Absolutely. It almost should be illegal because you are borrowing the full purchase value of the home from the bank, but you get to walk away with cash that really belongs to the bank. It is the same with those deals where they throw in a car or a vacation or any other time that is not part of the house. This makes housing prices look artificially stable. The "perks" are not reflected in the true value of the property itself.
I was very naive and could not understand why would the banks make loans which will most probably go into default. Then I learned about huge mortgage market where banks package loans and resale them for PO/IO derivatives. And this whole situation started making much more sense. Once bank makes a loan, then repackages and resales it, theyâve got their $. Who cares about the rest.
Oh contraire, the proper way to look at housing these days is as a storehouse of commodity that can be monetized/liquid via the instant ATM effect of home equity loans. Those homes have enormous amounts of concrete, steel, copper, PVD, asphalt and oil products embedded within them. So the value of the home is legitimately the replacement value which is often much higher than current prices. Eventually people are going to come around to realizing the housing is one of the best commodity plays on the planet in an era of competing global resource scarcity and prices are going to have to shoot up again. The new twist is in the liquidity value of the home that one can get from purchase incentives and home equity loans. Some people leverage that liquidity to make better returns than the banks do elsewhere. And with gov subsidizing losses and risk via tax credits on mortgage rates and investment losses its really a terrific way for owners to compete for higher returns elsewhere with underwritten risk. If banks want to take on the risk of people defaulting and leaving them with 20 cents on the dollar in extracted equity that is their business. If really concerned just short the mortgage lenders who you think are most liable to getting into trouble and hoping that people decide to abandon housing in favor of living in their large SUVs and hummers they got as alternative housing as incentives to purchase the home. TS
That's one of the oddest rationalizations I've ever seen for the housing boom. Homebuilders are still making money building homes and selling them at market prices. That makes it improbable that the replacement value of housing stocks are higher than their market value. Most of the replacement cost of a house is labor, not commodities. Of the material cost, you mostly have commodities like wood, gypsum, concrete, and glass which were inflated by the homebuilding boom, a demand-side shortage. The few homebuilding commodities which may be facing genuine supply-side shortages, such as copper, plastic, and asphalt, are a tiny part of the cost of a house.
I don't know what market area you are in but Real estate is my forte and what I made a lot of money in. I am a broker (when I am not trading equities). Around here in central FL homebuilders have SHUT down production since they are bumping up against their old inventory built for lower costs 2-3 years ago. That is the effect I am talking about. True labor costs have come down some due to lack of new construction and hungry subcontractors. But there is such a high risk in new construction that it is insane for developers to start new projects until slightly older inventory is resold in the resale market. The one thing that is keeping labor down, in addition to the lack of new building is the flood of cheap Mexican labor all over the country. Most construction crews do not speak English and the only real skilled laborers we see anymore are the electricians. BTW: That trend could reverse depending on the governments action on illegal immigration and if fines start being handed out. I disagree that material is not a large component of const. There is a LOT of concrete, concrete block and oil based (asphalt shingles esp). product in homes. Condos also suck up a lot of steel. Those things are not going down in price since I believe we are firmly in a long term secular market in those particular commodities (e.g. China, Russia, Brazil, India etc. have just started their industrial revolutions and growth phases). Around here what developers are doing to compensate for higher material prices is increasing density on small lots and lowering livability quality. That means "as new" homes only 2-3 years old are the sweet spot in value and are conforming to all the most recent hurricane construction codes. In other words the best deal in America right now is stuff that is on the market today at a discount (due to lack of current demand) to what it would cost to build today. This is especially true on luxury waterfront condos since that land is unattainable and has many EPA/environmental restrictions on buildability. What boggles my mind is why the large home builders do not simply go into local markets and cherry pick cheap inventory to remove it from market and corner local markets. They could carry these at low carrying costs and slowly sell single properties off and drive prices up for much less risk than starting new projects. TS
No Mortgage Payment for 12 Months http://www.rismedia.com/wp/2007-01-...-announces-no-mortgage-payment-for-12-months/
Homebuilders are shutting down production because there's no demand and huge oversupply. It has nothing to do with commodity costs. You've got the tail wagging the dog. Let's inject some facts into this discussion. I tried to estimate how much of the value of my house is in raw commodities. According to the building cost estimator at www.building-cost.net, direct material costs are 37% of the building cost of my house. According to Zillow.com, building cost is only 41% of the total appraised value. However, materials like windows, appliances, and even plywood involve costs other than the raw commodities that go into them. So, very generously assuming that half the material cost is attributed to raw commodity prices, that means that only 8% of the value of my house is directly sensitive to commodity prices. If there's anything supporting home values it's labor, not commodities. Immigration reform would have a big impact on homebuilders. Labor has a much bigger share of the cost of a house than commodities to begin with. And while commodities have already had a good run for the last 5 years, every indiciation is that labor is underpriced and due for some gains, particularly with the new Democratic majority in congress. Martin
Aw, shucks, I hate it when you hit me the "facts". But here is another perspective to consider as to "why developers are canceling projects and going idle. The truth is there is still a huge demand for lower cost homes. I am not talking about the granite everything large McMansions that were all the rage over the last 3 years. No, I am talking about your everyday basic "blue collar" specials for small/young new families trying to get their kids in school and still come out ahead at the end of the week after expenses while employed in conventional low pay retail and service kinds of jobs. We are selling a lot of homes in the $150K -$240K price range. So its not so much a lack of demand as it is a lack of ability to qualify for a loan. The higher tier home sales that I normally sell ($500K and higher) have gone totally flatline. The market has stratified into tiers of indifference and need. Basic good low cost homes are still in huge demand. Its the more luxury and vanity oriented properties that are not moving. Here we have what I call the "buzzard effect" as wealthy and greedy individuals try to out wait each other on price points. Its like a bull/bear standoff with the bears wanting to see the bulls slowly bleed to death to rock bottom prices and losses before they come in to steal a good deal. They literally are like those buzzards sitting on the fence waiting for something to die. But with this class of buyer/seller its still a vanity/ego thing and that ultimately will result in a cave in just as soon as we get a minor hiccup upward in sales volume or prices. Then it will be the herd mentality again. It's only a matter of time. The market is essentially sold short and there are not too many more negative news events possible to drive prices down substantially below this level. New construction costs set the lower threshold and in the upper tier markets I firmly believe we are very close to the bottom and an inflection point in sentiment change. T'was fun chatting, TS
You are all making this way too complicated. Homes sales are based on mortgage payment affordability. Rates are still very very low right now, and have been trending down lately. Joe average isnt even aware of all the crap we talk about, all he cares about is what his monthly payment is, nothing more. Super low rates + insanely low lending standards + creative financing = housing boom, period, the end. Then momentum took over and the market went way passed what it should have, and more buyers got sucked in by euphoria and dreams of making 20% a year on their homes (welcome bag holders). Now the fed is keeping rates low as long as they can hoping even more buyers will come out of the woodwork and keep buying so we get a nice flat landing. Only problem is, the stats are just horrible and you cant keep the rates low for 10 years straight. Everything is lining up against them. Those rates will have to eventually climb. Then look out below. Huge supply and zero affordability = price sky diving. Im moving out of my luxury apartment for a nicer cheaper one. More and more desperate condo owners are appearing with lower rents trying to save their own asses now. Building up a huge keg of dry powder for a big purchase in about 2 years from now. Unless there is a real fast panic, and then maybe in 1 year. But I think we go down in slow motion.
"there are not too many more negative news events possible to drive prices down substantially below this level" We dont need news events. That is not what is going to make the market move lower. At least in california. Interest only loans are starting to reset, so monthly payments are going up. When the Fed finally starts raising rates, a certain percentage of the 85% of buys who got interest only ARMS are going to get hit HARD. Too many people are just getting by here with their insane mortgage payments, it wont take too much to shake them out, and then the downtrend accelerates.