The End of the Bull Market in Real Estate is Near...

[ckelly78z]

One sign is when a critical mass of buyers define "affordable" in terms of their initial monthly payment, and little else.

I have many friends who have no idea what the terms on their new car loan are, only that the "payment stayed the same".

I can see alot of first time home buyers using the 40 year option, and 10 years later, when the family is growing, they have no equity, or hope of buying anything else.

 

[Andre1969]

I have many friends who have no idea what the terms on their new car loan are, only that the "payment stayed the same".

I can see alot of first time home buyers using the 40 year option, and 10 years later, when the family is growing, they have no equity, or hope of buying anything else.

Yep, and a lot of people fall into the old trap of "real estate always goes up", and then suddenly, 10 years have gone by, and in their case, it hasn't.


For instance, I looked at a house back in late 2014 that really caught my eye. It was a sprawling 4br, 3.5ba 4-level split with a 2 car garage on 2+ acres in a pretty nice neighborhood. The only real issue I saw with it was it was a bit dated, decor-wise. Anyway, according to records, it sold for $715K back in 2005. When I was looking at it, it was on the market for $575K. It finally sold in April 2015 for $525K.


Supposedly, the real estate market has been heating up since then. However, I just checked redfin.com. A similar home in that neighborhood sold for $530K in 2018. And another similar one is now on the market for $550K.


Factor in inflation, and those numbers look even more bleak. Just to break even, inflation-wise, that $715K home in 2005 would have to sell for around $935K today. Even more depressing, just think of what the SP500 has done in that timeframe.

 

[RISP]

I agree. Way more damaging than the 40 yr term.

I mean, I wouldn't do it, and obviously they are targeting an audience that probably shouldn't take out mortgages anyway, but why do you think the '10-year interest-only clause' is so bad? You could take advantage of the lower monthly payment by investing the difference.

When I (re)financed, I was interested in three things:
1) What's the interest rate?
2) For how long is it guaranteed?
3) How much can I pay extra annually without additional fees?

OK, maybe 4) What is the monthly payment? as an afterthought. But I wouldn't really mind a structure as described above, if all other conditions were fine. Now, that'll clearly not be the case here, given the 'FICO score 600 requirement', but all other things being equal...

 

[Sunset]

I, personally, just refinanced because I had just bought the place in September of last year, and was at 4.75%. I was only 7 months into the mortgage. This refinance dropped my monthly payment by around $250.
.

Great move you made, and now it all makes sense.

 

[jazz4cash]

I mean, I wouldn't do it, and obviously they are targeting an audience that probably shouldn't take out mortgages anyway, but why do you think the '10-year interest-only clause' is so bad? You could take advantage of the lower monthly payment by investing the difference.



When I (re)financed, I was interested in three things:

1) What's the interest rate?

2) For how long is it guaranteed?

3) How much can I pay extra annually without additional fees?



OK, maybe 4) What is the monthly payment? as an afterthought. But I wouldn't really mind a structure as described above, if all other conditions were fine. Now, that'll clearly not be the case here, given the 'FICO score 600 requirement', but all other things being equal...

If you have the discipline and extra money to invest the difference that is fine but this loan appeals mainly to people that want more house than they can afford using traditional ratios. With a 600 credit score a borrower is probably not getting the best offers. Not sure if the rate was cited but that will tell the tale. I was actually taught to use very very long fixed mortgages (fully amortized) to take advantage of depreciated dollars but that logic is heresy on these boards and I’m the guy that doesn’t care if I never payoff the mortgage (assuming my rate is less than I’m earning in the market).

 

[Vacation4us]

After the 10 years the loan payment resets to include principle. Which means suddenly your payment goes up $$. If you can’t afford a 30 year loan then you can’t really afford a 40 year loan either. Can’t pay equals lose house....

 

[MichealKnight]

Im a contrarian here.

Make exceptions for the old, the mentally ill.

BUT beyond that..... i'm sorry but I don't hold lenders responsible.

I hold BORROWERS responsible. Look - we *all* get credit card offers in the mail - - why do I have a feeling that most people on this board didn't get irresponsible with those? Why do I feel like betting that people on this forum - didn't overbuy houses despite having credit ratings to do so?

My parents were 1st generation immigrants - bought smallest home in the best school district. They didn't ever buy soda at restaurants. I wore Kmart shoes and got teased by kids daily. Fast forward, I did rather well early in life and certainly spent WAY MORE on luxuries than my parents did but it was never over my means.

I think people over-buying will of course cause a crash again.

I maybe earlyRet within 12 months. I certainly don't wish ill on anyone but I admit, a 'crash' would be perfect for me as it would be a sweet entry point into buying assets for the long haul.

If people want to overbuy a house, still have a new car, still have designer handbags, and still fill the parking lots of restaurants every weekend.....have at it folks.

If only I had the guts to invest in 2009.....

 

[BigNick]

My parents were 1st generation immigrants - bought smallest home in the best school district. They didn't ever buy soda at restaurants. I wore Kmart shoes and got teased by kids daily.

We live in France, on the border with Germany. The first two words of German my kids learned, on shopping trips over the bridge with DW, were "Stark Reduziert" ("Price Slashed"). They could choose any clothes they liked as long as it had that written on the hanger (usually on a bright orange label).

We also often picked what to eat on any given evening from what was on clearance (because the sell-by date was the next day or whatever). It actually made for better variety than if we had chosen what we thought we wanted.

None of this was "necessary" as I was making a (low) six-figure salary, but both DW and I grew up in homes where there wasn't too much money left at the end of the week. Plus our parents had been through WW2 and were aware that if you get used to "too nice" things, you miss them more when they're not there. (That said: we were amazed by how much money DW's parents left to her and her brother!)

 

[jkern]

I have many friends who have no idea what the terms on their new car loan are, only that the "payment stayed the same".

I can see alot of first time home buyers using the 40 year option, and 10 years later, when the family is growing, they have no equity, or hope of buying anything else.

It's highly dependent on your local RE market. In the SF Bay Area the idea would be to keep pace with the RE market instead of being priced out. With a few exceptions, you will almost always gain equity over 10 years. In flat RE markets there is no point in using 40 yr or interest only mortgages. Much better off just to rent and save up money.

 

[troutnut1]

Possibly interesting to seniors IF qualifying ratios are based upon the interest only payment. I am currently trying to help friends in their mid 70’s who have a paid off $750,000 home and very little qualifying ability because they only get about $25,000 a year in income. They need to access some of their equity. A loan like this might allow them to stay in the home another 10+ years which is what they want to do. Their health and age won’t allow them to stay in the home 40 years anyway. And they have no heirs to worry about.

 

[Beststash]

I think a lot of the rationalization of an interest-only mortgage of 10 years has a lot to do with the constant infomercials on house-flipping and year-after-year appreciation of housing (and property taxes). With wages being almost stagnant for the most part I don't think this can continue indefinitely.

The financial engineering of the last few years seems to be based more on profit than sustainability. Maybe it's a "Brave New World" but I don't see it.

 

[RobbieB]

Yup. The house flipping seminars are still going strong here.

 

[Bongleur]

"10 years of interest only payments"
But all kiddies like balloons!

 

[RenoJay]

I think the title of this thread may be wrong. When you start getting crazy mortgages and very loose underwriting, that can push the real estate market into the bubble phase as opposed to ending the bull market.

 

[HFWR]

It’s almost as if we learned nothing from the GR/housing crash. In a sense, we’ve got a tiger by the tail. Without debt-fueled consumption, both public and private, the whole thing collapses upon itself... And recessions don’t win elections.

 

[SnowBound]

It’s almost as if we learned nothing from the GR/housing crash. In a sense, we’ve got a tiger by the tail. Without debt-fueled consumption, both public and private, the whole thing collapses upon itself... And recessions don’t win elections.

We learned that balloon loans are great. With these loans, if the housing market collapses we can stop making payments and live rent free for two years. American Consumers are a lot brighter than the Banks are.

 

[Sunset]

We learned that balloon loans are great. With these loans, if the housing market collapses we can stop making payments and live rent free for two years. American Consumers are a lot brighter than the Banks are.

True, depending where you live.
I even saw a tv show years ago of a real estate woman in Las Vegas using that as a selling point.

She told a fellow:

1. Buy this used to be $600K apt for $200K , with a $150K mortgage.
2. Then move out of your exact same used to be $600K apt where you own $600K and stop paying the mortgage.
3. You end up in same building, same apt size, but go from $600K debt to $150K debt.
4. May not get another mortgage for 8 years but don't need one.

 

[Another Reader]

True, depending where you live.
I even saw a tv show years ago of a real estate woman in Las Vegas using that as a selling point.

She told a fellow:

1. Buy this used to be $600K apt for $200K , with a $150K mortgage.
2. Then move out of your exact same used to be $600K apt where you own $600K and stop paying the mortgage.
3. You end up in same building, same apt size, but go from $600K debt to $150K debt.
4. May not get another mortgage for 8 years but don't need one.

A number of people in Phoenix did exactly that. I don't think all of them went to a seminar on how to do it, either.

 

[jazz4cash]

Just received two unsolicited offers in the mail from housing brokers. That hasn’t happened since the last housing bubble.

 

[Another Reader]

My question is what to short and when?

Already prepping one house to be sold if it gets any more toppy...

 

[Bongleur]

True, depending where you live.
I even saw a tv show years ago of a real estate woman in Las Vegas using that as a selling point.

She told a fellow:

1. Buy this used to be $600K apt for $200K , with a $150K mortgage.
2. Then move out of your exact same used to be $600K apt where you own $600K and stop paying the mortgage.
3. You end up in same building, same apt size, but go from $600K debt to $150K debt.
4. May not get another mortgage for 8 years but don't need one.

When you mail the keys to the mortgage holder, what does the letter need to say to indicate you are exercising the option to surrender your property interest in lieu of paying the mortgage? Otherwise they will hound you.

 

[WestUniversity]

When you mail the keys to the mortgage holder, what does the letter need to say to indicate you are exercising the option to surrender your property interest in lieu of paying the mortgage? Otherwise they will hound you.

I did not see this noted elsewhere in the thread. If you walk away from a mortgage be prepared to receive a 1099 for the balance owed on the note. According to the IRS, forgiveness of indebtedness is considered income, and that dollar amounted has to be claimed on your tax return...

 

[Bongleur]

I did not see this noted elsewhere in the thread. If you walk away from a mortgage be prepared to receive a 1099 for the balance owed on the note. According to the IRS, forgiveness of indebtedness is considered income, and that dollar amounted has to be claimed on your tax return...

Interesting. But you have executed a fair value trade, so you can present the IRS with the mortgage note stating the value agreed upon between you and the mortgage holder, which logically will offset the income. Wonder how it really works out wrt the IRS?

 

[Teacher Terry]

We have a housing shortage here and 50k people moved in the last 5 years and they expect the same for the next 5. New companies have moved in also.

 

[calmloki]

We had tenants vacate a little old rental house on the 6th of this month. I figured a $225k sale price would be pushing it. We ended up doing a full interior paint, pro rug re-stretching and cleaning of the 3 year old carpet, roof cleaning and some rot repair and exterior paint touch up. Then new blinds throughout, some shrub/tree trimming and a pro cleaning. After all that I felt like reaching for a bit more, so we listed for $235k yesterday afternoon. Today our realtor had 3 showings and we had an offer within 24 hours of listing for $15k more than the asking. Could just work out that we catch this real estate wave at its crest.

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