John Lounsbury's  Instablog

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K202 Comments (3672)
 
SRS is looking better all the time as an intermediate term investment. The "gap" is very interesting in that the tax credit does not seem to be helping the higher priced new homes. Many of the existing home sales are lower end where the tax credit cap provides a much bigger bang. Combining FHA and the tax credit allows people to buy a home for $160,000 with nothing down. If they can get the seller to pick up closing costs, they can get a home with no cash out of pocket (with the exception of appraisal and perhaps an application fee for the loan). Then, depending on when during the month the closing occurs, the buyer can go near two months without a payment.

It would seem the banks and mortgage companies have not yet learned the lesson that if the buyer has no "skin" in the game they become more likely to walk away if they get under water. And with 5% or less down (covered by the tax credit) it won't take much of a drop. We're heading down the same road, or at least, so it seems.
27 Jan 2010, 01:16 AM Reply Like

Moon Kil Woong Comments (8207)
 
And yet bankers don't stop funding builders on the ropes. And builders keep submitting plans to get more funds to build more and use some of the money to pay up on their loans. Simply put, they won't stop building until they drag the whole economy into bankruptcy along with banks and then go bankrupt!
27 Jan 2010, 02:36 AM Reply Like

Silentz Comments (706)
 
No builders are being financed where I am. This data shows that SOME builders are building, but the pace has dropped like a rock.

www.census.gov/const/b...

There's been a 35-40% in starts yoy since the mess started. So I'm not sure it's the builders that are the problem. To give you an idea of what's happening in one corner of the US,

www.census.gov/const/b...

Granted, the article is almost a year old, but nothing has improved since then, and may have gotten worse for builders here in CO. Over 10 years of inventory of developed lots!

Developers is where the problem will be in 2010 IMO. Developers borrow to develop their lots. Development loans build in an interest reserve to service the interest debt so the developers don't have to do it personally. They take their profit once the project is paid off. Typically, the interest reserve is set based on an orderly reduction of principal. If there is no sales activity, the interest reserve runs out faster. There's little chance of a refinance to pad the interest reserve since the value of the land has most likely decreased. So you've got developers coming up against a situation where they have to service the debt themselves.

To me, this is the next shoe to drop. 2010 and 2011 will see many more of these development projects go belly up once the reserves dry up. It's been pushed out til now because those reserves have held so far, but it's not going to last much longer.
27 Jan 2010, 12:06 PM Reply Like

Silentz Comments (706)
 
Woops, that second link should have been this.

www.ncbr.com/article.a...
27 Jan 2010, 12:07 PM Reply Like