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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: LauA who wrote (20978)	3/27/2005 7:55:53 PM
From: Carl Worth	Respond to of 78956

PMI is private mortgage insurance. This company is apparently the leading provider of same, though I'm sure there are many others, as they likely wouldn't be allowed to have a monopoly. finance.yahoo.com Here's an interesting article regarding the likelihood of price decreases in various areas in the next two years. Note that the risk actually decreased from the last report, though it is still quite significant in a few areas. biz.yahoo.com I hear people mention 20% price downdrafts, as you have, as if this is a common occurrence. Other than the Great Depression (if it happened then), when has this ever happened on a widespread basis? Sure the prices of the overinflated new construction properties in Vegas dropped that much in October, but that was after the homebuilders had raised their prices repeatedly, so it's like a stock going from 12 to 20 to 16. This self-corrected and didn't affect the overall Vegas market more than minimally. It certainly didn't affect the nationwide market. I am no proponent of people being overextended, but again, just because someone's house stops appreciating 15 or 20% a year, as it surely has to, they aren't going to abandon the house, and the bank isn't going to issue the equivalent of a margin call. Even if the price dropped a few %, you wouldn't see most people walking away from their house, as they have to have a place to live. In the case of an investor, if the house is rented, their cash flow position won't be affected by the house's value not appreciating for a while. If it's a second home, they aren't going to care less about its value in a particular month, or even year most likely. When I bought my first house, it was not long before the RTC debacle. At that time there was no PMI, and the S&L's were making loans that were absurd in terms of people's income covering their payments. I have yet to receive any credible answer showing me where any such risky loans are being written in any quantity, and that is apart from the fact that we do now have PMI. Further, at this point there is far more solid demand for property from buyers well able to afford it, rather than so much new housing being built and sold to first time buyers, who really couldn't afford it. All of that said, prices didn't even drop 20% back then. Our house dropped from around 80K to the low 70's, and it represented the lowest rung of available housing, the most affected by the above conditions. Housing with a greater interest to the more established households dropped far less. There are sure to be foreclosures as there have always been, where a family suffers a job loss or other misfortune, but whereas this snowballed in the days that led up to the RTC having to be formed, PMI and a steady supply of buyers make it rather unlikely that we will see a repeat of that earlier dislocation IMHO. In fact, with property values rising and demand strong, without some kind of widespread problem, it's unlikely that the mortgage holders would even suffer any losses which would require them to draw on the PMI coverage, as most properties could be sold for as much or more than the mortgage balance anyway. As far as I understand the regulations, if your neighbors took seconds which reduced their equity to less than 20%, they are paying PMI as well, even if their original mortgage was for only 80% of the value. They may not even realize this, but it would be interesting for you to ask a few of them. Logically, it seems unlikely that a borrower could get around PMI by simply taking an 80% mortgage and then adding a second, but it wouldn't be the first time a loophole was created that easily. <g>