Friday, April 29, 2005

Crisis? One In Eight Families Have "Critical Needs"

The Center for Housing Policy has a report out, and it seems they woke up and realized the boom is a bust after all. "Barbara Lipman, the research director for the center, said a full-time job doesn't guarantee families a decent, affordable place to live."

"'The problem seems to be impervious to economic conditions because the number of working families in this situation has grown during the boom-boom '90s and early 2000s,' she said. 'More families are competing for a limited supply of affordable housing. The price is going up faster than the wages of working families.'" She catchs on quick!

"The group found that for every $1,000 families saved on housing by moving some place cheaper farther out, they're only $225 ahead because their transportation costs go up so much. 'Choices are a bit grim, commuting longer distances, working longer hours, having another wage-earner in the family, taking a second job,, Lipman said."

"One out of every eight families in the United States had critical housing needs in 2003, defined as either paying more than half of income for housing or living in run-down quarters. Homeowners now are more likely than renters to have critical housing needs, 55 percent are people who own their homes."

35 Comments:

At 12:18 PM, Anonymous Anonymous said...

I make $85K per year in Boston, but cannot afford to buy a home using a 30 yr fixed mortgage, and support my family, plus save in my 401k.

Suppose I don't fit the typical "crisis" candidate profile, so I won't get any help from the gov. But they sure will tax the daylights out of me so that they can give "low-income" families a fat down-payment with no strings attached.

Is this a free market?

Crash ALREADY!
These bloated $450K homes had better come down to the $300K level otherwise, there is gonna be lots of grief in America for many years to come.

 
At 12:26 PM, Blogger Ben Jones said...

Anon in Boston,
I have heard the taxes are brutal there. Taxes are high here in AZ, too. Do you have an income tax?

I agree that prices must come down.
Thanks for commenting.

 
At 12:38 PM, Anonymous Anonymous said...

It is very interesting that the bubble is finally hitting the limits for buyers. I wonder how many have already bought and are extremely over extended. I wonder what they are going to do when they realize they either have to sell at a loss or hold their purchase for 15 years until the market returns !

Me thinks a lot of head scratching is beginning to happen. This might be a very interesting summer.

I can't help but correlate all this with the decreasingly negative consumer sentiment that seems to be turning up in poll after poll these days.

The media blames it on oil, but I can't see the extra $25 per week that gas costs right now causing that much of a problem. I think the real culprit is housing.

 
At 1:19 PM, Anonymous Anonymous said...

Totally agree with Boston...I'm sick and tired of hearing about low income family housing that is government subsidized and paid for with my tax money. Husband and I make over 100K combined and can't afford the median priced house in San Diego with a 30 yr fixed. Oh sure, we can do the 5/1 ARM IO loan and get in over our heads, but I'm not that stupid. It feels like we're being punished for being successful and somewhat well-off. I sometimes think now that I wasted my time getting a college degree when I could have bought a house and be rich! By the way, if this housing boom never ends and keeps going upward, how does the next generation ever get in? The argument I always hear about the neverending boom is riddled with lies and holes. Our economy and financial future as a nation always relies on the next up and comers. If we can't afford a house now, they never will be able to afford a house ever.

 
At 1:25 PM, Anonymous Anonymous said...

Where is Fannie Mae and Freddie Mac ?

The only goal of these companys is
suppose to preserve and advance affordable housing.

 
At 1:32 PM, Anonymous Anonymous said...

All homeowners are subsidized by the government, through the mortgage interest deduction. It's just us renters who miss out.

 
At 1:51 PM, Anonymous Anonymous said...

All homeowners are subsidized by the government, through the mortgage interest deduction. It's just us renters who miss out.

Boy, you got that right! It's not just the mortgage interest deduction, either. You also get to deduct property taxes on your federal tax return. And let's not forget the biggest tax break: no capital gains taxes on your home after you've lived there for two years! No other investment gets that kind of tax break.

It could be argued that this kind of preferential treatment is helping inflate the real estate bubble. Remember, prior to 1997 you had to pay a capital gains tax unless you rolled your gain over into another house of greater value (unless you were 55 years old). Let's see, when did this housing boom start....1997?

 
At 1:57 PM, Anonymous Anonymous said...

Agree with the guy from Boston and the 1:19 anonymous. Our fiat dollar has turned the gov't into a socialist democracy that buys votes by robbing producers to reward consumers. Even Republicans today are such Keynesians that they make FDR look like a miser. Bush likes to brag about how many minorities have become homeowners since he was "elected", as if this were a laudable goal for the gov't! The gov't is supposed to preserve the free market, not use it as a tool for social engineering.

The one consolation is knowing that the gov't can force money into the hands of fools, but cannot keep it there. Unfortunately, the next step will be Bush's equally useless rich buddies coming in to scoop everything up after the meltdown. As an added bonus, they'll have created a perpetual debtor class, thus obviating the need for a politically untenable draft...

 
At 1:58 PM, Anonymous Anonymous said...

We sold our townhome and left LA in 2003 so my husband could go to law school and we're hoping to head back out west in 2006. We have 2 kids and my older child will start preschool in Fall 2007. I am willing to wait for a little while but I really want to be in a home by then. Until he graduates next year and gets a job offer, I am just here on the East Coast watching what happens with the housing market...I agree all the indicators look like a reversal is about to happen, but I have been wrong before.

 
At 2:05 PM, Blogger Ben Jones said...

(if this housing boom never ends and keeps going upward, how does the next generation ever get in? The argument I always hear about the neverending boom is riddled with lies and holes)

Great point and the one that really trumps the boom concept. Wages are stagnant. How will a young couple afford a $1.2m house in ten years? It's impossible. Thanks for all the excellent posts.

 
At 2:16 PM, Anonymous Anonymous said...

"they'll have created a perpetual debtor class, thus obviating the need for a politically untenable draft..."

What's your source for those aluminum foil caps to keep the Men In Black from snooping around in your brain?

 
At 2:39 PM, Anonymous Anonymous said...

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At 2:43 PM, Anonymous Anonymous said...

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At 2:44 PM, Anonymous Anonymous said...

>What's your source for those aluminum foil caps to keep the Men In Black from snooping around in your brain?

With all the crying from the Army about how they haven't got enough warm bodies to stand guard on our new Middle Eastern colonies (especially if we decide to add Iran)? Might as well get them from a convenient source.

 
At 2:59 PM, Anonymous Bob R said...

How will a young couple afford a $1.2m house in ten years?

Easy! By then they will able to get 100-year mortgages, just like in Japan at the peak of their bubble economy.

 
At 3:31 PM, Blogger deb said...

We have already done the 100 yr mortgage one better. What do you think the term is on an interest only loan? INFINITE!

 
At 3:41 PM, Anonymous Anonymous said...

Hey Deb, I have never really checked out the interest only details, but don't they eventually roll into an ARM or is it a balloon?

 
At 3:59 PM, Anonymous Anonymous said...

"Crash ALREADY!
These bloated $450K homes had better come down to the $300K level otherwise, there is gonna be lots of grief in America for many years to come."

I WISH there was a house in the Bay Area worth living in for 450K. About all you can get for that money is a 900sf shack or an outhouse. Any decent house around here will cost 700K+ and median incomes aren't any higher than what you're making. I guess both markets can be considered a bubble but it sounds like the CA bubble is a lot worse.

 
At 4:22 PM, Anonymous Bob R said...

We bought a 3br, 2ba, 1600sf single-family home in San Jose in 1995 for $270k. This was at the very bottom of the 5-year housing slump in Silicon Valley (lucky timing for us!)

In 2002, we spent $50k fixing it up.

Last May we sold it for $665k. Buyers were a young couple who estimated their monthly payment including taxes would be in the $4k range.

I'm sure that couple who bought it from us can sell it for around $700k today. But I'm not a bit sorry we sold it last year. Better to get out a little too soon than a little too late!

 
At 4:37 PM, Blogger deb said...

Anon at 3:41,

Yes, the interest only loans do convert to some type of amortized loan after a number of years, but I would be willing to bet that most of the borrowers have no intention of every paying off even $1 of that loan balance. They will refi to some other funky low payment program or sell.

I know some young families that have taken out these loans (for examlple: my step bro with a $600k IO loan, he makes $65k!!!??) They absolutely cannot afford the payment once it adjusts to an amortized loan. They must refi or sell. How many others in this boat? He has 18 months to do something about it. The clock is ticking for a lot of homeowners...

 
At 4:56 PM, Anonymous Anonymous said...

While standing in line at the Deli today, I noticed a couple of mortgage brokers pull up in their Range Rover. I asked them, when do you expect this bubble to burst. You already know their answer - "What Bubble". They said we don't see prices flattening for at least 3-5 years. In talking further with them, I found out that 80% of their loans are adjustable with the majority being interest only and less than 5% down. No news to us. BTW I live in Burbank California (LA) where the starter home in my area is now in the mid $500k range, for that you get a 1,000 sq ft old home on a 6,000 lot. Just had one close on my street 1200 sq ft sold for $689,000. Another 853 sq ft, 2600 sq ft lot on high traffic street asking $479,000 in escrow above list price. This can't continue folks.

 
At 5:15 PM, Anonymous Anonymous said...

One problem is that the market is being taken over by speculators who are driving up the prices. Sometimes entire condominium projects are bought up from the developer by speculators who then sell at higher prices. If the developers aren't paying attention, they end up competing with the speculators to sell the balance of their units.

Also, just about anything, no matter how old or run down is being condo converted, so there is less rental property which of course drives up rents.

In my neighborhood, wood shacks on busy streets turning commercial run $400K+.

Another problem, predatory lending practices. People are getting talked into taking an 80% mortgage and a second for the balance. They think the lenders wouldn't give them the money if they couldn't afford it,but that is not true. The mortgage brokers get their fees up front and the lenders often sell on the secondary market, so its the secondary loan purchasers who get burned. The the homeowners have no equity, cannot afford the houses they get talked into and often lose their homes on the first family emergency.

Finally, I see tons of fraud and forgery and don't forget unlisted subcontractors in construction--developers burning their subcontractors and the title companies with false contractor statements. Real estate has become a very difficult profession and homebuying is heartbreaking and full of peril.

 
At 5:18 PM, Anonymous Bob R said...

If you buy a house with no money down and an interest-only loan, you don't "own" anything. The bank owns it all. Subtract the future real estate commission and other selling costs, and you immediately start off with negative equity before you even move in.

Since you have an interest-only loan, you are essentially paying rent each month. The only way for you to build any equity is if the house appreciates in value. But if property values fall, you are on the hook for every dime of that drop.

And so, the day arrives when your interest-only loan converts into a conventional loan. In a period of declining property values, you are royally screwed. You have only bad choices: accept the much higher monthly payments required by the new loan, or sell the property at a large loss. You can also try to refinance, but remember now, your house is worth less than your existing loan, so refinancing is a lousy option also.

Keep in mind that in some overpriced markets, half of home sales are being done with interest-only loans. Because of this, many, many people will be defaulting and walking away from their properties down the road, even if interest rates remain stable. If rates go up, the stampede will be even worse.

It's a ticking time bomb.

 
At 5:41 PM, Anonymous Anonymous said...

>Another problem, predatory lending practices. People are getting talked into taking an 80% mortgage and a second for the balance. They think the lenders wouldn't give them the money if they couldn't afford it,but that is not true. The mortgage brokers get their fees up front and the lenders often sell on the secondary market, so its the secondary loan purchasers who get burned. The the homeowners have no equity, cannot afford the houses they get talked into and often lose their homes on the first family emergency.

Assuming this bubble implodes before 2006 or 2008, it'll be interesting to see who the politicians decide is to "blame" for all this, as they seek to pander to the largest possible number of greedy fools. Maybe Martha Stewart will be found to have flipped a house based on an appraisal that she knew was fradulent?

 
At 5:52 PM, Anonymous Anonymous said...

Since most people won't get chapter 7 but chapter 13 instead, walking away might not mean they can forget about the money they still owe. If there are millions of flippers trapped in the bubble and still have to pay back the debts for many years to come. It might be the greatest lesson of the century.

 
At 6:00 PM, Anonymous bob r said...

To continue in that same vein...

Contrast the characteristics of the interest-only loan with those of a conventional 30-year mortgage: with the latter, the monthly payment will never adjust upward, and you build equity with each payment - a little at first, and more with each payment.

If you plan on living in the house long-term, you can easily ignore any fluctuations in interest rates and property values.

With an interest-only loan however, interest rate and property value fluctuations keep you up at night. They may force you to sell your property at a deep loss when the piper comes calling.

THAT is why everybody should be scared crapless that so many people are taking out interest-only loans. In addition to inflating the housing bubble today, these loans will cause much more instability down the road.

Adding even more fuel to the fire are these new "option payment" loans. Borrowing a tactic from credit card vendors, one of the monthly options with this mortgage is to make a minimum payment THAT DOESN'T EVEN COVER THE INTEREST! The difference is added to the principal - ergo, negative amortization.

Countrywide Financial this week said that 18% of its new loans in the first quarter were these new "option payment" mortgages.

Disaster beckons.

 
At 6:19 PM, Anonymous Rob said...

In San Diego, I have a friend who works for a high risk home loan mortgage company. She said she can't remember the last time she processed a 30yr fixed. I don't have a hard time believing that there are plenty of knuckle heads out there with no money, that don't mind taking on excess debt. They probably figure, hey, I have nothing now, if the house don't appreciate, then I will still have nothing. I am sure most of them would say "Huh?" if you asked them if they had heard of the new chapter 13 laws.

But where in tarnation do they find investors willing fund these loans. Is it possible that they can sell these loans to Fannie and Freddie? Are we, the taxpayers the fools that are loaning them our future earnings.

The thought of that makes me crazy

 
At 6:57 PM, Anonymous bob r said...

Something to keep in mind before defaulting on your mortgage...just handing your keys back to the bank doesn't get you off the hook. The bank can sell the house and then sue you for the difference between what you owe on the mortgage and what they got in the sale, plus their expenses. And as people here have noted, filing for bankruptcy isn't as simple as it was a month ago.

 
At 8:08 PM, Blogger desi dude said...

point to note.

handing off the keys works in california. as long as the original mortgage was used to purchase a home you can do it. you are out of luck , if you did a refi.
am not sure about the second mortgage (in a 80/20 loan)

DOnt know about other states.

we have discussed this on this blog before.

 
At 8:14 PM, Anonymous Anonymous said...

I think you can still consider a refi "purchase money" if you didn't borrow any more than the original balance.

 
At 10:59 PM, Anonymous Jim in Venice said...

Anon in Boston - I'm with you. Fiancee and I make a little over 100k a year, no kids, no car payments, no credit cards... can't afford anything except a piece of shit condo in LA. Drives me off the wall.

On the plus side, I think we are moving into a gorgeous 2 bed/2 bath+office rental home for $1900 a month! I used to hate our landlords because I felt like we were buying our apartment for them. Now, I feel like they are subsidizing us.

 
At 11:02 PM, Anonymous Jim in Venice said...

Sign of a bubble...

This is unrelated, but hilarious:

My fiancee and I were at the mall here in LA this evening, and a kiosk in the middle of the mall (one of those typically reserved for cheap jewelry, ties, pretzels, etc.) was selling "pass your real estate license exam" courses for $99. Now I'm no expert, but when they are selling real estate courses at the MALL, there are problems - and no one can convince me otherwise.

 
At 12:42 AM, Anonymous Anonymous said...

(this housing boom never ends and keeps going upward, how does the next generation ever get in?)

i have been thinking the same thing...
that is why the govt has to pop this thing. im sure they see it and dont want riots on their hands in 5 years.

 
At 4:26 AM, Anonymous Anonymous said...

I am so glad to see the question arise about the future generation
being able to afford housing.
I have been wondering the same thing.
It is going to be critical to have a decent education to even have a shot at it.But your blue collar workers will have even a harder time.
Of course they will be alot of kids inheriting alot of wealth,
which will help.

 
At 5:45 AM, Anonymous Anonymous said...

(this housing boom never ends and keeps going upward, how does the next generation ever get in?)

i have been thinking the same thing...
that is why the govt has to pop this thing. im sure they see it and dont want riots on their hands in 5 years.

 

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