Baby, we got a bubble!?

[ILuvTO]

The mortgage business... as in all the money they're spending for the next little while is going to be to service the interest on their debt to the bank.

Most of these are probably upgrades.

eg. A couple sells their $380000 condo and gets $220000 from the equity from the sale. After all the expenses and what not, they get $200000 left over, which goes to a downpayment for a new home. They buy an $800000 house, which leaves them with a $600000 mortgage.

They were able to lock in last month to the killer rates, at 3.69% for a 5-year fixed, amortized over 35 years. Monthly payments are $2536, representing about a third of their $7500 monthly combined gross income ($90000 per year).

After 5 years, they still have $553631 left in their mortgage. The 5-year fixed rate then is 5.79%, a conservative estimate. In order to be able to manage, they are forced to re-amortize for another 35 years, and even then, their monthly payment is over three grand, at $3054. That represents a 20% increase in monthly payments. They've had a few pay raises since then, so now their combined monthly income is $8000 (or $96000 per year), and their monthly payment now represents 38% of gross monthly income. Manageable, but just barely.

This is a hypothetical situation, but this is what I think may happen in the real estate market and I'm a relative optimist it seems. The problem here though is if real rates hit jump even higher, say to over 7%. That's high for the last 10 years, but not completely out of the question. The bears predict this scenario, and that would wreak havoc on the market, including causing a big drop in real house prices.

Thanks for plugging some possible numbers into the scenario. What ever happened to the good old days of having a mortgage for 2.5 times your income? Pay off mortgage debt quickly, and save other money on the side for wealth creation. It seems like everyone wants it all right now. And guys like me that just want something struggle to get it because prices are so out of reach.

 

[Kenny]

Thanks for plugging some possible numbers into the scenario. What ever happened to the good old days of having a mortgage for 2.5 times your income? Pay off mortgage debt quickly, and save other money on the side for wealth creation. It seems like everyone wants it all right now. And guys like me that just want something struggle to get it because prices are so out of reach.

They didn't have such low prime interest rates before. Also, they didn't have mortgage based bonds until the late 90s. Selling mortgages wholesale spreads the risk, allowing for lower interest rates.

Cheap money, lower lending standards = dream home within reach for more people. Why save up for a big house when you can afford it at 5X your income today?

Prices are so out of reach? Maybe not! You'd be amazed at the size of the mortgage they'll sell you these days. So what if it's 5% down and over 35 years? If it's affordable now, it's affordable later, right? </sarcasm>

 

[urbandreamer]

My new forecast: Interest rates will be above 10% by 2025.

 

[Eug]

Luckily my home will be paid off long before then.

 

[quants]

The mortgage business... as in all the money they're spending for the next little while is going to be to service the interest on their debt to the bank.

Most of these are probably upgrades.

eg. A couple sells their $380000 condo and gets $220000 from the equity from the sale. After all the expenses and what not, they get $200000 left over, which goes to a downpayment for a new home. They buy an $800000 house, which leaves them with a $600000 mortgage.

They were able to lock in last month to the killer rates, at 3.69% for a 5-year fixed, amortized over 35 years. Monthly payments are $2536, representing about a third of their $7500 monthly combined gross income ($90000 per year).

After 5 years, they still have $553631 left in their mortgage. The 5-year fixed rate then is 5.79%, a conservative estimate. In order to be able to manage, they are forced to re-amortize for another 35 years, and even then, their monthly payment is over three grand, at $3054. That represents a 20% increase in monthly payments. They've had a few pay raises since then, so now their combined monthly income is $8000 (or $96000 per year), and their monthly payment now represents 38% of gross monthly income. Manageable, but just barely.

This is a hypothetical situation, but this is what I think may happen in the real estate market and I'm a relative optimist it seems. The problem here though is if real rates hit jump even higher, say to over 7%. That's high for the last 10 years, but not completely out of the question. The bears predict this scenario, and that would wreak havoc on the market, including causing a big drop in real house prices.

600k mortgages on 90K income? really? no wonder housing price in GTA is going up so quickly.

I checked CMHC website in terms of mortgage affordability:

Mortgage Affordability Calculator — How Much Can You Afford?

The shortest answer to that question is: it depends on a number of factors. The most important are your gross household income, your down payment and the mortgage interest rate. Lenders will also consider your assets and liabilities. Your own lifestyle and debt comfort zone also come into play.

* Use the Mortgage Affordability Calculator to estimate the maximum mortgage you can afford

This calculation is based on two simple rules that lenders use to determine how much of a mortgage you can afford. The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.

Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.

if banks follow the rule, the couple should not get their $600k mortgage.

I hope bank does follow these rules to approve mortgage in reality.

wait a minute. I just got a pre-approval of $650k based on my less than $90k income in Feb.

 

[Eug]

Interestingly, BMO claims that 74% of first time home buyers are targeting an amortization of 25 years or less. That's not bad. Mind you that means 26% are going longer than 25 years, but then again that's only for first time home buyers.

600k mortgages on 90K income? really? no wonder housing price in GTA is going up so quickly.

This calculation is based on two simple rules that lenders use to determine how much of a mortgage you can afford. The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.

Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.[/I]

if banks follow the rule, the couple should not get their $600k mortgage.

I hope bank does follow these rules to approve mortgage in reality.

Yeah, I was just making up numbers off the top of my head. In truth, a more conservative approach would require $55000 per person, for a total of $110000 combined income to more easily qualify for a $600000 mortgage. However, $55000 each is not exactly a big salary either.

For the sake of the calculations though, I was assuming that there were no car payments, or other loans needing repayment. Of course, that is often not the case.

wait a minute. I just got a pre-approval of $650k based on my less than $90k income in Feb.

LOL

I assume that is in a market (Toronto) where home prices are high, and you have an excellent credit record. BTW, when I bought my condo many moons ago, I also got pre-approved for way more than I thought was possible, despite my mediocre salary at the time. The final purchase price was less than half my pre-approval amount though, which meant I could pay it off quickly, fortunately.

 

[ponyboy]

a few years ago when I was looking at properties, I found it difficult to get realtors to show me many properties much less than the maximum I was approved for. Despite asking multiple times, they usually showed me properties that were 90% or more my pre-approved mortgage level. I had to go through two realtors, and make very clear that I wanted to look at a range of property prices. but it was difficult because they were ultimately selecting the places to show me.

 

[Eug]

March 2010 GTA average price $434696, with median price of $370000.
Average price for the quarter was $427948, with total quarterly sales of 22418, a new record.

a few years ago when I was looking at properties, I found it difficult to get realtors to show me many properties much less than the maximum I was approved for. Despite asking multiple times, they usually showed me properties that were 90% or more my pre-approved mortgage level. I had to go through two realtors, and make very clear that I wanted to look at a range of property prices. but it was difficult because they were ultimately selecting the places to show me.

You got unlucky with realtors then. I didn't have that problem.

 

[quants]

Interestingly, BMO claims that 74% of first time home buyers are targeting an amortization of 25 years or less. That's not bad. Mind you that means 26% are going longer than 25 years, but then again that's only for first time home buyers.

it's a good sign since at least most first time buyers are rational

Yeah, I was just making up numbers off the top of my head. In truth, a more conservative approach would require $55000 per person, for a total of $110000 combined income to more easily qualify for a $600000 mortgage. However, $55000 each is not exactly a big salary either.

For the sake of the calculations though, I was assuming that there were no car payments, or other loans needing repayment. Of course, that is often not the case.

LOL

I assume that is in a market (Toronto) where home prices are high, and you have an excellent credit record. BTW, when I bought my condo many moons ago, I also got pre-approved for way more than I thought was possible, despite my mediocre salary at the time. The final purchase price was less than half my pre-approval amount though, which meant I could pay it off quickly, fortunately.

I wish I can do the same thing as you but it seems really hard now.

 

[Eug]

Anyone have the Toronto 416 average prices for March? I can only find the overall GTA average on TREB's site.

EDIT:

Oops. I missed page two of the summary. Most of the the GTA price increase was due to the 905. The 416 went from $475579 to $477263 in March, an increase of 0.35% month over month. The 905 went from $402553 om Feb. to $407817, an increase of 1.3% month over month.

BTW, detached homes were the group that went up the most compared to last year. The prices for other categories of homes went up 14-18%, but detached homes in the 416 went up 35%. That's what's skewing the average price upward. The average price of a detached in the 416 is now just a shade under $700000. In March 2009, it was in the low 500s. Wowsers.

I wish I can do the same thing as you but it seems really hard now.

Also, I bought in the late 90s just as the market started to surge and it was a presale that got delayed, so by the time I actually got the mortgage (several years later) I had gotten a pretty significant downpayment too. Ironically, when I bought in the 90s, I was deathly afraid I might be overpaying just before a pullback. How my perspective is so different now...

 

[JayBee]

Good News!

"Royal LePage warns of real estate 'irrationality'"
http://www.cbc.ca/money/story/2010/04/08/real-estate-royal-lepage.html#socialcomments

When a Real Estate company says prices are too high, you know there's a big problem.

 

[TrickyRicky]

"Interestingly, BMO claims that 74% of first time home buyers are targeting an amortization of 25 years or less. That's not bad. Mind you that means 26% are going longer than 25 years, but then again that's only for first time home buyers."

I'm just playing but if you break it down BMO might be claiming that home buyers are "targeting" 25 year amortizations but they sure as hell aren't using them. I can't say I know of any of my peers who do not either have a low downpayment or a lengthy amortization period. Infact, as a fun game ask a new home buyer you know what a reasonable down payment on a property would be? I bet they have no idea that 25% used to be standard.

P.S. It would be great if everyone was getting 25% down 25-year amortization mortgages but the fact is that these kind of lending standards never stopped markets from tanking and people from losing their shirts in the past. No one can really say if markets are going to tank or not this time around, but one thing we know for certain is that if they do so many people will be utterly screwed.

 

[lead82]

Wow, I can't believe that banks are offering mortgages to people that are more than 6 times their GROSS annual income. When I was buying right before the markets crashed in mid 2008, my broker told me that I could only quality for $300K in mortgage based on a 60K gross income. I chose to find a place so that I didn't have to take out the max mortgage I qualified for, but I foresee that many people with huge mortgages will be very house poor in the next few years are rates go up and they are forced to cut back. I'm hoping that prices come down a bit on homes in the next few years or at least stabilize so that they aren't constant bidding wars.

 

[X2 Buyer]

It really depends on the group of people. All my friends we still have the standard of at least 25% down. Though there is a tendency to have 30 or 35 years instead of 25 year.

 

[Eug]

It really depends on the group of people. All my friends we still have the standard of at least 25% down. Though there is a tendency to have 30 or 35 years instead of 25 year.

Most of my colleagues had between 15-35% down for their home purchases and the tendency was for 25-year amortizations, but some of my acquaintances at work (the youngest ones with entry level jobs) had 5-10% down with 25-35 year amortizations.