patrick.net

To pick up on the 'disappearing jumbo' meme for a minute, is there any evidence appearing that investors are significantly segregating by LTV, other than simply requiring a given level of cash down.

It seems to me that there should surely be an investor market for loans at, say, 60% LTV. (And lest you laugh, that was every bank's maximum in Australia when my parents bought back in the early 1970's.)

@TOS

As I told you previously, I did not delete any of your posts. You didn't post on my thread. I do not have privileges to delete, modify or otherwise moderate threads started by Patrick. I also cannot ban. Talk to Patrick if you have an issue with how this blog is run.

Mo-Town Says:

> FAB: if the “off the books: crowd here in Modesto is
> making more than the median household income, it
> doesn’t show. I live in a neighborhood full of these
> folks. Few of them can afford to water their lawns (or
> perhaps they simply choose not to), and my ‘96 Ranger
> is actually one of the nicer cars on the block.

I’m no expert on Modesto but since I’ve decided that it will be a good idea to become truly “fluent” in Spanish (vs. just “getting by” with 6 years of High School and College Spanish) a few years ago I’ve spent lot more time talking with my tenants (both legal and Illegal) in Sacramento. Almost all of them send a lot of money back to Mexico every month and almost none of them have the same intense attraction to flashy cars as many Americans. All it takes is about $100 of little add ons like plastic spinning hub caps, a Mexican flag sticker and Virgin of Guadalupe in the back window and most of them will be happy with any car (while some American’s have to fight the urge to dump their “old” 996 and get a new 997 almost every day)…

SFWoman Says:

> A decline of 7% over a few years is a 33% decline.

Keep this in mind when Realtors™ mention “only” small single digit price declines. We are almost two years from the fall 2005 peak with most real comparable prices down for close to two years…

POS said :

It is showing a -3% to -7% decline and *not* a -33% …

Hmmm. Let's look at a sample. MLS 40279956. From ZipRealty, a random search of listings with "Reduced Price"

Price Reduced: 08/08/07 -- $775,000 to $725,000
Price Reduced: 08/27/07 -- $725,000 to $700,000
Days on Market: 69

All that in one month. 775 to 700 is roughly 10%. And this mother of all credit crunches is just waking up from a 5 year old sleep. (Or as Mish's post pointed out it's more a "Collateral Crunch".)

And please ... do not point that the sample size is one. Search ZipRealty yourself. But ... I forgot ... people don't want to understand this because their livelihood depends on not understanding it.

I only noticed the boats after the race was over!

And boats there have gotten a lot nicer (bigger) since 1985. :)

bap33:

we used to have a low class racist posting on azcentrals blogs with exactly that same name! Wow what a coincidence...

Nice to hear about your foreclosure and other loser activities.

I still own my two homes here in the valley of the sun, paid off, think i will string some xmas lights about the backyard and have una fiesta buena this weekend! come on over and bring some tecate amigo.

I don't think bap33 is a racist. Many of us are anti-illegals because we hate crime. Most here embrace legal immigration.

I used Bankrate's mortgage calculators to compare 2 scenarios.
Both scenarios assume 20% down payment, 30yr fixed.

A.
House price 600K. DP 20%, loan 480K.
Interest rate 8%.
Total interest paid over 30 yrs = 788K.

B.
House price 800K. DP 20%, loan 640K.
Interest rate 6%.
Total interest paid over 30 yrs = 741K.

This is what I expect BA house prices to do. Instead of buying the home for 800K with a 6% mortgage, buy it for 600K with a 8% (HOLY COW !) mortgage.

1. You end up paying 47K of interest more with FUTURE money over 30yrs in scenario A. But you save 200K of CURRENT money right now.

2. You will of course save on property taxes in scenario A.

3. The difference of down payment will earn interest over the years in scenario A.

4. If you sell the house, you will earn more profit in scenario A. (duh !)

5. The effect of mortgage interest deduction will make the difference of REAL total interest paid really small.

This is all better captured in Randy's Bubblizer. But I just wanted to answer POS for once and all. Sorry to have been baited by a troll.

I love how TOS assumes that people here are penniless scumbags, and our only shot at buying was during the rere RE bubble.

And Stuck in BA :

Don't forget option C :
You pay for the 600k house with a 200k down payment.
Loan is 400k with 8% interest. 656k interest paid.

Stockton is a short drive (about 40 minutes) north of Modesto. I've seen a definite drop in asking prices in the past year. There are older 3 bedroom tract homes in the northern suburbs that were going in the mid 300's, old appliances and all. Many have dropped to the 280-300 range. Some I have visited in person are in excellent condition. But it's really uneven. Some folks' minds are stuck in summer 2005 and they won't lower their prices. The market is schizo that way. But overall I am seeing significant price drops.
My friend is going through a divorce and they are trying to sell a rental two bedroom house they never lived in. Her realtor with Prudential told her two weeks ago, "I'm not going to list it this week. 50 more homes went on the market TODAY." It's an older home and the realtor is trying to talk her into going below the 200K barrier. That was unthinkable 12 months ago.

1 data point:

Smallish waterside condo down the street listed at 619K in May. Flashy sign, flashy ads, creepily shiny Realtor.

Walking past today, I noticed a new Help-U-Sell sign with cheap photocopies in the box. Asking is now 575K.

Last selling price for this condo was...drumroll...575K one year ago. So the sellers don't have a lot of room to move, unfortunately. I think the place would sell pretty quickly if they could drop closer to 500K, and I would so much rather see someone in the place who has a genuine interest in the area.

That's actually my least favorite aspect of this ridiculous housing bubble we've been having. When people think of houses as investment vehicles, when they do nothing but work for the house, when they are always on the two-year plan to move to the next bigger place in the next better neighborhood, it is in fact bad for communities. Something of value is lost. That something is hard to measure, but you can feel its absence when it is gone.

APEC update:

- GWB arrived early with a small entourage of only 1,000 -- now no govt money left for a bailout...

- the Oz Defence Minister, Dr Brendan Nelson, was *extremely* cosy with Condi Rice over the salad buffet -- clearly fancies a bit of the other...

- Chinese Premier Hu arrives today

oh, who cares...

@ StuckInBA

You are again playing little tricks by using asking prices...

1- If I buy a house in 2005 for 575K (example of Eliza), try to sell it for 619K in May 2006 and then lower my *asking price* to 575K....

Stupid question of the day:

2- Do you really feel good about yourself when you come here to tell us that *asking price* has been reduced by 8% from 619K to 575K and so price are down 8% ???? :-)

Hint: FB bought for 575K at the height of the bubble in 2005 and reduced his asking to 575K ...

3- With such a flawed logic, I understand why you can't believe the numbers of your idol Shiller.....

4- And you know what, I am sure that this guy will almost never bring much cash at the table (FB who dos not value is FICO score!!!), so effectively, if you want his house you will have to get it from the real owner, the bank...depending on the location, you will get a discount on the 575K … (5% in good school districts to 30% in ghettos)... :-)

4- Moreover, you see, your simple calculations on your two scenarios are *useless* unless you do a simple sensitivity analysis (like the ones Randy and I have done on numerous occasions here) on:

a- The mtg rate (8% for a jumbo today, is it from your dream???)

b- The size of the drop (you assumed 25%, is it from your dream???)

c- And on the number of years you have to wait before buying back (i.e. 25 Year mtg if you wait 5 year, to compare apple to apple)

Bottom line:

5- Do not get carried away by reduced asking prices, and understand that in the current environment, you will need at least a 10%-15% drop in *resale prices* in your dream neighborhood simply to break even….

6- On top of that to be able to benefit from the drop in prices, you will have to get a jumbo mtg, put up 20% and don’t borrow more than 3x your income (not trivial for mos poeple on the sidelines without the 50% discount that they dream of every night ... :-)

Conclusion:

7-The huge price drop are a consequence of a change in the characteristics of what you buy (ha these tricky implicit assumptions!!!).

For example in the modesto example, you are *now* buying in a specuvestor ghettos so a house there in 2007 not the same as a house there in 2004 (-33% for the getting in a ghetto)….

the drop in price in the good school districts is partly a result of the fact that getting a mtg now is more difficult resulting in making a 700K mtg in 2007 more or less as costly as a 800K in 2004…

8- When jumbo rate will come back down, then we will be in recovery mode (i.e. less downward pressure on the prices)

@ Randy H

My apologies to you if you did not delete or edit my posts.

Prices are finally starting to see some adjustments where I live in South Jersey, a 385k house we had our eye on adjusted down to 365k. My Wife wants to jump as soon as prices are affordable to us. Somehow it seems foolish to buy something on Tuesday, when you know the same item is going on sale on Friday.

Ideally I would like to wait until Sping of 2008 before making any below list offers, but the Wife factor may alter those plans.

Temporary OMO: Fed adds $8.50 billion with overnight RP

TechGromit,

The Wife Factor is a leitmotif here. For me it is like the quantum mechanics - I freely admit it exists, but fail to understand it.

TOS,

By implying that a $700K house at a higher interest rate is as costly today as an $800K house was in 2004 you are looking only at the monthly payment, the sacred idol of Realtors (TM)/Mortgage BROKErs. Many people might chose to accelerate payments, pay a higher percent down, etc. effectively cutting in to the amount of interest that they pay. Additionally, the interest on the first $1.1 million is deductible.

Also, from what I have read about recent sales activity there is a change in what people have been buying, and it hasn't been a downward change in square footage or amenities. The lowest end of the market seems to have had its legs kicked out from under it first (tricky implicit assumption).

@PermaRenter,

I enjoyed your 4:23pm post. Good link. While many of the posters below blasted the author for "having a firm grasp of the obvious" damn it, someone has to say it.

SFWoman Says:
TOS, By implying that a $700K house at a higher interest rate is as costly today as an $800K house was in 2004 you are looking only at the monthly payment, the sacred idol of Realtors (TM)/Mortgage BROKErs.

"and of used-car salesmen". You forgot to mention those professionals who pioneered the howmuchamonth concept.

SP

Pending sales lowest they've been in 6 years, according to the radio. I'd say that'll affect prices.

In the neighborhoods I follow no one seems to be putting anything on the market. I was going to do some open house window shopping but there was literally nothing on the market in the Forest Hill neighborhood in San Francisco or the Claremont neighborhood in Berkeley. And there was nothing new near where I live in Noe Valley or Glen Park.

This was probably just due to the Labor Day weekend, but I still thought it was odd. This is the first time I have seen so few homes on the market in years.

This is the first time I have seen so few homes on the market in years.

This time of the year it's typical to see inventory going down. And many people in addition to that must be thinking, this is a bad time to sell, let's wait for Fed to cut rates and by the time next spring comes, it will be easy to get a good price.

I think the "conundrum" will work both ways. Fed can cut as much as it wants, the credit markets don't recover that fast and LONG TERM rates will not budge.

Stuck,

I'll add another factor - have you seen today's WSJ's article about the LIBOR rate?

http://online.wsj.com/article/SB118891774435316875.html?mod=hps_us_whats_news

As you probably know, many, if not most ARMs and HELOC rates are tied to LIBOR, not to the Fed Funds rate. Until recently, these two have been pretty well correlated, but in part because of the credit crisis, LIBOR has been going up and diverging from the FFR.

This begs the obvious question: will Ben & co.'s rate cuts have any real effect on distressed borrowers? Probably not as much as everyone (esp in the REIC) is hoping for.

Pending sales lowest they’ve been in 6 years, according to the radio. I’d say that’ll affect prices.

sfbb,
Remember that these numbers reflect recent contract signings, so they are subject to probably a higher than usual cancellation rate, which will result in downward revision. Probably even more importantly, these numbers represent signings that occured in July, before the full-blown credit crunch occured. September's numbers will be very, very interesting...

POS :

Let's leave aside discussions of asking price for a moment. And concentrate on pure numbers.

4- Moreover, you see, your simple calculations on your two scenarios are *useless* unless you do a simple sensitivity analysis (like the ones Randy and I have done on numerous occasions here) on:
...
c- And on the number of years you have to wait before buying back (i.e. 25 Year mtg if you wait 5 year, to compare apple to apple)

So please tell me Ms. Aristotle, if I do the calculations using a 25 year mortgage (instead of 30yr fixed) then will I be paying higher total interest over the years or less ? I was first planning to do that then thought of using the same mortgage terms - as I didn't want you to cry foul. But thanks. Let's ask Bankrate again for total interest payments using 8% for 25yr term.

Total interest 631K. Which is less than scenario B (800K, 160K dp, 6% 30yr FRM) with total interest payment of 741K.

Now try to not be a troll for a change, and admit which scenario is better in numerical terms. Once you do that we can discuss if my "dream" scenario has a chance of being reality. But first things first.

I don't think that interest rate cuts will help distressed borrowers at all. They probably won't help those trying to buy homes either. I think that risk has been finally repriced to a more appropriate level, which means that people with crappy credit ratings aren't going to be getting any loans, at least not until the next easy credit cycle.

What the interest rate cuts are there to do is to save the economy from a full-on recession. I personally would not be surprised to see a half point or even larger cut on September 18th.

Jimbo and Skibum :

I agree completely. The spread between treasuries and other bonds will widen. So even while FFR or treasury yields keep falling, we will see mortgage rates not following suit. It would be the reverse conundrum for some.

Seems like Mish was right about treasuries.

Jimbo,

I agree re: rate cuts not helping distressed sellers or potential buyers. Yes, cutting the FFR will be an attempt at staving off recession, but it will likely be too little too late. The current Fed has explicitly denied "targeting asset prices", so they let this stupid credit and RE bubble inflate, and they will be unable to keep it from deflating.

If you read Ed Leamer's paper from Jackson Hole last week, he makes a strong argument that since WWII, essentially every housing downturn has led to recession, except for two instances, when the DoD came to the "rescue" of the economy with the Korean and the Vietnam wars. Who knows, maybe Iraq +/- Iran will do the trick this time, but is that something anyone really wants?

And until recently it seems, most economists seemed to agree that a recession once in a while is overall a good thing for the economy. Better a recession than stagflation, or worse yet a Japan-style downturn over the next 20 years.

skibum said:
As you probably know, many, if not most ARMs and HELOC rates are tied to LIBOR, not to the Fed Funds rate. Until recently, these two have been pretty well correlated, but in part because of the credit crisis, LIBOR has been going up and diverging from the FFR.

[sarcasm]
Heh, heh... maybe the realtards at NAR should try lobbying the Banker's Association... :evil:
[/sarcasm]

SP

@Jimbo,

I think there's been way too much focus on "people with crappy credit ratings" and their ability to get (or not get) a loan. Right now I'd say anyone "with less than sterling" credit is either going to have a difficult time getting a loan, or if they do, will probably balk at the rates/terms.

Didn't everyone learn that "howmuchamonth" is a screwjob back when they were buying their first car?

C'mon, I can get you into an Atherton mansion for under $3K/month if we can find a hedge fund willing to give us a couple centuries to pay it back.

Hint - That would be a bad deal for you. :-) :-) :-) :-) :-) :-)

There was some earlier commentary on median income in Cali.

Official estimates probably are low. Many people work under the table and under report their incomes, either because they cannot legally work or because people who make too much trackable money are not eligible for services from the government, including Section 8 and health insurance and preschool and food stamps and free community college and student aid and even some first-time homebuyer programs. People who depend on those services will make choices in order to retain them--not get married, remain underemployed, work for cash, etc. So we have several problems if we want to estimate the income (in both dollars and services) for California households:
1. How much income is not being reported at all?
2. How do we value services that the government provides to those with low income (but which people who make somewhat more money commonly pay for out-of-pocket)?
3. How much is household income skewed by the assumption that a household consists of a single nuclear family?

Any ideas on how to come up with a more realistic estimate of (dollar and service) income per household?

I don't think this information matters much for Marin. But it certainly matters for outlying and urban areas.

Hey Randy ...

C’mon, I can get you into an Atherton mansion for under $3K/month if we can find a hedge fund willing to give us a couple centuries to pay it back.

If I do that, then at least my family won't come on the street at the whim of the landlord !

So why exactly is it a bad deal ? ;-)

TOS,
Your response to my earlier data point--the condo by the shore--looked time-consuming for you. The condo was just something I saw while walking my dog. But you are welcome to get all het up about an innocuous post anytime you like, sweetie! Just try not to give yourself a headache! :-)

Jimbo,

What I "should" have said was that over the last several years lenders based their decisions almost solely on the collateral and it's liklihood to continue to appreciate. With very little emphasis on the creditworthiness of the borrower. If I could find a seller willing to take ___% below comps even in The Fortress, I could find a lender.

I don't think lenders are as freaked out by the possibility that they'll get stuck with the unpaid loan as there are about getting stuck with grossly overpriced and un-sellable real estate.

Eliza,

For trackable income they probably use state tax returns. There is certainly some under reporting on taxes. There is a huge grey economy around domestic workers/agricultural workers/etc. that is probably not easily tracked.

I think household income is the 'tax household'. I'm not sure what happens with roomates. Are they a household?

Seriously tighten up no-doc lending standards and a lot of people will be forced to report and pay taxes on their incomes to get the mortgages they want. There will always be those who work around the system, however (two cash registers, mortgage from the family, not marrying live-in boyfriend and father of brats, etc.)

Perhaps they should devise a 'market basket' of jobs, weight it by prevalence of the type of job for the area, use the average wage of the jobs for the area and come up with a measure of affluence/incomes and income spread for the local.

It would probably be very interesting to look at the effects of Walmart wages on areas.

I have no doubt that housing price will fall slowly in the next 2-4 years. It's a cycle and I agree with Randy that it's sticky but I have doubt how much a person who have been renting for last 4-5 years will gain with the present market condition. FED will start decreasing rates, there will be some help for distressed home owners and all of these will slow the bleeding. In the meantime, a lot of buyers with not so good credit will not be able to qualify for mortgage and rent will increase............I definitely agree with TOS that anybody that bought before 2004 will come ahead than any renter.............