patrick.net

Roberto,

Your strategy makes sense, and should be lower risk.

But better current income is usually accompanied by lower appreciation.
It is a trade-off. A question of risk-reward and timing preference.

Let's overlay the 30yr rate over that:

(vertical axis is flipped on the rate, +y = more accelerant)

good point! along with the first time buyer's credit, the FED bought 1.2 gazillion dollars of MBS to keep mortgage rates low. That is also ending, so we'll, lets see how housing fares without bribes... (except in California, California is completely unwilling to quit bribing home buyers, despite a HUGE budget deficit!)

The 30 year fix rate will probably rise slowly to about 6% by this time next year. That is still low by historical standards, and not an impediment to affordability. Affordability high very good in most of the country, and on average countywide. Unemployment and the fear of job loss, and potential further declines in housing prices are the biggest factors holding back demand. Shadow inventory will keep supply plentiful, preventing any big price increases. All of these issues will fade during the next two years.

Zephyr says

The 30 year fix rate will probably rise slowly to about 6% by this time next year. That is still low by historical standards, and not an impediment to affordability

I'm hesitant about tooting my own horn but as soon as I made that graph my mouth dropped at its explanatory and predictive power.

The correlation between the 2009 turn around and 5% rates is unmistakable. That's why we're "going up" right now. A 100bps raise in rates cuts buying power 20% across the board; the 2009 turnaround appears to be a rather wispy thing compared to the historical degree of stimulus being applied.

Now, if the PTB really wanted to save the housing market and what's left of the private economy they need to figure how to keep the price curve going up. We assume the 5%-6% zone is within the FOMCs power to hold, perhaps so, perhaps not.

To really save the housing market the PTB need to figure out how to get 2% loans to people, like Japan has been doing for the past 10+ years.

Many people are still leaving CA.

Only a few people are going to CA (I am one of them).

Prices are still way too high compared to both rents and median incomes. Without toxic mortgages, there is no way for average person to buy. Couple with increasing supply and decreasing demand... there is only one way for prices to go. I would not be moving to CA if I was not fairly confident in this.

Troy says

To really save the housing market the PTB need to figure out how to get 2% loans to people, like Japan has been doing for the past 10+ years.

I think the bigger problem is that people equate "saving the housing market" with "keeping the current price level." When gas is overpriced... why don't we save the gas market by keeping it overpriced?

Zephyr says

We are in the window of time where home prices have bottomed and will likely be close to flat for 2-3 years. This is because shadow inventory will temporarily offset the slowly improving demand. Official unemployment will likely decline from the recent peak of about 10% to around 7% by 2012. At that point, shadow inventory will have dissipated and the rising demand will start to push housing prices up.

You forgot the /sarcasm flag at the end of your post.

The111 says

Prices are still way too high compared to both rents and median incomes. Without toxic mortgages, there is no way for average person to buy. Couple with increasing supply and decreasing demand… there is only one way for prices to go. I would not be moving to CA if I was not fairly confident in this.

Not to worry, with high prices and higher compensation needs, you need not come here, our jobs will most likely come to you. Many other state governments are certianly courting employers here to set up shop in their states.

@Zephyr

One possible source of housing that I think has been missed is current owners who aren't willing to put their homes on the market while things are unknown. If you were thinking of selling in 2006, and didn't, then by 2012, you've essentially been waiting 6 years for the "right time". I don't have specifics, but I'm betting that the housing crash forced many sellers to avoid selling, giving more space for foreclosures. Foreclosures might be trickling onto the market now, but I'm betting they're also replacing some traditional home owners as well.

Those home owners are going to be just itching to trade up/down/relocate/etc by 2012. They could create a continuous glut of homes for another couple of years and/or slowly come onto the market now, forcing banks to pull a little inventory off the market to protect prices.

The flipside is that many of those people will be creating equity during this time as well. If they had planned to move after 8 years (buying in 1998), instead of leaving after 8, they're looking at 14 years, a decent chunk of the mortgage should be paid off by then.

It should also create extra money for the stock market, as they may not be able to trade up right now, thus the effects of siphoning off money to a larger mortgage won't be in play and those people could end up with much larger pots of money in the stock market.

I don't have any figures unfortunately for this, but based on the fact that every time I do a housing search it's 50% foreclosures, and the market isn't exactly crying about an astronomical number of houses on the market, meaning someone had to hold off putting their homes on the market to create a 50/50 divide.

California population data, to july 2009. Shows a pretty constant growth. There might be lots of "talk" of people leaving, but the numbers don't show it.

http://www.google.com/publicdata?ds=uspopulation&met=population&idim=state:06000&dl=en&hl=en&q=california+population+statistics

pkennedy says

California population data, to july 2009. Shows a pretty constant growth. There might be lots of “talk” of people leaving, but the numbers don’t show it.

Or do they, your numbers are showing the rise of "Rug Rats"
put into numbers of migration...
http://pewsocialtrends.org/maps/migration/

Troy,

It is the correlation with the financial crisis and the bottoming of the economy that is unmistakable.

The mortgage rates are important but they are trumped by fear (and greed). People don't care about interest rates when the prices are seen as declining and when they are worried about their income. Fear keeps most people from buying bargains during the market bottom. They also don't care about interest rates during bubbles when they expect prices to surge. Exuberance drives most people to want to buy during market bubble highs. For example, interest rates have been at very high levels and even rising during some previous boom/bubbles. And they have declined during some busts, as prices also declined.

Right now there are more houses than needed. So even with low interest rates, supply exceeds demand. But not by as much as it did a year ago. Recent months have brought a mitigation of this mismatch, so the prices have moved up a little from their depressed levels. And the government policies have also boosted that demand.

Even if mortgage rates rose to 6%, the average US family could still afford the average home today. In most places affordability is not an issue for buyers. They are worried about the risk in the current economy. They are scared by the high unemplyment.

Once unemployment declines people will become more confident. Only then will real demand pick up. Shadow supply will keep prices from moving much for a while, but slightly higher intrerest rates will not be an issue.

The population of California (like the entire US) is growing.

pkennedy,

People who have waited to sell are a major element of the shadow inventory.
However, it should be noted that nearly all of them will immediately buy or rent another house.
They have to live somewhere. So, they cause no real net shift in the supply vs demand balance.

The shadow supply that does push the balance are the empty foreclosures and the empty inventory of new homes.

@thomas.wong1986

Sounds good, population is increasing, we agree!

As Zephyr said, the US population is growing. California is growing right along with it. It has outpaced much of the US for a long time, even if it slows down, it's still growing.

@Zephyr

Ah good call. Makes sense. If they have acquired equity, it could be an additional shot to the housing economy for a short period at least.

pkennedy says

@thomas.wong1986
Sounds good, population is increasing, we agree!
As Zephyr said, the US population is growing. California is growing right along with it. It has outpaced much of the US for a long time, even if it slows down, it’s still growing.

I hardly think two people boinking last Saturday nite or a Suturday nite 10 years ago will have any impact on what your thinking of. Increase in population isnt going to drive housing, it will be jobs, jobs and more jobs.

People need housing. More people need more housing.

Thomas, It is the combination of population and jobs. Population increases the need for housing, and jobs increae the ability to pay for housing. These are fundamentals.

Overlay that with sentiment. Fear is holding the market back right now - just like overconfidence drove the silly bubble a few years ago.

You do know who Novellus is and how long they been in SV ? one by one jobs walking away....

ACCOUNTANT at NovellusLocation: Tualatin, Oregon (Portland, Oregon Area)

Type:Full-timeExperience:Mid-Senior levelFunctions:Accounting/Auditing Industries:Semiconductors Posted:April 28, 2010Employer Job ID:6715BRJob Description
Novellus Systems designs, builds, and services manufacturing equipment that is used in the production of semiconductor devices, or chips. We are the backbone of the tech revolution. As one of the top ten global semiconductor equipment companies in the world, our systems are essential to producing fast, complex, powerful, and cost-effective chips used in the latest cell phones, computers, MP3 players and HDTVs.

JOB TITLE: Senior Accountant - Corporate Accounting & Reporting

PRIMARY RESPONSIBILITY:

We are looking for a highly skilled and motivated senior accountant within our Corporate Accounting and Reporting Group based in Tualatin, Oregon

pkennedy says

People need housing. More people need more housing.

Brilliant!!!! who said engineers cant count!

I don't see "bottoms" I see graphs, and trends that are driven by the macro picture.

The upward glide on the left side of the curve was clearly aided by the increasing cheapness of the cost of money.

This gave the market upward momentum, which was continued by the 2001 & 2003 tax cuts & credits, and the rise of IO and suicide lending available to all takers, 2004-2007.

Casey Serin, the last Greater Fool was found in 2006 and his collection of suicide mortages finally blew him (and his lenders) up in 2007, heralding the top so clearly evident in that graph.

The inflation bugbear was taken off the table by 2008 as everything started collapsing upon itself. In early 2008 the PTB responded by raising the FHA limit to $729,750 (wow!), and printing $1.25T of money to reload the mortgage market 2009-earlier this year.

This and the 4 ~ 5% interest rates arrested the fall as the cost of money made purchasing the incoming distressed inventory a no-brainer for people with no brains and/or who wanted to roll the dice.

Yet the slope of the housing crash remained the same until second quarter 2009

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

The $8000 tax credit became effective 2/09

The PTB threw what they had at the problem and managed to halt the spiral. This is normal. I'm no major EW proponent but it's clear that nothing moves down in straight line anyway, though housing is pretty sticky so that decline from 2006 to 2009 took me by surprise, I can tell you.

If the market follows the example of the 1990s, we go flatline from here while interest rates creep upward.

I was in Japan at the time but from the graphs

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

http://research.stlouisfed.org/fred2/series/CASTHPI?rid=171

I see that rates really didn't "creep upward" in the 90s; there was loose policy coming out of the '91 recession, but the RE market was f---ed and didn't respond (since .mil jobs were leaving the state), and the RE market remained f---ed through 95 as monetary policy reversed as the overall economy got moving again, partially thanks to the rising trade and trade deficit in China coupled with the new efficiencies of big-box retailing.

California became happening as the dotcom bubble brought billions and billions of bucks into the state. LA was kinda behind the times until 2000 or so (condos were still cheap in Irvine when I was looking there in early 2000) but there was full employment in the valley in the late 90s, and apartments were getting real scarce in mid-2000 when I arrived in the south bay.

If there’s a bond crisis however, all bets are off and homes might be at 2006 levels in 5 years or less.

Either we live on different planets or we have a different understanding of how economics works and what state the world is in right now.

Lending is f---ed now. 2009 saw more money go out of mortgages than be put in by new borrowing. This is not just recessionary this is Depression economics.

If there's a "bond crisis" everything will be f---ed and we'll be lucky to retain our current semi-functioning constitutional gov't let alone be able to offer GSE funding of mortgages at anything under 10%.

You apparently don't understand how tapped out the middle class and below is right now, and how little power J6P has negotiating his wages from The Man.

You have this naive understanding of economic history, that the 70s wage-price spiral can repeat itself even though everything is different now.

Japan is the model, if not G.D. I.

This decade was *supposed* to be the decade we got our house in order in preparation for the Boomer retirement wave hitting in 2020. The leading contingent is turning 64 this year, and Peak Boomer production was 1955, aged 55 now. If you don't count the interest OASDI is "earning" on that filecabinet of unmarketable bonds it holds, the SSTF is now in actuarial deficit and will remain so for the remainder of our lives unless payroll taxes are raised again, and I fail to see how raising payroll taxes is good news for home prices.

Medicare is an unsolved $100T problem, we're spending a trillion (!) a year on military BS, we've got 99-week unemployment that people are still falling out of at the end.

But yeah, 2006 prices are possibly just around the corner because wage inflation is coming if the wheels fall off and the engine blows up.

Pull the other one.

The real estate market was in the doldrums in the early 1990s because of the excessive inventory of homes from the previous bubble. The Resolution Trust slowly released those properties into the market, mitigating the severity of the decline, but prolonging the agony.

Today we also have an excessive inventory of homes from the recent bubble. They are being steadily released into the market, keeping prices down. But the process will not take as long this time.

Japan is not the model. The problems of Japan are very different. They have no population growth, shifting to actual population decline. So housing is in a permanent oversupply. When supply exceeds demand, prices fall. Even with low interest rates.

We do have fiscal mess in our government finance. It is a rapidly growing problem now, and will develop into a real burden by the 2020s when the retirees are more numerous.

Along with boomer retirement will come a labor shortage, leading to real wage increases.
The bad news is that taxes will go up faster than real wages.

Zephyr,

Sorry, but I almost laughed out loud when I read your comment. Are you serious?

In California, unemployment is way up and is contuning to climb.

No job= no money + tighter lending standards = no buying houses.

There won't be a labor shortage.. Business will continue to do what they are doing now...hire cheap labor in other countries.

Housing market is going down and will go down for many years.

Sorry to bust your bubble. : - )

davidgrove says

Housing market is going down and will go down for many years.
Sorry to bust your bubble. : - )

Sorry to burst your bubble, but housing is NOT going down right now. In the future, who knows, but in the present it is going up.

David,

Don't worry, your comment does not worry me. Your feeling is understandable given current conditions, and popular sentiment. But that is temporary. Job markets and the economy are cyclical, and do change. We have had comparably high unemployment several times before in my lifetime. It swings back and forth between high and low unemplyment. And it will happen again. Demographic and macroeconomic analysis supports my view.

A common error that many people make is to think that market direction will not change. This is the mistake that bubble buyers made during the housing bubble. They thought prices would keep going up, or at least not decline. But it is a cycle that alternates between rising and falling.

Today, many people are making the same mistake that the bubble buyers made - only in reverse. They think the prices will keep going down or at least not rise. They are just as wrong as the bubble buyers were.

Every single one of us colors the information we hear with our own past experiences and future desires. Everyone "talks their book" as it were. You can see the change here with members who were bearish on housing suddenly switch when they bought a house. It could be that they caught the bottom in their area and they made the right call. But at the same time they are looking for validation that they made the right decision.

For me it's quite simple. Where I live (mid-peninsula, SF Bay Area) it is still cheaper to rent than it is to buy by historical measure. Current price/rent ratio is at 22 in my neighborhood and it should be less than 17. So until that ratio comes down, I'll keep renting and keep stashing away extra money into savings. If it never comes down I'll just keep renting or move somewhere where prices are in balance.

"1. buyers credits to stimulate buying
2. FED buying MBS’s to keep rates down.
3. Foreclosures delayed due to attempted workouts, and banks being overwhelmed.
4. 50% increase in homeowners not paying their mortgages in the last 12 months, 100% in 18 months.
5. California/City budgets all must be cut, bad for jobs, bad for housing."

All very good points. Very difficult issues.
But these are all temporay issues.
We have seen similar things in every down cycle.
They do get worked out.
The world is not ending now.

I am seeing Zephyr's point. Sometime, maybe not now, the crash will reverse itself, and it would be very easy and very human to continue to believe the truth that has worked for so long, to believe that real estate is going down, and to utterly miss seeing a very real upward trend.

That said, we continue not to buy because it does not make sense for us. A home identical to ours just went up for sale down the street. Buying it would more than double our housing costs and lock us into a financially troubled school district in a financially troubled state for a very long time. Since we are happy where we are, and since we actually do save the difference in cost, we are much more comfortable letting our savings grow toward an ever-larger down payment and maintaining a larger range of possibilities for our family. Eventually, one of two things will happen: either the cost of housing will come down to a level that feels good to us, and we will buy; or we will continue to look at other locations that might work better for us and take our money and skills there to buy a home.

In just the last year or two, I have seen several houses on our street bought and foreclosed within the same year. The people who would like to live on our street--largely lower-to-middle middle-class families--cannot afford the average home price for this neighborhood yet. The people who can afford to live on this street don't seem to want to buy here. So it goes. I would rather be a renter than get in over my head.

I am open to the possibility that we might be wrong about real estate prices dropping or staying flat. And I am cool with the possibility that we might get locked out of Bay Area real estate forever. Because buying in right now would be bad for us financially and emotionally, and I would rather be a happy renter, or a happy homeowner somewhere else, than miserable here. So, based purely on our own perspective, I am not big on the idea of housing going up. But I am OK with the possibility that it might.

@Eliza

If you read what he said, the bottom has mostly come and gone, but it will be fairly flat for years to come as things work themselves out, and inventory is flushed. You've still got a few years before any price increases could really dampen your abilities.

People who move in/out within a year had some other issues. Perhaps they were renters who were used to spending all the "extra" cash they had. But something major has to happen for someone to move in, screw up, blow through all their savings and move out. They obviously didn't have a 6 months emergency fund!

Eliza says

I am seeing Zephyr’s point. Sometime, maybe not now, the crash will reverse itself, and it would be very easy and very human to continue to believe the truth that has worked for so long, to believe that real estate is going down, and to utterly miss seeing a very real upward trend.
That said, we continue not to buy because it does not make sense for us. A home identical to ours just went up for sale down the street. Buying it would more than double our housing costs

This is a common analytical mistake -- I made the same thing in 2000-2001 when my housing costs were $750/mo and decent pre-GOOG-IPO condos in/near Los Altos were still under $350K. I shoulda bought anyway.

The rent vs. buy decision will rarely make sense in any given point of time. There is an immense number of very wealthy forces that comb through the market looking for anything that will cash flow or close to it, supporting the high end, because everyone expects the history of the 20th century to repeat in the 21st, where every 20 years rents doubled.

When making the buy decision you've got to first NOT count principal repayment as a cost like rent to the LL. Then you should factor in the tax benefits (less the $11,400 standard deduction).

I don't know if RE is going to go up or down from here.But I do know it will respond to larger macro forces, and these macro forces are very different compared to the economic history of any time period in the past you care to name.

tatupu70 says

Sorry to burst your bubble, but housing is NOT going down right now. In the future, who knows, but in the present it is going up.

That was the point of my posting the graph with 30-year rates overlaid. Shoulda also put the $8000 tax credit overlaid too I suppose.

Rates on a 15-year mortgage are under 4.5% and a 5/1 ARM is under 4%. If wage inflation is coming any time this decade, buying now will NOT be a bad decision since paying down these mortgages will be a walk in the park compared to rents.

But it's important to note that the macro picture is still out there as a force, even though Fed intervention was papering over the problem with the historically low interest rates.

San Jose just announced they need to slash tens of thousands of jobs. Regardless of what they do a lot of sh-- needs to happen this decade to return to any good times.

We need to raise taxes & cut spending, increase health insurance contributions, devalue the dollar more, all the while being on the flipside of Peak Oil and with OPEC with the whip hand in setting price as the 2.5 billion people of China and India collectively try to replicate the American standard of living as it was in the immediate past.

This is not your grandfather's recession. Well, it is my grandfather's, he was born in 1911 and I'll let you do the math on that.

Zephyr says

Job markets and the economy are cyclical, and do change

We've gotten used to the cycle since the postwar, a sharp recession every 10 years and then everyone gets back to work.

I think there's an argument that things are different now. The 2001 tech recession was only stopped by the massive SIX TRILLION over-investment in housing, which pushed a lot of debt but not much new actual produced means of production (ie fixed capital) or labor skills into the economy.

It's my thesis that the 2003-2006 so-called recovery did more damage than good, and we're collectively behind the eightball more now than we were in 2002.

What if we simply have more people than jobs, thanks to NAFTA and wide-open merging of our labor market with India and China. Clearly their wages will be going up over time, but I think it's possible wages will meet in the middle. This does not bode well for current RE price levels!

The future is unknowable and it is very likely that the PTB will continue to throw everything they can at the housing market to try to keep prices from falling more. They have a very large set of options they can try, but every one they do puts us more in the Japan camp.

Japan experienced a beat-down from 1990 through 2003. I was there for most of it and saw how it works first-hand. Rents in Tokyo now are where they were when I got there in 1992.

Japan is not the model. The problems of Japan are very different. They have no population growth, shifting to actual population decline. So housing is in a permanent oversupply. When supply exceeds demand, prices fall. Even with low interest rates.

What's happening in Japan is the hollowing out of the rural areas as all the young people pick up stakes and move to the cities. There's oversupply of housing in the cities no doubt, but if you take out immigrant hispanics, the US population pyramid looks a lot like Japan's.

Even if the demographics are different thanks to immigration, the problems of Japan are NOT very different to us. Their labor market too has been utterly clobbered by economic integration with China. They've luckily got a language impedance problem with India so integration with the Indian tech labor market is relatively less.

Japanese banks put their customer's money into way too many bad loans 1985-90. We had millions of Casey Serins that banks found to replicate that behavior.

As far as households go, Peak Debt here in the US was Q308 @ $20.2T. This is up TEN TRILLION from $11T at the end of 2001.

We're not out of the woods after just one year of unwinding, just as Japan wasn't out of the woods in 1992 or the US was out of the woods in 1931.

What happened in Greece... stays in Greece.

This may sound cold, but it really doesn’t matter what 90% of Americans spend their money on. They own so little wealth that their actions are irrelevant. What matters is what the aristocracy decides to do....Who’s going to stop them?

Perhaps Zzzax, The Living Dynamo?

Real personal consumption spending bottomed in Q2 2009.