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How far would prices in LA/SF drop if FHA 3.5% down loans were eliminated?


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2012 Jan 13, 1:03pm   32,585 views  86 comments

by FuckTheMainstreamMedia   ➕follow (3)   💰tip   ignore  

I ask because theres a few desireable areas, and a few up and coming portions of LA where investors are paying cash, fixing the places up, then flipping at huge profits. Almost all final user buyers are using 3.5% down loans(both annecdotally and via realtor info) in these areas because they do not have 20% down.

In my mind, this means that if the fed stepped away from low down payment mortgages, prices would have to fall to a point where people could afford 20% down. Since its clear people can't and won't save the amounts required now, prices would have to meet what people could afford.

Example:

http://www.redfin.com/CA/Burbank/1011-N-Brighton-St-91506/home/5335424

http://www.redfin.com/CA/Burbank/1845-N-Niagara-St-91505/home/5359870

http://www.redfin.com/CA/Los-Angeles/334-Kirby-St-90042/home/7087245

http://www.redfin.com/CA/Los-Angeles/442-N-Avenue-52-90042/home/7077727

As you can see from the links above, the homes sold likely cash for much much less than their resale a few months later. And while the homes were likely in poor condition, clearly the flipper is making bank. On the last one esp...over $200K in profit...a flipper laughing all the way to the bank. And theres also just about no way the flipper even put half that into the upgrades(LOL at the front yard).

And heres the rub....anyone that had the ability to scrape up 20%($100K), would have been able to buy at $290K, and put the rest into fixing up the place, at least part way. Thereby paying $330K, and doing other upgrades at a later point in time. With $40K, easily could have done the roof, plumbing, electric, painting, flooring, some windows, and landscape on the very cheap. Clearly I would think that saving $170K would be high on most peoples lists(not even factoring in the cost of interest).

But thats not whats happening because people don't really have that money. Instead, they are able to STILL purchase with almost entirely funny money. And they do really stupid things like overpay on a house by at least $100K.

So do I have this right? If 20% down became the new norm.....would prices fall as far as I seem to think?

#housing

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1   dannybsmith   2012 Jan 13, 2:41pm  

Um, yes. And that is what many of us have been pointing out since, oh I dunno, around 2005. Relentless and unprecedented propping up of prices from the Fed and the Federal Government has applied the brakes to the inevitable unwinding of the price bubble, but it certainly hasn't stopped it. And it will continue until prices fall back to the trendline. Los Angeles has a long ways to go.

2   anonymous   2012 Jan 13, 3:34pm  

dodgerfanjohn says

So do I have this right? If 20% down became the new norm.....would prices fall as far as I seem to think?

we put 20% down on our house...

I don't think prices would fall like you think. Look at europe, germany especially, they never had 0% down loans or even 3.5% down loans, yet prices are almost double from ours here. Banks never did crazy loans like over here and still everything is inflated. They have super strict lending standards and still...700k euro's for a a duplex in munich subburbs is the norm. That's 1 million $. Makes our real estate dirt cheap in comparison.

I think there are more people with 20% than you think. The question is do they wanna cough it up? As soon as people will realize/think that the real estate market has stabilized or is at least holding ground they will feel confident to put down 20%. What are you gonna do with 100k these days? the stockmarket was flat in 2011 and the bank pays you 0.8%...might as well use it to buy a house. Especially, when comparing to rents, I bet these houses would all rent between $2000-2800.- so a mortgage (with 20% down) would be less or equal to that. At that rent price, you wait a year and keep renting and in order to break even you need the house price to fall $30k+ at least so that it was worth the wait. Can you buy any of those houses for $30k less next year? Maybe, maybe not. Either way, if you do have 20% down its worth doing it now because you also wanna be done with paying the house sooner than later, right? So if you rent for 3 years...spend 60k on rent in that time...and then buy the house for 60k less...what have you gained?

That said, FHA isn't going anywhere...

But its an interesting question...

3   JodyChunder   2012 Jan 13, 7:14pm  

E-man says

How high would prices go if we bring back no docs loan and drop interest rate to 2% at the same time?

they would not go much higher and anyway it is not possible, Interest rates are as low as they can go. This is it. Get it while you can.

Can't go through life based on "what if".

Yup. Better to do like the baby boomers and la la la la live for today. Do not analyze or question anything. If it feels good do it and to hell with the concequence.

4   thomas.wong1986   2012 Jan 14, 12:02am  

SubOink says

Banks never did crazy loans like over here and still everything is inflated. They have super strict lending standards and still...700k euro's for a a duplex in munich subburbs is the norm. That's 1 million $. Makes our real estate dirt cheap in comparison.

Danish Housing Bubble Leads Industry to Look to German Model

http://www.businessweek.com/news/2011-12-13/danish-housing-bubble-leads-industry-to-look-to-german-model.html

Denmark’s Social Democrat-led government, elected in September, said this month it will appoint a committee to investigate the causes of the financial crisis, including what role Denmark’s real estate market played. It sees the budget deficit widening to 5.1 percent of gross domestic product next year, more than the euro area average shortfall of 3.4 percent, according to the European Commission’s Nov. 10 estimates.

Affordable mortgages have made homeownership possible for about 50 percent more Danes than Germans, and adopting Germany’s model could limit homeownership to older, wealthier people, according to Ane Arnth Jensen, director of Association of Danish Mortgage Banks

The association rejected calls by the central bank earlier this year to discontinue interest-only loans, which Governor Nils Bernstein said are destabilizing the market. It also rejected a proposal by its rival, the Danish Mortgage Banks’ Federation, to reduce refinancing risks by eliminating the one- year bonds that fund 20- and 30-year adjustable-rate loans. The association cited consumer and investor demand. Refinancing auctions this month have resulted in near-record low yields.

By the end of next year, average home values in Denmark will have dropped 25 percent since peaking in 2007, according to the government-backed Economic Council. Denmark’s $325 billion economy probably will contract 0.1 percent in the fourth quarter, Danske Bank, the country’s biggest lender, said earlier this month.

Home Ownership

About 43 percent of Germans own their own homes, according to the German association. That compares with at least 64 percent in Denmark, figures from the country’s statistics agency show.

Adopting Germany’s mortgage lending value also would reduce mortgage banks’ need to raise additional collateral, according to Realkredit’s Kristiansen. “It is very expensive for us to see house price come down 20 percent,” he said.

The lenders, which fund virtually all home loans in Denmark, can issue covered bonds against 80 percent of a property’s market value. If prices fall, lifting the loan-to- value ratio above 80 percent, lenders must provide more collateral to restore the ratio.

5   thomas.wong1986   2012 Jan 14, 12:04am  

German Govt and its Tax payers will be picking up the bill for the European Housing bubble... The Euro is going Bust!

6   thomas.wong1986   2012 Jan 14, 12:16am  

Study finds endemic European housing bubble

http://www.ft.com/cms/s/0/534695a2-385f-11e0-959c-00144feabdc0.html#axzz1jRwXJmiz

House prices inflated more in western European countries ahead of the financial crisis and declined more sharply after the bubble burst than they did in the United States, according to a newly published analysis.

The findings by Freddie Mac, the mortgage finance company owned by the US government, shows that the seeds of the housing crisis were as endemic in other countries as they were in the US. The study also counters the notion that the problem was an American creation that was exported abroad.

He cited a 2004 IMF study that compared house price volatility to the use of fixed-rate mortgages in about 20 countries. “The more fixed-rate mortgages were used, the less price fluctuation,” Mr. Nothaft said.

The notable exception was Germany which, although it has seen prices decline 13 per cent since 2006, did not experience the same pre-bubble inflation. That is partly because Germany went through its own property bubble in the years immediately following unification. But it also has to do with the way the German housing market is structured.

Borrowers in Germany are typically required to put up a downpayment of as much as 35 per cent and are subject to stiff pre-payment penalties. Meanwhile, public policy in the country has tended to favour supporting rental housing for the middle class, which has suppressed the home ownership rate to 42 per cent, compared with 67 per cent in the US and 80 per cent in Spain.

7   thomas.wong1986   2012 Jan 14, 12:25am  

Germany Prices the same as it was 10 years ago...
Read on...

http://www.spiegel.de/international/business/0,1518,552901,00.html

Why the Global Housing Market Boom Bypassed Germany

If you were to buy a house in Germany today, chances are you would pay the same amount as you might have 10 years ago. While house prices have shot up at staggering rates in many industrialized countries, Germany's housing market has been in the doldrums: An average detached house in Germany today costs virtually the same as it did a decade ago

Post-Reunification Exuberance

To understand why Germany's housing market has been in the doldrums for the last decade you have to go back to the early 1990s. In June 1991, eight months after reunification, a law designed to revive the economy of former East Germany, called the Fördergebietsgesetz, came into force. It offered incredibly generous tax incentives to property investors: Anyone who renovated or built real estate in the former East or Berlin, could write off the entire cost of the investment from their taxable income over 10 years.

Many wealthy West Germans leapt at this once-in-a-life-time opportunity, including some of Germany's biggest celebrities -- such as TV presenters Thomas Gottschalk and Günther Jauch -- to a former foreign minister Hans-Dietrich Genscher to lawyers, dentists and managers. They all poured money into real estate, ranging from single flats to giant office complexes and housing estates.

Buoyed by the generous tax breaks, Germany's property market boomed in the early and middle 1990s. Between 1990 and 1998 -- the year the tax incentives finally expired -- the price of buy-to-let properties rose by around 70 percent. But the policy also helped to create a real estate bubble.

Boom Turns to Bust

But in the rush to take advantage of the incredible tax break, many investors seemed to have forgotten to ask themselves whether there really was demand for the property they were building and renovating.

"After 1998 a sobering of the market set in," Jürgen Michael Schick, vice-president and spokesman of Germany's Real Estate Association (IVD), which represents property advisers, brokers, administrators and experts, told SPIEGEL ONLINE. "The tax incentives no longer existed and in the 1990s investors had built over and above market demand."

As the housing market bubble burst, investors' exuberance turned to gloom. While house prices at the end of the 1990s were rising -- and kept rising for the next decade -- in many industrialized countries, Germany's housing market entered a prolonged slump. According to the Economist's global house price league table, the average value of homes doubled or even tripled in many countries between 1997 and 2007. In Britain house prices rose 210 percent, 190 percent in Spain, 168 percent in Australia and 104 percent in the US.

Germany, however, is one of only a handful of economically advanced countries not to experience a housing market boom in the last 10 years -- prices there have stagnated. According to research by Germany's Real Estate Association, which was carried out in 150 German towns and cities, the price of a detached home in 2007 was virtually the same as 10 years earlier.

8   anonymous   2012 Jan 14, 3:06am  

thomas.wong1986 says

Germany, however, is one of only a handful of economically advanced countries not to experience a housing market boom in the last 10 years

That is completely wrong!! I know this first hand.

A house that cost 500k DM 20 years ago is now 500k EURO = double the price...just like everything else (price on milk, gas etc)

They just didn't have a insane bubble like us, because of stricter lending standards the market has continuously gone up but at a very slow pace. (which is ok in my book).

The euro won't bust. And knowing us, we're going to keep sending bailouts there so not only will germany's taxpayer pick up the bill but the US too...its already happening right now. The banks are just too interconnected, banks fail there, banks fail here and vice versa. It's a mess.

9   Honeydew   2012 Jan 14, 8:38am  

No Wong.....you are wrong. The LAST 10 YEARS Germany has been pretty much stuck. I know firsthand. 20 years ago.....sure. But NOT the last 10. Munich and some other affluent places rose some, but the NATION AS A WHOLE absolutely did NOT experience a rise in RE. To their credit and good fortune.......just because our dollar has been Bernankiezed, don't equate that with rising RE values in euro vs. dollar terms. Germans don't use the house as a piggybank. Which also kept them stable.

10   anonymous   2012 Jan 14, 12:37pm  

honeydew - thats actually what wong said...LOL.

11   tatupu70   2012 Jan 14, 10:12pm  

dunnross says

If 100% of the loans were financed by FHA (3.5%), it's simple math to figure out that houses would have to drop 6 times (20 / 3.5) if the FHA loans disappeared. However, only 80% of the loans are FHA, now, so, that would translate to only a 5x drop (about an 80% drop).

That's definitely simple. Completely and utterly incorrect, but simple.

12   dunnross   2012 Jan 14, 11:23pm  

tatupu70 says

That's definitely simple. Completely and utterly incorrect, but simple.

No, my friend. All my calculations are 100% accurate. Notice how this calculation also perfectly correlates with my 1975 prediction, because, that would put the median US house price at about $36K - quite close to the 1975 median.

14   TMAC54   2012 Jan 14, 11:56pm  

dunnross says

No, my friend. All my calculations are 100% accurate. Notice how this calculation also perfectly correlates with my 1975 prediction, because, that would put the median US house price at about $36K - quite close to the 1975 median.

Even RENTERS hope the pendulum does not swing that far (1975). I believe prices will return to their phenomenal prices, 2.5 times income. BUT, there are variables OWNERS like to ignore. Unemployment rate, housing inventory, etc.
This chart shows incomes declining and unemployment rising. IF,,,,,, Unemployment is reduced, will the amount of income equate ?http://blogs.reuters.com/felix-salmon/2011/10/10/chart-of-the-day-median-income-edition/

15   TMAC54   2012 Jan 15, 12:39am  

Excellent image of modern day " Those that got rich and those that didn't fight back via Patrick.net "!.

16   tatupu70   2012 Jan 15, 12:47am  

dunnross says

No, my friend. All my calculations are 100% accurate. Notice how this calculation also perfectly correlates with my 1975 prediction, because, that would put the median US house price at about $36K - quite close to the 1975 median.

Your assumptions are the problem. Just because someone takes out an FHA loan doesn't mean that they wouldn't have qualified for a conventional one. Just because someone puts down 3.5 doesn't mean they didn't have 20% if they had to put it down.

Hell, at these rates I'd put down as little as possible too. Invest your downpayment and make more than 3% and you come out ahead.

17   B.A.C.A.H.   2012 Jan 15, 1:04am  

Nomo,

It is Peninsula Envy.

18   toothfairy   2012 Jan 15, 2:20am  

ease of credit definitely has an impact on housing prices but right now the pendulum has swung in the other direction.

If the GOP succeeds in repealing Dodd-Frank it could reopen the money spigot and have the opposite effect of what you're hoping for.

19   dunnross   2012 Jan 15, 4:41am  

tatupu70 says

Invest your downpayment and make more than 3% and you come out ahead.

The era of making money on asset appreciation and so-called "investments", is a long by-gone era. After more than a decade of 0% S&P appreciation, and a housing prices which are back to the same level they were 10 years, ago, the fact that we still have people who think that anything other than "wealth preservation" is a possibility, is a major sign that we are still more than a decade away from the true bottom. The true bottom will come, when, people who think like you become the laughing stock, just like I was back in '06 when I sold my house in the Bay Area, and most people told me that I was crazy.

20   tatupu70   2012 Jan 15, 4:45am  

dunnross says

The true bottom will come, when, people who think like you become the laughing stock, just like I was back in '06 when I sold my house in the Bay Area, and most people told me that I was crazy.

No offense, but they are correct. You are crazy.

21   dunnross   2012 Jan 15, 5:18am  

Nomograph says

and shit into the other

That depends on whether you think that your shit stinks or not!

22   dunnross   2012 Jan 15, 6:04am  

Nomograph says

Investors are making money hand over fist right now. Have you been asleep at the wheel?

Is that the same hand they've got stuck up their own ass, getting ready to smell their own shit:

http://www.google.com/url?sa=t&rct=j&q=median%20price%20of%20homes%20in%20us&source=web&cd=2&ved=0CDYQFjAB&url=http%3A%2F%2Fwww.census.gov%2Fconst%2Fuspricemon.pdf&ei=Ku4ST4aTO-WKiALauaDKDQ&usg=AFQjCNHPSIRejSGnDY6IBjwwLhwS50L1iQ&cad=rja

23   dunnross   2012 Jan 15, 6:07am  

tatupu70 says

But, just out of curiosity, where would 1975 prices be on that chart?

For all of you 1-celled organisms out there, 1975 is the year on the left of the chart, and 2011 is the year on the right of the chart.

24   tatupu70   2012 Jan 15, 6:09am  

dunnross says

tatupu70 says



But, just out of curiosity, where would 1975 prices be on that chart?


For all of you 1-celled organisms out there, 1975 is the year on the left of the chart, and 2011 is the year on the right of the chart.

Nice. So you think real prices should be 67% lower than in 1975?

25   dunnross   2012 Jan 15, 6:12am  

dunnross says

Investors are making money hand over fist right now. Have you been asleep at the wheel?

Here is where most of those 2-bit investors wind up.

26   dunnross   2012 Jan 15, 6:21am  

tatupu70 says

Nice. So you think real prices should be 67% lower than in 1975?

Yes, nominal will be at 1975, real, probably 67% lower. Just like the "real" price of gold at $250/oz back in 2001, where it took 4000 ounces of gold to buy a terminate-infested 2x4 in cury-stinking cupertino.

27   dunnross   2012 Jan 15, 6:49am  

E-man says

Or is it better to live in your "what if" dream logic?

So far, my "what if" dream logic has really paid off. In fact, selling my house back in 2006 and buying precious metals with all the proceeds has really paid off for me, so that now, I don't have to eat yam and yucca. But, if you do, I am really sorry. All that yam and yucca you ate, should have taught you not to make rash assumptions about other people. In fact, what you don't know about me, is that I was born to a very poor family.

28   dunnross   2012 Jan 15, 7:02am  

E-man says

Instead of being frustrated with RE prices in the bay area

Why frustrated? I am just sitting back and watching the show with glee, as all of you bulls, run around scratching your heads, and wondering why house prices are still dropping after 5 years, where all the self-acclaimed economists predicted a recovery in '09, '10, '11, '12, at infinitum.

Somehow, I think, at this point I strongly suspect that most of you bulls on this blog are a lot more worried than I am. I start to notice that a lot of you are actually, considering my 1975 prediction, where you wouldn't give me the time of day a mere 2-3 years ago.

But the mainstream media is still impervious to this "reality show" of a housing collapse. After all we still get statements like this from the Mercury News:

"After years of decline, housing prices are expected to stabilize or even increase in some parts of the Bay Area this year, according to a new forecast."

Ha, ha, ha. What a joke. And these people call themselves a "News Organization".

29   dunnross   2012 Jan 15, 7:04am  

Nomograph says

Based on how you carry yourself, I'm guessing you actually did neither.

Like I said, I trust my bank account a lot more than 2-bit BS'ers like you.

30   dunnross   2012 Jan 15, 7:06am  

Nomograph says

It's easy to say that you sold a house at the height and bought gold at a low. Based on how you carry yourself, I'm guessing you actually did neither.

And, as usual, I challenge you to eat your hat, about 10 years from now, when house prices do fall to 1975 levels.

31   dunnross   2012 Jan 15, 7:19am  

Nomograph says

It's easy to say that you sold a house at the height and bought gold at a low. Based on how you carry yourself, I'm guessing you actually did neither.

Yes, and I bet you were among one of those people who would have laughed me out of town, back in '06, if I had mentioned even a 20% decline, back then. That's why it's so hard for you to believe that somebody could sell their "HOME" and buy a worthless piece of a "barberous relic" back in '06.

32   dunnross   2012 Jan 15, 7:53am  

Nomograph says

In 10 years I will have blissfully forgotten all about you.

Probably, because you'll be long-time dead, having eaten so many hats!

33   anonymous   2012 Jan 15, 8:19am  

tatupu70 says

Just because someone puts down 3.5 doesn't mean they didn't have 20% if they had to put it down

Exactly. We ended up using 20%, I just hated the idea of $300/month PMI...but at some point we almost went with 3.5 down FHA. If we did, dunross would assume that we NEEDED to go that route.

dunnross says

Yes, and I bet you were among one of those people who would have laughed me out of town, back in '06, if I had mentioned even a 20% decline, back then

Just because you were right then (in hindsight), does not mean you are right now. Every broken clock is right twice a day...

If we were to go back to 1975 prices, you wouldn't buy a house then because you would have lost all your money, have no job and things would be very ugly - be careful what you wish for...it may work against you.

I also don't "buy" that you sold a house in 2006 and bought Gold with the proceeds. I got that feeling. Just like I had that feeling in 2006 houses were too expensive...I was right then, so I am right now. (applying your logic)

34   dunnross   2012 Jan 15, 8:55am  

Nomograph says

You can't compose a grammatically correct sentence, and you want us to believe you are some kind of financial genius?

Oh, BTW, remember goldboy back from 2006. Yes, the same one who told you to sell your house and buy gold back then at $500/oz. Well, why do think you can still read about him in my history. That's because he and I are the same people.

35   dunnross   2012 Jan 15, 8:56am  

Nomograph says

Probably, because you'll be long-time dead, having eaten so many hats!

Neither could Henry Kissinger.

36   dunnross   2012 Jan 15, 9:05am  

dunnross says

you would still be able to buy that house in Palo Alto with just 30 of your gold coins, no matter how low the price of gold gets

Now, let me explain to all you multi-cell organisms out there, how far-sighted my calculations really were, back in '06:

House Price in Palo Alto in 2001: $750,000
Price of Gold in '01: $250
PA/Gold Ration: 3000

House Price in Palo Alto in 2006: $1,200,000
Price of Gold in '06: $500
PA/Gold Ratio: 2400

House Price in Palo Alto in 2012: $1,000,000
Price of Gold in '12: $2000
PA/Gold Ratio: 500 (notice the trend already)

House Price in Palo Alto in 2020: $300,000
Price of Gold in '20: $10,000
PA/Gold Ration: 30 (as predicted by goldboy (alias dunnross) in '06)

37   dunnross   2012 Jan 15, 9:17am  

dunnross says

You can't compose a grammatically correct sentence, and you want us to believe you are some kind of financial genius?

Actually, I am not the financial genius. All my ideas came from my friend, Kondratieff, who lived over 100 years ago.

38   toothfairy   2012 Jan 15, 9:25am  

Depending on where you live if you sold in 06 you are still down a significant amount

39   dunnross   2012 Jan 15, 9:32am  

toothfairy says

Depending on where you live if you sold in 06 you are still down a significant amount

Not if you traded your greenback for gold & silver, like I did.

40   dunnross   2012 Jan 15, 9:34am  

toothfairy says

Depending on where you live if you sold in 06 you are still down a significant amount

Oh really? I thought we were at the bottom?

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