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Tuesday, June 29, 2010
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17 comments:
CNBC Opinion Piece: "A Closer Look at the Second Leg Down in Housing"
http://www.cnbc.com/id/37975955
Neither of those two charts factor in interest rates. Having sub-5% interest rates means that the price to income ratio that can be sustained on a cash-flow basis is much higher than historical norms. Likewise it changes the price at which buying and renting are at parity.
Granted the wisdom of taking on a larger principle in a cheap-money environment is debatable.
However, since most buyers are cash-flow limited his charts for the fundamentals are inherently flawed and misleading.
I also object to his classification of lending standards as "tight". Compared to the boom, sure, they are tight, but compared to pre-boom times, they are perfectly normal or even loose on DTI. So in terms of restoring normal levels of demand, lending standards are a non-issue.
So in his scenario it comes down to, when do you think interest rates are going to go back to historic norms, such that housing fundamentals will put pressure on prices again?
Personally I think rates won't be above 6% for another year or two. So I think the bigger pressure on housing is the continuation of the REO and SS supply.
Mike-
I agree with the piece that the trend will clearly be down, but most of his charts say houses are within ~5-10% of the correct price. So the question is whether historically low rates are able to get housing prices to stay at fair value or whether the high inventories will bring house values below their long term fair values. My best guess is that the market will continue to falter and the government will try and create a new program in about a year to try and keep housing prices up near fair value.
Cara-
Good point about the rates. I missread the second chart and thought that was ownership cost vs. rent, but you are correct it was just the price of these two things.
Although I agree lending standards are still fairly loose one thing to consider is that peoples credit is worse than usual. Many people have lost jobs during this recession and missed payments on loans, so I would guess a higher percent of the population is currently not prime than usual.
The trend has clearly been downward for housing and the end of the tax credit will not help this trend. So based on his metrics and a minimal drop we will get to fair value the question is what happens after this.
hb,
My guess for the new program? Put even more wieght on the GSE's by dropping the PMI requirement for loans up to 90% LTV. Have different interest rates for 90, 80, 70 etc LTV (which is true now anyway), but essentially make the PMI more subtle (and last the lifetime of the loan).
Perhaps also temporarily allowing up to X% capital gains losses on your primary residence to be counted as capital gains losses. Enough to allow sellers to more comfortably cover agent fees and subsidize closing costs. Basically back-dooring the $8k. (This might backfire as it might create more inventory).
Other ideas? I think it will need to be something fairly subtle like the above in order to avoid an outcry.
hb,
I've been late on CC payments once every 2 years or so (air-headedness or stress) and my credit score is over 800. Sure it dips by 20 or 30 points for a month or two, but it comes right back up if it's not repeated.
So, I'd be interested in seeing a chart or an article on how renter's FICO's scores have changed over the course of the recession. With unsustainable mortgages, I have no doubt that owner's FICO scores have dropped. (I'm still of the opinion that 1st time buyers are the principle driver behind the national market even though they normally make up less than 40%? of buyers).
(in some of our local markets they may be a necessary step but not a driving force)
Cara-
I fully agree its all about the first time buyers, because they are the ones that reduce inventory. Switching houses obviously just switches what is in the inventory. I agree if you miss just one payment on one card its not a big problem, but if they lost their job for a couple of months it could be not paying several cards for several months which takes a lot longer to come back from. The credit bureaus are pretty good at knowing who is just being forgetful and who is closer to the brink of credit problems.
Even during the bubble FICO was pretty good at saying who would default on their loans, its just S&P/Moody's ignored the indicators and rated everything AAA and investors believed S&P instead of FICO effectively.
Holy sh*t I should not have over estimated people's stupidity for how much they will overpay to get 8k. Housing prices went up 2.4% in the April CS number. Based on the fact they using rolling 3 month look back periods that must have been a massive gain to counteract the previous couple of months of ~ -0.5%. I am floored by how wrong I was!
The other big new of the day is the ten year treasury is under 3% for the first time since the December 2008 crash. So here comes 4.5% mortgage rates if not lower.
HB -- I saw that Case Shiller report too. That was a huge jump, it erased 4 months of price declines in a single MOM gain. Wow.
I was expecting a +0.2 or +0.3% gain due to the annual seasonal bounce. However, the abnormal size of the gain, its almost certainly due in large part to the tax credit. If so, it might show a pretty healthy drop in the next few months as it wears off. I guess we will see.
all,
Harriet's got the chart up, moving to the next bucket...
Jeremy: Do you still need an agent? I had an agent who was a heckuva gunslinger and answered emails religiously.
Thanks NoVAwatcher, but I think we've decided to dump our agent and try Redfin. Unless a home comes on the market in the next 2 months that we love we will likely renew our lease in September for 7-8 months and try to buy again in the spring. I'll be sure to let everyone know if we have any problems with their responsiveness or scheduling home tours.
http://franklymls.com/DC7118626
sold 430K 2008, now 155K.
Now thats a clearance.....
Signed a short sale for single family home in Ashburn,VA for $515K and bank approved the short sale. Its a 4 year old SFH and the seller baught for $725K. The Zillow shows $590K value for the home.
Suggest to go forward to buy or back off from the contract.
cara
90% of all lending is federal, Fannie,Freddie, FHA.
The private sector isn't lending..
pat,
Yes, the GSE's and FHA and VA are the lion's share of the current market. Again, I'm not following what conclusion you want to draw from that.
To me that just says any adjustment to the GSE guidelines or criteria would be all the more effective at changing the marketplace dynamics... But I'm guessing you're thinking something else.
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