Moh is right-on in his comments about the speculators. Austin and others have cited that existing homes-for-sale inventory is up, days on market are becoming longer, and list vs. sale variance is negatively increasing.
If the result were limited to speculators getting out of the market, then this would be a healthy occurrence. I think it will be more significant than that (although I’m not forecasting a “collapse”). The influence of the high percentage of ARMs (Adjustable Rate Mortgages) has to be considered in certain markets (like mine, where there has been steep appreciation and now a significant cooling). Increasing interest rates, increasing inventories, and decreasing sales prices are erasing the “assumed” appreciation many people thought they would have if they purchased in the last 12-months.
How many buyers went to ARMs to maximize their purchasing power? A lot. How many were convinced (either by their own irrational exuberance, or by some loan agent hype) that the appreciation would continue? How many were “sold” on the idea that they could refinance again before the higher payments kicked in, probably with additional equity to qualify for a fixed loan, because who was predicting price declines? Or, if interest rates were more favorable for the ARMS (which, for a while, that appeared to be the case), refi with another ARM and keep the mortgage payment artificially low?
I’ve attached an actual case study I did on a review in the city where I live. Subject was purchased for $950k in 06/05. It was just appraised for $1,000,000; roughly, a 5% increase. The house is newer construction (less than 3 years old) in a master planned community of 5,000+ homes with new construction continuing at present. No change has occurred to the home since it was purchased.
The actual market data shows a real decline of 3-8% (depending on where you want to cut the time periods) since the subject was purchased. If it was purchased with a 10% down (roughly a $100k down-payment), the 90% LTV is now 95% (and that doesn’t include new financing charges). How are they going to qualify for a 30-year fixed? How are they going to qualify for another ARM that is going to be cheaper than what they have? Their payment is going to adjust upward, and by reading the stories in the news, this adjustment could be up to 50%+. Will they be able to make the payment and “ride the storm out”? Perhaps. But not everyone will. I said in another post that we might be in for a unique period of foreclosures where the primary reason is not job-loss of overall economic downturn, but because of the inability of a fully employed (probably 2-income family) borrower to make their regularly scheduled loan payment that the lender made to that borrower knowing all the facts at the time of the loan.
There was a post not to long ago about a borrower suing Ameriquest (no surprise there) for putting them into a loan they allege they couldn’t afford. The interesting thing about the suit was they included the appraiser, and in their filing, used the specific language that the appraiser arrived at a “pre-determined value” to facilitate the loan approval.
Here’s my prediction (and I’ll make it public)- Look for a class-action suit by a group of borrowers against a developer. Facts of the case: Builder in control of all the homes and consequently controls (and can manipulate) the selling prices. Builder steers borrowers to its “in-house” or “preferred” lender, offering some incentive (discount or additional upgrade credit) for using said preferred lender. Lender (who is allied with if not controlled by builder) uses its “in-house” or “preferred” appraiser (most likely, the same one over and over again for most of the deals). Lender puts borrowers in ARMs that which, if the payments are calculated at the full interest rate and therefore full payment liability, borrowers could not qualify for. As these homes are in contract or closing, builder’s inventory is building up, and builder is starting to offer significant price reductions that are disguised as design credits or lot premium concessions, etc. In-house lender (and appraiser), who is intimately familiar with development and actual prices, is not disclosing the on-gong discounts and “real dollar” lower sales prices. Borrowers, after 6-months, try to refinance and then find out sales at development have been significantly discounted, and that in-house lender cannot refi because there’s been no appreciation (or, decline as in my analysis). Borrowers find out that original value of home was based on a mix of same-builder sales (some with discounts, some without-none adequately considered in appraisal), with minimal (or no) outside development sale support. Borrowers file suit against Builder, Lender, Appraiser, and anyone else who touched the deal.
Anybody want to tell me, “Ah, Denis, you’re crazy!”
(Some may want to tell me that, but I’m talking about my Hypothetical Lawsuit only).
