Market CorrectionThank goodness for Kenneth R. Harney. Finally, someone has pointed out that this minor, much-needed adjustment in the local housing market is beneficial ["All Crashes Should Be So Good," Real Estate, Oct. 14].
All of this media brouhaha about a plummeting real estate market discourages the very people who most need the financial security that owning a home provides: first-time buyers.
HOLLY WORTHINGTONPresident
Greater Capitol Area Association of Realtors
Silver Spring
Tuesday, October 24, 2006
Letter To The Editor in WashingtonPost
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Sorry, Kenneth is on my blog in a NAR cheerleading outfit and I'm not taking it down!
ReplyDeleteIt seems to me that in the last three or four years, the real estate industry squeezed out every last buyer they could find.
ReplyDeleteNow the buyers they're left with don't want anything to do with this market or the risky loans that come with them.
skytrekker said:
ReplyDelete"So be prepared to wait- I could be wrong, but the fall in the end will be horrendous for all assets- try late next year, or at the latest autumn 2009."
Yep ... when Armagedon doesn't happen as scheduled ... let's push the date out so that we can still say "we're right" ... And, of course, the Fed and everyone else will continue their "manipulation" of the market which is otherwise known as "doing their job". Will the Bubbleheads just get a clue and realizd their false religion is just that ... and the longer they wait for their messianic depression to rescue them, the further behind they get. In the end they will learn though it is is themselves they'll have to count on to save themselves ... and not a boggyman depression that just ain't coming ...
anon --
ReplyDeleteGood point. I have first-time buyer friends who have run across this problem. They initially were pre-approved for a mortgage up to $375K. Put a $399K bid on a lovely house in a great town -- it needed about $10K in repairs and the only other problem was that it was too small -- and then had to withdraw it because that pre-approval assumed that they were willing to take on an ARM or other "risky" loan.
They are now out looking again, with $275K pre-approved because they will *not* take anything except a fixed-rate 30-year mortgage. That's a 100K reduction! And it's proving to be much harder to find anything. $375K is just about the median house price for our area; $275K is scraping the bottom of the barrel -- run-down houses with lead paint issues in bad towns.
The fact that *anyone* can get a mortgage is hurting them badly.
The amazing part is that people honestly expect a "minor" correction after the largest run-up in history. What gives?
ReplyDeleteOnly a "new paradigm" would make this so.
AGAIN, I expect a dead-cat bounce end of this year, beginning of next, followed by the real crash.
Historically, even "minor" run-up bubbles required 7-9 years (not months!) to return to peak pricing.
In this, the largest run-up ever, who knows how long/how sharp the decline will be????
The only position that seems untenable is that no real drop will occur....
My friend in Florida who worked for an architectural firm just got laid off along with half of his coworkers. He said the residential construction markets are so dead right now and he is not even in the south/southwest Florida area where the most inflated real estate markets are.
ReplyDeleteIt's good to hear I'm not the only one who won't use an ARM to buy a home.
ReplyDeletequietann said:
ReplyDelete" ... because they will *not* take anything except a fixed-rate 30-year mortgage."
And after jet travel became common, many people refused to give up the relatively safer oceanliners to cross the Atlantic. But as time went on they realized how'd they'd been left behind and the world had spun forward. Today, unless you are willing to pay oodles of dollars to take the QEII, your only other ship choice are freights that take on guests ... Not quiet the oceanliner experience of years ago. The moral here? Times change ... Change with them or be left behind. Learn to adapt. Creative mortgages didn't cause price inflation. They were developed to combat it. Your friends are just plain wrong to be limiting themselves as they are doing. (A) When one gets approved for an ARM one gets approved as being able to handle the ARM if it reset to the highest interest rate allowed per the contract (i.e., the "cap".) Which means that even in a worst case scenario --- an unlikely scenario --- they'd still be able to afford the house provided they were willing to make minor sacrifices to have that house; and (B) Just about anyone can and should expect to have a rise in income between the time the loan originates and the date it resets 5 or more years down the road. Your friends are putting up artificial and self-imposed roadblocks to their happiness and security. It's there life, so it's best not to say anything. But certainly don't encourage them in this irresponsible behavior!
quietann said:
ReplyDelete"$275K is scraping the bottom of the barrel -- run-down houses with lead paint issues in bad towns."
yep, better to deal with mental issues with the kids later ... than to do some sacrifice up front for them ...
Lance-"(A) When one gets approved for an ARM one gets approved as being able to handle the ARM if it reset to the highest interest rate allowed per the contract (i.e., the "cap".) Which means that even in a worst case scenario --- an unlikely scenario --- they'd still be able to afford the house provided they were willing to make minor sacrifices to have that house"
ReplyDeleteThat is patently untrue and an incorrect generalization. Please look at the MD state FB bailout program as well as their home affordability programs--here is the fact sheet . It clearly states that the buyer is approved/qualified using the IO payment, not the fully amortizing, fully indexed rate. Lance, if lenders had actually done as you suggest and as the new guidance requires, this bubble never would have happened. You are saying that every ARM recipient has the ability, using their fanancial holding and earnings, to pay back the entire value of their homes. I hate to break it to you, but a couple earning $75K a year hasn't the means to repay a $500K loan using anything other thatn the collateral of thier home and the potential profits from selling it.
nikki said:
ReplyDelete"I hate to break it to you, but a couple earning $75K a year hasn't the means to repay a $500K loan using anything other thatn the collateral of thier home and the potential profits from selling it."
Nikki, did you even attempt to do the numbers before making this statement? I just did ... and you're wrong. An interest only loan at 6.50% would result in payments of $2,708 per month (or $32,500 per year)... and this is 43% of gross income add in property tax and you are at something like 45% ... That is still less than the 46% - 49% that most lenders use as the upper limit of acceptable. So, you're not comfortable with an interest only loan? Then don't buy that big of a house (or in that nice of a neighborhood) that you're going to need a $500,000 mortgage. Buy less ... but weigh the consequences of your actions. Personally, if I had to choose between the "comfort" of an amortizing loan and getting a lead-free house in which to raise my children, I'd pick the latter even if it meant doing an interest only loan.
"Daniel Mudd, chief executive officer of Fannie Mae, told the conference that the payment shock accompanying many monthly mortgage bills would have a profound impact on the housing industry next year. He said that out of $9 trillion in mortgage debt outstanding, roughly $1 trillion will reset in 2007."Those resets are going to have some interesting and difficult-to-predict impacts on consumers," Mudd said."
ReplyDeleteLance-"(A) When one gets approved for an ARM one gets approved as being able to handle the ARM if it reset to the highest interest rate allowed per the contract (i.e., the "cap".) Which means that even in a worst case scenario --- an unlikely scenario --- they'd still be able to afford the house provided they were willing to make minor sacrifices to have that house"
Lance,
Theoretically, you are right. However, history shows past irrational exuberance from banks, with real estate bubbles aided and abbetted by easy money, including commercial real estate in the late 80's. These things go in cycles like most things. Most banks look at around 36% as being reasonable, and above that loans are approved as exceptions. The run up in real estate value could make those with homes appear to be candidates for exceptions, and they get approved, then falling prices leave them struggling as rates reset.
Some of the exotic loans make sense for some people; if you have just finished medical school, for example, and your income will skyrocket, its for you. If your income earning spouse is on a non-paid leave, it also makes sense. ARM's are not appropriate for those whose income will increase at near the rate of inflation to start repaying, especially if the market falls. And, in general, ARM's are bad in an increaing interest rate environment. With lots off investors buying using ARM (makes sense if they expect to flip, and works if they can), housing prices took off.
The bottom line on whether there is froth or not is whether homes are affordable. With interest rates low, houses were affordable to more so prices increased rationally. But then... Now they are at a point, where good salary, can't afford you a decent place to own, if you didn't already own.
what the hell kind of financial security is provided to first-time buyers with suicide loans?
ReplyDelete