Underwater

A number of houses in Southern Queensland are literally underwater at the moment, with torrential rains bringing huge floods. But we've just discovered that a lot of houses in the United States are underwater in a different way.

We had visitors last weekend from Reno in Nevada, a state with a population of around 2.7 million. Beth is a broker with Morgan Stanley and she commutes to the adjoining state of California to work at her office in San Francisco. Nevada and California, along with Arizona, Florida and Michigan are the states hardest hit by the housing bust in America.

After she arrived on the Diamond Princess cruise boat, we showed Beth around our fair city and our various house styles - villas, bungalows, cottages and in-fill townhouse developments. She mentioned how so many houses in Nevada were "underwater" and explained that this is the term realtors and bankers use to indicate that the size of the mortgage is higher than the value of the home. The term we use is here is "negative equity".

Nevada has 13% unemployment and 70% of its homeowners with a mortgage are "underwater", so the problem is enormous. Having no job and being "underwater" are the 2 biggest drivers of foreclosure and handing the house keys back to the bank.

Aussie interest rates cycle on the upswing

Well the big story this month has to be the Reserve Bank's (RBA) decision to increase the cash rate to 3.25% (an increase of 0.25%). The RBA board in its wisdom decided that Australia didn't need to keep the official cash rate at its historical 49 year low of 3%, and demand for houses, cars, whitegoods, flat screen TV's and all other things retail needs to be tempered.

The world's most profitable banks, our big four banks didn't take very long to lift their rates so mortgages are going to start taking a bit bigger bite out of home owners' household budgets.

All of the experts are saying going forward we can count on more rate increases.

The RBA board is concerned about a real estate bubble and booming house prices and interest rates are one of the few instruments they can use to dampen demand. As we have pretty strong population growth and a quite healthy local economy, we are feeling more confident about South Australia's future (even though we were already confident last time we checked). There is also an undersupply of new housing, so we feel that our market can sustain some moderate rate increases and still have period of capital growth over time.

Sub-prime revisited

As far as company names go, you would think that the "Federal Loan Modification Law Center" sounds pretty solid and reputable. Wouldn't you?

We have just read a story in the Australian Financial Review about a company which promised borrowers in California that, for a fee, they could negotiate lower loan repayments on their mortgages. Everyone has heard about "sub-prime" lenders and "ninja" loans (no income, no job or assets) that mushroomed during the US real estate boom - it turns out that the same guys that amassed a fortune selling these loans just changed the script and the product. Apparently they are still working out of the same offices! Plus they are charging fees up to $US3,495 with most of it paid up front!

Oh, and guess what? According to a New York Times investigation, despite all of the promises the company often failed to deliver reduced mortgage payments. The moral of this story has to be do your research and don't pay fees up front to mortgage brokers!