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SK in CV
Participant[quote=ocrenter]
ok, forever is a slight exaggeration. 🙂long term as in 10+ years would be a no brainer to pay off the MR. mid term as in 5+ years the numbers could still work.[/quote]
My apologies for thread jacking, this is a bit off-topic from the OP, but I have to question the whole pay off MR thing…
My understanding, and maybe some RE professionals can chime in here, is that paid off MR doesn’t generally bring a higher sales price.
I suspect that the interest rate on MR bonds are probably a few points higher than prevailing mortgage rates, so on a $60K MR liability, the interest differential might be $1800 a year.
From what I’ve read here, paying off MR early does eliminate future increases in MR assessments, though I’m a bit confused exactly why this is so.
But for a homeowner who has a mortgage, why wouldn’t it be better to pay off a big chunk of mortgage debt rather than paying off MR? Paying off mortgage debt is a guaranteed increase in equity, and paying off MR may generate zero increase in equity, and the interest savings compared to equity build is pretty minimal. Are any of my assumptions way off? What am I missing?
Participant[quote=spdrun]”Conventional loan” is the term for a non-GSE loan, at least locally to me. They won’t lock 4% for 30 years, but they’ll lock 4-4.5% for 10 years, which is enough in my book.[/quote]
I think you misunderstood. A “conventional” loan is not FHA or VA, both of which will finance with (usually) lower down payments than conventional. Neither are GSE’s. They are government agencies. Conventional loans today are generally 20% down and don’t require PMI, though some lenders are free to make up their own rules. Most though not all conventional loans today are also conforming loans (“conforming” to the GSE requirements) if they’re below the conforming loan limits and meet the other requirements.
Participant[quote=CA renter]
It is not the over-supply of housing that will cause the future house price decline, IMHO, but the reduced demand — particularly of those who are willing to pay current prices. If investors/speculators begin to think that the housing market isn’t really all they thought it would be, you could see a pullback in demand between 20-50%+ in some markets. And if traditional buyers see the slowdown, they will also not feel as compelled to pay the same prices that are seen today because of the incredibly hot market (thanks, in large part, to the Federal Reserve’s interest rate policies and price-setting mechanisms which affect prices/yields of all asset classes over time…and are being coordinated with central banks around the world).[/quote]
The big investors are already out of most markets, and they have been for a few months. More in some markets. So far, resale numbers nationwide haven’t dropped significantly. June existing home sales is likely to be slightly lower than May and inventories only slightly higher. As I said here late last year, this summer is likely to show some moderation in the price gains over the last 18-24 months, and possibly even slight drops in some markets. Higher interest rates (which are likely to drop back 20-50% of the recent increases) are likely to put similar and additional downward pressure on prices. That said, demand will remain sufficient to support prices in most markets.
Participant[quote=CA renter]Now, in addition to this possible (likely?) reduced demand, most funds who are investing in SFH real estate have disposition plans for these assets in 5-7 years. Not only that, but many of the current RE investment funds have multi-year lock-up periods. What happens when investors in these funds decide to redeem their funds? What if this coincides with time that the funds plan to sell off these properties? What happens if interest rates are higher and investment returns on lower than had been anticipated with these funds (which is what I’ve been saying for some time)? What if the economy *still* hasn’t picked up for Joe Sixpack when all of this comes about?
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Investors in these funds have no option to redeem their interests. They are at the mercy of the sponsors. If their returns are lower, then their returns are lower, there are no guaranteed returns. (At least not in any of the 1/2 a dozen prospectuses that I’ve seen.) If the economy hasn’t picked up in 5-7 years, then the investors probably made lousy investments. They’ll sell at market value, but they’re not fools. If they have sufficient inventory to materially affect any local market, then they’ll put them on the market slowly so that they get market prices without reducing the market prices. They have absolutely no incentive to do anything else.
Participant[quote=spdrun]Why the blue fark would you buy an investment property that doesn’t produce income? Dumbest idea ever, and those who do deserve what they get.[/quote]
For investment interest deduction purposes, rental income doesn’t qualify. If the money is borrowed for rental property, the interest is deductible against that property. If some other type of investment is made with the proceeds (like stock, non-income producing land, gold, debt), then the interest deduction is limited to investment income. “Investment Interest” has a very specific meaning”.
Participant[quote=spdrun]You’d be incorrect.
Cash-out interest on a rental property isn’t deductible IF it’s used for personal use. If it’s put into a business, another rental property, or a different category of investment, it can be deducted just fine.
Essentially, you deduct it AS IF it were the mortgage on the next rental, bought with cash pulled out, or business loan interest.
If you cash-out refi’ed and used it to buy a shiny new car, you’d be an idiot anyway (car loan rates are cheaper than home loans these days) and deserve to pay through the nostrils.[/quote]
“deducted just fine” is an exaggeration. First, the investment has to be traceable to an investment. And there are limitations on investment interest deductions. No income, no deduction.
It’s just not near as simple as buying for cash, then financing and pulling 80% cash out, and deducting the interest it as if it was purchase money debt. You can’t, for instance, borrow cash from a 401K, use it to buy a property for cash, subsequently finance the property, and then repay the 401K loan and deduct the interest.
Participant[quote=spdrun]Uh, what? It’s definitely possible to get cash out on an investment property, first position loan. Talking conventional loans, not GSE-backed, of course.[/quote]
I’m pretty sure he didn’t say it’s not possible, only that it is harder now than it once was. I also strongly suspect it’s not near as common as some think it is.
Beyond that, I’m pretty sure if this is done for rental property, the interest is not deductible. There’s a 90 day grace period after acquisition for interest on a personal residence. I don’t think there is any such grace period on investment property. There may be a 30 day look-back period that applies, though the IRS rules on tracing are pretty specific, and I’d speculate that these rules are rarely met.
Participant[quote=CA renter]
The problem with the Fed keeping interest rates so low is that investors/speculators are forced to get into riskier and riskier assets in order to chase yield. This pushes the prices of these assets up well beyond what would be “reasonable” if the Fed were not engaging in ZIRP and QE. I would argue that risks are not being appropriately priced in…not by a long shot.And I’m NOT saying that this housing “crash” will be worse than the last (not saying that it won’t be, either). Everything is connected, and the damage from this credit bubble might have even more dire consequences in areas other than housing.[/quote]
At least now we’re past the faulty conclusion that there is not more risk in the market today than 4 or 5 years ago. But you’re still implying that there is a pending crash, which I don’t see happening with current conditions.
If I understand correctly, you think the cause for the looming crash is the investors suddenly dumping their properties on the market. Barring a life changing event (worse than the credit crisis of 2008) I don’t see a real world scenario where this is likely to happen. Let’s go through a few examples of the type of investors turned landlord that we have out there that might cause this crash:
Example 1: I’ll call this guy the Pig investor. He’s 30-45 years old, has a good paying job, maybe in tech, his family has owned rental properties before and he has a few extra bucks, so he scours the market to get a good deal that gives him a 7-8% cash on cash return with a 20% down payment. He dreams that it will be much higher, but he’s never been a landlord himself so he doesn’t really understand that shit happens. AC units break. There are uninsured water leaks. And his expenses are much higher than anticipated, but he got a good low interest rate so he can handle it, and unit is rented. He maintains a positive cash flow but nowhere near what he expected. As a result of market conditions, property values drop by 10-20%, but he still has equity because he bought below market. His unit is still rented at the expected rate, so his return on market equity is now in range he only dreamed of, just on a much lower equity. Barring a personal financial crisis, what is his incentive to dump the property?
Example 2: This is a real world example, a guy I met a few months ago. Very experienced RE investor, though mostly in the multi-unit residential and commercial markets. Net worth of about $250 million. He buys 400 homes for cash in 2011 and 2012 at prices 10-20% below today’s prices. Mostly SFH, but also bought the last 25 units in a new 150 unit condo complex for 1/3 of the 2008 asking price (coincidentally eliminating any chance of existing or new resident owners getting traditional financing with more than 50% of the units non-owner occupied). Takes him longer than expected to reach full occupancy, and now more than a year after he bought his last unit, his vacancy rate is still 10%. But since he has no debt, his cash flow is still huge, because on average, he only needs 2 months of market rent per year to pay all his expenses. If market prices fall even 40%, what other market conditions could change that would motivate him to dump his properties on the market?
Example 3: Private equity investor that’s bought thousands of homes across the country for cash. The money has been provided by investors who have invested based on prospectuses projecting 7-10% returns on their money. 100% of management responsibilities and control is maintained by the PE sponsor (think Black Rock). They’re lousy property managers compared to the first two examples, without the infrastructure in place, and their vacancy rate is as high as 30% for units owned more than 90 days. Cash flow doesn’t develop as projected, but it is still positive since there is no debt. Investors aren’t happy, but they have zero control. What are the market conditions that could develop that would motivate the mass sale of the units under management?
Maybe you have some other scenarios where there would be a mass liquidation by investors. Maybe you can identify some market condition in these examples that would lead to a mass liquidation by landlords. If so, I’d really like to know what they are.
Participant[quote=SD Realtor]I have already posted documented sales statistics debunking the claims that cash buyers are accounting for many sales.[/quote]
I know it’s beyond your direct involvement, but do you have any insight into the assertions that properties are commonly being bought with cash and subsequently financed?
Participant[quote=CA renter]SK,
Delinquencies are down because prices are up. This has enabled people to sell or refinance at lower rates. Prices are up because interest rates have been kept at artificially low levels (for far too long!), and because investors have been chasing yield all around the globe…and have found U.S. housing to be one of the better bets in a world where yields do not match risks.
Inventory has been kept off the market for quite a few years now, and investors who’ve had access to “back-room foreclosure deals” have made agreements with lenders to keep properties off the market a specified period of time, giving the artificial impression that inventories are low/declining via “natural” means. These homes/statistics are not visible to the general public.
Various investors have been piling into the RE market for the past few years, many of them entering a market in which they have no experience, and in which there is a LOT of existing and future competition (all those other investors doing the same thing). In many areas, investor demand has made up 30-50% of the housing demand. More investors than ever have been getting into the “buy to rent” market, and they are over-estimating returns on these rentals for a variety of reasons. Just like I’ve warned in the past, those rosy returns are not coming in many cases. The smart money has already been moving to the sidelines.
So…if you remove ~20%++ of the demand from the market, and add to that the fact that many of these funds will be rushing to put homes on the market once the market turns down, (let’s not forget that interest rates are still at/near historical lows, and more likely to go up than down over the long term), it would seem that the risks to housing prices would be greater than many are anticipating.
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I only read the part of your comment that I’ve quoted, because the rest didn’t seem to be the least bit pertinent to the discussion. (I’ll get to it later.)
The point of discussion is whether the market is at higher risk today than it was 4 or 5 years ago. Some of the things you describe are pretty accurate, though I’d take exception to your assertion that interest rates have been kept artificially low, and that’s somehow done something bad to the market.
Other parts of this comment are nothing more than conspiracy theory. Investors making back-room deals with lenders to keep inventory off the market and paying less than market prices would be a federal crime if the loans were owned by the GSE’s or federally chartered banks. A close friend did prison time for something similar in a deal with an RTC asset manager in the early 90’s. If you have any hard evidence it’s happened, I suspect the US attorney’s office would be interested in hearing about it.
And you kind of make your own two-sided argument with regards to investor influence. First they conspire keep properties off the market and buy at artificially low prices, and then they buy up all the properties on the market driving prices up. Either way, they have supplied capital to remove distressed assets from the equation.
If there ever was this “phantom inventory” you describe, eventually it would show up in the numbers of properties transferred. It hasn’t. It never existed. We’ve heard about it over and over again the last 5 years. Along with dire predictions that various dates will bring tidal waves of foreclosures as variable rate loans are reset.
Your description of the overall investor influence on the market sounds about right. But I don’t think it’s been a bad thing. As I said, it’s removed high risk capital from lenders and moved it to the private sector. And as much as I despise the economic influence of big banks, particularly of the TBTF variety, we need a healthy banking system. I think your predictions about what those investors will do with the properties remains to be seen. Most will not get the predicted returns, though I don’t suspect that any wholesale dumping of properties back on the market will occur. I would rather propose there will be both little incentive and too illiquid and inefficient a market for that to happen. (I expect more likely, the PE RE funds to develop a secondary market, where another round of smart money following less smart money will buy partnership interests at even deeper discounts.) I guess the key to the whole claim of higher risk today is centered on your prediction of mass dumping. Why and how do you think this will happen? And precisely what effect will it have on the market. Please show your work if it’s beyond speculation.
Interest rates that are charged on mortgages are real. My mortgage says right in the loan documents that my interest rate is below 4%. And that’s what I will pay until the loan is paid off. There is nothing artificial about that. You can argue that the market rates are manipulated. And you’d be right. Just as they’ve been manipulated at least since the mid-70’s, and somewhat similarly to how they’ve been manipulated since the Fed was established over 100 years ago. That’s part of the Fed’s job.
That’s not to say that all risk has been removed, it hasn’t. The general economic condition is still fragile at best, the recovery has been primarily for those at the top, and those at the bottom continue to be left behind. Monetary policy to stimulate improvement has all but been exhausted, and I doubt there will be much help from fiscal policy, as it’s frozen, both in the US and abroad, and “do less harm” is about as good as gets. Hopefully we’re at the end of the delta in public spending being a continued impediment to growth.
And back to the main discussion point, even if we disagree about some of the details on how the RE market got to where it is today, I’m still unclear on what evidence there is that the market is less healthy today that it was 4 or 5 years ago.
Participant[quote=HLS]SK,
I’m sure that you know how to read data.
I’m not sure that you understand the meaning of the information gathered to provide you with this meaningful data and thus your contention that the trends are improving.Lie 10 times, then 9, then 8, it certainly indicates that the trend is improving.
There is no point in discussing this with you, you are the final word.
You know how to read data. You stated that an article written about an official report issued in May 2013 from the highest level possible is ill-timed and you have drawn your own conclusions, therefore any other view is incorrect.
If I said that CAR was 1 in a million, it would mean that there are about 314 other people in this country that get what I am talking about. That might just be accurate.
Enjoy your govt manipulated, misleading statistics and charts. Continue on with the trends that you believe are accurate and I hope that this serves you well and continue on with your agenda of support to the propaganda.[/quote]
You realize the silliness of your argument? You call the numbers manipulated and then cite them as evidence of a crisis. The very “manipulated” numbers “from the highest level possible” come from the very same source that shows the improving trend. This feels much like those adorable AT&T commercials, asking the children which is better, more or less? There are “less” delinquent loans today than 4 years ago. Do you dispute this? If so, cite your evidence.
Participant[quote=CA renter]Jumping in here…
The statistics on foreclosures are manipulated because many lenders have simply stopped foreclosing on many people who would have been foreclosed on in times past. Additionally, asset prices are artificially high because interest rates are artificially low, pushing more and more people further out on the risk curve than they would have been without all of the manipulations (repeating the same mistakes that caused the “financial crisis” in the first place). This has been keeping foreclosures off the market, too, either by enabling people to sell instead of being foreclosed on, or by enabling them to refinance to lower and lower rates (which I don’t think is a bad thing, it’s just not the norm, historically-speaking).
As for employment trends, most people I know are making less than they were in 2008, and many of their jobs are also less stable than they once were. More people who want to be employed full-time are being employed part time, and they are often under-employed, as well.
People have been watching their incomes go down or stagnate while the costs of basic goods and services have skyrocketed — so many have lost a lot of purchasing power since 2008.
The unemployment numbers are skewed because the participation rate has declined rather dramatically…and these numbers still don’t include those who are under-employed or who are employed part time, but want to work full time.
http://data.bls.gov/timeseries/LNS11300000
http://research.stlouisfed.org/fred2/series/CIVPART/
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Once upon a time, people believed that “inflation” would make their earnings go up, but that lie has been largely put to rest. Instead, it will make the cost of living/asset prices go up while wages stagnate or decline, especially if we don’t do anything to stop the race to the bottom in the “globalized” economy.
Just my 2 cents, but I have to agree with what HLS has been saying. I think that there are much larger risks out there than most people are willing to acknowledge.[/quote]
CAR, as I said before, I haven’t cited any foreclosure statistics, only delinquency statistics. Have they been manipulated?
I’ve also cited trends, not hard numbers. Is there any evidence that the number of houses that could be in foreclosure is higher now than it has been in the recent past? Beyond that, I would argue against the assertion that the numbers of foreclosures are being “manipulated”. Lenders are horrible at dealing with distressed assets. That’s not a new phenomena, it’s been that way for decades.
As I also said before, the employment trends are also improving. There are not more unemployed people now than a few years ago, there are fewer. It still sucks, but that doesn’t make it worse now than 4 years ago.
In agreeing with HLS, you’re arguing that the housing market is at a higher risk of imploding today than 5 years ago. The fact is, the housing market DID implode 5 years ago. I’m not arguing that there is no risk of it happening again. Only that the statistics cited aren’t evidence that we’re at higher risk today than 5 years ago. They all point to lower risk.
Participant[quote=HLS]
Statistics are manipulated which create the data needed to determine the ‘trends’ that you refer to.
I’m just as concerned with the precise numbers because people believe them as they are released.
I disagree that future economic risk has been diminished. I think that the risk is greater than ever.1.The foreclosure COMPARISONS that are reported are a complete joke yet are used and analyzed by virtually everyone EXCEPT the people who really understand what is going on. It’s easy to fool everyone when fools are in charge.
The entire process of selectively manipulating the process creates completely useless comparisons.
COMPLETELY MEANINGLESS. When’experts’ repeat this blather, it becomes even clearer to me how clueless these ‘experts’ are.2.Unemployment reports are another joke. the current U-6 is 14.3% far worse than the sub 8%
that the govt & media repeat like it was gospel.Maybe black swan events aren’t really black swan.
The govt interference & manipulation to keep a ‘black swan’ from becoming a recurring event is VERY real.
The ‘potential crisis’ is not just being called out now, it’s been talked about for the last 8+ years by a tiny minority who just may realize the risks that 99.9% of others refuse to acknowledge, even if it is a remote risk.For many, many people, their personal situation is far worse than it was at the end of 2008; yet according to the ‘trends’ that you are accepting one would believe that the horizon is rosy and ‘we’ have turned a corner.
I’m extremely skeptical of the reports and trends that are released when I know of many individual situations that are diametrical. I disagree that risks have clearly fallen over the last 4 years. For many people, it has never been worse, and about 10 million people have died in this period so their situations are no longer considered.
With any reports that get released using manipulated statistics, it’s garbage in and garbage out.
It’s always possible to view stats and trends with an alternate perspective if one wants to, rather than just blindly accept what ever gets released, reported and repeated without really understanding the content and how data was compiled.[/quote]
Precisely how and why are the statistics selectively manipulated?
Why is the risk today greater than it was 5 years ago?
Why are the unemployment trends, whether the base number or the U-6 a joke? Both are on a downward trend (June U-6 being an exception).
It seems your whole premise is that you don’t believe the data because you have nothing more than anecdotal evidence that is contrary to the data. I strongly suspect that the data sample used as the basis of these monthly numbers is substantially larger than your anecdotes. Larger the data sample, the more accurate the results. Do you think that is not true?
(And I do understand how to read data.)
Participant[quote=HLS] I totally disagree that the article is “ill-timed”
Do you base your comment one the premise that LPS is 100% correct therefore the article is flawed/incorrect ?
I know for a fact that the way information is reported gets twisted and skewed to meet someone’s agenda.
a) The foreclosure numbers/filings reports are completely misleading and inaccurate.
b) Using the median home price as an important statistic is foolish.
c) Believing the govt released numbers for many things (such as unemployment & inflation) is simply idiotic; yet these last 3 things are relied upon heavily as though they are totally accurate and came from an ethical source without a hidden agenda.[/quote]
I don’t think LPS numbers are 100% correct, but they’re consistent with the CORE logic numbers, and I don’t think either has an agenda other than getting their numbers as accurate as possible. Neither of them is precise, but the value of their reports is in identifying trends. And the trend in the number of delinquent loans is down.
Can you explain why or how either of those reports are misleading or inaccurate? Keep in mind, I’m looking at trends, not precise numbers.
Your comment about using median home prices is a complete non-sequitur. I haven’t, and neither do either of those reports.
Neither have I used government numbers for unemployment or inflation, but similarly, their value doesn’t lay in individual numbers, but in trends. And the unemployment rate is flat to falling, and inflation outside of housing is virtually non-existent.
The article implies we are at near crisis levels. Something horrible could happen if all of a sudden all these delinquent loans hit the market as foreclosures. But the risks of that happening have clearly fallen over the last 4 years, and most all indicators of future economic conditions would lead to a conclusion of future diminishing risks. The economy is always at risk created by black swan events. But excepting events like that, what substantiation exists for calling out this particular potential crisis now? Is there an agenda in doing so?
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