patrick.net

JH says

I don't know what annual income limits existed pre-Depression, but home loans were essentially 1 year ARMs. Each year you had to convince the bank to re-lend you the money

Not entirely sure where you got this. The typical loans before the Depression were:
1) 5-year balloon, usually around 50% loan to value, maybe 60% max -- this means that the loan was not fully amortized, and had a substantial balloon payment due in 5 years. Often times, people rolled this into another 5-year balloon, which made sense during a bubble, but could be disastrous in a credit crunch.
2) approx. 12-year amortizing loan -- usually this required less down than the 5-year balloon and fully amortized in 11-12 years or so. This was more often offered by savings & loans. This is obviously a much higher payment than the typical 30-year fixed, so when times were tough, people had trouble paying them.
3) a hybrid of the above two -- you would take a balloon for a portion of the loan and amortize the rest. Often people rolled over the balloon for this too or tried to get an amortizing loan for the balloon, which meant it was also disastrous in a credit crunch.

tatupu70 says

Prices wouldn't go down--there would just be more rental houses and fewer owner occupied.

Of course they would go down - massively. People can only rent for what they can afford RIGHT NOW. No extend and pretend. You cannot find enough wealthy people to charge hefty rents.

tatupu70 says

This should be obvious by looking at what happened over the last 5 years. Hedge funds, all cash investors were prevalent.

This is only due to cheap money and leverage due to favorable conditions if you have more buying power, the hedge funds will bail as soon as there are no renters, In fact they are bailing already.

tatupu70 says

Again--how is that better?

In other countries people save from birth on via special vehicles or regular long-term saving accounts so that you can pay down 50% at the minimum or build your own house on a lot with that money. Much better/stable than taking out a mortgage.

tatupu70 says

This should be obvious by looking at what happened over the last 5 years. Hedge funds, all cash investors were prevalent.

Powered by the government's choice to drop interest rates and make investment in anything other than stocks and RE pointless.

tatupu70 says

Prices wouldn't go down--there would just be more rental houses and fewer owner occupied.

Then the rentals would cost less. Landlords would not be exchanging property as frequently. Purchase prices would then be lower. It would be utopia. jkjk. It would be different, absolutely. And if it happened today, it would wreak havoc. But I really think we need to move beyond FHA bullshit and go with conventional financing as corn tortilla said...at least 20% down.

Tim Aurora says

mell says

LOL. Honestly I don't care at what leverage they want to lend/borrow as long as they don't get bailed out. If I were running a bank though I would only go to 2 x annual income from a single person (nothing of this combined crap), a hefty down payment (nothing of this FHA crap), 25 percent absolute minimum, 30+% percent preferred, plus register additional valuables that can be sold as collateral. Or - as AF would say - it's cash or fuck you, America ;)

You do understand that nobody will come to your bank, pretty soon your bank will fold and use the taxpayer money to bail it out

In 2008 smaller banks and credit unions who did not participate in loose lending practices were ready to take the spot of the TBTFs, but they were denied the change and healthy mobility/rotation was thwarted.

Diomedes777 says

I just did a quick search for my area (I rent in Los Gatos). The median household income for this area (which is pretty affluent) is currently at around $120,000. The median home price however is at around $1,000,000. Nearly ten times actual median income.

I suspect that the median income of buyers is not the same as the overall median income. You can see this effect in the Fortress areas from LG up to Palo Alto and Menlo Park. Older person or couple is in a house that they had bought in the 60s or 70s. In retirement their median income is not so high, pulling down the average. They pass away or move to a retirement home, and sell the house. The people buying the house are one or two-income high-earners.

I can see this on my street - I bought a house like this, and several other neighbors are double-income high-tech workers who bought from older folks. Mix in a bit of magic commie dragon gold (and these people may have zero USA income, pulling down the median) and I can see how this happens. In fact in my immediate neighborhood, 100% of the people that I know that have moved in during the last 5 years are either double-income high-tech or magic commie dragon gold. And the people who have lived there for 15+ years probably couldn't buy their house now on their current income. Anecdotal, yes, but it's something to consider.

SiO2 says

magic commie dragon gold

How many actual Chinese nationals are we talking about? How do you know they are not Chinese immigrants who have been here for a while? When I go to open houses in the Bay Area and see people speaking Chinese (as realtors always say), most of them appear to be either people who were born here or immigrants who have been here for more than a few years. I've seen very little evidence of actual Chinese nationals, at least not to the extent claimed by realtors.

SiO2,

Observed similar anecdotes in my neighborhood. In fact, if they come here recently, many got help from parents.

corntrollio says

Not entirely sure where you got this. The typical loans before the Depression were:

Are you asking for my source or just quoting the wikipedia page "National Mortgage Crisis of the 1930s?" Seriously.

My source is a peer-reviewed article in the Journal of Economic Perspectives by Richard K. Green and Susan M. Wachter titled, "The American Mortgage in Historical and International Context."

A few quotes from the article:

The US mortgage before the 1930s...feature variable interest rates, high down payments and short maturities. Before the Great Depression, Americans typically renegotiated their loans every year.

...residential mortgages were available only for a short term (typically 5-10 years) and featured "bullet" payments on principle on term. Unless borrowers could find means to refinance these loans when the came due, they would have to pay off the outstanding loan balance.

...very low LTV ratios of 50% or less...did not place substantial stress on lenders, because when borrowers were short of cash their property could be sold if necessary to redeem their loan.

So in the old days, people renegotiated annually and the bank foreclosed if they couldn't pay when the loan matured (or before it matured in the case of a default). Then along came the government. Why? Because in the depression, banks couldn't foreclose without taking a loss. So, after a short restructuring period for loans (HLOC), FHA and Fannie Mae's daddy were born to protect lenders from having any losses on the books.

And here we are today with high prices, bailed out banks, and people mortgaged to their eyeballs in debt, not just in California. All in the name of protecting the consumer. Bullshit.

corntrollio says

SiO2 says

magic commie dragon gold

How many actual Chinese nationals are we talking about? How do you know they are not Chinese immigrants who have been here for a while? When I go to open houses in the Bay Area and see people speaking Chinese (as realtors always say), most of them appear to be either people who were born here or immigrants who have been here for more than a few years. I've seen very little evidence of actual Chinese nationals, at least not to the extent claimed by realtors.

Hi Controllio,
actually, i was copying a phrase used earlier on patrick.net. I agree with you, the vast majority of foreign-language speakers here have been here for some time and made the money to buy the house here. These are the dual-income high-tech families I mentioned earlier.

I do personally know two families who made enough money in China to buy Fortress houses. It's not common, but it does happen.

clambo says

Guys like me who put the equivalent of a California trailer in AAPL shares in 2009 are able to buy a house for cash and have lots more left over.

And people say SOcal is full of conceited braggarts.

Social welfare for the rich abounds in post bailout era.

It was best to buy between during 2008 through 2011 especially with the fixed 30 year mortgage rate hovering around 3.5%.

The NY Times rent vs buy calculator is of great value as far as getting a good estimate on the comparison between buying and renting.

mell says

Of course they would go down - massively. People can only rent for what they can afford RIGHT NOW. No extend and pretend. You cannot find enough wealthy people to charge hefty rents

Right--they would go down to rental parity. Which in the vast majority of places is about where prices are today.

mell says

This is only due to cheap money and leverage due to favorable conditions if you have more buying power, the hedge funds will bail as soon as there are no renters, In fact they are bailing already.

Because we're at rental parity. But, if prices went down again, as you are proposing they would, then the hedge funds would come right back again. They'll go where there is money to be made.

mell says

In other countries people save from birth on via special vehicles or regular long-term saving accounts so that you can pay down 50% at the minimum or build your own house on a lot with that money. Much better/stable than taking out a mortgage.

How is that better?? Until banks gave out loans like candy to anyone that signed their name, we never had an issue. If they kept reasonable underwriting standards, then the 20% down system is MUCH preferable to a required 50% down. Why do you want to create an ownership class that preys on the renters?

The only true way to reduce prices is to build more.

I guess a great question to posit at this stage is to ask the question: what will happen when interest rates start to rise?

We are at historic lows for interest rates and while the low rates could persist for some time, I am guessing we will at some point return to more normal levels, which would be interest rates (non jumbo) between 7-8%. That will put downward pressure on prices although a recovering economy could offset that somewhat.

tatupu70 says

How is that better?? Until banks gave out loans like candy to anyone that signed their name, we never had an issue. If they kept reasonable underwriting standards, then the 20% down system is MUCH preferable to a required 50% down. Why do you want to create an ownership class that preys on the renters?

The only true way to reduce prices is to build more.

No, it's to stop supporting this corrupt sector with floods of cheap credit and buying of MBS. There are countries that are far far more densely populated than the US and you don't see such rollercoaster speculation crap, prices remain fairly stable. The US has enough land and houses for the foreseeable future. What it doesn't have are high enough interest rates.

mell says

rollercoaster speculation crap

I have been told that Berkshire Hathaway Home Services, which used to be Prudential has a new business plan.

An army of Real Estate agents is going to go out and look for properties, not for a listing, but to offer to buy the property for cash whereas then the corporation will do repairs and remodel and then flip it for a higher price.

The agent gets 50% of the profit plus the usual commission.

adarmiento says

It was best to buy between during 2008 through 2011 especially with the fixed 30 year mortgage rate hovering around 3.5%.

Complete bullshit because...

Diomedes777 says

We are at historic lows for interest rates and while the low rates could persist for some time, I am guessing we will at some point return to more normal levels, which would be interest rates (non jumbo) between 7-8%. That will put downward pressure on prices

How many of your parents who purchased at 10% are still riding out that 10% interest loan? THEY are the ones sitting at 3.5% now.

If you want to start at 3.5%, you have to buy an overpriced abode. You know a home's "value" is in it's monthly payment, right? When interest rates go down, prices go up.

Unfortunately, if the US spikes interest rates, 1) our national debt payments will balloon and our economy will contract, 2) Wall Street will whine like a bunch of fucking babies. So we might be low for the foreseeable future.

tatupu70 says

But, if prices went down again, as you are proposing they would, then the hedge funds would come right back again. They'll go where there is money to be made.

If prices go down, hedge funds first have to leave; they are the ones who drove it up last year. They are just speculators. Once the appreciation is drained out of this rag, they will be on to the next "big thing"

Tim Aurora says

The home is back in the market much improved and ready to move in

and costing way more than the flipper put into it

Tim Aurora says

What is the point of this posting?

People can read into the posting in any way they choose.

The purpose of a blog, I would think. To get information not readily available elsewhere.

JH says

When interest rates go down, prices go up.

I know your statement seems intuitive, but historically there is basically no correlation between interest rates and housing price movement.

JH says

If prices go down, hedge funds first have to leave

No--they are making money off the rent. If prices go down, homes become cash flow positive again and hedge funds will buy them up for the rental income.

David9 says

I have been told that Berkshire Hathaway Home Services, which used to be Prudential has a new business plan.

An army of Real Estate agents is going to go out and look for properties, not for a listing, but to offer to buy the property for cash whereas then the corporation will do repairs and remodel and then flip it for a higher price.

The agent gets 50% of the profit plus the usual commission.

You've been told? And the agent gets 50% of the profit plus the usual commission? Who told you that? Santa Claus?

mell says

What it doesn't have are high enough interest rates.

Well, you should be on board with reducing wealth inequality then. That's what will drive up interest rates. Right now, there is literally a sea of cash looking for a place to go because the 1% has more than they know what to do with....

When cash gets back to the folks that spend it, interest rates will go up.

tatupu70 says

JH says

When interest rates go down, prices go up.

I know your statement seems intuitive, but historically there is basically no correlation between interest rates and housing price movement.

Are you being serious? In the short term (YoY) there may be truth to your statement, but in the long term there is a whole lot of truth to mine, at least outside the moat of the fortress. I can give you calculations if you want them.

tatupu70 says

No--they are making money off the rent. If prices go down, homes become cash flow positive again and hedge funds will buy them up for the rental income.

Landlords are but not flippers. What you said certainly can work, but as SFH rentals increase, I would expect downward pressure on rent prices. But I don't know that we have a precedent for this, so I'm not really sure what to expect.

Bigsby says

Who told you that? Santa Claus?

Yes, I have been told. I certainly not divulging personal and private information on a public blog.

Time will tell.

David9 says

Bigsby says

Who told you that? Santa Claus?

Yes, I have been told. I certainly not divulging personal and private information on a public blog.

Time will tell.

Time will tell what? Agents wouldn't get 50% of the profits and their usual commission, would they? That part is obviously nonsense, so...

Bigsby says

Time will tell what?

That the posting is based in fact.

Called this person, no answer, sorry!

David9 says

Bigsby says

Time will tell what?

That the posting is based in fact.

Called this person, no answer, sorry!

You should ask them for a job. 50% of the profits indeed + commission!

JH says

Are you being serious? In the short term (YoY) there may be truth to your statement, but in the long term there is a whole lot of truth to mine, at least outside the moat of the fortress. I can give you calculations if you want them.

I know the calculations, but the point is that house prices are affected much more strongly by incomes. And there is a positive correlation between incomes and interest rates that overpowers any interest rate effects.

Call it Crazy says

Hey Tat, I think the true data disproves your comment:

#1-- try using a larger data set than 1 year.
#2-- you still seem to have a hard time understanding the difference between falling prices and price rises that are slowing.

tatupu70 says

mell says

What it doesn't have are high enough interest rates.

Well, you should be on board with reducing wealth inequality then. That's what will drive up interest rates. Right now, there is literally a sea of cash looking for a place to go because the 1% has more than they know what to do with....

When cash gets back to the folks that spend it, interest rates will go up.

Bullshit - where was the sea of cash in 2008? It's all debt driven. The "folks that spend it" will put on more debt and then we will have QE forever an ZIRP as long as they can print. Capital formation is necessary, not spending. In fact spending cuts are necessary across the board.

JH says

Landlords are but not flippers

I'm no expert, but my understanding was that hedge funds were hiring out companies to be landlords for them. They weren't flipping.

mell says

Capital formation is necessary, not spending.

You think with interest rates at next to zero, capital formation is the problem??? Do you understand that those two statements are at odds with each other?

mell says

Bullshit - where was the sea of cash in 2008? It's all debt driven. The "folks that spend it" will put on more debt and then we will have QE forever an ZIRP as long as they can print. Capital formation is necessary, not spending. In fact spending cuts are necessary across the board.

You're partially correct--the debt acted as an equalizer by giving money back from the 1% to those that spend it. When the debt party ended, the SHTF.

Call it Crazy says

Not quite incomes, prices are affected by "payments

Nope--I had it correct.

tatupu70 says

I know the calculations, but the point is that house prices are affected much more strongly by incomes. And there is a positive correlation between incomes and interest rates that overpowers any interest rate effects.

Apparently you don't know the calculations. Incomes have increased with inflation over 30 years (one generation) almost to the dollar. Home prices have MORE than increased with inflation. In fact, they have increased right in step with inflation PLUS interest rate drops such that monthly payments are the same today as they were 30 years ago adjusted for inflation.

You understand that people are way more leveraged today with respect to income than historically. Home prices ARE NOT indexed to income. Monthly payments ARE...except in areas where cash is king (both cheap and expensive areas).

tatupu70 says

JH says

Landlords are but not flippers

I'm no expert, but my understanding was that hedge funds were hiring out companies to be landlords for them. They weren't flipping.

Fair enough. I'm curious to see what happens this year if flippers pull back. Landlords are pushing the margins, too, but if they come in all cash, they are still OK I would think.

JH says

Apparently you don't know the calculations. Incomes have increased with inflation over 30 years (one generation) almost to the dollar. Home prices have MORE than increased with inflation. In fact, they have increased right in step with inflation PLUS interest rate drops such that monthly payments are the same today as they were 30 years ago adjusted for inflation.

Please show me your calculations.

If you plot house prices vs. interest rate--there is NO correlation. If you plot house prices vs. income growth there is a strong correlation.

Call it Crazy says

Yes, you've proven that over and over again here....

I expected this comment a little quicker. You're slipping.