Housing Bubble Bursting?

[The Warrior Monk]

I'm glad someone finally mentioned investment properties. Whether SFR's are overpriced is someone subjective, but investment properties are another story. We can't rely on the Income Approach in certain areas. What someone would pay historically for an investment property has nothing to do with the current market. Typically the Sales Comparison Approach is 25% higher than the Income Approach. IMO, people are betting on large increases in equity to offset the low to negative returns in the early years of the holding period.

The prices of these properties would have to drop 20% overnight just to be competitive with other investments. That's not something I'd want to invest my money in.

 

[George Hatch]

It's not "demand" that's important to residential pricing, it's "effective demand" that's important. When the prices of residential properties are so high that less than 10% of a local market's population earn enough to buy, what difference does it make how much immigration is occurring or how many "jobs" are being created? The only jobs that matter are the ones that pay far in excess of the averages, which at <10% doesn't bode well for price stability. Of those jobs that pay that well, an even smaller fraction can be considered relatively stable. That doesn't help anything.

Now if our economy were creating a lot more high-wage jobs and there were prospects for getting the average wages up where 20% or more of the population could afford the current prices, I'd call those prices pretty sustainable. Is there anyone here who really thinks that's going to happen?

 

[Randolph Kinney]

No, wages are not going up to match the price increases. If anything, average wages have declined when you factor in the job losses due to outsourcing and exporting jobs to foreign competition and job growth at the lower end of wages. China and India are having an explosion in jobs, wages and savings. And that is good in that it keeps our interest rates lower than they otherwise would be.

 

[JSmith43]

Cheer up, guys. A creative LO can boost "effective demand" beyond models with static assumptions

I do a fair share of loans with multiple people on applications. In MN it is probably more of an exception, compared to areas where there are larger immigrant populations having a tradition of extended family occupancy.

However, in MN I have noted an upsurge in sister/brother combinations, "army buddies", etc forming alliances to purchase. I guess landlords insisting on keeping the music down and the kegs off the porch, are creating additional "demand pull"

 

[Steve Owen]

I guess landlords insisting on keeping the music down and the kegs off the porch, are creating additional "demand pull"

That's what did it for me! Now I put my keg wherever I want to.

But... we just put our last rental property under contract for sale... to little return and too much hassle... and too much troble keeping the kegs off the porch, not to mention getting sued (but winning) for the renter's lack of dog control.

 

[Couch Potato]

It's not "demand" that's important to residential pricing, it's "effective demand" that's important. When the prices of residential properties are so high that less than 10% of a local market's population earn enough to buy, what difference does it make how much immigration is occurring or how many "jobs" are being created? The only jobs that matter are the ones that pay far in excess of the averages, which at <10% doesn't bode well for price stability. Of those jobs that pay that well, an even smaller fraction can be considered relatively stable. That doesn't help anything.

Now if our economy were creating a lot more high-wage jobs and there were prospects for getting the average wages up where 20% or more of the population could afford the current prices, I'd call those prices pretty sustainable. Is there anyone here who really thinks that's going to happen?

We all know real wages are not going to go up 20% or more. We also know a major decline in highly leveraged real estate would be an economic disaster. The solution is quite simple, general inflation of prices to match the inflation of real estate prices over the past few years. It has already occurred in with energy prices; expect food, clothing and other goods to follow soon. The relative value of real estate will fall back to "normal", but don't expect real estate prices to go down; everything else will just go up. It is the same situation as was faced in the 70's. Have you raised your prices recently?

 

[Brad Ellis]

Moh,

Read the WHOLE article. Here is an exerpt: "That's not exactly true. According to the Federal Reserve's Flow of Funds report for the fourth quarter of 2005, mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent. "

See the word commercial in there? Only a couple of the top 10 lenders are commercial banks. Countrywide is not. We are not. ECM is not. Argent is not. Ameriquest is not. Option One is not. Did you see her parcel out residential mortgages? No. The Fed Funds Flow includes commercial activity as well.

Did you see anywhere in the article where this lady tells anyone what actually happens to a defaulted loan? No. First Ams division says 17% of all mortgages are for investment/second homes- up 10% from a decade ago.

Then it says they currently perform as well as owner occ mortgages.

Let me give you some facts.

Good REO operators can generate about 88-90% of the unpaid balances on loans when they default- on average. It does not matter much if they do it themselves or outsource. Litton did a study on it and I have heard the results- along with about 1000 REO brokers- last week in Indian Wells.

If banks lose 11% average on 3.7% of their loans, that is under 4/10 of 1%- well below the Yield spread premiums (Roger- sorry about using this foul language!), to say nothing about origination points.

Now this may change in the future, but it has not changed so far.

Unless the investor can demonstrate misrepresentation in the loan application, errors in underwriting or misrep in the appraisal, they get to keep the loan- and take the loss.

The single most effective firm in forcing repurchases is Fannie Mae. Study their balance sheets and P+Ls- you will see them taking losses on defaulted loans. Look at the securitizations- you will see losses there as well.

They do not all come back to the banks that fund the loans- or even to the non-bank mortgage firms.

Brad

 

[moh malekpour]

Moh,

Read the WHOLE article. Here is an exerpt: "That's not exactly true. According to the Federal Reserve's Flow of Funds report for the fourth quarter of 2005, mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent. "
Brad

Brad,
For some reasons the article is not there anymore! I clicked on the link and it was blank. I don't know when you read it but this morning I tried it and it was blank. May be I should have copied and pasted it instead of putting the link there. It looks fishy.
But here is my take on that:
When I do any appraisal, I usually look at the comps financing. It is not fannies mea request but I do it out of curiosity to see how many of them are 100% financed. In most areas 80% to 100% of my comps have been 100% financed and mostly with two loans: the first one with 80% that I suppose is a hybrid loan meaning it is fixed for a short period of time and then it becomes adjustable and the 2nd loan which is possibly adjustable at the beginning to cover the risk premium. I haven’t seen your bank to be one of those 100% financiers but I have seen countrywide and WMU but I don’t do too many appraisals.
It is obvious to me that all those buyers of my comps who have 100% loan didn’t have any money to put down for a fixed amortized loan so the lender who might be any bank, facilitated two loans for them to get the transaction done hopping that the second loan compensate for the risk of having no down payment and possible default but meantime hopping the property value keeps going up and build up a cushion for the broke buyer. It seems with the current rate increase , the empty pocket borrower not only is not able to built up any equity but is going to have a higher payment at least on his second loan right away and since there is no equity built up yet and he/she has no down payment to pay for refinancing to get a fixed and lower rate, he would be stocked with what it is that could end up to a sad default. Who is holding those second loans?

 

[Randolph Kinney]

Deed in lieu of foreclosures (aka short sale) are now popping up in my market. For example, one property was last refinanced 07/18/2005 for $472,500, prior refinance 03/29/2005 for $416,000, prior refinance 12/17/2004 for $359,250.

It was originally purchased on 04/02/2003 for $282,000. The original financing was FHA, fixed 30 year, with FIRST MAGNUS FINANCIAL for $277,643 first mortgage.

I suspect I will be seeing more of these short sales and outright foreclosures as the market prices stay flat and interest rates continue to rise in my area.

 

[Randolph Kinney]

Here is another example of distressed sales in my area.

Property was bought 12/21/2004 for $500,000 with a $400,000 first mortgage and $100,000 second mortgage, both financed with Ownit Mtg Solutions. The property is back on the market subject to lender/court approval and was originally listed on 03/15/2006 for $579,000. The listing is now listed as a value listing for $439,000 - $479,000.

It seems the second mortgage holders in these risky 80/20 purchases are going to take a bath. I suspect that the investor groups that buy these kinds of paper is going to be the big loser.

No more bailing out marginal borrowers with rising market values. No more free ride for the second mortgage market either.