bostonbubble.com

[john p]

I spoke to someone I know who deals with mortgages and he told me that the norm seems to be a 10% down payment, a 720 plus credit rating, and a good debt to income ratio are where the bar is set.

I wonder if first time buyers are having a lot more trouble forking over 10 percent plus closing costs while still maintaining a decent emergency fund and paying for repairs and for furniture and modest personalization like painting, new floors, window treatments, etc....

The monthly payment component of the "affordability" may be coming around due to lower prices, but the bar being raised to 10 percent down payment might be a new barrier to entry.

One blogger I read said that they were happy that rates were going up because it would lower price significantly which would mean that their down payment would be a greater percentage of principal.

Here's something to think about when it comes to mortgages: jeez, I haven't had a thought like this in a couple months...

Anyway, with respect to mortgages, I see two major components, the cost of capital and the value of the asset (the property). Because the value of the property was taken from the equation because mortgages could be bundled, the lender was less concerned about home prices dropping.

I think this dynamic is soon to change. When the government starts to get a handle on this, they will realize that the lender needs to be on the line in case the borrower defaults because that in of itself creates a more stable market. When these escape routes are closed off and lenders remain on the hook for the underlying asset, you will see lenders correcting the markets by not allowing that much slack.

So I ask you guys, sure cost of capital might go up due to inflation and devaluation of the US Dollar, but what about the inflation/deflation of house prices? If you're the lender are you more afraid that your capital will not be worth as much when the borrower pays you back or if the underlying asset is not worth as much if you end up having to own it? If you’re a borrower and you’re up to your ears in college loan debt, how much are you saving each month and how long will it take to save for a 10 percent down payment, and maintain a decent emergency fund; further, what is the “Boston Premium” worth? If we get inflation, higher rates and price declines, are baby-boomers going to stay in the workforce longer or relocate to a cheaper cost of living area. I think the answers to these questions will form the fundamentals. I wonder what percentage of mortgages are being accepted and if Realtors are up to speed with these new higher hurdles and if they are avoiding situations like closings that don’t happen due to a borrower not getting a mortgage…

What would you add as a new "fundamental" or hurdle?

[Guest]

[john p]

Check out the spike in rates in the past month:

http://www.bankrate.com/ ...truncated...

This has got to be throwing a monkey wrench into lots of real estate deals made a month ago, and closings scheduled beginning of July...

Check out the past five years, talk about turbulence.

http://www.bankrate.com/ ...truncated...

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[admin]

[john p]

Oh, yes, cash flows were important; I wasn't able to squeeze all of the juice out of the guy unfortunately. I think the 20% down aligns more with a lower price to income ratio than what we're dealing with now. The bar being lifted from 5% to 10% suggests that the industry is looking for a lower price to income ratio. Young buyers might need to wait longer and save, wait and hope that prices nosedive, hope for wage inflation or all of the above.

Very interesting article you posted; give you some insight from the mortgage industry's perspective, harkenings of the automobile industry's policies with safety recalls (weigh the cost of the recall versus the potential costs of liability of not recalling). Also factor in the fact that individuals do play musical chairs, retire, cash out and play the artful dodger when it comes to responsibility.

I went to a manufacturer of a building product and watched a film they used to do "stress tests". They would put their product on this "shake table" to simulate an earthquake. They could model the behavior at different magnitudes. I'm kind of shocked that for very small building components we are required to test these sorts of things, but for real estate, the most common asset, there are no serious industry performance criteria, it is left up to the companies to determine what risk they feel comfortable themselves taking. I guess most of us were naive to think that this industry was run by "grown-ups".

I'm told that mortgages companies are hearing crickets now due to the spike in rates (early June 0.