Please vote in this poll using the sidebar.
Does the Freddie / Fannie takeover change your outlook on housing?
- Yes, it will help the market regain strength. (24%, 41 Votes)
- Yes, it will weaken the market further. (20%, 34 Votes)
- No, it won't make a difference. (58%, 101 Votes)
Total Voters: 174
This poll will be active and displayed on the sidebar through 09.14.2008.
Jump to the bottom to add your comment. ↓
89 responses so far ↓
1
S-Crow
// Sep 8, 2008 at 9:02 am
I’m not sure it will change anything other than bolster some confidence in foreign investors and central banks that have an interest in the agencies. Some are arguing that what we have essentially is already a failure in the two GSE’s.
Going forward, IF there are meaningful changes in lending guidelines (ie loosening a bit), then it would be positive for the residential housing markets.
All that to say if rates stay at 6% or go below for a sustained period (say, well into 2009) and housing prices stay flat or continue to soften, then buying opportunities will be good.
Plus, Dr. Chris Thornberg (I think a week ago) commented that the idea of someone “missing the bottom” is laughable as the bottom will be prolonged. In other words, it will be nearly impossible to miss.
Have a good week everyone!
2
S-Crow
// Sep 8, 2008 at 9:08 am
I should temper Dr. Thornberg’s comment in that he could have been referencing only California (although I think he probably was speaking more broadly) and not of the Seatte/Puget Sound Region.
3
K
// Sep 8, 2008 at 9:33 am
They say the takeover will make credit more available, and even lower rates as much as a point, but they then say that actual criteria (FICO and DP) won’t change at all. So I don’t understand. It makes better deals for those who already qualify but doesn’t expand the qualification pool — so how will it help the market? If it helps anyone it will be the banks as they can sneak in a little more margin. I guess that will make up for the losses they’ve taken on their bad mortgages.
4
Sniglet
// Sep 8, 2008 at 10:06 am
The GSE nationalization doesn’t change my oppinions of the real-estate market one bit (i.e. that Puget Sound prices will drop 80% or more in the next 5 years). I fully expected the GSEs to go bust and be bailed out in some form or another, so things are playing out right according to plan.
If anything, this move will just speed up the deteroriation of financial institutions. Now that the government is aggressively expanding the GSE portfolios it will become difficult for private lending to exist (i.e. who wants to get a mortgage from a bank at 12% interest when you can get it from a GSE at 6%?). Slowly but surely every means of making money from private banking is vanishing. About the only thing left is to borrow from the Fed window and buy GSE securities. That’s not much of a business…
Messr Roubini is dead on with his observation that the business model investment banks have relied on for the last 30 years is DEAD (i.e. borrowing short and lending long). Before this crisis is finished I expect to see almost every single investment bank either merge or shut-down, with the remaining players becoming mere shadows of the past resorting to nothing more than generating fees from trades.
5
patient
// Sep 8, 2008 at 10:29 am
It will not help the housing market one bit and was never intended to. It’s to save the dollar and the banks and delay the recession to the next presidency. Reporters and analysts as usual tries to prop the market and the confidence by throwing in the words housing, stabilizing and bottom without any real supporting theory. Home values will not stabilize until they can be supported by income and is closer to the historical relation to rents.
Here’s a suggestion for government use of tax money to a real solution to bottom the housing market and stop the bleeding of the banks and home owner equity without punishing the innocent: Offer 5-10 years of no income tax to home buyers. The tax money spent will explicitly go to keep home values without the issue of getting people into lifelong strangeling debt as earlier and current programs do.
Making the take over to look like a saviour of the home values is just another shade of the lipsticks they keep putting on the pig.
6
Sniglet
// Sep 8, 2008 at 10:45 am
No. There is absolutely a desire to prop up the housing market. Why else would the Treasury Department announce that the GSEs will now begin to aggressivly EXPAND their portfolios? If this was only about protecting the dollar, and calming foreign investors who were considering dumping GSE bonds, they could have easily accomplished that by seizing the GSEs, guaranteeing the debt, and slowing winding down the issuance of NEW business. But that isn’t what they have decided to do at all.
7
b
// Sep 8, 2008 at 10:54 am
I think it will have a psychological effect of home sellers on crack believing everything is now dandy, they should raise their “too low” price, etc. However I do not think this will change anything.
F/F was already pretty much the entire mortgage business this year and looked to continue that in the future, this does not change that. Mortgage rates may decline because they have cheaper borrowing costs but the gov’t still didn’t give an explicit straight-out guarantee so their cheaper costs may not translate into cheaper loans. Finally, this whole thing isn’t going to last much more than 3 months before its totally changed anyway, right after the election no matter who is in charge this will be something Congress/the President will revisit in some manner for better or worse.
8
Tim
// Sep 8, 2008 at 11:01 am
Sniglet, I believe there is a bubble and believe prices will still decline, but I think you are nuts if you believe prices will decline 80%.
9
patient
// Sep 8, 2008 at 11:04 am
Sniglet, it’s about investor confidence. They try to make it look like they are propping the house market which they know is a lost cause but it still has the potential can trick some investors for a while as today’s rally shows which is the whole point.
10
Eleua
// Sep 8, 2008 at 11:14 am
Decidedly deflationary for housing. This does NOTIHNG to bolster housing, and if the stock market doesn’t find footing, we are going to see some real fireworks.
My solution?
11
TJ_98370
// Sep 8, 2008 at 11:19 am
Does the takeover mean the federal government will control real estate valuation? Will we have “government appraisers” for future Freddie / Fannie loans?
12
Ubersalad, Ph.D
// Sep 8, 2008 at 11:26 am
Yay for more government oversight…NOT.
13
SeattleMoose
// Sep 8, 2008 at 12:23 pm
When all is said and done this will have zero impact on preventing the greatest housing crash in history. We have a long way to go…….
14
patient
// Sep 8, 2008 at 12:33 pm
Off-topic, does anyone know if the nwmls August numbers are out yet?
15
dogwood
// Sep 8, 2008 at 12:36 pm
The FMs have managed to underwrite trillions of dollars of mortgage debt with less than 1% equity (and that’s before accounting for the evaporation of shareholder equity). Nobody really knows the actual extent of their leverage because they’ve been exempt from reporting rules that apply to other publicly-traded companies. They’ve amassed a debt greater than that of the US government, which is now going to “bail them out”, and thereby assume this debt.
I don’t see how the effects of this can be anything but devastating, for the US and the rest of the world. This completely eclipses the S&L bailout of the late 80s, and is happening against a backdrop of a sustained and unprecedented decline in housing prices and a deepening recession. The notion that this won’t weaken the housing market further (currently held by 57% of respondents to the poll) is wishful thinking.
16
TJ_98370
// Sep 8, 2008 at 12:39 pm
Too funny Eleua -
Was Synthetic properly vetted?
17
The Tim
// Sep 8, 2008 at 12:40 pm
patient @ 14,
Not as far as I know. I’ve been checking regularly throughout the day. No mention of them on the Times or P-I yet, either. Be patient :^)
18
Sniglet
// Sep 8, 2008 at 1:29 pm
You are right. I should likely be talking about 90% or greater price declines (from median peak).
This is all happening even faster than I predicted just a few years ago. Already the US government is responsible for underwriting something like 80% of all new mortgages, and the seizure will likely boost that to the 99% range within 6 months. It is now virtually impossible for any US financial institution to make money through lending (i.e. private institutions can’t afford to lend as cheaply as the government run GSEs).
With the very real prospect that most banks will go bust the 80% price drop idea looks pretty optimistic.
19
Ubersalad, Ph.D
// Sep 8, 2008 at 1:44 pm
Our financial future is ruined…spend all your cash on commodities while cash is still worth something!!!
20
Eleua
// Sep 8, 2008 at 2:08 pm
If the .gov has taken over the mortgage business, and it demands 20% IN CASH, not PMI, for the down payment, ask yourself what kind of savings do people have, if they don’t transport equity from thier previous house? Keep in mind that we are likely going to go into a whopper of a recession, which will drive earning power into the dirt for your typical family.
Multiply that by 5 and you have the price of a home, provided people want to part with their life savings on a purchase that has recently shown it can wipe out that savings in the span of 15 months.
My house lost $1100/DAY - EVERY DAY - over the past quarter.
Think about that.
21
Ubersalad, Ph.D
// Sep 8, 2008 at 2:12 pm
I agree, hence spend all your money while you still can!
22
softwarengineer
// Sep 8, 2008 at 2:44 pm
GOOD POINT ELEUA
I was thinking the same thing this week. In 1999 my realitor was upset with me because I bought half the home they thought I could afford.
A little bird told me even then; a housing was bubble was coming in 2003 [I was about 2-3 years off], so don’t buy stock or real estate when its peaked in price.
Now, everyone is super jealous of me for buying a smaller real estate investment that still has lost about $20,000 the last couple years…..in comparison though, their bigger homes lost like $40-60K. In 2009 I predict more yearly losses and when the losses ends….”Lord only Knows”.
23
Lamont
// Sep 8, 2008 at 3:23 pm
I voted “no, it won’t have an effect” — although *not* doing the bailout would have been much worse — but that would have been a systemic crisis and not just related to the housing market.
The government was faced with a choice of having all the freddie and fannie bonds out there fail and locking up the whole financial system, or bailing them out. So of course it chose to bail them out. This had to happen once the ball really got rolling.
24
Ray Pepper
// Sep 8, 2008 at 3:34 pm
I don’t know whats worse for depression reading some of these posts or watching the Hawks…….Think of the good things:
Gas under 4.00
Hasselback is NOT out for the season with a torn ACL………….yet
Oklahoma comes to town and HUSKIES ARE MAD!
WB keeps going up so I’m smiling everyday!…20.00 soon!
1.10 Scones..Eat about 4 and all will be better.
Sunny
I’m off to the fair!
25
Jillayne Schlicke
// Sep 8, 2008 at 4:07 pm
The F&F bailout won’t make a difference. Instead it will prolong the recovery for many years into the future.
If F&F are the only game in town, conforming paper will soon require not just 10% down but then 15 and soon 20% down, a great credit score, and 2 years stable income history.
The lenders will continue to shove the FTHB (first time home buyers) into the FHA insurance program.
When prices decline further, the 3.5% down FHA program will start to show signs of cancer, just like F&F.
There is a long road ahead until we see bottom.
Eleua,
Why did they “really” do this? What was Paulson and his merry band of men hiding from us?
26
Sniglet
// Sep 8, 2008 at 4:20 pm
There is no mystery or conspiracy here. It is simply the action of terrified politicians looking into the abyss of financial catastrophe. They decided they would rather try and delay the inevitable a bit more, with the hopes that a) some miracle occurs that helps the real-estate market recover and bail everyone out or b) some other politician will be in office when everything goes south.
Obviously the seizure never would have occured unless things were bad, so that’s a given.
As this whole crisis has evolved the policy makers have always stepped in at the very last moment to give a bail-out whenever a critical financial institution was about to go bust. I expect this process to continue for quite some time. WaMu and Lehman are on deck, CitiGroup and Wachovia aren’t far behind.
27
Steve Tytler
// Sep 8, 2008 at 4:25 pm
I think we may see a “mini housing boom” this fall because mortgage rates have falled dramatically since the Fannie Mae take-over. We are now back to our lowest rates of the year, and they may go lower. When the people who have been sitting on the fence hear that mortgage rates are low … and home prices have dropped .. they will think that now is a good time to buy.
So I expect to see an increase in homebuying in September and October, which are traditionally strong homebuying months anyway.
However I do NOT expect this home buying activity to a major impact on overall home prices. I think that average home prices will continue to fall through this year and into next Spring, when I think they are likely to bottom out.
So I think that now IS a good time to buy a house if you shop hard and drive a hard bargain and lock in a low interest rate. But do NOT buy a home unless you plan to live in it for at least 7-10 years. If you sell sooner than that, you will almost certainly lose money when you figure in the selling costs.
Real estate should always be considered a LONG term investment. The problem with housing booms like the one we had a few years ago is that people get the mistaken idea that they can buy a home and sell it for a profit a couple of years later. That almost never happens — unless you have good luck and get in and out during the “bubble.”
Steve Tytler
Everett Herald Real Estate Columnist
28
Ubersalad, Ph.D
// Sep 8, 2008 at 4:36 pm
Ya…right…we don’t like Steve, right?
Anyway, one of the factors leading to where we at was the “historically” low rate. By inducing another “small bubble” like you have suggested will only delay the housing crash and possibly lowering the bottom even further.
Simply put, don’t buy anything now or few months from now.
29
david losh
// Sep 8, 2008 at 4:39 pm
With all respect to Roubini (sp?) this is a given. Our government has always stood behind Ginnie, Fannie, and Freddie, it’s a part of the deal. I would have never thought they would step up to the plate. This is a culmination of decades trying to make the banking system work as a private entity. It just never made sense.
Private Investors trading paper without any end game, just simply discounting the paper until it was worthless was never going to work.
LBJ pulled an accounting trick. He spent money on the Viet Nam war, the war on poverty, and created a legacy of spending for the good of the People. His is the name the Republicans envoke when they point to tax and spend. LBJ covered his tracks by privatizing Fannie Mae. He also tinkered with Social Security to make the deficits appear smaller.
Today the government did the right thing, at the right time, by infusing liquidity into the mortgage market. It should have been done years ago.
As far as government over sight, that’s what we pay for. We pay to be protected. We pay for police. The FDA, SEC, NSA, TSA, how many letters do you want? We pay to be protected and we were not protected from this financial crisis until now.
You can debate the merits of this protection, but it needed to be done.
30
Sniglet
// Sep 8, 2008 at 4:47 pm
I rather doubt we will see much of a “boom” this year. The next shoe is about to drop: a contracting economy. The increase in lay-offs that was reported last week is just the beginning of the bad news that will keep coming out through the rest of the year as company after company announces lower earnings.
Stocks will likely take it severely on the chin this fall as well (what with all the bad economic news and lowered earnings). As a result, low mortgage rates won’t prove to be much incentive to home buyers who are worried about keeping their jobs.
31
david losh
// Sep 8, 2008 at 4:47 pm
Uh Oh, the Steve thing got in while I was researching my comment, Holy Cow, it’s a prediction.
I have no doubt there are a bunch of Real Estate sales people who have been on the phone all day giving the good news of the lower rates. I did happen to check pricing today for houses and was shocked that prices are sooo high.
You would have to be in a coma, only to have been awakened by the ringing telephone with that Real Estate sales person, who you know you can trust to have solid, up to the minute information, on the telephone to tell you, Now is the time to buy, in order to believe that.
32
Sniglet
// Sep 8, 2008 at 4:50 pm
Right. We needed a GSE bail-out like a heroin adict needs a fix. The bail-out doesn’t fix a THING and will only make the inevitable withdrawal (of government subsidized mortgages) even worse when it finally occurs.
In the meantime we can lay back and enjoy our latest hit, as it courses through our veins… However, it won’t be long before the economy will need an even bigger fix.
33
Sniglet
// Sep 8, 2008 at 4:52 pm
I am sure there were investors who bought GSE stock last week who thought they were getting an incredible bargain. FNM was more than 90% off of peak price on Friday. What a deal!!!
Its the old problem of catching a falling knife.
34
EconE
// Sep 8, 2008 at 5:08 pm
Nationalize Fannie and Freddie….check.
Nationalize The Banking Industry….coming
Nationalize the Insurance Industry….coming
Nationalize Healthcare….coming.
Nationalize YOU….coming.
Welcome to the cult….I mean…machine.
35
matthew
// Sep 8, 2008 at 5:08 pm
Saving you a few bucks on your monthly payment isn’t going to matter. Housing is still way overpriced and we are headed into a deep recession.
This has been the only housing bust that has actually occurred BEFORE an increase in unemployment. Now that unemployment is increasing, the housing situation is going to be even more bleak.
Mini housing boom? Yeah right. Dream on. We are going to see 10%+ YOY price declines moving into the fall. If you needed a slightly better rate to afford a house, maybe that house wasn’t affordable to you in the first place.
All this did was guarantee the Great Depression 2.0 and the eventual collapse of our bond market.
Lights out.
36
mukoh
// Sep 8, 2008 at 5:10 pm
This actually did lowe rates, 30yr at 5.5% in one day drop from 6%+ is a vote of confidence imho.
37
matthew
// Sep 8, 2008 at 5:10 pm
One more thing, it doesn’t matter what mortgage rates are if you can’t qualify for a loan.
That’s the biggest issue right now, it’s not the rate, it’s the lack of potential buyers that are qualified.
38
Eleua
// Sep 8, 2008 at 5:16 pm
@ Steve Tytler, #27,
Please tell me you are auditioning for a Monte Python skit with that entry.
How any sentient being can look at the macro economic picture and then discount it against ONE DAY’s worth of bond pricing (which is likely manipulated), is truly, truly delusional, even by REIC standards.
This bailout was HIGHLY DEFLATIONARY for homes, as it destroys demand. Housing is going right into the abyss along with jobs, savings, the equity markets and bond markets.
Mini housing boom…
Steve! 7 government interventions in 13 months has ACCELERATED the slide in housing, not the other way around. Doesn’t the Herald cover macro-economic issues?
39
Jay
// Sep 8, 2008 at 5:29 pm
This Fannie and Freddie bailout simply calms the markets. IMO, It would not bring in buyers en masse, it would not make MBS hot again, and it would not allow one to refinance mortgage greater than the collateral property value. What it would achieve is averting a market crash and allowing the mortgage machine to operate uninterrupted. Of course, the reduced interest rate might turn out to be just the thing to push the pendulum to the other way, but that depends on things like current affordability and number of available properties vs. number of would-be buyers, and I’m not sure such things have a reached a tipping point where reduced interest rate alone would be sufficient trigger. Ultimately, easy credit will only come (if at all) after the housing market has started recovering, and that recovery cannot occur before all the bad loans are shaken out of the market.
What is positive for the housing IMO is that, now that Fannie and Freddie have been taken over, there is a very strong and powerful incentive for U.S. government to stabilize real estate prices, which may lead to legislations like forcing banks to refinance the “upside down” mortgages (i.e. reduce the debt and turn the reduced amount into equity investment in the property) before they can foreclose on the property or creating REIT-like agency that takes over distressed properties from banks (after forcing them to take necessary discount on the mortgage balance to insure at least minimal positive cash flow) and rents them to public.
40
SeattleMoose
// Sep 8, 2008 at 5:36 pm
Ah Steve-o, don’t you realize that you have just lived down to EVERYONE’s worst stereotypes about RE agents…..sigh.
ITS A GREAT TIME TO BUY!!! THE BOTTOM IS CLOSE!!!
and don’t forget the most important unspoken RE agent cliche…..my stomach is hungry
41
Jay
// Sep 8, 2008 at 5:36 pm
We shouldn’t discount the power of reduced interest rates though. It’s true that lower rates don’t matter if one can’t qualify for the loan, but they do make it easier to get qualified. Debt-to-income ratio probably is more important than the down payment and credit requirements when it comes to loan approval, and lower interest rates obviously help a lot there.
42
geon
// Sep 8, 2008 at 5:42 pm
…still bubble prices where I’m looking in the SW King County. I’m not buying jack….seems my wife finally got on the band wagon with me. I’ll take high rates, lower prices.
43
mukoh
// Sep 8, 2008 at 6:24 pm
How hard is it to qualify when you have 3%+ and income now? Not really hard, especially rates dumping so low today, in just one day.
I am sure those saps 200+ pounds pounding pavement on airport road by boeing with picket signs can even qualify.
44
david losh
// Sep 8, 2008 at 6:46 pm
The “bail out” of Fannie Mae and Feddie Mac fixes nothing. It was never meant to fix anything. The banking system has just so many ways to invest. Credit is more than mortgages.
All this does is bring our tax dollars back into the mortgage lending system. Taxes are free money. You may not like it, but there are no investment instruments associated with your tax dollars until they are invested or squandered.
Fannie Mae had a function since the great depression. It was altered into another entity competing for the same investment dollars as every place else. The entire system ran it’s course. There are no more investment dollars.
All that happened was that the investment instruments, mortgages, over inflated. There was no other way to sustain the liquidity.
It’s over. Values have a chance to regain normalcy. The paper, the securities, the mortgages have been repeatedly discounted time and again. They may even be worth the true value of the properties they are secured by. They have been sold repeatedly over these past few years at discounts in order to make investors more money.
The paper is sold at discounts to make money today. That’s what it’s all about. That’s what Roubini is talking about. Investors are making a quick buck today. Only the Chinese have stepped up for future dollars. In the end that may be the smartest thing. It’s looking like those future dollars may be worth thier weight in gold.
45
mukoh
// Sep 8, 2008 at 6:55 pm
One banker called today they are able to do 30 yrs at 5.45% tomorrow.
46
matthew
// Sep 8, 2008 at 7:58 pm
Mukoh,
Repeat after me: FICO score and VERIFIED income!
47
magnolia44
// Sep 8, 2008 at 7:59 pm
wow rates dropped like a rock…
i see some people getting off the fence in the next 6-12 months. Those wishing for the 30 - 50% decline, yeah even the funny guy with the 80% number lmfao…will have to keep waiting.
Until then business as usual maybe we see 10 -12% by Nov - Dec.
As for me I think i have 300+ monthly payments to go, no desire to get a heloc or refi…things are just fine.
48
mukoh
// Sep 8, 2008 at 8:43 pm
Mathew, Repeat after me, a local bank has 5.25% 5/1 Arm with 650 FICO score STATED INCOME, only on their product though.
Want to repeat it again? And that was FRIDAY. With 30Yr dropping to 5.5% range it is not looking bad.
49
Eleua
// Sep 8, 2008 at 8:54 pm
The tide has suddenly gone out and the fools are rushing onto the beach to pick up fish.
The tide chart does not show low tide and the tsunami warnings are blaring.
50
Alan
// Sep 8, 2008 at 9:06 pm
If the government is guaranteeing mortgages on properties that are going to drop 80%, isn’t that the same thing as printing money?
51
Matthew
// Sep 8, 2008 at 9:11 pm
Mukoh,
Show me a link. Talk is cheap. Show me a link to someone locally advertising a 30 yr fixed with a 650 FICO without putting at least 10% down.
52
patient
// Sep 8, 2008 at 9:55 pm
I hope the low interest rates stays for a while. It’s just interresting to see how many morons are still out there that can;t wait to make a stupid investment as soon as a chance is given. Hey they will still show up as blipp on the downward slide some time before we have gone through the big correction so why not now? I say flush them out, so horray for low interret rates.
53
mukoh
// Sep 8, 2008 at 9:58 pm
Mathew,
It is a local bank, construction projects in Snohomish County, 4 of them. 5.25% NO MONEY down, 650 FICO, STATED, 5/1 ARM. That has been available for two weeks and the projects are almost sold out.
If you are in the know you will know who it is.
54
EconE
// Sep 8, 2008 at 10:06 pm
http://www.thefreedictionary.com/hokum
55
Eleua
// Sep 8, 2008 at 10:11 pm
If home prices continue to drop and the people holding mortgages that are backstopped by the US.gov default, the US.gov will have to pony up the money to make the bondholder whole. Great system…right up to the point where the US.gov runs out of cheap money and has to go to the credit market to get more.
This is likely to be a dynamically unstable event, as each default causes a money-grab by the feds, which causes interest rates to rise, which causes homes to drop in price, which causes more defaults, which causes….lather, rinse, repeat.
At some point (after January ‘09) the Treasury Dept is faced with a decision:
Fund Social Security, Medicare, the military, and existing T-debt,
or
Fund J6P’s mortgage and China’s bond holders.
Real estate will already be in the tank, as very few people will be qualifying for those mortgages, so politically people will demand that the US.gov cut loose the mortgage guarantee, and we get a truly epic plunge in home prices, but the sheep get to keep their other gov bennies, until that approaches the infinite first dirivative.
This is more about math than about economics.
This is merely a stop-gap for Bush/Paulson to run out the clock. It sucks that my preferred candidates (at least the VP) is leading in the polls. I want them to lose. We can always get the USSC back with 2/3 of the Senate.
56
Aaron
// Sep 8, 2008 at 10:31 pm
Sniglet
80% is just not realistic. Think about what that would mean. $800K places would be selling for $160K. Fresh from college tech hires make $80K+… there just aren’t enough of those types of properties to meet demand at those prices.
There will be a bottom and we haven’t hit it yet, but you’ll be waiting forever (or until Seattle is Detroit v2?) if you wait for 80%. I don’t claim to know exactly when or what the bottom will be, but it will be well before the median loss is that severe… because there are a lot of people willing to catch the the falling knife long before we reach those prices.
57
mukoh
// Sep 8, 2008 at 10:39 pm
Aaron, don’t burst Sniglets bubble. You gotta let him think it will happen to keep him happy.
58
Eleua
// Sep 8, 2008 at 10:45 pm
Aaron/mukoh,
What makes you think that new grads will make $80k, and if they did, the price/income ratio would be 2.0, which is at the low end of the historical affordability range.
D
E
FLATION
59
Scotsman
// Sep 8, 2008 at 10:48 pm
This doesn’t fix anything, it just puts off until tomorrow what should be done now.
Here’s a question to ponder: If we are heading into a deflationary environment characterized by falling asset prices, what would you expect interest rates to do? Should they be heading up or down? There’s your answer about whether or not this is a good time to buy a house…
60
Joel
// Sep 8, 2008 at 10:54 pm
Wow, sounds like the financial crisis was just fixed overnight. I guess we’ve discovered how to go on a massive debt binge without any consequences.
61
EconE
// Sep 8, 2008 at 11:00 pm
In Detroit they’ll pay you to take a house off their hands.
I don’t see Seattle becoming Detroit v2
I can see Snohomish County becoming Riverside, CA v2 however.
Look at Lake Elsinore…they’ve got lake and mountain views too!
62
mukoh
// Sep 8, 2008 at 11:04 pm
Eleua,o
There are High School Grads hired in some M company in Redmond for $60k a year right now. People with 3-4 years experience in that industry are getting $100k a year. An old school friend of mine just got upgraded from his $90k to $125k with the same company.
I guess they don’t know what they are doing over there.
Its great to see bloggers make conclusions like they have their hand on the pulse by seeing data that is public and lags by 30 days. If same people who huff and puff stats on blogs with a lackluster experience were that smart they would be running the system, not posting projections out of a bong hit.
63
Scotsman
// Sep 8, 2008 at 11:19 pm
What do falling interest rates mean? They mean there is more money to lend than there is demand. Fewer people are/can borrow, given the standards lenders demand. Less borrowing means fewer goods and services being purchased, which means fewer goods and services need to be provided, which means fewer peopled are employed. Fewer people employed means an even greater drop in demand, which leads again to fewer employed. Rising unemployment means the available workers exceed demand, which leads to falling wages as more unemployed workers compete for fewer jobs. And on, and on, and on…
Before you know it, Microsoft isn’t selling as much product, or making as much money, and the new hires are replacing existing workers at ever lower salaries, and a group leader is now making only $60K a year, and buying a house that used to cost $800K for $170K. The new reality, just around the corner, past bankrupt governments and a world wide depression.
64
Eleua
// Sep 9, 2008 at 12:26 am
mukoh,
Who cares what happens today? Prices reflect today’s reality. Tomorrow is a different matter, and if unemployment is up, with demand for products down (no money), then the job market is going to suck eggs.
Your static analysis is your weakness.
What happens to interest rates in a depression? If our depression is catagorized by a collapse in lending due to a scarcity of money set against the backdrop of excessive debt, then you have escalating demand for money coupled with scarcity of money. That equals very high interest rates to keep the money flowing and offsetting the risk of default.
If the .gov doesn’t get its house in order, it will drive interest rates on its own.
Enjoy your brief mortgage rate holiday.
Keep in mind that Detroit used to have the highest home prices in the nation, and now they are giving them away. Detroit was “special,” at one time. Corporations that started with G, C and F knew what they were doing.
65
Aaron
// Sep 9, 2008 at 12:28 am
Scotsman, Eleua
Oh - okay. I see how this works and what you’re arguing. You expect 80-90% falls in home prices because you expect severe spiraling deflation coupled with a second great depression?
I follow the concept, but I think most of us are thinking and discussing in terms of inflation adjusted dollars. In the case of severe deflation, housing will be significantly cheaper - perhaps 80%-90% cheaper - in nominal dollars, but that doesn’t mean anything for affordability unless you already have a nestegg and don’t lose your job/income level.
66
economist
// Sep 9, 2008 at 3:27 am
Does the takeover mean the federal government will control real estate valuation?
RE valuation is always, repeat always, determined by the buyers. A house is worth the highest price a member of the public is willing to pay for it.
Now if the USG actually started buying houses it would be different, but I don’t think things will quite come to that.
This has been the only housing bust that has actually occurred BEFORE an increase in unemployment
Because the housing bubble had been driving the economy. Look ma, no jobs!
67
50%off
// Sep 9, 2008 at 7:05 am
Aaron, Mukoh,
Just remember that the RTC in the 80’s very often sold houses for 20 cents on the dollar just to unload them. Not every $800k house will go for $160 but more than you might imagine. When 20% downpayments are required, along with impeccable credit, AND an income that meets 8-12% interest rates, then the pool of buyers becomes so much smaller than what you’ve seen over the last 5 years or so.
Remember too, that this whole housing ‘crash’ has begun and is occurring during low unemployment times. Previous down cycles began with the unemployment issues. Now add them into what’s already going on and the banks desperate need to unload at what will end up being “any” price.
Finally, check out the usual graphs and calculate ‘returning to the mean’ which also requires overshooting on the way down. Yup, Sniglet isn’t necessarily so far off as he sounds.
heck, I’m starting to sound positively optimistic with only a 50% call….!
68
Sniglet
// Sep 9, 2008 at 7:27 am
There are many other precedents for massive price declines other than the RTC. Tokyo prices declined some 90% in the ’90s without the city becoming a hollowed-out shell (ala Detroit). Yes, I expect to see MASSIVE price declines, but I don’t think it will be the appocalypse. The NorthWest will still be a great place to live, life will go on.
69
Sniglet
// Sep 9, 2008 at 8:03 am
As I think about this a little more, the Japanese price decline occured at a time when the global economy, and financial system, was relatively stable. Today, by comparison, we are facing the greatest disruption of global finance of 2 or 3 generations. Banks everywhere are extraordinarily weak, and credit is tightening at an astonishing degre (whether corporate or private).
Just what will happen when EVERY one of Seattle’s major employers starts laying off significant numbers of staff? We are already seeing global struggling airlines cancelling aircraft orders (up to a 1/3 of Boeing’s orders are being cancelled) and IT spending always takes a major hit during recessions, which will take it’s pound of flesh from our regional tech-firms.
With this backdrop (i.e. a declining global economy and contracting credit) I just don’t see any easy way out of this downturn. MASSIVE real-estate price declines lie in store…
70
david losh
// Sep 9, 2008 at 8:18 am
Real Estate to global economy melt down translates into we need another war, World War, that will fix it. Seriously we are in a war economy. We buy sell and manufacture stuff to send over to Iraq, and Afganistan, so we can blow it up. We’ll leave what’s there of course because it’s cheaper to leave it than ship it back.
The economy is more than housing. Housing became a big part of the economy, but it ends up being a bunch of paper being sold for discounts.
Yes those construction jobs, that were plentiful, are gone. What you’re not seeing is the global climate war, over population, danger to our food supply, lack of oil, and at least a dozen other crisis situations that will need attention.
Money can be spent on thousands of things. Jobs can be created by any crisis. Don’t forget the Census is coming up at the end of the decade. It’s the largest mobilization of man power outside of a war effort.
Your tax dollars will be spent foolishly elsewhere to prop up the economy. Real Estate just happens to be today’s darling.
71
Matthew
// Sep 9, 2008 at 8:25 am
Japan was a nation of savers… The U.S. is a nation of debt ridden consumers.
72
rafael
// Sep 9, 2008 at 8:29 am
Rates are coming down due to the action. We see 30 yr fixed now at 5.75 vs 6.25 last week. This will stimulate the housing market!
73
Eleua
// Sep 9, 2008 at 8:31 am
@Aaron #65,
Housing will become more affordable, but it will do it at significantly lower prices on every metric.
Remember, housing is a labor intensive, perishable, heavily taxed, illiquid asset.
74
Sniglet
// Sep 9, 2008 at 8:33 am
Hardly. Low interest rates won’t help the housing market much. Heck, interest rates haven’t really risen that much in the last 3 years (we are miles below what people paid in the ’80s and ’90s) but real-estate has kept tanking anyway.
Using Japan again, they had interest rates at 0%, but that didn’t help their real-estate market.
Low-rates, in and of themselves, are no panacea when banks have tightened lending criterion and people are afraid of losing their jobs.
75
Eleua
// Sep 9, 2008 at 8:35 am
Rafael,
Delusional. Housing isn’t cratering due to rising interest rates. It is in the tank because of a lack of liquidity in the banking system coupled with historic unaffordability and a speculative pop in an historic bubble. This latest bailout does nothing to fix that.
You guys are rushing out to grab fish while a tsunami is building.
Ask yourself if the .gov cares about you or the banks.
Let me give you a hint; They don’t care about you one bit.
76
Eleua
// Sep 9, 2008 at 8:44 am
Any of you that think we will weather this storm in Seattle needs to take a good, hard look at WaMu.
Go back to their Jan07 10Q and bring yourself up to the present.
Rumor on the street is they will be taken under this month, and the FDIC doesn’t have the book to handle WaMu. Congress and the Treasury just shot their wad on Fanron, and FDIC is a much bigger deal.
If they go, it’s a banking holiday.
20c on the dollar will be a dream for those that are long housing.
http://www.treasurydirect.gov or you local safe deposit box.
I’m not buying the rumor, but it certainly fits with WaMu’s financial condition.
77
softwarengineer
// Sep 9, 2008 at 9:10 am
ELEUA IS RIGHT ON
The definition of true Fascism in my book is when government and organised crime corporations [like Fannie and Freddie] make the decisions for the Senate/Congress and We the People.
Before our federal deficit effectively went up about 50% last weekend with this horrifying $200 Billion bailout joke, called welfare to the rich [Fascism] and was implemented without a vote or a bill, the dollar ws going up…..I see it plummetting in value now, as the $200 Billion is eventually added to our current year $407 Billion federal deficit.
Oh, last I saw stocks are plummetting again.
Unemployment is up 10% in one month and underemployment probably rose 30% [they don't track it and the unemployment tracking is a joke too].
Oil was going down, but with a higher federal deficit and lower dollar, I see oil/food going through the roof again very soon, so some fat cats at Freddie and Fannie can pocket their $24 million salaries….these crooks should be in jail, not given government welfare.
There was article yesterday saying this bailout made America more Communist than China, I disagree, its not Communist, its Fascist.
Add the Boeing Machinist Strike into the recent Seattle quagmire and a depression economy will look rosy in comparison.
78
softwarengineer
// Sep 9, 2008 at 9:15 am
A POST THOUGHT TO MY BLOG ABOVE
There has been absolutely no thought or prediction of what would happen if we just let the fat cats sink into bankruptcy. My guess is it would be bad, but we could begin rebuilding out of debt much sooner, rather than sinking deeper into to it so the fat cats can retire in style.
79
Mark
// Sep 9, 2008 at 9:30 am
This past March the jumbo mortgage limits for FRE & FNM were raised from $417000 to $729750. This was supposed to have fixed the real estate crisis. Six months later and both of these institutions have effectivly failed. Is a government takeover going to fix things this time? Probably not!
80
Buceri
// Sep 9, 2008 at 9:32 am
Correct me if I am wrong; but if Fannie and Freddie go bust, then we assume the debt to all creditors (rumor is China has been pressuring the US for weeks to take over the FMs).
If this is the case, our national debt goes from 9 trillion to????
81
Eleua
// Sep 9, 2008 at 9:41 am
Buceri,
Congrats! You get it.
The debt is going to be “run out,” which means they won’t take on much new debt while they pay off the old debt.
In reality, this happens right up to the point where we have rapidly rising interest rates, where the .gov will pull the guaratee and stick the Chinesee with the bad debt. This will save their Treasury rating, but cut off mortgage related debt.
Yesterday, the smart money was swapping their crappy debt for US Treasurys, which explains the drop in interest rates.
This is going to be uglier than you think.
82
Eleua
// Sep 9, 2008 at 9:46 am
WaMu debt is getting worse and worse. It now costs $5.65M to insure $10M of WM debt for 5 year.
This is like insuring a 16yo with 10 reckless driving, 5 DUI, and 3 unlawful evasion tickets, in addition to 3 fatal accidents.
83
mukoh
// Sep 9, 2008 at 9:47 am
First of all, the qualifying guidelines right now talking to people in that industry on both retail an wholesale level are not that bad.
A buyer can get a reasonable loan i.e. 5%+- with 3% down, and fix it for 3-5 years.
Yesterdays turn around of rates getting to 5.5% for 30Yr product basically lit up their switch boards with calls to refinance or qualify to buy. Both retail side and wholesale.
All the talk about how salaries will drop so severe in the previous posts by Eleua are a bit off. Big companies pay salaries based on what they can sell and profit on a product one to five years ahead.
Surely there is a downside potential, but these people have more experience packed in there then we care to even know, and have better idea of what will happen.
Depression V2 talk? Come on guys, when was the last time we had a depression. 70+ years ago? I could see that being true today if supplies of energy/basic products were reduced via some cataclysmic events by 50% in a short span of a week, but not likely without that happening.
Global financial and economic system however will continue to suffer recessions and corrections, but not free fall in a sense of a real depression where is unemployment hits 25%+.
84
BrianL
// Sep 9, 2008 at 9:50 am
The general position I’ve seen is that we can’t go into a deflationary state because of foriegn debt. The least painful way for the government to get out of debt would be slow inflation. The fed (and US gov) will do everything in its power to avoid large scale deflation even more than they’ll try to prevent larger inflation than they plan.
Check out itulip.com if you want serious economic discussions about this sort of thing.
85
TJ_98370
// Sep 9, 2008 at 9:54 am
.
Does the takeover mean the federal government will control real estate valuation?
.
economist said:
.
RE valuation is always, repeat always, determined by the buyers. A house is worth the highest price a member of the public is willing to pay for it……
.
I would agree that a house is worth the highest price that someone would pay for it - if you can get financing. Consider the possibility of price manipulation by controlling the appraised values / loan approval process. Is it really that far-fetched to believe that a government controlled Freddie / Fannie could be made to operate within “guidelines” other than what would be dictated by a free market?
.
86
DrShort
// Sep 9, 2008 at 9:55 am
off topic:
Why are the NWMLS numbers not out yet? In past months they’ve been out by the 4th or 5th of the month.
87
Sniglet
// Sep 9, 2008 at 9:58 am
I am not so sure… Yes, I agree that what the government is doing is wrong (i.e. it will make things worse). However, I believe that most policy makers actually believe they are doing the right thing for the average citizen.
That said, the road to hell is paved with good intentions…
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mukoh
// Sep 9, 2008 at 10:05 am
There is hell?
89
jon
// Sep 11, 2008 at 5:00 pm
Four Senators have proposed letting people keep those houses they can’t afford:
http://biz.yahoo.com/ap/080911/congress_foreclosure_freeze.html
It’s just money.
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