I've had 2 very irritating conversations in the last couple of weeks regarding prices. The first was with a realtor at an open house. He tells me this house was appraised 3 years ago for a million dollars, and now that the recession is over it will be worth that again in 5 to 10 years. Oh really? Tell me more, oh enlightened one..... Of course, this was more than I could take and the fight was on (much to the dismay of my wife).
I asked him if he expected salaries to triple or quintuple over the next 10 years?
He said "well, probably not".
I then asked him, who will be able to afford it then?
He replied, "If the home appraises for a million banks will easily loan $800k"
I ask, who in the IE that can qualify for an $800k loan wants to live in this tract?
He ended the debate with "oh, there's plenty of people out here that can qualify"
I'm sure there are, but how many of them want to live in a KB tract home in Riverside? It just amazes me how many people really do beleive prices are going to shoot right back up again. They are convinced the bubble prices were normal and that the current price point is the aberration.
The second conversation was with a person a friend introduced to me to talk about his loan mod. I'm no financial guru but I still get asked for advice. I tell em my advice is free and worth every penny!
On the surface this loan mod sounded golden. Their current loan was for for roughly $600k, an Option Arm of course. They also had a heloc for $100k that they used to pay bills, buy a car and put a back yard in (so it's all gone). They have not made a payment on the heloc in 2 years. He works in a distribution center driving a forklift, his wife is a admin assist (whatever that is). Together they make$84k (seems like a lot for those jobs but that's what he told me they made). BTW, the house is worth approx $280k, he thinks.
The original loan was a option ARM and of course they are making the min payment of $1800/mo, the payment on the heloc was $1200 but since they are not paying it I guess it doesn't matter. The only other debt payment they have is a $400/mo car payment.
Check out this loan mod offer. He gets a 25yr fixed with a payment roughly equal to his $1800/mo (before taxes). His taxes are $480/mo. So his total nut is $2280/mo or roughly 32% of his gross. Here's the kicker though, in order to make that happen they stuck a $420k forbearance on to the end of the loan (balance of the original loan, plus the reverse arm amount, plus fees and late payments). He's happy as a pig in shit. I've never seen a mod like this one and it's from some lender I've never heard of. I'm wondering if this mod is a one in a million or if they are offering up mods like this on a regular basis. If this is common then this crisis will drag on for decades as these folks default when they need to move.
I asked about what he will do if he needs or wants to move. "Oh, that will not be a problem, prices will have recovered in a few years and we will be fine". WHAT?? Are you freeking kidding me. You think a tract home in So. Corona on a postage stamps sized lot will be worth $700k in a few years. His new total loan amount is for $100k more than peak prices AND he still owes the heloc. He is trapped in a cave of debt and the foreclosure monster is just waiting for him to pop his head out.
I did not know this guy so I didn't want to argue (much), besides he seemed thrilled that he had "saved his house". I simply asked him to think about who would be able to buy a $700k house. How would they get a loan. I asked him to consider the possibility that his house would be worth about the same in 5 or even 10 years and left it at that.
For all those people out there that think prices are coming back I would offer up this nugget. House prices follow incomes. The first 7 years of the century they didn't because banks removed just about every normal requirement for loaning out money. We are back to normal (if you can call this normal). That means homes will only be worth what people can pay for them. And what should people pay? Depending on the interest rates anywhere between 2 and 4 times their gross annual incomes is the normal range.