Yeah, so I've been reading a lot about the sub-prime mortgage industry caving in, and house prices dropping and people losing their homes and how its a good time to be renting and yada yada, but I dont really have a good grasp of how this stuff works. Would anyone with half a lick of knowledge care to explain what they're talking about, and how all this affects house prices and stuff?

4/24/2007 8:31:02 PM

this could take a while.

OK the housing market is kinda like the stock market. People buy houses as investments, and those investments looked especially lucrative a couple of years ago when housing prices kept going up and up. Homeowners were making money and lenders were making money.

People with bad credit and / or little cash at hand wanted in, and they were offered subprime loans with little cash down and adjustable rate mortgages with low initial payments. Of course the bubble burst and houses stopped appreciating in value like crazy because of a variety of factors including higher interest rates, less available money for real estate and fewer buyers on the market.

Now those subprime homeowners have much higher payments than they had originally (hence the adjustable rate mortgage), and they are defaulting at record rates. By flooding the market with defaulted homes, it drives the price of other homes down. Nobody wants to invest in new housing, existing homeowners lose equity, and a host of other problems arise which can threaten the economy. It's kind of like when the bubble burst on the tech sector about 8 years ago.

At least thats my understanding from reading the paper every once in a while.

[Edited on April 24, 2007 at 8:55 PM. Reason : 2]

4/24/2007 8:53:36 PM

And the lack of new housing loans reduces the growth of money available for loans that have nothing to do with housing but still affect the economy (such as small business loans). Also, banks become more risk averse in general because they have to balance non-performing loans on their books.


No matter what happens, though, Jews caused it and are making big bucks off of it.

[Edited on April 24, 2007 at 9:08 PM. Reason : sdf]

4/24/2007 9:00:26 PM

Dunno how good this is, I have it marked to be read, just haven't done it yet

http://consumerist.com/consumer/real-estate/everything-you-ever-wanted-to-know-about-the-subprime-mortgage-meltdown-253330.php

4/24/2007 9:10:22 PM

Subprime borrowers have poor credit histories, or perhaps can't provide full documentation for a loan (ex. commission sales - you might earn a high income, but it's not steady & reliable). They're inherently risky, hence the higher interest rates on subprime mortgages.

Banks like to make subprime loans in a hot real estate market - they get relatively high interest rates on the loans, with theoretically less downside - predicated upon their ability to sell the property for a gain in a rapidly appreciating market. If the property value is climbing 10% a year, there's little risk to having an individual default on the loan - you can recoup the money selling it in the open marketplace.

Housing prices are stagnant or declining now, for a few reasons:

1. Relatively fewer buyers. Suddenly, a whole segment of the population can't get a loan at all because of tightening lending standards. [My personal belief is that if you're in this marginal category...can you really afford to own and maintain a home? Probably not.]

2. Less generous lending terms to qualified buyers. A 1% swing in interest rates can change the amount of loan for which a person can qualify by $20,000 or more. Requiring 10-20% or more down payment, instead of 0-5%, also changes how much house one can purchase. It might take someone out of the game altogether, if a couple more years are needed to amass the larger DP.

3. More properties on the market. The subprime mortgage holder down the street who can't afford the loan payment is a 'motivated seller' - this can stop the prime mortgage holder at the other end of the street from selling his property as quickly, putting downward pressure on prices. This situation also occurs with prime folks who just bought more house than they could truly afford.

Basically, the banks and the subprime borrowers brought it on themselves, and we all suffer as a result. Unless you happen to have $Texas lying around and can capitalize upon the buying opportunity

4/24/2007 9:24:08 PM

ok, so this makes perfect sense...

and in summary, thank god I went to grad school instead of getting a job and buying a house.


So my next question is, if, in two years, when I get a real job and look at houses, assuming the market is still low, then that may be a good investment, like buying stock when its at a record low and could go up?

4/25/2007 12:27:17 AM

It's hard to believe you are a graduate student.

4/25/2007 12:28:58 AM

the housing market itself is very specific to the locality that you're dealing with.

Bigger markets like the bay area, Miami, Tampa, etc. take the biggest hit.

Other areas are relatively flat.

Then you have the triangle. Still growing. You'd think there was no housing bust.

4/25/2007 12:38:11 AM

The Triangle has been ranked as one of the most bubble-proof markets in the country. The bubble didn't really burst because there wasn't much of a bubble in the first place...you just had a steady rate of appreciation of a few percent a year. In places like the DC market, housing prices were going up 20 or 30 percent a year.

4/25/2007 2:53:36 AM

^

4/25/2007 8:40:21 AM

^^^^

That's an ignorant statement. I don't see how being a grad student requires any background in mortgages and shit like that.

4/25/2007 8:51:07 AM

I'm not going to insult you, but the connection between foreclosures and lower house prices is basic supply and demand.

4/25/2007 9:09:04 AM

^^ I think what he's getting at is that one would assume that a grad student (or anyone really) should be able to get at least a basic understanding of just about anything by harnessing the might of google.

I'm not hatin', just sayin'

4/25/2007 9:32:54 AM

^^^You're right. I guess it is possible to make it to grad school without basic life skills.

4/25/2007 10:52:27 AM

Unreal

http://bigpicture.typepad.com/comments/2007/04/go_fico_yoursel.html

4/25/2007 11:58:45 AM

Quote :

"and in summary, thank god I went to grad school instead of getting a job and buying a house."

if you're in grad school here (at State), this statement is generally wrong.
As markgoal& Bobby said, the Triangle has not seen a real-estate bubble burst like much of the rest of the country has, the main reason being there never was much of a bubble to begin with. Real estate around here has been climbing strongly and steadily for years, but not unreasonably so. In many places in California, for example, where so many people are in trouble, houses were doubling in value every 2 years. That's just insane, and obviously unsustainable. It was great for people who bought 5 years ago and sold 1 year ago and made a fortune. But then those people either had to 1) move out of the area with all their cash, or more likely, 2) buy an even more expensive house at a high price, the value of which has probably plummeted in the past year.

The market around here never got too overvalued, and it is still a seller's market in Cary & Raleigh. Houses in Cary stay on the market for a matter of days - i would know - i'm moving into one this weekend.
I bought my first house in Holly Springs in December 2004, and sold it last month, making over 20% ROR based on the selling prices, or 9%+/year. It had almost 20 showings in the first week and sold in 9 days. 9%/year is a reasonable return for a short-term investment. It's not making me rich, but it's certainly better than most investments do over the first 2 years.
When we were looking at houses in Cary, it was not uncommon for them to go under contract within 1 or 2 days of being listed. We were on an automatic mailing list for MLS listings, and sometimes if a house showed up one morning, it was too late to do a showing the next day because they already had an offer.

point being, the market is still really strong here because it is a desirable place to live, houses are still relatively cheap compared to other high-tech corridors (Si Valley, Boston, Austin), and otherwise the cost of living outside of housing is relatively low. The Triangle will continue to grow and stay strong, especially now that people are starting to pour out of insanely expensive places like San Diego and San Francisco.

4/25/2007 12:17:38 PM

I paid 185 for my house last year, all the houses around me are currently selling for 235-290. By selling I mean sign goes up in their yard, and a week to two weeks later there is a sold sign in their yard. So I am glad I quit grad school and bought a house, cause now I couldnt afford to buy in my neighborhood.

4/25/2007 4:27:24 PM

Quote :

"cause now I couldnt afford to buy in my neighborhood."

Yeah if you want to buy a house in Raleigh/Cary, you might as well go ahead and do it yesterday, because things aren't getting any cheaper. Don't plan or wait for some kind of massive correction or crash around here anytime soon.

4/25/2007 4:48:04 PM

word from the wise

creative loans mean you can't really afford it.. get no more than a 30yr FIXED RATE.
otherwise you can't actually afford the house.

4/25/2007 4:53:07 PM