patrick.net

@PermaRenter,

I enjoyed your 4:23pm post. Good link. While many of the posters below blasted the author for "having a firm grasp of the obvious" damn it, someone has to say it.

SFWoman Says:
TOS, By implying that a $700K house at a higher interest rate is as costly today as an $800K house was in 2004 you are looking only at the monthly payment, the sacred idol of Realtors (TM)/Mortgage BROKErs.

"and of used-car salesmen". You forgot to mention those professionals who pioneered the howmuchamonth concept.

SP

Pending sales lowest they've been in 6 years, according to the radio. I'd say that'll affect prices.

In the neighborhoods I follow no one seems to be putting anything on the market. I was going to do some open house window shopping but there was literally nothing on the market in the Forest Hill neighborhood in San Francisco or the Claremont neighborhood in Berkeley. And there was nothing new near where I live in Noe Valley or Glen Park.

This was probably just due to the Labor Day weekend, but I still thought it was odd. This is the first time I have seen so few homes on the market in years.

This is the first time I have seen so few homes on the market in years.

This time of the year it's typical to see inventory going down. And many people in addition to that must be thinking, this is a bad time to sell, let's wait for Fed to cut rates and by the time next spring comes, it will be easy to get a good price.

I think the "conundrum" will work both ways. Fed can cut as much as it wants, the credit markets don't recover that fast and LONG TERM rates will not budge.

Stuck,

I'll add another factor - have you seen today's WSJ's article about the LIBOR rate?

http://online.wsj.com/article/SB118891774435316875.html?mod=hps_us_whats_news

As you probably know, many, if not most ARMs and HELOC rates are tied to LIBOR, not to the Fed Funds rate. Until recently, these two have been pretty well correlated, but in part because of the credit crisis, LIBOR has been going up and diverging from the FFR.

This begs the obvious question: will Ben & co.'s rate cuts have any real effect on distressed borrowers? Probably not as much as everyone (esp in the REIC) is hoping for.

Pending sales lowest they’ve been in 6 years, according to the radio. I’d say that’ll affect prices.

sfbb,
Remember that these numbers reflect recent contract signings, so they are subject to probably a higher than usual cancellation rate, which will result in downward revision. Probably even more importantly, these numbers represent signings that occured in July, before the full-blown credit crunch occured. September's numbers will be very, very interesting...

POS :

Let's leave aside discussions of asking price for a moment. And concentrate on pure numbers.

4- Moreover, you see, your simple calculations on your two scenarios are *useless* unless you do a simple sensitivity analysis (like the ones Randy and I have done on numerous occasions here) on:
...
c- And on the number of years you have to wait before buying back (i.e. 25 Year mtg if you wait 5 year, to compare apple to apple)

So please tell me Ms. Aristotle, if I do the calculations using a 25 year mortgage (instead of 30yr fixed) then will I be paying higher total interest over the years or less ? I was first planning to do that then thought of using the same mortgage terms - as I didn't want you to cry foul. But thanks. Let's ask Bankrate again for total interest payments using 8% for 25yr term.

Total interest 631K. Which is less than scenario B (800K, 160K dp, 6% 30yr FRM) with total interest payment of 741K.

Now try to not be a troll for a change, and admit which scenario is better in numerical terms. Once you do that we can discuss if my "dream" scenario has a chance of being reality. But first things first.

I don't think that interest rate cuts will help distressed borrowers at all. They probably won't help those trying to buy homes either. I think that risk has been finally repriced to a more appropriate level, which means that people with crappy credit ratings aren't going to be getting any loans, at least not until the next easy credit cycle.

What the interest rate cuts are there to do is to save the economy from a full-on recession. I personally would not be surprised to see a half point or even larger cut on September 18th.

Jimbo and Skibum :

I agree completely. The spread between treasuries and other bonds will widen. So even while FFR or treasury yields keep falling, we will see mortgage rates not following suit. It would be the reverse conundrum for some.

Seems like Mish was right about treasuries.

Jimbo,

I agree re: rate cuts not helping distressed sellers or potential buyers. Yes, cutting the FFR will be an attempt at staving off recession, but it will likely be too little too late. The current Fed has explicitly denied "targeting asset prices", so they let this stupid credit and RE bubble inflate, and they will be unable to keep it from deflating.

If you read Ed Leamer's paper from Jackson Hole last week, he makes a strong argument that since WWII, essentially every housing downturn has led to recession, except for two instances, when the DoD came to the "rescue" of the economy with the Korean and the Vietnam wars. Who knows, maybe Iraq +/- Iran will do the trick this time, but is that something anyone really wants?

And until recently it seems, most economists seemed to agree that a recession once in a while is overall a good thing for the economy. Better a recession than stagflation, or worse yet a Japan-style downturn over the next 20 years.

skibum said:
As you probably know, many, if not most ARMs and HELOC rates are tied to LIBOR, not to the Fed Funds rate. Until recently, these two have been pretty well correlated, but in part because of the credit crisis, LIBOR has been going up and diverging from the FFR.

[sarcasm]
Heh, heh... maybe the realtards at NAR should try lobbying the Banker's Association... :evil:
[/sarcasm]

SP

@Jimbo,

I think there's been way too much focus on "people with crappy credit ratings" and their ability to get (or not get) a loan. Right now I'd say anyone "with less than sterling" credit is either going to have a difficult time getting a loan, or if they do, will probably balk at the rates/terms.

Didn't everyone learn that "howmuchamonth" is a screwjob back when they were buying their first car?

C'mon, I can get you into an Atherton mansion for under $3K/month if we can find a hedge fund willing to give us a couple centuries to pay it back.

Hint - That would be a bad deal for you. :-) :-) :-) :-) :-) :-)

There was some earlier commentary on median income in Cali.

Official estimates probably are low. Many people work under the table and under report their incomes, either because they cannot legally work or because people who make too much trackable money are not eligible for services from the government, including Section 8 and health insurance and preschool and food stamps and free community college and student aid and even some first-time homebuyer programs. People who depend on those services will make choices in order to retain them--not get married, remain underemployed, work for cash, etc. So we have several problems if we want to estimate the income (in both dollars and services) for California households:
1. How much income is not being reported at all?
2. How do we value services that the government provides to those with low income (but which people who make somewhat more money commonly pay for out-of-pocket)?
3. How much is household income skewed by the assumption that a household consists of a single nuclear family?

Any ideas on how to come up with a more realistic estimate of (dollar and service) income per household?

I don't think this information matters much for Marin. But it certainly matters for outlying and urban areas.

Hey Randy ...

C’mon, I can get you into an Atherton mansion for under $3K/month if we can find a hedge fund willing to give us a couple centuries to pay it back.

If I do that, then at least my family won't come on the street at the whim of the landlord !

So why exactly is it a bad deal ? ;-)

TOS,
Your response to my earlier data point--the condo by the shore--looked time-consuming for you. The condo was just something I saw while walking my dog. But you are welcome to get all het up about an innocuous post anytime you like, sweetie! Just try not to give yourself a headache! :-)

Jimbo,

What I "should" have said was that over the last several years lenders based their decisions almost solely on the collateral and it's liklihood to continue to appreciate. With very little emphasis on the creditworthiness of the borrower. If I could find a seller willing to take ___% below comps even in The Fortress, I could find a lender.

I don't think lenders are as freaked out by the possibility that they'll get stuck with the unpaid loan as there are about getting stuck with grossly overpriced and un-sellable real estate.

Eliza,

For trackable income they probably use state tax returns. There is certainly some under reporting on taxes. There is a huge grey economy around domestic workers/agricultural workers/etc. that is probably not easily tracked.

I think household income is the 'tax household'. I'm not sure what happens with roomates. Are they a household?

Seriously tighten up no-doc lending standards and a lot of people will be forced to report and pay taxes on their incomes to get the mortgages they want. There will always be those who work around the system, however (two cash registers, mortgage from the family, not marrying live-in boyfriend and father of brats, etc.)

Perhaps they should devise a 'market basket' of jobs, weight it by prevalence of the type of job for the area, use the average wage of the jobs for the area and come up with a measure of affluence/incomes and income spread for the local.

It would probably be very interesting to look at the effects of Walmart wages on areas.

I have no doubt that housing price will fall slowly in the next 2-4 years. It's a cycle and I agree with Randy that it's sticky but I have doubt how much a person who have been renting for last 4-5 years will gain with the present market condition. FED will start decreasing rates, there will be some help for distressed home owners and all of these will slow the bleeding. In the meantime, a lot of buyers with not so good credit will not be able to qualify for mortgage and rent will increase............I definitely agree with TOS that anybody that bought before 2004 will come ahead than any renter.............

Official estimates probably are low. Many people work under the table and under report their incomes, either because they cannot legally work or because people who make too much trackable money are not eligible for services from the government, including Section 8 and health insurance and preschool and food stamps and free community college and student aid and even some first-time homebuyer programs. People who depend on those services will make choices in order to retain them–not get married, remain underemployed, work for cash, etc.

Good question --I've often wonder about this myself. Of course, when something is deliberately not reported/underground, it's hard to reliably quantify by definition. Anyone out there have any decent ballpark estimates on how much extra income the cash economy generates in CA?

"In the meantime, a lot of buyers with not so good credit will not be able to qualify for mortgage and rent will increase"

Yup, with the millions of soon-to-be "accidental landlords" out there plus flat-to-negative real wage growth, no doubt rents are poised to start shooting up anytime now. The real estate investor trades sound real bullish too:

National Real Estate Investor

“It's so competitive out there for value-added deals right now that many investors are making aggressive assumptions about projected rent growth,” says Dr. Sam Chandan, chief economist at Reis Inc., who warns that extreme optimism may be clouding some investors' judgment.

Chandan expects a flood of condos-for-rent to dampen rental growth in 2007. He's also calling for a jump in new completions to slow the pace of rent growth. While he expects the final tally on 2006 asking and effective rents to show 4.1% and 4.2% growth respectively (year-end figures weren't available in late December), he anticipates slower growth in 2007. Chandan predicts that asking and effective rents will grow by 3.4% and 3.6% respectively in 2007.

3.4/3.6% --Wow! Why that's practically even with CPI-reported inflation.

HiThere,

I wouldn't say anybody who bought by 2004 is OK, only because I have seen a lot of people extract every cent of equity from properties as soon as they appreciated. There are a lot of affluent-appearing people who are a mortgage payment away from disaster and have been supporting their bloated lifestyles on extracted appreciation.

HARM,

I saw a study, several years ago, that had the marijuana trade from Humbolt County alone at about $100 million/year. I'm guessing it's not reported for the most part (maybe some of the medical growers report taxes to avoid Al Capone's fate?).

I saw a study, several years ago, that had the marijuana trade from Humbolt County alone at about $100 million/year.

Good enough reason to legalize marijuana.

Eliza

I don’t think this information matters much for Marin. But it certainly matters for outlying and urban areas.

Don't fool yourself. People in Marin lie about their taxes as much as anyone. In fact, the actual absolute dollar amount of understated income in Marin might well be much higher than the meager labor wages everyone seems to get all bent out of shape about inland.

Keep in mind that in affluent areas there are two types of tax distortions:

* Tax avoidance, which is legal use of loopholes
* Tax evasion, which is illegal cheating, underreporting or failure to report

I and about everyone else in Marin does avoidance. That's what our tax accountants get paid for. I usually decide about 6 months into the next year how much "income" I will earn for the previous, on top of whatever normal salary I've drawn. Some of that is passive, some is active-but-deferred. I've had years where I earned $0 taxable income, and years where I've earned a handful of hahas. Depends upon how the net tax picture comes out.

So, if you hit a "synchronicity wave", you could see a flattening of incomes somewhere like Marin not because people are making less, but because a large number of them are deferring income at the same time.

On evasion, I do not evade. I wouldn't tell you if I did, but I can honestly say that I pay all the taxes I legally owe. I'm a rare bird that feels it's my obligation as a member of my community, state and country. I also believe it gives me a full right to bitch about taxes and politics whenever I feel so inclined. People say if you don't vote you have no right to bitch. Bullshit. If you pay your taxes in full, legally, then you have a right to bitch whether you can/do vote or not.

But lots of ass wads here in Marin cheat. My McLandlord is one example. Nearly half the McMansions in this enclave are rented out. I'd bet you 500 green cards that only one or two of these Marin Land Barons pays the appropriate taxes or forgoes their mortgage tax deduction.

I definitely agree with TOS that anybody that bought before 2004 will come ahead than any renter………….

I am glad you said that. Even in BA, I don't see that happening. We will discuss this again in 2009. Hope to see you around then. Unlike Mr. Face Reality who has vanished.

Personal story. We were at an open house by chance. It was a typical McMansion. Kind of OK for us. I came back and checked ZipRealty and Zillow. Here are the numbers.

Bought more than 3 years ago, in 2004 for X. Initially listed at X+120K. Then got reduced to X+80K. Still above the comps. It's been over 1 month since price reduction.

I called the RE agent. I offered X-30K. Yes, 30K below what they had paid in 2004. And 110K below asking price. I was not laughed away. The agent correctly explained to me that this is below their purchase price, so it won't work. But if I had really liked the place, I can have it for X+20K. So they would come down by 60K and I need to up the offer by 50K.

If I had gone ahead that 20K profit would have been less than the property taxes paid over 3 years. Not even counting the (mortgage + insurance + hoa - equivalent rent) factor. Not counting the effect of inflation. Not counting the interest earned on the down payment. And please don't give me the crap about howmuchamonth calculations. I am done with that.

But I didn't go ahead, as I hadn't liked that place that much. And mainly because I can wait. I can well afford to wait.

Hate to bring up DataQuick numbers when we are on a roll here, but I will post them for reference. Modesto's July median was $300k, a decline of 11.76% from a year ago ($340k). June's median was $315k.
Jimbo, always enjoy your on-the-ground observations. On a bike ride a couple of days ago I noticed a disturbing number of "Sold" signs -- including one POS that had been exhorbitantly overpriced in the spring, taken off the market, and then sold in the fall (will be curious to see that sale price -- the Zillow entry had the "claimed by owner" tag). Bah, maybe those sales got funded before the "money spigot" was turned off...

I have been watching the Stockton market very closely since earlier this year. It should be similar to the Modesto market.

Prices have fallen more than 20% (from the peak in mid 2005) for new homes or areas with many new homes. Prices have fallen slightly more than 10% for areas with mainly existing homes.

Sellers are very slow to reduce prices. Homeowners selling their houses drop prices so slowly that by the time they drop asking prices the market has moved lower with the result that their homes are still on the market 6 months to 8 months after first listing. In areas with few new homes prices are slowly starting to come down to early 2005 levels.

By the way, is anyone looking for investment properties in areas where there have been large drops in prices? I think it should be possible to get a rental property in Stockton by about the end of 2008 that will be cash-flow positive assuming you put down 20%. This is in a working–class neighborhood and not becoming a slumlord. Prices just have to fall for the next 18 months at the same rate as they have for the last 18 months.

http://www.ftb.ca.gov/professionals/taxnews/0706/0706_5.html
Under paid taxes.

Anecdotal/dog walk observations: I walked by a Victorian Italianate house for sale yesterday on the outlying part of Pac Heights (Vallejo near Franklin). I noticed the house was for sale before I went on vacation (mid July) and it is still for sale, no pending sign. It's well renovated, attractive, too close to a busy street to be Prime, but in a very walkable, attractive neighborhood. Nobody was at the open house yesterday. I'll walk by later and get the address and see if I can look it up on MLS and propertyshark. Maybe I'll even pop in next week if it's open again. I'll chat with the agent.

HiThere Says:

> I definitely agree with TOS that anybody that bought
> before 2004 will come ahead than any renter………

Here in the Bay Area you will have to go back to 2002 to come out ahead since it costs so much more to “buy” than to rent. In the nicer parts of San Francisco you can rent a condo for a little less per month as the “owners” in the building are paying in property taxes and HOA fees.

Many $1.5mm places (like where I live) “rent” for $3K a month where the (pre tax) cost to “own” (assuming that you take your down payment of $500K out of a 5% CD and get a $1mm 7% loan and have $500/month HOA dues) is over $9K a month.

When you are renting you have the ability to move at any time (without paying almost $100K to sell the place) and it is amazing how fast your money grows when you are investing $5-$10K a month that others are paying out to banks and contractors (for home improvements).

I like the last sentence of the snippet below.

Fed: Credit Crunch Effects Limited

http://biz.yahoo.com/ap/070905/fed_economy.html?.v=6

Fed Chairman Ben Bernanke, in a speech last Friday, pledged the central bank would "act as needed" to limit any fallout on the economy from the credit crunch. He made clear, though, that the Fed's decision would be driven by what is best for the economy. The Fed would not bail out investors and lenders "from the consequences of their financial decisions," he said.

gavinin,

I spoke with an economist at a cocktail party around New Years about why people didn't simply lower their asking prices on houses that won't sell. He told me that people actually study the psychology of it. Apparently there is so much self-identification with housing that people practically need a gun put to their head to get them to conceed that they may have made an unwise financial decision around housing. People would rather walk away from the house, 'saving face', than take a hit or break even.

StuckInBA

I said "I definitely agree with TOS that anybody that bought before 2004 will come ahead than any renter………".........in the example you used the house was bought in 2004.

SFWoman,

Just a quick add-on, even assuming these people that bought in (or is it now "before" 2004) and left their equity unmolested is no assurance they're not under water!

Once again as TOS/POS inserts foot in mouth "Hi There" arrives in the nick of time to innocently do damage control. How convenient.

Randy H Says:

> Don’t fool yourself. People in Marin lie about
> their taxes as much as anyone.

Two common “Marin County” tax tricks are to not tell the IRS that the guy renting a room in your Sausalito condo is paying you $1,500 a month and going to the bank to “cash” checks for side jobs like database development or IT consulting from small firms that probably won’t send the IRS a 1099…

DINOR and StuckInBA,

FYI, do you know what was the mortgage interest rate in 2003/2004.........I don't know for sure about 2003 but I have a 5/1 AMR from JUNE 2004 at 4.06%........and that doesn't reset until June 2009 with a maximum 1.5% per year exclalation clause........that means in 2010 it will be max 5.56%.....and I am sure by then FED will decrease it lower enough for me to re-finance.....

What's the interest rate today DINOR and StuckInBA?

For DINOR, I know you like to get into details.........if you have any doubt...feel free to ask me...I will give all the information about the loan :)

AMR = ARM

JIMBO,

I think I read a couple of threads back that you use PATELCO (a northern california CU). I primarily bank with them, I have a couple of mortgage loans (the one amazingly 4.06% 5/1 ARM from June 2004) from them and they never resold them. They kept the loans with them. I am more concerned with the CDs I have with them. They run specials like 5.85% 3 year CDs and I have quite a lot in them. Now they are privately insured up to $250000. Do you think it's a good idea to move the CDs to a different bank?

Randy H is in a fowl mood.

http://www.zillow.com/site/ViewThread.htm?tid=5364