Tightening Lending Standards Discussed at RCG

[finance]

B - Lets just say that Real Estate prices typically increase by 4% per year. If you put 20% down your Leverage Ratio is 5X, which equals a 20% return per year (using the banks money). If you only put down 10%, then you have a 10X or 40% return per year on RE...yes I know there are opportunity costs fo that money, but think, a 20% to 40% Gross ROE, (as Jim Cramer says) Boo Ya!

Lets assume that the additional costs cut the Net ROE in half due to additional expenses of owning and operating the property. Thus a 10% to 20% profit per year isnt too shabby! Where else can you easily get this much leverage for a realtively save hard asset?

My own example: I put money down on my condo on June 27th 2006 for $239,990 and was just appraised for $265,000 yesterday ($25,010) or a 10.4% increase in real price. Accounting for my closing costs and additional expenses above the implied rental rate increases my Net ROE to 16% in just one year (including my closing costs, refi costs & negative CF). Over time my closing costs will be spread over several years (and tax deductible which I did not take into account which would offset emergency large expenses over time). Im about to finish a refi, thus saving me ~$250/month in mortgage pmts...

Now my cashflow is only $-400 per month on my condo (which has been taken into account in my Net ROE Calculation above), including the tax deduction my CF would be ~$-150/month (or a Net ROE of 44% with the tax deduction and using my now lower neg CF)...not too bad and not too far off from my guestimate example above (which I did before this calc).

[mike2]

[Eleua]

That conversation didn't get me on Dustin's Christmas card list.

No, I got nuked over an offhanded statement about immigration patterns in the Western world.

I probably should have eased up on the accelerator and kept banging away on interest rates.

Ardell knows I'm right. She wakes up in the middle of the night and thinks of what I tell her. She can feel it in her bones.

I wonder if I could go back on RCG with some of those quotes you found.

I'm sure she is giving a rat's ass now.

[mike2]

[synthetik]

[rose-colored-coolaid]

[finance]

rose-colored-coolaid - I think you sumed up the real estate situation nicely. If I receive a 1% real rate of return (or 1% ROA) after expenses and inflation on my property then with putting 20% down = 1% X 5 times = 5% ROE. If you put 10% down = 1% X 10 times = 10% ROE.

The Bear Sterns fun was investing in Subprime CDO's...this is a single personal investment and Im sure they borrowed money to invest in the CDO...thus if they used a leverage ratio of 10X on mortgages with 10X leverage it comes to 100X.

mike2 - Yes you are correct that I am using a "bubble" year calculation, however I just wanted to figure out what my 1 year ROE was.

As for my income it has increased by 60% this year (40-25/25), but leaving for a job in an area where I want to work...the overall compensation will be exactly the same (large part due to benefits, a bonus plan, school reimbursement, and paid vacation time) and is in a more secure industry.

[rose-colored-coolaid]

[Ubersalad]

[Eleua]

[Alan]

I think prices will stabilize when months of inventory reaches three months on the way down. We just recently passed that on the way up so prices have just recently begun to drop. I don't know what that fair price is, but if it is more than I can afford then I will move to another part of the country.

Congratulations on seeing the light after inventory started skyrocketing.

[dgeng265]

Ubersalad,

If you really have been hanging around here for the last 2 years as you repeatedly claim, then you obviously would have read many, many people's opinion on exactly such a formula to calculate the/a fair price. Every single regular here has asked the same question and come up with their own formula. And, if you are as intelligent as you sound, then I'm sure you can come up with your own as well. It's not really that hard, and I'm even an engineer.

You can also put your intelligence to use and use the forum's or the blog's search feature. I think even The Tim had a whole blog dedicated to the subject.

This question has also been asked ad nauseum on other housing bubble blogs as well. My 2 favorites are The Housing Bubble Blog and Patrick's.

[explorer]

I would wager the venrable Aredell was not in banking just before the Great Depression.

I understand that banks were loaning to anyone with a pulse just before the Great Depression took hold...

Not to say, to quote Frank Zappa: I'm telling you my dear, "It can't happen here"

[Eleua]

If you go over to the on RCG, you can see that Ardell is still in denial about what a banking crisis means.

She is going off her historical perspective, which is not long enough to encompass a banking crisis of the magnitude we are currently facing.

I don't care what your credit is. If the banking system seizes up, it will be almost impossible for anyone to get a loan. Imagine what the market and comps will be if interest rates are double digit and 20-35% down payments are required. Keep in mind the banks will just be recovering from getting burned and many will be under a very watchful federal eye.

The only people getting loans in that environment are those that can PROVE they don't need it.

F-U-G-L-Y!

[perfectfire]

I don't think house values track with inflation. I think if you look nationwide it would appear house values track with inflation, but if you look locally house values track with incomes just like rental prices. This would make sense because renting is in competition with buying.

When it becomes equally affordable to buy a home as it is to rent then that will be the signal to consider buying. It'll probably dip below that but I'm not banking on it. I feel lucky that the bubble is bursting when it is, because it'll give me enough time to save up a 20% down payment so I'm not really having to wait for prices to come down from the peak because I would've had to have waited anyway to save up money.

-Joel