bostonbubble.com

[john p]

I think one of the big challenges of 07 was the contingencies, meaning because the market was mixed regarding expectation levels of price, the days on the market lengthened. People who didn't have contingencies were much more attractive buyers and sellers.

This year, I think the challenge is Loan to Value. I mean think about it, what if someone offers $400k for a place and after the offer is signed the bank appraises the place at $350k? I've got a feeling this might be happening but would like to hear from anyone if you've heard any first hand accounts of this sort of thing. Also, people selling might be upside down, can't refinance.

Think about the leveraging of the banks. If there was a sales transaction in a town, I'd imagine that that sale was the basis for about 2 to 3 refinances. Refinances that were pumping money into the economy. Now, fewer refinances and less and less equity to bring out into the economy is available.

Another angle with the loan to value is that with rising house prices you could have a certain percentage constantly living off of equity in their home. They'd buy a place for $300k, and after a few years take a HELOC out based on their new increased value of $350k. So this family can spend a little more and just eat away at equity. Now, people don't have that equity to fall back on so maybe because the LTV is getting worse for people, it might unveil who is living beyond their means and we'll see more homes on the market?

I think Loan to Value is a growing concern in this years market and I wonder if any of you see any other angles that it may have in this years market?

[melonrightcoast]

From john p: "This year, I think the challenge is Loan to Value. I mean think about it, what if someone offers $400k for a place and after the offer is signed the bank appraises the place at $350k? I've got a feeling this might be happening but would like to hear from anyone if you've heard any first hand accounts of this sort of thing. Also, people selling might be upside down, can't refinance."

I don't know what the banks would do if the appraisal was more than 10% under asking price. I imagine it would be a problem, as this is what was recently explained to me:

You find a house you love and agree on a purchase price of $575K. You have 20% to put down ($115K), which is very good for two reasons: 1)you don't have to pay PMI and 2)you can get a second mortgage/heloc for the difference above the conforming $417K limit fairly easily ($43K). If you have less than 20% down payment, then you are limited to only a handful of lenders that do the second mortgages/helocs and it can take 6 weeks to two months to process the loan. And you could get stuck with PMI.

We have friends stuck in the under 20% down payment scenario and it is unclear whether or not they'll be able to close on the home.

As for the above scenario, lets say you put 20% down on $575K, then it only appraised for $515K ... you may not be able to get the second mortgage/heloc because in the lenders' eyes, the house isn't worth that much. You may be able to convince the seller to lower their price so the sale can go through (ya right).

What I would think would be worse was if the bank thought you had enough of a down payment and was fine letting the sale go through even though it only appraised at $515K and you paid $575K. Unless you put a contingency in saying that the appraisal needed to be at or above the sale price, you may not be able to back out if the bank agrees to it. Would you still want that house knowing you were already under water over 10%, and you were essentially loosing a big chunk of your down payment instantly? I don't think I would.
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melonrightcoast ... are you?

[JCK]

[john p]

I wonder what the loan to value is going to do to college tuitions because I think college tuitions skyrocketted because colleges required families to tap their home's equity before they qualified for student aid. The personal wealth of real estate values was the fat cow that colleges ate into. I'd assume that most families who have college kids bought a long time ago so Loan to Value shouldn't be an issue, but who knows?

The reason why I think about this is that if people are tapping into their equity for junior's college, they may in fact be forced to downsize. If they can't even get that far because they can't even get the loan to value to refinance, that might force colleges to drop their tuitions.

As a capitalist, I see market corrections as beneficial to a society insofar as they reduce the asset bubbles to more sustainable levels. College tuitions are tied to house values and I didn't like Lawrence Summers comment about using stimulus money to continue to prop up college tuitions. The best thing for families is that the colleges drop their prices. It gets me mad to see these liberal colleges talk about the benefits of socialism while they are the most aggressive robber barron opportunists.

[melonrightcoast]