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Monday, September 15, 2008
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23 comments:
hey
we are talking about the housing crisis this week on www.purplestates.tv (bipartisan video project working with the washington post). You have some good thoughts about this. Want to come join us?
Cinnamon Kennedy
online producer
www.purplestates.tv
twitter: cinnamonk
I'm seeing 30 year fixed for 5.5% on conforming loans. However, I'm wondering if the current economic crisis and the fear of job loss may discourage people from pulling the trigger on a purchase. I know it would certainly scare me right now...If 5.% interest rates and falling prices don't increase sales, then we may be in for a long 5 months for real estate.
Anyone else have thoughts on how the falling markets impact the psychology of potential buyers?
zmonet
Considering that the commonly held wisdom about interest rates was "if the prices fall the interest rate will go up and you'll still be priced out" I'd say all the 5.5% apr does is alleviate that unsubstantiated fear. I.e. "everyone" thought this spring that you needed to consider buying now, because by the time prices came down interest rates wouldn't be good anymore. But here we are months later and interest rates are still great (relative to anything other than 2003). So, I don't think that the rates will effect buyers decision to pull the trigger at all, it will just effect how much money they can borrow for the same cash-flow.
*"everyone" being the people I talk to in real life, I wasn't on this blog then.
Cara,
I wasn't meaning to imply that 5.5% interest rates will cause a buying spree. I think it has made realtors and sellers think that there may be a spurt. I see this evidenced by the number of open houses over the last few days and a slow down in price reductions in the 125+ houses I have been tracking. When I talk about the impact of falling markets, I'm more talking about the decline of the stock market and the fear that is just starting to creep into the mainstream regarding keeping jobs, not to mention huge "losses" in 401Ks/stock holdings. If "feeling richer" made people spend more on houses on the way up, will "feeling poorer" make them spend far less (or not at all) on the way down?
Interest rates are tied to 10 year treasuries.
As long as there is economic uncertainty or a slump, that bond yield will be low because people will buy them up. That means interest rates will be low.
HOWEVER, if there are inflationary pressures, that treasury yield goes up because your effective rate is less so less people buy them at auction. This drives up mortgage rates, like it did earlier this summer.
Usually, 30 year fixed mortgages are 200-225 basis points higher than the 10 year bond, which is at 3.31% today.
Uncertainty in the credit market can make that spread wider.
I mean to say "Mortgage interest rates"
Zmonet,Shamrock,ZeropointZero,
jeremy,zapoteca,
Marc,GoldH20 & Cara
Thanks for everybody's advice. I am not offended. I am here to ask you guys and Share. This what blogs all about isn't it?
Cara,
I am using the calculator you referred.
- Leo
Thanks Doug, I understand how mortgage rates are set.
What I am looking for input on is the impact of people feeling poorer and how that will impact what some people seem to be saying is a coming leveling, if not upward movement, in the housing market. I guess this depends on just how much stock market volatility we have going forward.
Thanks Doug,
I never took an econ course so I don't know how exactly mortgage rates are set, so I greatly appreciate your comment.
Calc. Risk, has talked about mortgage rates versus 10-year treasuries before, and I had always understood this to be a correlation, due to two rates being effected by the same market rather than a direct causal connection. Is this correct?
But I had forgotten about the whole point, of that inflation expectations set the rates people are willing to pay/buy at. Thus, the recent minor decreases in the mortgage rates being a result of the recent confirmation that the inflation worries appear to have been overblown, because the inflation seen was purely commodities based, as opposed to a wage-price spiral, makes a lot of sense.
Thus since I am of Krugman's and CR's opinion that inflation is not happening in any extraordinary way and that deflation might even occur, I am now more confident about my decision to put off buying for another year, because I no longer expect us to inflate our way out of the housing bubble, and thus that rates will remain nice and low.
Zmonet,
I don't think either rates or the stock market downturn are dominant factors that can overcome the return to fundamental affordability required to re-assert a performing loan portfolio for major mortgage holders. But sure, feeling poorer, or losing jobs could indeed eliminate any dead-cat bounce that normally would have happened, thus continuing the downward house price trend, and potentially avoiding the long stagnant period in home prices experienced in the DC area last time. Or it might contribute to an actual downward overshoot. Hard to say, but I wouldn't look at how sellers and realtors are interpreting the winds if I wanted to come up with good predictions on the housing market.
I dont feel any poorer.
I never treated my house like an ATM. I treat it as any other loan, as something I will pay off as soon as I can.
My home is worth what it is worth. I intend to pay it off long before I sell it. My kids may be the ones selling it.
Doug, as a renter, I also don't feel any poorer. We had a bunch of our mini-nest egg for the downpayment in Mutual Funds, but took them out of that this spring. A little later than we should have, but it's not like it wasn't obvious that if you actually need liquidity to buy a house in the near future, you shouldn't keep your money in a potentially falling asset like stocks. It's in savings, earning a pittance (3%), but I don't care (so long as inflation doesn't beat it too badly).
So, if serious buyers are like me (a dubious proposition at best) then the falling stock market does nothing. If however, they were planning on borrowing from the 401K to make the DP, then that's another story and they may need a few more months to devise a better plan (than selling stocks at the bottom to create liquidity now).
Doug,
I'm not talking about your house making you feel poorer, but rather your investments falling making you feel poorer. Maybe this doesn't apply to you. I know when I look at my investments and 401K, I immediately notice that if I were to liquidate right now that I would have substantially less than I would of had if I liquidated a year ago. This doesn't necessarily make me feel "poorer" but I probably don't have as much of my money in a 401K/IRA/stocks as most people. Still, the uncertainty in the markets does make me a little fearful that I won't be getting the return on my investments I'll need to retire at 65 (or ever) and if I was in the immediate market to buy a house it might give me some additional pause. Of course thinking about retiring and saving money, not to mention about responsibly purchasing a house, are crazy ideas in this country.
We moved almost everything into treasuries early this year. Not even making 3% like you but at least I didnt lose 5% yesterday, lol.
Doug,
No worries, my retirement's entirely in treasuries.
Zmonet,
Well the whole point of buying instead of renting is that eventually you'll have the house paid off and only have maintenance and property taxes to worry about. So, I guess, the natural conclusion would be, if everyone really starts to worry this way, then prices will have to come down to the point where 15 year loans become affordable to most buyers on a cash-flow basis, rather than the "standard" 1st time buyer loan be the 30 year loan. I just don't think it's likely that the market mentality would move that far towards my usual absurdly conservative stance. But who knows? I got this way by growing up watching my parents struggle under maxed out credit cards every summer (Mom was paid on a 9 month basis), so maybe the whole country will learn the hard way from personal experience. It could happen.
Cara -- I would love it if people became more savings oriented, but I don't think a consumer nation is set up to get there very quickly.
Wow, I'm impressed that you guys are invested in treasuries. I hope other readers were that forward looking.
zmonet,
Don't be too impressed, that was the default setting when I got the job and I've never bothered to change it.
:)
Leo - the one thing that people often don't realized when they go to buy their first place (or forget when doing rent comparisons) is that there is more to owning than just a mortgage.
With renting, you have rent and renters insurance.
WIth owning you have:
mortgage (principle + interest)
homeowners insurance
property tax (this can be a shocker)
recurring maintenance (lawn, snow removal, etc.)
emergency maintenance (replace shingles, etc.)
OT...
does anyone know any similar site/blog focusing on MoCo? i think we're ready to start looking at Bethesda/Chevy Chase/Rockville/etc. homes more closely.
tks!
Whoops, I forgot about home owners association (HOA) fees. These can range from $50 a year for some neighborhoods to $500 a month (or more) for some condos.
zmonet:
5.5 looks really great right now on paper, but if I wait five months, the interest rates are likely heading much lower. I have seen 3.5 percent before this financial crisis ends, which I find unbelievable. So why jump in now when prices are still high, and interest rates are sliding. Let's see where this is all going. Are real estate prices bottoming out? I hardly think so, looking at the data, so I don't know what a fair price is for RE these days. When the flood of CRE enters the market, and people start losing jobs, there is the prospect of even better deals. So I am one of those renters waiting and not drawn in by sucker pricing.
novawatcher, I would add to your list:
renovations/additions, such as kitchen or bath remodeling, adding a deck or patio, adding on a bedroom or family room, etc.
Even people who buy new houses will run into these if they stay in the house long enough. And most who are buying within 10 miles of DC are not buying new or entirely renovated homes.
NovaWatcher & Ace,
Now I am doing the right math including all those you both mentioned.
Thanks for all the advice.
- Leo
Not that it matters, but to clarify my position: I sold my townhouse 6 months ago because I saw enough downward movement in price and have been renting. My point is that I am firmly in the camp of waiting and seeing how this plays out. I rather buy when the housing market flattens out or even starts going up than buy in too early. No knife catcher here.
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