MACRO future foreclosure concern

[livinincali]

[quote=FlyerInHi]Livin, what s scenario do you see rates doing up enough that would cause home prices to crash back to the 2009/2010 bottom?[/quote]

I didn’t necessarily say prices would crash. A crash would be caused by a forced investor liquidation and/or a lending crisis which most seem to think are currently off the table. That may be true but I’m not sure the risk is as small of some here seem to think.

I said if the interest rate trend change is secular and rates tend to move up then prices would decline over time as I don’t expect income gains to make up for the interest rate changes. That’s what’s happened in Japan even though interest rates have remained low for a very long time. Japanese home prices and stock prices have been bouncing along the bottom for 15-20 years after their crash.

The scenario for rising rates is pretty simple. Just look at most of the countries in the Euro zone. Their interest have gone up not because of an improving economy and rising inflation expectations. It’s been the complete opposite. They are facing deleveraging and the rates are going up because people are fearful that they won’t get paid back.

I’ll say it again, most of us haven’t lived through a period of deleveraging so we don’t understand what it’s going to mean. We’ve gone 30+ years of increasing leverage in a declining rate environment. The average has been a 3.5%/year increase in nominal incomes and a 40-50 basis point decline in the interest rate. That environment has allowed people to expand debt at a rate of about 6.5-7% per year and still maintain the debt to income ratio. When that trend changes things are going to be different and assumptions that it worked like that before are going to be wrong in that environment.

[CA renter]

[quote=SK in CV]

Investors in these funds have no option to redeem their interests. They are at the mercy of the sponsors. If their returns are lower, then their returns are lower, there are no guaranteed returns. (At least not in any of the 1/2 a dozen prospectuses that I’ve seen.) If the economy hasn’t picked up in 5-7 years, then the investors probably made lousy investments. They’ll sell at market value, but they’re not fools. If they have sufficient inventory to materially affect any local market, then they’ll put them on the market slowly so that they get market prices without reducing the market prices. They have absolutely no incentive to do anything else.[/quote]

That’s not how I understand it WRT redemptions, but will have to look into it more. Also, “market” value may well be much lower in 5-7 years (because of higher interest rates, lower investor demand, etc.), so it doesn’t matter how carefully they try to manage their assets, they can still lose money. Some will stay in bad investments, but others will want to cut their losses and move on. Whether or not the funds have to sell the houses, prices can still go much lower than they are today, IMHO.

[SD Realtor]

You make a good point cali. Unfortunately I don’t believe there is reliable data to quantify the effects of higher rates on the San Diego submarket.

I think it is very hard to predict what the San Diego housing prices of today would move to if we endured an environment comparable to say the late 70s and early 80s.

I do believe it is safe to say that no way in hell would prices be able to survive that sort of rate movement. Rates went from 3.5 to 4.5 and everyone moans and groans. How about rates at 8 or 9%. No friggin way a 4S Ranch home priced at 700k today could keep that value.

The question is, what will be the decline? Is it linear? Doubtful. Hard to say what it would look like. I don’t think looking back at say rates in the mid or late 90s is a good barometer either because that was a much more robust economy.

[livinincali]

[quote=SD Realtor]You make a good point cali. Unfortunately I don’t believe there is reliable data to quantify the effects of higher rates on the San Diego submarket.
[/quote]

I don’t think there is either. In a particular submarket who knows. Somebody could invent the next big thing in Carlsbad and create a Facebook like IPO. That would send prices in Carlsbad and some of the sounding areas up, but it probably doesn’t do much for 4S and certainly doesn’t help Bonita.

[quote=SD Realtor]
The question is, what will be the decline? Is it linear? Doubtful. Hard to say what it would look like. I don’t think looking back at say rates in the mid or late 90s is a good barometer either because that was a much more robust economy.[/quote]

I don’t know what the decline would look like. It could be rather volatile like we’ve seen recently or it could be a less pronounced slow grind lower. I just know that the carrying cost of somebody’s total debt is the wall that going to limit home price increases. I also know that it’s much easier to see asset price inflation in a declining rate environment because most assets are leveraged and speculation in assets increases as rates come down. We’ve had a positive feedback loop for assets over the past 30 years. If rates are going to steadily rise than that positive feedback loop is going to turn into a negative feedback loop, especially at the margin which is where price is determined.

Now you could certainly argue that we might get the best case scenario and the fed can successful maintain rates at 4-5% and incomes continue to rise at 3-5 percent. That at least opens the possibility of a continued rise in asset prices. The rise will be limited by the increase in incomes rather than incomes + declining interest rates.

[The-Shoveler]

Livin, SDR,

Anyway I think You also have to throw in the Gov’s (local and Fed) interest in paying (or monetizing) it’s debt into the equation.
You got CalPers already behind and getting further while demanding Pay me first and expect 7% or better returns from it’s investments. FED not doing much better job.

think there will be keen interest in getting wage inflation higher somehow(My two cents).

This should be interesting.

I don’t see how you can get too much higher mortgage rates without wage inflation and keep the all the balls in the air.

[SD Realtor]

Well wage inflation is not an entitlement. If you look at previous periods of wage inflation, they were due to strong economic growth. Our growth has been tepid and the most growth we have seen is in the public sector. Mortgage rates are not indexed to wage inflation, they are essentially indexed to treasury yields. Monetizing debt has been the strategy. As long as that keeps happening the lid stays on. Also for many many housing markets a hefty rise in rates will hurt but be tolerable. For those markets with severe price premiums well above median incomes there will be depreciation.

[CA renter]

[quote=SD Realtor]Well wage inflation is not an entitlement. If you look at previous periods of wage inflation, they were due to strong economic growth. Our growth has been tepid and the most growth we have seen is in the public sector. Mortgage rates are not indexed to wage inflation, they are essentially indexed to treasury yields. Monetizing debt has been the strategy. As long as that keeps happening the lid stays on. Also for many many housing markets a hefty rise in rates will hurt but be tolerable. For those markets with severe price premiums well above median incomes there will be depreciation.[/quote]

Just wanted to correct this because it’s a pretty popular (but entirely incorrect) meme.

———

“Private Industry Workers

Compensation costs for private industry workers increased 1.7 percent over the year. In March 2012 the
12-month increase was 2.1 percent. Wages and salaries increased 1.7 percent for the current 12-month
period. For the 12-month period ending March 2012, the increase was 1.9 percent. The increase in the
cost of benefits was 1.5 percent for the 12-month period ending March 2013, down from the
March 2012 increase of 2.8 percent.

Among occupational groups, compensation cost increases for private industry workers for the
12-month period ending March 2013 ranged from 1.6 percent for sales and office occupations and
service occupations to 1.9 percent for natural resources, construction, and maintenance occupations.

Among industry supersectors, compensation cost increases for private industry workers for the current
12-month period ranged from 0.9 percent for leisure and hospitality to 2.2 percent for information.

State and Local Government Workers

Compensation costs for state and local government workers increased 1.9 percent for the 12-month
period ending March 2013. In March 2012 the increase was 1.5 percent. Wages and salaries increased
1.0 percent for the 12-month period ending March 2013, the same as the March 2012 change. Prior
values for this series, which began in June 1982, ranged from 1.0 percent to 8.5 percent. Benefit costs
increased 3.5 percent in March 2013, up from the March 2012 increase of 2.3 percent.”

http://www.bls.gov/news.release/eci.nr0.htm

——–

“Even modest increases will likely make a big difference to state employees, many of whom haven’t seen significant pay increases since the recession began in 2008. State and local government wages grew by 1.1 percent in 2012, compared to 1.7 percent growth in the private sector, according to data from the Bureau of Labor Statistics. State and local governments have shed 681,000 jobs since their peak in August 2008, by far the largest drop of any recession in the past 50 years, according to the Rockefeller Institute of Government.”

http://www.pewstates.org/projects/stateline/headlines/pay-boost-on-the-horizon-for-some-state-workers-85899452754

———–

“Educators and government employees will miss out. Teachers at all levels and public-sector employees — think postal workers — will see the smallest raises, averaging 2.1 percent, Chou says.”

http://www.nbcnews.com/business/3-percent-pay-raise-new-normal-2013-1C7103235

—————————————————

Other than that, I agree with you about wage inflation, in general. Probably not going to happen on a wide-scale basis, especially not enough to offset possible interest rate increases.

[livinincali]

[quote=The-Shoveler]Livin, SDR,

Anyway I think You also have to throw in the Gov’s (local and Fed) interest in paying (or monetizing) it’s debt into the equation.
You got CalPers already behind and getting further while demanding Pay me first and expect 7% or better returns from it’s investments. FED not doing much better job.

think there will be keen interest in getting wage inflation higher somehow(My two cents).

This should be interesting.

I don’t see how you can get too much higher mortgage rates without wage inflation and keep the all the balls in the air.[/quote]

The government could certainly monetize it’s debt but that just means purchasing power gets destroyed. It’s certainly possible for congress to print up money and give it to everybody in the untied states and get Weimer hyper inflation. Of course does a retiree really care that he’s getting his $70K per year government pension if gas costs $20/gallon and a minimum wage worker makes more than him. Maybe that’s easier in a legal sense but it doesn’t change the fact that you just screwed the pension holder. Honestly what’s the difference between telling him you going to get 20% less money or we’re going to reduce your purchasing power by 20%. The result is the same in that he’s getting less goods and services.

I suppose that scenario is better for those that made bets on house prices and other asset prices going up but the years of labor it takes to buy the house will likely go down.

[SD Realtor]

I can cherry pick articles that counter your argument but don’t have the time, nor care to.

[SK in CV]

[quote=SD Realtor]I can cherry pick articles that counter your argument but don’t have the time, nor care to.[/quote]

The articles didn’t counter your claim, they weren’t related.

[The-Shoveler]

It’s more about reducing the years in labor it takes to pay off your current debt than anything else.

Or reducing the value of your current debt.

[spdrun]

SDR – why is depreciation a bad thing? Depreciation being a bad thing ass-u-mes that prices during the 2003-2007 period were the norm. If anything, home depreciation helps the young buy homes and fucks the boomer parasites who counted on using their houses as ATMs. Good riddance to bad idiots — they made a bad investment, they should hold their tears back, man (or woman) up, and sell short if they need to sell. Buh-BYE!

[livinincali]

[quote=The-Shoveler]It’s more about reducing the years in labor it takes to pay off your current debt than anything else.

Or reducing the value of your current debt.[/quote]

That’s only one side of the balance sheet. For someone who’s in debt that’s favorable. For the person holding that debt as an asset it’s a negative. The reason I feel deflation and default is a better outcome is because at least in that scenario some debts will still be worth something. In a hyper inflationary situation all debts are worthless.

The problem that we have when looking for economic solutions is we tend to ignore the repercussions on the other side of the balance sheet. Would it be good to reduce our overall debt. Yeah it would of course that means the people on the other side of the balance sheet have to take losses. Who are those people, well it’s going to pension funds, retirement portfolios and wall street.

[The-Shoveler]

Right then we reduce wages as well,

Make the money in the bank worth a lot more.
Heck then cash hording will come back in style.

Too bad about the student loan debt.

[The-Shoveler]

Well anyway, Wage inflation for the bottom 80% has been very low and falling behind, The Gov’s (both local and FED) have debts that are near impossible to pay without some serious inflation (or default).

I guess we will see.

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