Anybody who bought any real estate 30 years ago and held onto to it is way up in nominal dollars.

Whatever the true market value of that house may be right now, there is a really good chance it will be less in six months and it may stay that way for years.

David this is Shoreline, which is not included in that report. Right before Innis Arden.

EconE, what do you think a home in Shoreline 2000+, with ready to move in condition worth? Considering almost .47 of an acre lot.

http://www.vintageseattle.org/2008/06/15/before-we-were-all-priced-out-forever/

Once again….

$8000 in 1979?

That was 29 years ago.

Let’s try a “housing bull” calculation of appreciation. You know…the rule of 72…10% yearly appreciation doubling every 7 years.

1979 ——- $8,000
1986 ——- $16,000
1993 ——- $32,000
2000 ——- $64,000
2007 ——- $128,000

and at the 15 year average doubling that Mukoh states above.

1979 ——- $8,000
1994 ——- $16,000
2009 ——- $32,000

So, moving back to Mukoh’s example of a person who bought a house in 1979…

It’s obviously not “average” as it’s worth more than $32,000

It’s certainly not one of those rare “double in every 7″ year houses, because Mukoh states that it is now worth over $400k instead of $128k. From this…all I can conclude…is that must have been one really lollypopping special house.

Hokum.

Rates have nothing to do today with Real Estate value, or price. It is how much you can buy it for, rather than how much you can finance.

In my opinion the global market is fascinated with interest income. You just trade a bunch of paper and make money. You can create paper by producing crap, charging way too much for it, then financing. Heck we’ll even buy stuff from China at twice the price if we can finance it.

Also in the 1980s there was a shift from value based profit to paper profit. Those 16% notes created income, got refinanced, prices of Real Estate began to go up, and the mortgage backed security market saw a chance of recitative income. Again it’s my opinion that wealth created by paper profits far exceeded anything that a working company could produce.

Those are purely my assertions, but in the world of Real Estate it changed the market place. With huge price tags we had huge equities. In residential, having a house go up $100K looks great for the home owner so they played along. In many cases prices did double and triple quickly.

The money, the real money, was in the commercial Real Estate market where terms took on magical powers. Donald Trump I think is the most recognizable player in the terms market. He has said on more than one occassion it’s all about the terms. In commercial, when there is a profit, there is that chance interest rates, and long term financing may be a benefit. Even some small rental investors may be interested in terms, but for home ownership it’s a joke.

Your home, as every financial planner will tell you, should be owned free and clear. That’s home ownership. How close will you be to owning your home free and clear? That’s the only question. It is the same for small investors. It’s what stabilizes rents. It is all about income.

Price is what makes the deal for the home owner or the ability to get it paid off.

http://jalopnik.com/5101442/jones-big-ass-truck-rental-and-storage?autoplay=true

With the extrodinary low LIBOR and 3 month TBill rates, ARM resets might even lower mortgage rates. This should help people stay in homes in the short run.

ARM recasts happen when LTV (loan to value) or too many minimum payments are made on option payment ARMs. Recasts will always increase the payment and will most likely force refinancing or forecloure.

Recasts peek in 2010…

A Tokyo resident who “jumped” at the chance to buy a home in 1994 (after prices had dropped some 40% from peak prices) at near 0% interest is now living in a home that is work over 30% less than what they paid in 1994. There is ample evidence that low interest rates are not sufficient to prevent price declines.

Another point I’d like to clear up is the belief that interest rates are “artificially” low. The primary reason for low rates is that investors are rushing for the safety of treasuries and government backed securities (e.g. Fannie & Freddie paper). This is a very rational response to deflation, as people come to realize that ALL asset prices are going to see significantly greater declines.

I have a podcast on why low interest rates are a bad omen. http://msurkan.podbean.com

The Chinese Gov’t is asking its airlines to postpone or cancel plane orders in the next few months. This was reported on NPR during a piece on decreasing US exports; a segment were Boeing is number 1 and it was specifically singled out as a company that “would suffer in 2009″.

Basically these numbers need to move much closer together so let’s split the difference so $264k, wouldn’t want to being buying that place today at $400K because watch out below.

As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.

“We will never see these prices again in our lifetime, when you adjust for inflation,” says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. “These were lifetime peaks.”

Read more

Don’t let the gagging response from Lawrence Yun’s quote (NAR’s economist) prevent you from reading the full article. For your reading pleasure, I’ll put it out:

National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.

He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. “People who bought at the peak in those states will need time for prices to recover, even up to five years,” he says. Yun says people who buy now “have much less risk of price declines and a great possibility of price gains.”

“Return to their 2006 peak in three years, not counting for inflation.” I wonder how Yun explains the impending devaluation of the USD, and the ensuing inflation, in relation to his “appreciation” calcs. Any thoughts?

This is a great thread. Thanks to all for logical, reasoned, thought provoking posts. Many excellent points, bravo gents and ladies. Hat tip to The Tim et al.

David Losh @ 34 points out a pending shift, an inflection point of what classes investment capital is migrating from and will be moving into. Japan in the 90’s all over again? Who knows.

After much much more pain, the rental market will eventually pull us out of the bear market. Because this is where commerce occurs. When investors, not celebrity flippers, can earn a return on investment, at a sane acceptable level of measured risk, the market will hit bottom and begin to recover.
.
This will apply pressure to the ‘at risk’ segments that includes marginal rentals, bought or refi’d in during the boom. Rents will drop as these gems enter the market with lower break even points.

A last wave of foreclosures (dare I say a foreclosure apocalypse) will hit and the market which will be characterized by a trough pattern for an extended period.

As prices slide and foreclosures pile up, low interest rates and fire sale prices will incentivize investment capital (as DLosh pointed out #34) into the market.

We won’t know when we reach the bottom, as it is always confirmed anecdotally.
Nor will we see a symmetrical recovery, bear markets jump around, rallies are the norm, interspersed with dead cat bounces, bear traps, sell offs, profit takers, short sellers, puts, derivatives, swaps, indexes, etc.

0% doesn’t exist in a liquid market. Period.
Too many reasons to list:
Time Value of Money
Risk
Costs, et al.

No matter how much they would like to Barack, Nancy, Harry, Joe, Hillary, B-Rich, and Rahm ain’t gonna give us all 0% loans. And if anybody gets one, it better be me.
My gut tells me we all feel like this. F the taxpaying American and his great grandkids.

All the wishful thinking in the world won’t get buyers off the sideline, because houses are fundamentally overpriced. People simply can’t afford it. Now add in unemployment increasing and things only get worse.

We do live in strange times.

I wonder how much wealth was really created in the last 30 years compared to what was merely transferred to the current uber rich (9 figure+ net worths) ?

mukoh // Dec 11, 2008 at 9:26 pm

EconE,
The house that he owns is a 2400, Split. Huge yard though. And is probably $400s today.

Exactly why I stated “hmmmm, interesting”.

Perhaps the bubble started in the 70’s?

My parents bought a house in 1972.

They were the second owners and purchased it for double the price it cost to build (including land from what I am told).

It was built in 1925.

Food for thought.

When I made the tool to look at mortgage rates compared to house prices, I was surprised to see that rates don’t seem to matter much. You and I are not alone in our belief that lower rates won’t fix the problem.

” A 2006 study of mortgage rates and New York City housing prices going back to 1975 by Lucas Finco of Quadlet Consulting found no correlation between lower mortgage rates and higher housing prices, or vice versa. “The relationship between mortgage rates and home prices is pretty obscure,” says Jack Guttentag, a professor emeritus of finance at the Wharton School of Business.

James Hamilton, a professor of economics at the University of California, San Diego, says he used to think that lower mortgage rates were responsible for rising home sales in the first half of this decade, and for that reason he projected home prices would rebound in 2007. He now says rising home sales were the result of deterioration of lending standards and not lower mortgage rates. “I was wrong. The real story with home sales has to do with the availability of credit,” says Hamilton. “And credit is tight now.”

http://seekingalpha.com/article/109621-when-lower-mortgage-rates-don-t-boost-house-prices?

The problem is that buying at 0% because the government pushes rates down artificially means when you go to sell, your buyer will be paying 7-8% (assuming the gov’t cannot afford to push down rates forever).
People generally buy a home on the monthly payment basis, in my opinion, and not necessarily on the overall purchase price.
To put this into numbers:
- You can afford $1800/month for your mortgage payment (plus maintenance/insurance/etc)
- The homes you want are overpriced right now, so you are waiting for that $400k house to drop to $300k (assuming you have 6%)
- Uncle Sam steps in and says, we will give you $400k at 0% interest and now your payment is $1100/mo. If you are smart, you stick with the house you wanted before and not now extend into a huge house (this will be approx 2% of buyers, with the other 98% buying as much as possible)
- After 5 years you want to move and upgrade to a better house, you owe $333k on your mortgage so you go to sell. Lets assume there has been no appreciation or depreciation overall since then (it fell then came back up)
- Your buyers come around and have $1800/mo to spend. Why? Because the home you bought is one which an $1800/mo household would want.
- Rates have now gone back up to a more normal 7% (though they will probably be far higher). Your buyers can afford $270k. You owe $333k. Even if you plowed the $700/mo you saved on interest onto principle, you are still underwater. If you add in transaction costs, you are REALLY underwater.

Number one it’s the end of some fiscal years. Some lenders want to wait for the new year to take the losses or write downs. Second is that the law may change in January to allow owners to stay in the home at a reduced payment.

Lenders have way too much inventory. Even if they liquidate for cash the market is frozen.

The next shoe to drop will be commercial. If and when commercial properties begin to go down in price then we will see redsidential begin to loosen up.

The dollars, big dollars, are in those office spaces, retail, and industrial lands. Once a bank, investor, or holding company sees an opportunity to invest in commercial at a lower price they will begin to dump the residential properties for what ever cash they can get. Over time they will reinvest that cash in properties that have a higher and more stable value.

That was 29 years ago.

Let’s try a “housing bull” calculation of appreciation. You know…the rule of 72…10% yearly appreciation doubling every 7 years.

1979 ——- $8,000
1986 ——- $16,000
1993 ——- $32,000
2000 ——- $64,000
2007 ——- $128,000

Hmmmm. Interesting.

That’s pretty much the same thing they said in the other direction on the up side of the bubble.

0% interest rate is comparable to a cash buy.

A full cash purchase has opportunity costs.

30 year fixed at 0%…not so much…other than the down payment.

On another note. Don’t most potential buyers have 401k’s/pensions that have been cut nearly in half? That alone is enough of a factor to leave people on the fence for quite a while IMHO.

Not true. 0% interest rate is comparable to a cash buy. I wouldn’t buy today even if I had the cash for a cash purchase. Why would I when homes are getting cheaper by the month?

Of course if interest rates got low enough, even happy renters would jump in.

of course, that’s an assertion.

by that logic, car sales are doing just fine too

Of course if interest rates got low enough, even happy renters would jump in. Looking at the low interest rates now and saying it’s not working isn’t really possible because we don’t know what would happen if no action was taken. It’s pretty safe to say it would have been even worse that it is now. Whether bailouts are worth the long term consequences is harder to say.

“, the interest rate play will just be throwing good money after bad – a bonus for people who were going to buy anyway.”

Not necessarily. Every sale these days is letting the most desperate hard luck stories get out of the market and puts someone fresh in. So it benefits the lender and ultimately the government, which has put its credit behind mortgages also.

http://www.msnbc.msn.com/id/28035238/

Tim, do you have data on how much exposure the Seattle area has to “Pay Option” loans relative to the rest of the country… or relative to other types of loans?

http://www.msnbc.msn.com/id/28035238/

why isn’t this post titled “Forecluses Decreased in November” ?

Maybe because they were up between 28 and 57% from last year? Is that a decrease? Generally M2M figures are pretty meaningfulness.

They need to stop the deflationary cycle. Although the national months of supply is high now, if sales were to go up, that would cause the MOS figure to drop to normal levels soon

I agree they need are trying to stop home price deflation – but my point is that interest rates have already fallen dramatically and home sales are still falling. So what logic says that dropping them even further will automagically fix sales volume by causing people to buy? There is no evidence that this approach will work in this market. What is happening is exactly the opposite. There are too many other factors at work here, the interest rate play will just be throwing good money after bad – a bonus for people who were going to buy anyway.

They transfer an asset from an emotional “owner” with price and contractual constraints to a seller seeking only to minimize losses.

The pattern in bubble areas has been: 1) prices peak, 2) inventory builds while prices slowly fall about 10% over a year, 3) foreclosures swamp the market and prices crash on light volume, 4) prices stabilize as value investors buy the foreclosed properties.

Step 5) is either that prices fall further as value investors are forced out of the market due to falling rents and lack of loans or that prices form a bottom based on fundamentals of cash flow value.

We’re at the end of step 2). Foreclosures are critical to our reaching stability in step 5 in a few years instead of a few decades.

That is, however, until you realize that you probably will sell the house in 5-10 years and rates will be substantially higher. Add to that the fact that houses are still significantly overpriced by any normal standard of appreciation. Then add to that the fact that the Fed will most likely do everything it can to keep interest rates low until we come out of this deflationary cycle (which will most likely be after house prices get back to normal).

See the11/21/08 proof:

http://rawstory.com/news/afp/US_plans_holiday_relief_from_forecl_11212008.html

So the November foreclosure numbers may likely be mitigated during the Bush helm for now, with a giant avalanch of Bush helm foreclosures added in after Obama gets in.

Its all politics.

Shouldn’t the value of a home not have any correlation at all to the chances of an “owner” going into foreclosure?

Quite the contrary. Falling values are the cause of foreclosures. The reason is that normally, when home values are inching upwards, anyone that cannot make their house payments (for whatever reason) can just sell their home and rent or buy something cheaper. With falling home values though many people that bought recently and now cannot make their payments have no choice but to default because they are underwater on their loan.
It is true however that falling values should have no effect on the ability of the homeowner to make payments. Falling values only effect the ability of a homeower to sell their house if need be.

We’re hoping in a year that there’s a perfect storm of lower prices, low mortgage rates, and our savings reaching our target. Until then, all we can do is keep watching the numbers, save, and try to keep our jobs :)

Banks are sitting on some serious amounts of mortgage apps right now, just my banker at Wells said he has 19 approved apps. As interest rates go from 5.75 Real rate right now to 5.25 rate. It will put more purchasing dollars in sellers pocket thus getting them off the fence. Those “apps” are sitting as I was told waiting for rates to go down by .25-.50. At least thats what he said.

I would be sitting waiting for prices to come down IMO.