patrick.net

mell says

Of course they would go down - massively. People can only rent for what they can afford RIGHT NOW. No extend and pretend. You cannot find enough wealthy people to charge hefty rents

Right--they would go down to rental parity. Which in the vast majority of places is about where prices are today.

mell says

This is only due to cheap money and leverage due to favorable conditions if you have more buying power, the hedge funds will bail as soon as there are no renters, In fact they are bailing already.

Because we're at rental parity. But, if prices went down again, as you are proposing they would, then the hedge funds would come right back again. They'll go where there is money to be made.

mell says

In other countries people save from birth on via special vehicles or regular long-term saving accounts so that you can pay down 50% at the minimum or build your own house on a lot with that money. Much better/stable than taking out a mortgage.

How is that better?? Until banks gave out loans like candy to anyone that signed their name, we never had an issue. If they kept reasonable underwriting standards, then the 20% down system is MUCH preferable to a required 50% down. Why do you want to create an ownership class that preys on the renters?

The only true way to reduce prices is to build more.

I guess a great question to posit at this stage is to ask the question: what will happen when interest rates start to rise?

We are at historic lows for interest rates and while the low rates could persist for some time, I am guessing we will at some point return to more normal levels, which would be interest rates (non jumbo) between 7-8%. That will put downward pressure on prices although a recovering economy could offset that somewhat.

tatupu70 says

How is that better?? Until banks gave out loans like candy to anyone that signed their name, we never had an issue. If they kept reasonable underwriting standards, then the 20% down system is MUCH preferable to a required 50% down. Why do you want to create an ownership class that preys on the renters?

The only true way to reduce prices is to build more.

No, it's to stop supporting this corrupt sector with floods of cheap credit and buying of MBS. There are countries that are far far more densely populated than the US and you don't see such rollercoaster speculation crap, prices remain fairly stable. The US has enough land and houses for the foreseeable future. What it doesn't have are high enough interest rates.

mell says

rollercoaster speculation crap

I have been told that Berkshire Hathaway Home Services, which used to be Prudential has a new business plan.

An army of Real Estate agents is going to go out and look for properties, not for a listing, but to offer to buy the property for cash whereas then the corporation will do repairs and remodel and then flip it for a higher price.

The agent gets 50% of the profit plus the usual commission.

adarmiento says

It was best to buy between during 2008 through 2011 especially with the fixed 30 year mortgage rate hovering around 3.5%.

Complete bullshit because...

Diomedes777 says

We are at historic lows for interest rates and while the low rates could persist for some time, I am guessing we will at some point return to more normal levels, which would be interest rates (non jumbo) between 7-8%. That will put downward pressure on prices

How many of your parents who purchased at 10% are still riding out that 10% interest loan? THEY are the ones sitting at 3.5% now.

If you want to start at 3.5%, you have to buy an overpriced abode. You know a home's "value" is in it's monthly payment, right? When interest rates go down, prices go up.

Unfortunately, if the US spikes interest rates, 1) our national debt payments will balloon and our economy will contract, 2) Wall Street will whine like a bunch of fucking babies. So we might be low for the foreseeable future.

tatupu70 says

But, if prices went down again, as you are proposing they would, then the hedge funds would come right back again. They'll go where there is money to be made.

If prices go down, hedge funds first have to leave; they are the ones who drove it up last year. They are just speculators. Once the appreciation is drained out of this rag, they will be on to the next "big thing"

Tim Aurora says

The home is back in the market much improved and ready to move in

and costing way more than the flipper put into it

Tim Aurora says

What is the point of this posting?

People can read into the posting in any way they choose.

The purpose of a blog, I would think. To get information not readily available elsewhere.

JH says

When interest rates go down, prices go up.

I know your statement seems intuitive, but historically there is basically no correlation between interest rates and housing price movement.

JH says

If prices go down, hedge funds first have to leave

No--they are making money off the rent. If prices go down, homes become cash flow positive again and hedge funds will buy them up for the rental income.

David9 says

I have been told that Berkshire Hathaway Home Services, which used to be Prudential has a new business plan.

An army of Real Estate agents is going to go out and look for properties, not for a listing, but to offer to buy the property for cash whereas then the corporation will do repairs and remodel and then flip it for a higher price.

The agent gets 50% of the profit plus the usual commission.

You've been told? And the agent gets 50% of the profit plus the usual commission? Who told you that? Santa Claus?

mell says

What it doesn't have are high enough interest rates.

Well, you should be on board with reducing wealth inequality then. That's what will drive up interest rates. Right now, there is literally a sea of cash looking for a place to go because the 1% has more than they know what to do with....

When cash gets back to the folks that spend it, interest rates will go up.

tatupu70 says

JH says

When interest rates go down, prices go up.

I know your statement seems intuitive, but historically there is basically no correlation between interest rates and housing price movement.

Are you being serious? In the short term (YoY) there may be truth to your statement, but in the long term there is a whole lot of truth to mine, at least outside the moat of the fortress. I can give you calculations if you want them.

tatupu70 says

No--they are making money off the rent. If prices go down, homes become cash flow positive again and hedge funds will buy them up for the rental income.

Landlords are but not flippers. What you said certainly can work, but as SFH rentals increase, I would expect downward pressure on rent prices. But I don't know that we have a precedent for this, so I'm not really sure what to expect.

Bigsby says

Who told you that? Santa Claus?

Yes, I have been told. I certainly not divulging personal and private information on a public blog.

Time will tell.

David9 says

Bigsby says

Who told you that? Santa Claus?

Yes, I have been told. I certainly not divulging personal and private information on a public blog.

Time will tell.

Time will tell what? Agents wouldn't get 50% of the profits and their usual commission, would they? That part is obviously nonsense, so...

Bigsby says

Time will tell what?

That the posting is based in fact.

Called this person, no answer, sorry!

David9 says

Bigsby says

Time will tell what?

That the posting is based in fact.

Called this person, no answer, sorry!

You should ask them for a job. 50% of the profits indeed + commission!

JH says

Are you being serious? In the short term (YoY) there may be truth to your statement, but in the long term there is a whole lot of truth to mine, at least outside the moat of the fortress. I can give you calculations if you want them.

I know the calculations, but the point is that house prices are affected much more strongly by incomes. And there is a positive correlation between incomes and interest rates that overpowers any interest rate effects.

Call it Crazy says

Hey Tat, I think the true data disproves your comment:

#1-- try using a larger data set than 1 year.
#2-- you still seem to have a hard time understanding the difference between falling prices and price rises that are slowing.

tatupu70 says

mell says

What it doesn't have are high enough interest rates.

Well, you should be on board with reducing wealth inequality then. That's what will drive up interest rates. Right now, there is literally a sea of cash looking for a place to go because the 1% has more than they know what to do with....

When cash gets back to the folks that spend it, interest rates will go up.

Bullshit - where was the sea of cash in 2008? It's all debt driven. The "folks that spend it" will put on more debt and then we will have QE forever an ZIRP as long as they can print. Capital formation is necessary, not spending. In fact spending cuts are necessary across the board.

JH says

Landlords are but not flippers

I'm no expert, but my understanding was that hedge funds were hiring out companies to be landlords for them. They weren't flipping.

mell says

Capital formation is necessary, not spending.

You think with interest rates at next to zero, capital formation is the problem??? Do you understand that those two statements are at odds with each other?

mell says

Bullshit - where was the sea of cash in 2008? It's all debt driven. The "folks that spend it" will put on more debt and then we will have QE forever an ZIRP as long as they can print. Capital formation is necessary, not spending. In fact spending cuts are necessary across the board.

You're partially correct--the debt acted as an equalizer by giving money back from the 1% to those that spend it. When the debt party ended, the SHTF.

Call it Crazy says

Not quite incomes, prices are affected by "payments

Nope--I had it correct.

tatupu70 says

I know the calculations, but the point is that house prices are affected much more strongly by incomes. And there is a positive correlation between incomes and interest rates that overpowers any interest rate effects.

Apparently you don't know the calculations. Incomes have increased with inflation over 30 years (one generation) almost to the dollar. Home prices have MORE than increased with inflation. In fact, they have increased right in step with inflation PLUS interest rate drops such that monthly payments are the same today as they were 30 years ago adjusted for inflation.

You understand that people are way more leveraged today with respect to income than historically. Home prices ARE NOT indexed to income. Monthly payments ARE...except in areas where cash is king (both cheap and expensive areas).

tatupu70 says

JH says

Landlords are but not flippers

I'm no expert, but my understanding was that hedge funds were hiring out companies to be landlords for them. They weren't flipping.

Fair enough. I'm curious to see what happens this year if flippers pull back. Landlords are pushing the margins, too, but if they come in all cash, they are still OK I would think.

JH says

Apparently you don't know the calculations. Incomes have increased with inflation over 30 years (one generation) almost to the dollar. Home prices have MORE than increased with inflation. In fact, they have increased right in step with inflation PLUS interest rate drops such that monthly payments are the same today as they were 30 years ago adjusted for inflation.

Please show me your calculations.

If you plot house prices vs. interest rate--there is NO correlation. If you plot house prices vs. income growth there is a strong correlation.

Call it Crazy says

Yes, you've proven that over and over again here....

I expected this comment a little quicker. You're slipping.

Call it Crazy says

Oh, you mean those two blue marks that are in negative territory for Nov. and Dec. on the C/S graph??

The non-seasonally adjusted ones? lol. That's the best you've got??

Call it Crazy says

Hey Tat, I think the true data disproves your comment:

I haven't seen that second graph before, does Case-Shiller put out a longer term on that...or do you know of a database? As long as finance rules, it is the key graph.

mell says

I looked at a complete teardown shitshack in Parkside and it was listed at over 750K. If that's not a strong indication of a top forming.. ;)

The sucker is the one who is left holding the empty bag at the end.

Call it Crazy says

Yeah, Non-Seasonal (you know, the REAL numbers) not the massaged "seasonally adjusted" numbers....

No--you're right. It's prefectly appropriate to compare December to July. There are just as many people moving in both months, wouldn't you agree?

tatupu70 says

Please show me your calculations.

Here they are...

So I posted earlier my analysis of Fullerton 1980s vs. today, right? I did the same on Morgan Hill. It was tougher because it's a newer area...but I found several homes with purchase histories in the 1980s.

Overall, it's the same story. Monthly payments for a home purchased today are comparable to monthly payments in 1980s. For example, a 1700 sqft home purchased in 1988 for $210k with 10% down carried a monthly payment of $2066 (a pretty standard size/sale price for the area it seems). This required an income of $88k, while the national median income at the time was $26k. Only an upper middle class family (or better) could afford this.

Flash forward to today, and that monthly payment with inflation is $4068. If someone put down 10% and pays 4.4% interest with that $4068 payment, they are purchasing a home that cost $660k. This payment requires an income of $174k, while the national median is ~$50k. Again, the family that purchases that home today has to be well off...just as their parents had to be 26 years ago!! Homes have simply increased in "value" because of inflated wages and lower interest rates.

A couple of caveats. First, I was shocked when I ran these numbers in Fullerton and discovered it wasn't as unaffordable as I thought! Yet I think housing is overpriced. haha. Second, my numbers don't work with existing list prices. They are about 20% over what they should be based on monthly payments. That is because cash has been king for about a year now and propped up the market 20% over where it should be. So that home in Morgan Hill would actually list for, say, $750-800k.

So homes are in line with historical (at least one generation historical) plus a little blip from all cash buyers in 2013. BUT here are the two biggest problems: First, a 10 or 20% downpayment costs a lot more today because home values have increased beyond just inflation. (Notice that 3.5 and 5% downpayments have been en vogue although harder to get in 2014...) Second, today's buyer cannot refinance in 10 years because interest rates will not be multiple percentage points lower.

Now, in Palo Alto, for example, this is not the case...homes disconnected with monthly payment values with the tech booms because people are making large downpayments (or all cash) and demand is high. Mortgages don't matter.

Call it Crazy says

That chart came from Marketwatch this morning...

Didn't notice it below the Bitcoin mess headlines

tatupu70 says

JH says

Apparently you don't know the calculations. Incomes have increased with inflation over 30 years (one generation) almost to the dollar. Home prices have MORE than increased with inflation. In fact, they have increased right in step with inflation PLUS interest rate drops such that monthly payments are the same today as they were 30 years ago adjusted for inflation.

Please show me your calculations.

If you plot house prices vs. interest rate--there is NO correlation. If you plot house prices vs. income growth there is a strong correlation.

FWIW:

Now in real (inflation adjusted terms) there is a correlation. But, in nominal terms, lets just say the guy who didn't buy in 1980 @75K was pretty pissed when interest rates tripled and the nominal price continued to ooze slowly upward...

JH says

Here they are...

OK--it's a nice analysis, but very specific to one certain area. I wouldn't be comfortable extrapolating it to apply in general.

I disagree with your earlier assumptions as well.

JH says

Incomes have increased with inflation over 30 years (one generation) almost to the dollar

Incomes have increased more than inflation. Medians might not show it because of increased disparity.

tatupu70 says

OK--it's a nice analysis, but very specific to one certain area.

Thanks, I've also tried it in the LA area and San Jose (ie, BA outside of Steve Jobs' direct sphere of influence). I was mainly looking at the difference between me buying today vs. my parents buying 30 years ago. Trying to figure out how to complain to them that life isn't fair.

Unfortunately, I was wrong.

tatupu70 says

Incomes have increased more than inflation. Medians might not show it because of increased disparity.

I think we would need to look at historical quintiles to confirm this. Because...

JH says

I think we would need to look at historical quintiles to confirm this. Because...

OK here you go:

But, even in your chart above, there have definitely been gains in real median income over the last 30 years. Looks like ~10%?

tatupu70 says

OK here you go:

Nice chart...changes in tax code are the difference between yours and mine! I am going to plug those numbers into my calculations (later at home) and see how things line up if people were to spend the some proportion of their income on housing.

Probably the middle and fourth fifths (maybe 81-90) are primary mortgage borrowers...?

tatupu70 says

But, even in your chart above, there have definitely been gains in real median income over the last 30 years. Looks like ~10%?

yeah, I figured that was a wash now that we all have cell phone bills and internet service...