This is nuts

[farmerEd]

http://www.msnbc.msn.com/id/8008924/

Maya Vestal, 25, who works for a biotech company, took the plunge this month with her boyfriend, plunking down $585,000 for a 1,200-square-foot home near San Jose in a neighborhood she describes as “not great.”

Frankly, the three-bedroom, one-bath house doesn’t sound all that great either. Built in 1940, it needs about $50,000 worth of work including new plumbing, new wiring and a new kitchen, she figures. “The only thing we’re keeping are the floors, which are beautiful, original hardwood.”

Together, Vestal and her boyfriend, a 25-year-old city worker, earn more than $100,000 a year, but the new $3,800 monthly mortgage payments will eat up nearly 70 percent of the couple’s take-home pay.

 

[Marshac]

I don't even understand how they qualified for this mortgage. 70% of net income My rough estimate puts that at about 45% of gross...

 

[BristolBane]

I think they're nuts too. This is just like 1996 - 1999 when some people kept saying the Nasdaq was in a bubble but it kept going and going and you hated to sit on the sidelines for fear of missing the next big leg up. Then it goes over the cliff... splat.

It's interesting.. last year when the Fed started hiking some people thought (me included) it would raise mortgage rates and prick the bubble. Mortgage rates have barely budged. In fact, you can still get 5.375% 30 yr fixed no points.

 

[cute fuzzy bunny]

I don't even understand how they qualified for this mortgage. 70% of net income My rough estimate puts that at about 45% of gross...

Current mortgage environment:

Got a pulse? Have a mortgage!

Whoops, no pulse? How about a home equity line of credit instead?

 

[ESRBob]

If all they're keeping is the floors, they'll spend more than 50k putting the house back in shape!

This so smacks of bubble to me.

My brother bought a townhose near DFW Airport around 1983. He says the dollar value (not inflation adjusted value) is only now getting back to where he bought in at. 22 years later.

I see some bad things coming when the interest-only gang starts having to pay the piper.

Still, a generation of indentured workers -- sounds like they won't be following us into ER any time soon. At least they'll stay put and pay their taxes. I feel for them, though.

Deep Philosophical Question: Should we feel sorry for them or glad they're willing to do it, thus keeping the economy ticking along for those of us living on earnings from our portfolios?

 

[Calgary_Girl]

No thanks....I sleep much better at night knowing that I don't owe a cent to anybody. They're either gutsy or just stupid.

 

[Nords]

Wait until they have kids, or until one of them loses their job.

Straight out of "The Two-Income Trap". Keep an eye out for this bargain at your local bankruptcy court.

 

[Michael Moore]

We bought our 1948 1100 sqft house in San Francisco in 09/1985. With two decent Federal salaries we just squeeked in and had to go with an ARM to qualify for the $157.5K price . If we'd waited another 4-5 months we would have been permanently priced out as things jumped a significant amount.

This new market is really scary looking for first time buyers, and I'm sure glad we're not in it (we paid off the house 2 years ago).

cheers,
Michael

 

[Brat]

What the couple in the article paid for the house is common in that community.  Frankly, if what they needed is a roof over their head they should not have done any remodeling.  

My daughter and her husband live in the area... their home is a 1970's split level in Bristol condition (a boating term) which they 'stole' right after 9/11 for ~$700,000.  Comprable homes are selling now for $800,000+.  

Employers will start having staffing problems again as a result of housing costs.

 

[cute fuzzy bunny]

Yep, bought my san jose area 900 square foot 1950 vintage house (big lot though, not a bad neighborhood but not super great) in 1993 during a dip for $162k. Two years later sold it for a little over $225k and thought I made out like a bandit. Today there are a couple of similar homes in the same neighborhood (its still iffy) selling in the high 500's and low 600's.

Thats nuts.

 

[deserat]

Yup - northern CA is nuts - my home in Vacaville has appreciated over 100% in the last 5 years. I just closed on a 10 year mortgage to pay it off at 5% and when the notary showed up she said I was the only 10 year loan she'd processed. She's had three 15 year loans and mainly the rest being 30 year re- finances or movers up to bigger and better this year. I laughed at what my house appraised at - I owe significantly less than half of that....but I always take that with a grain of salt as one needs to actually sell the house and see the money before they know the true appraisal.

I think it is crazy and wonder if it will at least stay at what it is. I thought I was getting gouged 5 years ago when I bought the house.....oh well. I guess it's lucky for me I'm where I am.

Bridget aka Deserat

 

[Mountain_Mike]

I refinanced last year with just a 5-year loan. My interest went from 6.75 to 4.5%, and I saved nearly $200 per month, which I promptly dumped into my 457 account!

I can't see the logic of volunarily signing up to be a slave for 30 years, but that's what most people seem to be doing.

 

[Marshac]

 

[uncledrz]

If all they're keeping is the floors, they'll spend more than 50k putting the house back in shape!

You are absolutely correct on this one. Building materials are increasing dramatically. Fifty grand will not redo a house completely, including the plumbing, electric, etc, unless the owners are able to do most of the work and genral contracting themselves.

 

[cute fuzzy bunny]

Looks like a chart of the nasdaq minus the last 5 years...

 

[cute fuzzy bunny]

You are absolutely correct on this one. Building materials are increasing dramatically. Fifty grand will not redo a house completely, including the plumbing, electric, etc, unless the owners are able to do most of the work and genral contracting themselves.

Pretty unlikely even then. We put ~ 45-50k into the wifes old house with me doing plenty of the work and buying all the materials on sale with 10% discounts and no payment/no interest offers. My brother in law and two of her cousins (all licensed contractors) and a bunch of her brothers contractor friends came by to do the hard stuff. What I paid them was probably half what they normally get working a job.

You can spend 40k remodelling a KITCHEN...

 

[VoyT]

Wait until they have kids, or until one of them loses their job.

Straight out of "The Two-Income Trap".  Keep an eye out for this bargain at your local bankruptcy court.

 
    Heck, it's already happening out here ...  the bankruptcy court has  record filings every year now -- helped by a soft manufacturing base and lenders who will (as TH said) give $$ to anyone with a pulse.  And our house prices are nowhere near California's

 

[Cut-Throat]

Yup, this is where the 'stupid money' is going today. - If you want to know where the next crash is all you have to do is follow the cash.

No one is excited about the stock market, and that is the only thing that makes me somewhat comfortable with it. High P/E's and all.

 

[ESRBob]

C-T;
I love the way you think, man!

Still, if everybody starts agreeing that housing is in a bubble, who knows, it could end up letting things go even higher.

I've been calling the housing bubble (wrong) since 2003. Now its even higher.
Can you believe _average_ house prices (for home resales I believe) were up across the country some 15% year-on-year in the latest stats. If the average is up 15%, there must be some wacked out appreciation in some parts of the country. Feels bubble-like to me.

 

[retire@40]

Still, if everybody starts agreeing that housing is in a bubble, who knows, it could end up letting things go even higher.

I don't think you can have EVERYONE agreeing there is a bubble, otherwise there will be no bubble.  The bubble happens when SOME people think there is nowhere to go but up and keep buying no matter what the price is.  When those people are gone, that's when the bubble pops.  I too thought there was a bubble 2 years ago, and I too have been wrong so far.  Now I think we have a bubble on the bubble, but maybe I'm wrong again.

 

[lets-retire]

I would have to agree with some of the ex-sperts, some areas are bubblish most are not. It seems most people are looking at the prices of houses and the fact that it takes two incomes to afford the prices. Many if not most housholds have been two income since WWII, I doubt that will change anytime soon. In most areas, unlike the late 90's early 2000's stock market, the fundementals support the price of the houses.

But just in case I'm wrong about the bubble I'm throwing most of my portfolio into the stock market. Nobody is paying attention to it right now. The ones who are complain that it isn't doing anything. Give it a few years, if the "bubble" bursts peope will start putting money back into the market and watch it go nuts again. If there isn't a bubble my house will be valued high enough to retire to a small plot of acrage in the country some where.

Kind of off topic. Did anyone see the report that many high schools are experiencing a large influx of students. To me it sounds like the employee pool will be growing in the near future, further increasing house prices.

 

[Brat]

There was an interesting discussion on NPR last night (this am) about housing prices. The host was a gal out of Georgetown. Basically, housing prices are driven by local demand.

 

[P.S.]

There was an interesting discussion on NPR last night (this am) about housing prices.  The host was a gal out of Georgetown.  Basically, housing prices are driven by local demand.

I remember in the mid-90's, there was local "concern" that middle eastern proprietors were invading the Georgetown business scene. You could get a cute (but tiny) federal townhouse for as low as $150K.

Now I think we have a bubble on the bubble, but maybe I'm wrong again.

maybe this is the froth that Mr. Greenspan refers to...

Couple of things wondering about...
-if many loans in certain areas are interest only with no money down, then when the foreclosures come (and they will) won't the banks try to recup. at cost so that the foreclosed price be not such a bargain?

-if these loans are interest free for the first 5-10y, then barring any change in the overall economic scene/job availability, would it be conceivable that prices cont for the next few- (10 minus a couple) years until the "reckoning" arrives?

 

[Martha]

Back in the early 80s I spent a lot of unhappy time at work foreclosing on peoples' homes. With the very high interest rates and a struggling local economy, a lot of people were upside down on their homes.

In Minnesota, you can foreclose the "hard" way or the "easy" way. The hard way involves getting a judgment for the amount of the debt, foreclosing the house, and if the foreclosure price is less than the judgment, the lender would have a deficiency judgment against the borrower for the difference. Often this ended up driving the borrower into bankruptcy when the lender tried to collect the deficiency judgment. The easy way just involved a foreclosure sale and didn't allow for a deficiency judgment.

Most lenders took the easy route, foreclosed and then sold the house as fast as possible for whatever they could get.

 

[brewer12345]

I remember in the mid-90's, there was local "concern" that middle eastern proprietors were invading the Georgetown business scene.  You could get a cute (but tiny) federal townhouse for as low as $150K.

maybe this is the froth that Mr. Greenspan refers to...

Couple of things wondering about...
-if many loans in certain areas are interest only with no money down, then when the foreclosures come (and they will) won't the banks try to recup. at cost so that the foreclosed price be not such a bargain?

-if these loans are interest free for the first 5-10y, then barring any change in the overall economic scene/job availability, would it be conceivable that prices cont for the next few- (10 minus a couple) years until the "reckoning" arrives?

1) That's great until rates rise and payments go up materially. Remember that most of these loans involve interest rates tied to 6 month LIBOR or something similar. That rate has gone up a lot in the last year and will likely continue to rise. Only a matter of time until borrowers who were stretched to buy with these loans in the first place start defaulting. When the actual principal payments kick in, watch out below.

2) Banks hate having OREO (other real estate owned) on the balance sheet. They do not want to sit on a bunch of single family homes that are empty, so they sell quickly. They get whatever market price is. If there was little borrower equity (or negative equity), te bank takes it in the shorts.