Mid-Week Open Thread (2009-12-02)

Here is your open thread for the mid-week on December 2nd, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.

Be sure to also check out the forums, and get your word in the user-driven discussions there!

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

18 comments:

  1. 1
    David Losh says:

    Real Estate is a little corner of the investment world. It has always been a safe place to put money for a passive return. Appreciation has been a small incentive to hold and control properties. A Real Estate is owned free and clear. The price of money is only relevant in terms of how quickly you can pay the loan off. You can only leverage with cheap money if the price is low enough and the return, in terms of rent, is great enough.

    What ever the economy does is secondary to Real Estate. Jobs and Job Centers have an impact on the rentability and economic viability of a property. The value of Real Estate is tied to the Consumer Price Index as the cost of a housing unit, or how much people are paying for shelter.

    All of the other economic forces aside Real Estate is still a no brainer. You buy it, and pay it off.

    The debate the past few days is if you should pay off the debt or walk away. It’s a simple decision each family should make. Is the property you are paying on worth keeping now that we know it will lose value until it is once again economically viable.

    My personal decision is that yes, a property can be paid off even though a person over paid. You need to get in front of the loan and begin paying principle. That is what most people should be thinking about. Most people should be thinking in terns of paying down, or paying off, the quarter, to half, of a million dollars they have in debt. If you own rental property you are probably stuck with it. You’re going to need to pay it down, or pay it off, to get rid of it.

    Personal finances are in many cases tied up in properties today. Many people, I think 10%, were never going to be home owners, but here we are. Now those people, along with millions of other people, need to come to grips with the fact they will not be selling, or refinancing, out of a mortgage. They need to pay it off.

    Money should be shifting from your 401(k) into principle payments. Your property is now your number one asset.

  2. 2
    Scotsman says:

    I think very, very few folks will be paying off any home purchased during the last 4 or 5 years. Their soon to be reducing incomes won’t be able to cut it.

  3. 3
    David Losh says:

    RE: Scotsman @ 2

    The conclusion I’ve come to is that they will have no choice. People are going to be stuck with whet they have. If the other thread is true, and prices will be declining back to 1998 levels, or below, properties will either need to be paid down, or off. If they are paid down then why not amortize the loan out?

  4. 4

    RE: Scotsman @ 2

    Suzy Orman Agrees With You

    She warns never touch 401Ks to pay off foreclosed loans….the 401Ks you can keep, but any home mortgage princple payoff is lost forever after bankruptcy.

  5. 5
    Scotsman says:

    RE: David Losh @ 3

    They will walk- in droves. It will be the new norm. My guess is the laws and expectations will change to facilitate it once the movement gains momentum. The feds will work something out to backstop some portion of the losses with the banks, not cram-downs, but cushioning losses after the fact.

    Eventually it will come to be seen like the 500 year flood. Life sucks, but you do not have the right to expect any asset will hold its value during normal times, let alone atypical circumstances. Your fellow man doesn’t owe you a comfy retirement, a certain value for your house, or any other guarantee, especially during a major economic and societal shift or reset. Not even Bill Gates can afford everything he wants, and we as a society won’t be able to afford all that we want to do going forward.

  6. 6
    AMS says:

    RE: Scotsman @ 5 – “They will walk- in droves. It will be the new norm.”

    …and all those former buyers will be out of the market renting for how long?

  7. 7

    RE: AMS @ 6
    Good Question

    Assuming they can hang on to their old household incomes; they may rent until they save enough cash [no mortgage] to buy again….that may take like 5-15 years, depending on how quickly they save and how quickly home prices collapse.

    If household incomes collapse with home prices, getting out of renting will be like trying to grab the gold key from the merry-go-round that keeps accelerating on you….you can’t save fast when your household income collapses.

    Credit ratings may become a joke when homes are bought with simple bags of cash in the future.

  8. 8
    AMS says:

    RE: softwarengineer @ 7 – Strategic Default…

    So many are holding out for the market to return and go back above the former peak. These will have the hardest time, as they continue to bleed to death.

    Which brings us to topic #2, which should be included in my discussion with One Eyed Man regarding rent versus buy:

    “Assuming they can hang on to their old household incomes; they may rent until they save enough cash [no mortgage] to buy again….that may take like 5-15 years, depending on how quickly they save and how quickly home prices collapse.”

    5-15 years is an eternity for many Americans. The discount rates are very high. Assuming that the cost to rent versus buy is approximately equal, should someone who wants to have an ownership lifestyle put such on hold for up to a 15 year period? You know my position on cheap rent. Why buy when the rent is relatively cheap. I guess this begs the question as to why someone would want to buy.

    “If household incomes collapse with home prices, getting out of renting will be like trying to grab the gold key from the merry-go-round that keeps accelerating on you….you can’t save fast when your household income collapses.”

    This is very similar to the case when housing prices were rising faster than incomes. The difference in the rates of change between the two are important. If you income is falling faster than housing prices, then housing continues to increase in terms of percentage of incomes that go toward housing. In other words, affordability goes down whenever the rate of change of housing prices is greater than the rate of change of incomes, even if housing prices are going down.

  9. 9
    David Losh says:

    RE: Scotsman @ 5

    Hope springs eternal. Maybe if they hold out for another year, maybe next year will be better than this year, maybe a few years from now, with inflation, and the maybes will go on.

    More importantly just look at the discussions of the past week about strategic default. Of course every one should walk away from debt. It only makes sense. Bankruprcy courts should be waiting line capacity, but they aren’t. People will pay. The only question is if they will pay strategically or will they try to live like they always have.

    In my opinion, as the circumstances sink in, people will make the choice to pay down debt and make the sacrifices they need to. It’s not really that hard to do.

  10. 10
  11. 11
    DrShort says:

    Tim,

    I think it’s time for another bottom prediction posting. You did one early in the year with a lot of the methodologies picking early 2010 as the bottom. I’d be interesting to revisit that and see how assumptions and predictions have changed.

  12. 12
    Scotsman says:

    Ouch. The truth about “Black Friday?” Flat. Compared to the prior week even.

    http://www.gallup.com/poll/124508/Gallup-Economic-Weekly-Thanksgiving-Week-Disappoints.aspx

  13. 13
    Johnnybigspenda says:

    Interesting article on SeekingAlpha today…. check out the Radar Logic price index charts further down in the article…. even cities that had a month or two of upward prices recently have resumed their downward fall…. Seattle appears to have leveled off, but based on the 8 other cities, I think we can predict our fate…

    Nine Regional Housing Markets Now Down Below March Lows… and Counting

    The extra-seasonal, “cash for first time homedebtors” fueled housing price bounce having reached its peak in most markets in mid-summer now appears to be completely reverting for some.

    The Radar Logic home price data now indicates that there are nine regional markets that have now dropped below their March lows.

    This presents an unequivocal bump in the road of the supposed “V” shaped economic recovery as a significant “housing recovery” disappointment shapes up over the next few months.

    The following rollup shows the regions that have now completely reverted from the summer peak to break the prior lows seen in March… some even dropping to series lows, resting at levels not seen since the late 1990s.

    Note that I added “value” loss for homes purchased at the summer peak and costing either $200K, $300K, $400K and $500K… all losses are well in excess of the senseless $8000 government carrot tax “credit”.

    http://seekingalpha.com/article/175781-nine-regional-housing-markets-now-down-below-march-lows-and-counting

  14. 14

    RE: Scotsman @ 12

    I Was Thinking About That Issue This Morning

    Part of the reason, IMO, that Americans aren’t buying the farm this Christmas is high interest on credit cards [i.e., Citi just raised their lowest interest rate for this Christmas to 22.9%] and one late payment jacks the loan shark rates in to the 30s.

    The big thing now everyone is using now is VISA debit….LOL….problem with debit is maximum cash available in checking and believe me, after rent [or home interest], food, power, dental, etc, etc…sucking on checking accounts, IMO, there ain’t much left for plastic debit anytime during the year for most Americans.

  15. 15

    RE: Johnnybigspenda @ 13

    $1 Trillion Stimulus Piles of Debt Cash: Burned Up in a Year

    Then we’re back to square one, and a monthly credit card bill to boot for the stall tactic.

    Onion News had a funny related article:

    http://www.theonion.com/content/news/obama_tells_nation_hes_going_out

  16. 16
    AMS says:

    Today I will consider ‘affordability’ based on percentage of gross income going toward housing. While I have heard various levels of what a reasonable maximum is, we also know it depends, at least in part, on two factors. First is the gross income itself. As gross income increases, it is possible to reduce the percentage going toward housing. On the other end are those who make the least. For these individuals, housing will be a much greater percentage of their income. The second factor is the other goals and objectives of the members of the household. Don’t ask me why, but some people have a high desire to live in the so-called “McMansion” on small wages. While this is totally out-of-whack in my opinion, we have the so-called ‘invisible hand’ that makes these larger decisions.

    Ok, now back to the analysis. As usual, I will make some nice assumptions to make the math nice, such as low transactional costs, that there are not significant changes in housing sales mix, that the asking prices reasonably approximate selling prices, and so on. Clearly this analysis has a fair amount of error in it, but the error should be relatively low as contrasted to the larger picture.

    I am using the data sets from http://www.housingtracker.net – I have not researched extensively what the methodology behind the data is, nor do I have any reason to dispute the data sets. I am open to other data sets.

    Affordability.

    Let’s say you purchased a median priced home in the following areas in 2006:

    Chicago, Detroit, Las Vegas, Los Angeles, Miami, NY NY, Phoenix, Portland, St. Louis, Seattle, Tucson

    Methodology:

    Average the median 2006 HT prices. Average the last median prices for September 2009, October 2009 and November 2009. Compute the difference, and then divide by 39, an approximate to the number of months that have passed. This will approximate the change in market value for a person who held over that time. Of course for those who do not sell it’s all unrealized. Many people purchased earlier and still hold. Some people purchased after 2006, and so on and so forth.

    Area, average month price change, annualized
    Chicago, -1530, -18360
    Detroit, -1350, -16200
    Las Vegas, -4990, -59880
    Los Angeles, -4510, -54120
    Miami, -3850, -46200
    NY NY, -1820, -21840
    Phoenix, -3620, -43440
    Portland, -1680, -20160
    St. Louis, -420, -5040
    Seattle, -880, -10560
    Tucson, -1790, -21480

    Total Changes (Mid 2006 – Late 2009)
    Chicago -59,600
    Detroit -52,500
    Las Vegas -194,600
    Los Angeles -175,800
    Miami -150,200
    NY, NY -71,000
    Phoenix -141,200
    Portland -65,700
    St. Louis -16,300
    Seattle -34,300
    Tucson -69,800

    Under all the nice assumptions, this suggest that a person who financed 100% of the purchase price would have needed to pay several thousand dollars each year toward the principal. Taking the low St. Louis at $420, I wonder how many buyers have the extra cash to stay above the change in market value.

    In the Vegas market, it’d take an extra $60,000 per year to stay above water on a $335,500 purchase. Clearly with median prices at about $140,900 this average will decrease very soon. How many households have an extra $60,000 per year above and beyond the current payment?

    In the Seattle area it’d only have taken an extra $900 per month to stay above water on a $386,400 purchase. That’s only $10,600 per year. Over 10% of an annual $100,000 household income.

    Who knows what’s happening in the future, but it’s no wonder so many ‘owners’ are upside down, underwater.

    I am not so sure how ‘affordable’ housing was for the represented group.

  17. 17
    AMS says:

    To: One Eyed Man
    Re: More on rent versus buy

    Starting with this message:
    RE: Jun 15, 2009 at 9:20 am Geek

    If I pay 1750/month for 30 years, no matter the original price of the house (no early payments, etc), I’ve payed 630k. If the original price of the house was 350 vs 200, I might have got a better deal. Sure I’ve payed an extra 50-60k in property taxes, depending, but that’s still 2x price paid vs. 3x price.

    If I’m lucky, a 350k house will be worth more than 630k 30 years later too.

    Still, what a racket. 630 to borrow 350, or less.

    She also discusses her current rental situation a bit. While it is really tough to tell, I think she is suggesting that renting is not her preference. But she does compare the monthly cash flow of the rental versus the cash necessary to service the debt:

    Anyway, as your average renter (ha ha), I definitely look at house prices and iterest rates together to get monthly payment.

    Many will recognize that Geek’s analysis does not discount the money to present value. Is it really a ‘racket’ when someone desires to use cash today and pay it back later? Often GAAP accounting is not discounted, and thus the $630k in payments is on a undiscounted GAAP basis, where both principal ($350k) and interest ($280k) are included. Yes, there are time when GAAP requires discounted values be used, including some instances of “zero percent interest” sales. While all of this is very interesting, I’d like to concentrate on the center paragraph:

    If I’m lucky, a 350k house will be worth more than 630k 30 years later too.

    Note how Geek implicitly seeks positive leverage (actually, Geek ties her discount rate to the interest rate, and then she seeks to avoid negative leverage). As long as the market value goes up by the level of interest paid, then this is acceptable. If somehow we knew this was going to take place, then I am going to suggest a reasonable strategy of 100% financing, negative amortization, if possible. Making the nice assumption that the value does go up exactly as fast as the interest rate, net of all transactional costs, in the end the ‘owner’ would simply pass title to the next owner.

    What happens in this case is that the ‘owner’ has lived in the home for some 30 years, and while there are some operating costs, such as maintenance, insurances, taxes, and so on, there was no initial capital investment, nor was there any expense in the end. The capital was borrowed, and the negative amortization covered the interest ‘expense.’ (Is it really an expense? In this contrived example I am not sure, but normally the monthly interest would be an expense. In this case it is expected that it would never be paid, since the proceeds at the end will cover the exact balance due. So if you never expect to pay something, and there is no monthly cash flow, is there any expense?)

    If this really was going to happen, for someone to claim it’s cheaper to rent we must concentrate on monthly operating costs versus the cost to rent. This is going to be a much more difficult argument to overcome. Essentially the ‘owner’ was able to use the capital for free for 30 years. The operating costs needed to be paid, but this is always the case.

    Back to the basic idea of under capitalization. If a person thinks the asset is going to be in the positive leverage case, then “bigger is better.” This, I suppose, might explain the issue in my message above. I said, “Don’t ask me why, but some people have a high desire to live in the so-called “McMansion” on small wages.” Well, if you have a outlook that suggest that the market is in a high appreciation period, and the cost of money is low, then making more money is simply a matter of being able to handle the monthly cash flow. Who cares how much interest is paid, since it will all be recovered at the end. If the market appreciates sufficiently, then the returns might be highly positive. In other words, the estimated terminal value has a very high net present value, even with all the interest and operating costs paid.

    Clearly there is a risk that the market does not behave as expected. What 2006 buyer thought the market value changes outlined in my message above were going to take place?

  18. 18
    AMS says:

    More on affordability.

    Here is a list of various areas that includes affordability in terms of:
    Percent Income
    Mortgage/Rent
    Price/Income
    Price/Rent

    As far as percent income, LA tops the list at 63.5%, Seattle is at 31.8%, and the minimum is Detroit at 11.4%.

    Not surprising, the price/income ratios are high in the cities that have higher percent income ratios. Detroit has a price/income ratio of 1.9, Seattle is at 5.2, LA is at 10.4.

    The price/rent uses monthly rent. Adjusting for annual rent, which we have discussed here, Seattle comes in at 25.4, which is on the high side of our discussion, but not unreasonable. The methodology is “The median single family home sale price divided by the local median monthly rent for a 3 bedroom apartment.” San Jose tops the list at 37.6. Yes, that’s right, nearly 40 years, or annual rent is under 3% of purchase price. New Orleans is under 10.

    http://www.housingtracker.net/affordability/?sort=pct-income&dir=down
    (click on columns to sort, up or down)

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