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400K for 1200 square feet of house on 1/8 acre. In state with massive underemployment. Yes, I know, California is ‘different’ and is just the world’s most ‘wonderful’ place to live. I actually lived in LA in the 80’s. But given the current situation, all I can say is ‘No thanks’.
My friend’s daughter has a real job in education and at age 30 cannot afford to by anything in LA. I’ll stick to my boring midwestern location where homes like this go for a bit over 100K, young adults can afford housing, and established adults have cash left over for saving and toys. I have a middle of the road IT job, but live in a near McMansion size home, can afford my daughter’s hobby of owning horses, can max out my 401K at work, and still have cash left over at month end.
You’ve hit the nail on the head. The exodus of the middle class (and retirees) out of California will continue. Smart working class people know that high income taxes, high housing prices, high rent, hour long daily commutes, and flat or negative YoY salaries cannot be a formula for a successful, happy life.
Recently moved from midwest to SoCal due to hubby’s job change. We owned our house free and clear and after everyday expenses all the rest of the paycheck went to our savings. We saved a lot and also traveled quite a bit because we were able to. We sold our house before moved to SoCal planning to buy one of similar size. Now we know the proceeds from selling our midwest house is only enough for a downpayment and have to take on a loan of half million with a 30 yr mtg. We decided to rent instead and take the wait and see approach. The idea of a half million loan scared this midwest girl a lot to be honest.
You go Justinee
And you are right to be scared.
Even a 300k mortgage is enough to be afraid.
High home values suck and are an impediment to financial freedom.
http://finance.yahoo.com/news/Home-Prices-Will-Decline-for-cnbc-966544395.html?x=0&sec=topStories&pos=4&asset;=&ccode;=
Justinee—time for hubby to check if he can get his old job back!
Word ... best advice is to move back to flyover country unless you both have stable 6-figure jobs.
Amen..
400K and you have to live in 1200 sq ft where you don’t even have seperate rooms for your kids who have to share tiny room with a bunk bed.
Living free for two years after taking out $250K in equity. Sweet.
Irvine ? California
There are plenty of places in the state which have real estate prices that are more typical with the nationwide average. Of course, lots of people don’t want to live in Bakersfield or Lancaster or even Riverside. Then again, lots of people don’t want to live in Cleveland or North Dakota either.
point taken, but when young adults can’t afford properties en mass, it is a bit of a red flag.
Irvine is not different, maybe somewhat of a premium, but not that much.
A year or so back, some blog posted an affordability index—the number was something like:
“If the buyer had 20% down, could they afford the house they were in” and the answer was ‘No’ for almost 90%. Does anyone have an update on that number?
Let’s not forget the average Irvine home price in 1999/2000 was under $300k.
Reversion to the mean is inevitable.
If we’d chosen a simple 3/1 ARM (in which the payment and rate is fixed for the first three years and adjusts quarterly after that with a small spread above a popular index), our mortgage payment would probably be ~$700-$800 lower today.
That would be nice, but the key word is “today.” We would quickly get used to that much lower payment and it would be painful watching it go up over the next few years at some point exceeding our current fixed-for-30 amount.
According to RedFin, the average “sold price” of Irvine homes is at the 2009 bottom (2009: $329/sqft. 2010(Dec): $330/sqft).
This double dip is going to get ugly.
I like ARMs, as long as you know how to manage the risk and plan accordingly.
How does one manage the risk on an ARM? Short of refinancing into a FRM, I don’t see how this is accomplished.
irvine_home_owner just got pwned
irvine_home_owner just got pwned
Oh the horror! I must rend my clothes and repent my sins.
Yes you must, however, even doing that will not bring about the year of Jubilee where debts are forgiven.
Like you said, refinancing into an FRM is one option.
If you track rates on 3/1 or 5/1 ARMs, you can refi before it goes to adjusting.
For the infamous OARMs, make more payments per year, pay more than the minimum and make sure you can financially handle the rise in payments. Some OARMs came with fixed rate conversion options.
Just like any loan, if you borrow within a reasonable DTI, you can manage the highs and lows accordingly. If you are responsible enough, ARMs *can* save you money. Like if I were to buy right now, I would consider a 5/1 or 7/1 ARM because I doubt I will stay in that home for more than 5 to 7 years.
ROFLMAO
Too smart for me.
Are you channeling Alan Greenspan?
If you aren’t planning on being in a home for greater than the fixed period of the ARM, then sure ARMs are great products.
For the most part an ARM is used because someone is not taking on a reasonable DTI, as IR mentions. If everyone is just using an ARM as an interest-rate gamble/investment and has plenty of income to cover potentially higher payments, we wouldn’t be where we are today.
People who were getting 7/1 ARMs in 2003 are bailed out by the lower rates today. For those buying today, who expects rates to be lower in 5/7 years? (You have to note that the same arguments were made 5 or 7 years ago).
The nasty default rate on OARMs should tell you that they were not a good product, really for anyone.
this is the bullshit sales pitch that every soon-to-be-cocktail waitress and former highschool dropout used when selling these loans 4 years ago. They made damn good money doing so.
this may work for a few, but is already showing to be a disaster for most.
the only part you left out was, “prices never go down in socal…you can always refi in the future and save with an ARM in the meantime.”
you are giving poor advice, even to yourself. purchasing with an ARM right now is rolling the dice because of 1.) future LTV problems 2.) future buyer affordability when they try to purchase your house (assuming you were to sell).
@matt138:
Whoah… I’m not giving any advice, just expressing my opinion and answering IR’s question (even though he doesn’t like to answer some of mine).
And like other posters have said (and what I was trying to get at), it’s not the ARM that’s the problem, it’s how it’s used. Or else there would be no ARMs to begin with.
true, ARMs are for a very select audience, which should be the discretion of the underwriter.
one may find himself in an ARM bind should rates rise and/or prices fall.
many underestimate how high rates will ultimately go. the million dollar question is how quickly.
Fixed rate investors aren’t just handing out free money then. The premium affixed to fixed rate mortages isn’t free for the risk undertaken by the mortgage bond holder.
The argument shouldn’t be that ARMs are riskier, but whether the FRM premium is insufficient to cover the risk of the ARMs.
Buying a fixed rate mortgage is the same principle as buying a put. You cap out your risk, and pay a fixed premium in return. As with all forms of insurance, all these schemes are generally designed so the house always wins over the long run. I’d argue the premium put into fixed rate mortgages is designed to make sure the bank doesn’t lose out in the long run. Banks will cover their asses.
How do you manage risk on an ARM? You put away enough cash that, should the interest rate go up to the maximum allowed by the ARM, you can buy down that loan to keep payments the same. For the buyer with substantial cash who doesn’t want to use that cash as a downpayment in the immediate future, by necessity or choice or cannot access that cash right now, that ARM could be useful.
And of course if you’re absolutely certain you must move out of that house in five years no matter what, taking a 30-year fixed rate is actually a dumb idea.
Ditto. In concept I’m fine with ARMs, but needs to be used by someone savvy enough to plan properly. Only borrow what you can afford if the rates max out each time. Match your adjustment schedule with your expected time horizon, and use your savings to pay down the mortgage early.
I haven’ used an ARM, but I successfully used 7 year balloons before.
I have had ARMs, but only because I was too stupid or naive or something to insist on a 30-year fixed.
BTW: This doesn’t mean I recommend ARMs. At current rates, even if they are at an ALL TIME THREE MONTH HIGH… fixed is probably better.
It also depends on your budget, income and ability to handle larger payments in the future. I used an ARM when I was younger, engaged and just starting my career so I was confident in earning more to offset a rise in rates and it worked out quite well. Nowadays, being older, having a family, seeing too many question marks in the economy and real estate, and probably less likely to see a sizeable increase in income, I would lean towards a fixed, but I still woulnd’t rule out an ARM.
Again, I agree with IHO.
Right now, ARMs make very little sense. Historically low rates. And if you think you will be selling in the next 5 to 7 years, now is probably not the time to buy in the first place.
Thats why we used a 15 year fixed on our purchase last year. A 4.375 rate in Feb 2010, and we refi’ed at 3.375 in Nov.
I’m glad we had the option to pick and choose between different loan types.
Fully amortizing ARMs should be available but banks should make people qualify based on the worst case rate, which is usually capped at a few points over the initial rate as I understand it.
“Californians pay too much for their houses because many get trapped into adjustable-rate mortgages to borrow as much as possible”
Exactly… I was flipping the dial during the ballgames over the weekend and happened on HGTV where they had a young CA couple both employed as pharmacutical sales reps looking at a FC in Riverside near Palm Desert. It was new construction without landscaping or window treatments. Opening bids were in the low 300s but the realtor expected the price to go higher. This couple didn’t want to bid because they were afraid of how much it would cost to install window blinds/drapes. WTF. They were streaching so much they would have trouble buying a few blinds. If I were the realtor I would have told them, look, you need to be looking at a lower priced property. PERIOD. Spend so much of your income on a house that you can’t afford to recarpet one or two rooms and put in some blinds. CRAZY
I was talking to a coworker a while back and he told me that he paid in the high 400s for his house because the realtor told him to, “buy as much house as possible.” I think he makes a decent income but because his wife is a stay-at-home mom, the mortgage must be an albatross.
The mortgage is the albatross, or the non-working spouse is? I’m confused…
I wrote, “...the mortgage must be an albatross.” Perhaps the sentence was awkwardly constructed, but I think your confusion is due to poor reading comprehension.
Perspective just forgot that html tags don’t work in the comments..
<sarcasm on>The mortgage is the albatross, or the non-working spouse is?<sacasm off>
my belief… he has at least two albatrosses or is that a gaggle of albatross
Albatri.
Ah, I see. I’m really bad at discerning sarcasm online.
Yes, I was being sarcastic. There are five guys in my office whose wives don’t work (and not all have kids). It’s a frequent topic here.
My wife works and happens to out-earn me by 41%. She probably works twice as many hours though…
This is all good and all but the US is only one of a handful of countries even offering 30 year fixed rate mortgages. Even Canada’s “fixed” mortgage are actually only fixed for five years in the majority of cases. Most countries in the world would be surprised at how favorable and risk free the american mortgage terms here.
Your title should probably read “ARM cause volatility in world house prices”, not California. Americans are now convinced that fixed rate mortgages are the “normal” way of taking a mortgage and ARMs are the minority bet, but really in most of the world it’s the other way around.
Considering their ubiquity in a lot of countries that haven’t had their housing markets brought down, I’m not convinced ARMs are a key part of the housing crash at all - option ARMS, neg ARMS, yes, but not vanilla ARMs.
Your’r right of course. In the rest of the world you put at least 20% down and got an adjustable loan based on say the 30 day LIBOR + 2% and had to have your income verified. IR’s post today makes it look like ARMs were the problem when in fact it was giving a “partial interest only” loan to a gardner claiming to make $500K with no proof on income that was the problem. If everyone could actually afford their ARM because they were properly qualified (28%) DTI for the fully amortized amount we wouldn’t be having this problme today.
i dislike the greenspan cartoon. it insinuates only tainted product would be available sans regulation.
the market slowly learns which loan products are viable long term. regulating, then deregulating, creates a burgeoning can o’ worms that bursts open upon deregulation.
investors/creditors learn a lesson by losing money, or seeing others lose money. i fail to see why govt subsidizes and distorts this process.
Not to say any words for that ........
Tom
Ravenshoe Real Estate
ravenshoerealestate.com.au
Well it’s obvious that all the new laws, rules and regulation is structured and developed to the benefit of 2 parties, the client which is noble and letting only the big banks take over the mortgage industry. Well the question that rise, how will the mortgage bankers / correspondent lenders pay their loan officers more then what bank of America, Wells Fargo, Chase pay their loan officers and stay competitive with the big banks?
The answer to that is something that lot of people are waiting for, and besides that everyone is anxious to see how things is going to fall in place, knowing that mortgage brokers and mortgage bankers loan officers are not a breed that enjoy the corporate way of doing business, and knowing that the big banks are not going to be hiring any new people due to the fact that they are going to be hammered with employment applications by loan officers, and that’s when crisis rise again and create more trouble in this industry.
I see another wave of crisis for the mortgage industry that is coming, and this time it is going to really hurt and take little longer for everyone to adjust, also it’s going to reflect some unemployment and some financial crisis to some more people that are working hard and surviving out of today’s mortgage industry, the question is when is the crisis going to end for the people that are struggling to survive in today’s economy and decided not to leave the mortgage industry and decided not to work for the banks.
I believe the answer to that, would be for the mortgage brokers and mortgage bankers to give more then what the big banks are giving to the public and to the real estate industry. It’s a simple philosophy give and you will get much more in return. We have set our path for 2011 strategy and the execution of our strategy will begin in January 15th of 2011. Our strategy will create opportunities for real estate agents to have more business and develop for them a strategy for continuous growth in return to have a massive bonding strategy between the real estate agents in our market with our loan officers in exchange for the value that is provided by the services and the strategies we bring to our industry. All we would like to ask for the loan officers, the mortgage brokers and mortgage bankers that are in the industry and they are facing some financial trouble or facing frustration of growth and development for their office or their company to join us on Facebook and join our company so we could put our hands together and promote what banks can’t promote, give the public and the real estate industry something that has never been provided and asking nothing in return.
Our formula for success in 2011 is the way of conquering markets, it’s the new way to conquer this industry lets come together and turn this industry to our benefit and show the banks how hard it is going to be for them when we are taking their business away, and how much this industry is in a need for our breed of professionals.
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