'Crocodile Tears' for the 'Jumbos'!

The NAR and the NAHB have been whining and crying hoarse that the 'jumbo' loan market is just dead and that the rich guys are finding it difficult to get jumbo loans at cheap rates. As a result, the high end borrowers are just not in a position to secure a mortgage to buy their cookie cutter homes!

I sat down to do some simple math to try and understand all of this whining and crying. Let us take a family and a home in San Ramon, CA. 50% of the households in this City have a household income that is greater than 125K. The other 50% of the households have an income that is less than 125K.

So, doing the simple affordability test, the average selling price of a home in San Ramon, CA could be in the range of $400K-450K.

According to the website Trulia.com "The average selling price of detached single family homes for May 2009 in San Ramon California was $676,176".

Without getting into the complicated calculations, it would follow that a vast majority of the population in San Ramon, CA has purchased homes that are actually way beyond their 'affordability' levels using these "Jumbo" mortgages to leverage themselves!

I would think the same logic applies to all these so called "High End neighborhoods". It is all about leverage and leverage and leverage!!

Are Home Prices Really As Low As "Experts" Say?

I love Diana Olick. She is sooo good at putting her foot in her mouth! Here is one example. Read this article:

http://www.cnbc.com/id/30603534/

Please note the parting shot of the article - “I did, however, get a call today from a real estate investor who claims the housing crisis in California is over. He says a house listed under $200,000 got 20 (!) offers and wound up selling for over $200,000.”

Well, I also got a call from a realtor friend who also informs me that that there have been multiple offers on newer (move-in/livable) homes listed around $ 200K and that they were originally sold for more than twice that price.

And by the way, this realtor friend of mine is busy once again working on arranging Short Sales for his ex clients (some of them are common friends) whom he had helped buy those same houses at inflated prices during the boom!

I guess I would be labeled an “Investor” because I was too timid to buy during the boom and as a result I have good credit and cash lying in my bank.


He sent me over some REO and Short Sale listings (which are at a 50% discount from their original sale prices) in the Sacramento area and I did the math to see if it any of em pass the Rent vs Buy smell test and still could not be convinced that I could get a Monthly Rent on the properties that would cover my Mortgage (with a 25% down payment!), Property Taxes and Insurance, HOA etc. So, I told him I am still not biting!!

Another thing he told me was that the higher end homes were just not selling and that banks were overloaded with REO’s in the 300K - 700K listed price range because very few qualified buyers were interested in them.

He thinks that once the newer/livable homes in the less than 300K price range get cleared, there is going to be a long drought in home sales for the simple reason that the lending norms have been tightened and as a result naked speculators (flippers) are shut out of the market, while the "Investors" like me are doing the simple math to see if a home can at least be rented out to cover the Mortgage and Taxes, which I would think would be the case with the regular buyer too. I cannot fathom any rational reason why anyone would buy a property by plunking a down payment of 25% and end up having a monthly payment of more than the rent they were paying!!

Till now a majority of the shoes that have fallen have been in the mid to lower end of the homes. The next shoes to fall would be in the upper end of the homes. With Jumbos having become virtually impossible to obtain and the homeowners unsure of any appreciation in the future, there is going to be a loong loong pause in home sales!!

So, I am not convinced that the housing crisis in California is over yet. Phase II of the crisis is just unfolding with interest rates rocketing up in the last 2 weeks.