[Daniel]

Neurocrine lay-offs are related to the FDA rejection of their would-be blockbuster, Indiplon. Check out the stock chart for NBIX. First big drop is when FDA made the announcement, second drop is when Pfizer (as a result of the rejection) decided to stop working with them. If there is a single lay-off story that has absolutely nothing to do with the economy or the housing market, then this is it.

[Daniel]

My spending is still about 40% of disposable income 🙂

[Daniel]

Have you heard of Mr. NIMBY? He’s powerful. He doesn’t want no airports. He doesn’t want anything to be built, really. Especially new housing units. Once his own house is up, all other development should stop.

[Daniel]

Rich,

You’re right on target: I don’t actually have issues with the graph itself, but I do have issues with the way the graph has been used to support certain predictions on this forum. I think the Primer, as a whole, is very balanced and well-written, but that graph has been taken out of context so many times in order to justify certain arguments, that I felt the need to say something about it.

It may not come as a surprise to the regulars here that, almost every time Powayseller cites the “upcoming 50% drop” and the “reversion to the mean”, I come out of the woods arguing with her. So I think I owe her some data and analysis to justify my (somewhat) rosier view of the situation.

[Daniel]

None taken.

[Daniel]

Powayseller,

I think I’ll address some of the issues in the Primer myself. Not right now, because I need to gather some data to make my points, but hopefully fairly soon (in the next few days, if everythig goes well). So, until then, the ball is in my court, as they say.

Now, mind you, I’m not going to come out and say that there is no bubble, as it’s pretty clear that there is one. But I will take issue with the price/income graph that’s at the top of the Piggington page, the one which shows SD housing about 100% overvalued. I think that graph is leading many here to believe that a ~50% drop is in the cards. I don’t share that belief. Anyhow, let me gather my data, and hopefully I’ll be able to put it together in a convincing way. I’ll keep you posted on this.

Take care,
Daniel

[Daniel]

I like it in SD. I have been around the world and seen many nice places, but SD is still among my favorites for a permanent residence. Sure, SF is gorgeous, and so is Paris, but I would rather visit there than live year-round.

[Daniel]

No, he did not. He stated a fact (which IS actually a fact): if people used ARMs rather than fixed loans in the past, they would have saved money. His statement has been widely misinterpreted in the media, though, as saying that people “should” use ARMs from now on.

And to keep things in perspective: believe it or not, it is actually true that ARMs are generally cheaper than fixed-rate loans over the long run. On a fixed-rate loan, the lender assumes interest-rate risk, so it compensates for that by higher rates. If the borrower is willing to shoulder that risk, he/she gets lower rates in return. It’s the exact same thing with Treasury yields: long-term paper (30-year bond) almost always yields more than short-term paper (6-month bill). Think of the 30-year bond as a 30-year “fixed mortgage”, and the 6-month bill as a “6-month ARM”. The yield curve is sometimes flat or inverted, but most of the time the 30-year yields more than the 6-month.

And before you power up your flamethrowers, no, I’m not talking about the 1% teaser ARMs, the ARM as an “affordability vehicle”, and all the other junk out there.

[Daniel]

Folks, give the guy a break. Let’s not chase out of this forum everyone who disagrees.

There is a lot of “positive reinforcement” on this site, whether most of us realize it or not. Seeing dozens of people agreeing with one’s views is certainly rewarding, but it is not the greatest recipe for critical thought. I would actually like it very much if more RE optimists were posting here.

Daniel

[Daniel]

Dear X1Y2Y3,

Thanks for all your answers, it’s been very helpful to us all. I have a question on a more technical note: what are the typical margins of the standard ARMs and 30-year fixed mortgages over their respective benchmarks?

Let me take a concrete example: say we have the perfect borrower (high FICO, high assets, full doc, etc) in the perfect loan (conforming, very low LTV, etc). Say the borrower wants a 30-year fixed. I believe the benchmark for that is the 10-year Treasury. So the mortgage rate would be the 10-year yield (about 5% now) plus a margin. What is historically that margin? 1.5-2.0%? Same question for ARMs (say 1-year ARMs). The benchmarks must be either the 6-month or 2-year Treasury, I assume. And what would the margin historically be?

Thanks very much for taking your time to answer our questions.
Daniel

PS: I forgot about the possibility of “buying down” the rate. Let’s say our borrower doesn’t go overboard with that, and just pays the typical closing costs.

[Daniel]

PerryChase asked…

“Daniel, I would agree with you that London is the canary.
Why do you think that our Fed will pause since our deficit is so much bigger than the Brits’?”

I think the Fed feels that the economy is going under. I don’t think we’ll have an inflation problem, I think we’ll have a recession problem. In every past cycle, the Fed stopped a few months BEFORE the CPI peaked. The recession hit soon afterwards. It is often said that they drive by looking in the rearview mirror, but I would give them more credit. They have a decent idea of what’s coming down the pike.

[Daniel]

Sorry, forgot to post the URL: http://www.sdcia.com/

[Daniel]

Powayseller,

We should mostly hold dollars because we live in the US. It’s as simple as that. Our future goods and services will be paid for in dollars, so this is the natural currency to hold for US residents.

That being said, it is good to be diversified for investment purposes, especially in uncertain times. I’m 75% in dollars, and feel comfortable that way.

[Daniel]

Quick comment: E*Trade also allows you to trade futures (E-minis on S&P, cubes, and Russell, and also Forex futures). Commissions are low.

Disclaimer: before trading futures, make sure you know what you are doing. If you’re not sure, consult a pro (our friend Chris Johnson here).

[Daniel]

That’s very, very interesting. I would say that the UK economy has some of the same issues facing the US economy (housing bubble, trade deficit). Their housing bubble is just as bad if not worse than ours; their deficit is much smaller, though. I can’t quite see why the Bank of Italy would pick the sterling (over the yen or the swiss franc, let’s say).

Speaking of UK, I should probably bring into discussion that the true RE “canary in the coal mine” is not San Diego, but London (and also Sydney, down under). The RE cycle in the national US market is about one year behind SD, and two years behind London. London last year was exactly like San Diego now: pretty slow. But this year it surprised most analysts by going even further ahead. “Dead cat bounce?” I guess we’ll see. The Bank of England just started raising rates (again), and their governor has been much more vocal against the property bubble than our Fed.

[Author]

Posts