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Thursday, March 12, 2009
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35 comments:
I've been reading your blog for longtime, I want to know if your blog is only for Arl, Alex and PWC?
If yes, plse can you direct me to a
Loundoun County blog? Tks
feza1964
It's not specific to Arl, Alex and PWC, that's just which areas come up in conversation most often, I'm sure if you wanted to discuss Loudoun County others woudl come out of the woodwork.
In general financial meltdown news c/o Calculated Risk:
Boston Globe: FDIC collected premiums only selectively from 1996 to 2006
WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.
The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts.
OMG.
FEZA-
I watch Loudoun Co, East of the "great wall" Route 15.
However, I don't really watch 20176, which is basically Lansdowne. I'm not interested in paying their $300.00 Monthly HOA fee.
Pretty much any where else I can give you my obervation on.
Note : I do not have statistics!!
I've been following the discussion on this board for a number of months. Very interesting stuff.
There has been a lot of discussion regarding the various factors that influence home prices, such as employment figures, stimulus incentives, price to income ratios etc...
What are people's thoughts on a possible inflationary or deflationary economy and how that will impact the buyer's market?
Cara,
The Globe story doesn't seem thorough enough. (That's a nice way to say "severely lacking"). I find it frustrating. The supposedly "investigative" reporter calls these decisions "political" but refuses to name names. (Looking at the background of the guy, it's no big surprise).
I'm stuck starting my own research on the whole thing, starting with The Federal Deposit Insurance Reform Act of 2005 which was passed with a tie-breaking vote by Dick Cheney.
jaime,
I'd like to hear people's thoughts as well. I brought up a couple of days ago my sense that given the number of purchases since 2006 of >$400k TH in Kingstowne, I don't see how "we" can avoid massive pain on the scale of at least 1 in 10 homeowners going into foreclosure in the next 5 years here unless we get wage inflation up and going soon.
However, while Warren Buffett thinks we're in store for massive inflation soon, I think most experts feel it would be hard for this to happen in the near term.
Question on buying points:
I am getting a jumbo conforming, meaning I am putting 20% down but the loan amount (80%) is over the 417 threshold.
I have some great rates (remember, these are not "conforming", they are jumbo conforming and thus higher:
5.125 with 0 points
4.5 with 2 points
4.375 with 2.375 points
What is your strategy when it comes to buying points?
Rates have been doing pretty well lately. From those I have spoken with, they could drop a bit more, but it is so impossible to tell.
The bottom line is these rates are the best they have been in many, many, many years, and from a quote the other day:
"Warren Buffett we're in a massive bubble in the treasury market, and the bailout will lead to big inflation. Interest rates are going significantly higher over the next couple of years."
I have done break even calcs and the 4.5 and 4.375 both break even at the same point: 4.4 years. I plan to live there for a minimum of 10 years, if not longer. You never know though...
The brokers I spoke with don't advise buying points, but I guess (my ignorant hunch) that it is because they want you to contact them to refi if the rates get better. The banks I have spoken with think it is a decent strategy.
I don't know how much better the rates can get. My thinking is you don't buy points if you can refinance in a few years for a better rate. But I would venture to guess that in 2-4 years, the rates will be worse (if not the same) than they are now, as opposed to getting better.
Using that logic, I am inclined to buy 2.375 and have a rate of 4.375.
Any thoughts from those more experienced than myself?
not a great hood, odd detached townhouses surrounding. outside pic of sky looks photoshopped. i like other parts of cherokee ave, fun drive down it..
http://franklymls.com/FX7002788
T,
They both break even with respect to the 0 points loan within 4.4 years, correct? (the WaPo has one that nicely graphs the comparison over the whole life of the loan if you haven't seen that one).
Your thinking is crystal clear and correct with respect to future interest rates and how those should influence your decision. Those are cheap points, buy them.
(a few months back this was covered on WaPo and they were noting how cheap points are right now)
Thanks for the quick reply Cara.
Yes, the 4.4 is breakeven from the 0 points.
I am glad my common sense thinking is correct and that those brokers are full of it.
If you have any links to the WaPo graph comparison, that would be great to see.
I think I found the article you were mentioning:
"· Paying points to reduce the interest rate: Stressed markets do offer one significant bargain: buying down the interest rate by paying points. In 2005, it cost about 1.5 points to buy down the rate by 0.25 percentage points on a 30-year, fixed-rate loan. (A point is 1 percent of the mortgage.) In early 2007, it cost about 1.125 points. Today, the price is down to about half a point.
In part, the lowered price is due to the shorter average life of loans, which increases the value to investors of collecting points upfront. In addition, lower rates carry lower payments, which reduce the likelihood of default. In a stressed market, this carries a lot of weight.
Borrowers viewing a rate buy-down as an investment can earn a very high return. For example, one lender on Dec. 12 offered a rate reduction of 0.5 percentage points for 1.119 additional points. This investment in points would yield 28 percent over five years and 32 percent over 30 years.
Bottom line: Buying down the interest rate is a very good investment."
I also read a quote in an article that said:
"If you're getting more than a quarter percent for the point, that's a real bargain and it's worth serious consideration"
Based on my math, I am getting .32% for 1 point when buying to 4.375 and I am getting .31% for 1 point when buying to 4.5.
So I guess I will take your advice and buy the 2.375 points to get a rate of 4.375. Thanks again.
WaPo pay points?
t, yup that's the article I meant.
above is the direct link to the points comparison calculator.
t, and I'm misremembering the quality of the graphics... kiplinger has a graph but it's calculators are stranger...
http://www.kiplinger.com/tools/
and it's harder to pick the tool you really want...
T,
Let me start by saying I am not a homeowner and never have been, so my expertise is limited on these issues. (Nothing like undermining your own credibility when you are about to make a point)
With that said your question relates to my earlier post regarding inflation and its impact on buyers.
I expect inflation (higher interest rates) to place a downward pressure on home prices as buyers will be less able to afford as much house as they would have during a period of lower interest rates. As inflation increases, sellers will have to react to this market force and reduce the price on their home in order to find buyers.
I think one question you need to ask yourself is whether buying a home today at a higher price and a lower interest rate will provide you more benefit than waiting and buying the same home down the road at a lower price but at a higher interest rate?
You can only negotiate the home price once, but you can renegotiate your interest rate (refinance) at anytime, assuming the differential in rates is to your advantage. It is this premise that some have argued that times of lower interest rates are not necessarily the best time to buy.
Buying when interest rates are at historical lows prohibits your ability to refinance down the road, especially when inflation and interest rates are projected to increase.
It is this quandary that I am trying to figure out. I sort of feel there is enough uncertainty in the market with other economic factors that waiting and paying a higher interest rate might make more sense. Perhaps somebody who has looked at real estate history, or who knows more about how these economic factors relate to each other could answer your question better.
Jaime, you're absolutely correct. That's why I hate it when RE agents say "prices and interest rates are really low". First, prices are still bubbled, so they need to shut up on that point. Second, who cares if rates are low? Rates go up, prices fall. If I buy at a high rate, I can refi to a lower one later. I can't refi to a lower principal amount though.
So the excuse about rates is almost self defeating - in terms of market rates.
Thanks Cara!
Jamie - for a first time buyer, you may have a valid argument. In my situation, I am a buyer and a seller, so if I just sit back and wait to find the bottom of the market in terms of prices (and from what I've read here, by the time you know it's the bottom, it really has already passed), my sale will be that less as well.
In addition, if we really are seeing interest rates at a serious low and points as cheap as they are, there is really no better time get that rate than right now.
I hear your argument about renegotiating the rate later, but that assumes the rate (later) will be back to this level. And I don't know enough (nor do many people) to say how long these rates will stick around or if they will ever be back once they creep up a percentage point or two.
Also, with regard to "buying the same house for a lower price" in the future depends on your ability to find that "same house". From what I have seen in the areas I have looked, the houses I actually walked through and rated highly went quickly. People really did start getting more aggressive in Feb/Mar than they were in Dec and Jan. Yes, there will be more houses that come on the market and more opportunities to find a great house.
But I look at it as "glass half full" for my situation - I bought the house for much less than I would have paid 1-5 years ago. My rate is better now than it has been ever in my "home ownership" days.
Could I buy a similar house in 3-6 months for a cheaper price and a similar rate? Perhaps, but again, I am selling one too, and would get less for it.
I am as interested as you are to hear from some forum experts on the matter. I am just a regular home owner/buyer, far from an expert. So my views and opinions may seem simple/wrong to those "in the know". I'm just sharing how I see things.
The only thing I could add is I don't understand the logic of not wanting to buy now simply because:
"Buying when interest rates are at historical lows prohibits your ability to refinance down the road, especially when inflation and interest rates are projected to increase."
If you believe what you are reading, and think that interest rates are going to increase, why would you want to wait for that to happen when there are plenty of deals out there? You assume you can buy one in a little while and pay a higher rate for a few years, and then refi when the rates drop, but you don't know when/if that will even happen, and the difference in what you saved on purchase price may evaporate in what you are paying out each month (depending on size/location of what you are looking for). Again, this assumes your logic that the prices are "high" now and rates are "low", but in time, the prices will be "low" and rates will be "high". Personally, I think both prices and rates are low. Are they rock bottom? No. But where I live and where I am buying, prices have come down considerably the last couple of years. Maybe you one of the people looking in Arlington where the prices have not fallen as much.
Jaime,
I have a different take on the effects of inflation/deflation.
Yes, with inflation comes higher interest rates (on both mortgages and savings) and I do think this is coming.
However, there is also the question of income inflation. The period bewteen 2000 and 2008 was anomalous in having moderate price inflation but little to no income growth above that.
So under "normal conditions", while buyers in the future will face higher rates they will also have more income. This is why buying a house is considered an "inflation hedge" so that you'll be able to trade it for a similar home in the future, while tying your monthly payments and costs down to current prices.
So, your scenario of inflation and interest rates go up, causing prices to drop, requires the doomsday combination of inflating prices with stagnant income.
Now the really scary part relates to CRT's very very interesting numbers from yesterday on the net flux of households making more than $200k a year into each area.
And I see this as the following, if income disparities increase, and you're income increases aren't keeping up with the Jones's then you really need to buy sooner rather than later (assuming for the sake of discussion that prices don't have much further to fall). And that's the kicker, we could get high inflation and high interest rates which would really hurt all those with income losses.
Right now, I think deflation, not inflation will lead to the lowest house prices, because current owners based their purchases on the expectation of increasing incomes, and could see income loss and therefore need to sell. So deflation carries the greatest potential to drag down house prices in the near-term. Inflation, if it includes wages, is the only way for many of these people to keep their homes.
new FICO score for mortgages
new BEACON Mortgage score.
Will the public be able to access these? Or are the instituting a new method that we won't know how we're doing or how to repair it until we apply? I am not happy about this, not one red cent. I've done many things specifically to keep my FICO score high that I personally view as silly or wrong from a fundamental perspective, and now they could change there rules such that my actions will be viewed in another light. No, not happy about this at all.
I don't know about how that works Cara, but I do know that you can definitely get a lender to give you the score. Obviously you will have to give them your SSN and other things needed to apply for a loan, but I got copies of all the credit reports that were run from the couple of lenders I was looking "hard" at.
t,
Of course they'll give me the score, but that will be too late to do anything about it.
I.e. right now the FICO scores like you to have many lines of credit that are active but extremely underutilized. For this reason, I haven't canceled the cards that I accumulated when everyone was offering 0% deals and I was still working through CC debt from my grad school days. Personally, I would think having many lines of credit would make you a poor choice for a borrower on a house, what if the new scoring method agrees with me?
See how evil that would be?
Likewise they could ding me as a "pre-payment" risk, because I'm paying off the car loan at faster than the 4 year term...
All kinds of draconian things could be true...
(what, me, paranoid much?)
Or they could start paying more attention to the fact that we're already paying out in rent more than the PITI on our intended price-point, and hence are demonstrably able to afford it. This would make sense to me, but who knows?
I see what you are getting at, and why that would make you mad. Hopefully someone with more knowledge will come along to provide insight.
Jamie,
Inflation, technically is the reducition in value of the currency. Since currency is the divisor in everything, higher inflation doesn't change anything's real value. However, since some asset's value consists mostly of their ability to generate or offset cash payments (think of a house as an asset that allows you to avoid monthly rent) the value of avoiding a payment stream that will increase with inflation increases. The other trick for homes is most in the US are financed with fixed rate debt. Fixed rate debt is a very good inflation hedge, because the real cost of fixed rate debt declines dramatically due to inflation.
If you expect high inflation, the best thing to do would be to borrow as much money as you could to buy "hard assets" or things that generate regular real value that can be sold for inflationary cash in the future (that inflationary cash can be used to pay the loan's costs). Even if the value of the asset doesn't rise in real terms, it will still result in huge real and nominal savings of inflation adjusted rents.
This strategy would be a disaster in a deflationary scenario, since the real cost of making the fixed loan payments rises with deflation, while the stream of real value provided by the asset drops. While I agree that eventually there will be high inflation, I'm not as certain when it will occur. Defaults are exceedingly deflationary, as are savings (deleveraging and cash savings). The tricky part is that once consumers begin a cycle of deflation, the longer you save the lower prices go further boosting your savings value. Japan has been in deflation for the better part of two decades.
That's one of the factors that kicked off our bubble. People advised home buying based on a highly inflationary past, extrapolating into a much lower inflationary future.
Adam,
Well said!
T,
(sorry if I sounded mad, it was in no way directed at you)
Cara - I just locked up the rate.
Can someone verify this statement:
I was told by the lender: "typically when the stock market is bad, rates are good. When the stock market is good, rates begin to get worse."
At any rate, the Dow is now just over 7000 and the market is having a good day thus far.
She said if the market gets better, rates will begin to get worse, so now is a very good time to get things locked.
One reason the market may be having a good day:
NEW YORK -- Bank of America Chief Executive said on Thursday that the company will produce $50 billion in earnings before taxes and loan loss provisions. Speaking in Boston to the Boston College Chief Executives Club, Lewis did not say how much the firm expects loan loss provisions to be. He added that the firm will generate more than $100 billion in revenue in 2009. "With turbulent markets and spiking credit costs, there is no question that many banks are under a lot of pressure," Lewis said, "But I don't think the industry as a whole is in nearly as dire shape as some would have us believe."
T,
Sweet!!
In that currently we have a flight to safety that will support high-quality MBS she is right. But for this to effect mortgage rates there would have to be the expectation that the stock market has bottomed and is now safe. (JMHO with no actual historical fact checking)
The other really good news today was that banks are giving back their TARP funds. I.e. now that the fears are over that CDS or other bonds with Lehman are somewhere on the books of any given bank, they don't need the additional capital. In fact, since they were all required to take this money, there's no way of knowing if they ever needed it, and this is these banks way of signaling that they were fine all along.
Or at least that's how Wall Street appears to be viewing it. I, personally, think that they just didn't like the strings that have gotten attached retro-actively.
I saw an article on CNN that said
"The main reason foreclosures are rising is due to dropping home values"
TOTAL BS!
The reason people are foreclosing is due to the obscene RISE in home prices from 01-06 that caused idiots to get stupid financing because they couldent afford a house.
Everyone is trying to spin it like its bad that prices are dropping. Honestly, until you can buy a decent 3/2 tract home out in PWC or Loudoun for 200k, I wouldent expect the prices to stabilize.
GT,
Looking at your link, I just had an odd '90s flashback to the video for "Black Hole Sun".
People are foreclosing for 2 main reasons:
1) person cannot afford the payment (due to the rate on arm resetting higher, loss of income, etc), this is standard issue.
2) person does not want to hold an asset that is worth much less than original purchase price (i.e. you bought a home for 500k, similar one costs 300k now, you buy this home and default on your 500k home, destroy your credit but pay much less for your housing)
#1 is mostly due to stupid loans and life events (just happens more often when hpi goes down)
#2 is mostly due to the drop in home values (only happens when hpi goes down).
GT: I had a flashback to UFO's album "Phenomenon"
http://blograge.files.wordpress.com/2009/01/phenomenon.jpg
RealtyTrac's February numbers are out. Definite drop in foreclosues for PWC: 633 for month of February, versus 866 for January. That would be one of the lowest #s this past year. But then February 2008 was dramatically lower than any other month last year, so maybe it is an anomaly.
Other counties:
Fairfax: 820
Loudon: 320
Stafford: 193
Manassas City: 64 (1 in 222 units, lowest I've ever seen it)
Tabitha:
A couple of points:
1) February has 28 day, so a few less days than January for foreclosures to happen; and
2) The GSEs and some big banks had foreclosure moratoriums during the last half of February in order to give the administration time to announce it's foreclosure prevention plan. Actually, the GSE's have extended their moratorium through March.
Fannie Mae and Freddie Mac said they will suspend foreclosure sales involving occupied single-family and two- to four-unit residential properties through March 6.
The announcement from McLean, Va.-based Freddie (NYSE:FRE) and Washington D.C.-based Fannie (NYSE:FNM), which own or guarantee almost half of the nation’s mortgages, comes after some of the largest U.S. banks last week agreed to a similar measures while the government works out a plan to stabilize the banking industry.
Moratoriums from JPMorgan Chase, Wells Fargo, Bank of America Corp. and Citigroup Inc. also remain in effect until March 6.
http://www.bizjournals.com/columbus/stories/2009/02/16/daily2.html
Government-controlled mortgage finance company Fannie Mae said Friday it is extending a halt to evictions on foreclosed properties through the end of this month as it implements pieces of the Obama administration's plan to help struggling homeowners.
Fannie Mae's extension comes two weeks after the company announced its moratorium on foreclosure-related evictions, which initially was to run through Friday.
On Thursday, Freddie Mac, another mortgage finance giant controlled by the government, took a similar action, extending its moratorium on foreclosure-related evictions through April 1.
http://www.businessweek.com/ap/financialnews/D96OPOP81.htm
Some of the top U.S. lenders own as many as 700,000 foreclosed homes they have yet to offer for sale, said Rick Sharga, executive vice president for marketing for RealtyTrac.
The banks may be waiting to see how U.S. government plans develop before selling the properties, Sharga said. The lenders and government-owned Fannie Mae and Freddie Mac, the two biggest U.S. mortgage financing companies, have already extended temporary foreclosure moratoriums.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aFS4Zbll06TU&refer=us
In my opinion, inflation will only impact houses being built, because the price of materials will increase. That should hold true until wages catch up, at which time used houses should increase in price.
Of course, inflation will make everything more expensive and people will have less income to spend on houses, so house prices may drop below the historical average or roughly 2x income.
Deflation will make savers richer. Not sure they'll allow that to happen.
IMO, prices should have a lot more to do with income than inflation. There are those who would argue.
If we have inflation in the form of a wage-price spiral, then the price of almost everything will increase, since people will be nominally earning more dollars, which will chase a limited supply of goods. Any resulting increase in housing prices will be tempered, however, by a spike in long term interest rates -- but current mortgage holders will love having their mortgage balance inflated away.
Again, all this assumes that inflation will increase wages. The commodity bubble that we saw in 2007-08 increased the price of fuel and food, but it did not increase wages by a like amount.
What's putting the upward pressure on wages? If anything, U-6 unemployment at 14.8% puts downward pressure on wages. Source: BLS
ralph,
there is no upward pressure on wages... that's why my "let's inflate our way out of this" solution is just not going to happen anytime soon.
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