San Diego Housing Bubble News and Analysis

I think the big psychology shift thats going to occur is when folks simply stopping payment on their mortgage (rather then stretching) and forcing foreclosure proceedings.

If enough people do this its going to overload the system and they will be able to stay in the property for months (years?) rent/mortgage free until the bank can kick them out.

You can get a loan!
Jumbo Loans (above $417k)
30 YR Fixed, 20% down are 7.625%.
(2nds are available up to 90-95%) with 680+ mid credit score. With a score above 720 or 780 it gets slightly better.
Money is still available. Jumbo rates are higher than they were a month ago, but still less than they were years ago.

Below $417K 30 YR fixed are about 6.25%.

Sub $400s in 4S? I doubt it, but I think $600-$700s are a real possibility, and I would be willing to pay that. If I can get a loan.

Let's work this out. First of all, you're going to have a hard time getting a non-conforming loan from here on out. That sets a maximum loan amount of $417K. Let's say your dream 4S ranch house costs $600K. That means you'll need to pony up $183K for a down payment. Okay, let's run some numbers:

Interest rate 7.5% (they are going up and loans are becoming harder to get now)
30 year fixed

Payment (Principal/Interest): 2915.72/mo
Property Taxes @ 1.25%: 625mo
Insurance: 200/mo
Opportunity cost of $183K down payment in a 5% CD: 762/mo
Approx tax benefit of deducting interest: 750/mo

The opportunity cost of giving up your down payment basically cancels out any tax benefit, leaving you to spend $3740/mo for your $600K home.

Now ask yourself a few questions:

1) How many people have a $183K down payment?
2) Of those, how many will be willing to give up their guaranteed safe 5% return to invest in a home?
3) How many families can afford to spend almost $3800/mo for their housing? This of course doesn't factor in maintenance.

Of course if you don't have a $183K down payment, you *might* still be able to get an 80/10/10 where you'd only have to cough up ~91K but then you'd be paying principal and interest on that second which would increase the monthly nut even more...

I'm guessing that you're a physician from your handle, so you're probably going to be allright no matter what you do. But I wouldn't be so quick to discount the possibility of homes returning to the $400K range in 4S ranch...

Best of luck to you whatever you decide!

Navydoc, you are right about the average joe with little or no interest in the market has changed their thinking but it didn't have to come from housing blogs. In the last month it has dominated the wall street news and in many cases the national news, anyone who picks up a paper or turns on the t.v. will be mentally prepared to join that conversation no matter how busy they are. Those young doctors talk to patients all day long, they probably just hear things from their wide variety of average joe interaction or the t.v. being on in the rooms they walk into. You no longer have to seek out the info, it will find you.

Let's work this out. First of all, you're going to have a hard time getting a non-conforming loan from here on out. That sets a maximum loan amount of $417K. Let's say your dream 4S ranch house costs $600K. That means you'll need to pony up $183K for a down payment. Okay, let's run some numbers:

Ok... I'm probably going to be the first to say this that's going against the grain. I keep seeing a lot of folks post something like "it's going to be hard to get a jumbo loan. Jumbo loans are going to vanish. etc.etc.etc." Pardon the this viewpoint, but aren't we just drinking the "doom and gloom" kool-aid that also portrayed in the media too much???

Yes, secondary markets are going to contract, but do we really expect that well doc'ed, good income, with sufficient down are really going to have "problems" finding financing beyond paying higher interest rates from a historic low? I don't think it's a question of finding financing. It a question of how much interest can the buyer afford.

Borat, I'm failing to see the math your posting here. You're quoting rates from a jumbo, but you're running the downpayment based on what it would take to do a conforming.
Don't think conformings are at 7.5% Plus, there are other variables not being considered. That 186k earning 5% is also subject to income tax, among many others. Plus where are the costs for rent. From a purchase perspective, you're missing property tax, insurance, mello-ruse, etc.

Borat, where you getting your information ?

It's not as dismal as you say. I'm in the lending biz.
Conforming loans have NOT gone up and they are NOT harder to get.

The thirst for returns from Wall Street is NOT going to disappear, and conforming rates will NOT be out of whack.

Everything to a lender is risk/reward. Until they sort out the new guidelines, it was easier to just say no for now, which created the current situation. It ISN'T permanent.

The mentality of a primary residence as an investment needs to go away. It's a life style choice like buying a car.

Your math is perfect for an investor, and of course it doesn't make sense in our area. NICE ?

Every poster has made a valid point but they are all missing the same thing that caused me to post yesterday.

The average Joe is not a Dr!!!! Affordability for J6P is the issue that got us here. If J6P only has a median HHI of Sub 70K where do you think they are going to come up with the downpayment on a 400K house???!!!??? Where??!!

A lot of the posters here are extremely myopic about this issue and need to open their freaking eyes.

I would add another line to Borat's list:

4. How many people satisfying 1,2,3 do not Already own a home. In this era of very high home ownership rate, it will be rare to find someone unencumbered by present ownership And having a lot of cash in a bank account. May be a few Piggingtonians; but who else?

Every poster has made a valid point but they are all missing the same thing that caused me to post yesterday. The average Joe is not a Dr!!!! Affordability for J6P is the issue that got us here. If J6P only has a median HHI of Sub 70K where do you think they are going to come up with the downpayment on a 400K house???!!!??? Where??!! A lot of the posters here are extremely myopic about this issue and need to open their freaking eyes.

Uh, good financial planning, savings, and spending habits? How hard is it really to save $100k for a couple? Shouldn't take longer than 8 years, 4 if you're really disciplined. Don't know. Anyone else care to chime in.

I would add another line to Borat's list: 4. How many people satisfying 1,2,3 do not Already own a home. In this era of very high home ownership rate, it will be rare to find someone unencumbered by present ownership And having a lot of cash in a bank account. May be a few Piggingtonians; but who else?

And do you think those people will sell if they really are 1,2,3, and add to the supply that's in the market, even if prices come down? After all, it's a primary resident.

The only exceptions i see are job transfer into or out of an area.

"Shouldn't take longer than 8 years, 4 if you're really disciplined"

How many times do I have to remind people that there a negative savings rate in the US??

Posters here are an exception to this and generally have good financial management skills. That is not the norm right now. It is a mistake to extrapolate that characterisitc to population in general.

I have a question for the experts - admittedly, I'm not a finance guy.

Using the above example, I was under the impression that the $417K limit was for purchase price, not loan amount. Thus, the 20% down would shift exposure to downside price risk from the lender to the buyer.

I guess that it could go either way, but could someone who knows confirm this? Is it $417k loan value or purchase price for a conforming loan?

If it's loan value, does that predicate a 20% down - thus setting the max purchase price at ~$521K with a $104K down? If so, I think that half-million will be the new magic number...

How many times do I have to remind people that there a negative savings rate in the US?? Posters here are an exception to this and generally have good financial management skills. That is not the norm right now. It is a mistake to extrapolate that characterisitc to population in general.

No kidding, americans are bad savers?  Really? :)

but how many people who are "serious" buyers don't have some financial plan or financially capable? Haven't we already eliminated all the normal 100% financing people from the prospective buyer list?

Wow, didn't think this post would attract this much attention!

Temeculaguy, I know their knowledge didn't come from housing blogs. My point was to say that you are right, the major news media stories are actually sinking in, as evidenced by my observation in an arena as diametrically opposed to the financial markets as a Sunday morning post-call breakfast.

And yes, to those who question it, I do have $183,000 down, and if I found a property I was happy with I would accept the possible depreciation if I can afford the monthlys. I am a military physician, and am starting to tire of moving around. Hopefully I will get to settle in SD in 2009, and I WILL be looking to buy then. If It still looks like a long way to the bottom then, I may change my mind. It is nice to be in this position, and I'm not going to lock myself into any position considering how volatile the economy appears to be.

$417K is LOAN AMOUNT, has nothing to do with property value.

GSE's don't buy loans above this amount, except if the property is in Hawaii or Alaska, then the limit is $625,500.
Go figure.

Loans that are above 80% of the appraised value (but still under $417K) will require mortgage insurance.

I had a borrower sign docs on Friday, 95% loan. 30 YR Fixed, 6.25% PLUS MI payment.

He didn't qualify for 6.74% without separate MI payment because he went stated.

I think that half-million will be the new magic number...

Yes, $521,250 is the Magic Number. I am predicting a Limbo dance around that.

http://en.wikipedia.org/wiki/Limbo_(dance)

It will be harder to get loans even with documentation, because foreigners US investors will pull their money out of US markets altogether as the dollar drops. Stagflation is just around the corner. Plus the US investors that stay domestic will not trust the mortgage firms that are desperate to sell loans. May loans will have to be more traditional, were the originator actually services the loan.

HLS: Am I reading that right...your client didn't qualify for 6.74% but did qualify for 6.25%? Is the MI payment bigger than the marginal payment difference of the lower interest rate?

Thanks for helping us newbs out with the real deal...

HLS, I agree with you that getting a loan is not as dismal as many are saying but what is dismal are the loans that are available juxtaposed to current home prices. Yes nonconforming loans will come back on the market but I can guarantee you they will not look anything like they did during the boom, they will be at much higher rates. From what i am seeing and hearing it is the underwriting of the conforming, jumbo and non-conforming loans that is experiencing the most profound change i.e they are actually underwriting the loans now. I think we all agree it is a good thing to see sanity come back into the lending industry. But there are going to be consequences. We are seeing falling home prices now and in some cases severe drops. That puts the lender in a bind to loan money for an asset that is falling in value due to the unknown reaction of the conforming good credit borrower facing a home which will be valued at substantially less than the balance of the loan. It is going to take a long time to get through this phase.

He actually did qualify for the 6.74% payment, the lender approved it and locked it that way. On day of drawing docs, lender called me and said that program didn't allow lender paid MI...which was an add of .49%
So they changed it to 6.25%, with an MI payment.

It was lender mistake. I got my borrower a $1,000 credit for their mistake. He was OK with it, still a great loan for 95%.

His payment will be about $120 a month higher until MI can be removed, and then he will save $130 a month at the lower rate for the life of the loan.
He plans on staying there a long time, so it may actually work out better for him in the long run.

With a 30 YR amortization, a loan is at 80% after 10 years, and about 78% after 11 years.
He may be paying the loan down sooner, and get rid of the MI.

LA_R. of course you are correct, but I was just trying to stick with the topic!

Many LOAN scum are trying to screw people worse than ever right now because they have so few deals to do and need to make some money..It's borrower beware.

There are and will be zillions of dollars on Wall Street.
Money will loosen up again.
I have no problem with lending standards getting back to where they should be.

Now when I tell some people that I CANNOT get them a loan, I will actually be telling them the truth. ;-)

I've been around So Cal for 40+ years, I've seen almost everything.

I read about the non-conforming loan issue last week, I'm trying to find the article and I'll post the link when I get it. There is some talk of it over at Ben Jones' blog (see "the end of an era"):

http://thehousingbubbleblog.com/

Basically the point is that mortgage brokers are going to have a much harder time selling non-conforming loans to be bundled into MBSes. Default rates on non-conforming loans are higher than those on conforming and MBS issues with non-conforming loans in them have become very unpopular.

And even IF you can get a non-conforming loan for that hypothetical 600K house, the numbers are just going to be that much worse. Instead of a $3800/mo outlay it's gonna be even more.

2000 prices in inflation-adjusted dollars at the bottom, that's where we're headed.

If I assume a bottom of 2010 and a Y2K price adjusted for inflation on my home that would get me to a nominal price around late 2003. I didnt know you were so bullish Borat?

sdr,

What's that, about 5-10% off current prices?

It was Cramer who was screaming on one of his recent video rants on the Street.com --- that he couldn't get a decent loan...as he said: and... "I'm rich."