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

[don Hosek]

Forcing yourself to save $$$ every month for retirement is really easy if you have a 401(k) or 403(b) plan available through your employer. They'll even send you periodical positive reinforcement as you see how much your savings has increased.

[Floomby]

Well, we think we're middle class. We're moving here from upstate NY and we're looking at your $500,000-$700,000 "starter" homes. (To me, 2 bed+1 bath is a starter home). This is why I'm calling us middle class. Our 5-figure salary barely covers the payment, according to the subsidized mortgage program my partner can enroll in from his job (dream job; otherwise we wouldn't be doing this to ourselves). We have a 12-year-old and we insist on living somewhere where he can go to an adequate school, meaning minimal violence and gang activity and decent academics. This is the priority, even though we will have little space and zero disposable income (our cars are 7 and 10 years old, for example). Maybe we're nuts to buy (which reading this forum seems to confirm), so if we have to we'll rent in a good district instead. We're not out to impress anybody, just get by and do what we can to ensure a future for our son. I call those solidly middle-class values.

[Confidential (for this blog item only)]

I'm a homeowner of a property I purchased in 1987. It also has apartments. I easily cover my mortgage payments and all other overhead ... with extra monthly cash flow from my rents. So I guess you could say I'm sitting pretty.

I have to now admit that all of this negative real estate market news is giving me a queezy feeling. Investor Guy says it best in this blog item, "...(the) entire economy will be kneecapped if (a real estate crash) happens. you can't isolate a "crash" to one segment of the economy. " Investor Guy, I usually agree with all of your rationle. Inland Empire's too.

To those who say to a crash " "bring it on": your short-sightedness amazes me. With a pit in my stomach, I now believe you'll get your wish. All the signs now point to a market collapse. But be careful what you wish for. Tens of thousands -- likely more -- of jobs are in peril. The domino effect of a real estate market crash will be enormous. The mere fact that banks are protecting their interests by doing what they can to slow or halt mortgage lending says plenty. I'm pulling in my chips myself in case this is all going to drag out for a long time. That means I'm spending less and approaching all financial decisions with my eye on fear and not pleasure or promise. I'm acting like we're in a recession. Multiply me by millions of people and you have a financial nightmare.

I would think all of us should feel badly for the people in dire financial circumstances. They were wrongly tempted into buying into a mortgage. Or they were just plain stupid. It's sad. This entire situation is a mess. Shame on those of you who are so house hungry that you don't give a damn about the bigger picture.

It's official. After faulting the Chicken Littles out there for months, I now believe the sky is falling. And it's nothing to celebrate. We're all in this world together. Together we sink or together we float.

[www.BetterVillage.com, XYZ, PDq.]

Floomy: Does the employer's program reimburse closing costs and/or pay part of the mortgage?

don Hosek: After hearing the retired union fellow talk at the afl-cio forum, I'm inclined to think that savings plans -- other than "put your cash in a solid bank," bonds, or t-bills -- are considered ripe for the picking by unscrupulous investment advisors, and currently indefensible when shaky companies go belly-up.

Pension funds, calstrs, calprs, et al. were all (still are?) making solid gains year after year, in part due to their heavy investment in real estate. That party could be over for a little while.

[Trent]

I have to agree with AnnS (and Randy Adams, etc.) here: rising interest rates and tightening of credit is an absolutely necessary reality check. The market has been in need of correction for a long time, and there's no painless way of going about it. To "Confidential" and "Investor Guy": you shouldn't take it personally, because it has nothing to do with a nihilistic desire for a market crash. And no, no one is arguing that all sectors of the economy will be insulated from the real estate meltdown. But guess what? The bubble market has already negatively affected millions of middle class people who have been either shut out or forced out of the homebuying market. Simply put, anyone who has been honest has known for a long time that the real estate market is unsustainable, and a correction has been a long time in coming. The fact that so many of the problems have been conveniently ignored for so long has ensured that the crash will be a significant one, but such is the result when a bubble mentality (i.e., irrational speculation and rampant corner-cutting) is either overlooked, or actively encouraged.

In short: hold on tight, and take your medicine. The wound is uncovered and the necessary pain has begun.

Oh, and Floomby: if your combined annual income is still under six figures here in the Southland, are we operating under the same definition of "dream job"? In all seriousness, I would be VERY cautious about purchasing anything within the next year (or more), particularly if you're not certain that your SoCal stay will be for the long haul. Even so, I'd seriously consider the rental market before putting yourself in such a financially precarious situation. Good luck!

[mike d.]

Confidential (for this blog item only) said:

"To those who say to a crash 'bring it on': your short-sightedness amazes me. With a pit in my stomach, I now believe you'll get your wish. All the signs now point to a market collapse. But be careful what you wish for. Tens of thousands -- likely more -- of jobs are in peril. The domino effect of a real estate market crash will be enormous. The mere fact that banks are protecting their interests by doing what they can to slow or halt mortgage lending says plenty. I'm pulling in my chips myself in case this is all going to drag out for a long time. That means I'm spending less and approaching all financial decisions with my eye on fear and not pleasure or promise. I'm acting like we're in a recession. Multiply me by millions of people and you have a financial nightmare."

It's not like the act of them wishing for a crash is going to bring it on, the crash will happen because of fundamentals.

LA really needs a deep correction in RE prices if it wants to remain a viable city. Companies are having an awful time recruiting talented workers because of the insane housing prices. If by some miracle houses in LA were to remain at their insane valuations you would see a large out-migration of the middle and upper-middle classes (which I believe is already happening) because most of them are not going to be content in the long run with the housing they would be able to afford vs. what they could get in other parts of the country.

It doesn't matter if you're for it or against it, residential RE prices will crash in LA. The rising interest rates don't help, but what is going to kill it here is the tightening of lending standards. Ask any local mortgage broker what will happen if 10% or greater down payments become required along with full documentation of one's income (and PITI to income ratios are capped at around 45%). They'll tell you that hardly anyone would qualify for a mortgage for a house that they actually wanted to buy at current prices. And it looks like these types of changes to lending are coming fast.

If you think sales have been low for the first half of the year, wait until the changes we've been reading about in the mortgage markets over the past few weeks work their way through. I believe sales this fall and winter will be absolutely abysmal.

[vultur]

Broadly speaking the real estate market will keep chugging along as average home prices across the country barely nudged down 0.5% from last year. Although that reversed a multi-decade trend of annual average increases, it dispels the notion that the whole country if f**ked just because things got a little overzealous in CA.

To those in CA and unable to afford a home, I say RELAX and rent your way to financial freedom until such time as it makes prudent sense for you to be a homeowner. There's no shame (unless of course you are one of those pathetic souls so insecure about outward opinions) in renting vs. owning if it suits your needs.

SOCAL may be crumbling but the rest of the country really just have some indigestion stemming from the liquidity crisis. In time this will get worked out as risk premiums rise to more suitable levels, mortgage rates get prices PROPERLY, and yes Virginia, prices fall in SOME markets steeply, other markets barely, and finally rise in some cases.

[RE Market Watcher]

LA is not the only part of CA that is starting to feel the squeeze from changes in home lending:

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/08/09/BU3IREG2E.DTL

Also, thanks Peter for creating and running this blog, it brings REAL conversation to our real estate market ramp full of smoke and lies.