patrick.net

Anything under the FHA limit -- $729,750 -- will have buoyancy in these times.

3% down on $700K is $17,000, the government gift covers half of that, plus you can chisel closing cash from the seller in this buyer's market.

4.5% interest rates give us an actual monthly carrying cost of $2800.

That cash flows compared to rents so prices are NOT out of line at the moment.

Now, buying now is hazardous since if/when rates go back to 7% and stay there prices will have to adjust down to $500,000 or so.

Troy,

3% down on $700k is $21k.

FHA requires 3.5%...so it is $24.5 down, so the gov gift would closer to a third.

Also, I calculate $700k with $24.5k down @ 4.5% gives a monthly of $3424. Not sure where your numbers came from.

I agree that buying now is hazardous, just not with your math.

Speaking of people Long Gone but not forgotten, I wonder whatever happened to BearMarket... he was on the extreme other side of the spectrum, predicting 50% to 80% price drops, and extolling the virtues of Oil City, PA.

Prices may have stabilized, but how much of that is due to government intervention? When the stimulus stops then what... it's like a global game of musical chairs.... just be sure you not left standing when the music stops.

now that's funny!

There's no way you die as a bear and come back as a duck.

Bearmarket lost his virginity at the Oil City bus stop, then applied to Phoenix University.

Don't you love the people that can't think of anything that has increased in price? Off the top of my head, oil, nat gas, electrciity, sugar, chocolate, wheat, coffee, rice, gold, silver, copper, nickel, aluminum, coal, wood, train tickets, plane tickets, tolls, COLLEGE TUITION, HEALTH CARE.

elvis says

Our politicians are destroying the economy. They are hijacking private business and are stealing our money and our children’s future.

you're writing words but are expressing emotions, unsupportable falsehoods, and vague agit-prop ("Won't anyone think of the children!")

The economy has been imploding since NAFTA -- Perot was right. After transfering our manufacturing to our trading partners we're going to have to devalue our currency in response, since AFAICT making the balance of payments differential in services is a pipe dream.

http://research.stlouisfed.org/fred2/series/MZM

The GUI and internet revolutions increased local productivity in the 90s, deferring the bill, but this decade should have been one of retrenchment, until the powers-that-be got the bright idea of blowing the mother of all asset bubbles in real estate (assuming the various policy changes and monetary policies were intentional and not just one big honking accident), ca 2002-2006.

Once that bubble souffled we're left in a situation somewhat like Japan, 1990. I'm no macroeconomist and I don't know anything -- "I don't have any solution but I certainly admire the problem" as Ashleigh Brilliant says.

Private business is screwed. We are living beyond our means. 5-10% of the population owns 50-60% of the wealth. Things are going to have to change and be changed: higher taxes, lower real estate prices and rents, more wealth creation and less rentierism.

Well, if I were King that's what I would push.

Troy says

Perot was right.

I voted for Ross.

Syncopation says

I calculate $700k with $24.5k down @ 4.5% gives a monthly of $3424. Not sure where your numbers came from.

I don't count principal repayment as part of the carrying cost, and the tax credit on the mortgage interest & prop tax is ~$1400/mo.

As for the DP discrepancy, that's the kickback from buying via eg. ziprealty.

Troy says

I don’t count principal repayment

Where are you getting your interest only loans these days?

"The price dropped almost $150/sq ft since then! It has since rebounded a slight bit, but the overall price went from $500 to $375 per square foot representing a 25% drop...Two points: (1) OTS was dead wrong; (2) prices appear to be rising."

LOL! I wonder if OTS ever figure out prices of homes ran around $125/sqft before the bubble per 1998, or median prices were $200-225K around the Bay Area. A single snap shot of 'market volatility' as Robert Shiller described the recent blip, is hardly a turn in the market. This is the 'catching the falling knife' phase of the bubble. Further declines are in order.

totallyscrewed123 says

Where are you getting your interest only loans these days?

principal repayment is a form of savings, so I don't count it as a carrying cost in my calculations.

This is assuming the appreciation of the land at least matches depreciation on the fixed asset plus deferred maintenance costs.

"was on the extreme other side of the spectrum, predicting 50% to 80% price drops"

yes some places have seen this already. Not so extreme after all. Somewhat right on the money.
Marco median home prices drop 62 percent in past year; biggest fall in Florida
http://www.naplesnews.com/news/2009/feb/26/marco-island-median-home-price-falls-62-january-bi/

Florida FHFA Home Price Appreciation Tracker
http://www.housingbubblebust.com/OFHEO/Major/Florida.html

http://www.housingbubblebust.com/OFHEO/Major/Florida2.html

http://www.housingbubblebust.com/OFHEO/Major/SoCal.html

The last correction lasted a very long time in SoCal 4+ years until it 'bottomed'..
currently SD is only 2.5 years into the decline. Quarter over quarter still declining.

All this plastic crap we're buying is actually consumer and (some) capital goods, a form of wealth. Unfortunately, this wealth is somewhat ephemeral in that its service life is generally measured in years not decades.

The Chinese are practicing labor arbitrage quite well, we don't live or work like Chinese laborers so their lower costs have enabled them to hollow out our light industry.

The Feds collectively owe $800B to the Chinese and $750B to the Japanese. Perhaps we can cover the debt by selling Alaska to China and Hawaii to Japan.

I don't know what's going on with Japan this century. They're in demographic decline and while very wealthy this wealth is cross-held against a massive government debt and deficit.

As for China, AFAICT we've got to see the yuan go to 4 or 3, this will cut that 100% profit margin on ducks down to size, but even so that adjustment will double the Chinese ability to compete for natural resources against the dollar and euro blocs, assuming the yuan becomes a third global currency.

I wonder if WW3 is in the cards. Not sure what we'd be fighting for but IMO much of the Cold War BS was actually a currency-bloc conflict, with Russia and the US proxy fighting to keep countries in their respective currency blocs.

The 19th century was the century of the Sterling, the 20th was the Dollar, perhaps the 21st will be the Yuan.

OFHEO is same-property (longitudinal), not median. Median just says how much buyers can afford, not what they're buying. OFHEO also doesn't count non-conforming, which changes the data somewhat.

Troy says

The GUI and internet revolutions increased local productivity in the 90s, deferring the bill, but this decade should have been one of retrenchment

I have been thinking about this too. Since the explosion of PCs and office automation, many of the business related jobs have become redundant. I expect the same thing to happen in the healthcare industry soon. We are losing manufacturing and business support jobs. This was temporarily filled by real-estate/finance related jobs but what is our future? I don't know if California survive as an idea economy like is has been claimed.

Also ... I wasn't paying attention during NAFTA debates ... and just assumed it allowed free trade within north America. Does it also impact trade between us and other emerging economies?

^ I think NAFTA got the ball rolling, and it rolled right over to Guangdong.

Troy says

^ I think NAFTA got the ball rolling,

Nah! in the SF Bay Area it started back in the late 80s. Much of the HW production moved to South East Asia and helped create 'Asian Tiger' nations to boom. Singapore, Malaysia, Philippines, Taiwan.

totallyscrewed123 says

he GUI and internet revolutions increased local productivity in the 90s, deferring the bill, but this decade should have been one of retrenchment

You give too little credit to the Mainframes which started back in the 60-70s. Not to mention explosion in Software, like ASK ManMan ERP, or the host of Email / Collaboration. Even back in the 80s we had chats and IMs ....Clunky but it was the same stuff you see today.

c:/*.* d:\data\file\*.* Look familiar

Past tense, we already lost our manufacturing/support many years ago.

http://www.latimes.com/business/la-fi-fha3-2009dec03,0,5834812.story

Reporting from Los Angeles and Washington Alejandro Lazo -- Thousands of Southern California home buyers, and millions nationwide, will have to come up with more cash and reach higher minimum credit scores to get a government-backed mortgage under changes unveiled by the Federal Housing Administration.

Some loans might require more than the current 3.5% minimum down payment, but the Obama administration is resisting calls for an across-the-board hike. Instead, it is looking at other ways to increase the amount of cash at closing, such as requiring borrowers to pay more of their mortgage insurance premiums up front.

The FHA, which insures mortgages with low down payments, is scrambling to balance its increasingly important role in propping up the housing market with faltering finances of its own that could require a government bailout.

The agency's share of home loans has surged from 3% in 2006 to nearly 30% this year as credit has tightened and borrowers' bank accounts have been depleted. But that increased exposure has led to more defaults, driving the FHA's reserves below their mandated levels.

"We've learned from recent history that the market is fragile, and we have to plan for the unexpected," Housing and Urban Development Secretary Shaun Donovan, who oversees the agency, said at a House hearing Wednesday.

What I saw happening all over CA was the new version of flipping.
Only low cash offers were taken.
Example....Offer 75k for a 200k place that would normally go to a 'loan'.
Overnight flip it to the next guy/entity for 175k.
Then the property goes back on the market for the original higher price.
The 1st person just made a killing.
Why not repeat that.
Do it a few times and now youve made a sizeable chunk to put towards a big McMeaty place.
Movin' on up.

Its not just happening in Fla 'insider' repo market...it is happening all over.
Meanwhile, the inventory piles up.

"Banks" arent making loans....they will take your cash tho.

speaking of old characters, i wonder what happened to this guy http://sdcia.websitetoolbox.com/post?id=1854186&trail=30
and casey serin?

There were a lot of Alt-A mortgages taken out on the peninsula in the last few years before the peak. Many were Interest Only. By definition, the vast preponderance of the people who took these loans out could not afford a healthy mortgage. What makes you think that three years+ later that they'll be able to afford a higher mortgage payment?? (from their Interest Only loans recasting to regularly amoritizing loans) I've got two relatives in this situation in highly sought after areas on the peninsula and the one family will not likely run into serious problems until 2016. They paid $950,000 for a 53-year old POS, and now comps are going for $100k - $200k less. And this is with interest rates hovering at historic lows. Wait until rates begin going up (they will). And they act like they have no concern (knowledge?) of the graveness of their situation. Instead, they are having another baby.

The nicer areas of the Bay Area have much trouble ahead.

Once again I STRONGLY disagree that rates going up will force the price of real estate down. Not only does most historical precedent say otherwise

God*DAMN*it. :)

You can't compare the 1970s to the 2010s. 50 million indians weren't on the ARPANET back then and phone calls from the third world to & from here weren't free, either. 1.3 billion Chinese weren't fully integrated into our economy. The baby boomers were turning 30 not 70. Unions still had pull to raise wages. Two-income families was still something of a novelty when Mary Tyler Moore was on. Tax rates were beginning to move DOWN from historical highs not UP from historical lows as now. The country was running something of a rational Federal budget in the 1960s and there was an actual trade surplus in the early 1970s.

All things being equal, it should be incontrovertible that higher rates will put downward pressure on prices. Housing is MUCH more precarious now because every factor listed in the previous paragraph is running in REVERSE now.

Quant HF Mgr says

There were a lot of Alt-A mortgages taken out on the peninsula in the last few years before the peak. Many were Interest Only.

Yes. Given prices doubled by 2000 30 year fixed were unworkable. Even with low rates the payments were unworkable for homebuyers.

One relative bought near the peak for $1,070,000 in San Ramon. Late last month a neighbor's house that sold for $1,169,000 at the peak sold [back to the bank via NOTS] for $762,000 and is now for sale for $752,400. That's 35% off, and prices will not stop there. That entire neighborhood of homes like that will go back to $500k-$600k, and I may be being generous here.

Too, I see a lot of people citing "how it used to be" in the 80s or another decade, or citing averages going back a few decades, and acting like that is a sure fire bet for mean reversion (and no further) now. That's not much data. I like the European housing market study (Holland, I think) that studies home prices over 300+ years....home prices only keep up with wage inflation. Guess where home prices are going again? The Bay Area has been in a bubble since the early 80s....all bets are off now. Think long term mean reversion and fundamentals. Wage inflation = house appreciation in the long run.

Quant HF Mgr says

Too, I see a lot of people citing “how it used to be” in the 80s or another decade, or citing averages going back a few decades, and acting like that is a sure fire bet for mean reversion (and no further) now. That’s not much data.

Wow.. not even I would use 80s numbers.. Our last balanced, normal years was 1997. Using the same logic regarding inflation and median prices 3.5-4x incomes.

Historic information is interesting, but historic loans were also made on different terms. The more stable a country becomes, the more leverage it has for loans in general. Places like China still see savings rates in the 30%. That will decrease as they become more confident in their ability to find a new job. Our loans are based on the ease of which finding a new job is possible. Even with 10% unemployment, that leaves 90% employed. Many of these countries have 1 income supporting 10+ people. Lose that job, and everyone sinks. Here 2 people are working, and if one loses, that hurts, but it's not like 10 people are going to starve. It leads to lots of problems, but finding a new job, is possible. The general public isn't out of work for multiple years searching for "anything'. Yes some people are, and we hear about them but lots aren't.

Which leads me to this question. Our current loans seem ludicrous when compared with loans 10-20-30 years ago. But they are the new norm. Are they being factored in here? Those above graphs talk about coming back in line with inflation, but shouldn't there be an aspect for people being able to obtain larger mortgages, longer re-payment times, etc? People take longer times to repay loans, which means a larger potential loan is possible. This doesn't seem to be factored in anywhere.

I'm thinking that inflation line should be a little more curved up in reality.

Why in the hell would the 21st century be the Yuan?

You think the world as a whole would trust the policies of a centrally planned government for a reserve currency?

When the dollar ceases to be the reserve currency, the reserve currency will simply become an artificial construct made up of a basket of currencies. The dollar will be on par with the swiss franc or austrialian dollar in terms of importance. No single currency will dominate.

I really don't understand this bizarre assumption that the US will go from being the wealthiest country in the world to a third world cesspool overnight. It's absurd.

Kevin says

I really don’t understand this bizarre assumption that the US will go from being the wealthiest country in the world to a third world cesspool overnight. It’s absurd.

I don't think this, either. Our land/population ratio is pretty good, and our social and societal capital is still dominant.

http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_cd&idim=country:USA&q=gdp#met=ny_gdp_mktp_cd&idim=country:USA:CHN:JPN:DEU:FRA:IND

Looks impressive but the incipient knee at 2002 ($10.4T) was avoided by injecting several trillion dollars of funny money into the system, money largely now in the hands of our trading partners: China, Japan. and OPEC. "Partner" is a mis-nomer, they are our suppliers. They give us stuff we want in exchange for debt.

I don't know how things are going to go this century, or next decade for that matter.

Perhaps technology will continue to bring amazing rises in productivity and a new golden age will dawn.

Perhaps Kunstler is right and there will be a mass die-off.

The PRC has its challenges but I think they now have a lock on the tertiary secondary level of the global economy. If you want something assembled, you outsource it to a Chinese factory.

AFAICT, it's not unlikely we will follow Japan's levelling off in that GDP graph and China will continue its rise, until the yuan is at parity with the dollar later this century.

There are other possible futures, of course.

Could the plastic duck be correlated to the US spend on social services?...at a certain point shouldnt we stop borrowing and downsize the services provided like any corporation does during times of recession and/or loss of profit.

1. Defense 613 Billion
2. Social Security 612 Billion
3. Medicare (aid) 682 Billion

Troy says

Syncopation says

I calculate $700k with $24.5k down @ 4.5% gives a monthly of $3424. Not sure where your numbers came from.

I don’t count principal repayment as part of the carrying cost, and the tax credit on the mortgage interest & prop tax is ~$1400/mo.
As for the DP discrepancy, that’s the kickback from buying via eg. ziprealty.

Plus $600 PMI.

The tax credit isn't really $1400 either. You're paying ~$3000 a month in interest and taxes ($2500 in interest and 500 in taxes, give or take -- look it up with an amortization calculator if you don't believe me). Your marginal rate is not 46%.

Assuming a marginal rate of 28%, you're looking at $2760 in "carrying costs" using your arbitrary definition -- and, hell, that's also assuming that you naturally have more than $12k in deductions for other reasons (most people don't). In reality you're still probably dropping $3k a month into the void on that one.

4X says

1. Defense 613 Billion
2. Social Security 612 Billion
3. Medicare (aid) 682 Billion

On the other-side of the ledger of that $2T/yr in social spending is a lot of respectable jobs. Walmart and landlords pick up much of the $600B that goes through SS, medical professionals pick up the medicare, and our honored soldiers (hand over heart) cash the paychecks that made up the $600B for defense.

Dividing that $2T by $50k per job, that's 40 million jobs you wanna cut.

SS should be off the table since it is entirely self-funded savings program through 2040 or whatever. We can cut medicare but that's going to result in tons of misery and increased impoverishment throughout the land. I'm all for cutting the military but the last time we did that we got the 90s recession.

The alternative is to raise taxes on the 10% of the country that owns over half the wealth. They can, and will, pay. If not, they're welcome to move to Cannes, Dubai, or Paraguay and let the working people do our best to get along without their irreplaceable skills.

Ask someone who’s gotten to the end of his rope and is forced to file bankruptcy if things can change overnight.

then again, compared to most of the G-7 or whatever it's called these days the US debt isn't so bad. Like Japan, we owe a lot of this debt to ourselves, which AFAICT means that the really rich aren't as rich as they think they are, since when things get tight we'll have to tax them first and most thoroughly. Assuming the dumb-ass teabaggers don't take over next decade, of course.

pkennedy says

Historic information is interesting, but historic loans were also made on different terms. The more stable a country becomes, the more leverage it has for loans in general. Places like China still see savings rates in the 30%. That will decrease as they become more confident in their ability to find a new job. Our loans are based on the ease of which finding a new job is possible. Even with 10% unemployment, that leaves 90% employed. Many of these countries have 1 income supporting 10+ people. Lose that job, and everyone sinks. Here 2 people are working, and if one loses, that hurts, but it’s not like 10 people are going to starve. It leads to lots of problems, but finding a new job, is possible. The general public isn’t out of work for multiple years searching for “anything’. Yes some people are, and we hear about them but lots aren’t.
Which leads me to this question. Our current loans seem ludicrous when compared with loans 10-20-30 years ago. But they are the new norm. Are they being factored in here? Those above graphs talk about coming back in line with inflation, but shouldn’t there be an aspect for people being able to obtain larger mortgages, longer re-payment times, etc? People take longer times to repay loans, which means a larger potential loan is possible. This doesn’t seem to be factored in anywhere.
I’m thinking that inflation line should be a little more curved up in reality.

so, what you are saying is we have a "new paradigm" in lending, we are in a "new economy" and this should shift the housing prices in a parabolic arc upwards... hello 2006 just called...he wants his buzzwords back.

the loose lending standards are not the "new norm", loose lending standards will be history when the government gets their grubby hands off the mortgage market.

Kevin says

Your marginal rate is not 46%.

No, as above I'm using 37%. Here's my numbers from my own "rent vs buy" spreadsheet:

Purchase Price 700000.00
Down Payment 20300.00
Loan Principal 675500.00

IO 2814.58 (5%)
PMI 281.46 (1.5%)
Prop Tax 719.83 (1.23%)
Tax Credit -1411.87

Subtotal 2404.00

Then I add another $400/mo for insurance, HOA/Utils, maintenance, etc. to get the $2800 carrying cost.

Serpentor says

so, what you are saying is we have a “new paradigm” in lending, we are in a “new economy” and this should shift the housing prices in a parabolic arc upwards… hello 2006 just called…he wants his buzzwords back.
the loose lending standards are not the “new norm”, loose lending standards will be history when the government gets their grubby hands off the mortgage market.

LMAO.

Owning a web site doesn't make you 'a millionaire', house debt is not = wealth, and there are no "sharks that shoot lasers" either.

Kevin says

Software that I work on is responsible for more than $6b in export revenue a year. It’s hard to judge my fair share of this (since there are a few thousand co workers who work on the same products), but I’m absolutely confident that it’s far, far less than what I import and consume, since the latter is fundamentally limited by my income.

unfortunately, we're not all software engineers able to shoot the shit in the afternoon of a workday . . .

Also, that $6B is due to IP protection more than inherent COGS or production cost of the software and as such WILL decline over time as Chindia develops its software sealegs.

Already it's getting tough to justify a $120,000 silicon valley salary vs. a team of 6 in Mumbai working for the same amount.

Troy says

4X says

1. Defense 613 Billion
2. Social Security 612 Billion
3. Medicare (aid) 682 Billion

On the other-side of the ledger of that $2T/yr in social spending is a lot of respectable jobs. Walmart and landlords pick up much of the $600B that goes through SS, medical professionals pick up the medicare, and our honored soldiers (hand over heart) cash the paychecks that made up the $600B for defense.
Dividing that $2T by $50k per job, that’s 40 million jobs you wanna cut.
SS should be off the table since it is entirely self-funded savings program through 2040 or whatever. We can cut medicare but that’s going to result in tons of misery and increased impoverishment throughout the land. I’m all for cutting the military but the last time we did that we got the 90s recession.
The alternative is to raise taxes on the 10% of the country that owns over half the wealth. They can, and will, pay. If not, they’re welcome to move to Cannes, Dubai, or Paraguay and let the working people do our best to get along without their irreplaceable skills.

We can also place better requirements for access to these programs. How about this?

-Spouses who did not work can no longer file on their husband/wife social security benefits?
-18 mos of unemployment/welfare checks then your cut off?
-No war shall be waged that does not result in the US increasing available markets and/or receiving oil receipts?

Not my responsibility to pay for the laziness of others. Not my responsibility to pay for wars that do not add economic value to our country. And if 50 million people are employed by these programs it relfects more so on the fact that the USA does not have any industries here due to all the offshoring.

Troy says

Kevin says

Software that I work on is responsible for more than $6b in export revenue a year. It’s hard to judge my fair share of this (since there are a few thousand co workers who work on the same products), but I’m absolutely confident that it’s far, far less than what I import and consume, since the latter is fundamentally limited by my income.

unfortunately, we’re not all software engineers able to shoot the shit in the afternoon of a workday . . .
Also, that $6B is due to IP protection more than inherent COGS or production cost of the software and as such WILL decline over time as Chindia develops its software sealegs.
Already it’s getting tough to justify a $120,000 silicon valley salary vs. a team of 6 in Mumbai working for the same amount.

Your first sentence speaks volumes about your last sentence.

And you know very little about how money is made in the industry if you believe the second sentence. Software IP, other than maybe copyright, exists for the benefit of lawyers, not the actual industry (and even copyright is of questionable value. Most of what we do is dependent on simple trade secret).