Rate cut WILL NOT save the housing bubble
I don’t have time for a long post right now, but I wanted to get my quick thoughts on the 50 basis point rate cut.
Sadly, this will only make things worse in the long run. Unless the median income reaches into the 6-figure range over the next 1-3 quarters, this 50bp rate cut isn’t going to save the housing market.
It will be nice for some businesses and aspects of Wall Street, but remember that lots of people got their ’sweet’ interest-only loans and ARM’s when the Fed Funds rate was at 1%. If they couldn’t afford a fixed rate loan when the fed rates were over 4 points lower, how can they afford it now? I know that mortgage rate are not completely tied to this number, but you get the point.
It is really simple: there is a huge disconnect between income and property values thanks to creative financing and little to no risk assessment.
Sadly, this goes WAY deeper than subprime. We have not even had the option-arm loans start to do their recasting and we have not had the worst crop of loans that were made in 2006 come to light yet. Just wait until all the crappy loans that were made to ‘keep things going’ in 2006 start to default. A lot of these loans are Alt-a and even A-paper. Just because you are an ‘A-paper’ borrower, doesn’t mean you have the INCOME to afford your loan. (especially when it adjusts!)
Let’s not forget that a lot of properties in the major ‘bubble areas’ have already had their gains from the past 2-3 years erased. I know people that bought 3.5 years ago that are ‘upside down’. Sadly, I also have a lot of friends with 700+ credit and good jobs. They can afford their 5yr I/O loans now, and for the next 2-3 years, but if property doesn’t appreciate, they will be hurting. Their payments will jump, and they are already upside down, just hoping things will turn around in the next 3 years. Unfortunately, I think they are mistaken and will only be further in a bind as they owe a lot on a house that is worth much less than their mortgage. What is the market going to do when all these ‘A-paper’ borrowers making 80-100k start getting behind on their payments??
The pundits and analysts can bat this thing around for the next few months and tell you that it is ’subprime’ and that is has ‘worked it way out’, but there are a good 2-3 more waves coming. There will be blood in the streets by 2009 as we enter a recession that was completely our own doing.
‘We’ threw out risk assessment and gave anybody with a pulse (and a lack of integrity as lying about income was a necessary part of ‘qualifying’ for many of these ’stated’ loans) a loan for whatever they wanted. It was easier to get a 500k mortgage than a line of credit at Circuit City.
Like I have said before. I know what is behind the data that all these ‘analysts’ are reading. I know what is really in the mortgage paperwork, no matter how Moody’s or anybody else ‘rated’ it. This thing gets worse for at least 2 more years before it gets better.
Stay Tuned…
SoCalMtgGuy
September 18th, 2007 13:28
It is scary indeed, SoCal. I am planning to temporary live abroad starting 2009
. But then again, I am wondering if I can ever avoid getting a share of the incoming whiplash.
September 18th, 2007 13:41
SC,
I always enjoy your posts and wish you would/could post more.
Do you know what 30 yr mortgage rates are tied to?
Thanks.
Pen
September 18th, 2007 14:19
SC,
Great post as usual! What would your suggestion be for a young family. We have over 100k in stocks and are currently renting; paying about 2g’s a month. Income is around 85 w/ a score of 720. Would love to buy in south oc. Saw a house in AV 2200sqft for 600,000. Do you really thing it will come down more?
September 18th, 2007 15:08
Very interesting post!!! Listening to the media would make you think that all the problems are over and it’s time to party after the rate cut. Like you said, home prices are still way out of whack with incomes and that can only be fixed by price reductions.
September 18th, 2007 15:52
Belladad,
Yes OC prices will get worse. One tip is to improve your good credit score, make it GREAT. buy a $10 book to figure some tips, or talk to a mortgage broker (for tips only)
PENN,
The 30 year mortgage is most closely tied to the 10 year treasury
September 18th, 2007 15:55
SC, I’d sell any of your stocks that are consumer-related in any way at all. Just go with cash at a nice interest rate (> 5%), etrade bank for example.
Personally I think real estate’s going down more.
September 18th, 2007 16:19
The rally on wall street today shows how desperate people are.
Real estate is going to tank in certain areas as the fraud and lies are exposed. OJ better be ready for lots of new friends in the pokey.
September 18th, 2007 16:37
Belladad,
Median home price in the OC was about $219,000 back in 2000/2001…in 2005/2006 it was about $640,000 depending on whose numbers and what month they presented the stat.
Point being…did incomes double or triple in those 5-6 years? Did SoCal just get sunny? Did ‘THE OC’ tv show put orange county on the map?
OR did creative financing and ‘low to no’ risk assessment combined with historically low rates make it happen???
Your rent for $2000 a month looks like a bargain compared to the ‘real’ mortgage on a 600k home. Not to mention the $500-600 a month that would have to go towards property taxes.
It is going to get uglier in 2008 and 2009….
Stay tuned…
SoCalMtgGuy
September 18th, 2007 17:33
Pen,
Many people think that mortgage rates are tied to the 10-year treasury, but they are actually tied to the bond market. Sure, sometimes they ‘track’ together, but it is how the bonds are trading that really determines mortgage rates.
SoCalMtgGuy
September 18th, 2007 17:46
Diarrhea is the only word that comes to mind about this situation.
September 18th, 2007 18:12
SoCalMtgGuy
Perhaps you care to comment on this:
“House Approves Plan to Help Struggling Homeowners Avoid Foreclosure
WASHINGTON (AP) — The House on Tuesday approved a plan to expand federal backing of mortgages in hopes of helping struggling homeowners avoid foreclosure. [..snip..]
The bill passed the House 348-72. It would allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to back refinanced loans for tens of thousands of borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial “teaser” levels.
…the legislation could enable more than 200,000 homeowners whose loans are excluded from federal backing to come under the agency’s umbrella.
…the administration remains concerned about specific provisions — notably much higher limits in the bill for mortgages that could be insured by the agency, as much as $729,750 in high-cost areas compared with the current $362,000. However, Montgomery added, “I feel optimistic we’ll work out these differences” as the legislation moves through”
~ http://biz.yahoo.com/ap/070918/congress_mortgages.html?.v=12
$729,750?? Like I pointed out in an earlier topic here, IMO this action would ONLY serve to bail out (and reward) the lenders. Taxpayers money, will be transfered to the most wealthy companies and individuals…under the guise of helping out the poor slob who got duped by these same “predatory” lenders. The borrower will be a slave to their [lenders] property, paying whatever they can scrape up. With that “top limit”, this will probably be applied to the more affluent borrowers anyway. The SubPrime/Alt-A/and Prime Investment houses will just buy bigger yachts and corporate jets.
What a racket.
September 18th, 2007 18:55
SoCal,
Great post, as always. Wish you’d post more.
You hit the nail on the head that it’s about INCOME - people in OC earning 80K simply can’t afford 700K homes, without resorting to lying, “creative finance”, or suicide mortgages. Because income is the problem, there is no solution (government or otherwise) - it’s simply an impossible solution. The only workout that comes to mind is what we’ve been doing for 200 years when people owe more than their assets and they can’t pay their debts - the old name for this is bankruptcy.
I was also amazed to read the previous poster’s (Dogma’s) story on the FHA bill. I had thought (and I may be wrong) that the FHA was designed to help folks with low to moderate income. What in the world are we doing putting low or moderate income people into 700+K houses. Someone should have their head examined.
September 18th, 2007 19:40
I think today’s .50 cut was BB doing a big CYA. When housing still tanks, for all the reasons outlined in tonight’s post, he can say The Fed did what they could.
If the secondary market is dead, and investors don’t want our mortgage junk anymore, then the game really is over.
And I don’t believe for 2 seconds that a lot of these FB’s will want a bailout…who wants to make decades of mortgage payments on a house that may never again be worth what you paid for it?? When they see new buyers down the street getting in for a $100K, $200K less than they did?
Today was a band-aid on a slit wrist. Nothing more.
September 19th, 2007 00:15
once again you are spot on with no spin on what’s happening. I’ve seen a lot of information in the last 12 hours on the rate cut and on a variety of issues over the last year as I’ve been reading housing blogs to keep up on the reality of what’s happening. Yours cuts quickly to the truth and gets rid of the emotional aspect on both sides and points to the simple truth that if you make $50k a year you simply can’t afford a $500k place. I don’t know how people have gone so far from the “buy a place that you can afford that isn’t more than an absolute maximum of 5x what you make in a year.”
“….lots of people got their ’sweet’ interest-only loans and ARM’s when the Fed Funds rate was at 1%. If they couldn’t afford a fixed rate loan when the fed rates were over 4 points lower, how can they afford it now?”
and
“It is really simple: there is a huge disconnect between income and property values thanks to creative financing and little to no risk assessment.”
both of those comments as well as your posting should be on all the major finance sites instead of the spin and endless optimism that is out of whack with fundamentals
September 19th, 2007 17:00
There is alot working behind the scenes to work through this mess. The drop in the dollar is one mechanism, since most of these instruments are denominated in dollars. Other things, such as the Level 3 accounting rules, are allowing the financial companies to weather through this storm. The Fed cut should prove beyond a doubt that the institutions are in place to negate the effects of this storm. Spend a decade behind trading desks and it becomes very apparent.
September 19th, 2007 20:09
hey oscar,
for a guy who runs a website on money, you’re sure pretty naive and ignorant. (and i’m being nice.)
September 20th, 2007 13:09
Neophyte question:
I understand that when it comes to the affordability of primary residences, homes prices that strayed above the historic 3 to 5 times annual income will eventually return to those levels. However, when it comes to investment-type properties, which is really the intent of owning any property not a primary residence, where is their bottom? There are only two reasons for investing in real estate, in my mind (not counting the need for a write-off), appreciation and income (or a combination). If neither has the prospect of return that the Dow has in either the long or short term, and if in fact high prices and overstock have killed investing in the residential real estate market, from where will investors come? I mean, even if such properties fall in price to a “more realistic level” it won’t mean beans for investors if the property still has no discernable potential for a generous appreciation. I guess prices fall to the level that one can buy to rent out. Will the cheapening dollar bring foreign investment to sop up the coastal condo glut?
September 20th, 2007 18:50
Another good summary by SoCal. In my area of Coastal South LA County (South Bay to Long Beach), prices peaked in about 2ndQ 2006. Prices are down about 10% since then. But sales are slow and there is continued downward pressure on prices. My opinion (30 years in home loan business) is that prices got about 40% too high based on standard qualifying, based on incomes. That means prices should drop another 30%. They may do this or more.
From my experience in the early 90s bear market, we are far from the bottom. There is still too much interest in investing and speculating. People are looking for deals. The pain is not high enough yet. There has to be total disgust for anything having to do with RE, which we saw in 1994-5.
Subprime, 100% financing, and most stated-income lending is done, and will be for many years. The investors of mortgage backed securities have lost billions and will lose billions more. When are they ever going to buy this junk again? Another good reason why most major lenders of this stuff are out of business: Who will buy a mortgage bond with loans from them in the future. I think this will hurt the future prospects of “the big one.” What investor will buy bonds with mortgages from this biggest offender who is adding hundreds of foreclosed houses per week? That is why they are a big proponent of increasing loan limits. They can then sell their loans to FNMA and FHLMC. Increasing loan limits will permanently keep areas like California unaffordable. Hawaii has 50% higher limits and their home prices are proportionately higher.
(I work for a bank that never did 100%, subprime, option ARMS and was conservative with stated-income, and keep our loans.)
September 21st, 2007 06:45
I have quite a few buddies that formed partnerships and bought houses in florida hoping to flip them, now they are sucking wind with huge mortgage payments on top of the insurance, utility, and maintenence fees. They are hoping they can sell for profit in two to three years but I think they are in for a big surprise. Most of these guys are in the real estate business in one way or another and have made a killing the past couple of years, hence they as of now can afford to make their interest only payments, however, it is just a matter of time before one member of the partnership stops pulling his weight(ie payment) and then the whole deal gets f***ked. With the stock market you have all of your money invested so once the market tanks you lose everything at once whereas with real estate loans and leverage it takes much longer to play out, a slow death of mortgage and maintenance payments hoping for the miracle and then the capitulation and the jingle mail starts, should be an interesting couple of years.
September 23rd, 2007 15:43
Hi SCalmtgeguy,
Thanks for the feedback on 30yr mtge following the 10yr/bond market.
Pen
September 25th, 2007 12:04
Thanks for the excellent post sensible lender and So Cal.
I am surprised that we are seeing any sales still at prices I still consider high. 10% drops is chump change. What are these fool buyers thinking?
September 25th, 2007 12:05
Can anyone give any tips on bidding on reo properties?
tia
October 10th, 2007 15:14
I am just your “unaverage” American who purchase a home with 20% down and I used my real income to justify my 30 year fixed conventional loan.
I think a lot of this spending frenzy is simply a byproduct of wealth transfer. Inheritance is playing a huge role in all of this.
Cheap and easy financing was just the icing on the cake.
October 13th, 2007 21:07
Wait till the entertaiment industry is shut down by a lengthy strike, as now appears likely. That will be like the earthquake in 94 and will tip the SoCal housing market onto its ass!
October 13th, 2007 21:07
Wait till the entertaiment industry is shut down by a lengthy strike, as now appears likely. That will be like the earthquake in 94 and will tip the SoCal housing market onto its ass!
October 13th, 2007 21:07
Wait till the entertaiment industry is shut down by a lengthy strike, as now appears likely. That will be like the earthquake in 94 and will tip the SoCal housing market onto its ass!
October 15th, 2007 19:17
Now is the time to buy yoiur dream home at an affordable price. It is unfortunate that the market has forced many to sell their homes at below market prices, but that presents a great opportunity for many of us looking to buy a home.
A friend of mine just turned me onto a website that has homes that are being sold undermarket value and even in pre-foreclosure and foreclosure. The site is 321gone.com. Its kinda like ebay with a countdown clock.
Good luck to all those weathering the storm and happy hunting to those lucky homebuyers.
October 25th, 2007 18:49
Email from Peter Schiff
Dear Investor,
Today Merrill Lynch announced a massive 8 billion dollar loss, and S&P downgraded their debt. This is just the beginning, as trillions of dollars that Wall Street loaned to American homeowners will never be repaid.
Watch this video clip from Fox News “Cavuto on Business” that originally aired Aug 17, 2007. The exchange is amazing in view of what has just happened. See how I tried to explain to a panel of delusional “experts” why earnings in the financial sector were about to turn into losses. Ben Stein even recommended Merrill Lynch as his favorite stock and lost his cool as I tried to enlighten him and Fox viewers regarding what was about to happen. You just have to see the exchange for yourself to believe it!
http://www.youtube.com/watch?v=6XtQoZAqjc8
On a similar line, this video (originally aired on Dec 29, 2006) of a similar exchange I had on Fox “Bulls & Bears” regarding the impending collapse in the housing/mortgage market must also be seen to be believed.
http://www.youtube.com/watch?v=yoZV5jt9puc
It is important that the public understand just how bad the advice main stream “experts” are peddling. Please forward this email, or the YouTube links to as many people in your contact list as possible and ask them to forward the email to their contacts as well, and so on.
Let’s get the word out and hold these clowns accountable for their lousy forecasts.
Sincerely,
Peter Schiff
President and Chief Global Strategist
Euro Pacific Capital
October 25th, 2007 20:56
Reports Suggest Broader Losses From Mortgages
“Every time economists and Wall Street executives think they have acknowledged the full extent of the losses from the meltdown in real estate mortgages, more bad news turns up.”
http://tinyurl.com/26y8z6
Buffett says mortgage ills might linger at least 2 more years
http://tinyurl.com/22xoyc
October 25th, 2007 22:14
SoCalMtgGuy:
Help! It’s been almost six weeks! Stock market pulled back in July when America first learned the term “sub-prime” but it roared right back and made new record highs. That means the entire “mortgae meltdown” so far has cost nothing! How can this credit crisis be absorbed for a few weeks by the markets and then be determined to have no real economic cost at all?
What do you think we are looking at here? Are we going to lose a major bank like Wells Fargo or Citibank? Are the SIV’s and commercial paper heading for the tank and breaking the buck on their way down? Only one person in the entire blogosphere and MSM has been dead on so far and that is you.
I am still renting on the westside of L.A. where things are still (gulp!) going up. They definitely take longer to sell but they are not dropping, even though everywhere else in the city already is, especially the Valley.
Please weigh in with even a short post if you have the time, just to let us know what you think might be in store. Because Wall Street keeps acting like the Fed will simply cut in response to any credit crunch signals, and that everything will thus be fine.
November 1st, 2007 12:58
It’s time to pay the piper. Lenders are going to have to bite the bullet.
On my website this month I have an angry real estate agent that says just that. He specializes in Short Sales and he’s busy as ever. Short Sales and forgiving debt are the only way out of this mess.
www.AnonRecordings.com
November 2nd, 2007 19:50
>Let’s get the word out and hold these clowns accountable for their lousy forecasts.
>Sincerely,
>Peter Schiff
Nobody in the media will held accountable. They have no legal responsibility, and the half-life of public memory has been shrinking fast.
November 2nd, 2007 19:53
Julie Taylor on October 15th, 2007:
>Now is the time to buy yoiur dream home at an affordable price.
Surely, you’re joking, Ms Taylor, or you’re out of your mind.
>It is unfortunate that the market has forced many to sell their homes at below market prices,
When they sell and buyers buy, THAT price is the new market price.
November 4th, 2007 18:50
SoCalMtgGuy,
How now Citibank? Will alt-A and A have just as much losses in store?
November 6th, 2007 10:16
>Let’s get the word out and hold these clowns accountable for their lousy forecasts.
>Sincerely,
>Peter Schiff
>Nobody in the media will held accountable. They have no >legal responsibility, and the half-life of public memory has >been shrinking fast.
Sad, but true.
SoCalMtgGuy,
We need a fix man. Gold is going crazy. Citibank is going down (did I cause this by taking all my money out??). Throw us a fricking bone
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February 2nd, 2008 21:38
Gains have been unrealistic. Prices are now coing to a point where the middle class is not being shut out of the market. Florida has taken measures to try to revive the real estate market and I see a rebound in the months to come as demand outstrips supply.
With the voters approving the new tax relief amendment, there will be an increase in the home sales market and a rise in prices. The increase in the homestead exemption and homeowners being able to take their tax base with them will spur the resale market. This will save them hundreds of dollars monthly. With low interest rates, lower property taxes, the tax portability afforded by the new law and lower prices, there has never been a better time to buy.
http://www.southfloridarentals-homesales.com/
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