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Tuesday, May 5, 2009
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42 comments:
Hattip CR: WSJ and then there were 10. As the numbers of stressed out banks gets closer and closer to the rantings that contrarion posted, will we admit that while his source may not have been credible, the statement may still prove to be true?
(Please don't restart the credible source discussion though, please??????)
10 banks out of 19. Yup, lots of trial bubbles.
Relevant wishy-washy news from the NY Times, housing beginning to begin to start to bottom out?
This is exactly what Nova guy (and me) have been saying recently. The low end is flattening. I, too, have been seeing some "flips".
Increasing inventory is what caused me to claim the Market had peaked in July '05. Prices continued to hold thru '06, but the writing was clearly on the wall. Game over for smart speculators.
Decreasing inventory, slight price increases and bidding wars on cheap reo's signal, in my opinion, the beginning (or more) of the bottom for reo's at entry level prices.
Increasingly, my daily "alerts" show far more "contingent" than price drops or new listings. Perhaps this is a product of my search area, but I do follow several zips.
va_investor,
indeed. I'm definitely seeing more "closed" sales from listings this winter than I am new REO listings at the cash-flow level.
It is worth pointing out however, for those of us looking at one step up from this level, that this flattening and declining of truly distressed inventory is a necessary step towards the bottoming process, but that even in this article they state that it will take 6 months or more for this to effect the rest of the market or slow the price declines and that no one expects prices on non-distressed properties to rise any time soon (other than seasonally).
Cara,
A couple of things. Most sales are distressed and many are first time buyers (although banks are increasingly going with cash offers, even if this results in a lower price - too many things can cause a financed sale to fall out).
Also, your price range (<300K) falls squarely in the sights of many buyers; both investors and first-timer's.
Better prospects may lie in the 500K+ market, or at least 400K. Of course this is all speculation on my part, mixed with data on sales. I can only make predictions based on what I am seeing now and my beliefs about inventory importance.
Many are hanging their hopes on a deluge of reo's forcing prices down. That assumes two things; that this flood will actually overwhelm demand, and secondly, that we have not reached a bottom on reo's in the under 300K market. The two are so intertwined that I suppose they represent the same thing.
va_investor,
That indeed sums up the point most people are making but it's not what I was getting at.
Here's the thing. Currently at ~$500k you have a wierd mix of houses that are truly worth that and are selling like hotcakes, and houses that have no business being priced there and are sitting like logs. If some of these lesser sellers are in a position to lower their prices, eventually they will, otherwise they'll never sell. It's this downward pressure from the better properties that will pull demand away from the properties that are currently demanding and obtaining $300k.
It doesn't take an REO wave. The pressure is already evident in the number of really good values in the $500k price point in Burke.
How many cheap houses can each of these cash investors sop up? Each first time buyer who buys now is one fewer client next year.
That said I do think the "bottom" is fluffier than most people are picturing. I think there are houses that are already at their bottom price. They're sprinkled in there with everything else. And the wide spread in pricing for similar properties will continue as long as the market uncertainty remains. There is no one bottom. Every single house has a different one, as does every buyer.
I agree that there is no single bottom, but I trust everyone understands that. It is true for the stock market as well.
It would not at all be surprising to see the market move up now to be followed next year with more declines, especially if rates go up. I think a lot depends on employment and whether there is any prospect for historical housing/income ratios to be restored. Assuming you believe those ratios should come back, you would be a fool to buy now. Even I'm not convinced they will come back though - it is quite debatable.
I look at the current RE market this way, if you really have a good reason to buy, find a reasonable value and can afford it, you may as well buy now. It is a better time to buy than since 2004.
If you don't have a reason that you need to buy, and are not buying a REO/short with plan to renovate, buying now is not that compelling an investment. This is definitely not true for all properties everywhere, but I think reflects the broader NoVA market.
contrarian said: "In order to vilify me, John Fontain continuously claimed the Stress Test results had already been released."
Please provide the quote in which I made such a statement.
contrarian, as i recall it, our discussion was whether Hal Turner was credible when he claimed that he had an advance copy of the stress test results. you insisted he did and I suggested he was not credible. it should be noted that he still has not provided his advance copy as he said he would do.
Blacksilver2010,
What are the historical income/price ratio's? As far as I can remember, standard underwriting ratio's were 28/36 and the general rule of thumb was 2.5X annual salary.
My difficulty is that the 2.5 guideline is what I heard when rates were 12%, not the 5% that we have now.
I am under the impression that in FX County Median income CAN now afford Median price. Am I wrong?
Cara,
Of course no one knows how much investor $$$ is out there and how long before it dries up. The stock situation has drawn a certain amount of cash to RE that would otherwise be going into that Market. Witness the wapo article.
As an investor/LL, I am actually planning for retirement just as those in the stock market. I simply chose a different path.
Another not so unknown is the pent-up demand of first time buyers who are finally not priced-out and feel some level of confidence in the fact that we are well off the highs.
Two articles that provide, in my opinion, a more realistic assessment where we are in the recession/recovery
U.S. Home Prices May Be Lost for a Generation: John F. Wasik‘Green Shoots’ Won’t Lead Economies Out of Woods: Matthew Lynn
va_invesor
All the money that escaped the stock market is not going into RE. And even if it did, it's still finite.
The second one, how many 1st time buyers have built up is not unknown, and is smaller than you think. Why? Because home -ownership rose not fell during the height of the price insanity. Hence, sure there are those couple odds and ends of people like us here who would normally have bought in 2003-2006 and aren't buying until now, but compared to how many people who bought in 04-08 without saving for it and got caught, it's a drop in the bucket.
Bottom-line, this is spring. This is the first spring with okay prices since 2002. So of course there's a lot of activity. But next spring? and the spring after that? not so much pent up demand left, only those who would normally have been buying then anyway, and a lot of those will be pushed back by tightening lending standards and job loss.
So, yeah, demand is strong now, don't mistake seasonality for a trend.
VA_Investor - You made two points, let me separate them.
1. Historical price/income ratios are irrelevant now because rates are low. I would agree with this if rates were guaranteed to stay low. I believe rates will return to historical norms sooner or later. But I admit it could take a long time. Or it could happen suddenly. Ignoring the historical ratio completely is a very short term view.
2. In FFX have we reached median income = median price? This point depends on the first point. If you believe the interest rate changes the price level to income ratio, you can make a good argument for this I suppose. If you don't, this chart shows that the ratios are not at historical levels.
So I think we disagree over only one thing - will interest rates go up? Given the country's quickly increasing debt level, there is reason to believe that interest rates have to rise. On the other hand, perhaps the global nature of this recession will put this off for a while. I don't know. And because I don't know, I tend to go with history which says definitively that rates will go up.
But as I said, if you need to buy now or have a good investment case, then I think you should do it. Even a traditional buyer (non fixer-upper SFH) has a better buyer's market now than since 2004. There is definitely some pent-up buying activity and also some great deals in certain areas like PWC. But in FFX and most of the rest of NoVA, there is a lot of risk.
Cara, I disagree with only one thing you wrote - prices are not as good as 2002 except in PWC. Definitely not in FFX.
VA_Investor,
Per wikipedia, median household income in Fairfax Co. was estimated for 2007 to be $102,460. With your 2.5X income standard, the median housing price would have to be less than $256,150 for the median income to afford the median priced home.
blacksilver2010
agreed, I mean the best buying price since 2002. which is similar to your statement that the demand has been pent up since 2004.
I have a question. If I am closing at the end of this month and my lender can not make the closing date, then what are my options? What tf the seller is unwilling to delay the date? Any advice would be greatly appreciated.
Ace,
You miss the point. 2.5 X salary applied when interest rates were 12%. I believe that the tried and true (and conservative) 28/36 ratio's should apply and that makes median price affordable to median income.
If you want more than Median price, then you need to make more than 100K.
Cara,
Firstly, the "should be" renters are back to renting; the others have been waiting to buy. There is a certain supply of housing and it will be absorbed at some point. Just like the 90's, there will be no new construction (or very little) for several years.
Secondly, YOY inventory puts your "seasonality" argument in question.
Michael,
End of May?? Often times lenders aren't very responsive until very very close to the deadline ,and you do need to keep haranguing them, but is there some other indication you have from them that they won't be able to fund it by then?
va_investor
No, I'm pretty sure ACE got that point. And blacksilver already replied directly to it. 2.5x income is used not just to decide if a home is affordable to an individual but also is the long-term historical income ratio.
For investors like yourself who intend to won outright before selling and cash-flow as rentals before then, it's irrelevant. But for us mere mortals who have to hedge for the real possibility of needing to sell sometime in the next 5 years against our preferences, then we can't just use the current interest rates as a gauge, because future prices matter too.
To go 180 from that, if interest rates do rise? It will be most likely be because inflation expectations will also have risen, so in nominal (non-inflation adjusted) dollars you may in fact make out okay buying based on 28/36 DTI ratios (or whatever exact ones you choose to consider). This is of course assuming that inflation implies both inflation of incomes and inflation of house prices, (possibly not keeping up with incomes as has been historically true, but at least keeping up with other goods).
Sesaonality dissappeared from PWC entirely during the bubble crash years Virgina inventory graphs and was a barely detectable moderation in FFX. And has just now resumed. So, no actually, the YoY doesn't dispute my claim at all.
as for the "should be renters" comment. Again we have a by market segment problem. In your target marget segment, properties that were perfect rental material instead got bought up by owner-occupants many of who would have been better off remainer renters, but who were enticed by the heads I win tails the bank looses 100% financing deals (which as you rightly pointed out yesterday were most decidely not FHA during the run-up).
However, this is not the case throughout the housing stock. Much of the more expensive housing was bought be people in fear of being priced out forever, and who doubly feared that saving up for a downpayment was a sisyphean (spell?, right myth?) task when prices were rising faster than their downpayment savings could even keep up with, and so just went ahead and used the 80/15/5's or piggy back's or PMIs to buy now while prices were still within what they could swallow on a cash-flow basis with an option-arm. (my apologies for the hyperbole) But a chunk of these people would otherwise have been saving up their down payment and taking their time. But now their gone from the buyer pool or adding to the seller pool for some time into the future.
contrarian,
sorry, but "are" being released does not mean "were" released. as we all know, release of the data has been delayed because banks and the government still disagree as to the results of the calculations.
your credible source, who promised to release his advance copy of the stress test results, has still not done so. care to explain why that me be?
Reading all this talk about houses being affordable at X times income because rates are abnormally low makes me think that too many people don't have their eyes on the right ball. Houses may be affordable given today's low rates, but that does not automatically mean that their valuations are appropriate.
As I said about two months ago, value has nothing to do with what you can afford to pay, it has to do with what the house is really worth. And affordability is not a measure of value.
Cara,
All direct bank lenders such as Wells, Citi, BOA are all saying one thing. But I know an insider at one of these places, and all the lenders have been taking 45-60 days from the date of rate lock.
So if the bank can't meet the closing, do you know what are some ways to convince sellers that we are still interested? What are effective ways to get them to extend closing?
Thanks...
Samer,
Very interesting! We have heard similar responses. Anyone heard of the same thing?
Cara or anyone,
do you know of anyways to help alleviate the situation of extending closing dates.
Michael,
One way you may want to try is to offer partial payment of their mortgage. Just a thought.
contrarion,
I'm just trying not to fan the flames. If you must know my comment was going to be "like a broken clock that's right twice a day" contrarion's source turns out to be much more accurate than we had first given him credit for.
I have tried to maintain throughout a healthy skeptism until the final official results are really released (aka May 4th now Thurday, maybe). My first feeling before you posted your source was that all banks would be given basically a clean bill of health, and then they'd crash anyway later pulling everything down with them. What's actually happening appears to be somewhat in between my scenario and the one you linked to. The real health of the banks is miserable, as was well understood all along, but the stress tests will be more honest than I had thought (i.e. they'll say, hey these 10-12-16 need more capital) but less honest than your source had suggested they might be, i.e. a blanket clear statement that these X banks will fail. (I forget the predicted number)
Michael, if you search back through this blog you'll find our comments to Tabitha before her April 19th? closing. It was much faster than 45 days from rate lock and they got it done. There was a lot of good advice there...
Bits Bucket from 4/3 with advice for Tabitha
VA_investor, I didn't miss any point. I simply reported factual information and made a calculation using the ratio that you cited.
If you want to speculate about how to interpret those data, be my guest.
contrarian,
I can't tell if your reading comprehension problems are intentional or not, but I get the point - you don't want to discuss Hal Turner or the fact that he never did release his advance copy of the stress test results as promised.
Just to be clear, none of the banks have been shown to be insolvent right now (let alone 16 of the 19 that you claimed). There may be some that don't pass the worst case stress test; that I don't doubt in the least. But for you to claim that 16 of the 19 are currently insolvent (even before the stress test) is something else all together.
I guess we'll see when the final results are published. If 16 of the 19 are insolvent, then I'll be the first to come on here and admit that your guy Hal Turner was right. Will you do the same if you are wrong?
Michael: Why do you think your lender can't meet your closing date? The answer to this question will determine what will happen.
contrarian said: "We are still in the VERY EARLY stages of bank failures, and this includes most of the 19 largest on the Stress Test list."
If "most of the 19 largest" banks fail, as you just predicted, I'll be the first to give you props for your call.
During the Savings and Loan "financial" crisis..they failed by the THOUSANDS...just a thought, we did survive without a blip. Geez, I actually remember recessions were my family memebrs were fired or laid off..barter was the rage and construction companies went under by the thousands.
"JF said...
If "most of the 19 largest" banks fail, as you just predicted, I'll be the first to give you props for your call."
JF - no offense, but you shouldnt be playing on Contrarian's turf. Even if Hal Turner had the results and even if he nailed it completely, that doesnt change the fundamental issue that HAL TURNER IS NOT A CREDIBLE SOURCE!!!!
Say I reported things from what I said was an "inside source" and said last summer:
(a) Fannie & Freddie will fail by August and
(b) Al Quaeda has infiltrated the Obama administration.
Does the fact that I got one right and one wrong make me credible? The answer is HELL NO! What it shows is that I MAY indeed have access to privileged info, but you cannot tell if what I am saying is real or not because I have the propensity to lie about things - namely that Al Quaeda has infiltrated the Obama administration.
Thus, when I then come out and say I have the results of the stress test - you have no way of knowing if my stress test story will be like (a) or (b) above. Quite simply, I am then no longer credible.
Same thing with Hal Turner. His clear hateful views of blacks and jews aside, the moment he posted the Amero was being printed and sent to China as part of a jew based consipiracy, his credibility was seriously seriously damaged.
Then, when an astute poster found the source of the secret "Government struck Amero", and found out anyone could go out and buy them themselves...THATS IT GAME OVER...CREDIBILITY DESTROYED. Thus given Mr. Turner's propensity to lie, we had no reason to trust him on the Stress test story - NONE!
Now, Mr. Turner may rebuild his credibility by having a string of correct postings, but thats going to take years to happen. In the mean time, this guy is poison and anything he says must be treated with serious skepicism.
Why Contrarian cant admit this is beyond me.
"Contrarian said...
Hal Turner said he was NOT going to release the results he allegedly has, at least until the Treasury released theirs. Therefore, I am confused why you would have expected him to release them previously?"
Heres the real question Contrarian. Hal Turner says "I have the stress test" but offers no proof -- yet you blindly accept that he has it why? What specifically has Mr. Turner said to trust that he is in fact telling the truth?
Sorry but this issue really burns me. Its the same thing as when a court refuses to accept the testimony of a known liar. Even if a pathological liar says "I saw A kill B" and even if thats true, the fact of the matter is, you just cannot trust the source -- end of story.
The Anon,
What's funny about the Amero claim is that the story is completely the opposite of what is true. The Amero wasn't created by the government in advance of our currency merging with Canada and Mexico's, it was created by a coin designer as an art project to provoke discussion about something he feared and opposed - the merging of our currency with Canada and Mexico's.
If you look at the list of Hal Turner's past blog entry claims, about 90% of them are certifiably false in hindsight. Pretty amusing stuff, until you realize that some people believe that garbage.
contrarian said: "WSJ: Bank of America Needs $35 Billion in Additional Equity"
On the surface, this looks scary. But digging a little deeper...
http://www.cnbc.com/id/30599372
"Reports this morning that Bank of America needs $35 billion of 'capital" according to the stress tests are essentially wrong."
"What Bank of America needs is about $35 billion of equity in the form of common. It does not, according to sources we've spoken to, need "fresh capital."
"The bank does not need to convert the MCP to common immediately, only as needed to maintain a certain common equity percentage of its capital. So that makes the $35 billion a source of potential dilution, but not an absolute dilution."
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