.jpg)
Mrs ERJ and I had a chance conversation with Mr. Drysdale on Friday. We stopped into Arby's after visiting Mom to check out their two fish for $6 sandwich special.
The gentleman who came in right behind us admitted to being in the banking industry and was driving a "company truck".
I asked if he was in property management and he replied that he was in mortgage loans.
The service in the restaurants was slow. We talked briefly about inflation and the economy.
The biggest risk he sees for his segment of the industry involves buyer's remorse on the part of new home buyers who bid properties past the assessed value. It is his world-view that the psychology that drives the feeding-frenzy behaviors can fade very quickly.
Michigan is not seeing the excesses seen in other, more desirable destination states like Florida and Texas but Mr. Drysdale said that properties in some subdivisions were regularly selling for $30k-to-$40k over traditional fair-market values.
The risk he sees is that buyers who are giddy for snatching up a rapidly appreciating property will walk-away from their payments when interest rates rise and the property's projected selling price drops. Potential buyers can only squeeze their income so much for housing costs. If interest rates rise then the only way to not exceed that limit is for the basis (principal) to be smaller.
Ergo, the selling prices must drop and the property the buyer expected to be a cash-cow becomes a liability.
Good Lord! That implies he is writing variable rate mortgages. Argh!
ReplyDeleteThe sense I got is that the high-bidders intend to flip the property and make a bunch of money. They don't see any reason to continue payments after the market turns and they no longer have the ability to sell to a bigger-fool.
DeleteThere is an entire generation who believes that they should benefit from their lucky decisions but not be held accountable for their unlucky ones. Student loans, for instance.
With no skin-in-the-game on the downside, they have little incentive to exercise personal, due-diligence.
Both times we were shopping for houses (in theory our started home and our "forever" home) we were told by some of our parents/banks/randoms off the street/friends we were dangerously under buying. The area wasn't nice enough, the schools weren't good enough, it wouldn't appreciate enough, we'd need a bigger house, more space, blah blah blah. Just spend another 100k and it'd be fine.
DeleteThe thing it reminds me of most is middle years of HS, when anyone thinking of taking a path other than 4 year college was told they were wrong. At one point I was told I literally could not research as one of multiple choices being a garbage man. Pointing out that the database we were using said they made more than teachers didn't change anything.
As an adult, of course, it's your responsibility to tell them to take a long walk off a short pier and under-buy (i.e. buy reasonably for your budget). It is depressing how hard people seem to try to make sure everyone else is also mortgaged/in-debt up to their exact limit.
It somewhat feels like a mutual insanity cult, where they are annoyed that other people might not opt into the debt lifestyle.
We raised four kids in a 1400 square-foot ranch. Yes, it was a little bit snug for a few years but why buy an additional 800 square-feet for what might be 5-to-10 years?
DeleteMany of our kids elected to visit friends rather than invite them to our chaos. I was mostly OK with that except for the one time...
Here in the UP real estate prices have also gone insane. The listed prices are opening bid and it quickly shoots up. I see ratty old houses going for amazing prices. There are few houses or land that are on the market for more than a couple of days. Properties are being bought without being viewed. Just from the Realtors pictures and description and my discussions with the Realtors indicate that most of the buyers are from out of the area, are cash deals, and are people that think they are going to live here now or if things go bad. Working from home has really changed the market here. We are all very unhappy with this, it is getting crowded, and our communities are falling apart. ---ken
ReplyDeleteERJ, I would suspect many/most of these "The Sky is the Limit" buyers do no remember the crash of 2008 - 2009 and thus think that walking away from your home is no different than forgetting a bill payment. In point of fact it will keep you out of the housing market for a minimum of 5 years if not longer and will stay with your credit rating a much longer time.
ReplyDeleteI do wonder if the market will not drop as much as before - but will revert as larger corporations buy blocks of homes for investment purposes. In the end, it might be that the single family home buyer will be the one that will both be squeezed out now and not be able to take advantage of the market in the future when it turns.
I think the market pretty much has to turn down at this point.
ReplyDeleteHome prices are high enough to stretch budgets with low interest rate mortgages - and rates are rising quickly at the same time.
Around here the market has slowed and higher end houses have had some price drops. As economic uncertainty (and probably unemployment as well) people are going to pull back on spending; despite high salaries and a good outlook here, I'm starting to see toys for sale (fancy trucks, motorcycles, campers, etc). Prices are high so far but the listings are out there.
I don't know how much price drop we'll see, but a correction will be coming.
Last time it was largely urban and missed most rural areas, but with the above mentioned interest in rural properties, I suspect it'll hit more widely.
And as for variable rate mortgages - yes, some people are getting them. What I've seen most often is fixed for 3 to 10 years because it gets a lower interest rate. If the buyer assumes they'll move or sell soon, they see it as a way to save money, especially when "buying up" to a more expensive place.
Interest rates on mortgage loans can only rise if your in a multiple year adjustable rate mortgage. My friend and another designed the ARM loans for David Rockefeller. Last time I saw him in Hawaii he considered it one of the worst loans for buyers out there. Never, Never take anything except fixed rate. Only the banks make out. The fixed rate mortgage has a lower foreclosure rate. ARM can be any term before it rolls over to fixed, most common is a 5/1. Low interest year one but tied to market index every 12 months and up your mortgage goes. But was the most common foreclosure when I worked in the buying of closed loans.
ReplyDeleteYou may listen to banker Drysdale, but I always preferred the calm advice I got from Miss Jane Hathaway. I may not be a smart man but I know math ( Naught X naught = naught) for example. I know too many bankers ( and far too many buyers) try to time the markets.It is better to act calm, do some whittling and not act like you got into some "tonic" every time someone comes around with new money forecasts.
ReplyDelete@glasslass, ARMs make sense when you are not planning on keeping a home for the long haul. We are in the process of moving from a high COL area to a lower COL area and will be using the proceeds of our current home sale to fund building a custom home. We bought a temp home in the low COL area using a 30 year ARM with a 10 year fixed rate period with the expectation we will sell the temp home in a bit over two years. By spacing the home sales out we can reuse the $500,000 capital gains exclusion and shelter our profits from both home sales.
ReplyDelete@Rick, when rates dropped and you could buy a home with little to nothing down the buyers flocked to buy. When I first started it was 28% of gross and 36% of gross to mtg + debt. With ARMS it rose to 40/50. I can't begin to count the number of buyer, when shown the next years potential payment said of course it will be no problem. Very few were wise enough to buy a home to sell in a year or two. These were 'starter home' for a great many. They did not want a small home they wanted what mom & dad had after 25/30 years. Federal law states that mtg. co. cannot carry more than 5% delinquency. That skyrocketed and then it became a buyers market on the secondary market. Loans were traded back and forth. But the bottom line was foreclosure. But don't even get me started on the secondary reason for the foreclosure. You are an experienced buyer and very few ARM loans are taken buy anyone that expects to stay in a home.
DeleteERJ, though not all places in Michigan have seen excessive price gains in housing sales, EGR, MI has. A number of properties there have sold for between $650K - $800K only to be torn down and replaced by something somewhat larger in square footage. Even home prices on the outlying streets of EGR, what I refer to as the ghetto of EGR, have seen significant gains. Houses which 2 years ago which sold for $350K have been selling now for $435K. It's kinda crazy.
ReplyDeleteWhat is EGR ?
DeleteEast Grand Rapids??
DeleteYes, EGR is for East Grand Rapids. Sorry about the abbreviation.
DeleteThe idea of using an ARM to flip a property sounds nice until you get stuck with a house that you can't sell for enough to pay off the mortgage. That's what happens when the party ends and the market turns down. Say goodbye to your rolled-over capital gain and all your equity with it.
ReplyDeleteThe property I just paid off was fixed for 10 years, then floating. I paid it off at 9 years. I never expected to be in the property that long (it's currently rented).
ReplyDelete