Revised Option ARM Reset Schedule
Blue bars on the chart represent the recast schedule if all the loans were to recast five years after origination date. Gray bars represent the expected schedule of option ARM resets, which show loans recasting sooner after hitting the principal cap. Credit Suisse
Thanks to Burbed reader Madhaus for this submission.
The premise of this piece is that the ARM reset problem is going to surge as property prices decline, and minimum payments rise, both conspiring to drive more houses underwater, and thus triggering ARMs to reset.
Is that really the case though in the Bay Area? As we’ve heard, people who bought houses in the end of 2006 actually saw appreciation (condos… not so much… but may next year.) That and FaceBook is going to pop at any moment – flooding the Valley with thousands more millionaires. Also, soon we’ll be heading into Fall – and Fall bounce can be pretty strong!
Nice try Madhaus. You can’t scare us Burbed readers.
June 19th, 2008 at 8:22 am
The ARM resetting dealio could very well get the price de-escalating machine rolling in the BA. The reason is that from 2003-2006, close to 70% of all loans made in the BA were of the ALT-A ( ARM) variety. The severe upswing in resets represents the echo (cause and effect) of such a large adoption. But who knows? Since everyone works at Apple, Google, and Facebook, prices won’t be affected at all except in Oakland, Berkeley, Alameda, Fremont, Hayward, Sausalito, and the bad parts of PA. But at least the good parts of Palo Alto will still hold up, thus the entire BA is saved.
June 19th, 2008 at 8:41 am
Well I don’t know if anybody needs to be “qauking in their boots” but you should be concerned RBA. Option ARMS were sold in 2005 through 2007 as a way to combat skyrocketing RBA house prices. RBA was not the epicenter for Sub Prime, but Alt-A was big here. I know several people who bought 700k-900k houses with Alt-A type loans (back in ’05 & ’06) that varied from interest only to Option ARM. Their theory was to buy as much house with as small a payment combined with little or no down payment to reap the biggest reward from “appreciation” that they could get(for those not following along, housing is a super leveraged investment when it’s going up).
These folks were buying anything just to get on the bandwagon. Didn’t matter that the house might have termites or off of it’s foundation they just wanted in to the hot market real estate was back then. Some of these folks do have some equity still but it’s fading fast in some cases and in others just hangning by a thread before it finally evaporates. If people can refi into something they can afford then maybe they will be okay but there will be some who just can’t swing it and they WILL walk on the loan. I don’t know how big the problem will get for the RBA area but I know there will be some problems from SF down through the peninsula.
You could see prices in Hayward of all places start to firm as prices in RBA start to collapse. Case in point are the mini me mansions off Mission Ave in Hayward by that small golf course that used to go for $950 in ’06/’07 peak that are now being offered at $650-$700K with no takers. The bottom there could be around $550 or so. But that implies some RBA property needs to trade down from 1mill plus to $750-$900K.
Anyway, it’s just a guess because right now there are still a lot of moving parts to consider in all of this.
June 19th, 2008 at 8:52 am
Wow, that sure makes me feel like a sucker using a larger down payment to make my mortgage payment lower and more affordable…
June 19th, 2008 at 9:27 am
@ Nomadic
Funny you should mention the concept of wanting a lower mortgage payment. Indeed that’s what all this crazy financing was designed to do; give people a lower down payment on the same size or bigger house. Only problem was it was based on a false premise; namely, housing prices never go down.
This kind of crazy financing enables RE agents to sell houses like car salesmen sell cars. A car salesmen will always ask you how much you can afford to pay per month and then without respect to how much you are ultimately going to have to pay(sales price plus interest paid)figure out a way to “jam” you into the product. This crazy financing let RE agents “jam” people into product they should have never been in because it allowed them to focus on an “affordable” payment, which by the way was temporary, and not the total cost of the house in relation to income and assets. Just my 2 cnets…
June 19th, 2008 at 9:34 am
A car salesmen will always ask you how much you can afford to pay per month and then without respect to how much you are ultimately going to have to pay
Everyone knows that in real estate, profit simply:
Profit = salesPrice – purchasePrice.
It feels right that way.
Only communists and terrorists would include silly things like maintenance, insurance, property tax, and interest payments.
June 19th, 2008 at 9:42 am
I knew way, way too many people who did some absolute crazy financing to get into something. A guy I worked with a few years ago took out an ARM and 5 yr. IO loan combined. He explained to me that he figured that in 5 years, he would be making more money, the house would’ve appreciated, and therefore he would be golden.
Still another was absolutely desperate to get something… ANYTHING. He bid, bid, and bid on mainly smaller, crappy little fixer-uppers. One had severe foundation problems and needed a $20,000 termite certificate or something like that. He finally settled on a 670k tiny little deal in El-Cerrito and used two seperate loans combined.
Yet one more somehow found a little loophole where if you were an artist, ran a business for x number of years, and so on, then you could qualify for special government assistance on below market rate housing.Rather complex.
I think the BA is in for a real surprise come the day that these things come upon the horizon. In my neighborhood, I’ve noticed that quite a few homes- even some of the upscale homes- that sold less than a year or two ago have suddenly come onto the market. It seems only too coincidental that so many people who bought and are now selling in less time that the average person rents.
As far as Hayward bottoming at 500k… well that’s still too much for that area. 400k would be more like it.
June 19th, 2008 at 10:16 am
Hellboy, that was precisely my point. Some people got ridiculous loans, while the conservative (aka fiscally responsible) types sunk more cash into their houses in order to make the payments more reasonable.
It’s funny you used the car analogy, because I was thinking of the same thing when I posted. When I went to buy my second car out of college, the salesperson was so intent on getting me to say what kind of payment I was looking for. When I told her, she said “oh, you can’t afford this car then.” I was naive then and didn’t understand. I just thought to myself, “of course I can, I have a down payment” and decided to find myself a smarter salesperson at another dealership!
June 19th, 2008 at 10:18 am
bob, the article talks about “Option ARMs,” not ordinary ARMs. Alt-A is something different (no-doc), as is Interest-only. Let’s not lump them into one pot.
Ordinary ARMs are pretty benign. No-doc may make sense for people with non-W2 income. Interest-only may make sense if the rates are low (for the same rate, IO is always better than non-IO due to added flexibility). Option ARM is something much riskier.
June 19th, 2008 at 10:27 am
Option ARMS are different than ALT-As and is for those people with “unstable income”. Well, it’s going to get really unstable soon.
June 19th, 2008 at 10:52 am
I’ve come to notice that everyone says:
* its going to be unstable real soon
* prices are going to crash to hell
* all those arms are going to reset all at once
* foreclosure hell is right around the corner
* its better to live in flyover country because you get more…
* illegals are stealing our jobs
* the sky is falling
*until* they buy a house. Then the attitude completely changes 360 degrees. Just an observation…
June 19th, 2008 at 11:07 am
Well Mrbogue,
You pretty much nailed it on the head. If George falls off a 100 foot cliff, that’d comedy. If I get a papercut, that’s tragedy. Everyone basically wants to assure themselves that they made the right choice. Those who bought ” know” that they’ve made the best investment ever in the entire world. Those who haven’t bought think that they’re morons and fools with their money.
Its just more dramatic in the BA because houses are the only thing people live for or ever talk about around here as well as how to get em’, how to sell em’, and how to make money off of em’. I’ve never lived anywhere that had such a religious attachment to big wooden boxes that will rot unless you pour money into them. The more people you get living in one area, the more herd mentality reins supreme. California has roughly 1/9th of the entire country’s population squashed mainly in the coastal areas. almost 40 million people fighting tooth and nail over houses, schools, and other stuff. Hence something as dimunitive as a house takes on almost god-like status. It’s more of a pissing contest to prove that if you bought, then you’ve beat the crowd and can now sit back and say: ” ha ha! now I’m a permanent part of the Bay Area!” ( except that most buyers these days seem to sell almost as soon as they buy). I still find it rather hilarious that these small little suburban masterpieces take on such a precious meaning.
In regards to “flyoverland”, well there’s more to it than that. Most from CA and other places who move there have never lived there, hence they haven’t got a clue, and are likely moving for the cheep housing. I have the advantage of having been “Born-n-raised” there. So for others, the decision is because they actually like the culture better in other places. Besides, I’m sure that people in GA, TN, TX, CO, and the other 49 states enjoy being lumped together generically.
Whenever I go home, I can assure you that people there are just as vehemently assured that where they live is the single greatest place on planet earth, people in CA are totally full of crap, and that their lives and their surroundings are of utmost importance.
June 19th, 2008 at 11:21 am
actually california is not the single greatest place on planet earth. it is the bay area. i should twitter that.
June 19th, 2008 at 11:30 am
actually, The Peninsula part of the BA is the best place on earth.I don’t know it well enough to drill down any further. Any takers on what town within the Peninsula is the best town of the best part of the BA? Hell- let’s break it down to the street.
June 19th, 2008 at 11:41 am
Over the last year I have seen the 300k homes in Stockton, 400K homes in Tracy, 500K homes in Dublin, 600K homes in the East Bay and 700k homes in San Mateo all fall significantly. The drops in prices ranged from 50% in Stockton to 25% in Dublin and 15% in San Mateo.
Initial people claimed that even if homes fell in the central valley in Stockton and Tracy they would not fall in the Bay Area. After they started falling the Dublin, east Bay and San Mateo (mainly less expensive parts) the claim has been that they would not fall in the “Real Bay Area” (RBA).
But if the RBA only has buyers who can easily afford their payments, why did they have to resort to exotic, interest only or neg-am (option arm) mortgages?
There are two possibilities
1. The residents of the RBA became financially sophisticated in 2004 and were able to handle a complex mortgage product
2. The only way to afford a house (temporarily) was to use a mortgage with initial low payments
One way to distinguish between the two options above is to look at what the professionals are doing. The companies like Countrywide, Washingon Mutual (WaMu) and Wachovia are likely to have the best information about the peformance of such loans. The fact that Countrywide has stopped offering such loans and WaMu announced yesterday that they would no longer offer option arms implies that they are not such good products and the first possibility is likely to be false.
http://www.housingwire.com/2008/06/19/wamu-nixes-option-arms-adds-1-billion-to-borrower-assistance-fund/
To predict whether foreclosures are going to increase among buyers who used neg-am mortgages, see what investors who have their own money on the line are saying. Share holders of specialists in neg-am mortgages such as Indy Mac bank (ticker IMB) and Downey Financial (ticker DSL) certainly don’t have any faith that home owners with such mortgages will continue payments. IMB has fallen from about $32.00 to $1.25 and DSL has fallen from about $70.00 to $3.60 in the last year.
June 19th, 2008 at 11:46 am
I think you guys have it wrong. I’m going to call my mortgage broker( yeah he’s still employed )to see.
As I understood it, Alt-A is just a class of loans which can can include straight ARM(normal), IO(less normal) and Option Arm( More less normal ). I only deal with fixed because I’m fairly conservative and have a propensity to plan for the worst so I don’t look at all the other types of loans often. But I pretty sure my broker said that Alt-A can have many kinds of loans in that class?
June 19th, 2008 at 11:48 am
@bob
Best part of RBA to me is Atherton hands down. Baically any street will do
.
June 19th, 2008 at 11:49 am
Bob, clearly the best town in the best part of the bay area is Redwood City, which has that giant sign over downtown; “Redwood city: Climate best by government test.”
June 19th, 2008 at 12:10 pm
Everybody knows the only real real real part of the RBA is one block of Palo Alto on University Avenue. The rest of the Bay Area can decline in price but as long as people will still spend $15 mil for a place there, RBA property will continue doubling every ten years.
I sent burbed quite a bit more info on these option ARM resets than was included in this piece. When an option ARM resets, the negative amortization loan, which isn’t even covering the interest payments, converts to a fully-amortized loan. People who had been making the minimum (neg-am) payments now found they had to pay double or more when the loan was recast as fully amortized (principal plus interest payment).
The “option” part of option-ARM meant you could pay one of several monthly payment choices:
– the fully amortized payment at your real interest rate
– the fully amortized payment at your teaser interest rate (2.5% versus 6.5%, say)
– the interest payment only on your teaser rate, no principal
– the minimum payment that didn’t cover all the interest, and added it onto your principal (hence the negative amortization, or “neg-am”)
Guess how many people paid the lowest payment? The resetting is occuring as the loan reaches 110, 115, or 125 percent of the ORIGINAL amount borrowed, this has nothing to do with equity. The dropping value of the property makes things worse because they can’t refi.
Remember when I listed all the foreclosures in 95125 and 95129 (San Jose Willow Glen and Westside)? All but one had a loan taken out after 2003. This is going to get a LOT worse.
bob, I own a house, I’ve been in it for 15 years, how do you explain my attitude about all this? I’m not insisting everyone else should buy now, because I think those that do are knife catchers (sorry WG, you too). I would love to trade up, not so much to get a “better” address as to have more space and stay in this immediate neighborhood. I’m not sure this is the right time to do it, and I do rather enjoy my large equity percentage, my small mortgage payment (even on a 10-year amortization schedule it’s small relative to rent) and lower property tax bill.
June 19th, 2008 at 12:10 pm
I threw in “flyover country” since RealEstater seems to have coined it, and its become regular language here on burbed
Actually there are quite a few awesome places outside of the good ol’ BA, RBA. For example, I’ve been to Kentucky last year and was shocked to find beautiful 5+ bedroom brick houses in tree-lined neighborhoods and walking distance to fine-looking schools for $200k (maybe even less now!) Only problem is that the average IT guy there makes around 50k or so and from what I hear the weather can get pretty humid/wet.
Anyhow, I’m just noticing alot of people point at non-BA places blogging “hey, thats a better place to live, we should move there” but I suspect within a few minutes switch over to a redfin view of the Bay Area Pennisula, a tad hypocritical if you ask me!
As for the best place on Earth? Its clearly Elmwood Berkeley east of College Avenue. Real Estate there will never, ever drop and its not even part of the Real Bay Area!
June 19th, 2008 at 12:52 pm
mrbogue,
I got ya, I was just giving you a hard time. In regards to KY, well Louisville is actually really nice. It hasn’t yet become the latest “best city to live in” yet, meaning it hasn’t been overrun with people from “Up north” or Florida.
As far as 50k salaries,well I’ve fully come to terms with the fact that wages are a lot less there and in other places. But in all honesty, wages are the last thing I’m concerned about. If you figure that if an avg IT guy in the BA were to be frugal and save, they could probably save up 200k in 5 years. Perhaps more if you invest. Move to another area and buy a 130-200k house. Trust me- you can get decent homes throughout that region for well under 200k. Less if you like the idea of living say 10-15 miles outside the city, which in the case of Louisville, Nashville, and other such cities means that you’re in the sticks. So say 150k for a decent place. Put down 100k. That leaves you with a 50k mortgage, or approximately $400 a month minus taxes.
Put that into context with your adjusted cost of living, and 50k starts sounding a hell of a lot nicer. You might as well be making 150k because with your life expenses pared down to that small amount, you’ll be able to save more than with a 150k salary in the BA.
With the other 100k, put 70% of that into retirement. 70k at a median annual historic appreciation will yield you approximately 700k in 20 years, well over a million by retirement time. The rest, well you can save that for a nice car, home repairs, or whatever.
You see where I’m going with this. I’m even thinking of the possibility of not working in tech once I move, but rather do something more relaxing, like work in some old hardware store, fix lawn equipment, or something else like that. So what if I’m making 10 bucks an hour. Everything else will be paid for by then.
In regards to humidity… you get used to it. I grew up in the stuff. Never thought about it until people out here told me how ‘horrible’ humidity is, like some green monster that hides under the bed at night to get you.
June 19th, 2008 at 1:31 pm
Re: “Alt-A is something different (no-doc), as is Interest-only. Let’s not lump them into one pot.”
According to a broker I know, Alt-A is just a class of loans as I thought it was. It’s not a type of loan. In other words, you can have Alt-A loans which can be fixed, IO, reg Arm or Option ARM. The Alt-A designation just means that it’s in between Sub prime and Prime. According to him “low doc” doesn’t really have anything to do with it because the low doc part of it is an underwritting issue or so he relayed to me. Anyways I was kind of confused so I called.
June 19th, 2008 at 1:46 pm
I enjoy talking about Real Estate on this thread but this overhyped reset schedule gets a big YAWN, sorry. The fact is anybody who is going to reset in the next 2 years has already seen their equity collapse and has walked or dealt with the matter through a short sale or some other mechanism. Its just stupid to think that somebody with a 600K loan set to reset in 2010 is sitting here with negative equity diligently paying their mortgage in clueless bliss.
June 19th, 2008 at 1:55 pm
The upcoming ARM reset is our new Y2K bug. It’s real but probably overhyped and has gotten the concerned folks scrambling for a little while already. So I think its effects are being felt already and we shouldn’t expect something dramatic to happen at the time of the graph’s spikes.
June 19th, 2008 at 2:00 pm
DreamT- you are correct. First of all that reset schedule is national. Secondly when you go out looking at short sales what you discover is most of the folks selling in short sales haven’t even reset yet- they just lost their equity and want out. The y2k bug is a good analogy because the panic caused by these reset graphs has caused a lot of foreclosures BEFORE they would ordinarily foreclose, just because people want out. By the time that reset schedule actually kicks in, the RE bust will be largely over and we will be clawing back.
June 19th, 2008 at 2:01 pm
But it isn’t out of the question that a major reset could in fact have a devastating effect on the housing market.Its already happened nation-wide with the largest number of ARMs resetting in large concentrated cycles for well over two years. The height is just now ending with those, which was at its highest in April-May. As expected, the number of foreclosures spiked to their highest-ever levels. Just like clockwork.
So for anyone “hoping” that this here little overhyped reset thingy is a false alarm, they had better hope that the number of people who took these loans out are less than reported.
The question isn’t if this will have an effect on the area, but rather to what degree of damage will it cause? I tend to be of an opinion that a considerable amount of homeowners in almost all markets in the BA are hanging by a thread. It doesn’t take much to send it toppling.
June 19th, 2008 at 2:03 pm
Lastly, why do you think congress, homebuilders, and banks and screaming for the Gov to do something about this and save foreclosures? Because they know what’s about to happen and are making a lame attempt to dull the impending damage.
June 19th, 2008 at 2:20 pm
Bob, it’s only true to a point. Let me run the cynical line here: the parts of congress, the homebuilders and banks that are screaming for the worst in a down market do not get so much so credibility in my book as the ones that were vocal about it before the bubble burst. There’s no better time than a down market for them to get favorable consideration in preparation for the future. Congress gets voters’ appreciation by appearing to listen to their concerns. Homebuilders get a break in their business and possibly better business environment when it’ll be expanding again. Banks aren’t just concerned about damage control but also about maximizing future profits. This is me playing the devil’s advocate, but I wouldn’t take everything at face value and infer what the future holds based solely on what these political and market players say today.
June 19th, 2008 at 2:35 pm
DreamT,
You and WG seem to be thinking that the hooplah over a large concentration of resetting loans is hogwash because I imagine that you’re both in the camp that thinks that surely- the worst must be over and now that things have spent a year or so going nuts and crashing, that now is the right time for things to settle down and behave, getting back to where things aught to be, meaning homes turn back into little money-machines.
But if you look at the big picture, we’ve got a sick economy, gas prices that are likely going to stay high, rising commodity costs, and a war that has cost so much that if it were spread across all 300 million of us, we would each owe $10,000. These items of course don’t even touch those tied to RE, which would be tighter lending standards, slow to slower sales, and rampant depreciation in some areas. Then on top of that, we have a huge reset of loans in a great concentration right around the corner.
So I don’t think it is at all out of line to entertain the thought that perhaps we’re actually quite a ways off from being close to being done with the bust. Perhaps several more years are in the pipeline. Maybe I’m wrong and houses will start selling like hot cakes and prices will start going up. But the way I reasonably see it is that there’s simply way too many factors placing downward pressure on RE to simply have it reverse anytime soon.
The resetting loans are only one of a few things piling up behind the crash.
June 19th, 2008 at 2:37 pm
Hey WG,
Just wondering about a couple of comments you made. First the reset schedule being national. I agree this is true. But your comment implies that somehow the RBA schedule is better than the national one. Do you have any figures to that end. How do you no the reset schedule for RBA doesn’t look worse than national? Second on short sales. The only short sales I’ve seen so far have been in less desirable hoods where prices have already come down. How do you know there aren’t people in RBA sitting on 5 to 15% equity hoping their area doesn’t fall by 10-20%? I guarantee if that happens we could very easily see short sales in areas that as of today we see none.
I’m not saying you are wrong I just want to know if you’re holding out on us
. I need a good source of info…
June 19th, 2008 at 3:03 pm
Bob, profiling again? No I don’t consider myself in the camp that you described in your first paragraph (things are back to before and one should buy). I think there were deals to be found last year, today, next year, and that some real estate markets will go down, some will go up, and that if more than usual are going up or down isn’t very relevant for the single investor. I refrain from making any generalizations beyond neighborhood-level real estate markets and as I wrote yesterday, I don’t believe about a generalized real estate boom anytime soon.
That said, I disagree with you on a few things: I believe there’s a gas price and commodity bubble, so these are destined to go down (possibly ~ 40% to 50%) in less than a few years’ time. I believe RE financing will start exploring 40y and 50y horizons, which will alleviate tightening lending standards. I believe inflation will put those who are waiting partly at a disadvantage, although will they still be vindicated for waiting, I have no idea.
And I don’t think you’re out of line at all to entertain the thought that perhaps we’re actually quite a ways off from being close to being done with the bust.
June 19th, 2008 at 3:09 pm
WG (#$24) Here’s a nice article from the Economist that explains why people with an impending ARM reset might still decide to keep a house that loses in value rather than sell:
http://www.economist.com/displaystory.cfm?story_id=11579107
It’s just one variable among many that makes it hard to estimate how much impact that reset will have.
June 19th, 2008 at 3:50 pm
Dreamt,
I swear I’m not trying to start a fight here. It sounds like in reality, we’re both on the same page.So you’re cool in my book.But I do disagree that 40 and 50 year loans are on the horizon. Banks got burned really badly, and are going to continue to be burned by their previous actions. For them to suddenly cook up another miracle cure would be suicide.These loans aren’t even really all that beneficial to the consumer: They would be paying considerably more in the long run.
Prices will correct, and people will be able to afford, likely without insane financing.This is the only way that the US can hope to recover from the recession and get back onto the fast track economically.As it is now, the consumer is now drained of buying power because his home has stripped him of his money.
You have to remember that 90% of the country isn’t like California and the average person just a few years ago could afford a home on an avg salary. The BA is absolute hell in that respect. Having the entire country be like the BA would throw the economy into eternal financial chaos. So the sooner those prices fall, the better.
June 19th, 2008 at 3:55 pm
bob, its not that I think the hoopla over this option arm reset is hogwash. I’m just saying lets be honest here. According to SFGate this is the slowest May in 20 years for Bay Area housing.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/06/19/BUBP11B99U.DTL
What people like me are looking at, that see a glimmer of hope that we are somewhere near the bottom, is a month over month sales increase and some other *very short term* phenom. But big picture wise, times are very very bad. There are millions more people in the bay area than 20 years ago thanks to the internet and PC technologies- does anybody actually remember 1988 here? HP was the big employer, then. Doesn’t it seem like just maybe things are about as bad as they are going to get? One of the problems with this blog is perspective.
June 19th, 2008 at 3:57 pm
Why would gas prices go down 40%? They’re not making anymore dinosaurs, but they are making more Chinese, Indian, and American consumers.
June 19th, 2008 at 4:04 pm
Gas could easily go down 40% if the dollar rose to the levels it was against other currencies when Bush was first elected. In 2002 dollars, oil is $79/bbl right now. Thats more than 40% off the current $138.
June 19th, 2008 at 4:11 pm
Indeed- the problem with fuel is that suddenly, there’s now a middle class in China, Brazil, Russia, and India. Guess what? They all watch TV and what’s on TV most of the time? American shows, or perhaps American influenced shows that depict our so-called robust and healthy middle class lifestyle. So they all want a piece of the action.
Just to put this into perspective, last time I checked less than 10% of Chinese citizens owned cars. The best selling foreign brand in China is GM, specifically Buick. GM has been staying afloat as a company mainly because if GM sales in China continues as it has, they will actually sell more product in China than in the US. The fact that less than 10% of China owns a car, yet even this amount equals fantastic sales for GM tells you just how enormous the ramp up in scale will be.
Another little snippet: It took the US over 60 years to build around 45,000 miles of Freeway for the national Freeway system. In less than 20 years from now, China will eclipse that amount. China is a HUGE country with LOTS of people. Everything they do en mass is going to have a huge impact on how we consume. Now add India, Russia, and Brazil to the mix. There is no going back to the good ole’ days. Is there a bubble in commodities? Yes. Will it go down? Probably. Will prices keep rising? Yes, and likely to levels much higher than even now.
WG, As mentioned before, the easy way to touch bottom is to buy at the start of appreciation- more specifically after a good six months of solid positive results.
June 19th, 2008 at 4:13 pm
WG (22) – There is no reason to believe that people with Option ARMs will default early. They will hold on until the last possible second. In some cases, these people are paying as if they have a loan at 1-2%, meaning that they are often paying less than they would be paying in rent. The fact that the house is underwater means nothing because they can’t beat that deal. If the house appreciates at the end of that time, they win, and if it depreciates, who cares? They’ll suck the bank dry for as long as possible.
DreamT (31) – Assuming they CAN hold onto the house… Not likely with ~70% of people choosing to make minimum payments on their Option ARMs.
June 19th, 2008 at 4:15 pm
WG, As mentioned before, the easy way to touch bottom is to buy at the start of appreciation- more specifically after a good six months of solid positive results.
Thanks for the advice bob. How much money have you made in real estate, or other investments? You tend to grill others on their investment acumen, while making a lot of naive statements yourself.
June 19th, 2008 at 4:17 pm
cntl-Z, sorry but even the teaser rates for mortgages in the bay area are much higher then renting, at which point your equation falls apart- the current mortgage holders indeed have something to lose, more money. Once these people lose their equity they are gone. I saw many of them looking for my recent foreclosure.
June 19th, 2008 at 4:22 pm
bob – since it seems like the American economy can only survive by concocting one bubble after the other, I doubt banks will play it safe for very long. They have too much to lose by playing it safe over an extended period of time. In any case it’s not a miracle cure, just natural progression. 15- and 20-year mortgages were much common during my parent’s time. Finally future consumers esp. future generations will get used to 40- and 50-year mortgage, won’t find it insane, and probably won’t have a more beneficial choice. Note I’m talking long-term, not within 5 years.
The US has alternatives to recovering from its bad economic bout. Stopping the war, expanding free trade, revising tax policy, and generally creating more sensible economic policies and sounder regulations can make wonder within very few years. It’s anybody’s guess if that’ll happen though. The point is, houses don’t necessarily need to be more affordable everywhere for the economy to improve. Recent climbing rents show that home affordability trends is actually a mixed picture. For a renter in the peninsula, his home is less affordable now that two years ago.
One last point: due to improved financial transaction channels, the world economy has been accelerating. Bubbles are created more quickly and closer together. But at the same time, the economy is more resilient. I know Greenspan’s book has been reviled but I think he got these two points right, and so I don’t think RBA homes will ever be affordable again like they were 10 years ago. The current economy’s getting too good at cleaning up after itself.
June 19th, 2008 at 4:45 pm
The upcoming ARM reset is our new Y2K bug. It’s real but probably overhyped and has gotten the concerned folks scrambling for a little while already.
———-
DreamT,
Before subprime crisis started last year, other than some obscure articles, can you recall any mainstream media focusing on this issue? In 2006 and early 2007 all I read is that “foreclosure is very low in historical level and subprime market, which constitutes less than 10%, is not going to cause problem”. Interestingly nobody talks about that “historically low” statistics anymore.
Hence the experience tells me just opposite – most of the people, including media, live in denial until it happens.
Y2K? That’s a different ballgame. Certain industries had vested interest for hyping up the issue and sell their snake oils.
June 19th, 2008 at 4:49 pm
burbed – I meant in dollar terms not absolute price. Combination of weak dollar, low US interest rates, speculation on oil futures, people’s increased awareness about alternative technologies, rising global pressure against and local awareness about pollution, OPEC’s interest in de-incentivizing research on alternatives by increasing production to keep crude oil prices lower (http://www.domain-b.com/industry/oil_gas/20080619_saudi_arabia.html for ex.), awareness that we need more refineries (http://campaignspot.nationalreview.com/post/?q=NmYyZmE1NmM0NDU2ODQ0ZGE3NjBmNmQ3OTBjNDRiNjg=) etc etc etc.
The 40% figure is a dramatic one. There’s potential to hit that, but the reality is likely to be more measured. I can see it going back to $100/barrel easily though.
June 19th, 2008 at 5:07 pm
Pralay – No indeed. However the ARM graph that burbed got from madhaus has been on real estate bubble blogs for more than three years, and medias (not just financial medias but also general ones) have been talking about real estate-related financing problems for about ten months. I just can’t picture all these people with soon-to-reset ARMs still living in denial right now, esp. in the SF peninsula. Many must have adjusted their lifestyle, prepared contingency plans already, or started working with their mortgage company which are now reported to be less oafish about it (as short sales don’t sell easily).
As a result, the impact of each reset is likely to spread over many months, elongating the graph greatly, and that impact will translate into foreclosures (many months later) on probably less people than expected. Then who’s to say what the true impact will be (certainly not me)
June 19th, 2008 at 5:55 pm
I disagree w/DreamT and WG in minimizing these issues. This is not the same graph you’ve seen for 3 years, this is an Option-ARM graph, not the graph of subprime/Alt-A/Prime resets that was going around a couple of months ago. How many places have you heard about the 110/115/125 percent triggers? I’ve been following real estate for a while but all this hit about a week ago, and I sent it in then, but burbed didn’t run it until now.
The typical consumer of an Option-ARM program has no clue that making the minimum payment results in borrowing more money. Remember the article yesterday about the family whose payment doubled? Option ARM. That’s why it doubled. The loan recast as a fully amortized. Most of these people are not sophisticated financial analysts. Those that are tended to get as conservative a loan as possible. If they got an ARM, they refinanced it to a fixed as soon as they could. Ask yourself how and why a family earning less than $60K a year were buying a $750K home.
I think the error you make is in assuming that because you would do the prudent thing, these FBs would as well. I don’t agree at all, I suspect they are ignoring the coming problems as best they can.
June 19th, 2008 at 6:05 pm
Here’s an interesting article on our bubble economy for anyone who’s interested:
http://www.harpers.org/archive/2008/02/0081908
June 19th, 2008 at 10:38 pm
Adding more years really doesn’t reduce the payments much.
30 year 500k at 6.5% 3160
40 year 500k at 6.5% 2927
40 year 500k at 6.875 3062
50 year 500k at 6.5% 2819
30 year I/O at 6.5% 2708 (This is the limit for like a 1000 year amortizing mortgage)
You will pay a slightly higher interest rate on the 40 year versus a 30 year in all the cases I have ever seen. So at best your saving 230 dollars and more likely 100. That isn’t going to help a lot of people buy houses.
June 19th, 2008 at 10:57 pm
Eichler, you’re just stuck in Loan 1.0 thinking. If you can’t afford the house with a 30 year payment, then we’ll just have to go to Loan 2.0.
30 year 500K @6.5% – $3160
40 year 500K @6.5% – $2927
50 year 500K @6.5% – $2819
100 year 500K @6.5% – $2712
There! I’ve saved our hypothetical homebuyers $350 a month for 100 years. Um… 30 years. Er…
Wait, did you say the interest rate goes up as the term elongates?
100 year 500K @6.75% – $2815
Well, the bad news is that you don’t save anything compared to the 50 year loan at six and a half, but the great news is in 50 years that extra hundred bucks a month out of your pocket won’t even buy you a cup of coffee. (Am I predicting high inflation? No, I am predicting coffee shortages.)
What’s that? The term goes up more than a quarter percent?
100 year 500K @7.6% – $3168.
Hmm. That payment looks kind of familiar. Oh yeah. It’s the payment we started with. The 30 year loan.
June 19th, 2008 at 11:03 pm
Eicherl – Thanks for crunching the numbers. Yes you’re right it won’t help the way option ARMs seemed to help. That’s why I called this a natural evolution rather than a ‘miracle cure’.
And yet, how many of the homebuyers currently saddled with an ARM they were happy to sign, would opt for a $200 monthly savings on their cash flow statement, regardless of the added cost at term?
Also a conventional 10/50 ARM for ex. could probably be very attractive because it could come without the slight premium you mention.
June 20th, 2008 at 7:50 am
WG (39) – This is just not true; please do some research. When Option ARMs were in full swing, they were starting with teaser rates at 1.25%. So you could borrow 1M for ~3300/month. In PA, you can *maybe* rent a 1M house for 3500/month. Frankly, with that kind of deal, the “homeowner” could care less whether or not he has any equity.
It’s just like Madhaus said in (44) – those people the newspapers keep dredging up whose payments literally doubled are Option ARMs. Even if you don’t care about those specific examples (and I don’t), it should show you that there are people out there currently paying less than 1/2 what they should for their mortgages. At less than 1/2 the payment, the monthly out of pocket is very, very close to rent.
I don’t claim to know how many of these there still are, so I don’t know what kind of effect they will or will not have. But I definitely would not assume that all these people (who are not going to reset for another 8-18 months) have walked away already. It just doesn’t make economic sense for them to do so.
June 20th, 2008 at 9:17 am
Thanks for the advice bob. How much money have you made in real estate, or other investments? You tend to grill others on their investment acumen, while making a lot of naive statements yourself.
I haven’t made a penny in RE because as I mentioned, I don’t view RE as a way to make money. A house to me is what you should buy to live in. If you’re buying just to invest, then you’re buying for the wrong reason. Its as simple as that.Then again, that’s my opinion and maybe not yours.
I have done well investing, which I’ve done since I was 16. Stocks paid for my college. I have zero debt as a result. I also have enough in retirement now to essentially be set once I turn 50. So does my Wife.
Here’s the thing: you really do not need to shove all that much money into retirement from the age of 20 and on. All you need is around 50-60k or so and wallah- you will be fine by the time you’re 55. Somehow, 99% of all people don’t get how easy that is and instead buy houses and luxury cars. I’m not putting them down. As someone here mentioned, life is meant to be enjoyed, and if buying nice things is what makes you happy, then you should do so. If you want to buy houses as investments, then go for it. Buy 2. Buy 3.
We all have different investment ideas. Money and finances are like religion,therefore I realize I’m getting into deep doo-doo talking about it here. But I suppose since housing is now seemingly another arm of personal finance, its unavoidable.
DreamT, I agree that the bubble patterns in this country have been what has essentially floated us along for the past 20 years. I am in agreement with that. But stepping back, I do not see how the US can hope to return to anything remotely stable. We’ve bounced back every time so far, but for the past 60 years, we’ve been the biggest kid on the block while the majority of the third world was so poor that it didn’t matter because they consumed a tiny fraction of what we did.
The era of US prosperity was basically a freak. WW2 ended, the world was in shambles, our country was in peak form, having developed a trim manufacturing machine and thus fueled the world with goods. The middle class was in power at that time. But since the 60′s, things have slid to the point where the middle class has less power. If you look at the BA, there’s basically no more middle class. We have a Increasingly Mexican style social structure with lots of rich, and a lot more poor with not much inbetween. I imagine that since California tends to be a trend setter, this will spread nationally.
Bottom line, we are becoming an increasingly weak country with a powerless middle class with the threat of a international explosion of new middle class consumers that will ramp up consumerism 10 fold. In my mind, the future is going to increasingly be about the world fighting for resources.
Of course I’m being all doom and gloomy. So who knows? Perhaps Apple will invent a cure for cancer and we’ll all be stinkin’ rich. It’ll be interesting to see what happens.
June 20th, 2008 at 9:33 am
Z,
So you could borrow 1M for ~3300/month. In PA, you can *maybe* rent a 1M house for 3500/month. Frankly, with that kind of deal, the “homeowner” could care less whether or not he has any equity.
Are you trying to say it costs 3500 to rent a ONE million dollar house? Thats just not true. One million dollar houses can rent for $2400 if you look hard enough, due to the non existant carrying costs of Prop 13 owners.
We’ll have to see the results of these Option ARM resets, I doubt many here are going to budge on it. All I can say is I saw dozens of houses listing as “short sales” starting last year and most of those did not reset. What was happening was the owners stopped paying and made up a hardship story with the bank. Since almost no shortsales end up closing due to the difficulty of managing the process with the banks (the loans are sold and can’t be addended and the banks don’t want a NEW LOAN with the same borrowers)- these short sales have mostly gone to foreclosure, and thats what I bought. Far fewer short sales listed than there were previously.
On these loan resets it is interesting to go to a cheaper area and look a the houses and whether they are selling. Taking Santa Teresa under 450K for example, 7 of the 14 SFDs have now sold with 7 of the properties (not the same 7 as the solds) listing in the past 7 days. These were sitting around and not moving a month ago.
June 20th, 2008 at 9:56 am
The monthly payment has a strong correlation with the interest rate. Anyone who is “waiting for the fall” is taking a risk with the interest rate, because in the current inflationary environment, interest rate can go a point or more higher. If that happens, even if you save a bit on the home price, you will be more priced out than ever, because the payment won’t be in your favor. Paying for a house is one thing, paying interest unnecessarily is not a smart move.
June 20th, 2008 at 10:48 am
bob Says:
June 20th, 2008 at 9:17 am
Somehow, 99% of all people don’t get how easy that is and instead buy houses and luxury cars.
Bob, get off your pedestal. You sound reasonable when you talk about your own life, but sound totally ignorant when you talk about others. Most of your arguments rest on how everybody else is financially irresponsible. That’s naive, and not true. Sure, some people made poor decisions, but 99%? C’mon! If you pay attention to other commenters, most of them are financially prudent, even if they bought houses. You can’t seem to accept that one can buy a house in the bay area and still be financially responsible?
You mention how people here are intolerant (in another thread, sorry I read the RSS feed), but your comments come across as most intolerant.
June 20th, 2008 at 10:55 am
The only reason why housing(residential)is such a great investment is because the government subsidizes it so much. It’s a practical tax free give away when it comes to SFH investment. And yet the stock market still gives RE a run for it’s money and in many cases is be a better investment. Geez, I wish they would give me 500k tax free on my capital gains or interest deduction on any margin account I use. Tax policy for RE is shameless and very unproductive IMHO.
June 20th, 2008 at 10:55 am
RealEstater Says:
June 20th, 2008 at 9:56 am
The monthly payment has a strong correlation with the interest rate.
RE makes a good point (ack). Now, without a doubt, there is weakness in the market, but the price drop (10-15%) in the last 9 months has more or less coincided with an increase in jumbo rates (1%). Monthly payment did not go down nearly as much as house prices, i.e. homes are not much more affordable than a year ago. Of course there are exceptions where prices dropped by 40%-50%, but look at the big picture.
June 20th, 2008 at 10:58 am
Oops meant to say shameful…
June 20th, 2008 at 11:32 am
Just remember, if the monthly payment is the same, you are much better off with a cheaper house at a higher interest rate. You pay less in taxes and insurance, you get a larger interest deduction, and you have less principle to pay back.
June 20th, 2008 at 11:32 am
Hellboy, older generations ramble about how real estate is also a great shelter against income tax, against inflation, and against rainy days. Also stocks are a more risky game esp. if you’re past 40.
Bob, I agree with your doom & gloom. But I include land and real estate among the scarce resources people will increasingly fight for. If the middle class vanishes, the wealthy will eventually monopolize land again. If I had $$ today I would buy land.
June 20th, 2008 at 11:34 am
from Business Journal article on coming Option-Arm/Alt-A 2010 meltdown. We’ve discussed most of what’s covered in it, I just thought Hanson’s [he's Mr. Mortgage] view of what Alt-A meant was interesting.
June 20th, 2008 at 11:51 am
Now, without a doubt, there is weakness in the market, but the price drop (10-15%) in the last 9 months has more or less coincided with an increase in jumbo rates (1%).
————
That’s a valid argument ONLY if he/she is sitting for 9 months with same amount of money for down payment. Too bad that he/she did not save some more to make the mortgage amount smaller.
June 20th, 2008 at 11:53 am
Wow, I’m shocked to read that mortgage broker’s take on Alt-A. Most self employed people have Alt-A loans for documentation reasons. To claim Alt-A is subprime is really pushing it. Especially in the bay area with all these IT consultants, they are Alt-A. Doesn’t mean they are subprime. And as for the 800 credit score there are a few levels of this. They look at credit history as well as just score, now. The 800 credit score people with one gas card are not the same as those with 10 year credit history with no late fees ever.
June 20th, 2008 at 11:59 am
OH- NEVER MIND.
With most of the country still reeling from the subprime mortgage meltdown, Mark Hanson is warning of the next looming blow.
Hanson, a bank consultant and former mortgage broker from the Bay Area who writes a blog under the name “Mr. Mortgage,”
“Mr. Mortgage” is one of the most angry renters on the web. He actually goes on youtube and rants and makes a complete idiot of himself. He has his youtube link right on this post of his. I figure he chose to rent all through the housing bubble and his wife ran off with Mozillo, or something. Seriously clowns like this don’t deserve the airtime they get- WAY TOO EXTREME.
http://mrmortgage.ml-implode.com/
June 20th, 2008 at 12:08 pm
I keep reading on this blog primarily how great of an investment stocks are. Have you people noticed that the S&P has been flat for 8 years now? This is not a rising stock market in the tradition of the 90s. Sure you can always find that one stock going up like apple but the stock market as a buy and hold game, as it was for 20 years from 1980-2000 has gone away in this decade. Whoever says stocks are a better investment than real estate ~recently~ is drinking the funny water.
June 20th, 2008 at 12:10 pm
As his wife ran off with Mozillo, I guess Mozillo deserves airtime.
When it comes to housing market topic, most of the time I see and hear Lawrence Yun kind of RE industry people in TV/radio. I am still waiting for some sane and deserving people to get their fare share of airtimes.
June 20th, 2008 at 5:35 pm
WG, I don’t care for his youtube rants, because I find video to be a poor way of passing along information. But I enjoy the columns he writes, and they seem particularly well-informed. I must seriously ask you if you’re so strongly rejecting his info because you just made a purchase and he advises everyone to stay the heck away for the next 2-3 years.
I assume your purchase is for the long term? Because if it isn’t, I don’t think you will find this profitable.
Do you care to share your loan terms (interest rate, down payment %, fixed/variable, etc) with us?
June 20th, 2009 at 11:16 am
Maaaaaaaaaaaaannnnnnnnnnn