Uhh-Ohh… Looks like the ‘wealthy’ people got a little carried away too. I told you this was coming!
Wow, what interesting times we are in right now! American’s largest lender Countrywide was teetering on the brink of bankruptcy. American Express has to write off a measly 480 million that borrowers didn’t/couldn’t pay. Citibank and Merrill Lynch are having some pretty large write downs. I mean, what is a few Billion here and there. What I find EXTREMELY interesting is this sentence regarding the Merrill Lynch situation:
“The loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989, sending Merrill down 10 percent in New York trading, the biggest decline since the 2001 terrorist attacks.”
Wait, the analysts were off? Never, no way, I don’t believe it. How could the all powerful analysts that completely underestimated the stock bubble miss this one too? How could all the MBA’s and Wall Street ‘geniuses’ screw this up to the tune of tens of billions of dollars? Maybe because they have a vested interest in keeping things going as long as possible. Either way, it doesn’t matter. Just take everything that the analysts, or any other person with a vested interest says with a grain of salt. Speaking of, how is Gary ‘In the Bag’ Watts doing right now? Haven’t heard much from him or Leslie Appleton Young lately. I guess 15% appreciation is NOT ‘in the bag’ this year. But what do I know…
What has been interesting up until this point is that ALL of the mortgage mess has been the fault of the ’subprime’ borrower. Now I know better, but you would think it was just the people with poor credit ruining the economy and the mortgage backed securities market for everybody. Then the news hits today “Wealthy may be next in line in home crisis”. Oh really? But I thought if you had a 700+ FICO score then you could easily afford the payment on a 1.2 million dollar mortgage?!?!? So credit score does not necessarily equate to income? Who knew?
That said, even if you could get a 100% 1.2 million dollar fixed loan at 6.5% your payment would be $7584.81 per month, PLUS taxes and insurance. I don’t know Chicago property taxes, but in California, that would be an extra $1200 a month. With insurance you are probably close to a total payment of $9000 a month. Even at a 50% debt ratio with NO other debt, you would need an income of 18k per month. To use the ‘old’ debt ratios of about 35% of your income to a mortgage, you would need to make $25k a month. I am not as familiar with the Chicago area, so I will apply this to California. A million bucks doesn’t buy much more than a tract home in many parts of California. The fact that you would need an annual income of 200k-300k for 30 years to truly ‘afford’ those houses is out of whack to what REAL incomes are.
The problem is that for the past few years, you could get 1-1.5 million dollar loans with NO money down, and very little documentation. The ‘creative’ financing with option-ARMs could make that $7000-8000 mortgage payment less than $3000. So THAT is how the ‘value’ of many of these properties reached those levels. Lets not even get into all the people that were living WAY beyond their means by living off their house of ATM.
Things in San Diego are definitely down. I was talking to a friend that used to work the VIP bottle service at one of the ‘high end’ downtown hotspots. She said things were ‘dead’ and that the amount of people that used to come in for $400 and up bottle service ($1000-3000 per VIP booth) has completely dropped off. That doesn’t mean a whole lot as it is just some anecdotal evidence, but I know for a fact that a lot of money that was being thrown around was from mortgage brokers and real estate agents. Now that those 10-30k monthly paychecks are not rolling in, it is hard to justify dropping $500+ bucks on a night of drinking at the club.
Lets get back to the ‘wealthy’ people. You probably saw that the $3 billion dollar Cosmopolitan property in Las Vegas is probably going into foreclosure. I’m not sure, but I would bet that foreclosing on a $760 million dollar loan can hurt even the wealthiest of people. Who knows the details, but I believe that many ‘wealthy’ people made similar mistakes as ‘typical’ homeowners did, they just did it on a larger scale with a few more zeros.
I spoke with some people on Wall Street and at the higher levels of some financial companies. The outlook is not good. The dollar is dropping in value and the talk is that the big R is coming. NO, not recovery, but RECESSION. A contact of mine in capital markets said that the loans made in 2006 are performing HORRIBLY, with some delinquency rates hitting as high as 24%! And those loans won’t reset until the 2009-2011 time frame. The reason these loans are sooooo bad is because these were the loans made to people when the companies were doing ‘anything’ to drive volume. They got their volume, but the quality is terrible.
The downward price pressure is going to make things even worse. Just wait until late 2008 and 2009 when all the alt-a and A-paper 5-year ARMs from the boom times of 2003 and 2004 start to reset in the face of down property values. It is NOT going to be pretty, and this thing is going to be ugly for at least the next 5-10 years as this whole mess gets worked out. You cannot hand out 500k-1million dollar loans to people with such little risk assessment and expect things to end well. Even the people that can afford to ‘wait it out’ will have to do so for years. It is going to take a long time for incomes to reach a level that makes these recent home values attainable. If we go back to debt-to-income ratios at 40% or under, that will further put pressure on the markets as it will remove lots of ‘potential’ borrowers from the market. It needs to happen. It doesn’t make sense that people should have to spend 50-55% of their gross income on housing.
I know this post was a little scattered, but I hope it covers some of what has been going on. I have been following things, but I have been working hard on building the new business and doing quite a bit of traveling which has been nice.
Thanks again for reading my blog!
Stay tuned…
SoCalMtgGuy
January 18th, 2008 05:32
Many of those “wealthy” people buying those expensive houses weren’t wealthy to begin with.
January 18th, 2008 07:59
Lou,
You and I know that. After seeing thousands and thousands of credit reports, you can see all the $1500+ car payments and people living a lifestyle which they cannot ‘truly’ afford in the long run.
Stay tuned…
SoCalMtgGuy
January 18th, 2008 08:44
Wouldn’t the new bosses at Citi/Merrill/etc. tell their numbers people to use the most pessimistic assumptions possible and take the BIGGEST possible losses on their portfolios NOW?
That way they can blame the big losses on Chuck Prince/Stan O’Neill/the old boss? Then the new boss is more likely to get the benefit of some upside surprises in the future.
January 18th, 2008 09:24
What’s this $400-$3000 bottle service you talk about? I recall it being mentioned in the blog entry about the rise of the MTV Cribs/Pimp My Ride mentality. Do these places serve ultra-expensive wine for A-list celebrities? Or are people trying to get an army of sumo wrestlers drunk?
I have never spent $400-$3000 for a night on the town even once in my life, much less on a regular basis. Then again, my idea of a status symbol is Berkshire Hathaway Class A stock.
January 18th, 2008 10:08
Larry,
They are not going to take huge losses because they are required to maintain certain financial ratios to stay in business. Otherwise, the regulators declare them insolvent and shut them down.
The $1 Trillion elephant in the room is that the banks are all already insolvent. I’m talking all the big names too. They want to postpone those writedowns as long as possible with the hope that they can raise enough capital from somewhere to cover their required financial ratios. This is why you see Citi and JPMorganChase essentially giving away their companies to Chinese and Arab interests.
It isn’t about who to blame. That’s easy. It is about trying to keep the entire system from falling apart.
January 18th, 2008 12:29
The other wild card in this scenario is the recession itself. With recessions come job losses. So even those families that were a little more fiscally responsible and didn’t over-extend themselves to eggregious levels (or extracted equity) are going to feel the pinch. As job losses mount, that will be one more weight pushing housing prices down further.
I have to agree that we are not even remotely close to levelling off at this stage. 5 years down the road if we are lucky, some normalcy will begin to hopefully creep in. But in the interim, I am a VERY happy renter.
January 18th, 2008 12:39
For months I have been thinking - ‘when are people going to wake up?’ Now I am wondering - ‘what happens if and when they do?’.
Report from the field:
My Dad, (wealthy person), pulled me aside last weekend and says: ‘I just don’t know whats going on with the economy… I am selling my other property no matter what it takes - I will drop the price daily until someone buys it. I am converting much of my assets into gold, and your step-mom and I are getting carry permits.’
Dad has been consistantly the most optimistic person in my family as it relates to economics, investments and the US economy.
Should be quite an interesting 08.
January 18th, 2008 13:17
AAoII,
Bottle service has been popular in major cities for years. Started in Vegas, NYC, etc. but is now ‘everywhere’ You get a ‘vip’ table with a bottle of alcohol (usually high end vodka, rum, gin, etc.) and various mixers. You get a set hostess to take care of you for the night. There is usually a 2 bottle minimum at many places with prices starting at a low of about $250 for a bottle of Absolut vodka and 350-400 for a bottle of Grey Goose or other ‘top shelf’ liquor. Usually there are plenty of people there (6-8) to split things up…but you can see how a night can easily get expensive.
Either way, my point is that bottle service is not a necessity, and now that the ‘easy money’ isn’t flowing anymore, either is the amount of people taking advantage. Things were so crazy for a while, that people would ‘bid’ to get tables at the hot spots. The same thing in vegas with renting ‘cabanas’ by the pool for hundreds if not thousands of dollars a day. That also reminds me of the condos in miami that were trying to ’sell’ cabanas by the pool for visitors.
I would also like to echo the earlier statement about ‘being glad they are a renter’. I can’t tell you how many ‘upside down’ people I know right now. Yeah, then can still afford their payments, but it starting to affect their life choices.
Stay tuned!
SoCalMtgGuy
January 21st, 2008 18:20
Hi SoCal
Glad to hear from you. I’ll pop a bottle of Ripple tonight in you honor. Keep posting.
Jim
January 22nd, 2008 04:01
But but but the losses were…unknowable. I have a CFA designation and an IVY MBA. If I didn’t see it coming that nobody did. I’m a FINANCIAL GENIUS after all. Did I mention I have a CFA?
January 24th, 2008 11:08
So Cal Mortgage Guy….what to you think of the GSE limit being raised to $620K? I know the MSM will cheerlead this, but I see this as shrinking the buyer pool even more. Now you actually have to qualify under GSE standards for everything up to $620K. I’m guessing no bank will touch a non-conforming loan up to this amount.
Won’t this cause an acceleration in price declines, versus “propping up” home prices?
January 24th, 2008 13:45
Lisa,
They should just leave this to the free-market. If they keep the same standards for loans up to 620k, I don’t see it helping too many people. A 620k loan at 6% means the mortgage payment is $3717.21 fixes for 30 years. Throw in taxes, insurance, and HOA is there is any, and you are looking at 4400-5000 a month in total payment.
Assuming no further debt, they would want to see documentation of income in the 10K+ per month range. Let me reiterate…SEE DOCUMENTATION! No stated income…no bs. So why do the GSEs need to step in to help people making 120k+ a year to buy a house? Let the free market make them loans.
People can say yeah, we did, and look at the Real Estate bubble they created. EXACTLY…and now the free market has adjusted and the nonsense is stopped or has slowed tremendously.
The GSEs raising loan amounts isn’t going to save this RE bubble or housing prices.
I want to get a t-shirt for all these people: IT’S THE INCOME STUPID!!
Most people don’t make the INCOME to truly afford their homes. The income needed to qualify at 35-40% debt ratios on 500-600k homes is in the 10k+ range. And from what I have seen, most people don’t have the 80-120k downpayment to be purchasing these homes anyway.
Face it people…we are in the beginning of a recession. It is going to be LONG and painful for the RE markets. Just wait until the a-paper defaults start rolling in during late 2008 and through 2009-2010.
Stay tuned…
SoCalMtgGuy
January 24th, 2008 13:51
Consider: A homebuyer today, $500k purchase price, 10% down, 4.5% interest rate. Monthly payment w/taxes: $2,695 (+ mello roos, maintenance, insurance)
A homebuyer 2 years ago, same purchase price, same down, same rate, but interest-only. Monthly payment incl. taxes: $2,034
With an ARM at 2% teaser rate, monthly payment: $2,079.
Mortgage rates would have to drop to 2% for today’s buyer to get a payment as low as 3 years ago’s buyer. Or else that $500k house has to lower the price to $385k. And people were stretching 2 years ago, but rationalizing the pain and risk because they were sure they’d make a profit. Today, not so much.
I don’t see how cutting interest rates or increasing GSE loan cielings is going to save housing. I don’t see how anyone in government believes that, either.
January 24th, 2008 17:47
So Cal Mortgage Guy…Thanks for the quick response! I think the gov’t did it in the belief that it would increase liquidity in the mortgage market at higher price points. But what they don’t seem to grasp is what you point out….very few people will actually QUALIFY for this higher loan limit under GSE guidelines, and this move will probably wipe out non-conforming jumbo loans up to $625K. What bank will want to touch this?
It’s an election year, so I think it’s just one more CYA move. But I can’t wait to see how the MSM spins this, like the housing market has just been saved.
January 30th, 2008 05:10
Consider this, people currently in noncorming loans will now be able to refinance at ta discount due to FNM ability to discount due to tax breaks. This is a gift to wealthy people able to pay their mortgages. On the downside those same people will probably see their taxes raised when the Dems take over in Washington. Oh well the Bush years were fun while they lasted, time to pay the Piper.
January 30th, 2008 20:25
As Dr. Roubini has said; we do not have liquidity problem, we have insolvency problem. Many home owners, banks, Wall Street investment bankers (remember level 3 assets) are insolvent.
This sh!!t look nasty and will end nasty, we just do not know how nasty will it be!
February 5th, 2008 17:31
Actually allowing Fannie and Freddit to increase the limits will cause housing prices to fall faster.
Why? Because the high end stuff will have to sell for 620k. The stuff that used to be a million will sell for 400k. The stuff that was 500-600K will sell for 200-250k. The 250k stuff wells for 100k.
February 12th, 2008 00:30
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February 12th, 2008 09:03
SoCalMtgGuy,
What do you think of this new “Project Lifeline” that’s supposed to be the solution to the mortgage mess? Is it really going to have an effect?
February 17th, 2008 18:30
keep at bro!
looks like i’m not the moron OR a jealous renter afterall.
the worse pasrt is a still talk with people and they keep thinking w’re at the bottom!
February 17th, 2008 19:13
well maybe my spelling skills need improvement
February 18th, 2008 14:27
I thought Countrywide was on it’s way to annihilation.
Good thing big daddy BOA came to the rescue.
yes, it astounds me too on how they analysts the MBA’s can be so blind and lose their company tens of billions of dollars.
February 19th, 2008 09:24
Explanation on CDOs
http://docs.google.com/TeamPresent?revision=_latest&fs=true&docID=ddv7hj34_03774hsc7&skipauth=true
March 10th, 2008 14:52
Great article. It’s nice to read something written by someone who isn’t obviously pushing his own agenda. Amazing that no one (well, that’s wrong but no one cared to pay attention to the writing on the wall) saw this coming. But I guess we could say the same thing about the dot com bust, etc.
Keep posting! I’m a renter/potential future buyer and things are finally starting to look up!
March 10th, 2008 22:30
Alex, that presentation was hysterical!
http://docs.google.com/TeamPresent?revision=_latest&fs=true&docID=ddv7hj34_03774hsc7&skipauth=true
March 13th, 2008 19:33
Andy — Wait a few years more. All those adjustables with teaser rates that were taken out in ‘06 won’t reset till 2011. Most people will be able to make their payments until then, but come 2011 a great number of these people, probably a majority, will not be able to make their payments and will have to walk away from their homes which will be terribly underwater by then. That’s the year to start thinking about it. Rent until then. The price that a seller can get today will soon be gone and won’t be back for another ten to fifteen years. Waiting a bit more could save you a few hundred thousand dollars and make the difference between a pleasant life and a burdened one.
March 13th, 2008 19:34
SoCalMtgGuy,
What do you think of S&P coming out today and saying that we’ve now seen the worst of the subprime crisis?
March 17th, 2008 09:05
Back on Dec 27th I wrote here:
“As I write this, 1.00 EUR = 1.45013 USD. I think this time next year, 1.00 EUR will = 1.7xx USD. A 15% or so gain.”
Then anon posted:
“January 12th, 2008 13:30
Do NOT buy Euros!”
http://housingbubblecasualty.com/what-does-08-have-in-store-for-our-economy-and-the-housing-market/#comments
Today, March 17, not even 3 months and todays rate is:
1.00 EUR = 1.6011 USD
About a 10% gain in less than 90 days. Nor I will restate my forecast to 1.9xx USD for the Euro before year end.
There is no magic to any of this, the financial collapse model we are in can be found here: http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
(simply replace Japan with U.S.)
So most likely, as in Japan, we will see a 75% decline in home prices from bubble-peaks. Perhaps 80%. It’s already at 40% in markets like Vegas. People must understand that this is a total financial market collapse…just like Japan’s. Took them 10 years to begin to recover. We have another 9+ years to go. A few people in Japan made $$$ during this time, Learn from them.
Since SoCalMtgGuy no longer post here, this will me my last look at this site. Good luck all.
March 17th, 2008 17:42
I will have a post up here soon!!!
Been VERY busy with a ‘paying’ job….and now there is actually some news to report!
SoCalMtgGuy
April 8th, 2008 15:29
Another data point that the wealthy should take note of: vacation and second home sales are down 31% according to writer Amy Gunderson. http://realestate.halogenguides.com/archives/1101-realtors-group-says-vacation-home-sales-down-31-percent
April 18th, 2008 17:46
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May 11th, 2008 00:29
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