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Thread ID: 13495 | Posts: 11 | Started: 2004-05-02
2004-05-02 12:17 | User Profile
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Title: Rush to lend exposes homeowners to rate-rise shocks Source: Chicago Tribune URL Source: [url]http://www.chicagotribune.com/business/chi-0405020004may02,1,5446067.story?[/url] coll=chi-business-hed Published: May 2, 2004 Author: Michael Oneal and Susan Chandler Post Date: 2004-05-02 06:53:15 by sarcasm
On Good Friday, Joe Booth became a homeowner for $500 in cash.
The 29-year-old software salesman said goodbye to the two-bedroom rental he had shared with a roommate for two years. He borrowed $166,500 from National City Mortgage to buy a $167,000, one-bedroom condo on Melrose Avenue in Chicago's Lakeview neighborhood.
"I wasn't saving up to buy a place, so I had nothing to put down," Booth said.
But that didn't matter. With the post-recession era of really low interest rates finally starting to wane, banks and mortgage companies are lining up to lend money to first-time buyers like Booth--even those with limited cash resources or questionable credit histories.
"They allow you to do a lot of crazy stuff," said Dan Gjeldum, a National City assistant vice president.
Some economists are wondering whether the mortgage market is starting to look a little too crazy.
Lenders seeking to squeeze every last drop out of the housing boom are rolling out increasingly exotic (and risky) mortgages that bring inflated housing prices within reach of less-qualified buyers.
Not only is that tempting people to stretch their resources and gamble on the future, but it is also driving home prices to ever more lofty levels, some economists warn.
And with rising inflation putting pressure on the Federal Reserve to raise short-term interest rates later this year, that leaves individuals and the economy especially vulnerable to rate shocks.
"This will test the mettle of the fledgling expansion," said Mark Zandi, chief economist at Economy.com. "The economy is arguably more rate-sensitive than in the past."
To buyers like Booth, jumping into homeownership at current rates is practically irresistible. He wanted a new place to live, and handing over money to a landlord each month didn't make sense.
His token $500 down payment pushed the interest rate on his 30-year fixed mortgage to an above-market 6.24 percent. But when you add insurance and assessments, that still translated into a $1,500 monthly outlay, which is the same as his apartment rent.
The difference is that Booth was splitting the rent with his roommate, meaning his new housing costs have doubled. And like many Americans, he has plenty of other monthly obligations.
A new Saab 9.3 sedan he purchased in January comes with a $500 monthly payment, plus insurance. He has got a student loan that costs $400 a month, and a credit card balance that fluctuates between $2,500 and $3,000. To fill up his new place, he spent another $2,500 on furniture, financed by a deal that offered no interest if he pays it off before 2005.
"I definitely feel like I can handle it," Booth said. But Gjeldum of National City said it's clear that Booth's financial brew and lack of cash resources wouldn't have passed muster in a less frothy mortgage market.
Booth's bet is that his income, which is partly commission, will rise well into six figures this year from last year's total of $90,000. His company has improved its software offerings this year, giving him a better product to sell.
But he's also aware that he's stretching, especially because his monthly income varies based on sales.
"There are months when you might go without a commission check," he said. In those cases, "I might be living thin for a little bit."
Booth has a good credit history and may well have no problems. But as banks lower credit standards, the market overall could suffer, economists say.
Paul Kasriel, the chief economist of Northern Trust in Chicago, points out that housing prices have well outpaced disposable personal income over the last several years.
Houses have remained affordable for a broad swath of the population because the Federal Reserve has been holding interest rates at rock-bottom levels, hoping to pump up the economy and spur new hiring. If rates were to rise sharply, the market would slow and people's debt burdens would become more costly.
Given elevated debt levels, especially among lower income people, that could put a drag on the economy as a whole, Zandi said.
Housing market bulls like David Seiders, chief economist of the National Association of Home Builders, argue the Fed won't raise rates unless there's solid evidence that the economy and hiring are picking up, which should boost incomes enough to sustain home prices at a more manageable level.
"Inflation will firm up very gradually," Seiders said. "Affordability should be virtually unaffected."
Others are not so sure.
Kasriel points out that mortgage foreclosures and personal bankruptcies were at an all-time high last year. Even with rates on fixed-rate mortgages at record lows, people have flooded into interest-sensitive adjustable rate loans as they stretch to afford more expensive homes.
According to the Mortgage Bankers Association, the percentage of adjustable rate mortgages has risen from around 15 percent of the total at this time last year to 33 percent. And as people buy houses with nothing down, or use home equity loans to raise cash, Kasriel said, the level of ownership relative to debt among U.S. homeowners has fallen to historic lows.
"People are counting on their housing as an ATM these days," he said.
The Federal Deposit Insurance Corp., which guarantees bank deposits, was worried enough about the trend that it devoted much of its spring outlook letter to an essay describing how "the economy is in uncharted territory with respect to household indebtedness."
The agency noted that low-down-payment, variable rate mortgages have drawn an increasing number of people with "high leverage, volatile incomes or limited wealth" into the housing market.
"As interest rates rise," the report warned, "these homeowners may see their incomes strained by rising debt service costs, while slower home price appreciation limits their ability to build equity and lower their leverage."
Mindy Berg has been stretching for years to repair her credit history after running into debt in the late 1990s. Since she and Eric Berg got married in 2001, they have cobbled together money for a down payment on a new home while making sure every bill gets paid on time.
This spring it all paid off. After running the Bergs' credit application periodically for three years, Reed Brunzell, a loan consultant with Hartford Financial in Skokie, finally got a bite. With banks easing terms and credit requirements, the couple qualified for a three-year adjustable rate loan with a 4 percent interest rate. And since they only needed 5 percent down, the money they had saved up afforded them a $278,500, three-bedroom split-level in suburban Palatine.
"We fell in love with it," Mindy said. "It's really cute."
The Bergs could have had a fixed-rate loan at a little more than 5 percent interest, but they couldn't afford the higher monthly payment. Even with the lower adjustable rate, she said, "we're going to be eating macaroni and cheese for a while."
Mindy, an administrative assistant at Abbott Laboratories, and Eric, a dairy manager at Jewel Foods, were paying $750 a month in rent. Now, their monthly payment will be $1,750. They've been used to scrimping and have little other debt, so they are confident they can make the payments.
But what if rates go up over the next three years, jacking up their payment?
"I'm a little nervous," Mindy said. "But we'll have two years under our belts paying the mortgage and my personal credit will be way better than it is today. We might refinance."
That sort of thinking gives Doug Duncan, chief economist for the Mortgage Bankers Association, the willies.
"The folks that bother me," he said, "are the first-time home buyers who are in a salary category that doesn't have strong prospects, who are taking interest-only adjustables and stretching to get there."
The problem is that most people don't know what their mortgage payment could increase to when interest rates rise, warns Catherine Williams, vice president of financial literacy for Consumer Credit Counseling Service of Greater Chicago.
"They're not preparing for that rainy day," Williams said.
Homeowners with adjustable rate mortgages, especially those that adjust monthly, should be socking away an extra $75 a month right now, she says, both to create a cushion for themselves and to practice devoting more income to the mortgage.
Some folks, particularly those in Cook County, could have a second nasty shock this fall. The second installment of property taxes will be due in September, and that payment will reflect most of the increase from a recent reassessment that boosted some appraised home values by 40 percent or more.
Williams suggests stashing another $75 a month in a "plain vanilla savings account" to cover the expected rise in property taxes.
"Those dry rocks to jump to are getting very slippery," Williams warns.
"My advice to consumers is to really rein in all unnecessary spending."
And we all know these folks will be screaming for those who didn't spend recklessly to bail them out, when it all turns south on them.
2004-05-02 12:47 | User Profile
The stupidity of these people is incredible. I try and save about 60 percent of my income post-tax. Feels like I dont even live on the same planet as them.
Im thinking of moving my savings to Gold - although government spending madness is not as bad as yet in Britain and the pound is a fairly solid currency. But I am not investing in stocks or corporate bonds. Thats for sure.
2004-05-02 13:49 | User Profile
[QUOTE=Peter Phillips]Im thinking of moving my savings to Gold - although government spending madness is not as bad as yet in Britain and the pound is a fairly solid currency. But I am not investing in stocks or corporate bonds. Thats for sure.[/QUOTE] I've been thinking the same thing, but I don't know the best way to jump into gold. I've looked at gold funds, like the Gabelli Gold Fund, and gold coins. Are there any other gold investment instruments that are worth looking into?
For what it's worth, I would advise everyone to dump dollars and get gold, Euros, or other stable foreign currencies. The dollar has just run off the cliff, but it is still running in place and hanging in the air, like Wile E. Coyote on the old Road Runner cartoons. As soon as the markets realize what has happened, the dollar will begin to plummet in earnest.
2004-05-02 14:06 | User Profile
[QUOTE=Quantrill]I've been thinking the same thing, but I don't know the best way to jump into gold. I've looked at gold funds, like the Gabelli Gold Fund, and gold coins. Are there any other gold investment instruments that are worth looking into?
For what it's worth, I would advise everyone to dump dollars and get gold, Euros, or other stable foreign currencies. The dollar has just run off the cliff, but it is still running in place and hanging in the air, like Wile E. Coyote on the old Road Runner cartoons. As soon as the markets realize what has happened, the dollar will begin to plummet in earnest.[/QUOTE]That analogy with the Coyote was pretty funny (chuckle).
Speaking of investing in gold, youve got to be extremely careful. Buying Gold direct and buying into a FUND that invests in Gold are two different things. The problem with a lot of these funds is that your investment is little more than a piece of paper. You own a share in a company or Fund that invests in Gold but you dont actually own Gold directly.
I can think of a few gold funds that went bust because they were mismanaged and so on. So Id be very cautious about that. However, I do believe that Gold represents the most solid investment in today's climate (if invested into correctly).
If the Dollar collapses, the world economy will go into a depression it may never emerge from. All of East Asia is living off Exports it sells to the US. If you destroy the US Economy, China and Japan will shut down faster that you can blink an eyeball. Then youll have a domino effect. And when that happens even nations that have been prudent with their finances, such as many in Europe, would pay for the profligacy of the US Government.
2004-05-02 22:20 | User Profile
If you are investing in gold as an "investor" then do it your way but if you are investing as a survivalist then buy it and put it under your mattress, the reason for this is that if TEOTWAWNI comes then even the money houses will be gone and so will the gold that they are holding for you
2004-05-03 08:44 | User Profile
[QUOTE=Ponce]If you are investing in gold as an "investor" then do it your way but if you are investing as a survivalist then buy it and put it under your mattress, the reason for this is that if TEOTWAWNI comes then even the money houses will be gone and so will the gold that they are holding for you[/QUOTE] Yup. The only problem is how much can you store under your mattress!
But that said, you can buy lots of gold and store it in vaults. That should work fine too. There are some Swiss Banks that are safer than anything ever built on earth that do precisely that.
2004-05-03 14:41 | User Profile
[QUOTE=Peter Phillips]Yup. The only problem is how much can you store under your mattress!
But that said, you can buy lots of gold and store it in vaults. That should work fine too. There are some Swiss Banks that are safer than anything ever built on earth that do precisely that.[/QUOTE]
Peter? how can I transfer about 1,250 of silver to a Swiss Bank? tell me a good way to do it that would not cost me to much and I will do it and you also have storage charges,,,,,,,, nawwwww better burried in my yard.
2004-05-03 14:59 | User Profile
Be careful. Gold has fallen 10% over the past month. For investments consider more broad-based funds (especially global funds).
2004-05-03 15:15 | User Profile
[QUOTE=Ponce]Peter? how can I transfer about 1,250 of silver to a Swiss Bank? tell me a good way to do it that would not cost me to much and I will do it and you also have storage charges,,,,,,,, nawwwww better burried in my yard.[/QUOTE] Mate, I am assuming that pile is going to get bigger with time......;-)
2004-05-03 15:17 | User Profile
[QUOTE=Feric Jaggar]Be careful. Gold has fallen 10% over the past month. For investments consider more broad-based funds (especially global funds).[/QUOTE] True. But the fact is that it is the only investment that is almost completely SAFE. If and when the US economy goes under because of Government profligacy and deficit spending, not many investments on earth are going to be safe. It would trigger an economic catastrophe not seen since the Depression.
The only issue with that would be when - If the US Government keeps spending this way, I cant see how this can be too far off.
2004-05-13 16:42 | User Profile
Keep in mind that when gold and silver become the medium of exchange, its purchasing power will become greater reletive to the dollar. You may need far less than you will think you will. The majority of people will be stuck with assets that they will be willing to sell at any price in gold or silver in order to buy necessities.
If the Fed were to liquidate itself, roughly $1,800 will trade for each ounce of gold held by the US government. The price of gold has tremendous upside.
The smart money will buy gold while it is still inexpensive before the mainstream catches on. Because once the average person gets into a panic, the price of gold will rise hundreds of dollars an ounce in a matter of days.