October 7, 2015 at 12:11 am #44307
Is Icahn right? This maybe one of the many things that will collapse the economy. Read this article/videoOctober 7, 2015 at 5:36 am #44309
Yes, and others have been writing about it as well. But we don’t generally see it discussed in detail on the nightly “news” so no one thinks there’s a problem. A major part of the overall problem nationwide is the absurdly low credit. It used to be that people paid almost three times the original price of their homes if they didn’t pay off a conventional 30 year mortgage early, given mortgage interest rates around perhaps 7-8%. That used to be the “rule.” But with interest rates where they are today, people will pay less than twice the selling price even if they go the full 30 years on a mortgage. That induces people to buy as big a house as they can, which heated up the market big time (particularly new homes – everybody wanted a “new” home). And the problem isn’t just single family housing, it’s rental properties, and commercial properties. The bubble is huge. Once the slowdown really starts to bubble up through the nice pretty wallpaper applied over it, and the cracks can’t be hidden any longer, that bubble will burst just like the dotcoms did.
A related factor that I don’t see much discussed is that with the upturn in foreclosures over the past few years (which has pulled housing prices way down in some areas), they’ve been scooped up by investors as rental property. Rentals are very hard to come by in many areas. We’re becoming a nation of renters (again), and it’s about to get much worse. What happens when rental property owners can’t charge enough rent to cover their inflated prices (they got the properties cheap, but had to put a lot into fixing them up, so they can’t discount the rents too much)? So what happens as more people lose jobs, can’t make house payments, and have to fall back into the rental market that was purchased at high bubble prices?
There are so many different facets to this problem that it truly is a gigantic house of cards, with each card representing a different part of the economy or social fabric. It will look something like the classic demonstration of how a chain reaction works, where mouse traps are set on a ping pong table, with walls up along all four sides of the table, and one ping pong ball carefully placed on each set trap. Then one more ball is tossed into the center of the table, which sets off one trap thereby launching its ball. Two are in the air, triggering two more traps, then four balls, then eight, 16, 32, 64, 128, 256, etc., within just a couple of seconds. If you’ve never seen a video of that demonstration, it’s worth looking at, just to get an idea of how fast things can deteriorate (as Selco has so clearly taught from his first-hand experience). Suddenly NOTHING works, whether utilities, public services, law enforcement, or indeed anything within the usual social order of things.October 7, 2015 at 1:00 pm #44310
Real estate matters tends to be very local. When prices rise sharply in an area, they tend to fall sharply too, especially if median prices surpass the rule of thumb of being 2 to 3 times median incomes for the area. When they do, people on average are buying more house than they can afford. Such situations cannot be sustained. The last time property in my current town was revalued for tax purposes was 2009. As a Lister (Assessor), I see all of the property sales. On average property is still selling for 10 to 20% below assessed value. There has not been any pricing recovery here. That doesn’t mean prices can’t drop further if the overall economy tanks, but there has not been any speculative increase here such as in many parts of the country. Each geographic area has its own issues, good or bad driving real estate prices. Too much good can drive real estate speculation to absurd heights and that has happened in many areas. What is keeping prices suppressed where I live is a slow but ongoing population decline due to young people moving away to areas with better job opportunities, leaving us with an aging population that mostly isn’t in the market for homes. Our school enrollments drop about 1% a year and have been for some time. Rents keep rising however due to more demand. Fewer people can afford to buy homes even at suppressed prices and so they rent.October 7, 2015 at 3:29 pm #44311
Renting in general is a trend , like people not wanting to get married . The reasons for both are similar , too many legalities . A lot of people dont want that anymore . Other reasons are the fact that a house is a boat anchor , it keeps you trapped in a job , and an area , its also a money pit at times . Some people are still scared to buy , because of the first crash , they dont want to get screwed ………..so they prefer to rent a house instead . It used to be that a house was a good investment , now that notion is more spinning the wheel of chance . Buying land is probably a better investment . My mother does very well for herself doing that . She will buy land , then parcel it up so that its affordable to most people , and is her own banker .October 7, 2015 at 4:13 pm #44313
MB, You are right on target with what Icahn is saying. So if in your areas the value is still 10 to 20% under value then how many people are still under water on there loans that they have? They got there loans for 90 to 100% value at the 2000 to 2008 and are still under water. When there is a slowdown of the economy many will lose there jobs again and will let go of these properties that they have a bigger debt then what the value is.
Then there are the big cities that the value is back to the 2008 which will take a fall.October 7, 2015 at 9:15 pm #44323
freedom, I don’t have any data but my guess is that plenty of people who bought in the mid-2000’s are underwater on their mortgages. I have a neighbor who is seriously underwater from that time period due to borrowing against her house after her husband died, and now she can’t keep up with the payments. Her options are a short sale if the bank will accept it or foreclosure. This is someone in her 60’s who will not be able to retire. Lots of folks like that out there.
October 14, 2015 at 1:08 pm #44405
- This reply was modified 3 years ago by MountainBiker.
Buy a house and become a prisoner/hostage of your state. Ha Ha HaOctober 14, 2015 at 3:19 pm #44406
Buy a house and become a prisoner/hostage of your state. Ha Ha Ha
LOL you may have said that in jest , but it can be true . I have a friend ( female ) , that got her house through divorce . She is not fond of phoenix , but is trapped there because of the property ( and other reasons ) , she kept it far too long , and now it would take a good amount of money to get it marketable . She should have gotten rid of the monstrosity right after her two boys left home . I suppose she could rent it out , but she is not free of it , even doing that .October 14, 2015 at 7:46 pm #44410
Ten years ago when my wife and I were getting married we decided to buy a new home together. We kept my condo and sold her home. We found a home we liked in a great neighborhood. When we made the mortgage application the broker said: “Are you sure you don’t want something bigger, either one of you can qualify for this on your own.” We said, No! Now here we sit ten years later, owning a home free and clear, while enjoying a pleasant life style. I feel sorry for the people who got sucked into the interest only mortgages by the mortgage brokers who promised them that the their home would only increase in value.
When the real estate market crashed I bought her a dozen roses and thanked her for not wanting the huge home with the mortgage that came with it. It took me a while to learn, but living debt free may be one of the greatest freedoms you can have.October 14, 2015 at 8:43 pm #44411
Our last house was about 3,200 sq.ft. plus a full basement, a full 3rd floor walk-around type attic with lights, windows, and its own stairwell up to it, and an oversized garage. We had it for 22 years. At its peak we maybe used the Dining Room 3 or 4 times a year. It was down to 0 to 1 (Thanksgiving) by time we sold it. The Living Room was used maybe 2 to 3 times a year at its peak and was down to 1 (Christmas Day) when we sold it. There was a Sun Room that both the Living Room & Family Room opened to. It was never used more than maybe 2 times a year and was down to 1 (Daughter’s birthday) by time we sold it. With 4 bedrooms and 3.5 baths, we had additional unused rooms once the kids moved out. A huge house was occasionally nice but it had a lot of wasted space that we paid for, paid taxes & insurance on, and heated/airconditioned. Our current home is big enough to be comfortable when the kids come and otherwise only has the kinds of spaces we actually use on a regular basis. The only non-regularly used spaces are the 2nd & 3rd bedrooms that the kids use when they visit and the bathroom that goes with them. We got smarter as we got older.
The one thing that we did do smartly is never to have started the mortgage from scratch time-wise. Our 1st house had a 25 year mortgage and I swore we would in fact be mortgage free in 25 years. 6 years later we moved and I took a 20 year mortgage. 8 years later we moved and I took a 15 year mortgage which I proceeded to pay off in 11 years, exactly 25 years after starting the very 1st mortgage we had.October 14, 2015 at 9:05 pm #44414
MB and Roadracer, what’s the matter with you two? By today’s standards, you’re both mentally ill! Get with the times! [sarc/OFF]
Seriously, my hat’s off to both of you. Thank you for posting those excellent examples for anyone young enough here that is still in the earlier decision-making stages of life. There’s wisdom in them-thar words. And even if people aren’t in a position to pay off a mortgage early, they should at least be keeping a penny-by-penny accounting for about three months (maybe more) of where every bit of their money is going. Once they’re sufficiently shocked, they can realign their priorities and come out much better with the above kinds of decisions and situations. We did exactly that with our spending 40 years ago, and were utterly shocked at what we were actually spending our money on day to day. It was literally a life-changing experience.
For any that don’t know, it’s less out of pocket each month than most people would imagine to get a 15 year mortgage as opposed to a 30 year mortgage. While that spread was much less back in the days of 8-10% mortgage rates (or higher), it’s still not twice as much per month to take a 15 year loan as opposed to a 30 year loan. First, interest is tacked on up front in mortgages,with virtually nothing going to principal. The amount of any given mortgage payment actually applied to one’s principal only starts becoming meaningful in the late years of a mortgage. So equity isn’t built up for many, many years. Second, 15 year rates are considerably lower than 30 year rates. It’s best to get it paid off as early as possible. Forget the noise about “freeing up” more money for other things now by stretching out the mortgage to 30 years. Get the security of some place you can’t be moved out of unless (1) Trump wants to build a casino or hotel on your land and it gets taken through eminent domain, or (2) you simply can’t even pay your property taxes once a year. Short of those two things, having a paid off place to live can be one less significant worry.
Nice posts, both of you!
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