Posted on 03/25/2008 8:15:50 AM PDT by shrinkermd
The mortgage loan modification plans put forward by the governor and, at various times and by the U.S. Treasury Department all failed to fix the problems. Why? They pretended that the problem is the structures of the mortgages used to buy houses ...
Nothing could be further from the truth. The real issue in today's housing markets is that prices currently sit at levels that are unaffordable given income levels.... Take Los Angeles County, where the median price of a house peaked higher than $530,000. With a 6% interest rate and assuming a 10% down payment, the total annual cost of owning such a house would be $35,000 for the mortgage alone and $43,000 if taxes and insurance are thrown in. This would eat up roughly 75% of gross annual income of your median homeowner in the county -- much more than twice the maximum affordability rate used by Fannie Mae and Freddie Mae...
So what caused prices to go so high? Home bubbles are nothing new. The bubbles are characterized by people buying an asset and thinking they can sell it at a higher price regardless of the fact that the price being paid is completely out of whack relative to fundamentals such as income. At their root, all bubbles are driven by individual greed -- the desire to make money.
Think of it this way: Every buyer over the last few years had a choice: Buy a home or rent an apartment... Many leaped into the housing market even as prices climbed to such high levels because they thought they could sell at a higher price. This bubble is larger than any we have seen since at least World War II because the sub-prime markets gave buyers the means to speculate like never before.
(Excerpt) Read more at latimes.com ...
Home ownership in California is getting to be a rich person’s game.
And the reason why is the silly loans that keep liquidity in the real estate markets and allow people with a $100,000 household income to buy a $700,000 house.
Median house prices have historically been 2.6 to 3.0 times the combined household income of buyers. In California, the medians are skewed upwards into the 5.0 to 7.0 range. The prices have to fall by about 50% for them to come back into line. And one of the things that has to happen for this to happen is for all the bizarre and idiotic mortgage products particular to California (interest-only, option-ARM, 50 year notes, zero money down ARM’s, etc) get thrown out and a policy of 20% down, 30 year fixed notes be re-instituted.
True....but people need to pay attention. Realtors run prices higher than hell. They want bigger commissions. They run the prices up, when the house doesn’t sell, they talk the seller into lowering the price so they can make a quick sale. Anybody who bought a house for $200K would think they hit the jackpot if a realtor told them to sell the house for $600K, three years later. These people drive the price of homes so high that the average person couldn’t afford to buy, or they get into trouble.
If you can, don’t use a realtor. If you want to sell or buy, use a real estate attorney and buy or sell on yourown. You’ll most likely save about $30K.
I sold my house in San Diego in 2001. I purchased it for $105,000 in 1983 and sold it for $242,000 in 2001. It topped out in the overheated market around $500,000. Just plain silly. The equity from my house in San Diego was put into a 3900 sq ft house in Idaho. The basement is unfinished, but could add 2 BR, 1BA and a "bonus" room to the existing 4 BR, 2 1/2 BA. A local real estate agent just left a flyer for a neighbor's home. It is 3800 sq ft with 6 BR. Priced at $369,000.
Guess what,...When they won't let people build houses, the prices for the ones already there go through the roof.
I left that socialist cesspool 8 years ago and it was the best decision I ever made.
Now I'm making 32.50 and hour and looking at land 15 minutes from work...Running about $40,000 an acre.
BINGO!!
And, once upon a time two years ago, those prices could be afforded only temporarily with smoke and mirror loans that put monthly payments at the cost of "interest only" with artificially low interest rates at that.
Prices reached those idiotic levels only because idiotic lending was taking place.
Anybody want to buy a mutt puppy for $5,000? They may be selling for $10,000 in three years. I would not B.S. about a thing like that.
I will arrange financing so that the cost of the puppy will be only 10 dollars per month for the first 24 months.
For the Government to buy such mortgages as some politicians are now asking is for the Government to subsidize reckless speculative greed and stupidity.
I turned down a 2500 sq ft house on 17 acres for $185,000 in October 2000. It is just far enough away from town to prevent getting the necessary network connectivity I needed to make a living. I seriously had no idea of what I would do with 17 acres. I barely have time to keep my current 1/3 acre landscaped to my liking.
Everybody was winning. Buyers egos were satisfied. Realtors were getting higher commissions. Lenders were getting higher origination fees and more interest. Governments were getting higher property taxes, allowing them to buy more votes. Insurance companies were charging higher premiums. Stock values were going way up based on forward earnings projections.
Well guess what? Those stock values are still up - but we are calling those valuations the "new normal". Government spending is still way up, but those spending levels are the "new normal". Mortgage-backed securities built on those inflated housing values are a key component of many retirement funds, but the higher benefit levels the funds are paying out as a result are the "new normal".
The housing-based American economy is like a ski jumper: if it tries to straighten up and flail its arms in mid-air to keep from crashing, it will cause the very crash it is trying to avoid. All it can do at this point is tuck its head down, play a massive game of "let's pretend", and hope the eventual impact will occur way further down the slope and not hurt too much.
Street talk here in NoCal? Some people express relief over the situation because the market here has made homeownership simply unaffordable.
With the way banks are finally waking up and making sure motgages they are providing are actually affordable. Now that the money supply for loans is shrinking, home prices are coming down as a result. Eventually, economic necessity will get home prices to a level appropriate for income. But I will say that it was all these exotic loans that gave more money to people with less income that let home prices be bid up as a result.
Well guess what? Those stock values are still up - but we are calling those valuations the "new normal". Government spending is still way up, but those spending levels are the "new normal". Mortgage-backed securities built on those inflated housing values are a key component of many retirement funds, but the higher benefit levels the funds are paying out as a result are the "new normal".
The only problem was that personal incomes were not rising as quickly and becoming the "new normal" to sustain these hih home values. You can't have inflation (rather rapid and massive price increases relative to income) in one sector of the economy and not have significant problems.
That sucks arse, I might have tried to ride a bike or something that distance if possible.
I tried it. Once. I rode my bike west on Mira Mesa Blvd, under I-805 and down Sorrento Valley Rd to the intersection of Sorrento Valley Blvd. At that point I crossed the train tracks and headed up the onramp to southbound I-5. Riding a bike up that onroad and getting off immediately at the Genessee Dr offramp was permitted as there was no other alternative. I was riding up the long hill in the "bike lane" when I car came ripping up the hill IN THE BIKE LANE doing almost 60 MPH. I had to dive into the dirt hillside to avoid being hit. Never again.
The alternative path for a bike would require a 3 mile back track to get to Miramar Rd and Camino Ruiz before riding 5 miles west, then 2 miles north to the office. A 10 mile trip on a VERY heavily used segment of Miramar Rd. I did try that once too. The probability of being run down by a car as you cross I-805 on westbound Miramar Rd is very high. Especially as westbound cars dive into the exit lane for the I-805 South onramp.
A few bikers get killed every year on Miramar Rd.
Actually it’s not Realtors that price houses, it is the sellers. Realtors usually have to talk sellers down as most of them are quite unrealistic about the value of their house.
“Think of it this way: Every buyer over the last few years had a choice: Buy a home or rent an apartment... Many leaped into the housing market”
I don’t live in California, I live in Indiana. Here, buying a house is cheaper than renting. You always buy if you can. Of course we don’t have ridiculous prices like California either.
No, the problem is that people choose to buy them. If it's unaffordable, don't buy it ... go somewhere else. If buyers are willing to pay the price, sellers are willing to charge it. Prices (for ANYTHING) will keep going up until enough people say "no".
Home ownership in California is getting to be a rich person’s game.
Hey, for those looking for killer deals, there is always Oklahoma, Kansas, Indiana etc.
Indiana isn't exactly California is it? In winter your temps are colder than my freezer and the ecomony in Cal if larger than 30 Indiana's. Ya get what ya pay for.
“Indiana isn’t exactly California is it? In winter your temps are colder than my freezer and the ecomony in Cal if larger than 30 Indiana’s. Ya get what ya pay for.”
Nope, not even close. I like to visit California but I sure wouldn’t live there. The temps and the economy ain’t everything. To each his own.
Lets see, near perfect weather and the largest economy in the country... Well, we all have our priorities.
Well Ok, I’m not going get in a pissing contest with you.
I watch HGTV and see the prices of those dinky little houses in California and DC and wonder who could afford them!
Homes, by definition, must be “affordable.” It can be no other way. Therefore, homes will revert to the mean, becoming affordable with respect to incomes and rents. It can be no other way. Certainly, temporary prices can go out of whack but they have to come back. The law of supply and demand is a pretty good thermostat.
Comment on one of your points:
It is absurd the way some people are using the highly optimistic valuations to claim that PE ratios are historically reasonable. Just absurd. The nice thing about the market is, I don’t think it can be artificially propped up for any length of time. The market is pretty ruthless and real values will eventually come to light. I predict lots of anger and denial.
If I may, what sets the price for anything, is a seller willing to sell at a particular price, and a buyer willing to pay a particular price.
True, realtors make a living of the sale and the purchase, they are the agents for either the buyer/seller. You can use them or not. Sometimes you can buy direct, or sell direct, and thus do without paying the fees to the realtor. Heck, you can even do without many of the other fees, such as inspection, loan origination (if you have piles of $).
However, these are but a mere small percent of the actual purchase price.
If foolish people wish to pay inflated dollars, because they are willing to do so, it is their choice. it does drive the overall market up.
Similarly, when people are refusing to attach such lofty values as 30 months ago, the price drops.
It will drop until the price looks attractive, then they will be gobbled up again to start another uptick.
This has happened like clockwork while I have been paying attention since 1970. Most likely it has happened with regularity since we climed down from trees and took to the grassy plains. (or Aam and eve, if you wish)
Fine, willing buyers price the market. Sellers set the asking price, not Realtors, and your original point blamed that on Realtors. If only that were true, I’d still be a Realtor. Most of my time was spent trying to talk buyers and sellers into being more sensible. Unfortunately, there are Realtors that would let a buyer or seller name any price, just to get the client. The good ones though, do not.
The point of my post was that realtors had minimal or no say in the matter.
Sorry!
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