Sunday, November 01, 2009

Sacramento Real Estate Market - November 2009 Water Cooler

Post off-topic links, observations, and stories about the Sacramento real estate market here. Please read the comment policy before posting.

97 comments:

Diggin Deeper said...

How will this affect our local small business community and the Sacramento real estate market?

CIT Bankrupts

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0140708520091101?pageNumber=1&virtualBrandChannel=10522

As expected CIT filed for bankruptcy Sunday evening. This will affect hundreds of thousands of small businesses that depend on CIT for short term financing, invoice factoring, and cashflow requirements. With small businesses generating between 60-70% of new jobs in this country, this bankruptcy will surely impact the economy and produce small business bankrupties, job losses, etc.

In its "emerging" form CIT is expected to be able to finance only 20% of what it used to finance.

Imho, this failure will affect our community and real estate in general.

paranoid renter said...

Definitely some kind of mini-boom going on. 8201 Sienna Loop is off the market in just few days.

RV6Flyer said...

CIT Bankruptcy

There are plenty of other local asset based lenders in the area who will be more than happy to take up the slack--such as my friends at http://www.assetcc.com/client.html

CIT's SBA loans were bordering on fraudulent. If every other bank in town turned you down, CIT would somehow put together a deal at ridiculous pricing that in no way matched the risk.

I really do not think this will have that great of an impact on our local economy. This, in my opinion, marks the start of the comeback for the local banks. With the super-regionals not lending and the CIT vacuum gone, community banks can now take on some risk and price it accordingly.

"In its "emerging" form CIT is expected to be able to finance only 20% of what it used to finance."

And that is all they should have been financing in the first place. I have no idea how CIT passed its reviews every year.

Deflationary Jane said...

PR,

I see this a lot. There are people making crazy offers on houses contingent on viewing, then the house falls out in either a matter of days or the house sits as contingent for 6 months and it comes back on the market once the better houses around it come down in price to mathch. This has been the cycle since last winter.

The good news is that if it's a HUD home, they take owner occupied offers over investors. I've seen it in the listing notes. There is something similar going on with the Macs too. I counsel patience but if you get caught up in the frenzy, you will unhappy later.

And if it seems all too depressing, it could be worse. I'm in OC right now. I really hate this place. It's turned into a total pit and I can't wait to get back to my trees, tule fog, grapevines and pheasant in the mornings.

Diggin Deeper said...

"This, in my opinion, marks the start of the comeback for the local banks. With the super-regionals not lending and the CIT vacuum gone, community banks can now take on some risk and price it accordingly."

I hope you're right.

What concerns me is that many of the locals, and local regionals, have a big stake in the CE market and there appears to be a race toward whether the general economy will stabilize in time to offset the non-performing CE assets sitting on their books...such a delicate balance that leaves little room for error.

If you go back an look at the bank failures for the year, the locals are "out failing" the bigger banks by a factor of 8 or 9 to 1. In bottom's up fashion, the bigger banks are circling above and picking off market share and deposit assets as the weaker banks fail.

Diggin Deeper said...

Here's another interesting set of figures from the Census Bureau News

http://www.census.gov/hhes/www/housing/hvs/qtr309/files/q309press.pdf

We basically have 18.8 million homes, out of 130.3 million, that are sitting vacant...or about 14% of all US homes. Those numbers break down as follows:

2.0 million empty homes for sale
4.6 million empty vacation homes
4.6 million empty and for rent

and my favorite

7.8 million "other empty homes" ????

How does the Census Bureau account for approximately 6% home vacancies that are not for sale, not for rent, and not for vacation?

husmanen said...

Last week I stepped into BoA (former Countrywide) to get a reality check on my budgeted qualifying numbers. As we went through the process the loan officer hardly looked up when he asked about down payment.

Come to find out he assumed an FHA loan. He said it is a strategy for most of the loans they are doing. I said, hmmm interesting, it takes 6% to sell a home, so they are basically upside down from the beginning. Looks like the new sub-prime and you may be getting these homes back as they are leveraged to the hilt.

He looked at me in dismay and said, "...well, I hope we don't get them back."

I said, less convincingly, "yeah, me too!"

mopar777 said...

FOLSOM: One year after people, the two-story next door to me is once again occupied. The buyers are hard working Ukrainian immigrants who poured their hearts and souls into a month long remodel after getting a real bargain on the place. I estimate they put at least$70,000 of sweat equity into it. They are not done yet since the the pool is green and much of the shrubbery is dead, but at least they are moved in. Neighborhood realtors are cursing them because they blew out the comps, but I feel alot more in common with them than I do with the Jersey bums who pumped the house for equity, moved out and then filed for bankruptcy.

sacramentia said...

"Neighborhood realtors are cursing them because they blew out the comps"

The Realtors should be cursing themselves and all the others involved in RE who add no value.

husmanen said...

Mopar777. That is the making of a more stable neighborhood, my hat is off.

On the same note, I heard another story on the weekend for EDH where the buyer blew out the comps.

My first reaction was, yeah that is really close to the fundamentals and I should look at that area again.

Then I realized I totally forgot about the group of people that have generated above normal profits and great unearned income during the bubble, they won't be happy. And of course they weren't.

patient renter said...

I thought this was going to be another sob story about foreclosure, but it turned out to be something different:

http://www.theroot.com/views/bank-tried-take-my-home

Yet another exhibit for why private companies should not receive public support.

Diggin Deeper said...

According to the Fed statement yesterday

"Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit."

Huh? Sounds like they called in Greenspan to write it....

So if you lose your job, or the job you have pays subpar wages, and the value of your home keeps falling, while the limit on your credit cards is being cut, you're stilling going out and expanding your purchases?

Not too believable...

sacramentia said...

should have been written:

"Those benefiting from bailout money are spending while everyone else is screwed."

Diggin Deeper said...

Fannie Seeks $15 Billion in U.S. Aid After Ninth Straight Loss

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFLwswlRTFn4&pos=3

What a fricken sinkhole!!!

patient renter said...

More like black hole. At least AIG is finally "profitable", eh?

Diggin Deeper said...

And just to add a little more suspense to the foreclosure "shadow inventory" theory, rumor has it that Fannie Mae introduced a Deed for Lease program whereby the homeowner turns over his/her home to Fannie, and Fannie rents it back through a third party management company. There would be no inventory for sale, and the poor, helpless homeowner gets to "walk" without having to move...when the air conditioner needs replacement, or when the property taxes come due, it's all on the Feds.

Add it up...our central government will soon hold "world's largest" titles as a landlord, bank, car dealer, and healthcare provider...

husmanen said...

Man, a definite break is occurring in EDH with many homes going below the $400k threshold now. This has occurred in a very short time, less than two months.

The next psychological barrier is probably $350k.

Folsom cannot be far behind.

Rental parity here we come!!!

Buying Time said...

I noticed a lot of nicer EDH homes in the sub 400k listings lately as well. It ain't called fall for nothing ;)

Diggin Deeper said...

Unemployment as we all know is now over 10% domestically. That's the official U-3 figure given by the Bureau of Labor Statistics. However, the BLS also has a broader measure of unemployment that measures "under employed", not looking for work, etc. That BLS metric, the U-6, states that unemployment is at 17.5%. Some outsiders, like John Williams at Shadowstats, pegs the actual unemployement rate at 22% which would be within a a whisker of the 25% level we saw during the Depression.

If we're truly approaching a ratio of 1 in 5 unemployed, what good reasons would there be to believe that foreclosures would slow, and real estate prices would stabilize?

David said...

Blowing out the comps.

After two years of looking, we bought into Pheasant Knoll in Fair Oaks last month. Meeting the neighbors, one of the first things they ask is "What did you pay?" When I tell them, they look at me with a mixture of envy and disgust, as the Zestimate for their houses is at least $70K above our price and will likely come down when the other two empty houses on the street sell. I tell them I rather hope their values will pull ours up.

If you are looking in the $300K+ range, your patience will be rewarded. This is twice as much house as a similarly priced and located property we bid on in October 2008, and that realtor seller (alligator tears, everybody) pulled out when his house appraised at $30K less than contract price.

David said...

P.S. Forgot to mention, that realtor's house never did sell and the Zestimate now sits at $75K less than the October 2008 appraisal. Some of them really do drink their own Kool-Aid.

Diggin Deeper said...

Home prices fell in most U.S. cities in third quarter

http://news.yahoo.com/s/nm/20091110/bs_nm/us_usa_housing_prices

More evidence that the housing prices continue to fall...

patient renter said...

Congrats David

husmanen said...

David, thanks for the follow-up and sharing. If my guess is correct, that house is awesome. Enjoy!

We just put a bid in on a house and were out-bid by an all cash buyer. The house is very close to our dream, sans pool (which I may be the only one that cares). The rental parity worked out, schools, location, layout, garage, etc.

This house is one of the homes that is breaking the resistance in EDH/Folsom. There will be more, guaranteed, and we will dream another day.

Now back to watching my rental foreclose and the market in general.

husmanen said...

Just speaking with a coworker and he said his neighbor has just purchased another home (more expensive) and is walking away from their current home. The walk away home was bought in 2004 for $500k, current value $260k. New house about $280k.

So, my question is, how can they swing this? Is this a timing thing, buy a new one before you let the old one foreclose? Or?

David said...

Could be the old loan was in one spouse's name and the new one is in the other spouse's name. I got our loan by myself, so if anything happens my wife is clean if applying solo.

husmanen said...

David, true, didn't think of that. Also, I have heard that they have been saving the monthly loan in a 'special account'. Even so, that could be max $36k for a year at $3k/month. Maybe they are going FHA (the new subprime).

sacramentia said...

David - Congrats on the new house.

Diggin Deeper said...

The "buy and walk" strategy has been happening for some time. Its surprising how little has been done to stop it altogether. I guess it's one thing to "strategically" fail on your obligations and move on. But to be free to buy another property and then dump your present home without recourse, says a lot about why were in the mess we are today

wimpyVO2max said...

Banks have wised up to "buy and walk." See http://www.lvrj.com/news/56171687.html?numComments=155

husmanen said...

Nice article, but it was focused on Nevada. I think we have different rules in CA, which would make it more likely here.

BTW, I heard two other stories along the same lines yesterday. Weird.

RV6Flyer said...

Real Estate Prices to Rise 4% in 2010!!! Buy now before it's too late!!!

http://finance.yahoo.com/news/Realtors-home-prices-to-rise-apf-935437126.html?x=0&sec=topStories&pos=1&asset=&ccode=

Jeff said...

Typical NAR article.

patient renter said...

We're hearing a lot of contradictory predictions as to where prices will go next year, even from within the industry.

The Milken Institute's best performing cities (jobs) index is out.

http://www.milkeninstitute.org/pdf/bpc2009.pdf

Sacramento ranked 119 out of 200, falling behind numerous cities that you'd think would be worse off.

Diggin Deeper said...

22 Percent of Florida Mortgages Non-Current

http://www.thetruthaboutmortgage.com/22-percent-of-florida-mortgages-non-current/

"A staggering 22 percent of all mortgages in the state of Florida are non-current, according to a new report from Lender Processing Services.

By non-current, they mean loans that are either delinquent or in some stage of foreclosure; perhaps more troubling is the fact that 10.4 percent of home loans in Florida are in foreclosure."

"The report also highlights the large shadow inventory of foreclosed properties that could wreak havoc on home prices and a possible housing recovery.

“The number of loans deteriorating further into delinquent status is now more than twice the number of foreclosure starts, indicating another major wave of troubled loans in an already clogged loan pipeline,” the company said.

“Nearly one-third of foreclosures remain in pre-sale status after 12 months – twice as many as the year prior. The six-month average deterioration ratio has risen the past two months to 300 percent, showing that for every loan that improves in status, three more deteriorate further.”


I wonder what the real story is in Sacramento????

patient renter said...

I wonder what the real story is in Sacramento????

So far the lid has been kept a little tighter on things around here.

sbg said...

Based on my observation, there is currently only one bank owned home on the market that is over 400k in Folsom. Rest are all 352k or lower. This may be the reason why the higher priced homes are holding up in this area. How is the trend in El Dorado Hills?

We put a bid on an REO in Folsom and we were told that there were 2 virtually identical offers for that property and our's is the highest bid by $100. The bank however selected the other offer. Would'nt it make sense for the bank to go with the highest bid when 2 offers are otherwise identical?

David said...

sbg, remember that the bank only sees offers after the seller's agent sees them. The agent has a great deal of influence over the selection of the winning bid -- do you know if the lucky buyer used the same person or firm as the buyer's agent? All things being equal, a double dip will win every time. It even wins sometimes when all things are not equal. Ask me how I know.

Deflationary Jane said...

'All things being equal, a double dip will win every time. It even wins sometimes when all things are not equal. Ask me how I know.'

No need to ask. I've seen it in action >; )

But the banks are catching on. In a couple of cases I've seen, the bank will ask for all offers and not just the seller's choice of best offer. Which is why you have people tossing out bids 15k to 40k over asking on multiple short sales in the hopes that one of the banks pick theirs.

Then they use the new appraisal rules to screw the bank down to market value. Most often the bank doesn't play along and says gimme difference between your stated offer and the appraisal or we'll go to the next highest offer. But that doesn't always work because chances are good that the back up offers have already moved on to the next 'bargain' as the market screws it's way down on $/sqft and listings in better neighborhoods.

So when you hear from your agent that their are multiple over list offers, don't panic because chances are that buyer has put in at least 3 more offers on other properties just to see which bank takes the bait. Most likely that that property will fall out in a few weeks to 5 months.

Or you could just wait until all the 590 FICO yahoos desperate for the tax credit leave the market in May of next year. If you don't need down payment assistance to come up with the 3.5%, that's what I'd do.

husmanen said...

Speaking of pulling out, the all cash offer that we got beat out by "didn't perform" and we are being considered. I love the "didn't perform".

As DJ mentioned, I have mentally moved on, but my wife has not. We will see what happens.

In the mean time two other homes came on the market that were very interesting.

One of the homes we put a bid on, and I provided a market analysis to support my offer that includes trends, comps (going down) and rental parity. Probably won't help.

Personally I still feel I am rushing the game for the higher end as I see new and better homes with equal rental parity coming on the market weekly. I still need to keep things non-emotional and clinical since we are probably on the cusp of the upper end movement.

If I wait just a little more <2 years, then it will be like shooting fish in a barrel.

David said...

hus, there is no doubt in two years the house you covet will be on the market at a price that makes you smile, but...

Price timing is not everything. Underwriting standards are becoming tougher by the week. Folks who qualified last quarter don't qualify this quarter. As interest rates start to creep up the affordability index will be less influenced by price and more by ratios -- can you afford that $350k house at 7% or do you have to start looking at a lower price band to keep the payment the right size?

Those of you who are still reading and have your brains engaged will say, "Won't that exert more downward pressure on prices?" Yes, it will. The question is whether you'll be able to get a loan after the government runs out of tricks to keep rates low.

husmanen said...

David, yeah, I have done some calcs based on higher percent interest, here is what I get (rounded):

Int Price Loan PITI/mon
7% $350k $280k $2300
5.25% $410k $328k $2300

Actually, I look forward to increased standards as it will decrease number of buyers, i.e. demand. AND it will decrease overall leverage, leading to greater stability in the market. FHA (new subprime) is doing the opposite right now.

I have read that the historical norm for interest rates are about 9%, which would push the selling price down to $300k for a PITI of $2300/month.

Deflationary Jane said...

I'm in the same camp as Hus; I'd rather have a lower sales figure then lower interest. With a low 800 fico and cash, I personally can't wait for tighter standards and higher rates. That's where those extra $1000 a month applied to principle payments come in real handy. Forget mortgage tax deduction, I want that house paid off asap.

patient renter said...

Speaking of pulling out, the all cash offer that we got beat out by "didn't perform"

Hahaha. I too would love to know how an all cash offer doesn't perform.

If I wait just a little more <2 years, then it will be like shooting fish in a barrel.

That's my gameplan, but remains to be seen how much all of this market intervention (withheld inventory) will play out.

I look forward to increased standards as it will decrease number of buyers

Ditto! Bring it on!

With a low 800 fico and cash

Ditto!

I want that house paid off asap

Ditto! It's going to be a 15 year mortgage, max, but at my current income and savings rate I could pay down something equivalent to what I rent in 7 years. I imagine owning a home means less money to save though (improvements) so we'll see how that plays out.

Deflationary Jane said...

The other thing I can't believe no one has mentioned is what happens once interest rates go back up (and we all know they will) and home appreciation stays low to flat? Who is going to want to slap money down on a house when that same money could be out making compound interest?

sbg said...

"With a low 800 fico and cash"

I was talking to a co-worker who recently bought a house. He has enough cash to make a 20% down yet he went with FHA. The reason he told was that, he is not sure how the prices will be in a few years and he is not sure of his long term plans. Do you think this kind of thinking will change in a couple of years if the prices keep falling due to rising rates and other factors?

David said...

In a declining market, FHA looks appealing. We pulled off what nobody is supposed to be able to do -- 3.5% down, 3% back for closing costs and got the $8K tax credit. If we take a 10% equity hit in the first year, we'll be underwater like everybody else but have not lost our cash. The factor that pushed us to buy now is the 5.375 interest rate. We could have waited and saved another $20K or so on price but would have paid that and more back in higher interest.

Diggin Deeper said...

"The reason he told was that, he is not sure how the prices will be in a few years and he is not sure of his long term plans."

Just speculating but it sounds more like your coworker wants as little risk in the deal as possible so if he had to walk at a future date, the bank would be holding most of the problem...3.5% down on a $250k property, plus the tax credit, just about washes out most of the risk, except for closing costs and often times there's a credit to the buyer for a portion (if not all) of those charges.

Speaking of bubbles...rates moving upward are a given, the only problem is that the Feds have kept the lid on rates for so long, when they do breakout, it's liable to be volatile and abrupt in a way that will freeze out prospective homebuyers alltogether. Because of the massive size of this market, having to fund $Trillions in govt costs, the slightest strain in confidence could prove ugly.

Imo, the 30 yr T bond closing above the 4.65% level could be a game changer with regard to longer term interest rates. We're not quite there yet but not we're that far off either.

David said...

Diggin, you are all over it. When the levee breaks it will not be pretty because the interest rate pressure continues to build from all sides. Everything pegged to a benchmark is going sky high and fast, and that was too much risk for us.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

David, you got a great deal. A friend of ours did the same thing on a $250K home. No risk, locked in a 4.8% on a 30 yr fixed, got the tax credit, and bank paid most of the closing costs...

No skin you win!

The thing that gets me though, is that without risk, and without penalty, what's the difference between someone who risked nothing to buy a home during the boom and what we're seeing today with 3.5% down, big time tax credit, and seller paying most of the costs???

David said...

Whether there is a difference depends on what kind of stakeholder you are. From a buyer perspective, there is no difference other than we are not expecting instant magical equity. From a realtor perspective, there is no difference because anything that causes inventory to churn is a good thing as far as they are concerned. From a government perspective, the downside of increased taxpayer risk is balanced against the benefit of the market not going flatline. From a lender perspective, it's a better deal because the FHA mortgage is insured by the government -- unlike the no money down loans during the boom.

There are many more facets to the question, but all in all if the "new subprime" didn't exist no amount of life support would keep the market alive and the dominos would do what dominos do...

smf said...

but all in all if the "new subprime" didn't exist no amount of life support would keep the market alive and the dominos would do what dominos do...

What makes you believe that the day of reckoning has been stopped? (To remind everyone, we purchased last year)

The US and the entire world based economic growth on producing excess and creating bigger and bigger debts.

And their solution to overspending is...more overspending.

Doesn't take much to realize that such a financial orgy is simply something that will end badly, regardless of policy.

patient renter said...

David, you and Diggin are hitting on the thing that bothers me the most about waiting. We're really not even interested in buying now, so waiting isn't a problem. And knowing that interest rates will be higher is fine, as prices will be lower and I'd take higher rates with a lower purchase price any day. But the potential for rates to explode is what worries me.

what's the difference between someone who risked nothing to buy a home during the boom and what we're seeing today with 3.5% down, big time tax credit, and seller paying most of the costs???

We all know the answer to that :) So how is the potential outcome not just as dangerous? Well, we all know that answer to that too :)

From a government perspective, the downside of increased taxpayer risk is balanced against the benefit of the market not going flatline

This is where I have an issue. The government should not be in the business of influencing a particular market, particularly one that is coming down from an unprecedented bubble. Pretending that the bubble didn't happen has been the best strategy.

if the "new subprime" didn't exist no amount of life support would keep the market alive and the dominos would do what dominos do...

That's very true. So how long can the new subprime be sustained? The runup in the stock market fueled by excellent earnings was the result of companies kicking employees to the curb en masse. This itself is unsustainable. How do you contribute to our consumer driven economy or even pay your mortgage if you're unemployed?

patient renter said...

From a government perspective, the downside of increased taxpayer risk is balanced against the benefit of the market not going flatline

I'd like to add - much of the government's policies towards keeping the market going have enabled banks to hide inventory, perhaps indefinitely. The unintended consequence is even more more unneeded inventory will be built, and the problem is perpetuated.

How long can the government keep rates down? How long will the Fed hold onto crap for cash? How long will the government subsidize homeownership at a loss to taxpayers? How long can banks hide inventory? Many questions...

David said...

patient, here is the government's problem: "extend and pretend" keeps hundreds if not thousands of banks open and operating. That's why mark-to-market failed -- the banks' financial positions would be so far in the dirt the government would be forced to intervene. Intervention on that scale would undermine confidence in the market, with unpredictable and potentially catastrophic consequences. The government is trying to manage the crisis, but it's riding the big one and may get pounded into the sand when the crest falls. Nobody will ever know if it could have been done with less damage, but everybody already knows who will get the blame. FDR pulled it off, but he needed a world war to put the U.S. back on firm economic footing.

I am a die-hard laissez faire believer -- a transparent market's innate ability to right itself has never been questioned. The so-called "stimulus" has introduced uncertainty and encouraged unhealthy behavior. This is the point where I refrain from passing judgment in order to keep political affinity from turning our forum into just another flame war festival.

The one thing you do have to understand is that our elected officials from both parties made this happen as it did, and they above all should be held accountable. They did it just so their banking buddies would never have to actually declare what their assets are worth on the open market.

Diggin Deeper said...

smf...couldn't agree more...

"it's a better deal because the FHA mortgage is insured by the government"

It's a better deal until the FHA flatlines as mortgage delinquencies overwhelm them...some believe the FHA will lose so much money that we'll require another "stimulus" package...

Juicing the market while manipulating market forces has created the biggest bubble of them all in the Treasury market. No one knows when it will blow, but it makes (all combined) the real estate bubble, dot.com bubble, sub-prime, and the current credit meltdown, insignificant in scope and size. It is "the 800 pound gorilla in the room."

mopar777 said...

FAIR OAKS: After nearly four years of tracking duplexes on one street I've closed escrow on one of them. At the height of the bubble a greedbag was asking $800K for one of the ones I wanted. With glee, I watched him chase the market down to his breakeven ($450k) only to have it taken by the bank.

The one I bought is across the street from it and was taken back from the same "owner" who paid 66% more for it in 2004 than I did this month. It's in a desirable area and will rent easily and cashflow nicely.

When it went on the market in July there were 43 offers on it within five days, most of them over asking price. The asset managers at the bank really blew it on this one by starting way too low.

At first mine was offer #2, behind some guy who offered $55K over asking. The problem was that he never intended on paying that much in the first place. All he wanted to do was to get the bank (seller) to open escrow to shut out the other buyers. He then sent a bogus inspector over there to find $35K worth of repairs, which was reduced from his original highball price. The bank told this jerk to take a hike of course and went to my offer. I guess they teach this tactic in the Trump or rich dad seminars.

patient renter said...

Nice response David. Policies that support banking interests should surprise no one, but a lot of the support being given to the housing industry will benefit non-bankers, or at least non-systematically important banks. Facilitating shadow inventory is what bothers me the most, since the result is as I mentioned, more unneeded inventory. But several of non-banking industries benefit from this.

Mopar: Congrats on the win!

Deflationary Jane said...

Exploding rates is fine by me because if they do, I will be able buy with cash and retire at 50.

bring it on >; )

David said...

Here's what we're facing. First, bad weather = lower prices. Second, tax credit expires = lower prices. Third, mortgage rates go up = lower prices. Fourth, reality arrives in the MTH price band = lower prices. Fifth, alt and option resets over the next 3 years = more foreclosures = lower prices. Cash buyers will be happy. Borrowers who can find a sweet spot will be happy. Lots and lots of people will be unhappy.

patient renter said...

DJ - though my savings accounts wouldn't complain about exploding rates, I wouldn't exactly be in an all cash position for a while. I figure if that happens, and I can't find the price/rate sweet spot, I'll just accept it as fate or something and enjoy the cashflow on my savings. That in itself is an interesting concept - whereas this decade was all about owning and the wealth built from debt, perhaps the next decade will be about not owning and the wealth built from having that money used elsewhere :)

husmanen said...

Speaking of FHA...

http://paper-money.blogspot.com/2009/11/bob-toll-yesterdays-sub-prime-is-todays.html

Diggin Deeper said...

Cash may be the only answer if the bond market gets too volatile. That is, if your cash is worth anything at the time.

We're already beginning to see countries diversify away from holding dollars and into hard assets with their dollars. China, India, Russia, and other countries have been on a mission to work their dollars into something that holds value against a falling dollar.

If lack of credit is a problem during the current mess, one can only imagine what credit will be like if and when the Treasury bubble pops. If you really think about it the
only real drivers in the today's economy are the very T-bills and T-bonds that are expanding our debt.

The real problem is not interest rates and what they will do. It's all about the dollar and what it's worth. Imho,it looks like a slow methodical grind to the bottom with "fits and starts" in between.

Diggin Deeper said...

"They did it just so their banking buddies would never have to actually declare what their assets are worth on the open market."

David, that's supposed to change January 1 as FAS 166 & 167 are supposed to kick in and force banks to reveal and compensate for their non-producing assets. Will it happen? If it does, banks are not as bad off as first thought. If it doesn't, you can draw your own conclusions.

husmanen said...

DD. Here is a link with plain English translation for FAS 166 & 167

http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176155633483

Interesting, very interesting...

husmanen said...

And another:

http://www.istockanalyst.com/article/viewarticle/articleid/3648745

RV6Flyer said...

DD, I think Meredith Whitney hit it on the head with the Fed pulling out of the MBS market. That will push mortgage rates higher, even before the treasury market makes a move. This will also force banks to keep loans on their balance sheet, thus pushing lending requirements to some unrealistic level because the banks are and will continue to be so risk adverse.

http://www.bloomberg.com/apps/news?pid=20601087&sid=acyezZUH_MYo&pos=5

DJ, with a falling dollar, I would much rather be in an asset levered with a super-low rate than in cash getting a negative real return in a savings account.

As for the rising rates, falling housing price conversation...at what point do rates no longer push prices down on primary residences? Standard bond pricing models do not work in such a scenario and I wonder if the headless masses might actually rush to buy before rates "go any higher," thus pushing up medium values?

patient renter said...

I would much rather be in an asset levered with a super-low rate

Even a declining asset?

I wonder if the headless masses might actually rush to buy before rates "go any higher,"

Isn't that what's been happening?

Deflationary Jane said...

RV, things are very different for me now compared to last year. I'm now looking at 95819 and all cash (Davis can still go stuff it's self). What works for me won't work for most folks.

I'm still not sure what to do about dollar valuations. The dollar has been more resilient then I would have imagined thus far so it's on the back burner. If I ever get my probate issues resolved, USD fluctuations will get my attention again. First things first as it were.

Still, all things considered, I'd be more concerned with making my debt obligations as close to zero as I could before I'd worry about loosing a lousy 8k tax credit.

David said...

So ultimately I would like a future price (2012) now with current interest rates (5%). That is a tall order and very difficult, but not impossible. Diligence and timing. I have the diligence and time is on my side.

RV6Flyer said...

DJ, would love to have you in the 95819.

RV6Flyer said...

"Even a declining asset?"

patient renter, I guess I really do not think housing as a whole is going to face an additional precipitous drop in value. I think rates will stay low for another year and home prices will only go down another 5% on average during the same period. 12 months from now will be the sweet spot to purchase in my opinion. Beyond that, the impact of rising rates will exceed the gain in potential drop in values.

robert said...

95819 is very sticky. Wonder if it's all the big hospitals (Sutter General, Mercy, Sutter Memorial)? I've rented here in 95819 for many years and never could justify purchasing. It still seems to lack rental-to-mortgage parity. Anyone else see similar?

Several friends I know in this zip code, even one doctor, all stretched to buy homes in the last 5-7 years. They paid huge premiums to rent the money needed to purchase a little brick shack on a small lot that needs lots of TLC. They stay home and fix broken pipes. Then cancel the vacation because they are broke. I call the landlord and head out the door for fun and games.

Jane, you'll pay 100% cash, so no need to rent money from one of the criminal bank organizations. But, don't forget taxes, insurance, and maintenance. Maintenance can be a big one down here if you end up with an old place that hasn't been maintained.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

As to paying cash or financing...On one hand it makes sense to lever at low rates paying the mortgage off with future dollars. On the other what do you do with the rest of the cash? I guess you could always lever up today, and retain the cash to pay off the mortgage later. But saving at 0% interest and then adding a minimum of 2% inflation per year you're compounding at a 2% negative rate of return. If you think we're running 4-6% inflation, it doesn't take very long to erode purchasing power. Beyond that you have to play a risk game...

Holding cash is great in the right environment, but I'm not convinced its a good idea in this one.

It's very simple to watch what world creditor nations are doing. For the most part, they're divesting out of our long term Treasury Bonds. The Treasury International Capital Report shows long term debt purchases have fallen dramatically YoY from September '08 ($750 Billion) to September '09 ($213 Billion). A month's worth of data doesn't make a trend but a year's worth does...

Again, its all about the dollar and what's it doing to economies abroad. As former Sect of the Treasury John Connelly said to the rest of the world in the 70's, "It's our dollar, and your problem" In today's environment, other countries are starting to take action...

RV6Flyer said...

DD, what burns me is who is taking up the slack in foreign purchases of our debt...OUR banks. Indirect bidders in the last year have been strong, and if it is not coming from China or Japan, then it is from our new zombie banks.
BofA, Citi, Wells, are all buying treasury debt with the nearly free money they get. They make a nice spread--a better spread than can be had lending the cash out to risky borrowers--and then report record earnings.

RV6Flyer said...

"Holding cash is great in the right environment, but I'm not convinced its a good idea in this one."

That is why you buy commodities or other physical assets. Or better yet, an apartment in Barcelona.

Diggin Deeper said...

RV...Actually, that's one of my goals for next year. Buy real estate outside of the country and outside of the USD.

I almost bought a place in Brazil...had it all the way up to signing a contract on pre-construction beachfront development. But the contract was in Reals and had an inflation escalator with no guarantees that price wouldn't double due to inflation by the time you closed. I was going to hedge the entire investment with 1/2 Aussie $ and 1/2 Brazilian Reals and make progress payments using those funds...but it got complicated and I backed out.

I'm looking for a country that's commodity self sufficient, energy self sufficient, poised for long term growth, and not in debt up to their necks... Brazil still fits the bill if I can find a place that's move-in ready.

smf said...

Before anyone thinks that investing in other countries is the way to go, you should all know that the bubble in many other countries made our own bubble seem like child's play.

I include China and India in that mix, with Dubai topping them all.

RV6Flyer said...

DD, we are on the same page. Commodity rich countries will fare best over the next 10-20 years. Canada, Brazil, Australia, and even Sweden/Norway, are all good choices. In our situation we have a couple of friends who want to go partners on a place and Spain seems to fit everyone's bill. We as a group first purchased a cabin in Tahoe 10 years ago, so we know we can get along.

husmanen said...

The FHA craziness continues, example of a million dollar home in SF.

http://www.nytimes.com/2009/11/20/business/20limits.html

husmanen said...

Housing bubbles are still inflating in some countries. In Sweden the prices are still going up, interest rates are just about zero. That rate is with an adjustable rate, adjusts by the month, 99% of borrowers get this type of loan.

But the caveat is that the longest you can lock an interest rate is 5 years, it is the 4.75%.

Now all the people buying at 0% will get killed if there is not massive wage inflation to compensate for large jumps in interest rates, say from 0% to 2%. Doubling the monthly nut.

Lastly, you are personally responsible for the loan, they don't have the 'non-recourse' loans like in CA.

patient renter said...

I guess I really do not think housing as a whole is going to face an additional precipitous drop in value.

Not much happens as a whole, but I'm not sure how we can conclude anything about this market when it is so artificial. If supply, absent manipulation, is twice what it is now (as Deutsche Bank indicated), and demand is less absent subsidies, where are we?

Beyond that, the impact of rising rates will exceed the gain in potential drop in values

Sure, but as rates rise the main thing stopping an inverse correlated drop in values is the ability for buyers to pay cash. How much cash is there, all things considered?

patient renter said...

I should point out again that you can't really do a nice comparison of lower rate/higher purchase price versus higher rate/lower purchase price without considering when you might resell the home. If the home is resold before the loan is payed off, the lower principal owed can certainly make up for the additional interest payed.

Many variables to consider, and guess at.

Diggin Deeper said...

"But the caveat is that the longest you can lock an interest rate is 5 years, it is the 4.75%."

Hus

That's the current problem, and the potential opportunity, in emerging economies. When emerging countries transition into well run established economies, government and corporate bond ratings begin rising to investment grade status. The higher the investment grade the more fluid credit becomes for the national population, and longer terms would come into play.

Our AAA status allows for long term debt to be guaranteed based on our past performance, and up to now, we've easily been able to finance homes out 30 years and beyond. If our debt got re-rated at some point, the ability to obtain financing would suffer. If it fell too far, long term credit might have to shorten up in order to compensate, and interest rates would certainly move higher in response.

I'm keeping an eye on other signals on the foreign front. Rating agencies have been making noises about Great Britain's debt with regard to whether they merit such a high investment grade. Any re-rates to GB's credit ratings from here, signal a "shot over the bow" directed at our own debt policies. If their investment grade ratings go down, can we be far behind, given the similarities of our problems?

patient renter said...

I'm starting to wonder if the FHA could singlehandedly facilitate a reflation of the housing bubble, at least until it goes broke.

http://www.nytimes.com/2009/11/20/business/20limits.html

Diggin Deeper said...

PR...Between the FHA and the FDIC, it's a race to see who goes broke first. Then again, you can't go belly up when there's a money tree in the backyard...

patient renter said...

I can't imagine where the political will to draw back the FHA's activity will come from. The same goes for the Fed's involvement in the MBS market (I'm betting they announce an extension for their planned withdrawal).

Diggin Deeper said...

Half of Banks' Losses May Still Be Hidden: IMF Head

http://www.cnbc.com/id/34143699

"It's possible that 50 percent (of bank losses) are still hidden in their balance sheets. The proportion is greater in Europe than in the United States," he said."

Proportionately greater in Europe but likely growing here in the US...

husmanen said...

Pool vs. No Pool.

Here is my question. Would you buy a house without a pool if it fits ALL other criteria?

A pool has been on our 'must have' list for a long time. However, we have identified a house that fits all of our criteria, EXCEPT it doesn't have a pool. What to do?

I cannot foresee me putting in a pool, as the costs range from $30k - $90k. Basically, I feel this is one time chance, miss the pool and it won't happen.

Any thoughts?

patient renter said...

Well it's easy for me to say go for it since I have no interest in a pool :) BTW, I had thought 30k to put one in was average, not the low end?

Personally, I have enough things to worry about without having to take care of a pool. Avoiding the maintenance is something you can certainly be happy about.

husmanen said...

Yeah, all those that are not interested in pools it is an easy choice. But those that are, it becomes difficult.

The maintenance and the monthly costs are part of the gig, acceptable.

RV6Flyer said...

Big foreign central bank demand for 7 year treasury auction today.

http://www.cnbc.com/id/34151160

sbg said...

Hus, we are in the exact same situation. For me, a pool is in one of the top priorities, but my wife thinks it is a must. We are still looking, but if we find a home that meets all our criteria except pool, we might go for it...btw, we are only looking in Folsom. For some reason, we are not open to the idea in EDH...On a comparitive note, how is the current inventory, median price etc in Folsom vs EDH ?

husmanen said...

SBG, welcome to the hunt. EDH has its drawbacks, one major one is PG&E. I have done calcs comparing PG&E and SMUD for the same house on a peak day, average day and winter day. PG&E is always 50% higher and is 100% higher on a peak day. BTW, I use data from energy bills from 5 persons in PG&E land and 4 from Folsom.

An antidote, I have friends that moved from the bay area in the summer and keep the AC rolling, the bill... $1000 for the month. OUCH!! They run between $350 and $500 now. I hope to stay around two hundred on average.

Now inventory. I don't have any general numbers because I am very selective in the areas that I monitor, e.g. I exclude about 90% of Folsom because of lot size and 50% of EDH because of high HOAs.

In the areas I keep close tabs on there are new homes popping up every week. The homes close to rental parity are bid on immediately and go PS. The others lag.

Folsom has a greater percent to fall than EDH, only because EDH has really started to crack lately. I'd say 15% for EDH and over 20% for Folsom, on average.

BTW, the Folsom rental market is expanding quickly and prices are being pressured accordingly.

paranoid renter said...

For all those planning to buy, plan to wait a little longer. There's more fraud on the horizon...

http://washingtonindependent.com/69107/mortgage-fraud-threatens-housing-rebound (via Naked Capitalism)

“Anytime there’s money out there, someone will begin trying to figure out a way to get to it,” Simpson said. “Right now, the fraud gets shipped over to the FHA. We’ve got to hope they are being very diligent, because if they are not, the damage will be irreversible.”