Why Real Estate Forclosures Will Continue to Increase

Posted on: November 20, 2008 Posted by: Real Estate We Blog Comments: 0

Why Real Estate Forclosures Will Continue to Increase

Take a look at your local newspaper and thumb through it until you find the real estate section. Now more likely than not, you’ll see advertisements from new builders who are offering amazing interest rates or temporary buydowns if you purchase a new condo or townhome from them.

There’s a relatively new condo development (one of many) in San Francisco called 170 Off Third. I went down to check them out because they’re in a great South Beach location literally across the street from the San Francisco Giants baseball stadium. The units are on the smaller size but I really liked the modern art deco look and feel of the building and common areas. It would definitely be a nice place to live but I’m cringing for those who fall victim to their “last chance” offer. Here’s a portion of the e-mail I recently got from them:

Last Chance for 170 Off Third’s 5.625% Interest Rate!

This weekend is your last chance to take advantage of 170 Off Third’s Seven Year, 5.625% Interest Rate Offer! Hurry in – you must enter into a contract this weekend on either a two- or two-bedroom plus residence.*

This exciting program’s monthly savings have allowed our newest residents to afford a more spacious home. Come in and speak with 170 Off Third’s onsite lender who will work with you to explain this rate’s immediate and long-term benefits. The savings can help place you in a spacious two-bedroom residence in the heart of South Beach!

It’s a great deal and I must say it’s very enticing but here’s the sentence that worries me. “This exciting program’s monthly savings have allowed our newest residents to afford a more spacious home.” You know what that translates into? It’s telling me that someone who can’t really afford to live in this building now can because of this lower interest rate offer. That’s great but when the terms of this introductory rate are over, chances are this person is going to be hung out to dry because they can’t afford the increased mortgage payment.

Also, what are the terms? If you notice the “*” at the end of the first paragraph there is the fine print which is located at the bottom of the e-mail. Here’s what it says:

* Interest rate based on 7/1 ARM Interest Only and is fixed for seven years. No buy down fees to be paid by borrower. This is NOT a negative amortization loan. This is NOT a temporary buy down loan. First loan amount assumed to be 80% of purchase price, or less, with a minimum down payment of 10% of purchase price, full documentation of assets and income, and a credit score of 720 or above. Interest rate and payment on second loan will be based on prevailing market rates and amount of down payment. Rates are subject to current market conditions and may change at any time. Valid only for owner-occupied homes. Valid only for loans originated with The Murray Team at Triton Funding Group. Other terms and conditions may apply.

This is really what worries me and the lending industry as a whole because builders have already invested in developing the condos but with the slowdown in the housing market they just can’t fill them fast enough (or at all) to recoup their original investments. So instead they offered these amazing low interest rates to lure naive home buyers just to get them in the door and then the builder can cash out and go along his merry way.

I think it’s gonna get much worse before it gets much better. These promotions of low interest rates for home buyers of course look great and they are… for the first couple of years. And for some it may work out fine as they make more money each year or end up selling before their ARM actually adjusts. If that’s the case, great. But for the majority it’s unfortunately not going to play out this way because they either aren’t thoroughly educated by the lender or broker or they have unrealistic expectations in the future of how much more money they will make by the time their ARM adjusts.