This is the problem in So. Ca. .... with engineering and technical industries moving out I am wondering who is going to be buying all these homes ... the brokers selling to each other ?
I can confirm, and it is just amazing to witness. Add to the equation an incredibly superficial and flashy culture down here and you have a lot of people who have no business anywhere near a $650,000 home signing crazy mortgages so they can look like they have better than the next guy. It feels sickly overleveraged. I am no real estate guy, but it makes one think about the effect on the market when those adjustable rate mortgages rocket and a percentage of these middle-income people realize they can't afford their half-million dollar homes after all and need to bail.
Probably not much since anyone in property in Ca for more than 6 years has more than doubled their paper worth..... most san diegans are in the same situation as people all over the metro areaas - LA/Orange County, Bay Area. Essentially most of them cant afford to transact their properties and move up. Once they transact their huge gains they need to move and with the property runup not only are they looking at taking a large note to cover costs but their ongoing costs from property taxes are much larger. The hidden dilema for the counties is that the property tax burden due to the extreme price appreciation will take some time to unwind and this will continue the mometum to drive businesses and families from these areas.
Part of the reason I ask is because there seems to be a huge migration of people from So Cal to states such as Arizona, Nevada, and Texas. If prices were to decline in So Cal, wouldn't that further increase the rate of people leaving to other states... may even drive UP prices in those areas while So Cal is going down..
The time to short will be when the Negative Amortization "option arm" mortgages begin to go bad. These loasn offer a teaser rate of 1% to 2% and defer interest for a period of time. A lot of these are being used by borrowers who assume value can only go up and that they will be able to refinance if their payment goes up. These loans have a 5 year or 110% of original loan size recast point. When this point is reached the monthly payment due more than doubles. Currently by making negAm minimum payments it will take a buyer approximately 18 to 26 months to reach the 110% threshold. When this is reached 2 things will happe. First we will see lots of foreclosures and a drastic fall in prices. Second companies Washington Mutual, Countrywide, Golden West Financial, and expecially small REITs like Impac Mortgage Holdings (imh) will be sereously impacted. They are currently booking all of the defered interest as revenue, but the one time chrages they will take when these loans do not perform and they are unable to recoup the money owed on the load will devastate their balance sheets. The major lenders and the mortgage holding REITs will be a great short at that time. I believe that this will all begin to play out around Q4 06 to Q2 07. I am curently a loan officer at a mortgage brokerage in the DC market and can see the rise of these loans and the neighborhoods which will be effected.
That is amazing. Thanks for the heads up. How can they book interest due in the future as current revenue?.
The reason for lenders being allowed to book the deffered interes as income lies in a combination of the terms of these exotic mortgages and some kind of loophole in accountg rules. The borrower has the option to pay either: A. Minimum payment with defered interest B. Full interest due C. All interest due + some principal The lender can thereby book the new debt as revenue since this has been interest generated by the loan in their portolio. They are probably no longer able to book the defered interest once the loan goes into default (wether the default is a full foreclosure or simply late payments.) However most borrowers are grossly unaware of how much defered interest they are accumulating, at what rate, the fact that this rate compounds and has been increasing, and the consequences of loan re-cast. These laons have been more popular in California and also heavily marketed in Florida. Here in DC/Baltimore they are common especially among the less educated poor English speaking members of the Hispanic community. A lot of these people have been mislead into buying <2000sq ft homes which are >30 years of age and in average condition for >350,000 using non traditional documentation levels with no income verification and high instances of fraud, or interest only sub prime mortgages in the 7 to 8% range which will adjust up to the 9% to 10% range in 2 years. There is also a large problem here with a lot of high paying mortgage and real estate jobs dissapearing when the boom busts. There will be a high foreclosure rate and I believe approximately a 33% drop in property values. Home builders will be effected due to lower sales and profit margins but not to the same extent as lenders with a high percentage of NegAm exposure in their loan portfolios, they will be in the deepest trouble as they will suffer from a slowdown in business and a need to restate prior earnings.
does anybody think that with the NYSE inevitably opening earlier later on this year, the value of real estate on long island might be affected?
DR Horton is down over 11% this week alone...how are you "managing" your position? Does "Convert" have a stop loss??? Toll Bros down even more, almost 13%. OWP