Home — Simple Minds
Perhaps the best illustration of the problem with the housing market is the simplest one. Speculators with access to 100% financing did not have to worry about losing money, so they went out and bought every property available and bid prices up to very high levels. Now that prices are falling, they are simply walking away and letting the lender absorb the loss. The big lesson lenders are learning is that 100% financing brings in more business, it just isn’t the kind of business you want. The new housing bailout bill passed by Congress and signed by the President has a provision in it eliminating downpayment assistance programs. From this day forward everyone will need a downpayment. With all the losses lenders are absorbing due to the defaults of 100% financing purchases and refinances, you will not see them bringing those programs back any time soon.
When I first started putting downpayment requirements on posts, people were incredulous. I was repeatedly told 20% downpayments will never be required again. Zero down financing was here to stay. Perhaps it will rise to 5% or maybe 10%, but 20% is from a bygone era. Well, go try to get a loan from anyone other than the FHA and see what they tell you. There will always be programs allowing you to put less than 20% down, but good luck qualifying for one of them. From this day forward — until we build the next bubble — a minimum of 3% down through the FHA will be the primary avenue of first-time buyers. Everyone else better have 20% down, or you will not be buying.
One of the overlooked features of the bottom of the market is the difficulty in qualifying for a loan. Prices drop because buyers cannot get loans. When prices look relatively cheap, very few people will qualify for loans to take advantage of the low prices. That is why prices are low. If everyone could qualify for a loan, they would bid prices up like we saw in the bubble rally. The future of Irvine’s housing market is going to be a lot of loans at the conforming limit — currently $417,000 — plus whatever downpayment people have saved. The median will probably be supported at around $430,000 because that is the conforming limit plus 3%. If you have saved 20% or more, you will be one of the few buyers who can bid higher, and you will likely find some outstanding deals at the bottom. Those $900,000 homes at the peak will be going for $500,000 for the conforming limit borrower with 20% down.
Save your money. Cash is king.
Asking Price: $579,900
Income Requirement: $144,975
Downpayment Needed: $115,980
Monthly Equity Burn: $4,832
Purchase Price: $690,000
Purchase Date: 8/30/2006
Address: 66 Stepping Stone, Irvine, CA 92603
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,700 |
| $/Sq. Ft.: | $341 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Mediterranean |
| Year Built: | 2004 |
| Stories: | 2 Levels |
| Area: | Quail Hill |
| County: | Orange |
| MLS#: | S542271 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours)
|
|
baths, 2 car attached garage. One bedroom and full bath down. Wood
laminate floors. Granite counters in kitchen.
Yes, there is a garage, and inside, there is a wall…
As I mentioned in the introduction, this is a simple transaction. The former owner bought this property at the peak with 100% financing. The first mortgage was $552,000. The owner made some payments, but then stopped. The total outstanding balance was $555,044 at the time of foreclosure, so that is what the lender bought it back for. The second mortgage was a complete loss (JP Morgan Chase Bank is hating life.) If this property sells for its asking price, and if they pay a 6% commission, the total loss on the property will be $144,894. The bank is trying to get a few bucks back but they are over market, and they will need to reduce price to find a knife catcher. Expect to see this same, simple story over and over again as this crash drags on.
I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
.
God gave me travelling shoes, God gave me the wanderer’s eye,
God gave me a few gold coins to help me to the other side.
Looked around and said: be careful how small things grow,
God gave me travelling shoes and I knew that it was time to go.
Sent in the ship at night to take me to the hidden port.
Found me the key at last to open up the prison door.
Brought down the blackbird’s wings, gifted me with beggar’s eyes.
Sent in the jackals to tell me I should say bye, bye, bye.
I’m home, home,
Home, home, home
And I’m home, home,
home, home, home
But I’m miles and miles and miles and miles and miles away
Where can I hide?
God gave me one last chance, gave me one last reprieve.
Jah gave me hunger, gave me the air to breathe.
Gave me one suitcase, gave me one last goodbye
Gave me travelling shoes, without them I would surely die, die, die
Home, home
Home, home, home (2x)
Miles and miles and miles and miles and miles away
Where can i go?
Where can I hide?
Home — Simple Mind
This is why the market doesn’t recover for the next decade. Unless sellers drastically drop prices to conform with what people can qualify for, this thing isn’t any where near bottom. My guess is that some will be able to afford tha payments they are locked in at (if they were wise enough to lock in) and they won’t be forced to sell as others and/or banks will need to do. All bets are off if owners who can afford their current payments decide it isn’t worth making payments and just decide to walk.
I imagine there will be sporadic buying when prices drop and those that can afford the properties and can qualify for loans decide to snap up what they perceive to be good deals, but that doesn’t change the fact that these individuals are few and far between.
Prices will either need to plummet to be more in line with what people can afford to qualify for or lenders will need to get loose with the money again.
The bursting of bubbles drag on for years or decades. Look at the tech bubble and it’s aftermath. Stock investors are calling it the “lost decade.” Basically, if you bought into the NASDAQ bubble ten years ago, you STILL haven’t gotten back to even.
Thus, those who think that housing will return to previous bubble levels anytime soon are simply ignoring (very recent) history. Look at the FACTS – when a bubble bursts, it takes a decade or longer to get back to even. We have a long, long way to go. Maybe by 2016 prices will get back break even (except you lost 40% to inflation over that decade, but who’s counting a $240,000 purchasing power loss (40% of $600,000.))
Oh dear God! How long before I buy my own house and settle down?
God: Anyday when you think you made a good decision putting money into Cisco at 65$.
CZ
(I won’t say anything about the glut of downsizing boomer mc mansions to be dumped on the market for the next 30 years as the biggest demographic in history relocates to smaller, underground plots.)
I realize the demo is not as large, but consider that over the next thirty years, the immigration bubble, especially from Central America and Mexico, we have seen, will likely affect two areas: housing and Social Security, although not in any way to mitigate the bubble bursting now or for the next five or so years.
Just drove by a house yesterday that has been unoccupied for the lasts six months–a walkaway, we think. There is an open window on the second floor that has been open for over a month or so. Like the McMansions you mentioned, LC, I wonder if a lot of properties will simply be bulldozed and removed from inventory that way.
P
Anyone have any comments on how the credit crunch is impacting VA loans?
You can still get zero down through VA, as long as you meet certain triggering criteria. I know because I am a veteran of the first Gulf War, and am currently going through the VA approval process. My preapproval is for $521,250 (max available through CalVet VA program) at 0% down and 5.95%. They offer as low as 5.5%, but your household income has to be below $130k to qualify for 5.5%.
http://www.cdva.ca.gov/CalVetLoans/BestLoan.aspx
IMO, this is a pretty very good loan program. Over the last few years I never thought I would use the VA loan — now it is going to save me, since I don’t have 20% as a 1st time home buyer.
Thanks for the info, hopefully in 1-2 years after things settle further the new Uncle Sam won’t screw us.
What has happened to the PMI market/underwriting for conforming mortgages? I know that when I got my mortgage in the early 90’s we could only afford 10% downpayment and had to get PMI at an annual cost of around 0.3% of the value of the mortgage. We hadn’t accumulated a large downpayment as we had just finished paying off student loans. We had a good credit score and were within the 28% DTI. This was early 90’s in New Jersey when the market was going through a difficult spot – the reason we bought then was because it was cheaper to own than rent so yes that does happen. I also seem to recall though that going less than 10% down wasn’t an option even with PMI.
BTW wouldn’t “Money’s Too Tight To Mention” by Simply Red have been a good song for today’s topic?
PMI is still around, but it’s more expensive and harder to get.
“That means buying a California home using a small down payment will get tougher. Companies that sell mortgage insurance – a part of the process that many home buyers don’t think about – have been tightening their guidelines for months, and most have raised rates.
On Aug. 4, one of the companies, MGIC, will increase premiums and no longer offer insurance for California properties if borrowers have down payments of less than 10 percent. Other insurers have already made the change….
For example, on a mortgage of $400,000 where the borrower puts down 10 percent, monthly mortgage insurance premiums from one insurer Princeton Capital works with will soon cost $206.67, up from $173.33, Riordan said. That’s a difference of about $400 more a year.
MGIC alone has paid out hundreds of millions this year to cover obligations to lenders. Companies have posted huge losses and watched their stock prices dive. The result is an industrywide need to raise rates and tighten standards, Zimmerman and representatives for some of his competitors said. Other U.S. mortgage insurers include AIG United Guaranty, CMG Mortgage Insurance, Genworth Financial, PMI Group, Radian and Republic Mortgage Insurance Company.
On top of that, housing values have fallen. That has mortgage insurers anticipating that even more homeowners will default if they’re in trouble, because many will not be able to sell their homes for enough money to pay off their mortgage debts.
Tighter underwriting
Of the industrywide exposure to losses, “I would equate it to not unlike Allstate Insurance in Florida after a hurricane,” Zimmerman said. “We’ll still insure loans in . . . the markets that have had trauma; however, we’re going to change our underwriting.”
MGIC’s new maximum “loan-to-value” ratio of 90 percent means that borrowers with less than 10 percent down have only a slim chance of getting a loan from a conventional lender.” http://www.mercurynews.com/news/ci_10019672
Frankly, I expect more of the PMI firms to go out of business. Then the premiums will rise more, and the standards will get even tighter.
“BTW wouldn’t “Money’s Too Tight To Mention” by Simply Red have been a good song for today’s topic? ”
Yes, it probably would have, but I have already used it…
https://www.irvinehousingblog.com/blog/comments/moneys-too-tight/
Great post. One of my favorite business books is called “How to sell at margins higher than your competitors.” It points out that it is often better to raise prices and work with more attractive customers at higher margins.
When you cut prices in a low-margin businesses, you must increase volume dramatically (more than you intuitively think) to ‘make up in volume’ what you lose in margin on the original customers. The customers that you gain are generally customers that aren’t as well suited to your product and are more expensive to support.
The people who got stuck holding these zero down mortgages (the lenders) ended up drastically cutting prices to increase volume. They pretended the extra zero-down customers were actually higher margin, yielding inflated profits. But in reality, these zero down customers were low-margin, unattractive customers, and the profits were illusory.
Now, the banks have to pull back to the original ‘good’ market of solid borrowers who repay loans because they have made large down payments. In some ways, the story of 20% to 0%, and back to 20% is the universal business story of overreaching for unattractive market share, then pulling back to your core (profitable) market. Its not that unique to banks, although the level of excess was greater than usual.
During the S&L;crisis of the 80’s I put $50,000 down on a $140,000 home.
They couldn’t lose with this much down; however at that time, the banks trusted no one.
In spite of good credit history and a good professional job, the lender demanded;
Tax returns from 5 years back.
A notarized statement as to where the down payment money came from.
A letter from my realtor regarding market time for my existing house.
A year by year salary history verification letter from my employer of 15 years.
We were about to walk out and rent when our approval came. We made all payments on time, and the loan was paid back in 12 years. I still have a sour taste in my mouth about ever borrowing money from banks again.
This sounds very familiar. I bought my house in 1983 at a THIRTEEN PERCENT INTEREST RATE (might be coming, guys, if we get inflation), and in 1987 as rates dropped refinanced to 8 and then later to 6. I vividly remember the 1987 experience — the bank actually sent an inspector to our house and the guy went through it with a fine-tooth comb and made us fix all kinds of little dinky stuff (all superficial, of course — they didn’t look at plumbing and wiring, both of which turned out to be catastrophes waiting to happen when we did a big remodel in 1997)and made us fix them before they would do the new loan. He made us feel like slum-dwellers. Another cool part was at the time I was the only family member making a salary, since my husband was retired. However, they insisted that the loan be in the name of “the man of the house.” As I recall the amount involved was about 80K. How the world changes.
but if the banks had continued to require docs like you were required to supply, the whole bubble, crash, and resulting financial crisis would not have happened. I have trouble seeing this as a bad thing.
Seems as though the lenders fully embraced the Saturday Night Live School of Business rule of:
Lose money on every sale, but make it up in volume.
Great post. Mucho hard-data showing “the worst 10% of your customers cause you 90% of your problems”.
The interesting thing to watch for is how people’s attitudes begin change with the return of the down payment.
Some of the usual suspects on here have been quick to pound their chests “I’d pay 800K for this” or “There is no way the price will drop to 600K because I’d jump in and buy it at 750K” etc etc etc.
If people have to go back to getting the down payment the hard way (working a job), they are going to start expecting a lot more for their money than a tract home with a puny “wrap around” back yard with barely enough room to hold the trash cans and a gazebo.
“…quick to pound their chests “I’d pay 800K for this””
LOL!
Yes, when you can only borrow $350K, paying $600K gets pretty tough.
This is so true! We had been wanting to buy a home during the rapid rise in prices, but I had it in my head that we HAD to put 20% down. Yeah, I knew there was 100% financing, but for us, it was going to be 20% down.
We’re pretty good savers, but every time we thought we had enough DP, the prices had risen again. When we had $80K saved for DP and saw that all that was going to land us was a really crappy condo in a crap area with crap square footage, we decided to heck with OC, let’s figure out where we can move and actually get a darn yard for our hard earned money.
We figured we worked too hard and sacrificed too much for that money to hand it over for less home than our rental at twice the monthly cost. We were both a little ignorant by believing the real estate mantra that RE never goes down, so our attitude was “fine, you can have your OC property because we don’t want it.” In fact, the price of home ownership was the biggest factor in our decision to get out of here as soon as we can… it made us bitter about the area.
I thought the conforming limits was officiallly raised. That makes a huge difference right?
The new housing bill brings the following with it:
“An increase in conforming loan limits for Fannie Mae and Freddie Mac to $625,500.”
http://www.mercurynews.com/realestatenews/ci_10052767
This means future of Irvine housing will be at $625K plus whatever downpayment. Unfortunately, prices won’t have to fall a lot more for this.
Except you’ll have to make 150% of median Irvine resident income to qualify for this product.
$420K cap and/or whatever 3x your documentable income is will be the cap.
Reply to: “The new housing bill brings … An increase in conforming loan limits for Fannie Mae and Freddie Mac to $625,500.”
The VIP-treatment given to certain area is not fair to other markets. I am surprised no one has taken this to court. The realtors in so-called “inferior” area should take challenge this in court.
• Giving the FHA the ability to lend as much as 115 percent of an area’s median home price up to $625,500.
********************
what is the OC median now? $480k? what will it be when they set the FHA limit?
even if it is still $480k, 115% of that is only $552k
Even though it’s conforming, the rate on everything above $417K is higher. We were looking at financing $435K and B of A broke it down to a first of $417K at a good rate and the remainder was going to be a second at a higher rate. We decided it was better to have just a first under $417K.
They temporarily raised the conforming limit earlier this year, and they ended up with a two-tier market for loans similar to what we had with Jumbo loans to begin with. Loans in excess of the old conforming limit will pay higher interest rates. Plus, there isn’t enough income to support a $625,000 median. Prices will still fall.
“…When I first started putting downpayment requirements on posts, people were incredulous. I was repeatedly told 20% downpayments will never be required again…”
I was one of those naysayers. I was wrong. I thought the new norm in the downturn would be 10% down with stiffer PMI rates, but it looks like 20% down will soon become the predominate characteristic of most mortgages.
I, too, was one of those naysayers. I thought that banks would be foolish to turn down applicants who had, say, 15% down instead of 20% down.
It’s becoming increasingly clear that 20% down is the new standard. I still think banks are foolish to pass up all the business available from creditworthy borrowers who are in the 10% to 19.9% down range, but it seems that the nature of this business is one of extremes; too-loose lending followed by too-tight lending.
I am not sure I would call 10% too tight lending. If the market falls another 10%, a very real possibility, the lender will be losing money in the event the borrower loses their job or has a medical problem, etc.
The lenders are stupid, I know I worked for New Century until the end came, but they have enough sense to remember losing billions for a least a year or two.
While the institutional lenders are tightening up the purse strings, there is still the next wave of creative financing to come from sellers. So far, the homeowners have been bailed out by short sale concessions by the banks. As that availability narrows, and prices ride down, we will see many of the same escape vehicles that we saw in the last downturn: seller-carried seconds, wraparounds, and assumed mortgages, to name a few.
IR – Many of those who purchased with zero down will end up with a 20% down payment. Unfortunately for them, it will be in the form of a loan to the next owner, out of necessity.
I have also been wondering why there hasn’t been much seller financing this time. In the last cycle, I especially saw seller financing on land they had owned a long time. Some of the sellers foreclosed on the land multiple times as the buyers either couldn’t get funding to build, or just ran out of money. Often, what they got back was an improved lot.
There’s still not the urgency perceived by the general public. There is still 100+ financing (and more) that is taking place.
Some recent Irvine examples:
6/12/2008 – 120 Agostino – 100% financed
6/7/2008 – 347 Deerfield Ave – 100% + $4500 closing costs financed.
6/7/2008 – 5 Peacock – 100% + $5000 closing costs financed.
These are far fewer than were seen during peak, but they’re still out there. IR or HOL can confirm.
Back in the early Spring of this year, B of A was doing 5% down, which was a rise. By the time we decided to pull the trigger, they changed it to 10%.
We had put 20% down on a house up north back in Nov, which appraised for much more than our purchase price, so we were given an equity line on that property at 80:20 LTV for MORE than our DP.
I told B of A that we were going to draw from that line for the DP on the house here. They said that was fine, but just needed to take the payment on the HELOC draw into consideration for the debt to income ratio.
This home appraised for more than our purchase price too, so again they opened up a credit line and again, it was more than our DP. We moved the debt from the other house to this one to keep things straight. That was just last month. If we wanted to draw on the whole line, we would be at over 100% financing. If we drew both lines to their max, we would have 50% more cash than we originally started with.
That being said, we have good credit (763 and 849 FICO’s) and above average income and borrowed under 28% of our gross.
We have friends that bought a condo in April and they qualified for $50K more than I thought they would. Very little down, but good credit and long term jobs.
The credit is out there today if you have good credit and verifiable income.
Thanks for earlier post – I would suspect DTI and FICO are tightened as well.
Do Fannie & Freddie consider a seller second as equity for the 20%…as Tejano noted above it used to be that not only was the first capped at 80% but the downpayment couldn’t be borrowed and hand to be one’s own hurt money.
If buyers are capped at 80% LTV for their financing I’m assuming ultimately that 20% will be eaten by the lender to get the sale done, and will be a larger loss for them ie in today’s example the loss is $144k but if the bank has to fund 20% of the asking price that is another $115k they don’t get back. I think that will be better for the bank than waiting a few years for someone to show up with that kind of down payment. I doubt that is factored into the CDO prices for these deals
Reply to: “While the institutional lenders are tightening up the purse strings, there is still the next wave of creative financing to come from sellers.”
From my own experience, the lender still want to make sure you put down more than 20% of your own money that excludes second mortgage and gifts. Unless the seller is also the 1st mortgage lender, your wishful thinking is just not possible.
I’m not sure all lenders will exclude gifts. A large part of the reason behind 20% is that counts as housing downturn insurance. Look at all the properties that have been profiled here: how much less would the banks’ losses have been if everyone had put down 20% (and there hadn’t been HELOC abuse). Even with the market down 30% from peak, that’s a 10% loss, somewhat ameliorated by 2 years of interest payments. (BTW—shouldn’t PMI be kicking in to the lender or note-holder on some of these foreclosures?) The buyer’s equity is the first thing to go.
My thinking is that some lenders will accept gifts, provided the payments fall below 28% DTI. Not 29%, not 28.5%…28% flat. Not all lenders will. But, I think that the smaller lenders would be more likely to do that.
There IS the principle that people are more likely to care when it’s “their” money on the line. But, I think the major reason why 20% was the norm for so long was that a 20% loss in value was seen as the likely maximum (though we’re learning how bad that assumption is in a bubble). However, nationwide, a 20% hedge is actually still holding up ok..it’s just in the bubble regions (albeit, a lot of value there) where it’s been passed.
We had a gift from parents to fund our mortgage in the early 90’s and we had to provide a written statement from my father-in-law that it was a gift and not a loan. There also was a max % of the downpayment that could be a gift, I think it may have been half.
The other thing is not only were downpayments 20% (or less with PMI) but there were liquidity tests that you had to have a certain amount of cash left over in the bank when you walked out of closing, my recollection was that it was something like one or two months mortgage payment.
Seller financing still requires the seller to have equity. There may be some seller financing for those who really want to sell and have equity.
My mom was in real estate in the 80’s when interest rates were raised to 17% to kill the inflation problem. What Irvine Realtor mentioned above was the norm back then.
On an aside, as we approach the end of the first year of the credit crisis, we will see year-over-year statistics used to show an improvement in housing more and more in the coming months. It will be an attractive number because the denominator (e.g., Aug 07 – July 08) is so low.
As a percentage, things will seem better. In aggregate, sales will still trail additions to inventory, so prices will continue to drop.
More fun with numbers.
“Cash is King”.
Indeed!
Although I agree with “Cash is King” statement, with the weaking dollar and inflation rearing its head, the mighty greenback is losing ground. Perhaps its best to say “precious metals are king” or “a basket of foreign currency is king”….just sayin’
How about “Bling is King?”
I say a well diversified portfolio is king.
I think it will be worse for Irvine than IR predicts. Instead of loans being limited in size by the conforming limit, I think the limit of 28% of income will be imposed again, and if mean family income in Irvine is $87k then mean loan limit will be only $311k, not the conforming limit of $417k.
The days of getting loans at 4 or more x income will disappear.
Good. WTF were people thinking?
Houses are not supposed to be commodities.
Yes, borrowing 4 times income or more is still possible in a very low interest rate environment, but since interest rates are also likely to climb, the amounts financed will drop.
Alan,
If that happens, I think people who qualify for such loans will buy in Irvine, and others have to look at other surrounding areas. There are far too many people in Irvine making good amount of money.
CZ
When people have access to 100% financing and take it they have nothing that they have personally put in. This makes it so they don’t have as high of a vested interest than if they were to put down a good amount of money for a down payment.
You wouldn’t think the lenders would have to learn such a lesson. Hand out loads of essentially free money to people who have absolutely no financial incentive to pay a single cent back if their real estate bets don’t turn a profit. Doesn’t seem like much of a sound business plan to me; but then again, I can’t show up at the Fed with my mooching sack when all the loans I made go bad, either.
What you are missing: make a boatload of money on the transaction and sell the loans off to a greater fool. There are lot of owners of mortgage companies that did this and walked away fat and happy. I know some of them. Don’t know if I would feel good about what what did, but they saw the wreck coming and jumped at the right time.
with due respect to the opinions presented here. While the devastation in prices will probbly be more and longer than “spun” by the talking heads, I also believe in human nature and efficient markets.
Further, while home ownership as pure speculation by the masses will cease, homes/sales/rentals will in one fashion or another, given our tax system be vehicles for wealth.
Consequently, if there is a market, then there will be a product created. Just as corporations are now turning to private equity instead of banks for financing, there will be some product to allow downpayment strapped buyers to acquire properties.
IMHO
Plenty of people want to buy plenty of things, but markets are not always created for them.
Having watched banks and hedge funds eat it on subprime and 0-down loans, I’m not sure what large pile of money chases that in.
I, too, don’t think that 20% will be an absolute, rock-hard floor. For example, my credit union is currently doing 5% for houses and 10% for condos…I could very easily see major institutions doing something similar, with 20% for condos, but 15% for houses. Maybe some banks will start playing with a direct deposit/automatic payment system and allow someone to put only 18% down if they do that. PMI companies, seeking to stay in business, might offer better rates if you get to 15% of equity, making it attractive for banks to offer those products.
So, I don’t think the old days of “20% or else” are coming back, but I’m inclined to think it’ll be “20% (or something close to it and creative)”
The key assumption you are making is that people will repay these loans. There has always been a need for these products, and bringing them to market is what caused the housing bubble. Since none of these loan programs are stable because people default, it doesn’t seem likely lenders or investors will be anxious to put money back into loan programs with a now proven history of failure.
Ha ha, i’ve been saying cash is king for years now!
Anyways thanks for the write up, wonderful as usual.
-bix
I predict 100% down will become the norm. People could save enough for a house in 10 years…granted, maybe not in Irvine…or pay double for a house, and make some banker rich. Out of sheer disgust for the corrupt bankers, people may equate that to giving money to terrorists or worse.
Sneaky 2nds will make a big come back. But if prices drop, the sellers will be out anyway.
Also sneaky assumptions of mtges with nice rates. But this only works if the Buyer has enough cash to come up with the difference. Yeah, yeah, I know about the due on sale clause. This will be ignored for years, if the monthly payment cash keeps comin’ in.
The raise in conforming limits means basically nothing. If the debt to income rules are adhered to this only helps people with extremely high incomes. Not so many as everybody thinks.
IR, downpayments are only one of the factors driving up home prices, and the zero down loans, IMO, aren’t nearly as big a factor as the types of loans, and the debt:income ratio.
A no-down loan could be ok if it is for a low multiple of your income, like 2X your income, or 2.5X at the most.
We started to witness bubbly runups in house pricing in the early 80s when lenders began to finance borrowers for 4X their income. Why is this ratio considered “conservative”? A house loan for 4X your income is INSANE. I don’t care how big your downstroke is, a loan this large relative to your expenses, because it leaves you with almost nothing for other life expenses and other debt.
Consider the diff between a large downpayment, like 20%, and a loan at 4X your income, vs no-down or very little down on a loan that is 2X or 2.5X your income.
Let’s say you make $100,000 a year and buy a $500K house on which you are putting 20% down. You are still servicing a loan that is really huge relative to your income, with payments of about $2500 a month, plus taxes of about $800 at least, utilities, insurance, and normal maintenance. That all adds up to about $4000 month, half your gross (pretax) income.
Now, if you were to keep your $100K a year for emergencies and other needs, and go no down (not that you would, but you could) on a $200K loan on a house of that price, you would have payments and taxes less than half that, and most likely smaller utility bills and other expenses.
What makes 4X your income even crazier is that people nowadays have much bigger consumer debt loads than once they did. My mother bought her house with 40% in 1971, leaving her with a mortgage not quite twice her income. The precise ratio was 1.67 times her income. She had no car loan, and one tiny ($200) charge balance. We still felt “stretched” because my mother was new to homeownership and the additional expenses, such as urgent house repairs, that it occasions.
What on Earth, I wonder, would we have done if we had assumed a loan 4X her income, and had also two car loans plus a pile of CC debt equal to 25% of her income?
One wealthy older gentleman here on the north side of Chicago, a landlord, has a sideline of lending people with “marginal” credit money to buy houses and condos with little or no down. He’s been doing this for years, with good results, but he doesn’t do it exactly the way lenders do. For one thing, he gets to know his borrowers- their debts, their families, their credit history, their level of commitment to their homes. Then, he sticks with low loan amounts, not even 2.5X income. He meets people personally and is extremely selective. He looks for people with orderly lives and residential stability- people who’ve lived in one apt for many years. He ignores lending software and computerized “models”.
If we want to prevent a debacle like this from setting up again, we need urgently to go to much lower debt:income multiples, and much lower in the case of small or no down.
I’m with you Laura. I think LTVs are just one factor in measuring risk. I’d finance a prime borrower with conservative underwriting standards and a 100% LTV loan before I’d finance a less-than-prime borrower pushing the affordability limits in a 5/1 ARM with 20% down.
There’s simple much more risk in the second scenario.
I am surprised that this gentleman hasn’t been sued for being “prejudiced” or for “discrimination” by people he is unwilling to finance.
I would never do such a business here in San Francisco. Far too risky.
It is a rotten game when first you have to prove how much money you have before they let you buy a house. Can you imagine any other vendor behaving like a realtor? First tell me what you have, and then I will tell you what it will cost.
“For one thing, he gets to know his borrowers- their debts, their families, their credit history, their level of commitment to their homes…”
Gosh, he sounds like the small town bank of old.
I noted that this gentleman is “wealthy”. Probably not by accident. Perhaps banks will take note!
So what does everyone think of the house? Not much comment on it, so it must be nice.
Not a comment on the house per-se, but it’s interesting to see that the “14 photos” of the condo are actually 7 unique pictures all shown in duplicate. Maybe the realtor got lazy??
I hate HELLOC abusers, more so I have this communist crook govt.
FED and IRS should go after the HELLOC abusers who cashed out 100% or whatever equity via refinancing or lines of credit and then walked
away leaving the banks holding the bag. This communist crook Govt. and Fed created this condition earlier this year by allowing IRS to
forgive taxes on forgiven debt by banks on foreclosed homes. Even if the folks who walked away with say $100,000 (debt loss) have to pay
tax, you are talking about freaking only 33%, those HELLOC abusers will still end up making 66% legal money. 90% of people who cashed
out didn’t spent a dime back into home improvements.
I say that Govt. and Fed shoud annouce that all folks who used HELLOC and lines of Credit, spent the money, need to pay back 100% of the principal debt borrowed and abused. This will force culprits to forefit the money they made and will discourage others who are simply walking away from their homes because they cashed out and are now upside down. This will also ensure they these folks have miserable life as their wages could be garnished and their assets could be
seized.
This still wont please, yet I would accept this as somewhat fair payback to the fiscally responsible people who didnt buy homes during bubble or those who are still paying their
mortgages, yet they are stuck with tax dollars in the bailout! If Fed doesnt do this, they should provide the responsible people with taxyear holiday.
The HELOC abusers don’t have any of the money left. They spent it on Hummers and what-not.
Moreover, I can’t see how that’s legal. The banks made a loan, and as part of the contract for that loan, they specified a house as collateral. The former home “owner” is defaulting on the loans, so the bank now takes the collateral.
I’m no lawyer, but I can’t see how the government would have the power to compel payment, particularly in light of bankruptcy laws. Try to pass something retroactive, and I would think that a person could win a case on due process grounds.
Finally, I find it ironic that you complain our government is communist when you’re advocating a MUCH larger role for the government (though, to be fair, in a more fascist direction).
Has anyone noticed the listing at 3141 Michelson Dr. #807 Irvine?
Form a cool $1 Mil. last December (WTF price) to $499,000 today.
Ouch! Talking about having a haircut. Head shaving may be the right word.
I’m wondering how the owner feels right now? And also all the knife catchers who bought other units in that high rise from $1 mil down to 500K?
Such is life!
Actually, it sounds like the first sixteenth inch of the skull bones have been taken off too.
The house was ok; just still too expensive.
That garage is simply *inspiring*. Who wouldn’t want to be tied to a debt trap with a garage like that?
Dude,you do great research and
I commend you for that. But this #### is getting old. Find some new material, yes the market is sucking wind as it has every 7-10 years. Yes there has HELOC abuse, and yes this market will recover just like it always has. This will not take decades to resolve itself as all the sheep and renters want to believe. Look for the deals and take advantage you will be happy you did in 10 years. Hey gang don’t drink the cool-aid (as you like to say) it’s a down market and thats it news flash over.
Sorry, but this isn’t a once-in-a-decade sort of crash. The last time something of this magnitude happened was 1929, and it took more than a few years to recover.
Looks like another bitter homedebtor has found the site. Perhaps she/he is the “owner” of the profiled property.
This really sucks for people trying to get into the market. Yes the purchase prices have come way down but now you need 15 or 20% down, interest rates are up because of the Freddie / Fannie mess and the PMI costs are getting to be pretty brutal.
Samiam don’t worry, a rise in interest rates and downpayment requirements only forces prices down further. Better to have a lower price on the house (less property tax, + chance for re-fi down the road when interest rates lower, etc.) than to buy at a higher price (reverse of above: higher property tax, no refi option, etc.).
I’m curious.
So there’s all new foreclosures.
And consumers with foreclosures on their credit report.
Where are they subsequently going on to live?
Are they all going back to mom’s?
Or are landlords/property management companies relaxing their standards/guidelines with respect to foreclosures?
Credit standards are much lower for renting than they are for buying.
If your credit is too bad, your landlord might require a double deposit, and he might also want you to show bankruptcy papers.
The reason he might want to see those docs is because, if you have a towering load of debt, he doesn’t want your debt to him included when you finally BK. He will want to see that you’ve already bankrupted, because that means you are on the hook for whatever you do subsequently for the next 7 years, and he can put you in collection if you jump the lease.
Cyberpunk, I find it interesting that anybody that offers a contrary opinion is either a loon or a bitter home debtor.. I happen to own free and clear in south OC and I am a realestate investor. The funny thing is I am working harder than ever to find REO deals because I have to compete against so many investors making offers on property. The smart are jumping at the deals. These are multi million dollar guys getting into the market.
Request for an analysis post:
One thing I haven’t seen discussed is, how long “should” it take to save up a downpayment?
I know it’s irrelevant in the current market, since one “shouldn’t” buy yet, and prices are going down, making your downpayment go further, and people have illustrated the numbers on that, but the generic question still stands.
If 2.5x income is the house price one should aim for conservatively, then how long “should” it take to get to 20% down on that first house?
This goes to the question of how high “normal” rents “should” be in a normal market. And how high rents themselves could create a culture in which low downpayments for first time buyers is percieved as normal. Which in turns feeds more housing unaffordablility and higher dollar amounts for real downpayments etc.
If rents are painfully high, as they are in Irvine (and the D.C. area, where I am now) and house prices historically are around 4 times income, isn’t the “priced out forever” meme likely to come back and feel true relatively quickly?
I guess what I’m personally looking for is justification for cutting back on our savings a little bit. Because right now we’re saving at a rate that makes our cash-flow a little tight. And rent’s about to go up again, and my effective pay (since I now am eligible for SS and Medicare and retirement contributions) has gone down. So if you could run the numbers and say, “yeah, it should take 5 years in a normal market to accumulate a 20% downpayment while renting” then I could have an excuse to cut ourselves some slack and stop saving more towards the home purchase than we are currently paying in rent.
I do have tons of sympathy of people in the position of putting 66% of takehome towards housing, because that’s exactly what we’re doing now (except without the financial commitment or immobility)