patrick.net

Yeah, Portland, Oregon was below average in our use of subprime loans but above average in our use of Option ARMs and Alt-A. Would love to see specific stats re: Portland's deliquency rate on those two items though just find stats stating 40% deliquent for the nation.

Yeah, Portland's unique, just like everyone else.

" how can anyone believe that crap when everything is propped up artificially,"

As former CA Gov. Grey "RED" Davis, said in a CNBC interview, 'The Real Estate Industry has displaced both Hollywood and High Tech Silicon Valley as top ranking Industry in California'. He was looking at ways to keep prices high as well. Another reason we were lucky to get rid of him.

It is in the best interests, of many vested parties to keep prices up or make it appear that way. I don't blame for people moving out. But so are our other industries as they simply adjusted to the economic costs.

http://www.doctorhousingbubble.com/the-truth-about-option-arms-pick-a-pay-mortgages-and-alt-a-loans-looking-at-wells-fargo-bank-of-america-and-jp-morgan-we-are-in-the-eye-of-the-469-billion-toxic-mortgage-hurricane-and-silence/

Good article...

The funny thing is that this "top ranking industry" is wealth-sucking not wealth-producing, when talking about existing housing stock. Even new housing and refurbs are a form of consumption and not truly accretive capital investments.

Tax policy is completely bass-akwards. We should tax RE capital gains up-the-wazoo, same thing with ground rents (unimproved value) of commercial properties. Instead, many commercial properties are on the tax rolls at mid-1990s valuations, or even lower. 'course, that's unpossible given how stupid we are.

Great article, it looks like mid 2011 my family will start looking to buy....Patrick, what do you think?

"many commercial properties are on the tax rolls at mid-1990s valuations, or even lower. ‘course, that’s unpossible given how stupid we are."

While residential property is assessed based on purchase prices. Commercial Property also carries heavy tax burden. Not only will the state tax land/building (real properties) but they go after new improvements and personal properties. That includes existing and new cubicles, furniture, Computer HW/SW, Office Equipment. Ever see $ 50,000 to 200,000 Property Tax bills ? A small company may pay up to Half Mil to Million in property tax alone in 10 years. And I done plenty of 571 filings.

"We should tax RE capital gains up-the-wazoo, same thing with ground rents (unimproved value) of commercial properties."

We already do after the $250K deduction the rest falls into 35% Fed and over 9% on State. Nearly half!

If anything we, have heard countless reports how the banks are NOT modifying loans.

Congress is stuck on Sub-Prime and haven't yet even touched on Alt-A.
As for ALT-A we already heard how several members of Congress have already lost their
homes due to Alt-A.

With interest rates still low folks should have been able to refi but what happens when banks now want a dp or equity in the home for the refi to occur? What about PMI? What if the refi was still too much of a monthly? What happens when folks don't want to refi and plan to walk since the home might have lost much value?

My brother finally sold his home via short sale though he tried to get a loan modification and he got the run around and what was realized is that he needed to be behind on his payments to qualify for the mod programs. So he falls behind. Well, that created another entire mess. He's been lucky to get out with his sanity intact.

I found this site to be useful: http://data.newyorkfed.org/creditconditions/

How many folks were paying the minimum (less than interest only) on an Pick a payment/Option ARM which would lead to a balloon payment after so many years? I would guess speculators fall into this category in hopes of selling the property before the collapse...and boy did we have lots of those in Portland's condo market!

This one isn't much better.

Updated April 2009:

http://healdsburgbubble.blogspot.com/2009/05/reset-chart-from-credit-suisse-has.html

And here is another thought process...

Recast vs reset:

From the Healdsgurg Bubble blog

But interest rate resets don't pose much a problem for those with Option-ARMs when rates are low. They can continue making a minimum payment that only adjusts upwards by 7.5% once a year. The real "payment shock" comes when the loan is recast (i.e. becomes fully amortizing over the remaining term of the loan). This occurs after a contractual time limit (normally 5 or 10 years) or, if due to negative amortization, the loan value increases to 110-125% of the original principal of the loan.

Leigh says

he loan value increases to 110-125% of the original principal of the loan.

Exactly, And its the same people with credit bills around $20K... up to their eyeballs in debt.

These people pay the minimum because thats all they can afford, even 10% increase (doubtful) could push them over the top....these people you speak of still faces underwater mortgages, large credit card bills, job losses, even if they can afford the recast, many are going to walk. Banks can't keep shadow inventory hidden forever. eventually they will have to sell or risk these abandoned homes falling into disrepair. Do we have real data on how much of a % hike these mortgage payments are going to be when they recast?

The housing market started to tank NOT when people started to reset, NOT when people started to lose their jobs, but when the banks pulled the plug on refinancing people out of their problem. Sooooo many of this garbage is from people who'd been floating for years. That's your built up inventory. Insolvent investors have been flushed out.

but it’s NOTHING compared to watching a teaser rate jump from 2.9% to 9% like happened with much of the sub-prime market.

technically I believe subprime never had access to such low rates. That's more Alt-A, people with good credit histories who got adventurous.

subprime borrowed the down-payment too, at astronomical rates.

@knewbeter - excellat post

their backup plan is to walk away and rent.

The backup plan as I understand it is to refinance. When I was approached by Wells Fargo for an interest only loan with no money down, I asked what happens in 5 years when the interest only period runs out. I was told I would be able to refinance. That's not much of a plan as mortgage rates were already incredibly low. People got duped and won't be able to pay when the time comes.

Back up plan is already being utilized...dipping into 401K and other retirement savings to save the house. Also, not contributing to retirement is a big issue.

What's scary about Portland is that we have a large share of Alt-A and Option ARM's, we didn't drink much from the subprime bowl, though.

I don't think the Fed is going to raise rates until we are definitely on solid ground and that's not gonna be clear until the home buyers credit expires and the housing stabilizes and U6 numbers get down to around ummmm? 12%?

One huge aspect that we aren't taking into consideration is how housing problems will be viewed. Right now, we're essentially in year 1 of our problems, where people are starting to THINK about what to do, vs just running around.

In another 2-3 years we're going to have specialists in this area. We will also have a potential shift in how this is viewed in terms of a social acceptance. If walking away from a loan because it was underwater/a mistake becomes truly acceptable, we could be in for a serious world of hurt. Right now people might feel too ashamed, some might have no choice, and others say "it's a business decision..". If all three line up and say walking away is acceptable, it could become pretty interesting.

What "specialists" might come out of this could be interesting too. Someone has to figure out how to make a lot of money on keeping people in their homes. Someone will figure out a system for them to keep them.

I ain't no kinda expert like some of y'uns but I think there are tons of loans in the bay area (la la land) that gots people paying like $2500 on a $800,000 note, that changes in some kinda way I don't unnerstand in 2010 or 2011. Like sumptin' 'bout them having to like, 'fully service the debt' or such. Like, I think they hafta start payin' like they had a reg'lar loan so they stop addin' to the debt.

But like I say, I don' know much about this stuff.

The sky has fallen as far as it is going to fall.

The bottom is behind us for the lower third of the market.
The middle market is bottoming now.
Higher end home prices will keep slipping during 2010.

With all the wild government spending and Fed printing of money, inflation is coming. The lower end market has been rising for a year now. We will never see those prices again. Ever.

There is more pain remaining for many. But, the end of the world has passed.

... better buy now or be priced out forever.

Zephyr says

The sky has fallen as far as it is going to fall.
The bottom is behind us for the lower third of the market.

The middle market is bottoming now.

Higher end home prices will keep slipping during 2010.
With all the wild government spending and Fed printing of money, inflation is coming. The lower end market has been rising for a year now. We will never see those prices again. Ever.
There is more pain remaining for many. But, the end of the world has passed.

There is a lot of speculation and fluff in this post but it does not address anything about the massive government intervention that will expire at some point, increasing shadow inventory, terrible unemployment, and upcoming alt-A option ARM recast/resets. In the long run, I don't see housing as a good investment due to babyboomers retiring and downgrading to smaller homes and nursing homes.

Markets always overshoot - especially on the upside. The exuberant fools drive prices to wild levels. And the lenders become exuberant too, giving money away, thinking there is no risk.

On the downside, the overshoot is mitigated by bargain hunting investors (real investors, not the bubble fools) who buy with cash and hard-nosed rationality. Currently these investors are buying up the rentable properties, making it difficult for first-time buyers. Prices are rising from the depths of despair.

I am one of those investors. I was buying rentals in the 1980s, selling in 1989. Buying again in 1998 to 2003. Selling in 2006. And now I am buying again.

During the bubble, the fools were those who thought prices would never fall.
During the crash, the fools are those who think prices will never rise.

Serpentor, The various problems you mention are temporary, and not new to this cycle. They will pass. However, you stated: "In the long run, I don’t see housing as a good investment due to babyboomers retiring and downgrading to smaller homes and nursing homes."

This is a very real problem. The really big houses will feel this effect first. However, this process will not be significant until the boomers are in their late 70s. The average boomer is about 53 today - so we have more than 20 years before this occurs. There will be another full boom/bust cycle (or two) before this begins to be an issue. In addition, the population will grow by enough to offset this effect entirely by then. So demand will hold (but not grow) at that time.

Over the last 30 years demand grew significantly. Homebuilders thrived by supplying ever bigger homes to meet this growing demand. 20 years from now there will not be as much growth in demand, and homebuilders will have to lower their expectations. But there will be buyers for the existing inventory.

Zephyr says

Prices are rising from the depths of despair.

With an assist from the ever-helpful "3.5% down" FHA, $700K limits, and 4.5% fixed money. That'll support any market.

Edit: I maintain an interest in Tokyo Real Estate, and was puzzled by the sky-high valuations there. Then I saw their 2.5% loan rates, and I Understood.

Bap33 said: "better buy now or be priced out forever."

I am not saying that at all. Only that we are at the cyclical low.
As the economy recovers the interest rates will rise. Prices will also rise.
What we are seeing now is as good as it gets.

Zephyr says

Markets always overshoot - especially on the upside. The exuberant fools drive prices to wild levels. And the lenders become exuberant too, giving money away, thinking there is no risk.
On the downside, the overshoot is mitigated by bargain hunting investors (real investors, not the bubble fools) who buy with cash and hard-nosed rationality. Currently these investors are buying up the rentable properties, making it difficult for first-time buyers. Prices are rising from the depths of despair.
I am one of those investors. I was buying rentals in the 1980s, selling in 1989. Buying again in 1998 to 2003. Selling in 2006. And now I am buying again.
During the bubble, the fools were those who thought prices would never fall.

During the crash, the fools are those who think prices will never rise.

The problem is that prices have not come down to rational multiples of rent or income yet. These "temporary" problems we are discussing are huge drivers in prices. By your definition, the great depression, Katrina, 9-11, are all "temporary problems" as well. With a leveraged purchase like a house, the entry point can either make you rich or break you.

You claim these factors are "not new to this cycle", where in the history of the mortgage market have we seen zero down liar loans, alt-a/option ARM time bombs, massive fraud, CDOs, historically low interest rates, etc etc?

take a look at Japan, their real estate prices have not recovered from the boom of the 80s. What makes you think the biggest bubble in the history of the US will be over in just 2 years, especially when half of all the doomed mortgages have yet to be addressed?

Zephyr says

What we are seeing now is as good as it gets.

Wake me up when *nominal* wages rise. It's my thesis that wages are going to be under pressure for the foreseeable future. *Especially* in the still expensive (but non-Fortress) areas.

(fwiw, I think any enclave-like market will hold its own and will in fact respond to inflationary pressures, since people with $$$ -- professionals -- tend to have pricing power in an inflationary environment -- it's J6P that I see tatooed and screwed going forward)

Serpentor,

Yes. The serious past problems you cite were very serious, but they were not permanent.

You said: “With a leveraged purchase like a house, the entry point can either make you rich or break you.”

I agree. That is my point - Timing is very important.
Getting it right is financially rewarding.

We have had serious mortgage problems in prior cycles.
The details are different as we find new ways to make old mistakes.

During the 1980s bubble the mortgage fraud was so rampant that the Savings and Loan industry was devastated. The S&L crisis was so bad that it caused the insolvency of the Federal Savings & Loan Insurance Corporation (FSLIC) and required the formation of a federal agency the Resolution Trust Corporation (RTC) to hold all the underwater properties owned (foreclosed) by the roughly 1,200 bankrupted lenders (S&Ls and Banks) taken over by the government FSLIC and FDIC.

As for Japan, we had a RE crash when they had theirs (see above). But our policies were dramatically different from theirs. They did as we had done in the Great Depression, making things worse. In addition, Japan’s population age profile is dramatically different from ours. That caused a decline in real demand after their bubble. Our growing population and demography does not suggest a decline in real demand.

Troy,

I agree. Real wages will be under pressure, especially for J6P.

But our “government gone wild” is spending like drunken sailors, and the Fed printing press has been working overtime. This will lead to inflation. Nominal wages will rise, and investors will chase real assets to avoid the loss of purchasing power. Similar to the 1970s all over again…

the problem has not past yet. I ask again, what makes you think we are immune to further price drops if these "serious problems" have not taken affect yet?

Zephyr says

Similar to the 1970s all over again…

I think this may, and I mean may, prove to be totally naive.

The baby boomers were entering their 20s in the 1970s not their 60s as now.

The national debt was under a trillion and there was a modicum of fiscal restraint. State finances were also less unbalanced. Unions with real negotiating power still existed.

PCs, that wonderful productivity multiplier, were just getting started.

China was imploding under the Gang of Four. Working with India meant a $4000 plane ride or sketchy and expensive long distance communication over voice lines, but of course back then India didn't know a TRS-80 from trash.

We still made stuff and we only recently had gone into importing more manufactured stuff than we exported.

Japan has printed like crazy and what do they have? Lower wages and lower land values than 1985.

There could very well be raging inflation in global commodities like energy, food. Healthcare could double. Tax burdens could go up. None of these effects exert upward pressure on home prices. Quite the opposite, in fact, since housing -- rents -- is a household budget line that comes AFTER taxes, transportation to get to work, and essential food and other survival goods.

Zephyr says

Our growing population and demography does not suggest a decline in real demand

We may be growing by 2.5M people per year but 1M of those are immigrants and much of the rest are shall we say relatively unproductive mouths to feed. Looking for population growth to automatically stimulate the economy is a major broken window fallacy.

Population doesn't increase land values, after-tax household income does. And household income is primarily driven by wealth creation, something that may or may not grow as it has for the past 40 years.

" Our growing population and demography does not suggest a decline in real demand."

Plenty of land in CA central valley and even more in the South West.

thomas.wong87 says

Plenty of land in CA central valley and even more in the South West.

Unfortunately, there are ~no jobs~ in those locations. Plus every 20 people you add takes an acre-foot from ag.

There would be very little impact on Agriculture business.