Pop Goes The LIBOR

I’ve been skeptical about the much-discussed housing bubble in the past. I’m getting less skeptical when I read things like this:

As recently as 2002, only 11% of the new mortgages in the [San Francisco Bay] area were interest-only mortgages. But today 66% of new mortgages in the area are financed that way. While such mortgages are not as common nationwide, the upward trend extends across the country. Fewer than 10% of new mortgages nationwide were interest-only mortgages in 2002 but that has now risen to 31%.

That’s from a pithy and rather scary WSJ column by Thomas Sowell, and I’m sorry to say that it tracks with what I’ve been hearing about in two regions I’m familiar with, namely metro Atlanta and the north Gulf Coast of Florida.

Atlanta first. Driving around here and seeing signs for houses ranging from “upper $400’s” to “$750’s” and up–and this is not in the fancier sections, mind you–I’ve been asking for years, “Who the hell buys these places, and what do they do for a living? How can that many people afford the mortgage on a house like that?” The answer may be, “They can’t–unless it’s floating on a cheap ARM or LIBOR.”

I was talking with a friend a couple of weeks ago, whose next-door neighbor is indebted about as deeply as you can possibly imagine: interest-only main mortgage on a very pricey home, a home-equity loan based on its appreciation (meaning he owns absolutely nothing), and various auto loans and personal lines of credit. According to my friend, this guy and his wife are obsessed with ‘keeping up with the Joneses,’ and have spent every penny of that credit on lavish home improvements, furnishings, electronics and such. Here’s the kicker: they’re trying to sell off their house to buy a bigger and more expensive one in a supposedly more-desireable subdivision, but they’re asking so much (they have to, they’re upside down on the house), they aren’t getting any bites. And balloon payments on those loans are getting closer every day.

No, wait, that wasn’t the kicker. That’s just a random data point about one couple who’re making spectacularly stupid decisions. Here’s the kicker: the neighborhood they’re in has a 29% foreclosure rate, according to a local realtor my friend also talked to. This isn’t what you’d think of as a high-risk area, either. This is one of the toniest suburbs in the state. There are an awful lot of trailer parks that don’t have 29% foreclosure rates.

Second, north Florida. For the last four years or so–beginning roughly fifteen minutes after I sold the house I used to own in Panama City–real estate in the Florida Panhandle has been on a jaw-dropping boom. Lots within smelling distance of the water began to flip at multiples of their original selling prices, and construction has exploded. Panama City Beach alone has over thirty new high-rise condo complexes in various stages of construction–forget the old “Redneck Riviera” scene, it looks like South Beach down there today.

You’ve heard of “doing land-office business?” That’s what’s been going on in the Panhandle since roughly 2002. Lots, condos, and houses have flipped and flipped and flipped, from one speculating owner to another, with the price just about doubling every time in many cases–and almost all of them are on interest-only or ARM loans. Housing has gotten so expensive along the once-sleepy coast, home values are being forced up well to the north, as people look to once-backwater burgs like Ponce De Leon and Defuniak Springs for an affordable house.

“So what?” you ask. “Coastal property always appreciates, this is just a previously little-known area that’s been discovered and is being bought up.” And that’s true–except that according to a construction foreman I know in Destin, housing sales plummeted by 28% in April, and May is looking just as bad. He’s working on a large project in Destin where five “flips” backed out on deals in just the last two weeks. He also tells me that multitudes of “for sale” signs have popped up all along the coastal roads in the last couple of months, where previously the properties were being snapped up within days or even hours of going on the market.

All anecdotal, to be sure, and Neal Cavuto would argue that we’re talking about three particularly distorted markets where speculation is rampant, not the whole country. But all of the above, plus Sowell’s numbers certainly suggests to me that there are going to be an awful lot of high-dollar properties defaulting into the hand of lenders over the next couple of years. Opportunities for some, and disasters for others.


47 Responses to “Pop Goes The LIBOR”

  1. Mike Says:


    I also live in the Atlanta area. I am not sure there is a housing bubble here, when compared to other major metropolitian areas. In fact, Atlanta prices are very resonable when compared to SF, Chicago, LA, Miami, etc., etc.

    Also, appreciation here has been modest, at best, For the last 5 years, houses have appreciated aound 3-5% per year.

  2. Sandy P Says:

    We’re buying a home.

    Our friend is a mort. banker and we asked him if a lot of people are gong IO.

    Our age group, middle age, is putting money down.

    It’s the young-uns who aren’t.

    Plus, with the Euro high, Orlando’s on an anglo-saxon tear. And how much housing stock did FLA lose last year, and, those $)%*$)%*$() retiring boomers getting 2nd homes. Most probably nominal, but dern foreigners are buying US up, too. Oh, well, GM/Ford/United will take care of a midwest bubble.

    And as for Frisco and NYC, that’s what happens when you have decades-long rent control and restrictive policies.

    Our own little socialistic petri dish.

  3. WIll Collier Says:


    Atlanta is certainly “cheap” compared to NYC or San Francisco (or even Destin), but I still question whether all those half-mil and up homes/condos/townhouses are being bought by people who can really afford them.

    My house went up by a very hefty chunk last year, at least according to the tax assessor (although with cities fudging assessments upwards to bring in revenue, that could well be phantom equity)…

  4. Scott in CA Says:

    I live in the Bay Area, near Berkeley. We bought our house 5 years ago for $375,000. It was just reappraised for a re-fi at $700,000. It’s a 2200 sq ft house, on a corner, built in 1939. Excellent, old established neighborhood, with two BART stations and 4 Transbay commute buses to San Francisco (locals will know how desirable that is). What Sowell was saying about San Mateo County is similar to where I live. You simply CANNOT build anymore. It’s all built up and established. People are willing to pay top dollar to live where I do because they don’t have to drive two hours to get to work in the city. We also put a quarter million down on this place, and our current mortgage is 5%, so no problems for us. But it does really bother me that the newer burbs could end up with a glut of repossessed homes. But in this state, they’ll get snapped up by sombody. There simply isn’t anywhere else to build due to land restrictions and green lines.

  5. Scott in CA Says:

    And remember, here in CA they can’t raise your property taxes more than 2% a year. The house is only reassessed for tax purposed when you sell it. The new buyer pays the big increase, not the seller.

  6. wolfwalker Says:

    {{ But all of the above, plus Sowell’s numbers certainly suggests to me that there are going to be an awful lot of high-dollar properties defaulting into the hand of lenders over the next couple of years. Opportunities for some, and disasters for others. ]]

    That’s not all, either. Recently, WeekendPundit wrote that something like 25% of all home sales right now are to speculators: people who buy the house, maybe do a bit of fixing-up, then try to resell it for a big profit. This is part of what’s driving up housing prices and keeping the housing market “hot.” I wonder what’s going to happen when the speculators run out of buyers who can afford to pay them what they demand?

  7. JJL in Boston Says:

    If anyone is interested this may be the debate of our time financially. One good site to see is http://thehousingbubble.blogspot.com.
    I have been following the real estate market up here in northeast Boston for the last 3 years and it is getting late in the game in my opinion. My anecdotal evidence is this: A couple I work with bought a house that they could not possibly afford. I probed a bit and they went with an Interest Only loan, and used the trick the realtor suggested of doing the application with the “stated income” option that is being pushed so hard here. Went over for a visit and they have plastic lawn furniture in the living room and a blow up bed. 70%! of their NET income goes to this mortgage. Now I ask you, if mortgage rates even tick up a little, or prices come down even 5%, what do you think is gonna happen here? They are not alone, and this is not just a boston area specific problem. Things could get real interesting real soon.

  8. Brainster Says:

    There is zero possibility that a subdivision which is not in an area experiencing complete economic collapse would have anything approaching a 29% foreclosure rate. As for I/O loans they are less of a risk than they might appear; at 5% interest and 30-year amortization a homeowner would only have paid off about 8% of his mortgage after five years.

    IMHO, this is another “double-dip recession”; something that the libs are praying for to prove that they were right all along about the tax cuts.

  9. dave Says:

    I’m sitting in the East Lake neighborhood of Atlanta, 1 mile from the MARTA, 4 miles from downtown, with a lovely 4 bedroom/4 bath new construction purchased two years ago at $325K. Fixed rate, 15 years, 20% down, Momma didn’t raise no fools. I’d love to believe there’s a boatload of people about to move in from Alpharetta and Marietta to escape their mortgages, driving up the values just enough to push the worst of the remaining security issues out. There’s early signs of that happenning, even a couple of mini-mansions going up, but it’s far still too soon to tell. I’ve been implicitly betting on a crash since I moved here. Gonna be feeling really good if you’re right…

  10. jmaster Says:

    Caveat emptor.

    Whoop de doo…

  11. Tim P Says:

    Ok, so we’ve got a lot of people engaging in rampant speculation. Playing the real estate version of musical chairs. Flipping and reflipping property ad nauseum.
    They’re gambling. If they get burned I do NOT have one iota of sympathy for them. I am so tired of seeing folks living beyond their means and leveraging themselves to the hilt to do it. And to what end I wonder? Something wothwhile? No, to ‘keep up with the Jonses’ as you say. It used to be normal to work and scrimp and save to get that house or pay for school for your kids. Now everybody, it seems, wants to borrow and have it all now, regardless of their ability to pay it back. To me, that’s a symptom of decadence in our society.
    It seems as if fiscal responsibility, self discipline, saving and deferring gratification until you can afford it have become quaint notions for the old and feebleminded. Well, the fundamental laws of economics don’t care about the Jonses and haven’t changed with the times, and an awful lot of folks are in for a rude awakening.
    I applauded the reform of bankruptcy laws recently to make it more difficult to default. I know it sounds mean and crumudgeon like and I don’t want to come off that way, but there are a lot of folks out there who need some serious financial reality therapy.

  12. tree hugging sister Says:

    Pensacola, FL. Little 2000sf tract box house like so many others. September 15th 2004, couldn’t GIVE it away for $118K. September 16th ’til now? Going for $220K and the sky’s the limit. The difference here? One word ~ Ivan. Almost 9 months later and 4 THOUSAND people still homeless in the county. Living in FEMA trailors or their own if they’re lucky and waiting on any sort of housing to open up. Like we all say: sure you could make the killing of a lifetime. But once you sell your house, where’re you gonna go?

  13. dukeofpittsburgh Says:

    Seems as if the banks didn’t learn a bloody thing after the lending institution scandals of the mid to late 1980’s. The present situation is likely the brainchild of some whizbang MBA’s who think they’ve found a way to repeal the laws of gravity and thermodynamics.

    Anyone who’d lend into an area with a 29% foreclosure rate, can I get a kilo of whatever he’s been smoking?

  14. ErikZ Says:

    I’ve actually started on the path to buy a house just this week.

    At the very start of the path that is. “What can I afford? What is out there?” are the questions I’m currently researching.

    When I heard about LIBOR loans, my jaw just dropped. It made sense for it’s inital purpose, but to buy something you can’t afford it’s a horrible idea.

  15. Jonathan Says:

    Will, I used to live in Dothan, Al and hang out at PC Beach all the time … Hows the water ?

    Anyways, the driving force behind prices in most things is speculation … much like what is driving up oil prices, and making big profits right now for oil companies.

    IO loans and the other new “fad” loans are meant to do one thing … make someone money… and that someone is NOT you as a buyer.

    As for forclosure rates … if you could get monthly payments from someone then get the home back later worth even more than it was before, and not owe the person who had been paying you for the home one single penny of what they had been paying you … was the “investment” wise? Did you make money?

  16. heidi Says:

    I owned a home near chicago, and sold at just the right time – the prices are skyrocketing. We had to move to Indiana, and we were able to pay cash for a larger, newer home. no mortgage at all, that is the way to be in your mid thirties, dont you think?

  17. richard mcenroe Says:

    Anytime you have more and more money chasing a reasonably fixed supply of goods, you are set for a bubble and its inevitable bursting. The rest is gloss.

  18. amy Says:

    So long as all these crazy people stay away from Texas! We like our cheap houses!

  19. pete Says:

    So what?, the cycle ends. No, it just slows down. All you with the doom and gloom. Smart investers roll with the cycle. Fix and flip still provides a valuable service to all communities. Who else is going to fix up these places?(have you seen some of them). Would you all prefer that 29% of your neighborhood be old delapitated pieces of crap that drive the cost of your area down. These people are taking a home 20-30% below mkt.value making it a nice home and selling it for actual mkt value- get it- previously determined mkt value set by all the rest of you with currently cute homes that you will sell for as much as you possibly could.
    Don’t blame the invester, lenders may be but they get what they deserve if they lend 125% of a homes value.

  20. doug quarnstrom Says:

    No Heidi, paying cash for a house doesn’t make much sense unless you are incredibly risk averse. The combination of the interest tax break and putting your downpayment money into other investments makes paying off a house a somewhat bad decision, unless one is on the verge of a collapse in all investment vehicles.

    But my business partner and I are selling our apartment building, and I am seriously considering selling my lovely Denver square and heading for a much cheaper, but bigger, house in the country. I will not pay it off, but I will feel really good haveing mid-six figures in cash….

  21. vwgirl Says:

    I live in Alexandria, VA and we rent a townhome. Townhomes in our neighborhood are selling for $500K+. We just met a neighbor who bought his townhome in the 80’s. He chastised us for not buying. We told him point blank we couldn’t afford to pay that kind of money for a home and especially for an older townhome. SFH here are selling in the 700’s and that is for an average size older home.

    Housing prices here are only climbing and affordable housing has moved so far out of the DC metro area that most people are commuting over an hour to work.

    We also just recently inherited property on the coast in Maine. Family members who are selling a home there tell us that buyers are willing to pay 800K+ for homes on the water only to tear the home down and rebuild.

  22. JABBER Says:

    Uh, Brainster…aren’t IO loans just that, “interest only”? Meaning that your payments include NO principle? I’m not seeing how you can figure that ANY of the mortgage is paid down…otherwise it wouldn’t be “interest only.” I would rephrase your observation that IOs are not as risky as they sound by tagging on “AS LONG AS PROPERTY VALUES CONTINUE TO INCREASE.” Given these ridiculous valuations, that may not be such a good bet.

  23. byrd Says:

    I’ve lived in NYC for almost a decade and every couple years I tell myself “housing’s as high as it can go. It just can’t possibly keep climbing like this” and it just keeps climbing like that.

    Million dollar one-bedroom apartments, half-million studios–they’re a dime a dozen. I don’t know where all the money comes from, but real estate has completely warped the local economy. Ethnic neighborhoods are being gutted, even successful businesses are going under because of the rents.

    I don’t see any way I’ll ever afford decent housing without a real estate crash. And I have a good job.

  24. Ken Hall Says:

    I’d be willing to bet the same thing is happening on the Outer Banks of North Carolina. Certainly, real estate appreciates fast there. Of course, there are differences–very few buyers live there year-round (unless they also own a tourist business), and can generate income with the property while they’re not using it themselves. I know I’d like to grab a condo in Manteo and later upgrade to a house in Duck.

  25. Sandy P Says:

    byrd, that’s socialism for you.

    I think it’s safe to say that while we have not won their hearts and minds, major operations are over and it’s time to lift WWII rent control.

  26. Sandy P Says:

    I agree w/Doug.

    You have an illiquid asset, cash is king.

  27. denise Says:

    Jabber — I don’t think Brainster is trying to say that any principal is paid off with an I/O loan — just that if you have a conventional 30-year fixed at 5%, you’d only pay 8% of your principal over the first 5 years, so there’s not that much difference. I don’t agree that 8% is anything to sneeze at.

    In fact, I don’t knock Heidi for paying cash for her house. It seems a lot of people in her situation (and I know some like this) would never put 10% down on the same house and invest the other 90%, as Doug suggests. At best they would pay the same amount of cash she did as a down payment on a house priced 10 times higher (in West Clay or some such place) and mortgage the rest. She’s in a much better position than those people IMHO.

    The problem is, in keeping up with or surpassing the Joneses, it is unseemly to talk about how much you have invested in mutual funds and 401(k), but it is perfectly acceptable to tell people where you live, and you can get your bragging in that way.

  28. TL Says:

    From a Pacific Northwest perspective….

    Real estate prices in this area are primarially driven by scarcity of land and new people moving into the area (mostly from California). It’s not that there isn’t land around, it’s just that due to ever tightening environmental regulations you can’t build on enough of it to satisfy the population growth rate. Toss in a saturated transportation grid around Seattle, Tacoma, and Portland and you end up with rapidly escalating prices for anything in a location with with decent commuting times. Unless there are some drastic changes in the local population growth rates, that’s not going to change much.

    To me, housing prices haven’t looked like a bubble so much as a rapid rise to a new plateau. The current annual 20% growth rate in values isn’t sustainable, but we still have a housing shortage so values aren’t going to drop real quick.

  29. Zero Says:

    The 8% is standard because you always pay more interest at the begining of the loan and principal towards the end. But the point is with the fixed loan you know you’ll by paying the same ammount every month you will eventually pay off the loan with 100% principle. With the IO loan and to a lesser extent ARMs you better have some money for the balloons or the increases in payments or else you’re definitly going to be up shit creek. But as discussed before, keeping up with the Jonses doesn’t involve saving money for the balloon payment you have to make in five years. So I really think that theres going to be a lot of foreclosures in the next 3-5 years.

    Real estate speculation in also rampart. While I’m going to college here in West Covina, CA my current landlords are the definition of real estate speculators. They ‘own’ 6 pieces of property with no equity in any of them. Once housing values appreciate they take the money out for a small down payment on a new place to rent out. Not only that but to save money, my real landlord is technically their 19 year old son, because he’s in a lower tax bracket for them to funnel the funds through, so the arrangement is that they sub lease the house to their son for a small sum of money(which is taxed in their bracket), then the son sub-leases out to the house tennats at the regular rental rates (which is taxed at his tax rate which is nothing because he doesn’t work). Its going to be hilarous when they do eventually loose all the places. I can always tell when they have vacancies at their other places when they come over to our place and start bitching about how much their energy bills are and try to find new and unique ways to get money out of us($50 a month to rent a space in the garage). So consequently the garage is empty so 2 of us park in the driveway and the other 3 park in the street.

    As for the pay off your house or always have a mortgage debate it all depends on the persons personal financial situation. You debate the cost savings in keeping a mortgage vs. piece of mind for owning a house outright . You also have to take into account how steady your personal income is and what the chances are of an extraordinary event happening where you might have a cash flow crisis which would cause you to lose your house. So the debate on whether to pay off your mortgage is not black and white.

  30. doug quarnstrom Says:

    I agree zero, the debate about whether to pay off a house or not does depend a lot on one’s situation. Being in your thirties and having the house paid of is enviable in a way, but thirty is a hell of a long way from retirement, so unless your employment situation is dodgy or you are convinced the markets are about to tank completely it strikes me as somewhat unwise to have seed capital totally tied up in a house. Hell, I am 45, and I am still far enough away from retirement, I presume, that I won’t do it. I have roughly 20-30 years to retire, and that is long enough to park money in the broad market and have some reasonable expectation of an 8-11% CAGR. You might do pretty well parking it in a house as well if the market is growing…

  31. Scott in CA Says:

    Doug, what about me? Really, I’m asking because I don’t know this stuff well and because of my situation. I am retiring in 8 years. We have a half million in equity in our house now. I will have 2 pensions plus SS (yes, it will be there for me because I’m 54 and it’s too late to change in my situation).I will have about $50,000 a year in retirement. I want to buy the retirement home in cash. I don’t want a house payment since it will just eat into my monthly income. I have other investments, and will inherit another house at some point. Do you think that buying cash is best in my situation?

  32. Zero Says:

    Scott, from reading your other posts you said you had a home in San Fran. Is that the home you’re going to retire in or are you going to try to find a different home to retire in?
    Also are you going to move as soon as you retire or stay in your house a while longer after retirement?

  33. Scott in CA Says:

    No, my present house is in the East Bay, near Berkeley. Because this is a built up, older suburb, there is no room to expand. I am not worried about falling prices in my case, as there is no more room. I intend to retire to SoCal, so I want to buy a house cash using part of the equity from the present house. I don’t even have to use it all, as I may invest the rest. My main concern is not having a mortgage payment when my monthly income will be stable. This is not counting any other possible income from other investments or inheritance. My mom is a retired tax accountant, and she says at retirement age it’s best to have the house paid off if you can. I’m curious what others on this thread thing about that. Thanks.

  34. Will Collier Says:

    I think your mom is a smart lady, Scott.

  35. Sandy P Says:

    My parents did. No worries.

    And you could always take out a reverse mort if you need to, and let your little ingrate beneficiaries rot, if you have that type of beneficiary.

  36. heidi Says:

    wow, i have never been so concerned about a decision i made until now. i just knew that we would be in a VERY tight financial situation, and didnt want to have a mortgage. i actually had extra, not much, but have it invested. so now if i want to get another house, i can take a mortage, but a really small one for a shorter period of time (that was my logic, is it a really bad idea?)

  37. Zero Says:

    Heidi- your situation sounds really complicated, I’d say pay a couple hundred bucks and ask a certified financial planner figure it out for you.

    For the other debate it still just boils down to piece of mind. If you pick to take a mortgage then remember its not like you’re getting extra money, you’re paying money to save money. On the other hand by buying a house outright you never have to worry about a payment ever. In my judgemetn if you’re retiring, buy the house outright and not worry about financial games. The piece of mind in that time of your life is worth way more than the tax savings.

  38. Will Says:

    Fifteen minutes… man, what a bummer.

  39. Reagan Says:

    There is definitely something to be said for living in Texas. I’m 28 and looking to buy my first home. I’m going to barrow somewhere between 75k and 85k for a 3/2/1, probably, but I may find a two car garage as well. Somewhere between 1200 and 1500 sq. ft. in an older established neighborhood. My morgage payment will be about what I’m paying for rent, $525, plus taxes and insurance. I’ll get a roommate and actually save money from what I’m paying now. I really can’t imagine the situations some of y’all are in. God I love Texas, and for those of you who are curious I’m buying in Arlington no more than 15 minutes from work.

  40. Jonathan Says:

    Living in Texas is great as far as the home market/pricing goes, but don’t be to smug … those “scam” loans have came here too. I hear them advertised all the time.

  41. Chui Tey Says:

    Real Estate value are priced

    1) in anticipation of growth in future income or future scarcity (population growth). Cities will continue to aggregate people as farm income drops, and farms become larger. Of course, this could change around if telecommuting becomes widespread.

    2) in anticipation of the aspirational value of houses, as a status symbol, rather than utility. In 18th century England, the new-rich began to keep pets precisely to show off how much they are able to waste. Massclusivity in this decade dictates that the middle class will have to own aspirational goods that are financial sink-holes. Why not houses?

    3) as a measure of what time is worth (e.g. if you save 1 hour of commute each day, what’s that worth to you? Answer: lots if you are time-poor)

  42. John Says:

    Texas has in general a lot of land and not that many environmental restrictions, which helps keep housing prices down. But if you want to see what other sections of the country are experiencing in terms of speculative housing prices, take a drive over to the west side of Austin (west of I-35 homes are in the hills, many around Lake Travis; east of I-35 they’re in the less-desirable flatlands) and check out what some builders or seller are asking.

  43. Pat Says:

    Maybe investors in the Destin, Santa Rosa Beach, Grayton Beach areas of Florida aren’t in as much trouble as you might think, Stphen.

    I spent hours on the internet yesterday trying to find a vacation rental. I looked at the many cottage communities (similar to Seaside) that have sprung up in that area. Most only rent by the week, and ranged in price from $1800 to $4,000 per WEEK. Most were booked solid through Labor Day. Those rental prices would pay the mortgage for the year.

    Also, January through May is when the “snowbirds” come down. They rent by the month.

  44. The Kudzu Chronicle Says:

    Quick hits on my Return

    Got back from the Indy 500 today and am playing catchup. Quick thoughts from what I’ve seen in the news…

  45. doug quarnstrom Says:


    My comments really only apply to someone who is not nearing retirement. If I were you I certainly wouldn’t put your house’s equity into the stock market.

    Retiring young is also different from retiring old, and you are young, so maybe having the house peid off is a good idea if you want to live there for the next 30 years.

    If I were retiring old, however, I would not own a house at all, probably. I would sell the house and put the money into a mix of income-generating investments to live off of. I would probably rent.

    But as someone else said, financial planners are the right people to ask. All I can say is what I would do for myself, and I don’t really ever anticipate owning a house free and clear except possibly when I near retirement and know for a fact I want to live in a given place forever.


  46. Coyote Blog Says:

    OK, There May Be A Housing Bubble

    I don’t have access to the right kind of data to decide whether there is a housing bubble in the US, though a lot of people are writing about it.

  47. Accidental Verbosity Says:

    Toil and Trouble

    Chan has written my post on the housing bubble so I don't have to. Seriously. The other day I saw this housing bubble post at Coyote Blog, which led me to this much-linked post by Will at Vodkapundit. I also checked his other links. Plungin…

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