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Thursday, December 4, 2008
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60 comments:
For those who don't want to subscribe to the WSJ here's an
NPR story on the possibility of the Treasury inducing a 4.5% 30-year fixed rate for new home buyers.
My question is, are we (potential buyers) really that dumb? This is being pushed as a method to _prop up_ housing prices. What part of that doesn't signal to home buyers that if you and everyone else are getting this rate, you'll also be unnecessarily overpaying for your new home? Duh! These people who have been sitting on the sidelines for years that they want to attract back into the market have also been reading blogs and doing the math, etc trying to understand why prices got so high and how far they need to fall. I am of the opinion that nothing other than rental equivalence will induce buyers to buy. Yes, 4.5% interest allows that price to be slightly higher than otherwise. My rough guess-and-check estimate on the Ginnae Mae calculator says that going from 5.5 to 4.5 allows a 5%, 10% increase in purchase price (1 year, 3 year occupancy). When similar homes are listed at 20-30% different prices, is this really a big deal? How long you think you're going to stay in the house has a much much larger effect. And anyway, you have to consider the interest rates your future buyer will have.
Okay fine, nobody has to consider any of these things, we'll all continue to look only at our own bottom line and off we go racing up out of affordability again.
And Calculated Risk has a very good take on the question. If he's not worried that this interest rate trick will stop the price declines, then I'm not worried.
CR direct link to story
I've been playing with some rent/buy calculators (initially in an attempt to guage the effects of 4.5% interest rate). They are extremely sensitive to underlying assumptions input. So:
a) What calculators have people found useful? My favorite is dinkytown follwed by NYtimes.
b) What assumptions are people using? I have generally used 3% inflation, 5% investment return (conservative)
c) This one is the trickiest (so I gave it it's own letter)- What appreciation estimate do you use? This has tremendous bearing on the output of the calculator. I find it particularly difficult because I think the farther prices fall in the short run, the more likely we are to see appreciation after that. So, say a 30% decline over the next 2 yr might be followed by years of 3-4% increases, whereas a 10 decline might be followed by years of stagnant prices. As I try to use the calculator to determine a good price at which to buy, as I decrease the price, I have to increase the appreciation.
I'd be interested to hear what you all use. Maybe I'm way off.
I don't see the 4.5% interest rate having much of an effect on my decision-making process since I think home prices have a long way to go. The only ones I really see being influenced by this are people that don't think prices are too high - and they'd be buying anyway.
Maybe it will affect how much those people are willing to pay but I'm not sure it will bring a lot of people in from the sidelines.
To follow up on Edward Allen's comments. I agree - releasing this news was a terrible idea unless they planned to implement it immediately. As you said, if I was thinking about buying, and I heard this, what would a rational person do other than wait to hear the details and see if it was implemented? Depending on how widespread this story is, this could kill January sales.
I disagree a bit on the govt being overwhelmed by Alt A holders. This is just for new purchases, not refis. I think they will do their best to get noticed by new buyers pulled off the sidelines by this, but my assumption is there would not be much direct benefit to them (their credit is likely trashed anyway - very small chance they could get a new purchase loan now).
Cara - to answer the question, are we really that dumb? Unfortunately I think the answer is YES! I dont believe this blog is representative of the general public - this group is far more educated, and likely more risk adverse, as evidenced by the mere fact that we sought out this blog. Many I know who buy simply read an article or two, play around with a couple of online calculators, and then go house hunting - its really absurd how little thought goes into it for many.
As to the efficacy of this program, I think it could pull some buyers off the sidelines who could afford it, but thats it. If the underlying problem is affordability (which I think it is) there will be many many more waiting until prices come down to their market clearing price.
The more I look at this, the more I think efforts to fix mortgage rates at 4.5 percent are misguided and will only worsen the market. The first reaction will be from would-be homebuyers, who are now going to postpone any buying decision until the government figures out the new rates. Why rush to get a 6 percent mortgage, when 4.5 percent looms in the future? SO when the market freezes, the government will panic and ratchet down the rates even more?
The force behind this is the homebuilders, who want to create a new market. They are not interested in existing homebuyers, so if this rate is offered only on new homes, the market for existing homes will dry up and the inventory of unsold homes will swell.
If they decide to offer this to everyone, watch for a stampede of current homeowners renegotiating their mortgages, including all of those happy with paying the mortgages they now have and not in any trouble at all. The paperwork involved would be truly staggering.
But I should add that I have thought of a grand and universal mortgage refinancing plan as one way out of this mess. If the U.S. government were to back mortgages for everyone at 4.5 percent, it could create a new class of federal mortgage bonds that would carry a rate that could be higher than Treasuries. They could pay a rate of 4 percent, in lieu of 2.7 percent for long-term Treasuries. We don't have much problem selling this sort of debt even now, but this sort of float at attractive and guaranteed rates could dry up investment funds in Europe, thus worsening their recession, and so ours.
My conclusion is that it is better to get out of the way and let the market work it out. It took Japan a decade to work through this because they tried to manage their collapse, and I fear that attempting to manage this collapse is only going to drag out the pain. I read that Japan's market eventually settled out at about 40 percent of their value. Dutch tulip bulbs, which once sold at the value of an Amsterdam canal house, settled out at pennies.
The Post finally caught up with the WSJ:
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/03/AR2008120302889.html?hpid=topnews
"so if this rate is offered only on new homes, the market for existing homes will dry up and the inventory of unsold homes will swell."
EA - are you sure about that? I read it the first time and thought as you did, but then I read it again and assumed "new" meant purchase (distinguishing it from refinancing).
If this (or really any help) is given solely to the homebuilding industry, it could really exacerbate the problem. A big issue right now is a huge overhang of homes. If you prop up the builders, they continue to do what they do, - build homes, further adding to the problem.
Another problem with the homebuilders is there size. Is anyone else surprised none of the major builders has declared bankruptcy or merged yet? A generation ago, when you had hundreds or thousands of thinly capitalized mom & pop builders, they would quickly go belly up in a downturn, thereby quickly reducing the supply of new homes being built (i.e. speeding up the recovery).
Now that we have a market dominated by a handful of major national builders (with large wads of cash) they stay around longer, continuing to build where they think they can squeeze out some profit - and every new home sold is one current home that sits longer than would be the case if the building stopped.
Incidentally, I heard some realtor groups are telling their offices to gear up for some buying, as if this plan was already set in stone. Further, what if they do it and it works, what happens when the program expires? Will the buying continue? One of the things killing the auto industry is that consumers are now conditioned to expect 0.0% financing. Are we setting the stage for the same thing in homebuying now?
Honestly, while I think this had the potential to do some good, the potential downside is too great. Im worried now that the cat is out of the bag (and baked into expectations), the treasury has no choice but to implement it. Whoever leaked this thing to the media should be dragged out into the street and shot.
eponymous said: "As I try to use the calculator to determine a good price at which to buy, as I decrease the price, I have to increase the appreciation."
Save yourself all the judgment and guessing and stick to the great rule of thumb of paying no more than 135 x the monthly rent that your target property could reasonably rent for. That is the pre-bubble average price to rent ratio.
Regarding the government's new plan to prop up the market with artificially-low mortgage rates:
Let me get this straight. The global financial mess was a result of asset bubbles in most every class of assets, especially housing. The bubble in housing prices was due, in large part, to abnormally low interest rates designed to save us from a recession after the tech meltdown.
So now the government, in its infinite wisdom, wants to "fix" the financial mess with abnormally low interest rates (i.e., the very thing that caused the problem in the first place)?
Is the Treasury out of its mind or am I?
crt,
If you listen to the NPR story, which sadly was not written out in any detail, there are two things to ease your worries.
1) No, this is not just for new homes.
2) 80%?? Of the homebuilding market is still small builders.
eponymous,
I use Ginnae Mae, and irvine housing blog. I assume 0% appreciation and just allow the difference between buying and renting acount for changes in sale price. However, IHB made a good point along the way which is that in this market you should be comparing your first year costs. The logic being that, if it makes sense to buy within the first year prices probably won't drop much further, and secondly the question you are asking yourself in a falling market is not whether to rent or buy, but rather whether to rent 1 more year or buy now. Thus if it doesn't make sense at the current price in the current year, there's no reason not to wait until next year. So your assumptions should reflect what question you want to answer. As far as appreciation, I just run those in a separate Excel spreadsheet myself to see how long does it need to appreciate at 2-4%/year in order to overcome an initial drop of an additional 10-20%.
JF,
Maybe they're trying to "fix" the problem by taking all potential buyers off the table this winter while they wait for 4.5% interest rates. Make the rest of the drop happen now. And then, never cough up the low rates, and create the true bottom at realistic rates.
Perhaps not.
It seems like Treasury is looking to extend the timeline by propping up prices. Why do visions of "Hack-a-Shaq" come to mind. In the end, the outcome will be the same -- it will just take longer and have (possibly many) unintended consequences.
Maybe they're trying to "fix" the problem by taking all potential buyers off the table this winter while they wait for 4.5% interest rates. Make the rest of the drop happen now.
As optimistic as most sellers still seem to be, it seems like both sides will have a "wait and see approach." Many sellers still feel like they are selling at a huge discount because they could of gotten a much higher sale price in 2005. If the media plays up that this whopping less than 1% drop in rates (if it happens) is going to cause a buying frenzy, how likely will sellers be to chop prices down?
Floating this story now seems like a HUGE mistake and I would think there only options are to quickly state that they are not going to do it OR take steps towards implementing the lower rates.
One last thing, then I'll shut up.
If implemented, I wonder how this plays out on low end versus low end sales. Jumbo conventional mortgage rates are currently 7.75% (2.5% higher than a coventional). I wonder if something will be done to lower the jumbo conventional and/or jumbo rates -- either keeping the 2.5% spread on jumbo conventionals or lowering them even further.
FYI -- I see AIMLOAN currently has rates of 5.25% on a conventional 30 year fixed. Rhetorical question, but do rates really need to be lowered further?
crt,EA, Zmonet,
Paulson and Bernanake have been going back on their words in this crisis, especially with the TARP.
So there is hardly any guarantee that they will stick with this plan even if Congress supports it.
But even the expectation of the Treasury plan might force lenders to reduce the current rates even further.
The 4.5% interest rate is a brilliant political move that benefits nearly everyone:
Anyone selling a house:
existing owners, builders and realtors just got a federally supported price cut without actually having to lower prices.
Anyone owning a house, even though they can't refinance using the 4.5% rate will get acecss to a rate almost as low as this program effectively lowers rate further.
The government: given that the entire world is rushing to buy treasuries, the government can sell a 3% bond to finance this, but then earn 4.5%. Brilliant.
Buyers: Those on the sidelines get a new reason to jump in with a low rate that helps them buy more affordably.
There is risk of overpaying if rates jump substantially. The gamble
is that as long as we have low inflation/deflation, there will be less reason to increase rates.
The idea is to help the markets cool without freezing. To get the price declines that some on this blog talk about the housing markets would need to freeze for an extended period - with severe negative economic effects.
Don't worry, even with lower interest rates, prices will still fall, but hopefully not as fast and with more buying activity to revive the market.
Blacksilver2010 -- I don't think the gov. gets 4.5%, more like 4% and I'm not sure how much they expose themselves to some default risk. I also imagine there is some administrative cost to the entire thing...and you can't sell an unlimited amount of 3% treasuries.
Lowering the interest rate doesn't help people waiting for a rational market...it just extends the game, something you allude to.
Concerning the government's take...that 3% on treasury bonds is for all intents and purposes 100% guaranteed.
The 4.5% mortgage interest income is anything but guaranteed. If someone gets one of these loans to buy an overpriced house and then runs into trouble...good luck selling that house at that price to someone that can only get a 6.5% mortgage a year from now. I don't like the government taking on this debt AT ALL.
This is of course an amazingly stupid idea... others have already pointed out that this is little more than an attempt to solve a problem caused by abnormally loose lending with more of the same.
I suspect the real objective here is to slow the rate of decline in housing with the misguided idea that that will lead to a shorter/milder recession.
I don't think this plan will work well. It will take massive amounts of borrowing to artificially lower mortgage rates to 4.5% and in the long run the affordability problem remains. How long is the government going to attempt to keep mortgage rates artificially low? How much money will that take?
Once they do let mortgage rates return to market prices, what will that do to the housing market? They may very well be setting themselves up for a situation where mortgage rates might jump very sharply once the program ends.
"Further, what if they do it and it works, what happens when the program expires? Will the buying continue? One of the things killing the auto industry is that consumers are now conditioned to expect 0.0% financing. Are we setting the stage for the same thing in homebuying now?"
To some extend I think the auto industry was just borrowing buyers from the future. Relaxing lending standards and lowering interest rates will of course bring in a certain number of marginal buyers who otherwise wouldn't have been able to obtain financing, but you can't just keep doing that. Sooner or later the "buyer" is going to have to pay for their new truck, even if they did get it interest free for 2 years or whatever.
With lending standards returning to sanity, unqualified buyers are being removed from the market. A buyer today might actually have to save up some money in order to purchase a new vehicle, and that takes time.
I personally don't like this program since it will give the Sellers a reason to cling to their high prices. After all the Buyers will rush right in - right??
How long is the Program supposed to last or does anyone know?
Can someone explain to me WHY the government is trying to "prop up house prices"?
Why is that considered the solution to the housing bubble?
Given that the reaction from people in my office to my announcement of this possible program was "Oh, wow, then you have to buy!!!" I'm thinking CRT is right. Most people don't think this through.
I think calculated risk is right though that the effect on the market will be neglible compared to the other major forces right now.
Sure, I'd love to pay less interest, but I plan on doing that the sure-fire old-fashioned way. Pay down the principal. People really don't realize how much less interest you pay on a 15 year rather than a 30 year mortgage, and how little the increased payment is, if you can also get a lower rate by going with the shorter term. Since we'll be one of few 1st time buyers using that method, (as opposed to letting "everyone" get the 4.5%) we'll actually be at an advantage in terms of the total house cost overtime.
CRT: No, I meant only to newly constructed homes. You have to understand that it is the homebuilders who are pushing this, to get their new home inventory moving and get back into building more homes. You hit on the crux of the problem: Joe Sixpack offering his $500,000 home on the market with the expectation a new homeowner will pay a 6 percent mortgage, versus a homebuilder with a $500,000 new house offering 4.5 percent 30 year fixed.
I have pondered this for some time, and the only justification for it that I can guess is to reignite the property bubble, with the expectation that a boom in new house construction will trickle down to the other parts of the market. I believe that at this point, it will only result in increasing the overhang of unsold homes, or increased instances of people walking away from their
mortgages.
The difficulty in making any assessment of how this will work is the explanations of the Treasury plan differ in description, according to various news accounts.
T
Tabitha,
They're not trying to solve the bubble, they're trying to keep banks solvent. In this instance by offering to buy MBS's from well-documented loans at reasonable LTV, while simultaneously providing knife-catchers to keep the interest payments flowing to the banks.
If we're truly in a deflationary cycle anyway, 4.5% will be offered anyway and seem high if future money will be dearer.
cara,
1) is it possible and 2) does it make sense to get a 15-year loan with 10% down?
tks!
MM,
You can get FHA 15 year fixed loans with as little as 3.5% down, so yes, at least in principle. 15 year loans are generally marketed to refinancers, but you most certainly can get one on a purchase. Basically they push 30 year loans for purchases because that allows the highest loan amount, and hence the highest payout for all the brokers and bank, whereas with a refinance (unless you heloc'd or are rolling in credit-card debt) they can't get you to take out more money anyway, so might as well offer you the 15 year which carries less risk for them (by virtue of being shorter term).
Does it make sense? How much should you hold onto your cash even if you have it and make the lowest down-payment and lowest cash flow possible, so that your saved money can keep earning interest? That depends on the details, and I haven't made a spreadsheet for that yet. But in general, unless the interest rate is extraordinarily low, it makes sense to put down as much as is feasible (i.e. keep cash reserves for improvements and repairs on hand) because that's money you then don't have to pay interest on. And then there's the question of, if you only have 10% to put down, is mortgage insurance prohibitively expensive, such that it makes more sense to wait. In general, MI is actually fairly reasonably priced, so it's a matter of how much is it worth it to you, to be able to buy now rather than later, and calculating that out.
ZMonet: I agree. Another way of looking at this situation: if everyone wants to borrow money from the Federal Government (witness the punished yield on Treasuries), then why shouldn't we oblige them?
Many have pointed out that it was loose credit that got us into this. The difference here is that, managed well, we can put the money on the sidelines to good use, earn a profit on the debt, and revive the business cycle. Most countries couldn't dream of doing this, espesically now, but the safe haven status of US Treasuries gives us the ability to do this. When the world beats down your door for a product, in this case US federal debt, why not sell it and earn money on it... while supporting the US economy at the same time. What we have to do better this time is put some regulation in place so that we can keep out loans with a high risk of default. Otherwise I agree with the comments that we won't get the 4.5% - we'll throw the money away into more no doc loans. Good management of this program is necessary.
The *REAL* irony is that it was bad US security products that got investors and banks into this mess. Their reaction to the crisis has been to INCREASE money flows to the US, but to the Federal Government instead of our banks and businesses.
Blacksilver - the more I think about it, the more I think you have nailed the current thinking from the masters of the universe.
As it stands, and as sad as it is to say, right now the US Government is the safest investment on the planet. EVERYONE knows we are going to start printing to fight deflation, and yet they are still willing to take everything we can give them at a very very modest rate of return. In that regard, it really is a once in a lifetime opportunity - its an avenue out that Japan didnt have...
And to think, at 4.5%, even when you factor in default rates, servicing costs, etc. the spread is likely large enough you are still making money on the thing.
Not saying I am endorsing this mind you. Im not smart enough to think through all the ramifications of this long term. However, on the face of it, it makes sense, and it seems to fit in to our understood assumption of the govts plan to print until it matters. Interesting...
Wow. N. Arlington remains VERY pricy:
4405 17th ST N Zoning: R-6 Lot Size: 5866
Owner Name and Address: Legal Description:
DOSTER BRIAN L LT B BK 6
DOSTER KATHLEEN WILLETT HTS
4405 17TH ST N 5866 SQ FT
ARLINGTON,VA 22207
Property Class: 511-Single Family Detached Map Book Page: 042-12 Polygon ID: 07026020
Tax rate: The 2008 general tax rate is $0.848/$100 of assessed value.
VIEW IMPROVEMENT DETAILS
--------------------------------------------------------------------------------
ASSESSMENT HISTORY
EFFECTIVE DATE LAND VALUE IMPROVEMENT VALUE TOTAL VALUE
2008 01- Annual $485,100 $300,700 $785,800
2007 01- Annual $485,100 $360,800 $845,900
2006 01- Annual $485,100 $381,900 $867,000
2005 01- Annual $396,000 $321,600 $717,600
2004 01- Annual $302,000 $199,900 $501,900
2003 01- Annual $264,600 $186,900 $451,500
2002 01- Annual $196,000 $170,700 $366,700
2001 01- Annual $171,500 $175,900 $347,400
2000 01- Annual $116,800 $192,600 $309,400
1999 $95,900 $192,600 $288,500
1998 $91,400 $192,600 $284,000
1997 $84,600 $203,800 $288,400
SALES HISTORY
SALES DATE SALES PRICE SALES CODE GRANTEE DEED BOOK DEED PAGE
11/17/2008 $965,000 DOSTER BRIAN L 4225 1654
9/26/2003 $731,000 DYER WALTER A & ALLISON R 3600 2072
I received an ad in my mailbox today saying the Park at Courthouse (2220 Fairfax Drive, Arl, VA 22201) is rolling back prices to 2003 levels.
But the price is $600K for a 1512 sq ft, 2 BR + Den, brand new.
Is that really 2003 level? If so, those of you interested in ARL may want to take note.
"Ted K said
But the price is $600K for a 1512 sq ft, 2 BR + Den, brand new.
Is that really 2003 level? If so, those of you interested in ARL may want to take note."
Hmmm - assessors office indicates very few of the 2BR units have sold since it first opened (2007). The few 2BR sold have sold in the 650K range.
8% off 2007 prices isnt really 2003 prices - sounds like a gimmick to me. Still if 600K is your starting point to lowball from...
this 2005 TH is going to set the new low for BROMPTONS AT CHERRYDALE (off Lee Hwy in 22207).
Arlington assessment record shows this TH was purchased new on 2/7/2005 at $739,123. current owner bought it on 3/28/2007 for $860,000. (that's the "it's different here" price, btw)
Sales in BROMPTONS AT CHERRYDALE From 07/01/2006 to present:
SALE DATE SALE PRICE 5/15/2008 $865,000 4/15/2008 $783,900 1/4/2008 $815,000 12/27/2007 $785,000 7/24/2007 $790,000 6/26/2007 $790,000 3/28/2007 $860,000
from my observation Cherrydale is doing very poorly right now, for reasons unclear to me. if this homes is sold at listing, there is going to be a lot of unhappy neighbors.
MM:
Ah, yes, the famous Bromptons at Cherrydale. Famous due to the Bromptons building that's been sitting there half-finished for over 18 months, visibly decaying. The County formally began legal action against developer Ed Peete Co. in September, which will result in demolition of the building, which was discovered to have unrepairable structural flaws.
This eyesore/disaster undoubtedly has been having an impact on resale prices for other Brompton units in the same complex. You can view the eyesore on the Google Streetview via the website you linked.
Tabitha, i left a post on yesterday's blog re your dad. Best of luck and supportive thoughts to you and yours.
"current owner bought it on 3/28/2007 for $860,000. (that's the "it's different here" price, btw)"
LOL. good one. frankly, i'm surprised that people would even pay the "low" price of $730,000 for those townhouses. they aren't near the metro, have no yard at all, are tightly packed together so that no matter what window you look out you are looking right into a neighbors window (and vice versa), etc. seriously, three-quarters of a million dollars for that???
MM,
15 vs 30 year
However!!! Currently 15 year fixed rate loans national average is only 0.2% lower than the 30 year average. And at many banks the 15 year rate is higher!! So, unless there's a pre-payment penalty on the 30 year loan, there's no reason to bind yourself to the 15 year amoritizing payment, you can just get the 30 year loan and pay at the 15 year amount and get the interest savings without being tied to the larger payment in lean times. Unless the 15 year rate is substantially lower, there's no reason to tie yourself to that higher payment. So, right now they're making that part of the decision making process easy.
Question:
When I started looking into buying last year, the 15 year rates were always at least 3/4 of a point lower than the 30's, if not a full point. My friend, who's bought at least 5 times over the years claimed that that's not the norm, that usually the 15 year rate is higher. (Which just didn't compute to me for the reasons above). Anyone have a perspective on this?
NYTimes has finally weighed in on the subject, and all I can say is, oh, go to H, E, double hockey sticks.
NY Times on the housing solutions
This in particular got my ire up:
But the new focus on helping individuals could create a bitter split between those who want to buy homes and those who already own them. It has already opened up a rift between the real estate industry, which wants to increase sales, and the banking industry, which wants to get out from under staggering volumes of troubled mortgages.
...
But the cheap mortgages would be available only for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate.
As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford. Nor would the plan offer any benefit to people who have stayed current on their mortgages and would simply be interested in taking advantage of a lower rate. As envisioned by Treasury officials, homeowners who now pay 6 percent would be watching new neighbors arrive whose monthly payments were almost one-third lower.
Because watching neighbors move in next door whose mortgage balances were 20, and then 40% higher was perfectly all right. It's already happening anyway you twit, by lower prices. GRRRRRR.
What I've started to worry about is the unintended consequence of "trapping" people into these low payment homes. Since interest payments will inevitably rise again, near term buyers will be "trapped" into their current house unable to move and keep the same low payment. Of course this is infinitely better than people trapped with a high payment waiting for house prices to come back up to their mortgage amounts, as these new people will have money to spend elsewehere.
Cara: I am already looking for loopholes and think I can devise away around the prohibitions to take advantage of the lower rates. For example, you could easily strike a deal with your neighbor to sell your house to him, while he sells his to you. (You can switch back later, and, yes, there are closing cost considerations). Then you get the lower mortgage rate.
The other problem I have with these news stories is that they keep on telling us that the government wants to bailout homeowners. But how come all I can see from what they are doing is to bailout the banks. This latest plan seems designed to get the real estate moving off the books of the banks, not to move the stagnating general real estate market. With the TARP and other actions, I thought they were just trying to deal with the banking issues first, and would eventually get around to the overall mortgage issues. Now, I'm not so sure. I believe the plan is to help out the banks and get them back up and running properly with clean balance sheets in the expectation that will eventually help the economy. I should note this approach was tried by FDR, only to fail because once the bankers got their money, they sat on it. Sort of sounds familiar, doesn't it?
The only thing given homeowners is telephone assistance to renegotiate your loan payments.
This morning's unemployment report is awful. The economy lost more the 500K jobs last month, and has lost more than 1 million jobs over the past three months. No end is in sight.
The good news: We are beginning to wise up to reality and make necessary adjustments. We cannot live beyond our means and sustain a productive economy at the same time. We are now realizing that we were devoting too much of our limited resources towards the financial services and real estate industries. The adjustments directing capital away from those industries will cause temporary and painful displacement of workers, and it won't be fun to watch. Additionally, high unemployment will increase economic anxiety and end our paradoxically inefficient and wasteful system of private health care. I also expect some adjustment to the cost of higher eduction, which has increased more than three times the rate of inflation over the past 30 years. We will learn an invaluable lesson and come out stronger in the end.
Much of what I've just said has nothing to do with our local real estate market, but everything to do with why many of the "bears" post here. We do not want to see people lose their homes and their jobs, nor are we jealous of owners in the immuno-zones. To the contrary, we were alarmed by the complacency of the many who thought it was a great idea to encourage folks to devote 35% or more of their gross income towards their "American Dream" while leaving savings for another day. It was a recipe for disaster; the aggregate effect of this mentality is a country that has built McMansions, shopping malls, and a bloated financial industry that nobody really needs, while leaving infrastructure to decay. I think I speak for many bears when I say that our current pain is a necessary means to a much better end.
OK, rant off. Flame away.
"My friend, who's bought at least 5 times over the years claimed that that's not the norm, that usually the 15 year rate is higher. (Which just didn't compute to me for the reasons above). Anyone have a perspective on this?"
Your friend is incorrect. Shorter duration loans bear lower rates almost without exception. Lenders charge higher rates for longer duration loans to compensate themselves for greater interest rate risk over the duration of the loan (i.e., markets rates exceed the actual rate of loans on their books, causing them to hold assets with less than market yields).
If the spread between 15 and 30 year fixed loans is immaterial, you are correct that you should pick the longer duration loan. This gives you optionality - a lower monthly payment when and if you need it, but also the ability to amortize the loan like a 15 year product with higher monthly payments (prepayment penalties on such loans are extremely rare).
"As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford."
Sure it does. If rates are dropped low enough, that will spur additional buyers to step up and buy the numerous short sales out there. This will allow people who bought at the peak to get out from under an enormous burden without having to face foreclosure. Underwater home owers should be thankful for the prospects of any plan that might spur a little interest in their overpriced properties.
"As envisioned by Treasury officials, homeowners who now pay 6 percent would be watching new neighbors arrive whose monthly payments were almost one-third lower."
Actually, probably even more than one-third lower because today's buyers would get the benefit of the government-subsidized 4.x% rate and today's (somewhat) lower house prices. Looks like those who were smart enough to not go ga-ga over housing at the peak will be sitting pretty when all is said and done. Finally, some justice.
"As envisioned by Treasury officials, homeowners who now pay 6 percent would be watching new neighbors arrive whose monthly payments were almost one-third lower."
In neighborhood after neighborhood in PWC, people are moving into the exact same model house and paying 50% less than their next-door neighbors. This has been happening for the past year. And that's without government action. In New Bristow Village, houses that sold in the $700Ks-$800Ks two years ago are selling for the $300Ks-$400Ks. A house that sold for $750K in 2006 sold for $475K in the spring...and then the same exact model two doors down sold for $370K in August. Has this ever happened before?
Tabitha: Have you seen New Bristow Village? Every house looks the same, as if stamped out by a cookie cutter. So the disparity of prices paid really sinks in. This has happened before, I believe in the 81-2 S&L crisis, which also fueled overbuilding excesses. In Texas, they responded then to unsold new houses by bulldozing them down, so you had the situation of people who paid top dollar sitting next to empty lots worth zero.
Tabitha Asks: Has this ever happened before?
yes it has!
During the 80's Texas/Louisiana/Mississippi Oil RE crash entire neighborhoods walked away from their homes - literally shanty towns.
This has also happened about every 20-25 years in Cali as well.
I'll sure it has happen many other places, but I lived thru these personally!!!
"Edward allen said...
Tabitha: Have you seen New Bristow Village? Every house looks the same, as if stamped out by a cookie cutter."
This is another reason why I think the bust has been so severe out in the newer areas. In the older subdivisions (particularly the very old areas like DC) the houses are all unique. Even if two houses are in the same neighborhood and even if the square footage is pretty close if one house sold for X, an owner could make a plausible argument "well, my house is worth more because of the flemmish bond brick, the handcarved dentil work, the history, etc, etc.". Further, a buyer may recongnize this and be willing to pay for it.
Contrast that with the situation out in say New Bristow Village.
Builder comes in, clears away everything in sight, and then builds hundreds of identical homes from just a few base models. When a house in the neighborhood sells for X, how can you as the owner say your house is worth X+1 when it is essentially same house save for a few things you picked up at Expo Design Center?
I should mention too, that cookie cutter phenomenon is also detrimental to new condo units in a development. These are just as fungible as are the new SFH in the hard hit areas.
Good arguments all around on the 4.5%
I'm not sure how I feel about it.
But --
-- I own (and at a fair, slightly above rent price) and the thought of new owners getting 4.5% while I'm stuck paying a higher rate just doesn't seem fair. Let me explain why.
-- Yes, if 4.5% starts hiking up prices again then, technically, I gain; less inventory and price declines may slow or stabilize.
-- But this isn't just about my asset value. My house value is, pointedly, irrelevant because I have no immediate plans to sell. But more money paid toward interest rates, means less money for other investments and that's why I find a government supported 4.5% to be a problem.
-- Yes, new buyers have been squeezed out of the market, and housing prices are too high. But fairness issue cuts many ways.
"Finally, some justice."
Nice - I'm getting scr--d and you think that's justice?
First, I had to take a loss on my house in NJ. I bought the place with the intention of staying there for the rest of my life (I still really miss the place). However, I got laid off and I had to relocate. This was the summer/fall of 2006. I recognized the market was softening and I had to act quickly, so I sold at a loss - thems the breaks.
I then purchased a home here in Virginia (after renting and getting to know the area). I knew that it was probably not the bottom of the market but my wife was really keen on getting out of our rental place. We found a pretty nice house with the unusual condition of no houses in our "back pocket" - the area behind us is a resource protection area (RPA) - in short, I like where I live.
However, the value of my house has dropped - again thems the breaks.
MY issue is now we're supposed to throw money at all the irresponsible people that can't make their mortgage payments and encourage others to jump into the market at an interest rate I can't access. I am SICK and TIRED of acting responsibly and getting my pocket PICKED to support both the rich/powerful/connected and the irresponsible among us.
There is NO justice here.
BTW: the payment for 4.5% 30-yr is NOT 1/3rd lower than a 6% loan -- it's closer to 15% lower (a little over $500/m per $100k vs. $599/, per $100k for the 6% rate).
kob and david,
So, the NYTimes is right that this will pitch current-owners against buyers, eh?
Interest rates rise and fall, but normally (at any time other than this proposal?) current owners can refinance if the rates drop. Thus your beef with this initiative (or rumour thereof).
one response is, prices rise and fall too, why is interest rate favoritism a more malignant unfairness?
But in truth, the people who proposed this idea at Columbia did not propose this as two tiers. And I'm a bit confused as to why someone thinks that's a good idea. All I can think of is that if you only get this by buying, this will induce more sellers to come into the market to offload their overpriced homes and get in the boat with both the bottom of the market and the low interest rates.
Producing a frenzy of activity now (and hence swifter price discovery and affordability) and creating total stagnation in the housing market in the near future until incomes and job security turn around.
My sympathies, David. Having just bought in 2007, this plan means too much unnecessary disruption and too much transaction costs and losses to eat too quickly. However, I would say that the low interest rates are not the problem, the timing of your life matching up poorly to the timing of the business cycles is the problem. And furthermore, I don't think there will be this huge disparity. Bank rates are going down for all mortgages on news of this being in the works. So, even if the Treasury (or Fed, whatever) buys only new-purchase MBS, the banks are unlikely to price them disparately.
I think I didn't make my objections to this newest hairbrained scheme clearly.
I am not looking for any sympathy on the loss I took on my NJ house or the fact that the value of my current house has fallen. You pay your money and take your chances.
I've been really aggravated since they came out with the first mortgage bailout nonsense (remember that one? this is before the $750 billion boondoggle). I have been very careful to keep within my means - I have no problem making my mortgage payments because I did the responsible thing. I sold my house in NJ and took the loss because I knew I couldn't hold on to that house and also afford rent in Virginia. Then, I selected a house here in Virginia I could afford - I really wanted a place with some acreage like I had in NJ, but it couldn't be done affordably.
Also, I've been looking for raw property to build my "live in forever" home. I need/want prices to come back to reality before I can even consider making a purchase. I really resent the government throwing my (and other taxpayers') money around and distorting the market.
I've been responsible - I'm not looking for any handouts/bailouts/favors. I want the government to STOP mucking the markets up and let the chips fall where they may.
David,
Thanks for clarifying. I think the vast majority on this blog can whole-heartedly agree with your last statement:
"I want the government to STOP mucking the markets up and let the chips fall where they may. "
(under the caveat, so long as that doesn't create armageddon)
I tend to agree with David on the "chips fall..." I bought without government help and while my timing could have been improved it's my timing, my decision and my life. If the government wants to hold a fire sale on interest rates I'm all for it as long as those rates are available to anyone on two legs. There's no moral authority for any other course.
Typically, a lender may charge 1% upfront for every 0.25 % reduction in the rate. So, given that a 30 yr fixed with no discount point is at about 5.5% now, the Treasury's plan to make it 4.5% would be tantamount to the government giving 4 % or more of the loan free to the lender, who is supposed to pass it onto the buyer.
For a $500K loan, that is a minimum of $20K in free money to buyers.
TedK,
What you're talking about is a buy-down or something like that where the Fed or treasury or gov entity pays points on the buyer's behalf. That has been discussed in the media, but that's not method behide the latest rumor. The method here is that the Treasury (I always get them messed up) will be promising to buy well-documented mortgage backed securities on the condition that the interest rate to the buyers was as low as 4.5%. These would then be loans initiated and serviced by lenders primarily Fannie and Freddie (who have more stringent DTI requirements and are thus less risky anyway) but who would be then held and owned by the US government, enabling further lending by the banks or GSEs. If Fannie and Freddie can offer 4.5% loans through this mechanism, everyone else will have to as well to compete. Basically the Fed is stepping up to replace the investors who have fled the MBS market, and since it's such a huge single player, it can use its clout to set the terms of the loans.
OR as some might say, socializing mortgages.
Cara,
I know the Treasury's plan is not the same as a buy-down. But from the perspective of new buyers, the benefit could be quantified by comparing it to a buy-down.
Most articles are talking about the difference it will make in monthly payments without making explicit the total benefit in current dollars.
TedK
My apologies. People rarely do translate into total costs, and that is definitely worthwhile.
Cara,
No need for apologies at all.
Continue to make your excellent contribution to this blog.
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