Wikinvest Wire

The new American investor

Friday, May 30, 2008

While not defending the Garcia's, their decision-making process and its fateful results are certainly more easily understood when considered in the context of a nation-wide credit and debt orgy over the last ten or twenty years.

Really, what did ivory tower economists and politicians expect ordinary Americans to do when the credit spigot was turned on them earlier in the decade?

Watching from afar for all these years - the junk bond boom, the Japanese stock boom, the S&L housing boom, the internet stock boom - this was their chance to "invest" in something they understood - real estate.
This comment tells you about all you need to know about the plight of the Garcias who, like many others a few years back, borrowed against the equity in one house to buy an even bigger and better one thinking that perpetually rising real estate prices would make them wealthy:

“We wanted to make it an investment,” Ms. Garcia said.
In their defense, a couple years ago, along with nearly all of Main Street, most of Wall Street (most importantly the rating agencies) also thought that home prices would climb higher in perpetuity.

It really was conventional wisdom at the time, former Fed chief Alan Greenspan counseling "nominal house prices in the aggregate have rarely fallen and certainly not by very much".

In addition to having lost the "investment" to foreclosure, also like many others, the Garcias are facing a hefty tax bill. This report in the New York Times explains:
Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.

Many of these people will lose their properties in foreclosure and then stagger into bankruptcy under the weight of a sizable tax bill. While Congress has granted some tax relief to people who lose their primary homes, there is no such aid for those who fall behind on payments on a getaway condo in Las Vegas, a retirement home on the Florida coast or an old house that they are renting out for income.

Bankruptcy lawyers say they are seeing a wave of foreclosures among owners of second homes in such a position, owners who thought they had found sound advice for financial security.

Two years ago, Lilia Garcia and her husband, Jesus, bought their dream house in Linden, Calif., for $535,000 and financed it in part by taking out a bigger loan backed by their previous house in nearby Stockton. They decided to hang onto the Stockton house and rent it out, believing that it would more than pay for itself and could be sold years in the future to help pay for college for their two children.
This is the "ownership society" in reverse gear, apparently.

The new American investor is experiencing a major setback.

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8 comments:

Anonymous said...

A coworker of my wife works in financial services and is upside down in her home, owes $60K more on it than it's work, got a crazy ARM that is about to reset, and even with two very nice incomes is in trouble. This is a problem of national education. Virtually nothing of money management is taught to citizens. And our culture encourages overspending to keep up. If you lack the fancy goodies, you're a "loser". We're a nation of poseurs living above our means, where an honest living is for suckers. Even though my wife and I earn enough to bank 50% of what we take home, and will be set by the time I'm 50 y/o, I'm constantly prodded by family and others to do more with my life and earn more. A sick society is the problem. We watched a few too many episodes of dynasty in the 80's.

Anonymous said...

I believe there are quite a few boomers in this situation. Wonder how many will hold on. The market's supposed to rebound in a couple months or weeks or something.

BOO HOO HOO NO SYMPATHY HERE said...

This couple, like many others were greedy and ultimately stupid to listen to the bought-and-paid for MSM (main street media). THey signed on the dotted line and became 'investors"\' alright...

NOW they are reaping the whirlwind have to pay their debts, one way (BK=ruined credit, Jingle Mail,=ruined credit, etc.)or another. Its not too late for them to start over, even with F'ed credit... Keep working though, the 2 kids need EVERYTHING for a loong time yet...

As the Gangster Paulie Walnuts in the Soprano Family opined; "Put their sh*t in the street and let it rain on them".

No Sympathy, No bailout, No Help, NO NOTHING, DOPES.

Anonymous said...

"A coworker of my wife works in financial services and is upside down in her home, owes $60K more on it than it's work, got a crazy ARM that is about to reset, and even with two very nice incomes is in trouble. This is a problem of national education. Virtually nothing of money management is taught to citizens. And our culture encourages overspending to keep up. If you lack the fancy goodies, you're a "loser". We're a nation of poseurs living above our means, where an honest living is for suckers. Even though my wife and I earn enough to bank 50% of what we take home, and will be set by the time I'm 50 y/o, I'm constantly prodded by family and others to do more with my life and earn more. A sick society is the problem. We watched a few too many episodes of dynasty in the 80's.""

Too bad they didn't have a board of directors to give them a few million $ on their way out the door!

Anonymous said...

...let me guess... they did this all on a combined income of $90k.... I wonder...

Anonymous said...

Agreed. No sympathy from here either. Mind you, we too dabbled in real estate during the boom. And did well. But we did two or three things that seemed quite uncommon among others: 1) We always planned for the worst case (i.e., holding only as much mortgage as we could afford to carry in the worst case (i.e., no renters), 2) developing and living on a very clear budget, and 3) watching the economy and market carefully for any signs of trouble. As a result, we made out quite well - clearing $550k after 6 yrs, paying off $60k in grad school loans, putting 20% on a close-in house and neighborhood we plan to grow old in, and paying off car loans and remaining credit card debt. We often had to fight off crazy loan offers with a stick, and ignore society's invitations to live well beyond our means. It wasn't always easy. I used to think we were failing a 1-item IQ test. But then we saw friends start losing their well-paying but unstable jobs, wracking up crazy debts, and then crying into their beer as their home values deflated. There was nothing special about us -- we just were honest with ourselves and refused to be convinced otherwise.

Greyhair said...

Tim, I think you're sounding a bit too pessimistic about housing. I think you're going to be surprised and shaking your head in a couple of years.

Fact remains that the U.S. is a desirable place to live. The areas of the country that are popular will regain their price footing (a few haven't lost much)and the long term trend will re-establish itself. And the areas of depressed economics will continue to lose pricing power. The overall price growth won't be the "bubble" of the past few years, but a reasonable increase in property value that exceeds inflation won't surprise me.

There are a million stories of people who were going to "get rich" during the bubble. And they were fooled (and get the headlines). But that's not the same as the patient homeowners who've lived in their homes for years and have tons of equity .... still.

Like any other investment, a home is a long term investment with a historical reasonable rate of return. That will resume as prices "revert to the mean".

Tim said...

Sometimes I think I just read too much Kevin Phillips...

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