patrick.net

ScottC,

Again, fixing up repossessed homes is a great thing, but this is not the business the GSEs are in (perhaps you have them confused with HUD and Habitat for Humanity?).

As Allah & Peter P noted, their core business and reason for being is purchasing mortgages from the banks/originators, repackaging them as MBSs and selling them to institutional investors at a profit (thus, providing mortgage market “liquidity”).

We seem to be arguing apples and oranges here.

I expect that the magnitude of the housing bubble bust will exceed my expectations.

Did I just create a paradox?

Talk about entertainment.
http://sacramento.craigslist.org/rfs/116568833.html

With all the chatter about free food, they forgot to mention this is mere minutes away from Folsom State Prison!

Did I just create a paradox?

Which one is greater: Peter P's immovable pessimism, or the bubble's irresistable implosion? :-P

Which one is greater: Peter P’s immovable pessimism, or the bubble’s irresistable implosion?

If I am immovably pessimistic, I must be optimistic about my pessimism, right?

A small newsflash: our Marin Bubble Blog was mentioned in a local paper.

http://tinyurl.com/e22s7
-Kurt S

Listen to this guy from the article:

"Clearly, this is a case of someone who has come up with an early case of Marin real estate flu," laughed Marin Association of Realtors President Jack McLaughlin, who was quoted in an Independent Journal article posted on the blog. "We don't have the vaccine for this guy."

Laugh it up while you still can Jack. What an a-hole!

"Did I just create a paradox?"

What you stated was an Oxymoron.

What you stated was an Oxymoron.

This is a false statement.

Somewhat of a paradox unless it was the result of a parallax.

"This is a false statement." and "I always lie."

"Hoo hoo hah hah, it's as if the foolish peons don't even realize that I have the most to gain personally for keeping this housing bubble inflated," chortled Marin Association of Realtors President Jack McLaughlin. "Oops, did I just say that in my out-loud voice? Can I get a retraction on that? I mean, I was just kidding!" added McLaughlin.

does anybody know what would be the median home price in mountain view, sunnyvale, santa clara area in 2006, 2007, 2008 and 2009? My estimate is that the prices would bottom out by spring 2008. I dont know by how much. Comments? --Realistic Desi

I would go with a 25% drop by then. Most will probably think that's much too rosy, but that's my story and I'm stickin' to it!

I would go with a 25% drop by then. Most will probably think that’s much too rosy, but that’s my story and I’m stickin’ to it!

25% is a bit rosy. IMO many properties will face a 50% - 65% fall.

My opinion... For single family detached homes, I would bet on a decline in real terms of about 20 to 25% by the market bottom (2008 or 2009). Condos should decline by about 30% to 40% in real terms.

My opinion… For single family detached homes, I would bet on a decline in real terms of about 20 to 25% by the market bottom (2008 or 2009). Condos should decline by about 30% to 40% in real terms.

I have to add that Zephyr's predictions are likely to be much more accurate than mine.

I expect inflation will be about 4% in the near future, but will drop below 2% by 2009. So the nominal declines should be about 15% for single family detached homes in the areas like the ones mentioned, and about 25% for condos.

For the countrywide averages I expect prices will be close to flat or modestly increased (0 to 15%) by 2009.

There will be examples and selected zipcodes where much more significant drops will be seen. Of course, there will also be some places where prices will continue to rise even during the worst years. For the most part, the more that prices have recently increased, the more they will decline.

I expect inflation will be about 4% in the near future, but will drop below 2% by 2009.

Which inflation?

The switch by speculators from the buy side to the sell side of the market is the major factor tipping the scale now. Many of these people bit off more than they could chew, and were naive about the realities of the market cycle.

It will take about two years before most of these amateurs will have given up, sold out and gone away. Then the market will have only the real need buyers, and the experienced investors.

CPI, but at such low inflation numbers there is little difference.

I also expect a mild recession to start about one year from now.

On Easier Credit and Tax Deductions…

I think there is some confusion on the topic of how easier credit affects housing affordability. Clearly, easier credit contributes to higher prices. The reason that easier credit drives prices up is that it makes housing more affordable at the same price, which then causes the prices to rise to restore the previous affordability balance (all else being equal). To be sure, the effect (like all market changes) affects some buyers more than others. If credit were more difficult the prices would be lower, but it would be harder for most people to pay them.

The tax deduction for mortgage interest has a similar impact. However, it helps borrowers who pay a high income tax rate more than it helps lower income tax borrowers. The price level is driven up to the middle ground of this effect (probably by about 10 to 15%). People who get very little benefit from the tax deduction lose out because the prices are higher. So ironically, because first time buyers tend to be in lower tax brackets, the tax deduction for mortgage interest may actually make housing less affordable for most first-time buyers. Offsetting this is the fact that the tax deduction clearly favors those who borrow a larger share of the price – a characteristic of first time buyers.

Also, tax deduction causes some people to lengthen mortgage term or use interest only mortgages in order to "maximize" deduction.

Zephyr writes:
I expect inflation will be about 4% in the near future, but will drop below 2% by 2009.

I'm sure this has been discussed already, but isn't taking out a home loan most expensive in real terms when the rate of inflation is low, although the loan interest rate might be low, too?
Main reason being that your monthly payments are inflated down only very very slowly, and thus stay painful (like: "no vacation, no furniture"-painful) for a longer time?

Girgl, The real rate of interest on a mortgage will be higher if the rate is fixed and inflation subsequently declines. However, if you have an adjustible rate loan your nominal rate would (normally) decline along with the decline in inflation (and rise with increasing inflation) keeping your real rate somewhat stable over time.

As borrower you should prefer a fixed rate when you expect rates to increase substantially in the future, and an adjustible rate when you expect stable or declining rates. In the very long run borrowing with a fixed rate is significantly more expensive than using adjustible rates because of the premium you must pay for certainty.

I financed all of my property with fixed rates prior to 1987, and switched to adjustible rate loans thereafter.

Zephyr says:
In the very long run borrowing with a fixed rate is significantly more expensive than using adjustible rates because of the premium you must pay for certainty.

Interesting! I had never really thought it through to that depth. Certainly makes sense.
So if you assume that the trend towards a world economy based on free trade does not reverse (and there are people who state there's a long-term cycle between free trade and a more closed world economy), the deflationary pressures brought forward by globalization and increased productivity are here to stay, and thus interest rates will stay low for quite a while.
At this point an ARM mortgage might be the better choice.

At this point an ARM mortgage might be the better choice.--Girgl

Don't count on it--interest rates are still at historically very low levels right now. Globalization cannot continue to make things cheaper forever because globalization requires energy to run on. Energy being a limited natural resource necessitates a long-term upward trend in its' price. Furthermore, the new FED chief has long declared deflation as the devil and basically will not allow it to happen no matter how much money he has to print.

I agree that markets tend to revert toward the mean. However, the key question is determining the mean value. The market mean shifts with time as the underlying fundamentals evolve. What was a valid mean a few years ago at higher interest rates and lower GDP will no longer hold true today.

Look at some other areas for comparison -- medical expenses have risen faster than GDP and inflation for decades. Must these costs collapse in order to revert to the mean? Not likely. The economics have evolved – the mean value has shifted. How about college tuition, which has increased even faster than medical costs? Will there be a collapse in tuition prices to revert to the mean? No. There are sound economic and demographic reasons for the continued real increase in tuition prices. The mean value has shifted.

People who currently forecast serious housing price declines do so based primarily on the fact that prices have gone up so much, along with easier credit and speculator activity. These are all significant considerations. However, it is not enough to focus on the imbalances that come with the temporary exuberance near the cycle peak. One must also examine the evolving nature of the fundamentals that drive real housing demand. There will be a decline, but how far depends not only on the current frothiness but also the underlying enduring fundamentals.

While the easy credit and flippers have been getting all the attention, nearly all of the bubble trackers have neglected to look at the shifts that are taking place in our economy and our population.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations, and an accelerated shift toward higher average age of the population. The propensity to own goes up with age, as does income and wealth. This means that we will have significant growth of real demand for owner-occupied units in the coming years. So the mean value has been rising underneath this frothy market, and will mitigate the magnitude of the decline.

The housing-price decline that seems to be starting now will be short-lived and less severe than usual. This mild correction will be followed by an unusually strong market thereafter.

Girgl, ALL of my debt is adjustible.

We have finally exited a three decade aberration in interest rates. The normal world has finally returned. It only seems abnormal to those with a shorter sense of history.

I expect short-term rates to rise a little further in the next six months or so. Then the cycle will likely turn and rates should decline. Between 5% and 6% is a realistic long-term sustainable level for the 30 year mortgage interest rate. This is the mean value for the reversion tendancy. ARMs should hang around 4% for most of the next decade.

I wish this low inflation and low interest rate scenario would not happen because higher inflation is very friendly to my investment strategy and positions. However, all of the data and economic forces point to this low inflation scenario for the longer term. So I will adjust to it... We can't change it through wishful thinking.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations

You Sir are a fucking idiot.

Leveraged ownership of real estate and stocks. Debt declines in real value as the assets rise in nominal price and real value. Moderate inflation accentuates the economics of this position, and rising inflation enables one to achieve lower real interest rates, as the debt markets lag the shift.

Surfer-X... Thank you for the compliment.

One must also examine the evolving nature of the fundamentals that drive real housing demand. There will be a decline, but how far depends not only on the current frothiness but also the underlying enduring fundamentals.

Huh?

If it were women and children I would feel guilty. But I know that it is just a bunch of bay area types who are as selfish as I am and, hence, when the screw gets turned on them it brings no pangs of guilt.

There should be no guilt whatsoever. Money ought to be amoral. Market participants ought to be apathetic.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations

If that is the case rent will go up extraordinarily. Once it is confirmed that such fundamental change overpowers the effects of the credit cycle, I will probably buy.

On the other hand, credit and markets do tend to affect the fundamentals. I will not be surprised that "household formation" be muted by "market conditions".

Moreover, one can argue that the current boom was caused by the anticipation of the "householf formation" going too far.

We will see.

If you study the demographic profile of our country you would see that the age distributions are such that we are about to experience a significant increase in household formations

FYI, here's a graph on population demographics.
I see a bulge past the usual "household formation" age
http://tinyurl.com/7r4pe

Zephyr, can you explain why the rate of household formation will increase?--flak

I would really like to hear that too Zehpyr. I agree wholeheartedly with basically everything you said EXCEPT for this about the demographics pointing to increased household formation. I don't see that in the data. I thought the demographic trend was toward an aging, larger population of boomers followed by a much smaller younger generation (even if you clump together Gen X, Gen Y, and the new breed coming up now), most of whom have already bought in to the RE market. And of course, many boomers own TWO homes. I don't see how we get to increased household formation going forward from where we are now.