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Wednesday, February 16, 2011
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47 comments:
MSM wakes up to what some salient voices have been saying here for nearly 2 years:
http://www.calculatedriskblog.com/2011/02/update-on-option-arms.html
The option arm tsunami has effectively gone buh bye!
Anon-
Agreed option arms will not be an issue going forward. As long as the country can stay out of a double dip recession I think housing should be fine (neither big gains or losses) for the next couple of years. I guess if rates rise really quickly without wage inflation that would be a problem, but this is pretty unlikely.
Option ARMS are not the huge wave because Bernanke has kept short term rates so low that they remain cheaper then rent,
However, it's merely delayed the inevitable.
There are a huge number of people underwater and they can't sell.
pat-
The bigger deal with option arms is not that rates are very low, but instead that the vast majority of these loans have already defaulted or been refinanced. For most of the option ARM MBS that I see only ~20% of the original loans remain and are not in some stage of default. Sure the low rates are helping protect the final 20% of people, but this just isn't a huge wave.
Also its not like its a difficult decision for Bernanke to keep rates at 0. He has two mandates one is to keep unemployment near 5% and the other is to keep inflation between 2-3%. Seeing that we have too much unemployment and inflation is below 2-3%, why wouldn't he keep rates at 0.
HB said...The bigger deal with option arms is not that rates are very low, but instead that the vast majority of these loans have already defaulted or been refinanced.
Correct, and WRT the 20% or so that still remain they are the so called "stong hands" that will simply ride it out - after all it is a fallacy to assume all 100% of option arms ever made will default.
Also, option arms in and of themselves are not new. They were used for decades (and quite well I might add) by a small portion of the small business owners who are wealthy but do not cash flow well. These are the people who could refinance into 30 year fixed, but would never never do so as it would be financially unwise.
I should add, the problem was 5-10 years ago option arms were expanded from a tool to be used just by the small business owners, to another affordability product for any idiot with a pulse. Fortunately, the idiots are long gone, washed out with the one (and only) tsunami wave we saw in 2006-2008.
this is a transcript from a national finance show
Caller: In 2006… we bought a condo. Of course, knowing we would be gone in four years and knowing of course that our condo would sell… at that time we got a 5/1 ARM and were doing interest-only. Well, of course the price went down… I moved out of Washington… We owe about $157k on it, and it was appraised a few months ago at $164k.
Ramsey: What’s your plan with the condo?
Caller: Ultimately we would love just to be done with it. But, we know at this point that if we try to sell it, not only are we going to lose that $36,000 we put down, we’ll end up paying a little on top of that. So [selling] it just doesn’t seem like a real good option, at this point.
Ramsey: You’ve got two options. One is you lose some money on it now, or you let [the loan] adjust this once, rent it for another year, and then dump it next year, regardless. In a year it may come up enough that you don’t actually write a check. But the $36,000 is gone, dude.
(How many people think this is going on here? )
WASHINGTON -- Home construction rose at the fastest rate in 20 months, pushed up by a spike in apartment building. But construction of single-family homes declined, a sign that demand for housing remains weak.
Builders broke ground on new homes and apartments at a seasonally adjusted annual rate of 596,000 units, a 14.6 percent jump from December.
Single-family homes, which make up nearly 70 percent of new construction, fell 1 percent to an annual rate of 417,000 units. Multifamily construction, a more volatile category, skyrocketed 80 percent to an annual rate of 171,000 units.
as people leave houses are they moving into apartment buildings?
MFDU starts are up. but builders aren't doing single famil houses.
I'm on board. No more pessimism here.
Who do I write the check to?
:-)
Happy Days are Here Again...
"Pay to the order of....."
pat-
Yes I think you have it exactly correct about apartments vs. single family houses. Family formation continues to increase so these people need places to go. Most will rent and rental vacancies are starting to come down. It will also take 1-2 years from when they start the apartments until they are ready, so they are making sure they can deal with demand for 2012-2013. On the other hand way to many sfh were made so they are just waiting until the excess inventory is mopped up from a growing population.
I always laugh when I read articles saying how people are excited that homebuilding picked up, which helps the economy. This is an extremely short-sited view. We need to take the pain for a while and not build houses so we can align supply and demand.
We need to take the pain for a while and not build houses so we can align supply and demand.
Pffft. That's not going to make you popular anywhere in the USA, especially DC.
You should bottle that common sense and sell it.
On a different note, there are three (3) yes three very large, very expensive, SFH's under construction in my 'hood. All three are at least 3,000-3,500 square feet or better. All three displaced 1950's/60's ramblers. I saw two of the new homeowner's while walking the dogs. Early 30 somethings with babies. A Prius with paper plates at one, and a new Lexus at the other. Seem's they were checking out their new home construction.
Like I said...happy days.
I may stop at Whole Foods this week and actually buy something.
:-)
"He has two mandates one is to keep unemployment near 5% and the other is to keep inflation between 2-3%. "
HB
He's failing badly on the first and
the second is failed. The Bernank
has managed to increase Wall Street Incomes, but at the expense of his two mandates.
Look, Energy is up 30% from last year, Food is up. 20%
what's down? Housing prices.
Oh yeah there are food riots across africa and the Middle east.
today's WaPo web headline
"On national debt, interest is the monster"
where have i seen this before? hmm... that's right, right here by housebuyer in one of his many really informative posts. (I'm sure The Anonymous could find that post in the websphere plus what Contrarian had for breakfast that day :))
kudos to housebuyer and please continue to contribute on here.
We've just had back-to-back 0.4% CPI increases. Why do all of the commentators look at the previous 12 months and say, hey, it's only 1.5%.
Inflation is 5% RIGHT NOW and accelerating.
Pat-
The problem with economic policy is that you don't know what would have happened if he had not implemented the policy. Yes it is very obvious that unemployment is at unacceptable levels, but lower interest rates help all companies who have debt (the vast majority of companies) buy lowering their payments. Although these companies are slow to higher I am fairly sure that higher interest rates would have cause more layoffs and less hiring.
Also the fed's policy has some impact on oil and food, but it is pretty small. The main issue is that global demand for both of these products has been increasing quickly as the population of the world increases and becomes richer. Supply for oil has been fairly stagnant since the early 2000s and food production this year was down significantly due to unprecedented droughts, floods, and heat waves across the world. Bernanke obviously can't change the weather. So if you want someone to blame for crop prices increasing either blame global warming or just call it an act of god. As for energy prices hopefully the US/other countries will continue to mandate higher fuel standard for cars and look for better alternative fuels.
As a side note where are you getting food prices are up 20%. The BLS says food prices are up 1.8% YoY (and yes they do account for when package sizes decrease). I am also seeing prices much closer to flat than up 20% in what I buy.
Robert-
Most of the inflation recently has been oil. If you keep all prices including food, but exclude energy inflation is much tamer. This month was up 0.2% and the previous 11 months were between 0-.1% per month.
If you look at oil prices they are clearly volatile. If you predict oil will continue to gain $5/month indefinitely then yes we have an inflation problem, but if you think perhaps some of the oil price increases were related to strengthening economies and middle east conflict (notice oil is down ~$7 since the end of the month). Then you shouldn't need to worry about inflation. Also in expensive areas like DC oil is a much smaller percentage of the basket than the total country. So oil prices are less important for us than most of the country.
PS-
As a side note for those who follow oil markets. I will admit Brent Crude prices continue to rise I am not sure I have a clear picture on whether I believe brent vs. cushing oil prices are more representative
(not that i could afford it, but) does anyone else find the price of this tear-down-new-built a bit low? they paid $435K for the torn down house last April, tear it down, clean up the lot, then build a new 3292 sqft 5/4/0 SFH, and sell it for (just) $1.1MM?
and compare it to this home - also sold in last April, but for $650K, and a total renovate later it's listed at $1.5MM.
?
MM, I saw that too but several important factors keeping the price down are:
1) VERY busy and noisy location - right on Glebe, and near the intersection of Glebe and the entrance ramp to 66
2) no basement AND no garage and apparently the attic is hard to use. Where would you put all your garden stuff? And, you or your guests would likely have trouble finding parking in that location.
I suspect they didn't tear down but instead built up from the old house, and that's why they didn't include a basement or garage (and saved a lot of construction money in the process).
MM, I love that contemporary--and its location is much more private AND it has a great garage, with plenty of space for cars and storage of necessary house "stuff."
MM, also note, for the renovated contemporary:
--the land is twice the size than for the other.
--the contemporary has a finished basement PLUS it is large above ground relative to other Arlington houses.
Subjectively speaking, IMHO, the cont. reno. really looks high quality and well done, the other one ranges from ordinary to ugly on the exterior (though the floor plan seems pretty well done).
Not sure it will sell for the full $1.5 mill. though. I would guess about $100K less than that. It's so different from other houses that both a lot of buyers in this range will pass it buy, but also someone who has the $ may fall in love with it and pay whatever it takes.
YMMV.
I have to correct myself (I was looking at the wrong tax records). The contemporary is not that big above ground - the listing brags about 3800 sq. feet but didn't mention any adding on, and Arl. shows this house to be <2000 sq ft above ground.
The kitchen granite looks low-end/standard grade, rather than the unique, pretty, swirling type that you might expect in a house in this price range.
I'll adjust my selling price prediction downward, to somewhere in the $1.2+ range.
So I will
http://franklymls.com/AR7469368
assessed at 225K, sells at 220K
http://franklymls.com/AR7469368
assessed at 225K, sells at 220K
1. Why is that house two colors?
2. Why are there two sets of garbage cans?
3. Why does the fence in the back yard go to the middle of the rear wall vs. one or other edges of the lot?
LOL...
Someone lost a little money on this one. About $381,000 if they paid the real estate agents the full 6%. Ouch.
http://franklymls.com/FX7482549
HB
"The problem with economic policy is that you don't know what would have happened if he had not implemented the policy."
Those who fail to study history are doomed to repeat it. Badly....
We came out of a credit bubble/collapse.
Good corrolary. Japan.
Insane price runup, leads to
crazed mortgages, leads to collapse.
Businesses are upside down, buyers are upside down. Rents are nutty cheap in tokyo.
Iceland: Crazed lending leads to bank sector collapse. People rebel, banks are flushed. World continues.
Ireland: Crazed lending leads to bank collapse, government guarantees all losses. Budget collapses, people starve.
Hummmmm...
So, you have 3 scenarios to show.
The Bernank opted for Japan.
http://franklymls.com/DC7464792
assessed 378K, sells at 210K.
down 45%.
DC is really starting to clear the pipeline.
Pat-
The world goes on in all three of the scenarios. The question though is how does the country do not how does the world do. Also you need to look at the relative size of the bubbles. The Japan bubble was by far larger than the other bubbles. At the peak of their bubble land in Japan was more valuable than all land across the entire world. Also Japan has a lot of other issues for why there situation is so bad with the largest being they have an elderly population that is not growing
In scenario 2 the government tried to bail out the banks, but the banks were much larger than the country, so the country failed as the banks failed. Unemployment in Iceland has also quadrupled since the 2008, while inflation has increased to 5%/year, so its not like the country is doing well.
Do I think the government is acting perfectly? Of course not, but I think the fed is doing a much better job than congress. Part of the reason that the fed needs to keep getting involved is because congress will not settle on a plan for how to fix structural issues in our economy.
HB says
"Also the fed's policy has some impact on oil and food, but it is pretty small."
food vs energy
Um, Want to reconsider that?
HB
"I think the fed is doing a much better job than congress"
That's a pretty low bar.
Who'se worse. Paulsen, Geithner,
Bernanke, Frank or Boehner?
me, i'd take them all to nuremberg
"even more significant is the improved underwriting that began after the mortgage market crashed. “The loans that are in the system now on average are better quality than what was in there before,” says Brinkmann, who explains that loans usually go bad in the first three years of life. We’re now past the delinquency peak on loans that were underwritten during the worst, headiest phase of the housing boom in 2006 and 2007. “These new loans are less likely to go bad,” Brinkmann adds."
The new loans are now much better quality. Thats a solid sign the market is much sounder, the question is what happens to all the people who got caught in the mania.
Pat-
All that graph shows is that oil and food moved together. It does not show that the fed policy caused the prices to move.
Also the food price index is the price of commodities. In the US the price of commodities (wheat, corn...) are almost always less than 10% of the price you pay at the grocery store so they are only slightly relevant to our food prices.
hb,
I think inflation is here and I don't think it's going away anytime soon.
Robert-
Do you think inflation will only be from commodity price increases or do you think it will because of wage inflation causing the price of everything to go up?
hb,
Yes, commodities - oil, corn, wheat, lumber, cotton. Oil is the biggie though.
With 10% unemployment, employers don't need to raise wages except in specialized fields. It is possible that we can have wage deflation and price inflation at the same time. Not good for the middle class.
I believe that some of the commodity inflation is an exodus from fiat currencies. I think this could accelerate.
So, I think we could have 10% inflation by year end 2012. The world does not end, and the economy continues to grow, but our standard of living goes down.
Ouch! Six years later and more than $75K gone, poof . . . in a highly coveted area of the city, no less.
http://www.redfin.com/DC/Washington/2117-N-St-NW-20037/unit-3/home/9052103
Mike,
Perhaps the seller rolled profits from a previous sale into the 2005 $575k price.
I'm speaking from experience. I first purchased in 1993 and rolled the profits into my current residence I bought in 2004.
Also, the couple that bought our house in 2004, rolled the profits from a townhouse they had held for 10 years previously.
Robert-
Although your scenario is definitely possible it would imply that commodity prices will all need to increase by ~100%. In the US labor costs are by far the largest cost and raw materials costs are very small. So in order to have wages flat to down and the costs of good increasing you would need a massive increase in commodity prices particularly oil.
The guess it is also possible that companies lower pay and raise the price of their goods and take a larger profit margin. Although this is possible profit margins are already near record highs, so I doubt that there will be significant increases, because of competition. For example during this weeks several airlines tried to raise prices, but after a day of the higher prices one airline got rid of the price increase and the rest followed
During all the raging talk of the "substitution effect" dragging prices in the immunozones down into oblivion, I remember CRT noting how some exurban prices must go negative for some buyers to give up on buying in their close in nabes.
Funny enough, that looks to be happening in detroit:
http://www.businessinsider.com/abandoned-houses-detroit-2011-2
800K turn of the century bungalow in N. Arlington or a free turn of the century bungalow in detroit (+800K to spend on airfare) hmmmm.
Anon-
or for 800K you can go to Leesburg and get a 10K sq.ft. place (5000/floor) that comes with 5 acres and a tennis court. The views from the backyard are pretty amazing
Leesburg
HB, that house would be extremely expensive to maintain (to say nothing of the commute to DC and updating that many people would want to do, etc., etc.). So it's actually a lot more expensive than many (smaller) No. Arlington bungalows.
Ace -- my first thought was, nice, but I cant imagine having to keep that place clean!
Ace & Anon-
Yeah I agree with both of you there is no way I would want a place that big/far out, but I am still amazed at how inexpensive it is. I was posting it mostly for some comical value. I think the very nice looking tennis court is a little absurd.
Anon & HB,
HB, I know you were sort of kidding. But it's also a good example of how people make different tradeoffs and how house selling prices are only part of the story.
As a tennis player who knows many others, I can tell you that a lot of them would see that as the best feature of the house (though it would have to be resurfaced frequently, new net annually, etc.)!
Anon, Agree about the cleaning. And 5 acres--hope the buyer has a big lawn tractor, edger, trimmer, etc., and a day or two per week to devote to lawn and garden care.
How 'bout them utility bills too? And furniture costs. And I hope that roof won't need replacing any time soon...
homeless agent meets homess broker
Before the real estate bust, Rob Paxton and Susan Schneider might have met at a networking event or through their home-buyer clients. Instead, they first crossed paths at a day shelter for the homeless in Falls Church.
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