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However, I'm not sure what "I didn't listen to anyone" means ... you mean your fellow consumers? Hopefully, you got some good information from the Realtors around here.
Ha, I don’t recall who said what, just know the vast majority said to wait. My own realtor who is very well regarded was very upfront, unprecedented times, no one really knew. I know the realtors on here give solid advice, those were wild times!
I don't believe that graph is meant to be read as a trend line....just three bar graphs comparing two variables for 3 distinct populations.
The cause of the meltdown was the hot potato game with MTG backed securities and derivatives financial institutions were playing. If Subs/Investments on ARMs were a bigger portion of that MBS pie...well you know where that leads.
Historically, subprime mortgages were about 8% of all mortgages originated in a given year. From 2004-2006, they were 20% of all mortgages originated.
ARMs adjusted, home values peaked in '06 and people were caught holding the bag of higher payments on less valuable homes. Investors also played a role too, don't get me wrong. But this idea that a boom in subprime lending, didn't play an oversized part, I don't believe is backed up by the maths.
My wife's good friend bought a house in Gilroy CA (south of Silicon Valley) with a 5/1 ARM. It adjusted and she literally just stopped paying and walked away from it because she couldn't refi.
A roommate from college went all the way to close on a three family triple decker in Walpole MA (So far in fact he had two groups of people lined up as renters for the other two units) that he was going to buy for 850K using an 80/20 "Backpack loan" (I am not a financial product expert but I believe its like 80% a lower, adjustable rate and 20% at a higher, fixed rate...could be wrong) and he had an income in the that year of $0.00 (and was a college student making $7.75/hr the two years before that)....who had just defaulted on his student loans to two different MA State schools.
I don't share these two anecdotes as shining examples of sound financial decision making. I share them as examples where the guard rails should have stopped people like them from borrowing and it didn't. And we all know there are many, many examples just like them.
Without looking harder for the numbers, the MBS (CDS & derivatives) game was the chief cause of the meltdown, because it was approximately 10x larger than the underlying mortgages themselves. In essence, that means for every $1 of mortgages, there was $10 "bet" on it through derivatives.
And so, any $1 loss became a $10 loss.
The use of ARM's to get the rate down so the borrower could qualify for the payment - and I'm including 2 year ARM's and "pick-a-pay" loans - all relied on:
1. Borrower making more money when the initial ARM period ended - oftentimes a LOT more money. Pick-a-pay said you could get a 1% "amortized payment" while the actual 30 yr interest rate was 6%. That means every year of that initial period, you were actually owing 5% more on the house. And so the expectation was that you'd be making so much MORE money in 3-5 years that you could afford the huge new payment. And even if it was a "legitimate" ARM, and your rate was say 3.5% - when it came due it could (and would) go up 2-3%/year
2. The value of homes continuing to climb - in the above example at least 5%/year. It really was a perfect storm of stupidity on the part of Wells Fargo and other lenders that allowed pick-a-pay and negative am. Because they also wanted/expected the LTV to go down to 80% and be able to make true "conventional" mortgages. Certainly some analyst got paid a lot of money to say "Look, that ARM/balloon will never happen. 61% (or whatever) of people move within 5 years, and so that mortgage will just get cancelled."
So, in GVoR's example, the lady in the Garlic Capital of the world - she wasn't making 30% more, and the house wasn't worth 20% more, and so she made a decision the lenders basically help lead her down the primrose path of - it ain't worth it to even try.
And previously credit-worthy people, for whom "their home was their castle" and would pay the mortgage before ANYTHING else ... well, a few of them simply couldn't refinance out of that ARM or that balloon note.
And every one of them had a 10X effect on the MBS market. And pretty soon enough "my castle" owners looked around at everyone else doing it, threw up their hands, and said "screw it - if they can do it, I will too."
and so, back to the Raleigh real estate bubble (and it actually goes back to art's thread too), I go back to:
Does the median price of a home line up with the median income?
Right now, the median Raleigh household income supports a $310K mortgage. The median sales price is about $360K .... which means you need not quite a 20% downpayment.
And thus, so far the median income still does support homebuying/owning. Especially, if we were to try and divine out renters from owners, and especially based upon income, and talking about folks moving to town for the jobs, etc etc etc.
I know in the US, we have a hard time exceeding 66% home ownership. I'm very surprised to see (per US Census quick facts) that we're only 51.5% home ownership. NYC has a higher rate (above 53%).
And maybe I'm looking at it optimistically - we've got a good 14% more of households that COULD be homeowners. Maybe that's wrong, and really being so far below the 66% cap is a sign it IS too expensive for those folks to purchase.
Without looking harder for the numbers, the MBS (CDS & derivatives) game was the chief cause of the meltdown, because it was approximately 10x larger than the underlying mortgages themselves. In essence, that means for every $1 of mortgages, there was $10 "bet" on it through derivatives.
And so, any $1 loss became a $10 loss.
The use of ARM's to get the rate down so the borrower could qualify for the payment - and I'm including 2 year ARM's and "pick-a-pay" loans - all relied on:
1. Borrower making more money when the initial ARM period ended - oftentimes a LOT more money. Pick-a-pay said you could get a 1% "amortized payment" while the actual 30 yr interest rate was 6%. That means every year of that initial period, you were actually owing 5% more on the house. And so the expectation was that you'd be making so much MORE money in 3-5 years that you could afford the huge new payment. And even if it was a "legitimate" ARM, and your rate was say 3.5% - when it came due it could (and would) go up 2-3%/year
2. The value of homes continuing to climb - in the above example at least 5%/year. It really was a perfect storm of stupidity on the part of Wells Fargo and other lenders that allowed pick-a-pay and negative am. Because they also wanted/expected the LTV to go down to 80% and be able to make true "conventional" mortgages. Certainly some analyst got paid a lot of money to say "Look, that ARM/balloon will never happen. 61% (or whatever) of people move within 5 years, and so that mortgage will just get cancelled."
So, in GVoR's example, the lady in the Garlic Capital of the world - she wasn't making 30% more, and the house wasn't worth 20% more, and so she made a decision the lenders basically help lead her down the primrose path of - it ain't worth it to even try.
And previously credit-worthy people, for whom "their home was their castle" and would pay the mortgage before ANYTHING else ... well, a few of them simply couldn't refinance out of that ARM or that balloon note.
And every one of them had a 10X effect on the MBS market. And pretty soon enough "my castle" owners looked around at everyone else doing it, threw up their hands, and said "screw it - if they can do it, I will too."
Without looking harder for the numbers, the MBS (CDS & derivatives) game was the chief cause of the meltdown, because it was approximately 10x larger than the underlying mortgages themselves. In essence, that means for every $1 of mortgages, there was $10 "bet" on it through
The bonds broke down because they no longer performed as people stopped paying. Your statement is like saying what caused the gunshot victim to die was excessive bleeding - sure that's true - but what really caused it was the bullet hitting them.
Had defaults not happened, the bond market would've gotten through it relatively unscathed.
Why did people stop paying? Was it because rates increased and ARMs, which were all the rage back then, couldn't be paid? Possibly, but not probable. What about energy prices? An increase in gas is essentially an additional tax, and given the choice, people will buy gas rather than pay one's mortgage as it's essentially an inelastic product. A sharp increase in energy costs has preceded 10/11 post industrial economic busts after all, and in roughly 3-4 years gas went from $1.25 to $4.00 all while buying homes further away from city centers and living in the era of the gigantic SUV (Ford Excursion, Chevy Suburban).
A well researched MIT study (620-660 is considered subprime cutoff):
Quote:
the share of mortgage defaults from borrowers with high credit scores increased during the crisis, whereas the share for subprime borrowers dropped. When we compare cohorts of loans originated from 2003 to 2006 and track defaults three years later, we see that the fraction of mortgage dollars that are in delinquency from high credit score borrowers (those with a FICO score above 720) goes from 9% for the 2003 cohort to 23% of delinquencies for the 2006 cohort. The share of delinquencies from borrowers below a credit score of 660 dropped from 71% in the 2003 mortgage cohort to 39% for the 2006 cohort.
Quote:
5. Conclusion
This paper shows that mortgage credit increased across all income levels and for prime and subprime borrowers. As a result, even at the peak of the boom, high- and middle-income borrowers accounted for the majority of credit originated in the mortgage market. At the same time, there was no “decoupling” of mortgage credit growth and income growth at the micro level during the period before the financial crisis. Once the crisis hit, high- and middle-income borrowers, as well as borrowers with a credit score above 660, accounted for a much larger fraction of mortgage dollars in delinquency relative to earlier periods, especially in areas in which the crisis was preceded by more pronounced house price booms. Because these middle- class borrowers held much larger mortgages, what looks like a small increase in their default rates had a large impact on the aggregate stock of delinquent mortgages.
What's interesting is all the evidence that has challenged the traditional narrative yet it's still referred to, and widely known as, the "subprime crisis". This tells me the country/world has learned nothing and it is a foregone conclusion that this will happen again.
and so, back to the Raleigh real estate bubble (and it actually goes back to art's thread too), I go back to:
Does the median price of a home line up with the median income?
Right now, the median Raleigh household income supports a $310K mortgage. The median sales price is about $360K .... which means you need not quite a 20% downpayment.
And thus, so far the median income still does support homebuying/owning. Especially, if we were to try and divine out renters from owners, and especially based upon income, and talking about folks moving to town for the jobs, etc etc etc.
I know in the US, we have a hard time exceeding 66% home ownership. I'm very surprised to see (per US Census quick facts) that we're only 51.5% home ownership. NYC has a higher rate (above 53%).
And maybe I'm looking at it optimistically - we've got a good 14% more of households that COULD be homeowners. Maybe that's wrong, and really being so far below the 66% cap is a sign it IS too expensive for those folks to purchase.
Google says raleigh's median household income is $61k. I'm really surprised that supports a $310,000 mortgage, but you are the expert. That seems crazy to me, but maybe that is why everyone else is living in a much nicer home than I am . I do agree this area is still relatively affordable especially for the upper 20% of income earners where, unlike in large cities, they'd be living in rented condos for what gets you 3000 sq ft and 1/4 acre lot.
Google says raleigh's median household income is $61k. I'm really surprised that supports a $310,000 mortgage, but you are the expert. That seems crazy to me, but maybe that is why everyone else is living in a much nicer home than I am . I do agree this area is still relatively affordable especially for the upper 20% of income earners where, unlike in large cities, they'd be living in rented condos for what gets you 3000 sq ft and 1/4 acre lot.
I am not sure what median HH income number Bo used. I have always seen the median number listed as what you have here; around 60K.
I believe there were a few old rules of thumb about "what you can afford" (realizing Ramsey and Orman probably have complete different ideas; all cash, 15 year notes which simply aren't realistic for many people, since they apparently want people to die with as much money as possible...ahhh the old debate I have with my dad...."It's your money dad, you worked your *** skin off for it...leave me nothing...enjoy retirement!"):
1. 28% Mortgage to Gross Income Ratio
2. 36% DTI Ratio
3. The old "multiply your HH Income by 2.5 or 3".
Using rule one, you could afford 1400 a month in MTG expenses
Using rule two, isn't easy to confirm without knowing other debts
Using rule three, you're at between 150K - 180K
The bonds broke down because they no longer performed as people stopped paying. Your statement is like saying what caused the gunshot victim to die was excessive bleeding - sure that's true - but what really caused it was the bullet hitting them.
Had defaults not happened, the bond market would've gotten through it relatively unscathed.
Why did people stop paying? Was it because rates increased and ARMs, which were all the rage back then, couldn't be paid? Possibly, but not probable. What about energy prices? An increase in gas is essentially an additional tax, and given the choice, people will buy gas rather than pay one's mortgage as it's essentially an inelastic product. A sharp increase in energy costs has preceded 10/11 post industrial economic busts after all, and in roughly 3-4 years gas went from $1.25 to $4.00 all while buying homes further away from city centers and living in the era of the gigantic SUV (Ford Excursion, Chevy Suburban).
A well researched MIT study (620-660 is considered subprime cutoff):
What's interesting is all the evidence that has challenged the traditional narrative yet it's still referred to, and widely known as, the "subprime crisis". This tells me the country/world has learned nothing and it is a foregone conclusion that this will happen again.
I think it's a simple "calculation" of researchers to go with the "increasing subprime led to more risk. Capital was flowing, MTGs were packaged together and sold...those MBS had more risk because of an increase in subprime and ARMs... MBS led to the crash....therefore Subprime".
You're probably right that it wasn't "Subprime crisis" in terms of "what part of the pie of defaulted notes did subprime MTGs account for".
If we want to really pinpoint the cause...it was back in '99 when we repealed Glass-Steagall....but that's a different story for a different thread.
Wake county median income is right around 80k, maybe that's what he was referring to. Still hard to see how that equates to a 320k mortgage but just going by a rule of thumb isn't always the best way to figure it.
Wouldn’t the old rule of thumb be something like this?
$300k house
$60k down payment (20%)
$80k household income
Basically borrowing up to 3x your household income. This is the guideline I’m comfortable with. However, we are the people that don’t like to spend. Our mortgage, taxes, HOA and insurance are 9.5% of our gross monthly household income. We are super debt averse.
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. I do agree this area is still relatively affordable especially for the upper 20% of income earners where, unlike in large cities, they'd be living in rented condos for what gets you 3000 sq ft and 1/4 acre lot.
