Post by: Art Eatman on March 27, 2007, 07:18:25 AM
Friday's rally of the US$ due to a turn around by the housing market was short lived as new home sales, as reported Monday morning, fell dramatically in February. Sales of new homes dropped to the lowest level seen in nearly seven years, while inventories of unsold homes rose to a 16-year high. These number bear repeating: Sales of new homes are the lowest in seven years, and inventories of unsold homes are at a 16 year high! Some economists blamed bad weather for the drop in home sales, but how can you blame weather for a surplus in unsold new homes which represents an 8 month supply?
>
> I have a somewhat unique perspective on this problem, as I ran a family business selling manufactured housing. After leaving the remnants of Mark Twain Bank and while waiting for Frank and Chuck to get EverBank WorldMarkets started again, I ran Coachman Homes; a manufactured housing business started by my father in 1968. The manufactured housing business peaked in 1998 and 1999 when lenders were flush with 'Wall Street' cash and were willing to put just about anybody into a manufactured home. The party came crashing down in late 1999 and 2000 as a couple of the major lenders started to have problems with foreclosures (Greentree Financial, Security Pacific) and therefore began to tighten lending standards. The manufacturers were slow to realize this was not just a temporary slowdown and kept building homes as quickly as they could get them produced. We soon had a glut of home inventories, and the lenders wouldn't approve as many buyers; so naturally the prices of homes started to come down. This caused several new homeowners to suddenly become upside down in their home loans (they actually owed more than the home was worth) and so they just decided to 'walk away' from the homes and 'give them back to the lenders'. Suddenly, the new home retailers were competing with bank foreclosures chasing after a decreasing number of approved buyers. Needless to say, the industry has taken several years to work out of this down turn and is still struggling to turn a corner even after some help from mother nature (Hurricane Katrina was a godsend to the manufactured housing industry).
>
> I use this as an example of why I don't believe we will see the full effect of the housing down turn for some time. Yes, builders are now scrambling to offer incentives to buyers of their 'spec' homes. But what about all of the homes which are going to start hitting the market due to foreclosures? US foreclosure filings last month jumped 12 percent compared with a year ago. More than 130,000 homes entered foreclosure last month according to RealtyTrac, which is the second highest reading since they started keeping records in January 2005. Adding to the mortgage problems, there will be a massive amount of adjustable rate mortgage resets coming in the next few years. More than $2.28 trillion worth of ARMs were originated in 2004, 2005, and 2006, at the peak of the housing boom. Many of these ARMs enticed buyers with very low 'teaser rates' which will significantly change the amount of the monthly mortgage payment when they reset. Now that these homes are no longer increasing in value and lenders are tightening credit standards, look for foreclosures to skyrocket.
>
> Our friend, John Mauldin, did a great job explaining this problem in his weekly newsletter "Thoughts from the Frontline": "A drop of 20% in the number of homebuyers that we have seen in the past two years, coupled with a dramatic increase in the number of foreclosures, is going to put serious pressure on housing prices, especially in markets where there was a lot of "froth." And combine that with increased down payments and tighter credit for even credit-worthy buyers, and there is real room for concern."
>
> John goes on to explain how the housing slowdown will likely spill over into consumer confidence numbers which will start dropping in the coming months. According to John, housing related construction employment will seriously plummet and consumer spending is going to take a hit as cash-out Mortgage Equity withdrawals are going to be increasingly hard to get. Such mortgages accounted for 2-3% of GDP growth per year for the past four years.
>
> So what will this mean for the US$? Well we will definitely be seeing a dramatic slowdown in the economy and possibly a reduction in interest rates by year end. Not good news for the US$ which has been seeing some strength from thoughts that the FOMC would actually have to raise rates sometime in 2007 to combat inflation. Lower rates and a slower economy will help to force a sell off in US treasuries by foreign investors..."
These final two paragraphs illustrate quite how "everything is connected to everything else" in economics as well as in environmentalism.
Art
Post by: wmenorr67 on March 27, 2007, 07:45:01 AM
Post by: Sindawe on March 27, 2007, 07:54:21 AM
Reminds me of what I learned about the boom in the stock market in the early decades of the 20th century. And we all know where THAT lead....
Post by: 280plus on March 27, 2007, 07:57:14 AM
Quote
housing related construction employment will seriously plummet
I can vouch for this, it already has...Anybody want to hire a slightly used and somewhat abused old HVAC mechanic?
Post by: The Rabbi on March 27, 2007, 08:41:36 AM
But doesn't the housing market run in cycles just as everything else? Can this not be chalked up to a natural reset of the market?
Yes and no.
In this case the housing market was goosed to the max by an over-accomodative Fed worried about Y2K and then a recession.
The world is awash in dollars. There is money worldwide looking for yield, and mortgages offer(ed) tempting yields, especially the junky kind. Companies would borrow money in Japan at close to zero interest rate, convert to dollars, and buy MBSs and collect the interest. A no brainer. At least until the securities began defaulting and the yen rose against the dollar, making repayment more expensive.
But in the meantime, every Tom Dick and Shloimy was getting qualified to buy a house he couldnt afford and probably wouldnt pay for. So the cheap money was creating artificial demand, stimulating building,etc. This has been going on for probably 7 years.
Now the party's over. And the rule is: the larger the bubble, the bigger the pop. It will be some time before all the unsold inventory of homes is worked through the system. And with lenders in mortal fear, lending standards will tighten like the CEO's sphincter, cutting out new buyers.
I'd give it 18 months or so. Watch for stories in your local papers about former real estate whiz kid who lost all and is now pursuing his dream of [fill in the blank].
Post by: Brad Johnson on March 27, 2007, 10:34:23 AM
Brad
Post by: Manedwolf on March 27, 2007, 10:41:44 AM
Post by: Brad Johnson on March 27, 2007, 10:51:31 AM
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
Post by: Manedwolf on March 27, 2007, 11:10:52 AM
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.
Post by: The Rabbi on March 27, 2007, 11:14:59 AM
Funny, everyone in the media is talking about how "bad" the housing market is, yet ERA, Coldwell Banker, and Century 21 (all Cendant companies) just came off another record-setting year.
Brad
Brad
Note to self: short Realogy tomorrow at open (symbol H).
Post by: Brad Johnson on March 27, 2007, 11:19:32 AM
Quote
Note to self: short Realogy tomorrow at open (symbol H).
Not following you - way over my head, man.
Brad
Post by: charby on March 27, 2007, 11:22:45 AM
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
Post by: charby on March 27, 2007, 11:23:57 AM
Quote
Note to self: short Realogy tomorrow at open (symbol H).
Not following you - way over my head, man.
Brad
I think he is talking about dumping stock in Realty Companies that he owns shares of.
Post by: Sindawe on March 27, 2007, 11:28:09 AM
Quote
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.
Same here. Townhouse style condo's, people are asking for $182k for a two bedroom two or 1.5 bath units. Detached single family homes (ie tract housing) are running in the $350k. Further east, the house my parent bought for $39,500 in 1977 is also in the $300k range. For a two bedroom, one bath ranch built in the early 1960s.The disparity between middle class income and housing meant for the "middle class" is extremely wide.
I could not afford to buy my home now, given those prices.
Post by: Brad Johnson on March 27, 2007, 11:38:35 AM
Quote
Note to self: short Realogy tomorrow at open (symbol H).
Not following you - way over my head, man.
Brad
I think he is talking about dumping stock in Realty Companies that he owns shares of.
ahhhh... gotcha. I don't play the market so I'm not up to speed on share-speak.
Brad
Post by: The Rabbi on March 27, 2007, 11:49:47 AM
Quote
Note to self: short Realogy tomorrow at open (symbol H).
Not following you - way over my head, man.
Brad
I think he is talking about dumping stock in Realty Companies that he owns shares of.
Close. Realogy is one of the succesor companies to Cendant and owns Century 21, Coldwell Banker etc etc. All the names in the real estate industry. Stock is close to its 52 week high. Company has high debt levels. I would expect with the housing market slowing, dramatically in some cases, their revenue will fall off significantly, making it harder to make debt payments. Stock price should suffer. I sell short and when the price drops I buy it back and pocket the difference.
Post by: Art Eatman on March 27, 2007, 12:12:02 PM
Remember that in the past, personal indebtedness was relatively low; savings rates were higher. Right now, the credit card debt averages some $9,000 per household. Multiply that by around 125 million households or more. Then look around at how many folks you know with essentially no personal debt beyond, say, the house and the car. Somebody's in deep doo-doo. Many somebodies.
Then look back at those final two paragraphs of the cite in my first post. Add in the rising commodity costs (rising in all currencies) and the ensuing costs of just about everything from reloading components to refrigerators.
And I've seen nothing to indicate that wages are anywhere near keeping up.
Interesting times...
Art
Post by: Brad Johnson on March 27, 2007, 12:18:28 PM
Yep, as of last year Cendant, Realogy, and Wyndham became three completely seperate entities when shares of Realogy and Wyndham were exchanged from shares of Cendant common stock. Realogy is the real estate end (real estate brokerage, franchises, and mortgage services), Wyndham is the hospitality end (hotels, resorts, and timeshares).
Brad
Post by: Brad Johnson on March 27, 2007, 12:37:24 PM
Quote
And I've seen nothing to indicate that wages are anywhere near keeping up.
Yep.
My feeling is that a lot of other people see it the same way and that's what drove the variable-rate fiasco that's imploding the sub-prime industry as we speak. People didn't feel their incomes were keeping up but they still wanted more, so they used the most convenient means at hand to get it - variable rate mortgages with an escrow opt-out. Not thinking about the consequences (and, quite honestly, usually not the kind of folks who thought past their nose anyway) they got themselves into a bind when the rates jacked up or something went haywire with their income - new kid, loss of a job, just plain overextended, etc.
A little perspective though... The money hasn't gone anywhere, it's just tied up in property or not being spent. As with the Great Depression, the amount of money in the economy didn't change. It was people's spending habits that took a radical turn. They stopped. And when people stop spending, things stop being bought, which means companies that make things make fewer or none at all, and the companies slow down, and employement slows down, and capital improvements slow down, and... well, you get the picture.
Our economy is based on one thing and one thing only - our belief that it's working. That's it. It works because we believe it's working. When we are optimistic we tend to spend and borrow more, and the economy is stronger. The inverse is true when pessimism sets in.
Also, a lot of people put great import on how much credit card debt a household has - equating that to general stability - but we never hear about overall debt or net equity, which are much more indicative. Sure, a house may have $9000 in credit card debt but have no other debt obligations. On the other hand, I know a lot of people who take great pains to keep their credit cards paid off but have six, or even seven, figures in other "stuff" that they are making payments on without blinking an eye. Houses, boats, bikes, lake cabins, TVs, furniture, you name it. They have no credit card debt but are in hock up to their eyeballs with everything else they financed to support their lifestyle.
Also, as the new housing starts slow (fewer new owners) the occupancy rates for rentals tend to rise from the people who are renting instead of buying. This means people buying rental property, which are traditionally some type of existing home. It won't show up on the radar as a housing start but it is a housing transaction. It's just not as sexy on the news as "new home sales" so you rarely see it.
Brad
Post by: Matthew Carberry on March 27, 2007, 01:11:56 PM
The sub-primes and exotics are tightening up, loans I could do last week I cannot do today. I'm finding that due to the large number of people who actually bought or refi'd in the past few years the level of education among buyers and sellers is increasing as well.
Looking at a good year for purchases and refi's, fixed rates are historically low so folks facing adjustment are not necessarily facing an impossible escape from their ARMs.
As Brad pointed out, the investment market was less attractive the past few years as anyone marginally qualified could buy a SFR or condo, reducing the pool of good renters for higher rent properties. That seems to be settling and hopefully reducing, which is good news for landlords like me.
Post by: Sylvilagus Aquaticus on March 27, 2007, 01:16:20 PM
I worked in the family real estate business for several years in the 80's. Like selling syphillis to whores.
I did make a decent living chasing trailer houses and wobbly boxes (manufactured housing, excuse me) doing pre-repo inspections for Greentree, et al, as a side job. Gave me quite a perspective of life out there...or what passes for a life.
Regards,
Rabbit.
Post by: Desertdog on March 27, 2007, 03:04:51 PM
My payments was affordable so I just stayed where I was. Prices are back up, constructions is booming and my house is now VERY affordable.
If you are struggling with your payments, if you can hang in there, don't do anything rash and things will straighten out.
Post by: Lee on March 27, 2007, 04:24:54 PM
Post by: RJMcElwain on March 27, 2007, 05:32:06 PM
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
Post by: CAnnoneer on March 27, 2007, 07:26:27 PM
Post by: Manedwolf on March 28, 2007, 12:22:01 AM
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.
Post by: LadySmith on March 28, 2007, 01:24:36 AM
Post by: The Rabbi on March 28, 2007, 02:33:12 AM
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.
Post by: Art Eatman on March 28, 2007, 06:11:00 AM
Art
Post by: charby on March 28, 2007, 07:13:45 AM
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
Post by: The Rabbi on March 28, 2007, 08:08:03 AM
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.
Post by: Matthew Carberry on March 28, 2007, 08:55:02 AM
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.
Post by: Matthew Carberry on March 28, 2007, 09:11:20 AM
Quote from: Manedwolf
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.
Post by: The Rabbi on March 28, 2007, 09:36:13 AM
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.
Post by: Matthew Carberry on March 28, 2007, 09:52:11 AM
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.
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.
Post by: The Rabbi on March 28, 2007, 09:59:12 AM
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.
Post by: Headless Thompson Gunner on March 28, 2007, 10:02:09 AM
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
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.
Post by: Matthew Carberry on March 28, 2007, 10:06:33 AM
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'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.
Post by: The Rabbi on March 28, 2007, 10:10:17 AM
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?
Post by: Brad Johnson on March 28, 2007, 10:13:10 AM
Quote
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
Post by: Headless Thompson Gunner on March 28, 2007, 10:14:26 AM
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. 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
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.
Post by: Gewehr98 on March 28, 2007, 10:21:37 AM
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.
Post by: Headless Thompson Gunner on March 28, 2007, 10:30:19 AM
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.
Post by: Brad Johnson on March 28, 2007, 10:34:08 AM
) in a two bedroom farmhouse that I guesstimate was around 900-1000 sq ft.Brad
Post by: The Rabbi on March 28, 2007, 10:56:01 AM
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.
Post by: Gewehr98 on March 28, 2007, 10:56:37 AM
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.
Post by: Brad Johnson on March 28, 2007, 11:07:29 AM
Quote
As for expectations, that's really open to conjecture.
Exactly.
Need = objective
Expectation = subjective
Brad
Post by: charby on March 28, 2007, 11:58:03 AM
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.
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
Post by: Brad Johnson on March 28, 2007, 12:00:59 PM
Quote
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
Post by: charby on March 28, 2007, 12:06:33 PM
needs could be a tin roofed shed with a woodstove and outhouse out back.
Post by: K Frame on March 28, 2007, 12:11:48 PM
But, what I want and what I get may well be two very different things.
I want a 5,000 square foot Victorian-era house.
No way in hell am I ever going to get that in the DC metro area unless I hit the lottery.
Post by: Gewehr98 on March 28, 2007, 12:39:30 PM
Some say we don't need guns with 30-round magazines and semi-auto capability.
Cosmoline lives in a shed up there in Alaska. I see he has a built-in pantry and larder. Maybe I could find similar accomodations for my family?
Post by: Matthew Carberry on March 28, 2007, 01:22:30 PM
Quote from: Gewehr98
Nobody needs a car that goes over the legal speed limit, too.
Some say we don't need guns with 30-round magazines and semi-auto capability.
Some say we don't need guns with 30-round magazines and semi-auto capability.
Right, but most folks accept that if they want a performance car it is A: going to cost more to buy than an economy 4-banger, and B: they will be paying more for gas and maintenance over the long haul.
They don't go into the car dealership and plunk down $600 a month for a payment and then claim they were "misled" when the non-hidden-at-any-time payment, gas and insurance costs catch up to them.
If they do complain, we roundly heckle them for being so patently stupid.
Folks who do the equivilent financing on a house deserve similar scorn, not hand-wringing over "evil lenders" and an "out-of-control market".
That big farmhouse in the sticks should be affordable. The problem is the idiots who think they can, or even should be able to, get the same house within 30 minutes of a major downtown core in a nice neighborhood with nice schools and a good-sized yard.
That isn't realistic thinking, market be damned.
Post by: tokugawa on March 28, 2007, 04:47:42 PM
Post by: K Frame on March 28, 2007, 05:00:21 PM
It's 7,000 square feet of Richardson Romanesque Revival.
I just found out, though, that the people who operated it as a B&B are closing it, so I'm going to write to them and see if the house is on the market...
Post by: Laurent du Var on March 28, 2007, 08:53:23 PM
is there a Lurch (spl?) that comes with it ?
Will you create a human/zombie creature in the basement ?
Post by: Tallpine on March 29, 2007, 06:15:01 AM
Quote
needs could be a tin roofed shed with a woodstove and outhouse out back
on 160 acres
Post by: charby on March 29, 2007, 06:31:47 AM
Quote
needs could be a tin roofed shed with a woodstove and outhouse out back
on 160 acres
sounds like my future deer camp someday
-C
Post by: charby on March 29, 2007, 06:41:07 AM
This is the house I almost bought. Missed it by a couple of days, unfortunately.
It's 7,000 square feet of Richardson Romanesque Revival.
I just found out, though, that the people who operated it as a B&B are closing it, so I'm going to write to them and see if the house is on the market...
It's 7,000 square feet of Richardson Romanesque Revival.
I just found out, though, that the people who operated it as a B&B are closing it, so I'm going to write to them and see if the house is on the market...
Mike are you geographical location specific on your Victorian? The reason I ask is that there is a lot to be bought for reasonable prices in SE Iowa. Towns like Burlington, Ft Madison and Keokuk. Many will have nice views of the Mississippi River.
Problem is that there are no jobs or much economic growth in those areas.
Post by: K Frame on March 29, 2007, 07:16:46 AM
I can buy the house of my dreams.
Only, I can't afford to live in it!
Post by: Manedwolf on March 29, 2007, 07:20:27 AM
And on top of that...they often had a shed or barn to keep their crap in, and had very few outfits to wear. A couple of everyday work outfits and a Sunday suit or dress.
It's 2007. We have a lot more stuff that goes in the house, from appliances to DVDs to PCs to TVs. We don't retire at sunset. We're not out working all day and come home only to eat and sleep. And we have, in general, a LOT more clothes than people used to. Wear the same few outfits every week, and people would look at you funny.
And even aesthetics have changed. People just seem to feel more comfortable with a little floorspace, now. The Victorian-era "stuff a room with as much furniture as possible" idea would make most people feel crowded, these days.
Even bathrooms...doesn't anyone who has a newer home feel just a bit cramped when they visit someone with an early 1950's ranch-style with a bathroom that's as narrow as half a train car?
Post by: Manedwolf on March 29, 2007, 07:21:39 AM
This is the house I almost bought. Missed it by a couple of days, unfortunately.
It's 7,000 square feet of Richardson Romanesque Revival.
I just found out, though, that the people who operated it as a B&B are closing it, so I'm going to write to them and see if the house is on the market...
It's 7,000 square feet of Richardson Romanesque Revival.
I just found out, though, that the people who operated it as a B&B are closing it, so I'm going to write to them and see if the house is on the market...
Nice architecture...but you'd need to have at least one picture of it at night with a lightning bolt behind it.
(And man, I hope that chimney is sound! That's a big tower of brick, right there! ...probably had a huge coal-fired boiler.)
Post by: K Frame on March 29, 2007, 07:29:58 AM
It's located in Connellsville, Pennsylvania, about 40 miles south of Pittsburgh. When I was looking at moving up there I had a solid lead on a job.
As for the chimney, structually the house was billed as being in excellent shape, with a new boiler, upgraded plumbing and electrical, etc.
Post by: charby on March 29, 2007, 07:43:46 AM
That's great, Charby.
I can buy the house of my dreams.
Only, I can't afford to live in it!
I can buy the house of my dreams.
Only, I can't afford to live in it!
work freelance from home.... Actually Siemans is opening a wind turbine plant in Ft Madison, maybe you could get a job there.
Post by: K Frame on March 29, 2007, 07:45:52 AM
They didn't bite.
Were that allowed, I'd be back in Pennsylvania so quickly that you wouldn't be able to follow me without a motion stop camera.
Post by: Manedwolf on March 29, 2007, 07:59:49 AM
I've already tried to convince my bosses that I should be telecommuniting regularly, and only coming into the office on an as necessary basis.
They didn't bite.
Were that allowed, I'd be back in Pennsylvania so quickly that you wouldn't be able to follow me without a motion stop camera.
They didn't bite.
Were that allowed, I'd be back in Pennsylvania so quickly that you wouldn't be able to follow me without a motion stop camera.
That unfortunately doesn't work as well as people hoped, for one simple reason. Out of sight, out of mind.
If you're not a familiar face in the office, present at meetings and a familiar voice, you're far less likely to get promotions, and also a lot easier to round off on the balance sheet if any cuts are needed.
Post by: Tallpine on March 29, 2007, 09:18:48 AM
Quote
I've already tried to convince my bosses that I should be telecommuniting regularly, and only coming into the office on an as necessary basis.
Your boss would probably go for it if you lived in India 
Quote
If you're not a familiar face in the office, present at meetings and a familiar voice, you're far less likely to get promotions, and also a lot easier to round off on the balance sheet if any cuts are needed.
I worked "offsite" for almost five years (only visited the office twice, and that was in the first six months), and was one of the very last to be laid off. Unfortunately, finding another such situation is almost impossible.
Post by: Matthew Carberry on March 29, 2007, 09:21:26 AM
Numbers are all that matter, keep making the sales and you're the king.
Post by: RJMcElwain on March 29, 2007, 11:23:38 AM
We're happy to wait for reality to enter. My question is, for those who may know the Florida market better than I do, is how long do you expect the slide to continue, and how bad will it get?
Bob
Post by: The Rabbi on March 29, 2007, 11:30:56 AM
Anyone with the answers to those questions isn't posting here but out making billions of dollars with his ability to predict the future.
Post by: RJMcElwain on March 29, 2007, 11:44:00 AM
The downturn will continue until it improves. It will get really really bad until it gets good.
Anyone with the answers to those questions isn't posting here but out making billions of dollars with his ability to predict the future.
Anyone with the answers to those questions isn't posting here but out making billions of dollars with his ability to predict the future.
True. But, like orifices, everyone has an opinion.
Bob
Post by: Gewehr98 on March 29, 2007, 12:06:23 PM
Quote
We're happy to wait for reality to enter. My question is, for those who may know the Florida market better than I do, is how long do you expect the slide to continue, and how bad will it get?
Question is, how much do you want to spend for homeowner's insurance on that artificially-valued piece of property? I was very much involved in the SpaceCoast Florida real estate world until March of 2006, and was frankly amazed by the amount of realtors, brokers, and agents that a single square mile could sustain. It reminded me of the old joke about the common characteristics of prostitutes and helicopters (no visible means of support). I watched with interest as the local Real Estate Book dropped from 160 pages to just barely 100 as the bubble deflated. We left our beachside Florida home last year after witnessing our $1000/month premiums climb through the roof to $20K/yr AND them having the audacity to threaten to cancel our policy. Now I see the insurance companies want to raise our premiums in Wisconsin to offset their losses in Florida.
Florida can suck my left *@%!
Post by: RJMcElwain on March 29, 2007, 12:28:12 PM
Quote
We're happy to wait for reality to enter. My question is, for those who may know the Florida market better than I do, is how long do you expect the slide to continue, and how bad will it get?
Question is, how much do you want to spend for homeowner's insurance on that artificially-valued piece of property? I was very much involved in the SpaceCoast Florida real estate world until March of 2006, and was frankly amazed by the amount of realtors, brokers, and agents that a single square mile could sustain. It reminded me of the old joke about the common characteristics of prostitutes and helicopters (no visible means of support). I watched with interest as the local Real Estate Book dropped from 160 pages to just barely 100 as the bubble deflated. We left our beachside Florida home last year after witnessing our $1000/month premiums climb through the roof to $20K/yr AND them having the audacity to threaten to cancel our policy. Now I see the insurance companies want to raise our premiums in Wisconsin to offset their losses in Florida.
Florida can suck my left *@%!
All true. And well expressed. And the piece of sand we're sitting on is part of the Space Coast, so I know exactly what you're talking about. And as i said, my brother and I are very patient. If this particular property drops by 30-40% we , might get interested. In the meantime, it will be interesting to watch what happens.
We've all been through this before. In the last 20 or 30 years, we've seen a few market corrections.
Bob
Post by: Manedwolf on March 29, 2007, 12:50:21 PM
This is a timely thread for me because about two weeks ago an opportunity came along for my brother and me to buy a condominium next door to one we already own in Florida. We'd like to own a second unit and, supposedly, the seller is interested in a fast sale. However, he's pricing it at $369,000. which appears to be at least $90,000. too high for current market conditions.
We're happy to wait for reality to enter. My question is, for those who may know the Florida market better than I do, is how long do you expect the slide to continue, and how bad will it get?
Bob
We're happy to wait for reality to enter. My question is, for those who may know the Florida market better than I do, is how long do you expect the slide to continue, and how bad will it get?
Bob
I believe there was already a condo boom and bust in the 80's, wasn't there?
Will probably happen again.
Post by: K Frame on March 29, 2007, 03:21:20 PM
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Post by: The Rabbi on March 29, 2007, 03:47:53 PM
My take on it is that we're days, no, minutes away from the entire nation losing faith in the dollar.
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Lose faith in the dollar? You're just a coward, Irwin.
Post by: Gewehr98 on March 29, 2007, 04:25:07 PM
Quote
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Taking the High Road here. That's a cowardly assessment on your part, Mike!
And it blows my chickens 'n eggs post-apocalypse financial strategy completely out of the water. Time to fire up the grill and have a barbeque, I guess.
Hmm, maybe I can barter in ammunition when the time comes...
Guess I'd better ask Mercedesrules what he would do.
Post by: thebaldguy on March 29, 2007, 04:57:09 PM
Swiss time is running out on their unaffordable lifestyles. Their unrestrained spending and lack of savings are catching up.
By the way, there's already folks asking for a Fed bailout of the mortgage/lending business.
Post by: K Frame on March 29, 2007, 05:30:02 PM
My take on it is that we're days, no, minutes away from the entire nation losing faith in the dollar.
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Lose faith in the dollar? You're just a coward, Irwin.
Yeah?
I'm brave enough to have 50 metric tons of zinc in my basement.
I'm either set for life, or I'll be able to make one hell of a lot of batteries.
Post by: MattC on March 29, 2007, 06:07:02 PM
NY Times: Irresponsible Mortgages Have Opened Doors to Many of the Excluded
Quote
Irresponsible Mortgages Have Opened Doors to Many of the Excluded
Article Tools Sponsored By
By AUSTAN GOOLSBEE
Published: March 29, 2007
We are sitting on a time bomb, the mortgage analyst said a huge increase in unconventional home loans like balloon mortgages taken out by consumers who cannot qualify for regular mortgages. The high payments, he continued, are just beginning to come due and a lot of people who were betting interest rates would come down by now risk losing their homes because they cant pay the debt.
He would have given great testimony at the current Senate hearings on subprime mortgage lending. The only problem is, he said it in 1981 when soon after several of the alternative mortgage products like those with adjustable rates and balloons first became popular.
When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of risky exotic and subprime mortgages, he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.
Almost every new form of mortgage lending from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.
Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.
A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.
These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: peoples decisions unrestricted by the amount of money they have right now.
And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didnt have enough assets in the bank at the moment they needed the house.
Of course, basing loans on future earnings expectations is riskier than lending money to prime borrowers at 30-year fixed interest rates. That is why interest rates are higher for subprime borrowers and for big mortgages that require little money down. Sometimes the risks flop. Sometimes people even have to sell their properties because they cannot make the numbers work.
The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. The latest numbers show that foreclosures have been concentrated not in places where real estate bubbles have supposedly been popping, but rather in places whose economies have stagnated the hurricane-torn communities on the Gulf of Mexico and the industrial Midwest states like Ohio, Michigan and Indiana, where the domestic auto industry has suffered. These do not automatically point to subprime lending as the leading cause of foreclosure problems.
Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. As Professor Rosen explains, The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment. It has allowed them access to mortgages whereas lenders would have once just turned them away.
The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups. Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.
And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.
When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.
Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business and a research fellow at the American Bar Foundation. E-mail: goolsbee@nytimes.com.
Article Tools Sponsored By
By AUSTAN GOOLSBEE
Published: March 29, 2007
We are sitting on a time bomb, the mortgage analyst said a huge increase in unconventional home loans like balloon mortgages taken out by consumers who cannot qualify for regular mortgages. The high payments, he continued, are just beginning to come due and a lot of people who were betting interest rates would come down by now risk losing their homes because they cant pay the debt.
He would have given great testimony at the current Senate hearings on subprime mortgage lending. The only problem is, he said it in 1981 when soon after several of the alternative mortgage products like those with adjustable rates and balloons first became popular.
When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of risky exotic and subprime mortgages, he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.
Almost every new form of mortgage lending from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.
Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.
A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.
These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: peoples decisions unrestricted by the amount of money they have right now.
And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didnt have enough assets in the bank at the moment they needed the house.
Of course, basing loans on future earnings expectations is riskier than lending money to prime borrowers at 30-year fixed interest rates. That is why interest rates are higher for subprime borrowers and for big mortgages that require little money down. Sometimes the risks flop. Sometimes people even have to sell their properties because they cannot make the numbers work.
The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. The latest numbers show that foreclosures have been concentrated not in places where real estate bubbles have supposedly been popping, but rather in places whose economies have stagnated the hurricane-torn communities on the Gulf of Mexico and the industrial Midwest states like Ohio, Michigan and Indiana, where the domestic auto industry has suffered. These do not automatically point to subprime lending as the leading cause of foreclosure problems.
Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. As Professor Rosen explains, The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment. It has allowed them access to mortgages whereas lenders would have once just turned them away.
The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups. Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.
And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.
When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.
Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business and a research fellow at the American Bar Foundation. E-mail: goolsbee@nytimes.com.
I like that Mr. Goolsbee mentions how these different types of mortgages have been good for many people, as carebear pointed out in reply #32. This article reasserts what has been under discussion here: the problems have arisen from irresponsible lenders and short-sighted borrowers, not from maliciously designed lending schemes. So why should the government be "contemplating a serious tightening of regulations to make the new forms of lending more difficult"?
Post by: Matthew Carberry on March 29, 2007, 06:08:13 PM
My take on it is that we're days, no, minutes away from the entire nation losing faith in the dollar.
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Revolution will follow, until someone comes forth to lead us back into the light and base our currency on zinc.
Lose faith in the dollar? You're just a coward, Irwin.
Yeah?
I'm brave enough to have 50 metric tons of zinc in my basement.
I'm either set for life, or I'll be able to make one hell of a lot of batteries.
At the very least your outboard will never corrode.
Post by: roo_ster on March 29, 2007, 06:28:03 PM
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.
Brad:
It is not just dumb/smart folks doing their things in the market. The "invisible foot" of gooberment has an effect on the housing and other markets.
An example of this is the present policy in effect on illegal aliens and the city of Los Angeles.
The data tell us that LA is now a typical third-world city: huge underclass, thick crust of the affluent, and a tiny band of middle class. The housing stock reflects this.
My company has plants in LA/OC and the employees there attest to the housing situation. All who work there are middle class, spanning from lower middle to upper middle. Folks who have worked there for 15-20 years are likely to live nearby. They bought when the surrounding housing stock was built for and affordable by L-U middle class.
New hires or transfers do not have the option of living near the plant. Single folks can live closest, by ferretting out some of the few lower-priced apartments (really studios/efficiencies). Folks with families live further out.
What drove the point home was when I was on a business trip to LA and a co-worker pointed out the rather large proportion of camper shells and serious pickup bed campers. The deal is this: They live 2, 3, 4 hours away . They drive in Sunday PM or 0'dark-thirty Monday. Work during the day and then sleep in the camper at night. Shower in the on-site gym. Drive back Thurs PM (if your job allows flexible hours) or Friday PM.
I am told this is not unique to my company.
Post by: The Rabbi on March 30, 2007, 05:29:51 AM
1) Screams for legislation to "protect the consumer" from "unscrupulous mortgage bankers."
2) Sen. Kennedy et al and Rep Barney Frank (Faygola-Mass) will sit bloviating in committee in front of the cameras while mortgage co executives cower in testimony trying to explain why they made the loan that cost Grandma her house.
3) A series of proposals for increasingly bad legislation to "fix" the problem, ending in compromise that will be both harmful to lenders and the public, and ineffective in fixing any actual problems.
4) Investigations into mortgage company practices, culminating in charges by ambitious states Attorneys General, ending in massive settlements by the few mortgage companies to survive their portfoli meltdown.
5) A drying up of lending in the housing market, leading to
6) A sustained downturn as buyers cannot get financing.
I've seen this play before and know how it turns out. The fun is just starting.
Post by: RJMcElwain on March 30, 2007, 05:54:44 AM
Quote
bloviating in committee in front of the cameras
Rabbi,
You are so right. I've always wondered if politicians bloviate when the cameras are off. And as Senator Ted keeps expending his girth, I keep waiting to see him just explode on camera someday.
As for Barney Frank, he should never bloviate on financial issues. I remember him trying to interrogate Alan Greenspan once. Pathetic.
Bob
Post by: roo_ster on March 30, 2007, 06:50:28 AM
The best thing gooberment can "do" is:
1. Stop implementing more regulation. "Don't just do something! Stand there!"
2. Cut off the flow of illegals (by enforcing existing law). Fewer illegals hopping the border would mean lower property taxes (making the real cost of housing lower), lower crime rates (lowered insurance premiums), and less competition for housing stock (reducing demand usually results in lowerd market price).
Sadly, it seems a goodly number of folks want third-world demographics in the USA.
Post by: Art Eatman on March 30, 2007, 06:54:47 AM
From the article: Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult.
Yeah, right. "They stole the horse! Lock the barn!"
If you make lending more difficult, does that make borrowing easier?
The American Way: "I don't care what it costs; what are the payments?"
Art
Post by: Matthew Carberry on March 30, 2007, 07:33:32 AM
Quote
The American Way: "I don't care what it costs; what are the payments?"
There's nothing inherently wrong with that "Way", as long as you have a financial plan that takes advantage of it. "Cost" only matters if the end goal is actual ownership.
Maximizing an income property but plan to sell in 7-10 years as maintenance costs start to rise? Go for the lowest payment.
Buying a home with the express idea you'll be upgrading or moving in only a few years? (which in a country where the average "churn rate" in business is 7 years makes sense) Go for the lowest payment.
Like leasing a car, if you can find tax and lifestyle advantages in treating your home costs as a month-to-month expense instead of a long-term capital investment, good for you.
Post by: Manedwolf on March 30, 2007, 07:35:27 AM
Some folks think they can legislate away "stupid." Making the world safe for the dim-witted drives those who do the societal/economic heavy-lifting into less-productive ventures.
The best thing gooberment can "do" is:
1. Stop implementing more regulation. "Don't just do something! Stand there!"
2. Cut off the flow of illegals (by enforcing existing law). Fewer illegals hopping the border would mean lower property taxes (making the real cost of housing lower), lower crime rates (lowered insurance premiums), and less competition for housing stock (reducing demand usually results in lowerd market price).
Sadly, it seems a goodly number of folks want third-world demographics in the USA.
The best thing gooberment can "do" is:
1. Stop implementing more regulation. "Don't just do something! Stand there!"
2. Cut off the flow of illegals (by enforcing existing law). Fewer illegals hopping the border would mean lower property taxes (making the real cost of housing lower), lower crime rates (lowered insurance premiums), and less competition for housing stock (reducing demand usually results in lowerd market price).
Sadly, it seems a goodly number of folks want third-world demographics in the USA.
One more. END the Section 8 subsidized housing debacle that's destroyed entire parts of cities, turning suburbs into Hood/Barrio 2.0s and making absentee landlords rich, all on the taxpayer dime.
Post by: Matthew Carberry on March 30, 2007, 07:45:02 AM
From the other side of the coin, I had one tenant who was Section 8 and she and her brats trashed my place. The rent was higher than her check and she began to be late with and finally quit paying the overage. I finally got her out, having to fight the "tenant's rights" BS the whole way with Sec. 8 not lifting a finger to help.
Dirtbag deadbeats with no respect for other people's property. I, like a lot of landlords with decent and maintained properties, will now, no matter how worthy their need, rent to Section 8 anymore. That lady, who seemed all "looking for a hand up, not a handout (LIAR)" ruined it for all the rest, good folks and bad.
I can understand why those absentee landlords let their properties run down and just pocket the money. Decent individuals notwithstanding, the Section 8 clients bring their crappy living conditions down on their own heads.
Post by: Manedwolf on March 30, 2007, 07:50:13 AM
Good point Maned,
From the other side of the coin, I had one tenant who was Section 8 and she and her brats trashed my place. The rent was higher than her check and she began to be late with and finally quit paying the overage. I finally got her out, having to fight the "tenant's rights" BS the whole way with Sec. 8 not lifting a finger to help.
Dirtbag deadbeats with no respect for other people's property. I, like a lot of landlords with decent and maintained properties, will now, no matter how worthy their need, rent to Section 8 anymore. That lady, who seemed all "looking for a hand up, not a handout (LIAR)" ruined it for all the rest, good folks and bad.
I can understand why those absentee landlords let their properties run down and just pocket the money. Decent individuals notwithstanding, the Section 8 clients bring their crappy living conditions down on their own heads.
From the other side of the coin, I had one tenant who was Section 8 and she and her brats trashed my place. The rent was higher than her check and she began to be late with and finally quit paying the overage. I finally got her out, having to fight the "tenant's rights" BS the whole way with Sec. 8 not lifting a finger to help.
Dirtbag deadbeats with no respect for other people's property. I, like a lot of landlords with decent and maintained properties, will now, no matter how worthy their need, rent to Section 8 anymore. That lady, who seemed all "looking for a hand up, not a handout (LIAR)" ruined it for all the rest, good folks and bad.
I can understand why those absentee landlords let their properties run down and just pocket the money. Decent individuals notwithstanding, the Section 8 clients bring their crappy living conditions down on their own heads.
The problem is more the landlords who buy up older rowhouses or such, don't maintain them, declare "ahh, section 8!....$2000 a month!" ...Government pays $1800 or so of that, tenant pays $200. They don't screen the tenants. Tenants are likely to be anything from drug dealers to illegals to members of the Crips or Latin Kings. Neighborhood becomes a cacophony of blaring music, gunshots, 3am domestic violence and arguments and police visits, buildings further trashed, remaining original residents burglarized and terrorized, end result urban blight, a "bad area".
I really like what one lady said whose formerly nice neighborhood went Section 8 said..."We worked really hard to get out of the ghetto. We didn't think it'd follow us here."
Even country-club-like apartment complexes have been taken over by gangs and dealers directly due to section 8. It's a horrifying failure and should be terminated immediately...it's paying the financially failed to live in often BETTER conditions than the hardworking sorts! ...and then they trash the place, too.
I don't blame you for not accepting it. To me, it means you're a good landlord who actually cares about the original residents and doesn't want them beaten or shot.
Post by: Matthew Carberry on March 30, 2007, 08:05:59 AM
One tenant is a redneck ex-coworker and the other a former Marine biker. My neighbor is one of my best friends, also a Marine buddy.
They wouldn't let me rent to anyone unsuitable.
Post by: The Rabbi on March 30, 2007, 08:15:32 AM
I'd suggest some research before spewing opinions. BUt this is the internet.
I had 2 Section 8 tenants. Both of them were terrible, one disasterously so. It's a bad program simply because people value what they have to pay for. If it's free, they don't value it. Doesn't matter that they live there. They will treat it like dog poop if they're not paying.
Post by: Manedwolf on March 30, 2007, 08:22:24 AM
Actually anyone convicted of drug dealing is ineligible for Section 8. Even to live in one.
I'd suggest some research before spewing opinions. BUt this is the internet.
I'd suggest some research before spewing opinions. BUt this is the internet.
Yes, so deadbeat welfare mom, with no convictions, does the actual rental, and then the extended family of dealers deals out of there.
That's hard to envision?
Post by: K Frame on March 30, 2007, 08:30:17 AM
Actually anyone convicted of drug dealing is ineligible for Section 8. Even to live in one.
I'd suggest some research before spewing opinions. BUt this is the internet.
I'd suggest some research before spewing opinions. BUt this is the internet.
Yes, so deadbeat welfare mom, with no convictions, does the actual rental, and then the extended family of dealers deals out of there.
That's hard to envision?
Oh, NO, Manedwolf.
That NEVER happens.
Except in the Section 8 frigging co-op down the street from me.
Post by: The Rabbi on March 30, 2007, 08:33:45 AM
Actually anyone convicted of drug dealing is ineligible for Section 8. Even to live in one.
I'd suggest some research before spewing opinions. BUt this is the internet.
I'd suggest some research before spewing opinions. BUt this is the internet.
Yes, so deadbeat welfare mom, with no convictions, does the actual rental, and then the extended family of dealers deals out of there.
That's hard to envision?
Not at all. I said it wasn't supposed to. Not that it didnt happen.
Post by: Matthew Carberry on March 30, 2007, 08:46:09 AM
Quote
Not at all. I said it wasn't supposed to. Not that it didnt happen.
Left something out Rabbi.
Quote
Not at all. I said it wasn't supposed to. Not that it didnt happen, all the frikkin' time!
There, fixed it.
Post by: Ben on March 30, 2007, 10:43:36 AM
Of course I'm also very picky on who I take in, to the point of, given tenant-centric CA laws, probably having someone I've denied being able to take me to court. On the plus side, being picky has given me great tenants, and the last time I had to advertise a unit was six years ago.