Random Market Data

Monday, March 2nd, 2009 at 9:51 AM

What’s to talk about today?

February Detached Sales/Average $$ per sf

Town or Area	2005	2006	2007	2008	2009	Off-peak Pricing
Carmel Valley	$355	$411	$355	$359	$326	-21%
RSF	$559	$491	$547	$534	$516	-8%
Encinitas	$420	$461	$412	$391	$348	-25%
Carlsbad	$362	$328	$323	$318	$272	-25%
Oceanside	$327	$336	$298	$241	$180	-46%

Oceanside’s market is red hot currently, so we can probably guess that the other areas would ignite should they approach the same -46% discount from peak pricing.

You’d buy a house at 46% off peak pricing, wouldn’t you?

Or maybe somewhere in between today’s number and -46%?

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Sales are a leading indicator though, so check the latest detached closings for February – there will be a few late reporters:

Town or Area	2005	2006	2007	2008	2009	% off-peak	ACT/PEND	Ratio
Carmel Valley	29	16	29	19	17	-41%	195/30	6.50
RSF	14	9	6	8	3	-79%	276/22	12.55
Encinitas	28	32	23	20	19	-41%	201/32	6.28
Carlsbad	74	74	53	46	33	-55%	381/103	3.70
Oceanside	107	103	80	69	86	-20%	509/301	1.69

Rancho Santa Fe has 276 active listings, and three closed last month? What is wrong with people?

Oceanside sales are 25% above last year.

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We saw that HSBC is selling $18 billion in shares, how are they are the others holding on? HSBC, Deutsche, Bank of NY, and US Bank were the big buyers of Countrywide’ s private-label MBS:

Bank	# of REOs 6/2008	# of REOs 2/2009	># Sold	Amount lost @ $150K each
Deutsche	904	473	1,668	$250M
US Bank		433	1,407	$211M
BoNY	579	438	1,221	$183M
WFB	524	373	1,131	$169M
HSBC	414	233	880	$132M

I guess you can say that the foreclosure moratorium is working, every bank has fewer REOs today than last June. But how many properties are in default, waiting in line for their trustee sale?

Hard to count, but there are a few thousand, to say the least.

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Two weeks ago 11% of the active listings disappeared, and only half of them went pending.

How do the cancelled/expired/withdrawn listings compare to previous years?

SD Detached Listings that Cancelled, Expired, or Withdrew between Jan 1 and Feb 28th

Year	C/E/W	C/E/W over $600K	% over $600K
2001	1,611	332	21%
2002	1,667	438	26%
2003	1,580	613	39%
2004	934	451	48%
2005	2,000	1,089	54%
2006	3,206	1,911	60%
2007	4,118	2,197	53%
2008	4,637	1,805	40%
2009	3,255	1,179	36%

This year was better than last year, but 2001 and 2002 look far more ‘normal’, and we’re running double the cancellations of those years

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Posted on Monday, March 2nd, 2009 at 9:51 AM in Afternoon Data, REO Counts | 31 Comments » | Print You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Reader Comments: 31 Responses

I wouldn’t buy a house in a high-bubble area (eg: San Diego, LA, bay area, Las Vegas, etc.) for -46% from peak; that’s not low enough for me any more. Back in 2006 I was thinking the market in LA (where I live) would fall roughly 50% from peak, and that was before all the government actions to prolong the crisis and deepen the recession. If I had to make a prediction today, I’d guess closer to 65% or more off the peak before the market really bottoms out, and several more years of market pain (at least).

Know how you can tell we’re not near the bottom yet? Some people still think they are getting a bargain, and are looking to buy. When you stop hearing that sentiment, then we’ll be close.
Nick | March 2nd, 2009 at 10:12 am
“Only three closing in Rancho Santa Fe”

Yea, but there are 22 knife catchers pending.

Can’t wait for all the option ARM disasters to start this year. If you notice the government bailout. People with loans above $700,000 are not going to get any help.

Homeowners can still continue to pay $2500 a month for their last year in their million dollar house with a $900,000 loan. They might as well start counting down their days to the sheriff makes a knock on the door.
worm | March 2nd, 2009 at 10:28 am
Rich people are different. They can hide insolvency far longer than most. That has always been a long term advantage. No longer. The rich have shortened their time frames and this downturn is/has lasted longer than they anticipated. The slinky at the high end is about to snap back big time.
Rob Dawg | March 2nd, 2009 at 10:36 am
As soon as those 1000′s of foreclosures make it through the market prices can begin to stabilize. We all know they’re the elephant in the corner nobody (banks and government) wants to talk about.
shadash | March 2nd, 2009 at 10:44 am
-46% in RSF… they really would/will be giving them away! You’d be talking 5000 sq ft in the covenant for $1.5 mil.

Full disclosure here (again)… I own a lot in Olivenhain near the 15,000 sq ft place cited below, and am building. It hurts to see I way overpaid for the land, and that building costs will be way more than the place is worth. But… at least a continued decline will make my property tax assessment at the end a lot cheaper!
Aztec | March 2nd, 2009 at 10:47 am
Since I’m not an investment buyer, a 46% discount off peak is only an incentive if I want to live in the house so much that I won’t lose sleep if it undergoes further reductions in value.

When I’m househunting I’m looking for a home and not “the bottom;” when I’m gambling I never bet more than I can afford to lose.
GeneK | March 2nd, 2009 at 11:20 am
Great stats Jim. These would be great stats to share with my local market too. Keep up the great work. Alex
Alex H. Wang | March 2nd, 2009 at 11:22 am
46%? I’d be shopping if they would drop 30 percent. But the fools in my neighborhood are still partying like it’s 2005. Geez. They would rather let them sit on the market for months than drop the price. Go figure.

I think 46% would be a more accurate number to bring them to a rent/vs. buy number though.
KC | March 2nd, 2009 at 11:44 am
From its peak of about 5K, Nasdaq dropped by about 50% by early 2001. It briefly flirted with those levels in 2008 and now its at about 1300. Moral of the story (which I learnt the hard way if I may add), is that just because something is half as expensive as it used to be, doesn’t mean it can’t drop more.

In the housing market — the same truth holds. So I think you should buy if you feel that a) you really need the house, e.g. you may have kids and you want them to run around a real backyard, b) if you feel comfortable with your financial situation and you have some cushion and c) if you like the place as a place to live, not as an investment. Don’t buy because you see that the house prices are 46% off its peak.
Burnt by Nasdaq | March 2nd, 2009 at 11:45 am
This is long, but I would love to hear your thoughts on in Jim:

Currently the Federal Government is doing what it can to keep home loan rates low. Interest rates on home loans

are currently at 5.5% or so, and there has been talk of trying to get it down to 4%. This is under the auspices of

trying to assist current homebuyers and to keep homes “affordable”. This is also an effort to keep home prices

“stable”, or rather, to keep them from falling (“deteriorating”) further. I think Bernanke would readily admit

this.

Given this premise: What would happen to home prices if rates were to rise significantly?

From common sense and through admission by the Fed through their actions, it is obvious to conclude: A RISE IN

RATES WILL MEAN A DROP IN HOME PRICES.

Anyone disagree?

O.K. So, how significant would the drop in house prices be, if rates immediately went to, say, 13%?

Suppose you had a typical 4 bedroom/3 bath 2,500 sq/ft house that today was selling for $480,000 in Southern

California (was $700,000 at the peak).

At 5.5%, the loan with a 20% down of $80,000 would be $400,000, which works to about $2,200 a month (P&I only).

If rates were to rise to 13%. That same $2,200 payment would only get you a loan of about $200,000

So, that same house, at 50% off, or $240,000, with a 20% down $40,000, would leave a loan of $200,000. With a 13%

interest rate on the home loan, your payment would be about $2,200.

I think it’s safe to assume that that if rates were to rise to 13% right now, that house prices would fall

signficantly, perhaps by about 50%. Given that home prices are at least in theory tied to the prevaling wages and

rent equivalent in a certain area, it stands to reason that the monthly payment would be similar for a given house.

Afterall, the monthly payment determines affordability. So in this example, if rates went to 13%, a house that

was “affordable” at $480,000 is now similarly affordable at price closer to $240,000.

With me still?

Admittedly prices would take some time to adapt to rates. There would be initial freezing in the market (as we’ve

already seen), but as prices dropped sales volume would pick up (again, as we’ve already seen).

Now, you are a prospective homebuyer, A first-time buyer just starting out in life.

What would you rather buy, a $480,000 house with a 5.5% loan, or that very same house for $240,000 at 13%.

Well, I think it stands to reason that anyone would obviously rather pay less for the house and more for the money.

Why you ask? Well, firstly, you can’t refinance your principle, so as rates fall at some point in the future (as

they are more likely to do at 13% than at 5.5% since rates tend to move to the historical mean of say 7-8%) you can

refinance and reduce your payment. And by this same logic, as rates fell to more “normal” levels, the value of

your house would increase as the “buying power” of future borrowers increased. Second, it would require a much

smaller amount of money to satisfy the 20% down needed ($40,000 as opposed to $80,000). Third, a higher portion of

your payment would go toward interest, and thus be a larger income tax deduction.

So, in this example it is apparent that LOW interest rates are NOT a sure-fire way to help homeBUYERS. In fact,

presuming that a rise in rates would cause a commensurate drop in house prices, the HIGHER the rates the BETTER for

homebuyers.

Want more proof?

Ask anyone who remembers home loan interest rates at 16% or higher in the early 80′s, particularly if they bought a

home back then. You will find that, although they may recall it with dread, they’ll readily admit that they made a

lot of money on the purchase. In fact, it was this generation’s success with real estate purchases back then the

reinforced the mantra that “housing is a great investment”.

Now ask anyone who bought a home when the rates were most favorable, or the lowest, i.e. during the bubble years

and you’ll be hard-pressed to find anyone who hasn’t lost a significant amount of money on their “investment”.

So, the next time you hear a realtor say, “You’d better buy before rates go up”, or “Now is a great time to buy

since rates are so low”, or “We can’t let rates rise because it will harm prospective homebuyers”, you now know

this is either misleading, ignorant, or a down right LIE.

If you want to borrow money to buy a home, pray that rates rise significantly.

Now, lets continue with this thought.

Suppose you are someone who has capital, cash money, available to lend to people to purchase homes. Would you

rather lend someone $400,000 to buy a $480,000 home at a 5.5% return, or lend that same person $200,000 to buy that

same house for $240,000 at a 13% return?

I don’t suppose you have to think about that answer too long.

It’s obvious that you’d want the higher return. In fact there are several reasons in addition to the obvious

higher returns: First, you’d be able to spread the same amount of money (say you had $2 million total), to

multiple homebuyers spreading the overall risk. Second, the cost of a single default would be lower since it’s

likely that housing prices were at bottom or obviously closer to it at $240 grand than at $480 grand. Third, if

you did get the house back in default and couldn’t sell it, then cashflowing it through renting would be more

profitable.

In any case, I can’t see how anyone thinking of lending to a homebuyer would choose to accept the higher risk at

lower rates. In fact, the very existence of governement subsidized lending via Fannie and Freddie means that

eventually all private capital will move to the sidelines. How can they compete? Who wants to? It’s akin to an

anti-competetive business willing to lose money on a loss-leader to drive out competition and corner a market.

It’s illegal to do this for anyone other than the government.

Moving on,

Now let’s again continue on with this scenario.

Suppose you are a “cash buyer” of real estate. A real estate investor. Perhaps you run a REIT, or would like to

invest in one. What would rather do, buy a house for cash at $480,000 or buy that same house for $240,000? Duh!!

Of course you’d rather pay less. The existance of low interest rates means that it’s more difficult for cash

buyers to buy property that they can cash flow. The existance of “cheap money” means that their cash has less

power over borrowers, in essense they only have a 5.5% advantage over a borrower. But with rates at 13%, cash

buyers will find properties much more affordable and cashflow becomes child’s play.

So, here we have a situation where rates rise significantly and yet everyone from here on out is better off, the

cash buyer, the borrowing buyer, and the lender.

Those who saved up cash, were prudent, didn’t buy an overpriced house, didn’t speculate, recognized the bubble in

housing and were patient, would be rewarded if rates were to rise.

Also consider others who may move into the market to fill the void caused by high rates. How many Moms and Dads

currently having to accept a measily 0-3% on their nest egg in retirement would be eager to help Junior buy his

first house? Junior, rather than borrow from a traditional lender and pay 13%, could pay his parents. say, 8-9%.

He gets a lower rate on a cheaper home, and Mom and Dad get a reasonable monthly income from their nest egg in the

form of Junior’s monthly mortgage payment. As you can see, the desire to increase liquidity and draw private

capital into the mortgage market will be fulfilled through normal and natural market forces.

Recall that without government assistance, in this current market the natural tendancy for rates would be to rise

from their present levels. Afterall, you are lending to people who are buying a (currently) depreciating asset,

during a recession, during increasing job losses, record home inventory levels, and price compression on prevailing

rents. For anyone to take the risk of making a home loan, rates would have to reflect that significant risk. I

mean really, what kind of return would you require to consider lending to a homebuyer today?

Now, after rates rose, and prices fell, then the risks would self-correct for all the reason described above.

Private capital would begin to rush in for the high returns, and as the housing inventory was sucked up by cash

buyers, as losses on defaults became smaller, and as defaults themselves became less common, then competitors could

afford to reduce rates to say 11%, then 9% and so on, and home prices would slowly begin to rise as rates fell,

further reducing risk, and thus further reducing rates and thus a healthy virtuous market cycle begins. At some

point they’d find an equilibrium and move above and below it slightly self-correcting all the while.

This is how markets work. This is how it has occurred in the past, albeit with much smaller and less destructive

oscillations and swings.

Moving on,

Why is it then that Fed Chairman Bernanke and others are so dead set on keeping rates low, when everyone who might

buy a home, borrow to buy a home, or lend to a homebuyer, would benefit if rates rose significantly?

Admittedly the destruction to the wealth of current asset holders (those who “own” homes and those who own the

current loans on those homes) would be devastating. This is a given. We all know that during a deflationary

collapse like the Great Depression, those who didn’t speculate, remained in liquid assets and cash were in the best

position to profit from other’s misfortune. We’ve probably all heard that some of the greatest fortunes are made

during these times.

So why don’t we just let this occur? Why don’t we let rates rise and thus house prices collapse and allow some to

take huge losses while others reap huge rewards? Isn’t this mass transfer of wealth from the speculators to the

prudent how it’s supposed to work? From the weak hands to the strong? Sure, some will be devasted, but others

will become rich. For all the wealth that is destroyed, so too will wealth be created. Also, those who may take

huge losses will have the same opportunity, provided they were not completely irresponsible and have some reserves,

to participate in the upside; much like a long-term investor takes advantage of dollar cost averaging by picking up

cheap shares on the dips to offset the times they overpaid at the peaks. This is Capitalism. The damage is called

creative destruction. This is the reward for doing the right thing, and more importantly, the just result of being

foolish and taking on too much risk.

The answer to this question, why don’t we just let the markets work, may be two-fold:

The first answer is rather cynical; that those who stand to lose the most, have the power to try to prevent it.

The current asset holders, the individuals, businesses and corporations who will suffer, are the ones that made the

campaign contributions to the politicians. Certainly those businesses that will rise from the ashes don’t yet

exist, and thus can’t lobby for their interests. Those who have been prudent, remained on the sidelines and moved

to liquid cash, by definition are less likely to have a method or identifiable motive to lobby in any given

direction or for any specific policy. They don’t sit on any board of directors, they aren’t stock holders or stake

holders where the current power structure resides. Their names aren’t familiar on Wallstreet, so they are not among

those handpicked by the President to govern policy or chair the Fed.

It is only natural to expect that those who have much to lose and the power to try and stop it, will try to do so.

Limits on government are critical for the survival of capitalism. It’s inevitable that government will eventually

try to alter capitalism’s natural forces. I wouldn’t expect the gazel, especially the oldest and the weakest, to

voluntarily choose to be eaten by the lion for the long term health of the species. It’s too much to ask, so best

not to leave it up to anyone to choose, especially not to those who must be sacrificed.

A possible second answer to the question, why don’t we let markets work, which may be more plausible and less

conspiratorial, is that the pain from allowing the losses to be taken would be, or are believed to be, so damaging

to our overall economy, that we couldn’t survive it. There would be no winners, only losers. That those who fell

would be so numerous, and those left to pick up the pieces so few, that asset prices would fall to rediculously,

and devestatingly low levels. Perhaps too many people invested too much money into the credit bubble, the biggest

part of which was housing, that taking the pain is not an option. So, the only choice left is to spread out the

damage to the most people over the longest period of time so as to be able to survive it.

Think of it much like a heroin addict. The only true, natural, and healthiest way to kick the habit is to do so

cold turkey. However, it may be that due to the severity and duration of the addiction, the addict is so weak and

feable that the ravages of the withdrawl would likely be fatal. It may then be deemed prudent to simply ween them

slowly off the drug. This consigns them to a life on Methadone. Certainly better than the alternative, but a

destiny never to soon return to normal vitality, energy, and health: a zombie status.

This is what we are doing to ourselves as a Nation. Yes, the powers-that-be will claim that we are no “Japan”.

But in fact, that’s exactly what we are shooting for, by choice. On our example above, rather than have the house

drop to $240,000 with the entire benefits going to the prudent patient purchaser and the entire loss going to the

previous owner/lender, we have instead chosen to convince the next buyer (with an artificial “once-in-a-lifetime”

mortgage rate) to significantly overpay for the asset. This “opportunity cost” to the buyer is easily swallowed as

it is invisible. Whenever the new homeowner grows old and sells the house, they’ll likely never know that they had

$200,000 less in equity in it than they otherwise would have had. At the same time the lender who held the

original $700,000 defaulted loan was able to recover $480,000 instead of $240,000. The lender of course, provided

they were too big to fail, isn’t on the hook for it. The taxpayer is. We all our. And when the powers-that-be

are begging for bailouts and trying to keep existing “franchise’s” afloat so shareholders and management are not

wiped clean, then every little bit helps.

So we all pay a little bit, directly through corporate bailouts, quantitative easing, increased government debt,

increased taxes, substandard return on cash savings, and indirectly through substandard returns on asset appreciation.

Average Joe
Average Joe | March 2nd, 2009 at 11:47 am
GeneK and Burnt: It’s refreshing to read a few non-doom-and-gloom replies. Thank you. I purchased late last year because I met all the criteria outlined by Burnt, and I’m extremely happy with my home. Sure, it has devalued like every other piece of real estate, but I still feel it’s worth my monthly payment. That’s what matters, right? (Well, that and the ability to afford said monthly payment.)
Kwaping | March 2nd, 2009 at 11:58 am
Average Joe, it’s called comments, not posting god knows what. Don’t be a friggin jerk.
ChrisL | March 2nd, 2009 at 12:25 pm
I like Burnt’s comparison to the Nasdaq. A point (I think) he is inherently making is that measuring from the peak may be the wrong way to look at it. Instead, we should be looking at prices relative to the stable prices before the bubble; say, ’97 or ’98?

I remember thinking in 2001 that real estate had just gone crazy and there was definitely a bubble. 46% off peak sounds great but it might not be . . .
The Blur | March 2nd, 2009 at 12:29 pm
Average Joe,
You are quite correct. That is EXACTLY how it is working here in South Africa all mortgages are variable rate which currently is 13%. To Jims prospective customers re Avg Joe’s comments about the 80′s….That hammering sound you have been hearing in the distance is the US Mint fitting the dollar bill printing presses with 380 volt 3 phase motors so they will work faster. Property keeps its value in times of high inflation, if you dont believe me ask my uncle in Zimbabwe……..he is STILL living of his rental income though the amounts in Zimbabwe dollars are flabergasting.
Inflation IS coming to America thanks to the bailout, increased Government spending, reduced income from taxation and the costs of the middle east wars.
andrewa | March 2nd, 2009 at 12:44 pm
So I only had to scroll down for 15 minutes to get here – thanks Joe.

Ditto Burnt’s thoughts on not focusing on the % “discount”, which I feel many out there are doing. And if you buy for the reasons Burnt suggests, you do need to be prepared to stomach the likely evaporation of value, possibly a big reduction depending on your locale. If you buy a SFR in Carmel Valley now and you know you will feel sick if it devalues $100K, $150K, “your number here”, then you should probably re-think your strategy.

I think no matter how long this devaluation trend lasts, there are always going to be people who decide it’s time to buy. I doubt we will ever see a situation where everyone agrees it is not a good time to buy, so then you can go out and get your deal. There have been and will continue to be knife-catchers all the way down.
RSS | March 2nd, 2009 at 1:32 pm
Ditto everything Average Joe just said. Everything. Great post.
TeaParty | March 2nd, 2009 at 1:59 pm
A few thoughts/questions and this is going to be really long, (just kidding);

1.) Is Oceanside a good measure for the North County Market to begin with? Locals know that Oceanside is a shabby town. I don’t see how Carmel Valley/RSF and Oceanside compare.

2.) It is my understanding that most of the run-up in pricing was in low income areas during the bubble. The same places where we saw the subprimes & NINJA’s. Not sure about this but I don’t think the increases were as astronomical in Coastal North County.

3.) Seems like the banks are now thinking it’s better to hold onto the houses even if non-performing and wait it out too. Might not work out but what’s happening now isn’t exactly working either. Creating some scarcity will boost values somewhat.

4.) Of course cancellations are up. Who would sell right now?

Would 46% decline get me to buy now? Sure, so long as I had, and knew I would continue to have a job. A better measure might be looking at 2001 & 2002 before the run-up in a slightly recessionary climate.
Mozart | March 2nd, 2009 at 2:07 pm
“You’d buy a house at 46% off peak pricing, wouldn’t you?”

What?? The stock market is off over 50% from it’s highs. Nobody is buying the stock market. Let all things come to the “market price”. Let the government stop wasting our money, time and energy. Let them stop propping up deadbeat corporations and deadbeat indivduals. Give the first time, motivated home buyers their turn, and get things going again in our country. No more whining and no more horseshit!!
John | March 2nd, 2009 at 2:26 pm
I’ve been trying to answer my questions but here is an interesting piece information regarding San Diego median incomes:

1996 = $34,000
2000 = $45,733
2004 = $56,438
2008 = $72,100 = (2.21 x 1996 income)

Will incomes drop in 2009? Seems likely, but the rate of increase is fairly consistent, between 23%-35% every 4 years. Is this a possible way to measure what home values should be?

I found that the median San Diego home was about $160K in 1995-1996, so, $160K x 2.12 = $339,200. Just a thought, though we are now at $280K for the median home now.

The distressed sales are distorting values but I wonder what others think the median should be?
Mozart | March 2nd, 2009 at 2:41 pm
In other words, how far down is the bottom?
Mozart | March 2nd, 2009 at 2:45 pm
Mozart,

Banks aren’t selling assets (houses) right now because they don’t have to. The Fed and TARP1,2,3,4,etc is keeping the doors open. If they were forced to liquidate assets to stay solvent home prices would fall through the floor.

Isn’t democracy, I mean socialism great.
shadash | March 2nd, 2009 at 2:54 pm
Thanks for the info, I’m sure you spent a lot of time compiling all this.
Could you put together similar data as table 1 for attached housing ppsf? It seems townhouses are starting to drop in CV, but it would be nice to see the data.
Jtt | March 2nd, 2009 at 3:15 pm
Avg Joe, aside from you having way to much time on your hands there are a few things you are missing.

While it is intuitive in today’s economic climate to conclude that increase in rates = lower property prices, I suggest you look at history. There have been many historical instances of real estate prices increasing while interest rates have been increasing. This usually happens in an inflationary environment.

And if affordability was the only thing determining when real estate bottoms, we would have bottomed in the last cycle in 1993.

And as far as America going the way of Japan? There is one big difference. America is debtor country. Japan was and is a creditor country. It may seem like we are doing the zombie bank thing but it is still early in the cycle, and our Govt will leave no stone uncovered to fight and avoid deflation. It won’t stop until inflation is firmly entrenched.

So at some point in this cycle, the best hedge will be to get long term debt leveraged up. The government will want to repay all that debt in cheaper dollars, and I will want to repay all my debt in cheaper dollars too. Kind of gives a new meaning to the phrase “don’t fight the fed”.
Kingside | March 2nd, 2009 at 3:15 pm
Is Oceanside a good measure for the North County Market to begin with? Locals know that Oceanside is a shabby town. I don’t see how Carmel Valley/RSF and Oceanside compare.

Oceanside is listed because it’s a hot market, and the others are, well, how shall we say it, less than hot? Oceanside got hot because there are plenty of homes available at 40%, 50%, and 60% off peak pricing. If it is considered ‘shabby’, then a simple comparison might conclude that the others wouldn’t have to average -46% to see turnaround.

It’s not that simple, though.

You could also conclude that all markets will have to get into Fannie/Freddie/FHA territory so buyers can get the better rates.
Jim the Realtor | March 2nd, 2009 at 3:33 pm
High interest rate “usually” will not lead to lower housing price. You need to know why we have high interest rate in the first place.

And for Fed to hike interest rate, we need to have high inflation first. And that means we will be paying $5-$10 for a gallon of milk and gas, and have minimum wage around $10-$15.

And guess where the housing price will be ?

If we have normal inflation 3-5%, and when Fed think the economy is stable, then yes, they might hike the rate to 4-5% and that will lead to lower housing price.

But the high inflation will only lead to high housing price.
Eric Chang | March 2nd, 2009 at 3:42 pm
Eric Chang and Andrewa–I agree with both of your posts on the inflation factor–I have been posting similar responses for a while. The Fed will print money (alot of money) and this will lead to inflation. I don’t want to pay $10.00 for a Pizza Port draft, but that is destined happen sometime in the next decade, probably sooner. Real Property has always been a good hedge against inflation and I plan to continue to build my portfolio with income properties that cash flow at 10 times gross or less. Those who don’t own anything tangable will see their worth diluted–those who leverage will see their weatlh multiply–I would rather be on the multiply side.
Local Boy | March 2nd, 2009 at 4:41 pm
Sorry for the long post. I won’t do that again.

Thanks for reading it to those who did.

My two main points are that the old mantra that low rates a good for homebuyers is a lie. Coommon sense and the past proves otherwise.

Those like Chang who think we need inflation for higher rates need to ask why they need to be held down by Fed then. Rates are a function of price of money combined with risk. The risk is high now.

What would rates be if it were up to private capital?

Bernanke himself said that he wants low rates to put a floor under housing prices.

It can’t get more OBVIOUS than that.

Chang said “High interest rate “usually” will not lead to lower housing price.”

That is ridiculous on its face and the Fed agrees with me.
Average Joe | March 2nd, 2009 at 4:42 pm
Mozart,
1) Parts of Oceanside are shabby, but so are parts of Leucadia (Encinitas), Carlsbad, etc. In each town there’s still a sub-location, location, location factor. IF one were to rank the towns as a whole by location quality & appeal, Oceanside would probably be one of the worst. But the Stand, St Malo are very high end areas in Oceanside.

I think Oceanside is the belleweather on the North Coastal market because if what has happened to O’side is mostly due to the subprime fiasco (which I think it’s fairly safe to say), I think the far bigger, two-wave ALT-A mess approaching in the “better” areas, is going to make subprime look like a cakewalk.

2) There was plenty of run up in non-subprime , especially around the coast. One neighborhood I’ve tracked for a long time (beach-walkable, very solid middle-class) was $32k when new in the 70′s, hit $250k in the 90′s, was $400k in early 2000, doubled to $800 almmost overnight about 2003 or 2004; it peaked around $1.2-1.4M. Recently asking around $800-900 again. Desirable nieighborhood, not a lot of turnover, so it will take longer to have a fall.

3) I agree, it seems like the banks have been “holding out” to either not dump on the market and decimate pricing or waiting to see what incentives the governement will give them to modify instead of foreclose. So far, it seems like a bad approach as they have lost a lot of money so far in this game, as Jim’s many examples have shown.

4) Not me! (But I don’t currently own one, but if I did, I’d be holding long term at this point, anyway.)
shoppingaround | March 2nd, 2009 at 6:44 pm
Great info as always Jim. I have to echo sentiments that we’re just getting started with ALT-A resets pressuring the higher end.
sdbri | March 3rd, 2009 at 12:54 am
Agree with Average Joe.

Not only does one have to consider interest rates and prices, but monthly payments/income and overall debt-to-income ratios.

We’ve had such high DTI ratios during the run-up that lenders had to resort to neg-am loans with 1.5% teaser rates to make things more “affordable.”

We hit the affordability ceiling at the peak of the bubble. Once that happens, if incomes stay stagnant (and barring any new sources of high down payments/cash), higher interest rates will absolutely force prices lower.

As Joe points out, today’s rates are NOT natural rates. The Fed is leaning heavily against rising rates. That’s what the whole “credit crisis” is all about. There is no “credit crisis” in real life. It’s just that market-based interest rates would probably be in the high single digits, if not low double digits, right now. There is plenty of money on the sidelines, and the Fed is trying to force that money into riskier assets without commensurate rates. This is exactly what led up to the bubble in the first place.

The solution to the problem would be to let rates move to their natural, market-based levels. Asset prices need to fall, and interest rates need to rise. This would set us up for a new cycle of economic growth.
CA renter | March 3rd, 2009 at 1:19 am
Nothing that is done in the housing market is going to do anything to “set us up for a new cycle of economic growth.” In any normal economy, housing is the tail that wags the dog, because people buy houses when they have jobs that can pay for them. The bubble was the result of government attempting to shill housing to make it appear that the economy was creating jobs when it really wasn’t. Those who called the bubble early recognized it as such because they could see that without fantasy mortgaging the jobs being “created” by housing were not really paying enough for those working in housing to be able to afford the housing, the traditional red flag that identifies any Ponzi scheme.

In order to set us up for a new cycle of real economic growth, something will have to happen in manufacturing or services that will attract enough investment to produce job growth that is self-sustaining and pays people enough to feel comfortable about buying things like cars and houses again, and that’s not going to be lower prices on resale homes. Lower home prices will just make it a bit easier for whatever comes along to do the job.
GeneK | March 3rd, 2009 at 7:20 am

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