You can tell that the housing market has topped out ...
... by how hard mortgage lenders are working to get 'marginally qualified' would-be home buyers financed.
(snip)" Most mortgages are for people who can document that they are in this country legally. A few lenders are experimenting with providing home loans to people who have no such documentation. They are called ITIN loans because borrowers use individual taxpayer identification numbers (ITINs). These numbers are provided by the Internal Revenue Service to people who aren't eligible for Social Security numbers, but who pay federal income taxes.
A typical ITIN customer is a Mexican immigrant who has lived in the United States for a few years, says David Motley, executive vice president of Fort Worth-based Colonial National Mortgage, which has underwritten a few of the loans.
Colonial is still developing the loan program, which allows the use of nontraditional credit and recognizes cash income. The mortgages are risky because the borrowers are subject to deportation and the loans can't be sold in the secondary market. So they have higher interest rates -- anywhere from half a percentage point to 4 percentage points higher than for a standard, fully documented fixed-rate mortgage. The loans require substantial down payments. "That's kind of our hedge against that deportation risk," Motley says.(snip)"
Re: You can tell that the housing market has topped out ...
Home prices have risen so much since interest rates are so low but it makes me wonder if the rates will start to go up and then all of these homes people have paid so much for will dump in value tremendously?
Re: You can tell that the housing market has topped out ...
that's how it will start.
The real estate market, and most economic indicators, goes down much faster than they went up (not necessarily as far down). And for those people that don't think the real estate market goes down (my wife is in that group) check the prices in the mid 80'2, late 80's and the mid 90's and late 90's.
Re: You can tell that the housing market has topped out ...
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And for those people that don't think the real estate market goes down (my wife is in that group) check the prices in the mid 80'2, late 80's and the mid 90's and late 90's.
I absolutely agree that from the standpoint of real estate investment, the high probability that home resale values will drop 20% in the future represents a 'dealbreaker'. However, for would-be real estate buyers who intend to live in the house they buy, being able to get mortgage financing offering a 'do-able' monthly payment at any purchase price is more important than the dropping resale value of a house that they do not intend to resell anytime soon. This monthly payment mentality will continue to fuel home purchases in the short term even if mortgage interest rates rise slightly.
However, falling resale value can represent a ticking time bomb a year or two down the road. If the economy continues to 'hover', business bankruptcies, outsourced jobs etc. many 'new' homeowners may find themselves unable to swing that monthly payment next year - this particularly being the case for people who took out ARM's who will face a monthly payment which has risen by 50%.
At the point where they are in danger of defaulting on their mortgage, they'll also get the rude surprise that, due to falling real estate resale values, they actually still owe more on the mortgage than the house can be resold for, despite having made a 10%-20% down payment - i.e. they have zero or negative equity. At the same point they're likely to discover that US bankruptcy laws have been changed such that it's no longer possible to 'walk away clean'. This combination has the potential of totally 'wiping out' vulnerable homeowners, financially speaking.
Re: You can tell that the housing market has topped out ...
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Originally Posted by Crakeur
that's how it will start.
The real estate market, and most economic indicators, goes down much faster than they went up (not necessarily as far down). And for those people that don't think the real estate market goes down (my wife is in that group) check the prices in the mid 80'2, late 80's and the mid 90's and late 90's.
...And all those periods occurred with real mortgage rates (rate-y/y inflation) in excess of 6%. they are currently in the neighborhood of 3.25%. I by no means believe any further gains in home prices are bankable, but the majority of gains in value up to about 6 months ago are quite safe. Nationally, the price gains of 2002, 3 and early 04 are not extreme. As with stocks, do not believe that because a price rose 15% in your market last year, it is going to go up 15% this year.
If you do not speculate and have solid equity you will do fine in the long run if you do not chase the market.
Re: You can tell that the housing market has topped out ...
The Market is a Seller's Market right now. With the interest rates being low, a lot of people have decided to buy they're own homes as opposed to rent. However, if, when, the interest rates keep going up, the market will become a buyer's market...or a renters market. The homes will either be sold lower than what the seller wants...or the renters will come back in force.
Just because the RE market fluctutates should NOT discourage anyone from buying. In fact, the best time to buy is when the RE is a buyer's market. Sure you'll have "higher" interest rate, but you'll be able to obtain properties much cheaper than if you were to buy the exact same property right now. In fact, your payments will most likely remain the same with the difference between high cost/low interest and low cost/high interest.
For the people who have ARM's...when they're ARM turns over to an insane rate, they simply re-finance the loan. Will they get 3% rate, again? Probably not, but even 6% is better than 15%.
Seems like a lot of people are getting flustered over nothing, at least in MHO.
Re: You can tell that the housing market has topped out ...
I have to buy a place this year, probably in Boston or Seattle--both markets that are overvalued as it is--so I'm not thrilled about the prospect in general. However, as VG said, even at 6%, so long as my actual mortgage payment isn't particularly onerous and I have more of a long-term, non-investment approach, it's hard not to take the opportunity.
Re: You can tell that the housing market has topped out ...
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For the people who have ARM's...when they're ARM turns over to an insane rate, they simply re-finance the loan. Will they get 3% rate, again? Probably not, but even 6% is better than 15%.
While this might be true for someone with a 650+ credit rating (although why someone with that sort of credit rating would take out an ARM in the first place eludes me), it is probably NOT going to be true for a 'marginal' homeowner. From a banker's standpoint, if housing market prices are thought to soon fall by 20%, a 'marginal' borrower walking in for refinancing on a house he paid $100,000 for, with $5,000 down, a year or two worth of ARM mortgage payments behind him which reduced the principal by maybe $2,000, a current market value of say $95,000 and a likely future market value of say $80,000, are you going to take a $93,000 risk on this sort of loan with only $80,000 worth of collateral backing it by the time you can foreclose ?
The banker is probably going to require an additional $13,000 in cash or other collateral so that the bank isn't 'underwater' on a new loan from the 'git go'. The 'marginal' homeowner is very unlikely to have that $13,000 laying around to eliminate the value 'gap' on a new fixed rate mortgage, thus they're stuck with the ARM financing they have.
Re: You can tell that the housing market has topped out ...
a lot of ARMs (including mine) have a max interest rate and a maximum annual increase that are reasonable, so no surprises.
and why I got an ARM...because I will be making large extra payments for my mortgage. It will even be likely that I will have it paid off (or clsoe to it) in 5 years.
Re: You can tell that the housing market has topped out ...
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Interest Rates Rise
The Reserve Bank of Australia (RBA) today announced that its benchmark cash rate would rise 0.25% to 5.5%. The last increase was in December 2003 when it rose the same amount.
As far as impact goes, someone with a mortgage of $200,000 and who is now 7% interest will be paying an $7.32 per week out. This doesn't sound like a whole lot at first glance... but it is!
Continue....
Some websites for Australians in re: Real Estate Investing
PropertyInvesting.com is the home of positive cashflow property investment. http://www.propertyinvesting.com/
The Estate Agents Co-operative (EAC) is the largest independent real estate organisation in Australia. http://www.eac.com.au/home.asp
Re: You can tell that the housing market has topped out ...
I have seen way too many people that bought beyond their means because the interest rates were so low. Someone who normally wouldn't qualify for a $800,000 mortgage did because, at 4%, the payments fit the finances. Give them a 1% increase and they might be ok but they know that at 6% they can no longer afford the mortgage payments. They will get nervous that they won't be able to afford the payment in a year and, with values inching downward, they will want to get out before they lost their own money.
People with ok credit and/or ok assets and income went with the lowest possible rate so they could score the biggest, grandest home. They have put themselves in a pinch.
Re: You can tell that the housing market has topped out ...
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People with ok credit and/or ok assets and income went with the lowest possible rate so they could score the biggest, grandest home. They have put themselves in a pinch.
Besides any 'keeping up with the Joneses' psychology which might have been involved with such purchases, an equal amount of the decision probably came from the much hyped but faulty assumption that real estate prices would keep rising forever. This probably gave rise to such paradigms as 'if I spend twice as much on a new house, I'll make twice as much money when I sell it". However, ALL trends eventually change direction, as some overextended home buyers are about to find out in spades.
As far as the impact of 1% increments on an Adjustable rate mortgage, consider the following differences in monthly payments on a $400,000 home (at or below the median home price in most large US cities) bought with $50,000 down and $350,000 via a 4.0% ARM with a 36 month interest clamp, a 1% annual increase cap, and a 12% max interest cap.
month int% monthly
1 4.00% $1,670.95
36 5.00% $1,862.23
48 6.00% $2,058.19
60 7.00% $2,257.77
72 8.00% $2,460.02
84 9.00% $2,664.07
96 10.00% $2,869.18
108 11.00% $3,074.66
120 12.00% $3,279.89
132 12.00% $3,279.89
For someone who is already a year into their ARM payments, next year their mortgage payment would go up by about $200. The year after that their mortgage payment would go up by yet another $200 and on and on. Given that real estate taxes are also likely to rise, that heating/electricity costs are likely to similarly rise etc. the net effect of ARM home ownership may amount to an extra $300 + per month per year - which is a significant amount of extra money to come up with.
Also, assuming that the future market value of this home which was purchased for $400,000 declines to say $300,000, it will take about 10 years worth of ARM mortgage payments to reduce the $350,000 loan principal down to $300,000. Thus for 10 years at least, the buyer's $50,000 down payment will be at risk should they be forced to sell the house. As you point out, this may indeed precipitate a stampede of 'marginal' homeowners attempting to sell and cut their losses before declining home resale prices wipe out their down payments. The early sellers will probably be able to emerge with minimal losses. However, later sellers will wind up taking a bath i.e. not only losing their house but also losing some or all of their down payment money in order to get clear of the escalating ARM payments.
~
Re: You can tell that the housing market has topped out ...
I'll weigh in considering I happen to work for a mortgage lender. What VG said was true-take it to the bank. What Mel says is partially true. too many people overbuy when rates are low, and are screwed when rates rise. This is their own fault. The fact that lenders are taking TIN loans is nothing new. This has been done for years, so it is indicitive of nothing. The rate at which real estate is rising in value will eventually slow, and in some areas, even stop. Could property values reverse? doubtful. The ones affected by this would be people whos neighborhoods turn into into crack havens, and folks who bought specialty properties like high-rise condos or lofts could be hurt-the bread and butter single family homes and multi-units will not go down in value. And when the rates rise, the renter market explodes, and those holding real estate that they can rent out will actually make more money than in todays low rate market. bottom line, unless you are one of those twits who used creative financing to buy a home you cant afford, dont be afraid to buy real estate-especially investment property.
Re: You can tell that the housing market has topped out ...
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Originally Posted by scorpio
single family homes and multi-units will not go down in value.
care to put any money on that statement?
Re: You can tell that the housing market has topped out ...
absolutely-in about 95% of the country.
If you live southern California, I might be in trouble. Anywhere else, unless you were a moron and bought your property above market value, you will not lose money.
Re: You can tell that the housing market has topped out ...
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Could property values reverse? doubtful. The ones affected by this would be people whos neighborhoods turn into into crack havens, and folks who bought specialty properties like high-rise condos or lofts could be hurt-the bread and butter single family homes and multi-units will not go down in value. And when the rates rise, the renter market explodes, and those holding real estate that they can rent out will actually make more money than in todays low rate market
Scorp I certainly acknowledge that you're an actual real estate pro while I'm clearly an amateur. However, this does not change the fact that real estate is highly subject to local factors of supply and demand, and that these factors are subject to local economic issues i.e. growing vs shrinking local economies/job markets, falling vs rising property taxes, etc.
I agree that there will be a certain element of would-be home buyers who will very probably decide to postpone actually purchasing a new home under higher interest rate conditions, and as a result will increase rental demand for safe, 'upscale' units as you describe. However, this one 'growing' rental market segment is counterbalanced by other possible 'shrinking' rental market segments i.e. laid off / outsourced / merged out employees whose current income does not allow for covering the cost of renting a safe, 'upscale' unit, migration away from northern Blue states towards southern Red states in search of better economic opportunities etc.
Thus I dispute your claim that 95% of single family and non-commercial real estate is safe from a significant decline in market value (particularly in Blue states such as your own Illinois), and caution that each geographic area's own local economic conditions need to be carefully evaluated.
Re: You can tell that the housing market has topped out ...
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Originally Posted by scorpio
absolutely-in about 95% of the country.
If you live southern California, I might be in trouble. Anywhere else, unless you were a moron and bought your property above market value, you will not lose money.
since just about everything is overvalued, it's a safe bet for me.
you can't really think that 95% of the country is't over-valued.
oh, wait, you need people to think that so that the business keeps rolling in.
too bad you aren't a dancer, I'd be betting for lapdances.
Re: You can tell that the housing market has topped out ...
Mel...
You are absolutely right about local micro-economics-these can have an acute effect on the housing market. However, for the majority of the market, it is not so. Also, while you are correct about the effect of unemployment, jobs, etc on the rental market-the bottom line is that people have to live somewhere, and if they can't afford to buy, they will rent, thus, when rates go up, the rental market improves, and once again, those holding real estate will profit.