Housing bubble bursts

[bascule]

http://biz.yahoo.com/ap/061026/economy.html?.v=10

 

Housing prices saw the largest decline in 35 years, back in the midst of the Watergate scandal.

 

What was the cause? I'm going to go ahead and pin it on resetting Adjustable Rate Mortgages:

 

http://abcnews.go.com/Business/wireStory?id=2093736

 

Lenders have really screwed themselves with them. I'm hoping they start to see the error of their ways. Meanwhile many Americans are now losing equity in their homes, saddled with mortgages for much more than the value of their homes. Those foolish enough to opt for a sub-prime ARM are now feeling the burn of it resetting to a substantially higher interest rate, and I can only suspect many are being forclosed upon (in my homebuyer class, I found out $100m worth of property is forclosed upon in my state every WEEK!)

 

Does this mark the end of the credit boom, when it finally comes time to pay the piper and millions are found lacking?

[ParanoiA]

http://biz.yahoo.com/ap/061026/economy.html?.v=10

 

Housing prices saw the largest decline in 35 years, back in the midst of the Watergate scandal.

 

What was the cause? I'm going to go ahead and pin it on resetting Adjustable Rate Mortgages:

 

http://abcnews.go.com/Business/wireStory?id=2093736

 

Lenders have really screwed themselves with them. I'm hoping they start to see the error of their ways. Meanwhile many Americans are now losing equity in their homes, saddled with mortgages for much more than the value of their homes. Those foolish enough to opt for a sub-prime ARM are now feeling the burn of it resetting to a substantially higher interest rate, and I can only suspect many are being forclosed upon (in my homebuyer class, I found out $100m worth of property is forclosed upon in my state every WEEK!)

 

Does this mark the end of the credit boom, when it finally comes time to pay the piper and millions are found lacking?

 

They keep saying this, but I wonder how many really were "duped" into it. We signed an ARM because it's fixed for 3 years at 5%, then jumps to whatever, but we plan on selling our house this spring. We weren't duped into anything, rather we made a business decision.

 

I'm sure most of these are folks that are going to get burned, but I also wonder how many of these loans were done with the intent of getting out of the home before the ARM jumps. They may intend to refinance, but considering the closing costs they most certainly will suffer a net loss.

[Pangloss]

Housing prices saw the largest decline in 35 years, back in the midst of the Watergate scandal.

 

I'm confused, what does the Watergate scandal have to do with the housing decline in the late 1970s? Was there a reason for mentioning that or was it just a chance to bash Republicans? I don't care if it's the later (that's your axe to grind, whatever), I'm just wondering if I missed an actual point of information here.

 

 

What was the cause? I'm going to go ahead and pin it on resetting Adjustable Rate Mortgages:

 

http://abcnews.go.com/Business/wireStory?id=2093736

 

Lenders have really screwed themselves with them. I'm hoping they start to see the error of their ways. Meanwhile many Americans are now losing equity in their homes, saddled with mortgages for much more than the value of their homes. Those foolish enough to opt for a sub-prime ARM are now feeling the burn of it resetting to a substantially higher interest rate, and I can only suspect many are being forclosed upon (in my homebuyer class, I found out $100m worth of property is forclosed upon in my state every WEEK!)

 

Does this mark the end of the credit boom, when it finally comes time to pay the piper and millions are found lacking?

 

It's an interesting premise, but there are some aspects of this whole ARM-and-refinance thing that I don't understand.

 

Yesterday I saw a report on ABC News in which they gave an example of a single mom with two kids living in a VERY nice, VERY large house in Atlanta (clearly much larger than their needs). The reporter said that because of the new interest rate, the woman was going to have to give up her home. He explained that "she was unable to refinance", therefore she was going to have to rent an apartment for her family and give up the house.

 

Um.... ok, but why can't she refinance?

 

That's the thing I don't get. If the bank is telling her that the house is out of her reach, then doesn't that just reflect reality? Why can't she -- here's a thought -- LIVE WITHIN HER MEANS? It's not like her kids were out on the street -- she's clearly making real money, she just made a mistake and stepped outside of her means. Stuff happens, you deal with it and you fix problems and you move on.

 

Where's the problem?

 

Not that any of that has anything to do with the economy (and let's facing, bashing people who step out of their means is one of MY axes to grind! <grin>).

[Pangloss]

Oh by the way, I think it's really interesting that as the Housing market declines, the Dow is rocketing skyward.

 

I can't help but wonder if we're just seeing the boomers push their money around again. When the bubble burst they all became real estate flippers. Now that market is failing so they're all swarming back to the stock market. Around and around and around we go.....

[Skye]

Haven't US companies been having AGM's and announcing profits, etc? I would take a guess there's been some good news and that is boosting the market.

[bascule]

I'm confused, what does the Watergate scandal have to do with the housing decline in the late 1970s? Was there a reason for mentioning that or was it just a chance to bash Republicans?

 

I was providing context. Take it for what you will.

 

It's an interesting premise, but there are some aspects of this whole ARM-and-refinance thing that I don't understand.

 

Sounds like you understand them pretty well. People got them because they were easier to qualify for, and also because they didn't understand them. The low low low introductory rate was very alluring, now they're all getting screwed. Guess that's why you read the fine print, or at least the truth-in-lending statement.

 

Oh by the way, I think it's really interesting that as the Housing market declines, the Dow is rocketing skyward.

 

http://money.cnn.com/2006/10/27/news/economy/gdp/index.htm?eref=rss_topstories

 

However, GDP growth was the weakest in three years

[ParanoiA]

Um.... ok' date=' but why can't she refinance?

 

That's the thing I don't get. If the bank is telling her that the house is out of her reach, then doesn't that just reflect reality? Why can't she -- here's a thought -- LIVE WITHIN HER MEANS? It's not like her kids were out on the street -- she's clearly making real money, she just made a mistake and stepped outside of her means. Stuff happens, you deal with it and you fix problems and you move on[/quote']

 

See, that was something that bugged me when they ran that kind of story here. They said that because of ARM's people were buying bigger and bigger homes, more expensive homes and the bubble was going to burst when the ARM's fixed rate period expires and the big interest kicks in.

 

The first thing I thought was, who in their right mind would spend so much more on a mortgage when they know it's going to kick their ass in a couple of years when the rate jumps? That's beyond ignorant to me. You can even be stupid and see the lack of sense in that.

 

The only thing I can think of, is they're just deliberately refusing to think about tomorrow. Only concerned with "what makes me happy today". Which, as most of us know, makes you miserable tomorrow.

[Pangloss]

Surely they had to sign some kind of "truth-in-lending" statement. I find it hard to believe that all those people were duped, especially given all the media focus on the story *at the time*. It seems more likely they knew exactly what they were getting into.

 

That having been said, maybe those kinds of loans should be disallowed in the future, given that people are apparently too stupid to use them correctly (whatever correctly is).

[bascule]

ARMs made homebuying attrictive to people who shouldn't be buying homes in the first place, due to their financial situation, and also let them qualify for a home loan even with bad credit.

[john5746]

I have used ARM's in the past and they worked well for me as they do for millions. I didn't use it to qualify for something bigger though. It is obvious that lenders were desperate to qualify people. I think people should have to qualify for a fixed loan, then get an ARM if they choose to gamble a bit.

 

With more money going to less people, this will continue to be a problem. The middle class will find it harder and harder to afford housing, cars and insurance. They will need to tighten their belt more, but also learn to live with more risk as well.

[bascule]

Yeah, I don't want to make ARMs out as universally bad. If you intend to flip your house in less than 3 years, it's a good choice, although I'm not sure why someone would only wait 3 years before selling. I intend to live in my townhome for at least 5 before I think of selling it.

 

The problem is, of course, the people who really shouldn't be buying homes in the first place getting an ARM because that's the only way they can qualify for a mortgage. The sort of people Pangloss is describing, who use an ARM to buy a house they can't afford, and get screwed. It's also a problem with loan officers working on commission trying to sell as many ARMs as possible, and lenders who aren't policing these loan officers, who are now going to be stuck with a lot of devalued property. And lenders don't want to be in the real estate business...

 

It's a bad situation for everybody.

[ParanoiA]

In our case, we were actually refinancing. We had a fixed rate, at a horrible rate, then refinanced with an ARM. I was really nervous about doing that, but it cut our house payment down a couple hundred bucks a month which saves us almost $6,000 over 3 years. Closing cost were roughly $3,000, so it made good business sense.

 

We had already planned to move in a couple years or so, and I'd never sell a house outside of spring or summer, unless I was forced to.

 

So, I wonder if I'm contributing any to the housing bubble numbers...

[Pangloss]

I guess we could pass a law requiring a means test for ARMs, or just ban them outright, but I'm pretty dubious about stuff like that. Maybe it's necessary, not because it hurts idiots but because it hurts *me*, e.g. everybody who has to cover the focsts of defaults over the long run.

[bascule]

As for me, I bought a house in a market with a moratorium on new construction. Consequently property values never go down here... ever.

[Mokele]

To hell with the economics, I'm just glad I might actually be able to afford my own home at some point in the future.

[bascule]

To answer my own question:

 

Does this mark the end of the credit boom, when it finally comes time to pay the piper and millions are found lacking?

 

From the article:

 

But former Federal Reserve Chairman Alan Greenspan told a Washington audience on Thursday that the economy will rebound after going through a "very weak patch" this summer.

 

"Most of the negatives in housing are probably behind us but we still have a way to go" before hitting bottom, Greenspan said. "We have too much inventory still."

[Pangloss]

More confirmation that the bursting of the housing bubble is negatively impacting the economy came out this past week, when the new economic numbers showed a GDP growth rate of only 1.6%, the lowest in four years in what has generally been a good economic period (albeit not as good overall as it was under Clinton).

 

http://news.google.com/?ncl=http://www.sfgate.com/cgi-bin/article.cgi%3Ff%3D/c/a/2006/10/28/BUGC5M1GIK1.DTL&hl=en

 

Without the housing numbers, GDP would have been up something like 2.5%. That's a huge sway for only one indicator.