C'mon guys, cut the personal attacks. There was 30 year fixed, then there was ARM, then there was interest only mortgage but here comes 40 year loans! Keep the bubble going any way you can. Just amazing if you ask me. Fannie Mae introduces 40-year loans in test January 16, 2005 BY ALAN J. HEAVENS KNIGHT RIDDER NEWSPAPERS Here is an idea that has gone around and come back again: the 40-year mortgage. Fannie Mae, the nation's largest source of home financing, is test-marketing a 40-year mortgage, using 21 federally insured credit unions around the country as guinea pigs. By limiting the test market to credit unions, Fannie Mae aims for an audience of low- and moderate-income buyers. Spokeswoman Sandy Cutts said Fannie Mae looked at programs in light of its "American Dream" strategy, designed to create homeownership opportunities for such buyers. Credit unions usually serve professionals such as teachers, police officers and firefighters, people who often cannot afford to live in the areas where they work. Cutts said there are no data yet indicating whether people are opting for the 40-year mortgage. The test-market results will be examined and a decision on whether to continue - and maybe broaden - the program will be made. A 40-year mortgage allows a person to buy more house for the money, but it has disadvantages. For one thing, it takes longer to build up equity in your home. For example, extending the mortgage payments over 40 years instead of 30 years could reduce the amount paid on the principal each month by more than half. For another, depending on the size of the mortgage and the interest rate, adding 10 years to the loan might result in the home buyer paying more than $100,000 extra in interest. Fannie Mae's timing of the pilot project was a bit off. When it was launched a year ago, "interest rates looked as if they were heading up," Cutts said. But fixed rates stayed under 6 percent for most of the last 12 months and it remained a refinancing market. The most recent Mortgage Bankers Association of America survey showed that the refinancing share of all mortgage activity is increasing, closing in on 50 percent of the business. Forty-year mortgages have been around since the early 1980s, when 18-percent fixed-interest rates were squeezing consumers out of the real estate market. One-year adjustable mortgages with teaser rates of 16 percent did not offer much of an alternative. Extending a 30-year mortgage over 40 years served to reduce the high interest rates and adjustable 40-year mortgages made payments even lower. But interest rates today are one-third of what they were 20 years ago, and economists say it is unlikely they will ever be as high again. Demand has been so low and so few 40-year mortgages are written these days that the Mortgage Bankers Association of America does not even keep track of them, said spokesman Matthew Royse. It is not that the 40-year mortgage has not been available - if you wanted one. Washington Mutual, one of the nation's largest mortgage lenders, has continued to offer them, as do many smaller lenders. Other major lenders - Wells Fargo and Countrywide, for example - do not. At least not yet. "Countrywide is constantly looking at consumer demand when evaluating loan products, and the 40-year mortgage is something we have on our radar," said executive vice president Vijay Lala. Peter Buxbaum of Arlington Capital Mortgage in Bensalem, Pa., said he hadn't done one in ages. "There are so many better mortgage products on the market," he said. Some critics have suggested that 40-year mortgages will encourage people to borrow more money than they can handle and that if the longer-term mortgage comes into widespread use it could help boost home prices even higher. "As with any mortgage, the 40-year isn't for everyone," said Cutts, the Fannie Mae spokeswoman. "Our risk assessment and credit standards haven't changed. Mortgages will continue to be granted on a person's ability to afford them. "Our studies have shown that people don't remain in their houses for the life of their mortgage," she said. "After five to seven years, they either refinance or move." A homebuyer's perceptions play the biggest role in the kind of mortgage they go with, Buxbaum said. "You have to remember that people don't look at the long haul, but at the size of the monthly payment," he said. "If the 40-year lowers that payment to make the house they want more affordable, then that's what they'll do. The fact that they'll never pay the mortgage off doesn't matter." As long as interest-only loans remain "the No. 1 alternative to the plain-vanilla 30-year fixed mortgage," said Fred Glick, president of USLoans.net in Philadelphia, he does not see much of a future for the 40-year mortgage. Interest-only loans, which have been around since the 1920s, allow buyers to increase the amount of money they can borrow without raising their monthly payments. For example, with a 30-year fixed-rate mortgage that has an $800 monthly payment, some of that $800 goes to the principal. With an interest-only mortgage, all the payment goes to interest, so a buyer can borrow more. Some interest-only mortgages come with slightly higher interest rates. In addition, the interest-only feature does not last for the entire term in most cases, Glick said. Fannie Mae's InterestFirst mortgage has two terms of 15 years each. The first is interest-free and the second fully amortizing. But again, people who take out interest-only loans are not building equity. "One of the appeals of these loans is that people expect that their houses will continue to appreciate in value, as they have done over the last several years," Buxbaum said. "So devoting $100 or so to the principal each month doesn't mean that much." Moreover, mortgage rates that have hovered around 5.75 percent since the summer, "make the money very cheap" even if the interest-only rate is a bit higher, Buxbaum said. The problem will come if the houses do not increase in value. To some people, the plain-vanilla 30-year mortgage still looks good enough. Like Buxbaum's father, who just refinanced. He is 87.
40 year mortgages - that's terrific. I guess we'll really know that we've reached a peak in this 'bubble' bull when Bush starts pushing for perpetual mortgages as part of his ownership society. After all, land doesn't depreciate, and if perpetual bonds were good enough for the Brits, why not for the American consumer? Another tidbit for everyone here, and a counterweight for Build-dude to chew on: Ed Hyman, the founder of ISI　research, has been saying that rates are going lower and that we've only seen the beginning of a housing bull market. Ed is the most followed economist on Wall Street. I mean , SERIOUSLY followed. (Ed doesn't post on message boards - one has to PAY serious $$$ to get on his client list.) There remain lots of long-only fund types who buy/follow the argument and they won't be so quick to change their minds. We still need to see a sea change. My bet is that $70-80 oil this summer ought to get the ball rolling.
Glad you brought that up BlueHorseshoe. I heard Ed Hyman speak recently and if I recollect correctly he said real estate was in the 5th inning. Say, I wonder if Hyman knows the correct size of a 2X4? OldTrader
>>>>To the rest of you guys: this is going round and round nowhere here. Blue H, Ratboy, OWP and others have already said it like it really is. The END. Why beat a dead horse. You guys are right. My 35 yrs in this business says trust yourselves and don't listen to the other tripe. Preserve your wealth. Those other guys are going where Risk way outweighs Reward. What you should be discussing is how to move and preserve your money. Forget the if....>>>>> Well said Billbuild. I would like to thank you for sharing your wisdom as for relatively young guys like us, it is difficult to remember the downturns in the RE markets. These are cyclical businesses and if incomes are not going up and rates are moving higher eventually the major correction will be very ugly. The virtual wealth created by the low interest rate unconscious heavy borrowing will lead to a major foreclosure frenzy in the very near future imo. I think people who are buying RE at these levels have the same mindset of of the lemmings that bought CMRC, FMKT, or other internet stocks in FEB 2000 and held it..
Just so you understand, I have never been that interested in the actual "hands-on" aspect of the building process. How many 2x4's, how much concrete, type of carpet, etc. Having been in the real estate business since 1970 in one of the most active markets in the world, I am probably the most capable person on this thread to speak on the subject, including anyone who builds houses. I have been an active commercial real estate broker in Houston which is the 4th largest city in the US and also, as many of you may not realize, does not have any ZONING!!!! Not part time, but full time all day, every day. Houston is also one of the most creative, innovative markets in the world. I did one of the first deals that was an apartment development financed by bonds, passed through a city council, thereby rendering them tax free or the equivalent of a "muny". At the time, it was very necessary as we were in a very high interest environment (16-18%). This made the front page of the WSJ regarding a new method of financing investment real estate. Houston has been the target of almost every real estate company in the world since the early 70's for several reasons. We have very large growth, OIL, and an abundance of buildable land. Almost all, if not all, of the major real estate players in the world have been here. A lot have invested money here, some came, looked and did not invest. The movie Urban Cowboy, really got them coming here. I went for a period of over 5 years only dealing with Europeans. Movie stars, celebrities: Johnny Carson, Buddy Hackett, Charles Bronson, Wintrop Rockerfeller all had major real estate investments here. Gerald Hines, one of the largest office buildings developers in the world, is a local. Weingarten Realty Co., REIT is large shopping center developer. Camden Property, an apartment REIT are local guys. Sam Zell, Helmsely-Spear, Trammel Crow were all here in the early-mid 70's. If you have to ask who they are, you have made my point. Zell said in a recent interview that "Houston is a trader's market" meaning you had better be quick and smart. No room for error as we have a brutal market because so much undeveloped buildable land serves as a low barrier to entry. Daytrading: Block Trading: Any one remember them??? Had big glass enclosed offices in the Galleria, where the public could stand and watch the traders going at it like crazy, LOL. Momentum Trading? Local guys. Sold to Etrade and now run Velocity Trading. All Houston. Sorry I ramble on but when someone questions my creditability or qualifications I have to stop and explain exactly who I am and what I have done. DONE, not talked about. I take no offense if you don't agree with me on my prognosis but I do take offense when my qualifications to speak on this subject are questioned. SteveD
Thanks for posting some of your qualifications. Basically I think it has become clear that Billbuild believes that he alone has the skills necessary to analyze the residential real estate market. And what are those skills? He's been a builder for most of his life he says.....an occupation that has endowed him with certain crucial information like the true dimensions of a 2X4! Most of the investors I know hire guys like Billbuild to handle elements of the building process. OldTrader
Notice how I said compared to the insider sales at techs during the bubble. A few million shares is not a mass exodus.
Good post about SB/Lima. Just a few things to consider about SB that didn't show up in the article (note I am extemely biased since I own many properties in the area). I'm saying this so that you all have some perspective on SB because it is different from many so-cal areas. 1. The median income are for those working in SB but not necessarily living in SB. The fact is most people commute into SB for work from much cheaper areas - areas that are 1/4-1/5 the price of SB if you drive 30-40 minutes north, south or east. 2. A lot of people who move/live here do not work here. They work in LA or travel a lot or have/make money that would make even the top hedge fund managers envious. 3. There is a large market in the 5-20mil range and believe it or not, the county's figures for appreciation in the last few years were 10-12% consistently per year and some local areas saw little appreciation. IMO, 10-12% is relatively modest and not as crazy as some make it sound. I beleive the market here is relatively stable and certain people make it a point to pick on one of the most exclusive areas in the world (this area has always been unaffordable, even during corrections) for the purpose of an argument. Mike