Real Estate Woes

The early morning terrorist news sent the pre-opening futures down both here and across the pond in Europe.  But, as the morning wore on, the traders here in the US decided that the thwart of the attack was better than selling so the tape went green about two hours into the session.  The indexes closed near their best levels of the day.  Our position remains extremely bearish for the next six weeks or so, maybe more.

We have noticed, in the past several weeks, various real estate reports involving the residential housing market.  The WSJ has an article in Thursday’s edition that seems to exhibit some of current issues.  It appears on page D1 and is titled “Homeowners Start to Feel The Pain of Rising Rates” with a subtitle of “Payments on Adjustable Loans Hit Overstretched Borrowers; ‘Budgets Are Out of Whack’” by Ruth Simon.

The article starts by saying that an accountant refinanced her $312,000 mortgage in 2004 with an option adjustable-rate mortgage with an introductory rate of 2.35%.  The option in the title of the mortgage meant that the accountant had multiple payment choices each month.  Obviously one of the ways she chose to use was to pay less than the interest on the loan because her mortgage now stands at $324,000.  The problem is that after two years, the introductory 2.35% has jumped to 8.75% with a minimum monthly payment of $2,257.  Using our math skills we notice that the 2.35% interest only payment would be about $611 a month.  One thing, though, is that the mortgage went up about $12,000 in two years meaning that she was paying about $500 a month less than she was supposed to.  What do these people think?  

The article continues with the accountant’s story saying that she tried to sell the house last summer (in our opinion the height of the housing prices) at $400,000 but now have it on the market at $270,000.  Doing the math on that, we see that with a mortgage of about $324K and a selling price of about $270K less realtor fees of about $10K, these people would have to cough up about $64K at the closing.  This is referred to as a “short sale” in the article, meaning the sale price is short of the mortgage.  (In the auto finance world, this is called being upside down.)

The article talks about another person who bought a house here in St. Paul two and a half years ago.  This guy got an 80-20 loan and we’re not talking about 80% loan and 20% down, we’re talking about an 80% first mortgage with a 20% second.  His two year ARM reset to a higher rate and increased his payments $200 a month.  The article goes on to say that he was stretched before this increase??? and now he starting to fall behind on his water bills, car payments and student loan.  Last month, it says, he received a letter from his lender with the words “rate increase” on the envelope but he didn’t open it “because it gets too discouraging”.  He then says, “If I had been aware both loans were interest-only, I would have probably turned the loan down”.  What?!?

The one point in the article is that “Many of these borrowers took out loans that didn’t require them to document their income and overstated their earnings”.  But, all of us Know that real estate prices always go up, Right?

Keep these things in mind when you are thinking about the stock market.  That’s what we do on a regular basis because we believe the housing market will fail badly and it will take the stock market down with it.

Dow Industrials:  11,124.37  +48.19
QQQQ:  36.79
RYVNX:   23.93  (own)
RYAIX:  25.29
RYCWX:  43.29  (own)
TLT:  85.77  (own)
BEGBX:  13.61