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Monday, July 14, 2008
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21 comments:
if mortgage lending reverts back to 20% down and loans < 3X gross income.
so hypothetical family earning 200K will max qualify for a 600K loan, but will need to come up with 150k downpayment for a 750K house.
1) how many families can make a 150K downpayment?
2) how many families earn 200K??
3) how many families have both 1) and 2) above????
The 600 to 1 mil market will stall with no one able to buy and no one able to sell...
if mortgage lending does not revert, expect income taxes to rise significantly; especially for the higher income tax brackets...
4) And no other debt?
Buck,
Wrong paradigm for that market segment anyway. On what planet did it ever make sense for 3/4 to 1 million dollars to be a starter home? I don't think that was the case even at the height of the boom. That's the move up the housing ladder market. Those loans should always have been no more than 60% LTV. In which case, sure you need a $200k income for a 1 million dollar house after rolling in your equity from the sale of your previous house. But that's reasonable. The problem for that segment of the market is that the huge bubble equity that people were counting on to move up into it is evaporating and 30 year loans by themselves don't get you equity that fast.
I don't see what this has to do with income taxes unless you mean through loss of property tax when the prices in this range revert closer to the mean.
Federal government, one year ago: "We are not a backstop for Fannie and Freddie, and they should not rely on the government to bail them out. Mark our words."
Federal government, today: "Yes, we are bailing out Fannie and Freddie, but this is the last time we are bailing anyone out. No other entities should count on the government for a bailout and we mean it. Mark our words....no really, we mean it this time."
All this is exacerbated by sellers, who much prefer buyers with the tiny down payment and big loans. Everyone else (who wants to put down a lot and borrow a little) has equity in a home that they have to sell. Even in this buyer's market, most sellers won't even consider a contingent sale. If you were a buyer with a lot of equity in a house, in a buyer's market, would you want to risk
-- selling your house for a low price then being forced to negotiate from a position of weakness (buy quickly, or have to find and apartment, then move twice) or
-- IF you can get financing without first selling your house, which is highly unlikely -- buy first then potentially be unable to sell your old house and carry two mortgages (or a huge new one if the old one is paid off)?
Who is left to buy these homes?
Ace,
Scenario 1 is what one always normally has to do, every time someone needs to move for a job. That's why closing times are in the 45-90 day range. The right thing to do is to put your house on the market for an appropriate price, start looking for your move-up house, but don't put in an offer until you have a confirmed buyer for your old house.
But really, needing to close quickly isn't much of a weakness in this market as long as there are houses out there that you want and can afford.
I do agree though, that seller would prefer the simple clean transaction, but as terminator-x has pointed out, it's not up to them right now.
Ace and Cara-- contingent sales used to be pretty much the norm until the bubble years. My parents suggested it to my brother and sister-in-law when they bought their 'move-up' house. Unfortunately they didn't listen and ended up begging for a loan when the first house didn't sell. Caused some hard feelings when my parents refused.
cara,
Let me clarify
1)never said that 600k-1m is a starter home.
2) how many faimilies have 150K for a downpayment (that is have 150K in equity in their existing house and/or other assets)
3) as fontain pointed out, the feds will ante up and that is why income taxes will rise.
so either the feds grant a huge bailout or we have only seen the tip of the iceburg
Cara, it's not that easy, in this market, for reasons people have articulated here. Many "move up" houses are still overpriced and don't suit the needs of the buyers. And don't forget that many people have assistance from employers when they move for a job.
But when you are not moving to take a new job but instead to find a house you like better and are willing to pay more for, why should a buyer who doesn't have to do so subject himself or herself to that kind of risk and cost? If the whole point of moving is to find a house that you really like, why in a buyer's market would you put yourself in such a risky position? Most people won't, in a buyer's market. And the related point is that sellers are being really unrealistic (and hurting themselves) if they refuse to return to the "old days" as Sarah describes. They can work with the buyer to structure the deal to reduce risk to themselves (with kick out clauses, with having their agent specify the asking price, etc.). The seller whose house has been on the market unsold for months risks very little to have to market it as contingent-kick out for a short time -- when there were no other bidders anyway.
If Buck is right, sellers of expensive houses are going to have to be more flexible and work with people who can truly afford their houses.
$150k is peanuts if it's equity in your existing home (in a metro area) so long as you bought in a "normal" time and lived in it for 10 years. My friends had $150k equity when they sold their puny 1960s house in commuter-hell-land deep connecticut. And that's after paying off their outstanding credit card balances with the proceeds. Sure, they don't also make anywhere close to $200k a year and so only got a $450k condo in Reston when they moved here. But part of my point was that $150k only looks like a lot of money when you have to save it on top of paying rent, not when you're deep into your loan and the principle payment starts being larger than the interest. Thus, 20% down is a starter home down-payment in my opinion. Sorry to jump on you.
Ace, Sarah
I agree, a contingent kick-out is a conservative option in this market for the move-up buyer to use. And given how in the past it was often close on the old house one day, close on the new house the next, I can see how that would have often have been facilitated by that contingency. However, it's even more conservative to just sell your own house first so that you know exactly how much money you have to work with. Because I think at the moment you will see a lot of these contingencies fall through when the first house didn't sell for as much as was expected. Not that that really hurts anyone... But yes, sellers will have to become more open to these normal processes that exist to lubricate the home-buying system.
Cara, a person can always estimate conservatively on the proceeds expected upon selling the house. We'll have to agree to disagree about whether it is conservative to sell a house without having a place that is the right house at the right price for you, in this market--and that's assuming that you can find a buyer willing both to pay you a reasonable price and agree to give you a reasonable time to find a new one. I think it is all too likely that you will find yourself without a house and have to deal with twice the upheaval. I think that is a major reason why you see so few interested buyers in the market in the desirable neighborhoods. Sellers of move-up homes have been spoiled by all the high income, no down payment/funny loan couples.
If financing returns to the pre-bubble days, other selling conditions likely will have to as well, to respond to the decreasing # of people who really do have the wealth and income to pay for the relatively costly houses, particularly since prices still are much higher relative to salaries than in the past.
ace,
Yup, I can agree to a truce on that.
The high end is going to stagnant even more than it has already for the reasons you stated.
It's a very emotional issue for me, because while here I am looking for an affordable starter home for myself, I am the only person in my family or friends who is in this enviable position. My best friend is trying to move back to Boston, and trade her 1 million dollar home in Rockville for a 1 million dollar home in the extended Cambridge area. She has an absolutely gorgeous home, with a great location, and the house next to hers sold just 3 months ago for 1.175k, but I'm just worried that there are no buyers out there for her. And I can't talk to her about it because I'm so far on the other side of the fence, and this is like her 5th house and umpteenth real estate transaction, so the last thing she needs is advice from me. Although, mentioning to her trying to get a contingent from a seller in Boston, is not a bad idea...
But it's just wrenching being a housing bear, when my mom would like to downsize, but move to a more in-town location in Cape Cod, and my one sister is HELOC'd to the max in western mass, and the other is underwater out in Oakland, CA.
Cara-- I hear you. My sister and brother-in-law bought a very modest house well within their ability to afford. It's close to the metro, a nice neighborhood, and until just this fall the prices had been rising steadily since they bought in 2005. Now all the appreciation's gone and they'd have to bring at least $50,000 to the closing if they wanted to sell. And it looks like it's only going to get worse. They're now in their 60's and I'm wondering if they're ever going to be able to retire.
cara,
1) no offense taken.
2) "Sure, they don't also make anywhere close to $200k a year and so only got a $450k condo in Reston when they moved here."
how much is that $450k condo worth now? $300K??
3) exactly my point. your friend d/n have $200k income and c/n afford a $600-$1M house.
My point is that there are very few buyers with BOTH 20% dwn pymt AND income qualificaiton for homes in the upper housing bracket.
Sure most of the sellers in these ranges can sit and wait. And wait they will do. So prices may not fall that much for the desirable neighborhoos, but sales will slow dramatically.
Someone who must sell may need to consider special financing arrangements. (ie a second loan between the buyer and seller..you heard it here first)
Sarah and Cara, I'm sorry to hear about your friends'/family members' difficulties. I hope their situations will be resolved well. And Cara, I hope you will find a great starter home when you are ready to buy.
Buck
What is it worth now? Hard to say. They actually are the perfect candidates for the housing bailout bill because they have a 10/1 ARM and must have lost a significant amount of their equity. But for them, owning a house before did do its job of acting as an "inflation hedge", or in this case bubble hedge allowing them to move to a new job despite the housing insanity. They love their condo, it's huge, has cool 70's style in a good way, and a great location (for them), and they really are planning on living there for 20+ years raising their 2 kids. And they can afford it, just not as comfortably as one might like. How much are they selling for now? How much at the true bottom? I don't know. 5 bed 3.5 bath condo in Reston off Wiehle. I think its better if they just don't look.
3 and a half:
Yep, we'll soon see exactly how wrong the bubble logic of "everyone around here is wealthy" turns out to be.
I'm working to 150k down payment for 600k home.
But that 600k should be 500k.
its still not at 2004 levels..
here's a new hard luck story:
http://www.wtopnews.com/?nid=226&sid=1418100
Cara: Did you know that most homesellers are not accepting "with contingency" offers? That is, "I won't buy your home unless I can sell mine" offers?
New home builders will offer them - but only for new homes that are not selling well.
My husband and I have a nice home, and sometimes think of trading up. But for the homes that we have looked at in Fairfax county, no one will accept contingencies. Probably because due to the market there is a high probability that our house would not sell. There are two homes on our block that have been for sale all spring and summer - and this is a nice neighborhood.
Joyrenee,
Interesting evidence. Terminator-X had looked up the other day the percentage of contracts with contingencies, and they are getting close to the 50% level. So it's interesting that you're not finding that to be the case. My point was that in this market it made more sense to be sure you can sell your own house first before moving up. Partially because I don't believe there is a lack of good houses on the market to move up to. Ace were advocating basically to wait until the sellers are more desperate and will start accepting contingencies as better than nothing. And your evidence jibes with Sarah's that in a normal market these are common-place (but we're not in a normal market).
I think there may also be a factor of how serious they felt your offer was. I may have misread your meaning, but it sounded as if your current home isn't on the market. To me, that's a very different case than accepting a contingency from buyers who you can see have their home on the market at a reasonable price to sell.
bass,
sounds like a self-created hard luck story...
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