“When Risk Rears Its Ugly Head” In California
The LA Times reports from California. “ShaRon Lewis is facing a 50% hike in the payment on her adjustable-rate mortgage next month. This week, she discovered she can’t qualify for a new loan with payments that she could afford. And although she’s willing to sell the West Hills home she’s owned for two years, she has been told it won’t fetch what she paid for it. ‘I have to laugh to keep from bawling,’ Lewis said.”
“Her situation is becoming increasingly common across the country amid the implosion of the business of sub-prime mortgages — loans for people with less-than-perfect credit or no credit histories.”
“Even some borrowers already in the pipeline are being rejected. ‘You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,’ said Philip X. Tirone, a senior loan officer with United Pacific Mortgage in West Los Angeles.”
“As recently as two months ago, consumers could qualify for a home-purchase loan or a refinancing even if they had low credit scores and no cash for a down payment. Not anymore. ‘You’re back to real credit standards,’ said Scott Simon, a mortgage expert and money manager at Pacific Investment Management Co. in Newport Beach.”
“Mark Cohen, a mortgage broker in West Los Angeles, said some lenders already were toughening standards for the so-called Alt-A group of borrowers: those with solid credit scores but uneven employment history or inconsistent income. ‘The question is, is it really limited to sub-prime and Alt-A, or will it go up the food chain?’ Cohen asked.”
“As loan standards tighten for sub-prime and Alt-A borrowers, as many as 1.1 million people could be closed out of the housing market this year, said Dale Westhoff, head of mortgage-backed securities research at brokerage Bear, Stearns.”
“That’s the unhappy state in which homeowner Lewis finds herself. Two years ago, when Lewis was looking for a larger house, she easily prequalified for a nearly $700,000 house even though she had no down payment and a spotty credit record. It helped that she was willing to take on two loans to cover 100% of the cost.”
“‘I wasn’t completely aware of the mortgage terms but I knew it would adjust in two years,’ she said. But almost as soon as she and her family moved in, Southern California’s housing market began to cool off, giving Lewis a chill.”
“‘I knew I was in trouble the very next month, and it’s been that way since,’ she said.”
“Although she has shopped around for a new loan, she can’t find one that would enable her to keep her monthly payment at its current level, around $4,000. And because her house hasn’t risen in value, she can’t use equity as a down payment on a refinancing.”
“Starting next month, her payment is slated to jump to more than $6,000, an amount she says she won’t be able to pay. ‘It’s overwhelming,’ said Lewis, who hopes that if she can sell her home within the next few months, she can at least break even after closing costs before she misses too many payments.”
“‘I can completely ruin my credit,’ Lewis said. ‘Or get out the best way I can.’”
The Orange County Business Journal. “The spectacular meltdown of the subprime mortgage sector now has turned into a guessing game. ‘The effects will be felt here on Main Street,’ said Kerry Vandell, director of the Center for Real Estate at the University of California, Irvine. ‘The hits are going to be real. Some of these companies aren’t just going to cut back, they are going to go away.’”
“‘When risk rears its ugly head, someone ends up taking the hit, there’s a real effect,’ Vandell said. ‘People are going to lose their homes because of this.’”
The Union Tribune. “‘Fraud against lenders is a growing problem that hurts everyone throughout the mortgage process, from the lenders themselves through the brokers and appraisers to the consumers and the communities we invest in,’ bankers association Chairman John M. Robbins said at the National Fraud Issues Conference, which ends today at the Omni San Diego Hotel.”
“At the meeting, Robbins and FBI Financial Crimes Section Chief Karen E. Spangenberg signed a memorandum of understanding to issue nationally a new mortgage fraud warning notice. Lenders would distribute notices to borrowers warning that mortgage fraud is punishable by up to 30 years in prison, a fine of $1 million or both.”
“The warning ‘is a reminder that this is not a game you can play anymore and expect not to be punished,’ Robbins said.”
“‘Fraud is at record levels,’ said Richard H. Wohl, president of IndyMac Bank. ‘A lot of us are seeing deals pushed in our shops that never should get through the front door.’”
“Outside the conference, Gary Wong, senior vice president of residential lending for Union Bank of California in San Diego, said large banks in the state don’t have licensing requirements for loan officers.”
“‘My loan officers here do not require licenses to operate,’ Wong said. ‘Obviously, we have our own internal regulations, guided by the federal government. The level of oversight is intense.’”
The Voice of San Diego. “I spoke with Christopher Cagan, a researcher with FirstAmerican who monitors loan resets. He said he doesn’t expect a ‘terrible crash’ from the subprime belt-tightening, but added prices could drop as some people find themselves unable to refinance out of challenging loan terms.”
“The marketplace is doing a good job of regulating subprime mortgage lenders now, Cagan said. He said those ‘Bankrupt? No Problem’ mortgages never quite sat well with him when they were getting popular during the housing boom days.”
“‘To me, bankruptcy is a problem and you should wait a couple of years,’ he said.”
“For homeowners stuck in a loan or thinking about purchasing a home, Cagan said such folks would be wise to rein in some of the free-money ideas of the housing boom and think of their homes as places to live in, not investments, similarly to how a couple of generations past thought of real estate, he said.”
“‘Survive and get through and understand what you’re in,’ he said. ‘Listen to your grandmother and come out fine.’”
‘He said he doesn’t expect a ‘terrible crash’ from the subprime belt-tightening, but added prices could drop as some people find themselves unable to refinance out of challenging loan terms.’
Isn’t this the same Cagan that said the billions in southern California foreclosures would be no big deal? Now what does he say to the FB’s?
‘Survive and get through and understand what you’re in,’ he said.’
…‘Listen to your grandmother and come out fine.’”
The FB’s are on the verge of financial and emotional ruin, and Cagan gives them a Fireside Chat.
They’ll have to be listening to Grandma, since they’ll be living in her basement.
LOL
Bang on.
Old Economics vs New Economics
Grandson-in-law better hope Grandma never saw “Kingpin”….
It’s weird because I saw a presentation from Cagan he did a few years ago where he hinted that the So Cal market is developing into a bubble. He was one of the first people I found who didn’t think housing would go up forever. Now he’s way to wishy-washy on the downside.
I just listened to a local Sacramento radio show hosted by a RE agent. First he joked about how some of his ex-clients owe more than they own. He then brought in a colleague who specializes in short sales, and their phones started ringing off the hook with underwater homeowners wanting to learn more about the process. All of them were in trouble, and at the end of the hour-long show the cheerful host said, “sorry we can’t answer the rest of your calls - please call back next week.” There may not be much time left for these people.
There is no next week for many of these stooges
ROTFL
But… they’re rich property owners. Practically landed gentry. Why, I feel so bad renting. I’m even doing silly things like saving as if we were paying a mortgage (including all tax pros and cons,insurance, etc.). I’m going to feel pretty poor doing this.
How the heck would it feel to do it for real? Where if you don’t make the “savings” its a late mortgage payment?!?
I feel bad for families losing their homes. But why didn’t anyone question “buy now or be priced out forever?” We’re about to see job exports where it makes since (mostly to other states). I’m sure this drove outsourcing to India too.
Oh, the bubble markets are about to get slapped around in a violent three stooges episode.
oh well.
Got popcorn?
Neil
When does your savings reset upwards by 50%?
It’s so satisfying to read about these arrogant house owners suddenly realizing they are screwed. It’s almost as good as sex.
“The marketplace is doing a good job of regulating subprime mortgage lenders now, Cagan said.”
Well, great. Too bad this wasn’t done THREE YEARS AGO.
Good point. Now that hundreds of $billions have been loaned at nosebleed prices, they are doing a ‘good job.’ That’s exactly what will push them into default!
The marketplace is doing a good job of….
Making a sh#tload of commissions for the participants… Oh, I guess that’s the preferred definition of “good regulation”
Is he referring to the sub-prime lenders that just went BK?
the marketplace is not a free marketplace. Fannie and Freddie bought more and more subprime loans as the bubble got bigger.
Fanny and Freddy own a lot of mortgages, sure. But those pigs that are croaking on the ABX indices are purely private. The free market built that house of cards.
I’d have to disagree. Fannie Mae and Freddie Mac bought 44% of subprime mortgages in 2004. There is no way the private markets could have absorbed so many subprime loans.
Well, I don’t have the numbers handy, but I bet they bought progressively less than 44% in 2005 and 2006. Please correct me if I’m wrong. And my other point remains, the subprime meltdown is concentrated in the private sector. It’s not Fanny that’s melting down, it’s New Century, Fremont, etc., with Countrywide coming soon.
No,Fan & Fred don’t buy the toxic waste of the subprimes. They are much more regulated (although I’m sure the CEOs wished they could partake in the greed) and they will be standing while the rest are choking on f@cked lender vomit.
Some people want to blame Big Gubermint for this problem. No way jose. This was 98 44/100% private, unregulated laissez-faire George W Bush Republicanist crony capitalist greed.
Are you in lala land? The GSE’s bought 44% of subprimes. That’s a fact you can look up yourself. Denial isn’t just a river in Egypt.
As far as CEO greed, did you happen to hear about the $10 billion accounting fraud at Fannie Mae under Frank Raines? What fairytale are you living in? Is Larry Kudlow your Goldilocks friend?
A free market wouldn’t have allowed a Federal Reserve which manipulated rates and caused this speculative bubble.
That’s what happens when the federal government buys mortgages.
If we had a truly free market, this kind of thing wouldn’t be happening.
Excerpt from MarketWatch:
Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, Md.-based publisher that covers the home loan industry.
In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.
Three big lenders, NovaStar Financial, Deutsche Bank and BNC Mortgage, part of Lehman Brothers, sold more than half of their subprime MBS to Fannie and Freddie this year, said Andrew Analore, editor at Inside Mortgage Finance.
Ofheo, Fannie’s regulator, has noticed that the company has increased its subprime exposure.
“They’ve expanded in that area in recent years, but it’s still not an enormous part of their business,” Andrew Lawler, chief economist at Ofheo, said. “It’s an area we’re increasingly looking at because they’re increasingly involved in it.”
An Ofheo report due out later this year is expected to show Fannie’s subprime exposure is “generally moving up,” he added.
It’s so hard to fathom how a person who can qualify to make $4,000 of monthly mortgage payments (never mind $6,000) was not able to save up any down payment at all. Or why (if she has no savings) she would feel entitled to a $700,000 house. Rent, for chrissake.
700 big ones; it does have a deer in the headlights quality to it.
The real deer in the headlights quality is when you add up the cost of the loan over its life. At 6% a $700,000 loan works out to something like $1.5M over 30 years. Seeing that on paper is even more daunting than a $700,000 purchase price.
2000 more a month….. so all she needs to do is double her income by next month. what’s all the fuss about?
Stripping pays well in LA. Not that I would know anything about that.
Chuck Ponzi
http://www.socalbubble.com
$700k. Just 4 years ago most people would think you have to be independently wealthy to consider getting into a house that costly. Many people have been drinking kool-aid since then.
I don’t know how any one in the media, government, etc. can say with a straight face that everything is going to be just fine when unqualified folks like this are able to get a $700K loan. When trillions of dollars like this are thrown at people who can’t pay, eventually the ponzi scheme is going to crash and take everything else around it down. Period. WTF?
Many made the loans thinking the FB’s could sell or refinance. They only cared about the commissions. Everyone thought appreciation would save them… till it doesn’t. Even the banks and the ones who bought the loans thought this.
Who will be there to bail them out?
The taxpayers will bail everyone out. Privatize the profits and socialize the losses. That’s our brand of capitalism.
The problem with large numbers is that people have no comprehension of what they really mean. 700K in debt sounds like a nightmare you never wake up from to me.
At least her loan is purchase money and as long as she doesn’t refinance is non recourse. ‘course the bank will probably offer to restructure the loan and by modifying the terms cause it to become full recourse - no one will tell Ms. ShaRon Lewis that it will become full recourse. Sad
“It helped that she was willing to take on two loans to cover 100% of the cost.”
second loan…… oh, oh
helped who?
For the entire 2004-2006 period I kept wondering HOW ARE PEOPLE AFFORDING AN AVERAGE $600K HOUSE???? Now we know. They couldn’t, and can’t. Only BIG STUPID IMMORAL LENDING allowed it. Now we all will pay the price. Yes, all, because in some way the gov’t will *HELP* these fools who over paid. [ARGHH]
no, they will “save” the institutions, protecting the system is the FED mandate
anything congress comes up with for the borrowers will just be window dressing
Lenders loaning to the stupid and immoral allowed it.
I understand there are $ 370 TRILLION of derivatives - “far more than the net worth of all the financial institutions in the world” related in part to home loans. I heard Warren Buffet refer to these as financial WMD’s. Is this when they start going off ?
They got it all figured out. Everything is fine. Not to worry…
Suzanne Researched This
My husband and I thought the same thing….we make good salaries, but we lookd at each other and our smallish older house and older cars and just thought, what are we doing wrong here? What is The Secret (pun intended) that all these other people know? Now we do know…..and we sit here with our smallish older home with no mortgage, and our older cars with no payments, and smile…..
“…we make good salaries, but we lookd at each other and our smallish older house and older cars and just thought, what are we doing wrong here?”
Those same kind of thoughts are what prompted me to seek out answers, ultimately leading me to this blog. Starting in 2004, I couldn’t believe the prices people were paying (in WA). And then, it proceeded to get much worse. It seemed the entire state/country had all this money to burn, and I was some little peon who couldn’t compete. I first found Patricks site, then finally, this one. I was happy to learn I wasn’t the only one calling BS. The number of people in over their head right now is staggering. This thing cannot get better anytime soon.
Don’t count your government leaders out of the game; I am guessing they are crafting FB bailout contingency plans as I type.
“Don’t count your government leaders out of the game; I am guessing they are crafting FB bailout contingency plans as I type.”
I don’t think so. I have thought about this, and I cannot see how they could. This thing needs to take care of itself. A lot of these people are not only overleveraged in real estate, their credit card payments are through the roof, as well as the payments on the Hummer and the ladies SUV. I plan on hammering the politicians ears should they even so much as talk about a bailout for these fools. Not our problem these people wanted to live like kings on the wages of a pauper.
A Psychiatrist friend of mine with a private practice told me that many of his patient’s problems are mostly related to leveraged lifestyles. Completely stressed out, up to their eyeballs in payments for houses and SUVs, and it is all of their own doing.
Bantering Bear,
Not sure if you’re in Seattle proper or where exactly, but do you remember all the for sale signs in 2000-2001?
I had a few customers up of off WA 519 near Kirkland. I thought prices were insane then and there were tons of properties for sale. Then came low interest rates and things just took off.
Those same kind of thoughts are what prompted me to seek out answers, ultimately leading me to this blog.
‘Bear, we followed the same path at the same time. I was astounded at what was going on around me…Now we know that it’s not that I don’t earn enough or don’t save enough. It’s that I’m debt averse.
My wife does not read here. About every two weeks I send her a link from one or two articles. That’s enough to keep her away from wanting to buy.
hey sleepless_near_seattle,
check out the for sale signs up on Issaquah Highlands and you will freak out.
sleepless_IN_seattle,
will do. A co-worker of mine up there just bought in that area. Hasn’t sold his other house near Puyallup. Good luck with that strategy.
His reasoning for buying: 20% gain on a $500K house is much better than on a $200K house.
I don’t fault his move to a more desirable area, but…..
sleepless_near_seattle,
The problem with reasonings like that is because the concern is more about the money they think they can make on the house rather than the enjoyment of living in a house they can afford. Sure, a lot of us would like to live in a better area than we currently live, but as the song goes, “you can’t always get what you want.” For most of us, we make the best of where we are and enrich our lives in other ways. But, such is life. Your co-worker is now a member of a really big club…GFofA…Greater Fools of America.
BayQT~
The other fallacy is not to take into account the increased taxes, maintenance, and other costs associated with a large house. We have a combined income of $125K, and a $289K, 5.875% mortgage we’re paying 400 a month extra on. That payment by itself is $2100, which I gag on, but soldier on. We own two decent cars and a motorcycle outright, and they’ll last for years - but I can’t imagine borrowing $500K - just in CASE real estate doesn’t go up forever.
“Bantering Bear,
Not sure if you’re in Seattle proper or where exactly, but do you remember all the for sale signs in 2000-2001?”
I’m not in the area at the moment. I do remember the market around 2001, but didn’t follow it very closely. I remember it enough to know that prices were a little high even then, but half of what they are today. I do distinctly remember that rentals in downtown Seattle were a hard sell. So much so, that rents were declining. How short peoples memories are. I believe Seattle, the entire Puget Sound region for that matter, has seen its peak, and is in decline. And I am not just talking about real estate. I believe that tough times are ahead for the whole region economically. I know many people who have either moved away, or who have plans to. Not just because of high housing, but the outrageous cost of living period. And the quality of life in the area has been deteriorating rapidly. The infrastructure is crumbling, and there are no definitive plans to remedy it. Seattle had its boom, its bust is on the way.
And don’t even get me started on that garbage in the Issaquah Highlands. To call them hideously overpriced eyesores would be an understatement. Disgusting.
BayQT,
Yep, I agree.
The problem as I see it when people have his attitude, is that the people in my demographic (I am mid-30s, he’s early 30s) have never seen a real downturn. Times have mostly been great since we graduated 10 years ago from college. All we have seen is economic expansion. There hasn’t been much punishment for borrowing and spending.
Hopefully the savers and planners won’t pay for the mistakes of the last decade, but I’m sure we will in some way.
“Privatize the profits, socialize the risk.”
I still ask my wife every time a new family buys a home in our area whether they are wealthy or stupid. And it looks like stupid is about to be underwritten out of the buyer pool.
Good point. Real estate debt is just a part of the picture. No one pays for anything anymore outright. Car dealerships will barely ALLOW you to pay all cash for a car anymore - last time we did it, the salesman looked at us like we were from another planet. Furniture, jewelry, electronics, everything is being paid on time. The result is, overstretched borrowers and inflated prices. And don’t get me started on what federal student loans have done to the price of a college education.
“For the entire 2004-2006 period I kept wondering HOW ARE PEOPLE AFFORDING AN AVERAGE $600K HOUSE???? Now we know.”
Exactly. 1st mortgage. 2nd mortgage. Interest only. That’s how people “afforded” these houses. Not income. Not savings.
Speaking of BIG STUPID IMMORAL LENDING, does it strike anyone else that asking mortgage brokers to comment on the depth of the subprime problem is a lot like asking crack dealers to comment on the depth to which drug dependence in this country has become a problem and whether or not it’s a threat to our health?
21.5% of all buyers out of the market, at least 2 or 3 percent of the last two years of buyers desperate to sell or be foreclosed on…yeah, this won’t spread.
You are soooo right. Remember the savings and loans fiasco of 80’s. pisses me off.
Rent, for chrissake.
What, and throw her money away??
She is going to make the decison to either max out her credit cards and work a second job to keep up OR sit in the thing for six months and then walk away. I’d say probably the second of the two.
Unless there is some kind of stupid price supporting bailout.
Wouldn’t that be wonderful financial suicide for the country.
geez,put an ad on craig’s list,lady,2 weekends a month and you can cover the increase easy.
People will react to this bubble the same way they reacted to the stock market bubble. They will ride it all the way down, hoping every little uptick is the bottom. In the end that spells doom.
Has anyone see the article in the WSJ from Thursday where a guy who spoke no English and only makes $27k a year bought a $700k house in N. California for $1800/mo. and is now going to lose it? This article was amazing!! I was stunned, but not suprised. The crap-bucket we are renting is only 6 years old and has multiple build quality issues. It would still sell in the high $500’s. CRAZY!! I am hoping for a 50% haircut!! I’m not overpaying because some worthless piece of trash was too stupid to know any better!!! AND greedy to boot!!
Because she had visions of her 700,000 home becoming worth 900,000 thats why.
$700K in San Mateo, CA will get a good 2-3 bdrm condo or a very small house.
Her name is Sha-Ron
you figue out the rest
$6,000 per month plus property taxes and insurance alone works out to over $200 per day and probably at least $240 per day which is a flat $10 per hour or so. Even seeing this i can’t believe it.
“$6,000 per month plus property taxes and insurance alone works out to over $200 per day and probably at least $240 per day which is a flat $10 per hour or so. Even seeing this i can’t believe it.”
Yes, it is amazing. It reminds me of a story in South America where some scavengers found some “blue stuff that glows” in a disgarded piece of medical machinery, and they gleefully rubbed it all over themselves and danced about…totally unaware that the “stuff” was radioactive.
Maybe they couldn’t rent because they didn’t have enough for a security deposit.
“…is facing a 50% hike in the payment on her adjustable-rate mortgage next month. This week, she discovered she can’t qualify for a new loan with payments that she could afford.”
Yep, here we go…top of the second inning.
The tide’s goin’ out…… could someone throw ShaRon a towel.
party pooper
Or at least give her a bathing suit. The dropping tide is going to show a lot of bare a$$es out there…
I just love the name “ShaRon”. It’s too bad she didn’t pull cash out at closing like most people…
A house to live in; it sounds so…unCalifornia, like Ozzie and Harriet. (snark)
You havta wonder what the champ is gonna be for all-time maximum suicide loan. Biggest teaser-resetting, no doc, no down, of them all.
Start a pot and take bids.
actual bank loss or largest loan to income?
hmmm.. if Casey had already quit to “invest” full time when his first house closed, we may have a winner. Hard to beat an infinite ratio.
“For homeowners stuck in a loan or thinking about purchasing a home, Cagan said such folks would be wise to rein in some of the free-money ideas of the housing boom and think of their homes as places to live in, not investments, similarly to how a couple of generations past thought of real estate, he said.”
Wait - is this the New New Paradigm he’s talking about? Or just a Newer Old Paradigm?
Somebody out there, please help me keep up with my Paradigms!
I believe you are referring to a “pair of dimes”, which is what these azz-fooked borrowers will be left with when the smoke clears
Pair of dimes … Heh… Reminded me of description of _______ (
Is it me, or does every new comment like this seem to be stripped right from this blog?
“‘To me, bankruptcy is a problem and you should wait a couple of years,’ [Christopher Cagan, a researcher with FirstAmerican who monitors loan resets] said.”
With clueless wonders like this doing their “research,” it’s no wonder the subprime lenders are dropping faster than Paris Hilton’s panties.
italics off
Boy, the show is just getting started in CA. This lady looks like the leadoff hitter ready to go down. Now, who is going to bat clean-up? And who is going to be the champion pitcher? Gotta love these stories of special California FBers that were obviously sitting on their brains instead of using them. Unfortunately, there are 1000’s more like this lady. I refused to take on a $700K mortgage, so I left for a more affordable area. Sayonara, Arnold and Co. You can have Kalifooornia.
The entire west coast is toxic loan central. CA, OR, WA, and throw in NV and AZ. 300% appreciation was not unheard of in certain areas. The whole sh!thouse is going down now.
Call me Trevor Hoffman. I’ll be there for you in the bottom of the 9th, Mr. FB.
2007 is going to suck.
-Rent
Maybe Casey Sarin could make some $$ and save his @ss marketing videotapes and seminars on staving off foreclosure to losers like this.
Where’s crisrose? She’s got one of the best California housing bubble stories on this blog. Something about a 38 year old single lady with a $10.00/hour job who sold her house for a tidy sum and made like $100,000 profit. cris begs her to put the money away and save it. NOPE! Lady goes and buys a $300,000.00 home with little or no money down and spends her $100,000 on remodeling it. Loses her job, out of work for a while, gets another for $9.00/hour.
The housing bubble: turning dollars into noncents.
thank god for morons like this…how else would we be entertained?
The new American success story: drove into town in a $30k car and left in a $100k bus.
Single, 48 years old - retirement center housemaid making $10 an hour sells LA house 07/06 for $100k profit (right before the reset on the neg am loan). Told them the housing market was crashing and to sit on the cash.
In August, buys Bakersfield 50-year-old $hithole in a bad neighborhood for $325k. (’Compared to LA, houses are so cheap up there!’) with 80/20 i/o loan due to reset in 09. I don’t know if it is neg am but total payments are $2200 including property taxes.
Spends $100k profit on remodeling (new floors, walls, electric, plumbing)/7 months living expenses - the $100k is GONE! Last week, finally finds job in Bakersfield hospital cleaning floors for $9 an hour. Over the past month has applied for a job at McDonalds, working in the fields…
The loan officer told her to come back to see him before the loan resets so she could refi. I told her son the LO already made his commission and would be long gone by then, as would her ability to refi.
Her son, who works in my office, is trying to find a job in Bakersfield. In the meanwhile, he commutes to LA to a $12 an hour job (because he can’t find work up there). He, his stay-at-home (unemployable) wife and two kids (under
live in the Bakersfield house.
Five people living off $43k a year with a $325k mortgage. $9 an hour hospital maid blowing $100k in cash in seven months on remodeling. Care to guess how these people dress, eat, live? The f%cked lives/future their children have?
Yes, the REIC sure took advantage of her.
That’s a completely amazing story, with some of the best details I’ve heard.
But you gave her excellent advice and she didn’t take it. You warned her, so I’m not sure the REIC really took advantage of her. She could have rented, or even moved elsewhere and practically bought outright in a less bubbly market, if she wanted a house that badly.
“so I’m not sure the REIC really took advantage of her.”
I think crisrose was being sarcastic…?
Do I understand this correctly Lewis bought homes with no money down hoping someone else would buy her home with no money down and so on and so on?
Wow. If lots of people followed her example and made a lot money selling their homes to other buyers at some point you have to figure there are a lot of dolts holding on to homes they can’t afford. All these morons deserve what they have now. Bills they no way can afford to pay.
How sad that this thing is unwinding not because buyers finally wised up and refused to pay these absurd prices, or to take on such huge amounts of debt, but because the lenders finally had no choice but to take away the punchbowl. So, if the subprime lenders were still going strong, I guess the market would still be going up, up, up?
Ummm, maybe not, since the supply of housing would have exceeded the number of GFs pretty soon. It’s one thing to “buy” an absurdly over-priced asset when everyone else is doing it; it’s another to sign a contract in a sales office where you’re the only buyer, and the development is a ghost neighborhood.
They committed to “free money”. They stayed the course till there were few left to “borrow” the free money. Now they decry the free money and close the free money door.
What’s next?
I don’t think so. We would still have the foreclosure problem at some point. It would probably take longer to play out, since prices wouldn’t drop fast enough to prevent refinance at first. But it would probably accelerate much faster and ultimately collapse much faster too.
“…Even some borrowers already in the pipeline are being rejected. ‘You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,’…“As recently as two months ago, consumers could qualify for a home-purchase loan or a refinancing even if they had low credit scores and no cash for a down payment. Not anymore. ‘You’re back to real credit standards,’…”
I am absolutely loving this. This is precisely what my mortgage broker told me this past week. Even pre-approved deals are not being funded come closing. All of the lenders are at once “holding their horses”. This screeching halt of transactions is going to inflict serious pain on buyers, sellers, agents, brokers, etc. It’s a big cold glass of ice water to the face. Sellers are in for a rude awakening, as buyers were just added to the endangered species list.
Which proves one thing, Bantering: the price of housing was driven up by sharks and losers who had no business buying in the first place. And they’ve made it hard on the rest of us.
Credit=inflation.
‘You’re back to real credit standards,’
Usually the FLA thread is the hands-down winner for unintentionally funny quotes. Today the Cali thread has broken out of the pack and running right on FLA’s tail.
I thought so, too. REAL credit standards are still nowhere to be seen.
2007 is going to suck.
-Rent
Sellers are in for a rude awakening, as buyers were just added to the endangered species list.
BanteringBear, even in LA’s Westside, where people have not yet woken up from they kool aid-induced slumber, realtors catch you at the door of an open house and ask you right off if you are preapproved for a loan. I think this is what is going to bring prices down to something resembling normalcy. Now, even qualified buyers who want or need to buy will have to set their sights lower. I confess I am becoming a little scared at what could happen.
“I confess I am becoming a little scared at what could happen. ”
Not me, I’m laffing my ass off!
people have been using these now unavailable loans at every level of purchase in LA, from Compton to West Hills to Palos Verdes. This will rock the roofs off everywhere…
Got that right…
Not to mention that SoCal is way overdue for a huge earthquake. Not a matter of if but when. That’ll probably make the insurance fiasco in FL look small by comparison.
What could happen in LA that would have negative impacts which would result in catastrophic housing price declines and a complete meltdown in the region? Besides the subprime meltdown!
1 potential 8.0 along the san andreas fault
2 Harbor nuke blast
3 RIOT
4.severe drought period such as we are in now?
Here’s a real-time neg impact scenario LA is having right now:
What LA has is a Major Gang problem. They are all over the place, even in parts of the westside. Culver City boyz, Venice shoreline crips to name a few.
The story regarding the LAPD clampdown on the 204th st gang in Harbor City for the gang killing of a 14 year old black female is a case in point.
There have been repeated gang shootings and murders in that area and East Torrance T-Flats for decades, as well as other notorious South Bay hellholes as Wilmington,Carson,Gardena,Hawthorne.
The Authorities previously never gave a rats ass because hispanic gangs killing each other, or interrival gang drive-by shootings, were never considered racial hate crimes such as the alluded above case is.
The LA civic leaders and LAPD have been giving belated attention to the exploding LA gang problem. Maybe they and our enlightened Gov’t should have considered the consequences of allowing 30 miilion illegals to flood into the US, with 20% of those cramming into SCAL/LA,thus spawning a host of immigrant gang-banging offspring.
One More black eye for LA, the city of Angels.
I don’t know, after the last housing bust, there were the Rodney King riots (1992) and the Northridge quake (1994). There was no “meltdown” - at most, maybe it caused the real estate market to languish a couple of years longer than it might have otherwise, but things started getting bubbly again only five years after the earthquake, as if it had never happened. The neighborhoods hardest hit by the riots (South LA, Koreatown, Hollywood) are currently more expensive than West LA was in the mid 1990s. Not much of meltdown really.
I personally don’t think most riots would trigger or exacerbate any kind of housing panic, but I do think that a powerful earthquake, one that will make Northridge pale by comparison in cost and casualties, definitely would.
“people have been using these now unavailable loans at every level of purchase in LA, from Compton to West Hills to Palos Verdes. This will rock the roofs off everywhere”
Yes Sir they will, though different LA Submarkets will experience the declines at different rates. Real pain in the stagnating mid-priced, mid-lower class ‘family’ zones of $500,000-$600,000 in such places as Burbank, Van Nuys,Torrance, East Long beach,Lakewood, Whittier, Gardena,ect. South Bay starting to crack.
Inner LA s*itholes like Compton, Bell,Wilmington,SCentral EastLA,Cudahy,Maywood,harbor city,Inglewood will provide an ample supply of foreclosed POS clapsheds as tinder for the next round of Riots(hood street lighting).
Just for the record, I’d like to confirm: Mexicans are still flipping houses like there’s no tomorrow in South Central. I think Ben needs to created a Spanish language version of this board, or at least copy part of it onto La Opinion.
Why? They’re just buying the homes that Americans won’t buy.
Cassiopeia,
I am really wondering what the recent buyer’s finances look like here on the Westside. I see young families living in houses that sold last year for over $2.5 million. Even if they both have great jobs, that means they are paying thousands of dollars per month for the nanny, before they even get to the mortgage. It can’t all be inherited wealth, A-list actors, and basketball players.
Let’s say they put down $500,000 from their last place, and borrow $2 million at 6.5% for 30 years. That’s about $12,500 per month for the mortgage, $2000/ month for the taxes, plus say $1000/month for incidentals like insurance and gardner. That’s $186,000 per year in housing expenses before you pay the nanny, buy food, or heaven forbid, private schools.
Dual Lawyers, No Life?
Again, what an eye-opener it will be if an illness befalls the family or the second income goes away. It’s amazing the kinds of predicaments people put themselves in.
BayQT~
smlandlord, I used to wonder a lot about that too. I thought it was because everybody else made a ton of money more than us, but even considering you made a bundle on your last home, it doesn’t hold up if you analyze it. Roughly, I think that you need to make over 30K per month to afford one of these homes, and even then things would be tight after taxes and regular expenses. Really, how many people can bring home that kind of money, even with two incomes? It just doesn’t add up, but I don’t see my neighbors panicking (yet), not judging from the lines at the mall and the asking prices of homes. We’ll have to wait and see.
I have multiple friends that bought on westside in last 5 years Mar Vista, Culver City, Westchester, Venice, Redondo and Marina. All in the under a million range. The later buyers used 80/20 & with 3 year arms. The ones that bought early (2000-2003) Have ALL re-fied and either bought INVESTMENTS (in AZ, even SC), or renovated their houses, as an investment. I sold in 2005 and I am still “a nut”.
PS in 2001, houses on the hill of Mar Vista were going for maybe 400k. (which is what I think they’re worth)
This RE agent I was sort of working with a couple years ago told me she sold a 1.2M house to a couple, wife was not employed and was pregnant, the husband was taking time off as an accountant to get some college degree, and they had no current income coming in, just the hubbie’s student loans. “You just have to be a little adventurous”, was what the agent advised me. That was when I decided there was no way we were going to be able to “trade up” in this city.
So, Imploder, would you dare to dream we will get back to 2001 prices?
Imploder- you are the guy I need to get more detailed info from…I’ve been trying to outline to my beloved, oh so friggin unable to realize what’s going on wife, that the people in these areas you mentioned are NOT unique from the bass-ackwards stuff we’re seeing in the ‘obvious’ places. She somehow insists that because none of her friends here in the broad areas you mentioned (Westchester, PDR) did this type of stuff (my points to the wide differences between ADMIT doing and having done falling on deaf ears) that it isn’t happening here, and thus we’re immune..blah blah blah. I’d like to get some non-incriminating info about these people if you a) have it and b) can spare it.
Thanks,
SoCal: When in Rome…
Take out as many credit cards to temporarily drag your credit down, buy gold, open CDs that lock down your money for a fixed period, just find as many ways of locking up cash and on paper, having too mucn unsecured credit potential that makes you a subprime borrower.
If you go looking for a places, you’ll never qualify for mortgage anyhow
I’m thinking timeshares for primary residences will take off next. You live homeless for 50 weeks, but for two weeks you get to live in a McMansion in Malibu.
This will cause serious pain to sellers, agents, brokers.
And it will save a FB, think of the last guy to die at the end of the war.
Saving the next FB from their potential fate is what the next step is all about.
Glass half empty: this will be a catastrophe.
Glass half full: a lot more people become undone by this every day that it’s allowed to go on. So stopping the madness is exactly what needs to happen.
The FB’s who bought in the past few years are yesterday’s news now. Time to make sure this doesn’t happen to even more people- at least for another 50 years til everyone goes bonkers again.
“And it will save a FB, think of the last guy to die at the end of the war.”
All’s Not So Quiet of the Western Front…..
“‘You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,”
The media has been downplaying the significance of the subprime implosion, but I think in about 60 days we’re going to be reading about a complete collapse in home sales. Very few people have any meaningful amount of money in savings, not even 10% of the cost of a house. Without low/no down loans many current contracts will fall apart, starting NOW. Sales will implode. The spring pickup will not only not occur, but the exact opposite will happen, a spring falling off a cliff in sales.
I expect this will trigger a stock market downturn that makes the opening shot of a couple of weeks ago seem like chicken feed. Be VERY careful with your savings/investments here. The subprime implosion is the warning shot, you won’t get another one.
“You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,”
Yea, about as frustrating as is to be a lender who loaned 800k 60 days ago, and then the borrower doesn’t call to say they won’t be making any payments or ever honor the loan….
Sorry Charlie, your commish on bogus loans is toast…
One should probably call the teetering mortgage broker and ask if he will help make the payments to save one more buyback
“Very few people have any meaningful amount of money in savings, not even 10% of the cost of a house.”
Really! We have a negative national savings rate (but no worries, say the top guns at the Fed…). Maybe I just don’t have enough imagination, but I cannot foresee what is going to prop up the market when there are no more 100% financed deals.
GetStucco, there was an article out about 3 weeks ago, some economist was saying that some folks are saving TOO MUCH for retirement and not spending enough. It hurts the general economy.
That is pretty funny. I guess we were saving way, way too much during all the years between the mid-1930s and just a couple of years back, while the US economy had a net positive savings rate?
“It hurts the general economy.”
The attitude of this economist and this attitude alone is why I feel we are about to move to a lower standard of living in the coming decade.
Yes, relative to the economy of the past decade if we slowed our spending, we would hurt the general economy.
But that level of “economy” has been held up by people spending money they don’t have. A virtual economy, if you will.
We need some pain in the short term to get back to a more sustainable level of growth.
Granite counters = higher standard of living
That is categorically false. The Fed has repeatedly warned about low savings rates and their implications. Not only do they whine about this to congress, but they have a bunch of outreach programs to promote savings. This may all be ineffective and besides the point, but saying that the top guns at the Fed have no worries about national savings is about as false as you can get. The bubble is not a cause to be sloppy and stupid, it is an occasion to look at the facts in a sober manner try, just this once to really do the math and get the numbers right. Just because you don’t like the Fed does not mean you get to pretend they say the exact opposite of what they have spent millions of tax dollars to promote.
Not only are there very few people with a downpayment, there are very few people who can afford a full P+I payment on these monster mortgages.
And if you don’t have money for a downpayment, you probably don’t have money for that inevitable rainy day either.
Bring it on!
John M Robbins is shocked, shocked to find out that fraud is going on!
Cagan said such folks would be wise to rein in some of the free-money ideas of the housing boom and think of their homes as places to live in, not investments
I know I’m sounding pedantic, but a home is an investment precisely because it is a place to live in. The yield on the investment is shelter. If people properly evaluated housing as an investment this bubble would never have happened.
The problem is that to the public “investment” has come to mean “something with a guaranteed capital gain”. There’s no such thing. I thought people would have learned this in the dot-com fiasco, but I guess they thought RE was “different”.
a home is an investment precisely because it is a place to live in. The yield on the investment is shelter.
yogurt, I guess that’s why mortgage payments have to be reasonably in line with rent payments, which what people forgot this past few years.
Sometimes I think that a good idea would have been to publish a price-to-earnings ratio with each house sale, dividing the cost of the house by (comparable annual rents - taxes). If it was in their face that the cost was 30 times (rent - taxes), they might have second thoughts about calling it an investment.
‘There’s no such thing. I thought people would have learned this in the dot-com fiasco, but I guess they thought RE was “different”.’
Through 2005, we heard stories that RE was “different,” because it is the “best” asset class in which to invest. I can’t say I recall any recent reports that people still hold this view…
The problem is that to the public “investment” has come to mean “something with a guaranteed capital gain”.
Yes, and I am amazed at how many people were turned into “real estate always goes up” zombies. I work with a bunch of people with PhDs, and I am stunned by frequently I get in these conversations. Yes, prices ARE too high, but, you see, RE ALWAYS goes up! No wonder zombies like ShaRon bought home they could never possibly afford. I want to see some RE blood in the streets for this incessant lying, swindling, and spinning by the industry. Scooter Libby is a cub scout compared to Dave Lareah.
I’d like to take this opportunity once again to say I predict Liarreah will be out by September.
I guess he’s right, Real Estate is Local…
The financing to BUY IT how ever is NATIONAL…..
Reminds of a comment a home buyer made years ago after some time doing their homework looking for a mortgage. They found out they did not have to go to Acme Bank down the street to get a mortgage but could get one from California, Florida, NY, Arkansas, etc. So, alot of money floats in the system. Could it be that many folks have RE investments out of state too? I mean, they could just with a click of a mouse get the $$ to finance something in a booming area w/o ever having to worry about a market decline, right?
It *is* amazing how long it’s taken for people to come back to the idea that perhaps RE might go down in value. It’s like people are getting there in gradual steps.
Friends who are finally beginning to acknowledge that RE will go down in some markets or at lower price points are still telling themselves that it won’t go down EVER in specific places, like parts of Manhattan, the Cape, etc.
Like that home a block from the ocean will take a 50% dump but the one 50 feet away will double in price over the next few years, etc. Very wierd.
Some friends sold a teensy weensy 1 bdroom apt. on Central Park West about a year ago and bought a whole beautiful house in Brooklyn. People thought they were crazy to sell that apt. And it WAS a trade off because that is an absolutely unique area for the US. But for sure that tiny apt. is going down in price. Who knows, maybe they can buy it back at a huge discount in a few years with the money they had left over after buying the house in Brooklyn!
This blowout has been so phenomenal that nothing will surprize me going forward as far as how far these prices can fall.
Does anybody have stats on what happened to RE prices after the ‘29 crash and during the Depression? What percentage got taken back then? And far had they risen during the 20’s? I would love to see that chart.
You can find the chart here:
http://blogs.business2.com/business2blog/2005/08/scary_housing_b.html
It doesn’t show what you are expecting.
Most of the impact was agricultural, not residential.
The graph seems to show that prices were depressed during the European civil war (WWI and WWII) and are completely out of line possibly owing to irrational exuberance over the supposed “End of History” interregnum following the complete end of the Cold War.
How’s that for historical analysis
I’m reading “The Great Crash 1929″ right now.
“In 1925 bank clearings in Miami were $1,066,528,000; by 1928 they were down to $143,364,000. Farmers who sold their land at a handsome price and had condemned themselves as it later sold for double, triple, quadruple the original price, now on occasion got it back through a whole chain of subsequent defaults. Sometimes it was equipped with eloquently named streets and with sidewalks, streetlamps, and taxes and assessments amounting to several times its current value.”
“As the speculation spread northward, an enterprising Bostonian, Mr. Charles Ponzi, developed a subdivision “near Jacksonville”. It was approximately sixty-five miles west of the city. Ponzi believed in good, compact, neighborhoods; he sold twenty-three lots to the acre.”
The comparison to the 1929 crash is way off. The big real estate crash at that time came mostly around 1926 and was largely over with by 1929. There was speculation and homes and overbuilding of mansions, but these places were nothing like what we have just built. This was during the reign of the small house movement and the vast majority of dwellings were well under a thousand square feet and lacked indoor toilets.
Real estate may not always go up but the value of our currency will always go down in the long run.
CUB SCOUT? HELL, he is a brownie!!!!!
Glad to see ShaRon’s story is on the front page of the La La Times. Maybe angelenos will start to wake up. Nah.
Good article in the nytimes on subprime meltdown and wall street’s role
http://www.nytimes.com/2007/03/11/business/11mortgage.html?hp
You’ll have to put it in a tabloid, Spanish language newspaper, or E! television for Angelenos to get the message.
you mean as opposed to the rest of the world…
Too much “can’t happen to me” syndrome still around.
“Sharon Lewis is facing a 50% hike in payments…’I have to laugh to keep from bawling’ “.
What does one say? I would like to interview Sharon and find out what she was thinking two years ago.
My guess is some realtor told her prices always go up and showed her how she could take out an IO ARM loan, sit on the house for two years, and cash out with a fat profit.
It was the Realtors, and Re/Max, and Century 21, and Coldwell Banker and every other con artist real estate company who convinced people like Sharon to buy inflated homes using risky mortgages.
I hold realtors, and the sellers they contractually represented, responsible for defrauding people like Sharon.
And I denounce Sharon for being greedy and stupid.
I am with you clearview (see post above),
Yes, ShaRon was greedy and stupid, but RE is complicated, emotional business. Parents, friends and everyone else is crowing about how infallible RE is and, for the insecure, it provides a feeling of accomplishment. It is easy to get confused. Truth is, a good loan officer can tell pretty quickly who can really pay off a loan and who is either foolish or fraudulent. I had a financial officer at my credit union shut me down after five minutes of reviewing my materials. He was doing his job. The current bunch of loan professionals are simply payday lender with better offices. I hope the slimebuckets end up dunking fries or doing time when this is all played out.
What gets me is that I still can’t convince my home owning coworkers that the bubble was real. Just last week I was having a conversation about the bubble and one of my coworkers said, “prices will not go down because people are not going to take a $300,000 hit.”
What do you say to people like this? My observation is that home owners have an irrational mental block regarding home prices declining. It’s like a form of insanity.
For those of us who are still sane, how much do you think the average house price will decline in 2007 and 2008? Let’s say in south Florida or CA.
“prices will not go down because people are not going to take a $300,000 hit.”
In some places they already are, like it or not, and we’re just getting started on the downside.
“For those of us who are still sane, how much do you think the average house price will decline in 2007 and 2008? Let’s say in south Florida or CA.”
>20% would be my guess.
Hmm… I don’t know where you live Judicious, but in the areas where RE has tripled and quadrupled in value over the past 10 years, I would be absolutely shocked if values stopped at - 20%.
Maybe I’m nuts, but I can’t even imagine it stopping at - 50%. What in the world would make it stop there? I think we’re looking at a repeat of the Nazdac where it plunges and then stays put for a decade at least. It’s the only scenario that makes long term finacial sense to me.
On the West coast at least, - 20% means tons more of funky loans that will “never get repaid”.
I’m emotionally prepared for the value of my house to go down 30% over four years. Luckily, I’m also financially prepared!
the condos in alhambra i am looking at were according to zillow, $100k and now they are selling for $395-400k in one complex. Beyond any comprehension at why these people wouldnt just accept my offer of $350k 5 months ago. oh well almost 7 months later its still sitting there, but now its vacant.
Most people are unable or unwilling to connect the dots between loose lending standards, shoddy or fraudulent appraisals, low interest rates, MBSs, CDOs, and foreign central banks. It is all too much.
What they have seen was very real — homes appreciating at 20% per year.
They are indeed correct: someone who bought a home for $700K will not take a $300K hit. No sane person would.
They are unfortunately missing the whole picture. As credit standards tighten, the number of buyers for their homes will shrink as well as the amount of money any single borrower can borrow/spend on a home. The combined effect will be a market where the ‘bid’ and ‘ask’ price spread will widen considerably. As the sellers bleed cash every month — buyer’s negotiating power will strengthen.
Your friends/coworkers are unable to imagine the following outcome:
- Real estate prices are set on the margin. They may not discount their house by $300K. But the bank that repossesses the house across the street will. That will lower comps for them.
- They should not fear their neighbors. They should fear the true owners — the banks. Banks don’t give a damn about the value of the street or neighborhood. They will want to sell in 6 months to clear their books.
“They are indeed correct: someone who bought a home for $700K will not take a $300K hit. No sane person would.”
Who said it was a $700K house? I was thinking more along the lines of $1M +
VERY well said, CentralBanker.
Did you see this article in The Economist about housing prices?
If the Bank of England could successfully reflate their bubble, what
would stop the Fed from playing the reflation card?
One guess: Foreign creditors might get uneasy at the prospect of losing the value of their investments in our bond market to inflation.
A second guess: We already have an inventory glut of homes thanks to speculative building and investing in second homes, vacation homes, flip homes, etc. and reflating the bubble will add to the overbuilding problem.
———————————————————————–
House prices
Home result
Mar 8th 2007
From The Economist print edition
Our quarterly look at the price of housing around the world
…
American homeowners may take heart from the experiences of two other once-booming markets: Australia’s and Britain’s. Both stalled in 2005, yet both have clocked up house-price inflation of around 10% in the past year. However, the effects of recent increases in interest rates in Britain have yet to be seen. And Australia’s official index, a weighted average of prices in eight capital cities, was boosted by booms in Perth (up by 36.9% in the year to the fourth quarter) and Darwin (17.6%). Prices in Sydney, the biggest city, fell a bit.
————————————————————————-
http://economist.com/finance/displaystory.cfm?story_id=8822670
GS, I haven’t read the article, but I will say that I don’t think this bubble can keep going. Subprime is dead and that def. means anyone looking to buy a 900K home better have 200-250K for a down and better be making close to 250-300K a year. I just don’t see many more ShaRon’s getting the opportunity to buy 800K McCrapperboxes while making 10/hour. Just ain’t going to happen anymore.
“…better have 200-250K for a down and better be making close to 250-300K a year.”
There can’t be enough of these folks around to prop up prices, especially when you weigh in the fact that most folks who earn $250K+/year are fairly well informed and unlikely to be interested in catching a falling knife.
Yeah, but those $900k houses are likely going to cost about $400k by the time this all shakes out. Those of us with $100k cash set aside and decent incomes will be sitting pretty when that happens!
I agree with OCDan. No way is this bubble reinflated anytime soon. The bottom of the barrel has been scaped, there’s noting but a hole there now.
“Subprime is dead and that def. means anyone looking to buy a 900K home better have 200-250K for a down and better be making close to 250-300K a year.”
In the Bay Area, “starter homes” in some areas are $800K+. This will effectively shut down first time buyers.
Speaking from the bay area, “starter homes at 800K” is going to be a nice memory in but a few months. Inventory is increasing, virtually few sales are happening, and those that do are happening with 10-15% haircuts from their wishing prices. Everywhere I look (downtown SF, Oakland/Berkeley area, etc) Condos are going up too. 800k starter houses — in everywhere but a few blocks in Palo Alto as they have the wages for now to support this — are gone gone gone.
You’re dead on about the condos. We like to play “count the cranes” when we drive through downtown SF on 101. My son got 20 the other day. Fewer cranes in Oakland/Berkeley, but small to midsize condo projects going up absolutely everywhere.
“American homeowners may take heart from the experiences of two other once-booming markets: Australia’s and Britain’s”
Complete bullshit. Britain went through a meltdown in the early 1990’s and will soon do so again. But it’s NOTHING like what has gone on here.
What, 1 trillion in crummy loans leveraged X 10 or 20 with derivatives….
Let’s be totally honest here. This market is Fu.ked! We just have to keep our heads down. For how long, who knows?
Britain is different, because land IS scarce and there was not so much new building going on during the appreciation as in the US. Britain did see, however, large depreciation in the beginning of the nineties. Australia has enough land, like the US, but Perth and Darwin in Australia were different (like Calgary in Canada), because they profited from booming commodity prices - where are commodity prices now? Give it time, and housing will come down.
“The combined effect will be a market where the ‘bid’ and ‘ask’ price spread will widen considerably. As the sellers bleed cash every month — buyer’s negotiating power will strengthen.”
Your post states the situation very clearly. What I believe will be different this time is that there are relatively more weak hands in the owner pool who will not be able to ride out the bust. If there is a mile-wide gap between bid and asked prices, the weak hands will have to either yield to the bid or hand the keys over to the bank. And the bank will sell by auction, which automatically finds the bid. The bid prices will prevail in reconciling the vast gulf between bid- and asked- prices.
What’s that jingling sound I hear?
It ain’t Santa!
Got 10% down?
slightly wrong about that central banker… they will want to clear books yes but they will have more leaway to manipulate the transaction due to easing of standards for banks in regard to real estate that passed recently either last year or a year before.
thats basicaly means some banks that are very skrewd will foreclose on 700k house sell it back to original owners for 400k and finance the transaction (where the people could pay the lower mrtg) yes they will lock them up with penalties and disincentive to refi etc… after these banks fail the gov’t will clear their balance sh$!ts at pennies on the dollar…
Your co-worker is probably right. The bank will take the 300K+ hit. These turkeys will just take a credit hit, and any holding cost, and walk away if they can’t take the interest rate reset.
It got insane on the way up, and it’s going to get insane on the way down!! A 300K lost will become a dream housing bottom when all this is said and done.
Right. There are many FBs, but there are also many FLs (Lenders).
Like they have any say in the matter!
“prices will not go down because people are not going to take a $300,000 hit.”
What will happen is that people will go into foreclosure, the bank will get ownership of the houses and well them for the $300K hit to salvage what they can from the situation. That will lower comps and if people want to sell, like when they have to move or they can’t make the payments, they WILL take a $300K hit ! Just watch !
The New York Times is becoming unglued
over NEW’s meltdown….
News Analysis
Crisis Looms in Mortgages
On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor home buyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.
Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential home buyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market.
http://www.nytimes.com/2007/03/11/business/11mortgage.html?hp=&pagewanted=all
If NEW goes BK I will finally go out & get an oversize box of Pop Corn he he he
“As loan standards tighten for sub-prime and Alt-A borrowers, as many as 1.1 million people could be closed out of the housing market this year, said Dale Westhoff, head of mortgage-backed securities research at brokerage Bear Stearns.”
I have been reading and writing about the housing bubble on this blog for a couple of years now, and I am dismayed to discover that I, too, am in a state of shocked denial about the likely effect of subprime lending on California housing prices. The rational side of my brain says that prices will have to come down by a lot to reflect the loss of the subprime bid, but the irrational side (abetted by my wife’s observation this morning that “prices are still crazy”) can’t quite get used to the idea.
GS, do you think it is possible, despite all the fundamentals pointing down, that prices wil stay high for a long time? I only ask because it seems that while FBs can walk way, I don’t think banks will be able to sell for dimes on the dollar. I know we all believe someone is going to get left holding the bag, but this may take awhile. I also suspect that some FBS may have been smart and have some HELOLC reserved to make ends meet for another year. On a side note, I noticed a house in Rancho Sata Margarita going for 465K. I don’t know if concrete has been poured down the pipes or what, since I was reading over someone’s shoulder. However, mid 400s in South OC is unheard of, unless you remember pre-bubble days.
“I also suspect that some FBS may have been smart and have some HELOC reserved to make ends meet for another year.”
The issue really isn’t whether some FBs played it smart and kept something on reserve to hold them through a potential seven lean year period. It is really more about how many FBs did not play it smart, and put themselves into a situation where they do not have the staying power to wait out the bust. I am guessing the number in the latter situation is considerably higher than in previous housing market downturns, based on
1) News stories about foreclosures rising at exponential rates in all parts of the country;
2) The huge surge in subprime and alt-A financings with exotic loans over the post-2004 period;
3) Stories we have seen on how many exotic loans are going to reset over the next couple of years;
4) The collapse of the subprime lending sector over the past 2 1/2 months, which should give rational observers cause to believe that home sale prices will soon drop in response;
5) Stories about investors in recent years purchasing multiple flip houses.
The list goes on. To summarize my point, the number of listings normally falls in a housing bust, as nobody wants to lose money by selling when prices have dropped, but I am predicting that this time there will be more owners in a position where they have to sell whether they like it or not, which will create more of a fire-sale inventory pyre than in other busts over the past 50 years. I also don’t expect banks to waste much time holding on to REO while prices are moving against them. So while the adjustment process is likely to be slow, the price trend is headed down for the foreseeable future IMO.
GS, this may be slightly OT, but what’s your take on higher-end (1,000,000+) housing in SoCal? How much will the sub-prime implosion affect prices higher up on the foodchain? Someone I know just bought a $2.5 mil place in SD. Tried to tell them to wait, but that never works, it seems.
Can I humbly add:
6) The amount of jobs that were created by this bubble in the first place that are about to shrivel up like George Costanza after a cold shower.
I would say what you definition of soon is. The banks will take a while to get organized on the flood of REO properties. They will be adjusting reserves and determining exposure.
They are the guys that are pretty good at math so will probably not panic and find another wave of knife catchers. At least they will try.
I think you have to look at a model of holding cost and track how fast the values are trending downward. Other banks will get wrapped up in how to handle the losses (big in 07 or 08).
A lot of them will not write down the properties but make sure they secure their own personal money and bonuses before the big losses on the sale.
The forclosures and resets will start coming in waves. There might be a liquidity injection to slow things down. Some legislation as well.
This will go forward for at least this year and will not get to the bottom till 2011. People will be shaking out and their reserves depleing for a while. Many realizing they will not be able to get into a nice house for at least 7-8 more years.
A small case in point to support your theory about there being more properties for sale during this bust.
In Carpinteria, Ca, population 15,000 there were 3 condos total sold in January and February. There are currently 46 condos for sale in Carp, with more being added every week. At current sales volume, there is a 30 month supply of condos. By June my forecast is a 40 month supply.
Oh but surely the bad weather in Santa Barbara County must be to blame for the lack of sales!
OC:
I’ll answer you question but I’m not GS!
Cali RE will go down. It has before (late 80’s early 90’s) and it will again. RE is cyclic. Always has been. The only debate in my mind is BY HOW MUCH. Here my crystal ball is fuzzy.
For the life of me, when I think of every homeowner that I know in California (and I know a lot) I can only think of maybe 5% tops that can truly “afford” their home. (based if by nothing else by asking them the simple questions “can you afford your house at today’s prices”)
My working class friends stretched up to 11x their income to get into the house. I have one who now abandoned his SD house to go to SF. I have 2 other friends in pre-foreclosure.
My many upper middle class friends who are homeonwers (combined incomes of 90-180k/yr) all stretched to get into a nicer neighborhood, because they are “professionals” and why buy in the hood. Thus, they too had to buy homes in the 8x income range to make it. ($800-1.5 million). But again, they’re stretched. They can make the payments… barely. But in the future they now have to ask “what if we have kids?”. Because this would decrease the wife’s salary. So they can BARELY afford their homes.
My well off friends can make their payments (those making $300k and above) but even then they lament at what they own and how much they have to pay for it.
If you knock out the first time buyer and the loose lending, it all falls down.
California will likely always have some sort of premium over places like the midwest. But the premium is too high for what CA is ‘worth’. It will thus fall. I personally think a 30% correction in many parts of “desirable” CA is not out of the question. And up to 50% in the hellhole places like the inland empire, where nobody really wants to live anyway. Places like Chico will be like Detroit is now.
“can you afford your house at today’s prices”
No, but so what? I paid about 1/4 of its current market value. At least so far, with very little inventory here, it doesn’t matter; sales occur within a week of listing.
But I see what you mean for the long run. Unless my heirs want to keep the house, it will be sold, and then who can afford it? Actually, I wouldn’t mind a 30% correction, since my kids would be better able to buy here. And if I want to help them buy, my cash will go that much further.
But SFBay,
that is my point. Hardly anybody can afford to “rebuy” their current house. which means the pool of true buyers is very low in number.
In many crack neighborhoods you have prices so high that even a double income professional couple can barely afford to buy there. That’s insane.
Case in point (if you’re from SF): the Mission. when I left SF, we made more than 95% of people in the US. And I couldn’t even afford a condo in the MISSION for god’s sake (without suicide financing)! Don’t even get me started about Duboce Triangle or Noe Valley.
now people are trying to sell the idea that Potrero Hill and Mission are desireable? Please, when I was growing up they were practically the hood (or at least working class at best)
Noe valley used to be working/middle class. Now it’s conisdered “rich”. Noe valley? huh?
And places like the Marina or Pacific Heights are unreachable to all but the truly rich.
San Franciscans make good money. But not that good of money. In the end, San Franciscans NEED bigtime financing to ‘afford’ these places. As financing dries up, SF will tank, just like it did in the late 80’s (where my childhood home lost about 15% of it’s value)
SF got a little ahead of itself. It will fall only because there is nobody who can buy anymore.
Inspector, I was just playing devil’s advocate. I lived in SF proper as a young teen, and didn’t enjoy it much. Then in ‘98-99 I worked at the foot of Potrero Hill (for a dot.com) and witnessed the yuppification. It does seem insane…
But my point is that if the current residents who can afford to stay want to stay, then prices may stay high, but turnover will drop way off. This is happening in my part of the Peninsula, where the housing per se is merely middle class, but the amenities are great. To put it bluntly, it will be interesting to see what happens when the long-term owners die off.
I agree that many many people will want to stay in the hugely appreciated slum-house-that-is-now-desirable in the SF Bay Area. THat said, 1) People move/get transferred, 2) Many many people have been living off of HELOC draws, and 3) A HUGE amount of supply is coming on the market with all the condos being built EVERYWHERE.
Some teacher who got lucky and bought their 200K house in the mission in 1988 is now sitting on a million dollar property right now. I agree. But as more and more stories come out about “housing collapsing” and, what comps there are (most likely from busted condo deals being dumped on the market en masse), this teacher WILL sell try to sell. Property owners in the Bay Area have baked the “property always goes up here” in both their DNA and in their retirement planning. They will sell for what they can once prices start collapsing.
Property owners in the Bay Area have baked the “property always goes up here” in both their DNA and in their retirement planning.
True of some, but not of all. A lot of us are happily retiring or downshifting early while staying. Our retirement planning focused on curbing our spending and investing wisely so we could continue to live here if we chose to. But I’m not talking about the Mission.
Hey Chico is a pretty nice college town,
You mean Chino? In any case, I agree with you crystal ball gazing. Yes, California will be more expensive than, say Iowa, but I do not think the entire state it can persist at 5x the price of other decent places. First time homebuyers and others of moderate means will go elsewhere.
chico, chino… sorry, not from SoCal so I confuse them.
but still, why is Chico even expensive? College town… hmmm.. ok… let’s do the math… ok… add a little here… carry the 1…
Ok cool, Chico should cost around $200,000.
(joke)
Chino?!! Chino is a smelly, dairy town next to Corona in the greater Los Angeles metro area. We went house hunting there a few years ago and the stench in the 400k housing projects was nauseating. Maybe that’s changed but I was always amazed that people would buy houses there with that smell.
“noticed a house in Rancho Sata Margarita going for 465K”
I track recent trends in My little corner of LA County(Long Beach) and it looks like the immigrants(And others) still gobbling up and overpaying for POS homes in LA cesspool hood areas using IMHO the last available toxic subprime loan products available up to end OF February.
A few signs of reduced sold prices in SFH’s in the better areas but majority of prices still idiotic. Already saw a few SFH’s-1300-1700 sq ft, 3/2’s on 5000-7000+lots, pre-and-post WWII built, in decent stable areas of LB/lkwd- going for mid-$400,000’s. Cannot vouch for condition of these properties but judging by the areas(LB zips 90808,90815,90807/lkwd 90712,90713-all stable solid middle class areas), this shows some downward pressure on prices for middle-lower middle class relatively stable older sfh neighborhoods of LA County.
Sounds like 465K for that SOC rcho SMargarita home not a fluke!
one day things just change….
Yep. That happened way back in 1638 when tulip bulbs turned to onions. No Bid. it was crystallization or precipitation. Everyone seemed to wake up at the same time on the same day and all the “wealth” evaporated. Actually not quite true as it took a few months for all of that to precipitate and what i think one can see from all the stock market stuff and even the postings on Ben’s blog here that even the most bearish are for the most part in denial in that quite a few think that the “correction” will be 20% or 30% or so yet in reality perhaps even 50% which makes more sense but may be not believable. Imho the tide has turned in spades and Ground Zero is the (Global) Illiquid Real Estate market and more likely than not the collpase will be utter and total. Of course the Powers That Be will try to do everything and anything to prevent this so one ought to watch and wait and see if they are “All Hat and No Cattle” or whether or not they can deliver the goods. A real sniff of fear and deflation showed on the Friday close in gold and oil imho that implies that delevering is taking place and losses are being realized not only in real estate but in other cash markets.
Yep, deflation here we come. Not only are there inventory overhangs in housing and autos, but there’s global overcapacity in manufacturing. But hey, if you’ve got cash, then a 50% correction is a buying opportunity.
The disconnect between pricing and affordability is unimaginable.
FBs sell who buys?
how long can banks hold empty RE?
According to zillow.com prices still holding up nicely.
Hmmm…
Not in San Diego, baby.
2007 is going to suck. ™
-Rent
Funny to find yourself in denial, isn’t it? We still live in this crazy world, and are therefore somewhat “anchored” by the common wisdom.
Remember the guy who flew that MIG-25 to Japan? He knew TASS, Pravda, etc. were total propaganda, yet he still found it hard to believe Americans owned multiple cars and stocked supermarkets because the propaganda still framed his thinking.
Not me. Everything’s going down hard, SoCal among the hardest. Whatever you’re thinking now, it’ll be worse.
Hope he didn’t buy in Japan. Probably owns two houses in Spokane, WA.
I have seen some of the biggest names in the global banking business, including HSBC, Morgan Stanley, Credit Suisse, Citigroup, etc. mentioned in recent news stories as sources of funds for subprime loans. Does anyone else find it rather distasteful for international banking behemoths to funnel wealthy investors’ money into the hands of marginally qualified households, who are thereby enabled to buy homes they cannot actually afford with a future foreclosure pretty much “in the bag?” I am quite certain the situation would make Ebenezer Scrooge blush.
To make the situation even uglier, I am guessing that people of color were disproportionately targetted for the subprime koolaid; does anyone know of statistics on what percent of subprime borrowers were black or hispanic?
Will Democratic politicians connect the dots and make political hay out of this unpleasant situation over the next couple of years? One can only hope…
The GSEs Freddie and Fannie are under mandates to increase minority home ownership. That’s done by lowering lending standards and ‘creative financing’. That’s the way it has to be.
The net effect of it was to skyrocket housing prices. Now that the tide is receding, the same people who were charging racism because not enough minorities could buy houses are charging racism because too many minorities bought houses.
“That’s the way it has to be.”
This sounds like nonsense and propaganda. In the early 1990s, there was a documented problem of redlining, which meant minority borrowers of comparable credit ratings were getting their mortgage applications turned down at a higher rate than white applicants. The law requires that borrowers of equal credit quality are treated fairly without regard to race, creed or color.
I have never heard of a government “mandate” to increase the number of minority homeowners (regardless of whether they are qualified) until your post, but I would be interested in whatever evidence you can produce to substantiate your assertion.
Equal Opportunity Foreclosures - This policy will end up only hurting those it was intended to help. This is the problem with one sided thinking. Lower standards so minorities qualify, rather than helping minorities qualify by raising their standards. Ultimately, the policies only got these individuals into a whol eheap of trouble, and will cost everyone big time.
Yep — in the same vein, it would make me reluctant to see a minority physician; not because I am racist or because they aren’t necessarily qualified, but because if the standards were lowered for them, explicitly or more likely implicitly, that is just hurting them in the long run.
I grew up in NYC in the 70’s. I remember the police force was predominantly white with very few minorities, all male, and very tall. Now you will see in uniform a minority lady officer in uniform that is both very short and very obese.
I am all for hiring more minorities to have the force have a better representative sampling of the population (including women), but this is not, IMO, how to do it.
I have been away from NYC for quite a while now, so I do not know what mayor is responsible for screwing up the NYPD like this. How do you now fix it? It is virtually impossible.
I worked for many years as a career employee of the USPS and I have witnessed what happens to the obese in the USPS who work in the P&DC’s; they eventually wind up on “light duty” due to health reasons. In other words, these people are essentially worthless to the organization, yet they get a paycheck and health benefits and retirement benefits like anybody else. (All they have to do is simply show up for work.) This may be what will happen to the short obese minority officers of the NYPD. Either that, or they will be promoted out of any work that requires walking a beat.
What I also find so troubling about these very short and obese police officers in uniform is that foreigners will see this; what will they think about us?
Got 10% down?
Stucco,
re “I have never heard of a government “mandate” to increase the number of minority homeowners…”
Sure you have, it’s been posted here several times. From George W…
“The American Dream Downpayment Act of 2003 is helping thousands of low to moderate income and minority families with downpayment and closing costs, which represent the greatest barrier to homeownership. Since 2002, when I announced our goal to help 5.5 million minorities become homeowners by the end of this decade, the rate of minority homeownership has climbed above 50 percent, and more than 2.5 million minority families have become new homeowners. My Administration will continue to provide counseling and assistance for new homebuyers and expand homeownership opportunities for all Americans.”
http://www.whitehouse.gov/news/releases/2006/05/20060524-6.html
I am of Asian descent. Do I qualify or am I the wrong type of minority?
“My Administration will continue to provide counseling and assistance for new homebuyers….”
Is he talking about all the BK counselors designed to “assist” with the new BK rules?
HUD’s “Minority Homeownership Initiatives”
http://www.hud.gov/offices/fheo/lending/minorityhome.cfm
I agree with GS. When I was working on RE appraisal research in the mid 90s, one of the good sources of information was the Mac and Mae’s fair housing data bases. There was obviously a lot of redlining, at least in the cities I looked at (minorities in the same economic position were getting turned down more than non-minorities). The recourse was to threaten the banks to end discriminatory practices, as far as I know there were no programs that actually gave minority buyers any kind of advantage. I even got to hear RE researchers arguing that ‘Black people like living in poor neighborhoods’. Not in public, though… >(
unfortunately, its not just wealthy investors whose money is funneled into subprime lending - a lot of it is common man’s money. eg 401k’s which get invested thru mutual funds into such companies or fanie may etc which may get bailed out using tax payers money or pension funds such as Calpers which invest via hedge funds into these deals. If there’s huge correction in housing Fed will cut rates, dollar will fall even more and nominal prices decline will be cushioned. savers and wage earners will get screwed because they are holding depreciating dollars. only protection is to move out of dollar.
On that note, thanks Ben for the link to Everbank, I bought some Swiss Francs, made a little money, and feel better about having sort of an insurance policy against all this madness.
“Will Democratic politicians connect the dots and make political hay out of this unpleasant situation over the next couple of years?”
GS I think the Dems have been in favor of looser credit standards to allow minorities and working class folks a chance to buy a house. Wasn’t the redlining issue from their camp?
Warm Climes,
stop trying to blame democrats for a Bush/Republican foul-up. As posted above, from George W…
“The American Dream Downpayment Act of 2003 is helping thousands of low to moderate income and minority families with downpayment and closing costs, which represent the greatest barrier to homeownership. Since 2002, when I announced our goal to help 5.5 million minorities become homeowners by the end of this decade, the rate of minority homeownership has climbed above 50 percent, and more than 2.5 million minority families have become new homeowners. My Administration will continue to provide counseling and assistance for new homebuyers and expand homeownership opportunities for all Americans.”
http://www.whitehouse.gov/news/releases/2006/05/20060524-6.html
I take it you and Gradma Hillary are opposed to this?
Republicrats will bail out the FL’s while Democans will bail out the FB’s. Responsible middle-class taxpayers get the bag of manure
Woo hoo! The American Dream Downpayment Initiative. It is a scheme to help low-income households make downpayment. It pays, at most, about 6% of the house price, mostly for the downpayment. The net result was to help more poor people get in over their heads. It is not a minority program- one is eligible if they are under 80% of median income and are first-time house buyers. The money was run through the states, not directly from the feds. A good chunk of the money was reserved for housing rehabilitation (i.e. lead paint removal, etc). I would not characterize it as a minority housing program.
bet on it
the new squat to pee GOP will tag along too
Well, well, well. Ben, very nice article. So much to say about this topice, esp. living in South OC Klowniforhkneea.
First, what they h3ll is anyone doing lending 700K with nothing down? Oops, I forgot, this is a bubble.
Second, why is anyone taking on more then 4K a month, bet its higher and she is being conservative, so as not to be too embarassed. Hey, I say you’re already telling 4K, be honest and let us know that is is really 5K when you add in everything else.
Third, READ THE DOCUMENTS AND UNDERSTAND WHERE THAT ARM MIGHT ADJUST TO. Yeah, that 6K payment just blindsided me. Never saw that one coming. PULEASE! For easy math, let’s say the loan was 720K, divide that by 360 month (30 years) and you would still be paing 2K a month just for the loan, IF THERE WAS NO INTEREST EVER ON THAT SAID LOAN! Now, figure that you pay 3 times on house over 30 years. Take that 2K and multiply by 3. What do you get. In bubblicious world $750 payments. In real world of banksters you get 6K A FREAKIN’ MONTH!
I know we have all had our opinions on every aspect of this blog, but it never fails me that buyers can’t get there mathematicall-challenged brains around mortgage payments. I just did a simple calculation above, no amoritization with mortgage or anything dificult like that. Does no one, but us here and a few others, take any time anymore to figure ’stuff out? These mathletes are unfreakin’believable!
WHEN YOU SEE GREENLIGHT SAYING GET A 300k MORTGAGE FOR $450 A MONTH, RUN. RUN AS FAST AS YOU CAN AWAY FROM THIS CRAP. Anyone with half a brain cell, let alone a brain can see this will never be paid off at that rate. Something else has to be in the loan.
Alas, articles like this are going to get more and more common, eventually we may even read or know about people in this situation. Unfortunately, there are some simple solutions, like mailing in the keys. However, there are NO PAINLESS solutions for these FBs. They are ‘gonna pay for a long time.
Nice rant!
Yes, money is always tight around our house with just one outside income, a mortgage, and a young child. My wife, usually canny as a Brooklyn bookie, brings me one of these “200k MORTGAGE FOR $650 A MONTH” junk mail offers and asks me if maybe it would be good for “right now.” I finally had to take her to an online calculator and show her that the best we could hope to find and pay off sustainably is $200k at 5% on a 30 yr. fixed = ~$1100/mo. Add taxes and insurance you get ~$1300/mo. Anything cheaper is too good to be true.
“However, there are NO PAINLESS solutions for these FBs.”
Sure there are. Down a couple of gallons of whiskey through the ol’ college beer bong. You should be unconscious before long - with heart stopped not long after that.
2007 is going to suck. ™
-Rent
“‘I wasn’t completely aware of the mortgage terms but I knew it would adjust in two years,’ she said.”
Why bother reading and researching. I mean, you’re only borrowing about THREE-QUARTERS OF A MILLION DOLLARS
SOS… didn’t matter, she was gonna get rich.
7 Years ago today, Nasdaq peaked at just over 5000. Two years later, it bottomed out at just under 1200 — loosing more than 75% of its value.
As we now see the other side of the housing bubble, I try to remember my thoughts and feelings from March of 2000 to September of 2002. The grind down was shocking and awful.
The grind down from the peak of the housing bubble isn’t going to be any better. We’re going to see the fraud exposed, we’re going to see risk borrowers bounced on their rear ends, we’re going to see experts stating how shocked they are by the sudden turn in the market, we’re going to see smug i-told-yous on tv. We’ll see innocent people who truly believed that they would be priced out forever stuck in financial hell or bankrupt.
It will not be pretty.
innocent people who truly believed that they would be priced out forever
I was about to say that at least people will never fall for that line again, but then again they fell for it THIS time after it was proved to be false just 15 years ago. He who ignores history is doomed to repeat it, etc.
I like the reference to Santayana. As an historian, that is my favorite quote.
W. Buffett: “What we learn from history is that people don’t learn from history.”
Well — it has been said that if humans could learn from anothers (or their own) mistakes, their would be only one child.
Unfortunately, history shows us that people ignore history all the time.
again and again
They were getting priced out because they could feel our currency was losing it’s value as in comparison to housing. The dollar does not have an absolute value of one. It has an ever depreciating value. It may even rise in the short term but as long as the growth of money outpaces goods and services it will continue to depreciate.
“Even some borrowers already in the pipeline are being rejected. ‘You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,’ said Philip X. Tirone, a senior loan officer with United Pacific Mortgage in West Los Angeles.”
Are big investment banks immune to political and economic fallout? I would guess not, because it sounds as though the lending kingpins are getting a collective case of cold feet.
“‘Fraud against lenders is a growing problem that hurts everyone throughout the mortgage process, from the lenders themselves through the brokers and appraisers to the consumers and the communities we invest in,’ bankers association Chairman John M. Robbins said at the National Fraud Issues Conference, which ends today at the Omni San Diego Hotel”
John M. Robbins……….it was you and your “bankster” mates that set this whole thing up……..the day of reckoning has arrived.
Amen. Too bad nobody will be able to collect their “upfront” commissions/fees for all of these “good” loans as the smart insiders had the foresight and time to plan for this sting.
Stupid rich people who never deserved the money they have (inherited, luck etc) are losing it in mortgage investments. That’s a good thing.
I think this is worth a read……….
http://www.nytimes.com/2007/03/11/business/11mortgage.html?ei=5089&en=ed57267facea4636&ex=1331269200&partner=rssyahoo&emc=rss&pagewanted=print
Oh my goodness.
ndprices will not go down because people are not going to take a $300,000 hit.
And didn’t a few people stay in New Orleans and think Katrina wouldn’t get them? Look at the results. (Wilma, Rita, and what other storms. An earthquake isn’t going to get me either. I refuse to let my home fall down.
‘
More than a few, way more than a few.
ndprices will not go down because people are not going to take a $300,000 hit.
And didn’t a few people stay in New Orleans and think Katrina wouldn’t get them? Look at the results. (Wilma, Rita, and what other storms. An earthquake isn’t going to get me either. I refuse to let my home fall down.
‘
ndprices will not go down because people are not going to take a $300,000 hit.
And didn’t a few people stay in New Orleans and think Katrina wouldn’t get them? Look at the results. (Wilma, Rita, and what other storms. An earthquake isn’t going to get me either. I refuse to let my home fall down.
‘
I know of a SFH in Chantilly, Fairfax County, VA, close to the Dulles Airport. Zillow shows current estimate as approx $540K. The owner has already listed it at $500K and it is not selling–he told me he would accept an offer close to $450K. This was appraised in 2006 at $650K. Although in this case the owner didn’t buy it at the peak, for all practical purposes the house has already taken a $200K haircut from the bubble peak.
And another townhouse in Oakton, VA, sold for $770K in 2005. Now REO owned, not selling at $600K. Zillow shows the value falling steadily below $600K by $18–20K/month so the home will almost certainly not be sold for more than $550K. That is a $220 K haircut. If that can happen in NoVA, why not $300K in California?
I know nearly all sellers are still in denial, but it is just a matter of time before they panic and start cutting prices. The trigger will come when the subprime mortage troubles spread and there is suddenly a glut of foreclosures– the trigger will be in the second half of this year, but a bottom will come only by the second half of 2008 or later. As Dean Baker says, in ‘real’ terms, the bubble peak will never come back for the next several decades.
Does anyone know about the algorithm Zillow uses? A constant problem with comp appraisal is that it is based on sales in the past. So, in a falling market the comps tend to tack too high. If the rate of sales slows, the algorithm might have to go further back in time to get enough comps, which would further inflate prices.
In terms of the housing bubble and those schrills in the MSM and those who think this thing has bottomed I would remind them of a “Winston Churchill” quote……..
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
That’s a great quote and quite applicable. Trying to pick a bottom is just as hard as picking a top, but a lot more dangerous. Thinking of the dynamics of the situation, people like Ms. Lewis will hang on as long as possible before foreclosure. I don’t live in California, so I don’t know the exact amount of days between N.O.D. and a property ultimately becoming “real estate owned”, but it’s not an insignificant amount of time. All these FB’s must go through the process for the market to become saturated with REO’s. Once the market is saturated, the race to the bottom can begin. When these REO’s start to catch a bid sometime in the future, then talk of a bottom would be prudent. People a lot smarter than I are predicting a rate cut by the Fed sometime this year to try and reinflate this mess, however it might be unwise to buy into that possible rally. This was the greatest bubble in the history of the planet bar none, time is on our side.
A rate cut, at this point, is like a bandaid on an amputation. Useless. The fundamental problem is the price of the house. I would rather purchase a $200k house at a higher interest rate, than a $500k house at an all time low rate. You cannot lower the principle, but you can refinance the rate.
True, BB. And thank you for your take on Somersett in Reno. Which leads me to think that you might even be understating your case, since it’s not just the price, but the sheer number of houses on the market. Looking at the swath from Sacramento to Reno, I wonder if all the available housing could be occupied, by anyone, unless rents fell a lot.
Plus, the lower the price the easier it is to pay down bigger % chunks of the principal (to save on interest) with one time injections of cash.
Not sure if this was posted. Very interesting regarding subprime implosion. (I hope the link works.)
Wall Street Journal: SUBPRIME MELTDOWN
BayQT~
Amazingly, this is probably what is going to finish off Bush. Not the Iraq debacle, or the Katrina debacle, or the dismantling of the Constitution, or Walter Reed or any of that.
It’ll be the housing crash, because “It’s the economy, stupid!” Now, if there had been some sex scandal, that would finish him off, too. Sex or money, that’s what it takes, these days.
> Amazingly, this is probably what is going to finish off Bush.
Yeah, there’s no way he is going to be re-elected now.
This astounds me. From the NYT story:
In a recent presentation to investors, UBS Securities discussed the potential for losses among some mortgage securities in a variety of housing markets. None of the models showed flat or falling home prices, however.
Are they a bunch of monkeys sitting in a circle counting bananas? Do they hire their quants from DeVry? And people pay premium rates for this “research” while watching the top muckety mucks at these firms make million dollar bonuses?
and this is where the sheetz hitz da fan
Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.
“How these things are valued for portfolio purposes is exposed to management judgment, which is potentially arbitrary,” Mr. Rosner said.
and this is why I said on Friday that I believe there will be an attempt to keep NEW alive.
The profits from packaging these securities and trading them for customers and their own accounts have been phenomenal. At Lehman Brothers, for example, mortgage-related businesses contributed directly to record revenue and income over the last three years.
…and that the ratings services have a vested interest in keeping this monster on a ventilator. that was new to me.
“Are they a bunch of monkeys sitting in a circle counting bananas? Do they hire their quants from DeVry?”
Thats funny ! I totally agree.
Oh, they’re sitting around in a circle alright, but they’re doing something a little different with their “bananas”.
So, you guys who keep asking me if it’s time to buy puts on subprime lenders and HB, no, try THIS
Lehman
Goldman Sachs
Morgan Stanley
UBS
Dere’s your put candidates!
and here’s why. Great article! Thanks for posting it~
Interestingly, accounting conventions in mortgage securities require an investor to mark his holdings to market only when they get downgraded. So investors may be assigning higher values to their positions than they would receive if they had to go into the market and find a buyer. That delays the reckoning, some analysts say.
“There are delayed triggers in many of these investment vehicles and that is delaying the recognition of losses,” Charles Peabody, founder of Portales Partners, an independent research boutique in New York, said. “I do think the unwind is just starting. The moment of truth is not yet here.”
tx- you’re a one woman thread ;o)
Txchick or anyone,
I was talking to my friend who works as an economist at Lloyds of London, about the possible implosion of some of the market big boys. He said if it did happen, it would be hard for the govt to bail them out based on the earnings over several years and the huge losses. He thought the crisis would lead to investigations the likes that Congress has never seen, even if Congress wanted to bail them out it would still be a financial mess of 1929 magnitude and would drive the implosions further. He also believe that any tinkering by the FED lead to save them will lead to a financial meltdown. His basic belief is the FED is back into a corner and has to do the right thing sooner or be written off after the crisis.
I was surprised to hear such doom and gloom from him, right now his bets are on a short depression. He did have a clue how to resolve a defunct BigBoy or the impact it would have across Wall Street besides that Wall Street would be in the dumps before it happened.
What is your take? Is it possible and what happens to all the Big Boys devalued assets?
http://www.markit.com/information/affiliations/abx
“Lehman
Goldman Sachs
Morgan Stanley
UBS”
I though this was the FED? (of course not all the owners..)
Being rather conservative by nature, I don’t attempt to “Beat the House”…. Good Luck
I thought that everyone would have their losses hedges with loan guarantees. The loan guarantee people will be getting killed, if anyone. And how can you bail out someone that guarantees a loan ? They KNOWINGLY took that risk !
What about JPM? What’s their stake in this?
I already took the plunge and bought puts on Goldman against advice from experienced people. However, it’s obvious to me that the experienced people are totally wrong about the current situation. In fact, I now think the entire elite of this country are incompetent morons and that there is truly no one at the helm of the U.S of A.
We’re finished. All that’s left is 10 years from now to pick up the pieces and forge something new. Our decadence has finally doomed us.
I see mortgage free home ownership in my future. Thanks for the article. I was geting ansy and starting to look at property again. I’ll just wait a few more years. Sorry sellers…
Devestment : The ‘Punksatony Phil’ of the HBB.
It’s gonna look like the Land of OZ around here with Falling Houses Crushing People…RUN for your Life Toto…Here COMES another ONE !!!!
“Now, sub-prime loans made just last year, many of them for the full value of the homes and without proof of borrowers’ incomes, are going into default at a record pace.”
Positively shocking. Who would have ever guessed?
Lets be conservative and estimate the current value of the average Los Angeles house is 500,000 (see Trulia.com http://www.trulia.com/real_estate/Los_Angeles-California/ )
Let’s guess there are 1,000,000 houses in Los Angeles.
Let’s assume a 50% loss of value before the crash is finished. That would be 250,000 per house.
250,000 times 1,000,000 is 250,000,000,000 or 250 Trillion Dollars of value lost.
Does anyone have any idea what the loss of that much value does to a nation’s economy?
And keep in mind, this is just Los Angeles. The outlooks for San Franciso and New York are probably much worse.
Any questions?
Oops. 250 billion. Sorry, I lost track of zeros. Well you try it then.
I think that’s 250 billion, not trillion.
I’m not sure I agree with your premises (1 million houses in L.A., 50% drop in value), and I think your math is off, but I don’t doubt that if the perceived value of all of the residential real estate in America dropped, say, 20%, it would bring the economy to its knees.
If everything gained is lost (and IMO it will be) then the national hit will be well over $4T. As I’ve said before, “Too Big to Bail”.
that loss of value is NOT a loss of wealth, on the macro scale (the individuals who paid money only to go ‘underwater’ are a different story).
Another 8.0, race riots, Hiroshima-type event . . . that is how wealth is actually destroyed.
I’m tired of feeling like we need to protect people from themselves, and it’s our fault if we don’t do it well enough, and all the while people are screaming at us (in languages we don’t understand) that we should be minding our own business. Business is business, we have had so many examples of greed at the top that I am sure I am not the only one who is not even surprised that the lenders have dug themselves into a hole that they thought would be lined with gold. And I think the term ’sheeple’ is so appropriate…remember these are the people who would spend money on pet rocks, and will pay $100 a pop to have their name on an internet virtual bar for an hour, and they just gotta have those hummers. I feel bad about collateral damage, but guess what, I’ve been the innocent victim of collateral damage in my lifetime, too. I feel REALLY bad that right now my kids can’t afford to buy a house to live near me; maybe next year they will!
as someone else on this blog would say, ‘rant off’.
How can Screwed Buyers be bailed out? I really don’t see it.
1) Mortgage payment moratorium? You think the creditors who have the big money are going to let the gubmint do that?
2) Lower interest rates drastically? So what? The houses are losing value. You can’t refinance a dump that is worth less than when you bought it no matter what the interest rate. Lowering the interest rate will also hasten flight from the U.S. dollar as a value investment. China will dump it’s 1 trillion dollars as fast as it can into better deals.
No matter what you do, the profits were extracted by the brokers. The underwriters are left holding the bag and the home owners are going to be evicted. If you are a foreign or domestic investor in mortgages, you are screwed too. And you are also stupid and I have no sympathy. You are too stupid to be trusted with your own money. That’s OK. If you had enough extra cash to be investing in bullshit, I’m glad your money is getting redistributed to someone else who might use it more wisely.
Already realtors are sending me bank owned property, 1/3 off deals (Los Angeles). Ha! No way. I’m waiting for at least 2/3 off and more if they are that desperate already.
I think these people are royally screwed and there’s no saving them. Thanks for inflating the prices of houses so I had to wait to upgrade. I’m going to be only too happy to have the sheriff evict your greedy, stupid ass into the snow along with your latte machine, your Abercrombi & Fitch wardrobe and your spoiled kids. A lot of good their Heelys will do in the snow.
Risk finally showed up at the party, and he just smashed the punch bowl.
He’s so late that some thought he wasn’t coming at all, but he’s here drunk and mean and ready to kick some a$$.
You could also just own puts on the broker/dealer index (^XBD). Probably more conservative. Yeah I’m sure GS and Lehman are cooking up ways to make more money, probably in this subprime garbage but it you think it will fail and a large scale disaster is upon us, they have a lot more air under their stock prices than the HB or subprime lenders. As always, betting against a market in an uptrend since 1900 is risky but fun when you’re right.
Yes, Goldman Does Know People. But what does their and those others’ stock price today discount in terms of losses on their MBS holdings, etc. Perception, not reality. UBS is tempting, since they’re also in the middle of other scandals.
Really, it’s a pity that IMH is only a 4 dollar stock. Not much room to fall there.
Buying profitable puts right now on the lenders and financials is like shooting fish in a bucket. I cannot believe the idiots who are keeping CFC, NEW, NFI, AHM and the others afloat. It’s quite likely these are all going to 0 at some point. Some near point. The slight amount these disasters have bounced last week makes me think there are computer algorithms doing the purchasing. Computer algorithms that weren’t programmed to account for an upcoming depression.
I have been reading this blog for about 18mos -Never posted.I’ve been in the mortgage business for close to 25yrs– all at the retail level. The finger pointing just pisses me off. This business is capitalism at its finest(or worst). A commisson is paid to a LO for finding a borrower and closing the deal. Not as easy as it seems(the last 4 yrs excluded). The objective for everybody at the company is to charge as much as you can without chasing the client away. Everybody at the company to a degree is paid on the profitability of the company. That being said It is a very competive business and if you have the highest price and the most fees –you will not be doing any business. The retail mtgbk do not make the underwriting guidlines (we just live by them). In the 80’s 28/36 ratio’s were the hard and fast rules -I remember one deal I had — 30% down perfect credit 300k in the bank after closing 22/40 ratio’s– I had to get a Senior VP to sign off on the loan because the UW turned it down for the 40 back end. Now how the (the holy grail of home ownership )intensified. IMHO Henry Sesnoro(SP) Hud Sec during the Clinton Admin. began a witch hunt. HMDA data was required on all apps. Before this the borrower did not have to disclose his race-nat-color or sex –Now the lender has to disclose this –regardless of the borrowers wishes. After the the data was collected for a couple of years ( headlines in the newspapers min 7 times more likely to be denied mtg loan. ( Everybody in the industry could have guessed that without that data) Credit profile was never considered mainly because credit was subjective. Its all about the $$ folks if you are green or blue and you meet the guidelines we are going to do your loan. A couple of stories from the witch hunt. A lady see’s a home that she wants to buy and calls the realtor –the realtor does the contract– sends the buyer to his favorite LO –LO says No way– Borrower has poor credit and is on public asst. but does have the downpayment from a traffic accident(law suit) Sp of the home is just 35k - One of my New LO’s has been trying to get this realtors business and tells him she would give it a try. She brings me the loan ( I’m like no way) But lets package the deal the best we can and let the underwriter make the decision. We get letters about the poor credit and budget letter etc. Loan is denied — Lady files a complaint with HUD against us and the realtor for discrimination— Hud asks us for all FHA files for the last 5 years — Lawyers tell it will cost at leat 60K to retrieve those files from micro-fish — We explain to hud that it is cost prohibitive ” Then I suggest your settle this” This is after we have asked FHA to underwrite the file and if they signed we would make the loan. The borrower asked for the full 35k –We settled for 10k — Chevy Chase Bank settled a suit with the Fed’s for millions — because they did not have branches in some of the run down area’s of DC –regardless that they applied to put branches there but were turned down by the RTC. The mortgage industry helped come up with credit scores and automated underwriting to get away from the witch hunt. In the late 90’s there was a sub-prime melt down. History repeats its self (remember Dan Marino and First Plus Stock went from 35 to 10cents in weeks ) Sub-prime then then made some sense 125’s full doc good credit — bad credit may be 90ltv max . The last 3 years sub-prime was insanity— Borrowers call —I have poor credit and currently paying $700 rent and have no money but I saw this 225k home that I want to buy. I tell her lets clean up your credit and save some money or look for a gift and in six months we can maybe go FHA — Tells me she is already approved at x mtg co on a 2/28 — go for it( what ever) —-
microfish? Perhaps if you kept your files in more accessible storage than the fishtank your overheads would be lower.
The general climate of business in this country is that things are Regulated such that consumers don’t have to stress over getting screwed on every *%#!#@ financial transaction they make, from buying a hamburger to getting a loan funded. The REIC is certainly disabusing people of this gold standard of Social Capital this country once enjoyed.
And dude, the enter-key is your friend. Look into it.
I like the puts, sold uncovered calls here on cfc, but wondering if I should use cash raised to buy puts at lower price? Stock seems ready to bounce for a month or so and I don’t have a feel for CFC’s countercyclical mortgage servicing business because this could give some support to the business.
SF chronicle has article on how Land use rules result in high housing costs in bay area
But was it really so simple? Was land-use regulation really the thing between the Bay Area and a wealth of affordable housing? Could it be that the Bay Area housing crisis exists not because everyone in the world wanted to live here — but because we won’t let developers build enough housing to keep up with the demand?
Later, when I spoke to Perkins, he reiterated his perspective in no uncertain terms. “The reality is that the San Francisco Bay Area has some of the most draconian land-use restrictions in the entire nation, and it’s artificially inflated the cost of developable land.”
He mentioned one project recently in which developers in Livermore were being charged $50,000 per house in a 300-home development. He noted that in Texas or Florida, homes were a fraction of the price of similar ones in the Bay Area. Finally, he suggested that groups like the Greenbelt Alliance (the organization trying to curb sprawl, support smart growth and preserve farmland and green space) are purveyors of “the Joni Mitchell myth: that developers pave paradise and put up a subdivision.”
True. It’s not the whole story, but it is a major factor. Land conservation is supported not only by the wealthy but also by lower-middle class homeowners in low-density areas. Just try building even slightly-high density affordable housing in a suburban SFH neighborhood and the neighbors will fight you tooth and nail. I know, I tried it (I’m not a full-time builder; I was just dabbling with friends).
But on the bright side, I live on the western edge of San Mateo, a city of 80k population on the SF Peninsula, and I look out at a humongous greenbelt owned by the SF Water Dept. There are many deer and a few coyotes in my neighborhood, and the air is clean. And yes, there are lots of Joni Mitchell fans here.