Borrowers Find ‘Adjustable Rate Means Up’
A pair of reports on high risk loans. “Millions of Americans who have financed their homes with adjustable-rate short-term mortgages, some of which require interest-only payments, are starting to see their monthly payments rise as low introductory rates expire and market rates kick in.”
“‘I just cringe every time I get that bill,’ said Mindi Davis in Brandon, FL. The bill, which was $100 a month in May 2004, is now $219 a month and climbing. ‘I anticipated an increase,” Mrs. Davis said, ‘just not this much that quickly.’”
“Brian Wrage, who lives in Tampa, said he had begun to unload his investment properties in part because of the adjustable-rate mortgages attached to them. ‘My second mortgage on one property started at 5.7, and by the time we sold it three years later it was 9.9,’ Mr. Wrage said. ‘It was eye-opening: adjustable rate means up.’”
“‘Normally, nothing is a better predictor of foreclosures than high unemployment and credit card delinquencies,’ said Rick Sharga, of RealtyTrac. ‘But what most people are talking about isn’t any of that now. We think adjustable-rate increases coupled with a slowdown in the price appreciation and the demand of houses is why we are starting to see a fairly significant increase in the foreclosure rates generally now.’”
The Sacramento Bee. “Last year Janice Pierini fell in love with a two-bedroom condominium in Natomas and rushed into an adjustable-rate mortgage. She said it was the only way she could get into a place that cost her more than $200,000.”
“Now she’s struggling, like a growing number of homebuyers who face the risks that come with the loan that has become the leading way for Californians to buy a residence.”
“Pierini’s troubles occurred just months into her interest-only mortgage, when she saw her income fall because of sickness and fell behind on payments. Though she’s worked out a repayment plan, her next hurdle is less than a year away when she must start paying principal, too. ‘Down the road a little way I find I am really struggling with this mortgage,’ said Pierini.”
“Mortgage rates, which are tied to other interest rates, rise at designated intervals. That leaves many people who barely qualified for the homes in the first place paying higher monthly mortgages than they planned on. But Michael McGee said the industry’s array of adjustable mortgage products has opened homeownership to thousands who otherwise could never afford today’s prices.”
“Though there are risks with adjustable rate mortgages, many homeowners successfully use them to their benefit. Retired state employee Mark Stuart recently refinanced from one interest-only loan to another on his house in Carmichael. The new loan raised money for a son’s college expenses.”
“Stuart’s plan is to sell the house and downsize before the principal becomes due in three years. ‘We’ll be out of the house here before we have to pay more,’ he said.”
“Experts say adjustable rate loans generally work well in markets where values are rising and best when they’re rising quickly. That’s no longer the case in Sacramento and much of California. Yet buyers still get swept up in emotion while buying a house and often don’t adequately think through their loan decisions, said Pam Canada, executive director of a nonprofit homeownership center in Sacramento.”
“‘My guess is there’s a large percentage of people going in blind,’ Canada said. First-time buyers are especially vulnerable, she said, to a hurry-up atmosphere in which loan officers often say ‘just get this loan now and in a couple of years you can refinance.’”
‘Mark Stuart recently refinanced from one interest-only loan to another on his house in Carmichael. The new loan raised money for a son’s college expenses.’
Why not just get a student loan? That wouldn’t put the home up as collateral. This retiree may end up in that house a little longer than he planned.
‘Normally, nothing is a better predictor of foreclosures than high unemployment and credit card delinquencies,’ said Rick Sharga, of RealtyTrac. ‘But what most people are talking about isn’t any of that now.’
It looks more and more like crazy lending will be what unwinds this thing.
Exactly! What an asshat! A student loan is the cheapest loan you’ll get in your whole life! Why on earth would you roll that kind of debt into your house when there is a one-time sweetheart loan available? Thimk, Sheople, Thimk.
LMAO! How do you pronounce “thimk?”
Let me consult my Specuvestor Handbook, and I’ll get back to you on that.
Because if you declare BK, you might be able to wipe it if it’s in your home, but the student debt you can’t get rid of. Who knows what he was thinking, or even IF he was thinking.
If it’s a REFI loan, it
If it’s a REFI loan, it doesn’t get wiped out by a BK. There is RECOURSE, spelled F’KD.
Did we ever get clarity on that. Was it state to state or across the board I’m going to have to do a search on that.
From section 1 article 8 of the U.S. constitution
To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States
Bankrupcy law is an explicitly listed federal responsibility. It’s not one of those extensions of a pretzelfied commerce clause.
SHORT of bankrupcy, the individual states regulate whether loans are recourse or non-recourse. Course in my state we don’t have non-recourse mortgages.
Could be that the son’s already maxed out on student loans, but still needs more. I’m willing to give the guy the benefit of the doubt there.
Are you and those who replied to your comment aware that the rate on guaranteed student loans is increasing to 6.8% on July 1st? With all due respect, leveraging the equity in your home to cover college costs for your children is a good option for many people. Certainly Mr. Stuart is taking on more risk using an interest-only loan, but he is doing what is necessary as the days of low cost student loans are over.
As for myself, I’ll be closing soon on a 2nd mortgage on my home to finance my children’s college. With the tax benefits of the loan, I will pay less than the student loan rate while not having to saddle my kids with a ton of debt.
Your getting a second for less than 6.8%??? Who’s your lender.
Thank goodness I locked in 2.875 fixed for my loans.
Your tax benefit is of no moment. Qualified Student Loan Interest is deductible as an adjustment to AGI (even better than itemizing mortage interest expense), and is fully deductible as long as modified AGI doesn’t exceed certain limitation amounts. If the interest rate on the student loan was cheaper than the mortgage refi rate, (and assuming your AGI was under the limitation amounts), you would have been better off with the student loan.
Note that Mark Stuart is described as a RETIRED state employee. Unless he has another job, he made a foolish mistake, IMO.
His kids can **work** their way through college and get their own student loans to supplement costs. I didn’t see where Mr. Stuart lived, but if there is a local jr. college nearby, the kids can live at home and attend there. Afterward, they can attend the local state university. No reason on God’s green earth why a retired parent has to put his kid through school (not sure what portion he’s paying, but books & tuition would be more than generous, IMHO).
correction: supplement income.
winjr:
I don’t meet the AGI requirement. And I know I’m not alone. In areas with a high cost of living, like San Francisco, the AGI excludes practically everyone. I will, however, enjoy the tax benefits of the second.
CA renter:
My wife and I have as our no. 1 priority to provide our children with the best education possible. But anyone who holds to this value has to work within their own means. For some, maybe all they can do is kick in for books. We consider ourselves blessed that we’re in a position to do more.
Woohoo! Let the foreclosures begin!!!
San Diego forcloseures for everyone!!!
The bill was for $100.00/month? For what? A garden shed?
I believe it was a second mortgage. Payment doubled though.
That was their piggyback loan, because they went in with no downpayment.
Yea, but still a 100.00 bucks a month even if it is a second what planet is that.
HELOC?
I’m guessing that it’s from the planet of teaser rate1%!!!!!(negative amortizaiton will be added to principal)
No seconds don’t operate like that yet.
There are no free lunches. Our entire society is built on living beyond our means, of excessive comsumption, and satisfying wants not needs. Our parents and grandparents knew that if you couldn’t afford to either buy it with cash you shouldn’t buy it. That or they understood and were responsible about the use of credit.
This country needs to learn a hard lesson. We are rapidly progressing towards evolving into those third world banana republics we laughed about just twenty years ago when we watched their currencies devalue and their economies crumble.
I agree with you. I decided years ago that freedom from paid employment and debt slavery was far more important to me than “lifestyle” enhancements (house, car, toys). Luckily, I married a man who felt the same way. I look at fabulous architecturally designed houses and wish for a second or two that I could live there but it passes quickly. I’m just not willing to do what you have to do to have those things.
” I’m just not willing to do what you have to do to have those things.”
Amen.
I downsized in 1999 after a divorce. It took a few years to get over the wanting and needing, but now the thought of consumption gags me. I went to Wal-Mart yesterday and couldn’t find even one item I wanted or “needed”. I go there once in a while to remind myself why I so hate the american way of life. I live in a reasonably sized rental house that is very cheap (in fact free because I trade labor to the landlord by doing maintenance work on his other units) and I’m quite happy doing so. I walked away from a 22 year marriage in ‘99 with $200 in my pocket, my personal belongings, and my company retirement plan and 401k’s intact. Now I have a comfortable cushion of $, and some rental property. I don’t owe money to anybody except for the rentals which are just starting to produce positive cash. I go where I want, whenever I want knowing I’m not a slave to a job or a prisoner to a house. I work with people who fear the next layoff. Not me, I’m looking forward to some time off.
Too bad the guy who on another thread who says he made an offer on a $1.2M house didn’t read that. For that kind of scratch, I’d have to be able to pay cash with at least 5x that left in the bank.
Karma bites, in the long haul.
“The consequences of your past actions bite you in the back of your neck, just when you think you’ve reformed” —
Friederich Nietzsche
aka:
Life is like a jalapeno - Whatever you do now will burn your ass later.
PERFECT quote!!!
“…rushed into an adjustable-rate mortgage. She said it was the only way she could get into a place that cost her more than $200,000.”
There are 3 things wrong just w/this sentence: ‘ARM’ (for anything more than 1 year term); “ONLY way she could afford…” (gee, that is usually why people rent…); ‘rushed’ (do not RUSH into any large financial committment.
A TSUNAMI OF INEPTITUDE ABOUNDS
I just attended a government safety meeting where a tape of 911 calls from the Biloxi, MS area during the landfall of hurricane Katrina was played. People were ordered to leave the area due to the coming storm surge, but many chose to stay behind. When the water was up to their kitchen counter tops and rising fast they called 911 for help, and they were told that emergency rescue workers couldn’t negotiate the rising water or fierce winds either. Dispatcher, “We told you to evacuate, but you didn’t listen!” Loser, “Oh my…GAWD!” [followed by truly morbid sounds of helpless bleating and crying]. Today’s U.S. citizens have somehow come to believe that their government is always going to be there to rescue them regardless of the risk or expense. Today’s FB’s most likely believe that someone is going to rescue them too from their IO-ARM hell. Good luck!
People were ordered to leave the area due to the coming storm surge, but many chose to stay behind. When the water was up to their kitchen counter tops and rising fast they called 911 for help, and they were told that emergency rescue workers couldn’t negotiate the rising water or fierce winds either. Dispatcher, “We told you to evacuate, but you didn’t listen!” Loser, “Oh my…GAWD!” [followed by truly morbid sounds of helpless bleating and crying].
Not everyone has a Chevy Tahoe with a full tank ready to go like you do.
I am thinking of diversifying my savings as a feel there is big devaluation risk going forward. Still trying to find out how (foreign currency maybe) but on the other hand shouldnt I stand with the dollar as my future is still tied to it.
It’s a hard call to make. On the one hand declining asset prices should greatly slow the velocity of money (basically people hoard cash after a big loss) look at the great depression and 1990s Japan for examples of that.
However, on the other hand It’s very hard to get out of that type of cycle, no matter how much pro growth effort the government takes people just sit on the cash.
So the Fed’s preferred method of dealing with this threat is fight hard with massive inflationary pressure.
Trying to call what will happen if the bubble pops badly is something I think about frequently, but haven’t had any inspiring ideas.
The discussion is kind of moot unless you have substantial savings. If not, your biggest asset is your future earnings steam which is somewhat inflation protected (as you can almost always move and work in more stable currencies).
Bluto,
I am on a very similar wavelength — even if my insubstantial savings get wiped out by Helicopter Ben’s successful efforts to inflate them away to nothing, or unsuccessful efforts to avoid a currency devaluation, hopefully my training will provide an inflation-adjusted income stream going forward. But you make me think once again that perhaps I ought to brush up on my foreign languages, just in case…
GS
I’ve invested in Rydex Weakening dollar fund (RYWBX) and precious metals mutual funds for these exact reasons. As many people have pointed out, inflation is going to lead to much higher metals prices (especially gold) and the US dollar is going to get trashed as the Fed puts a halt to rate hikes. Also, many foreign govts are making hints rumours and outright comments now that they’re going to start reducing their dollar holdings.
There are always ways to profit from a coming catastrophe if you look around.
Well said, Big Daddy.
“‘My guess is there’s a large percentage of people going in blind,’ Canada said. First-time buyers are especially vulnerable, she said, to a hurry-up atmosphere in which loan officers often say ‘just get this loan now and in a couple of years you can refinance.’”
That’s one thing I almost never hear pimped to me anymore — this “hurry-up atmosphere”. Seems closer to an “uh-oh atmosphere” right now, soon to be a “DANGER! RUN! atmosphere”.
“There are none so blind as those who will not see.”
“Those who will not see” are usually busy looking at something else.
I don’t know. I was driving from the airport today and counted 9 billboard advertisements still with the hurry up and get into this hot market attitude. Those are just the ones I counted when I started paying attention.
One was specifically for mortgages. Another was to get into the market- with no money down, no kidding…. (it said that)
Another was to become a real estate investor and buy 4 properties a year, they will teach you!
Another was for the real estate and wealth investment seminar…
all of them had the same tone… they are still trying to herd the sheople into participating full speed ahead into their own manipulation. Partipulation.
For the readers who missed the Warren Buffett news in earlier posts and threads:
‘On the real estate bubble: Buffett, ‘”What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.]‘
‘The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We’ve had a real bubble to some degree. I would be surprised if there aren’t some significant downward adjustments, especially in the higher end of the housing market.’
‘On mortgage financing: Munger, ‘There is a lot of ridiculous credit being extended in the U.S. housing sector.’
‘Buffett: ‘Dumb lending always has its consequences. It’s like a disease that doesn’t manifest itself for a few weeks, like an epidemic that doesn’t show up until it’s too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year’s 10Ks, and look at their balances of ‘interest accrued but not paid,’ you’ll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt].’
‘When you have speculation-type holdings and Internet day traders moving into the day-trade of condos, then you get a market that can move in a big way,’ he added. In Florida condominium markets, monthly sales turnover has dropped sharply and listings are up a lot, Buffett noted.’
Warren always has a no-nonsense way of neatly wrapping it all up for his high-profile presentation.
His parable of the Gotrocks and Helpers is also a good one (from the annual report).
Its a great parable on why you want to go with index funds or buy & hold forever for any investments in capital.
I believe these dumbass loans we’ve been seeing the last 5 or so years are the equivalent of the margin loans that precipitated the Great Depression.
Following up on Buffett’s lead, I checked the 10-K (annual report) for Countrywide Financial. To say the least, the amount of pay option loans has been exponential:
“Following is a summary of pay-option loans held for investment:
December 31, 2005 and 2004
(In thousands)
Total pay-option loan portfolio
$26,122,952 $ 4,701,795
Pay-option loans with accumulated negative amortization:
Principal
$13,973,619 $32,818
Accumulated negative amortization (from original loan balance)
$142,034 $29
That’s $142,034,000 in accumulated interest in 2005.
And what percentage of that $142,034,000 will disappear with defaults when people can’t pay? I’m guessing the losses will be much greater. If I understand correctly, that number merely represents the degree to which their borrowers can’t pay the interest on their mortgage when rates are at historic lows, and therefore owe more than they borrowed. When prices start going down, instead of a combined loan to value of, say 105%, they’re looking at a CLTV of maybe 125%.
It is great to hear Buffett shoot straight from the hip about the bubble. He has no need to Fedfuscate the bleak situation brought about by the total abandonment of loan underwriting standards.
Another thing I have noticed over the last couple of years was that home buyers told themselves alot of lies to justify taking out these crazy loans, such as “I will only be in this house 1 or 2 years so I dont need a fixed” or “I am sure it will go up 20 % this year and bail me out”(how can you know that).
Now they are telling themselves lies again. Even though the market has stalled in alot of places and gone down in others, they still say the market will go up “only”5-10%” this year. I heard this today, even though volume is way down prices will still go up. I guess if they conceed that the market is busting it will change they way alot of people will live the rest of thier lives, think about it, alot of people have no choice, RE MUST CONTINUE TO GO UP, there is no plan B. If you think I am wrong ask any highly leveraged home owner or better yet flipper,”what if the market goes down”. I guarantee they will either say nothing or say that is not possible
Yes, I get the same thing. But RE never goes down. It’s like math. You have to prove something is true always for it to be true. If you prove it false just once, then it is not a proof or an identity. It’s merely not true.
So because houses went down in areas and went down nationally during the great depression, then to say never goes down is a lie. It’s funny how soon people forget the past.
For the life of me I can’t understand why people don’t invest in whats rare. While this market is looking toppy to say the least there are still uninformed people jumping on board. Are they hoping for a double, triple or more?
I sincerely wish they would all read the following and they will understand why silver has doubled in one year and will be a 10 bagger from here in very short order, a return one can never get from RE going forward. The entire silver supply each year can be bought with about 500 homes in America…read on:
Source Jason Hommel
“The actual numbers are very rough, but about 650 million ounces of silver are mined each year, and about 200 million ounces come from scrap recycling, and about 100 million ounces used to come from investor selling, or government selling. That’s a total of about 950 million ounces.
Of that, about 42% is consumed by industrial use, about 28% consumed by jewelry, 20% consumed by photography, 5% consumed in coins and medallions, and that’s 95% of total available silver each year! This implies either a “surplus”, or “investment demand”, of about 5% of the total, or about 42 million ounces–for 2004.
In other words, there is no room in the silver market for any significant investor demand of any significant monetary or investment size, of say, over $500 million.”
Thank you Mr & Mr Hunt.
LOL
“The actual numbers are very rough, but about 650 million ounces of silver are mined each year, and about 200 million ounces come from scrap recycling….”
Ah, but the 200 million from scrap recycling is the wild card, as the Hunt Brothers found out. That number can easily double or quadruple as 700 million people in India turn their old silver into cash. That’s what k/o’ed the price of silver in 1980.
I had a conversation with a woman that I work with the other day. She said something like “Real Estate is always a good investment” To which my response was “Tell that to the people that I bought my house from, I paid them $5,000 less than they had paid for the place 4 years earlier.” We ended up agreeing that generally most people have found it advantageous to own the house that they live in. Then we had a conversation about the benefits of selling with or without a realtor. I’m pretty agnostic on the issue, but she’s convinced that listing with an agent is a complete waste of time since ~10 years ago she tried to sell her townhouse and it was on the market for about 12 months with nary a nibble. I MAY have been able to convince her that >300 DOM =price is too high. “But prices are so much higher now.” “But they weren’t then.”
She also refuses to buy a used house. At first she says that it’s because she doesn’t want things breaking, but when pressed it’s because she thinks living in somebody elses house is kind of ookie. Hey, it’s a free country, and since I have a similar marginally rational aversion to HOAs, I can’t throw stones. But like cars, the more prevalant this sort of belief is, the more the building will depreciate once you move in. Witness the prevalance of “never lived in” touted as a selling point in Craigslist.
I’ve talked to people who have such a vested interest in this market, that RE going down simply does not compute with them. No amount of reasoning will work.
If you were about to get a barb wire enema would you want to talk about it.
Yes, I just had lunch with a newbie LA realtor. I mentioned the possibility of declining prices and she actually said prices don’t ever go down. She wasn’t trying to sell me anything — she just plain believed it. I told her they’ve gone down before, and she asked when. Early 90’s I said. She just gave me a blank look.
You’re absolutely right, there is no Plan B for most people. They simply don’t even consider the possibility of price declines. (”But no Cat 5 hurricane has hit here for as long as I can remember!”)
No “plan B.” Every person with whom I’ve brought this up says they will refinance or sell the house.
“What if prices are down or interest rates are higher,” I ask.
“Won’t happen,” they say, “prices have never gone down nationally. If they do, I’ll just hold on until they (prices) go back up again. Prices always go back up in the long term.”
These people think low rates and exotic mortgages are here to stay. They’ve bought the mortgage industry’s line that amortized FRMs are obsolete (actually had a few LOs tell me that), and “savvy buyers” use the new affordability products. Why throw money away on principal when you can let the market build the equity for you on the lowest cost?
I think people are going to be surprised at the lack of resilience in the future housing market. I believe demographic trends portend lower prices well into the future. We will see…
“Won’t happen,” they say, “prices have never gone down nationally. If they do, I’ll just hold on until they (prices) go back up again. Prices always go back up in the long term.”
I’ve never understood why people CARE at all whether prices have gone down nationally, unless they’re investing in MBSs. After all homeownership isn’t, buying a share in national house prices, it’s buying a particular house in a particular market, and plenty of THEM have gone down in price. And plenty more have had a negative real rate of return for a decade or more.
LA (aka “La-La Land”) is notorious for its short collective memory of local real estate history. I just finished reading a book called “The Control of Nature” (John McPhee) which has a chapter called “Los Angeles Against the Mountains,” which explains how many LA citizens unwittingly buy expensive homes at the base of the San Gabriel mountains, utterly oblivious to the debris flow which buried all the homes in the area within the last six years. I am guessing the same form of amnesia erases from mind the last period when many LA household balance sheets were buried in debt due to falling real estate prices.
“Though there are risks with adjustable rate mortgages, many homeowners successfully use them to their benefit. Retired state employee Mark Stuart recently refinanced from one interest-only loan to another on his house in Carmichael. The new loan raised money for a son’s college expenses.”
“Stuart’s plan is to sell the house and downsize before the principal becomes due in three years. ‘We’ll be out of the house here before we have to pay more,’ he said.”
—————————————————————
Gain today, pain tomorrow. ziprealty CA Central Valley inventory just broke the 30K level today, to 30,516. Ten days ago it was 29,212. Good luck being out of the house before you have to pay more. That HELOC you just took out could be a millstone.
Please tell me that this guy doesn’t think that the deductability of his loan is worth the incredible risk he is taking with this type of a loan. Like OC Max says, the student loan is a no brainer (though not like they used to be).
Besides, once you take money out for something, even if it is a legitimate need, it’s amazing how people justify taking a little more out at the same time (I mean, why not?) for things like the new car, vacation, bling, bling, bling. Here today and gone tomorrow.
Well, if you can’t be a good example, then you’ll just have to be a horrible warning.
Heck, even the deductability issue issomething of a wash since the income limits for the student loan interest deduction are pretty generous these days.
Good luck being out of the house before you have to pay more.
My thought exactly. Another FB who thinks he’s clever enough to get out in time…
“http://apnews.myway.com//article/20060507/D8HEK18OE.html”
Check this out, a condo building under construction in Miami collapsed today killing 3 workers. Now these idiotic condo developers are taking innocent workers with them.
“But Michael McGee said the industry’s array of adjustable mortgage products has opened homeownership to thousands who otherwise could never afford today’s prices”
I can’t stand these kind of comments. What should have happened at that point when people “could no longer afford” the prices being asked was a flatening or adjusting of the market. Instead, we had lending of insane proportions allowing people who had no business borrowing that kind of money to buy houses to go ahead and sign their lives away.
The answer to lack of affordability became helping the borrower to borrow more.
Exactly! They still can’t afford the house and have pro-longed the inevitable.
Absolutely. Those thousands who cannot afford today’s prices will not be able to afford tomorrow’s payments. Better to have barriers to entry than to cause people to lose homes they thought they owned, have their credit absolutely trashed and deal with the pain and agony of the foreclosure process. Not to mention, even landlords want good credit, which they might have had if not for “buying” that house. For years, they will pay via much higher interest rates (if anyone is even willing to lend to them), and they will not be able to compete for better rental housing, as folks with better credit will usually be given the better deals.
The credit market did a major disservice to these people as well as to those who could truly afford a house, but were “priced out” by so many unqualified buyers being forced into the market at once. Now everybody will have to pay.
I first read about adjustable rate mortgages in the 90s. I sold my house in 1996 after its value fell (over 6 years) 20% and bailed out. Luckily it was a $100,000 house. From what I read about ARMs, I could never understand one good thing about them. And now during the current bubble, tens of thousands, perhaps hundreds of thousands of people are being caught in the rapidly increasing payments. I read one post that 40% of Phoenix houses sold in the last few years are through ARMs. Many people got caught up in the emotion of this bubble hysteria. It’s all greed on their part (buyers). They will refuse to eat humble pie and blame agents, MBs, and so on for their stupid decisions. My loss was $20,000, but the losses of many will be in the 6 figure range for this burst bubble. I haven’t noticed lighter traffic in Phoenix yet. I lived in the South Bay of LA for 3 years through the end of this March and noticed “open house” signs mushrooming there (Redondo Beach, Torrance, Manhattan Beach, Hermosa Beach, RPV, PVE, etc). The foreclosures are going to put a cramp on spending. Despite that, I think the large multi-national corporations are good stock investments for those who were lucky enough to sell high (real estate) and bail out with their green. I think RE values will go down sharply in the next few years because incomes will continue to go up in the single digits. My reasoning is this: Employment has been boosted tremendously by R.E. When housing-related jobs go (and look at Ameriquest, for example), they take spending money out of consumers, more people are in the job market to compete. The former real estate agents have to go head to head with, say, Insurance salespeople, thus bringing down the entry level pay for insurance agents. All this downward pressure on salaries will ripple and keep wage pressures lower. In the meantime, health care costs will go up, as well as gasoline prices (once a barrel of oil is extracted, refined, consumed and burned, it’s one less barrel of oil in this earth). We can have high inflation and high unemployment (back above 5.5). Sharp price drops in houses: It has to be, because housing affordability is still seriously at a low percentage. In LA less than 1 out of 7 people can afford a house.
Wouldn’t ARMs make sense when interest rates are at all time highs? Like if the interest rate goes up to 15%, would it be better to take out an ARM, or get a fixed rate product and incur the refinance charges as the rates drop?
I’d be interested in an analysis if anyone’s run the numbers. But taking out an ARM in the past decade? I think you’d have to be (a) ignorant, (b) stretching to buy more than you can afford, or (c) an investor whose only in it for the hoped-for appreciation
In answer to your comment: Yes.
Interest Rates have been at historical lows.
You may draw your own conclusions.
It makes sense to borrow short-term (like ARMs) in a falling interest rate environment, not necessarily when the rates are high.
It COULD be a good strategy if, say, you had another property, and were waiting for the proceeds and KNEW that you were going to pay the ARM off in the short-term. Like I said, about a year or so - two MAX. But your typical person with an ARM is not a savvy investor, just a fool with an albatross that they seem to not even know is there - yet.
Absolutely!! In fact the public is alway 100% wrong!! At the peak of the last interest rate cycle in the 80s. ARMS were practically ZERO percent of mortgages. At the trough of this cycle, ARMS were close to 80%.
Draw your own conclusions. But I assure, the reputation of the masses being idiots was not unearned.
“Experts say adjustable rate loans generally work well in markets where values are rising and best when they’re rising quickly.”
“Experts say that lottery tickets work best in an environment where your numbers are selected and best when all your numbers are selected”
What these ‘experts’ are really saying is that these loans are incredibly dangerous and thousands of people will be crushed between rising rates and falling values.
“Experts say that lottery tickets work best in an environment where your numbers are selected and best when all your numbers are selected”
Crap crap CRAP! So THAT’S what I’ve been doing wrong.
Deadbeats say adjustable rate loans generally work well in markets where you never intend on paying off the loan.
The mortgage broker / drug dealers pushed the I/O Option ARM as the way to get into otherwise-unaffordable houses for cheap. The lenders must have suspected that higher interest rates would kick in at some future point — otherwise why would it work out to their advantage to not collect any principle and charge a lower rate than on a fixed-rate mortgage? Unfortunately for all parties concerned (esp. taxpayers), the whole deal does not pan out when skyrocketing interest rates drive the I/O payments up by a large multiple, which tends to make it difficult for paycheck-to-paycheck households to keep up on those ever-increasing payments.
The only unresolved question is who gets to pay for the huge (1) home equity gains, (2) realtor’s commission, (3) closing costs, (4) homebuilder profits, (5) flipper profits, (6) etc. that were gouged out of last year’s FBs, once they walk away and leave the keys.
The lenders must have suspected that higher interest rates would kick in at some future point — otherwise why would it work out to their advantage to not collect any principle and charge a lower rate than on a fixed-rate mortgage?
Because they can offload the loan to someone who does not understand the risk. They are middlemen, not lenders.
Thanks for the reminder, feepness. When the dust settles on this bubble, economic historians will be amazed how effectively globalization enabled the marketing of risk to greater fools.
They are middlemen, not lenders.
Not necessarily true. WaMu, for instance, is holding $80 billion in Option ARMS on their own balance sheet (as “loans held in portfolio”), according to their last 10-K. In fact, most of what they’ve been selling are their 30-year fixed mortgages. Some of the smaller guys, like Accredited, are also sitting on top of mountains of junk paper that they either can’t sell or can only sell “with recourse”, meaning they have have to buy the loan back if the borrower defaults.
That is good, b/c it dries up the loans for neg amortization. The Fed is starting to talk about discouraging these sales, so they will hopefully dry up.
Then prices will fall if only due to lack of affordability.
you CAN get a free lunch in the castro district of san francisco,just make sure you have good health insurance…i/o loans and arms make sense in a stable market for a small percentage of buyers…for an example buying a fixer upper,selling after 2 years or so and trading up…in a stable market they can also make sense they can also make sense for someone who makes their $ in uneven chunks,like some art dealers i know,or real estate salespeople…i/o loans are appropriate for 1-2% of borrowers who are sophisticated enough to use them as intended….it has not been a stable market for years….so if you have a choice between an arm and one of those free lunches in sf…..you are probably better off with the lunch,even if you are straight.
“The Sacramento Bee. “Last year Janice Pierini fell in love with a two-bedroom condominium in Natomas and rushed into an adjustable-rate mortgage. She said it was the only way she could get into a place that cost her more than $200,000.””
Perhaps she simply should have not bought the place.
“Mortgage rates, which are tied to other interest rates, rise at designated intervals. That leaves many people who barely qualified for the homes in the first place paying higher monthly mortgages than they planned on. But Michael McGee said the industry’s array of adjustable mortgage products has opened homeownership to thousands who otherwise could never afford today’s prices.”
Wow, good thing rates dropped. No one could have afforded those high prices. DOESN’T ANYONE SEE THE LINK BETWEEN LOW RATES AND HIGH PRICES?
Rental Watch ….I see the link between low rates and high prices.
It was the lower interest rates that pushed this housing boom along .Even more than low rates at some point it was also the easy underwriting of loans that created demand that should not of been ,that further raised the prices .
No it’s not good to put people in houses they can’t afford on the notion that real estate always goes up.
OT - the oracle sez: bad things ahead.
OMAHA, Neb. (MarketWatch) — The U.S. real estate market is clearly slowing, especially in areas that used to be the hottest, while speculation in commodity markets is rife, Berkshire Hathaway Chairman Warren Buffett said Saturday.
Buffett said at the annual meeting that “significant downward adjustments” in house prices are possible, especially at the high end of the real-estate market and in situations where homes were purchased as investments.
“We’ve had a bubble to some degree,” he said, noting that Berkshire has a good view of the market through the thousands of real estate agencies it owns. “We see a slowdown every place.”
“When you have speculation-type holdings and Internet day traders moving into the day-trade of condos, then you get a market that can move in a big way,” he added. “First it kind of stops, then it reopens again.”
In Florida condominium markets, monthly sales turnover has dropped sharply and listings are up a lot, Buffett noted.
Influence on commodity market
Speculation has also begun to drive commodity markets, Buffett warned.
The price of metals, such as copper, and other commodities like oil, initially climbed on fundamentals, but the gains have now attracted more investors betting on further price gains, he explained.
“What the wise man does at the beginning the fool does at the end,” Buffett quipped. “Once a price history develops enough for other people to see it and get envious, that takes over markets. We’re seeing that some areas of the commodity markets.”
The Berkshire chairman also warned that it could end badly, likening commodity markets to Cinderella at the ball.
“At the start of the party, the punch is flowing and everything’s going well, but you know at midnight it’s all going to turn into pumpkins and mice,” he said. “People think they’ll be able to get out just before midnight, but everyone else thinks that too.”
“The problem is that, in commodities there are no clocks on the wall,” he added.
Berkshire mostly avoids commodity speculation because Buffett said he’s “not good at the game of figuring out how far the speculative gains will go.”
That means Berkshire won’t make as much money as other investors who stay on until “the final 30 days or weeks of a wild orgy,” he said, recalling a big investment Berkshire made in silver.
Buffett said Berkshire didn’t make any money on his silver investment because he “bought it very early and sold it very early. Other than that, everything I did was perfect.”
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B505AA31F-EB4D-4F1B-B532 -66B44374D2C9%7D&siteid=google
It’s good to hear his comments on commodities. Hearing him say that, my commodity clock just struck 11:00pm and I’m going to try selling most at 11:30pm (I’m thinking September).
Yes, I know it’s a gamble. I’m not eating with that money.
Warren is the best INVESTOR on the planet and the absolute worst SPECULATOR. He has an amazing track record with his purchases but he does not ever go with momo plays. Buffet doesn’t play with bubbles because with his vast fortune he has no need to. EVER!
Commodities are in the formative stages of a bubble IMHO. I have been in on commods since 2001 and I am “speculating” that we won’t see the end until the dollar regains a foothold.
Warren is talking out of both sides of his mouth though since he has previously taken large bets against the dollar. We go sub 80 in the dollar index and I think inflation will go crazy!!
“We’ve had a bubble to some degree,” he said, noting that Berkshire has a good view of the market through the thousands of real estate agencies it owns. “We see a slowdown every place.”
Whose opinion seems more credible: The Oracle of Omaha’s (”We’ve had a bubble, and now we see a slowdown every place”) versus that other guy (”No national bubble — only a bit of local froth”)?
‘“The problem is that, in commodities there are no clocks on the wall,” he added.’
Peak Oil zealots and precious metals bugs should consider themselves forewarned. I wonder how many of you look at yourselves in the mirror and see the reflection of last year’s condo flipper?
Well put, stucco. Real estate speculators pointed to a few valid fundamentals to justify the rise in prices and ignored the huge “speculative premium” driving price increases. Likewise, commodity speculators point to a few valid fundamentals such as increasing global demand for oil, inflation, etc, but fail to realize that these facts alone don’t justify a doubling or tripling of prices. Like Buffet said, it starts with fundamentals and then the speculators move in and then the speculation becomes dominant.
There were never any “valid fundamentals” underlying increasing home prices.
Also, a “speculative premium” does not drive longer term price increases, it simply establishes a margin between the real cost and the perceived potential.
Who said anything about long term?
And you’re wrong, tj. There are in fact reasons why housing prices should increase modestly over time. The price of construction materials goes up, populations increase, etc. These would explain a nominal price gain in line with inflation (or less), generally speaking. But they don’t explain home prices doubling in some instances in just three years.
Not last year’s condo flipper… more like someone holding a lot of shares in Microsoft and Dell in the early 90’s.
I think Buffett is right about real estate and wrong about commodities. As Jim Rogers said, the shortest commodities boom in the past was 15 years long. The longest was 23 years. So 5 years into the commodities boom, we are expecting to see it crash? And gold is $710 per ounce. It is far below the $850 per ounce when you account for inflation since the year 1980. Also China and India are bidding up resources prices. The printing presses are going full force with fiat money all over the world. I think Buffett better stick to stocks. I have been buying a few gold and platinum coins every couple of months for over a year. Bubble or not, I’m working on building up to 10% of my assets in metals and to keep that level.
“Stuart’s plan is to sell the house and downsize before the principal becomes due in three years. ‘We’ll be out of the house here before we have to pay more,’ he said.”
Absolutely brilliant plan! I wonder why every other homebuyer in the State of California didn’t think of this?
LOL!
ALERT ALERT ALERT ALERT ALERT
Local First Amerian Title Office Shut down !!!!
This is in Bakersfield. I will get a pic for the site.
Last November, First American in SLO laid off some worker bees.
They just did a big acquistion last month. I’d be surprised if they were actually in trouble. They move around a lot depending on staffing no matter the market.
Sacramento has a new inventory record with the current # of homes for sale at 13,521.
Previous record was at 13,507, reached 4/1992.
New records are now in Sac, SD, LV, Denver. Anywhere else?
should add 10% to your basis for most of those markets due to pop increase,but give it 60 more days
Another sign of the times, my wife and I every so often go looking at houses in the area, to get a feel for the dynamics and prices here on the central coast. One of the houses we looked at today is around 2600 square feet, and lists for around $760K. The interesting thing, however, is that the current owner (who has had the house less than a year) is delinquent about $8K in property taxes, and half of that is 5 months over due. I wonder if this is a sign that recent purchasers have been stretched to the max just to get into a house?
Check to see when they bought the house, and for how much. Then you can see if they are trying to flip. If it’s a death, divorce, or job situation then I don’t know. Trying to save on cash flow could be a reason. The lender (if there is one) will be concerned and even send a notice of default.
A couple of would-be flippers near us bought a place for around 550k a little over a year ago: a 3br 1 ba that rents for 1950/mo. It is on an R2 lot and near CalPoly campus, but the second unit is still hypothetical. They put the place back on the market for 770k last spring, less than 6 months after purchasing. It has not sold. Now, a year later, they are asking 669k, and describing themselves as VERY motivated sellers (their emphasis, not mine). Lot’s o’ luck to them.
The realtor sales pitch “buy now or forever be priced out of the market “, hit alot of fear buttons with vunerable people . In the final analysis this fear sales pitch will be viewed as panic selling .
My father use to advise me to never fall into panic buying . He use to say “There will always be another house , another car ,another road to take “.
… another girl to date
OT: the inventory of SFH for sale is way higher than what ZipRealty shows. A fair amount of the houses for sale that I see every day (while going to work: Pasadena and Altadena) had been listed in ZipRealty some time ago, some with price reductions. They are not listed anymore, but the for sale signs remain in place. Again, this is not one or two houses, this is a fair fraction of the houses I see/track.
Anybody else noticing the same?
Pasadena brokers are notorious for not putting their listings in the MLS. You will never get accuracy with zip realty or realtor.com for that market. You can drive down the street there and see 20 for sale signs and you would be lucky to find 2 in the MLS.
Some realtors have a “EXCLUSIVE LISTING “,meaning only they can sell the listing .Your not going to see the real estate people put a “EXCLUSIVE LISTING” on the MLS.I have played around with the” Exclusive listing” before in a attempt to pay cheaper real estate costs hoping the agent will put all their time /advertising money into the listing because only that agent ,( and usually the agents office ),can make the money .
In a really hot market the “EXCLUSIVE LISTING ” works because houses sell so easy that often times you don’t even need the MLS to sell . In a bad market you need all the help you can get .So, Im sure the inventory of homes is higher than it shows on the MLS .
By the way on the EXCLUSIVE LISTING I give the agent 4 week to sell it themselves ,after that , I have a clause in the listing that it than goes to the MLS and becomes a regular Listing . Big Real Estate Offices will push their Exclusive Listings and even give higher commissions and advertising costs ,hold more open houses, etc., if they have a Exclusive .
Anyway , this might be part of the reason that some of the listings are not showing up on the MLS. So many rules have changed since I was in the business ,so someone correct me if this isn’t the way EXCLUSIVE LISTINGS work anymore .
Thanks for the eye opener. In any case, what these guys are doing is simply stop listing houses that were listed at a given time, and are still for sale.
By the way, I am seing in Pasadena flippers that after reductions, would be selling at a lost. In a case one block from where I live, the flipper has stopped mowning the lawn, really funny
Why is that?
I realize that real estate agents are slime, but they technically have a fiduciary duty to their clients which should require them to list on MLS to maximize exposure of the listing.
It sounds like the payments for some of these interest-only loans have doubled or worse.
My rent hasn’t gone up in two years.
Yeabut your rent is going to go up soon — take it on the authority of Robert Cote’s (aka a landord’s) opinion
“But Michael McGee said the industry’s array of adjustable mortgage products has opened homeownership to thousands who otherwise could never afford today’s prices.”
But if the borrower can’t afford the mortgage after only a few years (or even months!), it’s hard to characterize the home as affordable. Financial hocus-pocus with an exotic mortgage can’t make an over-priced asset affordable forever.
“What the wise man does at the beginning the fool does at the end,” Buffett quipped.
Remember when waiters were giving stock picks in 99 and early 2000? Same exact thing.
wow 10% of all jobs are RE related
so if 1989 is a guide then
so mort jobs fall 30% -
RE sales 20%
Contruction 15%
= at least2.5% of employment just from RE jobs lost= 07 recession
Good start. Then factor in the effect of losing $600b in housing ATM consumption spending on the retail and automotive sectors and you have a mo-fo of a recession…
I provoded a link in the url entry that would support your prediction of a recession, but only more so! Since the year 2000, homeowners extracted $2.5 Trillion equity from their homes to use for other purchases. The chickens will come home to roost, IMO. There needs to be some big stimulus to prevent the recession. Extending long term capital gains tax breaks and dividends tax breaks another 2 years is a step in the right direction but it’s like a candle against the sun. I read long ago that a wise investor will have a small percentage of his assets in precious metals. One coin shop owner says the right percentage is the equivalent of what you think the probability is that the U.S. will have another major economic crisis. For me, that’s 10 percent. I’m not there yet, so I’m overweighting my dollar cost averaging into gold and platinum bullion.
ARMS are like playing musical chairs with hot potatoes. The last guy standing gets burned.