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Wednesday, June 18, 2008
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32 comments:
Interest rates up , loan demand down for the 4th week of 5.
http://tinyurl.com/4g2so2
30-year mortgage rate of 6.57% chills demand
NEW YORK (Reuters) — Applications for home mortgages dropped for the fourth week in the last five as soaring interest rates choked off refinancing opportunities and soured the housing outlook, an industry group said Wednesday.
From the most recent Atlantic Monthly, a brief article by Robert Shiller, comparing investment bubbles to epidemics -- both in cause and in solution. From the article:
"Bubbles are a lot like epidemics. Every disease has a transmission rate (the rate at which it spreads from person to person) and a removal rate (the rate at which those individuals recover from or succumb to the illness and so are no longer contagious). If the transmission rate exceeds the removal rate by a certain amount, an epidemic begins.
Speculative bubbles are fueled by the social contagion of boom thinking, encouraged by rising prices. Sooner or later, some factor boosts the transmission rate high enough above the removal rate for an optimistic view of the market to become widespread. Arguments that this boom is unlike past bubbles—I call them “new era” stories—become more prominent and seemingly credible. In the recent housing boom, such optimism was much in evidence. A survey that Karl Case and I conducted in 2005, for instance, found that on average, San Francisco home buyers expected housing prices to increase by 14 percent a year over the next 10 years. About a quarter of the respondents reported truly extravagant expectations -- occasionally more than 50 percent a year."
The rest of the article can be found here:
http://tinyurl.com/4njqjp
bas,
I think the expectation of most people here (including myself) on interest rates was that it would stay low for at least a few more months before inflationary pressures caused it to rise. I think Doug was even saying that rates would go down in response to FED rate cuts.
That the rates have risen fairly faster than people imagined in the last two months shows that predicting short term market behavior is a fool's game.
By the way, I think consumers' purchasing behaviors in response to rising rates has not been discussed in detail.
Personally, when buying a car, I would prefer a cash back offer to a 0% rate offer because I could find the same 0% financing elsewhere, or pay cash.
With housing, the ability to put down a larger percentage of the price, coupled with a bigger than anticipated drop in prices may help buyers who were planning to wait longer. However, rising rates may affect some people who were planning to purchase within the next few months, as the price drops in response to rising rates may not occur fast enough.
Personally, I don't think higher rates have a direct impact on prices. The whole seller mentality and stickiness of prices to the downside is the reason. Sellers don't think about how much buying power a buyer gains/loses due to interest rate fluctuations.
I think the effect is secondary. Higher rates mean fewer buyers can afford a given price bracket. This simply translates into lower demand. Now you're back to the simpler how many months of inventory do we have and, as a seller, how aggressive do I need to be given the homes I'm competing with?
My $0.02
"$0.02 said...
I think the effect is secondary. Higher rates mean fewer buyers can afford a given price bracket. This simply translates into lower demand. Now you're back to the simpler how many months of inventory do we have and, as a seller, how aggressive do I need to be given the homes I'm competing with?"
I think so too. Despite it not being the smart or correct thing to do, the fact of the matter is most buyers think in terms of monthly payment. When the rates go up, they plug the purchase price and interest rate of their target house into a yahoo calculator and get a number. If that number is too high, they look at cheaper houses.
In the long run, this would translate to fewer sales - meaning sellers would have to drop prices to accomodate the buyer's way of thinking. Long term if interest rates continue to rise (due to inflation or otherwise), this could really drive down prices for those that are desparate to sell.
0.02$,
Thanks for your comments. What you say about stickiness of prices is true. But will it hold in an abnormal market environment, when there is already downward pressure on houses even with fairly low interest rates? I think the momentum may cause prices to drop faster.
The Anon,
>>In the long run, this would translate to fewer sales.>>
Are there any studies you can point to...or anecdotes from people with past market experiences to tell us how long (months?, years?) it might take for a 1% rise in rates to impact housing prices.
Thanks.
Ted K Said...
"Are there any studies you can point to...or anecdotes from people with past market experiences to tell us how long (months?, years?) it might take for a 1% rise in rates to impact housing prices."
Studies no. Only anecdote I have is back in the days of ultra high interest rates in the 70's. As far as I understand it, interest rates were running as high as 18% via bank loans. Sellers could not unload their properties so seller financing (at a lower rate) became very common in order to move houses.
Of course, seller financing only works when you (the seller) have substantial equity and the buyer has enough cash to pay off the seller's loan balance. That sort of thing would seem to not be common these days.
the anonymous-- Not the 70's, but the 80's. When we first started looking at houses around 1977, interest rates were around 8% as I recall. When we bought a year or two after that our loan rate was 10.75%. When my parents bought their condo-- can't remember when it was exactly, but some time in the mid 80's, their interest rate was around 16%. It was adjustable and it may have gone up a bit from that before it started coming back down.
So your timing is off, but you're quite right about seller financing. Sellers would also offer to take back a second mortgage in a down market to sell to first time buyers who didn't have the 20% down payment that banks required. Or they'd do lease options, or sell a percentage of the property along with occupancy rights. Lots of creative things you can do -- if you have enough equity.
The Anonymous said...
"Only anecdote I have is back in the days of ultra high interest rates in the 70's. As far as I understand it, interest rates were running as high as 18% via bank loans. Sellers could not unload their properties so seller financing (at a lower rate) became very common in order to move houses.
Of course, seller financing only works when you (the seller) have substantial equity and the buyer has enough cash to pay off the seller's loan balance. That sort of thing would seem to not be common these days."
You are basing your deduction on a false assumption. And I'm not sure you can make any comparison ... Let me explain ... In that era (and in most states) it was common practice for mortgages to be assumable ... and in an era when most sellers had mortgages on their homes in the range of 7% - 9%, giving a second (i.e., arranging for seller financing) for the "equity minus downpayment" balance allowed buyers to buy more than they otherwise could have ... And helped push prices up even further than they had already been pushed up due to the inflation/stagflation we were experiencing.
Example:
$100,000 house with $60,000 mortgage at 7% which seller had bought 3 years earlier for $77,000.
Buyer would come in with 20% down (i.e., $20,000), assume the $60,000 1st mortgage (27 yrs left) and get an Interest Only loan from the seller for $20,000 at 12% (when rates were 18% - 20%) that was due in full in 10 years. The combined payment meant they were getting a mortgage at an effective rate well under 10% at a time when market rates were double that. And before the 10 years were over, they could refinance (rates did drop a lot by the mid 80s) or sell or even pay it off as inflation (combined with raises along the way) helped make that 2nd mortgage balance insignificant in terms of real purchasing power.
Time is always on the side of borrowers ...
Wondering if anyone can shed some light on a foreclosure question-
I noticed a house in Loudoun that went under auction and reverted to the lender- The tax records now show the lender (Greenpoint) as the current owner.
This week there was a Notice Of Trustee Sale for the same house that is scheduled for later this month- The amount listed is $90k which I'm assuming was a 2nd mortgage.
How does this work? I thought that the 2nd (junior) lender lost out completely when the 1st (Senior) lender foreclosed on the property. What does the 2nd lender get by putting the property through a 2nd auction in this case?
Not sure if it makes a difference but the house went directly to auction and then REO, no pre-foreclosure or foreclosure as listed on Realtytrac (Sent the keys back to the bank perhaps?)
For what it's worth (3 cents?), I'm with mytwocents.
I have only a memory of eyeball statistics to back this up, but I remember one time comparing historic mortgage rates to historic home prices and seeing no pattern. That surprised me. I had expected the high interest rates in the early 80s to tank prices, but apparently they didn't.
Of course, my memory could be faulty on this one.
The report on the foreclosure rate for DC and area will be at this link I believe sometime today (Thur.)
http://www.mwcog.org/
I just checked and didn't see it yet. It's timed with a conference. The part in the Post's report that made me very interested in seeing this report was this:
>>Although Prince William and Prince George's counties have experienced the most home foreclosures, the report identifies several communities as potential "hot spots" for future foreclosures, including Centreville, Falls Church, Herndon and Vienna in Fairfax County, Germantown and Olney in Montgomery County and Adams Morgan in the District.<<
Why Adams Morgan? And how, then, does it stack against Dupont, or Logan, Columbia Heights and all the rest then?
I'll read this report with interest.
Novawatcher said...I have only a memory of eyeball statistics to back this up, but I remember one time comparing historic mortgage rates to historic home prices and seeing no pattern. That surprised me. I had expected the high interest rates in the early 80s to tank prices, but apparently they didn't.
Of course, my memory could be faulty on this one.
Your memory is correct. In fact one of the California bubbles was going on just as interest rates were rising to all-time highs. I think that's one of the reasons why that one felt just as nutty as this one-- although prices didn't go anywhere near as high the payments people were making relative to income were just as insane. In fact, probably more so, since there weren't these exotic mortgages that there are now. The 10.75% that we paid was a fixed rate 30 year mortgage with 20% -- and we had never heard of anybody having anything else.
After a few years of rising interest rates for adjustable rates began to be offered-- that must have been in the early 80's. That helped a lot on the way down, since your fall in equity was being offset by the fall in your actual payments. It meant that most people could ride out the downturn quite comfortably, without ever paying much attention to the value of their house.
It was only the people who really needed or wanted to move who were in a pickle.
Lance, some loans were assumable and some weren't. If they were you would see 'assumable loan' very prominently in the advertising copy.
Contrarian, the Post's article was interesting.
His research suggests that foreclosures will increase until at least early next year, largely because of decreasing home values. "When the price of housing drops to an extent that the amount you owe is more than the house is worth, if you don't have a lot of equity, there is a tendency to walk away from it and just have it foreclosed," McClain said.
The analysis found that the steepest declines in home sale prices, between April 2007 and April 2008, occurred in the outer suburban ring, defined as Loudoun, Prince William and Frederick counties. The average price there dropped by $110,900, or 25 percent. The inner ring, Fairfax, Montgomery and Prince George's, had a decline of 3.2 percent. The core, defined as the District, Arlington County and Alexandria, experienced an increase of 3.4 percent.
Here it is again.
Outer ring, toast.
Inner ring, down slightly.
Core, up.
What's the core? The District, Arlington County and Alexandria.
My records and analysis show that some categories in my zip code have fallen. In 22305, older TH and garden apartments are down about 10%.
There are many more marginal units on the market, mostly around E REED. This will tend to pull down the median.
10 $200K'ish units on E REED would overshadow 2 $1,000 SFH in Beverly Hills-22305.
McEnearney shows total units for sale in 22305 below 50. (they still list the place on WAGON, which is not in 22305) There were more than 70 earlier this year.
Even more interesting, there are very few SFH available.
Here's a webpage that shows historical charts of mortgage rates. Note the chart at the bottom of the page showing rates from 1971-2008. Mortgage rates are currently at historical lows, yet many people still cannot afford to buy without a 'teaser' rate.
"Arguments that this boom is unlike past bubbles—I call them “new era” stories—become more prominent and seemingly credible."
Interesting ... So, the saint of the BHs, Robert Shiller himself, acknowledges that there's nothing new happening here ... That we've been down this road before.
So, what he is calling "a bubble" is nothing more than the normal ebb and flow of the usual real estate cycle ... And NOT the non-repeating event that a bubble represents in most people's minds ... such as the one we witnessed with the stockmarket in 2000 where it wasn't the normal cycling occuring but rather the revelation that many of the stocks had no underlying relevant value.
Mr. Shiller isn't a BH. Interesting.
OOOOH yeah... digggit...
http://www.nbc4.com/news/16650997/detail.html
WASHINGTON -- An analysis of the housing market in the Washington region shows the area has one of the fastest-growing foreclosure rates in the nation.
The report commissioned by the Metropolitan Washington Council of Governments and Freddie Mac shows more than 15,000 homes in the region went into foreclosure during the 12-month period ending in February.
Prince William and Prince George's counties have had the most foreclosures, but the report said communities in Fairfax and Montgomery counties could soon be "hot spots."
"Kob said...
Why Adams Morgan? And how, then, does it stack against Dupont, or Logan, Columbia Heights and all the rest then?"
I saw that too - interesting. If I had to guess I would say it had something to do with the ethiopian community there. It seems like once an area gets infected with flippers and speculators, it brings in more of the same. Moreover, if they follow the latino pattern (latino mortgage brokers preying upon their own) they were selling the american dream to a bunch of immigrants that really couldnt afford it.
I will wait until I get to read the report, but that would be my first guess.
kh said...Core, up.
What's the core? The District, Arlington County and Alexandria.
Part of that core is already down:
Over this [March 2007 through March 2008] period, prices in the District of Columbia dropped by only 4.7 percent and condominium prices were down only 3.7 percent.
This is compared to the 20009 zip in DC, where prices are down 24% over the same period. Incidentally, the report has a footnote about the 20037 zip in DC which has also been hard hit. It's the zip that contains the Watergate apartments. Prices are down 20% there.
It's interesting to compare the chart on page 11 of the report showing 'core' prices up by 3.4%, inner suburbs down by 3.2% and outer suburbs down by 25.6% to the situation last year, when inner suburbs were still up and only the outer suburbs were showing modest declines.
crt,
I don't think the potentially high foreclosures in Vienna and Olney can be explained as only due to the gullible among immigrants or fraud or something that happens only in the Condo market.
Too many people redefined what they could afford even at peak prices in the belief that prices would continue to go up.
tedk: i remember someone in 2005 paying a BOAT load for a condo..
he was definitely caught up in the excitement and to have bought a place.
i just wished him the best of luck.
i hope he likes his overpriced place in falls church now.
"Tedk said...
I don't think the potentially high foreclosures in Vienna and Olney can be explained as only due to the gullible among immigrants or fraud or something that happens only in the Condo market.
Too many people redefined what they could afford even at peak prices in the belief that prices would continue to go up."
Hooold on there Ted. Like I said, I hadnt read the report yet so I was just speculating at the time - as it seemed shocking to see a place like Adams Morgan even mentioned as a place for potential problems.
Now that I have read it, with regard to Olney - it certainly looks like it was a case of people over extending themselves. This place is old and established, nothing that would attract flippers etc.
With regard to Vienna that is an interesting case. New high end homes could be a magnet for flippers (as was the case of the guy with 11 homes Loudon in the post a few weeks ago), or overextension by people who tried to live beyond their means.
With regard to Adams Morgan - I was wrong, it certainly was not ethiopian immigrants as I speculated. The type of homes subject to potential foreclosure problems (high end condos) is not where you would find scores of Ethiopians.
That said, to the extent there was flipping close in, high end condos was the place you would find it - thus I do think flipping was at the root cause of the problems in Adams Morgan. This neighborhood will be an interesting test case to watch.
Lance said...
“there's nothing new happening here ... That we've been down this road before.”
Sure Lance. A few hundred mortgage brokers and real estate agents get arrested for mortgage fraud; just another day in the life of the industry.
Nothing to see here folks…move along..
Robert,
I guess you never heard about the savings and loan bailout of the early 80s? (and the people who should have been put in jail for it ...)
And NOT the non-repeating event that a bubble represents in most people's minds ...
Non-repeating event??? What the... Well, that's certainly a very unique definition.
Non-repeating event, huh. I guess that's why they called this, Here comes another bubble.
Bubbles have always occurred at regular intervals-- as soon as people have forgotten about the last one. The truly bizarre thing about the real estate bubble is that people moved into it from the stock bubble almost without a pause. You'd think the, "This time it's different. The fundamentals have changed. It's a new paradigm" talk would have set off alarm bells, but for some reason it didn't.
Of course you're right that speculating in houses is different than speculating in stocks. It's much more destructive, the effects are more far reaching and it takes much longer to bring back some stability.
Sarah @ 4:22
Lance's post wasn't worth a response; it's just the old strawman tactic of creating one's own weak adversary and knocking it down. Narcissists must win every argument, even if they must invent the opponent to do so in their own mind. [Sadly, KH is adopting the same tactic.] If there's any similarities between the actual viewpoints of the posters here and what Lance asserts are they are, it's a coincidence.
terminator-x-- You're right, of course, but I watched this country take what I think was a disastrous turn in the wrong direction in the 80's. One of the main reasons was that this style of 'argument'-- ignoring or twisting the points made by your 'opposition', hammering over and over on a few simplistic points, and labeling those holding different opinions with pejorative terms -- became the norm.
Maybe continuing to respond is just playing into this. On the other hand, I know from my own experience that if you let false arguments go unanswered for long enough, you eventually forget that they are false.
Lance...I think most won't argue there haven't been past bubbles and that it may be cyclical. I'd say the argument is this one is the biggest ones since WW2. The bubble of the 70s and 80s were tiny compared to this one.
Once again, here is the historic inflation adjusted home pricing graph from Robert Shiller GRAPH
Please be sure to ignore or discount this data at your earliest convenience.
Lance said...
Robert,
I guess you never heard about the savings and loan bailout of the early 80s? (and the people who should have been put in jail for it ...)
I apologize Lance. When you said:
Lance said...
So, what he is calling "a bubble" is nothing more than the normal ebb and flow of the usual real estate cycle ...
I thought you were talking about real estate. I didn’t realize you were talking about the S&L bailout of the 80’s.
Robert: A few hundred mortgage brokers and real estate agents get arrested for mortgage fraud; just another day in the life of the industry
Here.
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