Tuesday, December 06, 2005

"Are we there yet??" "What is taking soooo long!?!?"


Like a neverending road trip in the family station wagon as a kid...one poster wonders "when are we going to get there?" (this post was actually taken from Ben Jones blog with the posters permission to use it here)

Former LA Homeowner said...

socalmtgguy and all the rest,

I believe there is a housing bubble, especially in So Cal but it is taking a freaking long time to burst. How long do we have to wait for this mess to unravel? I just want a decent house, nothing to flip or speculate on.

1:21 PM

There is not been any REAL pressure on the market yet for it to start coming down. Yes, interest rates have gone up some, and lending standards have tightened a smidge in some places, but for all intensive purposes, not much has changed. The latest increase in rates doesn't really affect that many people at the moment.

We all know that in the bubble markets, there is an overwhelming use of ARMs, I/O ARMs, and option-ARMs to be able to "afford" the property. Most of these loans are fixed for a minimum of 2-5 years, with some going as long as 7 and 10 years. The borrowers that are refinancing right now more than likely bought 2-3 years ago, and now their ARM is adjusting, or about to adjust. Assuming they didn't take out too many HELOC's (home equity line of credit), they should have plenty of equity to be able to refi at a lower LTV. Some of these people will be impacted, but for the most part, they have enough equity cushion to keep themselves safe.

On the other hand, you have the people that have bought in the past 12-18 months. These people are still sitting pretty with their low payments for another 12-18 months at least. Some of these people have some decent appreciation.

Here is where things get tricky. In 2006 there are approximately 335 billion dollars worth of ARMs that are set to adjust. Let's just assume that each loan set to adjust is for $500,000. That means 670,000 households are going to have 4 options: refi, sell, foreclose, or pay the higher payments.

Things get really tricky in 2007 as 1.2 TRILLION dollars of arms are set to adjust. That means 2,400,000 households have to pick one of those 4 options. (again, we all know that 500k is a high loan amount, but it will give us a 'low estimate' as the number of households that could be effected) Let's look at those 4 options a bit closer now...

Refinance - Most people will NOT like their mortgage payment fluctuating on a monthly basis, and they will certainly not like the fact that their payments will jump pretty dramatically as rates will most definitey be higher in 2006 and 2007. Rates will still be historically low, but not in the 4's and 5's which many of these borrowers will have had.

Sell - This is an option that many people will take. They knew going in that they could not afford the property for 30 years, but they would do whatever they had to do to get a piece of property and start getting the appreciation. There will be many of these people who will try and sell. The only problem is that supply and demand works both ways. The got the appreciation when the supply was low, now they will have to give it back as there are massive increases in inventory.

Foreclose - do I really need to go here? Many borrowers will lose their property because they cannot make their adjusted mortgage payment, or they cannot sell fast enough, or they cannot sell where they won't be upside down.

Make the higher payment - Some people might not be able to refi because of credit scores dropping, employment changes, or even tightening of lending standards. These people will do what is necessary to keep making the payment. Hopefully the jump in payment will not crush them.

So there you have it. That is one of the things I belive that will be the catalyst for the bubble to burst. Massive people selling will lower prices. Rising rates will force people to lower prices as the same payment buys less house. Tightening lending standards will pull potential borrowers out of the market. Once those stated loans get a bad rap and/or they actually start pricing them correctly, you will remove another section of people from the market.

Once these things start happening, I think you will see the beginning of things REALLY coming down. Don't fall for the dead-cat-bounce when people start buying in on the first dip.

I hope this helps to shed some light on how much longer "you will be stuck in this station wagon"!

SoCalMtgGuy

32 Comments:

Blogger SoCalMtgGuy said...

Sunset beach guy

Please e-mail me at socalmtgguy@gmail.com

I'd like to talk to you more about that.

Thanks!

SoCalMtgGuy

12/06/2005 5:07 PM  
Blogger Sensible Lender said...

This topic summarizes the situation very well. The thing to remember is that once a market turns down, it builds on itself and accelerates just as the increasing market does.
As people have trouble making adjusted payments they decide to sell, and the supply gets larger, and prices start to drop. It takes about 7% in costs to sell a house, which means that everyone has 7% less equity. At some point, sooner or later, some people have no equity and give back the house to the lender (foreclosures.)

Lenders do not like this type of assets on their books (the bank auditors slap their hands), so they sell it quickly at a lower price, which brings prices down further. This causes more people to have no equity and decide not to make large mortg, tax, insurance and maintenance payments when they can rent for much cheaper.
It takes time for this to get started and can take years for it to run its course. In the early 90s it took over 5 years for it to hit bottom. You will know it hits bottom when the maximum amount of pain has been inflicted on the maximum number of people, and no one has any desire to invest in real estate.

12/06/2005 6:57 PM  
Blogger Former LA Homeowner said...

socalmtgguy,

Thanks for the detailed explanation. I could be waiting at least 12 more months before I can "negotiate" a reasonable price on a house. Depressing but your explanation makes it a lot of sense. It helps to have an "insider" shed some light on this craziness. I hate competing with stated income/no doc, I/O loans when trying to buy a house. I have noticed that in Valencia where I am currently renting, the inventory and "for sale" signs have been increasing a lot compared to 6 months earlier but the prices are not going down or just a little bit ($10,000 off a $600K house - give me a break). I...must...keep...on...renting...;-).

12/06/2005 8:19 PM  
Blogger SoCalMtgGuy said...

Former LA homeowner,

I KNOW it is hard...but your patience will be rewarded!

2007 is when I think things will really capitulate, and like Sensible Lender said, at that point you will get the downward pressure.

Just keep renting and saving money. It is NOT worth jumping out there and buying a place if it increases your overhead 2-3 times.

Hindsight is 20/20. No logical person would have thought that taking a stated 100% I/O loan would have been a great financial move 2 years ago. Ok, so a lot of people have some paper equity...they don't have anything UNTIL they sell.

Feel free to e-mail me if you want to talk about it further. I'm in the same boat you are. socalmtgguy@gmail.com

SoCalMtgGuy

12/06/2005 8:50 PM  
Anonymous rent_boy said...

if this is going to take a couple of years to play out, should I continue to rent for 2 years ( $2k month - $50K for 2 years ) or buy now and deal with a the drop in price?

12/06/2005 9:40 PM  
Blogger SoCalMtgGuy said...

Rent boy...

I need to ask you some questions first...

What is the value of the home/condo that you rent??

How many bedrooms? Sqft? What location??

Let me know and I will get back to you tonight.

12/06/2005 9:56 PM  
Anonymous yoster said...

Great post about what will eventually cause this thing to break.

I feel that this is a very likely senerio but also think that we cannot rule out another Fed reflation.

If the Fed raises rates two far and something breaks in the economy (i.e. recession). I could see them taking rates down just in time for this next refinancing cycle.

This could mean hyper inflation and a slowed appreciation in the housing market while incomes catchup.

Either way, the next two years should prove interesting.

12/06/2005 10:28 PM  
Blogger SoCalMtgGuy said...

yoster...

I don't believe there is enough time to raise rates high enough so they can be lowered.

Again, rates are still at historical lows. Sure, they have been lower, but not by a too much (as a whole).

Low rates is responsible for part of the boom...stated income, lax underwriting, and other "creative" loans are the main culprits.

Only time will show who is right.

12/06/2005 10:32 PM  
Blogger WArenter said...

Do you see a possible scenaria where lenders end up deciding to work with troubled bwrs. - giving them things like 5 to 10 year IO loans, or something else to keep things from bottoming out?

12/06/2005 11:10 PM  
Blogger WArenter said...

)ops. Should be scenario.

12/06/2005 11:30 PM  
Blogger SoCalMtgGuy said...

Not really.

Remember, most of that stuff was packaged and sold. The lender does not "own" the loan anymore.

That is the trillion dollar question that we keep kicking around on this, and Ben's blog.

Never before have we lent money sooo easily to such poor borrowers...and then sold the loans on such a scale.

I guess the lenders could work with the borrowers if they still hold the loans, but the rate needed to help most borrowers would be too low for the banks to make any money what so ever.

Who knows for sure...only time will tell.

Stay tuned!

12/06/2005 11:31 PM  
Blogger Rob Dawg said...

Another end to the bubble might come from two changes in consumer attitude. It isn't scientific but it is possible for markets incuding housing to just plain old get exausted. SUV sales are still off 30-60% even though the oil price spike is a memory. Then there are the other consumers, the buyers of MBSecs. I find it likely that they won't want any more paper at any price. This doubly worries me as we discussed earlier how lots of seemingly ordinary commercial paper is merely laundered MBSecs. A careful analysis of what assets or supports are actually behind the loan market would probably dictate caution and lightening up on anything with exposure.

Both of these issues may play out a lot faster than the ARM I/O refi loan fiasco of 2006-7.

12/07/2005 6:16 AM  
Blogger Jim A said...

Is there truly nobody who has the authority to "work with borrowers"? Is there no way to unbundle these mortgages and start dealing with individuals? Of course in my worst fears I picture somebody stepping in, buying foreclosures, and making below market rate loans to the foreclosed. These loans would of course be sold to F&F under some special authority to buy extremely nonconforming paper.

12/07/2005 6:23 AM  
Blogger Jim A said...

Cote
I think that you're right that sentiments in the bond market might reset considerably faster than sentiments in the housing market. Still, "at any price"? There's always some price that it can be sold at, but alot of this stuff will be sold at junk bond prices, which would mean that nonconforming mortgages might get >10% interest rates.

12/07/2005 6:29 AM  
Blogger Rob Dawg said...

Jim,
I debated about "at any price" and I deliberately stuck my neck out. Yeah, I'll stick with that in this case. I don't think you can make a market or find a market clearing price for worthless paper that might even carry a negative value. How much would you pay for a nonperforming loan that might not get through default for years as you pay lawyers and sherrifs and management companies as you watch taxes accrue before you can even hope to recover a deprecitated and now years neglected unsellable property? That's an extreme scenario but when you own these things can you strip out the ones that aren't going to pull down the bundled package?

12/07/2005 7:09 AM  
Blogger SoCalMtgGuy said...

Robert and Jim

You guys are correct, the resetting ARMs is not the ONLY thing that could pressure the market.

I was using it because it is ONE good example of WHY this is taking soo long.

I too worry about the appetite of the MBS market for the crappy loans out there. If that dries up, the thing ends even faster.

I also know that a major subprime lender just got 3 new "investors" they can sell their loans to.

I might try to write about the liquidy scenerio later.

Thanks for the input!

SoCalMtgGuy

12/07/2005 9:33 AM  
Blogger Rob Dawg said...

Maybe the way out is going to be a leverage squeeze play. For 2006-7 we have really high interest rates to calm the international borrowers and stick it to the ARM I/O crowd as they reset. Then we tighten the refi market so they can't swap to low or fixed rates and we then lower rates to restart the economy. All the people responsible for the mania are stuck paying the cleanup costs. They aren't going to bail under the new bankruptcy laws so they are trapped. Serves 'em right. Their being locked also prevents them from reigniting the mania.

12/07/2005 9:56 AM  
Blogger John Doe said...

yoster said...
I feel that this is a very likely senerio but also think that we cannot rule out another Fed reflation.

If the Fed raises rates two far and something breaks in the economy (i.e. recession). I could see them taking rates down just in time for this next refinancing cycle.

This could mean hyper inflation and a slowed appreciation in the housing market while incomes catchup.


Yoster. Reflation could be worse for the American economy. Inflation is both predictive as well as explanatory. If inflation increases relative to global currencies, there would be a flight from the 'Dollar Standard", creating stagflation much worse than the 70's. Mortgage rates are low mostly because of foreign investors and pension plans buying fixed income derivatives for retiring boomers and Bernake's 'saving's glut'. In the coming 3 years, when pension plans scale back investment, and assuming that foreign investors are no longer propping up the Dollar to sell us their cheap DVD players, we could see higher rates, high import costs, and tighter lending restrictions. The Fed only attempts to control US government debt, not free market rates. A credit event is on the horizon, no matter how you look at it.

But, that this credit event is global in scope, it is difficult to predict what will happen. Could we have a global econcomic meltdown? What about deflation? Without exogenous factors to influence our currency, will it fall as fast as the rest of the world? Unless Martians start buying our San Diego and Orange County inventory, we cannot avoid the slide.

12/07/2005 11:11 AM  
Blogger Rob Dawg said...

Mortgage rates are low mostly because of foreign investors and pension plans buying fixed income derivatives for retiring boomers and Bernake's 'saving's glut'.

Gotta disagee. Mortgage rates are low because of the velocity of money and the lack of risk premium built into the cost structure.

"Foreign investment" has always been around. If you were a rich capitalist pig Nouveau Riche ChiComm would you entrust your money to the mainland financial system? NFW. And balance of payments data are broken. No longer reliable. It isn't as bad as it seems.

What long term is gonna kill low interest rates is the necessity to inflate our way out of paying back all the SocSec money that isn't there but that's 8-10 years away.

In order of occurance:
1 Velocity of money slows down (M3 no longer reported, coincidence?)
2 MBSecs fall out of favor in the secondary markets.
3 Commodities pricing finally honestly shows up in the inflation data.
4 The Republicans (re)capitulate on taxes (again).
5 The Fed screws up one time too many.
6 The boomers start drawing down earlier than ever expected at the same time the extended lifespans of their parents so dearly bought both radicalize health care and push assetst onto the markets. Property and stocks, etc.

Welcome to a short history of 2005 through 2012.

12/07/2005 11:26 AM  
Anonymous Jamelle said...

Hey SoCalMtgGuy!! Love the blog! Can you point me to a source where it says the the 600 something billion worth of mortgages will mature in 2006? and the same with the Trillions in 2007? Really those are Rock solid facts and figures that would justify almost everyone's concerns in a Housing Bubble.

12/07/2005 3:57 PM  
Anonymous Jamelle said...

Nevermind I seem to be much better with Google than I thought. Here's the link from CNN MONEY
http://money.cnn.com/2005/11/18/real_estate/financing/ARMs_coming_due/?cnn=yes

12/07/2005 4:02 PM  
Blogger Jim A said...

coté
As a registered pedant, I'll say that a negative price is still a price. Paying somebody to clean up a toxic waste dump is part of the value of the property, even if it is negative. But really, these loans aren't non-performaing when they're sold. I think that we agree that the risk premium associated with them will probably approach asymptotic and they'll disapper. (or come close) I just hope that F&F will hold the line on conforming loans. My fear is they (and their stockholders) have become so addicted to volume that they'll start seriously chasing this crap in the name modernizing for the current market.

ISTM this economy is like a crazed college student who has convinced himself that he never needs to sleep again (have a recession) if he just drinks enough coffee.(rate lowerings and tax cuts) The problem is after three days, even cofee won't stop the halucinations.

And a quibble: I wouldn't say thet we're "paying back" the social security money. We tax the employed to assist those who are old or disabled. The politicians have discovered that people are more willing to pay into a regressive tax called "social security" than into a progressive tax called "income taxes", so guess which one has been raised. Arguably, the "trust fund" just means that 8 years from now (or whenever "crossover" occurs) we'll simply be paying for a larger proportion of expenses out of progressive income taxes. We shouldn't complain about living longer, healtheir lives, we just need to figure out how to pay for it. None of which forgives the current attempt run massive deficits in an attempt to borrow our way out of the business cycle. The net effect: "Uncle Sam is cosigning my loan, I'm getting an Escalade!"

12/07/2005 4:25 PM  
Blogger SoCalMtgGuy said...

Thanks Jamelle...

When I was writing the post, I didnt have the time to go through all of my data to put the links in.

Thanks for adding that info!

SoCalMtgGuy

12/07/2005 4:30 PM  
Blogger 41cadillac said...

What about the interest only loans? Any information when those loans will adjust and to what monthly payments?

12/08/2005 4:15 AM  
Blogger SoCalMtgGuy said...

41cadillac...

I/O is an option used mostly on ARM mortgages. So whether the loan is just a fully amortized ARM or a I/O ARM, the stats are the same.

You could add I/O ARM to every time I said it in that post. Nothing is different.

The only difference is that when the ARM adjusts, you are NOW paying principle and interest, and not just interest at the higher rate.

12/08/2005 9:00 AM  
Anonymous Anonymous said...

mmmmhhh...

2/24/2006 9:03 AM  
Anonymous Anonymous said...

What are MBSecs?

I appreciate all the information you are sharing on this blog.

The part of this game that should not be discounted is that there will be many, many people with little or no equity left. I've suspected for a long time that this economy is being supported by equity loans. When people realize that they have squeezed every penny of equity out of their property AND are now left with an unaffordable mortgage payment, AND an upside down property, there will be a lot of people just walking away.
Lou

4/11/2006 12:14 PM  
Anonymous El Americano said...

I live in Anaheim, CA. The homes in my neighborhood were @ $180,000 on average in this area before the surreal estate market took off. Now homes here are valued @ $650,000 on average.

Yet most of those who bought homes here lately are immigrant Mexican families who barely pull in $20,000 yearly. How do they do it?. Easy. They rent out every available room they have to boarders, often having two or three mostly single men sharing a single bedroom. Others rent out a single bedroom TO A WHOLE FAMILY!. Some have even converted their garage into additional living space in defiance of housing codes. I have 12 people living in the house to my left and another 10 (and counting) in the home on my right.

Many Vietnamese families do the same.

This phenomenon is not limited to Anaheim but occurs all over CA. The result?; I live in a seemingly prosperous neighborhood were homes are close to a million bucks yet the streets are overcrowded with shitty dented run-down cars, Mexican music is blasting everywhere (together with humongous Mexican flags proudly waving on the lawns). Garbage is springing up all over and I have single males (mostly day laborers) coming and going at all hours of the day and night from the homes surrounding mine.

Don't get me wrong, I am NOT a racist. I'm just trying to point out how unreal this situation is. Most of these people could have NEVER bought a home on those incomes in the real world. Nor should they have.

4/14/2006 1:02 PM  
Anonymous Anonymous said...

I read that Fannie Mae and May are propped up by money coming in from China. I read that they just raised the money needed to continue buying these crazy loans from Banks and Sub Prime Lenders.

4/18/2006 1:56 PM  
Anonymous Anonymous said...

Another end to the bubble might come from two changes in consumer attitude. It isn't scientific but it is possible for markets incuding housing to just plain old get exausted. SUV sales are still off 30-60% even though the oil price spike is a memory. Then there are the other consumers, the buyers of MBSecs. I find it likely that they won't want any more paper at any price. This doubly worries me as we discussed earlier how lots of seemingly ordinary commercial paper is merely laundered MBSecs. wow gold opportunity! A careful analysis of what assets or supports are actually behind the loan market would probably dictate caution and lightening up on anything with exposure.

7/17/2006 11:01 PM  
Anonymous Anonymous said...

I/O (interest only) is just another way to rent - except you get title and in exchange you have a balloon that is going to kill your credit rating when you default. You're better off renting month to month. Even with a longer term lease, the deficiency judgment on an eviction for non-payment can't come close to being upside down on balloon payment.

7/25/2006 1:26 PM  
Anonymous QUALITY STOCKS UNDER 4 DOLLARS said...

The housing market will not pick up until we see some high wage jobs being created.

1/09/2013 11:23 PM  

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