San Diego Housing Bubble News and Analysis

Gosh, does looking at that chart bring back bad memories. I remember in the early '80's looking to buy my first new car and they were telling me interest rate was something insane like 21.9%.

Well, I just hope rates stay low for another year at least until I buy my house. And yes, I suppose that is a selfish attitude.

Great chart. I'd love to hear the "pros" opinions on this topic also, as it's something I've been wondering about too.

We'd prefer that they go up ASAP, as our home is paid off, and we're sitting on lots of cash, but in this economic climate, I'm not holding my breath.

Careful Marion, interest rate rises are home value killers. That's likely to be the final stake in the heart of the housing market causing values to crash precipitously. I plan on buying my first home too but plan on waiting until the Treasury market takes a dive and housing has reacted. I'll be paying massive interest but not worrying as much about soon losing the down payment equity.

Also remember that FFR does not dictate mortgage rates. The 10 year U.S. Treasury rate is most closely tied to mortgage rates.

I am no pro, dont even work in the field. So take whatever I say as meaningless watercooler banter and dont invest on anything I say.

Rates are being held low cause they have to. I dont know where to get the numbers but demand for morgages does a swan dive when rates approach 6.5%. Look at our jumbo market, people are bemoaning the terrible 7% jumbos out there, and they CAN afford it. If the fed followed father Paul's preaching and RAISED rates like they need to be to defend the dollar, housing would be road kill. How many people here want to buy a house at 9%? The fed has capital impared banks that are on life support at 2.25%. Immagine 7%. So rates will stay low till the banks can live without them (2010?).

As for HOW this is gonna happen, that is debateable. The current party line goes something like this. "We are currently in a slow down, not a recession. Because of this "slow down", inflation will fall as demand slackens. Then, our Federal stimulus package will put money in the hands of consumers and all will be well again as demand picks back up again in the resulting rise, but inflation will be tamed permanatly." This has the same smell, look and texture as the stuff on my toilet paper after finishing up.
More likely we'll just eat higher inflation for a while and then be told that we did it to save our economy and country. Sure, mistakes were made, but no one could have seen them coming and there was no way to plan for it, so we have learned our lesson and itll be better in the future cause I said so. (why not? it worked with 911, Iraq, Katrina, Afganistan, No child left behind, deficit spending,...................)

Now the fed has to silence those that are being robbed by all this (savers) so they goose the numbers alittle. If the offical inflation rate is 4-5%, we just say that CORE inflation is more important. Now that is high too, but who cares, it is only 2.4%. Core inflation strips out all those nasty sectors that arnt playing nice right now, too bad we still are not in the "Comfort Zone".
Now mind you that chart in the OP was based on inflation calculations that are not used anymore. I hear "old school" inflation is really about 7-8% maybe 10%, not 4-5%, but since the late 1990's we calculate inflation differently. Amazing that we came up with a system that suits our need to have CONSISTANTLY low inflation, who would have thunk it?

If all else fails, LIE. Our supposed rebound comes in 3-4 months, just like it was suppose to be now 3-4 months ago, and 3-4 months ago 8-9 months ago. It has been said over and over again since the music started to get quiet in late 06. Eventually they will be right.
Oh and leave it to the aussi press to find this about the rate that the fed doesnt control...... I have no idea if it is true, but it wouldnt suprise me.
http://www.theaustralian.news.com.au/sto...

Plus, the markets are still more concerned about missing out on the next boom than capital preservation. Even after all this some banks are ramping UP ARM's and other affordability tools to get in on the rebound. As long as just about every national or major regional player is too big to fail, risk is limited but rewards are sky high.

So where does this leave us? Addicted to low rates. Inflation will rage, lies will be told, promises will be made and eventually this will all go away. Then rates will go up alittle and increased regulation and gov support will be promised to negate the need of higher rates. So, dont worry. You will still get that 6% interest rate next year, all of our best laid plans rely on it, and you know what they say about those.

I saw this article, and thought of this thread...

Teens turn to thrift as jobs vanish and prices rise..
http://www.usatoday.com/money/economy/20...

DWCAP .. great post.

There have been a few people hinting that for selfish reasons, they wouldn't want higher rates. Are you sure? This has been debated here before and in another thread. When rates rise, housing prices fall dramatically to account for the higher monthly payments that everyone shopping for homes must make. You are competing for homes with your peers, usually they can only afford to finance so much as well. You may still make an $1800 mortgage, but the home is now $250k, vs $300k when rates were lower. So the only difference being the sales price(lower), and all other factors based on the sales price like property taxes, insurance, escrow fees, points, etc.(also lower)

The advantages to this are: Buying a house at a lower price than everyone else, the opportunities to get to refi when rates become low again(and have an absurdly low mortgage), since you are paying a higher interest rate, you'll enjoy more of a tax write off, and when you sell, if rates are low, you will make a killing due to a likely increase in home values. Those with even more of a down payment should want higher rates even more so, due to the fact that they are financing less than everyone else, and in the mean time, can earn a more decent return with their cash.

So for me, sure I want higher rates, and lower home prices, and Marion, you should probably want higher rates too.

Here is a better chart for mortgage rates since 71...

hipmatt - I agree that we should want higher rates, pushing the homes prices down. No one mentioned the fact that your property tax will be lower, since the home price is lower. And you know taxes are for life.

So when can we expect to see higher rates? We haven't had monster rates since the '80's.

Yes, if you are a smart and serious buyer, you want a low principal balance, high rates, in market bottom with better economic times ahead.

There is a lot of cognitive dissonance on this site about this issue even though it was discussed here in depth many times two years ago. The Relator Triad posting here doesn't like this because it will make it more difficult for them to earn large commissions off of fewer transactions at lower amounts should that scenario come to pass. This is why you really have to take whatever they post here with a healthy dose of skepticsm and critical thinking or you will walk away thinking that worst has already passed.

I also realize that higher rates keep home prices low and you have the added bonus of lower property taxes. Just to clarify my comment about low rates, in my area (Temecula) prices are plummeting regardless. I don't see how much lower they can go no matter where the rates are, but of course, the lower the better. :)

As usual JW has his head up his......

Cant speak for the other 2 but I'd rather do more transactions at lower price points than fewer transactions at higher prices. I know I enjoyed the business more than it was that way.

I think it goes without saying that you are as big a dope as JW if you dont take whatever ANYONE posts here with a healthy dose of skepticsm and critical thinking. (Oh well, I guess I just said it).

"...more difficult for them to earn large commissions off of fewer transactions at lower amounts should that scenario come to pass."

Re-read what I wrote before you post again. I see you never miss the opportunity to get personal eh?

Whatever...in the end, you all know I'm right.

Don't worry JWM-

Despite his fairly good job of e-balling these past few years, our favorite realtor will likely find himself on ocrenter's radar screen before too terribly long.

Now, back to the schadenfreude...

I dont agree with the realator triad thing said earlier. I think the RE agents on here are some of the few who really have any idea what is going on. I appreciate their comments and insights even if I dont want to hear what they are saying. Just about everyone on here cept the trolls wants affordable housing and lower prices. Being an RE agent/morgage broker isnt like being a drug dealer, even if some people in this country hold them in the same comptemt.

It breaks down this way. If you plan on buying within the next 6 months, you want low rates. Housing really wont fall enough in that time span to justify your resulting higher payments. If you plan to make a purchase more than 6 months out, you want high rates as that will drive prices down more. The thing is there is NEVER a bad time to buy in the RE industry, so any rise in rates seems like a travisty.

My problem lies with the Federal Researve and the Banking industry cronies in Washington. They have managed to privatize gains and socialize losses. I know that is said alot, but it really is true. My problem is that the Fed acts as a appolgoizer for the Gov's actions as a debt pusher. We will always be ok if we can just tell the truth and stick to the facts. It is when our hearts start bleeding as a nation or greed starts corrupting our choices that we will fall. Lets take our pain now, and get back to healthy normal growth.

I also realize that higher rates keep home prices low and you have the added bonus of lower property taxes.

I don't know if you've read one of the post about this a few weeks back, but property tax will be what the last owner paid if that was higher, until you get them to reassessed. So the property tax argument is moot.

Marion, home prices are based on affordability and most of the time (other than the last 6-8 years) closely tied to fundamentals. In the last 6-8 years prices have been driven to the point of exhausting affordability even with tinkered and highly levered loan products. To make it simpler to see take the home you want to buy plug the loan amount into the amort calculator at the current interest rate and 20% down and try adding 4-5% to that. Adjust the loan amount so that you have a the same payment at the higher rate and the difference is a good idea of the hit your home value would take if rates increased.

Given the fact that the credit markets are getting so bad that banks don't trust each other and the Gov't is stepping in and taking on losses to help these banks (i.e. Bear Stearns) we should expect to see Treasury rates rise drastically in lack of trust. That will bring about increased mortgage rates in a bad way.

"...but property tax will be what the last owner paid if that was higher, until you get them to reassessed. So the property tax argument is moot."

Well, that is a valid point. However, if you think about that carefully, it would result in more polarization of the buyers. It would seem to me that that would be a major detterent to buying even in a favorable market since it would increase cost of ownership so much that I can't believe that there wouldn't be a major incentive to get the property re-assessed...otherwise selling it could be a problem if the property in question is 25 to 50% less than its last assessed value.

Maybe I'm just too binary minded ;-)

OK. You guys are far much more knowledgeable than I. I thought if you bought at peak and the property value decreased now, you have it assessed and potentially get lower taxes.

But for some reason I thought that the property value is calculated by the purchase price. If someone 2 years earlier purchased a home and now it sells for, say, 25% less and other homes in the area are also selling for more or less the same, then wouldn't the tax rate fall accordingly?

I mean, just seems logical. If it's based on the value of the property, can they just say, in 1985 the place sold for 100k, but in 2006 it sold for 800k so that's what the new tax base will be, but now it sold for 500k, but we're still assessing it at 800k? That doesn't even seem right, especially if other properties in the vicinity are selling for less. Seems like they will assess according to the new lower sales price. They don't have a problem assessing when the new price is high, but they're not going to adjust accordingly when the value drops?

jpinpb, the thread I'm referring to is here. I guess that's the down side of prop 13.

We don't know how much the housing price explosion correlated to historically low fixed interest rates. We do know it had a very high correlation to teaser rates and stated income. Those items for the most part have been fixed. The "Time Bomb" has already exploded. We will be primarily seeing the effects of that and the recession, going forward.

The value to be derived from any correlation of fixed rates to prices is going to be much more nuanced, especially in markets where prices have been beat down pretty well and owning is cheaper than renting,cash flow is produced or where seat equity is involved or some combination of these variables exist.

Another argument for the buy at high rate crowd is that they will refinance to a lower rate. How long will it take until these new great higher rates come around?How much will they affect price and how long will the great refinance rate take to come around? How will all this effect cost as compared to buying at the lower rate in the first place?How much is that refi going to cost? How does this play with paying higher rent than mortgage and foregoing any potential tax deductions?

I invite anyone to make a great data driven argument for proportional fixed rate/ price correlations that prove this theory of waiting for higher rates to be a winner and not a bias. I can't do it so I need help. I believe Rich has said he can't find a strong one. He has posted a chart in the bubble primer that shows fixed rates and price from 1977. I can't see strong convergence or divergence except for times when low adjustable rates/creative financing were also in play. In fact, often times the theory is dumped on its head. Rising rates and rising prices, falling rates flat prices, etc.

It does seem that rates and price would seek equilibrium if left in a vacuum but there are to many other pulls.

In the real world people make decisions based on desire, comfort/risk and a multifaceted perception of value not fixation on one parameter, especially when that one parameter involves a lot of speculation as to when it will come and what proportional effect it will have on pricesand long term costs. Rates are a positive factor right now.

Standing by to eat crow...It would be worth it to see a good data filled argument on this point.

Yes prices are still going down.(even though fixed rates are very, very, very low)

Ok. With the conflicting information, I just went to the horse's mouth. Jessica at the recorder's office explained it to me this way:

Yes, you will pay the previous sales price bill if higher AT ESCROW. It takes 6 to 9 months b/c they're busy for the assessor to come out and "officially" assess your house based on the price you paid for it and other homes that have sold in the area (comps) Then they issue a new bill. If the value of the home is less, then technically it won't be a bill, but a CREDIT.

So, this makes more sense. Since more and more homes are selling for less, say a particular area, each home sale drags down the other, you certainly would have the comps to justify the price reduction.

Yes, you will have to pay the higher tax, but you'll get it back once they get around to assessing it properly. She didn't make it sound like a re-assessment, either. It was an assessment of your house at purchase, but they just are too busy to do it immediately. Nice to know it's retroactive to date of purchase.

Good job with the phone call JP.
This credit comes via a "supplemental" tax bill.If the purchase price is mid-year and more than the previous January assessment you are hit with a bill for supplemental taxes.In each case the bill due in the future is based on the purchase price. That is how I understood it until this last thread people have mentioned.

It only makes sense that they will do it based on what you purchased it for. It's one thing if you purchased a home at peak for 30% less and the other homes are still going up, I can see where they would red-flag it. That would be an anomoly. (Congressman comes to mind) But not a secret, MSM and everyone coming out and saying the market sucks, basically. There's no way they're not going to say nowadays your lower price is not the real, new, justified price. Getting supporting comps shouldn't be difficult. For example, from what I've been reading, all of Temecula, just about, is taking a dump. No assessor is going to come along and say your place is worth 2006 prices when so many homes are on a downward slide.

For a minute there, I was getting worried, thinking government circumventing again. That would suck to pay 2006 priced taxes for the life of ownership, especially w/some Piggs saying further declines - baby-boomer sales in few years to come, inventory rising, etc.

Submitted by asianautica on April 21, 2008 - 10:14am.

I also realize that higher rates keep home prices low and you have the added bonus of lower property taxes.

I don't know if you've read one of the post about this a few weeks back, but property tax will be what the last owner paid if that was higher, until you get them to reassessed. So the property tax argument is moot.

- - - - - - -

For those keeping score, based on the info from the Tax assessors office above, I guess that makes AN's point moot. Therefore the previously moot point of "added bonus of lower property taxes" is now un-moot (i.e. valid).

FormerSanDiegan, if one buy at a higher price, one can just as easily request for reassessment too. So w/in a year, both houses will be paying the same property tax. So, please tell me, where's the tax advantage? Also, Rustico brought up a very good point and I completely agree. If someone want to debunk that theory, I'd love you see your #.

With respect to the FFR and USD LIBOR, I feel that we are looking at several years of rates in the general vicinity of where we are now. I think the FFR is going lower before going higher. The USD LIBOR has been and may continue to be more erratic but I believe it will remain relatively low for several years.

But since the Fed is currently the sole provider of credit to the banking system via US Treasuries, if the cost of Gov't debt goes up drastically the FFR is powerless and it's illusion of value will be gone. The long end of the bond curve is what to keep an eye on as it drives the validity of the FFR value.

Marion, home prices are based on affordability and most of the time (other than the last 6-8 years) closely tied to fundamentals. In the last 6-8 years prices have been driven to the point of exhausting affordability even with tinkered and highly levered loan products. To make it simpler to see take the home you want to buy plug the loan amount into the amort calculator at the current interest rate and 20% down and try adding 4-5% to that. Adjust the loan amount so that you have a the same payment at the higher rate and the difference is a good idea of the hit your home value would take if rates increased.

Hi Capeman. Yes, I understand the concept. My point earlier was that prices in my area are plummeting quickly even though rates remain low. Therefore, if I can get 1996 prices for a home here along with low rates, then that is the ideal situation-as it would be for anyone.

However, in the absence of that scenario, it's better to pay less for the house when rates are high, rather than pay more for it when rates are low.

You posted that you were going to buy your first house. In what area are you looking?

It isn't necessarily better to buy during high interest rates if they are not going to go higher. I'm keeping that as one of my main criteria on timing my buy because I don't want to see my 20%+ down payment evaporate because of a precipitous rate increase. If I had been able to buy in '98 (in college) I wouldn't worry at all while having lower rates and lots of equity in a fairly priced house.

Being that I will likely be buying in a down trending market I don't want to be caught off guard by another variable and not have enough equity to get out in an emergency. Take my input for what you will since I don't have data to back it but with all of the fraud and chicanery we've seen in the credit markets/banking industry it's a given that at some point the game will be up and rates will soar because of it.

I'm hoping to buy in the SD North County coastal area in the next couple of years but I am willing to wait out for optimal timing even though the family is kind of crammed in a small coastal rental right now.

"Therefore, if I can get 1996 prices for a home here along with low rates, then that is the ideal situation-as it would be for anyone."

The implications are that the prices are going to go even lower than they currently are. I know, it's even hard for me to believe that, but looking at the big picture, it is looking more likely than not.

Marion, I understand what you are saying and having seen what is happeing in Temecula / Murrieta upclose and personal a couple of weeks ago (saw some very nice properties for sale with the nicest one with a huge foreclosure auction sign in the window...corner lot too), I can understand how tempting it is. It is the one area that if you have a steady job with enough income to support it and don't really plan on moving anywhere for a long time, you could justify the purchase. The key is having a stable income in that area and that is going to be bigger assumption than most think it is in the coming years.

"The key is having a stable income in that area and that is going to be bigger assumption than most think it is in the coming years."
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I think we are going to see the economy effect alot more people moving forward - salary cuts, or no raise, or job loss, etc, all resulting in increasing pessimism regarding income and stability. You can be looking at a fantastic price on a home with a historically low interest rate, but if you are really concerned about job stability are you going to pull the trigger and buy or are you going to remain in a holding pattern until you feel some stabilization?