All of the variables in today’s analysis are nominal.  What happens when you run everything with real interest rates and real prices?

I suspect you will reveal that much of the public is not noticing that current real interest rates are not especially low.  If you go to http://www.martincapital.com/chart-pgs/Ch_mmnry.htm you can see that 10 year treasuries are slightly higher than average when adjusted for inflation.

Current borrowers in Irvine are making two bets.  1. Current deflation will not continue.  Otherwise, they would certainly want to rent.  2. Nominal interest rates will not go much higher.  Because so many people watch nominal interest rates instead of real interest rates, it affects the housing market.

Yes, real interest rates are very high when you consider the deflation occurring. Unfortunately, the CPI which is the only adjustment I can make, is starting to show some inflation when we all know deflation is still going on. Real interest rates as calculated by adjusting to the CPI will look lower than I believe they really are. Perhaps Shadow Stats or some other site has a better measure of inflation to work with.

This actually brings up a related point; Ben Bernanke wants real interest rates to go negative, but this is impossible in a deflationary environment. Until deflation ends and real inflation occurs, the big players who really move the economy will not borrow much money. When negative interest rates actually pay people to borrow, money supply will expand again, and the economy will perk up. Until we have negative real interest rates, the economy will go nowhere fast.

So is the house 2,509 sq ft or 2,495 sq ft?

The biggest dilema the Fed faces is how do they stop buying treasuries?  The latest TIC just came out and shows China, Japan, and the UK are again buying less treasuries and bills.  Right now, the Fed is buying a horrendous amount throught POMO or surreptitiously exchanging teasuries for foreign held agency debt.  The Fed can not stop buying because interest rates would skyrocket and the US gov would not be able to roll over its debt and pay the interest on the debt.  And the Fed can not continue to buy because foreign buyers of treasuries are divesting from the dollar as the reserve currency.

Not sure if this is the result of the media’s more optimistic spin lately, but this is what we experienced this weekend that we kept commenting to each other about as we went about our business:

- South Coast plaza was PACKED at about 4pm Saturday… And people were buying. Big change from just a couple months ago.

- Our go-to sushi place, also full. 20 minute wait. Two months ago, we ate there alone one night.

- The Block… Packed, couldn’t find parking, when we went to NM Last Call on Saturday night at 9 PM. It was a ghost town two months ago.

- Leased a new car yesterday. Lexus sold 12 cars while we were there (for 6 HOURS) because we had to wait our turn for the one finance person on duty.

Sunday night, every restaurant in the Asian market on the corner of Walnut/Jeffery had a line out the door.

Can a recession end just because psychologically people WANT it to end? Even if we still have fundamental problems, it just seems people are sick of staying home and “saving”.

Actually, I hope so. I’m sick of the doom-and-gloom :(

Change in consumer attitude can do much, but unless someone is loaning them money to spend, I don’t see the stimulus. Recessions end when those with cash start spending it. The recovery gathers steam when people start going back to work and receive credit offers to “help them out” with a life of servitude. If the people you were seeing were those with good jobs and savings, then we may be at the beginning of the government-fueled expansion. I doubt there will be a pickup in aggregate demand from the free-market economy (if there is such a thing).

real interest rates high?

Check this credit card out:

http://consumerist.com/5382051/heres-a-credit-card-with-an-79-interest-rate

79% interest rate + $75 yearly fee.

Now, that’s a HIGH interest rate.

In my experience the banks have a split personality. 

On the one hand they are trying to recoup their losses by increasing interest rates (like my Macy’s never used CC which just raised rates to 26%)..  OTOH, if you have good credit they are giving money away with 0% teaser and very low rates (7%).

I think the banks are desperate.  The people that will use the very high interest rate cards are likely to default hence the banks can’e make much money off them.

Of course, People with good credit, jobs and/or money are not using the very high rate cards, they use the very low rate cards and with some intelligence they can easily move stuff around the 0% offers, or more likely, just pay off the amounts every month.

So, I think the CC business is not that good mid term for the banks.

Meanwhile the mortage business is risky.

And yes, with a 0% CPI, a rate of 5% is no lower than the 18% from 1981 when inflation was running 15%... In fact, the current rates are effectively higher!

We need a nice war.

Isn’t that how Democratic presidents always fix the economy?

Do you think we can beat China?

Bernanke cautions on risks from imbalances

SANTA BARBARA, Calif., Oct 19 (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke warned on Monday that Asian policies promoting exports could lead to a reemergence of imbalances in trade and capital flows, which some believe helped fuel the U.S. housing bubble.

Trade surpluses achieved through policies that artificially enhance domestic saving and export industries distort the allocation of resources, he said.

“To achieve more balanced and durable economic growth and to reduce the risks of financial instability, we must avoid ever-increasing and unsustainable imbalances in trade and capital flows,” he said in comments prepared for delivery to a San Francisco Fed conference on Asia.

Bernanke said imbalances have narrowed following the crisis, but warned that as the global economy recovers and trade volumes rebound, global imbalances may reassert themselves.

The Fed chairman said that that Asian economies had rebounded strongly from the crisis, with annualized growth rates in the double digits expected in China, Hong Kong, Korea, Malaysia, Singapore, and Taiwan.

“At this point, while risks to the economic outlook certainly remain, Asia appears to be leading the global recovery,” he said.

Countries with the most open economies, such as Singapore, Hong Kong, and Taiwan took the biggest hits as a result of the turmoil, he said. China, India, and Indonesia, which are “among the least financially open” economies, expanded throughout the crisis, Bernanke said.

However, while conceding that greater global integration increases vulnerability to world-wide economic shocks, he said greater openness would promote stronger growth over the longer term.

“Protectionism and the erecting of barriers to capital flows should thus be strongly resisted,” he said. (Reporting by Mark Felsenthal; Editing by W Simon)

Don’t we already have two nice wars?

Just askin’

: o )

“reemergence” WTF? Exactly when did the trade and capital flow imbalance end?

And it sure looks like he just made the case for less financially open economies, unless you enjoy taking the biggest hits and having the slowest recoveries.

Except from a Goldman Sachs bonus perspective.

That darn democrat George W Bush is always starting wars. His dad, also a democrat, started the Gulf war. Those darn democrats.

Oh wait.

Since Obama has taken power, nothing has changed with all this ponzi scheme bullshit going on at The FED & The Treasury.  If anything, things have gotten a lot worse.  These scumbag politicians and bureaucrats just want to kick the can down the road.

I think many people have learned their lesson from this massive pipe dream gone bad, but the govt will do everything they possibly can to make those same people forget.

Hey ... The Bankers have already forgotten about the debacle ... hells bells, they’re insolvent, yet with the govt assistance, they’re gonna pay record bonuses this year.  Ain’t that grand!

ModGuy ... Americans days of spending more money that they make in income, then relying on bloated assets and consumer debt to fill the gap, is ENDING.

We’re all a little sick and tired “doom and gloom”, which is the reason why many of us want the govt to stop playing games with our economy, and allow the true free market to reset.  The economy needs to be placed back on a sustainable path.  A sustainable growing economy isn’t sexy, but it doesn’t destroy people’s lives the way that a Ponzi scheme economy does.  The longer we play games with our economy, the longer the pain will persist.  It’s that simple!  The Japanese know all about this.

So what does everyone think?  What will be the “bottom” price per square foot in places like Fountain Valley and Laguna Niguel?

Nicely said!

“reemergence” <—Now that’s funny!

Yeah, its a steal at 2,509 sq ft. At 2,495 sq ft. this place is a ripoff.

Modguy:
Consumer spending in the Palm Springs area is down considerably. My wife owns a couple of small businesses and talks regularly with other business owners. All are seeing very significant declines in various types of businesses through out the valley.
Real estate market? Eight visiting couples from south Orange Co spent Fri and Sat nite at a spec home built last year and originally marketed at $8M. It’s now asking $3.95M and renting for $1000/night. It’s located in a gate guarded community itself located in a larger gate guarded community. The visitors didn’t see a single person in nearby homes (all on an acre or more).
I think the South Coast Plaza, Lexus buying, etc. is an anomaly. Will be interesting to see what’s happening in 6-12 months.

I’m mystified by the continuing rise in the Dow and S&P while money market funds over the last 2 months have continued to show week over week increases in fund growth despite abysmal interest rates. Given increasing unemployment, job losses, the real estate fiasco, etc., what expectations are driving the market?

the weak dollar

The hope of another taxpayer-funded bailout.

Great post. Thank you.

My better half wants us to start shopping for a home now because of the lower interest rates and the tax deductions.  We’re renting and saving a lot, but renting is killing us on the income tax front right now. Just killing us.

Can you pls. explore more about any fallacies associated with the tax deductions that come with “homedebtorship”?  I think a lot of people in OC are considering buying a home for the wrong reasons (not just lower rates and declining prices seen today).

Also, are there things that renters in Irvine and OC, in general, are doing to alleviate the brutal assault on their take home pay (federal and state income taxes)?

Just wondering out loud. I wouldn’t ask except it appears that we Californians are starring down the barrel of more income tax and property increases in future years.

Thank you.

I think I have noticed increased traffic at malls, stores and a little bit at restaurants. This past Saturday night was pretty packed at the Spectrum, it reminded me of a couple of years ago.

However, we went to Simply Fondue restaurant in San Juan Capistrano and we were the only people there the whole hour and a half we were there.

Well, on the other hand, if you buy a house you will be saying that property taxes and HOA fees are just killing you big time and are not worth the saved Federal taxes.

Heh.  It’s just you would think the listing would be internally consistant.

I do think the tax deduction savings of home ownership is understated. I’ve done my taxes without putting in the mortgage interest and property tax calculation and the difference is pretty significant.

It’s easy to reasonably estimate what your savings would be for any year in which you’ve paid california taxes. Simply add the actual amount of federal and state tax you paid and divide that sum by your adjusted gross income. That is the percentage you would have saved. For example, if you paid $15000 federal and $6000 Cal
totalling $21000, and your adjusted gross income is $80000, then
21000/80000 = .26 = 26%.%.
Then add your annual mortgage and property taxes together. Suppose they are mort = 18000; tax = 2200; total = $20,200.
Then multiply .26 x $20200 = $5252 = good rough estimate of total annual savings from owning.
This estimate can be picked apart depending on how accurate you wish to be but it will probably be within 10-15%. And a more accurate figure will likely require carrying a worksheet around. Hope this is of some help.

By the time you pay property taxes and HOA, you’ll break even on the income tax deduction. Its a wash. There is no “net” tax benefit.

from that the difference, can you subtract: home insurance, HOA, property tax?

I’m curious to see if it still comes out ahead, and by how much % of the cost of the house…

thanks

I’ve thought the same thing visiting shopping arenas.  I just smile and think, “what recession?”
I just get an eerie feeling that all those people are going to get clobbered.

What if you took the 90s bottom $/sqft and inflation adjust into the future?

Just a correction on thrifty’s comments. If you itemize your taxes you will forgo the default standard deduction. so in thrifty’s case it wud be close to 4000, that is your actual benefit from owning this house.

Also the deductions are on the interest pad. Since the interest paid is going to be less because of record low interest rates.

Also do not forget about your insurance + HOA + maintenance.

Thax savings on a home purchase are not understated as quoted by “irvine_home_owner”, In my opinion they are overrated.

As you pointed out, it depends.

On newer homes, with Mello Roos and high HOAs, there may be no difference or even negative results. On older homes, those costs are non-existent or less (although maintenance costs may be higher).

A while back I did a breakdown on 4/3s in Irvine where the sales price was $650k or less and I focused on homes built after 1990 to minimize maintenance costs. Most of those homes alos had very low or no HOAs. After doing the math, it seemed that rental parity was close with payments around $3000 and current rents for 4/3s in Irvine at anywhere from $2700-$3500. Even if you adjust the tax savings, you’re not off by much. This could explain a recent run-up on SFRs located in West Irvine, where the cost to own is not much more than to rent.

Now, this isn’t saying you should buy… I’m just trying to state the other side because usually when I hear someone tell me that the tax savings isn’t very much, they’ve never owned so they don’t really know how much the savings actually is in their own case.

There is still the issue of actually having a 20% down payment and the possibility of losing all of that in the next few years… but having moved from owner to renter and back to owner within a year’s time, there are some headaches of being a renter that are understated too.

The actual taxes paid (line 75 on fed return and line 62 on Cal return) include either itemized deductions or the standard deduction(s) and all other modifications as well.
Insurance, HOA and maintenance are not deductible.
I do understand that there are other considerations in addition to the tax benefits; my suggestion had strictly to do only with a quick but helpful estimate of the actual dollars saved in taxes.

Is this like double bagging?

http://money.cnn.com/2009/10/19/news/economy/housing_finance_agency_bailout/index.htm?postversion=2009101918

I dunno how many times I have to repeat myself until I get sick in the stomach: govt intervention versus fundamentals.

Guess what? So far, it’s the govt that’s winning.

“Administration officials unveiled a plan to aid state and local housing finance agencies, which provide mortgages to first-time and lower-income homebuyers and enable the development or rehabilitation of rental properties. Officials declined to put a pricetag on the program, but said there would be no cost to taxpayers.”

There would be no cost to taxpayers because, after this admin raids through everything, there would be NO taxpayers left in US

2 RINO’S.
Same teams for the finance and defense.  Only thing is the doubling of the bailouts.

I thought Obama stood for “change”?

Maybe we need to revisit The Who:

“Meet the new boss,
same as the old boss”

“We need a nice war”
“Do you think we can beat China?”

ROFL

If you would like some detailed heat maps of real estate prices, school quality and demographics for the state of California, there are some great interactive heat maps at http://www.localetrends.com/st/ca_california_home.php?MAP_TYPE=re_r

Your worst case scenario is still way too optimistic.  Prices in Irvine are going to crash below where they were at the start of the bubble, before resuming the gradual upward trend tracking inflation.  See your own Las Vegas bubble chart for a preview of Irvine price trends.

Home prices here are still unsustainably high compared to income levels.  Jobs are still not being added.  Commercial real estate is still sitting vacant and on the brink of its own crash.  Banks are still sitting on massive shadow inventory.  Capitulation hasn’t happened yet.

The only hope to avoid this would be a broad-based economic recovery, but that would likely create double-digit inflation, leading to defaults on unprecedented numbers of ARMs, killing the housing market and the young recovery along with it.

Sorry to be gloomy, and I hope I’m wrong.

Fiserv is predicting another 11 percent drop nationally by June of next year, with 20-plus percent drops in Los Angeles, Phoenix, Las Vegas, and Miami:

http://money.cnn.com/2009/10/20/real_estate/home_price_forecast/?postversion=2009102003

Mark,  IMHO
Just add up all the expenses for home ownership, tax, interest, MR, HOA, repairs, insurance, lawn care,  utilities, etc. vs. renting cost (rent and renter’s insurance).  A tax program like TurboTax(R) can be used to figure with and out house owner owner cost after taxes.  CA has renter’s deduction for lower income tax filers.  On the expense side the tax and interest are Sch A deductible.  I don’t know about MR.  The reduction of principle is not deductible, but should be considered as forced saving or spending if the property prices declines.  Also consider the cost of purchase ~1% to 2% for closing cost and other fees and ~7% on selling the house.

For many high income with high charitable deductions, the interest is essentially AMTed out.  For those with little deductions, Sch A filing removed the standard deduction.  Best to run the number by an accountant.

A tax saving of $3,000 per year is little consolation for a house price drop of $150,000.

Remember you’re considering buying a house not a home.

+1 on the renter headaches.

We bounced out of 2 different rentals because the owner was moving back “home”.  Moving costs add up fast, and that’s truly “throwing your money away.” 

In my case, kids and a marriage are in the picture, as well - there’s only so much waiting and moving a family can do.  It takes its toll - ask a military “brat.”  We finally pulled the trigger on a place a few months ago, but the area (Valencia) corrected quite a bit more than OC (median income $105k+, median house $400k-ish).  GRMs right around 160.  It made sense.

Anecdotally, OC’s job market is one of the worst in So Cal - quite a few talented folks on the street, and the interviews are flowing in LA and SD, but nary a peep out of Oh See.

The unemployment rate tells a different story, and again, this is anecdotal.  Worth about what you paid for it.