Interest only morts all the rage

[tryan]

I perdict a 50% drop in some areas.

That's why I've been a seller since ~2000.

I lived the +50% drop (north of Boston) between '91-'94. Took 12 years for my upside down mortgages to flip right-side-up. Very localized. Nieghborhood to nieghborhood, based on foreclosure activity. Banks take no chances; houses are boarded-up for "protection". Imagine what that does to the value of the nieghboring houses! But that's why national and even city wide statistics never show the drops I saw locally. Interesting really ...

Can't wait for the next buying opportunity ... where there's chaos, there's opportunity.

Enjoy!

 

[Jarhead*]

Ol Rancher:

Does your crystal ball work only for Real Estate, or
can it also be used for stock market?

 

[cute fuzzy bunny]

Ol Ranchers scenario is one that could play out, probably in areas where prices have run up but the underlying value proposition isnt there. Thats what happened in sacramento CA from 1990-1996. Lots of new mcmansion construction but no stores, restaurants, employers commensurate with the price structure and comparable to areas like san francisco and the bay area. Prices there have shot up again, but the 'quality of life' infrastructure followed the price increases this time.

I'd be wary if you live in an area thats seen fast price growth but still has plenty of buildable land, and a weak supporting cast of QOL services. I live in such an area. However I bought here when I could pay ~ home construction cost plus a small cost for the land. Even if all the price appreciation went away and we dropped back to basic developed land cost plus home development cost, I'm still above water.

I'd predict for built out areas with good QOL service levels (manhattan, SF bay area, etc) that prices may not drop much but might go sideways a long time. Although overly valued homes in those areas may not hold up, ie the $500k 900 square foot fixer uppers in the so-so neighborhoods.

Guess we'll see...

 

[laurence]

San Diego County has very little buildable land, we are grading hills just to make room for more. But if what you say is correct, that should protect us somewhat. Where I see people having big paper losses is Riverside county, the Temecula/Murietta area specifically-everyone there works in San Diego and commutes 1-2 hours each way. Plenty of flat land out there, building more all the time, yet despite the long commute (45 miles to my 12) their home prices have almost matched ours (sq. footage is larger on average, but still!).

 

[P.S.]

I own a house in San Diego - it makes up about 1/3 of my net worth.  Although I believe there is a housing bubble, just as I believed there was an internet bubble in the stock market, I'm having a hard time believing the value of my house will get cut by even 25% when the bubble pops. 

Believe that's what exactly happened in late 80's early 90's in places like SD, LA, Orange county, Boston etc. Similar fall in prices in Houston Dallas but not sure when.

Ol Rancher, agree with what you've written. Parents live in LA area, they've seen selling house prices in their neighborhood stagnant for >12 months. There's only so much that people can "afford" or buy, even with an interest only mortgage. I'm thinking maybe a large percentage of the persistent rise in prices in So Cal are because of people getting into the market (read starter homes, farther out) and investors buying "cheaper" properties, so that established neighborhoods are beginning to level off.

 

[riskadverse]

Believe that's what exactly happened in late 80's early 90's in places like SD, LA, Orange county, Boston etc.

I was in SD during that time and didn't see it. I had some friends who bought at the very top and at new devleopments at the very outskirts of the city who saw maybe a 10 to 15% drop. As I remember the biggest complaint was they couldn't refi, because the appraisals wouldn't come in high enough. They had to sit tight on their 8% mortgages for a couple of years or get creative mortgages (which they usually did). I do remember the newspapers making a big deal about it. I still know a couple of them - own million dollar homes - pay taxes on 250K value and have refinanced 3 or 4 times. They got great interest rates, but I don't know about equity, for some reason they never seem to mention that. Probably have better use for the money somewhere else.

 

[tozz]

Dunno about San Diego, but the Boston market sure bubbled in the late 1980's.  My property lost 60% of its value from 1989 to 1992.

Believe that's what exactly happened in late 80's early 90's in places like SD, LA, Orange county, Boston etc. 

 

[P.S.]

Wasn't in SD, but just reporting what heard from parents through friends thereof.  Maybe not your neighborhood or price range...
I would only amend my prior sentence by adding D.C. and Fairfax County, where I was growing up at the time.  Remember spending Sunday afternoons with my mom mapping the forclosure announcements.

 

[Nords]

The free Sunday WSJ has an interesting article about the consequences of a real estate crash.

Unsurprisingly they think that it'd be far worse than a stock-market crash.

I think loose mortgage money, especially IO, is far worse than a housing bubble. When that's finally throttled down then I think the housing bubble will deflate. Let's just hope that interest rates rise gradually instead of overnight!

 

[retire@40]

...the Boston market sure bubbled in the late 1980's.  My property lost 60% of its value from 1989 to 1992.

I experienced that too in Boston. I think history might repeat itself even worse than before. C'mon a 3 family house (2 bedroom per apt with no offstreet parking and no back yard) selling for $1 mil?!?! Who is buying this stuff? You would have to triple the high rents just to break even!!!

 

[laurence]

Nope, no housing bubble:

http://moneycentral.msn.com/content/P116257.asp?GT1=6657



It almost sounds reasonable, just like Dow 35,000....

 

[NYC Guy]

Logically, it seems like a RE "bubble", but prices are still determined by supply and demand, and here in NYC, there is little supply and lots of demand. Unless NYC becomes an unattractive place to live, I don't see this changing.

We bought our 2 bed co-op in October 2001, after about a 15% dip in the local RE market due to some well known events.. Paid 700k, spent 60k to fix it up. Current value is about 1.4m. We took out an adjustable mortgage, but paid it off quickly, saving some money. Even if prices did drop 20-30 percent, we'd still be up a lot from our purchase price. I've thought of selling, but then we'd have to rent, and pay brokerage costs. "Timing the market" doesn't usually work well. Yes, we could sell it and retire somewhere cheaper, but we want to live in NYC and retire here. I don't believe that our property will increase much over the next few years. But I don't believe there is a bubble. Housing was undervalued relative to other assets in 1995, because people kept their money in stocks. That has now reversed.

 

[cute fuzzy bunny]

Sure its all supply and demand.

Now consider if a 1br apartment at 73rd and columbus ends up costing you $3M. A 3500 square foot house on a half acre in Montclaire NJ ends up costing $1M.

What does it cost you to have a driver pick you up at home in Montclair and drive you to your office over 10 years? I dont think its $2M.

So along with supply and demand is an associated cost factor that idles alongside commuting times and costs.

 

[BUM]

Interest only loans, hmmm. Wasn't that invented by the mafia? "Da vig is 4 hunnert. Have it by Toisday erelse!"

 

[tryan]

I experienced that too in Boston. I think history might repeat itself even worse than before. C'mon a 3 family house (2 bedroom per apt with no offstreet parking and no back yard) selling for $1 mil?!?! Who is buying this stuff? You would have to triple the high rents just to break even!!!

Reminds me of the last 2 I sold ... a single family for 180k which rented for $1100/mo. And a duplex which rented for $600/unit/mo sold for 202k. Forget taxes, water, insurance, maintenance and vacancy; these people can't get rents that will cover the pricipal and interest on thier mortgage.

What are these people smoke'n?

 

[cute fuzzy bunny]

Thats why we sold my wifes house. $240k for sale and I could maybe have gotten 1000-1100 a month for rent.

So some scumbag could wreck the house I just remodelled.

I parked the money into muni's, a little high yield, a little gnma and a tax free MM fund and its throwing off $800 a month, largely tax free, completely hassle free.

Makes one wonder about how things will change when all these folks who are holding rental properties in these high appreciation areas realize that they can make a lot more by selling the property and buyers needing to be a homeowner rather than someone looking to rent the property. Because you simply cant ask for $3000 in rent in my wifes old neighborhood, and if you did, nobody that would live there could afford to pay it.

The area will convert to a bunch of homeowners from renters, which will be good for the neighborhood quality, but where will the renters go? Everything within several hours drive is way overpriced.

 

[NYC Guy]

Notth - Good points. But of course a one-bedroom on the Upper West Side is about 4-600k, not 3 mill. Metro-NY real estate should go up and down in synch. Sometimes the burbs go up a bit more, then the city catches up and pulls ahead, then the burbs do better. You can have a Victorian mansion in Montclair or a 2-bed on the UWS for about the same money. Some people want the one, some people want the other. You have good points about prices versus rents - they are at extremely high levels historically speaking. And Trump just sold his west side development. I am sure he doesn't do that because he thinks prices are going up. But unless financial wages go down, or the city becomes unsafe, supply and demand do not indicate a "bubble". I expect stagnation for several years, while interest rates rise a bit. If prices drop in Manhattan, then people just won't put their properties on the market.

Our choice is that we can bank the 1.4 on our Manhattan property and basically retire now to Jackson Heights, or Montclair, NJ or Astoria, (in an apartment, not a full house, or course) or work a while longer and retire where we are. I am 38, my wife is 34 and we both have corporate jobs. We both tried a artsy jobs first, but they didn't work out well enough to continue. We are likely to keep working for a while, but unlocking the home equity is tempting. Let's just say I hope you are wrong about the real estate bubble.

 

[cute fuzzy bunny]

Yeah, I was throwing out some inflated figures there to illustrate a point, not reality. I'm good at that Cant get that old marketing career out of my blood...

Man would I take the cash and run. Leave the area completely and buy someplace warm. Maybe resume your artsy jobs once you dont need the money? Some nice places in AZ, NM and TX that are pretty cheap and still nice places to live...

My thoughts on the RE bubble? Wont affect manhattan much, or places like that which are limited in available land and are well supported by culture/arts and other social infrastructure. Places that are below that in 'lifestyle' are probably going to go sideways for 10 years or more. Places with huge swaths of open land and just mediocre 'lifestyle' amenities are going to take a pasting.

 

[treypar]

These interest only loans are a problem. Developers of new condo's tell me that most of their buyers go the interest only route. The buyers believe that they are only going to be there for a couple of years and sell at a profit. Mostly young people who have not experienced any downturns. Definitely an accident waiting to happen when rates rise. Real estate does not always go up and if you cannot qualify at these low fixed rates.......

 

[cute fuzzy bunny]

Makes you think about people who had never invested before grabbing up internet stocks in the late 90's and crowing about their gains over a golf game, doesnt it?

 

[NYC Guy]

I've also lost money on real estate. The first house I bought was in a new townhome development in the midwest. Maybe 95k or so. The trouble was that there was endless farmland around it, and a new developer could just buy another farm and put up more mushroom houses. When we had to sell because we were moving, we were competing with a new development right down the street, and had to cut our price about 10k to find a buyer who wanted our 3 year old place, and not the new one down the street. NYC real estate goes up because it is tied to the international market, and you can only build so much on an island.


We've looked into selling the place and retiring to a nice college town. When we met we were both penniless grad students in debt, living in a nice college town. But we make very good money here in NY (between the two of us, maybe 7-800k, depending on bonuses and options). We only spend about 20-25 percent of our after-tax income, even with one small child. That's why we could take out one of those interest only adjustable mortgages, and then pay it off before the rates really rose. Maybe we could have done better investing elsewhere, but the bank didn't get much of our money. In about 5-6 years, we could retire right here at our current spending and savings rates. We like the culture of NYC, we hate driving cars, and there is stuff worth spending money on, in our opinion. I don't buy into lots of consumer stuff - but I like jazz clubs, I like travel to unusual places, and to expensive places (like London or Italy). I don't really buy stuff, but I will buy experiences.

If it wasn't working out, I would consider moving from Manhattan to Queens to bank equity in the apt., but I think the 5-6 years is worth it. My wife is basically agreed, but worried about health insurance and isn't quite ready to pull the plug just yet. I'm a city and culture guy, not sure that Texas or NM would really be right for me. Shame though, I could retire to Albequerque, or Missoula, or Boise right now.

I've lurked on these boards for about a month before posting. It's all given me a lot to think about.

 

[cute fuzzy bunny]

We get a few more earthquakes here in CA and you might find yourself with a new place on the Gulf Of Arizona...

If you move to missoula, say hi to "unclemick" for us.

 

[NYC Guy]

Notth - Of course, here is the latest editorial in the JUne 18th edition of the Economist: "We have been warning for some time that the price of houseing was rising at an alarming rate all around the globe, including in America. Mow that others have noticed as well, the day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years. This boom is unprecedented in terms of both the number of countries involved and the record size of the house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history. The bigger the boom, the bigger the eventual bust. ... The whole world economy is at risk ... The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion."

Well, Mr. Economist editorial page writer, tell us what you really think!!

 

[cute fuzzy bunny]

Oh its no illusion. The reality of those 3-4 refi's and/or the heloc to 'unlock the increased value of the home' and then blown on toys that are probably already cast aside or wearing down is going to be very, very real to a lot of people...

 

[haha]

They Just Rang the Bell

http://moneycentral.msn.com/content/RetirementandWills/P118076.asp?GT1=6584

Forget saving, just move to the right zip code and you will become rich beyond dreams.

Ha