Don't Buy Housing Bubble Propaganda

TRA 86 hit just as over building in apartments was heating up, couple that with a huge drop in oil and the SL's were doing joint ventures with developers and everything came crashing down at once.

The 80's were probably the low point for real estate. A lot of laws were changed from that period of big excess.

No financial institution survived in Texas!! It was a depression, not a recession. The Houston area lost 250,000 jobs!! Then it just spread out all across the Sunbelt to include Austin, Dallas, Phoenix, Denver, Atlanta etc etc. The city of Houston went from 1985 till 1995 without any significant new home construction at all.


At that time Texas did not allow branch banks, did not allow foreclosure on "refinance" of home mortgages. Most home loans were kept in house as opposed to being sold "upstream" to intuitional investors.

The real estate market is now a much more sophisticated and fluid financial market with a world wide reach to liquidity. For instance, a Japanese bank can buy a pool of Texas home mortgages that are traded like a bond.

I think most of the tax benefits of real estate are now in the owner occupied home ownership part of the business. One can accumulate up to $500,000 tax free selling one's home, not counting the deduction of mortgage interest.

There would be fatalities in DC if that were taken away, LOL. And, I don't mean Congressman voted out of office. I mean Congressmen taken out of their office and strung up to the nearest tree.

SteveD

 

No he said that tax cuts should be accompanied by spending cuts not that we need to raise taxes.

John

 

I think most of the tax benefits of real estate are now in the owner occupied home ownership part of the business. One can accumulate up to $500,000 tax free selling one's home, not counting the deduction of mortgage interest.
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Perhaps a major structural change making bubble calling based on traditional rent to value ratios misguided.

(By the way I said perhaps. I did not say it is different this time.)

 

re: "spending cuts"....NOT LIKELY.

On front page of CIO magazine, 6/15/2005:

"Since 9/11, FBI has gone thru FOUR CIO's,
WASTED $170 million on a FAILED case-file system,
spent $400 million on computer equipment,
yet agents STILL NOT EQUIPPED to do their job better"

Bottomline:
Govt profligate spending and waste at an all time high....
ominous long term.

 

=======
John;

That also is a pattern of his that repeats ;
tax cuts /spending cuts speech and like mr Feldstein has published for years, tax cuts = greater gov revenue.

As far as ''unsustainable trend'' ;
you could just as easily say that about every trend ,
but I dont approach trading that way.

However ,RE arould my county is marked up too far past appraised value to buy, so its too late right now for me to buy,even forclosures are too high priced for me.

Dont buy the media use of highly inaccurate word ''bubble'';
but IBD did mention last week a major NYSE homebuilder had in past,
''condo crashes''
so perhaps condo prices are ''unsustainable''

 

I have a question.

Can anyone name a single instance of a howeowner or small business receiving a notice of adjustable rate mortgage rate increase?

Let's use a short time frame - during this decade..

Geo.

 

one of 2 things is going to happen. rents rise a ton, or house prices fall. no way they continue to diverge to this degree. see a chart...

 

to prior question in thread: "Can anyone name a single instance of a howeowner or small business receiving a notice of adjustable rate mortgage rate increase?"

I guess you're trying to prove that the pendulum is about to reverse direction... or do you think that interest rates are going to sub-zero?

 

When Federal Reserve Chairman Alan Greenspan told Congress on June 9 that "the apparent froth in housing markets may have spilled over into mortgage markets," he was surely talking about mortgage markets like San Diego's.

BusinessWeek Online has obtained the first-ever measurement by metro area of the increasing popularity of interest-only mortgages, and it shows that San Diego rates No. 1, by number of "IOs" in 2004. In metro San Diego, 47.3 percent of all mortgages required interest payments only in their early years. The survey covered the top 50 metro areas in the U.S. and measured by the total number of mortgages issued. Atlanta, San Francisco, Denver, and Oakland, Calif., followed close behind San Diego. Milwaukee, Wis., turned in the lowest number, just 4.8 percent interest-only loans last year.

Frenzied market
The data comes from LoanPerformance, a San Francisco-based real estate information service. Although LoanPerformance also has statistics for the first few months of 2005, those numbers are too small to make them reliable.

Greenspan isn't the only one worried about the sharp rise of interest-only mortgages, which accounted for less than 2 percent of all loans as recently as 2001. The concern: that they're helping supercharge already overheated housing markets. Because no payment of principal is due in the early years, interest-only loans offer lower monthly payments (even though the interest rate is slightly higher) than conventional ones. Based on the initial monthly payments, borrowers may be able to buy a more expensive house than they might otherwise afford.

Trouble is, when borrowers do have to start making principal payments — after anywhere from 2 years to 10 years — the monthly payment could jump by up to 50 percent, or even more if the index for the adjustable rate rises as well.

Under surveillance
BusinessWeek Online has also obtained new data from Fannie Mae and Freddie Mac that lend credence to the LoanPerformance numbers. They show that, in April, going by dollar volume, interest-only loans accounted for 35 percent of the adjustable-rate mortgages in securities sold by Fannie Mae and 39 percent of the adjustable-rate loans in securities sold by Freddie Mac. That represents a sharp increase for both giants, which buy mortgages from lenders and then repackage them as securities for sale to investors.

As recently as January, 2004, only 10 percent of adjustable-rate mortgages in securities sold by Fannie classified as interest-only. And Freddie didn't sell any securities with interest-only loans at all until last December. (Amy Crews Cutts, deputy chief economist of Freddie Mac, provided the statistics to BusinessWeek Online.)

Freddie Mac — which uses a computer model to decide which mortgage loans to buy from the original lenders — says it views with skepticism the rise of interest-only loans. "It is something that we are paying attention to very closely," says Cutts.

Arms race
With mortgage rates remaining low despite Federal Reserve rate hikes, home prices keep going up. The Office of Federal Housing Enterprise Oversight says single-family home prices rose 12.5 percent from the first quarter of 2004 through the first quarter of 2005. Nevada led the nation with a 31.2 percent increase.

For people worried about a bubble, the increasing popularity of so-called option ARMs look even scarier. Option ARMs have teaser rates as low as 1 percent and give borrowers four different choices of how much to pay every month. The minimum-payment option is so low that it may not even cover all the interest due. Whatever isn't paid gets added to the principal, a phenomenon called "negative amortization" that many credit-card users know all too well.

Cutts says Freddie Mac doesn't buy option ARMs from lenders — but she believes there's a "secular shift" toward them and away from ordinary interest-only loans.

Economy can take it
Keith M. Schemm, a mortgage broker in Santa Clara, Calif., says option ARMs are "pretty dangerous loans to do" for many families. "The problem," he says, "is there's such a frenzy in the marketplace to buy a home."

In his testimony before the Joint Economic Committee on Capitol Hill on June 9, Fed chief Greenspan voiced his own concerns about the increased use of interest-only loans and their variants. Despite his worries about mortgages, in the end, Greenspan maintained his view that even if home prices decline from their current elevated levels, he believes the economy can withstand the fallout. Here's hoping.

BusinessWeek Interest-Only Loans across the U.S.
Rank Metro area Interest-only mortgages as share of total, 2004
1. San Diego 47.6%
2. Atlanta 45.5%
3. San Francisco 45.3%
4. Denver 43.4%
5. Oakland, Calif. 43.1%
6. San Jose, Calif. 41.1%
7. Phoenix-Mesa 38.3%
8. Seattle-Bellevue-Everett 37.2%
9. Orange County, Calif. 37.0%
10. Ventura, Calif. 35.3%

 

IO loans don't forbid principal payments. They simply give one the option.

Only the banks know how much of the IO loans are being serviced by the borrower as IO only.

I converted a 30 yr fixed to a 6 month ARM IO that began at 2.75% and is currently 4.75%, but I maintained the same total payment. I covered the refinancing costs in 4 months.