Very infrequently I come across some articles that are so well written that I feel obliged to recommend them to people. And I found it at Irvine Housing Blog. IrvineRenter, the owner of the blog has written a couple of excellent articles that should be must-read for every home buyer.

On “Valuation of Lots and Raw Land”, IrvineRenter explained in details how the valuation of an investment in raw land would work out. To sum it up, land investment works like a call option on the housing market.

On “Loan Assumption is the Appreciation of the Twenty-Teens“, IrvineRenter gave his best advice (and I concur too) that the best bet in building your home equity is probably by buying with an assumable AND fixed-rate loan. Unfortunately, as far as I know, the only assumable loans these days are FHA loans, which have higher fees in general. Why is that? A good deal to the borrowers is always a bad deal to the lenders. The scarcity of such loans automatically tells you that assumable loans are not good for lenders.

And at last, on “Fundamental Valuation of Houses – Part 1“, IrvineRenter explained in details about the math of home ownership cost. His article almost acts like a companion manual to my online java housing cost calculator. All of the factors that he has mentioned, I have included them in my online housing calculator, plus commute cost difference. But just one caveat, garbage in, garbage out. My calculator is only as good as the validity of your input assumption. If your assumption on the housing parameters such as rent/housing inflation or tax rate, are inaccurate, then the results will be inaccurate as well.

So what’s the buying strategy for the housing market? In case you missed it, it’s using assumable fixed rate loan. On a longer term, I believe that the mortgage rates will be going up. Contrary to all the unscrupulous realtors, the best time to buy real estate is when the mortgage rates are at the highest, not when they’re at the lowest. Lower mortgage rates always cause the housing valuation to expand, while higher mortgage rates will rein in the price. Assuming a forward picture of higher than normal inflation, and mortgage rates trending higher, the inflation force may arrest and balance out the decline caused by higher mortgage rates. Nominal housing prices may stagnate for a decade or even two decades, but inflation-adjusted price will continue to decline. Such picture does not bode well for many participants. The renters will see their rents going up due to general inflation. The new home buyers may still see price declining if the nominal prices have not reached bottom. Worse yet, if the equivalent ownership cost of their home is higher than prevailing rent, then they’re effectively speaking draining any potential savings that they could have built without buying a home. In such picture, the only potential remedy would be to have an assumable fixed-rate loan, so that one could recover the price benefits between future higher mortgage rates and the current lower mortgage rates.

And if you cannot find such loan, make sure you put the least amount of down payment, and borrow as much as you can for 30 years fixed. Forget about adjustable ARM. The only way to short the bond markets and US dollar simultaneously and safely without margin calls is to borrow against your real estate holding.

This is the first time that I’ve ever tried to “bust the door” for black Friday sale. I went to Toys R us to get legos for my kids. The sale started at midnight, and I was 30 minutes late since I was going through global stock market news due to Dubai debt panic. Stocks are down 3% to 6% around the globe, and US will open with hefty losses too. Gold has already sold off in Asia by $50.

Anyway. At 12:35am, I arrived at ToysRus, and parked my car at a really far away location since the entire parking lot was basically full. Starting from the door, I kept walking to get to the end of line. It took me about 5 to 10 minutes of walking to get to the end of line, which is about 500 feet away. The store itself was full of people already, as I could see thru the window, and there are probably some 200 people outside waiting to just get into the store. I asked the person who was at the end of line, and confirmed that the line was indeed for Toys R us. Man, I couldn’t help but laughed. This is just crazy! Thirty minutes after the sale begun, and I probably won’t get into the store for another 40 minutes.

Realizing that the lego items that was on sale was most likely sold out already, I decided to go home instead. As I drove away from the full parking lot which was designed & allocated for 3 other big chain stores like Toys R us, I also noticed that all other stores are still closed. Boy, all the cars there were mostly for Toys R us, except for a few early campers at other stores.

I’m not sure where the recession is. Looks like the Thanksgiving & Christmas sales may not be too bad. If you want to look for bargains, you will have to find a way to beat others to store. I think I’m going to try online. Bing search engine is providing cashback for various stores. At Walmart.com thru Bing, you can get 15% off. Maybe that’s an easier way to get to your bargains.

Happy Thanksgiving.

I have noticed that Ameriprise, the auto insurance company thru Costco has been raising its price. I just have recently changed to GEICO, because when calling their sales agent, he was willing to not only match the prices from Ameriprise, but also lower the price by a little bit more.

A solid proof again that NOT everything at Costco is cheaper.

After my previous minor car accident, which cost GEICO about $500, they still did NOT raise my price as promised by their customer representative. I’m amazed, and a little guilty, since this is the first time ever that I take money out of the insurance system. GEICO was extremely unlucky in the sense that I have never had an auto claim in my life so far, which is about some 20-year driving history. For all of their great customer experiences, and my “under-water” account (a negative $130 return for the first six months), I’m giving them a thumb-up.

I’m 95% sure that you cannot beat this deal from all major insurance companies. I only pay for $370 every 6 months for two cars having

$100K/$300K body injury liability,
$100K property liability,
$1000 deductible for comprehensive on both cars
rejecting uninsured/under-insured motorists coverage
and $1000 deductible for collision coverage only on my 2-year old Honda Odyssey. My other car is a 10 year old Toyota Camry.

I believe GEICO is quite aggressive in acquiring new customers. So you should be able to negotiate with the sales agent for a little better price if you call them up.

I have blogged about “different ways for a busted refinancing plan” back in 2006 at the height of housing market. I argued that once the housing markets fall, most of the real estate “investors” will NOT be able to refinance out of their payment troubles. It was very clear to me that a housing Ponzi scheme simply cannot last forever, and was destined to pop. Of course, according to Greenspan, Bernanke, Wallstreet, and traditional news media, nobody could have seen the financial crisis coming.

I definitely thought that things would be worse in the housing markets. Due to various factors that I didn’t forsee, including Obama’s home affordability programs, delays in foreclosure processes by banks, and a dramatic drop in the interest rate curve, things are not terrible as of now. In fact, in 2009, housing markets actually went up (at least in California), sucking in the last bunch of ever-hopeful real estate “investors”. Regardless, numbers won’t lie, and let’s see how the negative amortization or option ARM homebuyers are doing.

Below is a summary from the monthly payment history based on a hypothetical case that I’ve made up for a California home ($500K, 20% down). I think it is pretty representative. You can get the original complete Excel spreadsheet here. All the interest rate data are from X-mortgage. I’m listing both MTA and COFI indexes which are the two most common indexes for option ARM:

Date	MTA (%)	11th District COFI (%)	Monthly payment (MTA)	Balance (MTA)	Monthly payment (COFI)	Balance (COFI)
2004	1.2383	1.802	1,286.56	400,042.88	1,286.56	400,230.78
2005	2.5042	2.515	1,383.05	402,760.80	1,383.05	403,981.61
2006	4.1425	3.759	1,486.78	410,981.87	1,486.78	411,293.82
2007	5.0292	4.224	1,598.29	424,437.96	1,598.29	422,556.80
2008	3.5283	3.111	1,718.16	436,514.40	1,718.16	432,092.15
2009	1.34	1.38	2,332.69	436,960.64	2,325.33	433,770.30

From the original teaser payment of $1286.56, the payment increased 7.5% annually, and is recast to about $2200 after 5 years from 2004. I think the more aggressive homebuyers who couldn’t cover the annual payment increase of 7.5% would have dropped out already. They either
1. sold and made some profits,
2. refinanced into another option ARM before housing markets dropped in 2007 (which will cause more problems later in 2012),
3. or defaulted already.
The more “conservative” homebuyers who were able to sustain thru 4 years of annual payment increases of a total of 30%, now will be facing an additional payment shock of 28% from $1718.16 to $2200. That is a total increase of 71% from the original $1286.56.

Needless to say, an increase of 71% in 5 years will be huge for anyone. Very few family will be able to make it thru a combination of salary increase, second job, and/or having non-working spouse going back to workforce. Unfortunately, refinancing to 30-years loan at today’s 4.75% will not be an option either, since the monthly payment for 30-years is about $2200, the same as the recast option ARM loan, if not more. I originally thought that these people probably would have problems with LTV or loan-to-value ratio. But Obama’s home affordability program has “solved” the LTV problems for these most of these homeowners. The monthly payment issue is still there. One cannot make an unaffordable home in the first place to be affordable.

Looking forward next year, once the home affordability program expires in mid-2010, we will probably get more defaults and walkaways from homes. Due to Bernanke’s cutting of interest rate, and a huge buying program in both treasury and mortgage market, current interest rates are temporarily held down. If the option ARM indexes like MTA and COFI rise up to 3% for example, the monthly adjustable payment will go up by another 25% to 30%. I don’t think the housing markets will recover anytime soon due to this impending supply of homes (from defaults of the option ARM loans).

So what should you do if you are one of the option ARM homeowners? There are many sites & articles that talks about foreclosure options. In my opinion, short sale would be the best choice (if you have this choice), since you won’t be liable for the deficiency judgment, and it will hurt your credit report the least. The second best choice is loan modification, although not many can negotiate a good deal with banks. The rest of the choices such as foreclosures are not ideal, but it’s probably earlier the better under the assumption that it does not affect your job prospects based on a much worse credit report.

Here is some of good sites & articles that I’ve found on foreclosure-related options. Some of the site owners are very helpful, and may be able to provide you with needed advice or services:

• Foreclosure option networtk. Hanna was particularly helpful to me on a couple of nasty legal questions.
• Foreclosure options from MSN
• More info on various foreclosure options from foreclosure university.

Not sure if any of you catch this story from NPR (national public radio). A homeless person gave $400,000 to NPR, and several other nonprofit organization.

Richard Leroy Walters was a retired engineer from AlliedSignal Corp, but who gave up all the materialism of this world, and what could be afforded to him. Didn’t have a car (but a bike), nor a home, but looks like he did own several stock-related investment, trading over the phone at the senior center. He was an “avowed atheist” but converted to Catholicism on his deathbed. It’s amazing that someone who owned so much, and yet didn’t take any enjoyment of any materialism, while mostly remained atheistic in that process. I have always thought that if someone is atheistic, he or she must take comfort in material things. I guess there are different higher souls.

There are some readers’ comments in NPR website, a few criticizing Walters using resources for homeless people. I must say that after all, Walters gave more than he had received (whether it was given before or after his death). For many, we don’t remember that whether we own a lot of money or owe a lot of debt, when it comes to living in this world, we are consuming resources and relying on others constantly. Our debt to this world is our consumption, whether we pay it fully or not. What would be better served besides paying in full with our hard-earned money is a grateful attitude towards everything that we received.

My wife is currently on vacation with my kids, and these days, I just cook my own simple meals, and bag my own lunchbox: rice plus tofu most of the time. I barely spend any money besides gasoline. I’m perfectly content without many unnecessary stuffs. When I wash the uncooked rice, I am always reminded a Chinese saying: “every grain of rice doesn’t come easy but with sweats of the farmers”. That was of course from the ancient days when many farming was not done through modern day machinery. Regardless, I’m grateful for the abundance of food that I can eat, for there are still too many hungry people in the world.

Oh, yeah, one of my few consumption besides meals is that I did buy a new book from local bookstore, knowingly over-paying $10 for it relative to Amazon.com. Since I frequent that bookstore, I hope that extra $10 goes to their pocket so that they won’t go out of business one day.

I admire what Richard Leroy Walters did. For his gifts, the world was made better.

Being the second bank after Citibank, HSBC has cut my credit card line from $7200 to $3000.

I don’t know how they evaluated this, but it is for certain that they don’t care that I have paid down all of the balance every month, and that my credit FICO score is at about 800 (well, if that means anything at all). And the speed that they do it is amazingly fast. Right after the monthly statement is cutoff, the credit line is changed immediately. I’m guessing that there must be increasing numbers of people who are behind and going delinquent.

Under normal circumstances, I would never advise people to get lots of credit cards. However, you should really get extra credits while you still can (and still holding a good job), before both banks and economy go tumbling down again. You should apply credits to different bank/companies, so that you could reduce the impact of credit card issuers cutting your credit lines after the fact. Especially for people who don’t have a lot of emergency reserve, I strongly advise you to load up your credit availability.

The wrong way to use your credit cards is to think that they are your money. Credit is not cash. Credit is for your extra financial buffer. Frankly, I think people need to be prepared for being out-of-job and without any income for 2 years at the minimum. Assume that you will go into “early retirement” for 2 years, and make sure you have enough credit/money to come out from the other end of tunnel.

So far, it appears that American Express still has very high credit limit. I have more than $15000 on that card thru Costco. If you need lots of credit, maybe you could try that.

It goes without saying that you should not get a card that has annual fee, build up more debts, etc. Better yet, you should get those cards that pay you back. Between the two cashback cards of HSBC & American Express last year, I had $500 max cashback from HSBC, and over $200 from American Express. That’s a total of $700 cashback. Not too bad at all. For some more details, here is my old post on this.

Here is just some decision flowchart on what I think you should do for your home/mortgages in many circumstances. It’s based on my personal opinion, and you should always consult professionals & legals when it applies. There aren’t many solutions for you besides out-right sale, short sale, refinancing, loan modification, foreclosures, and walkaways. But you should choose carefully on each option. Anytime you choose short sale, foreclosure, and walkways, it’s implicit that you will lose all the amount of any down payment that you have put into the home when you first bought it.

1. Case #1: if you are “underwater”, meaning that your loan amount is greater than your home market value, your decisions should be dependent on your loan type.
   1. Case #1A: if your loan was a PURCHASE loan, meaning that you have never refinanced your loan since your home purchase, in many states such as California, where there are laws protecting home buyers from loss of incomes or jobs, you should probably walk away from your home. In such cases, you should be protected by state laws, and you should not be responsible for lenders’ loss. The laws however cannot protect you if you have lied about your income and assets on your loan application. Please make sure that you consult lawyers for specific details, because I cannot be responsible for your legal troubles. Please NOTE that if you have a second loan, but the second loan was a purchase loan which you’ve probably paid PMI insurance on, you should still be okay. However, the same does NOT apply to home equity or piggy-back loan. Home equity loans are recourse loans, and it means that banks can theoretically or legally hunt you down, extract all of your current assets and future salaries, until you file bankruptcy.
   2. Case #1B: if you have more than one loan, and the second loan is home equity loan, you should probably try a short sale first, and then try doing a loan modification. The short sale is better in the sense that your credit is just partially ruined. The banks need to take their deserved losses. If you cannot do a short sale, you should try to modify your loan thru Obama’s home affordability program. With this method, I believe that your credit profile stays the same. However, you’re stuck with your own losses, banks get off the hook, and taxpayers may be stuck with your losses if later down the road, you walk away.

   For both of Case #1A or #1B, you may want to stop or slow down on paying your first loan or the purchase loan, so that you can force bank to come to the negotiation table with you. However, you will be risking a real foreclosure. Also, in case #1B, you should continue paying down your home equity loan regularly because it’s a recourse loan.

   3. Case #1C: if you have refinanced your home loans, then you’re out of luck. Legally, you’re 100% responsible for your loans. Nevertheless, you should try contacting banks for short sales, and doing loan modifications, like in Case #1B. Both will be to your advantages, if they go through.
2. Case #2: if you are at about the same the “water level”, meaning that your loan amount is about the same as your home market value, you should in general try to refinance, and/or short sale if you decide that you don’t want to keep your home.
   1. Case #2A: If the prevailing rent is still higher than your home cost: mortgage payment after tax benefits, plus any property tax, or potential interest credits, then you could try wait out the downturn (although I think the downturn will be much longer than anyone expects). You should at least try refinancing and see if you can lower your monthly cost. The Obama’s home affordability program will allow refinancing of up to 105% of your home value, if your mortgages are owned by Fannie Mae or Freddie Mac. You can check that at the home affordability page.
   2. Case #2B: If the prevailing rent is lower than your home cost, I think you should try to do a short sale, and forget about doing any refinance. Your short sale will be easier to go through bankers. And this way, it will prevent you from suffering further home losses down the road.
3. Case #3: if you still have substantial equities in your home, meaning that your loan amount is smaller than your home value, you are financially sound. I would advise to do refinancing through the normal channels, cash out any equities that you can, and hold on to your cash in 5-year US treasury for another two to three years for better opportunities. The best refinancing time is either now or possibly in Oct/Nov if stock markets take a dive at that time.

Here is the Obama’s home affordability page, in case you don’t know about it. If you follow thru the links, you can find out how to verify that your loans are owned by Fannie Mae or Freddie Mac.

And for potential new home buyers, my advice stay the same: just stay put and wait for year 2012. Your patience should be rewarded (in my opinion). That $10,000 home buying tax credit cannot come close to the amount that you may gain through further home value erosion.

Labor day weekend is here. Are you travelling less due to the higher gas prices?

I used not to think about the cost of gasoline. But nowadays, I am a lot more conscious about where I travel. Indeed, I find myself travelling shorter distances to everywhere. It just makes more dollar sense. I’m increasingly opting for local restaurants than places far away, and same for travel destinations. More and more people are doing staycation (staying at home), rather than vacation.

What are some good and cheap alternatives for not travelling? Probably renting DVDs to catch up the movies that you missed is one of the cheapest way to spend your hours. The next on the list would be going to a movie. Or simply have a good barbecue or picnic with friends is good. Dining out at a more expensive restaurant that you don’t usually go to is pretty cheap, relative to the cost of a long travel. Hiking or biking in a nearby regional park is pretty good too if you haven’t done it for awhile. Probably the single most important thing about vacation is simply having a relaxed mind-set.

Anyway, I will see you all next Tuesday. I need this break, since I have been just too busy working day and night for almost last month already.

I have always thought that Honda has pretty good mpg. But I’m getting about 16 mpg combined on city/highway on my Honda Odyssey. That is quite different from the statements on invoice: 18 in city, and 25 on highway. That just seems awfully low.

I have always driven Toyota, and this is my first Honda car. My mpg experiences with Toyota is much better. The actual mpg comes out to be so much closer to the invoice sticker. My next car will definitely go back to Toyota.

That brings my attention to Toyota’s Prius. According to a UK AutoExpress report, the next Prius will offer 94 mpg!! That is double of the current 45 mpg. At 94 mpg, even if it costs $10 a gallon, you will only spend 11 cents every mile. That is CHEAP. Okay, even at 45 mpg, it is 3 times better than my Odyssey. At $5 a gallon, the difference between 45 mpg and 15 mpg for 7500 miles is about $1700 every year. In 3 years, you can save $5K on gas, and in 6 years, you can save $10K on gas. That’s about 40% to 50% of the cost of a car.

It’s slightly harder to justify between a 25 mpg on my camry and 45 mpg on a Prius, when you have made your investment in the car already. But if Prius does come out with 94 mpg, I’m just going to grab one if I can, and dump my old car. Unfortunately, I think the waiting list will be really long, given a high gasoline price and long commute distance in California.

Mortgage rates have gone up quite a lot along with the fall in bonds. The rates have been rising across the board (by almost 0.75% now).

I cannot understand who is selling the bonds, along with $US rising (just a little bit). This is truly a weird combination. Where is the money going?

The only sensible scenario that I can come up with is that Fed is lending all the financial institutions treasury bonds on its book in exchange of toxic mortgage bonds. The financial institutions are selling the treasury bonds in exchange for cash right away to resolve their credit crunch to satisfy cash demands from customers or depositors. Since all the transactions are domestic, $US exchange rate is not affected much. In effect, Fed is indirectly creating these new cash through these financial institutions, and supporting the solvency and liquidity of the financial institutions.

Still, eventually (or immediately) these new cash will find a new home. Apparently, they have blown up the commodity prices.

Fed is obviously trying to prevent housing deflation. Apparently, they have opted to save the greedy bankers and brokerage houses, and dumped the homeowners. To bring down the mortgage rates, Fed should actually buy up treasury bonds and/or mortgage bonds. Reducing the supply of bonds will increase its price, and therefore reduce the yields. Of course, such monetization effort will result in the immediate increase of cash circulation.

I guess Mish’s deflationary thesis has been right on. Cash is in demand. Not bonds, not stocks, not gold (yet) either. Before cash becomes trash, cash is still king. But I don’t think Fed has any ways out of this mess, besides trashing US dollar (or cash).