Stinger

But it was an option to buy a $400,000 home and put some money down or a $300,000 home and put some money down, or save and put some money down. It is also an option to just make the payment they agreed to make and just live there and not worry about what it is worth on paper.

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Stinger

How does that force a home owner out of their house. I've had a mortgage for over twenty years been through all sorts of economic times and it hasn't forced me out of my house.

In the case I cite how did that force those people out of their house when in fact they spent every dollar of credit they could get their hands on put that debt on their house and then one day found out they couldn't keep up with the debt service they had taken on.

william the wierd

True. It's the cascade effect that will kill the market. Currently only homeowners who have less equity according to their loan statement than the market has declined are walking away. Call it an initial 10% decline.

Since foreclosures compete directly with relocations and new construction even a few foreclosures above normal load have a compounding effect. If the supply of housing increases by 1% relative to demand prices should drop about 2% due to a usually inverse square relationship of supply and demand. But many, sometimes most, local and state officials either invest in real estate and/or get most of their campaign money from landlords and construction companies so the local foreclosure laws create a long foreclosure process (or other delaying tactic). This allows politicians and campaign contributers to get out from under before the foreclosures really hit.

This creates a multi-stage rocket headed down with lots of local and state variances. So the politically connected drop the price of housing prior to the first wave of foreclosures which puts more people upside down and in foreclosure. To use your example these are the people whose 500K 20% down has declined 21-22% in the first 3 years of ownership with a 30 year mortgage. The owners no longer have any equity at this point. They go under and it can go various ways from here.

But one of the biggest local investors around here moved his hardware store and built a condo project at just about the market peak. I mention that because this kind of "inside info" does not protect high octane operators from themselves. If you are the peak you are screwed. but everytime the ratchet moves the move is bigger and the moves are faster on the downside. If those condos were an apartment complex he could maybe get out using the normal 3rd stage: identity theft to get mortgaged purchases from non-existent buyers should hit the news soon. This in turn causes a tightening up on qualifications that make sales and prices go down and further increase foreclosure rates. but march of next year should be a great time to head for the exits. Should be a really convincing deadcat bounce around then, no guarantees most of the country should be in between stages of collapse and really convincing BS that the worst is over should be floating around: get into cash and rent.

Socio-biology and selection is a fact of life and death not a political option

Politics is a continuation of war by other means

Calling congress a parliament of whores insults the morals and principle of crack whores

Stinger

I know what you are saying. Everytime I read some story in the paper about people going into foreclosure when you get into the details you find out they loaded themselves up with debt they could not pay, used every penny of their home equilty line to cover frivolous credit card debt (OH I can write it off and it doesn't cost me anything) and basically gambled on their houses.

Why should responsible homeowners like myself have to get up go to work and then turn my earning over to them to get them out of the mess they created, and THEY get to live in a better house than mine?

Heel31ok

that is a reason why I would like to see a breakdown to differentiate b/t those who bought as an investment and those who bought for a long term home.It seems a lot tried to take advantage of creative financing and use it to make money and it backfired. how many of these are primary residences and how many were not. Those planning to live in their homes longterm should not have to worry about the drop in value if you go to term and pay it off. Yeah you pay more than you would if you waited but that is like anything you buy and could happen anytime.

Another question or point is the inflated prices in the first place. in the links some of the areas involved most heavily are areas that have heavily inflated home prices, so naturally this could not be sustained, it had to break eventually and it has.i am sure that the dollar and interest rates and what-not have some influence but for the most part perception of value in these areas was more a factor. A trendy address factored into the whole equation.

The loss of jobs and income is a factor but the question remains how much of a factor was it for these? Answers to these questions will show the real picture.
My big picture point is that if all this weak dollar , losing value, governmental fiat scenrios are at a crisis level then the bubble would burst in the whole market and be a major happening.We all would be facing the same troubles and crisis but we are not. That is why you have to narrow down the questions and look at specifics to determine what is happening and why.

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Pragmatist

[quote]With lenders offering loans with little or no money down it was also an option to buy that $500,000 home and put nothing down.

With lenders offering loans with little or no money down it was also an option to not bother to wait and save.

It is also an option for them to say to the bank, it's yours, I have nothing invested in it and am no longer interested in paying for it.

It's all well and good to say what they should have done or what they should do, I'm saying that what they ARE doing is walking away from their homes because they have nothing invested in them. If the banks had maintained a 20% down pre-requisite in order to get a loan they would not have so many defaulting on their loans.

Pragmatist

They created? If lenders had not been irresponsible with giving loans to people with no money down they would not have been able to create the mess they are in. And what are you talking about YOU having to turn over your earnings to them? Seems the gov't is bailing out the banks, not the homeowners.

Both the lenders and the buyers are responsible for the mess but it started with lenders giving loans they should not have. Without them we would not have the problem we currently do.

william the wierd

A few things:

1. It's only been in the last 10-20 years that owners and lenders could get an accurate price fix, fast and cheap, on property values. In "The Trouble with Prosperity" James Grant makes seemingly absurd claims about the real estate market but which were true 12 years ago.
2. The current international mortgage market is totally artificial and of fairly recent origin dating back to the collapse of the S&L industry in the late 80s/early 90s. Real estate is the ultimate local market with properties kitty corner to each other differing by more than 100% in land value. Likewise type of construction can have similar amplifying effects on value.
3. The standard deviation in income year to year has more than doubled in the past 10 years. Going from 200k to 20k or vice versa in X time period has more than doubled in frequency while loan qualifications have stayed the same.
4. Signature debt, mostly credit cards, has also exploded but more importantly legal changes in the seniority of credit cards vs. mortgages have made mortgages and home equity less valuable.

That's an explosive mixture that will cause a 75-90% implosion of real estate in constant dollars. By November 2010 rental properties will be a dime a dozen almost literally.

Socio-biology and selection is a fact of life and death not a political option

Politics is a continuation of war by other means

Calling congress a parliament of whores insults the morals and principle of crack whores