By Jon Christian Ryter
July 5, 2006
The price of the typical 3-bedroom, 3-bath, 3,000-plus square foot American home is skyrocketing beyond the ability of the atypical American consumer to purchase one—or keep up with the spiraling payments. The mortgage payment dilemma is based in large part on the creative financing plans that are used today to qualify moderate-income buyers for mortgage loans that everyone knows is well beyond the ability of the average wage earner to pay when the full mortgage payment matures in three to five years. On the other end of the home market spectrum—because of the megaprices being charged for older dwellings that were affordably priced homes less than two years ago—new home sales are plummeting because existing homeowners who want to "move up," are finding fewer takers for overpriced older homes. In many parts of the country, the sellers' market has completely vanished. The "bidding wars" where prospective home buyers start at the asking price and compete with one another has been replaced with an ugly bearish buyers' market where consumers are balking at Realtor-inflated older home prices that have more than doubled in the past couple of years.
In many boom markets oversold homeowners are trying to refinance mushrooming mortgage payments that have resulted from the unique forms of creative financing that put them in homes they simply couldn't afford and should not have purchased. Fixed rate mortgages that were sold with 0% interest for one or two year years suddenly becomes mortgages with 6% interest—and the mortgage payments that they could barely afford at 0% have ballooned. Or the homeowner was cajoled into taking an adjustable rate mortgage that is spiraling out of control each anniversary as the Fed continues to increase the prime rate to slow inflation—at the expense of home owners who were assured by overzealous mortgage brokers that the low interest gravy train express would not slow down in their lifetime.
Now, in many of the slowing real estate markets, new home owners are being asked how much of their genuine equity—the down payments and the principle paid in their monthly mortgage payments—they are willing to lose to get rid of their expensive albatross. For many, the American dream is fast becoming the Nightmare on Elm Street. One such home buyer is San Diego homeowner Cortney Henderson who celebrated her graduation from UCLA San Diego with a Ph.D. in biomedical engineering by purchasing a modest new home—for $540 thousand. Her home is a simple one-story bungalow with an attached garage—the kind of house you'd find in Montana or Idaho, or Rudyard or Trout Lake, Michigan for $85,000 to $99,000.
San Diego is a real estate "boom town." Unlike most California communities, it was a relatively affordable coastal city when Bill Clinton became president. You could purchase a nice 1,800 square foot 3-bedroom, 2-bath home for less than $300 thousand. When the city's real estate prices began their rapid upward spiral—reaching prices twice that of metropolitan Phoenix—the average household income of the San Diego wage earner was "spiraling" at the rate of about 5% as real estate has almost doubled in the past five years.
Henderson should never have been given a half million dollar loan—regardless of her credit score. Her $27,000.00 down payment (she earned her down payment as an egg donor at a fertility clinic—something you fertile housewives might think about when you and your husband are trying to find the down payment for your new home) helped cinch the deal. The rule-of-thumb used by mortgage bankers to determine if you can afford the house you want to purchase is whether your fixed monthly debt obligations—not just your mortgage—are less than 25% of your net income. In Henderson's case, her mortgage payment (including insurance and taxes) ate up 70% of her gross earnings. If it was not for the $700 a month her boyfriend kicked in to help her, Henderson would have already lost her home. If she has an ARM [adjustable rate mortgage], the odds are better than even that she would be forced to sacrifice her home in a "get-out-from-under-the-mortgage" fire sale within a year or two. That's because, San Diego is viewed as one of a dozen markets where major home pricing "corrections" are about to take place. If that happens, Henderson will be stuck with a home priced well above market, and will likely be forced to dump the house for less than the current balance of her mortgage to get rid of it.
Rising interest rates are now making it increasingly hard to buy a home in most areas of the country as builders, aided by hungry real estate agents and greedy county tax assessors who believe every home in the market increases in value when an out-of-state buyer is suckered by a real estate broker into paying a premium price for one home. Inflated home prices combined with spiraling interest rates are putting the brakes on homes in the most inflated markets. San Diego home prices have grown over 200% since 2000. The median home price at $607,000. Homes in San Bernardino and Ontario, California have risen over 195%, with the average home costing just under $400,000. Homes in the retirement paradise of Fort Meyers, Florida have risen 171%, with the average retirement home costing $267,000.
Real estate markets which have peaked, and where experts believe major pricing corrections will take place within the next 18 to 24 months (in order of vulnerability) are:  San Diego and San Marcos, California;  Nassau, New York;  Boston, Massachusetts and Santa Ana, Irvine and Anaheim, California (tied);  Sacramento and Arden-Arcade, California;  Ontario, Riverside and San Bernardino, California;  Oakland and Fremont, California;  Los Angeles and Glendale, California;  Providence and New Bedford, Rhode Island;  San Francisco and Redwood City, California;  San Jose, California;  Cambridge, Massachusetts and  Edison, New Jersey. The estimates are based on a report from the National Association of Realtors which watches home-selling trends across the country. The report noted that sales on existing homes—the precursor to new home sales—dropped 6% from January to May, 2006. According to Gannett News Service in a USA Today news story, the decline was the steepest drop in 11 years. The number of homes for sale rose sharply—a sign of slackening demand.
David Lereah, the chief economist for the National Association of Realtors [NAR] said he expects home sales to fall by as much as 8% this year due to what he sees as more interest rate hikes by the Federal Reserve—on top of a quarter-point rate hike by new Fed Chairman Ben Bernanke on June 29. However, Bernanke and the Fed bankers, who had been making tough talk about raising interest rates to whatever level was needed to curb inflation decided that the sudden slowdown in the housing market had sufficiently cooled inflation fears. As he announced the quarter-point spike, Bernanke indicated the quarter-point raise in the prime, to 5.25%, would very likely be the last interest rate hike unless inflation rears its ugly head later in the year.
Wells Fargo senior economist Scott Anderson said: "We think the housing markets and the consumer cooling down will put a lid on inflation." Wall Street and the NAR were afraid, based on the Fed's rhetoric, that the housing starts would stall—which would likely bring down commodity and gasoline prices. Instead, Bernanke's statement caused gold and commodity stock prices to spike. The dollar fell, increasing the likelihood that oil prices will continue to rise (dispelling the myth that oil prices spike only when there are shortages) To keep the real estate boom alive—which, essentially, is camouflaging the job exodus from the United States and keeping the American economy alive—the Fed has to contain inflation without letting rising interest rates destroy the low cost, but highly risky, adjustable-rate mortgages that are keeping the real estate bubble from bursting. One-in-five mortgages today is an ARM. In another year, one-in-three will be an adjustable-rate mortgage. Most of those mortgages will reset on their anniversary date in one to three years at much higher rates. Over 50% of those who have ARMs will discover it will literally take an arm and a leg to make their mortgage payments—and most won't be able to. Those who are unable to refinance will be in jeopardy of foreclosure.
Even though the boom is basically over, as long as the economists can keep the balloon floating, the residuals will continue—a real estate boom with no reason for existing—and no end in sight as long as home buyers are willing to become distant commuters, moving farther away from the core urban centers where they work in order to stay ahead of the price bubble—doubling commuting time on the Interstates and Byways, and burdening mass transit systems. The bubble will burst only when new home buyers stop coming or inventories of unsold older homes begin to stack up like cordwood.
At the end of June, the average 30-year fixed rate loan was 6.7%—up from 5.57% at the same period in 2005. If a home buyer financed $230,000 at 6.7% the monthly payments (principal and interest, excluding insurance and taxes) the monthly payment would be $1,484.00. At 5.7%, the basic mortgage payment would be $1,316.00. If Cortney Henderson has an ARM mortgage, her mortgage payment may have increased by as much as $336.00 a month in a year.
As the prices of new and existing homes skyrocketed, banks and mortgage companies were forced to create new financing packages to accommodate buyers since few people, using the traditional credit yardsticks, would have sufficient income levels to qualify for new home loans. For the first time in history, banks began offering 50-year mortgages. In San Diego, the real estate sink hole of America, 74% of the new home buyers received loans in which only the interest—and sometimes only a portion of the interest—were due the first year. One-, two- and three-year modified interest-only mortgage payments have become common place. Tragically, they will lead to record levels of personal bankruptcies before this decade is over.
Since 2000, the median price of a single family home has more than doubled in at least 30 US markets. Home prices have risen by as much as 30% to 50% or more in other parts of the country. Even the most depressed economic areas of the country have experienced spurts in the real estate sector that are unjustified by the rest of the economy. However, those markets offer homes that are reasonably priced. For example, in Des Moines, Iowa, you can still buy a median-priced home for $150,000. In Ocala, Florida that median-priced home is $160,000. Still affordable considering that the same home in Sarasota, Florida (just south of St. Petersburg) is $383,000. That same home in Anaheim, California would cost you $713,000.
In May, when the median price of a single family home (the average price in all markets nationwide) rose 6.4% to $228,000, existing home sales fell 1.2%—a foreboding sign of what was happening. As profits plummeted, the five largest home builders in the nation all agree that, nationwide, the boom has peaked although there are still "pocket" booms in various areas of the country where the "affordability crisis" is still forcing the urban exodus into less expensive rural suburban markets. Roughly twenty-nine percent of the residents of San Diego are not only considering moving out of the city, but out of the State, to find somewhere more affordable to live.
Biotech companies in San Diego have stopped interview job applicants outside of California because the California housing sticker-shock keeps most people from accepting jobs in a city where a "starter home" costs over a half million dollars. Most of those who live in places like San Diego, Sacramento, Foster City, Santa Ana or Los Angeles have never paid a super-inflated price for a home since they bought their homes long before the current wave of real estate inflation began. For example, homeowners who bought in Foster City, California when that planned community broke ground in the 1960s got a comfortable three-bedroom, one-bath home for about $22,000. Something bigger with four bedrooms and three baths would run about $50,000. Now that same four bedroom home in Foster City is about a million-two. Some appreciation—especially if you were the original buyer. For part 2 click below.
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© 2006 Jon C. Ryter - All Rights
[Read "Whatever Happened to America?"]
Jon Christian Ryter is the pseudonym of a former newspaper reporter with the Parkersburg, WV Sentinel. He authored a syndicated newspaper column, Answers From The Bible, from the mid-1970s until 1985. Answers From The Bible was read weekly in many suburban markets in the United States.
Today, Jon is an advertising executive with the Washington Times. His website, www.jonchristianryter.com has helped him establish a network of mid-to senior-level Washington insiders who now provide him with a steady stream of material for use both in his books and in the investigative reports that are found on his website.