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Housing Boom Fading, Leading Real Estate Economist Says
Origiator Times ^ | 10/31/2005 | Steve Brown

Posted on 10/31/2005 11:28:13 AM PST by ex-Texan

SAN FRANCISCO, (KRT) - A combination of higher interest rates and years of rising prices could soon take some air out of the hot U.S. housing market.

"The boom is showing some signs of tiring," David Lereah, chief economist with the National Association of Realtors, said Friday. "We are looking at about a 4 percent drop in home sales next year.

"We are projecting a significant drop in the price appreciation pace," Lereah said.

But even though the velocity of the housing market will subside, "we are looking for a soft landing," he told real estate agents from across the country who are meeting in San Francisco.

Economic forecasts have been mixed in recent months, but Lereah is the latest high-profile housing-sector economist to forecast a decline in housing.

David Seiders, chief economist of the National Association of Home Builders, said recently that the housing market is "topping out."

The Realtors association is forecasting that home appreciation will slow from a nationwide average of more than 12 percent this year to only about 5 percent in 2005. In hot markets, the falloff could be more pronounced, Lereah said.

"Some markets are more susceptible to interest rate risks and shock," he said. "I cannot guarantee that there will be no hard landings."

Cities including Las Vegas; Orlando, Fla.; Phoenix and Washington, D.C., are on the Realtors' list of areas that have seen the biggest home price increases in the last three years. Markets like Dallas; Detroit; Austin, Texas; Houston and Denver have remained cool.

"The country is really unbalanced when it comes to the price of a home," Lereah said. "The boom has really discriminated across America."

Many cities are already transitioning from a sellers' market to a buyers' market. And the time it takes to sell a house is increasing in many cities.

"Eventually that seller will have to revise his expectations downward," Lereah said. "Instead of getting 20 percent appreciation in their home they will have to get 5 percent."

Even with the forecast decline in sales next year, housing activity remains at a very high level. And Lereah said the market is fundamentally sound.

"In the real estate market, there is not hard evidence we have bubbles waiting to burst," he said.

But higher interest rates alone will cause a softening in home sales, economists agree.

"Mortgage rates are going up, but they will still be below 7 percent," Lereah said.

While still low by historic standards, he said that mortgage rates approaching 7 percent "could be more troublesome" for some of areas of the country.

The increased use of adjustable-rate mortgages and so-called "exotic" home loans has made some homeowners more vulnerable to higher interest rates. Adjustable-rate loans make up about 30 percent of the mortgage market, Lereah said.

"The biggest risk I see right now in California and other parts of the U.S. is the element of risk introduced by adjustable-rate mortgages and interest-only loans and negative amortization loans," he said.

"When it comes to these exotic loans _ even though it may slow home sales a bit _ I'd like to see stricter guidelines so we can slow housing a bit so we can have a soft landing."

Lereah said among the real threats to the continued health of the housing market are proposals in Washington to cut tax deductions for home mortgage interest and property taxes.

"In my opinion it's terrible timing - it's almost irresponsible," he said. "That would do severe damage to a lot of the local markets across the nation.

"We are looking at probably a 10 to 15 percent drop in home prices" if the proposals become reality.


TOPICS: Business/Economy; Culture/Society; Front Page News; Government
KEYWORDS: bubbles; housing; realestate
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Now even the chief economist for the National Real Estate Association is admitting that there is a risk of a "hard landing" in certain regions of the U.S. Only 30 days ago, such an admission was not within the realm of possibility. When the chief economist for the nation's realtors says that some regions of the nation may face a "hard landing" -- naysayers have to listen. Over 58 cities in the U.S. may get hit with bubble woes early next year. (Want to learn more?)

Already, some regions of California have suffered 15% price declines. Is this economist aware of these facts? I am suggesting that he well aware of the bubble and is softening the blow for his employers. What is going to happen to all those new real estate related jobs across the nation? (Real estate accounts for 45% of all the jobs created in the past two years). Nada por nada.

But what do I know, anyway. After all, I'm just a geezer living the Sheeples Republic of Oregon.

1 posted on 10/31/2005 11:28:14 AM PST by ex-Texan
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To: ex-Texan

The lumber restrictions aren't helping either.


2 posted on 10/31/2005 11:30:34 AM PST by Brilliant
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To: ex-Texan

"We are looking at probably a 10 to 15 percent drop in home prices" if the proposals become reality.
Lets see, the price is up 50% over three years since I bought, and we are looking at a 15% drop? OK


3 posted on 10/31/2005 11:31:16 AM PST by SF Republican
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To: All
The source of this opinion piece was The Originator Times which is one of the leading papers read by mortgage brokers across the U.S.
4 posted on 10/31/2005 11:32:02 AM PST by ex-Texan (Mathew 7:1 through 6)
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To: ex-Texan
Orlando, Fla and most anywhere else there now...

Mike

5 posted on 10/31/2005 11:32:47 AM PST by MichaelP ("Everybody pities the weak; jealousy you have to earn." -Arnold)
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To: ex-Texan

In southern california construction has not kept up with demand. I am seeing multiple offers on properties under 450,000. Tell me again what's making the market go down.


6 posted on 10/31/2005 11:33:47 AM PST by bigsigh
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To: ex-Texan

q: How can you tell a realtor is lying?

a: Their lips are moving.


None of them will ever admit that prices are going down. For them its always, "Buy now! They aren't making anymore land!! Buy now or be priced out forever!!"


I have watched as condos in Seattle that were going for 280K at the begining of the year now being sold for 380K in October. I hope the whole house of cards comes crashing down on the speculators heads as soon as possible.





7 posted on 10/31/2005 11:35:50 AM PST by Proud_USA_Republican
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To: ex-Texan

The worst-case speculation regarding adjustable rate mortgages always assumes an increase much greater than the less-than-7% rate cited here. They'll just refi into another 3/1 ARM at about 5.5%. Not a huge hit to the bottom line in the majority of households.

Capping the mortgage interest deduction won't get any further than similar proposals got in 1993. That sacred cow ain't getting slaughtered any time soon, so speculating upon the effects of such a cap is highly premature.


8 posted on 10/31/2005 11:37:33 AM PST by RegulatorCountry (Esse Quam Videre)
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To: bigsigh
"we are looking hoping for a soft landing,"
9 posted on 10/31/2005 11:37:56 AM PST by glorgau
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To: ex-Texan
Even with the forecast decline in sales next year, housing activity remains at a very high level. And Lereah said the market is fundamentally sound

Yes, markets will soften. But it doesn't look like a doom and gloom scenario.

Even the chief economist says the market is fundamentally sound.

10 posted on 10/31/2005 11:38:51 AM PST by Siena Dreaming
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To: Proud_USA_Republican

You are absolutely correct. I've spent over 80% of the last thirty years in title insurance, and that's what they always say. I lost a title insurance job in mid-August, the bloom was off the rose at that point, as far as new title orders were concerned. Figures that you read in today's paper are from September closings, where the deals were inked back in June or July.

It's all downhill for real estate from here. Sure glad I found a job outside of that industry.


11 posted on 10/31/2005 11:40:59 AM PST by hunter112 (Total victory at home and in the Middle East!)
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To: SF Republican

Exactly. Most economists are predicting a 15%-20% downturn in the Central California housing market when interest rates go back up. Since I'm up 40% since I bought it, I'll still come out ahead.

The people who will get burned are those who either just bought, or who cashed out all of their equity. A good friend of my wife are living examples of the kind of idiots who will get burned. They bought a house in a new development before any of the houses were built. The home was far beyond anything they could hope to afford, but by the time it was built it's value was up over $100,000. They cashed out that equity, dumped it into an interest bearing bond, and now use it to pay their mortgage. In their minds, they'll simply sell the house and move when that money runs out, and they'll have spent nearly five years in a gorgeous mini-mansion at no cost to them. They're assuming, of course, that they can get everything they owe out of it AND have enough additional appreciation to buy another house and do it all over again...an assumption that's looking extremely unlikly at this point.


12 posted on 10/31/2005 11:45:30 AM PST by Arthalion
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To: RegulatorCountry
They'll just refi into another 3/1 ARM at about 5.5%.

That's assuming that interest rates will stay at the point where you can get a 5.5% ARM. That's also assuming that you can get an appraisal that covers the existing loan balance, and the closing costs to do the refinance. Nobody's going to come up with 3 to 4% of a $200K-plus loan out of their own pockets just to keep the balls juggling in the air for a few more years.

A couple of pretty big assumptions there.

13 posted on 10/31/2005 11:46:14 AM PST by hunter112 (Total victory at home and in the Middle East!)
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To: ex-Texan

q: How can you tell a realtor is lying?

a: Their lips are moving.


None of them will ever admit that prices are going down. For them its always, "Buy now! They aren't making anymore land!! Buy now or be priced out forever!!"


I have watched as condos in Seattle that were going for 280K at the begining of the year now being sold for 380K in October. I hope the whole house of cards comes crashing down on the speculators heads as soon as possible.





14 posted on 10/31/2005 11:46:35 AM PST by Proud_USA_Republican
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To: Proud_USA_Republican

whoops.


15 posted on 10/31/2005 11:47:15 AM PST by Proud_USA_Republican
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To: Arthalion
Since I'm up 40% since I bought it, I'll still come out ahead.

You'll be fine as long as you don't have to move, and can hold on to the income stream that makes the payments on that house. Should you find yourself in a position of having to sell, you'll be up against lenders trying to unload foreclosed homes with all kinds of sweet deals for buyers willing to take them off their hands. During the last housing decline of the early 80's, they were even paying moving costs for people who would take these white elephants off of their hands.

There's a heck of a lot more constructed housing stock out there than there was 25 years ago. Much of it is financed to the hilt.

16 posted on 10/31/2005 11:49:54 AM PST by hunter112 (Total victory at home and in the Middle East!)
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To: hunter112

"That's assuming that interest rates will stay at the point where you can get a 5.5% ARM."

Referring back to the article that is the subject of this thread, it wasn't my assumption that interest rates will settle in somewhere lower than 7%, but the authors. That's what the 5.5% was roughly based upon. If rates go higher than the author posits here, then ARM loans go with it, at a proportionally lower rate.


17 posted on 10/31/2005 11:50:22 AM PST by RegulatorCountry (Esse Quam Videre)
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To: Arthalion

I so hope you are wrong. My husband and I are just about to buy, we live in Fresno.


18 posted on 10/31/2005 11:50:23 AM PST by diamond6 (Everyone who is for abortion has already been born. Ronald Reagan)
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To: ex-Texan
There Is No Housing Bubble To Go Bust

Man, you sure do like posting "sky is falling" articles about real estate.

I can only surmise that you missed the great surge in appreciation these last few years and you're pissed.

19 posted on 10/31/2005 11:51:11 AM PST by FReepaholic (Taglines? We don't need no stinking taglines.)
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To: Proud_USA_Republican
you need to stop hanging around dishonest people.

bigsigh, broker

20 posted on 10/31/2005 11:52:38 AM PST by bigsigh
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To: RegulatorCountry
Good point, but I think we will see 30 year fixed rates at 8, maybe 9 percent when all is said and done. If you look at rates over the last three decades, that's below the average, but way above what fueled the boom of the last few years.

I see houses of cards ready to collapse. It will affect everyone, in some way or another.

21 posted on 10/31/2005 11:55:30 AM PST by hunter112 (Total victory at home and in the Middle East!)
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To: ex-Texan

I'm so glad I'm in my last house. It's all paid for, now, with the proceeds of the sale of a vastly overvalued home in California used to buy this one.

I'm here. I'm staying. I'm not going to sell. I suppose I'll die in this house.

I'm out of the housing market forever.


22 posted on 10/31/2005 11:55:43 AM PST by MineralMan (godless atheist)
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To: Arthalion

Time cures all real estate investment mistakes, Although as you noted you have to be able to hold on long enough to make it work


23 posted on 10/31/2005 12:03:26 PM PST by underbyte
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To: Proud_USA_Republican
...I hope the whole house of cards comes crashing down on the speculators heads as soon as possible....

How dare capitalists make money!!

We should take their money and give it to those that need it!!.

...Proud_USA_Repblican...

You might want to change your name.

24 posted on 10/31/2005 12:03:39 PM PST by FReepaholic (Taglines? We don't need no stinking taglines.)
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To: Brilliant

Steel is still a problem.


25 posted on 10/31/2005 12:05:48 PM PST by RightWhale (Repeal the law of the excluded middle)
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To: tscislaw

We should take their money and give it to those that need it!!.

I never said that. /smackdown time


26 posted on 10/31/2005 12:08:44 PM PST by Proud_USA_Republican
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To: hunter112

"I see houses of cards ready to collapse."

There are vast swathes of the country that haven't seen anything near 10% appreciation. Most of these areas have fairly decent economic conditions, too, such as where I am, Greensboro, NC. We've been muddling along with 3% or so a year since the late 90s, with only a slight jump to a projected 7% for the year for 2005. There's no bubble to burst here, because appreciation has been below average for the duration of all this cheap money. We were doing fairly well during the mid-late 90s with rates around 8%, so I just don't see the end of the real estate world due to that. This is true for just about all of so-called "Red State" America, other than Florida, and some coastal areas fueled by cash out refi money flowing into beachfront vacation homes.


27 posted on 10/31/2005 12:10:01 PM PST by RegulatorCountry (Esse Quam Videre)
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To: Proud_USA_Republican
"whoops."


Hey! Stop that! I'm confused enough as it is. ;)



28 posted on 10/31/2005 12:13:16 PM PST by G.Mason
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To: ex-Texan

Oh no! People in Washington DC metro area will have to live with 5% appreciation on their $650,000 colonials instead of 20% appreciation on their $250,000 colonials!


29 posted on 10/31/2005 12:13:59 PM PST by silverleaf (Fasten your seat belts- it's going to be a BUMPY ride.)
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To: silverleaf

"People in Washington DC metro area will have to live with 5% appreciation on their $650,000 colonials instead of 20% appreciation on their $250,000 colonials!"

Head for the hills!!! What's funny is, they actually are heading for the hills. Areas of MD and WV that would have been sneered at as redneck backwaters even five years ago are really taking off.


30 posted on 10/31/2005 12:19:48 PM PST by RegulatorCountry (Esse Quam Videre)
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To: ex-Texan

Is this the same dude who said we will see a slow down last quarter when there was actually a 12% increase in new home sales?


31 posted on 10/31/2005 12:20:52 PM PST by DM1
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To: RegulatorCountry
Well, then, why should someone move to Greensboro, NC, when a lender overburdened with foreclosed homes (in other areas) is letting people walk into them with zero down, no closing costs, and even moving expenses? Do you think that will have an influence on your prices?

When you live in an area with fairly anemic real estate inflation, while the rest of the country is percolating along at double digit raises, then it speaks to the wages being paid in that economy. Rising interest rates will mean that these lower income people will be even LESS able to afford the prices you have already. I agree, the amplitude of the shock is greatest at the center, but the ripples spread out eventually.

Let's not forget the "paper wealth" factor. Whether we're talking about values of tech stock portfolios, or home values, when people perceive themselves as suffering a loss, they spend less on everything. That affects essentially every segment of the economy. I just hope we can snap out of it by late 2007, or be prepared for President Rodham.

32 posted on 10/31/2005 12:25:10 PM PST by hunter112 (Total victory at home and in the Middle East!)
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To: RegulatorCountry

Somehow I doubt that commuting from Hagerstown and Gettysburg to Washington DC will appeal to many future job holders....! Idiots maybe.


33 posted on 10/31/2005 12:27:15 PM PST by silverleaf (Fasten your seat belts- it's going to be a BUMPY ride.)
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To: silverleaf

Colonials in the DC area (esp Loudoun county) have been dropping since June. That was the peak. That said, there could always be a double top but not until 2007 at the earliest.


34 posted on 10/31/2005 12:28:18 PM PST by palmer (Money problems do not come from a lack of money, but from living an excessive, unrealistic lifestyle)
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To: hunter112

"Well, then, why should someone move to Greensboro, NC, when a lender overburdened with foreclosed homes (in other areas) is letting people walk into them with zero down, no closing costs, and even moving expenses?"

Oh, I don't know, job growth maybe? There are other factors at work, as to why some areas have not skyrocketed. There is very little to prevent new residential construction here, with readily available tracts of land. This tends to limit appreciation of existing housing to the rate of inflation, with new construction pulling existing up as costs increase. New will always trump existing, with the exception of the very close in, older "charming" neighborhoods built in the teens, 20s, 30s and 40s. Or, at least that's true here, and in Dallas and Atlanta and Memphis and Indianapolis and, and and.


35 posted on 10/31/2005 12:31:03 PM PST by RegulatorCountry (Esse Quam Videre)
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To: silverleaf

"Somehow I doubt that commuting from Hagerstown and Gettysburg to Washington DC will appeal to many future job holders....! Idiots maybe."

You'll be right if a physical commute is an ongoing, daily requirement. I can envision that not being the case for all, at least not every single day.


36 posted on 10/31/2005 12:34:05 PM PST by RegulatorCountry (Esse Quam Videre)
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To: RegulatorCountry

Ok, maybe your part of the country is immune to the coming economic effects of the housing bubble slow leak. It could be, if those jobs don't depend on newly-poorer-feeling-people having to buy a product or service produced there. Maybe those jobs are all in government?


37 posted on 10/31/2005 12:45:40 PM PST by hunter112 (Total victory at home and in the Middle East!)
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To: ex-Texan
BTT 4 L8R



38 posted on 10/31/2005 12:47:53 PM PST by Cacique (quos Deus vult perdere, prius dementat ( Islamia Delenda Est ))
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To: tscislaw
How dare capitalists make money!!

Most speculators aren't true capitalists, they are quite often just gamblers. Especially the people who get in late, and are hoping for one more round of fools to bail them out.

Capitalists take chances, of course, but they do so with a business plan that doesn't end with, "sell out at a profit before the market tanks."

39 posted on 10/31/2005 12:48:30 PM PST by hunter112 (Total victory at home and in the Middle East!)
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To: ex-Texan

BTTT


40 posted on 10/31/2005 12:49:52 PM PST by SweetCaroline (For as he thinks within himself, so he is......Proverbs 23:7)
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To: hunter112

"Ok, maybe your part of the country is immune to the coming economic effects of the housing bubble slow leak."

Immune? Only if a generalized recession isn't brought on due to a drop in consumer spending elsewhere in the country, if refi money goes away.


41 posted on 10/31/2005 1:08:32 PM PST by RegulatorCountry (Esse Quam Videre)
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To: RegulatorCountry

Good post.


42 posted on 10/31/2005 2:02:13 PM PST by PatriotGirl827 (There are no short cuts to any place worth going.)
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To: diamond6

You want to buy now?!?!

Here's the problem. I live in Modesto, where the average household income is about $50,000 a year and the median home price is $400,000 or so. Any economist, heck, any high school kid, could tell you that this ratio is unsustainable. So why are housing prices to high? People from the Bay Area (where the median income is $80k-$100k) buy here because it's comparatively cheap and drive the housing prices up.

Here is why this affects you: People who work in Modesto can no longer afford to buy here, so they buy down the freeway in Merced and commute into Modesto every day. This drives the value of homes in Merced way up, since Modestans have much higher incomes than Merced(ites? ians? ers?). People from Merced and the surrounding areas are priced out of their own local markets as a result, so they look for somewhere else in commuting range. A LOT of the real estate sales further south in Central California are indirectly driven by people who are economically displaced thanks to market pressures originating in the Bay Area.

Now, with interest rates rising, the housing markets in Tracy, Patterson, Modesto, Stockton, and other outer rings of the "Extended Bay Area" become less attractive to home buyers. I'm constantly amazed that people will commute 4-5 hours a day to save $500-$800 a month on their mortgages, but they do just that. When rising interest rates narrow that gap to the $100-300 a month range, far fewer people will see it as worthwhile. When that market pressure evaporates, prices in this area will drop. They already are in high end homes where prices are already down 10% in many neighborhoods. We also have new developments that, for the first time in nearly a decade, have lots sitting unsold for weeks and MONTHS.

When the market in this part of the valley drops, less people will commute from the south, lowering market values there. This will set off a ripple effect that will lower values from Sacramento to Bakersfield.

If you must buy, just keep in mind that housing dips only affect those who plan on selling. Make sure that you plan on staying in whatever you buy for a decade or so, and you'll be fine. Market drops only hurt if you're refinancing or selling.


43 posted on 10/31/2005 2:45:03 PM PST by Arthalion
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To: hunter112
Much of it is financed to the hilt.

A key point. These 'creative' solutions, such as loans which initially have interest only payments, have yet to be tested by a tough market.

44 posted on 10/31/2005 3:25:07 PM PST by BlackVeil
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To: ex-Texan

Anyone have a good, accurate read on NYC? I am prepping my condo in Chelsea for sale this month, and am concerned. Thanks.


45 posted on 10/31/2005 3:31:58 PM PST by montag813
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To: montag813

NYC real estate has been going *down* in recent months from what I've read...


46 posted on 10/31/2005 5:21:39 PM PST by estjohn
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To: BlackVeil
Much of it is financed to the hilt.

A key point. These 'creative' solutions, such as loans which initially have interest only payments, have yet to be tested by a tough market.

It will be interesting to see what happens when those paying their 4.50-5.00% 3/1 rates have their loans adjust to 6.50-7.00%. On a $200,000 IO loan, someone paying 4.50% at a payment of $750, the new rate will most likely be 6.50%, which will jack up the new payment to $1083, unless of course the borrower has used the extra money to pay principal down. On a $300,000 loan, the payment will increase $500 per month. And if they have to repay principal, the payment will increase $860 per month. It will get even uglier with the MTA loans (aka option ARM's), where there will be negative amortization. When the negative amortization reaches a certain point, the borrower has to repay the principal at the higher interest rate. This most likely will increase the amount of foreclosures which in turn will have to bring down home prices. The new payments will also have to have a dramatic affect on the economy as higher payments eat up any disposable income. I'm glad I'm renting right now.

47 posted on 10/31/2005 5:35:25 PM PST by Subsonic22
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To: silverleaf

New housing developments in Hagerstown, Harper's Ferry, and Gettysburg are still selling like hotcakes. These buyers aren't commuting into DC but into Rockville, Gaithersburg, and Germantown. It's still a mean commute but not impossible, as the real traffic headaches on 270 sometimes don't start until you get as far south as Gaithersburg exits.

I just hope the crash holds off until I can sell my Montgomery County house in the spring. Or if houses in my area decline in price, maybe prices in the area I'm moving to will decline as well, I hope.


48 posted on 10/31/2005 5:38:24 PM PST by Capriole (I don't have any problems that can't be solved by more chocolate or more ammunition.)
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To: Arthalion

Tell me about it.
In July I helped my son and his girlfriend buy a starter home in the San Jose/Cupertino area. A 40 year old 1850 sq ft 2 story which needs all the bathrooms kitchen and floors replaced. It was listed in the high $700's and my son felt "lucky" to get it for just under $850K. A property which wouldn't fetch $300K in the Toronto area. And he'll need to put at least another $100K into it to get it to todays specs....
I don't get it. He and his girlfriend make good salaries, but they could loose those at a moments notice..
The good news was that someone bought his girlfriends 2 bdrm condo (which was also in the area) for just under $500K (she'd paid LT $300 for it about 5 years ago), so at least they were able to put a few buck down on their house..
But still, it's getting a little wacky out there..


49 posted on 10/31/2005 5:38:34 PM PST by CaptainCanada (Don't pee in my boots and then tell me it's raining............)
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To: estjohn

There is going to be a tidal wave of foreclosures in the metro Detroit area once the automobile and auto parts workers get their wages cut in half during the next 2 years. This will ripple throught the economy creating additional bankruptcies and forclosures in the service sector. You will be able to pick up homes in beautiful suburban areas for 50 cents on the dollar.


50 posted on 10/31/2005 5:44:39 PM PST by HuronMan
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