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Monday, March 29, 2010
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63 comments:
Today's 10 AM Diane Rehm show (WAMU): Discussion of Obama Administration's Revamping of Anti-Foreclosure Programs
BEA reported personal income results for 2009 which will in all likelyhood capture the worst of the recession.
In the United States, personal income declined by -1.7% for the year. Here locally, the results were better.
MD +0.9%
VA +0.6%
DC +1.1%
The census will likely confirm this in a few months. The worst of the recession did slow down income growth considerably, but in the DC area, its unlikely it will have actually declined.
The Adjustable Rate Mortgage Time Bomb Proves To Be A Dud
"It was feared that adjustable rate mortgages (ARM) would slam U.S. homeowners in droves as low teaser interest rates adjusted-up.
Many intelligent analysts and investors showed us how waves of ARM's would come due for scheduled adjustment, causing havoc to their owners.
Well, it turns out that many ARM holders either modified their loans ahead of time or were simply already driven into foreclosure before it even happened."
Read more: http://www.businessinsider.com/the-adjustable-rate-mortgage-time-bomb-fizzles-out-2010-3
Tom-
I think you are missing the most important reason why there was no ARM time bomb. Short term interest rates are at 0%. So although rates were expected to go up when the teaser period ended the fact that LIBOR went from ~5% to ~0.25% overwhelmed this so peoples payments went down not up.
The other major impact is that nationally tons of people are defaulting but the inventory is never hitting the market. Currently only ~4% of foreclosures are turning into REOs each month.
Personally I am fine with this although it would be nice to be able to get a house cheaply, I understand that it may be better for the economy to let housing prices continue down at a slow rate or have them stagnate and let inflation help make prices reasonable.
" because many borrowers, prior to facing higher payments, received modifications, refinanced or defaulted. Option ARM volume peaked at 1.05 million active loans in March 2006. At the end of last year, there were 580,000 loans outstanding, according to First American CoreLogic.
Read more: http://www.businessinsider.com/the-adjustable-rate-mortgage-time-bomb-fizzles-out-2010-3#ixzz0jZsBPazH
"
So half are still outstanding.
what happens when the Fed stops keeping rates in the sewer?
What I thought was significant about the Diane Rehm program today was that people were urged not to stop making mortgage payments to get banks' attention, encouraging homeowners to do whatever they can to maintain their credit scores.
Another highlight: one of Obama's new programs is to provide unemployed homeowners the opportunity to recalculate their mortgage payment so that it is only 31% of their unemployment benefit. As before, banks are not obligated to follow new government guidelines, but they are given financial incentives to follow this and other new programs. This would have helped my neighbor with five children, if it had been in place last year.
"Needs everything, but land valuation alone is $471K" talked about bank dumping a property like a hot potatoe. i know it's the least desirable N Arl neighborhood and all that, but still... it was actually priced so low that i never noticed it.
MM-
Wow that person got a great deal. I bet we will see that house with 50-100K worth of work come back on the market listed for 200-300K over what they bought it for.
housebuyer said...
Personally I am fine with this although it would be nice to be able to get a house cheaply, I understand that it may be better for the economy to let housing prices continue down at a slow rate or have them stagnate and let inflation help make prices reasonable.
I don't get this. You'd prefer a Japan-like slow bottoming that would in the end give us more people underwater.
Kevin-
First, in my situation I do not think more people end up under water. If housing stays flat/ goes down 1-2% you don't get underwater because you are paying down your loan.
Second I don't see us going into a Japanese style situation. I think we will continue to have inflation so this can chip away at the problem. Japan never got the inflation necessary to fix the problem do to slow government responses, a shrinking population, and too high of a savings rate. None of these are problems in here.
So if the option was 20+ years of deflation vs. 20% drop in prices I would take the price drop. If the options are prices dropping 1-2%/year for 5 years with 2-3% inflation vs. 20% now I would take the first option.
So as long as you believe price drops can be slow and fix the problem, like I do, there is no need to having housing drop another 20% now, which would have catastrophic impacts on spending and thus unemployment.
Housebuyer, I don't follow that logic. Arguing that prices should be propped up 20% now is no more sound than those who three years ago wanted them propped up 50%.
Kevin-
As I said I am fine with them going down I just don't want it too happen quickly. The economy has too many moving parts so no one really knows what will happen when someone drastic happens. So rather than risk it I would rather take a more controlled approach to the movement in prices. I don't see why it is so essential we must hit bottom as soon as possible other than you want to buy a house.
The other difference between now and 2006 is that mortgage payments are not expensive now while they were very expensive in 2006. So I am fine with interest rates slowly coming up and keeping housing stagnant.
Need information, does any one know when the contract date for short sale to get the 8K? The contract was signed on 1/8/10 but has not been approved by the Bank yet.
HB
A big drop and slow rise is better because it convinces people to stay in, life will get better.
A long walk througa cold driving rain is the worst because once people believe that will be everything they ever get for a decade, they give up hope.
http://franklymls.com/DC7118626
now heres one wehre a fast drop moved it, and now it's set a floor for pricing, as opposed to a drag into acid.
shay,
good question. i don't know the answer but all sales must close by 6/30 to claim the credits.
housebuyer,
from what we've learned in the past couple of years, do we still not know what would happen if housing dropped 20%? in the last go-around the banks suffered and credit froze and then Uncle Sam came to the rescue, and 1.5 years later Dow's above 10K again. i guess i fail/refuse to see the 'bigger picture' of how housing is so essential to the economy that it must not see dramatic changes. is it that housing value has significant effect on jobs?
HB,
It isn't that simple. Overpriced housing and holding back inventory will/shall bring more supply from home builders. This is how markets work. This just means there will be oversupply when you add shadow inventory. The problem will eventually get bigger (and not smaller)
I don't know about you. But, I see quite a few land deals at substantially cheaper rate than what finished product sells in the market after cost.
If you think they can twist the laws of economics...think again.
MM said
"Needs everything, but land valuation alone is $471K" talked about bank dumping a property like a hot potatoe. i know it's the least desirable N Arl neighborhood and all that, but still... it was actually priced so low that i never noticed it.
Why is that the least desirable N Arl neighborhood? What's wrong with that area?
Jeremy said (a few days back)
I think what Poppy meant, or at least what makes me not consider Franklin Farm, is that it was already considered as a potential area to be redistricted to South Lakes which makes it more likely to be redistricted the next time they draw the lines. For those of us who haven't even had their kids yet, we want to purchase a home well inside our desired school district, not out on the edge.
I was unaware that FF was considered for South Lakes. I guess it's possible in some hypothetical future round of redistricting it may be under consideration but it seems to me much more likely that in the future South Lakes [and Marshall] will have *too many* students and not the opposite in the future given there will be major growth in the Tysons and Reston areas. Note that FCPS is increasing Marshall's capacity as part of the renovation.
I recall that Mozart said South Lakes already has way more students than the county predicted while doing the redistricting so it seems unlikely it will need more neighborhoods.
Half of Commercial Mortgages to Be Underwater: Warren
Geithner: Commercial real estate loans problematic
Tracking Bank Failures: Bair Expects 2010 to Top Last Year
TBW, you may be right but I'm not willing to risk it. Worst case it just shortens the future trips to football/soccer/whatever practice. The Oakton and Madison school districts are so weird shaped with the schools in the South-East corner of them, and so close together.
One could certainly save some money buying just a little farther out like that and still get all the same schools.
MM-
There are two ways that housing value has a large impact on jobs. First, there are a lot of jobs in the housing industry itself that go away, but more importantly when housing values drop people feel poorer so they cut back on spending, which causes deflation. Although I think contrarian is way too pessimistic, he is correct that it is difficult to break out of a deflationary cycle once it gets nasty, because as people spend less jobs are lost and the cycle repeats itself. The government had to spend trillions of dollars to bail us out of the last 20% drop.
Way OT - just need to vent.
Some crook charged Civil War relic hunters $500 each to rape my land. I'm beside myself. I've denied permission for a number of years and this/these guys pulled this. I've got the sheriff on it.
This is so outrageous I am in shock.
This will please a number of people. The appraiser on my sale came in 10% below contract price eventhough I had 6 offers in 2 days.
Did the relic hunters find anything cool?
VA-
Wow on both accounts. I can't believe someone charged people to get on your land. That also sucks about the appraisal. Did the person backout/lower their contract price on that house?
Leroy,
Yes they did. A single belt buckle can go for thousands. They have been down there before (illegally). It is a VERY significant site. My husband is a huge Civil War buff and we were hoping to have him and a friend do this as a hobby down the road when time is available.
housebuyer,
Yes they dropped to 2K above appraisal. In the past week since the appraisal, there have been two closings at much higher prices than his comps. I'll probably wait a couple weeks (for another closed sale) and re-list. It was Pentagon Federal, btw.
Housebuyer:
I don't see why it is so essential we must hit bottom as soon as possible other than you want to buy a house.
So it has to be about me? Maybe you want to delay a price correction to milk more out of the bubble. I can't think of any other reason to delay the inevitable. Look at Japan. They spread the pain to the next generation because they thought that if they could just pump the brakes on the pain, it would make everything better.
Consider the point I just laid out, that the net effect is more people underwater. You can call it easing through inflation or whatever, but the net effect is that every young person that buys a house over the next few years will be unable to sell it as its value won't have gone up and they cannot afford the astronomical agent and closing costs.
As to whether it's better for the economy to delay the inevitable, I don't see the benefit. Particularly when the methods to "ease the bleeding" are put on the taxpayers and in the end provide the general public nothing.
Kevin,
You were never supposed to be able to sell in less than 5yrs and break-even. If you want things to return to what they used to be, you should check history.
VA, yes, you were. Check your own history, back when people actually put a significant down payment on a house.
The issue here is the creation of more underwater homeowners. I think the evidence stands on its own to say that keeping prices propped but stagnant for an extended period of time will just trap more people underwater and delay the inevitable. Just. Like. Japan.
Kevin-
How am I milking the bubble for more profit? I don't nor have ever owned a home. I already explained that Japan was doomed for several reasons like a shrinking population that we do not need to worry about here.
I said I would prefer housing to stagnate that means no one new gets underwater. Sure it takes time to be able to cover the agent fees, but a couple of years of amortization will do this just fine. You on the other hand want prices to fall 20% immediately, so yes new buyers will not be underwater, but a much higher percentage of sellers would be underwater. So In my case no one new gets underwater and yours many people get underwater...
If prices are stagnant you pay down your house a couple of percent a year, so you can pay for the agents in 4-5 years. So please explain how this has more people underwater than immediately having prices drop.
Hey,
VA_Investor,
I agree that breaking even in less then 5 years is not normal in when price growth is at historical averages. At the same time you drop a mention of getting deals below FMV all the time.
Also breaking even and being underwater is quite a different thing.
Konstantin-
I agree that breaking even and being underwater are different things. I am saying that if housing stays flat you are not underwater. You may not break, but if you had any reasonable DP you would be able to sell and not eat a loss
Housebuyer:
How am I milking the bubble for more profit?
I don't think you are. But if in a debate about the economic ramifications about delaying a correction you would suggest my opinion is simply of self-interest, I redirect such a silly claim.
I said I would prefer housing to stagnate that means no one new gets underwater.
That would mean an inflationary solution which could take many long years. While we're most of the way through the correction, just think of what that would have done had it been reality since the bubble's peak. Everybody would be underwater. The faster it resets, the less people in the long run will be underwater. The mitigating factors that differentiate ourselves from Japan aren't enough to discount the similarities.
I said I would prefer housing to stagnate that means no one new gets underwater. Sure it takes time to be able to cover the agent fees, but a couple of years of amortization will do this just fine.
For housing to stagnate, every buyer without at least 7% down would be underwater. Not only that, but the aggregate debt would be far greater, impacting the equity down the road be it five, ten, or fifteen years. There's no net positive as far as I can see it.
And a couple of years of amortization will not even come close to covering it. Have you ever even looked at a 30 year amortization schedule?
If prices are stagnant you pay down your house a couple of percent a year, so you can pay for the agents in 4-5 years. So please explain how this has more people underwater than immediately having prices drop.
Okay now you're saying five rather than a couple. Closer to reality. Really it depends on what the interest rate is, but it can be upward of seven. Not just for the agent fees, but for paying the buyers' closing costs. This is the norm now, at least.
It puts more people underwater in the same way that those who have been buying since the market's peak are underwater. The only way for the market to become stable is if prices were to increase at the rate of inflation. Decreasing values in real dollars is not a solution, and the net result will be more people stuck in houses that if not underwater, are near the brink.
Apply your logic to the beginning of the bubble's deflation and it makes no sense at all. While the deflating bubble has its detrimental impacts on the economy, most of that is behind us. So why prop up prices now? We're going to see the impact of the tax credit for first time buyers this summer as it ends. I think when the results are seen and all gains will be lost in addition to whatever continued declines should have happened during the time, the consensus will be that this thing needs to correct itself as soon as possible. You cannot delay the inevitable and kicking the can down the road spreads the pain to more people.
I am saying that if housing stays flat you are not underwater. You may not break, but if you had any reasonable DP you would be able to sell and not eat a loss
It is all anecdotal, but in general people aren't putting a lot down on a house. FHA minimum doesn't even come close to covering the cost of selling. Assuming that as an aggregate the population is purchasing at prices that will not change and with close to the minimum DP required, they are underwater as soon as they buy. Not just that, but they will continue to remain underwater for many long years. This is simple stuff. Don't know where we are disconnected on it.
Kevin said...
"You cannot delay the inevitable and kicking the can down the road spreads the pain to more people."
From Rich Toscano (AKA Professor Piggington):
"Kicking the can down the road" is a vague term.
If it's used to mean, "exchanging current problems for different, possibly bigger future problem," I agree that this is what's happening.
If it's used to mean "housing will just plummet in the future" I completely disagree (or at least I disagree that this conclusion is a given).
If you "kick the can down the road" for long enough, and you devalue your currency enough as you are doing it, affordability can be achieved without a big drop in nominal prices.
So I completely disagree with the premise that principal reductions (along with the rest of the bailout dog and pony show) won't make any difference. They may cause an entirely different set of problems in the future -- but that's not the same as making no difference.
I never said principal reductions wouldn't make a difference. They would bring defaults down to almost nothing. However, it's morally repugnant and I don't think it's worth the price of having houses default since foreclosures lead to a quicker price discovery. Principal reduction = give lots of money to the biggest risk takers that put no money down. So very wrong.
Kevin -- I am not talking about principal reductions. I was thinking about your statement:
"I think when the results are seen and all gains will be lost in addition to whatever continued declines should have happened during the time"
Anonymous, in the end it will make no difference in the value of houses. Temporary bandaids and temporary stimuli are just that - temporary. Trying to freeze the market and allowing inflation to wait out the return of the fundamentals is costly and has no benefit that I can see.
HB, the down payment is irrelevant to whether you had a loss.
Person X and Y buy two identical properties, each paying $400K. Person X puts down $80K. Person Y puts down $10K. Both have to sell four years later when they get transferred. Both houses sell for $410K. The transaction costs are $25K. Both losses are exactly the same = $410-$400-$25 = $15K. The only difference is that Person X doesn't have to bring as much $ to closing but Person X lost just as much of his savings used as a DP in Year 1 as did Person Y did of whatever savings in Year 4 is being tapped to be brought to the table.
This simple example ignores the time value of money and other complications of course, to focus attention on what determines a loss. But it's also possible that both down payments and savings had been invested in the stock market, which could have had gains or losses during that time, and either X or Y might have lucked out or been adversely affected by the timing.
"Yes they did. A single belt buckle can go for thousands. They have been down there before (illegally). It is a VERY significant site. My husband is a huge Civil War buff and we were hoping to have him and a friend do this as a hobby down the road when time is available."
What did they find?
"I said I would prefer housing to stagnate that means no one new gets underwater."
Just one quick note to add, stagnant prices coupled with inflation means people are still losing money(in real terms), they just find it less painful to lose money this way for some reason.
Holding an asset that is losing value is a bad thing, even if it looks like a wash because your currency has also lost value. (inflation)
I believe that until the bubble, per historical averages, housing prices generally have gone up enough annually to just about offset or exceed transaction costs in 5 years. For example, if inflation is historically 3% per year (until this century, that's probably close), that 15% would offset transaction costs. Of course, you could be an an atypical 5 year period (such as the DC area in the 90s), and the real cost of the house is obviously unchanged if it just matches general inflation or if you put $ into the house that you can't get back when selling, etc. And moving costs (if not fully paid by an employer) would be additional.
"Kevin said...
Trying to freeze the market and allowing inflation to wait out the return of the fundamentals is costly and has no benefit that I can see."
I agree it is costly. As Rich said, we very well could have a different set of problems down the road. As to the "benefit", as he said...
If you "kick the can down the road" for long enough, and you devalue your currency enough as you are doing it, affordability can be achieved without a big drop in nominal prices."
The benefit is out there, its just not benefiting guys like you and me.
Ace-
I know that the DP has nothing to do with whether you had a loss. It has a lot to do with whether you area underwater. I thought Kevin was talking about the problem that if you are underwater you tend to not care about your house as much and are more likely to walk away.
Kevin-
I am not sure you realize what the amortization table looks like at 5% interest rates. Even in your first year you pay down 2.5%. I agree when interest rates are high you pay down almost nothing, but at 2.5% it only takes ~3 years to cover transaction costs so maybe I should have said a few years rather than a couple, but that really isn't that long
Anonymous said - If you "kick the can down the road" for long enough, and you devalue your currency enough as you are doing it, affordability can be achieved without a big drop in nominal prices."
Even a better idea - why not give away mansions to everyone using the same theory? We will not have any homeless, lot more construction jobs, everyone will be so happy - all the problems solved...right?
Point is - it isn't that simple...it never is. If you cause your currency to crash and inflation to sky-rocket with so much slack in the economy and stagnant wages, economy will come right back down crashing (consumers will be dead with no spending power in this scenario) Higher inflation will also make refinancing/servicing of government obligations almost impossible at levels they currently stand. The last point alone will ensure fed won't let this happen.
For argument's sake - even if you wanted to, you can't "cause" inflation with M2 crashing and employment at this levels.
HB: I am not sure you realize what the amortization table looks like at 5% interest rates.
Um, I do. You're the one that said it takes only a couple of years to pay down the agent fees which is b.s.
Even in your first year you pay down 2.5%.
Wrong again. Not even close in fact. At 5%, you don't even shave 1.5% during the first year. Second year you're at 3%, end of the fourth year you're past 6%. That's enough to cover agent fees but not likely the closing costs.
maybe I should have said a few years rather than a couple
First you said a couple, then five, now a few. How many times can you both contradict yourself and be wrong in the same thread?
And I'm the one that doesn't understand an amortization table?
OK, HB, this is your statement that was misleading in linking DPs to losses:
"You may not break, but if you had any reasonable DP you would be able to sell and not eat a loss."
"Spider said...Even a better idea - why not give away mansions to everyone using the same theory? We will not have any homeless, lot more construction jobs, everyone will be so happy - all the problems solved...right?"
Where did I say that? Problems Solved? Did you glean thats what I meant when I said "we very well could have a different set of problems down the road"?
"Spider said...For argument's sake - even if you wanted to, you can't "cause" inflation with M2 crashing and employment at this levels."
M2 is crashing huh - you sure about that???
http://www.economagic.com/gif/g71019102350191100843364431930462121.gif
OR
http://www.economagic.com/gif/g71019102350191100248364482175365686
Kevin-
Sorry you are correct on the amortization table. Somehow when I was calculating the amortization table in my head I put 20 months in the year not 12. Wow not sure where my head is today!!!
I guess I should also be more careful in giving precise time tables. When dealing with bonds with long durations like mortgages I have no issue interchanging words like a couple or a few to generally mean several years. It sounds like you and several other people do not use such loose definitions, so I will try and remember in the future to use more literal terms to separate 2,3,4,5.. years.
Ace-
Similar to my comment to Kevin, I am not sure where my head is today. I meant to say you will not break even, but will be able to eat the loss. Maybe I should stop posting today, and see if my brain is working better tomorrow :)
That link doesn't work.
Velocity: Monetary Trends
Anonymous, I know you mentioned it will cause problems down the line. What I am pointing to is the fact that it isn't that far down the line as you think. I also don't think they control this to the extent you think they do.
In any case, if they do "manage" and "want" to cause inflation (I don't think this is true), anyone owning RE will still be poorer in real-terms.
HB, honest mistake, no harm.
But the real argument is whether it's better to just let prices freeze and wait for the fundamentals to catch up. In real dollars, they're still losing value. By adding more time to the dilemma, you increase the number of people buying into the bubble. If you hit the reset switch (let housing prices correct), then that lessens the spread of pain. Personally I don't care if this creates more defaults in the future, I just hate seeing the market artificially tinkered with and ultimately screwing over future homeowners. Those that endured the market collapse thus far can stomach another 10 or 20 percent drop. No reason to increase this pool of bad gamblers.
kevin, housebuyer,
You have to throw rent versus buy into the mix.
IF (emphasis on the IF) buying is similar in cost on a monthly basis to renting, albiet by governmentally aided low interest rates, then that changes the math. After 5 years, even in the house value is declining in real terms, rents would have been rising as part of the inflation against which the house price is declining.
While it's not a large win, it may partly offset some of the transaction costs.
If you're buying a home that is not at or below rental parity, then it's a whole nother beast. Then any propping up is indeed essentially making today's buyers worse off for buying, and adding them to the existing layers of injured parties.
In NoVa right now, I'm betting all conditions exist. I've seen condos well below rental parity and VA_investor has found condos and THs at cash-flow positive. I bought a 3 bedroom SFH at essentially break-even with our 2 bedroom apartment. And I'm guessing that a lot of people who haven't quite bought yet are still saving money every month that they delay by delaying that purchase.
So, what I'm saying is I agree with housebuyer, that the stagnation route to a bottom in real prices is a perfectly valid and okay route that may help save a lot of current owners more pain than necessary. But I'd add the caveat that I'm only okay with this because entry-level housing near me has reached rental parity such that it is no longer an inherently losing proposition to buy it.
That's the difference between stagnation now and stagnation at the peak.
The problem is, this is all national policy, essentially, and well, real estate actually is local. So some places are ready to stagnate, some places will keep falling anyway, and some places could have used a shove, but instead will remain overpriced, as kevin says adding more of a debt burden on the owners over the next 5 years than was necessary.
Cara, that's a valid point. However, it sounds like the caveat to it is that rents must be somewhat equal to purchase price, something that is only seen in certain areas and at the lowest tiers. Keep in mind that the areas I am typically referring to aren't in PW or Loudoun county and are still considerably overpriced. I don't think any property with another 20% to fall has parity to the rental value yet.
kevin,
The interest rates mess everything up. If the same house that's at rental parity at 5% interest now, needs to still be at rental parity at say 8% interest rates.... then on a real basis it could still "need" to fall by a large amount. (feel free to run your own amoritization tables, and rent scenarios and inflation scenarios). That may not be 20% depending on your favorite numbers to run the comparison on, but it could easily be 10%.
I didn't buy in PWC or Loudoun. I bought in Burke/Springfield. 2 minutes outside the beltway, and a 20 minute commute to my work. Reston likewise, seems to be near rental parity. And is convenient for many folks. Not everything that's at rental parity is far out or "low end". I'd say "entry-level" is a much fairer characterization of the things I'm seeing at rental parity. Which makes sense, since it's 1st time buyers, current renters, who are chosing between the two options.
I would agree however, that "low end" probably characterizes well the only things in Vienna that are approaching or at rental parity. Or rather, I'm perfectly willing to believe you if you say so. Someone else who's also looking there can choose whether or not to try to dispute it or concur.
So if by "need to fall 20%" still, you mean in order to reach rental parity at some reasonable rate like 6 or 6.5% that might occur in the next few years, then yes, those things that are currently at rental parity, don't really have much further room to fall. Or not that much room, anyway.
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