patrick.net

klarek says

All things being equal, lower prices increase consumption. This is a very fundamental economic concept.

Thing is, houses aren't so much as consumed as occupied.

Land and housing is a very odd capital good.

There's no substitute for land unless you live in a zeppelin, or on the seven seas.

We all "consume" housing whether we rent or buy. The only way to "consume" less housing is to room up with people, or live like a caveman.

klarek says

HousingWatcher says

“When prices go down, more people will buy.”

So then why are more peopel not buying right now? Why did more peopel buy when prices were gong up then when they are going down. When prices go down, fewer people buy. That is how it has always worked.

Investor behavior often goes against the supply and demand rule that drives consumption and spending.

Because supply and demand are constantly being manipulated. All things being equal, lower prices increase consumption. This is a very fundamental economic concept.

There are people sitting on the fence for a while. The reason they are sitting on the fence is simple. They are not sure if the market has bottomed. Once the price stabilizes, they will start buying. The other reason is the amount they have to pay per month for mortgage (plus tax and ins) vs the rent they are paying has to be close and at equilibrium. Say I am paying $2200 as rent and my monthly mortgage would be around $2500 - $3500 if I buyg. Should I keep on sitting on the fence or buy? Of course this is assuming the prices have stabilized and the interest rate is not going down any more.

If the rent goes down, I would keep on renting. If the rent creeps up and the price goes down, they will reach equilibrium at some point. That's the time to buy.

Third factor - you are getting old sitting on the fence. No point buying a house if you have to wait till your retirement age to buy a house. (that's when you sell and go to Washington/Oregon/Nevada/Arizona/Mississippi... wherever )

On a different note, I feel the middlemen should be eliminated from the real estate business. Why do we need a realtor in the first place? The work they do is not commensurate with the commission they earn.

newbie says

Why do we need a realtor in the first place?

Buyers don't need realtors, sellers do.

Hopefully FSBO will become a first-class citizen in online listings, and any industry resistance will be eliminated by the government as anti-competitive abuse of monopoly market position.

Still, even FSBO could use a real estate agent-like service to get escrow through the title company and loan process.

The question isn't the service, it's their 6% cut, as you say.

Troy says

Still, even FSBO could use a real estate agent-like service to get escrow through the title company and loan process.

All you need is an Contracts Attorney and a legal assistant to handle such services. All this takes about 2-3 hours tops. You may be out $1-2K but that is small change compared to $30,000 ( $500,0000 * 6%) in commissions. Sadly most state laws, drawn by realtor interest groups have created like you said a monopoly.

If govt got out of lending, private lenders would not lend at 3.5% they would require a 20% downpayment. and no one in their right mind would lend without having the closing costs as downpayment.
This is how private lenders would price risk. The risk is actually the same and doesnt magically change just because the goverment is calculating it.

E-man says

By then, most of you wouldn’t have a job to buy a house.

What if buy home now and no job later to pay mortgage? I guess you are right there will always be some program like HAMP :)

we are back in business Patrick. Time to start writing to Congress. Love this thread.

CA Senators:

http://boxer.senate.gov/en/contact/
http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.Home

ChrisLA says

CA Senators:
http://boxer.senate.gov/en/contact/
http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.Home

Oh yea..like that is gonna help. I dont think so!

thomas.wong1986 says

ChrisLA says

CA Senators:

http://boxer.senate.gov/en/contact/

http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.Home

Oh yea..like that is gonna help. I dont think so!

you have a better option?

yeah, don't tilt at windmills.

3.5% down is not a big deal. Every year the mortgage is paid, LTV goes down 1.6% or more -- thus after only 3 years the buyer has another 5+% of "skin in the game" and has also paid 3.45% in monthly PMI, for an effective LTV of under 90% already, halfway to the magical 80% LTV of perfect safety.

As long as home prices are flat or slightly declining from here, low down payments don't present any great systemic risk to the system.

People rallying against them are either idiots or have a hidden agenda.

If home values crash from here the system is going to have much, much larger problems than the new buyers who've come into the market now.

Remember, lending stayed elevated at over $800B/yr for most of the last decade:

http://research.stlouisfed.org/fred2/graph/?g=yX

lending activity now is miniscule compared to the bubble, and thus its risk is also miniscule compared to the bubble debt that is still on the books:

http://research.stlouisfed.org/fred2/graph/?g=yY

Blue line is total homeowner debt.
Red line is total homeowner asset value.

Note the red line has fallen $6T since the peak, while the blue line has mostly still just topped out. The St Louis Fed doesn't break this down by new loan volume, but overall loan volume is still net negative, with more default losses than new loans being taken out.

newbie says

There are people sitting on the fence for a while. The reason they are sitting on the fence is simple. They are not sure if the market has bottomed. Once the price stabilizes, they will start buying. The other reason is the amount they have to pay per month for mortgage (plus tax and ins) vs the rent they are paying has to be close and at equilibrium. .

Do you think some folks are reluctant to purchase a home because they are not confident about their income (/job?).

thomas.wong1986 says

Troy says

Still, even FSBO could use a real estate agent-like service to get escrow through the title company and loan process.

All you need is an Contracts Attorney You may be out $1-2K

That is what we did when the home we picked out to buy was FSBO. It was less than $1k but that was 20 years ago.

E-man says

I know some of you meant well for wanting lower home prices, but TPTB would not let this happen because they are freaking scare of the potential deflation feeding on itself as mentioned above.

I hate to break it to you, but TPTB cannot stop housing prices from correcting. I hate to burst your bubble, but prices fell substantially from 2006 to 2009, and now are continuing their descent. There's nothing you or congress can do about it except pray to all holiness that a miracle will keep the bubble inflated. I'm not going to make any money bets on your ability to channel divine powers to perform such a feat.

klarek says

I hate to break it to you, but TPTB cannot stop housing prices from correcting

mortgage interest rates are about twice here what they are in Japan. There's still some more fuel to throw at the fire.

Troy says

klarek says

I hate to break it to you, but TPTB cannot stop housing prices from correcting

mortgage interest rates are about twice here what they are in Japan. There’s still some more fuel to throw at the fire.

and that's been working great for the japanese for 20 years now right? prices dropping every year...

japan is our future.

Lots of interesting discussion here, very relevant to my situation. I'm looking at 3.5% down on a $350,00 loan. I'm in the bay area (north bay). My interest rate is 4.3% (not locked yet - pre-approved). Household income before taxes is ~$105,000/yr.

I've submitted an offer on a foreclosed property, a bit of a lowball offer, and will see what they say.

I've been a little uneasy about the whole thing due to the uncertainty of the market and the fact that I can only put 3.5% down, and I'm still considering pulling out (and I'm pretty sure the bank won't accept my offer anyway, and will probably counter). I would love to put 20% down and side-step FHA, but for my situation, I either use FHA or continue renting. We are a family of 4. The house is amazing for the price compared to other properties I've looked at; and the neighboring house is smaller, on less land, and sold for more money.

I'm sure this will generate a myriad of opinions, but to you real estate veterans, is this something you'd stay away from, or do you think this is a good time to buy considering my situation?

Jimbob says

Lots of interesting discussion here, very relevant to my situation. I’m looking at 3.5% down on a $350,00 loan. I’m in the bay area (north bay). My interest rate is 4.3% (not locked yet - pre-approved). Household income before taxes is ~$105,000/yr.

Bay area with household income of $105,000 and without the 20% amount for downpayment.
Hedging on prices falling further(they should,bay area is soo overpriced) and saving up for downpayment would be the ideal choice.But the fear of being priced out of the market is always lurking.
With that household income and a loan of $350K,you are pushing yourself.

Jimbob says

and I’m still considering pulling out

Jimbob says

o you think this is a good time to buy considering my situation?

Jimbob says

I’ve been a little uneasy about the whole thing due to the uncertainty of the market

You just answered your own question. Stay away or jump in as your risk is only loosing 3.5% in case of walkout or default situation.

Rethug says

With that household income and a loan of $350K,you are pushing yourself.

At 8% rates this is true, the housing cost runs around ~$2500/mo.

But at 4.3%, the housing cost is ~$2000/mo.

ChrisLA says

you have a better option?

Why ? because they will throw you in the same bucket for the need for some new govt sponsered affordable housing programs including some 3% down payment assistance program. And we are back where we started.

Both wrongly believe the problem is strickly limited to bad lending and high foreclosure. Their only solution, is fix the lending and stop the foreclosure process at what ever cost.

Both didnt ever acknowledge that home prices are well above incomes and inflation, well into unsustainable bubble. Both still kling to the idea that past high home prices were somehow legitimate and will recover.

Options left ? vote the bubble enablers out of office.

Jimbob says

I’ve been a little uneasy about the whole thing due to the uncertainty of the market and the fact that I can only put 3.5% down, and I’m still considering pulling out

Look at what prices were before the bubble and factor in inflation from 1997 to today which comes to 35% over 1997 prices. The further you get to that price the safer you will be.
Over the long run prices only go up at rate of inflation.

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

So far Santa Rosa prices have corrected nicely so LOWBALL hard its your money and the seller ego.

http://www.dqnews.com/Charts/Monthly-Charts/SF-Chronicle-Charts/ZIPSFC.aspx

sybrib says

Do you think some folks are reluctant to purchase a home because they are not confident about their income (/job?).

Yes, some may postpone but that is part of the planning.

"Stay away or jump in as your risk is only loosing 3.5% in case of walkout or default situation."

No matter what he does he lost his 3.5% since it costs nearly double that to sell a house.

The real demand uptick has not even started. Wait until all the soldiers return from Iraq and Afghansitan and start buying houses with their ZERO down VA loans.

"and that’s been working great for the japanese for 20 years now right? prices dropping every year…

japan is our future."

No, not really. First, Japan had a much larger run up in prices. Second, their population is DECLINING. Ours is increasing.

Actually, US home prices also went up from 100 to 250, 1997-2006:

http://research.stlouisfed.org/fred2/graph/?g=zd

that graph has interest rates in red to show the price support rates are giving to the market.

Second, their population is DECLINING. Ours is increasing.

Increasing population is neither here nor there if there are no more jobs for anyone.

We are not necessarily Japan since there are many different factors -- our immense trade deficit with China, and the over $200B/yr of oil imports we have.

HousingWatcher says

“Stay away or jump in as your risk is only loosing 3.5% in case of walkout or default situation.”
No matter what he does he lost his 3.5% since it costs nearly double that to sell a house.

Loose 3.5% down and walk out. No selling no commission to loose.

Hey there:
I do not know the US tax rules, etc. well, but I presume that with very broke federal, state,and local governments, the tax credits that Troy needs to make buying at the given price/rent ratio marginally OK are at great risk. And that is before considering that the release of foreclosed inventory will put more downward pressure on prices AND rents. Finally, at some point bondholders will lose faith in the US, rates go up, etc... I know and like Bellingham, I used to ride my bike to there as a kid, Lake Whatcom, Fairhaven, Base Camp, and The Sandwich that Ate Cleveland. BUT $330k?? for an apartment of 800-1000 feet or so? meaning $300-$400 per square foot?? I just can't see it. I bought my house in a midsize town, nice view, for $100/foot in 2004. Not on the coast but not far. On the BC side of the border you can rent a full 3bd house for 1200-1400 in lots of places. My own house rents for 1500 for 2400 square feet in a town very much like Bellingham (university, full hospital, etc...). So, sorry Troy, but I would be extremely leery of paying that much per foot for any apartment...

Low house prices is not good for everyone.

Why should house price gets lower because you want to buy. There is always the other side of the trade, the current asset owners, they want the price higher.

People often talk about the old stats of Price-To-Income ratio. That ratio is looking backward, before the days of Internet. Why not look back even farther, the days when people had to pay all-cash to buy house?

So it goes like this:
1.Pony express, train, wired telegraph, telephone, Internet.
2.Royal family own land, rich peasant own real estate & pay all-cash, common middle-class buy with 50% down and mortgage, buy with 20% down, buy with 3% down.

barrister says

and that’s been working great for the japanese for 20 years now right? prices dropping every year…
japan is our future.

I hope you're being facetious -- things *have* been working out great for the Japanese for the past 20 years; particularly for the past 10 years, in which housing has either been flat or has declined at rates small enough that the money saved in not having to rent has more than made up for the small losses. Housing has returned to being the non-speculative, safe investment that it should have been all along.

Troy says

Rethug says

With that household income and a loan of $350K,you are pushing yourself.

At 8% rates this is true, the housing cost runs around ~$2500/mo.
But at 4.3%, the housing cost is ~$2000/mo.
“Nessuna soluzione . . . nessun problema!„

This is close -- we have to tag on an additional ~$300/month for private mortgage insurance because of the 3.5% down (FHA) until we get 20% equity in the house - then that payment goes away. If I buy, I'm not planning on going anywhere for at least 5 years...but most likely more than that.

The value may still drop, but do you think the drop will be significant? Or will it be a negligible amount? Do you believe it will it bounce back within 10 years or so?

I pay $1900 a month for rent now.

APOCALYPSEFUCK says

eat a Realtor!

Thanks for the delicious morning breakfast. :)

MoneySheep says

Why should house price gets lower

Why should it be expensive as hell? Why should the buyer work all his/her life for the RE cartel? Screw it. Cash only!

I have no idea what the market is going to do.

2-3% interest rates is another card the PTB can possibly play to support home prices and the existing stack of $10T of housing debt.

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

A 1970s-style wage-price spiral doesn't seem too likely to me . . .

The 1970s saw the participation rate from from 60% to 64%:

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

which tells us the 1970s was actually a tightening labor market.

I do think we're in something of a Big Government Bubble now. All this money-pumping but unemployment is still higher now more than the worse of the 1970s:

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

We're spending $5.3T on government now, that's $40,000 per household, plus another ~$6000 per household on social security payments.

Federal spending to GDP is very high now:

http://research.stlouisfed.org/fred2/graph/?g=zm

Raising taxes is deflationary to housing, and cutting state spending is deflationary to housing. Printing money is inflationary to commodities and thus deflationary to housing (since the Bay Area is a consumer not a producer of commodities).

Massively borrowing to pay for government might prove to be deflationary to housing too since it possibly puts upward pressure on interest rates, though with our $10T national debt we can no longer afford 5% treasury rates -- that would be a $500B/yr interest cost, $300B more than now.

Housing inflation can only come from rising real wages and/or lower monthly borrowing costs.

I kinda don't think even rising nominal wages will increase housing -- rising nominal but flat real wages just means people are getting wage increases to handle the rising cost of living -- energy, food, health care . . . if those costs keep going up I just don't see how the price of housing is going to get bid up too.

But the wildcard is the regional advantage of job distribution . . . if the Bay Area is the only regional job center, then people will pay proportionally more of their incomes to live here, since the alternative is starvation w/o a job.

If you can find a place you'd be happy to stay in for the next 10 years, I think buying now might work out fine. This is just going on a gut feeling rather than any understanding of present price dynamics.

The whole point about this thread is that with anything less than 20% down, the taxpayers become responsible for low down payment loans. FHA, Fannie and Freddie need to be disbanded and the federal government out of the mortgage guarantee business. If getting a mortgage is truly a business decision, then the borrower and the lender need to agree on terms and not have the ability to play with numbers and let the taxpayer eat any losses.
These programs are being abused daily by borrowers, builders, realtors and bankers and need to be reined in. Government (taxpayer) guarantees are total BS. These programs are designed to benefit the realestate companies, title companies, wallstreet and the bankers.
By offering people 3.5% down, they are offering a welfare program to buy homes. Most of these people should be renting.
After closing costs, they are completely underwater. With non-recourse loans, the taxpayers will be at substantially higher risks and this is not warranted. The new PMI programs are now government funded and backed by taxpayers. Non-recourse loans with less than 20% should not exist if the taxpayers are at risk. If a bank wants the risk, then let them have it.
As a taxpayer, I don't think I should back anyone's mortgage or any banks losses.
I know that the stock market will fall and the banks will suffer, but this is not our problem. Those that made the mistakes ought to pay for them..............

Disgusted Realtor says

By offering people 3.5% down, they are offering a welfare program to buy homes. Most of these people should be renting.

Landlords generally say that. This goes back a very long way, like back to "It's a Wonderful Life", where, if you remember, Mr Potter was trying to get George to stop making mortgage loans with easier terms to poor people so they would be forced into his Pottervilles.

Like I said, if we ran the landlords out of the SFH market out on a rail, I'd be willing to see the private market take over.

Until then, we need the government intervention to keep some semblance of a housing market for families and not all the specu-vestors buying up properties to wring easy money from people who actually have to work for a living.

The whole point about this thread is that with anything less than 20% down, the taxpayers become responsible for low down payment loans.

Only to the extent home prices decline from here. Plus low-down home buyers are required to pay 1.15% a year in PMI premiums, and also pay another 1.6% or more to principal, so as long as prices fall less than 3%/yr there is no systemic risk to "the taxpayers".

Prices aren't going to fall 20% immediately, so this insistence on 20% is just an artificial barrier to keep families from buying the homes that the parasitical real estate investors are scooping up now.

It is really quite disgusting, actually.

Troy says

Housing inflation can only come from rising real wages and/or lower monthly borrowing costs.

Very straight forward point that most bulls on this site don't get it and always confuse that inflation scenario will influence housing equally as all other goods and services. Without healthy rise in income of average Americans nothing can stop the slow bleeding(thanks to RE freaks pushing this on taxpayers).

MoneySheep says

Why should house price gets lower because you want to buy. There is always the other side of the trade, the current asset owners, they want the price higher.

Their concerns will be heard when the market is not overinflated. Right now, it's just echoes of the same delusional whining we've heard for years.

You're arguing against a cheaper cost of living for future homeowners. To you and all the bubble bait out there, your ability to profit from your bad purchase does not supersede the need for all others to have a quality standard of living.