More comments on the mortgage and adjusting ARM data
Here we go again. Some more analysis of that great 33 page data set that I started talking about yesterday titled “Mortgage Payment Reset - The Rumor and the Reality“. Let’s get right to it…after all it is a Friday!
The author starts off trying to minimize the affect of ARMs adjusting and mortgage payments increasing. There are a few things I want to point out though as we move along.
“By definition, fixed-rate loans do not face payment resets, while adjustable rate
loans do. A small increase in a monthly mortgage payment – say from
$1,500 to $1,600 – is unpleasant, but is usually not enough to ruin a
family’s finances and force them to let go of their home.”
I honestly can’t think of a realistic way that the mortgage payments would jump from $1500 to $1600. To get mortgage payments in this range you are probably looking at a 280-320k loan. To get $100 separation between the payments, you are talking about a 50 basis point adjustment in rate. I guess it COULD happen, but rates are way more than 50 basis points higher in the past 2-3 years. Heck, even a 1 year ARM is going to have rates over 50 basis points. You are probably looking more along the lines of a 1-1.5% change. Most subprime loans have a 1.5% cap on each adjustment. The author goes on to discuss a ‘large increase’ in payment.
“A large increase – from $1,500 to $3,000 – may be too great for a household to handle.
Try as they may, a family facing that sort of increase could be forced into
default if they have no equity and are thus unable to sell or refinance.
It is important to note that a household facing a doubling of mortgage
payments will be in difficulty, whether that increase is applied in a single
month or in a series of incremental steps spread over two years.”
Mortgage payments doubling is going to hurt whether it takes place over 1 month, 6 months, or 24 months. This next part made me shake my head in disbelief:
“Additionally, an interest-only feature makes little difference, since the first few years of a
mortgage loan are almost entirely devoted to interest in any case; including
or omitting principal payments doesn’t change the monthly terms much
for the first few years of a mortgage.”
Are you kidding me??? If the interest only feature made little difference, then 82% of the purchase loans in California last year would not have been interest only or option-ARM mortgages. Sure, on an 60k loan, the I/O payment is not going to save much. But look at the numbers for a $550k ‘median’ priced California home. At 6% on a fixed rate, you are looking at a payment of $3,297.53. If you get an interest only (I/O) payment at 6%, the payment is $2750.00 a month. That is a monthly savings of $547.53. I don’t know about you, but I think 550 bucks a month makes a difference. Not to mention that the interest only loan would probably have a lower rate than a fixed rate loan to begin with. I know that you only pay about 1% of principal per year in the first few years of a 30yr fixed mortgage, so it only stands to reason that the larger the loan amount, the more that interest only is going to help. The author is correct about that point, but he is not applying it to the large loan amounts that are necessary and commonplace in the ‘bubble areas’.
“The primary driver of reset sensitivity
is the magnitude of the interest rate change. An initial interest rate of 5
percent that adjusts to a market rate of 6.3 percent will lead to higher
monthly payments, but the increase will not be catastrophic. On the other
hand, a loan with an initial interest rate of 1 percent that resets to a market
rate of 6.3 percent will experience a substantial increase in payments, all
the more so if negative amortization has increased the total principal
amount subject to interest. That type of loan will experience reset payment
sensitivity. An option-payment loan with a minimum payment below that
of a 1 percent loan will face even greater reset sensitivity.”
Nothing to argue with there, some pretty solid information. In the next part, you will see where this guy is using ‘old school’ ratios. I say ‘old school’ in the sense that it is not the standard I see most companies using. I think it is a good rule to abide by, but it is by no means the norm in high cost areas of this country.
“From Table 10, we see that an adjustable loan of $300,000 that resets from
5.0 percent to 6.5 percent has a monthly payment increase from $1,610 to
$1,896, a rise of $286, to about 18 percent higher than it was before. If the
borrowing household was devoting 30 percent of their income to mortgage
payment, the increase is 18 percent of 30 percent, or 5.4 percent of their
income. This level of strain upon family finances is definitely unpleasant, and
might require cutbacks in personal spending or other lifestyle adjustments.
But normally this level of pain would not be enough to force default. To
look at an example from another part of the economy, the late summer
and early fall of 2005 saw a dramatic increase in gasoline prices, in many
places to above $3.00 per gallon. This price rise led to changes of choice
and to lifestyle adjustments. The sales of large sport utility vehicles (SUVs)
declined. But the national economy did not enter into a tailspin. Yes, there
was pain; but life went on, and life still goes on.”
Is this guy funny or what!?!? First off, if you look at the statistics, very few people can get a $300k mortgage and only spend 30% of their income on the payment. Take the $1610 mortgage payment…remember this is just the mortgage, no taxes or insurance included. If you take that amount and divide by .30, you need a monthly income of $5,366.67 or $64,400 a year. Remember, I’m not adding in $350-400 for taxes and insurance that most companies would take into account for housing debt ratios. If I did, the required annual income would be $80k a year, not $64k. Yes, I know that many single people and couples can ‘afford’ this type of payment…but if you look at the median income in California, it falls at about 53k. The government stats have the nationwide median income at about $45k. My point is that many people qualifying for these 300k loans are spending more than 30% of their income. An 18% jump in payment IS going to hurt. Keep this in mind: I can do fulldoc (W2’s and paystubs) to a 55% debt to income ratio. The author is talking about 30% just on mortgage, I’m talking about total debt payments. That probably puts the DTI the author is targeting in the 30-35% range, not the 55% range that many subprime loans are being done at. Keep in mind, this doesn’t include the ’stated income’ deals that couldn’t even fall into the 55% DTI category. I think it is completely comical to take increases in fuel costs, and compare it to mortgages adjusting. For the most part, individuals have more control over fuel usage than mortgage costs. Individuals can change they car they drive, drive less, take public transportation, carpool, etc. I know some people are driving a lot, but it takes a lot of driving for the extra 70-80 cents a gallon of gas to break people financially (as compared to a mortgage adjusting).
“Perhaps surprisingly, reset adjustments to sub-prime loans may not be as serious as
one might think. An adjustment on a $300,000 loan from 8.0 percent to 9.0 percent
(linked to a national prime rate or other index rate) leads to an increase in payments
from $2,201 to $2,414, about 9.6 percent higher than before. If a family had been
paying 30 percent of their income in mortgage payments, this increase would be 30
percent times 9.6 percent = 2.88 percent of their monthly income. Even a family
with stretched finances paying 40 percent of their monthly income on their mortgage
would experience an increase of 40 percent times 9.6 percent = 3.84 percent of
their monthly income. Such an increase is less in percentage terms than the earlier
example of the reset of a near-market-level adjustable loan. While painful, this
increase would probably not lead to an immediate default. Furthermore, if the
situation worsened and a default did occur, many lenders would be protected from
loss exposure by having used more conservative loan-to-value-ratio guidelines.”
I really don’t think this guy has a handle on the subprime mortgage market. One of the BIG misconceptions is that subprime is all high rates. Sorry to inform you, but for a long time there, I had ’subprime’ rates in the 5’s with a few blocks in the 4’s. Not too long ago, I could to a stated 100% loan for a borrower with a 620 FICO, and the rates would have been in the 6’s on the 1st and 10’s on the 2nd. Yes, there were some areas where borrowers could get into the 8’s and 9’s, but you would REALLY have to try to get rates that high! With all of the competition, there were times when subprime rates were better than A-paper rates on certain programs! I won’t go into it again, but for subprime loans, the author is using debt ratios that are too low. I used to do lots of loans for “a-paper” borrowers on the subprime side BECAUSE subprime would take the higher debt to income ratios (DTI), and the rates were about the same. I don’t know where he got the idea that lenders were using ‘more conservative’ guidelines with subprime borrowers as far at DTI is concerned.
“With this in mind, consider what happens when a 1 percent payment schedule is
reset to a market level of 6 percent. It matters little whether payments are calculated
on an interest-only basis or not; and it matters little whether the reset happens all at
once or in a series of increments. It is the broad magnitude of the reset increase,
brought about by interest rate differentials, that is important. From Table 10, the
monthly payments reset from $965 to $1,799, or 86 percent higher than before. A
family paying 30 percent of their income on mortgage payments would experience
this as 30 percent times 86 percent = 25.8 percent of their total income, which is
likely to be an unendurable strain. They would have to devote 30 percent + 25.8
percent = 55.8 percent of their income to mortgage payments alone. If, in addition,
the household has no equity in their home and therefore cannot sell or refinance, a
default may loom in the future.”
No argument from me there. I don’t think most borrowers have a handle on the type of loan that they have. This article from Yahoo supports that fact. 52 percent of the homeowners said they didn’t know much about the mortgage options that were available when they bought their homes. Gotta love it when half the people are pretty clueless to what will probably amount to the 2nd largest expenditure of their life (house), with taxes being the first. That should really tell you something right there. Half the people don’t know much about their mortgage options when buying a home. Even the article admits this is a vague question, but it doesn’t really surprise me with what I have seen the past 2 years in the market. Lots of borrowers know the ‘payment’ and that is about it. That means that 1 of your next door neighbors is probably clueless to the surprise coming in the mail when their mortgage adjusts. (this paragraph had corrections made after an inaccuracy on my part was pointed out in the comments)
“The difficulty of payment reset can be worse than what I have described. If the
original loan was 30 years with an introductory period of 2 years, the mortgage
would reset into a 28-year schedule rather than one of 30 years, resulting in higher
payments. Moreover, this does not consider the impact of negative amortization. A
loan with a true rate of 5 percent and minimum or introductory payments at 1
percent will add the remaining 4 percent to the balance of the loan, increasing the
amount owed by 4 percent per year, or 8 percent in two years. Thus, the newly reset
payments will be 8 percent higher because of this increase in principal – and it will
be less likely, after this increase, that the property will still have equity to make a sale
or refinance possible.”
I’m glad that he covered the fact that when a 2 year interest only ARM adjusts, the loan is amortized over the next 28 years, not 30 like most people ‘think’. I did the math for this exact scenario in this post. Check it out and see some realistic examples of what happens when 2, 3, 5, 7, and 10 year ARMs adjust.
Well, I hope I was able to shed some light on ‘another’ viewpoint here. I think the author did a good job overall. I believe he is looking at things on a ‘national’ scale instead of a ‘bubble area’ scale. I don’t think there is much of a ‘nationwide’ housing bubble…but I definitely think there are several areas that have become so disconnected from the fundamentals, that a correction is inevitable. I also agree that the crazy lending practices are probably more commonplace in the skyrocketing areas than the ‘normal’ areas where real estate isn’t booming.
Have a great weekend everybody…and I look forward to the comments and feedback!!
SoCalMtgGuy
February 17th, 2006 04:54
The lowest margins I see are LIBOR plus 1.5%. I’m sure SoCalMtgGuy has the real blocks and spreads but from what I see of the white paper the numbers are only for the very best borrowers with the most conservative adjustable products.
2years at 1% neg-am and say LIBOR plus 2% resetting today would go to 7.095%. But it would also be on 111% of the initial loan and would be on a 28 year repayment schedule. $100k borrowed thus would go from $85 to$761. Of course you actually borrowed $500k; so expect to go from $425 to $3805. If like most you’ve accrued enough equity to re-fi a fixed 30 would still be $3,400, if you qualify otherwise. Let’s face it this can’t happen. The FB is going to look at $555k debt on a house he thinks is worth $650k and he’s going to try to cash out and go small. They are ALL going to try to cash out and go small. Watch for a crush at the exits.
I still want to know who is holding the last bag of paper. Is GE Capital able to pay off PMI defaults of this size? On the example above they collected less than $1500 in those 2 years. Typically $60-80 per 100k. And the default if it took 6 months to dispense would have them on the hook for $75,000 in lost interest. If they pay off on only 2% of their holdings they’re FIs (F@cked Insurers). Anybody even remotely believe that only 2% of those in the above situation are going to default? That’s also assuming that there’s enough equity in the house to cover all obligations of principal. Anybody even remotely believe that? Gawd, I’m scaring myself. I knew it was going to bad in general and very bad in patches but this is big. GE has a market cap of -only- $360b. The mortgage insurance loses could sink one of the largest companies in the world. Don’t even think about GMAC, mortgages and insurance.
Thanks for listening and have a nice decade.
February 17th, 2006 05:16
I’ll add a couple of points:
1. This level of strain upon family finances is definitely unpleasant, and might require cutbacks in personal spending or other lifestyle adjustments.
The point here is that even if people do not default, wind will be taken out of the consumer economy. I believe that NY & California were extra depressed in the early 1990s because the “winners” were those who sold at the top and left the region, spending the proceeds elsewhere, while the “losers” were first time local buyers who ended up living in house-poverty for a decade. I don’t think this was factored into his lost GDP calculation. Moreover, if the bubble was producing “extra” spending and the bust will produce “below-normal” spending, the difference between the two will be greater than the difference between normal spending and “unpleasant” cutbacks.
2. State level data shows that in inflated markets, those with mortgages are less likely to have less than 15% equity.
Maybe, but it is exactly these markets where prices are most likely to fall by 15% or more. And the price in real estate is set on the margin, so a substantial increase in false sales will have a disproportionate effect on price. Just as price exceeded real value (what everyone could sell their home at) in early 2005, it could be below real value (what everyone could buy at) in 2007.
February 17th, 2006 05:17
A friend’s ARM recently reset to 7.25%. Even though he is in a high-income category, he felt the pain so he refi’ed to a fixed just under 6. I wonder how long this escape route will be open?
February 17th, 2006 05:55
Yep, 7.25% is more typical of the very best ARMs. Most people believe the Fed has at lest 2 more rate hikes, Mar and May to 5% which should run ARMs later in the year to at least 8%. If your friends ARM was tied to the Fed overnight then it was Fed plus 2.75%. Two years ago he was paying 3.75% or $463 per $100k. 7.25% is $ 682. Nearly a 50% jump and it ain’t over.
February 17th, 2006 08:24
The bizzare rate environment, with an inverted yield curve, makes it even more insane that people are taking ARMs.
I remember just assuming as a 20-something in the early-1980s that I had better save up a big downpayment, because my interest rate would be at least 10%. I was stunned when I got a 7% APR 15-year in 1994. And yet, with rates far lower than that, people have been taking ARMs!
February 17th, 2006 09:42
I’m looking for the: “52% admit they don’t know what kind of mortgage they have” in the article to which you linked, but all I could find was this data point:
“52 percent of the homeowners said they didn’t know much about the mortgage options that were available when they bought their homes”
http://biz.yahoo.com/brn/060119/18127.html
The meaning is quite different among these two statements. It’s quite possible to know exactly what type of mortgage one has, while not knowing about all the full myriad of options out there.
For example, I’m personally only looking at 30-year fixed mortgages, so I don’t know very much thing about interest only, or adjustable interest rate mortgages.
February 17th, 2006 10:00
Every time I hear “You don’t pay any priciple in the first years of a 30 year fixed . . .” I cringe. It’s small, but it is something. That nothing might keep you from being underwater. People don’t understand that you don’t need a crash to be financially devasted when your money is leveraged. 200k loan, no down pmt, IO, 5% price decline, 5% selling costs, and get ready to bring a $20k check to the closing.
February 17th, 2006 10:17
This is clearly an author trying to keep “his finger in the dam”. “The dam” being all of the FBs rushing to sell at the hearing of recent data and media being released confirming bubble speculations to be true………
Great article for those in the know……
February 17th, 2006 10:21
FirstTimeBuyer…
You are correct. I will make that change. After re-reading the yahoo article, I agree with you. I thought I had another article that talked more about what I said.
I have a massive ‘favorites’ folder that has hundreds of links in it, so sometimes finding a specific article can be a pain.
Thanks!
SoCalMtgGuy
February 17th, 2006 10:31
Jason,
1% certainly is small, and you have to start somewhere! That 1% can be a decent amount of money when you are talking about 500k to 1.5 million dollar loans. That is why so many opt for the interest only payment. It can save 500-1000 bucks a month…nevermind that payments will jump that much more when the loan is amortized over a shorter period of time.
SoCalMtgGuy
February 17th, 2006 10:59
Bottom line: There are a lot of people out there w/ no money “buying homes”. Has the definition of buying changed? It seems to me it has. Buying in most cases is really takeing on a payment. Face it, it is very hard to save money.Most people don’t have any money in savings. They are living from paycheck to paycheck. Sure they can make a payment in good times but if the economy goes south they are in trouble. Everyone is acting as there will never be a slowdown. That is why we are in such a vulnerable position. Everything is assuming prices won’t go down and the good times will roll on. Most of us know that the economy does do great over long periods but the are bumps along the way. I am not worried about myself but the damage that other people can do to me!!!
February 17th, 2006 11:30
interest payments aren’t the only thing going up:
1) With appraisals rising, property tax has to go up too. (Not every state has Prop. 13 to protect the increases.)
2) I have yet to see a hazard insurance payments stay the same or go down (unless I get a higher deductable).
3) higher utility bills now compared to, say, 1 year ago [back when crude was $45 vs $60 today].
For get the ARM reset: these 3 alone can increase your monthly expenses by a significant amount! [Higher fuel will eventually mean higher food, clothing, etc. costs….]
February 17th, 2006 14:03
Don’t forget:
4) Workers in China and India will eventually agitate for higher wages. This will drive inflation in US consumer goods and services. And there is not a thing the Fed will be able to do to stop it.
February 17th, 2006 14:39
Jason,
Sorry dude, the principal you pay in the first 5 years of a 30 yr fixed mortgage is pretty much meaningless…
If housing corrects even slightly, it can bury your equity - trust me, I’ve been there. If housing corrects as we expect, people who bought 5 yrs ago (with 100% financing) might find themselves upside-down. Remember that we’ve built a few houses since then, so there’s gonna be more inventory.
Not that I’m advocating I/O loans!!! Just pointing out that you don’t build a lot of equity at the beginning of long amort schedules
Peace Bro. See ya after the shake-out!
February 17th, 2006 14:59
SoCalRenter, #13, that would increase the # of jobs in the US, no?
February 17th, 2006 17:40
“To
look at an example from another part of the economy, the late summer
and early fall of 2005 saw a dramatic increase in gasoline prices, in many
places to above $3.00 per gallon. This price rise led to changes of choice
and to lifestyle adjustments. The sales of large sport utility vehicles (SUVs)
declined. But the national economy did not enter into a tailspin. Yes, there
was pain; but life went on, and life still goes on.”
This comment is so typical of the perma-bull.
Households still had equity and refi potential to absorb this increase. In fact 150B was taken out and probably financed the 60B increase in energy costs!
The question should be how will American households fare when they can’t take out any more equity? I guess they’ll have to work… if companies don’t go on mass layoffs to keep peak earnings up.
February 17th, 2006 18:43
First people heard that ARMs were okay because real estate always goes up.
Now we’re hearing that resets on all of these no-down mortgages are going to be no problem.
Next we’re going to hear about how great Alpo tastes with a little salt and cayenne pepper.
February 17th, 2006 20:53
One other thing the authors left out was the geographical distribution of the risky loan types. Which market has more I/O loans outstanding, California or Tennessee?
The only time they look at geography is when they look at equity, which we all know depends on the market conditions.
February 18th, 2006 07:35
I don’t think geography matter in this case. I take that back, geography doesn’t matter as far as most places. These loans are packaged up and resold all over the world. And the exceptions? Places like Westlake/Calabasas home of Countrywide and B0 (ground zero for bubble disease). Orange County and San Digeo ar also epicenters with their overpaid bloated mortgage industry staffs.
February 18th, 2006 08:47
SoCalRenter said:
“Don’t forget:
4) Workers in China and India will eventually agitate for higher wages.”
This is already happening. Growing economies mean more demand for a Western middle-class lifestyle. Manufacturers are already looking for the next-cheaper place to go, but there is no next-cheaper place to go.
February 18th, 2006 12:39
Oh yeah there’s a cheaper place to go:
Africa baby. Hey, I’m going to start an emerging market bond fund for Africa:
Starting with Nigeria, Ivory Coast, Monrovia, Sudan. I feel there is some serious economic upside to Africa! It has been the lost continent far too long.
Bond interest rates at 15%. Anyone want in? It’s better than GM junk bonds at 9%.
Fewlesh. (And yes, I’m a bond broker for PIMCO, yeah right!)
February 18th, 2006 15:55
As far as hearing different contradicting reasons for buying. I was told several years ago by many people: you ALWAYS move, so you might as well buy with an ARM right now, buying is like putting money in the bank, housing only goes up. Better than throwing away money renting.
Now a couple of years later, the same people will say, you should buy because you know you’re going to keep your place for awhile, even if you move, you can rent out your old place and buy a new one. It’s like putting money in the bank, housing only goes up.
So the same people who bought with ARMS two-three years ago because they ALWAYS move, or now saying you NEVER move, and even if you do, you can rent out your old place.
Hmmm..mmm..good. Real Estate the most magic of all investments. It’s like owning stock that never goes down and you can sleep in it.
February 18th, 2006 21:25
This is changing the subject some, but in line with these macro remarks about India, China, etc. I doubt workers in those countries will be seeing wages increases anytime soon. Modern technology is fantastically productive compared to the old make-by-hand methods. I mean there are people in India who still make sandals by hand (no machine). Put these workers on an assembly line with a sewing machine and supply skyrockets. Unless the governments of the world unite to deficit spend like crazy, the whole world is staring deflation in the face when the American consumer stops spending.
I have no doubt that the US Congress will rise to the occasion and do its own fair share of the deficit spending. What I doubt is whether this will be enough to keep inflation above 2%. Given the Japanese and German experiences in the 1990’s, I suspect not. Which means we’re looking at a long period of low inflation, during which real interest rates on mortgages, whether fixed or adjustable, become a crushing burden. 5 or 6% interest sounds low, but if inflation is 1%, that 5 or 6% is absolutely crushing.
Everyone says the government will bail out the homeowners. I say the government will bail out the workers and the businesses (the productive parts of the economy) by deficit spending sufficiently to make up for the lost consumer demand. But my political radar no more sees a bailout for recent homebuyers than there was a bailout for day-traders when the stock bubble collapsed.
February 18th, 2006 22:03
I don’t think geography matter in this case.
I think geography matters in the sense that there are certain areas of the country that are more bubbly than others, and resets/defaults will affect those areas disproportionately. The authors are essentially averaging the negative impact of ARM adjustments across the entire country, when in fact the impact won’t be felt nearly as hard in a place like Tennessee compared to sunny CA.
Sure, Katrina wasn’t so bad for the nation’s economy as a whole, but ask those people in ‘Nawlins how it was…
February 19th, 2006 08:06
Wages in India could rise because many of the jobs sent there are information type jobs. (I’ve already donated two of mine.) There’s no Victorian-era industrialization techniques that can massively the boost the productivity of those jobs. What strikes me as odd is that the entire outsourcing game is dependant on about a dozen overseas fiber optic lines. A well-written logic bomb that shut down the switching equipment of every overseas cable could bankrupt every Fortune 500 company dependent on jobs overseas. That this hasn’t happened leads me to believe that there aren’t that many programmers or scientists that were displaced by outsourcing, who are unable to find work, and are sufficiently angry (or bored) to end outsourcing.
February 19th, 2006 10:57
I have a question for you bloggers.
I live in MD between Baltimore and Washington. I currently have an 850/mo mortgage payment with 145k equity. I found a graet place to rent for 1585/mo.
I can afford the higher monthly payment, but do you think it’s dumb to sell and cash out my equity?
February 19th, 2006 11:49
gowin, I’m no financial whiz by any means, but I have to say I wish I was in your shoes. Whether selling and renting would be wise for you kind of depends on whether you think you’re going to be moving in the next few years, and if so, do you stand to take a loss if you sell when the market corrects. It seems to me that if you plan to stay put in that area for the long haul, and you could afford rent payments that are nearly double what your mortgage payment is now, you’d be better off either saving that extra cash or paying down the principle on your mortgage.
February 19th, 2006 14:14
Gowin, first this is just guesses so if I screw up it is because you didn’t give enough info. You mtg payment isn’t what it costs to live in your own house. Mortgage minus tax break plus property taxes plus insurance plus upkeep, etc. I -guess- your $850/mo home is actually running $1100-$1200 right? Cashing out would net you $130k that could throw off $700/mo in income after taxes. So you are looking at $1150 with a risk/reward of equity versus $885 ($1585-$700) with risk/reward of de/inflation. Seems pretty obvious to me.
February 19th, 2006 15:00
Wages in India could rise because many of the jobs sent there are information type jobs. (I’ve already donated two of mine.)
Consider the system as a whole. American information worker was earning $70K, but loses his job to an Indian worker and so has to take another job paying only $40K. Indian worker was making $5K doing menial work, but gets a big raise to $25K when he gets the job formerly performed by the American. Let’s ignore taxes and savings and assume all the earnings translates straight to demand. So before, there as $70K + 5K = $75K of income and thus overall worldwide demand, but after there is just $40K + $25K = $65K of income and thus demand. Obviously, I just pulled these numbers out of the air, but they illustrate the point I’m trying to make. Globalization is very deflationary. I’m not predicting true deflation, since I’m confident the government will deficit spend enough to prevent his, but low inflation is quite likely.
February 19th, 2006 15:03
Robert
Thanks for the feedback.
In places like Cal, Phoenix, and NYC, renter is cheaper than buying. However i’m in a different situation where i’m actually stepping up in payment to cash out my equity.
I see you calculated a 700/mo dividend off of the 130k. What type of investment were you considering? At best i’m thinking 4.5-5% in some sort of money market/cd investment.
This housing market is way out of control and the sheeple are doing dumb things. A massive transfer of wealth is underway………..
February 19th, 2006 16:14
I calculated you stepping up from $1150 to $1585 and receiving 6.5% from equity as a mix typical of a long term balanced conservative portfolio.
As to location, make no mistake you are -worse- than the bzero places you mention. I wouldn’t touch an OPAC (Obsolete Pre Automotive City) if you paid me.
The real decision revolves around appreciation and inflation. Personally I am betting, my real money, on a LOT of (housing) depreciation and some inflation.
February 20th, 2006 06:37
Remember when Alan Greenspan was advocating people getting out of those silly fixed rate loans to go ARM in 2004. He’s the guy who set them up. When he said it, all I could think of was who is this guy kidding? But there are your FB’s loans resetting in 2006 and 2007 partly because of his bad advice and policies. Is he that much of a moron or is it something more malicious. I seem to remember reading some analysis speculating that the economy needed a little more of a push at the time because refi’s had slowed down and spending was lower than expected.
http://www.suntimes.com/output/savage/cst-fin-terry045.html
http://biz.yahoo.com/pfg/e03greenspan/
February 20th, 2006 07:45
SoCalRenter
February 17th, 2006 14:03 13Don’t forget:
4) Workers in China and India will eventually agitate for higher wages. This will drive inflation in US consumer goods and services. And there is not a thing the Fed will be able to do to stop it. I think as we go into recession China will become even more price sensitive and lower prices to drive out competition.
February 20th, 2006 08:34
SoCal,
FYI,the NYT RE blog “The Walk Thru” is again lifting from the bubble blogs. This time on the report you highlight in this thread and the previous. Can’t they at least reference the blogs they steal their ideas from? Shameless! It would not hurt if they were even a little critical of what they read like they are of these bubble blogs.
February 20th, 2006 10:57
“SoCalRenter said:
“Don’t forget:
4) Workers in China and India will eventually agitate for higher wages.”
This is already happening. Growing economies mean more demand for a Western middle-class lifestyle. Manufacturers are already looking for the next-cheaper place to go, but there is no next-cheaper place to go.”
They don’t even need to demand higher wages. If the dollar depreciates, that has the same effect. It would probably encourage more manufacturing in the US, and help the export economy. the problem is for China, as who will buy all their crap….
February 20th, 2006 12:26
SoCal, I was wondering how often you see larger deals (over $1.5MM) and what form they take.
Are these high dollar borrowers using option-ARMs? I heard there some sort of ceiling at $1.5MM that makes a mortgage harder to fund. Do you know anything about this?
February 20th, 2006 12:33
Most of the ’subprime’ deals that I see are max 1 million. I have friends that have pushed some 1.1 and 1.2 million dollar deals through on exception. The LTV’s were less than 65%, so that is why the exceptions were made.
Over 1.5mm, you are looking at more alt-a and a-paper. Some of these deals will be done for people with ‘bad credit’ but only if the LTV is low and it is a good risk for the lender.
I know that some companies will do multi-million dollar option arms…but I don’t know any of the specifics. Those were deals you heard about in the offices, but nothing I worked on first hand.
SoCalMtgGuy
February 20th, 2006 13:41
Manufacturers are already looking for the next-cheaper place to go, but there is no next-cheaper place to go.
How about Indonesia & the Phillipines? I’m no expert in those areas, but it’s my understanding that despite some areas that are more third-world in stature and have a militant, Islamic prevelence, there are modernized, safe areas where businesses could setup shop.
Also how about South east Asia, such as Vietnam? Finally, places like Pakistan and Afghanistan might become better options as time roles on and those places become less risky spots to invest.
February 21st, 2006 07:01
A Stupid question for whoever feels qualified to put forth a response
1). Greenspan tells folks to go Variable Rate.
2). The yield curve recently goes inverted.
3). The 30 yr bond recently comes back
4). The I/O loans are resetting in greater numbers to a high rate, which was known a couple of years ago.
Question: Is this a deliberate set up for another refinancing boom to benefit the banking system or is this issue mute because of other factors brought up in earlier posts?
December 30th, 2006 10:29
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