Why are mortgages so complicated? In principle, it is just a long term loan used to buy real estate. Yet, mortgage products have become so complex that no one understands them anymore.
A recent study by the Federal Trade Commission confirmed some of difficulties that people have in deciphering today's mortgage products. The commission surveyed 819 recent prime and subprime mortgage customers in 12 locations around the country. The findings of the study were disturbing:
· Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.
· Four out of five could not explain why the stated interest rate on the loan note was different from the annual percentage rate, or APR, highlighted in the truth-in-lending disclosure.
· Two-thirds did not identify a potentially nasty trap lurking in the loan; a substantial penalty if they refinanced within the first two years.
· Nearly a quarter could not correctly identify the total amount of settlement costs.
Mortgage companies would argue that mortgage products now cater for a diverse customer base with different financing needs. However, this argument looks rather weak in the face of these survey results. If people don't understand the products, how can they identify which loan is best for them?
How many times have you had a conversation that started something like this: "Yes, I have just sold my home for $100,000 more than I paid for it five years ago. I made soooooo much money from my house. However, all those loser renters have missed out"
Invariably, the house-owner has spent little time contemplating the wider cost of house ownership. However, we no longer have to go through the tedious exercise of explaining that there are such things as utilities, local taxes, and realtor commissions. All we have to do now is refer them to this site.
the last few months, for a fleeting moment, I have occasionally re-examined the possibility of buying. After all, "prices are coming down", I say to myself and at some point, "it has to make good financial sense to buy".
However, the question remains in my mind for about as long as it takes to put in some numbers into a mortgage calculator and wait until the computer returns with the monthly mortgage repayment. Despite recent price declines, housing ownership numbers still don't come within a mile of making it better than renting. Mortgage costs are still way out of line relative to rents. When all the other housing-related costs such as repairs, and taxes are included, owning a house looks like stupidity.
In contrast, renting is akin to having an undated option. It allows the owner of the renter to enter the market when he is "in the money". At the moment, home ownership is a wealth minimising strategy. It is a cash flow killer. With the current misaligned and tramatized market, no sane person would seriously consider buying.
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Today, Bloomberg provided a neat summary of the state of today's housing market.
June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.
Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.
Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.
The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.
Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.
The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.
The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.
In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.
About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.
Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.
A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.
Subprime mortgages have rates that are at least 2 or 3 percentage points above the safest so-called prime loans. Such loans made up about a fifth of all new mortgages last year, according to the Mortgage Bankers Association in Washington.
The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group.
The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.
Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.
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Moody's investor services finally picked up on the reality confronting the US mortgage market; it downgraded 131 subprime mortgage investment products. It also put 237 under review.
The downgrades will inevitably make it harder for lenders to finance subprime mortgages. It should push mortgage rates up, and put further pressure on an already deeply distressed housing market.
To put it another way; it is just one more nail in the coffin.
WASHINGTON (AP) -- Moody's Investors Service said Friday it downgraded 131 mortgage investments backed by loans issued to people with weak, or subprime, credit histories. More people who took out subprime mortgages, especially adjustable-rate loans issued over the past two years, have been defaulting on their monthly payments as their mortgages reset to higher rates. That, in turn, makes mortgages pooled into securities and sold to investors a riskier proposition.
Moody's said it also put 237 securities on review for further downgrades, including 111 of those already downgraded Friday. The downgrades affects both investment-grade and below-investment grade debt, including securities that had been rated 'Aa', 'Aaa' or 'A' and below, Moody's said.
The ratings agency's action affects mortgage securities issued by companies including Bear Stearns Cos., Merrill Lynch & Co., Credit Suisse Group, First Franklin Corp., and IndyMac Bancorp Inc.
Moody's said the downgrades were a result of a higher-than-expected rate of defaults among second mortgages issued to subprime borrowers last year. Moody's said the loans "were originated in an environment of aggressive underwriting."
These are desperate days for mortgage lenders. Interest rates are up, foreclosures are skyrocketing and losses are mounting. Overall, it is a difficult environment to generate more businss.
Therefore, it shouldn't be too surprising if we hear that mortgage brokers pushing out scare stories about failing lenders. In this particular story, GMAC are caught putting out a letter warning people about the financial frailties of their rival - Washington Mutual.
For mortgage brokers, it is always about the commission. If borrowers stop refinancing, brokers stop earning. With rates rising rapidly, things do look rather bleak. Therefore, scare tactics such as these are the last resort of an industry in free fall.
However, few of us will be outraged. It is what we have come to expect from the American housing industry.
NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.
Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.
What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.
Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"
Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."
GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.
US homebuilder confidence is at a 16 year low. The industry isn't short of misery; rising inventory, falling sales, rising defaults, falling profitability, rising interest rates, and falling prices. Who could hold a happy face after that litany of problems?
June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged. The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.
Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.
The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32. The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.
Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.
Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.
Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.
Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast. The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.
Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.
The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week. U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.
From liar loans to FICO scores, the housing market is riddled with dishonesty. Things are so bad that you begin to sorry for the poor hapless mortgage brokers out there. Is there anyone out there that they can trust?
Here is one scam that needs to be stopped quickly. People with poor credit can boost their credit scores by linking up with people with good credit histories. The trick is quite straightforward; people with good credit histories attach people with poor credit histories onto their credit cards. Furthermore, the Internet is there, ready to match up the credit cripples with the people with beautiful FICO scores.
The scam has some interesting implications for the current foreclosure crisis. Suppose that a large number of low interest mortgages were extended to people who should have received high interest subprime loans on account of the poor credit history. Superficially, this might mean that these pseudo-high quality borrowers have a lower probability of default, since the interest on their loans is lower than it otherwise would have been.
However, it is more likely that these irredeemably irresponsible borrowers maxed out on their credit limits. They probably took out larger loans in the otherwise could have, leaving them just as vulnerable to default, regardless of their fake credit scores.
Will this have an impact on the fast imploding housing market? It comes down to a question of how many subprime borrowers infiltrated the quality mortgage market. One thing is for sure: mortgage brokers were not asking too many searching questions about default risk. Perhaps, we shouldn't feel so sorry for them after all.
(Washington Post, June 16) The days may be numbered for dozens of Internet-based companies that promise to quickly boost FICO credit scores by 200 to 300 points. Fair Isaac, the developer of the widely used FICO score, plans to introduce key changes designed to derail schemes that transplant high-quality credit card histories to the files of people with low FICO scores.
The credit-boost companies, easily found on the Web by searching for "credit trade line," claim that they violate no federal laws and are not seeking to defraud mortgage lenders. But mortgage industry groups, federal and state regulators, and credit industry leaders say the programs represent significant threats to the home lending system -- opening the door to fraudulent home loan applications.
Using a FICO-boost service, for example, a mortgage applicant with a history of late and missed payments and a FICO score in the 500s could puff up his or her score well above 700 and be eligible for the best interest rates and fees.
How could that happen? Check out the online pitch of one promoter: "Rent your credit and earn thousands," it proclaims. The company offers cardholders with sterling payment histories on cards with high balances "as much as $10,000 a month or more" simply by accepting unseen borrowers with poor credit backgrounds as "authorized users" on their card accounts for 90 days.
Although the add-on users receive no access to the credit card and cannot rack up charges, Fair Isaac's FICO model allows the cardholders' excellent payment histories to flow directly into the credit files of all authorized users on the card. The addition of the high-quality credit quickly raises the scores of any authorized users -- even though the add-on users may still be poor credit risks.
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These are desperate times for condo developers in Washington DC, and desperate times require desperate measures. This article in the Washington Post highlighted one particularly sad and desperate attempt to roll in some potential buyers. However, it is doubtful if lavish parties will save the DC property market.
Condo sales numbers in the nation's capital are catastrophic. Currently, property developers are selling around 1,600 condos a quarter. During 2005, developers were shifting around 3,000 units a quarter. Think about those numbers for a moment. Imagine if the sales volumes in your business fell by almost half.
Looking forward, the DC market will be saturated with unsold condominiums. Currently, there are about 21,000 under construction, and another 20,000 are slated to construction in the next three years.
Taken together, property developers need to shift 41,000 units while current sales are standing at 1600 units. Given current sales volumes, it will take over six years for the excess inventory to clear. If parties are what it takes to shift condos, then it is party time in the nation's capital.
(Washington Post) The valet parking attendants were at the ready as the SUVs and BMWs pulled up. Men in suits and women in cocktail dresses walked through a white tent into a lobby where bartenders poured Bellinis, Kir royals and orange sorbet mimosas. Waiters passed trays of shrimp, ahi tuna on toast points and cucumber slices with crabmeat.
There was even a paparazzo in the form of Darren Santos. Posing for him in the tent was YouthAIDS founder Kate Roberts, fresh from a trip to India with a delegation that included actress Ashley Judd. "Glamorous and photogenic," Santos gushed.
It was one of the glitziest social events of the week, drawing about 200 people on a Wednesday night. But it wasn't an embassy party or a charity event or a political fundraiser. This was the preview party for the Grant, a new condominium on Massachusetts Avenue NW.
Some of the hottest D.C. parties this spring and summer have combined two of Washington's biggest obsessions: real estate and networking. With the condo market still in a slump, developers are throwing lavish affairs to create buzz for their projects, turning to a marketing technique more common in Miami and New York.
"We're in Washington. People love their events and their black tie and their kind of sassy parties," said Tracy Danneberg, special events coordinator for Metropolis Development, builder of the 90-unit Metropole near Logan Circle. "You have to keep up with it and be different."
Here's why: In the first quarter of 2007, developers sold 1,629 new condos, down from the more than 3,000 they sold each quarter of 2005, according to Gregory H. Leisch, chief executive of the Alexandria real estate research firm Delta Associates. Meanwhile, in the first quarter of 2007, there were 21,523 units under construction or being marketed, and another 20,469 units are planned over the next three years, Leisch said.
Hence the parties, some of them lavish affairs with price tags of more than $50,000, others intimate Sunday champagne brunches. There are groundbreaking parties, preview parties, grand opening parties.
Foreclosures might be heading for the stratosphere, prices might be crashing and inventory piling up, but local newspapers still find something positive to say about the real estate market.
Today's puff piece comes from San Francisco. In this article, we are being asked to believe that, the "market is back". We are asked to forget "the leaking bubble stories", and "never mind the doom and gloom". Suddenly, real estate agents are selling again, and picking up their undeserved 6 percent commissions.
Obviously, this article will make the hard pressed and increasingly wealth challenged realtors of the bay area happy. It is good that newspapers try to raise the spirits of people who are finding it hard to make a living. Spread the joy, that is what I say. However, it is not the truth. Reality for realtors is not a happy-clappy Wednesday morning revival meeting. The truth is falling sales volumes, rising inventory and no, I repeat, no commission.
Read on and laugh......
On a recent Wednesday morning, Jackie Cuneo entered her office meeting with a heightened sense of anticipation -- in a good way. She, along with about 140 other Zephyr Real Estate agents and brokers, crowded into a large conference room and politely sat for announcements of real estate forums, reminders to use the company intranet and an announcement from an agent soliciting donations for an upcoming charity marathon. All buzzed by quickly, and Cuneo, a Bay Area native, sat easily, sipping her morning coffee.
Then the show really began. "Anybody work this week?" deadpanned company co-founder and owner Bill Drypolcher from the podium, cocking an eyebrow. The meeting came alive. Hands shot up. Sales manager Don Saunders slipped between tables to hand people the microphone to announce their sales for the week. Cheers broke out and agents muttered amongst themselves. Nearby, a staff member kept a running tally of the results. A smile spread across Cuneo's face. It was her turn.
She introduced herself and made her announcement in a very businesslike way: She represented a buyer in the joint purchase of a tenancy-in-common on Casselli Avenue in San Francisco's Castro district. "It received eight offers," she rattled off. "It went five ways over."
A "way" is $50,000. The property sold for $250,000 over asking. The cheers and applause were louder and more raucous for Cuneo's announcement than for any other of the day, and Cuneo, who is friendly but a bit shy when speaking in public, laughed. Never mind the gloom and doom stories in the newspaper and on TV. Forget about a leaking bubble. In this room you could feel it: The market was back.
Are you ready to buy a new home? This realtor add tries to persuade you that now is the time to go out and buy. This add is rather like someone telling you to leave your cellar and walk into a force 5 hurricane. Personally, I am going to stay in the bunker. No house purchases from me, thank you very much.
But are you ready? Thought not.
This week, the London Times carried a story claiming that a retiree, aged 102, received a 25-year mortgage. However, there is little realistic chance of repayment. He will have to live until 127 before he makes the final payment. According to the article, this guy is a property investor who has taken out an interest-only £200,000 mortgage. He plans to meet the £958 monthly repayments with income from rent.
The broker who arranged this deal - Jonathan Moore, of Mortgages for Business said. “Obviously there is an element of risk if property prices and rental income suddenly fall but there is no sign of that at the moment.” What about the risk that this investor dies in the next six months? More generally,it is hard to see how this 102-year-old man understood what he was signing.
The story generated a response from a UK group representing retirees. Gordon Lishman, the director-general of Age Concern, said: “It’s crucial that people think about the long-term implications.” When you are over 100 years old, next week is long term.
The UK housing market – it is absolutely insane.
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Today, readers were confronted with the Post's "Housing outlook: 2007". The newspaper is still at it, spinning out feel-good stories for realtors, despite the fact that the market is crashing in flames.
Take for example the article A Buyer's Market? Lenders Permitting. It is highly representative of the kind of rubbish for which the Post is famous. Rather can speak the truth and say that the market is collapsing, and that it is unlikely to recover for years, this is what the newspaper passes off as analysis:
"Once upon a time, would-be home buyers had to outbid each other and forgo inspections to get the place of their dreams. Now, sellers are the ones making concessions. "The buyers are in the driver's seat," said John Eric, a real estate agent with Long & Foster in Arlington.
But not completely. The real estate boom that ended in 2005 was driven partly by lenders' willingness to give money to people with blemished credit or with no money for down payments. Nontraditional loans, such as adjustable-rate mortgages with low introductory interest rates that increased dramatically after two or three years, became popular. With foreclosures now at a record high, banks are once again getting picky. "It's not just a buyer's market," said Leon Bailey, a real estate agent at Exit Powerhouse in Prince George's County. "It's a buyers-with-great-credit market."
Think for a moment about supply and demand. On the supply side, Washington is flooded with overpriced and largely unsellable housing inventory. Moreover, there is a glut of half constructed condos, waiting to pour onto the market. More supply means inevitably lower prices. It may take some time for sellers to understand this reality. There may be a lot of denial out there. But, more supply means lower prices.
It is true that lenders are now scared witless by sub prime defaults. It is also true that mortgage lenders will be much more reluctant to extend loans to people who don't have the capacity to repay them. However, that is a demand side issue. Less financing means less demand, which means lower prices.
So lets summarize for the benefit of all economically illiterate real estate journalists out there. Greater supply means lower prices; less financing means less demand, which in turn means lower prices.
So, if you are a buyer, in the sense that you have the financial capacity to buy a home, the collapse of the sub prime market means that it really is a buyers market. In contrast, if you are a recidivistic credit-crippled debt defaulter, yes, it will be much harder for you to buy that overpriced POS in Manassas, or the converted crack house in SE DC.
If the Post wants to regain its credibility, it has to stop quoting self-interested realtors. It needs to start telling the truth. The truth is simple enough to understand, just think about supply and demand, and it will follow like water flowing from a tap.
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The Japanese property bubble is now just a horrible memory, softened by the passing of time. At the height of the bubble, the land beneath the Imperial Palace in Tokyo was supposedly worth more than the entire state of California. In 1989, prices were highest in Tokyo's Ginza district, where land was changing hands for over US$1.5 million per square meter ($139,000 per square foot). However, by 2004, prime "A" property in Tokyo's financial districts were less than 1/100th of their peak. Things were a little better for Tokyo's residential homes, they were worth 1/10th of their peak valuations.
There is one much less commented upon aspect of the Japanese real estate crash - its speed, or lack of it. It was slow, real slow, like watching paint dry. It took years of painful gradual downward price adjustment. Disbelief was the real driver of the crash. No one in Japan wanted to believe that land had become so overvalued.
There was no comfort in this lack of energy. The subsequent damage to the Japanese economy was enormous. The ten years after the real estate peak are now known in Japan as the lost decade. Furthermore, the economy over there still has a long way to go before recovery is assured. Government indebtedness increased dramatically during the last decade, and it is a problem that will come back to haunt the Japanese for decades to come.
The subprime crash claimed another victim. On Tuesday, California based People's Choice Home Loan., filed for Chapter 11 bankruptcy protection from creditors. According to court documents, the company listed more than $100 million of assets and employed around 1,100 people nationwide.
Many Americans are depending on their home for security in their retirement. But how well has real estate performed as a long term savings vehicle? As a recent Fidelity Research Institute Report points out, historically, real estate returns have been rather poor.
The Fidelity researchers examined long term real returns going back all the way to 1835. They then calculated the average returns over 5, 10, 20 and 30 years. They found that real estate performs worse than stocks, bonds and treasury bills. In fact, real estate closely tracks the real income growth. As such, if property prices are growing faster than income growth, it is a sure bet that property is overvalued.
If real estate offers such poor returns, then why is there is misconception that it is such a good investment? There are a couple of reasons for the real estate super-returns myth. First, people often just look at capital gains and largely ignore other real estate related costs; for example taxes, repairs and maintenance. Second, people often under-estimate the interest costs of long term debt; a 30 year loan does involve a lot of interest payments. Finally, people often confuse real and nominal growth. Six percent annual capital gains might seem like a healthy return, but if inflation is growing at 5 percent, then it is obviously a lot less impressive.
Certainly, during the last five years, returns were higher than historical averages. However, prices are now definitely heading south. If you haven't sold and started renting, stop counting up the retirement resources embedded in the value of your home. Insofar as that equity windfall existed, it is about to slip away.
More bad news for New Century Financial. The struggling subprime lender is edging ever closer to bankruptcy. On Tuesday, the company admitted that that it can no longer sell mortgage loans to Fannie Mae or act as a primary servicer of mortgage loans.
In a filing with the U.S. Securities and Exchange , New Century said that Fannie Mae terminated a mortgage selling and servicing contract with the beleagured subprime lender, citing alleged breaches of contract.
Meanwhile, New York's banking department suspended the banking license of New Century's Home123 affiliate for up to 30 days.
Who were guilty men and women that created the great housing catastrophe that wrecked the US economy in 2007-8. Today, we expose the guilty.
The first in the dock must be the Fed and in particular Alan Greenspan. Reducing short-term interest rates to just one percent was an almost criminal act of inflationary irresponsibility. This wild deed laid the basis for the credit boom that fired up the inferno.
The second indictment must go to financial market regulators. These men and women permited lending standards to become so lax that anyone, regardless of their credit history, could obtain a mortgage. They ignored the dangers of unfettered financial innovation. They failed to prevent highly specialized products - such as the interest only mortgage and adjustable rate mortgages - from being mis-used and abused by mortgage lenders.
No, the lenders do not escape judgement. They took advantage of the weak-willed regulators. They recklessly sold mortgage products to people who did not understand the risks. Through misleading advertizements, they sought out the vulnerable and when they found them, they defrauded and deceived them.
The next indictments go out to the realtors and appraisers. Despite understanding the long run dynamics of local housing markets, they conspired to overvalue and inflate property prices. Through the callous engineering of bidding wars, they spread fear among first time buyers. They were the dark magicians that conjured lies about housing shortages. They promised untold riches through real estate investing. It was never about serving their client; it was always about the commission.
Finally, we have the media. Local newspapers, across this country, talked up the bubble. They accentuated the fear, and confirmed the lies and distortions spouted by realtors. Rather than seek out the truth, they searched for ad revenues, and the realtors were willing to buy them off.
Now, it is all over. Prices are coming down; markets are crashing. There no lies left to tell. There are no more distortions can disemble the truth. All that is left is foreclosure, despair and ruin.
Nevertheless, should the ordinary American also bear some responsibility for this calamity? Did not greed also play its part?
Greed is an intrinsic part of human nature. Society needs to create institutional constraints to protect us all from our own evil nature. We ensure that protection by creating institutions and by entrusting individuals with responsibility. We ask central bankers to protect the value of our national currency. We require our financial regulators to ensure the viability of our financial enterprises. We demand honesty and integrity from mortgage lenders. We expect realtors and appraisers to work in the interest of their clients. We hope that the media will always seek out the truth.
Over the last five years, institutions failed and individuals evaded their responsibilities. Now, there is a terrible price to pay for that failure.
Despite earlier interest rate hikes, China's economy just keeps on growing. Last year, it expanded 10.7 percent. This extraordinary economic growth has fueled a remarkable property bubble.
The red kingdom has perhaps the strangest property bubble in history. In principle, a bubble should be impossible; the state owns all the land. Moreover, there is no effective legislation guaranteeing private property. Instead, there is a leasing bubble. The state issues leases, normally lasting for 70 years, and which gives the owner the exclusive rate to use the property. However, the leases are transferable and this creates the basis of the Chinese bubble.
The leasing system has been one of the cornerstones of the Chinese economic miracle. Since all land is state owned, the Chinese government can determine land usage without any annoying planning regulations. Therefore, when a new foreign investor needs a factory, the bulldozers move the locals out and up goes the shiny new building. A few little envelopes here and there and things can move real quick.
But what happens when the leases expire? Now that is a tricky question. No one really knows for sure. It is not as if there is a functioning legal system that can defend property rights.
Despite these legal difficulties, investors have bought up these leases with scant regard for the future. Prices have shot up, partly fueled by easy credit. Now, the central bank is trying to calm things down. However, it is going to take more than one marginal hike to calm the crazy Chinese non-property bubble.
According to local realtors, the Las Vegas housing crash seems to be accelerating. In January, the median price of homes sold on the Multiple Listing Service dropped 1.3 percent. That is quite a reduction for just one month. It brings the total decline to 4.4 percent since June, when the sales price was an all-time high of $315,000.
Las Vegas has always been most commentor's pick for America's most overvalued housing market. Recently, BusinessWeek analysts said Las Vegas will lose the most of any major city in 2007 with 9.9 percent of its value disappearing. Fortune was a more less gloomy; it predicted prices will drop 6.6 percent in 2007 and 8.1 percent in 2008.
Keep away from those Las Vegas condos, folks. It is the fast track to foreclosure, bankruptcy and financial ruin.
Hey! You've won a ride back to the top
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