It’s the last Friday of 2006, and things are winding down here at the virtual office of HousingDoom. We’re packing away the Christmas decorations and breaking out the party hats to celebrate the New Year. If Lereah is right, the market has bottomed out, and John and I will have to spend 2007 eating crow. On the off chance though, that it’s Lereah breaking out "101 Easy Crow Recipes" and not us- we’d appreciate your links, comments, suggestions, and words of wisdom for the new year.
As always, this thread’s for you!
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I have a question for fellow Doomers.
Let me describe my situation:
In August 2004, I bought a brand new SUV. The sticker price was $66,800, but I got it for $56,000. I didn’t have to put down any cash at all, just my trade-in, which was worth $2,000. Pretty sweet deal, right? I am officially an SUV owner — the American Dream!
In August 2005, my neighbor bought the exact same vehicle and he was dumb enough to pay sticker price for it, $66,800, because it was the last one on the lot and the dealership didn’t want to discount it. What a dope, I thought. Glad I “bought in” before the boom.
But then it occurred to me: since my vehicle is “worth” so much more than I paid, I have “vehicle equity” (according to my neighbor’s “comp”). So I went down to my bank, told them I wanted to re-fi my “appreciating asset” into a Vehicle Equity Line of Credit for $66,800. They said, “Yeah, sure,” because they got to take a transaction fee off the top. Everybody wins, right?
Well, in August 2006, I realized I needed more cash to feed my reckless spending habits, so I went back to the bank for another VELOC and — the nerve of these guys! — they told me no!
But why, I asked?
Because, they said, what you have there is a depreciating asset and right now it’s not even worth what you re-fi’d it for. When you drove it off the lot it depreciated 15 percent, and we were dumb to give you the re-fi. And if you try to sell it, you certainly won’t get what you owe on it, so you better be ready to bring some cash to the table to get rid of it.
Gee, where did I go wrong?
Of course, this scenario is made up, but when I think about housing these days, I find it’s sometime helpful to substitute a car for the house in order to get the proper perspective on what many are facing in the housing market — depreciating assets. Maybe not over a 20-year span, but on a short-term basis, yes.
So many people are going to be upside-down in their SUVs — I mean houses — in the next five years, and there’s really no way out for most of them, even if things don’t get any worse than they are now. If interest rates go up or job layoffs increase, all’s the worse.
Now, anyone out there still interested in buying a home right now with a no-doc, I/O, 80/20, ARM piece-of-c*** enslavement loan? H***, even a 30yr-fixed is no good now because you’re still buying an overpriced, depreciating asset.
No new information here, folks, just a little different way of looking at the old info.
Judge -
Do I understand correctly that under the new BK rules, most US individuals would need to file for bankruptcy under Chapter 13, where “a record of this stays on the individual’s credit report for 10 years”?
Judge-
People seem to think that it takes a cataclysmic drop in prices in order to adversely affect the market. Here’s what the drop looked like in Phoenix during the S&L crisis of the 1980s, according to the W.P. Carey School of Business (ASU):
Somehow in our collective memory we’ve forgotten that the economy has its downturns. It doesn’t take a huge downturn for a bunch of people with no equity, no savings and no jobs to run into trouble. It unfortunately says something about our society that when you try and say that things could be bad- that you should have savings, avoid debt, and diversify your assets- that you are accused of being an apocalyptic gold bug. A cautious, conservative attitude towards your finances used to be considered prudent common sense. Now you’re considered a fool who doesn’t understand “the power of leverage.”
JohnM — I would love to answer your bankruptcy question, if I could. I am not a judge and I have no legal background. I could give you a two-bit guess, but I won’t other than to say, declaring bankruptcy and getting away free-and-clear ain’t as easy as it was two years ago. But we all knew that.
For JohnM and all others, I’m starting to wonder about how psychology and human nature are going to affect housing once sellers get real about pricing.
If every seller was to drop his/her price tomorrow by 10 percent, would that be enough incentive for buyers to get off the sidelines, or would it merely confirm buyers’ suspicions and make them wait even longer for the “real” price drops?
After all, even in a falling market, what buyer wants to feel like a moron two months later? If prices drop 10 percent, will buyers continue to wait until sellers’ blood begins to run in the streets?
On another site, a recent poster wrote: “It’s not a buyers’ market, it’s a buyers’ revenge market!” Who knows if that’s true, but if that sentiment becomes widespread, it’s going to take more than 10 percent price cuts to goose the market. Do I hear 30 percent?
Reno, NV now has almost FIFTEEN MONTHS of unsold inventory.
You’ll have to read between the rosy optimism sprinkled liberally throughout (“The Californians are coming back in force!”) and do the math, but it’s there:
“[Reno, NV] Median resale price rises in November
(3,261 + 794) / 275 = 14.75 months of inventory.
People seem to think that it takes a cataclysmic drop in prices in order to adversely affect the market.
I disagree with those people.
This is no ordinary economy.
Right now, we have a convergence of three unique events: 1) record fast decline in housing, 2)record low savings and 3) an economy that’s been fueled since 2002 primarily by home equity withdrawal.
In the coming months, we’ll be seeing economic drag from all three of those factors.
I honestly can’t see how we’ll escape a recession in 2007.