January 10, 2006

Greater Fool in Boston: A new home, grand trip, and boatload of debt


I'm speechless

(hat tip to HP reader Mike for the article)

Eleanor Hoxie makes a good living as a marketing manager for a Boston consulting firm, but is she spending her money wisely?

The 28-year-old Rhode Island native says she lives a ''pretty rich life," eating out a lot and planning lavish trips such as her $4,000 vacation to Hong Kong with her boyfriend. But her biggest splurge by far is the $375,000 East Boston loft condominium she bought in August 2004, using two interest-only mortgages to get in the door without a down payment.

''It was a very rash decision," Hoxie said.

''I know I could be doing something better, but I'm unsure where to focus energy. Should I pay down the principal on one of the mortgages, try to get rid of the credit card or student loan debt or focus on retirement savings?" Hoxie said.

Sagan said the purchase of a home with no money down 20 years ago ''was unheard of."
''This product arose in response to those who want to be homeowners but lack the income and/or the assets to make a down payment," he said.

The number of interest-only loans in Massachusetts has surged to 19.5 percent of total mortgages in 2005, up from 1.8 percent in 2000, according to LoanPerformance, a San Francisco firm that tracks mortgage data.

''Without the interest-only option, Eleanor would not have been able to afford the condominium," Sagan said

17 comments:

inseattle said...

All I can say is, let's hope there are a lot more like her ouy there because I REALLY want to buy a house some day.

Butch said...

I posted this on another board in response to California's housing boom, but I believe it would also be useful here. Please forgive the length of this post as there are so many lies to expose. Below, is my take on the TRUE "economics" of housing. Please feel free to share this with any brainwashed sheeple who spout about what a "great investment" housing is. To wit:

1. First and foremost, let's get our nomenclature straight, shall we?:
a. House PRICES are INFLATING, NOT the "VALUE" is "APPRECIATING".

b. The "ASSET" (the home), is really a LIABILITY (no quotes needed, as it literally IS a liability--more on this below).

2. There are NO "homeowners", but only HOMEDEBTORS!!! One NEVER is a "Homeowner". First off, they must make each and every one of the 360 monthly payments to the mortgage company (the owner of first resort), then they must pay RENT to the ultimate owner, the state, in the form of property taxes--in perpetuity. If the HOMEDEBTOR doesn't make the rental payments to the state landlord, then the landlord will evict the HOMEDEBTOR/renter and sell the state's property.

3. Now, using proper nomenclature and taking a slightly different perspective, let's play out the CORRECT scenario as described below:

Let's say the the HOMEDEBTOR signed off on the original loan for the house in 1976 and was LUCKY enough to enjoy the fruits of "Proposition 13" where their property taxes were capped at the basis on the original price and only raised the 3% per year.

Next, let's assume the HOMEDEBTOR simply bought the house and--God forbid--actually decided to live in the house FOR THE REST OF THEIR LIFE!!! (As did generations before houses became "financial assets".)

Now, given all the above, TRUE, parameters we can construct a much more accurate picture of the actual "gains" or LOSSES.

So, returning to our example based on all the proper, true criteria above we can really see the situation for what it is. To wit:

The HOMEDEBTOR moves into the house, makes ALL the payments to the mortgage company, then CONTINUES TO MAKE PAYMENTS to the state, THEN continues to make payments for insurance, maintenance, furniture, and improvements.

Over time, as INFLATION roars, the HOMEDEBTOR is slowly eaten alive by the expenses of taxes, maintenance, and insurance. Eventually, the HOMEDEBTOR/renter is priced out of the home when they become old and retired and on a fixed income as the ever-escalating taxes, insurance, maintenance slowly eat them alive.

So, there is NO "return" on the "asset", there is only COST/PAYMENTS/EXPENSE on the LIABILITY.

Now, the ONLY way that one might, theoretically, enjoy a "gain" on the LIABILITY would be to sell the house, MOVE to a cheaper area (a TRUE "hedonic adjustment" if I've ever heard of one!), then banked the differential. However, even if the HOMEDEBTOR moved to a less-expensive area (again adjusting for the difference in weather, terrain, and other factors that make California so desireable) he/she would STILL be slowly eaten alive by the same taxes, maintenance, and insurance on the LIABILITY. (Furthermore, if they moved out of CA, then they would perhaps be facing much higer property tax rates on the home.

So, there you have it. The TRUE representation of HOMEDEBTORSHIP.

Anonymous said...

Butch,

You hit the nail on the head when you said no one is ever a HOME OWNER. Paid off your mortgage? Great! Now, when the next property tax bill arrives in your mailbox, just throw it in the garbage. Let's then see how long you OWN your home!

ECOBUILDER said...

BLOOMBERG:

Where to Invest If the U.S. Housing Boom Is Over: by John Wasik

http://quote.bloomberg.com/
apps/news?pid=10000039&
refer=columnist_wasik&sid=auihDqUQ5ok4

Bake McBride said...

This quote from the article says it all:
***Without the interest-only option, Eleanor would not have been able to afford the condominium***

I have more then enough to get in the housing market...I'm just waiting for these "Homeowners" to get burned first. There are too many of these debtors that thing as long as their name is on any kind of mortgage they are a homeowner...

My money is on waiting these guys out over the next 18 months--This is going to get very ugly for some.

Anonymous said...

What goes up must come down. But when will it happen? Has it started already?

Anonymous said...

butch, you sound really cranky, but bring up the valid point that there are benefits, risks and trade-offs in owning real estate. I owned CA real estate. For a long time I paid mortgage comparable to friends who were paying rent. But I got to enjoy having my "own" castle, but of course I had to rake leaves and maintain the place etc. Since I'm not crancy like you, I found a certain satisfaction and pride in that. Sensing a bubble problem, I eventually sold and moved to the NE. Again, there are benefits , risks and trade-offs to that. I put the procedes from selling in CA into better investments and I now have to buy a snowblower. I just consider that living life. I don't need to be in a perfectly temperate climate to be happy. I can point to many benefits to our move. Were there risks? Yes. Are there trade-offs? Yes. Do I feel like I came out ahead? Yes.

town_mouse said...

I'm so impressed by the fact that out of - paying off credit cards, paying down her mortgages (plural),paying off her student loan, or saving for retirement - she has chosen $4000.00 trips as a way to 'focus her energy'.

r patrick said...

$4000.00 trips...

And I want a 3K bike. But this lady was not planning.

As someone said on another blog "they rolled over one day and said 'honey lets go get a house'"

Anonymous said...

to inseattle: you will get your wish. May I present the bona fides of Ms. Carol Lloyd of the San Francisco Chronicle, who writes a weekly column called "Surreal Estate":

Carol Lloyd is currently at work on a book about Bay Area real estate. She teaches a class on buying your first home in the Bay Area, and another class based on her best-selling career counseling book for creative people, "Creating a Life Worth Living."

Quite the knowledgeable observer, wouldn't you say. Constant and current exposure. A ringside seat to the bubble. First to call -- and to be called by -- industry experts to discuss the latest developments in the SF Bay Area housing market.

Her observations and conclusions are firmly in line with what we post here every day:

"Though the "experts" (a.k.a. industry whores) may still talk about how Fed Chairman Alan Greenspan's choice of the word froth to characterize the real estate market could be construed as "effervescence," even many insiders are finally relenting and suggesting that the writing is on the drywall."

"It may not happen next week or even the next year, and it may not happen in a flash from Zeus' bolt in a 20 percent tumble, but the evidence is undeniable: Many real estate markets around the globe are being driven to the precipice..."

"Even as the band of giddy idiots dances deep into the night, some already hear the whispers of leakage -- both here and abroad."

And yet...

"So, what's my recommendation? Don't panic. In fact, don't give this article another thought. And, pleeease, don't do anything -- because here's the pisser: Even as I write this, I'm in escrow on a house I can't afford. And I know I'm not alone. The logic of a bubble defies even those who know better. I'm not trying to make money; I just want to break even -- and I am convinced I'm going to be different, that, actually, I got a good deal, a deal that if I waited only a few months, I really wouldn't be able to afford."

The date of these quotes and her cough-up-your-coffee admission? June 24, 2005 -- exactly one week after Time's infamous "Home $weet Home" cover story.

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