Tightening Lending Standards Discussed at RCG
One day behind S-Crow's informative post here at Seattle Bubble, Rain City Guide notices the tightening lending standards.
I posed the following question to the real estate professionals there:Rhonda Porter wrote:For example, if a buyer had a $400,000 mortgage, instead of qualifying based on the interest only payment of $2041.67 (plus taxes and insurance) at 6.125%; the borrower will now need to qualify using a fully amortized payment of $2430.44.
Essentially, this means that if a borrower could only qualify for a payment of $2041 (plus taxes and insurance); instead of being approved for a $400,000 mortgage utilizing an interest only product, they now qualify for a mortgage in the amount of $336,000.
Based on this example, the homebuyer is qualifying for $64,000 less of home.
I have noticed a general tightening with debt to income ratios and with the amount of reserves (funds you have in the bank after closing) being required. Credit scores that once flew by with an approval are no longer.
Some highlights from the responses so far:The Tim wrote:So how many people are the new standards likely to affect? 10% of potential homebuyers? 50%? 90%?
In the example, the potential buyer's purchasing power was shaved by 16%. If that kind of scenario plays out across even a significant minority of the potential homebuying market, I don't see how the result can be anything other than a serious downward pressure on prices...
Rhonda Porter wrote:Listings may sit longer...I'm not a Realtor but if there are less buyers, then I would think prices of listings would be impacted in the conventional-loan-amount markets.
ARDELL wrote:I do think the market will be affected, but I think it's a good thing.
Sandy wrote:The number I've heard is that 10 - 15% of the market that existed for real estate at the beginning of the year no longer exists.
Comments
Property prices dropping by 16%, as a result of a stroke of the pen, is not a good thing as far as RE agents go.
Wait until the lenders require a no kidding 20% hard cash down payment and an interest rate in the mid/high 9s.
Now, how much can someone who can afford $2K/mo and $10K in savings afford?
On a side note, wasn't it Ardell that was chiding us on how we never change our tune even as the market moves against us?
It was never about the price action; it was about risk management. Perhaps she now has an understanding of what we were trying to say.
This is just the beginning. WM just put the kabosh on 2/28s and is probably going to terminate the 3/27 soon. No more NINJA loans.
Who is left to buy houses?
most of us on this blog :twisted:
I see a vicious cycle.
If I were a real estate agent right now and saw sales going down I would also REALLY want sellers to drop the prices and get them back down to a level where people are buying houses again.
It's better to take a 25% drop in price (and commission) than it is to keep the price level (or higher) and take a 50% drop in the number of transactions.
Most on this site seem pretty pragmatic and have been in and out of the housing market before. Myself, I bought in 2003 and sold in 2005 (moved out of state). I wouldn't have sold if I hadn't moved.
However, I *have* seen comments like "I've been waiting for prices to come down since 2002" and have similar thoughts to your own.
I think some (not all) confuse "overpriced" and "overpriced for me".
Bubbleheads? I'm not quite sure what this term refers to, perhaps since we are trying to be educated before purchasing, that we are somehow ignorant? I just don't understand how waiting for a price to reset, (to what it has traditionally), is cause for a Bubblehead title. Calling names makes you what? Better than a "bubblehead" ? I will go out on a limb here and bet that you are in the middle of selling... right? Upset that the market isn't so grand? Therefore it must be "bubbleheads" that are causing this grief? Sorry but I am well educated and I will not be purchasing anything until prices are inline with inflation. If that means I have to wait 5 years so be it, if it means I am priced out forever, then fine. I really don't mind renting. All liabilities are off my shoulders when I rent, and I get to pay a minuscule amount comparatively. I am currently trying to sell a Condo that I am going to lose a lot of money on. Do I care? Not really, I just won't be the guy who makes the mistake of waiting too long to sell again. I only wish I would have learned that before I found myself in a situation like the one we have mounting now. Label me a bubblehead, I could care less, but don't assume to know anything about price cycles, or where we will be. You should focus on the mess you are in and why you feel such labeling is necessary.
"I think some (not all) confuse "overpriced" and "overpriced for me"."
As far as overpriced and overpriced for me. When median house prices out pace median wage... It's pretty obvious what overpriced is. Seattle has a median house price of about 440k. With the "HOUSEHOLD" median being about 70k. Does this strike you as odd yet? ... Lets break that down...
228k you need to make 61k to afford
332k you need to make 89k to afford
440k .... you do the math
I think its rather depressing to see the state of Seattle right now. Everything is overpriced, groceries, housing, renting, clothing, blah blah blah. This town isn't even affordable any longer. Oh wait I forgot, we all work at Boeing and Microsoft.
Boeing = 70,000 employees
Microsoft = 35,000 employees
Population = 1,860,000
pfft
Consider that long-term, real estate prices grow at a rate just slightly higher than that of inflation. Let's say 4% consistently to be generous.
Extrapolate that smooth growth pattern (again, ignoring the stagnated wages during the current decade) out to 2008, and I think THAT is what many posters here would consider a reasonable price based on "fundamentals".
Note that this requires ignoring short-term market distortions like liar-loans, cheap/easy money, and public manias. Therein is the problem.
When you hear someone who derives income from schlepping real-estate talk about "strong fundamentals" (as if thoroughly average numbers of population influx and corporate hiring drove the mania) take it with a gigantic boulder of salt. This market is disconnected from fundamentals, and that is what causes many people to view the frenzied markets of 2004 - 2007.5 (housing bubble, R.I.P.) as unsustainable, unrealistic, and overdue for a correction.
Reversion to the mean is a b*tch.
Lest we forget, not even all those 70,000 Boeing jobs and 35,000 Microsoft jobs pay 80k a year salaries. Some of those people are management and engineers, but some of them are also food services and janitors.
Sit back and enjoy, my fellow 'BUBBLEHEADS', the previews are over and the main attraction is about to commence! 8)
Your memory is steel-trap, my friend.
Yes, Ardell did say that she didn't give an RA about credit and interest rates.
RE agents are getting a lesson in math and economics.
The vortex is tightening, and the turd is about to go down the pipe.
7. ARDELL - July 19, 2007
That makes no sense, really. How can someone have to qualify at 11.125? Rhonda, is that true? I find that hard to believe.
Then she goes on to say that qualifying people at the fully indexed rate doesn't make sense under other circumstances because they won't be living in the house when the rate adjusts.
Oh Really? You don't say.
Ardell,
Hi, it's me, your "center," and I was just wanted you to know that I'm still thinking of you.
I too have a feeling in my bones. I smell a banking crisis. Do you have any friends in the industry, and what are they telling you?
All the best,
E
Ardell - February 27, 2007
E.
Stay on topic
Ardell,
Banks that lend to the Great Unwashed so they can buy the homes you are selling are a subject you need to give a lot more attention to than just a RA.
If a bank books 2/3 of it's profits on money it has never seen, and that money is subprime and will likely not be paid back, it is a BIG, BIG, BIG deal.
Requiring good credit, ample cash down payments, and very tight ARMs or fixed only mortgages on higher interest rates will make RE (even King County RE) gap down faster than the DJIA did today at noon.
Banking problems are nuclear winter for real estate. No amount of feeling in your bones will keep prices up.
22. ARDELL - February 27, 2007
E.
Not gonna happen. Not going there with you. Talk Real Estate here. I was in the banking business way too long to listen to the banks all going under stories. In 1984 they said there would only be 5 banks in the Country by 1990. Didn't happen
you guys can read the whole thing at Rain City Guide: Seattle Area Appreciation
was that the conversation that got you banned from RCG? Rereading some of my comments in that thread I'm surprised that I didn't get a talking to as well. Dustin, aka Captain Censorship deleted about half of my comments in that thread. I can't wait until the end of the year and repost the link to that thread over at RCG.
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).
Weren't you also posting a few weeks ago about how your income has dropped this year?
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. :P
Nah looks more like denial, maybe approaching anger.
Classic.
It's really not as great of an investment as that. If I can put 20% down on something, and see it grow at 4% a year, that's just fine. In fact, that's not much different than what Bear Sterns thought they were doing leveraged 10-to-1 on real estate CDOs.
But here's where the analogy breaks down. In addition to the financing cost, which you would probably pay on any investment that involves borrowing, you are also paying maintenance costs, which is typically 2% of the houses value per year. Further, you are paying taxes on the asset itself. Further, if you make as much money as you like to brag about, the interest deduction may actually be a tax burden as it pushes you into AMT.
Doing the math correctly, with assumed 4% (historic appreciation) you're seeing just over 1% appreciation a year with additional out of pocket costs. Add in inflation, and you are only getting 1% real appreciation with over 2.5% out of pocket costs a year.
So how do you win? You win because your debt is depreciating because of inflation. That's right, the same power that Uncle Sam uses to silently lower his own debts is helping you slowly escape your debt as well. And that really is how it works.
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.
I consider a 5% return on investment to be very poor. You can do that with a T-Bill or a CD with no leverage. Additionally, the leverage you incur to get 5% is not a good thing. That means you can lose more than you put into it. If you've got an investment where I can expect a 20% return, with 5/1 leverage and no downside, then I'm all ears. Maybe I should call that Unreal Estate
I have no problem with people buying real-estate. In general, I think land is a great place to live on or run a business on. But I do get tired of people spouting out how great of an investment it is, just because of the last 3 years; or because they have one relative who bought 100 acres in downtown San Francisco 100 years ago for $6 and a horse; or because their parents bought a place for $60k 30 years ago, and now it's worth $180k, which is 200% increase if you ignore inflation; or even how 'they aren't building more land (even though they are building condos like there's no tomorrow).
Then my challenge for you, develop a formula to calculate what you think is the reasonable price for this market. That is at least constructive as oppose to at this point, simply being a nay sayer.
I agree with most of your dedication to "educate" during the rising inflation of house price. However, I think most of us at this point can see it quite clearly with rising inventory and many other factors. Therefore, rather than simply stating prices being too high, why don't you calculate the fair price.
I think there would be more room for argument in that aspect than all the same thing over and over for the past 2 years.
This week long summer storm SMACK-DAB IN THE MIDDLE OF PRIMO REAL ESTATE SELLING SEASON has to suck for RE agents and sellers.
At least it will give them some cover when their sales numbers line up for Hep-A shots because they are in the sewer.
Congratulations on seeing the light after inventory started skyrocketing.
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.
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"
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! :shock:
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