Monday, August 13, 2007

Monday Morning Recovery

Great time to buy a house
Sub prime lenders and young couples in trouble for being idiots

It's a special time in my life. No, not because I have this gross leg infection that would've made me a double amputee or I had a vasectomy recently that has benefits galore. My wife and I are about to seriously begin searching for our first home.

The process is fascinating, but very revealing at the same time. We have very good credit and know we will be able to get a fixed mortgage at a good rate. However what I have found fascinating is the loan amount we are able to get approved for.

I know what I want to spend and can afford. What amazes me is that mortgage companies/banks tell me that I can afford a bigger loan, in fact nearly 40% more than we are asking for. I know they have formulas that figure out what borrowers are eligible for and the more money they loan the more money they make. Simple economics 101.

However, if John Q Public and his wife apply for a mortgage and the broker tells them they can afford a $2200 a month payment when they have believed all along they can handle no more than $1600, how many people believe the money man over their own common sense? Sadly too many.

Welcome to the current world of foreclosures and lender bankruptcy. Granted, the sub prime lenders are the ones suffering the greatest loss. These companies loan money to people without good credit at rates higher than the prime rate. However, I recall talking to one of these brokers about 5 years ago when my credit was shabby at best and he to was willing to loan me more money than I knew I could afford.

If you lend money to people who have a track record of credit unworthiness and talk them into borrowing more than they can afford at a high interest rate, what do you think will happen? Welcome to the current force driving our markets south.

The Housing industry is fascinating because even the economists who predict the future markets are often unwilling to admit certain realities. Simply put, anyone who owns a home cannot fathom the idea that their property values could decline. The truth is that people such as your brilliant blogger knew five years ago that housing became ridiculously overpriced and no matter how good economic conditions may be, every market has a period of price adjustment.

Three to five years ago every young couple in America was being pressured to buy a home. They were told rates would never be better and they must buy now. So they bought over valued property they couldn't afford and got 4.5% interest rates by purchasing a short term arm (adjustable rate mortgage). Over the past 18 months those loans have come to term and now families have to get a fixed rate mortgage at 6.5% if they qualify. Their homes may no longer have the value they had when they first purchased the property. Meaning they are unable to get a mortgage to cover what they owe or they often have to borrow more money then the home is worth which greatly increases the interest rate.

John Q Public had a mortgage payment of $1200 a month and now is paying $2200 and can't afford it. Here comes the bank to foreclose.

What puzzles me is the brilliant economic minds that seem surprised at the current housing situation. The truth is that the current housing market is as predictable as Bill Clinton at a sorority party.

Overpriced homes, overextended homeowners and a decade long buying boom made it obvious that we would be in the situation we are in today. However, not all is bad.

People such as your brilliant blogger didn't cave into their elders and peers who told us we had to buy back in 2002. At the time I was not going to move my wife and unborn child into a dump so I could have a tax deduction. Today those same people are envious that we are looking to purchase a home in the best buyers markets seen in decades. Many of them want to move themselves, but they have a home to sell and can't get enough to make a move worthwhile.

Earlier this year people told me that the housing market was going to turn around by Spring so we better buy now. I knew their comments were based solely on wishful thinking and not market conditions. Anyone not looking at the housing market through a bong filled haze knows that Spring 2008 is the earliest the market will change and chances are we won't see any improvements next year.

If Fed Chairman Ben Bernake believes the housing woes are a bigger concern then inflation, he will lower the Federal Reserve rate, lowering mortgage rates witch could slightly spark an improvement in the housing market. I believe this will happen eventually, but unless the rate change is significant, the market will barely improve.

Related story

I remember being 15 years old and first being diagnosed with Cancer. Suddenly everyone in the world was a doctor or expert with advice. Family members had me on a plane to Sloan-Kettering before we knew the extent of my illness. However, my father as he has been throughout my life was the voice of reason.

He told everyone to shut up and remember we live in Chicago, which has some of the best medical facilities in the world. He sat at my bedside and told me to remember every ones reaction because it was a good life lesson.

"You will find in life that everyone thinks they are a doctor a lawyer and when you need to make a big financial purchase everyone has a friend in the business," he said with an attitude of contempt for the world.

He was right then and it holds true today. Everyone I run into is an expert in the housing market and mortgage industry. However, like everything in life, one must take control of their own situation. I have very good friends who I trust and know will steer me in the right direction when the time comes.

It's an exciting time for my family, but still scary. However, the time is as close to perfect as it ever will be to become homeowners. I will keep my readers posted and hope they can learn from my latest adventure.

Back Tomorrow!

Paulie

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