Would You If You Could ?

[LuckyOne]

Sorry, this is not one of those off-topic, smutty posts .......

If you could acquire a house in the United States with a 100% repayment mortgage fixed at 5% for 30 years in a non-recourse state, would you do it?

The cost of servicing the mortgage is about 6.5% per year. Other costs of carrying the asset will be about 3.5% of the cost of the asset. I think of these costs as the premium for the option to buy the house due to the non-recouse nature of the debt. The full recourse to borrowers in the UK negates the optionality available in non-recourse states.

Positives :

- The US might be getting close to the inflection point where deflation gives way to inflation

- The mark to market of the liability (the mortgage) will drop if rates rise

- The ability to default strategically. Some have a problem with the ethics of this. I don't. It is a feature of the contract willingly entered into by two knowledgeable parties

- There is a miniscule chance that the US does something insane like writing off a percentage of mortgages with printed money. It is a nice, freee option to own.

- The average house price in the US is about 2.4x average earnings

Negatives :

- 10% per year is a pretty large option premium

- The fiscal condition of governments at all levels in the US (Federal, State and Local) is so dire that the property market might never be able to recover.

As an aside, the non-recourse nature of mortgage debt in the US and very long term fixed rates which are currently very low might be two keys to finding a bottom in the US market that we do not have in the UK.

[Bloo Loo]

just one thing...can they proove the seller has true title to sell the thing in the first place....there is some doubt.

[Kyoto]

Are you talking about to live in, or as an investment?

To live in, probably not. You wouldn't need much to be a cash buyer out there, but there's the visa situation and the whole societal collapse they are on the edge of.

As an investment, I guess the non recourse thing makes it an almost one way bet and a free option.

I guess the problem is getting a mortgage. Who would give one to us as UK citizens wanting to buy in the US?

[General Congreve]

Wouldn't even buy with cash. While real estate may well turn the corner at some point as inflation picks up, I believe you'll get much better returns, without the sort of liability incurred by buying a property in the States (financial upkeep, gun-toting squatters etc.), by sitting here in the UK with a pot of physical metal and some popcorn to munch on during the show.

[The Masked Tulip]

There are many tempting aspects to the US lifestyle but here are some negatives:

1. Healthcare

2. Poverty in Old Age

3. Crime

4. Sense of Humour

5. Working hours/week/year/lack of holidays

6. View of the World

People in the US often find themselves in debt for millions after themselves or a child spend a week in hospital.

I suggest you pop over to Paul Mason's Newsnight blog and have a read of his recent reports on life in the US.

There is a storm brewing there which is coming from within the US and not without.

[LuckyOne]

Are you talking about to live in, or as an investment?

To live in, probably not. You wouldn't need much to be a cash buyer out there, but there's the visa situation and the whole societal collapse they are on the edge of.

As an investment, I guess the non recourse thing makes it an almost one way bet and a free option.

I guess the problem is getting a mortgage. Who would give one to us as UK citizens wanting to buy in the US?

I wouldn't even term this an investment. It is pure speculation.

It costs about $2,000 to create a US "person" in the form of an LLC.

[LuckyOne]

I would be tempted.some states are already 50% down.the main complicating factor is that the municipal/state govts are about to enter their period of collapse,which might involve one last lunge at homeowners before the inevitable realisation dawns that they'll default.on the otehr side of that,very tempted if I was a US citizen

In California, there is a law which limits property taxes to 1% of the market value of the home being taxed. Voters would have to vote for higher property taxes before the government could change it. I struggle to see that happening.

[LuckyOne]

There are many tempting aspects to the US lifestyle but here are some negatives:

1. Healthcare

2. Poverty in Old Age

3. Crime

4. Sense of Humour

5. Working hours/week/year/lack of holidays

6. View of the World

People in the US often find themselves in debt for millions after themselves or a child spend a week in hospital.

I suggest you pop over to Paul Mason's Newsnight blog and have a read of his recent reports on life in the US.

There is a storm brewing there which is coming from within the US and not without.

Agreed. I would never live in the US but I do enjoy the time that I spend there.

[The Masked Tulip]

Agreed. I would never live in the US but I do enjoy the time that I spend there.

It is a great place to visit and if I was super-rich I would spend more time travelling around there but if I was looking for a home outside of the UK then the US would be lucky ot make the top 10.

Because we speak the same language and watch the same films we think we have more in common with the US than perhaps we actually do. The US has moved away from us in the past 30 or so years.

We keep angsting over the so-called special relationship with them but, frankly, they should be worrying about keeping it going with us.

[_w_]

Interesting.

First, out of interest how does "The mark to market of the liability (the mortgage) will drop if rates rise" become a benefit unless you are aiming to produce funny accounting to screw some shareholders or something?

One more (probably silly) question: can you do IO?

[LuckyOne]

Interesting.

First, out of interest how does "The mark to market of the liability (the mortgage) will drop if rates rise" become a benefit unless you are aiming to produce funny accounting to screw some shareholders or something?

One more (probably silly) question: can you do IO?

I am a mark to market guy and I believe in marking both sides of the balance sheet to market

If I bought a house for 100k with a mortgage of 100k at 5%, I wouldn't care if the price dropped to $78,828.26 if rates rose to 7.5% as the mortgage would still be worth the same as the house. If rates fell to 2.5%, the house price would have to rise to $136,154.56 for me to think of myself as still breaking even unless I was able to refinance at the lower rate (which is possible in the US where the borrower has the right to keep the fixed rate if rates rise but renegotiate to the lower rate if rates fall).

The IO market is very thin in the US. With rates so low, IO payments are 5% and P&I payments are 6.5% so the cost savings is not that material anyway.

[richc]

I'm a US citizen, so I could easily buy property there, but I wouldn't touch it with a ten foot pole. The economy in the US is well and truly screwed at the moment, and it's hard to see how things will turn around. Unemployment hasn't been this high for this long since the 1930s. My mother, working in her 60's after having been pushed into bankruptcy by medical expenses, was just informed by her employer that her holiday time is being cut back. She now gets 80 hours a year for combined sick leave, vacation and personal time. Imagine getting 10 days holiday a year -- they probably get more time off in China. Things are grim in the US these days.

The downside is pretty big on any purchase there just for an investment with limited upside. Prices in the US aren't going to suddenly rebound to heights of the boom. People wouldn't fall again for the games that made the property bubble possible.

[nuts]

I wouldn't even term this an investment. It is pure speculation.

It costs about $2,000 to create a US "person" in the form of an LLC.

What does this actually mean ?

[LuckyOne]

What does this actually mean ?

To apply for a mortgage in the US, you need either a Social Security Number or a Taxpayer Number. As they no longer give out SSNs to non-residents, the only way to meet the requirements is to get a TN is to set up a US domiciled Limited Liability Company (Delaware is that jurisdiction of choice) which can be granted a TN.

[LuckyOne]

I'm a US citizen, so I could easily buy property there, but I wouldn't touch it with a ten foot pole. The economy in the US is well and truly screwed at the moment, and it's hard to see how things will turn around. Unemployment hasn't been this high for this long since the 1930s. My mother, working in her 60's after having been pushed into bankruptcy by medical expenses, was just informed by her employer that her holiday time is being cut back. She now gets 80 hours a year for combined sick leave, vacation and personal time. Imagine getting 10 days holiday a year -- they probably get more time off in China. Things are grim in the US these days.

The downside is pretty big on any purchase there just for an investment with limited upside. Prices in the US aren't going to suddenly rebound to heights of the boom. People wouldn't fall again for the games that made the property bubble possible.

I agree that it is probably still too early. In California, there is still a two tiered market where distressed sales are taking place at around 50% off peak prices and non-distressed homes are being offered (and are not selling) at around 30% off peak prices. Until these two segments converge, I do not think that it will be time to buy yet.

On an an affordability basis, the market is already slightly cheap at 2.4x earnings but deleveraging / supply will probably push the market down to something like 2x earnings so down another 17%.

[GeordieAndy]

What does this actually mean ?

Setting up a fake company so you can buy a house I imagine but not upto speed with USA - this is the process required in Thailand though

[bogbrush]

I'm a US citizen, so I could easily buy property there, but I wouldn't touch it with a ten foot pole. The economy in the US is well and truly screwed at the moment, and it's hard to see how things will turn around. Unemployment hasn't been this high for this long since the 1930s. My mother, working in her 60's after having been pushed into bankruptcy by medical expenses, was just informed by her employer that her holiday time is being cut back. She now gets 80 hours a year for combined sick leave, vacation and personal time. Imagine getting 10 days holiday a year -- they probably get more time off in China. Things are grim in the US these days.

The downside is pretty big on any purchase there just for an investment with limited upside. Prices in the US aren't going to suddenly rebound to heights of the boom. People wouldn't fall again for the games that made the property bubble possible.

Christ they really are in a mess!

[Kyoto]

Offers in excess of $1,200

http://www.rightmove.co.uk/overseas-property-for-sale/North-East.html?sortByPriceDescending=false

Observed prices (above is obviously an extreme example) and stories such as the above represent an out and out collapse. The more visible coasts betray what is going on throughout large swathes of America.

Edited October 13, 2010 by Kyoto

[ParticleMan]

If you could acquire a house in the United States with a 100% repayment mortgage fixed at 5% for 30 years in a non-recourse state, would you do it?

No.

If I could buy oil on the same terms though, now you're talking.

The cost of servicing the mortgage is about 6.5% per year. Other costs of carrying the asset will be about 3.5% of the cost of the asset.

Your "yield" as it were is still USD denominated.

Why not just service the same leverage rolling a boring old FX option?

That's what this is...

[LuckyOne]

No.

If I could buy oil on the same terms though, now you're talking.

Your "yield" as it were is still USD denominated.

Why not just service the same leverage rolling a boring old FX option?

That's what this is...

I have been wondering about that too. If the whole QE / ZIRP / stimulus / demographic problem is going to turn into a hyperinflationary nuclear winter, it might make sense to be short the currency where it all started. 5 to 10 year USD calls / JPY puts struck at 100 to 125 or so might make some sense. I think that the skews are still the right way around. Interest rate differentials aren't as favourable for the forwards as they were but they are still in the right direction.

If the JPY goes the same way as the Zim Dollar, the payoff could be close to the USD notional of the contract and it is cheaper and easier to execute.

[_w_]

I am a mark to market guy and I believe in marking both sides of the balance sheet to market

If I bought a house for 100k with a mortgage of 100k at 5%, I wouldn't care if the price dropped to $78,828.26 if rates rose to 7.5% as the mortgage would still be worth the same as the house. If rates fell to 2.5%, the house price would have to rise to $136,154.56 for me to think of myself as still breaking even unless I was able to refinance at the lower rate (which is possible in the US where the borrower has the right to keep the fixed rate if rates rise but renegotiate to the lower rate if rates fall).

Interesting way of approaching this.

Here's my two pence:

I've been thinking about doing this but avoided the tough questions by deciding that it didn't make sense investing in the US while living in the UK.

IMO we will have much more clarity of where we are going within the next twelve months. I can't believe the tensions building in the system can last for much longer without something cracking.

If you are inclined to believe that Ben the manic printer will be the trend setter, you are effectively looking at playing the inflation game and the venture is worth looking at.

It is dangerous because while inflation may take over, there is no guarantee that properties in the US are still not overvalued (I don't know the market but read convincing arguments on both sides).

While a 10% yearly premium on a call is a bit high, yield may provide the answer. If you buy a property that can generate cash flows, you can reduce those from your premium and at 5% or less 'premium', the proposition begins to become distinctly attractive.

One more thing on the 12 months. If you approach it as a twelve months project then your maximum exposure is 10% of purchase price. If you rent it, and taking into account the length of time it takes banks to foreclose, you could get 2 years rent or more for those 10%. You could end up quids in even if things don't turn out the way you expected. A tad unethical perhaps but the US is now a zoo so you might as well behave like an animal:-) It will be our turn soon enough...

Sorry for being so long winded.

[LuckyOne]

Interesting way of approaching this.

Here's my two pence:

I've been thinking about doing this but avoided the tough questions by deciding that it didn't make sense investing in the US while living in the UK.

IMO we will have much more clarity of where we are going within the next twelve months. I can't believe the tensions building in the system can last for much longer without something cracking.

If you are inclined to believe that Ben the manic printer will be the trend setter, you are effectively looking at playing the inflation game and the venture is worth looking at.

It is dangerous because while inflation may take over, there is no guarantee that properties in the US are still not overvalued (I don't know the market but read convincing arguments on both sides).

While a 10% yearly premium on a call is a bit high, yield may provide the answer. If you buy a property that can generate cash flows, you can reduce those from your premium and at 5% or less 'premium', the proposition begins to become distinctly attractive.

One more thing on the 12 months. If you approach it as a twelve months project then your maximum exposure is 10% of purchase price. If you rent it, and taking into account the length of time it takes banks to foreclose, you could get 2 years rent or more for those 10%. You could end up quids in even if things don't turn out the way you expected. A tad unethical perhaps but the US is now a zoo so you might as well behave like an animal:-) It will be our turn soon enough...

Sorry for being so long winded.

Most responses have helped me clarify my thinking.

There are much easier ways to take positions to benefit from a Mad Max outcome. Long term, deep out of the money options on USD / JPY, crude, nat gas and gold are probably an easier way to express the view and risk the same premium. Why put so much effort into trying to create optionality when it can be purchased directly?

[1929crash]

Bloo Loo pointed out the most salient fact about real property in the US - you could never be sure of your title to it.

50 states and Dc have launched investigation sinto the massive mortgage fraud - as the BBC calls it - and Obama is doing nothing about it. Even peopel who have paid acsh and never had a mortgage are being subjected to mortgage repossession proceedings.

[bpw]

The answer is ... i depends. I just bought a house but not for reasons you might expect:

1. we were forced to move three times by landlord who wanted us to buy their houses.

2. schools are either excellent or totally crap and not fit for my child. So we moved to a place where there is a good elementary (after that private to ensure she can get into Harvard or Stanford)

3. Rented housing is mostly poor quality and you're stuck with what is available at the time you have to move

4. mortgages with 35% down are 4% ....4 frickin percent! Inflation runs at 3 and is set to go higher, possibly a lot higher

5. all of the interest and your property tax is a deductible.

6. in some areas like Texas houses were never outrageously expensive. Where I live I would guess the mutiple is around 3

7. While there are additional costs there are quality of life benefits - hard to measure but tangible

Only after taking on board those facts would u be ready to weigh the cost benefit of renting vs buying.

Sorry, this is not one of those off-topic, smutty posts .......

If you could acquire a house in the United States with a 100% repayment mortgage fixed at 5% for 30 years in a non-recourse state, would you do it?