patrick.net

robertoaribas says

Interest rates won't rise for no reason, they will rise when the economy is clearly recovering

That is a scary statement.

robertoaribas says

FAR more distressed homes are being sold through short sale, than foreclosed on. In Phoenix, since 2006, 170,000 short sales have happened, while banks have sold 80,000 bank owned homes. This doesn't even count foreclosure auctions that went to a third party... so this metro has disposed of a quarter million distressed properties for sure, and probably more like 300,000. Someone the other day tried to say the 20,000 foreclosures in process here guaranteed the market would tank, but I don't buy it at all.

That may be true, but I think the point of the article is to show that the Foreclosures, and distressed properties backlog is still growing faster than they are actually being sold. That would indicate that inventory should be growing just by the numbers LPS is presenting instead of falling...

... unless they are being artificially being held off the market which is a running theory on Patrick.net and other housing discussion communities.

ZMan says

That is a scary statement.

Not sure why it's scary. It's definitely true though.

ZMan says

Kinda funny you mention interest rates.
I remember back in the 80's, locking into a 10.75% interest rate mortgage and I was thrilled. This was standard rate back in the day, not due to any credit or whatever issues.
Now today we are at 3.5%-4.25% and still lack of demand.

Meaningless. Utterly meaningless w/o accounting for inflation.

The real interest rate = the nominal interest rate minus the inflation rate.

If you were able to get a 10.75% interest rate in 1980, for example, that was great. The inflation rate for that year was 13-14%. So your real interest rate would have been negative. It's very unlikely that someone was paying you to borrow money from them, of course.

Which year did you get a 10.75% interest rate?

robertoaribas says

More often than not in history, rates and home prices have risen together, than the reverse.

Probably true, since nominal interest rates rise as the inflation rate rises. Real interest rates are what matter.

robertoaribas says

This is a fine theory, if you prefer your theories completely plucked form thin air, and ignore all historical data...

Interest rates won't rise for no reason, they will rise when the economy is clearly recovering, and inflation is seen as the bigger threat. More often than not in history, rates and home prices have risen together, than the reverse.

Rob historical data suggests that prices drop when rates go up since most people buy into payments they can afford.

wthrfrk80 says

If you were able to get a 10.75% interest rate in 1980, for example, that was great. The inflation rate for that year was 13-14%. So your real interest rate would have been negative. It's very unlikely that someone was paying you to borrow money from them, of course.

Which year did you get a 10.75% interest rate?

1980's I don't the exact year, it was a few days ago :)
And like I said I was jumping for joy at 10.75%

FortWayne says

Rob historical data suggests that prices drop when rates go up since most people buy into payments they can afford.

No, it most definitely does not. Historical data suggests that there is very little correlation between prices and interest rates.

Full disclosure: I bought a month ago.

Has housing reached a bottom? That's almost impossible to determine but can only be done once prices are clearly rising and probably doing so on a national level. The same as when a peak is reached- when prices start to fall and thus there is a measurable difference.

But I don't think that its not exactly out of line to suggest that we're not in a bursting cycle and instead at the very least things are stagnate to slightly improving. So that would suggest that change one way or another is probably closer than it was a few years ago.

I also think the attitudes in regards to housing has changed. Back in the bad ole' days of the housing bubble- back when on any given day I could browse any number of housing bubble sites and see 100's of comments per thread pertaining to overpriced real estate, it was clear as a bell to all of us that the bubble was going to deflate. That sort of reassurance was in many ways comforting- to know that many other logical people were drawing the same conclusions. There must have been at least 20+ housing bubble blogs for the Bay Area alone. These days many of those sites are either gone or seldom updated. Others simply changed formats and the topics slowly went from being mostly about real estate to more of a mixture of things. Simply put- the intense interest in seeing through the collapse of the bubble dried up within a year or so after it was clear that the bubble had burst. This was followed by a few frustrating years of hoping prices would fall and fall more.

These days I'd say that people have gone from being scared to buy to suddenly being very interested in buying. Only problem is that due to the aftermath of the bubble pop, now a lot of people are scared of selling because they're underwater. Its possibly that those who couldn't afford to be underwater already exited during the initial bust and subsequent few years afterwards and thus those left are those who can afford their homes but don't want to lose money either. So its a catch-22: People want to buy and thus there is no supply and therefor more competition for what few homes are available.

That's at least how it is in the Bay Area. Others areas are of course totally different. Places like SF are probably closer to being at the bottom if they aren't already. If not- oh well. I could care less because my home isn't an investment.

edvard2,
Hope you got a good deal. I've made an offer at 50% off asking price & I'm waiting for a response. I expect a counter offer & if I'm insulted. I'll counter @ 55% off asking price.

edvard2 says

Has housing reached a bottom? That's almost impossible to determine but can only be done once prices are clearly rising and probably doing so on a national level. The same as when a peak is reached- when prices start to fall and thus there is a measurable difference.

Very easy! what ever price you area was selling at around 1997 add inflation and your back to normal pricing.

http://www.youtube.com/embed/d__GPqOVNbE

Call it Crazy says

Actually, I got a interest rate of 10% back in 1980. If I remember correctly, normal interest rates were between 12% and 13%. I got a original owner financed rate of 10%, I though I hit the jackpot!!

I would say you hit the jackpot, yes! That would have been a real interest rate between -3 and -4%. It's like someone paying you to borrow money.

Very easy! what ever price you area was selling at around 1997 add inflation and your [sic] back to normal pricing.

Not quite so easy. Even ignoring inflation (which is probably wise in actuality given the effect of deflation on housing), a simple regression function will land you between 120-130 considering all data available. There are long-run secular trends in the data as well as cyclical factors. If you apply non-linear growth assumptions...say if you believe population and derivative effects such as increasing regulations are affecting market function over this long a period...then you will end up closer to 150.

Call it Crazy says

So, 3.5% interest rates today are a STEAL.... (only if you have a job and the down payment unfortunately...)

You missed my point I think. Sure, 3.5% is much less than 17%, but that's just the "nominal" interest rate. Inflation is also much lower now than it was then(between 13 & 14% in 1980).

real interest rate = nominal interest rate - inflation

Why is that the case? Because inflation eats away debt.

tatupu70 says

FortWayne says

Rob historical data suggests that prices drop when rates go up since most people buy into payments they can afford.

No, it most definitely does not. Historical data suggests that there is very little correlation between prices and interest rates.

hope this helps
http://www.freddiemac.com/pmms/pmms30.htm

thomas.wong1986 says

Very easy! what ever price you area was selling at around 1997 add inflation and your back to normal pricing.

Not necessarily. The housing market doesn't behave " as it should". Regardless of current prices and their relation to past historical performance, if and when prices do go up then that would be your best indicator that the bottom- aka- the lowest average prices will go- has been reached.

HEY YOU says

edvard2,
Hope you got a good deal. I've made an offer at 50% off asking price & I'm waiting for a response. I expect a counter offer & if I'm insulted. I'll counter @ 55% off asking price.

Not sure where you live but sure- we too could have offered 50% less than asking. Anyone could. That means we wouldn't have gotten the house because around here houses are typically going over-asking. Yes- we got a pretty good deal. Close to 200k less than what the house had been listed for during the housing boom. But it was the right "deal" for us, and that was after 12 years of saving and renting a dirt-cheap house.

I got a interest rate of 10% back in 1980. If I remember correctly, normal interest rates were between 12% and 13%.

Yes, those were common rates for home mortgages then. It wasn't uncommon to find someone carrying a 10.5% 30 year mortgage.

But then again, those weren't normal times by any measure. Those rates were the product of stagflation; and that was the 2nd bout of that malaise. It's one of the main reasons we all voted for Reagan.

Funny how this always boils down to predicting where house prices go. The job market in tech definitely has heated up again due to smart investor money parked on the sidelines during the crash and fueled by relentless artificially low interest rates, but mostly for senior positions and the interview process is much longer and harder than during the dot-com bubble. In fact a lot of companies have positions open for 6-12 months, churning though potential candidates and claiming the cannot find any rockstars. If you talk to a few recruiters you will find out that it is very hard to place engineers for them, so they stepped up their game and mass-email anybody who could be a potential match. House prices may show some swings in the future, but even if they go up temporarily, it will not be sustainable as real wages continue to stall or decline. $120K per year just pays the bills for a 3 person family (1 child), usually you need double income. As soon as the new venture capital dries up and backers remove their support for flailing companies you will see layoffs again. And if the main breadwinner loses their job, they will lose their house unless they have lots of savings/investments. Taking again that $120K per annum salary, any property buy above $500K is financial stupidity IMO and everything over 400K is risky - if you rent, try to stay around $2500 (excl. utilities) or below. What you say?

In the US the real rate equals the nominal rate except in the very short-term (as in overnight rates). That's the power of seniorage. The same is largely true in Japan and was true in the Eurozone until the Germans fractured from the ECB on notes.

FortWayne says

hope this helps
http://www.freddiemac.com/pmms/pmms30.htm

Nope. This is completely meaningless to the point at hand. The graph you need has been posted here many, many times. It shows nominal home prices vs. mortgage rates.

I guarantee you that it shows very little correlation.

Call it Crazy says

OK, so what is the "real" interest rate today?

Are you talking mortgage rates?

Mortgage rates are about 4%, and inflation is about 2%, so that makes real interest rates about 2%.

Of course, that assumes your income keeps up with inflation. It might not.

Randy H says

That's the power of seniorage.

I've got to admit, I've never heard that term.

I googled seigniorage but I can't say I understand it.

Seigniorage (I always misspell it) is basically the power to print money. If the value of the printed money exceeds or equals the losses incurred by printing it, all considered, then seigniorage power exists. Every dollar printed causes some inflation of the money supply. But the effect is non-linear when variables such as global reserve currency status, velocity of money and efficiency of money are factored in. Most people apply a simple linear devaluation model to the concept which is why everyone was fooled by the prospect of hyper-inflation back in 2008-2009 when we printed quite a lot of money. The truth is that hyper-inflation is a political situation not a monetary one, primarily because some nations have the power to print money which others will value irrespective of the direct inflationary effects.

Or put more colloquially, when you have a lot of trade and the guns to protect it, then you tend to have the ability to mint money as a store of future value which others will demand.

edvard2 says

Not necessarily. The housing market doesn't behave " as it should". Regardless of current prices and their relation to past historical performance, if and when prices do go up then that would be your best indicator that the bottom- aka- the lowest average prices will go- has been reached.

Over the long run, they do, and like Shiller points out using years of data.

We are too focused on here and now and ignore long term fundamental performance to understand the norm.

Cannot ignore simple price to income (or rent) rations which indicate normal prices with low risk. What your proposing is akin to speculation..

Call it Crazy says

Inflation, 2%... I wish.... does that mean if inflation was really 4%, that mortgages would be FREE????

In theory yes. As long as your wages keep up with inflation. Which is a big "if" thanks to the shenanigans of the top 0.1%.

Think of it this way: if inflation is 5%, the value of your debt dollars has decreased by 5% after one year. That's what inflation is: dollars becoming worth less and less every year. That's good if you're borrowing money, not so good if you're lending it. If the interest rate is the same as the inflation rate, it's essentially a "free" loan.

That doesn't mean you should go out and borrow a few million bucks for no reason. If you lose your job, you're in deep doodoo.

But it does mean it is sometimes better to finance than to pay with cash. It all depends on the interest rates relative to inflation.

robertoaribas says

Interest rates won't rise for no reason, they will rise when the economy is clearly recovering, and inflation is seen as the bigger threat. More often than not in history, rates and home prices have risen together, than the reverse.

But since pay isn't increasing, I don't see housing increasing any time soon.

I wish I could say pay isn't increasing given the number of software sorts I have to support in my cost center budget. But the fact is I'm being forced to adjust pretty aggressively right now just to compete for talent. I gave my top 20% performers between 9-15% earlier this year and I'm still losing people to competition. And we're supposedly one of the top 12 highest paying software firms, so I'm reluctantly and disgustingly forced to realize that there is indeed wage pressure in the system. I thought this would last only a few months and was a blip, but it's now a year in the making and only getting worse.

I won't call it the making of a new tech bubble yet. But having been here when the last one formed back in the early/mid 90s, I will say that parts of the dynamic are starting to feel familiar. Interestingly, many of these same housing arguments were going on then as the post Loma Prieta housing slump was yet to truly turn around. We bought our first home in Redwood City for 20% less than the seller paid and the conventional wisdom was that there was no bottom in sight for housing. Capitulation had yet to occur -- although when it did about 2 years later it was too late for most people to take advantage of it.

I like to consider my interest in buying a house much like fishing adventures. the fish just are not biting.

mell says

Funny how this always boils down to predicting where house prices go. The job market in tech definitely has heated up again due to smart investor money parked on the sidelines during the crash and fueled by relentless artificially low interest rates, but mostly for senior positions and the interview process is much longer and harder than during the dot-com bubble. In fact a lot of companies have positions open for 6-12 months, churning though potential candidates and claiming the cannot find any rockstars. If you talk to a few recruiters you will find out that it is very hard to place engineers for them, so they stepped up their game and mass-email anybody who could be a potential match.

House prices may show some swings in the future, but even if they go up temporarily, it will not be sustainable as real wages continue to stall or decline. $120K per year just pays the bills for a 3 person family (1 child), usually you need double income. As soon as the new venture capital dries up and backers remove their support for flailing companies you will see layoffs again. And if the main breadwinner loses their job, they will lose their house unless they have lots of savings/investments. Taking again that $120K per annum salary, any property buy above $500K is financial stupidity IMO and everything over 400K is risky - if you rent, try to stay around $2500 (excl. utilities) or below. What you say?

What do I say? I think you've been snooping around my mind!

Randy H says

I wish I could say pay isn't increasing given the number of software sorts I have to support in my cost center budget. But the fact is I'm being forced to adjust pretty aggressively right now just to compete for talent. I gave my top 20% performers between 9-15% earlier this year and I'm still losing people to competition. And we're supposedly one of the top 12 highest paying software firms, so I'm reluctantly and disgustingly forced to realize that there is indeed wage pressure in the system. I thought this would last only a few months and was a blip, but it's now a year in the making and only getting worse.

I won't call it the making of a new tech bubble yet. But having been here when the last one formed back in the early/mid 90s, I will say that parts of the dynamic are starting to feel familiar. Interestingly, many of these same housing arguments were going on then as the post Loma Prieta housing slump was yet to truly turn around. We bought our first home in Redwood City for 20% less than the seller paid and the conventional wisdom was that there was no bottom in sight for housing. Capitulation had yet to occur -- although when it did about 2 years later it was too late for most people to take advantage of it.

I'm with you here. I am pretty well aware of what is going on at Apple, Google and Microsoft down in the Silicon Valley since I work at one (hardware engineer), and large numbers of my coworkers have been poached by the other two. I got a very large raise, partially as a result of a threat to go to a competitor (gotta play the game, sadly), and I know that my friends that left are getting big stock awards and bonuses from their employers. Considering all the reports about how precarious the job situation is across the nation, the competition by companies here to retain talent seems sort of absurd. I have only been out of college for 5 years though, so maybe it is always that way. It does seem like there is no shortage of engineers, just a shortage of good ones.

A number of my former coworkers that work in software also bailed for various start-ups. The one that went to Zynga 6 months ago must be pissed, based on what I have seen ZNGA's stock price do. I am still largely at a loss when I try to describe what half of the software start-ups actually DO in the valley, but the VC funds seem to be flowing anyway.

"No man, it isn't a server farm offering remote storage, it's the CLOUD SOLUTION man, totally different!"
"No man, it isn't a color balance tweaker and image storage site, it's a SOCIAL NETWORKING PATHWAY and we'll figure out how to make ad money later, totally different!"
"No man, it isn't money from spamming ads that we are after, it is INTELLIGENT TARGETED ADVERTISING WITH HIGH RELEVANCE and people will totally buy stuff once we connect them with the right products. It isn't about making money NOW, it is about making money LATER but IPOing before our awesome technology takes off! It's the new NEW PARADIGM, man!"

The economic theoretical reason is called "wage efficiency theory"...or as I call it, "wage inefficiency theory". It comes down to inertia: companies are most rational to continue to escalate their bets on the known resources even beyond the intuitively quantitative break even point.

More to the point, contact me if you're interested in being poached. My peer who runs the infra division is more desperate than I am right now.

It is taking much less time for the economy to undergo paradigm shifts. If one happens to be in an ebbing industry, there is no way for his conditions to improve just by macroeconomic changes. It is increasingly important that one does just something in the right place at the right time, as opposed to doing something "right".

The world is becoming a giant casino. Or perhaps it already is... we could have been born in Somalia!

Most eloquently described by Taleb in Fooled by Randomness. I think it's always been this way. I'm not a believer that there ever were "good old days".

Call it Crazy says

The old lady has been haunting me to buy a house again

Uh oh.

Call it Crazy says

trying to "guess" which way the economy is going to go...

"Never make predictions. Especially about the future."

You want a "factor of safety" in any major financial decision, so it's good to think of "what if" scenarios. Like "what if the economy goes tits-up?"

Call it Crazy says

My options, put down a good chunk and go the 15 year route (or shorter) to maximize my equity.... or.... totally leverage the sucker and go FHA 3.5% down and go max on the 30 years and keep the cash in my pocket (and bank the difference).
By what you said above, If inflation continues, it also becomes free money to finance, so let the bank hold the tab..

If you have a wife that likes to blow cash on frivolous stuff, it might be best to do the 15 year route and have as much cash as possible "tied up" in the house. ;-)

Where do you live? Do you live in an area subject to wild RE price swings like CA?

Call it Crazy says

But... she loves to "start" home projects that I get to "finish", that's why I bailed on the last house.... I'm getting too old to be doing this crap and be her handyman........

Solution: RENTING!

Call it Crazy says

That is the BIGGEST issue.... I'm in NJ and it looks like there's going to be a big wave of foreclosures this year. You know what they will do to the property values... That's what makes me "gun shy" on buying again until it looks like this area gets close to the bottom...

Not only that, much of the local RE market is probably tied to the Wall Street Casino Economy, right? What happens the next time the bets go bad?

My two-cent advice: keep renting

Call it Crazy says

But, unlike many others that come here, I don't base it just on the dollars to dollars of monthly payment comparison. I also factor in and budget for repairs, upgrades and maintainance (and with my wife, I have to budget HIGH) as well as amoritize the closing costs on both sides (buying and selling) which very few factor into the equation.

Without getting into logic of including upgrades again, that's the right way to do it. But you should also factor in the principal repayment and tax savings as well.

Not sure why you think others that come here don't include repairs and maintenance though. I think almost everyone smart enough to have found this website is also smart enough to factor in maintenance costs...

Call it Crazy says

I also factor in and budget for repairs, upgrades and maintainance (and with my wife, I have to budget HIGH)

It sounds like your situation is somewhat unique. Any house you might own looks like a real money pit for you.

How long will your wife tolerate renting? Are diamonds cheaper than your wife's remodeling projects? If so, buy her diamonds. At least they tend to hold their value. And you don't have to pay property taxes on them.