“Is The Pain Shifting Out Of Subprime?”
Several readers suggested a spread of the subprime markets over to the prime as a topic. “OK, so subprime is toast. But I don’t think investment losses on stupid loans, and foreclosures of deals that should have never been done to begin with, will sink the economy, do you? No one else seems to think so either, judging by the financial markets.”
“The question is whether there is any evidence that the pain is shifting out of subprime, and is that likely to happen in the future. Mortgage rates on traditional mortgages are still low. So are default rates.”
“I just saw a chart that shows that risk spreads over Treasuries are less than 1.0% across the board — mortgage backed, corporate, municipal, whatever. And Treasury bonds themselves have a NEGATIVE inflation risk premium relative to cash.”
“Is subprime the canary in the coal mine or the whole problem? And is there some proof, even if anectdotal?”
A reply, “I think it just might be the canary. The problem is the whole system of pension & hedge funds that invests in these securities, especially the higher yielding ones. These vehicles are themselves geared, and then investors in them can also be geared, so you have gearing on gearing on gearing.”
“It can’t be healthy, and means you get a domino effect if only one link in the chain fails. But then again, I am a bit ‘glass half empty’ on this subject.”
One saw this argument. “As I understand it the ‘bear’ theory is that ’subprime is toast’ => ‘real estate is toast’ => ‘consumer is toast’ => ‘economy is toast.’”
“Many ‘bulls’ refute this chain of implications as follows: 1.) Real estate doesn’t depend on subprime (o.k. maybe in S. Florida) 2.) The consumer is robust and will keep buying Hummers and Plasmas even as they lose their home equity. 3.) Even if the ‘little’ consumer stops buying the super rich will keep right on going. After all the top wage earners account for ‘most’ of the consumption anyway.”
“I don’t buy argument (1) one iota although I have to admit arguments (2) and (3) may yet prove to have some truth behind them. So yes the economy may well come through this but the real estate market is an all together different story.”
“Ironically the economy stabilizing may yet be the final nail in the coffin for real estate as it may keep the BB helicopters grounded. My theory is that this is exactly the outcome the fed’s want … and likely what most bulls on wall street are counting on.”
Another discounts the stock situation. “That’s because the recession of 2000 was halted by the credit bubble. The ’soft landing’ was enabled by the credit/housing bubble.”
“Now, IMHO, we will likely experience the fallout due in 2000 plus the carnage created by the destruction of the credit/housing bubble — unless they’ve got another bubble on the way (have to wonder about that stock market).”
One looks at the media. “Even the commentators on CNBC, you know, the same ones who hadn’t said a word about problems with subprime until last week when it was no longer possible to ignore - even those guys are saying it’s going to eat into prime.”
“Why would it be confined to subprime? Seriously, how many Amerians can trully afford a 400K and up home? Yet in many areas of the country, that’s all that’s been available for several years.”
“Also, in the Seattle area, and I’m sure many others, realtors and brokers have been encouraging people to borrow outside of their comfort zone- it was an agenda of theirs really for several years now. It was a racket really, to stretch people in all income categories past a rational limit.”
One sees a larger picture. “You are looking at the wrong market. Subprimers (poor credit and/or highly leveraged borrowers) are unable to quickly sell property for the amount they owe. As a result, they are defaulting. These defaults are being reflected in the subprime paper market. In other words, the value of the real asset is falling and that affects both prime and subprime borrowers alike.”
From Reuters. “Subprime mortgage companies’ shares dropped on Friday, extending more than two weeks of declines and triggering slumps in many finance companies’ shares.”
“‘There’s so much fear and loathing and panic in the subprime mortgage sector,’ said Howard Shapiro, a portfolio manager at KBW Asset Management, which has positions in several mortgage lenders.”
“Other decliners included Lehman Brothers Holdings Inc. and Bear Stearns Cos., investment banks perceived as having large exposure to the mortgage market. Share weakness even extended to Fannie Mae, and Freddie Mac, though neither has extensive subprime exposure.”
“But stock investors may be overreacting, analysts said. Even lenders with minimal subprime exposure, such as American Home Mortgage Investment Corp., are selling off.”
“‘They’re getting tarred with the same brush,’ said Lee Norton, an analyst at JS Asset Management, which owns American Home shares. KBW’s Shapiro estimates that total subprime mortgage industry losses for 2006 loans would be in the ballpark of $6 billion.”
“‘There’s no evidence of this yet, but the risk is that subprime is not just an isolated example of overstretched lending, but the first crack in a broader problem in credit in market,’ said Bob Albertson, chief strategist at Sandler O’Neill.”
Note: I am putting the gold topic suggestion thread up on my Money and Metals blog momentarily.
I have noticed in the past month Gold has taken off again. silver is at or near it’s record price. I have also noticed it sawtooths on the way up, jumping 20% or so and falling back 15%. If we take a base asumption that “true inflation” is running at 12 - 15 % then gold and silver “on average” should approximately mirror this since it ratains true value. This does not take into account short term bubbles which seem to form rapidly and burst as quickly.
Pretty close. Gold averages 15% annual return for the last 6 years, highest of all asset classes. Gold is up 8% this year versus S&P of 1%. Return on metals should accelerate at a faster rate than inflation going forward.
IF the economy keeps moving, along with commodities generally. If not, it will probably have some residual value greater than paper or assets that have to be maintained.
Gold took off this week because of the collapse of the Yen. Golds correlation with inflation is not very good (see golds price 1980 - 2000), but Golds price correlation with commodities is excellent. Gold is not a leading indicator and with the commodities exploding on the upside expect gold to follow.
Collapse of the yen? It’s been around 119-121 for months.
A better measure of inflation is how your personal basket of goods and services changes in price from year to year. The price of caviar and plasma TVs doesn’t effect me, so I couldn’t care less if they’re getting cheaper or more expensive. What I do care about are rents (averaging 4-5%/year), healthcare (about 8%/year), energy (about 12%/year since 2000), transportation (unchanged @ $1.67/trip for a while now, but it tends to go up in very large jumps), and food (little changed). The other expenses, like cheap Chinese electronics and toys, are small potatoes.
With my basket, I get an inflation rate of about 5%. I expect gold and silver to somewhat beat inflation over time, since the economy is getting bigger while the supply of gold and silver is limited by geology.
Inflation is NOT an increase in prices. The inflation rate is NOT the increase percentage for various consumer items. Inflation is an increase in the money supply. The increase in the money supply is running probably close to 9%-10% per year in the U.S., and is quite high in most industrialized economies. Don’t be fooled by TV blather that inflation is an increase in the prices of items.
Fiat Currency + Baby Boomer Retirement + Peak Oil/Peak Natural Gas = (Much) higher gold and silver prices. If you think silver at $14.00 per ounce is expensive, you haven’t seen anything yet.
In the old days(LOL), the boys on Wall Street would look at M3 and say Inflation is running within a point or 2.
Current calculations show M3 running at around 12%, so a best case scenario has Inflation running at 10%…enjoy.
“silver is at or near it’s record price.”
Did I miss something? Silver is trading at or above $48/oz?????
Silver has been in a deficit for a few years now, Even the bullish on wallstreet see gold above $750 this year.
Steve Forbes who last year said PM’s were nowhere to be now said he’s scared at where gold is going…as it it could rocket up.
Russia ,China, Mideast are increasing reserves incrementally…
as for the US$, well….as this RE market, MBS’s unwind, won’t be good…
A repeat ,but this chart, if it corrects as most spike do symmetrically, ..won’t be good. Gold Gold?/ Silver?
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
Gas price in Bay Area is reaching $3 again. Too bad for FBs with Hummers and Escalades.
Other events lurking:
1. Iran is going for nuke. US can’t afford another war.
Sanction? Oil and gold will be higher.
2. Israel, not US, will strike Iran.
Oil and gold will be much higher.
3. Ethanol corn will raise both oil and food prices.
FBs will have to choose: food, gas, or mortgage.
This was denied, nevertheless interesting:
http://www.foxnews.com/story/0,2933,254299,00.html
Here’s a question…I’m in CA, everyone I know has a piggyback mortgage. So, if you have good credit, but did low doc 80% 1st mortgage, 15% 2nd mortgage, 5% downpayment, are you a prime or subprime borrower?
I’m wondering if piggyback low doc or no doc loans are automatically subprime, regardless of credit score issues.
This does not answer your question, but it does give some data for California cities.
http://www.axisoflogic.com/artman/publish/article_23972.shtml#top
Really interesting article. The bank holding the 2nd mortgage is a total bagholder if the owner goes for a short sale, so more of these “piggyback” owners may be forced to go the foreclosure route if the 2nd lender refuses to accept a wipe-out from a short sale. 2nd mortgage could also be a HELOC tacked on after an initial purchase, and what homeowner doesn’t have one of those?
I think as the subprime continues to explode, piggyback loans even for people with better credit are going to get tougher to get, and since people don’t have downpayments, will start to shut out more & more buyers, regardless of credit score.
The second lender is wiped out anyway once the property is bank owned. Most of the listed REO properties in my neighborhood have nearly $100k haircuts (about 20%).
Lisa, following your argument, if people can’t borrow that 15% or 20% for the second mortgage, that should bring prices down 15% or 20% in time. On top of that, if credit becomes more restricted, that should bump out a significant chunk of buyers from the market. In this blog, there has been a lot of speculation as to exactly how much prices should correct downwards. I think I won’t even begin to look at houses seriously before prices are down 30% to 35%. It could take a few years, though.
The timing depends more on the rate at which REOs start showing up in the marketplace. Those are MUST SELL properties and they will presumably be subject to the very same lending restrictions, if not moreso. I am expecting 20% off on the median in CA, NV and AZ this year. Perhaps another 15% next year and then a very mild decline for a couple of years after that, if the NODs are any indication of what’s coming down the pike…
> piggyback loans even for people with better credit are going to get tougher to get, and since people don’t have downpayments, will start to shut out more & more buyers, regardless of credit score
I agree with your premise but would draw a less harsh conclusion: Instead of second mortages, PMI will gain in popularity again, now that PMI have become tax deductable like the interest on the second mortgage.
What does PMI do in case of a short sale?
Don’t need short sale if you have PMI. Bank will foreclose and if there is any loss to bank- PMI will pay the bank loss. F’dB is now really F’d. RE agents don’t get squat.
“…if you have good credit, but did low doc 80% 1st mortgage, 15% 2nd mortgage, 5% downpayment, are you a prime or subprime borrower?”
This has always been my question. Does subprime only refer to those with low FICO scores? If so, I would then argue that the meltdown will be in prime loans as well. Based on a few people I know, some of those with great credit and above average incomes, bought too expensive a home. Some of these people will be forced to sell due to adjusting loans, and stretched budgets. With declining values, they could find themselves in foreclosure, or worse, BK.
You are a so-called Alt-A borrower. Subprime refers to credit score only, below 640 or 660 depending on the lender.
no,the distinction between prime and subprime has been strictly based on credit scores for several years.however if you bought a home in sonoma county during the last 2 years with 5% down,you have no equity.if you need to refi you will need to meet stricter underwriting standards,bring $ to the table,and still have a decent credit score.this will get a lot tougher to do as equity continues to evaporate,and standards return to some semblance of sanity.good luck.
The US populace is being subjected to a level of propaganda and disinformation the likes of which of not been seen since Joseph Gobbels.
“Tell the people lies long enough, and soon they will believe them to be the truth”.
You act surpirsed. That has been going on for thousands of years. The lies and loss of freedom accelerated with Woodrow Wilson and the creation of the Fed and federal income taxes.
The pervasive, recurring message is: “buying stuff will make you happy.”
I am still kicking myself in the ass for not shorting Novastar…
I have been getting some appraisals in but again the refi’s are dead due to the fact of the loan program the borrower got into 1+ ago and the house not being worth it. The purchases are actually easy cause the sales prices are lower then the comps. I have been kicking around the Idea of using depreciation on the comps but the industry does not take to kindly to that being on the appraisal (They can’t handle the truth) right hd74man.
I too am an appraiser and I am seeing depreciation in the southeastern Connecticut market. Whether the industry takes kindly or not to making a depreciation adjustment, I make the adjustment if the data indicates it. The $500,000 + market is very soft and the $1,000,000+ even softer. Inventory is through the roof, many new construction dwellings sitting on the market for more than a year. The spring market will sure add to those numbers. Warren Group just published their numbers for 2006. The area saw nearly a 15% decline in the number of sales in 2006. The lowest number of sales in 10 years. A recent re-sale in 12/2006 sold for $2.1 million,it previously sold in 1/2005 for $2.6 million. Just one of many such sales.
how exposed is Peoples Bank of Conn?
Thanks
“Whether the industry takes kindly or not to making a depreciation adjustment, I make the adjustment if the data indicates it.”
Ding- Ding- Ding … We have a winner.
Appraiser’s Certification #9: I have reported adjustments to the comparable sales that reflect the market’s reaction to the differences between the subject property and the comparable sales.
**** Rant On ****
The appraisal non-sense I see on a daily basis would make any large investor in broker originated MBS defecate their suite pants. But for many years the industry was consumed by credit lending with little or no attention paid to the actual collateral.
Lenders are now expecting ‘tighter appraisals’ and are focusing more on collateral. HA … good luck ! The appraisal industry is overrun with semi literate economic hacks. They were initially pushed through the 90 or so hours of “classes” by the trade school slimeballs. Then they were “mentored’” by long in the tooth semi literate economic hacks. Then they got their own license and then went out on their own.
I have had conversations with many appraisers and seen many reports that proved in my eyes the industry is not a “profession” but merely a trade.
*** Rant Off ***
“best wishes” - Good to see someone taking real estate appraisals seriously.
http://www.businessweek.com/ap/financialnews/D8NG773G2.htm
A little more on the topic of sub-prime and the ripple effect its having in the sector/industry.
There was been no true “prime” for at least 10 years now. That is why subprime exploded. People have been plucking money out of thin air since about 1998, thats when the canary died. That money is turning back into just a bunch of hot air.
Nothing from nothing means nothing.
Exactly, there is no true prime market. It is a mix of old and new and this and that, a pinch of heloc here and a touch of piggy pig pig there with a big side order of fraudulent documents.
In Florida fully 75% of all loans in the past 4 years has some form of creative financing. Even good borrowers we sold a bill of goods such as buying vehicles etc wth HELOC’s and just wait for the real estate market to wipe out your debt.
Hell yeah, the average mid management up guy was doing this too. I can give you the public records here in Orlando area and have you packing for the Northwoods in 2 hours. All hell is gonna break loose.
Let it break loose. I can barely wait. Dummies!
IMO the strongest point in the “shifting from subprime” thread is made in the question: how many Americans can truly afford $400K and up. Wikipedia shows 15.8% of households have incomes of $100K+, 5.8% of households with incomes of $150K+, and only 2.7% of households with incomes of $200K+ . Many of the $200K+ probably have two houses already. (ALL the $200K+ people in my personal acquaintance have two or more houses already, but this is a small sample.)
Foreign buyers and super-rich people may sop up some inventory of multi-million-dollar houses, but the $400K-$2M range seems to suffer from a shortage of qualified buyers who would be end-users. Certainly nobody with more than half a brain would now buy these units with the intention of renting them out. Hence, as prices sag, recent “prime” buyers of mid-priced properties may be underwater, accounting for the stickiness of prices … they can’t sell without bringing money to the table. My best guess is, prime will not pop, but prices will sag and sag and sag and sag and sag and sag and sag and sag (2014?). While price declines at the lower end will be accelerated by subprime implosion, the “prime” borrowers will themselves implement a very slow deflation as they move around.
Did I completely miss your point (I probably did)? Don’t you think there are many people in the $100-$200K salary range that have subprime mortgages. I personally know of a few. Are you suggesting that there high incomes will cause them to hang on longer? Won’t they also suffer from being upside down and have a problem refinancing unless they can bring cash to the table. Does income really matter if they didn’t purchase a home based on affordability? We are in that income range and have been sitting around for years wondering how everyone we know affords these mcmansions and expensive cars.
“Does income really matter if they didn’t purchase a home based on affordability?”
These impressive graphs show that your assumption is correct:
http://tinyurl.com/2quby2
SF bubble girl — My point really was that not many people can truly afford a house over $400K, but also that I do think people with $100K+ incomes are more likely to try to avoid throwing the keys on the roof. I was assuming that most “subprime” borrowers had lower incomes, but I could be completely wrong about that.
“Don’t you think there are many people in the $100-$200K salary range that have subprime mortgages”
Yes, absolutely - this has happened all around me in Santa Barbara, CA. I was pissed for a long time because I saw friends and coworkers ‘buying’ these very expensive places, and thought “I’m just not making enough money”.
Well, come to find out nearly everyone is in ARMs and suicide loans - nobody could (or even intended to) pay off these $700K-$1M loans. It was all speculation. These are all folks making well over $100K.
When the market was in full swing, 20% appreciation every year, maybe it “made sense” to some folks to leverage yourself to the highest degree possible, because that translated to a higher potential for profit.
I’m in Marin, and what I’m seeing is that people who bought 2 years ago and selling now are losing money. By the time you factor in that giant mortgage & property taxes and 5% agent commission, there is no profit. That’s what’s been lost in all this insanity. Prices have reached a point where recent buyers aren’t making money.
It’s very strange in my area. Some new homes are going for $180K for 3000sf. Then 10 minutes away the nearly identical home is selling for $250K. The neighborhoods are nearly identical cookie-cutter surburban subdivisions. I guess one is more special than the other.
I finally saw a Centex ad for $25K off in the Dallas area. They have 4/2.5 houses listed for $195K. I’m thinking they are worth $150K max.
I believe you are absolutely correct in your assessment. In Tuscson you are hard pressed to find a new house under $200-$250K. I don’t think that many who bought these homes in the past two years can bring any $$ to the table. Builders still building . Wages here do not any way support this construction. it would seem that houses have already been sold to anyone who wants one and can fog a mirror. Prices have to sag for a very long long time.
I also don’t understand how so many new houses and condos going up across the country can be so expensive. There is still a smattering of affordable housing and sanity, but it’s amazing that so many of these builders think the average person can afford a $400K house or condo.
They don’t. They just think the average person can get a $400K mortgage.
Actually what the builders “think” is irrelevant, it’s what the market thinks that matters. Builders must sell, and they will sell at the market price, whatever that is.
I see this going on where I am, in the Boston area, too. The market’s very very soft in the “middle” (anything between about $400K and $1M; keep in mind that this is a very expensive area even when there is a downturn.) This has been the traditional province of people who are moving up, on their second or third home purchase. They’ve had the equity to not have to finance a huge amount of their home purchase. But moving up is very hard if you can’t sell the house you already own, and that’s where a lot of these folks stand now.
The low end, well, true “starter homes” are hard to find in this state, and when they come on the market, they get snapped up quickly so long as they are in reasonable structural shape. *No one* is building starter homes now, because land is just too expensive and zoning is restrictive. (I’ve mentioned before that my husband and I have an acre lot on each side of our house. At the height of things we could have gotten $300K an acre, easily. Now maybe $200K. But zoning prohibits subdiving these lots, so a builder only would have incentive to build a McMansion on them.)
Young couples are willing to buy in less desireable areas, thinking that they’ll have 5 or 6 years to build equity until their kids are ready for school… at which point they will enter the *madness* that is trying to move to a town with good schools. And if they’ve financed “creatively” they may not have much equity to fall back on at that point (if they manage to keep the house at all.)
The higher end of the market is also doing reasonably well, although even there prices have come down and things stay on the market longer. What we’re seeing now is a lot of interest in the true luxury condos ($1M +) in downtown Boston, but older people unable to sell their homes in the suburbs to buy them. “Bridge” loans, that make it easier to pay mortgages on two places over the short term, are getting very hard to find, because the market’s so slow. Of course, the people with “real money” don’t really worry about stuff like this but they are dealing with a different market than the rest of us schlubs.
Cancer doesn’t shift; it spreads. Dr. Bernanke thinks he can just give it a shot of morphine (liquidity). Prognosis is poor.
The folks who preach that increasing liquidity will cure most ills doesn’t take into account investor and popular sentiment, which can grow anxious and bearish very quickly.
Media only talks about subprime right now, just wait until they find out about ALT and Prime delinquencies and foreclosures. They’re way up…..
It makes sense. Once your rate adjusts, it doesn’t matter whether your credit score was 800 or 640. Either you can afford the higher payment or you can’t. I think this gets us back to incomes stretched to the max regardless of credit score.
Except that those with higher credit scores (obtained at least in part by not buying what they can’t pay for) probably didn’t buy using subprime. Never bought real estate without significant equity, even when AG was pushing “free” (as in low interest) money and even though people told me it was stupid because interest is deductible. The equity isn’t just for the bank. More importantly, it is for you! A dollar paid in interest is still a dollar, even if it tax deductible.
“Except that those with higher credit scores (obtained at least in part by not buying what they can’t pay for) probably didn’t buy using subprime.”
True, but most people I know in the Bay Area who bought since 2004 are all at 6x+ gross income. And have IO loans. And car payments. And HELOCs. And kids.When those mortgages reset, there could well be problems making the higher payment, because the original purchase was a stretch.
I absolutely agree that subprime was the first to implode, because those buyers weren’t great credit risks to begin with. But as short sales and REO’s start to impact pricing, it will also affect Alt A and Prime borrowers as well.
If you’re in a house you can’t afford over the long haul, it doesn’t matter what your credit score is.
Ugh, I/O loans. My parents just refinanced into another 7-year I/O last November and cashed out right up to 20% equity to avoid PMI. Their last refi in my opinion. There are probably a bunch of people who will financially expire 7 years from now. How sad to live in a situation watching everyone in the neighborhood experience carnage and know that your turn is coming…tick tock, tick tock.
Everyone is talking like credit scores are fixed at purchase time and never change. Miss a bunch of payments and watch your 800+ credit score plummet in a month or two. Many prime loans won’t be prime if the mortgage gets reviewed. That’s why purchasing these AAA notes as they change hands at par is dangerous…
Having good credit doesn’t necessarily mean that they have lots of money or did not get caught in the insanity housing mania. Most people who bought a house on the coasts had to use ARMs. Even a large number of people in the MidWest used ARMs to buy more house than they could afford. The appreciation hid the bad loans on the coasts until now. There was a story about DINKs losing their homes because of ARMs resetting. A couple with no kids and a dog bought a 4000sf house and lost it when the ARM exploded. These were both professionals with college degrees, but they didn’t know what they were getting into. They were not trying to flip the house.
Yep. I have an 800+ credit score, thanks to good luck and being very careful about credit cards, while still using them, so my carefulness is on record. I have had the occasional late payment, once every few years, but in the 20+ years I have had cards, only one reportable problem.
A few years back I financed about 70% of a new car. I was eligible for 0% interest, no questions asked. And the damn dealership tried to get me to buy a more expensive car, “since you won’t be paying interest anyway.” And I had to very carefully explain to them that while my credit was great and I could afford a $300 car payment, given my actual income, I could *not* afford a $400 one. They thought I was nuts!
There is absolutely no way, on my income, in/near Boston, that I could buy anything but the cheapest POS condo in a neighborhood I could stand to live in, without getting “creative” financing.
OT, but…
I had a slightly weird experience a couple of years ago buying a used BMW from a dealer. (I had 20k burning a hole in the bottom of my bank accound) They only looked at me a little funny for paying cash. (though they WANTED to lend me the money) But they assumed that I wanted new tags rather than transferring the tags from my trade in. Now the difference in cost is greater than $100. The guy is walking toward me with new tags and I say, “No I wanted to transfer the old tags.” He laughs and I have to say “I’m not kidding.” He unhappily turns around to go do the RIGHT paperwork. Every time I’ve bought a car (always used) from a dealer before, they’ve always asked whether I wanted to transfer tags.I’m left thinking “Are rich people just stupid?”
It will take a while, but eventually Prime mortgages will start to be affected by the problems created by loose lending.
The simple facts are that in a large portion of the country home prices are too high for the average working couple to afford in a traditional mortgage.
Plus, far too many people have been keeping up appearances in their nice homes by taking out all of the equity that the appraisers and lenders would allocate to them. This has only helped increase their mortgage balances at a time while in affect putting them at 125-150% LTV. When they thought they owed $400k on a house worth $500k, they still felt pretty wealthy.
As they watch that loan balance hold tight at $400k, Home value decrease to 275-300k it will be crushing.
Far too many people feel that they have basically been given new cars, college educations for the kids, zero balance credit cards all at the hands of the housing Gods. And truthfully those that were able to sell and get out from under their over appraised/mortgaged homes might have done just that, but somebody(GF) paid the tab.
But far more of these fools that sold probably bought an even bigger home through an even crazier loan, or are still holding onto their homes through the latest low payment mortgage that allowed them to afford a home mortgage that would have been off-limits just a few years ago.
It doesn’t take long for someone to move from a prime customer to a sub prime customer. Watch how many people that right now appear to be doing very well, are suddenly hurting once their housing ATM Card doesn’t work any longer.
Quite simply, if you are paying for a home that you can’t afford, you are either cutting way back in some other area, or you are robbing Peter to pay Paul. Housing ATMs have been the BIG PETER for a lot of people and you all know what that BIG PETER is going to do to a lot of these FB in the next few years. Squeal like a pig.
BINGO! I think most of the people who sold ended up buying a more expensive home or maybe even two. MY B-I-L sold his house and bought a house twice as big with an 80-20. All of the equity he got from selling his first house went to upgrades on the second house - wood floors, plasma tv, stainless steel blah blah blah. Now they’re talking about selling that house to get another one. I asked them about all the money they were losing each time they sold and bought thru the realtor fees and closing costs. Apparently, having a new house every few years is more important than building wealth. All the while I’m saving up six figures in my accounts in my early 30’s and enjoying life with a nice car and vacations. They are struggling to pay their utilities on their McMansion.
“and you all know what that BIG PETER is going to do to a lot of these FB in the next few years.”
LOL. Your observations are on the money. The exact same scenario you described happened to my FB buddy Bob. He was keeping up apprearances and mixing funds from every possible source until everything was maxed out. Now he is awaiting foreclosure. The end.
“The question is whether there is any evidence that the pain is shifting out of subprime, and is that likely to happen in the future. Mortgage rates on traditional mortgages are still low.”
Prices on homes (at least in most of California) are out of reach of what most folks can afford using traditional mortgages. So the pain has shifted out of subprime (which is drying up), but it is about to be transferred to sellers who will discover the difficulty of finding a buyer who is willing and able to pay 70% of 2005 prices without liar loans, 100% I/O option ARMs with shaky credit, etc.
The CAR’s old affordability statistical calculation (the one based on an assumption of fixed-rate financing with a downpayment) may need to come out of retirement soon. If it does, a shocking truth will be revealed: Rather than 24%, CA affordability (at least at 2005 prices) will come in below 10%.
I’m counting on this. IMO all prices are going to have to revert back to 2002(maybe even 2000). I have nothing to back that up other than common sense. This will bring prices back down to normal appreciation levels. I’m estimating that my $180K bought in 2000 eventually drops to $250K. This would seem to be normal appreciation based on everything that I’ve read on this blog. It also places a glut of mcmansions on the market with extremely small demand.
I think that I saw 2% a couple of months ago on this blog - when the old (i.e., real) standards were applied.
Stucco, I could be wrong about this, but the last figures I saw where traditional lending numbers were applied to median CA homes, 1.2% could afford a home. Yikes.
Well, ISTR those figures were that 1.2% could afford a MEDIAN (half cost mofe, half cost less) priced home.
I agree, that’s the number I was trying to remember.
Things are TOTALLY screwed right now.
“Why would it be confined to subprime? Seriously, how many Amerians can trully afford a 400K and up home? Yet in many areas of the country, that’s all that’s been available for several years.”
Spot on. For all of the wreckage in subprime, there’s an even bigger tsunami swelling up in Option ARMs, I/O loans, and other questionable prime lending. Look at the balance sheets of some of the major banks. Washington Mutual has over $60 billion (with a ‘b’) in Option ARM debt in its portfolio. Furthermore, they booked hundreds of millions in negative amortization last year as “earnings”. In other words, the mechanic who bought a $500K home is making the minimum payment, because that’s all he can afford, and WaMu is tacking on the balance to the loan and calling it profit — even though there’s a good chance that the borrower will NEVER be able to pay off the amount. Banks are, in effect, hiding bad loans by making them bigger and that is going to blow up sooner or later.
The 400K thing was one of my comments. I know so many people in the Seattle area who bought homes the past few years that are way over the 2- 3X income. More like 6 -10 X income. They’re all couples too. If one loses a job, forget it. And they’re all “responsible people with good credit”.
The only buyers I can think of who could be safe through all this are the ones who bought prior to or early in the bubble (before ‘98) and either stayed put or traded up with huge downpayments, so their mortgages are really pretty low even though the price they paid for the house was stupid.
I am also astounded to find that several people who I thought were quite conservative with their money fell for the “Heloc your equity ” line which has been so prevalent the past seceral years. I think a lot of them will be “okay” but they are certainly not as rich as they appear to be. Debt debt everywhere.
What a sham. And a shame too.
I’ve had three Seattle area friends who were early Boeing retirees who have gone back to work at Boeing becuase of financial reversals, ARM resets, or their realtor spouses suddenly having no cash flow. They’re lucky Boeing’s hiring again at the moment.
I keep that in mind, but folks are still buying like crazy. I am renting in belltown, and let me tell you there continues to be price appreciation, and these new buildings sell-out at asking price. Very frustrating.
As long as Boeing keeps growing, there will be buyers. Boeing is one of the last traditional manufacturing employers in the country (at least one of the last making any money). So, I expect North Seattle/Everett to take a bit longer to dive. But the resets will hit, and even Boeing employees will start to feel the pain.
“As long as Boeing keeps growing, there will be buyers.”
Sorry, but that’s total BS. Boeing wages have actually fallen. Most of their workforce cannot afford houses at current prices. Boeing has NOTHING to do with the current buying activity. Period.
some of it might be new MS employees, but i cannot explain the rest. Is it new bio-tech? new financial employees? Would love to understand this.
I guess it depends on who you ask.
The people that I know get annual raises that usually do as well as inflation and then these nice bonuses every year ($4k this week, for example).
But you are right in that even Boeing salaries cannot keep up with prices, but they will do MUCH better supporting housing prices for a while than Disney or Retirees in FL.
“…some of it might be new MS employees, but i cannot explain the rest. Is it new bio-tech? new financial employees? Would love to understand this.”
It’s the SAME as every other bubble market. It’s nothing but a hodgepodge of speculators and end users, having nothing to do with the local economy. The people buying now are the greatest of fools. Think most people in the greater Seattle area are rich? Thing again. The Seattle areas prices are already cracking, it just hasn’t shown up yet. Just look at the inventory numbers. They’re much higher than last year at this time. And there are a staggering number of condo projects in the pipeline. Just because Seattles appreciation ended later than other markets, does NOT mean there is no bubble. It just got started a little late. People are constantly trying to find reasons as to why Seattle is “holding up”. It’s not. It is just behind. Just wait until two years from now. It’s going to be really, really nasty. In my opinion, worse than coastal So Cal.
I agree with most of your ‘bantering’, and me and my wife have been trying like crazy to get a relative to sell a recently bought condo unit (now renting), while there’s still a market if you price 10% under comps. The only (minor) disagreement that I have is that the fall will be worse than CA - and that’s only because CA has a higher starting point. I do think that Boeing and MS have given Seattle a way to delay the inevitable - but the SubPrime crash will destroy every place that’s had a bubble, and will be painful even in the few places without a real bubble.
You just cannot simply chop out the bottom few feet of a ladder (the subprime market) without the rest of the ladder coming down crashing.
The market in Seattle is not “holding up better than other places.” Seattleites are just, okay I’m gonna say it and it’s not pretty, kind of braindead in comparison to other areas of the US. Sorry. And I mean that (sorry).
Every single time a piece of news comes out that is contrary to a preconcieved bullish outlook on the area, it gets promptly ignored.
-Seattle was shown last year to have one of the most toxic loan environments in the country (top 10). Promptly ignored as irrelavant.
-Merit Financial lenders, the darling of the local business scene just a few years back, closes overnight last year, one of the first lenders to go down in the nation. Promptly ignored as irrelevant.
- Properties in Ravenna, prime NE Seattle areas were taking up to 200K hits off asking prices one and a half YEARS ago. Promptly ignored as irrelevant.
- Seattle median price dips 40K last month, surprising even Ballard realtors for a day. Then promptly ignored as irrelevant.
- Inventory is way up over last year. Ignored as irrelevant all day every day.
What people in Seattle are not understanding is: just because there are still a bunch of clueless GF’s out there buying Belltown condos, that does not mean the market is still in boom time.
They also fail to understand that this is happening not only in Seattle, but even in places like Phoenix. We are not special. People all over the US are still buying homes. And people in the US will continue to buy homes every single day, all the way to the bottom.
Ang again, the bubble in Seattle did NOT “get started later than other areas” as the REIC is drilling into your heads. It got started EARLIER than other areas- way back in ‘97. Same as some of the other tech places in CA. So forget about going back to 2001 and trying to find the doubling of prices in a year. You won’t find it because it had happened already in the late 90’s. Go back to ‘96 and ‘97 and you’ll be shocked at what you find.
And to Bob, who wants to understand why the prices are so high, there’s just one answer Bob- toxic, loose lending.
Hey who knows, maybe the loose lending will come to a halt in every state in the country EXCEPT WA. That would hold our market up and make us trully “special”.
But if you’re looking for those Boeing/MS/biotech jobs to hold the prices up, they are simply incapable of doing so in a normal, conservative lending environment. The salaries are too low.
Yep, it’s no coincidence that WAMU, Countrywide and GMAC are all offering very high rates on CD’s and money market accounts. I think they are all trying to raise cash reserves given what lies ahead.
my bank, suntrust begged me to give them 10k for a month- they lied about the rates- I actually felt bad for them9 just mangers at a branch)- desparate for cash?
Don’t even get me started on this topic about banks not having enough cash to cover their repsective a$$ets. About 3-4 months ago a gentleman was asking the teller for 4K in cash for a vacation he was taking. Don’t know why he wanted to go that way. However, the teller had to get the manager to approve it and then she politely told him that next time he should give them several days advance notice for that kind of transaction. Just for fun I wanted to ask the teller for 25K, all in small bills. I know most banks run even below the traditional fractional reserve, but things likt this get me scared. Just imagine a small bank where 10-20 customers all pull out a grand each. Next guy can’t even get 40 bucks out of the ATM. Once all this cash dries up, as so many have pointed out, CASH WILL BE KING! At least until the dollar tanks!
I would also like to comment on affordability and debt (Again!). Even if WE ASSUME in South Orange COunty, CA, and average household income of 75K, you are talking about 6K gross per month, which after taxes and retirement and health, you might have about 4200 a month. Given even the most extreme example of spending half of that a month on housing, you are still at 2100 a month. If you assume 600 for taxes and HOA, you are left with 1500, which at 600/for 100K borrowed @ 6% over 30 years, you have………a 250K note. reasonably speaking, most homes in South OC should not be selling for more than 300K in my humble opinion.
As for all the resets, even for those who can make the payments, I believe many will have a quality of life issue that even the homeless, and I mean no derision of them here, would blush at. In other word, who want to work 60-80 hours, inc. the OT, have a wife doing eBay or Tupperware all night and on weekends, have the 120 mile roundtrip commute, deal with $2.75-$3 gas, and still maintain a depreciating asset.
The more I look at the entire situation, the more I know we still have a long way to go , esp. in California. It is like we discuss here, the RE bubble is just part of a bigger problem. When people realize that the their mortgage payment is a problem that is bigger than just the income, as I pointed out above, then I think we will see some movement. Heck, we rent a nice 3-bedroom apartment and we have a pool, spa, and gym. Sure I share, but it isn’t like they are all overcrowded, except for the pool on a Sunday afternoon in the summer, which is no surprise. However, my rent is what helps maintain them, not 10 hours every weekend. JUst a small example. When people begin to realize they can’t even keep up the curb appeal, in addition to, the mortgage, goodbye home. Jingle keys, anyone?
Jingle keys, anyone?
I prefer the expression “throw the keys on the roof.”
Got popcorn?
Neil
Here’s another thought about Alt A — for the past four years residential mortgages have become more like commercial real estate mortgages.
Residential mortgages used to be supported by the homeowner’s income, but with all the “liar loans” the lenders were clearly counting on something else. Commerical mortgages are secured only by the income and value of the property. When house prices were soaring, I think houses were looked at the same way.
Lenders werent’ thinking about income. That would have required them to think about rent to mortgage ratios. They were thinking about asset appreciation, just like the buyers. If you are planning to squeeze interest and fees out of someone, foreclose, resell for more (taking out lots of fees in the process) and repeat, it doesn’t matter what the borrower’s income is. You are getting your return from the property itself.
The default rate on commercial mortgages is much higher on residential, and they are usually priced appropriately (but not recently!)
Weekend Chalk Board, Pulling Ponies out of Manure:
http://wallstreetexaminer.com/blogs/winter/?p=461
“The most immediate impact will be that both the lenders and investors will be more careful on who they make loans to,” said Richard F. DeMong, a bank management professor at the University of Virginia. “In Finance 101, we try to teach that return should be enough to compensate for risk.”
double duh!
The low prime index ABX-HE-A 07-1 is now at 92.5 down 7.5%.
The subprime index ABX-HE-BBB- 06-2 is at 69.39 down 30.61%.
The decline in the low prime is proof of the spreading damage.
Can you expalin what the numbers mean to interest rates on the loah and the reset rates?
The market value of a house does not depend on if the borrower had a prime or subprime mortgage. Whatever the reason the house gets sold it must compete with the comp of its neighbors. Thus, the desparate seller drags down the stable neighbor. The stable neighbor can not withdraw equity that has disappeared into the lower price of the most recently sold neighbor’s house.
The subprime desparation drags us all down by lowering the liquidity. This is a death spiral.
And that is really the biggest problem. As people start to bail, or just get foreclosed and autioned, the comps will totally fall apart. Good luck trying to sell a home for 100K more then your neighbor in a down market. Especially since someone (likely a lender who is being burned badly by all the bad loans they wrote in the past 5 years) will have to underwrite that paper. You think they are going to be keen to write a loan for 100K more then the last sale in a declining market? Wake up, that’s just not going to happen.
It truly is a spiral, as the comps sell cheaper and cheaper, the lenders become more and more leery of lending money. The inability to borrow leads to lower prices, and so on. Others here have described is much better, but that’s the general idea. Just as it seemed unstoppable on the way up, so will it on the way down.
Also, on the topic from above. How many people can afford a 500K home (let’s just call it a 500K loan; because that’s a majority of “affording” the home)? Not many. Not many at all. My income would place me in traditional “affordability” range for that loan (3X income). Let me tell you, not a chance in HE** I would take that much money. That would have a dramatic, and negative impact on my life/savings/happiness.
Instead, I live in a 500-600K home for less then 2K a month. Much more managable. I would buy it for 300K (maybe), not a penny more. 2000 sq/ft, 2 miles from the ocean, in PB Gardens FL. Construction is decent, definately not great.
$100 sq/ft builds a home like this. Is the land worth 100K? I don’t think so, perhaps other would. Is it worth 300-400K for the land? Not on your life.
Mike,
500K @ 3x income would mean that one should make about 170K/annually. Given the numbers above, what is that about 2% of America. WTF? Something very BIG is going to give and very soon. This insanity to take on megadebt is going to bust very soon!
This reminds me of a recent article lamenting how hard it would be for people to save up the $40,000-$50,000 for a down payment on a home. They mention the economic difficulty in putting aside this type of money.
So I’m thinking, these people can’t set aside two grand a month for two years? This will give them the 10% down plus the miscellaneous closing costs.
To total of saving for the down payment amount and rent (say $1,200/month), they’ll need to come up with $3,200 per month. Once they get their mortgage, the amount they’re hypothetically paying over the next thirty years (pv=$360,000, i= 6.75%, n=360) for p&i alone is ~$2,350/month. (Ok call me silly, but I used a 30-yr fixed for my illustration.)
So add taxes in to that, and you’re looking at at least the amount they need to come up with over the next thirty years of home ownership. I guess my point is, some people shouldn’t be homeowners.
The problem with your example is that few people/families could save $2000/month. Maybe with a dual income, but you are right back to the problem of not living on 1 income and if one loses his/her job, you are toast.
Look at it this way. Imagine bring home 4K/month, excellent money for many. Even if you lived in your car, you would probably spend about $15-$20/day on food and water, costing 600/month, liberally. That leaves 3400/month. You will also need a cell phone, which liberally will cost 100/month. Down to 3300/month take home. Now, add in gas and the health club, you need the club for showering and if you want to keep in shape while living in the car. That will run another 200/month. Now that take home is down to 3,100/month. Finally, add in others stuff, clothes cleaning, going out (once a while at least, you are living in the car), auto insurance and maintance on car, plus storage for all the other stuff you can’t fit into the car. That should run about another 400, liberally per month. That leaves about 2,700/month leftover. Therefore, looking at that number, even saving 2 grand a month is tough for many, esp. on 1 income and if they have kids and live in highly bubblicious areas where even rents a tad higher than they should be. Sure, making 4K in Oklahoma is gravy, but in elLAy, nice try. Even frugal people if they have kids and 1 income are going to be hard pressed.
Good illustration. After what you described, I live a rather frugal existance. Fortunately not in my car.
Thankfully, I never got caught up in that race either of requiring the latest and greatest toys.
Let me offer a counterpoint on the difficulty of saving money. I’ll try not to whine.
2k/month for a young couple (presumably the ones trying to buy the 500k starter home) isn’t trivial. Taxes mean that you’re basically putting aside 3k/month in equivalent salary, not to mention paying taxes on the interest from your savings. Yeah, yeah, I know, you can maybe avoid the tax thing by borrowing from your 401k. Screw that; my 401k is for retirement, not buying an overpriced home.
Anyway, 2k/month for my wife and I works out to 2 car payments (and nothing flashy, GMC & Honda), auto/renters insurance, all our utilities & groceries, going out a couple of times, and what’s left over after all that could pay a decent chunk of our rent. Again, I don’t mean to whine about this; we’re doing well enough. However, it’s way more difficult to pay 10% of the home’s value in 1 year, than it is to pay the remaining 90% over 30 years. It’s not as simple as foregoing Starbucks or the movies.
And really, what’s the motivation to kill yourself to save for 12-24 months straight, when you have to compete against people who aren’t putting anything down? Especially if home prices are rocketing upward from easy money?
We saved the $4,000/month with minimal spending, but my situation was similar to yours. In one year paid off my cc debt, and put another $20k in the bank for the down payment. (Already had $10,000 in a s/t CD.) Sold a car (the 95 Subaru) and downshifted to one car (the 98 VW) and bought two bikes to ride to work when we don’t take the bus. We managed to scrape together 10% in 12 months (If you count the cc debt and the ACL surgeries for the dog). The only real expense for the year was two season passes at Heavenly (600 bucks), since we lived five minutes from the lift (in a $750/month apartment). Still, we weren’t rolling in the dough either. Our meal out for the week was a cheap Mexican restaurant and the bill was around twenty bucks (including tips and drinks).
Most young people are not this disciplined (we are both 40) and need the flashy cars and latest fashions. I know I couldn’t save like that when I was younger. But then again, a younger couple shouldn’t really be considering a 500K home. Christ, the home we just bought is the home I hope to be carried out of feet first is only 1000sqft.
Nah, it’s not whining. It’s how it is.
If you already have a home and are buying another one, you are exchanging like-for-like assets. Getting into a new house with somewhat reasonable isn’t so bad (on paper at least. This has proven quite tricky for those who didn’t sell first before buying the second)
But if you are a new homebuyer and live in a bubble area where where the cost of the home that you’d actually want to live in is 4x your pre-tax income, you’re hosed.
In my area, houses that I’d consider living in are still easily $500K+. The vast majority of first-time home buyers do not have $50K-$100K in liquid assets on their own. You are correct in that borrowing from your 401K doesn’t make financial sense. You will pay back that loan with post-tax earnings AND get taxed again at withdrawal (ow!).
So, if they want the home badly enough, of course, they go for 100% financing or pretty close to it.
Our goal is to have an asset base of at least 33-50% of our home value when we finally buy. This doesn’t mean we would liquidate that asset base for a house. That’s just stupid. It violates basic diversification principles and my post-tax return on my investment assets will likely exceed my home over 30 years.
But what it will allow me to do is get a relatively good interest rate on the home when I do want to buy because even in the worst of times the best loans always go to those who don’t need the money. And if something should happen like one of us loses a job, we will have an asset base to act as a safety net to continue making the payments.
Crazy talk, I know.
Hamster. Just curious. Why the move from So. Lake Tahoe to Bellingham? Which area are you from?
South Lake Tahoe’s prices were ridiculous. As were Reno’s and CC’s. And the people were generally flat and boring. In the winter all they talked about was skiing and real estate. In the summer all they talked about was real estate and skiing. Tahoe is a nice place to live for two years (as we did), but Bellingham has more of a community feel. And more affordable.
I’m originally from Pennsylvania, but spent time in Ohio (“a good state to be from” as an inlaw says).
“a good state to be from”
)
–
LOL. I use that line about WA state. (Well, Eastern WA
Historically, most people scrimped and saved and slaved for years to get that first down payment together when they were young. After that, it was simply a matter of trading up equity.
Once all these existing homeowners lose that equity, they’ll be back to square one. Will they really be willing to go through the lengthy struggle to save a down payment again? IMO, NFW.
“… the comps will totally fall apart.”
How do auction sales results make the comps fall apart? Are these results public information?
G.S. In Canada any person can check the title. The title here shows the last sale price. They use the sale price to compute the fee for title change. If I want I can see what my neighbour paid for his house, but not how he financed it or his indebtedness amount. It would cost me a small search fee , but it is public information. Can anyone in the U.S. do this or is it private? Just interested. What does your titles Show.
“The subprime desparation drags us all down by lowering the liquidity. This is a death spiral.”
IOW, the property lending market will slip into a credit crippling lock down. As home prices fall, lenders get bombarded with short-sales requests, and equity cushions evaporate, less and less sellers at the top of the equity stack will be able to sell because the buyer’s lender will not lend more than the last comp. With fewer home sales and less liquidity in the property lending system, prices drop further as equity rich sellers at the bottom of the stack switch addresses with each other.
“…buyer’s lender will not lend more than the last comp.”
Does the buyer’s lender have auction sales results to use as comps?
In some instances lenders will be the ultimate seller at these auctions (developer or individual foreclosures); in other instances the mortgagor will be calling the lender after the bidding process and begging to allow a short sale; so, yes they will have the results to use as comps.
Crackheads buy starter homes from people with good credit who are looking to move up. The thousands of people who bought a new house before selling their old starter home are toast because they’re carrying two mortgages and the crackheads can’t get loans anymore.
I just talked to a co-worker who did just that. She better be ready to take a haircut to get out of two mortgages. She hasn’t even put her old home up for sale yet.
Let the feeding frenzy start at the bottom and feed to the top. The difference between homes in undesirable neighborhood to desirable neighborhoods has shrunk. This disparity has to be remedied.
Even though subprimes can be found in all neighborhoods, they are definitely front and center in the poorest neighborhoods.
Oakland, CA in the poorest neighborhood where couples make 70 to 100 K are selling for 500K. You also have to dodge the driveby shooters.
One sees a larger picture. “You are looking at the wrong market. Subprimers (poor credit and/or highly leveraged borrowers) are unable to quickly sell property for the amount they owe. As a result, they are defaulting. These defaults are being reflected in the subprime paper market. In other words, the value of the real asset is falling and that affects both prime and subprime borrowers alike.”
I think this is one of the key points because even if there is only one subprime borrower on a street that has to short or foreclose that will drag the comps down unless another house sells on that street for an amount that counters the loss of the subprime. And IMO I do not see that as something that can be counted on in this market. The number of GFs is fast diminishing and when coupled with the increases in defaults there seems to be only one direction prices can go and that is down.
I also agree with many posters on the point that it is not only subprime borrowers who are at risk. I cannot tell you how many times stealtors tried to convince me that I could “afford” to buy a property that I knew I could not afford by using ARMs, I/O and even Neg Am loans. It was grueling to hold fast with all of the pressure and all of the now well know talking points. I never bought into it, but I wonder just how many prime borrowers did. I imagine it was a high number of buyers over the last 5 years here in CA simply because the price of properties was so far out of reach to so many people unless they used toxic loans.
I cannot see any way for this not to spread like a plague.
The best counter to the bulls’ argument #1 is this: real estate *historically* has not been dependent on subprime because subprime lending was high-risk, a small percentage of the market, and generally shunned. Times have changed.
Consider the effect of loose lending standards, low interest rates, “creative” financing, infinite leveraging through the MBS programs, and the get rich quick mentality of the past five years. The subprime masses discovered that lenders would give them essentially unlimited cash to buy a house when they never could have done so in the past. This groundswell - from the bottom - has driven an enormous upswing in prices. The upswing in prices has not been because the super-wealthy were bidding against each other for real estate. It was driven by a wave of unqualified borrowers, who would pay literally anything for a house, which drove up prices for everyone else.
Now consider the effect of tightening lending standards, cutting of credit lines for subprime lenders, various bankruptcies and unwinding of leverage and derivatives. Will those masses of unqualified buyers be able to keep what they bought? Some. Will any more come breaking down the door waving fistfulls of cash? Absolutely not. That source is gone forever. Demand will vanish from the bottom, undercutting the entire market. Face it, when people who earned their money the hard way, and who understand finance are at the bargaining table, they’re not going to pay inflated prices. Nobody’s going to offer a half-million for a suburban townhouse (funny, no?) anymore. So, yes, bulls, the subprime market can have a major impact on the entire market. Haven’t you heard of principles of contagion or poison?
Posit number 2 is flawed as well. Consumers can, and do, shift their spending from high-end luxury items to used, secondhand, and low-end items very quickly once they feel threatened. Joe 6Pak can and will decide not to buy a plazma television and hummer when he or his wife loses their job and the house is already in negative equity.
What the super-rich will do is up to them. Certainly if they feel like showering the rest of the market with gold (golden showers, funny, no?) then the market may benefit. Unfortunately, the super-rich got to be that way by being careful, by and large, and they are not apt to change their habits of a lifetime overnight. They may bargain-shop, pick up a faltering golf course here, a luxury home in a resort destination there, but they don’t just window shop at the local mall. I really don’t think they have any altruistic intentions. In fact, in 1929, while some attempted to halt the crash, others shorted the stocks and made massive profits. This seems to me to be the far more likely outcome.
Capitalism 101: Each man for himself.
Yeah, anyone counting on “the rich” to save any home market is brain-dead. There simply aren’t enough of them around to prop up any single market.
They’re not tightening that much. See the article at the link below.
http://news.yahoo.com/s/ap/20070224/ap_on_bi_ge/subprime_woes
Key part: The shifting market is prompting investors to demand higher standards for loan approvals. Loans for 100 percent of a property’s value required a minimum credit score of 580 last year, but now require at least a 600 score, said David Zionts, owner of Connecticut Mortgage Lenders LLC.
A high-value loan with no income verification could be had last year with a credit score of 620 a year ago but now needs a minimum score of 640, he said.
Ugh.
I realize these major banks will some how stick to people who are credit worthy, but I am glad some of these companies are going to feel the pinch. They have been sticking it to everyone for a while, nickel and diming us to death for things like cashier’s checks, and money orders, which cost them nothing but the paper used. NovaStar may go 5 years without a profit. Good, see what life is like on the other side of the fence!
It’s funny how out of context credit scores have been taken.
Getting a high credit score is not particularly hard if you want one. A bank could probably loan me say $25K for an auto loan based on my FICO score alone and feel reasonably sure that I could make the payments. The payment scheme is in sync with the level of financial activity that my FICO score is based on. That’s why credit scores work out ok overall.
But just because my high FICO score works at the car-loan level doesn’t mean I’m not a credit risk if you loan me say $10M to be paid back over 30 years with an adjustable rate. There is nothing in my financial history to show that I can handle that kind of leverage.
I’m extremely good with debt (never so much as was late on a single bill or debt) and my credit rating isn’t very good, so it can be very hard to get a good credit score.
The reason that my score isn’t that good is that I’ve never borrowed (aside from accounts payable - ie., bills). A person without a credit card seems to get a mediocre credit rating it seems.
While there’s no way in the world I could pay even a ’small’ mortgage back if I got one today, I’m also smart enough to know that and not try to get one without being sure I’ll be able to pay it. More an ethical thing than anything, as I consider a loan taken in bad faith to be fraud.
True, they’re not tightening much yet, but give them another month or two. As the meltdown continues into the spring, they’ll figure it out eventually and start circling the wagons.
Kia you make many, many excellent points. The one that stood out is about the rich picking up a faltering golf course. Excellent point, but you forgot to mention that that in and of itself will do nothing to trickle down to J6P, esp. when he can no longer to afford the green’s fees to play on said course, let alone derive any monetary value out of it.
What your remarks reiterate for everyone else is just how enmashed this whole economy and worldwide economy is. If anyone of these links goes under, the whole kit and kabudle is toast. This is what happens when you overleverage by several trillion dollars and produce nothing more than debt and green paper money with dead guys on it for the rest of the world to consume. How sad!
Here’s a sad post from the Investor Village Novastar stock board:
—————————————————————————
“Forced to sell entire position — the bovine is done — the adventure is over.
Was forced to sell out today–Schwab raised margin requirement to 50% and wouldn’t budge.
Sold last of it; 4K @ 9 and 6K @ 8.50.
Paid off the margin loan.
Paid the only credit card balance I was running.
Have $22K left to pay taxes next year (probably will owe $28K–Argh).
I’ve paid the 2006 taxes already, and I’ll send the IRS what I have left on 4/15 and be done with it.
No debt; SSI coming in, VA for medical plus Med part-B for extras.
Now it’s a task of reducing cash out-flow to where it’s not more than in-flow.
Going to be an exciting time–I’ve never had to live on a budget before.
First to go have to be the cows, our most heart-rending task–but they are expensive pets.
We’ll just keep feeding the 12 cats, 5 duck, 14 chickens and 1 dog. They all serve their purposes.
Saved our loving bull–Enrico Luciano–he’s going to my daughter along with two heifers.
Daughter is trading us her kind-a not so nice bull and two bred cows–all Scottish Highland.
Now all I need to do is find someone that wants a small herd–or send them to slaughter.
Have a fella that will rent my land for ag purposes; won’t pay much but will keep the ag tax exemption.
It’s probably for the better–I’ll no longer need to sit here day after day at this computer.
Being outside doing things will probably be better for me and much much more enjoyable.
Was nice while it lasted–got more than 3 good years out of NFI dividends–a real adventure.
If I’d a traded my plan all would be OK and I’d still have 10K shares free and clear.
It’s not the use of margin or debt that kills one; it’s the not sticking to ones plan.
In this case is was that my greed overcame my good sense and I abandoned the plan.
I’ll be wrapping up my participation on the board pretty soon. Hate to leave you good folk.
I’ll try to update the spreadsheet and post a last copy–but it’s pretty much dead.
Not because it’s inherently inaccurate–but it only works when the business plan hasn’t changed.
It’s been an adventure. Too bad I won’t be able participate in and enjoy the fìnâlis.
It was a case of being down to the point that any further drop could have me losing the farm.
And, that, I was not willing to risk (came way too close as it is).
So; it’s soon to be adeu..
Hae a grand one.
bov
Fare thee well for I must leave thee
Do not let this parting grieve thee
The time has come for you and I to say goodby
Adeu adeu my friends adeu
I can no longer stay with you
I will hang my heart on a weeping willow tree
And may the world go well with thee.”
I like how he at least admitted it was his greed that overcame his good sense. He didn’t blame anyone else, which is good.
What surprised me is that Schwab is raising margin requirements!
1st: when did they drop below 50%?
2nd: Is anyone else raising margins? As someone who doesn’t run a margin account, what is the normal limit?
Got popcorn?
Neil
Sounds like no matter what that guy is safe–he’s got livestock! WTF.
“Betting the Farm”….
Great topic for discussion today on Bens Money and Metals, BUT I couldn’t get it to publish my comment.
me neither. I have tried a couple of times. It must be an intelligence screen. I am out of luck.
The Blogger update seems to have screwed things up a bit, but I’ve managed to work around it.
First, enter your comments, verification string and login/password, then hit “preview”. If you like what you see, enter *another* verification string and then hit the “publish” on the right. DO NOT hit the “publish” button on the left below the previewed post.
I really don’t see what’s the difference between the subprime and prime nowadays. Most of the loans made in the last few years are crap, and the only thing that was holding up their credit worthiness was the self-perpetuating process of ever-increasing prices.
It doesn’t matter what the credit score is if you are underwater and your IO/ARM resets.
Yep.
As an example, we were looking to trade up in spring of 2004. We had a 40% downpayment, 800-ish FICO scores and a $100K/yr income. We put in an offer on an older, very regular house on a semi-busy street in a mediocre part of town. Price? Almost half a million dollars.
Anyhow, I was stressing on the monthly PITI payment (30-yr, FRM, of course), and worried about the bubble already. The monthly payments would have been around $2,300, not including tax deductions or maintenance costs, which I figure is a wash. Even for us, that was far more than I’m willing to spend for a place to live. That’s a lot of money, and when one considers the very real possibility that we might not see the kind of wage increases common in the past few decades, $2,000+/month is more than someone earning $100K+ should spend.
Point being, yes, prime borrowers have stretched way beyond what they could truly afford. The carnage will go all the way to the top, IMHO.
Here is the economic order:
1. Subs started to fail in May 06
2. Q406 Results show up on the front line
3. Lenders start to feel the pinch in Q107 like well, you guess
4. Munis become questionable and the spread widens
5. Financials decrease even more drag in other indexes
6. Hedge funds can record the losses as positions unwind (SOX)
7. Q307 Consumers feel exausted, retail falls
8. Q407 Dow hits 8k
9. Q108 Feds address the problem - bad borrowing, fraud, hedges