The bottom line..do I have it right?

[hipmatt]

Bottom line:
-housing boom over, first the SMART speculators/investors sell as they
realise the inevitable, thus adding more housing inventory to the
already high amount.

-current interest rates continue to climb reducing the purchasing
power and this means more homes will sit on the market unless they
lower the price FAST(which they won’t do to much of yet because most
homeowners are GREEDY(making 100-200k in the last few years just isn’t
enough, I’m gonna hold onto this goldmine until someone gives me what
its worth! mentality), and IGNORANT(forgot that R.E. have crashed
before..1990 anyone, and actually believe the agents/lenders/brokers
that homes only go up in value) to whats going on. This will reduce
the demand for housing making the supply-demand ratio even worse.

-ARM mortgages and interest only loans start to reset, these payments
will go up dramatically forcing many people to sell as their payments
may start to exceed their incomes causing even more inventory. More
bad news for supply and demand.

-Home equity lines/Refies/second mortgages will basically come to a
halt soon as the historically low rates have been moving upward and
equity drops and home values do. There will now be LESS money to throw
back into the economy, Home Depot, the movie theater, etc, and since
gas is so pricey, you will be buying less Starbucks too. Corporate
earnings WILL go down. The stock market will not like this, and it
will show this most likely causing a recession…yes I said recession.
Sorry.

-Many R.E. related jobs will vanish. Lenders, R.E. agents, const.
workers, flooring, plumbing, landscape, paint, appliance, termite
insp. title, escrow, etc. Some of these people will be forced to sell
the homes that THEY own, now that business is slow..adding even more
home inventory..and putting less money back in the economy. A lot less
22″ wheels for escalades and H2’s will be sold in the near future, I’m
afraid.

-As you can see, there will be A LOT of homes for sale very soon. We
remember the whole supply and demand thingy from high school and
realise that either home prices drop drastically due to the
supply/demand/price curve or there will be a mass number of
foreclosures. I think we will see BOTH. What I don’t know is how all
of this unpaid debt will effect everything. I figure that debt
securities like gold will go up in value, but I don’t know much about
this yet. I also don’t think rates will be this low again for a
while, but I could be wrong. What I do know is that keeping the rates
low to save this disaster would most likely create another disaster.
We Americans and our country are SO far into debt that it makes our
money here nearly worthless, especially to other countries. A sign of
this is inflation that is currently climbing faster than expected. As
a general rule interest rates go up to combat inflation, so we will
have to see how this affects the overall world economy.

-There’s so much to think about, but if this seems correct, let me
know. If you have any other ideals, I would like that input as well.
I am not a DOOM/GLOOM-ER. I am a happy person that is looking forward
to the future. I just want to stay grounded, avoid the hype, and
learn how things work so that I don’t get burned.

[powayseller]

Yup, that’s it. To job losses, add restaurant, retail, and anything else that has benefited from mortgage equity withdrawal. Cruises, travel, furniture (retail again)….

We haven’t even considered the personal dispair. Everytime someone is upside down at closing (I heard of someone yesterday in this position – they will owe money at closing), or gets a NOD, there is more human suffering. People owe taxes on the unpaid debt. They’ll need moving and downpayment money for the rental. At the same time, many will have lost jobs, and have no savings left. How will they manage this? I think we need to expect serious despair among our fellow Americans. I never wanted to write this before, because it’s too sad, but I think divorce, drinking, drug use (prescription?), and suicide will go up.

BTW, if interest rates rise to 10% as johnelco wrote on another thread, I wonder if house prices have to drop even more. With median household income of $65K, the median housepayment at 35% DTI (which is the ratio the banks will come back to soon enough), can only buy you a $250K house max. This would be the new median house price.

House prices are completely dependent on lender rules. Completely. It was only the loose lending that allowed stratospheric prices. Tight lending forces them down. This is a gradual process, which hasn’t started yet. My friend is selling a house to a couple with a low FICO, getting an 80/20 loan. The 20% portion is 10.5%. No money down, stated income. This disaster loan is still being made.

Now imagine these loans are no longer made. People need even 5% down, documented income. We go from 50% DTI to 30% DTI. This will force prices down, putting even more downward pressure.

All these things won’t happen in a big way until 2007 and 2008. This year is just the turning point. Housing is a slow moving ship. Do you think by 2007 and 2008 we will really pick up steam?

Next on the agenda: with the scenario you outlined, hipmatt, where do we go from here?

[4plexowner]

I was in a real estate office yesterday. My realtor shares my view of the market but sits in an office with another realtor who doesn’t.

I was talking with the other realtor about several of the factors that hippmat and powayseller mention above.

Here’s a quote from her: “If people would stop reading that kind of stuff and talking about it, everything would be fine.”

OK! I couldn’t have stated the “got my head in the sand and everything’s fine” way of life any better than she did.

Then, I was in the break room reading the bulletin board (good way to get a feel for an office setting). Prominently displayed is a letter from the county tax assessor. Here are some quotes: “This isn’t Buffalo, it’s San Diego. First-time home buyers, move-up buyers, out-of-town buyers, everyone wants to live in San Diego.” He continues espousing the reasons why now is the time to buy a house and then finishes with: “… the best investment you can make.”

The “everyone wants to live in San Diego” line particularly amused me because I had just read about a high-rise condo buyer in Austin, Texas who stated that “everyone wants to live in Austin.”

So, all of us who have less-than-positive views of the San Diego real estate market need to do two things:

1. stop reading and talking about all the fundamental reasons why the market is headed down (in a big way)

2. adopt “Everyone wants to live in San Diego” as our mantra

[powayseller]

I believe not too many people truly believe in a bubble. Most believe we’ll have a 5-10% drop, then flat prices.

The only reason sales are down is because people cannot sell their starter home, and starter buyers cannot qualify. It’s the damn high prices, and the high interest rates. People still want to buy!

Another big trend is people leaving. Last year, 44,000 San Diegans moved out of here. My realtor friend told me in his last 5 deals, every seller said they are leaving SD if they sell their house. This is one reason the inventory is so high. People are tired of the high payments and just want to get away from the debt. It’s not that they dislike the city, but their finances have gotten too stressed.

Tell that lady realtor that 44000 people left San Diego last year, long before any bubble articles appeared in the paper! Tell her that people are still dying to buy a home, but are not doing so because the sellers price their homes too high or they cannot qualify. Demand is alive and well!

If every seller lowered their price by 5-10% today, we would double our sales this month, I am sure of that.

[dukes]

powayseller:

Love your insightful posts and agree with them all. My fear in all of this is that as the economy weakens, which I think it is well on its way to doing short term interest rates will be lowered by a panicking Fed, and the longer term rates will be lowered by bond market players.

I believe that the Fed can keep the inflation genie in the bottle, although it has crept out in the past couple of weeks. So, to reiterate, my fear is a Fed that bails out next years resetting ARM’s with lower rates and reliquifies the Housing ATM…thoughts…

[4plexowner]

The Fed is between a rock and a hard place.

The rock is a faltering housing market that needs lower interest rates and massive injections of liquidity.

The hard place is the US dollar (and the bonds/notes that back the dollar) which is being rejected by more and more international players.

Don’t forget that America is dependent on the kindness of foreigners to buy $2 billion of her debt EVERY DAY. Our fair country also needs the current holders (China, Japan, asia) of almost $2 trillion in US notes/bonds to CONTINUE HOLDING THEM.

Lowering interest rates and pumping money into the housing market will cause more international players to reject US denominated debt.

The only way to entice international buyers to buy and hold US denominated debt is to raise interest rates.

The Fed’s choice as I see it: sacrifice the US dollar and America’s place in the global economy or sacrifice the debt-ridden US citizens and the housing bubble that is currently sustaining them.

I’m guessing that the bunglers-in-charge will manage to do both – ie, sacrifice the dollar AND the US citizens.

[pencilneck]

Word of the day regarding 4plexowner’s comment regarding the “got my head in the sand and everything’s fine” mentality:

Struthious- like an ostrich.

[powayseller]

I assumed the Fed would keep rates high to keep the dollar strong. We should all do some reading on the possibility of this scenario, because it would change the outcome for housing, that’s for sure.

It also appears the gov’t may not care if the dollar weakens. Sure, it means our long term bond yields rise as foreigners dump them, and our interest payments on the long-term debt goes up. But at the same time, our exports will be cheaper. A weaker dollar is good for our exports.

The media writes that the Fed is raising interest rates to contain inflation. Is that the real reason? I don’t really know. Is it likely that the Fed is raising interest rates to entice foreign investors to buy our bonds?

Has anyone studies the Federal Reserve Flow of Funds report? In the Dollar Crisis, Richard Duncan publishes lots of the FF data. I was surprised that foreigners hold more of our stocks than our Tnotes and Fannie Mae bonds. Raising interest rates will lower stock prices, and foreigners may sell their stocks, but that doesn’t hurt the economy. The Fed needs to make sure someone keeps buying our government debt.

The whole liquidity problem, the source of the money coming out of our houses, is global investors, who are willing to take very low risk premiums to buy mortgage backed securities. This is the real cause of the housing bubble. Don’t blame realtors any more! I will start a thread on this soon.

[john67elco]

If rates go up as high as 1985 you will see only people that can buy homes cash. 3/4/1985 13.15%

Check history of rates here pretty cool.

http://www.mortgageresearchcenter.com/mortgagerates/ratehistory.htm

[john67elco]

Think about this a sec. Have you ever seen that show on A&E called King of Cars? Most people go to buy a car and only wonder what monthly payment is. Nobody ever brings a calculator and calculates the payment times 42/60 months or whatever. They just see is they can actually afford it. So with that in mind now a monthly payment at $400k loan 6.5% is $2528.27 (no pmi/Inssurance). Now do same thing on $288k at 10% $2527.41… I remember the day I first acquired my job 10 years ago and bought this 5.0 GT convertible. Lied about how much I made, forged a statement, and bought it at 20%. Guess how that sucker turned out? WHAT EVER IT TAKES I WANT IT. In the end its going to be extremely difficult to maintain current median at higher rates. The loan guy I was talking with said that Arm’s are affected by FED hikes, but 30 year fixed are adjusted by stock market and gas prices and fluctuate almost every day. Imagine high rates like in early 80’s or mid 90’s. I mean anyone ever consider the term history also repeats itself? I still may buy due to things posted in other thread but the home I buy at 450k would have to go under 300k for me to “have made a better choice” payment wise. But we will pay it down ASAP with all tax returns going to principle and when rates come back down we may refi at lower rate and rent it out or just pay it off. We rented the dump I’m in for 7 years. The home I buy will be 10 years +.

[john67elco]

One other thing. Adian ct in Temecula. There are 8 homes on that small culda-sac st. 3 are currently up for sale. There was 5 out of the 8 homes for sale 2 months ago but 2 sold (probably slashed). There are 5 other homes in that tract in walking distance for sale. Wonder what housing is going to look like drive through there as a starting point and go north into Murrieta. Go through there on the weekends. Signs actually are on top of each other on corners for open houses.

[dukes]

I don’t think this Fed is going to be “tough”. I think they will let the dollar tank and reliquify the system.

Essentially, I am saying they are cowards and will follow the path blazed for them by Greenspan, there is no one of Volcker’s fortitude in the bunch.

This could mean lower rates and a reliquified housing market.

[Anonymous]

I just did a fairly detailed researching of the following. Housing price swings compared to real vs nominal interest rate changes. Here is what I found.

The past 2 very tough periods for RE both had rising real rates, but not necessarily rising nominal rates. What this means is that if this is any guide, the following will need to happen before a big selloff will take place.

4 Scenarios can bring that about:

1) Rates rise and inflation remains flat
2) Rates rise and inflation drops
3) Rates drop, but inflation decreases more
4) Rates are flat and inflation drops

If inflation rises alot, it is unlikely the fed would raise rates enough for real rates to rise. Hence, if the past is any indication, if inflation spirals out of control, it is not likely housing prices would tank in that environment.

#2 could easily happen if we get a commodities market selloff.

Just food for thought, no real opinion intended with this. Anyone reading my posts knows I am in the bear camp, this is just the results of what I found for whatever it is worth.

[barnaby33]

You are forgetting the most insidious option, stop paying on the debt and start printing money, not just lowering rates, but flat out printing money to cover current expenses.

Josh

[4plexowner]

How does today’s economy compare to the past 2 tough times for RE. What are the time periods you are refering to?

Were incomes rising, flat, declining?

What was the job situation? Were decent paying jobs available?

What was the debt load at the consumer, municipal, state and federal levels like?

What was the condition of the US dollar? Did these ‘tough times’ for RE correspond to declines in the dollar? Did the dollar start the tough times from the 0.90 level or better?

I would like to consider some of these factors and look for similarities/differences to today.

If I understand what you are saying, Chris, no matter what happens with interest rates the Fed will continue to create new money/debt at a rate faster than the prevailing inflation rate – thereby keeping ‘real’ interest rates negative.

And, it is only by implementing positive real interest rates that the RE market could be affected significantly.

Several of the proponents of silver and gold as the only honest money believe that the prices of those metals will continue to rise for as long as real interest rates remain negative as they are today. They point to the precious metals bull market in the late 70’s and the fact that Paul Volker had to raise nominal interest rates into the 20’s to create the real interest rates that would halt and reverse the precious metals bull.

Lots of interesting stuff to think about.

[Author]

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