Many financial experts, from Greenspan on down, decried the trend toward nevative amortization loans. And many of those written a couple of years ago are set to get massive interest adjustments when the low-low come-on teaser rates expire. Lots of folks will be shocked when their payments nearly double in one year, yet they can’t move because they have eaten into their equity and can’t aford the next loan. So defaults are predicted.
Or so the story goes. Make sense to you?
Interesting. While I hadn’t heard that particular scenario before (there are only certain times I read up on this stuff), I do know that some of the more accurate contrarian-conservative market analysts have suggested that real estate prices have been in something of a “bubble” – overpriced for what a “realistic” market would value them at (which of course begs the question of what constitutes accurate “value”). But the presumption underlying their advice is that there will come a time in the near- to mid-term future when the overinflated prices begin to break, for one reason or another, and that it’s likely to turn into a classic crash – except it will be one where land, one of the traditional “hedges” against a falling market, will instead be one of the value-loss contributors to the problem.
According to this new book by Kevin Phillips, the “financialization” of a great power’s economy is a classic sign of its decline.
Definate risk of this happening. Anyone remember 1990-92? The tipping point is when rising interest rates on I/O loans or resets on the sweetheart loans the OP is talking about is combined with banks starting to repo and dump non performing loans. Property price gap downwards and there are no transactions.
Watch the transaction volume. If prices are dropping but there are still plenty of buyers, it’s not too bad. If prices are dropping and there are no buyers, it’s bad.
While I agree with you in large part, CG, I think the most important leading indicator will be in your first paragraph.
When banks stop working with owners in or near default and beginning ramping up their repo/seizure divisions we’ll begin to see the crisis. Most banks now will work with an owner rather than go through the hassle and risk of foreclosure. Once one or two major lenders begin giving up on that and taking assets we’ll be next to the abyss.
I don’t think it will be bad, well on a grand level, on some personal levels it will be a disaster. Banks will be unwilling to forclose on a property if they have a shortfall of equity on it, better to work with the homeowner while they still hold the title, then force a sale, sue the former homeowner for the balance, and the former homeowner getting the dept discharged in bankrupcy.
I don’t think too many are in a really bad situation, of zero or negative equity, payments already too much for the homeowners, and subject to go up due to non-fixed interest rates. But then again I can’t understand getting a non-fixed rate at this time of historic low interest rates. Perhaps some people with a tapped HELoC will struggle to pay that back.
so as someone who is going to begin looking at homes soon,and buy one next year, and happens to be in a formerly hot real estate market that has cooled (Jacksonville, FL), should I sit tight til the end of next year? There is a glut of homes available here. As recently as 18months ago, people were pretty much listing a home and selling it in 1 week, tops…now they sit and sit.
Transactions are WAY down in California.
http://www.dqnews.com/RRCA1106.shtm
Prices haven’t dropped yet, but are nearly flat. I’d be surprised if prices don’t go negative very soon.
Well I know there are all types of formulas for determining whether homes are over-valued, which I don’t really understand. One thing that baffles me, though, is that last year I read opinion after opinion that this time it’s “different” because there was supposedly a genuine housing shortage in California, and inventory levels were supposedly critically low. But now, all of a sudden, there seem to be record numbers of houses on the market with nobody buying them, and no explanation of how this supposedly dire housing shortage suddenly evaporated. I wasn’t tuned into the housing market in 1989, but friends tell me that there was exactly the same kind of “it’ll never happen” talk right up to the crash.
But that “genuine housing shortage” line is easily proven to be false. In real housing shortages rents go through the roof. And has the rental market kept pace with the housing market? Of course not, rents have risen very slightly compared to skyrocketing house prices.
I’m of the opinion that next year will spell the final chapter in the housing bubble we’ve seen the last 5 years.
Paul Krugman wrote a column in the NY Times a few days ago which predicts the same.
We’re 3/1 odds on a full-blown recession next year. Those are my numbers. And the housing bubble, which supplied all the money for the good times we’ve had the last few years, is a goner.
Don’t buy just yet. The bottom ain’t there yet.
So… how long should I hold off buying a house then?
I work for a major Wall Street lender and I cannot remember the last time I saw a fixed-rate first mortgage. Especially in the higher priced markets out west, almost all loans are “pay option” ARMs.
My wife and I just want to get out of our house without losing any money. If we break even so be it. We (stupidly) bought in May of this year, which was the very end of the housing bubble in our area. Now we’re paying interest only on a house that is not appreciating - basically paying rent to the bank, but it’s twice what the rent on a nice apartment would be.
We were thinking of waiting until the first of the year to sell but I’m starting to wonder if we should just go ahead and put it on the market.
And should I be rooting for a real estate crash or start worrying about a larger recession?
Bad times anyway. I figure it’ll be like the early '90s, with falling interest rates and flat to falling home prices, and a soggy economy at best.
If I were looking to buy a home, I’d wait until the second half of next year. If I were looking to sell, I’d do it now for as much as I could get.
OTOH, I don’t think ARM holders have that much to worry about. Longer rates have been trending down since the middle of the year, and if that continues, they should be able to either get bailed out by more lower rates, or refi to a fixed-rate mortgage at a nice low rate and save themselves.
There ARE fundamentals to the housing market: What the average person will pay to live there, given their average income. It’s not difficult to figure out, people who have figured this out won’t be affected (directly) by any fluctuations in the market. Pick a spot, decide how much you want to pay to live there, given a conservative estimate of your earning power, if you can afford it, buy, if not, don’t.
However, when people start buying houses with the expectation that the value will double in a year, that value calculation is no longer valid. Of course I should take out an exotic mortgage and pay 2x what I can afford, why not? The value of the house doubles every year! In fact, I’ll buy ANOTHER house, and my value will be quadrupling! These are the people who take the “your house is an investment” part to heart without understanding the fact that “investment == risk”, and betting the entire farm on a single volatile market is a bad bad idea. Funny thing about this bubble business is that if enough people buy into it, it actually comes true, people will keep buying more and more overpriced houses with that expectation, as long as the next greater fool can get an exotic enough mortgage to finance it. The last part is what, in a perfect lending enviroment, should stop the spread of the bubble. The lender realizes that giving a $900k interest only mortgage to a family that makes $50k/year is ridiculous. When this “music” stops, the last guy holding the bag is screwed.
Now, it is the opinion of many pundits(not neccesarily mine, as I don’t live in the US) that the lending enviroment, due to a number of factors like the securitization of mortgages into mortgage backed securities, is allowing this bubble to grow without checking it.
basically housing crashes go on for much longer than anyone expects. the key indicator is the transaction volumes. doesn’t matter what pundits are saying if sellers can’t find buyers.
also remember that the property market is like the stock market, all related parties make a lot more money in a rising bull market. therefore evry talking head will say nows the time to buy, this time is different, turnaround is coming, etc. no one is out there saying you’d be dumber than a syphed up crack ho to even think about buying for the next 2 years.
nixon on a pojo stick, does anyone with a brain think housing price
are gonna go up in the next 2 years given record number of io loans, refinanced houses at record low rates, adjustable mortgages, stupidly high prices from an affordability view, virtual guarantee interest rates are headed upwards?
i’ve seen bubbles in the US (1990-92), Tokyo (1991-2003), Hong Kong (1994-95) & (1997-2000), Shanghai (1997-2000), etc. They all go on for a long time.
not saying we’ve gone over the abyss in the US, but we’re getting close. if you’re not going to hold, dump it now before the rest of the suckers. if you’re gonna buy, I can confidently say that you won’t be any worse off over the next 2-5 years and you’ll probably be able to get something at a bargain price.
All the 3/1 and 5/1 ARM holders whose rates are about to reset might be in trouble. Even if they wait, and the rates are down a bit from the current ones, they’re still 1-3% higher than they were three or five years ago.
Not so fast: 10 year for the past five years.
Depends on exactly when the person bought, at least on this rate. Also, the 10 year is lower than the one year right now, I believe, so a person should be able to get a lower rate by going to a fixed rate mortgage now than simply rolling over an ARM.
basically housing crashes go on for much longer than anyone expects. the key indicator is the transaction volumes. doesn’t matter what pundits are saying if sellers can’t find buyers.
also remember that the property market is like the stock market, all related parties make a lot more money in a rising bull market. therefore evry talking head will say nows the time to buy, this time is different, turnaround is coming, etc. no one is out there saying you’d be dumber than a syphed up crack ho to even think about buying for the next 2 years.
nixon on a pojo stick, does anyone with a brain think housing price
are gonna go up in the next 2 years given record number of io loans, refinanced houses at record low rates, adjustable mortgages, stupidly high prices from an affordability view, virtual guarantee interest rates are headed upwards?
i’ve seen bubbles in the US (1990-92), Tokyo (1991-2003), Hong Kong (1994-95) & (1997-2000), Shanghai (1997-2000), etc. They all go on for a long time.
not saying we’ve gone over the abyss in the US, but we’re getting close. if you’re not going to hold, dump it now before the rest of the suckers. if you’re gonna buy, I can confidently say that you won’t be any worse off over the next 2-5 years and you’ll probably be able to get something at a bargain price.
What appears to be happening is that buyers and sellers are playing chicken. Sellers who don’t have to sell are waiting until spring, when the market rebounds a bit, and buyers who don’t have to buy are waiting for the prices to drop. In our market the cards from the real estate agents with recent sales are coming less frequently with fewer sales on them, but the prices seem to be holding reasonably well. We’ll see in the spring.
I wouldn’t buy now, though. At the very least in a few months you can find a house that has been on the market for a while and make a really good deal.
BTW, there seem to be a lot fewer ads on the radio for mortgages - and all are pushing for more conservative loans.