FALLING REAL ESTATE PRICES A “JUMBO” PROBLEM

Sorry everyone. I will be on hiatus for the next couple weeks because of a huge deadline for a web project. CNBC has a fast money summary and The Street also has a summary for both Mad Money and Fast Money but you have to read and click through everything while you miss some tips and slight of hand. I’ll try to update now and then. Thanks for everyone who has been reading. Be back soon.

Well back to the topic. The spreading of the credit problem not only spread through the sub prime (low credit) loans and alta A (non documented loans) but now spread to the jumbo loans (any loan above $417,000). Well the problem lies not in the sub prime loans because people with poor credit aren’t exactly supposed to get loans if they have a bad record of paying them back. Second the problem isn’t in the Alta A loan problem because people who can’t document their assets or their income shouldn’t get a loan based on their word because that would mean every Tom, Dick, Larry and Jane can walk off the street and get a loan. I’m sure if Dateline did bust with a homeless guy trying to get a stated loan a last year, it would have blown the cover off the loan industry but it didn’t happen but boy that would have been some story.

The problem lies in the secondary market drying up for jumbo loans. Well these people can afford a half a million dollar loan but they can’t get the loan because the secondary market has stopped funding it although there isn’t as much risk as sub prime or Alta A because these people can document their income and have assets but don’t want to take out a loan that is 1-3% higher because of the amount. Let’s think about this. Well in most major markets, a half a million dollar home is not as big as it sounds. It’s very comfortable in places like Miami, Chicago, New York, San Francisco, and Los Angeles. The average home in Los Angeles is $500,000. If you save up $100,000 for your home which is a huge task for a starter home, you maybe not even get the loan because it borderlines a jumbo loan. So what is happening now is that the real estate prices are coming down to meet this lack of liquidity in the jumbo loan market. In parts of the Los Angeles county prices are being slash forty to seventy thousand so that it can be sold. So if the higher end market prices goes down, then of course the lower end market will go down but perhaps not as much. It’s a vicious cycle.

Here is the best solution: The government has to lift the jumbo loan amount for Fannie Mae and Freddie Mac to above $500,000 so that there is more liquidity for certain markets like California and New York. But here comes the problem, the government would just be feeding the fire more fuel to keep prices artificially high because most people can’t afford homes already. But we all have to worry about consumer spending as well with prices of homes going down, the refinance piggy bank is running empty on equity so those big purchases may be cut off soon. How would you feel if $50,000 equity went off your house in one month or if you already took out equity and figure out that you now owe more than the house! Not a good situation because we need our home prices high to keep some of the spending going because just today there were reports of credit card defaults were moving up so is this a sign of the consumer dying with the jumbo fall of real estate?