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ParticipantI think it’s a mistake to think that when interest rates rise the resulting salesprices will only adjust to the point that the monthly payment is the same.
The only reason there is a 70% disconnect between the market rent and the market value of homes right now is because the buyers have been counting on the potential to profit upon resale. The reason the investors got out of the housing market was because they realized that the “short-term profit motive” was gone. Sooner or later most property owners are going to come to the same conclusion – there is no short term profit potential right now. Thus, no reason to pay the premium for ownership.
I think the increase in interest rates will be of greater impact on pricing than the relationship of must-sell listings to will-purchase buyers OR the number of ARM resets. Combining the three factors – credit, distress listings, and ARM resets – and the results will exceed the mere sum of the three; those results will be compounded.
I think it’s actually possible that nominal pricing could overshoot the long term trend and go seriously into the red if interest rates go up drastically. Who knows? Maybe the pricing could even settle back to 1996 levels before it’s all over.
Letsee: a $250,000 home with a 90% loan would result in a monthly payment of $1,958 + $275 for property taxes and insurance = $2,233/month. That easily compares to a $2,000 monthly rent, and right now we can rent $600k homes in SD County for $2,000/month all day long.
And that’s with a 10% downpayment.
ParticipantIt wasn’t all that long ago that people were salivating over the prospects of a mortgage with an interest rate below 10%. It is not beyond the realm of reason to think that those rates couldn’t go back above 8% within the next couple years.
The thing to remember is that in addition to the cost of money at the “wholesale rate”, all the retailers of credit will have to factor in higher profit margins on their end, too. Instead of 2% above prime it could go back to 4% above prime.
The maximum (conventional fixed/30yr) loan a $3,000/month mortgage payment will support at a 6% interest rate is about $500,000; the maximum amount at 8% is about $410,000. That doesn’t include property taxes or insurance. So yeah, higher interest rates can and will affect pricing trends in those markets that are dependent on employment wages for debt service.
ParticipantIt wasn’t all that long ago that people were salivating over the prospects of a mortgage with an interest rate below 10%. It is not beyond the realm of reason to think that those rates couldn’t go back above 8% within the next couple years.
The thing to remember is that in addition to the cost of money at the “wholesale rate”, all the retailers of credit will have to factor in higher profit margins on their end, too. Instead of 2% above prime it could go back to 4% above prime.
The maximum (conventional fixed/30yr) loan a $3,000/month mortgage payment will support at a 6% interest rate is about $500,000; the maximum amount at 8% is about $410,000. That doesn’t include property taxes or insurance. So yeah, higher interest rates can and will affect pricing trends in those markets that are dependent on employment wages for debt service.
ParticipantThere were several articles some months back about some of the big builders walking away (locally) from a number of land options and losing millions in deposits in the process.
I’m also seeing sales transactions for some parcels from one builder to another, borne primarily out of concerns for project feasibility.
The only reason there’s any construction going on right now at all is because these builders are too far into those projects at this point to walk away or to allow those projects to just sit in wait of the more profitable market conditions. Once they get going they all have holding costs in the form of loans, and the terms for those loans are a lot more expensive than for your average home loan.
Going forward there will be fewer 500-unit subdivisions that would attract the big developers, but there are a lot of builders who can profitably develop a 12-unit or 30-unit subdivision and there remain a LOT of parcels in those smaller size ranges.
ParticipantThere were several articles some months back about some of the big builders walking away (locally) from a number of land options and losing millions in deposits in the process.
I’m also seeing sales transactions for some parcels from one builder to another, borne primarily out of concerns for project feasibility.
The only reason there’s any construction going on right now at all is because these builders are too far into those projects at this point to walk away or to allow those projects to just sit in wait of the more profitable market conditions. Once they get going they all have holding costs in the form of loans, and the terms for those loans are a lot more expensive than for your average home loan.
Going forward there will be fewer 500-unit subdivisions that would attract the big developers, but there are a lot of builders who can profitably develop a 12-unit or 30-unit subdivision and there remain a LOT of parcels in those smaller size ranges.
ParticipantBuilders are running (not walking) away from land options right now in a big way. Does that sound like an undersupply situation to you? It surely doesn’t sound like that to me.
What’s irrational is the idea that homes have to be built in large developments. There are tons of infil development potential, and long after that’s gone there will be redevelopment opportunities. We’re much more likely to run out of meaningful employment than developable lots. Take a look around. We already don’t have enough local employment resources to support the existing housing inventory, let alone future development. That’s why the market is correcting right now.
Our sales volume is declining at the same time our must-sell inventory is increasing. Whatever changes occur over the next 24 months will more likely jibe with the expectations of the bears than the bulls.
Sorry, guys; but thanks for playing.
ParticipantBuilders are running (not walking) away from land options right now in a big way. Does that sound like an undersupply situation to you? It surely doesn’t sound like that to me.
What’s irrational is the idea that homes have to be built in large developments. There are tons of infil development potential, and long after that’s gone there will be redevelopment opportunities. We’re much more likely to run out of meaningful employment than developable lots. Take a look around. We already don’t have enough local employment resources to support the existing housing inventory, let alone future development. That’s why the market is correcting right now.
Our sales volume is declining at the same time our must-sell inventory is increasing. Whatever changes occur over the next 24 months will more likely jibe with the expectations of the bears than the bulls.
Sorry, guys; but thanks for playing.
ParticipantPS II
ParticipantPS II
ParticipantI’ve seen a lot of those signs and some of them appear so similar that I think they might be printed. Maybe that’s their way of conveying the impression that they’re beginners and therefore easy to take advantage of.
ParticipantI’ve seen a lot of those signs and some of them appear so similar that I think they might be printed. Maybe that’s their way of conveying the impression that they’re beginners and therefore easy to take advantage of.
June 10, 2007 at 12:39 PM in reply to: NEED your input, About to buy a new Pienza home in 4S Ranch #58236ParticipantBefore you get overly connected to that $10,000, consider how much of a loss that builder has already suffered on that unit between the time it was previously in escrow and now. At the retail price of the upgrades their loss is a lot more than the $10,000. Now project that rate of loss over the next 12 months.
Taking a $10,000 hit right now is definitely the better choice compared to what’s going to happen to your financial position if you buy that house now. At some point it is not unreasonable to think that house could lose $10,000 in value every couple of months. An annual loss of $60k is not at all beyond the realm of reason.
Stick around for a while I’m sure you’ll save a ton of money on that house.
June 10, 2007 at 12:39 PM in reply to: NEED your input, About to buy a new Pienza home in 4S Ranch #58263ParticipantBefore you get overly connected to that $10,000, consider how much of a loss that builder has already suffered on that unit between the time it was previously in escrow and now. At the retail price of the upgrades their loss is a lot more than the $10,000. Now project that rate of loss over the next 12 months.
Taking a $10,000 hit right now is definitely the better choice compared to what’s going to happen to your financial position if you buy that house now. At some point it is not unreasonable to think that house could lose $10,000 in value every couple of months. An annual loss of $60k is not at all beyond the realm of reason.
Stick around for a while I’m sure you’ll save a ton of money on that house.
ParticipantThere are people who “lost” money they could have garnered had they stuck with their homes longer while the market was going up. Some of them express regret at not being patient enough to hold off on their decision to sell, although that is frequently tempered with the “bird-in-hand” argument.
There will also be people who will “lose” money as a result of buying during what they recognize is a falling market.
From a financial perspective the difference between the two groups of losers is that the former’s losses are widely viewed as consisting of unrealized profits, whereas the latter group’s losses are in the form of hard earned cash.
Patience and commitment has a reward if you can identify the trend; the trick is to exercise that patience and commitment.
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