Archive for refinance

Rising Interest Rates Mean Falling Home Prices

Posted in Just the Facts with tags , , , , , , , , , on February 13, 2011 by marcitz

A recent broadcast on NPR called Buyers Face Gamble with Rising Mortgage Rates made it clear that buying a house now may be a very bad idea.  While they gave some very good points they missed some very key (and much more concerning) points.

While they pointed out that its dangerous to buy now because prices are due to fall another 10% but that threat existed  before interest rates rose.  With interest rates rising that will be a new and different reason to drive housing prices down leading to enhanced price decreases.  Afterall the logic is housing prices go up when interest rates fall because its cheaper to buy that house (you pay less on your mortgage purely because of interest rate) so you have more to bid in getting that house.  Well the same logic applies in the negative.  Prices go down when interest rates go up because people have to put more of their budget into servicing the mortgage debt and less into the principle so they get a smaller loan.

Oh and one other thing.  With rising interest rates those that have to refinance will be less able to do so for two reasons.  The comps will fall with enhanced falling prices (so they’ll get lower appraisals and won’t be able to refinance as much) and they will be less able to afford the refinance as well as the whole point of the refinance was to lower your monthly payments.  Bonus issue is with falling prices they’ll just be more foreclosures anyway.  The net of these two-plus issues is that foreclosure rates will increase again creating more supply providing the third impetus for housing price declines.

Don’t anyone let you believe the market turns around this year or in 2012.  We’ve got until 2013/2014 before anything long term happens (not these little short-term govt incentive inspired blips) and that won’t be spectacular.  Get into a mental place where a good housing market means flat growth.

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Killing MORE Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , on May 4, 2009 by marcitz

So my last article on the myths of homeownership was so popular I decided to produce a sequel.  This is not so hard because there are so many.  Enjoy!

Myth #6 – Once you pay off your home you get to live in it for free

The theory goes you have 30 years of payments (lets assume you haven’t, like friends of mine, refinanced it over-and-over again pushing out the end of the loan).  After that you have no more payments.  With rent you will have payments every month forever.   The latter is true, the former notsomuch.  In fact there are many substantial ongoing payments you will encounter with your house including:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent both in its ongoing behavior and the fact that it can change and grow over time.  Here’s another thought to consider.  Property tax is a major source of school financing.  Given the “great recession” we are in (and will continue to be in for the next 2-5 years) other sources of funding are being cut making schools even more dependent on property taxes.  As school quality is a major contributor to housing values expect home owners to be extorted into paying increased property taxes to preserve their home values.
  • Maintenance also goes on forever and that is variable and unpredictable. So it also behaves like rent but much more violent in its swings.  I never got a bill from my landlord for $15,000.  As a homeowner its only a matter of time before you get that bill for a new roof ($15,000) or new pipes ($thousands).  Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.  Oh and if you live in New York City you are familiar with “maintenance payments” which are often substantial (in the thousands) and are paid monthly (like rent).

Myth #7 – At least your monthly payments are predictable and won’t go up like rent

Well this really depends on how you financed it. A very large percentage (and possibly the majority) of mortgages done in the past 8 years were adjustable-rate.   That could swing way above rent or way below depending on the interest rate environment.  Given the dramatically low interest rates that drove the housing bubble and there is really no where for your mortgage payment to go but up.  Combine this with the large amount of cash being pumped into the economy (which will lead to inflation) and you are looking at MASSIVE interest rate adjustment 2-5 years out meaning your “rent” is going to go up possibly 20-100% (my rent has never gone up more than 10% and that was during a boom and during a bust it actually went down).

So remember, homeowners and renters are not so different except for the massive loss in equity that ownership is currently providing. 

Please feel free to bust more housing myths in the comments section.

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Killing the Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , , , , on April 16, 2009 by marcitz

Recently I read an article in The Economist that had many incorrect assumptions that shows just how far the myth of homeownership has permeated society.  Here are some of the common myths and corrections along with actual articles from other sources to back up the key points.

Myth #1  - Home ownership encourages “forced savings” because home owners have to pay off their mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

Myth #2 – The mortgage income tax deduction is good for homeowners.

ABSOLUTELEY NOT!  It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained, good means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays).

Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)

Myth #3 – Homeowners benefit from many social advantages.

Sorry but  there are NONE and actually some social disadvantages, including worse sex.  Study after study done as recently as last January show that there is practically NO social benefit of homeowning vs. renting.  In fact home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, less racist, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don’t believe me check out these links:

Recently published study by Wharton  (Its a long academic study but just read the first paragraph)

The American McDream from the San Francisco Chronicle (renters have better sex, too)

Understanding how Obama’s Plan Hurts 100 MILLION US Citizens from watchingmarcitz.com (this shows how home bailout programs have a dark underbelly)

How the Crash Will Reshape America from The Atlantic (why renting is actually the answer to the problem we now face)

The Advantages of Renting from National Public Radio

Myth #4 – The market is finally finding a bottom

Take a lesson from the movie Titanic. The ship has just temporarily stabilized before its violent rush to the bottom as shown here.

Myth #5 – Once you pay off your mortgage your house is free (rent goes on forever)

Not exactly:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent (including changing from time-to-time)
  • Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
  • Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.

See more myths in this follow-up post.

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Obama Administration Says NO to Bankruptcy Loan Modifications

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 15, 2009 by marcitz

So Congress has been trying to push a law that will allow bankruptcy judges to modify the terms of mortgages including reducing interest rates and “cramming-down” loan principal.  Many have opposed this because it violates contract law.  The highly justified fear is that if the government can just violate any contract at will then contracts of any kind (past, present or future) will no longer have any value.   Up until this morning the Obama administration has signaled that it supports these in-bankruptcy modifications.  That all changed on the Sunday morning talk show circuit when Larry Summers, head of President Obama’s National Economic Council, came out in strong defense of contract law.

According the the New York Times:

Mr. Summers, who also appeared on CBS’s “Face the Nation” suggested, however, that the government’s ability to require…scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts.”

Ok, now for a little truth telling.  Dr. Summers was actually talking about the bonuses being given to AIG employees but isn’t the sentiment the same?  After all, last time I checked a mortgage is a contract and by Dr. Summers own admission the government cannot “abrogate” them yet that is what congress wants to do. 

As an invisible renter I am sure you are thrilled because you want your shot to buy a house at a fair price and by NOT allowing in-bankruptcy loan modifications you will get your chance.  So please don’t forget to call and email Dr. Summers to thank him for his support of contract law (I just talked with his office) and for signaling that the Obama administration will now veto any in-bankruptcy loan modification legislation that Congress may propose.

Dr. Lawrence Summers  

Or is that not what he meant to say…

P.S.  See how the New York Times also seems to have come out against housing bailouts in this analysis of an article by Joe Nocera.

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Is Wells Fargo Playing Games? – Tell Us Your Scam Story…

Posted in Stories with tags , , , , , , , , , , on March 11, 2009 by marcitz

So talking to a friend the other day who is one of the lucky ones thanks, potentially, to some good old-fashioned game playing on the part of his mortgage appraiser.  Seems that he bought a house 3 years ago and was ready to refinance it so he called in Wells Fargo.  This is where it gets strange.

Apparently the only house that they could find to comp against his house for the appraisal was HIS house based on its purchase price from 3 years before.  What’s cool is that his house, even given all the stuff going on in the macro economy, hadn’t lost any value in the past three years based on that comp (neat trick!). 

Of course given the increase in houses on the market how is this possible that his house was the only comp they could use?  Afterall, not to far away there were many houses for sale (and many foreclosures) that were used as comps when he first bought his house (of course they weren’t in foreclosure then).  Turns out that Wells decided to “tighten-up” the radius from when he had bought his house 3 years before so, one might guess, the foreclosures wouldn’t be included in the appraisal and then they couldn’t give him the loan. (another neat trick!)

But why would they want to give him a loan that exceeded the true value of the house?  Well because (just like over the past few years) they weren’t going to keep it and if they didn’t get the appraisal they wouldn’t get the loan origination business.  Sure enough he said that they weren’t and that it was immediately going to Fannie Mae because he had a conforming loan. VOILA!

Well its nice to know in these crazy times that some things never change. 

So have you heard a recent story of financial “magic” (spelled “s-c-a-m”)?  If so please share it here because you, as a taxpayer, just bought my friends house.  He’s a responsible and talented guy and will make good on his loan but there are many out there that probably got the same treatment and may not be so responsible.

ARE YOU A RENTER - STOP  THEY NEW YORK TIMES FROM HURTING YOU

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RENTER ALERT – Stop the New York Times from Hurting You

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , , , , on March 6, 2009 by marcitz

Dear Invisible Renters,

The New York Times today published an editorial in which it supports a law winding its way though congress to force banks to cram-down (AKA reduce) the principle balances on home mortgages and we must stop it.  This is ridiculous for many reasons stated in a letter below you can send to key departments and people at the Times.  Addresses and a draft letter are below:

Dear New York Times,

Why are you making homes less affordable to 68% of your New York readers and neighbors, who are renters, by encouraging the cram-downs of mortgage principle?  This is bad for everyone in the long run:

  • For Renters this will hold housing at unrealistic and high levels longer making it impossible for us to become responsible homeowners if we so choose (feel free to continue renting anyway its a valid lifestyle choice no matter what society says)
  • For the New York Times - 68% of your New York City readership are renters and this action is an attack on the majority of your readers.
  • For the Economy  by keeping people in homes they can’t afford we’ll only prolong the agony as we have a continuous stream of higher than normal foreclosures over years as opposed to in one big (and yes painful) lump.  By getting it over quickly you will see buyers come back into the market because they know we’ve reached the real (not a weak unsustainable subsidized) bottom AND homes will be much more affordable.

Here are some other things you need to know:

  • Housing prices will continue to fall at least another 10-15 points (ask any economist).  So what does that mean if a house is reset to a lower level only to find its not the LOWEST level.  Will there be another cram down?  Won’t those people only default later (after having received the first, now unsuccessful cram-down) for the same reasons you are stating now?
  • Housing prices will get another kick in the pants in two years when interest rates have to start going up again (to combat inflation from all this money being printed and flushed down the economy) so this will only get worse and require more cram-downs. Remember people tell you to buy when interest rates are low so the flip side is…

Why trash contract law in this country to delay the inevitable. 

Thank you for listening

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Renters of the World UNITE!

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 1, 2009 by marcitz

Tell us a story about a Really Fucked Homeowner (RFHO)  (deadbeat neighbor, relative or something you read) who got in over their head and share it with others  so we can get rid of the pro homeowner bias in the United States.  Also please post this on other blogs and comments to articles. Read on to see why…

Homeownership is the “American Dream” – or is it YET another bubble?  I’m an invisible renter (politically, financially and socially all renters are) who decided it wasn’t part of my “American Dream” yet society continues to lionize the homeowner at the expense of the renter. 

How invisible are we?  When politicians says “lower house prices hurt us all” they forget the 100 million renters that they help.  Its time to wake up and realize that while homeownership is good for some its not good for all (same goes for high house prices) and public policy and perception needs to adapt to that harsh reality.   Oh and if homeownership is so great why not give renters a chance to try it out by letting prices fall to their natural level?

Why am I doing this?  Well to paraphrase Dean Vernon Wormer of Faber College – its time for someone to prick this bubble and that prick is ME! 

Welcome to ReallyFuckedHomeowner.com where we see the dark side of homeownership and the bright side to renting as an alternative lifestyle.    Please share your stories of a really fucked homeowner (RFHO) or feel free to rant about anti-renter government policies so we can get past anti-renter bias. 

Please NO names or specific addresses of the RFHOs.  Oh and don’t forget to let the government know how you feel.  Also please tell your renter friends (or even rational homeowner friends) about this site.

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