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Is the government creating a future housing bubble and crash?

Old 04-03-13, 04:34 PM
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Is the government creating a future housing bubble and crash?

Here we go again...

Obama administration pushes banks to make home loans to people with weaker credit

By Zachary A. Goldfarb, Apr 03, 2013 12:48 AM EDT

The Washington Post The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps.

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.

“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

Administration officials say they are looking only to allay unnecessary hesi*ta*tion among banks and encourage safe lending to borrowers who have the financial wherewithal to pay.

“There’s always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s,” said a senior administration official who was not authorized to speak on the record.

The administration’s efforts come in the midst of a housing market that has been surging for the past year but that has been delivering most of the benefits to established homeowners with high credit scores or to investors who have been behind a significant number of new purchases.

“If you were going to tell people in low-income and moderate-income communities and communities of color there was a housing recovery, they would look at you as if you had two heads,” said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit housing organization. “It is very difficult for people of low and moderate incomes to refinance or buy homes.”

Before the crisis, about 40 percent of home buyers were first-time purchasers. That’s down to 30 percent, according to the National Association of Realtors.

From 2007 through 2012, new-home purchases fell 30 percent for people with credit scores above 780 (out of 800), according to Federal Reserve Governor Elizabeth Duke. But they declined 90 percent for people with scores between 680 and 620 — historically a respectable range for a credit score.

“If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you’re leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery,” said Jim Parrott, who until January was the senior adviser on housing for the White House’s National Economic Council.

One reason, according to policymakers, is that as young people move out of their parents’ homes and start their own households, they will be forced to rent rather than buy, meaning less construction and housing activity. Given housing’s role in building up a family’s wealth, that could have long-lasting consequences.

“I think the ability of newly formed households, which are more likely to have lower incomes or weaker credit scores, to access the mortgage market will make a big difference in the shape of the recovery,” Duke said last month. “Economic improvement will cause household formation to increase, but if credit is hard to get, these will be rental rather than owner-occupied households.”

Deciding which borrowers get loans might seem like something that should be left up to the private market. But since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.

The FHA historically has been dedicated to making homeownership affordable for people of moderate means. Under FHA terms, a borrower can get a home loan with a credit score as low as 500 or a down payment as small as 3.5 percent. If borrowers with FHA loans default on their payments, taxpayers are on the line — a guarantee that should provide confidence to banks to lend.

But banks are largely rejecting the lower end of the scale, and the average credit score on FHA loans has stood at about 700. After years of intensifying investigations into wrongdoing in mortgage lending, banks are concerned that they will be held responsible if borrowers cannot pay. Under some circumstances, the FHA can retract its insurance or take other legal action to penalize banks when loans default.

“The financial risk of just one mistake has just become so high that lenders are playing it very, very safe, and many qualified borrowers are paying the price,” said David Stevens, Obama’s former FHA commissioner and now the chief executive of the Mortgage Bankers Association.

The FHA, in coordination with the White House, is working to develop new policies to make clear to banks that they will not lose their guarantees or face other legal action if loans that conform to the program’s standards later default. Officials hope the FHA’s actions will then spur Fannie and Freddie to do the same.

The effort requires sign-on by the Justice Department and the inspector general of Department of Housing and Urban Development, agencies that investigate wrongdoing in mortgage lending.

“We need to align as much as possible with IG and the DOJ moving forward,” FHA Commissioner Carol Galante said. The HUD inspector general and Justice Department declined to comment.

The effort to provide more certainty to banks is just one of several policies the administration is undertaking. The FHA is also urging lenders to take what officials call “compensating factors” into account and use more subjective judgment when deciding whether to make a loan — such as looking at a borrower’s overall savings.

“My view is that there are lots of creditworthy borrowers that are below 720 or 700 — all the way down the credit-score spectrum,” Galante said. “It’s important you look at the totality of that borrower’s ability to pay.”

http://www.washingtonpost.com/busine...5_story_1.html
Didn't we just go through something similar?
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Old 04-03-13, 05:25 PM
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Re: Is the government creating a future housing bubble and crash?

Does "weaker credit" mean people like the idiot blogger IamFacingForeclosure, or for people like me, who would have been an acceptable credit risk for most periods since WWII?

IIRC, my credit score was right around 700 when I bought this house fifteen years ago. From what I've heard, no one would have offered me an mortgage today.
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Old 04-03-13, 08:08 PM
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Re: Is the government creating a future housing bubble and crash?

Lower home prices are always seen as a problem and the solutions are always to make loans easier for younger borrowers or those with bad credit. So we want to increase the home prices until they are out of reach and then get peoples signed into 30 years of debt through loans by relaxing standards.
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Old 04-03-13, 08:44 PM
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Re: Is the government creating a future housing bubble and crash?

Originally Posted by Nick Danger View Post
Does "weaker credit" mean people like the idiot blogger IamFacingForeclosure, or for people like me, who would have been an acceptable credit risk for most periods since WWII?

IIRC, my credit score was right around 700 when I bought this house fifteen years ago. From what I've heard, no one would have offered me an mortgage today.
I think for FHA you would still be fine.
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Old 04-03-13, 09:19 PM
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Re: Is the government creating a future housing bubble and crash?

I read an article today about the auto industry lending people money even if they have shit credit and faulty job prospects. The guy in question was able to get a vehicle and all he put down as a downpayment was his shotgun.
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Old 04-03-13, 10:02 PM
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Re: Is the government creating a future housing bubble and crash?

Weaker credit scores being allowed won't make a difference. Change the score requirement right now on FHA, and nothing will happen. Most deals are still dying in underwriting and have nothing to do with the borrower or the house, but the whim of the underwriter.

We just had (and this is not uncommon) people with good credit get turned down after 3 months of messing with the bank. The loan went to underwriting 3 times. On the last time, they finally killed the deal over some comments that were in the appraisal. Those comments did not kill the deal the first two times the underwriters saw them, but they did the last. It is an arbitrary process, and deals are just dying. Many people are losing faith in the lending system as a whole.

But as to lower credit people getting loans (I think it is a bad idea), I don't think it would have a big impact. The biggest problem I saw in the last bubble wasn't really lower credit borrowers, but "no doc" loans, nearly no requirements for the home, and "the man" telling underwriters to get loans through. That pendulum has swung all the way to the other end, and people who should get loans often don't as the underwriters puff out their chests to show their bosses just how tough they are now, and how they have "saved" the bank from a potentially bad loan.

I get offers to refinance my loan all the time. Often I'll call up just to get turned down again, so I can tell them to quit sending me stuff. Why do I get turned down? Credit is over 800, income is fine, value is fine, etc. But I'm on 40 acres. Didn't matter when they first gave me the loan, but it matters now. Also, the "poker house" doesn't fly with them. Too many outbuilding, possible farm, etc. I get new reasons each time, and so I kindly ask them to quit trying to get me to refi with their constant letters.

TL: DR Lowering the credit of borrowers is a bad idea, but likely won't lead to significantly more loans made
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Old 04-03-13, 10:04 PM
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Re: Is the government creating a future housing bubble and crash?

Originally Posted by Why So Blu? View Post
I read an article today about the auto industry lending people money even if they have shit credit and faulty job prospects. The guy in question was able to get a vehicle and all he put down as a downpayment was his shotgun.
Probably true, but those are just made by auto company financing that will get bailed out, not government backed.

I think they are doing this to move inventory, and this is part of what they need to do to achieve it. Plus, where slightly used cars seem to hold value much better than they use to, it is probably a decent risk. Plus they get higher interest on riskier loans.
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Old 04-03-13, 10:28 PM
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Re: Is the government creating a future housing bubble and crash?

I dunno. But I swear that someone bought up all the houses in my area.
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Old 04-03-13, 10:31 PM
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Re: Is the government creating a future housing bubble and crash?

I admit to being suspicious when Fannie Mae had a record profit.

Low interest rates is what's driving people to buy propteries. Fed rate is tied to unemployment rate - I think they said get to 6.5% and then Fed rate will go up, so maybe two more years of ultra low rates.

I think they're still very strict on income checks.
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Old 04-03-13, 10:42 PM
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Re: Is the government creating a future housing bubble and crash?

Originally Posted by troystiffler View Post
I dunno. But I swear that someone bought up all the houses in my area.
That may have something to do with this:

Are housing investors creating a new bubble? Cash purchases cloud outlook for market

Housing has emerged as the brightest spot in the economy this year, but some analysts are questioning whether the market’s recovery is built to last.

Home prices, sales and construction have increased sharply in the past year after six years of relentless declines, suggesting a classic recovery and adding fuel to a broader economic expansion. For the first time since the Great Recession, the housing sector started adding jobs in areas such as construction over the past few months in a sign of a dramatic market turnaround.

But a close look at the numbers reveals that much of the housing activity is driven by abnormal conditions stemming from the housing crisis.

Much of the pickup in sales and prices has been powered by investors who, convinced that the market is bottoming, are scooping up bountiful supplies of distressed and foreclosed properties at bargain prices and often paying with cash.

With investors targeting lower-priced homes that they intend to purchase and rent out, they have been crowding out many first-time buyers who are having difficulty getting mortgage loans and are at a disadvantage when competing with well-heeled buyers. Cash sales to investors now account for about one-third of all home sales, according to the National Association of Realtors.

Although rock-bottom interest rates on mortgages and low home prices undoubtedly remain strong attractions, traditional buyers are encountering other formidable obstacles.

Mortgages are difficult to obtain because banks want to lend only to the most creditworthy customers and are demanding down payments of at least 20 percent on any loan that doesn’t have government backing.

Homeowners who are underwater or close to it can’t come up with down payments of that size, while first-time buyers may have to save for years to come up with the cash if they don’t get help from relatives or friends.

“The recovery in housing prices seems to be disconnected from traditional economic drivers,” said Christopher Whalen, managing director at Carrington Investment Services, who estimates that about one-third of Americans who would have qualified for mortgages in 2006 can’t get them today. People of ordinary means, unlike investors, can’t buy homes without credit because they hardly have the cash for down payments much less the entire costs of the properties.

Political leaders and investors need to take note, he said.

“The weak rate of participation by homeowners in the home price rebound is a concern, and one which is underscored by the lack of bank credit creation” since the recession. “In a normal housing cycle, the creation of new home mortgage credit would be growing in tandem with rising home prices, but the current rebound is anything but normal.”

Spot shortages

For buyers who are able to overcome the credit obstacles and enter the market, other hurdles await.

Many are encountering shortages of homes for sale in the District and some other areas, but not for reasons characteristic of a healthy market. Home prices are 30 percent below their 2006 peaks in most regions, leaving nearly one-quarter of homeowners underwater on their mortgages and unable to sell their homes without losing money.

The shortages of homes for sale in the most desirable neighborhoods may give the appearance of robust conditions, with buyers queueing up to make bids, but analysts say appearances are deceptive.

David Stockman, a former Reagan budget director and Wall Street investment banker, is convinced that the market is not what it seems.

He blames the ultra-low interest rates engineered by the Federal Reserve, which he said has encouraged investors to enter the housing market in droves with the goal of making easy money on low-priced homes and then quickly heading for the exits when interest rates reach more normal levels. It has created at least a temporary bubble in some markets, he told the Daily Ticker recently.

“We don’t have a real, organic, sustainable recovery,” he said. “In a world of medicated money by the central bank, things aren’t what they appear to be,” he said, noting that some of the sharpest, double-digit gains in home prices and sales recently have been in formerly distressed markets such as Phoenix and Las Vegas, which were devastated during the housing market collapse and have had a glut of foreclosed properties.

“It’s happening in the most speculative subprime markets, where massive amounts of ‘fast money’ are rolling in to buy, to rent, on a speculative basis for a quick trade,” he said.

Blackstone, a leading investment firm, has spent $3.5 billion buying single-family homes in nine markets in the past year and is expected to buy another 15,000 units this year. Other investment firms active in buying up houses are Colony Capital LLC and Two Harbors Investment Corp.

“As soon as they conclude prices have moved enough, they’ll be gone as fast as they came,” Mr. Stockman predicted.

The investment activity has obscured the fact that first-time buyers and trade-up buyers are largely missing from the market, he said, though these types of consumers are essential to ensuring that the market keeps rising under more normal circumstances.

Young potential homebuyers can’t find jobs, are weighed down by staggering loads of student debt and are unable or unwilling to buy homes, he said, while baby boomers are looking to trade down to smaller homes rather than trade up to larger ones as they approach retirement.

Investors fuel boom

An analysis by CoreLogic, a real estate information firm, bears out Mr. Stockman’s point that the 8 percent rise in home prices in the past year has been fueled by investors diving into formerly depressed markets such as Phoenix and Las Vegas, where hedge funds and other investor groups have been most active in snapping up foreclosed properties.

Home prices shot up at double-digit rates in the past year in areas targeted by investors — 23.2 percent in Phoenix, 15.3 percent in Las Vegas, 13.4 percent in Atlanta and 13.8 percent in Detroit — as investment funds entered the market en masse.

In addition, CoreLogic found that individual investors — who sometimes pay in cash but also obtain mortgages to buy homes — have been driving up sales and prices in other markets, most notably Los Angeles, San Francisco and San Diego, which experienced price gains of 12.1 percent, 17.5 percent and 9.8 percent respectively in the past year. Miami is another market where sales to investors, domestic and foreign, likely drove up prices by 10.8 percent in the past year.

The robust sales gains, primarily in the South and West, in turn fueled a jump of 8.1 percent in home prices nationwide, the fastest since the top of the housing bubble in mid-2006, according to the S&P Dow Jones home price index. But markets not flooded with investors, including New York and Chicago, experienced more subdued gains of 0.6 percent and 3.3 percent, respectively.

“The markets have been uneven” because of the concentration of investors in a handful of areas, said Sam Khater, an analyst at CoreLogic.

Individual investors usually have been much bigger forces driving up the market, he said, though they are less visible than the big investment funds. Individual investors purchased 600,000 homes last year — far more than their institutional brethren.

Hope springs eternal

Despite worries that investors, not homeowners, are driving the market, many economists remain optimistic that the housing revival is real and here to stay.

Federal Reserve Chairman Ben S. Bernanke frequently touts the rebound of housing as one of the central bank’s main accomplishments in driving interest rates to historic lows in recent years. The rates on 30-year fixed-rate mortgages used by most consumers have been below 4 percent since the Fed started purchasing Fannie Mae and Freddie Mac mortgage bonds again last fall.

Patrick Newport, an economist at IHS Global Insight, said the Fed’s extraordinary easing is bearing fruit and, coupled with slow but steady job growth, is providing fuel for a lasting recovery in the housing market.

A drop in distressed sales, apparently as investors absorb much of the supply, is allowing home prices to firm up, enabling indebted homeowners to regain some of their lost wealth, he said. The Fed estimates that the value of homes nationwide increased $1.4 trillion last year, adding substantially to the principal source of middle-class wealth that was drastically depleted during the housing market collapse.

Higher home prices lifted 1.7 million homeowners above the underwater mark in 2012, according to CoreLogic.

Mr. Newport noted that higher home prices also are boosting property tax receipts for strapped state and local governments and making it more profitable again for developers to build homes and hire construction workers, producing dividends for the broader economy.

To many analysts, the influx of investors may not seem normal, but it has served an important purpose: It provided a jump-start to the market by prompting more traditional buyers to worry that they will miss the bottom in prices and interest rates if they don’t act soon.

“Expectations are starting to play a role,” said Mr. Newport. “Potential home buyers are entering the market now instead of later because they are afraid that prices will shoot up if they wait. Their expectations, which can become self-fulfilling, will magnify price increases in some places as housing markets improve,” creating a kind of virtuous cycle that is replacing the vicious downward cycle that prevailed in housing for years.

http://www.washingtontimes.com/news/...bubble/?page=1
There's a lot of speculative buying in severely depressed areas.
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Old 04-03-13, 10:48 PM
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Re: Is the government creating a future housing bubble and crash?

Mr. Newport noted that higher home prices also are boosting property tax receipts for strapped state and local governments and making it more profitable again for developers to build homes and hire construction workers, producing dividends for the broader economy.
Thought I would bold that entire section. The City Of Portland, OR has been doing exactly this for many years, and isn't going to stop anytime soon. I swear every Ford F-150 around here is a small construction company that was contracted by another contractor, who was contracted by the city.

In the end, the homeowner is the one who pays the higher property taxes and carries all the risk.

Which is why the prices are just outrageous, but what's even more pathetic and sad...is people are still buying these overpriced pieces of shit. Many of these quick-mix homes are already falling apart, need new roofs, cement driveway is already cracked, etc.
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Old 04-03-13, 10:49 PM
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Re: Is the government creating a future housing bubble and crash?

There was that dude in a story today about him buying up all the properties in hist town of Carpenterville (or whatever it's called) his portfolio included about 300 properties that he bought, restored, and now rents out. He says he did it, because he did not want his city to turn into Detroit.
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Old 04-03-13, 11:00 PM
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Re: Is the government creating a future housing bubble and crash?

Originally Posted by X View Post
That may have something to do with this:

There's a lot of speculative buying in severely depressed areas.
Absolutely. And a LOT of all cash deals. The rich get richer. However, they also keep the housing market afloat on a lot of this. But given where most investment income is, physical houses that can bring 8% or more as a rental sure looks good.

Originally Posted by Ranger View Post
I admit to being suspicious when Fannie Mae had a record profit.

Low interest rates is what's driving people to buy propteries. Fed rate is tied to unemployment rate - I think they said get to 6.5% and then Fed rate will go up, so maybe two more years of ultra low rates.

I think they're still very strict on income checks.
They are still strict on a lot of things. Until the government makes (seriously makes) banks ease up on requirements beyond credit, not much will happen. And here is why.....the gov't MADE banks take riskier loans at the beginning of the last bubble. They blackmailed them into it. And then when it crashed, even though they had mortgage insurance on the loans backed by the fed, the banks still took a bath because the loss of value was far more than the 20% equity allowed. And those that didn't follow strict FHA guidelines on the loans that defaulted were told "well, looks like you didn't adhere to our guidelines (which we told you not to) and therefor the mortgage insurance is not valid, so you will take this loss on your own."

Of course we then bailed them out, but banks seems to be a lot more weary of playing that game again. It will take blackmail again.
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Old 04-04-13, 03:57 AM
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Re: Is the government creating a future housing bubble and crash?

I live in an apartment that costs $700 a month. It's works very well for my budget.

Several years ago, my sister told me that I could get a mortgage for $250,000 if I wanted it. When I told her I couldn't afford to pay it, she said they didn't care, and I could still get it anyway.

Fortunately, my sister and I were both taught by our parents to live within a budget.

Home ownership is not for everyone - and we should not be trying to expand it to people who can't afford it.

Obama is an idiot.
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Old 04-04-13, 02:59 PM
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Re: Is the government creating a future housing bubble and crash?

Creating a bubble? No need to create one. The RE bubble never really popped, just deflated a good bit.

The entire US economy is one big bubble...
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Old 04-04-13, 03:06 PM
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Re: Is the government creating a future housing bubble and crash?

Originally Posted by grundle View Post
I live in an apartment that costs $700 a month. It's works very well for my budget.

Several years ago, my sister told me that I could get a mortgage for $250,000 if I wanted it. When I told her I couldn't afford to pay it, she said they didn't care, and I could still get it anyway.

Fortunately, my sister and I were both taught by our parents to live within a budget.

Home ownership is not for everyone - and we should not be trying to expand it to people who can't afford it.

Obama is an idiot.
We bought our second house WELL before that idiot Obama was President. We were told that we could afford a house much higher than the price point we settled on. Just because a BANK tells you you can afford something doesn't mean you can. The banks were out of make money off of you - either with interest or foreclosure.
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Old 04-04-13, 03:50 PM
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Re: Is the government creating a future housing bubble and crash?

Orange County, Ca is the nation's biggest hub for sub-prime lenders. I can tell you first hand that the sub-prime lenders are back in a big way. Companies like CashCall, Greenlight Financial, and ClearVision Funding, companies that all shrunk or disapeared during the recession, have all been grabbing up office space as fast as they can over the last 12 months. They are the biggest players in the market right now, but landlords consider them long term risks because the perception is that these lenders are re-starting the cycle.
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Old 04-04-13, 04:04 PM
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Re: Is the government creating a future housing bubble and crash?

Originally Posted by Why So Blu? View Post
There was that dude in a story today about him buying up all the properties in hist town of Carpenterville (or whatever it's called) his portfolio included about 300 properties that he bought, restored, and now rents out. He says he did it, because he did not want his city to turn into Detroit.
Well the good news is there will be a lot of skilled tradesmen around to fix up the homes.
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Old 04-04-13, 08:17 PM
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Re: Is the government creating a future housing bubble and crash?

The government has no business creating economic bubbles -- that's the free market's job!
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Old 04-04-13, 10:30 PM
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Re: Is the government creating a future housing bubble and crash?

I hope so, I need to sell my townhome during the next bubble.
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Old 04-05-13, 12:38 PM
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Re: Is the government creating a future housing bubble and crash?

Yeah, I don't think the bubble really burst, at least around here. People say all the time that the housing prices are a steal, but they're still comparing to post bubble prices... if you look pre-bubble, it's got a ways to go.

I know that investors are buying up a lot of inventory. At least in this area, the weak dollar is also luring international investors with cash-only bids. This is also driving things up. And of course the low interest rates. And the shadow inventory which is keeping available inventory down.

All I know is that if they ever really consider getting rid of the home mortgage deduction, there will be a lot more foreclosures. I don't think you're supposed to budget that into your plans, but people around here have always considered that part of the calculation. I think traditionally the rough calculation is salary x 3, or maybe 25% of your income going to a mortgage. No way that's the case in CA.

On a side note, why do they always interview NAR on housing news? Their reply is always the same: now is the best time to buy. The housing market is down, and housing prices are so low now is the time to buy. The housing market is up, and if you don't buy now you'll be priced out. You'd think they have some bias or something.
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Old 04-05-13, 05:52 PM
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Re: Is the government creating a future housing bubble and crash?

We are at pre-bubble prices. Fortunately, because of a large plant closure, we didn't go up nearly as soon or as quickly as most. Hard to believe we are now thankful for that closure.
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