More on Real Estate and Mortgages

Here's a good example of "investor" speculation fueling the mortgage crisis:

http://www.msnbc.msn.com/id/24569891/

(Self-absorbed man buys eight negative-amortization homes and loses his shirt when the market goes bad).

I have represented several clients with a similar story, though none used such a ridiculous mortgage product. In a neg-am loan, the borrower artificially reduces his payment BELOW the amount necessary to cover the interest. Principal is never paid. You read that right. The balance on the note gets bigger over time! As if interest-only mortgages weren't bad enough.

The real estate business is a mine field, and investing in it with mostly borrowed money (or in risky mortgage variants) puts your financial future in the hands of shaky tenants to pay the rent and a volatile real estate market to eventually recapture your investment.

There are thousands of people in North Texas right now who think they are the next Donald Trump. These "investors" are "investing" in real estate with other people's money, and for every success story there are ten others who have flamed out, unable to pay the mortgages on properties nobody wants to rent or buy.

The Real Estate Market

Residential real estate prices have fallen and sellers ask "has it bottomed out yet?" The answer is no. A glut in available homes coupled with a downturn in homeowner purchasing power is a recipe for a market slump.

Flat wages and increased costs of living for transportation, utilities, and food have made it harder for North Texans to justify a mortgage commitment at the prices of yesteryear. In Tarrant County, a mortgage payment higher than $1,200.00 is beyond the means of most people. Yet the new home construction continues (typically priced at $150,000.00 or higher), adding to the oversupply problem.

The factors in North Texas leading to this crisis:

• overbuilding;
• speculation in the real estate market;
• the aggressive marketing of risky mortgage products, including interest-only and adjustable rate mortgages;
• the refinancing boom of 2002-2006, resulting in a reduction in home equity;
• a flat or falling job market in most sectors; and
• increases in consumer costs in transportation, food, and utilities

In short, this is an excellent time to be a buyer or a renter, but I would only recommend purchasing a home in this market to someone who plans on living in the home for at least the next three to five years.