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ParticipantI realize some will interpret this as me being a wise guy, but as far as I’m concerned this is all according to the script. It’s 1991 all over again, only worse. The only thing that surprises me was how long they were able to hold out. By stalling for so long they have only pressurized the situation. That’s why it now appears to be unwinding so rapidly.
I think the pace of sub-prime’s collapse will increase in the next few weeks, and the manner in which the survivors underwrite their loans will swing like a pendulum to the other extreme. We will end up going back to 10% downpayments and higher interest rates because these lenders have to undewrite the additional risks that go with a declining market and reduced investor participation.
Think about what this is going to do to the general market psychology, and hence to both volumes and pricing. It will become the corrolary to irrational exuberance.
Participant4plex,
Sadly, it’s been my experience that even the most crooked appraiser will swear up and down that they are among the most professional appraisers there are. I think a lot of these jokers might even believe it. When I start talking about these things to my students I occassionally get a donkey who starts in with the “this is how it is in the real world” rationale. Needless to say, that’s an impossible rationale for them to defend for more than about 2 minutes. Everyone knows the difference between right and wrong.
The way most “bad” appraisals are manipulated are in the mischaracterization of the subject property’s
attributes. “Overlooking” defiencies is probably the 2nd most popular way of dorking an appraisal, surpassed only by the use of obviously superior quality/appeal properties as representing the “most similar” comps. Really, the two are usually done together.The problem for the appraiser who does this is that the facts pretty much speak for themselves. Those properties that back to the rail tracks won’t be by themselves, they’ll have neighboring properties that also back to those tracks. In addition, all those properties have prior sales that can be compared to the similar prior sales of nearby “comps” that don’t have that problem, so the penalty for that location factor is readily apparent with even just a cursory glance at that data.
The only thing a donkey appraiser would have going for them is that it takes some extra effort to research and analyze these factors in review, and most lenders don’t want to pay the costs that go with that extra work. They just want to keep their assembly line rolling with the least amount of distractions. Penny wise and pound foolish, if you will.
They only start to care once they start taking some of those $100k hits. Then they’ll be all over appraisers for misdeeds past. Unfortunately, by the time that happens they’re already too late. They should have shown the requisite diligence BEFORE they made thse loans, not after.
Bad deals are made during good times.
ParticipantI subscribe to the hundred monkey theory. The first few monkeys are considered idiots because they’re going against the trend. As the indicators stack up showing that maybe they’re not so dumb after all a few more monkeys change direction and join them. This keeps building – with the two factions remaining in opposition – as the one side grows from the minority towards being the majority and the other side losing their membership accordingly.
All semblance of parity between the two groups changes when the hundreth monkey joins in. At that point all the remaining monkeys change course and follow the new majority.
We Piggington’s were among the first monkeys, and we suffered no small amount of rotten bananas and whatever else monkeys tend to throw. But now our ranks are growing and we only occasionally get the straggler who waffles back and forth between the two groups. We have yet to get to our 100th monkey, but we’re also not on the recieving end of the rotten bananas anymore.
ParticipantThese schemes are more about financing terms and mortgage fraud than anything else. The irony is that it takes both a fraudulent appraisal (to overvalue the property) and a lazy/indifferent lender (to not see that) to pull it off. If the lender cared enough about having good loans they’d catch the crooked appraisal up front.
ParticipantI have to wonder what that appraisal looks like. While I’m at it, I have to wonder how many appraisals this sale will be used in.
ParticipantI agree – It’s going to take a while before the big spenders burn off all their other assets and have to face foreclosure on the house. All the action happens on the margins, but the margins still aren’t yet big enough to cause those kinds of losses.
If it unwinds another 10-12% this year that will be a lot.
ParticipantBulletproof – you literally can’t lose unless the whole economy unravels and rents drop 30%. A lot of people would say that locking in the interest rate and the right to enjoy future appreciation gains are worth a 20% premium over rents anyway.
Don’t worry about the purchase or the price and don’t look back or second-guess your decision. Just savor the merits of responsible homeownership.
ParticipantFirst off, congratulations on getting what may well turn out to be a bulletproof price and a great loan. Everyone should be so fortunate.
Secondly, a large share of the buyers have been using the so-called “Liar Loans”, which apparently are well named.
With these subprime lenders dropping like flies and the pipelines for these exotic loans being turned off at the tap, I expect we’ll be seeing a lot less of these loans, and most likely a lot fewer of these buyers.
Who knows, maybe the mini-spike in volume was in anticipation to the news that the lenders were cranking down.
ParticipantHaving seen the mortgage markets contract in the past, I can tell you from experience that this is just the first round of layoffs. This lender is attempting to reconfigure for competing outside of it’s primary niche. It probably won’t be successful at that because they have no experience in operating in those markets and no momentum to carry them through the transition. As a company entity they may or may not survive, but if they do it won’t be in their current visage as a subprime lender.
ParticipantI do agree with the premise that people pay more to live in places like SD; the big question is, how much more?
Most market segments in San Diego County dropped at least 20% during the mid 1990s in response to the spike that preceded it. The current spike is 3 times larger than the 1990 spike. If our academics had projected the 1950-2000 trend of 2.6% average annual increases from 2000 to present, the 3bd/2ba house in Carlsbad that sold in 02/2000 for $375,000 would now be selling for $448,000 instead of $700,000+.
That’s one of Piggington’s primary points – that long term trend does hold up. In order for the $700,000 price to correct back down to the 1950-2000 trendline these academics are using, it has to decrease another 35% on top of the 10% that’s already occurred. That’s assuming it doesn’t overshoot, which is what’s happened every other time these markets have distorted like this.
Their own statistics don’t even uphold the premise that this time it’s different.
Participant“Do you really think that GE would be behind a scheme as stupid as you described?”
Ummm, yes I do. Look at HSBC – all they do is banking and they made that mistake.
ParticipantA loss in value is a loss in value whether it happens as a result of an outright price correction over the short haul, or by inflation over the long haul.
Think about what correction by inflation means – it means that everything else will double and triple, including salaries, but RE will remain flat. The people who purchased investoments will be watching the value (as opposed to price) of their investment decline.
Either way, a buyer will have more money to use for other things than housing if they rent during that time period. The problem with correction by inflation is that everyone pays more for everything; whereas a correction by price only penalizes the greedy idiots who made the bad decisions.
That’s why EVERYONE – including the idiots – should hope for price corrections more than for inflation.
ParticipantBoth the arguments you advanced in support of your opinion are…highly questionable to say the least.
“1) The dollar is going to lose a tremendous amount of purchasing power in the next 10 years. In nominal terms, today’s housing prices will look a steal. ”
Okay, I need you to put your critical thinking cap on here. If a person buys a home for $750,000 dollars in 2005 and inflation occurs at a 4% annual rate, that means that in 2010 dollars, todays $750,000 will have to increase to $910,000+ just to stay in terms of “value”. Do you see that happening right now? No, you don’t. What you see happening right now is that 2005 purchase at $750k has declined to $700,000 in 2006 dollars, which at the 4% inflation rate would have been equal to a 2005 $672,000 purchase price, not $750,000.
“2) San Diego is NOT the same San Diego it was 10 years ago. There is a new high-tech worker that lives here but works elsewhere. Their payrolls are not reflected in crappy government statistics. ”
Name 3 of them. If anything, the homeowner class is actually in decline right now, courtesy of outmigration and equity flight; and yes I can personally name more than a dozen of those households.
BTW, the O.C. and L.A are both going to follow along in this downturn – they aren’t immune.
ParticipantIf a borrower can’t service their debt there is a loss and its the lienholder who suffers it.
There might be a lot of liquidity out there, but the investors have no intentions of losing it. They’ll put their cash where it generates the best returns; and right now that isn’t in RE.
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