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Monday, March 31, 2008
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39 comments:
This proves my post yesterday.
http://thehousingbubbleblog.com/index.html
People where talking about fairfax home income being $110k/yr. I said these are the people who took out big arm's loans for 565k homes, only to lose value and be stuck in these loans with no chance of refiance.
This family made 80k/yr and was in a $465k loan and is now screwed.
They took out 2 mortgages of 9 and 11 percent! They must have had horrible credit.
Really people like that I have no sympathy for. They have a history of not paying back debt, they want a home but dont want to save for a few years and rebuild their credit - they just want it now.
Nobody should have ever given them a loan.
"This proves my post yesterday."
An anecdote is not proof. The question on the table was “how could the median family in Fairfax Co. afford $350k?” The answer is they could, because (1) the median family income is $110k and (2) interest rates have been very low for some time. Of course 500k is a different story, but the extent to which families were over-extending themselves in the DC area is still unknown and may not be fully understood for some time.
It wasn't so much a question of whether of median family could afford a $350k house as it was me commenting on how silly it was that $350k was where Razzi put the low end of the market.
$350k is not where the vast majority of "first time buyers" should be looking for a home.
Leroy said:
"$350k is not where the vast majority of "first time buyers" should be looking for a home."
There's that word "should" again ...
Leroy, wasn't it you looking for hard facts? ... "should" certainly sounds subjective to me.
That makes more sense, but that is still an empirical question. If the buyer of interest is single then that buyer can afford more than if the buyer supports a wife and child (holding income and location constant). Then what we really need to know is what percent of buyers reached too far at time of purchase. We have some data on this already given how hard the markets in certain areas have been hit (Herndon, Manassas, Woodbridge, etc.). The book is still out on much of the DC metro area, however.
Leroy, what if you make 200k plus a year? I know many people like that who recently bought first homes in the 500-600k range.
"Leroy, what if you make 200k plus a year? I know many people like that who recently bought first homes in the 500-600k range."
Well, that is where the "vast majority" part of my statement comes in.
Obviously there will be some people that can afford far more but they are special cases.
"There's that word "should" again ...
Leroy, wasn't it you looking for hard facts? ... "should" certainly sounds subjective to me."
Resorting to nit-picking now?
People should buy within their means.
Is that an overly subjective statement for you?
$350k is an awful lot of money for the large majority of first time buyers.
"Then what we really need to know is what percent of buyers reached too far at time of purchase."
I don't know that we will ever get good quality data that answers that completely.
We know that the price to income ratios are way way out of line with historical norms, but that doesn't directly give you an answer to your question.
We also know that at the height of the bubble more than half the home buyers in DC were using interest only loans. That speaks to the bubble mentality that existed at the time, but it doesn't give a specific answer either.
leroy—I think we will actually get some pretty decent data, and it will be forthcoming this year. So far we have seen many foreclosures but they have occurred in areas well outside of the DC-metro core. There are, however, many zips closer to the city have held up better. They have all experienced price erosion (as far as I can tell) but have been largely free from foreclosures. My guess is that 2008 and maybe into 2009 will be key for these zips. As you and others have pointed out, a massive amount of interest-only loans start paying principal in 2007/2008. If many of these loans were taken out in zips that, as yet, have not seen a significant number of foreclosures, then we may be in for serious pain in the metro area.
Harriet,
Another new listing for your discounts column:
8314 ROLLING RD
MANASSAS, VA 20110
listing price: $199,900
last sale: Feb 16, 2006 $470,000
Let us put out the numbers again so people have reference. For 2008, the median household income in Fairfax county is around $105K. From the Feb 2008 vs 2007 MRIS for FFC :
Median Sold Price:
$405,000 $448,900 -9.78%
That is 4x the median income. Having it at 3x would be more affordable and be in line with numbers pre-bubble.
There are many factors involved and many facets to the current problem, alot of which was caused when common sense got set aside for greed. Like the couple that made $80k a year and bought $465K house. I suspect they put no money down and don't know if they had any student loans or the like at the time. Frankly I am sick of some of the creative math that is done to determine how much a house one can afford. I've seen the agents and brokers telling these people they can afford these places. Values were going up at very fast rate than normal and the smart person would have sold after a couple of years and cashed in on the profit of the sale and bought something more practical in there budget. I've personally seen real estate agents push people to make offers. Telling them if they don't make a reasonable or a bit higher offer they will be outbid. Buyers who bought and waited to long to sell while the market was going good or refinance, provided they could refinance. Alot of these buyers didn't sit down and really do there homework with the numbers to see what was more realistic in what they could afford. I remember being told many decades ago, a quick calculation of what someone could afford used to be around 3 times what they made in a year. Now it seems that has changed to around 5 or more times what one makes now. Alot of people, real estate agent, brokers, mortage, etc. were after that quick buck. Well it worked great for awhile, but now the down side is here and they are crying the blues and saying it wasn't my fault. Well there is plenty of blame to go around, and it seems no one wants to take responsibility for the mess they helped create.
The problem is that those of us here are fairly well educated on one level or another. What is surprising is the lack of eduction/knowledge about finances that even non-immigrants have in particular about home buying.
I can't begin to count the number of folks that came to me seeking advice during the boom asking my opinion. Some took my advice, others were hearing promises that they could sell a year or so down the road and walk away with $100K to $250K in equity.
Many were hoping to cash out and move to more affordable areas of the nation. They were looking for their cash cow.
Darren, you have a point about the income needed to afford a home now. Right now I am being told I can do 4x my income on the condo I am looking at.
I would be very happy if I could get it at 3x my income. I would be saving 20% in my MTI! Fortunately because of the bubble the owners have put in over $20K+ of improvements.
If i get it, I will be happy to use 4x my income for this place. That still leaves with a nice nest egg left for any surprises.
As I mentioned in another post here, I consider myself well informed on my choice in this. Can't begin to count the hours that I have spent looking at every detail about the condo. How many hours I spent talking to renters and owners.
Once I go to closing, I feel that I will have all the info I need to make the right choice for now and down the road for what ever life might bring me.
Darren said:
stic in what they could afford. I remember being told many decades ago, a quick calculation of what someone could afford used to be around 3 times what they made in a year. Now it seems that has changed to around 5 or more times what one makes now.
Decades ago there were very high interest rates compared to now.
Also MOrtage interest rate reduction helps out too. Say on $4000 a month payment, you can get back about $800 a month..
bas_madone52 . . .
please let's not go through this again . . .
you cannot put a blanket over the issue and say "plus you get the mortgage deduction" . . . there are MANY additional costs to owning vs. renting. 1) HOA/condo fees, 2) maintenance, 3) insurance, 4) taxes. Once you have added in those additional costs it pretty much neglects most, if not all, of the mortgage deduction-not to mention you must itemize in order to take full advantage of the mortgage interest, and in addition you must find at least 10k (if married) in other itemized deductions or you won't get take advantage of the full deduction of the interest.
The 2-3x your income was a rule of thumb . . .just that a RULE of thumb not set in stone, but a darn good estimate. It was 2-3x your income b/c of interest rates . . . if interest rates were high it was more around 2x if IR were low around 3x. You can't use low IR and mortgage deduction to justify 5x income . . . it doesn't work.
Chip,
The thing is, I have seen dozens, maybe hundreds, of examples of people owning a house for a couple MONTHS to a year and walking away with $100K-$250K in profit...back in the 2004-2006 day. How many of these were savvy investors, fraud, schemes, or just luck, I have no idea. I noticed some trends, mostly by ethnicity: the sellers were almost always Asian/Middle Eastern, the buyers almost always Hispanic. But the fact was, there were plenty of real-life examples of the mythical six-figure turn-around to make people believers.
"I can't begin to count the number of folks that came to me seeking advice during the boom asking my opinion. Some took my advice, others were hearing promises that they could sell a year or so down the road and walk away with $100K to $250K in equity.
Many were hoping to cash out and move to more affordable areas of the nation. They were looking for their cash cow. "
That is what people don't seem to understand about housing. Housing more or less tracks inflation.
That is something older generations seemed to understand much better. They bought houses as a place to live, not as a means to finance their retirement.
Housing is an expense. In the long run you will come out ahead by buying when compared to renting, but you will also come out behind against virtually every other possible investment. It makes sense to buy, but not as an investment.
Lately when people asked themselves "how much can I pay for a house?" they were asking the absolute maximum they could pay before getting over their head.
Why not ask what income ratio you can spend on a car? Or fine dining?
Sticking to a smaller ratio is wise not because it allows you put more money into your lifestyle, but because it allows you to invest more money for the future in something that will beat inflation.
So when you see people working out ways to leverage themselves into houses that cost 4-5x their income it doesn't mean "oh, the old ratios are obsolete! It IS possible!"
What it means is that someone just bet their retirement on housing.
Buying too much house too early in your life is one of the worst financial decisions you can make, especially now in a declining market.
Every penny you spend on housing is going to have to be repaid, with interest. If you play with a compound interest calculator you can see what that money might do if directed towards something more productive.
The better choice is to buy as little house as you can get away with and save aggressively. Let the interest work in your favor for once. Then, later in life if finances allow you can buy a nice big house, with cash.
Of course all this thinking went out the window with the bubble.
gtexxx said: "bas_madone52 . . .
please let's not go through this again . . .
you cannot put a blanket over the issue and say "plus you get the mortgage deduction" . . . there are MANY additional costs to owning vs. renting."
ok ok not to rehash stuff I wasn't here for..
I am looking to get out of my 750 sq ft apartment for $1400/month and get into a townhouse of 2400 sq ft + 2 car garage with driveway.
I'd be looking at around $3600 a month in payment.
It'll definitely free up my cramped apartment life. I hate it. Been doing it since 1999.
There was an article in the post about foreclosure tours in Fairfax, Loudon and Prince William counties. I found this quote interesting:
“Manassas area properties were the last stops. By then, the tour participants had thinned out. Several said they weren't interested in seeing Prince William houses, even though prices were significantly lower. They cited the extra commute, school quality and political tensions over the county's policies toward illegal immigration.
"Most people aren't going for price," Bogenn said. "They gauge by commute time."
I would be curious to see how pervasive this sentiment is as it would go a long way toward explaining why the suburban and exurban markets are taking the largest hits.
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/30/AR2008033002193.html
From that same Washington Post article...
"As a buyer, you can still get in with zero money out of your pocket," she said, adding that banks are so eager to sell foreclosed properties that they are offering cash back to provide borrowers with enough for a down payment and closing costs."
So much for the credit crunch! Cash back with 100% financing? What are these banks thinking?
"So much for the credit crunch! Cash back with 100% financing? What are these banks thinking?"
The exact same thing they were thinking during the run-up, that it is somehow a problem of financing rather than price.
How many times have we heard various real estate pumpers try to argue that creative financing or exotic loans are an answer to unaffordable housing?
This is just more of the same.
I also liked this quote:
"Kellian McIlwrath, a loan officer from Wells Fargo-affiliated Prosperity Mortgage, told tour participants it was the first time in memory that property shoppers could reap the benefits of both low prices and low interest rates."
Can there be any doubt these people are just looking for a quick commission?
I mean low prices compared to what? I guess this loan officer just doesn't have much of a memory...
Doug said:
"So much for the credit crunch! Cash back with 100% financing? What are these banks thinking?"
What's so wrong with this financial arrangement if the buyers are qualified buyers?
"What's so wrong with this financial arrangement if the buyers are qualified buyers?"
Whats wrong with it is when that person decides to walk away because their home is worth less than it is today, you and I have to pay for it.
"Whats wrong with it is when that person decides to walk away because their home is worth less than it is today, you and I have to pay for it."
Exactly, the article makes it plain that many of the participants in this tour were investors looking to make a buck.
What happens when these "investors" find out their house is worth less than they paid?
If these people are so qualified a 10-20% down payment shouldn't be a problem in the slightest. Afterall... prices are low right?
leroy .. .
bravo . . . well said
bas_
I wasn't trying to pick on you at all. As a renter, starting a family and looking to buy eventually (about a year), I get sick of the constant mantra by Realtors, HH, the uninformed, etc, trying to convince it's better to buy vs. rent now. They always end up leaving something out of the calculations. I just expect honesty in the calculations.
It'll definitely free up my cramped apartment life. I hate it. Been doing it since 1999.
Can't you just rent a townhome for significantly cheaper. I know I do.
"Exactly, the article makes it plain that many of the participants in this tour were investors looking to make a buck."
First, that was not at all clear to me. The article quoted a couple folks who were not speculators and are attracted by the low prices. Second, even if some speculators are attracted back into the market, please explain to me how having ANYONE (so long as that person is informed) in the house, even for the short term, is worse than the home laying fallow. Worst case scenario is that the town collects property tax revenue for a couple years, the bank collects some revenues for a couple years, and then it must revisit the problem on A PORTION of these homes in the future.
Here is my concern: foreclosures are a totally different animal than a conventional purchase. As the article pointed out, all these homes are sold as is. I would be worried if buyers again got over-extended because they did not build in an extra cushion for additional repairs and problems that are more likely to occur with foreclosures.
"First, that was not at all clear to me. The article quoted a couple folks who were not speculators and are attracted by the low prices."
From the article:
"Some said they were looking for their first home, others were looking for a good investment, and some were just looking."
Speculators are one of the factors that helped drive the market during the bubble. There is nothing inherently wrong with speculators except for the fact that when given zero money down loans they have a tendency to stick someone else with the losses when things turn out badly.
The fact that there are still speculators trying to enter the market is a sure sign that the market's mentality has not yet completed its reverse.
(Yes, there will always be some serious RE investors even at the bottom of the market, but those aren't the people you are going to find riding around on a foreclosure bus getting lectures on the basics.)
The market's mentality will not have completed its swing until capitulation occurs. As long as there are still significant numbers of people that think things are somehow going to "bounce" the market isn't done correcting.
The bottom will occur when people give up on a market rebound and instant fortunes in real estate and just go on with their lives.
”(Yes, there will always be some serious RE investors even at the bottom of the market, but those aren't the people you are going to find riding around on a foreclosure bus getting lectures on the basics.)”
Leroy—what percent of homes on the market in Loudon and PWC right now are foreclosure or preforeclosure? I’ll bet it’s pretty darn high. If you are an honest buyer in the market for a home there, chances are you are going to have to educate yourself about buying a foreclosure. In fact, you would be foolish not to. As I said, the one thing that worried me about that article is that people would take one L&F tour and think they know it all. Buying a foreclosure is risky. However, the fact that buyers are in that market at all is a good sign. That means that consumer confidence is not totally shot and price has fallen enough to get some folks back into the market.
I am right with you on the bottom of the market. Any buyer--homeowner or speculator--should look at rental prices versus price to own. If those are way out of wack then buying makes no sense unless you are willing to lose money
"So much for the credit crunch! Cash back with 100% financing? What are these banks thinking?"
I have no problem with these terms as long as the risk is being appropriately priced in. As far as I can tell, that was the problem before. When these things were packaged and sold to wallstreet, the issuer put together a public offering statement with a parade of horrors on what could go wrong and why these things were garbage. Problem is, no one really reads offering statements. Instead, they get submitted to the rating agencies who look at them and then issue a letter grade based on how risky they are (AAA, BB, etc).
As I see it, the problem was since these were new products, the rating agencies really didn’t know how to assess their risk properly. Apparently they got a bunch of eggheads to came up with algorithms on how many people will default, how many people will be late, how many will go to foreclosure, etc. and priced them according to these models. Turns out, the algorithms were WRONG – the defaults, walk aways, etc. were worse than they eggheads predicted.
The flip side was, if the rating agencies had assigned the right risk to these in the first place (CCC or below investment grade status) wall street would not have had such an appetite for them. Without the appetite, the banks could not sell them. If the banks could not sell them, they would not have offered them. If they had not been offered, the flippers couldn’t have used them. If the flippers couldnt use them, they would not have driven up prices, etc. etc. etc.
That said, if these products are still being offered, my guess is the market has now priced in the appropriate amount of risk (maybe they only offer them to people with 750 credit scores, potential high earners at the beginning of their career, granting above market rate interest to subsidize the cost of others defaulting etc.) I have to believe that since the market for garbage loans is really dried up, to the extent they are making these loans anymore, they must have a better handle on the risk. If so, there is (supposedly) little chance we will have to bail out a future wave of funny money loans going bad – at least I hope that is the case.
Impressive price drops:
10231 TRELLIS CT
MANASSAS, VA 20110
Beds: 4
Baths: 4.5
on market 137 days
previous price: $570,000
new price: $297,000
Other price reductions:
This one has actually been for sale since last summer, when it began around $600K, I think:
14000 GARROW CT
BRISTOW, VA 20136
Price: $484,900
Feb 06, 2008 $519,900
Feb 28, 2008 $504,900
Mar 28, 2008 $484,900
Down the street, on the "crazy culdesac":
10044 THREE SISTERS CT
BRISTOW, VA 20136
Price: $398,000
Feb 16, 2008 $539,000
Mar 29, 2008 $398,000
Other two houses for sale on culdesac are still at $499,900 and $649,000.
Then there's this one, a favorite of mine, for sale forever, falling apart structurally, full of garbage and rotting furniture, a rusty exercise bike on the sagging front porch, that's been moving down in tiny increments:
10796 AVONDALE DR
MANASSAS, VA 20111
Price: $412,000
Nov 08, 2007 $499,000
Nov 28, 2007 $487,000
Dec 18, 2007 $475,000
Jan 11, 2008 $460,000
Jan 30, 2008 $445,000
Feb 20, 2008 $430,000
Mar 11, 2008 $421,000
Mar 31, 2008 $412,000
This next house clings to the side of a cliff--I shudder to think of accessing it in the winter. The listing now says it is under "auction terms:"
6051 ANSLEY CT
MANASSAS, VA 20112
Price: $350,000
Sep 28, 2007 $519,900
Nov 13, 2007 $459,000
Jan 23, 2008 $436,000
Mar 24, 2008 $350,000
This last one is fascinating. It was for sale two years ago, when we first moved here. I saw its listing change to "under contract" last September, but it never left the market. They have had at least 10 open houses since then, several with front-page-of-the-Post-real-estate-classifieds-section billing. I've been to several, since I can walk to it, and each time, it's like the realtor has never seen me before: "You should buy this house." (me:) "It's out of our price range, but we like it." "Well, there will never, ever be a price reduction, so you might was well buy it now." (me:) "Well, it's been on the market for a couple years now." "And they will never, ever reduce the price. So put an offer in writing now!"
9104 TRUSLER CT
MANASSAS, VA 20110
Price: $650,000
Jul 11, 2007 $681,950
Aug 23, 2007 $700,000
Jan 08, 2008 $680,000
Mar 01, 2008 $664,950
Mar 28, 2008 $650,000
How long can they hold out?
Wait--another one:
9508 Vinnia Court
Manassas, VA 20110
current price: $315,000
original price: $400K something, I forget, maybe $450K.
Under contract now.
This is a couple culdesacs down from the one on Trellis Court, that dropped from $570K to $297K.
I am thanking my lucky, lucky stars that an investor underbid us with cash and snagged a house in that neighborhood that we had bid on. It had previously sold for $625K in 2005, and we were happily offering $380K with closing costs paid when someone offered less, but had cash. The only other house that had sold in that neighborghood in the last year had been asking $475K when it sold for $400K, so we thought we were safe. That was in January. Another $100K below that, only a couple months later...whoever would have guessed. And this is a fine neighborhood, with bike trails to the nearby school, a mile away from Old Town and the VRE. Thank you, God, for saving us from ourselves.
Keep waiting Tabitha - !!
Wait until Sept, Oct & Nov
When all the (repeat) sellers realize they've "lost" another Spring market and aren't selling, again. (This will be like the 3rd "bad" Spring RE Market...)
You'll see some good realistic price reductions then!!
Tabitha, You are right many were able to time things right. I was one of the lucky ones that did well when I sold 3 years ago my TH in Herndon. That neighborhood started to turn a month after I sold.
I just advised the folks that asked me that we were in unrealistic times. I told them just not believe everything they were being told. Most of my friends and associates are much like me - hard working but being priced out of FFX county.
I am telling them now is the time to look carefully at the offerings out there if they are looking for a roof over their head.
Those were the values I was raised with about a home. After 3 years since I sold, I am just a hair away to buy again.
Just never believed in taking a chance in real estate given the experiences that some of my neighbors had in the 1990's.
But Life is filled with shouda-couda- wouda's. Hell I could have taken and doubled my money if I bought Apple stock back in mid '06 and and sold early this year.
Bubbleboy, you have a strong point about buying foreclosed properties. That is why I settled in on condos for a number of reasons. With due diligence, one can make a better guess IMO as to whether it a buy or not.
Lucky for me the condo association has a pretty decent website for me to research ahead of the HOA Disclosure Documents under the contract terms.
It has taken me about three weeks to get to the point of ratification in the next day or two. The finals docs may hold surprises; but I doubt it. I spent a lot of time in the last three weeks talking with both owners and renters.
Leroy, speculators will always be there when the media paints a picture of doom and gloom. There are those of us that are making an educated guess that we will be able to sell at a modest profit in the next few years if we need to.
I think that we need to get past the idea of quick profits in any investment.
Tabitha, You are right many were able to time things right. I was one of the lucky ones that did well when I sold 3 years ago my TH in Herndon. That neighborhood started to turn a month after I sold.
I just advised the folks that asked me that we were in unrealistic times. I told them just not believe everything they were being told. Most of my friends and associates are much like me - hard working but being priced out of FFX county.
I am telling them now is the time to look carefully at the offerings out there if they are looking for a roof over their head.
Those were the values I was raised with about a home. After 3 years since I sold, I am just a hair away to buy again.
Just never believed in taking a chance in real estate given the experiences that some of my neighbors had in the 1990's.
But Life is filled with shouda-couda- wouda's. Hell I could have taken and doubled my money if I bought Apple stock back in mid '06 and and sold early this year.
Bubbleboy, you have a strong point about buying foreclosed properties. That is why I settled in on condos for a number of reasons. With due diligence, one can make a better guess IMO as to whether it a buy or not.
Lucky for me the condo association has a pretty decent website for me to research ahead of the HOA Disclosure Documents under the contract terms.
It has taken me about three weeks to get to the point of ratification in the next day or two. The finals docs may hold surprises; but I doubt it. I spent a lot of time in the last three weeks talking with both owners and renters.
Leroy, speculators will always be there when the media paints a picture of doom and gloom. There are those of us that are making an educated guess that we will be able to sell at a modest profit in the next few years if we need to.
I think that we need to get past the idea of quick profits in any investment.
Lance said...
“What's so wrong with this financial arrangement if the buyers are qualified buyers?”
psssst, hey Lance, those foreclosures you see in the news….those buyers were “qualified” at one time too…..
I am so frustrated! I'm a first time home buyer, have excellent credit, have my pre-approval letter, have a long history of working with the same firm, have the earnest money, and have put four offers in for homes in Prince William County. Each time I have been out bid!! Can you belive that!! Today, after waiting for a week on the offer I submitted, I was told that someone else I had submitted an offer and the realtor was taking that offer! How can they do that!! Yet, the offer the realtor is accepting still does not have an approval letter from the bank or the earnest money to put down. How can a realtor make this decision? I thought if an offer is submitted they (the realtor) needs to submit it to the bank within a certain time frame. And they are to submit all offers to the bank. It's up to the bank to make the decison WHICH offer they want to accept. I think the realtors are the ones messing the market up! I'm so angry...I can't belive that this is happening!
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