patrick.net

We support you "hole" heartedly, HARM

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?).