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Friday, June 27, 2008
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48 comments:
CRT,
I agree that the inner desirable places will not crash to the extent that further out will for similar reasons to what you state. However, they will crash a lot more than 10%. They already have according to Harriet's data.
I think the difference in our perspective can be summed up by what we're using as our predictive tools. Months of supply is a market indicator. It tells you how supply and demand are running and current and near-future market conditions. I'm not using that, because I don't care how swift the dowturn is or which market players loose the money or when. I'm using rent-to-buy ratios (as defined in Irvine housing blog, or the Ginnae Mae online rent versus own calculator), because they indicate the floor beneath which prices cannot go for long before correcting back up. They indicate fundamental value prices at which investment cash-flow buyers will step in to save the market. So, 160 times monthly rent for an equivalent property for live-in buyers in normal times (i.e. keeping up with inflation), 140 times rent for live-in buyers in sketchy markets (now) 120 tmes rent for cash-flow investors. That said, yes you're right, renters don't care about fabulous 1840's buildings in Old Town, and hence there is a premium for that. However, first-time buyers can't afford that premium, so you need bubble money to pay for it, or exotic toxic loan products (take your pick). But yes, those will bottom at no less than 200 times rent.
However, what I am looking at is the price gain history of the area. Everywhere around NoVa and MoCo had multiple years of over 20% gains. This is speculation, whether it's by true "investors" or by those with loans they can't truly afford. This will be erased. Affordability ratios were recently above 80%!!! While, it may be my own flavor of kool-aid to hope for that again, I see 60-70 as being closer to long-term healthy sustainable markets.
Also there is the point about long-term owners who have no mortgages. Well I've got news for you. (1) A lot of them have already sold. (2) Since they have nothing to loose? Guess what that means? They can and will undercut your price when they do decide to retire or their descendants sell the house to split the proceeds. To watch the market using market indicators like months of supply is to drink the kool-aid. Bottom calling is all about fundamentals. Luckily where I want to buy is already near those fundamentals. Sadly, it got there by REOs. I'll post later about the kool-aid still flowing amongst the price bracket one tier up. (a $200k premium just to have a garage? My ass, you're coming down!!!)
WITHDRAWN:
http://tinyurl.com/3w8vms
Originial Price: 774,000
Last Price : 747,000
Previous Sale : $682,300 07/30/2004
bas,
I'm not sure if that was in reference to my comment or not. Those places have quite a bit more than just a garage relative to what I'm looking at. They're still insane, though. I'll be buying in the under $300k tranch, I'm talking about the current $450k freaks that were $550-$600k two years ago and are getting snapped up like hot cakes at the 20% discount.
I think the 'premium' us potential buyers are willing to pay in Arlington is quality schools. No offense, but Alexandria doesn't fare well in that category based on my limited understanding.
mm, I agree, and would add that from what I have read on websites (you decide the reliability :-)) Arlington is perceived as a better managed county as well -- metro/housing planning, providing services, better police responsiveness, etc.
I'm not sure I understand the comments about how perceived desirability and/or premiums AREN'T factored into the price. Econ 101 proposes that price is very largely a function of perceived desirability, which may differ from person to person. Many factors may go into perceived desirability - school quality, metro access, proximity to DC or short commute (varies depending on where you're commuting to), safety/crime, house size, house condition or updating, lot size, pleasantness of neighborhood, etc.
Cara - the only problem I have with focusing on the fundamentals is that it is way too analytical. The fundamentals assume a rational actor with perfect information. However, there is alot of research being done now on why people do not always act rational, even with perfect information.
The difference, if you will is one of economics versus behavioral economics - put another way, investors versus homeowners. Turns out, humans do all sort of things they should not do if they were acting rationally. We demand a salary at say $60 per hour, but then we refuse to pay $50 to get an oil change done and spend 1.5 hours doing it ourselves. It pains us to pay $100 at the gas pump, yet within a day, we treat that gas as a sunk cost and decide to take 2 trips instead of one. In short we do all sorts of irrational things and, and I personally believe one of these is paying for a home where emotion is always a driver for some.
This blog is filled with incredibly analytical people with near perfect information. We read the blogs and the news and know pretty darn well what the risks are with buying in this market. If the broader market was filled with the same sort of people that dominated these blogs, the fundamentals would be dead on.
The problem is, the broader housing market is made up largely by emotional actors working with imperfect information. So much of the broader populaiton has only a limited view of the bubble, the credit crunch, etc. For so many of them out there, the only real question they ask themselves is "can I afford it" and little more.
Now, I will agree with you 100% that the funny money changed that "can I afford it" analysis. Time was, banks would save homeowners from themselves by deciding if the homeowner truly could afford it or not. The banks got away from that and are now paying the price for it. That said, the fact of the matter is that even at what you and I would consider absurdly high prices, certain segments of the market are still moving - not at prices of 2006, but in some cases not very far off the mark - and this is with all the funny money more or less gone.
Now your larger point about investors (i.e. rational actors) establishing a floor is absolutely correct. If homeowners were so panicked they completely left the market, this would be the true market clearing price - and in cases like PWC especially, I think that is right. However, other markets around here (especially those that didnt have alot of speculators to begin with) did not panic and are unlikely to unless there is some underlying fundamental change in the economy, the credit markets, their jobs, whatever. The question then is, if the homeowners (emotional actors) have not left the market, how much above and beyond the true floor will the buyers pay?
Our fellow blogger Amy for example bought knowing full well she will lose 10%. Another blogger (perhaps GTE) said he was so disgusted by renting that he is highly likely to capitulate (buyers can capitulate too you know) and buy by this fall. I know one guy personally who is under threat of divorce if he doesnt have a place bought by August 1st. How much above the absolute floor are these people paying? Are there enough of these people that they are really the ones that establish the true floor of that particular market?
I dont know the answer to that but my larger point is, if you rely too heavily on the fundamentals that do not take into account (like it or not) the human factor, chances are good the price will not get all the way down to what you might expect. I am not saying throw out the calculators - or anything close to that. What I am saying however, is if the calculator says the price is X, and there are non-investors who are interesed in that market, the true market clearing price will be X+1 or X=2 or whatever. Either way, it is something that shoud be included in the calculation.
"Ace said...
I'm not sure I understand the comments about how perceived desirability and/or premiums AREN'T factored into the price. Econ 101 proposes that price is very largely a function of perceived desirability, which may differ from person to person. Many factors may go into perceived desirability "
Ace agreed - the only point I was trying to make was (1) the various factors that make up that perceived desirablity that may not be obvious but are still important to some and (2) the potential items which may have changed during the bubble years which affected buyer's perceptions (i.e. the city is no longer a hellhole). Either way though, your right - its baked into the price.
I thought I would give everyone a brief update...
We have officially made our move. We haven't yet found a place to live so we are doing a fair bit of house hunting right now.
I suspect I will only be around off and on for the next few weeks until we find a place to settle down.
crt, thanks, I agree that trying to understand the change in relative prices of houses in two different areas requires that we understand what has changed in those areas and how people perceive them.
good luck, Leroy!
"Cara - the only problem I have with focusing on the fundamentals is that it is way too analytical. The fundamentals assume a rational actor with perfect information. However, there is alot of research being done now on why people do not always act rational, even with perfect information."
This is largely true... but while markets can behave irrationally, over a long enough period of time, the fundamentals almost always win out. (There are exceptions... and and there is a lot of interesting writing on these exceptions but since we are not dealing with one I am going to skip ahead...)
You can't just say "sure the fundamenals don't support these prices, but that doesn't matter because people aren't completely rational."
Even irrational people are constrained in their ability to act on their irrational desires.
During the bubble irrational people were able to find others to bankroll their decisions. With lending standards returning to normal, irrational people are now being forced to explain their thinking to suddenly rational lenders.
Being irrational with your own money is anyone's right. Being irrational with borrowed money requires you to make a believer of someone else.
Those who consistently act irrationally with their money rarely have money to lend for long. Thus, in the end the market will return to its fundamentals regardless of whether irrational people dream about buying something they can't afford or not.
Incomes have not risen sufficiently to justify bubble level pricing. Without income growth the only way to fund bubble level pricing is through increased borrowing. The funny money is disappearing however, the end result will be a return to fundamentals.
"good luck, Leroy!"
Thank you, it has been tiring but fun so far. We have seen some cool places but nothing perfect so far.
crt,
agreed. Most home buyers (actually probably closer to 95% or more) are not rational actors. This is, to a large extent, what I'm afraid of. That buyers will continue to buy at whatever the max amount banks will lend them, thus never re-establishing affordability in much of the D.C. area.
I think you've hit the nail on the head as to whether those buyers will be forced down to fundamentals. Market conditions. Credit availability. New risk paradigms for the banks. These could make even the posh-est places come back to earth. But, again only time will tell. But I agree, individual buyers will not bring the market down to fundamentals. The impossibility of getting a loan with less than 20% down after piggy-backs are eliminated (because no one will buy them on the market) and mortgage insurers have all gone under? That will. (Or rather will if it comes to pass)
Personally, I wish FHA would limit it's low downpayment program to people who can prove that their new mortgage payment (fully amortizing) will be less than their rent. When I came to D.C., I found out about the FHA loans and that they weren't limited by income, and thought, fantastic! We'll be able to buy much sooner (before we get Priced Out Forever TM)! Now I realize that while it seems like a good idea for each individual, collectively it contributes to unaffordably high prices.
In amy's defense, however, there is a price under which it is still cheaper to buy a house than rent even when you know it will drop 10%. For me that's $200k, which I'll admit is a bit absurd, but there does exist such a price and one can calculate it using online calculators. (just re-assign your buy versus rent gain to allowable loss).
Agree with the many posts underscoring that what makes a neighborhood attractive to a potential buyer can be a very subjective thing. Sure, fundamentals are fundamental: location near transportation access, low crime, good schools (for parents), etc. But just as one poster thought N. Arlington didn't have many as many "architecturally distinctive" houses as Alexandria, plenty of people find many N. Arlington neighborhoods charming -- and that includes those "World War II era brick colonials." It seems practically every time I have a guest over at our house in 22207, he/she/they exclaim how "charming" our neighborhood is; several have insisted on going on a walk around the block to look things over!
Just goes to show that what's sauce for the goose isn't always sauce for the gander.
From today's WP chat with Haggerty and Razzi:
"Montgomery County: Thanks for taking my comments. Love your chats. My house has been on the market 4 months in Montgomery County. Only reason I'm selling is because I got married last year and my husband and I don't need 2 homes. My house has quite a bit of equity in it and it took 11 years to build up the equity. I know buyers are looking for the best deals possible but it would be helpful if they realized that not every house is in foreclosure or having a short sale. I priced my house 10K below the appraised value of 2 years ago because we are no longer in that kind of market. As a matter of fact the appraisal was, I believe, well within reason for the market. In other words, no fluff. What occurs to me is that a good number of buyers really may not be able to afford to buy at listed (non-fluff) prices. I've reduced the price by 7K in the hopes that I could get an offer within maybe 5K of the reflected price on my net sheet. But what I'm being told is to lower it more and be prepared to possible give some closing help. All that lower and helping is basically telling me that buyers do not have the income or cash to buy and if that is the case, why are they looking in these price ranges? The difference in price is basically settling for 1 1/2 baths and an unfinished basement rather than 2 1/2 baths and a finished basement. And they still want a relatively non-existent new home "as seen on tv". My son is currently living in the property. I pay mortgage and he pays utilities. It's hard trying to tell realtors/buyers that I'm not just going to give away my equity. And the realtors don't seem trying to educate buyers of this fact. Everyone is not losing their homes. It's a crazy market. Glad I can make the decision to take the house off the market if I want to."
Is this seller mentality still widespread? They think that a fair price for their home is 10k off the 2006 appraisal? I guess pricing your home according to the comps goes out the window when you still hold on to what you could have gotten for your house at the peak.
BTW, I'm a longtime lurker. I currently rent in Arlington and am looking to buy in 2009 or 2010.
Cara - it looks like we understand each other pretty well. Incidentally, it will be curious to see where exactly the banks "settle in" with regard to what loans they will make and what they will not.
For example, from what I understand, until sometime in the 1930's the only loans really available were 5 year baloon notes. Lenders had no obligation to refinance, and there was no equity of redemption. Yes there were some looser and some tigher terms out there, but more or less this was the standard.
After the FHA, the 30 year mortgage became the standard. When it did, it widely expanded homeownership, changed the definition of what was "affordable" and consequently affected prices. No one knew for sure at the time if it would work (i.e. will there be mass defaults). Turns out it did, and affordability was in essence redefined.
The problems seen in the broader lending market now are by and large the result of a few eggheads employed by Moodys or S&P. These egghead came up with an algorithm to determine based on all these exotic loans, X will default, Y will not, and so forth. They were wrong and in some cases spectacularly wrong.
As a result of this the banks are tightening down. However, the real question is at the end of this where do they settle in? If they determine 100% of the new loans are junk, then affordability will be defined exactly where it was before the funny money. However, if they determine that say only 95% of the new loans are junk but the other 5% are ok, at the margins, the definition of affordability will change a bit.
My guess is all the exotics will never go away fully. They will be available to a few more borrowers than they were before the bubble. However, they will never be available at anywhere near the same scale they were available a few years ago.
ww, the minute I reached the poster's line about "$x under the appraisal TWO YEARS AGO" I thought, "why wouldn't you tell us about the most RECENT appraisal?" And of course, we know the answer.
I think you're right on target, and yes, I believe that this factor is very important in explaining why this year's sales are >40% down (per MRIS, May 08 vs. May 07) in desirable neighborhoods (such as most in 22207) as well as in many others.
ps, just to clarify, I disagree with the poster that WW quoted, who believes that the primary factor is that buyers "can't afford" her home and are shopping in the wrong price ranges. Obviously affordability is a real issue region wide as prices have greatly outpaced incomes, as many here have said. But in the specific case of the poster, I would bet you a finished basement that the people looking at that poster's home CAN afford the price range of her home, but that they WON'T. After looking at it, they have determined that the home is not worth the price in this market. They aren't trying to cheat her; they are trying to avoid overpaying for a home that they in turn would lose money on, if they had to sell sooner rather than later. Truly amazing, how much data it takes before some sellers "get it." I would not like to be a Realtor right now.
In defense of buying while assuming another 10% drop, there's this: The down payment has to be somewhere. Ours was in a variety of places and when we divested in Nov, our investments dropped by 7% between then and when we gave the money to the nice seller-lady. So, we "saved" 7% by divesting that downpayment. If we had that money still in the market, it would be done a bit more but I haven't done the math.
Cara; The seller was one of those 30-year owners you mentioned and so she was willing to drop the price to sell...
Not to get off topic or try to change the subject. But, I wanted to hear everyone's thoughts on the effect of an interst rate hike by the fed on home prices. Are we in an era where everyone tinks that approx. 6% is the interest rate that eveyone is going to pay forever? Do too many people focus on what their monthly payment is? I have been extra reluctant to buy a home in the last couple of years for my fear of interst rates rising and home prices dropping dramatically.
Can the fed keep interst rates low forever, risking inflation, just to prop up the housing market?
ACE: I"ve mentioned that some of our offers weren't countered and we got that attitude as if we couldn't afford it. We looked at quite a range in terms of price and looked under what we could afford as we like flexibility...Anyway, I'm still shocked at what some people (a) thought they could get and (b) got. I have not come to terms with (b) yet...
But just as one poster thought N. Arlington didn't have many as many "architecturally distinctive" houses as Alexandria, plenty of people find many N. Arlington neighborhoods charming -- and that includes those "World War II era brick colonials." It seems practically every time I have a guest over at our house in 22207, he/she/they exclaim how "charming" our neighborhood is; several have insisted on going on a walk around the block to look things over!
I think you are referring to my earlier post. I agree about the neighborhoods. As I mentioned, I live in one, and would have sold and moved long ago if I didn't agree.
I was responding specifically to the suggestion of an earlier poster, that the premium for Arlington houses might be the result of their architectural or historic values. My point was that that might explain values for Old Town, but not for most of Arlington where most of the houses aren't that architecturally or historically significant, yet people still pay a premium for them.
I'd agree completely that the nature of Arlington neighborhoods, even those, or maybe especially those, with the old post-war colonials, is a major part of the desirability of Arlington.
While I still think these houses - including mine - are architecturally uninteresting, when I look at houses in other areas I quickly realize that there are lot worse things for a house to be than boring.
Keith K: We live in a 1930's ARL 22205 neighborhood and, although I think our house is cute (AL siding), I LOVE the ones I see out my back yard. brick, slate roofs,they all look different... And the gardens are nice too, always something blooming.
"Glad I can make the decision to take the house off the market if I want to."
This line from the Montgomery County seller is very telling. In it lies the key to why downward prices in a real estate are "sticky" and why buyers should only expect big drops in areas where there are a lot of homes in foreclosure (i.e., the newly developed or redeveloped areas I've often talked about.) In your average area, most buyers have the option of just taking the house off the market ... And in the infrequent case where they don't, you can bet the bank or some other individual or entity with cash, will be at their door before you can say "Will you take $X for it?"
Moral of the story? Yeah, if you're looking to buy in a recently developed or redeveloped area, you have a good chance at getting something for a lot off. (Of course, you won't know when you buy how much further it might fall before turning around ... which it eventually will.) But if you are looking to buy in an established area, don't except to get something there at "close out" prices even in this market. You get lucky and beat the investors and the bank to those few and far between deals, but chances are you won't.
The much more prudent route is to find something you like AND can afford and stop thinking "Oh, maybe I can do better by waiting."
As a sanity check, assuming you were looking to buy in one of these established areas a few years ago, ask yourself whether you would not have been better off had you bought what you could there then. Honestly and truely. Of course, it might be hard imagining what you missed out on if you don't know what you missed.
WW: good find.
Yes buyers are more often than not being required to come up with 20% down. Interest rates are UP UP UP.
45k homes on the market in the area instead of 10-15k.
This seller is out of touch with reality.
And with a lot of buyers who can't sell to move up now, you have to find a different buyer (probably a first time buyer with some cash - and those are A LOT harder to find ).
Actually, the telling comment in the Montgomery County seller's post was Razzi-the-housing-pumper's response.
Elizabeth Razzi: The market is talking to you. You just don't like what it's saying.
Amy, unbelievable. How insulting - and pretty stupid on the seller's part to treat you that way. It's such an arrogant attitude for sellers to assume both (a) that their own house is worth more than the market price for comparable houses (unless they have evidence that those really aren't comparable for reasons that buyers value (e.g., not their collection of ceramic snails or their 70s era fake wood paneling in the living room)) and (b) that they are financially superior to and more intelligent that buyers, who have nothing better to do than spend days looking at houses they can't afford. Further, if sellers were smart, they'd realize that Realtors don't have time to waste with buyers like that, and that the buyers' agent is not going to tell the sellers that the buyers have as much $ as they actually do, because sellers could get greedy and no deal is made.
I went to the WaPo chat to see the columnists' response to the poster, and they were tactful but tried to explain how markets work in a sentence or two. Hope other buyers and sellers are listening...
Lance said...
"The much more prudent route is to find something you like AND can afford and stop thinking "Oh, maybe I can do better by waiting.""
we entered into contract of a home in Arlington in Mar but backed out when we finally concluded that even we loved and could afford it, the 'cost' was just too high - we would've forgone annual vacations, weekly eat-outs, all-day daycare, and my dream of owning a boat, etc. (house-broke in other words.)
so now our goal is to find something we like and can 'comfortably' afford - the rent we're currently paying.
"agreed. Most home buyers (actually probably closer to 95% or more) are not rational actors. This is, to a large extent, what I'm afraid of. That buyers will continue to buy at whatever the max amount banks will lend them, thus never re-establishing affordability in much of the D.C. area."
This was true before the bubble... people want more than they can have.
Given their choice virtually everyone would choose to live in huge mansions on wooded hills and drive luxury cars on their way to boutique stores and gourmet dining...
Nothing fundamental has changed between 2000 and 2008. Most people want it all today just liked they wanted it all 10 years ago or 1000 years ago.
The issue is paying for what they want. With limited resources (most)people are forced to settle for less than they want.
People can't just decide to ignore price.
Since we know that income growth hasn't kept pace with bubble pricing, there are only two real explanations.
A: people are now willing to spend dramatically more of their income on housing than was previously the case. (and this appears to have been the case during the bubble)
or B: they borrowed far more than they previously did, which is simply a way of choosing option A with interest tacked on. (which was of course also done during the bubble)
So the real question is, have people decided en masse to spend a far greater percentage of their income on housing over the last few years?
I think it is safe to say that during the bubble years many people did make that decision. They did it because they were scared of being priced out forever or because they had been convinced that housing would ultimately prove to be a profitable investment. At the very least most seemed to believe that they couldn't lose on the deal.
The bursting bubble is waking people up just as it is waking up the lenders. They will never become completely rational actors, but they never were in the first place. The market will still return to fundamentals.
"Cara said...
Personally, I wish FHA would limit it's low downpayment program to people who can prove that their new mortgage payment (fully amortizing) will be less than their rent."
Actually I wouldnt think that would be a good idea, because I think people who are looking to buy "under rent".
In my case for example, before I bought I was renting a basement apartment for $500 because I was saving up for a downpayment. If my mortgage payment was $500 or less I would have only been able to afford to live in a van down by the river!
Lance,
Honestly? What could I have bought 2 years ago??? Are you kidding me? I couldn't have bought a 600 sqt ft studio apartment from 1972 even in Franconia/Springfield 2 years ago. Not without an interest only or neg/am loan.
So, yeah, I'm waiting. Because I'm not buying something I won't be happy in. I don't need that much. I will settle, but I am cheap. I'll admit it. 30 year loans make my stomach hurt with just the thought that it'll be 10 years before more than half of my payment is going to principle not to interest. I'm going for 20 down, 15 year loan, and I know that limits my buying power. Heck I refuse to get a loan that needs both our salaries to cover it. I know, crazy, crazy talk. But I demand sanity. My own sanity that is.
"As a result of this the banks are tightening down. However, the real question is at the end of this where do they settle in? If they determine 100% of the new loans are junk, then affordability will be defined exactly where it was before the funny money. However, if they determine that say only 95% of the new loans are junk but the other 5% are ok, at the margins, the definition of affordability will change a bit.
My guess is all the exotics will never go away fully. They will be available to a few more borrowers than they were before the bubble. However, they will never be available at anywhere near the same scale they were available a few years ago."
Exotic loans are nothing new. Obviously some of the specific types of exotic loans are recent, but there have been various sorts of "exotic" loans for a long time.
The thing is that most of these types of loans don't truly increase affordability over the long term. They provide a few years of low payments followed by a relatively big adjustment up.
Exotic loans aren't going away. What will go away are lenders willing to offer exotic loans to borrowers they aren't sure will be willing and able to repay the mortgage following its adjustment.
The practice of using an exotic loan to "get into" a home while planning to refinance into a different mortgage a few years later was never affordability.
One of the things the media has given relatively little attention to is the fact that most of these mortgages were sold off to investors with not only unrealistically low expectations of defaults, but also unrealistically low expectations of buyers refinancing or selling before or when the loan adjusted.
If a buyer takes advantage of below market interest rates for a year or two then sells, the investor effectively loses money.(The lenders generally made their money on fees.)
The whole idea was that these borrowers would actually pay the absurdly high interest rates that these loans adjusted to. That is what made them APPEAR so profitable to investors.
Otherwise you are just lending money at below market rates to high risk individuals.
The lenders were telling buyers "oh don't worry, just refinance or sell later when it gets expensive" even while they were telling the investors "when these things adjust up you are going to make a fortune lending money at 10%+ at virtually 0 risk!"
crt "In my case for example, before I bought I was renting a basement apartment for $500 because I was saving up for a downpayment. If my mortgage payment was $500 or less I would have only been able to afford to live in a van down by the river! "
Ah, but you see, you did save up a downpayment, hence you don't need the low-downpayment assistance! By allowing only 5% rather than 10 or 20 they actually did you a disservice by increasing the prices of all the homes around you, and hence your mortgage as well.
The original purpose of lowering the down payment qualification was to prevent people in high rent areas from getting "priced out forever" when buying would be cheaper in the long term. I think that purpose is still a good one. But using it for basically everyone just artificially inflates the costs and forces people like us to live absurdly spartanly while renting to save up gigantic downpayments on inflated prices. IMHO.
Leroy,
I agree with that sentiment. I also have more faith in the market fundamentals re-establishing themselves as Cara suggests than CRT does.
The market fundamentals represent the "sane market's" long term equilibrium. Unless you can convincely argue about "what is different this time" to alter that equilibrium, then that equilibrium will reassert itself in my opinion.
My pet theory back in 2005 when I first started looking at all of the crazy lending was that the introduction of the internet, and the cheap mass marketing, and the ease with which any lender had access to any borrower, changed the name of the game in in the 20% down payment category. In other words, the internet lowered the barrier to entry for a lender. This increased competition and drove down costs for the consumer. As a result, banks eliminated the down payment requirement in their frenzy to do business.
So, with this basic assumption, I was willing to concede that a 20% increase in the cost of housing was supported (a true it's different this time) because of a new way to do business.
So then, take a home, take what you would consider a normal price (late 90's..?) tack on a 1% or 2 above inflation for every year out, and then add on 20% for the newly leveraged 0% downpayment portion. Of course, homes were still way higher than this.
So now, with the advantage of hindsight, we see that these lending standards were grossly inaccurate. So perhaps even this granting of a 20% bump in the price of homes was overly generous. CRT suggests that there could potentially be more lending products available going forward, even with all of the irresponsible products that have been generated, and I agree. However, how big of an effect that has on prices is yet to be seen.
I'm going to go with negligible and come back to relying on market fundamentals.
My $0.02
Cara,
If you're relatively new to following this blog, I would advise not getting too worked up over what Lance writes.
As for creative financing/loans. I look at it this way, they are meant to be used by sophisticated borrowers to manage cash flow or for people who are looking to enter/exit the market in a very specific timeframe. They are not meant to be used as affordability mechanisms.
Even more ridiculous, when someone with no particular wealth wants to take out a home equity loan, for improvements, and refinances into one of these exotic loans, they are truly being an ignorant consumer.
My $0.02
"Leroy said...
The thing is that most of these types of loans don't truly increase affordability over the long term. They provide a few years of low payments followed by a relatively big adjustment up."
There are still plenty of fixed rate exotics that will stick around. 40 & 50 year fixed are probably here to stay in greater numbers than before. Same with negative AM fixed. All will likely be available to those that have low income now, but are likely to have higher or significantly higher income in the next few years. Same thing with some ARMs. A 10 year arm is essentially a bet between you and the lender - you bet you will leave that house before the 10 years is up, lender bets you will stay for some time thereafter. If you "know" you will only be there 8 years, why pay the higher rate on a 30 year fixed?
All I am saying is I feel pretty certain at the end of the day there will be greater percentages of what we perceive to be exotics that make up the market than there was say 8 years ago.
Again, 70 years ago, the idea of a 30 year fixed mortgage was deemed to be patent absurdity - a true cutting edge exotic loan attempting to redefine affordability. Turns out it worked and now we usually dont think twice about it. Yes, none of these exotics will become the new standard, but they will increase at the margins, (and we all know what happens when we are speaking of things happening at the margins).
"Cara said...
Ah, but you see, you did save up a downpayment, hence you don't need the low-downpayment assistance! By allowing only 5% rather than 10 or 20 they actually did you a disservice by increasing the prices of all the homes around you, and hence your mortgage as well."
Actually, the irony is I saved up for the 5% down payment. 8 years ago, I was new to the job market & the wife was still in school earning a law clerks salary. It took us a year to save that 5% and we didnt want to wait the 2 more years to ge to the 20% so we went for it, and we streeeeched to buy and make it work - along with a commitment to essentially eat baloney sandwiches until she graduated.
Fast foward 2 years later - our incomes were now 3 times what they were when we bought. Fast forward 4 more years later, and we now have enough cash saved enough to pay of 70% of the note. We choose not to though, we keep making the minimum payment at 5.5% interest, while reinvesting the rest and making money on the spread.
In hindsight, we really werent qualified to buy when we did, but the bank made it work in part because they recognized we had good potential to earn considerably more, considerably soon. 5 years earlier, we would not have been able to get that sort of loan, so I personally am glad that sort of exotic was around and easy to find back then.
Oh I don't doubt some exotics will stay around, but there are diminishing returns where affordability are concerned.
Going from a 30 to a 40-50 year mortgage doesn't really provide much lower payments. Not only that... but who expects to work for 50 years? Are you really expecting to ever honestly own that house? You could buy it at 25 and finally pay it off at 75...
I think we have pushed mortgages just about as far as we can. A person borrowing with a 30 year mortgage is already planning on paying for that house over the large majority of their productive years.
You can play with exactly how those payments are distributed, but there is only so much that can be done. Back-loading mortgages introduces a great deal more risk and higher payments over the life of the loan.
Exotics provided to specific types of people under specific circumstances make perfect sense. They aren't new and they aren't going away, but they aren't going to provide "affordability" to many buyers either.
"Leroy said...
"Are you really expecting to ever honestly own that house? You could buy it at 25 and finally pay it off at 75..."
Perhaps you never would own it but its still a matter of cash flow. The attorney in the office next to me has a number of estate planning clients who still make payments well into their 80s out of their retirement funds. They do this based on their accountants advice -They are paying a 6% mortgage with money earning 7% in other investments - making money on the spread. If possible they would do it until they die and have the debt serviced out of the corpus of their estate.
Granted this isnt for everyone but you might be surprised how many uber wealthy people choose to have debt forever. I know I was.
"They aren't new and they aren't going away, but they aren't going to provide "affordability" to many buyers either."
No doubt but again we are speaking at the margins. How big does that margin have to be in order to make a perceptable difference? I dont know, but it is something to think about.
Ace said...
But in the specific case of the poster, I would bet you a finished basement that the people looking at that poster's home CAN afford the price range of her home, but that they WON'T.
Great threads these past few days. Kudos to all posters willing to think analytically, even on “behavioral economics” themes.
The above post says a lot. We have gone back and forth several times for a long while about the “worth” of a home. Alas, the seller does not/will not realize that these potential buyers do not hold the “worth” of this home at her price point. Both sides are engaged in “behavioral economics” and in this instance; conservative heads (or pocket books) prevail.
However, my little anecdote. When I first moved to my new area due to a job change, most of my co-workers tried to convince me to purchase. I simply said no and left it at that. After several weeks of hounding, the conversation turned rather hostile. One individual in particular was very irate, especially after I showed him some facts and figures. I finally told the guy that I did not want to be in his position; “underwater”. Well, that set the room ablaze with jeers.
Fast-forward to 2008. The co-worker that was most irate…..is practically begging me to buy his home. Can’t sell, can’t re-fi, underwater and is on the verge of foreclosure. Other co-workers have noticed the irony, yet are certain that prices will rebound, some say later this year. Gas at $4.00, DOW down 300+ points, rampant inflation; nothing will permit these folks (who complain of living paycheck to paycheck) to step back and look at the data.
I have a feeling that these same folks will be ecstatic and declare “problem solved” when/if gas goes down to $3.95.
Lance said...
“The much more prudent route is to find something you like AND can afford and stop thinking "Oh, maybe I can do better by waiting."”
Prudence Lance, is what has been lacking the past few years. Have you not watched the news lately?
Robert said...
"Great threads these past few days. Kudos to all posters willing to think analytically, even on “behavioral economics” themes."
Its an inherent bias of mine. Without giving too much about myself away it is the product of taking a few classes taught by professor Vernon Smith. I never knew going into law school that property law was going to involve so many Nash Theorems!!!
Keith K: We live in a 1930's ARL 22205 neighborhood and, although I think our house is cute (AL siding), I LOVE the ones I see out my back yard. brick, slate roofs,they all look different... And the gardens are nice too, always something blooming.
I'm happy for you. There are nice areas of Arlington, especially some of the pre-War neighborhoods. And those areas do have nice, often very interesting houses. And I especially like the bungalow style houses of the 20's and 30's.
Again, my comments were in response to a specific post that suggested that the interesting architecture and historic significance may explain the premium prices in Arlington. I was pointing out that much of Arlington, including some of the areas that have resisted falling prices, are made up of houses that don't meet those criteria.
I didn't say these houses were bad, or those neighborhoods weren't nice to live in, or that none of the houses in Arlington are nice looking, or that all the neighborhoods have boring houses. I was just trying to make the point that enough of the houses in Arlington are unremarkable and lacking in historical significance, yet sell for premium prices, that interesting architecture and history can't explain the premium. There must be some other explanation.
I now realize how wrong I was. George Washington and Abraham Lincoln probably slept in all the 1952 Broyhill colonials in Arlington. I'll be sure to mention that when I send the pictures of mine to Architectural Digest.
AR6797173, a new listing in 22207,
priced at $599,000.
3/1, 7030 sf colonial in MILBURN TERRACE
Is it priced right for the market?
"5116 27th St N
Arlington, VA 22207
Love HGTV? Tired of Everything you see done-up the same way? Have It Your Way! Ready-2-B Updated, solidly built energy efficient brick colonial w/ 1440sf of additions-layout easy to work with. Priced accordingly. Nott/Wmsbg/Yktn tri. Walk to Lee/Harrison Shops."
Thoughts?
mm, without seeing the inside (how much $$$ would it cost to fix?) or the street, it's hard to say. But if it just needs decorating, it looks to me to be a pretty good buy.
mm, looks as if it's been a rental. And the above ground sq. footage is 1700+; the sq. ft. claimed in the ad includes part of the basement.
http://tinyurl.com/6z77f7
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