RE Debacle - Have Questions

chisueAugust 21, 2007

Does anyone have an idea where I can find answers to these questions?

1. How much equity did homeowners remove from their homes and plow into the economy in 2005 - 2006? How much will consumer spending fall now that that piggy bank is bust? Was this just a media hobby-horse, or meaningful numbers?

2. What will be the impact on local, state and federal governments when homeowers walk away from foreclosures and cease paying RE taxes?

3. How much American real estate is owned by people who are not US citizens? (There would seem to be a tremendous buying oportunity here if you're on the right side of the exchange rate.)

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I'd be interested to know the answers as well. I've been told that over half of the RE in Hawaii is owned by Japanese.

    Bookmark   August 21, 2007 at 6:37PM
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VERY interesting question, Chisue. I saw a number earlier in the week that was in the trillions - did a double take to insure I was seeing a T and not a B in that article. Sorry I can't recall the specifics better.

You piqued my curiosity though, so I got googling. The site below says home equity loans alone went from 500 billion to over 1 trillion from 2002-2006. And that is not even counting subprime primary mortgages. Just the equity cash out craze. The subprime sector looks like another 500 billion dollars of problems.

For reference the entire national debt/deficit is at 150 - 400 billion, (depending on who is counting what) and that is billion with a 'B'.


Here is a link that might be useful: equity loan numbers

    Bookmark   August 22, 2007 at 12:46AM
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zone8_grandma -- We've been vacationing in Hawaii for years. I think it was in the 1980's that Japan's market peaked (and then collapsed). Many properties in Hawaii had been bought up by Japanese investors, creating huge price increases. Then...they were all for sale "half-off" (half off the over-inflated prices). Japanese tourism also dropped off a lot.

Even the TripAdvisor forum shows that visitors to Hawaii are increasingly coming from Canada and the UK. We used to discount rates on our Maui condo to Canadians when the exchange rate was very different. No more! For 2007 nearly half of our guests are Canadians. Lots of Brits have bought in Florida, too.

    Bookmark   August 22, 2007 at 11:00AM
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Hawaii has always been a desirable vacation area for Canadians to escape winter. For western Canadians especially, it's not that far of a jaunt on an airplane.

When the US v. Cdn $ exchange was so bad for Canadians, people flocked to Mexico, Dominican Republic and Cuba instead. Cuba advertises like crazy for Canadian tourists because our govt has not embargoed or prohibited our citizens from going there.

Now that the Canadian dollar is close to par with the USD, it's going to be interesting to see if tourism from Canada to the US increases. However, with the new US passport requirement and passport backlogs, some trips to the US could be postponed.

    Bookmark   August 22, 2007 at 2:20PM
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celticmoon -- Thanks for the link! So...are Mr. and Mrs. America short 1.5 Trillion for groceries? Maybe they just won't buy a new car, but it could cut deeper.

    Bookmark   August 23, 2007 at 6:45PM
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Chisue, I guess my main concern isn't the 1 trillion in home equity debt itself - though whether folks can/will actually repay all that does give one pause... My concern is more that the 1 trillion siphoned off, spent and pumped into the economy translated to an awful lot of goods and services (=jobs) these last few years. What will keep all that afloat now?

    Bookmark   August 23, 2007 at 11:15PM
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One of the things that will keep it all afloat now are those foreigners who hold currencies that have appreciated in value relative to our US dollar. Those same Canadians and Europeans who are renting Florida condos and buying US real estate will spend money here. Because US goods and services are relatively "cheap" in this stage of the cycle, foreign money is being spent on our shores. And it's not just a small group of tourists who are doing the spending. It's foreign corporations and investors.

We are part of the most global economy these days that I think we've ever seen. Because things are so global, things like the US real estate crisis for US homeowners is a pretty small blip in the big picture of basic economic strength. Corporate earnings are still relatively strong due to the US selling goods and services overseas. I don't think one gets an accurate picture if they look at only what goes on within our shores.

I read the attached article and found it kind of interesting...

Here is a link that might be useful: Samuelson article Washington Post

    Bookmark   August 24, 2007 at 6:23AM
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Here is a chart that shows mortgage equity withdrawal and shows it as a % of disposable income (it reaches over 10% in 2004-2005).

Link to article.

    Bookmark   August 24, 2007 at 9:25AM
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skylyn -- Am I reading this correctly? The peak years of moving home equity into spending money were '04 and '05, so now the percentage is down under 5%?

celticmoon -- Yes, that's my concern too. Where will the grocery money come from now that the home equity is tapped out? Maybe we *should* think harder about the loans not getting repaid though.

kec01 -- Re: the whole global economy thing. I just read a report from Bank of Montreal touting holding commoditiesm reasoning was the rise of a middle class in China and India who will want (and be able to afford) more and better food -- even changes from vegan to meat. The POST article talks about the vast decrease in poverty world-wide, and questions if it can be sustained without "funny money" (my term).

Anybody buying TIPS (Treasury Inflation-Protected Securities)? I'd like to know more about those.

    Bookmark   August 24, 2007 at 10:10AM
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The charts skylyn linked to show figures per *quarter* not annual figures. So the 150-225 billion is money pulled out per quarter. Not inconsistant with the total owed reaching a trillion by end of 2006.

I suspect the chart show drop offs for 2007 partly because of the recent tightening of credit. And folks perhaps coming to their senses or simply running out of equity to tap in declining markets.

Chisue, on the TIPS, I recall something about the interest being reset that made investers pretty unhappy. Will try to track that down for you.

    Bookmark   August 24, 2007 at 11:39PM
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Here you go, Chisue. This is a good article that explains the TIPS volitility and other issues. Because they were so hot in 2002-2004, market value of traded TIPS funds was driven up further. But when earnings went flat in 2006, lots of people dumped them, driving fund values down further. That's about when I remember reading of investors getting pretty unhappy. TIPS funds are trickier than they seem at first.

Like with other bonds, one way around the market swings is to buy and hold the bonds themselves rather than the funds. Depends on whether the scale and time frame and risk vs earnings of the bond works for you.

Here is a link that might be useful: TIPS

    Bookmark   August 25, 2007 at 9:53AM
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The real estate taxes will get paid. If the homeowner being foreclosed on doesn't pay them...then the foreclosing lender will.

However, as home prices fall & property values are reassessed it 'could' mean a decrease in incoming property taxes. Of course, they can always increase the mil rate to compensate. lol

Our town is reassessing this year. We are reassessed every four years. So, even with the current drop in home prices our home is still worth substantially more than it was four years ago. Our taxes will increase. I'm sure I will not be alone at City Hall waiting my turn to present my case for a tax challenge! Timeframes for reassessing real property vary all across the country. Some reassess every year but most are on a four, six, or ten year schedule.


    Bookmark   August 26, 2007 at 7:05PM
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We are on an annual reassessment plan here in Lake County. When we lived in suburban Cook County, it was every three years. I protested every time in Cook -- and won. Our house is only six years old, so there's been no basis to protest; been pretty fair.

Our town's sales have slowed by at least a third, but median prices have risen a tad. We've had several older homes sold for teardowns in our neighborhood. Two big houses are being built now. Three more to go. (Land values for some of the older homes are greater than the improvements.) Guess I'm just going to see tax increases!

After reading here of the taxes paid in some NE towns, I should not complain. Ours are under 1% of TRUE market value -- what we'd get if we sold today.

    Bookmark   August 27, 2007 at 10:23AM
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