Real Estate Margin Calls
Real Estate Margin Calls
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.