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September 22, 2006 at 5:39 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #36124
(former)FormerSanDiegan
Participantpowayseller –
You are right about the hurdles to refinancing out of an option ARM. There are many. And these conditions are likely to persist limiting them from doing so.
The one scenario for people with ARMs that works in their favor is if rates are the same or lower when the re-set happens. This is only for those who have traditional ARMS or those with option ARMS who have made principal payments. The neg-am option ARM people are screwed either way (That is … unless they put 50% down and have low debt ratios or are making big bucks off their other investments. Which is likely to be an insignificant fraction of the option ARM folks).
ParticipantCardiffBaseball –
While 4% is what the market seems to be asking, isn’t that a losing propostion in a flat or declining market? At least for new investors it must be a deterrent.
You are absolutely correct. Now that appreciation is out the window there are no investors buying for cash flow because they can get more on their investment in an ING account or a CD.
As for a “standard calculation” for determining whether the renter is ahead on the deal, that number changes with time, depending on interest rates, rents, and potential for appreciation.
If you are talking about rent vs buy, then you would need to compute the PITI (principal, interest Tax and Insurance) payment and comapre it to monthly rent after taxes, as well as account for any opportunity costs for tying up a downpayment. By this calculation a number in the 7-8% range or so in today’s environment is probably reasonable.
From an investor standpoint, if I could get 8% return on a property today, I would probably buy it, because that means it’s about 40% cheaper (in terms of return on investment) than most property in San Diego. This is in-line with the range described above.
ParticipantThere is no proper price to charge as a percentage of purchase price. The resale market and the rental market define it for you.
The current rate for SFR in San Diego is in the 3.5-5% range. E.g. a ~500K house in Clairemont rents for $1700 per month or $20,400 per year. Compared to house value thats about 4%. (I use Clairemont because that area has been very near the SD median for the last decade).
ParticipantJES – That is priceless !!!
September 21, 2006 at 5:27 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #36018ParticipantI think lowering 30-year fixed rates to 1% would revive this market, just as hooking up 120 Volts AC to a dead body might produce some muscle twitching.
We would have to call that Bernankenstein’s Monster !
ParticipantIONEGARM – You take out 25-40% of the buyers, you have the same number of properties coming on the market as before and what happens ? Inventory swells. Too many goods, not enough buyers. That spells price decline to me.
An analogy …
If I own a bakery and 40% of my customers disappear how low do I have to cut my prices to get the equivalent of those customers back and get them back in time to buy my bread before it goes stale and I have to toss it out at day old prices (foreclosure/REO) ?ParticipantSparkey –
Q: When has the median income in San Diego been enough to purchase the median priced home on a 100% LTV 30-year loan ?
A: Never.
Perspective … In 1995-96 the median home was in the 160-170K range and required todays median income of about 52K to qualify at the (then) 30-year rate of 8%.September 21, 2006 at 4:22 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #36009Participantrocketman –
Wouldn’t lower rates would reduce the number of bankrupcies since it would improve the balance sheets of many borrowers. Sure, the overextended 0% down option arm people are screwed, but reduced rates would aid the balance sheet of many potential bankrupcy cases than increased rates.
I guess it depends on the timing and extent of potential rate drops relative to the ARM re-set time bombs.
My guess: rates drops would dampen the severity and lengthen the time for prices to fall.
ParticipantThis could just be speculators leaving the market
That’s 25% to 40% of last years’ buyers leaving the market !
Is that not significant ?Discuss.
September 21, 2006 at 3:48 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #36004ParticipantSuppose I have an ARM at 5.5% that resets in late 2007. ARMs are tied to short-term rates. Suppose that the index to which my ARM is tied drops to 3% and the margin is 2%. My ARM payment just went DOWN to 5% from 5.5%.
If re-setting ARMS higher causes negative pressure on real estate and the economy, won’t re-setting rates lower cause positive pressure on real estate and the economy ?
Even if the ARMS don’t reset to lower than the current rate, the fact that if rates reset to 5-6% versus 7.5-8% makes a huge difference in the impact on the borrower, their free-cash flow, and the economy.
Yes, the interest rate does have an impact. Lower rates will dampen the fall, higher rates will hasten the fall.
If you believe that ARM resets to higher rates will negatively impact real estate and economy, then why is the converse not true ? Simple logic.
ParticipantI’d pay extra to NOT live in a gated community. Luckily I don’t have to.
September 21, 2006 at 1:55 PM in reply to: Could a Fed Funds Rate of 3% Revive the Housing Market #35987Participant“Probably there was a fundamental reason for the price increase: larger houses, rising incomes, greater productivity, introduction of loan program which raised demand and allowed more homeownership, etc. ”
My Theory : #1 The rise of women in the workforce during WWII and subsequent increase in dual income families in the following decades.
Without any stats or back-up I believe this to be the primary cause of the large post-war shift upward in the home prices per the Shiller chart, resulting in a new higher plateau from post WWII to 2000.
Rates are secondary.ParticipantMy take …
Fluctuation Happens.
ParticipantRoman – This is the thread related to the plot you posted.
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