Analysts are not taking into consideration how much trouble the American economy will be in across the nation when those middle to upper class home owners all over the nation see their prices fall as much as the lower end has. This will happen - it has to. Unless folks start paying cash and see extra value in million dollar homes, home prices will gravitate to the most readily available financing, which is still $417k.
He tosses California a special bone:
BUYING A $650K HOME WITH $85K PER YEAR INCOME - MOST POPULAR IN CA
A 5/1 interest only at 5%, qualifying at interest only payments, means that a $520k loan carried a payment of only $2166 per month. Add in $650 per month for taxes and insurance, and the total is roughly $2825. With a 15% second of $97,500 at Prime carrying payments of $325 per month and reasonable ‘other debt’ at the time of $400 per month, the total payment out the door would be $3541 approx. This means a household income of $7082 per month could buy a $650k home with 5% down. This is not out of the realm of hourly workers or moderate income single worker families .
Now the same home is worth $450k, the borrowers added debt after the loan was funded and all of their after tax income is going out to debt each month. They can’t save a penny and are going broke just to live in this underwater house. They can rent the same house for $2500 per month. The best decision is to walk.
$650k Purchase in 2006 - 95% first/second combo
$2166 per month on a $520k 5/1 interest only Jumbo Prime
$650 taxes and insurance
$325 per month on a $112,500 heloc
$400 other debt
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$3500 per month total payments
$7000 per month ($84k per year) needed to qualify(numbers above are approximate)
Now days, the same income buys a $275k to $300k mortgage with 10% down. This shows why housing prices keep falling.
The average note discount at Trustee Sale in CA last month among the big banks was 45%. If these loans were mostly 80% loans at the beginning, this means the homes are being discounted over 55% and still less than 5% sell at auction. They rest go back to the bank as REO.
Home values going parabolic in Jumbo regions like CA had much to do with the nation’s past six year’s wealth effect. When a home goes from $300k to $1 million, that equity is extracted and spent. The home in Nebraska going from $100k to $200k was insignificant. This is why when it comes down to housings impact on the broader economy, ‘as goes CA so goes the rest of the nation’.
Oh; is that all? Actually, there is more in the original post.
In case anyone's wondering who this Mr. Mortgage is or what he looks like, when I first heard of him back in April, he was foaming at the mouth about Lehman mortgage lending standards. This when Lehman was a $44 stock, and not a pink sheet special. Yet.
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