TN housing Market (Norris: lender, lawyers, buy)

[Carat98]

"If you are disciplined enough financial to save the difference between the interest only payment and fully amortized payment"

I think the operative word in this quote taken from realtor on this board is "disciplined". IMO, most people are not disciplined enough to save the difference on the interest only payments.

[mbmouse]

Actually there are many people that are. But you are right If you aren't one of those that can do this comfortably, you shouldn't get that type of loan. Any good Loan officer can determine that right off the bat anyway though. If you aren't a saver and have a Loan Officer pushing that loan, get a new Loan Officer.

[sliverbox]

Just using my own logic, I think it is safe to say that the only time people use IO loans is when they currently cannot actually pay for the house. The assumption is that they will be making more money in the future and that they can refinance once their home gains enough value. But in today's economy, neither one of those is really happening, and that's why we're just now starting to see some serious errosion in the marketplace.

and Tony, I remember reading an article regarding Memphis a few months ago and apparently, there was something like 18,000 foreclosures. My only thoughts on that are that the crime rates in Memphis have gotten pretty bad and ultimately affected home values. Memphis also has a large lower income population and there were probably a lot of people who took out the aforementioned loans without a clear understanding of how they actually worked.

From what I have observed, many who took out IO loans could barely pay for the IO payments alone. Why would they suddenly be able to pay the full amount once it resets? that's the basic question many people like myself have been asking for years. Nobody should be surprised.

[mbmouse]

Sorry to correct you here, but I have to disagree with that statement. No, that is the very wrong reason to use these loans and if they are used for that reason, then you have the wrong person originating your loan. The only reason to use these loans are to pay off the house in less than 15 years, not to qualify.

Originally Posted by sliverbox

Just using my own logic, I think it is safe to say that the only time people use IO loans is when they currently cannot actually pay for the house. The assumption is that they will be making more money in the future and that they can refinance once their home gains enough value. But in today's economy, neither one of those is really happening, and that's why we're just now starting to see some serious errosion in the marketplace.

and Tony, I remember reading an article regarding Memphis a few months ago and apparently, there was something like 18,000 foreclosures. My only thoughts on that are that the crime rates in Memphis have gotten pretty bad and ultimately affected home values. Memphis also has a large lower income population and there were probably a lot of people who took out the aforementioned loans without a clear understanding of how they actually worked.

From what I have observed, many who took out IO loans could barely pay for the IO payments alone. Why would they suddenly be able to pay the full amount once it resets? that's the basic question many people like myself have been asking for years. Nobody should be surprised.

[sliverbox]

No, that is the very wrong reason to use these loans and if they are used for that reason, then you have the wrong person originating your loan.

Perhaps things are different in TN. In CA, the ONLY people using these loans are those that fit the bill of what I described above.

[mbmouse]

True, CA is a weird residential financial market! LOL!
However nationally, these loans are not used that way. Or at least they shouldn't be, granted there are some being used wrongly in the way you described even besides CA, but that is not the reason for these loans and they should only be used as intended, which is not to qualify.

[sliverbox]

These loans were totally marketed as a means to buy with " no money down!" in the same way that cars and furniture are advertised. It made buying a house seem simple and easy, plus with the added incentive of not having to pay the full amount made it even better sounding. By the time IO loans became popular, people were already used to unconventional home finance: low interest rates, the refinance craze, ARM loans, 80/20 loans, and then finally- IO loans. I think home buying practices got so out of touch with reality that many people simply assumed that this was all perfectly ok.They were conditioned to think that what in reality was extremely unusual was normal. The media told them that it was all-good, they could not lose, and that Real Estate NEVER goes down.

This was especially true in places like CA where I live now. The prices got so far out of reach for the majority of the population that the only way that most of the middle and even upper middle class could get into a home was with loans like these. Again- I am not in TN and am not familiar with the way loans are advertised. But in MANY pricey metros, these loans were handed out like candy.

[hiknapster]

As I understand it, interest-only loans would be good for people that took the money that they would normal pay the principal with, and actually put it into a high-yield account. In that was, you would actually come out ahead.

However, people being people, they would probably blow the money on a Hummer.

I use to see a lot of those folks in southwest Florida. Those are the same folks that took out equity loans, and now there house isn't worth as much. I personally know one of these people. She didn't make any improvements on her house and is driving around in a 15-year-old vehicle. I asked her where the extra $45,000 in equity money went and she can't account for it!

[Tony1790]

Originally Posted by sliverbox

These loans were totally marketed as a means to buy with " no money down!" in the same way that cars and furniture are advertised. It made buying a house seem simple and easy, plus with the added incentive of not having to pay the full amount made it even better sounding. By the time IO loans became popular, people were already used to unconventional home finance: low interest rates, the refinance craze, ARM loans, 80/20 loans, and then finally- IO loans. I think home buying practices got so out of touch with reality that many people simply assumed that this was all perfectly ok.They were conditioned to think that what in reality was extremely unusual was normal. The media told them that it was all-good, they could not lose, and that Real Estate NEVER goes down.

This was especially true in places like CA where I live now. The prices got so far out of reach for the majority of the population that the only way that most of the middle and even upper middle class could get into a home was with loans like these. Again- I am not in TN and am not familiar with the way loans are advertised. But in MANY pricey metros, these loans were handed out like candy.

Good summary and so true, I also don't know about TN, but in the rest of the country, WA/OR/CA/FL/MA, heck ANYPLACE that a house costs 10 times annual income, etc These IO loans are the NORM not the exception and the ONLY way that people can afford to buy these overpriced homes.

Who can say with a straight face that someone in WA or CA, etc that makes $60k a year can afford or even qualify for a $800k loan if they had to put money down or qualify at the FULLY AMORITIZED rate.

The reason for the Fully Amoritized rate is that in Sep 07 the new Freddie Mac rules should come online mandating that new loans will need to be written where the buyer qualifies on the fully amoritized payment.......that is HUGE, that will knock out a big chunk of buyers, couple that with the ending of the 100% financing and subprime loans ending and it will be harder to get your buyer all the way to the closing table.

Also, whoever said that people will actually be better off investing the difference on a IO loan????? I for one would rather take a guaranteed rate of return by paying down principal of say 6.5% than taking a gamble on the stock market, etc and perhaps making 10% or perhaps losing 10%. Even if you make 10%, you will have to pay capital gains tax on that, so your rate of return is closer to what?? 8%?? So gamble for 1.5% after tax?? Not me, besides as a nation we are on our second year of negative savings rate, so ask yourself, how likely are those big screen buying fools with their $10,000 credit card balances going to "invest" the difference?? And don't forget universal default on those same cards, miss a light bill payment and when your card company finds out (and they will) you are declared to be in universal default and your will jump to 29.95% on your balances......it's true, it's happening and used to be against the law (loan sharks).

Update on me, I'm now homeless as the movers have my stuff in storage and I'm in my lifeboat (RV). And to top it off, my buyer STILL HAS NOT CLOSED.........100 days and counting.....why? Because they are on their 3rd loan program, the lenders on the west coast are cutting 100% finance and subprime, last I heard Alt A loans are starting to get crunched.
But not to worry, supposedly next week it will close......I should make it by the skin of my teeth.....we'll see.

Anyway, hopefully things in TN won't turn out like CA/OR/WA/FL/MA, et al
There is still affordable housing there, but there also seems to be some Insanely priced homes there now as well, I mean who is buying $300k to $1.5 mil homes in TN? People from the forementioned cratering markets? What will that do to demand?

Questions, questions, wish I knew the answers, I could finally retire rich

Good luck to all in TN, hope that your spring selling season is well and good, wish me luck that I can pull my butt out of this credit crunch unscathed

Tony in WA

[hiknapster]

The people that are buying these homes are retirees or cashed out and made a mint when they bought low and sold high.

Still, if this keeps up, these low salaries will not keep up with these home prices. That's if they can find a job. I saw on bestplaces that Knoxville actually is losing jobs. However, I don't put much stock in that website. They are consistently wrong.

But I have watched retirees and people that cashed out move into a low-paying area and knock an entire state on its head.