More poisonous loans...Option Arms are going to blow up....

Parent Cafe
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<p>“Also the Lannar example was mixing apples with oranges. Lennar sold a bunch of lots and land is the first to go down when improved prices go down as the costs of labor and materials almost never go down. So the land takes the hit. Land is the most volatile type of RE.”</p>

<p>You’re right about Lennar.</p>

<p>Here is my thinking. I take the inflation adjust housing price chart which shows how much we have gone up compared to anytime in the last 100+ years, and then I take the chart that shows option arms coming due (and other loans too), and I can’t help but think we are going into some bad times and we are not getting out of them for several years. Not 20 years, but several years.</p>

<p>Because people just can’t afford to buy or even stay in their homes. </p>

<p>The problem is affordability.</p>

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<p>What amazes me is that people manage to overlook the fact that home prices can’t rise any faster than incomes, over the long term. You can have peaks and valleys, but ultimately, people have to pay the mortgages, they can only pay the mortgage out of income, and theres a limit to how much of their income can be devoted to housing costs. So when housing costs appreciate faster than incomes, eventually there has to be a correction. This is the simplest kind of economic reality, yet it seems to be ignored.</p>

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<p>But only ‘some’ people can’t afford to buy or stay in their homes and it’s a minority of people who are losing their homes due to the downturn - people like the one in the article who over-leveraged and apparently didn’t bother to read the contract he signed.</p>

<p>While overall there’s a correlation between income and rising housing prices there are other influences as well in some areas - wealthy and/or retired people moving to particular areas of the country (like La Jolla or Del Mar, Ca.) and not relying directly on income, households with multiple incomes where it’s very common for a household to earn > $100K, multiple families in one dwelling (common for illegals), etc.</p>

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<p>“But only ‘some’ people can’t afford to buy or stay in their homes and it’s a minority of people who are losing their homes due to the downturn - people like the one in the article who over-leveraged and apparently didn’t bother to read the contract he signed.”</p>

<p>Prices are set on the margin. Prices are not set by all people. Prices are set by some people. The people in the marketplace set the prices.</p>

<p>If demand decreases due to a tightening of credit standards, and supply increases due to overbuilding and these former buyers becoming sellers, prices are going to drop. </p>

<p>As prices drop, others who would have been able to refinance can no longer refinance because their loan is now too big compared to the value of their house. So now they have to sell. So we start a spiral on the downside. Lenders tighten standards. Buyers change their minds.</p>

<p>If prices drop, lenders who own the loans get hit. RE brokers get hit. Developers get hit. Construction workers get hit. Furniture makers get hit. Etc…</p>

<p>So even though, I as a homeowner and am doing nothing, the economy is being affected all around me. Companies are having trouble. Government revenues are decreasing. The Fed is diluting the currency. People are starting to lose their jobs. The banking system has loans that are worth more than the collateral. People that were using their homes as ATMs now have lost access to that and have to cut spending. Companies that rely on that spending get in trouble.</p>

<p>Goldman Sachs says if banks lose $200 billion, the banks will cut lending by $2 trillion. </p>

<p>"The second shock to the economy from the housing bust will come from the financial sector, which has been weakened by losses on mortgages as well as mortgage-backed securities and more exotic derivatives. Banks borrow so much money to fund their investments that if a loss on some holding reduces their capital by $10, they have to reduce their lending by $100 to avoid exceeding their self-chosen leverage targets, calculates Goldman Sachs (GS) chief U.S. economist Jan Hatzius. He estimates that banks and other financial institutions will suffer about $200 billion in real estate losses and respond by cutting their lending by $2 trillion, or about 5% of total lending. The cutback could be even more extreme if they react to the turmoil by lowering their leverage ratios, he says, rather than keeping them intact. Banks have already begun tightening lending standards. In the third quarter, mortgages were harder to get than at any time in the 17-year history of the Federal Reserve’s survey of senior loan officers. "</p>

<p>And no, this is not the usual recession.</p>

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<p>Yet Quadrant will get you into a new $450,000 house with $500. There is money for good credit. We don’t need as much credit as their was during the peak. People were churning houses. Total sales will probably only be 75% of the peak volume so losing 5% of lending is nothing. </p>

<p>As to overall demand, look at all the kids busting to get into college the last 7 years. They will be in the market and is prices are down and loans are cheap they will be buying. Also legalizing the 12 million illegals will bring at least a few million new buyers in the market. </p>

<p>When my parents got a house 20 years was the standard mortgage. Now it’s 30 and url]<a href=“http://there”>http://there</a> are some 40’s out there. If there is demand the market will figure a way. The only killer is high interest rates. But we even learned how to work around that.</p>

<p><a href=“http://quadranthomes.com/findyourhome/astercreek/[/url]”>http://quadranthomes.com/findyourhome/astercreek/&lt;/a&gt;&lt;/p&gt;

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<p>Quadrant must be desperate.</p>