Why Is California's Unemployment Rate So High? (real estate market, foreclosure)

[SOON2BNSURPRISE]

Haoleman,

The Inland Empire is the 14th largest metropolitan area in the nation. It is east of both LA and Orange County and North of San Diego County. They started calling it that back in the 1950's. What it is is the mass of land and people that live inland from the coast predominetly in Riverside and San Bernadino Counties.

[sheri257]

Originally Posted by cobmw

My friend's son just got layed off from the surf board shop in Newport Beach where he has worked for 5 years. Surely that can't be housing related?

Yeah, actually, it is. People were buying all kinds of toys with money borrowed on home equity that didn't really exist. Now that it's all crashed ... they're not spending money on anything non-essential.

If you have limited funds are you going to eat or spend money on surf boards. The answer is obvious.

[FresnoFacts]

Originally Posted by Charles

From Maslow's hierarchy of needs:

and down here----->>>>> broadband

LOL, I agree but I better not show it to my wife, she may not agree. But I keep telling her isn't it better that I need broadband more than a sports package on cable.

[FresnoFacts]

Originally Posted by sheri257

Yeah, actually, it is. People were buying all kinds of toys with money borrowed on home equity that didn't really exist. Now that it's all crashed ... they're not spending money on anything non-essential.

If people were buying based on what they earned it would not have hit as hard.

But like you and I said it was paper value in the home equity that they borrowed.

The thing need people need to keep in mind is that home values have returned to where they were in 2001 or 2002.

If we had all recognized that it was just a temporary bubble that was bound to pop, the debt levels would not be where they are today..

[Charles]

Originally Posted by FresnoFacts

But like you and I said it was paper value in the home equity that they borrowed.

I never really understood this (not that I disagree...I just don't understand.)

Assume you borrow as much as you can afford, assume fixed. Assume the bank won't let your payments be more than 30% of your salary. For numbers say you make $50K and the bank will loan you no more than $200K because you don't have the cash flow to borrow more - read again - because you don't have the cash flow to borrow more. It's all based on that 30%. Remember, we're talking fixed rates.

Now, say your house appreciates on paper to $500K. You still make $50K. You are still paying as much as you can afford towards that $200K loan. You are still constrained to that 30%.

How do you borrow more money based on the home equity? If you were to borrow more money your payments would have to go up. But you are already maxed out in cash flow - you can't borrow more.

So, what does increased home equity have to do with it? Nothing unless one or more of these things happen: The bank lets you go above the 30% constraint (which would mean higher monthly payments with the same salary); interest rates go down (so you can borrow more for the same payment), your income increases (so you can borrow more money because you pay higher payments)....I can't think of any more...

But the explanation we always read about (and is referenced by the poster I quoted), is that you can borrow more ("Home Equity ATM") because of increased home equity. The math doesn't support this. Maybe I'm missing something.

[NYSD1995]

Originally Posted by Charles

The math doesn't support this. Maybe I'm missing something.

You based your entire argument on bank limits that got tossed out the window starting in late 2004 and continuing through much of 2007. That's what you're missing.

People pulled 200k from their homes and spent it. Went back and took whatever was left too. That money was spent on everything from surfboards to cars to vacations to college tuition. That money is now gone.

Remember whether you consider it "paper value" or "real value", money all spends the same. If you extract 200k from your house and spend it, it doesn't matter very much what kind of "value" that is.

[justhere]

Originally Posted by Charles

I never really understood this (not that I disagree...I just don't understand.)

Assume you borrow as much as you can afford, assume fixed. Assume the bank won't let your payments be more than 30% of your salary. For numbers say you make $50K and the bank will loan you no more than $200K because you don't have the cash flow to borrow more - read again - because you don't have the cash flow to borrow more. It's all based on that 30%. Remember, we're talking fixed rates.

Now, say your house appreciates on paper to $500K. You still make $50K. You are still paying as much as you can afford towards that $200K loan. You are still constrained to that 30%.

How do you borrow more money based on the home equity? If you were to borrow more money your payments would have to go up. But you are already maxed out in cash flow - you can't borrow more.

So, what does increased home equity have to do with it? Nothing unless one or more of these things happen: The bank lets you go above the 30% constraint (which would mean higher monthly payments with the same salary); interest rates go down (so you can borrow more for the same payment), your income increases (so you can borrow more money because you pay higher payments)....I can't think of any more...

But the explanation we always read about (and is referenced by the poster I quoted), is that you can borrow more ("Home Equity ATM") because of increased home equity. The math doesn't support this. Maybe I'm missing something.

Awesome chart!! Good points - add to the above no doc loans

Now lets say, they lied, okay, strong word, inflated their actual income figure. Add to that they just moved out of the house for the first time (or just never owned a home so have no idea what the numbers really mean), been on their job not too long (or the many variables to conclude in disaster) and have no real financial track record. Add to that their house appreciates, they take a equity loan and do what everyone's said above, borrow and buy toys. Add that they are not even paying on the principal actually, but just the interest/fees. Now, the bubble bursts, they never could afford the house, they never paid on the principal, they have extra debt with the high end toys (hummer, bmw, jet skis, vacation to puerto vallarta, cancun, blah, blah, blah), and voila! We throw the ugly wig on the floor.

[Charles]

Originally Posted by Sassberto

You based your entire argument on bank limits that got tossed out the window starting in late 2004 and continuing through much of 2007. That's what you're missing.

So the lender's criteria in 2002 was 30% and by 2005 the lender's criteria increased? That is, the banks will allow the borrower pay a higher percentage of his salary than they would had his house not appreciated (on paper)?

If so, I don't think I missed it:

Originally Posted by Charles

So, what does increased home equity have to do with it? Nothing unless one or more of these things happen:The bank lets you go above the 30% constraint

That makes sense, and I sort of figured that all along. The lenders figure with all that equity they can still recoup their loan amount if the borrow cannot meet payments.

[NYSD1995]

Originally Posted by Charles

That makes sense, and I sort of figured that all along. The lenders figure with all that equity they can still recoup their loan amount if the borrow cannot meet payments.

The lenders had excess money to lend and huge demand for the money, so they lent it. Along the way they didn't really care about how it got repaid.

[Ultrarunner]

Originally Posted by Charles

So the lender's criteria in 2002 was 30% and by 2005 the lender's criteria increased? That is, the banks will allow the borrower pay a higher percentage of his salary than they would had his house not appreciated (on paper)?

If so, I don't think I missed it:



That makes sense, and I sort of figured that all along. The lenders figure with all that equity they can still recoup their loan amount if the borrow cannot meet payments.

One more piece of the puzzle... there was an explosion of variable rate loans with very low teaser rates and some fixed rate loans at artificially low rates for 3 and even 5 years...

Also the appraisals were starting to become drive-by appraisals... not the go out and measure the square footage and examine the home's condition in detail appraisals of the past.

Appreciation was reflected in higher appraisal values and the low teaser loan rates let people "Qualify" for loans based on payments that did not begin to cover the principal and interest... let alone market interest in many cases.

Lots of folks did interest only loans too.

Remember... variable interest loan resets are what started the downward spiral... as the loans reset to market rate... many people found they could no longer afford the payments and as home prices declined... many people no longer had the desire to hang on when they could rent the same home in the same neighborhood for 1/3 to 1/2 the true cost of being a homeowner.

At least this is the case for about a dozen of my co-workers that bought and lost their homes all in the last 6 or so years...