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Housing Bubble
April 19th, 2008 categories: Mortgage, Real Estate Tips
Housing Bubble video below shows homeowners who got themselves in deep real estate trouble. My guess is that this guy bought his home in the year 2000. Just like many homeowners he made a great deal of equity in his home and thought he could refinance.
Bad idea. Not just because it’s obvious now, it just doesn’t make good sense to rob your home’s equity unless there is a death or severe illness. As you know by the sound of your phone ringing and the junk you get in the mail everyone and their dog is trying to get you to refinance. Don’t do it even when times get good, again. One exception is if the current interest rate and terms are better than what you currently have with your loan. The key word here is TERMS are better.
Now, let’s get back to the little guy in the video who bought his house in 2000.
He says, “Gena, it appraised and then suddenly home prices fell in Sacramento.”
Here is where you need to understand the difference in home appraisals, refi appraisals and CMA’s. There is a difference between an appraisal when purchasing a home and an appraisal when refinancing a house. The big difference is that when purchasing, a Lender is taking quite a big chance on giving you a loan so they want to make sure that the house appraises for at least what the loan amount is.
However, when appraising a house or condo for a REFI, there is equity in a house or condo otherwise you wouldn’t be able to refinance. The lender isn’t taking a huge risk since part of the equity is secured and only a percentage is allowed for refinancing.
Many homeowners decided to refinance and use a great deal of equity that had built up to pay for vacations, new cars, boats and pay off credit cards.
The only trouble with that is that now the homeowner had 2 payments instead of one low payment. This is called robbing your equity.
And oh so many homeowners were quick to refinance their house or condo, assuming the real estate market would continue to rise in Sacramento County. Homes were selling for $10,000 more each week. Oops, it didnt happen and the refinance appraisals were coming in high.
Refinance appraisals are always higher than appraisals for new loans. Banks assume that you intend on living at the property and not selling. They dont think there is a lot of risk associated with refinancing. Or should I say, they didnt think there was such a big risk.
When purchasing a home, the bank sends an appraiser and the appraisal amount for the house needs to reflect the exact amount that the house would sell for just in case the new home buyer fails to pay the mortgage. As you can see, this is a bigger risk for the lender so the appraised amount will be less than a refinanced amount where there is equity.
Since a refinance appraisal includes equity already in the home, this is not as big a risk to the Lender. Hence the higher appraised value.
This all becomes a bit confusing when I meet with home sellers to determine the value of their home. Home sellers that they want to place their house in the real estate market for sale are bewildered when I tell them the value of their house. This is what we call a CMA or Comparative Market Analysis when the sellers home is compared to like homes within a one square mile radius. Sellers are usually shocked at the difference in the two appraisal amounts.
Many of the home prices in Sacramento County are down below 2003 prices with many of them bank owned and in foreclosure. The subprime loan market is responsible for many of these bank owned homes for sale. A few are a result of real estate fraud and mortgage fraud and others due to refinancing or should I say stripping the equity right out of the house.
Can’t tell you how many times I have sat at someone’s dining table to only find that the homeowner had refinanced to buy that boat, the new car or pay off credit cards and take a lovely vacation. And oh so often, very remorseful that they had fallen prey to the refinance bug.
Since the homes have declined in price and the real estate market took a dive, many of these homeowners are now losing their houses. You cant refinance something that has lost value or should I say, youve used all the value up.
Refinancing is not always the life saver that homeowners hope for. Theres a lesson somewhere in this dont use your home to pay for what you cant afford. We need to start living within our means and treat our homes with the respect that they are due.
A place to live and call home is essential in life. It’s time to learn to budget and live within our means. For all you new home buyers out there, remember to honor your home, don’t steal from it.
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Very thorough and I really enjoyed it. It’s amazing how people have a need to point fingers at who is to blame. Was it mortgage brokers, the gullible and uninformed consumer, Realtors?
Stop pointing and take responsibility…..it’s the only way to stop the madness.
Ines,
Nice to see you. Glad you liked the article. I just love the video. I first saw it on an article of Missy’s and asked if she would mind if I used it. I think it’s priceless.
I agree to a point with you. But, at least here in CA we had several cases of FRAUD and I don’t believe that those people should be lumped in with homeowners that don’t know how to manage their money.
There is never one story to fit all…it seems there is always an exception.
Thanks for popping over from Florida.
We have the same situation here in Florida with Fraud and you are right…..should not be in the same category as those that don’t know how to manage their money.
That’s a pretty funny video. Ultimately homes are worth whatever someone is willing to pay for them. However, many short sighted people didn’t realize that interest rates can go up just as fast as they come down and that variable rate loans are very high risk.
Milan,
Glad you liked the video. I too found it pretty funny but unfortunatley very true in this day and age. Hope there are a lot of future home buyers who have taken notice of how getting into financial ruin happens.
Come again, anytime.
Hi Gena,
Loved your post. There’s also a positive side to the mayhem. Anyone getting loans now will learn from what has transpired. They are more savvy, more aware, and are asking the right questions regarding what loans ae good for them. They are more qualified.
Thanks,
Patrick - OrangeCountyRealEstateVoice.com
Patrick,
You are absolutely right. Hopefully, this has taught the home buyers and homeowners that there is more to a loan than just the interest rate.
Thanks for popping by.