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Friday, December 12, 2008
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28 comments:
Here's the other comment from the NYT "Buy now!" article that I thought was informative. It's a good description of why a 4.5% government interest rate will hurt in the long run.
To boil it down: Interest rates will change but the price you paid for a house never will.
http://tinyurl.com/6cauf6
For anyone looking to buy a new home, a 4.5% rate would be great. While it is true that sellers may *want* to increase the price because of the lower rate, that doesn't mean they will or that buyers have to pay it.
To avoid overpaying one can value that property based on a reasonable PITI with a 6-8% mortgage rate and then bid. Perhaps 2000-2001 sales prices as comps? This will take negotiation, but if the person needs to sell you can get a house at a good price with a low mortgage rate. The 4.5% rate idea is also driving down the normal interest rate - today at around 5.125%. And this is before the 4.5% has been realized. This is great news also for refinancers.
I see little evidence that as rates have fallen that prices have gone up. Properties that have been priced well have sold without much consideration of the interest rate. Overpriced properties won't move and the mortgage rate won't affect that.
I don't think prices will increase, I do think some people may think "Oh this is a great time to buy, interest rates are so low!" when that may not be the case. If it pushes more buyers into the market it's a bad outcome in my opinion.
They'll buy at excessive prices and be stuck in a few years if they're forced to sell.
If people were willing to sell at 2000-2001 levels I think all of us would be buying soon :)
JeffB, blacksilver,
I look at it this way: The 4.5 % plan will try to push up prices by roughly 5%, assuming current interest rates at 5.5%. But inexorable economic forces from the excesses of the bubble have at least 15--25% of more drops left on average for many areas.
So, on average, any bailout/stimulus is still likely to leave further drops in the range of 15%. And where foreclosures haven't yet forced sellers to cut prices, the drops are likely to be higher.
Any purchase decision now has to be based on whether one is comfortable riding out that level of drop over the next few years.
If you limit your search to areas where sellers are not in denial, where only 10% further drop is possible, and if the property meets all of your conditions, then I think buying now is not a bad idea if you are willing to ride out further drops.
But if these conditions are not met, waiting further is the better approach.
came across this piece on USAToday.
some excerpts:
"...As painful as the decline has been, history suggests home values, still may have a long way to drop and may take decades to return to the heights of 2½ years ago..."
"...We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks..."
"...a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom..."
happy reading.
I guess the main thing that I take away from it is that the 4.5% doesn't mean much unless you're planning on staying for a long time. If you think there's a chance you might be forced to sell (job relocation, etc.) in the next 2-3 years then it seems like the 4.5% rate will end up hurting you.
When you go to sell buyers won't have a 4.5% rate available and they'll be expecting a lower sale price because of it.
In the example you used TedK this would mean that you would lose the 5% increase in price if you had to sell. It would be an additional loss on top of the price drop due to the market downturn.
I like this one from that article. Why would you ask for a statement from a PR person and treat it as a legitimate prediction?
"National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.
He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. "People who bought at the peak in those states will need time for prices to recover, even up to five years," he says. Yun says people who buy now "have much less risk of price declines and a great possibility of price gains.""
Jeff B.
You read _all_ those comments! I'm impressed. But I think it's clear from those comments that it's very hard to push buyers into the market right now. The low rates may prevent foreclosures for those current owners who bought at unreasonable but not insane DTI's, and that will buffer the mortgage industry from the losses, but at this point I don't think there's anything aside from the return to historical income to price and rent to price ratios that can set a bottom in the market. It's all about the banks remaining solvent at this point.
JeffB,
No one should buy a home if there is a high probability of moving out in 2-3 years. It might have worked during the bubble, but will not work for at least the next couple of decades.
I was talking about the case where the buyer stays put at least 7--10 years.
About the USA Today article
•Rent —Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.
WTF? Did anyone check their math? I hope people don't read the article and take those numbers as gospel, as they are blatantly wrong. Homes traditionally sold for closer to 10x annual rent.
Using their numbers:
monthly rent = $1000
annual rent = $12,000
20x annual = $240,000
Your mortgage (PITI) with 20% down would be approximately:
$192,000 at 6% = $1152
taxes & insurance = $300
PITI = $1452
You'd be a moron to buy, and you would be much wiser to rent at 70% of the cost.
If rent is only $1000, then a fair price would be closer to $150k. That is 12x rent, or nearly 2/3rds of the ratio (20x) espoused in USA Today as 'normal'.
5 years my a$$!
Try 50 years!
Once we find a bottom, which for NOVA is likely closer than a lot of people on this page think, prices will likely stay there for 10-15 years.
The only way that prices catch up quickly is if the dollar collapses and we get hyperinflation. When oil is $1200 a barrel, foreigners wont mind picking up a nice house for 500k.
Contrarian - Yeah I was surprised to see the numbers in the chart on the left-hand side of that USA Today article. D.C. is right up there with the boom markets that are mentioned on every newscast, yet we're never really mentioned with them. Our price decline according to that chart (-24%) is much lower than any other of the top bubble markets.
Novawatcher -- regarding the 20X rent factor, as I understand it, the rent factor can depend on the area. For example, dont quote me on this but I believe in SF proper the rent ratio historically was like 32X. During the bubble it got to like 50X or something but now its reverting back. Not that that makes sense mind you to buy at 32X (apparently buying a house in SF hasnt made economic sense in a long time). I dont know what the historical rent factor is for the DC area...
Contrarian -- regarding the 90% collapse call, that would mean the median housing price in arlington would be about 50K. Im kinda curious, what do you think median incomes will be at that point?
Jeff B -- you picked up on that huh? As it turns out, even some of our more bearish bloggers (Contrarian aside) dont think prices will revert here as much as other areas in the country (much to my chagrin). The futures market has picked up on this and project that DC and NY will be the only 2 markets tracked by Case Shiller that do not get back down to year 2000 levels (adjusted for inflation). Cest la vie...
not to advertise or anything, but a L&F realtor email list I'm on sends up updates when rates change.. and Jennifer @
http://gofirsthome.com/
has these rates as of today:
30 yr fix 4.75%
30 yr jumbo 4.875%
Beating out PENFED currently.
maybe penfed will catch up next week?
BAS -- Is that with 5 points? I don't buy that they have rates that low without major points. The jumbo rate is ridiculously low. I wouldn't trust those rates until I had everything signed.
Zmonet,
I have seeen others, say Amerisave.com, also quote low rates like the above, but I know they have points. They just don't mention it on the web upfront.
Contrarian,
Peter Schiff is correct that the bubble prices are not going to return, maybe not for a century, but you can't jump from that to wave theories and make the 90% drop call.
Such wave theories have been talked about for so long, but have not proven accurate. In fact, people who listened to theorists like Schiff lost a lot of money in the markets in the past.
The global economy is a complex system that cannot be modeled.
Many, many people got the bubble right and wave theorists also got it right, but no one has a predictive model that works all the time.
Beyond extremes of inflation or deflation, which the global central banks have ways of controlling, it is not hard to analyze the factors that affect local real estate prices.
A 90% drop in real estate prices will come only in the event of a tsunami of mass starvation and unemployment (say 40% unemployment rate). If it ever comes to that, it will be something where all your assumptions about your own security will be wrong, so there is no way you can prepare for it.
The Anonymous: it's not based on area, but on fundamentals. Whether it be Des Moines, SF, or NYC, there is an upper limit that bounded it. And that upper limit is rent. In a normal mark, rent is more than PITI -- often by a substantial amount.
To be more accurate, PITI (+ HOA or Condo fees) should not cost more than rent, and ideally it < 90% of rent (some markets the norm is closer to 70). This also means that this ratio is a function of interest rates.
Here you'll see that in 2001, it was around 15 for DC, a little higher in SF & NYC, 10.4 for Atlanta, and 12.5 for KC. With a little math, this can be calculated from the 4th chart for each metro area.
http://www.housingtracker.net/affordability/dc/washington
Having said that, this data inflates that by quite a bit*. What you really want to do it to calculate the price to rent for identical properties, and then average across them. This compares the rent of 3br apartment with the median home price, which is not remotely the same thing. I would imagine that the median home would sell for more than the median 3br apartment turned into a condo.
* Actually, this is really bad methodology, but HousingTracker has to work with what it has, so far that I commend Ben Engebreth for his efforts.
Novawatcher - here is an example of what I am talking about:
http://money.cnn.com/2008/07/07/real_estate/price_to_rent.moneymag/index.htm?postversion=2008071604
See the chart at the bottom of the page.
As you can see, this chart says the rent factor can vary wildly by area - even the 15 year average suggests some areas (mostly in CA have a super high price to rent ratio.
Novawatcher - heres another one:
http://www.princeton.edu/~rmcduff/Market/0805/0805.html
His numbers are a bit different, but you can see again, the difference by area. My point is, if you were say, some guy living in SF waiting for prices to return to 10X annual rent, you would likely be waiting for a long long (Like forever) time.
Thanks for the interesting #s, The Anonymous. I wonder to what extent overbuilt condos that are now being rented out rather than sold are factoring in.
Here's a perfect example of what I consider a symptom of a less-than-robust market caused by multiple delusional sellers in Arlington.
http://franklymls.com/AR6939739
Very nice high end house (and way out of my range, of course). However, look at the pricing. It was built in 2005/2006, at Arl.'s peak. The owners paid less than $1.6 MM, and there is no evidence that they made any additions or changes (why would you, on a new build?) or that others would value them (vs. painting the rooms the color they liked). According to the assessed value (about $1.52 MM) and everything we know about what has happened to prices since 2005/2006 (per the Decade of Sales), that house's peak value was at the time the owners bought it (brand new, and at the top of the market), and now probably has dropped by about 15-20%. However, somehow these owners think that their slightly "used" house is now worth more than $200K over what they paid.
Anonymous: their 15-yr average includes the bubble years. To use those years in the calculations is at best dumb, and at worst disingenuous and sneaky.
Since those data came from the National Association of Realtors, I'm voting for option #2.
And look at the year 2000, almost all of those places at the top of the list were part of the tech boom and were experiencing their own local realestate bubbles. Some of the numbers, I know from first hand experience, are full of crap. For example, during that time frame I was looking to move to Orange County, and I can vouch that that price-to-rent ratio they are listing is BS. The same for Nashville. The same for the Inland Empire (or at least Riverside).
When it comes to realestate, always question, and do the math yourself. For this, I'd have more confidence in OFHEO, HUD, or Case-Shiller numbers.
Novawatcher - I agree that the 15 year average is inflated due to the bubble years, but look again at the second source I sent you.
http://www.princeton.edu/~rmcduff/Market/0805/0805
The numbers he cites are years 1990-1997 and even back then, he is reporting big variations in price to rent ratios by city -- some cities over 20X rent. Some cities under 10X rent.
His explanation as to this larve variation makes sense to me:
"Each city has a natural long-run price to rent ratio that depends on many factors, including the growth rate of rents, the rate of homeownership, mortgage rates, etc. We should not expect to see the same long-run price to rent ratio across cities. As a basic rule, the ratio should be higher in cities that are growing and lower in cities that are stable or declining (just like you would expect a higher P/E for Google than you would for Exxon-Mobile)."
Its obvious too the guy believes the whole thing is a bubble, and prices will go down. Thus, I dont question his motives as I do the NAR.
Either way, it clearly suggests that in some cities, people are willing to pay more than 15X annual rent, and in other cities, they would never dream of paying close to 15X annual rent.
DeForest McDuff's (yes, that is his real name) analysis suffers from the same problems as Ben Engebreth's. More specifically, they are not comparing likes to likes. This isn't quite the same thing as the representative statistic problem*, but has has some of the same faults. For example, in some areas, the choice is between a condo and an apartment. Physically, they are fairly equivalent. In other areas where the CPI is made up of rental apartments, homes are exclusively SFH homes and condos don't exist. In those areas, the rentals would be 2brs and the homes would be 4br with quadruple the square footage, a 2 car garage, land, etc.
To put it nicely, it means that those sorts of analyses are worthless, if not deceptive, when comparing different areas, because they are not truly measuring price-to-rent-ratios. They do have some merit for comparing the *same* place over time. When you do that, you see that San Fran is in trouble (1990-07 = 20.9, today = 37.2).
In other words, from that data there is no way that you can conclude "that in some cities, people are willing to pay more than 15X annual rent, and in other cities, they would never dream of paying close to 15X annual rent." Those measures make impossible to compare absolute prices or ratios of cities (you can compare rate of change), as they are normed by different baselines.
Even ignoring that, Price-to-rent is not a great metric (not bad, just not great). Price to PITI is a better, more stable metric.
* The problem with the statistic, er, problem, is that it compares single representative statistics, such as medians or means. The problem is that people assume that the distribution is unchanged. But people's buying preferences, and abilities change, and they will make substitutions, etc. A good example of this is the Oakton/Vienna area, where median prices are largely unchanged for the last 3 years. But if you compare resales of identical homes, or use a quality normalizer, such as past tax assessments, you find that prices are 20% off of peak. For example, for those areas, prices peaked at 110% of the 2006 assessment, and now are selling for 90% of the 2006 assessment. But the median tells a different, if deceptive, story.
For example: http://novawatch.blogspot.com/
I haven't updated that website in a while, but the data isn't any prettier. And for those that are fans of binning, if calculate monthly averages from those data it's clear that prices peaked at 110% of 2006 assessments, and are selling for 90% of those same assessments. But, the median says otherwise. But I could care less about the median: I'm just happy I can buy the same house that sold for low $800s in 2006 for the high $600s today.
A sobering a scary look at the alt-a mess on 60 Minutes tonight. The report is online.
http://tinyurl.com/66u37r
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