Discussion: This isnt the bubble popping

[IONEGARM]

What if what we are seeing right now isn’t the bubble popping?

This could just be speculators leaving the market, and general affordability due to the interest rate hikes effect on short term loan rates.

If the Fed does cut rates (decreasing the impact of ARM resets and allowing new ARMS to be written at low rates) and we dont get any credit tightening (the “real bubble”) we could very well be in for a “Soft Landing” once the inventory overhang gets worked through the market.

Discuss.

[Anonymous]

Let us say that the Fed does drop rates AND stops the use of ARMs. This is a long shot, but let us look at the numbers.

The median price home = 533,000.
The interest = 3%
Payment = 2,247 – 30 year fixed

This does not sound very bad! Let us all buy!

Wait!!!

Can we afford even this?

How much do we need to make to afford this median home?

2,247 * 12 = 26,964 yearly payments
monthly payment * 12 months = money spent on housing in a year.
26,964 / .03 = 89,880
msohiay / 30% fundamental amount that should be spent on housing = yearly income.

AAAAAUUUUHHHHHHHHH!!!!!

I still can’t afford the median price home!

With a 20% down it will work, but I would rather a low house price and high interest vs. high house price and low interest. Cut the price in half and not the interest rates.

[(former)FormerSanDiegan]

This could just be speculators leaving the market

That’s 25% to 40% of last years’ buyers leaving the market !
Is that not significant ?

Discuss.

[zk]

That argument leaves out one thing. And that one thing is the thing that drives the market up past where it should be and down past where it should be. And that thing is, of course, market psychology.

The only reason prices are as high as they are is that people thought prices would keep going up forever. So, no matter how much they had to stretch, no matter how many extra hours they had to work, no matter how many other things they could’nt buy or services they couldn’t afford, buyers would spend whatever it took to get a house at whatever price they could buy one at. The only reason so many people paid $500,000 for a 1300 s.f. crackerbox in Clairemont Mesa was that they thought it’d be worth $600,000 in a year or two.

So, it doesn’t matter if interest rates go down again (unless buyer sentiment turns around with it. But that would require the whole herd to change direction again, and that doesn’t seem likely to happen twice in one year). Because if interest rates went down, then while affordability would be back to where it was when interest rates were lower (and affordability was pretty damn low then), people wouldn’t make the sacrifices and stretches that they would have before in order to buy the house. They wouldn’t pay more than the house was worth as shelter (plus whatever premiums “pride of ownership” and what not add). Because they’d be expecting them to drop in price, rather than go up.

In fact, now that the herd is expecting a drop in prices, there will be plenty of people out there who won’t want to buy a house at any price until they’re convinced that prices aren’t dropping any more. The herd has a lot of inertia. And the herd is accelerating. So it may be a while before the herd is convinced that prices aren’t dropping anymore.

Affordability wasn’t the issue on the way up. If it was, then prices wouldn’t have gotten so high. And affordability, while it may be what turned the tide and sent the herd thundering in the other direction, is not the issue on the way down, either.

Fear of being priced out of the market was the main factor on the way up. And fear of losing money will be the main factor on the way down.

[IONEGARM]

To Sparkey:

You are credit tightening yourself. Others, as we have clearly seen, do not do so and are doing what is necessary (High DTI, High LTV, IO and Neg arms loans) to get into a home.

This may not compel you to buy, but for the ignorant masses that what X house and Y monthly payment (regardless of the terms from what we see in the bubble areas) they will still buy.

To FormerSanDiegan :

The number of speculators and second home buyers is significant, but is it enough to drive the market down or is it just as likely (if not more so) that we face a period of relative stagnation.

[no_such_reality]

IONE, the main thing working against the more traditional stagnation is the number of people that bought in the last 2-3 years that financed with ARMs that could only afford the payment based on the teaser rate or using other features like the minimum payment on the Option ARM.

The reality is that bewteen 60-80% of the people that bought in the last two years could not afford their home mortgage using the actual mortgage interest rate or long term fixed rate.

As they run out of time, the race to exit will begin for those that find themselves in an unsustainable situation.

[Anonymous]

IONEGARM,

I was talking about “IF” the Fed stops those predatory loans. I’m not sure what will happen All I was trying to get across is that the median income ~52,000 still won’t responsibly be able to afford the median house even if the rates are dropped again. If the rates are dropped I hope the banks learned their lesson and won’t offer those loans again…but probably not.

[(former)FormerSanDiegan]

Sparkey –

Q: When has the median income in San Diego been enough to purchase the median priced home on a 100% LTV 30-year loan ?

A: Never.
Perspective … In 1995-96 the median home was in the 160-170K range and required todays median income of about 52K to qualify at the (then) 30-year rate of 8%.

[(former)FormerSanDiegan]

IONEGARM – You take out 25-40% of the buyers, you have the same number of properties coming on the market as before and what happens ? Inventory swells. Too many goods, not enough buyers. That spells price decline to me.

An analogy …
If I own a bakery and 40% of my customers disappear how low do I have to cut my prices to get the equivalent of those customers back and get them back in time to buy my bread before it goes stale and I have to toss it out at day old prices (foreclosure/REO) ?

[JES]

To continue that analogy, let’s say that those same 40% are buyers who used to buy your bread and resell it at a premium at the beach. They never actually had the money to pay for the bread, so they paid with credit cards, carried balances every month and used their profits to buy more bread from you. Business was so good that you raised prices every month in ‘phases’, and so did these resellers. By the end of 2005, bread stands could be seen on every street corner and prices were up a staggering 25% YOY. Some people were even buying bread and selling it on Craigslist for a profit!

Unfortunately, only 5% of the public could actually afford a loaf of bread by the summer of 2006, and many people began to go hungry. 50,000 people fled the city to go to states where bread costs were 75% cheaper. Massive numbers of loaves were placed for sale, only to sit and grow mold as the summer humidity kicked in. Some sellers discounted their loaves and sold, but most were too arrogant and greedy to even consider lowering their prices. Loaves rotted and beachfront stands were forced out of business. Bakeries provided the media with free loaves in exchange for positive stories about a ‘leveling’ in prices and a quick return to rising prices, to no avail.

By the end of 2007 bread prices were down 30%, millions of jobs were lost and many lives ruined at the hands of one of the greatest ponzi schemes ever witnessed. As he signed the foreclosure papers, the bakery owner cried, wondering why he was never able to get back those loyal 40% of his customers. Suddenly, he realized the answer. Those were never cusotmers to begin with – just bread flippers! Even those nice families never bought to eat the bread, but just to hold on to it and sell it for a profit!

[(former)FormerSanDiegan]

JES – That is priceless !!!

[JES]

Sometimes I wonder if analogy and common sense aren’t better ways to gauge this market than analytical, number based study! Or maybe I am just biased since I am horrible at math!

Either way, it is clear that we have a major yeast infection here in San Diego, to continue the bread analogy:)

[speedingpullet]

And they only seem to be selling Matzohs and flatbread here in L.A 😉

[Anonymous]

http://iamfacingforeclosure.com/24/honest-for-sale

A 24 year old “investor” with 2 million in debt

[IONEGARM]

Forgive the long time between replies (went to Vegas the day after I started the thread and promptly forgot about it) I posted the original post because I am looking through homebuilders glasses for the future.

In reply to zk excellent post, who I always meant to come back and give it the time it deserved.

While I do absolutely agree that psychology drives markets, the other part of the psychological makeup is the fundamental desire to own a home in America (which is different, than say the fundamental desire to own some stock) which counterbalances the market when homes get expensive people wont buy “extra” homes or may not stretch to buy, but people will still buy.

The desire for people not to “lose” money in buying a home is matched by the desire for the owners not to “lose” money when selling . The instant a realtor, or zillow.com, or themself, or whatever tells an owner they can get X for a home… any dollar less than X is a dollar lost in their minds.

I think the psychological factor gives a reason for a long protracted muddled descent, with prices slowly edging down while inflation is lifting incomes and eventually, many years or so down the line an equilibrium has been achieved.

[Author]

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