patrick.net

Are ARMS pegged at the same rate as short term T-Bond or the 10 year like fix?

TN,

Most ARMs in the U.S. are pegged to LIBOR, or a derivative thereof. Most FRMs are pegged to the 10-year Treasury. The Fed more or less directly manipulates LIBOR, by adjusting the Fed funds rate. In theory, they have far less control over FRMs because Treasury rates are set on the open market via auction.

However....

The Treasury Dept itself issues Treasuries (hence the name ;-) ) and the Fed regularly buys and sells large quantities them "as needed": http://www.newyorkfed.org/aboutthefed/whatwedo.html By being able to manipulate demand to some degree, they do have some control over these rates as well (greater demand results in lower rates, less = higher). This has given rise to some conspiracy theories re: the PPT (Plunge Protection Team), often centered around the activities of the shadowy "Working Group": http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm

WARNING: Totally OT!

I've been told that my impersonation of "Kramer" is hysterical. Ah-hem, "Kramer" will not be making the rounds during the Holiday Season this year thanks to some j@rk-off that totally screwed it up for me!

Can you believe the lost revenues to the entire former cast as a result of this? I'd heard a quote yesterday that the only person in America happy to hear about this was Mel Gibson!

FYI all bloggers:

If you need to contact a moderator, such as myself, Randy H, Peter P, SQT (or the Big Man himself, Patrick Killelea) simply post your wish to be contacted. As long as you are a) registered and logged in, or b) you aren't registered but use a valid email address when you post, we will be able to see your address and can contact you.

In general I would not advise posting email addresses here, given the amount of trolling going on.

Muggy,

I've already contacted you. Now that you've piqued my curiosity, I'd like to at least know what your question was ;-).

Money magazine just arrived at my door, they have a housing article, perhaps someone cleverer than I can post it for you, but basically they say prices are going down, but only by 5-15%

If houses are too expensive, how can they think that by only going down 5% or so they will stimulate people to buy again? I don't even think they look at the issue that it is much cheaper to rent than buy!

@Claire,

You might want to take a look at who is buying most of the full-page ads in Money. If you see a lot of mortgage, Realtor and/or home builder ads, then there's your answer. Fyi: Fortune has been a lot more "forthcoming" about the scale and risks of the bubble. I saw a number of great pieces last year by Shawn Tully. As DinOR likes to say, Shawn's "on the team" :-) .

Harm - yeah - but they are both owned by the same people - actually on the website it lists them all and when you dig deeper they do have a lot of housing related articles - I was just a bit disappointed in them that's all.

And the fact none of them seem to grasp the issue that the rent vs owning costs are totally out of whack in some areas - or maybe they do and just don't want to tackle it! I wish someone would write a letter to the editor - maybe I will, but I'm sure someone else would be much more eloquent and I'm never very good and giving accurate figures for the ratios.

Does anyone have any idea what happened to the forsakencraft website? The server is still up, but there is no longer a web page to be displayed. He has had this radio show bashing RE that he was doing every friday night, but suddenly it all disappeared. I sent an email to John, the owner of the site last week and still haven't gotten an answer. I'm thinking maybe some angry Realtwhores kidnapped him.

HARM,

Thanks for sparing me this once! Money Mag. is primarily filled w/ads from no-load mutual funds. Vangard, Fidelity etc. Their ideal market demographic is the DIY crowd. Not that there's anything inherently wrong w/that but it also fits hand in glove with *not* upsetting their readers too much. (Vice say being p1ssed off at your broker).

5-15% corrections won't help buyers a lick. Yet at the same time this gives their readers the sense that this isn't anything they can't weather! If you can walk away from this thing and all you had was 5-15% downside count yourself lucky! Some markets have already taken that big a hit and then some. Factor in incentives/discounts etc. and it's probably a lot worse.

DinOR,

Part of the reluctance to call a spade a spade is knowing which side your bread is buttered on. The other part is not wanting to be the one to yell "fire" in a crowded theater (and then getting sued for causing the stampede). I'm sure the editors/publishers know *exactly* how bad this thing is likely to get, and if you did a survey of how many of them sold off personal "investment" properties over the last 12 months, you would see many hands.

DinOR,
Could you explain a bit more about the $250k tax free conspiracy (or point to a link if you have already done this in detail). The reason I'm asking, is, from my limited analysis, it would seem the at the old law (defer cap. gains) actually redirected more money into the RE marketplace as you had to roll your gains into a new, more expensive place. People like you and Randy are actually examples of folks taking advantage of the $250k exemption and getting out of the home buying machine -- under the old system this was not possible (without taking the cap. gains hit). Admittedly, tax free money is hard to pass up and there are folks at the high end (see SFWomans posts about the million dollar home sold back and forth) and fringes taking advantage of the system, but I am not yet convinced. Anything more to add?

King Corbra says

"I am not a shark that will look for opportunity at the expense of people’s sufferings."

Unfortunately, with property values dropping before we are willing to buy, we will be buying from people who will be financially suffering from their HELOC's and ARMS from Hell!

EBGuy,

The practical application was that b/c you were forced to re-direct the capital back into a home of equal or greater value........ most folks simply stayed put! There wasn't any real advantage b/c you couldn't "pocket" the gains (at least until you were 55 or older) and were allowed to downsize.

So it wasn't as much about "the money" b/c they were real sticklers about it. If 18 months from the sale of your home had elapsed and you hadn't re-invested? Hello tax bill! Most folks didn't want to expose themselves to this kind of liability so speculation was left to the pros.

Because you HAD to re-invest in your PRIMARY residence you didn't have all these options and people using HELOC's/re-fi cash outs to buy 2nd and 3rd homes ALL w/ tax free money. Where do we think the the money to fund flipper nation came from? Our great "savings rate"? In 2004 36% of home sales were described as 2nds. In 2005 it was 40% of home sales! Previous to this the average was more like 3-5%! I'm not even remotely interested in how much of this was done w/o the aid of HELOC bubble bucks. That would be chasing a rounding error.

Any time someone argues w/you about how this is a "non-factor" just tell them you'd be glad to take 35% of their profit! I mean, if it's all the same to you? Look, when there are no tax consequences people can afford to get pretty silly! Once they enter the picture it totally changes the whole complexion of the conversation. Sobriety sets in very quickly and humor dries up.

Show me another time in American tax history when people could take up to 500K in tax free gains without so much as visiting a CPA! When you word things in those terms, it sounds pretty stupid doesn't it.

King Cobra,

We've done a number of threads on that very topic before. In fact, here's one from March, which exactly addresses your question. When we get a place to add some perma-links, I'd like to see this one included:

Housing Price Rules-of-Thumb

SFWoman,

Excellent "case study". Let's look at that for a minute. Just so I understand, o.k? Your neighbor WAS NOT able to use the proceeds of the sale of their ginormous condo to buy 2 pre-construction flips in Ft. Lauderdale, a mountain retreat in Tahoe and have enough left over to cover closing costs on their Shaker Heights home?

O.K. That's what I thought.

So EBGuy, does that make a little more sense? By having said taxpayer focus their resources on their primary residence you take the flipper nation cash money machine multiplier effect totally out of the equation!

Oh, btw that's why we can't swing a dead cat without hitting an "exclusive area" any more! That's why the whole damn country is either a gated community or shall we say......... upscale? Pffft, what ISN'T upscale these days?

Bottom line for me is: when monthly carrying costs of "owning" (i.e., renting money from the banks) is roughly at par with renting an equivalent property AND I can make the monthly nut without having to resort to an NAAVLP, then I will buy.

If "house prices decline 2-14% (let’s say 8%) in nominal prices gradually until 2010", while high (non-RE) inflation doubles the price of everything else (including wages), then rent & income-to-price ratios can be re-established in real terms, and I will buy.

If "house prices decline 2-14% (let’s say 8%) in nominal prices gradually until 2010", but general inflation doesn't happen and wages stay stagnant, then this is not enough of a correction to bring real house prices back into line with those fundamentals (rents and incomes), so I will not buy. This is actually close to what happened in Japan, where the BOJ's ZIRP policy slowed their housing crash to the point where it took a full 16 years for real prices to correct.

Regardless of nominal prices, prices must correct in real terms enough to be re-aligned with the supporting fundamentals or I will not buy. If the Fed adopts Japan-style ZIRP and the correction here takes 16 years, so be it. If it never happens (unlikely), then I will be happy to declare "New Paradigm", apologize for being wrong and resign myself to my role in the new permanent renter underclass.

HARM,

Excellent summary! You know that little "cheat sheet" they give you that slides into the cover of your TI Calculator? Yeah, this should be there!

For me so much of the buy/rent calculations are simply the justifications I employ to "sit the sideline". MOST of what gets my goat is the ethical issues. If we were at an entry point where buying "did" make sense I would to keep the peace at home. But until the "irregularities" are ironed out, I'm not going to feel that great no matter how good a value that purchase represents!

Prices might make you feel better about not having been duped but do nothing to address why we're at, where we're at.

King_Cobra,

This has been debunked here time and time again, but what the heck...
Population growth rate in the U.S., including immigration, is about the same as it was 30 years ago: approx. 1%/year. Home builders have never before had a problem with keeping up with this population growth rate, so why would they have one now?

Yes, the growth rate is somewhat higher in border states like CA, which also has some very stringent anti-development NIMBY laws, which artificially restricts housing supply. This is one reason why CA's long-term average prices (and rents) are consistently higher than the rest of the U.S. Where the rest of the U.S. has a median HH income-to-price ratio of 1:3, here the long-term average is closer to 1:6 (currently 1:11). Even in pricey CA, though, the monthly carrying costs of buying has stayed remarkably close to renting over the long run --up until about six years ago. When super-easy credit blew prices through the roof.

Again, I see no supporting evidence that some New Paradigm has suddenly emerged in the last 6 years, other than the Fed/GSE/MBS-engineered "fog a mirror" easy credit.

The main differences in Japan's ZIRP versus a theoretical US ZIRP:

* The USD is a reserve currency, therefore granting the US interest-free seniorage powers. ZIRP may end USD dominance, but it wouldn't happen overnight; probably would take a decade or two to unwind.

* Japan was an export-driven economy before their ZIRP, and became even more so during their ZIRP. The US is an import-driven economy with 80% of GDP internally generated. Even with ZIRP growing US exports (a weaker dollar helps US manufacturing), the US will still derive most GDP internally after a long ZIRP period.

* Japanese consumer culture is vastly different than US consumer culture. US perspective on debt-financed consumption and debt-financed business growth will not instantly "shut off" just because of rising inflation. In fact, inflation would increase credit spending in the US.

* Japan experienced deflation during their ZIRP (due to a liquidity trap). It is highly debatable whether such a liquidity trap could occur in the US. Even if we accept it could, it would undoubtedly be less of a deflationary driver than in Japan -- if for no other reason than due to the much larger absolute scale of the US economy.

* Finally, Japanese ZIRP did _not_ cause any far-reaching global realignment of current account balances. At most it affected regional balances and distorted currency carry-trades. A US ZIRP would realign the global balance of accounts by dramatically shrinking the real-value of USD denominated debts. Ironically, Japan is one of the top-5 holders of said debt, so their 16-year nightmare could be just a prelude to a much harsher period as an export economy with an overvalued currency.

King_Cobra,

I think you may well be right but if we're 3rd........ it's a very distant 3rd. Believe it or not I still welcome newcomers to this country (legally of course).

To me attributing the HB to well moneyed immigrants is along the same lines as directing blame toward first time buyers. (You know) t h o s e people that are not like "us"? Yeah uh huh, "those" people!

Jeebus, what is this a "private club"? We were ALL first time buyers (and young) at one point! I sure came in on a shoe string! We couldn't afford it. You see my wife and I were t h o s e people, now we're t h e s e people.

I suppose if all of t h o s e people had just stayed right where they were meant to be none of this would have ever happened!

Blaming people that were using NAAVLP's to catch up w/the mess "we" created b/c they were tired of living in an apartment? Sounds kind of conflicted to me. Let's see, on one hand they can't name the 3 branches of government but on the other hand they're super smooth sophisticated debtors (like "the Donald") that knew exactly what they were doing?

Which one is it?

Randy H,

So basically, you're saying ZIRP would be far more advantageous (and more effective) here in inflating non-RE assets, while simultaneously DE-flating our mostly foreign-owned USD-denominated debts (Treasuries & MBSs). And it could even have the added benefit of stimulating consumer spending and averting a deep, housing-led recession?

So in your opinion, ZIRP is the path of least resistance for the Fed/pols?

I am nowhere near the economist that Randy is, but if ZIRP can rapidly inflate (but not hyper-inflate) non-RE prices AND incomes, then fine. I have often said I wouldn't mind getting a 100-200% raise. Whatever re-balances the rent/incomes : price ratio is fine by me.

However, if ZIRP fails to significantly drive up wages and non-RE inflation, then this FB bailout scheme won't work. In that case, we could see something closer to the Japan-style slow, grinding, death march.

Which outcome is more likely? Who knows, but either way the fundamentals get re-aligned... eventually. Personally, I prefer to take my medicine quick and get it over with. Politicians and the average American consumer on the other hand...

DinOR, I figured you might go down the speculative money route, and your point is well taken. To rephrase for others, even though part of the $250k deduction can leave the RE marketplace (my point), any of the portion that re-enters is highly leveraged (the multiplier effect DinOR spoke of). I still think the pre-1997 law helped somewhat to inflate the "upgrade" market. Personally, I don't know any $250k speculators, but then again I ought to get out more often :-) My own theories are colored by a heavy BA bias. Goes something like this:
1. Stock market bubble of late 90s fueled home buying.
2. Post dotcom bubble cheap money kept things moving.
3. From this point on, fear drove the market (with speculators hopping along for the ride).
The folks I know who bought within the past 2 years didn't have dollar signs in their eyes, they simply wanted the utility derived from having their own place. They were scared that they would be forever priced out of the area.

SFWoman, Shaker Heights -- now those are "old school" mansions.

EBGuy,

Well exactly. The last waves of GF's or FB's or whatever really didn't understand what they were getting in to! They just knew that having to step over Keystone Light (TM) cans to get into their apt. was getting to be a drag. ince many didn't have a framework of reference to build from they signed on w/what was offered. I have NO problem w/first time buyers. We provided them w/tons o' cheap credit and for FTB's the only tax "loophole" they're "exploiting" is their Schedule A deduction! Big whoop.

My issues are w/ Mr. Serial-Refinance and their three investment properties built on MEW. Remember when we say "any" 2 of the last 5 years (they needn't even be consecutive). So think "Imelda's shoes".

RE: "Buy_in_Cali" & "King_Cobra"

*Sniff*, *sniff*... I smell troll.

wouldn’t it make sense to just buy now anyway since your monthly payment will be low due to the low interest rates?

If you go solely by howmuchamonth on the mortgage payment alone and assume rates will rise in direct proportion to house prices falling, then sure. Problem is, it's not that simple.

First there's no guarantee mortgage interest rates will rise as prices continue to fall. FRM rates haven't budged much in the last year, despite repeated Fed hikes. Plus, the Fed may soon have to slash rates to avert a recession and spur broad-based inflation (see ZIRP discussion above). If you buy now assuming higher FRM rates and they don't rise, guess what? You just bought yourself an overpriced house now worth a lot less than what you paid.

Plus, your purchase price (cost basis) also determines a lot of other monthly expenses, such as property tax, homeowner's insurance and --critically-- the total amount of interest you will pay over the life of the loan.

But, hey, if you want to overpay for a rapidly depreciating asset, go knock yourself out. The REIC will love you for it.

@HARM,
RE: Buy_in_Cali, thanks for saying what I was going to say. *If* he/she is not a troll, there are several other fallacies in his question. His scenario leaves out the effect increasing interest rates will have on prices. Since we are at the limits of affordability for many people, if interest rates shot up without any other variable changing, this will create downward pressure on housing prices. But of course, interest rates don't change in a vacuum.

Also, it is almost always better to secure a low principal (low price) at a higher rate than vice versa. The rate can be re-financed down later, but the principal cannot. Also, the cumulative servicing costs on a higher principal are usually more hefty than that from higher mortgage rates.This crap has been discussed up the yinyang before on this board. On second thought, this guy probably *is* a troll.

Also, it is almost always better to secure a low principal (low price) at a higher rate than vice versa. The rate can be re-financed down later, but the principal cannot. Also, the cumulative servicing costs on a higher principal are usually more hefty than that from higher mortgage rates.

Yes, forgot to mention the refi angle --thank you.

Yes, the growth rate is somewhat higher in border states like CA, which also has some very stringent anti-development NIMBY laws, which artificially restricts housing supply.

@HARM,

Even this population growth trend is projected to slow down significantly. It already is slowing:

http://www.lao.ca.gov/2004/cal_facts/2004_calfacts_econ.htm

DinOr,
I think this is where you and I differ. If someone wants to put down stakes for two years, I will give them their due (hell, I am jealous, I want to do that -- well, the tax free proceeds part, moving is a pain). Maybe I am "misunderestimating" the speculator crowd, but I think most got their capital through the great serial refinance (not the $250k tax free proceeds) and are taking the depreciation expense on their rental house flips (maybe I need to take a RE seminar to see what the hucksters are recommending these days.)
Heck, I have a friend who has owned a three unit apartment building for over a decade. He is smart guy, but it took a lot of convincing on my part for him to realize that he will do quite well if he does the condo conversion himself (instead of selling out) and then moves through the units serially every two years. That could be a huge gift from Uncle Sam. Again, I would do that -- except for the fact that my portfolio would no longer be diversified :-(

By now, I'd say it's obvious to practically everyone here that “Buy_in_Cali” & “King_Cobra” are probably bored REIC troll(s) trying to spam and/or sow doubt among newcomers by re-hashing the same tired old crap they've been spewing for years.

Either that, or very sophisticated spambots of the kind Randy has been warning us about :-).

@Buy_in_Cali,

If you're not a troll and just a newcomer, then I offer my sincere apologies and welcome you to the blog. Unless you register and login (free by the way), it's very hard for us to tell though.

Not trying to be a d*ck here. Sophisticated spammers & trolls often try to use the innocent "I'm just the new guy" approach to try to hijack the discussion. In the past, anonymous trolls have taken many screen names and routinely change IPs/email addresses.

ConfusedRealtor came on with an almost identical approach. I was assuming this was the same situation, but I still always try to answer logically and truthfully.

You are just too nice! Most of us are probably on the verge of gang-piling on anyone who smells trollish.

Sometimes being logical and polite infuriates people who need to use emotions to get people to accept their point of view.

How Vulcan of you!

@King_Cobra/ConfusedRealtwhore/CuriousCat/MarinaraPrime/Happy, etc...

*yawn*

I'm in CA in Silicon Valley, all I can say is it is MUCH CHEAPER to rent than buy - the house I'm in would sell for $900,000 - $1M and I'm paying $2400 in rent for it. It's not worth 900,000, four years ago it would only have been 400-600,000 range. Even that I think is more than it's worth - I'm seriously thinking of relocating to East Coast - worse weather, but a lot cheaper!

What is the point of buying a house if you can only get a suicide loan, and house prices are not appreciating. You are just paying the BANK rent (and probably twice the amount) instead of a landlord and what's more you're also paying the property tax, insurance and upkeep for it too - any landlord would be in heaven if you did this for them!

Wherever there is a job suitable - most likely Boston, Philadelphia or NJ somewhere. We go where the job trail leads us.

HARM

I do think that "ZIRP" is the path of least resistance. But not true ZIRP, as in what the hardcore neoclassic crowd are advocating. More likely LIRP (low interest rate policy).

I am dubious of shock-therapy, even though it serves my own (and many of your) personal purpose vis-a-vis the housing market. Shock therapy has an absolutely terrible historical track record. It's kinda like the neocon nationbuilding strategy of economics: it looks great on paper, the plans are flawless, the logic irrefutable. But in practice all hell breaks loose, and unintended consequences rule the day. Russia's default was the direct result of US-IMF initiated macroeconomic shock therapy.

But if I'm given the choice of LIRP, ZIRP or HIRP, I'd take ZIRP. HIRP will cause a deep recession, perhaps even semi-depression. That will solve housing too, but it's more like using a .45 to solve a splitting headache. At least ZIRP is like using vodka to solve the headache -- it'll go away so long as you stay drunk.

At least ZIRP is like using vodka to solve the headache — it’ll go away so long as you stay drunk

:lol: Nice analogy! Only problem is, with ZIRP you may wake up one day in a ditch without your wallet, or in bed next to, uh... something you'd rather not wake up next to. And long-term ZIRP addiction can lead to all kinds of health and social consequences, like cirrhosis of the currency, or the breakup of your carry-trade "marriages".

@Randy H,

How about NIRP (No Interest Rate Policy)? Otherwise known as "let the market decide what an appropriate risk premium is"?