A Bridge Too Far
The endless chatter about “low mortgage rates” is pure granfalloonery.
David Liarhhea was quoted in a WSJ article this week about housing distress in Naples, FL. He basically said that housing will be “A-OK” down there because mortgage rates are affordable.
Who cares? It’s the prices that got unaffordable.For example, the median home price in Naples was about $220K back in 2001. They went up to $482K by 2005. The average 30-year, fixed mortgage in 2001 was about 7%. Last year, it was about 6.4%. So mortgage rates are more “affordable” now than six years ago.
But a median home in Naples in 2001 would have cost $1,463 a month based on a 30-year fixed. By 2005, the same median home cost $3,014 per month on the same basis.
The problem isn’t the mortgage rates. It’s the prices and the fact that incomes are flat as a pancake.
In order for a 2001 home in Naples to cost $3,014 a month based on a 30-year fixed (using 2005 home prices), mortgage rates would have had to have been 16.25%.
Would be nice if the occasional reporter would call Liarhhea on some of this bullshite. Of course, that would assume at least one RE journalist knows something about what he/she covers. A bridge too far, perhaps.
January 11th, 2007 at 8:40 am
Amen!
It’s about time someone pointed out that home *prices* are just plain ridiculous throughout most of the USA, but expecially in places like Florida and California.
All that virtually free financing that came into existance after the dot.con bust caused the foolish bidding wars that got places like California and Florida into the beginnings of this fine mess. Even though most people are not very financially savvy, they were at least clever enough to see that in theory a tangible thing like a home was worth more than so many bits of free paper. If only they had used only their own devaluing ‘money’ to buy stuff like houses they’d be okay, but no they also started using other people’s ‘free money’ and in some cases even turned their equity into ever more ‘free money’ to buy even less valuable stuff and worse rapidly used-up ’services and experiences’ (seriously who would have ever thought a cup of coffee should cost 5 dollars or that a trip to Disney World would set a family back thousands of bucks?).
I forsee a lot of people who won those bidding wars will have to suffer the “winner’s curse” for the next few years, especially those who kept playing the ‘auction’ game for other things services and experiences.
By the way when real estate lenders are taking a page from the auto lenders and asking potential buyers “How much of a monthly payment can you afford?” it’s time for the buyers to either run for cover or sign their souls over to Satan (there’s a reason that the word “mortgage” literally translates to “death pledge”).
January 11th, 2007 at 1:14 pm
Home prices are over the top everywhere, looked at Chile recently? It’s very dificult to find a location within the USA that has a reasonable ratio between income and RE prices. I say reasonable being 3X income and considering the service economy we currently have maybe 2X should be the norm.
How many net worth documents used for loans of all types are based on these inflated RE prices? A drop in RE values back to the 90′pricing would cause a margin call beyond anything we can imagine.