Real Estate Blog - WORRIES OF THE DALLAS MC MANSION EXPANSION HAVE ARRIVED

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WORRIES OF THE DALLAS MC MANSION EXPANSION HAVE ARRIVED

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Bill Cherry Realtor

Dallas, Texas

My 43rd Year

Meet me on the web at www.billcherrybroker.com

The Dallas McMansion expansion has lots of lenders and financial advisors worried. At issue: young people with high incomes but no savings taking on massive mortgage debt. They come with a Pollyanna attitude that they will never be out of work, never be faced with a financial emergency, and that there will be someone ready to pay them much more for the house when they are ready to sell it.

The real estate boom has made what used to be called exotic loans such as interest-only mortgages or 103s and 107s (which require no down payment and actually let you borrow 3% or 7% more than your home's price) more common than ever.

In their parents' time, in all likelihood when they bought their first home, they had to have twenty percent of the price in cash as well as their part of the closing costs.

But these days lenders with their relaxed underwriting have gotten as cavalier as their borrowers.

Apparently neither wants to face the problem that these exotic loans all come with huge risks for both the borrower and the lender. When you buy a house with an interest-only mortgage, for an example, you are able to have low monthly payments but the only chance you have to build any equity is if the house appreciates, or you begin paying on the principal.

So if real estate prices have stagnated or have declined when you choose to sell, you may actually owe more money to the bank than you'll net from the sale. It happens all of the time. Many buyers who used these products to finance their homes are unable to sell them right now because to sell them will require that they add money to that which they are getting from their buyer. And they have insufficient savings or other assets to make up the short fall.

When people have to do an interest-only mortgage because they can't afford a principal-and-interest payment, they're usually making a huge mistake. They forget that after a honeymoon period of, say, five years, the lender is going to require them to start reducing the loan principal. Will they have the money to do that? is the question most refuse to face.

How do you know if you can afford your mortgage? Consider the rule lenders used in your mom and dad's time. Your principal and interest payment should not exceed 25% of your gross monthly income, and your total house obligation which includes principal, interest, taxes, insurance -- should not exceed 36%.

And a buyer should never purchase a particular home, condo or townhouse if their sixth sense is screaming at them letting them know it could be hard to sell when they're ready to move on. I believe Realtors have an obligation to their clients in these situations as well.

Posted by BILL CHERRY on 05/16/2007 08:59 PM

Comments (4)

exotic mortgages, park cities, highland park, m streets, no down payment, dallas home buyers, bill cherry realtor

Originally posted at: BILL CHERRY'S GREATEST DALLAS PARK CITIES REAL ESTATE BLOG: WORRIES OF THE DALLAS MC MANSION EXPANSION HAVE ARRIVED

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4 Comments on WORRIES OF THE DALLAS MC MANSION EXPANSION HAVE ARRIVED

JUL

2007

Finally! A McMansions post that makes sense! I agree with you whole heartedly. How is it that a 30 something couple with less than $200k a year in income, 2 car loans, a boat loan, and credit card debt just walk in and purchase a a$650k property? And in Texas, there is a good chance that their property tax bill will be somewhere in the neighborhood of $14k per year on top of their note???

I cannot blame the McMansions, bunch, though. This problem is not exclusive to that crowd and I cannot single them out. The truth is, until recently, homebuilders in the 'FHA price range' (currently still under $200k for Austin) did the exact same thing--only the salaries were a combined annual income of maybe, $50k per year and same type of scenario--credit cards, 2 car notes, KIDS, etc. Their mortgage payment including taxes is $1700 per month (or more) when they are bringing home $2600 in total. Less than 2 years later the house is on the foreclosure block and that family has to go back to leasing.

We, as Realtors, have an obligation to educate our buyers, regardless of their background or price range. It is tempting for many buyers (of all tax brackets) to max out. This is not a smart move. I would love to see a stronger movement from Realtors to position ourselves not only as sales agents, but as advocates for our buyers that help them make smart decisions long term, and treat their homes as a 'nest egg portfolio' rather than a visit to the craps table. Kudos to you for making the point!

JUL

2007

Miss Sharon,

Thanks for your enlightening thoughts. That interest rates are rock bottom and money is so freely available that lenders feel it needs to be invested in loans no matter what, gives the nation a false security. Everyone decides things are good...couldn't be better...love the Good Old USA, etc.

And as usual, the general public's opinion is wrong. Deep in the bowls of the economy where it can't easily be seen, economic erosion is beginning and working in an exponential fashion. And then one day, BOOM, everything is upside down and the McMansion brats are wringing their hands.

The very idea that loans are available to people who want to buy very expensive houses but don't even have (or want to invest) a dime to throw in as equity is a stark raving stupid plan that has disaster at the end....the only thing that's unpredictable in that formula is when that end will come.

Each generation either refuses to study history or believes it won't apply to them.

SEP

2008

Seems every generation has to learn this lesson: don't buy what you can't afford. When I sold real estate in Austin in the early 1980's, other agents pressed buyers into houses beyond their affordable price ranges, then had mortgage lenders push through the loan, using ARMs and 3-year balloon payment to finance. I showed buyers only what they could could comfortably pay for each month on a fixed rate 30-year mortgage. The only buyer who chose an ARM lost the house in the 3rd year when the balloon note came due and prices had dropped; they still hadn't saved for a down payment and couldn't refinance.

In the early '80's, prices had been escalating 10% per year, California investors started flipping houses in Austin, so the market went out of control and beyond the range of the average homeowner. When the market stalled, foreclosures followed, savings and loans went bankrupt, and the federal Resolution Trust Corp (RTC) had to liquidate a two-to-three year nationwide inventory backlog while the market started to correct itself. It finally began to recover in the early 1990's. Greed and ignorance have again driven and fueled this market, exacerbated by Wall Street's investment into the secondary mortgage market. Some folks have to learn the hard way in order to get this lesson. Maybe they'll pass this one on to their own children.

Now that the bottom has fallen out of the RE market and Wall Street from the bundled loans, we'll have to start over. We should have restrictions against low-equity loans, and strictly qualify buyers, to save them from themselves. Bailing folks out (either Wall Street, or investor property owners) after the fact isn't the right lesson. Natural consequences for greedy actions are a built-in lesson. If it's a reasonably priced homestead, maybe some help on the rate or due date, but a taxpayer buyout of greedy folks unwilling to act in moderation and assure themselves some financial security won't work.

OCT

2008

Miss Margaret,

You did a good job expressing your thoughts through your comments. I hope you'll copy and paste them to a blog piece for all to have the benefit of reading.

Thanks for posting it here.

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