Prices already dropped 5% in many SD areas, and we’re just coming off the top. We have to agree to disagree on the depth of the price drop. I put my money on my beliefs, you put your money on yours. Only time will tell… Steve, were you an appraiser in the 90’s? Privatebanker posted that he worked in an REO department for a major bank in SD, and they were selling homes for 20% of previous prices. Some homes got that cheap.
As far as listening to the experts, that hasn’t got me very far. As I posted earlier today, Dean Baker wrote to me about the poor track record of economists. In 2/01, the 50 top economists wrote their predictions in the Blue Chip report. Although the stock market was already unraveling, not one of them predicted a recession. The lowest GDP projected for 2001 was 2.4%. Neither economists nor Wall Street financial advisors recommended that I flip RE or buy PMs. So now I get my financial ideas from reading piggington, Calculated Risk, GlobalEconomicAnalysis, TheMessThatGreenspanMade, OfTwoMinds, iTulip, and IAmAFuturesTrader. I subscribe to Zeal and Yamamoto Forecast, and may join Iacono and Chris J’s services. I am sorely disappointed in the quality of economic forecasts!
S&L: I remember the S&L bailout, and the LTCM hedge fund bailout. More to come! What you saw before will be peanuts compared to what we’ll see in 2010 and 2011. Banks have failed before. Now, with lending standards lowered to the point that we have increased homeownership rates from a stable historical rate of 65% to 69%, and the credit quality has gone way down as investors chased the higher yields of the most risky products, the foreclosure risk has intensified. Main culprit: staggering of risky products: no doc, stated income, 0% down, adjustable rate, negative amortization. The main problem is the layering of these products. 100% financing is risky, no documentation of income is risky, but giving someone a no doc 100% loan is more than 2x as risky. I’ve written about this before.
Re: quality of SD loans. You have a IO loan. I don’t want to pick on you, but let’s examine the typical reason that you, or anyone got a loan like that. The buyer qualifies for a 30 yr loan on a $800K house, but wants the $1.5mil house. He opts for the IO loan to get a house more expensive than he could get with a 15 yr or 30 yr fixed loan.
Further, he gets the house based on the highest payment for which he qualifies, typically a 35%-40% DTI. So now you’ve got a 40% DTI IO loan. The buyer is not paying down any principal, so basically he’s renting the house from the bank, and getting equity only if the house keeps appreciating. Today this homeowner is losing equity on a house he’s renting from the bank.
So we’ve got a borrower who stretched to get a house he couldn’t afford with a fixed rate product. When the market cools, he’s underwater on the mortgage. If his job is RE related, his risk of job loss is high, and he can be foreclosed on. When his IO period ends, or his interest rate adjusts, how will he make his payment. Steve, you said your loan is IO for 10 years. I am guessing that the higher interest is being tacked onto the principal. The most popular product was the 1/1, 2/1, 3/1, or 5/1 ARM. $2 trillion of ARMs are adjusting nationwide next year. The adjustment will be 10%-50% higher! Since people are already maxed on the payment, how will they handle the higher payment? Add rising gas cost, doubled credit card minimums….Perhaps you are safe for 10 years, but most people are not. Every day, newspapers across the country report on people losing their homes to foreclosure because their ARM did what its name tells you it’s going to do: adjust.
This trend will really pick up in SD this year, and grow as a problem in 2007, 2008, and peak in 2009. This puts distressed property on the market.
Please let me know if you would like links to these stories. I can dig up data for everything I have written. For example, Christopher Cagan of First American Real Estate Solutions said 29% of people who got a mortgage in 2005 have 0% or negative equity in their homes. Douglas Duncan, chief economist with Mortgage Bankers Association said 35% of loans since 003 are not a traditional 30 yr fixed, and the March delinquency rate was 4.7%. ABC News reports foreclosure rates are up because people stretched into homes with ARMs and IOs, relaxed lending standards, 0 or no equity, and people’s reliance on equity buildup through price appreciation rather than through paying down principal. You fit into this last category. Reliance on price appreciation as a way to cover debt loans cannot continue, per ABC News. In Denver, thousands of ARMS were obtained 3 years ago, and will cause tens of millions of dollars in extra mortgage payments and drive up foreclosures. In 2005, there were 14,000 foreclosures in Denver, and this is not due to any recent job loss. Foreclosures are rising in Columbus and Georgia due to these loans. It’s really a nationwide problem.
American Real Estate Solutions estimates that 1/8 of pepole who took out ARMs, 1 million people, are expected to default on their loans.
An LA/Bloomberg poll found that in March, 26% of ARM holders were worried about making mortgage payments if interest rates go up.
Anyone with an ARM needs to make sure they can handle their mortgage payment when the interest rate to to which their loan is pegged rises to 6%. That would be probably a 9% interest rate. If they can’t, they should get a fixed rate loan or sell their house. The only other option is foreclosure, and that’s the path most will take, bec. they cannot afford their current home with a 30 yr fixed. If they could, that’s the product they would have obtained.
And to prove my point, ask yourself how many times in the life of your IO loan, you made more than that minimum interest payment. Ask yourself if you’re banking on appreciation to pay off your house, if you can make the payments if you had to switch to a 30 yr fixed….Most people cannot. And that’s the problem.