patrick.net

EBGuy says

With rates like we have today, many ARMs were a good bet (although some folks did get slammed when they went to the full amortization schedule). I shudder to think where we'd be without the low rates

My young DINK coworker got their 800K place in The Fortress this summer, proud new 1st Time Homeowners In The Fortress. S/he told me, their savvy "5/1" adjustable made it doable. I dunno what the "/1" means but s/he told me that the rate (or payment?) won't go above 2.5% till 5 yrs have elapsed.

CrazyMan says

t's too bad the bay area doesn't match that chart. At all.

That's right. It Is Different Here. And It Is Different This Time.

Randy H says

The fundamental evidence of deflation is all around, quite unfortunately.

Yes it is. Even in times of deflation there will some things we pay for that have rising prices. Doesn't mean there's inflation. Just ask the many folks whose wages are stagnant.

B.A.C.A.H. says

/he told me, their savvy "5/1" adjustable made it doable

translate... couldnt get a traditional 20% down + Fixed Rate 30 yr mortgage..
Perhaps that $800K should be alot less.. like 1997 prices ($350K plus 35%).

Randy H says

The function driving prices is extremely noisy and at best is approximated by a multi-linear analysis, of which interest rates are but one variable.

Hype! thats what is driving prices...

Deflation can act as either The Great Equalizer or The Great Stratifier. The current establishment is assuredly doing everything in their power to try to split the difference, but that's the least likely outcome. I think right now deflation is causing accelerated stratification -- some things keep costing more and more compared to stagnant wages and salaries, but many other things, which happen to be those things coveted by those in upper wealth strata, are deflating very rapidly compared to their wages/wealth-income.

If deflation is allowed to spin into a spiral cycle, then it starts reversing and destroying the upper wealth bands very effectively, as it did in the Great Depression. But Japan showed us that it's possible for enough modern government intervention to prevent that outcome and to preserve the current arrangement of wealth strata by simply extending the time horizon for the correction.

I think the best outcome the inflationists could hope for at this point is some sort of very weak stagflation. I think even that is a fleeting hope at this point.

Randy H says

Yes, life is horrible in Japan. What a miserable failure.

Give me a break.

It's completely fine if you ignore all the radiation and such.

thomaswong.1986 says

B.A.C.A.H. says

/he told me, their savvy "5/1" adjustable made it doable

translate... couldnt get a traditional 20% down + Fixed Rate 30 yr mortgage..

Perhaps that $800K should be alot less.. like 1997 prices ($350K plus 35%).

Or they are smarter than you and realize the expectation of interest rates increasing over the next 30 years is already priced into the 30 year fixed product. So they decided it was unlikely they would stay in the current (starter) house for more than 6 years and decided against paying a higher interest rate. 6 years because even if it resets higher in year 5, it still can only go up 1-2% per year, which would put them where they would be with the fixed product. For most mortgage products, interest rates would need to effectively double for the floating rate to be higher than current 30 year fixed products.

This doubling is likely in the next 30 years at some pointm, but unlikely in the next 5 (or even 10). If interest rates do double, rest assured house prices will be significantly higher so refinancing or selling is certainly an option.

These ARMs are not "teaser" rates that you heard about during the boom/bust.

EBGuy says

Randy, I still carry a folded copy of this chart in my wallet along with

Ivy Zelman's ARM reset chart. With rates like we have today, many ARMs were a good bet (although some folks did get slammed when they went to the full amortization schedule). I shudder to think where we'd be without the low rates. In my mind the ARM reset chart is why we've got to be Japan for the next decade. Those who can, did refi -- others will default if the rates go up.

Yep. For those ARM owners that stuck out this long, HARP 2.0 helped some people. If the current HARP 3.0 passes, expect the distressed market to dry up significantly, and we would essentially be back to a normal market so quick that it would make your head spin. Then expect a steady year or year upswing after that.

I know a couple persons that saw their ARM dropped to 3.0% and 3.25%. They're as happy as ever. Each month, they're paying down over $1k worth of principal. I guess you can call that beginner's luck. Good for them. :0)

On another note, I know quite a few people that are paying about 2.0% interest only on their HELOC. That's a payment of $166/month for each $100k of borrowed money.

Get that money & throw it in mREITs, and you would make out like a bandit. We're talking about making a 10-12% spread here. Of course, there is risk. There's no free lunch. Gamble at your own risk. :0)

Randy H says

Yes, life is horrible in Japan. What a miserable failure.

Give me a break.

Reticulating Splines

Yeah, tsunamis and nuclear meltdowns are wonderful!

Just kidding, I'm sure Japan is fine overall. I wouldn't want to live in Tokyo though, seems very crowded.

For those willing and able to do the actual financial math, there are a lot of incredibly attractive debt options available right now to those with the credit worthiness and collateral.

For example, the interest only option fixed rate loans are not the IO garbage we saw in the boom, but are back to the products they were intended to be -- an option for high-equity owners who want to maximize interest deduction tax shield but intend to pay down the remaining principle in a block later.

E-man says

On another note, I know quite a few people that are paying about 2.0% interest only on their HELOC. That's a payment of $166/month for each $100k of borrowed money.
Get that money & throw it in mREITs, and you would make out like a bandit. We're talking about making a 10-12% spread here. Of course, there is risk. There's no free lunch. Gamble at your own risk. :0)

Yes, in 2005, they were giving out prime - 1.25% - 1.5% HELOC. Of course at that time, prime was 7% - 8% vs 2.75% now (That's why it was prime minus). Effectve my loan is around 1.5% - 1.75%, net of tax, it is around 1% - 1.25%.

The big mistake was my line was 220K and I utilizied appoximatelty 120K of it. In 2008, they took away the rest. Should have banked that 100K and leave it in a bank account and put in into a REIT/preferreds in the middle of 2009.

It looks like prime rate will stay low for at least the next 3-5 years. Yes, we are making out like bandits with the money (3 years already) and will prospectively for the next 3-5 years. We bought preferred shares that pays 10 cents every month for around $9, about 12% yield. The shares are now $11, or 9% yield.

SFace says

Yes, in 2005, they were giving out prime - 1.25% - 1.5% HELOC. Of course at that time, prime was 7% - 8% vs 2.75% now (That's why it was prime minus. Effectve my loan is around 1.5%, net of tax, it is around 1%.

The big mistake was my line was 220K and I utilizied appoximatelty 120K of it. In 2008, they took away the rest. Should have banked that 100K and leave it in a bank account and put in into a REIT in middle 2009.

Aww. Extracting that $100k would have been golden. We're talking about making a spread of $1,000/month with REIT for doing nothing, and that doesn't even count the appreciation in the stock prices. :o)

I made the same mistake. Paid down the equity line to be conservative and then in late 2009 they took away most of what I paid down due to the financial collapse. I would have been FAR better off to max out the line and put it in the bank. Between interest deduction and interest arbitrage I would have netted between 9-11% risk free return on that capital.

Oh well, can't win em all.

robertoaribas says

So, I had (have) 125K loan against a condo that plummeted to about $45K in value in 2011. I used that money to buy 3 more condos, and the payment on it is STILL only $287 a month.

This has worked out even better than if I had sold that unit, because I would have had to pay: 1. capital gains taxes... 2 depreciation recapture, 3. transaction fees...

Instead, that unit has actually remained cash flow positive the entire time... and now values are on the way back up, along with signs rents are improving.

These are the kind of stuff that I see here too. Homeowners underwatered by $100k-$150k are still doing good (I wouldn't call it great) because the tenants are paying down their phantom principal on the order of $1,000 - $1,200/month. With RE prices rebounded recently and the principal pay down in the last couple of years, they are now only underwatered by $25k to $75k. They're now thanking me for stopping them from short selling a couple of years ago. Hey, I get lucky sometimes. :)

Part of the reason the "ghost inventory" arguments are wrong. Yes, there is certainly some shadow inventory in terms of inefficiency and local market manipulations. But not all underwater properties are distressed. Sometimes I think people on these blogs fail to grasp what buying-opportunities look like. They are risky, bumpy, and messy.

It was very very very easy 7 years ago to make a rent-versus-buy decision. In fact it was so simple it was a very unique event within our lifetimes. I think the risk now is that many who lived through that think such clear conditions are normal and they think similar clarity will appear when the equation reverses. Those folks will probably be waiting a very long time.

david1 says

If interest rates do double, rest assured house prices will be significantly higher so refinancing or selling is certainly an option

Huh?

Infiltrate says

Huh?

Interest rates doubling would happen because the Fed is attempting to control inflation. Inflation cannot occur unless BOTH prices and salaries rise. In an environment of rising salaries and prices, home prices tend to also rise in tandem with general background inflation.

Randy H says

Inflation cannot occur unless BOTH prices and salaries rise

i think so too but a lot of people argue that inflation is only rising prices.

There's one person on patrick.net who will throw a tantrum on the blog to make that point, while backing it up with a list of citations.

B.A.C.A.H. says

There's one person on patrick.net who will throw a tantrum on the blog to make that point, while backing it up with a list of citations.

For some, inflation is a religion in and of itself. Shiff and others mislead a great many people over the past 10 years.

Even during stagflation, there are both rising salaries and prices. The main difference we saw during our stagflationary malaise was that wages rose very unevenly and with sudden jolts (a lot of that due to unions and government wages being tied to CPI).