Housing Bubble Bursting?

[Randolph Kinney]

S.D. real estate concerns Fannie Mae

S.D. real estate concerns Fannie Mae

'No question' about slowing, says official

By Emmet Pierce
UNION-TRIBUNE STAFF WRITER
July 20, 2006

Widely seen as a forerunner in national real estate trends, San Diego County is being viewed “with some trepidation” by lending giant Fannie Mae as its housing market cools.

“San Diego is one of the areas of the country that has had incredible . . . price gains,” Fannie Mae Chief Economist David Berson said yesterday during an economic and mortgage market report. “There is no question that the San Diego housing market has slowed.

“Inventories have surged in San Diego and the surrounding areas,” he continued. “Home price gains . . . are certainly down from their peak and perhaps will fall.”

San Diego is one region that is experiencing low affordability after a rapid and unsustainable rise in home prices, Berson said. Major metropolitan areas on both coasts are experiencing their lowest affordability levels “since the mid-1980s, when interest rates were considerably higher than they are now.”

While San Diego County's economy is basically sound, the strong presence of investors in the housing market makes it subject to price fluctuations, he added. “We view it with some trepidation. It is one of the areas we are concerned about.”

Berson said the condo market here is at risk “because the supply has gone up dramatically.” There have been “lots of condo conversions. The investor share probably has been far more active in the condo market.”

Investors favor condos over single-family homes because they're considered to be easier to sell quickly, he said. “Condos are far more commodity-like than single-family homes.”

Berson said the national housing market will continue to slow.

“We have had five years of record home sales,” he said. “That is unprecedented in the modern era. New home sales this year will fall by 9 to 10 percent. . . . Existing home sales, we think they will fall this year by about 7 to 9 percent.”

Across the country, home values, as measured by sales, rose last year by about 11 percent, Berson said. “This year, by the end of the year, it will have fallen to about 3 percent.”

In the fourth quarter of 2005, about 24 percent of condominium buyers here were investors, estimates John Karevoll, analyst for DataQuick Information Systems. That fell to about 21 percent in the second quarter of this year.

In June, San Diego County experienced its first year-over-year price decline in a decade. It was the 24th consecutive month of year-over-year declines in sales. DataQuick reported that the county's median home price slid to $488,000, off 1 percent from June 2005 and down 6 percent from last November's peak of $518,000.

Berson, based in Washington, D.C., yesterday delivered his economic and mortgage report to journalists during a telephone conference call. Nationally, single-family home starts were down about 4.5 percent over the first half of this year compared with the first half of 2005, he said. Mortgage originations, which reached almost $3 trillion last year, will drop this year to $2.3 trillion to $2.4 trillion, he predicted.

In a related report yesterday, there were new signs that the housing industry has lost steam. The Commerce Department reported that the home construction fell by 5.3 percent in June. Applications for building permits fell for a fifth consecutive month.

“Our reports from builders and census data on sales and reports from public builders all show the market is falling off,” said Michael Carliner, an economist with the National Association of Home Builders. “Builders don't want to build more than they are selling.”

In recent years, “housing has been one of the major forces in raising the economy,” he said. For the time being, economic growth “will have to come from other sectors, like business investment.”

 

[Big ole Boy]

Jack of all trades income is going to shrink

Something being missed out there is the guy who was buying houses and fixing them up and then reselling them as a means of making a living wage to support themselves.

There are a lot of people that make a living this way who for obvious reasons found a "Jack of all trades" self-employment job ..... a lot of people in this catagory will be affected ....

Maybe they sold a little real estate and flipped a few houses and worked in the evenings and weekends fixing up houses .....

These jobs will be going away ... and many of these kinds of jobs just won't show up on the radar screen in our current unemployment numbers .... but rather, take several years to shake the real health of our employment sector ....

..... I heard the other night a commodities traders describing the current foreseeable future as an "inverse stagflation" ....... instead of high interest rates we will have high food prices .....

...... what this commodity trader does not realize is that if the dollar is to be bankable for the world .... then the FED will have to squeeze the consumer with higher rates to head off higher food prices ....

the FED is forced to curtail inflation through draconian size increases in the Federal Funds rate ........

 

[Randolph Kinney]

ARM Reset Presents No Problem

Re-Refinancing, and Putting Off Mortgage Pain

By VIKAS BAJAJ and RON NIXON
Published: July 23, 2006

It is the latest twist in the gravity-defying world of the high housing prices and exotic low-rate mortgages: As monthly payments on adjustable-rate mortgages are starting to balloon, many Americans have found a way to put off the day of reckoning.

They are refinancing with new adjustable-rate mortgages that keep monthly payments low — for now, that is, though their payments will likely rise even higher in the future.

“Some people would say I am a little crazy,” acknowledged R. Lance Perry, 42, of Danville, Calif., one of the new breed of people refinancing their mortgages. But faced with a sharp increase in his monthly payments and a need to take cash out of his home, he refinanced earlier this year to keep his payments the same.

By the time the rate goes up, he figures, his income will have increased enough to cover the higher payments, he will have refinanced again or he will have moved.

Like Mr. Perry, millions of Americans have turned to adjustable-rate mortgages, or A.R.M.’s, in recent years to afford a home as prices soared.
Typically set at artificially low rates in the first years of the loan, these mortgages are then reset at the prevailing interest rates. For borrowers, the bet was that interest rates would remain low.

Now, the first big wave of the mortgage boom is cresting as more than $400 billion worth of adjustable-rate mortgages, or about 5 percent of all outstanding mortgage debt, will readjust this year for the first time, according to Loan Performance, a research firm. Next year, another $1 trillion in loans will readjust.

When that happens, for instance, a typical borrower with a $200,000 A.R.M. could see his monthly payments increase nearly 25 percent when the A.R.M. adjusts from 4.5 percent to 6.5 percent. In total dollars, that is an increase from $1,013 a month to $1,254.

Yet instead of paying more now, many borrowers are refinancing into their second or third adjustable-rate mortgage, loan data indicate and industry experts confirm.

So far, the number of borrowers refinancing this way is relatively small — several hundred thousand in the estimate of the credit ratings firm Fitch Ratings — but mortgage industry officials and analysts expect the numbers will surge next year. In doing so, these borrowers are pushing out any eventual shock of higher payments by another two or three years, if not longer.

“They get another two- or three-year hybrid with a low introductory rate to keep payments down,” said Frank E. Nothaft, a vice president and chief economist at Freddie Mac, the mortgage buyer. “They’re trying to put it off forever, which is O.K. as long as interest rates are low. But when they start to spike, then it’s going to be more problematic.”

For now, this mini-refinancing boom is assuaging fears that rising interest rates and higher monthly payments would drive some borrowers into foreclosure or force them to scale back sharply on other spending. As a result, consumer spending may hold up better than some economists had thought.

But the refinancing also represents a doubling-down on a bet that housing prices will continue to rise on the West and East Coasts and in other hot markets. If the value of the home falls closer to the amount of the loan, that could curb the ability to refinance, and may prompt the homeowner to either invest more in the home or to sell it.

Still, borrowers like Mr. Perry say the loans make sense because in a few years they plan to move to another home, earn more or refinance again, often using the same assumptions they made when they took out their earlier loans.

With his new loan, his third adjustable-rate mortgage, Mr. Perry, a former technology project manager, cashed about $200,000 out of his home’s equity and is investing it into his four-year-old financial planning business. “I could have sold my house and made my family move,” said Mr. Perry, 42, who lives with his wife and a 3-year-old son in Danville, about 20 miles east of Oakland. “But I didn’t do that. I said, ‘Look, I want to start a new business,’ and this product allowed me to do that.”

He said he was taking on more risk than many of his clients would be willing to because he believes his business will continue to grow. After spending 15 years in the technology industry, which put him on the road constantly, Mr. Perry said that being self-employed allowed him to spend more time with his family, which he also expects to grow. As far as the house, he said: “I am not going to be here for 30 years. Why is it important to have a fixed mortgage?”

That sentiment resonates nationally, and especially in California.

(continued on page 2)

 

[Randolph Kinney]

Page 2

Re-Refinancing, and Putting Off Mortgage Pain

By VIKAS BAJAJ and RON NIXON
Published: July 23, 2006

Even as mortgage applications over all are falling because of slowing home sales and rising rates, adjustable-rate mortgages made up about 30 percent of all loans in May, down only slightly from 34.2 percent in May 2005, according to the Mortgage Bankers Association of America. In the San Francisco Bay area, adjustable mortgages of the kind Mr. Perry borrowed make up 49 percent of all refinance loans so far this year, according to Loan Performance.

Though they have been around for decades, the use of adjustable-rate mortgages has soared in the last several years, helping fuel the housing boom by letting people borrow more than they might have been able to. For buyers who do not intend to stay in their homes for long, they can cost a lot less than 30-year, fixed-rate mortgages.

Adjustable loans come in many forms. Most have low and fixed teaser rates initially. Many, like interest-only or “option” A.R.M.’s, also let borrowers pay only the interest portion of the debt or even less than that. After the introductory period ends, lenders require bigger payments and ratchet up interest rates. And rates have been rising as the Federal Reserve continues a campaign to make credit more expensive.

The national average rate on a five-year adjustable-rate loan was 6.28 percent in June, up from 5.02 percent in early 2005, according to Freddie Mac. The average rate on 30-year fixed loans increased to 6.68 percent from 5.63 percent.

For businesses involved in financing real estate, adjustable loans and the refinancing they generate assure a steady stream of transactions. The beneficiaries include mortgage brokers, appraisers, banks, mortgage companies and Wall Street, where home loans are increasingly bundled and sold as securities.

Industry officials say that adjustable-rate mortgages cater to borrowers’ changing tastes and strategies. With interest rates still near historical lows and lifestyles that are more transient, many borrowers view the standard 30-year, fixed-rate mortgage as an anachronism.

Borrowers no longer “ask me what is the quickest way I can pay off my mortgage,” said Jack Williams, the president of the California Association of Mortgage Brokers and a broker in Orange County. “I haven’t heard people say that for 15 years.”

Many home buyers, however, say they have used adjustable-rate mortgages to manage their finances in the short run with the expectation of going to a fixed-rate loan.

Maribel Chino and her fiancé, Felix Burgos, refinanced the option A.R.M. on their town house in Brooklyn four months ago with a fixed-rate mortgage with a 7 percent rate after seeing the levy on a prior adjustable loan climb past 6 percent from an initial rate of 4.25 percent.

The $800 increase in the couple’s mortgage payment, now $3,100 a month, has forced them to budget more carefully, but they believe that the $8,000 to $12,000 a year they saved in payments for the first three years they owned their home made the A.R.M. worth it.

“It was good to start with,” Ms. Chino said. Mr. Burgos added: “Now we are paying 20 to 25 percent more, but we are comfortable.”

The ability to refinance with additional adjustable-rate mortgages diminishes when housing values fail to keep up with the rise in the household’s debt. So far, use of A.R.M.’s tends to be concentrated on the East and West Coasts, where housing markets have remained relatively robust. And even as interest rates rise, consumer default and delinquency rates have remained low.

“Before you see a distress sign, you have to have distress,” said Susan M. Wachter, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. “And the distress will be higher unemployment and declining home values.”

Stress, however, is starting to build in some regions and among certain borrowers.

Midwestern states have seen a rise in foreclosures and defaults because of job losses in automobile and other manufacturing industries. In the South, the aftermath of last year’s hurricanes is still rippling through family finances.

Yet these regions do not have as heavy a concentration of adjustable loans as the East and West Coasts do, which suggests that an economic downturn may be far more devastating in coastal markets.

California, which has 14 percent of the country’s housing stock, leads the nation with 21 percent of homes purchased with adjustable-rate mortgages, and 44 percent of California borrowers have refinanced with option-A.R.M. loans so far this year, according to Loan Performance. Other markets where those loans are popular include Arizona, Nevada, Florida, Virginia, and Washington, D.C.

Another group that draws concern are borrowers with subprime credit, a group that has been a growth market for many mortgage companies.

About 6.28 percent of all outstanding subprime, adjustable mortgages were in foreclosure or delinquent for more than three months during the first three months of this year, up from 5.23 percent in the same period a year ago, according to the Mortgage Bankers Association.

While those numbers are still lower than they were at the start of the decade, economists say there is reason for concern. An analysis by Fannie Mae, the mortgage buyer, of subprime adjustable loans issued from March 2003 to March 2004 that have adjusted showed that 16 percent of subprime borrowers have defaulted or are late in making monthly payments; another 14 percent have not yet refinanced. About 70 percent have refinanced.

The fate of subprime borrowers, industry experts and economists say, will be closely tied to home values and the job market. If they make more money and the value of their homes continues to appreciate, they will be able to refinance and make higher monthly payments.

If home prices fall or stagnate, homeowners will have less collateral against which they can borrow, said Grant Bailey, a director in Fitch Ratings’ residential mortgage-backed securities group.

“They kick the can out two years,” he said, “and everything works fine as long as there is pretty decent home price appreciation.”

 

[Steve Owen]

Borrowers no longer “ask me what is the quickest way I can pay off my mortgage,” said Jack Williams, the president of the California Association of Mortgage Brokers and a broker in Orange County. “I haven’t heard people say that for 15 years.”

They're not homeowners, they are glorified renters.

Still, if only 5 percent of all mortgage debt is financed this way, what would be the impact if all 5 percent of it went belly-up? Probably not a bubble burst.

 

[Randolph Kinney]

They're not homeowners, they are glorified renters.

Still, if only 5 percent of all mortgage debt is financed this way, what would be the impact if all 5 percent of it went belly-up? Probably not a bubble burst.

Yes, I agree, ARMs are just another way of renting with a tax deduction with the exception of falling interest rates, you will have lower rent, something you rarely see in a true rental market.

California, which has 14 percent of the country’s housing stock, leads the nation with 21 percent of homes purchased with adjustable-rate mortgages, and 44 percent of California borrowers have refinanced with option-A.R.M. loans so far this year, according to Loan Performance. Other markets where those loans are popular include Arizona, Nevada, Florida, Virginia, and Washington, D.C.

My bold for emphasis on California. What happens in California can have a significant impact on the surrounding states and the nation because of its more than average population, housing, and economic contribution to the whole.

You can see that ARMs are popular in general here, and specifically in those areas that have the bigger house price appreciation.

The worry is not the total mortgages outstanding and having a 1 or so percent default. Defaults will be a concern because the mortgages that will have zero equity, in general.

Midwestern states have seen a rise in foreclosures and defaults because of job losses in automobile and other manufacturing industries.

This will be the concern that causes defaults. With rising interest rates and a slowing economic growth, that translates into higher unemployment. The lack of job creation or increasing job losses kills demand for housing. That in turn cannot keep home prices stable.

 

[George Hatch]

The reports are that 70%+ of all purchase transactions in this region last year involved an ARM or interest-only mortgage product.

 

[Dee Dee]

Colorado has been #1 in the nation for the highest number of foreclosures per capita for the past few years. According to public officials within the counties with the largest numbers, creative financing has now moved up the ladder to being the top reason why people are losing their homes.

Remember the old standard belief that illness and job loss are the primary reasons for foreclosure? Well...if you still believe that then it's time to pull your head out of the sand.

 

[Bobby Bucks]

The disappointment level in here has risen 8% in the last week for no other reason than that the bubble hasn't occurred yet.

 

[Pamela Crowley (Florida)]

Colorado has been #1 in the nation for the highest number of foreclosures per capita for the past few years. According to public officials within the counties with the largest numbers, creative financing has now moved up the ladder to being the top reason why people are losing their homes.

Remember the old standard belief that illness and job loss are the primary reasons for foreclosure? Well...if you still believe that then it's time to pull your head out of the sand.

Can you point us to where those public officials have said that? I would love to see it!