How will the universities adjust to this type of diversity?
First off, I think providing GIs opportunities to earn degrees is a good thing, and I am Pro-Diversity so that is out of the way.
It really is a "Hate the game, not the player" situation. We have a tendency to throw more money at the problems in education when many times, there are other problems not being addressed. (e.g. Detroit's public school system had more budgetary problems due to corruption and graft, not funding.) Also since everyone in the CR Commentariat tends to be anti-QE, those GI Bill USDs come from somewhere, and the chances are good it isn't coming from tax revenues.
As for the Greek system, I wonder how that world will survive at most campuses when Dad's credit cards don't work. It will make parties much more dull if they are all working 20-30 hrs a week for their dues.
The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.
Which is precisely why the program should be continued. First time buyers who remain current (i.e., 93% of them?) contribute dollar velocity to the economy, bring stability to neighborhoods and get a chance to build a stable life.
Just because house prices will likely decline further doesn't mean first time buyers will walk.
As you can see from my posts today, Im not particularly worried or scared about climate change, abupt changes in weather, or Paulson/Bernanke's scaremongering of a financial meltdown if TARP isnt approved.
But I do wonder how many shoes can drop in terms of the ineffectiveness of the Paulson/Bernanke/Bush and Geithenr/Bernanke/Obama bailouts, toxic debt purchases, and obligations? How many dropped shoes (last years crises, then GM, and now FHA ?) shoes til people "give up"?
The idea that "the American people will lose faith in government" really doesnt play into GOP hands or Glib-bertarians hands; Glibs lack leadership skills for the most part...at least when it comes to leading human beings rather than pet economic theories.
The GOP Bush failures are too fresh to think people will really believe the GOP has a solution.
Maybe people will just ignore the federal govt all together...and with state governments being insolvant, I guess they'll be irrelevant too.
Leaving city-state fiefdoms and mafias? Hmm, guess they have to bail out FHA too.
The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.
I know we are in the QE world, and Wall Street has tons of USDs to use for speculation. Meanwhile back at the ranch, J6P is un(der)employed with UI ending within 6 months unless Congress steps in. He cannot put money down on a house or a car without the U.S. Gov't providing a push, and even then, 10+% of 'em will be unable to keep up on the payments.
Throwing non-existent money down a hole only seems to be making the hole worse, or am I missing the here?
Edit: On the bright side, Gold is still sitting north of 990, and the Yen is back up over 92.50.
why cant 1st time homebuyers just remain as responsible renters for a few years longer?
What's the rush to use them to be a vehicle for funnelling fed dolars into propping up falling house prices?
I dont buy the meme that renters arer irresponsible baby-molesters who dont pay taxes or pick up their dog poop.
We need to stop tilting-at-windmills against price deflation in real estate.
The Greek system will survive even full-time jobs and school. Seen too many friends do it as well as I did. If I'd gone to a big school I wouldn't have gone Greek. At a tiny little school, that was the only social life provided at all.
I wouldn't have a problem with FHA lending, provided that lending was performed under it's original guidelines.
This idea of lending up to $729K with only 3.5% down is pure madness. Not only has it guaranteed the implosion of the FHA, it's just one more nail in the coffin of the USD.
What's the rush to use them to be a vehicle for funnelling fed dolars into propping up falling house prices?
Where did that come from?
There have always been first time buyers and the 3.5% down payment plus insurance has been around longer than the latest round of tax cuts for the rich.
Who is rushing?
Who is using?
What is the supposed relationship to falling house prices (which, as I said, will continue to fall over the next year or so)?
this post almost looks like something i would expect to see over a ticker-forum. not sure, but this is scary. i guess because fha has FEDERAL in the name...
The Greek system will survive even full-time jobs and school.
We shall see. I know the system survived GD 1, but it was also tied to mostly affluent institutions that seemed to be independently wealthy. Mixing in raising tuition at (your school here) and decreasing parental support, we shall see. Unless you mean there is no house, then probably yes
Hoocoodanode that there were so many gov agencies all working on busted business models? Guess they made sense as corrective public policy to extant market failure at some stage in the distant past, but it seems that the tipping point has long since been and gone when they solved the apparent problem(s) on a sustainable basis.
This idea of lending up to $729K with only 3.5% down is pure madness.
I concur. The biggest single indicator of pre-determinant factor is a lack of down payment. The FHA is just filling the void left by New Century and Countrywide.
well good, then we're in agreement.
Let's scrap the 3.5% down and go old school and have buyers wait til they have 20% down.
With prices falling down.....the 20% will be reached earlier.
We'd all be better off if people save and have a down payment. So many positives to a down payment, too many to list in one post.
Lets accept the short term housing volatility while adjusting to sustainable and responsible lending - lets tighten standards and require downpayments. Let people learn the value of the money they save and have skin in the game when they buy a house.
I am saving now, and will buy when prices are rational and I have 20%.
Congress, Mr. President - show us you know what fiscal sustainability and responsibility mean to you in your actions with the FHA.
This idea of lending up to $729K with only 3.5% down is pure madness. Not only has it guaranteed the implosion of the FHA, it's just one more nail in the coffin of the USD.
FHA lending limits are as low as $271,000 is some areas.
Do you really think first time buyers will qualify for a $729,000 mortgage?
. . . it's just one more nail in the coffin of the USD.
Winner. This is crass, but... go to an SEC football game and take a stroll by where the frats and sororities are pre-partying. Not everyone's beautiful or handsome, only 95% of them...
Oh, and FHA is going to implode. Another new For Sale sign on the road into my subdivision. Most everyone around here got FHA loans to go with their hoopties.
The feds figured that in order to blow a sequential bubble in a popped asset, you'd need to replace the irresponsbile actor with a state agency. Let's see if it works.
On tax credit: Goldman has a research note out tonight making some of the same points I've made. They argue the demand is already fading - although the expect a surge as the program ends. If the program is extended, they think the demand will really fade.
So that will probably mean taxpayers pay $100,000 or more per each additional home sold because of the tax credit if it is extended. Probably not the most effective use of taxpayer money at this point.
TJ and The Bear, The madness is already starting to show up in the delinquency numbers too.
Nuke (profile) wrote This idea of lending up to $729K with only 3.5% down is pure madness
Im with Nuke.
Yes, even though the FHA conforming limits vary by region.....allowing 3.5% down on such over-valued properties is a senseless fight to prop up house sales in those areas. Let them devalue.
Let the renters stay as renters. Let the houses sit unsold or be adapted or retrofitted on a Pay-as-U-go basis into new uses, if people cant save up 20%.
Ultimately whenever we get to something that is bubble-free and financially sustainable (not Enabled by excessive debt) , that will be a key component: big money down. It will force an equilibrium between home prices, wages, wage growth, joblessness, and debt service.
Can I just say "it's complicated" or will I get smacked with a trout?
What I would like to see is more true FTHBs out there and just scores of bad revirginizations. The later have had their chance at the windmill and will likely have proceeds socked away. The former need all the help they can get because they have to complete with the later.
What I really really hope to see is the Fed take all those crappy MBS they are holding, figure out which ones are whole or cheaply make them whole and then begin a national affordable housing project. This would be a slap in the face to the banks who stood back and choked off lending and would take some air of the NAR's sails. I'd pay 10% interest to the gov to make it so and happily.
In 1933, newly-elected President Franklin D. Roosevelt decided to counter the falling money supply in a most drastic manner. To accomplish this he confiscated all privately-held gold and immediately devalued the US dollar. This goes to show how governments, in a period of emergency, can change rules and break their own laws.
Fast forward to 1971, when President Nixon “slammed the gold window,” ending its dollar convertibility. Without a gold backing, there was no hard, physical limit to how many paper dollars could be issued.
What will it be like to live here when our nation is creating a trillion dollars every four weeks? How about every four days?
I agree that the 3.5% down is a token gesture at best and a dishonest one at worst. Why not just hit the 110% point again? Is that setting just too crass in the current market?
- it depends upon the area and a host of other qualifications.
Sure, but the FHA should've never been lending beyond the conforming limits as determined by the median house pricing model, which would put the maximum somewhere back in the low $300K range these days.
Financing anything more is just begging to lose taxpayer money.
TJ - you know as well as I do that the FHA 729k limit is an absolutely transparent attempt and keeping CA, NJ, and many other high end home markets from cratering. They cant have that stuff crater...impossimole. It craters, banking sector, game over. No way to hide the insolvency at that point, which is not to say it's going to be easy to hide the commercial losses. But I digress....
This is in reference to the thread on education and democracy, as well as housing prices:
"The approach to education linked to manufacturing in these countries has profoundly shaped the xyz program on education. It was there we ....saw first-hand the power of the School-to-Work link and the necessity of a social partnership between business, labor, and government "
That's the wording concept I was looking for. Our social partnerships...esp the ones involving work and finances...are non-existant these days. We're missing so many linkages that should be present in a modern society and be mutually-beneficial rather than parasitic.
I say let the tax credit expire. All it did was bump up the price by 8k. But keep the DP 3.5% or make it 5%, just not 20% and require a 30% DTI on verified income, certified assets (VICA) and don't budge from that mark. No stated loans, no exceptional need.
FHA would have been fine if it had stuck to its old standards, but it didn't. 7% delinquency is already a disaster, and the big surge in FHA is of very recent vintage, so there's much more to come.
The Republican anti-government types are really going to make hay out of the FHA's coming trouble. Yet another way Obama will regret ditching his campaign promises (to go after crooked lending) in favor of continuing or even (in this case) expanding bad Bush policies.
we need to wean our economy and all manner of economic sectors and headcounts off of homebuilding and homebuying as a profit source. Going back to 20% down will return homebuying into a more sustainable role in the economy as was shown historically.
We need to stop mythologizing homeownership and stop demonizing renting.
hahahahaha yes I know what a 203K - both full and streamline.
Good luck on ever closing one. Toss one of those in the ring and the lender will take the first all cash offer it sees. Don't ask how many potential homes I've lost this way. It will make me, you, and red-headed second cousin's stepchild cry >; )
A thin downpayment and strict underwriting can produce acceptable outcomes if the market is stable and healthy, with prices comparable to renting. It's going to be a disaster with grossly overpriced houses; even more so with all the rats scurrying about trying to dump bad loans on the nearest available sucker. And with those credit ratings, and the huge expansion in lending (=new underwriters, overloaded underwriters, or both), I have my suspicions about the quality of current FHA underwriting.
"The borrower must meet standard FHA credit qualifications. " - and I'm sure they no longer approve NINJA liar loans, or fake pay stubs. You really have to qualify, now. I would be interested in finding out when these 7% of delinquent loans were originated, and by whom.. Not recently, I'll bet.
sportsfan: "the 3.5% down payment plus insurance has been around longer than the latest round of tax cuts for the rich"
John Burns Consulting: ""The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. ..."
3.5% FHA downpayment loans may have been around for a long time, and I can handle them continuing at their prior levels, but the number of these loans being made now is more than 10 times (23% / 2%) what it was just 4 years ago. It's the vast extra quantity that is distorting the housing market, making prices unaffordable for responsible people of modest means, and putting irresponsible people into homes many of them will be unable to keep, and giving others windfall gains at the expense of the more responsible.
Patience, thanks for providing that market context.
CR had a graph on Sacramento where FHA was doing a smuch as 75% of the volume done by conventional lending.
And FHA never ramped up staffing for this workload....so dont be surprised if the lending stads on paper are not what's happenning in the real world.
BTW, it's an insurance program...NOT a mortgage program...many lenders are still involved.
Actually most politicians keep some of their promises. And I certainly expected Obama to be better than most (not perfect, of course). I'm honestly surprised to see him substantially worse.
Automated underwriting is what will sink FHA, why allow AU to do things that manual underwrites arent allowed?
You manually underwrite and your DTIs are 31/43.. yet AUS accepts allow for significant pushing of those ratios?
The whole underwriting system is bastardized, someone figures out that X underwriting rule works for low income workers who have at least the promise of wages growing with inflation if not more in the future.. then later down the line X underwriting rule gets applied to everyone. And then on top of it congress comes in and pushes the loan limit envelope to "save" the housing market.
But because "homes" occupy this mythical status in american culture and the fact that politicians are now trying to save everyone from there bad decisions we get this trainwreck that apparently nobody can stop. There are many voters who want the system to continue and expand and they outweigh the people who arent trying to vote themselves a paycheck or ability to retire on their home.
Sure, they're applying stricter qualifying guidelines, but still not nearly as strict as prior to the boom. It's the leverage that gets me, though.
Again, putting 3.5% down puts the buyer immediately underwater, so there's no skin in the game whatsoever. Every new price drop is an incentive to default, because it's all just sinking deeper. The bubble markets like SoCal -- where the highest limits apply -- have the worst falls yet to come in the mid-to-high end, too.
The Dallas Fed chief said he expects an output path that will resemble a "check mark."
That will mean a "near-term snapback from the short, intense downstroke," followed by "a transition to a long period of slower growth corresponding to the elongated side of the mark."
Fisher drew attention late last month, when he said in an interview that the U.S. economy was no longer declining.
Fisher noted Thursday that "the worst may well be over for household consumption, barring some new shock," thanks to the expected swift adjustment among consumers to an improving economic outlook. Dallas Fed chief warns of 'deflationary risk' - MarketWatch
Should I write to my congressman, senators, and the president about this? It seems that important (really).
I guess I could call too, I do have the number memorized (202) 224-3121. My 20 minute commute is well suited to calling my two senators and one congressman.
OMG!, John Burns Consulting put forth an opinion that the FHA will fall below their 2% reserve level, and that...well nobody actually thinks that with have any impact on anything, but some people might think that there might be some political pressure on the FHA to maybe implement some additional buyer education classes or something, but probably not. No doubt the international markets are roiling from this prophecy of doom from the mighty John Burns Consulting, it is a good thing this wasn't released while the domestic markets were open. I am sure there is a joke in there about being a Real Estate Consulting company based in SoCal that I am not able to tease out at the moment.
I actually dont have a problem with 3.5% down if it goes along with strict qualifying ratios. No alternative incomes or calculating X overtime and all the other BS they do ON TOP of allowing aggressive DTI ratios. 28/36 is plenty aggressive, especially for a low down payment home. Income as reported by the IRS for the people on the loan, that is what should be allowed for FHA.
FHA shouldn't be the savior of the housing market... Or, if they do keep such massively aggressive underwriting then apply the appropriate risk premium. The real issue with FHA is they are trying to have it all AND low cost premiums.
I was looking at FHA in all it's myriad forms and was still held to the traditional DTI ratios. It wasn't until you and credit pointed me to the broker boards which I had stopped reading in 07 that I realized the madness was still there, it just had a new set of monogrammed initials.
I'm from Illinois.... Voted for him.
Not surprised too much by what's happenned these 200 days.
When he appointed Timmie, I suspected it was not going to be a fairytale story...LOL.
Why Timmie? Obama's adherece to the economic orthodoxy; the economic status quo (with mere tweaking of NAFTA and tax rateds) was the only economic platform he could muster on his own....I really believe the whole braintrust of Axelrod, him, Jarrett just didnt grasp the fundamental instability of debt overhang & deleveraging while campaigning.
Flat-footed, Team O allowed Timmie to bungee-cord the team to GoldmanSachs-thinking and pursue Wall Street-Care and BigBankCare. O felt compelled to believe the solution is some middle ground and that his ( blind) faith in all this blue-chip blue-blood orthodoxy of Timmie's and Ben's...and now Rahm. After all, such faith never failed him before.
Bush's pick of John Snow as Treasury Secretary in 2001 was far bolder move than Obama's decision of Timmie.
Can anyone cite the length of time John Burns, CEO of John Burns Consulting, spent employed by a company that is not now bankrupt?
Bonus point: Can anyone pick the highest ratio of lame personal information to professional qualifications info of any of the John Burns Management Team as carried on the company's website?
There are still state and city DPA programs allowed but many of them are having funding issues because of budget constrictions. But ehy are still out there.
p.s. Deflationary jane, you are most welcome and thanks for the kind words.
Effective Demand: "The real issue with FHA is they are trying to have it all AND low cost premiums."
I think you make a good point, ED, but I think adequate down payments are still needed. Let's suppose you could buy call options on stocks without paying the entire cost of the option up front. You get to pay a small amount every day. Then lots of people who have no money should buy very large call options. If stock prices go up, they have a large profit. If stock prices drop, they walk away from the call option at just a small loss. That's what these low-down FHA loans have done to the housing market.
More basically, how do we get people who buy a home for $400,000 to appreciate the fact that they are promising to pay a very large sum of money for that home, and help to ensure that they can actually pay $400,000 over time? Asking them to first come up with a small but decent % of that $400,000, like 20% or 30%, seems to me to be a sure and simple way to get the job done. As for affordability, we all know that if we did that, home prices would drop so much that most people could afford a home even with a 20% down payment requirement. Let's not make the perfect the enemy of the good, trying to save 10% of buyers and screwing it up for the other 90%, and endangering our entire economy in the process.
And for a dose of some other country's , the South China Morning Post:
"Fiona Tam
Sep 02, 2009
Thousands of villagers in Fujian clashed with riot police, smashed police vehicles and took government officials hostage in the latest peaceful mainland protest over industrial pollution to turn violent...."
We'd all be better off if people save and have a down payment.
We'd also all be better off if everyone paid cash for a house, and there were no mortgages.
The truth is, that's never gonna happen. And saving more than 3.5% in today's world is a very difficult thing to do, without selling a home that has already appreciated in value.
You might as well say only a very, very few will ever own a home. And then watch the slumlords rush in.
tj and the bear, I agree 3.5% seems ridiculously low, from growing up in a world where 20% was the norm. But it has to be helping many who formerly were responsible renters. There will always be some who default, no matter what. How do you prevent any defaults, especially in this economic climate, whatever they put down? I know, don't make any loans.
As I said, "It will force an equilibrium between home prices, wages, wage growth, joblessness, and debt service. "
20% down will create a powerful force in pricing downward to affordability.
It is still a deleveraging process and it will create necesary and unavoidable carnage with banks, bondholders overseas, or on the Fed's balance sheet. But there's no other way towards anything financially sustainable that's also without excessive debt.
Am I getting the jest from some in the crowd that home ownership with 3.5% down is now a fundamental right? Life, Liberty, and Pursuit of Cheap Housing?
The fact that we are so tied to credit when most people in the rest of the world can have housing without any credit makes that argument rather odd, or is this the part where we talk about the declining standard of living in the US?
"We'd also all be better off if everyone paid cash for a house, and there were no mortgages.
The truth is, that's never gonna happen. And saving more than 3.5% in today's world is a very difficult thing to do, without selling a home that has already appreciated in value."
The notion that more than 3.5% down payments are essentially the same as 100% is absurd. If you believe that, then you'd be happy to pay a million dollars for your next $36,000 car.
"The truth is, that's never gonna happen."
people say that because they cant see beyond today's vastly inflated prices that our govt is trying to prop up.
Prices will come down when 20% is the new norm.
TJ, my first house I bought w/5% down. I was a very responsible debtor, and my last house I put down 30% or so. Sometimes young couples need the low down payment.
Not to mention the fact that the primers are the ones foreclosing the fastest these days. It's unemployment-related now. It doesn't matter what down payment you had, if you lose your job, you lose your house eventually. Times have changed.
Evaluating the consequences of any of these programs is easy. Ask yourself; "Does this induce more debt?" That's it. That simple. We have too much debt and more debt is bad. More debt is extend and pretend. More debt is the accelerator and not the brake. Low down payments will allow some of the smarter people last chances to get out but make no mistake, taking on a 96.5% mortgage even at 5% and 30 years is not going to ever be the cash machine we saw over the last generation.
How can people pay $500,000 for a home if they can't scrape together more than $17,500 (or maybe even less, after subtracting the $8K tax credit, just $9,500 net) now? If tehy can really afford $500,000, it won't take long for them to put together $100,000.
Of course, putting together $100,000 free and clear is hard to do for most people. The obvious and correct conclusion is that $500,000 is way too high a price for most people to pay for a home. Bu they can't see that if the down payment requirement is a tiny fraction of the ultimate price. With low down payments, the home price is completely divorced from the real money people can earn and save. Home prices become Monopoly Money amounts, with no anchor in daily budgets and reality.
You are absolutely welcome.
Some days I don't know whether to be relieved or pissed off that I was never offered any of those crazy UW schemes
As far as I can tell, the state programs like CalFHA are on oxygen and wheezing hard. When I think of them, it's always a pick-the-nightmare lotto:
1) I qualify for them (am I really that big of a looser?)
2) I don't really need them, I'd rather see that money go to a family who could really use it
3) what are the chances that a family that would benefit the most would ever get a dime?
4) what program are they impoverishing to find the cash anyways
5) and would I have broken the vase if she didn't say anything?
If the average $300,000.00, then one would have to save $60,000.00 for a down payment. How long will that take if you make $50,000.00 a year and save 10% ? Plus pay your rent, save for retirement, have a child, save for emergencies, make a car payment, pay for health insurance. (don't forget the student loans)
Answer, forever. Cause s*** happens and eats up the savings for the down payment.
That's right, it was "heteroflation" that I was looking for the other day. Got caught up in back-reading on mid-80s heterodox stabilization programs in Brazil, ARgentina, and Israel, and didn't get back to the thread.
Also defined as a bunch of different weird stuff with money supply, demand, and asset values depending on where you are and what miscellany of gov programs are raining cash on you while others suck your lifeblood out through your nether regions.
Josap the average home needs to return to 3x family incomes. The FHA is part of the government's effort to keeping that from happening, and taxpayers will catch the falling knife.
That's fine, as long as it's a relatively cheap house.
It was $80K. And the 5% was a gift from the inlaws.
But it's better than our neighbor around the corner, who bought his foreclosed home for $64K WITH CREDIT CARDS. Actually the deal ended up well for him, the houses appreciated to about $300K in their heyday.
Answer, forever. Cause s*** happens and eats up the savings for the down payment.
Doesn't that assume that the price of housing won't decline and you stay employed during the term of your purchase? If you are dying to stay in a high rent area of the country--relatively-speaking--then what seems to be the problem with saving up the money?
Maybe the sad, new reality is 30 and Unders won't be able to live like their parents right out of college, and they may be 40 before they can take the mantle of the American Dream.
Edit: Just be glad that you aren't the next round of 18-24 year olds. They are taking it worse in the shorts than the 25-35s are.
Again, 20% down will FORCE downward the pricing and bloated valuations into something thats in equilibrium with wages & salaries, the cost of college, childcare, etc etc.
It has to be allowed to find a new equilibrium...all those variable do. They will locate their own equilibrium and be affordable.
Good question. I would love to see an informed, educated debate about the right level of down payments. Clearly any number can be shown to be higher than it needs to be for some people and purposes, and lower than it needs to be for other people and other purposes. But one of our biggest problems recently was that we recognized that variation and responded to it by just lowering standards. We need to avoid that going forward, and establish some simple rules that will be imperfect for some people. Better to have a few simple rules and a solid system that works well for most people than permitting the terrible deterioration in underwriting standards that happened during the last 4-5 years.
I do have some thoughts about down payment %'s, but it's a line of thought that I haven't seen much of anywhere, so I'm not sure I want to start after 11 pm. If you're interested, I'd like to exchange thoughts at an earlier hour.
same,
Dad was a vet. House was paid off when he died and my mom is the cheapest bi@tch to walk the face of the planet. She sold it in last year (after 3 yrs of nagging her of course).
Even if joblessness persists and there's no return to single-digit jobless rates, new equilibriums between home valuations & pricing, wages & salries, college costs , and childcare, will be found.
And 20% down has a documented historical record that can be examined as it survived wars and recessions.
Down payments need to be large enough to make strategic defaults extremely rare and high enough to self select for people who can demonstrate money management skills. 20% sounds about right.
TJ, my first house I bought w/5% down. I was a very responsible debtor, and my last house I put down 30% or so. Sometimes young couples need the low down payment.
I had less than 5% down on my first house - but I paid $45K for it and was making close to $30K at the time in a VERY secure job... I didn't want to wait to save up money as I was fresh out of college with a new baby on the way. On top of that the rent I was paying was more than my payments and the rental was in worse shape & farther from work. That was early 1980s in an industrial midwest farm-factory town. We are a long way from those conditions now... in most of the US.
Great analysis...that's the problem in a nutshell. And to restate the obvious, the $750k fixer in San Carlos would go for maybe $200k in 85% of the rest of the country.
And that $200k would be 3x the household gross pay of 2 people working $35k a year jobs.
Those people in the CNN piece who bought the $750,000 home... At 5.5% their payment will be $4200+ !! Add property taxes and school taxes and that might be $7000 a month. That has to be one of their full incomes most likely.
Wtf, how will they pay that, month after month after month for 30 years? I hope he can do more than drive a crane, because all it will take is a surfeit of crane drivers or him hurting himself for a couple weeks and his income is toast.
People are just nuts. Our mortgage and escrow in Texas is $1200, which feels reasonably safe, certainly cheaper than renting for a small 4 bedroom house.
"....one would have to save $60,000.00 for a down payment. How long will that take if you make $50,000.00 a year... Answer, forever. "
If that situation is common, then the $300,000 price of that home will come down, a lot. A 2nd job, or overtime, or more education, or more sucking up at work, will get you more than $50,000 a year. That, and old-fashioned frugality, can get you a long way.
I had less than 5% down on my first house - but I paid $45K for it and was making close to $30K at the time
That's a good point, because back when we were buying w/low down payments, banks wanted to know income and debt to make sure you could afford the payments. I told Tanta way back that back then, being self-employed, you had to show the bank pretty much everything except baby pictures to prove your worth. And when I took cash out from under my mattress to cover closing costs (yes, I did have a stash back then), they looked at me like I was a drug dealer. They were WAY more particular, and that may have had more to do with success than the size of the down payment.
..we also forget that as an entire nation in the 1950s and 60s we raised whole families in rental units as well as in homes that averaged 1000 sq.ft. It's not impossible to live smaller and within one's means. and to survive renting.
The San Carlos couple mentioned that "...the $8k credit is saving us." If I'm not mistaken, doesn't the credit start phasing out at an AGI of $150k/year for couples? So they snagged that $750k loveshack on an income of less than $150k/year. (Though we aren't told what their downpayment was.)
But hey -- they got a courtyard. Great for entertaining.
..we also forget that as an entre nation in the 1950s and 60s we raised whole families in rental units as well as in homes that averaged 1000 sq.ft. It's not impossible to live smaller and within one's means. and to survive renting.
Some of us still live in houses like that. We all didn't drink the koolaid.
If you are still out there, after reading, making a few spreadsheets, and some more writing, I have come to the conclusion that either the Michigan faculty have no clue what is happening in the larger world or that they really don't care but want their ponies. I honestly don't know which is worse.
Just looking for 2 more things: does anyone know what property taxes run around that part of Michigan and what is the name of the institution handling their pension funds?
All the appraisers knew this was going to be the next sub-prime 2 years ago. You can only repackage the same shite...so many times. When you give cheap money to irresponsible people with NO money down....you get folks that get free rent for 6-9 months before the eviction/foreclosure is taken to it's conclusion. Idiots in DC caused this mess and FHA is a conduit of that stupidity...MM
"I think the problem is more income to debt ratio than the down payment"
I really think that a lot of what got us into this mess of overvalued and overleveraged home buying was this line of reasoning. (No personal offense, josap.) When people had small down payments, the actual purchase price became almost irrelevant, and house prices lost one of their most important connections to reality, and to basic household budget items like the dollars we earn vs what we spend on groceries and the like. All people asked was whether they qualified, and what the early duration payments were. As long as someone came up with loans that produced low early payments, there would have been lots of very ordinary people who would have signed up for million dollar homes, then 10 million dollar homes, then 100 million dollar homes.....
If the average $300,000.00, then one would have to save $60,000.00 for a down payment. How long will that take if you make $50,000.00 a year and save 10% ? Plus pay your rent, save for retirement, have a child, save for emergencies, make a car payment, pay for health insurance
Umm, uhh, how are they going to pay off $300,000 on $50,000 salary? Plus the child, emergencies, all those other things ...
Sounds like a default in the making.
If it's correct, that you can't get to $60K off $50K salary, how can you get to $300K off same $50K salary?
All the expenses are retained (except rent), plus interest, insurance, taxes, repairs ...
I suppose I'll be the one to put dryfly to shame. My house cost less than his, but I bought mine 3 years ago. 2100 sq ft.
LOL - I know they are out there. The house I live in now is 'expensive' - probably get $100K for it... that is if I take three months off to fix all the cracked plaster & paint the outside [original wood siding from 1915]... might get $130K... it would only get that kind of a price because we are within a long commute of the Twin Cities... move out another 50 miles and the prices fall in half!!!
Folks in bubble land have no idea how far down 'down' is.
The only way that would really work is if buying for investment was also removed otherwise once prices get low enough, the wealthy will scoop you every time and you have a permanent rentier class kinda like what we have now >; )
One more post -- dryfly if you want to fix (cover over) that cracked plaster, look into Flexiwall Systems.
I've developed my own system [engineers you know never take advice - we reinvent the wheel over and over]... but my system works for me, once done you can't even tell it was worked on - looks original & holds up astonishingly well. Just a helluva a lot of work...
OK, you guys are right. I won't try basic math until the flu meds wear off.
Was thinking that if income to debt were more of a qualifier people wouldn't be able to buy more loan than they could afford. Also think ARMs should be done away with.
Down payments need to be large enough to make strategic defaults extremely rare and high enough to self select for people who can demonstrate money management skills. 20% sounds about right.
..................
Weren't mortgages completely different pre WW2?
Something like 50% down and very short repayment terms...
I really think that a lot of what got us into this mess of overvalued and overleveraged home buying was this line of reasoning.
Patient, we're saying the same thing but I think it will be awhile before people hear it.
Ditto for those in Congress who arent necessarily trying to reinflate the bubble but who cant imagine going back to 20% down (how can they afford a 750k house @ 20% down??, they will cry) and play into the hands of those who are committed to reinflating the bubble.
I also voted for him and am disappointed, but also not surprised by much that's happened since the election. A real solution would have required a fundamental rethinking of the economic orthodoxy that has prevailed at the top of the Fed and Treasury across administrations. The chance for that rethinking to happen was back in September when panic was really in the air - by the time it struck more mildly again in December/January, Bush was a lame duck and Obama was still a few days away from office. Obama's conception of "ending the politics as usual" meant compromising and meeting people halfway, which of course turned into meeting the banks just a bit more than halfway.
I really think the Obama team now truly believes the worst of the economic problems are behind them - from the way they are talking, they are staking a lot of political capital on it. The Republicans don't have a damn clue what's going on either, but that won't matter in the midterms or 2012.
TJ, sorry I had to attend to some domestic duties. You said more than an hour ago:
It's not just FTHB. There are three-quarter-mil homes being sold in SoCal using maxed out FHA financing.
It's 30-to-1 leverage upon purchase, and these people are immediately underwater. Again, insanity.
First off, I though FHA was limited to FTHB, and, as I recall, the original idea of the program was to guarantee bank loans to lower income folks who otherwise might not qualify.
The loan limits were $362,000 up through 2007 when Congress raised them, but I thought to the $417,000 ceiling on Fannie and Freddie. Apparently not. Perhaps they did raise the FHA limit "to Fannie and Freddie's limit," then raised Fannie and Freddie.
Now, personally, I believe paying $729,000 is insane in the first place. Anywhere (with the possible exception of an ocean view). I live in a place where the average or median home sale price is probably 20% of that number or around $145,000.
Given the cliff diving in RRE, perhaps it's time for Congress to lower all the limits.
Avl Dao, I agree. I am rather afraid, however, that it will never be heard. Sometimes the world changes, and never goes back... at least within one lifetime.
dryfly (profile) wrote (in reply to...) on Thu, 9/3/2009 - 8:31 pm
Folks in bubble land have no idea how far down 'dow
I know how far down is because that's when I got my primary residence. I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf.
sportsfan, um, you kinda dont' get what is goin on here in CA.
GDD, I don't understand the statement. I've lived here for quite a while, attended fine universities here, have had a CA DL since they didn't have so many digits. What am I missing?
I know how far down is because that's when I got my primary residence. I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf.
Not in nominal terms - in 'real' terms it might... depends on how much pressure there is coupled with money supply growth [monetary inflation].
"I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf"
I actually think it might already have gotten there, just 2 years after the last market peak, if the federal govt had butted out completely. But of course, we both know that's a pipedream.
I really think the Obama team now truly believes the worst of the economic problems are behind them
so do I. Watched Biden speech @ Brookings today, listing stimulus projects so far underway, with about three times that yet to come over the next few years. Much more than imagined. We're only 200 days into a massive program. They're letting contracts as fast as they can. Much more to come.
You aren't going to see $85/sf when you have dualies commonly breaking $100K. People are still going into SoCal. Now my area, you have had 10% fewer students in kindergarten than graduating seniors for awhile. I would estimate that 1 in 10 houses around here is vacant. SoCal ain't there.
- so do I. Watched Biden speech @ Brookings today, listing stimulus projects so far underway, with about three times that yet to come over the next few years. Much more than imagined. We're only 200 days into a massive program. They're letting contracts as fast as they can. Much more to come.
Ya there is going to be huge shortage of orange cones if this keeps up.
The government is putting a floor under certain price points. Above that level, down will come eventually. Just letting the air out the tire slowly. As John Candy in SCTV might say, that bubble blowed up good, real good!
We drove from Phx to Durango, took a different way back, road construction everywhere both ways. The reservations had several road projects in full swing.
"You aren't going to see $85/sf when you have dualies commonly breaking $100K."
My comment was based on wage-adjusted amounts, so 1995 $85 is probably about $150 today. And if the govt had completely butted out of direct and indirect house price supports during the last 2 years, some sellers would have been very, very happy to get an offer at $150 today.
yeah, I think the they've dranked too much economic orthodoxy. the multipliers on construction projects wiill not turnover nearly as much as they hope...and the bump up in employment wont be widespread because roadbuilders, bridge welders, etc simply dont ,make up a good chunk of the unemployed in a service based economy with a GDP 70% driven by debt-enabled household spending.
I think they targeted all Timmie & Ben's stimulus to simply juice up the most juice-able components covered by the media: 1) stock prices, 2) how many people are getting jobless benefits, 3) how many of the best known banks are still alive and not closing; and ignore the stuff the media doesnt cover very well anyway.
I think they merely want to buy economic time til 2010 and wash,rinse,repeat and buy time til 2012.
Pardon the language, but F'n idiots just doesn't cover it.
That will be their Achilles Heel - it will massacre them at the midterms. The problem with a lot of these 'programs' is they don't put a ton of bodies to work - and certainly not at good wages - not like FIRE did.
When I bought my apartment in 1997, I bought it as a HUD repossession, using a State Fannie clone loan where if I remember correctly I put $300 down, on a 99K loan. I still think I over paid, but hey I have had a place to live for the last 12 years without having to move.
I could be an example of how this program can work. I paid my loan off in 9 years because I did not like paying the interest and my MI/PMI was for the life of the loan and not 80% LTV. At the time homes where just around 4.5x the average income.
All in all I'm happy with the deal I got, and appreciate it greatly.
But no way in hell would I do the same thing with an overpriced house here at 600K+ when I think they are still around 9-10x the average income.
"The government is putting a floor under certain price points. "
Those floors are sky-high. They only look "reasonable" in comparison to the ridiculous peak prices of 2007. There were small old condos selling for $750K in 2007 in my old middle class neighborhood that were bought for $125K in 1995. So $500K looks like a cheap floor, but the $750K anchor that's leaving that impression was nuts.
But I do wonder how many shoes can drop in terms of the ineffectiveness of the Paulson/Bernanke/Bush and Geithenr/Bernanke/Obama bailouts, toxic debt purchases, and obligations? How many dropped shoes (last years crises, then GM, and now FHA ?) shoes til people "give up"?
The idea that "the American people will lose faith in government" really doesnt play into GOP hands or Glib-bertarians hands; Glibs lack leadership skills for the most part...at least when it comes to leading human beings rather than pet economic theories.
The GOP Bush failures are too fresh to think people will really believe the GOP has a solution.
One possibility is that many voters will just sit out 2010 and maybe 2012. Many GOPers sat out 2008...the story simply got lost in the MSM...but the data was there.
3.5% FHA downpayment loans . . . , but the number of these loans being made now is more than 10 times (23% / 2%) what it was just 4 years ago.
Yes, and four years ago the number of FHA loans had fallen from 10%-12% in the mid 1990s to less than 2%. Why? Because of all the crazy lending others were doing.
. . .It's the vast extra quantity that is distorting the housing market, making prices unaffordable for responsible people of modest means, and putting irresponsible people into homes many of them will be unable to keep, and giving others windfall gains at the expense of the more responsible.
I completely disagree with all 3 or 4 points in that sentence.
One possibility is that many voters will just sit out 2010 and maybe 2012. Many GOPers sat out 2008...the story simply got lost in the MSM...but the data was there.
If Dems [or Indies] sit out - GOPers win... they'd retake the House and could come close in the Senate - I haven't looked at the ratio of open seats in a while. Irony is that might save BO in 2012 - give him something to 'run against'. If the Dems have BOTH Congress & WH going into 2012 & the climate isn't a lot better - they'll get Cartered and badly.
"I could be an example of how this program can work. I paid my loan off in 9 years"
KK, if you paid off your loan in 9 years, then you could have saved up an entire 20% down payment in 2 years. Would you trade a world where you had to wait that extra 2 years (or come up with more of your prior savings for a down payment) and the entire debt system of the USA was founded on solid ground for the real world, where you got a no-down loan and the prices of homes went crazy from overleverage, and our financial system collapsed and had to be rescued by payments from taxpayers for the next 20 years.....
Actually most politicians keep some of their promises. And I certainly expected Obama to be better than most (not perfect, of course). I'm honestly surprised to see him substantially worse.
Fair Economist, we certainly see eye to eye on that score.
FHA is distorting the market by allowing inflated valuations to persist (by insuring against default losses) while transactions are occuring.
The data is all there.
Dont know where that meme erupted that FHA in 2009 is suppose to help low-income people...thats not even prominent on the website and the data says otherwise. FHA in 2009 is merely a vehicle for govt insurance to prop up excessive valuations....and justify excessive leverage.
patientrenter -
I saw a good opportunity and jumped on it, but I was still very concerned about taking on that debt. I actually had cash on hand to do a 20% down payment, but the numbers with the no money down made much more sense than cashing out of the stock market.
I currently have cash on hand put down on a SFH, even at these prices, but I'm not going to do it. (Wouldn't be prudent).
And to be honest my distrust of banks has grown so much I would prefer to pay all cash and just avoid messing with any bank.
"I completely disagree with all 3 or 4 points in that sentence"
And you are in the majority, which is why our system suits your views better than mine, and isn't going to change by much. You are the voice of the status quo when it comes to housing finance, housing leverage, and house prices.
Sportsfan and others apparently see some good in what the FHA does.
Personally, I view today's FHA activity as all bad. It's simply an attempt to prop up house prices. Any pretense that it's to make home ownereship affordable to a greater group of people is laughable, as the market was accomplishing that by price drops.
There's not much (societal) good that comes from price fixing, especially for such a basic, essential good such as housing. What happens when you implement price supports is that you generate additional supply over what would have been produced. Witness the lack of bankruptcy filings by the major homebuilders, and the irrational level of housing starts (given the couple million vacant homes).
Whatever benefit does accrue comes at the expense of someone, namely all taxpayers who cannot participate. The benefit accrues to those who see the opportunity of a no-risk investment (courtesy of the FHA loans combined with tax credits).
I did see you discussing H1N1 earlier. We had a "flu related death" on campus last month and there has been at least one death in the county. And yet people are still coming into work sick. ugh
KK, so as a data point (excuse the depersonalization ), you're not an example of someone who would have been forced by a 20% down payment requirement into waiting to buy. Makes me feel even better about a 20% down requirement being pretty good.
Oh, and the additional supply (being prompted by the price supports) will ultimately cause more downward pressure on prices. Then what will happen if/when the price support policy is abandoned, for whatever reason?
Don't konw if this has already been discussed here: Interesting discussion about Gross Domestic Purchases (which is like GDP less the imports part.) Bottom line is that deflation is happening.
"what will happen if/when the price support policy is abandoned"
It will never be abandoned. To see what the ruling majority will do, just read sportsfan's comments. Price supports will never be abandoned. Just ain't gonna happen.
There are so few convetional loans available that FHA is all that is left. And no loans, even to qualified buyers means a much harder and faster crash.
FHA does not, nor has ever , done no doc loans. They have done buy downs in the past, people got burned on those too.
I'm just plain old tired of bailouts! propping up overinflated housing is a disgrace...the fha is a failure along with regulators, ratings agencies and our govt....
JP - I compete against offshore and I see the exact opposite - they are less competitive price wise than a year ago and becoming less competitive everyday. That's one reason there are fewer containers unloading...
There's not much (societal) good that comes from price fixing,
Nor from the meme alleging that some great benefits will accrue from a US society of homeowners in excess of our historic statistical level of homeownership. That fairytale is also discredited and should be put to rest.
Worse, this meme wasnt even the same thing as saying that minorities should have greater access to homeownership.
The data on subprime loans, based on a the definition of a loan significantly varying from prime rates, showed that a sizeable number of so-called subprimes went to non-minorities. Add in NINJAs, liar loans, alt-a, etc, and ur looking at primarily borrowers from majority backgrounds with significant incomes...and also looking at many flippers.
But the gullible chose to believe the relaxed lending stds were primarily to "help minority homebuyers"...and the gullible proceeded to support the larger agenda of simply using excess leverage to enrich big banks issuing MBS.
And the demonizing of renting in that meme was laughable.
Patient, my old SacLanding commrade,
I disagree too but I want to express it in numbers before I put my weigh behind it.
Short,
On price supports, I get the nagging feeling someone did some quickie math and decided that it was cheaper to support the markets and home prices rather then be in the position to constantly bail out pension fund. The problem is, they haven't been able to make it stick and the more they try, the worse the political pressure gets. I wish I knew where the train is going.
CCLT,
You missed the bashing on auto underwriting on FHA streams earlier >; (
I didn't want to wait to save up money as I was fresh out of college with a new baby on the way. On top of that the rent I was paying was more than my payments . . .
Two factors that are very common today when FTHBs decide to buy.
It's not the 1980s and house prices are not cheap everywhere, but people are motivated today by the same things that motivated the last couple of generations.
"no loans, even to qualified buyers means a much harder and faster crash"
No loans: I am very conservative financially, but I would be happy to lend up to 50% on many properties in many areas, and up to 70-80% in some. Why is more than half the same as nothing? We have become so used to ridiculous leverage that even when most of the purchase money is borrowed, we write it off as nothing. We have lost our perspective.
Crash: Of what? House prices, or people's material wellbeing? If my house is going to go down by 60%, why is it better for me materially if that happens in one year, or five? If you are referring to an economic crash, then I don't see why pouring trillions into propping up home prices for a few more years is better than spending all that money on new investments that increase our nation's productivity.
It's not the 1980s and house prices are not cheap everywhere, but people are motivated today by the same things that motivated the last couple of generations.
And 3 decades of Americans lived in houses of 1000 sq ft where they raised entire families!
Nothing justifies using FHA insurance as a means to artificially prop up overvalued inflated prices.
By requiring 20% down and strict UW, u lower demand and prices drop to a new equilibrium based on what local wages allow, given that a 20% DP is required.
People will & can wait for that to happen.....a house, rather than waiting and renting, is not a constitutional entitlement.
In the housing data fest: I want to say (from experience) that 4x income can be an affordable home price for a frugal family with a mortgage rate under 6%, stable employment & wages, and so on. But one has to be very careful about controlling expenses and remembering to save for the unexpected, which most folks don't do well.
"people are motivated today by the same things that motivated the last couple of generations"
Of course they are, but the prices of homes in vast regions of the country, in comparison to incomes, has changed, and often by a great deal. That changes everything for the first time buyers.
In the housing data fest: I want to say (from experience) that 4x income can be an affordable home price for a frugal family with a mortgage rate under 6%, stable employment & wages, and so on. But one has to be very careful about controlling expenses and remembering to save for the unexpected, which most folks don't do well.
A lot of caveats in that explanation - 2X or 3X income covers up for a lot of those caveats maybe not working out as planned.
Where has 4X+ worked out okay? Where the resale market was almost always hot, prices appreciated & if in trouble sell for a gain. Cali, Florida & the NE. Not anymore - at least not now.
Last night I started posting the results of a stock screen built around three premises:
(1) There will be a time in the future (though maybe not for some time yet) when buy-and-hold makes sense again.
(2) For buy-and-hold, dividend earnings are more valuable than capital gains, since corporations can and do die off unexpectedly. Corporations which have reasonable dividend yields (say above the 5 year Treasury yield) are demonstrating respect for their shareholders and are worth selecting for.
(3) It is the productive, industrial sectors of the economy that will be worth investing in, not FIRE, entertainment, or other "nonessentials" which were overbuilt in the bubble (and added limited economic value).
(4) The economy will continue to be rocky so a strong financial strength is important.
I ran a Value Line screen with selected industries, a minimum 2.25% dividend (close to current 5-year Treasury yield), and a financial strength ration of A or better (though I'm not sure what this means exactly yet).
Out of 1476 or so stocks in the Value Line database, I wound up with only 92 that would be worth further study under these criteria.
The world of sensible stocks is not very large!
I'm going to do a further screen based on debt burden relative to earnings (though this maybe captured in Value Line's financial strength rating already, I want to be sure)...
My M.O. is clear....we need to get to economic and household practices that are financially sustainable...all this baseball, apple pie, homeownership and meeting folks entitlement desires is secondary.
We need to get back to pay-as-you-go on many fronts and use deflationary pressures to bring down excessive valuations, asset bubbles and the inflated costs of college, of childcare, housing, healthcare, and get them into equilibrium with the realities of today's wages and salaries and jobless levels.
It will be an ugly process and i dont care if the 2010 and 2012 and 2014 and 2016 elections doom certain political careers in the process.
"I want to say (from experience) that 4x income can be an affordable home price"
No matter which home financing rules we come up with, there are some people for whom those rules will be too lenient or too strict. Hard cases make bad law applies equally to any set of rules. We responded to the desire to bend the system to meet unique needs by lowering all underwriting standards to the point where our system collapsed. We need simple rules that produce a solid, reliable financial system that works very well for 90% of people. It's when we try to reach that last 10% that we lose simplicity and we lose sight of the basic elements of a safe and sound system.
Don't forget the embedded put option for when it doesn't work out okay!
We've been saving since the market turned in 2006 and have effectively converted the 4x to 2-3x (though not by prepaying the mortgage - we like the put option since our local market still seems to be declining). So we think we're relatively safe now. And I can't imagine the stress felt by those who weren't able to turn the corner and are now in dire straits...
JP - I compete against offshore and I see the exact opposite
Note that it was gross domestic purchases. For you to see the opposite, you are raising your prices.
Is that what you meant? (If so, more power to you.)
Avo,
Been doing more reading on student loans, have you ever heard of an educational trust certificate?
nope that is a new one to me. was it inflationary....allowing schools to increase costs dollar-4-dollar?
That will never change with 3.5% down loans available to large segments of the market. Buyers limiting themselves to a home price they can afford to actually pay over a reasonable time period will be outbid by buyers considering only how high a monthly payment they can qualify for. Almost all of the price supports directed at housing lead - surprise! - to higher prices, not more affordability.
It will be an ugly process and i dont care if the 2010 and 2012 and 2014 and 2016 elections doom certain political careers in the process.
I don't see it happening the way you want - it will happen in 'real terms' but I don't see it happening in nominal terms... there will be some nominal correction but a lot more real price correction... and the subsidies will NOT go away... they will be restructured so they won't keep up with inflation. That's how you real them back in w/out the public noticing too much.
And we will get monetary inflation - that I am certain of. Just uncertain as to how much or how soon.
Regardless you cans still have 'real deflation' in a positively increasing money supply - wages and prices increasing slower than the money supply is increasing - the difference being absorbed in debt & asset value destruction.
Not willingly, but they won't have a choice. It'll be fish or cut bait (i.e., monetize or quit) time as soon as the whole UST debt ponzi scheme collapses, and every new parasite brings that day closer.
These FHA programs will end, just as the bubble did, because they are totally unsustainable. First it was the private market that went bust making bad mortgages, then the GSEs, and soon it'll be FHA. It won't last and it can't last -- simple as that.
Wisdom speaker, that's how I buy stocks. I bought exactly one non-dividend stock in the last 4 years (versus maybe 40 dividend payers). I haven't had done research lately, but if you see any nice ones, please let us know.
There is no doubt there are some incredibly gifted economic thinkers in CR's commentariat. But u are the outliers.
Does anyone really believe that Mr. and Mrs. J6P reflect long and hard about whether this house is 2x, 3x or 4x income? They see everyone else getting granite countertops. They don't want to live in rental city. The money was there for the asking. It's over. It happened. So now what?
CR is right. The move up buyer is stuck now. It's baked in the cake. The best one do now is watch the event horizon.
Avl Dao, I just don't accept the premise that "FHA insurance [is] a means to artificially prop up overvalued inflated prices."
As for the political and conspiratorial overtones on this thread, it's not like Obama needs to pay off California to get its electoral votes in 2012. I'd say that's a lock no matter what happens.
Note that it was gross domestic purchases. For you to see the opposite, you are raising your prices.
Is that what you meant? (If so, more power to you.)
Sometimes - sometimes not. What we are seeing is the offshore competition raising prices and we follow in underneath - sometimes at their price sometimes a little above or below. There is a ton of deflationary pressure but little of it is from offshore right now - that was not the case 2-3 years ago when the offshore producers were really pushing us hard & making us drop prices like crazy [or shut down]. A very different climate now.
The multitude of factors that go into regional housing prices are currently all aligned against California. Any appearance of prices leveling off are just the gasps of the few factors left running their course. California is getting poorer, population pressures are easing, every infrastructure attraction is failing, employment prospects bleak. All that's left is weather, reputation and inertia.
@Wisdom Speaker "In the housing data fest: I want to say (from experience) that 4x income can be an affordable home price for a frugal family with a mortgage rate under 6%, stable employment & wages, and so on. But one has to be very careful about controlling expenses and remembering to save for the unexpected, which most folks don't do well."
"Save for the unexpected" you mean like employment and wages not being so stable after all? LOL
And if there's such an emphasis on frugality just so you can "own a home" why not make it easier on yourself and family and just rent. 4x defeats the purpose and turns the logic inside out.
Exactly. I won't re-start that long-running debate (ya know, de- vs in-), but you know that the monetization option allows them to avoid quitting, and you probably can guess where I stand on the odds. 'Nuf said.
Wisdom speaker, yes please share, I'm too cheap and too poor to pay for valueline access. It takes a lot of savings to buy a SFH home here, I think I have taken a vow of poverty until I'm wealthy.
Buyers limiting themselves to a home price they can afford to actually pay over a reasonable time period will be outbid by buyers considering only how high a monthly payment they can qualify for.
Like the old line says: "You can't fix stupid."
There will always be people who overpay for stuff. I don't see how that leads to your next sentence, assuming that there are price supports anywhere in the process.
Some times I think I'm the only person who sees opportunity in the old rust belt. I wish there was an ETF of it I could buy. I'd get a stock certificate and frame the puppy on my hall.
An acquaintance just bought an overpriced home in SoCal for $900k. Didn't bargain hunt, didn't negotiate. Better homes, bigger/nicer lots in the area (half a block away no less) listed for as little as $650-$700k. Still owns his first home and is going to rent it out.
Have people become blinded?
I must say, I don't get it. But, I guess it's not mine to get.
think it will happen in as ugly a process as whats started here in the US in 2006 when the 1st rez mortgage defaults skyrocketed.
The equilibrium will be reached for between excessive valuations, asset prices (cars, college, homes, healthcare), and wages & salaries.
Equilibrium doesnt mean stationary or inert.....
but if you've seen the charts on how HH debt and corporate debt are at historic highs compared to the sustainable historic norms...you'd see what the new targets are.
So I've taken my 92 stocks and added up long and short term debt and other current liabilities, and divided that "total debt" metric by net income (trailing 12 months; note this is not "operating income" but the real deal). This way I get a sort of "total debt / income" leverage ratio... not so different from the mortgage/income ratios we're also discussing, except in this case the "income" is net of the payments on the debts, rather than prior to the debt-service costs. (BTW, in my 4x home price/income example above, there's no other debt... there used to be 25% equity but that's gone for the moment...)
Anyway, some companies are clearly cyclical and suffering due to low net income over the last few quarters, but let's look for the real capitalist strongholds here... Profits in any economy are possible, and this list demonstrates that. However, Valero Energy falls off the "Top 92" in this screen, due to being unprofitable for the past 12 months.
Only 32 companies in the Value Line database (out of nearly 1500!) have debt/income ratios less than 4!
Only 12 have debt/income ratios less than 2.
And only 3 companies have total debt/income ratios of less than 1x right now: Paychex, Garmin and Exxon Mobil.
Damn, there's a lot of speculative finance (Ponzi finance) in even the productive corporations... Procter & Gamble is at 4.19 and also carries "intangibles" on the balance sheet worth nearly 9x income. Now I'll grant they have some valuable brand names, but nothing is worth 9x income...
Pfizer had a ratio of 4.45 but of course now they've got a multibillion dollar fine to deal with. There goes about 1/3 of their earnings...
Kellogg cereal is levered at 5.42 to 1 by this metric.
Waste Management, which ought to be as stable a business as I can think of, has a ratio of 9.81! Might as well call them "Debt Management" now...
Kraft Foods, another company one would consider a consumer staples / safe investment, is cranked up at 20:1!!! (Have they just had a really lousy earnings year? They have nearly $20 billion in long-term debt and only $1.3 billion in actual net earnings.)
If we don't get a V-shaped recovery in profitability, AND a functional corporate debt-rollover marketplace, we're going to see a lot of debt defaults from these highly leveraged but "financially sound" corporations!
Sports I cant make u accept what u dont want to believe.
Dont overread into the election statement, it's not about California and just house prices, the deflationary pressures have evolved far beyond one state and one segment.
Elections are not the prime point.
And I also say we as a nation are not promised, entitled to nor have we earned EZ painless-free paths towards the inevitable new equilibrium between assorted asset prices & wages & salries.
A lot of the 4x bit comes from the now silly idea that there's a reliable investment component in homeownership. That said, there is something to paying more for houses in places like california. I can afford to spend a bit more because I can plan taxes out for decades, spend 1/3rd what harsh climate owners spend on upkeep and stay comfortable running the single wall heater a dozen days out of the year and no air conditioning. Those types of savings go a long way to affording to pay a bit more.
Dryfly has gone over it before, but I would add caution to anyone who thinks there is hope in the midwest. Outside Chicago there is nothing. I know dryfly will add Mpls to Chicago, but goodness. Not to be doom and gloom out here, but relatively simple things like housing stock are in very poor shape. Stick built construction was not meant to endure for generations. Almost all the old housing stock is stick built and around the 90-110 year mark. The last significant gains in housing stock in the 60s and 70s aren't holding up all that well either. Sure, there is modern construction. Madison, WI, and other university towns have quite a bit of it, but those are noticable only because of everything around them. Then you move on to infrastructure. There isn't a community that isn't going to have to replace most of their water and sewer within the next 20 years. A lot of communities still have lead pipes for crying out loud. I'm not trying to be apocalyptical here; there's just a lot of structural problems here.
I pulled up a pdf from May the other day. SocGen, Véronqiue Riches-Flores: Inflation to ease the debt burden
It is 28 pages, but it a short and fun read. The premise is that there is more debt than incomes can support, and considers some hypothetical responses.I of course have some quibbles with the report, but I found the basic legwork done for each scenario to be enlightening.
`
The end result of her meanderings is to suggest higher inflation for a decade. The coordination and weaknesses of that scenario over time are left to the reader's own imagination. Bernanke is probably aiming for a decade of inflation within a 4-8% target band I speculate.At that point my quibbles come in, but I will give others a chance to read the piece first and form their own opinions.
I have been amazed and knocked over the head that there are still greater fools here paying at over 9x average income.
The New Hope data that CR linked to a few days ago really blew my mind when I looked at the Hawaii data. I'm just reminded of the Dune line of "We come for you", if the economy stays bad I think Hawaii will be competing with Nevada, Cal, and Fla very soon, population adjusted.
An observation, today I went down to a lunch at Aloha Tower, pretty empty, and one of those party cruise ships headed out. Of the four levels the top 3 where completely empty. And the bottom level looked maybe half full.
I don't know if they can pay for the fuel cost with that.
I also say we as a nation are not promised, entitled to nor have we earned EZ painless-free paths towards the inevitable new equilibrium between assorted asset prices & wages & salries.
On that we certainly agree, Avl Dao. There's gonna be hell to pay before this shake out is finished.
As someone mentioned earlier, the real pain goes to the youngest in society. They will have to live in a country remarkably different than the country the previous few generations experienced.
The main problem I see is that they don't see it coming.
Equilibrium doesnt mean stationary or inert.....
but if you've seen the charts on how HH debt and corporate debt are at historic highs compared to the sustainable historic norms...you'd see what the new targets are.
Again - flood the place with money and the 'real debt load' for HH & corps appears more sustainable... doesn't say we are wealthier or make more stuff - only more money floating about. And even if the asset prices on the collateral backing those debts also increases [so as to make the debts 'appear' more 'maneagable'] that STILL doesn't mean they haven't deflated in real terms IF the money supply has exploded with resulting increase in prices for things like commodities.
There are a lot of ways this shell game can be played - my guess is we'll see them all if we live long enough. Its gonna play out for a long while.
" "You can't fix stupid."
There will always be people who overpay for stuff."
When CEOs of banks are overpaid for taking risks in good times, when the offsetting losses in bad times are taken by taxpayers, that's an example of stupid overpayment, just as much as people overpaying for houses because they can get large 3.5% down loans. Both are fixable, as long as people recognize them as problems, and have the political will to do something about it.
"I don't see how that leads to your next sentence, assuming that there are price supports anywhere in the process."
C'mon, sportsfan, I know you're not an economist, but you're not a dunce either. You're telling me that giving people who have less than $17,500 saved for a house another $482,500 to spend doesn't lead to most of them spending most of that $482,500? Yes, it's a loan, but people don't even think about repaying $482,500. They just think about the lender qualified them for the loan, which they do based on monthly payments.
as there's no cnspiracy theorism needed....all Timmie, Ben, Barney & Obama need to do is say what they've already said.....no need to lie because cognitive dissonance on the part of listeners (aka denying what they're hearing) will kick in as usual.
Team O has said that 1) credit is the lifeblood of the economy and we will extend credit wherever we can; 2) downward home prices are destroying wealth and we will use fed programs to counter downward valuations and get them back up...etc.; 3) the overseas bondholders must be protected, they've all said it publicly.
No lying is needed...as I said, poor Nixon was 3 decades too early...he'd flourish in these times without having to tell any lies....tell the truth and watch people lapse into cognitive dissonance.
@ Weather Helm: "And if there's such an emphasis on frugality just so you can "own a home" why not make it easier on yourself and family and just rent. 4x defeats the purpose and turns the logic inside out."
To be honest, at the time we bought we expected a smaller fall off the peak, and we also expected stronger wage growth. We didn't expect to be at 4x for very long.
But looking at it another way -- we bought up into a nicer community than we would otherwise be living in, and we're taking advantage of the extra amenities, better school system, and so on.
From a purely financial perspective it was not the best decision. But in terms of family happiness and stability, and quality of life -- some of those intangibles that don't make it into GDP calculations -- it's still turned out to be a good choice for us.
So yes, I still think that 4x is reasonable, if it's the right place for you, and you're willing to make owning a nice home the focus of your economic efforts for many years.
4x at current interest rates also works out to PITI payments that are under 33% of income, which is not too extreme. So the affordable-monthly-payment analysis is not so far from the price-to-income analysis.
My bottom line is that prices may still fall farther, but those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed!
One of Mauldin's newsletters put it at 10% for 10 years. The only problem is that it won't work, because they'd need broad-based inflation and they won't get it without engaging hyperinflationary levels of monetization.
@Jane: think I'm the only person who sees opportunity in the old rust belt.
Actually, as our "career transition / loss-of-job disaster" scenario (where the put option in the mortgage gets used) we were contemplating ditching our 4x home in CA and moving to the old rust belt to make a go of it there.
"I can only hope that FHA credit analysis has been done well"
I'd imagine about as well as the triple A ratings analysis done by the ratings agencies. A lot of over-generous appreciation rates and nary the thought of prices ever going down.
" those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed"
That's true, WS, but only by virtue of politically-motivated govt price supports on an unprecedented scale. Economics would have taken prices down to 2x - 3x already in many areas that are still elevated, and we're only 2 years from the peak.
Now, now. You know If I was feeling mean I could of done a lot worse. Remember, I still have a mountain cabin so I do visit the snow and the seasons, they just don't visit me.
I'm currently designing an add-on to my instant tankless water heater. The exhaust temp is so high I think I can patch in a passive air|air heat exchanger with a differential thermostat bypass and heat the garage and kitchen for free.
When buying, the biggest problem I had was how to come up with a down payment. The house was $257,000, and I needed to put down 3.5% to meet the FHA rules. I didn't have all of the $9,000 required, but then I found out about the FHA's new program where you can use the tax credit for the down payment. Using the plan, which the FHA announced in May, I was able to buy the house without draining all our savings.
I got a great deal on the mortgage. The interest rate is just 3.5% for the first year and costs about $1,500 a month, with taxes and insurance. The rate goes to 4.5% the second year and caps after that at 5.5%, about $1,900 monthly, which we should be able to swing as our earnings go up. What I bought with my $8,000 tax credit - Alex Bauer (6) - CNNMoney.com
patientrenter, we've had a lot of stupidity (and even more greed) kicking around this past decade. Making the taxpayers pay for it is just a dose of salt in the wound.
Your premise (with which I don't agree) is that giving people 96.5% loans somehow leads to higher prices for what they buy with those loans. I'm sure you're not alone in that thought process. I just don't see it.
Would I like to have true price discovery as soon as possible (short of creating a depression)? Absolutely. It's why I supported cramdowns in BK on owner occupied SFR and why I was disappointed when Obama pulled his support from the concept while it was pending in Congress.
There will be a lot of pain to go around, so let's start spreading it out as equitably as possible.
That will be their Achilles Heel - it will massacre them at the midterms. The problem with a lot of these 'programs' is they don't put a ton of bodies to work - and certainly not at good wages - not like FIRE did.
Not only that, from what I can see, these stimulus projects promised very little return on our investment. I thought one of the concept about these stimulus projects is to "investment in our infrastructures." But how much ROI can you get from repaving a perfectly good road through downtown?
My bottom line is that prices may still fall farther, but those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed!
Plus when folks say 'X times' what do they mean? Typically when talking about an area that means the median house in that community is priced at X times the median income in that same area. So on an individual level you might have an income TWICE the local median in an area that typically prices 4X and yet if you buy the median home you are well within a comfortable 2X on an individual basis.
Likewise you might be in a 2X community but only make half the median and then find yourself a bit more at risk if you buy the median priced home.
The context in which people discuss X's makes a difference.
I blogged on this CNN article tonight.. my title for the post was "You can't fix stupid.. but apparently you can give it a tax credit."
True enough these days. Some would argue that stupid needs the credit more than others.
Reminds me of the old DUI attorney whose closing to the jury was always the same song and dance: basically a drunk man is just as entitled to safe roads as a sober man . . . and more in need of them.
I'm currently designing an add-on to my instant tankless water heater. The exhaust temp is so high I think I can patch in a passive air|air heat exchanger with a differential thermostat bypass and heat the garage and kitchen for free.
Well I can store food out on my porch [frozen] for free for about six months of the year - does that count?
"I don't agree... that giving people 96.5% loans somehow leads to higher prices for what they buy with those loans."
Sportsfan, either your commonsense about people's nature has been switched off (which I don't believe), or you find that accepting what it tells you would undermine some of your other near-religious beliefs. No point in debating religion....
@Effective Demand: We bought in 2005, with a jumbo 30-year fixed at 5.75%. I think I get credit for top-ticking the neighborhood market (on the wrong side). Then we had trouble selling our old place as the market shifted, and I woke up to what that meant. In 2006 I started getting my belated education in real-world economics. Thanks to CR and some of the other econ blogs, we were smart enough to sidestep the stock market crash, so the savings that I mentally use to offset the 4x down to 2x are still intact.
4x income is sustainable given certain assumptions. If someone for example foretold much of the income growth over the past two decades occuring within 30 miles of major research universities, the expectation would have been reasonable. I would speculate that you would need annual increases in wages of around 10% annually to make a 4x income mortage work. Within 5 years you would be down below 3x income, and that is reasonable as long as you have new construction so you can avoid the surprises. I would again speculate that there were some areas around the country that saw this level of income growth. It wasn't my part of the country, but as they say median means half are below.
You would be in good company.
I'd say 4/5 of my retired faculty have sold and gone to various locations in the midwest. The other 1/5 have gone back to their country of origin.
And if my current land deal doesn't work out, I may not stay in CA either.
I thought I lucked out with the 11th row seats behind home plate for the giants game last Sunday. Well the gods must looking highly on me lately as I just received two tickets to the padre game in one of the corporate boxes. Woohoo!! Free food as well.
Actually, as our "career transition / loss-of-job disaster" scenario (where the put option in the mortgage gets used) we were contemplating ditching our 4x home in CA and moving to the old rust belt to make a go of it there.
Well I can store food out on my porch [frozen] for free for about six months of the year - does that count?
If only you could time shift that trick to the other 6 months. But I feel for you I really do. My porch is on the north so during our six weeks of winter the tomatoes grow mighty poorly.
Thanks, WS. I will use that list. I don't buy unless the yield exceeds 4%, so I will wait a bit. I saw opportunity in March, but was too busy at work to do more than buy one stock - Toyota.
Sportsfan, either your commonsense about people's nature has been switched off (which I don't believe), or you find that accepting what it tells you would undermine some of your other near-religious beliefs. No point in debating religion.... Smile
Again, I just don't follow. We obviously start with different premises before moving forward. It's not surprising that where we end up tends to be on separate paths.
Modern kitchen design is kinda stupid. Today we baked bread in the oven, which is surrounded by an airconditioned environment. In winter, I will put stuff in the fridge, which is surrounded by a heated room.
My wife (who is from a different country) constantly points out to me how totally unconscious Americans are about their energy usage.
[Edit: As a result of her training me to think about it, and my agreeing to her frugality] we don't do any serious cooking when it's hot outside. Also we don't run the air conditioning unless the interior is intolerable in shorts and T-shirts, which we find doesn't kick in until about 83 degrees with the dry heat here. With the money we've saved by that sort of energy consciousness, we're about half a year ahead in our mortgage payments now after just 4 years...
@PatientRenter: Yes, my list is only provisional for me as well. My sense of this list is that stocks are clearly still well out of alignment. But I'm trying to work through my decision-making process so if/when we get a correction (or another bear slide) that leads to a bottom I'm willing to believe in (for a long-term buy/hold decision), I'll be positioned to work through the due diligence quickly enough not to miss the moment.
"4x income is sustainable given certain assumptions."
Again, I think we can find some cases that justify any rule for home financing. But what we need is a simple, reliable home financing system that works for most people, not all people. And those rules are probably not too far away from 20% down and 2x -3x income. Almost everyone here who deviated from that did so by choice (KK, who had the downpayment; or WS, who had the down payment and could have bought at 3x or less if he had waited a few more years).
@Wisdom Speaker: "My bottom line is that prices may still fall farther, but those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed!"
It's a safe bet my wife and I have separated ourselves from the desire to see attractive areas' home prices drop to 2-3x. We frankly don't care. Our kids' college is funded now, we rent what we want, and if our high-paying jobs end, we're outta here lickity split.
I'm finally going to make an on-topic post. I remember the whole securitization stream freezing (post Bear Sterns, feels like last summer), and at the time congress basically ordered all housing agencies (primarily FNM and FRE at that time) to go wild in order to keep mortgages available. Nice to see the length of time between bad decision and consequence continue to shorten.
`
What I want to know is about the FHLBs. I have a rudimentary knowledge of that system, but haven't heard of any developments since member banks at most FHLBs were stopped from cashing out shares. Are such FHLB shares still carried at full value, and what tier of capital would they make it into? Can the FHLBs just wither and die, or if they need a bailout then how long before there is some action on it? [note: $1.3 trillion is held in assets across the 12 regional FHLBs]
C'mon, isn't this owned by the FedGov too? What's another bail-out with all the rest?
What is the over/under for the first Quadrillion spent in a fiscal year?
How will the universities adjust to this type of diversity?
First off, I think providing GIs opportunities to earn degrees is a good thing, and I am Pro-Diversity so that is out of the way.
It really is a "Hate the game, not the player" situation. We have a tendency to throw more money at the problems in education when many times, there are other problems not being addressed. (e.g. Detroit's public school system had more budgetary problems due to corruption and graft, not funding.) Also since everyone in the CR Commentariat tends to be anti-QE, those GI Bill USDs come from somewhere, and the chances are good it isn't coming from tax revenues.
As for the Greek system, I wonder how that world will survive at most campuses when Dad's credit cards don't work. It will make parties much more dull if they are all working 20-30 hrs a week for their dues.
HOOCOODANODE???
I heard the treasury is going to sell $70 billion in junk T-bills next week, that should buy a few more weeks.
The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.
Which is precisely why the program should be continued. First time buyers who remain current (i.e., 93% of them?) contribute dollar velocity to the economy, bring stability to neighborhoods and get a chance to build a stable life.
Just because house prices will likely decline further doesn't mean first time buyers will walk.
As you can see from my posts today, Im not particularly worried or scared about climate change, abupt changes in weather, or Paulson/Bernanke's scaremongering of a financial meltdown if TARP isnt approved.
But I do wonder how many shoes can drop in terms of the ineffectiveness of the Paulson/Bernanke/Bush and Geithenr/Bernanke/Obama bailouts, toxic debt purchases, and obligations? How many dropped shoes (last years crises, then GM, and now FHA ?) shoes til people "give up"?
The idea that "the American people will lose faith in government" really doesnt play into GOP hands or Glib-bertarians hands; Glibs lack leadership skills for the most part...at least when it comes to leading human beings rather than pet economic theories.
The GOP Bush failures are too fresh to think people will really believe the GOP has a solution.
Maybe people will just ignore the federal govt all together...and with state governments being insolvant, I guess they'll be irrelevant too.
Leaving city-state fiefdoms and mafias? Hmm, guess they have to bail out FHA too.
The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.
I know we are in the QE world, and Wall Street has tons of USDs to use for speculation. Meanwhile back at the ranch, J6P is un(der)employed with UI ending within 6 months unless Congress steps in. He cannot put money down on a house or a car without the U.S. Gov't providing a push, and even then, 10+% of 'em will be unable to keep up on the payments.
Throwing non-existent money down a hole only seems to be making the hole worse, or am I missing the
here?
Edit: On the bright side, Gold is still sitting north of 990, and the Yen is back up over 92.50.
Seriously, haven't we been expecting this??
Treasury's already supporting FNM, FRE, AIG; FDIC and FHA are on the verge; FHLB and PBGC coming 'round the bend.
Oh, and the Treasury itself is dependent upon the Fed.
There's no way good way out of this...
Adam Smith said there is much ruin in a nation. I have a feeling we are about to discover how much ruin a nation can sustain.
why cant 1st time homebuyers just remain as responsible renters for a few years longer?
What's the rush to use them to be a vehicle for funnelling fed dolars into propping up falling house prices?
I dont buy the meme that renters arer irresponsible baby-molesters who dont pay taxes or pick up their dog poop.
We need to stop tilting-at-windmills against price deflation in real estate.
The Greek system will survive even full-time jobs and school. Seen too many friends do it as well as I did. If I'd gone to a big school I wouldn't have gone Greek. At a tiny little school, that was the only social life provided at all.
My Way
sportsfan,
I wouldn't have a problem with FHA lending, provided that lending was performed under it's original guidelines.
This idea of lending up to $729K with only 3.5% down is pure madness. Not only has it guaranteed the implosion of the FHA, it's just one more nail in the coffin of the USD.
What's the rush to use them to be a vehicle for funnelling fed dolars into propping up falling house prices?
Where did that come from?
There have always been first time buyers and the 3.5% down payment plus insurance has been around longer than the latest round of tax cuts for the rich.
Who is rushing?
Who is using?
What is the supposed relationship to falling house prices (which, as I said, will continue to fall over the next year or so)?
this post almost looks like something i would expect to see over a ticker-forum. not sure, but this is scary. i guess because fha has FEDERAL in the name...
???
The Greek system will survive even full-time jobs and school.
We shall see. I know the system survived GD 1, but it was also tied to mostly affluent institutions that seemed to be independently wealthy. Mixing in raising tuition at (your school here) and decreasing parental support, we shall see. Unless you mean there is no house, then probably yes
"The Greek system will survive even full-time jobs and school."
who cares?
Hoocoodanode that there were so many gov agencies all working on busted business models? Guess they made sense as corrective public policy to extant market failure at some stage in the distant past, but it seems that the tipping point has long since been and gone when they solved the apparent problem(s) on a sustainable basis.
C
/ducks
This idea of lending up to $729K with only 3.5% down is pure madness.
I concur. The biggest single indicator of pre-determinant factor is a lack of down payment. The FHA is just filling the void left by New Century and Countrywide.
Greeks. Besides Alla Geta Eata, probably only people wanting to date the hawt singles on campus.
well good, then we're in agreement.
Let's scrap the 3.5% down and go old school and have buyers wait til they have 20% down.
With prices falling down.....the 20% will be reached earlier.
We'd all be better off if people save and have a down payment. So many positives to a down payment, too many to list in one post.
Lets accept the short term housing volatility while adjusting to sustainable and responsible lending - lets tighten standards and require downpayments. Let people learn the value of the money they save and have skin in the game when they buy a house.
I am saving now, and will buy when prices are rational and I have 20%.
Congress, Mr. President - show us you know what fiscal sustainability and responsibility mean to you in your actions with the FHA.
This idea of lending up to $729K with only 3.5% down is pure madness. Not only has it guaranteed the implosion of the FHA, it's just one more nail in the coffin of the USD.
FHA lending limits are as low as $271,000 is some areas.
Do you really think first time buyers will qualify for a $729,000 mortgage?
. . . it's just one more nail in the coffin of the USD.
The USD is already dead.
Goodnight everyone.
Winner. This is crass, but... go to an SEC football game and take a stroll by where the frats and sororities are pre-partying. Not everyone's beautiful or handsome, only 95% of them...
Oh, and FHA is going to implode. Another new For Sale sign on the road into my subdivision. Most everyone around here got FHA loans to go with their hoopties.
The feds figured that in order to blow a sequential bubble in a popped asset, you'd need to replace the irresponsbile actor with a state agency. Let's see if it works.
I'm checking out, too.
On tax credit: Goldman has a research note out tonight making some of the same points I've made. They argue the demand is already fading - although the expect a surge as the program ends. If the program is extended, they think the demand will really fade.
So that will probably mean taxpayers pay $100,000 or more per each additional home sold because of the tax credit if it is extended. Probably not the most effective use of taxpayer money at this point.
TJ and The Bear, The madness is already starting to show up in the delinquency numbers too.
best to all
...handsome, only 95% of them...
You have Legacies for a reason, man.
This idea of lending up to $729K with only 3.5% down is pure madness.
https://entp.hud.gov/idapp/html/hicostlook.cfm
Nuke (profile) wrote This idea of lending up to $729K with only 3.5% down is pure madness
Im with Nuke.
Yes, even though the FHA conforming limits vary by region.....allowing 3.5% down on such over-valued properties is a senseless fight to prop up house sales in those areas. Let them devalue.
Let the renters stay as renters. Let the houses sit unsold or be adapted or retrofitted on a Pay-as-U-go basis into new uses, if people cant save up 20%.
Ultimately whenever we get to something that is bubble-free and financially sustainable (not Enabled by excessive debt) , that will be a key component: big money down. It will force an equilibrium between home prices, wages, wage growth, joblessness, and debt service.
Can I just say "it's complicated" or will I get smacked with a trout?
What I would like to see is more true FTHBs out there and just scores of bad revirginizations. The later have had their chance at the windmill and will likely have proceeds socked away. The former need all the help they can get because they have to complete with the later.
What I really really hope to see is the Fed take all those crappy MBS they are holding, figure out which ones are whole or cheaply make them whole and then begin a national affordable housing project. This would be a slap in the face to the banks who stood back and choked off lending and would take some air of the NAR's sails. I'd pay 10% interest to the gov to make it so and happily.
sportsfan,
It's not just FTHB. There are three-quarter-mil homes being sold in SoCal using maxed out FHA financing.
It's 30-to-1 leverage upon purchase, and these people are immediately underwater. Again, insanity.
D-Jane, this is a Trout-Slapping Free Zone. So ur safe.
In 1933, newly-elected President Franklin D. Roosevelt decided to counter the falling money supply in a most drastic manner. To accomplish this he confiscated all privately-held gold and immediately devalued the US dollar. This goes to show how governments, in a period of emergency, can change rules and break their own laws.
Fast forward to 1971, when President Nixon “slammed the gold window,” ending its dollar convertibility. Without a gold backing, there was no hard, physical limit to how many paper dollars could be issued.
What will it be like to live here when our nation is creating a trillion dollars every four weeks? How about every four days?
Crash Course Chapter 9: A Brief History of US Money - Bretton Woods | Crash Course Videos at Chris Martenson - Bretton Woods, gold standard, hyperinflation, reserve currency, US dollar
History repeats. Recoinage is right on course.
...or will I get smacked with a trout?:
mIRC reference?
I agree that the 3.5% down is a token gesture at best and a dishonest one at worst. Why not just hit the 110% point again? Is that setting just too crass in the current market?
?? FTHB ??
- it depends upon the area and a host of other qualifications.
Sure, but the FHA should've never been lending beyond the conforming limits as determined by the median house pricing model, which would put the maximum somewhere back in the low $300K range these days.
Financing anything more is just begging to lose taxpayer money.
sportsfan, um, you kinda dont' get what is goin on here in CA. It's the madness of King George, writ large. With an encore by King Obama.
TJ - you know as well as I do that the FHA 729k limit is an absolutely transparent attempt and keeping CA, NJ, and many other high end home markets from cratering. They cant have that stuff crater...impossimole. It craters, banking sector, game over. No way to hide the insolvency at that point, which is not to say it's going to be easy to hide the commercial losses. But I digress....
You can get 110% with an FHA loan, if the house needs fix up.
Funds for Handyman-Specials & Fixer-Uppers - HUD
Avl - FTHB - first time home buyer, otherwise known as, not TBTF.
Wow! That means my Detroit Dream Home can get me 22k instead of 20k!
Thanks, HUD!
This is in reference to the thread on education and democracy, as well as housing prices:
"The approach to education linked to manufacturing in these countries has profoundly shaped the xyz program on education. It was there we ....saw first-hand the power of the School-to-Work link and the necessity of a social partnership between business, labor, and government "
That's the wording concept I was looking for. Our social partnerships...esp the ones involving work and finances...are non-existant these days. We're missing so many linkages that should be present in a modern society and be mutually-beneficial rather than parasitic.
a.k.a. hasn't bought a house in 3 whole years!
hoopties and trout slapping. lurve it.
first time home buyer
I say let the tax credit expire. All it did was bump up the price by 8k. But keep the DP 3.5% or make it 5%, just not 20% and require a 30% DTI on verified income, certified assets (VICA) and don't budge from that mark. No stated loans, no exceptional need.
FHA would have been fine if it had stuck to its old standards, but it didn't. 7% delinquency is already a disaster, and the big surge in FHA is of very recent vintage, so there's much more to come.
The Republican anti-government types are really going to make hay out of the FHA's coming trouble. Yet another way Obama will regret ditching his campaign promises (to go after crooked lending) in favor of continuing or even (in this case) expanding bad Bush policies.
we need to wean our economy and all manner of economic sectors and headcounts off of homebuilding and homebuying as a profit source. Going back to 20% down will return homebuying into a more sustainable role in the economy as was shown historically.
We need to stop mythologizing homeownership and stop demonizing renting.
The FHA has become the subprime lender of last resort....
When the FHA was created in the 1930s to revive housing, it required 20% down.
hahahahaha yes I know what a 203K - both full and streamline.
Good luck on ever closing one. Toss one of those in the ring and the lender will take the first all cash offer it sees. Don't ask how many potential homes I've lost this way. It will make me, you, and red-headed second cousin's stepchild cry >; )
A thin downpayment and strict underwriting can produce acceptable outcomes if the market is stable and healthy, with prices comparable to renting. It's going to be a disaster with grossly overpriced houses; even more so with all the rats scurrying about trying to dump bad loans on the nearest available sucker. And with those credit ratings, and the huge expansion in lending (=new underwriters, overloaded underwriters, or both), I have my suspicions about the quality of current FHA underwriting.
"The borrower must meet standard FHA credit qualifications. " - and I'm sure they no longer approve NINJA liar loans, or fake pay stubs. You really have to qualify, now. I would be interested in finding out when these 7% of delinquent loans were originated, and by whom.. Not recently, I'll bet.
Yet another way Obama will regret ditching his campaign promises (to go after crooked lending)
Fair, on an asside, Im curious...did u expect him to be a different kind of politician...one who really kept his promises?
Just being nosy here.
So what happens if it does break down?
sportsfan: "the 3.5% down payment plus insurance has been around longer than the latest round of tax cuts for the rich"
John Burns Consulting: ""The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. ..."
3.5% FHA downpayment loans may have been around for a long time, and I can handle them continuing at their prior levels, but the number of these loans being made now is more than 10 times (23% / 2%) what it was just 4 years ago. It's the vast extra quantity that is distorting the housing market, making prices unaffordable for responsible people of modest means, and putting irresponsible people into homes many of them will be unable to keep, and giving others windfall gains at the expense of the more responsible.
Bob_in_MA: "When the FHA was created in the 1930s to revive housing, it required 20% down."
Thank you for injecting that note of sanity into the discussion.
Patience, thanks for providing that market context.
CR had a graph on Sacramento where FHA was doing a smuch as 75% of the volume done by conventional lending.
And FHA never ramped up staffing for this workload....so dont be surprised if the lending stads on paper are not what's happenning in the real world.
BTW, it's an insurance program...NOT a mortgage program...many lenders are still involved.
Avl Dao: lol
Actually most politicians keep some of their promises. And I certainly expected Obama to be better than most (not perfect, of course). I'm honestly surprised to see him substantially worse.
The request for a taxpayer bailout will come in the same letter as the resignation of the entire HUD administration right? Right?
Automated underwriting is what will sink FHA, why allow AU to do things that manual underwrites arent allowed?
You manually underwrite and your DTIs are 31/43.. yet AUS accepts allow for significant pushing of those ratios?
The whole underwriting system is bastardized, someone figures out that X underwriting rule works for low income workers who have at least the promise of wages growing with inflation if not more in the future.. then later down the line X underwriting rule gets applied to everyone. And then on top of it congress comes in and pushes the loan limit envelope to "save" the housing market.
But because "homes" occupy this mythical status in american culture and the fact that politicians are now trying to save everyone from there bad decisions we get this trainwreck that apparently nobody can stop. There are many voters who want the system to continue and expand and they outweigh the people who arent trying to vote themselves a paycheck or ability to retire on their home.
barfly,
Sure, they're applying stricter qualifying guidelines, but still not nearly as strict as prior to the boom. It's the leverage that gets me, though.
Again, putting 3.5% down puts the buyer immediately underwater, so there's no skin in the game whatsoever. Every new price drop is an incentive to default, because it's all just sinking deeper. The bubble markets like SoCal -- where the highest limits apply -- have the worst falls yet to come in the mid-to-high end, too.
Avl Dao: Seriously, they increased the FHA workload 10-fold without a major staffing increase? Holy cow, this is going to be bad.
Enjoy Karl Denninger’s rant (video).
Kneale Abuse - The Market Ticker
"I have my suspicions about the quality of current FHA underwriting."
And so you should. The huge expansion of the FHA program in bubble states was designed for only two purposes:
a. Help reflate the housing market back to unsupportable levels
b. Move bad loans held by banks and private investors to the taxpayers by refinancing.
Underwriting isn't a high priority. They do just enough to avoid getting onto 60 Minutes.
So what happens if it does break down?
Not if, when.
The Dallas Fed chief said he expects an output path that will resemble a "check mark."
That will mean a "near-term snapback from the short, intense downstroke," followed by "a transition to a long period of slower growth corresponding to the elongated side of the mark."
Fisher drew attention late last month, when he said in an interview that the U.S. economy was no longer declining.
Fisher noted Thursday that "the worst may well be over for household consumption, barring some new shock," thanks to the expected swift adjustment among consumers to an improving economic outlook.
Dallas Fed chief warns of 'deflationary risk' - MarketWatch
Should I write to my congressman, senators, and the president about this? It seems that important (really).
I guess I could call too, I do have the number memorized (202) 224-3121. My 20 minute commute is well suited to calling my two senators and one congressman.
Okay, TJ, what happens when it breaks down
OMG!, John Burns Consulting put forth an opinion that the FHA will fall below their 2% reserve level, and that...well nobody actually thinks that with have any impact on anything, but some people might think that there might be some political pressure on the FHA to maybe implement some additional buyer education classes or something, but probably not. No doubt the international markets are roiling from this prophecy of doom from the mighty John Burns Consulting, it is a good thing this wasn't released while the domestic markets were open. I am sure there is a joke in there about being a Real Estate Consulting company based in SoCal that I am not able to tease out at the moment.
They can just change the reserve to 0.2% to match the FDIC.
Oops, forgot the FDIC DIF went negative last week.
The bitch is that (a) is only temporarily slowing the descent and (b) is succeeding wildly.
Re: "particularly when so few entry-level buyers have a substantial down payment.'
This is between sad and pathetic, because no-doc loans were very fashionable a few years ago.....
I actually dont have a problem with 3.5% down if it goes along with strict qualifying ratios. No alternative incomes or calculating X overtime and all the other BS they do ON TOP of allowing aggressive DTI ratios. 28/36 is plenty aggressive, especially for a low down payment home. Income as reported by the IRS for the people on the loan, that is what should be allowed for FHA.
FHA shouldn't be the savior of the housing market... Or, if they do keep such massively aggressive underwriting then apply the appropriate risk premium. The real issue with FHA is they are trying to have it all AND low cost premiums.
thanks effective
I was looking at FHA in all it's myriad forms and was still held to the traditional DTI ratios. It wasn't until you and credit pointed me to the broker boards which I had stopped reading in 07 that I realized the madness was still there, it just had a new set of monogrammed initials.
very few see it. i know i know, we are blogging the events.
but still, nobody sees it coming.
The whole problem is that IRS statements need to show greater abilities to be more elastic and to allow people to lie their fucking asses off....
How does down payment assistance work into the huge 3.5%? Haven't heard about that much lately...
or, we could just allow the FHA to do risk-based pricing.
Oh, wait - that would somehow be unfair.
So, after the Fed, is there a need to "audit" the FHA?
FHA is only holding about $1T in loans, they need to take on an extra $4T to fill the hole left by Fannie/Freddie.
Lever on up.
I'm from Illinois.... Voted for him.
Not surprised too much by what's happenned these 200 days.
When he appointed Timmie, I suspected it was not going to be a fairytale story...LOL.
Why Timmie? Obama's adherece to the economic orthodoxy; the economic status quo (with mere tweaking of NAFTA and tax rateds) was the only economic platform he could muster on his own....I really believe the whole braintrust of Axelrod, him, Jarrett just didnt grasp the fundamental instability of debt overhang & deleveraging while campaigning.
Flat-footed, Team O allowed Timmie to bungee-cord the team to GoldmanSachs-thinking and pursue Wall Street-Care and BigBankCare. O felt compelled to believe the solution is some middle ground and that his ( blind) faith in all this blue-chip blue-blood orthodoxy of Timmie's and Ben's...and now Rahm. After all, such faith never failed him before.
Bush's pick of John Snow as Treasury Secretary in 2001 was far bolder move than Obama's decision of Timmie.
Audit the FHA? Nah, we already know they are underwater. Just remember to scuddle the ship before you man the liferaft.
Could be time for another pop quiz....
Can anyone cite the length of time John Burns, CEO of John Burns Consulting, spent employed by a company that is not now bankrupt?
Bonus point: Can anyone pick the highest ratio of lame personal information to professional qualifications info of any of the John Burns Management Team as carried on the company's website?
C
Well the seller funded DPA programs went away.
There are still state and city DPA programs allowed but many of them are having funding issues because of budget constrictions. But ehy are still out there.
p.s. Deflationary jane, you are most welcome and thanks for the kind words.
Treasuries headed for a weekly gain before a Labor Department report that economists said will show the U.S. lost jobs for a 20th month in August.....
This type of headline will have greater impact next year when we are in the 30 month range...
Not bankrupt now: 0 yrs, 0 mns, 0 days
Ratio: 68.5%
Effective Demand,
Yeah, Cali had one of those, and even LA was talking about one. Anyone checked on those lately?
From CR's WSJ link:
"there is no way they will make the 2%" if the current study follows last year's methodology, says Mr. Lawler.
Well, the solution is implicit right there!! [/snark]
Effective Demand: "The real issue with FHA is they are trying to have it all AND low cost premiums."
I think you make a good point, ED, but I think adequate down payments are still needed. Let's suppose you could buy call options on stocks without paying the entire cost of the option up front. You get to pay a small amount every day. Then lots of people who have no money should buy very large call options. If stock prices go up, they have a large profit. If stock prices drop, they walk away from the call option at just a small loss. That's what these low-down FHA loans have done to the housing market.
More basically, how do we get people who buy a home for $400,000 to appreciate the fact that they are promising to pay a very large sum of money for that home, and help to ensure that they can actually pay $400,000 over time? Asking them to first come up with a small but decent % of that $400,000, like 20% or 30%, seems to me to be a sure and simple way to get the job done. As for affordability, we all know that if we did that, home prices would drop so much that most people could afford a home even with a 20% down payment requirement. Let's not make the perfect the enemy of the good, trying to save 10% of buyers and screwing it up for the other 90%, and endangering our entire economy in the process.
And for a dose of some other country's
, the South China Morning Post:
"Fiona Tam
Sep 02, 2009
Thousands of villagers in Fujian clashed with riot police, smashed police vehicles and took government officials hostage in the latest peaceful mainland protest over industrial pollution to turn violent...."
China News Headlines | Hong Kong's premier newspaper online | SCMP.com
Maybe a war would help the economy?
3.5 percent down at these crazy rates...
Can we start the 'comrade' meme again?
BTW, check out MaxedOutMama on why the super low rates really aren't good for growth: MaxedOutMama: Bouncing Along The Runway
We'd all be better off if people save and have a down payment.
We'd also all be better off if everyone paid cash for a house, and there were no mortgages.
The truth is, that's never gonna happen. And saving more than 3.5% in today's world is a very difficult thing to do, without selling a home that has already appreciated in value.
You might as well say only a very, very few will ever own a home. And then watch the slumlords rush in.
tj and the bear, I agree 3.5% seems ridiculously low, from growing up in a world where 20% was the norm. But it has to be helping many who formerly were responsible renters. There will always be some who default, no matter what. How do you prevent any defaults, especially in this economic climate, whatever they put down? I know, don't make any loans.
In some countries where home loans are unavailable, houses sell for cash. And for less than 1 years wage. And there is almost 100% homeownership.
No granite topped kitchens, though.
As I said, "It will force an equilibrium between home prices, wages, wage growth, joblessness, and debt service. "
20% down will create a powerful force in pricing downward to affordability.
It is still a deleveraging process and it will create necesary and unavoidable carnage with banks, bondholders overseas, or on the Fed's balance sheet. But there's no other way towards anything financially sustainable that's also without excessive debt.
We already have 2
Credit is as credit does.
After awhile here, I sometimes start to forget how real 'mericans think.
Am I getting the jest from some in the crowd that home ownership with 3.5% down is now a fundamental right? Life, Liberty, and Pursuit of Cheap Housing?
The fact that we are so tied to credit when most people in the rest of the world can have housing without any credit makes that argument rather odd, or is this the part where we talk about the declining standard of living in the US?
"We'd also all be better off if everyone paid cash for a house, and there were no mortgages.
The truth is, that's never gonna happen. And saving more than 3.5% in today's world is a very difficult thing to do, without selling a home that has already appreciated in value."
The notion that more than 3.5% down payments are essentially the same as 100% is absurd. If you believe that, then you'd be happy to pay a million dollars for your next $36,000 car.
But it has to be helping many who formerly were responsible renters.
If they're truly responsible then they can demonstrate the fiscal discipline by coming up with a sufficient downpayment.
The homeownership percentage was 64% prior to the boom and it'll go back to that (or worse) after the bust.
Here's a recent FHA first-timer $8k tax-credit loan:
CNN/Money: $750k in San Carlos
The couple even admits they're "tapped out" after the purchase of their own special courtyard-with-a-house-around-it.
Sounds encouraging!
"The truth is, that's never gonna happen."
people say that because they cant see beyond today's vastly inflated prices that our govt is trying to prop up.
Prices will come down when 20% is the new norm.
TJ, my first house I bought w/5% down. I was a very responsible debtor, and my last house I put down 30% or so. Sometimes young couples need the low down payment.
Not to mention the fact that the primers are the ones foreclosing the fastest these days. It's unemployment-related now. It doesn't matter what down payment you had, if you lose your job, you lose your house eventually. Times have changed.
Prices will come down when 20% is the new norm
.
Not to disagree, but why 20%? Why not 10% or 30% or ... ?
Dallas Fed chief sees 'deflationary risk' as pre-eminent
Dallas Fed chief warns of 'deflationary risk' - MarketWatch
Evaluating the consequences of any of these programs is easy. Ask yourself; "Does this induce more debt?" That's it. That simple. We have too much debt and more debt is bad. More debt is extend and pretend. More debt is the accelerator and not the brake. Low down payments will allow some of the smarter people last chances to get out but make no mistake, taking on a 96.5% mortgage even at 5% and 30 years is not going to ever be the cash machine we saw over the last generation.
TJ, my first house I bought w/5% down.
That's fine, as long as it's a relatively cheap house. $730K?!?
I think Fischer is right on this one. He is pretty likable for a Nazgul.
How can people pay $500,000 for a home if they can't scrape together more than $17,500 (or maybe even less, after subtracting the $8K tax credit, just $9,500 net) now? If tehy can really afford $500,000, it won't take long for them to put together $100,000.
Of course, putting together $100,000 free and clear is hard to do for most people. The obvious and correct conclusion is that $500,000 is way too high a price for most people to pay for a home. Bu they can't see that if the down payment requirement is a tiny fraction of the ultimate price. With low down payments, the home price is completely divorced from the real money people can earn and save. Home prices become Monopoly Money amounts, with no anchor in daily budgets and reality.
You are absolutely welcome.
Some days I don't know whether to be relieved or pissed off that I was never offered any of those crazy UW schemes
As far as I can tell, the state programs like CalFHA are on oxygen and wheezing hard. When I think of them, it's always a pick-the-nightmare lotto:
1) I qualify for them (am I really that big of a looser?)
2) I don't really need them, I'd rather see that money go to a family who could really use it
3) what are the chances that a family that would benefit the most would ever get a dime?
4) what program are they impoverishing to find the cash anyways
5) and would I have broken the vase if she didn't say anything?
Are we are back to the short-term/mid-term deflation, long-term (hyper)inflation now, or is the
not dropping enough Benny Bucks?
If the average $300,000.00, then one would have to save $60,000.00 for a down payment. How long will that take if you make $50,000.00 a year and save 10% ? Plus pay your rent, save for retirement, have a child, save for emergencies, make a car payment, pay for health insurance. (don't forget the student loans)
Answer, forever. Cause s*** happens and eats up the savings for the down payment.
No, the answer is about as long as it took your parents.
That's right, it was "heteroflation" that I was looking for the other day. Got caught up in back-reading on mid-80s heterodox stabilization programs in Brazil, ARgentina, and Israel, and didn't get back to the thread.
Also defined as a bunch of different weird stuff with money supply, demand, and asset values depending on where you are and what miscellany of gov programs are raining cash on you while others suck your lifeblood out through your nether regions.
C
There's 60+ years of historic data that show how that model of 20% down fared in recessions, etc.
Seriously, haven't we been expecting this??
I sure have... and the resulting huge bailouts and then continued loose lending and more bailouts.
Josap the average home needs to return to 3x family incomes. The FHA is part of the government's effort to keeping that from happening, and taxpayers will catch the falling knife.
Dad was a vet. 0 down loan. This was in 1959.
Where is Suzan? I think she is sucking, but I do not know what?
YouTube - Suzanne Researched This Commercial
Josap the average home needs to return to 3x family incomes.
Or lower - in much of flyover the number is more like 2:1.
That's fine, as long as it's a relatively cheap house.
It was $80K. And the 5% was a gift from the inlaws.
But it's better than our neighbor around the corner, who bought his foreclosed home for $64K WITH CREDIT CARDS. Actually the deal ended up well for him, the houses appreciated to about $300K in their heyday.
Answer, forever. Cause s*** happens and eats up the savings for the down payment.
Doesn't that assume that the price of housing won't decline and you stay employed during the term of your purchase? If you are dying to stay in a high rent area of the country--relatively-speaking--then what seems to be the problem with saving up the money?
Maybe the sad, new reality is 30 and Unders won't be able to live like their parents right out of college, and they may be 40 before they can take the mantle of the American Dream.
Edit: Just be glad that you aren't the next round of 18-24 year olds. They are taking it worse in the shorts than the 25-35s are.
Again, 20% down will FORCE downward the pricing and bloated valuations into something thats in equilibrium with wages & salaries, the cost of college, childcare, etc etc.
It has to be allowed to find a new equilibrium...all those variable do. They will locate their own equilibrium and be affordable.
"why 20%? Why not 10% or 30% or ... ?"
Good question. I would love to see an informed, educated debate about the right level of down payments. Clearly any number can be shown to be higher than it needs to be for some people and purposes, and lower than it needs to be for other people and other purposes. But one of our biggest problems recently was that we recognized that variation and responded to it by just lowering standards. We need to avoid that going forward, and establish some simple rules that will be imperfect for some people. Better to have a few simple rules and a solid system that works well for most people than permitting the terrible deterioration in underwriting standards that happened during the last 4-5 years.
I do have some thoughts about down payment %'s, but it's a line of thought that I haven't seen much of anywhere, so I'm not sure I want to start after 11 pm. If you're interested, I'd like to exchange thoughts at an earlier hour.
I agree that homes have to cost less. When I was younger your housing costs were not to exceed 25% of income.
same,
Dad was a vet. House was paid off when he died and my mom is the cheapest bi@tch to walk the face of the planet. She sold it in last year (after 3 yrs of nagging her of course).
Even if joblessness persists and there's no return to single-digit jobless rates, new equilibriums between home valuations & pricing, wages & salries, college costs , and childcare, will be found.
And 20% down has a documented historical record that can be examined as it survived wars and recessions.
Down payments need to be large enough to make strategic defaults extremely rare and high enough to self select for people who can demonstrate money management skills. 20% sounds about right.
TJ, my first house I bought w/5% down. I was a very responsible debtor, and my last house I put down 30% or so. Sometimes young couples need the low down payment.
I had less than 5% down on my first house - but I paid $45K for it and was making close to $30K at the time in a VERY secure job... I didn't want to wait to save up money as I was fresh out of college with a new baby on the way. On top of that the rent I was paying was more than my payments and the rental was in worse shape & farther from work. That was early 1980s in an industrial midwest farm-factory town. We are a long way from those conditions now... in most of the US.
Great analysis...that's the problem in a nutshell. And to restate the obvious, the $750k fixer in San Carlos would go for maybe $200k in 85% of the rest of the country.
And that $200k would be 3x the household gross pay of 2 people working $35k a year jobs.
Those people in the CNN piece who bought the $750,000 home... At 5.5% their payment will be $4200+ !! Add property taxes and school taxes and that might be $7000 a month. That has to be one of their full incomes most likely.
Wtf, how will they pay that, month after month after month for 30 years? I hope he can do more than drive a crane, because all it will take is a surfeit of crane drivers or him hurting himself for a couple weeks and his income is toast.
People are just nuts. Our mortgage and escrow in Texas is $1200, which feels reasonably safe, certainly cheaper than renting for a small 4 bedroom house.
"....one would have to save $60,000.00 for a down payment. How long will that take if you make $50,000.00 a year... Answer, forever. "
If that situation is common, then the $300,000 price of that home will come down, a lot. A 2nd job, or overtime, or more education, or more sucking up at work, will get you more than $50,000 a year. That, and old-fashioned frugality, can get you a long way.
It seems lots of folks cant see home prices declining....they keep phrasing the question based on today's govt-supported inflated valuations.
If mortgages were tied to income, 30% of gross maybe, then you could buy a house with those payments and any downpayment would buy you more house?
Of course with some sort of min amount down.
I think the problem is more income to debt ratio than the down payment.
I had less than 5% down on my first house - but I paid $45K for it and was making close to $30K at the time
That's a good point, because back when we were buying w/low down payments, banks wanted to know income and debt to make sure you could afford the payments. I told Tanta way back that back then, being self-employed, you had to show the bank pretty much everything except baby pictures to prove your worth. And when I took cash out from under my mattress to cover closing costs (yes, I did have a stash back then), they looked at me like I was a drug dealer. They were WAY more particular, and that may have had more to do with success than the size of the down payment.
..we also forget that as an entire nation in the 1950s and 60s we raised whole families in rental units as well as in homes that averaged 1000 sq.ft. It's not impossible to live smaller and within one's means. and to survive renting.
The San Carlos couple mentioned that "...the $8k credit is saving us." If I'm not mistaken, doesn't the credit start phasing out at an AGI of $150k/year for couples? So they snagged that $750k loveshack on an income of less than $150k/year. (Though we aren't told what their downpayment was.)
But hey -- they got a courtyard. Great for entertaining.
it's a line of thought that I haven't seen much of anywhere
Then I'm definitely all ears!
If you're interested, I'd like to exchange thoughts at an earlier hour.
would like to hear it
..we also forget that as an entre nation in the 1950s and 60s we raised whole families in rental units as well as in homes that averaged 1000 sq.ft. It's not impossible to live smaller and within one's means. and to survive renting.
Some of us still live in houses like that. We all didn't drink the koolaid.
Basel,
If you are still out there, after reading, making a few spreadsheets, and some more writing, I have come to the conclusion that either the Michigan faculty have no clue what is happening in the larger world or that they really don't care but want their ponies. I honestly don't know which is worse.
Just looking for 2 more things: does anyone know what property taxes run around that part of Michigan and what is the name of the institution handling their pension funds?
All the appraisers knew this was going to be the next sub-prime 2 years ago. You can only repackage the same shite...so many times. When you give cheap money to irresponsible people with NO money down....you get folks that get free rent for 6-9 months before the eviction/foreclosure is taken to it's conclusion. Idiots in DC caused this mess and FHA is a conduit of that stupidity...MM
I suppose I'll be the one to put dryfly to shame. My house cost less than his, but I bought mine 3 years ago. 2100 sq ft.
badger, there's got to be more than 1 of us who would love to know the rest of that story.
"I think the problem is more income to debt ratio than the down payment"
I really think that a lot of what got us into this mess of overvalued and overleveraged home buying was this line of reasoning. (No personal offense, josap.) When people had small down payments, the actual purchase price became almost irrelevant, and house prices lost one of their most important connections to reality, and to basic household budget items like the dollars we earn vs what we spend on groceries and the like. All people asked was whether they qualified, and what the early duration payments were. As long as someone came up with loans that produced low early payments, there would have been lots of very ordinary people who would have signed up for million dollar homes, then 10 million dollar homes, then 100 million dollar homes.....
If the average $300,000.00, then one would have to save $60,000.00 for a down payment. How long will that take if you make $50,000.00 a year and save 10% ? Plus pay your rent, save for retirement, have a child, save for emergencies, make a car payment, pay for health insurance
Umm, uhh, how are they going to pay off $300,000 on $50,000 salary? Plus the child, emergencies, all those other things ...
Sounds like a default in the making.
If it's correct, that you can't get to $60K off $50K salary, how can you get to $300K off same $50K salary?
All the expenses are retained (except rent), plus interest, insurance, taxes, repairs ...
I see a crabby person in my future tomorrow...
I suppose I'll be the one to put dryfly to shame. My house cost less than his, but I bought mine 3 years ago. 2100 sq ft.
LOL - I know they are out there. The house I live in now is 'expensive' - probably get $100K for it... that is if I take three months off to fix all the cracked plaster & paint the outside [original wood siding from 1915]... might get $130K... it would only get that kind of a price because we are within a long commute of the Twin Cities... move out another 50 miles and the prices fall in half!!!
Folks in bubble land have no idea how far down 'down' is.
what can I say, cold medicine makes me brave
The only way that would really work is if buying for investment was also removed otherwise once prices get low enough, the wealthy will scoop you every time and you have a permanent rentier class kinda like what we have now >; )
/ducks again
One more post -- dryfly if you want to fix (cover over) that cracked plaster, look into Flexiwall Systems.
I've developed my own system [engineers you know never take advice - we reinvent the wheel over and over]... but my system works for me, once done you can't even tell it was worked on - looks original & holds up astonishingly well. Just a helluva a lot of work...
"the wealthy will scoop you every time"
So if home prices are very high, you can outbid the wealthy, but if they are low, then you can't? That makes no sense.
The story. 18 month foreclosure in a county of 50,000 that has lost at least 3000 manufacturing jobs in the past decade.
It seems lots of folks cant see home prices declining....they keep phrasing the question based on today's govt-supported inflated valuations.
Anchoring bias.
OK, you guys are right. I won't try basic math until the flu meds wear off.
Was thinking that if income to debt were more of a qualifier people wouldn't be able to buy more loan than they could afford. Also think ARMs should be done away with.
Close, you flipped it.
I'd guessed as much - be like that around Fond du Lac & Sheboygan pretty soon.
Down payments need to be large enough to make strategic defaults extremely rare and high enough to self select for people who can demonstrate money management skills. 20% sounds about right.
..................
Weren't mortgages completely different pre WW2?
Something like 50% down and very short repayment terms...
That makes no sense.
What part of madness is supposed to make sense?
I really think that a lot of what got us into this mess of overvalued and overleveraged home buying was this line of reasoning.
Patient, we're saying the same thing but I think it will be awhile before people hear it.
Ditto for those in Congress who arent necessarily trying to reinflate the bubble but who cant imagine going back to 20% down (how can they afford a 750k house @ 20% down??, they will cry) and play into the hands of those who are committed to reinflating the bubble.
Pre WWII, loans were 5-year balloons. The deflation spiral was in part caused by people not being able to refinance their negative equity.
I also voted for him and am disappointed, but also not surprised by much that's happened since the election. A real solution would have required a fundamental rethinking of the economic orthodoxy that has prevailed at the top of the Fed and Treasury across administrations. The chance for that rethinking to happen was back in September when panic was really in the air - by the time it struck more mildly again in December/January, Bush was a lame duck and Obama was still a few days away from office. Obama's conception of "ending the politics as usual" meant compromising and meeting people halfway, which of course turned into meeting the banks just a bit more than halfway.
I really think the Obama team now truly believes the worst of the economic problems are behind them - from the way they are talking, they are staking a lot of political capital on it. The Republicans don't have a damn clue what's going on either, but that won't matter in the midterms or 2012.
First comment here - hope it wasn't a
TJ, sorry I had to attend to some domestic duties. You said more than an hour ago:
It's not just FTHB. There are three-quarter-mil homes being sold in SoCal using maxed out FHA financing.
It's 30-to-1 leverage upon purchase, and these people are immediately underwater. Again, insanity.
First off, I though FHA was limited to FTHB, and, as I recall, the original idea of the program was to guarantee bank loans to lower income folks who otherwise might not qualify.
The loan limits were $362,000 up through 2007 when Congress raised them, but I thought to the $417,000 ceiling on Fannie and Freddie. Apparently not. Perhaps they did raise the FHA limit "to Fannie and Freddie's limit," then raised Fannie and Freddie.
Now, personally, I believe paying $729,000 is insane in the first place. Anywhere (with the possible exception of an ocean view). I live in a place where the average or median home sale price is probably 20% of that number or around $145,000.
Given the cliff diving in RRE, perhaps it's time for Congress to lower all the limits.
"it will be awhile before people hear it"
Avl Dao, I agree. I am rather afraid, however, that it will never be heard. Sometimes the world changes, and never goes back... at least within one lifetime.
dryfly (profile) wrote (in reply to...) on Thu, 9/3/2009 - 8:31 pm
Folks in bubble land have no idea how far down 'dow
I know how far down is because that's when I got my primary residence. I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf.
sportsfan, um, you kinda dont' get what is goin on here in CA.
GDD, I don't understand the statement. I've lived here for quite a while, attended fine universities here, have had a CA DL since they didn't have so many digits. What am I missing?
Joanna!
Where were you earlier and how are things at my unofficial
pad? We were having a good time going over education finance.
I know how far down is because that's when I got my primary residence. I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf.
Not in nominal terms - in 'real' terms it might... depends on how much pressure there is coupled with money supply growth [monetary inflation].
"I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf"
I actually think it might already have gotten there, just 2 years after the last market peak, if the federal govt had butted out completely. But of course, we both know that's a pipedream.
I don't think coastal SoCal is going to go back to those days in 1995 of $85/sf.
Not the true coast, but more than a few blocks inland.
I really think the Obama team now truly believes the worst of the economic problems are behind them
You aren't going to see $85/sf when you have dualies commonly breaking $100K. People are still going into SoCal. Now my area, you have had 10% fewer students in kindergarten than graduating seniors for awhile. I would estimate that 1 in 10 houses around here is vacant. SoCal ain't there.
- so do I. Watched Biden speech @ Brookings today, listing stimulus projects so far underway, with about three times that yet to come over the next few years. Much more than imagined. We're only 200 days into a massive program. They're letting contracts as fast as they can. Much more to come.
Ya there is going to be huge shortage of orange cones if this keeps up.
Where were you earlier and how are things at my unofficial pad? We were having a good time going over education finance.
..............
LOL Working at my state-funded university job, then out picking chard.
Our U isn't as badly hit as many, but we have another big round of cuts coming in December.
If the administration really thinks the worst is past then they don't deserve the credit we give them here, and that ain't much!
Pardon the language, but F'n idiots just doesn't cover it.
The government is putting a floor under certain price points. Above that level, down will come eventually. Just letting the air out the tire slowly. As John Candy in SCTV might say, that bubble blowed up good, real good!
Orange cones are everywhere.
We drove from Phx to Durango, took a different way back, road construction everywhere both ways. The reservations had several road projects in full swing.
"You aren't going to see $85/sf when you have dualies commonly breaking $100K."
My comment was based on wage-adjusted amounts, so 1995 $85 is probably about $150 today. And if the govt had completely butted out of direct and indirect house price supports during the last 2 years, some sellers would have been very, very happy to get an offer at $150 today.
yeah, I think the they've dranked too much economic orthodoxy. the multipliers on construction projects wiill not turnover nearly as much as they hope...and the bump up in employment wont be widespread because roadbuilders, bridge welders, etc simply dont ,make up a good chunk of the unemployed in a service based economy with a GDP 70% driven by debt-enabled household spending.
I think they targeted all Timmie & Ben's stimulus to simply juice up the most juice-able components covered by the media: 1) stock prices, 2) how many people are getting jobless benefits, 3) how many of the best known banks are still alive and not closing; and ignore the stuff the media doesnt cover very well anyway.
I think they merely want to buy economic time til 2010 and wash,rinse,repeat and buy time til 2012.
Pardon the language, but F'n idiots just doesn't cover it.
That will be their Achilles Heel - it will massacre them at the midterms. The problem with a lot of these 'programs' is they don't put a ton of bodies to work - and certainly not at good wages - not like FIRE did.
Oh yeah....your
pad is going up in value compared to the rest of the county 
Must be the 200+ onions I harvested this week.
"its market share of the mortgage industry to grow from 2% in 2005 to 23% today"
Holy Cripes Batman!
$85/sf in 1995 = $120/sf in 2009 per BLS CPI. Here's the DQNews SoCal Chart: DQNews - Los Angeles Times Zip Code Chart
Looks like we've got a ways to go.
I think they merely want to buy economic time til 2010 and wash,rinse,repeat and buy time til 2012.
Won't work - not even close. BO needs to do a little roast beef w/ Ann Pettifor.
Generation Bagholder wrote on Thu, 9/3/2009 - 11:40 pm
First comment here - hope it wasn't a
Hey Generation bagholder, welcome to our world.
That was a good rookie post, btw.
Between FHA and fannie and freddie and all the uncle sugar backed agencies, how much of the mortgage market is backed by, um, us?
Anyone?
When I bought my apartment in 1997, I bought it as a HUD repossession, using a State Fannie clone loan where if I remember correctly I put $300 down, on a 99K loan. I still think I over paid, but hey I have had a place to live for the last 12 years without having to move.
I could be an example of how this program can work. I paid my loan off in 9 years because I did not like paying the interest and my MI/PMI was for the life of the loan and not 80% LTV. At the time homes where just around 4.5x the average income.
All in all I'm happy with the deal I got, and appreciate it greatly.
But no way in hell would I do the same thing with an overpriced house here at 600K+ when I think they are still around 9-10x the average income.
"The government is putting a floor under certain price points. "
Those floors are sky-high. They only look "reasonable" in comparison to the ridiculous peak prices of 2007. There were small old condos selling for $750K in 2007 in my old middle class neighborhood that were bought for $125K in 1995. So $500K looks like a cheap floor, but the $750K anchor that's leaving that impression was nuts.
More than I want to own.
...
But I do wonder how many shoes can drop in terms of the ineffectiveness of the Paulson/Bernanke/Bush and Geithenr/Bernanke/Obama bailouts, toxic debt purchases, and obligations? How many dropped shoes (last years crises, then GM, and now FHA ?) shoes til people "give up"?
The idea that "the American people will lose faith in government" really doesnt play into GOP hands or Glib-bertarians hands; Glibs lack leadership skills for the most part...at least when it comes to leading human beings rather than pet economic theories.
The GOP Bush failures are too fresh to think people will really believe the GOP has a solution.
One possibility is that many voters will just sit out 2010 and maybe 2012. Many GOPers sat out 2008...the story simply got lost in the MSM...but the data was there.
Thanks - been lurking for some time now so figured I'd jump in the fray.
3.5% FHA downpayment loans . . . , but the number of these loans being made now is more than 10 times (23% / 2%) what it was just 4 years ago.
Yes, and four years ago the number of FHA loans had fallen from 10%-12% in the mid 1990s to less than 2%. Why? Because of all the crazy lending others were doing.
. . .It's the vast extra quantity that is distorting the housing market, making prices unaffordable for responsible people of modest means, and putting irresponsible people into homes many of them will be unable to keep, and giving others windfall gains at the expense of the more responsible.
I completely disagree with all 3 or 4 points in that sentence.
One possibility is that many voters will just sit out 2010 and maybe 2012. Many GOPers sat out 2008...the story simply got lost in the MSM...but the data was there.
If Dems [or Indies] sit out - GOPers win... they'd retake the House and could come close in the Senate - I haven't looked at the ratio of open seats in a while. Irony is that might save BO in 2012 - give him something to 'run against'. If the Dems have BOTH Congress & WH going into 2012 & the climate isn't a lot better - they'll get Cartered and badly.
"I could be an example of how this program can work. I paid my loan off in 9 years"
KK, if you paid off your loan in 9 years, then you could have saved up an entire 20% down payment in 2 years. Would you trade a world where you had to wait that extra 2 years (or come up with more of your prior savings for a down payment) and the entire debt system of the USA was founded on solid ground for the real world, where you got a no-down loan and the prices of homes went crazy from overleverage, and our financial system collapsed and had to be rescued by payments from taxpayers for the next 20 years.....
What's your pick?
Thanks - been lurking for some time now so figured I'd jump in the fray.
Welcome to the mad house.
Actually most politicians keep some of their promises. And I certainly expected Obama to be better than most (not perfect, of course). I'm honestly surprised to see him substantially worse.
Fair Economist, we certainly see eye to eye on that score.
FHA is distorting the market by allowing inflated valuations to persist (by insuring against default losses) while transactions are occuring.
The data is all there.
Dont know where that meme erupted that FHA in 2009 is suppose to help low-income people...thats not even prominent on the website and the data says otherwise. FHA in 2009 is merely a vehicle for govt insurance to prop up excessive valuations....and justify excessive leverage.
Real Politik sucks - Team O is learning that the hard way. I don't care who was in that office right now - they'd be learning that.
patientrenter -
I saw a good opportunity and jumped on it, but I was still very concerned about taking on that debt. I actually had cash on hand to do a 20% down payment, but the numbers with the no money down made much more sense than cashing out of the stock market.
I currently have cash on hand put down on a SFH, even at these prices, but I'm not going to do it. (Wouldn't be prudent).
And to be honest my distrust of banks has grown so much I would prefer to pay all cash and just avoid messing with any bank.
"I completely disagree with all 3 or 4 points in that sentence"
And you are in the majority, which is why our system suits your views better than mine, and isn't going to change by much. You are the voice of the status quo when it comes to housing finance, housing leverage, and house prices.
Sportsfan and others apparently see some good in what the FHA does.
Personally, I view today's FHA activity as all bad. It's simply an attempt to prop up house prices. Any pretense that it's to make home ownereship affordable to a greater group of people is laughable, as the market was accomplishing that by price drops.
There's not much (societal) good that comes from price fixing, especially for such a basic, essential good such as housing. What happens when you implement price supports is that you generate additional supply over what would have been produced. Witness the lack of bankruptcy filings by the major homebuilders, and the irrational level of housing starts (given the couple million vacant homes).
Whatever benefit does accrue comes at the expense of someone, namely all taxpayers who cannot participate. The benefit accrues to those who see the opportunity of a no-risk investment (courtesy of the FHA loans combined with tax credits).
You're a research scientist right? This is what started it all.
freep.com | | Detroit Free Press
I did see you discussing H1N1 earlier. We had a "flu related death" on campus last month and there has been at least one death in the county. And yet people are still coming into work sick. ugh
KK, so as a data point (excuse the depersonalization
), you're not an example of someone who would have been forced by a 20% down payment requirement into waiting to buy. Makes me feel even better about a 20% down requirement being pretty good.
Oh, and the additional supply (being prompted by the price supports) will ultimately cause more downward pressure on prices. Then what will happen if/when the price support policy is abandoned, for whatever reason?
Don't konw if this has already been discussed here: Interesting discussion about Gross Domestic Purchases (which is like GDP less the imports part.) Bottom line is that deflation is happening.
YouTube - Chart of the Day - Journey Into Deflation - Bloomberg
"what will happen if/when the price support policy is abandoned"
It will never be abandoned. To see what the ruling majority will do, just read sportsfan's comments. Price supports will never be abandoned. Just ain't gonna happen.
patientrenter -
KK, so as a data point.
Most data sets have us weird outliers. I'm usually removed by statistical normalization.
There are so few convetional loans available that FHA is all that is left. And no loans, even to qualified buyers means a much harder and faster crash.
FHA does not, nor has ever , done no doc loans. They have done buy downs in the past, people got burned on those too.
I'm just plain old tired of bailouts! propping up overinflated housing is a disgrace...the fha is a failure along with regulators, ratings agencies and our govt....
bailout syndrome...
JP - I compete against offshore and I see the exact opposite - they are less competitive price wise than a year ago and becoming less competitive everyday. That's one reason there are fewer containers unloading...
There's not much (societal) good that comes from price fixing,
Nor from the meme alleging that some great benefits will accrue from a US society of homeowners in excess of our historic statistical level of homeownership. That fairytale is also discredited and should be put to rest.
Worse, this meme wasnt even the same thing as saying that minorities should have greater access to homeownership.
The data on subprime loans, based on a the definition of a loan significantly varying from prime rates, showed that a sizeable number of so-called subprimes went to non-minorities. Add in NINJAs, liar loans, alt-a, etc, and ur looking at primarily borrowers from majority backgrounds with significant incomes...and also looking at many flippers.
But the gullible chose to believe the relaxed lending stds were primarily to "help minority homebuyers"...and the gullible proceeded to support the larger agenda of simply using excess leverage to enrich big banks issuing MBS.
And the demonizing of renting in that meme was laughable.
Patient, my old SacLanding commrade,
I disagree too but I want to express it in numbers before I put my weigh behind it.
Short,
On price supports, I get the nagging feeling someone did some quickie math and decided that it was cheaper to support the markets and home prices rather then be in the position to constantly bail out pension fund. The problem is, they haven't been able to make it stick and the more they try, the worse the political pressure gets. I wish I knew where the train is going.
CCLT,
You missed the bashing on auto underwriting on FHA streams earlier >; (
I didn't want to wait to save up money as I was fresh out of college with a new baby on the way. On top of that the rent I was paying was more than my payments . . .
Two factors that are very common today when FTHBs decide to buy.
It's not the 1980s and house prices are not cheap everywhere, but people are motivated today by the same things that motivated the last couple of generations.
"no loans, even to qualified buyers means a much harder and faster crash"
No loans: I am very conservative financially, but I would be happy to lend up to 50% on many properties in many areas, and up to 70-80% in some. Why is more than half the same as nothing? We have become so used to ridiculous leverage that even when most of the purchase money is borrowed, we write it off as nothing. We have lost our perspective.
Crash: Of what? House prices, or people's material wellbeing? If my house is going to go down by 60%, why is it better for me materially if that happens in one year, or five? If you are referring to an economic crash, then I don't see why pouring trillions into propping up home prices for a few more years is better than spending all that money on new investments that increase our nation's productivity.
It's not the 1980s and house prices are not cheap everywhere, but people are motivated today by the same things that motivated the last couple of generations.
And 3 decades of Americans lived in houses of 1000 sq ft where they raised entire families!
Nothing justifies using FHA insurance as a means to artificially prop up overvalued inflated prices.
By requiring 20% down and strict UW, u lower demand and prices drop to a new equilibrium based on what local wages allow, given that a 20% DP is required.
People will & can wait for that to happen.....a house, rather than waiting and renting, is not a constitutional entitlement.
deflationary jane,
Cant believe BMW finance lowered fica threshold to 575 on one of thier tiered programs..why worry about your fica? what a joke that is...
In the housing data fest: I want to say (from experience) that 4x income can be an affordable home price for a frugal family with a mortgage rate under 6%, stable employment & wages, and so on. But one has to be very careful about controlling expenses and remembering to save for the unexpected, which most folks don't do well.
"people are motivated today by the same things that motivated the last couple of generations"
Of course they are, but the prices of homes in vast regions of the country, in comparison to incomes, has changed, and often by a great deal. That changes everything for the first time buyers.
In the housing data fest: I want to say (from experience) that 4x income can be an affordable home price for a frugal family with a mortgage rate under 6%, stable employment & wages, and so on. But one has to be very careful about controlling expenses and remembering to save for the unexpected, which most folks don't do well.
A lot of caveats in that explanation - 2X or 3X income covers up for a lot of those caveats maybe not working out as planned.
Where has 4X+ worked out okay? Where the resale market was almost always hot, prices appreciated & if in trouble sell for a gain. Cali, Florida & the NE. Not anymore - at least not now.
. . .been lurking for some time now so figured I'd jump in the fray.
Frays are definitely more fun once you jump in.
Last night I started posting the results of a stock screen built around three premises:
(1) There will be a time in the future (though maybe not for some time yet) when buy-and-hold makes sense again.
(2) For buy-and-hold, dividend earnings are more valuable than capital gains, since corporations can and do die off unexpectedly. Corporations which have reasonable dividend yields (say above the 5 year Treasury yield) are demonstrating respect for their shareholders and are worth selecting for.
(3) It is the productive, industrial sectors of the economy that will be worth investing in, not FIRE, entertainment, or other "nonessentials" which were overbuilt in the bubble (and added limited economic value).
(4) The economy will continue to be rocky so a strong financial strength is important.
I ran a Value Line screen with selected industries, a minimum 2.25% dividend (close to current 5-year Treasury yield), and a financial strength ration of A or better (though I'm not sure what this means exactly yet).
Out of 1476 or so stocks in the Value Line database, I wound up with only 92 that would be worth further study under these criteria.
The world of sensible stocks is not very large!
I'm going to do a further screen based on debt burden relative to earnings (though this maybe captured in Value Line's financial strength rating already, I want to be sure)...
My M.O. is clear....we need to get to economic and household practices that are financially sustainable...all this baseball, apple pie, homeownership and meeting folks entitlement desires is secondary.
We need to get back to pay-as-you-go on many fronts and use deflationary pressures to bring down excessive valuations, asset bubbles and the inflated costs of college, of childcare, housing, healthcare, and get them into equilibrium with the realities of today's wages and salaries and jobless levels.
It will be an ugly process and i dont care if the 2010 and 2012 and 2014 and 2016 elections doom certain political careers in the process.
"I want to say (from experience) that 4x income can be an affordable home price"
No matter which home financing rules we come up with, there are some people for whom those rules will be too lenient or too strict. Hard cases make bad law applies equally to any set of rules. We responded to the desire to bend the system to meet unique needs by lowering all underwriting standards to the point where our system collapsed. We need simple rules that produce a solid, reliable financial system that works very well for 90% of people. It's when we try to reach that last 10% that we lose simplicity and we lose sight of the basic elements of a safe and sound system.
You are the voice of the status quo when it comes to housing finance, housing leverage, and house prices.
House prices are too high in most of California. Do I need to say this a dozen time before it registers?
Rob Dawg's $120/sf for coastal is just about right for a nice place.. We just aren't there yet.
@dryfly responding to me ...
Where has 4X+ worked out okay?
Don't forget the embedded put option for when it doesn't work out okay!
We've been saving since the market turned in 2006 and have effectively converted the 4x to 2-3x (though not by prepaying the mortgage - we like the put option since our local market still seems to be declining). So we think we're relatively safe now. And I can't imagine the stress felt by those who weren't able to turn the corner and are now in dire straits...
wisdom seeker or teaser?
JP - I compete against offshore and I see the exact opposite
Note that it was gross domestic purchases. For you to see the opposite, you are raising your prices.
Is that what you meant? (If so, more power to you.)
575? seriously? Damn, I could have just defaulted on that damn chase bill, kept the cash, and then picked up a FHA loan. I'm such a zero risk chicken.
Avo,
Been doing more reading on student loans, have you ever heard of an educational trust certificate? Michigan Educational Trust (MET) Program | Financial Operations
Personally, I view today's FHA activity as all bad. It's simply an attempt to prop up house prices.
ShortCourage, we disagree on that. The simple solution is to have Congress lower the limits to reflect the reality of 2009.
Also, I would define FTHB as first time, not as 'more than three years ago.'
The $750k house is San Carlos on an FHA loan is utterly ridiculous and should not be part of the program.
Avo,
Been doing more reading on student loans, have you ever heard of an educational trust certificate?
nope that is a new one to me. was it inflationary....allowing schools to increase costs dollar-4-dollar?
"House prices are too high in most of California"
That will never change with 3.5% down loans available to large segments of the market. Buyers limiting themselves to a home price they can afford to actually pay over a reasonable time period will be outbid by buyers considering only how high a monthly payment they can qualify for. Almost all of the price supports directed at housing lead - surprise! - to higher prices, not more affordability.
It will be an ugly process and i dont care if the 2010 and 2012 and 2014 and 2016 elections doom certain political careers in the process.
I don't see it happening the way you want - it will happen in 'real terms' but I don't see it happening in nominal terms... there will be some nominal correction but a lot more real price correction... and the subsidies will NOT go away... they will be restructured so they won't keep up with inflation. That's how you real them back in w/out the public noticing too much.
And we will get monetary inflation - that I am certain of. Just uncertain as to how much or how soon.
Regardless you cans still have 'real deflation' in a positively increasing money supply - wages and prices increasing slower than the money supply is increasing - the difference being absorbed in debt & asset value destruction.
It will never be abandoned.
Not willingly, but they won't have a choice. It'll be fish or cut bait (i.e., monetize or quit) time as soon as the whole UST debt ponzi scheme collapses, and every new parasite brings that day closer.
These FHA programs will end, just as the bubble did, because they are totally unsustainable. First it was the private market that went bust making bad mortgages, then the GSEs, and soon it'll be FHA. It won't last and it can't last -- simple as that.
Wisdom speaker, that's how I buy stocks. I bought exactly one non-dividend stock in the last 4 years (versus maybe 40 dividend payers). I haven't had done research lately, but if you see any nice ones, please let us know.
Nope, it's like a futures contract with all the hazards that entails but it does slightly penalize the institution if they raise tuition too fast.
There is no doubt there are some incredibly gifted economic thinkers in CR's commentariat. But u are the outliers.
Does anyone really believe that Mr. and Mrs. J6P reflect long and hard about whether this house is 2x, 3x or 4x income? They see everyone else getting granite countertops. They don't want to live in rental city. The money was there for the asking. It's over. It happened. So now what?
CR is right. The move up buyer is stuck now. It's baked in the cake. The best one do now is watch the event horizon.
Avl Dao, I just don't accept the premise that "FHA insurance [is] a means to artificially prop up overvalued inflated prices."
As for the political and conspiratorial overtones on this thread, it's not like Obama needs to pay off California to get its electoral votes in 2012. I'd say that's a lock no matter what happens.
Note that it was gross domestic purchases. For you to see the opposite, you are raising your prices.
Is that what you meant? (If so, more power to you.)
Sometimes - sometimes not. What we are seeing is the offshore competition raising prices and we follow in underneath - sometimes at their price sometimes a little above or below. There is a ton of deflationary pressure but little of it is from offshore right now - that was not the case 2-3 years ago when the offshore producers were really pushing us hard & making us drop prices like crazy [or shut down]. A very different climate now.
The multitude of factors that go into regional housing prices are currently all aligned against California. Any appearance of prices leveling off are just the gasps of the few factors left running their course. California is getting poorer, population pressures are easing, every infrastructure attraction is failing, employment prospects bleak. All that's left is weather, reputation and inertia.
@Wisdom Speaker "In the housing data fest: I want to say (from experience) that 4x income can be an affordable home price for a frugal family with a mortgage rate under 6%, stable employment & wages, and so on. But one has to be very careful about controlling expenses and remembering to save for the unexpected, which most folks don't do well."
"Save for the unexpected" you mean like employment and wages not being so stable after all? LOL
And if there's such an emphasis on frugality just so you can "own a home" why not make it easier on yourself and family and just rent. 4x defeats the purpose and turns the logic inside out.
"monetize or quit"
Exactly. I won't re-start that long-running debate (ya know, de- vs in-), but you know that the monetization option allows them to avoid quitting, and you probably can guess where I stand on the odds. 'Nuf said.
Wisdom speaker, yes please share, I'm too cheap and too poor to pay for valueline access. It takes a lot of savings to buy a SFH home here, I think I have taken a vow of poverty until I'm wealthy.
patientrenter,
Yeah, I don't see them quitting either.
All that's left is weather, reputation and inertia.
Amazing how far those can carry, though.
Buyers limiting themselves to a home price they can afford to actually pay over a reasonable time period will be outbid by buyers considering only how high a monthly payment they can qualify for.
Like the old line says: "You can't fix stupid."
There will always be people who overpay for stuff. I don't see how that leads to your next sentence, assuming that there are price supports anywhere in the process.
Some times I think I'm the only person who sees opportunity in the old rust belt. I wish there was an ETF of it I could buy. I'd get a stock certificate and frame the puppy on my hall.
An acquaintance just bought an overpriced home in SoCal for $900k. Didn't bargain hunt, didn't negotiate. Better homes, bigger/nicer lots in the area (half a block away no less) listed for as little as $650-$700k. Still owns his first home and is going to rent it out.
Have people become blinded?
I must say, I don't get it. But, I guess it's not mine to get.
All that's left is weather, reputation and inertia.
Amazing how far those can carry, though.
How did you two know I was out in my woodlot again today?
think it will happen in as ugly a process as whats started here in the US in 2006 when the 1st rez mortgage defaults skyrocketed.
The equilibrium will be reached for between excessive valuations, asset prices (cars, college, homes, healthcare), and wages & salaries.
Equilibrium doesnt mean stationary or inert.....
but if you've seen the charts on how HH debt and corporate debt are at historic highs compared to the sustainable historic norms...you'd see what the new targets are.
So I've taken my 92 stocks and added up long and short term debt and other current liabilities, and divided that "total debt" metric by net income (trailing 12 months; note this is not "operating income" but the real deal). This way I get a sort of "total debt / income" leverage ratio... not so different from the mortgage/income ratios we're also discussing, except in this case the "income" is net of the payments on the debts, rather than prior to the debt-service costs. (BTW, in my 4x home price/income example above, there's no other debt... there used to be 25% equity but that's gone for the moment...)
Anyway, some companies are clearly cyclical and suffering due to low net income over the last few quarters, but let's look for the real capitalist strongholds here... Profits in any economy are possible, and this list demonstrates that. However, Valero Energy falls off the "Top 92" in this screen, due to being unprofitable for the past 12 months.
Only 32 companies in the Value Line database (out of nearly 1500!) have debt/income ratios less than 4!
Only 12 have debt/income ratios less than 2.
And only 3 companies have total debt/income ratios of less than 1x right now: Paychex, Garmin and Exxon Mobil.
Damn, there's a lot of speculative finance (Ponzi finance) in even the productive corporations... Procter & Gamble is at 4.19 and also carries "intangibles" on the balance sheet worth nearly 9x income. Now I'll grant they have some valuable brand names, but nothing is worth 9x income...
Pfizer had a ratio of 4.45 but of course now they've got a multibillion dollar fine to deal with. There goes about 1/3 of their earnings...
Kellogg cereal is levered at 5.42 to 1 by this metric.
Waste Management, which ought to be as stable a business as I can think of, has a ratio of 9.81! Might as well call them "Debt Management" now...
Kraft Foods, another company one would consider a consumer staples / safe investment, is cranked up at 20:1!!! (Have they just had a really lousy earnings year? They have nearly $20 billion in long-term debt and only $1.3 billion in actual net earnings.)
If we don't get a V-shaped recovery in profitability, AND a functional corporate debt-rollover marketplace, we're going to see a lot of debt defaults from these highly leveraged but "financially sound" corporations!
Sports I cant make u accept what u dont want to believe.
Dont overread into the election statement, it's not about California and just house prices, the deflationary pressures have evolved far beyond one state and one segment.
Elections are not the prime point.
And I also say we as a nation are not promised, entitled to nor have we earned EZ painless-free paths towards the inevitable new equilibrium between assorted asset prices & wages & salries.
A lot of the 4x bit comes from the now silly idea that there's a reliable investment component in homeownership. That said, there is something to paying more for houses in places like california. I can afford to spend a bit more because I can plan taxes out for decades, spend 1/3rd what harsh climate owners spend on upkeep and stay comfortable running the single wall heater a dozen days out of the year and no air conditioning. Those types of savings go a long way to affording to pay a bit more.
Catching up from 90 minutes behind while commenting is not easy.
Bottom line is that house prices will continue to fall. I say another year of it, at least.
I guess at this stage I can only hope that FHA credit analysis has been done well.
Dryfly has gone over it before, but I would add caution to anyone who thinks there is hope in the midwest. Outside Chicago there is nothing. I know dryfly will add Mpls to Chicago, but goodness. Not to be doom and gloom out here, but relatively simple things like housing stock are in very poor shape. Stick built construction was not meant to endure for generations. Almost all the old housing stock is stick built and around the 90-110 year mark. The last significant gains in housing stock in the 60s and 70s aren't holding up all that well either. Sure, there is modern construction. Madison, WI, and other university towns have quite a bit of it, but those are noticable only because of everything around them. Then you move on to infrastructure. There isn't a community that isn't going to have to replace most of their water and sewer within the next 20 years. A lot of communities still have lead pipes for crying out loud. I'm not trying to be apocalyptical here; there's just a lot of structural problems here.
I pulled up a pdf from May the other day.
SocGen, Véronqiue Riches-Flores: Inflation to ease the debt burden
It is 28 pages, but it a short and fun read. The premise is that there is more debt than incomes can support, and considers some hypothetical responses.I of course have some quibbles with the report, but I found the basic legwork done for each scenario to be enlightening.
`
The end result of her meanderings is to suggest higher inflation for a decade. The coordination and weaknesses of that scenario over time are left to the reader's own imagination. Bernanke is probably aiming for a decade of inflation within a 4-8% target band I speculate.At that point my quibbles come in, but I will give others a chance to read the piece first and form their own opinions.
I have been amazed and knocked over the head that there are still greater fools here paying at over 9x average income.
The New Hope data that CR linked to a few days ago really blew my mind when I looked at the Hawaii data. I'm just reminded of the Dune line of "We come for you", if the economy stays bad I think Hawaii will be competing with Nevada, Cal, and Fla very soon, population adjusted.
An observation, today I went down to a lunch at Aloha Tower, pretty empty, and one of those party cruise ships headed out. Of the four levels the top 3 where completely empty. And the bottom level looked maybe half full.
I don't know if they can pay for the fuel cost with that.
I also say we as a nation are not promised, entitled to nor have we earned EZ painless-free paths towards the inevitable new equilibrium between assorted asset prices & wages & salries.
On that we certainly agree, Avl Dao. There's gonna be hell to pay before this shake out is finished.
As someone mentioned earlier, the real pain goes to the youngest in society. They will have to live in a country remarkably different than the country the previous few generations experienced.
The main problem I see is that they don't see it coming.
Equilibrium doesnt mean stationary or inert.....
but if you've seen the charts on how HH debt and corporate debt are at historic highs compared to the sustainable historic norms...you'd see what the new targets are.
Again - flood the place with money and the 'real debt load' for HH & corps appears more sustainable... doesn't say we are wealthier or make more stuff - only more money floating about. And even if the asset prices on the collateral backing those debts also increases [so as to make the debts 'appear' more 'maneagable'] that STILL doesn't mean they haven't deflated in real terms IF the money supply has exploded with resulting increase in prices for things like commodities.
There are a lot of ways this shell game can be played - my guess is we'll see them all if we live long enough. Its gonna play out for a long while.
" "You can't fix stupid."
There will always be people who overpay for stuff."
When CEOs of banks are overpaid for taking risks in good times, when the offsetting losses in bad times are taken by taxpayers, that's an example of stupid overpayment, just as much as people overpaying for houses because they can get large 3.5% down loans. Both are fixable, as long as people recognize them as problems, and have the political will to do something about it.
"I don't see how that leads to your next sentence, assuming that there are price supports anywhere in the process."
C'mon, sportsfan, I know you're not an economist, but you're not a dunce either. You're telling me that giving people who have less than $17,500 saved for a house another $482,500 to spend doesn't lead to most of them spending most of that $482,500? Yes, it's a loan, but people don't even think about repaying $482,500. They just think about the lender qualified them for the loan, which they do based on monthly payments.
dryfly (profile) wrote (in reply to...) on Thu, 9/3/2009 - 10:00 pm
All that's left is weather, reputation and inertia.
Amazing how far those can carry, though.
How did you two know I was out in my woodlot again today?
It's the first week of September, where else would you be?
as there's no cnspiracy theorism needed....all Timmie, Ben, Barney & Obama need to do is say what they've already said.....no need to lie because cognitive dissonance on the part of listeners (aka denying what they're hearing) will kick in as usual.
Team O has said that 1) credit is the lifeblood of the economy and we will extend credit wherever we can; 2) downward home prices are destroying wealth and we will use fed programs to counter downward valuations and get them back up...etc.; 3) the overseas bondholders must be protected, they've all said it publicly.
No lying is needed...as I said, poor Nixon was 3 decades too early...he'd flourish in these times without having to tell any lies....tell the truth and watch people lapse into cognitive dissonance.
This idea of lending up to $729K with only 3.5% down is pure madness.
Let me see, what is leverage ratio on that !
100/3.5 = 28.5
That only 28.5 to 1 ratio. Common guys we can do better. How about 50 to 1 ratio?
badger - we should have stayed in our ancestors soddies.
Like the old line says: "You can't fix stupid."
Lol, I blogged on this CNN article tonight.. my title for the post was "You can't fix stupid.. but apparently you can give it a tax credit."
That one hurt Dawg - true - but still hurt. [* big sigh*]
"I can only hope that FHA credit analysis has been done well"
I think you know that you are sticking your head in the sand, but you'd never admit it here
@ Weather Helm: "And if there's such an emphasis on frugality just so you can "own a home" why not make it easier on yourself and family and just rent. 4x defeats the purpose and turns the logic inside out."
To be honest, at the time we bought we expected a smaller fall off the peak, and we also expected stronger wage growth. We didn't expect to be at 4x for very long.
But looking at it another way -- we bought up into a nicer community than we would otherwise be living in, and we're taking advantage of the extra amenities, better school system, and so on.
From a purely financial perspective it was not the best decision. But in terms of family happiness and stability, and quality of life -- some of those intangibles that don't make it into GDP calculations -- it's still turned out to be a good choice for us.
So yes, I still think that 4x is reasonable, if it's the right place for you, and you're willing to make owning a nice home the focus of your economic efforts for many years.
4x at current interest rates also works out to PITI payments that are under 33% of income, which is not too extreme. So the affordable-monthly-payment analysis is not so far from the price-to-income analysis.
My bottom line is that prices may still fall farther, but those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed!
How about sharing the 'dirty dozen'?
EHP,
One of Mauldin's newsletters put it at 10% for 10 years. The only problem is that it won't work, because they'd need broad-based inflation and they won't get it without engaging hyperinflationary levels of monetization.
@Jane: think I'm the only person who sees opportunity in the old rust belt.
Actually, as our "career transition / loss-of-job disaster" scenario (where the put option in the mortgage gets used) we were contemplating ditching our 4x home in CA and moving to the old rust belt to make a go of it there.
"I can only hope that FHA credit analysis has been done well"
I'd imagine about as well as the triple A ratings analysis done by the ratings agencies. A lot of over-generous appreciation rates and nary the thought of prices ever going down.
" those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed"
That's true, WS, but only by virtue of politically-motivated govt price supports on an unprecedented scale. Economics would have taken prices down to 2x - 3x already in many areas that are still elevated, and we're only 2 years from the peak.
Now, now. You know If I was feeling mean I could of done a lot worse. Remember, I still have a mountain cabin so I do visit the snow and the seasons, they just don't visit me.
I'm currently designing an add-on to my instant tankless water heater. The exhaust temp is so high I think I can patch in a passive air|air heat exchanger with a differential thermostat bypass and heat the garage and kitchen for free.
When buying, the biggest problem I had was how to come up with a down payment. The house was $257,000, and I needed to put down 3.5% to meet the FHA rules. I didn't have all of the $9,000 required, but then I found out about the FHA's new program where you can use the tax credit for the down payment. Using the plan, which the FHA announced in May, I was able to buy the house without draining all our savings.
I got a great deal on the mortgage. The interest rate is just 3.5% for the first year and costs about $1,500 a month, with taxes and insurance. The rate goes to 4.5% the second year and caps after that at 5.5%, about $1,900 monthly, which we should be able to swing as our earnings go up.
What I bought with my $8,000 tax credit - Alex Bauer (6) - CNNMoney.com
proof that FHA = Subprime. 0 down ARM and all!
patientrenter, we've had a lot of stupidity (and even more greed) kicking around this past decade. Making the taxpayers pay for it is just a dose of salt in the wound.
Your premise (with which I don't agree) is that giving people 96.5% loans somehow leads to higher prices for what they buy with those loans. I'm sure you're not alone in that thought process. I just don't see it.
Would I like to have true price discovery as soon as possible (short of creating a depression)? Absolutely. It's why I supported cramdowns in BK on owner occupied SFR and why I was disappointed when Obama pulled his support from the concept while it was pending in Congress.
There will be a lot of pain to go around, so let's start spreading it out as equitably as possible.
@Wisdom Speaker I'm curious when you bought and what kind of loan you used when you bought?
Axiom: "You can't fix stupid."
Corollary: "But you can always re-elect it."
That will be their Achilles Heel - it will massacre them at the midterms. The problem with a lot of these 'programs' is they don't put a ton of bodies to work - and certainly not at good wages - not like FIRE did.
Not only that, from what I can see, these stimulus projects promised very little return on our investment. I thought one of the concept about these stimulus projects is to "investment in our infrastructures." But how much ROI can you get from repaving a perfectly good road through downtown?
good god.
Well, anything that can't go on forever, won't.
EDIT: Damn, all the stories in that link are nutso.
free energy! We can start a hydro farm...
My bottom line is that prices may still fall farther, but those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed!
Plus when folks say 'X times' what do they mean? Typically when talking about an area that means the median house in that community is priced at X times the median income in that same area. So on an individual level you might have an income TWICE the local median in an area that typically prices 4X and yet if you buy the median home you are well within a comfortable 2X on an individual basis.
Likewise you might be in a 2X community but only make half the median and then find yourself a bit more at risk if you buy the median priced home.
The context in which people discuss X's makes a difference.
I blogged on this CNN article tonight.. my title for the post was "You can't fix stupid.. but apparently you can give it a tax credit."
True enough these days. Some would argue that stupid needs the credit more than others.
Reminds me of the old DUI attorney whose closing to the jury was always the same song and dance: basically a drunk man is just as entitled to safe roads as a sober man . . . and more in need of them.
I'm currently designing an add-on to my instant tankless water heater. The exhaust temp is so high I think I can patch in a passive air|air heat exchanger with a differential thermostat bypass and heat the garage and kitchen for free.
Well I can store food out on my porch [frozen] for free for about six months of the year - does that count?
"I don't agree... that giving people 96.5% loans somehow leads to higher prices for what they buy with those loans."
Sportsfan, either your commonsense about people's nature has been switched off (which I don't believe), or you find that accepting what it tells you would undermine some of your other near-religious beliefs. No point in debating religion....
@Effective Demand: We bought in 2005, with a jumbo 30-year fixed at 5.75%. I think I get credit for top-ticking the neighborhood market (on the wrong side). Then we had trouble selling our old place as the market shifted, and I woke up to what that meant. In 2006 I started getting my belated education in real-world economics.
Thanks to CR and some of the other econ blogs, we were smart enough to sidestep the stock market crash, so the savings that I mentally use to offset the 4x down to 2x are still intact.
Top 12 stocks coming up next...
Liabilities/Income Company Ticker Dividend Yield
0.40 Paychex, Inc. PAYX 4.36
0.59 Garmin Ltd. GRMN 2.33
0.63 Exxon Mobil Corp. XOM 2.37
1.10 Lancaster Colony LANC 2.35
1.10 Alcon Inc. ACL 2.67
1.11 Weis Markets WMK 3.73
1.13 Royal Dutch Shell 'A' RDS/A 6.03
1.31 Chevron Corp. CVX 3.83
1.64 Automatic Data Proc. ADP 3.42
1.69 Johnson & Johnson JNJ 3.29
1.87 Intel Corp. INTC 2.88
1.89 Genuine Parts GPC 4.24
Well I can store food out on my porch [frozen] for free for about six months of the year - does that count?
Modern kitchen design is kinda stupid. Today we baked bread in the oven, which is surrounded by an airconditioned environment.
In winter, I will put stuff in the fridge, which is surrounded by a heated room.
Crazy when you think about it.
4x income is sustainable given certain assumptions. If someone for example foretold much of the income growth over the past two decades occuring within 30 miles of major research universities, the expectation would have been reasonable. I would speculate that you would need annual increases in wages of around 10% annually to make a 4x income mortage work. Within 5 years you would be down below 3x income, and that is reasonable as long as you have new construction so you can avoid the surprises. I would again speculate that there were some areas around the country that saw this level of income growth. It wasn't my part of the country, but as they say median means half are below.
You would be in good company.
I'd say 4/5 of my retired faculty have sold and gone to various locations in the midwest. The other 1/5 have gone back to their country of origin.
And if my current land deal doesn't work out, I may not stay in CA either.
Creditcriminal,
I thought I lucked out with the 11th row seats behind home plate for the giants game last Sunday. Well the gods must looking highly on me lately as I just received two tickets to the padre game in one of the corporate boxes. Woohoo!! Free food as well.
Balances out the downer of my SRS purchase.
Actually, as our "career transition / loss-of-job disaster" scenario (where the put option in the mortgage gets used) we were contemplating ditching our 4x home in CA and moving to the old rust belt to make a go of it there.
You wouldn't be the first...
In Detroit, Artists Look For Renewal In Foreclosures : NPR
Well I can store food out on my porch [frozen] for free for about six months of the year - does that count?
If only you could time shift that trick to the other 6 months. But I feel for you I really do. My porch is on the north so during our six weeks of winter the tomatoes grow mighty poorly.
Thanks, WS. I will use that list. I don't buy unless the yield exceeds 4%, so I will wait a bit. I saw opportunity in March, but was too busy at work to do more than buy one stock - Toyota.
Sportsfan, either your commonsense about people's nature has been switched off (which I don't believe), or you find that accepting what it tells you would undermine some of your other near-religious beliefs. No point in debating religion.... Smile
Again, I just don't follow. We obviously start with different premises before moving forward. It's not surprising that where we end up tends to be on separate paths.
@JP:
Modern kitchen design is kinda stupid. Today we baked bread in the oven, which is surrounded by an airconditioned environment.
In winter, I will put stuff in the fridge, which is surrounded by a heated room.
My wife (who is from a different country) constantly points out to me how totally unconscious Americans are about their energy usage.
[Edit: As a result of her training me to think about it, and my agreeing to her frugality] we don't do any serious cooking when it's hot outside. Also we don't run the air conditioning unless the interior is intolerable in shorts and T-shirts, which we find doesn't kick in until about 83 degrees with the dry heat here. With the money we've saved by that sort of energy consciousness, we're about half a year ahead in our mortgage payments now after just 4 years...
@PatientRenter: Yes, my list is only provisional for me as well. My sense of this list is that stocks are clearly still well out of alignment. But I'm trying to work through my decision-making process so if/when we get a correction (or another bear slide) that leads to a bottom I'm willing to believe in (for a long-term buy/hold decision), I'll be positioned to work through the due diligence quickly enough not to miss the moment.
"4x income is sustainable given certain assumptions."
Again, I think we can find some cases that justify any rule for home financing. But what we need is a simple, reliable home financing system that works for most people, not all people. And those rules are probably not too far away from 20% down and 2x -3x income. Almost everyone here who deviated from that did so by choice (KK, who had the downpayment; or WS, who had the down payment and could have bought at 3x or less if he had waited a few more years).
@Wisdom Speaker: "My bottom line is that prices may still fall farther, but those hoping for prices in attractive areas to drop all the way to 2-3x income may be disappointed!"
It's a safe bet my wife and I have separated ourselves from the desire to see attractive areas' home prices drop to 2-3x. We frankly don't care. Our kids' college is funded now, we rent what we want, and if our high-paying jobs end, we're outta here lickity split.
I'm finally going to make an on-topic post. I remember the whole securitization stream freezing (post Bear Sterns, feels like last summer), and at the time congress basically ordered all housing agencies (primarily FNM and FRE at that time) to go wild in order to keep mortgages available. Nice to see the length of time between bad decision and consequence continue to shorten.
`
What I want to know is about the FHLBs. I have a rudimentary knowledge of that system, but haven't heard of any developments since member banks at most FHLBs were stopped from cashing out shares. Are such FHLB shares still carried at full value, and what tier of capital would they make it into? Can the FHLBs just wither and die, or if they need a bailout then how long before there is some action on it? [note: $1.3 trillion is held in assets across the 12 regional FHLBs]