csua.org/u/ekr -> anotherfuckedborrower.blogspot.com/2005/12/are-we-there-yet-what-is-taking-soooo.html
Another FB is written by a mortgage 'insider' who happens to have a solid financal background. but lax underwriting standards, low rates, stated income, interest only loans, option-ARMs, neg-am's, no-doc loans, and more, made this froth/bubble/bubblette/credit bubble possible.
socalmtgguy and all the rest, I believe there is a housing bubble, especially in So Cal but it is taking a freaking long time to burst. I just want a decent house, nothing to flip or speculate on. Yes, interest rates have gone up some, and lending standards have tightened a smidge in some places, but for all intensive purposes, not much has changed. The latest increase in rates doesn't really affect that many people at the moment. We all know that in the bubble markets, there is an overwhelming use of ARMs, I/O ARMs, and option-ARMs to be able to "afford" the property. Most of these loans are fixed for a minimum of 2-5 years, with some going as long as 7 and 10 years. The borrowers that are refinancing right now more than likely bought 2-3 years ago, and now their ARM is adjusting, or about to adjust. Assuming they didn't take out too many HELOC's (home equity line of credit), they should have plenty of equity to be able to refi at a lower LTV. Some of these people will be impacted, but for the most part, they have enough equity cushion to keep themselves safe. On the other hand, you have the people that have bought in the past 12-18 months. These people are still sitting pretty with their low payments for another 12-18 months at least. In 2006 there are approximately 335 billion dollars worth of ARMs that are set to adjust. Let's just assume that each loan set to adjust is for $500,000. That means 670,000 households are going to have 4 options: refi, sell, foreclose, or pay the higher payments. Things get really tricky in 2007 as 12 TRILLION dollars of arms are set to adjust. That means 2,400,000 households have to pick one of those 4 options. Refinance - Most people will NOT like their mortgage payment fluctuating on a monthly basis, and they will certainly not like the fact that their payments will jump pretty dramatically as rates will most definitey be higher in 2006 and 2007. Rates will still be historically low, but not in the 4's and 5's which many of these borrowers will have had. They knew going in that they could not afford the property for 30 years, but they would do whatever they had to do to get a piece of property and start getting the appreciation. There will be many of these people who will try and sell. The only problem is that supply and demand works both ways. The got the appreciation when the supply was low, now they will have to give it back as there are massive increases in inventory. Many borrowers will lose their property because they cannot make their adjusted mortgage payment, or they cannot sell fast enough, or they cannot sell where they won't be upside down. Make the higher payment - Some people might not be able to refi because of credit scores dropping, employment changes, or even tightening of lending standards. These people will do what is necessary to keep making the payment. That is one of the things I belive that will be the catalyst for the bubble to burst. Rising rates will force people to lower prices as the same payment buys less house. Tightening lending standards will pull potential borrowers out of the market. Once those stated loans get a bad rap and/or they actually start pricing them correctly, you will remove another section of people from the market. Once these things start happening, I think you will see the beginning of things REALLY coming down. Don't fall for the dead-cat-bounce when people start buying in on the first dip. I hope this helps to shed some light on how much longer "you will be stuck in this station wagon"!
The thing to remember is that once a market turns down, it builds on itself and accelerates just as the increasing market does. As people have trouble making adjusted payments they decide to sell, and the supply gets larger, and prices start to drop. It takes about 7% in costs to sell a house, which means that everyone has 7% less equity. This causes more people to have no equity and decide not to make large mortg, tax, insurance and maintenance payments when they can rent for much cheaper. It takes time for this to get started and can take years for it to run its course. In the early 90s it took over 5 years for it to hit bottom. You will know it hits bottom when the maximum amount of pain has been inflicted on the maximum number of people, and no one has any desire to invest in real estate.
I could be waiting at least 12 more months before I can "negotiate" a reasonable price on a house. Depressing but your explanation makes it a lot of sense. It helps to have an "insider" shed some light on this craziness. I hate competing with stated income/no doc, I/O loans when trying to buy a house. I have noticed that in Valencia where I am currently renting, the inventory and "for sale" signs have been increasing a lot compared to 6 months earlier but the prices are not going down or just a little bit ($10,000 off a $600K house - give me a break).
It is NOT worth jumping out there and buying a place if it increases your overhead 2-3 times. No logical person would have thought that taking a stated 100% I/O loan would have been a great financial move 2 years ago. Feel free to e-mail me if you want to talk about it further.
if this is going to take a couple of years to play out, should I continue to rent for 2 years ( $2k month - $50K for 2 years ) or buy now and deal with a the drop in price?
Great post about what will eventually cause this thing to break. I feel that this is a very likely senerio but also think that we cannot rule out another Fed reflation. If the Fed raises rates two far and something breaks in the economy (ie recession). I could see them taking rates down just in time for this next refinancing cycle. This could mean hyper inflation and a slowed appreciation in the housing market while incomes catchup. Either way, the next two years should prove interesting.
I don't believe there is enough time to raise rates high enough so they can be lowered. Sure, they have been lower, but not by a too much (as a whole). stated income, lax underwriting, and other "creative" loans are the main culprits.
That is the trillion dollar question that we keep kicking around on this, and Ben's blog. I guess the lenders could work with the borrowers if they still hold the loans, but the rate needed to help most borrowers would be too low for the banks to make any money what so ever.
Another end to the bubble might come from two changes in consumer attitude. It isn't scientific but it is possible for markets incuding housing to just plain old get exausted. SUV sales are still off 30-60% even though the oil price spike is a memory. Then there are the other consumers, the buyers of MBSecs. I find it likely that they won't want any more paper at any price. This doubly worries me as we discussed earlier how lots of seemingly ordinary commercial paper is merely laundered MBSecs. A careful analysis of what assets or supports are actually behind the loan market would probably dictate caution and lightening up on anything with exposure. Both of these issues may play out a lot faster than the ARM I/O refi loan fiasco of 2006-7.
Is there truly nobody who has the authority to "work with borrowers"? Is there no way to unbundle these mortgages and start dealing with individuals? Of course in my worst fears I picture somebody stepping in, buying foreclosures, and making below market rate loans to the foreclosed. These loans would of course be sold to F&F under some special authority to buy extremely nonconforming paper.
Cote I think that you're right that sentiments in the bond market might reset considerably faster than sentiments in the housing market. There's always some price that it can be sold at, but alot of this stuff will be sold at junk bond prices, which would mean that nonconforming mortgages might get >10% interest rates.
Jim, I debated about "at any price" and I deliberately stuck my neck out. I don't think ...
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