Business Week sees "buying and bailing"
Business Week still sees many reasons to be bearish about housing, reporting, "The housing crisis is entering a new and frightening stage." Two take-aways from this lengthy and worthwhile report ominously titled "The Housing Abyss":
"Overshooting" -- Because prices are falling so rapidly, housing analysts believe it is likely prices will "overshoot" -- that is, continue falling below levels that might otherwise make economic sense. "The risk for the financial system and the economy is that the price drop, already horrifying, will start feeding on itself.... That process has already started in parts of Arizona, California, Florida, and Nevada.... Fiserv's James L. Smith worries that instead of settling at a reasonable price level, 'we're going to blow past [it] without even looking back.'"
"Buying and Bailing" -- Business Week spots another of those anecdotal but not easily quantifiable trends: homeowners who buy a new house at a low price, then bail on the upside-down mortgage of their older home: "Steve Hawks, owner of RE/MAX Platinum real estate agency in Henderson, Nev., says he has been flooded with calls from people interested in 'buying and bailing' — that is, buying an additional house while their credit is still good, then walking away from the old one unless they can cut a favorable deal with the lender. So far the number of people who have done so appears to be small."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat Tip: Patrick.net
Fannie Mae came out with a new guideline to go into effect August 1st to stop buy and bail. If you are going to claim the old property is an investment property (i.e. renting it out) then you have to have 30% equity in it OR 6 months PITI and be qualifed at paying BOTH mortgages with standard ratios.
https://www.efanniemae.com/sf/guides/ssg/
annltrs/pdf/2008/0816.pdf
Posted by: Cal | June 30, 2008 at 08:13 AM
I can't imagine it would take lenders long to identify potential "Buying and Bailing" scammers. They've wised up, haven't they?
Posted by: MarkW | June 30, 2008 at 08:46 AM
When scheduling issues forced me to let a week pass before the closing on my new and old homes recently, the lender on the new home wanted a list of confirmed tenants for the old property before allowing the closing. Nailing down a detail like not having a borrower be potentially stuck with two mortgages they can't afford must be one of the oldest tricks of the trade for any lender with good standards and oversight by management...
Posted by: Rich | June 30, 2008 at 09:13 AM
Although I do think the market will overshoot the bottom, we're a long way from that point, and there will be many, many, many more people calling both the bottom and an overshoot before we actually overshoot. A good approximation for the actual bottom is construction cost; it discounts land value, but generally new homes are worth more than pre-existing homes, so it's a reasonable approximation for most areas. Prices are still roughly double construction cost; we have a long ways to go before we're in overshoot territory.
Posted by: Nick | June 30, 2008 at 10:29 AM
Overshoot.
In order to overshoot prices that make economic sense, homes in the Beverly HIlls flats need to fall another 80 percent.
We aren't within the ballpark yet. But we will be...might take a monster recession and a ton of folks out of work to get there. But we prob will...
Overshoot has just become another catch-phrase for lobbyists to garner sympathy of Congress and beg for bailouts...it's ridiculous.
Posted by: Wilson | June 30, 2008 at 03:08 PM
Overshoot? We're not even close to overshooting.
Posted by: IToldu2CashOut | June 30, 2008 at 06:24 PM
I've been approached by three potential clients in the last three weeks regarding buying and bailing. One client, a doctor and his wife(also a doctor) bought a 1.2 million dollar home in 2005 and now the same house as theirs across the street is 699K they wanted to buy it and then walk from the one they were paying on. I said it was conspiracy to commit fraud and I could not help them --I am certain there are many out there who will help though.
Posted by: PotsNPans | June 30, 2008 at 08:47 PM
Buying and bailing makes perfect sense for people that are upside down on the mortgage, but still have perfect credit and payment history.
current lenders that let this to happen should not be bailed out in any circumstances.
However, i think most buying and bailing would be down silently. That is husband is on the current upside down loan, Wife buys the new house and gets new loan, husband forecloses = end result family has new house cheaper and with a reduced payment. Bank gets screwed, and ultimately Frank and Dodd will force us the tax payers to foot the bill for that. NICE!
Posted by: Laker | June 30, 2008 at 09:17 PM
I was wondering why the cover of BizWeek looked familiar when I got home and pulled it out of the mail: Oh yeah, I read about this earlier on LA Land.
Remember when the news stories were all Pollyanna about the new era of homeownership for all and the vast wealth that came with it? I almost don't at this point.
Posted by: Brad A. Greenberg | June 30, 2008 at 09:31 PM
Feh. The house we are buying is 40% off peak, and we are not so stupid as to realize it won't lose money in the short term.
But I calculated it as reasonably priced based on extrapolating where it should be using the 2000 prices here in Riverside as the basis for my Case-Shiller mode analysis. A house in Riverside should be going for abou $134 per square foot (which is what we paid). Crazily enough you can still find idiots out there pricing their homes at nearly $300.
http://www.redfin.com/CA/Riverside/3390-
Sunnyside-Dr-92506/home/4971767
We have a long way to go before most prices reset. I'd say an easy 50% off peak.
Posted by: Anthrodiva | July 01, 2008 at 08:31 AM