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Fitch warns home prices overvalued


By Call it Crazy   Follow   Fri, 4 Jan 2013, 3:19am PST   3,894 views   70 comments
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Despite national home prices increasing by more than 2%, the largest gain since before the market peak, Fitch Ratings believes national prices are 10% overvalued.

Fitch reports technical factors behind the appreciation will eventually mute growth in the future, much to the opposition of current market predictions. The latest report from the Standard & Poor's/Case-Shiller Home Price Indices, for example, revealed that home prices continued to rise in October with prices up 4.3% annually.

While Fitch agrees that it’s hard to not be upbeat with home prices on the rise, indicating a healthy housing rebound, the ratings company is remaining cautious in its outlook based on the past few quarters.

“Many models place a high value on price momentum, which can skew long-term projections. Another factor differentiating our model from many in the market is that our projections are in real terms as opposed to nominal dollars,” said Stefan Hilts, director of Fitch Ratings.

"While pent-up demand is helping to boost support for home prices in some markets, a truly robust long-term market requires strong employment trends,” noted Hilts.

http://www.housingwire.com/news/2013/01/04/fitch-warns-home-prices-overvalued

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New Renter   Tue, 8 Jan 2013, 1:24am PST   Share   Quote   Permalink   Like   Dislike     Comment 31

swebb says

rufita11 says

In any case, if I can't have a clean diesel Forester or Outback in the US,

I would buy a diesel Outback too. Who wouldn't? Why in the shit doesn't Subaru bring it to us?

What, no love for the diesel mazda CX5?

Facebooksux   Tue, 8 Jan 2013, 1:30am PST   Share   Quote   Permalink   Like   Dislike     Comment 32

SFace says

San Francisco housing market is destined to go up 50% in the next 3 years (no need for insults).

Reasons:

Liquidity - People tend to underestimate just how much money people have vs. 1988-2000. DOW is already within 1% of All time high. Foreign ranks and money come from anywhere in the world in the most diverse city in the world. Forget median income here. It is about wealth (down payment comes from parents, existing wealth) and earning power of the top 20% which are the players in this market.

How's this for an insult?

You're fucking delusional.

iwog   Tue, 8 Jan 2013, 1:59am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 33

RentingForHalfTheCost says

Affordability is useless to the under and unemployed. What use is a $2000/mth payment when people are not working. Foreign money will not last forever around here. Tick tick tick

Again we see the disconnect in understanding between moderately high unemployment and "People are not working".

Most people are working and any affordability index will take into account typical family wages.

iwog   Tue, 8 Jan 2013, 2:00am PST   Share   Quote   Permalink   Like   Dislike     Comment 34

SFace says

People tend to underestimate just how much money people have vs. 1988-2000

Pearl of wisdom here. There's an ocean of cash available and most consumers have no fricken idea how dangerous it is. Just the increase since 2010 is stunning.

David Losh   Tue, 8 Jan 2013, 2:14am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 35

iwog says

There's an ocean of cash available

You are so right, there are oceans of cash, cash reserves, and corporate profits, or excessive salaries for non profits.

So why would any one tie up cash in Real Estate? Real Estate is a long term hold, of questionable value, or it is a Return on Investment.

Well, cash can buy, and sell, a hundred other options in a year for much higher returns than Real Estate.

iwog   Tue, 8 Jan 2013, 2:36am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 36

David Losh says

So why would any one tie up cash in Real Estate? Real Estate is a long term hold, of questionable value, or it is a Return on Investment.

Real Estate is the only solid inflation hedge that pays a dividend. Even a whiff of inflation news will send billions into REITs and rental LLPs.

Besides having a lot of money qualifies you to buy most of your real estate on credit at tiny interest rates. At that point you have a double-hedged investment that is nearly foolproof.

ELC   Tue, 8 Jan 2013, 3:49am PST   Share   Quote   Permalink   Like   Dislike (1)     Comment 37

iwog says

you have a double-hedged investment that is nearly foolproof.

You're joking right?

iwog   Tue, 8 Jan 2013, 4:12am PST   Share   Quote   Permalink   Like   Dislike     Comment 38

ELC says

iwog says

you have a double-hedged investment that is nearly foolproof.

You're joking right?

Nope, I'm not joking. A fully financed home that earns several hundred dollars per month over carrying costs is ONLY susceptible to a catastrophic drop in rents. This event is so rare that "rents never go down" is a mantra that has been repeated for decades if not hundreds of years.

I can't imagine a safer situation than the one I'm in now.

Bellingham Bill   Tue, 8 Jan 2013, 4:32am PST   Share   Quote   Permalink   Like   Dislike     Comment 39

iwog says

This event is so rare that "rents never go down" is a mantra that has been repeated for decades if not hundreds of years.

http://research.stlouisfed.org/fred2/series/CUUR0000SEHA

says rents went down by half 1930-34, but yeah, short of the global economy blowing itself up like it did then rents should be fine.

Now, if this debt ceiling thing results in a change from our current free-spending regime to austerity via higher taxes and/or less government cheese going forward, then rents might have a problem.

Also, a weaker dollar will result in some amount of food inflation, both due to higher producer costs and foreign importers getting more of our food for their money, resulting in less oversupply here. (Food inflation didn't do any favors for rent inflation in the 1970s since urban people don't produce food almost by definition)

I can't see the future, but I don't expect rents to go down at all from here.

But then again we need to repeat this same analysis on the state and local level. Rents respond to the health of the local economy, and S&L spending has a lot to do with that, too.

iwog   Tue, 8 Jan 2013, 4:37am PST   Share   Quote   Permalink   Like   Dislike     Comment 40

Bellingham Bill says

says rents went down by half 1930-34, but yeah, short of the global economy blowing itself up like it did then rents should be fine.

That's an interesting graph that shows rents getting jacked up in the roaring 20's then falling back to earth during the depression. Since I'm expecting a health care boom phase going into the next decade, I think I'll be fine.

Obviously investors who bought rentals from about 2003 to 2007 are in trouble, however most of them have walked away by now. Real estate is the one place where you can get leverage and then disappear when the margin call comes.

Bellingham Bill   Tue, 8 Jan 2013, 4:39am PST   Share   Quote   Permalink   Like   Dislike (1)     Comment 41

iwog says

I can't imagine a safer situation than the one I'm in now.

the worst that can happen is that the banks foreclose on their trust deed and get back their rental property on the courthouse steps (if the loans are non-recourse).

There might also be tax liability from a 1099-C involved.

But the system is clearly biased to inflating at any cost and not deflating. Too many voters and too many pigs get hurt in the deflation case, not enough "savers" to counter-act that.

Bellingham Bill   Tue, 8 Jan 2013, 4:43am PST   Share   Quote   Permalink   Like   Dislike     Comment 42

iwog says

That's an interesting graph

I can also attempt to change this nominal index into a real index:

http://research.stlouisfed.org/fred2/graph/?g=eni

shows that rents have been at all-time highs in real terms.

Affordability is good only because the macro is fucked up and bullshit.

http://research.stlouisfed.org/fred2/series/TCMDODNS

David Losh   Tue, 8 Jan 2013, 4:46am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 43

iwog says

Real Estate is the only solid inflation hedge that pays a dividend.

You're talking about rentals again, and God bless you for that, we need more rentals.

What you don't look at is that we have wage stagflation. The consumer only has so many dollars. Every rent increase is less they have to spend on food, and gas.

As for the debt, you owe that debt. When you are done with your property you still have to pay the remaining debt.

Your renter walks out the door owing nothing.

swebb   Tue, 8 Jan 2013, 4:49am PST   Share   Quote   Permalink   Like   Dislike     Comment 44

RentingForHalfTheCost says

Affordability is useless to the under and unemployed. What use is a $2000/mth payment when people are not working. Foreign money will not last forever around here. Tick tick tick

I would guess that most people buying housing in SFBA have a college degree (maybe I'm wrong about that?). As a group, degree holders are essentially fully employed.

It may surprise you, but for many many people $2k/month is very comfortable.

swebb   Tue, 8 Jan 2013, 4:52am PST   Share   Quote   Permalink   Like   Dislike     Comment 45

iwog says

I can't imagine a safer situation than the one I'm in now.

Being geographically diversified in your real estate holdings wouldn't hurt. I don't think SFBA is going the way of Detroit, but you do have all your eggs in one geography...Would a massive quake change things? Maybe.

iwog   Tue, 8 Jan 2013, 4:53am PST   Share   Quote   Permalink   Like   Dislike     Comment 46

Bellingham Bill says

I can also attempt to change this nominal index into a real index:

http://research.stlouisfed.org/fred2/graph/?g=eni

shows that rents have been at all-time highs in real terms.

That's why mortgage financed rental property is double-hedged. It doesn't matter if rents are at an all time inflation adjusted high because inflation effects will be mostly cancelled out by the corresponding debt load. Stagnant rents in an inflationary economy are just fine.

David Losh   Tue, 8 Jan 2013, 5:06am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 47

Bellingham Bill says

Also, a weaker dollar will result in some amount of food inflation

I'm looking for that weaker dollar. The dollar seems to be in fine shape considering the global economic situation.

My opinion is we have a false sense of inflation because of lower interest rates.

http://www.ritholtz.com/blog/2012/01/222-years-of-long-term-interest-rates/

That affodability thing people keep talking about stretches back to the 1980s. That's when everything changed.

It's OK for your car to cost $20K because your payment is much less than a car you bought for $10K in the 1980s at 17% interest.

It's OK to spend $400K for a house that cost $100K in the 1980s, because the interest rate is so much less than 16%.

That loaf of bread, you put it on a credit card, because you get bonus miles.

We pay more for the convenience of a lower payment, and the ease of credit.

I think that's going to change.

ELC   Tue, 8 Jan 2013, 11:53am PST   Share   Quote   Permalink   Like   Dislike (1)     Comment 48

iwog says

I can't imagine a safer situation than the one I'm in now.

Are you saying this for the benefit of someone who is financially backing you? People who are investing their own money don't talk this way.

JodyChunder   Tue, 8 Jan 2013, 12:20pm PST   Share   Quote   Permalink   Like   Dislike     Comment 49

David Losh says

It's OK to spend $400K for a house that cost $100K in the 1980s, because the interest rate is so much less than 16%.

It really isn't...

The Professor   Tue, 8 Jan 2013, 12:53pm PST   Share   Quote   Permalink   Like   Dislike     Comment 50

iwog says

At that point you have a double-hedged investment that is nearly foolproof.

Never underestimate the ingenuity of fools!

iwog   Tue, 8 Jan 2013, 5:03pm PST   Share   Quote   Permalink   Like   Dislike     Comment 51

ELC says

Are you saying this for the benefit of someone who is financially backing you? People who are investing their own money don't talk this way.

People who have no idea what they are talking about and just like posturing on the internet talk this way. Your assertion is idiotic.

I only invest my own money in real estate. I manage a trust worth millions of dollars but it is not invested in real property.

ELC   Tue, 8 Jan 2013, 8:59pm PST   Share   Quote   Permalink   Like   Dislike     Comment 52

iwog says

I only invest my own money in real estate. I manage a trust worth millions of dollars but it is not invested in real property.

So the people whose trust you manage have nothing to worry about because, "I can't imagine a safer situation than the one I'm in now."

Look, I'm just giving you a hard beause you sound like a salesman. Anyone holding real estate in this market who says they can't be safer is either in total denial or is selling something. Period.

ELC   Tue, 8 Jan 2013, 9:03pm PST   Share   Quote   Permalink   Like   Dislike     Comment 53

David Losh says

It's OK to spend $400K for a house that cost $100K in the 1980s, because the interest rate is so much less than 16%.

I'll take the 100k house at 16% thank you. Interest rates can and will decline at 16%. But with a high principle and low interest rates that can and will increase, you're trapped... unless of course your 400k shitbox that's woth 100k goes up in value.

tatupu70   Tue, 8 Jan 2013, 9:13pm PST   Share   Quote   Permalink   Like   Dislike     Comment 54

ELC says

I'll take the 100k house at 16% thank you. Interest rates can and will
decline at 16%. But with a high principle and low interest rates that can and
will increase, you're trapped.

Except that it's a false choice. As has been posted on here by many others--there is almost no correlation between interest rates and house prices historically. Home prices follow incomes and incomes are usually postively correlated with interest rates.

ELC   Tue, 8 Jan 2013, 9:24pm PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 55

tatupu70 says

Except that it's a false choice. As has been posted on here by many others--there is almost no correlation between interest rates and house prices historically. Home prices follow incomes and incomes are usually postively correlated with interest rates.

I understand what you're saying but what's happening today can't be viewed from a historical perspective. Interest rates (are supposed to) follow risk. High incomes decrease risk. Yet now a days we have high risk, low incomes and low interest rates. If interest rates merely doubled, incomes will never be able to keep step with the higher payments especially if inflation inevitably kicks in. Prices will have to fall to keep homes affordable.

What we're dealing with today is that massive fraud is being used to repair massive fraud.

tatupu70   Tue, 8 Jan 2013, 9:59pm PST   Share   Quote   Permalink   Like   Dislike     Comment 56

ELC says

Interest rates (are supposed to) follow risk. High incomes decrease risk.

I think you have to be more specific--to which rates do you refer when you say "interest" rates? I'm assuming you mean either mortgage rates or US treasuries (not all that different really since mortage rates follow 10 yr notes). Those rates typically vary based on the outlook for inflation as the US is (still) considered the safest investment.

ELC says

If interest rates merely doubled, incomes will never be able to keep step with
the higher payments especially if inflation inevitably kicks in. Prices will
have to fall to keep homes affordable.

Historically, interest rates don't double without wage inflation. So, even though rates and payments are higher, wages are higher as well, and houses actually appreciate in nominal terms, even if the price is flat in real terms.

ELC   Tue, 8 Jan 2013, 10:39pm PST   Share   Quote   Permalink   Like   Dislike     Comment 57

tatupu70 says

Historically, interest rates don't double without wage inflation.

You're talking as if interest rates are market driven like wages are. Perhaps there was a time when they were but not anymore.

ELC   Tue, 8 Jan 2013, 10:44pm PST   Share   Quote   Permalink   Like   Dislike     Comment 58

tatupu70 says

Those rates typically vary based on the outlook for inflation as the US is (still) considered the safest investment.

Those rates are in part based at whether the US can make it's interest only payment on it's national debt. Again, you seem to believe that interest rates are market (risk) driven.

It's nice to be the fox in charge of the hen house as long as there are hens.

ELC   Tue, 8 Jan 2013, 10:58pm PST   Share   Quote   Permalink   Like   Dislike     Comment 59

tatupu70 says

mortage rates follow 10 yr notes).

Our national debt is what drives interest rates first and foremost. If low mortgage rates benefit an ailing economy and hold off a banking colapse then all the better. At least this is what the the powers that be are estimating. I see it as them trying to turn lead into gold. It's obviously easier and more desirable to do that than follow the stolen money and try to recover it.

Like I said in a previous post. This is what happens when the fox is in charge of the hen house. If a leader did come into power and zealously tried to recover the stolen money the same thing would happen to us that happened to Germany in World War II. And as in Germany's case, it wouldn't be us who would be the ones enjoying the spoils of war.

tatupu70   Wed, 9 Jan 2013, 12:27am PST   Share   Quote   Permalink   Like   Dislike     Comment 60

ELC says

You're talking as if interest rates are market driven like wages are. Perhaps
there was a time when they were but not anymore.

Again--tell me what you define as "interest rates". Regardless, they are most definitely market driven. The Fed can attempt to influence them, but their power is usually overstated. Rates are low now precisely because of the market--there is a LOT of cash chasing very few good investment opportunities.

tatupu70   Wed, 9 Jan 2013, 12:28am PST   Share   Quote   Permalink   Like   Dislike     Comment 61

ELC says

Those rates are in part based at whether the US can make it's interest only
payment on it's national debt.

Yep--and that's why I say that the US is still considered to be the safest investment. Whenever there is a flight to quality--people buy US treasuries.

ELC   Wed, 9 Jan 2013, 6:25am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 62

tatupu70 says

Yep--and that's why I say that the US is still considered to be the safest investment. Whenever there is a flight to quality--people buy US treasuries.

But at the rates they're giving now it can't really be called investment. They're just parking their money. It does show what a financially unsafe world this is right now rather than how safe US Treasuries are.

iwog   Wed, 9 Jan 2013, 6:27am PST   Share   Quote   Permalink   Like   Dislike     Comment 63

ELC says

Look, I'm just giving you a hard beause you sound like a salesman. Anyone holding real estate in this market who says they can't be safer is either in total denial or is selling something. Period.

What makes you so scared you can't even talk about why?

I've covered my end in great and glorious detail even explaining why inflation and falling home prices aren't a risk. You haven't devoted a single word to supporting your assertions. Period.

ELC   Wed, 9 Jan 2013, 7:08am PST   Share   Quote   Permalink   Like   Dislike     Comment 64

iwog says

I've covered my end in great and glorious detail even explaining why inflation and falling home prices aren't a risk. You haven't devoted a single word to supporting your assertions. Period.

It's really pretty simple. Your success is dependant on unpredictable Government policy rather than a predictable fair market economy. If you're not worried something's rotten.

iwog   Wed, 9 Jan 2013, 7:27am PST   Share   Quote   Permalink   Like   Dislike     Comment 65

ELC says

It's really pretty simple. Your success is dependant on unpredictable Government policy rather than a predictable fair market economy. If you're not worried something's rotten.

Yeah except this is total BS. Government policy is not causing the current bull market nor did it cause the bubble and subsequent crash. I don't accept your premise.

Boom/bust economic cycles happen regardless of what interest rates are doing. The fact that there are so many all cash sales should be a clue that finance isn't the driving force here.

ELC   Wed, 9 Jan 2013, 10:21am PST   Share   Quote   Permalink   Like   Dislike     Comment 66

iwog says

all cash sales should be a clue that finance isn't the driving force here.

All cash sales is a symptom that lack of conventional financing is a driving force. Who except the Government is dumb enough to make a loan in this environment at these interest rates?

David Losh   Wed, 9 Jan 2013, 10:22am PST   Share   Quote   Permalink   Like   Dislike     Comment 67

iwog says

Boom/bust economic cycles happen regardless of what interest rates are doing.

That's not exactly true, and we are certainly talking about boom, and bust cycles here.

Long term interest trends have added undue pressure on prices by speculation.

Borrowing at low interest, and continueing to buy, or lending to as many people as you possibly can, can drive up prices.

My contention for ten years is that banks weren't making loans as much as they were controling Real Estate.

Banks, with the help of speculators, drove up the price of Real Estate to unsustainable levels.

They then sold the paper, and collection rights, before foreclosure, and ultimately weeding out dog properties with our government guaranteeing the Securities that were created.

We are awash with cash because every poor dumb sap who bought property paid into the system.

The cash is still mopping up any unclaimed returns, but at a point in the near future every investor will make the loans to mom, dad, and the kids at a more reasonable price, and a little more interest.

Once the Real Estate market hits equalibrium the cash will fade away.

ELC   Wed, 9 Jan 2013, 10:39am PST   Share   Quote   Permalink   Like   Dislike     Comment 68

David Losh says

My contention for ten years is that banks weren't making loans as much as they were controling Real Estate.

I remember banks telling the mortgage brokers, "they're not in the real estate business" and they didn't want to have to foreclose. The minute I heard that I knew it was bullshit. Not only were their actions not consistant with their mantra, it was pretty obvious they were setting up the mortgage brokers to be the fall guy.

RentingForHalfTheCost   Wed, 9 Jan 2013, 12:38pm PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 69

Good luck to all of us. We will need it soon. Real estate owners and cash owners. There is really no good outcome from this BS

inflection point   Fri, 11 Jan 2013, 3:27am PST   Share   Quote   Permalink   Like   Dislike     Comment 70

The best outcomes will be for the political class, bankers and of course Jon Corzine. Too big to fail and too big to jail.

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