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Thread: live by the sword ... die by the sword

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    Banned Melonie's Avatar
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    Default live by the sword ... die by the sword

    or more specifically ... housing had been the one dependable generator of consumer cash for the last few years, besides providing a huge amount of jobs in the construction and banking industry. In the last few months real estate demand and prices have stopped rising just as mortgage interest rates have started rising, ending the consumer cash engine. Now it appears that 'it's time to pay the piper', as homebuilders are losing control of new home prices.



    The peripheral effects of distressed sales of recently purchased shakily financed individual homes plus bailout sales by 'trapped' speculators plus homebuilders selling new homes at 'liquidation' prices, thus creating a self-perpetuating downward spiral in real estate prices, will be widespread and nasty.

    (snip)"n addition, the economy in general is far more dependent on home building that it was on telecommunications manufacturing. Not only does the former create employment directly through construction, landscaping, remodeling, furnishing, etc, but also indirectly through real estate sales, appraisals and mortgage lending industries. In addition, the added spending power associated with home equity extractions helped create jobs and incomes across the entire spectrum of the American economy. Therefore, a decline in new construction and home prices will not only crush the home builders, but also the entire bubble-economy that their reckless behavior helped to artificially sustain."

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    God/dess Bridgette's Avatar
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    Default Re: live by the sword ... die by the sword

    With ya. Been saying it for well over a year, and nobody seems to believe.
    Reminds me of the whole tech bubble thing...

    Quote Originally Posted by pheno View Post
    When you lead a nontraditional life don't try to measure it with traditional milestones.

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    Featured Member lunchbox's Avatar
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    Default Re: live by the sword ... die by the sword

    Of course, I live in the one area with zero decline to date.

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    Featured Member Vamp's Avatar
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    Default Re: live by the sword ... die by the sword

    Good Article Melonie. I think Fannie Mae should be a good indictor of where housing market is. I still believe nationwide the value of homes will drop at least by a third. People continue to think the bubble has burst and its over. The bubble is just beginning to burst. The fall out in the next few years will be huge. Subprime mortgages go into major default. Why? Considering that 70% of all subprime mortgages are ARMs and interest rates will continue to rise, it is a disaster waiting to happen. Some say they can refi, but can they? The FDIC has been watching this closely (another article from Melonie) refi laws may change. They dont have to change though because with more subprime lenders themselves going bankrupt financial institutions will tighten their own belts to keep from having too much lose.

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    Temporarily Banned Vaughn's Avatar
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    Default Re: live by the sword ... die by the sword

    Because of the decline in home sales over the past few months alot of builders and sellers are giving deep discounts. Due to that fact it was the perfect time for me to have a new house built. I got a 15% discount in base price, no closing costs and several other perks.

    I have almost perfect credit so I got a pretty good rate locked in too. Only downside is the construction is going VERY slow.

    My point here is that if you are in right position one can make this situation work to their advantage.

  6. #6
    Banned Melonie's Avatar
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    Default Re: live by the sword ... die by the sword

    My point here is that if you are in right position one can make this situation work to their advantage
    Agreed, IF you are in an area where real estate market values are not likely to decline further. But if distressed / ARM subprime homebuyers, 'trapped' speculators and overstocked homebuilders start dumping houses in your market, you could find that the 2008 resale value of the house you just purchased for say $250,000 instead of the 'normal' $300,000 has declined to $200,000 ... in which case your 20% down payment will be toast and your equity will be zero. Obviously home prices in some very desireable areas won't decline at all, but in other areas IMHO the housing market is going to get downright brutal over the next 12-18 months.

    This possibility is also likely to be the mechanism behind snowballing ARM defaults ... and there are 1.6 trillion dollars worth of ARM mortgages coming up for rate adjustments by the end of 2007. If mortgage interest rates pop from the original say 5% to 7-8%, we're talking about monthly mortgage payments on a $250,000 house could rocket up $400+ per month. When the ARM mortgage homebuyer attempts to refi, he's likely to discover that the current market value of his home has declined to $200,000, his mortgage has negative equity since he only put down $25k as a down payment, and that even if he passes tighter creditworthiness standards set by wary mortgage lenders he'll still have to pony up another $65k in cash to 'dehydrate' his underwater ARM and inject some equity towards a new fixed rate 20% 'down' $160k mortgage on a property now worth $200k.

    Obviously, very few homeowners are going to be able to cough up that sort of cash to get their current mortgage 'above water' and lock in a fixed rate refi - thus they are going to be stuck making higher monthly payments on their current underwater ARMs. Add in rising property taxes / utilities etc. and a whole lot of marginal recent homebuyers are likely to soon be headed for bankruptcy court ... with their houses in turn headed for the auction block ... which will further drive down local real estate prices ... which will push more mortgages underwater, make lenders even more wary, tighten creditworthiness standards even further, and prevent even more homeowners from being able to refi ...

    Unless you are looking to purchase a house in a market that is in super-high demand thus safe from further declines in real estate values, buying a house now before the real estate snowball reaches the bottom of the proverbial hill exposes you to the distinct possibility of capital losses. You're probably better off renting and waiting this out - as you're likely to find even better bargains in 2008 than those now becoming available in many areas where motivated sellers now outnumber qualified buyers.
    ~
    Last edited by Melonie; 06-09-2006 at 03:31 PM.

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    Banned Melonie's Avatar
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    Default Re: live by the sword ... die by the sword

    PS if anybody doubts the potential 'fallout' of a real estate bust, this chart really says it all !!!

    .

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    Temporarily Banned Vaughn's Avatar
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    Default Re: live by the sword ... die by the sword

    Quote Originally Posted by Melonie
    your 20% down payment will be toast and your equity will be zero.

    More doomsday predictions, eh

    Sorry to disappoint but there is no indication that will happen to me.


    As I said before IF a person is in the RIGHT SITUATION then they can make the current real estate market work in their favor.

    My area is not supposed to decline but things have slowed a bit from the predicted large growth rate. Thus I have taken advantage of the situation. There are few states where this can or might be done right now without too much fear of further decline. These states are found in the left hand side of the table at the bottom of this linked page.

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    Banned Melonie's Avatar
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    Default Re: live by the sword ... die by the sword

    Great article, Vaughn. As I already posted, there are going to be a few high demand markets which will be 'immune' from a downturn, and you are apparently lucky enough to be living in such a market. However, the 'devil on my shoulder' is whispering that something doesn't jive when you were able to purchase a house at a 15% markdown in a region where property values supposedly aren't falling.

    At any rate, the purpose of my post was to try and point out to any potential new home buyers that, where housing prices are concerned, everything is relative. The previous 'safe assumption' that home prices will continue to rise forever is now clearly disproven in virtually every local housing market in America. Today's 'safe assumption' that a 15% local real estate market decline represents the 'bottom', versus a further 15% local real estate market decline over the next year being a distinct possibility, is also just an assumption.

    Along those lines, it costs very little for a would-be homebuyer to wait a little longer before committing to a new home purchase to see whether the local real estate market they are interested in has actually 'bottomed' or not. On the other hand, it could cost a would-be homebuyer 15% of the purchase price if they buy now and the local real estate market continues to decline. But, admittedly, if someone intends to live in that home, mortgage interest deductibility, local rental cost avoidance, transportation cost avoidance etc. form parts of a larger 'personal' equation which may justify the risk.
    ~
    Last edited by Melonie; 06-10-2006 at 03:13 AM.

  10. #10
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    Default Re: live by the sword ... die by the sword

    yep, we got out of tampa at the right time. The new owner tried to flip the house for $300k more than they paid and it is still on the market after 8 months. The only person who benefited was the property assessor who took the opportunity to raise the assessed value from $600k to $2,000K.

    Can you imaging paying $60k in taxes plus interest on a $1.5 million interest only loan while NOT living in the house. That's like $11,000 a month in T&I. !!! Ouch.

    Things are going to get nasty. I am working my stocks out into more cash to sit out the plunging knife and buy back in later.

    Where I am now, the housing market has LOTs of inventory, but the houses are SO cheap that people can't get hurt too bad. They just can't sell them.... at any price.

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    Banned Melonie's Avatar
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    Default Re: live by the sword ... die by the sword

    but the houses are SO cheap that people can't get hurt too bad. They just can't sell them.... at any price.
    .., which probably speaks to the 'root' issue at work behind the global turnaround ... foreign central banks draining liquidity from the world's economy even if the USA is not, plus raising their own interest rates. End result will obviously be 'Cash is King', since there isn't anywhere left in the world economy now where money can be borrowed 'on the cheap'. Sooner or later this is going to affect foreign investor's risk tolerance re loaning their money to Americans, forcing further increases in US interest rates and further tightening of US creditworthiness standards re loaning out whatever money IS available. A willing buyer is NOT the same thing as a 'qualified' buyer who has approved financing !!!

    Morgan Stanley's analysts just released a report discussing the possible effects of a reduction in global liquidity ...



    (snip)"The bigger picture point to all this is that the fundamentals are now much less supportive. This is a point argued by our European strategy team (see Graham Secker, Anatomy of a Bull Market Correction, 30 May). As Graham noted, compared to the prior setbacks, long and short rates are now higher, US real yields are positive, curves are flatter, and inflation is higher, as are commodity
    prices. Put another way, this correction could be the first genuine growth scare that we’ve seen in this cycle. If it is the prospect of slower growth (and tighter liquidity) that’s forcing the markets lower, markets could fall a long way because neither of those factors is likely to turn soon. Finally, remember that leverage is more pervasive, even compared to the (already elevated) levels that existed last year. The unwind of leverage may lead to overshoots or signs of financial distress. Liquidity has dried up in some markets. Whenever that happens, you can see selling in liquid markets in part to hedge less-liquid positions that can’t be closed."(snip)
    ~
    Last edited by Melonie; 06-10-2006 at 09:43 AM.

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    Temporarily Banned Vaughn's Avatar
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    Default Re: live by the sword ... die by the sword

    Quote Originally Posted by Melonie
    something doesn't jive when you were able to purchase a house at a 15% markdown in a region where property values supposedly aren't falling.


    It's because I am buying from a large national builder who is getting hurt in most other areas and making up some slack in areas like mine. That and because as I already mentioned new home sales have slowed some here but not like they have in many other areas. The result is that this builder is taking profits where they can get them- in places like my area.

    I know you would like to see me loose my shirt and all but it's just not likely because I have combined knowledge and luck (meaning my area in terms of current market) to work in my favor.

    The point is that things aren't bad everywhere and for everyone.

    Could you please do me a favor and stop FOLLOWING me around attacking or trying to put down EVERYTHING I add to a subject here. If I am way off base on something I am sure someone else will point it out.
    Last edited by Vaughn; 06-10-2006 at 11:44 AM.

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    God/dess Deogol's Avatar
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    Default Re: live by the sword ... die by the sword

    ^^^

    I don't think Melonie is hoping for your demise, Vaughn. Sometimes it is hard to express what is going on in emails. Sometimes I get a response and mumble "How the fuck did they read that into it? (pause) Oh. I guess one could see it that way."

    So builders are moving past the "hold the price but give em granite counters" strategy to finally admitting the price has to go down?

    Personally, I want to buy a house (or maybe settle for a condo) - but man, I sure can't get myself to pay the kind of money they want for those things. I just think they are seriously overpriced right now. There has been a lot of "free" and easy money made available and I am sorry - but that is inflation. Sure it is localized - but I can't see a better textbook definition.

    Especially with this kind of nonsense going on

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    God/dess Bridgette's Avatar
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    Default Re: live by the sword ... die by the sword

    Now Vaughn, you're being ridiculous

    Quote Originally Posted by pheno View Post
    When you lead a nontraditional life don't try to measure it with traditional milestones.

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