O say, can you see, by the dawn’s early light,
What so proudly we hailed at the twilight’s last gleaming,
Whose broad stripes and bright stars, through the perilous fight
O’er the ramparts we watched, were so gallantly streaming?
And the rockets’ red glare, the bombs bursting in air
Gave proof through the night that our flag was still there;
O say, does that star-spangled banner yet wave
O’er the land of the free and the home of the brave
Star-Spangled Banner — Francis Scott Key
Great Video (warning, you will cry)
Remember yesterday’s WTF homes where the owners paid about $1M but thought they were worth $2M? Well, today’s property is another Northwood beauty, but this seller actually wants to sell his house. After 125 days on the market, he is going to be a rollback.
Asking Price: $1,350,000
Purchase Price: $1,381,500
Purchase Date: 12/29/2005
Address: 31 Early Light, Irvine, CA 92620
Beds: 5
Baths: 4.5
Sq. Ft.: 3,640
$/Sq. Ft.: $371
Lot Size: 7,000 sq. ft.
Type: Single Family Residence
Style: Mediterranean
Year Built: 2005
Stories: Two Levels
Area: Northwood
County: Orange
MLS#: P574241
Status: Active
On Redfin: 125 days
Unsold in 90+ days
From Redfin, “Model perfect designer home that includes a Home Theatre plus a separate Casita with full bath! Highly upgraded with dark Mohagany wood floors, Extensive use of granite throughout, Top of the line stainless steel appliances, large great room off kitchen with built-ins, Expansive Master Suite with Jacuzzi and 2 Large walk-in closets. Professionallly landscaped including buit-in BBQ and fantastic Spa with waterfall!! Show & sell today!!”
This realtor is showing some restraint by only using two exclamation points. He still missed a few typos though…
.
.
If today’s seller gets their asking price, they stand to lose $112,500 after a 6% commission.
I can’t help but be struck by the difference in pricing between someone who wants to sell their home and someone who doesn’t. If you look at the times and purchase prices of yesterday’s homes and today’s, you see the steady progression of prices typical of bubble appreciation. These are all comparables. Now you look at today’s home which isn’t selling as a rollback as compared to yesterday’s properties which were offered for sale at double the purchase price. The contrast is remarkable.
Let’s get back to our discussion from last night.
What are comparable rents for units of this size in Northwood?
What is the price of ownership you are willing to pay to be fully hedged against inflation in your cost of dwelling? Remember a owner who uses a fixed rate mortgage is immune from the upward push of inflation on his cost of housing?
Addtionally, the lot on this one is between 1500 and 3000 sq. ft. smaller than the ones last night! I assume land still had some value In Irvine?!? Or does your analysis eschew the cost of land because its free to the Irvine Company. How much of price difference can safely be attributed to land?
I would also like to point out that this owner bought at the peek, and is probably under a hell of lot more financial stress than the fortunate owner who purchased the “comparable” model for $650. This is important because is past housing downturns. the price of homes displayed extremely high persistence, while the sales rates fell through the floor. People will simply refuse to sell for less than they perceive the alue of their home to be. I have referenced a link detailing this phenomenon (http://en.wikipedia.org/wiki/Anchoring_and_adjustment) Essentially the housing market freezes in downturns.
Now one can argue that this time is different due to the prevalance of “innovative” mortgage products, and that people will be forced to sell by virtue of rate adjustment… See previous comments regarding Fed Reserve.
—–
There is a reason this house isnt selling. From the curb, its stucco overkill and the side yards are real small. The backyard looks like it has enough room for a nice pool and thats missing. Although, with a lot size of only 7k ft I am not so sure.
And of course, the price is too high in todays market.
They say it has a home theatre, but I dont see a pic of it. I hope that pic of the TV is not their idea of a home theatre.
I would pass on this place, even at 800k.
I am guessing here, but if someone is selling for less than what they paid for it, might I assume that there is a very good chance that this is a distress sale???
IR – though you did mention yesterday that today’s post would not be a 100% comparable, I think you should point out major differences in the post. CapWorks is right – the land difference is a big deal. Most people will look at the yesterday’s properties and compare the $/sf ft.
I think we need to devise a better system to compare properties. Perhaps if we can set our own $/sq ft of land, we can subtract that and find the cost of the structure. For example, all 4 properties are in Northwood. If we assume $100/sq ft of land in Northwood, we can subtract it out and compare the cost of the actual buildings. The $100 is a guess from me as I don’t know land costs but many in this blog do.
I don’t know what this would rent for. I would estimate $5500-$6000 a month. If someone has some comparables they could post, that would be great.
The problem right now does not seem to be hedging against inflation, but avoiding deflation. Once you start paying a premium for an inflation hedge, it starts to lose its value rather quickly.
I have written the following piece on the value of land:
https://www.irvinehousingblog.com/2007/07/16/land-value-101/
The value of land is impacted by the value of the house, not the other way around.
We are already witnessing the market freezing up. Sales volumes have dropped every month for the last two years. This trend will continue and actually get much worse now that credit has finally dried up.
One of the central points in the bearish argument is the notion that foreclosures will create a large amount of must-sell inventory. Prices will not be “sticky” on this decline because there will be so many foreclosures. It doesn’t matter what price the non-distressed homeowners want for their property. If there is a huge selection of REO’s on the market, prices will drop.
I would argue that it is different this time because of the innovative mortgage products. IMO, it will be much, much worse.
Actually, the land costs are not relevant. Land value is a residual calculation dependent upon the value of the structures built on it. Please see:
https://www.irvinehousingblog.com/2007/07/16/land-value-101/
This property is actually a pretty good comparable to yesterday’s properties. It is a bit smaller, but that should actually make its cost on a per square foot basis a bit higher. If this house sells for $371/SF, then the houses yesterday should sell for $350/SF.
Some homes are unappealing at any price due to flaws in design or the neighborhood. This is one of them. Look at the pictures of the backyard. You better be friendly with your neighbors because they all have a crystal clear view of your backyard from their windows. No privacy. This home reminds me of Ladera Ranch.
For over a million dollars, I want to be on a hill with views and privacy. This place wouldn’t be fun to live in at any price.
Craigslists shows four 5 bed with Northpark as keyword. $4500 to $5700.
Of course, once you’re talking that size, a little flexibility and you get many more choices. Still, at this size, the rental market is very small.
Without a ‘Gourmet Kitchen’, this house isn’t even on my radar…
I agree – for this price, you’d better have some space between you and your neighbors. Seems like you’ll have to buy an older place for that in OC…most of the newer properties I’ve seen are all crammed in. You can tell that making a little extra $ by crowding a few extra units in was the priority over providing more breathing space for the residents.
Just about anywhere else in the country other than urban centers like NYC we’d be talking in terms of acerage for this price. And if you want to see overcrowding, I’d also like to recommend Rancho Santa Margarita or Aliso Viejo. Or check out that new columbus village.
There’s also a pretty new development in Tustin Ranch (sold for in excess of $650k each) where I swear you’d be able to reach out one of your windows on the side of the house and touch someone who was leaning out of the house next door.
Subprime Mortgage Crisis Spreading to High-End Housing Market
http://biz.yahoo.com/ap/070829/expensive_homes.html?.v=2
“To some degree the change is due to difficulty getting financing, as borrowers are finding fewer lenders willing or able to fund “jumbo” mortgages, loans for amounts greater than $417,000.”
“Banks until recently were able to offload the risk of many jumbo mortgages by selling the loans to investors. But now, as investors burned by the subprime debacle have become extremely picky about what they will buy, banks are having to keep more of these loans on their own books and as a result are charging higher rates.”
This will not get better any time soon. Once a credit crunch takes hold, it doesn’t reverse course.
If you were a potential investor in these mortgages, and you had no idea how many of these people were going to default because the recent trend is shattering old records and standards, would you still park your money there?
How much data showing a stabilization in the default rates would you require to put your money back into mortgages, a few months or a few years? What incentive would you have to invest in mortgages now?
You see, if you put yourself in the shoes of these investors, you would not be putting your money into mortgages now or any time in the near future. There is too much risk, and the risk cannot even be accurately quantified.
The credit crunch will continue until default rates stabilize and investors can accurately quantify risk. Then the risk must be priced in to the mortgages — which will eliminate Option ARMs and many interest-only products. Then, and only then, will credit become more widely available. Of course, this will be at an increased cost, and it will not be available to many people who bought during the bubble. Subprime is dead.
This credit crunch will continue for many years, and it will depress prices.
The good news is, if you have cash and good credit, you will get a fantastic deal on a home because you will be one of the few who will qualify for a loan. You want to buy when the terms are the most restrictive possible and interest rates are high because you can always refinance into better terms when credit loosens, but you can’t refinance into a lower mortgage (at least not without cash).
I completely agree with IR’s last post. Suprime is dead. I have seen two of these market adjustments in my lifetime of owning a home. The last one 89-90 market collapse. We saw our home depreciate dramatically, and the people that bought just across the street from us (same model as ours) bought at the height of the market, then when things went bad, guess what, they foreclosed. When we bought our home in 1980 we had an interest rate of 13%, when the market collapsed and interest rates went down, we refin to 5.25 (how about that one?) and cashed out with a substantial amount of CASH, our monthly payments were lower than before! But I would much rather buy a house at a lower price and pay the higher interest rate, (tax ded) than buy an expensive house that you cannot deduct. Also you must consider a lot of these new homes come with Mello Roos and Association dues, you can never pay these off, they are there for the life of the home. What a sucker bet that is.
I guess I forgot what it was like to live in an Irvine tract house.
We loved living there but at the current prices I won’t live with 5′ setbacks.
CG2699, I agree, for > $1M you should not be able to see 1/4 of the neighboring houses in the listing photos.
Unless that backyard was included in the purchase price (doubt it), I am guessing, based on what I was quoted 6 years ago to do a similar project, that set him back another $75-$95K.
How long will a bank keep an REO on the market to avoid lowering the price? 3 months? 6? A year? Seems that the longer they are willing to hold the slower prices will drop.
“….and cashed out with a substantial amount of CASH, our monthly payments were lower than before!”
Did you refinance to a shorther term? Or did you sign up for another 30 years? Either way cash you pull out of you primary residence is still borrowed money.
“…pay the higher interest rate, (tax ded) than buy an expensive house that you cannot deduct.”
I wish people had a better understanding of the home mortgage deduction.
Sorry to be a little off topic, its freaking hilarious that these people didnt know that subprime was affecting homes worth $500K and higher. Were they looking at Florida and Texas only?
http://biz.yahoo.com/ap/070829/expensive_homes.html?.v=2
I think that these news agencies need to join our forum to get clear picture.
“I wish people had a better understanding of the home mortgage deduction.”
Please explain. I would have thought that, given a monthly payment of $1000, you’d be better off with $800 of it going to interest and $200 to principal instead of the other way around. What am I missing?
Case in point…lol
As for inflation hedging, what is the option/insurance premium worth to the owner (or the renter for that matter)? Determining this value is critical.
Land has a value independent of the structure on it. What is that value for Irvine? Northwood? How much does that value change in relation to the addition of a structure? Does the type of structure, and the surrounding structures matter? If so, how much deviation can be expected, and what are the other contributing factors?
IR, I believe part of your overall premise that housing prices are headed for a continued slide. $900 Billion in mortgage resets over the next 18-24 months makes the case pretty well. I am just not convinced that prices will drop by 35-50%. I am far more inclined to believe the real estate market goes into a freeze, and goes “sideways” for an extended period of time, while NOI rental equivalents and replacement cost values catch up to some greater percentage of the comparable cost of ownership.
I’ll get back to this after work today. Hopefully someone can put up the rental figures in the neighborhood.
Okay, I’ll agree my response was in bad taste. I mean we are all here to learn, right?
Guess I’m the only one feeling cheeky this morning.
🙂
I don’t know – maybe I’m missing the point here. What is “must sell” inventory? Even if I don’t have to sell, why would I continue to pay on a property which is underwater? If I owe $1,100,000 on the mortgage and can net, after commissions and sales expenses, $825,000 for the property, why pay? The market is giving me ONE chance in a lifetime of getting a $275,000 “get out of debt free” card, so I’m a fool not to take it.
And don’t sermonize me with the, “but you promised to pay back the Asian billionaires who bought your loan” crap. They took the risk, they rolled the dice, and their CDO came up snake eyes. Too bad – that happens sometimes when you’re an investor.
So can someone explain why, even if I could afford to keep paying, why I should? And my credit might take a hit, but I’ll keep my credit cards and car loan current, so it won’t be a big deal. Why not help our trade deficit by keeping $275,000 in America instead of shipping it off to China? Hey, maybe walking away is our patriotic duty to keep our hard earned dollars in the good old USA!
Agree, wouldn’t even look at this for my residence due to the back yard~I would go for less house and more privacy/views–
People try to factor out the human element in buy/sell formula, there is timeless value in this. Wars are fought over good land.
It is nice inside, though.
“Hey, maybe walking away is our patriotic duty to keep our hard earned dollars in the good old USA!”
Maybe that’s what our government intended to do all along! Maybe that’s what Alan Greenspan was planning for the USA!
We might be on to something here.
Must sell inventory is those people who are facing ARM resets and can’t carry the payment.
Some homeowners, if they can afford the payments and they like there house, will continue to make payments even if they are underwater. The presumption is that over time HPA gains will once again put them in the black.
Bankruptcy is not as simple as you might think, and I think most people will go to great lengths to avoid going BK.
Just missing a couple of small details but your basic point of one chance to get out of debt free is a good one, especially if the bank gave you (or whomever) the loan with -0- down. You have no “skin in the game” and you’d be nuts to pay in the example you give. Lots of people are gonna do just that. The problem with your example is, if the loan was for $1,100,000 and the lender sells it for $825,000 the $275,000 has to be written off the lender’s books as a forgiven debt. Then, the little “surprise.” They send you an IRS 1099 (c) form stating that you “made” the $275,000 on the transaction and you (or whomever) will be liable for x amount in taxes on the “gain.”
As far as the credit cards go, some companies run credit checks every month. If a foreclosure or deed in lieu of foreclosure shows up, they’ll cancel your (or whomever) credit card. Bam. Just like that. If you have a lot of credit cards, it really isn’t that big of a deal. But if you only have one or two (OK, nobody has JUST one or two credit cards, but this is a just an example) they might hit the cancel list and that credit line would be adiosed.
Re: just walking away – some employers will run a credit check before they hire you. A BK or foreclosure on your record may mar your chances of getting hired.
Also, most landlords will run a credit check before they rent to you. Not being able to make your mortgage payment makes you a risky choice here as well.
Just walking away is not as easy as… well, just walking away.
Housing Bailout Chatter… from theStreet.com
http://www.thestreet.com/s/housing-bailout-chatter-gets-louder/newsanalysis/banking/10377008.html?puc=_tscs
“The presumption is that over time HPA gains will once again put them in the black.”
This presumption will also be one of the casualties of the bubble. It is based in denial. When people see comparable properties selling for $300,000 less than they paid for theirs, and they see the conditions for appreciation negated by tight credit and an ailing economy, they will give up. This is market capitulation, and it is part of almost every financial bubble.
Absent another real estate bubble, it will take over 25 years for fundamentals of income and rents to catch up to today’s pricing. That is a long time to wait to get out at breakeven.
Check out how little room there is on the sides and the comment upthread about a backyard just big enough is definitely true. It’s the property in the center right at the T intersection 4 houses up from the street corner in the lower right. If you switch to Google, it’s a newer infill (not even cleared yet) that was next to some small business with a parking lot (ex-group home?):
http://www.flashearth.com/?lat=33.701364&lon=-117.761043&z=20&r=0&src=aska
“In hindsight, it’s easy to question whether many borrowers should have been granted a mortgage in the first place.”
No. It was easy to question these mortgages as they occured.
“Let’s see, should I buy a house that is 8-10 times may salary?”
The answer is one of the following:
a) No.
b) No.
c) Heck no.
What are the guesses here? Fed to lower rates ….50 basis pt or 100 basis pt?
What exactly are the conditions for appreciation, in your estimation? I have always considered real property a real asset, therefore the growth in the price of that asset should at least equal the real growth in prices. Again, if COLA is going up at 6% (some would say this number is closer to 8%) and it cost more to build a structure the cost goes up. Growing prices at 6% for the next 25 years would me we would double at least twice, for a 4x current value in 25 years (roughly). To say this you have to believe that houses will decline by 75% from current values in order to reach instrinsic value, and then start growing along with the real cost of living.
Of course, this belief runs contrary to you opinion yesterday where you stated that housing you correct another 33% from here.
Again, IR, help me out here:
1) How far is housing going down, final answer?
2) What is your forecast for inflation over the next 5-10 years?
3) What is your forecast for HPA over the same horizon?
4) What is your estimate of the current value of call option purchased by owners and sold to renters? (for further clarification of the difference between hedged and speculative finance please see http://en.wikipedia.org/wiki/Hyman_Minsky)?
5) Do you believe that Irvine is premium location that will tend to exceed the prevailing rate of inflation in terms of HPA over the secular horizon?
If you actually believe housing prices will be flat for the next 25 years, well I’m actually not sure what to say.
“Bove joins hard hitters including Pacific Investment Management Company bond guru Bill Gross in suggesting that government intervention could ease the pain.”
So, Bill Gross is in favor of giving the tax payers a gross bill for the folies of the homedeptors!
No thanks Bill!
I imagine one could invest enormous amounts of time mapping out innumerable scenarios for the housing decline, each with their own set of assertions.
The bottom line is I will be buying a house when I have a 20% down payment and my DTI is no more than 33% for a (modest) home that I like.
I can’t tell you if this will be in 1-2 or 5-10 years from now. It may be that I NEVER buy a home in So. Cal. and instead rent and retire with a lot of cash instead.
I can tell you this though: If everone did what I plan to do, we wouldn’t have the housing mess we have today.
I think you misunderstood I/R’s statement. He didn’t say prices would be flat for the next 25 years, he said that it would take 25 yrs for fundamentals (rent prices and household incomes) to catch up to today’s prices. This simply means today’s prices won’t persist.
I certainly agree there is a strong link between HPA and inflation but who knows what will happen. Inflation is tooling along nicely now but if the European banking Structured Investment Vehicles start pulling down Eurpoean growth, and if it’s not just the Bank of China Ltd that has $9.7bn of exposure to subprime the the PRC (Lord in Heaven, did we really sucker them into buying this stuff? I hope not because we need them to decouple from us so they can be OUR export market when our currency declines!), then demand for things like copper and oil and iron ore might fall along with the income generated for those who mine/refine/transport those items and then inflation will subside.
Delighted to see the reference to the late Dr. Minsky. He would certainly agree with IR that there has been spectacular Ponzi excesses in todays (er, actually, yesterdays) mortgage markets that will result in a blowoff – which we are seeing right now.
A brief note from the Prudent Bear, my favorite pessimistic site:
“How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is “less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion.” ”
And to return to the 25-yr topic, I KNOW somewhere in Prudent Bear this week there is a reference to Rotterdam in Holland, where after a housing market crash in 1899 prices in inflation-adjusted amounts did not return to 1899 levels until, I believe, 1980. I will try to find the article. Someone else at Prudent Bear demonstrated that houses in Miami did not return to inflation-adjusted 1920s prices until the early 1960s. That was much earlier in the year and may have rolled off the site archive; I will attempt to find it.
The John Mauldin quote was from Susan Walker’s article at http://prudentbear.com/index.php?option=com_content&view=article&id=4738&Itemid=57.
Dear CapitalismWorks,
I couldn’t help but notice that you keep trying to nail people down on how far the market is going to drop. Nobody knows, because it depends on a lot of factors.
Let me say that while the bubble started in 1998, few bears expect to see 1998 prices in dollar terms. In other words, a house that sold for $350,000 in 1998 isn’t going to sell for $350,000 in 2010 (if that ends up being the bottom). But rather, most bears think that we will see 1998 price to income ratios primarily driven by monthly mortgage payments. Anyone that thinks they can nail down a price or a percentage drop is full of it, but we can certainly take guesses based on interest rate and income assumptions.
I’m too lazy to search for the numbers, but you would have to dig up interest rates for a 30 year fixed in 98, median income in 98 and median house in 98. Take the house price, subtract 20% (down payment) figure out the monthly payment and it’s ratio to monthly median income. Then work backwards with today’s data: 07 median income, what the monthly payment would be with the same ratio to income from 98, how much loan that gets you at say 6.8%, add back the 20% down payment (not 20% of the loan, but 20% down) and you would get a rough price of what the median home price should be today (not what it will be at the bottom – the actual bottom will cost more due to inflation).
For the median house price at the bottom, you would need to come up with projections for median income and interest rates for whatever year you think the bottom will be. Good luck with that, but you can get a rough idea. Once you figure out the projected price, you can figure out the approximate decline.
And people. If you think the Fed can lower mortgage rates by cutting the federal funds rate then you haven’t been paying attention. Mortgage securities are considered to be crap by most investors. Do you think an investor is going to buy brand spanking new mortgage securities (crap) that pay less than current rates when they aren’t buying the stuff now? It’s the investors that will drive the rates. Pump those rates up for a decent benefit to risk ratio and new mortgages will sell. Rates are going up. How much? Who knows? We have to wait for the dust to settle.
To sum up: No one knows when or what the bottom will be, but it’s a safe bet that it is going to be a ways off and it is going to be severe.
If you have a fixed rate mortgage, can afford the payment and like your house then it doesn’t matter for you. If you can’t afford your payment then you are screwed and should have thought of that when you bought the house. Sorry, I know the pressure was enormous, but that is reality. The decline isn’t forcing you out of your house. It’s the fact that you bought something you couldn’t afford in the first place. If you are a first time home buyer there is no rush to buy. Save up a down payment and get in when you find a place that you like and can afford. Don’t worry about making money off the house. Worry about your quality of life. Maybe buying isn’t even right for you. It is for me though.
Yeah… their idea of home theater is a cheap RPTV and five speakers built into the ceiling. In their den. And, to top it off, the TV is on the short wall and the five speakers are tightly coupled in the middle of the room, ahead of the couch and the TV. The sonic image probably sounds like it’s coming from the bedroom upstairs. Yuck!
Jeez… if you’re gonna advertise an in house HT you better build the room with the correct acoustics, layout the speakers correctly, add multiple dedicated AC lines, etc…. I should know… I have a properly designed 7.0 HT in my den.
With a liquor cabinet near by. 😉
1) How far is housing going down, final answer?
https://www.irvinehousingblog.com/2007/03/11/predictions-for-irvine-housing-market/
2) What is your forecast for inflation over the next 5-10 years?
I don’t know. The rate of growth in wages has averaged 3% for a long time, that trend may or may not continue.
https://www.irvinehousingblog.com/2007/04/30/appreciation-is-dead/
3) What is your forecast for HPA over the same horizon?
Based on the links above, you will see that I have estimated we will have depreciation for the next 5 years followed by stagnation until the effects of the bubble have been worked out of the system. Might we have a bubble after that? Sure.
4) What is your estimate of the current value of call option purchased by owners and sold to renters? (for further clarification of the difference between hedged and speculative finance please see http://en.wikipedia.org/wiki/Hyman_Minsky)?
The call option is worthless because properties are going to decline. Renters are going to benefit from the decline because they do not own a depreciating asset. Will this change at some point? Sure. Last time the call option went worthless in 1990 and regained value in 1997. Personally, I think you needlessly complicate the analysis by introducing esoteric concepts like options when referring to the relationship between owners and renters (I trade options, so I do understand them.) Nobody is actually purchasing an option. There may be elements to the transaction that function like options, but IMO futures would be a better analogy.
5) Do you believe that Irvine is premium location that will tend to exceed the prevailing rate of inflation in terms of HPA over the secular horizon?
No, it can’t. Do the math. Do you think Irvine houses will be worth $2,000,000 in 2020 while houses in Aliso Viejo are only worth $400,000? If the premium difference gets too large, people opt for alternatives. Irvine will always command a premium, but there is a limit to how much it can command relative to nearby communities. You are confusing premium with appreciation. The rate of appreciation is dependent upon growth in wages and rents while premium is the relative desirability of one property versus another.
If you actually believe housing prices will be flat for the next 25 years, well I’m actually not sure what to say.
I did not say that. I said that it will take more than 25 years for fundamentals to catch up to current valuations. In the posts I have been directing you to, you can see the calculations for yourself.
I have posted links to the analysis posts where I have answered your questions in great detail. You keep asking as if I have not answered you. Please take a moment to read some of the links. It is easier for me to link to a detailed answer than it is to give a shortened version that is incomplete.
Zero. The rate will be unchanged.
We haven’t discussed this from what I’ve seen, but I am starting to wonder about the terms of these loans. I can make the argument the a 30 year mortgage is just down right silly, and it is. The only reason why they came up with the 30 year mortgage was to keep the payments low. With a 30 year fixed mortgage, you’ll still be essentially renting your home from the bank for the first 5 years. It is also the safest loan–no chance of adjusting.
If you are serious about buying a home you should look at a 15 year fixed. The duration of a 30 year fixed is over 20 years! This means your payment is mostly interest until that point in time. Scary. I am certainly not advocating against 30 year mortgages here, just trying to get to the underlying facts about loan terms.
Since the inception of Fannie Mae and Freddie Mac, we’ve seen a continued easing of guidlelines, increase in loan caps, and increase in loan terms (length). Will we be saying goodbye to the 40 year loan?
That would indeed be an interesting discussion…
Maybe they will try to repeal proposition 13 and try to tax them out of the neighborhood.
Nuts; STILL can’t find the Miami reference but I found something even more interesting:
http://prudentbear.com/index.php?option=com_content&view=frontpage&Itemid=69&art_id=2813
This guy is an engineer not an economist so we can argue about how unqualified he is if we don’t like his conclusions, which appears to be that building height can be used as a proxy for the time it takes a market to recover its value. In which case it took 40 years for much of the US market to recover after the 1920s !
“It is also the safest loan–no chance of adjusting.”
That is why I advocate it.
I am opposed to all interest-only loans because they really are renting from the bank.
I like the 15 year fixed. In fact, I like the idea of using a 30-year fixed like an Option ARM with your payment options being the 30-year fixed and the 15-year fixed. I also like making additional principal payments whenever possible.
But I am crazy after all. Most people have much better uses for their money than actually paying for what they “own.”
A fluke. Uni will rule again soon… It’s the normal state of things and a 50% asian mix ( let me guess, Chinese ) is NOT going to help property values.
I’m not prejudiced… my wife and step dad are/were asian -not chinese- but I have noticed that the Chinese in Irvine have a habit of creating all chinese “Chinatowns”. The end result are neighborhoods and schools that are less desirable to the general population and the property values don’t do so good.
So, yeah, Northwood may have scored higher in Math this time, but just give it a year and reality will once again settle on the scores at IUSD.
Besides, my kid’s at Uni and his GATE scores are always been through the roof… My daughter will show up there soon!
Bottom line? Folks… it’s Northwood. Leagues away from the ocean. Remember what happened to Yorba Linda in ’90? Boom!
Bingo.
In fact, we just changed the payment schedule on our 30 year so that the money gets paid bimonthly. I think this turns the loan into a 25 year loan.
Add to that the fact that we can make extra payments and then the loan shrinks.
Of course, you should only do this after you are maxing out your 401K contribution.
40% housing decline. Ok, I am in the 10-15% camp personally. I noticed a large portion of your housing decline analysis was based on the San Diego number from the early nineties. Please remember that San Diego was faced with huge decline in government jobs related to the unwinding of military operations and related defense services.
If fact, unemployment is an enormous factor that may serve to buoy housing prices over time. Over that past 100 years, now is the only YOY period of outright HPA depreciation not accompanied by rising unemployment. Respective to Irvine, unemployment levels are even lower that the national average, leading me to believe that there is more built in wage support.
Without significant increases in unemployment, there is no precedent to falling housing prices. We are, as I think everyone can agree, going to witness return of marginal home buyers to the rental market. Home ownership rate will fall from the high of 69% toward the old 65% mark, but they probably won’t ever get there. Why? The Federal government likes homeowners.
As for the belief that the Fed/Congress will not act in some way to stave off a collapse of the home market as you predict, it is simply that, a belief. I believe that the Fed/Congress will act, to save the marginal owner from losing the house through a combination of subsidized loans and lower interest rate. Again, that is just my belief. I am not happy about it, since I am one of the fully hedged home owners sincereley hoping for a drop in housing (I will admit it, I would love to upgrade to a McMansion someday!).
Options are a part of every housing purchase. The owner buys a put option on the mortgage that goes into the money everytime the rate falls. Hedging against inflation is a risk that is the market is willing to pay for (See TIPS). This additional value varies by individual, but it has a market value. Additionally, just because you believe that HPA will be non-existent doesn’t mean that the option premium is zero, it means that the option at expiration is zero. There is a difference. Every heard of term life insurance? Think of the part of the excess cost of ownership as an insurance premium.
As for the substition effect between local housing markets, yes clearly it exists. But of course again you assume that I think only Irvine will appreciate. All SC real estate will appreciate along with the COLA, while some more desireable areas will appreciate slightly faster. As population pressure mounts, traffic condition worsen (ever driven through the “Orange Crush”), premium locations (read: those that are close to work and recreation), will be value higher relative to others.
As for inflation at 3%, I thought we dispelled that notion yesterday. I thought we agreed that “real inflation” was much higher 6%+.
Response to Anonymous: Most Investors are Fools. I do like your analysis for PTI measurements and comparisons over time. IR, have you run those numbers anywhere?
disparity in rates…..
I have a client buying a home in manhattan beach for 995k. Downpayment of 578k and a 30yr fixed loan of 417k for 6.375%. NO BUYDOWN. awesome deal.
If I try and run the loan through as 418k, he loses conforming pricing and the rate jumps to 8.125%!!!!!! I am not kidding.
The massive disconnect between jumbo and non-jumbo pricing is stunning. The spread also seems to be widening by the day.
IR, I have been reading here for about a month. Did you read the book “Sell now?”By John Talbott? I finished that book in July. and its amazing because many things he stated or predicted have occured. Also you tend to repeat his ideas.
none of my family or friends read this stuff or care.
Conventional wisdom is not always right.
I listened to a CD set Called turning debt into wealth.
very conservative. like your Minnisota phlosophy.
When im ready to buy I plan to pay off early.
I will have to by less house/Condo. plan to pay 3 or 4 times my salary.
Thanks for the advice. regardless of the home prices your statments about value, debts and rampent consumerism help me keep a leavel head and not buy what I dont need.
BOB.
“Prices will not be “sticky” on this decline because there will be so many foreclosures.”
I agree, but assuming no measurable economic downturn, or unemployment increase in Irvine homeowners, isn’t it possible that the median could drop dramatically (30%+) for a year or two on very low sales volume, but once the mortgage market loosens due to the vast majority of loans performing well, that the median could pop back-up 20%+? (apolgize for the run-on).
The proximity of new homes is so close that there’s more privacy available if you share a wall with a neighbor. Then there are no windows to see and hear things through.
“Without significant increases in unemployment, there is no precedent to falling housing prices.”
We are definitely in uncharted waters. We don’t have any precedence for giving out Option ARMS and liar loans to 80% of purchasers either (2005 & 2006 stats.) Unemployment is only one source of foreclosures and must-sell inventory. People buying too much home is another.
It is also a misnomer than unemployment caused the last housing downturn. The job losses came after the downturn started. It probably delayed the recovery a bit, but it was not the causal factor.
“As for inflation at 3%, I thought we dispelled that notion yesterday. I thought we agreed that “real inflation” was much higher 6%+.”
Wage growth is 3%, and it is wage growth that ultimately determines rents and the value of houses. Inflation, if you believe the CPI, has been running less than 3% since the early 80’s when we finally got inflation under control. Now lately the FED has been turning a blind eye to inflation outside of the CPI, so I think a convincing argument can be made that inflation is running at a greater than 3% rate.
However, inflation has nothing to do with house prices. If you want to have a meaningful discussion about house prices and inflation, we will need to contain the discussion to wage and rent inflation.
The historic rate of home price appreciation of greater than 6% cannot be sustained. It has happened due to a lowering of interest rates since the early 80s and and increase in the debt-to-income ratios people have utilized to buy homes.
https://www.irvinehousingblog.com/2007/04/30/appreciation-is-dead/
The system is at the breaking point. Interest rates can’t go any lower, and people cannot put higher percentages of their income toward housing.
There has been much debate lately over future FED policy. I am one who believes the FED will not lower interest rates because it will cause the dollar to crash and inflation to rise. Plus, there is no reason to think the lowering of the FED funds rate will translate into lower mortgage interest rates. The risk premium between the two is increasing because lenders are losing so much money. IMO, the FED will not and can not ride to the rescue.
Housing crisis keeps buyers on sidelines
http://www.ft.com/cms/s/0/9fd5e4de-558e-11dc-b971-0000779fd2ac.html
Housing crisis keeps buyers on sidelines
http://www.reuters.com/article/bondsNews/idUSN2735472220070828?sp=true
Ed Smith, vice president of government affairs for the California Association of Mortgage Brokers, blamed “media hype” for the worries over declining property values. “It’s not fueled by empirical data,” he said.
…
I’ve been saying to people, if you can afford to buy in a decent neighborhood right now with a decent (mortgage) product, you should do that,” said Lori Gay, chief executive of Los Angeles Neighborhood Housing Service, a nonprofit affordable housing lender and developer. “Hoping that there might be a phenomenal deal a year from now in that nice neighborhood might not be the way to play it.”
…
I’m a little hesitant to jump right in immediately, because I think that prices are still going to go down,” said Duplessis, who has been paying $2,600 a month in rent since she sold her last home in the city of Inglewood near Los Angeles a year and a half ago.
“I’m not at this point too anxious,” she said. “You know why rich people are rich? Because they shop around.”
Bernanke Says Fannie, Freddie Asset Caps Should Stand (Update3)
http://www.bloomberg.com/apps/news?pid=20601087&sid=apbjRCn0Q7iE&refer=home
But what’s your reward? e.g. You were considering a home purchase in 2001, but because you have financial sense you abstained because homes were over-valued. Finally the market is turning (like you knew/thought it should have years ago). Within the next year or two, there may be many homes on the market 30%+ below their 2005 peaks. So after a decade of renting you’ll buy, but at an inflated rate to compensate the lender for their elevated risk in this environment (extreme depreciation with prime borrowers walking away from mortgages).
“But rates always come down” just like “homes always appreciate” so in an additional year or two you’ll refi, and you’ll then finally, you’ll have paid a “fair” price for your home and your monthly costs will be the same as if you’d bought around 2001. Congrats! Your benefit? Well, your net worth will have benefited. But if it’s your net worth that you’re concerned about, then you should continue renting and save/invest the difference.
These decisions are never as black-&-white as we think they are…
The first part — isn’t it possible that the median could drop dramatically (30%+) for a year or two on very low sales volume — yes, that is possible. It does seem to be where we are headed right now. Pretty dramatic, don’t you think?
The second part — but once the mortgage market loosens due to the vast majority of loans performing well, that the median could pop back-up 20%+? — this doesn’t seem quite so likely.
First, we will need to clean all the bad mortgages out of the system. This will take years. The ARM reset schedule shows this dragging on until 2012. It will take 2 or 3 years after that for the last of the die-hards to go into foreclosure. All that overhead supply will prevent any meaningful appreciation.
Second, we will need to have a track record of borrowers paying their mortgage. It will also take years to establish investor confidence in the system, particularly after the devastating losses these mortgage investors are about to take. I can’t imagine any real appetite for mortgage loans not backed by Sallie Mae or Freddie Mac for quite some time, probably 10 years or more. That means anything other the conforming loans are gone for the foreseeable future (and probably beyond.)
At some point, we will drop to fundamental values where rents and incomes align. Appreciation will return to the market at that point, but only at rates equal to wage growth (historically 3%.)
All the owners in the market must capitulate and give up on the idea of being bailed out by future appreciation before appreciation will return. I know that sounds crazy, but that is how markets work.
This is the question borrowers will be asking over the next few years – cost v. benefit of walking away. Is the hit to my credit report worth the paper loss (adding back the taxes for debt forgiveness)? Good luck convincing your wife you should do this!
CapitalismWorks,
You remind me of the people that pushed for the war with Iraq. You throw out all kinds of “information” and jargon, but the fact is that you are full of hot air.
Especially when you mentioned puts and calls. That’s an intimidation tactic. “Look at me, I know so much more than you.” Hell, you aren’t even talking about real options. You are just using the terminology how you see fit. It doesn’t matter either way though. Options are simply a contract to, at your option (hence the name), buy or sell an underlying security or asset at a set price within a certain time span. Options don’t drive the market. Sure, they can cause emotional reactions and drive the underlying security or asset in one direction or another just like a rumor. But in the end, it is fundamentals that drive the market. Surprise! I occasionally trade options.
I don’t think the people that got us into Iraq with their horribly flawed data and logic deserved a platform and I don’t think people like you deserve(d) a platform.
I have nothing but contempt for people like you. You alone are nothing special. It is when people like you flock together and amplify your irrational views that your influence is felt and people (lot’s of them) get hurt. War or bubble.
People that are upset because they got victimized in this housing bubble should not direct their anger at us. We are simply pointing out the facts. They should direct their anger at you and people like you.
I for one am tired of, year after year, having to listen to mentally deficient people pretend that they know something, convince a bunch of lemmings that it’s true, create a disaster and then have these same people accuse me of either enjoying other people’s misery or wanting America to fail. No, I don’t enjoy other people’s misery and I don’t want America to fail. I want rational people in charge and want the facts aired.
Can you guess which two people in this video you remind me of?
https://www.youtube.com/watch?v=yoZV5jt9puc
At least you say the market will decline. But, 10% or 15% is a joke.
No personal attacks please.
Obama unveils radical mortgage plan
http://www.ft.com/cms/s/0/9fd5e4de-558e-11dc-b971-0000779fd2ac.html
Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate
Thanks Bob. No, I haven’t read that book, but I will check it out.
Sounds like the useless pandering we will hear more of as we get closer to the election next year…
A 15-year is only “better” if you end-up living in the home for 30 years. I think the average is 7 years. In this case, a 30-year fixed is the best balance between paying some principal yet keeping the monthly carrying cost low enough to save/invest outside of your home.
Anonymous – Suprise, who gives a S*** if you trade options. Good for you dude. Why don’t you explain to us all the negative convexity inherent in mortgage back securities in relation to path dependence and optionality given your prediction for mortgage interest rates over the next five years, and how that impacts your view on housing. You don’t a have a clue dude, so spare me.
Optionality is inherent in mortgage finance. I find options a simple way to break down decisions. I am sorry if you were offended by my seeming high-handedness, but it appears to me that you are more offended that I disagree with the “Party Line” of complete disaster.
I think there is more than a little bit of chicken-little-ism going on here, and I am hoping to vette some serious arguments that may help me construct a clearer picture of what will happen.
The reason I keep harping on the option value question, is it forces everyone to recognize that there are benefits to home ownership beyond the fact that you have a place to live. Simply put one will be willing to pay more to buy than to rent. I want to know how much more that amount is, and how much people on this board think it it. The owner premium is an integral part of the overall valuation puzzle. If you believed that housing prices were apt to appreciate at 20%+ you would pay a hell of a lot more than a renter to “get-in” the market in an effort to prevent having your housing costs dragged upward. Of coure, at its extreme this leads directly to the inane bubble pricing we have witnessed recently. The I gotta get-in now attitude.
Funny, that you call my view irrational, rather that addressing some of my assertions, while simultanseously invoking Iraq (where the Hell did that come from). Though I would guess they aren’t having much trouble with HPA in that part of the world.
As for IR, I appreciate his arguments, and wouldn’t spend my time on this board if I didn’t find something valuable. That said, we obviously agree on the direction of housing prices, we obviously disagree on the extent of the decline. I am, frankly, amazed that pressing for more information and asking questions would be greeted with hostility.
Credit fears may curb home sales
Some experts see pending deals fall out of escrow in part because of the turmoil in the mortgage market.
http://www.latimes.com/la-fi-escrow13aug13,0,2019672.story
Ohlbaum said he was seeing real estate deals die for other reasons too. One client who had been approved for a mortgage that covered 90% of the value of the home she wanted to buy withdrew her offer Friday because “she is scared to death to buy right now.” It didn’t matter to her that since getting loan approval this month, the lender stopped funding such high loan-to-value mortgages.
“She blew the opportunity,” Ohlbaum said, “because she is worried about the market and making a bad decision.”
LOL! It’s the same meaningless drivel from you. That’s why I bring up the Iraq comparison. I’ve seen the same type of B.S. tactics then that you are pulling now. Different subject, same tactics. Back then I’d actually go off and get real facts and post them. Waste of time. Same when I talked economics with the same people. I did graphs and everything. Waste of time. Your type just comes back with more meaningless junk.
Watch that video I posted for 2007 real estate predictions. Go watch some YouTube of the Iraq debate in 2002/2003. Any similarities in how the people discuss things? There’s a reason for that: Detachment from reality.
The fact is that the dude that does this blog already answered all your questions. I’ve already answered your questions. Yet you still yammer on with ridiculous statements and more meaningless questions that you want answered point by point even though they are irrelevant to the discussion. You’ll never stop and would love to have people spinning their wheels just so you can come back with some other junk statements.
Like I said. I’ve seen it before. You are simply a troll. Whether or not you actually believe any of the stuff you say I don’t know. But, what’s the difference when the effect is the same?
Hostile? Most people here seem pretty laid back. I’m the only one that is outwardly hostile. That’s just me, because I’m tired of people like you and enjoy bashing you around. It’s wrong though and I’ll stop.
CaptalismWorks – you might find this article by Robert J. Shiller interesting. “Irrational Exuberance” book is on my library hold list.
A Psychology Lesson From the Markets
http://www.nytimes.com/2007/08/26/business/yourmoney/26view.html?ex=1345780800&en=f22bc73ddd26445e&ei=5124&partner=permalink&exprod=permalink
Anonymous: Yes, the people who support the troops are similar to the people who support home owners. They are both right and patriotic. We are winning in Iraq and there is no housing bubble.
“But, what about the falling prices?”
The only reason you are seeing falling prices is because the liberal media is talking down the housing market and giving material support to our enemies. The media isn’t reporting the good side of the housing market. Once America wakes to the propaganda against home owners you will see housing prices soar like a mighty eagle.
It is very telling that you post anonymously. Only cowards without conviction would hide behind the internets.
Goldman Sachs Housing Horecast
http://calculatedrisk.blogspot.com/2007/08/goldman-sachs-housing-forecast.html
In a research note today (no public link), GS forecast house prices to decline 7% in 2007, and another 7% in 2008 (based on the Case-Shiller index). They believe the OFHEO index will show smaller price declines.
In addition, GS forecasts New Home sales to drop to 650K in Q1 ’08, at a seasonally adjusted annual rate (SAAR). This is even below the BofA forecast of 700K for later this year.
For existing homes, GS forecasts 5.25 million SAAR in Q4 ’07 and a lower rate in ’08.
Sorry, I can’t copy & paste the titles from calculated risk, so had to retype it. That should be “Forecast” in the title.
I thought you meant “whorecast”. Thought it was pretty funny actually.
Exactly.
Even an effective bail out, that would somehow keep people in their homes instead of just prolonging the inevitable, won’t keep home prices up. It’s more than a question of just inventory.
I wonder what a big quake would do if it were to hit now. Not that I’m hoping for one, mind you.
That would be a prediction of what the NAR will say next.
IR, in reference to the SD/unemployment scenario and the inapplicability to the current situation, you are correct. The current situation is driven by a credit creation wave the likes of which the world has never seen. Without HPA everything goes down the tubes. I think we’re all agree. I still maintain that these facts make it far more likely, as opposed to less, that we will see a vigorous Fed/Congressional response to the problem. The risk is too great to the overall economy. The government has stepped in to save the S&Ls, the financial system after LTCM, why wouldn’t they do it again?
Just because Greenspan is out, doesn’t mean that the Fed has switched its mandate. The Fed is first and foremost intended to maintain the integrity of the financial system. Inflation fears are abating, recessionary fears are looming, and given the huge lag between Fed rate cuts and a corresponding response in housing, plus layer on the fact that a wholesale restructuring of the mortgage origination universe is underway, it would seem far MORE LIKELY for a Fed ease. But, I guess we’ll have to wait until September 18.
Of course the ability to sell products back to the street is required to get the mortgage market going again. I also believe liquidity we’ll return sooner rather than later. Smart money is already sopping up mortgage paper at great prices. I do concur that we will not see anything close to the mortgage insanity of the past decade, but prime borrowers using Jumbo loans won’t be paying a 150 basis point spread to conforming forever. The market is always hungry for yield. High quality MBS offers spread and AAA credit.
Bi-monthly is a scam. Banks used to push it so they can charge extra admin fees on payment processing. Check your statements to make sure this isn’t happening. The savings comes from making a “13th” payment every year, not from “paying more often and eliminating interest”.
You are better off just paying extra with you regular checked.
Actually Anonymous, please continue. Dazzle me with your acumen. Since you have it all figured out, I would love to hear more. Tell me more about Iraq. Wha’s going on over there? What should we have done? What’s your plan to fix it? Maybe we could write the president, or the UN!
Sue Thank you for the book recommendation. I must say that I have very little time for pleasure reading at the moment (especially with all the time on this blog), but I keep a list for the time when I have more time.
As for dollar crashing when the Fed lowers rates. I don’t believe it. It won’t help, but an adjustment to the dollar value is already under way. Additionally, the dollar is still THE reserver currency globally and though foreign sovereign wealth entities have displayed some willingness to diversify, the dollar is still number one.
Foreign producers have shown a willingness to accept bouts of dollar weakness by lowering prices for american consumers. This effectively cancels out the inflation impact in the short run. There is some breaking point, but it is difficult to pinpoint.
Another thing to remember is that Americans hold a tremendous amount of foreign assets, held through equities of mulinationals, foreign direct investments, and direct fixed income holdings. The value of these securities to a domestic investor increases proportionally to the decline in the value of the dollar (sorry if that was too obvious). At any rate Americans, by and large hold riskier (read higher yielding) investment abroad by comparison to the relatively conservative holding of foreign central banks. It is at least one mitigating factor to a decline in dollar value.
Hi Kurt,
It is good to see you again. Your comments are always “interesting.”
CapitalismWorks,
There is a premium for ownership based totally on the inflation hedge. It used to be to obtain these benefits you had to save money and sacrifice. This made the premium something you “paid” for through sacrifice rather than through paying more money. Ownership should reflect a savings over rental right from the start. If you actually pay more money for this premium, you may never see it. Many people don’t own that long and never see the benefit of this premium.
I am willing to entertain the idea that home ownership will become a premium you pay for in the price of the home. I don’t think that will be the case because downpayments are returning.
When you really think about the impact of downpayments, they are a barrier to ownership that depresses prices. When this barrier was removed during the bubble, prices rose dramatically, and ownership rates skyrocketed. Now that downpayments are necessary again, prices will tumble and ownership rates will decline.
If you want to crunch numbers to evaluate the ownership hedge premium, I would examine the crossover point at 3 years ownership and at 5 years ownership. If the premium gets so high that you see no benefit in 3 to 5 years, it fails to become a positive incentive. Also, don’t forget to factor in the 6% appreciation needed to get to breakeven after commissions. Off the top of my head, I would say this would be a 10% to 15% premium.
Where do you get you wage growth assumption of 3%? Is that a real or nominal figure? If its nominal, I think you are mistaken. The idea that someone works there whole life only just keep pace with inflation is absurd.
Capitalismworks – As long as we are on the subject of books to read and your handle indicates you are pro-capitalism, may I humbly suggest you read, “The Creature from Jekyll Island” by G. Edward Griffin. It is a fascinating study on the Federal Reserve and it’s effect on the economy.
This is the nominal figure based on government statistics. It does not imply that individuals may not see raises larger or smaller than this.
You can still buy ah SFR in Manhattan Beach for 995k? Where in Manhattan Beach? What street or area?
And what fines should be levied against the unscrupulous borrowers who lied on their loan apps.
Taking the high rent number of $5700 we can work backward to carrying a loan of 6.5% for 30 years at $900,000.
Again if we consider the option value (sorry anonymous I can’t help myself with the drivel), we would adjust the payment upward. I am not sure how much. Does $500 sound good. That brings us to just under $1MM at 6.5%. Obviously given Maestro’s rate sheet there is no way that is going to happen
Using 8.125% interest with the $6300 payment we end up at an $850K loan. And that is on the very high end.
Note I ingored all tax benefits because I assume that property taxes will roughly match the mortgage interest deduction.
Now, does that seem right based on renter equivalency valuation? Is the option cost too high, too low?
It does seem to be a VERY low number relative to current prices.
As a side note, I thought housing prices were absolutely insane 2001 after the run they had from 1997. Back then I would have bet a million dollars (assuming I could borrow that much), that prices were at a peek. I am not saying this time is difference, but I do remember running the same type of analysis and coming up with fair values far below markets when using rents.
Is it possible that rents are a lagging indicator? I would assume they are. Any thoughts anyone?
That is a pretty sad statistics. IT IS NOMINAL? My God. Are you telling me that the average working stiff out there labors his whole life just to break even with inflation?
Quoting from the Princess Bride, “That may be the worst thing I have ever heard.”
A lowering of our interest rates will depress the value of the dollar. I don’t know if you have ever traded currencies, but they tend to move in long-term trends based primarily on interest rate policies of the central banks. The British pound is so strong right now because they started raising interest rates over there a couple of years ago (to pop their real estate bubble believe it or not).
It works that way because investors chase returns. Right now, you can get 8% in New Zealand, so everyone is trading in their currency for New Zealand’s currency to get the 8%. The Yen is extremely undervalued right now because Japan has had its interest rate set at 1/2% for a long time.
If the FED lowers interest rates, the value of the dollar will decline. This will cause all imported goods to become more expensive. Inflation is inevitable.
The scenario you describe is certainly possible. For reasons I described in another post on this thread, I don’t think credit will become looser any time soon. There is too much risk.
If I am right, the FED will not lower rates on September 18.
Awgee I don’t have time for any pleasure reading, but I will faithfully add to my ever growing list of books. Thanks.
IR, I can’t argue on too many points. Prices down, ownership rates down, credit spreads wider, 20% down payment back-in-style, long run HPA tied to real wage growth.
On the Fed we disagree, the degree of the crash, and perhaps on the propensity of the market to start sopping up prime jumbo paper in the near term.
I am just concerned that we are missing something. Daniel Goleman (the emotional intelligence guy), came up with the decision making process where debate is eliminated. Debate is a time waster. Instead everyone gets on one side of the topic and give all the pros. Then they get on the other side of the debate and give all the cons. Both list are to be mutually eclusive and collectively encompassing (though in our case I think Fed would have to go on both sides of the ledger). Then everyone reviews both lists and votes in secret. That’s it.
The idea is it helps people by preventing them from anchoring and digging in the heels, and pushing them to find the “missing pieces” from the counter-arguments.
Something to consider.
Please see
http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2007/Global+Perspectives+August+2007.htm
Did anyone read or hear of this today. I believe it went like this. The govt. is considering funding $100 billions to have banks lower rates for homeowners. The rationale behind this is. Although, it might seems like a big amount. But if it allows the housing market to worsen. The cost to the economy will be much more than $100 billions.
I think we had a shaky start, but this turned into a good discussion. In a good debate, we first must find areas of agreement then proceed to explore areas where we disagree. Fortunately, we agree on the facts. Where we disagree, it is all conjecture about the future.
I have seen several new people come through this blog. Many come here with the more “reasoned and balanced” view that prices will correct, but not as much as we bears believe. Many become more bearish when they start to run the numbers.
I have never been a bear in my life prior to this bubble. Extremists are generally not very happy people, and they are most often wrong. When I examine these conditions, I just can’t put together a scenario where this isn’t a complete disaster. These conditions have made me a bear, and I think the 40% decline scenario is perhaps conservative. If this market over corrects and overshoots fundamentals — which often happens when a bubble deflates — it could be an even bigger decline.
https://www.irvinehousingblog.com/2007/04/02/how-bad-could-bad-get/
You should check out our forums. We had some discussion on that article there.
Have anyone read of heard of this today? That the govt. is proposing $100 billions for banks to lower rates for borrowers. The reason for this is if the housing crisis worsen. The negative impact to the economy would be more than just $100 billions.
Wouldn’t that fall under the category of fraud?
I was reading in this week’s economist that a lot of money is sitting on the sidelines right now due to the fact that they don’t trust the ratings. The vultures will eventually make a killing in this fiasco.
I doubt we’ll see another rate cut (although I wouldn’t bet my life on it) unless we start sliding into depression. IMO the fed’s responsibility starts at that poin, and not before; keeping damage control over a recession, but not necessarily preventing it. I think you’re right that the fed won’t change their mandate drastically just because greenspan is gone.
I agree that the vultures will make a killing in all of this. I wish I had more money to throw around.
Ack. I need to proofread before pressing Add comment.
The trick to the walking away part is to rent a new place BEFORE forclosing and making sure you have enough credit cards to hold you over 🙂
IR – Are you a bettin’ man? I haven’t checked myself, but I heard that the futures market is pricing a 100% chance of a 25 point cut. And a 50 cut ain’t doin’ too bad either.
Everyone keeps saying how there is so much money sitting on the sidelines. I dunno. I can’t help wonder if maybe there is no money sitting on the sidelines, but rather there are a whole lotta financial institutions which have been borrowing for a long time and they are not now borrowing. There is a huge diff between actual cash and a line of credit.
“I can spend money faster than Imelda Marcos [when the price is right]” – Warren Buffett quoted in the Economist.
LOL!
No, I don’t think IR is saying that. Remember, every year, some experienced, higher-paid folks retire and newer folks graduate college (or HS or whatever) and enter the job market at lower rates. So while individual wages will trend higher than 3%, median wages tend to increase at the 3% rate. Also, there are periods of large-scale layoffs which have a tendency to “reset” the wage plot for many people.
This is off topic, but I have long laughed at the American education system. People complain about class size, not enough funds, etc… There, class sizes are at least double what you would expect here, they actually have to pay to go to school (even though they are public), parents whip there children for not doing good in school, and parents further reaffirm the values of education away from school on a daily basis. High-schooler’s have homeworks similar to university level work. A sizable amount of kids have tutoring sessions well into the night (they have not even begun to do their homeworks yet) while their parents toil in work to pay for it. You take a national exam to be placed in appropriate junior, high, and universities. Do you even know how competitive it is in the East? You may think that you are happy to see your kids scores above state sanctioned tests. However, in the global economy (more so in the future) we are in, they are laughing at our education system. If not for affirmative action policies you would see many more unqualified people pushed out of good universities here in the states. If you are not qualified to go to a good school you don’t get admitted, period. I would go as far to say that the values that Asians have brought with them have made it far more competitive to many average and good school districts. So, good school districts always command a higher premium to Asian home buyers. I am Asian, yet, I would not pay the current premiums in Irvine or SoCal for that matter. I just spend more time tutoring my kids. I have encountered many individuals at the checkout line to count the pennies, nickels, quarters, to add up to 46 cents only to give me give me back more than I owed. So, this subprime mess is not surprising to me when quite a few college level kids still have to take entry level algebra courses. Way to go, American education system. If you want to counter my claims, try putting your kids through a school in the East.
CapitalismWorks: I don’t think that’s a good idea at all. President Bush shouldn’t have to deal with some anti-American home hater like this coward. I bet the traitor doesn’t even have a yellow ribbon his car. I’ve got four on my hummer. Back, two sides and the roof. And a custom gold W08 emblem on the grill. You can’t support the troops much more than that! Thank God for my HELOC or I wouldn’t have been able to afford this setup. And thank God I got this setup to sleep in since the bank foreclosed on my home and I accidentally drove the RV into the Gulf while trying to sober up. Well, I’ve got to go frog gigging tonight if I expect to eat tomorrow. Good night.
Hehe. That made me laugh as well.
Another quote by the man,
“In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to ‘model’ rather than to ‘market'” – Warren Buffett, Fortune, 8/16/07
CapitialismWorks, regarding housing:
You bring up a lot of convoluted points. Hedge against inflation is valid. Yes, you pay a premium for it. Almost no one thinks “hedge”, they simply think, “I’ll lock in my monthly payment and never have to worry about a landlord increasing rent again.” You only get this security with a fixed rate mortgage. If rates go down then refinance. If they go up then all the better for you. Maybe overall inflation is flat, but if rates move up you would have inflation in your mortgage if you were in a variable. Also, you’ve locked in your home price so you don’t have to worry about that provided you could afford it in the first place.
Puts, calls, hedges, options, futures, pork bellies… whatever labels you want to throw out. All these things are already built into the price to income ratio I mentioned earlier in this thread. All these things are already built into pretty much all the projections on this blog. There is nothing earth shatteringly new to the housing industry that people now need to price in. The same fundamentals that were there in ’98 are here in ’07. Nothing new at all… except… irresponsible lending. Well, now that is gone.
This is all very simple. It is not complicated like you are trying to make it sound. If you want to figure out the theoretical “premium” for an inflation hedge I think that is a wonderful hobby. Not sure what practical purpose it would serve, but it is interesting.
Offended? No, just tired of B.S. Complete disaster? No, most people will be unaffected by the bubble deflating. People that got in during the bubble with a variable or any loan where they can’t afford the payments will have a personal disaster. Actually, that happens outside a bubble all the time, it was just so prevalent in recent years that it drove this bubble. Prices will decline dramatically.
If this thing is accurate:
http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html
It will be about a 45% decline nationally (from near peak) in adjusted dollars. Orange County will be worse as will most metropolitan areas. What the actual amount on the for sale sign will be will depend on the year the bubble hits bottom. I’m not going to try to take a guess on that, but I don’t think IrvineRenter’s numbers are far off up to 2010.
Personally, I’m not targeting the bottom. I’m waiting until my mortgage payments will be reasonable. I expect to initially lose value on my purchase. This would be my premium to move up to a nicer place earlier. Quality of life is my focus. That said, I won’t go in if I think that decline in value will be severe and prolonged.
Regarding Iraq:
What should we have done? Not gone into Iraq. They were not a threat, and even if we pretend they were, we already had weapons inspectors in Iraq which stopped the threat. We should have stayed focused on Afghanistan and put pressure on the Saudis to do something about their radicals. There were no Iraqi’s on the hijacked planes. There were plenty of Saudis on those planes and one real bastard Saudi in Afghanistan. What happened to him? I forgot his name. That’s okay. Everybody else in this administration did too.
What should we do now? Leave. We have no credibility and at best we can only prolong a bad situation. I think it is reasonable to guard the borders to keep the civil war from spilling into other countries, but other than that we need to get out.
Kirk, nice site.
Whip your kids because they didn’t get the A++?
Yell at your kid because she didn’t get an overperfect 105%?
Nuts!
Yep… I’ve seen/heard about that. My kids have told me that some their chinese schoolmates suffer that crap.
And then there were the two mornings at TR Elementary when I observed a chinese father yell at his kids because of some homework ( I found that part later from my kids).
Hell, at home we laugh about Chinese parents and their poor kids. Sometimes. Mostly we feel pain for the kids.
If I had been the principal, I would have called the cops on those two men and have taken the kids away from them.
One of my kids in on excellent auto pilot -most of the time. The other one has proven to be a challenge but things are getting better.
Yelling and whipping kids to perform is NOT the answer (at least not all the time). Building up their self esteem, making them comfortable and providing a nurturing environment is the ticket. And that is more expensive in time and money than just yelling at them….
I do not want to live in a world driven by a lack of love and a crass chase for commercial gains. I don’t want my kids to be stuck in such a situation either.
This is one of the reasons why many people shy from schools and neighborhoods that are heavily tilted towards Chinese immigrants.
I will check on that. I don’t recall seeing any fees except for a 70 dollar up front set up fee.
But I don’t see the 13th -extra- payment. Bi monthly payments just mean 24 payments per month. It’s not biweekly.
Err…. 24 payments per YEAR.
If the government gave ME and a ten thousand others, TEN MILLIONS each, it would help the economy better.
Let’s see…
My wife would get fake tits.
I’d get matching Hummers and an SL600.
The kids would go shopping to Fashion Island.
We’d buy a McMansion on Newport Coast (or TRidge…. I’m sure Hannuh Reddy would be happy).
I’d invest in two high rise condos in Miami and buy a condo at Trump’s Tower in Las Vegas.
I’d invest a million in CMOs from American Home Mortgage.
Heck, in no time at all the economy would get going and we’d all be back in a bull market.
Sorry, I thought I read bi-weekly.
There should be noo net advantage of a bi-monthly payment assuming the regular monthly payment is simply split in two.
I guess they figure the interest get paid earlier. The write up was quite clear and the savings obvious.
I imagine that since we’re at 6 and 1/8 they want us to prepay ASAP. They figure rates will be higher in the future and they’d rather get their money back faster.
The problem with US schools is there are focused on minimums. There funding and efforts go primarily to bringing lowest quintile to a minimum at the expense of the top four quintiles.
Time Magazine actually talks a bit about the problem in this weeks cover story.
http://www.time.com/time/magazine/article/0,9171,1653653,00.html
At my kids elementary school (Alderwood) if they don’t do their homework, they get benched (no recess). They can also get incomplete slips and then get no fun time on Friday. They also get lots and lots of homework.
There are also awards (ex. Principal Golden pencils for the younger grades, academic certificates for the older grades) and only those that excel get them (ie. it’s not a ceremony where everyone gets one).
And I say, good for them. The kids seem focused on doing well in school for status (for example, a few girls were jealous of/a bit catty towards my daughter for doing well on the district math test and getting into prealgebra), which is great, it’s much better than doing the status thing based on outward displays of weath like clothes.
I hear Rancho San Joaquin and University High are a bit like that too – highly competative academically.
I’m all for building up kids self-esteem and providing a nuturing environment. But high expectations are important as well.
To clarify – everyone gets lots of homework. The homework is not tied to behavior.
And to play devil’s advocate a bit:
If the kids that got yelled at for not doing or doing a sloppy job of their homework, learn that understanding what’s on a paper and doing a good job of it is important … that’s probably going to help them a whole lot in the future when they sit down with some bait and switch mortgage broker who pressures them to sign off on some 70 page document. They’re probably going to sit there and read the whole thing and refuse to sign until they understand the whole thing.
The world is never as kind to people as they parents were.
I do agree that there are certain houses that are indeed unappealing and I could say this property could have been better if there is some pool in the backyard with such price at the same time the lawn isn’t that big as well. Too many glass in the backyard as well which I wonder if its worth to compromised your privacy with that.