How low will it go? Quick survey

[stansd]

I’m thinking purely of the income it takes to support the mortgage, not any psychological factors (behavioral factors may swing with the winds of popular opinion, but the fundamentals are the fundamentals). As long as rates stay below 8-9% (which I think they will), 100K will support a 350K house.

If rates go higher, that means we have inflation and we won’t need the same kind of nominal declines to get back to normalcy.

Stan

[bsrsharma]

Stan, There is nothing psychological or behavioral in a credit crunch. For example (very oversimplified, still illustrative):

case 1: Your case: 100K income supports 350K house price. No problem.

case 2: 200K income. supports 700k house price. The potential buyers save up 140K (20%). Find the 700K house. When they search for mortgage, find none. Pick up a mortgage for 417K, try to transact at 557K.

What happened? Well the 700K house got devalued to 557K. Why? Because, this model applies to everyone in that resource universe. Since there is no competing offer, the seller has to reprice it to 557K to sell or he has to take it out of market.

Unlike conservation of matter and energy, there is no such thing as conservation of value. Value is whatever the potential buyers think it is. When they can’t get enough funds, the asset automatically devalues or goes out of market.

[bsrsharma]

Stan, There is nothing psychological or behavioral in a credit crunch. For example (very oversimplified, still illustrative):

case 1: Your case: 100K income supports 350K house price. No problem.

case 2: 200K income. supports 700k house price. The potential buyers save up 140K (20%). Find the 700K house. When they search for mortgage, find none. Pick up a mortgage for 417K, try to transact at 557K.

What happened? Well the 700K house got devalued to 557K. Why? Because, this model applies to everyone in that resource universe. Since there is no competing offer, the seller has to reprice it to 557K to sell or he has to take it out of market.

Unlike conservation of matter and energy, there is no such thing as conservation of value. Value is whatever the potential buyers think it is. When they can’t get enough funds, the asset automatically devalues or goes out of market.

[bsrsharma]

Stan, There is nothing psychological or behavioral in a credit crunch. For example (very oversimplified, still illustrative):

case 1: Your case: 100K income supports 350K house price. No problem.

case 2: 200K income. supports 700k house price. The potential buyers save up 140K (20%). Find the 700K house. When they search for mortgage, find none. Pick up a mortgage for 417K, try to transact at 557K.

What happened? Well the 700K house got devalued to 557K. Why? Because, this model applies to everyone in that resource universe. Since there is no competing offer, the seller has to reprice it to 557K to sell or he has to take it out of market.

Unlike conservation of matter and energy, there is no such thing as conservation of value. Value is whatever the potential buyers think it is. When they can’t get enough funds, the asset automatically devalues or goes out of market.

[stansd]

Bsharma,

Strongly disagree. Income is a key fundamental (limitations of the median notwithstanding)to housing valuation. The credit crunch is much more transitory-Credit will no doubt be tighter than in the past, but there will be an active and vibrant secondary market for loans…likely even those of the Jumbo or subprime variety at appropriate risk-reward valuations.

Listen to what you wrote: “The fundamentals have undergone a seismic shift.” Fundamentals don’t undergo seismic shifts, that’s why they are fundamentals.

Stan

[stansd]

Bsharma,

Strongly disagree. Income is a key fundamental (limitations of the median notwithstanding)to housing valuation. The credit crunch is much more transitory-Credit will no doubt be tighter than in the past, but there will be an active and vibrant secondary market for loans…likely even those of the Jumbo or subprime variety at appropriate risk-reward valuations.

Listen to what you wrote: “The fundamentals have undergone a seismic shift.” Fundamentals don’t undergo seismic shifts, that’s why they are fundamentals.

Stan

[stansd]

Bsharma,

Strongly disagree. Income is a key fundamental (limitations of the median notwithstanding)to housing valuation. The credit crunch is much more transitory-Credit will no doubt be tighter than in the past, but there will be an active and vibrant secondary market for loans…likely even those of the Jumbo or subprime variety at appropriate risk-reward valuations.

Listen to what you wrote: “The fundamentals have undergone a seismic shift.” Fundamentals don’t undergo seismic shifts, that’s why they are fundamentals.

Stan

[JPJones]

Stan,

“…but there will be an active and vibrant secondary market for loans…likely even those of the Jumbo or subprime variety at appropriate risk-reward valuations.

I assume by “appropriate risk-reward valuations” you are talking about higher interest rates for borrowers of said secondary market loans. Would you please explain how the higher payment that comes with those higher interest rates won’t bring the cost of the property down to compensate? I’m having trouble following your logic.

[JPJones]

Stan,

“…but there will be an active and vibrant secondary market for loans…likely even those of the Jumbo or subprime variety at appropriate risk-reward valuations.

I assume by “appropriate risk-reward valuations” you are talking about higher interest rates for borrowers of said secondary market loans. Would you please explain how the higher payment that comes with those higher interest rates won’t bring the cost of the property down to compensate? I’m having trouble following your logic.

[JPJones]

Stan,

“…but there will be an active and vibrant secondary market for loans…likely even those of the Jumbo or subprime variety at appropriate risk-reward valuations.

I assume by “appropriate risk-reward valuations” you are talking about higher interest rates for borrowers of said secondary market loans. Would you please explain how the higher payment that comes with those higher interest rates won’t bring the cost of the property down to compensate? I’m having trouble following your logic.

[Arraya]

Fundamentals=affordabilty
affordability is a function of interest rate
Loans above 417K: large interest rate shift due to risk-reward valuations
affordability of jumbo loans greatly decreased due to higher interest rate
affordability takes seismic shift
affordability=fundamentals

[Arraya]

Fundamentals=affordabilty
affordability is a function of interest rate
Loans above 417K: large interest rate shift due to risk-reward valuations
affordability of jumbo loans greatly decreased due to higher interest rate
affordability takes seismic shift
affordability=fundamentals

[Arraya]

Fundamentals=affordabilty
affordability is a function of interest rate
Loans above 417K: large interest rate shift due to risk-reward valuations
affordability of jumbo loans greatly decreased due to higher interest rate
affordability takes seismic shift
affordability=fundamentals

[stansd]

Of course higher interest rates will reduce affordability. That’s one of the key reasons we are all talking about 20%-50% reductions in housing prices from current levels.

Income remains a key determinant of affordability, increased interest rates not withstanding. The fundamentals don’t change, but changes in the fundamentals drive changes in values (previous post was in response to the idea that income based analysis was worthless).

Rates (and spreads) on jumbo and subprime loans will be higher than in the past couple years, but these products will remain part of the mortgage landscape the current lack of availability notwithstanding. Rates will go up, home prices will go down, but income (along with interest rate levels) will remain a key determinant of how low they go.

Stan

[stansd]

Of course higher interest rates will reduce affordability. That’s one of the key reasons we are all talking about 20%-50% reductions in housing prices from current levels.

Income remains a key determinant of affordability, increased interest rates not withstanding. The fundamentals don’t change, but changes in the fundamentals drive changes in values (previous post was in response to the idea that income based analysis was worthless).

Rates (and spreads) on jumbo and subprime loans will be higher than in the past couple years, but these products will remain part of the mortgage landscape the current lack of availability notwithstanding. Rates will go up, home prices will go down, but income (along with interest rate levels) will remain a key determinant of how low they go.

Stan

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