Someone will be getting a haircut

My DW had her haircut yesterday, so she talked to her hairdresser. Turns out, the lady has an interest only mortgage, a.k.a. very expensive rental from a bank, $600K, and a house that is basically in tear-down condition. She figures, it needs another $600K of work. So, she was wondering what they should do... Funny, ha? Oh, both her and her husband are self-employed, so they would only qualify for an Alt-A mortgage. Did I mention that she has 2 babies, and a used BMW? She does own her own 'business', but I doubt she makes more than $100K.
Part of me wants to feel bad for these people, but then again, I can't be sincere in it. They'll get what they asked for. It used to be that you get eaten by animals if you were not smart - now, it is just loosing your shirt and mind.
The party continues. The stock market stopped falling, temporarily, but I expect the real deal to start in October.

On another note, my in-laws were in town last weekend, so I've flipped through a used-house salesman publication, and I found my new real home of genius (sorry, Dr. Housing Bubble, I hope you won't mind), that I have to share:
A 2007-built, 2 bedroom, 2 bathroom townhouse, in the industrial area of town, 30 yards to the 101 freeway. Price - $2,000,000 :-). That is $1,000,000 per bedroom. I think this developer is a little late to the party, don't you?
The picture of the winner is shown above - now, the location is what really matters - note the freeway and different industrial facilities around:

DC used up his nine lives

Big news is that DC did use up his 9 lives - they bought a 1923 row-house on Capitol Hill. Price paid close to $600K, 2 bedroom, one bath, with a couple of sunrooms, and another bedroom/bath unit in the basement. A back yard, lawn, and no garage.
I am really glad for them, since their mood was getting just too difficult to bear. The move in date will be early September, the loan is supposed to be secured (interest rates did go up .25% due to the piercing of the credit bubble). So, I suppose there is no going back. We'll see how it will turn out.

CoolAid is still popular around here...

Well, I ran into a neighbor the other day, he was asking how our move (to a bigger apartment) went, so I sensed he wanted to be asked about the news.
They bought a house!!! And, they were able to secure funding despite the current credit crunch. A 3 bedroom, 2 bath, I figure they paid ~$800 000, and that they will need to spend another $40K to make it decent.
Besides being individually rich, I just do not see their math works out: he is a young lawyer, and in our town, it would be hard to imagine that he could be making more than $100K at this stage. Let's be generous, and assume $120K. His wife is a part-time admin worker/mother of a baby, so that is another $15K. They own two new Volvos, that is $1200/month. The house, unless they took some crazy loan, should cost about $5K+ (including insurance, property tax and tax deduction). So, it seems that their monthly available cash is ~ $1800. 2 adults, a kid, no retirement savings and no college fund. I know, a lot of people live with that much, but to me, this just does not compute.
A funny thing is that the guy made a serious comment:"Well, now we just have to pray". "For what?", I asked. "That the prices do go back to the previous level over the next few years".
Sounds like a lousy ARM deal to me...

Brainwashing is a powerful concept...

I ran into an acquaintance at the store today. We started chatting, and I told her that DW and I spent the whole weekend moving (that is right, we moved to a new rental apartment, $2300 for a beautiful, new 3 bedroom, 2 bath, with washer and dryer hookups, a large patio etc.)

She asked me, all optimistic - "Oh, did you buy something?" My reaction was -" Of course not, in this market". Her answer -"Ah, you are going to wait for it to double again?" ?!?!?!

That just blew my mind, and I did not know what to say. I mean, what is there to say after such a ridiculous statement. And from another educated (engineer) person.

Of course, she and her husband own a house (probably really own, they bought it 20 years ago or so), and as such are disconnected from the reality. I would like to think that if I were in their shoes, I would have sold it last year (both of their kids are in college). But, it is easier to think that you are a paper millionaire, and still rationalize why you need to stay in your house, and how the prices are going to keep increasing. Human psychology is a strange thing - even though you are making these 'paper' gains, the loss to follow will hurt as if you actually lost the money...

Oh, another news is that DC lost yet another bid for another ghetto lair in DC. This would be offer number five. I wonder when their incredible luck will run out, and when one of these offers will go through? We'll see if you get 9 lives in the real estate bubble as well...

foreclosures in SoCal Paradise

While looking for the map/location of a friend to visit locally, after a web search, I noticed the third link from the top - Yahoo Foreclosures. It was a map of our area, SoCal Paradise, with the houses in different stages of foreclosure. I noticed a house that was in the same block as another friend's house, a happy owner of a fixer-upper since this Xmas. It was a 4 bedroom, 2 bath, for $750K. Hmmm... our friend paid $800K for a 3 bedroom, 2 bath fixer upper. Interesting... and fun :-)
DW pointed out this article today on MSN - "Why rent? To get richer"
An interesting, and realistic look at things. This paragraph summarizes it for me:

"What about the pride of homeownership?"

It's not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. Homeowners must pay taxes each year even when their mortgage payments are done. In certain markets they can't even make changes to the houses they've paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I'm proud to occupy a nice place while leaving the burden and poor returns and maintenance to someone else.

Being a naturalized American, it is so interesting to be able to analyze this society, and the level of brainwashing that exists about the "American Dream", and owning a "home". My initial reaction was always - you don't own it, the bank does, and does the word home imply that we , the renters, are homeless? Anyway, think about that.

Another day in Pacific Paradise

This evening, my dear wife (DW) and I went for a nice dinner, and a short ride to an area of town where a couple of friends owned a house in the mid-nineties. I wanted to check the address, so that I can check the current price on Zillow. We were having this discussion a few days ago about the pricing of real estate in this area of California, and I was trying to convince DW that in 1998, their house was totally reasonably priced, at $350K. We're talking about a nice house, with an ocean view, a nice patch of land and so forth. Check out the photo below...

Anyway, my friends sold this $350K house three years later in 2001 for about $700K, and right now, the price is around $1.2mil. Seriously.

The price history of this house is shown on the graph above (dark blue). The light blue is the average price for this zip code.

Which makes sense, since we keep hearing about how we have all these millionaires who moved into our little town, and all the rich Japanese who snapped up all the tract houses in the area, and not to mention, we're running out of land to build on in this area, and the population pretty much tripled since 1998. Yes, that must explain the insane rise in real estate prices. Naaat!!! (a Borat joke).

We then went on-line to check out the price histories of the houses in the area that some of our friends bought recently. Now, we are a well-educated couple, with graduate degrees, and so are our friends. So you'd think they'd know better than to buy during the late 2005/early 2006 peak in housing prices, but apparently not. I guess the positive side of the story is that they did get fixed mortgages... but how much they paid, and what that money bought them is beyond comprehension! (We're talking, $5,000 a month in housing expenses.) If the smart, well-educated ones are suckered into this out of control real estate market, it's scary to think what the "Average Joe-type" folks must be doing.

Here are the graphs of the house valuations for a couple of other (smart and educated) friends from the area:

1) a tract house, built in circa 1970 (bought in 2006) - dark blue (this house), light blue (zip code)

2) a town house, built in circa 2000 (bought in 2003) dark blue (this house), light blue (zip code)
As for us, we are happily typing on our laptops in our nicely equipped, modern rental paying rent that is about 2/5 of the total housing expenses for a similar place (even after accounting for tax deductions). We're young (in our 30s) and missed any possibility of jumping into the housing market while prices were still normal (blame grad school for that), so we're patiently waiting on the sidelines, tucking away money for a downpayment once the market tanks, maxing out our 401Ks, going on nice vacations, and otherwise living quite comfortably while our buddies with $5000 housing payments pray that their roofs don't need replacing any time soon.

More news: my dear cousin (DC) sent me an email today to tell me how they managed to not win yet another bidding war for a 1940 d*u*m*p in an "up-and-coming" neighborhood (a.k.a. crackhead-ville) in a major metropolitan area on the East Coast?!?! It strikes me as so bizarre that there are people still engaging in bidding wars over real estate. Isn't this supposed to be a "buyer's market" now? Do these people live on a different planet? Here is an example of what I am talking about (note that the drug deal taking place on the corner didn't quite make it in the picture):
He and his wife, and I love them both to death, have been determinedly trying to buy a house for the past year, with no success. I tried to talk them out of it with arguments about waiting until the market cools down and deflates, but things quickly become uncomfortable -- they had their mind made up. ... Must ... have ... the ... American ... Dream ... now! So now I am mostly sitting by now, pretending to be happy for them and their plans, and secretly relieved for them every time they get screwed over in a bidding war.

Although, I feel that I should be happy for them when they fail - a year of failures has brought them from the crappiest crack addict part of the ghetto to the slightly more "gentrified" part of the ghetto. For the same price. ... Imagine if they waited for another year or two?!? Maybe they could find some place they could afford where they'd actually not have bars on the windows and drive-by shootings every weekend. Somehow, they fail to realize this fact, and they are deeply unhappy that they are still renting, especially since their plan was to buy something by the end of the last summer. Some people just have more luck than logic.

Anyway, it is time for me to check the situation out at patrick.net before I go to bed. Tomorrow is another wonderful day to sit, relax, and wait for the near future when the house owners will realize what a Ponzi scheme they are up to their necks in.