Wednesday, July 05, 2006

Runaway Housing

I came across this commentary/opinion piece from "News With Views" this morning. I'll add a disclaimer here, I don't know who this outlet is, or what their agenda might be. I just thought this piece was interesting, so I'm going post it up:

RUNAWAY MARKET
By Jon Christian Ryter

The price of the typical 3-bedroom, 3-bath, 3,000-plus square foot American home is skyrocketing beyond the ability of the atypical American consumer to purchase one—or keep up with the spiraling payments. The mortgage payment dilemma is based in large part on the creative financing plans that are used today to qualify moderate-income buyers for mortgage loans that everyone knows is well beyond the ability of the average wage earner to pay when the full mortgage payment matures in three to five years. On the other end of the home market spectrum—because of the megaprices being charged for older dwellings that were affordably priced homes less than two years ago—new home sales are plummeting because existing homeowners who want to "move up," are finding fewer takers for overpriced older homes. In many parts of the country, the sellers' market has completely vanished. The "bidding wars" where prospective home buyers start at the asking price and compete with one another has been replaced with an ugly bearish buyers' market where consumers are balking at Realtor-inflated older home prices that have more than doubled in the past couple of years.

In many boom markets oversold homeowners are trying to refinance mushrooming mortgage payments that have resulted from the unique forms of creative financing that put them in homes they simply couldn't afford and should not have purchased. Fixed rate mortgages that were sold with 0% interest for one or two year years suddenly becomes mortgages with 6% interest—and the mortgage payments that they could barely afford at 0% have ballooned. Or the homeowner was cajoled into taking an adjustable rate mortgage that is spiraling out of control each anniversary as the Fed continues to increase the prime rate to slow inflation—at the expense of home owners who were assured by overzealous mortgage brokers that the low interest gravy train express would not slow down in their lifetime.

Now, in many of the slowing real estate markets, new home owners are being asked how much of their genuine equity—the down payments and the principle paid in their monthly mortgage payments—they are willing to lose to get rid of their expensive albatross. For many, the American dream is fast becoming the Nightmare on Elm Street. One such home buyer is San Diego homeowner Cortney Henderson who celebrated her graduation from UCLA San Diego with a Ph.D. in biomedical engineering by purchasing a modest new home—for $540 thousand. Her home is a simple one-story bungalow with an attached garage—the kind of house you'd find in Montana or Idaho, or Rudyard or Trout Lake, Michigan for $85,000 to $99,000.
...
Henderson should never have been given a half million dollar loan—regardless of her credit score. Her $27,000.00 down payment (she earned her down payment as an egg donor at a fertility clinic—something you fertile housewives might think about when you and your husband are trying to find the down payment for your new home) helped cinch the deal. The rule-of-thumb used by mortgage bankers to determine if you can afford the house you want to purchase is whether your fixed monthly debt obligations—not just your mortgage—are less than 25% of your net income. In Henderson's case, her mortgage payment (including insurance and taxes) ate up 70% of her gross earnings. If it was not for the $700 a month her boyfriend kicked in to help her, Henderson would have already lost her home. If she has an ARM [adjustable rate mortgage], the odds are better than even that she would be forced to sacrifice her home in a "get-out-from-under-the-mortgage" fire sale within a year or two. That's because, San Diego is viewed as one of a dozen markets where major home pricing "corrections" are about to take place. If that happens, Henderson will be stuck with a home priced well above market, and will likely be forced to dump the house for less than the current balance of her mortgage to get rid of it.

8 Comments:

Blogger grim said...

ADP Jobs report came in strong, 10 year yield up at 5.20%.

Treasuries Fall After ADP Report Shows Job Growth of 368,000

U.S. Treasury notes fell after a private report estimated that U.S. companies last month added the most jobs since at least 2001, fueling speculation the Federal Reserve will raise interest rates again.

The report comes two days before the government's employment report for June, among the releases most closely watched by bond investors as an indication of the economy's strength. Futures traders added to bets the Fed will lift the overnight lending rate between banks after ADP Employer Services said companies added 368,000 jobs.

``Getting a strong employment report like this is going to cause some nervousness in the market and selling of bonds,'' said Paul Horrmann, a broker and Treasury market strategist at ICAP Plc in Jersey City, New Jersey, the world's biggest inter-dealer broker. ``It's some more evidence the employment picture is little more rosy.''

The yield on the benchmark 10-year note rose almost 5 basis points, or 0.05 percentage point, to 5.20 percent at 9 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. The price of the 5 1/8 percent note due in May 2016 fell 3/8, or $3.75 per $1,000 face amount, to 99 7/16.

7/05/2006 08:16:00 AM  
Anonymous Anonymous said...

That story has been posted before, while it is a good example of what could/may/is happening, the fact it is the same story as has been posted either here or other blogs makes it seem as if its a rare example.

KL

7/05/2006 08:22:00 AM  
Anonymous Anonymous said...

anybody else having a problem signing in?

KL

7/05/2006 08:22:00 AM  
Blogger Shailesh Gala said...

Where Houses Are Selling And Where They Are Not

Boom Days Over in Southern California

Last month, the median home price in Southern California ($485,000) posted its smallest year-over-year price gain, 6.4%, since July 2000, according to the Los Angeles Times. It's taking longer to sell a house, thanks to increasing mortgage rates, fewer speculators, and homeowners trying to sell before prices fall further, the article says. The areas that saw the smallest price appreciation in May were the first ones to see skyrocketing price tags during the boom, the Los Angeles Times says.

For instance, last month, San Diego County's median home price went up a mere 0.4% to $490,000 from $488,000, and Ventura County's median price rose 3% to $586,000, the article says. However, the paper says, three counties reached record-breaking median prices in May: Los Angeles (which rose 10.9% from the year before to $509,000), Riverside County (which had a rise of 9.4% to $417,000) and Orange County (which saw an increase of 7.6% to $635,000).

Flipping Houses in New Orleans

House flipping -- buying a home and reselling shortly thereafter for a sizeable profit -- was a popular activity of real-estate speculators during the heyday of the housing boom. Those days appear to be over in many parts of the U.S., but in hurricane-ravaged New Orleans, it is a growing occupation, says Bloomberg.com. About 100,000 single-family homes were damaged by last year's storm season, and now, renovations have begun on 34,000 houses, the Web site says.
One local flipper, who plans to make a living renovating and reselling New Orleans-area homes, says he can make a gain of 80% for three or four months of work on each residence, the article says. "If you're a regular person who knows how to swing a hammer, opportunity is jumping up and down in New Orleans," the Web site quotes one local real-estate broker as saying. Small-time handymen and speculators aren't the only ones getting into the act -- Home Depot Inc. has opened a few area stores in response to demand for construction materials, and home-builder KB Home is building houses in the region.

Buyers and Sellers Lock Horns in Orlando

The scale is tipping toward buyers in Orlando, but sellers are refusing to lower asking prices, the Orlando Sentinel says. The inventory of existing homes for sale is five times greater than it was last year and homes are taking longer to sell, the article says. Convincing homeowners that they have to accept less than their neighbor did last year is tough, the paper quotes ones local real-estate agent as saying.
Some real-estate professionals are putting in extra hours as buyers become choosier and negotiations take longer to complete, the article says. Local developers are wooing buyers with "sweeteners" like price discounts and closing costs, the Orlando Sentinel says.

Foreclosures in South Bend, Ind.

South Bend, Ind., home to Notre Dame University, saw year-over-year home prices drop 10.2% to a median of $81,800 in the first quarter of this year, the Chicago Tribune says. Contributing to this decrease was an outbreak of home foreclosures in the city, the paper says. Area homeowners are being forced to sell as local industrial jobs dwindle and monthly payments on adjustable-rate mortgages become harder to meet, the article says.

Investors who renovate homes and resell them are profiting from the high number of foreclosures, the article says. Unlike residential areas closer to Chicago, South Bend isn't a popular second-home locale, in part because of its two-hour drive to downtown Chicago, the paper says.

Anything But Cool in Austin

Home sales and prices may be cooling as a whole in the U.S., but not in Austin, the Austin American-Statesman says. There, the year-over-year median home price increased 8% in May to $174,000 the article says, and houses tend to sell in less than two months. Boosting sales are a strong local economy and buyers who see the Austin market as a relative bargain, the paper says.

"Somebody living in California in a 1,400-square-foot home could sell it anywhere from $700,000 to $1.2 million, take the profit and buy a mansion in Austin," the article quotes the chairman of the Austin Board of Realtors as saying. Outlying areas such as Round Rock and Oak Hill are seeing an increase in buyer interest as home prices within the city rise, the paper says.

7/05/2006 08:37:00 AM  
Blogger Metroplexual said...

Grim,

I went to the main "News With Views" webpage. I cannot figure out what the political agenda on that site is. It seems to be utterly paranoid though.

7/05/2006 09:02:00 AM  
Blogger Mr. Oliver said...

HE is a columnist for the Washington Times, which gives a good indication of his conservative bent.

7/05/2006 09:49:00 AM  
Anonymous Anonymous said...

I wonder though just how many people are affected by the housing bubble over the past 5 years.

Of course, anyone who has bought and/or sold a house. But of the total number of home owners just how large is it with problems.

If 25% own their homes w/o a mortgage, how many more have owned their place for more than 5-10 years and have no problems paying their current mortgage. Or those whose income is high enough that they can pay whatever the mortgage payment is (wondering though why they'd need a mortgage in the 1st place).

How many people are speculators (including those who supposedly bought a vacation home)? And how many have sucked every last cent of their equity out and spent it all?

Etc, etc, etc.

If we knew these answers to these questions, could we then begin to develop some analytic models to guage this looming problem?

7/05/2006 10:00:00 PM  
Anonymous Anonymous said...

What a Whorendous mortgage payment!

7/06/2006 12:36:00 AM  

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