The Housing Market Thing

[Manedwolf]

Sorry but I got no pity for the morons that mortgage themselves to death. They drive demand and therefore the pricing up to insane levels and thus make it far harder for responsible borrowers to afford their own house. Housing is not a luxury but a necessity, so when a group of idiots make it less accessible to everyone else, then I say, let them burn in the hell of their own making. I look forward to the inevitable major crash, when the smart and responsible can step in and get good houses at significantly lowered prices.

I definitely agree there!

And it's a two-pronged problem. I don't know if houses will drop in value THAT much...has that ever happened before in history? Usually, it's been a sort of push-me-pull-you of house prices and wages racheting up in relative reach of each other.

But real wages haven't kept up. Not even close. While a home that may have been $119,000 in 2000 is now $350,, a lot of the same career positions that paid $50k-$60k...still pay $50k-$60k. Wages have stagnated badly, resulting in a lot of loss of buying power for the middle class. Thus the shift from mortgages people can afford to bad-idea things like ARMs and interest-only. Whereas someone with such a salary could easily afford a $1200/month mortgage, something more like a $2500/month mortgage can be more than half their monthly takehome pay, and just can't be done.

[LadySmith]

I wonder if that eminent domain decision also plays a factor? Discussing the housing market here at work and the majority of my coworkers are saying they're not going to slave to buy a house when .gov can come and yank it from under you. That's 6 out of 9 coworkers, so if this sentiment is nationwide...

[The Rabbi]

I wonder if that eminent domain decision also plays a factor? Discussing the housing market here at work and the majority of my coworkers are saying they're not going to slave to buy a house when .gov can come and yank it from under you. That's 6 out of 9 coworkers, so if this sentiment is nationwide...

THat might just be the dumbest reasoning I've seen this week.  It's like saying, why do anything since we could all be killed by terrorists.

[Art Eatman]

Rabbi, don't forget that a helluva lot of people don't understand the total package that involves the use of eminent domain.  They've heard OF it, but they don't really know the what/why.  "Ignorance is curable, stupidity is forever."  The ED thing is ignorance.

Art

[charby]

And it's a two-pronged problem. I don't know if houses will drop in value THAT much...has that ever happened before in history? Usually, it's been a sort of push-me-pull-you of house prices and wages racheting up in relative reach of each other. 

I can happen, all it takes a is a lot jobs to leave an area and nothing comes in to replace it. Also excessive surplus will drive the price of homes down.

-Charby

[The Rabbi]

And it's a two-pronged problem. I don't know if houses will drop in value THAT much...has that ever happened before in history? Usually, it's been a sort of push-me-pull-you of house prices and wages racheting up in relative reach of each other. 

I can happen, all it takes a is a lot jobs to leave an area and nothing comes in to replace it. Also excessive surplus will drive the price of homes down. -Charby

In early 1990 I got married and we bought our first house, cost $169,000.  We decided we hated Philadelphia and wanted to sell and move here.  Housing market tanked (recession) and we ended up selling it for iIRC $135,000.  I got a lesson in real estate I will never forget at private school rates.

[Matthew Carberry]

And it's a two-pronged problem. I don't know if houses will drop in value THAT much...has that ever happened before in history? Usually, it's been a sort of push-me-pull-you of house prices and wages racheting up in relative reach of each other. 

I can happen, all it takes a is a lot jobs to leave an area and nothing comes in to replace it. Also excessive surplus will drive the price of homes down.

-Charby

Happened in Anchorage in the '80's.  Pipeline was finished and the price of oil dropped, think Wild West boomtown.

We were a one-note economy and the bottom fell out of the market.  You could pick up (then) $80K condos for .15-.20 on the dollar.  But it rebounded and prices have risen steadily, the same downtown condos now go for $150K. 

Overvalued now?  Maybe a little, but there is only so much developable land (they aren't making more) and people will pay for location when long commutes and such are the other options.

[Matthew Carberry]

Thus the shift from mortgages people can afford to bad-idea things like ARMs and interest-only.

Tripe and bushwah.

There is nothing inherently "bad-idea" about either ARMs or interest only loans.  In fact their whole purpose is to make more properties affordable, just under certain stated time constraints.

There's just a whole lot of financially stupid people out there misusing them, that ain't the loan programs fault.

If you are a soldier with a family stationed in Anchorage for a 3 year hitch and can't get (or don't want) on-base housing, a 3-or 5-year ARM makes perfect sense.  You'll have the house sold before you deal with the adjustment.

Pay less in mortgage payments for the home while you live there and then sell it when you leave.  Even as our market has slowed a bit there will still be enough appreciation to cover your closing costs and probably leave you with a profit.  If you don't want to keep the property long-term, why not take the lower initial rate of the ARM and live in a nice house during your tour? 

If you decide to keep it or stay you just refinance, since you have maintained good credit, built up cash and retirement reserves and live within your means, a refi of that property, even a 100% ARM to a VA fixed rate won't be a problem.

I/O loans are useful for the same reason.  If your area is still showing appreciation (which has, on average, continued even through short-term crashes everywhere) the fact that you may not be putting money toward the principle is meaningless.  If the I/O period is 10 years and you plan to sell in 7 and you are confident in the area market, why not take that principle payment and put it in your pocket or even into a higher yield investment device.  Borrow my money at 6.5% and earn 10% on it in your mutual fund.  Makes even more sense if you are using the I/O on an investment property.  Maximize cash-flow from an investment you don't necessarily plan to keep long-term.

Loan programs aren't inherently good or bad.  Some just require the borrower be a little sharper financially and have a definite plan.

[The Rabbi]

Agreed.  IO loans can be great things, especially for people who earn a lot of their money in a few months, like airline pilots or commissioned sales people.  NegAm loans ditto.  In fact I have one myself.

But often that isn't how they are sold and unscrupulous mortgage originators (never seen any of them, right?) will sell the low payment to the customer as a teaser and not mention the rest of it.

[Matthew Carberry]

Agreed.  IO loans can be great things, especially for people who earn a lot of their money in a few months, like airline pilots or commissioned sales people.  NegAm loans ditto.  In fact I have one myself.

But often that isn't how they are sold and unscrupulous mortgage originators (never seen any of them, right?) will sell the low payment to the customer as a teaser and not mention the rest of it.

The library and the internet, not to mention the loan paperwork itself; both sets even, the disclosures signed with the originator AND the final set signed at recording with the title officer, contain all the information you could ever need about I/O's and ARM terms.  Shopping around to different lenders, especially those who work in association with large, respectable banks and brokerages (as opposed to fly-by-night, internet, too-good-to-be-true firms) will also provide you with free information.

If it's a refi, in many states there are even 3 day right-of recission delays to allow you to back out of the loan no harm no foul.

So I have very little sympathy for anyone who claims they were totally "misled by their lender".

All the info in the world about loans is available for free, in essence that person is claiming to be deliberately ignorant and apathetic about the biggest loan of their life.  They are proudly claiming idiot status.  Usually you will also find they were chasing some obvious crock of *expletive deleted*it "free lunch" loan that any adult with half a brain would be suspicious of.  Greed led to many of these peoples problems.

[The Rabbi]

I think I had one, maybe 3 or 4 customers at most who actually bothered to read all the disclosures.
I'm not defending the borrowers.  You are 100% right they think they are getting something for nothing, or are overly optimistic or whatever.
But I've seen plenty of originators operate and sell the deal.  If customers were getting great advice you wouldn't see the level of defaults we're seeing now.

[Headless Thompson Gunner]

The get-rich-quick "flippers" that helped drive the market up beyond what people could afford for actual homes to live in can go to hell.

The market is the market - it won't go any higher than buyers will pay, or lenders will loan.  The flippers didn't create a market increase, they simply took advantage of a market opportunity.

As for homes being higher than people can afford, no.  That's a false concept based on our ingrained (and potentially disastrous) "consumerism" mentality.  The problem isn't homes that are "too high", it's people who think they have to have more home than they can pay for.  They will mortgage themselves to the eyeballs to get into the "house they can afford" then blame everyone else for their financial troubles.  A house is a house and a price is a price.  Whether or not it is "too high" is totally dependent on the buyer's willingness to be financially honest with themselves.

Brad

And in this area, a tiny "starter house" of about 1200 sq feet or less is $300k. Anything less than that gets you a "needs work" shack in an area that may include crack dealers.

The disparity between middle class income and housing meant for the "middle class" is extremely wide.

Such is the nature of the marketplace.  When lots of people bid against each other for a limited commodity, prices will naturally rise.  Get pissed about it if you want, but what's the point?  You may as well get pissed at the weather.

I'm growing awfully tired of people expecting life to be a piece of cake, and expecting to have everything their hearts desire wrapped up and delivered on a silver platter.  Luxuriously large houses in major metropolitan areas are NOT going to be cheap.  Why on earth would anyone expect otherwise? 

Price, size, or location:  pick any two.  There are plenty of new, clean, large, comfortable houses available for middle class prices.  But they aren't located in the high-demand urban areas.  There are affordable houses in safe, respectable urban areas, but they aren't very big.  If you want a mansion in the best neighborhood, it's gonna cost you big bucks.

And in this area, a tiny "starter house" of about 1200 sq feet or less is $300k. Anything less than that gets you a "needs work" shack in an area that may include crack dealers.

The disparity between middle class income and housing meant for the "middle class" is extremely wide.

That I can agree with, the average household income where I live is 50-60k average decent home is $200k. Anything below $135k is going to need at least $40-50k worth of work or is so small you'd go nuts by yourself in it.

-C

This is a prime example of the problem.  People have somehow gotten it in their heads that they "need" a large residence, else they'll "go nuts" or suffer some other calamity.  It's pure BS.  I live in a 400 square foot apartment, and I am perfectly comfortable.  I live in the exact neighborhood I want to live in, and I don't have to pay an arm and a leg to do it.  It's a matter of choices, priorities, and reasonably/rational expectations.

Everyone in America seems to have vastly overestimated how much residence they "need".  Worse, they also seem to think they're entitled to have this unreasonably high "need" met cheaply and easily.  When they find that reality differs from their unreasonable expectations, they automatically blame reality.  If they can't live in a cush home in the best neighborhood for a cheap monthly payment, then obviously there's a problem with the market, or with the system, or with the government.

At root it's an attitude problem, not a financial problem.

[Matthew Carberry]

I think I had one, maybe 3 or 4 customers at most who actually bothered to read all the disclosures.
I'm not defending the borrowers.  You are 100% right they think they are getting something for nothing, or are overly optimistic or whatever.
But I've seen plenty of originators operate and sell the deal.  If customers were getting great advice you wouldn't see the level of defaults we're seeing now.

I don't disagree people were misled.  I just have a problem with them blaming the lender for it. 

Don't want to be misled?  Pull your head out and do research like a grown-up.

Get into financial trouble because you were an idiot?  Man up and admit you have only yourself to blame in the end.

Don't point fingers and then deny that doing so inherently means you are simultaneously admitting your stupidity.

[The Rabbi]

Yeah.  Especially when the one who's really going to take the beating is the lender.
So you have people who put down maybe 2-3%, in most cases probably nothing, strapped themselves into high payments they could barely stretch to afford, and now the car breaks down, water heater goes out, major medical bill etc intrudes and they have nothing because they had no savings.
So they walk away from the house because they can't afford to stay, they can't afford to sell, and they don't have anything in it anyway.  The lender ends up reselling it, after a long and expensive process, for probably 75% of what is owed, maybe less.
Who's getting hurt here?

[Brad Johnson]

Housing is not a luxury but a necessity,

Not exactly.  Shelter is a necessity, but the scope and scale of said shelter falls squarely in the "Luxury" category.

I see it every day - a young couple buys the house they qualify for, but it's way more house than they can afford.  Has nothing to do with the market or the lender.  It has everything to do with poor financial acumen and an "immdiate gratification" mindset.  Do they need three bedrooms and two bathrooms?  Nope.  Do they need 2000 sq feet?  Nope.  Do they need the big back porch?  Nope.  Do they need the granite counters and designer appliances in the kitchen?  Nope.  Do they need $300 faucets in the utility room?  Nope.  Do they need a Jacuzzi tub in an elaborate master suite?  Nope.  All they really need is a place for a bed, running water, and a working toilet.  They could get in for a third of what they actually are paying and have more in less time.  But noooooo... they gotta have the best and have it NOW!  Thus the opening for all the creative financing and the lenders willing to offer it as an option.  

People get themselves into trouble by being actively oblivious.  They don't keep things in context and have no grasp of the difference between "gross" and "net".  All they know is a lender said they can get them in a house for $X per month.  They get so wrapped up in the exitement that they don't take a big-picture look at what they are doing.

Did some lenders actively prey on folks who might not have gotten loans anywhere else?  Yep.  But the majority of the problems in the mortgage business were borrower-driven as the result of being both horrendously uninformed and tragically lacksadaisical about it.  They heard only what they wanted to and never paid attention to the potential negatives.  

It's really sad how many people actually live this way.  Makes me appreciate the more sensible folks I hang around with here on APS.

Brad

[Headless Thompson Gunner]

There's a saying on Wall Street, "When you start getting buy-recommendations from cab drivers and grocery clerks, it's time to get out of the market".

I think the corollary for real estate is, "When there's a TV program called "Flip This House" it's time to get out of real estate.

Bob

There is much truth here. 

Over the past few years the popular sentiment was that everyone should buy real estate.  Well, the truth is that not everyone can or should buy real estate.  But most of them bought it anyway, because that's what the popular sentiment was telling them to do.  Reality is beginning to set in, and most of those people are going to get burned.  That's what happens if you play with fire without knowing what you're doing.

Those who do know what they're doing know how to avoid problems like this.  They don't buy into these absurd mortgage arrangments.  They don't buy in a sellers market.  They don't overextend themselves.  And when they see other people doing all this, they know that it won't be long before the situation reverses itself.  They know that the time to buy isn't right now while everyone else is trying to buy, it'll be in a year or two after the upside down market rights itself. 

The flip side to the old saying mentioned above is this: when cabbies and clerks and everyone else all agree that the real estate market sucks, now is probably the time to buy into it.

[Gewehr98]

WTF? If I lived in a 400 square foot apartment with my wife, kids, and dogs I'd go nuts. 

Hell, I'd have to go outside just to change my mind.

If you're single, and just mustered out of the Marine Corps where you lived out of a footlocker in open bay barracks, I suppose 400 square feet might seem palatial in respect. You can do the WKRP Les Nessman thing and put striped tape on the floor, too.

But don't tell me I should look at 400 square feet and think that's what's best for me and mine, thankyouverymuch. 

On the farm I was raised on, the cows and horses in the barn had more than 400 square feet to do their thing.  This is 2007, we don't need to build one-room sod homes and have several families living under the same roof, smelling the byproducts of last evening's meal without any recourse.   

[Headless Thompson Gunner]

If you have a large family then you might want more space.  But two parents and couple of children can still live comfortably in 1,500 square feet.  That was the usual practice in times past, and the only thing that's changed is our (your) expectations.  I don't know of any markets where livable 1,500 sq ft houses can't be had for a middle income price.  This is especially true given the almost-free financing that's readily available.

Yep, it's 2007, and we don't need to live in one-room sod houses.  But at least have the brains to realize that if you want something more you have to pay for it.  If you want a 3,000 square foot luxury home, it'll cost you.  If you want an especially short commute to work in a big city, it'll cost you.  If you want a house that's so new that it won't require any maintenance work for the next 20 years, it'll cost you. 

If you don't have an uncommonly large income, you won't be able to afford the newest and best home or the best neighborhood.  Why don't people anymore realize that "the best" isn't affordable to "the masses"?

I saw a billboard today advertising 2,000 square foot homes for $150,000.  These homes are in semi-rural Indiana as opposed to a major city, and they probably aren't built or spec'd all that well.  But they're certainly livable and comfortable, even for a largish family, and they won't break the budget. 

Get your expectations right and suddenly you'll find that housing is still remarkably affordable.

[Brad Johnson]

My grandparents on my Mom's side raised five girls (five - egads! ) in a two bedroom farmhouse that I guesstimate was around 900-1000 sq ft.

Brad

[The Rabbi]

Those who do know what they're doing know how to avoid problems like this.  They don't buy into these absurd mortgage arrangments.  They don't buy in a sellers market.  They don't overextend themselves.  And when they see other people doing all this, they know that it won't be long before the situation reverses itself.  They know that the time to buy isn't right now while everyone else is trying to buy, it'll be in a year or two after the upside down market rights itself. 

Boy, is that the case.  But I guess the news is slow getting to CA.
So, I decided I had had enough trying to manage my 4plex and run my gun business at the same time.  Time to sell.  I knew the market well enough to know about what it should sell for and I knew what I needed out of it.
So after 3 days we got a full price contract with some concessions on our side from a couple in CA.
Looking at the closing statement, they got a 75% first mortgage and not quite 20% second mortgage.  I have no idea what the rate is on either of these.  So they got in for about $13,500.
I figure their positive cash flow, less repairs and vacancies, will amount to about $200, maybe less.  And they are planning, as far as I can tell, to manage this from California.
Hello?  I know where this one is headed.  But I guess they paid attention to everyone on TV saying that real estate was a guaranteed ticket to wealth.  Somehow I think they're in for a shock.

[Gewehr98]

Did expectations really change that much over the years?

My grandparents owned a 4-bedroom, 2 bath farmhouse in rural Wisconsin, part of a farm with barn and several outbuildings on about 10 acres.  The house was built in the late 1880s, and when it got to be too much for my grandparents to maintain and maneuver in, they sold it to my parents in the 1970s.  Sold is a misnomer, my dad basically had to build my grandparents a 3-bedroom, 1 bath single story retirement house on an adjacent parcel of land, then my grandfather would sign the farmhouse and property over to my dad.  When my dad leaves us (not for a long time, hopefully!), my mom has already said she will sell me the farmstead and find a smaller residence further out into the countryside.

I'll agree that one should only buy as much house as they can realistically afford.  As for expectations, that's really open to conjecture.    

[Brad Johnson]

As for expectations, that's really open to conjecture.

Exactly.

Need = objective
Expectation = subjective

Brad

[charby]

This is a prime example of the problem.  People have somehow gotten it in their heads that they "need" a large residence, else they'll "go nuts" or suffer some other calamity.  It's pure BS.  I live in a 400 square foot apartment, and I am perfectly comfortable.  I live in the exact neighborhood I want to live in, and I don't have to pay an arm and a leg to do it.  It's a matter of choices, priorities, and reasonably/rational expectations.

Everyone in America seems to have vastly overestimated how much residence they "need".  Worse, they also seem to think they're entitled to have this unreasonably high "need" met cheaply and easily.  When they find that reality differs from their unreasonable expectations, they automatically blame reality.  If they can't live in a cush home in the best neighborhood for a cheap monthly payment, then obviously there's a problem with the market, or with the system, or with the government.

Could you share your 400 sq ft apartment with a wife who likes to quilt and a labrador retriever and still find santity staying at home? I used to live pretty small myself (with my lab), used to live in a 700 sq ft house and before that a 400 sq ft l bedroom apartment, things change when your household grows.

My wife and I don't need a 3000 sq ft house, our needs are pretty simple to use. 3 bedrooms, 2 car garage (either attached or not), a eat in kitchen with at least 20 linear feet of countertop, basement and a yard big enough for a decent sized garden/pontenial patio/deck room. A den in the basement would be nice but can be added later. We figure a 1200-1800 sq ft house would be perfect for us.

-C

[Brad Johnson]

needs are pretty simple to use. 3 bedrooms, 2 car garage (either attached or not), a eat in kitchen with at least 20 linear feet of countertop, basement and a yard big enough for a decent sized garden/pontenial patio/deck room. A den in the basement would be nice but can be added later. We figure a 1200-1800 sq ft house would be perfect for us.

Those are "wants", not "needs". 

Brad

[charby]

okay they are wants..

needs could be a tin roofed shed with a woodstove and outhouse out back.