If You are Thinking About Buying a House or Refinancing, DON'T!

[The Lone Liberal]

According to the Economist we are on the verge of a “housing market” depression. The predictions are that within the near future we are going to see at least a 20% reduction in the value of housing. That means anyone who has purchased or refinanced a house over the last 36 months will owe more than the house is worth.

With the new bankruptcy laws they will be unable to rearrange their debt and they will be in hock forever!

[greatauntoftriplets]

1. I have friends who are refinancing!!!

Yikes! The papers have just been signed.

Wonder if my real estate taxes -- which have soared along with property values -- will come down now. HA!!!!

[punpirate]

5. The trick is still to get a good fixed rate mortgage....

If your friends are doing that, then they will be better off doing it now than waiting.

If they're considering a variable-rate mortgage because the low variable rate is better now, they should reconsider (they still should have several days to back out of the contract in most states). Greenspin has been opining that variable-rate mortgages are good, but that's just a lame attempt to protect the lenders when the interest rates go through the roof....

[Junkdrawer]

9. What punpirate said...

I can see putting off a purchase if the market is about to drop, but I can see no reason to not refinance if you can get a lower fixed rate.

[SW FL Dem]

42. Just don't take cash out to buy a car or take a vacation.

[tom_paine]

89. Bingo!

[mountainvue]

20. Yes and no.

Some ARM's have a fixed period where the rate is locked. they also have caps-most can adjust a maximum of one point per year (up or down) and 5-6 points over the life of the loan (generally 30 years).

[formernaderite]

86. People who are buying homes now wish they'd bought during the last.....

..bubble. As long as you don't have to sell soon, this is still a great time to buy. Every bubble ends, and housing prices always go up, unless you live in an economically depressed city. Housing is a finite commodity in suburban areas around booming cities. Of course, if you can it's always better to downsize. Who needs all these huge McMansions.

[camero]

14. Maybe

The millage rates will go up though. I could bet the house on it. :)

[XanaDUer]

2. Proud renter here!

:hi:

[mourningdove92]

3. I am not very knowledgeable about economics, but this whole

refinancing thing has never smelled right to me. I don't have very much equity in my house, and I would certainly love a lower interest rate, but at least my interest rate is fixed. I have felt all along that this big, huge push to refinance while rates were low was a scam of sorts. I mean, since when did lenders go out of their way to do anything to benefit the consumer? I just wonder how many people who have recently refinanced will end up losing their homes?

[cally]

11. You don't have to borrow more when you refinance

Just do it and get the lower rates.

I think housing prices will decline in some of the markets like where I live--California. I haven't heard 29 percent, though. With the extent of the deficit, then interest rates will have to increase soon. Much of the housing price increase was because of the low interest rates so people could buy more expensive houses. As interest rates rise, the price of housing will probably decline. If you plan to stay in your house for a long time, then even if the price falls short term, in the long term you will probably make up that decline.

One other point, most real estate economists are predicting a decline in value for large, family homes. The size of families are decreasing and ageing baby boomers probably will want smaller houses.

[cprompt]

57. refinancing is good if you are already in the house

perfect example is me and the misses. bought the house 2 years ago, first time homeowners, we were so happy to get the house we wanted that we didn't really ask any questions and kinda just went with the program. they put us in on a 2-1 buydown which is were first year we paid 6%, 2nd 7%, 3rd 8% then it locked at 8% for the remainder. At 8% our payment was $986, we refinanced with a little under a grand out of pocket, new payment $716 fixed for 30 years. By doing the math I saved $97200 over 30 years. don't refinance for money to pay off things, just pay them off, refinance to get a better deal on something you are already paying for.

[tedoll78]

4. This may sound selfish of me..

but I've been banking on this happening.

I graduate from school in about three years, and in five years, I'll have enough for a down payment on a house. Shame on me for including this expectation in my calculations.. :P

[onecitizen]

6. I am so sorry I read this post.......

my son and his new wife just moved into their new home today!!

I hope you're wrong.:cry:

[mountainvue]

7. Sigh.

The sky is not falling. Refinancing for a lower interest rate is not a scam. Most people aren't anywhere close to 100% leveraged in their homes anyway. And yes, I'm a mortgage broker. Flame away.

[Jacobin]

10. Here's a small fire

People who borrow against the home to pay off credit card debts (if they are close to going under anyway) are fools. They just turn unsecured dischargable debt into secured debt that can't be altered if its turned into a first mortgage on their home.

Sorry, but this isn't about the bottom line of mortgage brokers. It's about people having a home to live in when the housing bubble breaks.

[mountainvue]

27. As long as they can

make their payment, they're fine. The greatest effects of a decline in housing value would have been seen post 9/11, IMO. If there is a decline, then eventually it's going to turn around anyway. But honestly, I don't think it's going to happen.

[GiovanniC]

92. Changing $1000's in Credit Card Debt at 23.9% Interest

Into $1000's of debt at 5 or 6% interest seems pretty damn smart to me... and makes the possibility of bankruptcy much smaller, IMO.

Am I just not looking at it right?

[The Lone Liberal]

12. They will need to have at least a 25% equity

or they are going to be financially in bad straights.

[mountainvue]

28. Can you explain?

[shanti]

38. excuse me?

i've NEVER had 25 percent equity. now what??

[buycitgo]

25. not going to argue at all.....need some help, actually

can you check you Personal messages?

I just sent you something

important

thx

[fishnfla]

30. no flames here

it depends on the market area, and the markets overall. real estate, leveraged or not, is always a good investment.

[The Lone Liberal]

33. Not according to the Economist

This is going to be world wide and is not going to come back anytime soon.

[Art_from_Ark]

72. Real estate is not always a good investment

Just ask folks in Flint, Michigan, or Gary, Indiana, or inner city Detroit, or Asbury Park, New Jersey, or "Middle-of-Nowhere Estates", Oklahoma, where a housing development was built without access to water!

Caveat emptor!

[Art_from_Ark]

81. Another thing about real estate is you have to pay

maintenance fees and property taxes on it while you own it.

Then there's that little problem with liquidity. In a hot market, you might not have any trouble selling, but property in a cold market, or on the wrong side of town, can become a real albatross around an owner's or investor's neck.

[Jacobin]

8. Current bankruptcy laws won't let you alter

a first mortgage on the family home. But re-financing to add more to your mortgage to pay off credit card debts is a baaaaaaaaad idea. Credit card debts are dischargeable.

[BrotherBuzz]

17. Are credit card debts still dischargeable?

I swear that was one loophole that Bush* closed the first year of his misadminstration. Can't let his banking buddies lose sleep worrying about deadbeats declaring bankruptcy and skipping out in the middle of the night.

[Jacobin]

21. They haven't passed it yet

But they are still trying to push it through

[fearnobush]

13. Bubbles must always burst.

Too much wheelin' and dealin' going on.

[DulceDecorum]

15. Neo-slavery

is the name of the game.

I guess the property taxes won't be going down either.

[JanMichael]

16. The question isn't "if" but "when". Here in NC the first stages of the....

...RE burst is already happening.

My particular city (One of the big ones) has had it's first negative property tax revenue since the depression.

And a relative of mine in Charlotte told me tonight that the prices are dropping in the new developments and at best staying even.

This is something that mortgage brokers, bankers, and RE brokers, will poo-poo until the the end of time but that's to be expected I guess.

[DemoTex]

32. Have you ever read the works of Asheville's Thomas Wolfe?

In You Can't Go Home Again Wolfe displayed an antipathy for his mother that one would not expect from a son. His number one criticism of Mrs. Wolfe? She was a speculator in real estate in the frenzy leading up to the depression.

I really need to re-read Wolfe. In fact, I have never read Of Time and the River, and here I sit at the headwaters of that river, the French Broad (runs through Asheville, and - ultimately - to the Gulf by way of the Mississippi).

[KoKo]

47. Wolfe can be very depressing, but an interesting re- read for your new

home in NC. I read him in my teens. Wonder if he would seem dated now if I went back and re-read. I didn't remember that about his mother. Interesting.

[DemoTex]

60. I agree. Depressing.

Wolfe obviously had an ax to grind. Look at Judge Rumford Bland, a character on the train (from NYC to Asheville?) in "You Can't Go Home Again." Lotsa shit going on there. He was not only "blind," in the sense of sightless (but was he blind to the law?), but he was also syphilitic that added to the subtle corruption charge and further equivocated the blindness claim. Makes one think Wolfe had a bad experience with a judge. A particular judge. Revenge in ink (my favorite form, BTW).

[MissB]

18. Not quite true

"That means anyone who has purchased or refinanced a house over the last 36 months will owe more than the house is worth."

True, if the reduction of 20% happens, many people will be caught in a bad situation. But not everyone will be.

[SarahB]

19. There goes my equity

We bought our house 9 years ago when the market was pretty low and now it's worth about double what owe. We have a small second mortgage, but even with a 20% drop, we'll still be okay. I would hate to buy in this market though. Hell, I'd hate to have to be renting right now in this market.

[SoCalDem]

22. The "new" bankruptcy bill has not passed the Senate yet.. BUT

my friend's mother in law just filed and her lawyer said that it probably will in the next few months..

Just a heads up ...

[mmonk]

23. As a real estate agent

I noticed decline recently due to record numbers of foreclosures. When some people put their homes on the market and it didn't sell for six months, the original worth when first put on the market didn't hold up when they sold because the houses wouldn't appraise for a loan. Surrounding foreclosures brought the appraised worth down. I believe that has turned around somewhat though (or at least I've seen some improvement).

[PretzelWarrior]

24. this is a problem that's been bothering me a while...

I owned in 2001 and moved...sold my house before layoffs hit our area big and before 9/11. Basically broke even. However, I've seen housing markets keep the economy from outright depression...and I feel it can't last.

I'm actually waiting til the market goes south due to high interest rates due to the big deficits which WILL continue.

Many folks are going to be hurting...but at least they have low rates. They'll be less mobile which isn't great in this type of economy.

[54anickel]

26. I feel for the folks that took out Interest only mortgages recently if the

market is truely going to go down that quickly and that soon. I'm sure it seemed like a good idea when they signed up, but a 20% decrease in the value of the home is really gonna hurt.

[Kathy in Cambridge]

29. Depends on where you live

they've been predicting a real estate bubble in NYC, Boston and San Francisco, but demand is still high so it hasn't happened.

Refinancing is a GREAT idea-if you get a low fixed rate. I have friends that have cut hundreds off their monthly payment.

[skippysmom]

80. Exactly my thoughts

In Mass they don't seem to be building enough homes, so supply is still low and demand is high. Particularly as they keep building more expensive homes, so the supply of "affordable" homes doesn't grow at all.

[ezee]

31. a great article at

www washington monthly.com .entitled "there goes the neighbor hood"
its worth the read

[54anickel]

35. Yep, here's a link. I'm still in the middle of reading it. Came across

it somewhere here on DU earlier this AM and just haven't gotten around to finishing it yet....been a busy day.

http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

[KoKo]

51. Hey "54!" The bottom of the article is better than the top...think links

posted by you in "Marketeer" thread are more informative. But, still, it's one more voice entering the growing crowd of folks cautioning so it's an interesting read.

The time frame seems to be some months out so that warnings will hopefully help all those who are thinking about making moves now steer clear of the pitfalls of those "adjustable rate mortgages" and paying too much for what may go down eventually. :shrug:

[54anickel]

53. Heh, think you're right - I just finished reading it. Interesting that

this author seems to think nothing will be done to reel Fannie and Freddie in before they tank. And here I thought there was some minor progress being made by Congress on this issue. Not much mind you, but some progress.

[The Lone Liberal]

34. This will be the "Great taking down of the middle-class"

Strip the wealth from the middle class.

[shanti]

36. oh shit

i was planning to send in my documents for a re-fi tomorrow. my house is worth more than i paid for it and i'm not really cashing out too much (30000). my interest rate is going down 1.5 percent tho. i really shouldn't do this??

help!!!

[Journeyman]

41. Make a decision based on "your" knowledge. . .

and beliefs, and seek the advice of people you know and trust whom you can speak with in person. Talk with someone other than your broker or loan officer. Don't follow advice you receive on an internet discussion board. What you read on these boards may be the best advice possible and then again, it may be the blathering of fools. Seek wise counsel with people you know and trust.

[54anickel]

44. Depends -

Do you really need the extra 30K?
What % of the current value will be in your new loan? More than 75%, I'd reconsider that extra 30K.
Is it fixed or ARM?

It the forclosure rates that are starting to push prices down, so it depends on the area you're in as well.

Foreclosures will probably go up whenever the rates are finally raised, but despite some of the speculation going on about Greenspin raising them before Sept, I doubt it. Jobs would need to grow near this trend steadily for him to raise rates. There is still no "wage inflation" and they'll never admit to general price inflation in that PPI. No inflation = Fed can remain patient on rates. :eyes:

[mountainvue]

67. 1.5 %?

Are you doing an interest only? What's your margin? You might want to take a look at the index that determines your rate and how long the rate is fixed for.

[Yupster]

76. Go see some experts man

Don't take financial advice from internet message boards.

[Lex]

37. If you refinance your current loan amount only

and get a lower fixed rate than you have right now, how can you be worse off?

My SO and I refinanced our fixed rated mortgage from where it was to a lower fixed rate, and decided on a term of 15 years instead of 30 (which is what it was).

Our monthly payment is only $25 higher, but our term is now 15 years and not 30--and more of our payment goes to principal than interest than before.

It was probably one of the best moves financially we've ever made.

[boxster]

39. I'm sorry, but that's horrible advice.

Especially telling people not to refinance. Many people are dropping their interest rates 1-3%, and if they're financing the same amount on the new loan that they owed on the old one, they're going to be MUCH better off with the new one, regardless of the housing market. The decrease in payments alone is financially advantageous.

Do you honestly believe that people would be better off owing $100k or $200k or $500k at 8% rather than at 5.5%? Why on earth should they keep making higher payments and keep a higher-interest loan?

That makes zero sense. In the future, please think things through before freaking people out like this.

[The Lone Liberal]

48. Depends on the discount rate you will pay on refincnce?

I would think, plus the equity you have.

[boxster]

52. With rates as low as they are, don't pay any points.

There's no reason to do so.

You can then refinance for $1500-$2000 TOTAL. Most people will easily recoup that in one year, maybe less.

Re: equity - it doesn't much matter anymore. Many financial institutions will refinance up to 100% of the value of the home.

But, again, if you're refinancing the same balance as that owed, but at a lower rate, the housing market is irrelevant. You owe what you owe. Either you owe it at the current rates, the low 5's currently, or you owe it at your old rate.

We recently refinanced our house - we paid a total of $1400 in fees. We lowered our payment $300/month. So, in five months, we paid for the refinance completely. Everything after that is money in our pockets.

[mountainvue]

69. Total not including escrows.

[klook]

40. Am I missing something?

When you refinance you don't have to borrow more money. Let's say you have a $150,000 balance on your mortgage, you're currently paying 7%, and you have 12 years left on the loan. You find a lender who'll refinance that $150,000 at 5.5%--fixed rate for 30 years.

You don't have to take 30 years to pay off that new amount (since you were careful and read the fine print in the loan application to make sure you don't have a prepayment penalty). You can still pay it off in 12 years by just paying extra every month.

I don't understand all this panic about refinancing. Buying a home, maybe, but that's always a bit of a crapshoot.

In the real world of real estate, house prices don't really decline as a rule, or at least not much--unless an old toxic waste dump is discovered in your neighborhood or something like that. When the market gets soft, people just tend to hang on to their houses until the market gets better. So, unless they have to move, they don't have to sell their house at a lower price. These cycles happen over and over.

Listen, in the wonderful Reagan years, the 1980s, I had a mortage on a house that was costing me 14% interest, AND it was adjustable! It could have gone up 2% every year with a lifetime cap of 5% or something, so I could have ended up paying 19% interest on this house! That's like buying a house with a friggin' credit card. (Thanks, Ronnie, for deregulating the financial services industry!!)

Fortunately, things got less crappy over the years I lived in that house, and the adjustable interest rate never adjusted upward.

I say, if you know somebody who's about to buy a house, tell them to go ahead and enjoy it, assuming they can afford the payments.

What's truly a mistake, as someone else pointed out in this thread, is to borrow against the value of your house to support a lifestyle you can't afford.

See http://www.bized.ac.uk/timeweb/digging/dig_verifying_work3.htm for an interesting perspective on trends in U.K. real estate, for comparison.

[Kimber Scott]

43. It would be silly not to refinance to a lower rate as long

as you don't deplete your equity. And, you will always need a place to live.

[David Zephyr]

59. That's The Key, Kimber Scott --- Not Depleting Your Equity.

But if you can refinance, reduce your long-term debt exposure with a lower fixed interest rate and at the same time, perhaps shorten the term from a 30 year to a 15 year period, then one might not want to miss these low rates if you are fixed into a higher rate.

I would not advise interest only mortgages unless you plan on moving soon.

Finally, as Kimber Scott says, really, really think twice before you draw money out during a refinance and thereby reduce your equity. She says it best: you will always need a place to live.

Good Advice here.

[doubles]

45. As long as interest rates are low, the real estate bubble will continue!

Real estate is still the only relatively safe investment out there. Where else would you put your money? The stock market? Hell no!

The Northern California bubble is at its present level, just plain ridiculous, no wonder all those Silicon Valley companies are sending jobs overseas, how else can companies hire people where the average house is $600,000? When that bubble eventually pops, I am returning to the Bay area!

[The Lone Liberal]

49. The interest rate will continue low as long as foreign investors finance

the deficit?

[boxster]

54. Southern California is the same way, especially San Diego.

The San Diego housing market has been insane - the average home price rose 22% average each of the past two years and 15%+ each of the previous two years. A recent study said that only 15% of workers in SD can currently afford a median home.

[Zorra]

46. Save your money and buy after the next Depression begins.

Houses will be dirt cheap.

[kerry-is-my-prez]

50. The real estate market will go back up. Also- the stock market will crash

if the real estate market goes belly up. If the real estate market goes bust - the economy will be in deep trouble. There'll be no-where to invest.

With real estate - you have a better chance to recoup because the prices will always go right back up...

[welshTerrier2]

55. this makes no sense

perhaps i'm missing something here but i think part of your post is dead wrong ...

i just refinanced my house a few months ago ... i lowered my interest rate on a fixed rate loan from 5.25 to 4.74 and it didn't cost me a penny to do it ... i did NOT increase the amount of my loan which represents about 20% of my homes' value ... i also shortened the term of the loan ...

i fail to see how obtaining a better financing arrangement within the last 36 months was the wrong course of action, whether the housing market collapses or not ...

i also don't see how you can make such a blanket statement that refinancing is a bad idea right now ... suppose someone has 25 years left on their mortgage and has a 7.5% interest rate ... say they can refinance with no points or closing costs and can obtain a 25 year mortgage at say, 5.5% ... it seems like a good idea to refinance whether or not the housing market collapses ...

why would you argue otherwise ??

[webjamn]

65. You are right

It is a good idea to refinance if you are going from a fixed or adjustable rate mortgage to a fixed rate that is lower. However, if you are going from a fixed rate to an adjustable rate and you plan to stay in your house longer than the fixed rate term of the ARM (adjustable rate mortgage) then refinancing is probably a bad idea. Interest rates are near all time lows right now and will likely be much higher when the rate begins to adjust higher in two or three years.

[Oddman]

56. Let's see - my house has appreciated 110% in the last 6 years

when I refinanced last month I lowered my interest rate by 2%. I was able to go from a 30 year to a 20 year mortgage and my payments are LESS than they were before refinancing. So if my house loses 20% of its value I'm still ahead 90% plus my payments are still lower. My math adds up for me!

“President” Bush Takes a Vacation!!!
http://www.arts-america.com/vacation.htm
Was our fearless leader asleep at the wheel of terrorism???

[AngryAmish]

58. I can't find that article in the Economist

Could you provide a link or the title of the article?

One way to tell if there is a housing bubble is to compare rents to mortgage payments of similar properties. Mortgage payments get lowered by the mortgage interest deduction, so if your mortgage is $1000 per month (after figuring the deduction) and a renter would only pay $700 for a similar property, that is a pretty good sign that there is a bubble.

[The Night Owl]

61. Oops... Wrong article. NT.

[AngryAmish]

64. The May 2003 article in the Economist

I read it then and here is the link <http://www.economist.com/surveys/displaystory.cfm?story_id=1794873>

The editorial stated they (the Economists editors) expect the bubble to burst by May 2004. It has not really happened yet.

I think it is very irresponsible to tell everyone that their homes are about to be devalued. In some urban areas yes. But certainly not across all of America. (Foreign countries I do not know so much about so I will be quiet about them.)

Honestly, please read the entire survey from last year in the Economist. The link above is just to the cover editorial. The links are on the right side. You will get a lot more facts, and not scare-mongering.

[The Lone Liberal]

74. What I have read is that it is going to be a world wide

devaluation of real estate.

[The Night Owl]

62. For buyers and sellers, what is the bottom line?

If I am simply looking for a new house to live in the rest of my life, should I sell now before the bubble bursts and then buy when housing prices plummet?

[AngryAmish]

66. The bottom line is this

Making a decision about one of the larger decisions in your life based solely upon an internet chat-board is really stupid. I may be just as stupid as the other people on this board. (And I am not saying anyone in particular or generally is stupid. This is just a plea for obtaining your own information.) Please, do your own research.

There are generally two tests to determine if your particular real estate market is suffering from a bubble. The first (and in my opinion the best) is comparing rents of similar real estate to mortgage payments. Remember, you get to deduct the interest on your mortgage so that is not factored into real cost. When there is a large gap that means you may be in a bubble-type situation.

The other test is percentage of income test. The old rule was 33% of income be spent on housing, now they let one go higher.

My advice is if you want to buy a place for the rest of your life buy a place that you can afford now. The bubble they are talking about is in some urban areas, Washington DC, Boston, NYC, San Fran, etc. And some of their suburbs. If you are not in those areas, you are fine.

And if you are going to live in a place for the rest of your life, a 15-20% drop in value will be made up for over your life. (Assuming a 5+ year life expectancy.)

[The Lone Liberal]

75. Good advice --- I am only telling you what I have read.

and it is speculation. Speculation is only thinking the future can be forecast. There is no universal law of physics that says housing will either go down or go up.

Of course, one might look at the housing stock and the demographics. The nation is getting grayer, what happens to the housing stock when the "boomers" either cash out for retirement or cash out because of "Forrest Lawn?"

The other variable is the devaluation of income. As more and more jobs run to low wage countries, there will be a rush to bottom in U.S. wages. What happens to the housing market when that occurs.

Both of these variables are going to have an effect on real estate. Less people making the income required to support high priced real estate.

[Zinfandel]

63. Question Please: I Bought my house 10 years ago in N CA for $225,000.

I put $100,000. down, I have an adjustable loan (30 yr), I have no second, I put about $60,000. of my own cash into the house for remodeling, the house is now apprasied at $440,000. My interest rates have been going down every six month's for the past four or five years to 4.65% today, I owe $95,000.00 on the house. (I expect the adjustable rate to go down once more in a couple of months, when it's time for adjustment).

My Question: My adjustable can only go up or down 1 point a year and a cap I think at 9%...Would you re-finance to a fixed Mortgage???

[webjamn]

68. Yes

lock in a low fixed rate now so you won't start sweating when rates inevitably rise in the nest one or two years. If you have a good credit rating it won't cost you much to refinance.

[mountainvue]

71. Have you adjusted at

your max of six points plus or minus yet? It should be a six point adjustment either way. Check the index or treasury note that your ARM follows and see what it's been doing. As the other poster suggested, do some research and don't just pay attention to what's said on an internet chat forum.
Also Zinfandel as of Friday you could still get a 15 year at 5% and a 20 year at 5.375%. I expect those prices to go down a bit next week. Hope this helps.

[NewJeffCT]

79. Yes

Do it now - lock in a low rate. After the election, Greenspan will be forced to raise short term rates and long term rates will follow suit... see if you can re-fi for a fixed 15 year rate if you can afford the payments, or even 10. You save a ton of money in interest.

[Must_B_Free]

70. Mistrust of corporate CEOs

is what has driven people into real estate lately.

That confidence is wall street will not soon return.

[MercutioATC]

73. Boy, am I glad I bought where I did...

Financially stable community in the west 'burbs of Cleveland that's almost fully developed. Great schools, great city services and one of the lowest tax rates in the county.

I'm not worried about my property value...

[NewJeffCT]

77. They've been predicting the bubble bursting for a while now

Not the Economist, but many national publications have been predicting the end of the housing bubble for over a year now. It's already slowing down in some parts of the country, but it has been for a while now.

The real bubble bursting will happen when Greenspan is forced to raise rates to keep the dollar stable and long term rates follow suit.

[spinbaby]

78. This may depend on where you live

On both coasts, housing is way overpriced, but it seems to be very reasonably priced in much of the heartland. My guess is that the coasts are where you'll see the real-estate crashes. Heaven help you if you own a house in LA.

[amazona]

83. no bubble here

Renting is more expensive here (south Louisiana) than buying. I couldn't afford to rent a house in my neighborhood. The house two houses down is going for over $1,000 a month! Yikes. It makes sense though, since when you rent you have all the normal expenses plus the landlord's profit.

When people say renting is cheaper, when you look into it, the only way it's cheaper is if they are making an unfair comparision, such as comparing a small apartment to a house or comparing a safe neighborhood (with mostly owners) to an unsafe one that's all run-down. It just wouldn't be logical that landlords would go to all the trouble of renting places and not include a profit motive so renting for equivalent properties has to be more expensive than buying.

I agree with the poster who says, if you ever see rents going lower than a house note, then it's a bubble. But we sure don't see that here!

[jbonko]

82. It's the 20% drop that's the issue - you owe the difference

All mortgages have a clause saying that if the value of the home drops below the amount borrowed, you have to pay off the difference (or even the WHOLE thing) THAT month, or they can foreclose.

Since most people make a 20% down payment, and little progress is made paying off the principle in the first couple of years, a 20%+ drop in the value of the house a few years after buying it can force a default if you don't have cash on hand.

[amazona]

84. nah

Maybe some mortgages say that. Mine sure didn't. I haven't heard of anyone being challenged like that since the Great Depression era. When houses were upside-down in 1990-92 (the S&L crisis) the people who lost their homes lost them because they also lost their jobs in the huge recession of the time, not because banks wanted to foreclose on people who were making their monthly notes. They were kept hopping as it is, to keep the economy out of collapse, just because of all the foreclosures on people who WEREN'T making their notes.

Do you know the joke about the two buddies in the forest who run into the bear? One man turns and starts to run. The other says, "You really think you can out-run the bear?" First man points out, "I don't have to out-run the bear, I only have to out-run you."

Banks, sheriffs, courts, etc. will be kept hopping with the first order of business -- people who aren't able to make their monthly payments. The depression would have to go on for years before they would have time to do re-appraisals and try to foreclose on random people just because their houses are upside-down. Keep in mind, the bank DOESN'T want your house in a falling market. It wants your money. They will not be looking for ways to make MORE people foreclose (and hence to further depress the value of the properties they've already unwillingly acquired in various neighborhoods). Banks that end up with too many foreclosed homes or even entire ruined neighborhoods go out of business...see under the S&L crisis. Even if you do have such a clause in your mortgage (which if you haven't signed it yet, just ask them to strike it), then this is way way down on your list of things to worry about.

[newyawker99]

87. Hi jbonko!!

Welcome to DU!! :toast:

[mountainvue]

88. Complete BS.

[hertopos]

85. Here is how it works

Neither refinancing nor getting second mortgage is bad. It all depends on your debt level and how much equity you have. You can trust me on that since I taught financial math many times.

I carry two first mortgages, one for my residential property and one for my rental property. When I bought these two properties, most of my friends thought I was crazy since there are located in Baltimore City in Maryland. Well, it was in Baltimore City but it was also located in a historic district called 'Bolton Hill'. With the change of Mayor and the addition of new town homes at the North end of Bolton Hill, the property value appreciated about 80% without any renovation or repair. Since I did a lot of repair and renovation to both of my properties, the value of my properties has at least tripled. (Yes, their original prices were very low.) Hence now I have 60-70% equity floating.

Before I get into all refinancing questions, I also noticed that so many people get a house with 30 year mortgage. That's a very bad idea in general since you are still paying your mortgage when your kids need to go to college. Let's look at numbers. Making a loan of $200,000.00 and 7% fixed annual rate:
With 30 year mortgage, monthly payment is ($1,330.60)
With 15 year mortgage, monthly payment is ($1,797.66)

So the difference is only &$480.

When you buy a house;
1. Save enough of down payment so that you don't need second mortgage to cover the difference.
2. Pick up an affordable house. You should stick to the price range, with which you have enough money for down payment and can pay the monthly payment for 15 years mortgage not 30 years. In addition, you should save safety net money that covers at least one year of mortgage payment plus very basic expenses. With the above case, absolute minimum will be at least $36000 for the family of 4.

Buying a house as your residence is good for several reasons.
1. Mortgage interest is tax deductible.
2. When you sell a house at the retirement to buy a smaller house, there is a one time tax break over the capital gains you made on your current home.
3. By paying mortgage, you are accumulating equity unlike paying rent.

Now about refinancing. If the rate went down a lot, let's say about 2% points, that's a must do. This should happen to the people who bought the house during Clinton administration, when the interest rate was high. However, typically, stick to fixed 15year mortgage.

Again, if your home prices more than doubled, it is good idea to consolidate your debt. I mean it is a good idea to take home equity loan to pay off credit card debt.
Because
1. Typically, the rate is lowered with home equity loan.
2. The interest from home equity loan is tax deductible.
The biggest mistake people make is that many people tend to make much bigger than needed amount. I am generally very cautious about taking a home equity loan to do home remodeling because not all remodeling add the value to the house. It all depends on where you live. What kind of remodeling will add values also depends on the location.

Finally, my remarks about variable rate I usually stick to variable rate. However, I have just changed one of my mortgages to variable rate. Here are my reasons.
1. The current rate is not just low; it can hardly get lowered type low. Only way to take advantage of this low rate is to use variable rate. In fact, I was persuaded by this argument written by one of most conservative (here it means financially very cautious.) personal finance expert.
2. Because current rate is so low, it takes a while to catch up with the current fixed rate with rate hike.
3. I have a rather pessimistic faith about U.S. economy. The U.S. economy can only grow by widening the gap between have and have-not, which I don't support. Hence, we will have to deal with slow growth economy like Europe and Japan to increase social safety net. This means the interest rate cannot go up very high for quite sometime.

Off the topic. About the economy and Globalization.
The best book is 'The future of Success' by Robert B. Reich, who was one a labor secretary for Clinton administration.

He is explaining how we are indirectly responsible for 'outsourcing'. If we want to keep our middle class in United States, we do have to deal with trades off. Well, we all DUer's know that material success is not the source of happiness. The house which is a bit smaller than we originally dreamed of give us better society and better financial security.

My academic background is Math (PH.D) and MBA. I am not exactly finance major but I was lucky and had a responsibility to deal with certain amount of equity my father left for me. (BTW, I am originally from Japan. We paid 50% inheritance tax. I believe that was reasonable.) I have to say that I cannot be responsible for your financial decision that may be affected by my opinion written here.

Hope this will help.

[StayOutTheBushes]

90. Yeah, that real property has a long history of

across the board reductions in value. Never has been much of an investment.

[AirAmFan]

91. Mortgage rates will go up when jobs start getting created...

... in large numbers. So just don't go on a spending spree with any cash out from refinancing. And weigh lower future house prices against higher future mortgage rates.