Housing Bubble Bursting?

[Randolph Kinney]

Fremont General Gives Mortgage Staff Two-Month Dismissal Notice

http://www.bloomberg.com/apps/news?pid=20601087&sid=a33cSfIcD_zs&refer=worldwide

There is a consequence to making bad loans. Your employees will suffer job losses and the value of what is left of the business has a severely reduced value as investors shun the perceived risk of subprime mortgages.

California requires employers to give workers 60 days notice before ``a plant closing or mass layoff,'' according to the state Employment Development Department's Web site.


The shares have fallen by half this year on concerns that bad loans in the U.S. subprime market would lead to losses and reduce the unit's worth to potential buyers. On Friday, Credit- Based Asset Servicing and Securitization LLC cut the price it would pay in a previously announced takeover of mortgage lender Fieldstone Investment Corp., based in Columbia, Maryland, citing ``severe deterioration of the market for subprime loans.''

Accredited Home Lenders Holding Co., a rival lender based in San Diego whose shares have fallen more than 60 percent this year, said today it may lose its Nasdaq Stock Market listing because the company failed to file an annual report on time.

 

[Randolph Kinney]

U.S. Homebuilder Confidence Index Falls

http://www.bloomberg.com/apps/news?pid=20601087&sid=aD2aFaxi.5Yg&refer=worldwide

March 19 (Bloomberg) -- U.S. homebuilders lost confidence this month amid concern that tighter credit standards would discourage would-be buyers.

 

[Randolph Kinney]

Mortgage resets will cost the borrower and lenders

http://www.bloomberg.com/apps/news?pid=20601206&sid=aweFKzKWIeBE&refer=realestate

An estimated $2.3 trillion of adjustable first mortgages were originated from 2004 to 2006, many of which will begin to reset in two to three years. As they reset at higher rates, about 1.1 million loans amounting to $326 billion may go into foreclosure, the study said.

``The big years for reset are 2007 and 2008,'' said Christopher Cagan, director of research and analytics for First American CoreLogic. ``Until recently, the investment community wasn't giving a sufficient risk discount'' for the potential losses, he said.

Some adjustable loans reset in two or three steps, said Cagan. ``At full reset, it's going to be about $40 billion a year'' of additional interest payments, or an average of $1,500 a month per loan, he said. To avoid reset, borrowers often try to refinance before the higher rate kicks in.

Cagan estimated subprime borrowers would face an average increase of $400 a month, ``but these people are credit-impaired and already having difficulty'' paying. Subprime loans were the largest portion of the 8.37 million mortgages Cagan analyzed, accounting for 3.8 million loans representing $1.1 trillion.

Cagan estimated that 12 percent of the subprime loans will default. The estimated default rate for teaser loans and market- rate loans is 32 percent and 7 percent respectively.

Many lenders are willing to renegotiate to avoid foreclosure and reselling the property at a loss, Cagan said.

 

[moh malekpour]

In 2003 an LA economist (forget the university) said the market had to soon crumble because rents did not keep up with prices.

He was wrong.

Brad,
I don’t think the economist who said market had to crumble because rents didn’t keep up with prices was wrong. He might be a little early but he was not wrong. The market eventually changed but it took 3 years
It is now obvious that most renters within last 5 years turned to homeowners or renters of the lenders. Most of them were under heavy advertisements from loan or real estate agents that if they could own a home, why should they rent it. They were told that they don’t need to put any money down or any income verification. This was a god sent opportunity because their land lords used to ask for their income and also required at least the first month rent in advance to rent a home or apartment to them but it was not a requirement to owning a home. All they needed to have been to pay the initial monthly loan payments based on sub prime loans and the home was theirs. If some one gave that opportunity to you, wouldn’t you take it?
As renters became homeowners, the supply of rental properties increased and the rents went down significantly to the level that it was impossible to get a market value for rental properties via an income approach. Some income property owners grip to their property because their values were increasing but the rent was a secondary important income for them.
Now that those landlord lenders, who financed the full price of those homes and rented to those renters to occupy them with an option to buy if they were able to pay their mortgage payments, have to take their properties back and evict those renters homeowners, we will see that renters are going back to market to rent as they used to do and rent will go up within next one or two years. The rents of rental properties are going to go up because there would be more demands for them but their market values are going to stagnate because no body wants to buy them except those who are real property investors and enjoy being a landlord.

 

[Brad Ellis]

Moh,

So how come rents are increasing?

Not buying your scenario at all for the broader market. Of course there are some who qualify under that scenario but I doubt it is such a large number that it has a great impact on the overall market. While home ownership is up to 69% is is simply not all that much higher than before the sub-prime deals were started (the extreme ones- like neg ams, teasers, etc.).

We know rents are increasing. We know that about 24% of all housing is helf for investment apart from second homes.

I noted Chris Cagan's blurb posted by Randolph. Please note he has also said- publicly at the PMC conference- that we are not in a bubble. Same guy. The only market he worried about was San Diego and we all had that concern.

Brad

 

[moh malekpour]

Brad,
Don't you agree that if there is an option to buy or rent assuming all things equal, you would go for buying? That is what renters did. Now, rents are increasing and will increase more because there is no more easy borrowing game in town. Don't underestimate the sub prime effect. It facilitated many non-qualified homebuyers. That made an immediate and direct effect on rentals and market values of rentals and non rentals at the same time. This was an anomaly.

I know you still are not convinced that there was or is a real estate bubble and I tend to believe that you are authentic about what you believe but please make an objective judgment of what you read. I don’t know how much you know or heard about Steve Roach. He is the Morgan Stanley economist and he writes economic articles mostly about global economy almost everyday. He had an article about the economy, The bubble, sub prime and greenspan. If you have time, take a look at the link below and let me know what do think about his opinion.
http://www.morganstanley.com/views/gef/archive/2007/20070316-Fri.html

 

[GENTEEL]

Brad,
Don't you agree that if there is an option to buy or rent assuming all things equal, you would go for buying?

Obviously, but that hardly happens unless one has a large amount of down payment as equity where mortgage payment would equal or lessen rental payment and that too depending upon loan types. In any case, the benefit of owing a property far exceeds that of renting one, such as in equity, resale, ownership rights, privacy, replacing/reproducing items, refinancing, will to change, add/subtract or upgrade, dominant easement rights, trust deeds, second mortgages, gift, inheritance, tax shelter, rentability, etc. The major drawbacks of owning a property would be zoning changes, devaluation, maintenance and of couse foreclosures.

 

[moh malekpour]

Obviously, but that hardly happens unless one has a large amount of down payment as equity where mortgage payment would equal or lessen rental payment and that too depending upon loan types

Genteel,
That hardly happens unless one has a large amount of down payment as equity? haven't you heard about the sub prime loans that was available to anyone who had a pulse? the renters who only had one month rent were able to buy the same home that wanted to rent by the help of sub prime lenders. Was that too hard to do?

 

[Randolph Kinney]

We know rents are increasing.

Yes, apartment rents are increasing in California.

Competitive Apartment Class

Class A: Apartment communities in the most favorable locations with high levels of unit features and amenities (such as washing machines, quality finishes, walk-in closets) and community amenities (such as recreational facilities or a clubhouse). These apartment communities have state of the art systems, exceptional accessibility and a definite market presence. They compete for residents willing to pay rents above average for the area.

Class B: Locations are less favorable than Class A communities. Class B apartment communities are typically older than Class A communities. Property finishes are fair to good for the same area and systems are adequate, but the apartment community does not compete with Class A at the same price.

Data published by C.A.R. for 4Q 2006, asking rent for class A&B apartments for California was $1,351 per month. For San Diego, it was $1,315 per month.

Now contrast that with what George Hatch had to say about SFR rentals.

To the extent a home has intrinsic value as shelter (and we can all agree on that), one measure of that value is its rental value. Now it's logical that a homebuyer will pay extra for the right to benefit when the markets increase, but how much of a premium should that be?

Right now an "average" $550,000 home in the SD region rents for about $1800/month. Of that $1800, the landlord has to pay taxes, insurance and other expenses, so they aren't netting anywhere near the $1800. By contrast, a $500,000 mortgage loan at 6% has a payment of just under $3,000, not counting taxes and insurance and expenses. That's with a borrower who has put 10% down on the purchase.

It does not appear to me that SFR rents are rising while the apartment rents are rising. That may be due to the shortage that was created when so many apartments were converted to condo. However, the condos that are for rent are at higher prices than what they were as apartments.

It is going to be some period of time (a long time) for the gap to close on apartment rents and SFR rents. And it is going to take an even longer period of time for SFR rents to come even close to the monthly payment on a mortgage.

 

[GENTEEL]

Genteel,
haven't you heard about the sub prime loans that was available to anyone who had a pulse?

I am not sure what you mean by "pulse". How do sub prime loans equal rental payments in a given situation irrelevant of borrower's criteria, please explain?

the renters who only had one month rent were able to buy the same home that wanted to rent by the help of sub prime lenders. Was that too hard to do?

Only had one month rent???? What's that suppose to mean?

I have been living in a 4-bed 2-bath townhome since the last 3 years and paying a rent of $1725 excluding all utilities. The current value of this townhome is around $455,000. In a subprime loan with 100% LTV and the rate being 7% on first and 11% on the second (the best I could get), assuming that this loan is an 80/20 I/O on 5/1 Hybrid ARM, how is it possible to equal or lessen a $1725 rent? Do the math?