From Bloomberg’s story about a spike in “wealthy individuals’” bankruptcy filings related to real estate:
“Real estate is an incredible thing on the downside,” said Jason Green, a bankruptcy attorney based in Washington. “Equities can only go to zero. Property can go well below zero,” because of expenses such as property taxes, insurance and maintenance on primary residences, vacation homes and investment properties.
And then there’s that oft touted leverage. Oh, and if we’re not mistaken the image that accompanies Bloomberg’s story looks rather local and familiar.
∙ Wealthy Families Face Bankruptcy on Real Estate Crash [Bloomberg]
Love the oxymoronic headline. The copy editor has a sense of humor, or a tin ear.
There is NO margin call in regular real estate loans so the leverage play is actually much less risky than in the stock market where huge gains and losses can be realized in hours or days. For ever one that went bankrupted from playing the real estate market, there is probably ten that went belly up in the stock market, especially late last year. Of course, there are those that made a fortune from shorting the stock market. It is, however, quite hard for normal folks to go short on real estate.
although I agree with you that stocks and RE are different, and thus have different pitfalls, I would also disagree with some of your assertions.
I would bet that more people lost 100% plus on RE than lost money in stocks based on Margin calls, because not many people use margins but nearly everybody used leverage in RE.
I agree with you that it is likely that people lost far more in stocks than in RE last year. however… RE losses affect the common person more than stocks do (although many people own stocks, most people are more exposed to RE than they are stocks…. it’s really only a small number of fairly affluent people who own the majority of stocks, especially stocks on margin)
RE has significant holding costs, and those holding costs can and do skyrocket, due to recasts and resets of loans.
this is one reason why so many people are falling into foreclosure… they can’t cover holding costs.
thus, I would hypothesize that negative equity causing forced selling/foreclosure in RE is a bigger problem than margin calls in stocks.
unfortunately, we have both issues, so it doesn’t really matter which one is “worse”.
What I don’t understand is how negative equity would force foreclosure unless one is pulling money out constantly to pay for the carrying cost. In that case, you are just playing with fire. With a fixed mortgage, other than a psychologic hit, it really doesn’t matter whether you are above or under water. It is like holding a stock – example Citibank that you bought at $35 and is now at $5. You sigh and just go on with your life. You don’t go bankrupt unless you bought it on margin.
That said, I do know a few people that can easily afford to carry their deeply under water home but decide to let it foreclose just because they don’t see ever getting out from underneath. Not because they can’t afford the reset rate. I think that’s a shameful move. You live in the house because you need a roof over your head. If you paid too much for it, that’s life.
Quite right. It seems this topic comes up on a regular basis on socketsite.
And the reason leverage in real estate is more common is because “normal” people can’t go out and get someone to loan them money at sub 6% interest in order to buy a bunch of stocks, where we define “normal” as people who are not an “accredited investor” in accordance with Rule 501(a) of Regulation D. Someone with a large enough portfolio to be able to buy stocks on margin is just a special case of the non-“normal” group.
there’s alot going on in this discussion of RE investor vs.stock investor vis-a-vis leverage/margin. keep in mind that until the last 20 years or so, most people did not own stocks (before mutual funds became mainstream, along with 401k plans.) stocks were mostly for the elite. and the wealthy ones were able to buy on margin.
as for RE, well there have always been modest investors with small, inexpensive properties. these were never considered elite investors, as some small multi-unit bldgs can be had for under $80k in cheaper areas. but, they usually had loan options, and the banks do that because they see a hard, or ‘real’ asset that produces income and will lend based on that. sort of like how small biz loans are mainstream, and easy for the common man to get (as long as they have a reasonable biz plan, and can personally qualify.)
i see these 2 elements, SBA and small RE investor as a backbone of american commerce, and one that runs parallel to corporate and big biz interests. where would this country be w/o these? it’s part of the american free enterprise spirit. but, i think the whole notion of stock investing was largely excluded from the common man (luv that phrase), until the advent of mutual funds and the popularity of 401k plans, when stock investing came into the mainstream of american investors.
ok, FDR-to-Regan rant over.
I like that they used an image from San Francisco to illustrate the article.
As the RE value balloned along with insanely easy credit up to 2007, the gap and risk between playing RE and Stock with leverage has closed. This was helped by brokerage firms pushing the use of margin on small investors during the go go days less than two years ago.