There’s been a lot of finger pointing lately about who’s to blame for the housing fiasco. When, and if, an accounting is ever reasoned out, the following attitude has got to be placed near the top of the list of "Reasons Why This Happened": [Hat tip to "bkozak33" of Broker Outpost- I've edited just a bit.]
My Realtor gave me a contract for a lady to buy a home for $300K. I got her aproved at a 7.25 interest only payment- with taxes and insurance $2,500.00.
She told me all she can afford is $1,800.00/month. I told her that is the best I can do, and that "I won’t continue this loan, because I know, and you know, you can’t afford it."
She called me back and says that she want to go ahead any way, and that she would refi in six months. I told her that she won’t do much better than a 7.25 par rate, and that the house she is buying is too expensive, and it’s not the rate. She then told me she will just go to a diffent broker and get it done. i wished her luck.
This lady is staring at foreclosure, and is running full speed at it, with eyes wide open. Oh well.
What will it take to put a stake through the heart of this "Ignore the threat of foreclosure, don’t care about tomorrow, I want a house today attitude?"
Maybe if we didn’t see the Ditech commercial on every channel every ten minutes saying “people are smart” the sheople might not be so euphoric.
Instead of “location location location” we need “focus focus focus”.
Stories like this one tell my wife and I that things need to get worse before they get better, after which time we can buy a reasonably priced home. We’re thinking this euphoric idiocy has somewhere between two and six months of tread still left on it, amazing as that is.
Then we’ll all be taking the economic beating we deserve, including the ladies amongst us. We’ve decided that the “woodshed treatment” is the only good cure for our culture at this point.
Timely post about people still wanting to “get into real estate” at any price. . .I still talk with people who share this opinion – “prices are down, so it is a good time to buy income property.”. . .they don’t want to listen to terms like, “cash flow positive, etc.” I agree – it will take another 6 months before the news gets down to the man/woman on the street.
Denial and greed are pretty powerful, stupidity and lying seems to be pretty popular these days as well. I was going to sit this whole cycle out myself but was just tired of renting.
As low as rates are, why people are not going with regular fixed rate 30 year loans this whole time is beyond me.
Was at a foreclosure class last night handled by an attorney who specialzes in trustee sales. This guy predicts that foreclosure will peak in 2009. Majority of the properties are going back to the bank and no one has any idea what the bank is going to do with so many REOs. Even though he stands to benefit from all of this, he is amazed at the alarming rate at which homes are being foreclosed this year.
Toysarefun – good question – “why aren’t people going with 30 year fixed?”. . .here in San Diego, the average household income is 54K, and the average house price until recently for a home was 525K (now down to 490K). . .so the “average” person here could not afford a traditional 30 year fixed, with say even 10% down. . . so – they took an ARM, and hoped the price of the home would go up – then they would pull, say 100K out for a downpayment, and refinance into a regular 30 year fixed. A number of people I used to work with did this in the early 2002/2003 period . . .but once housing prices leveled off (not to mention fell 10% here) they couldn’t do this – now they are stuck with an exploding ARM. Of course for those of us lucky enough to have 20% down, and a good income, we are in the catbird seat.
You’re in the catbird seat with a home which is going to lose 60% of its value? How so? And you’ll be unemployed. Again, how so?
Wow, I guess I wasn’t too far off, lol.
I had just left another comment on the other post mentioning these folks who have the feeling they’re about to get bent over the barrel but choose to put on the blinders and run full speed to avoid thinking about it.
I can’t defend these buyers at all..
To: tryskmpr . . .well THIS catbird is going to sit in the catbird seat a long long time. . .my 20% down will buy a lot more house in two years. . .I think 60% house price decline is a little unlikely, but you never know – I would say another 20% here in SD on top of the 10% already – so 30%. . .my best guess.
Mark in SD-
I think lending standards are going to be key to what happens with prices. We’ve lived in a world where there has been a huge disconnect between what people could afford, and what they are allowed to buy. Many Californians have been “refi-ing the refi” on interest only loans for years, counting on appreciation to build equity.
With home prices dropping, the refi cycle breaks. If lenders will only allow borrowers to borrow what they can reasonably afford to pay back, sellers are going to have to take that, or not sell. Sure there are cash buyers and folks with large downpayments, but not enough to carry the entire market.
Sure high demand has affected house prices in CA- but so has wild and wonky loans that made it possible for prices to reach new heights. I think it’s going to be really interesting over the next few months to see what affect tightened lending will have on the market.
Boy at that point why didn’t someone mention “rent” and the how much house you can rent for $1800 a month? Why would someone want to buy a $300k home when you can rent a $400k home for $1800 a month. The tax advantages don’t even come close to saving you enough to buy.
I also think that we will not fully see the effect of the resets unitl end of first quarter 2008. It takes time for the foreclosure process.
The interest rates are coming down. Now if the house prices would follow. I am not seeing much of a change in the inner cities.
Of course for those of us lucky enough to have 20% down, and a good income, we are in the catbird seat.
I’m not so sure that having an 80% leveraged asset that’s dropping in value is the “catbird seat.”
The pyramid is collapsing and sound economic principals will prevail (like they always do…). “It’s the inventory stupid”…Now that sane lending standards are returning, inventory levels will subside when selling prices more closely match median household incomes. From my perspective, In most of the US, residential real estate won’t be a reasonable investment for quite some time. That means that sellers will have to appeal to buyers that intend to live in the homes they buy. Given the current mindset of mortgage lenders, this further means that median prices WILL HAVE TO MATCH median incomes.
Twist
Thank you for this forum. Typing this feels like thearapy. I’ve been watching and reading this site for months. Please do not hate me…but I’m a California Developer. I worked for a large private home builder for a few years before joining a smaller group just entitling land for future development. Before I joined the home builder I was an environmental consultant for a number of years. What I discovered on the developer side of the fence was pure greed. It was all about the mighty dollar…spend little…make a lot. The people I’m with now have a more “do it for the right reasons” attitude. Unfortunately the Central Valley has imploded in on itself.
This blog or article nailed the exact question I and some friends in the business (that still have a job in it) are asking and your answer to the San Diego guy nails it on the head. How lending standards get reformed will have a major impact on pricing. This will take time to work out. Unfortunately, we will continue to read about the forclosure fallout well into 2008 and I beleive that will continue to eat away at the current base prices.
Great web site…sorry for my lengthy response, I felt compelled to do my first entry. People continue to lose their jobs at my old company and at others I speak with on a regular basis. Home building is coming to a grinding end here in California’s Central Valley…it was about time…nothing was making sense to me any more. Homes in nasty areas going from $195K to $585,000 in 4 years…unsustainable.
Toysarefun – “why aren’t people going with 30 year fixed?”.
The reality is that most people are in the home 5yrs or less. Why get a 30 yr at 7.0% when you can get a 5yr ARM at 6.25%. Or a 7yr ARM at 6.5%?
It made sense to do it while values were rising, or somewhat stable. Now that they are declining, the fixed is the safer option. But if you are going to sell and move to another home in a few years, the adjustable mortgages save a lot of money.
The “greedy investor” angle is to get the adjustable rate for as low a payment as possible, so when rented, the property is positive on the cash flow. As the adjustable period approaches, just refi into a fixed rate. If the value went up in that time, the lower LTV would yield a lower interest rate that might be comparable to what the ARM was in the first place. It all makes sense when not in a declining value market. Just risk vs reward as in many investment industries. Just try to get a seat when the music stops. (Or be sure you can afford no seat…)
JDC-
It wasn’t just the “greedy investors” either. Builders loved to show how with “special financing” you could buy a lot more house.
They just didn’t point out that it might be difficult to keep the house you got if there were any hiccups along the way.