So what you are saying is that I should lock in my rate and buy now, because there’s no better time to be a homeowner?

Graphs are pretty to look at, but suboptimal predictors of future behavior, be it stock prices, home prices, or what not.  There are so many variables at work in this issue that it would impossible to predict anything with accuracy.  So since it’s all guesswork, I"ll say the bottom comes sooner than the 2012-2014 estimated on the last graph.  Attention spans and memories are shorter, bubbles are quicker to develop, and driving out the mantra that real estate never decreases in value will be hard.  So bottom is in 4q 2009 for CA/Fl, and other bubbly residential RE markets, with CRE and flyover country RRE coming 6-18 months later. .  We’ll see the sucker rallies and false bottoms between then, and like a good keg/kool aid party, we’ll only realize what happened in retrospect.
-----

IrvineRenter,

In your chart of Median House Value in Irvine vs. Rental value, you predicted the median house price in Irvine to have fallen $30,000 since January of 2007.  This has not happened.  However, it is clear that values are falling, and houses not aggressively priced are not selling.  Did you not foresee the change in market mix that is supporting the median value in Los Angeles and Orange Counties?  I believed the market was in for a correction since 2006 but I certainly didn’t know the low-end of the market would get creamed.

I have found it interesting that Realtors and bulls cling to the still stable median as evidence we are in for a minor correction that will soon bottom.  I predict that Realtors will begin to loudly reject the median as a barometer of market health once we really do start recovering in a few years.  This is because it will begin to fall quite fast once people start buying starter homes again.

If you concede that the median is stable because well-off people are still buying million dollar homes but working folks can’t get loans so only high-end homes are really moving, imagine it in reverse:  The market begins to recover, lending is available to all again, and the well-off people are still buying their homes in Newport Beach.  But wait, now the sales in Santa Ana and Anaheim are 3X what they were in the previous year, and the median tanks hard, even though the price of individual homes is rising.  Seems to me suddenly the Real Estate industry will understand statistics and explain to the public that the median is misleading.  What do you think?

My feeling is this balloon will lose steam really slowly, since so many people don’t need to sell and all that will be on the market for years is trash.

Carl

JMHO

The current credit crunch is likely going to make the charts above look more valid in the coming years.

Bank of America invested 2 billion in Countrywide last month.  CFC stock is now worth less than BofA’s initial investment, with no bottom in sight.  Bank of America = Bag Holder & Knife Catcher!

The more light that is shined on Countrywide, the worse things appear.  I don’t think they’re going to make it.  Either buyout, or BK.  Which comes first?

“There are so many variables at work in this issue that it would impossible to predict anything with accuracy.
You are so right ... and rents could decrease and prices could overshoot and prices relative to income may devalue so much more than IR is presenting.

The median is certainly has its problems as a measure of housing prices. The scenario you describe when the bottom of the market picks up is certainly possible if not likely.

Depending on who you believe, the median has dropped in Irvine. The DataQuick numbers which came out yesterday showed a mix-adjusted decline of almost 4% in OC while the median stayed steady. HousingTracker.net has shown an 8.9% decline in asking prices over the last year, for what it is worth.

http://www.housingtracker.net/askingprices/California/LosAngeles-LongBeach-SantaAna/SantaAna-Anaheim-Irvine

One interesting phenomenon I would like to note about recoveries: people almost always think they will come sooner than they do. When the tech bubble burst, nobody predicted it would take 3 years to bottom and 7 years to recover. In 1990, when the real estate downturn was underway, nobody thought it would take 7 years to bottom and 10 years to recover. Most people are optimistic in their outlooks.

In 1997, I bought a HUD repo 1 Br in MV for $45K, sold in 2001 for $110K. Worth $300K at the peak, now about $230K. The rent in 2001 was $675/mo. mortgaget about $350/mo. HOA $100, tax $50/mo. It was cheaper to buy than rent, but no one wants to buy.  The same condo would rent for $1250/mo today but again no one is buying.

I just rented out a studio in Irvine for my client for $1095/mo.  Got 2 applications with 700 FICO score.  I thought I did good, but found the same kind of model just rented $1150/mo.  I got 30+ inquires from just 1 craigslist ad.

I don’t know the effect of repos on rentals.  Unless banks started to rent them out, it probably won’t effect the rental market.  Many renters’ blog made home owners looked like fools, which in many cases, I agree.  But the lucky renters may have their landlords to thank for not raising rents to market levels. 

Actually the studio was on Streamwood, a complex on a recent blog post.  I guess the estimate rent was like $800mo from the blog.  Honestly, rent is so much higher and cheaper rentals are just hard to find.

I own several rentals and I am rushing to sell them at huge discount.  Because I don’t think there are better investment out there.  I don’t want to give up my cheap property tax base. And they are so easy to rent.  Well, things maybe changing.  But I got them all locked in low fixed rate mortgage.  The rent now is even to cover my payment.  I guess that thinking process explains why many owners stood on the sidelines for selling.

Anyway, renters who feels owners are fools.  Don’t show that attitude during lease negotiation.  The ones you called fools may decide to rent to someone else.

Sorry, typo.  rent of the 1 Br in MV in 1997 was $675.  rent was $850/mo in 2001.  Now it’s about $1200mo.

What effect does outflow migration have on SFDs rentals?  We’re just getting started.

LoL

I think there’s a lack of supply for what I call, illegal alien, student, dink, and yupie rentals.  Small condos and apartments.

However, if you own a SFD and you’re trying to rent it, it’s a whole different picture.  These landlords have less pricing power because the demand is simply not as strong.  I think this trend will become weaker as we lose more real estate related jobs.

Tech never recovered to peak.

True. The Nasdaq is still only half way back to its high. The DOW and the S&P have both fully recovered. Of course, they did so by changing the makeup of the index.

Not really.

Actually BAC negotiated the trade of the year. They bought $2B of 7.25% preferreds at $18 per share on Aug 23rd. On the news, CFC shot up 20% to $22 per share. Then BAC shorted the hell out of CFC and locked in their winnings. Netting over 400M in profit with a 7.25% yield. Essentially, BAC isn’t going to lose any sleep if CFC tanks. They’re hedged.

Fantastic trade actually.

I agree Carl, and I think we’ll see that huge drop in the median in a few months to a year, right when everyone thinks the market has stabilized.  And everyone will question the statistic’s value and even its accuracy.

How do you know BAC shorted?

For a large and non-normally distributed (skewed or not “bell shaped") data set, the median (sales prices) is best measure of central tendency. If I were a realtor now, I would cling to it for dear life because:

1) It is based on sales, which are few and far between, where few sellers, reluctant to drop their prices have gotten lucky and have actually sold.

2) The median price of sales does not take into account the incredible amount of inventory sloshing around on the market.

3) Or the number of homes which have not sold. Which is also a high number in this market. How many homes that were on the market in ‘03 or ‘04 do you think didn’t sell? Not as many now!

A damaging Median number for the RE industry now would be number of sales, and the subsequent comparison to 2 years ago.

But yeah, Yun will be dumping the sales price median number soon as he grasps for more straws.

(What would be a much better way to conceptualize the data set of home sales would be one that cut out the real high end, and centered on what those in the working class could afford. For this set, we might even ::gasp:: be able to return to parametric statistics, a normal curve and the mean (or “average” as we typically think of it) statistic instead of the median.)

I’m so sick of hearing people spouting out with the old “everybody wants to live here so it should be very expensive” argument. Nobody who bought a house prior to the bubble should be able to make that statement, considering the price they were paying was significantly less, relative to what prices are at now - yes there was a premium to live here, but it wasn’t a number of times more expensive than other areas of the country. That’s evidenced by the brochures in today’s post.

As someone who wasn’t old enough to buy a house in 1997, I’m hoping we see a return to pricing like the late ‘90s, where it does make financial sense to buy. Then I’ll be lining up right next to IR to buy a place.

Till then, I’ll happily take the extra $1k and change a month I save by not owning and keep adding that to the rest of the savings going into my downpayment fund.

To me the most revealing statistic I have seen is the decline in asking prices. Sure this is distorted by the WTF sellers, but to see a 10% drop in asking prices during a period of declining sales is amazing.

What would happen to car sales or TV sales if they lowered prices 10%? I doubt you would see the sales numbers decline 50% like we have in housing.

Prices cannot stabilize in the face of declining volume, and asking prices still have to come down more before volume picks up.

I hope people like yourself who have never seen rents and ownership costs align realize it is not just possible, but the inevitable result of the deflation of a housing bubble. Those who don’t believe it are destined to become knife catchers.

I agree 100% with the analysis made on this blog today. I believe that prices will fall until in makes finanancial and not speculative since to purchase a home/condo.

The numbers on this site show that median asking prices continue to drop:

http://www.housingtracker.net/askingprices/metro/California/LosAngeles-LongBeach-SantaAna/SantaAna-Anaheim-Irvine

It is only a matter time before the median sales price falls in line with the median asking price.............

Thank you IR, awgee, Mark, and particularly LG, for enlightening me on the subject of foreclosure yesterday.  I learned a lot!

Don’t you mean the median BID price?

IrvineRenter,

I had a comment and a question.  First the comment.  I love your blog and find your analysis very informative.  I’m hooked as a reader.

Now the question.  It is on your last chart and has a description of the decline of homeownership rates to the historical average of 64%.  If the 5% of homes are converted to rentals, where will the homeowners live?  Won’t they, by renting their homes out, essentially turn themselves into renters?  This would mean, for the most part, the total rental supply would stay the same and it would not contribute to the downward pressure of rental prices.

excellent post, I used a similar method to reach my conclusion of SFR costing somewhere around 175-200 per SF at the bottom.

sounds too low for most people but that where the cost to rent vs buy would make sense.

over the past few days I see 300 per sf has become very commom. another 30% to go and then I start looking and lowballing.

On that topic, today we have a price reduction of I think $15K (not totally sure, but I believe this one was sitting at $999K) on a 3,117 sf property in Northwood.  Address is not disclosed (how creepy is that?!), but that house is now down to $316 per sf from original list in May of over $350 per sf:

http://www.redfin.com/stingray/do/printable-listing?listing-id=791885

There’s your 10% drop in asking IR, and it will probably still sit.  It’s not a bad place either.  Good sized, nicely maintained, and they’ve put upgrades into it since purchase…

Promising new addition to MLS in Tustin Ranch:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1128408

A list of $325 per sf on an SFR in that area takes some balls.  I bet the guy down the street from this place, who has been on the market for 60+ days and is sitting at $375 per sf is really pissed off right about now.  This new listing undercuts his list price of $929K by approximately $125K when you consider the small square footage differential.  Maybe more than that when you factor in that the larger place should go for less per sf than a small house in the same area…

I bought a 3br house in Virginia Beach, VA 8 blocks from the resort oceanfront in 1997 for 117K.  So Irvine was about 2.3x as much.

I also bought a 2br 1200sf house in the same area for 93K.

Currently (2006) median house value was 362K, so the same approx 2x multiplier is there.

MMG.......

Do you need some miles for a down payment

Speaking of 10% drop in asking prices, here’s today’s price drop:

http://www.redfin.com/stingray/do/printable-listing?listing-id=791885

Actually a pretty nice Northwood place, 3,117 sf, now down to $316 per sf at list from original in May of $352 per sf.  Assuming one could get a price lower than list, this one could be had in the sub $310 per sf range.  Decent curb appeal and they have obviously done some upgrading… Encouraging, although a price of $275 per sf @ $850Kish total would look a whole lot better!

Considering the volume of WTF pricing out there, this new listing is a breath of fresh air:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1128408

$325 per sf for a SFR in a decent Tustin Ranch neighborhood.  The guy right down the block, sitting now for 60+ days on the market and currently at $375 per sf must be mighty POed right about now.  This new listing has undercut his list price by approximately $125K when you consider the small size differential between the properties.

I think $325 per sf on a property that size will draw some good buyer attention and get into escrow.

Home ownership rates in Irvine are far lower than the national average.  No surprise there.  Real Estate is a local market.  It would be informative to see the local home ownership rate changes over the past decade.  Anyone have it?

There is a condo in Irvine.....at 9 ericson isle.....listed a few days ago at $297.00 per square foot. This seems like a good test of the true market.......anyone know the history of this property?

Given that prices increased 200-300% since about 2000, I’ve been wondering why the postulated 25-30% drop is a big deal.  Sure, it’s a good thing, but is it enough to truly bring affordability back?

If a home sold for $250K in 2000, using a 4% annual increase in valuation gets us to $329K.  If that home sold for, say, $750K in 2005 or 2006, a $50K drop to a current asking price of $700K isn’t going to cut it for many (most?) potential buyers.  It seems to me that in order to get to affordability, current prices would have to be at least 50% less than the crazy purchase prices in 2005 or 2006.

What am I missing?  I understand the distinction between 10% drop from last purchase price and 10% drop in asking price...I’m asking a general question based on other posts about where the bottom might be, which seem to say that OC might be looking at a 25-30% drop.

There will always be a small number of buyers who are not sensitive to price. In a market with very small volumes, these buyers can artificially support a mythical median.

“If the 5% of homes are converted to rentals, where will the homeowners live? “

They won’t be homeowners any more. The conversion is going to be forced upon them through foreclosure. The new homeowner will not be a resident occupant, but an investor looking for cashflow.

The real downward pressure on rents will occur from two sources.

1. An increase in the number of rentals on the market. Many homes held for sale are vacant. There are many empty homes in the US right now, and if you look through the pictures of many of the houses featured here, you see they are unoccupied while on sale.

2. A decrease in earnings caused by a housing induced recession in Orange County. All the money that used to flow into the local economy through real estate has been cut in half. Many mortgage brokers were thrown out of work, and many realtors are hungry. Homebuilders and other real estate related jobs are next. The dwindling cash inflows will also impact retail and other businesses.

“What am I missing? I understand the distinction between 10% drop from last purchase price and 10% drop in asking price…I’m asking a general question based on other posts about where the bottom might be, which seem to say that OC might be looking at a 25-30% drop.”

You aren’t missing anything. We are at the top of a very tall hill, and we are looking at a very bid decline.

Considering BAC has an 18-month trading restriction on Countrywide following the deal, I find you tale somewhat apocryphal.  If it were true, I would imagine the regulators may be interested in what amounts to blatant stock price manipulation.

Bank of America, the second-biggest U.S. bank, gets shares that yield 7.25 percent and can be converted into common stock at a price of $18, Countrywide said yesterday in a statement. While the shares are convertible at any time, Bank of America will be subject to trading restrictions for 18 months, according to a regulatory filing by Countrywide today.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a89O3HS3Hcyo&refer=home

You can even check the filing (I didn’t), but I can guess shorting the newly acquired position is a no-no.

I find it hard to believe that Bank of America did this. That is essentially a pump and dump and I’m sure the SEC would be looking into it. Then again, Cox is a Bush appointee, so I guess anything is possible.

I wonder if they would be allowed to hedge their position in the options or futures markets? If so, they may have purchased puts when the stock was higher because the stock price was higher when the deal was announced. I don’t know if the single-stock futures market or the options market has the liquidity to hedge a position that large.

Kim - When the buyer supplies a down payment of 10% of 20%, a 10% or 20% drop is a 100% loss of their total equity.  A 30% drop is ...

Apocryphal?  Nice word.

“We are at the top of a very tall hill, and we are looking at a very bid decline.”

And we’re above the cloud line, so we have no perception of how high we are, or how far we go before we reach the floor.

Thank you for the great post, IR. 2013. Here I wait and stand.

I still can’t imagine paying 50-60% (or more) of my take home on buying and on top of that gambling that I will be able to refi to afford the home later on.  I would never imperil my family fanancially that way.  Therefore, I will rent at considerable fraction of what it would cost to buy.  As IR states, only when buying becomes on par with renting as reflection of income generated by the average buyer (particularly at first-time buyer level) will the bottom be found.  The American Dream to own without being owned by your home.  I wouldn’t enjoy sleeping under my own roof if I knew that it could come crashing down on the next reset.

Though I have a series 6 & 63 (I don’t sell securities), this is way above my grade.  With that said, there’s something wrong with a corporation investing in another corporation’s future, then shorting their stock as a hedge, to protect short-term profits.  I don’t think this passes the stink test.

But I could be wrong.

Actually, we’re above the death zone line on Everest.  If we linger too long, like a climber, we may find it kills our economy and possibly the financial underpinnings of our nation.

We could look back in a few years when the Euro is the denomination of choice.

“It seems to me that in order to get to affordability, current prices would have to be at least 50% less than the crazy purchase prices in 2005 or 2006.”

I’m looking at this market just like Kim. 30 percent decline? Big deal…

IR do you anticepate SoCal homes prices to ever reach a point where median income earners can afford a median priced home based on traditional lending standards that allow you to invest and save for retirement in addition to paying your mortgage?

If you are unable to saveinvest after making your mortgage payment aren’t you just living on borrowed time?

Another point.  I don’t think corporations can actively short a competitor.  Gosh if that were the case, the big insurance co’s and banks could control the market capitalization of their smaller competitors by simply borrowing all their available stock.

Here’s a sales history for 9 ericson aisle…

9/19/1989 = $204,500
8/30/2000 = $239,000
11/25/2003 = $430,000

There’s currently a 1st mortgage for $450,000 and a 2nd mortgage for $50,000 on the property.  The seller looks like they are struggling to stay afloat here, the property taxes haven’t been paid and there’s a HOA lien on the property.  There’s also an IRS lien and a judgment in favor of AmEX against the seller.

I don’t know how big this condo is, i’d guess around 1,200 square feet?  (just saw 1,679 on redfin)

Thanks for the information....it looks like someone that is trying to get out while they can...it will be interesting to see who bites at $297 sq ft..........if anyone

define ‘many’ (hopefully as a percentage of total homes).  This is implying that we have a housing surplus that will drive rents down.

What are the facts?

9 ericson
Owner: Rattanasak, Jetsada Trust
Last Sale Date: 11/25/2003
Last Sale Price: $430,000
Beds/Bath: 2 / 2
Living Sq.Ft: 1679
Year Built: 1989
listed $499,000
Subject to lenders approval of short sale. All commissions are subject lenders approval.

List Office Aloha Real Estate Services (PB6935) Office 949-234-0510 Fax 949-269-9172 Res
List Agent Joe Summers (psummjoe)

The CBOE options market could handle it. I don’t think an outright common short would make sense because BAC would have to be paying the dividend on that common and, like you say, the regulators might say no to that. The put hedge would make sense but then there’s that regulator problem again. Betting against your own stock and all that. As far as I can tell, the single stock futures could handle it, too. MF Global (MF) pretty much has the monopoly on these fairly new instruments and they have over 50 billion on the balance sheet plus the backing of the fed (!) They would be subject to CFTC and SEC and exchange margin rules just like anyone else, but then there’s the regulators again. BAC theoretically could sell covered call premium for a hedge while not being perceived as betting against the deal and I’m guessing that probably what they did if not disallowed for all the other reasons. In a world of crony capitalism, it’s hard to imaging BAC doing the deal without some kind of wiggle room.

Knife-catchers will be few this time around. We had a recent stock market bubble that has taught many of us that falling prices do not equal a great bargain as the prices tend to keep falling. I learned about “averaging down” myself. The smart money will wait for a rising market. I’d rather lose the opportunity to gain 10% by waiting than take the chance of losing 20% by jumping in too soon. This is a terrible time to buy unless you plan on staying put for 20 years.

I’m going to repost some old links from way back for new people who may not have seen them yet from time to time.

So, on this topic or looking down the hill, here is a link to the Schiller roller coaster housing price graph if you haven’t seen it yet.

Real Estate Prices
http://youtube.com/watch?v=kUldGc06S3U

“The dwindling cash inflows will also impact retail and other businesses.”

That’s a very good point - one that shows how interrelated things are (so why the heck did anyone believe the stupid “this mortgage mess will be contained to subprime” argument?)

I heard the fallout has already understandably affected some retailers like Home Depot, who are very connected to RE (http://moneynews.newsmax.com/money/archives/articles/2007/2/21/084534.cfm)

Wonder how bad it’s going to hit retailers who sell a wider variety of products, since I would suspect there will be a tightening of disposable income, since more than just a few ppl have been laid off.

The national vacancy rate on housing went above 2% last year for the first time in history. It peaked near 3%. I don’t know what the vacancy rate is in Irvine.

Countrywide Shares Gain on $12 Billion Borrowing Deal (Update2)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZA8IctEyi7Y&refer=home

A Home Loan Trap
http://www.nytimes.com/2007/09/13/business/13prepay.html?_r=2&ref=business&pagewanted=print

Jumbo loans decline in O.C.
http://mortgage.freedomblogging.com/2007/09/12/jumbo-loans-decline-in-oc/

Woah!

Looks like the ‘89 buyer took an inflation-adjusted loss after 11 years.  I thought RE always goes up?

August’s home slump smacks cheaper O.C. ZIPs
http://lansner.freedomblogging.com/2007/09/12/augusts-home-slump-smacks-cheaper-oc-zips/

Or, look at the ugly August another way: How a credit crunch zapped the market’s key segments, using DataQuick’s 20-year rankings …
• Existing homes: August was the 9th slowest month overall for traditional houses since 1988. Last time it was slowest? February ‘93.
• New residences of all types: This was the 11th slowest month overall. Though, it was even slower as recently as this past February.
• Existing condos: Only the 48th slowest month (out of 236 since ‘88.) Hasn’t been this slow, though, since July ‘96.
So when you add it all up, you find that August was the 11th slowest month since ‘88, a buying lethargy not seen in this town since January ‘96. Here’s a look at August stats vs. last year by key slices:

WaMu closing 2 mortgage divisions
The savings and loan’s move means about 1,000 jobs will be cut.
http://www.latimes.com/business/la-fi-wamu13sep13,1,2123571.story?coll=la-headlines-business

Slumping builder slashes home prices
Hovnanian offering 6-figure discounts
http://www.nj.com/news/ledger/index.ssf?/base/news-12/1189658360216280.xml&coll=1&thispage=1

“Crazy Eddie is back in the real estate business,” said Keith Gumbinger, vice president of HSH Associates, a consumer research firm in Pompton Plains. “Folks who are sitting on the fence right now are waiting for a reason to buy.”

Now that would be a funny You Tube video ....

For the record, I am still in with a 10-15% drop over the next 2 years.  After that I expect an extended sideways market for another several years.  Real Estate won’t be a solid investment for 5 years.

Lower Rates and supportive legislation will prevent homes from reaching “fundamental value” this time around.  The deluge of forceclosures implied by the ARM reset chart will be staunched by easy capital and return of liquidity to the mortgage market. 

Additionally, I think lending standards will be tightened to 10% down becoming the norm (as opposed to nothing or a return to 20%). 

I believe this because we don’t have the unemployment figures that traditionally have led to housing crash.

I wonder if this affects Avenue One???

D’oh! Another Mark’s entered this blogoshpere. I guess I’ll add something to distinguish - “ChallengingPerspectives” sounds appropriate.

Behavioral economics is an interesting area to study, and people do feel the pain of a 10% loss much more accutely than the pleasure of a 10% gain.  So I think prospective buyers will be right there with you over the next couple years fearing any possible loss on the purchase of a home.

Avenue One is having a blowout sale this weekend.  Two years ago Avenue One started in the “High $400s.” I received an email yesterday announcing new pricing starting in the “Low $300s” with up to $40k in incentives.

“by easy capital and return of liquidity to the mortgage market.
Yup, more debt is what will solve this country’s problems.  That and the idea that credit is cash.

I wish I was as optimistic as you are.  These lower rates you speak of are for CONFORMING loan amounts.  I don’t know of any investment houses-- Lehman, Deutsche Bank, Bear Stearns, etc.-- that are actively buying mortgages at good rates.

This risk premiums have bumped up significantly and I don’t see them going down anytime soon.  Housing would have to correct itself and have another long sustained uptrend for risk premiums to ease again.  You seem to believe that it is quite easy for people to get non-conforming loans right now. 

Here’s the reality:
1.) Can’t refi because equity loss coupled with tightening LTV requirements

2.) Can’t refi becuase FICO scores dropped.

3.) Can afford to refinance, but household discretionary income has significantly lowered due to higher costs of financing and costs of durable goods and energy costs.

Can you give me the logistics of how easy capital and liquidity are going to staunch foreclosures?  A simple influx of capital into the markets does not mean that lenders are any more willing to lend to homeowners.  Wall Street firms will just buy other investments, particularly those that hedge against a weakening dollar.

Humor: truly awful mortgage commerical.  Do not watch it at work or if easily offended.

http://www.youtube.com/watch?v=oouQbcXdyH0&NR=1

I was in the 10-15% camp for the last few months.  I’ve sinced moved further down the scale.

I think 10% down will be the norm too with many prime borrowers having 5% down financing available.  It all depends on how poorly these loans perform over the next two years.  The 80/20 30-year fixed to prime borrower loans are still peforming well.

People are throwing 100% LTV loans in with much more dangerous loan features (& combinations of these features) like no documentation, pay-option ARMs, and severely discounted initial periods.  These features will not vanish, but I don’t know if they’ll ever be combined again.

Rates are still historically low.  The jumbo 30-year fixed at Wescom Credit Union is 6.50%. http://www.wescom.org/rates/mortgage.asp.  Of course, that assumes 80% LTV.  PMI or a much higher rate on the piggyback loan would be required for any loan > 80% LTV.

It’s a little scary that we’re in this environment even when rates are still low!

And I just heard on CNBC that the LIBOR is finally easing downward.  That’ll help borrowers dealing with adjusting ARMs.

Housing costs punish family budgets

http://www.usatoday.com/money/economy/housing/2007-09-12-affordability_N.htm

See the graph at the bottom of the article
Areas where homeowners pay a big chunk of their income on mortgages

Metro area At least 30%
Los Angeles/Long Beach/Santa Ana, Calif. 53%

Metro area At least 50%
Los Angeles/Long Beach/Santa Ana, Calif.  24%

Let me hedge by saying, if the Fed DOES NOT EASE, all bets are off.  The housing market absolutely requires lower interest rates.  If that ARM reset calendar hits and nothing is done, I can’t quite see where the end is.

I am not arguing that there are problems right now.  Credit spreads have widened (read: normalized), and ABS market is in shambles.  This is temporary.  The market is frozen because (1) the confidence bands for reliable estimates of probable losses are too wide, (2) the non-bank financial markets are being reabsorbed into the primary banking system (this is why Wells charges 125 basis points more for the broker originated loan compared to an internally generated deal).  As time goes on institutions will have a better picture of valuation. 

LTV standards are indeed tightening but I believe they will end up at 10% down/equity.

Back to risk premium.  You may have noticed that the LIBOR swap curve has moved in the opposite direction of the Treasury curve over the past couple of months.  Generally these two curves move with a positive correlation is excess of 0.97.  The curves have diverged in the past in times of crisis, but have always snapped back (there is an imperfect arbitrage between the two).  Again the current situation signals a temporary dislocation.

Again, interest rates are the center of the business universe, and everything revolves around them.  Though it may perpetuate systemic problems in the credit markets, the Fed must ease in order to prevent the high risk deflationary spiral.  A Japan scenario is the threat they are seeking to combat.

Now that is one wacky add...is it for real?

Credit card debt? Mortgage can wait
http://marketplace.publicradio.org/display/web/2007/09/13/credit_card_debt_mortgage_can_wait/

Well I can only hope your scenario comes to pass, as it will be better off for my job.

Our executives think that the secondary market will improve, but I’m not so sure if it will happen soon enough.

Unfortunately for us Americans, this housing sliding is happening at the same time as price indexes are high and the dollar is ultra weak.

Is it a done deal that when the Fed eases, that liquidity will flow into the mortgage market?  And how temporary is the LIBOR/funds rate divergence?  Why would the European banks have any confidence in American paper after the burn they have received recently?  And how temporary is the lack of confidence in the ABS market?  Isn’t it possible the international banks may have their own liquidity problems and may not care to lend no matter what the Fed does?  Isn’t it possible there are alot of off balance sheet, highly leveraged derivatives for which GS, Lehman, Citigroup, JP, BS, Barclays, Deutsche, and others may be hoarding for?
Maybe not.

Geez, I read that as Hovnanian offering 5-finger discounts....  hello Junior High.

Carl

Is that for 2 bd units?  If so that would be great news!  Those units are renting for around 1800 to 2k.  If you could pick up one for 340k, I’d be tempted.  We’ve got 40k down pmt from the wifey’s family (marry an asian guys) and the rest from our own savings.  This would only leave us with financing 272k, which is less than 2x our gross earnings. This puts the P&I pmts @ $1,697 a month. 

It sucks though because it doesn’t have a garage, and it is like apartment living, but we do live in an apt right now, and the location is good.

I hope things work out for you as well. 

The secondary market will return.  It may cost more, and they certainly won’t buy half the crap they used to, but it will return.

The dollar is a lost cause.  The good news is it will make domestic business more competitive, the bad news is travelling abroad is going to cost a fortune.

Prices are high, but i don’t think they are likely to go much lower.  Wheat just hit an all time high, so did oil.  Corn was all time high within the last year before the biggest planting in history, but ethanol demand will continue to drive prices.  Higher corn (feed) means higher Beef, chicken, fish etc.  China is scrambling to feed its population (as usual) while facing several years of drought.  Yup, prices are going Up.

I think there is a huge HOA on these places.  Not sure though.  BTW, I would avoid High Rise living like the plague.  This ain’t New York, meaning there is unlikely to be much demand going forward.

Not more debt.  Lower interest rates to lower the cost of financing.  If things move sideways, as I predict, the outstanding float is constant while costing less. 

God forbid lowering rates would induce another run-up in prices, but truthfully without the exotic lending lower rates shouldn’t be any room for further price increases.

The “low $300s” is for the 1 bd 1 bth, but if you extrapolate, the 2 bd 2 bth floor plans will probably be in the low $400s with $40k in incentives.  Since these units already come with granite countertops and nice flooring, I guess you’d use the $40k to buydown your rate?

These units are easy to “value” because Villa Siena’s right next door - $2,300-$2,500 for equivalent 2 bd 2 bth.  So at 160x, $368,00-$400,000.  Avenue One may be near the bottom of its market.

Federal deficit down, expected to drop lower by end of budget year

Associated Press - September 13, 2007 5:03 PM ET

WASHINGTON (AP) - The federal deficit is running sharply lower than last year’s.

The Treasury Department says the deficit through the first 11 months of this budget year is down nearly 10% from the same period a year ago.

Analysts believe the deficit for all of 2007 actually will be even lower. They’re forecasting a sizable surplus in the final month.

The Congressional Budget Office predicts that when this budget year wraps up on September 30th, the deficit will drop by more than 36% from last year’s total.

Record flows of tax receipts have helped the government’s books, despite the housing slump that has reduced economic growth.

Republicans contend Bush’s tax cuts are a major reason government receipts are so strong now. But Democrats disagree, saying revenues are simply rebounding after sinking earlier in the decade.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Avenue One’s in the area someone here’s referred to as the “Epicenter” of the real estate crisis.  The asking prices are all down 20%+ from peak in this area.  This includes Central Park West which advertised its Maxfield homes in the high $700s less than a year ago and is now advertising in the low $600s.

Just wanted to quickly point out that in your first ad piece at the top of this post, e.g. ITS CLEAR. ITS BETTER TO OWN THAN TO RENT.  Your comment says quote:  (Notice the simple numbers above work without the tax benefits figured in.) If you look a little closer, the owner’s monthly cost @ $797 is only $5 less expensive than a renter’s expense until you add a monthly incometax savings of $141.  So, in this illustration there is in fact a substantial benefit that accrues to the owner from his or her tax treatment.  Just wanted to keep things straight.  I love your blog and enjoy most of the very well written and informative comments.

CapitalismWorks Says;

“Wheat just hit an all time high, so did oil. Corn was all time high within the last year before the biggest planting in history, but ethanol demand will continue to drive prices. Higher corn (feed) means higher Beef, chicken, fish etc. China is scrambling to feed its population (as usual) while facing several years of drought. Yup, prices are going Up.”

Capitalism it all these things are true please tell me why we would ever cut rates so a few LBO deals can go through and the secondary markets might open up?  Wouldn’t we be just opening the inflation flood gates thus creating a situation where in a yr from now we are staring at Fed Funds Rate near double digits.

IR--how would your graphs would change with a 2-3 years of 10%+ inflation similar to 1980?

2 bed 1 bath, 1100sqft condo in woodbridge for $400K

Rent $1,950.00

Buy
Interest* $1,866.67
HOA $240.00
Taxes $366.67
Tax Savings** $(441.67)
NET COST $2,031.67

*Interest on 80% LTV loan at 7%
**Tax savings based on $150K income and 2 dependents
Note: Calculation ignores potential return on 20% downpayment
IN ADDITION TO THE CALUCULATIONS ABOVE, AS A PARENT OF A 1 YEAR OLD I WOULDNT WANT TO WAIT SIX YEARS TO REACH THE BOTTOM AND LET MY KID SPEND HIS EARLY CHILDHOOD IN A RENTED APARTMENT. NO RATIONAL ECONOMICS BUT PURELY A PERSONAL DECISION.

SO GIVE AND TAKE SOME, OVERALL EVEN AT TODAY’S PRICES IT MAKES SENSE TO BUY LOWER END CONDOS.

There have been some interesting Avenue One threads on this blog.

ex.
http://www.irvinehousingblog.com/2007/08/18/guess-who-can-undercut-the-builder/

2500/month can rent you a decent 3 bedroom house.
how come the weakest link of housing can reach the bottom so quickly

Yeah but do you want your kido to spend his first adolescent years in a stuffy condo with 1 bathroom, no yard, and a wall shared with neighbors.

I found this comment today:

“Most of the loans are solid. Not all loans are sub prime, many people have fixed loans. The 548 foreclosures represent less than 1% of all loans in Ventura. This is not large enough to cause a crash in real estate prices. Once these bad loans filter through, prices will stabilize again. In the meantime, many shrewd investors are bucking the media hype and making some great deals on the best houses in this soft market.”

http://www.venturacountystar.com/news/2007/sep/13/foreclosure-sales-up-784-in-2007/

You can rent a 3 bed/2 bath(1250 sq. ft) for about $2,400 from the Irvine company.......third bedroom is for the new baby on the way. Or you could rent a 2 bed 1 Bath for $1800 per month and have extra money for diapers.  Also when you get transferred to another state, you can just move and not worry about all the money you will lose because the housing market is tanking.

Even better yet, just rent it from the bag holder home owner for $1500 per month........help the home owner avoid bankrupcy and subsidize your lifestyle.

Please remember, that in about 4 years when prices are still bottoming out, you can buy a place and make the “homeowner” that is selling take a second of 20% to make the down payment.

Good try.........buying in this market is just toooooo risky......just too much downside.

Covered calls are not a hedge. Yeah, they get a premium, but no it doesn’t hedge them. If the stock drops significantly, that premium offsets pennies on the dollar. If the stock goes up (who knows?) then they only get to keep the premium and lose all the gains when they either deliver the underlying stock or purchase a closing position. Covered calls are only good when you think things are going to move sideways or you are going to see a short term downturn.

A put on a stock you own is no different than a short sale on a stock you own as far as the IRS is concerned. It is the same as selling the stock outright in their eyes. I imagine the SEC sees it the same way as the IRS. Nothing wrong with doing this as long as you aren’t a huge company that is principally driving the stock price like Bank of America is.

You have just repeated what the Fed has been saying for the past year. 

These are indeed risks.  The Fed’s preferred inflation measure is CPI-U Core which strips the food and energy components from the calculation.  The idea is that the things are mean-reverting.  Have you ever heard the old adage, “The best cure for high commodities prices is… high commodities prices”.  The core measure is used because the Fed believes it captures second-round inflationary pressure, more notably wage increases.  To date these pressures have been weakening. The prospect of job loss directly related to construction spending, and the dampening effect on consumer spending related to the housing recession further bolsters the case the Core inflation is of limited concern. 

The question is will lowering rates induce a spike in Core inflation?  Answer: Very Unlikely.

The benefits to Wallstreet and any credit based markets is the unavoidable side-effect of using a blunt instrument to perform surgery.  Yes, the Fed would love to solve the problems in the housing market without the possibility of creating problems elsewhere.  It would certainly simplify the whole issue.  Problem is, they don’t have the tools.

The Fed must address the greatest current risk in the economy, housing.  Housing is notoriously unresponsive to Fed action, and the impact of Fed policy runs on a long lag 18+ months.  They cannot afford, given their mandate of stable GDP growth, to let housing swoon into a full blown depression without posing and extremely large risk of a full blown economy wide recession. 

Basically its a lesser of two evils argument.

Lower interest rates will run up the prices of some asset class.  That is what lower interest rates are designed and succeed at doing.  Lower interest rates inflate the money supply and the price of something or somethings go up.  More debt is created.

I am not so sure it is the lesser.

Capitalism

First off, I hate how the FED uses Core Inflation to measure the rate of inflation.  Personally it takes many of the things that we need to have to survive on a daily basis...ie energy, food, water...etc.

“The Fed must address the greatest current risk in the economy, housing. Housing is notoriously unresponsive to Fed action, and the impact of Fed policy runs on a long lag 18+ months.”

So if the greatest risk to the economy is housing but regardless of what the Fed does housing has been unresponsive why do anything about it whatsoever?  The issue with housing is that the Secondary Market has froze up and even after the FED and the ECB have dumped trillions of dollars into the system it still has not loosened up much.  Wouldn’t it be more prudent for the FED to keep the discount window low, interest rates where they are, and let the markets play this out? 

And oh yeah lets not forget about the Yen Carry Trade.

Awgee, below is link describing the arbitrage between Eurodollars and U.S. Bank deposits.

http://www.richmondfed.org/publications/economic_research/instruments_of_the_money_market/ch05.cfm

So yes, when the Fed eases it will impact the LIBOR curve.  Over time, arbitrage ensures that the Treasury curve and LIBOR curve move together.

We are certainly likely to see more problems down the road as leveraged players are forced to mark-to-market positions significantly below carrying value.  However, dealing with these problems, learning more about the issues, is precisely why the market will return.  It all boils down to valuation.  Once the market “knows” the risk/reward profile with reasonable accuracy, then a valuation can be applied.  This valuation may be a painful reality for some either through higher borrowing rates and far more restrictive lending standards, but there is a value.

With lower rates, the valuations are higher.