[powayseller]

Does anyone know the lag between inventory rising and prices falling?

[powayseller]

I’ve read good arguments for both sides. Goldbugs, cash holders, people shorting stocks, those who think we’ll have inflation vs deflation. No one can predict how this will play out. Lots of people make money trying to convince others that their vision will come to pass.

[powayseller]

The difference in payment between 30 yr, 40 yr, 50 yr, and 100 yr is minimal. On a $400K loan at 6%, your payments would be $2400, $2200, $2100, and $2000 (courtesy of housingbubblecasualty.com), respectively. However, your total interest paid goes to $860K, $1.1m, $1.3m, $2.4m!

A borrower who who can’t make the $2400 payment under a 30 yr amortizing schedule, could be put, by the lender, into a 100 yr loan. The payment would be reduced to $2000, which is still pretty high. I bet that our troubled borrower did not have a 30 yr loan; more likely, he had an I/O neg-am loan starting with super low payments of perhaps $1200. Thus, even the 100 yr loan won’t help him much, because it would cost $2000 monthly, and he qualified for only a $1200 payment. So the 100 yr payment of $2000 is almost doubling the payment he could make.

How could the lender possibly work with someone? As shown above, not by giving the borrower a longer loan term.

No loan product exists that can help someone whose ARM is adjusting. The lower their teaser rate, the quicker their demise when their ARM resets. The only hope is the Fed lowering short term rates.

I don’t think we’ll be seeing much of this rescuing. Remember, banks are owned by shareholders, and all those interest and principal losses will show up on the company’s profit and loss statement.

[powayseller]

Holding the bag will be the investors in these mortgages. Investors funded the houses and refinancing boom and America’s big spending spree: Pension funds, hedge funds, and other investors who own mortgage backed securities, collaterialized mortgage obligations, and first and second deeds of trust, and bonds in government sponsored enterprises, and banks who directly hold these loans (i.e. Golden West Financial). Also stock holders in Fannie Mae, Freddie Mac, and Ginnie Mae, for mortgages under the “conventional” limit.

There doesn’t appear to be any data on who holds these investments. It’s not tracked, as far as I know.

The housing bubble collapse will wipe out some individual homeowners completely, and the general economy will suffer right along with them. Loan defaults will wipe out investors, pension funds, hedge funds. I think the fall out could be huge, but again, without the data regarding who’s holding what, we won’t know who’s swimming naked until the tide goes out (gotta love that quote!).

[powayseller]

The risk is transferred to the mortgage holder, or, more typically, the MBS holder, i.e the pension fund and investor.

[powayseller]

I was looking for rental housing in Poway/Rancho Bernardo in November and December 2005. I did a brief search on my usual lists: U-T, craiglist, backpage.com. I did not search the MLS, since my realtor no longer has that access for me. My cursory overview shows the same number of rentals, and now it appears they are all well priced, at about $1/sq ft. In my 1-block area, there are at least 4 of us who are renting. These are attached units, so they may have been cheaper for investors to buy.

When I was looking at rentals, there were about half owned by investors, and the other half by people who had to move, and decided to keep their SD property for appreciation. In my neighborhood, there are 2 houses for sale, but neither is owned by an investor.

We had read about flippers/speculators pulling out, but has anyone seen this happening yet? My landlord is an investor, he’s in it for the long term. He owns many rentals. The flippers should be trying to cash out. Of course, flippers don’t put their homes up for rent. They fix it up and dump it within a few months, right.

[powayseller]

Read my post “preforeclosures in Poway”. There are definitely preforeclosures going on. I just don’t know what happens next… will the house go to auction?

Regarding lender leniency: What lender will let the homeowner live for free? They have to do something to get their money.

Once they’re behind, the homeowner can’t get help with refinancing. It is hard to get a loan, if not impossible, with “mortgage lates”. At some point, the homeowner runs out of CC, refinancings, HELOCs, and is out of money to make the mortgage, and by then it’s even harder to get caught up on default amount.

I don’t know if there have been these preforeclosures for many years. I just checked the first time last week.

[powayseller]

I found another preforeclosure. This is a friend’s neighbor (divorce), and we had been discussing how long this house has been on the market. They listed it at $775K last fall, and dropped the price in January to $750K. But in October they were served with pre-foreclosure! I would have expected a bigger reduction.

Does anyone know how to make sense of the RealtyTrac lien info? Do they list only current mortgages, or do the old ones stay on the record, even if they are paid off as part of a refinance?

[powayseller]

DiveUrge – be careful w/ bond funds -some can hold GSEs. Or they could own bonds in real estate related companies.

[powayseller]

I don’t have historical perspective, but complement you on your foresight. I told my family to make sure that none their holdings included MBS or any GSEs. Avoid Fannie Mae (GSE).

I anticipate some pension funds will be wiped out by this. They chase the high yields and perceived safety of second deeds of trust and MBS. But there seems to be no data on who holds these securities.

Another point – this time IS different regarding loan losses, because the loose lending standards were applied to the masses. There are more subprime borrowers now than last time, and these tend to default sooner. Combine this with no doc, 100% and 120% financing, and you get more people willing to walk away from their home in a downturn. We also have a large percentage of recent employment growth in real estate fields and consumer spending driven by home equity withdrawals.

The question is whether the stock market will be the next bubble. Forget about gold – that’s pure speculation. It could go way up, it could fall. Based on nothing but speculation. There is no fundamental reasons for its movement. It defies logic. People say it’s a safe haven. Can you ever pay for gas with gold coins? Can you pay your rent, mortgage with it? Can you go to Trader Joe’s to buy milk with gold? No way! Gold bugs are just in love with the flashy metal, with the beauty and allure of it. And if it ever got so bad that money lost value, then no one would go to work, and we wouldn’t have electricity or running water or cashiers at the grocery store, so what good is gold?

The dollar should remain strong, as the spread between interest rates in the US and the EU and Japan stays high; as long as investors can earn more on treasuries, they will keep buying dollars. The euro and yen are poised to pay low interest for a long time since inflation risk is low, and the dollar is going to pay higher interest after 2 more hikes.

I don’t see a dollar demise anytime soon. I’m staying in stocks and am trying to figure out how/if to short homebuilders and retailers. I would love to short MBSs, but how do you do that? My husband’s 401K allows him to buy stocks. Does yours?

[powayseller]

Check out housingbubblecasualty.com. SoCalMtgGuy, who runs this site, wrote an article a few weeks ago, showing that the payment on a 40 year is only slightly lower than it would be for a 30 year. I think those loan products are too much hype, and they won’t raise your affordability as much as the ARMs, I/Os and neg-ams did. Maybe SoCalMtgGuy can write an article about this – ask him. He knows a lot about loans.

[powayseller]

There is usually an inverse relationship between home price and interest rates. In the late 1970’s as interest rates increased from 9 to 11%, median home price/per capita income increased from a little over 8 to 10. Over the next 2 years, as interest rates increased to over 16%, home prices decreased to a ratio of 9. During the years 1977 – 2005, there was an inverse relationship between interest rates and price/income for 18 out of 29 years (per my visual look at the chart accompanying Rich’s article).

So although low interest rates led to increasing home prices during this bubble, it does not always do so. This bubble was helped by loose lending more than anything. Once lenders eliminated the down payment requirement, anyone with a pulse could buy a house.

Although people may pay more for a house when interest rates are low, the point of the article is that this in no way makes the home more valuable. If it did, now that interest rates have gone from 5% to 7%, an increase of almost 50%, home values should have fallen a great deal. They have not. Why are people not willing to pay 50% less for that same house, now that their payments are 50% more? So much for the direct link between interest rates and home prices.

[powayseller]

Great comment, about buying an asset when it’s out of favor. I also think now it will take 5 – 10 years. Initially, I thought prices would plunge quickly, but am realizing that Rich is right in his statement that the housing market is like a big ship on the ocean, which turns slowly. His historical price graphs show this too: the first bubble was 3 years up, 6 years down, the 2nd bubble was 5 years up, 7 years down, and this bubble has been 8 years up and could easily take 10 years to bottom.

[powayseller]

Yes, I wonder how much construction costs will decline as builders and subcontractors have to try to get work. Having just finished building a house in San Diego, I noticed several factors which affect prices:

1. Workers’ comp. Many subs told me they pay $33 for every $100 in wages. That is a 33% tax on wages! Crews with illegals don’t have that markup, but if they’re hard workers, they get paid about $25/hr anyway.

2. Competition. Although the contractors are busy and can leave you waiting for weeks to work on your job, so many people have entered this business, that the competition puts a damper on prices. OTOH, they all can charge more, because everyone is busy. Once, I called every backhoe operator in the Yellow Pages. Each did not call back, or said they were booked for 2 -3 weeks at least. The only guy I could find was someone who worked for a local utility, and did the work on the side, with a backhoe we had to rent.

3. Material costs. I’m not sure about this component. Perhaps someone else knows how much lumber, concrete, drywall, appliances etc. have gone up in the last few years. When we were in the Midwest last summer, in a city that had never heard of a housing bubble, we went to Home Depot and compared the price of some 2x4s, and a riding lawn mower to the prices at our SD Home Depot. The prices were the same. There is also a huge remodeling movement, so more high end stuff is desired for kitchens and flooring. So who buys a $50 sink when you can get the $600 stainless steel Franke. Who buys a $50 faucet when you can get the $475 Grohe pull-out LadyLux? Why get the $250 Costco dishwasher, when there is a super quiet Miele for $1600? Now they tell me that top-freezer refrigerators are “rental grade”. You’re supposed to spend at least $2000 for the bottom-drawer freezer, or get the side by side or built-ins for $5K. Perhaps the quality of components has improved. OTOH, granite is so popular now, it has come way down in price. It is no longer restricted to luxury homes. Consumers expect a higher grade of finishes and appliances. And the high end appliances are NOT made in China: they come from the good old U.S. and from Germany. (Perhaps they have manufacturing facilities in Asia?)

I was impressed with the professionalism of the contractors. I did see a pride in workmanship and concern for pleasing the customer.

So I think construction costs in CA are higher because of the 33% workers comp tax on wages, held down by all the competition and raised by the scarcity of workers, and raised by the more expensive materials people put into their homes.

[powayseller]

Yes, I liked it also.

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