Monday, June 19, 2006

AP: Foreclosures may jump as ARMs reset

The Associated Press reports that 'Foreclosures may jump as ARMs reset'. Readers of the Bubble Sphere are well aware of this trend. AP uses the term 'may,' which is a very weak term.

AP Title: Foreclosures may jump as ARMs reset
My Proposed Title: Foreclosures very likely to jump as more ARMs reset

Here are some highlights from the article:

This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the MBA. Monthly payments will leap too, many beyond what homeowners can afford.

"ARMs are a ticking time bomb," said Brad Geisen, president and chief executive of property tracker Foreclosure.com. "Through 2006 and 2007, I'm pretty sure we'll see a high volume of foreclosures."

Last year, foreclosures hit a historical low nationwide at about 50,000. But that number has more than doubled since then, according to Foreclosure.com.

The increase in the number and dollar amount of adjusting ARMs over the coming years will be a significant factor in driving housing prices down. Some of these properties will go into foreclosure, while ohers will be sold by the owners in attempt to escape foreclosure.

It is indeed sad to watch naive home buyers, who just wanted a house to live in, forced out due to adjusting mortgages. People should be more informed. It is after all, most likely, the biggest purchase of one's life. Yet, at the very same time, mortgage brokers have a responsibility to lend responsibly.

100 comments:

  1. The AP's title is more journalistically responsible than yours. I agree with you on many points, but this is a case of you making a sweeping generalization. That's fine, but it's rather silly to expect journalists to embed your sweeping predictions into their titles.

    It's quite possible that people will find some way to pay their resest ARMs. It'll be pretty miserable for them, and they'll find themselves living in serfdom to the bank, but hey, at least they don't have to call anyone to paint their walls, right?:)

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  2. fair enough. How about 'likely' to jump

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  3. I changed it to 'likely' in the post

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  4. David,
    Just for kicks, when you change a post, could you leave a marker so we can see what it was? I don't really care, especially in this case, but I'm curious to see where the "likely" went. :-)
    thanks!

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  5. waiting for godotJune 19, 2006 7:13 PM

    Please change the name of the post to: "if you have an ARM, then you are F'ed"

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  6. David, Of course foreclosures will rise when ARMs adjust upwards, but that is only because some people will have lied when they applied for their loans, others will have dealt with dishonest mortgage brokers who didn't properly qualify them, and yet others just won't know how to manage their money well enough to give up the non-essentials that would allow them to make their payments. The point is that --- absent an incompetent or fraudulent mortgage lender --- people CAN afford the higher mortgage payments because when one gets qualified for an ARM, they get qualified for worse case scenario (i.e., Can this person/couple afford to make the mortgage payments if interest rise to the highest possible rate that the loan affords?) With that in mind, the number of foreclosures due to rising ARMs should be minimal ... Unless you really believe it is anything other than a minority of lenders who are either incompentent or fraudulent.

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  7. Lance

    I've been through the mortgage application process and while I know what I can qualify for (I do financial analysis of fairly sophisticated businesses for a living) my mortgage broker felt I could qualify for a whole lot more if you know what I mean. Asking my MBA friends, this is NOT an isolated event to my mortgage broker.

    So I disagree. While in principal you are right that people qualify for the "worst case scenario" you are expecting guidelines for an industry with little oversight (nothing like the current state of affairs for lets say public companies) to properly police itself. Good luck on that one. Remember, mortgage brokers, real estate agents and all involved only get paid if a deal closes. I would have thought mutual funds were honest yet we saw what happened there and even before the recent investigations, the NASD and SEC were much tougher regulators than any regulator of mortgage brokers or real estate agents are now.

    I do expect to see numerous foreclosures and cases of extreme shock by barrowers who didn't realize that their ARM adjusts and can hit them squarely in the face.....foreclosures in my opinion are just around the corner.....

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  8. waiting for godotJune 19, 2006 7:47 PM

    Let's be realistic. Mortgage brokers don't get paid if they don't close a loan, Home appraisers don't get used if they don't bring back qualifying appraisals, and RE agents don't get commissions unless a house sells.

    None of the above scenarios constitute fraud per se, but they definitely motivate the person earning the money to present the information in such a way as to accentuate the positives and marginalize the negatives. I am not suggesting that these pros and cons be presented equally, because that be anti-capitalist. It is just something to consider when working within this field. (I find it more than a bit coincidental that the last three houses I sold were appraised between 3-5k above the amount needed for the loan.)

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  9. My God - if one can't be responsible enough to KNOW how much you can afford, then you shouldn't be buying a house. Jesus H. C. get a clue!

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  10. va_investor said: "My God - if one can't be responsible enough to KNOW how much you can afford, then you shouldn't be buying a house."

    My God!!! Maybe they learned their lessons from the federal government, which commonly borrows more than it earns. Or maybe they took their cues from investors who expose themselves to greater losses than they can hypothetically afford to cover in a worst case scenario. With these examples all around, it's no wonder that most people think it's completely normal to borrow more than they can earn. Jesus H.C., va_investor, get a clue!

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  11. Sounds like the "twinkie" defense.

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  12. Anon (4:38)

    "So I disagree. While in principal you are right that people qualify for the "worst case scenario" you are expecting guidelines for an industry with little oversight (nothing like the current state of affairs for lets say public companies) to properly police itself."

    Since most of these loans get bundled and resold in markets that are controlled by the feds, don't the feds police? Ultimately, it isn't banks or other lending institutions that own most of these loans anymore but rather the mom and pop investors who buy them through the bond markets ... and from what I have heard, the SEC is fairly strict ... yes, ENRON showed where a hole in the system was in regards to securities, but that appears to have been the exception rather than the rule. Of course I can't speak for all borrowers, but I know when I was out house searching and talking with my lender seeing if I could stretch my buying power on several otherwise unaffordable properties, she quickly nixed the ARMS because as she put it "Lance I'd have to qualify you on where the rate could go and not where it is now ... and you wouldn't qualify". Perhaps I just lucked on to the only honest lender out there ... But I do know that when I used her in the past (I didn't end up needing her this time 'cause we did owner-financing), there were always a thousand and one things I had to provide (via her) to the loan underwriters to verify that I was qualified. What I took away from this is that it would be very difficult to fib short of commiting outright fraud. I mean you'd have to go as far as changing the numbers on bank statements and paystubs. I suspect some people just think they wouldn't qualify under the worst case scenario. I remember when I bought my first place I quickly learned there were no more dinners out and whenever the chance to earn extra money at work I jumped on it. (Such as by doing lots of travel which both brought in more money and allowed saving more on food.) No it wasn't always easy making the payments, it meant depriving myself of the "extra" money I'd come to enjoy when renting ... But it was worth it then ... and definitely later via the appreciation that allowed me to gradually work my way to the house I really wanted. I suspect a lot of the folks who default will do so not because they have to but because they can't give up short term gratification for longterm gratification.

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  13. i would suggest that you should not change titles based on some idiot's idiotic comments.

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  14. http://www.banknet360.com/news/NewsAbstract.do?na_id=3812

    "Mortgage Fraud Reports Skyrocketing"

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  15. I really think many people underestimate how many people have stretched to get into a home here hoping that they could sell in a few years a hit the lottery. People don't generally take "arm's" unless they have to or the points are far less. In the past few years any, I say any, quality financial advisor would have told you to get into a fixed interest loan because the rates were so low. Trust me, when these arms reset alot of people will be taking a big hit.
    Bob

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  16. Bob,

    Many people took "arms" in the 80's and lived to tell about it. And fraud should not be a "scapegoat" for stupidity.

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  17. yawn.

    http://www.washingtonpost.com/wp-dyn/content/article/2006/06/18/AR2006061800689.html

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  18. Is this post meant to be "hard hitting", as you said previously? Or will there be something of substance to follow?

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  19. Hey, missed the Post Article - spend weekends at the beach house. Anything interesting?

    Sorry bubbleheads. Bought it 15 yrs ago and own it free and clear. I'm just TERRIFIED it will drop in value. LOL!

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  20. I was told my house was valued at a certain amount. This in order to get refinanced and take out equity. Now, it turned out that the house was worth far less. This was BEFORE the bubble and before interest only and before arms. So, I am CERTAIN that there will be many foreclosures and the ones that don't will be trapped in their loans and will have little money to boost the economy.I hope we are not facing a disaster, but it could happen. Get out of debt and save. That is the bottom line now.

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  21. "Sorry bubbleheads. Bought it 15 yrs ago and own it free and clear. I'm just TERRIFIED it will drop in value. LOL!"

    Could be blown out of the water by one of those Tsunami's. Just speculation. Remember global warming. But,you have insurance Right..LOL

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  22. waiting for godotJune 20, 2006 8:04 AM

    "Sorry bubbleheads. Bought it 15 yrs ago and own it free and clear. I'm just TERRIFIED it will drop in value. LOL!"

    I didn't know you old guys knew how to use a computer ;)

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  23. it simply money and lack of restrictions that creats a debtor society. it is an economic goal for those in power. create a slave state. too many people became middle class too fast. after 1980 and regeanomics, the govt. started creating the class society. fewer wealthy people and more people. it lasted until the middle 1990’s when technology reopen doors and wealth to many people again. the money and idea of wealth got to the head of many people (enron) and the good turned bad. deregulation of energy and techology killled the stock market. those who got out alive had alot money and no where to go. they brought real estate and the potential gain of killing two birds with one stone was too hard to resist. make people buy in glorious places and deregulate the whole housing market by putting people into 30+ year debts. once someone goes bankrupt now, lose their home and force to work hard to pay back the money they owe, they are a slave to the society. the wealthy people are stuck in cosmetic homes with no concrete foundation. they buy every new toy and keep a failed economy going. some people estimate 35 to 50% of the economy is housing related. look at the metro areas with the most foreclosures. it is areas where it basically poor to middle class people who should have never been given a loan for a home. who in their right mind buy a home that over 50% of their income is going to the mortgage. the coastal areas are facing a greater challenge. no one can afford to move there and buy thousands of new properties. when south florida school districts are facing (lower) student enrollments this year and next, you are losing families that buy homes in the future. this housing crash is in full swing and if you want to save yourself gain 100,000 by selling now, than wishing for 250,000 that is never coming. read the print version of the palm beach post and sun sentinel on saturdays. thousands of properties on sell, no one to buy and why. every increase of interest rates limits the buyer pool . 80%+ of the population in south florida cant buy a home over 200,000 with a traditional 30 year home loan. the ones who got home with an exotic or a couple of exotic loans are in housing now. with condo conversions, people are leaving the area, because the rents were too high to live in south florida. i was 2 months away from leaving, then i was asked if wanted to stay 6 months in a apartment that my rent will not increase. only 10% of the apts. / condos were sold and now condos are being rented out by flip floppers and losing money big time. taxes, insurance and cost of living is the end of the bubble in south florida and i am watching the circus go by .

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  24. The previous long post hits some very relevant topics. Your government does indeed want a society of homeowners. Notions of class aside; a society of homeowners is a society comprised of citizens who feel they have an palpable stake in their communities. Across the nation, this creates stability. The debt aspect of homeownership also creates stability on a national scale. The government WANTS this, which is why they encourage it by allowing you to deduct mortgage interest from your federal income.

    On the other hand, why is everyone so worried about "30 year debt"? Say you are making payments on a home when you are 45, and have a family. You are five years into a 30 year mortgage, and then you die. *THat is what life insurance is for*. Or, say you are 27 and have a mortgage on your starter home. You're in debt, and you die. Your family sells the house, takes your employer-provided life insurance, buries you, pays off the mortgage, and you'll never know the difference.

    Everyone talks as if they are immortal.. folks, the fact that you ARE GOING TO DIE does play a role in your financial planning decisions.

    - A homeowner who isn't afraid of a 30 year mortgage. (Death is another issue)

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  25. Amazing how David somehow missed this news report from yesterday that showed foreclosures and delinquencies DROPPED last quarter.

    Foreclosures, delinquencies decrease

    By Amy Hoak, MarketWatch
    Jun 19, 2006

    CHICAGO (MarketWatch) -- The strength of the economy and the job market helped residential delinquency and foreclosure rates decrease during the first quarter of 2006, according to the Mortgage Bankers Association's quarterly survey, released Monday.

    The seasonally adjusted delinquency rate for mortgage loans on one- to four-unit residential properties dropped to 4.41% in the quarter, down from 4.7% in the fourth quarter of 2005, according to the survey. The rate was up from the same quarter last year, when it landed at 4.31%.

    But remove the impact of Hurricane Katrina, and the delinquency rate would have been 4.31% -- level with last year, the association said. The destruction and dislocation caused by the storm is still having a significant impact on delinquency rates in Louisiana and Mississippi.

    "The economy grew at a brisk 5.3% pace in the first quarter of 2006, and labor markets were quite strong as well, with an average of 176,000 jobs added per month. Within this context, the housing market was normalizing with a declining pace of new- and existing-home sales, and slowing rates of home-price appreciation," Doug Duncan, MBA's chief economist and senior vice president of research and business development, said in a statement.

    The aging of the loan portfolio, increasing short-term interest rates and high energy prices were cited as issues in prior quarters; this quarter's positive economic factors offset those.

    "Going forward, we expect these same factors will continue to be important, including the fact that the Federal Reserve might need to raise rates further to keep inflationary pressures contained. In any event, additional modest increases in delinquency and foreclosure rates are likely in the quarters ahead," Duncan added.

    During a conference call with reporters, the economist said that the biggest risk to loan-delinquency rates is the loss of employment.

    The survey also said that the percentage of new foreclosures (loans that entered the foreclosure process during the quarter) was 0.41%, down from 0.42% in the fourth quarter. It also was 0.42% in the first quarter of 2005.

    The foreclosure-inventory percentage (the percentage of loans in the foreclosure process at the end of the quarter) was 0.98%, down from 0.99% in the fourth quarter. It was 1.08% in the first quarter of 2005.

    The survey found that all adjustable-rate and fixed-rate loans had lower seasonally adjusted delinquency rates compared with last quarter, except for subprime ARMs. The delinquency rate for prime ARMs decreased from 2.54% to 2.30% over the quarter; the rate for prime fixed-rate loans decreased from 2.21% to 2%; and the rate for subprime fixed-rate mortgages decreased from 9.7% to 9.61%. Subprime ARMs increased from the rate of 11.61% to 12.02%.
    The results cover more than 41.3 million loans. Of those, 31.4 million were prime loans, 5.6 million were subprime loans and 4.3 million were government loans.

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  26. I agree with va_investor's take on this.

    Consumers have never had as much access to information as they do now. Of course mortgage loan officers will approve loans for the maximum amounts. But isn't it up to consumers to figure out how much they can realistically afford before buying? For instance, I can go to a super expensive steakhouse and order myself a lovely porterhouse and a $1,000 bottle of wine. When the bill comes due, who's fault is it that I can't pay: mine for not looking at how much my dinner would cost before I ordered it? Or the waiter for taking my order without making sure that I could afford to pay for it? David's Big Brother/Nanny approach implies that it would be the waiter and restaurant's fault that I ordered the expensive meal, rather than my fault for not making sure ahead of time that I could afford it.

    Will people be forced into foreclosures or sales at a loss because of their inability to pay readjusted ARM interest rates? Sure. Will people be forced to do the same if they have no savings and either suddenly lose their jobs or have a major medical emergency? Sure. According to David's logic, in all cases, it would be the fault of someone else, not the purchaser, for how the purchaser got into the financial mess to begin with.

    As va_investor said, if a person is so foolish as to not use one of the hundreds of free online mortgage affordability calculators BEFORE they sign a mortgage, then they should stay forever a renter and invest in nothing more complicated than a savings account. Such a person is no different than my example of the guy who orders a porterhouse and super expensive bottle of wine, and then blames the waiter when he can't afford to pay the bill.

    People are adults. They need to take responsibility for their actions. Caveat emptor is not simply a nice little Latin phrase.

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  27. "People are adults. They need to take responsibility for their actions."

    But, but, it is all just a big scam! People with information are scamming poor, information-less people into buying more house than they can afford! It is all just an elaborate ploy by the Housing Industrial Complex.

    Incedentally, none of the people on this site were responsible for their own actions: http://www.darwinawards.com/

    (they were scammed into doing stupid things)

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  28. Wow, we are making progress. It appears Fritz and my buddy VA agree that there IS a housing bubble, but that its victims will have only themselves to blame!

    David, your efforts at education appear to be paying off. Do you remember, when house prices were rising (in the olden days), and many of us questioned the "new economic law," or "new paradigm?" We were all shouted down by real estate agents and mortgage brokers as "bitter renters" and "doom and gloomers."

    Now that we have been proved right, the cheerleaders are blaming the victims. Good heavens they are oily slick!

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  29. http://biz.yahoo.com/ap/060620/economy.html?.v=10

    Home construction on the rise - more homes to be added to the already inflated inventory - more air for the bubble...

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  30. dc_too makes car payments and thinks buying that car was a saavy financial move.

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  31. va_investor said:
    "Many people took "arms" in the 80's and lived to tell about it."

    There's a very distinct difference between getting ARMs at historically high interest rates and getting them at historically low interest rates. If a homeowner is offered a 5.5% mortgage rate, they're a damn fool if they don't lock it in for the long term.

    dc_too said:
    "Now that we have been proved right, the cheerleaders are blaming the victims."

    Don't count your chickens before they're hatched.

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  32. James, prices are falling in our area. That is not in dispute.

    The cheerleaders, above, are telling us the homeowner in trouble has no one to blame but himself - for listening to what the real estate agent and mortgage broker told him, no doubt, about prices rising forever and what he could "afford" today. If we were suckers for listening a year ago, please explain why we should listen to any of these people today.

    And you are absolutely right about buying an ARM with rates at 40-year lows - completely stupid.

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  33. Anon 8:00 - You are out of order per blog rules. However, there is nothing wrong with borrowing money to purchase a car, provided, a) one needs a car for transportation, b) the car is affordable, which leads to c) cars have not been subjected to a financial mania in which oldsmobilies have been bid up by panicked buyers, terrified of being left behind and egged on by car salesmen.

    If cars are subjected to this last condition and are priced beyond most people's ability to pay for them, with a conventional, three-year car loan, then I would bow to your witless sarcasm and join you in questioning a buyer's wisdom.

    Wanna buy a condo?

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  34. dc_too wrote:
    "If we were suckers for listening a year ago, please explain why we should listen to any of these people today."

    I don't think you should listen to those people, but I also don't think the housing bears have been proved right...yet.

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  35. Fair enough. But, anyone with an institutional memory longer than a teenager's has seen this movie before. It is not "different this time."

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  36. If you need to buy a car and cannot afford it all at once (or can earn a higher interest rate elsewhere), getting a low interest loan and making payments is a savvy financial move... as long as you don't pay substantially more for the car just because the interest rate is low. The same applies for a house.

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  37. Financing a car is never, ever a good idea. They ALWAYS depreciate in value, their value will ALWAYS go to zero. The process starts the moment you first start it up to take it home. At that point, you are underwater or "upside down" in terms of loan balance to value of the vehicle.

    Cars in the US, regardless of who makes them, sell at stunning markups over the cost of manufacturing them. About 80% of your purchase price is pure mark-up. (not necessarily profit, but mark-up) And you paid for it. SUV? Try 90% markup. (SUVs are based on pickup truck designs with modified sheet metal and a back seat bolted into what is actually the bed of the pickup truck)

    Why do you "need" a car? How long is your commute? Does your car reflect your personality? Did you buy into Automotive Industrial Complex scam of "expressing yourself" through your automobile?

    Automotive Industrial Complex lemmings also feed the gaping maw of big oil (Can you say "record profits for Exxon"?), not to mention our continued involvement the middle east. (did you see that Iran's chief cleric declared that he would cut off our oil supply if we try to stop their nuclear project?)

    Keep on truckin'!

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  38. bubbleheads; "I'd never go into debt for a home"

    bubbleheads; "Going into debt for an automobile is a 'saavy financial move'"

    LOL!

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  39. Cars depreciate, and apparently so also can houses! I know this for a fact personally as you can see from my previous post. So those of you in lala land, (and I don't just mean Los Angeles) who can't believe that house prices cannot fall are going to be rudely awakened. It is just a matter of time, artifically high prices, rising interest rates, declining real wages versus worldwide demand for commodities, and greed.

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  40. The value of real estate rarely goes down to Zero. Chernobol and Three Mile Island are exceptions.

    Next you guys are going to be rooting for nuclear war to help deflate the bubble.

    Cars are not "real property". Again, I suggest bubbleheads look into the legal definition of the term 'real' to see how it applies to land, and how it does not apply to automobiles.

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  41. "worldwide demand for commodities"

    Gary, the commodities markets are in bubble-like conditions right now....

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  42. dc_too:

    First off, pointing out that people should not buy more than they can afford is hardly the equivalent of sipping the Bubblehead Kool Aid. It's simple and basic personal finance.

    Second, please define "prices are falling in our area." What is the area? Prices of what: single family homes, townhouses, condos, all 3? "Falling" comparing what to when: asking prices, assessments, final sales prices?

    Third, when you make a major financial decision such as purchasing a home, the final credit or blame for the wisdome of that decision rests with you. Not the real estate agent. Not the mortgage broker. Not the media. Not the seller. Not the guy down the street or the man in the moon. I think what both va_investor and I agree with is that before you commit yourself to spending money on purchasing a home, make sure you run all the numbers to see if you can afford what you are buying. If I go into a Ferrari dealership and the salesman tells me that of course I can afford one of their cars, who is the bigger fool if I purchase a car: him for telling me what I wanted to hear? Or me for not having enough common sense to check the numbers and avoid any fuzzy math?

    Which leads me to Fourth: Both you and David seem to share the belief that homeowners who way overextended themselves to purchase a home aren't really at fault; that it must be the real estate agents who convinced the buyer to buy, or the mortgage guy who approved a loan knowing the buyer couldn't make the payments. But what about the buyer being responsible for his/her decision to buy? I totally agree that some buyers are going to face misery because they bought more than they could afford and so relied on ARMs, IOs, and other "exotic" mortgage options. The question is whose "fault" that is. Some want to argue that it's everyone else's fault, btu not the buyer's. Others want to apportion blame between the buyer and the agents, mortgage brokers, media, etc. How about the easiest route: The guy who signed the check and the purchase documents is responsible for his signature. Unless he was forced to sign with a gun to his head, he could have walked away and continued living in Renter's Paradise.

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  43. I still haven't heard from any desperate, bitter, mislead, lied to, homedebtors. Only hearing from bitter renters.

    No reasonable person (this includes me) has ever denied that real estate is cyclical. We've peaked (spring 05) and are heading down. Big yawn.

    Fritz - good "steak" analogy. David does have that socialist big brother thing going on. BTW, going to Morton's tonight to celebrate annivers. - think I'll have the steak.

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  44. anonymous wrote:
    "Financing a car is never, ever a good idea. They ALWAYS depreciate in value"

    Wrong and simplistic. If you need a car, and cannot afford to buy one outright, then taking out a loan is probably the only option. It doesn't matter that cars depreciate in value. The rate that the car depreciates is in no way influenced by the fact that you took out a loan.

    Second, if you can earn a higher return (through an index fund, for example) than the interest rate on the loan, then you are better off taking out a loan. This applies for any low interest loan (car loan, mortgage, etc.).

    If you CAN afford the car outright and CANNOT earn a higher interest rate elsewhere, then you are better off paying for the car all at once.

    other anonymous wrote:
    "bubbleheads; 'I'd never go into debt for a home'"

    What dumbass said never to to in debt for a home?

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  45. va invester
    "No reasonable person (this includes me) has ever denied that real estate is cyclical. We've peaked (spring 05) and are heading down. Big yawn."

    Supply and demand aspect is cyclical, unfortunately for renters housing prices are not as cyclical.

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  46. Sorry, I meant to say, "What dumbass said never to go in debt for a home?"

    anonymous said:
    "The value of real estate rarely goes down to Zero."

    It doesn't matter. If you buy a house for $400,000 and it falls to $300,000, then you have still lost $100,000.

    "Cars are not "real property"."
    Who said cars are real property?

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  47. "No reasonable person (this includes me) has ever denied that real estate is cyclical. We've peaked (spring 05) and are heading down. Big yawn."

    Actually, that is baloney, unless you plan to duck underneath the "no reasonable person" clause. The entire industry has fed the illusion that the run up is normal and permanent. Go read David DeLereah's book, or some of Bob "land shortage" Toll's media interviews if you have any questions.

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  48. James said "If you buy a house for $400,000 and it falls to $300,000,then you have still lost $100,000."

    And, you could get hit by a bus tommorrow or lose your job or get divorced or or or or or or or....

    Better not risk buying a house!

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  49. d.c.too,

    I was here in the 80's and 90's. Most people with any experience know (and knew) that the builder/realtor propaganda was just that.

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  50. fritz wrote:
    "...when you make a major financial decision such as purchasing a home, the final credit or blame for the wisdom of that decision rests with you."

    I fully agree with that part of your statement. However, to say that the real estate agent and the mortgage broker are not culpable goes a bit too far. Few people are real estate experts so they rely on market professionals to give them advice in the decision-making process. If the real estate agent or mortgage broker knowingly gives them poor advice, then they share much of the blame.

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  51. "Wrong and simplistic. If you need a car, and cannot afford to buy one outright, then taking out a loan is probably the only option. It doesn't matter that cars depreciate in value. The rate that"

    "Need" a car? Why? because you rent an apartment so far from your job? Rent a place closer to your place of employment. You'll save a lot of money.

    Honestly, I don't know how humanity survived before the invention of the authomobile.... (they've been around en masse for less than 100 years, by the way)

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  52. va_investor wrote:
    "And, you could get hit by a bus tommorrow..."

    You confuse possibilities with probabilities.

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  53. James, what if inflation increases (as it is doing now) and housing prices stagnate? What will your graph look like then?

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  54. James,

    What backs up your "probabilities" and, in the long run, is the distinction really relevant?

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  55. "You confuse possibilities with probabilities."


    LOL! Yeah, james thinks owning a car is a necessity (just as it was for his great grandparents, you know), RE everywhere will buck its historical trend between now and the end of time (breaking its relentless overall increase in value through recorded history), and he isn't going to have a health problem, ever.

    He needs to look into something called "time horizons" that extend beyond 2010.

    Good luck with all that, James. Let us know how immortality works out for you. And let us know how real estate did between now and 3006.

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  56. "Need" a car? Why? because you rent an apartment so far from your job? Rent a place closer to your place of employment.

    You assume that there is housing within walking distance to a particular person's job, or that there is available public transportation. You also assume that use of an automobile is not required for the job. You know what they say: when you assume, you make an ass out of yourself.

    "Honestly, I don't know how humanity survived before the invention of the authomobile"

    They used horses. Those cost money too and it's hard to find "parking" for them in the modern world.

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  57. "You assume that there is housing within walking distance to a"

    Most people are just too damned lazy, and you know it.

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  58. Anon 10:09 - Incomes will rise with inflation - stagnating house prices in an inflationary environment translate to a real loss.

    VA: The "long run," with an adjustable mortgage on a house you paid seven times income for? Um, I think we can apply that wisdom about being dead, in the long run. Besides, you still have to convince me I am not better off renting for a few years, in this, current, prices-are-falling environment. Please, please don't tell me prices will adjust in lock step with interest rates - ANYTHING but that.

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  59. DC_too:

    Are you really saying it's baloney that real estate DOES NOT go in cycles?

    Or are you saying that since David Lereah said housing will always appreciate, that his word is the end-all and be-all on that issue, and thus because he said X, then it was reasonable for everyone to believe in X?

    What you seem to be saying is, once again, people who overextended themselves financially aren't really to blame and that it's all someone else's fault. If that's what you're saying, then just be clear about it.

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  60. James, what if inflation increases (as it is doing now) and housing prices stagnate? What will your graph look like then?

    It would show a decline. Real prices matter, nominal prices do not.

    What backs up your "probabilities" and, in the long run, is the distinction really relevant?

    Reversion toward the mean, and yes.

    Yeah, james thinks ... RE everywhere will buck its historical trend between now and the end of time (breaking its relentless overall increase in value through recorded history)

    You don't seem to know the difference between real and nominal prices. As the chart showed, the long term trend of real housing prices is FLAT.

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  61. DC_too:

    If renting makes you happy for the next few years, then by all means rent.

    If renting makes you happy for the rest of your life, then by all means rent.

    What is with all the renters who seem to want nothing more than validation with their choice of renting? The vast majority of posters appear to be bitter renters who want to chat with other bitter renters about how smart they are for renting and how dumb it is to buy.

    Good grief people! You would be a bonanza for a shrink with all your personal validation issues!

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  62. dc_too,

    I said nothing about ARM's. Pretty stupid, IMO, to get an ARM with today's fixed rates being what they are.

    I don't WANT to convince anyone to buy. Afterall, I am a landlord. I just don't want to support you renters in your old age through social welfare programs.

    Oh, I forgot. You renters are saving copious amounts of money every month for retirement.

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  63. "Oh, I forgot. You renters are saving copious amounts of money every month for retirement."

    You seem to say that with sarcasm. I can't speak for all renters, but I certainly am.

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  64. Me, too. What VA knows, James, that you may not, is that I was once a homeowner in DC. I bought in the mid-90's, so I'd have a cheap place to live (and it was cheap). I was so alarmed by the mania, and prices went so high, in an environment of stagnating rents, I really had no choice but to sell. It was sort of hard - EVERYONE said it was completely stupid, prices will rise forever, blah blah blah. It was nice to find these blogs - others, who recognized what was happening.

    David's blog is fun because it's local. Sadly, it has become over run with bitter realtors since its honorable mention in the W. Post.

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  65. James,

    I'm glad you are saving, but I find it hard to believe some of the claims about "saving" on this blog. Even if people are socking their "rent savings" away, the stock market is no sure thing.

    We all know that Social Security will be "means tested" in our lifetime. We will be punished for our prudence and planning.

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  66. Hi all,
    I need some advice here - I'm renting now (paying $1200 for a one bedroom) and I am thinking about buying this condo in Arlington, Virginia. This studio condo is priced at $169900 (568 sf) and needs at least 10k of repair. This is the lowest priced condo compared with other similiar ones in the same area. I am pre-approved for the loan but I am agonizing whether I should get it now. I am not an investor and plan to live here maybe for 3 to 4 years. Most agents told me it'd be hard to sell a studio in a slowing market. My income to debt ratio would be around 54% if I get it with a 6.65% fixed 30 yrs mortgage. Also I work for a small software company and I'm worried what if I get laid off I'll only have enough savings to maintain the mortgage for 6 months whereas I can always move to a cheaper apartment. Or I should just wait until the winter and see if there're better deals?

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  67. unless you are purchasing well under market, three to four years is not a long enough time horizon. Also, your ratio's are out of whack unless your income will be increasing at a good clip.
    FWIW

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  68. Investment strategy for renters
    Buy some land (a small lot) in a place like Hickory, NC; invest in conservate growth mutual funds; retire; use your IRA savings to purchase a modular home and have it delivered to your lot.

    If anyone has a better idea for a renter to accumulate some equity, please speak up!

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  69. Is this a joke post by a Realtor-baiting blogger? Must be. Ha Ha.

    Yes, go buy the one-room apartment now, today, before you are priced out of the market forever.

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  70. For the guy looking for advice:

    Listen to va-investor; rule of thumb is don't buy unless you plan on being there for at least 5 years.

    Ignore dc_too and his never-ending bitterness.

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  71. VA Investor,

    What do you think about the regressive nature of the home mortgage interest deduction?

    My $0.02.

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  72. mytwocents,

    I agree. The deduction is very regressive but I don't think it will be changed. We already have a limit on deductible mortgage balances and home equity lines.

    These limits are not even inflation adjusted.

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  73. I am genuinely asking for advice here; don't too much care about all the sarcasms throwing around here. I've been looking in the Arlington,VA area for a long time and the condo I am thinking about has everything I need and in a relatively good neighborhood. It's hard to time the market plus the price is not so outrageous that even if it's down 10% in 4 years I'm only out 17000 which is 14 months of rent. The only thing holding me back is not comfortable with my income/debt ratio and the uncertainty of the job market.

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  74. "honorable mention in the W. Post."

    uh, the Express isn't the Post, and it isn't honorable. It was meant to be a light read while commuting via Metro. Or while sitting on the can.

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  75. Fritz, the economic law of 20% annual house price appreciation means this fellow will make over $100,000 if he buys, today, even with his time frame. You are giving terrible advice and should be ashamed.

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  76. Liukang - all kidding aside, as a financial proposition, buying this thing is not a good idea, given the parameters you have provided. VA_Investor is correct, in my view, that your time horizon is not sufficient to justify the purchase.

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  77. VA Investor,

    What is the limit on deductible home mortgage interest? I didn't think there was a limit per-se.

    Rather, I know that if you get snared into the AMT then you lose the interest deduction and pay taxes based on an entirely different set of rules. Is this what you're referring to?

    Either way, I would like to see the "wealthy definition" of the AMT linked to inflation and a cap on home mortgage interest deduction - something similar to the social security wages cap. Granted no one wants taxes to go up but we have to fund government somehow...

    My $0.02.

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  78. liukank,

    The condo market got creamed in the last downturn. Some dropped as much as 40%. Will you be able to lease it if you have to?

    If not, I wouldn't be looking to buy a studio or any condo right now. Again, FWIW. No one has a crystal ball.

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  79. liukang,

    Also, don't forget selling costs in 4 years and/or if you need to sell early. You're worst case scenario 10% loss needs to factor in another 6% for commissions. Though these fees are being attacked on several fronts now a days. Just don't bank on timely change.

    My $0.02.

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  80. "because you rent an apartment so far from your job? Rent a place closer to your place of employment."

    According to the Northern Virginia Association of Realtors, for the 1st quarter of 2006, the average rent for the 5 close-in jurisdictions (Alexandria City, Arlington County, Fairfax County, Fairfax City, Falls Church City) is $1889+.

    Don't most landlords require your rent to be no more than 1/3 of your income? Sad to say, many of us, even with 2 jobs, don't make $68,000+ per year.

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  81. mytoocents,

    As far as I know the limit is one million dollars for deductible mortgage including second home.

    The limit on home equity deductibility is 100K over original mortgage amount (not purchase price).

    Any CPA's out there, feel free to correct me.

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  82. Liukang
    Don't buy unless you are certain you can get a replacement job within 6 months (in case of a layoff) and your mortgage with taxes and insurance is less than your rent (extra money to payoff debts). Also will this condo be sufficient for you in the long term. If you are going to have a family, definetly not! You would have to wait 5-10 years to be able to sell it at a minimal loss.

    Bottom line, keep on renting.

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  83. Thanks for all your advices. A smiliar condo unit is being rented out for $900 which would not cover the mortgage+taxes+condo fees so leasing it out is not a good option neither. I think I'll wait awhile then. In the mean time I think I'll take a nice vacation and not to worry about going through the home buying process :-)

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  84. consumers vs. NRAJune 20, 2006 6:23 PM

    Consumer group goes after real estate industry

    Consumer Federation of America says home buyers pay higher prices because 'cartel' stifles competition.

    By Les Christie, CNNMoney.com staff writer

    June 19, 2006

    NEW YORK (CNNMoney.com) - A leading consumer rights group, the Consumer Federation of America (CFA), on Monday issued a report charging that real estate industry members act as a cartel to stifle competition, resulting in higher prices and poorer service for homebuyers.

    It's the latest episode in the long-running soap opera that pits consumer groups and the government against the real estate industry. The dispute has become increasingly heated in recent years as soaring home prices have resulted in huge commissions for the industry. At the same time, the technology advances that have dramatically lowered costs in investment, travel and other industries have not had a great impact on real estate.

    "Many traditional real estate brokerage firms, and their organizations, function as a cartel that tries to set prices and restrict service options," said Stephen Brobeck, CFA's executive director at a press conference in Washington D.C.

    The CFA charges that consumers are harmed in three main ways:

    * Traditional brokers charge high, uniform prices regardless of the quality of the broker involved. Even a newly licensed, inexperienced agent receives the same commission no matter what the level of service offered.

    * Traditional brokers who work with both seller and buyer in a home sale almost always function as facilitators. Brokers try to make sure a sale is completed (and they get paid), rather than as fiduciary agents acting in the best interests of their clients, as the brokers claim to do.

    * Brokers "double-dip," promoting their own listings or the listings of their firm over properties better suited for their clients.

    For those who have not followed the controversy closely, the CFA explained how traditional real estate brokers are able to control the sales process:
    By having sellers pay all commissions

    Home sellers' 6-percent commissions are split between their broker (the listing agent) and the buyer's agent. That creates reluctance among sellers and their brokers to lower commissions: They depend on their homes being seen by potential buyers, and buyers agents will be more likely to show homes with full commissions than discounted ones.

    According to the CFA, if sellers and buyers each negotiated compensation separately with brokers, brokerage services and prices would quickly become unbundled and clients would pay only for the services they need.
    Discriminary practices targeting non-traditional brokers

    Brokers will sometimes offer rebates to buyers or sellers - cash back at closing - to attract their patronage. But many state commissions have banned rebates, prohibitions that the Department of Justice has gotten overturned in some cases.

    State legislatures have also enacted minimum service regulations, which prohibit brokers from unbundling services and charging a fee for each. "We're asking states to end minimum service laws because we think they harm consumers," James Cooper of the Federal Trade Commission, noting, however that Washington can't dicate remedies to the states.

    There are also more subtle forms of discrimination by traditional brokers. In one, "boycotting," discount brokers say that traditional brokers refuse to show their listings to clients.
    Restricted listing services

    The CFA says traditional brokers dominate the unregulated multiple listing services and restrict full access to broker clients, hide commission splits from consumers, and restrict non-traditional brokers from access or full information.
    Lack of consumer knowledge

    The CFA says homebuyers and sellers, especially first-time ones, are at a great disadvantage in that they know little about industry practices. Those selling one home and buying another tend to be preoccupied with matching these sales. Many consumers do not shop and negotiate for brokerage services as carefully as they would purchase a car or other much less expensive transactions.
    Lobbying efforts

    Many real estate brokers also sit on state real estate commissions; they make up the majority of all state boards, according to the CFA. They regulate themselves and make rules that disadvantage competing business models.

    The National Association of Realtors released a comment on the CFA report calling the industry, "One of the most competitive business environments in the world, characterized by low barriers to entry, intense personal client service and a results-based compensation structure. Real estate consumers can choose from nearly 80,000 real estate brokerages and more than 2 million real estate licensees, more than 1.3 million of whom are Realtors. Competition is fierce. In fact, discount brokerages and many innovative business models are doing very well today and the average real estate commission, as computed by Real Trends, has fallen from 5.5% in 1998 to 5.1% in 2003."

    Tom Stevens, president of NAR, says the real estate brokerage is "an intensely client-driven business and every client's needs are different. You can't compare it to buying an airline ticket or stocks."

    Brobeck agrees that, despite the best efforts of the industry, the commission structure is eroding in some markets.

    "Sellers with a $600,000 home are saying, 'I'm not going to pay a commission of $36,000,'" he says. But in some slower markets, commission rates can still hover at around 7 percent. Overall, commission rates probably average well about 5 percent. They are much lower in other countries and would drop in the United States except for anti-competitive practices.

    "Prices should be left up to the marketplace," says Brobeck, "but the cartel still sets the prices."

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  85. Help, I need some advice...

    Hi all,
    I need some advice here - I'm renting now (paying $1800 for 4 BR/ 3 BA on 6 acres 45 min from DC) and I am thinking about buying this house in Clarksville, MD. This SFH is priced at $669900 (2568 sf on 1/2 acre) and needs at least 40k of repair. This is the lowest priced SFH compared with other similiar ones in the same area. I am pre-approved for the loan but I am agonizing whether I should get it now. I am an investor and plan to live here maybe for 3 to 5 years. Most asians told me it'd be hard to sell a house in a slowing market. My income to debt ratio would be around 45% if I get it with a 6.65% fixed 30 yrs mortgage. Also I work for a small company and I'm worried what if I get laid more than once I'll only have enough savings to maintain the mortgage for 6 months whereas I can always move to a cheaper SFH with more land. Or I should just wait until I get smarter and see if there're better deals?

    ReplyDelete
  86. Help, I need some advice...

    Hi all,
    I need some advice here - I'm renting now (paying $1800 for 4 BR/ 3 BA on 6 acres 45 min from DC) and I am thinking about buying this house in Clarksville, MD. This SFH is priced at $669900 (2568 sf on 1/2 acre) and needs at least 40k of repair. This is the lowest priced SFH compared with other similiar ones in the same area. I am pre-approved for the loan but I am agonizing whether I should get it now. I am an investor and plan to live here maybe for 3 to 5 years. Most asians told me it'd be hard to sell a house in a slowing market. My income to debt ratio would be around 45% if I get it with a 6.65% fixed 30 yrs mortgage. Also I work for a small company and I'm worried what if I get laid more than once I'll only have enough savings to maintain the mortgage for 6 months whereas I can always move to a cheaper SFH with more land. Or I should just wait until I get smarter and see if there're better deals?

    ReplyDelete
  87. Well, seems the party...er, conversation...totally deviated from the original subject on foreclosure forecasts... But I'd like to offer some anecdotal "evidence" to support David's post: I worked with a borrower last week who 3 years ago had taken an ARM with a 3-yr fixed rate to buy a very modest townhouse in Silver Spring (original price was under $250k, if my memory is correct). She was forced to refinance this year because her ARM would have been adjusted next month and her mortgage would have increased from $1300 to $1800+ (closer to $1900, actually). Now her new mortgage (a 30-yr fixed rate) is $2000 including property taxes (she took a modest cash back with the refi, and paid $11K in closing costs). She was not happy about it, but knew that if she did not lock in at a fixed, not-so-horrible rate now (7%), she might not be able to afford her adjustable rate mortgage in the future (which could legally increase to 12%). Before the closing, I asked her if she can really afford this new mortgage, and she replied in the positive, though her face and body language told me she might have her doubts...I hope for her sake that she can keep up with her payments... This woman is probably luckier than most others who will have to face harder financial decisions in the future because they bought homes at a time when they should have waited...And will probably need to consider a refi at HIGHER interest rates than 7% for fixed rate, or somewhat lower for yet another ARM.

    BTW, I know RE agents who have been busy trying to sell their own "investment properties" before the bubble bursts...And have thus spent less time marketing their clients' houses, which have been sitting in the market for months now...How does the saying go? When the rats jump ship....???

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  88. Anon 3:25
    You should get together with your buddy Liukang and buy the Clarksville House.

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  89. If she got an ARM 3 yrs ago, I seriously doubt it could cap at 12%. More like 10% at the most. Makes me doubt your whole story.

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  90. 11k in closing costs is also highly suspect - even for Maryland.

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  91. consumers vs. NRA said...

    ""Prices should be left up to the marketplace," says Brobeck, "but the cartel still sets the prices.""

    You did realize the "prices" they're talking about in this article are the commissions and not the selling prices of homes, didn't you? I.e., the cartel is stifling competition and keeping the sales commission prices at monopolistic levels. While this may increase transaction costs for the sale of real estate ... resulting in slightly higher costs to the buyer (and the seller), it has NO BEARING on real estate prices.

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  92. Reduce or subtract the commissions and the price will come down. This does have some bearing on how the seller (and agent) will price the house. 6% of anything will influence how participants in a transaction will behave.

    Again, go brush up on your economics a bit, Lance.

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  93. VA_Investor...Have you read the fine print in ARM notes??? The ARMs I have worked with can legally go up 12%; it's probably unlikely that they will go up by that much, but the fine print in the note allows it.

    Do you work in financing aspect of RE? If so, you can contest my "story," though not very well, as you are not me, and thus you have not seen what I have. If not, then your counter "argument" adds little to the coversation.

    BTW, 11K is not unheard of. That's high, but I have seen it before (I'm NOT an L.O. or a L.B., btw, so I have no say as to how much closing costs are). Still, in maryland loan brokers can legally charge up to 8 points, though from 1.5 to 2 points is the norm at THIS time. Going above that can raise eyebrows.

    Funny how NONE of the anti-bubbleheads have said anything about my observation that RE agents are in a hurry to sell their own investment properties. And that's not just the agents I know personally. If I take a drive from my home to the closest metro station, I will pass by TWO houses for sale which are listed as "agent owned."

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  94. I am quite familiar with all types of Notes. Most ARMS have lifetime caps of 5 or 6 percent over the initial rate.

    An ARM obtained 3 yrs ago would probably have carried an initial rate in the 4's and thus a cap in the 10's at the most.

    This is why I think you are blowing smoke.

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  95. "I am quite familiar with all types of Notes. Most ARMS have lifetime caps of 5 or 6 percent over the initial rate.

    An ARM obtained 3 yrs ago would probably have carried an initial rate in the 4's and thus a cap in the 10's at the most."


    VAinvestor = real estate cheerleader, aka paid pusher on housing bubble blogs.

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  96. "Yet, at the very same time, mortgage brokers have a responsibility to lend responsibly."

    Bah! This is America and we don't need any stinking responsibility. It's every man for him self. After all if things get choppy the central bank can just print money out its rear and have the tax payers float inflation until their hair goes grey.

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  97. anon 9:10pm,

    Brilliant analysis!

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  98. Check out my new blog: http://dcbubblemeter.blogspot.com/

    ReplyDelete