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Old 09-02-2004, 08:15 AM   #232 (permalink)
NoSoup
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Location: Green Bay, WI
Quote:
Originally Posted by Tulkinghorn
Nosoup-

This is a great thread! I think you are providing a quite valuable service.

My request is not for specific information, but to see what the general attitude in the retail banking world is like. I live in one of the areas with overheated housing costs, and I have gotten so tired of worrying about a collapse in the housing market that my wife and I are going to sell our home and move into a rental for a few years and save the equity for investing in something more promising.

Am I out of my gourd? I was the eternal pessimist when I worked in the financial securities business, bailed out of my investments in the summer of '99. I avoided the crash, but also avoided some good returns in the mean-time, too!

Right now, in my area, the cost of renting a home is something like half the cost of buying, without the sacrifice of a decent down-payment. You can not buy event slum-style rental without being underwater with your first tenant.

If you work with any mortgage underwriters, how do they manage to write loans with such craziness? Is the secondary market still so strong that all sorts or irrational prices are still supported at the retail level? What is a (supposedly) rational investor like me supposed to make of all this?
Well, I am going to agree with 90Degree on this one. Your home is an excellent investment - and regardless of the dips and gains in the market, over time the value usually appreciates.

As far as the general attitude of the mortgage industry... I can only speak for myself, although I would imagine that my views extend to at least some others in this industry.

First and foremost, we are entering market conditions that have never (at least not in recent history) existed before. There (at least in this area) is a huge surplus of homes that are currently empty simply because there were so many new homes built. Legions of new subdivisions went up, and those middle class families that were living in $125,000-$150,000 are building brand new homes with approximate values of $200,000-$225,000. Appreciation in this area -and I would imagine all over the U.S. - has been phenomonal. 10%, 12%, 15% a year!. On a 200k house with 15% appreciation you increase the value by 30k a year.

Now, with this huge flurry of new construction and upgrading to bigger homes, there are quite literally thousands of additional homes for sale. With so few buyers left the prices on homes nowadays are being driven down - the owners are competing with each other because it is no longer a quick sale - it is difficult enough to sell a home at all...

This is where my speculation comes in.

I would imagine that most people are going to get a wake-up call rather quickly. They purchased homes for far too much in hopes to make some quick dough with the crazy appreciation. They also took really crazy loans out - with really, really tiny payments. For instance, I have one client that took out a $423,000.00 Loan - on a 3.25% balloon with an interest only payment. Basically, his payment on that huge house is only $1145.00 a month. On a typical 30 year mortgage at 8% (just about the historical average rate) his payment would be over $3100.00 a month. His plan was to buy it, sit on it for a couple years letting it appreciate like mad, then sell it before the balloon payment - it has been on the market now for almost a year for the price he bought it for, and he still hasn't been able to sell it. He only has a few months to go before his balloon payment is due. There is absolutely no way he can pay that each month, so he will likely have to declare bankruptcy or take some other drastic measure, unless rates continue to stay low. People that "bought the most house they could afford" with the ultra-low interest rates being the only reason they were able to afford so much, are going to have a rough time coming up with these payments when the interest rates rise or when their ARMs or Balloons are up.

The huge amount of empty homes and the high number of people now supporting two mortgages are going to have to crack at some point. I think that these people will become desperate to sell, at which point the "real estate bubble" will pop. I have no idea if there is going to be a catastrophic crash in real estate prices or not, but I am nearly certain that they will drop significantly. The only reason (in my opinion) they haven't so far is because the public doesn't really understand the dire situation the market is in. We are still under the impression that we are in the same situation we were in a few years ago, when the rates had first dropped.

As far as the mortgage underwriters being able to underwrite with all these crazy conditions, they simply use the only information they have available - current information. It is very difficult to speculate on what will happen in the future with any degree of certainty - and if history repeats itself, the real estate market will always bounce back.

Real estate has always been a most excellent investment - seldom does it ever take large dips, and when it does, it generally, providing you sit on it long enough, will come back - and even continue to appreciate.

If you do decide to sell your home, I wouldn't sell out of fear. Sell it because you are getting an excellent price on it, or it requires too much maintenence, or because you prefer to rent, ect. The market may drop, but it generally comes back. This is especially important to remember if you were planning on staying there for a while. If you are, regardless of the drop, I can almost guarantee that over the long run you won't lose money on real estate, as long as there are no extenuating circumstances.

However, with all of the above information - make sure you take it with a grain of salt. I am but a mortgage lender, not an economist. Our situtation may be unique here in Green Bay as well.

Good luck with whatever you decide - and if you have any more questions, just ask!
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