patrick.net

Thanks HARM for coming to the rescue. In 2+ years, we haven't seen such a steep rise in the yield curve. A 750K house with 20% down, leaving a 600K mortgage just went from 3600 mthly pymt to 3900 in one month's time. $300 monthly increase is 108K increase in the course of a 30-year loan. Many on this blog are actually looking at houses in twice this range meaning their mthy pymts would've just gone up $600/mth were they to buy. I damn well hope this rate increase translates into a significant price drop. Hell, the boom in prices was the result of cheap rates, now we're at 5-year highs in rates, it's time for prices to drop.

Np, Busted ;-).

While this post was obviously tongue-in-cheek, it's often been pointed out that the greater the MSM's acceptance (and to a lesser degree, public's) of the bubble existence, the tougher it will be for us to produce fresh material and continue to be "contrarian", by definition. Every day, we see a flood of news stories confirming our POV, and there's not much else original to be said on the subject really.

That said, I think we *still* have a way's to go on the general public's acceptance, and for every HB "convert" there are still plenty of industry shills busy "bottom-calling" each week to be debunked. Perhaps Patrick will eventually have to reinvent this site with a broader scope as a contrarian thinkers' or investors' blog.

RE: Coalition to Defeat Irrelevance

Huh?

This blog is actually very likely to become irrelevant in some way or another. There doesn't seem to be much that could keep the bubble from deflating now, and the MSM is starting to cotton on to the truth. (Or be unable to hide it to keep their NAR advertisement money rolling in.)

This blog is actually very likely to become irrelevant in some way or another.

We can make a a very relevant food blog. :)

Busted :

Let's extend that line of thinking. I will use round number for simplicity sake. Using calculators on the ZipRealty site, here is some fun at numbers.

For 1M house, 20% down payment, 30yr FRM the PI in PITI comes out to be

at 6% = 4800 per month.
at 7% = 5300 per month.

So that's 500 per month increase. So let's try to find out at the same 4800 per month PI, how much house one can afford. This turns out to be

A 900K house with again 20% fixed and 30yr FRM

at 7% = 4800 per month.

So, if rates increase by 1%, instead of 1M house, the same payment can afford only a 900K house.

These are rough calculations. I did the same thing starting with a 800K house. With 7% the same payment can afford only 730K house.

Conclusion. A one percent jump in interest rates causes BIG affordability problems when people are maxing out on their mortgage payments.

This will not translate 1 to 1 in price drops. There will be some price drop and some of it will be compensated by buyers buying smaller house etc.

Real estate price is more dependent on job prospect than on interest rates.

Taking on a loan of 30-year duration requires a lot of confidence, not on the interest rate, which is locked down anyway, but the prospect of earnings. The BA job market today cannot be better, and it gives out a kind of false impression that since the job market is SO GOOD when the housing market is depressed in the rest of the country, how much BETTER will it be when the rest of the country comes out of the bottom? There are no shortage of stories of fresh grad school students getting $150K+ offers from web2.0 startups or financial outfits looking for the elusive alpha. If you just got handed $150K fresh out of school, what would you think of your job prospect for the next 30 years?

I repeat several times here already, until you start to see joker web2.0 startups folding en masse, the BA housing market is not going to land, at least not in the fortress.

Interest rate movement also doesn't affect people who have already locked down their rates, in fact, those who did are busy congratulating each other for getting into the "ownership club" before the door is slammed. Job does. Owner-occupiers or even investors will only sell if they have no more financial means to pay their mortgage. Job market has to crack first.

Hell, the boom in prices was the result of cheap rates, now we’re at 5-year highs in rates, it’s time for prices to drop.

I just watch 2 condos across the street from my rental sell in the last month. In the 2 years I've lived in this rental, I don't think I've ever seen a condo take longer than 2 months to sell in this complex.

I guess I'll find out what prices they sold at in a few months, but for now - it's pretty disturbing how fast they're selling at.

And meanwhile, my rent will have gone up 12% at the end of the 2 year mark. Cripes.

Frickin Fortress.

ptiemann :

I posted a link to a study where someone had analyzed prices in Manhattan and compared them to interest rates, and he could find no correlation.

The conclusion is quite incorrect. It is as incorrect as saying the exact opposite - "Real estate values drop when interest rates rise". Both are wrong.

Interest rate is ONE factor. Income might play a bigger role, although I have no data to show that. If incomes are rising and keeping pace with interest rates, prices will not fall.

Other factors, such as demographic change, regional economic boom, change in perceptions of desirability and many other factors will also play role. Those would be very area specific.

Few things to note for this time. The rate increases are happening for the worst time for ARM reset. It's hard to predict the exact amount of effect of it. One thing is sure, it will be negative for RE prices.

People are already maxing out on housing expenses. There is no cushion to absorb additional increases. And not everyone works in Web2.0.

To say that rate increases would not have much effect is premature. We will see.

eburbed,

I appreciate your comments on the blog, as they are informative, but I must ask - do you ever say anything positive? Man, you sound seriously glum and depressed.

Maybe you should change your handle to "eeyore-burbed"...

Yeah, I'm worried about eburbed. He may need to seek counseling if prices don't fall soon.

eburbed,

as long as their PITI+property tax+insurance+depreciation and maintenance is much higher than your rent, consider yourself lucky because you are being subsidized by the landlord.

Housing bubble is very difficult to deflate, look at Japan, it took them 16 freaking years. But the good news for us all is, Americans are pretty much broke, most Americans don't have that kind of savings to last 16 years, not even 16 months :-) :-)

When the job market turns, the correction will be pretty swift and sharp. But, job market must turn first.

do you ever say anything positive?

Well, sort of - there's the sarcastic positiveness on burbed.com, does that count? :)

Let me make a wild prediction.

I believe the housing price of the fortress BA will continue heading up till late 2008 at an escalated pace, not because of BA jobs, but because of money from China.

China will crash hard, all the factors for a perfect storm are well in place and brewing strong. But like all bubbles in the world, the last leg up will be the most spectacular. Lots of Chinese are making USD like mad over there now, due to the twin bubble of housing and stock market. Fortress price to these people look very reasonable compared to Shanghai or Beijing. When China crashes, there will be an exodus of wealthy emigrants along with their money coming to the coveted havens like Palo Alto, Cupertino and Saratoga (ranked in terms of prestige based on Chinese perception). Most of them actually will head for the SoCal fortress (Palos Verdes, San Marino, Arcadia). Chinese won't be able to hold back the tide of housing depression, but after all it is a big country with very skewed distribution of wealth. So the Chinese money will be able to delay and soften the landing of few select burbs.

I don't know much about India, but I sense that there is a risk of India crash landing as well, maybe not as bad as China.

I am well aware of the various factors that effect the value of real estate. But, in such a short period of time, I ask someone to point out what other value factor has had a significant change over the course of the past month to justify the increase in the cost of home ownership that has come as a result of the rate increases. I'm willing single-mindedly to say none other over that time. Hence, for the cost of ownership to stay the same during the past month, there needs to be a corresponding decrease in prices.

Arafat is dead. I won't comment on the effectiveness of the UN. But Jimmy Carter had a very distinguished post-presidential career.

Maybe this blog could turn into a book club...

Hence, for the cost of ownership to stay the same during the past month, there needs to be a corresponding decrease in prices.

I don't think it works that way. Last few years, people have been either paying more of their paycheck towards housing, or buying nominally cheaper houses (which are really more expensive in terms of $$/SQFT etc). The logic was, if the house you like is 1.2M and you cannot buy it, buy anything that is for 800K. A lot of crappy houses got sold for obscene amounts.

So buyers adjust their expectations about the house they can afford, more than the sellers adjust their expectations of how much their house is worth.

Although, the rate increase will help bubblesitters via another dimension. Now ARM resets will have even more adverse effect on prices.

Ultimately it's the psychology that will have a far bigger impact. This was a mania fueled by panic buying and speculation. Once that psychology changes - because of jobs, rates whatever - then real fun will start.

I dont remember a stock market bubble blog in 2000

No blogs then, but there was this.

Another year or two, and f'd company website should be revived and rarin' to go!

Most of them actually will head for the SoCal fortress (Palos Verdes, San Marino, Arcadia).

Good start, but you forgot to mention Monterey Park, Alhambra and San Gabriel.

astrid,

I was being facetious. I named only people or institutions that have been publicly declared "irrelevant" by the current Administration.

ptiemann,

I think the lack of correlation can be easily explained by time lag.

Unlike stock market, housing market takes time to adjust. When I do stock trading, I adjust my limit price 5 times a day if I want the transaction to clear. It is not the case for housing. Even the most aggressive sellers only adjust their price monthly. By the time that transaction price is recorded at the county and NAR, the market has long moved ahead.

If he does a T+X timeline plotting between housing price and interest rate, he probably would have gotten a graph with more visible pattern.

OO didn't like it when I was writing it here, but the past few days he has been writing nearly the same remarks as me:

"Prime" neighborhoods in Santa Clara County are being help up rich Asians, mainly Chinese.

But Indians too. I can't tell you how many Indian H1's I know who went "back home" within hours of getting their green cards, come back with an Indian bride and suddenly purchase a home in a neighborhood of the Bay Area that was off limits to blue collar locals like me.

During the dot-com there was a tongue-in-cheek editorial in a one of those free job listing tabloids about the pricing of dowries vs. Silicon Valley job status, US residency, type of degree, degree field and the like. A very intricate spreadsheet.

It'll be interesting times if OO's prediction about the Chinese bubble unfolds the way he said it might.

Maybe this blog could turn into a book club…
How about Edgar Allan Poe's short story The Masque of Red Death. Maybe Fortress BA can take a lesson from Prince Prospero. I don't think even good school systems will be able to fend off the Red Death (but maybe a good economy?).

Speaking for the Indian community in the bay area, I don't see any awareness about the bubble or the fact that it is bursting.

There is a dim awareness that things have "slowed down" or that houses are cheaper "for now" but beyond that, I haven't seen any greater awareness.

Of course, I don't speak for the entire community - my sample space is quite limited.

There are many reasons for this, but one big reason is that real estate has been on the rise in India for a generation or more (much of it is due to inflation and the devaluation of the rupee). Essentially, we have a people who have not seen real estate values go down. So it is never considered a bad idea.

Hopefully, there will be easily observed, hard evidence in the bay area soon. If the immigrant community starts believing in a bubble, it is pretty much over.

ptiemann :

I did read the document. And I was referring to his conclusions. He took 2 data points and tried to find correlation only between them. I noted that this is an incomplete analysis.

If incomes rise along with rates, during an inflationary environment, real estate prices will at least hold nominally. But they are falling in real terms.

Such kind of analysis (including effect of other factors) is absent. Simply taking 2 variables and trying to find correlation tells only part of the story. The finding - either way - whether there is correlation or not - is grossly incomplete.

I am not arguing FOR a correlation. I have stated in my other posts, that incomes are more important.

But rate IS is factor. So the only discussion is how important it is FOR THIS bubble. I argue it is very important. Maybe even more than income this time. So even is BA job market remains strong, a higher rate of something like 8 will have a very negative effect on RE prices.

Because interest rates are a fundamental factor affecting housing affordability it is logical to expect interest rates to be a prime mover of the housing markets. However, history does not support this view. Over the last 40 years, interest rates and home prices have moved together in the same direction as often as they have moved in opposite directions. Essentially, there is no significant correlation.

Interest rates do affect housing demand, but other factors are much more powerful. Prior bull markets have occurred while mortgage rates were high and rising. Mortgage rates declined during much of the bear-market years of the early '80s and '90s.

When interest rates rise it is generally in response to inflation and/or a stronger economy. Both of these elements will increase the demand for assets and drive prices upward. Eventually the market gets far ahead of its normal long-term trend and a slowdown or decline will occur to bring it back on trend (often temporarily below trend). This will happen with or without higher interest rates.

The point is that while interest rates are an important factor, they are overpowered by other economic forces. If you think you can forecast the direction of housing prices based on the direction of interest rates you are ignoring history.

The one fundamental that drives long term housing price trends more than anything else is the affluence of the upper 50% of the households.

The lag in supply adjustments, combined with market psychology drive the cyclical fluctuations around the long term trend.

We see an overshooting of the top because of momentum driven by buyer psychology, including exuberance and the twin demons of greed and fear. These become the two most powerful forces in the market and their best accomplice is foolishness.

Don't forget the market can stay stupid longer than we can blog.
The fact that there is still this obsessive interest in RE reinforces my feeling that this stupidity is going to last for a very long time. I'm talking about 10 years. There is no shortage of stupid money chasing RE. It is everywhere globally.

There is nothing worse in life than someone else paying more than the fair value for an asset you want to purchase.
It will be a long journey to the promised land and in the process this blog might become irrelevant indeed. Becoming irrelevant is part of the lifecycle, nothing to fear.

Be patient and have fun while waiting :).

A quote from a recent Paul Kasriel article:

Households' single largest asset, their houses, is carrying record debt relative to its market value. I can't confirm it, but conventional wisdom has it that about one third of all owner-occupied housing has no debt associated with it. If that's the case, then with record leverage in housing today, the two thirds of houses with debt associated with them must have an incredibly high debt-to-value ratio.

...which is why I - neophyte that I am - am not married to historical models as they relate to the relationship between interest rates and the market value (not asking price) of housing. There may be a few past instances of similar debt loads, but probably very few which coincide with a consumer-driven economy.

"There is nothing worse in life than someone else paying more than the fair value for an asset you want to purchase"

Did Ben Franklin say that? Is that a quote from Ben Franklin? It should have been! Oh I'm there Ozman, I'm there. Especially when that "someone" is a realtor!

I'm in the middle of a continuing ed. course (with an exam on Thursday) so I don't have all the time I'd like right now but this recent debate on the relationship between int. rates and RE prices is intriguing. I've never really heard this challenged before?

(And they say we're getting "over the hill"!)

I don't think anyone can be blamed for making that assumption. Particularly in the mainstream. After years of DL harping on the "boom" being sustainable as long as "rates remain low" and then imploring the Fed to LOWER rates we've all become focused on that as an all important factor.

Taken to extremes I don't suppose it would bode well for RE prices if the 30 yr. fixed was @ 1% if none of us had jobs? Just as being willing to pay nosebleed prices @ 15% wouldn't be a factor if no one qualified.

Busted Says:

"I damn well hope this rate increase translates into a significant price drop. Hell, the boom in prices was the result of cheap rates, now we’re at 5-year highs in rates, it’s time for prices to drop."
_____

I'm sorry Busted but you forgot one thing: it's the Bay Area.

You see, the Bay Area is very, very special. It defies all logic and even the laws of economic physics itself, for it is the land of milk, honey and great weather.

Any piece of crap shack in the Bay Area--from Morgan Hill to Napa Valley-- is a priceless jewel that commands a high price. You will be fortunate that housing prices only climb 5-7% per year before they take off like a bat out of hell for their usual 10-15% increase every year.

Didn't a realtor tell you that prices in the BA only go up?

So, my hard-won advice to you is to buy anything at any price any way that you can or be left behind groveling like a rat in the dust.

Just do it!

NOW! (just ask Surfer-x, he'll tell you!)

;-)

I thought young Indian women didn't want to marry H1B or GC holders because they can't get dirt cheap servants in America. What's so great about having more greenbacks if they have to trade a upper class existence for second class citizenship?

OT, but I thought you all might enjoy this - just reading the circular which accompanies UBS's statement.

On page three is 'Increase Your Borrowing Power', suggesting securities-backed lines of credit or equity extraction for UBS clients planning summer travel, a new car, home improvements or launching a new business venture.

How's that for advice?

"or equity extraction"

You mean there IS some still out there that HASN'T been tapped?

KT,

O.K, so they did look a little goofy, but what is up with the earlier buyers!? The one gal said "the developers promised us (as she fights back tears) they wouldn't sell below the market value!" Lady! Half of what you paid IS market value!

Instead of a book club, you guys could write a book. Patrick could write the first chapter, followed by harm, randy, etc. etc. Surfer-x and DinOr write about buying when they did. Peter P could have a food chapter. You could even have a just for fun chapter all about trolls.

dcfemme-I have the same problem, Brother in Santa Clarita, not here, friend in Willow Glen, not here, mother in law in San Jose, not here. I have decided to stop talking about it to them, and then they ask me Why are you not buying a house? It's annoying.