Last week, I heard someone complain that the housing market was “bad.” Well, when housing appreciated 10-20% per year, I heard other people complain that the market was “ridiculous.” The truth is that the housing market has never been healthier. Now that the recession has washed away a lot of the speculative excess, housing is affordable again IF you have cash. The problem plaguing the housing market isn’t so much a crisis of confidence on the part of buyers, but the locked up credit market with wide spreads for jumbo and investment property mortgages. Once those spreads narrow, you’ll really see the pace of real estate investment accelerate.
Tag: mortgage
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Interest Rate Cut
The Fed’s second interest rate cut in just over a week really confused me. Instead of being merely aggressive, it appeared a bit desperate. Perhaps, the national economy is faring much worse than I had believed. The problem for home owners and real estate investors is that our perspective is often local. Easy to tell how we are doing, but difficult to see clearly how others are doing. So long as we have a roof over our heads and a steady job, any recession does not seem too bad.
If you live in an area tha has not been affected by the sub-prime crises, you might be thinking that your area is different. However, it is difficult living on an island and eventually what happens to others may also happen to us. Make sure you have sufficient savings to ride out this storm.
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Bad Loan or Bad Financial Decisions
The Los Angeles Times ran an interesting article today on pay option loans. Essentially, these home loans work just like credit cards in that each month the lender only requires a minimum amount due. This minimum amount though does not even cover the interest due, leading to negative amortization. In other words, by just paying the minimum amount due, the borrower owes more and more each month.
One conclusion you can reach is that negative amortization loans are bad. However, the real lesson I see is the danger of throwing good money after bad. Let’s take a look at the article. The homeowner bought a house in Corona 11 years ago. In that time, his house appreciated in value, growing from $129,995 to over $400,000. The lesson could have been about a savvy real estate investor. Instead, the borrower proceeded to strip out the equity from his house to pay off credit card debts, purchase a car, travel internationally, and invest in stocks and commodities.
Let me restate this. The homeowner pulled money out of an asset that had tripled in value for him over 11 years, and poured it into discretionary spending and investments that ended up losing money for him. Therein lies the big lesson here. You don’t have to read Rich Dad, Poor Dad to figure what went wrong here.
Taking cash out when refinancing isn’t like withdrawing money from your bank account. You take $40 out of your checking account at the ATM and the money is yours. You take $40,000 out when refinancing and you have to pay the money back. That’s the difference.
Los Angeles Times:
A Loan That’ll Get Ugly Fast