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October 26, 2005
How do twenty-somethings afford houses? Here's how
The Washington Post recently published an interesting article on the challenge faced by individuals in their 20s and early 30s trying to buy houses in overheated markets like D.C. The Post quotes a realtor who is full of tricks to help his young buyers qualify for mortgage loans. Here's an excerpt:
Iobst recommends a few tricks to help his young clients stay competitive. One is to have their parents take over monthly bills for a few months so their bank accounts can stay full -- making it appear to lenders that the buyers really do have the cash on hand to seal the deal.
This isn't new. I have a friend who pulled a similar trick years ago when he was relocating from L.A. to Atlanta. He closed his bank account in L.A., opened a new one in Atlanta, then showed the lender his closing bank statement from L.A. as well as his new one in Atlanta. Told the lender he had two accounts. The lender believed it and he qualified. But if real estate agents are pulling tricks like this, I'm not sure they're doing their clients a favor if they end up defaulting in a few years...
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Isn't this fraud? Isn't this agent inviting criminal charges or at the very least having his license pulled?
He actually said this out loud to a reporter? Is he stupid? I don't get it.
Posted by: Sid Fish at October 26, 2005 06:37 PM
The problem is even if they don't wish to do this, it becomes necessary to compete with other buyers who are.
Posted by: Lord at October 26, 2005 08:13 PM
Funny that the realtors have "tricks" to help their clients qualify for mortgages. The realtors want to close the deal. Bottom line. The more house buyers can afford, the higher their commission. I hope all these realtors feel the crunch when the market collapses. Maybe the hacks will have to go back to their old jobs.....as bank tellers and substitute teachers.
Posted by: sharkmeat at October 27, 2005 02:21 AM
These "tricks" are what I refer to as fraud. This is horrible advice for any borrower to follow. The mortgage industry has many, many products available that will not require borrowers to lie. Plus these agents expose themselves to both civil and criminal penalties.
Please do not support these tactics.
Posted by: Bryant Keefe at October 27, 2005 09:22 AM
I can assure you my parents would not take over my bills in order to get a home loan - that is deception at it's worst. I've also heard other similar stories from friends doing certain things to apply for home loans (parents depositing $30k into a savings account as a "gift").
There are two outcomes to this game. Either the prices have risen to a level that has permanantly priced out a large number of people forever (like oceanfront property) or the housing prices have been artificially stimulated by creative lending as described above.
When it seems like #1 is the future, its' time to be really worried about #2. What about those people in CA in 1988 who thought they would never own a house there.....only to buy it for 1/2 the price in 1991?
Posted by: Wes at October 27, 2005 10:46 AM
No doubt there is rampant fraud in the hyper-speculative US residential real estate market...
Posted by: reader at October 27, 2005 11:09 AM
I don't think prices ever dropped in CA by 50%... But I catch your drift...
Posted by: B. Rintoul at October 27, 2005 06:35 PM
Lenders usually require at least two months of statements, which would prevent this trick from working.
Posted by: zephyr at October 28, 2005 11:21 PM
It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.
Posted by: RE Agent at November 15, 2005 12:06 PM
Isn't also a little unethical for the same company to provide Real Estate Agent, mortgage, appraisal, home inspection, PMI, and Homeowners Insurance; all under the same company name? Seems like no one is looking out for buyers and Real Estate companies have formed an illegal monopoly. Oh well, Enron here we come! Get ready for the clean up.
Posted by: Doesitmatter at November 20, 2005 12:16 AM
I see here that you guys have solid evidence as why a new home buyer should not buy in today's market. I live in Tampa, Florida in smaller house a top community (my current section in the community is the oldest and most investor driven)and I plan on upgrading to a nicer house within the same community in a much better section. However, I was wondering about an existing home buyer who has had their first home for over two years and would like to upgrade as soon as possible. Do you think it would be wise to upgrade now before interest rates go up or should I hold off until the market tumbles. Another, option, however, a bit riskier of an option is for me to attempt to sell high now and rent in an apartment for some time to allow things to drop. However, if they do not drop at this crucial time period but increase a bit longer and level off then my purchasing power is diluted substantionally. Any opinions?
Posted by: Jeff at November 25, 2005 06:53 PM
I think it's rather insane to resort to any deception or fraud in order for anyone to get a home loan. What I'm really surprised at, is how easy it is just to commit such actions and how many truly STUPID, and IGNORANT real estate agents there are in this country. Seems like anyone with a 5th grade education can study just enough to pass a little real estate exam and voila! you're suddenly a so-called "real estate marketing expert!" It seems like bulls--t to me but I can't wait for the big bubble to burst and see all the house of cards come tumbling down.
People, if you really want to figure out how to own a home (in your 20's or otherwise) you need a way to beat the banks and mortgage companies at their own game. Gain equity in your property easy, gain it through proper principal pay down with a flexible mortgage account and do it with an "Australian" or "New Zealand" mortgage. It's the only way to use an interest only loan to your benefit. Trust me...
Posted by: Ed at December 14, 2005 03:13 AM
It's nice to see others like me frustrated and sickened by the sheer greed of the housing market. I'm part of the working poor priced out of the city. I'm praying for the housing market to bust. Are you listening greedsters??? dg
Posted by: DOUG at December 15, 2005 03:24 AM
I can see mr. Ed does not know much about real estate. I have been in this market since 1993 and I have never seen the market drop 50% like the other person said. It did slow down a bit however, if you think renting is an option you have that right. I love rentors they make my mortgage payments for me and I laugh all the way to the bank. My first home purchase was way back in 1995 in Phoenix Arizona for just $105,000 now it is worth $400,000. And my balance is now only $80,000. My other purchase is in Los Angeles which was for 231,500 I had an offer to buy/sell my property of $675,000 and my balance is only $201,000. I only have 10 years left on both properties. I guess what I am tring to say is if you can buy without committing fruad by all means do so. All my own family said JESSE YOUR REALLY STUPID for buying the bubble is going to bust.They are all still renting and are waiting for this bubble to bust. I have been waiting now for 10 years. I am a state licensed real estate appraiser,a real estate agent and senior loan consultant and I have to admit I am not a high school grad and I have over $1,000,000 in real estate investments. If younger couples want to buy and need help from mom and dad they should ask for it after all if mom and dad won't nobody will. My e-mail is firstname.lastname@example.org I'd love to here from you.
Posted by: jesse at December 15, 2005 12:52 PM
In order for a young person to compete --and stay afloat-- in America's "housing bubble" we must be able to afford the mortgage, not trick the lender into thinking we can. Too large of a mortgage means defaulting, then bad credit. I personally pay off my credit card every month in order to create good credit (I use it basically like a debit card) and have already started saving for a house.
I also pay for school every quarter with the help of my parents, we go 50/50. It is hard to afford homes around places like Seattle where I live, but I'm 19, already have $3,000 saved up, and just got a better job in order to save more.
By the time I am 25 I plan on having enough money to put a 20% down payment on a house, and have enough stability to afford monthly payments. The only way to safely buy a house is to save, save, save. Skip the $60 meal out to dinner and cook a romantic dinner at home instead. Don't buy that $150 pair of designer jeans. That 60" big screen will fit better in a big home than in an apartment, so wait until you have the house. It'll be cheaper by then too. It really is possible, and possible without risk or going into debt.
Posted by: Just A Kid at December 15, 2005 08:07 PM
If everyone had to pay cash or 50% down with 10 years amortization to purchase a home, selling price of homes would be much lower than they are now.
With low interest rates like in the past 3 years and or with loans with a start rate of .05% that allow you not to even pay the monthly interest when due, makes it possible for a buyer to out bid other buyers not willing to use theses creative loans. Not to mention Zero down 100% financing.
The differed interest will be out performed by the rate of inflation or the loss of purchasing power of our currency (too many federal reserve notes chasing the same product.)
Posted by: John Rodriguez at December 15, 2005 08:16 PM
JustAKid: Great comments and an excellent way to start out your life. You do have a lot to learn though; what little debt I have bothers me (cc only, no other fixed payments) but I have highly educated friends who are holding 300K mortgages, 65k in auto loans, and this is on top of the Home Depot/Best Buy/furniture store credit cards. I don't think anyone ever intends to get into debt, it's just one of those things that happens when you stop being vigilant. Good luck and I hope you don't lose that vigilance.
Jesse: Congratulations on your paper wealth. I hope it doesn't go too far to your head though because I personally know people who used to be millionaires on paper at the peak of the DOT-COM boom only to watch it evaporate away in the meltdown. Now they're back to working the good ol $100k a year job reminiscing over Budweiser "If only I had sold out".
If there weren't any other warning signs (and there are plenty), the one article that would have made me sell my property was around Nov 2004 in Money magazine (IIRC). The premise of the article was that many billionaires and professional investors had felt the housing goose was cooked and had locked in gains. This comes back to a point I often make - would you rather trust a real-estate agent with a vested interest in seeing a boom continue or listen to BILLIONAIRE investors who can afford to pay the best and brightest minds on the planet to manage their money?
My money is on the pros, after all the bubble always bursts when people feel like geniuses for their sheer luck and premonition to buy the right property at the right time. If the small money is pouring in, time to bail. We all want to live like millionaires. Even a broken clock is right twice a day.
Posted by: Wes at December 19, 2005 07:18 PM
Forget the twenty year olds who can't afford housing. How about us old retired folks? Our income is less than it was when we were at our earning peak and now what? There's no way we could afford to live in those so called "cheaper" communities. Even the rural communities that are mentioned are out of sight. Where do we go? Most of the places mentioned start at over $200,000.00. Geeze!
Posted by: Mary B at April 9, 2006 08:28 PM
Real estate bubbles, and house price "bust" do occur. I have seen them. Eventually it rebounds to a higher level, but most people cannot afford to carry it through the 3-4 lean years.
Posted by: Raymond A at April 12, 2006 07:17 PM
Ah, memories are short. I purchased a new California home in 1992, just as prices were peaking. New out of college, had no idea about market cycles. We were given incentives to upgrade the house and given closing costs in order to keep the purchase price artificially high... same as is happening now. Three/four years later, entire cul-de-sacs in our neighborhood were in foreclosure, as all mortgages were new and upside down. And this was in the days before no downpayment, neg am loans were common. I recall talking with some poor kids on trikes in one cul-de-sac where they were the only inhabited house, about all their friends being gone. We were under water in our home for years - but the % underwater was still only about 20% of our annual income - prices then were not as inflated as they are now. It still felt like a lot, though. Can we imagine how families will cope if a recession hits, and/or they are upside down to the tune of their entire annual income or more? Families that could have continued their payments will walk away. The psylogical downer of being upside down year after year is greater than the upper of doubling one's income on paper in these good times. A 20% decline on a $500K house, which many experts now believe is probable in California, is $100K.
Posted by: Sue at April 14, 2006 03:41 PM
Basically, you need above average common sense and a lot of guts/gots to make it in the world today . I know lots of people that have lied to get jobs, mortgages, business loans etc and have actually succeeded till today . Getting a mortgage that the mortgage industry says you can qualify for doesn't guarantee that you will be able to afford the house you buy. Afterall when you buy the house they are not going to be there watching the way you spend your salary . Lots of people buy houses and then get in to trouble later because of other spending habits unrelated to their mortgages .They may eat out a lot buy designer clothes, travel too much , buy expensive cars etc ..
HERE IS A BRIEF TRUE STORY ..
A couple of years ago . My wife and I were 200k -two hundred thousand dollars in raw credit card debt . This does not include car loans or mortgages .. Minimum payments were probably $6k to $7k a month . It was ridiculous . I considered bankruptcy but I decided to fight back . I knew that we would never be able to pay the debt off just making the minimum payment but I came up with an idea . I took out a 125% loan on the house for 13% . It seems stupid but I did the math -- something most people should learn to do . Basically 13% is high for a mortgage but it is nothing compared to credit card intrest . Credit card interest is compound while mortgage interest is a type of simple interest . At 13% my payment was about $2200 a month a saving of over 4k a month . Yeah a lot of mortgage companys dont do 125% loans and some of the ones that do it were not willing to even bother giving me the mortgage .
Once I closed the second mortgage I refinanced my first mortgage from 6.8% fixed to a 6 month adjustable at 2.8% - I did not pay any fees on this loan . My fist mortgage dropped by $1300 for the first 6 months . It has been about 18 months now and my first mortgage is at 4.8% and even though my mortgage dropped by over 1k a month .The amount that goes towards principle tripled .
It is a long story but at the end I was able to reduce all my laon payments without making anymore money and my 125% loan is at 80% now .
You have to learn some personal finance and understand how to do some financial math . A lot of people said I was crazy for going from a fixed mortgage to an adjustible others said 125% loan is dangerous and that 13% was high .
DO DA MATH
On paper some people may not be able to qualify for a loan because the morgage companys might be using the 33% rule but what if that person wants to spend 60% of their income on the mortgage ? Some people qualify for a loan - buy a house - get married - then have 3 kids in 4 years . Now they cant afford the mortgage thay could easily afford 4 years earlier . There are a lot of factors that go into determining who will succeed or fail as a home owner . At the end, you cant take a one size fits all approach . People need to know what there strategy is then do da math .
There are some spelling mistakes in the article but I am in a hurry . I have learnt from past mistakes so dont worry I am not in debt again .
Here is a thought for everybody . Most Americans are financilly illiterate . IF EVERYONE IN AMERICA WAS GIVEN $I Million today most would be broke in a couple of years because people would not know how manage the money . A few would double the money . I mean today some people have come from having nothing to being very successful and wealthy while others have squandered millions of dollars .
Posted by: Naijaman Fgcl Atl at April 15, 2006 01:41 PM
Wow! Buying a house in my late 50's after mother's death,yep getting help from the parent's does mean a lot and why not? I couldn't get a job even though sober, attracted and talented because of negative "age related" perceptions so now I use good ol' Mom's money to 1. get a loan, a secured loan at 5% return to ME, and 2% to the Bank for the small reasonably priced bungalow I found for under 150,000 all renovated 2. started a biz in what I love (herbs, flowers, ceramics, garden decor). Have guts stick out, don't be afraid of people's envy when you manage to NOT owe big debts on clothes, cars and junk (basically all plastic metal and very disposable in 5 to 10 years or less, you know, landfill?) and still look good and feel good, health and the proper attitude, USE money wisely, be grateful to Mom and Dad and don't squander it as millions do. Amen
Posted by: Pam Gee at May 16, 2006 07:44 PM
The future is cooked! I've owned a few houses in my day. I used to buy them and live in them for 2 years. Sell, then move to the next fixer upper. I even passed up on a few because I wanted a new car. :( But have never been without at least one since I was 22. I still own a house, thank God, or I don't know where I would live. Think of the future. I can't buy and resell houses any longer because I can't afford to buy fixer uppers going for 125k. Something will soon give! Here is what I always explained to people. If you buy a home it usually allows you to itemize on your taxes. So your 1,500 refund turns into 4,000. So if you were paying 600 rent you could actually afford a 120k house if you filed your taxes correctly!
Posted by: Jared at June 6, 2006 09:13 PM