Probably the most frequent single question I get as a realtor from my friends and clients and contacts is “Are we in a real estate bubble?
Rain City Guide
Your Guide to the Seattle Real Estate Market
Probably the most frequent single question I get as a realtor from my friends and clients and contacts is “Are we in a real estate bubble?
Seriously Chuck, how can you make a post like this and not mention my blog? I find it hard to believe that you just haven’t heard of it… One thing you fail to mention in your analysis is that the so-called “demand-driven bubble” that you say Seattle is in is being fueled by “exotic,” “creative,” or as I like to call it, “suicidal” financing. Eventually the opportunity for such easy money is going to dry up, and Seattle’s bubble—just like those everywhere else in the country—will shrivel up.
Anyway, I’ll certainly be making a post on my blog about your post. Head on over tomorrow if you’d like to see my readers’ reactions.
The Tim, I have seen some warnings that interest only loans and other products could “dry up”. On the other hand, just today, I heard thay they are coming out with a FIFTY (50) year loan program!!
It’s not about demand, not about the world suddenly discovering that Seattle is such a nice place to live, not even about Microsoft’s endless hiring. The increase in real estate asset values is due to easy money policies of the Federal Reserve and the zero-down, interest-only mortgages available to anyone who can fog a mirror. It’s credit expansion and monetary inflation, primarily into the housing market, period.
These easy mortgages have bid up the prices of land and essentially created tremendous amounts of new money. We’re at the point now where the dollar itself is threatened by this credit expansion, and we’re looking at serious inflation and the overall cheapening of the US dollar.
The only solution now is to raise interest rates and constrain the amount of credit that can be issued. With higher interest rates, millions of overleveraged homeowners won’t be able to pay their mortgages and will default. Nominal values of RE will plummet, and loans/money in the economy will be destroyed. It’s one or the other at this point: either the US dollar or the inflated values of homes.
We’ve had a boom driven by monetary policy, and now we’re about to live through the hangover, a very serious recession or worse. This will likely be the nastiest economic storm we will see in our lifetimes.
You’re kidding yourself if you ignore the monetary and economic aspects of the very real Housing Bubble, and assure yourself instead that demand, and not highly risky, leveraged, speculative investment, has driven it.
It’s not about demand, not about the world suddenly discovering that Seattle is such a nice place to live, not even about Microsoft’s endless hiring. The increase in real estate asset values is due to easy money policies of the Federal Reserve and the zero-down, interest-only mortgages available to anyone who can fog a mirror. It’s credit expansion and monetary inflation, primarily into the housing market, period.
These easy mortgages have bid up the prices of land and essentially created tremendous amounts of new money. We’re at the point now where the dollar itself is threatened by this credit expansion, and we’re looking at serious inflation and the overall cheapening of the US dollar.
The only solution now is to raise interest rates and constrain the amount of credit that can be issued. With higher interest rates, millions of overleveraged homeowners won’t be able to pay their mortgages and will default. Nominal values of RE will plummet, and loans/money in the economy will be destroyed. It’s one or the other at this point: either the US dollar or the inflated values of homes.
We’ve had a boom driven by monetary policy, and now we’re about to live through the hangover, a very serious recession or worse. This will likely be the nastiest economic storm we will see in our lifetimes.
You’re kidding yourself if you ignore the monetary and economic aspects of the very real Housing Bubble, and assure yourself instead that demand, and not highly risky, leveraged, speculative investment, has driven it.
When 71% of all our closed 2005 purchase transactions were nothing down 100% financed sales, overwhelmingly fixed I/O ARMS (many 6 mos. LIBOR adjustables) for short periods like 2yrs or 5yrs, what does this tell you? Our firm is just a tiny micro-microcosm of our local market. Just think what the title companies are closing all across our county. That’s what boggles the mind.
IMO we are in a credit bubble leading to real estate bubble leading to a couple scenarios consumers will be faced with: pay huge mortgage payment increases when the adjustment period arrives or..
1- refinance again in 2yrs or so, if possible, if home prices do no less than go flat and if any principal is paid (highly unlikely if individuals spending behavior marches on);
2-sell, if possible, if home prices do no less than go flat;
3-delinquency.
Or, perhaps lenders will go the way of consumer electronics. I hear Magnolia Hi-Fi has a sweet Plasma that I can pick up for $5K and I don’t have to make any payments for 16 months! Obviously being sarcastic. 🙂
When 71% of all our closed 2005 purchase transactions were nothing down 100% financed sales, overwhelmingly fixed I/O ARMS (many 6 mos. LIBOR adjustables) for short periods like 2yrs or 5yrs, what does this tell you? Our firm is just a tiny micro-microcosm of our local market. Just think what the title companies are closing all across our county. That’s what boggles the mind.
IMO we are in a credit bubble leading to real estate bubble leading to a couple scenarios consumers will be faced with: pay huge mortgage payment increases when the adjustment period arrives or..
1- refinance again in 2yrs or so, if possible, if home prices do no less than go flat and if any principal is paid (highly unlikely if individuals spending behavior marches on);
2-sell, if possible, if home prices do no less than go flat;
3-delinquency.
Or, perhaps lenders will go the way of consumer electronics. I hear Magnolia Hi-Fi has a sweet Plasma that I can pick up for $5K and I don’t have to make any payments for 16 months! Obviously being sarcastic. 🙂
This article makes me feel very good about my decision to buy a home in the Bellevue area. I don’t have any money to put down, and am getting a 100% interest loan, with adjustable rates. But since prices will just keep going up I don’t have much to risk. If my income doesn’t rise appropriately to meet the future increased mortgage payments (as my loans re-adjusts), I could always just sell and take a good profit in the worst case scenario.
Better though, I can just refinance in a couple years (before my payments go up) and cash out some of the equity to keep making payments for even longer.
This is a can’t miss money maker!
But we have very restrictive state and local growth management laws and land use ordinances, and building is not keeping up with demand.
Every single place without exception that has seen substantial price rises has made this claim. What makes Seattle different in this one respect? It isn’t the most restrictive, it isn’t running out of land, inventory isn’t drying up, new homes are still being built. In short this claim is nothing more than a reworded version of “land, they aren’t making any more of it.”
The number of housing units in Seattle increased about nine percent (21,492 units) during the 1990s to reach 270,524 units, according to Census 2000. Seattle’s population also grew nine percent over the decade.
Wow, I guess thay are making more of it.
But we have very restrictive state and local growth management laws and land use ordinances, and building is not keeping up with demand.
Every single place without exception that has seen substantial price rises has made this claim. What makes Seattle different in this one respect? It isn’t the most restrictive, it isn’t running out of land, inventory isn’t drying up, new homes are still being built. In short this claim is nothing more than a reworded version of “land, they aren’t making any more of it.”
The number of housing units in Seattle increased about nine percent (21,492 units) during the 1990s to reach 270,524 units, according to Census 2000. Seattle’s population also grew nine percent over the decade.
Wow, I guess thay are making more of it.
Wow. The fun thing about blogs is that you actually get reactions.
Tim, I wasn’t aware of your blog – thanks for the link: http://seattlebubble.blogspot.com
Christian’s comments about easy money are right on – the price of all assets has been inflated by interest rates coming down steadily for 20 years (1982 -2002), and by the easy money policies of the Fed and the GSEs. But the Fed is in fact charged with not overturning the cart, so we may see several more years of moderate interest rates. Tim’s comments on the number of short term adjustable rate mortgages is a commonly stated concern, and I agree it is a risk. Would sure like to hear some solid stats on the number of less-than 5-year ARMS relative to the total volume of home purchases over the last 3 years, especially in the Seattle region. My comments were on what I think will happen with prices. This is hardly a no-risk situation. But homeowners have a lot more staying power than speculators (Type II vs Type I situations). And if inflation really starts to run, who knows what will happen to housing prices. The house I grew up in cost $14,000.
Wow. The fun thing about blogs is that you actually get reactions.
Tim, I wasn’t aware of your blog – thanks for the link: http://seattlebubble.blogspot.com
Christian’s comments about easy money are right on – the price of all assets has been inflated by interest rates coming down steadily for 20 years (1982 -2002), and by the easy money policies of the Fed and the GSEs. But the Fed is in fact charged with not overturning the cart, so we may see several more years of moderate interest rates. Tim’s comments on the number of short term adjustable rate mortgages is a commonly stated concern, and I agree it is a risk. Would sure like to hear some solid stats on the number of less-than 5-year ARMS relative to the total volume of home purchases over the last 3 years, especially in the Seattle region. My comments were on what I think will happen with prices. This is hardly a no-risk situation. But homeowners have a lot more staying power than speculators (Type II vs Type I situations). And if inflation really starts to run, who knows what will happen to housing prices. The house I grew up in cost $14,000.
If I can pipe in here…
Up until now, Rain City Guide has been void of all the name calling and uninformed banter (to put it nicely) that is prevalent on the bubble blogs. I deleted one comment so far because the person was so obviously wanting to call out someone else by name while hiding behind their anonymity. At least if you are going to call someone else by name, be decent enough to use a real name.
As long as negative comments stay informative (numbers and statistics), I’ll let them stay on the site. Start calling people names, and your comment will be deleted immediately.
If I can pipe in here…
Up until now, Rain City Guide has been void of all the name calling and uninformed banter (to put it nicely) that is prevalent on the bubble blogs. I deleted one comment so far because the person was so obviously wanting to call out someone else by name while hiding behind their anonymity. At least if you are going to call someone else by name, be decent enough to use a real name.
As long as negative comments stay informative (numbers and statistics), I’ll let them stay on the site. Start calling people names, and your comment will be deleted immediately.
Thanks, Dustin. This is a hot topic and needs to be discussed with civility.
Hi Chuck/others-
I wish I could tell you stats on the # of 1,3, 5 yr ARMS in relationship to the overall # of homes sold in the greater Puget Sound area. I can only tell you ours: that 71% of our entire purchase transactions we closed in ’05, were 100% financed ARM products. My best guess is that the title companies would mimic our stats. I do not think title companies would disclose those kind of stats. They are not pretty.
If I recall correctly, the economic and bond firm PIMCO was quoted in a WSJ article, stating that in ’05, 82% of all mortgage transactions originated in California were ARM products.
If one were to ask me if the borrowers were just “leveraging” the market and taking those funds that they would have placed as a down payment and investing it to obtain greater yields, I would say, no. Debt ratios are sky high and for many, there is little to NO money available to put down. In refinance situations, we are routinely paying off revolving debt, cars etc. that exceed $30-50K.
If you have a couple that is 45 min. late to a signing, and walk in our office eating McDonald’s, wearing what many would consider grungy clothes and their income “stated” is approx. $13K/mo as a painter, it kind of makes you wonder. Particularly after remarking that “the bus was late.”
Many of the people we served in ’04 and 05′ have already been back to our office refinancing. I imagine that it’s the same for other escrow firms. A few clients have flat out told me at signing that the HELOC’s are killing them (the piggybacked 2nds to avoid private mortgage insurance). There will be a boatload of short-sale transactions across the country in the near future. This is a market agents should pursue.
Sorry for the long post. Perhaps some of the LO’s that frequent this blog would like to chime in.
Hi Chuck/others-
I wish I could tell you stats on the # of 1,3, 5 yr ARMS in relationship to the overall # of homes sold in the greater Puget Sound area. I can only tell you ours: that 71% of our entire purchase transactions we closed in ’05, were 100% financed ARM products. My best guess is that the title companies would mimic our stats. I do not think title companies would disclose those kind of stats. They are not pretty.
If I recall correctly, the economic and bond firm PIMCO was quoted in a WSJ article, stating that in ’05, 82% of all mortgage transactions originated in California were ARM products.
If one were to ask me if the borrowers were just “leveraging” the market and taking those funds that they would have placed as a down payment and investing it to obtain greater yields, I would say, no. Debt ratios are sky high and for many, there is little to NO money available to put down. In refinance situations, we are routinely paying off revolving debt, cars etc. that exceed $30-50K.
If you have a couple that is 45 min. late to a signing, and walk in our office eating McDonald’s, wearing what many would consider grungy clothes and their income “stated” is approx. $13K/mo as a painter, it kind of makes you wonder. Particularly after remarking that “the bus was late.”
Many of the people we served in ’04 and 05′ have already been back to our office refinancing. I imagine that it’s the same for other escrow firms. A few clients have flat out told me at signing that the HELOC’s are killing them (the piggybacked 2nds to avoid private mortgage insurance). There will be a boatload of short-sale transactions across the country in the near future. This is a market agents should pursue.
Sorry for the long post. Perhaps some of the LO’s that frequent this blog would like to chime in.
Cute article. Type I insanity vs. Type II insanity?
Seriously, all this talk of appreciation and how Seattle is somehow “special” is really laughable. If I had the time, I am absolutely certain that I could find even more compelling articles about Boston, NYC, DC, Florida, San Diego, Orange County, Phoenix, Vegas, and Silicon Valley. What do all those metro areas have in common? They are all choking on inventory and prices are starting to tumble.
The previous posters on this forum have adequately covered how the mortgage lending standards are a joke. I will just ask you if you can do some 11th grade math.
Can you?
Try this example and let me know what you think. As interest rates rise, it kills off speculation, jobs, and the underlying value of the asset. That’s triple-witching for the housing market. Just so you know, Seattle IS just as subservient to the laws of economics as every place else. Our turds, despite what we might think, actually stink.
Seattle is the last domino to fall in the bubble (type I or type II) collapse. It will collapse into an environment that is worse than the environment that catches the first domino.
I also find it appalling that the Real Estate Industrial Complex is ruining young families by shoe-horning them into homes they have no hope of ever affording. You scare people into thinking that the snapshot of today is the way things will always be. We have had 25 years of falling interest rates, and now it is time to revert to the mean, and then some.
20 cents on the dollar by 2010. You heard it from me first.
I love McDonald’s and sometimes wear grungy clothes.
I do not however, ride the bus…
Tim the LO, and Chuck,
Tim – your stats are even more soboring than I had anticipated. I’ve been laughed off of almost every blog with my 20 cents on the dollar by 2010 prediction, but now I think it is almost a certainty.
Chuck – prices are set at the margin. SOME owners have staying power, but young families that bet the entire farm on their house going up in value faster than the payments do not. This will end in tears. I think the Labor Dept. estimates that 55% of Western Washington jobs created since the tech bubble burst, are in the Real Estate Industrial Complex (REIC). These jobs are bubble jobs, just as much as the internet jobs created from ’98-’01. My guess is the intenet bubble jobs got moved into the REIC, and when this bubble blows (and it will), those people will be forced to sell.
Retail has been the bulk of the remainder, and I wonder how much of the retail sector has been driven by HELOC money? I checked out my neighbors trust deeds at the county recorder’s site, and almost all have at least a second, and in more than half the cases, a third. I live in one of the more affluent areas of the state.
The only “catching up” to be done is Seattle RE prices coming down to meet a declining job base (once the REIC blows).
I apologize for the mean-spirited comment, it was probably one of my readers. I agree that some people get too emotional when discussing this topic. I asked people to comment here (and to keep it friendly) because I know that some of the regular commenters on my blog have useful and insightful things to say on the topic, and most of them share their thoughts without name calling. Others can be quite needlessly harsh though, and I understand your policy of deleting such posts.
I love McDonald’s too and wear grungy clothes, but if I made anywhere near $13K month and I don’t, I would own a car and I would probably be the owner of the paint company–taking the bus to sign paperwork on a home purchase seemed rather out of place.
PS. you can also get a loan even if you are only 12mos out of being in foreclosure (true). It doesn’t matter these days. Bankruptcy, no problem. I remember the good old days when it took YEARS to wipe away credit blemishes–today,it just a matter of what interest rate you pay.
I love McDonald’s too and wear grungy clothes, but if I made anywhere near $13K month and I don’t, I would own a car and I would probably be the owner of the paint company–taking the bus to sign paperwork on a home purchase seemed rather out of place.
PS. you can also get a loan even if you are only 12mos out of being in foreclosure (true). It doesn’t matter these days. Bankruptcy, no problem. I remember the good old days when it took YEARS to wipe away credit blemishes–today,it just a matter of what interest rate you pay.
The 50 year loan won’t save the easy money train-
Look at the amoritization chart for a 50 year loan and it’s easy to tell it’s just an Interest Only loan in disguise. You end up paying a lot more interest to qualify for just a little more house. Anyone who decides to take out a 50 year loan to afford a house is stretching their budget too far. If everyone stretches to buy a house sooner or later consumer spending will have to go down in the area. When that happens our economy could also go south too.
It seems many home buyers have had trouble thinking in the long term lately. Sure maybe some people think they will only own their house for 5 years and then move, but if property values don’t grow in the next 5 years and you have an interest only loan they you have no equity. How can they move then?
The 50 year loan won’t save the easy money train-
Look at the amoritization chart for a 50 year loan and it’s easy to tell it’s just an Interest Only loan in disguise. You end up paying a lot more interest to qualify for just a little more house. Anyone who decides to take out a 50 year loan to afford a house is stretching their budget too far. If everyone stretches to buy a house sooner or later consumer spending will have to go down in the area. When that happens our economy could also go south too.
It seems many home buyers have had trouble thinking in the long term lately. Sure maybe some people think they will only own their house for 5 years and then move, but if property values don’t grow in the next 5 years and you have an interest only loan they you have no equity. How can they move then?
Today I was talking with my wife about the type of loans we’ve closed over the last 16 mos. or so. A couple items that she brought to my attention that I forgot about were two VERY LARGE ASTERISKS on these 100% ARM loans:
1. Many of these loans have 24 to 36 month pre-payment penalties that, when you calculate, approach several thousand dollars in interest accrued, depending upon the loan amount. This wipes out potential equity and/or severely pinches those who need to refinance. I distinctly remember a couple times where this suprise nearly derailed a couple refinance transactions and made a seller irate when I let them know that they were “short” about $6K in proceeds due to this issue.
2. Many of these loans were originated allowing the borrower to pay their own property taxes. This is a recipe for pain. Therefore, there are no impound escrow funds for taxes as part of their monthly payment. When qualifying and a creative way to make a loan work, the devil is in the details. This scenario saves the borrower each month anywhere from $200-400 month (depending on the taxes)in mortgage payments when qualifying, but is still an expense that they are to budget for. But, will the borrower budget for it? If this was the only route/program in which to qualify for a home purchase, it makes you wonder? For exampple, just this past Feb., the Orange County Register (California) reported that over 40,000 Orange County single family homeowners were dilinquent after the 1st tax bill this year. Do any of you remember when the Orange County government went bankrupt just a few years ago?
PS. to all the Realtors/Loan Officers who frequent this blog…..
please ask your sellers if they have a pre-payment penalty on an existing loan. In addition, don’t forget to ask sellers if they have an underlying FHA loan–they must be paid off by the 1st of the month or FHA will charge an entire months interest. Conventional payoff’s are different. This FHA scenario in which an agent told their client to close sometime within the 1st week of the month cost their seller roughly $1500.00 in interest which is entirely avoidable.
Your friendly escrow advocate,
Tim
Today I was talking with my wife about the type of loans we’ve closed over the last 16 mos. or so. A couple items that she brought to my attention that I forgot about were two VERY LARGE ASTERISKS on these 100% ARM loans:
1. Many of these loans have 24 to 36 month pre-payment penalties that, when you calculate, approach several thousand dollars in interest accrued, depending upon the loan amount. This wipes out potential equity and/or severely pinches those who need to refinance. I distinctly remember a couple times where this suprise nearly derailed a couple refinance transactions and made a seller irate when I let them know that they were “short” about $6K in proceeds due to this issue.
2. Many of these loans were originated allowing the borrower to pay their own property taxes. This is a recipe for pain. Therefore, there are no impound escrow funds for taxes as part of their monthly payment. When qualifying and a creative way to make a loan work, the devil is in the details. This scenario saves the borrower each month anywhere from $200-400 month (depending on the taxes)in mortgage payments when qualifying, but is still an expense that they are to budget for. But, will the borrower budget for it? If this was the only route/program in which to qualify for a home purchase, it makes you wonder? For exampple, just this past Feb., the Orange County Register (California) reported that over 40,000 Orange County single family homeowners were dilinquent after the 1st tax bill this year. Do any of you remember when the Orange County government went bankrupt just a few years ago?
PS. to all the Realtors/Loan Officers who frequent this blog…..
please ask your sellers if they have a pre-payment penalty on an existing loan. In addition, don’t forget to ask sellers if they have an underlying FHA loan–they must be paid off by the 1st of the month or FHA will charge an entire months interest. Conventional payoff’s are different. This FHA scenario in which an agent told their client to close sometime within the 1st week of the month cost their seller roughly $1500.00 in interest which is entirely avoidable.
Your friendly escrow advocate,
Tim
Follow-up to Robert Cote’s comment on Saturday. Robert, I don’t think they are making any more of it. In fact ‘they’ are not even letting us use what we have. The aforementioned ‘they’ being us, who passed the Growth Management Act, and are now learning to live with it. So instead of making more of it, or using more of it, we are learning to slice, dice and stack what we have. Take a look at the Greenwood area where they tear down an old house and put up 4 new townhouse-style homes in its place – 3,000 sf lot, 1,300 sf house, $375,000 a pop – block after block. Or Belltown and Bellevue, both of which are building quite a few high-rise apartments and condos. Slicing, dicing and stacking are not ‘making more of it’, they are more like the old pig farmers joke about using everything but the squeal.
Chuck,
Seattle 1950 5,057 pers/sq mi. 1990 2,966. 2000 2,843
Seattle’s (City) 85 square miles have a population density of 6,400. By comparison, the central 250 square miles of Los Angeles (three times as large a geographic area as the city of Seattle) has a population density of 15,600 — nearly 2.5 times that of Seattle. Indeed, the 80 square mile core of suburban Orange County is more than 50 percent more dense than Seattle, at 10,300.
An excerpt from the King County Growth Management Plan:
An update of estimated land capacity is provided on the next page. In 2001, the Urban Growth Area of King County had the capacity for more than 263,000 additional residential units. King County jurisdictions have permitted more than 30,000 housing units in Urban areas in the first three years of the new planning period. That amount is 20% of the 22-year Urban growth target of 151,900 households, so we are somewhat ahead of the forecast track. At the end of 2003, the capacity is still more than 232,000 units, nearly twice the capacity needed to accommodate the remaining 2022 target of 121,200 units.
Almost half of this housing capacity is in the Sea-Shore subarea, which can accommodate at least 112,000 units.
Declining urban area densities, increasing urban area extents. Seattle is not running out of room and is not even being constrained in any meaningful fashion. The large builders will claim otherwise but suprise, they are lying. Imagine that. This is nothing more than the development industry and their parasitical real estate industry attempt to turn repetition into fact. Put 2.5 people where every single person one now lives and get back to me about infill. You don’t know how good you have it and instead of leveraging these distinct advantages everything the Seattle (and Portland) region is doing is pushing the people into Los Angeles style hyperurbanism.
I’m sorry if I sound terse and lectury but as you can see I’m really up on the situation and “not making any more of it” is one of those Big Lies® that needs to be quashed.
Chuck,
Seattle 1950 5,057 pers/sq mi. 1990 2,966. 2000 2,843
Seattle’s (City) 85 square miles have a population density of 6,400. By comparison, the central 250 square miles of Los Angeles (three times as large a geographic area as the city of Seattle) has a population density of 15,600 — nearly 2.5 times that of Seattle. Indeed, the 80 square mile core of suburban Orange County is more than 50 percent more dense than Seattle, at 10,300.
An excerpt from the King County Growth Management Plan:
An update of estimated land capacity is provided on the next page. In 2001, the Urban Growth Area of King County had the capacity for more than 263,000 additional residential units. King County jurisdictions have permitted more than 30,000 housing units in Urban areas in the first three years of the new planning period. That amount is 20% of the 22-year Urban growth target of 151,900 households, so we are somewhat ahead of the forecast track. At the end of 2003, the capacity is still more than 232,000 units, nearly twice the capacity needed to accommodate the remaining 2022 target of 121,200 units.
Almost half of this housing capacity is in the Sea-Shore subarea, which can accommodate at least 112,000 units.
Declining urban area densities, increasing urban area extents. Seattle is not running out of room and is not even being constrained in any meaningful fashion. The large builders will claim otherwise but suprise, they are lying. Imagine that. This is nothing more than the development industry and their parasitical real estate industry attempt to turn repetition into fact. Put 2.5 people where every single person one now lives and get back to me about infill. You don’t know how good you have it and instead of leveraging these distinct advantages everything the Seattle (and Portland) region is doing is pushing the people into Los Angeles style hyperurbanism.
I’m sorry if I sound terse and lectury but as you can see I’m really up on the situation and “not making any more of it” is one of those Big Lies® that needs to be quashed.
I personally agree that there is a credit crunch, which will lead to some significant declines in prices. Home prices are a direct result of mortgages due to affordability. The scary part is that many people will not be able to afford their mortgages shortly.
As an example take an ever popular 2/28 interest-only piggy back loan with a HELOC second, the first time buyers loan of choice in many areas. Assuming they had an interest rate of 5% to start with a few years ago, they are coming up on an adjustment on the first mortgage. The first adjustment will be up to 7%, fully amortized for 28 years.
Assume the loan was $300,000 – at 5% I/O payment was $1,250, new payment = $2,039 a 63% increase in payments ($789). This also does not include the increase in their HELOC second rates.
(For calculations: http://www.forsalebyownercenter.com/tools/228adjustableratemortgagecalculator.aspx )
The simple solution of refinancing is not that easy. Unless they are saving money, most lenders will not refinance the loan to a new increased payment, so they cannot refinance pre-adjustment. The second issue. Since they have a HELOC 2nd, which allows them to pull out money, the refinance is considered a “cash-out” refinance, which is more difficult to obtain and more expensive, especially if over 80% LTV. If they wait until the loan adjusts, they may not be able to afford the first payment. If they make a late payment on the mortgage because of the increased payment, then they are screwed because no lender will touch them with a 30 day late. Finally, if they go with a fully amortized loan assuming current rates, say 6.5% on a 40 year loan = $1,756 and 50 years = $1,691 both of which still $500 a month more than previously paying.
If they are normal jobs getting standard 2-5% raises a year, there is no way they can afford the payments, much less even qualify for a mortgage since most lenders are taking away the “stated income” loan for salaried employee’s.
So what’s the end result if they can’t refinance, can’t sell and can’t afford?
P.s in California there is not Type 1 or Type 2 because you ask “anyone” why they want to buy a home and tell will instantly tell you… “it’s a great investment”.
I personally agree that there is a credit crunch, which will lead to some significant declines in prices. Home prices are a direct result of mortgages due to affordability. The scary part is that many people will not be able to afford their mortgages shortly.
As an example take an ever popular 2/28 interest-only piggy back loan with a HELOC second, the first time buyers loan of choice in many areas. Assuming they had an interest rate of 5% to start with a few years ago, they are coming up on an adjustment on the first mortgage. The first adjustment will be up to 7%, fully amortized for 28 years.
Assume the loan was $300,000 – at 5% I/O payment was $1,250, new payment = $2,039 a 63% increase in payments ($789). This also does not include the increase in their HELOC second rates.
(For calculations: http://www.forsalebyownercenter.com/tools/228adjustableratemortgagecalculator.aspx )
The simple solution of refinancing is not that easy. Unless they are saving money, most lenders will not refinance the loan to a new increased payment, so they cannot refinance pre-adjustment. The second issue. Since they have a HELOC 2nd, which allows them to pull out money, the refinance is considered a “cash-out” refinance, which is more difficult to obtain and more expensive, especially if over 80% LTV. If they wait until the loan adjusts, they may not be able to afford the first payment. If they make a late payment on the mortgage because of the increased payment, then they are screwed because no lender will touch them with a 30 day late. Finally, if they go with a fully amortized loan assuming current rates, say 6.5% on a 40 year loan = $1,756 and 50 years = $1,691 both of which still $500 a month more than previously paying.
If they are normal jobs getting standard 2-5% raises a year, there is no way they can afford the payments, much less even qualify for a mortgage since most lenders are taking away the “stated income” loan for salaried employee’s.
So what’s the end result if they can’t refinance, can’t sell and can’t afford?
P.s in California there is not Type 1 or Type 2 because you ask “anyone” why they want to buy a home and tell will instantly tell you… “it’s a great investment”.
Some topics are hard to kill.
Robert, you make my point – we are dividing what we have into smaller pieces, not making more of it.
Jessie, good comments. You and Tim might enjoy the following article on folks who are biting the bullet now to get themselves out of variable-rate danger: http://realtytimes.com/rtcpages/20060509_refinancestorm.htm
Chuck, I sincerely don’t understand your use of the “they’re not making more of it” argument. Does that mean that you recommend buying buildable land as an investment? Is there a price at which land is not a good deal, whether or not they’re making more of it?
Galen, my comment is in the context of Robert Cote’s post on 4/29 when he said “this is nothing more than a reworded version of “land, they aren’t making any more of it.
A home inspector pointed out that the existence of older homes nearby the newer one he was inspecting for me, was a good sign that it was a truly “buildable” lot. When a very large parcel of land is “available”, you have to question why no one has built on it before, and make sure it wasn’t because of drainage issues or other undersireable factors.
It’s amazing how many short plats are going on in Kenmore. Sometimes a single new home in an existing neighborhood where the lot became available due to short platting, is better than a larger piece of land for many houses, that was deemed to be “unworthy” of building on before the market heated up.
Chuck,
Fantastic post. You are definitely right when you said that Rain City Guide gets responses to their posts. I am been reading them for awhile and complete enjoy their topics, but I also enjoy their readers responses.
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