[Cindy]

uh oh :uhoh

http://news.yahoo.com/s/nm/20070329/us_nm/usa_subprime_foreclosure_dc_2

[Super_BQ]

Yes, safe to say housing prices are coming down in the US. The following discusses some of the problems why: (note these are in online streaming audio so there's no need to read :nice1 ) - click Listen

http://www.npr.org/templates/story/story.php?storyId=8972571

A lot of emphasis for falling housing prices is targetted at "sub-prime mortgages". Quite simply, these are financial institutions that lend to people who don't normally qualify for a normal prime loan and quite often are stuck with a mortgage that is 100% of the value of the home.

We're seeing a lot of that happening here in NZ. People borrowing near 100% of the value of the home but don't have the income "test" to prove that they can make the payments when interest rates keep going higher.

Will NZ follow a similar pattern as what the US is experiencing now? We will have to wait....

PS: I find the term "Liar Loans" to be funny...

[Juniper]

We had to go with 100% financing ourselves. In our area, a 20% deposit would be something like $100k, for a regular ol' family home 20 mins outside of town. Not many have that lying around :-P Even a quarter of that is tough to muster, for a first home.

I hope we don't find ourselves contributing to this statistic, but at the moment I think we'll be fine...especially if we sell up and put that US equity into an NZ home!

[Trigirl]

i 100% financed my first home. so long as you can afford the repayments, even if interest rates rise significantly, and you are happy to sit tight if there's a downturn then its not such a big deal. the problems arise when people 100% finance themselves to a level they can only just afford on interest rates as they are now and then are all surprised that they can't afford their repayments when interest rates go up :roll

[Nathan]

I haven't seen an Economist article on the 'crisis'. Granted, I haven't been reading it faithfully of late. I'm not convinced the 'crisis' is as big as the mainstream media would have us believe. Economist is usually pretty good about covering the 'real' stories.
The problem has been growing and has been evident for some time, but the stock market doesn't seem to have responded to the bad news about the subprime lenders. And I think the problem isn't so much the fault of lenders as it is individuals who simply don't know how to manage their money. Personal debt in States is huge, and it seems to be financing lots of big screen TVs and low mileage SUVs. Is that predatory lending? ...maybe... At some point people need to take some personal responsibility. ...and that from a flaming liberal!!! LOL

[clg]

I think it is is very real and will impact quite a bit on home prices and maybe on the economy broadly as well. At a minimum the types of appreciation that used to occur will stop. When we sold our house in LA we had three offers and the people all included details of their financing. The person that bought our house was borrowing about 5 times their income spread over two variable rate mortgages. I remember very clearly the realtor telling them, when you sell in a few years and double your money you can move to NZ too! Housing costs, at least in LA, just got insane and I think a correction is at hand.

[jess]

The person that bought our house was borrowing about 5 times their income spread over two variable rate mortgages. I remember very clearly the realtor telling them, when you sell in a few years and double your money you can move to NZ too! Scary!! :exit

We also bought our first home with a 100% mortgage - but with a low fixed rate for the life of the loan - while house prices were still rising. We sold it a few years later for a profit. As Trigirl says it's that big jump in interest rates that seems to be causing foreclosures. People who can just make the original payments and hope they'll earn more by the time the terms of their mortgage hike the rate up in a few years.

I don't know a lot about it's effects on the wider economy, but the other day the top story on MSNBC was stocks taking a dive due to sub-prime loans. Then Bernanke from the Fed said he didn't think the sub-prime market would bring down the wider economy, and stocks went even lower, because investors didn't believe him. We'll see...

[barryp]

The USA correction so far has been with B-paper (subprime) loans, basically people who shouldn't have been permitted loans in the first place. But there are many people who are 'prime' - large equity, high income folks - who have mortgages that are fixed for a limited time and/or have adjustable rates on their home equity credit arrangements (HELOCs). We haven't begun to see the fallout from those corrections, which will happen over a period of years but have not yet begun.

In the old days - up to ten years ago, ahaha - US banks would generally hold their mortgages and make a profit from them. The past decade has seen that pattern almost disappear; practically every newly issued mortgage is resold in a secondary market very quickly. That removes the responsibility to assure sound finances from the issuer. It also isn't sustainable, and the reckoning will be very nasty.

US homeowners, especially on the coasts, have forgotten that real estate does not always appreciate at all, much less at absurdly high rates that have been part of recent memory. The expectations that 'you can always refinance' or 'you can always sell at a smaller profit' are no longer valid. If you bought a Florida condo two years ago with no money down, you can't refinance it today, and you might not be able to sell it today even at a significant loss. Your best remedy is to walk away, handing the keys to the financers on your way out.

Perhaps my impression is off, but it strikes me that NZ lending practices are a bit too generous as well. Based on a single NZ paystub, I was able to receive estimated loan amounts that were at least twice what I considered reasonable. (Interest rates here are far higher and there is no favourable tax treatment of mortgage interest as in the USA.) The 'fog test' seems to apply; if you're able to fog a mirror with your breath, you're able to borrow well beyond your means.

[clg]

I know some people that have had a hard time borrowing money in NZ. If you are coming into a mortgage and willing to put 20%+ down the banks will give you anything you want since they can always call the loan, which works differently here. As I understand it if housing values drop, they can call a loan or require more cash. I could be wrong on this but I believe that is the case, of course it will depend on the terms as well.

We know some people who moved back to Canada who had almost no cash to put down and were dismayed at what sort of mortgage they could get. Lending is probably easier than it should be here, don't get me wrong, but it is nowhere near as insane as in the US. I would not be surprised if housing values fell worldwide but I don't think it will be as far to fall here as in the US.

[MarkS]

As I understand it if housing values drop, they can call a loan or require more cash. I could be wrong on this but I believe that is the case, of course it will depend on the terms as well.

Nope. As long as you're up to date on the payments, they can't just call the loan in because they feel like it.

Even if they could, do you really think banks would want the negative publicity of kicking people out of their houses, even though they're happily paying their mortgage?

[MarkS]

Perhaps my impression is off, but it strikes me that NZ lending practices are a bit too generous as well. Based on a single NZ paystub, I was able to receive estimated loan amounts that were at least twice what I considered reasonable. (Interest rates here are far higher and there is no favourable tax treatment of mortgage interest as in the USA.) The 'fog test' seems to apply; if you're able to fog a mirror with your breath, you're able to borrow well beyond your means.

Our experience wasn't too dissimilar. When we applied to Westpac for our mortgage, I didn't yet have a job (several interviews lined up though), so it was purely based on Trigirl's salary. I went in with a little speech prepared that they should be flexible and consider what my income would be in a month or two's time. This however was completely unnecessary as they were very happy to offer us something like 4.5 times Trigirl's salary without caring about any income from me at all - this would work out about 80% of net income even when spread over 25 years. We were putting down about 30 - 35%, so not much risk for them, but possibly not the most responsible.

Kiwibank were a bit more conservative, they would only offer us about 4 times her salary (and I did need to use a little bit of my speech!), and they had to specifically authorise that with head office as it was above their normal levels. Still a lot though.

(Like the idea of the "fog test", by the way...)

[Juniper]

I believe ours must have been sub-prime as well, we were just "barely there" in terms of credit score at the time. Our agent was asked to get us a loan and she did everything in her power to make that happen.

While I understand that some people may be mislead, it was up to us to decide if we could afford it. Sometimes you just have to take risks in life. Lots of great stuff would never have happened to us if we'd played it safe. For all the people who default on their loans, there are lots more in similar circumstances who improved their lives significantly, and they deserve the chance to do it :-)

[dbonnett]

I haven't seen an Economist article on the 'crisis'. Granted, I haven't been reading it faithfully of late. I'm not convinced the 'crisis' is as big as the mainstream media would have us believe. Economist is usually pretty good about covering the 'real' stories.

From another liberal who reads the Economist:
http://www.economist.com/images/20070324/20070324issuecovUS400.jpg
JUNE is National Homeownership Month in America. National
Foreclosure Month would be more apt. Some corners of the
mortgage market—notably subprime loans aimed at those with
poor credit records—have a nasty case of dry rot.…

[Super_BQ]

More complaints from local NZ mortgagers.

http://www.stuff.co.nz/4018246a11.html

Article tells those that were turned down for a mortgage from the major banks and going off to other financial institutions (most likely at much higher interest rates) to secure their home.

An issue of sub-prime lending in NZ?

[MarkS]

There doesn't seem to be any real story to that "story" though. Someone from the CAB theorising that people utility bills and food budgets might perhaps "feel the pinch", but of course she was "unable to say....", well, anything concrete.

As for complaining that people who were being turned down by the banks were then being accepted for mortgages by the finance companies, well that's just the way the market works - if there's a gap where someone can provide a service and make some money, they will.

Of course, it's a personal tragedy for anyone who finds themselves with a mortgage they're not able to pay, whatever the reason is. But the wider issue is whether the banks and the finance companies have made sufficient provision for the bad debt that always occurs. That article is long on hand-wringing, but short on any real evidence that things are as bad here as they seem to be in the States.

Here's another article that makes some interesting points (I'm not completely convinced by it though)

The economic slowdown in the United States is unlikely to spill over into the rest of the world as long as America's problems remain confined to its troubled housing market, the International Monetary Fund has concluded.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/04/05/cnimf05.xml

[swank]

Those of you intterested/effected by this this might find this site interesting:

http://patrick.net/housing/crash.html

I found this article there:

http://patrick.net/housing/prices.html

What should you pay for a house?

Answer: It depends on rents and interest rates.

Rent and interest are the same kind of thing. They are what you pay to use something -- either to use a house, or to use money. Interest is the rent paid on borrowed money. To know whether to buy, you just have to compare one rental option to the other.

Even if you use your own money to buy a house, you're still in the rental game, since you're giving up the interest (rent) you could get on your money.

Say you can pay cash for a $250,000 house that would rent for $1,000 per month. Should you buy it? That depends on current interest rates.

$250,000 invested at the current interest rate will produce a certain amount of income for you each year. Right now, you can easily get 5% by investing in CD's with no risk of loss. This means that $250,000 will return $12,500 per year, since $250,000 x 5% = $12,500.

So if you have $250,000 and need a place to live, your choice is between these two options for the coming year:

Buy the house for $250,000 and don't pay any rent. Invest the $250,000 at 5%, and pay $1,000 rent per month to live in a house. Which one is better? In the first case, you're not getting any investment income, but not paying any rent either. Owning outright means giving up interest rather than paying interest, a different kind of loss, but a loss nonetheless. In the second case, you're getting $12,500 in interest income from your CD's, but paying out $12,000 in rent. $12,500 income - $12,000 rent = $500
So you would be $500 better off in the coming year as a renter.

"But I don't have $250,000 to pay for a house. I would have to borrow it."

In that case, it's an even worse deal to buy a house. Let's start with the simplest case: an interest-only mortgage. To borrow $250,000, you'll have to pay at least 6%. If your credit is bad, you'll have to pay more. Let's assume you have good credit and get a 6% interest-only mortgage.
The interest on $250,000 at 6% is $15,000 per year. In effect, that's the yearly rent you have to pay to use the money. These are now your two options for the coming year:

Buy the house for $250,000 in borrowed money, and pay $15,000 in interest. Pay $1,000 rent per month to live in a house, so $12,000 per year.
Buying would cost $15,000 in interest, but you could pay only $12,000 in rent. So you would be $3,000 better off per year as a renter.
"What if I put down 20%? Would that help?"

Not much. That's just a combination of the two cases above, both of which show it is worse to buy than to rent. So it would still be worse to buy.
If you have 20% of $250,000, that's $50,000. You could get 5% by putting that $50,000 in CD's rather than in a house, and that would be $2,500 per year in interest income.

These are now your two options for the coming year:

Buy the house for $200,000 in borrowed money plus your $50,000 downpayment, and pay 6% interest on the $200,000, which is $12,000.
Pay $12,000 rent per year to live in a house, but collect $2,500 in CD interest. So buying would cost you $12,000 per year, and renting would also cost $12,000 per year, but if you rent, you get the $2,500 in interest on your $50,000. So you would be $2,500 better off as a renter.
"But I'll get a conventional 30-year mortgage, not an interest-only mortgage."

That's still just a combination of the first two cases. As you pay off the debt, the interest you pay each month decreases, but the principal you are putting into your house is still a poor investment relative to your other options, like CD's, the stock market, or bonds.
"What about the tax advantage of mortage interest?"

It's not enough to offset the other costs of owning a house. It's true that you can reduce your taxable income by the amount of mortgage interest you pay, but the other costs of owning eliminate that advantage.
Take the previous case, but say that you pay that $12,000 in interest with pre-tax money. You've really paid it, and it's really gone, but since you didn't have to pay income tax on that money before spending it on interest, it's not quite as painful. At a 28% income tax rate, it's only 72% as painful as paying $12,000 in post tax money. So let's say your interest payment is only $8,640, which is 72% of $12,000.

But we should also consider that you'll have to pay property tax, maintenance, and insurance on your house, forever. Property tax is typically 1.5%, maintenance is about 1.5%, and let's say you can get house insurance for $1,000 per year. So for your $250,000 house, that's $3,750 property tax, $3,750 maintenance, and $1,000 insurance, a total of $8,500.

These are now your two options for the coming year:

Buy the house for $200,000 in borrowed money plus your $50,000 downpayment, and pay $8,640 interest after income deduction, plus $8,500 in property tax, maintenance, and insurance, a total of $17,140.
Pay $12,000 rent per year to live in a house, but collect $2,500 in CD interest. Property tax, maintenance, and insurance are paid by your landlord, so you have a net cost of $9,500 as a renter.
Buying would cost you $17,140 per year, but renting would cost you $9,500. So you would be $7,640 better off as a renter.
"But haven't houses always appreciated in the long term?"

Prices did rise a lot from 2001 to 2005, but that was very unusual, caused by exceptionally low interest rates and very lax lending standards. Prices peaked in the middle of 2005, and have been falling since then. If prices fall another 5% in the coming year, as they did last year, then your choice is this one:
A cost of $17,140 from the previous case, plus a 5% loss on your $250,000 house. That 5% loss is $12,500, for a total owner's cost of $29,640.
The renter has the same $9,500 cost as before, and does not care about the depreciation of the building he's in.
So you would be $20,140 better off as a renter.
If you look at the very long term, houses have been the worst investment available to the general public:

Average Annual Real Returns beyond inflation
Real Estate Stocks Bonds T Bills
5 Years 1.39% 6.97% 2.91% 3.01%
10 Years 1.28% 6.91% 2.75% 2.85%
20 Years 1.25% 6.67% 2.54% 2.65%
30 Years 1.36% 6.59% 2.34% 2.47%
From Yahoo finance

"But the CD interest is taxable, so you don't really get 5%"

Buying a CD is just the simplest possible investment example and not necessarily the best one. You can actually get 5% and defer taxes for decades, or not even have to pay tax at all. There are a few well-known ways:
Buy your CD's in your 401K account. 401K's are tax-deferred until retirement.
Buy your CD's in your Roth IRA. This is even better. The principal you put into your Roth IRA is post-tax, but all the accumulated earnings are completely tax free, as long as you keep them in the account until retirement.
Buy US Treasuries. Though the rates are a bit lower than CD's, maybe 4% instead of 5%, there is no state tax on US Treasury interest. Buy municipal bonds from your state. Now the interest rate is even lower, maybe 3%, but there is no state or federal tax on the interest. Buy and hold stocks. If you hold a stock for more than a year, the tax rate on any gains is only 15%. And you can put off the tax indefinitely just by continuing to hold the stock. Buy and hold index funds. Index funds, which are mutual funds that mirror stock market indexes like the Dow or S&P 500, have risen at 10% per year on average. And you can hold them indefinitely and put off the capital gains tax as long as you like. Pay off debt. If you pay off credit card debt and avoid 20% interest rates, you're way ahead of even the best professional investors. If a penny saved is a penny earned, then 20% saved is 20% earned. Actually, it's even better because it's tax free. Pay rent in advance for a discount. If you can get a 5% discount by paying an extra month's rent in advance, you've earned 5% in one month. That's an annualized rate of 60%, which is an insanely great return. This, however, gives up some of your leverage over your landlord to get things fixed when necessary, since you cannot withhold rent you've already paid.

"What about inflation?"

Inflation eats away at the real returns of all investments equally. What you really care about is after-inflation returns. A glance at the after-inflation returns of various investments in the table above shows that housing has the lowest real return. Most of the apparent rise in housing has actually been inflation. Banks know what they're doing, and they take inflation into account when lending you the money to buy a house. You can be sure you will be compensating the bank for the expected rate of inflation. On the other hand, it's possible that inflation could skyrocket, greatly reducing the value of the debt that borrowers owe.

"But rents will rise, while a fixed mortgage payment will not."

Rents have not been rising in most places. In fact, they are being driven down by the large glut of available housing because there has been way too much building going on. Rents in the San Francisco Bay Area are still less than they were 7 years ago, during the dot-com bubble. Rising rents are counted as inflation by the Federal Reserve, so if rents rise significantly, interest rates will probably also rise as the Fed tries to prevent inflation from from overheating the economy. That means it may still be a worse deal to buy, because it will cost more to borrow money. Property taxes, maintenance, and insurance will also rise with inflation.

If you own outright and interest rates rise, then the value of your house falls, because fewer people can borrow enough to buy it.

[Juniper]

Seems like this guy would advise everyone to rent... but didn't we already know that it's more expensive to buy than it is to rent? There's more reasons to buy than just trying to come out ahead in terms of $$. It could be as simple as wanting to own a dog, or maybe to modify the property to your liking, to settle into your "dream house." Not having to deal with landlords can be a big plus too, lol...

One benefit of owning our home has been that we're able to borrow against our equity in times of need. As freelancers, neither of us has a steady income, and we never would have made it through the "dry spells" without that credit to fall back on. Maybe it's not a great idea to get into that kind of debt, but it's made a big difference in our quality of life. I don't know many couples who both get to work from home ;) It's about stability, in our case.

Also, despite the falling prices we are still coming out ahead in terms of house value. Maybe we just bought at the right time, but over the years houses are bound to get more expensive, right? It just depends how long you can ride out the fluctuations before selling.

[veronica]

Can't answer for the states but our nz house has just been revalued and has increased in value over 100,000k in 2 1/2 years.