Sunday, October 28, 2007

Subprime Meltdown

I am really getting sick and tired of goverment comments, reporters, articles and common people all making comments about this real estate bubble. Everyone talks about it, but no one knows what the hell they are talking about. Since I do real estate investing, I know exactly what the problem is.

If you buy a house appraised at $250,000, you could get a 90% loan at $225,000 pretty easily, and make payments based on your income. When the ARM resets in 2-3 years, the interest rate spikes up so you simply need to get a new ARM. The ARM isn't the problem. The PROBLEM is that house buying slowed, so sellers lowered the price. Now, months later, that same house will only appraise at $225,000, which is what is currently owed. Now when you try for a new loan, you need 100% loan PLUS closing costs.

The issue isn't that ARMS are bad, or that the market slowed... BOTH happened at the same time, causing buyers to stop buying all together.

Now that foreclosures have begun making the way through the REO system, banks are dumping these properties back on the market for thousands less than homeowners. Now you have a $250,000 house selling next door to a $150,000 house. So, if that seller can't refinance it, he has to sell it, but he cant sell it. he may as well forclose too. Whether or not he can make payments or not, is irrelevant. Why SHOULD he, is the question.

Just wait though... the baby boomers have started to file for Social Security. Soon they will move into old age homes. Soon, all these houses will be willed to their kids, and then resold for much less than they are worth at that time, just to get rid of them in a market that doesn't need this much housing. Guess where i would like to invest my money? That's right, old age homes.

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