Sunday, May 08, 2005

Housing Bubble Morphs Into Cash-Out Mania

This Washington Post story was already put in the comments section, so I'll just point out a few of the dangerous things people are doing with home equity loans.

"Tom Regnell has refinanced five times since he bought his house. When he refinanced this last time, he finally took out some cash; enough to buy a piece of property near the Homestead resort and start building a second home."

"Ileann Jimenez-Sepulveda and her husband bought four years ago. They used their growing equity to buy another house three blocks away and renovate it to sell it. Then they bought a house in South America, and soon they'll close on a large single-family home in the upscale Crestwood neighborhood. In the meantime, Jimenez-Sepulveda, who had worked in the high-tech industry, quit her job to join her husband in the real estate business; he's a loan broker, she became an agent. Now they encourage their clients to use the equity in their homes to buy investment properties."

"'It's very easy, it's very tangible for people to understand because they see their neighbors doing it; taking the money out, buying something else, or investing in starting a restaurant,' she said. 'It's exciting to see people recognizing it and running with it.' She argues that real estate assets are bound to increase in value over the years."

"Nick Koufos, an attorney for the SEC, is 36 and has three children. He recently did a cash-out refinance on his Silver Spring home to build a house in Pennsylvania, to which he plans to retire someday. 'I think it's better to get it done sooner rather than later,' he said. 'I don't see how I could lose money.'"

"'Certainly as things retreat, you'll have some households that find themselves with two sets of loans, one on their equity line and one on their primary residence, as well as their new property investment, and that could be a lot,' said David A. Lereah of the National Realtors Assoc.. 'Certainly we're in a new world today.'"

13 Comments:

At 9:32 AM, Anonymous Anonymous said...

Smart money selling silicon valley commercial RE.
http://www.viewfromsiliconvalley.com/id149.html

 
At 9:46 AM, Anonymous Anonymous said...

Ben,

What bothers me most about this situation is that people like my wife and myself who are prudent savers have get caught up in the mess created by the disregard for common financial sense. I ran the numbers and it would have to be a compelling crash for me to follow up with a plan to sell our condo and rent (my wife's requirements for a rental are more expensive than I first thought). We will be selling our condo and buying the house we intend to live in for the next 20-30 years. It is not capitulation but getting on with our lives. We CANNOT put our lives on hold because of a bubble that may or may not pop to the degree we need to make sense to sell and rent. I've had it and I am just resentful that we worked hard and saved and made prudent financial decisions and it did not mean a damn thing in the end.

TheGuru

 
At 9:50 AM, Blogger John Law said...

(Nick Koufos, an attorney for the SEC)

well at least we know he won't lose his job.

 
At 10:13 AM, Blogger Ben Jones said...

Guru,
I understand the sentiment. This has been hardest on those who live conservatively.

Depending on where you live, maybe you'll get a good deal. I hope you do well!

 
At 10:27 AM, Anonymous Anonymous said...

Yeah, Guru, the bubble isn't good for homeowners, who need a place to live and are unlikely to rent instead due to high transaction costs, and it isn't good for first-time buyers. But the people who will really get soaked are the ones buying now, and be grateful you're not one of those. Maybe keep your eye open for forclosures?

Given enough time, the market will reward those who are living within their means.

 
At 2:08 PM, Anonymous bob r said...

What these speculators are ignoring is that leverage may be great when prices are rising, but it's sheer hell when prices are falling. These guys with multiple properties leveraged to the hilt will soil their pants when they realize that their properties are worth less than they owe on them. Then, the day of reckoning arrives when their adjustable-rate mortgages begin rising. No way to sell without a loss, no way to rent the properties without a loss. Can you spell foreclosure?

 
At 2:16 PM, Anonymous Anonymous said...

bob r,

As I was saying yesterday, I was lucky enough to learn about downward leverage in language of 5 digits. These people get to learn it in terms of 6 and maybe 7 digits. Fun!

 
At 4:13 PM, Anonymous undiesforeveryone said...

00

---These guys with multiple properties leveraged to the hilt will soil their pants when they realize that their properties are worth less than they owe on them. ---

This ought to be a big windfall for Warren Buffett. After all, he owns Fruit of the Loom. More soiled panties=more new clean panties sold. Think i'll short the homebuilders and go long Fruit of the Loom. There's always a bull market somewhere...

 
At 5:18 PM, Blogger John Law said...

I hate to wake up and be $100,000 grand or more underwater.

 
At 6:22 PM, Blogger Omari said...

Article's closing words: "I don't see how I could lose money."

So many people believe that the D.C. area is immune to price declines in real estate. Someone talked to me for over an hour last week, trying to convince me to buy a home (even though I have no money saved for a down payment) because I can't possibly lose money in this market. Ironically, because so many people believe they can't lose money in this market, there are even more people purchasing real estate without regard for how much it is worth. This just blows the bubble up even more--and makes the final result even uglier.

 
At 8:58 PM, Anonymous Anonymous said...

Regarding the DC market, it's true that everyone says it can never go down. They always emphasize job creation, influx of new residents, etc What they don't mention is that most new jobs are dependent on government contracting work. And yes, these are boom times for gov't contractors. No doubt about it. But that's also a bubble of sorts. Just talk to a contractor who worked in DC in the early '90s. Contracts expired, weren't renewed, money dried up, jobs were lost. This country is so financially lopsided right now that it simply can't continue. Gov't spending will have to be reined in. And while it's true that gov't employees are rarely fired, let me emphasize again that these new DC jobs are mostly contractor-based. They are not actual gov't jobs. And they can (and have in the past) disappear.

The thing I hate most is that people with common sense, those who did the right thing and saved and all of that, - they're the ones being forced out of this market by speculators taking obscene financial risks. There is a moral angle to this whole 'housing bubble' debate which is ignored by the mainstream media. I'm so glad to see it discussed on this blog. We as a nation should not be encouraging mountains of debt. We should not be happy that so many of our friends / family / co-workers cannot afford homes. I do believe in the American Dream of homeownership. But to put yourself at such financial risk and deprivation - and often for a property you don't even like but purchase anyway because it's all you can afford? Wow. This simply has to end.

 
At 10:29 PM, Blogger Ben Jones said...

8:58 Anon,
Right on. You just made my day!

 
At 11:36 AM, Anonymous Anonymous said...

An important lesson is that each area has its own excuse for why it is immune to the bubble. Remember, real estate is local! The most pathetic argument in DC is that due to the boom in this area DC is going to climb up the ladder and become one of the top three markets in the US! So LA and NYC might stagnate or drop while DC will play catch up. This is mind boggling but quite common in DC realty circles. Another argument is that average prices have never gone down (in nominal terms). I am not sure about this claim but I have looked at data for specific developments and seen some price declines. E.g. buy in 1989 and sell in 1994 for a lower nominal prices by 5-10% or so. In real terms people who bought houses in 1989-90 did not break even until early 2002 based on some attractively located TH developments where I have crunched numbers.

However, DC has never seen a boom (in real terms, ignore the 1970s inflation) of any significance. The late 1980s saw a relatively mild appreciation, so they are deep into uncharted territory.....

Also it's interesting how the tech boom (esp in No VA, which was one of the hotspots) had no impact on housing. The RE market was flat through the late 1990s. But now suddenly the Homeland security bubble/boom is the reason that RE will increase by 20% forever...

 

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