Major housing crash coming this winter or sooner

[Sparko]

My idea is that we bundle probable bad debt with good debt at mixed interest rates and risk. And we use that to fund expensive houses for the working poor beyond their likely ability to repay. And leave the market before anyone notices it is almost all bad risk.

[TDub]

wut

[twocoach]

One of the things that will limit this will be the fact that 80% of home construction is done by small independent contractors. They don't have a finance branch like Lennar. The investment security is in the fact that Lennar builds out a whole neighborhood at a time and builds in amenities like parks in their developments. I think during the post war housing boom there were big companies that did these things. And they are building smaller homes. As banks lose market share for mortgages they will get creative in response.

I think looking back at some of these older models for residential construction industry will be a thing in the near term. I know of one developer who is looking to building garden homes that back onto shared backyard space with 1,000 sf units that are geared towards multigenerational cohabitation. To keep the cost down they will use off the shelf metal building construction door the shell. Two workers can "frame" the house shell in two days.

Not many of the millennials saw the worst of the last recession. Annie owned a house in midtown KC. At one point half of the homes on her block were in foreclosure, and two of those had been abandoned. In the addition to that she lost her job and started waitressing on the Plaza and took in a roommate to pay her bills. Her life savings were tied up in an asset that had no value. She is acutely aware of the fragility of home value and approaches purchasing with a lot of research.

In the six years since my daughter graduated from college she has lived in Denver, Chicago and now SF. She has no interest in owning a home. It would tie her down and restrict some choices. She invests her money in something other than real estate. Her life seems pretty good and she seems happy. At her age I owned a fixer upper in the hood and spent my weekends rebuilding the place and trying to find ways to keep the neighbors from breaking in and stealing my tools while I was at work. She is spending her weekends hiking in the Presidio and the redwoods. And she likely has a lot more money in the bank (adjusted for inflation) than I did back then.

Values change, expectations change. There is a lot nostalgia for the "good old days", much of which didn't exist. The trumpers and the Bernie bros are both guilty of it, they just have different memories of what that consists of.

I do think some bank is going to figure out how to win market share in an environment like this one by doing purchase financings in a two-note structure. One at a principal amount equal to the amount outstanding under a buyer's existing note (and at that existing note's rate), and the other at a principal amount equal to the balance of the new purchase (at market rate).

For example, say I owe $250k on my existing note at 3%, and want to borrow a total of $400k to buy a new house. Someone is going to figure out how to roll that $250k forward at 3%, and have a second (sister) note for $150k at 7%. The same mortgage would cover both notes. Or there could be two mortgages. Whatever.

The point is that a bank that figures this out would OWN this present sort of environment.

It seems like a bank that tries that would lose their proverbial shirt. Only getting 3% on those funds means they aren't getting 7% on those funds and that does not seem to be a business model for success. Banks aren't private entities that have no associated expenses. It costs WAY more now to make money than it used to.

[jfish26]

wut

Go read The Big Short.

Really. It’s fantastic.

[jfish26]

One of the things that will limit this will be the fact that 80% of home construction is done by small independent contractors. They don't have a finance branch like Lennar. The investment security is in the fact that Lennar builds out a whole neighborhood at a time and builds in amenities like parks in their developments. I think during the post war housing boom there were big companies that did these things. And they are building smaller homes. As banks lose market share for mortgages they will get creative in response.

I think looking back at some of these older models for residential construction industry will be a thing in the near term. I know of one developer who is looking to building garden homes that back onto shared backyard space with 1,000 sf units that are geared towards multigenerational cohabitation. To keep the cost down they will use off the shelf metal building construction door the shell. Two workers can "frame" the house shell in two days.

Not many of the millennials saw the worst of the last recession. Annie owned a house in midtown KC. At one point half of the homes on her block were in foreclosure, and two of those had been abandoned. In the addition to that she lost her job and started waitressing on the Plaza and took in a roommate to pay her bills. Her life savings were tied up in an asset that had no value. She is acutely aware of the fragility of home value and approaches purchasing with a lot of research.

In the six years since my daughter graduated from college she has lived in Denver, Chicago and now SF. She has no interest in owning a home. It would tie her down and restrict some choices. She invests her money in something other than real estate. Her life seems pretty good and she seems happy. At her age I owned a fixer upper in the hood and spent my weekends rebuilding the place and trying to find ways to keep the neighbors from breaking in and stealing my tools while I was at work. She is spending her weekends hiking in the Presidio and the redwoods. And she likely has a lot more money in the bank (adjusted for inflation) than I did back then.

Values change, expectations change. There is a lot nostalgia for the "good old days", much of which didn't exist. The trumpers and the Bernie bros are both guilty of it, they just have different memories of what that consists of.

I do think some bank is going to figure out how to win market share in an environment like this one by doing purchase financings in a two-note structure. One at a principal amount equal to the amount outstanding under a buyer's existing note (and at that existing note's rate), and the other at a principal amount equal to the balance of the new purchase (at market rate).

For example, say I owe $250k on my existing note at 3%, and want to borrow a total of $400k to buy a new house. Someone is going to figure out how to roll that $250k forward at 3%, and have a second (sister) note for $150k at 7%. The same mortgage would cover both notes. Or there could be two mortgages. Whatever.

The point is that a bank that figures this out would OWN this present sort of environment.

It seems like a bank that tries that would lose their proverbial shirt. Only getting 3% on those funds means they aren't getting 7% on those funds and that does not seem to be a business model for success. Banks aren't private entities that have no associated expenses. It costs WAY more now to make money than it used to.

I am no expert on residential mortgage lending (clearly).

In my conception of this, you’re not changing anything at all about the profile of the “first” tranche, and any new money being loaned is being loaned out at market rates. So I’d think this compresses margin a fair amount, but the play would be that you’d make up for margin with increased volume (you’d be the only game in town).

[twocoach]

I do think some bank is going to figure out how to win market share in an environment like this one by doing purchase financings in a two-note structure. One at a principal amount equal to the amount outstanding under a buyer's existing note (and at that existing note's rate), and the other at a principal amount equal to the balance of the new purchase (at market rate).

For example, say I owe $250k on my existing note at 3%, and want to borrow a total of $400k to buy a new house. Someone is going to figure out how to roll that $250k forward at 3%, and have a second (sister) note for $150k at 7%. The same mortgage would cover both notes. Or there could be two mortgages. Whatever.

The point is that a bank that figures this out would OWN this present sort of environment.

It seems like a bank that tries that would lose their proverbial shirt. Only getting 3% on those funds means they aren't getting 7% on those funds and that does not seem to be a business model for success. Banks aren't private entities that have no associated expenses. It costs WAY more now to make money than it used to.

I am no expert on residential mortgage lending (clearly).

In my conception of this, you’re not changing anything at all about the profile of the “first” tranche, and any new money being loaned is being loaned out at market rates. So I’d think this compresses margin a fair amount, but the play would be that you’d make up for margin with increased volume (you’d be the only game in town).

So you're basically just giving a person who already has a $250k loan another loan for $150k. That doesn't really seem like as new a model as you think when it comes down to it.

[ousdahl]

wut

Go read The Big Short.

Really. It’s fantastic.

Is that the biography of Sherron Collins?

[jfish26]

It seems like a bank that tries that would lose their proverbial shirt. Only getting 3% on those funds means they aren't getting 7% on those funds and that does not seem to be a business model for success. Banks aren't private entities that have no associated expenses. It costs WAY more now to make money than it used to.

I am no expert on residential mortgage lending (clearly).

In my conception of this, you’re not changing anything at all about the profile of the “first” tranche, and any new money being loaned is being loaned out at market rates. So I’d think this compresses margin a fair amount, but the play would be that you’d make up for margin with increased volume (you’d be the only game in town).

So you're basically just giving a person who already has a $250k loan another loan for $150k. That doesn't really seem like as new a model as you think when it comes down to it.

What I haven’t seen in the market is a product that lets you roll that first $250k (you presently owe on Home A), on the terms of that loan, into a purchase of Home B.

[TDub]

what's the advantage for the lender?

mortgages are still being procured, even at the higher rates. Why would they give up 400k at 7% to get 250k at 3% and 150k @ 7%.

and what's the goal? the people have have the 3% loans. So is the goal just encourage more movement in the housing market and to stack debt?

If the housing market was stagnant because of high rates, mayyybbbe that would work. But, it's not, houses are still moving, inventory is still.low and demand is still high. We (the 40s and below people) think 7% is insane because we've had incredibly low rates most if our adult lives. Historically 7% is still a low rate for a mortgage.

[twocoach]

I am no expert on residential mortgage lending (clearly).

In my conception of this, you’re not changing anything at all about the profile of the “first” tranche, and any new money being loaned is being loaned out at market rates. So I’d think this compresses margin a fair amount, but the play would be that you’d make up for margin with increased volume (you’d be the only game in town).

So you're basically just giving a person who already has a $250k loan another loan for $150k. That doesn't really seem like as new a model as you think when it comes down to it.

What I haven’t seen in the market is a product that lets you roll that first $250k (you presently owe on Home A), on the terms of that loan, into a purchase of Home B.

Why would you get to roll a loan you haven't paid off on one house into the purchase of a second house? Whose paying for Home A?

[jfish26]

So you're basically just giving a person who already has a $250k loan another loan for $150k. That doesn't really seem like as new a model as you think when it comes down to it.

What I haven’t seen in the market is a product that lets you roll that first $250k (you presently owe on Home A), on the terms of that loan, into a purchase of Home B.

Why would you get to roll a loan you haven't paid off on one house into the purchase of a second house? Whose paying for Home A?

This is exactly the point.

Say I bought Home A for $350k (let’s say I borrowed all of that, just for ease of example here). Now, it’s worth $450k and I still owe $250k at 3%. So I’ve got $200k in equity.

I want to buy Home B for $600k. Even with my equity, I’m going to have to borrow, and prevailing interest rates are 7%.

Under the current model, I’ve got to sell Home A for $450k (paying off the cheap $250k), and use the $200k in equity as a down payment on a new note for $400k, at 7%.

What I want is a product where that cheap $250k is rolled forward (on its terms), and the new note (at 7%) is for $150k.

Of course I’m aware that second mortgages aren’t new news. But, to my knowledge, preserving the terms of the first note would be a new offering.

[twocoach]

What I haven’t seen in the market is a product that lets you roll that first $250k (you presently owe on Home A), on the terms of that loan, into a purchase of Home B.

Why would you get to roll a loan you haven't paid off on one house into the purchase of a second house? Whose paying for Home A?

This is exactly the point.

Say I bought Home A for $350k (let’s say I borrowed all of that, just for ease of example here). Now, it’s worth $450k and I still owe $250k at 3%. So I’ve got $200k in equity.

I want to buy Home B for $600k. Even with my equity, I’m going to have to borrow, and prevailing interest rates are 7%.

Under the current model, I’ve got to sell Home A for $450k (paying off the cheap $250k), and use the $200k in equity as a down payment on a new note for $400k, at 7%.

What I want is a product where that cheap $250k is rolled forward (on its terms), and the new note (at 7%) is for $150k.

Of course I’m aware that second mortgages aren’t new news. But, to my knowledge, preserving the terms of the first note would be a new offering.

Yeah, good luck with that. Pretty sure that the first guy in the mortgage department who floats that out there as a new idea is going to get shot down pretty fast. "You want us to loan money at 3% in a market where we can get 7% for it? Maybe you should transfer to the sales department." Banks aren't super big on collecting LESS interest in an environment where it currently costing them so much more to operate.

But yeah, I can see why as a consumer you'd like that.

[jfish26]

Why would you get to roll a loan you haven't paid off on one house into the purchase of a second house? Whose paying for Home A?

This is exactly the point.

Say I bought Home A for $350k (let’s say I borrowed all of that, just for ease of example here). Now, it’s worth $450k and I still owe $250k at 3%. So I’ve got $200k in equity.

I want to buy Home B for $600k. Even with my equity, I’m going to have to borrow, and prevailing interest rates are 7%.

Under the current model, I’ve got to sell Home A for $450k (paying off the cheap $250k), and use the $200k in equity as a down payment on a new note for $400k, at 7%.

What I want is a product where that cheap $250k is rolled forward (on its terms), and the new note (at 7%) is for $150k.

Of course I’m aware that second mortgages aren’t new news. But, to my knowledge, preserving the terms of the first note would be a new offering.

Yeah, good luck with that. Pretty sure that the first guy in the mortgage department who floats that out there as a new idea is going to get shot down pretty fast. "You want us to loan money at 3% in a market where we can get 7% for it? Maybe you should transfer to the sales department." Banks aren't super big on collecting LESS interest in an environment where it currently costing them so much more to operate.

But yeah, I can see why as a consumer you'd like that.

I think the business case is that you'd win on volume. There's a WHOLE lot of people out there who would be buyers, but are not because they don't want to suffer the rate difference.

[Sparko]

wut

See 2007-8

[twocoach]

wut

See 2007-8

Is that when a bunch of banks took risky loans and destroyed our economy when they inevitably failed?

[Overlander]

wut

See 2007-8

Is that when a bunch of banks took risky loans and destroyed our economy when they inevitably failed?

Hey dummy….they were deemed “too big to fail”

[Sparko]

They never thanked us for our life savings and taxpayer bailouts.

[Shirley]

They never thanked us for our life savings and taxpayer bailouts.

Having already lost ~ half my life savings in 2001, losing half of it again ~ 7 years later was a just lie back and enjoy it kinda thing.

[ousdahl]

Report: 44% of all Single-Family Home Purchases were by Private Equity Firms in 2023

https://medium.com/@chrisjeffrieshomele ... 0ff591a701

[TDub]

don't love that.