“I can drive to work all week in my Camry, without having to tank up.”
“I ride my bike to work, and get here in 10 minutes.”
“Yeah, well I bought a condo in Issaquah, so I have to drive.”
“I rent a house right here in Redmond.”
“What do you pay per month?”
“$1,700″
“I only pay $1,500, so you’re actually paying more.” (aside: I wonder what kind of financing he has?)
“But I get a whole house. 3 bedrooms, 2 bath, a yard…”
“Yeah, I just have 1,000 square feet…”
Overheard here.
“What? Thats horrible, how can we lose jobs? I thought our economy was strong.”
“I pay 1250 for a 3 bedroom rental.”
“I pay 1800 for a 2 bedroom mortgage, 30 minutes from work”
“I pay 925 for a 2 bedroom rental about 5 minutes from here. I just got it last week”
“Buying a house is a great investment.”
“We have a good economy in Seattle, don’t worry.”
BTW Aldreth, I love your work over on the Zillow forums. Those AGENTs crack me up.
ITS LIKE THAT SONG, “DON’T CHA WORRY ABOUT A THINGGGG….”
The comments I hears from a Sammamish homeowner coffee date last night [by the way, no 2nd meeting with this loser]:
“Yes, sales prices are coming doown in the Seattle area.”
“But I have a nice house and my neighborhood is different, they all go up in price.”
“Oh, there’s no chance this subprime mortgage mess will spiral us into a Depression. No, that’s not even a consideration to prepare for…”
Any 1st meeting with someone that spouts those kind of “denial exagerations”, has a credibility gap and would you trust her in a relationship?
Have a great Friday bloggers!!!
Why do I get the feeling 10 years from now the same bubbleheads will be making the same posts about the housing bubble from their 1 bedroom rentals. The difference being your rent will be 1.7 times what it is today.
Sure, housing prices are ahead of where they should be and yes people having no right to buy a home took on suicide loans and yes morons holding the CDOs, MBOs and other instruments will lose their shirts. Can housing drop by 50% – 80% in Seattle? Sure it can. But will it? Unlikely 50%-80% more likely 5% – 20%.
But, at what point do all these posts become repetitive, boring and devoid of insight. I think we reached that point months ago. Tell me something new!
“Why do I get the feeling 10 years from now the same bubbleheads will be making the same posts about the housing bubble from their 1 bedroom rentals.”
Because you have a poor understanding of economics?
HEY BUBBLEBUYER, JUST READ THE SEATTLE TIMES
Why do you post here in the first place?
Just curl up to your warm Seattle Times and have them whisper soothing 5-20% maximum plummet warnings in your ears. Ain’t denial fun. The problem is, no one knows what’s gonna happen in a year or two from now.
Not you or any blogger on this post. So why are you so adament its all gonna be rosy anyway? [that's what makes this site interesting, its not in cement, like you wish it was]
Are you a seer or a prophet?
Suzanne researched this!
Like I f-ing trust Suzanne….
I am not claiming things will be rosy. As I indicated a 50%-80% drop is feasible but highly unlikely. I see a slight price decline (slight being 5%-20%) although if I was a betting man I would put money on prices dropping 5%-10% over the next year followed by flat appreciation until inflation re-establishes balance between income and housing prices. I think for the most prices SFR prices are sticky on the way down absent an economic calamity.
I guess I find this site as bad as the Seattle TImes but with a bias 180 degrees out of phase. So reading this and the Times type content gives me a view with a higher likelihood of occurring. My point is I would like more Insight than the continual posts about how this sucker is going to implode and how stupid buyers are.
The other risk I was alluding to is that by burying yourself in the house bubble paranoia you will never find a time to buy and limit yourself to being a perpetual renter – not to say renting is bad ( I did it for 15 years) and not to say now is the time to buy. This happened to me in San Franciso in 2001. If I had bought then I would have made enough to weather any bubble bust.
Bottom line I choose INSIGHT over
HERE’S THE TRUTH ON RECENT REAL ESTATE INVESTING IN SAN FRANCISCO FROM SF GATE
[sorry Tim, to post the story and its a bit big, the friggin' URL is rigged not to let Seattle Bubble reference it]
“…Moving Pains: Torn between two markets — feeling like a fool
By Carol Lloyd, Special to SF Gate
Friday, December 8, 2006
When Laurian Rhodes and her husband Sluggo bought their house 2 1/2 years ago, they did everything right, according to real estate protocol. Veteran punk rockers, Laurian, 36, and Sluggo, 47, aren’t what would be characterized as the new San Francisco buyers — upscale professionals with fat paychecks. Together they own and run Fast Frame on Lombard Street, and Sluggo performs with his band The Grannies. But having just given birth to a baby daughter, Laurian was eager to do the right thing for her family’s stability.
“We’d lived in a big, rent-controlled apartment in Noe Valley for 10 years, but I thought, ‘We have to get into the market!’” she recalls. “There was this sense of urgency. It seemed like the smart thing to do.”
So they took what seemed to be a relatively risk-free path. They bought a single-family home (not a more risky condo or TIC) in an affordable but up-and-coming neighborhood — the Excelsior District. (At the time, real estate agents had begun dubbing this neighborhood the “new Bernal Heights,” which in turn had become the “new Noe Valley,” which in turn had become the “new Pacific Heights.”) In the conventional wisdom of the moment, any neighborhood in San Francisco was just a couple of degrees of separation away from multi-million-dollar mansions.
[Remainder snipped. The link (which I added above) works, it just takes a while to load. - The Tim]
I think for the most prices SFR prices are sticky on the way down absent an economic calamity.
Did you bother to look at the previous post? Asking prices have been plummeting a lot more than 10% since April, and April-August is supposed to be when RE is at its hottest.
Bottom line: I choose hard data over your “INSIGHT”.
Firstly, 10% decreases in prices are not occuring in my neighborhood which is one of the close in ones.
What impact do you think the credit freeze has had on asking prices? How long do you think the credit freeze will last? Do you think the latest employment data increases the odds of the fed dropping fed funds rate? Looking backwards is great if you are interested in forming a perspective on historical events but it hardly positions you to make wise decisions looking forward. PAst performance is no predictor of future performance. Also, research has shown market timing has consistently been proven to be impossible. Forward looking data are of more interest to me. Yes I bought several months back. I ended up paying 7% under asking, locked in a 30 year fixed at low rate with 20% down. Short of my losing my job and not being able to find equivalent work I have no interest in price trends over the next several years.
I have no interest in price trends over the next several years.
Odd that you’d visit this site. It’s (almost) all we talk about.
what’s your zip code?
“Why do I get the feeling 10 years from now the same bubbleheads will be making the same posts about the housing bubble from their 1 bedroom rentals.”
That’s right. Put those unwashed renters in their place. For the record, I’m one of the lesser well-off people who frequents here, and I live alone in a *two* bedroom. I’m quite happy with this arrangement, and frankly wouldn’t mind keeping it for another ten years.
for someone purporting to be a software engineer, you sure don’t understand how the internet works:
Link to the article
You can’t post links to your yahoo mail account and expect them to work. No rigging involved though.
BubbleBuyer,
I don’t see how you expect the Puget Sound real-estate downturn to be mild if you expect there to be any kind of deprecation. Could you explain how you think the masses of Puget Sound home-owners with 0 equity, and exotic mortgages, are going to survive even a year with 0 appreciation?
The really scary thing, in my view, is that over the last 5 years we have managed to ensure that well over 20% of Puget Sound home-owners DEPEND on price appreication in order to refinance and stay in their homes.
The numbers speak for themselves. Well over 30% of purchases in the Puget Sound area over the last several years were made with “exotic” mortgages that don’t actually pay down the principal (e.g. negative amortization, 100% interest, etc), and many purchases with 0 percent down.
This tells us that a LARGE portion of Seattle area home-owners really couldn’t afford their homes, and were counting on apprecation making it possible for them to refinance.
So just what is going to happen if we have even 1 year of no appreciation?
Sorry, BubbleBuyer, but I just don’t see an easy way out of this once we start getting waves of these equity-starved Seattle-area home-owners defaulting on their mortgages. That will drive prices down a lot.
Unfortunately, comparisons to previous real-estate cycles aren’t helpful since we have NEVER had such a proliferation of Puget Sound home-owners with no equity and fragile loan products.
If I am missing something in my analyses, please let me know what it is.
Those rents aren’t for places that are updated, For a cute place that your wife won’t complain about, the rent would be much more. If you don’t have one, enjoy life. As for riding your bicycle to work, most people that could use alternative transportation don’t use it.
There is in reality a deep belief of “Seattle is special” in the minds of everybody I know. People are almost irrational about it, like you would dare to tell them that there is no Santa Claus.
I personally don’t think that renting compares to owning and I don’t think prices will plummet 50%. At the same time I don’t think that you can be in the middle of the storm and don’t get (at least) splashed.
“Why do I get the feeling 10 years from now the same bubbleheads will be making the same posts about the housing bubble from their 1 bedroom rentals.”
Why do I get the feeling this is the same trolling we saw on Ben’s blog two years ago?
dropping 5%-10% over the next year followed by flat appreciation until inflation re-establishes balance
What if somehow inflation is low? Predicting a constant price with high inflation is the same as predicting a price drop.
Welcome to the club, Bubblebuyer.
20% of $500,000 is not “slight”. Especially for those whom are underwater on their ARMs. What a jag-off!
We all have opinions on what will happen but the fact is nobody knows for sure. In that environment, the people that yell the loudest end up influencing the discussion the most. Every opinion is a valuable as the next in the absence of data. In the end, we all make our decisions to buy now or later or never and we live with the the consequences of our decisions. That is the wonderful thing about America. And as to the question why do I read this blog. It’s to get a perspective that is different from the mainstream media. I bet that in several years history will show the final outcome lay somewhere between the Times and Seattle Bubble Blog predictions.
And to the person that asked, my zip is 98109.
BubbleBuyer,
I would love to hear an answer to my earlier question. Why do you think the masses of equity poor home-owners in our region (with exotic mortgages) are going to be able to hang on if there is no appreciation (which you say you think will happen for a year or 2)?
Do you think wages are going to rise a lot? Do you think there will be some sort of bail out? Or maybe you just don’t think there are enough of these over-stretched home-owners to really impact the market?
I would love to hear your thoughts on this. Maybe I am overlooking something.
Thanks Tim, you however, are the man. Beyond a shadow of a doubt, the world needs more people like you.
Please do not feed the troll. Signal-to-noise ratio worsening.
Sniglet, I don’t have data showing the number of home owners who took on suicide loans over the past 2 years in close in suburbs. If there are indeed a large number who took out 2 year ARMS and over extended themselves by playing the zero down piggybank game, we indeed could be in for a whole world of hurt. I don’t believe that enough did this to drive the close in market down by a large percentage. I do believe that enough probably did to drive prices down 5% – 10%. I also believe the recent credit freeze and re-pricing of credit risk has chilled purchases of homes requiring jumbo mortgages. The question on the latter is how long will this freeze last and how will risk re-pricing impact jumbo mortgage rates. Also, what impact has the latest employment numbers had on fed view on dropping rates at next meeting.
I do not argue that prices are or will drop, I just don’t see the blood in the street scenarios that a lot of people here see or wish for. I believe there are too many externalities to predict based on a narrow view of the economic environment. Perhpas you have data showing how many exposed home buyers purchased in the past 2 years. If this is indeed a big percentage of buyers then I may change my view.
“Every opinion is a valuable as the next in the absence of data.”. Study history and economics. Begin with the formation of the Federal Reserve and the abolishment of the gold standard. Then, move to the Great Depression of 1929. Then, read up on Seattle in the late-60s to early-70s, then read up on the early-80s in relation to real estate, then take a look at the early-90s. Then, read what “revision of the mean” means, and perhaps take Macro Ecomomics for Beginners. Oh, and let’s not forget the “new economy” of the late-90s, which didn’t end so well as I recall. Yeah, historical perspective has nothing to do with anticipating the future, none at all.
“Yeah, historical perspective has nothing to do with anticipating the future, none at all.”
I am not interested in debating symantics.
Timescale is key. What probablity do you ascribe to a prediction based on a 2 year time horizon versus an eighty year time window? If you are really that good at fine time scale prediction of the future you should quit your day job and put that predictive power to work investing in the market. However, if you are only able to predict the future over a 80 year time window I would argue your ability is near worthless.
MLS 27097229, list $1.2 mil, just sold for $1.5…
I guess there’s still bidding wars out there. The GF is alive.
Address is 20809 NE 15th st. Sammamish, WA 98074. Strange.
Could be fraud.
I’m smelling fish. Possibly float the buyer down payment to consumate the deal?
Ok, BubbleBuyer, tell me why things won’t revert to the mean, as supported by the underlying fundementals. At some point, no one will be able to buy a house, if things don’t come back in-line with, what was that we all keep chanting, oh yeah! Underlying fundementals. Look at what people/families earn here and compare that with prices now. I predicted that the tech stock bubble would burst when I heard of one company generating over 1 Billions Dollars on a single IPO. I was friggin’ right.
I don’t disagree that over the long term, fundamentals drive economic activity and we will revert to the mean. I guess we differ on how that reversion (?) will occur i.e. step function price drop, the leaking balloon scenario, inflation adjusting income in relation to mortrgages, low interest rate environment stimulating demand or a combination of some / all.
And, one last thought; Just because I can’t pinpoint the time-scale of inevitabilty doesn’t mean it’s not inevitable. You’re doing to die someday. Just because I can’t predict when doesn’t mean that it isn’t going to happen. I can make some pretty close approximations though, just based on your age and current health, if I know them. Since I do know more about what’s going on in economics with regard to real estate than I know about your health and age, I suppose my predictions about the real estabe market might have more validity.
I couldn’t agree with BubbleBuyer more about putting off buying.
In 2001 I lived in Boston and considered buying. Naw, I said, I can just rent, live in a cooler neighborhood, and just have fun! What an idiot I was.
With what I had in mind in Cambridge at the 2001 prices, I would have made $200k-$300k in equity or more when I sold to move here in 2005. Oh well.
Sammamish and Medina were the two areas that I saw on Altos where asking prices were not going down. Anecdotally, I have heard of cash buyers for >$1mm properties in these areas as the norm. Very popular for Microsofties, and hey, the stock has been up lately.
“Just because I can’t pinpoint the time-scale of inevitabilty doesn’t mean it’s not inevitable.”
Sure but since our life spans are limited, I value predictive power based on it’s ability to impact my life.
Also, when we talk about reversion to the mean as it pertains to real estate the mean is not a fixed number. It is a mean only in the relative sense. If a paradigm change has occured which influences the way the economy works the absolute value of the mean would shift e.g. the emergence of China, India and other 3rd world countries altering things like interest rate, inflation, trade balance, production capacilty / utilization in China, US household income. So current SFR prices may not be that far off the mean given the role China has played keeping inflation low and other factors. That’s a whole another argument and I don’t believe in paradigm shifts so I would absolutely not bet the bank on this but it is a possibility.
The public interest stories I have read like the one posted above have all been on tiny houses over $550,000 so far. The couple in the story above is currently leveraged for about 1.4 million. These are terrible individual decisions, not a massive depression.
BubbleBuyer; how about less psycho-babble and more application of common sense?
Conventional wisdom says; “don’t buy what you can afford”. 10x annual earnings for a first-time buyer is suicide, period. Banks won’t let them don it anymore, so who’s going to keep the market moving? First-time buyers are the plankton of the real-estate ecomomy. Get it?
not that I need to post this correction, but I mean “can’t”
My point is proven, thanks. Those that shout the loudest….
Demersus said,
on September 7th, 2007 at 2:52 pm
BubbleBuyer; how about less psycho-babble and more application of common sense?
actually, “don’t buy what you can afford” wouldn’t have been such bad advice to those considering suicide loans.
just because somebody will give you the loan and you can afford the payments today doesn’t mean you should buy it.
anyone else notice articles about how china is expecting a recession, independent of US forces. worth keeping in mind, if we’re counting on selling money to them. maybe it would lead to more chinese investment in US dollars as a safe bet or maybe it would mean less chinese able to buy US dollars. either way, something to consider
BubbleBuyer,
As you can see from this Credit Suisse report, 33% of ALL mortgages taken out in the Seattle region in 2006 were interest of an interest only or negative amortization variety. The percentage of such loans was even bigger in 2005.
http://www.recharts.com/reports/CSHB031207/e31.GIF
Keep in mind that this percentage would be even bigger if we were including all sub-prime and 100% financed loans. You’d easily be getting up to 50% of all Puget Sound loans in 2005 and 2006 if you added sub-prime and 100% financed, and no doc, but let’s be super conservative in this thought experiment and not do that.
Of course, not every house in the Puget Sound sold or refinanced in 2003 through 2005. Nevertheless, I think I think it is VERY conservative to say that at least 20% of the Puget Sound home-owners will have to default if there is no appreciation (i.e. which would enable them to refinance). Heck, even if you want to be even more conservative and just say the total figure of this class of doomed home-owners was just 10% of our region we would be in for BIG trouble. If 10% of the total inventory is foreclosed on in the next couple years, we would have a disaster on our hands and a 5% cut in current prices wouldn’t be the end of things.
BLAME BILL GATES
Thanks Egat and Tim for the help with my HTML Editor links. My computer has the Vista O/S and won’t accept the HTML Editor download….I’m thinking of going back to XP…lol
do we have an estimate of what portion of Seattle is in suicide financing on their house?
suicide financing being any financing that requires house appreciation to be sustained
greater context,
Yes. Look at my earlier post in this thread. I think we can make reasonable assumptions that the vast majority of people getting an interest only or negative amortization loan has “suicide financing”.
If you then add in the 100% financed and sub-prime loans you start to get VERY scary numbers as to the number of home-owners who have little (or no) cushion if anything at all should go awry (i.e. there would be no equity to bail them out if things got bad).
I think this assumption is the $1m question…..
“I think it is VERY conservative to say that at least 20% of the Puget Sound home-owners will have to default if there is no appreciation”
That’s a very big question and a very big assumption. I find it hard to believe that 20% of all owners in Seattle are at risk of default. However, if that is the case I suggest we all start digging bunkers. load up on automatic fire-arms, ammo, canned goods and bottled water. We’re in for depression like we have never seen before. Now if you’d chosen a percentage in the 1% – 4% range (best case to worse case) I might have accepted the assumption. I think 20% is an order of magnitude or so too large but who knows.
“In 2001 I lived in Boston and considered buying. Naw, I said, I can just rent, live in a cooler neighborhood, and just have fun! What an idiot I was.”
I don’t think the renters among us are renting for that reason today, Greg. Most of us are renting due to the laughable P/E for residential real estate. When I bought a place in 1999, the P/E made more sense. I could buy for slightly more than it cost to rent. Today, that ’slightly’ has become 3x. When that happened, it was time to find a greater fool and get out. When the P/E looks sane again, it will be time to get in.
Sniglet,
I don’t get how you get to 20% of homeowners with negative equity.
Nationwide there are about ~75 million homeowners, and I keep reading that these exotic loans over the last 5 years created 5 million homeowners who otherwise could not have purchased a home. So on average 6% of the loans for the last 5 years have the combo of an unconventional loan and a buyer who has risky credit.
If 30-40% of homeowners have no mortgage at all, I just can’t get to 20% with no equity.
Sniglet
You say,
“As you can see from this Credit Suisse report, 33% of ALL mortgages taken out in the Seattle region in 2006 were interest of an interest only or negative amortization variety. The percentage of such loans was even bigger in 2005.”
And then “logically” assume
“I think I think it is VERY conservative to say that at least 20% of the Puget Sound home-owners will have to default if there is no appreciation (i.e. which would enable them to refinance).
What you are not seeing here are homeowners who may have refinanced into interest only loans that are holding HUGE equity positions in their properties. For instance I have a $150k mortgage on a $700k property. Although I haven’t refied into an interest only loan, I did consider one.
You have no way of seeing the data on homeowner equity positions. Your “logic” is flawed.
Greg Perry,
Why would someone who could easily afford to make normal payments on the principal choose an interest only option? I know that there are SOME people who make this kind of choice so they can better allocate capital elsewhere. But the people who do so for that reason are few and far between. The fact that we keep hearing articles about how it is people with PRECISELY these kinds of 100% interest loans who are running into trouble in many parts of the country helps support this assumption.
I grant that I don’t have data showing how much equity people getting these types of loans have, but I would argue that it just isn’t logical for MOST people to get these kinds of mortgage products if they can actually afford a normal offering that pays down equity.
Cash flow, taxs, family considerations, inheritance, trust funds, asset allocation, leverage or liquidity are some of the reasons. You assumption that these loans are only taken out as a last resort is not accurate.
Going back to the “20% are in danger of default”, we know that 33% of all mortgages written in 2006 were somewhat exotic/toxic.
the Seattle area has around 1.2M households.
This (admittedly old) data from 2000
http://diversitydata.sph.harvard.edu/rankings.jsp?i=137
shows that there were ~37K loan originations in the MSA that year. Let’s assume this double by 2006 – we’d be looking at 37K * 2 * .33 = 25K of these exotics written in 06, and let’s assume 3x over the course of the bubble, or 75K.
If, say, every single one of these were for a different house (rather than a refi), and all were in trouble (a stretch), then 75K houses would be in danger of default from these loans.
That’s out of a population of 1.2M households, 66% of whom are homeowners (http://www.bls.gov/ro9/cexseat.htm)
That tells me that there are ~800K homeowners/debtors here.
It’s really hard for me to see how one could get to 20% in danger of default.
“Why would someone who could easily afford to make normal payments on the principal choose an interest only option? ”
Because the difference is rate between the IO and the fixed was VERY SMALL, so why not have the additional flexibility of the IO if you’re the sort of person that will actually pay back principal without being forced to.
I know someone that bought a 900K place a couple of years back. Put money down, got an IO loan. They make great money and would have had no problem paying it back on a regular mortgage. It’s silly to think that we’re the only people out there that have some financial discipline.
Now, do I believe that the majority of IO is as I describe above? No. I would guess (and that’s all it is, a guess) that’s is less than 25%.
Well said, Garth.
Also, you may not be living in the house for much longer.
Simple math plays into the game. If you can save $600/month for 60 months on an interest only ARM, your savings for the period is $36,000. The principal buy down on the loan is minute in the early years. If you are anticipating a change, why not take the money?
Garth & Greg,
Something doesn’t make sense. Why would someone who wanted to put their money to work elsewhere, and maximimize taxes, put any money down in the first place? Wouldn’t such people want to extract as much equity as possible? It doesn’t make sense to get a 100% interest loan AND keep substantial equity.
Snig,
Wha-what?
put any money down in the first place?
There are many reasons that make sense to extract reasonable equity (consumerism is not one of them), but I would never advise extracting as much equity as possible. BTW, intrest is deductable, not the principal buy down.
Just checking, Sniglet. Do you have a mortgage?
Greg,
I used to have a mortgage until I sold a few years ago, when I thought things were getting ridiculous with real-estate, and started renting.
I’m shopping for a house right now and will buy when I find one that meets my price range. Maybe prices will drop and maybe they won’t. I have no idea and I don’t want to spend the time waiting if it’s a right time or not. I want a home I can raise my kids and that I can call ours. I’ll be looking for a home with a pricetag that I can afford right now. And hopefully I will be living there a long time.
Don’t listen to um BubbleBuyer, I don’t agree with you 100% but you’r making more sense than many here.
50-80% drops, smile. Sure it could happen and bats could fly outa my butt but neither is LIKELY to happen
Part of me likes seeing idiots get there due but the thing is every piece of bad news is beating the hell out of my little list of overly aggressive stocks…
I wish everyone could have taken a field trip to our escrow office during 4th qtr 05′ and throughout 06′. (well not really, but you get the point)
My belief is that the Credit Suisse report is probably fair, but still conservative. As it shows, it does not include all sub-prime products, only I/O and neg am products. This leaves out a lot of borrowers. Lots. And it is only showing 06′. If you recall, as if I have not mentioned it over and over, 2/3 of 2005 purchase’s our office closed were 100% financed. Many of those were classic sub-prime, by many of our lovely and now imploded lenders.
Overall, speaking only from our company’s experience, and small fry in the pool of local escrow players, a boat load of borrowers were extracting a lot of equity and buying stuff and paying off consumer debt, some of which became serial clients of ours. The point about leveraging (100% deals, etc.)is really good on both sides of the argument, for and against, but my experience is that the majority of people did not have the enormous equity spread like Greg enjoys, rather, the borrowers used up the equity to enjoy the “consumerism” that you have to be disciplined enough to do without or in moderation. Moderation was not a sexy word over the last three years.
Bottome line, it would not be suprising to see more problems unfold than some people believe.
Water cooler talk: my wife spoke with an agent on Thursday who said the market (probably speaking of Southwest Sno.Co, and NW King Co) just stopped about a week or so prior to the holiday weekend and that the price reduction pace was exceptionally heavy on existing listed inventory after the holiday. But , that is just one agents anecdotal musing.
S-Crow
As long as the Fed is pumping US dollars into the economy, everything will continue to go up, including home prices. The value of the US dollar will decrease at the same time, however. People will continue to buy, as a result. Americans have no idea how to move their assets into other currencies, because their financial planners would make no money from offering that kind of advice.
Overheard a conversation in an elevator in a Bellevue office building where what sounded to be a person renting a house received mail addressed to the owner as well as a visit from somebody that took a picture of the front door after attaching something to it… eviction notice??
Haven’t seen any posts here about how even some number of renters are going to be affected by this mess by being evicted because of the property owner’s financial problems, possibly on short notice, and what that might do to the rental market. Any thoughts or insight?
BubbleBuyer, what point is proven? We haven’t seen the end yet, so you’re calling the game early, or what? Just because I’m adiment about what WILL eventually happen, and just because I’m outspoken about my opinions doesn’t mean I’m wrong. I wasn’t friggin’ wrong in 1999, and I doubt I’m wrong now. And, back to the whole time-line discussion; sure I don’t know if this mess will implode in six months or four years, but I know it won’t take 100, just like I could guess pretty closely how long you’ll live based on your current age and health. I know how long it took to run this bubble up, and I know it will come back down. Also, revision of the mean; DUH DUDE. Either wages have to come up about 2 – 4 x, or the price of house has to drop proportionately. What do you think will happen more quickly, my salary doubling or your house dropping in half?
As my old professor, Walt Rostow, used to say “Trees don’t grow to the skies.”
Housing markets that are out of balance either on a median price/median wage index or a rent/mortgage payment index WILL revert to historical norms. There’s no “paradigm change” that will stop this adjustment, and frankly given the Dot Com bust and now the housing bubble it is more than a bit silly to invoke the “it’s different this time” fallacy.
The only question is the timeframe the correction will take.
Let me restate to be more objective. What do you think will happen first, a doubling or the median family income, or the 50% reduction of the median priced home?
Okay, this has been bothering me for a long time. What is this connection people keep making between the median wage and the median price home?
The reality is not everyone can buy a home. This is probably not fair, but it has always been the case, and will probably always be the case. The folks in the lower 30-40% of earners can’t afford to buy, and will rent from people in the top 10% unless their situation changes.
So, you have to earn more than 30 or 40% of the population just to be able to afford something entry level. Entry level will not be the median priced home, it will be an entry level home, which will usually be significantly lower in price than the median.
I haven’t posted in a while but let me chime in…
first bubblebuyer doesn’t sound like a troll… he stuck to listen to the arguments…
I don’t have the data but 20% of ALL homeowners defaulting is way too high… that would almost mean 100% of all buyers the last 2 years…
Now if somebody rephrased that into 20% of all homeowners that bought or refi’d since 2005 will default I can swallow that number…
bottom line 5% default is a big number and can lead to more than 20% price drops… it’s all about psychology… buyers had an urgent need to enter the market because everybody was getting equity… simple greed and envy…
now that MSM has admitted there will be no equity… the psychology is gone… except to people still in denial…
it only takes one default/foreclosure in your street to bring your home value down 20% in this market… (foreclosures always sell below 80% of market value… sometimes 50%)…
the more foreclosures (5 in a development of 100) the faster the psychology brings the market down…
now 20% of all homeowners is unthinkable… but if it be true, we’ll all be growing vegetables in our backyard just to eat…
Demersus, George
Revert to the mean? Are you all telling me current interest rates even post credit squeeze are in line with historical means? Are you telling me interest rates will revert to historical means? Please. Looking at income as a predictor of housing price is only meaningful if it it normalized against cost of the mortgage. i.e. interest rates.
Sniglet,
Like greg said, you can’t get a tax deduction until you are paying interest, you wouldn’t get a 100% loan, but an interest only loan would maximize the amount of interest you have to deduct on your loan balance you might even go negative I/O if appreciation is good. As long as the spread between your interest payments minus the tax break and the return on your other investment vehicles is positive aggressive investors will keep doing it. In 2006 there were articles about money leaving hedgefunds and going into real estate meaning real estate was strengthening, based on talking to some tax/financial advisors I know I think it was people reducing their leverage (paying off their “suicide loan”) and taking profits based on an anticipated slowing in both areas.
S-crow,
I think you statements are pretty right on, I think sniglet’s is way off:
BubbleBuyer, income may not be the only factor to consider, but it is the PRIMARY factor in this equation. By the way, do you think interest rates are heading back down to 1-2%, or do you think maybe they’ll have to rise from here? What happens if the FED lowers rates? The dollar looses value compare to other currencies and we start loosing foreign investment in our debt. If the FED raises rates, well, then a bunch of over-zealous speculators and others whom simply were irresponsible loose a lot of money. Which one would you prefer?
BubbleBuyer, also, what do you think got us into this mess? People buying houses like they were financing a car. Have you ever had a car salesman ask you, “where would you like your payments to be”, before you even discussed the purchase price? Well, myself, the FIRST thing I consider is the bottom-line cash price, then I figure out how to best finance it.
My point being; artifcially low interest rates are what fueled this fire. I doubt even the youngest of us here will ever see rates that low again in our lives.
Wageslave, you ask a very scary question:
“Haven’t seen any posts here about how even some number of renters are going to be affected by this mess by being evicted because of the property owner’s financial problems, possibly on short notice, and what that might do to the rental market. Any thoughts or insight?”
Some dedicated renters here continually root for the housing market to tank. If the market completely implodes, you’ll see displaced homeowners looking to rent AND many of the landlords will be forced to sell. This will create a HUGE demand for good rentals. In a complete implosion, we could be faced with a situation where there are not enough landlords for those who want to rent. Here we go…..the law of supply and demand.
If you’re rooting for the real estate market to tank…..you better be careful for what you wish for.
And at the same time, a bunch of people will end up renting out their investment properties because they can’t sell the, increasing supply to meet demand.
I agree with sniglet and have taken up a similar position but think there’s going to be a bailout that will look something like this
Bush would originate mortgage loans with 1% interest rates
The Federal Housing Administration and Dept of Veterans Affairs would insure the loans against loss
The Govt National Mortgage Association aka Ginnie Mae would buy the mortgages at par from the banks allowing the banks to make a small profit
Ginnie Mae, taking a sizable loss, would then sell these loans to Fannie Mae and Freddie Mac
Fannie and Freddie would fund these purchases with low cost, govt guaranteed debt
BubbleBuyer, go look at any time series of rent/purchase or income/price indices.
Through a huge variety of interest rate and inflation enviroments, these indices always go revert to their historic averages.
A couple of years of extraordinarily low interest rates (which are now in the past) doesn’t amount to a new paradigm.
READ THE FINE PRINT THOSE LAWYERS PUT IN YOUR PRIME OR SUBPRIME ARMS, JUMBOS OR EXOTICS
Gentlemen, they weasle worded ‘em all different, its like reverse mortgages….
The bottom line, if you’re credit ain’t no shiny 800 or you’re self-employed; be prepared to “payback” an extra 2-3% interest ya owe ‘em over the approx 6% fixed base. An example: say ya got a wonderful jumbo for 5 years of 3% interest; then the mortgage payment automatically quadruples or triples in your contract [this is a real example contract example, I've posted it a few weeks ago]. Can you get out of that 2003 Jumbo Contract and refinance 7-8% fixed in 2008?
Well Honey, it all depends on which way the Recession Wind holds down loan acceptances today and in the future. That’s a big “IF”.
My best guess is absolutely not, based on the 1990 Seattle Bubble history, which makes the current 2007 subprime mess look like a walk in the park. Most loans in the 80s were 20% down conventional then [yeah I know a lot of people in Seattle have titles or smaller principles, but pink ponies don't exist and stop mixing this good stuff in with the nightmare....its a moot point, as it was in 1986-1990] but still, the banks freaked out and guess what…..ya had to have 30% free and clear “net pay” maximum mortgage payments and almost all 20% down and fixed loans. That eliminates almost all of America or the whole world for that matter, from buying a house in Seatte. Cause the banks can and will freak out, wouldn’t you?
Now, fellow truth seekers, lets get back to Johnny with the 2003 Jumbo and 2 SUVs that ate up his 2003-2005 equity too, who faces default on the triple mortgage payments, what’s he gonna do?
Hand the keys to the bank.
What’s the % of homes this is gonna happen to in the future? Well, excluding the pink ponies [homes not for sale and basically little or no mortgages]….sounds like 20% foreclosed is as good an estiamte as any….last I heard 60% of the Seattle homes were on “exotic” type lawyer babble contracts.
If you’re one of the buffoons that signed one of those Jumbo Payment contracts and aren’t rentin’ now [I bought in, but low end on purpose, even the foreclosed prices in my low end neighborhood are what they went for a year or two ago...wheeew]
But you guys sitting in Jumbo Payment McMansions that cost $500/mo to heat in the winter; watcha gonna do when the power bills double or triple on ya too? How will ya sel it at tight credit? Lord only knows.
Sniglet, i am concerned about your math skills. Here are two quotes taken from te same post of yours (September 7th, 2007 at 11:26 am).
“over the last 5 years we have managed to ensure that well over 20% of Puget Sound home-owners DEPEND on price appreication in order to refinance and stay in their homes.”
“Well over 30% of purchases in the Puget Sound area over the last several years were made with “exotic” mortgages that don’t actually pay down the principal “
This would mean that 2/3 of all houses in the Puget Sound region were either sold or refinanced in the past 5 years. Are you kidding me?
My guess is, the proportion of households in trouble or potentially in trouble in this region is far less than 20%.
Show us where you got that figure from or I’ll have to asume you pulled it out of that place where the sun don’t shine.
Sniglet –
I have problems reconciling an assertion that 20% of mortgage holders are at risk with what I know about the market. It seems very aggressive, not conservative as stated.
- There are ~500k owner occupied units in KingCo. Roughly 40-45k of those sell a year, so about 8 or 9% could possibly take mortgages each year
- Assuming new home owners take a mortgage (which overstates the case), then 33% of new purchases would be 3% of the housing units “at risk” due to the exotic mortgages
- Getting to 20% “at risk” would take 7 years of accumulated mortgages at that rate
There are a whole bunch of problems with that, of course
– in the last 7 years, we have had a 67% increase in the median price, so most of those “at risk” owners are sitting on piles of equity
- the average person only owns their home for about 7 years, so one could reasonably infer that half of these “at risk” owners sold already
- use of exotic mortgages peaked in 2005/2006 and prior to that it was much lower, so you’d have to go back much further to find 20% of mortgage holders that have this type of mortgage
- not all of the Neg-am/IO mortgages are really all that risky. Friends have a 10-year fixed IO mortgage. I doubt they’ll be defaulting in the near future with that mortgage.
Of course, this ignores sub-prime, ARM, etc – but apply the same logic and I think it is still hard to get to 20% of all mortgages. How did you get to that number? If perhaps you meant was that 20% of mortgages issued in 2005 and 2006 are at risk? I’d whole-heartedly agree with that, but this is probably less than 5% of outstanding mortgages in KingCo.
Fundamentally, every house/condo/etc. must be bought by somebody, either for the owner to live in or for the owner to rent out to somebody else as an investment.
If a home is owner occupied, the owner needs to be able to afford the cost of owning–mortgage payment, taxes, maintenance. That affordability is directly connected to personal income (mainly in the form of wages).
In the case where a property is being rented out to a tenant, the owner is using the property as an investment. The costs described above for owner occupied (mortgage, taxes, maintenance) still apply just as much for rental properties. However, because the owner is not living there, these costs no longer get them a roof over their head but rather income in the form of rent. Personal income directly figures in to the amount of rent a tenant can afford and therefore the amount of rent the owner can charge.
Like any investment, investors are looking for good returns for a particular amount of risk. In the case of a rental property that means income received plus appreciation compared to the costs of owning. If housing prices drift too far above rents and appreciation is low, owning rental properties for investment stops being a good deal. That’s pretty much exactly what’s happening right now in areas like Puget Sound. It just doesn’t make investment sense to buy rental properties because the mortgage payments eclipse the rent often by a factor of two or more. Without high appreciation to make up the difference, it makes no financial sense. It’s part of the reason why so many condo conversions have been going on in the past couple years. It’s become more profitable to sell rental properties and do something else with the money than to continue renting them out.
deejayoh, your post seems to ignore all of the refinancing activity in which people used their existing homes as atm machines to fund vacations, cars and material consumption
Old Ballard, I was flippant before but in fact am deeply disappointed by liberals who sold out their values for investment properties. I agree with you that the poor have been/will be screwed by it all and it makes me sad. I’m moving to San Francisco in a couple weeks, so bid you farewell.
jcsc –
I wasn’t ignoring them. I included them in the “etc” category. to get to a 20% number, the exotic/toxic refi activity would have to be 3x the purchase activity. is that what you are suggesting? I guess it could be the case, but I haven’t ever seen anything to suggest that is true. perhaps you something to back up your statement?
Demersus,
????
What do you think investors do with their properties now? Watch them grow piles of money while sitting vacant?
Deejayoh,
Your analysis looks more reasonable to me.
Deejayoh, I’m not going to argue sniglets point as my perspective is different and I’m only predicting a 20% decline in prices over the next three years. I don’t have time to answer your question as thoughtfully as it deserves to be, but
According to estimates by US Federal Reserve, in 2005, homeowners extracted $750 billion from equity of their homes (up from $106 billion in 1996), spending two thirds of it on personal consumption, home improvements, and credit card debt (From Fed report and this is national data)
Seems to deserve more than an etc.
Hey Tim – I’m wondering if you can visit the post at: http://aaalistshomes.com/index.php?option=com_content&task=view&id=19&Itemid=2 and the original post from a Windermere guy who claims our area is “Bubble Proof” at http://eastsidehomes.typepad.com/weblog/2007/08/where-is-the-se.html?cid=82020007
It just pisses me off when real estate “professionals” spread such misinformation. It’s the same type of people who tell their clients to get any type of financing they can because they can continue to expect double digit price increases forever …
I’d just like your take, as we were both writing about the impending market crash while these people were too busy spreading lies and cashing huge commission checks.
Thank you for your time.
jcsc –
not trying to argue, and I’m closer to where you are in terms of forecast than others I’ve seen here. My post was geared to the assertion that the 1/3 of mortgage figure was sufficient to support a 20% of home buyers are at risk assertion. I obviously didn’t think it was, but I’m pretty curious about how others get at their estimates. Incidentally, $750billion in home equity loans compares to a $7.8trillion mortgage market – about 10% (or about half of a year’s median price gain in Seattle) so – while it may have deserved a footnote, I’ll bet it doesn’t put more than a one or two percent of homeowners at risk of foreclosure.
Deejayoh,
I’m procrastinating so can’t really take the time to build up my case with data, but I’d like to run some thinking past you.
Let’s suppose it’s 2005 and the total mortgage market is 7.5 trillion
Further suppose that homeowners see a 20% gain in equity for the year, principle paid plus price appreciation, for 1.5 trillion in equity gains for the year
Let’s say 50% leave their equity alone
Given this scenario, 50% of people would withdraw ALL of their equity gains for the year, 750 billion
Now let’s suppose that they do it all again in 2006
from above:
“The bottom line, if you’re credit ain’t no shiny 800″
I see this all the time and I don’t get it. Everybody acts like it’s just fine to have "chocolatey" credit. Mine and my wifes are both over 800. Why? because we pay our freaking bills. Over the years we have run up debt several times and still we paid our freaking bills. If your credit is UNDER 800 you don’t need to be buying anything, much less a house, until you have your finaces figured out.
jc –
I get where you are going, but think your scenario misses that the mortgage market in any one year only reflects the turnover of 10-15% of housing stock – so the increase in equity for 100% of housing stock (with a hypothetical 20% gain) is actually ~7-10x the $1.5 trillion – or $10-15 trillion. I think the issue is the same math I pointed out above. Lots of people have done stupid things in the last two years – but even if half of them got into trouble, it’s still only a small fraction of the total housing stock.
I think the historical high default rate is something like 2 or 3%. If we get to 20% foreclosure rate, I don’t think it will be because of the current exotic loans. The numbers just don’t support it. It will be because we are in a severe depression with 20% unemployment and deflation, frogs raining from the sky, etc. It could happen- but I’m not preparing for that any more than I prepare to be struck by lightning every day when I walk out the door. It’s just no fun keeping all that ammo and canned food in the basement ;^)
Also, why have the really battered markets around the country seen nothing on the magnitude of these huge numbers?
George,
“..A couple of years of extraordinarily low interest rates (which are now in the past) doesn’t amount to a new paradigm.”
I have kind of lost track of where I was at the start of this thread. My original point was that everyone has a view but no single view is any more valid than any other view. There are just to many unknowns.
I am not suggesting housing will not fall, I am saying the chances of prices dropping 50% or more is incredibly small. A number of people on this blog believe or wish for a 50% drop.
As to the new paradigm, why do you think inflation has been so low over the past 5 years in the face of historically low interest rates? Could it have anything to do with the deflationary effect of China even in the face of China’s growth increasing energy and commodity demand? I am not suggesting China has infinite labor capacity but I am arguing the globalization has has a significant effect in keeping wages and consumer products low in the USA, effectively dampening inflation. Also, the latest employment figures suggest that the fed will drop interest rates at the next meeting and most likely will drop interest rates several times after that. What effect will a drop of 0.75% in interest rates have on affordability or demand for housing? Even if you remove the morons that had no right buying in the first place and will no longer be able to get financing after the rate cut.
The historical relationships will apply but the absolute values will shift. The interest rate environment we are in today is very different from the historical norm. Will it last forever? Probably not, at some point wages and production costs will equalize globally. But, we are a long way from this point. I won’t call it a new paradigm but I will call it a new interest rate environment and it does change the housing affordability equation for the forseable future.
A 20% drop in housing prices is a possibility. A 50% cut? Don’t hold your breath and if it does happen,you better make sure your bunker is stocked with automatic weapons, ammo, food and water. A 10% drop in the short term…probable but hey, my opinion is as valid as those claiming a 50% reduction is inevitable.
Defaults, bad credit, toxic mortgages and rates of foreclosures all play into the picture. The one key factor this discussion is missing… lenders availability to financing and credit. If the banks have no money to lend (can’t get it or will not lend it) your market will tank like it already is here in my area (Sacramento). Credit has really started contracting and once the money is gone, houses will not sell unless someone has the cash. It is no longer an issue of what someone would be willing to pay, or even if they can afford it based on income, it’s a matter of how much risk the bank is willing take in lending the money. As other markets tank, the few remaining good markets (seemingly good markets anyway) will be halted by the new tighter standards being applied across the board. The myth that housing only goes up has been dispelled so don’t think Seattle will escape just because your market is still appreciating. Once the money is no longer available, the pain begins.
Demersus, I don’t think it is a matter of if the Fed lowers rates, I think it is a matter of when. The latest employment numbers increase the probabilitythat the fed will drop rates at the next meeting followed by several additional drops.
I am with you however when it comes to the impact on the dollar. We are a debtor nation after all and need the Chinese, Japanese and Germans to keep buying our debt so that we can continue to live beyond our means. But, that is another whole discussion!
“… What happens if the FED lowers rates? The dollar looses value compare to other currencies and we start loosing foreign investment in our debt. If the FED raises rates, well, then a bunch of over-zealous speculators and others whom simply were irresponsible loose a lot of money. Which one would you prefer?”
One thing I have learned from this board is that some people just need a pink pony. 50% drops in appreciation, 20% foreclosure rates and 1990 Japan is coming are the fundamentalist bubblehead pink ponies.
In my example, 7.5 trillion represents the total of all US mortgage debt in 2005 not new mortgage debt. Verified value of homes sold in 2005 was 1.92 trillion from fed report.
In 2006, total US mortgage debt was 9.7 trillion. If you want to reference mortgage debt increases by year you need to use net increases
after sellers repay their remaining debt.
So, in my example, 50% of all people who have a mortgage cash out all of their
equity gains for the year. Since I assume we’re only talking about people
who have mortgages, your assertion that equity gains could far exceed total
mortgage debt is very strange.
750 billion in NET equity extractions in 2005 is a real number which you can easily
verify by reading the federal reserve report and 7.5 trillion in total US mortgage debt
in 2005 is not very far from the mark though I used it as an easy number to make my point.
2005 was not an anomaly. Equity extractions by year that are 40% of total value of all
homes sold that year is not insignificant by any measure.
Also, I predicted a 20% decline in prices over the next three years, not 20% foreclosures.
Over and out.
Just a reminder: mortgage rates are tie to treasury 10 year notes, not the short term interest rates Bernanke handles.
Hmmmm. Interesting thread…
But for all who continue to suppose that the Seattle area is somehow unconnected to the global realities of available investment funds, look out!
Sometime within the next four weeks (and likely on September 21st when the unmarked value of some trillions of derivatives will reset), the world financial markets will begin to understand who is holding the bag, and how big a bag it is being held…
Real estate values will no longer be seen as a local interest story, but rather as a sad side-show compared with the real carnage caused by the US$ implosion.
I’d be pleased to be wrong about it, but after watching markets for thirty years, I don’t believe I’ve ever seen a scarier combination of money risks in play.
Disclaimer: I sold all real estate investments in 2006 (including main residence) and have been renting since. We have a significant portion of our liquid assets in non-US$-denominated currency.
jc -
my mistake. I thought it was a conversation. not an argument. If it’s an argument, I really don’t get your point. You agree with sniglet? you want to nitpik my example?
I thought you disagreed with the 20% foreclosures, then I thought you agreed. Read my initial question. I addressed Sniglet, not you.
Buceri, I understand the fed does not directly determine 10 year yield, but historical 10 year treasury yields are out of line with yields since 2000. In the past, short term rates driven by fed funds rate tended to influence 10 year yield. Since around 2000, this linkage has broken / weakened. We can hypothesize on the cause – massive US trade deficit, Chinese investment in treasuries, massive pools of foreign cash looking for a return…I still think we are in a low interest rate environment relative to last 50 years.
“Most loans in the 80s were 20% down conventional”
I keep seeing this, but although probably more than 1/2 of the loans were conventional, ARMS were still pretty common. We bought a home in 1984 with a neg amortization ARM, and about 5% down, and I don’t think it was uncommon, especially with first time buyers. BUT, interest rates were very high (ours was over 12%, fixed was about 14%, I think. I remember one point where they were over 17%) and coming down, so I think that most people were able to refinance after a few years at a lower rate conventional. Plus we had to document to the hilt and my mom had to cosign for us to get the loan.
I want to add that it was in 2003 when I noticed that ARMS were becoming more and more common in a very low interest rate environment that I knew that big trouble would come of it.
Buceri, I you’re correct. But I think only 30-year mortgages are set to the 10-year note. ARMs are set to 12-month notes (short term interest).
But even if rates are lowered, it won’t matter. Nobody is buying mortgages anymore.
Ah, armchair (blogchair?) economics. Hilarious!
Macro and micro-economics are pretty complex, and the economy is rarely as straightforward as those who publish blogs on a single topic would have you believe (this blog is no exception). I’d wager dollars to donuts that the “percent likelihoods” people believe here are no better than random chance at being correct.
Here are some direct examples of the complex economy: When the dot-com bust happened, I was directly impacted (lost my job, took me almost 2 years to get back to work), but most of my non-tech-employed friends were only hit in their 401ks (which hardly mattered to them in the short run). When the oil bust hit Texas in the late 70s, my father-in-law was nearly bankrupt and it took him 10 years to recover, but my father was barely impacted. On the other hand, the change in reimbursement by HMOs/PPOs has made my father’s income decline annually for like 10 years, while my father-in-law is earning more than ever (oil/gas law). The US and global economies are complex beasts that shift in ways you can’t begin to predict – if you even have a chance of knowing what you’re talking about, unlike most commentors (self-included) here.
Even looking at the depression for what “might” happen can be a red herring now. One of the things that caused so many mortgage defaults during the depression is illegal now. Banks were able to demand that borrowers repay their entire loan at any time, and did so because they had a cash crunch. This caused many more people to default than otherwise would have. In the wake of that the government made it illegal for banks to demand you pay back your mortgage any faster than the amortization schedule states. So sure, people unable to meet the basic payments may default, but unless all of us
Anyone who tells you it’s black or white (“no problems in the economy, prices going nowhere but up” or “mass defaults around the corner, prices falling to mid 90s levels everywhere) is someone to safely be ignored.
My personal take is that no has a clue what’s going to happen to the economy in the next 10 years. We don’t know what might happen, good or bad, to massively influence things beyond our imaginging – mass earthquakes, terrorist attack, end of war in the middle east, new discoveries, rising/slowing birth rates, etc.
So the likelihood of someone named “The Tim” knowing that much is slim. About as slim as jcricket being a conscience you can trust.
We talk about prices coming back into line with incomes, but what about the possiblity that longer term loans become more prevalent? I’m not saying it will happen, but it doesn’t seem out of the realm of possiblities. I’m aware of how much of an increase in interest those longer terms would add, but there was also a time when 30-yr loans were the exception. What’s to say a similar revamping of the mortgage market won’t happen, ie 40 to 50 yr payment terms?
I wasn’t trying to argue. I tried to show you why I believe
that net equity harvesting of unrealized gains used for
renovations and material consumption would have a real
part to play in this puzzle. I digress from sniglet in that I
think there’s going to be a bailout, but I agree that large
numbers of households are vulnerable.
Banks were able to demand that borrowers repay their entire loan at any time, and did so because they had a cash crunch. This caused many more people to default than otherwise would have. In the wake of that the government made it illegal for banks to demand you pay back your mortgage any faster than the amortization schedule states.
I believe this is incorrect. I recall when be bought our first house in ‘98 (30 year fixed with WAMU, nothing exotic) the broker told us that was a standard part of the contract, but that it was very uncommon for banks to employ that option. Borrowers rarely can pay remaining principal on demand, so essentially it means forcing foreclosure, which is costly for the lender.
I am not a lawyer/broker/escrow agent, and my attempts to wade through the legalese of my last set of closing documents nearly induced a coma. I’d appreciate if any professionals could clarify—thanks in advance.
Moving from a 30-year fixed to a 40-year fixed on a 350K loan in this environment would only save about $150 on your mortgage payment. Going to a 50-year would only subtract another 60 or so.
That’s not enough to help much.
If you aren’t a lawyer/broker/escrow agent, what are you, Angie?
No, mortages in the US aren’t callable.
Moving from a 30-year fixed to a 40-year fixed on a 350K loan in this environment would only save about $150 on your mortgage payment. Going to a 50-year would only subtract another 60 or so.
That’s not enough to help much.
If you aren’t a lawyer/broker/escrow agent, what are you, Angie?
No, mortgages in the US aren’t callable.
jcricket,
You are obviously correct about anyone’s ability (or lack thereof) to predict the economic future, even those with loads of expertise on the topic. However, it is uncanny how the credit crunch is playing out very much like many on this blog seem to have predicted. Until VERY recently in the mainstream news, all was rosy. Until it wasn’t, that is.
Interesting article about the falling US dollar by Charles Hugh Smith at oftwominds.com/blog.html :
1. Lowering the interest rates will trigger a decline in the dollar with unknown but potentially fatal results which can only be fixed with much higher interest rates in the future.
2. The U.S. household is staggering under an unprecedented burden of debt, which it has created by borrowing and spending more than its income can possibly support.
3. Lowering the Fed funds rate will not rebuild the shattered structure of global risk appetite and trust; that is irrevocably broken.
4. Lowering the Fed funds rate will not rebuild the American consumers’ balance sheets which have been irrevocably broken by the decline in housing values.
5. Lowering the Fed funds rate will not enable households to extract more equity to spend–that tool is broken.
6. Lowering the Fed funds rate will not create new jobs or stop the erosion of jobs which has–despite painfully obvious official suppression of reality–finally become visible to all.
So exactly what will a Fed funds rate cut do? I am reminded of the schoolyard joke about the short-term benefits of peeing in your pants: it will give the stock market a warm feeling for a very brief moment.
Not in the RE business at all, bilirubin. (Except as a landlord, and a homeowner w/a couple of mortgages.)
I’m in a profession where one might not infrequently use words such as “sinusoidal” ;)
Still haven’t heard from Sniglet.
In particular he still hasn’t explained where his “20% homeowners in trouble” figure came from.
His dual assertion that 30% of the activity in that past five years was in “exotic mortgages” and that 20% of households are now in trouble automatically implies that something like 2 out of 3 homes in the Puget Sound area were sold/refinanced in the time frame considered.
Who other than a bubblehead desperatly wishing for a crash would believe something like that?
“Moving from a 30-year fixed to a 40-year fixed on a 350K loan in this environment would only save about $150 on your mortgage payment. Going to a 50-year would only subtract another 60 or so.”
I hadn’t dug too deep into the topic and the idea just popped into my head. So the minimal payment relief from that extended term is good to know especially when that’s balanced with the huge increase in interest payment such terms create. But then again, as I look more around the internet, I find more stories advocating the 40yr loan, even though the payment saving is so small.
Another idea I’d wondered on was how a comparison of the total payments for a given mortgage would compare to the increase in the underlying asset (i.e. house price) price over that same time period. IE, over 30 years a 100k mortgage would result in total payments of about 154k. How much did the asset increase in cost in that same time period?
Sammamish house price is dropping!
Fact -
1st house, MLS# 27163122, bought in 10/23/2006 for $497,000, is on market asking for $505,000.
This house, ML#27139163, same model in the same community as house #1, on market for 40 days, is asking for $484,990
YoY price – negative, zip code 98075.
An extra160K in interest on the 40 and 335K in interest on the 50-year.
Here’s the calculator: Goof around. It’s fun!
http://www.archerpacific.com/30_or_40_year_loan_payment_calculator.htm
Angie- ah. A landlord.
So you are the purchaser of that NAR nugget about “paying someone else’s mortgage,” not the seller of it. I’m kinda glad to hear that, but I’m not sure you’ll find a buyer around here, if you are trying to lay it off! ;)
The danger of platitudes and catch-phrases is that people start assuming they are laws, not untested hypotheses.
While in a normal market your catch-phrase would probably be true, when the rent/own ratio is at 1.5 and properties no longer cash-flow, your theory no longer holds.
Given your posts exude confidence and not fear, I assume you bought your rental property pre-2004, when properties did, barely, cash-flow.
I UPDATE MY PREVIOUIS COMMENT
Most loans in the 1985-1990 Bubble “should have been conventional fixed”. If you were stupid enough to go to an exotic or ARM you were the cause of the Bubble:
See the proof:
http://money.cnn.com/magazines/moneymag/moneymag_archive/1989/05/01/85125/index.htm
[Tim or Egat, you can cut a few words out of the URL with your HTML editor....a waste of time?]
Angie,
You’ve got some of us curious:
Not in the RE business at all, bilirubin. (Except as a landlord, and a homeowner w/a couple of mortgages.)
I’m in a profession where one might not infrequently use words such as “sinusoidal”
Sine Wave
I would bet you’re a person of technical background, perhaps an electrical engineer or an electronics tech, possibly a teacher / professor of math / electronics.
I don’t think you’re in sales as I don’t believe most in sales are even aware of the sine wave.
Has our educational system become that poor?
You aren’t taught about the sine wave in high school anymore?
TJ, I’m flattered by your interest. I will choose to remain a woman of mystery.
But I will cop to being a number geek, and in that spirit, will share a link to my favorite amortization calculator. No bells and whistles, lots of flexibility. That note about moving the calculator has been there for maybe a year, so I suspect it’ll be there for a while.
Bilirubin, thanks, I’ll hang onto the rental. And be grateful to the good folks who pay my (15 year) mortgage! Five years down, ten more to go…
More clues! You know the proper spelling biliruben.
Geez. You may be in my profession. Hopefully not in the office next door!
Billiruben-
You can easily graduate from high school without taking trig. You can even graduate from high school these days without knowing the multiplication tables. Unfortunately, I know thru personal experience that this is very true.
I was focusing on what professions would use the word “sinusoidal” on a not infrequent basis. I’m just curious.
-So Angie. Are you going to divulge?
biliruben-
You suspect Angie is in the medical profession?
Maybe. Bioinformatics. Biostatistics. Bioengineering. Epidemiology. Many possibilities, but not too many people know how to spell bilirubin.
Hee! You guys crack me up.
Biliruben, I’d always figured that your pseud referred to your jaundiced view of the real estate industry. (Or maybe was just a cutesy contraction of your name.)
Doesn’t take a doctor to make that association. You only need to be a good speller—and have gone a few rounds with a fussy newborn.
Nothing to see here, move along.
I’d like a response from those who think that housing prices are unikely to fall 50% from peak prices. hmmmm…seems that most places easily doubled in 5 years, but the chances of those now getting cut in half, what, you must be crazy??? pshaw……
Uh, Towering Rentferno, the NAR says that housing prices only increase.
That means they don’t go down.
Because they’ve got electrolytes. It’s what houses crave. (okay, maybe that quote is a bit obscure).
LOL, Angie. Ok. I’ll stop speculating. As long as you don’t have your realtor’s license, it’s all good.
people don’t start off buying a ‘median priced’ home. They buy a sh!t box in an area that they don’t really love and then they wait unit that appreciates. Since its a leveraged investment, they gain equity over 5-7 years. They then take that equity and move up to the next level of house. Maybe do that a few times in your lifetime and you CAN afford most houses in Seattle. (as long as you don’t spend equity like its cash)… if you own over 30-50 years, you WILL build equity… obviously there are cycles… always have been.. always will. Thats a good thing if you’re paying attention.
“Because they’ve got electrolytes. It’s what houses crave.”
I only wish the crops could do so good with all those mineral salts. It’s like they’re in the water too.
But seriously, how about figuring out an average interest rate for mortgages from between 1975 and now, and comparing the interest repayment to the differnce in housing cost. Is that were inflation comes from, all that cashola paid back to the originator?
———————————————
geon said,
on September 7th, 2007 at 1:15 pm
MLS 27097229, list $1.2 mil, just sold for $1.5…
I guess there’s still bidding wars out there. The GF is alive.
Address is 20809 NE 15th st. Sammamish, WA 98074. Strange
———————-
Who said it got sold ? Its still in market listed for $1.2 mil.
mls # 27097229
http://www.redfin.com/stingray/do/printable-listing?listing-id=798959
Who said it got sold ? Its still in market listed for $1.2 mil.mls # 27097229http://www.redfin.com/stingray/do/printable-listing?listing-id=798959EWW! Did you see that pink room? What the heck is that? Seriously, how would you live in a house like that?