From the Economist:
Bubble and squeak (Registration Required)
IN MANY countries, people are showing little sign of losing their appetite for residential property. Although the pace in several of the raciest markets around the world has eased a bit in the last quarter, prices have risen by more than 10% in the past year in eight of the countries in our table. The Economist has been collating these house-price indicators since 2002, allowing us to track the global residential-property boom (see chart).
However, in America the steam has come out of the housing market. In the year to the third quarter, the index of house prices compiled by the Office of Federal Housing Enterprise Oversight (OFHEO), a regulator, rose by 7.7%, the smallest year-on-year increase for three years. In the quarter itself, prices rose by only 0.9%, the weakest for more than eight years.
The National Association of Realtors reported that the median sale price of existing homes was the same in October as in September, 3.5% less than a year before; according to the Census Bureau, the median price of a new home bounced up in October. But both figures have been affected by a shift in the regional pattern of sales.
…
huge number of homes is awaiting sale: 7.4 months’ supply of both existing and new properties. David Rosenberg, an economist at Merrill Lynch, points out that inventories of new homes are 40% above their historical norm. The number of new properties completed but not yet sold has risen by 50% in the past year, to 166,000. America’s builders are cutting back hurriedly. In October alone private residential-construction spending fell by 1.9%; it was 9.4% lower than a year before.Although America’s bubble is deflating, other markets are still looking decidedly frothy. Denmark tops our property-inflation table; elsewhere in Europe, house prices in France, Spain and Ireland are still simmering. In Australia and Britain, where it once seemed that property markets had levelled off, prices have picked up again, rising by 9.5% and 9.6% respectively to November of this year.
…
In a thoughtful recent study David Miles, of Morgan Stanley, tries to explain the doubling of real British house prices in the past decade. Some of the increase, he says, can be ascribed to rising real incomes; a smaller share can be explained by increases in population; some can be put down to lower real interest rates (including the keener pricing of mortgages by lenders). However, a lot of it is speculative. Between one-third and one-half is due to increased expectations of house-price inflation. These amplify the effects of other factors. Faster increases in prices foster the belief that future increases will also be stronger, so that higher prices fuel demand rather than dampen it.The need to explain so much of Britain’s house-price inflation by a change in expectations, writes Mr Miles, “suggests that the current level of house prices may be rather unstable.” Once those expectations come down, real house prices are likely to fall. The trouble, of course, is predicting when.
The main issue I see is the way we are collecting Housing related data. We all know that Summer 2005 was the peak and prices have been declining since then. Till date I have not seen any chart reflecting this reality.
NAR reports on Median prices, which by nature are faulty. The Median prices reflect only how much people are spending, but not the quality or home configuration. I have mentioned in the past that family buying say $500K house, will still spend same amount but probably gets 5 bedroom vs 4 bedroom in better neighbourhood. Also if you see Median price chart, it shows decline only in 3rd quarter 2006, almost a 1 year behind the actual peak in RE prices.
Similar issues are there with OFHEO data. They only measure houses within conforming limits of $470K. That is much below most SFH’s in NNJ or CNJ area. Also I believe they use same house sales for coming up with HPI, but most likely same house is not sold every year. So there will be some qualitative differences.
I think the best indicator has been number of months of supply. This indicator has at least doubled or trippled since beginning of the year. Only when no. of months supply reduces to its average, I would call the normality setting in, where buyers and sellers both are comfortable with their decision.
Appreciation Slows To Lowest Level Since 1998
……“The housing market is feeling the full force of the 17 interest rate hikes initiated by the Fed….said Frank Nothaft, Freddie Mac vice president and chief economist. “It takes between 6 and 18 months for the economy to fully react to Fed actions and housing is the most interest rate sensitive segment of the economy. Thus, it isn’t surprising that the housing sector is now showing such a strong reaction to higher rates.
http://originatortimes.com/content/templates/standard.aspx?articleid=2205&zoneid=5
From Bloomberg:
The Fed’s Vision Is Reason to Worry: Caroline Baum
History suggests that housing cycles can be long and deep. While residential construction accounts for only 5 percent of real GDP currently, dismissing its impact — on consumers, on mortgage lenders — would be a mistake.
“In the prior nine housing cycles, the average peak-to- trough decline in real residential investment is 24.6 percent,” Northern Trust chief economist Paul Kasriel writes in a Dec. 1 weekly commentary.
And that was before mortgage lenders lured unqualified borrowers into the market with exotic adjustable-rate mortgages, known as option ARMs, compounding the pressure to unload homes. (Some of these homeowners are starting to understand that not paying is not an option!)
Residential investment is down 7.9 percent so far from its peak in the third quarter of 2005. With the supply of single- family homes outpacing demand by a wide margin — the gap between the two is the widest since the mid-1970s, according to Kasriel – – it’s hard to sound the all-clear.
“Unless this turns out to be a more moderate than usual housing recession — unlikely given the amount of speculation and leverage involved in the boom — then we have `miles to go’ before we can put this housing recession `to sleep,”’ he says.
…
Whenever I hear comments that housing, having experienced its longest and possibly its frothiest bubble in the post-war period, is stabilizing, I am reminded of the prophetic comments of German Chancellor Otto von Bismarck.
“If there ever is another war in Europe, it will come out of some damned silly thing in the Balkans,” Bismarck said shortly before his death in 1898.
In this business cycle, it will be some damned silly thing in housing that does the economy in.
“2008 Buyer Says:
Appreciation Slows To Lowest Level Since 1998”
I always beleived that the run up in housing prices was due to fancy mortgage products with low teaser rates. Many housing bulls refused to admit this and said that the growth in home prices was driven of fundamentals like income and population growth, etc.
So what happened to the *fundamentals* in the last couple of months?
1. Incomes are up slightsly.
2. Employment is decent
3. Immigrants are still getting of the planes.
But housing is in a rut.
Bottom line, this run up was purely due to the money supply that fed pumped into the economy to ward off a recession.
I’d like to learn more about OFHEO data. I may be reading the numbers incorrectly but if I bought a home in the Newark-Union MSA in the 4th quarter of 1982, my 4Q year-over-year returns are as follows:
1983-14.6%
1984-15.8%
1985-18.2%
1986-24.6%
1987-17.4%
… lots of “froth” until the stock market crash of Oct ’87.
Then I am looking at a subsequent five years return in the same MSA as follows:
1988- 2.7%
1989- (1.5%)
1990- (7.4%)
1991- (0.7%)
1992- (2.8%)
Is it oversimplifying to say that if I had bought in 1983 and sold in 1987, I would have had a gain of 90.7%? However, if I had bought at the peak in 1987 and sold five years later in 1992, I would have lost (6.8%)?
The reason I find this data confusing is that the 2001-2006 3Q year-over-year five year gain is 59.2% for this MSA; a smaller gain than in the 80’s bubble.
Why should I expect the market to come off the highs by any more than 6.8% as it did in the 80’s? I imagine there are numerous external factors here I am not considering (inflation?) and I am just looking for some education. The Shiller chart would indicate that somehow, inflation adjusted numbers would bring that 80’s bubble back down to earth?
Otherwise, maybe all I can hope for is a 5% discount off 2005 peak prices, not the 25% Booya Bob advises I should hold out for.
Thoughts?
My “sad” story, Wife and I marry and buy a Belleville condo in Aug, 1987 for $132,000. Turns out previous owner bought at $85,000 in 1985. Woops!
Market tanks and prices steadily decline. We have a baby coming a buy a house in 1993 while renting out condo since prevailing sales in development are now at $88,000 as the original buyers sell at their purchase price.
Finally deem market will never return and sell in 1999 for $92,000. You do the math!
Of course, like Cramer says, I was the bottom!
From Reuters:
U.S. home lenders brace for bad news, legislation
During the recent U.S. housing boom, mortgage lenders touted so-called exotic mortgages that allowed people to buy houses they could not otherwise afford. Now those lenders are bracing for the not-so-happy story of borrowers like Jesline Jean-Simon.
The Miami woman bought her two-bedroom condo a year ago on a 3 percent adjustable rate mortgage with flexible payments.
When home prices in the city were blasting off two years ago, Jean-Simon was sitting pretty.
But now prices have eased and she works three jobs just to manage a mortgage that has ballooned into interest rates of around 10 percent.
“I don’t sleep much,” the 35-year-old says about her round-the-clock work schedule. “But the first thing that I pay is my mortgage because I don’t want my credit to go bad.”
A mortgage survey due on Wednesday is expected to show that more and more Americans are in danger of losing their homes. The quarterly report from the Mortgage Bankers Association is also expected to show that the same mortgage products that helped send the housing market into the stratosphere are now weighing homeowners down.
…
“One way or another, the industry is going to get a black eye,” said John Taylor, president of the National Community Reinvestment Coalition, which promotes equal access to credit. “There will be questions about tricks, fraud and whether these loans should have been made in the first place.”
…
Many of those questions will come from the media, Taylor said, but the lending industry could face more than bad headlines as regulators and lawmakers weigh in.
In October, federal bank regulators tightened underwriting rules on “exotic” mortgages. In their sights were payment-option and interest-only mortgages that let borrowers lower their interest payments for a time but can deliver a kick later in the life of the loan.
And the industry could be in for worse than regulatory scrutiny next year when a new team of Democratic lawmakers like Barney Frank, the incoming chairman of the House Financial Services Committee, begin to consider predatory mortgage lending legislation.
Frank favors a national standard and the uptick in delinquencies expected Wednesday will strengthen his argument, said Howard Glaser, an independent mortgage industry analyst in Washington.
…
“These stats are an open invitation for a Congress with an agenda of consumer interest,” he said. “I don’t think (lawmakers) will ignore the spike in delinquencies.”
…
Still, he said, lawmakers might get pushed along by the coming headlines about defaults and people losing their homes. If Wednesday’s data shows a serious uptick in delinquencies, he said, “our arguments get harder.”
From Marketwatch:
Wholesale inventories build to 3-year high
Inventories at U.S. wholesalers rose to their highest level in relation to sales in three years in October, the Commerce Department reported Monday.
Sales at wholesalers fell 0.5% in October, the second decline in a row after sales fell a revised 1.5% in September, which was the fastest drop in three years.
Inventories rose 0.8% in October after gaining 0.7% in September.
The inventory-to-sales ratio rose to 1.20 in October from 1.18 in September. The last time the ratio was bigger was in November 2003. The inventory-sales ratio stood at a record low 1.15 in May, June and July. The typical wholesaler has about 37 days of sales on hand, up from 35 days in July.
The buildup in inventories, if sustained throughout the pipeline running from production to final sales, could lead to cutbacks in output and employment.
Wholesale inventories are up 10.1% in the past year. Wholesale sales are up 5.9% in the past year. The figures are not adjusted for price changes.
Mish talks with Paul Kasriel about the possibility of a Japanese-style deflationary scenario in the U.S.:
http://globaleconomicanalysis.blogspot.com/2006/12/interview-with-paul-kasriel.html
1987 Buyer, thanks for sharing. Sounds like you took a mich bigger hit than the MSA #s suggest. I guess its always tougher in the condo market.
On GSMLS, in my town, there are a few houses for sale that have just been advertised for rent. These are three-bedroom houses and the rent on them range $1850 to $2600. The houses are empty and look completely updated. Seems like unlucky flippers to me!
Seneca,
Because the OFHEO index isn’t adjusted for inflation, it’s going to overstate gains and understate losses.
OFHEO suggests adjusting the data for inflation by utilizing the “CPI – All Items less Shelter” figure released by the BLS:
Here is the Annual figure for the New York-Northern New Jersey-Long Island, NY-NJ-CT-PA MSA:
1980 – 11.1
1981 – 10.0
1982 – 5.1
1983 – 3.8
1984 – 4.8
1985 – 3.1
1986 – 1.9
1987 – 4.2
1988 – 3.2
1989 – 5.3
1990 – 5.9
1991 – 4.3
1992 – 3.3
1993 – 3.2
1994 – 1.9
1995 – 2.4
1996 – 3.1
1997 – 1.8
1998 – 0.6
1999 – 1.6
2000 – 3.0
2001 – 1.9
2002 – 0.7
2003 – 2.5
2004 – 2.9
2005 – 3.8
Adjusting your numbers gives the following result:
1983-10.8%
1984-11.0%
1985-15.1%
1986-22.7%
1987-13.2%
and
1988- (0.5%)
1989- (6.8%)
1990- (13.3)
1991- (5.0%)
1992- (6.1%)
From Marketwatch:
Economy strong despite housing slowdown, Paulson says
The U.S. economy is performing well despite the slowdown in the housing market, Treasury Secretary Henry Paulson said Monday. “We have had a correction in the housing industry and we are in the process of transitioning to a more sustainable growth rate,” Paulson said in remarks prepared for a housing forum. He also said Treasury is trying to make sure Americans can access home financing without taking unnecessary risks. “We do not want Americans to become over-extended and see their dream end in foreclosure,” the secretary said. Paulson is scheduled to address a national housing forum sponsored by the Office of Thrift Supervision
Question on a listing:
MLS 235 1629. List price: $325K; last sold in 99 for $135K. Fair price, or over-inflated?
“MLS 235 1629. List price: $325K; last sold in 99 for $135K. Fair price, or over-inflated?”
I don’t think what the buyer paid in 1999 matters. If you want to buy now you have to pay the current market price. From what you have posted before, it seems that properties listed in this area at $325K still go into bidding wars.
A buyer could have overpaid in 1999 or go a deal at a forclosure or estate sale.
I think the inflation effect on housing is more complicated than simply adjusting appreciation for CPI-less shelter.
For example, since most tax schedules aren’t inflation-indexed, inflation tends to increase your average tax rate. The home mortgage deduction increases in value to the extent that inflation raises your pre-deductible tax burden. In effect, the government subsidizes inflation risk for homeowners, but not for renters.
Well, they go into bidding wars in other neighborhoods. In this area of Maplewood, chances are it won’t go into a bidding war (and if it does, it will likely be within $5-$10K of list price).
I thought the general consensus on this board was that you should pay prices from pre-2001, appreciated by about 3-5% each year, plus any renovations?
That was the basis of my asking if $325K seems over priced right now….
In 2001, in the nicest section of Maplewood (Jefferson school district, between Wyoming and Ridgewood) a house we looked at in 2004 (for 485 at the time, bidding war 520) went for 325. So I would think that the house and area you are looking at is overpriced, maybe even more so than the homes in the better areas.
FYI, I heard you can now buy a used copy of David Lereah’s book, Are You Missing the Real Estate Boom? on Amazon for just $1.25.
Not sure if this was posted yet. From Dow Jones:
Economists Differ on Fate of Housing Market
Economists gathered in Washington on Friday to discuss the future of the cooling U.S. housing market offered varying views – from a soft landing to a sharp drop in valuations that could be most damaging to poorer homeowners.
Retiring Sen. Paul Sarbanes, D-Md., led off a panel organized by the Center for American Progress – a left-leaning think tank – by commenting on both general economic conditions and homeowners who may be especially vulnerable to a housing market downturn.
“I think it’s fair looking forward to predict that the steep downturn in the housing market will probably be a major drag on jobs and the economy over the next year,” said Sarbanes, the ranking minority member of the Senate Banking Committee.
…
“The progress we’ve made in minority homeownership may indeed rest on a very shaky foundation,” he said. Low-income borrowers have increasingly been sold exotic mortgages with initial teaser interest rates and payment plans that can re-price much higher over time, he said.
Sarbanes called for stronger federal laws to prevent predatory lending, limit financing fees attached to mortgage repayments, restrict pre-payment penalties and prohibit potentially abusive practices such as “balloon” payments and mandatory arbitration clauses.
Similarly, Sen. Chris Dodd, D-Conn., in line to become chairman of the Senate Banking Committee next year, said Thursday he wanted to crack down on predatory lending.
…
Experts on Friday’s panel had different perspectives on the economy and the degree of likely damage from a housing market correction.
Cooling real estate markets mean U.S. consumption is slowing, as many homeowners can no longer tap their home equity for new lines of credit and housing-related job markets weaken, said Christian Weller, senior economist for the Center for American Progress.
“We have to shift away from the housing-boom driven economy to something else,” Weller said. “The only something else we can think of and would hope for is an investment boom, and unfortunately so far that hasn’t really happened.”
In a new housing market study, Weller argues that the sharp rise in home prices since 2000 has made homeownership too expensive for many, while those who do own a home will be strained by higher interest rates and slumping sales.
But Mark Zandi, chief economist for Moody’s Economy.com, said the housing market is slowing gradually, and the overall economy seems to be responding well.
“The housing bubble is correcting in an orderly way,” though home prices are down more in some locations than others, Zandi said. Retail sales ahead of the end-of-year holidays are “solid,” and that suggests “very, very limited” spillover to the larger economy from weaker real estate, he said.
Looking ahead, Zandi said housing prices will likely continue to weaken through most of 2007, while about $750 billion of the nearly $10 trillion in outstanding mortgages are at risk of delinquency or default. But, he said, home sales are likely to reach a trough soon, if they haven’t already, and homebuilding will probably bottom out by the middle of next year.
Zandi said the Federal Reserve shouldn’t use monetary policy to deflate bubbles such as that seen recently in the housing market, but prudent regulation of mortgage lending can help contain damage from bubbles.
…
“I think the Fed could and should have done something about the housing bubble,” said Dean Baker, co-director of the Center for Economic and Policy Research.
To address housing market bubbles, the Fed and other authorities should first try public communication and tighter lending regulations, but the central bank shouldn’t rule out raising interest rates “if need be,” Baker said.
Oil producers shun dollar
http://www.ft.com/cms/s/277471c2-8889-11db-b485-0000779e2340.html
Using some of the 401K as a downpayment on the first home purchase.
The Kid would like to know the NJRER feelings on this. The Kid has read this is an option.
The Kid
From the LA Times:
A loan that’ll get ugly fast
EVERY day, Will Hertzberg owns a little less of his three-bedroom house in Corona.
Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.
Like many of them, he always chooses to pay as little as possible.
For the moment, this allows the 56-year-old Hertzberg to continue living in his tract home despite being only marginally employed. But his debt is swelling, and his mortgage company controls his fate.
“I am rather screwed,” he said.
…
When even that was too onerous for some borrowers, they offered loans such as Hertzberg’s, often called “pay option” loans.
One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.
A second possibility is to pay $2,279, which would cover only the interest.
But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.
Essentially, option loans are bets that good things will happen. Maybe the mortgage holder will get a big raise, or sell a script to Hollywood, or inherit a chunk of change. When the borrower has to start paying off the loan in earnest in five years, the plan is that he or she will somehow be able to handle it.
…
HERTZBERG bought his house 11 years ago for $129,995, immediately after his second divorce. (He has no children.) Since then, Corona and the Inland Empire have boomed.
Comparable homes in his neighborhood fetch more than $400,000. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid.
He would see little of that, however, because he’s already seen so much. Over the years he has taken out $190,000 in cash through refinancings.
Hertzberg’s home equity paid off his credit cards, financed trips around the world that allowed him to indulge his passion for photography, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities — and lost money faster.
“Free money always has the unfortunate effect of making people go overboard,” said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump’s “How to Get Rich.” “You’d be surprised how fast $190,000 can go.”
The money wasn’t really free, of course. It just seemed that way, the result of a radical shift during the last decade in how people view their homes.
Using some of the 401K as a downpayment on the first home purchase.
The Kid would like to know the NJRER feelings on this. The Kid has read this is an option.
My opinion? No, but my opinions are generally viewed as being extremely conservative.
Here is what I beleive to be an unbiased look at 401k DP borrowing and early withdrawl.
http://www.mtgprofessor.com/A%20-%20Down%20Payment/use_funds_in_401k_as_a_down_payment.htm
jb
Kid,
I’m not sure an employer-sponsored 401(K) is eligible for a downpayment. Might depend on the rules of the plan or company.
IRAs and IRA rollovers can be used for downpayments, but such withdrawals are taxable. This could be an option, depending on the size of your tax-deferred savings and time from retirement. If you’re in the 25% bracket, and you withdraw 10K, you’ll owe $2500 in fed taxes but pay no early withdrawal penalty. BTW, I think you can only w/draw up to a maximum of $10K for the purchase.
Suggest you check with a professional before proceeding.
yes, the condo market seems to fall further due to speculation. What added to my situation, was that you had a large pool of units, 100+ pretty much all bought in 1985-1986 for the low $80,000’s. Then as the boom hit, the builder literally squeezed in another building of 18 units. when people wanted to sell, there was a pool of folks willing to seel for what they paid…what i paid did not matter.
I avoided this last cycle…but see the same thing happening..guess i’m getting old!
P.S. my current monthly mortgage+ taxe + insurance is less than it was in 1987!
JB-
Thanks! Great info on the 401K as a downpayment.
The Kid
Kid, almost all company plans allow you to use a loan or a withdrawal from your 401k for a down payment. The loan is the better option, because you can pay back yourself over time and don’t lose the principle. However, if you part ways with your company, you must pay the remaining balance off.
You can also withdraw with penalties. If you are young enough and vested enough, this may be an option. I would first roll over some of your 401k into an IRA. You can then deduct up to $10k for your home purchase without the standard 10% penalty. Note that early withdrawals from from your 401k or IRAs are subject to income tax and must be reported.
Kid:
If you don’t have the down payment ready, and you are scrambling around and trying to pull money from everywhere……you ain’t ready to buy.
DuPont to cut jobs, boosts 4Q outlook
any of these jobs in NJ?
Let’s say i have 10K in a CD account (5.25% – 5yr) and 20K in my 401K. Borrowing 10K (9.25% – 5yr) from my 401k and at the same time using the 10K CD as collateral seems like a good idea. Any thoughts?
has someone else posted this crap……..
http://www.bloomberg.com/apps/news?pid=20601103&sid=aEvsG0eZ.uU0&refer=us
v Says:
December 11th, 2006 at 12:51 pm
Let’s say i have 10K in a CD account (5.25% – 5yr) and 20K in my 401K. Borrowing 10K (9.25% – 5yr) from my 401k and at the same time using the 10K CD as collateral seems like a good idea. Any thoughts?
collateral for what? a 401(k) loan doesn’t require collateral
Are you saying you want to borrow only the 10k from your 401k and use that as your down payment (don’t touch the cash in a CD)?
jb
General question re ARMS resetting. Has anybody read any articles re the refinancing percentages that have occured re thos loans that were to reset in 2007?
I’m sorry, but I can’t seem to overlook the risk associated with borrowing from a 401k for a downpayment.
Like I said above, perhaps I’m being too conservative here.
If you lose your job, or leave your company for whatever reason, the loan needs to be paid back in a very short timeframe, usually 30-60-90 days. If the individual needed to borrow against the 401k for the down payment, I’m not sure sure they’ll have access to funds to pay back that loan on such short notice.
jb
Just what the heck is Greenspan up to? From Marketwatch:
Treasury gains lighten after Greenspan remarks
Treasury price gains lost momentum Monday afternoon, pressuring yields, after former Federal Reserve Chairman Alan Greenspan reportedly warned that an extended period of dollar weakness is in store for the U.S.
…
Treasury prices shed some strength alongside a faltering dollar after news reports that Greenspan speaking via video link to a conference in Tel Aviv predicted an extended period of dollar weakness.
Greenspan reportedly also said that it would be unwise to “hold everything in one currency.”
More interesting news from MarketWatch. Interesting what can happen when the pace of the market slows..
Hubbell cuts 2006 outlook on slow construction
Hubbell Inc. (HUBB), a maker of outlet boxes and other electrical products, Monday cut its 2006 earnings and sales projections, citing a construction slowdown and inventory stockpiles at utility customers.
The grim outlook appeared to weigh on shares of other electrical-products companies, but one analyst said that reaction was unwarranted.
Both residential and nonresidential construction markets – which together comprise more than half of Hubbell’s sales – have been under pressure recently, the company said in a statement. Hubbell said the “pace and depth” of the residential construction decline “accelerated more rapidly than expected in the fourth quarter.”
“Also, lower order rates, due to higher inventory at utility customers and distributors following a below-normal storm season, are dampening volume,” the company said in a statement.
http://www.washingtonpost.com/wp-dyn/content/article/2006/12/08/AR2006120801682.html
A good read from an editor of the Weekly Standard. He started reading a realtor’s newsletter in the Spring of ’04 and tracks how the agent spins (or simply excludes) market data from recent 2006 updates on where the market is and where it is heading.
From Barrons:
The Mortgage Blues
By RANDALL W. FORSYTH
While things couldn’t be better at the top for the hedge-fund swells, junkie mortgages at the bottom of the heap are feeling pain. Ownit Mortgage Solutions of California, one of the largest lenders to borrowers with marginal credit, abruptly closed its doors last week. Derivatives based on the lowest tier of subprime mortgage securities have plummeted in price, sending the cost of insuring against these loans’ default sharply higher.
But elsewhere in the credit market, Citadel Investment Group became the first hedge fund to tap the bond market, obtaining cheap credit and freeing it from dependence on big banks and prime brokers (see Review & Preview). Ford Motor (ticker: F) also was able to issue $4.5 billion in convertible debt, albeit at extremely generous terms tailored to the hedge-fund crowd.
The deteriorating conditions for subprime mortgages have been evident in the relatively opaque market for credit derivatives. The benchmark for derivatives on asset-backed securities is an index known as ABX, which is split into the various sub-indices of varying quality. Markit, an online source of valuation for derivatives, reported that one of the lowest-quality indices, the ABX.HE 06-1 BBB and BBB-minus, recently suffered a “credit event.” Two underlying bonds had interest shortfalls resulting in losses, according to a Nov. 27 release from Markit.
Last week, the ABX took “a pounding,” says one mortgage professional, especially in the triple-B-minus indexes. Investors have been trying to get protection by selling this lowest tier of the ABX index. But, according to this pro, even after the ABX’s steep drop, the value of the constituent credits in the index may be even lower than implied by the index’s value — because there’s no market for credit protection for the individual names. So still more selling may be ahead.
The cracks in the subprime mortgage market may be the canaries in the coal mine for housing and the economy. When the cracks become visible to all, the Federal Reserve then will try to plaster them over by cutting rates.
Here is an interesting piece, right on time since we were discussing the OFHEO numbers earlier in the day:
Home price index loses credibility
A growing number of analysts – including Thomas Lawler, principal of Lawler Economic & Housing Consulting in Vienna, Va. – are becoming disenchanted with the OFHEO index, however. The low estimation in which OFHEO is beginning to be held can be attributed to what the index excludes as well as what it includes.
The OFHEO index excludes some important home sales for our area – luxury homes, for instance, as well as loans not securitized by Fannie Mae or Freddie Mac, which have limits of $417,000.
The index also underrepresents adjustable-rate mortgages, Lawler says, since Fannie’s and Freddie’s share of the ARM market is much lower than the national average.
It’s worth noting that our share is estimated to be much higher than the national average – some say as high as 25 percent of all purchase and refinance loans. That could certainly skew OFHEO reports for Palm Beach County.
Did it?
According to OFHEO, single-family home prices in Palm Beach County declined 0.5 percent in the third quarter from the second quarter of this year.
According to FAR, home prices fell 5 percent – not 0.5 percent – in the third quarter compared with the same quarter a year ago.
OFHEO also excludes properties with mortgages backing private-label securities (especially subprime loans), whose share of the market has soared in recent years.
…
What the OFHEO index includes also taints it, Lawler believes.
That’s because OFHEO’s report covers refinance mortgages, including “inflated-appraisal” cash-out refis, Lawler says.
“Clearly, the OFHEO indexes are producing some pretty meaningless, and in some cases scarily misleading, indications of what home prices are doing in many regions,” he says.
There are over $1 trillion in ARMs set to reset in 2007, the figures for 2006 was around $400+ billion. This makes me think of an old saying that needs to be rivised….a fool and a mortgage company’s money shall soon depart.
“The cracks in the subprime mortgage market may be the canaries in the coal mine for housing and the economy. When the cracks become visible to all, the Federal Reserve then will try to plaster them over by cutting rates.”
Wishful thinking………
2008 Buyer Says:
December 11th, 2006 at 1:39 pm
There are over $1 trillion in ARMs set to reset in 2007, the figures for 2006 was around $400+ billion. This makes me think of an old saying that needs to be rivised….a fool and a mortgage company’s money shall soon depart.
2008: Less relevent that I had estimated, becuase rates have remained low out the curve. The only squeeze is on those who took out something really fancy to finance a flip, or a joker wading over their head. As we have seen, both these operators have been, or are in the process of being, kicked out of the market. Most people are only marginally affected, and mostly in transactions costs.
The House-ATM still works for many, as I can attest from my client meetings today…..
chicagofinance (and others)…
Please don’t tell Kid he isn’t ready to buy or that he should keep renting. For many of us, we wouldn’t be able to afford a home at all if we weren’t able to borrow or withdraw from our 401k or other retirement investments, and continuing to rent is not an option. I’m not saying it’s the best move, but I, for one, can’t save enough money to put down 20% and won’t be able to for several years. But I’m young enough so that I can replenish my investments if I’m aggressive, and I earn enough monthly to pay myself back.
cf,
“collateral for what? a 401(k) loan doesn’t require collateral ”
collateral in case i need to pay up my loan because of a job loss.
jb,
“Are you saying you want to borrow only the 10k from your 401k and use that as your down payment (don’t touch the cash in a CD)?”
I used 10K as an example. yes that’s exactly what i mean.
Has this been discussed in the forum?
In a 367-45 vote, the House on Friday afternoon passed tax legislation that would renew for two years a host of expired business tax credits and popular individual tax breaks, and introduce a new, one-year itemized deduction for mortgage insurance premiums.
The legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance – which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on one’s mortgage is deductible if the taxpayer itemizes deductions.
The new insurance premiums deduction will only apply to mortgage insurance contracts issued in 2007 and is only available to taxpayers whose adjusted gross incomes do not exceed $110,000 ($55,000 for married taxpayers filing separately).
Go Carla Go
FirstTimeBuyer,
” for one, can’t save enough money to put down 20% and won’t be able to for several years”
several years for 20% but you will somehow manage to save 180% (including mortgage) in the next 30 years?
Most of us are in the same boat but i wouldn’t advise anyone to take a plunge when there is big sign saying “dangerous waters” and you see crocs floating around.
I noticed about a month ago the Bergen Record expanded their Real Estate section at their web site.
It’s mostly fluff pieces but what I find odd is why they didn’t jump on the bandwagon about 2 years ago?
Rich
PS Interesting bit of information dreamtheaterr. Looks as if NJ is helping those who shouldn’t purchase a home, hang themselves.
The dollar fell on Monday after former Federal Reserve Chairman Alan Greenspan warned that he expected a few years of greenback weakness, causing U.S. stocks to give up some gains.
But prices of Treasuries rose as investors covered short positions ahead of the central bank’s policy-setting Federal Open Market Committee (FOMC) meeting on Tuesday. The FOMC is widely expected to leave the fed funds rate unchanged at 5.25 percent.
Greenspan, who was speaking via video conference to a business meeting in Tel Aviv, said it would be “imprudent to hold everything in one currency.”
Listen to greenscam. he was a currency wrecker.
dreamtheaterr,
Discussed very briefly, but I don’t think we really explored the impact of that change.
I’m not sure if we’re going to see a big impact to the market because of it. We saw a shift away from mortgage insurance, simply because piggyback mortgages became readily available and offered tax advantages. Now that similar tax advantages would be available to those with private mortgage insurance, perhaps we’ll see a shift away from the piggyback.
jb
I think that particular change had more to do with the private mortgage insurers looking to win back business from the mortgage industry than anything else.
jb
From Inman News:
Congress creates new tax break for mortgage insurance
Households with annual income of $100,000 or less can get a tax break on their mortgage insurance when purchasing a home in 2007 using less than the traditional 20 percent down payment.
That’s because a new tax deduction effective Jan. 1 will allow them to write off the full cost of their private or government mortgage insurance on their federal tax return.
With rising interest rates and slowing home-price appreciation, insured loans are often the best deal for borrowers, according to the Mortgage Insurance Companies of America, a trade association representing the private mortgage insurance industry.
Mortgage insurance helps loan originators and investors make funds available to home buyers for low-down-payment mortgages by protecting lenders from a portion of the financial risk of default.
“Making the cost of mortgage insurance tax deductible helps those who need it most: low- and moderate-income Americans, primarily first-time home buyers, who are financially responsible but simply don’t have the means to amass a 20 percent down payment,” said MICA president Steve Smith in a statement.
Reaching all the way back to post #2:
2008 buyer,
Please note that while the Fed raised the overnight rate by 4.25% with the 17 hikes, mortgage rates did not increase anywhere near that much. The best 30-year fixed rate you could get when the rate on the overnight rate was 1% was never better than 4.75%.
If the rates moved in lock step we’d be at 9% now, but the spread shrunk instead. If we were anywhere near 9% for mortgages people would be jumping out of buildings.
Had an interesting conversation with mortgage broker friend other night. The friend is having trouble at work. Firm was bought out by national firm. The national firm is implementing stricter underwriting standards and the local brokers are getting killed as result. They are trying to require % of money down as my friend put it “you’d find in Iowa”. I feel sorry for my friend. Problem is Iowa standards should have been in place from the beginning.
“If the rates moved in lock step we’d be at 9% now, but the spread shrunk instead. If we were anywhere near 9% for mortgages people would be jumping out of buildings.”
Lindsey,
You have to make the distinction between adjustables, which were dramatically affected by the rise in fed funds, and fixed which are contolled by the market.(10 year)
From the AP:
Mortgage Delinquencies a Rising Threat
Mortgage delinquency and foreclosure rates are on the rise, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers, some experts said Monday.
Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get home loans “without taking unnecessary risks.”
“Expanding opportunities for more people to buy a home is a good thing. But we do not want Americans to become overextended and see their dream end in foreclosure,” Paulson said at a conference on the housing market organized by the Office of Thrift Supervision, a Treasury Department agency.
Some experts are concerned that the increase in mortgage foreclosure rates could affect the banking system’s financial health.
There have started to be “early signs of credit distress” in financial institutions’ holdings of so-called “subprime” mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.
In the sizzling housing boom that waned in the latter half of last year, many people took out subprime mortgages — higher-interest loans for people with blemished credit records who are considered higher risks — with adjustable interest rates.
When interest rates rise, as happened last spring, it can raise monthly payments for people with adjustable-rate mortgages, potentially creating a strain if they stretched to buy a home and don’t have a financial cushion in their savings.
William Longbrake, a senior policy adviser to the Financial Services Roundtable, an industry group, said he is among a minority of experts “who believe the worst is still ahead in the housing market” for home prices to continue to fall.
“There is worse to come. … The bottom is probably still many months ahead,” Longbrake said. He noted that the rise in delinquencies and foreclosures in subprime mortgages particularly affects low-income families.
It all depends on what boat you got on when your purchased your house.
About 1.4 million of those households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out, Dr. Cagan says, and an additional 1.6 million face smaller increases that are still likely to strain their finances….
Many subprime borrowers held down their initial costs by using so-called 2/28 loans, whose rates are fixed at a relatively attractive rate for the first two years….typical subprime borrower who took out a 2/28 mortgage in 2004 has been paying interest of 7.1% for the first two years, says Grant Bailey, a director at Fitch Ratings in New York. Once that introductory period ends, the interest rate is reset every six months for the remaining 28 years of the loan at a margin over interbank rates,….2/28 loans generally limit the size of the first jump in rates to around three percentage points..the monthly rate to 10.1%…..a loan of about $150,000 would rise to about $1,315 from $1,000. Assuming interest rates stay around current levels, the rate would jump again to about 11% within six months to a year, bringing the monthly payment to $1,400, or 40% higher than the initial payment.
http://www.realestatejournal.com/buysell/mortgages/20060315-hagerty.html?mod=RSS_Real_Estate_Journal&rejrss=frontpage
And that’s a $315 increase on a $150,000 initial loan.
The average house is like $330+ in Northern NJ?
How much of an impact would a $150 to $300 increase in your monthly payment affect your household?
From the AP:
Real estate expected to flounder in 2007
Donald Anthony has slashed the price on his four-bedroom, two-bathroom house by almost $80,000 — and added $40,000 worth of improvements, including a new kitchen and landscaping in the leafy yard.
He’s used three different agents. He’s listed the 1,800-square-foot home — an immaculate ranch on a quiet cul-de-sac — on for-sale-by-owner sites, in newspapers, on cable television and community site Craigslist. He or his agents have spent at least 50 idle afternoons hosting open-house events.
But the 74-year-old retired physicist cannot unload the house, now listed at $489,950 — well below the price of comparable homes in the fast-growing region between San Francisco and Sacramento.
“The buyers have vanished,” Anthony shrugged in front of new Shaker maple cabinets and never-used appliances. “If this doesn’t sell post haste, I’m going to bite the bullet and pull it off the market.”
…
decade, combined with mortgage interest rates that have increased about 1 percent in the past year, have resulted in residential real estate stagnation. The gridlock defies conventional wisdom, stubbornly remaining neither a buyer’s nor a seller’s market.
“We are currently experiencing the worst of the market freeze, which is being exacerbated by the gap between the buyer’s desire for bargains and the seller’s fantasy of what they once thought their homes would be worth,” said Diane Swonk, chief economist for Chicago-based Mesirow Financial, who forecasts a rebound in early 2008. “The good news is that there are some signs of stabilization. The bad news is that a substantial backlog of unsold homes still exists.”
…
The newest forecast by Moody’s Economy.com, a private research firm, projected that the median sales price for an existing home will decline in 2007 by 3.6 percent — the first decline for an entire year in U.S. home prices since the Great Depression of the 1930s.
…
“In order to play this ponzi scheme, the value of the homes had to go up faster than the economy grew and faster than people could service their debt. We’ve reached that limit,” Morci said. “The housing market sustained the economy at a time of very large trade deficits. It’s been a false prosperity.”
More than 10,000 government workers at the rally. Great picture in the NY Times..
http://www.nytimes.com/2006/12/11/nyregion/11cnd-jersey.html?hp&ex=1165899600&en=7fe0bef6dea4a5e3&ei=5094&partner=homepage
jb
“In order to play this ponzi scheme, the value of the homes had to go up faster than the economy grew and faster than people could service their debt”
It was one giant ponzi scheme. A combination of flippers selling to a worse fool and the only savior for I/O’s was higher prices. Even if prices consolidated, [no bubble has ever culminated in consolidating at the highs]the I/O’s were screwed. This scheme only works if prices continue to rise.
Throwing money away???
“Lenders enabled more buyers to qualify, but they also raised the risk of default, said Dennis J. McKenzie, a real estate instructor who teaches short-sale courses in Southern California. To keep buyers in the marketplace ‘lenders had to Mickey Mouse the financing, liberalize the financing,’ he said. ‘It’s gotten to the point of no money down, interest-only payments, negative amortization.’”
“Many buyers who entered the market at its peak, in November 2005, have realized little or no appreciation, he said. ‘It is like a chain letter. The last one in loses.’”
“Padilla purchased his Paradise Hills condo in April 2005. Tired of ‘throwing my money away’ on rent, he visited a mortgage broker to see if he could qualify for a home loan. ‘It was just at a very high interest rate. I put zero down. The only thing I had to come up with was the closing costs, which were about $11,000,’ Padilla said.”
“Padilla said he took out an adjustable loan with a starting interest rate of 8 percent. Long before his monthly payments were scheduled to adjust upward, he began to buckle under the weight of his debt. When he put the condo on the market in March ‘I did not get one single offer. I tried refinancing and I couldn’t because the value of my home went down.’”
“In October, Padilla stopped paying his mortgage and homeowner fees. Padilla said he left because he felt overwhelmed. ‘It was just too much.’”
“Padilla said he recently was offered $295,000 for the condo, but that’s $60,000 less than he owes. To make the sale work, the lender has been asked to forgive the difference.”
To whoever it was looking to pull 401K money for a downpayment…OMG, don’t!!! Unlike Grim, I’m a gunslinger- and I wouldn’t do it, either.
‘It is like a chain letter. The last one in loses.’”
This chain is only as strong as the weakest link.
“I tried refinancing and I couldn’t because the value of my home went down.’”
How long will this song be played???
Kid,
Bad idea about cashing out the 401(k).
It will bite you in the ass, especially around tax time.
Bad… bad…idea.
You can’t rob Peter to pay Paul.
I’d explain more, but I am really enjoying this smoked salmon right now ;)
SAS
you go Carla go
1987 Buyer Says:
December 11th, 2006 at 9:45 am
My “sad” story, Wife and I marry and buy a Belleville condo in Aug, 1987 for $132,000. Turns out previous owner bought at $85,000 in 1985. Woops!
Market tanks and prices steadily decline. We have a baby coming a buy a house in 1993 while renting out condo since prevailing sales in development are now at $88,000 as the original buyers sell at their purchase price.
Finally deem market will never return and sell in 1999 for $92,000. You do the math!
Of course, like Cramer says, I was the bottom!
Same happened to a friend of mine. Bought a house in 1988 in Maryland had to sell a few years later and was totally shocked that he lost money. It happens.
“you go Carla go”
Hugh???
SAS
Jim
When you talk of paying back a 401k in the event of a job loss you mean in order to avoid the tax penalty? It doesnt have to be paid back, you don’t have to pay back, just the tax man.
KL
Hey It’s Crashing (from #70)-
Unlike a bad Cramer stock pick, at least you can stay in your house thru the downturn (as long as you’re not drowning in a toxic loan & facing foreclosure).
Go ahead, permabears…cut loose on me for saying this!
Stocks = liquid, but not tangible
real estate = tangible, but not liquid
each has it pros and cons, and as we all know market timing is everything.
Stocks = liquid, but not tangible
real estate = tangible, but not liquid
each has it pros and cons, and as we all know market timing is everything.
So Hunter [a.k.a. chicagofinance jr. – 7 weeks old] what do you think of David Lereah?
https://www.njrereport.com/images/Picture_170_Prip.jpg
Unlike a bad Cramer stock pick, at least you can stay in your house thru the downturn
Very true, but at least least with a bad Cramer stock pick, you don’t have to worry about property taxes or a leaky roof.
Hello Everyone, just checking out mls. noticed a very nice T/H in New Providence mls2351163, bank owned, sold as is, ” responsible for municipal certs” can anyone explain this to me, I,m thinking a foreclosure, Thank you.
cf,
I see Hunter got your wife’s good looks… :)
jb
Nothing better than a beautiful baby to see with my coffee! Thanks, CF. Memories. Now I want another.
JB, P.S. great idea on the Toys For Tots. It was such a hit, they might incorporate it next year as part of the giving tree activity.
RE: 401(k) loans
If you take a loan early (under 30), what is your probability of repayment, historic average tax penalty of others who didn’t repay, and their projected net loss of retirement funds? Where do you fit in on the demographics? Can you increase your contributions at loan onset to cover not only the loan repayment, but regular contributions?
We know that someone who begins contributing early is much better off. http://money.cnn.com/popups/2006/fortune/buildwealth/index.html
I searched for some reports that I know are out there, but could only find official bls stats from the 1990s on participant activity related to 401(k) loan repayments.
Here’s one take. I’ve seen long-service employees successfully manage, on an on-going basis, a maximum outstanding loan balance (up to five loans, plan permitting). These are high balance accounts who know what they’re doing, and can do better outside the plan. They are NOT buying houses with the money. They pay off and reloan for maximum advantage.
But these folks are few and far between. The typical at-risk loaner has less than 7 years of service, a balance under 20k, and cannot increase contributions (must reduce savings, or even suspend them during at least the first few years of the loan). Many, if not most, do not repay at term.
If you are young (under 30-35), have some expectation that you will not be at your current job in five years, and your balance is under 20k, you may want to consider other sources of downpayment. If anything, do a trial run by taking that extra money away from yourself for a few months to see how well you manage.
A second job for a year or so (weekends, etc.) would be a great alternative to taking that $10k, and would GREATLY improve your 30-year balance outlook.
Good luck, Kid.