OptimizedPrime

Existing Home Sales Going Strong

I wonder what happens to our society when all of the people buying homes right now find out that they've been positively DUPED by their government.

In other words, as soon as the propping stops ($8k give-away, defacto govt. sponsorship of the mortgage market) then EVERY SINGLE ONE of the new home "owners" who plunked down their life savings on a down payment to get on board the New Bubble will be SCREWED. Prices will fall by AT LEAST another 20% across the board. Bye-bye life savings.

So what do you do when the government screws you like this? You walk away. The conscience of anybody holding out because they are trying to be Honest Citizens will cleared by straight-forward reciprocity: "the government screwed me, so I'm screwing the government BACK by walking away from my obligation to make house payments".

I've said this before: when (if?) we return to a semi-free-market society like we were pre-Bubble, EVERY home loan written will have the CERTAINTY of the walk-away concept built into it.

In other words, banks will need to price in the risk of the house going underwater (asset and buy-versus-rent) at which point a foreclosure is a IMMEDIATE CERTAINTY.

This means banks will need to drastically change their risk profile for mortgages (they will take ALL of the risk on minus the down payment). This means that, structurally, the actual free-market price of an American home loan has drastically INCREASED because of the Bubble. This in turn will make the entire market a lot more expensive to finance, which will in turn drive the price of the assets much lower.

Are there any economists out there that can let us know what we should invest in when that happens?


OP

What Happens When the Government Stops Propping Up Housing?

Remember, the $8k cash-for-condos deal is NOTHING compared to the $TRILLIONS the govt. is spending to keep writing liar loans and NINJA loans.

If the loan market was not propped up by the government, anybody want to guess what mortgages would be at? 10%? 20%? Unobtainable?

Remember that interest rates going from the impossible 5% they are now to a more free-market 10% will effectively increase the price of a home for the average buyer by about 50%. Put that in your models and smoke it.


OP

Conservative Property Index Predicts We're Less than Halfway Through Fall

@Jeffreygordon -- We're not talking about mortgage here, we're talking about the perspective of a cash investor. In this case the $1m in capital "costs" about $50k/year at 5% (just a ballpark assumption of what you might get from your capital in other markets). Then you pay property tax, other expenses, upkeep, etc. etc.

However, it really comes down to the return you want on your cash. You are right in saying that this ratio can certainly be more like $12k/million in certain situations, for instance on a property where you cannot count on full occupancy. I think the "15x annual rent" ($6k/million) rule-of-thumb is just a starting point, and you then need to work the number down from there.

When interest rates rise, housing is a TERRIBLE investment since you are hit with a double-whammy: 1) your capital is worth more when it's invested (so your effective "cost of capital" is higher); and 2) your asset loses value since house prices are highly indexed on interest rates since that is how they are typically purchases by non-investors.

By the way, if you are a individual homeowner wondering, "why should I care about what investors think" the answer is the "price/rent ratio" determines the "fundamental" value of your asset and usually portends the long-term direction of the price.


OP

Conservative Property Index Predicts We're Less than Halfway Through Fall

@Location Cubed -- Spot on. There are some areas that have probably fully corrected and some that are still partying like it's 1999 (2007) and sitting on a cliff ready for a 50% fall.

You can aggregate the real estate market to get overall trends, but you ALWAYS need to apply LOCAL math to a specific market. This is not hard: apply price/rent ratios. Today, "comps" in real estate should be based EXCLUSIVELY on rents and a proper Earth-bound rent/price ratio like the handy "6k/millon" rule (monthly rent to purchase price).

Just like the .bomb era made (and ruined) millions of "arm chair Buffetts" the housing bubble is going to eliminate the weekend "flippers" and return the practice to the realm of professional full-timers that know what to look for in a market. They will properly be called "speculators" and "investors" and NOT "homeowners".


OP

Three Factors that Will Drive New Home Sales

As others have pointed out, #'s 2 & 3 are temporary.

#1 is the only one open to debate, but everything I've read is that our unprecedented demographic bump with the Baby Boomers is going now, and they are all moving from their big family houses near work to small 1 or 2 bedrooms in the middle of nowhere to retire without the kids.

Combine this with a giant building boom that left millions of houses unoccupied (investor-owned homes are still "inventory" if they are sitting empty remember) and you have oversupply and under-demand.

Combine THAT with the anti-immigrant sentiment building in our country (think Japan here) and the fact that we're not breeding like we used to and the US is population-neutral without immigration and we're on course for a very long period of flat population growth.

Our population needs to grow by something like 15% before we'll fill the houses currently sitting empty (not counting the negative factors above). Also, for some bizarre reason, we are STILL building houses in this country and that of course needs to stop. Insofar as it doesn't the inventory glut will take longer to disappear.

Demographics have never, in the history of our country, been so stacked against housing. Never.


OP

Housing Prices Are Rebounding

Inventories are NOT down. That is crazy talk.

First, speculators buying up inventory does NOT reduce inventory--the inventory just shifts from one balance sheet to another. The houses are still unoccupied and they are still for sale eventually (or for rent, which will increase rent supply, which will reduce overall rents, which will tank purchase prices).

Second, the shadow inventory inside of banks is estimated to be equal of the current for-sale (visible) inventory.

If inventories are not down, then the "sea change" is not possible. People are still shacking up with their parents and friends and in general getting along with less housing in the US. This in turn would point to any bump in sales we've seen as temporary based on short-term incentives like the 8k give-away and government-backed loans (FHA).

This market today is not "real". When it returns to reality (or the US government goes bankrupt trying to prevent it) house prices will plunge. There's no stopping this.


OP

Fantasy Housing Numbers a Prelude to the Next U.S. Crash

@surgcare: the problem is not a "reset" of the same loan at a higher interest rate, the problem is a "re-cast" of the loan to a different form. Most of the absurd loans written in the last five years will NOT be offered to the same owners since there is no longer equity to back the bank's bet. When an interest-only or reverse-amortization loan rescasts to a standard 30-year fixed, the owners in question usually see 2-3x higher payments, which is devastating.

Stabilization of U.S. Housing Prices

Most of us are too young to have personally witnessed something like our current climate to put it into perspective. In other words, most of us weren't very old (or alive) in the 1930s when the last time we had a downturn like this and the last time our country faced significant widespread DEFLATION. Many younger folks think this is the 80s where were going to have a little "recession" and then BOUNCE right back to free-wheeling credit. Most of our myopic young can't understand that we're in the midst of the greatest deleveraging our country has ever seen.

Those old enough to remember, or can read their history books know that we're about two years into a ten year long down cycle. Buying a house right now although perhaps an exciting luxury for people with money to burn is an CERTAIN LOSER from an investment standpoint even "long term".

Credit the Real Estate industry for convincing the buying public to look at a house as a RETIREMENT PLAN instead of a place to live. Today, as an investment, housing looks terrible and they are complaining that nobody wants to buy. Live by and and die by it, mo-fos.


OP

Employment Report, September 2009: A Closer Look

The new house construction industry has lost 33% of it's jobs? How can these numbers possibly be THAT POSITIVE?

We have MILLIONS more houses than we need in this country and several combined secular changes together including a different credit situation (massive deleveraging) baby boomers moving into smaller digs and people are figuring out how to live with less house (doubling up, apartments, parents, etc.).

In other words, we are we STILL building 2/3 of the houses we were building during the boom times? Who the hell is going to pay for these houses? We should be building ZERO new houses right now!

Please tell me some of these workers are somehow connect to exports...


OP

Case-Shiller Gives Upbeat Outlook; MacroShares ETFs on the Move

Tell me again why these ETFs based on derivatives are any different than pure gambling? You could just as easily create an ETF based on which team will win this year's Super Bowl.

These Mortgage Rates Won't Be Here for Long

@Liz -- All I can say is that you're going to need to FORGET everything you've learned about real estate behavior in the last 50 years. This is a new world and all of the old rules are out the window.

For the last 50 years virtually every assumption, every sale, every pitch made to a buyer started with, "it's a great investment in your future".

People were buying a retirement plan as much as they were buying a house.

To see what the new world looks like, head on over to your local car lot and observe how they sell cars. You'll hear a lot about how great the car will improve the buyer's lifestyle, but no car dealer will try to make the case that the buyer will sell it for more than they paid.

This is going to be hard. You're going to tell me that "real estate ALWAYS goes up. always always always. it's a force of nature. there is no stopping it".

In the next five years it will slowly sink in to people here in the US that real estate is just like any other commodity and can go up, down or sideways.

In the specific case of housing, we have too many houses and not enough population growth and a demographic shift (baby boomers) that is going to vacate all of our big expensive work-located housing to small cheap houses in the middle of nowhere. Real estate, in the long run, is going DOWN not up.

At some point it will sink in: spending a lot on a house is exactly like spending a lot on a fancy car. A lot of fun for a while maybe, but surely not an "investment".


OP

These Mortgage Rates Won't Be Here for Long

@Kevin_W -- I don't make any such assumption. I agree that the current interest rates are absolutely unsustainable and will NEVER return to our planet except in rare cases when a government has the will and the means to give away free money for a limited time.

The point I was trying to make above is that buying in a high interest situation is not dangerous since you can always refi to the current lower rate IF THERE IS ONE. In other words, if there is a bit of panic and rates go to 15% its possible that something like 9% might be possible in the future and you can refi to that. That's all just speculation though. My point was just that you have options.


OP

Case-Shiller's Recent Strength: It's Not Just Seasonality

^^^^^^^^^^ Last line should read:

God help us if our scenario is NOT #1.

Case-Shiller's Recent Strength: It's Not Just Seasonality

There's nothing "normal" about what is going on right now. The US government is absolutely buying houses for EVERYBODY by giving them their down payment ($8k credit) an backing virtually every home loan.

Housing Numbers - Government Help = Zero

If you can make the case that the US government can be the defacto lender for all housing here in the US, that the the preponderance of these loans will bad, and that fiscal deficits do not matter, and we can sustain what we're doing here forever, then by all means the Bulls will have their day.

If you believe the laws of physics still apply here on Earth then there are basically two future scenarios for the USA:

1. The Government slowly (and soon, before the dollar crumbles) pulls the plug on all of the stimulus and we experience slight negative growth dampened activity for the next ten years or so. Our country operates basically like Japan and to some extent Germany have for the last decade.

2. The Government keeps it petal-to-the-metal and until we just crash and burn. The dollar crumbles, inflation goes berserk, interest rates go to 25% and we default on our debt (or just inflate it away, which is the same thing). Then a screwed China goes nuclear (literally) and our boys go attack North Korea and Iran and go defend Taiwan, Columbia and Japan and our government gets us into WWIII since that was the only way out of the last mess like this.

God help us if our scenario is NOT #2.


OP

These Mortgage Rates Won't Be Here for Long

@NN -- Dude, don't be an idiot. Just rent. There's nothing wrong with renting. The only reason to buy is to speculate. Are you feeling lucky? With your whole life savings? If you're looking at long-term... then JUST WAITING ANOTHER YEAR IS NOT GOING TO KILL YOU.

And yeah, inflation is something to watch, but as others have mentioned here to govt. is working overtime just to stave off DEflation... Inflation might be years away... Even then whatever gains you might make on paper might get smashed even on an adjusted basis because of the peculiar way houses are purchased.

A *smarter* move is to put your money in inflation-indexed t-bills. Then you'll be hedged against inflation and combined with the adjusted DROP in actual prices you'll clean up and be able to afford twice the condo.

Relax. Rent. Invest carefully. You can only win.


OP