House Crash

Generali

Sisyphus wrote: »

I bet you the banks didn't factor that in to their risk models!

Take away the house as collateral and what have they got left?

The banks weren't selling the mortgages directly in the main. Mostly they were sold by mortgage brokers many of whom have gone bust - most of the remaining ones probably will too. The loans were then packaged up into a sort of a bond called a CDO. These were then sold on to investors, mostly hedge funds.

The problem now is who has the loan and who takes the hit if it's not repaid, especially if the threatened ban on reposession happens? It depends on the wording of the CDO T&Cs. In most cases, the bank or agent has to take the CDO back on if too many default within a period of time. There is a big mess of bad debt out there that someone will have to take responsibility for. My feeling is that a lot of lawyers are going to make a lot of money out of this.

There are a lot of other issues here too. For example, a lot of people that are defaulting are the hard working poor and especially those from black and hispanic backgrounds. That brings racial politics into the mix. This is likely to get very messy, very quickly.

cupid_s

A_Fool_&_His_Borrowed_Mon wrote: »

Exception rather than the rule, your case though.

Average wage 25k, Average Price, around 180k.

That's just over 7x salary.

In the Mid-Late 90's, the average wage was around 18k, the average price around 80k.

That's some difference today compared to then (which wasnt long ago)....

Yes but if there are two of you earning the average wage then your income is 50k, meaning a 3x salary mortgage would be 150k. Then you're looking at a 30k deposit, not impossible on a salary of 50k a year.

pollyanna24

It's a shame though that you have to totally rely on joint incomes. How will children come about?! I know we have to rely on both our wages at the moment, but luckily we are young enough to put children off for a while.

cupid_s

I agree but they aren't totally relying on both salaries if it's only a 3x joint income mortgage a couple take out. At only 3 times their salary they should be able to cover the payments for the time one of them takes off work. And if they can overpay as much as possible whilst they're both working then they could reduce the payments when only one is working.

Generali

pollyanna24 wrote: »

Wow, an amazing response to my initial post. Thanks for everyone's comments. They have gone some way to alleviating my fears.

We're a young couple trying to do the sensible thing, so this time last year borrowed about 3.3 x our joint income to buy a house in Watford. We don't have any debts and just wanted a house over our head (admittedly, we probably didn't need the 3 bedrooms, but at least now we don't have to move).

Therefore, it's a bit scary when people say, don't overcommitt etc. as I know even though we were sensible (and I'm not planning on getting pregnant for a few years yet), if rates were to go above 10%, we would be !!!!!!ed.

The Generali advice - get a fixed rate mortgage. Interest rates have got quite a way further to go I reckon.

MiserlyMartin

cupid_stunt wrote: »

Yes but if there are two of you earning the average wage then your income is 50k, meaning a 3x salary mortgage would be 150k. Then you're looking at a 30k deposit, not impossible on a salary of 50k a year.

By this sort of reasoning:

Average joint income 36k, average mortgage 80k, and by your logic, in the 80's people took out joint mortgages too. This would work out to be only a 2.2x mortgage, yet the market still crashed.

MiserlyMartin

ruggerboy wrote: »

See my earlier comments to Sisyphus. CPI at 3.1% is not the end-of-the-world. What's more important is what the inflation trend is over the coming months. I note from the BoE's letter that their central prediction essentially remains unchanged:

But, on first sight, the news seems unlikely to alter the broad picture painted in the February Report. As the substantial increases in household gas and electricity prices that occured a year ago drop out of the annual comparison, and the falls in those prices which have already been announced take effect, CPI inflation is likely to fall back within a matter of months.

Don't ignore this!

Hello Chris

You seem to put a lot of faith in the MPC and Gordons Brown's miracle economy getting it right. You seem to read from the same page as the government! I see your point re: energy price falls causing CPI to fall, but what we also have is oil price firming due to further trouble in the Middle East and low output from OPEC, we have hurricane season approaching in the Gulf that could affect oil further also. This makes me think that energy prices may rise again. Add to this the last fuel duty hike of 1.5% from GB, add again the further 2% duty hike announced in the last budget due to kick in in Sept, this is sure not help.

What are your views on RPI?, this is far higher than CPI and should not be ignored. RPI is a more realistic measure of inflation and is more of a reflection of the financial pressures that the everyday person is exposed to including ability to pay their mortgages.

A_Fool_&_His_Borrowed_Mon

fivemice wrote: »

And as for "house prices only go up" well that statement is true in the long term. Sure, we may crash or have corrections

Indeed, House prices go up in the long term. Trouble is, so do Gas prices, Electricity, food, clothes, goods, cost of Living etc. Wages too.
Hey, i think Ive sussed out what that inflation thing actually means, you know, the one that's hot in the news today.

So the question should be, Yes House prices go up. But does the "House Value" go up, or stays largely relative to everything else....?
If not, are you really "Making" money by the long term?;)

(BTW, the above question is aimed at the "Investor" types sitting on a house for the long term to make money (so they say), not those after a place to live in. )

pollyanna24

Thanks Generali, I have a fixed mortgage. The problem is I am smack bang in the middle of it. This time next year it will have to refixed and there's nothing I can do if rates are sky high then. Shame, I would like to get out of the one I am in and refix for a lot longer.

Generali

pollyanna24 wrote: »

Thanks Generali, I have a fixed mortgage. The problem is I am smack bang in the middle of it. This time next year it will have to refixed and there's nothing I can do if rates are sky high then. Shame, I would like to get out of the one I am in and refix for a lot longer.

I really don't understand why people in the UK don't fix their mortgages for 25 years.

I remember the sob stories in the Sunday supplements from people that fixed at 8% when rates were 5%, but better that than having to pay 15%! I maintain that if you have a long term fixed rate, good insurance and a little bit in savings then you can just about guarantee that the only way you'll lose your house is if you really mess things up!