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Yield curve


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2006 Mar 7, 4:00am   18,689 views  183 comments

by Peter P   ➕follow (2)   💰tip   ignore  

Long bond rate is climing and it appears that the yield curve is steepening. What does it mean?

At the very least, fixed-mortgage rate is going up. In the Bay Area, this may not be very relevant because most mortgages are adjustable. However, will there be even more bubble media coverage because of the perceived correlation between long rate and the housing market?

#housing

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1   edvard   2006 Mar 7, 4:58am  

"buy while it is still affordable" ha. I think affordable left the station about 5 years ago.

2   Phil   2006 Mar 7, 5:05am  

I think Zillow.com will become the KBB.com for houses. I can just about hear people arguing while selling their houses that Zillow quoted 500K for their house, so they expect nothing less than that.
There should be a computer model that scales the appreciated value of a home using a fixed rate based on the building and land tax from previous years instead of comparing comparable houses.

I still do not understand how the value of a house can go up by 75K after you do an upgrade with new appliances that cost 15K. You redo the bathroom with 10K in hardware and 5K in labor but the value of the house is now 75K more. Thats ridiculous. The value of the house just went up 15K. Can someone explain this logic to me. : )

3   Peter P   2006 Mar 7, 5:12am  

I can just about hear people arguing while selling their houses that Zillow quoted 500K for their house, so they expect nothing less than that.

The seller may say, "don't be silly, it is already below zillow." :)

4   Peter P   2006 Mar 7, 5:16am  

The long rate is going up to allow room for the short rate (ARMs) to go up even more.

... without the fear of further inverting the yield curve. :)

5   jtfrankl   2006 Mar 7, 5:20am  

Regarding the inflated value of upgrades, I think it is a reflection of the inflated value many place on their time and inconvenience. Not having to put up with a little bit of dust and noise is worth a lot to some people so they pay up for something in "move-in" condition. I often hear people justify paying for the simplest of services by saying, "well, i get paid X/hr, so it is worth it for me to pay someone else much less to do it", as if you get paid 24 hrs a day for simply walking the face of the earth.

6   jtfrankl   2006 Mar 7, 5:22am  

Zillow- I have found it to be well below selling prices in my area (Sunnyvale). Maybe closer to actual value, but definitely not above current market. Is Zillow high in some areas?

7   Peter P   2006 Mar 7, 5:24am  

I often hear people justify paying for the simplest of services by saying, “well, i get paid X/hr, so it is worth it for me to pay someone else much less to do it”, as if you get paid 24 hrs a day for simply walking the face of the earth.

It depends on how much you value your free time. I value it highly, so to me my time is actually worth more than what I am paid.

8   Peter P   2006 Mar 7, 5:25am  

Zillow- I have found it to be well below selling prices in my area (Sunnyvale).

It may just be suggesting that buyers are silly. :)

9   Randy H   2006 Mar 7, 5:31am  

Is Zillow high in some areas?

Zillow is ridiculously high in some south Marin neighborhoods. Strawberry in Mill Valley is an example. Showing massive increases since January while the rest of the zip code has been heading down. Note, these are mainly $2M+ McMansions, many of which also happen to show up on foreclosure.com.

10   Peter P   2006 Mar 7, 5:35am  

The mortage rate has gone up and the price is not coming down at all. Is everybody insane or are we too conservative like our agent said. We have kept pushing our limit from 800K to 900K, now it looks like we need to go beyond 1M.

So it is the absolute worst time to buy now. If you do, you will be locked into high price and high rate.

I do notice that some sellers are listing very low prices (almost pre-bubble prices) to attract bids. NEVER use the asking price as a referrence. AVOID bidding wars at all costs.

NOT INVESTMENT ADVICE.

11   surfer-x   2006 Mar 7, 5:38am  

What is it now, about 14 days until the world can buy oil in Euros.

Hmmm, seems those pesky Persians won't give up the nukes, whoops I meant, won't price their oil in dollars, what's a debtor to do?

http://tinyurl.com/s824u

12   Peter P   2006 Mar 7, 5:41am  

We have kept pushing our limit from 800K to 900K, now it looks like we need to go beyond 1M.

How does it affect your financial picture if you get a mortgage for the 900K - 1M house?

Remember, we can rent indefinitely until the price/rent ratio normalizes.

13   Peter P   2006 Mar 7, 5:48am  

Remember, one guideline states that your PITI costs should not exceed 1/3 of your gross income.

For a 1M house with a 800K mortgage (assuming 20% down), the PITI is about 6000 a month.

14   Randy H   2006 Mar 7, 5:50am  

Nancy,

You're not crazy, and neither are we (at least most of us). Most everyone here believes that the Bay Area's RE market will correct. There is a lot of disagreement about exactly when, how long, and in what form. It is very hard to time any market; RE is no exception.

It's quite possible that things could get better and head up again, for a while at least. But the economics of affordability mandate that RE prices *must* return to "mean" affordability eventually. I can't tell you when eventually will be. I hope for my own family's sake it'll be sooner than later. I suspect I won't have to wait too much longer.

I've said before that each person has to evaluate their own personal finances, life priorities and needs. If you can afford a 30 year fixed mortgage (or 15 year if you're older than 35), with 20%+ down, and you can stand to stay there for a long-term (maybe 10-15 years), then you'll probably do OK buying even now. I really doubt you'll lose any equity in that time frame, at least. I'm not a believer in the theory that the CA correction will be like Japan's. I more think it will be like previous CA corrections, just quite a bit steeper.

As to your agent: remember, (s)he is a salesperson for the seller. Yes, even your "buying" agent is working to sell the home. In fact, every single intermediary in the transaction is serving the seller's interests first and foremost. For example, when you hear "but the seller pays for that", think to yourself, "Wait a minute! I'm the one ultimately paying for everything here as the buyer. Everyone else is going to take a cut of what I get my bank to fund". When I bought my first home, each party actually still usually had to use a lawyer. Although that was expensive, and inefficient, at least the buyer actually had someone on their side.

15   jtfrankl   2006 Mar 7, 5:51am  

I am not sure if I agree with the logic of using what someone else pays for something to determine what you will pay. The place I am in sold for $266k in 1993. I paid over double that in 2001. So they made a nice profit, whatrugonnado? That was then, this is now. That is like looking at a stock chart and saying, "oh someone paid less 5 years ago, the hell if I am buying that!" If you think things in general are overpriced, that's one thing, but personalizing things to that degree doesn't make much sense to me.

16   Randy H   2006 Mar 7, 5:52am  

Remember, one guideline states that your PITI costs should not exceed 1/3 of your gross income.

I would use a max of .28 of gross myself. But .33 is ok, so long as you're reasonably young with upside, and/or very confident in your career and industry.

17   Peter P   2006 Mar 7, 5:55am  

I would use a max of .28 of gross myself. But .33 is ok, so long as you’re reasonably young with upside, and/or very confident in your career and industry.

I agree, 0.28 is right. 0.33 is already stretching. 0.5 is highly speculative.

18   Peter P   2006 Mar 7, 6:02am  

Consider a 1M 2/2 upscale condo with a large master bedroom and the works in the Peninsula. That segment may not be too compressed either.

Determine what young (silly) families are buying. Avoid those homes.

NOT HOMEBUYING ADVICE

19   Randy H   2006 Mar 7, 6:02am  

That is like looking at a stock chart and saying, “oh someone paid less 5 years ago, the hell if I am buying that!” If you think things in general are overpriced, that’s one thing, but personalizing things to that degree doesn’t make much sense to me.

It's because corporate equities and houses are apples and oranges. I have no shortage of quite reliable mechanisms available for valuing equities (note this is different from predicting price movements). Most readily, I can value the entity's free cash flows.

With a home I have little to use as constraints in valuation, aside from medians, history, affordability, rent-to-mortgage, etc. So looking at past sales and applying an intuitive "sniff" test to them is very reasonable.

If I found a home to buy in 2006 that sold for $185K in 1993, then $850K in 1999, fine. I won't worry that gain too much. But if the same home then sold for $1,049K in 2004, and that buyer is now trying to sell for me for $1,550K in 2006...forget it. It's them, not me, that are basing their expectation of selling price on past gains. (these numbers roughly mirror a personal corte-madera situation; btw, that home never sold and is now empty assumedly being prepared for rental).

20   Phil   2006 Mar 7, 6:09am  

US is headed for a war in Iran. This will be interesting as it will help the Nation to concentrate on something else while their home values goes down gradually. They will be more worried about their protection when the threat level will be raised to the highest that they will conveniently forget that the house prices are back to what it was before. A scapegoat in the making.

My thoughts - US should stop trying to police the whole world and worry about itself first. Is the whole world scrutinizing the Nuclear shit that US is building up? No. No one cares. Because the rest of the world is secure about itseld and US is unsecure about itself.

21   Peter P   2006 Mar 7, 6:16am  

Is there a good way to monitor the fall-through deals?

Since buyers are still callow and sellers are still in denial, I expect more deals drop out of contract due to financing.

22   OO   2006 Mar 7, 6:16am  

Nancy,

before you make an offer, go to foreclosure.com to check if it is a preforeclosure sale by owner.

Honestly, for 800K-1M, what you get now is absolutely crap in the Bay Area, because that is the ceiling of what higher earner families can borrow. You will be banging your head against the wall 12 months from now for buying into a sh*thome.

I don't see what you see at all down here at West Valley. Nothing is moving, I mean, literally nothing. Some small reductions like 50K, 25K here and there but no takers. All the pending sales on MLS have been there for 2-6 months (who knows if they eventually cleared or not). Not only that, I have seen some houses on and off pending sale for at least twice!! Inventory in Saratoga and Los Gatos has been swelling, 280 homes sitting tight, delisted, relisted, sitting, delisted again, relisted, etc. the cycle goes on...A few homes are already listed at a price lower than the owner paid for 1-3 years ago.

30 miles away, Gilroy is already seeing 200+ homes sitting...Morgan Hill around 150+ homes, pretty much the same situation as last month, delisted, relisted, sitting...I won't call this market going up, what went up? The price has to clear in the market, if these homes are all sitting, whatever price they ask for is all irrelevant. If some idiots want to outbid you, let them be, one less potential buyer down the road to support the price when it starts to free fall.

23   OO   2006 Mar 7, 6:21am  

Zillow is good for one thing: providing transaction record of a home. You can look up what the seller paid for the home and when he bought his home.

There are quite a few flippers who are trying to sell their homes 200-400K higher than what they paid for a year ago. Yeahright, like that is going to fly.

24   lunarpark   2006 Mar 7, 6:22am  

"Inventory in Saratoga and Los Gatos has been swelling"

I'm seeing the same thing. Also, it seems like NOTHING is moving in Santa Clara County. Inventory had been sitting over the past week - nothing being sold or added. However this week inventory is taking off again. So if the RE market in the Bay Area is "picking up" it must be somewhere other than the areas I follow.

25   OO   2006 Mar 7, 6:26am  

Peter P,

I am just very suspicious of these fall-through deals. For example, there are homes A, B, C, D, E. On a particular day, A, C are on pending sale on the web, the next day (yes, one day later), B, D, E will be on pending sale while A and C have no more pending sale signs in the database! I have seen this too many times, which leads me to believe that some MLS agents are just randomly slapping on pending sale signs to existing inventory to make the market look more active. Since no one is buying, who will know?

I just don't buy the story that so many properties can fall in and out of pending sale repetitively.

26   jtfrankl   2006 Mar 7, 6:28am  

DinOR-

I didn't mean to imply that you shouldn't care about the pricing of an individual house relative to the market; I was trying to say that another person's _profit_ shouldn't influence your bid as long as the price is reasonable to begin with.

27   Peter P   2006 Mar 7, 6:40am  

I just don’t buy the story that so many properties can fall in and out of pending sale repetitively.

It is possible, especially when it is increasingly difficult for buyers to obtain financing. Many people may still think it it is possible to get a 4% IO loan. The payment for a 6% IO loan is 50% higher than that of a 4% loan!

Obviously, we cannot ignore the possibility of information manipulation by certain market players.

28   Peter P   2006 Mar 7, 6:41am  

Do you mean “sale fail” deals?

I think so.

29   Peter P   2006 Mar 7, 6:45am  

I also saw a piece on the ratio of children to adults in SF and it was very low.

And the ratio of dogs to children is likely to be scary.

30   edvard   2006 Mar 7, 6:46am  

Hey Nancy,
what you are seeing with the prices going up is an age-old retailing trick. People are putting houses on the market at what the undoubtedly know is way too high in the hopes that if someone doesn't make an offer, which they won't, then they can "lower" the price so the buyer will think they are getting a deal when in reality they're buying at way more than what the market calls for.
Buying now only means that you're doing just what the lenders, banks, and homeowners want you to do- take the bag from their hands. Someone above mentioned that there are other areas in the country besides the Bay Area. As someone from TN, I can tell you that there is no shortage of areas in the country with people that are just as smart and educated, and areas that are just as scenic, if perhaps not more so, for a fraction of the cost. Keep your options broadened.

31   Randy H   2006 Mar 7, 6:52am  

Believe it or not, there are still people who move to the BA for career opportunities. In fact, my wife just hired a finance manager out of Nashville who'll now need to figure out whether to buy in Marin or commute from somewhere near. Btw, this is the fifth out-of-state hire she's made since January alone. And, they're paying full move/relo packages for these folks.

I haven't relo'd anyone here in a couple years, but back in the early 2000s, I almost exclusively hired folks out of the midwest, mainly from big state schools there. I almost certainly will do the same again when I enter the next business cycle with my next company.

32   Peter P   2006 Mar 7, 6:54am  

DinOR, let's hope for an open MLS then. I am not accusing anyone but the bubble bust is going to uncover many dirty tricks. I guess any manipulation (if it exists) can be seen as a support for the case of an open and transparent system in the future.

I still want to see realtors as honorable people.

33   Peter P   2006 Mar 7, 6:56am  

Believe it or not, there are still people who move to the BA for career opportunities.

We do have better sushi, although Boston has better lobsters.

34   edvard   2006 Mar 7, 6:56am  

Hey Seattledude,
You seem pretty depressed about the whole thing. To sort of put your mind at a slight ease, just look at the basic facts. The average homeowner tends to be older, established, etc etc. I don't want to turn this into another ugly anti-boomer thing, but the reality is that the population in control is in a limited supply. The price of housing may go up, but there are only X number of these said groups who can continue to push prices up. Eventually, it will all boil down to us- the younger middle income folks who don't make 6 figures, who want to lead normal lives replete of the java houses and Ipods. In the end, it will and is people like us who have the last say. When the US runs out of people who can afford, then thats that, and those old folks will probably die sooner than later anyhow. The day is coming.

35   Randy H   2006 Mar 7, 6:56am  

I'm turning cynical on the prospects of the OpenMLS Act passing. The RE interests are already starting to test-market defensive positions. What I've seen is just so terrible and cynical in its own right that it'll almost surely work with the mass-voting-population.

36   OO   2006 Mar 7, 7:02am  

Peter P,

while true fall-throughs happen, do you believe that it only takes a day or two for the deal to fall apart? This is what I see, one day house A is pending, the next day it is not, two days later the same house is pending again, another day later it is not. If we do have a cursed house like that, so be it, but there are a few houses falling in and out in the same fashion with very elusive pending sale signs coming in and out of the database.

I believe when this bubble eventually bursts, interesting stories like this will be revealed by insiders. When someone makes an earnest offer on a home, I don't think the bank can turn around in a day and tell him, oh yeah you're outta luck on your valuation. If the seller is fooled once by an careless buyer, you'd guess he will learn the next time! Oh no, he keeps getting these irresponsible buyers who can't line up financing in time.

37   Peter P   2006 Mar 7, 7:05am  

When someone makes an earnest offer on a home, I don’t think the bank can turn around in a day and tell him, oh yeah you’re outta luck on your valuation.

But it does not take long for the loan clerk to laugh out loud when the payment and income is so out of whack.

38   Peter P   2006 Mar 7, 7:06am  

Peter P and I just expressed hope that the “cartel” is not beyond redemption and now this?

I actually thought of growing up to become a realtor when I was in grade school.

39   OO   2006 Mar 7, 7:07am  

People typically have pre-approval before making an offer. You don't just go in and make an offer assuming the bank is going to approve. Unless conditions change drastically between pre-approval and offer making, buyers have a good idea of what they can borrow.

And I am talking about homes around 1-1.5M, it is not your typical I/O loan homes, I would assume the buyers at least know what they are doing.

40   Peter P   2006 Mar 7, 7:10am  

And I am talking about homes around 1-1.5M, it is not your typical I/O loan homes, I would assume the buyers at least know what they are doing.

Really? ;)

People typically have pre-approval before making an offer.

True.

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