Monday, January 05, 2009

"An MSM Confession"

From the Sacramento Bee:

Sacramento-area real estate market befuddled the experts

Home Front spent time in the electronic library this week, looking at how experts misjudged the extent of this decline as the housing market began to wobble and shift in 2005 and 2006, even 2007. We aren't trying to pick on analysts who were then swimming in uncharted waters after a long, euphoric boom. The Bee's real estate coverage, too, had its overly sunny moments.
~~~
We feature a lot of real estate experts who misjudged the extent of the downturn - and note that our own coverage was sometimes overly rosy, too, as a result.
...
It had occurred to me a couple times as I researched today's column that there were early people saying we were going over a cliff with this housing boom. They were mostly bloggers and not mainstream "experts," predicting this was a disaster soon to unfold. Therefore, in the process that often leads to these kind of business stories, they seemed to have less weight than someone who sold houses for a living or financed them. (There's an MSM confession for you).

But many of these seers proved correct.
From the Sacramento Bee:
"One bright note is that the (housing) sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out," said Scott Anderson, senior economist at Wells Fargo & Co.

It's still too early to declare real estate's revival...But 2008 could also be seen as the year Sacramento-area real estate began to show signs of stabilizing, and the idea that housing might help establish a foundation for the economy here is something experts are starting to debate. Prices and inventory are down and sales are up, even as foreclosures continue. Mortgage rates have fallen to their lowest levels in at least 37 years. The correction has been enormously painful, but there are believers who contend Sacramento will be among the first U.S. markets to recover.
From the Sacramento Bee's Bob Shallit:
We anticipate the capital region will endure higher unemployment (perhaps hitting 10 percent), more hard times in housing, a grim market for commercial real estate and perhaps a bank failure or two...Builders and buyers will continue struggling in 2009, but by midyear we see home prices bottoming out, foreclosures dropping and sales picking up, spurred by declining interest rates.
From Rocklin & Roseville Today:
I believe we will start to see some stability in the Sacramento housing market. I am not suggesting that we don’t still have some downward pressure on prices but I think we will see, in some areas and in some price ranges, price stability and even some upward movement. I believe we will see buyer’s who took a wait and see posture in 2008 return to the market. At the same time, if we learned anything from our experiences in 2008, we must be mindful that there are likely to be some additional surprises along the way.
From Home Front:
[In 2008] Dunmore Homes went out of business. Then John Reynen of Reynen & Bardis Communities filed for personal bankruptcy protection. So did C.C. Meyers, owner of Winchester Country Club. And then so did Christo Bardis of R&B. I doubt ever in their wildest imaginings did they imagine it would all some day come to this...Crossing familiar names off my list of real estate industry sources as they disappeared into unemployment. Sacramento County's median price falling back below $200,000. (On the other hand I talked with a lot of happy new homeowners this year. That was the really cool side of the free-falling home prices).
From the Modesto Bee:
The housing slump will enter its fourth year in January, but Chad Costa sees reason for hope. The Modesto real estate agent said plenty of people will benefit from the reduced prices and mortgage rates. "I think what has to be identified here is that the affordability is back," said Costa, who specializes in selling property that has gone through foreclosure. "That's the upside of this, and you don't hear a lot about that."
From the Appeal Democrat:
A huge tide of home foreclosures rippled through the nation in 2008, and few communities were battered as badly as the Mid-Valley. Defaults left hundreds of houses from Yuba City to Linda to Wheatland — built and bought in anticipation of profiting from a decade of soaring real estate prices — empty as owners seduced by adjustable-rate mortgages were caught between suddenly higher payments and plunging values for their homes.
From the Sacramento Business Journal:
Sacramento on Monday announced it has laid off eight workers in the city’s development services department due to falling revenue.
From the Appeal Democrat:
About 70 workers at Kbi Norcal on Rancho Road in south Yuba County are slated to lose their jobs in the next few months, according to an announcement Monday from the lumber and wall panel plant’s parent company, Building Materials Holding Corporation. BMHC executives...have said they will shut down the Rancho Road plant some time during the first quarter of 2009.
From the Sacramento Business Journal:
Grubb & Ellis Co. on Monday released its 2009 global forecast that predicts a troublesome year for commercial real estate in the U.S., including Greater Sacramento. “Several forces contributed to the decrease in Sacramento’s investment market in 2008, primarily the unavailability of credit, and this will linger through the coming year,” said Robert Dean, executive vice president and managing director of Grubb & Ellis’ Sacramento office...“The depth and duration of the local residential recession has virtually assured retail’s struggle,” Dean added.
From the Wall Street Journal:
The commercial market "is going to be ugly for the next 12 to 24 months," said Michael Restuccia, chairman of the San Joaquin County (Calif.) Employees' Retirement Association. "Not just bad, but ugly."
From the Sacramento Bee:
Commercial real estate is in trouble...Brokers such as [Boyd] Cahill are suffering along with their clients. For a while, they were uneasily holding ground while colleagues in residential real estate were seeing their livelihoods melt away as home sales plummeted. Then the bad economy got drastically worse and the commercial business crashed
...
As "the toughest year" of his career closes, Cahill said the first half of 2009 doesn't look much better. He thinks more retailers will file for bankruptcy protection, adding to vacancies and making it even more competitive to land the few tenants looking for space. The shakeout will strike commercial brokerage firms, too, Cahill said. His company just closed its Sacramento office and pulled staff to Roseville.
From the Stockton Record:
Foreclosures continue to dominate the existing home-sales market, making up nearly nine out of 10 purchases...[M]edian home selling prices in the city [of Stockton] dropped as low as $130,000 for November - down more than half from $265,000 the previous November.

Lela Nelson of Lela Nelson Realty said December business was hopping as more first-time buyers and investors jumped into the market as ever-dropping prices combined with historically low mortgage rates. In more than 30 years in the real estate business, she said, she has never seen a better combination of low prices and interest rates for buyers.
From the Stockton Record:
Community Bank of San Joaquin has become only the second locally based bank during the current economic downdraft to receive a warning from state and federal regulators.
...
[P]roblem loans were made before 2007 to builders. In other words, they were made to exactly the kind of borrowers you would expect to be doing business with such a bank, and they were seeking loans when business, especially real estate, was booming...In fairness, no one saw this coming, certainly not the kind of downdraft we've experienced. And with San Joaquin County being the nation's foreclosure capital, the real estate market collapsed here with unprecedented speed and severity.
From the New York Times:
[T]he ultimate symbol of suburban success has become one more reminder of the economic meltdown, with builders going under, pools going to seed and skaters finding a surplus of deserted pools in which to perfect their acrobatic aerials. In these boom times for skaters, Mr. Peacock travels with a gas-powered pump, five-gallon buckets, shovels and a push broom, risking trespassing charges in the pursuit of emptying forlorn pools and turning them into de facto skate parks.
...
California officials estimate that there are tens of thousands of abandoned pools in the state, with as many as 5,000 in places like Sacramento County, where a building boom in the capital’s suburbs has gone bust.

62 comments:

Diggin Deeper said...

The bloggers called it right and called it early...let's see if they can call the bottom with as much accuracy...

Sold in '05 said...

So we're in a recession that is near Great Depression levels, credit is extremely tight, unemployment is soaring, the state government is projecting budget deficits approaching 25% of total expenditures with debt defaults on the horizon, pay is being cut for workers at major companies across the country, business from small to giant are lining up at the bankruptcy courts with cities from coast to coast seriously thinking of getting in line as well, commercial real estate's massive bubble is now exploding, Europe, China, Japan, Russia, India, Brazil and most every other country are experiencing rapid economic deterioration, outright recession and civil unrest... but this is the year that the magical Sacramento housing market will bottom and maybe even go up.

Hurray for Sacramento real estate investors!

Until these incessant cheerleaders are all beat down, we can not be near a recovery.

-CD

Cow_tipping said...

"One bright note is that the (housing) sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out," said Scott Anderson, senior economist at Wells Fargo & Co.

Oh yea, bottom, yes bottom for the whole economy.
The next order of business, I call an end to world hunger and the start of world peace. Done. OK. Good.
How about we then end deadly diseases, snake bites and heck, insect bites, now without the itching sensation. Booya, done.
Cool.
Cow_tipping.

Jacob said...

As bad as 08 was I think 09 will be worse. I don't see how anyone can take these shills seriously, they didn't see the bubble till years after it popped but now they see bottoms every week...

Interest rate are low now but guess what, you don't qualify to buy a cheeseburger now w/o 20% down.

Still lots of "investors" in line to lose money. There will be more job losses in state and private companies this year.

So let's see if a bottom is around the corner:

Prices are still falling.
Foreclosures are still rising.
Few people can get credit anyway.
More job losses.

Oh, I think I understand what they mean. Price declines will accellerate and home prices will go to $0 within the next few months.

I think that is a more likely scenario then prices reaching a bottom > $0 this year.

Deflationary Jane said...

Fixed asset deflation can be glacially slow as we've seen from 2006 to 2008. My bottom call is 3Q2010 to 2Q2011 but my scary voice says that's too soon. Even if I'm calling too early, the bottom will be like my great grandmother's chest: longggg and flat.

But to get to that bottom, following things need to happen:

1. The current unemployment wave that we are now experiencing has to be felt across the board. J6P, if he still has his job, is now frightened. This wasn't wasn't suppose to happen to him or his friends and he now having his Shakabuku. JoeCheapChardony is next. JCC's spider sense is already twiching but he's waiting for that black swan event to magically appear to save him.

2. People need to blow through their reserves hanging on including liquidating all their non-essential crap they bought in the last 5 years.

3. and lastly, 1 and 2 lead to foreclosure and those take time.

The more I think about it, the more convinced I am that 3Q2010 is too early but what the gov does is still up in the air so that's why I'm calling a spread of 6 mo.

Folks thinking that an Obama economic shock will turn the ship around within 6 mo of his taking office are in for a very big surprise. A downturn like this isn't like trying to turn the Titanic; it's like trying to turn a fleet of Titanics at the same time with intermittant radio signal and noone onboard knows how to read semaphore or morse code anymore.

patient renter said...

they [bloggers] seemed to have less weight than someone who sold houses for a living or financed them

But why? Someone who sells or finances homes for a living is no more an economist than an anonymous blogger. Bloggers are often independant, much like journalists (are supposed to be), whereas someone who sells or finances homes is obviously not.

Sold In '05 - Thanks for the reality check :)

patient renter said...

Haha, nice analogy DJ.

but what the gov does is still up in the air so that's why I'm calling a spread of 6 mo.

Despite the impending resets, unemployment, and everything else, I think this is the most important variable yet to play out - government intervention. Whatever they do, it's not going to make recovery faster, it's going to delay it.

So as nice as those interest rates are, I feel okay staying in my bunker for the time being and letting things play out a bit more.

RV6Flyer said...
This comment has been removed by the author.
RV6Flyer said...

DJ
Interesting to look at the CME Housing Futures. Traders are betting on a Nov 2009 bottom with two years of flat prices after that. Same goes for LA and SF--the only two California contracts. Interesting are the NYC contracts. They are pointing to a 2014 bottom for the big apple with a very ugly path to that point.

"they didn't see the bubble till years after it popped"

Just like the industry on the way up, I am questioning if some bubble bloggers are losing objectivity. It can become too easy to be be caught up in being right and not recognize the subtle, yet fundamental, shifts.

AND NO, I am not calling a bottom, so don't give me that BS.

sacramentia said...

I wonder about the loss of objectivity too. I haven't heard anyone say anything good about real estate in months. The whole conversation seems too one-sided to me.

And some bubble bloggers are starting to buy while acknowledging that prices will continue to fall. If everyone follows this logic it won't be true. Watch what they do, not what they say.

this quote fits here too:
"AND NO, I am not calling a bottom, so don't give me that BS."

Diggin Deeper said...

"Just like the industry on the way up, I am questioning if some bubble bloggers are losing objectivity. It can become too easy to be be caught up in being right and not recognize the subtle, yet fundamental, shifts."

I think that's a possibility although those shifts lately have been rather abrupt....and no one knows if all this priming by the government will do anything...using history as a guide, PR's thought is probably a good bet.

I doubt we'll know when a bottom is in...and timing it will be next to impossible...Hell it took a year before some renowned agency claimed we'd been in recession since the end of '07. Most of us sensed it but no one wanted to officially declare it until there was no reasons not to...same with this RE market...in some areas, at some price levels, we might already be at the bottom, while other price levels, in areas appear to have plenty to give.

smf said...

"And some bubble bloggers are starting to buy while acknowledging that prices will continue to fall."

Yeah, and?

We bought a place that we could live in for decades, and are not about to waste money, as some already have, buying 'investment' properties.

Still, no one seems to fully acknowledge the huge amount of housing overhang that is left. And that excess will not go away anytime soon, as there is not enough people in this country available to buy them all. Period.

You all have to recall that population #s are also partly derived from the # of homes built, and I will bet that in 2010, downward revisions will be made.

Diggin Deeper said...

No, I'm not calling a bottom either. There are too many variables...too many things have to go right, too many unknowns that will have an affect...but just like the "professionals" who have consistently gotten it wrong, it's fun to wild ass guess.

Deflationary Jane said...

from the FOMC meeting minutes:
'All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, ..... the unemployment rate was likely to rise significantly into 2010 .... The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.'

Yea, I'd call a bottom on that >; )

Diggin Deeper said...

"We bought a place that we could live in for decades, and are not about to waste money, as some already have, buying 'investment' properties."

Doesn't it really boil down to individual circumstance? Some will accept the fact that their home might lose value, others won't consider any price declines when factoring risk...neither one is wrong, the circumstances are different.

smf...by now your home is probably worth less then when you bought it...but you didn't buy it for investment, so the decline, I would think, really doesn't factor into your thinking. Would you feel the same way if it dropped another $100-150K?

Diggin Deeper said...

DJ...

I beg to differ...not with your predictions as they're as good as any...

It's just that

The FOMC was the very group of yahoos that told us last year that subprime was contained, the economy was growing, and that our banking system was in good shape.

The times they've been right measured against the times they've been wrong weighs heavy to one side.

Deflationary Jane said...

well you have a point but I find they tend to be too optimistic rather then contrarian.

patient renter said...

I am questioning if some bubble bloggers are losing objectivity.

It's a fair point to raise, but you have to ask from what are we trying to remain objective? We're not tied to the industry. We don't gain any personal benefit from a price bottom 2 years from now as opposed to 2 months from now. Most of us are simply interested in buying a house to live in, in whatever timeframe makes the most financial sense.

So I don't think staying objective is such a challenge for us.

in some areas, at some price levels, we might already be at the bottom, while other price levels, in areas appear to have plenty to give.

That's an important point. From here on out, everything might depend too much on one's personal situation to make any generalizations about whether it's a good time to buy. We've seen that in some areas, prices have already collapsed while in other areas declines are still under way. Buying sure does make sense for some people, and I envy the rates they're getting :) As for myself, the areas I'm interested in don't seem to have bottomed, and my situation is such that I'm perfectly comfortable waiting for the bottom, whenever that is.

patient renter said...

I should add, I'll soon be signing another 1 year lease on my current place, which is to say, I'm not ready to buy, and the areas I'm interested in aren't ready to be bought. Not yet.

Diggin Deeper said...

My greatest fear is that rest of the developing world could finance their own economic bailout programs with the treasury bonds they presently hold. All they have to do is sell them back to us, and then continue to build their cities and countries with proceeds at no cost to their citizenry. This is one of the unknowns that could dramatically affect our RE market here. I just read that in '09 we will refinance approximately 40% of all US debt through Treasury bond issues. That's one helluva lot of debt that's cut up into $1000 denominations. Somebody had better be on the other end of those sales or interest rates will take off and put pressure on RE prices here.

I also worry that Obama won't be in office long before he's tested internationally, and if that happens, oil will take off again. We have a middle east confict and Russia decides to quit shipping nat gas to eastern europe in the middle of winter...The price of oil which was $33 a few weeks ago is now pushing $50 or 50% higher today. If there was ample supply vs weakening demand, that shouldn't happen... so count your blessings with every $25 fill-up...as quickly as it fell, it can rise for all the right reasons. And that takes away a benefit and turns it into a burden when considering housing affordability.

Too many variables right now to get complacent...

Jacob said...

I am questioning if some bubble bloggers are losing objectivity.


Well people in the industry as well as the MSM benefit from painting a rosy picture of housing. More homes sell, prices go up, realtors and brokers get more $$, MSM makes more money from ad buys from NAR etc.

Most people blogging are just talking about their personnal decision to buy or wait.

No one would be happier than me if prices bottomed tomorrow, it would mean that I could feel comfortable buying. I am not willing to buy a home and have it go down $100k or more in a few years. I have no pressing need to buy right now except that I want to, and I can force myself to be patient.

Interest rates are low now, but what happens when you try and sell in 5 years and rates are 8%-10%? That doen't help you get more $$ from the sale because it means people can afford less.

As for hitting a bottom this year, we will have to wait and see. For 06 and 07 price per ft2 went up and spring and then started back down. In 08 the price didn't go up and just flattened.

http://1.bp.blogspot.com/_oqQI_LytgCE/SFg6S29nifI/AAAAAAAAAto/saUkSrxtWW0/s1600-h/SpringLedge.JPG

If in 09 we see the price continue down through spring then it might be a sign that the bottom is coming within 12-18 months or so.

On the way up, sales didn't go down for the winter in 05 which was a sign that something was out of whack. If prices continue down even during the spring bounce time I think it signals that capitulation has actually started.

Sold in '05 said...

PR-

"I should add, I'll soon be signing another 1 year lease on my current place..."

Will your landlord go month to month? We've been M-M for two years now and no rent hikes since Oct 05. It's made us very flexible in our home shopping. Even if he/she wants another year, are you going to try to negotiate a rent reduction? Seems like landlords would be under pressure to keep good steady tenants.

-CD

Husmanen said...

I was much less objective when I began this adventure into buying a home. I didn’t question things like:

* Renting is throwing away money
* California is different (no more land, weather, etc)
* The monthly payment is all you need to worry about (interest only reference)
* You can always refi
* RE always goes up
* If things get tough you can just sell (quick and easy)
* It is different this time
* Average sale price

Now things are different, I have more information and I am much more aware of what makes a market. I let the data speak for itself.

If the market bottoms today and stays flat, I will have to wait in my rental since I pay about 65% of the costs compared to owning the home (PITI, plus HOAs, MelloRoos and Maintenance). Not a small chunk of change, which we currently save … every month.

The data and the money in the bank makes me much more objective, not less.

Cmyst said...

Being forced out of the market for at least another 2 years has given me a different perspective. True, it's nerve-wracking to think about another rental foreclosure. But the R/O ratio is still way in the "renting" column. Not buying means more disposable income for weekend trips, books, etc. I keep thinking of the little receptionist that worked with me years ago, who was nearing retirement and still renting -- but she'd gone from renting a house to renting a small one bedroom Senior apartment. And she had traveled to Europe and Asia several times since her kids grew up and moved out. One could say her travels had kept her from home ownership, but she was happier than if home ownership had kept her from her travels.
I really do think it's the fundamentals that will signal us. They're still not right. Still much cheaper to rent. Median price is still much higher than 3 x median income for nicer areas, the median neighborhood income.
And the HGTV shows are still out of touch with reality.

Cow_tipping said...

HGTV still being on the air = houses are as valuable as cocaine. Unless HGTV gets bought by telemundo and airs "Illegal alien house hunt" complete with the "Immigracion" ads, I aint buying nothing.
BTW why is interest rate increase bad for house prices. I'd never think of buying before 10%, because a doubling of interest rates will almost half house prices.
Cool.
Cow_tipping.

Deflationary Jane said...

CT,

That's exactly why they say that - to be able to squeeze as much as possible out of their resale.

For myself, I could care less as the extra 1k payment a month that I'd be putting toward principle goes much father the cheaper the initial purchase is. It's kind of a "no duh" but most people don't think of it that way.

Diggin Deeper said...

Private job losses mount in December

http://news.yahoo.com/s/nm/20090107/bs_nm/us_usa_economy_10

"U.S. private employers shed 693,000 jobs in December, up sharply from the revised 476,000 jobs lost in November and far more than economists estimated, a report by ADP Employer Services said on Wednesday.

Separate data also showed planned layoffs at U.S. firms eased in December from the previous month's seven-year high but were up an astounding 275 percent annually as the year-old recession cut a huge swathe of destruction through job market."

Keep in mind the ADP report is notorious for being off by as much as 50% in either direction. But, if true, Obama could lose his 2-3 million jobs effort over a six month period of time....

As far as real estate goes, if you don't have a job, you don't care about interest rates or housing prices...You're one of 1-2million who are now in survival mode.

SacramentoCrash said...

Won't bottom until 2012.

andnee said...

What I want to know is where HGTV keeps finding houses on MY HOUSE IS WORTH WHAT? that were bought in 2005 and have increased in value. Because they always seem to have those on the show.

They need to have actual appraisers do the pricing and not some on Crack real estate agent who is trying to get the listing.

Jacob said...

On "My House is Worth What" I noticed a while back that they were going further back. I see several with homes bought in 2002 or in the 90s even.

Then they should $100k increase. But given the amount of time, it isn't as good as it is made to sound.

There are still some homes bought in 05 that show a "profit". But that is just a guess, they dont show comps, they dont add in any fees that would eat away at the profit. And they don't say, well after we get no offers on this imaginary price we will start dropping it by 5%...

As for interest rates, I would prefer higher rates case it will lower the price of the house and there will be a chance to refinance at a better rate later on. At 4%-5% there is little chance to refinance later at 3% and the prices are higher to take advantage of the lower rate.

But I am starting to see some nice homes in Roseville / Rocklin in the mid to low 300s. Homes you couldn't touch for less than 500-600 a few years ago. So we are getting there, slowly but surely.

Diggin Deeper said...

"But I am starting to see some nice homes in Roseville / Rocklin in the mid to low 300s. Homes you couldn't touch for less than 500-600 a few years ago. So we are getting there, slowly but surely."

This is truly a highly segmented market...from poverty homes to the semi opulent...with many price points in between.

With a good portion of the '08 sales occurring in the $100-250K range and predominantly foreclosures, a higher sales rate, at a higher price point, will tend to move the area's median price higher...that doesn't relieve the market from it's overall troubles. It just skews those numbers and makes it look like a bottom is in...I can only imagine all the RE pundits crowing if we do see this happen...

Buying Time said...

The problem I see with waiting for high interest rates, and lower prices to compentate....is that, as we all know very well, it takes a long long time for home prices to adjust downward (they are very sticky).

Of course, right now we have momentum in our favor ....so it could happen sooner than later....but there comes a point (at least for us), where waiting another 4 or so years just wasn't worth it. So instead we will be paying more principle and giving up the additional tax deduction that goes along with a higher rate.

Full disclosure, I am under contract, with a nice low fixed rate.

Cow_tipping said...

You can negotiate the interest at any time in the future too, its called re-fi. You buy when interest is 15%. You pay 100K for a house that was 300K when Interest rates were 5%. 3 years later when interest rates drop to 5% again you could refi and lock in 5%. You could also sell your house for 300 and rent. Wish I had done either, but I bought for 150K when interest was 5% cos I am in what I can only term as "perpetually depressed market".
Cool.
Cow_tipping.

RV6Flyer said...

Check out this spam I got in my inbox today:

"I just got the news that Wamu is ready to loosen the purse strings and is allowing principle balance reductions.

I also just got the word that GMAC has reduced the interest down to 1% on 4 of our clients loans for 5 years.

This is awesome!!!

Have a great week and chat with ya soon

Kev

Kevin McGill
President
United Mortgage Modifiers of America
530-676-0982
www.ummaa.vpweb.com"

Buying Time said...

CT - I'm not arguing with the premise. Lower home price due to higher interest rate is much preferred to higher price and lower rate...all things equal (since you can refinance to a lower rate, and are taxed on a lower principle balance).

However you have to be willing to wait for prices to adjust to the rates. If I had to guess, rates will stay low for a while. This will allow all those with toxic loan products to refi (if they have enough equity). After that rates will inch up as the economy recovers (say a year or two from now)....increasing rates will keep home prices flat for a good long while (price appreciation would be counterbalanced by increasing rates).

Diggin Deeper said...

Keep in mind that rates have been pushed to historic lows...arificially manipulated for reasons Buying Time gives. Its akin to price controls. That doesn't mean rates will just tiptoe their way up to an equilibrium level at some point. That would be the ideal situation under normal conditions. There's pressure building and the longer the manipulation of rates is employed, the more violent the correction will be on the other side...imo it's no different than what we've experienced in the RE market or equities. You get a parabolic move in one direction, expect a parabolic move in the other...how long it takes will depend on how long the market continues to play along...no one knows. The only market that has not been crushed by this downturn, is the bond market... and it's a bigger bubble than the RE and equities markets combined.

anon1137 said...

"You buy when interest is 15%. You pay 100K for a house that was 300K when Interest rates were 5%. 3 years later when interest rates drop to 5% again you could refi and lock in 5%."

This sounds a lot like the pitch that "mortgage strategists" gave to subprime borrowers. Of course, your house appreciates in value in 2 years and then you refi, simple as that. Ka-ching! With the power of leverage, no one needs to work for a living!! We're all rich!!!

RV6Flyer said...

Jacob, Cow_tipping

Lets run some numbers:

I buy a house today for $200,000 and get a 30 year loan at 5%

You buy a house in a couple of years for $150,000--a 25% decline from today's price--with a 30 year 10% loan.

My payment is $1073 per month. My total payments over 30 years are $386,500 and the total interest paid is $186,500.

Your payments will be $1316 per month. Your total payments will be $473,800 and total interest paid will be $323,800.

Are you still going to tell me that higher interest rates are better?

Yes, because you can simply refi in a few years at 5%. Now I am a betting man, and I bet the chances of seeing 5% rates in the next 30 years will be pretty slim. The average historical mortgage rate is something like 8%. You could be waiting a long time to refi at that lower rate, while I would be paying much less in interest during the same period.

Furthermore, during the last five inflationary periods when mortgage rates spiked, so did home prices. Your house is not a bond, it does not always fall in price as the yield goes up. It is an appreciating asset. Periods of increasing rates are usually accompanied by increasing salaries and economic growth--this does not make for falling home prices. Now next year could be different if we have stagflation, but I doubt it.

Sold in '05 said...

Speaking of interest rates.

Tonights Drudge Report has a red letter headline reading:

"China may balk at buying more US debt... Developing..."

If this headline comes to pass, mortgage rates will double or triple almost overnight and the Fed and Tresury will be helpless to do anything about it.

-CD

Sold in '05 said...

Stagflation?!

Not a chance in hell.

Stag-DEflation (Roubini's term) is more likely and the only thing more likely than that is just plain old depression style deflation.

-CD

Jacob said...

Don't forget about the down payment.

You buy for $200,000 now and put 20% down, or $40,000. Interest rate is 5%.

Mortgage $859
Total Payments $309,000
Total Interest $149,000

I buy in a couple years for $150,000 and put the same $40,000 down. Interest rate is 10%.

Mortgage $963
Total Payments $347,500
Total Interest $237,000

So it seems to come out in your favor by $104 a month, assuming that I had to pay that 10% for 30 years. But if we factor in property taxes of 1% then you would pay $2000 and I would pay $1500 for a savings of $42 a month. Now if we look at interest for the first year you would pay ~$8000 and I would pay ~$11000, I can deduct that extra $3000 (I assuming I am not in a phase out for AGI) and would save $840 Fed (28%) and $279 State (9.3%) for a savings of $93 a month, which then gives me the edge.

Now in my case I am saving money each month, so assuming I saved $20,000 over the next 2 years then the numbers would be:

Mortgage $790
Total Payments $284,000
Total Interest $194,000

But no one knows the future, so who can say what the rates will be. I just think that they can't stay at their historic lows forerver. And I would prefer the lowest price possible for the home, cause I can always pay off the loan early, or refinance if rates get better. If I overpay for the home I can't lower the principal (not counting bailouts or other such programs that generally are not available).

Once the rates go up to around 8% and foreclosures eventually start to decline then I can feel safer buying and not have to worry about a huge potential value drop.

But then the question is, how long do I wait? At some point the savings become minimal and the personnal value I would place on owning my own home will start to outweigh any potential further price declines. I am not quite at that point yet. Plus I don't necessarily want to buy just when a recession is in full force and I could be vulnerable to losing my job.

So I am thinking 2009 is out. Maybe 2010. There are a lot of job losses coming and many companies will close stores or go completely out of business.

I will also be watching the price per square foot declines this year to see if the yoy from 08 is less than 08 vs 07. 08 was pretty bad, so if that was the peak for declines then 09, 10, 11 those declines may still continue, but the amount will be less and less each month. If 09 is worth than 08 then I won't be buying anything except CDs.

Diggin Deeper said...

"You could be waiting a long time to refi at that lower rate, while I would be paying much less in interest during the same period."

RV6Flyer...Exactly! We have an entire generation of young real estate buyers working in industry right now that have never seen money get expensive in this country...the whole refi mantra of yesterday still applies which is a dangerous premise if you look back through rate history over the last 50 years or so. This isn't yesterday and the subtle shifts you mentioned above are upon us.

"If this headline comes to pass, mortgage rates will double or triple almost overnight and the Fed and Tresury will be helpless to do anything about it."

CD...that's a bigger problem than it appears but the outcome is certain regarding interest rates if it does happen. Some say it won't happen because you don't "bite the hands that feed you". On the other side, in times like these, countries turn inward and direct resources where they are needed most. When their ship is taking on water, the last thing they'll do is throw us a lifeline...when we have to finance our debt internally by issuing more debt on top of it...PR stated correctly the other day...like paying off one credit card with another.

It's official! The Congressional Budget Office projects a $1.2 Trillion deficit for FY '09. That's a lot bonds and a lot of buyers required to finance our lifestyle here....and the inauguration party hasn't even started...

paranoid renter said...

A lot of homes are starting to show up on MLS...inventories should be skyrocketing shortly.

RV6Flyer said...

"A lot of homes are starting to show up on MLS"

In my zip, 95819, there have been 13 new listings in the last 14 days, all but two are relistings (and at lower prices than last year). Not sure how much "new" inventory is out there.

patient renter said...

A few comments regarding the numbers scenarios presented up above.

While the difference on a 30 year loan is significant, how about a 20 year loan? The difference becomes pretty slim. Also Jacob was right to factor in property tax and loan interest savings. Those are important.

Furthermore, during the last five inflationary periods when mortgage rates spiked, so did home prices.

Not entirely.

During the 70's home prices spiked from 1976-1979 while rates went from around 9% to 12%. Subsequently as rates continued up to their 18% peak in 1981, home prices came crashing back down.

Periods of increasing rates are usually accompanied by increasing salaries and economic growth

Again, not always. In some of the scenarios mentioned here where the US has trouble financing their debt smack in the middle of a recession (or on the tail during recovery) rates could certainly shoot up while wages and economic growth are still flat.

Jacob said...

Not sure how much "new" inventory is out there.

All the flippers that bought last year and all the people that were waiting for spring to sell should pump up the inventory.

When prices keep falling as well as sales then the floodgates should open. Banks are still holding a lot of homes.

And if "investors" realize there is no quick flip anymore and stop buying, there goes 50%-75% of the total sales each month which could help us reach a bottom real quick.

Jacob said...

While the difference on a 30 year loan is significant, how about a 20 year loan?

Yea, I personally do not like 30 year loans. I can't stand that you pay more in interest than principal, that just bugs me.

If I do get a mortgage it would very likely be a 15y fixed. Or if I did get a 30y I would pay the 15y payment equivilent.

Jacob said...

I crunched the numbers on a 15y loan.

$200k with $40k down. 5% for 15 years.

Mortgage - $1265
Total - $228k
Interest - $68k

$150k with $40k down. 10% for 15 years.

Mortgage - $1182
Total - $213k
Interest - $103k

In this scenario I would pay less each month, but would still be paying more in interest so I would get a better deduction.

Over the life of the loan you would pay $15k more than I would, not counting the extra deductions that I would get.

This also assumes interest rates go to 10%, I think 8% is more likely. It also assumes that I could never refinance in the entire 15 years of the loan.

RV6Flyer said...

It also assumes the median home price will fall another 25%. Not sure where you are looking at buying, but that is a lot more downside that probably will not occur.

Jacob said...

Yea that's true, I was just using your numbers.

But even the housing cheerleaders are predicting a 10%-20% decline.

fortune magazine is predicting a 22% decline for Sac in 09.

I personnaly don't care if prices go down more or if they level off where they are, I just want them to level off somewhere.

More price declines are better for the purchase price but worse for the economy which will mean more job losses and more crime and those could negatively effect me.

So if we can find a bottom in 09 I will be happy. But I don't think it will happen, so we will see.

Cow_tipping said...

Jacob, Cow_tipping

Lets run some numbers:

I buy a house today for $200,000 and get a 30 year loan at 5%

You buy a house in a couple of years for $150,000--a 25% decline from today's price--with a 30 year 10% loan.

My payment is $1073 per month. My total payments over 30 years are $386,500 and the total interest paid is $186,500.

Your payments will be $1316 per month. Your total payments will be $473,800 and total interest paid will be $323,800.

Are you still going to tell me that higher interest rates are better?

You're assuming the house will be 150K, 25% is a big number ... only in your assumption. We already have houses that have dropped a clean 50%. where interest rates have dropped from 6 to 4% in the 05-09 time frame. I'd assume a 100K price with interest at 10% and I'd be closer to the reality I would argue.
Cool.
Cow_tipping.

Husmanen said...

An additional 25% decline from current levels in Folsom and EDH is well within the cards. The fundamentals haven't really hit this area yet.

There are pockets that will not experience this level, but the majority is still way out of line with fundamentals.

Husmanen said...

What would happen if you bought now Jan 2009 and compared that to a purchase in Jan 2011 (25% reduction)

and

both properties had to sell in January 2016?

* we can use the same numbers as the examples above.

Cow_tipping said...

Jacob - yea I hate 30yr loans too. The 15 actually also has .5% lower interest too. In fact the day I closed on my house 15 yr fixed interest was 5% but 30 yr fixed was at 5.75. That extra .75 is very crucial. The first 5 years I owned my house I also paid 200+ more per month, I was sorta paying what the rent will have been not what the note said. Of late property tax has ratcheted up and my income has dropped (to the tune of 20K) yes it has dropped, so ... there goes the theory of "income growth making houses saleable" I gotta call BS there, all our jobs have gone to India and china - I know I work for one of them. I am already their most $$ employee, but contractually they have to have a person sit at their desk daily. Anyway, A lot more to fall, 20% is a joke, I am certain there bottom is atleast 33% or more away from where we are now, and its close to 60-75% off the peak.
Land, labor and lumber also have crashed in prices, as has anyone who tried to build houses ... just drive around and look for the nice showrooms that built Manis or Hand crafted homes types. All gone.
Cool.
Cow_tipping.

Diggin Deeper said...

When it comes to rates and prices personal factors trump generalizations or specific parameter settings. They may count for you but they may not count for most others.

Most people look to 30 year fixed mortgages because they are the longest term readily available and the net result is a lower P&I per month. If the majority could afford a 10 year, 15 year or 20 year term, there'd be no need for the 30 year. If you're getting a 15 fixed mortgage at some point in time you're speaking for a minority of people that can. But it hardly speaks for most.

What really matters is the trend in both rates and prices. Imo, interest rates are low for the wrong reasons and housing prices are low for the right reasons.

History gives us periods of low interest rates followed by periods of higher rates, and in some cases, much higher rates. But today's rates are so low, in the face of fundamentals that are in direct opposition. At some point these fundamentals will rule the day.

All that is a given today is that abnormally low rates have met a 50% decline in housing prices in selected areas. Will we see a nice smooth balancing act between rates and prices when considering all the volatility we've seen over the last year...kind of doubtful from this end.

Husmanen said...

So at lunch I took some time to put a few theoretical numbers together using MS Excel based on the comments above.

House (A) sold 01Jan2009 for 200k with 40k down at 5% for 30yrs.
House (B) sold 01Jan2011 for 150k with 40k down at 10% for 30yrs.

* 01Jan2011 is bottom of housing price decline.
* After 01Jan2011 annual home price increases are 4%.
* Realtor fees are 6%.
* Both houses have to sell 01Jan2016.

Here are the results for each house respectively (rounded #s):

Hse LnAmt Intr Prnc LnAmt16
(A)$160k $53k $19.3k $141k
(B)$110k $54k $3.8k $106k

House$16 6% $16-6% $16-6%-LnAmt16
(A)$183k $-11k $172k $12k
(B)$183k $-11k $172k $62k

House Down $16-6%-LnAmt16-Down
(A) $40k $-28.5k
(B) $40k $ 21.5k

So, House (B), with the higher interest and lower price has a profit of $21.5k while house (A), lower interest rate and higher price, loses part of their down to the tune of $28.5k.

Maybe someone can QC my data, the assumptions are up for grabs.

* tax advantages with higher interest rates have not been included

Diggin Deeper said...

Husmanen with all due respect... with so many if'y fix points that have to line up in your analysis, changes to the bottoming date, appreciation rate, price decline, rate of inflation, interest rate, aging of the loan, unknown tax changes, or combinations thereof, really make those numbers vulnerable in a fluid market...with major errors that could occur on either side.

To project results, by adding in immoveable parameters, to create simple market generalizations, is a pretty tough stretch...If I could count on those dates and numbers to be correct, I wouldn't be buying real estate, I'd be at Vegas gaming table...

Husmanen said...

Diggin true, very true...

but each persons situation is different and the future holds different scenarios, many unknown at this time.

Putting a few out there and adjusting as time goes on gives you something to go after and generates some afterthought.

Buying Time said...

Husmanen....to be completely fair, you have to add in the rent that house owner B) will be paying for two years while they wait for the market to drop. That is a sunk cost....say $1,000 a month, for a total of 24k. When you add that in, so that both are starting from the same point in time the numbers are pretty close to a wash if you ask me.

Diggin Deeper said...

It's kind of like the rabbit and hare fairytale. The longer the term for the loan, the more irrelevent P&I becomes.

Just adding in normal inflation of 3-4% per year over the entire life of the loan will skew those numbers and without doing the calcs, I'd suspect that the low interest rate loan wins the race at some point.

Husmanen said...

BT - true about the rental cost

DD - yes the turtle wins in the end, actually before the end

patient renter said...

Without posting any more hypotheticals, I just wanted to point out that the e-loan rent/own calculator is very nice, and takes into account most of the real world variables. Give it a try if you haven't already (and be sure to set appreciation to some negative number):

http://www.eloan.com/s/rentvsown/input