I guess people who get into these situations simply can't imagine anything about the future at all. like what something might cost them if the payments are sure to go up. I really can't have much sympathy for people that are so.....well, is there any other word for it but stupid?
I took a job in the central coast area along with 5 others back in '99. We were all transplants from less expensive areas. We all loved the area and wanted houses, but the prices...sheesh! By '00 it was clear to me that we were in a bubble and I decided to continue to rent, but one of the guys who bought brought his morgage "miracle worker" into our office and said "I couldn't have done it without his help." Mr. Miracle Worker gave out cards and said, "see me. It's now or never. Real Estate prices will just keep going up."
Four guys eventually bought out of our group. Stupid me. I watched prices blast out of sight as I waited and waited for the bubble to burst. Four of the four have sold now and they all took pretty big haircuts.
It's not hard to understand the psychology. It's a combination of herd instinct and bad professional advice that gets folks into these dangerous loans.
I call BS. The LIBOR is roughly the same as in 2005 and lower than in 2006. 1 Year LIBOR - Rate, Definition & Historical Graph and FFR is also lower than at any time in the last two years, more than 300 bps below 2006 figures. There is no reset. If a "reset" to a rate lower than originally anticipated is causing defaults there are an awful lot of economists who need to return their Nobel prize money.
Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts.
strongbad writes:
I took a job in the central coast area along with 5 others back in '99. ... loved the area and wanted houses, but the prices...sheesh! By '00 it was clear to me that we were in a bubble and I decided to continue to rent,... Four of the four have sold now and they all took pretty big haircuts.
Huh? This makes no sense. I don't know of any places along the Central Coast that are anywhere near their '99-'00 prices never mind substantial haircuts below that.
"Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts."
Rob Dawg | Homepage | 06.14.08 - 4:41
Rob,
It's more of the Option part of the payment disappearing than the actual rate resets.
I explained to a couple of guys Friday at work what Option ARM's are. Both had the "What dumdfuck would do that look" and said it out loud. Then I mentioned that about 15% of Florida used this product.
"Fools," said I, "you do not know
Silence like a cancer grows
Hear my words that I might teach you
Take my arms that I might reach you"
But my words like silent raindrops fell
And echoed in the wells of silence
And the people bowed and prayed
To the neon god they made
And the sign flashed out its warning
In the words that it was forming
And the sign said "The words of the prophets are written on the subway walls
And tenement halls
And whispered in the sound of silence
"An Option ARM is a loan that has the same payment options as a credit card. Each month, you can choose to pay the full balance -- or you can choose to make a smaller minimum payment. If you make the minimum payment, as with a credit card, your total debt increases.
During the boom, many homeowners made minimum payments, believing the rising value of their home was outpacing the rising total of their debt. In retrospect, that wasn't a very good idea. What's worse is that most Option ARMs only offer options for the first few years. After that, homeowners need to start paying a defined portion of the loan each month -- just like any other borrower, and generally much more than they've been paying until now."
So this is not exactly BS. This is a really really Big problem.
I understand Option ARMs but the Lanser article never talked about them. CR did in his comments but in the context of them coming to a market near you sometime eventually. Think about an Option ARM taken out for $600k in Jun 2006 at LIBOR plus 2 and a 2 year reset. They've been paying 7.6% interest only or $3000/month. Now comes the dreaded reset. Currently they reset down to 5.2% for a 28 year period. The fully amortizing "shock" is $400/month. Even if they NegAm'd to their 115% limit that's $3900/mo.
The real shock is that they are going to have to make that payment for the next 28 years while hoping that their "investment" comes back to what they owe on it. They were counting on cashing out their equity in 10 years and moving to Arizona. In the mean time they are thinking: "I am going to be 70 years old when I finally pay this thing off. How am I going to save for my retirement, vacation in Europe, buy my next Lexus, put the kids through college, and absorb the cost of living increases we are seeing. Worse off, how am I going to make 150k a year consistently for the next 28 years."
I second the motion. Do we have unanimous consent?
Educated Americans are bred to be subprime! 90%+ of America's economic and political problems can be attributed to this fact. And there is nothing that can be done to correct the problems because Americans are bred to be irremediable dopes. They suffer from blind faith in the system even after the system is failing them.
Focusing on the root causes of America's problems,
"w" has hit the target. Run the numbers on a 28 year mortgage on a house just 10% underwater ($540k vs $600k) and that $3400 payment is $40,000 per year until 2013 to pull even on the new lower value. "I'll take RUTHLESS DEFAULT for $180,000 please Alex."
It's not just the negative equity, it's the negative equity as a percentage of income. If a house that is 2.5x income drops 10% the negative equity is only 25% of income. However, if a house that is 5x income drops 10% the negative equity is now 50% of income. Of course, during the boom people were leveraging upwards of 10x+ and the subsequent drops are much greater than 10%.
"Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings." That was apparently in 2006, and we can be fairly confident that people haven't decided to pay more on their mortgages in the past year and a bit.
So, in up to 4/5th of the cases, their reset (from Dr. HB) looks like going from $1,666 to $3,010 on $500k (actually higher due to Neg Am and shorter amortization). I'm too lazy to run the numbers with Rob Dawg's example, but this gives you an idea that the resets look to be life-changing for most people in the Neg Am world.
I second w's analysis, and add the point that LIBOR won't be there forever. That $3900 can change every month or every 6 months on many recent OA's.
Rob's example also assumes they didn't have a teaser interest rate plus a payment option at the beginning. Maybe they got in the door at $2000/mo. Then they got that big escrow notice in 2007 because the first year's taxes were based on the old owner's 20 year old Prop 13 basis.
Now they get the recast notice and say WTF?
Rob is right that a 30% payment jump when it recasts may be OK if you could afford the $3000 initially and still go down to PF Chang's a couple times a month. What if they were already eating Kraft's finest every night to make that initial nut?
The real bitch is that the homes they completely overextended themselves for would've been affordable to them on fixed rates had the bubble not happened.
As a first time home buyer waiting in orange county I am anxious to see homes come down to values that I can afford. Which at their current rate of decline will be somewhere next year. The other day in fullerton I saw a home that had fallen over 50 percent sense it sold in 2005 (although the deal smelled of fraud) it still gives me hope.
The dependence on underwater homeowners for low adjustable rates to keep their houses creates a "debt trap" for the economy. If the economy starts to recover, rates go up, kicking out homedebtors and pushing us back into recession. The economy becomes trapped in an indefinite extended recession. The low long-term bond rates show I'm not the only one thinking about this.
T-Shane writes:
...Rob's example also assumes they didn't have a teaser interest rate plus a payment option at the beginning.
Exactly and thus my previous comment "Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts."
The wonder is how the banks let this go on for so long to such extremes. Did they really think they were the smartest guy in the room and when the music stopped they'd have no hot potatoes AND still get the only chair left?
The boiling frogs aren't staying in the pot long enough to cover the bank. Surprise, surprise.
This is no joke. On Saturday's during baseball season I go up this one road and on and off during the season there is a family out there with a table of Beanie Babies for sale for $1 each. I really should take a picture of it.
The latest TSLF auction really... uhhh... what't the technical term -- freaked me out. The TSLF had been showing a gradual improvement over the last month (fell under $100 billion this week) and I was about to give a sigh of relief. But then this week's auction happened. Don't like the Reuters reported it either. They compared it the last Schedule 1 auction two weeks previous. I think the right thing to do is to compare it to the one four weeks ago (as the term is 28 days). Bid-to-cover went from .29 to 1.09; this is a $19 billion increase of swapped-out Treasuries (which should put us back over $100 billion). I'm going to become concerned if next weeks auction continues the trend. I figure this may be a sign of Alt-A hitting the fan...
I am living right in the middle of this OC Alt ARM implosion in an area that was developed during the housing bubble. I used to wonder how everyone could afford $800,000+ for a 2500 sf home with 2 nice cars in the driveway. Now I know the answer - they couldn't. It was all an illusion. Fake money. Fake wealth.
Good thing I bought my house with 30% down on a 15 year - this sucker is almost paid off. I figure I can rent it out in a couple years and buy that 2500sf house for half the cost these fools paid. Life is good!
We might all be subprime now, but dont worry well all be FHA in not so distant future. Our brave realtors still manage to sell overpriced POS houses and the vast majority of those lucky buyers go FHA. However things are getting worse than I even expected. I see bank repos selling for 27 cents on the dollar and vacant land for 10 cents on the dollar. If Florida doesnt go bankrupt in the next 3-4 years I would be really surprised. Dont get me wrong, I love Florida. After 30 years of Russian winters I feel like I am in haven.
It's crazier up here in Santa Cruz than in OC. We don't have an oversupply of houses, so instead of paying $800K for a new 2500 sq. foot house, you could pay that much three years ago for a shakily-remodeled 1950s 3/2 of 1600 square feet that's "only a mile from the beach." (Half of everything's less than a mile from the beach).
Sure, supply was limited compared to demand, but most of that demand wouldn't have been there without the easy money, except for the choicest ocean view properties.
"I used to wonder how everyone could afford $800,000+ for a 2500 sf home with 2 nice cars in the driveway. Now I know the answer - they couldn't. It was all an illusion. Fake money. Fake wealth."
Jim | 06.14.08 - 6:49 pm | #
Jim,
One of the mechanics I work with bought 14 years ago in Sarasota. He wondered how people could afford his neighborhood when it increased from 100k to 500k+ in that amount of time. Plus 2 new cars. Private schools. Then he found out how. Lets just say he is not quiet about having less than 6 payments left at about 800.00...
Hey Jim, right you are. Its the same as competitors' of Enron trying to trade energy products against them. The smart one said we can't do it, and didn't keep trying. The dumb ones did and lost their shirts. Enron wasn't smarter, or better funded, they were just illegallly manipulating the market, and went to prison for it. Its hard to be patient, like now, waiting for the next slam move down.
"I see bank repos selling for 27 cents on the dollar and vacant land for 10 cents on the dollar. If Florida doesnt go bankrupt in the next 3-4 years I would be really surprised. Dont get me wrong, I love Florida. After 30 years of Russian winters I feel like I am in haven."
Broker | 06.14.08 - 7:05 pm | #
Broker,
Don't know what part of Florida you are in but I have seen multiple auction failures here in Charlotte County. We have reached the point here stuff just ain't sellin...And yes our tax base is gonna collapse. I have been to numerous county meetings and its all deaf ears. This fall/next year as the high end(300k+) collapses it will get very interesting.
No one but the banks are listing houses in Orange County. The result is a slight decrease in listings, I'm sure the NAR will be pointing that out shortly. The number of delinquencies is a telling sign of the future. Couple that with the fact that real estate related jobs were the top employer along with financial are tech, look out.
Cobra, I think individual Fla counties will be hard hit, but the State seems to be cutting ok for the next fiscal year at least.
In spite of billions spent on property in Miami Dade, the tax assessor actually cut countywide taxable value in Dade by 2.7%. Since the tax assessor never assessed at bubble prices to begin with, that is really some cut. Real
property is supposed to be assessed at full value here. Before the bubble, I would use the assessed value plus 25%-30% more to estimate a fair value. Then the bubble came and I threw up my hands. Nothing made sense. Now I think the assessed value is pretty close to the true value.
Everybody threatened with cuts is screaming bloody murder, but cuts will indeed have to be made.
That doesn't count the people who simply won't pay their taxes.
If Florida doesn`t go bankrupt in the next 3-4 years I would be really surprised.
OT (and anecdotal data point),
Talked to someone yesterday, that knows lots of gossip on the Florida Nature Coast. It appears that some unsold condos at Suwannee were finally moved at 30-50% off original asking price. I was told that several $300K condos sold for $150K. No idea if the seller was a bank REO or a desperate builder.
Rob Dawg writes:
I call BS. The LIBOR is roughly the same as in 2005 and lower than in 2006. 404 Not Found libor.htm and FFR is also lower than at any time in the last two years, more than 300 bps below 2006 figures. There is no reset. If a "reset" to a rate lower than originally anticipated is causing defaults there are an awful lot of economists who need to return their Nobel prize money.
Rob, I hear ya (and tend to agree with your cut at the rationale for the spike in defaults) but mortgage rates have really shot up these past few months while refi qualifications have tightened. Looking over the 3 year window for 30-Year Fixed-Rate Mortgage Rate at Bankrate - the steep increase over the past 2 months have pushed rates well past 2005 and are close to matching the mid-2006 and mid-2007 spikes. I believe that 30-Year Fixed-Rate Mortgages now more closely follow the 10 year treasury than LIBOR. Also the sharp drop of 30-Year Fixed-Rate for the period spanning mid-2006 through mid-2007 was largely decoupled from LIBOR (and most everything else).
Anecdotal story: Some distant inlaws bought a house in 2006 with an OptionARM for 975k. Their minimum payment is 3300/mo, which they are of course paying. Their reset is coming next year at 7000/mo, which they cannot afford. Their house is on the market now.
Most Option ARMs allow you to pay far less then interest only for the first 3-5 years depending on when you hit your cap. So the actual interest rate that the loan will reset to is almost irrelevant, it all about going from Neg-Am to fully amortizing that kills. There are 300billion Option ARMs in california and 200b more elsewhere.
Those who are using fully amortizing ARMs will have no probems, since rates are low, its only the teasers and options that will get carried out.
«The real bitch is that the homes they completely overextended themselves for would've been affordable to them on fixed rates had the bubble not happened.»
But who wrote this also knows that the people that bought these houses on the up part of the bubble did not buy to hold, as if they had bought on fixed rates, but bought to sell to a greater fool and make a huge profit and feel like big winners.
Option ARMs were in effect used as the cheapest (in cash flow terms) way to "lease" title to a rapidly appreciating asset to then flip that asset, and that's why that 80% of option ARM debtors only made the minimum payment.
The ideas was to get title to a house that had gone from $150,000 to $600,000 in a few years, buy it at $600,000, sell it for $800,000 next year to a greater fool, and in that year pay as little cash as possible to hold title, and be a huge WINNER!
What all the flippers are now mad about is that they ended being the greatest fool, and the guy who sold that house to them at $600,000 is now a the huge winner, and they are LOSERS.
And this is something that a lot of people don't consider: that for every greatest fool that bought at $600,000 and now owes that much on a $300,000 house, there is a winner who got $600,000 cash for the same and is laughing all the way to his (foreign if he has any sense) bank, as well as the guy who made overall probably around $100,000 in fees on that transaction.
"Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts."
Rob, I agree with you that teaster rates/option ARMs will really cause a lot of pain.
I disagree with this: They've been paying 7.6% interest only or $3000/month. Now comes the dreaded reset. Currently they reset down to 5.2% for a 28 year period. The fully amortizing "shock" is $400/month.
$400/month may not seem like a lot to you, but IMO $400/month is a huge shock to a large percentage of American homeowners. Especially given:
-the rapid increase in other costs of living (gas, food, heating/cooling, etc)
-the high debt to income ratio that homeowners have
-the high amounts of debt Americans haev on other accounts (car loan, cc bills, student debt etc)
-the negative savings rates
given the above, Americans have clearly been living at the end of their means for a long time. I think $400/month is easily enough to break the camel's back for many many Americans.
that for every greatest fool that bought at $600,000 and now owes that much on a $300,000 house, there is a winner who got $600,000 cash for the same and is laughing all the way to his (foreign if he has any sense) bank, as well as the guy who made overall probably around $100,000 in fees on that transaction.
except you miss a key point: most of the "winners" took their winnings and bought another house that was also overinflated. they have to live somewhere
So the person who sold the $600k house then went and bought a $1.2M house.
I'm sorry, I think the only people who laughed to the bank were the people feeding off the transaction fees, and maybe a very very very small few who took their winnings off the table and downsized or rented (the so-called equity locusts)
Can someone tell me WTF is going on? We took the boat to Stockton yesterday for a day of racing drinking and eating and on the way, we hear this ad that was floging loans to people with bad credit!
No doc! The loans sounded like complete NINA loans. WTF!!!
«except you miss a key point: most of the "winners" took their winnings and bought another house that was also overinflated. they have to live somewhere
So the person who sold the $600k house then went and bought a $1.2M house»
Except that you miss a key point -- someone then got $1.2m cash for a $600k house. Those guys are retiring retired WEALTHY.
The American Dream is to find an Indian from which to take a dozen acres of free land, or a greatest fool who will pay 1.2m for a $600k house. The American Way is that winners WIN and losers LOSE!
«the people feeding off the transaction fees, and maybe a very very very small few who took their winnings»
THe people who fed off the fees made a lot of money, but the people selling the 3m excess homes are not a "very very very small few".
The losers are those who paid $1.2m for a $600k house and the guys who lent them the money. But for everyone of them there is a winner who got away with the cash.
You went to Calif in 1999 and thought the housing market was in a bubble and didn't buy! And NOW you pat yourself on the back??
The housing market in California bottomed in '97-'98. The rental market was in a bubble after that, because of the dot-com bubble. The best time to buy was '99, with more than 100% appreciation if you sold before 2006.
Blissex, your point actually works in a different way than you think. Sure, there were a few people who got wealthy this way. But many more people got slightly more comfortable off the (invented) asset appreciation - they their money and bought cars, paid for healthcare, and generally lived a good middle class life when real wage increases were not sustaining this. That group of people - much of the American public - is NOT retiring wealthy, they're "resetting" from homes in the Inland Empire and nice cars to living with relatives. That "retirement money" is generally already spent.
first, its 21:52 GMT-1
I guess people who get into these situations simply can't imagine anything about the future at all. like what something might cost them if the payments are sure to go up. I really can't have much sympathy for people that are so.....well, is there any other word for it but stupid?
The government fought against "wage inflation" while encouraging house inflation. The results are not shocking.
First.
Oops - I am stoopid.
happy to be renting in OC
Hoocoodanode?
I took a job in the central coast area along with 5 others back in '99. We were all transplants from less expensive areas. We all loved the area and wanted houses, but the prices...sheesh! By '00 it was clear to me that we were in a bubble and I decided to continue to rent, but one of the guys who bought brought his morgage "miracle worker" into our office and said "I couldn't have done it without his help." Mr. Miracle Worker gave out cards and said, "see me. It's now or never. Real Estate prices will just keep going up."
Four guys eventually bought out of our group. Stupid me. I watched prices blast out of sight as I waited and waited for the bubble to burst. Four of the four have sold now and they all took pretty big haircuts.
It's not hard to understand the psychology. It's a combination of herd instinct and bad professional advice that gets folks into these dangerous loans.
finally...
took big haircuts on their purchases they bought in '00? Or bought in '05?
Here is Mr Mortgage Guy via BMIT on Alt-A option Arms
http://tinyurl.com/3r69cr
Watch the video. It appears the worst is yet to come.
I call BS. The LIBOR is roughly the same as in 2005 and lower than in 2006. 1 Year LIBOR - Rate, Definition & Historical Graph and FFR is also lower than at any time in the last two years, more than 300 bps below 2006 figures. There is no reset. If a "reset" to a rate lower than originally anticipated is causing defaults there are an awful lot of economists who need to return their Nobel prize money.
Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts.
strongbad writes:
I took a job in the central coast area along with 5 others back in '99. ... loved the area and wanted houses, but the prices...sheesh! By '00 it was clear to me that we were in a bubble and I decided to continue to rent,... Four of the four have sold now and they all took pretty big haircuts.
Huh? This makes no sense. I don't know of any places along the Central Coast that are anywhere near their '99-'00 prices never mind substantial haircuts below that.
"Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts."
Rob Dawg | Homepage | 06.14.08 - 4:41
Rob,
It's more of the Option part of the payment disappearing than the actual rate resets.
I explained to a couple of guys Friday at work what Option ARM's are. Both had the "What dumdfuck would do that look" and said it out loud. Then I mentioned that about 15% of Florida used this product.
They both agreed we are fucked.
Chris
"Fools," said I, "you do not know
Silence like a cancer grows
Hear my words that I might teach you
Take my arms that I might reach you"
But my words like silent raindrops fell
And echoed in the wells of silence
And the people bowed and prayed
To the neon god they made
And the sign flashed out its warning
In the words that it was forming
And the sign said "The words of the prophets are written on the subway walls
And tenement halls
And whispered in the sound of silence
Even Simon and Garfunkel are subprime now.
Rob here is a good description of option arms
"An Option ARM is a loan that has the same payment options as a credit card. Each month, you can choose to pay the full balance -- or you can choose to make a smaller minimum payment. If you make the minimum payment, as with a credit card, your total debt increases.
During the boom, many homeowners made minimum payments, believing the rising value of their home was outpacing the rising total of their debt. In retrospect, that wasn't a very good idea. What's worse is that most Option ARMs only offer options for the first few years. After that, homeowners need to start paying a defined portion of the loan each month -- just like any other borrower, and generally much more than they've been paying until now."
So this is not exactly BS. This is a really really Big problem.
A forgotten lesson from history:
Leverage feels fine going up,
unless the cables are cut.
It's placing debt on the craps table.
But it beats school and work; right ?
I understand Option ARMs but the Lanser article never talked about them. CR did in his comments but in the context of them coming to a market near you sometime eventually. Think about an Option ARM taken out for $600k in Jun 2006 at LIBOR plus 2 and a 2 year reset. They've been paying 7.6% interest only or $3000/month. Now comes the dreaded reset. Currently they reset down to 5.2% for a 28 year period. The fully amortizing "shock" is $400/month. Even if they NegAm'd to their 115% limit that's $3900/mo.
Garfunkel is past prime, not subprime:
"Hello, baldness my old friend. . . "
The real shock is that they are going to have to make that payment for the next 28 years while hoping that their "investment" comes back to what they owe on it. They were counting on cashing out their equity in 10 years and moving to Arizona. In the mean time they are thinking: "I am going to be 70 years old when I finally pay this thing off. How am I going to save for my retirement, vacation in Europe, buy my next Lexus, put the kids through college, and absorb the cost of living increases we are seeing. Worse off, how am I going to make 150k a year consistently for the next 28 years."
Chris wrote: "....well, is there any other word for it but stupid?"
Two words: recklessly optimistic?
(Trying to be kind!)
--
"We are all subprime now!"
I second the motion. Do we have unanimous consent?
Educated Americans are bred to be subprime! 90%+ of America's economic and political problems can be attributed to this fact. And there is nothing that can be done to correct the problems because Americans are bred to be irremediable dopes. They suffer from blind faith in the system even after the system is failing them.
Focusing on the root causes of America's problems,
Jas
Let the beatings continue.
The expression "affordability products" always killed me. Anyone that couldn't qualify on a fixed had no business getting in on an ARM.
Sure, I know, lots of good people used ARMs with "qualifier rates" to get into homes prior to the boom. Doesn't change my opinion.
"w" has hit the target. Run the numbers on a 28 year mortgage on a house just 10% underwater ($540k vs $600k) and that $3400 payment is $40,000 per year until 2013 to pull even on the new lower value. "I'll take RUTHLESS DEFAULT for $180,000 please Alex."
It's not just the negative equity, it's the negative equity as a percentage of income. If a house that is 2.5x income drops 10% the negative equity is only 25% of income. However, if a house that is 5x income drops 10% the negative equity is now 50% of income. Of course, during the boom people were leveraging upwards of 10x+ and the subsequent drops are much greater than 10%.
From Dr. Housing Bubble
, from Business Week:
"Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings." That was apparently in 2006, and we can be fairly confident that people haven't decided to pay more on their mortgages in the past year and a bit.
So, in up to 4/5th of the cases, their reset (from Dr. HB) looks like going from $1,666 to $3,010 on $500k (actually higher due to Neg Am and shorter amortization). I'm too lazy to run the numbers with Rob Dawg's example, but this gives you an idea that the resets look to be life-changing for most people in the Neg Am world.
I second w's analysis, and add the point that LIBOR won't be there forever. That $3900 can change every month or every 6 months on many recent OA's.
Rob's example also assumes they didn't have a teaser interest rate plus a payment option at the beginning. Maybe they got in the door at $2000/mo. Then they got that big escrow notice in 2007 because the first year's taxes were based on the old owner's 20 year old Prop 13 basis.
Now they get the recast notice and say WTF?
Rob is right that a 30% payment jump when it recasts may be OK if you could afford the $3000 initially and still go down to PF Chang's a couple times a month. What if they were already eating Kraft's finest every night to make that initial nut?
The real bitch is that the homes they completely overextended themselves for would've been affordable to them on fixed rates had the bubble not happened.
Thanks, Alan.
Let the foreclosure flood begin,
As a first time home buyer waiting in orange county I am anxious to see homes come down to values that I can afford. Which at their current rate of decline will be somewhere next year. The other day in fullerton I saw a home that had fallen over 50 percent sense it sold in 2005 (although the deal smelled of fraud) it still gives me hope.
The dependence on underwater homeowners for low adjustable rates to keep their houses creates a "debt trap" for the economy. If the economy starts to recover, rates go up, kicking out homedebtors and pushing us back into recession. The economy becomes trapped in an indefinite extended recession. The low long-term bond rates show I'm not the only one thinking about this.
T-Shane writes:
...Rob's example also assumes they didn't have a teaser interest rate plus a payment option at the beginning.
Exactly and thus my previous comment "Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts."
The wonder is how the banks let this go on for so long to such extremes. Did they really think they were the smartest guy in the room and when the music stopped they'd have no hot potatoes AND still get the only chair left?
The boiling frogs aren't staying in the pot long enough to cover the bank. Surprise, surprise.
OT but funny.
This is no joke. On Saturday's during baseball season I go up this one road and on and off during the season there is a family out there with a table of Beanie Babies for sale for $1 each. I really should take a picture of it.
The latest TSLF auction really... uhhh... what't the technical term -- freaked me out. The TSLF had been showing a gradual improvement over the last month (fell under $100 billion this week) and I was about to give a sigh of relief. But then this week's auction happened. Don't like the Reuters reported it either. They compared it the last Schedule 1 auction two weeks previous. I think the right thing to do is to compare it to the one four weeks ago (as the term is 28 days). Bid-to-cover went from .29 to 1.09; this is a $19 billion increase of swapped-out Treasuries (which should put us back over $100 billion). I'm going to become concerned if next weeks auction continues the trend. I figure this may be a sign of Alt-A hitting the fan...
Poor yuppies.
Houses have no sell by date stamped on them, but if you hold them too long you still end up with a stinking mess.
I guess figuring this out was intellectually too exhausting, like trying to run Vista with 512 Mb of RAM.
I am living right in the middle of this OC Alt ARM implosion in an area that was developed during the housing bubble. I used to wonder how everyone could afford $800,000+ for a 2500 sf home with 2 nice cars in the driveway. Now I know the answer - they couldn't. It was all an illusion. Fake money. Fake wealth.
Good thing I bought my house with 30% down on a 15 year - this sucker is almost paid off. I figure I can rent it out in a couple years and buy that 2500sf house for half the cost these fools paid. Life is good!
Those beanie baby folks should start a bank under their paypal aegis and take their inventory to the discount window as level 3 assets.
TJ..... Agree 100% on the term 'affordability product.
We might all be subprime now, but dont worry well all be FHA in not so distant future. Our brave realtors still manage to sell overpriced POS houses and the vast majority of those lucky buyers go FHA. However things are getting worse than I even expected. I see bank repos selling for 27 cents on the dollar and vacant land for 10 cents on the dollar. If Florida doesnt go bankrupt in the next 3-4 years I would be really surprised. Dont get me wrong, I love Florida. After 30 years of Russian winters I feel like I am in haven.
Father's day shoppers cautious...[video]
Yahoo!
It's crazier up here in Santa Cruz than in OC. We don't have an oversupply of houses, so instead of paying $800K for a new 2500 sq. foot house, you could pay that much three years ago for a shakily-remodeled 1950s 3/2 of 1600 square feet that's "only a mile from the beach." (Half of everything's less than a mile from the beach).
Sure, supply was limited compared to demand, but most of that demand wouldn't have been there without the easy money, except for the choicest ocean view properties.
"I used to wonder how everyone could afford $800,000+ for a 2500 sf home with 2 nice cars in the driveway. Now I know the answer - they couldn't. It was all an illusion. Fake money. Fake wealth."
Jim | 06.14.08 - 6:49 pm | #
Jim,
One of the mechanics I work with bought 14 years ago in Sarasota. He wondered how people could afford his neighborhood when it increased from 100k to 500k+ in that amount of time. Plus 2 new cars. Private schools. Then he found out how. Lets just say he is not quiet about having less than 6 payments left at about 800.00...
Chris
Add to the resets the increased cost for gas, heat/air, water, and food. It is indeed going to get UGLY.
Hey Jim, right you are. Its the same as competitors' of Enron trying to trade energy products against them. The smart one said we can't do it, and didn't keep trying. The dumb ones did and lost their shirts. Enron wasn't smarter, or better funded, they were just illegallly manipulating the market, and went to prison for it. Its hard to be patient, like now, waiting for the next slam move down.
The median home price in OC at the peak was around 700K.
To be able to afford a 700K house in a traditional sense (no creative financing), a family need about 170K of income at least.
Now, what proportion of families in OC have income above 170K?
"I see bank repos selling for 27 cents on the dollar and vacant land for 10 cents on the dollar. If Florida doesnt go bankrupt in the next 3-4 years I would be really surprised. Dont get me wrong, I love Florida. After 30 years of Russian winters I feel like I am in haven."
Broker | 06.14.08 - 7:05 pm | #
Broker,
Don't know what part of Florida you are in but I have seen multiple auction failures here in Charlotte County. We have reached the point here stuff just ain't sellin...And yes our tax base is gonna collapse. I have been to numerous county meetings and its all deaf ears. This fall/next year as the high end(300k+) collapses it will get very interesting.
Chris
Are fake boobs recourse or non-recourse.
THERES A TIME TO HOLDEM AND A TIME TO FOLDEM.
Every rational gambler knows this is a losing bet, a bet that must be repeated every time the cards are dealt, and theyre dealt monthly.
Juice writes:
The median home price in OC at the peak was around 700K.
$630k ±. Your point ids still valid.
No one but the banks are listing houses in Orange County. The result is a slight decrease in listings, I'm sure the NAR will be pointing that out shortly. The number of delinquencies is a telling sign of the future. Couple that with the fact that real estate related jobs were the top employer along with financial are tech, look out.
The fully amortizing "shock" is $400/month. Even if they NegAm'd to their 115% limit that's $3900/mo
yes, but those home owners are also paying double their gasoline cost, and close to double their medical cost and food cost from five years ago.
Cobra, I think individual Fla counties will be hard hit, but the State seems to be cutting ok for the next fiscal year at least.
In spite of billions spent on property in Miami Dade, the tax assessor actually cut countywide taxable value in Dade by 2.7%. Since the tax assessor never assessed at bubble prices to begin with, that is really some cut. Real
property is supposed to be assessed at full value here. Before the bubble, I would use the assessed value plus 25%-30% more to estimate a fair value. Then the bubble came and I threw up my hands. Nothing made sense. Now I think the assessed value is pretty close to the true value.
Everybody threatened with cuts is screaming bloody murder, but cuts will indeed have to be made.
That doesn't count the people who simply won't pay their taxes.
If Florida doesn`t go bankrupt in the next 3-4 years I would be really surprised.
OT (and anecdotal data point),
Talked to someone yesterday, that knows lots of gossip on the Florida Nature Coast. It appears that some unsold condos at Suwannee were finally moved at 30-50% off original asking price. I was told that several $300K condos sold for $150K. No idea if the seller was a bank REO or a desperate builder.
and close to double their medical cost and food cost from five years ago.
Just wait until if/when the 2001-2003 tax cuts are reversed, too. Brutal.
That would be called change you can beleve in.
Rob Dawg writes:
I call BS. The LIBOR is roughly the same as in 2005 and lower than in 2006. 404 Not Found libor.htm and FFR is also lower than at any time in the last two years, more than 300 bps below 2006 figures. There is no reset. If a "reset" to a rate lower than originally anticipated is causing defaults there are an awful lot of economists who need to return their Nobel prize money.
Rob, I hear ya (and tend to agree with your cut at the rationale for the spike in defaults) but mortgage rates have really shot up these past few months while refi qualifications have tightened. Looking over the 3 year window for 30-Year Fixed-Rate Mortgage Rate at Bankrate - the steep increase over the past 2 months have pushed rates well past 2005 and are close to matching the mid-2006 and mid-2007 spikes. I believe that 30-Year Fixed-Rate Mortgages now more closely follow the 10 year treasury than LIBOR. Also the sharp drop of 30-Year Fixed-Rate for the period spanning mid-2006 through mid-2007 was largely decoupled from LIBOR (and most everything else).
Additional historical data
at Freddie Mac 30-Year Fixed-Rate Mortgages Since 1971.
Ditto on all of Rob Dawg's comments in this thread
Anecdotal story: Some distant inlaws bought a house in 2006 with an OptionARM for 975k. Their minimum payment is 3300/mo, which they are of course paying. Their reset is coming next year at 7000/mo, which they cannot afford. Their house is on the market now.
Most Option ARMs allow you to pay far less then interest only for the first 3-5 years depending on when you hit your cap. So the actual interest rate that the loan will reset to is almost irrelevant, it all about going from Neg-Am to fully amortizing that kills. There are 300billion Option ARMs in california and 200b more elsewhere.
Those who are using fully amortizing ARMs will have no probems, since rates are low, its only the teasers and options that will get carried out.
«The real bitch is that the homes they completely overextended themselves for would've been affordable to them on fixed rates had the bubble not happened.»
But who wrote this also knows that the people that bought these houses on the up part of the bubble did not buy to hold, as if they had bought on fixed rates, but bought to sell to a greater fool and make a huge profit and feel like big winners.
Option ARMs were in effect used as the cheapest (in cash flow terms) way to "lease" title to a rapidly appreciating asset to then flip that asset, and that's why that 80% of option ARM debtors only made the minimum payment.
The ideas was to get title to a house that had gone from $150,000 to $600,000 in a few years, buy it at $600,000, sell it for $800,000 next year to a greater fool, and in that year pay as little cash as possible to hold title, and be a huge WINNER!
What all the flippers are now mad about is that they ended being the greatest fool, and the guy who sold that house to them at $600,000 is now a the huge winner, and they are LOSERS.
And this is something that a lot of people don't consider: that for every greatest fool that bought at $600,000 and now owes that much on a $300,000 house, there is a winner who got $600,000 cash for the same and is laughing all the way to his (foreign if he has any sense) bank, as well as the guy who made overall probably around $100,000 in fees on that transaction.
"Looks to me more a case of teaser rates going away and/or loss of equity and not the actual reset amounts."
Rob, I agree with you that teaster rates/option ARMs will really cause a lot of pain.
I disagree with this:
They've been paying 7.6% interest only or $3000/month. Now comes the dreaded reset. Currently they reset down to 5.2% for a 28 year period. The fully amortizing "shock" is $400/month.
$400/month may not seem like a lot to you, but IMO $400/month is a huge shock to a large percentage of American homeowners. Especially given:
-the rapid increase in other costs of living (gas, food, heating/cooling, etc)
-the high debt to income ratio that homeowners have
-the high amounts of debt Americans haev on other accounts (car loan, cc bills, student debt etc)
-the negative savings rates
given the above, Americans have clearly been living at the end of their means for a long time. I think $400/month is easily enough to break the camel's back for many many Americans.
that for every greatest fool that bought at $600,000 and now owes that much on a $300,000 house, there is a winner who got $600,000 cash for the same and is laughing all the way to his (foreign if he has any sense) bank, as well as the guy who made overall probably around $100,000 in fees on that transaction.
except you miss a key point: most of the "winners" took their winnings and bought another house that was also overinflated. they have to live somewhere
So the person who sold the $600k house then went and bought a $1.2M house.
I'm sorry, I think the only people who laughed to the bank were the people feeding off the transaction fees, and maybe a very very very small few who took their winnings off the table and downsized or rented (the so-called equity locusts)
Can someone tell me WTF is going on? We took the boat to Stockton yesterday for a day of racing drinking and eating and on the way, we hear this ad that was floging loans to people with bad credit!
No doc! The loans sounded like complete NINA loans. WTF!!!
«except you miss a key point: most of the "winners" took their winnings and bought another house that was also overinflated. they have to live somewhere
So the person who sold the $600k house then went and bought a $1.2M house»
Except that you miss a key point -- someone then got $1.2m cash for a $600k house. Those guys are retiring retired WEALTHY.
The American Dream is to find an Indian from which to take a dozen acres of free land, or a greatest fool who will pay 1.2m for a $600k house. The American Way is that winners WIN and losers LOSE!
«the people feeding off the transaction fees, and maybe a very very very small few who took their winnings»
THe people who fed off the fees made a lot of money, but the people selling the 3m excess homes are not a "very very very small few".
The losers are those who paid $1.2m for a $600k house and the guys who lent them the money. But for everyone of them there is a winner who got away with the cash.
Hey "strongbad",
You went to Calif in 1999 and thought the housing market was in a bubble and didn't buy! And NOW you pat yourself on the back??
The housing market in California bottomed in '97-'98. The rental market was in a bubble after that, because of the dot-com bubble. The best time to buy was '99, with more than 100% appreciation if you sold before 2006.
Ur post smells of sour grapes.
Blissex, your point actually works in a different way than you think. Sure, there were a few people who got wealthy this way. But many more people got slightly more comfortable off the (invented) asset appreciation - they their money and bought cars, paid for healthcare, and generally lived a good middle class life when real wage increases were not sustaining this. That group of people - much of the American public - is NOT retiring wealthy, they're "resetting" from homes in the Inland Empire and nice cars to living with relatives. That "retirement money" is generally already spent.
Im getting different numbers than Dawg's example....
$600k, IO, 7.6% is$3800
$690k, 5.2% over 28 years is $3900