Surviving the Bubble

Special Offer to Doug Fabian Followers

Welcome Doug Fabian Followers,

As a listener of Doug Fabian’s you are well aware of the need to manage your assets and protect yourself from downside risk.  Today’s real estate market presents a real threat to the wealth of homeowners with risky financing. 

Unfortunately, the last few years have seen a huge upswing in the sales of risky mortgages.  These loans, featuring adjustable rates, interest only and negative amortization payments can lead to huge increases in debt loads and potentially foreclosure.

You can take the first step to protecting yourself today by getting a free Mortgage Risk Analysis.

STEP 1:  Compete and return the attached Risk Analysis Worksheet along with copies of your current mortgage statements.  This will give me the information I need to determine exactly what loans you have and how much risk you are exposed to. 

STEP 2:  I will run comparable sales to assess the value of your home, check the index that your mortgage is tied to and measure and quantify the potential payment increases in your future.

STEP 3:  We will have an in depth telephone consultation to discuss your situation and the possible benefits of repositioning your financing for greater security.

To get started today, download the risk_analysis_worksheet.doc and return it to my office via email or fax.

I look forward to helping you chart the course to a prosperous future.

Sincerely,

Josh Lewis

Mortgage Planner

VP Consumer Direct Lending

Stearns Lending

Housing Tax Breaks on the Chopping Block?

LA Times - 10.8.2005 - Tax Reformers Eye Breaks for Housing

This article rightfully calls the mortgage tax deduction a "sacred cow" and there is virtually no chance of it being eliminated.  However, there is a very good chance that the deduction for second homes and home equity borrowing could be reduced or eliminated.  This would have a huge impact on the economy in general and the housing market specifically. 

In the last 5 years many baby boomers have begun buying second homes that will eventually be used to retire in.  This increased demand would be significantly dampened if the tax deductibility of the 2nd home was eliminated.

With a policy change this significant, there is no need to worry about changes coming soon, but this is definitely an issue that bears watching.

More Lenders Tighten Standards

WSJ - 9.29.05 - Lenders Tighten Credit Standards

As far back as February of this year at the KLSX Real Estate Summit, Doug and I have been warning consumers that as the housing market slows lending guidelines are going to stiffen.  This article is more confirmation that major banks are starting to tighten lending standards on mortgage money-especially the riskier loans that have fueled the speculative excesses. Determined to reduce the number and improve the quality of riskier option ARM loans, Washington Mutual is raising the qualifying standards and increasing the margins for those loans. After the teaser rate has expired, borrowers must qualify for an interest rate payment of 6% to 6.25%--up an entire point from 5.25%.

Countrywide, Downey, H&R Block and New Century financial are among a handful of lenders who have begun tightening the reins on easy money. It's only a matter of time before other mortgage lenders follow their lead.

In addition to tighter guidelines, rising short-term interest rates have made option ARM loans less attractive to borrowers. The payment difference between a fixed rate loan and option ARMs is currently less than half of a percent.  Borrowers are rightfully concluding that that is too small of a discount to justify exposing themselves to the risks of a monthly variable interest rate and the potential for negative amortization.   

The bottom line:

1. Homeowners are going to find it harder to borrow themselves out of trouble as lending guidelines tighten and equity doesn't build up as fast, or disappears altogether(NY Times - 10.2.05 - My House, My Piggy Bank).
2. Without easy money, home sales will slow. If lenders won't qualify as many borrowers, the "able" demand for homes will shrink, limiting price pressures.
3. Look for a wave of foreclosures beginning in 2007 when $1 trillion in mortgages will adjust to market terms from their current introductory or teaser rates (LA Business Journal - 10.3.05).

Investors, homeowners with little or no equity and risky mortgage holders have a decision to make and time is growing short. We strongly advise a fixed payment or get out from under the home if you can't afford the payment at a fixed rate.

OC Register - John Lansner Talks with Doug

OC Register - 9.27.05 - He's just waiting for bubble to burst

Here's a link to today's piece in the OC Register.  John Lansner does a nice job of highlighting the recommendations that Doug and I have made for different categories of homeowners in our special report on the Housing Bubble.

It's tough to go into great depth in the space allotted for a regular column so Doug wasn't able to mention much detail of the empirical evidence we have uncovered for a coming downturn in real estate.  If your interest is piqued by the article, you can purchase the report at Doug's website www.DougFabian.com.

"Good" vs. "Bad" Flipping

Much has been made of the high levels of flipping and speculation in US real estate over the last several years.  Investor's Business Daily had a good discussion of the different types of flipping and their implications for future prices in the real estate market.

Another sign that the flipping phenomenon has reached critical mass is the presence of two new cable television shows centered around property flipping.  For those of you who may have seen them, the two shows, creatively titled Flip This House and Flip That House, illustrate another type of good vs. bad flipping.  Flip This House is a reality show following the ups and downs of Trademark Real Estate, a real estate investment firm in business for over 10 years, that seeks out distressed properties to rehab and resell.  Using professional contractors and creative financing techniques, Trademark purchases homes with little capital, quickly upgrades them and sells them at fire sale prices so they can take their profits and move to the next deal.

On the flip side, Flip That House is a reality show that focuses each week on a different "amateur" property flipper and their journey into real estate investment.  As you would expect the results vary widely.  Some people do a surprisingly good job buying low, fixing right and selling quickly.  Most buy at far too small of a discount, do poor or ill advised upgrades and realize a much smaller profit than anticipated with far greater time and effort spent.  Another hallmark of the program is grossly understated upgrade costs, inflated anticipated sale prices and the total failure to account for acquisition costs, sales commissions and capital opportunity cost.

All in all, both are quite entertaining and provide great insight into the current real estate boom and the issues that will likely impact its fall.

The First of Many

 Welcome to Surviving the Bubble, a blog dedicated to helping you understand the current state of the housing and mortgage markets so that you can prepare for, protect yourself and profit from the coming down cycle in residential real estate.  You may know this downturn by it's more popular media moniker "the Housing Bubble."  For many reasons I, and my co-author Doug Fabian, do not believe in the concept of a "bubble" but at the same time we are each bearish on real estate for the near term future. 

We recently released an extensively researched, 26 page special report available for purchase at Doug's website (DougFabian.com) explaining the many reasons why we believe a downtrend is imminent and inevitable.  After making the case for the bubble, the report provides a specific game plan for each type of market participant to avoid disaster when the downturn comes.

In this blog, we will feature links to media articles supporting our views as well as dissenting opinions, each time providing our take and analysis on the information provided.  We will strive to provide you specific actionable advice to advance your financial future.

Be sure to check our bios in the about us section so that you will know who we are and why you may be interested in heeding our advice and opinions.  We are very confident that the next 3-5 years in real estate will be significantly different than the last 5.  We look forward to chronicling the journey and hope you choose to take it with us.

Josh Lewis, editor