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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Anyone who thinks the sub-prime disaster is 100% the fault of buyers is being willfully naive. There are plenty of unscrupulous brokers out there, concerned only about their fees and having no responsibility for what happens in the future, who feed people all kinds of lines "Don't worry about it" "We'll just put your income down as $60,000 - everyone does it" "You can just refinance later" etc. Yes, people should read everything they sign, and ideally people should know better than to trust such brokers, but it takes a high level of sophistication for a first-time buyer, especially someone of moderate income and education, to recognize all these traps.

Posted on: 2007/3/22 14:38
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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ccitizen wrote:
banks didn't lend to the weak borrowers in the past and were accused of racism amoung other things..... You really are expressing some adolescent-level thoughts here.


a) If you know any adolescents who are smart enough to have any opinions about the mortgage market, I hope they're planning to apply to some good colleges.

b) It is really important to try to find ways to improve and save the loan programs for weak borrowers and not throw the baby out with the bathwater.

If you look at the current default data and there's no good pattern indicating why people defaulted, then maybe we just have to kill the subprime and stated income programs.

But, if there are patterns, maybe those patterns can be used to fix the loan programs.

Example: if most of the defaulters committed clear-cut fraud when they took out their loans, improved documentation requirements.

If 50 percent of the defaulters are people without health insurance who got sick and now have huge unpaid medical bills, just make sure the subprime/stated income borrowers all have health insurance when they take out their loans. Maybe build the insurance into the mortgage insurance.

If 50 percent of the defaulters are people who've lost their jobs, see if there's a way to figure out who's at risk of losing a job, or make the layoff insurance requirements tougher.

Posted on: 2007/3/22 14:25
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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JSalt wrote:
I bolded that text because the guy's analysis is based on prices staying flat from 2006. But more foreclosures may push down prices, so the analysis starts from a flawed assumption.

The analysis also makes the impact on the housing market sound minimal by pointing out that the likely foreclosures represent 1% of outstanding mortgage loans. But most of those mortgage loans are on properties that won't be on the market any time soon at all, so you're looking at a much bigger statistic when compared with the number of homes that will actually be on the market - significant enough to bring prices down, I'd think.



The start of your "analysis" is equally flawed is your sense of the phrase. I'll

stick with the fact that through all kinds of turbulant times the median home price in america has increased 5-6% a year. Production cuts by builders/Population growth/Private equity money bailing out subprime firms/"bailout" products being created by mortgage industry to save some of these borrower from default.

Again, at a minimum 30% of homes don't even have mortgages on them. So your talking about 1% of 70% of the market. I can't see that bringing the market down in any nationwide way.

Posted on: 2007/3/22 3:02
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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fat-ass-bike wrote:
I'd love to see all this development and high rise apartments empty for 3-5 years, so I can watch the developers and banks struggle to recoup their own money, then be forced to have 'fire sales' to attract buyers.


Uhhh, nope. That won't happen because they're mostly pros who, though playing with other people's money, can make rational decisions and have deep enough pockets to ride out a downturn by renting. My folks rented in the early 90's in a new construction midtown luxury condo with marble bathrooms etc that hadn't sold a unit. Eventually they did sell the units when the market heated up again. While your or I couldn't break even buying that condo and renting it, they only have to keep covering their construction costs, plus hopefully 5-10%. There's only a fire sale when people have seriously f**ked up, like they have in FL.

Posted on: 2007/3/22 2:46
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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river-rat wrote:
Excerpt from WSJ commentary today:

The report by Credit Suisse estimates mortgage originations could drop 21% during the next year or two because of tighter credit standards. Coupled with high inventories of unsold homes and the additional supply likely from distressed sellers, this drop in demand could produce an unprecedented nationwide decline in home prices.

Merrill Lynch estimates prices could drop as much as 10% this year. A price drop of this magnitude would lead to a vicious cycle in the housing market and pose a major risk to economic growth. And, of course, it would create a raging political firestorm.
-----------
And it's a Great Time to Buy a House, as any Realtor(R) will tell you.
---------


I also remember the famous Sallie Bros. reports predicting the RE markets wouldn't recover for 15-20yrs after the 80's. This is just more piling on.

This is going to effect maybe 1% of all the mortgages out there. Depending on who's info you believe 32-40% of homes in america don't even have mortgages.

The median price has creeped along through ww2, korean war, vietman, oil embargo of the 70's, watergate, S&L Crisis, 9/11...Do you really think things are as bad as any of those times?

Some individual markets (miami/phoenix/some parts of cali) will certainly get burned but on a national level it won't be a statistical huge story - though the media will play things up no doubt.


I wouldn't be surprised if the politicans don't force the banks to bail these folks out in the end in some way.

Posted on: 2007/3/22 2:42
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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You can't win. banks didn't lend to the weak borrowers in the past and were accused of racism amoung other things.. This time they do lend to them and they get vilified once again. I rember mortgage rates at 16+% in the 80's and people kept buying and the market didn't crash. You really are expressing some adolescent-level thoughts here.

Everything was fine when prices rocked up since 1994 and the family in JC that owned a property for 17K sold out to me 3 years ago for 500k. But a little market reality kicks in and the "industry" is to blame.


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fat-ass-bike wrote:
Developers, the banks that financed them and then gave loans to people who would be hard pressed to make payments, coupled with marketing and estate agents created this crap families are about to face. It amazes me that this isn't a case of conspiracy, profiteering and organised crime to dupe the public.

Developers will make a siht load of money and banks will recoup their intitial investment to the developers via sales. The marketing and estate agents will get their commissions and the banks will get a second 'bite of the cherry' with high / increased interest rates to families and when they default on loans, their property are then ceased.

I'll coast through this 'over-exaggerated' growth and sense of national well-being, but many families won't. I wish the federal government could freeze mortgage rates for the next 10 years, to give everyone the 'real' chance of home ownership.

Most of us on JClist will be lucky enough to see this through, but families in my neck of woods are already feeling the pinch. I just hope all the optimist's are correct on this one!

I'd love to see all this development and high rise apartments empty for 3-5 years, so I can watch the developers and banks struggle to recoup their own money, then be forced to have 'fire sales' to attract buyers.

Posted on: 2007/3/22 2:30

Edited by ccitizen on 2007/3/22 2:48:24
Edited by ccitizen on 2007/3/22 2:51:24
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Ben Stein Says Economy Is Fine

http://www.cbsnews.com/stories/2007/03/18/sunday/main2581859.shtml

Despite all the bad buzz about subprime mortgages, Sunday Morning correspondent Ben Stein says the economy is strong and that the amount of foreclosures is small in relative terms.

Posted on: 2007/3/21 22:19
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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JCP wrote:

I have a 30yr fixed and hope to never sell the condo :)


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Posted on: 2007/3/21 21:56
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Developers, the banks that financed them and then gave loans to people who would be hard pressed to make payments, coupled with marketing and estate agents created this crap families are about to face. It amazes me that this isn't a case of conspiracy, profiteering and organised crime to dupe the public.

Developers will make a siht load of money and banks will recoup their intitial investment to the developers via sales. The marketing and estate agents will get their commissions and the banks will get a second 'bite of the cherry' with high / increased interest rates to families and when they default on loans, their property are then ceased.

I'll coast through this 'over-exaggerated' growth and sense of national well-being, but many families won't. I wish the federal government could freeze mortgage rates for the next 10 years, to give everyone the 'real' chance of home ownership.

Most of us on JClist will be lucky enough to see this through, but families in my neck of woods are already feeling the pinch. I just hope all the optimist's are correct on this one!

I'd love to see all this development and high rise apartments empty for 3-5 years, so I can watch the developers and banks struggle to recoup their own money, then be forced to have 'fire sales' to attract buyers.

Posted on: 2007/3/21 21:23
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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brewster wrote:
Quote:

JCP wrote:
Timing the real estate market is stupid. Good luck with that. I am buying a condo in JC this year because I want to LIVE here. Debate all you want about prices; I'm just happy to have a home I can call my own, a roof over my head, and to be a part of a great City with loads of potential.


That's perfectly great, as long as you don't anticipate "absolutely needing to sell" within 5 to 10 years or so. A 15% fall when you've put down 5% on a $500k condo can leave you owing $50k to the bank in addition to having lost your $25k.

In the longer run RE is fine leveraged investment with great tax advantages, it's the short run that's risky. People buying rather than renting when they anticipate residing less than 5 years is a relatively new phenomena. The alternative to timing the market is staying in, not ignoring the timing.


I have a 30yr fixed and hope to never sell the condo :)

Posted on: 2007/3/21 20:42
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Excerpt from WSJ commentary today:

The report by Credit Suisse estimates mortgage originations could drop 21% during the next year or two because of tighter credit standards. Coupled with high inventories of unsold homes and the additional supply likely from distressed sellers, this drop in demand could produce an unprecedented nationwide decline in home prices.

Merrill Lynch estimates prices could drop as much as 10% this year. A price drop of this magnitude would lead to a vicious cycle in the housing market and pose a major risk to economic growth. And, of course, it would create a raging political firestorm.
-----------
And it's a Great Time to Buy a House, as any Realtor(R) will tell you.
---------

Posted on: 2007/3/21 20:40
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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brewster wrote:

Alb, I'm sorry, but a failure to increase as optimistically as expected doesn't equate to a price drop in my book! But I guess you're talking psychology here, so, whatever does you.


I understand what you're saying, but I think one issue is that a lot of people who bought before 2005 were really banking on the idea that the price of their homes would go up, not just hold steady. Maybe a lot of those people have already used home equity letters of credit to spend increases in home value that never materialized.

Regardless: I'm sorry if this discussion is making people uncomfortable. No matter what happens with the mortgage market, this is just one of those economic things. Markets rise, markets fall and the earth abides.

Posted on: 2007/3/21 18:42
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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JCP wrote:
Timing the real estate market is stupid. Good luck with that. I am buying a condo in JC this year because I want to LIVE here. Debate all you want about prices; I'm just happy to have a home I can call my own, a roof over my head, and to be a part of a great City with loads of potential.


That's perfectly great, as long as you don't anticipate "absolutely needing to sell" within 5 to 10 years or so. A 15% fall when you've put down 5% on a $500k condo can leave you owing $50k to the bank in addition to having lost your $25k.

In the longer run RE is fine leveraged investment with great tax advantages, it's the short run that's risky. People buying rather than renting when they anticipate residing less than 5 years is a relatively new phenomena. The alternative to timing the market is staying in, not ignoring the timing.

Posted on: 2007/3/21 18:20
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Timing the real estate market is stupid. Good luck with that. I am buying a condo in JC this year because I want to LIVE here. Debate all you want about prices; I'm just happy to have a home I can call my own, a roof over my head, and to be a part of a great City with loads of potential.

Posted on: 2007/3/21 17:35
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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I bolded that text because the guy's analysis is based on prices staying flat from 2006. But more foreclosures may push down prices, so the analysis starts from a flawed assumption.

The analysis also makes the impact on the housing market sound minimal by pointing out that the likely foreclosures represent 1% of outstanding mortgage loans. But most of those mortgage loans are on properties that won't be on the market any time soon at all, so you're looking at a much bigger statistic when compared with the number of homes that will actually be on the market - significant enough to bring prices down, I'd think.

Posted on: 2007/3/21 17:18
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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alb wrote:
Quote:

brewster wrote:
d I don't think they'll fall that far, more like 20%. I bought here 10 years, ago so 20% off peak doesn't get me excited, but I'm sure others will be thrilled.


Say Mrs. X bought a house for $200,000 in 1997 and could have sold the house for $500,000 in 2004 but waited till this year to try to sell the house at that price. Because the market is slow, she waits till 2009 and ends up selling the house for $400,000.

Even though the price would only be 20% lower than in 2004, Mrs. X would really be getting about 40% less than expected, because, back in the early aughties, she would have expected the price of the house to go up at least about 10% each year. (Really, a lot of owners probably thought the value would go up 15% each year, so Mrs. X's 2009 sale price really might be 50% lower than she'd expected.)

So, if a typical downtown Jersey City home price is 20% below the peak price in 2009, that might be the moral equivalent of a 50% to 60% drop in a small Midwestern town where prices have stayed about the same for many years.


Alb, I'm sorry, but a failure to increase as optimistically as expected doesn't equate to a price drop in my book! But I guess you're talking psychology here, so, whatever does you.

Posted on: 2007/3/21 16:54
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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This is such a futile argument. People only believe what they want to hear. So if you currently own a home you are going to believe all the articles that the housing bubble is not nearly as bad as it seems and you are going to be rich. If you don't own a home you are going to believe everything about the market crashing and therefore your paying rent is more justifiable.

Posted on: 2007/3/21 15:12
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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JSalt wrote:
Dr. Cagan analyzed 8.4 million adjustable-rate loans made during those three years and estimated that 13% of them, totaling $326 billion, will end in foreclosures. After lenders resell those properties, the total losses for lenders or investors holding the loans will be $113 billion, he estimated. That is about 1% of total U.S. home-mortgage loans outstanding.

"The vast majority of borrowers will be fine," Dr. Cagan said.


This analysis is too sunny because it ignores the fact that a foreclosure is to a lender what shoplifting is to a retailer.

If the owner of Imagine Atrium sells a toy for $20, he doesn't make a $20 profit. Maybe he pays $10 wholesale for the toy and gets a net profit of $2 per toy sold.

If a shoplifter swipes shoplifts a $20 toy, the Imaginatrium then has to sell at least 5 toys (e.g., earn $10 in profits) to make up for the wholesale cost of the toy stolen. That means that even a little bit of shoplifting is a big deal for the Imagine Atrium owner.

Suppose the net profit margin at a subprime lender is about 10% (see: http://financial.seekingalpha.com/article/29419). If 10% of the borrowers default, that could wipe out most or all of the profits that the lender gets from the other borrowers. If 13% of the borrowers default, the lender could suffer from huge losses.

Even if the lender's profits just go down a fair amount, that will make it harder for the lender to get money from investors.

Posted on: 2007/3/21 15:08
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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brewster wrote:
d I don't think they'll fall that far, more like 20%. I bought here 10 years, ago so 20% off peak doesn't get me excited, but I'm sure others will be thrilled.


Say Mrs. X bought a house for $200,000 in 1997 and could have sold the house for $500,000 in 2004 but waited till this year to try to sell the house at that price. Because the market is slow, she waits till 2009 and ends up selling the house for $400,000.

Even though the price would only be 20% lower than in 2004, Mrs. X would really be getting about 40% less than expected, because, back in the early aughties, she would have expected the price of the house to go up at least about 10% each year. (Really, a lot of owners probably thought the value would go up 15% each year, so Mrs. X's 2009 sale price really might be 50% lower than she'd expected.)

So, if a typical downtown Jersey City home price is 20% below the peak price in 2009, that might be the moral equivalent of a 50% to 60% drop in a small Midwestern town where prices have stayed about the same for many years.

Posted on: 2007/3/21 14:55
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Dr. Cagan analyzed 8.4 million adjustable-rate loans made during those three years and estimated that 13% of them, totaling $326 billion, will end in foreclosures. After lenders resell those properties, the total losses for lenders or investors holding the loans will be $113 billion, he estimated. That is about 1% of total U.S. home-mortgage loans outstanding.

"The vast majority of borrowers will be fine," Dr. Cagan said.

The estimates are based on an assumption that average home prices will remain about level with the December 2006 level over the next five years. If prices drop 10%, the number of foreclosures would jump to 1.9 million, Dr. Cagan projected. But a 10% rise in prices would cut foreclosures to 489,000, he estimated. When prices rise, people struggling with loan payments are more likely to be able to refinance into a loan with easier terms or sell their homes for more than the loan balance.


Uh, HELLOOOOOOO?!

Posted on: 2007/3/21 13:49
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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wibbit wrote: To the original poster, what are you smoking? and where can i get some. The full effect of the subprime implosion hasnt started to trickle down and felt by the average home seller/buyer yet. But they sure will in the near future (~6months), that's a fact. Most people really dont understand the gravity of the situation in the subprime mortgage fallout. Yes i am sure you read the news and saw mortgage firms lined up to file for bankruptcy protection and all the investment banks rushing for the door to hedge against their exposures. But what it really means for the buyer(even those with good credit) is a large percentage of them will not be able to get the mortgage they currently can, actually far from it. For example, before with 650 rating you can qualify for a 250k loan, now you can only get a 200k or 150k loan etc. On top of that, the market is very nervous about the current mortgage approval process (which is a joke), they will tighten that up significantly as well, you will actually required to have the income you wrote down on the application, imagine that! All of this translates to a much more difficult mortgage approval = less people able to buy real estate. For sellers, it's even worse as the <5 yr arms are now due, the estimated default/foreclosure rate is 20% for the next few years on those loans. That's 1 in every 5! The market will be flooded with supply, on top of reduced demand mentioned above. It doesnt take a genius to figure out what will happen to the price.. it may not crash, but you sure will find some very nice deals by next year.
WSJArticle differs with your doom and gloom Economy Can Withstand More Mortgage Foreclosures As payments jump on ARMs made in recent years, 1.1 million foreclosures could result, but the majority of borrowers will be fine, a new study shows. http://www.realestatejournal.com/buys ... erty.html?rejcontent=mail With the speed and extent of production cuts in new homes nationally i'm just not worried about most markets. I do agree with the dangers in overly speculative places like miami and phoenix and parts of cali but investor groups are already buying packages of properties in bulk. The markets remember the late 80's. The markets are much better prepared to handle this this time around.

Posted on: 2007/3/21 7:50
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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I agree with you wholeheartedly right up to the end. Great deals will be in markets that are so distressed that foreclosures go through and properties are auctioned. The residual strength in our area means that, while prices will fall somewhat, most distressed owners will be able to sell at "some" price, or if they are foreclosed, it will be sold by a broker rather than at auction. I guess I define a great deal as <60% of peak, and I don't think they'll fall that far, more like 20%. I bought here 10 years, ago so 20% off peak doesn't get me excited, but I'm sure others will be thrilled. Florida and the sunbelt markets will freefall, as they always do, as will some of the recovering rustbelt where the subprimes were pushed hard. Quote:
wibbit wrote: To the original poster, what are you smoking? and where can i get some. The full effect of the subprime implosion hasnt started to trickle down and felt by the average home seller/buyer yet. But they sure will in the near future (~6months), that's a fact. Most people really dont understand the gravity of the situation in the subprime mortgage fallout. Yes i am sure you read the news and saw mortgage firms lined up to file for bankruptcy protection and all the investment banks rushing for the door to hedge against their exposures. But what it really means for the buyer(even those with good credit) is a large percentage of them will not be able to get the mortgage they currently can, actually far from it. For example, before with 650 rating you can qualify for a 250k loan, now you can only get a 200k or 150k loan etc. On top of that, the market is very nervous about the current mortgage approval process (which is a joke), they will tighten that up significantly as well, you will actually required to have the income you wrote down on the application, imagine that! All of this translates to a much more difficult mortgage approval = less people able to buy real estate. For sellers, it's even worse as the <5 yr arms are now due, the estimated default/foreclosure rate is 20% for the next few years on those loans. That's 1 in every 5! The market will be flooded with supply, on top of reduced demand mentioned above. It doesnt take a genius to figure out what will happen to the price.. it may not crash, but you sure will find some very nice deals by next year.

Posted on: 2007/3/21 5:56
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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To the original poster, what are you smoking? and where can i get some. The full effect of the subprime implosion hasnt started to trickle down and felt by the average home seller/buyer yet. But they sure will in the near future (~6months), that's a fact. Most people really dont understand the gravity of the situation in the subprime mortgage fallout. Yes i am sure you read the news and saw mortgage firms lined up to file for bankruptcy protection and all the investment banks rushing for the door to hedge against their exposures. But what it really means for the buyer(even those with good credit) is a large percentage of them will not be able to get the mortgage they currently can, actually far from it. For example, before with 650 rating you can qualify for a 250k loan, now you can only get a 200k or 150k loan etc. On top of that, the market is very nervous about the current mortgage approval process (which is a joke), they will tighten that up significantly as well, you will actually required to have the income you wrote down on the application, imagine that! All of this translates to a much more difficult mortgage approval = less people able to buy real estate. For sellers, it's even worse as the <5 yr arms are now due, the estimated default/foreclosure rate is 20% for the next few years on those loans. That's 1 in every 5! The market will be flooded with supply, on top of reduced demand mentioned above. It doesnt take a genius to figure out what will happen to the price.. it may not crash, but you sure will find some very nice deals by next year.

Posted on: 2007/3/21 5:24
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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"Supply/Demand" is kind of like "survival of the fittest" - it's circular reasoning that doesn't fully explain anything by itself. Things are because they are because they are, etc.

I'm talking about the things that impact demand - in this case sub-prime loans, speculation and unscrupulous mortgage practices.

Posted on: 2007/3/21 4:01
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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What's the profit margin like on these new construction high rises? And if the market starts to suck, are they more likely to drop prices or just sit on their buildings and wait?

Posted on: 2007/3/20 14:13
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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You do live in such a country. The area is called Kansas. Move there.

Supply - Demand.

Posted on: 2007/3/20 13:15
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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As much as I've been one of those people hoping for a price drop so I can buy in the next couple of years, I worry that the fallout from all this for our society and economy as a whole will be far worse than any benefit buyers like me could reap. I'd much rather live in a society where home prices grew at a reasonable rate and people were strongly encouraged to borrow only what they can afford to pay back, even if it meant not having some coming "opportunity" to buy property at a low price.

Posted on: 2007/3/19 18:14
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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Jsalt and GrovePath,

thanks for posting such informative articles on this thread.
it's so sad that one of the foundations of the recent realestate boom is predatory lending on a wide scale.

That said, I've met plenty of JClisters who have nice jobs and want to purchase in the JC, but are still locked out of this market due to overvaluations. I think that one of the good points of a potential market correction is that some of these folks will be able to afford to buy here now......

and I say this as an owner with a long term investment in this community

Posted on: 2007/3/19 15:37
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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I think this is it:

http://www.ft.com/cms/s/ebad7158-d562-11db-a5c6-000b5df10621.html

==========================================
The wrong way to lend to the poor

By John Gapper -- Financial Times

Published: March 18 2007 18:06 | Last updated: March 18 2007 18:06

For confirmation of the old adage that the rich get richer and the poor get poorer, take a look at the US housing market. Lavish Wall Street bonuses mean that apartments and houses for the well-off in New York are still rising smartly in price. Meanwhile, in the poor US city districts where many blacks and Latinos live, something very nasty is going down.

Global stock markets shuddered last week at the prospect that an implosion in the subprime mortgage market would pull the US into recession and crimp world growth. Subprime mortgage lenders such as New Century Financial are in trouble because so many borrowers have defaulted on their mortgages as interest rates have risen and homes have fallen in value.

ADVERTISEMENT

Since I had never heard of subprime mortgages until recently, I spent some time last week discovering what they are. This is what I was told.

Imagine a man who is married with two children and who has a low-paying job as, say, a school janitor. It is 2004. He rents an apartment and has watched enviously as property prices and rents have risen sharply in the US housing boom. He decides that, for the first time, he should be able to make money by owning property too.

He does not go to see his bank because he had trouble with his bills in the past and he is afraid of being humiliated. Instead, he walks into the office of a mortgage broker who got one of his friends a loan. He explains that he does not get paid a lot and has hardly any savings but he wants to buy a house. ?No problem,? the broker says, ?take a seat.

?Your credit score?s not great and your income?s not high but we can deal with all that. The first thing to decide is what mortgage you want. Everybody used to choose 30-year fixed rate loans but you might prefer one that starts off with low payments. You need to buy furniture, and paint the place, so it gives you breathing room for a couple of years.

?As for the income, don?t worry: just tell me you?re paid rather than coming up with the paperwork. There are some fees but we can just wrap all of those up in the loan so you don?t have to pay the money upfront. Here?s what your monthly payments will be. Not bad, is it? Just sign here, here, and, oh, here, and we can get things going with the bank.?

If all this sounds ominous, it is. Our janitor has just acquired an exploding Arm (adjustable-rate mortgage) which is as painful as it sounds. His interest payments were fixed at 7 per cent for two years, since short-term interest rates were low in 2004, but he got into arrears on property taxes, because the bank did not follow the customary practice of collecting them monthly.

?No problem,? says the broker, when he returns the next year with his tale of woe. ?Great to see you again. You were wise to buy that house because it?s gone up in value. We?ll just refinance the mortgage to cover some of these bills. Just sign here, here, and, oh, here.?

By 2006, house prices have started dropping in his city and, in the middle of the year, the mortgage payments are reset. His 6 per cent fixed rate jumps to 10 per cent, with a further rise to 12 per cent in prospect: his Arm has exploded. He cannot pay and goes back to his broker. But he is not greeted warmly this time: there is no home equity left to support another refinancing.

Bye-bye, home. The mortgage securitisation trust that diced up the credit risk of his mortgage into tranches for different pools of credit investors calls the bank that made the loan and tells it to repossess the property. The house is boarded up and auctioned, which pushes down the sagging prices of houses on the same street even further.

It adds up to a sorry tale of human nature and financial incentives. The broker earned a higher fee for selling our janitor an exploding Arm rather than a fixed-rate loan and by getting him to self-certify his income (which involved him paying a higher interest rate). By not escrowing taxes, the bank made it more likely that he would incur a prepayment penalty of 3 per cent of the mortgage.

As long as prices rose, equity could be extracted by the mortgage broker and the lender (and the Wall Street banks that securitised the mortgages) each time the janitor had to refinance. Indeed, they had a vested interest in his loan being unaffordable and in him requiring a new one. The credit risk had been securitised away and they gained another round of fees.

When the property market dipped, the music stopped. Here are some figures to reflect upon. Some 52 per cent of loans made to black people in 2005 were subprime and 80 per cent of these subprime loans were exploding Arms. About 70 per cent of subprime loans were booked by brokers who had no fiduciary responsibility to the borrowers they advised.

Martin Eakes, chief executive of Self-Help, a lender and credit union, has estimated that 2.2m families could lose their homes to foreclosure because they are unable to pay their mortgages. He thinks it could become ?the largest loss of African-American wealth in American history?, one that was largely avoidable if borrowers had been better advised and had been given more suitable loans.

Poor people will always pay more than rich ones for credit because they are more likely to default. The cost of sound advice, which they need, can add to fees. Nor can those who took out loans be absolved of responsibility for their plight. But, examining what has happened in the US mortgage market, even the staunchest advocate of caveat emptor must despair.

john.gapper@ft.com

Posted on: 2007/3/19 15:17
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Re: So much for all of you folks who predicted a JC/NYC RE Crash
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John Gapper's column in today's Financial Times quoting Martin Eakes, CE of Self-Help, says that the sub-prime lending debacle could become "the largest loss of African-American wealth in American history."

Can anyone provide a link - this is a very informative article. I don't subscribe to their internet service (love those St. Joseph aspirin pages).

Posted on: 2007/3/19 15:10
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