Why are the prices of houses falling in CO? (Denver: ski resorts, foreclosed)

[formercalifornian]

Originally Posted by TimtheGuy

Just releasing a little steam as I get tired of people preaching on this website about how other people should be conducting their finances/mortgages when they generally know just enough to be dangerous. People are also way too influenced by the doomsday media.

Sure it would be great if every borrower could put down 20%+ on thier house. BUT, that is just not realistic in today's world. There are plenty of people who will do great buying their 1st home with $0 down.

Here is a real example that I am closing in the next 30 days: an engaged couple in their early 20's are getting married in 2 months. Both have good full time jobs with moderate pay, minimal debt and a great "go-getter" attitudes. They have saved a few thousand $. They qualify for a 1st time homebuyer program that currently offers a 6.125% 30 year fixed rate. They are looking at starter homes in our area that run about $200k. These homes are going to be 20-50 years old. Their debt to income is going to be under 30%. They are going to do a $0 down loan with seller paid closing costs and save their few thousand dollars for any repairs that come up and/or as reserve funds.

Why should they rent for 1-5 years while they save up the 10% ($20,000)or 20% ($40,000) down that some people seem SO SURE is the answer when they can get GREAT terms on a $0 down loan right now to start their lives together??

Would you consider this irresponsible lending??

Also, I will say again...contrary to the media $0 down loans are alive and well and working! And you don't need 700+ credit scores to get them!These are agency loans I am referring to (Fannie Mae & Freddie Mac). There are good borrowers taking these loans out and they will perform!

That appears to be a situation with low risk, so why wouldn't your bank be willing to portfolio the loan? I suspect it's because if these two great people are to lose their jobs, discover married life isn't all its cracked up to be, or experience some other life disaster, they would be less likely to stick it out because they have no skin in the game. Working for several years to scrimp together a 10% or more down-payment is an excellent incentive to make things work when the going gets tough and results in a lower risk of default. It also gives the couple something to draw on (not that I recommend HELOCs, but they're effective) if there is some financial emergency that depletes their savings. And, if they have to sell, that equity cushion may prevent a short sale if prices fall, but I guess that doesn't matter if your bank isn't holding the note. I'm not a doomsayer, but I am cautious and I've lived long enough to know that life doesn't always go as planned.

[TimtheGuy]

Originally Posted by NewAgeRedneck

I am inclined to agree with formercalifornian. Some of us are not aware of all the ins and outs of the mortgage business. Rather than seeing us as idiots becasue we miss your point, gently and kindly show us the error of our ways. Those of you who know the businees please EDUCATE rather than being snarky or condescending. Remember, there was a time when you too didn't understand everything about the business. We can all learn from your experience and wisdom.

blessings...Franco

I do try to educate as much as I can. Cali was a bit snarky too . There are many quality lenders out there and borrowers need to seek them out.

[hello-world]

Originally Posted by ColoWeb

ARM ---> Foreclosure ----> Too many houses on the market ---> Prices going down.

nice synopsis. i would add:

easy money and aggressive marketing lead to more demand for a while ... leads to ridiculously overinflated senses of value, leads to hi prices as well as typical greedy overdevelopment/overbuilding; but such irresponsibility leads to default, foreclosures and so a market flooded by cheap goods, a market that is already overpopulated by way too much inventory - now, supply's too far up while many people are priced out of the market that in reasonable times could be in it, so they stay back and enjoy their cheap rent for a while longer. if rent's that much cheaper than a typical mortgage - 30 year with some down, say - that can be a sign of market iffy-ness; and if you really look at the numbers, in the denver area, you're very arguably better off renting these days, especially if you don't know that you'll be around for several (say, at least five-ish) years. anyhow, not too far behind all this: falling housing prices.

if you'd bought responsibly 6, 10, 15 years ago (or plan on sticking around for as much time, say), you're probably OK. otherwise, you probably lose some sleep these days as an owner.

[jazzlover]

Why are housing prices declining in Colorado? A lot of detail in this thread, but many miss the two main points:

1. A lot of people bought more house than they could afford, and lenders gleefully lent the money for them to do it. For the younger or uninitiated, this little game also took place in the late 1970's in Colorado. When the market finally "corrected" (crashed), foreclosures went through the roof, banks and S&L's were awash in bad loans and REO's, and a bunch of banks and S&L's went under because of it. (Anybody remember Silverado Savings?--yeah, a Colorado S&L.) The current real estate debacle hasn't reached that point yet, but it's got all the pieces in place to head that way.

2. Much of Colorado, especially rural Colorado, has a real estate "affordability" problem. In other words, if a homebuyer has to rely on local income to buy a property, they probably can't afford it at today's real estate prices. That has occurred because so many buyers have brought their money with them or rely on outside income to pay their mortgage. All it will take to burst that bubble will be a decline in "mailbox" income to those relying upon it to finance their Colorado "lifestyle." A serious stock market correction (which most analysts believe is long overdue), some significant corporate bond defaults or bankruptcies, and more trouble in pension funds should be easily sufficient to push what's left of Colorado's over-inflated real estate market off of the cliff. $5.00-$6.00 per gallon gas would go a long way in that direction, too. Also, since so much of Colorado's modern-day "trivialized" economy is reliant on construction, when real estate REALLY tanks, it will take a huge chunk out of Colorado's employment base. That will further devastate the whole state economy, and lead to something the state has not seen since the last debacle in the 1980's: a population decline.

When or how many of these scenarios could play out? Enough that I sure wouldn't want to have much of my net worth invested in Colorado real estate right now--or have a big loan to pay for piece of property that might just turn out not be worth very much. If I were a construction worker, I'd be looking for a job out in the gas field--that's about the only industry in Colorado these days that looks to be growing for a while.

[TimtheGuy]

Originally Posted by formercalifornian

That appears to be a situation with low risk, so why wouldn't your bank be willing to portfolio the loan? I suspect it's because if these two great people are to lose their jobs, discover married life isn't all its cracked up to be, or experience some other life disaster, they would be less likely to stick it out because they have no skin in the game. Working for several years to scrimp together a 10% or more down-payment is an excellent incentive to make things work when the going gets tough and results in a lower risk of default. It also gives the couple something to draw on (not that I recommend HELOCs, but they're effective) if there is some financial emergency that depletes their savings. And, if they have to sell, that equity cushion may prevent a short sale if prices fall, but I guess that doesn't matter if your bank isn't holding the note. I'm not a doomsayer, but I am cautious and I've lived long enough to know that life doesn't always go as planned.

OMG. So should we just get rid of Fannie & Freddie then??

My bank would maybe offer a 30 yr. am with a 5yr. balloon at 8% with a minimum of 20% down. My community bank is ultra conservative (even worse than you ) and highly successful I should add. Should I tell these kids to save up for 5 years for that?

Did I mention that the loan carries mortgage insurance AND the program has a job loss component for the 1st 2 years that will cover 6 months PITI payments?

[formercalifornian]

Originally Posted by TimtheGuy

I do try to educate as much as I can. Cali was a bit snarky too . There are many quality lenders out there and borrowers need to seek them out.

Agreed. I was snarky, and I probably deserved it. Look, I am not out to bash lenders. There are some really good people out there. I am adamantly opposed to $0 down, interest-only loans that are bundled up and sold as securities because I think the shift in risk has created a lending environment prone to outrageous abuses and a housing market that is completely out of whack with fundamentals. Eventually, those risky loans will come home to roost, and I'm hoping those consequences won't play themselves out in my retirement fund, but I'm not holding my breath.

This is a valuable conversation, because our discussion encourages people to think for themselves and to question the motives of "experts." I'm grateful that we're arguing, because it's helping me to dig deeper into why I think the way I do and to question my own ideas. You might potentially change my mind, or you might not, but in the end we'll all be the better for the exchange of ideas.

I love to debate. I always learn a great deal, and occasionally I even make a fool of myself when I start typing before thinking it though. It's never personal, and I hope it's not for any of you either.

[hello-world]

Originally Posted by dvflyer

Soft enough to offset the rent they are paying? I think I understand the concept but would need to see real-life numbers to make it sink in.

If they rent for a couple of years, that rent $$ is gone. At a conservative $1000/ mo rent, that's $24,000 wasted in that two years. If they buy a house now, their home value (on paper) will/ may decline. If it declines $24,000 in those same two years, they are still better off because some of their payment has gone to principal and they have the interest payment write off.

The only reason I can see to rent is in hopes of getting that bigger house when/ if it comes down in value because you can't afford it now.... in which case, you are running too thin anyway.

Anyone is welcome to school me because so far, whenever I read the rent-until prices come down- argument, I just don't get it.

there are plenty of rent versus buy calculators online. you can google them. there was a good one in NYTimes about 10 months ago when things were starting to look deeply grim. they ask things like downpayment, terms of mortgage (30 year fixed? rate?), inflation, expected appreciation, house expenses, what you might otherwise invest in, rent, etc.. i've seen some that suggest that no matter HOW long you plan on staying some place, if rent's low enough, buying's never the way to go (contrary to what many realtors, lenders, or finance advisors might try to tell you). as far as i can tell, buying CAN be the way to go (often barely) if you don't want to worry about paying attention to other invesments, e.g.: though, in the end, economies are generally totally abstract and could arguably evaporate with even some doubt in their value which is part of what caused the Depression in the 30s ... (we'll hope NOT)

[formercalifornian]

Originally Posted by TimtheGuy

My community bank is ultra conservative (even worse than you )

I'll take that as a compliment.

[TimtheGuy]

Originally Posted by formercalifornian

I'll take that as a compliment.

..........

[CosmicWizard]

TimtheGuy wrote:

Sure it would be great if every borrower could put down 20%+ on thier house. BUT, that is just not realistic in today's world. There are plenty of people who will do great buying their 1st home with $0 down.

I bought my first home in '91 with a VA loan. Even though I had entered my40's at the time ( when home prices were MUCH lower ) I would have needed to delay the purchase for at least another 10 years to save up a down payment of 20%. Without the $0 down VA loan I might still be a renter! In today's world, the $0 down loan is here to stay ( hopefully ), with some elements of the VA loan structured into it.

blessings...Franco