Tuesday, January 31, 2006

Easy money never lasts forever!

There has been a lot of talk here and on the other blogs about the consumer spending that has been financed through the equity extracted from real estate. But what about the people that make the industry possible? What kind of money have many of these people been making, and what is in store for them?

To answer that question, let's look at the growth in the mortgage industry. Take a look at this chart from the Mortgage Bankers Association which shows the amount of mortgage originations by quarter. An origination is a purchase or refinance loan. I went ahead and added up the quarters to give an 'annual' picture of things.

1990 - 459 billion
1991 - 563 billion
1992 - 893 billion
1993 - 1.020 TRILLION
1994 - 769 billion
1995 - 640 billion
1996 - 785 billion
1997 - 833 billion
1998 - 1.656 TRILLION
1999 - 1.379 TRILLION
2000 - 1.139 TRILLION
2001 - 2.243 TRILLION
2002 - 2.854 TRILLION
2003 - 3.812 TRILLION
2004 - 2.773 TRILLION - 2.92 trillion per IMF Pubs
2005 - 3.120 TRILLION - only 2 quarters data from MBAA so IMF Pubs provided the 2005 data

If you look at this data it is pretty easy to see that as the stock market started cranking in the late 90's so did mortgage originations. Things tailed off in 2000 as interest rates were at their highest point in years. As you can see, 2003 was the largest year on record. Almost 4 trillion dollars worth of loan originations. Your interest only loans started becoming popular in 2002 and they took off in 2003 and beyond. There were almost more mortgage originations in 2002-2005 than there were from 1990-2001.

But what does all this mean?!?!? Let me ask you this (especially the people in California): how many people do you know that could do a loan for you? How many people did you know 3-5 years ago?

I couldn't find the article at the moment to provide a link, but something like 40-50% of the job growth in CA has been in the real estate/mortgage/construction industry since 2000. When you see an industry flooded with money like that, what happens. People run into the business for the money!

The whole point of the above data is to show you the size of the mortgage business. Now that you have seen the amount of money that is out there, you know that there were lots of people making good money.

During the boom times, it was not uncommon for somebody with little to no mortgage experience to make 5-10k in their first month...and some people made much more. You had people making 20, 50, 100k+ a month. Yeah, it was mostly the top dogs making 100k+ a month, but there were lots of them. From what I saw, it was pretty safe to say that most people were making 15-30k a month. I don't have stats or anything to prove this, just what I saw on the 'tracking' boards in offices, and from knowing how much people were making on the loans I was doing for them.

It's funny, I had loan officers that wouldn't "do loan amounts less than 500k". They would pass them on to somebody else because it wasn't worth their time to do anything smaller. But do you want to know what is REALLY funny, I was getting calls from some of these same people a few weeks ago for 150k loans in Florida. I said, "I thought you didn't do the small loans". They said, "very funny...in this market, I'll take what I can get".

I'm also seeing a bit more stress on some people's faces. After several good months in the business, many of these people realized they could get a mortgage, and they were making good money, so why not?!?!? The only problem is that that mortgage is a 30 year commitment. 6-12-18 months of good income doesn't mean you can afford that in the long run. When the 20k a month isn't rolling in so fast, that 4000-6000 a month mortgage starts looming large in some people's eyes. I even had one office where the other loan officers pointed to a guy who was stressing out...and I just watched as he was burning up the phones, dialing for dollars. You could tell he was on a mission. I asked one of the guys "what's up?". He said that the loan officer in question had a $4000 a month mortgage and the holidays were pretty rough for him. Rough in the sense that mortgage production slowed down, and there wasn't a big paycheck at the end of the month.

You could only imagine the stories I would hear from the 5000-10,000 dollar weekends in Vegas. The clothes, the cars, the jewelry...it was everywhere in some of my offices. There were 20-25 yr olds rolling in 745 BMW's, Hummers, 500SL Mercedes, Escalades, etc. You name it. The phones were ringing and there was an energy you felt when you walked in. People were making money, and life was good.

That energy is gone from my best offices. Many of the cubicles that used to be full, are empty. The top people are still around, but they are having to work much harder. Some have been in the business for a while, and knew it would slow down some. Some have never known anything other than the 'boom times'. Of the 'mom and pop' shops that worked out of their homes, or had small offices, some of them have closed their doors, or taken the step towards home office.

I will say this, at the same time when these people were making lots of money...and letting everybody know it. There were the quiet people (I really enjoyed talking with these people). The ones driving an older Honda Civics or pickup trucks. These people usually owned the shop, or had been in the business for a while. I think they knew this wouldn't last, or maybe they just weren't the 'flashy' types. Some of these people are probably set for life after the money they made...and the money they saved.

None of the above is scientific, or applies to every loan officer or broker shop. Everybody is different. There are all sorts of people that are in the business. Some are flashy, some big spenders, some are savers. Some care only about the dollar and nothing else. Some will do a loan that pays less because it is he right thing for the client. Some are a combination of the two depending on the situation.

One thing is for sure, there are 3 things that are going to affect the amount of originations the next few years.

1. interest rates
2. lending standards
3. property values.

If interest rates go up, then there will be less refinancing. If lending standards tighten, there will be less people able to qualify for a loan. If property values decline then the loans will be smaller. Smaller loans mean less commission. Higher rates and tighter lending standards will also affect property values. If the mortgage originations decline, so do a lot of people's paychecks.

Don't get me wrong, there is still plenty of business out there as a whole, but we are returning to a more normal market. I think we are returning to a more normal market that is not going to be able to pay everybody what they are used to being paid. If the market goes back to a 2 trillion dollar market, that is about a 33% cut. That cut is going to have to come out of paychecks, the number of people in the business, or a combination of the two. The established people will stay, some will stick it out, many will leave. I don't know when this will happen exactly, but I think the next 6-24 months are going to be very interesting.

What do you think??

I look forward to the comments and feedback!


Monday, January 30, 2006

Market update...what I'm seeing...and the NEW Ziprealty.com

For those of you having trouble accessing this site from work, I bought another domain name and pointed it to the blog. Use: www.housingbubblecasualty.com and that should get you here...but who knows, maybe the firewalls don't like 'debt' either?!?!?

Let's get right down to business...

Last Monday (Jan 23rd), there were 15,568 properties on the market in San Diego per Ziprealty.com. Today (Jan 30) there are 16,188 properties on the market. That is a 4% increase in one week! Let's not forget that about 18 months ago, there were about 3000 properties on the market.

What about the loans? The subprime I'm seeing is getting tougher and tougher to get done. I have had several people ask me about the lowered standards, and how that is impacting things. The truth is that yes, the standards have been lowered even more this year. No tradelines, no problem. BK's, no problem. But before you feel even more dejected that is this never going to end, I will tell you what the big problem is right now. It is ONE word.


The standards are pretty low right now, but the one thing that IS tightening up, is the way my lender (and others) are looking at income. With property prices in San Diego where they are, VERY few people have the W2 income needed to buy a 500-600k homes going full doc. So that leaves many borrowers having to go stated income. It was one thing when rates were at all time lows and more homes were in the 250k-400k range. You could 'get away' with stating income in the 5000-7000 per month range and have it be believable by most lenders. The problem now on those purchases, is that the homes are more expensive, and the rates are much higher. You pretty much need to state 10k+ a month to qualify for many of the 100% stated deals now.

I don't know for sure, but I'd be willing to bet the investors started noticing these high stated incomes, and quit buying loans with 'overstated' income. Since the lenders know that many of these loans are the equivalent of 'junk bonds' they sure don't want to hold them in their own portfolios...so they are scrutinizing the stated income deals much more closely today.

Let's not forget the standard assortment of junk loans that people are trying to get done. The days of refinancing and 'automatically' being able to lower your payments a few hundred bucks are over. The days of pulling cash out a few months after you bought a place are pretty much over. Rates are up, and overall it is a very tough market. From the brokers I am talking to, they are doing more A-paper loans, and lots of option-ARMs. After all, the option-ARM gives the lowest payment possible...and we all know that the 'payment' is the most important thing.

This weeked I happened to met up with some other account reps like myself who are with other companies. One of the reps told of a meeting they had with their manager. The manager wasn't too impressed with their performance, and questioned if their being in the business was "right" for them. The manager said they were not aggressive enough in the 'grey' areas. I know what that means...but I'll leave it up to you to decide for yourself. I'll go ahead and say that none of us that met together are aggressive in the 'grey' areas...maybe that is why I have been spending a lot more time on the blog lately?!?!?

On a side note, I want EVERYBODY to start using ZIPREALTY.COM when they look for property. I know you have to sign up for an account, but it is worth it. Why you ask? Well apparently they rolled some new features over the weekend. I won't get into all of them right now...but take a look at this:

ZipRealty Price Track:

Price Reduced: 11/21/05 -- $625,000 to $615,000
Price Reduced: 12/18/05 -- $615,000 to $599,000
Price Reduced: 01/04/06 -- $599,000 to $595,000
Price Reduced: 01/28/06 -- $595,000 to $585,000

Days on Market: 125

Yes, my friends, ZIPREALTY added a 'price track' feature that tracks the price reductions, and shows the days on market. Not only does Ziprealty update from the MLS several times per day, they provide MUCH more comprehensive information than realtor.com. Don't worry, I have not had any problems, or been bothered by anybody from ziprealty.com trying to get me to buy. Go ahead and register...it is the closest you are going to get to the actual MLS listings. I know they haven't expanded across the whole country yet, but they are in most metro areas. And no, I'm not affiliated with them, or getting paid by them in any way. I have been using them for quite a while now because they are more accurate and provide better info than realtor.com. When I was checking the inventory levels like I do every day, I noticed the new features, so I figured I would pass this information along to YOU!

Thanks for stopping by, and I look forward to the comments!


Sunday, January 29, 2006

Dr. 90210....homeowners always happier...and a realtor association withholding data??

One evening last week I was doing what most guys do real well...high speed channel surfing. I was flying though "those" channels that you usually don't watch too much in the first place...yeah, you know the channels I'm talking about...everybody has them. Anyway, I was flying through and I heard the word 'mortgage'. So, with my amazingly adept hand/eye, tv/remote coordination, I stopped on what happened to be the E! Tv channel. The show was Dr. 90210, and the topic wasn't boob jobs...but mortgage payments. I have seen bits and pieces of this show before, so I know basically what it is about...top plastic surgeons in Beverly Hills. Well, one of the surgeon's named Dr. Rey is going to be buying a new house and the payments are going to be pretty large. Since I missed most of the show at this point, I made a point on trying to catch a re-run so that I could get more details. I did find the re-run, and I caught it this weekend.

Before we look more into this situation, let me say I know nothing of this Doctor's finances, how much he makes or anything. I can only go by the information he and his wife personally said on camera. I know he makes a ton of money as a surgeon, and I'm sure he makes a decent amount from the show as well. Also, just because I talk about something here, doesn't mean they are an FB...I just find this story interesting. So let's take a look at what is going on...

It appears that Dr. Rey, his wife and 2 kids have found their 'dream home'...a $5 million dollar home. I assume this house is in Beverly Hills or surrounding area, as his office is in Beverly Hills. The show showed the wife going over the paperwork with her mother who is a top RE agent in Canada (if I remember correctly). She admittedly was nervous about moving, and getting their current house sold. They really need to sell their house quickly to avoid paying 2 mortgages at the same time. She says they are getting the bigger house so that her husband can have more space when he is relaxing and not working. She sign's the paperwork, and you see some boxes getting taped-up and ready for storage.

Next they cut to an interview with Dr. Rey. They haven't even bought the house yet, and he admits he is already thinking about the mortgage payment. He says: "let me put this in perspective for you, my monthly mortgage payment is more than I made in an entire year during my residency" (I think I got that quote right). They then show him in the house talking to his wife in the other room. "This means no more vacations, no more expensive suits and expensive shoes". "7 to 11 will be the norm, not the exception". He then says, I'm going to be working so much, I'm not going to get a chance to enjoy this house.

Let's look at this for a minute. Let's see how big this mortgage payment might be. I know you don't make much in residency, so my educated guess when he said this is that his mortgage payment is going to be about $30,000 a month. Let's see what we have here....

I'm going to assume (because I don't know) that they are going to sell their house, and put 1 million down on the 5 million dollar home. So with 20% down, they will have a mortgage of $4 million....again, I don't know how much they are putting down, but based on his comment that his monthly mortgage is more than he made in a year, I'm guessing they aren't putting 3-4 million down.

4,000,000 at 6.25% on a 30yr fixed makes the mortgage payment = $ 24,628,69
Let's not forget property taxes on a $5 million dollar home. I don't know about mello-roos or other special assessments, but in CA is it safe to assume a rate of 1.1% to 1.25%. When underwriting, we would use 1.25% as a safe bet. I'll use 1.2% since that makes it an even $5,000 a month for property taxes.

That puts us at $29,628.69 per month, and we haven't added in homeowner insurance yet. I tried to do a quick and dirty quote over at Allstate. With a 2 million replacement value, the annual premium would be almost $22,000 a year. For the sake of this post, we'll say the monthly payment is $1,371.31, which puts the annual premium at $16,455.72. I guess that sounds about right to insure a 5 million dollar home. That gives us an even $31,000 a month for the PITI payment (principal, interest, taxes insurance). Again, I'm guessing this number is pretty close to being correct based on his statement that his mortgage is more than he made in an entire year as a resident.

I know that top surgeons make a lot of money, but they also have a lot of expenses as well. LA county has 8.25% sales tax, 9.3% state income tax, and the usual federal taxes. The office is right by Wilshire and Santa Monica Blvd, so the office space can't be cheap either. Not to mention all of the expenses of doing business as a surgeon. I'm sure he can 'afford' this house, the question is just at what price? He even said "no more vacations" and long hours will be the norm, not the exception anymore. I can only imagine the amount of work that has to be done to keep making that payment month-in, month-out. It is hard for most doctors/surgeons to make any measurable amount of 'passive income'. They are paid extremely well for their skill and expertise...but when they go on vacation, they aren't making that big money. That isn't necessairly a problem, but it can be if you need to make 80-100k a month to afford your montly bills (before taxes).

I don't know what is going to happen, but you can find out Monday at 10pm on E!. At the end of the last show, they showed some scenes from the next show. I don't know if they will go through with the purchase of the other house or not. It will be interesting to see how it all pans out. I wish Dr. Rey and his family the best....I'm just glad I'm not on the hook for a 31k a month mortgage! Even if I was making the big money, I don't handle financial stress like that very well.

That brings me right into my next story. Apparently there was a nice article in the SF Gate that said that homeowners were physically and mentally happier than renters.

----"Even after controlling for such variables as level of income, education, race, etc., studies conclude that homeowners, as a group, are physically and mentally healthier.

They are happier and more satisfied with their lives. Their children receive more education and are less likely to get into trouble. Their daughters are less likely to become pregnant as teenagers. They vote more often and take a more active role in their community. They are more likely to recycle and less likely to get mugged."----

I don't doubt a lot of what they say, the problem is that you have to read down about half way to get to this gem: "Mathur is also quick to point out that it would be unwise to apply the results of the studies across the board to the Bay Area. Most of the studies were conducted in areas where an average home could be purchased for about $200,000."

Since you can't buy a home in California for 2.5 times that, and in San Francisco for 3-4 times that, doesn't that kind of discredit a lot of what the study says?!?!? I think lots of home owners are happy, especially the ones that bought in the 200k range, and others that have homes they can truly 'afford'. I also know that lots of home owners are worried about the large mortgage payments needed to 'afford' the current housing prices in California. I guess they were banking on people just reading the heading, and few paragrahs in before moving on. I don't think you should take a study done with 200k homes in other places, and try to relate that to the San Francisco housing market. In many cases, buying is better than renting...but in many areas of California, there is too big of a disconnect between income and housing prices.

***I just received an e-mail from a reader about this story from the Santa Barbara News-Press - Home Sales on a Slide Across the County. I guess the interesting thing here is this part of the article:
Over the past several years, the News-Press has obtained sales and median price data for the South Coast from the Santa Barbara Association of Realtors. The group recently told the News-Press that it now refuses to make this data available to the newsroom. Other associations of Realtors across the county willingly continue to share sales and price information with the paper.

I'm not going to jump to conclusions here, I just want to get this info out. If they are in fact withholding the data, I think it is safe to say that it isn't because things are looking good for real estate!

I look forward to the comments on all of these topics!


Friday, January 27, 2006

Help a Chicago reader...and an insightful e-mail

This is one of the many e-mails I have received the past few days. I can help with the financial part of things, but I need some people to chime in that have some knowledge of the Chicago market.

Let's take a look at our reader, and see what we can come up with:


It seems that I'm trying to become a f'd borrower.
Just today I tried to see if we could qualify for a decent rate (if not, there is no sense in buying at all). Lending tree returned offers right away, these are the lowest apr's in each category requested ( 380k loan). I don't know our credit scores.

15 year fixed: 5.405% apr

30 year fixed: 5.893% apr

7/23 ARM, 5.898% apr

I'm thinking of buying in a 3br in the Chicago Loop. We are expecting a baby and need a bigger place. Since our families live far away, we need some room for them to stay when they visit, and we expect stays of 3 months or so. A second baby will probably follow quickly. We'd want to live in this place for a long time, 10 years+. There is low probability that our jobs will take us elsewhere, and the jobs seem relatively secure. We currently rent a super cheap 1br nearby.

We want to spend about 500k with parking (that would be some of the cheapest 3br in the loop; it's easy to find 2br for much more). We have 20% down (barely), and ~200k in income which should grow over time (we are at the beginning of our careers, and no, the income is not RE related:). I figure that a 500k condo would cost us 2600/month in expendables (mortgage interest, tax, assessments, insurance, net of tax benefits). Equivalent rent would be 2200 on the low side, 2800 on the high. I am not counting the opportunity cost of the down payment or any additional maintenance not in the assessment.

I'm looking for a mortgage with the lowest APR possible, fixed for at least 7 years. I don't care about principal repayment, but would like to bring our net worth higher than the value of the condo in 10 years.

The buy/rent decision hinges on the question of the appreciation/depreciation of the condo. A 3% appreciation would make buying it a good deal. Less than that, and it's not a good deal any more. The wife is more adamant about buying than me, but I like the idea as well. Feel free to use it as a example in your blog if you want or find interesting. Your thoughts?

Well, I like the fact that you are putting money down, and that you have a 6-figure income that appears to be solid per your e-mail. There are a few things I worry about though. You can't shop for rates without knowing a ballpark credit score. Using the lowest advertised rates often leads to disappointment as there are many variables that determine what YOUR rate will be. Most lenders charge more for townhomes and condos than detatched SFR's (single family residences).

My advice would be to get a 30yr year fixed. The spread between a fixed loan and an ARM are so small right now, and the fixed is actually LOWER than the ARM right now (by .005 with your numbers above). I don't think you should pass it up, especially with your time frame. If you plan on staying in the house "10+ years", why would you get a loan that is only fixed for 7 years? Unless you plan on getting the interest-only loan, which I wouldn't advise in your situation, is there any good reason to not get the 30yr fixed?

As far as property taxes, HOA's, and the condition of the Chicago market, I need the help of my 'Windy City' readers. I don't know the market there. 500k for a 3 bedroom townhome would be a 'bargain' in San Diego right now, so we'll have to say what the readers have to say about it.

Even if they haven't had the massive appreciation that California and other places have had, I would still say that you don't have to rush. Take your time and wait for the right place at the right price. I would ideally suggest to wait and see how the market does once 'sping'time hits. We could be looking at huge increases in inventory in many areas as people rush to the exits to cash in on their appreciation.

Whatever happens, I wish you the best of luck!!

This e-mail is sort of long, but I think there are some GREAT insights from somebody that has lived through several up-and-down real estate cycles. I'm sure many of you will be able to relate to this reader...and some of you will get sick to your stomach. Enjoy...
I read your entry this morning and want to jump at the chance to write you an email. This isn’t so much about a FB as it is about my inability to get my mind around today’s housing market. I’ve recently moved to the SF Bay Area (Peninsula) and after looking for a house, announced to my realtor yesterday that I’m just not going to pay $1,000,000 for a one-car garage. It just isn’t going to happen. Sometimes I feel like a person from the Depression who can never see debt as anything but the path to ruin. Maybe it’s just my age – but I’m not THAT old!

I remember buying in the last housing frenzy – the late ‘80s. I remember the cars parked up and down the streets and the multiple offers. It was insane. I was in the middle of it all and so were all my friends. But - and I just discussed this at length with my husband – I don’t have ANY recollection of anybody taking out loans for 100% financing. Almost all of them were conforming with a full 20% down. A few here or there had less than a 20% down-payment, but for the most part, no one wanted to get into the PMI stuff. And I don’t remember anyone evading it through piggy-back loans! Or paying minimum payments amounting to less than interest and principal! Or lying about their income!

I remember people being desperate to buy because choices were slim. And the fear interest rates might go higher. But not because they felt prices would only go up. No one thought prices could go DOWN, but no one felt they’d be priced out forever if they didn’t pull the trigger immediately. If you found a place you could swing, you jumped at it. You had to live somewhere.

Which brings me to the next thing I don’t remember. I don’t remember ANYONE buying multiple houses for appreciation’s sake alone. I don’t remember ANY “investors”. I think this is the biggest difference to me. This and all the $100,000 chef’s kitchens and Mercedes. People in the ‘80s just didn’t spend money like that. There has been a fundamental shift in our country. Perhaps it’s here to stay and not to join in will be as unwise as the Depression era person forever after never taking on ANY debt. They just didn’t “get” it.

Or maybe it will be like the new web designers of the ‘90s thinking their 6-figure salaries were here to stay. And everyone who came before them deserved lower wages because THEY just didn’t “get” it. Yeah, right...

I have very good friends who also share the experience of buying in the ‘80s. She and her husband are in their early 50s. They bought a spectacular McMansion in SoCal about 5 years ago. Anyone would say they’ll be just fine because they bought awhile back and have some equity. But they put a lot of money into renovations so it’s not quite as rosy as it would appear on the surface. Thankfully, prices have really climbed and there’s still some equity there.

They took out a HELOC to cover the remodel and expected to pay it all back shortly after taking it out. But somehow, it didn’t get paid back but rather got rolled into a refinance with a 7 year adjustable. Because of job changes, the idea of refinancing to a fixed rate was out of the question. And now, it seems that my friend’s monthly income doesn’t meet her monthly expenses. Her husband just got a new contract which is good news. And she’s looking for a higher paying job to get back on track. But I don’t remember any of us with so little job security and simultaneously being so leveraged to debt.

My friends, until this latest housing boom, have always been prudent and conservative. Now, virtually everything is tied up in this house. They are faced with a house they can’t afford, an adjustable rate that will come due in 3 years. And they’re slowly recognizing there’s no way they can expect to live long term in this house. I asked my friend if the house was seen as a “not forever” place to live when they bought it. She said not exactly. It’s just been a slowly developing situation. They expect to gain more appreciation and have options when the adjustable forces their hand. But she’s nervous and sometimes thinks they should sell soon. Her husband is unwilling to even think about it. But mostly she’s very annoyed that a neighbor just sold his house for $200,000 less than asking. She describes him as being stupid when it comes to money.

Another, younger friend has totally cleaned out his equity to pay for renovations. He figures it will only help appreciation. He has a baby and a job with a young tech company. He gets positively ill whenever anybody suggests prices could go down. Or whenever anyone suggests rates could go up. Everything he owes is adjustable.

So having friends faced with these kinds of situations is something else I don’t ever remember seeing before. What a Through the Looking Glass world this has become! More debt is taken on with less job security! Houses become more burdensome with time, not less!

A mania has manifested itself in massive debt, multiple houses, shiny granite countertops, commercial stoves, plasma TVs and Mercedes cars. Happy times. Except the underside of it seems to have snuck up on us. Stress and pressure seems to be building terrifically. And fear. This nightmare will only fade away if positive appreciating numbers keep rolling in. That’s the gamble we’re all taking.
Thanks for your blog. It’s great.

Have a great weekend everybody, and keep the comments coming. Feel free to hit the 'donate' button as well. This blog is taking more and more time, and I appreciate the people that have donated and/or gone through my site to shop at Amazon.com. EVERY little bit helps!!!


Wednesday, January 25, 2006

I want to hear your FB stories

After the response to the FB post from earlier this week, I don't have any FB stories that can compare...emphasis on the 'story' part of it. I have the data but I don't have the story which gives it that extra 'oomph' so that you, the reader, can relate. It's just data and numbers...and that isn't interesting unless there is something you can relate to. How many of you can relate to a 576 FICO score? How many of you can relate to a husband and wife expecting a new born, and the financial impact of it all? Yeah, that is what I thought.

Based on the e-mails I received and the 80+ comments on the thread, I know that quite a few people related to our possible FB situation a few days ago. I think that adds much more value than me just stating the data about a particular scenario. That thread was a great learning experience for everybody involved. So that said, I want to hear from more of you! It not only helps out the person in question, but it helps out the thousands of people (yes, thousands...everyday) that read this blog. It also helps the people that make comments feel good...who doesn't like to help somebody in a time of need?!?!?

I received several e-mails from readers that printed the post and replies, and were passing it along to friends or family members that were in need of help. Some of these people were in similar situations, and some were ABOUT to get into a similar situation. I had one reader specifically e-mail me because they cancelled an offer on a property because of that post. They were about to get an 100% loan with interest-only to buy a fixer upper condo. After the mortgage, they wouldn't have had any money to fix it up, and they had no plan for what to do in 24 months when the ARM would have adjusted.

If you, or somebody you know is in a tight spot, send me an e-mail. Things will be kept completely anonymous. We have all sorts of experts in various fields that are reading this blog on a daily basis. Some of them pass me e-mails which I then pass to the person in need of help. The potential FB can do what they wish with the information.

Send e-mail to: socalmtgguy@gmail.com

That said, I want to share something interesting from a reader. This reader was telling me all about their situation. After they told me about their finances...they put this in parentheses:

--(yes, I always plot out several years on a spreadsheet and every month tracking my expenses to see if I'm on track to my goals - call me paranoid or weird but it makes me feel good)--

In my reply back to the reader I said:

--On a side note, isn't it ironic that you call yourself "paranoid or weird" for keeping a budget and tracking your spending? That just goes to show you the stigma in society about being financially responsible. It shouldn't be that big of a deal that people budget and save. But it is just easier to spend today, and not worry about tomorrow. "I'll worry about that when the time comes..." is going to bite thousands of people in the butt.--

They replied:

--I never actually looked at it from that angle before but now that I think about it, it is somewhat funny and disturbing that I have to explain away my spreadsheets and budgeting as an eccentricity to family and friends....--

So what do YOU think? Isn't a little bit weird that people have to hide the fact, or feel 'weird' about budgeting their money? I'm not kidding here. I have talked to brokers that made 50k in a 2-week paycheck, and 2 weeks later they tell me they are busting butt because they only have 10k left in savings! They have the cars, the clothes, the shoes, the jewelry, etc, but they don't have a budget!!!

If you haven't read the Millionaire Next Door, I suggest you check it out. Most 'real' millionaires have, and stick to, their budget. It shouldn't be anything to feel embarassed about. I guess people feel like the 'rich' have so much money that they don't worry about little things like 'budgets'. Boy are they wrong...

I look forward to the e-mails, comments, and stories!


Tuesday, January 24, 2006

A quick market update, a yahoo poll, and comments

Whew! ...is it the weekend yet?!?!?

I know we have a few more days, but wouldn't it be nice to trade places with this dog for a while?!?!?

Anyway...let's get down to business. I'm sure many of you are wondering what I'm seeing in the market right now. I'm seeing a bump in activity, but much of that activity is not translating into loans. There seems to be more activity on the A-paper side of the business at this time, but overall, things are still pretty slow.

I was talking to some other reps from 3 different companies, and they were seeing much of what I have been seeing. They are looking at less loans, and what they are looking at, is somewhat tough to get funded. I can't say that I'm seeing any great FB stories right now. Just the typical stuff where you can't help the person get the cash out/payment/rate they want. I think many people are accustomed to being able to refinance and automatically lowering their monthly payments and/or getting cash out. I'm seeing lots of borrowers that 'want it all'. They want lower rates, lower payments, and more cash out...and they get mad when the broker tells them they can't have it all. It will be interesting when these people are forced to do something when their ARM adjusts.

There is a commercial on the radio in San Diego all the time for "Paramount equity and mortgage" that tells listeners that rates are going up and to refinance now...and that the average home went up over 40 thousand last year...and you should get some cash out now...yada yada yada. That said, I think borrowers are thinking about refinancing, but they are putting it off when they see what the rate/payment would be right now. I'm seeing more people that would rather keep their lower payment now, and hope for the best in the future, instead of locking in a slightly higher payment on a fixed rate loan at this time. The thought process is to keep the low payment now, and just sell when it adjusts. And we all know what happens when everybody tries to sell...or at least should happen. The CAR seems to think that prices will continue to rise as the inventory grows...but I think we tackled that in my "economics 101" post.

Along those lines, check out this poll that I found on Yahoo! (the direct link to the poll wouldn't work, so the poll will be on the right hand side of that page) The question is:

If you're thinking about selling a piece of real estate, what's your time frame?
Thanks for voting!

Since Jan 20, 2006

I'm holding out for a high price. I think there's steam left in the housing market. 20 %
I'm actively trying to sell now. 41 %
I'm undecided. I don't know which economic piece of news to believe. 39 %
So 20% of the market feels comfident the market will 'take off' again come spring time. What is going to be interesting is how the 39% of the undecided's are going to react. I have a feeling that a large percentage of them will join the "actively selling now" crowd in due time. I have no idea how many people voted in this poll, but take it for what it is worth.

Since things are slower right now, I'm being proactive and looking at other options and working on some other projects while I see exactly what is going to happen with this market. That said, what do you want to hear about?? I think I have answered a lot in the comments and through e-mails, but what else is really weighing on people's minds. I really like using the blog to educate, inform, and help people. There are lots of very experienced readers and posters other than myself....if you have questions or comments this is turning into a very good place to get some good answers and feedback.

Thanks for stopping by!


Monday, January 23, 2006

A misleading statistic...and a firewall 'work'around

I want to take this post to show why an important stat is misleading and show people another way to get to this site if they are having trouble with firewalls at work. Not that anybody would ever surf the net from work or anything?!?!?

I like the pic on the side...it reminds me of how many people got through economics. Maybe they shouldn't have slept through all that boring financial stuff. Hopefully this site isn't getting boring for anybody...I wouldn't want that!!!

I know that most people don't go back a few threads to look for new comments, so I want to address this one here. A few days ago, a poster had a comment regarding some info posted by the San Diego Association of Realtors. If you go to the website, you will see a box on the right hand side with the heading "NAR Economic Outlook". You can download a 10 page PDF from there. On page 5 of the PDF, there was the stat that was in question: "However, only 3% of the loans have loan-to-value ratios over 90%, so the foreclosure risk is minimal". The reader was bothered because they thought this number should be much higher...BUT I have very little doubt in my mind that the stat is true! WHAT?!??!? Are you kidding me?!?!?! BUT SoCalMtgGuy, YOU are the one who says people are doing lots of 100% financing...what gives?!?!?

Here is the problem. Loan-to-value (LTV) is NOT the same as combined-loan-to-value (CLTV). That stat is ONLY taking into loans that have an LTV over 90%. That stat does NOT take into account somebody that has an 80% first, and a 20% second for a 100% CLTV. The subprime industry used to do a lot of 95 and 100% 1-loan deals. These deals did not have PMI, and the borrower did not have to take on a higher rate 2nd mortgage. Yes, they paid a slightly higher rate because the LTV was high, but they could also get interest only in the full 95 or 100% of the loan, instead of just 80% had they done a combo loan.

A 100% LTV means 1 loan. A 95% LTV is not the same as an 80/15 which is 95% CLTV. An 80/20 is an 80 LTV loan and a 20 LTV loan, for a combined 100% CLTV loan.

Have I lost anybody???

Many months ago, I used to do a lot of 100% 1-loan interest-only loans. Since then, the rates have gone up dramatically as most investors do NOT want to lend 100% of the value of a property in 1-loan. They would rather do 80/20's in case the borrower defaults, this way they will probably only lose on the 2nd lein. Most A-paper lenders will NOT do a loan over 90% LTV. They will primarily do 80/10, 80/15, or 80/20, and each of these loans will NOT fall into the 3% of loans with LTV's of 90% or more. These loans have high CLTV's, and first leins of 80 LTV.

The same can be said for people that might have taken out a HELOC to push their CLTV over 90%. I have seen plenty of people that put money down on their property, only to turn around months later and pull it out, or get a HELOC.

NOW, does it make sense why that statistic doesn't mean very much. Most people don't know the difference between LTV and CLTV...but now you do. Aren't you glad you didn't sleep through this?

I think I will do a post and point out the 'spin' they are putting on their numbers, as well as the holes in some of their arguments. That could take me a while, so look for that later this week.

I want to thank everybody for the constructive comments on yesterdays post. I think our fellow reader knows what needs to be done, and will find a way to make things work. They e-mailed me and were glad for the support and the comments. I will keep you posted as I hear how things work out. I think it is safe to say we are all hoping things work out for them!

I haven't had as much time lately to read the comments and post over on Ben's blog. I am receiving anywhere from 10-30 e-mails a day, and I reply to every one, so that leaves less time to post other places. I read the articles posted, and try to read the comments on 'hot button' stories. I did see where a reader overthere was looking for me as they were having trouble accessing the site from work because of the firewall at work. Here is another way to get to this site, that should bypass the website f-word filters: http://tinyurl.com/ccxls . I hope this helps some of you (thanks scprofessor for answering long before I could!)

Keep the e-mails, comments, and feedback coming! I also want to give a special thanks to those of you that have made donations...they are greatly appreciated!


Sunday, January 22, 2006

Confession from a reader: "I was in denial...I may be an FB myself"

I hope everybody had a good weekend! I want to share some e-mails that a reader and I have bounced back and forth. I have removed all personal and identifying information. I want to thank this person for their honesty and candor. I think this person has a very good chance at avoiding FB'dom because they did not go into denial, and are instead looking for a solution relatively early in the game. This person would like other CONSTRUCTIVE feedback for their situation. I think this person will be fine, and I want to wish them all the best. Now let's look at those e-mails....(note, I did change some of the personal/identifying information)
Dear AFB-blogman:

I was in denial. I've been reading all the mtg bubble blogs for 6 months, and I said I could handle, and I was. Now, I can't, and I may be a FB myself.

I recently exited the title industry after (xxx some issues xxx) with management, and find myself with a $4K mtg payment, another $3K in other bills, about $6K in 0% interest until May cc debt, $6K in checking, $9K in savings, $6K each in two IRAs, and a $4800 401(k) that I need to rollover. I owe $600K on the house, it's probably worth realistically $620K or so. I'm going FSBO at $640K. The property is in (xxxxxxx). I've paid the 1st and 2nd tax installments already.

I would love to dump the property and rent, while I accept a new job most likely next week, with an executive recruiter in (xxxxxxx). In the meantime, though, I will be running on fumes for the next 2-3-4 months, especially since my wife is due any day now. I am paying for (xxx some insurance xxx) for the delivery, so it's really $5K in checking. I'm wondering, though, if I should pursue a stopgap measure in the meantime. What do you think?

Some Title Company
Now here is my reply:


Thanks for the e-mail.

How much do you think you can make at a new job? It looks to me like you need to clear 10k a month after taxes to be able to afford things as you currently have them (4k mort, 3k other expenses puts you at 7k, plus you need to keep saving and pay off other debt). Do you think you will be able to get a job that is going to pay you close to 180-200k a year? If not, I would look at dumping your house as fast as possible.

If you have been reading the blogs, then you know about the people that keep 'pricing at the market' and riding things down. I'm by no means an expert on the (xxxxxxx) market, so I don't know what other properties are going for. If I were you, I would make sure that my property is BELOW the others, and get it sold. Even if you have to come out of saving a few grand to get it done, you will make it up by not having a 4k mortgage anymore.

That 4000 a month mortgage payment is a lot. Not to mention that you have a wife and baby on the way. Even if you keep the place, it sounds like you are going to have to work all the time to afford things as you currently have them. That means not very much time for the wife and kid.

Just out of curiosity, what kind of mortgage do you have on your property?

Feel free to ask any other questions. I really appreciate your honesty as I know it is hard to admit when you might be in trouble.

Also, would you mind if I spoke about your situation on the blog. I will NOT use your name/company/location or any other information that would make it attributable to you. I'm not interested in 'outing' anybody, just helping other people see what can happen to people when things don't go as planned (fall out with job).

Thanks for the e-mail and for reading my blog. I hope this helps you some.


And their reply:

Thanks for writing me back so fast. That's a pretty accurate assessment of our situation, and I've got a pretty good lead into an executive recruiting career where the commission level is pretty high. I'm amped for the opportunity, but the learning curve will probably stand in my way in the near-term.

Yes, we want to dump the house ASAP, and right now, it's a 2/28 at 6.125% on the first, and 30-year fixed at 9.85% on the second. I have a 7xx FICO, and my wife's is around 7xx.

I appreciate your sentiment very much on the family part; I 100% agree. Absolutely, you can use my story on the blog; I'm very interested in blogosphere feedback, too. I'm a salesperson; if I can't be honest, I can't sell. And right now, I could use all the help I can. We'll make, though. I'm very optimistic.

(Sent a quick 2nd e-mail)

A couple more things, too: we bought the house in August when we thought we were set, but we had no back-up plan. Also, we have no prepay on the mortgages.

(There were some other e-mails that went back and forth, but these contain the bulk of the information needed for your constructive feedback.)

There are a couple of points I want to make here. As you can see, this person's major fault was NOT having a back-up plan. The other major thing I want to get across to people is this: many facets of the real estate industry (title, escrow, broker, lender, etc) are commission driven on some level. During the past few years, lots of these people were making lots of money. Many of these people took on mortgage payments or other debt loads that assumed the money would continue for long periods of time. As you can see, this person ended up leaving their job in the title industry. It is not impossible to think they won't be able to duplicate the income they were making, but very seldom does a career change not involve a learning curve period where a new person is not at their peak earning potential.

Along those same lines. If you look at the last property decline in California, it was attributed to loss of jobs in the defense and construction sectors. If people don't have jobs, they can't make mortgage payments. Well, what happens if the mortgage/real estate industry, which is responsible for about 40% of the job growth in California the past 4-5 years, has a slow down? What happens when all the people that ran into the industry the past few years, that were making good money for the 6-12 months needed to get a loan, hit the slow times and can't make those $3500-6000 mortgage payments? Not to mention that many of these people didn't get 30yr fixed mortgages in the first place, so they will be looking at adjusting ARMs and increasing payments sometime in the future. Just something for you to think about.

Now I want to ask you, the reader, to provide this person with some CONSTRUCTIVE criticism, words of wisdom, or other advice. They said they are interested in "blogosphere" feedback, so let's do our best and see if we can help this person!

I look forward to the comments, as does the person who is looking for some feedback.


Thursday, January 19, 2006

FB Friday

Another week has gone by and it is time to look at some possible FB's. It has been a busy week and I'm ready for the weekend...how about you!?!??

Let's get moving...

How about the borrower I looked at this week that had 11 mortgages on his credit report. The broker told me it really wasn't that bad because they had just sold 3 of the places, and were buying one new one, so there would only be 9 mortgages when it was all done. The borrower had credit in the mid 600's. The problem is that the remaining 8 mortgages totaled well over 4 million combined. I could tell from the credit report that 4 were neg-ams, 3 were interest only, and 1 had actually been paid down several thousand dollars. How did I know they were neg-am? Easy, on a credit report there is a column that says loan amount, and then there is a column that says loan balance. If the loan balance is higher than the loan amount, then wallah! ...you know the borrower was making the neg-am payment. The other 4 mortgages were several months old, but the loan balances were the same as the original loans. Then there was the lone loan (ha ha) that actually had the balance paid down 10's of thousands of dollars. There wasn't really any way for me to know the LTV's of all those loans, but several of the loans were in the 600k-900k range and I assume they were in the 80-90% range. Aside from the problem that this person owned too many properties, and needing to do a stated income / non-owner occupied property / with I/O, they were also losing about 10k a month on the properties they were renting. Needless to say, I didn't need to get into all of the specifics with this one, as I knew I couldn't do the deal.

This situation took place not to long ago, and it is one of those situations where I was actually able to help an FB. There was nothing out of the ordinary with the file, except that they had a 1st, a 2nd, and a 3rd lein on the property. Ok, no big deal, the 2nd and 3rd were small loan amounts, there was plenty of equity, we'll just pay them off. Things got interesting when I got a call from my account manager on the inside. They informed me that when they pulled title, there were multiple (5+) hard money leins on the property! Somehow this borrower got behind on making payments to his hard money lender, so they just kept borrowing against their property to pay their loans. Fortunately for them, they had enough equity and a solid appraisal. It took some work on my part, but the deal made sense, and it really did help the borrower get back on their feet, and have a loan with a 'legitimate' lender again.

I looked at 2 loans today where the borrowers had the same problem...having 90-day mortgage lates, and then wanting/needing to refinance and pull 100k or more out. It doesn't take a rocket scientist to see what is happening when somebody can't pay their mortgage, and they want to refi, and pull out 100k or more. No matter what they say, what do you think they need the money for?!?!?

All in all, I'd say that activity is picking up some, but whether or not that translates into business is yet to be seen. Seems that people are waking up from the holidays and looking at credit card bills and the upcoming tax season. Seems that brokers are seeing mostly A-paper deals and some ugly subprime. I have gotten more calls this week than ever before with this question: "my borrower has a loan with your company, if they refinance it with you, will you waive the pre-pay penalty??" Unfortunately, the pre-pay penalty is generally there to compensate the investor, but there are some cases where lenders will make an exception, but not usually on the subprime side. It will be interesting to see how it all pans out.

I hope everybody has a great weekend!


Wednesday, January 18, 2006

Maxxxed out!!! ...and looking for a 'soft landing'

See this picture to the left. That person is doing what is called 'maxing out' on a lift, in this case the bench press. After warming up, the lifter attempts to do one rep at the max weight possible. Let's compare this lifter to some of the borrowers that maxed themselves out to buy a home, and/or live a lifestyle.

This lifter is at a point where he cannot handle anymore weight. Many borrowers are at a point where they cannot handle anymore debt. If you listen to all the bubble critics out there, they will tell you that adjusting ARMs and other things won't affect people that much. They will find a way to make their mortgage payment. But what about the people who got I/O ARMs at 55% DTI, or the people that had to go stated because they couldn't meet the debt ratios? You have seen my posts about how much payments can jump when ARMs adjust and/or rates go up (both are happening). Let's look at this lifter, he is currently bench pressing 644lbs. Do you think he could handle things if you added say another 10% to his weight (64lbs)?? Do you think he could handle another 20%, 30%? I have shown in earlier posts how payments can jump 20-30% or more in one shot when ARMs adjust. So lets just say we added another 128lbs (20%) to the bar right now....what kind of "soft landing" do you think his chest would be in for?? What kind of soft landing do you think is in store for the borrowers that are financially maxed out on their debt payments? Am I making any sense here?!?!?

I also want to talk about another type of scenario I am running into more and more. It involves the borrowers that bought with 100% or other high LTV financing and are now trying to refinance to either avoid an adjusting ARM, or pull some cash out. On paper, most of these people have some sort of equity, the problem is getting to that equity. As you all know, rates have gone up...especially in the higher LTV ranges. The investors are getting wary of lending 90% or more of the value of a property. Since it is their money, they seem to want a higher risk premium to pay for the risk that properties might go down 5-10%...or more. The market for 2nd mortgages is also tightening up as well. I was talking to a counterpart at another lender, and they said the same thing. The investors don't want the 2nd liens, and if they do, they want a high rate to compentsate them for their risk.

The rates today are MUCH higher than they were 6-24 months ago when many of these people bought or last refi'd. I have had 3-4 loans the past week where borrowers NEED to refi to pull out 8-12k cash. The problem is that most lenders won't do a refinance unless the borrower is pulling out a decent amount of cash. It doesn't look good when somebody pays $8000 to get $10,000 cash out. That is like paying 80 cents to borrow a dollar. "What you talkin about, Willis!?!?" That's right...many of these people need to make a 'cash call' with Gary Coloman, not refinance their entire loan to get a few grand cash out.

All in all, I think the subprime market is going to be in a for a rough time in the future. I know of 2 companies that stopped offereing subprime loans this month. They closed down their entire subprime operations. I know that popular opinion is that the subprime market will keep growing as more and more people get into debt and have their credit drop. In that sense, they are correct. There will always be subprime borrowers, but what will happen is that the 'risk premium' will return to the equation.

In the 'old days' subprime loans were noticibly pricier than their A-paper counterparts. BUT, over the past few years, competition for this segment of borrowers has grown tremendously. Lending to subprime borrowers was good business. You could charge higher rates, and with property appreciating the way it was, the lender was in kind of a win-win situation. They made more money on the loans, or if the borrower defaulted, they were holding an appreciating asset. The problem is that competition drove the rates down and eroded the 'risk premium' that made the loans financially possible.

The drive for market share and volume meant one thing...lower the standards and do loans others won't do. If companies will compete on rate, do you think they will compete on "lowering standards"?? Yes, they will. The combination of competing on rate and standards really led to 'giving anybody a loan'. As long as you could drive volume, things were good. After all, the statistics for defaults were still at all time lows. So let's keep lending!!!

Nevermind the fact that defaults were low because borrowers could refi or sell if they ever got into trouble. The appreciation machine saved many of these borrowers. You can make a lot of screw-ups with your finances when your property is going up 6-figures a year. Heck, most people's property was appreciating at a rate that was higher than their own salary!! I was talking to a doctor last week. His property went up over $300k in approximately 2 years. His condo appreciation almost outpaced his earnings from working as a doctor full-time for 2 years!! Can you expect that to continue forever?!?!?

All in all, I don't know how this is going to pan out, nobody does. All I can do is point out through facts, data, and personal experiences why I don't think things can continue as they have the past few years, and I certainly don't see a soft landing in the near future.

What do you think?!?!?


Tuesday, January 17, 2006

Reader shares an FB story, and in IMPORTANT question!!

I have steadily been receiving more and more e-mails from readers...keep them coming! I have had several readers relay FB stories to me, and many others have offered words of encouragement or other beneficial information. I'll start with a potential FB story and finish up with an interesting question that I think will spark some good commentary. That said...let's get moving!

This particular story comes from a reader. Apparently they know a couple in Orange County who just signed to purchase a 2 bed/1 bath condo in Santa Ana for about $425K using a 2/28 I/O ARM to 100% financing (80/20). The reader assumes they had to use stated income, but didn't ask. Things get tricky as the borrowers asked the reader if they could determine if the property taxes were included in their monthly pament. They were told by the loan officer that the taxes were included in the payment. After looking through the paperwork, the reader found the loan summary where it says County/City taxes, there was N/A filling in the blank. The reader couldn't believe the situation their friends were getting into. They were buying a place with 100% financing and an interest only payment, and their taxes were not included in the payment as they had originally thought. Their friends, like many others, are/were under the impression that they can just refinance if they get in trouble down the road. The reader told them they MIGHT be able to refinance later, but there are no guarantees. The reader then asked me if there is any recourse once they sign the dotted lines? Is there a grace period in which they can get out of the loans?

It sounds like these borrowers just got in over their heads. The sad thing is that they aren't out there to flip properties, they are just looking for a place to live. It sounds like they bought so they wouldn't be 'left behind'.
Unfortunately, once they sign, they don't have much recourse on a purchase transaction. On refinances, there is a 3-day recision period where the borrower can 'get out of it'. In this case, once the docs are signed, there is very little recourse they have to get out of the transaction. It is situations like these that I want people to avoid. Hopefully things will work out for these borrowers and they will be able to afford to keep their home once they move into it AND when the loan adjusts in 2 years. I just hope they find a way to pay the $400 a month taxes that they thought was included in their 'payment'.

That said, can somebody PLEASE give me some data that suggests how property can continue to go up?!?!? I'll post some quick data why I don't think it can continue to go up:

- Yesterday I posted the stats from San Diego county. From Dec 04 to Dec 05, property went up a whopping 4.8%. BUT, the decrease in value from November to December 05 was the single largest decrease in the 18 years that they have been keeping records. If you look at the stats from 1989 and 1990 right before the last bust, here were the appreciation rates: 16.6% in 1989 to 3.3% in 1990. This time around we had 21.1% in 2004, and 7.6% in 2005. Looks pretty similar to me...

- Today, we have 2 articles that came out in the OC Register: one article states that there is an entire zip code where every purchase loan was an ARM and in Santa Ana where 86-88% of the loans were ARMs (that is where our borrower above was buying). In another article, the tax collector stated that 46,000 residences have yet to pay their taxes due on January 7th. This is a 15% jump from last year, and the highest number since 1995.

- We have inventories in San Diego that are up 10% since January 1st, and 5 times what they were a mere 18 months ago.

- Today there was this article from the USA Today that states that 46% of first time homebuyers are using 100% financing.

Let's take a moment to look at a few things. Those of you that have been reading this blog for a while know that lots of people are using ARMs and 100% financing to buy property. Take the information above, with all the other information you have heard, along with the info I posted where 82% of the purchase loans in California are either I/O or neg-am, and answer this question:

Tell me how many of the 55,366 houses that were bought by people in San Diego during 2005 are in a good spot. Sure, I don't know all the specifics. I know that many people traded up, put money down, and can afford their house. I'm asking YOU, take a guess? I don't know! If you had to put your money on the table with a bet, where would you put your money?? I think quite a few of these 55,000 people are going to be in trouble in the next few years, especially if they bought with I/O, neg-am, or 100% loans.

But knowing that 82% of the purchase loans in Ca in 2005 were I/O or neg-am, knowing that people are NOT putting money down to buy houses, knowing that the appreciation ranged from -3% to 8% depending on when you bought last year, how many of those people do you think are in a 'good' place after buying what looks to be at or near the 'top of the market'??? How many will be in a good place when their ARM adjusts??

Again, I don't know the answers to these questions. Many of the statistics needed are nearly impossible to gather. I only know the information I read and what I see on a daily basis. I know that incomes haven't doubled in the past 3-5 years...but most property has. I know that rates are going up now...and that is bad news for ARMs. I know that massive appreciation was saving people....now it's not there. I see people not paying credit card bills, I see people not paying their taxes, I see inventories jumping, I see 'reduced' signs....so PLEASE, what am I missing. How are we going to get 10% appreciation this year?!?!?

I look forward to the answers....


Monday, January 16, 2006

San Diego 10pm News..."now is the time to buy" condos!

I was in the middle of writing my post for Tuesday when I heard a story come across the 10 o'clock news about "San Diego condo's...a time to buy?" Needless to say, I stopped what I was doing, and watched the entire piece. When it was over, I saved the post I was working on for another day, and decided to write this one.

Before I get into the news piece, I feel that I must offer you a very important trivia question: What is the official bird of San Diego??
Answer: THE CRANE!

Now that we are all a bit smarter, or laughing a bit harder, let's look at this news story and see what they had to say. The story started off by talking to a Real Estate Consultant and a then a Real Estate Agent. They said the days of 20%+ returns were pretty much over. They also said that investors and flippers, who were responsible for the big increases in price, seem to have left the market. They also went on to say that many people could be renting their condo's with negative cash flow for a while. They agreed that people need to be ready for more normal returns in the single digits for a while. They mentioned that there is a growing inventory of condos downtown and in San Diego area.

Ok, nothing in there that I can really argue with. I think anybody with a normal medula oblongata would agree that the 20-30% annual returns are over in San Diego for the foreseeable future. The news piece showed pictures of condos under construction, for sale signs, condo conversions, and more.

Then it was time for the story to answer the question "is now the time to buy?" They spoke with both real estate "professionals" again, and it the answer is.....YES, it is the time to buy! BUT hold on a second...there was a caveat!!!!! The caveat was that you plan on staying there for a few years. The realtor said that unlike past years when you grabbed your realtor and there was only 5-6 condos to look at, now there are a dozens. They went on to say that with the increase in inventories, you had more choice in finding the right property for you. So YES, now is the time to buy, just make sure you plan on staying a few years!

Whew, I'm glad they answered that question for me. I was getting worried it might not be the time to buy. Before they conclusion of the piece, they mentioned that some other experts say San Diego prices could decline as much as 15% over the next 2 years. This was quickly followed with the 'real' experts who say that property will probably go up about 10% a year, and worse case, property will just 'flatten out' for a while. The reasons San Diego won't burst is because of strong job market, population increases, and property shortages.

So there you have it. It is just amazing to me how people can look at the data, yet come up with a stupid conclusion. Why would it only be a good time to buy if I plan on staying put for a while? If property is going to keep going up 10% a year, why do I need to stay for a while? Why can't I buy condos for $400k, and sell them for $484k in 2 years? Even the worst case is that things flatten out, and I sell the place for just a bit more than I bought it for? You have to live somewhere right?

I guess they haven't had a chance to read this article from the San Diego Union Tribune titled "House Resales Take a Tumble In December". From the article: "San Diego County resale house prices tumbled last month by the biggest number in 18 years of record-keeping and contributed to the smallest year-to-year rise in overall prices in six years, DataQuick Information Systems reported Monday." Other notable stats, were that the median price of a home from December 2004 to December 2005 was still up, but by only 4.8%. The annual growth was still 7.6% in 2005. I'm not a founding member or Mensa or anything, but I'm pretty sure 7.6 still represents single-digit growth. This next part is VERY telling for me:

The yearly appreciation rate also represented the biggest slowdown from one year to the next in DataQuick's records. From 2003-2004, the median resale price rose by 21.1 percent.

The next biggest slowdown occurred at the start of the last big real estate bust, when the annual appreciation rate went from 16.6 percent in 1989 to only 3.7 percent in 1990.

So basically, the last time appreciation slowed by an amount this large, things took a turn for the worse.

I also need somebody to explain the shortage of property to me as well. By looking at ziprealty.com, it seems that the number of properties in San Diego has increased 10% in since the beginning of the year. On January 1, 2006 there were 13,916 properties on the market. On January 16, 2006, there are 15,318 properties on the market. Yes, I know that lots of properties expired at the end of December. But when you look back to May of 2004, there were approximately 2900 properties on the market. So in the past 20 months or so, the inventory has gone up over 5-fold. Sure looks like a shortage to me!!

I know this wasn't a 'mortgage' related post, but I think there are quite a few FB's that bought into many of these condos and condo conversions looking for the quick buck. They are going to find that flipping the property isn't going to be profitable, and renting at a loss will be their only option. Sorry, but unless you are putting over 100k down on most condos, it is going to be very hard to get any positive cash flow out of these $400-500k condos. Taxes and HOA's really eat into that rental income. It is going to be interesting to see how long the real estate market can defy the fundamentals of Real Estate investing. Renting at a loss has been popular the past few years as owners were content with the skyrocketing appreciation. I wonder how well they will fare when the "rocket man" runs out of gas???

Thanks for stopping by...and stay tuned for regular programming tomorrow!


Saturday, January 14, 2006

When should I buy a house? 6 things to guide you


That question is popping up more and more frequently in my inbox as it is one of the top questions on many people's minds. I am not an expert in every local market, and I certainly can't know everything with regards to each person's individual financial situation. Yes, there are tons of good deals and special situations out there. What I am going to do is give some solid advice that will help guide most people who are looking to buy their primary residence. Again, everybody has a different situation, but I think the 6 things below are a good place to start, and will keep most people out of trouble. That said, here is my quick and dirty opinion on things.

6 things to do - you could be ready to buy when...

1. You have done your own homework. Sit down with your friend named "google" and do some research on your own. Plenty of info on the net about mortgages, and plenty of places to get property info like ziprealty.com and realtor.com. If you do your homework, you will be able to better spot the 'red flags' that might pop up if you are dealing with 'overzealous' or less-than-honest salespeople. By doing your homework, you will less likely to be taken advantage of. Also, just because a friend, or a friend of a friend and is going to "hook you up", doesn't mean you are excused from doing your own homework.

2. You realize that the market performance of the last 5-8 years...it is NOT an indication of future results. Just because somebody you know made 100k in a year by buying a condo, doesn't mean the same will happen to you.

3. You have an absolute minimum of 3 months of ALL living expenses in your savings acount if you are single, or 6 month minimum if you have a family. This money is seperate from any money used for downpayment or closing costs. Yes, it can be in a money market or other 'liquid' account. No, its not glamorous or sexy, but the fundamentals never are.

4. Have some sort of money to put down. Preferably 10% or more, but even 3-5% will do. I know that it is hard for people to save up for the large downpayments that would required in many high value areas today. I know that "no money down" and "use the bank's money, not your own" have been popular mantras the past few years, but I'm talking about buying the house you plan to live in. I'm not writing this from the standpoint of advising 'sophisticated' people who understand leverage. I'm writing this for the people who want to buy their primary residence. See this post for more info on leverage.

5. You can get a fixed rate loan with a payment you can afford! Even though rates are up some, they are still near historical lows. If the only way you can 'afford' to get a house is with I/O or neg-am, you should probably wait. Even if you have to do an 80/10 or 80/15 loan, make sure the 80% is at a fixed rate, and try to get a fixed rate 2nd. When you have extra money, pay down the 2nd as fast as possible.

6. Find a place that you like and where plan to stay there for a while. Realize that homes don't always go up, and you very well could be upside down for a few years. As bad as that might seem, if you have a fixed rate payment that you can afford, you still have your job, and you are not forced to move, then you will be fine. Bringing cash to the table when you sell your place is not the best feeling from what I have heard. Make sure you have a realistic time frame for the amount of time you plan on living in the house.

So there you have it. I'll sum it up right here:

Do your homework, forget past results, have some savings, put some money down, get a fixed rate loan you can afford, and finally, find the house that you plan on making a home for a while.

I think that if you do those things, the odds are in your favor that you will be a successful homeowner.

I want to add a few quick things as well. I'm not anti-housing by any means. I think housing is overpriced in many areas and people are using creative "credit" as a means to not be priced out "forever". I'm not here to debate the value of a particular house. If you can do the things above, and realize that the value might go down, and you are ok with it, go ahead and buy. I'm not here to tell people what to do, just help give them some information so they can make an informed decision.

About the other 'creative' loan products out there. They all have their place for responsible, financially savvy borrowers that understand the risks, and have the finances to handle those risks. The problem is that most of the people getting these loans, are not that type of person. There are a million situations where these loans can be used correctly and effectively. There are many situations where I could recommend some of the "exotic" loans for people, but for the average person looking to buy a house, I would say stick with the basics above.

Enjoy the long weekend...and as always, I look forward to the comments and e-mails on this one!


Thursday, January 12, 2006

Realtor: "you will make a minimum of 10% every year you live in the house"

I will never forgot when I passed my Series 7 exam with a score of 87 several years ago. For those of you that don't know, that is the 'stockbroker' exam to be an NASD securities dealer. It is a 6 hour test where only 65% of people get the passing score of 70% or higher. Why am I talking about that test you ask?!?!? Simple, the NASD (National Association of Securities Dealers) is adamant that people get ONE point through their thick skulls...and that is that you cannot promise, or guarantee investment returns to clients. That industry is by no means perfect, but at least they try to make a big point about brokers not guaranteeing investors returns on stocks, mutual funds, or other investments. Why do you think every mutual fund ad has some small print that says "past performance is not an indication of future results"?!?!?

I received an e-mail from a reader that I will post below. I want you to read the readers e-mail, and then the realtors reply. Make mental notes of anything that sounds a little "fishy" to you.

---Here is the e-mail that a reader sent to a realtor:

Why would someone pay 319K for this house when in 2002 it sold for 195K.. Haven’t you realtors seen yet that prices are coming down, why should I line the pockets of a greedy seller? You guys are going to have to start lowering prices, soon…MLS 25162980

---Here is the reply from the realtor...pay special attention to the 3rd paragraph:

Great question; agents don’t set the prices. Agents act for buyers and sellers. Agents can make recommendations to sellers, but most sellers think their homes are worth more than the market value. Homes in the Puget Sound area have appreciated at about a 20% annual rate over the past two to three years. That is beginning to slow and most experts predict they will go up about 10% this year.

As for the house that sold for $195k in 2002; the sellers put a lot of time and money into the house remodeling it. It is only worth what a willing buyer will pay. So we have to wait to see what that price is.

If you don’t own real estate, you should. You have to live somewhere and if you own you will make a minimum of 10% on the total purchase price for every year you live in the house. Most people can buy with no money down and in some cases ask the seller to pay their closing costs out of the purchase price. I’d recommend you use my website or any website to search for properties and find something you can afford and have me or another agent help you buy a home. Don’t wait for prices to come down, they will not come down. They will go up more slowly, but they will not come down. That has nothing to do with agents; it is simply based on the growth in population and a fixed amount of land.

If you want to find out how much you can barrow call Dxxxx and ask him. It is painless. Dxxxx – 425-xxx-xxxx.

Thanks for the email. Have a great week,

Mike xxxxxx

xxxxx Realty

Ok, anything jump out at anybody in there?!?!? How about the fact that the realtor says you will make "a minimum of 10% of the purchase price of the house every year that you live there". If this house was a stock, that would be a major no-no and you could be put on probation and possibly lose your license...but hey, it's real estate...it always goes up!

How about the part where he states 2 times in a row that property will NOT go down...just appreciate more slowly. So property will appreciate more slowly...but based on his first sentence...at least 10% a year. How many of you would put your money in a mutual fund that never goes down, and will ALWAYS go up at least 10% a year?!?!? Sign me up!! But wait...there is no such investment that GUARANTEES that kind of return.

And finally...we get this precious jewel of information. The reason prices won't go down is because the population is growing and they aren't making any more land. Sounds good in theory, but we know that there are other factors that drove up prices, not the scarcity of land. Yes, there are areas that are completely built out, but not in the general context that the realtor was speaking.

I xxxxx'd out the names and other contact information of the realtor. I'm not here to out anybody...I'm here to point out the crap that the "experts" will say to make a deal happen. If you are reading this blog, you probably already know that property does not go up 10% a year, every year you live in the house. But, there are many people who have no clue, and will take this "experts" advice as gospel, and go into massive debt because it is a "can't lose" situation.

So there you have it...

Today was a pretty big day for this blog. I went over 100,000 page views and I have had over
66,000 unique visitors and since I really got this thing going less than 2 months ago. Please keep stopping by, and getting the word out to others. I want to thank everybody for the e-mails, comments, and donations that have been made...keep it coming!! We are just getting to the part where things are starting to get interesting. This thing will take years to play out, and I look foward to blogging through it all!

Thank you all!


Wednesday, January 11, 2006

Escrow company says 71% of purchase loans used 100% financing in 2005

First off, I want to thank:
Legacy Escrow Service, Inc in Washington State for sharing some of their 2005 year end statistics with me. Due to the competitive nature of the business, they asked that I not use the exact amount of purchase loans that they closed, but it is safe to say it was SEVERAL hundred purchase loans. Out of these purchase loans, 71% used 100% financing to get into the home. Many of those 100% loans used ARM's and interest-only payments. I want to reiterate that this is just one escrow company in the state of Washington, but I think it is just one more piece of data that confirms what I have been saying here all along.

I can tell you that I don't doubt those numbers for one minute. It goes hand in hand with what I have seen myself the past year. Legacy Escrow serves mainly the Seattle, Everett, and Bellevue communities in Washington State. Seattle might not be a top "bubble area" in the country like Southern California, but don't discount their numbers and don't think other areas are not seeing similar statistics. PIMCO research indicated that 82% of the purchase loans in California were either I/O or negative-amortization.

I feel like I'm beating a dead horse, but do you see the problems that could arise if 60-70% of the people are buying a house with NONE of their own 'skin' in the game? Yes, some of these people are responsible, but I think we can all pretty much agree that 70% of the people in ANY area are not going to be the 'sophisticated' type of homebuyer that is using 100% financing becaue they are getting a better return on their money elsewhere. Most people are doing 100% financing because they have no money to put down. They are using interest-only ARMs, and many are probably going stated because they don't even qualify under the 50% debt-ratio when going full doc.

Look at it this way...if property drops 5%, that leaves 71% of "several hundred" people underwater. Oh my bad, I forgot...real estate only goes up. Silly me, I forgot to follow the NAR (Nat Assoc Realtors) mantra where you face the nearest condo or housing development and chant "higher, higher, higher" 3 times per day. I was trying to drink their kool-aid, but I kept spitting it out while laughing at the various FB loan scenarios I see on a daily basis that are being counted on as the continuing fuel for this bubble.

Sorry for being a smart-ass...but I feel like the guy back in 97-99 who was saying that buying stocks that are trading 180 times future earning is not a smart move. The fundamentals weren't there, as they aren't there this time around. You just watch the "sping surprise" that many people are about to get when they all list their properties in March/April. I talked to 4 different people today that all mentioned they were going to be putting their places on the market in that time frame as "the appreciation will start again in the spring". Actually, it will be more like groundhog day...but he ain't showing up....so get ready for a long winter.

I look forward to the comments...

Web www.anotherf@ckedborrower.com