Tuesday, March 29, 2005

More Exciting Than a Mutual Fund...

The real estate bubble is here and now.

But don't take my word for it--read carefully the excellent article at the following link:


The stories are hair-raising to anyone with a memory longer than three years; but more importantly, they put flesh and bones on a story whose skeleton has been constructed by dry data from the National Association of Realtors and Fannie Mae.

And they remind you why cycles happen, over and over, no matter what.

Jeff Matthews
I Am Not Making This Up


EricBrock said...

Article in FT today, kind of buried. Says GMAC MORTGAGE operations (same unit that they are trying to sell 50% of for $1 billion) saw bad loans more than double last year. Loans deliquent for more than 60 days rose from 5.2% to 8.8%. Some of the rise was due to acctg rules that force them to go on balance sheet (instead of the special purpose entity (SPE)).

GM officials say bad loans are only part of the story, look at returns. Oh yeah. 8.8% delinquencies with GDP growing 4%+ and housing prices going up 10% per year. No worries?!??!?!?!

This is not good, and obviously there are other GMAC mortgage cos out there.

fwiw - Fitch analyst is quoted as saying GMAC has probably been more conservative than most in the non-prime space.

The Unknown Broker said...

While anecdotal evidence is not an exact science, it can shed some color. And enough anecdotes add up to a pattern worth noting, after all. So here's another:

I was recently speaking with a young fellow in Florida – the son of a good client. He bought a condo in the Fort Lauderdale area just a bit over a year ago for about $225,000. He is preparing to buy a nicer unit in a new development. His real estate agent told him that if he wanted to sell his present condo she could have him a contract, sight unseen for $350,000. However, he is going to rent it for $1600 per month, since (according the guru real estate agent) prices are “going to go up 30% next year.” Now, it doesn’t take a genius to figure that he’s settling for a pretty poor cap rate on the unit he’s keeping (particularly after debt service) but he said that he wouldn’t consider selling, since he’s "going to make another $100,000" in the year to come.

Also, (and to his credit he’s not doing this) his real estate agent was telling him to do what “everybody” else is doing there. Since mortgage payments – even at today’s still modest rates – are a stretch for lots of people with prices so high, she tells him that the rage is not traditional mortgages, not adjustable rate mortgages, not even interest only loans. De rigueur in that market is a negative amortization (neg-am) mortgage. Yep, you heard right. The loan is taken out and each month instead of making a principal repayment or even keeping principal standing still with an interest-only mortgage, the borrower is in essence borrowing more – adding to the principal balance. (Sort of like using a home equity line to make your mortgage payment.) The reason for this risky strategy? According the real estate agent, it’s a slam dunk. You buy more house than you could possibly afford under any other arrangement and when the lead pipe cinch 30% appreciation occurs next year you just refinance out or flip the property for the big gain.

Gosh, I can’t see any pitfalls to that strategy, can you?

I can’t tell you when it will happen, but I can share this truism: Bubbles end for different reasons, but they all end the same. Badly.

EricBrock said...

oh my, that is remarkable. I think we have seen enough anecdotes over the past few weeks to know that housing has had its blow off top. We have to find out who is making those loans. GMAC apaprently has its share of them.

dcm1023 said...

if the economy runs into another soft patch the problems in real estate run a little deeper than just the nitwits who are leveraging themselves to kingdom come. i just bought a home in the burbs of boston. my broker asked me how much i would put down and was floored when i said 20%. this guy's office had closed on thirty homes in february and march and not one person had put down more than 5%. also my mortgage guy told me that IO loans were perfect for "investment analyst types" like me since my base pay is low and i could take a whack the principal at year end "when i get my huge bonus".