patrick.net

... They don't see each other. They only see what they want to see. They don't know they're in debt.

Needless to say my favorite is P/E ratio. I will even look at a convincing forward-looking P/E ratio.

How about astrological indicators? I have not heard anyone here quoting them yet.

Another good indicator: sixth sense.

And how about "common sense" ?

And how about “common sense” ?

Nah, if they don't "see the debt" they're sure as heck not going to see "common sense."

Right now my favorite indicator is the mortagage/rent gap.

I'd have to say, as far as leading indicators are concerned, the price-to-rent (a.k.a. "PE") ratio is also my favorite, followed by the HAI and price-to-income ratio.

How about this ratio:

Let i be the 30-YR FRM interest rate
Let p be the price of the home
Let r be the annual rent of a comparable home

Ratio = (p * i) / r

This ratio is similar to "mortagage/rent gap" but it counts only the cost of money (interest).

Fake P, the ratio is for comparison only. Those fees, tax, and deductions are more or less constant over time for the same home anyway. I do not want to have a complex buy-vs-rent calculator. I do have a formula though.

Is this a sign?

Anonymous said...
I posted a while back about two condos for sale in my building. One went up for sale before Mother's Day, the other shortly after.

weather has been nice though

How about a waiver to acknowledge that weather can change due to global warming?

Was that before or after the one waiving the buyer's right to actually see/inspect the house before buying?

Peter P, your formula should include HOA and property tax and income tax deductions to be more accurate.

Fake, here's a Rent vs. Buy calculator that includes those items:
tinyurl.com/bkecn

Jack, inflation is well contained, not by the FED but by the process of globalization. The simple true is that so long as wage inflation is tamed, inflation is not a major factor in house prices.

Oil prices belongs to the global commodities demand competition group. Inflation in this category behave like taxation. It will have deflationary effects on housing.

Can you tell me more details about the causes of inflation in health case and education? I am not too clear about them.

Finally, the inflation of house prices is irrelevant because we are in a bubble. There is no rent inflation.

BTW, there is nothing wrong about using rent in the calculation of CPI. But I have problem by doing so AND over-promoting the benefits of homeownership at the same time.

House prices are high because people KNOW that money isnt going to be worth anything very soon.

Why not commodities? You get huge leverage and great liquidity.

I am AFRAID to sell the house, because all that cash doesnt translate into “security” like the house does.

Who told you to sell your house?

Jack
I don't just think it's the boomer generation wanting a home, it's wanting more than one home. What's really sickening is the few I know who buy second or third homes and then give one to the kids as an "investment."

I agree that we have some imbalances in health care and education. My question is, where are the additional costs going to? Lawyers? Government?

Will the extra costs have inflation-like effects or are they a simple wealth transfer?

I am no economist either. Economics is a voodoo science at best. :)

So there ARE many people in the bay area who ARE wealthy enough to buy two or three houses, not just for themselves, but to GIVE ONE TO THE KIDS!

Of course they are such people. Are there many of them? I do not know.

Which one is more sickening: owning 5 homes or flying private jets?

The answer is neither. One is free to use his money to do whatever he wants. Money is amoral.

But the point is that a few people who are not overextending will not underming bubble claims, when 60% of new purchases are IO/ARM loans and the median downpayment of first time homebuyers is 3%.

"But the point is that THESE PEOPLE ARE PROBABLY NOT OVEREXTENDED!
(Therefore UNDERMINING bubble claims)"

Not necessarily --any assumptions about what % of the market "such people" constitute or wht type of financing they're using are just that --unproven assumptions. What I find more telling are the 50% who used IO or neg-am loans in CA last year, and the 70% who are using them this year.

BTW, wealth will not stop a bubble from bursting. People were wealthy in Hong Kong and Tokyo but I heard that many "wealthy" people including movie stars went broke after the housing bust.

Jack,

While I agree that the official government figures for inflation (around 3%) are bull$hit (see http://tinyurl.com/9osq5), I also think it's pretty obvious that housing price gains have still been well above the "real" rate of inflation for some time.

I think Peter's point was that overall inflation alone cannot account for the recetn run-up in prices.

Jack, wealth will not prevent someone from using leveraging his fortune in order to make more wealth. I know people who have millions but they choose to leverge their equities with NAAVLPs to buy many homes.

People who use funny money to invest may have money, but that does not mean that they do not have even more debt. Even Donald Trump was very close to banruptcy at some point.

The 50 per cent and 70 per cent dont tell us that either!

Sure they do --they tell us half of all CA buyers bought using IO or neg-am loans in 2004, and it's trending even higher this year.

Call it something else if you like, but it sure feels like “prices going up” to me!

When things are going up in price without a commensurating increase in wage, don't you think they they will have less money to spend on housing? The important point is that workers are unable to demand more money.

I still maintain that the only way to make housing more affordable in the Bay Area is to increase supply. The problem won’t just resolve itself through some magical “crash”.

Again, Face, I don't think anybody disagrees with you that CA housing --even without the speculative Bubble-- would still be significantly higher relative to incomes than in other places. And yes, eco-politics/NIMBY-ish laws and regulations have much to do with it. But a supply crunch (or inflation) alone cannot account for the RECENT run-up in prices, or the growing disconnect between rents and prices.

If I help my kids, they have to pay less interest (or no interest) and they can help their kids, etc. The family becomes much wealthier by not leaking large amounts of interest money to banks.

One thing though: with non-recourse loans, it has some advantages to have the kids borrow from the bank. In case they cannot repay the loan, you do not lose the money.

Even Peter P admitted that taking an IO loan or an ARM makes sense - he said he would do it himself if he bought a house.

Peter said THAT?? Don't recall him saying that, but I'll give you the benefit of a doubt ;-)

Ok, I can see an ARM - if you expect rates to drop or stay steady for a long time, then sure, it's a better deal. But an I-O? Why would anyone intending to occupy/keep the house want to do that (unless you are expecting to flip it for a quick profit)?

HARM, IO makes sense if you have an irregular income flow or if you want extra safety just in case money is tight for one month. In either cases, discipline to pay down the mortgage whenver possible is essential. I still maintain that most poeple use these loans to get into homes that they cannot otherwise afford.

It makes no sense according to your formulas, so instead of insisting that the formula will eventually prevail, just admit that it is NOT prevailing, and perhaps look to some other reason (like wealthy parents?) as to why the formula is not working. Because it is not.

I stand by my analysis. The market, especially with asset prices, is not always right. One must not find reasons to justify anormalies.

I just think that people sense that inflation is in the offing, and may be acting accordingly. ANTICIPATING.

Want to start a "leveraged inflation fund"? We may be able to make a killing. ;)

KG, I won't worry too much about the 10-YR note. LIBORs are going up by the day. All the funny loans will see higher rates.

The only exception is Option ARM, which locks introductory rate at 1.75%, although accrued interest (negatice amartization) will accumulate faster because of the higher benchmark rate.

KG, Jack is probably not a fool. We like him all right. :)

The problem is that the burden of proof regarding the existence of an asset bubble is upon us. If one is unwilling to believe that a speculative bubble has been the driving force of house prices, "wealthy parents" is a much better argument then "they are not making any more land" indeed.

Wow
Make some comment about some boomers buying homes for their kids....
Funny thing. The people I was thinking about are HEAVILY leveraged in RE right now. They made some money and are now convinced that RE is a long-term can't lose deal. What's really interesting, is if you ask them what they do, they don't even mention RE because of all the flak they are getting these days.
As far as the rapid increase in IO's are concerned, I don't think for a second that people are using these loans just because they're a good deal right now. 30 year fixed rates are about as good as it gets so there is no reason to take out an NAAVLP unless you are reaching beyond your means IMHO.

Face Reality
I knew you were going to say that. The only reason to take an IO or ARM is if you expect rates to stay low and that the value on the house is going to go up. If IO's and ARMs were the end-all beat-all of loans, then we would have seen this huge proliferation much sooner. The fact is we didn't see an explosion of these kind of loans until housing prices shot well beyond what is rational in relation to incomes and rents. If 30 year loans were such a bad deal, then why did so many people refinance their homes with the lower 30 years rates rather than just go with the NAAVLP's? I'm sure plenty of homeowners did refianance with these loans, but I think mostly it's new home purchases that are generating the run-up in numbers.

These types of loans weren’t used as widely before because they weren’t as widely available as they are now.

I am well aware of this fact. But I guess I am one of the few who look at a house as a long term investment. I don't want to buy the house unless I can REALLY afford it. Also, ask yourself why the banks are making these loans so availiable to the public at large (especially the sub-prime lending). Is this because the banks, bless-their-hearts, have our best interests at heart? Of course not. The banks can flip the loan to Fannie & co. and let someone else take the risk. The banks don't hold the majority of the loans and they don't have the vested interest in making sure the borrowers default. NAAVLP's require a lot of assumptions to make sense in my book. You assume rates stay low and home go up. But what if they don't?

Face Reality:
If I know I’m going to sell an asset in a year and get, say, $200K for it, I would take a 1-year ARM for $200K because I know I can pay that much within a year, so why would I go with the higher interest rate of a 30-year loan?

First off, if you buy with the specific intention to sell in a year for profit you are a speculator/flipper by definition. Thanks for supporting the Bubble argument. ;-) This is a far cry from Peter's "irregular income" motivation.

Second, how do you "know" you're going to get $200K in one year? That may actually be close to the average appreciation for bigger BA houses over the past few years, but again, rear-view mirror driving. If prices plateau, or even decline, then what?

oops! gotta watch my typing. The bank's don't have a vested interest in making sure borrowers DON'T default. :oops:

HARM-
Is it not possible to get ten year IO loans, or even longer?

Yes, Jack, I'd agree it is possible, but the large majority of IO borrowers are not getting the IO/teaser rate period for that long. I don't have the exact figures (anyone, anyone...?), but the $400 billion in IOs set to adjust in 2006, and the additional $Trillion each in 2007 & 2008 gives you some idea.