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Housing Bubble.....Fact or Fiction ?
- Thread starter 2ez
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HumorMe
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Agreed
I have never seen so many houses on the market in our area and nothing is moving. One real nice neighborhood here (a very small town) has 8 houses on one street for sale. $400K houses and they have been on the market at least 6 months.
Something getting ready to happen and sellers will not like it. Buyers will love it.
I have never seen so many houses on the market in our area and nothing is moving. One real nice neighborhood here (a very small town) has 8 houses on one street for sale. $400K houses and they have been on the market at least 6 months.
Something getting ready to happen and sellers will not like it. Buyers will love it.
Depends on where you live.
There was a great article in Money last year that listed about 50 bubbles in the country that would experience some serious declines. The declines are in the high end markets.
What I found most disturbing of late was that new home starts are down by 17 + %, which was the sharpest drop in 20 years.
There was a great article in Money last year that listed about 50 bubbles in the country that would experience some serious declines. The declines are in the high end markets.
What I found most disturbing of late was that new home starts are down by 17 + %, which was the sharpest drop in 20 years.
home-price appreciation has been running far ahead of rates of inflation, wage increases, and national economic growth. The kinds of growth chalked up since early 2000 seems likely unsustainable, in the view of most analysts who follow the housing market.
But also consider, that close to 30% of the homes purchased were for investment purposes. If these home are not sold right away, more than likely the buyer will need to rent out to help pay the mortgage. So now if home prices are higher....could this buyer actually get enough to cover the mortgage. Rent in a particular area is determined by median income. So the buyer can not ask for rent that is much higher than the average...just so that they can cover the mortgage payment.
So if interest rates go up....so will mortgage payments and unless they are putting down 30 - 50%, rental income may not be enough to cover mortgage payments....which can result in increasing the housing inventory, thus causing prices to pull back some.
But also consider, that close to 30% of the homes purchased were for investment purposes. If these home are not sold right away, more than likely the buyer will need to rent out to help pay the mortgage. So now if home prices are higher....could this buyer actually get enough to cover the mortgage. Rent in a particular area is determined by median income. So the buyer can not ask for rent that is much higher than the average...just so that they can cover the mortgage payment.
So if interest rates go up....so will mortgage payments and unless they are putting down 30 - 50%, rental income may not be enough to cover mortgage payments....which can result in increasing the housing inventory, thus causing prices to pull back some.
Very Interesting article on the California market. Some will apply throughout the country:
San Francisco Bay Area Housing Crash Continues
Foreclosure listings nationwide went up 50% from February to March 2005.
PMI mortgage insurance now refuses to insure more than $350,000 of risk in speculative markets like San Jose/San Francisco.
A large majority of Bay Area houses are now bought with interest-only adjustible rate mortgages, exposing owners to bankruptcy.
New house sales plummet 9.2% nationally in January nationwide, while median prices fall 13%.
Speculators now account for 25% of all purchases nationally, and an additional 13% are vacation houses, making a market free-fall possible when they all sell.
Sydney, London, and Las Vegas are already well into their crashes. Now it's our turn.
Why?
Interest rates going back up. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate.
82% of Bay Area loans are now adjustable, not fixed. This means a big hit to the finances of many owners every time interest rates go up, and this will only get worse as more adjustable rate mortgages (ARMs) get adjusted upward.
From CBS.MarketWatch.com on 13 Jan 2005: "There is a double whammy inherent in these ARMs," said Frank Nothaft, chief economist for Freddie Mac. "At the end of fixed-rate period you face a hike in interest rates and you have to start paying principal. There is more default risk in these interest-only ARMs than in a fully amortizing product."
Massive job loss. More than 300,000 jobs are gone from Bay Area since the dot-com bubble popped. This is the worst percentage job loss in the last 60 years. It's worse than Detroit car problems or Houston's oil bust. People without jobs do not buy houses and owners without jobs may lose the house they are in. Even the threat of losing a job inhibits house purchases. Santa Clara County posted its third straight year of job losses in 2004, so it's not over yet.
Salary declines. From http://www.mccallstaffing.com/need/needsal.html we hear that "salaries have in fact returned to 1997 and 1998 levels." Local incomes are nowhere near what they need to be to sustain current house prices.
Mortgage fraud. Incidents of mortgage fraud tripled in 2004 compared to 2003, according to the FBI. A typical scenario is where the seller, buyer, both agents, and the appraiser all collude to inflate the price of a house to get a huge loan. They split the excess amount of the loan between them. The buyer then hides his share of the excess and defaults on the loan.
Stock option expensing. The Financial Accounting Standards Board issued final guidelines that will force companies to deduct billions of dollars of employee stock options from profits starting in mid-2005. This will reduce the amount of money that local technology employees will get, and that in turn will depress housing prices even more.
Population loss. San Francisco continues to lose population at the fastest rate of any city in the US and most of those are professional jobs. The problem is not only the dot-com crash, but also the outsourcing technical jobs to India, which continues at a frantic pace as corporations realize they can pay an Indian only 20% of what they must pay a similarly qualified employee in the Bay Area. Fewer people in the Bay Area means less demand for housing.
Stock market crash. The NASDAQ at about 2000 is still only 40% of the 5000 it was at the peak of the recent stock market bubble. The crash in the NASDAQ probably hit the Bay Area harder than anywhere else because of all the stock held by employees of tech companies. That money would have been spent on housing, but is now gone.
Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss, he's bankrupt in the real world. Even a small price decline will bankrupt buyers with small equity. Buyers foolish enough to buy with no money down are already bankrupt, but still unaware of the fact.
Inflation warp. The rest of the economy shows little inflation, but housing inflation has been very high. This disconnect makes houses more expensive in terms of real work. There is no increasing salary to pay off the ever higher interest, so the only way to do it is more work. Many recent buyers will have to postpone retirement because they overpaid for their house.
Surge in foreclosures. We are already reaping the consequences of bad lending. Foreclosures are at the highest rate they've been in 40 years, about 1,500 per quarter in Santa Clara county. There are only about 4,500 sales in the quarter, so on average, about one third of house sales are ending in foreclosure.
Shortage of first-time buyers. According to the California Association of Realtors, the percentage of Bay Area buyers who could afford a median-price home in the region plunged from 20 percent in July 2003 to 14 percent in July 2004.
Lightbulbs going on in many brains in the Bay Area: "Hey, I can just go to New Mexico or Oregon, buy a gorgeous house outright, and comfortably retire on the rest of the price difference. My neighbors just did it, so I'll have friends there too."
Surplus of speculators. Nationally, 25% of houses bought in 2004 were pure speculation, not houses to live in. It is now possible to buy a house with 103% financing. The extra 3% is to cover closing costs, and the buyer needs no money down. All this is on the unwise assumption that housing will rise ever higher, covering interest payments through appreciation. Even the National Association of Home Builders admits that "Investor-driven price appreciation looms over some housing markets."
Trouble at Fannie Mae and Freddie Mac. They are now being forced to tighten up sloppy lending. This means they are not going to keep buying very low-quality loans from banks, and the total money available for buying houses is falling. Fannie Mae recently announced a $9 billion loss and its mortgage portfolio shrank at an annualized 16.8 percent rate in January 2005, on top of a 10.1 percent decline in December 2004.
The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor."
Who disagrees
that house prices will continue to fall? Real estate related businesses don't make money if buyers do not buy. These businesses have a large financial interest in misleading the public about house prices.
Real-estate buyers' agents get nothing if there is no sale, so they want their clients to wildly overbid, the exact opposite of the buyer's best interest. Realtor(TM) is a commercial term, not a real word.
Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible.
Appraisers need mortgage brokers for their business, so they are going to give the appraisals that brokers and agents want to see, not the truth.
Banks get origination fees but have been selling their mortgages, so they take no risk. They do not care about the potential bankruptcy of borrowers, so they will lend far beyond what buyers can afford. Banks sell most loans to Fannie Mae or Freddie Mac. The conversion of low-quality housing debt into "high" quality Fannie Mae debt with the implicit backing of the federal government is the main support for the bubble. That is going to end as Fannie Mae shrinks.
Newspapers earn money from advertising placed by Realtors(TM), so papers have a strong motive to publish the Realtors'(TM) unrealistic forecasts.
Owners themselves do not want to believe they are going to lose huge amounts of money.
What are their arguments?
"There are great tax advantages to owning."
FALSE. It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost $600,000. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss.
Renting:
Monthly Rent: $1,800.00
Buying:
Property Tax: $400.00 ($625 per month at 1.25% before deduction, $400 lost after deduction)
Interest: $1,920.00 ($3000 per month at 6% before deduction, $1920 lost after deduction)
Other Costs: $250.00 (insurance, maintenance, etc)
Total: $2,570.00
Buyers still have to come up with the principal payment as well, just to watch it wiped out as the value of their house declines.
Remember that buyers don't deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them.
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
Under current conditions, a renter would be able to live in a house for 30 years, then buy that house outright with the saved principle payments, and have an extra $277,200 of savings on top of that: ($770 x 12 x 30). The renter comes out way ahead of the owner, and this doesn't even count the huge losses the owner will suffer as housing falls year after year for the next decade or more, just as in Japan.
Another way to look at it is that except for the rich, everyone either rents a house or rents money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. Owners with a mortgage seem to be renting their house from the bank, but there's an important difference. The bank takes no risk, the same as real renters take no risk. It's the owners who bear all the risk of falling house prices, and all the costs of repairs.
"OK, owning is a loss in monthly cash flow, but appreciation will make up for it."
FALSE. Appreciation is negative. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments.
"House prices don't fall to zero like stock prices, so it's safer to invest in real estate."
FALSE. House prices do not fall to zero, but even a fall of only 10% completely wipes out everyone who has only 10% equity in their house. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
"If you buy, at least you have a house, but if you rent, you end up with nothing."
FALSE. Renters in this market end up with much more money, while living in the same quality house as an owner. At the end of 30 years under our current conditions, a renter who saved and invested would have enough principle on hand to buy the same house outright and would have an extra $277,200 of accumulated interest savings, and would have lived in an equivalent house all that time. Owners frequently end up with nothing because they lose the house to foreclosure.
"Prices have been driven by supply and demand."
FALSE. Supply is increasing rapidly as building continues, and demand is falling as the population of the Bay Area decreases and the salaries of those who remain decreases. Prices have been driven by low interest rates and increasingly risky loans. The dramatic drop in rents and widespread rental vacancies prove that demand for housing is actually much lower now than a few years ago.
The www.census.gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased:
year units people
2000 580868 / 1686474 = 0.344 housing units per person
2001 587013 / 1692299 = 0.346
2002 592494 / 1677426 = 0.353
2003 596526 / 1678421 = 0.355
So housing supply in Santa Clara County increased 3% per person during those years. There is an oversupply compared to a few years ago. In a sane market, prices should fall 3% to compensate for the extra supply of housing.
At a national level, there is a similar story in the years 2000 to 2005:
2000 115.9M / 281M = 0.412 housing units per person
2005 124.6M / 295M = 0.422
At a national level, there is 2.4% more housing per person now than in 2000. So national prices should have fallen as well.
"Nobody is making land."
TRUE, but they are making houses at a record rate, which is increasing supply dramatically at a time when new houses are not needed. We have the highest rental vacancy rates since the 1950's.
"There's an under-supply of housing. That's why prices will rise."
FALSE. There is a large oversupply of housing. To repeat: builders are making houses at a record rate, which is increasing supply dramatically at a time when new houses are not needed. We have the highest rental vacancy rates since the 1950's.
"Population increase will fuel housing price increases."
FALSE. The Bay Area is losing population the fastest of any area in the US right now - worse than Buffalo, worse than Detroit. Immigration won't change this because jobs are emigrating even faster. Rents are falling in part because so many recent immigrants are leaving, with some going back to China because opportunities are so much better there. There is going to be a huge glut of housing as old baby-boomers sell their houses to use the cash for retirement, putting 20% of houses onto the market for that reason alone. An additional 25% of houses are owned by speculators, who will soon sell because they are losing money. Birth rates are declining in all industrialized countries, with the US birth rate barely replacing the citizens who die.
"As a renter, you have no opportunity to build equity."
FALSE. It is owners who are losing equity, and losing it in a leveraged way as their principle payments evaporate. Renters can build equity by starting a business, investing in businesses that actually pay dividends, contributing to a 401K, or by simply saving money in a savings account.
"If you rent you are a buyer. You are just buying it for someone else."
FALSE. It may be true that rent covers mortgage payments in other places, but not in the Bay Area. No one buys with the intention to rent out in the Bay Area any longer because that's not viable. The owner is subsidizing the renter, a wonderful thing for renters during this crash.
"If you don't own, you'll live in a dump in a bad neighborhood."
FALSE. It is easy to rent a much better house than can be bought with the same payment right now. Renters live better, not worse. All the best neighborhoods have rental vacancies. There are downsides to renting, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash.
You may worry about being forced to move, but the law says the landlord has to offer you a one year lease at a minimum, and they'll probably be delighted to offer you a two year lease and give you a discount for that.
"If and when the market goes south, you can walk away."
FALSE. Owners can try to default and walk, but the lenders and the law are not going to let them get away. Lenders will make sure the buyer's credit record is ruined, will take a chunk out of every paycheck, and may even press criminal charges. Bush has convinced the senate to pass new bankruptcy legislation that corners mortgage holders. There is no more walking away.
"The house down the street sold for 25% over asking, and that proves the market is still hot."
FALSE. Realtors(TM) try to create the false impression of a hot market by deliberately "underpricing" a house. Say a seller's agent knows that house will probably go for $500,000. He places ads asking $400,000 instead. The goal is to first of all prevent buyers from knowing what a realistic price is, and secondly to get buyers to blindly bid against each other. There are four players in this game and three of them are on one side: the seller, the seller's agent, and the buyer's agent. Yes, the buyer's own agent works against the buyer, because there is no commission if there is no sale. There's a saying in Las Vegas: "There's a patsy in every game, and if you don't know who the patsy is, you're it."
If you want to prove your agent is not on your side, ask to see houses "for sale by owner" or houses listed by discount brokers.
"I was lucky that my Realtor(TM) told me to increase my bid by $100,000. Otherwise I would have lost, because my Realtor(TM) knew about a secret bid $90,000 above mine."
FALSE. Your agent gets paid nothing if you don't buy the house, and he gets more if you waste more money by bidding too high. Those are two big motives to invent false bids.
"The MLS proves things are great."
FALSE. All sorts of funny things happen in the MLS (Multiple Listing Service, a private database controlled by real estate agents). For example, if a house just doesn't sell, Realtors(TM) can remove its record in the MLS so that you cannot see that it failed to sell. Then the house comes back on the market at a lower price, and unsuspecting buyers think it's on the market for the first time. Their Realtor(TM) can "prove" it's a new listing by showing the MLS record to the buyer: "See, here's the listing date, just came on the market. Better hurry and buy it, this one is hot."
There is nobody checking that the MLS shows true selling prices. The MLS prices are often just wrong. Realtors(TM) do not want buyers to see how much the buyer is being overcharged, so you can see the motive to fudge previous selling prices.
Furthermore, the MLS will not list any house for sale by owner for for sale through a discount broker. Those cheaper prices are just not in the system, because if you save money, they don't get as much money.
"The Bay Area is a special place that will always be expensive."
TRUE, but it was just as special ten years ago, so that does not account for the current bubble. Even at half of current prices, it will still be expensive.
"There's always someone predicting a Bay Area real estate crash."
TRUE, yet irrelevant. Just because there is always someone predicting it doesn't stop it from happening. There are very real crashes every decade or so. Even a broken clock is right twice a day.
"But housing was high when interest rates were 21%."
FALSE. Inflation was much higher then, so fixed debt was easier to pay off with increasing salaries. Now we don't have increasing salaries, just a housing bubble. House prices and salaries have become disconnected.
House price increases almost exactly mirror the increase in mortgage debt. According to the Washington Times: "Consumers have doubled their mortgage debt from $3.5 trillion to $7 trillion since 1996, borrowing and spending profusely on the assumption home prices will keep rising." So the increase in house prices is not backed by real assets and can easily reverse.
"My dad made money on his house, and it will work for me too."
FALSE. Your dad bought his house when houses were cheap compared to salaries, maybe 3 or 4 times annual salaries. Go ask him. Things are different now. Here is a chart of median house price vs median income in Palo Alto:
Year Median House Price Median Income Multiple
1980 148900 24743 6.0
1990 457800 55333 8.3
2000 910000 90377 10.0
Palo Alto has lost about 15% since 2000, but that is not nearly enough to bring prices and incomes back into relative alignment. Most bankers use a multiple of 3 as a "safe" price to income ratio.
"The government will make sure housing prices don't fall, because all the powerful people in the government have houses and want to keep values up."
FALSE. There have been many local crashes, and the government can't stop them. Nor would they even want to; the current Republican administration would probably be quite happy to see blue states like California, New York, and Massachusetts crash and burn, and those states are where the worst bubbles are.
"Look, housing continued to rise after the dot-com crash, so it will always rise."
FALSE, consider the turkey in the farmer's barnyard. He thinks the farmer will always come feed him and not ask for anything. Then Thanksgiving comes. Whack. Past performance is no indication of future results.
"Rent can go up, but a 30-year fixed mortgage payment cannot."
TRUE, but irrelevant. House owners lose even with a fixed mortgage, because the price of a house falls as interest rates go up. Most people want to sell within 7 years of moving in, and many have to sell because of illness or divorce. No one can afford what the owner paid for it, so the owner has to take a large loss. Renting it out will not come close to covering the mortgage. Rents have fallen 23% in the last 4 years.
"You have to live somewhere."
TRUE, but that doesn't mean you should waste your life savings on a poor investment. You can live in the same kind of house by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his downpayment.
"Newspaper articles prove prices are going up."
FALSE. The numbers in the papers are not complete and have murky origins. Those prices are "estimated" from the county transfer tax and making that tax public record is optional. A buyer who does not want you to see how little he paid has only to ask to put the transfer tax on the back of the deed and it will not show up on computer searches of the deed, which show only the front. Others voluntarily pay more tax than they have to, in order to inflate the apparent price to fool the next buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo county, you have to pay only $100 extra tax to make your purchase price look $100,000 higher. Another common occurrence is for the buyer to get a large cash payment back from the seller. So the house price looks high in the paper, but in reality the buyer got a huge rebate.
"It's not a house, it's a home."
FALSE. It's a house. Wherever one lives is a home, be it apartment, condo, or house. Calling a house a "home" is a manipulation of your emotions for profit.
"If you don't buy now, you'll never get another chance."
FALSE. This argument was also popular more than a century ago in 1889 in Los Angeles, just before a huge crash. There are always sellers and there are always buyers. Prices are always corrected when they get beyond what buyers can pay. In fact, they're being corrected right now.
"Property in the Bay Area is a luxury good, and so will be less affected by economic downturns."
FALSE. 82% of last year's Bay Area mortgages are ARMs, and ARM loans are not taken out by the rich.
"The limited land in the Bay Area means prices will always go up."
FALSE. Japan has a very severe land shortage, but that hasn't stopped prices from falling for 14 years straight. If we really had a housing shortage, rents would be going up, but they're going down instead.
"It would take another 911 terrorist attack or a major earthquake that wipes out this area in order for the price to fall by 50%."
FALSE. Even with a 50% decline in prices to $300,000 or so, the median price in the Bay Area will still be roughly double the median price in most of America, and the median Bay Area household income of about $70,000 will still not be sufficient to buy a house. So a 50% decline is well justified by the fundamentals.
"Housing is an excellent hedge against inflation, so you should buy now anyway."
FALSE. House prices are moving exactly opposite to inflation. Interest rates go up with inflation, and higher interest will be the last straw for ARM mortgages in the Bay Area. Their defaults and foreclosures will drive down the cost of housing for everyone else around here. Remember that 82% of Bay Area mortgages are adjustable now. There is little chance that salaries of ARM owners can keep up with inflation because of two billion people in India and China who would be happy to do their jobs for much less money.
"Houses always increase in value in the long run."
FALSE. House values are actually constant. Warren Buffett and Charles Schwab have both pointed out that houses don't produce anything. They do not increase in intrinsic value. Unless there's a bubble, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite - it drained cash from its owners for 100 years of maintenance and taxes. Its price went up about as much as salaries went up.
According to Yale Professor Robert Shiller, housing prices in the US rose by an average "of just 0.66 per cent per year in the 114 years between 1890 and 2004 - and most of that was thanks to the boom of the past few years."
"Maybe we should just accept that we missed out on a great opportunity to get into the real estate in the past N years."
FALSE. Did we all miss out on a great opportunity to get into the stock of pets.com or other Internet companies with no business model? The question is what is likely to happen in the next few years according to fundamental economics. The last guy to buy into the bubble will get hurt the most.
"I just want to own my own home."
TRUE, most people do and that's fine. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. Home ownership is great - unless you ruin your life paying for it.
What should you do?
To win this game, buyers need to save up a big downpayment, and be willing to wait until prices fall much more. Then buyers should come in with a huge cash position when sellers are desperate. Sellers have to sell now, while they still can.
If you've already bought, keep careful records of everything your Realtor(TM), mortgage broker, and appraiser said to you in a professional capacity. You may be able to hold them legally liable for misrepresenting the likely future value of the house they sold you, just like some Wall Street analysts were held responsible for misrepresenting the prospects of Internet stocks during the previous bubble.
San Francisco Bay Area Housing Crash Continues
Foreclosure listings nationwide went up 50% from February to March 2005.
PMI mortgage insurance now refuses to insure more than $350,000 of risk in speculative markets like San Jose/San Francisco.
A large majority of Bay Area houses are now bought with interest-only adjustible rate mortgages, exposing owners to bankruptcy.
New house sales plummet 9.2% nationally in January nationwide, while median prices fall 13%.
Speculators now account for 25% of all purchases nationally, and an additional 13% are vacation houses, making a market free-fall possible when they all sell.
Sydney, London, and Las Vegas are already well into their crashes. Now it's our turn.
Why?
Interest rates going back up. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate.
82% of Bay Area loans are now adjustable, not fixed. This means a big hit to the finances of many owners every time interest rates go up, and this will only get worse as more adjustable rate mortgages (ARMs) get adjusted upward.
From CBS.MarketWatch.com on 13 Jan 2005: "There is a double whammy inherent in these ARMs," said Frank Nothaft, chief economist for Freddie Mac. "At the end of fixed-rate period you face a hike in interest rates and you have to start paying principal. There is more default risk in these interest-only ARMs than in a fully amortizing product."
Massive job loss. More than 300,000 jobs are gone from Bay Area since the dot-com bubble popped. This is the worst percentage job loss in the last 60 years. It's worse than Detroit car problems or Houston's oil bust. People without jobs do not buy houses and owners without jobs may lose the house they are in. Even the threat of losing a job inhibits house purchases. Santa Clara County posted its third straight year of job losses in 2004, so it's not over yet.
Salary declines. From http://www.mccallstaffing.com/need/needsal.html we hear that "salaries have in fact returned to 1997 and 1998 levels." Local incomes are nowhere near what they need to be to sustain current house prices.
Mortgage fraud. Incidents of mortgage fraud tripled in 2004 compared to 2003, according to the FBI. A typical scenario is where the seller, buyer, both agents, and the appraiser all collude to inflate the price of a house to get a huge loan. They split the excess amount of the loan between them. The buyer then hides his share of the excess and defaults on the loan.
Stock option expensing. The Financial Accounting Standards Board issued final guidelines that will force companies to deduct billions of dollars of employee stock options from profits starting in mid-2005. This will reduce the amount of money that local technology employees will get, and that in turn will depress housing prices even more.
Population loss. San Francisco continues to lose population at the fastest rate of any city in the US and most of those are professional jobs. The problem is not only the dot-com crash, but also the outsourcing technical jobs to India, which continues at a frantic pace as corporations realize they can pay an Indian only 20% of what they must pay a similarly qualified employee in the Bay Area. Fewer people in the Bay Area means less demand for housing.
Stock market crash. The NASDAQ at about 2000 is still only 40% of the 5000 it was at the peak of the recent stock market bubble. The crash in the NASDAQ probably hit the Bay Area harder than anywhere else because of all the stock held by employees of tech companies. That money would have been spent on housing, but is now gone.
Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss, he's bankrupt in the real world. Even a small price decline will bankrupt buyers with small equity. Buyers foolish enough to buy with no money down are already bankrupt, but still unaware of the fact.
Inflation warp. The rest of the economy shows little inflation, but housing inflation has been very high. This disconnect makes houses more expensive in terms of real work. There is no increasing salary to pay off the ever higher interest, so the only way to do it is more work. Many recent buyers will have to postpone retirement because they overpaid for their house.
Surge in foreclosures. We are already reaping the consequences of bad lending. Foreclosures are at the highest rate they've been in 40 years, about 1,500 per quarter in Santa Clara county. There are only about 4,500 sales in the quarter, so on average, about one third of house sales are ending in foreclosure.
Shortage of first-time buyers. According to the California Association of Realtors, the percentage of Bay Area buyers who could afford a median-price home in the region plunged from 20 percent in July 2003 to 14 percent in July 2004.
Lightbulbs going on in many brains in the Bay Area: "Hey, I can just go to New Mexico or Oregon, buy a gorgeous house outright, and comfortably retire on the rest of the price difference. My neighbors just did it, so I'll have friends there too."
Surplus of speculators. Nationally, 25% of houses bought in 2004 were pure speculation, not houses to live in. It is now possible to buy a house with 103% financing. The extra 3% is to cover closing costs, and the buyer needs no money down. All this is on the unwise assumption that housing will rise ever higher, covering interest payments through appreciation. Even the National Association of Home Builders admits that "Investor-driven price appreciation looms over some housing markets."
Trouble at Fannie Mae and Freddie Mac. They are now being forced to tighten up sloppy lending. This means they are not going to keep buying very low-quality loans from banks, and the total money available for buying houses is falling. Fannie Mae recently announced a $9 billion loss and its mortgage portfolio shrank at an annualized 16.8 percent rate in January 2005, on top of a 10.1 percent decline in December 2004.
The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor."
Who disagrees
that house prices will continue to fall? Real estate related businesses don't make money if buyers do not buy. These businesses have a large financial interest in misleading the public about house prices.
Real-estate buyers' agents get nothing if there is no sale, so they want their clients to wildly overbid, the exact opposite of the buyer's best interest. Realtor(TM) is a commercial term, not a real word.
Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible.
Appraisers need mortgage brokers for their business, so they are going to give the appraisals that brokers and agents want to see, not the truth.
Banks get origination fees but have been selling their mortgages, so they take no risk. They do not care about the potential bankruptcy of borrowers, so they will lend far beyond what buyers can afford. Banks sell most loans to Fannie Mae or Freddie Mac. The conversion of low-quality housing debt into "high" quality Fannie Mae debt with the implicit backing of the federal government is the main support for the bubble. That is going to end as Fannie Mae shrinks.
Newspapers earn money from advertising placed by Realtors(TM), so papers have a strong motive to publish the Realtors'(TM) unrealistic forecasts.
Owners themselves do not want to believe they are going to lose huge amounts of money.
What are their arguments?
"There are great tax advantages to owning."
FALSE. It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost $600,000. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss.
Renting:
Monthly Rent: $1,800.00
Buying:
Property Tax: $400.00 ($625 per month at 1.25% before deduction, $400 lost after deduction)
Interest: $1,920.00 ($3000 per month at 6% before deduction, $1920 lost after deduction)
Other Costs: $250.00 (insurance, maintenance, etc)
Total: $2,570.00
Buyers still have to come up with the principal payment as well, just to watch it wiped out as the value of their house declines.
Remember that buyers don't deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them.
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
Under current conditions, a renter would be able to live in a house for 30 years, then buy that house outright with the saved principle payments, and have an extra $277,200 of savings on top of that: ($770 x 12 x 30). The renter comes out way ahead of the owner, and this doesn't even count the huge losses the owner will suffer as housing falls year after year for the next decade or more, just as in Japan.
Another way to look at it is that except for the rich, everyone either rents a house or rents money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. Owners with a mortgage seem to be renting their house from the bank, but there's an important difference. The bank takes no risk, the same as real renters take no risk. It's the owners who bear all the risk of falling house prices, and all the costs of repairs.
"OK, owning is a loss in monthly cash flow, but appreciation will make up for it."
FALSE. Appreciation is negative. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments.
"House prices don't fall to zero like stock prices, so it's safer to invest in real estate."
FALSE. House prices do not fall to zero, but even a fall of only 10% completely wipes out everyone who has only 10% equity in their house. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
"If you buy, at least you have a house, but if you rent, you end up with nothing."
FALSE. Renters in this market end up with much more money, while living in the same quality house as an owner. At the end of 30 years under our current conditions, a renter who saved and invested would have enough principle on hand to buy the same house outright and would have an extra $277,200 of accumulated interest savings, and would have lived in an equivalent house all that time. Owners frequently end up with nothing because they lose the house to foreclosure.
"Prices have been driven by supply and demand."
FALSE. Supply is increasing rapidly as building continues, and demand is falling as the population of the Bay Area decreases and the salaries of those who remain decreases. Prices have been driven by low interest rates and increasingly risky loans. The dramatic drop in rents and widespread rental vacancies prove that demand for housing is actually much lower now than a few years ago.
The www.census.gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased:
year units people
2000 580868 / 1686474 = 0.344 housing units per person
2001 587013 / 1692299 = 0.346
2002 592494 / 1677426 = 0.353
2003 596526 / 1678421 = 0.355
So housing supply in Santa Clara County increased 3% per person during those years. There is an oversupply compared to a few years ago. In a sane market, prices should fall 3% to compensate for the extra supply of housing.
At a national level, there is a similar story in the years 2000 to 2005:
2000 115.9M / 281M = 0.412 housing units per person
2005 124.6M / 295M = 0.422
At a national level, there is 2.4% more housing per person now than in 2000. So national prices should have fallen as well.
"Nobody is making land."
TRUE, but they are making houses at a record rate, which is increasing supply dramatically at a time when new houses are not needed. We have the highest rental vacancy rates since the 1950's.
"There's an under-supply of housing. That's why prices will rise."
FALSE. There is a large oversupply of housing. To repeat: builders are making houses at a record rate, which is increasing supply dramatically at a time when new houses are not needed. We have the highest rental vacancy rates since the 1950's.
"Population increase will fuel housing price increases."
FALSE. The Bay Area is losing population the fastest of any area in the US right now - worse than Buffalo, worse than Detroit. Immigration won't change this because jobs are emigrating even faster. Rents are falling in part because so many recent immigrants are leaving, with some going back to China because opportunities are so much better there. There is going to be a huge glut of housing as old baby-boomers sell their houses to use the cash for retirement, putting 20% of houses onto the market for that reason alone. An additional 25% of houses are owned by speculators, who will soon sell because they are losing money. Birth rates are declining in all industrialized countries, with the US birth rate barely replacing the citizens who die.
"As a renter, you have no opportunity to build equity."
FALSE. It is owners who are losing equity, and losing it in a leveraged way as their principle payments evaporate. Renters can build equity by starting a business, investing in businesses that actually pay dividends, contributing to a 401K, or by simply saving money in a savings account.
"If you rent you are a buyer. You are just buying it for someone else."
FALSE. It may be true that rent covers mortgage payments in other places, but not in the Bay Area. No one buys with the intention to rent out in the Bay Area any longer because that's not viable. The owner is subsidizing the renter, a wonderful thing for renters during this crash.
"If you don't own, you'll live in a dump in a bad neighborhood."
FALSE. It is easy to rent a much better house than can be bought with the same payment right now. Renters live better, not worse. All the best neighborhoods have rental vacancies. There are downsides to renting, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash.
You may worry about being forced to move, but the law says the landlord has to offer you a one year lease at a minimum, and they'll probably be delighted to offer you a two year lease and give you a discount for that.
"If and when the market goes south, you can walk away."
FALSE. Owners can try to default and walk, but the lenders and the law are not going to let them get away. Lenders will make sure the buyer's credit record is ruined, will take a chunk out of every paycheck, and may even press criminal charges. Bush has convinced the senate to pass new bankruptcy legislation that corners mortgage holders. There is no more walking away.
"The house down the street sold for 25% over asking, and that proves the market is still hot."
FALSE. Realtors(TM) try to create the false impression of a hot market by deliberately "underpricing" a house. Say a seller's agent knows that house will probably go for $500,000. He places ads asking $400,000 instead. The goal is to first of all prevent buyers from knowing what a realistic price is, and secondly to get buyers to blindly bid against each other. There are four players in this game and three of them are on one side: the seller, the seller's agent, and the buyer's agent. Yes, the buyer's own agent works against the buyer, because there is no commission if there is no sale. There's a saying in Las Vegas: "There's a patsy in every game, and if you don't know who the patsy is, you're it."
If you want to prove your agent is not on your side, ask to see houses "for sale by owner" or houses listed by discount brokers.
"I was lucky that my Realtor(TM) told me to increase my bid by $100,000. Otherwise I would have lost, because my Realtor(TM) knew about a secret bid $90,000 above mine."
FALSE. Your agent gets paid nothing if you don't buy the house, and he gets more if you waste more money by bidding too high. Those are two big motives to invent false bids.
"The MLS proves things are great."
FALSE. All sorts of funny things happen in the MLS (Multiple Listing Service, a private database controlled by real estate agents). For example, if a house just doesn't sell, Realtors(TM) can remove its record in the MLS so that you cannot see that it failed to sell. Then the house comes back on the market at a lower price, and unsuspecting buyers think it's on the market for the first time. Their Realtor(TM) can "prove" it's a new listing by showing the MLS record to the buyer: "See, here's the listing date, just came on the market. Better hurry and buy it, this one is hot."
There is nobody checking that the MLS shows true selling prices. The MLS prices are often just wrong. Realtors(TM) do not want buyers to see how much the buyer is being overcharged, so you can see the motive to fudge previous selling prices.
Furthermore, the MLS will not list any house for sale by owner for for sale through a discount broker. Those cheaper prices are just not in the system, because if you save money, they don't get as much money.
"The Bay Area is a special place that will always be expensive."
TRUE, but it was just as special ten years ago, so that does not account for the current bubble. Even at half of current prices, it will still be expensive.
"There's always someone predicting a Bay Area real estate crash."
TRUE, yet irrelevant. Just because there is always someone predicting it doesn't stop it from happening. There are very real crashes every decade or so. Even a broken clock is right twice a day.
"But housing was high when interest rates were 21%."
FALSE. Inflation was much higher then, so fixed debt was easier to pay off with increasing salaries. Now we don't have increasing salaries, just a housing bubble. House prices and salaries have become disconnected.
House price increases almost exactly mirror the increase in mortgage debt. According to the Washington Times: "Consumers have doubled their mortgage debt from $3.5 trillion to $7 trillion since 1996, borrowing and spending profusely on the assumption home prices will keep rising." So the increase in house prices is not backed by real assets and can easily reverse.
"My dad made money on his house, and it will work for me too."
FALSE. Your dad bought his house when houses were cheap compared to salaries, maybe 3 or 4 times annual salaries. Go ask him. Things are different now. Here is a chart of median house price vs median income in Palo Alto:
Year Median House Price Median Income Multiple
1980 148900 24743 6.0
1990 457800 55333 8.3
2000 910000 90377 10.0
Palo Alto has lost about 15% since 2000, but that is not nearly enough to bring prices and incomes back into relative alignment. Most bankers use a multiple of 3 as a "safe" price to income ratio.
"The government will make sure housing prices don't fall, because all the powerful people in the government have houses and want to keep values up."
FALSE. There have been many local crashes, and the government can't stop them. Nor would they even want to; the current Republican administration would probably be quite happy to see blue states like California, New York, and Massachusetts crash and burn, and those states are where the worst bubbles are.
"Look, housing continued to rise after the dot-com crash, so it will always rise."
FALSE, consider the turkey in the farmer's barnyard. He thinks the farmer will always come feed him and not ask for anything. Then Thanksgiving comes. Whack. Past performance is no indication of future results.
"Rent can go up, but a 30-year fixed mortgage payment cannot."
TRUE, but irrelevant. House owners lose even with a fixed mortgage, because the price of a house falls as interest rates go up. Most people want to sell within 7 years of moving in, and many have to sell because of illness or divorce. No one can afford what the owner paid for it, so the owner has to take a large loss. Renting it out will not come close to covering the mortgage. Rents have fallen 23% in the last 4 years.
"You have to live somewhere."
TRUE, but that doesn't mean you should waste your life savings on a poor investment. You can live in the same kind of house by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his downpayment.
"Newspaper articles prove prices are going up."
FALSE. The numbers in the papers are not complete and have murky origins. Those prices are "estimated" from the county transfer tax and making that tax public record is optional. A buyer who does not want you to see how little he paid has only to ask to put the transfer tax on the back of the deed and it will not show up on computer searches of the deed, which show only the front. Others voluntarily pay more tax than they have to, in order to inflate the apparent price to fool the next buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo county, you have to pay only $100 extra tax to make your purchase price look $100,000 higher. Another common occurrence is for the buyer to get a large cash payment back from the seller. So the house price looks high in the paper, but in reality the buyer got a huge rebate.
"It's not a house, it's a home."
FALSE. It's a house. Wherever one lives is a home, be it apartment, condo, or house. Calling a house a "home" is a manipulation of your emotions for profit.
"If you don't buy now, you'll never get another chance."
FALSE. This argument was also popular more than a century ago in 1889 in Los Angeles, just before a huge crash. There are always sellers and there are always buyers. Prices are always corrected when they get beyond what buyers can pay. In fact, they're being corrected right now.
"Property in the Bay Area is a luxury good, and so will be less affected by economic downturns."
FALSE. 82% of last year's Bay Area mortgages are ARMs, and ARM loans are not taken out by the rich.
"The limited land in the Bay Area means prices will always go up."
FALSE. Japan has a very severe land shortage, but that hasn't stopped prices from falling for 14 years straight. If we really had a housing shortage, rents would be going up, but they're going down instead.
"It would take another 911 terrorist attack or a major earthquake that wipes out this area in order for the price to fall by 50%."
FALSE. Even with a 50% decline in prices to $300,000 or so, the median price in the Bay Area will still be roughly double the median price in most of America, and the median Bay Area household income of about $70,000 will still not be sufficient to buy a house. So a 50% decline is well justified by the fundamentals.
"Housing is an excellent hedge against inflation, so you should buy now anyway."
FALSE. House prices are moving exactly opposite to inflation. Interest rates go up with inflation, and higher interest will be the last straw for ARM mortgages in the Bay Area. Their defaults and foreclosures will drive down the cost of housing for everyone else around here. Remember that 82% of Bay Area mortgages are adjustable now. There is little chance that salaries of ARM owners can keep up with inflation because of two billion people in India and China who would be happy to do their jobs for much less money.
"Houses always increase in value in the long run."
FALSE. House values are actually constant. Warren Buffett and Charles Schwab have both pointed out that houses don't produce anything. They do not increase in intrinsic value. Unless there's a bubble, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite - it drained cash from its owners for 100 years of maintenance and taxes. Its price went up about as much as salaries went up.
According to Yale Professor Robert Shiller, housing prices in the US rose by an average "of just 0.66 per cent per year in the 114 years between 1890 and 2004 - and most of that was thanks to the boom of the past few years."
"Maybe we should just accept that we missed out on a great opportunity to get into the real estate in the past N years."
FALSE. Did we all miss out on a great opportunity to get into the stock of pets.com or other Internet companies with no business model? The question is what is likely to happen in the next few years according to fundamental economics. The last guy to buy into the bubble will get hurt the most.
"I just want to own my own home."
TRUE, most people do and that's fine. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. Home ownership is great - unless you ruin your life paying for it.
What should you do?
To win this game, buyers need to save up a big downpayment, and be willing to wait until prices fall much more. Then buyers should come in with a huge cash position when sellers are desperate. Sellers have to sell now, while they still can.
If you've already bought, keep careful records of everything your Realtor(TM), mortgage broker, and appraiser said to you in a professional capacity. You may be able to hold them legally liable for misrepresenting the likely future value of the house they sold you, just like some Wall Street analysts were held responsible for misrepresenting the prospects of Internet stocks during the previous bubble.
Y_lifter
New member
Agreed on the regional nature of home starts and sales..
I can easily say new homes are going up at a record pace and rate down here...
Also existing home sales are higher as well.
Good news is that I voted for several new county leaders that are smart enough to realize that they MUST significantly raise new home impact fees to pay for the services they use.
They have as much at doubled fees for some areas such as sewer/water connections, schools and parks.
The developers are now crying that the fees are pushing some first time low income buyers out of the market. But hell, they won't lose their profits, so they simply pass these fees into the buyer in higher home prices.
Causing some buyers to look at existing houses vs new ones in new developments..
I can easily say new homes are going up at a record pace and rate down here...
Also existing home sales are higher as well.
Good news is that I voted for several new county leaders that are smart enough to realize that they MUST significantly raise new home impact fees to pay for the services they use.
They have as much at doubled fees for some areas such as sewer/water connections, schools and parks.
The developers are now crying that the fees are pushing some first time low income buyers out of the market. But hell, they won't lose their profits, so they simply pass these fees into the buyer in higher home prices.
Causing some buyers to look at existing houses vs new ones in new developments..
I hear a lot of Realtors state how no more land is being made. But ask these same realtors how many homes are being built. According to some, homebuilders are building to many. Not sure about your area, but lot sizes has decreased in my area, and also there is a lot more of building "up" instead of "out. "
Families need a place to live, but does this mean they are willing to continue to pay the higher prices or more importantly, can they even afford the higher prices, esp when salaries are not keeping up with the increase.
The price increase has no legs. Usually when prices increase....this is a result of either the cost to build has increased...or like i stated earlier, there has been an increase is salaries. Neither are the case here. Seems the low interest rates helped to fuel this...which can be argued that will also be the demise of.
a false sense of wealth has been created. Look at the latest reports how consumer spending has increased....again, if salaries are the same at best...where is the funds coming from....before answering, lcheck the numbers on how many have been approved for a Home Equity Line of Credit or Home Equity Loans.
Families need a place to live, but does this mean they are willing to continue to pay the higher prices or more importantly, can they even afford the higher prices, esp when salaries are not keeping up with the increase.
The price increase has no legs. Usually when prices increase....this is a result of either the cost to build has increased...or like i stated earlier, there has been an increase is salaries. Neither are the case here. Seems the low interest rates helped to fuel this...which can be argued that will also be the demise of.
a false sense of wealth has been created. Look at the latest reports how consumer spending has increased....again, if salaries are the same at best...where is the funds coming from....before answering, lcheck the numbers on how many have been approved for a Home Equity Line of Credit or Home Equity Loans.
GoldenDelicious
New member
i think that the segment of the housing market that bought for an investment is exposed to the same soerts of things that happen on the stock market, though in contrast to stocks, people arent as fickle when it comes to property - theyre less inclined to panic sell, as they would with stocks.jerseyart said:
as for the owner/occupier segment of the market, i fully agree. people are always going to need a place to live, and people these days are more inclined to live in a home far more spacious than they absolutely need.
overall, imo it wont be the increase in interest rates that will determine if there is an implosion or not, its how quickly interest rates will rise that will decide it.
at the end of the day, im not putting my money on property at the moment
Very good point Golden,
A home is now considered a speculative investment for some. Thus is the analogy of the stock market. Interest Only Loans, IMO are a gamble. I have a background in risk management and actuarial science and I am still trying to calculate the risk with this,.
Factor in another scenario...and this does not apply to all areas...
but in Northern Jersey, Municipalities are starting to re-access the value of homes for tax purposes (increase property tax). So for sure taxes (..ie monthly payments) will increase.
Also, not sure if anyone has heard...but those PMI people are now starting to cut down on some of the insurance,......Hmmmm ?
could this be because some have mentioned a higher rate of defaults ?
Has anyone noticed those with subprime credit scores (mid 500) can now obtain 100% financing on a home. In the past, this never happened.
does the new bankruptcy laws have any play here ?
Why has Warren Buffet, taken such a huge interest in Trailer Homes ?
A home is now considered a speculative investment for some. Thus is the analogy of the stock market. Interest Only Loans, IMO are a gamble. I have a background in risk management and actuarial science and I am still trying to calculate the risk with this,.
Factor in another scenario...and this does not apply to all areas...
but in Northern Jersey, Municipalities are starting to re-access the value of homes for tax purposes (increase property tax). So for sure taxes (..ie monthly payments) will increase.
Also, not sure if anyone has heard...but those PMI people are now starting to cut down on some of the insurance,......Hmmmm ?
could this be because some have mentioned a higher rate of defaults ?
Has anyone noticed those with subprime credit scores (mid 500) can now obtain 100% financing on a home. In the past, this never happened.
does the new bankruptcy laws have any play here ?
Why has Warren Buffet, taken such a huge interest in Trailer Homes ?
S
Spartacus
Guest
I have an XGf in LA that I fear is in trouble
she bought a home in 02 or so for 290K
sold it last year for about 550K
by then we were split up
she was under the impression that the recent appreciaiton would continue for ever
and bought a new home I surmise at the "high water mark" of value
I wanted to explain to her the dangers in her line of thinking
she bought a home in 02 or so for 290K
sold it last year for about 550K
by then we were split up
she was under the impression that the recent appreciaiton would continue for ever
and bought a new home I surmise at the "high water mark" of value
I wanted to explain to her the dangers in her line of thinking
GoldenDelicious said:
I don't think price are going to drop 50% or anything, but I do think there will be a steady relative decline over the next 10 years or so due to a variety of factors. I just hope my plans will work out and I will be able to cash in at that time...
Good point about people with below average credit scores getting 90-100% financing.
Also the bloated portfolios of Freddie Mac and Fannie Mae and the fact that Greenspan actually warned against them.
There is definitely a bubble where I am. I purchased my home free and clear a couple years ago. I wonder what it would appraise for now and what it would actually sell for? There are also several houses in my neighborhood that have been on the market for several months now.
Also the bloated portfolios of Freddie Mac and Fannie Mae and the fact that Greenspan actually warned against them.
There is definitely a bubble where I am. I purchased my home free and clear a couple years ago. I wonder what it would appraise for now and what it would actually sell for? There are also several houses in my neighborhood that have been on the market for several months now.
Info on what Fannie Mae and Freddie Mac has to do with this:
Fannie and Freddie buy mortgages and repackage them as securities for sale to investors. That process, according to Snow and others, is important to their federal mandate.
But they also keep some of the loans and securities in their portfolios, generating earnings for shareholders.
Critics say the portfolios, totaling some $1.5 trillion, are not necessary for the housing mission and potentially threaten the financial system because they concentrate interest rate and prepayment risk at Fannie and Freddie.
While Greenspan has urged a deep portfolio cut to $200 billion each for Fannie and Freddie, some lawmakers have said that curtailing the portfolios may be disruptive to markets.
Long story short.....Fannie and Freddie want to minimize it's risk exposure......Now if the housing market continues to improve and some has argued..........why are the biggest mortgage lenders concerned.....hmmm ?
Fannie and Freddie buy mortgages and repackage them as securities for sale to investors. That process, according to Snow and others, is important to their federal mandate.
But they also keep some of the loans and securities in their portfolios, generating earnings for shareholders.
Critics say the portfolios, totaling some $1.5 trillion, are not necessary for the housing mission and potentially threaten the financial system because they concentrate interest rate and prepayment risk at Fannie and Freddie.
While Greenspan has urged a deep portfolio cut to $200 billion each for Fannie and Freddie, some lawmakers have said that curtailing the portfolios may be disruptive to markets.
Long story short.....Fannie and Freddie want to minimize it's risk exposure......Now if the housing market continues to improve and some has argued..........why are the biggest mortgage lenders concerned.....hmmm ?
GoldenDelicious
New member
oh no wy will you see a 50% drop, im thinking that in my area at least, prices will be stagnant, or poorly returning at best.Becoming said:
at the moment, id rather buy into, or start, a business. there would be greater benefit (especially in terms of lifestyle, but also in terms of economic return) for me that way
Y_lifter
New member
We built in 2002 getting in on the local home building booms prices,
and built with size and features we wanted for the Long Term.
With intent of this being an "Until Retirement" home vs: an investment.
I would be concerned with a plan of selling UP or Down in say, 5 years with a goal of making a "huge" increase in equity in this market at least.
and built with size and features we wanted for the Long Term.
With intent of this being an "Until Retirement" home vs: an investment.
I would be concerned with a plan of selling UP or Down in say, 5 years with a goal of making a "huge" increase in equity in this market at least.
Your absolute best way to find out is to go to your local County Court house / records hall and go through new deed registrations to develop an average closing price. They are a matter of public record but are not digital.bdog527 said:
Y_lifter said:
Even if you don't plan to sell, it would still suck. Say if you are a younger person say 25-35 who buys a home at an exorbitant cost (which they all nearly are nowadays), and then price drop, leaving you upside down... only to bust your ass endlessly, noticing everyday that you could have gotten something equal for less....
Sounds like a recipe for a lot of people to start dropping a bullet in that morning bowl of wheaties.
All the speculation buyers in real estate today reminds me of just a couple years ago right before the stock market went in the shitter... Everyone was buying on speculation and then the rug got pulled out.
S
Spartacus
Guest
I'll never go 30 years on my primary residence either
Becoming said:
Good Point here......and what is being said about this is......
If you are a home buyer and not a Real Estate Investor........to not fret. Your plan is long term, so if home prices do pull back, you will have a longer timeline for a return to better levels. Prices pull back every 10yrs or so.....over long term, prices have still increased overall. Those looking to hold 5yrs give or take....need to do their due diligence and be careful with their purchase.
FreeballinDC
Dumper Humper
WODIN said:
I don't even need to do that. Every day, I get cards in the mail from real estate agents who crow about the house they sold, which is on the next block from me, and how much it went for. I have had a couple of agents even ask me to sell.
F U 2, I ain't selling.
2ez said:
Sure, don't fret, cause it will be you who is stressing and not the person that gave this lame advice...
Not saying that you are wrong, I am sure long term the values will increase overall. I am just saying it will still suck and be depressing especially if you are one of the true home buyers... I mean, it might suck to an invester to lose cash, but lets face it, if you are a home buyer, in a majority of situations, that is all you got.
Just cause it will work out in the long run doesn't mean your daily grind will be any less gloomy.
Another Good Article from MarketWatch.
I actually thought I would find someone that believes the housing situation will either improve or stabilize..
The risks from falling home prices
By Chuck Jaffe, MarketWatch
Last Update: 3:31 PM ET April 8, 2005
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BOSTON (MarketWatch) -- When I interviewed for the job that first brought me to New England in 1994, I met with seven different executives.
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Four of them were underwater on their mortgage, meaning that if they had to sell their home in the Boston suburbs, they would have to bring money to the table to pay off their lender because the home had declined in value.
They spent more time talking to me about how nervous the situation was making them, and wondering aloud what might happen next, than they did asking me about my thoughts and feelings for what became my job.
Just over a decade later, in most regions of the country, the idea of people lying awake at night worried about home values seems like ancient history, the stuff of legend.
But that may be about to change.
The winter 2005 Risk Index issued by PMI Mortgage Insurance Co. shows that homeowners in 11 of the top 50 metro markets have at least a 25 percent chance of experiencing a housing-price decline over the next two years. My home base in the Boston-Cambridge-Quincy, Mass/N.H. metropolitan area had the worst score, a 53.3 percent probability of weaker home prices in the next two years. Six California markets rank in the top 10 most likely to see a price decline. (For a look at the full report, click here.)
In real estate markets that tend to go through cycles of being super-heated and then cooling off, declines don't necessarily last for just a year or two. In those situations, past history shows that a housing-price decline can last a decade or more.
While consumers in many parts of the country have grown accustomed to feeling like housing prices will grow forever, the PMI Risk Index should make homeowners start to wonder just how much things have changed.
The boom in housing prices in hot markets has been fueled by a number of factors, demand chief among them. But with mortgage interest rates at the lowest levels in decades, consumers took advantage of cheap money to push prices higher.
Now, rates are on the rise, cutting into buying power, which in turn takes some air out of the demand balloon.
The result is a changing environment, one which affects homebuyers and some -- but not all -- homeowners.
"People should not count on their house selling for a certain price in a certain year as they look ahead at their financial future," says Valerie Patterson of RealEstateJournal.com. "They should not count on some huge sum of money being there, because they could be looking at a long stretch where their house is not appreciating in value, or is growing in value very slowly."
If, indeed, residential real estate is headed for a turn, reactions to the change should vary based on circumstance.
Homebuyers, for example, need to worry about buying at the top of the market cycle, particularly if they do not expect to be in the house for long.
While flipping houses -- buying one, fixing it and then selling -- has made for some fast profits in many markets in recent years, if that trend is going to change, you don't want to be the one to buy in and get stuck.
Typically, financial advisers suggest considering a house a "use asset," meaning you get your value from it by using it every day, with appreciation being a secondary benefit.
For homeowners, a potential decline in home prices raises several issues.
Anyone hoping to maximize their home's value as they downsize or retire may want to speed up the process in an effort to capture top dollar. Without the ability to make a change now, advisers note that homeowners planning on a big windfall from their home may have to postpone plans and build their nest egg in other ways.
"Some people have let the real estate market save for them, figuring their house would make enough money to put them over the top for retirement," says Lisette Smith of Smith Rapacz, a Boston advisory firm. "If selling at a certain price will make or break someone's retirement, then a decline in home prices means they may fall short of their goals and will either have to work longer or save more to make up for it."
Likewise, homeowners planning major renovations may need to reconsider whether they can get the money out of their improvements in the future. They also need to avoid taking on too much home-equity debt, because the higher debt loads increase the potential to be underwater on financing.
"In a down market, people need to be more careful to keep their heads above water," says Patterson. "People have been spending, thinking everything would keep going up -- particularly in the hottest markets -- and now they might want to cut back a little."
Experts also suggest that in an environment that mixes declining home prices with rising interest rates, consumers who borrow against their home equity use the money on things closely related to the home. Upgrading a bathroom or the kitchen, for example, keeps the money in the house; paying for a vacation uses the cash for something with no relation to the home.
Whether a downturn in home prices is short and fast or steep and long -- or happens at all -- is likely to depend on local conditions, but failing to see it coming -- especially for people who are likely to want to cash out from their current property in the next five years -- is shortsighted.
Says Patterson: "You haven't heard of people being underwater on their mortgage for a long time, but you are about to hear about it more and more, because it's going to be a real problem for a lot of homeowners."
I actually thought I would find someone that believes the housing situation will either improve or stabilize..
The risks from falling home prices
By Chuck Jaffe, MarketWatch
Last Update: 3:31 PM ET April 8, 2005
E-mail it | Print | Discuss | Alert | Reprint |
BOSTON (MarketWatch) -- When I interviewed for the job that first brought me to New England in 1994, I met with seven different executives.
Free! Sign up here to receive our Mutual Funds Weekly e-Newsletter!
Four of them were underwater on their mortgage, meaning that if they had to sell their home in the Boston suburbs, they would have to bring money to the table to pay off their lender because the home had declined in value.
They spent more time talking to me about how nervous the situation was making them, and wondering aloud what might happen next, than they did asking me about my thoughts and feelings for what became my job.
Just over a decade later, in most regions of the country, the idea of people lying awake at night worried about home values seems like ancient history, the stuff of legend.
But that may be about to change.
The winter 2005 Risk Index issued by PMI Mortgage Insurance Co. shows that homeowners in 11 of the top 50 metro markets have at least a 25 percent chance of experiencing a housing-price decline over the next two years. My home base in the Boston-Cambridge-Quincy, Mass/N.H. metropolitan area had the worst score, a 53.3 percent probability of weaker home prices in the next two years. Six California markets rank in the top 10 most likely to see a price decline. (For a look at the full report, click here.)
In real estate markets that tend to go through cycles of being super-heated and then cooling off, declines don't necessarily last for just a year or two. In those situations, past history shows that a housing-price decline can last a decade or more.
While consumers in many parts of the country have grown accustomed to feeling like housing prices will grow forever, the PMI Risk Index should make homeowners start to wonder just how much things have changed.
The boom in housing prices in hot markets has been fueled by a number of factors, demand chief among them. But with mortgage interest rates at the lowest levels in decades, consumers took advantage of cheap money to push prices higher.
Now, rates are on the rise, cutting into buying power, which in turn takes some air out of the demand balloon.
The result is a changing environment, one which affects homebuyers and some -- but not all -- homeowners.
"People should not count on their house selling for a certain price in a certain year as they look ahead at their financial future," says Valerie Patterson of RealEstateJournal.com. "They should not count on some huge sum of money being there, because they could be looking at a long stretch where their house is not appreciating in value, or is growing in value very slowly."
If, indeed, residential real estate is headed for a turn, reactions to the change should vary based on circumstance.
Homebuyers, for example, need to worry about buying at the top of the market cycle, particularly if they do not expect to be in the house for long.
While flipping houses -- buying one, fixing it and then selling -- has made for some fast profits in many markets in recent years, if that trend is going to change, you don't want to be the one to buy in and get stuck.
Typically, financial advisers suggest considering a house a "use asset," meaning you get your value from it by using it every day, with appreciation being a secondary benefit.
For homeowners, a potential decline in home prices raises several issues.
Anyone hoping to maximize their home's value as they downsize or retire may want to speed up the process in an effort to capture top dollar. Without the ability to make a change now, advisers note that homeowners planning on a big windfall from their home may have to postpone plans and build their nest egg in other ways.
"Some people have let the real estate market save for them, figuring their house would make enough money to put them over the top for retirement," says Lisette Smith of Smith Rapacz, a Boston advisory firm. "If selling at a certain price will make or break someone's retirement, then a decline in home prices means they may fall short of their goals and will either have to work longer or save more to make up for it."
Likewise, homeowners planning major renovations may need to reconsider whether they can get the money out of their improvements in the future. They also need to avoid taking on too much home-equity debt, because the higher debt loads increase the potential to be underwater on financing.
"In a down market, people need to be more careful to keep their heads above water," says Patterson. "People have been spending, thinking everything would keep going up -- particularly in the hottest markets -- and now they might want to cut back a little."
Experts also suggest that in an environment that mixes declining home prices with rising interest rates, consumers who borrow against their home equity use the money on things closely related to the home. Upgrading a bathroom or the kitchen, for example, keeps the money in the house; paying for a vacation uses the cash for something with no relation to the home.
Whether a downturn in home prices is short and fast or steep and long -- or happens at all -- is likely to depend on local conditions, but failing to see it coming -- especially for people who are likely to want to cash out from their current property in the next five years -- is shortsighted.
Says Patterson: "You haven't heard of people being underwater on their mortgage for a long time, but you are about to hear about it more and more, because it's going to be a real problem for a lot of homeowners."
Y_lifter said:
Hmmmm ?
so your saying cools the increase....and not pull back some ?
Think about it....
If homes idle for to long without a sale....someone is going to give in and then another and another.
Inflation is an issue.
i went to look at cars....seems you can't get anything for under $25k now. now look at oil and medical cost.
How does one keep up with all this....while salaries are still constant or lower ?
Answer: They will not be able to.....which leads one to believe that the recent change in the bankruptcy law is some forward thinking by our government.
Also, and I am not sure if anyone has heard....but savings are near an all time low. You see people are spending and spending...(according to the Government) but no one is saving (according to the Gov). A false sense of wealth. Check today's news on Bush's plan for Social Security. If you know like i know, you better put a little something away......but where is the Million Dollar question.
May 3rd (This Tuesday) is the next FED meeting on interest rates. Some are saying a definite 1/4pt.....but with the latest news on inflation, anything is possible...yet GreenSpan is conservative, so i don't know.
So why wouldn't GreenSpan raise rates to deal with Inflation ?
Answer: Well many believe that the housing market is the only thing holding up our economy. Increasing rates will have an affect on housing purchases. with the dollar weakened, deficit at all time high....it would be detrimental to loose the housing market...
but we may be at a point where there is no other option.
Last edited:
From Economist.com
Will the walls come falling down?
Apr 20th 2005
From The Economist Global Agenda
House prices have been growing at a breakneck pace in many developed countries. This has encouraged householders to keep spending even during the global slowdown. But now that housing markets are looking soft, consumers may be forced to retrench
AMERICAN homeowners, particularly those who have just bought their properties, are full of reasons why the run-up in house prices in recent years will continue indefinitely. These days, however, this is beginning to sound like so much whistling in the dark. While prices rose by 11.2% in 2004, the rate of increase slowed markedly in the fourth quarter, to only 1.7%. On Tuesday April 19th, the Commerce Department announced that housing starts fell by 17.6% in March, the sharpest monthly decline since 1991. The next day, the Mortgage Bankers of America (MBA), an industry group, reported that mortgage applications had fallen the previous week, despite a slight dip in interest rates. Investors who thought that real estate was a haven from the volatility of the equity markets might be getting a little nervous.
But worse may come. House prices have received an enormous boost in recent years from falling interest rates, which enabled homeowners to sell their properties for a higher price without a commensurate increase in the buyer’s monthly mortgage payment. But as interest rates have started to rise, buyers have turned to increasingly risky forms of financing in order to keep their monthly payment from bankrupting them. The MBA reports that over a third of new applications in recent weeks have been for adjustable-rate mortgages, up from just 12% in 2001. Anecdotal evidence suggests that “interest only” mortgages, which allow borrowers to make no payments on principal for a period of years, are also on the rise.
These changes have allowed more marginal homebuyers to clamber on to the housing ladder. But if interest rates rise as economists expect, many of those buyers will find it difficult to keep up their payments. And with many putting so little down—a fifth of American mortgages in 2003 were for more than 90% of the purchase price—any fall in house prices could leave a lot of them with negative equity, forcing them to default.
The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. And people seem increasingly to be basing their house-buying decisions on the notion that the large capital returns of the past few years—house prices in America are up by 65% since 1997—will continue indefinitely. As with a stockmarket bubble, if this confidence is shaken, prices could begin to fall rapidly.
Not merely an American folly
America is not the only country that has been experiencing a big run-up in prices. Its market isn’t even the most frothy. Between 1997 and 2004, house prices more than doubled in Australia, Britain and Spain, and nearly tripled in South Africa and Ireland (see table). And while America’s ratio of house prices to rents is 32% higher than its average value from 1975 to 2000, by that metric houses are even more overvalued elsewhere: by at least 60% in Britain, Australia and Spain, and by 46% in France.
Inflated house prices may have been a key factor in helping these countries weather the global slowdown in 2001. When household wealth is increasing, particularly housing wealth, consumers respond by saving less and spending more; economists call this the “wealth effect”. Explosive house-price growth thus encouraged consumers to keep their spending steady despite external shocks. It is probably not a coincidence that Germany, one of the few European countries where house prices have not been rising, fared far worse during the slowdown than its neighbours or America.
Unfortunately, when housing markets decline, the same process works in reverse: consumers have to cut back their spending and save more to compensate for lost home equity. Lower consumer demand generally means a slowdown in GDP. The sharper the correction, the greater the effect on the overall economy.
But how far will the market really fall? Prices have already begun to soften in places like London and New York, particularly at the high end, but it is possible that in most places price increases could simply moderate, giving incomes and rents time to catch up. An IMF study on asset bubbles estimates that 40% of housing booms are followed by housing busts, which last for an average of four years and see an average decline of roughly 30% in home values. But given how many homebuyers in booming markets seem to be basing their purchasing decisions on expectations of outsized returns—a recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decade—nasty downturns in at least some markets seem likely.
A fall in American house prices could be bad news not just for American homeowners, but for the rest of the world. Robust American demand has supported export-driven growth in many economies, particularly emerging markets and Asia. If American consumers have to raise their abysmal savings rate, exporting nations will feel the pinch. And given the parlous state of the Japanese and European economies, it seems unlikely that they will be able to pick up the slack—particularly if many European countries are coping with the fallout from their own housing bubbles.
Most worryingly, a collapse in American export demand could trigger a vicious cycle. In order to keep their currencies low against the dollar, and thus boost exports to America, Asian central banks have been accumulating dollar reserves, which they have poured into Treasury bonds. This has increased the supply of capital in America, and thus been at least partly responsible for the borrowing binge that fuelled the housing boom. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further. Those who thought that housing was a haven may be in for a nasty surprise.
Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.
Will the walls come falling down?
Apr 20th 2005
From The Economist Global Agenda
House prices have been growing at a breakneck pace in many developed countries. This has encouraged householders to keep spending even during the global slowdown. But now that housing markets are looking soft, consumers may be forced to retrench
AMERICAN homeowners, particularly those who have just bought their properties, are full of reasons why the run-up in house prices in recent years will continue indefinitely. These days, however, this is beginning to sound like so much whistling in the dark. While prices rose by 11.2% in 2004, the rate of increase slowed markedly in the fourth quarter, to only 1.7%. On Tuesday April 19th, the Commerce Department announced that housing starts fell by 17.6% in March, the sharpest monthly decline since 1991. The next day, the Mortgage Bankers of America (MBA), an industry group, reported that mortgage applications had fallen the previous week, despite a slight dip in interest rates. Investors who thought that real estate was a haven from the volatility of the equity markets might be getting a little nervous.
But worse may come. House prices have received an enormous boost in recent years from falling interest rates, which enabled homeowners to sell their properties for a higher price without a commensurate increase in the buyer’s monthly mortgage payment. But as interest rates have started to rise, buyers have turned to increasingly risky forms of financing in order to keep their monthly payment from bankrupting them. The MBA reports that over a third of new applications in recent weeks have been for adjustable-rate mortgages, up from just 12% in 2001. Anecdotal evidence suggests that “interest only” mortgages, which allow borrowers to make no payments on principal for a period of years, are also on the rise.
These changes have allowed more marginal homebuyers to clamber on to the housing ladder. But if interest rates rise as economists expect, many of those buyers will find it difficult to keep up their payments. And with many putting so little down—a fifth of American mortgages in 2003 were for more than 90% of the purchase price—any fall in house prices could leave a lot of them with negative equity, forcing them to default.
The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. And people seem increasingly to be basing their house-buying decisions on the notion that the large capital returns of the past few years—house prices in America are up by 65% since 1997—will continue indefinitely. As with a stockmarket bubble, if this confidence is shaken, prices could begin to fall rapidly.
Not merely an American folly
America is not the only country that has been experiencing a big run-up in prices. Its market isn’t even the most frothy. Between 1997 and 2004, house prices more than doubled in Australia, Britain and Spain, and nearly tripled in South Africa and Ireland (see table). And while America’s ratio of house prices to rents is 32% higher than its average value from 1975 to 2000, by that metric houses are even more overvalued elsewhere: by at least 60% in Britain, Australia and Spain, and by 46% in France.
Inflated house prices may have been a key factor in helping these countries weather the global slowdown in 2001. When household wealth is increasing, particularly housing wealth, consumers respond by saving less and spending more; economists call this the “wealth effect”. Explosive house-price growth thus encouraged consumers to keep their spending steady despite external shocks. It is probably not a coincidence that Germany, one of the few European countries where house prices have not been rising, fared far worse during the slowdown than its neighbours or America.
Unfortunately, when housing markets decline, the same process works in reverse: consumers have to cut back their spending and save more to compensate for lost home equity. Lower consumer demand generally means a slowdown in GDP. The sharper the correction, the greater the effect on the overall economy.
But how far will the market really fall? Prices have already begun to soften in places like London and New York, particularly at the high end, but it is possible that in most places price increases could simply moderate, giving incomes and rents time to catch up. An IMF study on asset bubbles estimates that 40% of housing booms are followed by housing busts, which last for an average of four years and see an average decline of roughly 30% in home values. But given how many homebuyers in booming markets seem to be basing their purchasing decisions on expectations of outsized returns—a recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decade—nasty downturns in at least some markets seem likely.
A fall in American house prices could be bad news not just for American homeowners, but for the rest of the world. Robust American demand has supported export-driven growth in many economies, particularly emerging markets and Asia. If American consumers have to raise their abysmal savings rate, exporting nations will feel the pinch. And given the parlous state of the Japanese and European economies, it seems unlikely that they will be able to pick up the slack—particularly if many European countries are coping with the fallout from their own housing bubbles.
Most worryingly, a collapse in American export demand could trigger a vicious cycle. In order to keep their currencies low against the dollar, and thus boost exports to America, Asian central banks have been accumulating dollar reserves, which they have poured into Treasury bonds. This has increased the supply of capital in America, and thus been at least partly responsible for the borrowing binge that fuelled the housing boom. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further. Those who thought that housing was a haven may be in for a nasty surprise.
Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.
Y_lifter
New member
They have been stable or rising since the 1980's thanks to Urban Sprawl...
Impact fees and property tax rates have remained very stable and too low
down here for years. Hence the issue we are having right now with services being overloaded and home prices going up partially due to the 100%+ increase in Impact fees for NEW houses..
People will simply not buy new and but existing to get around this issue.
Right now, new home sales are like 70% of total.
I would be shocked if values dropped more then a couple % if any..
Impact fees and property tax rates have remained very stable and too low
down here for years. Hence the issue we are having right now with services being overloaded and home prices going up partially due to the 100%+ increase in Impact fees for NEW houses..
People will simply not buy new and but existing to get around this issue.
Right now, new home sales are like 70% of total.
I would be shocked if values dropped more then a couple % if any..
Few things to consider:
1. Greenspan retires January 2006. Last thing he wants is to not go out on so-called top.
2. If Real Estate is really booming...why hasn't commercial real estate appreciated the same.
3. Salaries are not increasing, nor are jobs being created.
4. Creative mortgages (ie., interest only, No Doc and now the new 40yr mortgage) are the only way some are able to buy.
5. Companies are loosing valuable employees in the boom areas due to unaffordable housing.
6. Cheaper to rent than to own.
7. Smart Money (Big institutions) are now selling out of the home builders stock.
8. Sub prime borrowers are able to get a loan.
9. New bankruptcy laws.
10. Fannie Mae and Freddie Mac want to decrease risk exposure.
the list goes on and on.......but i will stop here.
Again, there is a very strong argument to support a pull back.
I ask you a very simple question....how can people afford these homes if salaries are not increasing ?
1. Greenspan retires January 2006. Last thing he wants is to not go out on so-called top.
2. If Real Estate is really booming...why hasn't commercial real estate appreciated the same.
3. Salaries are not increasing, nor are jobs being created.
4. Creative mortgages (ie., interest only, No Doc and now the new 40yr mortgage) are the only way some are able to buy.
5. Companies are loosing valuable employees in the boom areas due to unaffordable housing.
6. Cheaper to rent than to own.
7. Smart Money (Big institutions) are now selling out of the home builders stock.
8. Sub prime borrowers are able to get a loan.
9. New bankruptcy laws.
10. Fannie Mae and Freddie Mac want to decrease risk exposure.
the list goes on and on.......but i will stop here.
Again, there is a very strong argument to support a pull back.
I ask you a very simple question....how can people afford these homes if salaries are not increasing ?
Sup Y Lifter,
yeah that was last weeks news.
I guess you didn't catch what was said 2-3days later.
Seems as of April 1, 2005, the new housing numbers now consider condos and townhomes and not just single family homes. Also, the number has not been fully calculated and reflects an estimate....
Let's see what happens next month bro.
Thanks for the article though...
but never believe the hype....especially statistics...i know to well how to lie with statistics...
I was a trader, but now working in an Actuarial capacity. Actuaries are similar to statisticians.
yeah that was last weeks news.
I guess you didn't catch what was said 2-3days later.
Seems as of April 1, 2005, the new housing numbers now consider condos and townhomes and not just single family homes. Also, the number has not been fully calculated and reflects an estimate....
Let's see what happens next month bro.
Thanks for the article though...
but never believe the hype....especially statistics...i know to well how to lie with statistics...
I was a trader, but now working in an Actuarial capacity. Actuaries are similar to statisticians.
Hey Wodin,
Toll Brothers are one of the biggest home builders right. ? Well if things will continue....hehehehe
Why is he selling so much of his shares:
Shares Sold by Robert Toll, CEO of Toll Brothers
Date Number of Shares Sold Dollar Value of Sale
December 10, 2004 988,700 $63,446,065
December 13, 2004 250,000 $15,738,075
February 23, 2005 Goes on CNBC and touts his company’s stock.
February 24, 2005 777,500 $68,219,249
February 25, 2005 472,500 $41,863,027
Total sales 2,448,700 shares = $268,450,556
Not sure which way it will go....but there is a strong argument to support a pull back.
Toll Brothers are one of the biggest home builders right. ? Well if things will continue....hehehehe
Why is he selling so much of his shares:
Shares Sold by Robert Toll, CEO of Toll Brothers
Date Number of Shares Sold Dollar Value of Sale
December 10, 2004 988,700 $63,446,065
December 13, 2004 250,000 $15,738,075
February 23, 2005 Goes on CNBC and touts his company’s stock.
February 24, 2005 777,500 $68,219,249
February 25, 2005 472,500 $41,863,027
Total sales 2,448,700 shares = $268,450,556
Not sure which way it will go....but there is a strong argument to support a pull back.
Y_lifter
New member
I never said the BOOM wasn't gonna slow down here, or even creep slightly down.
I just don't think it will ever really crash is all here locally in Central Florida Suburbia..
I look around me every day as I drive and see more "single family" home developments going up, rezoning signs and land being cleared for even more..
Most all of them selling as soon as the lots go up for sale within 6 months..
I just don't think it will ever really crash is all here locally in Central Florida Suburbia..
I look around me every day as I drive and see more "single family" home developments going up, rezoning signs and land being cleared for even more..
Most all of them selling as soon as the lots go up for sale within 6 months..
you could be right...
but keep an eye on jobs and if salaries increase. someone has to buy right. Consider if builders are building to many. consider the prices to salaries and if creative mortgages are the only way to purchase. Realtors are now economist. they are saying there is a shortage of land, which I say is rhetorical BS. Also, land is being redeveloped. so again BS to what realtors are saying.
Saw this on a Real Estate message board:
Question: how much money does a person who lives in a $400,000 priced home have to make to afford that home? I live in NE Florida and it seems like all the new homes going up are 400-700k, are there that many highpaying jobs out there that people can afford those homes?
Reply: they are based upon INTEREST ONLY loans. The people buying these houses are smart in a way. The lenders are the dunces. In effect they are merely paying rent (Interest only loan is about 60% monthly payment of a regular mortgage) and when the prices go south (In overheated markets like Florida coast, San Diego and where I live in New Jersey, prices will fall about 30%-40% over time) the "Owners" will merely walk out of their temporary housing and leave the lender with a rapidly depreciating asset in which to further clog a market that will be full of foreclosedproperties. Watch what happens.
Reply #2: sold a house for payoff only to a guy who buys unwanted properties. He made $5M last year, expects that to triple this year due to foreclosures.
Reply#3: I wonder the same thing. I don't think there are enough jobs that pay well enough to justify the number of homes by me being sold in that price range (or even higher).
Reply #4: One things for sure. To afford any house, the prices must fall or wages must increase while interest rates climb; and climb they will.
"Many analysts believe 30-year mortgage rates, which dropped for a fourth-consecutive week to 5.78 percent last week, will begin rising in the months ahead and will likely end the year around 6.5 percent, still low enough to likely keep sales of both new and existing homes near last year's record levels."
Even by conservative estimates, housing must fall 7% or wages climb 10% by end of year.
Payment on $100K at 5.78% = $585.48
Payment on $100K at 6.5% = $632.07
Payment on $92.63K at 6.5% = $585.48
but keep an eye on jobs and if salaries increase. someone has to buy right. Consider if builders are building to many. consider the prices to salaries and if creative mortgages are the only way to purchase. Realtors are now economist. they are saying there is a shortage of land, which I say is rhetorical BS. Also, land is being redeveloped. so again BS to what realtors are saying.
Saw this on a Real Estate message board:
Question: how much money does a person who lives in a $400,000 priced home have to make to afford that home? I live in NE Florida and it seems like all the new homes going up are 400-700k, are there that many highpaying jobs out there that people can afford those homes?
Reply: they are based upon INTEREST ONLY loans. The people buying these houses are smart in a way. The lenders are the dunces. In effect they are merely paying rent (Interest only loan is about 60% monthly payment of a regular mortgage) and when the prices go south (In overheated markets like Florida coast, San Diego and where I live in New Jersey, prices will fall about 30%-40% over time) the "Owners" will merely walk out of their temporary housing and leave the lender with a rapidly depreciating asset in which to further clog a market that will be full of foreclosedproperties. Watch what happens.
Reply #2: sold a house for payoff only to a guy who buys unwanted properties. He made $5M last year, expects that to triple this year due to foreclosures.
Reply#3: I wonder the same thing. I don't think there are enough jobs that pay well enough to justify the number of homes by me being sold in that price range (or even higher).
Reply #4: One things for sure. To afford any house, the prices must fall or wages must increase while interest rates climb; and climb they will.
"Many analysts believe 30-year mortgage rates, which dropped for a fourth-consecutive week to 5.78 percent last week, will begin rising in the months ahead and will likely end the year around 6.5 percent, still low enough to likely keep sales of both new and existing homes near last year's record levels."
Even by conservative estimates, housing must fall 7% or wages climb 10% by end of year.
Payment on $100K at 5.78% = $585.48
Payment on $100K at 6.5% = $632.07
Payment on $92.63K at 6.5% = $585.48
heck i live in Loudoun County,VA ...3rd fastest growing county last year....and was number one fastest for 3-4yrs in a row before that....townhouse i got in 99 for $223k, neighbors putting theirs up for sale for $469k and are 300 sq feet less for. Figure if i sold, i could for $500k for 1900 sq ft living area.
Only problem is that i can't afford to get a single fam or another townhouse...since avg is $450 for a townhouse and $600 for a single fam
they are up for sale and under contract in 2 days...w/10 contracts put in by cob of open house...its crazy in the DC/Metro area...
Only problem is that i can't afford to get a single fam or another townhouse...since avg is $450 for a townhouse and $600 for a single fam
they are up for sale and under contract in 2 days...w/10 contracts put in by cob of open house...its crazy in the DC/Metro area...
But how much for the land YLifter ?
Wodin,
There are people dying in Florida too !
http://blue-state-secession.com/death_rate.htm
For every action, there is a reaction......But if you can find the male to female ratio....hehehe Let me know..... ! I may have to make a move.
GTRcivic,
your area is one of the top so-called bubble spots.
LetStat,
Please let me know how things work out. I have a cousin in the Palo Alto area that owns a Century 21. He is very well off these days as a result of what has happened in the Bay area.
Wodin,
There are people dying in Florida too !
http://blue-state-secession.com/death_rate.htm
For every action, there is a reaction......But if you can find the male to female ratio....hehehe Let me know..... ! I may have to make a move.
GTRcivic,
your area is one of the top so-called bubble spots.
LetStat,
Please let me know how things work out. I have a cousin in the Palo Alto area that owns a Century 21. He is very well off these days as a result of what has happened in the Bay area.
Last edited:
Y_lifter
New member
2ez said:
Varies on where it is really and what it is Zoned for..
Most houses down here in Orange/Seminole Co's (Central Fl-Orlando area)
are being built in developed communities, where the House/Lot are combined into the total price. And for the larger lots in the subdivision, you simply pay a $10K or so premium for them on top of that when you pick it out to build.. This is what we did 2.5 years ago.
As to buying property alone..
Some R1AA (SF Residential zoned) or lakefront property for developers can be as high as $100K an acre or more.
Though there are not many "non rural" lots for sale by themselves typically here.
Developers buy the land in 200+ acre chunks, they develop it, and then you buy house/lot combined from them and they build on it.
Some (Agricul or R1a) lots in more Rural area of the county can be bought in 1-5 acre lots for $20K an acre or less.
Interesting Article from Yahoo....
Majority of Californians make less than half the income needed to buy a home 1 hour, 46 minutes ago
LOS ANGELES -- California households are making less than half the income necessary to buy a median-priced home in the first quarter of 2005.
Statewide households, with a median household income of $53,540, are $60,380 short of the $113,920 qualifying income needed to purchase a median-priced home at $488,600 in California, according to the California Association of Realtors (C.A.R.) Homebuyer Income Gap Index (HIGI) report for the first quarter of 2005.
The association's HIGI is a quarterly analysis of the difference between the median household income and the qualifying income needed to purchase a median-priced, single-family home in the state and for selected regions within the state.
The HIGI is calculated with the same assumptions used to generate C.A.R.'s monthly Housing Affordability Index (HAI); a 20 percent down payment and a monthly payment for principal, interest, taxes and insurance (PITI) that is no more than 30 percent of a household's income.
For Southern California, the median-priced home was $477,660, which required a qualifying income of $111,370 to make the monthly PITI payment of $2,780. However, the median household income for Southern California was $52,050, leaving an income shortfall of $59,320.
"These numbers are particularly troubling for would-be first-time homebuyers, who often are locked out of homeownership because of the lack of affordable homes for sale," said C.A.R. President Jim Hamilton. "While home sales statewide continue to surge, the California real estate market is being dominated by repeat homebuyers, who account for three out of four home purchases in the state."
The HIGI for California increased 44.9 percent during the first quarter of 2005 compared to the first quarter of 2004, when the gap stood at $41,660, the median household income was $52,320, and qualifying income needed to purchase a median-priced home at $407,710 was $93,980.
"At $100,000, the household incomes of repeat homebuyers are much greater than the population as a whole," Hamilton said. "Repeat buyers also are able to take advantage of equity gains in their current homes, with many making a down payment on their new home that's frequently greater than 20 percent.
"For those repeat buyers, the income gap can fall as low as $23,320. Even though repeat buyers fare better than first-timers, that's little consolation to Californians spending a significant portion of their income servicing their monthly mortgage," Hamilton added.
According to the report, potential homebuyers in the Central Valley, with a median household income of $41,040, had the smallest income gap at $32,660, and needed a qualifying income of $73,700 to purchase a median-priced home at $316,100.
The San Francisco Bay area had the highest gap in the state at $92,930, where potential homebuyers had a median household income of $67,770 but needed qualifying income of $160,700 to purchase a median-priced home at $689,240.
Majority of Californians make less than half the income needed to buy a home 1 hour, 46 minutes ago
LOS ANGELES -- California households are making less than half the income necessary to buy a median-priced home in the first quarter of 2005.
Statewide households, with a median household income of $53,540, are $60,380 short of the $113,920 qualifying income needed to purchase a median-priced home at $488,600 in California, according to the California Association of Realtors (C.A.R.) Homebuyer Income Gap Index (HIGI) report for the first quarter of 2005.
The association's HIGI is a quarterly analysis of the difference between the median household income and the qualifying income needed to purchase a median-priced, single-family home in the state and for selected regions within the state.
The HIGI is calculated with the same assumptions used to generate C.A.R.'s monthly Housing Affordability Index (HAI); a 20 percent down payment and a monthly payment for principal, interest, taxes and insurance (PITI) that is no more than 30 percent of a household's income.
For Southern California, the median-priced home was $477,660, which required a qualifying income of $111,370 to make the monthly PITI payment of $2,780. However, the median household income for Southern California was $52,050, leaving an income shortfall of $59,320.
"These numbers are particularly troubling for would-be first-time homebuyers, who often are locked out of homeownership because of the lack of affordable homes for sale," said C.A.R. President Jim Hamilton. "While home sales statewide continue to surge, the California real estate market is being dominated by repeat homebuyers, who account for three out of four home purchases in the state."
The HIGI for California increased 44.9 percent during the first quarter of 2005 compared to the first quarter of 2004, when the gap stood at $41,660, the median household income was $52,320, and qualifying income needed to purchase a median-priced home at $407,710 was $93,980.
"At $100,000, the household incomes of repeat homebuyers are much greater than the population as a whole," Hamilton said. "Repeat buyers also are able to take advantage of equity gains in their current homes, with many making a down payment on their new home that's frequently greater than 20 percent.
"For those repeat buyers, the income gap can fall as low as $23,320. Even though repeat buyers fare better than first-timers, that's little consolation to Californians spending a significant portion of their income servicing their monthly mortgage," Hamilton added.
According to the report, potential homebuyers in the Central Valley, with a median household income of $41,040, had the smallest income gap at $32,660, and needed a qualifying income of $73,700 to purchase a median-priced home at $316,100.
The San Francisco Bay area had the highest gap in the state at $92,930, where potential homebuyers had a median household income of $67,770 but needed qualifying income of $160,700 to purchase a median-priced home at $689,240.
Razorguns
Well-known member
2ez said:
Supply vs Demand.
Southern California / LA, is crowded like fuck. Everyone and their mother lives here.
The amount of homes are limited. Almost every square inch in that metro part of LA where everyone wants to live -- is pretty much accounted for and zoned.
Therefore -- demand is what's dictating those prices. These "poor" people are more than welcome to live in Valencia or Riverside where you can get a nice home for $180,000. But of course -- they don't want to live there. Commuting is a bitch.
So there's not much you can do. Even if you magically waved a magic wand and made those houses $200,000 in Burbank -- there'd be 10,000 people lining up bidding for it. Driving the price back up to $480,000.
The only solution is for these poor people to start moving into outlying areas. Real estate in Bakersfield is pretty fucking cheap.
btw: I've ignored the ethnic angle of this issue. That's for another day.
Price may not get back to $480k if interest rates are 8%.
Every $100k borrowed today, is approx $600 per month, not including taxes and PMI. At $480k, you are talking well over $3000 per month.
Now take this same example and use 8%...and that $3000+ monthly mortgage less taxes and PMI is now $4000+, $5000 is probably closer to what is actual.
Not sure how many of those 10,000 people will be willing to pay that note.
Every $100k borrowed today, is approx $600 per month, not including taxes and PMI. At $480k, you are talking well over $3000 per month.
Now take this same example and use 8%...and that $3000+ monthly mortgage less taxes and PMI is now $4000+, $5000 is probably closer to what is actual.
Not sure how many of those 10,000 people will be willing to pay that note.
Y_lifter
New member
IMO, Calif is dying a Slow Liberal Death..
Every time I visit, I am amazed and the money being poured into goverment intrusion, regulations, Govmt Warning/Liability signs posted everywhere etc..
It's only saving grace is hollywood and that it's a beautiful state scenery wise..
Every time I visit, I am amazed and the money being poured into goverment intrusion, regulations, Govmt Warning/Liability signs posted everywhere etc..
It's only saving grace is hollywood and that it's a beautiful state scenery wise..
ridethesnake
New member
prop values are going up while rent is staying the same . . . .
a lot like the valuation of tech stocks soared without relation to P/E ratio. bad news.
i heard a commercial on the radio for a real estate school that was promising six figure incomes to people with no college degrees. bad news.
this could easily tie in to a devaluation of the $, making everything we buy more expensive (NOTHING is manufactured domestically anymore), making people default on non-specualtory homes. bad news.
that said, if you're careful and buy the right house with the intent of living in it for a long time you should be OK.
me, i'm waiting for everyone to default on their 2nd morgtages before I look at property.
a lot like the valuation of tech stocks soared without relation to P/E ratio. bad news.
i heard a commercial on the radio for a real estate school that was promising six figure incomes to people with no college degrees. bad news.
this could easily tie in to a devaluation of the $, making everything we buy more expensive (NOTHING is manufactured domestically anymore), making people default on non-specualtory homes. bad news.
that said, if you're careful and buy the right house with the intent of living in it for a long time you should be OK.
me, i'm waiting for everyone to default on their 2nd morgtages before I look at property.
Razorguns
Well-known member
Y_lifter said:
LA, which is not a surprise since many of the newcomers come from 2/3rd world countries -- is resembling more and more a 2nd/3rd world country.
Which is..
a plethora of rich people ... and a massive amount of poor people.
Sad cuz the strength of this country was it's preponderance of a middle class. The Beaver Cleaver nuclear family with a nice house and white picket fence. The Middle class are moving out.
But you're right. If it wasn't for the government injecting billions into this city for all kinds of services, jobs, etc. -- the place would die horribly.
The population is growing by leaps and bounds. But the new population really aren't producers or innovators. Just adding to an already high poor class.
Testosterone boy
New member
depends on the economy I reckon
fogg88
New member
2ez,
Not sure if you're very knowledgable about this, but it doesn't hurt to ask...
What's your opinion of the current bubble in the metro-Phoenix housing market? Do you see that following the same downward trends as Las Vegas and California? ...specifically, I won't be purchasing a home for about another two years, when I'm finally done with my post-grad. I'm hoping that by then things have returned to normal. (wishful thinking?)
Not sure if you're very knowledgable about this, but it doesn't hurt to ask...
What's your opinion of the current bubble in the metro-Phoenix housing market? Do you see that following the same downward trends as Las Vegas and California? ...specifically, I won't be purchasing a home for about another two years, when I'm finally done with my post-grad. I'm hoping that by then things have returned to normal. (wishful thinking?)
Sorry for the delay Fogg88,
Not exactly sure about Pheonix. I am hearing more about some areas being affected less or more than others. Here is a recent article on your area:
http://www.azcentral.com/news/articles/0515downtownliving.html
Not exactly sure about Pheonix. I am hearing more about some areas being affected less or more than others. Here is a recent article on your area:
http://www.azcentral.com/news/articles/0515downtownliving.html
GreenSpan now believes
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan said Friday the booming U.S. housing sector shows signs of some "froth" but that the central bank does not see a national housing bubble.
"We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles," Greenspan told the Economic Club of New York.
Greenspan said he saw "very significant acceleration" in the turnover of U.S. homes, due in part to purchases of second homes.
He said speculation in both the housing and mortgage markets had accelerated, and that people were reaching financially to purchase homes, using adjustable-rate and interest-only loans to make houses more affordable.
But the central bank chief said the inability to reduce home prices, which have climbed by double-digit percentages over the past few years, was not a serious macroeconomic problem. Prices, he said, were supported by relatively slow productivity growth in home building.
Eventually, home prices will decline because the underlying pattern is unsustainable, Greenspan said.
"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern. What we see are a number of forces, which are, as far as I can judge, not infinitely projectable," he said.
But when home prices slow, only those who purchased homes just as the prices begin to drop will be impacted by the decline, Greenspan said.
"The number of occasions in which an average level of prices in the United States have actually gone down are very rare," he said.
"Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems," he said.
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan said Friday the booming U.S. housing sector shows signs of some "froth" but that the central bank does not see a national housing bubble.
"We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles," Greenspan told the Economic Club of New York.
Greenspan said he saw "very significant acceleration" in the turnover of U.S. homes, due in part to purchases of second homes.
He said speculation in both the housing and mortgage markets had accelerated, and that people were reaching financially to purchase homes, using adjustable-rate and interest-only loans to make houses more affordable.
But the central bank chief said the inability to reduce home prices, which have climbed by double-digit percentages over the past few years, was not a serious macroeconomic problem. Prices, he said, were supported by relatively slow productivity growth in home building.
Eventually, home prices will decline because the underlying pattern is unsustainable, Greenspan said.
"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern. What we see are a number of forces, which are, as far as I can judge, not infinitely projectable," he said.
But when home prices slow, only those who purchased homes just as the prices begin to drop will be impacted by the decline, Greenspan said.
"The number of occasions in which an average level of prices in the United States have actually gone down are very rare," he said.
"Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems," he said.
I know there's not a housing shortage in my area, because they just threw up about a dozen or so 1,800-2,200 square feet houses in a little less than a month, about five miles from me. One day I drove by and they were still clearing the land, then three days later they had three houses dried in.
But I'm sure they are quality built.
But I'm sure they are quality built.
All good info, BUT... WHEN is this gonna happen is the question. "Soon" is really not good enough. My friend (in Noth Jersey) had a huge profit in his house. He told the realtor "If you can get me $525,000 clear, I'll sell it." Within a week it was gone. That was two years ago and he's still looking for a house. He's looking in the $700-$800k range because that's where they're all at now.
His house would go for EASY $700k+ now. He thought he sold at the top. "There's no way it could go up more than this." Just like we're saying here...
WHEN.......when??? Soon...
Of COURSE the bubble will burst.
His house would go for EASY $700k+ now. He thought he sold at the top. "There's no way it could go up more than this." Just like we're saying here...
WHEN.......when??? Soon...
Of COURSE the bubble will burst.
gonelifting said:
I think your on point Gonelift. Impossible to time the top or bottom. as long as your friend has profited then he should be happy.
a few people that i know did the same as your friend. they really were not looking to sell...but the offers were to good. Well some may say, but yeah now they have to buy into a more expensive home....which may be true in some cases....but these people that I know, who have sold...are moving into apartments and waiting. Not sure what is going to happen...but they are taking a chance.....Now this is what i call speculating....hehehe
A lot of people are getting those ARM / Interest only. After the locked down period is over....they have to fully amortized the principal.
Ex:
My cousin bought a $275k condo with an ARM, 3yr lock down period. Pymts are $1200/month. Now After 3yrs.....he will have to mortgage the remaining balance / principal for 27 more years. Which automatically means higher payments because he will have only 27yrs to pay off instead of the 30yrs if it were a traditional mortgage. Imagine having 36 months months to make a car payment instead of 48........obviously the higher pymts will be for the 36 month loan.
O.k. so back to my story......he is at the end of the lock down (3yr), and instead of having only 27yrs to pay....he opts to refinance...for 30yrs. Seems like a logical solution right.....well think again.....what if interest rates are higher ? Now he has the same amount to mortgage...because he never paid on the principal ($275k) only the interest....so now he is right back to square 1.
Now there are some positives......the interest only payments are fully taxable....so this is good...
but let's throw a monkey wrench into the plan.....
What if after the 3yrs....prices do pullback....let's say now the condo is worth $255k. ....remember he still owes $275k.....
Will a mortgage broker...lend him the additional funds..... ? I have heard of 125% LTV...were they will give you more than the house is worth...but i am not sure of the circumstances on when this can be done.
Interest Only and ARM's were originally made for people that know their incomes would increase......like a recently graduated medical student and so on.
This is my understanding on how things are done....if any of this is wrong....please correct me.
I really believe some money is coming from inheritance these days. People leaving houses and cash top family who have an easy $500k in cash and equivalent to do as they wish. They buy a new house with it, spend a little (or a lot) and it drives the market even more. People are the die. People are... the die, and a lot of them have houses (one or two) they paid $60k for and are paid off.
It may noit be a huge part of the market but I do think it drives it to some extent. A huge amount of people are reaching/have been reaching this age. Then they give all their money to someone who's never had more than 5k in the bank and they don't know how to spend it.
It may noit be a huge part of the market but I do think it drives it to some extent. A huge amount of people are reaching/have been reaching this age. Then they give all their money to someone who's never had more than 5k in the bank and they don't know how to spend it.
Not sure how many are doing this.....
but i do know a lot of people...that as their parents / grandparents get older....more and more is taken out of their names.
My Father-in-law did this with his Mother. As she got older.....he started transferring her assets into his name and his siblings...eventually nothing was in her name....
she was later diagnosed with Alzheimers....and as a result of not having anything in her name........she was able to get much better care with the assistance of the State Programs. Somethng that her insurance would have not covered or covered minimally if at all....and she was not rich enough to afford adequate care.
But here is the funny part....
My Father-in-law stashed his portions in investments.....has 7 figures on stash actually.
His brother who is less money savy blew a lot of it on tangible items....depreciating tangible items...new furniture, car, computers and trips. Now his brother needs a little help, because his pension does not cover his expenses.
Like you said....when you never had money.....and you finally get....some get careless.
This is what the elevated prices are doing....creating a false sense of wealth. some are getting Home Equity Loans and doing things that they would not typically do. A co-worker bought matching BMW's for he and his wife.
but i do know a lot of people...that as their parents / grandparents get older....more and more is taken out of their names.
My Father-in-law did this with his Mother. As she got older.....he started transferring her assets into his name and his siblings...eventually nothing was in her name....
she was later diagnosed with Alzheimers....and as a result of not having anything in her name........she was able to get much better care with the assistance of the State Programs. Somethng that her insurance would have not covered or covered minimally if at all....and she was not rich enough to afford adequate care.
But here is the funny part....
My Father-in-law stashed his portions in investments.....has 7 figures on stash actually.
His brother who is less money savy blew a lot of it on tangible items....depreciating tangible items...new furniture, car, computers and trips. Now his brother needs a little help, because his pension does not cover his expenses.
Like you said....when you never had money.....and you finally get....some get careless.
This is what the elevated prices are doing....creating a false sense of wealth. some are getting Home Equity Loans and doing things that they would not typically do. A co-worker bought matching BMW's for he and his wife.
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