Wednesday, September 06, 2006

All around the equity ladder
The FB chased the HELOC

The broker thought ’twas all in fun.
Pop! goes the loan rate!

A penney for a pergraniteel top,
A penney for a bidet.
That’s the way the money goes.
Pop! see equity fly away.

Up and down the City Road,
In and out of the marketplace,
That’s the way the money goes.
Pop! goes the tax base.

Half a pound of tuppenney Pergo,
Half a pound of Pella,
Mix it up and make the flip go,
Pop! goes the FB fella.

What's truly amazing is that the 16th century original warned of the dangers of pawning ones' assets for prolifigate spending habits.


Anonymous said...

Hilarious palimpsest on the old rhyme! I've been scouring things here for a bit, and am relieved to discover that "I'm not the only one out here."

I have a general comment about my situation. My new wife and I have been keeping eyes out for a new home, but we have decided to wait and watch. One good reason, from your location? There is a 1200 sq ft 2 bd 1 ba Spanish SFR in a good part of Glendale. Small but feasible. There was a sale in 1997 at $236K, another in 2001 for $315, and now the asking is about $650K. Looking at something like R. Shiller's housing price graph from the NYT:

...I did the following. If you put the $236K figure on the graph at 1997 and extrapolate, the $315K does line up well at the 2001 point. But, if we use the graph to estimate the price in 2006, it ought to come up in the range of $450K, $200K less than the current asking! And that bit of guestimation does not even question the sustainability of the current boom's sharpness. It's hard to believe that the post-2001 spike in the graph cannot have a downslope somewhere. If we postulate that 2001 should have been near a historical peak, assume that prices should have stayed flat excluding inflation, the extrapolated $315K price should be about $375K in 2006.

So I wonder what to think. It looks like the new "mean" or 100 mark since 1945 should linger around 110 on the graph. Will the new mean for fifty years be at 150? 180? 120? All I know is I'm glad we have my wife's condo in the low 200s on a mid fives 30 year fixed. And no HELOC. Where do people think money will come from if you're living with something adjustable on a no-money down so-and-so with over half your income going just to housing? How has this lasted so long in SoCal?


Rob Dawg said...

Excellent comments/observations. In neighboring Ventura county things have risen even more.

I'd say 1997-98 will be the new mean reversion benchmark. 1994-95 was the overshoot from the early 90s SoCal aerospace crash. That said, the Schiller Curve is a bit misleading because of inflation and changes in the size and components of the median house. Annual inflation compunds just like other things so a straight line from the late 80s isn't justified. I'd say your $375 is spot on for a reversion to the mean BUT in order to revert to the mean it is necessary to overcorrect. Calling the top was easy, the bottom will be harder.

California is about to hit an event horizon. The level of taxation and changing demographics are about to flip the State. They've been boiling the frog for a very long time; the rich and upper middle classes. They and their equity are fleeing a repressive, confiscatory unrepresentative system seemingly bent on self-destruction.

That's the "risk" we California die-hards face. The "solution" may very well be to lower everyone's QoL in order to help those less prepared. I think places especially like Glendale will be targeted. Not quite independent enough to assert local values, too subject to State and County policies. LA County is likely to let Palmcaster "twist in the wind" while agressively pursuing questionable urban planning experiments just right to "revitalize" places like Glendale.

Hey, anyone who uses words like palimpsest can post here anytime.

Anonymous said...

Always happy to share some vocabulary! I can name other good words such as "temperance," "circumspection," and "prudence." They seem to be antonyms to the words "real estate" in SoCal for the last half dozen years. If something like the property I discussed did show up close to $375K or even $400K, I would seriously consider it... but only because I would be planning on putting at least 50% cash down and a conforming conventional loan. Do more than one out of ten people even put any cash down these days? What I can't fathom is how recent buyers (the last 3 or so years) can maintain the cash flow. Even with teaser rates, on many LA houses in Glendale or Mid-Wilshire common prices upwards of $1M generate such huge property taxes that my wallet starts wiggling in abbatoir terror as if the leather were still attached to the cow.

In my current area (Wilshire/Fairfax), most desirable houses start over $1.1M, and that is for something like a nicer Spanish but less than 1500 sq ft, no more than 3 bd, and you are wedged next to your neighbor like a chuckawalla in a crevice. If some hypothetical lender gave me an impossible 30 fixed year loan at 2%, with 0% down (using the absurd to demonstrate, of course), the PIT would still exceed $4500 per month! Let's call the mortgage deduction a wash if we disregard maintenance, insurance and increased utility bills. Considering that such a loan doesn't occur even on this credit-drunk planet, and that a vaguely realistic 6.5% rate would add nearly $2500 to the bill, I must conclude that either I am the most underpaid man in 90036, or there is some sort of powerful Jedi Mind Trick going on here.