LA's jumbo mortgage problem

The credit squeeze could be particularly bad news for high-cost housing markets like Los Angeles, because the cost of jumbo mortgages has spiked sharply in recent days -- robbing buyers of purchasing power at a time when many buyers already feel the market is overpriced.

The result: buyers and sellers, already having a hard time meeting in the middle, could be driven further apart, which means further slowing of a market that's close to stalling out.

 

From The Wall Street Journal via Manhattan Beach Confidential: "Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May. ... The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000."

That's LA, folks.

CNNMoney: "Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on it 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent. Other lenders followed suit and more are likely to join them. ... The rate jump means the monthly bill for a $600,000 mortgage would hit $4,403, compared to $3,942 previously, an increase of $461. Jumbos are loans of more than $417,000."

Thoughts? Question: Does this put downward pressure on prices, or does it just cause houses to sit on the market longer?
Hat tip: Jonah, Manhattan Beach Confidential
Photo Credit: LATimes

Comments

[Jonah]

I got another good piece of info on this. I work for Vista Federal Credit Union which services the Walt Disney Company. After reading the above article I called our mortgage rep to ask her what she thought. She told me that she hadn't seen that article but was informed by Merrill Lynch just yesterday (they fund most our loans) that they were raising their jumbo rates to 8.8%! She went on to tell me that our member rates are at 6.5% and that they would now have to address this somehow since this is in conflict with what we offer.

One way they are considering getting around this is by breaking a high priced home up into 2 mortgages...the draw back? It actually makes the overall mortgage payment higher! I'm going to call her back to get some clarification on some of that but thought it was interesting.

[Nathan]

In response to the question, it causes houses to sit on the market longer, which causes downward pressure on prices.

[willie]

There goes the neighborhood. If the cost of money continues to raise, the affordability factor is greatly reduced, the prices of homes continues to drop because they are not selling at lower interest rates and the buyers, at least those that could afford a home who are not buying because of the volatily of the market, will get further discouraged from jumping into the homeownership bandwagon, recipe for disaster.

[Duken4evr]

Makes me glad I took the money and ran in 2006. Hi from Colorado!

[Steve]

bring on the crash!

[Rich]

Wall Street is now spooked to purchase any type of Mortgage Backed Securities that are not Fannie, Fredie, or Ginnies (FHA). Hopefully they will figure out that A paper Jumbo (full doc, good credit) is not the same as AltA and SubPrime. Once they figure this out, then you will see rates come back for this particular segment. Typically Jumbo fixed rates have run within .25-.375% of coventional fixed rates.

We had one lender, this week, that raised their jumbo rates to 9.875% with a cost of 1.50 points! They have shut off business until they can figue out this market, and this compnay is owned by a wall street investment house.

[AnnS]

"where homes typically bought by middle-class people can easily cost $500,000 to $700,000."

Pretty bizarre definition of "middle class" in terms of incomes. Here is the data on incomes in 2005:

50th% of income CA LA County
Median household 53,629 48248
Median family 61,476 53431

“Middle class” in terms of income is those in the middle or median. Defining “middle class” as being the 3rd quintile (40% –60%) would mean that the middle class household in LA has approximately incomes from $40671 – 61,007.

Don’t think they are the ones buying $500,000 –700,000 houses. The mortage would be pretty much the same as their entire gross income.

Trying to define "poor - low income - middle income - upper income -wealthy" in a way that makes those who could buy $600000 the 'average' income would mean that those with incomes in the top 10% are suddenly the 50% and the other 90% of households are poor.

Very dangerous to promote the delusion that the average-middle household could afford a $600,000 house - and implicitly that anyone who could not is not 'middle class' and is 'poor.'

It encourages people to overspend in order to maintain what they are told is a 'middle class' lifestyle.

It allows those who can afford such things to pretend that the majority of people have what they do - and they can ignore the few 'lower income' who do not.

Gives a very skewed idea of reality.

If $500000 - 700000 really is the middle range of home prices, they have a very very very long way to fall to be affordable for the real middle income buyers ---- like dropping another 75%.

Willie posting above must be selling. He seems to be worried about the 'affordability' of borrowing money than the 'affordability of the property based upon price.' Those prices are NOT affordable. The rising interest rates are a very good thing as they will force down purcahse prices. Sooner or later the prices will fall to a level where 50% of buyers can buy 50% of the houses.

[pugtv]

Hmmm ... what would NAR #1 Used Car Salesman Lawrence Yun say? Probably something to the effect of ... "Prices are falling. It's a great time to buy!"

[Kaye Thomas]

If the rates don't fall back next week then hang onto your hats folks because it's going to be a very bumpy ride. The Los Angeles County real estate market is priced such that most of our loans are jumbo loans. That doesn't mean that the buyers who get them are flaky it just means that our prices are higher then most of the conforming markets found in other parts of the country... they always have been.

What the market is saying is that they don't care whether the buyer is an excellent credit risk or a poor one.. no breaks for the high priced markets that are unable to utilize conforming loans.. everyone is being priced as if thery were a high risk buyer.

The credit market has decided that they made a mistake with all the "easy qual" loans to not so great buyers and now are taking a ham fisted approach and will ding anyone who doesn't fit the mold.. that means all the high priced markets are looking at some tough times.

This is really going to hurt those people who need to refinance because of adjustable rate loan increases.. if you had trouble trying to refi two months ago you are in deep trouble today.

I'm also wondering if part of the huge increase is not a signal to the FED from Wall St that we want rates lowered or else...

[Randy Adams]

No, folks. This is very good news on the house affordability front. Finally, people will be able to buy at more rational prices. The high interest isn't such a big deal because some time down the road the rates will come down and the owner (who is smart enough NOT to take equity out of his or her house) can refi to the lower rate.

One of the great nightmares of the market up to now is that people lock into horrible prices at low interest rates so that they never have any prayer whatsoever of improving their lot. The increase of the interest rate is a window of opportunity opening for genuine prospective homebuyers.

[vultur]

I've got an 8-figure private fund to acquire distressed property in socal. Any advice? Wait a few months? Talk to lenders (which ones)?

Preference for apartments and retail.

[Omar Tentmaker]

Interest only non-conforming ("jumbo") loans are available through reputable lenders for 6.875%. What is the point of slowly repaying the loan anyway?

[MiC]

If the rate increase for jumbos is not temporary, it has reduce prices over what they would have been if the rates were lower. Since there are lots of factors influencing what buyers are willing to pay, we may or may not be able to directly see the affect. For the same level of willingness to pay for the combined house+loan, the lenders are now getting a bigger slice of the pie so the seller's slice has to be less.

[Steve Reynolds]

What is that saying on Wall Street when you buy a stock that's free falling in value, oh yea "trying to catch a falling knife". With housing in Los Angeles, it's more like trying to catch a falling nuke.

[vultur]

Omar,

The point of amortizing a loan is self-disciplined savings. You'd be surprised how fast a working lifetime can flash by you. Do you want to wake it 10-15-20 years PRAYING that your house's value beat inflation in order to have a decent nest egg to retire with? Sure, if you can methodically force yourself to stay away $$$ in a vault every month then you are far stronger than most. Experience shows that most people tend to piss away their disposable income on depreciating material goods but the 30 year amortized mortgage kept them out of the poor house. There is a lesson to be learned from the 'Greatest Generation'. I'm once removed from it but I respect what they've done for us.

[investorguy]

vultur: go to the banks and offer to buy blocks (not geographical) of properties to get an even bigger discount. or open your fund to other investors looking for financing and make money on the interest, while partnering on the properties and making money on the appreciation.

[investorguy]

to steve and all the other short-sighted whiners begging for a real estate crash: SoCal's entire economy will be kneecapped if that happens. you can't isolate a "crash" to one segment of the economy. get your head out of the "boo-hoo, I can't buy a house" sand and realize that.

[Tim K.]

Sheer stupidity - even 1-2% drop in interest rates does NOT make a 500K house more affordable.

You're still paying nearly all of your median income salary to a home that you could rent for half of that price, and you have no money left over to eat.

Housing prices are going down even IF jumbo rates drop back to 6%. There's no friggin' way people pay this much for housing. The ONLY reason people did this the last few years was because they were gambling that they could make a profit and then NOT pay $4000/month.

[henry]

the flippers have destroyed this la oc market period.

[watchit]

Feds know how to deal with speculators, they will disappear soon, we all need home and not investment property. When yun says house will sell, of course they will seell, but in normal price line. We all need one, donot we?
I have a theory,housing was up because one guy made money and next made more, and in the end like stock market crash last one in line will pay for it. just wait

[Mary G.]

Vultur, you are spot-on. What really amazes me about the trend towards interest-only payments on mortgages (or more -- interest accumulating on top of the principal, with the teaser rates) is that people never own their homes. They never have a piece of the equity. How is that better than being a renter, even if you do get a maximum tax deduction on mortgage interest payments? It has gotten so much more expensive to buy than to rent that in many cases, you are paying more than a renter, even with the tax deduction, which you can only figure if it's on the plus side of your standard deduction. If you buy a condo, you pay a few hundred a month in homeowners fees; sometimes you pay those if you buy a detached house, as well. And NONE of those fees are tax deductible. It has created an entire class of indentured servants in this country, always owing money to their landlord mortgage holders. How is this the American Dream? There's no point in calling home ownership the American Dream if you never actually own the home, the lenders do, even if you never miss a payment.

[MBwatcher]

I ran some numbers thru a mortgage calculator.

The results suggest that prices would need to adjust down by 7-14% to keep the same level of "affordability," should rates remain high.

I invite consideration/reactions/discussion because I don't know what experience tells us:

http://mbcon.blogspot.com/2007/08/affordability-and-prices-at-higher.html

[eprobert]

... and lots of lessons that should be FORGOTTEN from the baby-boom generation (which I'm one removed from). IO loans would certainly fall into that category.

Of course, in LA I don't think this is such a big deal - most people are using Interest Only loans anyway, so who cares what a 30 year goes for?

[willie]

"Willie posting above must be selling. He seems to be worried about the 'affordability' of borrowing money than the 'affordability of the property based upon price.' Those prices are NOT affordable. The rising interest rates are a very good thing as they will force down purcahse prices. Sooner or later the prices will fall to a level where 50% of buyers can buy 50% of the houses."

Actually I am not selling. I am in a comfortable position of having a mortgage and payments that I could easily afford with just one income. I could have, like many others did, sell my home and use the equity to buy a bigger house albeit more expensive with a highly leveraged loan. Glad I did not because I would have seen the value of my home dissapear from under my feet, would have lost my downpayment even if I could afford the exploding payments two years down the road.

[Toby]

"where homes typically bought by middle-class people can easily cost $500,000 to $700,000."

LOL, middle-class?

Now can I ask a question? If that's middle-class, then what is considered poor?

A 200,000 dollar house? 300,000 dollars?

Is there any such thing as a poor neighborhood anymore?

Seriously folks, I think we zipped past the denial stage and went straight to the delusional stage of this bubble.

I mean, if a couple making 100,000 a year can barely afford one of those 300,000 dollars new condos being built in Watts,CA.

Well then the market is delusional.