Sunday, March 26, 2006

Clearly I'm in the wrong business...

Reading through the Sunday Times is always an eye opening experience, but today's homeowner profile nearly knocked me out of my chair. The article starts off with a kind hearted look at building in California and even the title seems tilted toward some rational financial behavior - The Construction Loan as an Owner's Safety Valve - but trust me, that's where all semblance of sanity ends.

WITH three children and large extended families, Alisha and Sudhir Karandikar thought that their 1,800-square-foot house in San Jose, Calif., was too small.

To finance the project, the Karandikars — she is a full-time real estate agent, and he is a high school math teacher and also an agent, part time — got a $450,000 construction loan. When the house is done, the total loan will be $1.2 million.

Let's pause for a moment and let that sink in - a real estate agent and a high school math teacher are going to have a $1.2 million Interest Only Mortgage which they plan to refi in 5 yrs.
By their own calculations this couple will have paid in almost $400k in INTEREST in five years without reducing their principal by a penny.

But obtaining the loan took only 12 days, and the Karandikars wanted to get started. "We are happy with this," she said.

Again I'd like to clarify that I'm principally focused on the challenges facing the national housing market and the impact that it's decline will have on the US economy. Jefferson County seems somewhat insulated from this trend right now (but have you noticed all the For Rent ads in the paper? That could be a trend to watch). Having said that when this housing market unravels, there will be two guilty parties - the US Consumer that feels that they have the right to have a $1.2 million house regardless of income or occupation and the financial institutions that have been their enablers. The odds are 60/40 that there will be S&L like hearings in Congress by the Spring of 2009.

What banker in their right mind would look at the W-2 for a real estate agent in Marin County (the frothiest - is that a word? - of the bubble housing markets) and a math teacher - no offense to the many hard working teachers in the US, you are clearly the hardest working, most underpaid professionals I've encountered - and decide "Yes, I'd like to loan you $1.2 million". That person should be fired yesterday.

For the record - Housing starts plummeted last week and the weakest areas in the survey? The west coast (California) and the south.


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