SDEngineer, in the old days, lenders kept loans on their own books, and took 100% of the loss from a failure to repay, or a failure to pay the full agreed original monthly payment. Today, nonrepayment of most mortgages is covered by guarantees from a govt agency, e.g. the FHA (directly) or the FDIC (indirectly). So the mortgage and housing markets will look nothing like they used to.[/quote]
What does this have to do with a property grading out as a cash flow investment however? My entire point was that both historically and currently, you can’t get a 0 down (or even low down) loan for an investment property, therefore the floor for investors is set at 20% or somewhere nearby down where all the expected expenses are lower than the rent it can bring in.
The fact that 5 years of catastrophic homeownership decisions by the fed, the banks, the realtors, the mortgage brokers, and the buyers is currently being unwound will eventually wind up hitting a wall set by investors based on what they can buy the place and rent it out for. That is simple market economics.
As a side note, once prices do fall to that level (and, as has been pointed out by Rich in some of his recent charts, in San Diego as an aggregate, we may be either near there or already there – though higher priced submarkets like the coast and the high end areas are pretty clearly not there yet), the risk to a bank then becomes fairly minimal in a default scenario, no matter who pays – since only in a deflating market do banks take large losses from a defaulted mortgage loan. After prices become normalized relative to rent and income levels, the value of the foreclosed property is high enough that in general it covers the value of the foreclosed loan.
Only in the case where the asset is extremely overvalued relative to the mortgage (i.e. a bubble priced house) do banks take a really big bath in a foreclosure scenario. Similarly, a buyer who winds up in danger of default can generally sell that house, avoid the ding on his/her credit, and pay off the mortgage if need be.
