How much worse will it (the real estate foreclosure crisis) get? Plenty

[c1ue]

http://www.doctorhousingbubble.com/o...erw/#more-3815

A nice summary excerpted from the 2010 US Census

As mentioned previously, there are about 110 million US households. The actual number is apparently 113616229

Of these, 74843004 'own' their places of residence. And of these, 50747854 have mortgages - the 2/3rds mentioned numerous times.



Of those 50M odd households, the total amount of negative equity (and the overall pie) - is startling: $2.9 trillion in negative equity mortgages



The distribution of negative equity is also fairly startling:



Note this doesn't take into account the costs of selling a home - typically a 6% commission paid for by seller. Shift all the x-axis labels by 6% to compensate.

So over 1 million homes/households are 30% or greater negative equity. I think it is safe to say these aren't going to move or sell anytime soon and are virtually guaranteed to default at some point.

Another nearly 1 million homes/households are 10% to 30% underwater - similar to above, but slightly higher chances of not defaulting. Say snowball in Sahara as opposed to Hell.

So there are about 2 million homes/households getting a temporary free ride before getting booted onto the street. Alternatively, the sovereign wealth funds/pension funds/whatever investors are going to eat some large part of $2.9 trillion in losses.

EJ's proposal to remove this excess negative equity has its merits, but of course the process of doing so swells the US government debt by another multiple trillion - and also doesn't fix the ongoing labor competitiveness issues.

[don]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Throw into the mix the likelihood that MBS were duplicated time and time again, having decisive political influence becomes a life-or-death necessity. Who will be thrown to the wolves, as FIRE bares its teeth to survive.

[Starving Steve]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Throw into the mix the likelihood that MBS were duplicated time and time again, having decisive political influence becomes a life-or-death necessity. Who will be thrown to the wolves, as FIRE bares its teeth to survive.

What scares me about the USA is the long tradition of dead-beats doing nothing except for squatting on property. It is called, "squatters' rights". This began in Kentucky during the late 18th C, didn't it?

And how do you get rid of the squatters? What is a land-title worth? And if no-one has clear-title, what is real estate worth?

Cash-buyers had better DEMAND a much lower price, and they had better move very sloooooooooowly. Be careful, because you are making the market on property. The comps (comparable sales) are meaningless.

The U.S. dollar is a joke, isn't it because the system in the U.S. is broken, maybe beyond repair. The Fed can't print their way out of this mess. Or if it does, it hyper-inflates. The U.S. turns into Argentina in hyper-inflation.

"But what do I know? I'm just the 800 pound gorilla on this airplane."

[thriftyandboringinohio]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

What scares me about the USA is the long tradition of dead-beats doing nothing except for squatting on property.

True, Steve. In days of yore, there was an agrarian option for dimwits and slackers in America. In 1897 a slacker could go west, stake out 40 acres, and through a combination of gardening, farming and hunting he could eek out a subsistence living. Speaking honestly, my uncle did that in northern Minnesota just before they closed homesteading. Great guy but not very interested in working. Today these people do other things to scrape out a meager and miserable existance at the margins of society.

[cjppjc]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Note this doesn't take into account the costs of selling a home - typically a 6% commission paid for by seller. Shift all the x-axis labels by 6% to compensate.


Add the tax many states charge for the luxury of being allowed to sell your property. Add the cost of complying to municipal resale standards, and throw in a legal fee or two.

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

A year ago I paid at a price to rent ratio of 6.75:1 (actually purchase price of this dump was less but that number reflects improvements to make respectable). By the time I'm done with the gardens & some extras, I'll be at about 7.58:1. The year 2000 price to rent ratio here was 13.13 (or 12.4:1 in the metro area). Comps, most of which need about as much work though some already renovated with prior ATM $s, have since been selling for about 23% more per sq ft than mine and that's just enough to cover replacement cost. Land and infrastructure are free with purchase.

So, not that things can't tank more, but maybe we're below theoretical bottom here. Are such markets included in calculating
congregate negative equity?

[c1ue]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

So, not that things can't tank more, but maybe we're below theoretical bottom here. Are such markets included in calculating
congregate negative equity?

It is far too early to say that the bottom is here. For one thing, there is massive shadow inventory both in terms of sellers' home not yet on market and in terms of bank foreclosures.

Throw in the lack of jobs leading to a lack of mortgage volume...

Think of this a different way: even discounting the above factors - just how much lower can interest rates go?

Is the likelihood of interest rates falling higher than the likelihood of a spike in interest rates?

I have no doubt there are areas which have somewhat resisted the housing crash and its effect on prices. But equally only those which have fallen 50% to 70% can truly be anywhere near 'bottoms' - because the price to rent ratio should be closer to 3 vs. 1

A ratio of 7 to 1 still shows either rents are far too low, or prices are far too high.

[touchring]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

A year ago I paid at a price to rent ratio of 6.75:1 (actually purchase price of this dump was less but that number reflects improvements to make respectable). By the time I'm done with the gardens & some extras, I'll be at about 7.58:1. The year 2000 price to rent ratio here was 13.13 (or 12.4:1 in the metro area). Comps, most of which need about as much work though some already renovated with prior ATM $s, have since been selling for about 23% more per sq ft than mine and that's just enough to cover replacement cost. Land and infrastructure are free with purchase.

So, not that things can't tank more, but maybe we're below theoretical bottom here. Are such markets included in calculating
congregate negative equity?

Interesting, but American REITS don't reflect that high yield?

http://www.globalpropertyguide.com/A.../Rental-Yields

Is yield part of the equation? The average yield in Shanghai is 2.19% for a 1300 sq ft apartment. I'm sure it goes lower for a larger house of 2000 sq ft, probably as low as 1.5%. That's a price to rent ratio of between 45:1 and 66:1.

At 1.5%, the rent is not enough to cover maintenance and upkeep of the apartment. No wonder that Chinese real estate speculators don't bother to rent out their apartment!

The other thing is that new Chinese apartments come totally bare, only concrete walls and floors, so if you add in the cost of making the place rent worthy, the real yield may even be lower than on the report.

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Sorry but I really do not know how to predict what interest rates tomorrow might bring. But I am reading Itulip and other sources trying to educate myself. Mostly though I think I'm just getting more confused. I bought a house to rent and I'm bringing in a roommate to my home and all that will give me, after most expenses, at least 6% on my investment which is more than I'm getting in the bank and I'm too scared to invest right now in things I do not understand.

But 45 or 66 to 1 on an apartment? Wow. I don't understand that either but it sounds very impressive. I think my new area here topped at about 21 or 23:1. Rents have since collapsed along with prices, though prices moreso. Rents holding up somewhat due to demand. Zillow shows my two down 53% from peak sillyness until my purchase but from sales I've studied in the area, it looks to be about 65% down. There's a huge university and a few medical complexes nearby to stabilize the area going forward, employment- & rent-wise, I hope. Currently there's not a single house for sale in my neighborhood of about 300 houses. Just two preforeclosures. One auctioned recently but new sales info not yet recorded (I happened by today during their move in). About the typical 1/3rd here are owned free & clear. I've been researching the current financing of each individual house in my new neighborhood as I'm considering buying another if a similar or better deal presents itself. Before purchasing I'd researched about 20plus years of sales history on numerous nearby comps.

I never said bottom, just theoretical bottom which I'm trying to judge for myself based on prebubble price to rent and price to income ratios. It is hard to find fundamental values any more so I just picked those. Also I'm judging by CPI-adjusted square foot prices going back as far as public records allow, mostly back to the 1980s or so. As well, it seems to me not unreasonable that if a property is purchased for construction costs, with no charge for land or infrastructure, that unless everything turns to Detroit, that maybe that's so-called bottom?

I understand that true bottom is just where ever that winds up being. But my point was that if so-called true bottom is very much below the mean, then isn't there some kind of built-in equity presumed which should be considered when figuring the negative equity of the whole? Or is it presumed that prices will never come back up to the mean?

PS.

re: "because the price to rent ratio should be closer to 3 vs. 1"

Just like I don't understand 66:1. I also don't understand where there would ever be a price to rent ratio of 3:1. Say you are renting a 1200 sq ft unit which cost $80/sq ft to build. That's 96,000 worth of house. Maybe the lot cost you $50k. You've got $145k invested. What's that going to rent for? $1200/month? That's 10:1 right there. Wouldn't 3:1 be a month rent of $4k? Who's paying $4,000/month to live in a $145k house? Or is that the hyperinflation scenerio? Because if so, I'm buying more.

[c1ue]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

re: "because the price to rent ratio should be closer to 3 vs. 1"

Just like I don't understand 66:1. I also don't understand where there would ever be a price to rent ratio of 3:1. Say you are renting a 1200 sq ft unit which cost $80/sq ft to build. That's 96,000 worth of house. Maybe the lot cost you $50k. You've got $145k invested. What's that going to rent for? $1200/month? That's 10:1 right there. Wouldn't 3:1 be a month rent of $4k? Who's paying $4,000/month to live in a $145k house? Or is that the hyperinflation scenerio? Because if so, I'm buying more.

The 3 to 1 ratio originates from loan to income ratios.

Prior to the recent housing bubble and its NINJA loans, the rule of thumb used since the Great Depression was that a bank would never loan money to a borrower if the loan amount was more than 3 times the borrower's income.

125K house with a 100K loan @6% interest, 30 year fixed = $600/month (PI)
Property Taxes and insurance add another $220/month (TI)
That $820/month = $10000/year

Once upon a time, this $10000 could not exceed 0.28 of a borrower's income - the rest being necessary for food, clothing, transportation, etc.

$10000/0.28 = $35.7K

$100K loan/$35K income = 2.86

With interest rates being lower but all else being the same, the ratio doesn't change all that much:

100K loan @4.5% = $506 (vs $599)

TI is the same.

Annual home spend = $8712
Income necessary to service loan = $31.1K

So the 1.5% interest rate fall only served to drop the income requirement a bit over 10%

In contrast with a higher interest rate:

100K @7.5%= $699 (+$220) = $39.3K
100K @9%= $805 (+$220) = $43.9K
100K @10.5%= $915 (+$220) = $48.6K

Take all these numbers and multiply by the average home price in your area, and you'll see what I mean about housing prices being ridiculously high still.

[don]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

The 3 to 1 ratio originates from loan to income ratios.

Prior to the recent housing bubble and its NINJA loans, the rule of thumb used since the Great Depression was that a bank would never loan money to a borrower if the loan amount was more than 3 times the borrower's income.

125K house with a 100K loan @6% interest, 30 year fixed = $600/month (PI)
Property Taxes and insurance add another $220/month (TI)
That $820/month = $10000/year

Once upon a time, this $10000 could not exceed 0.28 of a borrower's income - the rest being necessary for food, clothing, transportation, etc.

$10000/0.28 = $35.7K

$100K loan/$35K income = 2.86

With interest rates being lower but all else being the same, the ratio doesn't change all that much:

100K loan @4.5% = $506 (vs $599)

TI is the same.

Annual home spend = $8712
Income necessary to service loan = $31.1K

So the 1.5% interest rate fall only served to drop the income requirement a bit over 10%

In contrast with a higher interest rate:

100K @7.5%= $699 (+$220) = $39.3K
100K @9%= $805 (+$220) = $43.9K
100K @10.5%= $915 (+$220) = $48.6K

Take all these numbers and multiply by the average home price in your area, and you'll see what I mean about housing prices being ridiculously high still.

Reading all of the above posts there still seems to be some confusion over the dynamics of low mortgage rates and home pricing. The former raises the latter. The majority of people (non-iTulipers) remain mesmerized by the MSM 24/7 chant that with low mortgage rates houses that you otherwise couldn't afford are within your fiscal grasp. The reality is higher mortgage rates decrease housing pricing, in order to conform to c1ue's old-school banker's worksheet example. (The historically low mortgage rates are part of the ZIRP program, propping up Extend & Pretend bank portfolios.)

[karim0028]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

A year ago I paid at a price to rent ratio of 6.75:1 (actually purchase price of this dump was less but that number reflects improvements to make respectable). By the time I'm done with the gardens & some extras, I'll be at about 7.58:1. The year 2000 price to rent ratio here was 13.13 (or 12.4:1 in the metro area). Comps, most of which need about as much work though some already renovated with prior ATM $s, have since been selling for about 23% more per sq ft than mine and that's just enough to cover replacement cost. Land and infrastructure are free with purchase.

So, not that things can't tank more, but maybe we're below theoretical bottom here. Are such markets included in calculating
congregate negative equity?

No way in hell is this done with yet.... I love how people look at Price to rent ratios like its some kind of god send... Prices in a fair and stable market can go by ratio's but bubble markets/rigged markets can go from overvalued to undervalued in a process that takes ~ 10-20years; due to mistrust, investor apathy, pain felt, etc... Take a look at any chart of historical bubbles, stocks, gold, interest rates, etc... What looks cheap now will get cheaper. It only seems cheap now bc interest rates are so low and money has little income value. When the interest rates shoot up we will see what RE's true value is.....

Not making a prediction, just looking at all the problems facing RE right now and making conclusions...

If for instance, interest rates shoot up (and one way or another they will) to 10% and your CD can yield 10%/annum on 100K that is 10K/yr hassle free (no rent collection, marketing, legal, vacancy, calls in the middle of the night, prop taxes, etc), how much can you rent that 200K house for? With unemployment still high my guess would still be around the same amount you can today (~1200)... If inflation is alot higher than the nominal interest rates then gold and silver will zoom up.

The famous last words of a dying investor - "i never thought it could go any lower"

[LargoWinch]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

The famous last words of a dying investor - "i never thought it could go any lower"

The question is; against what?

[Starving Steve]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

Reading all of the above posts there still seems to be some confusion over the dynamics of low mortgage rates and home pricing. The former raises the latter. The majority of people (non-iTulipers) remain mesmerized by the MSM 24/7 chant that with low mortgage rates houses that you otherwise couldn't afford are within your fiscal grasp. The reality is higher mortgage rates decrease housing pricing, in order to conform to c1ue's old-school banker's worksheet example. (The historically low mortgage rates are part of the ZIRP program, propping up Extend & Pretend bank portfolios.)

A little review for the kids reading this, because our kids will write the history of this Great Recession which is getting worse by the month: ZIRP = Zero Interest Rate Programme; NINJA loan = NOTHING INVESTED (OR DOWN), NO REAL RATE OF INTEREST PAID, and NO JOB OR INCOME. ( I don't know what the letter "A" stands-for in NINJA, but I would be afraid to ask. ) And the "Extend and Pretend bank portfolios" are the portfolios in the zombie banks--- the banks rescued by Bernanke's TARP. And the TARP is the Troubled Asset Rescue Programme to save the TBTF ( TOO BIG TO FAIL ) banks and insurance companies.

Kids: this is why you have to be a sloooooooooooooooooow reader and even get yourself into remedial reading in school. Flunk your college SAT. Show the educrats what you think of their standardized timed-testing.

The Congress in the U.S, controlled by Demos--- the so-called, "liberals"--- passed the TARP. And Obama re-appointed Bernanke to head the Fed. So when the Demos claim that they were not to blame for this disaster, well, you know better. And the disaster is just beginning to unfold......

What is really interesting is that the economists did not have a clue what to do, so they made the disaster worse. They dug the debt-hole deeper with stimulus spending. The money was printed by all of the central banks.

The next chapter is maybe a sovereign debt crisis led by a collapse of the U.S. Dollar. Then the interest rates spike up. Then the run on the banks. Then the Argentina scenario unfolds....... Write this down, day-by-day, because the economists will say that it never happened. But it will !

[housingcrashsurvivor]

Re: How much worse will it (the real estate foreclosure crisis) get? Plenty

The 3 to 1 ratio originates from loan to income ratios....

Take all these numbers and multiply by the average home price in your area, and you'll see what I mean about housing prices being ridiculously high still.

I'm still confused. Are you saying 3 to 1 should be the rent to price ratio or the income to price ratio?

In my new location, the price to income ratio was 2.56 in year 2000, when the interest rate was about 8%. All the graphs I see (many on Itulip) seem to show 2000 the year when things went nuts. So I thought utilizing that 2000 ratio at today's median household income would give me some indication as to where a median priced home might fairly sell, and having it show that the current median home price should be about 8% higher than today's market prices made me think it a relatively safe place to put money. Did I screw up (yet again)?

I can see in your example that if interest rates rise enough, existing homes could eventually go for less than replacement value. So maybe the entire country is Detroit? I really don't understand how all that works. People still have to have a home. Population will still grow. Construction of new homes will still set values based on material & labor costs. Maybe even land will start appreciating again? In any case, the land under my residence can be subdivided into three legal parcels, so at least maybe I'll have that if need be.