ContraCostaTimes.com | 08/14/2006 | More use homes as main asset
The trend to tap equity seems especially prevalent in the East Bay, primarily because of the white-hot housing boom in the region. Valentine, who has hundreds of clients, sees differences in the portfolio mix of his East Bay and Peninsula customers.

“Among my East Bay clients, I often see a person’s retirement plan and equity in their home comprise well over 90 percent of their net worth,” Valentine said. “Among Peninsula clients, it’s only about 50 percent.”

Valentine believes South Bay clients tend to have more individual stocks and bonds, or wealth accumulated from venture-capital investment than is the case with East Bay clients, who have gained wealth from rising home values over the past 15 years.

Data specific to the East Bay seem to confirm that. In May 2004, the value of the average refinance mortgage was about $333,000. In May 2005, that climbed 17 percent to $390,000. In May 2006, it went up an additional 7 percent, to $417,000.

But tapping the equity in your house constantly, or cutting back on saving for retirement because of rising home values, can backfire, warned George Feiger, an executive with Berkeley-based Contango Capital Advisors.

“You are mortgaging your future,” Feiger said. “If you borrow money on the house, you have to pay the interest. That’s cash out of your pocket. So, you are betting not only on the house value appreciating in the future, you also need enough cash flow to service that debt.”

Fortunately, in the long run, real estate always appreciates. Of course, in the long run, we’re all dead.

Once in a while, I read something that truly cracks me up… check out the comments from this online chat:

Real Estate Live
Welcome to Real Estate Live, an online discussion of the Washington area housing market. Post staff writer Kirstin Downey fills in for Post Real Estate editor Maryann Haggerty.

Are you ready?

Ashburn, Va.: I’m so mad at my neighbor. I bought my new home here in Ashburn last summer and plan to sell it next year (after holding two years to avoid taxes) to make a nice return on my investment. The problem is my neighbor is trying to sell his house (very similar to mine) right now and he keeps lowering his asking price. Each time he lowers his price, I see my potential profits next year getting squashed. Doesn’t he realize he’s hurting the comps for all of his neighbors by doing this? I don’t think he is acting very “neighborly” by doing this. I want to say something to him and tell him he should stop putting his interests ahead of his neighbors. Its people like him who are ruining the market for the rest of us. If he would just refuse to lower his price, we could maintain our comps and everyone would benefit. What can I do to stop him?

Kirstin Downey: Wow. Interesting question. There’s nothing you can do. It’s his house, of course. It’s frustrating, to be sure. One word of advice: Don’t resort to violence.

Oh man… looks like someone doesn’t understand “the market” or “Prisoner’s Dilemma“… or that prices don’t always go up.

Be sure to check out the whole transcript – there’s also a pretty funny “How do I tell my neighbor to raise his price?” piece at the very bottom.

Bay Area still isn’t building enough houses
Bay Area cities and counties built 83 percent of the homes needed to meet population and job growth over the last seven years, exacerbating the region’s affordability crunch and lengthening many residents’ commute times, according to a study by a business-oriented think tank.

While cities from Hercules to San Jose approved more than their “fair share” of housing between 1999 and 2005, other municipalities such as Larkspur and Redwood City issued permits for only a fraction of the total condos and single-family homes prescribed by a regional group of governments, said authors of the Bay Area Housing Profile.

[snip]

In fact, researchers at the council expect that unless the pace of building in the Bay Area increases substantially, the housing crisis will deteriorate over the next quarter-century with the region expected to grow by 600,000 households and 1.6 million jobs.

Further proof that the Bay Area is special, and that they’re not making any more land. Just like I said – forget stock options, give me a house!

Re-Refinancing, and Putting Off Mortgage Pain – New York Times
With his new loan, his third adjustable-rate mortgage, Mr. Perry, a former technology project manager, cashed about $200,000 out of his home’s equity and is investing it into his four-year-old financial planning business. “I could have sold my house and made my family move,” said Mr. Perry, 42, who lives with his wife and a 3-year-old son in Danville, about 20 miles east of Oakland. “But I didn’t do that. I said, ‘Look, I want to start a new business,’ and this product allowed me to do that.”

He said he was taking on more risk than many of his clients would be willing to because he believes his business will continue to grow. After spending 15 years in the technology industry, which put him on the road constantly, Mr. Perry said that being self-employed allowed him to spend more time with his family, which he also expects to grow. As far as the house, he said: “I am not going to be here for 30 years. Why is it important to have a fixed mortgage?”

That sentiment resonates nationally, and especially in California.

So that’s the secret to California living – continual refinancing!

Property values (still) point up?
Front page headline read:
“Property values point up” followed by a sub-headline:
“ASSESSED VALUES INDICATE VALLEY ECONOMY RALLYING”

First of all, “Assessed values indicate valley economy rallying”?

So it’s true? Real estate is now the bellwether of the Silicon Valley economy? Not the NASDAQ? Not VC funding? Not IPOs? Not even Google, but real estate??? Apparently, we missed the memo…

Or maybe it’s just that all the traditional Silicon Valley measures benefited so few residents during the recently-alleged “boom” that real estate is the cheerleaders’ chosen platform to keep us in line, waiting for the next big pay day.

Uh oh… sounds like someone’s not a fan of the Merc.

How would you measure the health of Silicon Valley?

Article: Money – Refi loans could prove costly in foreclosure
Homeowners behind in their mortgage payments after hocking the house to pay for a major remodel or a new boat or car may be in for a rude awakening.

If they previously refinanced and their lender decides to foreclose, they may not only lose their house, but the bank also may be able to go after their other financial assets including stocks, savings and their paycheck.

And even if the bank doesn’t go after their other assets, a foreclosure may mean a big tax bill from the IRS and state Franchise Tax Board for any shortfall between what the bank gets for the sale of the owner’s home and the value of the loan.

[snip]

In the past, when a lender foreclosed, the homeowner usually still had the original loan they got when they purchased the house. Original loans, considered purchase money, are non-recourse loans that limit lenders to recovering only what they can get when they sell the house. They can’t go after the owner to pay any difference between the foreclosure sales price and the loan balance.

But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower’s assets once they obtain a court judgment.

“They can literally go after everything you have,” Hall says.

There are a few limited exceptions. Retirement accounts are excluded, and declaring bankruptcy could protect some homeowners.

Interesting times lie ahead!  I guess the lesson is to put as much money as you can into your retirement accounts!

I’ve never been to Denver – so I was wondering, what could you buy in Denver for the price of a median condo in Santa Clara?

I found this place – is it near denver?

REcolorado.com – brought to you by Metrolist Inc.
Address:
22645 E CALHOUN PL
AURORA, 80016
Price:
$500,000

Description:
AIR CONDITIONING-CENTRAL, BALCONY, BACKS TO OPEN SPACE, CABLE INSTALLED, COOK TOP, DECK, DRYER, DISPOSAL, DISHWASHER, EATING SPACE KITCHEN, FORMAL DINING, FENCE(D), FIREPLACE INSERT, GOLF COMMUNITY, GARAGE DOOR OPENER, KITCHEN ISLAND, LOFT, LANDSCAPE PROFESSIONAL, MASTER BATHROOM, MICROWAVE OVEN, POOL COMMUNITY, PATIO, REFRIGERATOR, SMOKE ALARM, SELF-CLEANING OVEN, SMOKE FREE, STOVE/RANGE/OVEN, TILE FLOOR, VIEW CITY, VIEW MOUNTAINS, WALK-IN CLOSETS, WALL TO WALL CARPETING

Looks a little McMansion – but it’s not a 2br condo in the Bay Area. And if you’re not living in the Bay Area, then life is not worth living!

I love reading Guy Kawasaki… so needless to say I was rather amused when I saw this particular quote in his piece on how to create a place that beats Silicon Valley:

\Signum sine tinnitu–by Guy Kawasaki: How to Kick Silicon Valley’s Butt
High housing prices. If houses are cheap, it means that young people can buy housing sooner and have kids. When they have kids, they can’t take as much risk and don’t have as much energy to start companies. (I have four kids—I barely have the time and energy to blog, much less start a company.) Also, if houses are cheap, it’s easier to “make it big,” and you want it to be hard to make it big.

It always amuses me when people say that the Bay Area is great for raising families. (It certainly ain’t the public schools!) Silicon Valley was based entirely around not having families. Look at successful firms like the early Apple, or the current Google.

Maybe I’m wrong. Do you think the Bay Area is great for families?

Friday! Reader Submission time!

MLSlistings Property Detail for MLS number 613808
20988 SIOUX TL
Los Gatos, CA 95033

$476,000
FIXER UPPER WITH POTENTIAL
Upstairs is about 750 SF with 2 bedrooms and 2 baths, downstairs is an unpermitted 350 SF studio apartment with a building code violation. Located in a quiet, established mountain community (Chemeketa Park) just 7 minutes to downtown Los Gatos. Beautiful setting in the redwoods. Los Gatos schools. Home is old and needs work. Home has propane heat, water, electricity, and has been inhabited up to the present time. Roof does not leak but needs replacing. Property inspection is available showing many recommended repairs and upgrades. Sellers rock bottom price, sold as is. Buyer may be able to do a wrap-around by paying closing costs and paying on sellers $423K 1st loan for a few month while rehabilitating the property. Fixed up value would be in the $600K range. Then buyer could resell or obtain conventional mortgage. This would be perfect for a contractor or investor. Buyer would need to pay some closing costs to transfer title. Listing agent may invest with buyer. Call for details

So let me get this straight – after you spend $476k, on this, and then another huge pile of money to fix it up, it might be worth $600k?

Steve, the submitter, also notes this:

7 minutes to downtown Los Gatos- right, if you’re insane and on a motorcycle (I’ve been on those mountain roads before)

Insanity is part of the deal! SOLD!

charles hugh smith-After the Bubble: How Low Will It Go? 

This chart provides a very clear picture of what a bubble looks like: a slow rise in values which suddenly turns up in a hockey-stick ascent to unsustainability. Note that the decade between 1986 and 1997 ended with housing values a bit above the historic line, but not by much. During all those years of flat-to-modest appreciation, the population was also growing, they weren’t making any new land, etc. etc.–all the conditions were present which are trotted out to justify the bubble. Note that the hockey-stick rise began as the Nasdaq bubble created hundreds of billions in new wealth in the late 90s.

Let’s go over the numbers. According to the Bureau of Labor Statistics, $100 in 1986 equals $178 in today’s (devalued) money. To that 78% rise due to inflation we add Shiller’s 1% per year appreciation in “real” terms, which adds up to a historically supported value 98% above the 1986 median price of $161,000. In other words, a reversion to the historic mean will bring Bay Area median prices down from $715,000 to around $315,000–a decline of $400,000.

This is the inescapable conclusion of Shiller’s analysis and historical trends dating back to the 19th century. It cannot be denied; but you can of course retreat into denial. Sadly, that’s what most investors did back in the dot-com heyday. As stocks tumbled, every brief uptick was embraced as the “bounce back” to the good old days, and every such bounce was a sucker’s rally, leading only to further precipitous declines.

Fortunately, as we all know, this is impossible.