We looked at financing through some of those new 'hip' lenders. My wife works for Google and SoFi had some of the highest rates (even with 'Google discount' and 10/20% down). They may get your pre-approval within a day, but in reality most lenders get that done quickly. In the end, they have to play the game everyone else is playing and it means long turnaround times to actually close. This is the part that is fundamentally broken and really in need of 'disruption'.
Just bought my first house a couple months ago. Despite picking a lender that seemed to have their ducks in a row, I wound up 'at the table' from 9AM to 6:45PM. Everybody involved was surprised it actually got done. Fundamentally broken is an understatement.
We bought a house last year with a credit union, and everyone during closing was quite surprised that we actually closed within two hours of starting. Apparently it is not unheard of for mortgage lenders to be doing final approval up to the day of closing, and keeping people on hold/not answering phones while you and the seller are sitting there twiddling your thumbs.
This is one of the reasons why a seller would accept an all-cash offer significantly lower than a competing offer where the buyer requires financing. No seller wants to wait around for a lender to figure out how to do the one thing they're being asked to do.
Both of mine (1996 and 2007) were under an hour, and that was gated on me reading each of the docs and validating the figures on the HUD-1, which I demanded they present to me the afternoon before and I scheduled both closings to start at 4 PM.
On both HUD-1s, I found "innocent mistakes" that would have been against my interests by a few hundred dollars. I started to believe that those weren't so innocent after all, but rather calculated to get people to just sign over an extra few hundred dollars to get things over with. Starting that argument at 10 AM by email was a way more effective use of my time than raising it (or caving) during the closing. "If you don't have this sorted, we'll have to reschedule the closing" is effective motivation for the real estate agents and mortgage broker, whose commissions are on the line.
That was exactly my experience when buying my first home back in 2003. There's a lot of information out there about buying a home, but very little of it is actually useful for first time home buyers, IMO. The mortgage company literally waited until the last minute to approve everything (or the broker waited until the last minute to tell us). Meanwhile, we had no place to stay if it fell through because we'd already ended our lease on the place we were before, and didn't really have the luxury to tack another week or so on closing if there were issues.
Yes. Completely irrational. I can secure $60k+ in a matter of hours to purchase a new Tesla or Merc. Drive it off the lot and suddenly worth less than the loan. Real Estate, however, can take 45 days to close a loan when the projected value of the asset is surely positive. Antiquated and balkanized title process and (I suspect) unhealthy regulatory requirements are a bog. From there, I think it is simply inefficiencies in the lenders' operations. Would love an insider's take.
That was my experience too. My guy at Wells Fargo knocked it out of the park. SOFI's service was not great. Slow to respond , often not responding to my direct questions with the info I needed, slow to move through underwriting etc. Oh and terrible rates compared to the banks I talked to. Even their technology was worse, in terms of being able to upload docs and track my loan.
I'm on my 3rd house. The escrow length isn't just about the loan, it's also to give you time to complete inspections. Home inspectors -- especially in hot areas -- can be booked out for weeks.
It also gives the sellers time to find a new place/get packed and moved.
The lender gets their ducks in a row because they're going to package and sell the loan, and there are lots of compliance issues to jump thru to get it sold (properly) after what happened during the crash. Lenders are very careful now, verifying down payment sources, income, credit, etc.
I also did cars for a while and I can tell you most (all?) in-house car financing is provisional, and they do the hard work AFTER you drive off the lot. They like it this way because once you've parked that shiny car in your driveway and shown your friends, you'll work hard to keep it should something come up with the financing. If it doesn't work out they can (at worst) tow the car back to the lot. Not quite that easy with a house ;)
The contingency period in the contract is parallel with the financing process. They are not intertwined - apart from the contract being contingent upon securing a loan. If the inefficiency results from compliance issues due to needing to rate, package, and sell the loan, then couldn't an enterprising banker market speed of closing and absorb moderately more risk by having the loan on his books for a few additional weeks? In a competitive market, cash offers (one less contingency, sure but also speedy closing) are preferred.
Speed is just not that important for most residential purchases. The most critical thing is ability to close, which is where cash excels. Predictability is #1 - given the choice between 80% chance to close in 10 days (remaining 20% the deal falls thru) or 99% chance to close in 30, almost everyone takes the latter, all else being equal. I just can't think of any situation where a turbo close gets you so many more deals that it's worth the extra risk as a lender.
On the other hand, people often pay extra for a lender that has a history of closing on-time.
One reason: Almost half of their compensation packages are in Apple shares. So their lender, Opes Advisors, assigned the couple a financial adviser who used a software program to factor in debts and future income, including the stock, and the costs of education over the years for two young children.
They don't go into much detail, but this part scares me.
I'm assuming the "model" estimates some sort of future value for the stock. "You only make $150K, but don't worry, our model says that once your stock starts to vest, you'll be making $250K per year thereafter".
Of course that assumes their "model" of the stock price is correct.
However, California is a no-resource [edit:non-recourse] state, so if the owners get to the point where they can't afford payments, then it's the lender that is on the hook for the loss.
Probably an autocorrect glitch. What he meant to say is no-recourse state.
In some US states, when a mortgage defaults the borrower is personally responsible for the full repayment of the loan. That is, the asset is first sold and if that fails to cover all expenses, the borrower must fork over the difference.
In no-recourse states, the asset turned over to the lender and even if it fails to cover the debt, the borrower gets to walk away.
I ended up turning off autocorrect- too many problems
Searching for no-resource state brought up a huge number of programming links - sometime I worry about user customization in search and other UI elements
A nit: You mean non-recourse state, as in "The lender has no recourse to tap your assets in order to fulfill obligations of the mortgage in the event of non-payment."
But CA is a bit strange: A mortgage is non-recourse only in defined circumstances, eg when the mortgage is purchase money guaranteed by the property. It used to be that refis turn non-recourse debt into recourse debt.
I'd be very surprised if a loan backed by stock met the non-recourse requirements. So if you fail to pay, it's probable that they can go after your other assets.
fyi I haven't kept up with how things evolved out of the mortgage meltdown, so perhaps things have changed. But anyone taking such a loan should figure out their potential liabilities carefully.
For the case where stock is not being pledged: I would be amazed if the lenders were taking on 100% of the risk of default. Usually there's some assumption of asset recovery. That probably means the no-money-down loan is being structured so that there is some additional liability on the part of the borrower. (The mortgage itself would be "nonconforming", so it wouldn't be backed by FNM/FRE.)
Or maybe we're just back to 2006 standards for mortgages and I'm slow to realize it.
I actually looked into it. You are required to put 4 months of payments in escrow. This is far less than a downpayment, but still shows your ability to pay.
I wasn't being clear: It doesn't matter that you can pay, it matters that you will pay. (Four months is nothing to the mortgage principal.)
Look, the Fed is going to raise rates RSN. Which way does the high end of real estate go when interest rates come off zero %? So suddenly the homeowner is down 10% on the value of their $2M home. Is it worth it for them to mail in the keys to the bank for $200K and tell the collectors to pound sand? For a lot of people, yes. So the bank (or more accurately, the loan service) has to figure out how to send over two guys named Rocko with the power to get their money back.
In the bubble, the solution was to lay off all the Rockos because, you know, housing never goes down. Maybe we're back to that state, which would be amazing, but I'd guess the banks are somehow covering for their liability on zero-down loans this time around.
Edit for tcoppi's comment: s/FedIncrease/BlackSwan/ because home prices do decline for a variety of reasons.
Edit for dragonwriter's comment (hn doesn't let replies go this deep?): Fed has been trying to normalize rates, and employment/gdp/cpi has been stabilizing. See the link above for implied prob from Fed Futures for how people are betting on Sept.
Is it? It doesn't really seem like it, they raised them .25% in December and haven't done diddly since then, with no signs that they will. Like it or not it is incredibly difficult for us to get out of the ZIRP trap, we most likely won't see anything more than 2% out of the fed for a decade or more. Barring massive inflation, it definitely won't go up fast enough to have a major effect on housing prices like that.
> Restricted shares may not be used to back a loan
This is not true. All manner of restricted stock units (granted to insiders) and unregistered stock (not publicly traded) can be used as collateral for loans (though some issuers make you sign documents promising not to do so). I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity.
> I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity.
That must be a ton of fun. How do they incentivize you and your operation to be conservative? Because they presumably only make money if you hit the number, which was the big problem with home appraisers in the housing bubble.
They only way I can think of to cause correct behavior would be to ensure that your operation maintains an interest in the loan after the deal is done.
I do think it is fun! My firm works with companies and their shareholders. Issuing a letter to a lender is something I do for clients as a professional courtesy. I receive no special compensation in connection with it, and strongly prefer to mark assets to market (i.e. the last comparable trade or fundraising event) over model.
The contents are less "this is where you should mark this asset" and more "this is where others have marked it, the circumstances under which they did so and how those circumstances may differ from this situation". The value isn't in providing a "right" number as much as turning a zero-information situation into an information-positive one.
Reminds me of the banks here in Spain in the early 2000s: "Why do you want the loan to only cover your house? Add a car and some vacations in there as well!".... Ummm sure, Ill add a car and vacations... to my house loan? Yea, then people wondered why the country crashed (apart from other issues such as corruption).
To be fair, in Spain, failing to pay a mortgage will mean not just losing the house, but pretty much anything else you own. A cousin of mine, very well off, bought a summer house, which quickly lost a lot of its value. In the US, she could have said screw it! and let the bank have the house, but Spain being Spain, she'd have to pay the difference between the house's market value and the remainder of the mortgage.
That's one of the reasons that in Spain you have such amazing mortgage rates compared to the US: The banks are taking less risk.
> I believe that is the case in some states as well (but not California). They get to repo the house, sell it and then can sue you for the rest you owe.
Even where allowed in the US, they tend (not always, it varies by state) to increase the judicial oversight of (and thus extend timelines for) the foreclosure sale, and often reduce the finality of a foreclosure sale by providing a post-sale redemption period. Both of these things are things that lenders might prefer to avoid in many cases where a deficiency would, in theory, be available.
Zero down is more concerning. It is commonly accepted to grant loans based on employment income. That is a cash-flow stream unilaterally cancellable by one's employer with limited notice.
Stock is not cash. It is less liquid and more volatile. But if one properly discounts to accommodate those factors, it's just another deferred cash flow. This time, not relinquishable by the company. (If the stock goes to zero the employment cash flows do, too.)
When is it not liquid? Sure, it's highly variable and the value could tank, but when has an S&P 500 company had zero liquidity?
Edit: Additionally, salary falls in the same boat. If your stock in your S&P 500 employer tanks, you salary will tank too. Also, I'm talking about a "sell as soon as it vests" strategy, which makes it pretty much just a variable form of salary.
Liquidity is a surface over the time in which a transaction must occur, transaction size and price. If you have a large amount to sell or buy (relative to the market), want it sold or purchased quickly (relative to the market) and/or don't want to eat more than an X% discount (if selling) or premium (if buying) (relative to the market), you will find the securities illiquid, i.e. not able to be turned into cash (or purchased) within your size/price/time parameters.
For a liquidator, time is usually same day or a few days. Size is fixed to the balance of the loan. That leaves price. In a turbulent market, the liquidator may end up selling your securities for pennies on the dollar - your collateral may insufficiently cover your balance. That leads to the lender eating a loss or the borrower coughing up cash. $100 of stock may cover less than $100 of balance; $100 of cash will always cover $100.
Retail margin lending is capped at 2:1, so a 50% discount would wipe out your collateral, but institutions and mortgages can go 5:1 and beyond, meaning smaller drops become dangerous faster. When everyone is rushing for the doors simultaneously, these price drops can be precipitous, if short-lived.
My point, however, isn't about collateral. It's about future cashflow. A Senior engineer at Google might have a salary of $150k, but total compensation package including 270 shares of GOOG distributed per year (~23 shares per month) for a total comp of $350k. For such an individual, do you lend based on salary alone or do you factor in the stock?
I imagine that with a correct discount the stock can and should be used in the cashflow calculation.
I hope the borrowers are being careful not to pledge their employer stock; that is against most insider trading policies, because it can result in a forced sale during a closed trading window.
How does it make sense to tie up $1M+ at 1%? Are they turning around and selling the note to Fannie or Ginnie Mae? Unless we are Japan (and that's a slight possibility, but not likely IMO) this will be a total loser - not as bad as buying Spanish/French/Italian debt at negative rates, but pretty bad.
Who else has friends going through all sorts of ridiculous acrobatics to buy houses in the bay right now? Where they are "lucky" to get their 10-20% over the list price offer accepted? Yeah, this will end well.
Three things likely going on here: loss leading, promotion and a hunt for yield.
Let's start with the hunt for yield. Yesterday's auction priced the 3-year at 0.87% and the 5-year at 1.15% [1]. We don't know the term of Zuckerberg'a mortgage. If it was less than 5 years, the bank might make a spread.
If it's a loan with a longer term the lender could have made more by lending to the U.S. Treasury. In that case, the difference may be booked as a promotional expense. "We're the guys Mark Zuckerberg gets his mortgage from" is succinct and memorable.
Finally, the lender may eat a loss on the loan for the opportunity to do more business with Zuckerberg in the future. One sees this with credit facilities in investment banking: JPMorgan and friends give companies cheap loans in hopes of winning their more-lucrative IPO and debt capital markets business.
Also, someone like Mark Zuckerberg has almost 0 default risk. To the banks, this is free money.
Remember, when the bank issues a mortgage for 3.5%, the spread between that and their cost of capital covers the risk of default. But if the default risk is minimal, they can basically issue the loan at cost.
It's all about the relationship. If Zuckerberg keeps even a small portion of his wealth at this bank or managed by their advisors, that's a huge win for them as they've increased their capital base available to lend to other customers.
All good points. I guess it's not Zuck's loan that troubles me the most, but the idea that similar lenders in SF are giving 100% loans and setting up inside tech companies.
I have a Silicon Valley loan that is at a rate probably near cost for the lending institution. I did put real money down though.
The big requirement for this loan was for me to move most of my banking to the institution, and to keep a minimum amount of assets with them. I generally like the institution, so the move hasn't been terrible.
So not only are they making interest on the loan, they also have my other business. I'm not super-high wealth (but I do pretty well), but my banking does make them money.
As I work through this thread, I'm wondering how the banks are structuring the liability (additional assets of the borrower are exposed?), or whether a new set of bagholders has been found (the taxpayers last time, hopefully not again.)
I'm wondering how the banks are structuring the liability
Yeah, that's what is I was wondering as well. They aren't selling those 1M+ 0% down to GSE's, but maybe somebody on wall street? If not, is it on their books? And yes, what is collateral? Just the property itself?
Same reason Apple finances stuff despite their giant cash hoard. With interest rates as low as they are, it's smarter to take the financing and have the money available for stuff with returns higher than the mortgage interest.
Check out my earlier comment. Any time you get to borrow money at 1%, you should take that loan and reinvest it in something (anything) that yields a higher return. It's almost like getting free money.
There's a saying along the lines of "You don't get rich by spending money" that applies here. A mortgage at 1.05% interest as mentioned in the article is basically throwing money at the person taking the mortgage.
Billionaires' finances are managed by accountants, money managers, and lawyers. So, the accountant in this case suggests what's best: tax write off (interest expense), and interest rate differential (higher returns elsewhere - mortgage rate).
How would he get that cash? If he has to sell stocks, his capital gains taxes would probably cost him a lot more money than the interest on a mortgage, or on a pledge asset line of credit with his investments as collateral.
If you have to sell stocks to pay cash for a home, a mortgage could cost you less money overall.
$1MM if single, $500k if married and filing separately.
EDIT: see comment below. One can deduct the interest on mortgages up to $1MM and $500k, but there is a cap on itemised deductions (mortgage interest deductions are this kind of deduction) around $450k.
From your link: Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately).
So mortgage interest for loans beyond $1M are not deductible at all.
Then there is the deduction phase-out
> You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $309,900 if married filing jointly or qualifying widow(er), $284,050 if head of household, $258,250 if single, or $154,950 if married filing separately. Your AGI is the amount on Form 1040, line 38.
Though somewhat ironically, Zuck probably isn't high income because his Facebook salary is $1 and the vast majority of his wealth is in FB shares that pay no dividend.
With more laws comes more accounts and more loopholes.
We need to overhaul the tax system, not pile more crap on top of it.
Besides, the vast majority of people taking advantage of this deduction is the normal American. Not a business owner or speculator. You'd be ending the largest tax relief the middle class has.
More likely that he was borrowing a great deal and preferred not to be forced into an unplanned stock sale. As the article hints, the odds are good it was a short term loan, which could be one reason for the unnatural rate.
He doesn't need a mortgage, it's just financially savvy to have one.
He avoids paying taxes on the sale of stocks to finance the home.
Mortgage interest is tax deductible.
His stocks will almost certainly yield more than the interest rate on the mortgage.
He's getting a sweetheart deal from the bank.
For him, selling stock is a PITA because he has special class of stock that grant him voting rights far beyond what a normal share is worth. These special shares are granted to him by the board of directors. So selling 1 share means losing like 1000 votes (they convert back to 1:1 upon sale), meaning he needs to be careful when liquidating assets. By waiting five years, he can use vested options to pay the mortgage, rather than selling his special class stock.
If you want to buy a million dollar home using shares, you have to liquidate them and pay capital gains. By getting a mortgage you lower the amount of income you 'realize' on a year-to-year basis, lowering your taxable income. There are details on capital gains vs income taxes, etc, but in general I think the point was that the less income you realize in a given year, the less taxes you'll pay.
"If you want to buy a million dollar home using shares, you have to liquidate them and pay capital gains. "
Just to note: you don't :)
In fact, if you wanted to pay all cash, and had enough shares, you'd generally take out a portfolio loan against the shares at some very low interest rate (probably not lower than current mortgage rates however) rather than sell the shares at all.
Whether this is better/worse than a mortgage depends on various things.
I have little interest in tying myself down by buying a house, but the part that's most appealing to me is the mortgage structure. You get to borrow money at a ~3.5% interest rate, in order to invest in something that produces 5-7% yearly returns. On average, this is going to make a ton of money in the long term.
Is there any way to do something similar with stocks, without paying an insane amount of money in interest rates or fees?
Edit: I know returns aren't guaranteed, I'm referring to expected returns. I'm perfectly willing to take on risk, in order to make positive-EV bets. I tossed out the 5-7% number as a very rough approximation - assuming that you buy a house with a buy-rent ratio of < 20, in which case the returns that you make by not having to pay rent, will be 5% or more.
Of course, and the interest rates are much lower than mortgages (which makes sense since stocks are more liquid than houses). However, you can only get ~4x leverage.
Owning a home can create real returns even if the home only appreciates at the long-term inflation rate, because of leverage. With a 20% down payment and 2.5% appreciation, you're going to see a return of 12.5% on that down payment.
Of course there are monthly payments and maintenance too, but you'd have to live somewhere even if you didn't own a house. To account for those properly in calculating the real return, you really should diff them against the rent on an equivalent property. And don't forget the interest tax deduction.
Finally there is the wonderful fact that capital gains on your primary residence can be kept tax-free up to $250,000 ($500,000 if you're married).
Owning a home can destroy real money if you have 20% down and prices fall by 10%.
At that point, if you need to sell, you've lost your down payment, as in WA at least, it costs approx 9.3% to sell a house (unless you're in an insanely sellers market, which you're not if you're down).
That's quite an assumption you're making on the interest rate tradeoff. No guarantee of 5% annual on RE, even if you're in an area controlled by bunch of NIMBY's.
The best model for that is to be a bank with the 3/6/3 model.
Borrow at 3%, lend at 6%, on the golf course by 3 PM.
Now doing something similar with stocks.... that's kind of Warren Buffett's model. He uses insurance companies like Berkshire and Aflac to create cash flows to buy stocks.
I guess you could use options to do something similar.
Take a look at the UK for a great example of how well that turned out. You can get a buy to let mortgage at around 3% (using your existing home as collateral), and achieve rental income of 10%+. I think you were even able to claim back tax on the interest up until this year.
Real estate returns are historically flat. Only recently have they risen so quickly. If the bank thought they would get 5-7% on the house, why wouldn't they just buy it themselves instead of giving you a 3.5% loan?
I'd be super careful with this. When I make 4x the median American income and have almost zero hope of ever being able to afford a home (until I get my FU money that is), that ought to tell you something about the sustainability of the current market.
As long as there are a lot of people with enough money to afford homes at the market-rate price, the market will remain sustainable. You may make 4X the median income, but there is no shortage of people who make a whole lot more than that. I see no reason to believe that will change anytime soon.
Given the number of homes in the Bay Area, yes there is a shortage of people making more than that. What there isn't a shortage of is wealthy speculators, a significant percentage of whom don't even live here.
Speculators make bubbles, not sustainable markets. The problem is too many people are vested in property values, so when 2008 happened, everyone bent over backwards to prevent prices to come down to what their true sustainable value was. Bailouts, properties taken off the market, presidential speeches, all to prop up the status quo. Banks didn't pay the price, and so it continues.
Sorry to pile on, but I wanted to throw out the fact that there's currently a huge transaction cost to exchanging real estate in the US too -- the largest factor of which is real estate agent commission (typically 5% in California, 6% in some states).
I seem to recall Angelo Mozilo doing some similar "deal making" type things for US Government Employees during the time he was turing Country Wide into a cesspool of bad loans. And, for some reason, he's never had to atone for his role in the 2008 crash. Not like he's the only one though.
tl;dr: Houses are so expensive that people can't afford a down payment, so banks let people buy houses for no money down, driving up the purchase price of houses.
This is a great point to reinforce. Low interest rates are a HUGE driver of housing prices.
No one knows what interest rates will do, but if they go from 3% to 6% (historical average), then suddenly everyone can't afford as much house and prices decline.
I'm confused. The title says "Silicon Valley Elites" but the article says "tech workers", then goes on to list Mark Zuckerberg and some Apple guy who's salary is apparently 50%(!) stock, as examples.
So who are these banks "courting" again? Elites or tech workers? Or just these two guys? It's hard to tell. Interesting news would be "Banks giving kickbacks to CEOs and VCs who throw them corporate business." This article seems to just be "Look! Some people are getting sweet deals on their mortgages."
You aren't writing checks. Send a Congressman $1000 (that's really all it takes to get their attention) and you'll be amazed how responsive they will come. Senators are a little more expensive, but still reasonably priced at $2-5k. Presidential candidates are in the low five digits.
Tech workers probably want to put that $1,000 into their homes, or into their kid's savings, or pay down some of that student loan debt.
I'm a tech worker and I don't honestly see a near-term future where I would throw $2,000 at a senator to talk to them about, say, net neutrality. I've got all kinds of things I'm saving for! My boat isn't going to drain me of my earnings by itself!
Everyone needs to decide on their priorities in life. If you want political influence (or at least the illusion of political influence) you can have it for a pretty modest price.
If you want real political influence of the sort that will actually let you move the needle on something like net neutrality then you need to be writing much bigger checks. $1k will buy you half an hour on the phone will a congressman who will pretend to listen to you. But to actually influence policy you need budgets in the 6-7 digits because you have to repeat the process across many dozens of congressmen and senators.
> You aren't writing checks. Send a Congressman $1000 (that's really all it takes to get their attention) and you'll be amazed how responsive they will come. Senators are a little more expensive, but still reasonably priced at $2-5k. Presidential candidates are in the low five digits.
Except for the first, all of those numbers are (or state a range that includes) amounts that exceed the limit for a single donors campaign donations for a single election cycle to a single candidate.
Having to return your donation because accepting it will exceed the legal limit may get a candidate to notice you, but perhaps more as someone who they need to be careful around to avoid scandal than anything else.
Yup. $2700 for a primary, $2700 for a general election. Now consider how much of the country could conceivably throw $5400 at something like that without significant sacrifice, and "elite" starts to make a lot more sense.
The elites in terms of expenditure-driven political influence are people whose expenditures far exceed the legal limit on direct donations (because they'll do that for more than one candidate in a cycle, plus giving money to entities like the party congressional/senate campaign committees, and the party national committees, and politically active interest groups, interest group PACs, and candidate- and issue-focused SuperPACs, and, in some cases, carefully structuring transactions to give goods and services directly to candidates and office holders while skirting bribery and corruption laws.)
I'm well aware, thank you. But if you max out your average Congressman and ask for a meeting, you get it. You will be invited to events--including ones that are not donation-expected for years after the fact, and your congressman will almost certainly know you by name, if not face.
This is not a great system, but many tech workers can get into that circle if it's something that matters to them.
> This is 2016. Tech workers are the American elites.
No, they aren't. The American elites aren't workers, they are capitalists. Tech workers are among the class of elite workers that have enough income that they can afford to make significant investments and tend to be in the petit bourgeoisie -- that is, in traditional terms of analysis of capitalist economic strata, the narrow middle class -- but "elite workers" are only elite among workers.
The actual American elites (as is true of all capitalist and most modern mixed economies) are the haut bourgeoisie, the capitalist class; those who derive the overwhelming majority of their support from capital which generates returns largely passively for the capitalist (usually, through the application of other people's rented labor.)
> Did you think elites were still guys with a monacle sitting in a drawing room that overlooks a coal mine or something?
No, but the elites are still the guys that have the same relationship to tech (and other) workers that those guys with monocles had to coal miners (and other workers.)
I think people have a weird distorted view of what a "tech worker" is then. Like watching medical dramas and thinking that's what being a doctor is like.
I'm a tech worker, and I can assure you I'm not an "American elite". I don't get white glove treatment at the bank, have a butler, chauffeur, or financial advisor. I schlep it 2 hours to work each morning and 2 hours back, and if I lose my job, I'm N paychecks away from ruin like everyone else. My "N" may be 5 where others may be 2, but most of us are in the same boat. Does that really sound elite to you?
The new elites are in tech, but they're not the rank and file. Making even $250k/yr may be top-5% for income and give you breathing room to make a few investments, but it will never make you wealthy. That's lifetime earnings of about $10m before taxes, so you likely wouldn't get to fuck-you money ever, let alone with time to use it.
There's a very serious discontinuity somewhere around the $1m/year mark where you get to the point that you don't have to work for the rest of your life while you're still young. There's another huge difference between that and the guys worth $100m+ who can have whatever they want, including financing insane research and construction projects, not just the normal comfortable middle-class lifestyle, and never run out of money.
Putting those people in the same group as your average software engineer for socioeconomic purposes is ridiculous. Sure, I might have more in common with Zuckerberg than with a coal miner, but only just, and that's not saying much.
> it will never make you wealthy. That's lifetime earnings of about $10m before taxes
This thread has taught me that people in the valley or the HN echo chamber really sort of have no idea how most people live in this country, let alone around the world.
and you must have no idea how much it costs to live in the bay area. a dentist in arizona will have a higher net worth at retirement than a tech worker in the bay area.
The average American household (no individual) income is $52,000 (2014).
You've got people on HN claiming that making 5x that makes them solidly middle class because they can't afford a home in one of the most expensive places in the world.
Exactly. The parent comment ignores the fact that in their scenario of "only" making $10MM in an entire career, they could spend as much as the average family for 20 years and have $9MM lying around in cash, plus interest. But, supposedly, not be wealthy.
Well, if you make $10MM at $250k/yr over 40 years in California, you're only taking home maybe 65% of that. And you're presumably paying rent. Let's be generous and call it $24,000/yr, and say that you do incredibly well at saving and manage to put together a down payment after 5 years, so after that only $5000/yr (wild ballparking, I haven't done the math since I'm so far from being a homeowner) goes to interest/taxes rather than your own equity.
At the end of 40 years, that puts you at $6.2M - a further 20% of which is tied up in housing equity - before any other expenses. That's a decent retirement, yes, but it's not rich in the way that the elites are rich. Not even close.
I think what you don't realize is that most people are, in traditional terms, working class (proletariat).
Relative to them, tech workers -- who are quite often in what is, in traditional terms, the middle class (the petit bourgeoisie) -- may seem like a narrow elite. This is an understandable perception, and there is a sense in which it is correct -- tech workers are elite workers.
But they aren't the elite within the country, and the gap between tech workers and the elite is much greater than the gap between the average worker and the average tech worker. The elite (the haut bourgeoisie) are not "workers" at all.
I don't see the contradiction between what I said and what you said. Most people in this country, let alone around the world, aren't wealthy. Most of the "middle class", as used in contemporary American political rhetoric, are poor. Just because tech employees aren't generally wondering where their next meal (or even next few rent checks) will come from doesn't mean they're wealthy.
The levels of income we're talking about for tech employees, especially in the SF area but also in most places in the US, will still force you to continue working for a salary for your entire adult life (until retirement age) or else eventually starve. You never get to the point where you can just quit. That's the distinction between us and Zuckerberg that comparing us to somebody making $50k doesn't expose: like them, we have to work and will probably never be anything more than comfortable with some luxuries. We're all proletariat - maybe bordering on petit bourgeoisie at the upper end, but still working for our money rather than having our money work for us.
Elites are the guys who make deals for a living. Investors, executives, traders, etc. The people who own the tech companies, the people who service the IPOs, the people who own the real estate we pay such ridiculous rents on, the CEOs and board members of our employers and the companies we buy stuff from.
Our pay is high, all things considered, but not nearly as high as law or medicine, and certainly not management. I'd say we are rising from the upper tier of clerical workers to the lower tier of educated professionals. That is "elite" compared to the average person, certainly, but not compared to the economy as a whole.
The term generally given to this strata is "upper middle class." Some resent calling it middle class at all, but nonetheless - there is a critical distinction between "owners of the means of production," "managers of the means of production," and "highly skilled operators of the means of production."
> most senior Google employees have around 50% comp in stock.
Far more pervasive than that. A buddy of mine just took a typical sys-admin position at AAPL and is paid 50% stock/equity. Same with an MBA I know working at AMZN.
Does anyone else experience mild anxiety reading stories about Bay Area real estate? Long ago I decided it can't be wise to buy instead of rent. Logic and math argue this must end and yet it seems there is always another "sucker". We seem to have entered a new phase in which Chinese are moving money offshore and into the local market. Lots of Chinese, lots of money, could go on and on but for how long? Ultimately a home is only worth what someone can rent it for, right? right? please????
Even if it does quit, there are so many large, established tech companies here that prices will remain high anyway.
Actually, most of the people I know who have bought houses in the past few years work for such companies: Cisco, Apple, Google, etc. Their employee stock plans are so generous that startup stock options are not very attractive.
I hadn't looked at zillow in a couple years, I can't believe how insane it's gotten. $800k for a century old 2 bedroom home on a rough stretch of MLK boulevard in Oakland.
Logic and math? We bought two years ago, my mortgage + taxes are about the same as what it would cost to rent a similar home today in the same neighborhood. I grew up in the bay area and remember my parents buying a home for $16,000 and selling for $28,000 thinking they made a killing in the real estate market. This area started back in the gold rush and continues today on the boom bust cycle. But having been through a few, the low of the current cycle is still usually higher than the high of a cycle or two before. I also think we may be entering a period world wide where there is more people with money than nice places to live. I have noticed as well that there are not enough "starter" homes, so they don't fall in the busts as much as the higher end homes tend to.
I think the market is over-exuberant right now for sure, but I also feel that people like the Bay Area because the Bay Area is an exceedingly pleasant place to live. This market has hit a little perfect storm of pricing and may correct, but I think the longview is that Bay Area housing prices will just keep marching up.
A lot of the price of homes is the land, which means that (barring local regulation) homes will begin to be built up a lot more. Already on my residential street there is a 7 story live/work building going in where a pottery store used to be. Density will lower renting costs but the land itself will remain valuable.
If you have no money left over for food after rent, do not live here -- full stop.
If you have no money left over after taxes, then you are doing your witholding wrong. And the Bay Area isn't some zone-of-enormous-taxation. We've got like 2% more sales tax and maybe 4% for restaurants who are passing on the medical buck.
A lot of the price of homes is the land, which means that (barring local regulation) homes will begin to be built up a lot more.
It might seem that way, but I've come to believe it's the other way around. When land is cheap, people build lavish houses (see the midwest). When land is unholy expensive, people are devoting every dime just to get the plot, they can't afford to build a nice house.
Similar to how (this is hearsay) new development is more lavish in times when mortgage interest rates are low, and more spartan when rates are high. Buyers who must devote more of their payment to interest, have proportionally less to spend on the property.
Regarding Chinese capital coming in, there's a sense that they're not doing it to invest for a profit. They're doing it protect funds from the Chinese government access and potential future instability. So it might not matter to many of these "investors" if they houses are profitable or not; they're just funds being held in something perceived as more real/secure than what they can get in China.
And the Chinese government is not happy about it. They are actively pushing banks to not allow their citizens to get mortgages. I have a colleague whose family pushed her pretty hard to accept and hold hundreds of thousands of dollars so her cousin could buy a house with it. She found the situations quite distressing. Apparently her father, in China, was not happy.
Everybody thinks it's Chinese money, and sure there is some. But there are just a lot of very highly paid ppl in the bay area. Facebook, Google, &c are moving a lot more money into this region than any Chinese outflows. In all my experience here, SF is not a city of the empty pied-à-terre.
They just released some data on foreign purchases in another crazy market, Vancouver. In the last month (June?) 10% of purchasers were foreign (all countries) and the average house price was the same as domestic purchasers.
Foreign investment has an impact in Vancouver, but by and large, it's Canadians who are over-extending themselves to get into a market they think they will be priced out of forever.
"Nick Merz knows how tough it can be. He’s a 41-year-old product designer at Apple Inc. whose wife also works there, and says they couldn’t figure out if they could afford to own a place anywhere near the company’s offices in Cupertino, where the median value is $1.8 million."
Glassdoor check for sr product designer = base of $157,000 to a max of $200,000.
With 7 years figure he's at $180,000.
Figure his wife is in another $100,000 territory as a co-apple employee.
So maybe they're at $280,000.
With a 20% downpayment they can "afford" $1,931,000 of house (2)
Why?
Because interest rates are insanely low.
But problem for nick and others is that lenders want a 20% down payment because that gets skin in the game.
On that $1.931 house that's $386,200 which is damn near impossible to cobble together after dropping crazy SF rents for a decade (or two).
My guess is that the bankers are using significant stock options as a swap or partial collateral for that down payment.
That's a bet I would take eg:
- You've got a guy with a 7 year track record at the most valuable company in the world + his wife there too which is solid income criteria.
- You've got him with real skin in his game - his life savings which just happens to be in apple stock and probably will always be worth more than zero, and likely enough to continue working for even in a downturn.
- Even if the house drops in value when interest rates go up (which is the most common prediction from mortgage bankers I know) Nick needs a place to live by Apple, is invested in his house, and is as likely as anybody to continue paying a mortgage on an asset that technically is worth less than he paid, but because it's tied to a monthly payment he can "afford", will stay on for the long haul.
> But problem for nick and others is that lenders want a 20% down payment because that gets skin in the game.
Lenders typically charge PMI if you have LTV > 80%.
Our first home was purchased with 0 down (perks of being military brat), and no PMI. Current home was ~10% down, with ~$500 in PMI (kind of a cluster-fuck--the mortgage broker said the loan had no PMI, but last minute it had PMI. We had 2 days before closing, and couldn't find a better deal, so we had them drop the rate).
Our family income is north of the projected Merz' family income of $290k, and while we could afford that 1.8m home, financially it wouldn't make sense to tie up so much of our income into a house (even though it would be straight baller).
Have you tried making extra payments to get your principal up from 10% to 20% sooner? That's the ideal situation for someone with more disposable income but less in savings (or doesn't want to tie up more saving in equity). The main thing to note is that you need to get up to 20% as quick as possible. That's because 20% is based on the current appraisal value of the property, not the purchase price. With Bay Area and other real estate markets appreciating so much, it's a ticking time bomb to get out of PMI.
We are (currently) making the equivalent of 1 extra mortgage payment a year, which should reduce the amount of interest that is paid over the lifetime of the loan. That, coupled with the increased value of the house since we've bought it, would help us remove the PMI payment.
Doing the Maths, paying the extra 10% down, wouldn't save us much over the length of the loan where PMI applies, so we opted to make an extra mortgage payment instead.
> That's because 20% is based on the current appraisal value of the property, not the purchase price. With Bay Area and other real estate markets appreciating so much, it's a ticking time bomb to get out of PMI.
I think you have that reversed. If values are rising, you have to do less work to get to 80% LTV (loan-to-value).
Example: I put $10 down on $100 worth of stuff with a $90 loan, giving a 90% LTV. If the value of stuff jumps to $120, then that $90 loan is now at 75% LTV, with zero payments made.
Medical school graduates get similar deals as long as they verify proof of residency. They can get up to $500k with no money down and $1m with some down and near zero interest rates.
I'm sure other types of employees get these deals.
Came here to mention this exact thing -- you don't even have to be an attending, my wife and I have this loan through a different company, and she is still a resident. We had banks fighting over our mortgage. No money down, no PMI, and they portfolio the loan instead of selling it right away like a standard mortgage. We live in a Detroit suburb.
Why would they "portfolio" (I'm inferring this means keep it on their books) such a loan instead of selling it? Because the risk is thought to be so much lower than standard mortgages that keeping it somehow helps them in some way?
Any advice on where to look for a house in the bay area right now?
Like I'm sure a million others, I'm sick of renting in a market where landlords sell and evict every day (happening to me right now, again). Got a kid, need good schools. Other than that, anything goes. I just want to live without constant fear of being upended every 6 months. Is that so much to ask?
I'm in the same boat, rented for my first year back in the bay after living in Seattle for a number of years and my landlord wouldn't let me sign another year long lease(meaning, I'm going to get booted sometime sooner). I just bought a home in Pleasanton and I'll be taking a shuttle to my office(everything in the south bay seems to have them). And, if I change jobs I can make it into SF on bart.
Basically: "you're about to have a high income and—as a class—have a very low default rate. We'll let you put 0% down and not count your student debt against you". Usually before you get your first paycheck (just need to show them the contract).
FWIW I'd argue that tech workers are—financially speaking—much more varied than doctors, who generally exit residency, get a position (sometimes in a new city) and see their income skyrocket. So I can't say this is perhaps as justifiable an idea as it is for new doctors, but I can buy the rationale for certain workers.
If you're in the boat of "I could afford a mortgage around here, but would take years to save a huge downpayment on these prices", the doctor mortgage can be a great thing. Not least of all because it's not always savvy to make a big downpayment: http://themortgagereports.com/18520/20-percent-downpayment-r...
I found it to be a particularly interesting headline because I thought such things were normal. When I bought my home in 2004 it was not only zero down but on a 7/1 interest only arm at just 1 point above the basis rate with a maximum increase over the life of just 4 points. As a bonus I got $50K out to pay off the boat. Needless to say when the housing market crashed I wasn't freaked out because I had effectively nothing to loose. Sometimes not having any money invested, especially for the first decade or so can be a relief if one must consider a strategic default of the mortage.
I think the "2004" in your reply is key. Crazy things were happening back then and as you called out, the housing market crashed.
I think what freaks people out is that only ~8 years out from the crash, you can already see lending standards getting more relaxed. Didn't we learn anything last time?
Not to mention the number of people I've talked to that said "housing always goes up, it's a great investment!". In less than a decade people have gone from "housing sucks" to "it will never go down".
Yeah, in my case I was far from a sub prime borrower. When everyone's rates adjusted up in the 2007-2009 timeframe mine went down. I was using a responsible mortgage tool. The problem was, people without an 850 credit rating were getting these same loans without great terms upon adjustment.
> Not to mention the number of people I've talked to that said "housing always goes up, it's a great investment!".
"One inflation-adjusted value index between 1928 and 2012 placed the annual rate of appreciation for real estate prices at just 0.2%." [1]
Overall, real estate has historically been a bad investment. That said, it does seem like there have been obvious indicators when an particular area is becoming a more desirable place to live, and when home prices are likely to go up significantly in the future. Although I imagine people have been hard at work modeling and forecasting this, and current prices will better reflect future appreciation (if this hasn't already happened).
Housing looks like a bad investment overall, but housing is local. I have no doubt you can make good money off of a house in a "up and coming" city.
The challenge is, how do you identify an "up and coming" city? Is it the same way you identify and "up and coming" stock? It's all just attempting to time the market.
Generalist doctors have a median salary of ~$200k, with specialists earning a median salary of ~$300k. The lenders will have an easier time vetting doctors since almost all of them make a high income with good job security.
By contrast, developers have a median salary of ~$95k nationwide and ~$110k in San Francisco according to Glassdoor (or $65k nationwide and $103k in San Francisco according to Payscale). Of course, some make much more, typically through stock options. So lenders are probably filtering by occupation and employer (e.g. Google, Facebook, etc.).
I'll trust that the lenders are competent to determine whether someone with with a ~$150k salary is a strong candidate to buy a $2M house with no downpayment. Housing lenders haven't shown poor judgement in the past (edit: /s).
I don't find the headline inflammatory, nor think the tech-workers are being entitled. I think this practice is a sign of how far the Bay Area housing market has blown up, and how close the Area is to a debt crisis when the unrealistic mortgages can't be paid.
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[ 4.0 ms ] story [ 215 ms ] threadIn Belgium, it takes three to four months. Plus about 15% of the purchase price in taxes, sky high monopoly notary fees and more.
On both HUD-1s, I found "innocent mistakes" that would have been against my interests by a few hundred dollars. I started to believe that those weren't so innocent after all, but rather calculated to get people to just sign over an extra few hundred dollars to get things over with. Starting that argument at 10 AM by email was a way more effective use of my time than raising it (or caving) during the closing. "If you don't have this sorted, we'll have to reschedule the closing" is effective motivation for the real estate agents and mortgage broker, whose commissions are on the line.
We made an offer on $2.2M house last year in July, and needed a $1.3M mortgage and $500k HELOC (so $400k down.)
We had a fantastic agent at Wells Fargo who promised he could pull it off in 15 days, at which point we'd leave on a 3 week vacation out of country.
We signed 13 days later. The guy would call us at 10pm asking for more documentation when more information was needed.
However, we had to send a copy of our plane tickets to prove to approvers further down the pipeline that there was a justifiable need for urgency.
It also gives the sellers time to find a new place/get packed and moved.
The lender gets their ducks in a row because they're going to package and sell the loan, and there are lots of compliance issues to jump thru to get it sold (properly) after what happened during the crash. Lenders are very careful now, verifying down payment sources, income, credit, etc.
I also did cars for a while and I can tell you most (all?) in-house car financing is provisional, and they do the hard work AFTER you drive off the lot. They like it this way because once you've parked that shiny car in your driveway and shown your friends, you'll work hard to keep it should something come up with the financing. If it doesn't work out they can (at worst) tow the car back to the lot. Not quite that easy with a house ;)
On the other hand, people often pay extra for a lender that has a history of closing on-time.
see Louis CK :) https://youtu.be/rMG1MOn49Ts
They don't go into much detail, but this part scares me.
I'm assuming the "model" estimates some sort of future value for the stock. "You only make $150K, but don't worry, our model says that once your stock starts to vest, you'll be making $250K per year thereafter".
Of course that assumes their "model" of the stock price is correct.
However, California is a no-resource [edit:non-recourse] state, so if the owners get to the point where they can't afford payments, then it's the lender that is on the hook for the loss.
http://www.nolo.com/legal-encyclopedia/whats-the-difference-...
In some US states, when a mortgage defaults the borrower is personally responsible for the full repayment of the loan. That is, the asset is first sold and if that fails to cover all expenses, the borrower must fork over the difference.
In no-recourse states, the asset turned over to the lender and even if it fails to cover the debt, the borrower gets to walk away.
http://www.investopedia.com/terms/n/nonrecoursedebt.asp
In California all mortgages are non-recourse debt.
Searching for no-resource state brought up a huge number of programming links - sometime I worry about user customization in search and other UI elements
But CA is a bit strange: A mortgage is non-recourse only in defined circumstances, eg when the mortgage is purchase money guaranteed by the property. It used to be that refis turn non-recourse debt into recourse debt.
I'd be very surprised if a loan backed by stock met the non-recourse requirements. So if you fail to pay, it's probable that they can go after your other assets.
fyi I haven't kept up with how things evolved out of the mortgage meltdown, so perhaps things have changed. But anyone taking such a loan should figure out their potential liabilities carefully.
edit: actually its complicated
Or maybe we're just back to 2006 standards for mortgages and I'm slow to realize it.
I wasn't being clear: It doesn't matter that you can pay, it matters that you will pay. (Four months is nothing to the mortgage principal.)
Look, the Fed is going to raise rates RSN. Which way does the high end of real estate go when interest rates come off zero %? So suddenly the homeowner is down 10% on the value of their $2M home. Is it worth it for them to mail in the keys to the bank for $200K and tell the collectors to pound sand? For a lot of people, yes. So the bank (or more accurately, the loan service) has to figure out how to send over two guys named Rocko with the power to get their money back.
In the bubble, the solution was to lay off all the Rockos because, you know, housing never goes down. Maybe we're back to that state, which would be amazing, but I'd guess the banks are somehow covering for their liability on zero-down loans this time around.
Edit for tcoppi's comment: s/FedIncrease/BlackSwan/ because home prices do decline for a variety of reasons.
BTW: Implied probability of a Fed rate increase in Sept is back to where it was before Brexit. http://www.ft.com/fastft/2016/07/25/odds-of-16-fed-rate-rise...
Edit for dragonwriter's comment (hn doesn't let replies go this deep?): Fed has been trying to normalize rates, and employment/gdp/cpi has been stabilizing. See the link above for implied prob from Fed Futures for how people are betting on Sept.
Is it? It doesn't really seem like it, they raised them .25% in December and haven't done diddly since then, with no signs that they will. Like it or not it is incredibly difficult for us to get out of the ZIRP trap, we most likely won't see anything more than 2% out of the fed for a decade or more. Barring massive inflation, it definitely won't go up fast enough to have a major effect on housing prices like that.
What in the considerations that drive monetary policy (employment and inflation, mainly) suggests that another interest rate hike is imminent?
This is not true. All manner of restricted stock units (granted to insiders) and unregistered stock (not publicly traded) can be used as collateral for loans (though some issuers make you sign documents promising not to do so). I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity.
That must be a ton of fun. How do they incentivize you and your operation to be conservative? Because they presumably only make money if you hit the number, which was the big problem with home appraisers in the housing bubble.
They only way I can think of to cause correct behavior would be to ensure that your operation maintains an interest in the loan after the deal is done.
The contents are less "this is where you should mark this asset" and more "this is where others have marked it, the circumstances under which they did so and how those circumstances may differ from this situation". The value isn't in providing a "right" number as much as turning a zero-information situation into an information-positive one.
This should be the slogan for all market research companies. Good way to look at it.
a) it's illegal and grounds for penalty if you merely write up such a contract, ("mayn't") or
b) it's not common practice to use them as collateral? ("aren't")
Because if there's someone who thinks it's valuable, then there's someone who's willing to accept it as collateral.
That's one of the reasons that in Spain you have such amazing mortgage rates compared to the US: The banks are taking less risk.
How much lower are they in Spain?
Even where allowed in the US, they tend (not always, it varies by state) to increase the judicial oversight of (and thus extend timelines for) the foreclosure sale, and often reduce the finality of a foreclosure sale by providing a post-sale redemption period. Both of these things are things that lenders might prefer to avoid in many cases where a deficiency would, in theory, be available.
Stock is not cash. It is less liquid and more volatile. But if one properly discounts to accommodate those factors, it's just another deferred cash flow. This time, not relinquishable by the company. (If the stock goes to zero the employment cash flows do, too.)
That argument is good until it is not. Unfortunately, when it is not is precisely when one needs it.
Edit: Additionally, salary falls in the same boat. If your stock in your S&P 500 employer tanks, you salary will tank too. Also, I'm talking about a "sell as soon as it vests" strategy, which makes it pretty much just a variable form of salary.
Liquidity is a surface over the time in which a transaction must occur, transaction size and price. If you have a large amount to sell or buy (relative to the market), want it sold or purchased quickly (relative to the market) and/or don't want to eat more than an X% discount (if selling) or premium (if buying) (relative to the market), you will find the securities illiquid, i.e. not able to be turned into cash (or purchased) within your size/price/time parameters.
For a liquidator, time is usually same day or a few days. Size is fixed to the balance of the loan. That leaves price. In a turbulent market, the liquidator may end up selling your securities for pennies on the dollar - your collateral may insufficiently cover your balance. That leads to the lender eating a loss or the borrower coughing up cash. $100 of stock may cover less than $100 of balance; $100 of cash will always cover $100.
Retail margin lending is capped at 2:1, so a 50% discount would wipe out your collateral, but institutions and mortgages can go 5:1 and beyond, meaning smaller drops become dangerous faster. When everyone is rushing for the doors simultaneously, these price drops can be precipitous, if short-lived.
My point, however, isn't about collateral. It's about future cashflow. A Senior engineer at Google might have a salary of $150k, but total compensation package including 270 shares of GOOG distributed per year (~23 shares per month) for a total comp of $350k. For such an individual, do you lend based on salary alone or do you factor in the stock?
I imagine that with a correct discount the stock can and should be used in the cashflow calculation.
ECorps have a lot of trouble doing that.
Who else has friends going through all sorts of ridiculous acrobatics to buy houses in the bay right now? Where they are "lucky" to get their 10-20% over the list price offer accepted? Yeah, this will end well.
Three things likely going on here: loss leading, promotion and a hunt for yield.
Let's start with the hunt for yield. Yesterday's auction priced the 3-year at 0.87% and the 5-year at 1.15% [1]. We don't know the term of Zuckerberg'a mortgage. If it was less than 5 years, the bank might make a spread.
If it's a loan with a longer term the lender could have made more by lending to the U.S. Treasury. In that case, the difference may be booked as a promotional expense. "We're the guys Mark Zuckerberg gets his mortgage from" is succinct and memorable.
Finally, the lender may eat a loss on the loan for the opportunity to do more business with Zuckerberg in the future. One sees this with credit facilities in investment banking: JPMorgan and friends give companies cheap loans in hopes of winning their more-lucrative IPO and debt capital markets business.
[1] https://www.treasury.gov/resource-center/data-chart-center/i...
Remember, when the bank issues a mortgage for 3.5%, the spread between that and their cost of capital covers the risk of default. But if the default risk is minimal, they can basically issue the loan at cost.
The big requirement for this loan was for me to move most of my banking to the institution, and to keep a minimum amount of assets with them. I generally like the institution, so the move hasn't been terrible.
So not only are they making interest on the loan, they also have my other business. I'm not super-high wealth (but I do pretty well), but my banking does make them money.
No, they're well beyond the conforming loan limits, even in "high-cost areas".
https://en.wikipedia.org/wiki/Conforming_loan
As I work through this thread, I'm wondering how the banks are structuring the liability (additional assets of the borrower are exposed?), or whether a new set of bagholders has been found (the taxpayers last time, hopefully not again.)
Yeah, that's what is I was wondering as well. They aren't selling those 1M+ 0% down to GSE's, but maybe somebody on wall street? If not, is it on their books? And yes, what is collateral? Just the property itself?
If you have to sell stocks to pay cash for a home, a mortgage could cost you less money overall.
The good news is that AMT comes along and typically eats up deducting property taxes and other things, but the mortgage interest itself still works.
EDIT: see comment below. One can deduct the interest on mortgages up to $1MM and $500k, but there is a cap on itemised deductions (mortgage interest deductions are this kind of deduction) around $450k.
http://www.bankrate.com/calculators/mortgages/loan-tax-deduc...
From your link: Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately).
So mortgage interest for loans beyond $1M are not deductible at all.
Then there is the deduction phase-out
> You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $309,900 if married filing jointly or qualifying widow(er), $284,050 if head of household, $258,250 if single, or $154,950 if married filing separately. Your AGI is the amount on Form 1040, line 38.
https://www.irs.gov/publications/p17/ch29.html
We need to overhaul the tax system, not pile more crap on top of it.
Besides, the vast majority of people taking advantage of this deduction is the normal American. Not a business owner or speculator. You'd be ending the largest tax relief the middle class has.
He avoids paying taxes on the sale of stocks to finance the home.
Mortgage interest is tax deductible.
His stocks will almost certainly yield more than the interest rate on the mortgage.
He's getting a sweetheart deal from the bank.
For him, selling stock is a PITA because he has special class of stock that grant him voting rights far beyond what a normal share is worth. These special shares are granted to him by the board of directors. So selling 1 share means losing like 1000 votes (they convert back to 1:1 upon sale), meaning he needs to be careful when liquidating assets. By waiting five years, he can use vested options to pay the mortgage, rather than selling his special class stock.
Also, free country and all, taking advantage of that special rate is still rather unsettling.
Can you elaborate on that?
https://en.wikipedia.org/wiki/Like-kind_exchange
Just to note: you don't :) In fact, if you wanted to pay all cash, and had enough shares, you'd generally take out a portfolio loan against the shares at some very low interest rate (probably not lower than current mortgage rates however) rather than sell the shares at all.
Whether this is better/worse than a mortgage depends on various things.
In practice, not for zuck.
1. Only the interest on the first 1 million is deductible. 2. The income phaseout probably also hits him hard
Is there any way to do something similar with stocks, without paying an insane amount of money in interest rates or fees?
Edit: I know returns aren't guaranteed, I'm referring to expected returns. I'm perfectly willing to take on risk, in order to make positive-EV bets. I tossed out the 5-7% number as a very rough approximation - assuming that you buy a house with a buy-rent ratio of < 20, in which case the returns that you make by not having to pay rent, will be 5% or more.
https://www.interactivebrokers.com/en/index.php?f=marginnew&...
Past performance is no guarantee of future performance.
You're also ignoring the carrying costs of a house.
Indeed, taxes and insurance can dominate the mortgage.
Of course there are monthly payments and maintenance too, but you'd have to live somewhere even if you didn't own a house. To account for those properly in calculating the real return, you really should diff them against the rent on an equivalent property. And don't forget the interest tax deduction.
Finally there is the wonderful fact that capital gains on your primary residence can be kept tax-free up to $250,000 ($500,000 if you're married).
At that point, if you need to sell, you've lost your down payment, as in WA at least, it costs approx 9.3% to sell a house (unless you're in an insanely sellers market, which you're not if you're down).
The best model for that is to be a bank with the 3/6/3 model.
Borrow at 3%, lend at 6%, on the golf course by 3 PM.
Now doing something similar with stocks.... that's kind of Warren Buffett's model. He uses insurance companies like Berkshire and Aflac to create cash flows to buy stocks.
I guess you could use options to do something similar.
No one knows what interest rates will do, but if they go from 3% to 6% (historical average), then suddenly everyone can't afford as much house and prices decline.
So who are these banks "courting" again? Elites or tech workers? Or just these two guys? It's hard to tell. Interesting news would be "Banks giving kickbacks to CEOs and VCs who throw them corporate business." This article seems to just be "Look! Some people are getting sweet deals on their mortgages."
This is 2016. Tech workers are the American elites.
Did you think elites were still guys with a monacle sitting in a drawing room that overlooks a coal mine or something?
I don't have any congressmen on speeddial to get whatever I want passed through the next pork barrel bill in Congress, what am I doing wrong?
I'm a tech worker and I don't honestly see a near-term future where I would throw $2,000 at a senator to talk to them about, say, net neutrality. I've got all kinds of things I'm saving for! My boat isn't going to drain me of my earnings by itself!
If you want real political influence of the sort that will actually let you move the needle on something like net neutrality then you need to be writing much bigger checks. $1k will buy you half an hour on the phone will a congressman who will pretend to listen to you. But to actually influence policy you need budgets in the 6-7 digits because you have to repeat the process across many dozens of congressmen and senators.
Except for the first, all of those numbers are (or state a range that includes) amounts that exceed the limit for a single donors campaign donations for a single election cycle to a single candidate.
Having to return your donation because accepting it will exceed the legal limit may get a candidate to notice you, but perhaps more as someone who they need to be careful around to avoid scandal than anything else.
This would likely be enough to get one congresscritter to look your way, at least.
This is not a great system, but many tech workers can get into that circle if it's something that matters to them.
Apparently I did not get the memo. </sarcasm>
No, they aren't. The American elites aren't workers, they are capitalists. Tech workers are among the class of elite workers that have enough income that they can afford to make significant investments and tend to be in the petit bourgeoisie -- that is, in traditional terms of analysis of capitalist economic strata, the narrow middle class -- but "elite workers" are only elite among workers.
The actual American elites (as is true of all capitalist and most modern mixed economies) are the haut bourgeoisie, the capitalist class; those who derive the overwhelming majority of their support from capital which generates returns largely passively for the capitalist (usually, through the application of other people's rented labor.)
> Did you think elites were still guys with a monacle sitting in a drawing room that overlooks a coal mine or something?
No, but the elites are still the guys that have the same relationship to tech (and other) workers that those guys with monocles had to coal miners (and other workers.)
I'm a tech worker, and I can assure you I'm not an "American elite". I don't get white glove treatment at the bank, have a butler, chauffeur, or financial advisor. I schlep it 2 hours to work each morning and 2 hours back, and if I lose my job, I'm N paychecks away from ruin like everyone else. My "N" may be 5 where others may be 2, but most of us are in the same boat. Does that really sound elite to you?
There's a very serious discontinuity somewhere around the $1m/year mark where you get to the point that you don't have to work for the rest of your life while you're still young. There's another huge difference between that and the guys worth $100m+ who can have whatever they want, including financing insane research and construction projects, not just the normal comfortable middle-class lifestyle, and never run out of money.
Putting those people in the same group as your average software engineer for socioeconomic purposes is ridiculous. Sure, I might have more in common with Zuckerberg than with a coal miner, but only just, and that's not saying much.
This thread has taught me that people in the valley or the HN echo chamber really sort of have no idea how most people live in this country, let alone around the world.
I live in New York City. I could probably grok the basic concept.
You've got people on HN claiming that making 5x that makes them solidly middle class because they can't afford a home in one of the most expensive places in the world.
At the end of 40 years, that puts you at $6.2M - a further 20% of which is tied up in housing equity - before any other expenses. That's a decent retirement, yes, but it's not rich in the way that the elites are rich. Not even close.
Relative to them, tech workers -- who are quite often in what is, in traditional terms, the middle class (the petit bourgeoisie) -- may seem like a narrow elite. This is an understandable perception, and there is a sense in which it is correct -- tech workers are elite workers.
But they aren't the elite within the country, and the gap between tech workers and the elite is much greater than the gap between the average worker and the average tech worker. The elite (the haut bourgeoisie) are not "workers" at all.
The levels of income we're talking about for tech employees, especially in the SF area but also in most places in the US, will still force you to continue working for a salary for your entire adult life (until retirement age) or else eventually starve. You never get to the point where you can just quit. That's the distinction between us and Zuckerberg that comparing us to somebody making $50k doesn't expose: like them, we have to work and will probably never be anything more than comfortable with some luxuries. We're all proletariat - maybe bordering on petit bourgeoisie at the upper end, but still working for our money rather than having our money work for us.
Our pay is high, all things considered, but not nearly as high as law or medicine, and certainly not management. I'd say we are rising from the upper tier of clerical workers to the lower tier of educated professionals. That is "elite" compared to the average person, certainly, but not compared to the economy as a whole.
The term generally given to this strata is "upper middle class." Some resent calling it middle class at all, but nonetheless - there is a critical distinction between "owners of the means of production," "managers of the means of production," and "highly skilled operators of the means of production."
I don't see the surprise there. I'd wager most senior Google employees have around 50% comp in stock.
Far more pervasive than that. A buddy of mine just took a typical sys-admin position at AAPL and is paid 50% stock/equity. Same with an MBA I know working at AMZN.
I don't see the Silicon Valley startup machine quitting anytime soon.
Actually, most of the people I know who have bought houses in the past few years work for such companies: Cisco, Apple, Google, etc. Their employee stock plans are so generous that startup stock options are not very attractive.
I hadn't looked at zillow in a couple years, I can't believe how insane it's gotten. $800k for a century old 2 bedroom home on a rough stretch of MLK boulevard in Oakland.
A lot of the price of homes is the land, which means that (barring local regulation) homes will begin to be built up a lot more. Already on my residential street there is a 7 story live/work building going in where a pottery store used to be. Density will lower renting costs but the land itself will remain valuable.
If you have no money left over after taxes, then you are doing your witholding wrong. And the Bay Area isn't some zone-of-enormous-taxation. We've got like 2% more sales tax and maybe 4% for restaurants who are passing on the medical buck.
It might seem that way, but I've come to believe it's the other way around. When land is cheap, people build lavish houses (see the midwest). When land is unholy expensive, people are devoting every dime just to get the plot, they can't afford to build a nice house.
Similar to how (this is hearsay) new development is more lavish in times when mortgage interest rates are low, and more spartan when rates are high. Buyers who must devote more of their payment to interest, have proportionally less to spend on the property.
Foreign investment has an impact in Vancouver, but by and large, it's Canadians who are over-extending themselves to get into a market they think they will be priced out of forever.
Let's take the example of Nick eg:
"Nick Merz knows how tough it can be. He’s a 41-year-old product designer at Apple Inc. whose wife also works there, and says they couldn’t figure out if they could afford to own a place anywhere near the company’s offices in Cupertino, where the median value is $1.8 million."
Glassdoor check for sr product designer = base of $157,000 to a max of $200,000.
With 7 years figure he's at $180,000.
Figure his wife is in another $100,000 territory as a co-apple employee.
So maybe they're at $280,000.
With a 20% downpayment they can "afford" $1,931,000 of house (2)
Why?
Because interest rates are insanely low.
But problem for nick and others is that lenders want a 20% down payment because that gets skin in the game.
On that $1.931 house that's $386,200 which is damn near impossible to cobble together after dropping crazy SF rents for a decade (or two).
My guess is that the bankers are using significant stock options as a swap or partial collateral for that down payment.
That's a bet I would take eg:
- You've got a guy with a 7 year track record at the most valuable company in the world + his wife there too which is solid income criteria.
- You've got him with real skin in his game - his life savings which just happens to be in apple stock and probably will always be worth more than zero, and likely enough to continue working for even in a downturn.
- Even if the house drops in value when interest rates go up (which is the most common prediction from mortgage bankers I know) Nick needs a place to live by Apple, is invested in his house, and is as likely as anybody to continue paying a mortgage on an asset that technically is worth less than he paid, but because it's tied to a monthly payment he can "afford", will stay on for the long haul.
(1) https://www.glassdoor.com/Salary/Apple-Senior-Product-Design...
(2) https://www.zillow.com/mortgage-calculator/house-affordabili...
Lenders typically charge PMI if you have LTV > 80%.
Our first home was purchased with 0 down (perks of being military brat), and no PMI. Current home was ~10% down, with ~$500 in PMI (kind of a cluster-fuck--the mortgage broker said the loan had no PMI, but last minute it had PMI. We had 2 days before closing, and couldn't find a better deal, so we had them drop the rate).
Our family income is north of the projected Merz' family income of $290k, and while we could afford that 1.8m home, financially it wouldn't make sense to tie up so much of our income into a house (even though it would be straight baller).
We are (currently) making the equivalent of 1 extra mortgage payment a year, which should reduce the amount of interest that is paid over the lifetime of the loan. That, coupled with the increased value of the house since we've bought it, would help us remove the PMI payment.
Doing the Maths, paying the extra 10% down, wouldn't save us much over the length of the loan where PMI applies, so we opted to make an extra mortgage payment instead.
I think you have that reversed. If values are rising, you have to do less work to get to 80% LTV (loan-to-value).
Example: I put $10 down on $100 worth of stuff with a $90 loan, giving a 90% LTV. If the value of stuff jumps to $120, then that $90 loan is now at 75% LTV, with zero payments made.
I'm sure other types of employees get these deals.
See this for example: https://www.53.com/mortgage/physician-loan.html
>clients for life
You'd think what is very clearly a paid advertisement for SFCU and SoFi would leave out the scariest details.
>clients for life
You'd think what is very clearly a paid advertisement for SFCU and SoFi would leave out the scariest details.
Like I'm sure a million others, I'm sick of renting in a market where landlords sell and evict every day (happening to me right now, again). Got a kid, need good schools. Other than that, anything goes. I just want to live without constant fear of being upended every 6 months. Is that so much to ask?
Basically: "you're about to have a high income and—as a class—have a very low default rate. We'll let you put 0% down and not count your student debt against you". Usually before you get your first paycheck (just need to show them the contract).
FWIW I'd argue that tech workers are—financially speaking—much more varied than doctors, who generally exit residency, get a position (sometimes in a new city) and see their income skyrocket. So I can't say this is perhaps as justifiable an idea as it is for new doctors, but I can buy the rationale for certain workers.
If you're in the boat of "I could afford a mortgage around here, but would take years to save a huge downpayment on these prices", the doctor mortgage can be a great thing. Not least of all because it's not always savvy to make a big downpayment: http://themortgagereports.com/18520/20-percent-downpayment-r...
I think the "2004" in your reply is key. Crazy things were happening back then and as you called out, the housing market crashed.
I think what freaks people out is that only ~8 years out from the crash, you can already see lending standards getting more relaxed. Didn't we learn anything last time?
Not to mention the number of people I've talked to that said "housing always goes up, it's a great investment!". In less than a decade people have gone from "housing sucks" to "it will never go down".
Amazing.
"One inflation-adjusted value index between 1928 and 2012 placed the annual rate of appreciation for real estate prices at just 0.2%." [1]
Overall, real estate has historically been a bad investment. That said, it does seem like there have been obvious indicators when an particular area is becoming a more desirable place to live, and when home prices are likely to go up significantly in the future. Although I imagine people have been hard at work modeling and forecasting this, and current prices will better reflect future appreciation (if this hasn't already happened).
[1] http://www.investopedia.com/ask/answers/052015/which-has-per...
The challenge is, how do you identify an "up and coming" city? Is it the same way you identify and "up and coming" stock? It's all just attempting to time the market.
By contrast, developers have a median salary of ~$95k nationwide and ~$110k in San Francisco according to Glassdoor (or $65k nationwide and $103k in San Francisco according to Payscale). Of course, some make much more, typically through stock options. So lenders are probably filtering by occupation and employer (e.g. Google, Facebook, etc.).
I'll trust that the lenders are competent to determine whether someone with with a ~$150k salary is a strong candidate to buy a $2M house with no downpayment. Housing lenders haven't shown poor judgement in the past (edit: /s).
I'm going to assume that this is sarcasm. (If it's not sarcasm, keep in mind all the nonsensical loans that were being given out pre-2008.)