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September 21, 2006 at 12:09 PM #7563September 21, 2006 at 12:25 PM #35971vcguy_10Participant
“could this be the first asset bubble in history to not revert to the mean”
Have you seen the historical graph by Shiller? It showed that home prices climbed by 60% (national average) in 1943-1947. After that, prices stayed flat through the 70s! Not even the 1958 or 1968 recessions made prices drop. Even the OPEC-driven recession of 1973-1974 had no adverse effect on RE prices.
No one knows what will happen in the near future. I’m expecting house prices to drop, but I may be wrong, as there are many factors at play. It would be naive to expect the RE cycle to necessarily behave like the last two downturns (early 80s and early 90s), when history shows that each cycle has different timing and dynamics.
September 21, 2006 at 12:38 PM #35975powaysellerParticipantProbably there was a fundamental reason for the price increase: larger houses, rising incomes, greater productivity, introduction of loan program which raised demand and allowed more homeownership, etc. This would be interesting to research. However, for San Diego, judging by fundamentals (wages and rents), we have a bubble on our hands.
September 21, 2006 at 1:55 PM #35987(former)FormerSanDieganParticipant“Probably there was a fundamental reason for the price increase: larger houses, rising incomes, greater productivity, introduction of loan program which raised demand and allowed more homeownership, etc. ”
My Theory : #1 The rise of women in the workforce during WWII and subsequent increase in dual income families in the following decades.
Without any stats or back-up I believe this to be the primary cause of the large post-war shift upward in the home prices per the Shiller chart, resulting in a new higher plateau from post WWII to 2000.
Rates are secondary.September 21, 2006 at 2:42 PM #35993SD RealtorParticipantPS – Don’t forget that the correlation between the Fed Funds Rate and 30 year conventional fixed rate mortgages is not as crucial as the 10 year treasury. As it has been noted many times, an inversion in the yield curves (I believe 6 out of 7 times) foretells an incoming recession. So then the recession hits, the fed lowers the Fed Funds rate and the curves are not inverted anymore.
The bond market rally is really puzzling to me. It “could” be an indicator that people are thinking the overnight rate “has” to get beaten down by the incoming recession. I really have no clue.
If housing doesn’t continue to depreciate over the next 2 years I have a wife who will skin me alive. As long as the monthly sales continue to decline I will be happy. As I said a few weeks ago, I have seen increased activity across many of the sectors for resale homes in several zips. The active/pending ratios have changed improved. Not alot but better then the middle of summer. This could be due to many reasons like people repricing aggressively, many actives simply dropping out of the market, etc… I expect inventory numbers to be down. I also expect September sales to blip up a little from August numbers but down from Sept of 05…
So my short answer is that as long as the 10 year stays above 4.5 then that will not stimulate a strong resurgence.
SD Realtor
September 21, 2006 at 2:53 PM #35995BugsParticipantLowering the rates didn’t do a thing for Japan’s market, except maybe extend the length of time it took to correct.
Stabilizing the interest rate won’t do anything (locally) for the people who are both fully extended and are facing an ARM reset. It isn’t going to bring an infusion of job or wage increases, and it won’t restore the misconception among the gambling class that RE always goes up and never goes down.
This last aspect is the one that’s most telling. A buyer has no incentive to bet everything on a purchase unless they’re confident the short term pain is going to have an outsized long term gain. Without that kind of upside they’ll avoid the risk.
The current buyer psychology is already in motion. In my opinion, the only thing that could make it reverse course right now is….nothing.
September 21, 2006 at 3:14 PM #35997socalarmParticipanti understand it may not influence potential buyers (like in japan) but won’t it take care of ARM resets? won’t a low rate mitigate the ticking time bomb scenario with a flood of refis? “refi while rates are low. it won’t happen again” etc etc.
September 21, 2006 at 3:23 PM #35999AnonymousGuestsocalarm – that works if and only if the house’s market value has not depreciated below the original loan amount. This probably won’t help option ARM loans. Even if it does help reset the loans, we are just adding time to when the bomb goes off.
September 21, 2006 at 3:38 PM #36001socalarmParticipantoption ARMs are in for a hard time, i agree. but aren’t the majority of these ARMs simple 3 /1 though? assuming most of them reset in ’07, that implies they’re at ’04 values. unless values have receded to pre-’04 by then, they should be ok, shouldn’t they?
September 21, 2006 at 3:48 PM #36004(former)FormerSanDieganParticipantSuppose I have an ARM at 5.5% that resets in late 2007. ARMs are tied to short-term rates. Suppose that the index to which my ARM is tied drops to 3% and the margin is 2%. My ARM payment just went DOWN to 5% from 5.5%.
If re-setting ARMS higher causes negative pressure on real estate and the economy, won’t re-setting rates lower cause positive pressure on real estate and the economy ?
Even if the ARMS don’t reset to lower than the current rate, the fact that if rates reset to 5-6% versus 7.5-8% makes a huge difference in the impact on the borrower, their free-cash flow, and the economy.
Yes, the interest rate does have an impact. Lower rates will dampen the fall, higher rates will hasten the fall.
If you believe that ARM resets to higher rates will negatively impact real estate and economy, then why is the converse not true ? Simple logic.
September 21, 2006 at 3:51 PM #36005rocketmanParticipantI agree with Bugs. The psychology of watching and reading about mass foreclosures, mass bankruptcies and people losing their homes, will instill a general fear of property buying which has not been seen since the Great Depression.
September 21, 2006 at 4:22 PM #36009(former)FormerSanDieganParticipantrocketman –
Wouldn’t lower rates would reduce the number of bankrupcies since it would improve the balance sheets of many borrowers. Sure, the overextended 0% down option arm people are screwed, but reduced rates would aid the balance sheet of many potential bankrupcy cases than increased rates.
I guess it depends on the timing and extent of potential rate drops relative to the ARM re-set time bombs.
My guess: rates drops would dampen the severity and lengthen the time for prices to fall.
September 21, 2006 at 5:27 PM #36018(former)FormerSanDieganParticipantI think lowering 30-year fixed rates to 1% would revive this market, just as hooking up 120 Volts AC to a dead body might produce some muscle twitching.
We would have to call that Bernankenstein’s Monster !
September 21, 2006 at 6:38 PM #36023The-ShovelerParticipantNor_LA-Temcu-SD-Guy
Lose lending standards, artificially low rates are what has got this country onto the verge of bankruptcy , Now is it wise to continue making more Americans go further into Debt than they can ever pay off (only renting from the bank in the form of interest only). Making it basically impossible for young people to get ahead.
Does not seem a wise choice , but neither was it to get us into the place where we find ourselves now.
Sad to say but having artificially low rates is like holding Candy out to a six year old while his mother is telling him it is not good for you. What do you think the six year old will do ???
September 21, 2006 at 8:10 PM #36024rseiserParticipantThis is all just my biased opinion, since I am obviously talking my own book:
Overall there are still going to be many unwanted side-effects. The obvious one would be inflation which probably explained the previous period mentioned. Maybe house prices didn’t drop in the 70s, but every commodity, e.g. gold, did much better. That’s why one should hedge for inflation somewhat if one doesn’t have a house.
The next wanted or unwanted consequence could be that house prices in the Mid-west would rise slightly, while bubble areas would still drop. This would bring them back in line with history, and also speculators (riding the trend) might help this adjustment.
Regarding the long-term rate, and especially the MBS market, those might at some point cave and point to higher rates, if inflation is obvious, or foreclosures do their damage on risk premiums.
Short-term rates in the form of ARMs might not be popular anymore either, since if anyone got in trouble it’s the one with an ARM, and people might be too scared to jump in on that one again. -
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