Market Conditions: 35.2% of Q1 Cook County Sales Were Foreclosure-Related
We’ve been chattering about what percentage of sales are distressed sales (i.e. foreclosures and short sales) compared to the overall number.
The Cook County Assessor’s Office recently completed research of the first quarter of 2010.
From the Tribune:
“The market is still having problems,” said Fran Lefor, a senior research analyst at the assessor’s office. “But if you’re not in foreclosure, things are not as bad as you might think. It’s good news if you don’t have a house in foreclosure. It’s bad news if you’re a bank.”
The study found that 35.2 percent of the 8,092 residential property sales completed during the first quarter were foreclosure-related transactions, and the $88,500 median price was a 21 percent drop from a year ago.
But in the traditional market for the county as a whole, the number of properties sold rose almost 49 percent, and the median price fell only 6.7 percent, to $231,000, from 2009’s first quarter. The median means half the homes are sold for more and half for less.
The assessor’s data includes all sales within the county, not just those reported to the local multiple listing service. The most dramatic year-over-year price changes were found in Chicago, where the 2010 first-quarter median price fell 6.5 percent, to $252,500, for traditional sales and plummeted 23.8 percent, to $80,000, for distressed homes.
These figures shouldn’t come as much surprise as many of us assumed the recent rebound in sales has been boosted by distress sales.
The bigger question is- what are the distress sale prices doing to the rest of the market?
Gauging foreclosures’ impact on home values [Chicago Tribune, Mary Ellen Podmolik, August 6, 2010]
The biggest problem w/these foreclosures is that they will be used for comps when buyers buy non-distressed properties. This will result in buyers being unable to get mortgages on these non-distressed properties w/o putting down a substantial amount of money (30-40%)
Buyers purchasing properties for their own personal residences are NOT the ones buying these forclosures (it is usually investors). This is because most buyers refuse (and should) to compromise their requirements for a personal residence (and very few distressed properties meet these requirements).
Foreclosures are only a small part of the larger picture. There still remains the issue of jobs, unrealistic sellers, underwater sellers, inability to come up with large down payments, HAMP modifications, and deflation.
Housing prices are slowly returning to realistic levels and those with a large down payment can take advantage of some ‘deals’; but, alas, searching the MLS for ‘deal’ is akin to scouring craigslist for a ‘deal’. 98% of the listings are completely overpriced and hence, languish, and the 2% of ‘deals’ get pounced on so quickly that you better be ready to make an offer within days of listing and hours of touring the home.
From what I’ve seen, much of the increase in volume is the lower end of the market being snapped up by 1) investors and 2) wanna be landlords picking up $200,000 two-flats. Most of the true lower end buyers bought prior to the expiration of the tax credit.
That’s not what I’m seeing.
3.5% down FHA loans continue to flow as freely as beer at Oktoberfest.
I’m still seeing people buy residences for $415,000 with large mortgages still in the $400,000.
“clio on August 9th, 2010 at 7:51 am
The biggest problem w/these foreclosures is that they will be used for comps when buyers buy non-distressed properties. This will result in buyers being unable to get mortgages on these non-distressed properties w/o putting down a substantial amount of money (30-40%)”
“We have not seen foreclosures become the market”
Why? Because foreclosure properties are in really bad shape or have lots of hair, generally speaking. Between that and your future buyer anchoring in on a low foreclosure price despite the broader market, I’d say foreclosures are no great bargain. 90% of buyers are not equipped to handle these homes so its best left to the pros (who deserve to make a little money for the risk and the expertise to turn places around).
You got it backwards clio. Sooooo many buyers are underwater and hence they have asking prices which exceed the balance of their current mortgage(s). Buyers today, in this economic climate, as a whole, are not willing to buy out some FB from their financial mistakes.
Hence, the ‘real’ market for today’s buyers is limited to: Foreclosures & fix-me-uppers, short sales, estate sales and long time owners.
So, I wish the best of luck to all buyers getting foreclosures and rehabbing for their own personal residences. That’s one of the only ways to buy a reasonably priced property in this market.
“clio on August 9th, 2010 at 7:51 am
Buyers purchasing properties for their own personal residences are NOT the ones buying these forclosures (it is usually investors). This is because most buyers refuse (and should) to compromise their requirements for a personal residence (and very few distressed properties meet these requirements).”
Clio beat me to punch. Ditto.
“The biggest problem w/these foreclosures is that they will be used for comps …” I know others will disagree. But I do not see this as a “big[] problem” and think it would be FANTASTIC if people saved to put 30% down. That is not so far above the 20% people USED to put down, and if prices are falling the way they should putting 30% down should not be so hard to scrape together. The problem is that people will not adjust their expectations to realistic levels and live within their means.
“This is because most buyers refuse (and should) to compromise their requirements for a personal residence (and very few distressed properties meet these requirements).” I agree there’s a different market for buyers of foreclosures (investors, as you say, but also people looking for a personal residence who could not otherwise afford what they’re looking for and/or just feel the need to take advantage of a great deal). But I’m NOT convinced that foreclosed properties are, as a subset of the market, so different from the market as a whole in terms of buyers’ “requirements.”
” Buyers today, in this economic climate, as a whole, are not willing to buy out some FB from their financial mistakes.”
True – but buyers today are also unwilling to take on most distressed properties. Buyers still have very high expectations and are unwilling to move into many of the properties that are in foreclosure/short sales. I agree w/ JMM when he says that 90% of buyers are not equipped to handle these homes – thus the stalemate between sellers of non-distressed properites and buyers continues…..
HD — Trees for the forest. You worry about valuation but valuation is i) subjective and ii) relative. The simple fact is valuation and transaction volume are the market — not what you think the market should be.
Interest rates are low and perceived valuations are also low. Buy a well maintained property at 2010 prices. Future buyers will anchor on 2010 price as “post-crash” and you will likely get out even or better in 10 years. Plus you have the best hedge on inflation ever — 4% 30 year money.
Your economic concerns are fully mitigated by future inflation.
More signs of future wage inflation from today’s WSJ:
“Some Firms Struggle to Hire Despite High Unemployment”
http://online.wsj.com/article/SB10001424052748704895004575395491314812452.html
PS — we used to import skilled labor to address our own educational, training and workforce deficiencies. Obviously, the political climate has frustrated this, which is another upward pressure on wages.
JMM, you’re missing the larger picture. The same (“The simple fact is valuation and transaction volume are the market”) could be said four years ago, when the value of a home was based upon what a minimum wage earner could borrow – which in some cases – of people I personally know well – was about a million dollars. The market was hot, volume was high, and the banks were giving cash back at closing – essentially paying someone to buy a house!
But it’s not like that anymore. The market is reverting back to what pricing ‘should’ be and what ‘should’ be isn’t based upon what I want it to be – its based upon what qualified buyers can afford to pay. And the fact, which you seem to routinely miss, is that there are not enough qualified buyers to pay today’s ridiculous listing prices.
Which is why the government now pushing on a string to keep prices high with tax credits, MBS purchases, low interest rates….etc.
1999 housing prices is where it’s going. What the bubble giveth, the bubble shall take away.
And in response to the WSJ’s claim of wage inflation, here’s a link to an article which dismisses the anecdotal evidence of the inability of employers to find employees as a bunch of crock.
http://www.nakedcapitalism.com/2010/08/why-is-the-journal-mystified-that-some-employers-are-having-trouble-finding-workers.html
JMM,
U.S. Underemployment Steady at 18.4% in July
http://www.gallup.com/poll/141770/Underemployment-Steady-July.aspx
It just sounds absurd to be talking about wage inflation when there is an 18.4% underemployment rates.
Here’s another story for you from cnn – apparently there’s an under supply of housing too!
money.cnn.com/2010/05/11/real_estate/home_supplies_shrinking/index.htm?section=money_realestate
Foreclosures aren’t the market in the green zone unless you are in a distressed high rise where all your neighbors are foreclosures/short sales (a la Invsco type buildings).
A ton of foreclosures on the west side/south side though and they are setting the market in those areas from what I have seen. Not sure if the stats bear it out, but it is what I see from the deals coming across my desk.
PPS- People HATE to lose money. When I worked on a trading desk, that was the single biggest issue inhibiting good trades and proper risk management — professional traders struggling to take a loss and move on. And these guys were pros. Part of it was admiting a mistake or an outcome that was unforseen. But most of it was the psychological bruise of losing.
I personally know of several younger families that want / need larger housing options in the city. They can afford it and have growing incomes and stable jobs. And, they can afford 25% to 30% down on 7 figure SFHs. But… NONE of them want to lose money.
You see this when people go to sell. Realtors can attest that getting buyers comfortable with taking a loss can be a long drawn out process.
My own personal view is that time will help this. It’s the 7th stage of grief! Acceptance and hope… Lol.
“They can afford it and have growing incomes and stable jobs. And, they can afford 25% to 30% down on 7 figure SFHs. But… NONE of them want to lose money.”
JMM – are they not buying b/c they are afraid of losing money or because they are holding out to see if they can get a better deal on something?
In terms of sellers, I truly believe that if they are able to hold out for a couple of more years, things WILL be much better than they are now (though obviously not what they were like in the mid 2000s).
Russ: foreclosures are all over. They’re concentrated in the bad neighborhoods but believe me, they’re there.
A lot of foreclosures or pre-foreclosures in the green zone have gotten loan modifications.
They’ll arrive in time. Green zone occupants are not immune to the market forces merely because of the location in which they chose to purchase.
“what a minimum wage earner could borrow – which in some cases – of people I personally know well – was about a million dollars.”
A friend of yours–who was making about $13k/year–got a $1,000,000 mortgage? Or are you (again) damaging your valid point with absurd exaggeration?
“And in response to the WSJ’s claim of wage inflation, here’s a link to an article which dismisses the anecdotal evidence of the inability of employers to find employees as a bunch of crock.”
Thanks for citing some random blog, but I’ll stick with the WSJ. Obviously the article annoyed you enough to do a google search that even Anon would be jealous of…
I heart REO’s – best investments ever!
“Obviously the article annoyed you enough to do a google search that even Anon would be jealous of…”
What’s the problem? Seriously.
Clio —
Losing money. Hard stop.
Most people that I know look at housing as a cost, not an investment. Many of these people are professional investors as well, so that should tell you something.
They look at it as follows: your equity is a deposit and the mortgage and taxes are the cost. If you don’t lose any of your deposit, the monthly operating costs are very reasonable at these interest rates. Therefore the critical assumption is — will I incur unforseen additional costs (above mortgage and taxes). If the answer is yes or is uncertain, then so too is the cost of the transaction.
“Green zone occupants are not immune to the market forces merely because of the location in which they chose to purchase.”
true – but if they can hang on long enough, the market forces will change. remember, people have NOT been investing as much in the stock or real estate market in the past 2 years because they jave been scared. They are leaving this money that they would have invested (earned income) as cash. As soon as more stable economic news comes out, these people will start re-investing.
Average Hourly earnings is going up so I don’t see deflation…
http://www.reliableplant.com/Read/25677/Average-hourly-earnings-workers
especially since bernake is even talking about quantative easing #2! to try to prevent that from happening
Citing studies or data that purport to show a shortage of housing or workers seems to me like relying on the weatherman’s predictions of a clear day while watching the rain pour.
it’s true that most people don’t know WTF they are talking about or what is going to truly happen (including me). The only thing that is certain is what is going on right now.
I can tell you that I have investors (including myself) who are willing and able to buy any great distressed properties out there (especially in the “green zone” -however, they are exceedingly rare (the good ones).
I agree with Clio. I see this all the time. Most homeowners do not want to take the equity hit to get out of their property in a timely manner. I don’t know if it is that the Realtors do a really poor job of explaining things to their listings or what it is, but most homeowners would rather just pay the carrying costs of the PITI for two years rather than just price the property low enough to get it sold almost immediately even if the end result is the same.
24 mos of PITI could be $60k (2500/mo) versus just dropping the price $60k from the start.
“Green zone occupants are not immune to the market forces merely because of the location in which they chose to purchase.”
Most highly compensated professionals other than law I know are doing better than a year ago. Financial services is surprisingly busy and strong, consulting has held up well. Corporate is sitting on a ton of cash and there is a dearth of good upper management replacement candidates for boomers.
Many of these same people paid off their second when the refi’d or went from a 90% LTV to a conforming by equitizing. Balance sheets are not as weak as you suggest. Again, this is the higher end in the city, which tends to be an owner that is late 30s to early 40s with increasing incomes (not at peak salaries). The lower end, condo markets and suburbs are different stories. Especially the suburbs where your owner is worried about retirement and bought a house that is WAY too big for them and now needs to downsize.
“Citing studies or data that purport to show a shortage of housing or workers seems to me like relying on the weatherman’s predictions of a clear day while watching the rain pour.”
Which is just what happened yesterday, right? And the Cubbies still played like crap in the sunshine.
JMM:
I’ve had this discussion with quite a few people in regards to the unemployment rate. Most of the folks in my social circle and clients are doing pretty well right now. In fact, I only know of one person who has been habitually unemployed and it is because they don’t have any meaningful qualifications (really spotty work experience).
My theory (also mentioned in that WSJ article) is that a lot of the unemployed right now are damaged goods. In boom times, this doesn’t matter as companies need anyone, whereas now it matters because companies can pick and choose from the best. Folks are either significantly over qualified so companies won’t hire them as they know they are going to leave as soon as something else comes along OR they aren’t really qualified for any meaningful positions (no degrees or extensive work experience).
Anon(tfo) – I’m not exaggerating. unfortunately due to confidentiality reasons I cannot link to the foreclosure but let’s just say I’ve known the owners since I was 15 years old. To add insult to injury the $1,000,000 loan, in the green zone off the blue line, was a refi of another $1,000,000 loan.
JMM – it both rained and was sunny yesterday.
Things might be well for the upper end, and those corporate, law and consulting gigs of which you speak, but for at least 18% or more of the workforce, things pretty much suck.
18% UNDER employment is a subjective number and its reliability as a statistic is questionable.
Gee, I’d LIKE to make more money (by way of more hours) so I am underemployed.
Gee, getting a job is a pain in the butt so I am taking some time off to play with my kids. Or I just cannot handle rejection, gee that is tough, I will wait until things are better.
I’m sorry but I will stick with — I am looking for a job and cannot find one as a measure of economic health.
Wow, you’re whistling past the graveyard ! Damaged goods? I know plenty of highly talented and qualified people: accountants, chefs, construction workers, IT, carpenters, lawyers – who’ve been laid off. There’s no work out there. And companies are unwilling to hire even if they have excess work.
Please, please, please, don’t go outside of your social circle espousing that the unemployed are ‘damaged goods’ and that’s why they don’t have a job. You’re liable to get a right hook to the face. It sounds so arrogant, so naive, and borderline offensive.
“#Russ on August 9th, 2010 at 9:14 am
JMM:
I’ve had this discussion with quite a few people in regards to the unemployment rate. Most of the folks in my social circle and clients are doing pretty well right now. In fact, I only know of one person who has been habitually unemployed and it is because they don’t have any meaningful qualifications (really spotty work experience).
My theory (also mentioned in that WSJ article) is that a lot of the unemployed right now are damaged goods. In boom times, this doesn’t matter as companies need anyone, whereas now it matters because companies can pick and choose from the best. Folks are either significantly over qualified so companies won’t hire them as they know they are going to leave as soon as something else comes along OR they aren’t really qualified for any meaningful positions (no degrees or extensive work experience).”
Gallup? You question the results of a Gallup poll? It’s not like it’s the undergrad economics dept of ISU taking the poll JMM, it’s Gallup.
You don’t like the results so you’re now attacking the unemployed saying that their results are too subjective? Wow, this is an arrogant bunch here. Pray that you’re not the next guy who gets the pink slip the next time corporate downsizing occurs.
it’s easier to swim downstream than upstream in most careers.
“#JMM on August 9th, 2010 at 9:20 am
18% UNDER employment is a subjective number and its reliability as a statistic is questionable.
Gee, I’d LIKE to make more money (by way of more hours) so I am underemployed.
Gee, getting a job is a pain in the butt so I am taking some time off to play with my kids. Or I just cannot handle rejection, gee that is tough, I will wait until things are better.
I’m sorry but I will stick with — I am looking for a job and cannot find one as a measure of economic health.”
“unfortunately due to confidentiality reasons I cannot link to the foreclosure”
That wouldn’t tell the other half of the story–the part I am dubious about–in any case. $13k income with no meaningful assets? So s/he/they absolutely, knowingly lied on the mortgage application?
“JMM – it both rained and was sunny yesterday. ”
Thanks for that observation. Point was, relying on the weatherman for a sunny day whilst it was pouring in the morning is was precisely the correct call (which makes the analogy sort of, well, not good). I am sure if you re-read it you will get it.
Yes. Stated income loans were a scourge. remember the NINJA loan? No Income, No Job or Assets?
“So s/he/they absolutely, knowingly lied on the mortgage application?”
HD:
It wasn’t meant to be offensive, but I am calling it like I see it. I hope you aren’t so naive to think companies don’t think about it the same way.
You will not get hired if you are over qualified and you will also not get hired if you don’t have spotless and specialized work experience. The reality is that our job market is being severely constricted between low pay/low qualifications jobs (think retail cashier) and high pay/high qualification jobs (think biglaw, consulting – jobs that require graduate degrees and specialized experience).
The folks in the middle are left out in the cold.
“You don’t like the results so you’re now attacking the unemployed saying that their results are too subjective? Wow, this is an arrogant bunch here. Pray that you’re not the next guy who gets the pink slip the next time corporate downsizing occurs. ”
UNDERemployed is not UNemployed (which you know but are too lame to admit).
One measures points of fact (I am unemployed, am searching and cannot find a job). The other measures subjective views on whether a respondent would like to make more hours or whether they are frustrated with their job search. Interesting, but subjective. It is also heteroscedastic, which is just a fancy word to say the concept of what UNDERemployed is has changed over time because perceptions have changed over time.
Unemployment is factual, and therefore is reliable in historical comparisons.
You know this, but are annoyed someone is calling you out on it.
I take issue with the comment about rising incomes – maybe in certain segments they are rising, but i can name many that are still not at the level of 2007. Accounting, consulting, and legal jobs still don’t pay as much as the peak.
Also, there are still many MBA’s (from top schools), CPA’s, and other professionals who are unemployed and can’t find work. This is the worst it’s been since the early 1970’s.
“The folks in the middle are left out in the cold.”
Which is exactly what is shown in the WSJ graph of “middle skilled” in the above referenced article.
It is also the reason why SFHs in Chicago tend to be somewhat durable as they are not likely to be purchased by a cashier or a $20 / hr union guy.
“can’t find work”
Can’t find any work or work they deem to be desireable?
Sort of like the unrealistic seller with a 20% overpriced home that can’t find a buyer. Is it them or is it the market?
“Sort of like the unrealistic seller with a 20% overpriced home that can’t find a buyer. Is it them or is it the market?”
great analogy!! but what is the answer? should the unemployed person/seller hold out or “give in”? there are good and bad points for both!!!
My point about can’t find work – a 32 year old CPA laid off in late-2009 who had been earning $125,000. Now he can’t find anything that pays more than $80,000, that would also be a significant demotion. What should they do? Accept the job and work their way back up over the next 5-7 years.
Good news is with employment, we’re in an at-will employment world. Take the job and hop when the situation improves. Same cannot be said for a transaction which is realized and done.
What Russ points out, and it is a very good point, is a lot of people aren’t going to see the pot at the end of the rainbow when/if the employment situation improves. They are, as he colorfully puts it, damaged goods. Or goods that think they are worth a lot more than they really are.
“What should they do? Accept the job and work their way back up over the next 5-7 years.”
Yes.
What if they had been making $160K and now can only get $75k? Take that one too?
if they can’t get anything better and have been searching for a long time… yes
You didn’t call me out on anything, in fact, you attempted to call out Gallup because you don’t like the results of their poll and then you proceeded to lay out a BS argument about how you don’t like the definition of underemployed. Take up your methodology with Gallup, not me. They may have a hot line you can call if you don’t like the results of their polls.
“You know this, but are annoyed someone is calling you out on it.”
JMM – now you’re contradicting yourself.
You tell the $125k employee to take $80k yet you say there is wage inflation down the road.
Which is it? a $45k hair cut for the accountant which is wage deflation – or, the lawn mower repairman in the WSJ article complaining of wage inflation?
How long will it take the accountant to increase his salary from $80k to $125k? How many years?
“#Dave M on August 9th, 2010 at 10:08 am
What if they had been making $160K and now can only get $75k? Take that one too?
“
“What if they had been making $160K and now can only get $75k? Take that one too?”
$75k is *still* about a 80%-ile salary. And, as anyone can tell you, it’s easier to find a job when you have a job. But I guess holding out for top 5%-ile job is a strategy.
“if they can’t get anything better and have been searching for a long time… yes”
Define “long time”. I’d feel like 6 months is a long time to be actively looking, and that’s *with* a job. w/o a job, a 6 month gap is enough to slip into “damaged goods” territory, even with nothing else.
“heteroscedastic, which is just a fancy word to say the concept of what UNDERemployed is has changed over time because perceptions have changed over time”
Not exactly correct.
“a $45k hair cut for the accountant which is wage deflation”
Not necessarily. Depends what the job categories/descriptions is/was. Wage inflation isn’t a *personal* stat.
So when the accountant is making $125k he’s a high incomer earner with skills, but when he happens to be laid off for reasons beyond his control, he’s damaged goods?
And now that he’s only making $80k it’s not wage deflation (at least not officially)? It’s not like he was fired and then they hired someone else at $125k to replace him. That $125k a year job is gone … and the guy who used to make $125k is now making $80k.
“So when the accountant is making $125k he’s a high incomer earner with skills, but when he happens to be laid off for reasons beyond his control, he’s damaged goods? ”
Are you saying you know *no* lawyers who lost jobs at larger firms? And/or how they are perceived by future potential employers?
There’s no way to know–from a resume–whether he was laid off for reasons beyond his control or not, and, unless the company went ch.7, there is an assumption that the laid off worker wasn’t good enough to keep.
On the deflation thing–if at $125k Joe was a Senior Acct, and at $80k Joe is a Junior Acct, but in 2008, Junior Accts generally made $60k, then, yes, there is clearly wage inflation even tho Joe took a major pay cut. Is there “wage deflation” when people leave corporate jobs to become teachers? Is the fired CEO of HP evidence of wage deflation? Because that’s what your formula would indicate.
I think the “damaged goods” comment is being taken too personally. What I think the original poster meant was that companies tend to lay off high income/lower producers non-essential employees first. To some, it can be a kind of scarlet letter (no matter how untrue it is!!)
Let’s say they were an accounting manager before and are now a senior accountant. The employee was laid off because previously there were 4 accounting managers and now there are 3. They were laid off because they earned more than the other 3.
The senior accountant position previously paid $85 in 2008, and now pays $80.
There were quite a few partners let go at the bigger firms in Chicago. Some were non-equity partners, but there were quite a few equity partners let go too. It divides up the pie amongst fewer people. Often the let go partners either retired early, or if they were too young and not rich enough to do that, they had to go to a smaller firm and accept 30-40% less pay. This was a common occurrence in 2009 in Chicago.
And I didn’t even mention associates. That is another story.
Oh boy, I seriously hope that none of you are reduced to pounding the pavement looking for a job this recession. Searching for a job can be humiliating and humbling at the same time.
You’ll find out exactly what it means to know that you weren’t good enough to keep around
“You’ll find out exactly what it means to know that you weren’t good enough to keep around”
I hope you are being sarcastic – I truly hope that people who get laid off realize that it is a function of the economy and NOT necessarily performance related.
“There’s no way to know–from a resume–whether he was laid off for reasons beyond his control or not, and, unless the company went ch.7, there is an assumption that the laid off worker wasn’t good enough to keep.”
“I truly hope that people who get laid off realize that it is a function of the economy and NOT necessarily performance related.”
U-3 as of July 2010 : 9.5%
U-6 as of July 2010 : 16.5%
http://www.bls.gov/news.release/empsit.t15.htm
That’s an awful lot of unproductive workers. I’m so glad that us producers, the valuable ones in this economy, are still keeping our jobs.
And in fact, we’re doing better than ever!
“Oh boy, I seriously hope that none of you are reduced to pounding the pavement looking for a job this recession. Searching for a job can be humiliating and humbling at the same time.
You’ll find out exactly what it means to know that you weren’t good enough to keep around”
I was only talking about perception, and the wisdom of holding out for a job you think will pay enough relative to what you were making before. You regularly decry the funny money of the past decade–some of that was flowing thru to employees. I think holding out for another $125k job, if one has an $80k offer, is not necessarily smart and may lead to one appearing to be damaged goods when that 3 months of UE turns into 9 or 12 or 18. And damaged goods b/c you were the first one laid off (or do companies regularly just draw lots to see who loses their job in an economic layoff?), or b/c you appear to not “have the drive” to work, or b/c you appear to think you’re too good to take a job that pays less and/or is a “demotion”. Ignoring the perception issue is a problem in the job hunt, too.
In reality lots of times they just lay off entire divisions or shut down entirely. My neighbor spent 15+ years at a large national RE firm and they laid off all but a handful of accountants to clean up the mess. Everyone in her division was escorted out and she had to leave everything. A year or so ago she was lamenting the years of work and knowledge and projects, templates, files, documents, that were on her hard drive that have all gone to waste. She’s still not working.
Her boyfriend/partner whatever you want to call him was a computer programmer who was laid off from a fortune 500 company after 25 years and they outsourced his job to india. Fortunately he claims he’s a millionaire from investing and livign frugally over the years so he never bothered to get another job and since he’s not even looking (which would be fruitless and pointless at this point in this market) he’s now retired he’s counted in the U-6, discouraged workers to stopped looking.
I’m not discounting the perception but its just a myth. there’s a woman I know who did hiring in the 80’s and 90’s for big four accounting/consulting firm and she said that even though she interviewed plenty of qualified candidates, she only hired people who were ‘polished’ – and that was her word and this consulting firm’s code word for big ten grads (or expensive private liberal arts grads) who grew up in rich suburbs of large cities throughout the midwest, and all the attendant cultural and societal influences that came along with that. So if you were an inner city kid who worked your way up, or if you were from a poorer suburbs but worked really hard, yet still a little rough around the edges, or a first generation college grad, you weren’t polished enough to work for this consulting firm.
Which is pretty much the way things are now, still. ‘Polished’. Nice code word. I wanted to slap her in the face.
“And damaged goods b/c you were the first one laid off (or do companies regularly just draw lots to see who loses their job in an economic layoff?)”
These examples are a lot more common than certain posters on here seem to believe. The job market often has a “country club” type of feel for certain types of positions. Hiring people with this right “pedegree” is similar to what used to happen back in the day more often. At the end of the day, I’d always hire the hungrier person over the spoiled rich kid. My company would do better in the long run with those kinds of people.
Commercial real estate was really hard hit. Over 1/3 of the industry’s jobs were eliminated in the last 2 years. Some have come back, but not many.
“I’m not discounting the perception but its just a myth.”
This doesn’t make sense. If it’s just a myth, then you should discount it, if you aren’t discounting it, it’s not a myth.
And I’ve had conversations with people in hiring positions and a big resume gap *does* cause a perception problem. Some people/companies get over it, some prospective employees overcome it, but that does *not* mean it isn’t a problem, in general.
maybe it’s time to go to medical school……
I think there’s different reasons for layoffs – here are 6 I can think of that are common:
1. For cause
2. Employee is let go due to performance, but not “for cause”
3. Corporate downsizing (eliminating positions entirely)
4. Layoff of an entire division
5. Outsourcing related layoff
6. Company is closing its’ doors/liquidating
I think they have varying degrees of stigma associated with them. Often it takes 4-6 months to find a job these days, and other than #1 or #2, these people laid off should try to present themselves in a positive light and be prepared to answer questions on the layoff, as they were driven by factors mainly out of their control.
HD:
A lot of companies take that position of looking for “polished” applicants because in general it is a lot less risky. Does that mean the polished applicants are going to perform any better? No it doesn’t, but it lowers the risk of them not. Not saying it is right, but a reality.
Firms focus on pedigrees because it just makes it easier during a bake sale to tell a client “our case team members are from top 5 business schools” It tends to take some of the sting off the client paying a few hundred dollars an hour to have a 27 year old with minimal work experience working on their project. I would imagine biglaw is the same… they have to justify those $160k salaries to 25 year olds who haven’t spent a day in court to clients some how. Much easier to do with a HLS or YLS grad than a John Marshall grad even if the John Marshall guy is just as smart.
During boom times, you don’t have to be “polished” as there are more positions than applicants. However, when things are slow, you very much need to be polished.
NakedCapitalism.com is one of my daily reads, and you will find it on many lists of top economic blogs. Yves Smith provides thoughtful analysis and daily links to stories I might not find otherwise. Don’t assume that because you don’t follow a blog that it must be obscure. IMO, in order to see through bias one has to read a lot of diverse viewpoints. You limit yourself if the only financial news you get is from the WSJ.
Naked Capitalism is found on many top economics blogs lists.
JMM”Thanks for citing some random blog, but I’ll stick with the WSJ. Obviously the article annoyed you enough to do a google search that even Anon would be jealous of…”
I think the point was that it was more the rich suburban kid getting hired than the inner city kid who acheived, even if they went to the same caliber of school. This “country club” hiring is bogus in my opinion, and like the good old boy network.
“Take up your methodology with Gallup, not me. They may have a hot line you can call if you don’t like the results of their polls.”
UNDERemployment rate is not exclusive to Gallup. They just execute the poll. I was pointing out the obvious flaws in that statistic, which you know, but gloss over because it is a more “scary” number. Did the BLS rip off Gallup on the U-6? Maybe you should call them and complain. Oh, looks like that number is DECREASING? Mostly because people are realizing its actually time to get back to work. A step in the right direction, even if it causes upward pressure on the true unemployment number.
“You tell the $125k employee to take $80k yet you say there is wage inflation down the road.”
No, actually, I say they should go from $0 (unemployed) to $80,000. That’s a heck of a better boost to our tax rolls and consumer spending than waiting, in vain I might add. $80k is a lot of money. Someone should be proud to earn that at age 32.
“Don’t assume that because you don’t follow a blog that it must be obscure.”
Ok so its a top economic blog and one of your daily reads. Point conceded. The WSJ tends to be a pretty respected rag on its own and this was just a trend story. I point it out because doom and gloom chooses to ignore facts or other evidence that does not support his case.
I’m not ignoring facts. The lawn mower guy in the WSJ article or the U-6? Which is more reliable?
“Much easier to do with a HLS or YLS grad than a John Marshall grad even if the John Marshall guy is just as smart.”
Just as smart eh?
Harvard: 173 LSAT and 3.85 GPA
http://www.ilrg.com/rankings/law/view.php/42
Yale: 174 LSAT and 3.87 GPA
http://www.ilrg.com/rankings/law/view.php/185
John Marshall: 154 LSAT and 3.14 GPA
http://www.ilrg.com/rankings/law/view.php/48
I never took the LSAT, thank god, but I do know the smarter kids scored higher.
One thing I do care about — the harder working the lawyer, the better the lawyer. 3.8+ GPA and some raw intelligence works for me anytime. And, apparently the rest of the world.
Ok Anon, I did google that, so I now am in a glass house. Sorry.
“Ok Anon, I did google that, so I now am in a glass house. Sorry.”
It’s better than just making it up, right?
I’m just peevish about being mixed up with Bob’s hardon for MWRD-stats.
The lawn mower guy.
Your arguments are old, weak and tired. 90% of what you spout is already well priced into the market. Look forward, not backward grasshopper. Wage inflation.
Apparently, many of us on this blog are in the “wrong indsutries” if we think there is a lack of wage inflation.
HD’s example of a million dollar loan on minimum wage is small compared to a fellow I know. He borrowed over 3 million with no income buying small apt buildings in nyc. then when they appreciated he refinanced… and this is the kicker… when he refinanced banks loaned him the new full value of the building without subtracting out the original loan. so he would buy a 3 flat for 500k, refinance a year later for 700k. and owe 1.2 mil on the place. he says the holders of the second mortgages are now offering to settle for 20 cents on the dollar. I’ve not seen anything in the press about this type of shenanigans but he did it on 3 different buildings.
Not sure where this talk of “wage inflation” is coming from. The U.S. Bureau of Economic Analysis saw incomes decline:
“Personal income declined in 2009 in most of the nation’s metropolitan statistical areas
(MSAs), according to estimates released today by the U.S. Bureau of Economic Analysis.”
http://www.bea.gov/newsreleases/regional/mpi/2010/pdf/mpi0810.pdf
If your industry is law, call it a correction, be thankful for what you have and move on. The days of hyper inflation are over!
http://www.nalp.org/2009septnewassocsalaries
2005 to 2009 CAGR = 6.4% Yee haw!
I’d guess CPI was up 2% during that same period.
“Thanks for that observation. Point was, relying on the weatherman for a sunny day whilst it was pouring in the morning is was precisely the correct call (which makes the analogy sort of, well, not good). I am sure if you re-read it you will get it.”
It was um, only an analogy (or, if you like, a simile). I didn’t mean it in a technical sense, nor did I put a morning/afternoon spin on it that you did. I think it is your interpretation that is “sort of, well, not good,” to use your words.
Of course you do. Lol.
Returning to real estate- the problem with the 32 year old who made $125k and now may take a job making $80k is that he bought a $400k condo three years ago assuming he would continue to make that higher salary (and more) in the next few years.
Is he able to pay the mortgage, auto loan, credit card debt and maintain his lifestyle on a salary cut of that magnitude?
In many cases the answer would be “no.” So what happens to the property? And now long does it take to be a distress sale?
That is why the housing bust still has years to play out.
Sabrina:
The answer is yes. 80k is a lot of money. Shame on anyone for not being able to afford a moderate lifestyle on that income. Since when does 80k not confer the ability to afford a 2/2 in Chicago? Hello?
One OTHER reason why — wage inflation. Don’t trust me, trust Buffet. Even so, I am sure HD will figure out a reason why he or a blog is smarter than Buffett…
“Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher.”
http://www.bloomberg.com/news/2010-08-10/buffett-shortens-duration-of-bond-portfolio-after-warning-about-inflation.html
“80k is a lot of money. Shame on anyone for not being able to afford a moderate lifestyle on that income.”
a person can live REALLY well on 80k one income family. very well!!!
“a person can live REALLY well on 80k one income family. very well!!!”
Agree!
If you can’t, you either are carrying heavy credit card balances, car loans, or are eating out and partying too much!
$80k for one person is totally do able.
$80k for a stay at home partner and two children becomes exponentially more difficult.
Up until recently (and arguably, even now) there’s no way someone can afford a 2/2 in the green zone on an $80k salary. The mortgage payment on a $320k mortgage is over half the take home of an $80k salary. Which is OK I guess if you want to be house rich and cash poor. – which, as we’ve learned from the past 6 years, is a recipe for foreclosure.
“$80k for a stay at home partner and two children becomes exponentially more difficult.”
still will have to say “nay” to that. 80k two kids and a homemaker is easily doable even in a good chicago elementary district.
a 320k mortgage is like $1600 a month… how is that half the take home of someone who makes $6666 per month? Or are you factoring in Obama’s tax hikes? 8)
PITI Sonies, $1,600 PI plus $350 taxes and $50 insurance…I didn’t even include HOA. $320k mortgage is a $400k place with 20% down.
And Bill Gross, among others, are predicting deflation. I don’t think anyone, including Buffett, is predicting “wage inflation” with unemployment where its at. A rise in commodities prices does not equal a rise in wages.
“One OTHER reason why — wage inflation. Don’t trust me, trust Buffet.”
“PITI Sonies, $1,600 PI plus $350 taxes and $50 insurance…I didn’t even include HOA.”
And take home, w/ 3 W-4 allowances, is $5325/month. Again, how is that “over half”? Maybe “too much”, but not half, and certainly not “over half”.
“still will have to say “nay” to that. 80k two kids and a homemaker is easily doable even in a good chicago elementary district.”
Certainly in Groove’s favored NW neighborhoods that’s correct. I know a couple with 2 kids that lives out there. Wife is stay at home. Not sure what husband makes exactly but $80K would have been right around my guess. They have a mortgage that I would guess is in the mid $200K range. I believe they have no sizeable student debt. They have what they would consider a pretty comfortable life although they do budget carefully.
“And take home, w/ 3 W-4 allowances, is $5325/month. Again, how is that “over half”? Maybe “too much”, but not half, and certainly not “over half”.”
Amen. Don’t forget to add $500 per month just for groceries. Ask any BK trustee that is what people eat nowadays. Must be a millionaire to afford a $400k condo…
Anon(tfo) – So maybe half was an incorrect calculation. But regardless, a $320k mortgage is 4x income and is still too much.
“Anon(tfo) – So maybe half was an incorrect calculation. But regardless, a $320k mortgage is 4x income and is still too much.”
You’re inclined to exaggeration-for-effect, but the effect is that we all pick on the exaggeration and ignore the underlying (usually valid) point.
I ignore his point here (really Sabrina’s) becuase it is not valid. 4x income is the outer bound, but remember this is the “I choose not to take this job because I made 125K before” income — hypothetically.
In a do-or-die situation 320k mortage is EMINENTLY reasonable. Not to mention, this hypothetical chap’s amortized balance 3 years in is more like 300k and not 320k.
So here is what the chap does:
1. Takes the 80k job
2. Refinances into a 5 year ARM @ 2.875%
3. Total PI of $1,250
4. Find a higher paying job and refinance or sell in 5 years
What is the problem? Seems like a very reasonable and sustainable outcome to me.
New law bans credit checks on job applicants
http://www.chicagobreakingnews.com/2010/08/new-law-bans-credit-checks-on-job-applicants.html
So much for the boogeyman argument from many of the moralists on here that you can be scarred job hunting from a foreclosure. It was likely never a widespread practice to begin with in any case.
Problem is:
1.rates could go up (Warren Buffett thinks so), which could make refinancing very expensive. ARMs are risky.
2.employment does not recover and even the 80k job could be lost.
3. what you think is reasonable and sustainable could be wishful thinking.
“4. Find a higher paying job and refinance or sell in 5 years
What is the problem? Seems like a very reasonable and sustainable outcome to me.”
5 years buys you a tremendous amount of flexibility and no one stays in a 2/2 for that long anyway. And rates will go up for sure. So if you want to stay more than 5 years, simply go with a 30 year fixed at 4%. HD was complaining about how expensive it is. All I pointed out is that 5 year ARMs are less than 3%. Seems like a pretty easy way to solve the income issue.
Any job can be lost (he could get hit by a bus too). If you lose your job and you cannot afford your rent, you are screwed as well… And you can take a roommate on in a condo you own as easily as in a rented place.
This is a stupid example to harp on. Hypothetical person in question HAD a job offer for 80K! Most people have trouble even getting another offer, lol. That is more than the majority of people in this city will make next year. Give me a break.
Wow, I like our debates JMM, but your #2 and #4 puts you on the same level as the subprime mortgage brokers. If I had a dollar for everytime I heard some broker say “take out an ARM and then refi or sell in 5 years” I’d be a rich man. That was a mantra for brokers in 2004.
“2. Refinances into a 5 year ARM @ 2.875%
4. Find a higher paying job and refinance or sell in 5 years
What is the problem? Seems like a very reasonable and sustainable outcome to me.””
Bill Gross thinks rates will stay low for two or three years. Personally, I don’t see Bernanke raising them until GDP and employment growth are improved. So a lucky buyer may be able to take advantage of low rates and increasingly lower prices for some time.
“And rates will go up for sure.”
“Wow, I like our debates JMM, but your #2 and #4 puts you on the same level as the subprime mortgage brokers. If I had a dollar for everytime I heard some broker say “take out an ARM and then refi or sell in 5 years” I’d be a rich man. That was a mantra for brokers in 2004.”
Not to defend every broker out there, but I don’t think anyone thought people wouldn’t be able to refinance. People can’t refinance for a lot of reasons:
1) Borrower didn’t do as instructed to improve credit, so conventional financing was not an option. This was the biggest issue with subprime borrowers. THey continued their subprime habits after getting a restart
2) 2nd mortgages won’t agree to remain subordinate behind a new first mortgage. We see this a lot. All you want to do is a rate/term refinance on the first but second mortgage lender holds you hostage.
3) Programs don’t exist anymore to refinance into. Had an 80/20 but no 80/20s exist now.
4) Things out of your control like too many neighbors renting their units out. HOA involved in lawsuits. Investor concentration. PMI won’t insure condo, etc.
An $80k job could afford a $300k mortgage if they are relatively frugal. Not ideal, but they shouldn’t be struggling if they have a reasonable budget.
I am far from a mortgage broker. But I am correct in my assertion that low rates are a boon to deteriorating financial circumstances such as that which was described. You can afford your condo on an 80k salary, anyone else who says you cannot is full of crap.
As for the bogeyman of rising interest rates — At 2.875% for a 5 year ARM, the new 5 year ARM rate would have to ae a whopping 5.650% for the next 5 years (years 5-10) for you to be any worse off from a cost of money standpoint than the current 30 year rate (4.25% assumed). That is 140 bps higher in 5 years than 30 year money (which the market has priced to be 4.25% in 2040). Someone has to be terribly wrong and I am guessing it is not the billions of dollars traded by professional investors.
EVEN SO — GUESS WHAT? BY THAT TIME, YOUR MORTGAGE HAS AMORTIZED FROM 320K TO $265K AT YEAR 10.
So, on a payment basis, your interest rate would have to balloon even higher, because your refi principal is now lower at year 10. Sure, money might cost more, but from a “CAN I STAY WITH AN 80K A YEAR JOB?” and make a fixed payment, you can take 7%-ish interest rates and still be close to the same payment.
Though it is rare, I would be willing to wager people do read this blog and inform themselves. Thus, I think it is disingenuous and unfair to let the fear mongers spout nonsense when the finance and numbers CLEARLY say something else.
JMM, if you have to use the word ‘clearly’ (in all CAPS too) then maybe it’s not so clear after all…
I have friends making in the 70’s and they’re struggling with two car payments w/ insurance, credit card debt and a young kid, and they rent for $1,200 a month. The ideal frugal tightwad fiscally astute person might be able to swing a $320k mortgage on an $80k salary but for most people it’s being house rich, cash poor and when life changes its a recipe for disaster.
HD —
The spending on items other than housing is the issue with your deadbeat friends.
Two car payments? Credit card debt? That isn’t a housing issue, that is a persoanl responsibility issue.
You blame house prices for all the woes, but you’re just biased because you cannot afford what you want and you spend most of your professional life cleaning after the worst 25% of financial trainwrecks in this town.
“if you have to use the word ‘clearly’ (in all CAPS too) then maybe it’s not so clear after all…”
HD — ok, so you think interest rates on a 5 year arm are doubling and going over 5.6% by 2015 but you also think nominal wages will decrease? These two observations clearly conflict, and you cannot have it both ways. Why worry about facts though when all you are doing is fear mongering anyway?
“interest rates on a 5 year arm are doubling and going over 5.6% by 2015 but you also think nominal wages will decrease? These two observations clearly conflict, and you cannot have it both ways.”
CLEARLY, even.
JMM, at $80k your putting somebody in to a 5 year ARM with a mortgage at 4.0x income.
It hardly worked in 2006 and it barely works today.
It requires a fiscally astute financially responsible person with no car payments, no student loan debt and a large down payment.
20 or 30 somethings in that scenario might be common in the north shore, east of Green Bay road, but outside of the John Hughes fantasy world, those people are far and few between.
If they were so common, hell, there would be no woes in the market and we’d all be living in prosperity again.
The “professional investors”, like Pimpco, seem to have the inside track on what the fed is going to do next. Its hard for the “nonprofessional investor” to keep track of all the players. Even Mish is talking conspiracy theory today. A lot of people have completely lost trust in the markets’ integrity and just try to keep out of the way while the sharks consume each other.
“As for the bogeyman of rising interest rates — At 2.875% for a 5 year ARM, the new 5 year ARM rate would have to ae a whopping 5.650% for the next 5 years (years 5-10) for you to be any worse off from a cost of money standpoint than the current 30 year rate (4.25% assumed). That is 140 bps higher in 5 years than 30 year money (which the market has priced to be 4.25% in 2040). Someone has to be terribly wrong and I am guessing it is not the billions of dollars traded by professional investors.”
Are there 10 year arms? I’d be interested in something like that if rates are low enough
“Even Mish”
Like he’s the frickin paragon of debunking conspiracy?
“Are there 10 year arms?”
There are/were. But I think they are not widely available now.
” At 2.875% for a 5 year ARM, the new 5 year ARM rate would have to ae a whopping 5.650% for the next 5 years (years 5-10) for you to be any worse off from a cost of money standpoint than the current 30 year rate (4.25% assumed).”
Is it easy to qualify for this type of mortgage? This seems like a teaser rate – in my experience they usually increase rates for investment properties and/or make you pay points, etc. If you know of someone who can get me a similar rate on investment properties, I have a few million dollars worth of refinancing I would pursue.
Many people I know are doing re-fi’s on conforming loans less than 417k.
So say 400k at 3.75% no closing costs 7 yr arms.
I know its not a 10 year ARM but its pretty sweet.
“So say 400k at 3.75% no closing costs 7 yr arms.”
Again – what mortgage companies/brokers are these people using? I don’t believe it at all.
Not really. Just a passing observation. Sorry to offend you.
“Like he’s the frickin paragon of debunking conspiracy?”
“Not really. Just a passing observation. Sorry to offend you.”
Not offended, but many on the ‘tubez cite Mish as if he’s the GD oracle of global finance. He (may) know slightly more than most of us and about the same as Gross, or Soros, or Buffett, or any professional investor, and he has an undeniably interesting perspective, but that’s about it.
Best case scenarios right now that I am seeing: 20% Down, Single Family, >740 FICO, no points, loan above $300-$417k, typical lender, appraisal, title fees.
5/1 @ 3.125%
7/1 @ 3.375%
10/1 @ 3.75%
30 @ 4.25
If someone paid 1 pt, they could conceivably get a 5/1 at 2.75%.
He’s another of my daily reads, but most of the time he is focusing on unfunded public pension liabilities. Today he caught my interest with the fed stuff.
“Not offended, but many on the ‘tubez cite Mish as if he’s the GD oracle of global finance.”
“Best case scenarios right now that I am seeing: 20% Down, Single Family, >740 FICO, no points, loan above $300-$417k, typical lender, appraisal, title fees…..”
Thanks Russ – that’s been my experience as well. No cost closings on investment properties are NOT going to be less than 4-5 percent.
Why is today the best time to buy seeing that 1) tax credit is done (8k loss to those who missed it) & 2) with each successive week rates go lower?
I dunno where the floor is with mortgage rates but I’d have to think we’re close.
HD —
The 2.75% solution has you cornered here. No one is putting anyone into anything. The fact pattern is:
Own 400k condo
320 initial mortgage from 3 years ago
125k salary, now presented with 80k job but won’t take it
What ever is he to do? Maybe he should jump of a bridge? Boo hoo!
Well, he could also post here and complain about things. Or he could refinance the 300k balance he has on his original 320k @ 2.75% for five years, take the 80k job offer (and run — we pay our staff CPAs 1/3 less than that) and comfortably move from a $1,700 ish PI payment to a $1,200 ish PI payment. I know HD doesn’t like that math, but it is what it is. Does he not understand the math? That would be surprising but possible.
Wells Fargo 5 year conforming ARM is 2.75%!! Published rate. Read it for yourself.
https://www.wellsfargo.com/mortgage/rates/
So tell me HD, why doesn’t your 4x ratio change as rates come down? I don’t understand — the payment is decreasing, so the debt service is less too. Isn’t the debt service the point (the actual cash cost of the loan)?
Why, yes it is.
And HD who sticks to rules of thumb that were developed when rates were at 8% or 10% is mistaken because he cannot calculate the payment sensitivity to interest rates (or he pretends not to be able to). Even 30 year rates (read: zero risk) have come down 50% or more. Lower borrowing cost = less income needed to qualify for the same fixed payment. Seems to call his uninformed “ratio” into question, doesn’t it?
Now, I am all for more equity in houses rather than less. But the point at issue is a refinance for someone who lost their job and is confronted with a lower paying one. I’d argue his borrowing cost went down more than his income.
“The ideal frugal tightwad fiscally astute person might be able to swing a $320k mortgage on an $80k salary but for most people it’s being house rich, cash poor and when life changes its a recipe for disaster.”
HD,
i wonder what you think of me? As i am around the 90k level one income, a kid, have a mortgage a HELOC, 2 car payments, rent of $1675, a parking spot payment of $225, lately a hefty dining out expense.
yet i survive and still max out my 401k, built a small portfolio and have reserves that have reserves, savings for college (private school if needed).
and if fired or downsized you wont see me across your desk for at least two years after unemployment runs out.
so as i say 80k is a comfortable life.
Russ is there some sort of mortgage amoritization & payment comparer for say
30 year fixed @ 4.875% (my current loan)
vs.
7/1 arm @ 3.375
320k loan amount, less than 2nd year of amo on the 30 year… if I refinanced (can FHA loans be refinanced into arms?)
and whats the maximum rate the ARM can reset to?
“If someone paid 1 pt, they could conceivably get a 5/1 at 2.75%.”
Russ —
You must be losing business to Wells. They are cleaning your clock buddy. Sucks not to have a retail presence and a balance sheet doesn’t it?
Once again and for the benefit of all:
https://www.wellsfargo.com/mortgage/rates/
Groove:
HD doesn’t think less of you. He just believes in hyperbole and fear mongering that is not supported by facts, market information or simple math.
It’s a paper mache high school debate tactic from his days at PHS. Say it enough times and vocally enough, and people may accept it as truth.
JMM – guaranteed rate loans are even cheaper than wells fargo…
“i wonder what you think of me? As i am around the 90k level one income, a kid, have a mortgage a HELOC, 2 car payments, rent of $1675, a parking spot payment of $225, lately a hefty dining out expense.”
I think HD would have been fine with you, until you started summering in lincoln park. I would berate you for your 2 car payments except that I know you need one to commute. You could wait a while before buying a new car again though…
Groove, you have rent and a mortgage?
JMM…
Retail banks are a non factor by in large. I could sell a loan to Wells cheaper than they would offer their own employees.
That link you provided assumes the borrower paying 1 point. See their small print. The only rate that matched with what I posted was the 5/1 ARM which again assumes you pay 1% in points which is exactly what I said.
The 30 year on that link is at 4.5% with 1 point versus what I said at 4.25% with NO POINTS.
Banks with a retail presence are almost always more expensive. Someone has to pay for all those executive salaries, names on stadiums, g4 flights, and bank branches.
“I would berate you for your 2 car payments except that I know you need one to commute.”
And 1.5 to leave in the driveway …
Wow, all this academic discussion about how $80k CPAs can afford $400k condos conflicts with what is actually going on in the marketplace.
Too bad the market isn’t minting nearly enough $80k a year CPAs to buy up all the $400k condos. It doesn’t make any sense because making $80k a year with a $320k mortgage perfectly compliment each other.
New purchase mortgage applications are at levels not seen since 1995! Look yourself if you don’t believe me!
http://calculatedriskimages.blogspot.com/2010/08/mba-purchase-
index-aug-11-2010.html
Damn it! Why aren’t all the $80k a year CPAs buying $400k condoze! It makes sense financially. See, look at the numbers! Do it, go buy! It makes sense! get a 5 year ARM with 1 point, don’t carry any other debt and you too can afford a $400k condo on $80k a year salary!
I mean come on, housing is priced appropriately
“#JMM on August 11th, 2010 at 12:54 pm
Groove:
HD doesn’t think less of you. He just believes in hyperbole and fear mongering that is not supported by facts, market information or simple math.
It’s a paper mache high school debate tactic from his days at PHS. Say it enough times and vocally enough, and people may accept it as truth.”
No Russ, those rates includes just a $650 origination charge. They’d waive it for an 1/8 on the rate so 2.750 becomes 2.875 which I was I used for the analysis above.
“Banks with a retail presence are almost always more expensive. Someone has to pay for all those executive salaries, names on stadiums, g4 flights, and bank branches.”
And someone has to pay your warehouse financing and underwriting costs. Your cost of funds is probably 3x that of Wells core deposits dummy.
Plus their rates subsidize new account acquisitions, which is why they are lower than a mortgage bank can offer.
Sonies:
There are a few calculators on line that show the amortization schedule. Generally if you are only 2 years in, you would go back to a 30 year or a 25 year.
Conventional ARMs have 5/2/5 caps typically. This means the first adjustment could go +5% above the start rate and each subsequent adjustment can only move up or down +/- 2%. So if you are at 3.75%, the max it could adjust to is 8.75%. Each year it adjust, it can only move that 2% up or down till it gets to 8.75% or the floor which would be 2.25%.
ARMs adjust once per year durign teh adjustment period. On the anniversary of the loan, the bank will look at the one year libor index and add 2.25% to it and that will be your rate for the upcoming year.
“JMM – guaranteed rate loans are even cheaper than wells fargo…”
Yes I would agree with that. Wells I think is more competitive on the jumbos however.
@ Clio
Regarding:
““So say 400k at 3.75% no closing costs 7 yr arms.”
Again – what mortgage companies/brokers are these people using? I don’t believe it at all.”
I have two data-points. I am not going to release the mortgage brokers names.
But each broker was selling the loans to BOA/Countrywide.
@ Sonies
Regarding:
“320k loan amount, less than 2nd year of amo on the 30 year… if I refinanced (can FHA loans be refinanced into arms?)
and whats the maximum rate the ARM can reset to?”
For my two data points at 3.75% no closing costs, the max interest rate
could jump to 8.ish
At 400k, the broker was getting about a 5500 YSP.
at Anon(tfo) and Groove:
““I would berate you for your 2 car payments except that I know you need one to commute.”
And 1.5 to leave in the driveway …”
Hey…a guys gotta have some outlets…
“It’s a paper mache high school debate tactic from his days at PHS”
JMM, nice a reference to Palatine is always funny in my book.
“You could wait a while before buying a new car again though”
Dz,
come on every 3-5 years gotta upgrade, wife is on a 5-7 schedule. btw i just upgraded and in 3-4 years will be the minivan being proactive now 🙂
“And 1.5 to leave in the driveway ”
Anon,
only good cars in the driveway, .5 in the garage, the 1 is on the street.
“I mean come on, housing is priced appropriately”
HD,
I am just trying to be your ying to your yang as you provide extreem examples of people living beyond what they should at 80k, i am giving myself as an example of a normal person who occasionally splurges and lives really good on that pay.
“Hey…a guys gotta have some outlets…”
….and yet I get berated for driving a lambo – hypocrites!!!
ok but can a 30 year fixed FHA loan be refinanced into a 7/1 arm?
“….and yet I get berated for driving a lambo – hypocrites!!!”
doode your cars total are the cost of my house, thats why.
“I think HD would have been fine with you, until you started summering in lincoln park”
DZ,
experiment done as of sept 1st. and wont be a repeat next summer.
JMM:
Sorry, you are incorrect. Any direct lender or broker’s overhead costs are no where near what it takes to run a retail bank operation. This is why there is a wholesale mortgage market because it is cheaper and easier for the larger depository institutions to essentially outsource the origination function to brokers and correspondents. Nearly every major bank has wholesale operations for this very reason – wells, citi, chase, bofa, gmac, etc not to mention a ton of banks you have never heard of.
The retail function is in place to solely capture borrowers who think that simply because they have a checking account at Too Big Too Fail Bank, they might as well get their mortgage there.
Every now and then a retail banks might try to buy the market, but rarely are they going to be cheaper across the board than solid direct lenders/brokers.
The wholesale market is exponentially cheaper and more efficient at originating mortgages.
@ Sonies
regarding:
“ok but can a 30 year fixed FHA loan be refinanced into a 7/1 arm?”
No idea.
DataPoint #1 was US Bank 30 year re-fi. 20% down. into 7/1 arm.
Datapoint #2 was brainfart 30 year re-fi. Brainfart into 7/1 arm.
Neither buyers were first time buyers.
“doode your cars total are the cost of my house, thats why.”
car, singular. No? b/c that list of 7(?) cars had an original MSRP well north of $400k.
Actually, in my McKinsey days we looked at the synergies and you are missing them completely. Cost of a new account acquisition for a consumer originating a jumbo is very high. Though my numbers are stale, the retail function originated close to 30% of new high net worth accounts for someone like a Wells. So they can subsidize rates or capture that forgone cost as a direct output of the retail operation. I could be mistaken, but I believe Wells direct originations account for 30-40% of the market right now.
Perl employs a warehouse line which is perpetually drawn to support the underwriting. The cost of funds of that is high in comparison with core deposits which cost next to nothing. There are also synergies on the servicing side. Origination is not that expensive and the retail operations pay for themselves for all these reasons.
Anyway, looks like 2.75% (no points, I checked) has your 5 year market locked up for now. I think you read the fine print wrong, there are no points in those rates.
Oh and Russ, I doubt you see Perl’s financials, so I wouldn’t expect you to know this, but your COF is very high realtively speaking. That is a big reason why retail operations make sense because that gets built into the cost of the loan from a correspondent.
“car, singular. No? b/c that list of 7(?) cars had an original MSRP well north of $400k.”
no not market value, my Perceived value of my house. so it would be plural
Sonies:
You can refi an FHA to a 7/1 ARM. As long as you have the equity and credit to qualify for conventional financing. You just have to run the numbers to see which way works best. Conventional will have higher monthly MI rates typically than FHA.
“Anyway, looks like 2.75% (no points, I checked) has your 5 year market locked up for now.”
From your linked page:
“Interest rates displayed below require that you pay 1% of your loan amount toward the loan origination charge”
What does that mean, if not paying a point?
It’s the origination charge which apparently maxes out at $650. That is a closing cost, not a point, at least as it was articulated.
“It’s the origination charge which apparently maxes out at $650. That is a closing cost, not a point, at least as it was articulated.”
Great website they’ve got there, as the “important disclosures” give no hint of that.
How’s the APR end up 49.7 bips higher then? (as you can tell, I’m not up on the new-ish rules for calculating APR)
It says 1% toward origination charge, then origination charge specifically says its not points. Go figure and I agree.
No idea on APR. But if it were 1% then the APR would be 100 bps higher. The regulatory framework around APRs is confusing and is probably about as sensible as GFEs which intentionally err high because if you are accurate but slightly low, you have to do it all over again.
“come on every 3-5 years gotta upgrade, wife is on a 5-7 schedule”
I don’t see why you can’t keep a car for at least 10-12 years. Of course, we only drive about 6K miles a year.
“No idea on APR. But if it were 1% then the APR would be 100 bps higher.”
I don’t think that’s right, but as I said, I dunno.
Using an apr calculator of unknown accuracy, to go from the 2.75 rate to the 3.247 apr, with a 30-year amortization on the WFB-assumed $175k loan amount, the closing costs would have to be $10,780. Which makes it seem like its a mistake.
I thought APR is only a 1 year calculation though. That is over my head. Point is, interest rates are low.
Refinance now or forever be priced out (and it doesn’t really matter because no prepayments).
“I thought APR is only a 1 year calculation though.”
Dunno, but–From a pop-up from the WFB site:
“Annual Percentage Rate (APR): A yearly percentage rate that expresses the total finance charge on a loan over its entire term. The APR includes the interest rate, fees, points, and mortgage insurance, and is therefore a more complete measure of a loan’s cost than the interest rate alone. The loan’s interest rate, not its APR, is used to calculate the monthly principal and interest payment.”
“Point is, interest rates are low.”
Very. Extremely, even. Might go so far as to call them **CLEARLY** low, tho the double-asterisk may be a stretch.
JMM:
Fully aware of how the back end works. While I agree with you on some points, you are severely underestimating the cost associated with the origination side of the business.
While I applaud you spending time at “The Firm”, Management Consultants often don’t really get it because they are too far removed from the way things really work. Bubble charts don’t necessarily tell the whole picture. I am sure Coca-Cola has stacks of Blue Books telling them that New Coke was a good idea too based on the research data, etc.
I will guarantee you that brokers/correspondents bring in exponentially more deals at lower costs than retail operations. Banks know this as well which is why there is a wholesale side of the business.
What you are missing is sales/relationship component in that broker/correspondents tend to have SUBSTANTIALLY higher loan production per LO than retail banks at substantially lower overhead costs even if the COF on a warehouse line are higher than depository institutions.
“I don’t see why you can’t keep a car for at least 10-12 years. Of course, we only drive about 6K miles a year”
I still have my 95 jeep it runs somewhat great. I only put about 10-11k a year on my car, wife when worked about the same now she doenst put any miles. her new car required a 1000k visit to check if valves and stuff settled correctly i took her forever to get there.
and yes cars can last long but really every five years is good it keeps you in a clean modernized safe travel machine. Plus when you dont buy expensive German sports car every 3 years its not really a big expense.
also when you do five year refresh, well look at it this way, 3 years 0% if free money, then you have 2 years no car note and at the five year warranty is up and just start over.
APR is assumed to be over 30 years. APR is also a flawed measure as it is completely worthless on an ARM and there aren’t any standards as to what is included in the calculation in regards to fees. Additionally, no one keeps a mortgage for 30 years so you have to recalculate it on your own based on a shorter time frame to make it remotely accurate.
JMM, you are definitely paying a point. I see the par rates for a ton of banks. They would be giving away the house at that rate with no points.
Rate quotes don’t mean the deal would actually get to the closing table though which is an entirely different issue/subject.
I’m actually finding the Russ/JMM exchange edifying.
Here’s a scenario for either or both of you (or anyone with a strong and well-founded opinion on the subject):
(1) Looking to buy a place in the neighborhood of $325 – $350k; (2) have o.k./fair credit; (3) have roughly 5% down; (4) make $170k/yr; and (5) have around $1,200/mo student loans (but no car payment).
My odds of getting a decent rate? Is it FHA or nothing? Pro’s/con’s of an ARM?
Many thanks in advance.
rehashing the wage inflation thing:
http://www.nytimes.com/2010/08/11/business/economy/11leonhardt.html?_r=1&partner=rss&emc=rss
Money (harhar) quote:
“since this recent recession began in December 2007, real average hourly pay has risen nearly 5 percent”
Russ I don’t know, but whatever the true rate is its damn low. $20 per month here or there does not materially alter the calculus.
People like HD were chirping about ARM resets that never materialized. He is still having a hard time believing his 4x ratio is absolutely worthless in a zero interest rate environment.
Loan value / 360. That’s where it is going.
“(1) Looking to buy a place in the neighborhood of $325 – $350k; (2) have o.k./fair credit; (3) have roughly 5% down; (4) make $170k/yr; and (5) have around $1,200/mo student loans (but no car payment).”
Interesting profile. @ 170k per year you should pay off the school loans (circa 100k?), save for a real downpayment and buy a house. Unless you are like me and drive a GEO METRO, you will outgrow a 325k place with that income profile and comcomitant tastes.
Anon:
The NYTIMES is completely wrong. As proof of this, one of HD’s paralegals couldn’t get a raise the other week.
Shame on you for posting anything other than a blog piece or your own micro observation of the plight of i) friends, ii) co-workers, iii) people you overhear on the El.
“Interesting profile. @ 170k per year you should pay off the school loans (circa 100k?), save for a real downpayment and buy a house. Unless you are like me and drive a GEO METRO, you will outgrow a 325k place with that income profile and comcomitant tastes.”
Sound advice – and seemingly very wise. But then again, you have to ask yourself, “what am i saving for?” , “what if I die or am disabled tomorrow?” You have to splurge a little and throw a little caution to the wind; let loose and enjoy!!! JMM, you shouldn’t be driving a Geo Metro – I can hook you up w/ a better ride. You won’t regret it!!
Yes please hook me up so I can drive over pot holes on North Ave @ 100 mph and get teenage freaks trying to take me off the line. Or worse, get car jacked outside of our south side plant. No thank you. Low profile = no hassles.
If I want to drop 100k on a toy, I have plenty of options in Burnham Harbor that keep the unwashed masses far away.
“If I want to drop 100k on a toy…”
oh, I was talking about something a little more expensive….
Well, the 52′ Hinckley does just fine for now. Plus the financing on it is tax deductible.
“Well, the 52? Hinckley does just fine for now. Plus the financing on it is tax deductible.”
Do you really have a Hinckley? One of my friends bought one (in 2005) and spent nearly 800k for it!!! The upkeep, docking fees, etc. are extremely expensive (even more than most 800k houses!!).
“Well, the 52 Hinckley does just fine for now. Plus the financing on it is tax deductible.”
Do you really have a Hinckley? One of my friends bought one (in 2005) and spent nearly 800k for it!!! The upkeep, docking fees, etc. are extremely expensive (even more than most 800k houses!!).
haha you wanna complain about assessments, check out what it costs to rent a slip in belmont harbor for a summer
About $110 per foot plus taxes, etc.
i could afford to dock a 3 foot boat then 8)
http://www.nytimes.com/2009/05/04/opinion/04krugman.html
Oh look JMM a year ago Paul Krugman in the NYT was talking about falling wages.
The old gray lady says one thing one day, and something else the next.
And JMM, I do like you, but seriously, you lambaste my paralegal asking for a raise story and then turn around and use the WSJ story involving……The LawnMower Guy….as your evidence of wage inflation.
Seriously, come on. Take a step out of your ivory tower (if it’s even real) and come into the trenches and see how the other half lives. YOu’ll be here one day too.
“since this recent recession began in December 2007, real average hourly pay has risen nearly 5 percent” (Leonhardt)
Leonhardt’s article which you quoted here has caught a lot of criticism. Statistics can be painted in misleading ways. I won’t bother arguing here, but will provide some links.
The Center For Economic and Policy Research points out that:
“David Leonhardt tells readers that the Great Recession has had some silver linings for many workers. High on his list is continued wage growth. This is misleading. All the real wage growth in this downturn occurred in the months of November and December of 2008. This was due to a plunge in the price of oil and other commodities. Since December of 2008 real wages have stagnated.”
http://www.cepr.net/index.php/blogs/beat-the-press/the-recession-really-is-not-good
Here is some more criticism, from the Economist and Roubini’s blog. You may also want to check out the comments section of your Leonhardt link. Lots of criticism there too:
http://www.economist.com/blogs/freeexchange/2010/08/americas_jobless_recovery_1
http://www.roubini.com/us-monitor/259416/the_compensationless_recovery
BTW, the “tank” comment was mine. Spouse’s computer had name & mail filled in from some long ago comment.
“since this recent recession began in December 2007, real average hourly pay has risen nearly 5 percent”
David Leonhardt is better than a lot of economics reporters but I still wouldn’t particularly trust him with these types of numbers. Didn’t have a lot of time to look but this stat seemed inconsistent with some of the BLS data I looked at quickly. There’s also a question of whether some of this is due to compositional effects.
When are u guys going to realize that NOBODY knows what the f@#k they are talking about? Seriously, do a retrospective review of all the geniuses in the economic/political world and their predicitions and reasoning – they are all full of it. Of course some are going to be right – but it is likely more from chance (akin to 2 weathermen predicting the weather – one says rain, the other says no rain. obviously one is going to be right (despite any faulty reasoning he/she used to come to that conclusion))!!
Which is why you should expand your reading beyond government and main stream media spin.
“Seriously, do a retrospective review of all the geniuses in the economic/political world and their predicitions and reasoning – they are all full of it.”
“Which is why you should expand your reading beyond government and main stream media spin”
Academia is full of BS’ers as well – remember their mantra “publish or perish”
Remember, Chairman Bernanke said subprime was contained in the summer of 2007 after the Bear Stearns hedge funds exploded. So no one really knows anything, as far as I’m concerned.