New Wave of Alt-A Foreclosures to be Worse than Subprime Wave

[sherwood]

I just read a study last week that said that in the bubble areas, a very small number of people were ~30% under, the median was around ~7-8% and nationwide the average homeowner who bought since 2006 was actually up about 5%.

I just registered to this site to ask, where did you read this study, very interested in this claim.

 

[Running_Man]

Doesn't seem to agree with the Schiller-Price index which indicates prices are about at the level of July 2004.


http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_072943.xls

 

[CitricAcid]

Not sure about the claim, but we have been on the topic of underwater versus overwater (above water, or whatever). Thus, homeowners who put 20% down (there are actually a lot of them still) since 2006 and paid principal and interest the last two years or so may have more equity in their home than they started with (due to declining mortgage principal) AND have a lower total house value. This does mean that they put more money into the home than they would get out if they sold, but talking about strictly above/underwater it could mean they are still 5% up.

Edit:
Not sure if it is the Schiller-Price index, but I know one of the oft-quoted indices only looks at the top 20 real estate markets it believes is important, not really indicative of the country as a whole, when it incldues Vegas, Florida and SoCal heavily weighted in it.

P.S.
No, I am not denying there is a downfall in real estate, just pointing some things out 8)

 

[honobob]

Edit:
Not sure if it is the Schiller-Price index, but I know one of the oft-quoted indices only looks at the top 20 real estate markets it believes is important, not really indicative of the country as a whole, when it incldues Vegas, Florida and SoCal heavily weighted in it.

P.S.
No, I am not denying there is a downfall in real estate, just pointing some things out 8)

And ignores condos! And the whole state of Hawaii!

 

[kcowan]

Condos in our town are so overpriced that the real estate board stopped publishing their prices separately and lumped them in with apartment buildings. We are about 18 months behind and just past the peak. (Vancouver BC)

 

[clifp]

Wow, I don't know what to think about this. Of course, I know nothing about the rest of the financial situation of this family. Maybe Uncle Clifp sends them a check every month.

I'm surprised that a lender would make a loan in today's credit market to someone who is spending 40% of their income on housing (mortgage, RE taxes, and insurance). Did your sister or someone else co-sign the loan? If not, I would think a lender who has likely been burned already, would see this as a "train wreck" waiting to happen.

If they are typical (income-wise) of the buyers in this neighborhood, I would think that home prices may have a ways to fall yet, or we may have another round of foreclosures in the making.

The whole family is surprised none more than my niece who has said. "we just aren't smart enough to sell at the top and buy at the bottom, God must have a plan...(married to a minister...)."

Knowing how careful/responsible my niece is I am sure there payment history is perfect although they probably didn't have enough debt history to have a super high FICO score. So I am somewhat surprised they qualified for a loan on one hand, but on the other hand the percentage of conventional 20% down 30 year fixed loans 2 points that have gone bad is still very small. (I believe 1 in 400).

I am sure there income is below average for their neighborhood. I interpret this anecdote far more bullish for the housing market. It seems to me when a family with a below median income is able to afford a nicer than average house (15 years old, 2000' sq foot and pool) , in an ok neighborhood, this puts a floor on the housing prices.

 

[tryan]

Doesn't seem to agree with the Schiller-Price index which indicates prices are about at the level of July 2004.

Spoke to my realtor today ... says prices are fast approaching 2001 level (north of Boston). And if rates RISE ... well, we all know the outcome of that one.

 

[ladelfina]

clifp, you seem to be using the word "afford" in a way that defines "affordability" as "finding a bank that will write the loan". The reason people with average incomes can't truly "afford" nicer-than-average houses is that they shouldn't be paying 40+% of their income for them. I hope your relatives are different and maybe they have different spending patterns than most people; I certainly hope they have no other debt.

I wish them the best of luck, but I think that if 40% is your baseline for a bullish housing outlook you might want to rethink that. You say it's "remarkable", and it is.. a continued sign of "remarkably" precarious lending.

 

[clifp]

I wish them the best of luck, but I think that if 40% is your baseline for a bullish housing outlook you might want to rethink that. You say it's "remarkable", and it is.. a continued sign of "remarkably" precarious lending.

I'm not sure why everybody is freaked out by 40% (as a disclaimer their actual ratio maybe a bit less than 40%). When I bought my first house almost 25 years ago in California the general rule thumb was no more than 1/3 your income for mortgage payments. However, in California they could stretched to be 36% if you had very little other debt. Currently VA has total (mortgage + other loans)t debt to income ratio 41%. Niece and family have zero other debt. The max debt to income ratio of about 40% has been mortgage guideline for at least 25 year, and probably around longer than most of us have been alive.

As for lending now, no offense but I am glad neither you nor Abreutime are running the banks that I own. Right now is a terrific time to be in the banking business the net interest margin are very high because interest on deposits is very low, and credit spreads are wide. For the same reason it makes more sense to buy stocks after they have fallen 30%, it makes more sense to loan money on houses after the value has dropped 30-50%, than after they've doubled. My niece loan is pretty much bread and butter banking, which have been approved by most banks anytime during our lives.

 

[siamamerican]

I just registered to this site to ask, where did you read this study, very interested in this claim.

I guess CFB doesn't possess the confidence to admit he made a foolish claim. He jumped all over me when I made a stupid post, and I deserved it.

Here is the data from the National Assoc. of Realtors:

Median National Home Price

Dec. 2006: 221,000
May 2008: 196,000
I'm pretty sure these dollars weren't adjusted for inflation. The loss in value would even be greater.

IMHO, we still have another 10% drop and then flatten out for a few a couple years. Thing have a way of reverting back to the means and houses as a whole are still overvalued.

 

[ladelfina]

clifp, no offense taken and I'm sure I would run a bank of very low profit (but perhaps enhanced stability).. I just came across this in some comments elsewhere, so I don't have the original link.. but you get the idea:

The Union Tribune. “The National Association of Home Builders yesterday ranked San Diego County as the nation’s 20th least affordable metro area, a major improvement from four years ago, when the region was ranked the most unaffordable market in the nation.”

“‘This is very positive news for people that have been unable to afford housing,’ said Kelly Cunningham, economist at the San Diego Institute for Policy Research. ‘It’s certainly hard for the people who got in over their heads over the past couple years, but the fact is that these prices had to come back to reality so that people could afford them based on their incomes and not on risky financing.’”

I just think that the concept of what's been "affordable" has been warped in the recent climate.

Go back to the standards of 25 years ago and, if you crudely apply the 33% vs. 40% across the board you are talking 7% less money per annum in the mortgage system. Some or all of this shrinkage still needs to occur.. and maybe even beyond as other pressures affect home prices (driving distance, layoffs, price inflation in other areas).

Irrespective of what people may need to have to do with that other 60% of income (pay taxes? buy food, gas, health care?) an extra 7% of one's income seems like it is still, somewhat, 'overpaying'. Again, if they value the house to that extent and they can handle it, great... this purchase is surely a belwether that the correction is in progress, but I wouldn't say we have reached general "affordability" yet.


another comment:

Last week I spoke with my sister-in-law who manages an apartment complex in southern California. She told me she was getting notices left and right from her tenants. Three-bedroom occupants were moving into two-bedroom units, two-bedroom occupants were moving into one-bedroom units, and one-bedroom units were moving back in with their families.

comments found at
http://globaleconomicanalysis.blogspot.com/

 

[clifp]

I just think that the concept of what's been "affordable" has been warped in the recent climate.

Go back to the standards of 25 years ago and, if you crudely apply the 33% vs. 40% across the board you are talking 7% less money per annum in the mortgage system. Some or all of this shrinkage still needs to occur.. and maybe even beyond as other pressures affect home prices (driving distance, layoffs, price inflation in other areas).

Irrespective of what people may need to have to do with that other 60% of income (pay taxes? buy food, gas, health care?) an extra 7% of one's income seems like it is still, somewhat, 'overpaying'. Again, if they value the house to that extent and they can handle it, great... this purchase is surely a belwether that the correction is in progress, but I wouldn't say we have reached general "affordability" yet.

I certainly agree there has been a change to the concept of affordability during the bubble, but this isn't an example
In particular a total debt to income ratio of 40% is NOT a change. The only difference I can see is banks are more willing to lump all debt payments together.

For example 24+ years ago I was making ~$3,000/month I could afford payments of $1,000 as long as my car payments and student loan payments were under $200. $1200 debt to $3000 income is 40%. Now days that don't care as much about the break down between mortgage and consumer debt. Actually going back and looking at my first mortgage, I put 10% down, at an interest rate of 13.75% (gulp) and negative amortization to boot, and it was made to 24 and 25 year old guys with thin and not perfect credit records. By comparison my nieces loan is Prime+.

During the housing bubble there is no doubt that standards loosen on the theory that appreciation would bail out any underwriting mistakes. Mortgage brokers found more creative ways of getting around the Debt to Equity limitations. However none of the concepts are new, interest only, increasing payments etc, ARMs (ok Options ARM is new) all have existed for decades. 24 years ago a bank loaned me money, with only 10% down, it required that I increase the payments by about 7% each for 5 years. I don't remember the exact details but due negative amoritization by the end of the 4th year I owed the bank an additional 5%, in effect reducing my down payment to 5%.

I do believe the ethical standards of mortgage broker and probably even some bankers did change. I imagine stretching the truth is always part of the lending process and bankers probably know it. My perception is that all too often during the most recent house bubble, loan applications were works of pure fiction. Rather than the stern warning that if you lie on the application,they'll send you to debtors prison for life that people used to hear, everybody expected people to lie.

Is 40% a lot to pay for housing, perhaps but American have invested much more into housing than any other society for several generations so it isn't a change.

 

[ladelfina]

American have invested much more into housing than any other society for several generations so it isn't a change.

ok.. this sounded a little off to me..
http://en.wikipedia.org/wiki/Homeownership_in_the_United_States
we can see that 1960-2005 the US ownership rate went from 62% to 69%.. and in that I think you have to take into account 3 factors: one is the appearance of a large condo market in the interim (new concept for the US); the second was the introduction of ARMs which only occurred in 1982; the third is today's bugbear: the increase in 'ownership' but at reduced levels of equity, to the point of Zero or even Negative equity from the get-go.

Try as one might, I can't be convinced that zero equity represents 'investment' even if there is nominal 'ownership'. Better to look at actual equity as a measure of investment.

http://www.msnbc.msn.com/id/24988315/

The equity Americans have in their most important asset — their homes — has dropped to its lowest level since the end of World War II.

Homeowners’ portion of equity slipped to 46.2 percent in the first quarter from a revised 47.5 percent in the previous quarter. That was the fifth quarter in a row below the 50 percent mark, the Federal Reserve said Thursday.

I wish I could find the source for this, that clearly tracked total equity over time.. I did come across this, with some interesting figures, though restricted to the authors' sphere of inquiry:
http://www.nber.org/programs/ag/rrc/NB0706 Poterba, Venti, Wise FINAL.pdf
In particular table 5-1 shows a change, from 1984-2004, for homeowners aged 60-70, of +69% in mortgage debt, and -8% in home equity (2000 dollars). That, to me, does not describe increased investment.

And while Americans have fairly high home-ownership, it's not "much more than ANY society". Several European countries have higher ownership rates (see above wiki link).

This is kind of generic as it examines continents:
http://business.baylor.edu/economics_papers/EWPS053.pdf

Table 4: Mean Home Ownership rate (2002) from UN figures
Africa 50.46
Asia 65.18
Europe 61.75
North America 62.59
South America 67.98

 

[clifp]

Wow tough board, I make one statement without researching it I found out I am pretty much dead wrong. I simply assumed that higher ownership + larger house meant a bigger investment. I hadn't thought about the equity side of the equation, and as for home ownership I am frankly shocked that many nations have equal or higher ownership than the US.

I also I am surprised that ARMs only came out in 1982. I got ARM about 86/87 to replace my 13.75 mortgage from hell, I didn't realize they were a relatively recent invention. Getting an ARM was of my financial best moves since I experienced an almost steady decrease in interest rates every year!

"It's not what you don't know that will get you in trouble, it is what you know that ain't so"

It does raise an interesting question though bigger houses implies higher cost/expense where does this money come from? There is your softball Ladelfina for the week.

 

[ladelfina]

clifp, what is this "money" of which you speak??

--
seriously, yes - a softball - if you have been following my posts of recent months: there has been no significant increase in what we think of as money (banknotes and other gov. obligations like T-bills *except for the new FNM/FRE exposure!), just an increase in CREDIT (otherwise known as debt). When you start to understand this, everything falls into place.

I posted this video animation elsewhere but will link it again here:
http://video.google.com/videoplay?docid=-9050474362583451279
"Money as Debt" (it might be more properly titled "Debt as Money")

The "money" to pay for and maintain the trend of bigger newer houses (and a lot of other "stuff") was never really there in the first place. It was created by banks out of thin air. I've also posted this JKGalbraith quotation before but it is also worth repeating:

The process by which banks create money is so simple that the mind is repelled.

-
Just wanted to add that while clif is "shocked".. I'M kinda shocked that, even among a group that is self-selected to be more interested and aware of money, finance, and related vagaries.. a group that isn't generally afraid of numbers, less-than-optimistic assessments are such a hard sell.

 

[jclarksnakes]

clifp,
....Tough crowd is right. Some of the folks here are VERY financially savvy. It does seem to me that you are trying to defend bank lending policies such as the approval of home loans with the home taking 40% of the family income. You seem to be making the arguement that this is how it has been done for many years and it is commonly accepted practice and so it is okay. As long as home values and the home buyers income along with it were increasing it worked fine. Recent drops in home values and slowdowns in wage growth, at least in many areas have resulted in these "common" lending practices causing serious problems in our economy. Gimmick mortages like ARMs and other "common" lending practices have hurt many buyers and now that their effects are resounding throughout the economy some of us are down right pissed that anyone would defend these practices. BTW, no sympathy is coming from me for buyers who habitually get themselves into debt trouble.
Jeff

 

[Abreutime]

As for lending now, no offense but I am glad neither you nor Abreutime are running the banks that I own. Right now is a terrific time to be in the banking business the net interest margin are very high because interest on deposits is very low, and credit spreads are wide. For the same reason it makes more sense to buy stocks after they have fallen 30%, it makes more sense to loan money on houses after the value has dropped 30-50%, than after they've doubled. My niece loan is pretty much bread and butter banking, which have been approved by most banks anytime during our lives.

I disagree with your bolded statement, but I don't dispute your assertion that there are profitable loans not being underwritten. These are not necessarily incongruent.

 

[cute fuzzy bunny]

Oh gosh, I'd unsubscribed from this thread when it turned into a "nyah nyah" contest with an absolute moron.

I'm pretty sure these dollars weren't adjusted for inflation. The loss in value would even be greater.

Besides flawed basic reading skills and an interest in making up your own word definitions, you also have no idea how inflation works.

But you did manage to unexpectedly blunder into the actual answer! Good for you!!

The Schiller data and most of rolled up Zillow "report" data is flawed in that it primarily looks at single family homes in metropolitan areas in bubble regions.

This is one of those cases where you need to stop staring at these comparable sales like a stock ticker tape and do a little prairie dogging.

The majority of homes in the US arent in suburban San Francisco, Boston or Miami. They're $110k-130k homes whose value is primarily the construction cost minus wear and tear/depreciation plus a small land value and adjustments for desirable/undesirable features.

There isnt a $250k land/location value bundled in. There was no bubble and no crash.

Building materials have gone up more than 10% since 2006. Labor costs have dropped around 3.5% since then. So your cost today to build a bog standard house in Tulsa, Grand Junction, Jacksonville NC, Champaign and Mobile has gone up around 3-4% a year, every year.

Granted theres a difference between value and current cost. In some bubble areas you're contending with a backlog of foreclosures and unsold new homes, which temporarily is depressing the cost. Until that backlog is removed.

But in most of the US, outside the bubble regions, there are no mass foreclosures. There are no empty subdivisions. So if you sell your house today it'll be worth more simply because the intrinsic cost of building one just like it on the next street over has been driven up by inflations effect on material costs.

For the rest of the country, outside of the small number of morons who paid ~2x the value of a home in some commutaburb an hour away from a bubble city and the idiots who refinanced their house to 100% value in 2004/5 with an adjustable rate partial interest only loan and builders who built 200 homes right at the end of the bubble...things are just ducky.

Either their homes have appreciated against new construction cost, or their value will be restored once the backlogs of distressed properties are resolved.

Some areas and some people screwed themselves and this is all the media wants to squawk about. The victims and the victimizers, the people losing their homes.

The reality is a little better, and its only going to improve.

Lastly, Siamamerican...if your primary purpose going forward is to continue to engage in a pissing contest with me, may I point out that this has historically not been a very rewarding activity and that you're also not very good at it?

Perhaps you'd like to reassess your strategy and try a different one?

 

[Marquette]

Isn't it odd when new members wade in on threads and start battling?

Why, it's pretty much like they're not new members at all.

Not sayin', it's just a weird coincidence I've observed many times over my time on teh intarweb.

 

[clifp]

clifp,
....Tough crowd is right. Some of the folks here are VERY financially savvy. It does seem to me that you are trying to defend bank lending policies such as the approval of home loans with the home taking 40% of the family income. You seem to be making the arguement that this is how it has been done for many years and it is commonly accepted practice and so it is okay. A
Jeff

Let me try this again.
Common lending practices is for a person/couple to put 20% down the bank loans the remaining 80%. The maximum the bank will lend is subject to 3 criteria; no more than 80% of the appraised value of the property, the total installment debt to income ratio has been capped at around 40%, and a loan limit that varies by market set by Fannie and Freddie which is periodically raised. These loans are conventional conforming loans and have been bought and securitized by Fannie and Freddie for decades. The criteria for these loans (other than max size) has not changed significantly over at least the last 25 years. Currently 98% of these loans are being paid on time, which while worse than 99+% were being paid on time a few years ago is fraction of the double digit default rates on the sub-prime loans. My niece's loan is conforming.

So yes I am defending banking practices which have been making banks tons of money for decades. I am not defending "new" lending practices 0% down , 100% Refi, no doc loans etc. Which part of the lending criteria of a conforming loan are you critical of?

Right now is a terrific time to be in the banking business

Abreutime I disagree with your bolded statement, but I don't dispute your assertion that there are profitable loans not being underwritten. These are not necessarily incongruent.

Glad to see somebody picked up on this. It is ugly time to be an existing bank and have to worry about all the assets on your balance sheet. But, I think if you could start a bank with clean slate and positive brand, e.g. The Micheal Phelps & Warren Buffett Olympic Bank you could make a ton of money, because the net interest margin is so large.

 

[siamamerican]

Oh gosh, I'd unsubscribed from this thread when it turned into a "nyah nyah" contest with an absolute moron.



Besides flawed basic reading skills and an interest in making up your own word definitions, you also have no idea how inflation works.

But you did manage to unexpectedly blunder into the actual answer! Good for you!!

The Schiller data and most of rolled up Zillow "report" data is flawed in that it primarily looks at single family homes in metropolitan areas in bubble regions.

This is one of those cases where you need to stop staring at these comparable sales like a stock ticker tape and do a little prairie dogging.

The majority of homes in the US arent in suburban San Francisco, Boston or Miami. They're $110k-130k homes whose value is primarily the construction cost minus wear and tear/depreciation plus a small land value and adjustments for desirable/undesirable features.

There isnt a $250k land/location value bundled in. There was no bubble and no crash.

Building materials have gone up more than 10% since 2006. Labor costs have dropped around 3.5% since then. So your cost today to build a bog standard house in Tulsa, Grand Junction, Jacksonville NC, Champaign and Mobile has gone up around 3-4% a year, every year.

Granted theres a difference between value and current cost. In some bubble areas you're contending with a backlog of foreclosures and unsold new homes, which temporarily is depressing the cost. Until that backlog is removed.

But in most of the US, outside the bubble regions, there are no mass foreclosures. There are no empty subdivisions. So if you sell your house today it'll be worth more simply because the intrinsic cost of building one just like it on the next street over has been driven up by inflations effect on material costs.

For the rest of the country, outside of the small number of morons who paid ~2x the value of a home in some commutaburb an hour away from a bubble city and the idiots who refinanced their house to 100% value in 2004/5 with an adjustable rate partial interest only loan and builders who built 200 homes right at the end of the bubble...things are just ducky.

Either their homes have appreciated against new construction cost, or their value will be restored once the backlogs of distressed properties are resolved.

Some areas and some people screwed themselves and this is all the media wants to squawk about. The victims and the victimizers, the people losing their homes.

The reality is a little better, and its only going to improve.

Lastly, Siamamerican...if your primary purpose going forward is to continue to engage in a pissing contest with me, may I point out that this has historically not been a very rewarding activity and that you're also not very good at it?

Perhaps you'd like to reassess your strategy and try a different one?

Wow, what a rant. Take a deep breath and try to answer the question.

Quote:
Originally Posted by cute fuzzy bunny
nationwide the average homeowner who bought since 2006 was actually up about 5%.


What is the source. You mentioned that you recently read an article that stated the above.

The rest of the post was just drivel with no supporting evidence. I understand, you purchasing a house in 2007, why you wish national home prices weren't freefalling, but the reality is that they are.

Also, 2008 dollars are worth less than 2006 dollars. You are adapt at using the dictionary, so take a look at the definition of inflation.

Remember, deep breaths.

 

[cute fuzzy bunny]

I know that was a lot for you to read and attempt to comprehend all at once and I hear that complex ideas can be very difficult for a lot of people with below average intelligence levels to comprehend.

Try it a paragraph at a time, maybe with a nap in between.

By the way, while dollars are worth less today, the materials to build a home have risen at a rate faster than the rate of inflation. That means that homes cost more to build today in real dollars than they did in 2006.

I didnt need a dictionary, I just had to go to elementary school. And not be an idiot that bought a house in Stockton (the armpit of California) for twice what it was worth.

Value and todays selling price. Two very different things.

I think its become clear to everyone at this point that you're just here to troll. You have a nice life now.

 

[siamamerican]

I know that was a lot for you to read and attempt to comprehend all at once and I hear that complex ideas can be very difficult for a lot of people with below average intelligence levels to comprehend.

Try it a paragraph at a time, maybe with a nap in between.

By the way, while dollars are worth less today, the materials to build a home have risen at a rate faster than the rate of inflation. That means that homes cost more to build today in real dollars than they did in 2006.

I didnt need a dictionary, I just had to go to elementary school. And not be an idiot that bought a house in Stockton (the armpit of California) for twice what it was worth.

Value and todays selling price. Two very different things.

I think its become clear to everyone at this point that you're just here to troll. You have a nice life now.

Quote:
Originally Posted by cute fuzzy bunny
nationwide the average homeowner who bought since 2006 was actually up about 5%.

Come on you can do it. What is the source. You mentioned that you recently read an article that stated the above.

Did someone fib?

 

[siamamerican]

By the way, while dollars are worth less today, the materials to build a home have risen at a rate faster than the rate of inflation. That means that homes cost more to build today in real dollars than they did in 2006.

If the national average was 221k in 2006 and 196k in 2008, the 221k dollars would be woth more than the 2008 dollars. You can go on about material costs, but it doesn't change facts.

 

[jclarksnakes]

Let me try this again.
Common lending practices is for a person/couple to put 20% down the bank loans the remaining 80%. The maximum the bank will lend is subject to 3 criteria; no more than 80% of the appraised value of the property, the total installment debt to income ratio has been capped at around 40%, and a loan limit that varies by market set by Fannie and Freddie which is periodically raised. These loans are conventional conforming loans and have been bought and securitized by Fannie and Freddie for decades. The criteria for these loans (other than max size) has not changed significantly over at least the last 25 years. Currently 98% of these loans are being paid on time, which while worse than 99+% were being paid on time a few years ago is fraction of the double digit default rates on the sub-prime loans. My niece's loan is conforming.

So yes I am defending banking practices which have been making banks tons of money for decades. I am not defending "new" lending practices 0% down , 100% Refi, no doc loans etc. Which part of the lending criteria of a conforming loan are you critical of?

clifp,
...So how is that working out for Fannie and Freddie? Seems like I heard something about them coming onto hard times. And how come I hear about so many people geting conventional mortgages with way less than 20% down? Are those conforming or not? There sure are a bunch of them. My specific problem with the conforming mortgage as you descibed it is that people can have 40% of their income going to debt service. Their company has a bad month or two and cuts back hours and they are in trouble. I appreciate that you are being a good sport here.
Jeff