patrick.net

"PP: “You are only 28?”

For another few weeks anyway… Why?"

Because you seem more sagacious than most 28 year olds.

What, no time to master X-Box? You waste your time chatting about the future of the world when you could be in there playing Grand Theft Auto, cheats and all?

J: "But I am afraid that the boomer effect is going to play out over a much longer, slower run, making it rather unreasonable that your house will conveniently drop in price in the short time frame you wish."

Sadly, I think jack may be on to something here. This may be the biggest threat to the short-term bear case in housing.

The long-term bear case is actually even more compelling: US population is predicted to peak as early as 2020 or so, and begin declining. Given that boomers will also start kicking the bucket in and around that timeframe, we will likely have falling demand and increasing supply. Sadly, this will make housing an even worse long-term investment for those of us entering the housing-as-shelter market over the next few years.

I'm sure Face will love that: Praetorian predicts housing market crash in 2025!

Cheers,
prat

Jack: "I think you guys have hit a new low with this interest rate argument."

Or... is it that we have hit a new high *so* high that there is a wrap-around error and it just *appears* low? Think about *that* for a little bit...

Jack: "Interest rates were higher right now and have a higher payment"

Thats just it: interest rates will be higher and people will have *the same* payment as right now, because prices will come down. People in parts of california are dedicating 40-50% of their income to housing payments. You expect this to go up as interest rates rise?

Jack: "By the way, low fixed interest rates are not going to look so bad for Fake P and myself if rates go up in the coming years."

Of course. Low interest rates are a great time to refinance and sell. And, as with *all* times, if you are in a fixed interest loan and the payments are manageable, you are going to be just fine. But keep in mind that this does not describe the average buyer in California right now, who we know is ARM'd and who many of us maintain is overextended and betting on appreciation.

_smile_ Does the fact that I rock myself to sleep at night repeating this argument over and over again make it necessarily wrong?

OK, out for the day.

Cheers,
prat

PP: “You are only 28?”

For another few weeks anyway… Why?

You are just a few months older than me. ;)

By the way, low fixed interest rates are not going to look so bad for Fake P and myself if rates go up in the coming years.

Yes, but it would be better for you guys if fixed interest rate drops, right?

Interest rates were higher right now and have a higher payment

This will get resolved soon enough. On the other hand, NAAVLPs are clouding the picture by deferring payment burden.

What I dont get is what (beyond simply not buying) a buyer right now is supposed to do with this information in a practical sense?

It is a conundrum, I agree. I do not know exactly what to do either. Any idea?

We must consider inflation (and expectation of such) as well.

Josh, good point.

Watch out for collective selling once it is apparent that prices are falling.

Let me attempt to make the "buy higher interest rate" idea more clear:

1. It is good to hold a mortgage in a declining interest rate environment because of lower payments through refinancing

2. Lower interest rate does not allow a buyer to get into a better house. It only allows him/her to pay more for the same house.

Thanks Peter P/Prat/Jack for your input on the higher interest rate issue.

The arguments aren't all that different than I expected. I understand the argument that says buying at a high rate is better. You're saying that overall you're paying less for the home and in a falling interest rate environment you can re-fi for a lower payment. But on average do rates tend to fall that quickly? We've seen low rates hanging around for quite a while, when rates are high wouldn't the same behavior apply? I don't know how fast rates move historically.

But doesn't the interest rate end up being a wash in the end? Higher interest rates=lower home prices, lower interest rates=higher prices. In the end, you're still making a similar payment, the only difference is how much goes to the principal owed on the home and how much you can write off; again a wash in my book.

And don't home prices tend to rise in an environment where interest rates are unusually high or low? Whether or not you are actually a home owner seems to me to be the biggest factor in which way you WANT interest rates to go. Right now, I wouldn't mind seeing them go up just to drive the prices down. Hopefully prices will come down at a faster rate than interest rates go up. But if I owned and had bought with a NAAVLP, obviously rising rates are not going to look to good.

I guess I'm returning to my old argument that whether you own or rent tends to skew your perceptions of the market.

I am in Sacramento attending a wedding. There are "For Sale" signs everywhere. They are also building like crazy. There is so much construction along I-5 near the city limit.

SactoQt, I think your town is PRIME'd for a house price crash. ;)

But doesn’t the interest rate end up being a wash in the end?

Yes, it does. The payment in either scenario will be very similar.

However, a high interest rate environment tilts the playing field in favor of people who can afford above-median downpayment, because the relative loan amounts will be smaller. If interest rate does come down, there will be refinancing opportunities to permanently lower mortgage payments.

I don’t know how fast rates move historically.

Here is a long-term chart for the 10YR bond. As you can see, interest rate can make significant moves in just a few years.

http://tinyurl.com/av4ye

One note of caution: do not base your buying decision on interest rate being high or low because it is more difficult to predict than the housing market. Moreover, rates can stay low or stay high for extended period of time. The ongoing discussion merely provides an argument against the popular perception regarding low interest rate being beneficial to home buyers.

If the US really starts divesting itself from its industries (other than agriculture), things will get really bad, and not just in the housing market… I don’t see how we can have an economy which consists of farmers, investors in offshore operations, and some people who serve those groups.

Face Reality, I agree. The problem is that our society does not provide enough relative opportunities for a production economy over a financial economy. Worse yet, existing indistries will be forced to enhance return through lowering cost (in order to compete for capital). The result is offshoring, which puts further competitive pressure on remaining domestic industries. Consequently, offshoring will become more than a return-enhancing mechanism - it will become a survival mechanism!

Face Reality, one thing I am very certain about: life will get increasing tough for the middle class in a developed nation.

Jack

I think Prat and Peter were saying they'd rather buy into a market with higher interest rates to take advantage of the deduction and have the opportunity to re-fi later. Best of both worlds so-to-speak. Me personally? I'm not sure. I certainly like the idea of paying less for the house. But if I'm paying higher interest, I'm still paying more-- though the deduction may make the difference here. I'm not a number cruncher by nature, but I do see the logic. And Astrid's point about inflation makes the higher interest buying environment make more sense. And the herd seems to like the lower rates-- a certain argument to do the opposite.

And the herd seems to like the lower rates– a certain argument to do the opposite.

This is actually the best argument yet. ;)

Actually, I rarely use mortgage interest deduction as an argument for anything. Tax is rather complicated. It is just that for the same after-tax monthly payment, I rather have lower loan principal and higher interest rate than higher principal and lower interest rate.

Just my USD0.02

Jack

I was thinking about that when I wrote my last post. I would love to be able to design the market I buy into to perfectly suit my needs. But life doesn't work that way. I am looking at the market with a POV of when can I realistically buy a home that will be a good place to raise my kids that won't bankrupt me at the same time.

Gotta go for a bit...

Can you imagine a scenario in which ANY herd would not like lower interest rates?

Is this a trick question?

PP: "You are just a few months older than me."

Excellent. I always felt I came across as more mature... _smile_

PP re Sactown: "There are “For Sale” signs everywhere. They are also building like crazy. There is so much construction along I-5 near the city limit."

Sacramento is DOOMED _fist clench_ DOOOOMED _fist clench_

Also, I drive home along Alpine road in palo alto to hit the Stanford range after work sometimes and there are at least 10 For Sale signs up between 280 and Stanford.

DOOMED! _smile_

Jack: "Interesting though, that these arguments seem to suggest that Peter, Prat, (and Astrid?) are still looking at real estate as an investment rather than as a place to live."

I don't have the slightest interest in being a landlord. I do wish to own a house of my own reactionary classical design in a reasonable urban environment, built with traditional materials of my choosing, however...

Cheers,
prat

Face: "I think that’s one of the reasons real estate shot up."

But where does this "value" come from, other than from our willingness to go into increasing debt to one another?

A: "What do you consider classical?"

I'm open to pretty much any style so long as the building is built with classical sensibilities: proportion, detail, symmetry, and traditional materials. The particulars of a building site put demands on the style in which the classical building is executed.

I very much like Arts and Crafts and Georgian neoclassic architecture for residential buildings. In particular, Edinburgh's New Town is, I think, the platonic ideal of a town. For public buildings, I'm a staunch turn-of-the-century neoclassicist. John Galen Howard's original plans for Berkeley were perfect, and since then we've done nothing but muck them up.

But I begin to bore...

Cheers,
prat

"Well, there’s no real value there..."

_smile_

"so I think the situation here is a little different"

Ah. But *how* different?

Anyway, Face makes good points. I'm willing to concede that the downturn may be more muted in prime areas of the Bay area. Except for the Marina. Which will fall into the ocean. Twice. After catching on fire. Twice.

Cheerio,
prat

Sacramento is DOOMED _fist clench_ DOOOOMED _fist clench_

My husband and I went to dinner tonight at a friend's who is moving to Oregon (new job). Anyway, he sold his 1500 sqft home in a modest neighborhood for $450,000. I don't know what comprable homes go for in the bay, but for here that is waaaaaaaaaaaaaay too much money. The new owner bought it as an investment property and has to ask $1500 to break even (they put $200,000 down). I'm glad for my friend though, nice guy and he made over $200,000 on the deal. He bought a home in Oregon for $270,000 that's a little over 2000 sqft.

It's funny though, we pulled up to their house and the guy across the street is taking down his open house sign. There are literally open houses on every corner these days. I can't believe our friend sold their house for so much. But I guess the buyer is like everyone else out there, convinced the market will go up and up and up. The buyer is a nurse and her husband is a janitor at the local community college. They made the $200,000 from another investment property and had to reinvest (I don't know the tax laws, I'm guessing capital gains??) I think there is a good chance they are going to end up upside down in the property, but we'll see. At least they had a down payment.

I didn't ask. The home is still in escrow and I didn't want to mess things up for my friend. (we met the new owner-to-be with the thought of maybe renting, but we don't want to pay that much. It's $500 more than we pay now for the same sqft.)

Well, there’s no real value there, but that’s the currently hot thing to invest in, and prices will remain high until people decide that something else is better as a way to secure their future. This may take a long time, however.

It may not take long...

I am getting so many oil and gas spam mail that it is not even funny.

Sacramento has so much buildable land within 20 minutes of downtown that real estate speculation is truly incomprehensible. The weather is better than Las Vegas, but the restaurants are not as good. :)

They made the $200,000 from another investment property and had to reinvest (I don’t know the tax laws, I’m guessing capital gains??)

Probably it is the tax-deferred 1031 exchange. This part of the tax law appears to keep investors from wanting to get out of the game. Sometimes, it is better to pay the tax and leave, you know.

The Sacto housing boom is inexplicable to me. The only thing to offer is proximity to the BA, and how far is that going to go in the long run? There are nice suburban areas out here, but not enough to justify the prices. Other areas that have benefited from BA transplants, like Modesto and Stockton also have high crime rates. So much for intangibles there.

But the main difference between us and the BA is all the land out here. The builders have not been idle and it's only a matter of time until there is a major housing glut.

It's definately risky to pay too much for another property rather than pay the taxes. But I think there are so many novice investors in this market that they're either not experienced enough to see the dangers, or they just get greedy.

SactoQt, I believe that the housing glut in Sacto is already building up.

Do you know when did the boom begin? It appears to be running out of steam already.

On the other hand, I am unable to see signs for a slowdown within the city of San Francisco yet. Can anyone give some input on this?

It’s definately risky to pay too much for another property rather than pay the taxes.

The psychology is quite easy to understand. People try to be savvy and optimize their tax perhaps too well. Consequently, they find more reason to stay in the game.

If I remember correctly 1031 exchange requires the replacement property to be of a higher value. As a result, people find themselves deeper in the game as well. Sad.

Also, I drive home along Alpine road in palo alto to hit the Stanford range after work sometimes and there are at least 10 For Sale signs up between 280 and Stanford.

Prat, don't you like the Palo Alto Muni range better? ;)

I remember seeing lots of "signs" along Alpine road too. I am seeing more and more unsold Palo Alto condos. Looks like it has begun...

The boom here has been going on for about 5 years or so. I really do think traffic from the BA started the upward movement in prices, and the lower interest rates really got the train in motion (now just waiting for the wreck). I'm saying 5 years because I got married 7 years ago, and I remember you could buy a modest 3bd home for less than 200,000. Now that same home is going for $450,000 in some areas. The first 2 years I was married, my husband and I thought we had time to save a down payment and buy. And at first that seemed reasonable because prices stayed pretty level. The next thing we knew prices started shooting up way faster than our income or savings could keep up with. We thought things would level off after a year or two, and then we'd buy in. But the train kept a rollin' (as the song goes...) But we are seeing significant numbers of homes on the market now, so I think it's only going to be another year or two for things to simmer down enough for us to feel comfortable buying. We'll see.

Getting bleary eye'd, think I'll turn in. Night Peter.

Good night everybody... (cat yawn)

P: "Prat, don’t you like the Palo Alto Muni range better?"

Infinitely. But I take 280 to work.

In other news....

http://tinyurl.com/aqw7n

[homer-voice]d'oh![/homer-voice]

Cheers,
prat

Population in the US will *not* be going down after 2020. I don't know where you get that information, but the census bureau predicts otherwise. The young population will flatten out and the older cohorts get larger, but overall population will continue to rise.

http://www.nationmaster.com/country/us/Age_distribution

California population will grow, too.

There is virtually zero chance of that happening.

The chance of the 1987 crash happening: virtually zero
The chance of failure in the portfilio of LTCM in 1998: virtually zero

The new meaning of 10-sigma events: they happen every few years

My scenario?

The market will be down 5% to 10% initially in several major bubble markets. Many people will continue to hold on to the homes. However, inventory will continue to grow with much lower turnover volume.

Mortgage payments will begin to adjust in quantity. Recent homeowners will discover that they are unable to refinance their IO loans and NAAVLPs. With much higher payments and a non-performing market many will attempt to sell...

Not in the next 45 to 90 days, they don’t.

You are probably right.