Lemme get this right... (sub-prime mortgage stuff)

[Black wallnut]

The sad thing it that consumers fears can cause a recession, especially in an economy so heavily consumption driven as ours. In my local there has been an unprecendented new housing boom but the bottom is quickly falling out with many of these new houses not being sold. Add to that the historic fact that there is often a recession near the end of two term presidential adminstrations. The FED makes it a point to manipulate the economy with the money supply so that may save us short term but I also think that there will be some rather long term realiangment that will hurt some. No mater the economic conditions there will be those that profit and those that go bankrupt. I only hope for my own security that those that I work for are the winners in this game!

[Hellrazor]

Housing is dead here. Over 1000 new homes were announced 3-4 years ago. Not one has been built. There is a $300k house about 1/4 mile from here. It has been on the market a year, they already dropped the price and the only person there during an open house is the realtor. There is a house for sale about a mile away. They want $250k for it.. it was bought for $140-150k right before the huge price bubble came along. They expect to almost double up over a 7-8 year period?? They will be dead in the water too.

[Tom Slick]

anyone remember the recession in 1977? 1987? 1997? now 2007, see a cycle?

one issue is when a house goes back to the bank it sits vacant for awhile, quite often being vandalized. when you get a couple of those houses in your neighborhood your property value goes down.

A big issue that most people aren't catching is that is wasn't necessarily banks or lending institutions like countrywide making the bad loans. in the past 6 years everyone and their brother got into the mortgage broker business. those small brokers make sub prime or improper loan but then turn around and sell it. they are only in the business of making and selling loans, never actually holding the note. A company like coutrywide comes along and buys loans on the open market. those loans have very little info attached to them, especially if they have changed hands a couple of times. mix that with a market that seems to be fat dumb and happy and it all is falling apart.

I think we are in an adjustment period, prices will continue to drop until they normalize again.

2 years ago, it was warned on the national news, that housing prices where severely inflated, riverside county, CA being the worst at 25%, now guess the spot hit the hardest by the real estate adjustment?

[JimD]

Housing prices where I live are stable or rising but perhaps more slowly than a couple years ago. I also find it hard to understand where the big problem is. To some degree, I think it is just the news media trying to find a reason for us to watch. I assume there are areas where houses have gone down in value but I'm pretty sure it isn't most of the country. If you have enough equity and don't need to sell, why would you care?

One of the guys in the office was talking about one his daughters buying a house. To avoid having to pay for mortgage insurance she took out a second mortgage. Apparently the lender suggested it. I hope she can affort the payments - seems risky to me. I did not comment, however. Not my kid.

Jim

[Ed62]

There was an article in the local paper this morning about housing. It said the real estate market, locally, has been pretty flat, but real estate values continue to rise a little. That seems a little contradictory to me. If you can't sell a home, how can the value rise?

Ed

[cgallery]

To some degree, I think it is just the news media trying to find a reason for us to watch.

There is some truth to this. Many of today's "issues" are media driven. And be careful when reading/watching/listening to those "experts" interpret what is going on. Most have a major in journalism and if you're lucky a minor in the field in which they report (business, econ., etc.).

[vaking]

[QUOTE=Russianwolf;311539]Another way this can depress the market is rather simple.

1) Banks tighten lending based on the way things are going now (people defaulting on loans they should have never been given).

2) Builders can't sell the homes they are building as there are now fewer people who can get loans (see 1)

3) Construction workers get laid off as home construction slows (see 2)

4) Loans made to construction workers who could afford their homes are now being defaulted as they have been laid off (see 3)

5) trickle trickle trickle.....

[quote]
Let me continue this thought:
If builders can't unload new homes - there is an oversupply of houses and existing homes are losing value.
If house values drop - home improvements stop. Contractors get no new business, plumbers, carpenters are sitting idle.
Big box stores (home improvement warehouse - remember Lowe's slogan) are losing sales and value of their stock.
It is difficult to understand from the outside how much of our economy is linked to housing values and real estate activity. You get a better idea after you spend some time in one of related industries. Once upon a time United States was industrial country. Now most manufacturing is abroad and majority of jobs left are related to things you can "customize". The house is the biggest thing we own and can customize.

[LinuxRandal]

There was an article in the local paper this morning about housing. It said the real estate market, locally, has been pretty flat, but real estate values continue to rise a little. That seems a little contradictory to me. If you can't sell a home, how can the value rise?

Ed

Ed, I deal with that issue with my location. Other factors that affect the value of your house:
Its location and developments around it.
Cost of living (inflation)
Even, weirdly enough, replacement costs.

[LCHIEN]

There was an article in the local paper this morning about housing. It said the real estate market, locally, has been pretty flat, but real estate values continue to rise a little. That seems a little contradictory to me. If you can't sell a home, how can the value rise?

Ed

Around here its the easiest way to raise taxes.
The local board controls home valuations. Real estate taxes are tied to property values. TO get 10% more revenue, you just have to raise valuations by 10%.
Now there is some hokey about valuations having to be realistic. But if you raise them then the homeowners have to protest and show recent comparable values that show lower valuations. Only some percentage will protest because it takes a lot of time and work, and if there are not a lot of sales, there's little evidence to say the valuations are too high, since they raised everyone's valuations.

oops, I hope I'm not being too political here...

[Russianwolf]

Around here its the easiest way to raise taxes.
The local board controls home valuations. Real estate taxes are tied to property values. TO get 10% more revenue, you just have to raise valuations by 10%.
Now there is some hokey about valuations having to be realistic. But if you raise them then the homeowners have to protest and show recent comparable values that show lower valuations. Only some percentage will protest because it takes a lot of time and work, and if there are not a lot of sales, there's little evidence to say the valuations are too high, since they raised everyone's valuations.

oops, I hope I'm not being too political here...

property value (per appraisal) and assessed value (for taxes) are totally different. The government controls the one, but the other is based totally on recent sales info of comparibles.

Now the goverment is supposed to assess value based on market trends, but they don't have to do it often (DC didn't reassess values for over 10 years, then realized they were throwing away revenues by not doing it)

How can sales be flat and values increase? If 10% of homes are selling as opposed to 25% the year before then sales would be considered pretty flat. But if those 10% that are selling are selling for steadily increasing amounts, then values will continue to rise.

Same can work the other way. If I have sells of 120 homes (10 per month) in the area as opposed to 12 (1 per month) last year, then sales are way up, right. But if those sales are going for steadily decreasing prices, then values are falling. Say of the homes sold in Jan were around $200k and the prices were dropping $5k per month. The same home valued at $200k in January would be worth $140k in December.

[BasementJunkie]

The biggest problem we have now is the combination of subprime mortgages and securitization of mortgages. In recent years, banks have gone from holding their own mortgages to 'bundling' a bunch of them together and selling them as investment assets ('securitization'). This worked really well as long as the market was rising/stable.

However, with the housing bubble, you had unscrupulous/ignorant lenders and buyers, mostly buying what they couldn't afford, at variable rates. When the rates went up, they couldn't pay their mortgages and went into default. When a mortgage goes into default, the value of the mortgage (an asset traditionally held by a bank) goes down. Since a lot of these mortgages have now been 'securitized' and sold as investments, the value of those investments have gone down.

The problem is most investors (including the large institutions holding these mortgage-backed assets) don't know what they have. The number of subprime loans in default is higher than it has ever been, but even those mortages amount to a tiny fraction of the overall value to all the mortgages held by banks and others.

Banks, investors, and politicians are going crazy because nobody really knows what they own, and this uncertainty is causing a couple of problems. First, it's causing the value of all housing to go down, because nobody wants to be the one holding an asset in default.

Second, the banks were burned because they didn't properly account for the risk in the mortgages now causing problems (writing mortgages at low rates to risky buyers), so now they are acting in a very risk averse manner and overcompensating in how much they are raising rates/denying credit to new buyers. This makes it almost impossible to get a mortgage at a decent rate.

All this has a chilling effect on the housing market, which was the one thing that really held up in the post-9/11 & bubble stock market scares. Also, since the home is the largest investment people have, they are also scared.

What will probably happen is banks will get a better idea of what mortgages are where and stop panicing. Once they realize they're not making as much mortgage income, they will relax back to 'normal' patterns, rates will stabilize, and people will be able to buy and sell.

If you don't need to sell a house now, I sure wouldn't. If you can make your payments, you really shouldn't worry about it, since the value of your house will get back to normal and back to historical rates of appreciation.

My only worry is that loudmouth politicians will get in and make this worse rather than better. (Too bad the Hyppocratic Oath doesn't apply to them --> 'first, do no harm.')

[germdoc]

Wow--lots of verbiage on this issue.

My .02--of course we can blame the "dumb" buyer who got in over his/her head, but lenders and sellers have hyped home-buying out the wazoo. They gave a loan to my sister, for instance, and now she's having trouble and will probably let them foreclose. In the past they have offered me mortgages on expensive homes that would take up over 40% of my take-home pay; fortunately, I didn't bite.

As the saying goes, follow the money. Who stood to make all the money off risky loans? The banks, the realtors, the middlemen. And it has been government policy for many years to emphasize home ownership as a basic right of being an American.

So, IMO it's like prostitution--blame the john, blame the prostitute, blame the pimp, blame the culture that tolerates and encourages the crime, etc., etc. But don't just blame the john.

[JR]

The biggest problem we have now...

Great description, Junkie.

[LCHIEN]

both the banks and the borrowers got greedy.
The banks saw an untapped market and went hungrily for it.
The borrowers either were stupid (some of them) but I think the majority were greedy - they saw an opportunity to get a house with no money down and a rising house market meant an unlimted upside if they could just turn the house before the interest rates went up. They knew the risks, but with no money down they had limited downside. Wrecked credit perhaps but we've never been so credit forgiving in our history before.

[davethegolfer]

Oil,deficits and subprime

A few comments on some comments by others. First, oil prices are not determined by the oil traders, over 95% of the world oil reserves and production is owned and controlled by governments - not oil companies. Oil companies are typically allowed in foreign countries to obtain ownership barrels by spending hard dollars on exploration and development. They get barrels in exchange for expenditures. Over half of the production is bought by them at market prices from the government owned companies. Traders can only effect short term small swings since they can't take any long term trading risks. I helped to set up many of the operations and know how they work and their effects on the market. The main reason for the oil price increase is that the world oil market is denominated in dollars - no other currency is as liquid as ours plus we are the largest importer. As the Federal Reserve System lowered interest rates, the dollar began to fall and some disintermediation occured as foreign investors began to move to other currencies due to our lower return. this put further pressure on the $ and the decline continued, further raising oil prices as the OPEC members were able to raise prices to largely offset the reduced buying power in world markets of the $'s they receive. There are two major problems underlying this problem. One is that as a nation, due to our tax code, we have lower savings rates than many undeveloped countries and all of the developed countries. Our tax code encourages consumption, not savings. The second is that our energy imports, both oil and gas, are significantly higher than they should be due to environmental restrictions. Of the energy prospective areas left in the US that contain oil and gas, over 85% are off limits due to environmental restrictions. This goes well beyond ANWAR. It includes the Atlantic seaboard, offshore Florida, most of the Rockies, and offshore California.

One last note, as the dollar has declined in world markets, unlike one comment earlier in the thread, our trade deficit has shrunk significantly since there is more demand for American products due to lower prices. This is but one of the numerous "self correcting" features of the world economy. Every action has a reaction and a consequence that tries to move the system to equilibrium.