed homes “will still distort house price trends over the next year or two, but to a far lesser extent, particularly for the states with especially wild swings,” Moody’s said.

States with lengthy foreclosure timelines will continue to be hindered by their foreclosure inventories, but the slow pace will prevent a flood on the market.

Nationally, the market holds about 3 million homes in serious delinquency or foreclosure—which is about 3 times the normal level, according to Moody’s.

Foreclosures increased 12 percent year-over-year in February, according to RealtyTrac. However, Moody’s points out a few states claim the lion’s share of this increase—New York, New Jersey, Illinois, Ohio, and Florida. When these states are taken out of the equation, foreclosures declined 11 percent over the year.

Outward economic factors will play positively on housing markets in the South and West, while the Northeast and Midwest will continue to struggle in the near future.

Regardless of the overall price increased expected across the nation, Moody’s expects residential mortgage-backed securities (RMBS) loss severities to remain elevated for the next year.

Almost 40 percent of delinquent loans have been delinquent for three or more years, which translates to much greater losses than on loans in delinquency for shorter time periods.

Aged delinquencies are more likely to encounter hiccups with titles, documentation, and judicial backlogs, while expenses continue to accumulate.

Bank of America and Chase hold high levels of delinquencies aged three years or more—46 percent and 43 percent, respectively—when compared to their counterparts, according to Moody’s.

Therefore, they “will generally realize higher loss severities than others,” Moody’s said.

• Default, modify, and repeat.

3. ### Report: Originations Down 4.8% Q-o-Q

As expected, mortgage origination volume slowed down a bit in the first quarter, with the usual suspects holding the bulk of market share.

According to data from Inside Mortgage Finance, originations totaled about \$500 billion in Q1, down 4.8 percent quarter-over-quarter (from \$525 billion) but more or less in line with analysts’ expectations.

Despite the quarterly decline, origination volume still looked fairly strong, especially when compared to the \$420 billion recorded during the same period last year.

“This bodes well for results going forward, with positive commentary from many institutions that have released

1Q results thus far,” FBR Capital Markets noted in an analysis. Using data from GSE loan sales, the firm projected a range of \$450 to \$500 billion for first-quarter originations.

In their latest earnings reports, Bank of America and JPMorgan Chase both recorded gains in originations last quarter, while Wells Fargo saw a dip. Nevertheless, Wells continued to hold a grip on market share, being ranked at the top with 22.0 percent. JPMorgan had about half that—11.1 percent—while online lender Quicken Loans and Bank of America were about even with 5.1 percent and 5.0 percent, respectively.

Though some might view Wells’ drop in originations as bad news for the industry, FBR believes “the void left in the market will likely act as a large boon to smaller originators looking to take up share in future quarters.”

Additionally, with rates low and origination volume remaining strong, FBR expects the second quarter is well-positioned to surpass the first.

“As such, we continue to believe our expectations for a \$1.7 trillion market in 2013 are realistic given a significantly longer tail to refinancing volumes than expected by [Wall] Street,” the firm said. “Additionally, we believe the upcoming government marketing campaigns and improving housing/purchase markets will act as further boons to already strong tailwinds.”

• Yes, but some are looking at “innovative” ways to increase loan volumes.

Lenders venturing back into subprime market

Lenders are reemerging to offer the classic subprime trade-off: high-priced loans for high-risk customers. This time, though, the standards are more stringent.

April 27, 2013|By E. Scott Reckard, Los Angeles Times

Michele and Russell Poland’s credit was shot, but they managed to buy their suburban dream home anyway.

After a business bankruptcy and a home foreclosure, they turned to a rare option in this era of tightfisted banking — a subprime loan.

The Polands paid nearly \$10,000 in upfront fees for the privilege of securing a mortgage at 10.9% interest. And they had to raid their retirement account for a 35% down payment.

Most borrowers would balk at such stiff terms. But with prices rising, the Polands wanted to snag a four-bedroom home in Temecula near top-rated schools for their 5-year-old son. By later this year, they figure, they’ll be able to refinance into a standard loan.

“The mortgage is a bridge loan,” said Russ Poland, now working as an insurance investigator. “It was expensive, but we think it’s worth it.”

In the aftermath of the housing crash, there’s no shortage of Americans who, like the Polands, are eager to rebuild their shattered finances. In response, lenders are emerging to offer the classic subprime trade-off: high-priced loans for high-risk customers.

Before the housing bust, a sprawling business arose in subprime mortgages and their cousins, so-called alt-A loans, which were issued to people who had decent credit but did not have to prove income. About \$1 trillion in subprime and alt-A loans were originated in 2005 and again in 2006 — more than a third of all home loans, according to the trade publication Inside Mortgage Finance.

But the explosion of mortgage defaults that began in late 2006 vaporized an entire industry of subprime specialists. The Wall Street firms that had bundled the loans into securities soon began to implode as well. Little wonder that loans for the credit-challenged disappeared.

Today’s high-risk lenders differ from those during the housing boom in key ways. These lenders say the new subprime mortgages are actually old school — the kind of loans made in the 1980s and 1990s. In other words, a borrower’s collateral matters, down payments matter, income and ability to pay matter.

Subprime lenders care because they are holding the loans on their books rather than selling them to investors. They hope a private securities market for subprime loans, also destroyed in the meltdown, will reemerge soon.

For now, the subprime and alt-A business remains small, maybe \$8 billion total, estimated Inside Mortgage Finance Editor Guy D. Cecala. That’s less than half of 1% of the \$1.8 trillion in U.S. home loans last year.

Among those hoping to reverse the trend is the Polands’ lender, Citadel Servicing Corp. of Orange County. Chief Executive Daniel L. Perl said he has tested the water by making a few dozen subprime loans since late 2011, mostly with his own money rather than investment capital.

The Polands, among the first to receive Citadel loans, are part of a success story, Perl said. None of the loans has gone bad; about a third have already been paid off. With that track record, Perl recently raised \$200 million from private investors. He’s hiring 55 employees to help him make loans through mortgage brokers across most of the West, and he’s moving from Citadel’s Aliso Viejo location to larger offices in Irvine.

“We’re looking to build it up over the next 24 months to \$30 million to \$50 million a month,” Perl said. “It’s a decent business plan in a credit-barren world.”

But lenders such as Perl are proceeding far more carefully than during the housing bubble. Then, borrowers commonly avoided down payments entirely in “piggyback” arrangements that allowed one loan of 80%, another for 20%. Some lenders offered “Ninja” loans — requiring no proof of income, assets or even a job.

Perl now requires 25% to 40% down, depending on credit scores that can drop as low as 500 on an 850-point scale. His potential customers, who pay a minimum of 7.95% interest, include higher-income as well as lower-income borrowers.

“Quite a few” affluent borrowers are good credit risks, Perl said, even though they had recent short sales — they sold homes for less than they owed on their mortgages. Perl also writes mortgages that exceed the Fannie Mae and Freddie Mac threshold for conventional loans, which varies but tops out at \$625,500 in the most expensive areas.

“They come from all walks of life — doctors and lawyers as well as blue-collar workers,” Perl said. “As long as they have the ability to pay and equity in their homes, they are a candidate for one of our loans.”

Another lender getting into subprime mortgages is Carrington Mortgage Holdings of Aliso Viejo, a manager of distressed loans and properties that has become a major landlord.

“There are a lot of borrowers who can make a big down payment, document that they have the income to pay the loan and have a good recent job history — but have a credit score that would make it impossible to get a loan,” Carrington Executive Vice President Rick Sharga said.

Carrington would like to start making subprime mortgages later this year, depending on the still-evolving regulatory environment for mortgages. Sharga anticipates “a lot of pent-up demand.”

In a related development, Consumer Financial Protection Bureau Director Richard Cordray last month encouraged credit unions, which often hold fixed-rate mortgages on their books, to make “responsible” loans that fall outside the bureau’s general guidelines for responsible mortgage lending. Bureau rules discourage most lenders from writing mortgages that increase total debt payments to more than 43% of a borrower’s income. Credit unions are given more leeway in exceeding that baseline, provided they properly vet applicants and charge no more than 3.5 percentage points above the going mortgage interest rate.

“The current mortgage market is so tight that lenders are leaving good money on the table by not lending to low-risk applicants seeking to take advantage of the current favorable interest rate climate,” Cordray told a credit-union trade association. “This actually creates a window of opportunity for credit unions that helped ‘write the book,’ so to speak, on what it means to underwrite responsibly.”

John C. Williams, president of the Federal Reserve Bank of San Francisco, sees no reason that subprime mortgage bonds can’t reemerge in “plain vanilla” form, as opposed to the complex concoctions that ended up as “toxic assets” in the meltdown.

“I can’t understand why it hasn’t come back sooner,” he said, pointing out that there’s a strong market for bonds backed by subprime auto and credit-card loans.

“California has been famous for devising exotic mortgages,” Williams said. “But the reality is that they held up rather well until we started doing things like giving them to people with no jobs.”

• What is the hope? That in the future they will be able to refinance their 10.9% mortgage to a 4.0% mortgage.

• “The Polands paid nearly \$10,000 in upfront fees for the privilege of securing a mortgage at 10.9% interest. And they had to raid their retirement account for a 35% down payment.”

Stupid is as stupid does.

• The down payment requirement plus fees will make this cost prohibitive for most subprime borrowers. It’s amazing that their credit is so bad that even FHA won’t qualify them.

• At 10.9% interest, their income won’t qualify for much of a loan. With competing buyers borrowing at 3.5%, these people had to have substituted down in quality significantly to become owners again.

• It occurred to me that I’ve met hard money lenders that will lend to flippers on more favorable terms than this.

4. ### Consumer Sentiment Slips in April, Matches Year-Ago Level

The Survey of Consumers Index of Consumer Sentiment dropped a bit from March to April but stayed level on a yearly basis, according to the latest release.

The survey, conducted at the University of Michigan and distributed by Thomson Reuters, shows Americans demonstrating more optimism about their current situations but apprehension about the future.

The overall index declined to 76.4 from 78.6 in March, a drop of 2.8 percent. April 2012’s index also read 76.4.

“The overall level of confidence declined in April from March, but was identical to last April reading,” Survey of Consumers reported. “Most of the April loss was in how consumers viewed future economic prospects. In particular, consumers were less optimistic about the ability of the economy to continue to expand without a renewed downturn sometime in the next five years.”

The Current Conditions Index, meanwhile, was 89.9, a drop of 0.9 percent from March’s 90.7. Compared to last

year, consumers were much more positive about their current circumstances, with April 2013’s index coming in 8.4 percent above April 2012’s 82.9.

According to Survey of Consumers, rising home values were reported by the highest number of homeowners since late 2007, though that percentage remains at less than half of its 2005 peak of 76 percent. Upper-income consumers were more confident about home values and showed more favorable attitudes toward vehicle and homebuying conditions.

At the same time, the Index of Consumer Expectations fell to 67.8, a 4.2 percent decline from March’s 70.8. Last April, the expectations index read 72.3.

5. Maybe some discretionary sellers will return to the market. Of course, since their loans are so large, they will price their homes at WTF price levels.

### Sellers Showing More Faith in Market

After showing some reluctance at the beginning of the first quarter, homeowners polled for Redfin’s second-quarter Real-Time Seller Survey seem far more interested in entering the market.

According to responses collected by Redfin, 45 percent of sellers believe now is a good time to sell, up from just 22 percent in the first quarter and 15 percent in last year’s fourth quarter. At the same time, 44 percent say now is a good time buy, down from 54 percent last quarter.

Fifty-two percent of respondents said they were planning to sell, up from 49 percent in the previous quarter. Out of those not planning to sell, 15 percent are renting out their homes. (Those who are planning to sell also seemed more open to the idea of renting instead, with the percentage of those willing to consider it rising to 52 percent.)

Having survived the slower cold season, homeowners were also a little more optimistic about future home price increases. Seventy percent of those surveyed expect prices will rise “a little” in their area in the next year (flat from Q1), while 15 percent anticipate prices will rise “a lot” (up from 11 percent).

“We are seeing more and more folks who bought before the bubble burst who are above water and listing their homes,” said Redfin agent Chad Dierickx. “When sellers see their neighbors’ homes selling quickly and for prices they never would have imagined a couple of years ago when foreclosed properties and short sales were dragging down home values, they can’t help but be optimistic about the market. I expect that this optimism will only continue to increase.”

The first-quarter seller survey, released in January, revealed many potential sellers (34.1 percent) wanted to hold out on entering the market in the hopes that prices would continue to improve. This time around, 32.3 percent indicated that missing out on future price gains was a major concern about selling now. More than one-fifth (21 percent) of sellers believe they would not get a higher price for their home if they waited a year to sell.

• The House Ways and Means Committee is having discussion on Mortgage Interest Deductions. To my surprise they are also looking at getting rid of the property tax deduction and the exemption on the first \$500,000 of capital gain on the sale of a principal residence. They are not looking at a 20 year phase out, but a 7 year phase out of the mortgage interest tax deduction.

Since the Committee is coming to the conclusion that the MID helps higher income people, I think we see a more aggressive MID scale back. Just like how the government is coming out very aggressive toward retirement accounts.

• History is your guide; the \$trillions spent subsidizing current home price levels will ultimately be re-collected from home owners (supposed ). That’s the primary issue problem with fixed targets.

• It would seem that in many high tax rate areas of the country, getting rid of the property tax deduction would be a very big deal.

Particularly since property tax rates seem to only trend up.

Personally, I am all for getting rid of MID, property tax deduction and 500K exclusion, even though I am a current owner. (Disclosure: I am looking for a 2nd property)

I am certain that if these subsidies were not in place, we would see a measurable downward trend in house values.

• The deduction for property taxes (and mello roos) is effectively already gone for higher-earners due to the AMT. So, assuming you have the \$200k to finance the \$1m Irvine house, you won’t be deducting property taxes nor mello roos.

6. Mortgage rates may be low – but other borrowing rates are not. LA Times 4/27/2013 has an interesting article “High-cost Borrowing is new Norm, Study Finds”…about a study by the National Bureau of Economic Research that finds “high cost lending is now firmly rooted in the American financial system…” Interesting reading…

• Thanks for the article. I may do a post on this one:

### High-cost borrowing is a new American norm, research finds

High-cost borrowing through payday loans, pawn shops, auto title loans and others is no longer on the margins of U.S. consumer behavior — about 1 in 4 Americans have tapped this kind of financing, new research shows.

A new study by the National Bureau of Economic Research finds high-cost lending is now firmly rooted in the American financial system after two decades of strong growth.

“High-cost borrowing cannot be considered a ‘fringe’ behavior that is limited to a specific and small segment of the population,” economists Annamaria Lusardi and Carlo de Bassa Scheresberg wrote in their study. “Rather, it is firmly rooted in the American financial system and is common even for households who are generally referred to as ‘middle-class families.’”

The new research comes amid a renewed regulatory focus on this type of lending, particularly the payday loan industry. A recent report by the Consumer Financial Protection Bureau found that payday loans were essentially a “debt trap.”

The average payday-loan consumer took out 11 loans during a 12-month period, paying a total of \$574 in fees — not including loan principal, according to the study by that federal agency. A quarter of borrowers paid \$781 or more in fees.

Separately, consumer advocates backed a state bill this month that would have restricted the number of payday loans to any one borrower. Senate Bill 515, which failed to pass in the California Legislature, would have barred the high-cost, short-term lenders from making more than six loans a year to any single borrower.

The paper by the National Bureau of Economic Research goes beyond the payday loan industry to encompass the entire realm of “alternative financial services.” It notes that in 2009 alone, the Federal Deposit Insurance Corp. found this industry to be worth at least \$320 billion in transactions.

The paper was based on several separate studies, including phone interviews of close to 1,500 Americans; a state-by-state online survey of about 28,000 American adults; and a military survey of 800 service members.

The study also found that about 34% of young adults have used a payday loan, pawn broker or some other form of high-cost financing. A low level of financial literacy correlated highly to the use of these loan products.

7. “…This is why the tradition of buying a starter home, waiting until it accrues 20% equity, then selling for a move-up is such a big part of our housing market…”

The Ponzi scheme of hype inflation on houses with low percent down caused this situtation. A starter house is for a starter home — a single person or starter family. Once wages goes up and equity by paying off the principal occured the 20% down for a large house was to occur. The situatutation should be similar to a starter car — with starter wages and a small family, you may only be a able to afford a lower priced car. One does not expect magical increases in the value of the cars unless you live in OC, CA.

8. I’m still a believer in the “contrarian” point of view – If “everyone” says it’s a good time to buy or sell anything (stocks, bonds, real estate), it’s probably the right time to do the opposite. The most pessimistic real estate years (2010-2011) turned out to be a great time to buy in Southern California, from both a rental parity and appreciation standpoint.

But when even the media and my own realtor start to comment that this is looking like a bubble, that makes me do a double-take.

• “The most pessimistic real estate years (2010-2011) turned out to be a great time to buy in Southern California, from both a rental parity and appreciation standpoint.”

Out of curiosity, why did you not buy at the time?

• I had just relocated for a new job and had corporate housing – I was not looking to purchase.

• we have not seen the most pessimistic years, as evidenced by ZIRP and “recovery” koolaid intoxication. we felt some pain, but the blood has yet to run in the streets.

these lemming herds need further culling: the realtor herd, the housing appreciation cult, the bond ‘flight to safety’ lemmings. We have not seen the despair portion of the cycle because interest rates are 1,000 basis points too low. Rates will get to where they need be, that is guaranteed.

’08 was a banking crisis. It was not solved. It has been transformed into a sovereign debt crisis. Your government has mirrored the subprime option ARM teaser rate buyer. Gravity cannot be fought forever.

• “Gravity cannot be fought forever.”

They have so far been successful, beyond anything I expected. The system is now 100% geared to consumption. If fact I starting to believe new buyers don’t care if they can afford the payments or not if sometime in future. If I get into trouble just default or just get me a house now I’ll worry about the payments latter. I can always get a loan mod, has replaced I want to pay off my loan.

I think the Fed will keep printing and printing until it can inflate wages. I don’t know if they can be successful. I totally expected a correction in 2012…now I finally coming to realize that fundamentals are temporarily gone. Really, the Fed is getting incredible cocky about their printing. In a few years (if they double current rates) the Fed will own 33% of the outstanding resident mortgage debt, as the “investor’ maybe you will get a fed principal reduction too. This is their plan.

Get all the bad loan owned the Fed….
Allow never ending loan mods to keep supply off the market
Allow principal reductions….
Just keep printing and printing to keep rates low
Eventually, wage inflation will push prices.

I hope you are right and we get a correction very soon (we need to return to normal supply and demand), but I think we are going to have several more years of this nonsense. Two positions I’m watching closely FHFA head and new Fed Chairman. If we get a principal reduction person and a printer it’s going to more of the same.

• “Gravity cannot be fought forever.”

No, but the immutable laws can be “muted” for considerable lengths of time. And remember, the idea that we have not “seen the most pessimistic years” is a matter of your opinion, and one that is not shared by the market.

Even in the depths of the great depression, there were a number of people who thought we “had not seen enough” purging of the excesses such that we could grow again. Well, history has proven the opinion of the most pessimistic of the pessimists to be wrong.

As will be the same case here. It is NEVER the fringe edge of optimism or pessimism that sets the market. There were a number of people in 2006 who (recognizing fully there was a bubble) thought we had “another 30-40% to the upside before flattening”, History has shown them to be tragically wrong.

So too will be those who (as it was in 1933) were the most pessimistic of pessimists. They went to their deaths only to see those once in a lifetime deals slip through their fingers…

9. Only by looking through a narrow frame, can one determine there was a housing bubble; or a Nasdaq bubble, or whatever bubble. The bubble was and is a credit/fractional reserve bubble and it has not gone away. It has not gotten smaller, and it has gotten larger. The credit bubble will pop.

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