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Your friend would have ben much better off, yes, but if only 40% off, would he have had money left over to save at a 30-year fixed? Even that might not be available in a couple years - it may be all ARMs. Rates may also be a lot higher as well, which does not seem to get much attention here. IMO, I honestly think 40% off peak in CA is too low an estimate, and it will not be done in another 2 years, but maybe 4.
The rates being higher has been talked about. Rates being higher will actually benefit buyers.
Homes are primarily bought by payment. The 28% DTI front rule is resurging. If interest rates go from todays 6.5% to tomorrow’s 8.5%, then that $200K condo will only command $165,000.
Higher interest rates can be retired by paying off the debt.
Do an experiment. Let’s pretend you bought a mobile home for the beach, just the home, at 6% interest the equivalent 30 year is $100,000, the same payment at 12% interest reduces the price to $58,000.
Which do you want? That’s easy, the later. If you go to pay it off in five years, you have a $1933/month payment on the $100,000 @ 6%. Making the same payment on the 12% loan pays it off in 3 years and you can bank the $24,000 a year for the next two years.
And if rates comes down, you can typically refinance.
Yes. You can always refinance a high rate. You can’t refinance a high purchase price.
Not to mention property tax is based on the sales price also.
You can now, thanks to the latest bailout.
Plus you can write off high interest charges, but not a high purchase price.
Amen. I don’t have a mortgage right now (or any dependants) and the taxes are killing me.
Ditto.
The government encourages me to get married, have twelve kids, and make poor financial decisions. If I educate myself, work hard, and spend conservatively, I am punished.
Tell me, how long until we become a second rate country? Where’s the incentive to be innovative, exercise self restraint and delayed self gratification, and save for a rainy day?
Your time will come as will mine. I am over $150K and paying high taxes, my rent is only $1500, I am saving substantial $$ monthly, savings will buy me a decent place and I will have $$ left over for investment home as well. I do not intend to buy anything until 2010 though! I have to be careful about the employment as well. Job stability is at risk going into 2009 for most sectors and industries. Home is not the only thing that one should worry about. I enjoy my time with my wife and two kids, go out, take vacations, and do everything that others are not able to do at this current economy. Chill out, save money and you will feel great, cash is the king.
Unless you lose all your savings to the hyperinflation brought on by all the government bailouts.
I am not sure my point was understood at all.
I don’t think the impact of possible rising rates as a factor in REDUCING house prices is considered as much as it should be here. We are seeing these drops in price already, but this is basically without fixed rates rising (maybe one point?).
No_Such_Reality restated my point, but was looking at a buyers standpoint. Yes, if rates went up and forced prices down at such time a buyer locks in. If the rates later went down, he would gain in being able to refinance at said lower rate, or perhaps get a better price if he sold. However, if rates continued to go up, he wins in only that he had the “less high” interest rate, while his house perhaps goes down more in value.
All of this is completely hypothetical, but it is my opinion that rates have a better chance of going up than going down in this environment. Then again, who knows what could happen, being that we really have never seen an environment like this before?
IrvineRenter, your acquaintance example sounds almost identical to what my sister-in-law and her husband are facing up in the Bay Area. Ten-year, interest only loan, purchase price was $950k, and combined income was $190k. Way overleveraged, but grew up on the Kool-Aid as many did up there. They also added a new baby and SUV to the picture, along with a new roof for the place. They are not saving a dime, and will likely lose the place in the next eight years (when their loan resets). Did I mention it is a 54-year old house that I would not pay $300k for???
2002 roll back of $215k will be close during the coming bottom.
These are going to party like it’s 1999.
Also notice, if listed correctly, that nice tile floor in the living room is laminate. (It could just be mis-listed). I’d pay $215k to live in it, i.e. the 2002 price, it’s well-laid out for the size.
DH and I sat at the closing table 5 years ago this November with seller’s who had made close to 100% in 4 years. They shot for close to 3 times what they’d paid with a ludicrous asking price of 560K in the spring of that year- the part-time realtor wife finally hired a local broker who brought the price down 80K - we negotiated down to 465K with a 20% downpayment which was about 2 1/2 times our yearly gross.
So far they were pretty smart right? Unfortunately the husband had inherited the philosophy from his Dad (as he told us at the closing table) that you buy as much as they’ll give you.. They moved out to a hinterland suburb to a brand new house - they’ve got a 600K mortgage on it. I check the registry records once it awhile to see if they’ve gone under - only a matter of time.
DH and I on the other hand are plugging away with extra payments to the principal. Our equity has been eaten away by the drop in prices here but we don’t care since we can afford the mortgage (and then some) on just one of our incomes. There are indeed 2 ways to build equity.
Larry King had one of the flippers from the reality show on Bravo as a guest last night. He said that no one can get financing for his properties right now because the bank is requiring 20% down and no one has that kind of cash to put down.
Looks like the whole thoery of “by as much as they’ll give you” won’t get you much anymore when “they” won’t give you any…
That 20% keeps getting easier. Let’s say you have $100,000 saved up. When your favorite Irvine houses were $1 million in late 2006, that was 10%. You could have bought the house, but keeping it in the long term might have been another matter.
Now that house is $720,000 and dropping. Your $100,000 is a 14% deposit. If you’re renting and can afford the house closer to bottom, you probably have added to the $100k in two years. Maybe you have saved $1000 a month and now have $125,000. That’s about 18% down.
Wait another year when the former million-dollar house is $500-550k and you easily have your 20% down.
But rates might be in the double digits by then too….
Back to square #1: Can you AFFORD it?
If rates go to 10%, the price won’t be $550k in another year, it will be more like $420. Aftertax payments on $440,000 @10% are about the same as $550,000 @7%.
If mortgage rates go to double digits then it’s because we’ve entered run away inflation circa 1970s and all bets are off.
At that point, housing may blossom because we’ll have a bubble has people inflation hedge thinking their salaries will keep up with inflation. Unfortunately, they are wrong. If that situation occurs, we are headed to parity with the developing world for labor rates.
It’s very important whether any major increase in rates is caused by inflation, or simply by a major credit crunch. So far, rates haven’t moved much but underwriting criteria have gotten tighter.
The last time mortgage rates were over 10% was in 1990, when inflation was about 6%. Rates were over 9% in early 1995, when inflation was about 3%.
crude has more than quadrupled in the past 5 years. the only reason that rates don’t reflect this is that the petrosheiks and Chinese can’t think of anywhere better to stuff their cash.
in a world where rates reflected actual devaluation and the CPI wasn’t a purely political entity, both would have been in the high teens years ago.
Long time lurker, first time poster.
I work for a financial advisor. We have a client in the Austin area that is in the process of buying a new house.
This client has plenty of assets (net worth over $1 million, over $250k in after tax assets) and wants to purchase a $250k home. The client also has a high retirement income and they own their current house free and clear.
They want to finance the new house purchase and then pay it off when the old house sells.
Even with his excellent credit, high income and assets, the bank wants him to make a minimum of a 20% down payment on this new house!
What does that tell you about the housing market nationwide?
Hopefully he didn’t tell the bank he wants to pay the loan off in a few months or a year when the other house sells. Unless they have prepayment penalties, that’s not going to make him their favorite customer.
That’s been true traditionally, but with how perverse the mortgage market’s become, the lender originating the loan doesn’t care too much about the future. They care about closing the loan, collecting origination fees, and passing it through the system and off of their books.
Good point, if he sticks around for long enough that the originators have already sold the loans, all they might lose is servicing income. The buyer of the loan (e.g., Freddie or Fannie) pays their origination fees under the expectation that the loan will be around for at least a few years.
The loans are going bad so fast the originators are having to eat them because they come back from the investment pools.
The investors are learning a hard lesson and will increase the send back time on a bad loan in porportion to the lack of downpayment. The current send-back time is based on standard performing loans which basically will mean 20% down. Going forward, I suspect any ability to pass off lessor cushioned loans will be subject to extended take back periods and/or higher rates.
I can’t even imagine what the effects will be on the 2nd loan market. I wonder if it will basically get eliminated since they are so prone to getting wiped out by an HELOC causing default on the 1st.
Do you mean $250K in after tax INCOME?
If so, your client should be congratulated on a couple fronts:
1. Owns his house F&C;—very conservative; good.
2.) Buying a replacement house valued at 1X after tax income—very conservative; good.
He needs to work on a couple areas, though:
1.) Unless your client is very young, why does he only have a net worth of only $1 million? (Granted, you said “over” $1 million, but this description leads me to believe it is “just” over $1 million. Where is the $250K in after tax income going—not to house payments and not to investments! (OK, not to “good” investments.)
2.) Why is someone with a $250K after tax income and no mortgage quibbling about putting $50K down on a second home? Sure, the bank is REQUIRING it—because someone with that kind of income SHOULD BE ABLE TO PUT $50K DOWN!
Just wondering….
I think he really meant $250k after tax asset.
Most of the millionaires (and billionaires) often have pretax assets such as stocks that haven’t been sold yet for short/long term cap gain taxation.
I knew real estate and everything related were in trouble when a random guy last October mentioned that an apt building in his family in a good ‘hood, cashflowing with a full 50% of equity couldn’t get a refi which would have brought the place down to 30% equity. still easily cashflowing…
I just wonder who the banks are lending to these days.
The 30% equity hedging against a down market is probably too much for any lenders to bear. 30% drop in a good ‘hood is possible given that the ‘hood probably has a huge run-up in prices over the last several years before the bubble burst.
JMHS(peculation)
This is just a very average appartment which has a lower rental value because it only has 1 1/2 baths. This is not someplace I would want buy to live in for 20 years. Places like this should sell only when it makes sense on a cash flow basis vs renting period. If it rents for $1500/month then max value is $240,000 period.
“People will come to realize that equity does not appear magically, but it is only obtained through retiring debt.”
AMEN!
BRAVO!
CHEERS!
The TRUTH is often forgotten.
I recall looking at properties in this area many years ago. It’s a very quiet neighborhood. Unfortunately the “lake” is just a pond and doesn’t even have koi in it. :(
A lake in Southern California is any body of water large enough to put a John boat on.
You don’t have to pay 2500 bucks to a stager (see NY Times this morning) to know this rule for showing an empty, boring condo: Put The Blinking Toilet Seat Down!
I know y’all hate caps, but…
Now they’ve found water in Mars… how long before I can buy a nice McMansion with a lakeview there?