December 19, 2005 at 1:03 PM #6333DoofratParticipant
Differences between the tech bubble and the housing bubble:
I think the aftermath of the housing bubble will be far far (yep, that’s two far’s) worse that the tech bubble (at least in San Diego).
With the tech bubble, the only money people had invested was money they already had. It wasn’t on any type of margin. When you invest in the stock market, you have to have money going into it, it’s not like you can borrow $500,000 with a low interest rate to buy Google stock. And when you buy stock, that’s it, you pay nothing until you decide to sell it, and then it’s only a small fraction of the value. At the end of the whole dot com bust, an investor had a lot less in their account, but the whole mess had some closure to it since you could either sell what you had left, or just hang on. You could sell your entire holding of AMCC stock for a $20 commission and be done with it.
With the housing bubble, you have people who had no assets before buying and who then margin their investment at a rate sometimes exceeding 100%. Permabulls say that the housing prices are stickier because you can’t just place a house on the market and then sell it with a couple of clicks of a mouse. The problem is that you CAN’T just sell a house with a few clicks of a mouse, and your carrying costs each month are thousands of dollars. What amazes me is how people lock themselves into these long term financial agreements where they are saying that they will pay thousands of dollars each month to a bank (basically their landlord), or the bank will proceed against them and take everything. So why would somebody willingly do this? Because they all think that prices will rise, and that they can just simply call a realtor and sell their house for XX% more than they paid for it. When these people realize that this isn’t going to happen and see the situation they are in, what do you think they will do (especially in the case of a job loss or other financial potholes)? They’ll foreclose and eventually, the entire economy will take the hit for it.
I think we are lucky to live in San Diego. I believe that the bust is likely to happen here first and will indicate when to brace for a major recession. Yes, I’m being a pessimist, but if you take off the rose colored glasses, and just look at the facts, I don’t see how you can come to any other conclusion.December 20, 2005 at 12:58 AM #23278
Great perspective! I’m selling my house for around $800K, we’re in escrow, and the buyers are getting a 5/1 ARM w/ 100% financing! With 80% of loans in CA reported as I/O, and some combination of no doc, neg am, and no down, these people will have to sell in 2006 – 2008 when rates go up. They won’t want to, but will have to.
Another interesting point: baby boomers are holding on to their homes as a retirement nest egg. I’m not sure how prevalent this is, but a few of my friends have told me they are doing this. Now we’ll have another round of boomers who are loosing their retirement nest egg.
Whew – we are getting out just in time. I believe we’ll have a 50% correction over the next 3 – 4 years. January will show a big drop in prices. NAR figures lag by a month – talk to any realtor – the MLS is full of price reductions, and many people are pulling their homes off the market because they can’t get their asking price. When they relist in January, things will be only worse. A lot of people are waiting for January to relist.December 20, 2005 at 7:51 PM #23279ARMwrestlingParticipant
Your analysis has the ring of truth to it. Housing prices can be sticky, but when leverage is involved a small loss can turn into a big one with a few percentage points in the wrong direction. “Sticky” doesn’t mean “impervious”.
Do I need to point out that anyone who sees their home value drop has incentive-a-plenty to get out before their losses are magnified? I don’t doubt that households will shift and shuffle their finances to make the mortgage payment, more than any other expense. But there are limits to how long someone will swim in an undertow with an anchor around them.
1. If your I/O payment goes up 30% once full amortization kicks in (worse if interest rates are higher), and
2. Your house has depreciated in the past year or two, with no sign of a market turnaround,
You’ll be looking hard at that rent/buy ratio and considering a lifestyle change. If it means avoiding a five or low six-figure loss by acting quickly then a lot of sellers won’t mind having a landlord worry about the roof and plumbing problems. And if you have investment properties that look iffy, selling them is even less of an emotional issue.December 22, 2005 at 11:30 AM #23287KingKongParticipant
As a person who invested during the tech bubble, I can tell you that stock can also be bought on margins. Most tech companies has a 50% margin requirement.
So a stock holder can buy $100 worth of stock with $50 and carry the rest $50 with a loan of about 7%. If the stock drop to $50, he has a choice of either pay up the $50 and still hold the stock or sell the stock and got nothing for it.
The only difference between tech and RE bubble is the size of the leverage. In stock, you got a 1 to 2 leverage (50% margin). In RE, the leverage before all the easy credit was 1 to 5 (20% down) but now with all the new creative financing, the leverage is 1 to infinity (0% down and no closing cost).
Also the carrying cost is different. You can do the math.December 22, 2005 at 12:09 PM #23288DoofratParticipant
And of course, another difference is that you have to actually bring money to the table for a stock purchase, even on margin. Like you say, you have unlimited leverage with loans these days with nothing down. How do you calculate the leverage on a zero down loan?July 22, 2006 at 8:38 AM #29269
I sure miss KingKong. Are you still around?July 22, 2006 at 1:03 PM #29282sdrealtorParticipant
Check the top of the Empire State Building 😉July 22, 2006 at 1:03 PM #29283sdrealtorParticipant
Check the top of the Empire State Building 😉July 22, 2006 at 1:08 PM #29284DaCounselorParticipant
“Great perspective! I’m selling my house for around $800K, we’re in escrow, and the buyers are getting a 5/1 ARM w/ 100% financing! With 80% of loans in CA reported as I/O, and some combination of no doc, neg am, and no down, these people will have to sell in 2006 – 2008 when rates go up. They won’t want to, but will have to.”
Will they really be forced to sell? What inside information do you have as to where interest rates will be or how the buyers’ personal financial situation will evolve?
I’m sorry, but I am continuously baffled by the gloom and doom prognostications based on that which is not known.July 22, 2006 at 3:12 PM #29288ocrenterParticipant
the reason a lot of these folks got in and are able to make do with the payments is because of the low teaser rate of 1-3% in the first year. after the teaser rate expires and rate goes up to the 5% ARM, they can’t afford it. and if they manage to survive past the 3 years of fixed rate, do you really think the rate will still be at 5%?July 23, 2006 at 12:31 PM #29347
My gloom and doom about ARM is because of one big problem in the lending guidelines: borrowers are qualified based on the intial teaser rate, or at the most what the payment is at the current non-ARM teaser rate. The financial institutions *should* qualify borrowers based on the average of today’s LIBOR rate and the maximum lifetime cap of the loan, to make sure the borrower can afford the payments if the LIBOR or Fed funds rate goes up.
Borrowers are too ignorant to consider that the LIBOR or Fed rate could ever exceed 3% or 4%, or whatever it was at signing.
None remember 18% home loan rates in the 80’s. It may never get that high again, but even 8% rates would almost double your payment from that 4% teaser rate. DaCounselor, do you really think that interest rates will not go back up to the historical average of 7-8%? What will happen to the ARM mortgage payment when rates go from 4-8%? Can the borrower refinance and qualify with less equity and a double payment? No way.
So the only way the ARM person can make their payment in 5 years is if mortgage rates are back down to the lowest rate in history plus they have not lost equity due to home price declines, OR they got a 50% pay raise and qualify for the higher payments. But without the equity, could they get the loan?
DaCounselor, I am not a loan officer, so if you could check into this and bring back some opposing facts, I am happy to corrected.
Until then, what I write is the info I got from a realtor, my loan officer friend, and the website housingbubblecasualty.com, run by a mortgage broker who exposed the exotic loans and the problems they would bring. That guy left the mortgage industry this spring and doesn’t post much anymore.
I would like to ammend my statement to say, “I believe that the buyers will be forced into foreclosure in 5 years, unless interest rates are back to 5% AND they can qualify for that $780K loan for a house which will at that time probably be valued at $480K. So in all likelihood, they will be forced into foreclosure”. Does this satisfy you?July 23, 2006 at 1:23 PM #29355speakerParticipant
Don’t sweat this fool, Poway. He/She is just a more civilized version of troll/flamer.
“End of line.”July 23, 2006 at 2:22 PM #29357docteurParticipant
PS – I got an adjustable rate mortage many years ago and was not qualified at the teaser rate but at a rate that I believe was equal to the teaser rate and the cap on the rate.
Are there any mortgage brokers out there that can clarify how these suicide loan borrowers are qualified, even though it might not make a difference if it was a “stated income” loan, because the borrowers could lie to meet the qualifications anyway. Just curious…July 23, 2006 at 4:57 PM #29372
The ARMs made in the last cycle occured in a period of high, falling interest rates, so they were not suidide loans like today’s ARMs which were made at a time of the lowest interest rates our country ever had. So the ARM you had probably reset at lower rates?July 24, 2006 at 10:05 AM #29439docteurParticipant
PS – Yes they probably did reset at lower rates. But I am curious at what rate most of the suicide loans were qualified? Was it the start rate or a fixed rate?
Because now that I think about it, I got a great start rate but had to qualify, full doc, at the fixed rate at the time, which was back in 1986.
Can a realtor or a mortgage person on this site tell me how those loans were made recently, say within the last two years?
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