[patientrenter]

I am absolutely fascinated by people’s ability to hold home buyers virtually harmless in this last great price run-up. When a homebuyer in 2005/6 gambled with someone else’s money, in the hopes of keeping 90% of the future upside profits, is it really “predatory” if they get stuck with 10% of the downside losses? I’d call that a nearly free call option, and it was an incredibly sweet deal for the homebuyers, many of whom committed fraud to get the loans. Quibbling over whether the buyers paid 3% more or less for these call options is like asking if the bank robber had to pay too much for gasoline for the get-away car.

You say homebuyers are losing “their” houses? They never paid for more than 10% of their houses in the first place, if that. I’m sorry that they lost their garages to C’wide. And I’m even sorrier that C’wide’s MBS investors lost 25% of the value of the rest of the houses to the previous sellers.

Sure, all those middlemen share some blame, but the big bucks and blame rests firmly with the buyers. They could always have rented if shelter were the only issue. Even the dumb ones were speculating, and they knew it, and now they want to shine the spotlight somewhere else.

/End rant

Patient renter in OC

[patientrenter]

Peter,

You’re asking for a special case of how to easily buy assets after they’ve gone up a lot in price for no apparent reason. I know you’re just looking for an easy way to “get in” to the Vancouver property market, but most bloggers here on Piggington will read your enquiry as asking how to buy into a market when it’s high (aka “hot”). They suspect you’ll be coming back in few years with a second enquiry: how to sell low.

I’d venture to say that most people on this blog, perhaps unjustifiably, believe that they have no special capabilities to share with you on how to buy high (and sell low). Sorry.

Patient renter in OC

[patientrenter]

brl, you might be right, but 2004-2005 was way, way higher than 3 years earlier, which was way higher than 3 years before that, which was higher than 2-3 years before that. So it’s very hard to see 2004-2005 prices as other than a peak in their own right, before the super-peak caused by unprecedentedly lax mortgage underwriting standards. We’ll see if your prediction is optimistic or not in the next few years.

Patient renter in OC

[patientrenter]

Alex,

If you think the banks are greedy, that must mean you think current mortgage rates are exorbitant.

I have two comments:

1. Mortage rates are determined by supply and demand in the mortgage-backed bond markets. Banks just retail the results to individual borrowers, and sometimes compete with the mortgage-backed bond market by lending a much smaller amount of their own money. They must follow the bond markets, not the other way around.

2. If you think the rates on mortgage-backed bonds are exorbitant, then take 50% of your savings right now and buy mortgage-backed bonds. They’re available to the public, in lots of flavors, one for any taste. After you’ve done that, come back and describe in more detail how exorbitant the rates are.

I am being slightly flippant, of course, but… only slightly. If you think those ‘exorbitant’ rates aren’t high enough for you to plonk down a chunk of your hard-earned cash for them, then don’t expect others to throw away their hard-earned cash for even lower rates.

Patient renter in OC

[patientrenter]

davelj,

I hope you are correct, but let me express why I am not 100% certain that your prediction (that market forces will win out) will come true.

The reason all the pols are scrambling to liberalize the rules on mortgages and mortgage securities for FNMA, Freddie Mac, FHA, OFHEO, FASB, SEC, the Fed, etc. is to keep home prices as high as possible. So if partial measures are seen not to be working as well as they’d like, they’ll move on to stronger measures.

For example, if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.

If ARM resets become too painful in the free market, then short-term interest rates will be lowered, and govt-backed guarantees for re-fis will be expanded until the pressure on prices is lowered.

Most voters will be OK with a 5-10% rollback in prices as necessary medicine, but beyond that voters will push their pols to take stronger and stronger measures. Price declines beyond that could happen, but as they do they will meet ever fiercer resistance.

I am not saying a large price decline is impossible. Ultimately even the strongest counter-measures could yet be overwhelmed. It’s not an exact science, so all these measures could be overcome by market panic or sharp recession or a severe dollar collapse or something else. And the battle may become protracted, with declines dribbling in and becoming large only after many years. But it’s not all decided and inevitable.

Patient renter in OC

[patientrenter]

Yes.

Patient renter in OC

[patientrenter]

Rich,

I just read that article of yours. Damn good advice, some of the simplest and best I’ve seen. Others should take a look too.

Thanks,
Patient renter in OC

[patientrenter]

contraman, cooprider, hipmatt,

I too still get mad sometimes about the favorable treatment accorded by government to irresponsible behavior. But in the last 1-2 years I’ve decided instead to find personal profit in the perfidies of others. For example, back in June I figured there was a good chance the Fed would buckle, so instead of getting mad, I just bought Yen futures. My only point is that it’s a lot easier to deal with other people taking advantage of your responsible behavior if you’re actually making a lot of money from predicting their behavior. Try it! If you’re still getting mad, then just increase your bets until you’re just plain enjoying the pols and regulators and others in action.

Patient renter in OC

[patientrenter]

Wickedheart, Texas is a very big state. Why do you think none of it is a desirable place to live? I visited Austin in June and yes, it was very hot, but it was also very nice in many other ways. I am sure there is some variety there. After all, the people who live there don’t all come out of a TV parody.

Patient renter in OC

[patientrenter]

HLS, your guess is as good as mine, but I think that as general prices go down over the next 2 years, buyers who bought at lower prices will start to face difficulties, triggering more price decline pressures. As esmith said, this thing feeds on itself, so it’s very hard to say that 2003 prices or 2001 or even 1998 form the bright line at which prices will stop declining.

For example, short of government intervention in the form of inflation or bail-outs, where will the rational lenders come from who give 90% of a home’s purchase price in an environment where prices are declining by 10% annually with no upturn in sight? You’d have to be desperate or stupid to be the ultimate investor making such a loan to anyone in a state with no-recourse purchase money loans.

Eventually, prices will go up. Why? Becuase they always do. But I think it’s too early to accurately predict the bottom for this downturn.

Patient renter in OC

[patientrenter]

Some people elsewhere on the board seem to be saying financing for high-end homes is still easy to get, and there are tons of wealthy people to support prices in the better areas.

My suspicion is that as long as prices are down by less than 10-20%, or for only a year or two, then those others may be right. But when price decreases exceed 20%, and they stay down for 2 years, even most of those wealthy people living or buying in the nicer areas will begin to lower their expectations significantly. Until then, prices will only move slowly in response to the gradually increasing ratio of distressed sales to the number of wealthy optimistic buyers who can get big loans.

Given how long a worthwhile(30-50%) price decrease would take under these dynamics, the possibility that inflation will be used to limit the nominal price decrease can’t be ignored. Most voters would prefer higher inflation over lower home prices. So if you’re going to wait it out for 3-7 years, you may want to buy assets that are likely to hold value even in the face of high US inflation. Yen and other currencies of the countries where savers are more politically powerful that they are here in the USA are my first choice.

Patient renter in OC

[patientrenter]

What you said, temeculaguy.

Patient renter in OC

[patientrenter]

What you said, temeculaguy.

Patient renter in OC

[patientrenter]

What you said, temeculaguy.

Patient renter in OC

[patientrenter]

I think we are mostly in agreement, davelj. I suppose I am a little more suspicious that the 50bp GSE ‘advantage’ can be boosted by govt action in two ways, thereby making conforming loans more valuable and the conforming limit more important. My half-century on this planet has probably just made me too cynical.

What are those 2 ways? The GSAs have to charge at least the long-term default rate on the loans so they can break even. Above that, they charge for risk.

GSA rate = risk-free rate + long-term default rate + risk charge.

The government can and does manage the risk charge down, by implicitly guaranteeing GSA bonds, and by allowing them to run on very low capital. They can manage it down further by allowing them to hold even less capital, or hinting more strongly that they’ll stand behind the GSAs in a crisis.

They can manage the charge for the long-term default rate down by saying that they’ll step in in a ‘crisis’ to subsidize the GSAs. Since most default costs over several economic cycles are incurred in the darkest depths of downturns, this effective reduction in the cost to the GSAs of the defaults could be dressed up as govt just doing what it should do – stepping in when all else fails.

I’m glad you are less cynical than me!

Patient renter in OC

[Author]

Posts