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Housing: Can someone explain what this graph means?

chucky2

Lifer
Dec 9, 1999
10,038
36
86
This first link is something I'd think people would be making news about, seeing as if it comes true, it'd seem to me that its effects would be bigger than the subprime mess we just went/are going through:

US Adjustable Rate Mortgage Reset Schedule

This second link is just something I thought was interesting, shows over time by county in the US the jobless rate:

Updated 03.27.10, The Decline: The Geography of a Recession by LaToya Egwuekwe (OFFICIAL)

I'm just starting to begin looking into all things housing, as I've got a decent amount saved up and living with the parents is not really moving my life forward (at 31.5, it's time to get moving). However, if what that first link is depicting comes true, maybe I'd be better off banking my money for another couple of years, buying when the market is basically trashed? At least if I lose my job, I won't have a house payment to make...

Anyone in the industry have any comments on the first link? (I really included the second just to showcase unemployment...if people aren't employed, making house payments current and future (when they're more expensive) isn't going to happen).

Chuck
 

StageLeft

No Lifer
Sep 29, 2000
70,150
2
0
That youtube is awesome, like a blight on the country.

Anything I've read of any actual length tells me that overall housing is not meaningfully recovering and if one was a betting man one would guess that by the end of the year on average houses will in fact be cheaper than they are now.
 
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Trianon

Golden Member
Jun 13, 2000
1,789
0
71
www.conkurent.com
I just scanned it but the pie chart of net worth I've seen before and I think it is not good news for the country. The sub-top tiers in this country are floundering and have been for decades while the upper accelerate away.
pretty much, so the point is, do you really want to tie yourself to possibly losing investment for decades to come. My friend has been doing quite well for himself, and I was really surprized to hear from him that he doesn't want the headache of owning a home ever after his experience(he bought a house back in 2003 and sold it in 2007)
 

Trianon

Golden Member
Jun 13, 2000
1,789
0
71
www.conkurent.com
That chart represents a good thing. It represents increase in earnings power by the individual and trust between the finance provider and the receiver. Some countries WISH they have the trust and flow of credit as it exists in the US.
Huh? I don't know what you are talking about, I don't trust my bank one bit, I just don't have any other options, "the providers" are all the same. Increase in earnings? Maybe nominal, but not relative to cost of living, at least for bottom 90%.
 

dullard

Elite Member
May 21, 2001
22,855
1,086
126
This first link is something I'd think people would be making news about, seeing as if it comes true, it'd seem to me that its effects would be bigger than the subprime mess we just went/are going through:
The mortgage industry went through a major change in the approximately 2003 to 2008 range. Instead of selling mostly standard 30-year fixed mortgages, there was a boom in fancier mortgages. These fancier mortgages include ARMs (teaser interest rate at first, then variable afterwards) and Alt-A (mortgages with little to no income verification). In that graph you linked, they looked mostly at option ARMs (the borrower has an option to pay it off in different ways) and unsecuritized ARMs (mortgages that weren't bundled and sold off to investors).

Alt-A is hit and miss. Often it is a loan to a self-employed person who can easilly pay the mortgage but who doesn't have a job with the same monthly paycheck. Just as often, it is to someone who wanted to hide the fact that they didn't have much (if any) income. Thus expect about half of the Alt-A mortages to have problems and half to be just fine.

Option ARMs are more difficult to predict. Sometimes people were smart and wanted the flexibility to pay off their mortage as they saw fit. Other times people wanted a mortgage that they could never afford.

Unsecuritized ARMs are the most difficult to predict. Either they were too good to be bundled with the crap subprime mortages, or they were so bad that they couldn't even be bundled with the crap subprime mortgages.


Typically these fancier mortgages were used with teaser interst rates at the beginning (very low interest rates) and the interest rate RESETS to a non-teaser variable rate in a few years. Many people chose mortgages that reset after 3-7 years. Add 3-7 years to the 2003-2008 time frame, and you see that there will be a LOT of resets in the 2010-2012 period.

As you properly noticed, subprime mortages were just a blip on the radar and these resetting mortgages are far bigger. The key is though, that subprime mortgages should mostly never have been made since the borrowers couldn't pay them back. With these Alt-A and ARM mortages, they often are made to people who can pay them back, but they just gambled with their mortgage by taking a fancy mortgage.

One key thing to keep in mind though is that interest rates are so very low right now that mortgages resetting today are probably DROPPING in interest rates. As long as the target rate is kept small by the fed (and similar international entities), people may be helped by the reset. The gambling done with their mortgages are actually paying off for those borrowers. Look at the 12-month column, many resets are based off this number, and the LIBOR average is a measly 0.87%. If I had a mortage, I'd love for it to reset to that level (generally they reset to LIBOR + 1%).

So, for now, the problem isn't very bad. But for the gamble to pay off long term, people need to take the interest rate savings and pay off the mortgage. If they instead take the savings and blow it on useless crap, then they'll be in a world of hurt once the interest rates rise.
 
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cubeless

Diamond Member
Sep 17, 2001
4,295
1
81
snip

So, for now, the problem isn't very bad. But for the gamble to pay off long term, people need to take the interest rate savings and pay off the mortgage. If they instead take the savings and blow it on useless crap, then they'll be in a world of hurt once the interest rates rise.
teeheeeheeeheee... that's funny... that's where crisis n+1 ( i can't even remember which crisis # we are on anymore...) will come from... the housing/mortgage problem is the gift that just keeps giving...
 

chucky2

Lifer
Dec 9, 1999
10,038
36
86
snip

So, for now, the problem isn't very bad. But for the gamble to pay off long term, people need to take the interest rate savings and pay off the mortgage. If they instead take the savings and blow it on useless crap, then they'll be in a world of hurt once the interest rates rise.
Thanks for the snip'd part, that was a great explanation, makes it easy to understand.

What you're saying though in this last paragraph is that unless they actually saved the money they were not having to pay these 3-7 years to help pay for their bumped up mortgage payment - because of reseting - that they'll be in trouble if they didn't?

Chuck
 

dullard

Elite Member
May 21, 2001
22,855
1,086
126
Thanks for the snip'd part, that was a great explanation, makes it easy to understand.

What you're saying though in this last paragraph is that unless they actually saved the money they were not having to pay these 3-7 years to help pay for their bumped up mortgage payment - because of reseting - that they'll be in trouble if they didn't?

Chuck
They aren't necessarilly in trouble. For example, if they bought a house that they can afford, then rising interest rates won't be much of a problem. But so many people bought a house that they could only afford with those teaser interest rates. As soon as those rates go away, many people will be ill-prepared. In that case, many of those will be in financial trouble.
 
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chucky2

Lifer
Dec 9, 1999
10,038
36
86
Right, I meant the people who couldn't afford it, and that didn't save for the 3-7 years (because the reality is, most people don't save).

The other thing I don't understand is if the rates are so low in that 12 month column, that even if you add 1% to that, that's like still incredibly low rates. A 30 year fixed is in the 5's or low 6's...if they can't afford the 12-month + 1%, then how the heck where they affording it all this time? I mean, can the bank give them negative interest rates?

Chuck
 

cubeless

Diamond Member
Sep 17, 2001
4,295
1
81
it's going to be 'option arm' and such type loans that keep being a problem... right now the interest rate is only part of the problem... going from 0% to 3.5 % only kills some people, but going from interest only to real payment is going to kill a lot of others...
 

dullard

Elite Member
May 21, 2001
22,855
1,086
126
The other thing I don't understand is if the rates are so low in that 12 month column, that even if you add 1% to that, that's like still incredibly low rates. A 30 year fixed is in the 5's or low 6's...if they can't afford the 12-month + 1%, then how the heck where they affording it all this time? I mean, can the bank give them negative interest rates?
They can afford it now. The issue is that once these reset, these are become variable loans. That means that every year from now on the interest rate can go up or down. If the basis rate returns to normal, or if it goes higher than normal, then what? Many people in that case could barely afford it at the low teaser rate, can they afford it at or above normal rates?

Here are some numbers for you to think about. Suppose they got in at a teaser rate of 4.5% for a $250,000 mortgage. That would work out to be $694.44/month in principal and $937.50/month in interest. Total of $1631.94/month. That is a fairly common mortgage. (I'm ignoring tax and insurance here).

If interest rates stay low, that 4.5% rate could drop to lets say 2.5%. Then the person owes $416.67/month in interest, still owes $694.44/month in principal, for a total of $1111.11/month. That is what happens if they reset today. So, in this context, that graph is temporarilly a good thing. They could save over $500/month if it resets now.

But, what if the LIBOR goes to a much more normal 6% in a year from now? That same person would suddenly owe a total of $2152.78/month. If you were barely getting by with $1631.94 could you suddenly survive with $2152.78 payments? Heck, what if the LIBOR rates return to high levels of 10%? Now the payments become $2986/month. THAT is the big looming problem.

It is even worse if we talk about California where housing prices were double what I used above and where people often chose an interest only loan. The interest only loan at 4.5% on a $500,000 house is $1875/month. If they reset next year with normal LIBOR rates of 6%, then they'd owe roughly $2916/month in interest PLUS the $1666/month in principal that they weren't paying before, making their payments jump from $1875/month to $4583/month (plus tax plus insurance). And that is just with normal interest rates, imagine the damage with high interest rates.
 
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Dec 30, 2004
12,554
2
76
This first link is something I'd think people would be making news about, seeing as if it comes true, it'd seem to me that its effects would be bigger than the subprime mess we just went/are going through:

US Adjustable Rate Mortgage Reset Schedule

This second link is just something I thought was interesting, shows over time by county in the US the jobless rate:

Updated 03.27.10, The Decline: The Geography of a Recession by LaToya Egwuekwe (OFFICIAL)

I'm just starting to begin looking into all things housing, as I've got a decent amount saved up and living with the parents is not really moving my life forward (at 31.5, it's time to get moving). However, if what that first link is depicting comes true, maybe I'd be better off banking my money for another couple of years, buying when the market is basically trashed? At least if I lose my job, I won't have a house payment to make...

Anyone in the industry have any comments on the first link? (I really included the second just to showcase unemployment...if people aren't employed, making house payments current and future (when they're more expensive) isn't going to happen).

Chuck
I'm not in the industry but I've been following this stuff for fun for a while.
I recommend you check out Dr. Housing Bubble Blog (google), he continuously links back to a few articles he wrote that explain the entire OptionARM mess. Basically tons of OptionARM loans were made in 2005-2007, and when those recast (not reset-- resetting is the rate increasing; recasting is when the principle finally amortizes over the last 20 years of the loan-- hold this thought I'll explain OA's in a second), and when those recast the buyers are going to have to get a new 30 year mortgage or face their monthly payments increasing 2-3x what they are paying now.

Why? Well, of all the OA's granted, about 80-90% were Option A. What was Option A? It let you make less than the monthly interest payment on the house, with the rest of the interest going onto the principle. This is how you can end up owing more on the house after 5 years than when you started. Banks created and allowed this because housing prices were continuously escalating and they assumed this would continue.

But we're in an economic mess and nobody wants to lend to anybody, so how are these people supposed to find a creditor so they can get a 30 year mortgage? Well, they can't. Especially when the value of their home on the market is less than the principle.

Sounds like doomsday, and it's too bad it's not-- most banks will probably end up doing what Wells Fargo has done which is extend the recast date to the 10 year mark, or turn the entire loan into a 30 or 40 year loan for the borrower so that their payments don't skyrocket when the principle finally amortizes over the life of the loan. It's hard to say what the real impact will be; banks are king at pushing losses off way into the future

Economic activity will pick up a little this year as we hire 1m workers for the US census, but watch unemployment begin to trend back up by the end of the year.

To answer your question: yes it may very well be wise to wait for a few years to buy a house,
however don't forget that mortgage rates trend above Tbond rates (which are getting pretty high), and the Tbond rates may continue upward due to all the spending we're engaging in with absolutely no sign of stopping. I would say buy now or in a year re-evaluate where the treasury rates for the 10 year are.
 

chucky2

Lifer
Dec 9, 1999
10,038
36
86
So what then controls this LIBOR rate that these things reset to?

Knowing the problem, why can't whoever controls that just keep it low for the next couple of years, and then start raising it up like one a year at levels that everyone will know about a year in advance?

Chuck
 
Dec 30, 2004
12,554
2
76
They can afford it now. The issue is that once these reset, these are become variable loans. That means that every year from now on the interest rate can go up or down. If the basis rate returns to normal, or if it goes higher than normal, then what? Many people in that case could barely afford it at the low teaser rate, can they afford it at or above normal rates?

Here are some numbers for you to think about. Suppose they got in at a teaser rate of 4.5% for a $250,000 mortgage. That would work out to be $694.44/month in principal and $937.50/month in interest. Total of $1631.94/month. That is a fairly common mortgage. (I'm ignoring tax and insurance here).

If interest rates stay low, that 4.5% rate could drop to lets say 2.5%. Then the person owes $416.67/month in interest, still owes $694.44/month in principal, for a total of $1111.11/month. That is what happens if they reset today. So, in this context, that graph is temporarilly a good thing. They could save over $500/month if it resets now.

But, what if the LIBOR goes to a much more normal 6% in a year from now? That same person would suddenly owe a total of $2152.78/month. If you were barely getting by with $1631.94 could you suddenly survive with $2152.78 payments? Heck, what if the LIBOR rates return to high levels of 10%? Now the payments become $2986/month. THAT is the big looming problem.

It is even worse if we talk about California where housing prices were double what I used above and where people often chose an interest only loan. The interest only loan at 4.5% on a $500,000 house is $1875/month. If they reset next year with normal LIBOR rates of 6%, then they'd owe roughly $2916/month in interest PLUS the $1666/month in principal that they weren't paying before, making their payments jump from $1875/month to $4583/month (plus tax plus insurance). And that is just with normal interest rates, imagine the damage with high interest rates.
don't forget about the recast vs. reset difference. Most journals mix these two up, and my guess would be that graph is as well.
 
Dec 30, 2004
12,554
2
76
So what then controls this LIBOR rate that these things reset to?

Knowing the problem, why can't whoever controls that just keep it low for the next couple of years, and then start raising it up like one a year at levels that everyone will know about a year in advance?

Chuck
Because you can't do that, that's giving free money away if you know rates are going to increase.
 

Ozoned

Diamond Member
Mar 22, 2004
5,578
0
0
This first link is something I'd think people would be making news about, seeing as if it comes true, it'd seem to me that its effects would be bigger than the subprime mess we just went/are going through:

US Adjustable Rate Mortgage Reset Schedule

This second link is just something I thought was interesting, shows over time by county in the US the jobless rate:

Updated 03.27.10, The Decline: The Geography of a Recession by LaToya Egwuekwe (OFFICIAL)

I'm just starting to begin looking into all things housing, as I've got a decent amount saved up and living with the parents is not really moving my life forward (at 31.5, it's time to get moving). However, if what that first link is depicting comes true, maybe I'd be better off banking my money for another couple of years, buying when the market is basically trashed? At least if I lose my job, I won't have a house payment to make...

Anyone in the industry have any comments on the first link? (I really included the second just to showcase unemployment...if people aren't employed, making house payments current and future (when they're more expensive) isn't going to happen).

Chuck
@ 31.5, employed, & still living with your parents, I would say that,,,,errrr,,,,uhhhh,,,,never mind,,, because that kinda says it all.
 

chucky2

Lifer
Dec 9, 1999
10,038
36
86
@ 31.5, employed, & still living with your parents, I would say that,,,,errrr,,,,uhhhh,,,,never mind,,, because that kinda says it all.
Well, I was out of the house when I was 18, didn't come back until I broke up with my ex-g/f and then a year on my own.

At that point, after the year on my own living in an appt (that was way too expensive, total impulse there, very unlike me), I basically had no savings. I either had a choice to make: Continue renting which is like throwing money away if your end goal is a house...buy a house with no money down...or move back in with the folks.

So I moved back in with the folks, banked my money. Now I've got a good amount saved up, pretty good credit (776/850, 845/990), but I don't want to buy and then have the economy take another huge dump.

That's my big worry.... :(

Chuck
 

chucky2

Lifer
Dec 9, 1999
10,038
36
86
Because you can't do that, that's giving free money away if you know rates are going to increase.
That part I understand, but, it's only giving money away if you're going to actually get it. If they increase and not enough people can pay, then you won't get anything...people will just walk away/not pay, right?

Chuck
 
Dec 30, 2004
12,554
2
76
That part I understand, but, it's only giving money away if you're going to actually get it. If they increase and not enough people can pay, then you won't get anything...people will just walk away/not pay, right?

Chuck
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2492881.ece

also, even if it were somehow possible to strongarm these guys into doing what we want to the detriment of the rest of the world, the much bigger problem is the OptionARM recasting.

If you know interest rates are increasing, you could form a company to take a loan out today and then re-lend it out below the higher rates tomorrow. Which would defeat the entire purpose of the LIBOR, to set interest rates based on the economy and inflation. This is why you never know until the day of if the Federal Reserve is going to increase rates. If you know the future of these things it breaks the entire system.
 
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