Wednesday, May 18, 2005

"Buyers Have No Idea" : Pulte

This Business Week story reports that the number of interest only loans is far higher than the MBA allows. "Here are some scary statistics: In 2004, fully 50.4% of the mortgage loans issued for purchases of single-family homes in Georgia were to pay interest only. That made the Peach State No. 1 in the nation in its share of interest-only mortgages."

"But a whole bunch of other states were not far behind: California was second, at 47.1%, Colorado third, at 45.5%, Nevada fourth, at 44.7%, and the District of Columbia, fifth at 43.8%."

"The numbers come from LoanPerformance..They're for loans that were packaged for resale, so they don't cover quite the entire market, but they give a pretty good picture of the trend."

"The availability of such loans has probably contributed to the upward spiral in home prices, as shoppers armed with cheap financing try to outbid each other."

"Interest-only mortgages were designed for wealthy families..Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public."

"But even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. 'In most of those cases, buyers have no idea how they're going to pay' the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes."

28 Comments:

At 10:13 AM, Anonymous Anonymous said...

First, Americans care only about low monthly payments... now they care only about low initial payment.

We really need much better financial education for everyone.

 
At 10:29 AM, Blogger deb said...

"Lenders that make interest-only loans argue that there's little risk of a wave of defaults as long as the economy remains reasonably strong and housing prices don't crash." from Business Week

sounds like:
"As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe","As long as the bubble doesn't burst, there should be no serious problem." from Scott Stern, chief executive of Lenders One

It's like jumping off a building and saying, "As long as I don't hit the ground, things should work out OK." posted by dannyboy

 
At 10:32 AM, Anonymous Anonymous said...

"We'll worry about it later."

That has become the national motto.

Big gov't deficits?

We'll worry about it later.

No savings for a rainy day?

We'll worry about it later.

Won't be able to pay the mortgage if interest rates rise even a little?

We'll worry about it later.

Inflation up at a 6% rate today? Hey, we thought it would be even worse, and beside when you exclude energy and food there wasn't any.

We'll worry about it later.

No one can afford a house due to the bubble?

We'll worry about it later.

Guess I'm pretty stupid to be worrying about this stuff now..huh?

 
At 10:41 AM, Anonymous Anonymous said...

Talk about uneducated borrowers, check out this comment from a buyer in Texas. Found on Mortgage News Dailey.

"No bubble here in Texas, no money down loans with no interest for the first seven years. Life is good!!"

WOW!!! This guy clearly does not understand the terms of his mortgage. He thinks his loan has no interest payments for seven years, when in fact it is ALL interest (IO loan) for the first seven years and NO principal payment.

Amazing!

 
At 10:52 AM, Anonymous snowball said...

In this day and age, I wouldn't be surprised if some mortgage products soon appear promising zero interest for a time period.

They would probably carry some (hidden) prepayment penalties, though.

 
At 11:05 AM, Anonymous Anonymous said...

Lowering prices for new homes have begun. Both coasts have reluctantly begun to report on negotiable prices for new homes by builders.

The supply of buyers who can afford not only to purchase but to "live" in their new purchased homes have dried up. There simply is no more people who have sufficient incomes that have not bought homes.

It has been calculated by the industry of all the rental leases expiring and direct marketing has exhausted the supply of qualified buyers.

As one Industry executive quote, " We do not have inventory of affordable housing to sustain our earnings and forecasts do not look positive as previous quarters. The lending institutions have conspired with us with longer length mortgages and longer length ARM but we are only getting applicants who are really not qualified. I am getting concerned in seeing the foreclosure rates appearing on my reports."

Research has revealed that Chapter 11 and 9 bankruptcies filing and foreclosure rates on new and existing homes have quadrupled in the last 3 months. Something the State or Federal Governments and especially the Real Estate industry does not want you to know.

 
At 11:09 AM, Blogger deb said...

Anon 11:05

Any links for the above? Thanks

 
At 11:16 AM, Anonymous Anonymous said...

Yes. Please give links.
I'm trying to convince my husband to sell and rent for a year or two.

 
At 11:22 AM, Anonymous Anonymous said...

Anon 11:05

Where did you find this information? Is there a link or a publication that can support your post?

Thanks

 
At 11:24 AM, Anonymous Anonymous said...

chairman of pulte is right... people don't understand the full extent of the terms of these mortgages... and man... when this bubble, pops... just watch-out... it's going to turn into the game of who can best sue the lender...

 
At 11:43 AM, Anonymous Anonymous said...

I do believe lenders will be sued. They are partly to blame for not issuing responsible mortgages.

Putting mortgage borkers in jail might not be a bad idea.

 
At 11:46 AM, Anonymous Anonymous said...

("Interest-only mortgages were designed for wealthy families..Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public.")

The people I know who are "wealthy" or at least darned comfortable are not doing I/Os. They don't have to. Most of them have rolled over gains from one house into another and have ended up with lower payments, not higher.

The folks I know who are struggling are going the I/O route.

That should tell you something...

 
At 11:55 AM, Anonymous gorgo said...

('In most of those cases, buyers have no idea how they're going to pay' the higher payments that will be owed once principal payments begin)

Sounds familiar. I recently read that 20% of baby boomers (ages 40-60) have 0$ in retirement savings. The median saved by all baby boomers is less than $50K.

Everyone lives for today. Guess that sounds nice in songs and poems, but it doesn't work when planning for the future. The "Me" generation is setting a bad example.

Taking out a home loan that will only escalate in the future is a guaranteed way to difficult financial times ahead.

 
At 11:57 AM, Anonymous greenscam said...

(It's like jumping off a building and saying, "As long as I don't hit the ground, things should work out OK." posted by dannyboy)

True. But it works for a while. And for the past few years, Al Greenprint has been digging that hole deeper and deeper so the poor schmucks falling through the air haven't hit the ground yet. Can he keep digging faster than we are falling? Stay tuned...

 
At 11:57 AM, Anonymous Anonymous said...

Here are a few of the mortgage offers advertised in today's Rocky Mountain News (Denver):

30 Year Mortgages: No Payments for 1 Year

One Year Rates as Low As 1% (3.6%apr)

$400k mortgage: $1011.42/month + $250 'gas card'

5 Yr Fixed: 1.75%

1% 5 Year Fixed

107% Purchase Program
------------
All this and the Denver market isn't going anywhere. I watch the Denver market closely and condo prices are falling from what I can determine.

The local economy sucks and there's a ton of properties on the market. There are many 1 bedroom condos in Aurora (just east of Denver) for under $50k; numerous 2 bedroom condos in the $50k-$100k range. Lots of HUD owned units.

In spite of this new developers are still building. A 34 story and 32 story 2-tower complex near City Park is about to start pre-construction selling in July: 900 sq ft 1 bedrooms from *only* $290k..and up. We'll see if they actually get built. IMO, The Fed has created WAY too much liquidity.

..DenverKen

 
At 12:45 PM, Anonymous snowball said...

(It's like jumping off a building and saying, "As long as I don't hit the ground, things should work out OK." posted by dannyboy)

Hey, at least they have the courage to live dangerously. How many folks can say that they've had the opportunity to experience the thrill of a free fall off of a building?

Wahahaha.

Personally I'd rather spectate.

 
At 1:11 PM, Anonymous boulderbo said...

anon 11:43

being a mortgage borker, i'm a little offended by your comment; i don't borrow the money nor do i make up the programs to lend it. if you read denver ken's post, all of those programs are available today and it should be obvious that there is no free lunch on these programs, in reality:

400K loan, interest only teaser, adjusted monthly after the first six months, gas card? might as well through in a big screen tv.

5 year fixed, 1.75% or 1%, really a neg am loan, payment is fixed, but you're accruing at a margin over index, about 4.75% today.

107% is available, although 4% of that is supposed to go to improvements, which usually turn out to be a big screen tv.

the real issue is the borrower in their 20-30's today has no problem using these products. they did not have depression era parents cautioning them of the dangers of down market. real estate has only gone up in their adult lifetimes. they are buying a half million dollar noose around their neck based upon the cheapest monthly payment and the highest leverage possible. good luck to them all.

 
At 1:26 PM, Anonymous jethrobodine said...

(the real issue is the borrower in their 20-30's today has no problem using these products. they did not have depression era parents cautioning them of the dangers of down market. real estate has only gone up in their adult lifetimes. they are buying a half million dollar noose around their neck based upon the cheapest monthly payment and the highest leverage possible.)

Very good point. This is a Monthly Payment Society. Young people (and boomers too) have now been conditioning to focus on the short-term (monthly payment) and not on the long-term (nominal price, total cost).

This has everything to do with credit. We buy everything now on credit---gas, groceries, entertainment, travel, appliances, furniture, cars, homes.

Obviously, credit has allowed us to buy things that we could not afford to buy with cash by stretching the length of time to pay. But we have gone too far. Lots of people think they are being smart by putting all expenditures on credit for the miles or for the bonus points or whatever. They think, "I'll just pay it off every month and get the free miles!" But very few do. And the majority who don't have debt balances that pile up at 10-20% interest rates.

That's bad enough. But the worst thing is how it changes your psychology: Buy now, pay later. Don't worry about tomorrow.

It also can be confusing. How many people truly know how much they are paying for a car? They know the monthly cost, but not the total cost. Same thing with electronics or furniture. Can I afford $4K for a plasma TV? No. But can I afford $99 a month for the next five years with no payments for the first year? Sure, why not.

So many of us are buying homes the same way we buy cars or plasma TVs. But homes are different. We intend to re-sell our homes and we are convinced we will sell them for a higher price than we bought them for. Yet we evaluate the price based on the monthly payment, not on the nominal price. But when we sell the home, we will be selling it based on the nominal price.

If you never intend to re-sell something, or don't believe it will appreciate, then it makes some sense to focus on the monthly cost. This is because it is an item of consumption, not investment.

But a home is an investment (at least that's how most are looking at it today). But it is being purchased as a consumption item.

I don't know how we get out of this bind. Or when. But it won't end without widespread tears...

 
At 1:48 PM, Anonymous boulderbo said...

jethro,

i agree with you completely, you must be as old as i am. question for denver ken or anybody on the board: if fannie and freddie are in as much trouble as i think they are, who do you think will be the trustee for the end real estate. the legislators are not going to allow the same clowns that got them into this mess to clean it up. in the 80's the chain was the individual bank/s&l, then fdic/fslic, then eventually to the rtc. will it be hud or another new government entity. just wondering

 
At 2:08 PM, Blogger John Law said...

you have to look at these things from their perspective. as long as they don't lose money, you make out like a bandit. it's practically free money to these people.

think about it. you're some young hot-shot who just attending a seminar in late 2002. you buy a property with an IO loan and sell it a year or so later with at 50% higher. who wouldn't buy 2 properties this time? then a year or so later you sell some and buy more or buy bigger properties. think about it, some of these people make more just holding a house than they do at their job. for a few years, these people are actually smarter than you and I...but only for a few year and only by luck.

of course, for it to all end these hotshots all have to pile in and lose their money big. nobody listened to reason when their tech stocks made them tons of money, and nobody is going to listen now when their $300,000 investment property purchased a year ago is now worth $400,000.

 
At 2:34 PM, Anonymous spectator said...

(think about it. you're some young hot-shot who just attending a seminar in late 2002. you buy a property with an IO loan and sell it a year or so later with at 50% higher. who wouldn't buy 2 properties this time?)

You are correct. But it's gambling just the same. I think a lot of the speculators I am reading about are staying too long at the table. You see this a lot with gambling. Someone gets on a winning streak, then thinks they are playing with "house money" (no pun intended.) Greed takes over and ultimately they lose everything.

A few of these kids i've read about have flipped a few homes and made a few hundred grand. So what do they do? They leverage up and buy seven or ten homes in hopes of making a million. But at some point, they will be stuck with a lot of inventory and they will lose everything.

I personally don't care what happens to them. What concerns me is the fact that these speculators are interfering with the normal ebb and flow of the housing market in many locales. They are essentially middlemen who corner a hot market and then try to prey off of unsuspecting buyers who are simply looking for a place to live and raise their family.

If I could give advice to anyone buying a home today, it would be this: absolutely do not buy in a market which has a high percentage of flippers/speculators. You are going to overpay and you are placing yourself at great financial risk.

Why? Because the first thing that happens in a downturn is fast money sells out. In markets with lots of speculators, there will be a mad rush to the exits and prices will come down as supply hits the marketplace. If you need to buy in a speculator-infested market, wait until the speculators start getting run out, then come in.

 
At 3:17 PM, Anonymous Anonymous said...

boulderbo said:

"if fannie and freddie are in as much trouble as i think they are, who do you think will be the trustee for the end real estate."

who could it be except the Federal Government?..which is just a mind bogling thing to think about

in the late 80s the Feds issued around $700 billion in bonds to bail out the S&L mess...this is FAR larger

there are currently about $3+ Trillion in Fannie Mae bonds alone outstanding. They won't all be worthless, but a large amount will be. Pension funds hold a huge amount of these.

so, in my mind the question is....will the gov't print so much money to make these bonds good that a buck will be all but worthless?

read this to see how bad that can get:
http://www.linns.com/howto/refresher/hyperinflation_20050509/refreshercourse.asp?uID=

"In Germany in 1923, there were trillions and trillions of paper marks in circulation. Prices could rise 1,000 times between the time that a worker was paid and the time that he could rush to a shop to try to buy something.

Germany's high-denomination prewar stamp was the 5 mark. In 1923, Germany issued the blue Numeral stamp (Scott 299), shown in Figure 1. The stamp's denomination is an astounding 50 billion marks."

The Fed is being unbelievably irresponsible, and Bush is asking AG to stay on longer?? unbelievable..

..DenverKen

 
At 5:30 PM, Anonymous Anonymous said...

Spectator
I agree with you that those speculators after one success go to higher inventory, and so on, and it will end up badly. But it seems that you are blaming them for what is going on. They are simply one of the victims. They are not cause, but one of the effects.
Real cause is overliquidity of credit, Federal Reserve Scam and Alan 'Easy Print Money" Greenspan.
And on different note. Dont You think guys that when market is advancing up, lenders should require bigger downpayments?
(Much like higher margin requirements in the futures market whenever market has prolong uptrend.)
And when RE market is down lenders should lose up requirements of Downpayments to get market moving. What we are seeing now is opposite. If people in Futures market can do this why other "market makers" can't?
The answer is: because they dont want to. It is a total scam!
MIke C., Chicago

 
At 10:51 PM, Anonymous Anonymous said...

DenverKen:

If you drive through neighborhoods like Stapleton (big new housing development in Denver), you'll see plenty of For Sale and For Rent signs. Yet even when driving through on a weekend, the place seems somewhat empty.

BF and I are looking forward to one day maybe buying a place all the way downtown. It's really hard to justify spending $350K for what is essentially a glorified condo though (what builders will call a "loft"). Now if those prices drop the way they should, it'll definitely be a much nicer thing.

I think I read somewhere that the median household income in the Denver metro area is something like $45k or $50k. Average housing cost is something like $230,000 for a single family home? Something is clearly going to have to give here. I don't know where all these jobs are to finance all these properties. The people who have been employed long enough don't seem to get pay raises on as regular a basis anymore.

--mol

 
At 11:13 PM, Anonymous Anonymous said...

boulderbo: in response to your 1:48 post -- I think that ultimately the taxpayers will be responsible for footing the bill of this credit bubble. Because that's really what it all is, a credit bubble. Didn't taxpayers have to pay for a similar bailout for the S&L scandals back in the 1980s?

I agree with the theory that lending standards will just have to be tightened up. Lenders will require 20 percent down again, and you'll have to document the hell out of your income. You won't be loaned a ridiculously large chunk of money that is out of ratio with your gross salary. And with the banks not loaning people all this money, the amount that you can sell housing for will be much lower. Because there will be less buyers. And Denver is pretty much a housing glut now anyway.

Question for some of you slightly older posters (I'm one of those 20-30 somethings :) ) : when did it become socially acceptable for a significant other to be carrying around a large chunk of consumer debt? It seems like so many people my age are getting into serious relationships with 10K, 15K of credit card debt over their heads. And that's before they plan the wedding and buy the house. I suspect a much higher divorce rate that correlates with the credit bubble deflation. Debt puts enough strain on you already.

--mol

(ps: Ben, I love this blog! I check it every day. Makes me feel happy that I'm still a renter. Plus I can impress people with the economic knowledge I've picked up. :) )

 
At 8:50 AM, Anonymous Anonymous said...

11:13 Anon.
I'm in my late 30's and saw the first of the acceptance of the high debt load in a spouse just starting when I was in my 20's (at least in the midwest).
I think the biggest change comes from graduating from college with a large debt load. When you walk out of college with 25 to 100K in college loans, the 10 to 15K credit card debt seems tiny in comparison, therefore insignificant. When I graduated in the early 90's a large fraction of my peers were debt free coming out of college. Today, I think a large percentage of students are graduting with LARGE college loans, car loans and credt card debt. The size of the college loan makes everything else seem ok.

 
At 7:47 PM, Anonymous alex norman said...

I'm in my 30's and recently graduated from B-School.

What I have seen is the downside of young adults (gen X and Y)becoming more financially sophisticated.

They consolidate their debt into low-rate student loans, rollover large balances from one 0% (limited-time) credit card to another, take advantage of tax breaks, etc. to "game the system" as much as possible.

Many of my friends took trips to Europe, Brazil and Japan while they were in school. Their attitude was, "hey, I've already got $40,000 in student loans, why not enjoy life a little before I'm stuck in a job for the next 30 years..."

I also agree with the person on this board who said she's got lots of friends with $15K of credit card debt.

It's the same old story. All people can think of is "What is the monthly...?"

 
At 1:24 PM, Blogger L'Emmerdeur said...

Actually, those statistics betray a slightly different (and more worrying) fact:

The loan data came from loans packaged from resale. In general, if you are a mortgage lender, you would normally keep ARM's, since rising rates mean rising margins (you've already financed these ARM's with low-rate fixed funds) and sell fixed-rate assets, since those margins cannot improve (fixed-rate asset, fixed-rate liability).

However, if they are selling their ARM's, this implies that they predict that the losses from defaults/foreclosures on those ARM's will far outweigh the benefit from rising margins on these low-quality assets.

 

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