Sunday, February 7, 2010

Get a clue people, prices ain't coming back!

I've had 2 very irritating conversations in the last couple of weeks regarding prices. The first was with a realtor at an open house. He tells me this house was appraised 3 years ago for a million dollars, and now that the recession is over it will be worth that again in 5 to 10 years. Oh really? Tell me more, oh enlightened one..... Of course, this was more than I could take and the fight was on (much to the dismay of my wife).

I asked him if he expected salaries to triple or quintuple over the next 10 years?

He said "well, probably not".

I then asked him, who will be able to afford it then?

He replied, "If the home appraises for a million banks will easily loan $800k"

I ask, who in the IE that can qualify for an $800k loan wants to live in this tract?

He ended the debate with "oh, there's plenty of people out here that can qualify"

I'm sure there are, but how many of them want to live in a KB tract home in Riverside? It just amazes me how many people really do beleive prices are going to shoot right back up again. They are convinced the bubble prices were normal and that the current price point is the aberration.

The second conversation was with a person a friend introduced to me to talk about his loan mod. I'm no financial guru but I still get asked for advice. I tell em my advice is free and worth every penny!

On the surface this loan mod sounded golden. Their current loan was for for roughly $600k, an Option Arm of course. They also had a heloc for $100k that they used to pay bills, buy a car and put a back yard in (so it's all gone). They have not made a payment on the heloc in 2 years. He works in a distribution center driving a forklift, his wife is a admin assist (whatever that is). Together they make$84k (seems like a lot for those jobs but that's what he told me they made). BTW, the house is worth approx $280k, he thinks.

The original loan was a option ARM and of course they are making the min payment of $1800/mo, the payment on the heloc was $1200 but since they are not paying it I guess it doesn't matter. The only other debt payment they have is a $400/mo car payment.

Check out this loan mod offer. He gets a 25yr fixed with a payment roughly equal to his $1800/mo (before taxes). His taxes are $480/mo. So his total nut is $2280/mo or roughly 32% of his gross. Here's the kicker though, in order to make that happen they stuck a $420k forbearance on to the end of the loan (balance of the original loan, plus the reverse arm amount, plus fees and late payments). He's happy as a pig in shit. I've never seen a mod like this one and it's from some lender I've never heard of. I'm wondering if this mod is a one in a million or if they are offering up mods like this on a regular basis. If this is common then this crisis will drag on for decades as these folks default when they need to move.

I asked about what he will do if he needs or wants to move. "Oh, that will not be a problem, prices will have recovered in a few years and we will be fine". WHAT?? Are you freeking kidding me. You think a tract home in So. Corona on a postage stamps sized lot will be worth $700k in a few years. His new total loan amount is for $100k more than peak prices AND he still owes the heloc. He is trapped in a cave of debt and the foreclosure monster is just waiting for him to pop his head out.

I did not know this guy so I didn't want to argue (much), besides he seemed thrilled that he had "saved his house". I simply asked him to think about who would be able to buy a $700k house. How would they get a loan. I asked him to consider the possibility that his house would be worth about the same in 5 or even 10 years and left it at that.

For all those people out there that think prices are coming back I would offer up this nugget. House prices follow incomes. The first 7 years of the century they didn't because banks removed just about every normal requirement for loaning out money. We are back to normal (if you can call this normal). That means homes will only be worth what people can pay for them. And what should people pay? Depending on the interest rates anywhere between 2 and 4 times their gross annual incomes is the normal range.

34 comments:

Vicki Lloyd said...

Do you really think his HELOC payment is $1200/month? (that would be over 14%!)

People who believe that prices will come back to bubble levels are totally in denial. They never should have gone that high, and they won't come back until incomes increase substantially (like triple!)

golfer_X said...

I think he said it was a 10 year at 7% or 8%.

rednail64 said...

Welcome back GolferX - you were missed!

Newbie Blogger said...

You should be right. But I'm concerned that you won't be.

If the banks know that a government bailout is coming when they mess up, what is to prevent them from doing the same thing over again. Everyone will want to be there in the beginning and will think that they can do something to avoid holding the bag at the end.

And if enough other people believe that the bubble was normal, they might drive prices up because that is a sign of recovery and is moving us back to the way things ought to be.

Of course, this will defy all logic. But so did the last bubble.

All I can say is that I'm very afraid.

golfer_X said...

The thing that "should" contain another price bubble is lending standards. Currently it's impossible to get a no doc loan. It's nearly impossible to get a loan without a sizable down (unless you go FHA and they only loan up to about $400k). Any loan over $417k, you need at least 15% down and unless you have some stellar credit they want 20%. Plus anything over $417k is a higher rate and anything in the IE over $500k is quite a bit more. That alone should contain any runaway price increases. Banks are not the only cog in the wheel. Banks are not going to gamble on risky loans unless they can get insurance and that's hard to come by too. They also have to be able to unload these loans, in order to keep lending.

Obama is tying to get some legislation passed to regulate the lenders. I don't know if that will fly but if enough people want it, it will happen. Public opinion is squarely in favor of it so it has a chance. They never should have deregulated them anyway.

Tyrone said...

The same people that denied Phase 1 of the meltdown are now in denial for Phase 2.

I left a comment similar to the above statement over at Dr. Housing Bubble's site and he would not approve it for posting. I did add the following tidbits regarding our current state of the economy: continued high unemployment, state insolvency, rising delinquencies, $1.5T deficits, $2T short-term debt that must be serviced, ...
And I left this video:
US Dollar Index

I'm not sure what was so objectionable about the content.

Tyrone said...

How apropos. This was just posted, minutes ago:

Second Phase Of Mortgage Defaults Part 1

golfer_X said...

Great video.

I don't think the second wave is going to be quite as big as thought it would be a couple of years ago. Most of the short sales we are seeing today are homes that would heave been swept up in that second wave. Certainly the people that try to hang on and save the house are likely to get pounded by it. But a lot of people are getting off the beach early by short selling. Nearly everything on the market right now is a short sale.

FairEconomist said...

The second wave isn't going to be as big in terms of foreclosures, but we are still going to see lots of people moving out of the houses they never should have bought. Short sales don't bring extra economic damage like foreclosures but all that supply will still drag down the prices.

Wonder at what point your friend's friend will realize he's been in fantasy land and give up?

golfer_X said...

I don't think he will get it until he wants to move. I just got the blank stare when I suggested prices may not go way up again.

I always knew that a large percentage of people had no idea about finances but I'm starting to realize that percentage is WAY higher than I had thought. They make the biggest purchases of their lives and don't make any effort to understand the basic math behind the transaction. These are the same fools that buy a car by only looking at the monthly payment. Then they act surprised when they find out they have a 7 year car loan. Simple math would have told them you can't have a $200 payment on a $20k car with a 5 year loan.

Allison said...

I have a family member who does loan mod - he's interested in who the lender is. He also said (as an attorney) he would NEVER recommend a client take that deal. That guy needs a lawyer and a new loan mod.

Horrible.

golfer_X said...

I wish I could remember the lender but it was not one of the big guys so I can't recall who it was. It was a horrible mod but not the worst I've seen. I know a nurse who owns a townhouse. Her mod offer was nearly $200 higher than her current payment. Let's see, she can't afford her current payment so they offer her a mod with a higher payment. WTF. I just scratched my head when I she told me.

Oldtimer said...

That type of loan modification is called a participating mortgage. Through the silent second, the lender "participates" in any future appreciation.

It is a fairly common approach in commercial loan workouts, but I haven't before seen it used on a single family loan. Commercial property investors typically agree to this arrangement when they are up sh!t creek but want to do right by their lender (think of a guy who owns 10 or 15 shopping centers, of which one is doing terrible - he needs to keep the credit window with his bank open, but can't afford to keep feeding his loser).

Unless it is a foreign bank using non-GAAP accounting rules, the lender has written off all of the excess principal. If your friends friend sells the property for more than $280K - say $400K in 5 years - the lender will record a nice gain of $120K, and your friends friend will walk with no cash in or out of his pocket.

In the meantime, he can raise his family in his home with housing costs he can afford, albeit without ever accruing equity. The bank can return the $280K loan to earning status, and hopefully have a nice gain down the road.

Starting from scratch, this is not how the lending and borrowing business should operate. But we aren't starting from scratch. There are still neighborhoods filled with families who owe mortgage debts that amount to far more than their homes are worth and cost more than they can afford.

Rather than abandoning their homes and neighborhoods, this seems like a fairly honorable solution, even though your friends friend would probably be better off, from a purely financial perspective, by defaulting and re-buying where he could build equity.

To each his own. We can all get richer by welching on debts (or selling illicit drugs, or whoring ourselves, ect.). But who wants to pass those lessons on to their kids?

Anjoli Wax said...

Blogs are good for every one where we get lots of information for any topics nice job keep it up !!!


house share

Anjoli Wax said...

It's a little weird that if housing prices are still going up units under construction are going down. Shouldn't new projects have ramped up again if everything is fine?

Could this be a factor in propping prices up? Supply is winding down and we could undershoot again like we did in the late 90's. I was really thinking that the construction overhang would help in a rapid correction but a bunch of that supply is being absorbed by low interest rates.

house share

VectorzSigma said...

Stories like that forklift driver POS makes me sick to my stomache. I know this is a far majority of the deadbeats out there too. Driving forklifts and flipping burgers, living in $700k homes, driving luxury vehicles bought on HELOC. Yet, the MSM is always crying to save these poor 'victims' while the young generation will not have their turn in home ownership thanks to these scum buckets and the scum in office keeping them there.

golfer_X said...

Ah, but they are not living in $700k homes, they are living in $300k homes that they happen to have paid $700k for. The root cause is not the forklift driver. The root cause was the ability for him to get a $700k loan on an income that could never ever service that kind of debt. Loose lending is the primary cause. If it were not for that prices would never have gone to those levels.

VectorzSigma said...

I don't agree with that. Personal responsibility comes with being an adult. We're not talking about minors here. I *LIKE* the fact that there is freedom and opportunity to have lots of different choices of products out there. It's up to YOU to make sure you can handle it.

golfer_X said...

Oh, don't misunderstand me. I'm not saying they are not responsible for taking out a loan they could never hope to repay. But then again we have to put signs up telling people to not put their arms through the bars on the tiger cage. We have already established most people cant do simple math. Most folks will beleive anything they are told by a person in a high level position (like a banker). In a perfect world buyers would be held 100% accountable. (buyer beware etc). But the whole home buying process is so totally skewed against the buyer it's easy to see why most people just sign. As a buyer you sit down and are presented with thousands of pages of paperwork written in legalease. 99% of the population cannot decipher that stuff. Then you are expected to sign it all and understand what you signed. The whole process needs fixed to make it easier for Joe 6pack to understand what he is signing.

Sure they are responsible but dangle a Bently in front of a guy driving a Ford Fiesta and tell him he can have it for $99/mo and he is going to take it. If they bury the real payment in a thousand pages of contract mumbo jumbo, the banks should not be surprised that the guy defaults when the payment goes up to normal Bently levels

VectorzSigma said...

I've heard that argument before but pleading the masses ignorance is giving them too much credit. I'm certain these people know what they're getting into mathematically doesn't make sense but it's the GREED that overpowers them. It's NOT the ignorance. They think their houses will appreciate forever and THAT is the greed that tempts them. Every single deadbeat I've spoken with (including members of my immediate family), did not deny that they KNEW the sticker price of the home was unfordable, nor did they deny they knew this was a TEMPORARY house payment that would balloon in price. They just simply thought house prices would go up forever.

VectorzSigma said...

I wanted to say one last thing in defense of my personal responsibility argument in contrast to blaming everyone else. The State of NY attempted to enact a tax on SODA. Now, put aside what you *think* the underlying agenda is and take it at face value - it is called the 'Obesity Tax' and is aimed at regulating soda consumption due to the inability of the masses to control their own food consumption habits. Where does this regulation of personal responsibility end? You tax and take away the freedom from RESPONSIBLE consumers due to the personal responsibility issues of the gluttonous and irresponsible. It's the exact same thing you're about to do housing. You're shifting the blame, taking away the freedom of choice, and taxing EVERYONE, including everyone who didn't over-consume, including CocaCola for providing a product that's bad for your health (yet is a perfectly fine product for those who WANT to drink it), due to the mistakes of the irresponsible.

snail said...

Here an old news to cheer you up X

http://www.mortgagefraudblog.com/index.php/weblog/comments/five_charged_with_beating_torture_of_loan_modification_agents/

snail said...

I fix the link ..
Beating

Unknown said...

Snail,
I read that beating article. Everytime I hear about loan mod I think to myself:
How funny that these people facing foreclosure don't have money to pay their mortgage, yet they can pay the loan mod thousands to try save their house. Where did they get all that money??? Then when the loan mods doesn't come through they cried claiming they pay the loan mod thousandths.

theyenguy said...

Thanks for the wise words: "Homes will only be worth what people can pay for them. And what should people pay? Depending on the interest rates anywhere between 2 and 4 times their gross annual incomes is the normal range."

Dr. Housing Bubble in article in article Where The Housing Bubble Still Lives reports tha in Watts, 90059, real estate prices from January of 2001 to December of 2009 have decreased 2%.

Median house price as of December 2009 was $118,000 in Watts.

Median Household Income in Watts is$26,000, California $59,000 and the US $53,000.

So using your rule of pricing even in Watts, housing prices still have a ways to fall.

I only recently learned what a HELOC is. I use to be simple and nieve. I now think most who took out HELOCs took the money and planned to eventually abandon the home as they saw the loan as free money; HELOCs were simply a free ATM.

The Option Arms were largely a California issue, as 50% of them were written in the state for white flight -- to get the white folk out of ares with an increasing minority population. And they were used by minorities to buy homes they could not afford.

And 50% Option Arms were used by flippers who bought investment property in California, Nevada, Arizona, and Florida. Now these states are headed off into bankrupty. And we will have another Great Depression.

doghouse said...

and then there are those still waiting for prices to drop alot more, sorry, the feast is over, yes there are still repo's, and short sales, but nothing like last year, the good stuff was picked up and now you have bidding wars on anything nice that comes up, (have you seen anything go for asking price?, most go for way over list price)
I know some here live in fantasy land, (or so it seems, by their comments) but my opinion... home prices will continue to improve SLOWLY, if I could predict when and how much, you think I'd post it here.?
return to the bubble prices? no, but reasonable increase? yes.
supply and demand will dictate the future,and Banks are trying to control that too.
and then there is AIG, but I'll go postal if I start on that!

Tyrone said...

return to the bubble prices? no, but reasonable increase? NO

Not for a long time.

Looming CA Bankruptcy

Tyrone said...

Another opinion:

This Crisis Won’t Stop Moving

As for housing prices, Mr. Rosenberg expects further declines of 10 to 15 percent over the next few years. He pointed to the roughly nine million residential housing units available for sale across the country, a very high vacancy rate when judged against a total housing stock of 130 million units.

If his forecast is accurate, the numbers of borrowers who owe more than their homes are worth will rise significantly. Mr. Rosenberg estimates that fully half of the mortgage-holding population in the country could be underwater by 2011.
...
“We are in a post-bubble credit collapse and there are going to be periods of calm and stormy weather. Investors will have to navigate through the volatility,” Mr. Rosenberg said. “Unfortunately, I think we are still in the early stages. The next recession will happen more quickly than people think.”

m2m said...

what do expect from people that elected an immigrant bodybuilder/ actor/ action figure to manage the 7th largest economy in the entire World?

Shangri-La has turned into a human landfill.

geordie said...

Blaming all the home 'owners' for taking the vast loans on the homes the 'experts' told them they couldn't lose on is about as much good as blaming the drug addicts after getting them addicted on free crack. People who can barely work out their restaurant tip went to people in suits with calculators and said "on $60k how much house can I buy" and the answer they got was more to do with drugs that real estate. So they said "oh, ok, if you say so" and went out and bought. So now the people who made a lovely little commission selling those loans to 'investors' through Goldman Sachs are holding up their clean hands and saying "not me, I just sold them the loan. It was the others, and they should have known better."

If I had borrowed $600k on my $125k income in 2003 I'd have myself to blame. I am an engineer and I can work the numbers and realize I can never repay that and live a decent life. But I can't blame the 'peasants' who believed the loan sharks.

This should all come home to roost with the banks, loans are their professional business and they deliberately made bad loans in the hope of defrauding third parties.

Unknown said...

"It's extrememly hard to get someone to beleive something when their well being/salrary relies on them not believing it." It's not worth arguing with people about it. It's almost as hard as convincing a religious person that there is no God.

Unknown said...

DOGHOUSE,
You are wrong. Prices today are based on the gov't assuming the risk of about 90% of all homeloans in 09'. Banks will not lend with rates kept so artificially low. The reward does not compensate the risk they'd have to take in 90% of the cases, so the gov't steps in and takes care of it. It would be impossible for the gov't to continue to pay the money to keep rates this low and to buy up the amount of bad debt they have been. As the rates rise and banks are the ones assuming most of the risk (therefore increasing their lending standards) prices will have to fall. It is common sense. The only way that your theory would be correct is if:
A. Salaries started to magivally rise
B. The gov't continued to subsidize these prices indefinitely.

Somehting has to give!

golfer_X said...

Looks like the engineers all think alike Geordie (Northerner eh?).

The average joe does not run the numbers. They simply rely on a broker to tell them if they can afford it or not. Any by the way that broker made a commission based on the sale amount as did the realtor. Is Joe 6pack innocent? Hell no, most of them driven by greed and the desire to live like Snoop Dog. However had their been normal standards in place those people could never have gotten a loan. In engineering terms we call that "root cause". Take away the ability for anyone to get the free money and there's no bubble

PeteDude said...

To be fair. . .

Riverside has always had its own little insular culture in regards to the value of certain areas. If his house is near Poly High or Canyon Crest, he might fetch the amount he's hoping for. . . if he's willing to wait a LONG time. He has to hope some local business owner hits the big time, or some finance company bigwig transfers into the area and picks up the property for his family.