johnnymk

I really hadn't figured on the kind of problems with the current housing collapse. I thought that house prices would go down gradually 20% to 30% from their highs, some unemployment in the building and realtor industry and some related jobs would occur.

I didn't think that the Dow would drop 2000 points, and that financial institutions would have the problems which are in the news daily.

This whole thing is just blowing my mind.

zippyjuan

In San Diego, housing prices are off only 13% from a year ago. I think the financial markets are scared (perhaps irrationally) and are too quick to sell on the slightest big of negative news. They (and the media and consumers) have convinced themselves that a recession is coming. This can become a self- fufilling prophecy as more people subscribe to the idea. Businesses fear declining sales, so they cut back on production- perhaps cutting workers as well. Individuals (wasn't it just a couple months we were worried about people not saving enough and spending too much of their money?) cut back on their spending.

These lead to lower sales figures and more fears of decline. More cutbacks result. Now you have both business and the consumer reducing their expenditures. If you can convince people that it may just be a mild correction then they do not cut back as much and the decline in the economy is not as bad as if they hear recession to describe the same statistics.

We knew people were spending too much money buying houses they could not afford. We knew people were spending too much money they did not have. Now that they are acting more the way they probably should, there is panic because the economy is not continuing into the stratosphere. It does not go up forever and contractions are useful in wringing out excesses. If everyone panics like it sounds as if they are, then the drop will be as much overdone as the bubble in the other direction was.

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RIVERWIDOW

We bought a 3br,1 bath in 1977 for $46,000. We sold it in 2003 after upgrades...extra br, fireplace, pool for $402,000. Its current market value is $329,000. The people who bought it from us are screwed. They put nothing down and financed 100%. The banks and mortgage companies got greedy and now they are going to pay the price.

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Lets go Padres !! All the way in 2009

brainsmile

good sell Riverwidow

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renovation

my house we bought for $30,000 in 1987. 2 years ago we had it appraised and that came to $275,000. in today's market if i could find a buyer i be lucky to get $175,000

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mcs328

I bought a condo a few years ago at 180-ish. High as 270 and now down to 230. I have a 30 year fixed so I'm good. I might just refi just because the interest rate is about 1/4% lower.

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zippyjuan

Mine (condo- one BR) was a bit over $100k, peaked maybe $320k and is probably around $275. At 5.85 fixed, I can pay extra each month and pay it off in about five more years.
Will it be worth it to do that- for just a quarter point? How much will that cost you up front and how much a month will that save you (calculating your break even point)? Then you will also have a few more years of interest to pay since the 30 years starts over again.

MrGreg

I've also got a 30 year FRM (18 months into it). I'm keeping an eye on the rate. Assuming my credit is as good or better than when I first got the loan, is there any reason not to refi and get a lower rate (still 30 yr FRM) ?

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zippyjuan

If you will keep it long enough to capture the money I mention in the previous post.

Layla

Closing costs. On a refi, they can get very high. Many borrowers don't realize it because they are not "out of pocket" but are instead rolled into the loan. Rates ARE really good right now, but Zippy is right, you need to look at more than just the "monthly payment".

If you Do want to seriously talk about it, pm me, I'm a loan processor, and I finally work for "one of the good guys" that I wouldn't mind referring people to.

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zippyjuan

I just did a couple quick numbers on a calculator at Bankrate.com and figured $100k for a basic figure. If your present interest rate is 6.5% the monthly payment (30 years loan) is $632 a month. Dropping the rate to 6.25 lowers that to $615. Costs will vary depending on your loan (your present lender may be able to do it for lower cost since they already have most of the paper work- if you really want to refi it would be best to start any conversation with them). This saves $17 a month per $100k.
How much will it cost? Typically 85% of your first payment is interest or in this case, $537. Refi can cost the equivelent of six months of interset - $3223 according to my figures here. At $17 a month, it would take you 189 months to break even- and that does not count the extra years of interest payments you would have (equal to the years you have already paid in) so about 16 years to break even on on refinancing for a 1/4 percent savings. You also lose the interest you have already paid.

This is just an example- run your own numbers- but you get the idea. An article:
http://moneycentral.msn.com/content/...ing/p42715.asp

MrGreg

I agree for only a quarter point it's not worth it. But if it's closer to 3/4 point, then maybe.

I can afford my current payment, so I'm on no hurry. I just saw rates are headed back down, and thought it was worth taking a look.

Prngr44

I always heard the rule of thumb was .5% or greater if you've had your loan less than 10 years. You'd need an even lower rate; 1%+ to make it worthwhile if you've had it longer.

I'm really itching to pull the trigger on locking a rate when I roll my construction loan into permanent financing. My last hard quote was 5.5% on a 30 year fixed. I just don't know if I'll have all my draws completed within that 60 day lock window to get it done.

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MrGreg

Of course, if you've had a loan more than 10 years, you could probably roll it into a 15 yr fixed and get an even better rate.

zippyjuan

The longer you have had your loan, the less sense it makes to refinance. First is all the interest you have paid is lost. Second is the progressive nature of home loans- the longer you are making payments, the higher percent of your payment goes to principal.

VTGreg

Is it that clear cut? Since you pay more of the principal as you get closer to the end of the loan you also get much less of a tax break on the payments.

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johnnymk

http://www.nytimes.com/2008/01/23/bu...th&oref=slogin


Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback. Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy “could slip into a recession and that the recession could be a long, deep, severe one.” In Monday’s Democratic presidential debate, Barack Obama made the same argument: “We could be sliding into an extraordinary recession,” he said.

In the next breath, of course, Mr. Obama suggested that the right policies might still help, while Mr. Feldstein has said that a recession isn’t yet a sure thing. And much of the great moderation is real. Computers allow managers to run their businesses more efficiently and avoid some of the wild swings. The Fed and central banks in other countries have learned from their past mistakes.

But a recession is now more likely than not. It may well have started already. The Philadelphia Fed reported Tuesday that the economy shrunk in 23 states last month, including Ohio, Missouri and Arizona, and was stagnant in seven others. California and Florida, with their plunging home values, may soon join the recession list.

The bigger question is how severe the recession will be if it does come to pass. The last two, in 1990-1 and 2001, have been rather mild, which is a crucial part of the great moderation mystique. There are three reasons, though, to think the next recession may not be.

First, Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: despite the recent declines, stock prices and home values have still not returned to historical norms.

David Rosenberg, a Merrill Lynch economist, says that the stock market is overvalued by 10 percent relative to corporate earnings and interest rates. And remember that stocks usually fall more than they should during a bear market, much as they rise more than they should during a bull market.

The situation with house prices looks worse. Until 2000, the relationship between house prices and rents remained fairly steady. The same could be said about house prices relative to household incomes and mortgage rates. But the boom of the last decade changed this entirely.

For prices to return to the old norm, they would still need to fall 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. This could happen quickly, or prices could remain stagnant for years while incomes and rents caught up.

Cheaper stocks and houses will benefit many people — namely those who don’t yet own a home and still have most of their 401(k) investing in front of them. But the price declines will also lead directly to the third big economic problem.

Consumer spending kept on rising for the last 16 years largely because families tapped into their newfound wealth, often taking out loans to supplement their income. This increase in debt — as a recent study co-written by the vice chairman of the Fed dryly put it — “is not likely to be repeated.” So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one.

“What people have done is make an assumption that these prices could continue rising at the rate they had been,” said Ed McKelvey, an economist at Goldman Sachs. “And that does seem to have been an unreasonable assumption.”

Certainly, there are some forces to push in the other direction. Outside of Wall Street, corporate balance sheets remain remarkably strong, while the recent fall in the dollar will help American companies to sell more goods overseas.

But it’s hard not to believe that the economy will pay a price for the speculative binge of the last two decades, either by going through a tough recession or an extended period of disappointing growth. As is already happening, banks will become less willing to lend money, households will become less willing to spend money they don’t have and investors will become more alert to risk.

Welcome to the new moderation.

Jeffbx

Look at it this way -

Beginning of the loan:

$10,000 goes towards interest, 500 goes to principle (over a year)
You can deduct the 10k on your return, so 4,000 back = $6,000 total out of pocket for interest = that money is gone

End of loan:

1000 goes towards interest, 10,000 goes toward principle
You get deduction on the 1000, so $400 back in your pocket = $600 out of pocket for interest.

So while you get a much larger tax deduction for a $10k interest expense, you're still FAR better off having that money go straight to your principle rather than to the bank as interest expense.

mcs328

I dunno. When I refinanced I had a different situtation. I had 80% loan at 5.875 30yr fixed and a 10-20% loan at the same rate but went over 6% after the first year. Since my place was worth more I combined the loans at a 5.375% rate and I would break even after a year after the refi costs.

True .25% difference doesn't seem like a lot if the refi costs are going to be giganormous. I don't plan on staying on my 2br/ba condo but if I can get the short term payments down and still ride out everything in the long term I should be fine. It's not like I can't afford the payments now because I can.

Slightly off topic...when does everyone think things will bottom out. Last year I said summer 2008 but not I think summer 2009. There are some greedy people in MD.

johnnymk

The rule of thumb years ago was that the new rate must be at least 2% lower than the original rate to justify refinancing. I can't imagine why that has changed.

zippyjuan

Did you pay your refi costs out of pocket or were they added to your loan balance? If they were added to your principle, then you are probably paying a higher cost of refinancing than you think. As long as you keep the place long enough to get past the bread even point of the refi costs you will be fine- even if you do not intend to live there until the mortgage is paid off.