Best Time to Rent, Buy, or Pay Mortgage Down Early?
Often those who choose to rent or pay down their mortgage are presumed to do so out of necessity rather than choice. Such an assumption is often incorrect, particularly in today’s housing market. Simply said, many Americans now find that median income household cannot buy median priced homes.
Historically there has been a notable cycle in the market that housing trends closely followed.
Generally speaking, whenever prices rise faster than incomes, income levels eventually rise as well, or home prices decline.
That said; this previous housing bubble has been larger than anything history has ever seen. For some reason incomes do not seem to be rising anywhere near fast enough to keep up with the gains made in housing in previous years.
While median housing prices have declined somewhat in the past year, they are still heavily inflated relative to median income levels.
This leads one to conclude that perhaps now is the best time in US history to be a renter if you do not already own a home. One is much better off paying somewhat high rents for the next few years than buying a home and then watching equity disappear should the market take a freefall.
Those already owning a home have benefited from recent gains made in housing prices. Such gains can sometimes be difficult to realize however as the demand to buy property has fallen. One’s home is worth more than when it was initially purchased, but selling it to realize such a gain is an entirely different matter.
This can be particularly difficult for flippers, or home owners who mistakenly purchased homes with adjustable rate mortgages expecting to easily sell their home in the future. Now that the market has slowed it can be terrifying holding a home with monthly rates about to skyrocket.
Adjustable rate mortgages often skyrocket after a few years, sometimes doubling one’s monthly housing payment. Such an increase in payments can be nearly impossible to afford.
According to many experts, housing prices that one sees today are artificially high and therefore not sustainable. Such a view is backed by events of the past; historically homes have been valued relative to income levels. In the latest housing bubble median home prices shot up by close to 50 percent. The median income, on the other hand, has gone up roughly 10 percent in the previous decade–a very meager increase compared to the drastic change in home prices.
Today’s incomes simply cannot support the bubble-inflated prices, a fact which many homeowners with adjustable rate loans are quickly learning. In places such as California, Americans earning the median income simply have no chance of affording a median priced home with a conventional loan. Often such expensive homes lead to homeowners purchasing a home they cannot afford using an adjustable payment mortgage. This makes such a loan affordable for a few years but unless incomes jump drastically (which they don’t seem to be doing), the home remains too expensive after the payment adjusts.
Sadly enough, most borrowers didn’t take out conventional financing during the previous housing boom in order to purchase their home. Instead, caught up in the housing craze many borrowers took out risky and illogical subprime loans in order to be able to afford a home. This led housing prices to a never before seen height. For a few brief years anyone who wanted was able to purchase an expensive home, often with little income or few assets to use as collateral. Obviously those with no job and poor credit find it difficult to continue to afford a home when payments jump. This has resulted in record numbers of foreclosures and a full meltdown in the mortgage loan industry.
Those with adjustable loans rarely realize that through the use of a second mortgage loan they can actually pay down a mortgage loan early. This can work miracles for those trying to manage a budget with a difficult loan.
With more than 150 major lenders having closed up shop in recent years, it has become incredibly difficult to qualify for a loan. Many homeowners who have already purchased a property cannot now refinance the same home. The only real option to avoid foreclosure can be using a 2nd mortgage (which is often easier to qualify for) in order to float and manage monthly payments.
Housing Crash Caused by Simple Panic?
The debate rages over the true cause of the housing crash with many including the writer feeling that subprime lending was indicative of the wildly speculative loans so easily dished out in previous years. Others argue that while lax lending standards certainly contributed to an economic crisis, the real cause of market decline was simple investor panic.
Sify.com argues in favor of the latter view:
It is a cliché to attribute the Crash of 2007-08 to the woes arising from the subprime lending in the US. It broke out within days after the meeting of the US Federal Reserve on August 7.
Fear seized credit markets, bred risk aversion and liquidity froze. Warriors (read, investment bankers) who could shuffle billions of dollars across computers in seconds in what was described as “statistical arbitraging” were scurrying for liquidity to bolster the value of their assets.
More than fear, it was the distrust of the value of the assets held by their peers that curdled cash flows.
Panic can cause investors to avoid all companies involved in housing (which seems to be occurring). Whether this is genuine panic or just concern that such companies won’t be able to payoff mortgage debt as foreclosure rise is a matter of opinion.
Foxton Lending Closes over Housing Slump
Another one has bit the dust. Asbury Park Press writes:
Foxtons, a West Long Branch-based real estate company that made a splash with its discounted commissions, said Wednesday night it is closing because of a downturn in the housing market.
The company said it is contemplating bankruptcy for an orderly shutdown, and it will continue only with a skeleton crew; it is laying off 350 of its 380 employees.
“The plain fact is that we have been battling against a real estate market that recently has turned into a sharp decline, and the company no longer has the liquidity to operate as a going concern,” said John D. Blomquist, Foxtons’ senior vice president and general counsel.
The decision marks the latest casualty in the softening real estate industry, and it brings a stunning end to a company that was a lightning rod among real estate agencies.
With lenders dropping like flies it’s getting harder every day for borrowers to find home loans. Even states that have come rather unscathed out of the housing crunch (such as Utah) are hard to borrow in. Often borrowers find it useful to take out a Utah home equity loan in order to help build equity in their prior property towards purchasing another home.
Foxtons was a novel lender once, with a flat 2% commission paid by consumers, and salaries issued to employees rather than paying employees with commissions. Apparently such a setup failed to render enough profit to keep the lender from contemplating bankruptcy.
Indymac Bribes Employees to Quit
Rather than embrace massive firings, Indie Mac has begun downsizing its mortgage operations by offering voluntary severance packages. Such packages along with a home equity line of credit may be enough to help some employees survive until they can find another job.
According to an insider:
I’ve been told that the size of the severance package varied based on current salary and how long the employee has been with the company, but all in all they’re said to be quite generous.
I’ve heard that some of the severance packages include compensation for up to a year, possibly longer, as well as extended health benefits.
Apparently the severance packages were extended to operations staff, though it appears they were not offered to members of the sales team (surprise, surprise).
Two weeks ago, IndyMac said it would offer the voluntary severance packages in an effort to shed 1,100 employees, and would follow those attempts with layoffs.
According to IndyMac employees, the lender said it was looking to “right-size”, not downsize its workforce in an attempt to fall in line with current market demand.
In a recent letter to company shareholders, IndyMac Chief Executive Michael W. Perry said he expects the lender to either break even, or lose up to 50 cents a share in the third quarter as loan origination has waned.
While it’s nice to at least get something prior to leaving a company, it’s unfortunate that many who do not leave voluntarily will be laid off as well.
Indymac’s stock has taken a huge beating in recent months as a result of financial hardships, sub prime foreclosures, and a myriad of other bad financial choices.
With loan volume plummeting by up to 50%, the need to cut employees is obvious.
Banks Work Hard to Gain Credit
In an attempt to get out of debt and avoid further credit crunch, banks across Europe are desperately borrowing at record rates. Bloomberg has the details:
The European Central Bank lent 3.9 billion euros ($5.5 billion) at its penalty rate, the most in almost three years, suggesting credit markets are still unable to meet banks’ borrowing needs.
The three-month London inter-bank offered rate for euros rose to 4.79 percent today, a six-year high, from 4.73 percent, according to the British Bankers’ Association. The increase shows that the fallout from losses on subprime mortgages is still making banks reluctant to lend to each other. The U.S. commercial paper market shrank for a seventh straight week as a Federal Reserve interest-rate cut failed to ease credit concern.
“It’s likely that money markets are going to be in a state of shock for some time to come,” said Stuart Thomson, a bond fund manager at Resolution Investment Management in Glasgow, Scotland, which manages $60 billion. “No one knows where the bodies are buried.”
Sadly this increased borrowing cannot continue endlessly. Eventually banks will find it difficult to obtain further credit, and that will translate into consumers not being able to get loans.
The economies of western nations seem to be at the critical point in a ponzi scheme where the money coming in starts to slow down faster than money goes out. Such a situation rarely ends well.
The Demise of Central Banking?
Martin Hutchinson has brought up some interesting points regarding the recent financial crisis’ suffered in Britain. Here’s a blurb from his editorial:
After pretending an unwonted firmness for a few weeks, the central banks in both Britain and the United States caved this week, accepting financial sector bailouts and in the Fed’s case lowering interest rates. Moral hazard has thus been made immoral certainty; financial market participants who indulge in grossly speculative activity can be “highly confident” (in the words of the old Drexel Burnham commitment letters) that they will be bailed out by the public sector, i.e. ultimately by the taxpayer. Rarely has there been such an obvious subsidy of the overpaid by the beleaguered. It raises the question: what if anything is the point of central banks in the new world we have entered?
What good exactly are central banks in today’s economy? They clearly did nothing to prevent the banking failures, excesses, and corruption that ran rampant in the last few years. Furthermore, they now seem to be acting to protect their own interests and are doing little to nothing for the average homeowner.
There are options for homeowners that need help, including careful use of a 2nd mortgage to pay down a first.
British Banks to Cut Credit
Big changes for our neighbors to the east. Bloomberg is reporting that UK banks are modifying their lending practices so as to reduce the amount of credit available to businesses. Here’s an excerpt:
U.K. banks will reduce the supply of credit to companies “significantly” in the fourth quarter as they tighten loan conditions and respond to higher market borrowing costs, the Bank of England said.
The central bank said its new quarterly survey of lenders showed a net 49.3 percent expect to cut credit supply in the next three months compared with 20.2 percent in the previous quarter. The figure tracks the percentage of lenders forecasting tighter lending conditions subtracted from the number who see looser terms. The responses were collected from Aug. 20 to Sept. 13.
Commercial lenders’ reluctance to extend credit raised the cost of borrowing between banks to a nine-year high Sept. 11, forcing Northern Rock Plc to seek emergency funding and prompting a run on its deposits. Tighter lending terms may crimp business investment, adding to the case for lower interest rates.
“Tighter lending conditions will help to slow activity and may lead to deteriorating financial health of U.K. businesses,” said James Knightley, economist at ING Financial Markets in London. “We were already expecting two rate cuts next year, and now we may see a third as well.”
Such cuts in business lending may lead to a recession as businesses find it harder to hire more employees and expand. Increased unemployment will make it harder for everyone to pay off mortgage loans and may lead to an increased housing downturn.
Housing Crisis to Persist Past 2008
Many have been wondering whether they should refinance or take out a second mortgage in order to lower their mortgage payments. Predictions range wildly regarding just how long the housing slump will persist.
The government has an answer according to Bloomberg:
Fannie Mae Chief Executive Officer Daniel Mudd said the housing slump will last beyond next year, dragging down home prices and increasing credit losses.
“We don’t think we hit a bottom until the end of ‘08 and then we have some period of time to work our way back up again,” Mudd said today in an interview in Washington.
The outlook from Fannie Mae, the largest source of money for U.S. home loans, is more bearish than that of the National Association of Realtors, which this month predicted new home sales will stop falling in the first quarter of 2008. Pessimism about the housing market is growing as prices fall and demand declines. Purchases of new homes in the U.S. dropped more than forecast in August and prices plunged by the most in almost four decades, the Commerce Department said today in Washington.
U.S. home prices will fall 2 percent to 4 percent this year, and “more next year,” Mudd said.
Should those predictions prove correct, it would be best to lock in a rate now as rates will continue to climb as lenders close.
Further Northern Rock Revelations
An editorial on the Wall Street Examiner hammers the nail on the head when it comes to the British banking disaster. Here’s an excerpt:
Readers will recall the Bank of England’s Meryvn King proclaiming that financial bail outs would not be forthcoming as they simply encouraged moral hazard behavior. However, with a bank run on Northern Rock well underway, the BoE was forced to both eat their words and lose their credibility with a rescue package. Next comes a story that can only be called scandalous in a stupid Beavis and Butthead kind of way. We now learn that Northern Rock continues to make crazy, outrageous loans, and is also planning on a nice dividend and executive bonus payout. Apparently other UK banks are acting more prudently, as Ponzi credit offerings to consumers are slashed.
While many in Britain have pointed and laughed at the American housing crisis, many are now realizing that banks worldwide have equally contributed to the current credit meltdown. Easy loans have been bought up by banks as a method of earning easy interest. This worked as long as housing prices were racing upwards. Increased defaults and downward shifting prices have made mortgage loans of any kind a risky investment, and to put it lightly, the gravy train is over.
Now that homeowners are failing to payoff mortgage loans, bank’s former indiscretions and corrupt practices are becoming clear.
Dollar Falls to Lifetime Low Compared to Euro
Inflation is clearly upon us, gold is skyrocketing in value and the Euro has become more expensive than ever. Those with home loans and home equity line of credit loans have cause to rejoice as their loans become easier to pay off. Those without homes may find themselves struggling to pay rent as things become more expensive and jobs fail to keep pace by adjusting wages upwards.
Reuters is reporting:
The dollar hit a record low against the euro for the third straight session on Monday amid fears that a deepening housing slump could rein in economic growth and trigger more cuts in U.S. interest rates.
Trade was light as attention shifted to existing-home sales and consumer confidence data due on Tuesday.
Investors are worried that weak economic reports will push the Federal Reserve to follow last week’s half-percentage-point rate cut with more policy easing, further eroding the dollar’s yield advantage over other currencies, particularly the euro.
After last week’s cut, U.S. benchmark interest rates stand at 4.75 percent, compared with 4 percent in the euro zone.
With a Euro now costing $1.40, there are concerns that the dollar could fall even further in relative value to the European currency. A high exchange rate encourages European imports of American goods, but makes it prohibitively expensive for Americans to travel and purchase European.