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March 20, 2007

Housing Goes Bust?

Michael Blowhard writes:

Dear Blowhards --

James Kunstler does the math and concludes that, where housing is concerned, Mr. and Mrs. Average American are screwed. Well, what Kunstler actually wrote was "fucked," not "screwed." But we don't use words like "fucked" at this blog. We're just too fucking respectable for that kind of thing. The New York Times reports that hundreds of thousands of people who bought homes in the last few years have already lost them. (Link thanks to Dean Baker, who has done a great job of hound-dogging the housing-market follies.)

Best,

Michael


UPDATE: Thanks to Bill for pointing out The Housing Bubble Blog.

UPDATE 2: Kirsten volunteers some "I been there" testimony:

Having once paired my fortunes with a person of questionable financial priorities (to put it nicely) I've had first-hand experience with the world of sub-prime mortgage lenders, and I can tell you, it's a bizarre place.

There is (or was ;-)) an army of salesmen out there whose mode of operation is a perfectly legal bait-and-switch. Legal because in theory you *can* get a mortgage for a 1/2 million dollar home for only $600 a month. So they dangle the possibility of these wonderful deals in front of you. Then when you get down to the actual numbers, they begin introducing reality -- not all at once, they don't want to scare you off -- but a little at a time. The low interest rates they mentioned creep up a point or two. The monthly payment is a bit higher every time they talk to you. Fixed rate 30 year deals morph slowly into ARMs or shorter-term loans with balloon payments waiting at the end. They aren't switching, technically -- they're just moving from theory to reality as you provide documentable information about your financial circumstances. But before you know it, the deal that started out looking so sweet is a deal that puts you just as far behind as you were before.

Because these guys are making their money by closing deals, they swarm all over anyone who has a relatively high rate mortgage or an ARM -- they know that the best customer is the person who has already swallowed the subprime bait. Of course what they don't point out is that every time you refinance -- which they position quite honestly as helping you take advantage of the low-interest-rate d'jour -- your closing costs gobble up a bit more of your equity.

If you even have any equity -- also left unmentioned is the fact that the appraisers these lenders work with are referred by . . . the lenders. It doesn't take a genius to realize that if an appraiser doesn't consistently estimate homes' values such that a subprime mortgage will work out (on paper), the referrals will dry up.

So the appraisers are invariably "generous" when they document your home value -- they know that the home's loan-to-value ratio is critical to setting your interest rate. An obviously inflated appraisal can get the appraiser into trouble, of course. So they're not going to go too high. But bottom line, it's a scam -- as a homeowner, you shell out several hundred dollars for the privilege of someone creating a document that has no worth beyond its value to the lender as regards his duly diligent ;-) paperwork. And which by the way helps you get into a mortgage where your debt likely exceeds the real-world value of your home. You're not leveraging your equity -- you're leveraging the speculative movement of the subprime industry itself. Hooo ha.

Anyway. Given what I've just written, this might seem a strange thing to say, but I'm grateful to subprime lenders -- if it weren't for them, I wouldn't own my house. But it's not a pretty world, and I'm not a bit surprised that these deals are starting to unravel. Had it occurred to me, I could have predicted it -- there was a time a year or so ago when I was getting a half dozen cold calls a day from subprime lenders. You could sense how frenzied it was.

In my case, my last subprime -- which I signed when I separated from my ex -- started as a fixed rate (quite high interest) loan, which after two years was scheduled to switch to an adjustable. I used that 2 years to do some scrupulous credit re-building; this let me claw my way into a better credit bracket and refinance again on terms that I can live with, quite happily, for the next three decades if need be.

Had I not done this, my monthly payment would have jumped overnight by $500 -- not a easy hit to take. So no, I'm not surprised people are losing their homes. Subprimes can be a great tool but are not a tool to be wielded carelessly.


posted by Michael at March 20, 2007




Comments

I really have very little sympathy for people who have to have it all, right now, with all possible bells and whistles included -- or they'll die.
The fact of the matter is: there's always an affordable house available. But some people can't live with less than 3,000 square feet, or a designer kitchen, or "the right" school district. Grow up America! Learn to live with less. You'll be able to afford it. And believe me -- you won't die from the social mortification.

Posted by: ricpic on March 20, 2007 6:04 PM



The housing bubble blog http://thehousingbubbleblog.com/
has been commenting on this for awhile.

Posted by: Bill on March 21, 2007 8:49 AM



Having once paired my fortunes with a person of questionable financial priorities (to put it nicely) I've had first-hand experience with the world of sub-prime mortgage lenders, and I can tell you, it's a bizarre place.

There is (or was ;-)) an army of salesmen out there whose mode of operation is a perfectly legal bait-and-switch. Legal because in theory you *can* get a mortgage for a 1/2 million dollar home for only $600 a month. So they dangle the possibility of these wonderful deals in front of you. Then when you get down to the actual numbers, they begin introducing reality -- not all at once, they don't want to scare you off -- but a little at a time. The low interest rates they mentioned creep up a point or two. The monthly payment is a bit higher every time they talk to you. Fixed rate 30 year deals morph slowly into ARMs or shorter-term loans with balloon payments waiting at the end. They aren't switching, technically -- they're just moving from theory to reality as you provide documentable information about your financial circumstances. But before you know it, the deal that started out looking so sweet is a deal that puts you just as far behind as you were before.

Because these guys are making their money by closing deals, they swarm all over anyone who has a relatively high rate mortgage or an ARM -- they know that the best customer is the person who has already swallowed the subprime bait. Of course what they don't point out is that every time you refinance -- which they position quite honestly as helping you take advantage of the low-interest-rate d'jour -- your closing costs gobble up a bit more of your equity.

If you even have any equity -- also left unmentioned is the fact that the appraisers these lenders work with are referred by . . . the lenders. It doesn't take a genius to realize that if an appraiser doesn't consistently estimate homes' values such that a subprime mortgage will work out (on paper), the referrals will dry up.

So the appraisers are invariably "generous" when they document your home value -- they know that the home's loan-to-value ratio is critical to setting your interest rate. An obviously inflated appraisal can get the appraiser into trouble, of course. So they're not going to go too high. But bottom line, it's a scam -- as a homeowner, you shell out several hundred dollars for the privilege of someone creating a document that has no worth beyond its value to the lender as regards his duly diligent ;-) paperwork. And which by the way helps you get into a mortgage where your debt likely exceeds the real-world value of your home. You're not leveraging your equity -- you're leveraging the speculative movement of the subprime industry itself. Hooo ha.

Anyway. Given what I've just written, this might seem a strange thing to say, but I'm grateful to subprime lenders -- if it weren't for them, I wouldn't own my house. But it's not a pretty world, and I'm not a bit surprised that these deals are starting to unravel. Had it occurred to me, I could have predicted it -- there was a time a year or so ago when I was getting a half dozen cold calls a day from subprime lenders. You could sense how frenzied it was.

In my case, my last subprime -- which I signed when I separated from my ex -- started as a fixed rate (quite high interest) loan, which after two years was scheduled to switch to an adjustable. I used that 2 years to do some scrupulous credit re-building; this let me claw my way into a better credit bracket and refinance again on terms that I can live with, quite happily, for the next three decades if need be.

Had I not done this, my monthly payment would have jumped overnight by $500 -- not a easy hit to take. So no, I'm not surprised people are losing their homes. Subprimes can be a great tool but are not a tool to be wielded carelessly.

Posted by: Kirsten on March 21, 2007 9:01 AM



The fact of the matter is: there's always an affordable house available.

Unless you live in the areas in California where the jobs are. I'm not saying that excuses people from making bad decisions. But you really can't get a house that's in decent shape for under 300K. If you don't have kids, that's not a problem, jump in and fix it up, or live in an "up and coming" neighborhood. If you do have a family, the temptation is great to get your kids into a nice (not extravagant) home.

Posted by: the patriarch on March 21, 2007 11:12 AM



MvB: You need to stop reading Kunstler except for laughs.

Kunstler writes: "The median price for a house in my region of the US (northeast) was $380,000 in the third quarter of 2006. Median annual income, meanwhile, was about $46,000." Note the apples-and-oranges comparison leading to an unsupported doom-and-gloom scenario.

For how many years has Kunstler been predicting apocalypse?

Posted by: jult52 on March 21, 2007 12:10 PM



Than you leave California, patriarch (yes, I know, it's scary) and go to places where you can afford to live. And if you have to switch from being a member of the talking class (I mean one who talks in class to captive audience) to a handyman - you do it to give your family a better life and not go bankrupt in the process.

Like all those forrin immigrants did.

Posted by: Tat on March 21, 2007 1:15 PM



Kirsten, the sales-guy job is to make a sale - and make a comission.
Your job, as consumer with the bank account, is to educate yourself before you sign on the dotted line. You said it yourself - they change their pitch gradually, nobody hold the gun to your head to force that signature down, you had multiple opportunities to back out of it.

Let me tell you - if I, an immigrant with very sketchy English, 7 years in the country at the time, could understand the differences between all kinds of mortgages and got thru the convoluted explanations in legalese and made a choice of getting only into a fixed 15-yr mortgage (and found myself a deal online at 3pts lower than local banks were willing to offer me) - any American can do it.

As Judge Judy said in yesterday's installment: Do you ever blame yourself for anything or is it always someone else's fault?

Posted by: Tat on March 21, 2007 1:28 PM



"For how many years has Kunstler been predicting apocalypse?"

Since his mother gave up washing his mouth out with soap.

Posted by: James M. on March 21, 2007 2:23 PM



JT -- Kunstler's my favorite prophet of doom, the guy I go to when I'm in the mood for some jeremiads. The doomy conclusions may or may not be worth paying attention to. (I get a kick out of 'em.) But he makes a lot of smart and hyper-evocative points on his way to his doomy conclusions anyway, and he puts on a good show too. You don't have any fave Jeremiahs?

Posted by: Michael Blowhard on March 21, 2007 2:23 PM



I agree, tat, but I do have sympathy for those who get caught up in it. As an immigrant yourself, I can see how the thought of picking up and moving to an entirely different area than the one you grew up in is an obvious answer to you. But to get priced out of not just your neighborhood or hometown, but your entire home region, is a tough pill to swallow.

Again, it doesn't excuse bad decisions, but I understand the emotions it causes that can lead to a bad decision.

Posted by: the patriarch on March 21, 2007 2:30 PM



Here's a hilarious blog that showcases the half-million-dollar "houses" for sale in La-La Land:
http://www.burbed.com/

Posted by: beloml on March 21, 2007 3:11 PM



You suppose picking up and going to a different country does not involve being priced out of your neighborhood, town and entire home region?

(my case is different, I came on a a refugee visa)

I think I mentioned here how one of the Spanish-speaking construction workers, trowelling fresh concrete in my patio 5 yrs ago turned out to be a civil (plumbing) engineer, licenced in Columbia?

Even better, let's not talk about them foreigners. Look at the Wild West pioneers - what could be more American?

Posted by: Tat on March 21, 2007 3:12 PM



MvB: So Kunstler fulfills your emotional need to hear about the disaster about to befall your nation? Very interesting.

Posted by: jult52 on March 21, 2007 3:44 PM



As Judge Judy said in yesterday's installment: Do you ever blame yourself for anything or is it always someone else's fault?

tat, you have completely misunderstood the intent of my comments and my attitude toward my experience.

I take full responsibility for my financial decisions, both those I made in my past and those I make today. I'm not blaming anyone for the position I painted myself into. On the contrary! I own every decision I've ever made and treasure the education I got by owning the consequences, as well.

To repeat myself, I'm *grateful* that I had the opportunity to take on these loans because if they weren't there, I wouldn't have been able to buy a house. Subprime lenders do what they do because people with poor credit and no assets are a bigger risk. I don't have a problem with that whatsoever. I've even contacted my Congressional reps in the past to protest over-regulating the subprimes (something they'll no doubt move to do again, now that the "people losing their homes" meme is getting ink) because I know, first hand, that their loans can be a useful tool.

I never misunderstood the terms of these loans or had trouble figuring them out.

I never felt personally taken advantage of -- these are business deals, no more, no less. I actually found the actions of the sales people amusing -- their motives were quite transparent, and I was never shy about telling them, bluntly, that I was fully aware of what was going on.

The process was an educational one that I experienced from the inside out, and chose to share here. I'm hardly complaining, I have no regrets, and I certainly don't view myself as a victim! So kindly put Judge Judy back in her box, thanks!

lol

Posted by: Kirsten on March 22, 2007 9:53 AM



Michael, thanks for the inclusion of my comment in your update :-)

Posted by: Kirsten on March 22, 2007 10:08 AM



Kirsten, I reread it again and see that you made the best out of situation you were put into by your ex.
Well, that could happen to the most savvy, and you did pull yourself up from it, so kudos to you.

I realise I was probably a bit projecting: I just heard from a lawyer who represented sellers of the house I bought 8 years ago - and which I already sold; to make a long story short, they went bankrupt immediately after selling the house to me, despite getting about 150K profit on the sale, and now, all these years later, the husband is trying to "undo" the sale! [his motivation - "it's not fair to us, poor people...we didn't know you can go bankrupt after having credit card debt and 3 mortgages on the house - and no income to speak of"]

Hmm, maybe there is a blog post in it...Thanks, I've got an idea!

Posted by: Tatyana on March 22, 2007 12:56 PM



Kirsten - I have a very good credit history and about a year ago I responded to a mass mailing about low interest rates and called a sales rep. I work in finance and I couldn't understand what this rep (who sounded none too bright) was talking about. The terms he used and rates he quoted kept changing and it confused me. (So I said thanks and hung up.)

My experience wasn't the same as yours but I very much identified with the gobbledygook some of these brokers can put forth. Working with more reputable lenders when I first financed my mortgage was a completely different experience, more like working with real bankers.

Posted by: jult52 on March 22, 2007 1:15 PM






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