patrick.net

I think we'll see 2% mortgage rates before 10%.

10% would utterly destroy everything, including the wealth basis of people buying the bonds.

A real mexican standoff.

I think you're right that interest rates will probably be kept low to protect wealthy bond holders, esp. US Treasury Bond holders. Bond prices fall as interest rates rise.

But I disagree that high interest rates would destroy everything. I think low interest rates are already destroying everything by artificially inflating assets and preventing rational investment.

L.10 Assets and Liabilities of the Personal Sector (1)

Total financial assets
2004: $34.7T
1Q09: $37.1T

(+7%)

Total liabilities
2004: $14.7T
1Q09: $19.8T

(+34%)

The market has rallied since 1Q09 so assets are up ~20%

Bernanke needs inflation, but so did Japan.

We're finding, like them, that there's no clean way to back out years of massive and systemic misinvestment in land valuation and unneeded construction.

It's hard marking that $5.1T gain in liability to $0.

Japan's M1 was ~$1.5T when I was FOB there in 1993. Now it's $4.8T and wages and prices there are lower now than then.

We're not Japan in the specifics but the liquidity trap is the same AFAICT.

Patrick -

First of all I would like to start for thanking you for putting up this site...I have been following it since 2007 and it is awesome!! You seem to be very focused on Bay Area or CA in general because that is where you are....I am also orginally from the Bay but moved to VA in 2005. Can you please add some information on Loudoun County in VA. Where do you see the future of this county?

I don't know anything about Loudoun County. But I always say just look at the rent/price ratios.

If yearly rent is under 5% of purchase price, then prices are too high. Rents are determined by jobs. You can't borrow to pay rent. So rents are usually at market price.

That means the house price compared to rent tells you whether to walk away -- or whether to run away!

I had once read that the market is always right. Unlike you Pat, I was a licensed Real Estate Agent from 1981 to 1997. Mostly in the bare land sector some business opportunities and multi. unit. It was futile to argue value with sellers as neighbor's prices skyrocketed. The new logic was BUY at any price because it will be worth 20 % more next year ! Yippie Kia Yae !
If we become educated as to WHY real estate prices became detached from reality we would understand where the values will return to. This IS what happened !!! One day In 1973 each american family was given double the credit for the purpose of buying a home. The reason was never discussed because its chauvinistic. ( Women were not considered credit worthy prior to 1972 !!! ssshhhh!!! ). Home prices exploded till 1981 when real property prices fell nationwide by 17%. I know this well as a regular comment around the office was that real estate sales were profitable till I got in the business. In the meantime Woz and Jobs were introducing a gadget that created more profit than ANY other invention Since and even BEFORE the alleged big bang. Virtually everyone in the free world bought some for the house and some more for the business And they replaced each and paid about $1,500 for each one every other year from 1982 until Around 2002 when Charles Schwab was asked why they have not replaced their work stations this year. The response was they do not need to. Hardware sales hit a brick wall. Do a little math. The amount of money generated by hardware is only a portion of that era's cash flow. Consider peripherals, software, ink sales, remember the "DOT COM BUBBLE".
That orgasm of cash flow caused over exuberance when shopping for Real Property and actually caused multiple buyers to offer MORE than asking prices. They did not have google earth nor did their Selling agents (for some reason) disclose the fact that their is still plenty of land to go around.
Humans phenomenally pay a multiple of 2.5 times their annual income for a home. When they hit the lotto, bets are off. The Bay area's prices actually passed 8 times median income.
No one argues that 17% of the people who live in the Bay Area can afford to buy in the Bay Area. I am willing to wager that approximately 17% of the Bay Areas wage earning population is/was in the high paying Technology field.

Thank You Pat, Promote freedom of education.

I echo the first post about your 3% rental figure EVEN in the Bay Area. The calculation does not work out at all. I like most of what you say, but that is simply not an accurate calculation of the rental market. For example, I am renting in the Claremont Hills in Berkeley, CA. It is fair to say the home value is 550K to even 600K because of a likely bidding war due to desirable area, front yard, back yard, three car ports, and great view. There is no way I could rent this home for less than 2,000 which your formula concludes. $2,300 to $2,500 is the rental range of this home.

I've been collecting a TON of rent/buy data lately, and more than 40% of rentals in the Bay Area are returning less than 4% of their valuation (from Zillow, tax records, etc).

So maybe you rental is closer to break-even for the landlord, but very many are not, especially in more expensive neighborhoods.

select count(*) from caps where metro_area='sfbay' and cap_rate < 0.04;

20925

select count(*) from caps where metro_area='sfbay';

48322

This is from my Bargain Finder service: http://patrick.net/?cat=3

Hi Patrick,

One variable you have not addressed is the national debt and the probabilty the dollar will devalue an additional 90% within the next year. It has already devalued by some 40% in the past year. If a home was purchased today for $400,000 then conceivably it could be worth $4,000,000 in a year if the dollar drops as predicted.

Hello Patrick,

I was falling for the whole "housing market hit bottom" line from my realtor, and the different institutions that try to profit from real estate. I live in the Florida Miami-Dade County/ Broward County area. I was hoping to buy my first home in the Broward area. From what I understand... these areas are the worst in the list for overvalued homes, and where foreclosures are at their worst. The market value is set to fall here the most. I recently found a 2 bedroom / 2 bath 1047sq foot home built in 1976 in the Broward county area for $95,000 as a short sale. It has many renovations and a new roof from 2006. I have put in an offer but this process can take months. After reading so much information on statistics from your site I'm thinking about forgetting the whole home buying thing for now anyway.

I was hoping to get some insight into this. I rent now for $800 in a duplex in a decent area in Dade County. I split utilities with the homeowner and I always spend around $900-$1000 a month for everything.

If I purchased that home in Broward County for $95,000, I estimated my closing costs to be around $10,000. And because the taxes on that property have a homestead exemption, taxes would be around $1900 a year. Plus hazard insurance, flood insurance, along with my principle/ interest/ and PMI at around the 5.25% interest rate... my payments should be around $870 all together. Of course this is not counting utilities. I would be paying $70 more a month to have my own property as opposed to renting, which at one point seemed to be more of a security than it is now.
Should I back out now for the next couple of years and continue renting?

lillybee62002 says

If I purchased that home in Broward County for $95,000, I estimated my closing costs to be around $10,000. And because the taxes on that property have a homestead exemption, taxes would be around $1900 a year. Plus hazard insurance, flood insurance, along with my principle/ interest/ and PMI at around the 5.25% interest rate… my payments should be around $870 all together. Of course this is not counting utilities. I would be paying $70 more a month to have my own property as opposed to renting, which at one point seemed to be more of a security than it is now.
Should I back out now for the next couple of years and continue renting?

Personally I am of the opinion not to buy unless you plan to be there for at least 10 years. I work in the default services industry and have a glimpse of what is in the pipeline and it's pretty ugly. I bought this year (at about rental parity) but I plan to be where I bought for well over 10 years.

At that low of a cost of a property you probably won't get a tax savings as you would only pay about 5K in interest. You would be putting money to principal though. Assuming your there for 10 years you would still owe 77K on the property (30yr/5.25).

Will your rent still be around $800 in 2020?
Will your place be worth $77K in 2020?
Do you want to be there in 2020?

I wish I had answers to your questions. I'm not sure about them. What is your guess to what values might be like around that time in the area I was planning to buy in? I wish I had some kind of reliable information that can give a good indication of the condition of the market in 2, 5, 10 years.

That house that I’m thinking about purchasing… what do you think the values might be like in 3-5 years based on the information you see everyday?

lillybee62002 says

I wish I had answers to your questions. I’m not sure about them. What is your guess to what values might be like around that time in the area I was planning to buy in? I wish I had some kind of reliable information that can give a good indication of the condition of the market in 2, 5, 10 years.
That house that I’m thinking about purchasing… what do you think the values might be like in 3-5 years based on the information you see everyday?

I wish I had the answers too. Short term is pretty bleak.

I only know everything point to the pice dropping over the next couple years. One of our larger clients has a HUGE back-log of loans that are already delinquent that they need to figure out what to do with. The "Shadow Inventory" is real. In 2008, we were seeing 4000+ loans per week of just HELOC's that were >90 days late from one bank.

FWIW one company is taking the a current BPO value and cutting it by 20-45% (depending on state/zip) adding in closing, foreclosure costs, holding and reo costs when deciding what to do. For FL your looking in the 40% range and it taking 330 days or so to handle the whole process.

I would say if your looking to live there for only 5 years, rent.

Good advice. But to clarify... the house I was looking at is a short sale. I noticed on the tax roll that the assessed value last year dropped to $129,000. They are asking in the short sale for $94,000. Do you think the banks are already taking into account the drop in value that is coming?

Is the 40% drop in value the worst of what will happen? Or that is just this year alone and we will be seeing more drops in value in coming years?

And I was thinking 5 years, but I would not mind being in that area I found for longer... I thought I could always rent it out too in case I need to move. Not sure if renting it out will be worth it at that time.

Wow - patrick, a side of you we never knew!

edited response: I wrote this in response to a spam ad for sex-related material. But since he removed it, I retract my observation.... :) sorry!

Not a side of me. Sex spam deleted. Those guys are like cockroaches.

Socialism is not freedom.

andrew.lieberman says

Socialism is not freedom.

And pertinence is everything.

Socialism is not freedom.

Au contraire, mon frère.

Socialism provides liberty of action by leveling the playing field between the haves and have nots. Without socialism, "all the freedom you can afford, but not one drop more" obtains.

It can go overboard, but when done right (eg Canada, the Eurosocialists, Australia, NZ, Singapore, Japan to some extent) the real-world results speak for themselves.

Any unregulated economy is just a money pump that sucks wealth from the weak to the strong in a self-reinforcing closed feedback loop.

In such an economy there's generally opportunity at the margin to escape the rat-race through entrepreneurial effort, but overall the great bulk of jobs are uncreative and soul-killing. Socialism just recognizes that in a modern economy somebody's got to pick up the trash, drive the buses, clean the toilets, front the storeshelves, and do the millions of other shit jobs that need to be done. These shit jobs have low skill levels and so are fungible and the people stuck in them lack bargaining power, but socialism obviates this dire state of affairs by attempting to provide subsidized social services -- health, education, transportation, recreation -- that the toiling masses would normally lose access to as they become increasingly peonized by predatory capitalism.

Few jobs outside the rat-race are really wealth-creating. Most are just naked rentierism, parasitical intermediary activities like real estate agents, mortgage brokers, landlording, resource extraction. A good example of socialism that kills two birds with one stone in this area might be Norway, with their oil-funded Pension Fund, but I haven't been there so I don't really know. But I do think they've got their act together better than the US.

National Socialist Party... that's socialism.

Bernanke is caught in a trap. He CANNOT raise interest rates as it would destroy the only certain money-maker the big banks have right now. Borrowing at nearly zero and using it to buy Treasuries or similar lame "money-printing" schemes is what is keeping their leaky boats afloat. All jawboning about raising rates, is just whistling past the graveyard. I would expect this "we might raise rates next cycle" to repeat for at least 3 more years, possibly as much as 5.

Heck, he can't lower them either! So the Fed is completely impotent, except for the possibility of helicopter drops of cash.

This next crash in the stock and housing markets will be interesting, because there's nowhere for interest rates to go. Looks like the stock market is crashing at this very moment, down >2% today.

Patrick,

I think it would be a very good idea to see where the NAR and CAR are putting their political money. Who is getting their lobby money for this next Nov. Can you get that info? Do you think it would be important for voters, specificly PatNet voters, to know? I know it would matter in my vote.

I've heard that the NAR and CAR contribute to everyone to make sure everyone owes them something. But it would definitely be interesting to see exactly where the money goes. There are laws about recording contributions, but I think they're pretty weak.

Anyone know how to get data on which politicians have been bribed the most by realtors?

I think you're right Patrick, it seems about 50/50 bribing to both parties:

http://www.opensecrets.org/industries/indus.php?ind=F10++&goButt2.x=7&goButt2.y=8

Click on the "Recipients" tab from that site to see who is receiving the most RE bribes.

It is slightly higher in recent years to Dems. They probably bribe the party in charge a bit more, but they definitely spread the obligation around.

andrewl570 says

National Socialist Party… that’s socialism.

No, that's fascism. It's an entirely different political philosophy. Why don't you look it up in the dictionary or in a history book? You may also want to look up another word, "propaganda." Then you might understand why that particular fascist party wanted to try to come across as "socialist" when in point of fact, they were fascists.

NSDAP shipped the real socialists in Germany to the KZs in the mid-30s. That's what the KZ system was originally established for.

Red triangle—communists, trade unionists, liberals, social democrats, Freemasons, anarchists.

Paying high interest rates is not smart money. The "haves" own real estate, and the "have nots" often pay for it. I'll bet Patrick owns his property.....buy smart and quit paying rent/ someone elses mortgage

You must be kidding! I absolutely do not own the place I live in. I let my landlord take the loss while I enjoy the property.

At this point, the "have nots" are usually the ones who "own" property, because they paid too much. Price is everything.

It's all about comparing the cost of owning vs the cost of renting. Prices are still WAY too high in the SF area, so it makes much more sense to rent. Far cheaper, and you can live in the same location and same quality place.

Recovery 101 – Have we seen much bang for the bucks spent in expectation of stimulating the US economy? The answer is No!
The only solution to really get the economy going and create jobs is to offer a residential mortgage interest tax credit, governed by the same higher income phase out rules as the current mortgage interest tax deduction. A credit rather than just a deduction will cause money to pour into the US housing market and create jobs for real economic growth. The cost to taxpayers for such a program would be far less than the already spent stimulus money and spur the US economy enough to pay for itself. Without such a solution, we may continue to stagnate as we have for the last year and a half.

Henkel7 says

A credit rather than just a deduction will cause money to pour into the US housing market and create jobs for real economic growth

Housing is consumption not production. The housing expense comes out of our producer surplus, and is significant, around 20% of GDP.

The actual reality we face is that the US needs to make more stuff that we trade to pay our way in the world, and producing bigger houses to park our fat asses in is not the answer here.

If we were serious about the nuts & bolts of our economy -- and not just mouthing meaningless mumbo jumbo about "real economic growth" like some retarded Cargo Cult natives expecting the return of their John Frum -- we'd start focusing our tax system on collecting actual rents, both the economic rents of corporate profits, and the ground rents of our cities.

I've mentioned here the efficacy of changing the tax deduction to a tax credit in preserving what housing valuation we still have from the bubble times, but this goal of preserving housing value is exactly similar to the desire to preserve high energy costs, and it's something I've said in fear not hope, since we should be trying to push housing costs lower, not higher.

Troy says

exactly similar to the desire to preserve high energy costs

It's somewhat different. I advocate higher energy costs, at least for gas, by raising the tax on it, to incentivize development of other sources and technologies. Otherwise we will wait too long for that development, and use up this cheap source first (disregarding true cost).

Also, people need more incentive to build and drive more fuel efficient vehicles.

In the case of fuel, it can be argued that a higher cost now prevents a higher cost later. I don't see that as the case with housing, although in the short run it is.

^ good point, given the long-run supply and ecological issues of the current hydrocarbon economy.

Pat,

I am currently underwater in my house. I have an FHA loan. I want to take advantage of the low interest rates. What do you know about the FHA streamline. Is it a good idea?

Thanks

Mike in MD.

myoute1 says

Pat,
I am currently underwater in my house. I have an FHA loan. I want to take advantage of the low interest rates. What do you know about the FHA streamline. Is it a good idea?
Thanks
Mike in MD.

I did a conventional loan streamline re-fi a few months ago with the current mortgage holder of one of my rental properties (have about 200K equity in the property...no cash out) and it was nothing more than a few pages of paper and no appraisal which was very simple and very smooth. I told my neighbor about this a week ago because she has a mortgage with the same company and they told her on Monday that the underwriters are no longer doing streamline refinance loans. I guess I was lucky to get in under the wire on that one, although it might be different from mortgage company to mortgage company so you're company may be doing them.....but I would think it's difficult if not impossible if you're underwater.

Mortgages should automatically re-fi every goddamn basis point down. : )

shrekgrinch says

Yeah, right. The millions of jobs created under Reagan just magically appeared by happenstance then.

Prime rate hit 20.5% in december of 1980. Long bonds hit 14%.

YES OVER TWENTY PERCENT !!! LONG BONDS AT 14% !!!

This was engineered by Volker (Carter's appointee) to kill inflation.

When rates came down HARD AND FAST, allowing businesses to finance again, of course things boomed. We can not have any idea how much Reagan's terrible fiscal policies, increasing defense spending while cutting taxes hampered this boom. But attributing the boom to Reagan policies is nothing more than your foolish religious dogma.

I will admit that Reagan's image and communication skills were a plus. And that whole "don't worry, be happy" thing was much more fun than Carter's malaise.

The millions of jobs created under Reagan just magically appeared by happenstance then

The baby boom in 1980 was aged 18 to 34. Quite a "surge" was in place to happen. This too was part of the "happenstance". Along with the interest rate drop:

and the trillion dollar deficit of 1980 becoming three trillion at the end of his administration.

Troy says

The baby boom in 1980 was aged 18 to 34. Quite a “surge” was in place to happen.

Yes. I have often thought that the pain of the seventies was in part due to absorbing the baby boom into the economy, along with all the women that were starting to work. By the early eighties, when interest rates cam down, we were poised for a stunning increase in household incomes (now coming out of the recession(s) with two wage earner families).

Note: To students working on PHDs in economics, please feel free to elaborate on this. Just a little gift from me to you. Were things overstimulated to absorb the baby boomers and the women into the economy? And then the resulting inflation was too much, having to be killed by taking short term rates up, until long rates (inflation expectations) finally stopped going up ?