Magical Thinking?
So I never did get around to making that second post on Monday.... I will still try to get around to it, but wanted to discuss another topic today. Of course, it is one of my favorite topics: the housing bubble.
My former roommate called me yesterday. He has always amazed me in regard to the amount of debt he is willing to take on and is currently in the process of closing on a $800k plus house in Irvine. He has roughed out the financials behind it and based on this I have backed into around $5k a month of housing costs for him and his partner (this includes pretty much the basics - P&I, taxes (which are going to run him $16k a year alone), association (yes, it is a beautiful master planned community in Southern California), and insurance.
$60k a year and you still have to furnish the sucker, buy window treatments and landscape it. Oy vey. I give him credit for financing it with a 30 year mortgage - versus using an exotic mortgage to get him into more house than he can afford. However, I estimate total gross income between the two of them of MAYBE $140k. After taxes, benefits cost, etc. you are talking around $90k net. If they want to max their 401(k)'s you are talking another $28k off of that - getting them to $62k, which gives them $2k to live on. Of course, it does not take a rocket scientist to figure out that they are probably forgoing the whole retirement saving thing.
The kicker is this - they both work in the real estate sector. One for a home builder and the other for the mighty Irvine Company. So, they have just recently taken what I perceive to be a very risky real estate position AND their very lively hood is tied to the local real estate market! Talk about putting all of your eggs in one basket.
As I listened to my friend talk excitedly about the community he would be moving into, I could not help but cringe. He indicated his property had increased in value by $80k since they had put their deposit down and that he projects it will be worth another $100k more by this time next year. At that point, I had to interject and ask him why he thought prices could continue to appreciate at this rate. He began to relay the stories that he hears at work (he works for the home builder). He indicated that demand is so strong, they are going to develop another phase with starting prices of $1mm AND 85% of the buyers in his current development (his employer is the builder of the development) were 100% cash buyers.
I found the cash buyer statement a little hard to believe. I pushed and asked how can so many people plunk down $800k cash for a house - he told me it was the "Asians." I have not had any time to research the percentage of cash buyers versus financing, but 85%? I really fear that the company is feeding misinformation to its employees in order to keep up this mania. I could see 15% of buyers using the home builder's mortgage company and the remaining 85% using another lender. However, this was not what he was saying.
He finally asked me how I was doing and I indicated I was fine, but had some pretty significant concerns regarding the economy and the potential for recession. He blew that comment off pretty quickly. Ah magical thinking......
My former roommate called me yesterday. He has always amazed me in regard to the amount of debt he is willing to take on and is currently in the process of closing on a $800k plus house in Irvine. He has roughed out the financials behind it and based on this I have backed into around $5k a month of housing costs for him and his partner (this includes pretty much the basics - P&I, taxes (which are going to run him $16k a year alone), association (yes, it is a beautiful master planned community in Southern California), and insurance.
$60k a year and you still have to furnish the sucker, buy window treatments and landscape it. Oy vey. I give him credit for financing it with a 30 year mortgage - versus using an exotic mortgage to get him into more house than he can afford. However, I estimate total gross income between the two of them of MAYBE $140k. After taxes, benefits cost, etc. you are talking around $90k net. If they want to max their 401(k)'s you are talking another $28k off of that - getting them to $62k, which gives them $2k to live on. Of course, it does not take a rocket scientist to figure out that they are probably forgoing the whole retirement saving thing.
The kicker is this - they both work in the real estate sector. One for a home builder and the other for the mighty Irvine Company. So, they have just recently taken what I perceive to be a very risky real estate position AND their very lively hood is tied to the local real estate market! Talk about putting all of your eggs in one basket.
As I listened to my friend talk excitedly about the community he would be moving into, I could not help but cringe. He indicated his property had increased in value by $80k since they had put their deposit down and that he projects it will be worth another $100k more by this time next year. At that point, I had to interject and ask him why he thought prices could continue to appreciate at this rate. He began to relay the stories that he hears at work (he works for the home builder). He indicated that demand is so strong, they are going to develop another phase with starting prices of $1mm AND 85% of the buyers in his current development (his employer is the builder of the development) were 100% cash buyers.
I found the cash buyer statement a little hard to believe. I pushed and asked how can so many people plunk down $800k cash for a house - he told me it was the "Asians." I have not had any time to research the percentage of cash buyers versus financing, but 85%? I really fear that the company is feeding misinformation to its employees in order to keep up this mania. I could see 15% of buyers using the home builder's mortgage company and the remaining 85% using another lender. However, this was not what he was saying.
He finally asked me how I was doing and I indicated I was fine, but had some pretty significant concerns regarding the economy and the potential for recession. He blew that comment off pretty quickly. Ah magical thinking......
posted by The Random Gay Guy at 2:01 PM
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