Real
Estate Margin Calls
by: Al Thomas
Have you ever heard of a real estate margin call? You
know about stock market margin calls. That’s when you
have bought more stock than you have money and borrowed
from your broker to buy extra shares. You bought $10,000
of stock, but only have $5,000 in your account.
It is great as long as
the shares continue to advance. If the stock declines by
a certain percentage the broker will call you to send in
a check to cover the shortage. Hence, a margin call. If
you don’t send in the money he will sell out your
position and you will have a loss which you must pay.
Many people send in money and continue to do so if the
stock declines.
All professional traders
will tell you, “Never meet a margin call. Sell.
In real estate we all
(most of us) have that thing called a mortgage. We
bought that house on margin. As long as you send in the
money every month you may remain in the house.
Today there are many
people speculating in real estate as they did in the
stock market. Buy something and wait for the market to
go up and then sell. Just like buying AT&T stock at $40
and selling it at $100. You could have done that. Today
it is around $20.
Condominiums are being
bought with a small deposit of five percent or less
before the ground is broken. Speculators will sell as
soon as the building is completed or before to another
speculator and he sells to another speculator until he
runs out of greater fools. It has been a speculator’s
dream and many have made large sums doing it. It’s like
the kid’s game of musical chairs.
Private individuals are
re-mortgaging at larger amounts to take out equity to
spend on their home, invest in other real estate as a
speculator or for other purposes. They are increasing
their monthly payments and ARM rates are increasing.
This will work as long as the borrower continues to have
income. Many count on the incomes of both spouses.
If and when the economy
slows down (and it seems to doing that now) it might be
difficult or impossible to meet the margin call, make
the mortgage payment. History has shown that there are 2
declining economic periods within any 10 year period and
there are longer 16 year cycles of good times and poor
times.
To maintain the
investment in property the mortgagee must keep up the
payments. It has been recorded in recent history that
when the home values fell below the mortgage amount many
folks walked away. That is not allowed any more as the
new bankruptcy law does not forgive mortgage
obligations. The borrower must repay any loss to the
lending institution.
Mortgage payments are
like margin calls. Failure to meet the call every month
means the loss of your equity. This is a margin call you
will want to meet.
