Friday, March 30, 2007

"Gambling With Fire"

From the Modesto Bee:
Chris Harrigfeld, the president of California Mortgage Associates in Modesto, [said] the subprime market is due for upheaval.

"The subprime market as it has existed in the last five years will not exist in another 12 to 18 months," Harrigfeld said. Banks won't underwrite such risky loans, he said, so lenders won't offer them. Harrigfeld said that as subprime loans default and banks foreclose on homes, they could drag down the real estate market. As those homes go back on the market, they lower prices across the board, he said.
In California, subprime woes aren't confined to Modesto. The top 10 U.S. areas with the highest percentage of delinquent subprime loans include Merced, Stockton-Lodi and Sacramento — all cities that had soaring home values.

An expert on the valley said valley cities may have a higher percentage of subprime loan problems because home appreciation outstripped wage growth for several years. "We would see that despite the drop in affordability, the percentage of homeownership would increase," said Richard Cummings, director of research and communication at the Great Valley Center, a Modesto-based growth think tank.

"Now you're seeing the shakeout," he said, because many of the people buying homes during the boom did so by stretching financially, including the use of subprime loans.
Also from the Modesto Bee:
Many people struggling today bought their homes using ARMs or similar financing tools to "get in" on the hot housing market of the past few years, much like the dot-com boom of the late '90s. They counted on continued rapid home appreciation to help pay for a house many couldn't really afford even with a decent job. As the prices of houses climbed, many used the promotional loan rates to get into their new homes.

But those rates are gambling with fire; they're not a tool to be used casually. They are viable if you plan ahead. If.

I speak with many owners of new homes who are beginning to sweat as they watch the ARMs muscle up to higher rates, and wonder where that extra $200 or more a month is going to come from.

Remember the early 1990s, when foreclosures surged and excess housing inventory sat all over Stanislaus County? Sounds familiar.

So what's all the surprise about ARMs? In the end, you always have to pay the fiddler — or the bank in this case — for what you're buying. Simply put, interest rates flex. If you can't afford to pay more than the bottom tier of an ARM, don't take the risk of losing your home. Don't buy what you can't afford.


anon1137 said...

Remember the early 1990s, when foreclosures surged and excess housing inventory sat all over Stanislaus County?

I remember the early 90s. I've noticed that many of the folks who don't understand today's market are people in their 20s and 30s who *don't* remember the early 90s.

I saw a sign on a telephone pole the other day that reminded me of the early 90s. It said, "We buy homes. 1-800-xxx-xxxx"

ralphk said...

What's more amazing to me is the vast number of people that seemed to have forgotten the early '90s.

ralphk said...

Should have said the vast number of people 40+

Perfect Storm said...

It looks like a quite week for subprime lenders going belly up, but according to the imploder forum today we may have 3-4 taking a dirt nap soon.

Good Riddance

Diggin Deeper said...


Do you remember the mid-seventies?

I think your recent article post on inflation was really important. A balanced housing market with modest inflation is ok. Home prices rise to meet rising costs and appreciation occurs due to all the buzzwords,ie. location, schools, amenities, and available inventory. Wages rise to cover the costs and everything marches along in lockstep.

Now subprime, Alt-A, prime ARMS and hybrids are on reset paths that could keep the market down for years. Due to new lending standards how much of the buying public drops off the screen...20-25%?

Inflation is on the rise in almost every category of consumer purchased goods and services. To say that this is not affecting the prospective home buyer would be ridiculous. The proformas for ownership must be getting tighter and tighter by the month. While the federal government's inflation gauge doesn't include food and energy, there's hardly a soul living that doesn't have to pay these costs every day.

The toughest scenario we'd face, imho, would be 70's style inflation in a sinking real estate market. Now that would be the perfect storm.