bostonbubble.com

[BostonObserver]

We are debating about whether to buy, and wonder whether it is better to wait 1-2 years to see how the anticipated Option ARM/Alt-A wave plays out. I am just curious what others think this of this issue -- how real is it? Will there be another sweeping wave of foreclosures among higher-end homes as these alternative mortgages hit rate resets? Or are the rates low enough now that it won't matter?

The link below offers one view of the situation. I am very curious to hear what others think.


http://www.advisorperspectives.com/newsletters09/pdfs/Son_of_Sub-Prime_Another_Wave_of_Defaults.pdf

[JCK]

I think this may be missing forest for the trees. The broader economy (employment) will probably be more important over the next couple of years than these resets. I wouldn't focus too heavily on this because you really need a magic crystal ball telling you what interest rates will be in two years to make any sort of meaningful determination.

I don't have the numbers, but my sense is that the real time bomb loans (the option ARMs) were less prevalent around here than in FL, AZ, and CA. Regular ARM resets are only an issue if your rate jump, the increased payment creates hardship or inability to pay, and you're underwater.

If your rate jumps and you have equity, you can always sell and escape. If a person is underwater, they will face a few options: key paying and hope prices rise, sell and bring $$ to the table, or not pay and wait to be foreclosed upon or renegotiate the loan terms w/the lender.

That's why a I think employment (or lack thereof) is a bigger deal. It doesn't matter whether you have a fixed rate or ARM, or whether or not rate resets to a higher rate, whether or not you're under water; if you have no job, it's unlikely you can make your payment.

That said, I think there are good reasons to believe prices will drop over the next couple years; employment, stiffer lending standards, less of a mob mentality around real estate, general state of the economy, just to name a few.

[balor123]

I would say that at a minimum you're not losing much by waiting.

[GenXer]

What are you waiting for? My sense is that you simply can not afford to buy your house now. Otherwise you wouldn't be waiting. Its like waiting for the stocks to crash (or to rise). There is no point. If you can not afford now, you'll have to wait until you can afford it. Its that easy! And there is no time table - it could take 1 or 2 or 10 years. Anything can happen. If you can afford it hands down by doing a stress test on yourself (similar to the one described here:)

http://www.bostonbubble.com/forums/viewtopic.php?p=7335#7335

then you shouldn't wait. If the prices come down more, who cares? You can't time it anyway, because you don't know whether they'll come down, and if they do, by how much (and how fast the houses will be sold). But if you can not afford to buy, you will have to wait until you can afford it, however long it takes.

[BostonObserver]

The fundamental question is whether there is an impending Alt-A/Option ARM foreclosure wave coming, and whether that wave will drive prices down significantly -- by another 10-20% or more -- in and around Boston.

The CSFB mortgage chart appears to indicate that this is indeed coming. And what I don't want to do is buy a house for $900k this spring only to discover that I could have saved $150,000 or more by simply waiting 18-24 months.

I do know that I checked out a house last summer -- 9 months ago -- listed for $950k and the realtor INSISTED that it would go at or above asking within a month. It finally sold in February for $825k. So yeah, I guess I'm still content to watch and wait.

[balor123]

Wow - looking at $950k houses? What kind of work are you and your spouse in?? My cousin was looking at houses in Newton but couldn't find anything under $1.2million that they liked. Her husband is an Analyst who moves between banks. I see perfectly nice houses around $600k - $700k but I guess I'm not too picky about the part of Newton and feel that 4 bedrooms new construction is plenty.

[GenXer]

Suppose I could give you an answer with 100% certainty, and suppose I'd say, yes, there would be a 20% correction. What happens if you buy, and get another 20% correction right thereafter?

From the information you supplied, you probably can not afford to buy what you are trying to buy. What difference would a 20% correction make? What if it goes up 20% in 5 years after it goes down 20%? Do you plan to sell right after you buy to make a profit? You realize that what you are saying makes about 0 sense. We don't live in a snapshot world. Our world has a time axis. It makes no sense to talk about price movements as if they were a series of discrete events. Not only are they continuous, but also random.
So, my suggestion is to stop pretending that your world is different from the one you live in. Life would be a whole lot more predictable that way.

[WestCoastXPlant]

Actually resets are not your biggest worry as the govt is so far successfully keeping the base rates down. Recasts however could be a whole another story. On the west coast I knew a number of folks who were buying "investment"/rental houses on IO loans. These weren't subprime borrowers, these were folks making upwards of 80K a year trying to supplement their income/grow their money. There is NO way that they can affort to pay P+I on these loans. And most of them probably don't have enough equity for a refi.

The other thing I'm wondering is about the effect of these recasts on the economy in general. You can read [url]calculatedriskblog.com[/url] for more details but from what I understand the banks balance sheets will be suffering a lot. Which IMO would affect the Boston area(since my feel is the economy here is somewhat heavily tied into financials) even if there are 0 of these loans here.

[balor123]

Financial companies are struggling but so far their employees are not. Those employees have gotten very stubborn over the past decade and, more importantly, they were paid so much that many of them probably don't have to work anymore. The compensation for these people has become Sticky. Not until the government lets these banks go under will this problem be fixed.

[JCK]

[barry]

GenXer why the ire, did someone piss in your cheerios. It seems like a completely logical question and has nothing to do with the the affordability factor. Can i afford a s500 benz-- yes i could but it is not something i am willing to pay for.. but would i drive one if i could get it for the price of a passat? Housing stock, locations, etc are not just base commodities but something that offer value besides a place to store your shit and sleep. What you get for the money is the key.



So if someone here wanted to get some users opinion on what alt-a might due to the market I think it would benefit the board users try to answer that and not attack him on "you can't afford it". It is wasteful and has nothing to do with the question asked.

I think that the broader economy and unemployment will have a much greater impact... but if we were at relatively stagnant grown, rather that recession, alt-a would/should have some impact, so i can only assume that the impact will be magnified in a recession.

[balor123]

So you would think. The laws of physics don't seem to apply to Boston though. My view is still that all these funny mortgages coming due over the next few years present known risks that you can't evaluate with much confidence. I'd much rather be purchasing in an environment where if there are risks they aren't known, as was the case for much of the years prior to the aughts.

[GenXer]

barry: More amused than anything. And annoyed. Because I see people trying to guess how many devils can stand on the tip of a pin, over and over and over again. Everybody's an expert. Everybody is above average. Then how come we have millions of people who are facing foreclosure? You may be surprised to find out that a large number of them are not subprime.

So you think you can afford that benz? If you were truly rich, a good stress test on your finances would show that you could. But if you were just a wannabe, you'd fail miserably. There are very few people who can afford a benz or a 1M house. But they may want to pretend that they can. A single job loss or a misfortune could easily send them to the poor house. And oftentimes, it is all preventable. The problem is, people are too ignorant of their own lack of predicting abilities, and they go about life pretending that everything is fine, while walking a fine line. The more 'wealthy' people feel, the less they are able to cope with circumstances beyond their control.

As far as Boston market, not only is it not predictable, it could ruin your finances. So, barry, go ahead and make your financial decisions on 'opinions'. In Engineering there is a concept of signal to noise ratio. The idea is that if you integrate enough of a noisy signal, even if the noise is larger than the signal, you will eventually come up with a much bigger signal than noise, owing to the property of signal to add up, while noise stays the same. Now, if you do that on pure noise, without the signal, all you will get is just pure noise. In effect, this is what you are doing. Integrating even 1000 of 'opinions', even if all of them came from Harvard economists amounts to nothing more than integrating a bunch of noise, while expecting to come out with the signal. As long as people pretend that their reality is different, they'll keep making the same mistakes.

[GenXer]

Ok, philosophy aside, I still do not see how there are any other considerations to buying a house other than affordability?

House prices have been proven to exhibit power law behavior, meaning that their deviation from the so-called mean or norm can be much higher than expected if the prices were normally distributed (i.e. bell-curve). What can we learn from this important discovery?

Here's what we can say for sure:
1) Any big deviation may or may not be caused by a single event (alt-a, unemployment, etc), but in the end, it wouldn't matter. We can retrofit an explanation after the fact, but it is no consolation if the prices plunged or rose by a large amount if you are on the wrong end of the bet.

2) It is pointless to speculate about short term price movements, because short term volatility is STILL going to behave like a power law.

3) The longer your horizon, the higher the risks and potential price movements. Prices may behave 'predictably' well (or so we may think), but longer horizon implies higher probability of an unforeseen event that can drive the prices higher or lower, making predictions even less accurate.

If anybody has any problems with the above, blame a bunch of MIT econophysicists. They wrote a number of papers on the subject recently, so it is a well-established fact that markets behave a lot worse than previously believed. For those who would like to still pretend that house prices can be predicted, timed and exploited, the graveyard which is already full of bankruptcies and foreclosures has plenty of space.

[Guest]

genxer i stick with my previous assumption-- someone pissed in your cherrios.

I am not basising my decisions on opinions, nor did i ever state i was, but a lot of big decisions in life are based on feeling, not fact, and if you try to apply engineering principles to a house you will fail.

affordability in our credit based society is different from yours, so be it. I agree that most live well beyond there means or comfort zones... if you look at median income vs home prices in towns like newton you would see the majority could not "afford" homes at current prices. But i think that almost anyone in this society is three bad breaks from being homeless.. but even if that is my though should you live life waiting for those 3 bad breaks? lawsuit, jobloss, death(s).. not much you can do to prevent.

I thought the purpose of this board was to stimulate dialog on "real estate bubbles" and if you do not want be a part of the dialog why read or comment. I think you have made your position clear, so you can leave the speculation to us.