People Still Asking for Nothing Down Loans: This Free Bus is Coming to a Stop.
“Some of last month’s drop was part of the longer-term slowing trend, but most of it was due to mortgage market turbulence and difficulties in getting jumbo financing. There’s a good chance there will be some “catch-up” sales activity between now and the end of the year as jumbo loans become more available. Still, we can’t expect the market to re-balance itself until sometime in 2008,” said Marshall Prentice, DataQuick president.
I’m not sure where this pickup will come from because it will be unseasonal in nature. That is, summer is usually the peak-selling season while fall and winter are slower selling seasons. This happens like clockwork. The fact that this summer was one of the worst summers housing has ever faced, gives us a premonition of how things will be for the next 6 months. Expect this “next spring and summer†things will be better rhetoric from the housing complex. And where are these jumbo loans going to come from? The mortgage brokers I’ve talked to still say that legislation needs to pass in order to make this happen. So again, if you read between the lines the fuel to this entire bubble is financing. The crossroad we stand at is this, do we subsidize the bubble via taxpayers’ money and support the market for a while longer or do we tighten our belt and face the music? And how big of an impact does this financing have on the market?
The number of Southland homes purchased with jumbo mortgages dropped from 5,359 in August to 2,681 in September, a decline of 50.0 percent. A jumbo mortgage is a home loan for $417,000 or more. For loans below that threshold, the sales decline was 19.3 percent, from 9,237 in August to 7,459 in September. Historically, sales drop by about 10 percent from August to September.
A whopping 50 percent drop in the jumbo market. Why did this happen? Well Wall Street and lenders on the secondary markets are now wise. They don’t want these mortgages anymore. The market is working itself out. Risky loans that went bad are coming home to roost and these companies are stepping out of the market. So now there is a symphony of chatter trying to push this risk onto the government sponsored entities (GSEs) to fill the void that the private sector once filled in pumping this bubble. But nothing is free in life. If the government steps in they are simply providing additional fuel into the bonfire of the worldwide credit bubble. And not many in the industry saw this coming. Even DQNews in March had this to say:
Indicators of market distress are still moderate. Financing with adjustable-rate mortgages is declining. Foreclosure activity is rising but is still in the normal range. Down payment sizes are stable and flipping rates and non-owner occupied buying activity is down, DataQuick reported.
Let us fast forward to October and take a look at what they are saying:
Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is flat, financing with multiple mortgages has declined significantly. Down payment sizes are stable, flipping rates and non-owner occupied buying activity is flat, DataQuick reported.
DataQuick is widely quoted here in Southern California by mainstream sources including the Los Angeles Times. If an institution with access to boatloads of data is unable to see a change in market trend over a few months, how do you think the average Dick and Jane will do? They rely on so-called experts to make what is most likely the largest purchase in their entire life, that of a home. As of today, the next pending issue is what is going to happen with the SIV market bailout; 3 large banks are now creating a bailout fund to add some liquidity into a stagnant market. Again, if you read the details carefully these large institutions are ensuring that they purchase high quality debt. What about the subprime loans that came out in 2006 and 2007 that haven’t faced the reset music? Once again, those in the biggest need of help are getting none while companies are padding their war chests for the impending downturn. No one seems to address this niche and just accepts that it is a foregone conclusion that these loans will go bad. Why don’t they restructure the debt? They have this power. Why don’t they offer restructuring solutions on their dime? These institutions are only trying to protect their multi-billion dollar interest in bad loans by convincing you that they are doing a good deed by helping the most distressed sellers. By most accounts, they are not. They see that a domino effect can ensue. Last weeks litany of bad news on the market demonstrated that housing will spill over into other sectors of the market. And logic will tell you that nothing operates in a silo. If people lose high paying jobs, that means they have less money to spend, that means consumption goes down, that means other industries that once depended on this consumption contract, and the cycle feeds on itself. It is hard to see the direct connection that housing will have on automobile sales but that is what we are facing. Or what about vacation spending and the travel industry? These are things that we will see as the credit market tightens even further.
The Fed has essentially become the U.S. loan shark. Incomes haven’t been rising at a pace to keep up with the cost of living increases we have been facing. We now have a negative national savings rate. To make up for this short-fall, we have become reliant on easy credit. Consider credit as your promotion or salary increase. Uncle Ben just gave you a nice sizable raise in credit while kicking your dollars in the shorts. Whatever you are lacking in salary or savings, you can make it up via easy financing. And people have responded to this message. I can’t even remember when it was “en vogue†to save. In this hyper-consumption world, instant gratification is the mantra of the day. Yet now we are seeing this come to an end. Lenders are requiring down payments. Remember all those multiple zero percent offers from credit card companies? Now, you’ll be lucky to find a 2.9 percent fixed for 4 months offer.
And when all else fails, we can take some advice from this SNL skit.
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32 Responses to “People Still Asking for Nothing Down Loans: This Free Bus is Coming to a Stop.”
I have no use for and don’t want free HDTV or free trips, I just want a nothing down loan. How else do they expect me to buy a home?
Another perfectly sensible and logical post which is prima facie irrefutable. When (if) we start to see similar commentary in the mainstream media we will probably be deep into a very nasty recession. The old Chinese curse of “may you live in interesting times” seems to have particular resonance today!
The no-money down loan is like putting the cart before the horse — people don’t want to take the time & patience to save up for a down payment, but still expect to be able to buy a home right away without putting in the work to get there first.
No money down? Hell, I want 125% financing or I dont buy!
Aaagh, this makes so much sense and instead we are fed the pablum and the hooey by most of the media and all of the government.
As long as we continue to slide down this path to oblivion with a rejection of responsibility, no delayed gratification and no ability to work for goals – like a nice home for example — we will continue on this path to perdition.
I’m reminded of some wag who commented that if you don’t know who the patsy or the fool is in a business transaction — then it’s you.
The buyer of an inflated house he expected to live in was nothing more than a mark for the Wall Street, mortgage broker, real estate agent cabal looking to make big money using houses as a catalyst.
These same people are scrambling like crazy to get the government to ante up a put option to save their malevolent skins.
I enjoy reading Dr Housing Bubble because he calls it with clarity and accuracy I only wish I could do.
Keep up the good fight. It’s a great read and maybe, just maybe the DOJ or an AG somewhere will see how he has a dog in this fight and will take them on.
We can hope…..
I think that sooner or late the real estate house of cards has to collapse. The moral hazzard in bailing anyone out with taxpayer money is obvious. What about all the peole who have already lost homes or lenders that have gone bankrupt. We are probably already well into a recession, but the fed statistics on the economy are so phoney and doctored, even the fed doesn’t know what’s going on. Anyone that believes the COL only increased 2.3% also believes in the tooth fairy and that bears do not do their business in the woods.
As a reply to the comment by Minimum Wage: “They” expect you to buy a home when you are in a position to play by whatever rules “they” are dictating. In the past, you might not have had a problem. In today’s environment of lender distrust and avoidance of risk, you do. The best advice for someone working minimum wage is to get more experience, education, training or whatever it takes to increase your income and standard of living. Think of opportunities to start your own business or have one on the side.
You have zero control over the market and the environment. But you do have 100% control over how you react to it and how you make decisions on your own financial future. Use this real estate market contraction as a once in a lifetime opportunity to observe it and to allow it to educate you. Talk to successful people in the industry (investors, realtors, lenders) who are manuvering through the crisis and who will come out the other side better off for it. Your future is actually bright, since I suspect that you are not burdened by the mortgage albatross now. Prices are coming your way. Good luck.
@ minimum wage
Your not supposed to own a home. At min. wage you need to be sharing an apartment with 2 or 3 roomates.
Now by sharing a rent payment, you can maybe not go into debt every month for basic things like food and transportation.
Now that will work fine until you get sick or have a car accident, at that point you’ll be way upside down with no hope to working your way out and you’ll need to declare bankruptcy.
6-10 bankruptcies later you can go on Social Security, but you benefits will be almost nothing because of your lifetime of low income.
Seeing the common thread here? Minimum wage = slave… We didn’t free the slaves, we legalized it.
Most anti bubble blog are vehicles for venting and sarcasm first and for information second. I just started reading this particular blog and appreciate the content because it is more educational than self righteous.
There is still tremendous demand for homeownership, for affordable home ownership that is. The question is how do we address this problem. While I agree housing prices will continue to decline through next year for all the reasons articulated in this website that still will not solve the affordable housing problem. Since there is minimal economic incentive to promote affordable housing we can’t expect the builders, realtors and bankers to take the initiative.
What we can do right now however is to start a discussion about it, in other words to educate. This is what happened with the “Green” movement, it took 30+ years of education and effort on the sideline to make it part of mainstream consciousness.
Now back to our matter at hand, one of my friends who has been successfully investing in residential real estate for 40 years commented to me that prices will go down 15% to 30% (depending on the market) over the next 18 months and then remain flat for a few years. His point is that psychologically
sellers will not accept a full drop to “real” values and instead will let time and inflation take care of the difference. Under this scenario prices would continue to decrease over the next 18 months and then remain flat for another 3 or more years. I think also this is a more likely scenario than prices decreasing all the way down and then going right back up again.
I’ve been following this Blog for about a year. It’s all falling into place. Nothing that I have seen to date has been a surprise.
Is anyone suprised at any of this?
“There is still tremendous demand for homeownership, for affordable home ownership that is. The question is how do we address this problem.”
Simply by reducing government manipulation of the money, less taxation and stopping the debasement of the currency. As long as we allow the Fed to increase the money supply, there will be inflation. This inflation is like water. It has to go somewhere. It flowed into the stock market in 2000, into property 2003-2006, and will flow into commodities 2008-2012.
The only way to stop this happening is to elect government who will not buy their way to power by promising the future in terms of handouts. There is no other way.
There are still nothing down loans out there for qualified first-time buyer loans. The days of 80/20s are hard to do, but for first-time buyers programs are still available. Many states run housing programs give grant money or have access to subsidized rates to make these loans possible. Also, for those who need money to remodel. Consider the FHA backed 203Ks loan. It is a streamlined product for dollar amounts up to $35,000.00 for non structural work and the financing is based on the improved value of the property. These are working great for rehabs or first-timers who don’t have the cash to do simple updating of appliances, paint and carpet. Check out http://www.ReadyToOwn.net.
If and when lenders bring back the “Nothing Down!!! No Payments for a year!!!” type of credit favored by appliance and used car salesmen, say through a bailout/raising of conforming limits, it’ll be time for a dead cat bounce in the market and a last chance for some people to get out from under their bad purchases.
All this pent-up demand consisting mostly of false expectations needs to be beaten out of the market first.
I saw OWC on $8.5 mil & $3+ mil in yesterday’s OC Register.
What I like with the market is that you can only fool it for so long. In the end it sets the right price for everything. Houses are overvalued, no doubt. sellers don’t want to burge. But for how long can they hang on? Even with loan modifications (a typical modification is at 9% instead of the double digit it would have adjusted to). How many folks out there with those oversized mortgages would even handle 9%? coming from their teasers of 4%?…and for how long? Someone would have to blink and I know it’s not the buyer. For the long term health of this economy this bubble air must be removed..
This article brings up something that has worried me for a while. My wife and I decided long ago to limit our mortage to be rougly 30 percent of our combined income after taxes. We also feel that 30 years of debt is long enough. However, the buyers out there who are willing to take on 40+ years of debt, and who are willing to take on higher debt to income ratios, will be keeping prices up and out of reach of the fiscally sane (not fiscally responsible mind you, but fiscally sane). It seems like the tightening of lending standards is keeping the insane dept to income ratio buyers in check, but its still on my mind…
Folks, I’m pretty sure Minimum Wage was making a joke…
@Michael Sluis
Perhaps you could rent some adspace on the good doctor’s site.
“Remember all those multiple zero percent offers from credit card companies? Now, you’ll be lucky to find a 2.9 percent fixed for 4 months offer.”
I can tell you from personal experience this is false. I recently obtained a $5500 0% for 6 months credit card from Washington Mutual with a TransUnion FICO of 670.
Just when you thought we were out of the subprime reset chamber of hell:
http://www.doctorhousingbubble.com/forum/viewtopic.php?t=65
A new chart from Credit Suisse rears its head to let us know we are in for a long ride. What you see is this:
1. Subprime hitting a peak in Q1 of 2008
2. Followed by a stew of mortgage stuntman resets until the end of 2008
3. Then we have 2 years of the next ball game, Option ARMs hitting in 2009/10
The Option ARMS may be worse since many of these folks are paying the minimum and letting their mortgage amortize with a higher balance. In fact, they are feeding a mini-bubble and inflating prices by their lack of paying down any debt. It may be the case that they will have a larger balance and depreciating home in 2009/10.
Eddie, my wife and I are concerned over exactly the same issue. Except we don’t think fiscal responsibility will re-enter the real estate financing picture until some truly catastrophic consequences unfold in the markets. I watched the last Bernanke interest rate move very closely, and a Volcker he is not. That signalled enough information to us when combined with everything else we have observed; we will be out of the country in 2009Q3 (over half of our liquid assets already are foreign-based…the jump in valuation due to dollar weakness alone has been more than a little unsettling, even though we had been expecting it for well over a year), and we will sit and watch for a good re-entry point while I try to expand my business to derive 80% of its income from non-US accounts from its current 5% level.
At current prices, we can afford a conventional 80/20 30-year mortgage with no greater than 30% debt-to-income ratio based on all debts and payments, interest, taxes, insurance and maintenance. However, properties in the largest 20 US cities pale by comparison to what you can get for the same amount elsewhere in the world. The value simply doesn’t exist for most of these properties, especially on recent construction (a severe drawback in our view, as the construction quality is exceptionally poor most of the time).
Until consumers treat their homes as a consumption good and not a speculative venture, or actual investment analysis rigor is applied to these assets (people bitch a storm over a 1% round trip transaction cost in an equities trade, but are giddy with excitement over a 6% round trip transaction cost in real estate, go figure), we’re content to stay in cash (foreign for now), commodities, energy, foreign residency, and offshore real estate. Sometimes growing your assets is the wrong focus; sometimes just staying even after taxes and inflation is considered a win at the end of the day.
The auto market is being hit too. The data for new car sales doesn’t show much of it, because it’s relatively healthy by comparision, but even Toyota is scaling down production in anticipation.
For the automarket, the very first thing to go is used sales, and that’s what you want to watch for overall market activity. There, sales are bottom barrel, some dealers are even closing up or relocating to different cities to try their luck elsewere.
I have not seen the Calton Sheets 0 down commercial programs lately- wander why?
I noticed a story today that Countrywide is about to allow thousands of borrowers to refinance to a lower rate than the original resets that would have forced them into foreclosure. Will this have any effect on the overall picture that Dr. Housingbubble predicts?
what do u all think of this?
http://www.seekingalpha.com/article/50949-proposal-to-correct-resource-misallocation-in-the-housing-lending-sector
they still have zero down financing with MyCommunity and HomePossible. You just need a 620 middle credit score to avoid High PMI. Fannie Mae & Freddie Mac are doing really good in these products!
That’s not good enough. I want a zero interest and 50 years term loan. I should I pay anything at all. Heck, the government should just give me a million dollar house.
http://online.wsj.com/public/article/SB119318489086669202.html
Note that this is main stream media – the Wall Street Journal has never been known for being a wild-eyed anti-business rag. Of particular humor – Mozilo “shocked” that most borrowers made only the minimum payment. Like in Casablanca. Shocked.
Nothing down loans are a bad deal for the lender. If everything goes OK in the market and the house appreciates then the buyer sells the house and makes a profit. If something goes wrong then the buyer walks and the house goes back to the bank and the bank loses money.
Example: Buyer buys a house for $150,000 in a hot market and 2 years later
his job is transferred and he has to move. The market has turned into a cold market and the house is now only worth $145,000 and the carpet needs to be replaced in the property. Lender has to replace carpet or sell the house at a $10,000 discount and pay Realtor fees & closing costs.
The bank would net about $126,000 once the house finally sold.
If I were a lender then I would want the borrower to have something to lose.
was going to contribute something of value, but my real estate agent friend called to get me to help him and his wife look for returnable cans along a rural ditch he has claimed as his territory. offered to loan him some dough for his tent rent, but hes too proud.
i am in need just for 800 please i will do any thing for it
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