Originally Posted By fkurucz << Renters absolutely pay for all those expenses over the long term. I suppose there are some bizarre circumstances where people are renting at below what the monthly mortgage cost would be, but that isn't typically the case at all. >> Its true that a neg am mortgage can make a house as affordable (temporarily) as an apt rental (in markets where a "starter" house doesn't cost 500K). But eventually the teaser runs out and the buyer is stuck with a huge monthly payment. In my neck of the woods a small fixer upper can be had for 150K. That ends up being about 1200 per month (including tax and insurance) for a subprime (no money down) buyer with a conventional loan. Really nice, brand new apts go for $800. Average ones can be had for 600 or less.
Originally Posted By mrichmondj << In my neck of the woods a small fixer upper can be had for 150K. That ends up being about 1200 per month (including tax and insurance) for a subprime (no money down) buyer with a conventional loan. Really nice, brand new apts go for $800. Average ones can be had for 600 or less. >> When I moved to San Diego last summer, I was very surprised at the dumps people were living in with enormous price tags. I immediately went to the rental market where I can have more square feet, nicer amenities, and fewer hassles with maintenance at a much lower price than buying. That doesn't work in every market, but it sure opened my eyes here.
Originally Posted By RoadTrip <<Suddenly a neg am looks really good. Take out some equity and you can buy that 50" Plasma TV as well.>> There you've hit the nail on the head. The problem is not so much in housing, but in the fact that young people today need to have it all and need to have it all now. I don't have a 50" Plasma TV and probably never will, even though we would not have to borrow or even withdraw from our savings to get one. Who the heck needs one?
Originally Posted By jonvn "But how do you access that wealth?" You take a second mortgage, or you just hold it for retirement or when you sell, as you said. "In either case, housing is not a very liquid asset that you can spend like cash." Oh, certainly it is. But like any asset, it has to be properly managed. "Well, if I was a shareholder in that company, I would be pretty ticked off with a return that was a low as that." You might be. Or if it was a steady growth company, and not a fast growth sort of thing, it'd be a very good thing to invest in. There are all kinds of stocks out there. This would be a very stable income type of investment. "Again, I've bought and sold homes before. I've rented before." So have I.
Originally Posted By jonvn "Who the heck needs one?" I don't know who needs a 50" plasma, but we have a 73" rear screen projection. And we enjoy it. That's who needs one. People who enjoy such things.
Originally Posted By RoadTrip <<And we enjoy it. That's who needs one. People who enjoy such things.>> And that is fine. I'm in DVC, and who needs that? My point was that when people pull equity out of their house to buy toys like that it is a personal choice (and for some a bad choice), not an indication of something wrong with the housing market.
Originally Posted By jonvn "I'm in DVC, and who needs that?" Not me. But you might. "My point was that when people pull equity out of their house to buy toys like that it is a personal choice" Yes, so? It's their money to do with what they want. I guess I don't understand what you're saying.
Originally Posted By mrichmondj << My point was that when people pull equity out of their house to buy toys like that it is a personal choice (and for some a bad choice), not an indication of something wrong with the housing market. >> It's not a problem with the housing market, but it is a problem to the broader economy. When the house of cards built with easy credit begins to tumble, it is going to hurt a lot of people -- even the thrifty folks who aren't buying the DVC units and big screen TVs.
Originally Posted By RoadTrip <<Yes, so? It's their money to do with what they want. I guess I don't understand what you're saying.>> It seemed to me that some here were blaming certain type of financing for all the ills of modern society (or at least most of them.) ;-) My point is that it is not the fault of the housing market or a specific type of mortgage that gets people in trouble. It is using that type of financing to buy things they can't really afford.
Originally Posted By jonvn Yes. It's really the fault of the lending institutions for lending money to people who can't possibly pay it back. They didn't use to pull this. It started with credit cards, giving people so much credit, it was impossible for them to pay off. Now they are doing it with houses.
Originally Posted By SuperDry <<< New Century is a "subprime" lender that specializes in selling mortgages to deadbeats with bad credit. Now it seems the deadbeats have decided not to pay, since their homes are worth less and less each day. >>> I think this mischaracterizes much of what the problem is. Subprime is an umbrella term that covers several different situations as to why they can't qualify for a conventional mortgage: a) they have bad credit, b) they don't have enough money for a down payment, and c) they don't have enough income to cover the payments. Obviously, many times there are two or perhaps all three at work in a particular situations, but they are different situations, each with their own set of problems. I don't mean to be overly literal interpreting what you said, but the problem is far broader than deadbeats that choose not to pay. Take this "average" situation from California: household income of $50K, and home price of $500K, and no down payment (these are done all the time). Let's assume that they buyer does have cash available to pay all closing fees and other costs, such that the loan amount equals the purchase price. Even at a 5.75% interest-only ARM, the interest payments alone will be $28,750 a year, and then you add to that insurance, property tax, utilities, homeowners fees, and so on, and you're getting pretty close to $46,000 of take-home pay a year (which assumes a 0% tax rate, such that only Social Security and Medicare are taken out). Of course, on top of that, there's all the other expenses of living: food, clothing, etc., not to mention the likelihood of there being credit card and car payments. So, even if someone had perfect credit and wanted to pay their bills, how could they in this situation? The answer is that they live on credit cards and rely on the appreciation of the house, such that they can refi every 1.5-2.5 years. Works great, as long as prices keep going up. Note that no how upstanding a person is or how good their credit is, it's simply not possible for a household in California with an average income to buy an average house, and the only reason that it got this way was because of the lax lending practices. This was unsustainable and the end was completely predictable (much like the dot-bomb), but nobody wanted to think about it.
Originally Posted By RoadTrip <<Note that no how upstanding a person is or how good their credit is, it's simply not possible for a household in California with an average income to buy an average house, and the only reason that it got this way was because of the lax lending practices. >> No. You are not putting the ultimate responsibility where it lies. The fault is with people who are idiots. Anyone who thinks they can afford a $500,000 home on a $50,000 income could use some financial counseling stat. So a mortgage company says they qualify. So what? In the end it is the individual's responsibility to decide if they should take it on. We purchased our current home before selling our previous home. We did not want to make a contingent offer because at that time they were rarely accepted. So we needed to qualify to carry BOTH mortgages at once. Which we were able to do. But could I really take that kind of debt on? To do so for an extended period would have involved radically changing our lifestyle and draining our savings. I figured we could manage it for a couple of months and figured our home would sell by then. We got lucky... our home sold the third day it was on the market, so it never became an issue. But in the final analysis the consumer is responsible for how he spends his money. To place the blame entirely on the lenders (though they do deserve some) implies that the consumer had no choice in the matter. That just ain't so.
Originally Posted By mrichmondj It's been no secret how lax the lending standards have been. There really should have been some intervention by the government to rein it in. Unfortunately, the federal government was only too happy to see the housing boom keep GDP growth afloat and make the economy look stronger than it really was post-9/11. Local governments were in complete control of developers and real estate speculators who were allowed to barf up cookie cutter subdivisions and strip malls on every bare strip of land. Now that the party is over, we'll face the consequences of all of this easy credit and local municipalities will soon face the prospect of having to maintain all of the suburban sprawl that is occupied by homeowners who can't pay the mortgage much less the property taxes. Then there's the consequences of all those new subdivisions that are either sitting empty due to a lack of buyers or turning into acres of rental property that won't be as well maintained as owner occupied homes. It's a real mess.
Originally Posted By jonvn "The fault is with people who are idiots. Anyone who thinks they can afford a $500,000 home on a $50,000 income could use some financial counseling stat." If the bank says you can, then it's the banks fault for misleading the public.
Originally Posted By SuperDry <<< local municipalities will soon face the prospect of having to maintain all of the suburban sprawl that is occupied by homeowners who can't pay the mortgage much less the property taxes. >>> The municipalities will get their property tax one way or the other. They will be affected by lower valuations, however. <<< acres of rental property that won't be as well maintained as owner occupied homes. >>> I was reading an article from the San Diego paper a few years ago about problems with the condo market there. The issue was where new buildings could not be sold at anywhere near what the builder thought they'd get, so they decided to turn them into rentals. But once the owner occupancy rate of a building goes below 50%, you can no longer get primary residence loans from most lenders (because lenders know that a building that's full of more than 50% renters is likely to be very poorly maintained, because renters don't have pride of ownership and because the rental owners will veto any supplementary assessments needed for upkeep). So the people that bought early got hit twice: they probably paid to much to start with, and once the buildings became 50%+ rentals, essentially all but cash buyers or those that wanted to get investment property loans were locked out of the resale market.
Originally Posted By RoadTrip <<If the bank says you can, then it's the banks fault for misleading the public.>> As my mother always used to say... If a friend of yours jumped off a cliff would you jump off one too? People constantly try to sell us lots of things that we really shouldn't buy. It is up to us to research the purchase and make an informed decision. I've got to tell you... it doesn't take an MBA to tell that you can't afford a $500,000 mortgage on a $50,000 income. A sheet of paper, a pencil a calculator and a brain would be all you need.
Originally Posted By hopemax >it doesn't take an MBA to tell that you can't afford a $500,000 mortgage on a $50,000 income. A sheet of paper, a pencil a calculator and a brain would be all you need.< You'd be surprised though. I remember watching an episode of Oprah about 4 years ago about debt. A wife was upset with her husband because he didn't want to buy the $800,000 house in NY that she wanted. The wife, of course, was making it about how much her husband loved her. Suzi Orman came out and broke down the mortgage payment and the rest of their financial obligations. You could see the lady's stomach turning as each part of the picture was revealed. She caught a clue, but it took being on national tv to do it. But then on the same show was another woman who wanted a fancy wedding but she and her finance already had college loans and other debt. She was shown the same financial analysis, but she wasn't having any of it. It would be okay, because they would just make more money. And you could tell these were college educated people. It's a scary world out there.
Originally Posted By SuperDry <<< No. You are not putting the ultimate responsibility where it lies. The fault is with people who are idiots. Anyone who thinks they can afford a $500,000 home on a $50,000 income could use some financial counseling stat. >>> Where are they going to get that counseling? It's not taught in the schools, and banks, mortgage brokers, real estate agents, and anyone else involved in the industry is certainly not going to give it to them. Plus, when they see everyone else around them doing it (and at least from outward appearances prospering), and especially when they realize that they will NEVER own a home if they stick to traditional metrics on home ownership affordability, what do you expect people to do? RoadTrip, I actually do agree with you to some extent. When I said "the only reason it happened was because of the lenders," maybe I didn't mean in a literal sense. I think I could better state my thoughts as being "If it were not for the loose lending practices, it would not have happened." mrichmondj is right when he says that there should have been regulatory oversight that prevented this from happening. I remember predicting that just this thing was going to happen sooner or later a couple of years ago, and everyone looked like me as if I was crazy. BTW, the same thing happened when I sold all my stock and went to cash in February 2000 any every other person around me though that the dot-boom would go onward and upward 25% a year forever. What the lenders did is a classic example of what happens in a free market when there are insufficient controls and oversight, especially these days. And everyone the lenders dealt with, from real estate agents to appraisers, went along with it because it was in their own self-interest.
Originally Posted By RoadTrip <<Where are they going to get that counseling? It's not taught in the schools, and banks, mortgage brokers, real estate agents, and anyone else involved in the industry is certainly not going to give it to them.>> Well, I research everything 17 ways from Sunday (is that an old expression or what?) and whether it is from the library back in the Middle Ages or the internet today, it is NOT that difficult to find the information you need. I realize that many people are not that diligent when checking out purchases, but they really should be. When you sign your name to a document that will be with you for 30 years you darn well better know what you are signing for. The information is out there… people today just seem not to want to hear it.
Originally Posted By Mr X >>>Over the past 35 years, I've heard people saying that "the bubble has burst" and that "prices can't possibly get any higher" time and time again. Every cool down or recessionary period is evidence that they're right, but in the long term, they've been nothing but wrong.<<< You know, K2M, I'm trying to look at this in a macro kinda way and what I keep noticing is...there's never been a real crash. There was that dot-com thing, but all the REAL companies did okay. Well, there was that one WAY back in 1929, but that's history right? Couldn't happen again. I mean...if there was a bubble building up for SEVENTY-EIGHT YEARS, imagine what kind of a crash THAT would be like! (reminder...there were very few homeowners in 1930) Just a thought.
