Nov302015
People desire homeownership but fail to save for down payment
A large majority wants to own a house, but only a small minority is actually saving money to meet that objective.
The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people’s inability to distinguish between desire and demand.The financial media frequently entreats us to stories about how home ownership is not dead because surveys proclaim 88% still desire to own a home. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit.
True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand.
When realtors or their shills in the financial media make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.
I want to point out to everyone exactly how the financial media operates:
- First, they believe people read financial news to get good news, so they spin every piece of information in a positive light, and they quote every economist willing to tell people what they want to hear.
- Second, they will repeat their spin in groupthink fashion until it becomes conventional wisdom (Do you remember how hard they worked to convince everyone slow real estate sales in 2014 was due to weather?)
- Third, they squelch any dissent from their groupthink wisdom with dismissive articles ridiculing contrary ideas or attacking the credibility of contrary messengers (Rembember John Burn’s quote about Mark Hanson, “I give him zero credibility”?
- Fourth, when reality proves them wrong — which happens quite often — they disremember the bad information they disseminated and respond incredulously to reality.
When it becomes impossible to ignore reality, they slowly break the bad news, “Sorry, our cover story is bullshit, and the housing market really is in trouble.” Somewhere in there, the financial media should apologize for leading readers astray, but most reporters probably know their readers are hearing what they want to hear anyway, so they don’t feel responsible for misleading them.
I write derisively about the mainstream media quite often, and it isn’t because I harbor some secret jealously or deep desire to be one of them. I find it offensive how they mislead people with bad information or shoddy analysis. People deserve better, particularly those considering making the largest financial purchase of their lives.
Renters aren’t saving to buy a house
Diana Olick, Wednesday, 18 Nov 2015
Looking across the vast spectrum of housing surveys today, most will claim that the majority of renters want to buy a home eventually. That may be, but they’re not saving to do that.
In other words, that desire is not translating into demand.
In fact, saving for a down payment to buy a house ranks fourth on their list of priorities, … Only 39 percent said saving for a down payment. This is particularly surprising given fast-rising rents. …
Potential homebuyers can’t save for down payments with high rents. Very few potential homebuyers have the necessary down payment, even the paltry 3.5% required by the FHA. And since renters put a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. There is no magic bullet or simple solution to this problem.
“We know rents are rising faster than incomes, and now we have data to show that many renters don’t have enough to pay all their debts each month, which is forcing them to make tradeoffs, such as cutting spending on other items,” said David Brickman, executive vice president of Freddie Mac Multifamily.
Tepid wage growth and rising house costs prices out low-income households. 
When supplies are limited, as they are now due to the presence of so many underwater borrowers stuck in the purgatory of cloud inventory, the substitution effect forces buyers at every price level to buy a lower quality house than they otherwise would. At the very bottom of the housing ladder, those buyers who can only afford the least expensive properties get priced out by higher wage earners substituting downward.
The share of renters who say they now have to put off plans to purchase a home rose to 55 percent in October from 44 percent in the last Freddie Mac renter survey in June. This occurred even as more said they would like to buy a home and have started looking.
Add it up and the lack of affordability is the answer. Renters may be looking, but they’re not buying because they are faced with rising home prices and rising mortgage interest rates.
When asked the main reason they expect to still be renting three years from now, the top three answers had to do with affordability. The fourth was not good enough credit.
Affordability will be the major housing market issue of 2015, and 2016 for that matter. 
The pressures on lenders to obtain business prompts them to expand loan programs and develop “innovative” loan products in order to keep sales volumes up when prices reach the limit of affordability. However, Dodd-Frank effectively banned these products, so the ceiling of affordability will be much more rigid going forward.
The inconvenient truth
The story the financial media doesn’t want to tell inadvertently leaked out in the story above. The consensus narrative is that Millennials will return to the housing market in large numbers stimulating housing demand. They primary reason they cling to this hope is because of feel-good surverys that show 88% still desire to own a home. However, since only 39% are actually taking action to turn that desire into demand, the inconvenient truth remains: Housing demand will be remain low for the foreseeable future.
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Conforming limits rise to inflate bubbles in high-priced counties
In 39 “high-cost” counties, the FHFA said that the conforming loan limit will be increased for 2016.
Four counties in California will see their conforming loan limits increase.
According to the FHFA, the conforming loan limit for Monterey County, California, which includes Salinas, will increase by $26,450, from $502,550 to $529,000.
In Napa County, California, which includes Napa, the conforming loan limit will increase from $615,250 to $625,500, an increase of $10,250.
The largest increase in California comes in Sonoma County, which includes Santa Rosa. In Sonoma County, the conforming loan limit will rise from $520,950 to $554,300, an increase of $33,350.
The conforming loan limit will also increase in San Diego County, rising $18,400 from $562,350 to $580,750.
Is there a housing bubble brewing on the West Coast?
he West Coast has dominated the top ten real estate market list for many months now, causing some people to be concerned that these market are overheated.
“Affordability is derived by looking at the median income for a particular area as a ratio to the mortgage payment needed to purchase a median priced home. An index score above 100 signifies that a household earning the median income has more than enough income to afford the mortgage,” the report stated.
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/Nov2015/San-Jose.png
Currently, San Jose has returned to averaging around 70, showing that income has increased to meet historic norms for the area. This isn’t a cause for concern unless it drops into the 50s like it did 2005-2007.
Isn’t a concern? It reveals how chronically unaffordable San Jose really is.
So as far as a possible a housing bubble is concerned, Pro Teck said, “The above are examples of what we see for all of our top ten CBSAs – while home prices are increasing, affordability is at or above historic norms and nowhere near ‘bubble’ territory of 2004-2007.”
I would suggest that is futile for them to even try to save sufficient money for a down payment for the following reasons:
Housing inflation year over year is far greater than wage growth.
Rent inflation year over year is far greater than wage growth.
Inflation in food and healthcare is far greater than wage growth.
See the pattern.
I have to wonder how long that can go on.
There are two types of inflation: wage-pull and cost-push. If inflation is being pulled up by rising wages, then only those people who aren’t getting big wage increases get hurt. However, if inflation is being pushed up by rising costs, which seems to be the case now, then everyone’s standard of living falls.
If this trend continues, the middle class will cease to exist. Or perhaps it’s more accurate to say that the lower middle class will fall out of the middle class and into a state of relative impoverishment.
In the past few years I have seen more and more people spend a larger and larger percentage of their incomes on housing. Even though we did not see an appropriate increase in incomes to offset the housing prices, we still saw housing prices increase. This never made sense to me. How could incomes be stagnant or go down, yet people spend more money on housing? I suspect people were able to pull this off because money was diverted from other areas of spending. If there is cost-push inflation as you suggest, then I cannot see any of this continuing much longer, especially if there is also a slowdown with Chinese buyers.
Housing costs over-corrected from 2007-2011 so the sharp increases in costs from 2012-2015 were the result of getting back to what stagnant incomes could still support. Irvine is probably different due to the level of foreign cash buyers driving prices up, but the rest of OC had some outstanding deals on houses during the downturn.
Once the fence sitters realized that prices had stopped falling, their fear turned into greed, and they were suddenly competing with each other and investors for those good deals which caused prices to rocket up.
Unfortunately, not everybody recognized what was happening in real time, i.e:
el ORACLE says:
March 7, 2012 at 3:33 pm
Well, that’s just incredible muchacho, barely 7000 homes for sale in OC. Hopefully, the tax credits will come back to fuel another “sustained bounce in prices” and we can all put our anti-gravity boots back on and ride HELOC’s to the moon. Lolllllll
But what are the reasons for rising costs?
1. More red tape
2. Congested infrastructure (traffic)
3. Lack of resources (water)
4. Land / real estate cost increase
All of 2. 3. and 4. are negatively affected as more people move to coastal California. It almost seems like we have a local overpopulation induced drag.
Most of the reason for increasing housing costs is lack of supply. If supply were allowed to come to market to meet the demand, housing costs would not rise any faster than the rate of wage increases that sustain them.
According to my monthly reports, house prices are not going up as fast as rents are increasing, so further home price increases are on the way, assuming rising mortgage rates don’t crash the party.
The rate of increase in rents is only sustainable as long as people are willing to substitute down in quality to live in Coastal California. Unfortunately, we create more jobs than we develop in new housing units, so the supply pressure will continue to push both rents and home ownership costs higher.
The Keynesian in me agrees with you, but the Capitalist does not.
If the cost to develop new housing supply is significantly lower than the sale prices of homes, we should have more supply.
That does bring up a very big question to me though. Builders are motivated by sale prices, but financed buyers are motivated by cost of ownership. If rates rise and prices dip, builders could lose motivation (lower prices) to build new homes while financed buyer also lose motivation (higher cost of ownership) to buy new homes.
Can you simultaneously have all three?:
– rising rates
– no bubble (cost of ownership comparable to rent)
– at least normal level of housing supply being built (builders motivated)
It seems to be that an environment of rising rates will exacerbate the California housing supply shortage.
I think you might not be factoring in the cost of inputs could all decline. The cost of land, labor, and materials could all decline and reduce the cost of homes. The cost of materials has already had massive declines.
Also if home builders are not building homes then they cease to exist so they will keep building something.
The problem in California is all the land use restrictions that prevent supply from coming to market. Builders would provide thousands of homes at much lower price points if they could get permission to build. The main reason people spend such a high percentage of their income on housing in California is because they must in order to compete with their neighbors for a scarce resource. Properties in Las Vegas are much cheaper, but not just because incomes are lower but because they spend a smaller portion of their income on housing. The moment prices rise higher than the cost of construction, builders go nuts out there because there are far fewer restrictions to provide new supply. It’s the NIMBYs in California that oppose new development that are the root cause of overly high house prices.
Citigroup sued over billions in mortgage debt losses
Make them feel pain
Citigroup (C) is still picking up the pieces from the financial crisis and faces a lawsuit over its alleged failure to properly monitor toxic securities backed by more than $13.8 billion of mortgage loans, resulting in $2.3 billion of losses. Per Reuters:
According to the article, Pacific Investment Management Co and other investors filed a complaint Tuesday night in a New York state court in Manhattan.
Citigroup breached its duties as trustee for the 25 private-label trusts dating from 2004 to 2007 by ignoring “pervasive and systemic deficiencies” in how the underlying loans were underwritten or being serviced.
Credit Default Swap Market Has Fallen Dramatically Since the Crisis
The credit default swaps (CDS) market has declined dramatically since the financial crisis. Trading volumes in CDS—which are financial swap agreements in which the seller agrees to compensate the buyer of the CDS in the event of a loan default—are a mere one-fourth of what they were in 2008, totaling less than $9 trillion in amount outstanding nationally as of June 2015.
What is the cause of the substantial drop in the CDS market, and what can be done to bring it back up?
A report titled “Can the Credit Default Swap Market be Salvaged?” from the Kroll Bond Ratings Agency (KBRA) states that new laws and regulations focused on reducing the risk of over-the-counter (OTC) derivatives products is partly to blame for the dramatic decline. But KBRA also said in the report they believe the decline is “part of a larger trend by large, systemically significant global banks to move away from products and markets that are seen as problematic.”
Home price inflation appear to be concentrated along the West Coast
Pro Teck released its Valuation Services Home Value Forecast (HVF) November update, which revealed that five of the markets featuring exceptionally high real estate values are located in California. Keeping with the West Coast trend, another four are located in Washington state, while one of the inflationary markets is located in Idaho.
So where are prices at an all-time high? Pro Teck points to Bellingham, Washington; Portland, Oregon; San Jose, California; and Seattle.
Meanwhile, Boise, Idaho, is forecasted to hit a new high by the first quarter of 2017, alongside Mount Vernon, Washington.
Other markets dealing with healthy home prices include Modesto, Stockton, Sacramento, and Vallejo, California. Still, these California markets are not expected to reach the bubble-levels reached during the pre-real estate crash over the course of the next five years, Pro Teck says.
“The first question people ask is whether there is a bubble on the horizon for any of these communities,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “While there are many factors that can impact a ‘bubble’ one of the most important factors at Home Value Forecast is looking at home affordability via an affordability index.”
What is the Cost of Delaying the Foreclosure Process?
While delaying foreclosure on a home does have some potential benefits, for the most part it is counterproductive, according to data released this week by Freddie Mac.
In Freddie Mac’s November 2015 Insight & Outlook report, the Enterprise notes the time it takes to foreclose on a home is twice as long on the average in judicial foreclosure states, meaning that the courts must approve the process before it is completed, as opposed to non-judicial states, where the process can be completed without the courts. The state with the longest average time to complete foreclosure (from the date of initial default) was a judicial foreclosure state, New Jersey, at 22 months—which was twice as long as the shortest average foreclosure timeline, 11 months, in two non-judicial states, Michigan and Missouri. In some judicial states the foreclosure process can take much longer than 22 months, such as in Ohio, where a bill recently passed in the State House of Representatives that would expedite the foreclosure timeline to as low as six months.
Freddie Mac notes that sometimes that a delay in the foreclosure process can potentially be useful. It can buy time for the borrower to either cure the delinquency or work out a loan modification. If foreclosure cannot be avoided, the borrowers may be able to use the extra time to work out a home forfeiture solution such as a short sale or deed-in-lieu of foreclosure agreement.
Despite the potential benefits of the extra time, however, delaying foreclosure can ultimately be counterproductive, according to Freddie Mac. Borrowers who are delinquent and facing foreclosure will sometimes desert the home, thus deferring maintenance. A deteriorating home increases losses incurred by the mortgagee and also can potentially breed more blight—resulting in squatting, vandalism, violent crime, and the deterioration of entire communities.
11-24 Freddie Mac Graph“Even if the house is maintained properly, delay by itself increases losses to lenders,” Freddie Mac said. “The cost to service non-performing loans is 15 times higher than the cost to service performing loans. And, if loans are securitized, servicers typically must advance interest payments to investors and make property tax and insurance payments even though they are not receiving payments from the borrowers.”
How Uncle Sam Nationalized Two Fortune 50 Companies
http://fortune.com/2015/11/13/fannie-mae-freddie-mac-nationalize-housing-finance/
Frightened, Ignorant and Cowardly is No Way to Go Through Life, Son
Seriously, I don’t think the bedwetting about Muslims has been this bad in a very long time, which is saying something, and the panic on Syrian refugees is particularly ridiculous. Here’s a nice, juicy quote from a just released essay on the subject:
Of the 859,629 refugees admitted from 2001 onwards, only three have been convicted of planning terrorist attacks on targets outside of the United States and none was successfully carried out. That is one terrorism-planning conviction for a refugee for every 286,543 of them who have been admitted. To put that in perspective, about 1 in every 22,541 Americans committed murder in 2014. The terrorist threat from Syrian refugees in the United States is hyperbolically over-exaggerated and we have very little to fear from them because the refugee vetting system is so thorough…
The security threat posed by refugees in the United States is insignificant. Halting America’s processing of refugees due to a terrorist attack in another country that may have had one asylum-seeker as a co-plotter would be an extremely expensive overreaction to very minor threat.
What horrifyingly liberal commie soviet came up with this load of codswallop? The Cato Institute, the libertarian think tank co-founded by Charles Koch, i.e., the fellow who with his brother is currently trying to buy the entire right side of the political spectrum for his own personal ends. When the Cato Institute is telling you to maybe take down the pearl-clutching over the Syrian refugees a notch or two, it’s an indication that you’ve lost all perspective.
It’s been particularly embarrassing how the mostly-but-not-exclusively (and thankfully not all-encompassing) GOP/conservative politician freakout about the Syrian refugees points out that, why, hello, bigotry really is a thing, still. From small-town mayors declaring that FDR had it right when he put all those US citizens of Japanese descent into camps to presidential candidates alluding that might not actually be a bad idea to make special IDs exclusively for Muslims here in the US, to the House of Representatives passing a bill to piss on the Syrian refugees, it’s been a banner week for bigotry here in the US.
Considering the abortion clinic terrorist attacks by Christians, maybe we should be considering registering, watching, and possibly deporting all Christians?
At least the violent xenophobic bigots.
Meh. Who can tell the difference? Better to be safe, and just intern every person who tells others how to live based on what the Gods are whispering to them.
Thankfully, we have left wing activists aplenty that could fill the role of telling others how to live, once all the Christians are interned.
Yep. The thought police and the socialists would be next to arrive in the internment camps.
There is no shortage of people interested in controlling lives, but there is a major distinction between the two, no? e.g. I evaluate Dave Ramsey’s advice on any given issue based on whether it makes sense for me and/or his more typical listener. I do not give any deference to any piece of advice from anyone with the argument that “this is what my God says.” That is immaterial to me.
Everything DR teaches is based on the Biblical concept that debt is bad, so even though you deny it, you are taking advice from somebody that teaches based on what God says. He may not phrase it exactly as you did, but as an evangelical Christian that is how he views it.
I don’t mind following someone’s advice if it comes from their religion as long as it’s good advice. I don’t drink alcohol because it makes me ill, not because Mohammed said that God said not to. It’s when they say “do this” or “don’t do that” because their God says so that I have a problem. When I see evangelists act as if they have a personal hotline to God, a hotline that only they have clairaudience to hear, it revolts me.
N.Y. tabloid declares war on the NRA
A New York tabloid is calling the National Rifle Association’s platform “sick jihad” and the organization’s leader “Jihadi Wayne” after the organization fought legislation that would prohibit people on the government’s watch-list for terrorists and suspected terrorists from purchasing guns.
The New York Daily News, a longtime NRA adversary, has published two front-page stories during the past week calling out the NRA and its “gun-loving Republican cohorts” for opposing legislation that would block people on the watch-list from purchasing firearms.
The tabloid’s response comes after The Washington Post and others reported that, over the past decade, more than 2,000 terror suspects legally purchased guns in the United States — and a bill to put an end to it had hit NRA resistance.
“These bills have rarely made it out of committee, in part due to vehement opposition from the National Rifle Association and its allies in Congress,” Wonkblog’s Chris Ingraham wrote last week.
[From 2004 to 2014, over 2,000 terror suspects legally purchased guns in the United States]
The Daily News wrote about the issue first last week, claiming in its cover story that people on the list who were able to buy firearms had gotten away with it “because gun nuts are blocking law that would end this madness.”
On Monday, it ran a follow-up with the headline, “Nowhere to hide, Jihadi Wayne” — saying NRA chief executive Wayne LaPierre had been “conspicuously silent” about the story.
The DEA has failed to eradicate marijuana. Some members of Congress want it to stop trying.
Last week, a group of 12 House members led by Ted Lieu (D) of California wrote to House leadership to push for a provision in the upcoming spending bill that would strip half of the funds away from the DEA’s Cannabis Eradication Program and put that money toward programs that “play a far more useful role in promoting the safety and economic prosperity of the American people”: domestic violence prevention and overall spending reduction efforts.
Each year, the DEA spends about $18 million in efforts with state and local authorities to pull up marijuana plants being grown indoors and outdoors. The program has been plagued by scandal and controversy in recent years. In the mid-2000s, it became clear that the overwhelming majority of “marijuana” plants netted by the program were actually “ditchweed,” or the wild, non-cultivated, non-psychoactive cousin of the marijuana that people smoke.
More recently, overzealous marijuana eradicators have launched heavily armed raids on okra plants and warned the Utah legislature of the threat posed by rabbits who had “cultivated a taste for the marijuana.” Last year, the DEA spent an average of roughly $4.20 (yes, really) for each marijuana plant it successfully uprooted. In some states, the cost to taxpayers approached $60 per uprooted plant.
The program has also proven to be ineffective. The idea behind pulling up pot plants is to reduce the supply of marijuana, thereby reducing its use. In 1977, two years before the program’s introduction, less than a quarter of Americans said they’d ever tried pot, according to Gallup. By 2015, after 36 years of federal marijuana eradication efforts, the share of Americans ever trying pot nearly doubled, to 44 percent.
Given that marijuana is legal in some form or another in nearly half of the nation’s states, some lawmakers are saying enough is enough. “The seizure of these plants has served neither an economic nor public-safety nor a health-related purpose,” Lieu and his colleagues write. “Its sole impact has been to expend limited federal resources that are better spent elsewhere.”
https://confoundedinterest.wordpress.com/2015/11/30/chinese-pull-back-from-u-s-property-investments-big-trouble-in-little-china-california/
This is what I understood from the article in case you dont want to read it. Id like to hear everyones opinions on this. I know Larry has mentioned this scenario many times in previous blogs.
1. wages do not support prices
2. home prices kept high from sales to chinese
3. Chinese economy sucks, currency devalued potentially making less chinese buy in the OC.
4. home prices may fall as a result of #3
The Wall Street Journal is reporting on this as well.
http://www.wsj.com/articles/chinese-pull-back-from-u-s-property-investments-1448649226
Per the article it says 30% of Chinese home purchases are in California. If that many billions in buying vanishes (or worse reverses) look out below.
Looks like a follow up post. Thanks for sharing the article.
To hello’s question, house prices may fall as a result of a lack of Chinese investor purchases, but first, we will go through a period of very low sales. The homebuilders will be strongly impacted first.
The big question is what will Five Points do in the Great Park. We know from experience that the Irvine Company will simply stop building and selling homes, but Five Points may not. That will determine what happens to house prices.
We are going through a period of very low sales and homebuilders have definintely been impacted as new home sales have been slowing down drastically. So…. what happens next?
First the incentives will increase as they attempt to maintain sales volumes without lowering price. Then there will be a pause as they consider a reset, then if sales still haven’t picked up, they will lower prices, probably with a new design to disguise the fact, but the prices will be lower. If demand doesn’t pick up in 2016, I expect to see lower prices by next fall. They will wait out the prime selling season, but if things don’t get better, they will do what they must to sell homes.
Prepare for exitous-unstudious™
You have been warned 😉
Yes, warned. Of what, it’s not so clear. And what I should be doing alternatively, isn’t clear either.
How about minimize your debt and maximize your savings? Good advice at all times.
“How about minimize your CONSUMPTION and maximize your savings? Good advice at all times.”
Fixed it for you. However it would require delayed gratification which is unpatriotic to the cult of consumerism.
“How about minimize the cost of your consumption? Good advice at all times.”
There are many ways to save more without affecting your standard of living.
Please enlighten me because the only way to save more is to consume less than you make. You can either freeze your costs and make more money, or lower your cost and make the same amount of money.
Not going into debt is irrelevant if you still consume everything you make.
“Minimizing the cost of your consumption” places the emphasis on lower cost, while “minimizing your consumption” places the emphasis on lower consumption.
– minimizing the cost of your consumption: Browse Cyber-Monday deals to get what you wanted for less
– minimizing your consumption: Don’t browse Cyber-Monday deals because you would just but stuff you don’t need
Reporters beginning to smell blood in this “Countrywide Is Back” article:
http://www.latimes.com/business/la-fi-nonbank-lenders-20151130-story.html
He is picking up on a symtom of the disease.
How housing prices are set:
“”We were thinking about what our monthly payment was going to be, not where the loan was coming from,” said Abraham Cardona, 32.”
Don’t worry about interest rates, I’m sure housing couldn’t possibly go down by more than 3.5%.
At least some in the lending industry still have common sense.
FHA loans should be banned.
“Let’s sell poor people a loan which when added together with the risk premium will cost much more than equivalent rent. In exchange, because poor people don’t have money, we’ll take all the risk.”
The only benefit to the loanowner is speculative. A program for PONZIs.
I have a friend who bought his home with a 0% down VA loan. He refuses to refinance it because he considers it a “put” if house prices go south. Since it’s a purchase money mortgage, he can walk away with no recourse.
He thinks he can walk away from a Gov loan just because its a non recource??? I’d do my research… I know a couple who walked way from a USDA loan and the gov is garnishing wages until they pay the over 200K difference. no recourse laws don’t protect you from the gov.
just saying USDA and VA government money.
You are correct about USDA loans. The Feds are brutal in their collection tactics and will even garnish Social Security for elderly folks living in poverty. You do not want to walk away from a USDA loan unless there is no other alternative.
However, VA does not enforce those same standards because it would be punitive to active duty service members, as well as veterans. Even though the government is more lenient about collecting VA loans in default, the performance of these loans is surprisingly high compared to non-VA loans with a similar risk profile.
Another difference is that VA loans have a funding fee similar to FHA MIP that creates an insurance pool to pay for losses, whereas USDA loans are loans made directly from the US Treasury and so there is a lot of pressure to recover the taxpayers’ money from deadbeats.
“This time, the executives say, will be different.”
That sent chills up my spine when I read it.
It will be different.
Geographies will be different.
Mechanisms will be totally different:
1. Interest rate rise killing ability for buyers to qualify for monthly payments based on new lending standards, stopping price rises and sales.
2. Pull back of investors and Chinese when it is apparent that the interest rates fueled a bubble and there is not any fundamental economic shift on the West coast to justify deviating from historic norms.
3. Speed Bump or small recession in economy due to cyclical nature of economy and poor allocation of capital due to interest rates being too low too long.
4. Price reductions
5. FHA loan defaults
6. Price reductions
7. Prices settle on affordability and underlying income levels (pent up demand for affordable property)
8. Foundation for next bubble in Southern California starts
See, a totally different bubble.
That is one of the best and most coherent bearish arguments I’ve read in a while. I may use that in a post. Thanks.
There’s a lot of innuendo in that article, but not a lot of factual evidence to back it up. Basically, non-bank lenders are only slightly more risky than bank lenders when it comes to FHA loans (1.1% vs 0.9% delinquency), and most of that higher risk is concentrated at only a handful of non-bank lenders reaching for market share.
They pointed out that Carrington is the riskiest lender making FHA mortgages, but that’s not surprising given their publicly stated guidelines of 550 minimum FICO. Eventually, HUD is going to start cracking down on Carrington and the other outlier companies with high delinquency rates. HUD compares each lender to the industry average and if your DQ rate is excessively higher than the industry as a whole, they will start sanctioning your company. I wouldn’t be surprised if this article puts Carrington front and center on the HUD watch list, if they aren’t already there.
The news gets worse when you consider that the rental units that are being built now are high priced. How is someone going to save for a down payment on a house when they’re paying $2,000 a month for their one bedroom unit + car payments + student loan payments? If you can save $500 a month it would take 200 months to save $100,000 for your downpayment. Interest on your savings at 1% or so doesn’t help much.
There are no easy solutions. Of course, realtors would suggest that we simply eliminate down payments entirely, but we all know how that turned out last time.
Build more housing.
Results in higher GDP and better affordability.
When someone occupies a high priced rental as their primary occupancy, that means there is one lower priced rental that opens up. The ironic thing is that rent is so high now the difference in rent between high and low quality properties is not even that much. Basically any new housing that hits the market where people occupy them as their primary residence is going to help keep rents more affordable.
So if builders can maximize profits with high end buildings (and clever cities negotiate concessions), then have at it.
I’m sure its hard for people to come up with down payments in the rest of the USA, but its possible. Here in So Cal the viable way is to have your baby boomer parents give you some of their ponzi money so you can participate in the ponzi scheme.
I think the most humeous term in So Cal real estate listings is “starter home” when its 500k + and 50 steps down from a comparable rental.
Move in with the guy who is paying $842/month for the two bedroom.
Here is a steal. Only $680K to make $1500 a month in rent!
https://www.redfin.com/CA/Los-Angeles/4457-S-Centinela-Ave-90066/home/6736910
You can make like 7K a year on this. That’s just over 1% per year return. Better buy now before you are priced out forever.
As an added bonus, the landlord can sleep in the garage while you just sit back and let that 1% dough roll in.
This is a good example of why I am so skeptical
That house is west of the 405, so it’s being valued on it’s location and lot value. Someone could scrape this POS and build a nice house on it.