How's your housing market? (1 Viewer)

[tommyGunZ]

ninja - obviously I and others understand the fiscal rewards of parking savings in an asset that provides a return instead of just sitting there as "home equity".

Do you think that's what's happening? Is the sudden popularity of these IO and Neg-Am loans the result of an enlighting of the American people with regard to financial investing?

Please take a 30 sec look at this data re: San Diego County: Increase in popularity of "risky" loans

Looks like Neg Am loans have gone from less than 1% of total market share to ~ 25% of all loans made in just 3 years. I'm asking for your general opinion - do you think this is a result of responsible, wealthy individuals parking their equity elsewhere, or is it a ton of people streching for homes they can't afford, because the medial home price is 9x the median family income?

 

[tommyGunZ]

Gunz, I don't disagree with you at all that many people are using these loans because they have to, not because they choose to, and I do think that will have an impact of some sort on the SD real estate market at some point. I still think you'll be waiting a long time for a 30% crash, but you watch your market much more closely than I.

 

[Chadstroma]

Chad, here's why I feel that way. If you are a self employed person with no cash reserves and can't always afford to make the interest payment on your mortgage, you probably should rent or live in a cheaper home.

With a neg am loan, you're essentially borrowing a little of your home equity every month. If someone, two years after purchasing their home, wanted to get a $20k heloc, would that be smart or dumb?

The obvious answer is that it depends on what you're going to do with the $20k. If you're going to lever yourself to earn an arbitrage on your home equity, then it can be smart. If you want to buy a Bryant Boat it's probably a dumb move.

With a neg-am loan, you're doing the exact same thing, just taking it out a little bit every month. Whether or not it is a smart move completely depends on the exact same thing it depended on if you took it out all in a lump sum. What are you doing with it? If you're using it to fund your lifestyle, you're most likely not using the tool correctly. If, however, you move that money along and earn a greater amount than the interest costs you, well, you're actually 'paying down' your loan more quickly that someone paying interest only, your home equity is simply in a vehicle other than your home.

I would have no problem owing more than my house is worth - provided I've been dilligent in putting the home equity I take out every month in a vehicle appreciating more quickly than my loan is going up.

Home equity does not have to be in your house. Also, the financing decision can be made completely apart from the purchase decision.

I see your point and I will not disagree with you here but I am very cautious about this. Depending on the product parameters it sometimes IS better to use a seperate Equity product to achieve the goals you layed out. I think we would both agree with the following; the Option ARM is intended to be a cash flow management tool- however the explosion of this product has made it way over used and dangerous to those who have no idea what they have or how to use it. This is why the Option ARM, which IS a very good product, has such a bad reputation.

 

[tommyGunZ]

Chad, here's why I feel that way. If you are a self employed person with no cash reserves and can't always afford to make the interest payment on your mortgage, you probably should rent or live in a cheaper home.

With a neg am loan, you're essentially borrowing a little of your home equity every month. If someone, two years after purchasing their home, wanted to get a $20k heloc, would that be smart or dumb?

The obvious answer is that it depends on what you're going to do with the $20k. If you're going to lever yourself to earn an arbitrage on your home equity, then it can be smart. If you want to buy a Bryant Boat it's probably a dumb move.

With a neg-am loan, you're doing the exact same thing, just taking it out a little bit every month. Whether or not it is a smart move completely depends on the exact same thing it depended on if you took it out all in a lump sum. What are you doing with it? If you're using it to fund your lifestyle, you're most likely not using the tool correctly. If, however, you move that money along and earn a greater amount than the interest costs you, well, you're actually 'paying down' your loan more quickly that someone paying interest only, your home equity is simply in a vehicle other than your home.

I would have no problem owing more than my house is worth - provided I've been dilligent in putting the home equity I take out every month in a vehicle appreciating more quickly than my loan is going up.

Home equity does not have to be in your house. Also, the financing decision can be made completely apart from the purchase decision.

I see your point and I will not disagree with you here but I am very cautious about this. Depending on the product parameters it sometimes IS better to use a seperate Equity product to achieve the goals you layed out. I think we would both agree with the following; the Option ARM is intended to be a cash flow management tool- however the explosion of this product has made it way over used and dangerous to those who have no idea what they have or how to use it. This is why the Option ARM, which IS a very good product, has such a bad reputation.

Agree 100% Chad. It's the overuse and sudden popularity of option ARMs at a time in which affordability in bubble markets is at record lows that makes me bearish.The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

 

[The Z Machine]

TGZ, when you finally do get the house, can I come over and sleep on your couch?

:40oz to vaporized:

 

[Chadstroma]

Chad, here's why I feel that way. If you are a self employed person with no cash reserves and can't always afford to make the interest payment on your mortgage, you probably should rent or live in a cheaper home.

With a neg am loan, you're essentially borrowing a little of your home equity every month. If someone, two years after purchasing their home, wanted to get a $20k heloc, would that be smart or dumb?

The obvious answer is that it depends on what you're going to do with the $20k. If you're going to lever yourself to earn an arbitrage on your home equity, then it can be smart. If you want to buy a Bryant Boat it's probably a dumb move.

With a neg-am loan, you're doing the exact same thing, just taking it out a little bit every month. Whether or not it is a smart move completely depends on the exact same thing it depended on if you took it out all in a lump sum. What are you doing with it? If you're using it to fund your lifestyle, you're most likely not using the tool correctly. If, however, you move that money along and earn a greater amount than the interest costs you, well, you're actually 'paying down' your loan more quickly that someone paying interest only, your home equity is simply in a vehicle other than your home.

I would have no problem owing more than my house is worth - provided I've been dilligent in putting the home equity I take out every month in a vehicle appreciating more quickly than my loan is going up.

Home equity does not have to be in your house. Also, the financing decision can be made completely apart from the purchase decision.

I see your point and I will not disagree with you here but I am very cautious about this. Depending on the product parameters it sometimes IS better to use a seperate Equity product to achieve the goals you layed out. I think we would both agree with the following; the Option ARM is intended to be a cash flow management tool- however the explosion of this product has made it way over used and dangerous to those who have no idea what they have or how to use it. This is why the Option ARM, which IS a very good product, has such a bad reputation.

Agree 100% Chad. It's the overuse and sudden popularity of option ARMs at a time in which affordability in bubble markets is at record lows that makes me bearish.The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others.

30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

 

[tommyGunZ]

TGZ, when you finally do get the house, can I come over and sleep on your couch?:40oz to vaporized:

Z machine always welcome in the GunZ house/home/hostel/cardboard box......

 

[tommyGunZ]

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others. 30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

We're ~ -9% in San Diego right now and the fun is just beginning. Foreclosures and REOs are exploding, so it's only going to get worse in mid-late '07 and '08 as the ARM resets hit full steam and all of those 100% finance folks will be underwater and facing stricter guidelines to refi.It's going to be interesting to watch.

 

[Redwes25]

Chad, here's why I feel that way. If you are a self employed person with no cash reserves and can't always afford to make the interest payment on your mortgage, you probably should rent or live in a cheaper home.

With a neg am loan, you're essentially borrowing a little of your home equity every month. If someone, two years after purchasing their home, wanted to get a $20k heloc, would that be smart or dumb?

The obvious answer is that it depends on what you're going to do with the $20k. If you're going to lever yourself to earn an arbitrage on your home equity, then it can be smart. If you want to buy a Bryant Boat it's probably a dumb move.

With a neg-am loan, you're doing the exact same thing, just taking it out a little bit every month. Whether or not it is a smart move completely depends on the exact same thing it depended on if you took it out all in a lump sum. What are you doing with it? If you're using it to fund your lifestyle, you're most likely not using the tool correctly. If, however, you move that money along and earn a greater amount than the interest costs you, well, you're actually 'paying down' your loan more quickly that someone paying interest only, your home equity is simply in a vehicle other than your home.

I would have no problem owing more than my house is worth - provided I've been dilligent in putting the home equity I take out every month in a vehicle appreciating more quickly than my loan is going up.

Home equity does not have to be in your house. Also, the financing decision can be made completely apart from the purchase decision.

I see your point and I will not disagree with you here but I am very cautious about this. Depending on the product parameters it sometimes IS better to use a seperate Equity product to achieve the goals you layed out. I think we would both agree with the following; the Option ARM is intended to be a cash flow management tool- however the explosion of this product has made it way over used and dangerous to those who have no idea what they have or how to use it. This is why the Option ARM, which IS a very good product, has such a bad reputation.

Agree 100% Chad. It's the overuse and sudden popularity of option ARMs at a time in which affordability in bubble markets is at record lows that makes me bearish.The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others.

30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

I think you need a recession coupled with an overpriced housing market to get a 30% decline. I don't think that is going to happen. Though the biggest risk to the economy right now is housing and the subprime market but I think you need it to spread to more then just the subprime market for it to cause a recession.

 

[Chadstroma]

Chad, here's why I feel that way. If you are a self employed person with no cash reserves and can't always afford to make the interest payment on your mortgage, you probably should rent or live in a cheaper home.

With a neg am loan, you're essentially borrowing a little of your home equity every month. If someone, two years after purchasing their home, wanted to get a $20k heloc, would that be smart or dumb?

The obvious answer is that it depends on what you're going to do with the $20k. If you're going to lever yourself to earn an arbitrage on your home equity, then it can be smart. If you want to buy a Bryant Boat it's probably a dumb move.

With a neg-am loan, you're doing the exact same thing, just taking it out a little bit every month. Whether or not it is a smart move completely depends on the exact same thing it depended on if you took it out all in a lump sum. What are you doing with it? If you're using it to fund your lifestyle, you're most likely not using the tool correctly. If, however, you move that money along and earn a greater amount than the interest costs you, well, you're actually 'paying down' your loan more quickly that someone paying interest only, your home equity is simply in a vehicle other than your home.

I would have no problem owing more than my house is worth - provided I've been dilligent in putting the home equity I take out every month in a vehicle appreciating more quickly than my loan is going up.

Home equity does not have to be in your house. Also, the financing decision can be made completely apart from the purchase decision.

I see your point and I will not disagree with you here but I am very cautious about this. Depending on the product parameters it sometimes IS better to use a seperate Equity product to achieve the goals you layed out. I think we would both agree with the following; the Option ARM is intended to be a cash flow management tool- however the explosion of this product has made it way over used and dangerous to those who have no idea what they have or how to use it. This is why the Option ARM, which IS a very good product, has such a bad reputation.

Agree 100% Chad. It's the overuse and sudden popularity of option ARMs at a time in which affordability in bubble markets is at record lows that makes me bearish.The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others.

30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

I think you need a recession coupled with an overpriced housing market to get a 30% decline. I don't think that is going to happen. Though the biggest risk to the economy right now is housing and the subprime market but I think you need it to spread to more then just the subprime market for it to cause a recession.

Greenspan just was quoted as saying he believes a recession is coming late '07 or early '08. I still think that 30% is steep and likely not going to happen but at the same time it is not out of the realm of possibility. If we could all be 100% sure about what is going to happen in things like the economy and real estate then likely we would all be like the average FBG that is a millionaire with a super-model wife and posting while in the private jet flying between the vacation home in Paris and the Yacht in Miami.

 

[John Mamula]

The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

Even if it is the latter, as long as the person can afford the monthly payment, that is a good thing.Why does it matter if a person who can afford a $2,500 a month mortgage is in a $700k house using an option arm or a $350k house using a traditional P&I loan? The monthly payment is the same and if the can't make the payment on either (due to losing a job for example) they're in trouble in either mortgage plan. Now if they don't lose their job the person who has the higher valued home will see an exponentially better return on their money than through traditional financing, will have a bigger tax benefit, and when appreciation occurs will be doubling the appreciation compared to the other home holding everything else constant.If you're talking about people using too much of their take home pay going towards a mortgage, well then you really have no issue with a type of mortgage product (i.e. Option ARM, 30 year fixed, etc.), but rather an issue with banks' loan to income requirements. I really don't get what you object to about ARMs by what you are stating above. It seems that you are against ARMs, but the reasons you give are not really an objections against ARMs, but other lending practices.How will a small % of these loans foreclosing impact the market "significantly"?

 

[stbugs]

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others. 30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

We're ~ -9% in San Diego right now and the fun is just beginning. Foreclosures and REOs are exploding, so it's only going to get worse in mid-late '07 and '08 as the ARM resets hit full steam and all of those 100% finance folks will be underwater and facing stricter guidelines to refi.It's going to be interesting to watch.

-9%, is that really correct? What I mean is that mean home prices are based on all sales and I would assume that most new sales have more upscale options.The house I just sold last year is now up for sale again. Based on the sale price that they put on it, it is now down @20% from the peak in the spring of 2005. That is in the DC area.I also thought that you mentioned specific sales that had dropped more than 9%. I think when you just look at median sales, it may not reflect the fact that the homes that went up the most are down a lot more than the median.

 

[Redwes25]

Chad, here's why I feel that way. If you are a self employed person with no cash reserves and can't always afford to make the interest payment on your mortgage, you probably should rent or live in a cheaper home.

With a neg am loan, you're essentially borrowing a little of your home equity every month. If someone, two years after purchasing their home, wanted to get a $20k heloc, would that be smart or dumb?

The obvious answer is that it depends on what you're going to do with the $20k. If you're going to lever yourself to earn an arbitrage on your home equity, then it can be smart. If you want to buy a Bryant Boat it's probably a dumb move.

With a neg-am loan, you're doing the exact same thing, just taking it out a little bit every month. Whether or not it is a smart move completely depends on the exact same thing it depended on if you took it out all in a lump sum. What are you doing with it? If you're using it to fund your lifestyle, you're most likely not using the tool correctly. If, however, you move that money along and earn a greater amount than the interest costs you, well, you're actually 'paying down' your loan more quickly that someone paying interest only, your home equity is simply in a vehicle other than your home.

I would have no problem owing more than my house is worth - provided I've been dilligent in putting the home equity I take out every month in a vehicle appreciating more quickly than my loan is going up.

Home equity does not have to be in your house. Also, the financing decision can be made completely apart from the purchase decision.

I see your point and I will not disagree with you here but I am very cautious about this. Depending on the product parameters it sometimes IS better to use a seperate Equity product to achieve the goals you layed out. I think we would both agree with the following; the Option ARM is intended to be a cash flow management tool- however the explosion of this product has made it way over used and dangerous to those who have no idea what they have or how to use it. This is why the Option ARM, which IS a very good product, has such a bad reputation.

Agree 100% Chad. It's the overuse and sudden popularity of option ARMs at a time in which affordability in bubble markets is at record lows that makes me bearish.The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others.

30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

I think you need a recession coupled with an overpriced housing market to get a 30% decline. I don't think that is going to happen. Though the biggest risk to the economy right now is housing and the subprime market but I think you need it to spread to more then just the subprime market for it to cause a recession.

Greenspan just was quoted as saying he believes a recession is coming late '07 or early '08. I still think that 30% is steep and likely not going to happen but at the same time it is not out of the realm of possibility. If we could all be 100% sure about what is going to happen in things like the economy and real estate then likely we would all be like the average FBG that is a millionaire with a super-model wife and posting while in the private jet flying between the vacation home in Paris and the Yacht in Miami.

Greenspan said that a recession is "possible" in late '07. He is pulling another one of those were he talks but doesn't really say anything. He is a master at it. Either way to get 30% declines you need some major events and what is going on now is nowhere near that. So we totally agree on that.

 

[tommyGunZ]

The big question is whether these option ARMs are being used responsilibly to put savings in another vehicle or if they're being used to put people in homes they could never qualify for with a fixed rate. IMO, it's overwhelmingly the latter, and since local housing values are set at the margins, even a small percentage of these loans going bust will have a significant impact on the market.

Even if it is the latter, as long as the person can afford the monthly payment, that is a good thing.Why does it matter if a person who can afford a $2,500 a month mortgage is in a $700k house using an option arm or a $350k house using a traditional P&I loan? The monthly payment is the same and if the can't make the payment on either (due to losing a job for example) they're in trouble in either mortgage plan. Now if they don't lose their job the person who has the higher valued home will see an exponentially better return on their money than through traditional financing, will have a bigger tax benefit, and when appreciation occurs will be doubling the appreciation compared to the other home holding everything else constant.

Your scenerio assumes appreciation - how much fun is double the leverage while values are declining?

If you're talking about people using too much of their take home pay going towards a mortgage, well then you really have no issue with a type of mortgage product (i.e. Option ARM, 30 year fixed, etc.), but rather an issue with banks' loan to income requirements. I really don't get what you object to about ARMs by what you are stating above. It seems that you are against ARMs, but the reasons you give are not really an objections against ARMs, but other lending practices.

Option ARMs allow borrowers to choose their monthly payment. So loan to income requirements can be skewed based on which payment a borrower is making. Loose lending and irresponsible borrowing has been covered up the past few years with the ridiculous appreciation rates. Even idiots who bought 5x the amount of house they can afford were rewarded handsomely by their leverage in an exploding market. Now that prices are falling, leverage works the opposite way, and loose lending and irresponsible borrowers are being exposed.

How will a small % of these loans foreclosing impact the market "significantly"?

B/c home prices are set at the margin. What percentage of homes are sold every year in a given market, 2-3%? Those 2-3% of homes sold set the market value for the remaining 97-98% of the homes in that area. The fallout from subprime money going away and the avalanche of foreclosures on the way will leave it's mark on the entire market, IMO.

 

[tommyGunZ]

Either way to get 30% declines you need some major events and what is going on now is nowhere near that. So we totally agree on that.

We got 50% increases with little growth in real wages/incomes. How are we to believe that the historic gains from '02-'-06 are real and here to stay when not supported by fundamentals, but declines of that magnitude impossible w/o "major events"?

 

[Redwes25]

Either way to get 30% declines you need some major events and what is going on now is nowhere near that. So we totally agree on that.

We got 50% increases with little real growth in wages. How are the historic gains many markets have seen "real", but declines of that magnitude impossible w/o "major events"?

To have a downturn of that magnitude you need people to lose their jobs and can't pay their mortgages. I don't think because entered into ARMs and other exotic mortgages alone is enough to create the necessary foreclosures for a 30% drop. It might be more likely in your area b/c I don't know your market at all but it won't happen in NYC where the real estate market is actually picking up after a weak '06. Posted article from last weaks NY Times earlier in this thread and this Sunday's Times had two more articles on real estate market improving in the area.

 

[tommyGunZ]

Either way to get 30% declines you need some major events and what is going on now is nowhere near that. So we totally agree on that.

We got 50% increases with little real growth in wages. How are the historic gains many markets have seen "real", but declines of that magnitude impossible w/o "major events"?

To have a downturn of that magnitude you need people to lose their jobs and can't pay their mortgages. I don't think because entered into ARMs and other exotic mortgages alone is enough to create the necessary foreclosures for a 30% drop. It might be more likely in your area b/c I don't know your market at all but it won't happen in NYC where the real estate market is actually picking up after a weak '06. Posted article from last weaks NY Times earlier in this thread and this Sunday's Times had two more articles on real estate market improving in the area.

I hear you - NYC real estate is a crazy animal in itself. I don't know if the speculative gains in your area measured up to the ridiculousness we saw in Boston, Florida, SoCal, etc.I think we'll see quite a bit of economic turmoil in the next year or two as a result of the RE slowdown. A huge percentage of the economy's growth the past 5 years was due to the RE boom. With that game ending, it's only natural to expect some regression. And RE touches so many different facets of the economy, from construction, to financialing, to retail, etc.

 

[stbugs]

Either way to get 30% declines you need some major events and what is going on now is nowhere near that. So we totally agree on that.

We got 50% increases with little growth in real wages/incomes. How are we to believe that the historic gains from '02-'-06 are real and here to stay when not supported by fundamentals, but declines of that magnitude impossible w/o "major events"?

Don't forget that in late 1998, the rates were about 8%. When I refinanced in 2003, I got for 0 points a 4.875% fixed rate and even in my new house I am in the 5s with 0 points.When interest rates are down 30-40% that helps prices go up.Also, you posted a while ago that home ownership went from 60% or so to close to 70%, that will make demand go up. Mortgage interest is still one of the biggest tax deductions and 0 capital gains on housing increases (if you live in the house for 2 years) is one of the best tax shelters around. In DC, I always heard news about how minority ownership was spiking as well.I think the growth in prices was pretty close to realistic, a bit overblown in some areas, but based on the tax benefits and lower interest rates, I don't think they were ridiculous. If builders had been smart and anticipated the slow down, prices might not have gone down much at all. They created the inventory issue that is around because people like you heard all of the warnings, which were smart to heed, and they kept building like crazy until they realized they build too much.If home ownership stays high and interest rates stay low, then I agree that a major event would be needed to rock home prices more than I think they have been. Like I said above, I have definitely seen 20% declines since the top of the market around the DC area, which is the removal of 25% gains.

 

[tommyGunZ]

I think to answer that question it is really going to come down to the lender and what underwriting criteria that is being used. Talking in general, the housing boom saw a lot of lenders loosen their underwriting in the mad dash to gain market share. Some lenders will not do well and some will- as always the case the cyclical housing market and economy go through their paces. Nationally speaking there will be a market correction which is under way currently. Real estate is all about location as the saying goes 'location location location' so some markets will do better than others and some will do much worst than others. 30% market decline is quit steep and I think in order to hit that there will need to be more market forces in play than sub-prime implosion and badly used 'exotic' products like the Option ARM. Really to see a third decline in market value, you will need to have a declining economy with much higher unemployment than what we currently see.

We're ~ -9% in San Diego right now and the fun is just beginning. Foreclosures and REOs are exploding, so it's only going to get worse in mid-late '07 and '08 as the ARM resets hit full steam and all of those 100% finance folks will be underwater and facing stricter guidelines to refi.It's going to be interesting to watch.

-9%, is that really correct? What I mean is that mean home prices are based on all sales and I would assume that most new sales have more upscale options.The house I just sold last year is now up for sale again. Based on the sale price that they put on it, it is now down @20% from the peak in the spring of 2005. That is in the DC area.I also thought that you mentioned specific sales that had dropped more than 9%. I think when you just look at median sales, it may not reflect the fact that the homes that went up the most are down a lot more than the median.

You're right stbugs - home values in SD as a whole are down more than 9% but the median price is being artificially inflated with all of the incentives being tossed in. Free kitchen upgrades, free vacations, free cars, etc. None of those incentives are factored into the sale price that is reported to the county.Lots of anecdotal evidence of homes with huge declines. A townhouse ~ 1/2 mile from my apartment was listed at 519k in late Dec. It dropped to 499k in early Jan. Two weeks ago, asking price dropped to 449k.Funny thing is, there's another identical unit for sale in the same complex for 529k that apparently hasn't noticed the firesale his neighbor is having.

 

[Chadstroma]

Story Link

Home prices fall at fastest rate in 14 years

Tuesday February 27, 12:33 pm ET

By Rex Nutting

Housing values are up 0.4% in past year

WASHINGTON (MarketWatch) -- U.S. home prices fell 0.7% in the fourth quarter, the fastest rate since 1992, and are up just 0.4% in the past year, Standard & Poor's reported Tuesday in the inaugural release of the national Case-Shiller price index.

A year ago, home prices were rising 14.6% year-over-year.

"Annual changes in home prices are either in decline, flat or yielding negative returns across all markets," said Robert J. Shiller, chief economist at MacroMarkets LLC, which produces the index for S&P. "All metro areas are showing smaller annual returns than those reported for November."

"Given the overhang of supply and clear signs of deceleration in home prices, we continue to expect a nationwide home price decline of about 3% in 2007," Goldman Sachs economists wrote in a research note. They called the Case-Shiller index "probably the highest-quality measure of home prices."

Home prices in the top 10 metro areas fell 0.8% in December, the largest monthly drop since 1991. Prices in the 10 cities are unchanged for the year.

Home prices in the 20 metro areas fell 0.7% in December, the largest decline in the seven year history of the index. Prices in the 20 cities are up 0.5% in the past year.

On an inflation-adjusted basis, national home prices are down 1.6% in the past year. Prices in the 10 cities are down 2% and prices in the 20 cities are down 1.5%.

Nominal prices in 18 of 20 cities fell in the fourth quarter compared with the third. Only Seattle and Portland managed gains. Nine of the 20 cities showed lower prices at the end of the year than at the beginning: Detroit, Boston, San Diego, Washington, Cleveland, San Francisco, Minneapolis, Denver and New York.

Among the 20 cities, the biggest gains in the past year were in Seattle (up 12.1%), Portland (up 9.9%) and Charlotte (up 6.7%). The biggest losses in the past year were recorded in Detroit (down 5.9%), Boston (down 5.1%) and San Diego (down 4.2%.

Prices had been rising at unprecedented double-digit rates during the housing boom in 2003 to early 2006.

In other reports, the National Association of Realtors reported sales of existing homes rose 3% in January.

Orders for durable goods fell 7.8% in January, the Commerce Department reported.

Also, consumer confidence rose to a 51/2-year high in January, the Conference Board reported.

How Case-Shiller works

The Case-Shiller indexes attempt to overcome flaws in other measures of home prices by comparing actual arms-length transactions on the same single-family home. New homes and condos are excluded.

Median prices for new and existing homes can be affected by the mix of homes sold. For instance, if relatively more homes are sold in high-priced markets, the median sales price would show an increase even though actual value of any particular home would not have changed.

The quarterly price index reported by the Office of Federal Housing Enterprise Oversight also compares price changes for the same homes, but only covers homes with mortgages that conform to Fannie Mae and Freddie Mac limits, currently $417,000 or less. In addition, the OFHEO index includes mortgage refinancings that are valued by an appraiser, not the market.

The latest OFHEO index showed prices had risen 7.7% year-on-year through the third quarter. For purchases only, the OFHEO index was up 6% year-on-year, the lowest in seven years. Fourth-quarter data will be released Thursday.

Other price indexes are based on the homes sold in a particuarl period. The median price of a new home was down 1.5% year-on-year through December. The median price of an existing single-family home was down 3.1% in the 12 months ending in January.

 

[Redwes25]

Story Link

Home prices fall at fastest rate in 14 years

Tuesday February 27, 12:33 pm ET

By Rex Nutting

Housing values are up 0.4% in past year

WASHINGTON (MarketWatch) -- U.S. home prices fell 0.7% in the fourth quarter, the fastest rate since 1992, and are up just 0.4% in the past year, Standard & Poor's reported Tuesday in the inaugural release of the national Case-Shiller price index.

A year ago, home prices were rising 14.6% year-over-year.

"Annual changes in home prices are either in decline, flat or yielding negative returns across all markets," said Robert J. Shiller, chief economist at MacroMarkets LLC, which produces the index for S&P. "All metro areas are showing smaller annual returns than those reported for November."

"Given the overhang of supply and clear signs of deceleration in home prices, we continue to expect a nationwide home price decline of about 3% in 2007," Goldman Sachs economists wrote in a research note. They called the Case-Shiller index "probably the highest-quality measure of home prices."

Home prices in the top 10 metro areas fell 0.8% in December, the largest monthly drop since 1991. Prices in the 10 cities are unchanged for the year.

Home prices in the 20 metro areas fell 0.7% in December, the largest decline in the seven year history of the index. Prices in the 20 cities are up 0.5% in the past year.

On an inflation-adjusted basis, national home prices are down 1.6% in the past year. Prices in the 10 cities are down 2% and prices in the 20 cities are down 1.5%.

Nominal prices in 18 of 20 cities fell in the fourth quarter compared with the third. Only Seattle and Portland managed gains. Nine of the 20 cities showed lower prices at the end of the year than at the beginning: Detroit, Boston, San Diego, Washington, Cleveland, San Francisco, Minneapolis, Denver and New York.

Among the 20 cities, the biggest gains in the past year were in Seattle (up 12.1%), Portland (up 9.9%) and Charlotte (up 6.7%). The biggest losses in the past year were recorded in Detroit (down 5.9%), Boston (down 5.1%) and San Diego (down 4.2%.

Prices had been rising at unprecedented double-digit rates during the housing boom in 2003 to early 2006.

In other reports, the National Association of Realtors reported sales of existing homes rose 3% in January.

Orders for durable goods fell 7.8% in January, the Commerce Department reported.

Also, consumer confidence rose to a 51/2-year high in January, the Conference Board reported.

How Case-Shiller works

The Case-Shiller indexes attempt to overcome flaws in other measures of home prices by comparing actual arms-length transactions on the same single-family home. New homes and condos are excluded.

Median prices for new and existing homes can be affected by the mix of homes sold. For instance, if relatively more homes are sold in high-priced markets, the median sales price would show an increase even though actual value of any particular home would not have changed.

The quarterly price index reported by the Office of Federal Housing Enterprise Oversight also compares price changes for the same homes, but only covers homes with mortgages that conform to Fannie Mae and Freddie Mac limits, currently $417,000 or less. In addition, the OFHEO index includes mortgage refinancings that are valued by an appraiser, not the market.

The latest OFHEO index showed prices had risen 7.7% year-on-year through the third quarter. For purchases only, the OFHEO index was up 6% year-on-year, the lowest in seven years. Fourth-quarter data will be released Thursday.

Other price indexes are based on the homes sold in a particuarl period. The median price of a new home was down 1.5% year-on-year through December. The median price of an existing single-family home was down 3.1% in the 12 months ending in January.

Interesting places where the declines are the worst. Two cities that probably had the biggest run-ups and one city is an economic disaster with the woes of GM and Ford. I wonder where Miami and Vegas stand.

 

[tommyGunZ]

"The slide at this point is a good deal steeper then we saw at the beginning of the decade and we don't see any sign of a bottom," David Blitzer, S&P Index committee chairman, told CNBC. "These are the worst numbers in at least ten years."Blitzer also told CNBC that the impact of the subprime mortgage market could further depress home prices: "The damage from the subprime mortgage market probably hasn't shown up in home prices yet," Blitzer said. "That will take a lot of buyers out of the market, and fewer buyers probably means weaker prices and less hope of a turnaround."

 

[Chadstroma]

Interesting places where the declines are the worst. Two cities that probably had the biggest run-ups and one city is an economic disaster with the woes of GM and Ford. I wonder where Miami and Vegas stand.

My understanding is that there are two different factors in Miami and Vegas. Miami has a glut of condo's and Vegas has the loss of speculation buying that pumped up it's market dramatically over the last few years. I was surprised by Charlotte and Boston on the top 3 and bottum 3 lists.

 

[Redwes25]

Interesting places where the declines are the worst. Two cities that probably had the biggest run-ups and one city is an economic disaster with the woes of GM and Ford. I wonder where Miami and Vegas stand.

My understanding is that there are two different factors in Miami and Vegas. Miami has a glut of condo's and Vegas has the loss of speculation buying that pumped up it's market dramatically over the last few years. I was surprised by Charlotte and Boston on the top 3 and bottum 3 lists.

Boston does not surprise me as I heard it was been crazy their. As for Charlotte it seems to fit the mold of smaller cities that have underpriced real estate that was bound for a run-up much like all of Texas and other areas of the south.

 

[Chadstroma]

Interesting places where the declines are the worst. Two cities that probably had the biggest run-ups and one city is an economic disaster with the woes of GM and Ford. I wonder where Miami and Vegas stand.

My understanding is that there are two different factors in Miami and Vegas. Miami has a glut of condo's and Vegas has the loss of speculation buying that pumped up it's market dramatically over the last few years. I was surprised by Charlotte and Boston on the top 3 and bottum 3 lists.

Boston does not surprise me as I heard it was been crazy their. As for Charlotte it seems to fit the mold of smaller cities that have underpriced real estate that was bound for a run-up much like all of Texas and other areas of the south.

Makes sense... the new "Las Vegas" or "Phoenix" type of affect.

 

[tommyGunZ]

Looks like the subprime market isn't the only market going down the tubes, it's just the first:

The Financial Times: “Repayment problems involving ’subprime’ US mortgage borrowers could have knock-on effects in the broader $8,000bn mortgage market and beyond.”

“The latest concerns centre on the Alt-A market, in which consumers with slightly better credit than the weakest subprime borrowers can obtain loans with loose terms - such as no proof of income. Late payments and defaults on such loans are running at four times the historical rate.”

“‘The delinquency numbers for the 2006 Alt-A originations are materially worse than a lot of people would have expected,’ said Charles Sorrentino, mortgage analyst at Merrill Lynch.”

From Inman News: “The Wall Street end of the mortgage business is entering an episode of distress at this moment, and we will see pricing and availability do some strange things in the next week or two.”

“The party most vulnerable to the retreat of housing exuberance is not housing, it’s the mortgage profiteers, at this moment the Wall Street co-dependents even more so than their Main Street lender-accomplices. As of Friday there are not enough buyers of subprime risk to cover loans recently closed or in process.”

“Trash, like other things, rolls downhill: Alt-A loans are closer to junk than trash, but high loan-to-value-ratio Alt-A loans are still trash.”

From theStreet.com: “Alt-A loans include option adjustable-rate mortgages, negative amortization loans and other nontraditional loans. These loans are made to homebuyers whose credit is generally better than that of subprime borrowers but worse than that of prime borrowers, on the basis of FICO credit-quality scores.”

“‘Everyone says these problems are contained in subprime,’ said Carl Tash, a portfolio manager of a long/short real estate securities hedge fund. ‘If you think about it logically, what is the difference [between subprime and Alt-A] ? Some arbitrary difference in FICO scores.’”

 

[Ministry of Pain]

I want to share what is happening at a new compnay I joined.

1. This is entirely an inbound operation. The owners probably mail about 75,000-100,000 mailers a week. Primarily California. I am getting anywhere from 5-10 inbound calls a day and we have a staff of about 20 L/Os. I tell you this because I get so many calls that you get a great idea for what is happening in different parts of the state. This thread is more and more about the housing buble in California and when it is going to burst if at all.

2. THere are 2 parts of the state that the owners are throwing away money. The 1st in San Diego and they have tried to stop mailing to that area much as the housing has slid backa bit. but the other part of the state that is out of control and I think even worse than San Diego is Sacramento...OH MY GAWD! These people bought homes a year ago for $500,000 in some areas...can't sell them for $450,000 now if they tried...if they paid $350,000, a lot of those homes are under $300,000 because they were lesser areas to begin with. I have had a bunch of calls from poor home owners that paid no money down on their home and they are now upside down. All were told they could refi in 6-12 months.

My point is I think TG is right to hold off for right now since he lives in San Diego...if he lived in Los Angeles I would tell him to still look for a decent deal and jump in, but Sacramento and San Diego still have some more bottom to hit before things get better. At least judging from the calls I am taking on a daily basis.

But if I were TG, I would be looking for an investment property rather than a SFR for the time being...less risk IMO in this market.

 

[Chadstroma]

I want to share what is happening at a new compnay I joined.1. This is entirely an inbound operation. The owners probably mail about 75,000-100,000 mailers a week. Primarily California. I am getting anywhere from 5-10 inbound calls a day and we have a staff of about 20 L/Os. I tell you this because I get so many calls that you get a great idea for what is happening in different parts of the state. This thread is more and more about the housing buble in California and when it is going to burst if at all.2. THere are 2 parts of the state that the owners are throwing away money. The 1st in San Diego and they have tried to stop mailing to that area much as the housing has slid backa bit. but the other part of the state that is out of control and I think even worse than San Diego is Sacramento...OH MY GAWD! These people bought homes a year ago for $500,000 in some areas...can't sell them for $450,000 now if they tried...if they paid $350,000, a lot of those homes are under $300,000 because they were lesser areas to begin with. I have had a bunch of calls from poor home owners that paid no money down on their home and they are now upside down. All were told they could refi in 6-12 months.My point is I think TG is right to hold off for right now since he lives in San Diego...if he lived in Los Angeles I would tell him to still look for a decent deal and jump in, but Sacramento and San Diego still have some more bottom to hit before things get better. At least judging from the calls I am taking on a daily basis.But if I were TG, I would be looking for an investment property rather than a SFR for the time being...less risk IMO in this market.

I have no qualms here. It is sad though that people who do not know better are told 'yea, take this horrible loan and in 6-12 months you can re-fi' as if there is no problem ever in doing this. My sister and her husband got in a bad situation up near Sacramento. They moved up there from L.A. area and sold their house in L.A... Part of the move up north was to work for his bro in law at a custom cabinet company they owned from being a general contractor. They bought the house up north and sold the house down south. As they pulled up in the drive way to close the deal up north they were told they could not do the loan. Because of the change of occupation. So, with two girls under 2 years of age and living out of a hotel, they got a Alt-A loan with an outrageous 12% and told they could re-fi in a few months. Well, to make the situation worst my bro in law burned through all their cash reserves, got behind on a couple of bills and to make the loan story short (get it?).... they ended up having the house go into foreclosure. Losing the house, living with friends back down in L.A. and basically starting all over with very poor credit now. As her brother, I was mad she did not come to me with help/advise until it was basically too late. I am sure their story is not too unlike others.

 

[Ministry of Pain]

I want to share what is happening at a new compnay I joined.1. This is entirely an inbound operation. The owners probably mail about 75,000-100,000 mailers a week. Primarily California. I am getting anywhere from 5-10 inbound calls a day and we have a staff of about 20 L/Os. I tell you this because I get so many calls that you get a great idea for what is happening in different parts of the state. This thread is more and more about the housing buble in California and when it is going to burst if at all.2. THere are 2 parts of the state that the owners are throwing away money. The 1st in San Diego and they have tried to stop mailing to that area much as the housing has slid backa bit. but the other part of the state that is out of control and I think even worse than San Diego is Sacramento...OH MY GAWD! These people bought homes a year ago for $500,000 in some areas...can't sell them for $450,000 now if they tried...if they paid $350,000, a lot of those homes are under $300,000 because they were lesser areas to begin with. I have had a bunch of calls from poor home owners that paid no money down on their home and they are now upside down. All were told they could refi in 6-12 months.My point is I think TG is right to hold off for right now since he lives in San Diego...if he lived in Los Angeles I would tell him to still look for a decent deal and jump in, but Sacramento and San Diego still have some more bottom to hit before things get better. At least judging from the calls I am taking on a daily basis.But if I were TG, I would be looking for an investment property rather than a SFR for the time being...less risk IMO in this market.

I have no qualms here. It is sad though that people who do not know better are told 'yea, take this horrible loan and in 6-12 months you can re-fi' as if there is no problem ever in doing this. My sister and her husband got in a bad situation up near Sacramento. They moved up there from L.A. area and sold their house in L.A... Part of the move up north was to work for his bro in law at a custom cabinet company they owned from being a general contractor. They bought the house up north and sold the house down south. As they pulled up in the drive way to close the deal up north they were told they could not do the loan. Because of the change of occupation. So, with two girls under 2 years of age and living out of a hotel, they got a Alt-A loan with an outrageous 12% and told they could re-fi in a few months. Well, to make the situation worst my bro in law burned through all their cash reserves, got behind on a couple of bills and to make the loan story short (get it?).... they ended up having the house go into foreclosure. Losing the house, living with friends back down in L.A. and basically starting all over with very poor credit now. As her brother, I was mad she did not come to me with help/advise until it was basically too late. I am sure their story is not too unlike others.

Terrible story Chad, but I have to tell you that most people...maybe not your brother...but most people don't want to listen to other people that try and give them advice. You can't tell homeowners with a family anything...they know it all. Look at these boards, people don't want to listen even when it is in their best interest.

 

[BigSteelThrill]

The Dow fell 546.02, or 4.3 percent, to 12,086.06 before recovering some ground in the last hour of trading. Because the worst of the plunge took place after 2:30 p.m., the New York Stock Exchange's circuit breakers, designed to halt precipitous moves, were not activated.

Investors' dwindling confidence was knocked down further by data showing that the economy may be decelerating more than anticipated. A Commerce Department report that orders for durable goods in January dropped by the largest amount in three months exacerbated jitters about the direction of the U.S. economy, just a day after former Federal Reserve Chairman Alan Greenspan said the United States may be headed for a recession.

"It looks more and more like the economy is a slow growth economy," said Michael Strauss, chief economist at Commonfund. "Moderate economic growth is good -- an abrupt stop in economic growth scares people."

The housing market, which the Street had been hoping had bottomed out, also looked far from recovery after a Standard & Poor's index indicated that single-family home prices across the nation were flat in December. A later report from the National Association of Realtors said existing home sales climbed in January by the largest amount in two years, but the data didn't erase housing-related concerns, as median home prices fell for a sixth straight month.

The Dow was down 360.42, or 2.85 percent, at 12,271.84 in the last hour of trading. Just a week ago, the Dow had reached new closing and trading highs, rising as high as 12,795.92.

Keep on fallin'!

 

[Chadstroma]

I want to share what is happening at a new compnay I joined.1. This is entirely an inbound operation. The owners probably mail about 75,000-100,000 mailers a week. Primarily California. I am getting anywhere from 5-10 inbound calls a day and we have a staff of about 20 L/Os. I tell you this because I get so many calls that you get a great idea for what is happening in different parts of the state. This thread is more and more about the housing buble in California and when it is going to burst if at all.2. THere are 2 parts of the state that the owners are throwing away money. The 1st in San Diego and they have tried to stop mailing to that area much as the housing has slid backa bit. but the other part of the state that is out of control and I think even worse than San Diego is Sacramento...OH MY GAWD! These people bought homes a year ago for $500,000 in some areas...can't sell them for $450,000 now if they tried...if they paid $350,000, a lot of those homes are under $300,000 because they were lesser areas to begin with. I have had a bunch of calls from poor home owners that paid no money down on their home and they are now upside down. All were told they could refi in 6-12 months.My point is I think TG is right to hold off for right now since he lives in San Diego...if he lived in Los Angeles I would tell him to still look for a decent deal and jump in, but Sacramento and San Diego still have some more bottom to hit before things get better. At least judging from the calls I am taking on a daily basis.But if I were TG, I would be looking for an investment property rather than a SFR for the time being...less risk IMO in this market.

I have no qualms here. It is sad though that people who do not know better are told 'yea, take this horrible loan and in 6-12 months you can re-fi' as if there is no problem ever in doing this. My sister and her husband got in a bad situation up near Sacramento. They moved up there from L.A. area and sold their house in L.A... Part of the move up north was to work for his bro in law at a custom cabinet company they owned from being a general contractor. They bought the house up north and sold the house down south. As they pulled up in the drive way to close the deal up north they were told they could not do the loan. Because of the change of occupation. So, with two girls under 2 years of age and living out of a hotel, they got a Alt-A loan with an outrageous 12% and told they could re-fi in a few months. Well, to make the situation worst my bro in law burned through all their cash reserves, got behind on a couple of bills and to make the loan story short (get it?).... they ended up having the house go into foreclosure. Losing the house, living with friends back down in L.A. and basically starting all over with very poor credit now. As her brother, I was mad she did not come to me with help/advise until it was basically too late. I am sure their story is not too unlike others.

Terrible story Chad, but I have to tell you that most people...maybe not your brother...but most people don't want to listen to other people that try and give them advice. You can't tell homeowners with a family anything...they know it all. Look at these boards, people don't want to listen even when it is in their best interest.

That is the thing... My bro in law is not unlike many people out there that do not know alot about loans. My bro in law is not a dumb guy and he has been successful in general contractor work for years and years... he just wanted a change and made this move. The problem was the LO they used which was the builders loan office or referral to a lender- did not do their job. They waited until literally the last second to check through things and find they could not get final approval on the loan because of the change of occupation. (which I believe they could have fought- but again, I got this story basically at the end and was not consulted... why? I dont know other than pride) So, they were paying hundred + dollars a night in a hotel with their moving truck out front and two young girls running rampage. They felt trapped into getting this awful loan and figured that the re-fi part would be easy down the road. Well.... not how it turned out with financial disaster being the end result. It really sucks. I feel very bad for them.I agree though.... people THINK they know and they really have no clue. It is way more dangerous than not knowing. Someone very influencial in my life told me once "Know what you do well and do it. Know what you do not do well and pay someone else to do it."

 

[The Z Machine]

Here's an article from the NYT this morning about the sub-prime loans and the mortgage industry as a whole:

Mortgage Crisis Spirals, and Casualties Mount

by JULIE CRESWELL and VIKAS BAJAJ

Published: March 5, 2007

Even in affluent Orange County, Calif., the growing wealth of executives and brokers in the booming mortgage industry was hard to miss.

For Kal Elsayed, a former executive at New Century Financial, a large lender based in Irvine, driving a red convertible Ferrari to work at a company that provided home loans to people with low incomes and weak credit might have appeared ostentatious, he now acknowledges. But, he says, that was nothing compared with the private jets that executives at other companies had.

“You just lost touch with reality after a while because that’s just how people were living,” said Mr. Elsayed, 42, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. “We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”

Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.

Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure. Many investors are also likely to suffer: Wall Street firms made billions in fees, commissions and trading revenue from packaging and selling subprime mortgages to them as bonds.

New Century has emerged as a poster child for the lenders that rode that boom to the top and are now in free fall. The company disclosed on Friday that federal prosecutors and securities regulators were investigating stock sales and accounting errors. The latter could jeopardize billions of dollars in financing for the company, which issued $39.4 billion in subprime loans in the first nine months of last year.

Weakening home prices and rising default rates have rocked the subprime business. But for those who cashed out before the market turned, the ride up was particularly sweet. The three founders of New Century, for example, together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial. They collected millions of dollars more in dividends, salaries, bonuses and perks.

The company said in a statement yesterday that the founders were “still significant shareholders,” noting that they collectively owned about 7 percent of the company at the end of last year.

New Century’s stock price, which seemed to mirror the trajectory of the subprime business, peaked at nearly $66 a share in December of 2004 and traded in the $40s most of last year; on Friday, it was trading at $11 a share after the market closed. In a series of sales from August to November, two of the company’s founders sold shares for an average price of about $40 a share, for a total profit of $21.4 million.

It is not known whether the stock sales by the founders are among the sales being examined by federal investigators. Some of them had been part of scheduled stock sales that are often used by executives to diversify their portfolios. But some of the sales occurred on the same day that the executives entered the plans. A New Century spokeswoman, Laura Oberhelman, said that executives declined further comment.

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

Robert K. Cole, 60, a co-founder who retired as chairman and chief executive last year, lives in a 6,100-square-foot oceanfront home in Laguna Beach that is valued at tens of millions of dollars and was once owned by the chief executive of Pimco Advisors, the giant bond trading and management firm. Edward F. Gotschall, 52, another co-founder who is vice chairman of the board, donated $3 million for an expanded trauma center at Mission Hospital that will be named for him and his wife Susan.

The executives from New Century are by no means alone in cashing in on the bonanza, and they do not appear to have scored the biggest profits. That title may be claimed by Angelo R. Mozilo, the chief executive of Countrywide Financial, the nation’s largest stand-alone mortgage company and one of the largest subprime lenders last year. He reaped more than $270 million in profits from sales of stock and the exercise of stock options from 2004 to the start of this year, according to the Thompson analysis.

Of course, most of the 500,000 people who work in the mortgage industry did not cash in so grandly. The wealth was concentrated among executives, loan officers and brokers, because the greatest rewards were meted out in the form of commissions, bonuses and stock awards.

“In the hot times, it was not unusual to see a broker make a million bucks,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “You can carry that up further to people who ran the companies. The whole business revolves around personal compensation.”

The hot times are clearly over.

New Century’s disclosure of the federal investigations on Friday was the most serious in a string of shocks to have rocked the industry in the last three months.

A handful of lenders have sought bankruptcy protection, several have been acquired and a few have been shut down. Also on Friday, Fremont General, a top-five lender, said it planned to leave the business.

Industry officials say they are seeing an exodus of executives and salespeople as companies fold, cut jobs and push out early leaders.

“Everyone has run for the hills,” said William D. Dallas, whose company, Ownit Mortgage, filed for bankruptcy protection in December after it lost financing from Merrill Lynch and other banks.

For the borrowers of these mortgages, it may become more difficult to refinance if lending standards are tightened significantly. Many are already facing the prospect of payment shock when low, fixed-interest mortgage rates adjust to higher, variable rates.

On Wall Street, big investment banks could lose a significant source of revenue if the appetite for bonds backed by mortgages dries up.

In the last two years many skeptics began warning that the red-hot housing market and adjustable-rate loans would blend into a toxic brew. Last year, subprime loans totaled $600 billion, or about 20 percent of all mortgages, up from $120 billion and 5 percent in 2001, according to Inside Mortgage Finance. More than half of subprime loans have adjustable rates.

Many of the problems that have surfaced thus far are not tied to the resetting of rates. Rather, they stem from a sharp and early spike in the default rates among loans issued last year.

For example, about 13.8 percent of the loans in a group of mortgages New Century sold to investors in April were behind in payments or in foreclosure by January. By comparison, only 6 percent of loans in a pool sold to investors in March 2005 had met that same fate by January 2006.

Investors and regulators fear that the problems will only worsen as so many borrowers have fallen behind so quickly, especially at a time when the overall economy is healthy. The phenomenon suggests that lending standards were significantly weakened last year and that lenders were not as watchful for fraudulent transactions.

For New Century, the early payment defaults pose significant financial problems. In the first nine months of last year, Wall Street banks and investors that it does business with forced it to buy back $469 million in loans it had sold to them, up from $240 million for the same period in 2005.

The company was able to sell back about half of those loans at a discount of 26.5 percent. How it handled the remainder — about $227 million — is now under scrutiny. According to accounting rules the company should have valued the loans on its books for what they were worth today, not their previous face value. But it did not.

If it had, the company would have seen its earnings fall by about $60 million before taxes, wiping out most of its profit in the third quarter, according to Zach Gast, an analyst at the Center for Financial Research and Analysis, a forensic accounting firm.

This is important, because the company’s financing agreements require that it not lose money for any rolling six-month period. On Friday, New Century said it did not expect to make a profit in the six months that ended in December and that it was negotiating with lenders to waive the requirement but has only secured six of 11 waivers it needs.

“They had losses sitting on their balance sheets,” Mr. Gast said.

In August, the company’s chief financial officer, Patti M. Dodge, announced she was stepping down from her post to oversee investor relations, a department that typically reports to the chief financial officer. Taj S. Bindra, a former executive at Washington Mutual, replaced her in November.

For the second time in a decade, New Century finds itself fighting to survive. The firm’s roots were planted at Plaza Home Mortgage Bank where the three founders of New Century — Mr. Cole, a longtime mortgage executive; Mr. Gotschall; and a lawyer named Bradley A. Morrice — worked together. The three formed New Century in 1995 after Plaza was sold to Fleet Mortgage Group, now a part of Washington Mutual.

In the late 1990s, New Century narrowly survived accounting concerns and a scare in the bond market after Russia’ s default in 1998. It pulled through thanks to an investment by U.S. Bancorp, a bank based in Minneapolis.

With interest rates at historic lows, it quickly grabbed a big share of the fast-growing subprime market during the housing boom.

“They walked into a niche industry at a time when everything was lining up perfectly for what they did,” said W. Scott Simon, a managing director at Pimco Advisors. “In 2001, 2002 and 2003 the subprime business was just phenomenally profitable. Home prices kept appreciating and it seemed that no loans ever went bad.”

So it seems that we know how has made the money off this housing and mortgage boom, but I'm not sure who will lose money. Will ti be the poor that got upside-down on a bad mortgage? Will it be existing homeowners with ARMs that will see their interest rates shoot up to cover the expenses of bailing out the mortgage industry? Will it be the i-banks who funded a lot of mortgages packaged as bond sales?My hunch: Everyday joe six-pack and Mr. underemployed, underskilled minority worker that got sold a poor bill of sale from unscrupulous real estate agents and mortgage lenders.

 

[Ministry of Pain]

Awesome article Z, thanks for posting that. I will be forwarding it to all my "Subprime Underwriters".

The market is in for a major correction, I will have a better beat on this with a few more weeks at my present company...but I can tell you that every new homeonwer in Sacramento in the past 12 months that bought their home with no money down is completely screwed right now. Home is not worth what they paid. If things do not get better(and they aren't), these people will have no chance to refi when their mortgages come due as most were locked for only 2 years...7% jumps to 10% and then they throw the keys back at the bank.

Good stuff Z

 

[The Z Machine]

I think it depends on what your definition of "everyday Joe sixpack" is. The true middle class guy who's upside down after using shaky financing to buy more house than he could afford? Yeah, he's gonna lose -- especially if he had a large down payment.But the guy who put no money down and paid interest-only for the past few years? I think he's gonna do alright. For him, his total cost has only been slightly more than what he would have paid to rent. There are a LOT of people willing to ruin their credit report (via bankrupcy) in exchange for 2-3 years of the high life.

I think the second scenario is still "paying for it", albeit through ruined finances instead of bankruptcy. But I'm wondering who will take the financial hit of a bunch of loans coming up bad for lenders.

 

[BassNBrew]

I think it depends on what your definition of "everyday Joe sixpack" is. The true middle class guy who's upside down after using shaky financing to buy more house than he could afford? Yeah, he's gonna lose -- especially if he had a large down payment.But the guy who put no money down and paid interest-only for the past few years? I think he's gonna do alright. For him, his total cost has only been slightly more than what he would have paid to rent. There are a LOT of people willing to ruin their credit report (via bankrupcy) in exchange for 2-3 years of the high life.

I think the second scenario is still "paying for it", albeit through ruined finances instead of bankruptcy. But I'm wondering who will take the financial hit of a bunch of loans coming up bad for lenders.

The general public as the foreclosures stall appreciation until they're all purchased. Investors as the number of rental units increases.Obviously too many unqualified people have been sold houses they shouldn't be in. A lot of this stems from builders and they're inside mortgage companies. I hope this comes back to bite them.

 

[stbugs]

I think the most interesting part of the article is this:

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

To me that basically says that this issue may be a problem in the US, but it looks like a huge problem in California. We have all seen those House Hunter type shows where you see an old 2000 sq. ft. house in San Jose/LA/SF with an outdated kitchen and it only sells for 900k versus the 1900 sq. ft. updated house that sells for over 1million.Where I am now in Charlotte, it wouldn't surprise me if this isn't much of an issue at all, because this and Raleigh are where all the folks from up North moved to because it was cheaper. I would think that just because of that and because prices are still reasonable for a really nice house, that most people around here actually have a good amount of equity. Now all the folks that bought our houses when they were close to the peaks in DC, Boston, California and New York, are probably in a lot worse shape.

It really doesn't surprise me that the sub prime market was huge in California, and it really won't surprise me if this does turn into a "local" issue rather than a national one. Sure there is a trickle down affect, but as they say in real estate, location, location, location.

 

[tommyGunZ]

Today from CNN Money:

Subprime woes: How far, how wide

Problems in lending to home buyers and owners with less than top credit becoming big threat to the markets - and the economy.

By Chris Isidore, CNNMoney.com senior writer

March 5 2007: 1:03 PM EST

NEW YORK (CNNMoney.com) -- Lending to home owners and buyers without good credit has suddenly become a very bad business, and possibly a very big problem for the U.S. economy as a whole.

The sector is known as subprime mortgages, which pumped $640 billion into the economy through financing home purchases and refinancings in 2006, according to trade publication Inside B&C Lending. That's nearly twice the level of this kind of lending seen as recently as 2003.

But experts in the field see bankruptcies and a sharp decline in this type of lending in 2007, due to rising delinquencies and defaults by borrowers, and proposals to toughen lending standards and regulation. That's sending shares of some major financial firms sharply lower Monday.

"Everyone in the subprime sector this year is going to lose money," said Bose George, analyst with Keefe, Bruyette & Woods, a Wall Street firm specializing in banking and finance. "They're getting squeezed on all sides. Going into the year, we were looking for a decline of 15 percent, but clearly now that is far too low. It's now looking like a 25 to 30 decline."

The biggest drop came at New Century Financial (Charts), the No. 2 subprime lender according to Inside B&C Lending. Its shares lost more than half their value Monday after the company said in a filing late Friday that its outside auditor KPMG had informed it that it now believed there was substantial doubt about New Century's ability to continue as a going concern.

But other lenders in the sector also got hit, including Fremont General Corp. (Charts), which tumbled some 25 percent after it announced it would exit the subprime sector.

It's not just smaller banks and financial services firms that play in the subprime sector, thought.

Among the leaders in subprime mortgage lending in the United States are of the nation's biggest financial services firms, including units of HSBC (Charts), General Electric (Charts) and Citi (Charts).

Some economists say that choking off more than $100 billion in home financing will cause problems for real estate and home prices overall by keeping some buyers out of the market, and forcing some current homeowners to sell or face foreclosure.

"People who a year ago could have purchased a house with a subprime mortgage aren't going to be able to purchase," said Paul Kasriel, chief economist with Northern Trust in Chicago. "Increased foreclosures will mean more inventory on a market that already has a glut of homes for sale."

And Kasriel said the additional hit to real estate from the subprime meltdown is likely to mean serious problems for the economy overall.

"Housing has played a very large role in this expansion and one of the reasons it's played that role is there has been a change in the mortgage market," he said. "This has been a credit-induced housing boom that lifted other sectors of the economy and it's all in reverse now."

$640 billion in subprime loans in '06? You've got to think that taking subprime money out of the market will have a significant impact on prices in bubble markets.

 

[BassNBrew]

I think the most interesting part of the article is this:

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

To me that basically says that this issue may be a problem in the US, but it looks like a huge problem in California. We have all seen those House Hunter type shows where you see an old 2000 sq. ft. house in San Jose/LA/SF with an outdated kitchen and it only sells for 900k versus the 1900 sq. ft. updated house that sells for over 1million.Where I am now in Charlotte, it wouldn't surprise me if this isn't much of an issue at all, because this and Raleigh are where all the folks from up North moved to because it was cheaper. I would think that just because of that and because prices are still reasonable for a really nice house, that most people around here actually have a good amount of equity. Now all the folks that bought our houses when they were close to the peaks in DC, Boston, California and New York, are probably in a lot worse shape.

It really doesn't surprise me that the sub prime market was huge in California, and it really won't surprise me if this does turn into a "local" issue rather than a national one. Sure there is a trickle down affect, but as they say in real estate, location, location, location.

It's a problem in Charlotte too. If you claimed you had a job and could sign a contract, most any builder would put you in a home.

 

[Joe T]

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Foreclosures May Hit 1.5 Million in U.S. Housing Bust (Update1)

By Bob Ivry

March 12 (Bloomberg) -- Hold on to your assets. The deepest housing decline in 16 years is about to get worse.

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.

The spring buying season, when more than half of all U.S. home sales are made, has been so disappointing that the National Association of Home Builders in Washington now expects purchases to fall for the sixth consecutive quarter after it predicted a gain just last month.

``The correction will last another year,'' said Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania.

A five-year housing boom that ended in 2006 expanded home- ownership to a record number of U.S. households. Now it has given way to mounting defaults, failing subprime mortgage companies and an increasing number of unsold homes.

Last Housing Slump

If this slump follows the same pattern as the last one, in 1991, it will persist for at least another year and may fuel a recession. New-home sales declined 45 percent from July 1989 to January 1991 and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession, said Robert Kleinhenz, deputy chief economist of the California Association of Realtors.

This time around, new-home sales have declined 28 percent since September 2005, hitting a low in January, the last month for which data is available. And though the national jobless rate is near a five-year low this month, mortgage-related jobs fell by almost 2,000 in January alone. At least two dozen of the more than 8,000 mortgage lenders have been forced to close or sell operations since the start of 2006.

Subprime lenders Ameriquest Mortgage Co. in Irvine, California; Ownit Mortgage Solutions LLC and WMC Mortgage Corp., a subsidiary of General Electric Co., in Woodland Hills, California; Mortgage Lenders Network USA Inc. in Middletown, Connecticut and Fremont General Corp. together have fired more than 5,600 workers in the past year.

New Century

New Century Financial Corp., the second-largest subprime lender, said today it ran out of cash to pay back creditors who are demanding their money now. The Irvine, California-based company has lost 90 percent of its market value this year and stopped making new subprime loans, prompting speculation it will seek bankruptcy protection. New Century already has cut 300 jobs and its 7,000 remaining employees are waiting to see if the company will survive.

Fremont General, the Brea, California-based lender that is trying to sell its residential-mortgage unit, was ordered to stop making subprime loans by the U.S. Federal Deposit Insurance Corp. last week. Fremont was marketing and extending loans ``in a way that substantially increased the likelihood of borrower default or other loss to the bank,'' the FDIC said last week.

Doug Duncan, chief economist of the Washington-based Mortgage Bankers Association, predicted in January that more than 100 home lenders may fail this year.

The subprime crisis ``has taken the fuel out of the real estate market,'' said Edward Leamer, director of the UCLA Anderson Forecast in Los Angeles. ``The market needs new money in order to appreciate, and all of that money is gone for a very long time. The regulators are not going to allow it to happen again.''

Higher Rates

Subprime mortgages are given to people who wouldn't qualify for standard home loans and typically have rates at least 2 or 3 percentage points above safer prime loans. The portion of subprime loans that financed new mortgages rose to 20 percent last year from 5 percent in 2001, according to the Mortgage Bankers Association.

Subprime loans contributed to a home-ownership rate that reached a record 69.3 percent of U.S. households in the second quarter of 2004, up 5.4 percentage points from the same period in 1991, according to the U.S. Census Bureau.

``Probably the gain in home ownership over the last four, five years, is almost entirely due to looser lending standards,'' said James Fielding, a homebuilding credit analyst at Standard & Poor's in New York.

Refinancing Option

As home prices steadily gained from 2001 to 2006, homeowners who fell behind on mortgage payments could sell their homes and pay off their loans or get better refinancing terms based on the higher value of their property. Now that home values are declining, many borrowers won't be able to refinance because they would have to come up with the difference between their new mortgage and what their home is now worth.

Defaults may dump more than 500,000 homes on a housing market already saturated with leftover inventory built during boom times, New York-based bond research firm CreditSights Inc. said in a March 1 report.

The portion of subprime loans more than 60 days delinquent or in foreclosure rose to 10 percent as of Dec. 31, from 5.4 percent in May 2005, the highest in seven years, according data compiled by Friedman Billings Ramsey Group Inc. of Arlington, Virginia.

Many of the delinquencies came from loans where borrowers didn't have to provide tax returns or other evidence of income, or where they financed 100 percent or more of the home's value, CreditSights analyst David Hendler wrote in a March 5 report. Other defaults came on adjustable-rate mortgages with artificially low introductory ``teaser'' rates, sometimes with ``option'' payment plans that allowed borrowers to defer interest.

`Beginning of the Wave'

Banks ought to be concerned about such loans and are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments, Federal Reserve Governor Susan Bies said last week.

``What we're seeing in this narrow segment is the beginning of the wave,'' Bies said. ``This is not the end, this is the beginning.''

About 1.5 million U.S. homeowners out of a total of 80 million will lose their homes through foreclosure, University of California-Berkeley economist Ken Rosen said last week.

``The subprime borrowers paid too much for their homes, and all of a sudden, they'll see their house value drop by 10 to 15 percent,'' Rosen said.

Borrowers at Risk

The Center for Responsible Lending in Durham, North Carolina, said in a December study that as many as 2.2 million borrowers are at risk of losing their homes, at a potential cost of $164 billion, from subprime mortgages originated from 1998 through 2006.

The number of U.S. foreclosures rose 42 percent to 1.2 million last year from 2005, according to Irvine, California-based RealtyTrac, while delinquencies in the last three months of 2006 rose to the highest level in four years, the Federal Reserve said.

Housing and related industries, which account for about 23 percent of the U.S. economy -- including makers of everything from copper pipes to kitchen cabinets -- fired about 100,000 workers last year. The total will be higher this year, according to Amal Bendimerad of the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

By the end of this year, job cuts at companies including Benton Harbor, Michigan-based Whirlpool Corp., Masco Corp. of Taylor, Michigan, and St. Louis-based Emerson Electric Co. may exceed the fallout from the 1991 housing slump, said Paul Puryear, managing director at St. Petersburg, Florida-based Raymond James & Associates. The Bureau of Labor Statistics doesn't give data for housing-related job losses.

`Fallout'

``The fallout in the early 1990s was much worse than what we've seen so far, but this downturn is not over,'' Puryear said. ``The full impact hasn't hit yet.''

U.S. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said he may propose legislation to reign in ``inappropriate'' lending, and a House subcommittee is scheduled to consider subprime lending and foreclosures March 27.

``The standards got loosened so much, and there's always the pressure to make money that there was pressure to maybe make the questionable loans that shouldn't have been made,'' said Ohio Representative Paul Gillmor, the subcommittee's top Republican, in a March 9 interview. ``The major problem has been the overall deterioration in credit standards by lenders that's exacerbated by those who are unscrupulous.''

The Federal Bureau of Investigation says mortgage fraud is ``pervasive and growing'' and the incidence of such fraud has almost doubled in the past three years.

`Unscrupulous Individuals'

``There has been an increase in unscrupulous individuals in the market,'' said Arthur Prieston, chairman of the Prieston Group, a San Francisco-based company that investigates mortgage fraud. ``There's an unfair assumption of a connection between subprime failure and fraud. But there is a connection between early default and fraud.''

Mortgage fraud is committed when a borrower misrepresents himself or his finances to a lender. Some of that fraud involved speculators. They drove up prices during the boom by ordering new homes with the intent of selling them immediately after taking possession.

That ``flipping'' inflated demand and put the speculators in competition with the homebuilders, propelling the median U.S. home price to $276,000 last June from $177,000 in February 2001.

``A lot of the housing bubble was speculation,'' said Mike Inselmann of the Houston-based research firm Metrostudy.

Cancellations

When home prices got so high that speculators could no longer turn a profit, they canceled their contracts and walked away from their down payments.

Cancellation rates for new homes have surged to almost 40 percent of home contracts, Margaret Whelan, a New York-based analyst at UBS AG, said in a report on March 2.

That forced the top five U.S. homebuilders -- D.R. Horton Inc., Pulte Homes Inc., Lennar Corp., Centex Corp. and Toll Brothers Inc. -- to write off a combined $1.47 billion on abandoned land in the fourth quarter of 2006.

On top of that, new home sales plunged 17 percent last year from 2005, the biggest decline since 1990, according to the Chicago-based National Association of Home Builders. Existing home sales fell 8.4 percent in 2006 from a record in 2005, according to the National Association of Realtors.

Donald Tomnitz, D.R. Horton's chief executive officer, said last week that his Fort Worth, Texas-based company would miss its projections for this year and that ``2007 is going to suck, all 12 months of the calendar year.''

Financial Stocks

Concern that the housing slump and defaults in the subprime mortgage industry will affect earnings at the largest banks and lenders has hurt financial stocks. They are the worst performers in the Standard & Poor's 500 Index since the benchmark reached a six- year high on Feb. 20. The group lost 5.6 percent, outpacing the broader index's 3.9 percent drop.

Investment banks including Merrill Lynch & Co., Deutsche Bank AG and Morgan Stanley have spent more than $4 billion over the past year to buy home-loan companies as add-ons to their mortgage-bond trading businesses. They needed loans to repackage into securities to sell to investors. Demand for higher yields led them into the subprime market. As that business flourished, financial firms either invested in subprime lenders of bought them.

The number of U.S. financial institutions in the mortgage business jumped 16 percent to 8,848 in the past four years, according to the Federal Financial Institutions Examination Council.

`Too Early to Tell'

``It's a little too early to tell how it shakes out for investment banks,'' said Andrew Davidson, president of New York- based Andrew Davidson & Co., which advises fixed-income investors on mortgage bonds. ``If it turns out that they have large losses, the investment banks tend not to be very forgiving and usually terminate businesses that haven't worked for them.''

Dale Westhoff, a senior managing director at New York-based Bear Stearns Cos., the largest underwriter of mortgage bonds, said last week that failing subprime lenders ``are going to be absorbed very quickly.''

``Hedge funds and private equity are going to play a very important role in buying distressed assets,'' Westhoff said.

In contrast to the 1991 housing skid, worker productivity is increasing, consumer confidence is expanding, interest rates remain within 1 percentage point of the 40-year low and the jobless rate fell to a five-year low last month. Last month, 7.4 million new and existing homes were sold, more than twice the 1991 bottom.

Optimists

And real estate people tend to be the world's most optimistic, said Bryce Bowman, director of development for Randolph Equities LLC in Chicago.

``There's a lot of capital chasing real estate and that has not ceased with this bust,'' Bowman said. ``Developers have stopped building crazy speculative housing developments and are burning off their inventory, so we're excited about the end of '07, and we want to be ready to go when business picks up in '08.''

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net .

 

[tommyGunZ]

nice find Joe.A few particularly interesting nuggets:

The subprime crisis ``has taken the fuel out of the real estate market,'' said Edward Leamer, director of the UCLA Anderson Forecast in Los Angeles. ``The market needs new money in order to appreciate, and all of that money is gone for a very long time. The regulators are not going to allow it to happen again.''

Banks ought to be concerned about such loans and are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments, Federal Reserve Governor Susan Bies said last week.``What we're seeing in this narrow segment is the beginning of the wave,'' Bies said. ``This is not the end, this is the beginning.''

About 1.5 million U.S. homeowners out of a total of 80 million will lose their homes through foreclosure, University of California-Berkeley economist Ken Rosen said last week.``The subprime borrowers paid too much for their homes, and all of a sudden, they'll see their house value drop by 10 to 15 percent,'' Rosen said.

 

[BigSteelThrill]

http://money.cnn.com/2007/03/26/news/econo...dex.htm?cnn=yes

NEW YORK (CNNMoney.com) -- Sales of new homes sank to the slowest pace in more than six years in February, with the government's latest reading on the battered real estate market showing the glut of homes on the market reached a 16-year high.

New homes sold at an annual pace of 848,000 in February, according to a Census Bureau report, down about 4 percent from the 882,000 rate in January, which itself was revised lower. The pace of sales tumbled 18.3 percent from February 2006, with all four regions of the country showing sharp declines.

New home sales in February fell to their lowest point since August 2000, just before the nation tipped into a recession.

Last month's pace was the slowest for new home sales since August 2000, just before the nation fell into a recession. Economists surveyed by Briefing.com had forecast sales would rebound to an annual rate of 995,000.

The supply of new homes for sale on the market rose to an 8.1-month supply from 7.3 in January. It was the biggest supply by that measure since January 1991. It is now taking builders 5.2 months on average to sell a completed home, the longest wait since April 2001.

<more>

Everywhere I look, there are tons of new homes being built and they are all much cheaper then used homes.

<more. On Thursday, KB Home (Charts), the No. 5 U.S. home builder, reported earnings plunged 84 percent and warned that higher foreclosures and tighter lending standards in the broader market could prolong weakness in the sector.

The CEO of D.R. Horton (Charts), the No. 2 U.S. builder by revenue,

told an investor conference earlier this month that prices and new home sales are "going to suck" in 2007.

Earlier this month, New Jersey builder Hovnanian Enterprises (Charts) became the latest to report a loss following shortfalls at No. 1 home builder Lennar (Charts), No. 3 Pulte Homes (Charts) and No. 4 Centex (Charts).

Good for me, I hope.

 

[Chadstroma]

Everywhere I look, there are tons of new homes being built and they are all much cheaper then used homes.

Odd thing is that date came out last week showing an increase on existing home sales. More and more the new builders are throwing in extra's to get their properties off the market. My girl and I went over to an Open House in our neighborhood and checked out a new construction condo unit. 12 units, 2 sold, 10 on sale. Nice places. Hope they sale for what they are asking. It will help with my comps for my place but worried they will sit there and not sale and drive down the prices. There are two other seperate condo units in 2 min walking distance from me and from what I know easily more than half are not sold yet.

 

[Kal El]

Virginia seems to be doing well in the housing market, though I haven't paid too much attention to it. However in Michigan, where I'm originally from, the housing market makes Jimmy Hoffa look like the picture of health by comparison. Nobody is buying houses in Michigan for good reason, because nobody wants to live under a socialist in Lansing.

 

[Chadstroma]

Virginia seems to be doing well in the housing market, though I haven't paid too much attention to it. However in Michigan, where I'm originally from, the housing market makes Jimmy Hoffa look like the picture of health by comparison. Nobody is buying houses in Michigan for good reason, because nobody wants to live under a socialist in Lansing.

Saw a story a little bit ago about houses being sold for as low as $29K. Obviously that is extreme but even if you find a house for about $40-50K and rent it out, there is very little risk (only $50K and monthly payments of $300 or so) and in the long term it can only get better? I mean, if a house is sold for $40-50K there is not alot further down the price can go. Only one direction is possible and even if it does not go up, again, not a huge loss or too much of a drain on the cash flow.

 

[Jefferson the Caregiver]

Article in NY Times today about buying vs renting, I bolded some relevant quotes that seem to support Tommy's assertion that you are better off renting vs buying. I know this has been controversial here and I don't know that they are right but thought it was interesting anyway.

NY Times Article on Buying vs Renting

A promotional spot for the National Association of Realtors came on the radio the other day. The spot, introduced as something called “Newsmakers,” was supposed to sound like a news report, with the association’s president offering real estate advice.

By the Realtors’ way of thinking, it’s always a good time to buy. Homeownership, they argue, is a way to achieve the American dream, save on taxes and earn a solid investment return all at the same time.

That’s how it has worked out for much of the last 15 years. But in a stark reversal, it’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country, including large parts of the Northeast, California, Florida and the Southwest, recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters.

Most striking, perhaps, is the fact that prices may not yet have fallen far enough for buying to look better than renting today, except for people who plan to stay in a home for many years.

With the spring moving season under way, The New York Times has done an analysis of buying vs. renting in every major metropolitan area. The analysis includes data on housing costs and looks at different possibilities for the path of home prices in coming years.

It found that even though rents have recently jumped, the costs that come with buying a home — mortgage payments, property taxes, fees to real estate agents — remain a lot higher than the costs of renting. So buyers in many places are basically betting that home prices will rise smartly in the near future.

Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent.

“House prices have to fall more before housing becomes a clear buy again,” says Mark Zandi, chief economist of Moody’s Economy.com, a research company that helped conduct the analysis. “These markets aren’t as overvalued as they were a year ago or two years ago, but they’re still unfriendly. And that’s one of the reasons the market is still soft — people realize it’s not a bargain.”

There is obviously no way to know what home prices will do in the next few years. But there are two big reasons to doubt the real estate boosters who insist that it’s once again a great time to buy.

The first is history. After the last big run-up in house prices, in the 1980s, a long slump followed. In the New York area, prices peaked in early 1989 and then fell 9 percent over the next three years, according to government data. (Adjusted for inflation, the drop was much bigger.) Not until 1998 did prices pass their earlier peak.

Keep in mind that the 2000-5 boom was even bigger than the ’80s boom and that house prices on the coasts, according to the official numbers at least, have fallen only slightly so far. So it is hard to imagine that prices will rise 5 percent a year, or another 28 percent in all, over the next five years.

The second reason for skepticism is that buying has never been quite as beneficial as Realtors — and mortgage brokers, home builders and everybody else who makes money off home purchases — have made it out to be. Buyers have to pay property taxes on top of their mortgage, while renters have the taxes included in their monthly rent bill. Buyers also face thousands of dollars in closing costs (and, in Manhattan, co-op charges). Renters, meanwhile, can invest what they would have spent on closing costs and a down payment in the stock market, which hasn’t exactly delivered a bad return over the last 20 years.

And that famous mortgage-interest tax deduction? Yes, it reduces the borrowing costs that come with a mortgage, but it doesn’t eliminate them. Renters don’t face any such borrowing costs.

Almost two years ago, I interviewed a thoughtful 37-year-old man named Tchaka Owen, who happens to be a real estate agent. (Whatever the sins of the Realtors’ association, there are a lot of smart, helpful agents out there. Just remember that they have a financial interest in getting you to buy a house.)

Mr. Owen and his girlfriend, Polly Thompson, had recently moved from the Washington suburbs to the Miami area and decided to rent a two-bedroom apartment with spectacular bay views. “You can get so much more for your money, renting instead of buying,” he said at the time.

Sure enough, house prices soon began to fall in South Florida, and Mr. Owen and Ms. Thompson started to think about buying a place. A three-bedroom Mediterranean-style house that they liked was originally listed for $620,000 last year, but the price was later cut to $543,000. They bought it in June for $516,000. Since then, the market has fallen further, but Mr. Owen said he didn’t mind, because they plan to stay in the house at least a decade. “We love it,” he told me.

Clearly, there are benefits to owning a house beyond the financial, like the comfort of knowing you can stay as long as you want or can fix the roof without permission. But real estate has been sold as more than a good way to spend money. It has been sold as a can’t-miss investment. Back in 2005, near the peak of the market, the chief economist of the Realtors’ association, David Lereah, published a book called “Are You Missing the Real Estate Boom?” The can’t-miss argument was wrong then, and it may still be wrong today.

After hearing that radio spot, I called Ms. Combs and asked her whether she thought there was any chance that she and her fellow Realtors had gone a bit too far in promoting the boom. “I absolutely disagree,” she said, still cheerful. “We help people look at the marketplace.”

So I asked what advice she gave her own clients in Grand Rapids, Mich., where she is an agent. “We often tell people that they need to stay in a house five to six years for it to make sense,” she said.

That’s a nuance that didn’t make it into her “Newsmakers” interview. In Grand Rapids, where the median home costs $130,000, it is probably good advice. In a lot of other places, it may still be too optimistic.

 

[JerseyToughGuys]

Hoping to jump out of the Northeast and jump into the mid-west (IND) in the next few months.

My area is still pretty hot (not much on the market and what has been on has sold for almost +50% of what we paid in 2003). Hoping to hit an Indy market that appears to have been running cold since this fall (ton of inventory and constant, repeated price reductions).

Wish me luck.

 

[stbugs]

I think the most interesting part of the article is this:

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

To me that basically says that this issue may be a problem in the US, but it looks like a huge problem in California. We have all seen those House Hunter type shows where you see an old 2000 sq. ft. house in San Jose/LA/SF with an outdated kitchen and it only sells for 900k versus the 1900 sq. ft. updated house that sells for over 1million.Where I am now in Charlotte, it wouldn't surprise me if this isn't much of an issue at all, because this and Raleigh are where all the folks from up North moved to because it was cheaper. I would think that just because of that and because prices are still reasonable for a really nice house, that most people around here actually have a good amount of equity. Now all the folks that bought our houses when they were close to the peaks in DC, Boston, California and New York, are probably in a lot worse shape.

It really doesn't surprise me that the sub prime market was huge in California, and it really won't surprise me if this does turn into a "local" issue rather than a national one. Sure there is a trickle down affect, but as they say in real estate, location, location, location.

It's a problem in Charlotte too. If you claimed you had a job and could sign a contract, most any builder would put you in a home.

Might be true, but I also think things will hold up better than say DC because I know of myself and neighbors that left DC with a nice chunk of equity. All my neighbors here did the same from some of the areas (FL, Cali, DC, NY, Boston) that were the hot spots. I would bet that a good chunk of the people that bought our houses did so with creative financing because the prices were quite high. My old house in less than a year has already been foreclosed on. The people taking the huge hit on my house is the bank. The person that bought my house probably lost some money, but they bailed because they would have had to write the bank a $100k check just to sell it.I would think sub-prime is a problem everywhere since builders weren't very discerning at all, but I think in an affordable area like Charlotte, the problems are <<<<<<<<<<< than a place like DC. I remember before I sold my house that my neighbors and I would remark that if we were new homebuyers that we would have a hard time affording our own houses. I could easily find a house in Charlotte comparable to my old house that would probably cost me the same as what I paid for my old house in 1998.

 

[Redwes25]

I think the most interesting part of the article is this:

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

To me that basically says that this issue may be a problem in the US, but it looks like a huge problem in California. We have all seen those House Hunter type shows where you see an old 2000 sq. ft. house in San Jose/LA/SF with an outdated kitchen and it only sells for 900k versus the 1900 sq. ft. updated house that sells for over 1million.Where I am now in Charlotte, it wouldn't surprise me if this isn't much of an issue at all, because this and Raleigh are where all the folks from up North moved to because it was cheaper. I would think that just because of that and because prices are still reasonable for a really nice house, that most people around here actually have a good amount of equity. Now all the folks that bought our houses when they were close to the peaks in DC, Boston, California and New York, are probably in a lot worse shape.

It really doesn't surprise me that the sub prime market was huge in California, and it really won't surprise me if this does turn into a "local" issue rather than a national one. Sure there is a trickle down affect, but as they say in real estate, location, location, location.

It's a problem in Charlotte too. If you claimed you had a job and could sign a contract, most any builder would put you in a home.

Might be true, but I also think things will hold up better than say DC because I know of myself and neighbors that left DC with a nice chunk of equity. All my neighbors here did the same from some of the areas (FL, Cali, DC, NY, Boston) that were the hot spots. I would bet that a good chunk of the people that bought our houses did so with creative financing because the prices were quite high. My old house in less than a year has already been foreclosed on. The people taking the huge hit on my house is the bank. The person that bought my house probably lost some money, but they bailed because they would have had to write the bank a $100k check just to sell it.I would think sub-prime is a problem everywhere since builders weren't very discerning at all, but I think in an affordable area like Charlotte, the problems are <<<<<<<<<<< than a place like DC. I remember before I sold my house that my neighbors and I would remark that if we were new homebuyers that we would have a hard time affording our own houses. I could easily find a house in Charlotte comparable to my old house that would probably cost me the same as what I paid for my old house in 1998.

NY's market is fine. Especially NYC. I would not bunch it in with the rest of crowd. I posted stories about the NY market earlier in this thread.

 

[TommyGilmore]

Home-price forecast: First ever decline

National Association of Realtors cuts 2007 forecast; would mark first drop since it began tracking values in 1968.

NEW YORK (CNNMoney.com) -- Home prices are expected to finish down for the year, the National Association of Realtors (NAR) said Tuesday, which would mark the first drop since the group started tracking values in 1968.

NAR projects a 1 percent decline in the median price of an existing single-family home, to $219,800. The group, in a forecast made a month ago, had previously been expecting a 0.7 percent decline. Prior to that, it had expected a gain of 1.2 percent.

The number of home sales is also expected to dip from 6.48 million in 2006 to 6.29 million in 2007, a drop of 2.7 percent.

Prices of new homes, at a median of $246,400, are expected to remain steady.

According to Lawrence Yun, a senior economist for NAR, speculative investing in real estate, which contributed to abnormal price growth for several years, has all but disappeared in the present market.

"Home buyers today are purchasing for the long-term, generally with a realistic expectation of modest gains over time," Yun said.

NAR is predicting that sales will recover gradually over the second half of the year and prices will begin to edge up again sometime after that. In 2008, NAR is forecasting price gains of 1.4 percent for existing homes and 2.2 percent for new homes.

According to Walter Molony, a spokesman for NAR, the statistics may exaggerate the drop because sales have slowed more in high-priced areas than in moderately-priced ones.

Homes from the fastest - and slowest - growing markets

Also affecting home prices is a crisis in the subprime lending industry. A rash of foreclosures and forced sales that will add to already lengthening inventories is expected to hurt housing markets throughout the year.

Loan originators are tightening up lending standards this year in response to increasing defaults among subprime borrowers.

That will make it more difficult for many credit-damaged house hunters to obtain financing, subtracting demand from already weakening housing markets.

NAR expects interest rates, currently at about 6.16 percent for a 30-year fixed-rate loan, to rise gradually to about 6.5 percent by the fourth quarter, which should also have a dampening impact on home prices.

 

[Gambino]

I put my house on the market Saturday and had 4 people look at it last night and 3 coming tonight. First offer is supposed to be faxed over later today according to the RA. FWIW, I'm selling it myself but paid to have it listed on the MLS