Interest Only Mortgages...

[saymyname]

People that don't believe in corrections should realistically look at the California market of the early nineties. I've done some reading and people think the fundamentals are worse now. Those were around 40% corrections back then.

Japan had massive corrections all the way up to 80%. Don't think it can't happen, even in the most land scarce areas on the globe. Will it? I have no idea. I just know that waiting a little bit longer to buy a house would benefit me since prices are dropping and properties are sitting on the market much longer. It used to be that you would have 10 bids on the first day. Sold in less than 12 hours. That doesn't happen anymore.


I just hope some of you who live in affordable areas appreciate it. This is all a moot point for long term buyers when property is cheap. You don't have a mortgage to worry about after a few years, maybe 10. If I could buy a good house for $150,000......

One advantage to an interest only loan is that you can make the same payment you would on a 30 year mortgage, thus paying off principle, but have a lower interest rate. If I'm not mistaken this would effectively lower your required monthly payment as well. If you make a bigger payment than required on a 30 year mortage it doesn't lower your monthly payment - it just reduces the length of time until you pay off your house.

 

[JS80]

Originally posted by: saymyname
People that don't believe in corrections should realistically look at the California market of the early nineties. I've done some reading and people think the fundamentals are worse now. Those were around 40% corrections back then.

Japan had massive corrections all the way up to 80%. Don't think it can't happen, even in the most land scarce areas on the globe. Will it? I have no idea. I just know that waiting a little bit longer to buy a house would benefit me since prices are dropping and properties are sitting on the market much longer. It used to be that you would have 10 bids on the first day. Sold in less than 12 hours. That doesn't happen anymore.


I just hope some of you who live in affordable areas appreciate it. This is all a moot point for long term buyers when property is cheap. You don't have a mortgage to worry about after a few years, maybe 10. If I could buy a good house for $150,000......

One advantage to an interest only loan is that you can make the same payment you would on a 30 year mortgage, thus paying off principle, but have a lower interest rate. If I'm not mistaken this would effectively lower your required monthly payment as well. If you make a bigger payment than required on a 30 year mortage it doesn't lower your monthly payment - it just reduces the length of time until you pay off your house.

First off, today is not = the ninties. Second, the 40% drop in CA were rare occurences; maybe the Condo that sold for the least dropped 40% from the peak of what comparables were selling for.

As a benchmark though, in the history of the US real estate value of Homes, the aggregate value has never gone down.

With that said, prices of houses in southern california will never go down. Condos in socal *might* go down slightly, but the days of the ninties are over.

 

[cpals]

I was just watching on the news tonight about insurance companies raising rates in Florida anywhere from 25% - 200%... makes me just want to rent. Bah.

 

[saymyname]

Originally posted by: JS80

Originally posted by: saymyname
People that don't believe in corrections should realistically look at the California market of the early nineties. I've done some reading and people think the fundamentals are worse now. Those were around 40% corrections back then.

Japan had massive corrections all the way up to 80%. Don't think it can't happen, even in the most land scarce areas on the globe. Will it? I have no idea. I just know that waiting a little bit longer to buy a house would benefit me since prices are dropping and properties are sitting on the market much longer. It used to be that you would have 10 bids on the first day. Sold in less than 12 hours. That doesn't happen anymore.


I just hope some of you who live in affordable areas appreciate it. This is all a moot point for long term buyers when property is cheap. You don't have a mortgage to worry about after a few years, maybe 10. If I could buy a good house for $150,000......

One advantage to an interest only loan is that you can make the same payment you would on a 30 year mortgage, thus paying off principle, but have a lower interest rate. If I'm not mistaken this would effectively lower your required monthly payment as well. If you make a bigger payment than required on a 30 year mortage it doesn't lower your monthly payment - it just reduces the length of time until you pay off your house.

First off, today is not = the ninties. Second, the 40% drop in CA were rare occurences; maybe the Condo that sold for the least dropped 40% from the peak of what comparables were selling for.

As a benchmark though, in the history of the US real estate value of Homes, the aggregate value has never gone down.

With that said, prices of houses in southern california will never go down. Condos in socal *might* go down slightly, but the days of the ninties are over.

No. They were not rare occurances as far as I know. My own house dropped 36%.

The value might not have dropped but over time they've gone up less than bonds in markets that have corrected.

 

[LegendKiller]

OK, I am with the bearish crowd here.

Why? First, a little background on me. I work in lending, securitization of assets to be exact. I work for one of the largest banks in the US in the treasury department. I get regular updates and also study the yield curves quite a bit. I also get insight into some of the largest mortgage companies in the country and how their portfolios are performing. I do not own a house, but can easily do so. Why? Because where I live (DC) is extremely overpriced and I believe prices are coming down.


1. Prices in SW florida (I am assuming Naples area) are overpriced by ~100%.

2. Lending in FL has taken a severe tone of liberal policies. The mortgage brokers have broken many traditional mortgage covenants to lend to people wh shouldn't be buying.

3. Hurricanes are only going to be getting worse over the next 10 or so years, according to all estimates. Add in shifting weather patterns and you get an explosive mix. I lived in Miami for 3 years and Orlando for 3 (grad school in miami then work in orlando), I was through all of the hurricanes. Flood/Hurricane insurance is increasing.

4. *NEVER* stretch to get into a house.

5. As stated by others, the market is overheated. Go read "Irrational Exuberance" by Schiller. In that book he created a very good housing matrix. He found that over 105 years (1890 to 1995) housing went up 20% adjusted for inflation. It went up 50% over the next 9 years. DOUBLE the growth in 1/10th the time. Nothing, population, wealth, increased costs, nothing has explained the increase. THe only thing that logically does is irrational exuberance in the market.

Now, some people say that the good times will continue. However, that is pretty BS and anybody who actually thinks logically will acknowledge that. There has to be a regression to the mean and that regression WILL happen one way or another. It can happen in depreciation or flatening. If we flaten, it will be a *VERY* long time until prices go up beyond inflation (if anything you will see them decrease in real terms).

Now, I am of the mindset you will see something like what is happening in the UK right now. A credit crisis. As rates increase and other costs increase, people will just stop paying. Even though the economy will grow at a decent pace they experience wage squeeze. You see mortgage and credit card portfolios with 4x the losses of the US, all because they over extended their credit.

Think of it this way. The economy has been steaming along on consumption. That consumption has been driven by housing appreciation. Equity cash-outs at are an all-time high, yet so is debt. This tells you that people are doubling up, reducing their net worth and increasing their debt, a potent combition that borrows growth from the future and brings it into the present.

Add to that that eventually growth, borrowed from the future, has to slow. ONce that slows, then houses stop appreciating. Once that happens then the source of income dries up, add to that that raises slow, jobs are lost, interest rates increase, real incomes get squeezed, and then what?

Well, considering that inventories at Pulte have multiplied and speculators have driven up prices, you have a glut of overpriced homes. Furthermore, as incomes are squeezed, banks start foreclosing, dumping more inventory on the market. Since people will get depserate to unload their houses, since they can't afford them anyway, and their equity was cashed out, they are f'd. They will either get foreclosed, or sell for a loss.

This decreases prices even more. Then, since people in the housing industry have been counting on more and more business, they lose their jobs, causing more crisis.


We see this happening already. The only people who say it won't happen are

A. Mortgage brokers.
B. Realtors.
C. Builders.


Now, who profits from keeping the housing market propped up for as long as they can?


Only a sucker would buy now. As I said before, I could buy, with an IO, probably a 600,000 house in DC. However, I'd be a complete idiot to do so. I will wait this out, 2 years and prices will go down. The place I am renting now, for 1575, is 480k on the market. 1.5br 1.5bth. Traditionally, you take 100-200x(monthly rent)= ~300k total is what somebody should reasonably pay for this place. So, it's more than 50% overvalued, which is about what the experts say.

Now, people say I am tossing away money, 40k over the next two years. Funny, considering that if prices depreciate only 15%, I win. Considering I won't pay taxes, nor lose money in interest, *AND* I invest that money, I doubly win.

Ohh, BTW, since I signed my lease, renting prices went up 3% and housing prices went down 4%.


Let the "Slaughter of the fools" begin.

Save now, buy later, laugh your ass to the bank at all of the suckers.

 

[LegendKiller]

Originally posted by: cpals
I was just watching on the news tonight about insurance companies raising rates in Florida anywhere from 25% - 200%... makes me just want to rent. Bah.

Yes, another huge problem with FL, hurricanes and flood.

 

[LegendKiller]

Originally posted by: saymyname

No. They were not rare occurances as far as I know. My own house dropped 36%.

The value might not have dropped but over time they've gone up less than bonds in markets that have corrected.

This is a very good point.

A. Housing prices HAVE gone down in history and have stayed down for a long period
B. Even if housing has gone up throughout history, it has always done so at a pace BARELY above inflation.
C. In the long-run you can almost always earn a better return investing in the stock market.

Adjusted for inflation, housing sucks.

 

[LegendKiller]

Originally posted by: JS80
Rates are ready to top out right now. Fed suggested maybe on more rate hike. Does this mean you should buy a house with an ARM? NOOOOOOOOOOOOOOO. If you're planning to stay in the house short term, AND you have the down payment to lose equity on the house in the event of a "correction" then an ARM may be for you.

The next increase is 50/50. However, one thing can tip that back to 100% and the next hike 50/50. Even if they stop after the next meeting all indications point to an extended stop period, then a slow decline backwards.

 

[FelixDeCat]

Yes. But not "payment option ARMS". Stay the hell away from those.

 

[JS80]

Originally posted by: saymyname

Originally posted by: JS80

Originally posted by: saymyname
People that don't believe in corrections should realistically look at the California market of the early nineties. I've done some reading and people think the fundamentals are worse now. Those were around 40% corrections back then.

Japan had massive corrections all the way up to 80%. Don't think it can't happen, even in the most land scarce areas on the globe. Will it? I have no idea. I just know that waiting a little bit longer to buy a house would benefit me since prices are dropping and properties are sitting on the market much longer. It used to be that you would have 10 bids on the first day. Sold in less than 12 hours. That doesn't happen anymore.


I just hope some of you who live in affordable areas appreciate it. This is all a moot point for long term buyers when property is cheap. You don't have a mortgage to worry about after a few years, maybe 10. If I could buy a good house for $150,000......

One advantage to an interest only loan is that you can make the same payment you would on a 30 year mortgage, thus paying off principle, but have a lower interest rate. If I'm not mistaken this would effectively lower your required monthly payment as well. If you make a bigger payment than required on a 30 year mortage it doesn't lower your monthly payment - it just reduces the length of time until you pay off your house.

First off, today is not = the ninties. Second, the 40% drop in CA were rare occurences; maybe the Condo that sold for the least dropped 40% from the peak of what comparables were selling for.

As a benchmark though, in the history of the US real estate value of Homes, the aggregate value has never gone down.

With that said, prices of houses in southern california will never go down. Condos in socal *might* go down slightly, but the days of the ninties are over.

No. They were not rare occurances as far as I know. My own house dropped 36%.

The value might not have dropped but over time they've gone up less than bonds in markets that have corrected.

Did you sell at the 36% drop? Was this loss realized? Most people don't sell their houses in a down market. And the people that do sell bought 15 years ago when it was half the price. If your house value goes up 100% in one year then down 40% in the next you're still up 20%. The only people who get burned are speculators and people who can't make mortgage payments and are forced to sell. LA investors are notorious for buying and holding forever. Being a resident of LA, I am not hopeful of a drop in real estate prices, so I plan on making money faster than appreciation so I can hopefully afford one.

 

[LegendKiller]

Originally posted by: JS80
Did you sell at the 36% drop? Was this loss realized? Most people don't sell their houses in a down market. And the people that do sell bought 15 years ago when it was half the price. If your house value goes up 100% in one year then down 40% in the next you're still up 20%. The only people who get burned are speculators and people who can't make mortgage payments and are forced to sell. LA investors are notorious for buying and holding forever. Being a resident of LA, I am not hopeful of a drop in real estate prices, so I plan on making money faster than appreciation so I can hopefully afford one.

Considering the speculators and the streatchers are a huge portion of outstanding mortgages, it's a good bet that prices will go down a lot more in some areas and the overall market will be depressed for a while.

 

[bennylong]

How can price keep going up when only 10% of the population in area like the Bay Area and LA can afford to own a house? You need an income of $150k to buy a fixer upper.

 

[saymyname]

Originally posted by: JS80

Originally posted by: saymyname

Originally posted by: JS80

Originally posted by: saymyname
People that don't believe in corrections should realistically look at the California market of the early nineties. I've done some reading and people think the fundamentals are worse now. Those were around 40% corrections back then.

Japan had massive corrections all the way up to 80%. Don't think it can't happen, even in the most land scarce areas on the globe. Will it? I have no idea. I just know that waiting a little bit longer to buy a house would benefit me since prices are dropping and properties are sitting on the market much longer. It used to be that you would have 10 bids on the first day. Sold in less than 12 hours. That doesn't happen anymore.


I just hope some of you who live in affordable areas appreciate it. This is all a moot point for long term buyers when property is cheap. You don't have a mortgage to worry about after a few years, maybe 10. If I could buy a good house for $150,000......

One advantage to an interest only loan is that you can make the same payment you would on a 30 year mortgage, thus paying off principle, but have a lower interest rate. If I'm not mistaken this would effectively lower your required monthly payment as well. If you make a bigger payment than required on a 30 year mortage it doesn't lower your monthly payment - it just reduces the length of time until you pay off your house.

First off, today is not = the ninties. Second, the 40% drop in CA were rare occurences; maybe the Condo that sold for the least dropped 40% from the peak of what comparables were selling for.

As a benchmark though, in the history of the US real estate value of Homes, the aggregate value has never gone down.

With that said, prices of houses in southern california will never go down. Condos in socal *might* go down slightly, but the days of the ninties are over.

No. They were not rare occurances as far as I know. My own house dropped 36%.

The value might not have dropped but over time they've gone up less than bonds in markets that have corrected.

Did you sell at the 36% drop? Was this loss realized? Most people don't sell their houses in a down market. And the people that do sell bought 15 years ago when it was half the price. If your house value goes up 100% in one year then down 40% in the next you're still up 20%. The only people who get burned are speculators and people who can't make mortgage payments and are forced to sell. LA investors are notorious for buying and holding forever. Being a resident of LA, I am not hopeful of a drop in real estate prices, so I plan on making money faster than appreciation so I can hopefully afford one.

Just to be clear, I'm talking about my Parents. No, they sold at the peak. The people that bought our house in West L.A. sold a few years later at a 36% loss. He worked for Lucas and probably could afford the loss but he still took it. It's now up again but over time it has only done about 5% a year. So if you're like my parents you make out like a bandit, if you're like the next two home owners you lose money, the next guy (current) would make money if he sold, and if you stayed in that house for the last 28 years you'd do a bit better than inflation. Point is that of the 4 owners of that house in the last 28 years it's a 50/50 split on making money and losing money. Housing is not a sure bet. Give it some time and this last guy might not do so well (although I think there would have to be a massive correction for him to lose money since he bought close to the bottom of the last correction if I'm not mistaken).

My Parents have hit the high of every home they've owned. It's unbelievable. They now live in one of the nicest houses I've ever seen and bought it for 22% below cost (the guy built it). Prices have gone up about 40% in the last couple years. That means they should be ok even when there is a correction. Most people aren't so lucky.

Furthermore, in California at least, a lot of people have stepped up into bigger homes. So although they might have more equity that doesn't mean they can't lose money on their home. If you bought a home 15 years ago for $300,000, sold it for $900,000 but stepped up into a $1.5M home, you can still suffer a financial loss. Going back to West L.A I don't see the same people there anymore. It's mostly turned over. Some people made the mistake of cashing out and investing in Arizona. They're so screwed now. Others jumped on the Vegas bandwagon. Good luck to them too.

I'm doing the same thing as you though. I'm trying to make money faster than appreciation but I'm also hoping for a continuation of the correction and at the very least a leveling off of home prices so that I can jump in down the road. Nothing is certain, but home prices look like the stock market bubble from a few years ago. Everyone just thinks they deserve more and more money from their home. Ask anyone in West L.A. and they'll all tell you how great they are and how their homes "should" grow at 30% a year.

 

[JS80]

Originally posted by: bennylong
How can price keep going up when only 10% of the population in area like the Bay Area and LA can afford to own a house? You need an income of $150k to buy a fixer upper.

I live in West LA. Supply = fixed. Population increases = Demand increases. => Price goes up.

 

[LegendKiller]

Originally posted by: JS80

Originally posted by: bennylong
How can price keep going up when only 10% of the population in area like the Bay Area and LA can afford to own a house? You need an income of $150k to buy a fixer upper.

I live in West LA. Supply = fixed. Population increases = Demand increases. => Price goes up.

The number of stocks is, for the most part, fixed. The number of houses everywhere, for the most part, is fixed. The amount of land is, for the most part, fixed. However, that doesn't stop idiots from paying too much.

 

[saymyname]

Originally posted by: JS80

Originally posted by: bennylong
How can price keep going up when only 10% of the population in area like the Bay Area and LA can afford to own a house? You need an income of $150k to buy a fixer upper.

I live in West LA. Supply = fixed. Population increases = Demand increases. => Price goes up.

You're forgetting one crucial part of that equation: income. People have to be able to afford the homes as they increase in value. As it is right now sub-10% of the population can afford a home in West L.A. One way they afford them is with some of these very creative and sometimes crazy loans - and now we've come full circle.

 

[FelixDeCat]

Originally posted by: JS80

Originally posted by: bennylong
How can price keep going up when only 10% of the population in area like the Bay Area and LA can afford to own a house? You need an income of $150k to buy a fixer upper.

I live in West LA. Supply = fixed. Population increases = Demand increases. => Price goes up.

cos( x /flip side ^upside (less population decline / inverse of illegal population ) )=1

 

[Slew Foot]

If it wernt for crazy loans, no one would be able to pay for houses in CA with their incomes on a standard 30 years fixed with 20% down. SO now that we see that when the crazy loans reset to regular loans, people cant afford their house anymore, they get foreclosed on. Just wait until this time next year, it'll be a major league bloodbath in CA.

 

[bennylong]

That's my point, most of the house purchased in CA recentaly are with ARM and Interest only loans. When these loans reset, payments are going to double for some people and they will have to sell. Who are they going to sell it to when only 10% of the population can afford it?

 

[Slew Foot]

Originally posted by: bennylong
That's my point, most of the house purchased in CA recentaly are with ARM and Interest only loans. When these loans reset, payments are going to double for some people and they will have to sell. Who are they going to sell it to when only 10% of the population can afford it?

Its kinda liek tech stock in 2000, people have short memories and have gotten used to 20% return, they look dumbfounded when you try to teach them about fundamentals.

 

[SampSon]

I wouldn't get into an ARM right now, rates have been slowly but steadily climbing, so thats' the only direction your ARM rate will go.

I had a whole post typed out about this topic and the current real estate crash paranoia, but I pressed the wrong button and lost it (TWICE).

In short, a pending readjustment is only going to affect small pocket areas strongly but won't crash the local or national economy. People have forgotten that a house is a value in use investment and does not replace traditional monetary investment vehicles. A readjustment is a cyclical event, but doesn't stop the buying and selling of homes. As long as there are people that need housing, real estate will be in demand. Thoes who speculated and thoes who lived far beyond their means due to borrowed money from quickly increasing equity, will get burned. Though thoes who are fiscally irresponsible usually lose out. Sucks to be a fool in southern california.
I'll be here waiting when the sky falls.

PS. Watch out for media induced frenzy.

 

[bennylong]

look at all the vultures waiting for the crash.

 

[b0mbrman]

Originally posted by: Vic
In addition, you can make payments of principal with interest-only loans at any time you want, and any such payment will reduce the minimum interest-only payment

Exactly.

Think about it this way: You can effectively turn a 6% interest only loan into a 6% 30-year loan by making the same payments you normally would...or a 15-year loan for that matter

You cannot, however, make a 15-year loan into an interest only loan.