Could a Fed Funds Rate of 3% Revive the Housing Market

[Bugs]

I look at the financing terms as an enabler of the problem, not necessarily the root cause of the problem itself. Were it not so, the bubble would have demonstrated itself EVERYWHERE the financing is available, which is everywhere.

As I see it, the root cause was the widespread perception of RE as a can’t-lose/high-return investment. That perception has been toppled from it’s tower and it’s going to take a miracle from on high to recreate it.

If there are no short term gains to be had and the pricing isn’t skyrocketing fast enough to create that irrational fear of losing out, buyers have no incentive to kill themselves to get in. We have a ton of inventory right now – proof positive that we were never really in danger of running out – with still more inventory in various stages of development.

So no, I don’t think most buyers are going to be so motivated to be a homeowner that they’ll sign on to pay 50% of their income for their housing (on an ARM) into perpetuity, knowing that there is no short term advantage to do so. I don’t think the banks are going to reverse course on tightening their lending requirements, interest rate notwithstanding, when they’re already taking some losses.

Lowering interest rates might mitigate the number of crisis transactions, but it ain’t going to change people’s minds about how sure a thing investing in RE is right now.

[FutureSDguy]

What’s worse for an economy: a lack of affordable housing, or failed loan commitments?

[powayseller]

Roubini writes today on his blog: The Fed ease will not prevent a recession as there is a glut of housing and consumer durables.

SD Realtor, since most loans and refis in San Diego are Option ARMs and I/Os, the Fed Funds rate is more important than the 10 year treasury. So I was just wondering if reviving the exotic lending sector would help housing.

Bugs, how do you perceive buyer psychology? People are still buying homes in San Diego every day, although I wonder when that will slow down.

rseiser, homes prices in the Midwest are falling already. The median price in the Midwest was down July 06 vs. July 05. Places like Omaha, NE which never saw a run-up are under negative pricing pressure, although the inventory glut and use of ARMs has not yet made prices fall. But the auto states and Colorado are having big problems and that’s where the biggest price drops are occuring.

[socalarm]

sorry to repeat, but IF (if) a drastic rate cut happens next year, shouldn’t it follow that the majority of risky loan holders will refinance and avoid the precipitous ‘reset’ decline ? wouldn’t the price decline in that situation stay limited primarily to entry-level homes, as they recede back to affordability?
if existing owners could afford to hang on to their homes regardless of the decline in values, wouldn’t they tend to keep them ? the glut and excess would then be related to flipper/ entry level homes…..

wouldn’t they…?

[PerryChase]

socalarm, I think if prices decline, people will not hold on to their houses, regardless of whether they can afford the payments. They would want to sell to get better a better deal. Or if they’re way under water, they would walk.

[rseiser]

Poway,
if the Midwest drops further AND the Fed drops rates to 3%, maybe I buy a house in Omaha and move there. And I will open my own fund next to Warren Buffet, haha.

[Trader Chris J]

Chris Johnston
iamafuturestrader.com

My research on home price movement does not show a real tight relationship to interest rates. When I first started studying this I was trying to use my knowledge of the bond market as an edge in forecasting housing. I was very surprised to find out that the relationship was not consistent.

My guess as to why this is true relates to market psychology. Maybe once the good ol momentum ball gets rolling one way, a clear fundamental like this gets basically ignored. I think we are in a down cycle and rates will have virtually no effect on it. Affordability still at some point has to matter.

Besides, I love being called a “bitter renter” by someone with 1/20th of my asset base. Keep it coming LOL! These types of people never have the big asset cycles right, it is a rule of nature.

Is anyone in this blog with the real name Ben Santos? If so please send me an email, the email address I got for you was invalid and as a result I could not reply.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

My take on this is, They have already ridden this horse into the ground trying to keep the economy afloat, don’t think they can keep making this dead horse run much longer. Keeping Rates low for too long just makes more people take out loans they can’t afford (MEW) at this point so they can buy more stuff from China or where ever. At some point you have to say enough is enough and come up with a better plan (Like maybe start a new Manhattan project for Energy independence).

Just My opinion.

[powayseller]

There are several hurdles to clear to refinance out of an adjusting loan. Most of the resets start next year, and people are not going to refinance now because 1) they don’t know their loan will reset and/or 2) they hope interest rates are lower when their reset happens. The majority of loan resets will be in 2009 – 2010, if I understand correctly that Option ARMs have 5 year intro periods. So the biggest decline in housing prices would come in 2010, in my opinion, due to the high number of foreclosures from Option ARM borrowers who will default.

The problem for refinancing today could be several. With each passing year, the severity of each of these points that I make, gets bigger.

First, most people who qualified for the adjustable loans will no longer do so under the new lending guidelines which will come out this fall. Those guidelines are going to apply to all lenders, even the private ones. They will use Regulation X and Z to cover them all.

Second, to refinance, your home must appraise for the loan amount. If you are upside down, as many people who bought in 2004 or later could be, then you wouldn’t qualify for a refinance.

Third, if you were making a minimum payment on an Option ARM, your new loan balance could be 10-15% higher, and you may not qualify for a refinance based on the appraisal coming in too low and the payment too high for your income.

Fourth, to get back to the original low teaser payment, the Fed funds rate would need to be exactly what it was when you took out the loan back in 2001 – 2002. I think the Option ARM has a 5 year intro period, and didn’t become popular until 2003, so those borrowers won’t have a reset anyway until 2008. You’d need a Fed funds rate of 3% or so (?)

Fifth, I know of several people whose payment jumped, but they don’t want to refinance because they have a 6 month interest prepay penalty. That is a penalty of 6 months of their mortgage payment (if they are paying only the interest).

[rseiser]

I totally agree with Powayseller, and with the arguments she made. I also don’t see any trick anymore left. Interest only loans/ARMs are in effect already infinity-time-frame loans, so even the 40-50 year mortgages wouldn’t make the current payments any cheaper. Also, there has been so much money taken out of real-estate rather than put in, so bailing out the home-owner by subsidies would take out even more money, and really throw good money after bad. So something like lowering interest rates again to 1% wouldn’t fly anymore IMO, especially since the inflation-monster will at some point raise eye-brows.
If anyone knows another trick that is left, I would really be impressed. But maybe I am not imaginative enough.

[(former)FormerSanDiegan]

powayseller –

You are right about the hurdles to refinancing out of an option ARM. There are many. And these conditions are likely to persist limiting them from doing so.

The one scenario for people with ARMs that works in their favor is if rates are the same or lower when the re-set happens. This is only for those who have traditional ARMS or those with option ARMS who have made principal payments. The neg-am option ARM people are screwed either way (That is … unless they put 50% down and have low debt ratios or are making big bucks off their other investments. Which is likely to be an insignificant fraction of the option ARM folks).

[PerryChase]

powayseller, you put it very well.

You post is very scholarly and few would find any faults with it. It’s free from the “strong and witty” style of delivery that others complained about, but which I miss. 🙂

[powayseller]

Thanks, Perry Chase, for sticking with the issues.

In regard to the rant from carlislematthew, I wonder if you would say all those things to me in person. I will be at the meet-up, and you have the opportunity to tell me exactly how you feel, face to face. When you call other people names in a public forum, while hiding behind your anonymity, it’s just being chicken.

Schahrzad

[carlislematthew]

In regard to the rant from carlislematthew, I wonder if you would say all those things to me in person. I will be at the meet-up, and you have the opportunity to tell me exactly how you feel, face to face. When you call other people names in a public forum, while hiding behind your anonymity, it’s just being chicken.

I have absolutely no desire to meet you, ever, even though I find you clinically fascinating.

I’m sure I’d enjoy the meetup, but it’s just not a priority for me. Checking into a forum every day or two is about as far as I’m willing to go with this part of my life. You, obviously, have different priorities.

I recommend you read your own posts before you accuse me of calling you names. The hypocrisy is simply amazing. Finally, my nickname is actually my name. I revealed my true identity the day I signed up to this forum, “poway seller”.

[powayseller]

Well, then enjoy observing…

[Author]

Posts