Irvine Housing Blog

I do agree that there are certain houses that are indeed unappealing and I could say this property could have been better if there is some pool in the backyard with such price at the same time the lawn isn’t that big as well. Too many glass in the backyard as well which I wonder if its worth to compromised your privacy with that.

And to play devil’s advocate a bit:

If the kids that got yelled at for not doing or doing a sloppy job of their homework, learn that understanding what’s on a paper and doing a good job of it is important ... that’s probably going to help them a whole lot in the future when they sit down with some bait and switch mortgage broker who pressures them to sign off on some 70 page document.  They’re probably going to sit there and read the whole thing and refuse to sign until they understand the whole thing.

The world is never as kind to people as they parents were.

To clarify - everyone gets lots of homework.  The homework is not tied to behavior.

At my kids elementary school (Alderwood) if they don’t do their homework, they get benched (no recess).  They can also get incomplete slips and then get no fun time on Friday.  They also get lots and lots of homework.

There are also awards (ex. Principal Golden pencils for the younger grades, academic certificates for the older grades) and only those that excel get them (ie. it’s not a ceremony where everyone gets one).

And I say, good for them.  The kids seem focused on doing well in school for status (for example, a few girls were jealous of/a bit catty towards my daughter for doing well on the district math test and getting into prealgebra), which is great, it’s much better than doing the status thing based on outward displays of weath like clothes.

I hear Rancho San Joaquin and University High are a bit like that too - highly competative academically.

I’m all for building up kids self-esteem and providing a nuturing environment.  But high expectations are important as well.

The problem with US schools is there are focused on minimums.  There funding and efforts go primarily to bringing lowest quintile to a minimum at the expense of the top four quintiles.

Time Magazine actually talks a bit about the problem in this weeks cover story.

http://www.time.com/time/magazine/article/0,9171,1653653,00.html

I guess they figure the interest get paid earlier.  The write up was quite clear and the savings obvious.

I imagine that since we’re at 6 and 1/8 they want us to prepay ASAP.  They figure rates will be higher in the future and they’d rather get their money back faster.

Sorry, I thought I read bi-weekly. 

There should be noo net advantage of a bi-monthly payment assuming the regular monthly payment is simply split in two.

If the government gave ME and a ten thousand others, TEN MILLIONS each, it would help the economy better.

Let’s see…

My wife would get fake tits.

I’d get matching Hummers and an SL600.

The kids would go shopping to Fashion Island.

We’d buy a McMansion on Newport Coast (or TRidge…. I’m sure Hannuh Reddy would be happy).

I’d invest in two high rise condos in Miami and buy a condo at Trump’s Tower in Las Vegas.

I’d invest a million in CMOs from American Home Mortgage.

Heck, in no time at all the economy would get going and we’d all be back in a bull market.

Err…. 24 payments per YEAR.

I will check on that.  I don’t recall seeing any fees except for a 70 dollar up front set up fee.

But I don’t see the 13th -extra- payment.  Bi monthly payments just mean 24 payments per month.  It’s not biweekly.

Whip your kids because they didn’t get the A++?

Yell at your kid because she didn’t get an overperfect 105%?

Nuts!

Yep… I’ve seen/heard about that.  My kids have told me that some their chinese schoolmates suffer that crap. 

And then there were the two mornings at TR Elementary when I observed a chinese father yell at his kids because of some homework ( I found that part later from my kids).

Hell, at home we laugh about Chinese parents and their poor kids.  Sometimes.  Mostly we feel pain for the kids.

If I had been the principal, I would have called the cops on those two men and have taken the kids away from them.

One of my kids in on excellent auto pilot -most of the time.  The other one has proven to be a challenge but things are getting better.

Yelling and whipping kids to perform is NOT the answer (at least not all the time).  Building up their self esteem, making them comfortable and providing a nurturing environment is the ticket.  And that is more expensive in time and money than just yelling at them….

I do not want to live in a world driven by a lack of love and a crass chase for commercial gains.  I don’t want my kids to be stuck in such a situation either.

This is one of the reasons why many people shy from schools and neighborhoods that are heavily tilted towards Chinese immigrants.

CapitialismWorks, regarding housing:

You bring up a lot of convoluted points. Hedge against inflation is valid. Yes, you pay a premium for it. Almost no one thinks “hedge”, they simply think, “I’ll lock in my monthly payment and never have to worry about a landlord increasing rent again.“ You only get this security with a fixed rate mortgage. If rates go down then refinance. If they go up then all the better for you. Maybe overall inflation is flat, but if rates move up you would have inflation in your mortgage if you were in a variable. Also, you’ve locked in your home price so you don’t have to worry about that provided you could afford it in the first place.

Puts, calls, hedges, options, futures, pork bellies… whatever labels you want to throw out. All these things are already built into the price to income ratio I mentioned earlier in this thread. All these things are already built into pretty much all the projections on this blog. There is nothing earth shatteringly new to the housing industry that people now need to price in. The same fundamentals that were there in ‘98 are here in ‘07. Nothing new at all… except… irresponsible lending.  Well, now that is gone.

This is all very simple. It is not complicated like you are trying to make it sound. If you want to figure out the theoretical “premium” for an inflation hedge I think that is a wonderful hobby. Not sure what practical purpose it would serve, but it is interesting.

Offended? No, just tired of B.S. Complete disaster? No, most people will be unaffected by the bubble deflating. People that got in during the bubble with a variable or any loan where they can’t afford the payments will have a personal disaster. Actually, that happens outside a bubble all the time, it was just so prevalent in recent years that it drove this bubble. Prices will decline dramatically.

If this thing is accurate:
http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html

It will be about a 45% decline nationally (from near peak) in adjusted dollars. Orange County will be worse as will most metropolitan areas. What the actual amount on the for sale sign will be will depend on the year the bubble hits bottom. I’m not going to try to take a guess on that, but I don’t think IrvineRenter’s numbers are far off up to 2010.

Personally, I’m not targeting the bottom. I’m waiting until my mortgage payments will be reasonable. I expect to initially lose value on my purchase. This would be my premium to move up to a nicer place earlier. Quality of life is my focus. That said, I won’t go in if I think that decline in value will be severe and prolonged.

Regarding Iraq:
What should we have done? Not gone into Iraq. They were not a threat, and even if we pretend they were, we already had weapons inspectors in Iraq which stopped the threat. We should have stayed focused on Afghanistan and put pressure on the Saudis to do something about their radicals. There were no Iraqi’s on the hijacked planes. There were plenty of Saudis on those planes and one real bastard Saudi in Afghanistan. What happened to him? I forgot his name. That’s okay. Everybody else in this administration did too.
What should we do now? Leave. We have no credibility and at best we can only prolong a bad situation. I think it is reasonable to guard the borders to keep the civil war from spilling into other countries, but other than that we need to get out.

Kirk, nice site.

Another quote by the man,
“In one way, I’m sympathetic to the institutional reluctance to face the music.  I’d give a lot to mark my weight to ‘model’ rather than to ‘market’” - Warren Buffett, Fortune, 8/16/07

Hehe.  That made me laugh as well.

CapitalismWorks: I don’t think that’s a good idea at all. President Bush shouldn’t have to deal with some anti-American home hater like this coward. I bet the traitor doesn’t even have a yellow ribbon his car. I’ve got four on my hummer. Back, two sides and the roof. And a custom gold W08 emblem on the grill. You can’t support the troops much more than that! Thank God for my HELOC or I wouldn’t have been able to afford this setup. And thank God I got this setup to sleep in since the bank foreclosed on my home and I accidentally drove the RV into the Gulf while trying to sober up. Well, I’ve got to go frog gigging tonight if I expect to eat tomorrow. Good night.

This is off topic, but I have long laughed at the American education system.  People complain about class size, not enough funds, etc…  There, class sizes are at least double what you would expect here, they actually have to pay to go to school (even though they are public), parents whip there children for not doing good in school, and parents further reaffirm the values of education away from school on a daily basis.  High-schooler’s have homeworks similar to university level work.  A sizable amount of kids have tutoring sessions well into the night (they have not even begun to do their homeworks yet) while their parents toil in work to pay for it.  You take a national exam to be placed in appropriate junior, high, and universities.  Do you even know how competitive it is in the East?  You may think that you are happy to see your kids scores above state sanctioned tests.  However, in the global economy (more so in the future) we are in, they are laughing at our education system.  If not for affirmative action policies you would see many more unqualified people pushed out of good universities here in the states.  If you are not qualified to go to a good school you don’t get admitted, period.  I would go as far to say that the values that Asians have brought with them have made it far more competitive to many average and good school districts.  So, good school districts always command a higher premium to Asian home buyers.  I am Asian, yet, I would not pay the current premiums in Irvine or SoCal for that matter.  I just spend more time tutoring my kids.  I have encountered many individuals at the checkout line to count the pennies, nickels, quarters, to add up to 46 cents only to give me give me back more than I owed.  So, this subprime mess is not surprising to me when quite a few college level kids still have to take entry level algebra courses.  Way to go, American education system.  If you want to counter my claims, try putting your kids through a school in the East.

No, I don’t think IR is saying that. Remember, every year, some experienced, higher-paid folks retire and newer folks graduate college (or HS or whatever) and enter the job market at lower rates. So while individual wages will trend higher than 3%, median wages tend to increase at the 3% rate. Also, there are periods of large-scale layoffs which have a tendency to “reset” the wage plot for many people.

“I can spend money faster than Imelda Marcos [when the price is right]“  - Warren Buffett quoted in the Economist.

LOL!

Everyone keeps saying how there is so much money sitting on the sidelines.  I dunno.  I can’t help wonder if maybe there is no money sitting on the sidelines, but rather there are a whole lotta financial institutions which have been borrowing for a long time and they are not now borrowing.  There is a huge diff between actual cash and a line of credit.

IR - Are you a bettin’ man?  I haven’t checked myself, but I heard that the futures market is pricing a 100% chance of a 25 point cut.  And a 50 cut ain’t doin’ too bad either.

The trick to the walking away part is to rent a new place BEFORE forclosing and making sure you have enough credit cards to hold you over

Ack.  I need to proofread before pressing Add comment.

I was reading in this week’s economist that a lot of money is sitting on the sidelines right now due to the fact that they don’t trust the ratings.  The vultures will eventually make a killing in this fiasco.

I doubt we’ll see another rate cut (although I wouldn’t bet my life on it) unless we start sliding into depression.  IMO the fed’s responsibility starts at that poin, and not before; keeping damage control over a recession, but not necessarily preventing it.  I think you’re right that the fed won’t change their mandate drastically just because greenspan is gone.

I agree that the vultures will make a killing in all of this.  I wish I had more money to throw around.

Wouldn’t that fall under the category of fraud?

Have anyone read of heard of this today? That the govt. is proposing $100 billions for banks to lower rates for borrowers. The reason for this is if the housing crisis worsen. The negative impact to the economy would be more than just $100 billions.

You should check out our forums. We had some discussion on that article there.

I think we had a shaky start, but this turned into a good discussion. In a good debate, we first must find areas of agreement then proceed to explore areas where we disagree. Fortunately, we agree on the facts. Where we disagree, it is all conjecture about the future.

I have seen several new people come through this blog. Many come here with the more “reasoned and balanced” view that prices will correct, but not as much as we bears believe. Many become more bearish when they start to run the numbers.

I have never been a bear in my life prior to this bubble. Extremists are generally not very happy people, and they are most often wrong. When I examine these conditions, I just can’t put together a scenario where this isn’t a complete disaster. These conditions have made me a bear, and I think the 40% decline scenario is perhaps conservative. If this market over corrects and overshoots fundamentals—which often happens when a bubble deflates—it could be an even bigger decline.

http://www.irvinehousingblog.com/2007/04/02/how-bad-could-bad-get/

Did anyone read or hear of this today. I believe it went like this. The govt. is considering funding $100 billions to have banks lower rates for homeowners. The rationale behind this is. Although, it might seems like a big amount. But if it allows the housing market to worsen. The cost to the economy will be much more than $100 billions.

Please see
http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2007/Global+Perspectives+August+2007.htm

Awgee I don’t have time for any pleasure reading, but I will faithfully add to my ever growing list of books.  Thanks.

IR, I can’t argue on too many points.  Prices down, ownership rates down, credit spreads wider, 20% down payment back-in-style, long run HPA tied to real wage growth.

On the Fed we disagree, the degree of the crash, and perhaps on the propensity of the market to start sopping up prime jumbo paper in the near term.

I am just concerned that we are missing something.  Daniel Goleman (the emotional intelligence guy), came up with the decision making process where debate is eliminated.  Debate is a time waster.  Instead everyone gets on one side of the topic and give all the pros.  Then they get on the other side of the debate and give all the cons.  Both list are to be mutually eclusive and collectively encompassing (though in our case I think Fed would have to go on both sides of the ledger).  Then everyone reviews both lists and votes in secret.  That’s it. 

The idea is it helps people by preventing them from anchoring and digging in the heels, and pushing them to find the “missing pieces” from the counter-arguments.

Something to consider.

The scenario you describe is certainly possible. For reasons I described in another post on this thread, I don’t think credit will become looser any time soon. There is too much risk.

If I am right, the FED will not lower rates on September 18.

A lowering of our interest rates will depress the value of the dollar. I don’t know if you have ever traded currencies, but they tend to move in long-term trends based primarily on interest rate policies of the central banks. The British pound is so strong right now because they started raising interest rates over there a couple of years ago (to pop their real estate bubble believe it or not).

It works that way because investors chase returns. Right now, you can get 8% in New Zealand, so everyone is trading in their currency for New Zealand’s currency to get the 8%. The Yen is extremely undervalued right now because Japan has had its interest rate set at 1/2% for a long time.

If the FED lowers interest rates, the value of the dollar will decline. This will cause all imported goods to become more expensive. Inflation is inevitable.

That is a pretty sad statistics.  IT IS NOMINAL? My God.  Are you telling me that the average working stiff out there labors his whole life just to break even with inflation?

Quoting from the Princess Bride, “That may be the worst thing I have ever heard.“

Taking the high rent number of $5700 we can work backward to carrying a loan of 6.5% for 30 years at $900,000. 

Again if we consider the option value (sorry anonymous I can’t help myself with the drivel), we would adjust the payment upward.  I am not sure how much.  Does $500 sound good.  That brings us to just under $1MM at 6.5%.  Obviously given Maestro’s rate sheet there is no way that is going to happen

Using 8.125% interest with the $6300 payment we end up at an $850K loan.  And that is on the very high end.

Note I ingored all tax benefits because I assume that property taxes will roughly match the mortgage interest deduction.

Now, does that seem right based on renter equivalency valuation?  Is the option cost too high, too low? 

It does seem to be a VERY low number relative to current prices. 

As a side note, I thought housing prices were absolutely insane 2001 after the run they had from 1997.  Back then I would have bet a million dollars (assuming I could borrow that much), that prices were at a peek.  I am not saying this time is difference, but I do remember running the same type of analysis and coming up with fair values far below markets when using rents.

Is it possible that rents are a lagging indicator?  I would assume they are.  Any thoughts anyone?

And what fines should be levied against the unscrupulous borrowers who lied on their loan apps.

You can still buy ah SFR in Manhattan Beach for 995k?  Where in Manhattan Beach?  What street or area?

This is the nominal figure based on government statistics. It does not imply that individuals may not see raises larger or smaller than this.

Capitalismworks - As long as we are on the subject of books to read and your handle indicates you are pro-capitalism, may I humbly suggest you read, “The Creature from Jekyll Island” by G. Edward Griffin.  It is a fascinating study on the Federal Reserve and it’s effect on the economy.

Where do you get you wage growth assumption of 3%?  Is that a real or nominal figure?  If its nominal, I think you are mistaken.  The idea that someone works there whole life only just keep pace with inflation is absurd.

Hi Kurt,

It is good to see you again. Your comments are always “interesting.“

CapitalismWorks,

There is a premium for ownership based totally on the inflation hedge. It used to be to obtain these benefits you had to save money and sacrifice. This made the premium something you “paid” for through sacrifice rather than through paying more money. Ownership should reflect a savings over rental right from the start. If you actually pay more money for this premium, you may never see it. Many people don’t own that long and never see the benefit of this premium.

I am willing to entertain the idea that home ownership will become a premium you pay for in the price of the home. I don’t think that will be the case because downpayments are returning.

When you really think about the impact of downpayments, they are a barrier to ownership that depresses prices. When this barrier was removed during the bubble, prices rose dramatically, and ownership rates skyrocketed. Now that downpayments are necessary again, prices will tumble and ownership rates will decline.

If you want to crunch numbers to evaluate the ownership hedge premium, I would examine the crossover point at 3 years ownership and at 5 years ownership. If the premium gets so high that you see no benefit in 3 to 5 years, it fails to become a positive incentive. Also, don’t forget to factor in the 6% appreciation needed to get to breakeven after commissions. Off the top of my head, I would say this would be a 10% to 15% premium.

As for dollar crashing when the Fed lowers rates.  I don’t believe it.  It won’t help, but an adjustment to the dollar value is already under way.  Additionally, the dollar is still THE reserver currency globally and though foreign sovereign wealth entities have displayed some willingness to diversify, the dollar is still number one.

Foreign producers have shown a willingness to accept bouts of dollar weakness by lowering prices for american consumers.  This effectively cancels out the inflation impact in the short run.  There is some breaking point, but it is difficult to pinpoint. 

Another thing to remember is that Americans hold a tremendous amount of foreign assets, held through equities of mulinationals, foreign direct investments, and direct fixed income holdings.  The value of these securities to a domestic investor increases proportionally to the decline in the value of the dollar (sorry if that was too obvious).  At any rate Americans, by and large hold riskier (read higher yielding) investment abroad by comparison to the relatively conservative holding of foreign central banks.  It is at least one mitigating factor to a decline in dollar value.

Sue Thank you for the book recommendation.  I must say that I have very little time for pleasure reading at the moment (especially with all the time on this blog), but I keep a list for the time when I have more time.

Actually Anonymous, please continue.  Dazzle me with your acumen. Since you have it all figured out, I would love to hear more.  Tell me more about Iraq.  Wha’s going on over there?  What should we have done?  What’s your plan to fix it?  Maybe we could write the president, or the UN!

Bi-monthly is a scam.  Banks used to push it so they can charge extra admin fees on payment processing.  Check your statements to make sure this isn’t happening. The savings comes from making a “13th” payment every year, not from “paying more often and eliminating interest”.

You are better off just paying extra with you regular checked.

IR, in reference to the SD/unemployment scenario and the inapplicability to the current situation, you are correct.  The current situation is driven by a credit creation wave the likes of which the world has never seen.  Without HPA everything goes down the tubes.  I think we’re all agree. I still maintain that these facts make it far more likely, as opposed to less, that we will see a vigorous Fed/Congressional response to the problem.  The risk is too great to the overall economy.  The government has stepped in to save the S&Ls, the financial system after LTCM, why wouldn’t they do it again?

Just because Greenspan is out, doesn’t mean that the Fed has switched its mandate.  The Fed is first and foremost intended to maintain the integrity of the financial system.  Inflation fears are abating, recessionary fears are looming, and given the huge lag between Fed rate cuts and a corresponding response in housing, plus layer on the fact that a wholesale restructuring of the mortgage origination universe is underway, it would seem far MORE LIKELY for a Fed ease.  But, I guess we’ll have to wait until September 18.

Of course the ability to sell products back to the street is required to get the mortgage market going again.  I also believe liquidity we’ll return sooner rather than later.  Smart money is already sopping up mortgage paper at great prices. I do concur that we will not see anything close to the mortgage insanity of the past decade, but prime borrowers using Jumbo loans won’t be paying a 150 basis point spread to conforming forever.  The market is always hungry for yield.  High quality MBS offers spread and AAA credit.

That would be a prediction of what the NAR will say next.

Exactly.

Even an effective bail out, that would somehow keep people in their homes instead of just prolonging the inevitable, won’t keep home prices up.  It’s more than a question of just inventory.

I wonder what a big quake would do if it were to hit now.  Not that I’m hoping for one, mind you.

I thought you meant “whorecast”.  Thought it was pretty funny actually.

Sorry, I can’t copy & paste the titles from calculated risk, so had to retype it.  That should be “Forecast” in the title.

Goldman Sachs Housing Horecast

http://calculatedrisk.blogspot.com/2007/08/goldman-sachs-housing-forecast.html

In a research note today (no public link), GS forecast house prices to decline 7% in 2007, and another 7% in 2008 (based on the Case-Shiller index). They believe the OFHEO index will show smaller price declines.

In addition, GS forecasts New Home sales to drop to 650K in Q1 ‘08, at a seasonally adjusted annual rate (SAAR). This is even below the BofA forecast of 700K for later this year.

For existing homes, GS forecasts 5.25 million SAAR in Q4 ‘07 and a lower rate in ‘08.

Anonymous: Yes, the people who support the troops are similar to the people who support home owners. They are both right and patriotic. We are winning in Iraq and there is no housing bubble.

“But, what about the falling prices?“

The only reason you are seeing falling prices is because the liberal media is talking down the housing market and giving material support to our enemies. The media isn’t reporting the good side of the housing market. Once America wakes to the propaganda against home owners you will see housing prices soar like a mighty eagle.

It is very telling that you post anonymously. Only cowards without conviction would hide behind the internets.

CaptalismWorks - you might find this article by Robert J. Shiller interesting.  “Irrational Exuberance” book is on my library hold list.

A Psychology Lesson From the Markets
http://www.nytimes.com/2007/08/26/business/yourmoney/26view.html?ex=1345780800&en=f22bc73ddd26445e&ei=5124&partner=permalink&exprod=permalink

LOL! It’s the same meaningless drivel from you. That’s why I bring up the Iraq comparison. I’ve seen the same type of B.S. tactics then that you are pulling now. Different subject, same tactics. Back then I’d actually go off and get real facts and post them. Waste of time. Same when I talked economics with the same people. I did graphs and everything. Waste of time. Your type just comes back with more meaningless junk.

Watch that video I posted for 2007 real estate predictions. Go watch some YouTube of the Iraq debate in 2002/2003. Any similarities in how the people discuss things? There’s a reason for that: Detachment from reality.

The fact is that the dude that does this blog already answered all your questions. I’ve already answered your questions. Yet you still yammer on with ridiculous statements and more meaningless questions that you want answered point by point even though they are irrelevant to the discussion. You’ll never stop and would love to have people spinning their wheels just so you can come back with some other junk statements.

Like I said. I’ve seen it before. You are simply a troll. Whether or not you actually believe any of the stuff you say I don’t know. But, what’s the difference when the effect is the same?

Hostile? Most people here seem pretty laid back. I’m the only one that is outwardly hostile. That’s just me, because I’m tired of people like you and enjoy bashing you around. It’s wrong though and I’ll stop.

Credit fears may curb home sales
Some experts see pending deals fall out of escrow in part because of the turmoil in the mortgage market.
http://www.latimes.com/la-fi-escrow13aug13,0,2019672.story

Ohlbaum said he was seeing real estate deals die for other reasons too. One client who had been approved for a mortgage that covered 90% of the value of the home she wanted to buy withdrew her offer Friday because “she is scared to death to buy right now.“ It didn’t matter to her that since getting loan approval this month, the lender stopped funding such high loan-to-value mortgages.

“She blew the opportunity,“ Ohlbaum said, “because she is worried about the market and making a bad decision.“

Anonymous - Suprise, who gives a S*** if you trade options.  Good for you dude.  Why don’t you explain to us all the negative convexity inherent in mortgage back securities in relation to path dependence and optionality given your prediction for mortgage interest rates over the next five years, and how that impacts your view on housing.  You don’t a have a clue dude, so spare me.

Optionality is inherent in mortgage finance.  I find options a simple way to break down decisions.  I am sorry if you were offended by my seeming high-handedness, but it appears to me that you are more offended that I disagree with the “Party Line” of complete disaster.

I think there is more than a little bit of chicken-little-ism going on here, and I am hoping to vette some serious arguments that may help me construct a clearer picture of what will happen.

The reason I keep harping on the option value question, is it forces everyone to recognize that there are benefits to home ownership beyond the fact that you have a place to live.  Simply put one will be willing to pay more to buy than to rent.  I want to know how much more that amount is, and how much people on this board think it it.  The owner premium is an integral part of the overall valuation puzzle.  If you believed that housing prices were apt to appreciate at 20%+ you would pay a hell of a lot more than a renter to “get-in” the market in an effort to prevent having your housing costs dragged upward.  Of coure, at its extreme this leads directly to the inane bubble pricing we have witnessed recently.  The I gotta get-in now attitude.

Funny, that you call my view irrational, rather that addressing some of my assertions, while simultanseously invoking Iraq (where the Hell did that come from).  Though I would guess they aren’t having much trouble with HPA in that part of the world. 

As for IR, I appreciate his arguments, and wouldn’t spend my time on this board if I didn’t find something valuable.  That said, we obviously agree on the direction of housing prices, we obviously disagree on the extent of the decline.  I am, frankly, amazed that pressing for more information and asking questions would be greeted with hostility.

A 15-year is only “better” if you end-up living in the home for 30 years.  I think the average is 7 years.  In this case, a 30-year fixed is the best balance between paying some principal yet keeping the monthly carrying cost low enough to save/invest outside of your home.

Sounds like the useless pandering we will hear more of as we get closer to the election next year…

Thanks Bob. No, I haven’t read that book, but I will check it out.

Obama unveils radical mortgage plan
http://www.ft.com/cms/s/0/9fd5e4de-558e-11dc-b971-0000779fd2ac.html

Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate

No personal attacks please.

CapitalismWorks,

You remind me of the people that pushed for the war with Iraq. You throw out all kinds of “information” and jargon, but the fact is that you are full of hot air.

Especially when you mentioned puts and calls. That’s an intimidation tactic. “Look at me, I know so much more than you.” Hell, you aren’t even talking about real options. You are just using the terminology how you see fit. It doesn’t matter either way though. Options are simply a contract to, at your option (hence the name), buy or sell an underlying security or asset at a set price within a certain time span. Options don’t drive the market. Sure, they can cause emotional reactions and drive the underlying security or asset in one direction or another just like a rumor. But in the end, it is fundamentals that drive the market. Surprise! I occasionally trade options.

I don’t think the people that got us into Iraq with their horribly flawed data and logic deserved a platform and I don’t think people like you deserve(d) a platform.

I have nothing but contempt for people like you. You alone are nothing special. It is when people like you flock together and amplify your irrational views that your influence is felt and people (lot’s of them) get hurt. War or bubble.

People that are upset because they got victimized in this housing bubble should not direct their anger at us. We are simply pointing out the facts. They should direct their anger at you and people like you.

I for one am tired of, year after year, having to listen to mentally deficient people pretend that they know something, convince a bunch of lemmings that it’s true, create a disaster and then have these same people accuse me of either enjoying other people’s misery or wanting America to fail. No, I don’t enjoy other people’s misery and I don’t want America to fail. I want rational people in charge and want the facts aired.

Can you guess which two people in this video you remind me of?

http://www.youtube.com/watch?v=yoZV5jt9puc

At least you say the market will decline. But, 10% or 15% is a joke.

This is the question borrowers will be asking over the next few years - cost v. benefit of walking away.  Is the hit to my credit report worth the paper loss (adding back the taxes for debt forgiveness)?  Good luck convincing your wife you should do this!

The first part—isn’t it possible that the median could drop dramatically (30%+) for a year or two on very low sales volume—yes, that is possible. It does seem to be where we are headed right now. Pretty dramatic, don’t you think?

The second part—but once the mortgage market loosens due to the vast majority of loans performing well, that the median could pop back-up 20%+?—this doesn’t seem quite so likely.

First, we will need to clean all the bad mortgages out of the system. This will take years. The ARM reset schedule shows this dragging on until 2012. It will take 2 or 3 years after that for the last of the die-hards to go into foreclosure. All that overhead supply will prevent any meaningful appreciation.

Second, we will need to have a track record of borrowers paying their mortgage. It will also take years to establish investor confidence in the system, particularly after the devastating losses these mortgage investors are about to take. I can’t imagine any real appetite for mortgage loans not backed by Sallie Mae or Freddie Mac for quite some time, probably 10 years or more. That means anything other the conforming loans are gone for the foreseeable future (and probably beyond.)

At some point, we will drop to fundamental values where rents and incomes align. Appreciation will return to the market at that point, but only at rates equal to wage growth (historically 3%.)

All the owners in the market must capitulate and give up on the idea of being bailed out by future appreciation before appreciation will return. I know that sounds crazy, but that is how markets work.

But what’s your reward? e.g. You were considering a home purchase in 2001, but because you have financial sense you abstained because homes were over-valued.  Finally the market is turning (like you knew/thought it should have years ago).  Within the next year or two, there may be many homes on the market 30%+ below their 2005 peaks.  So after a decade of renting you’ll buy, but at an inflated rate to compensate the lender for their elevated risk in this environment (extreme depreciation with prime borrowers walking away from mortgages). 

“But rates always come down” just like “homes always appreciate” so in an additional year or two you’ll refi, and you’ll then finally, you’ll have paid a “fair” price for your home and your monthly costs will be the same as if you’d bought around 2001.  Congrats!  Your benefit?  Well, your net worth will have benefited.  But if it’s your net worth that you’re concerned about, then you should continue renting and save/invest the difference.

These decisions are never as black-&-white as we think they are…

Bernanke Says Fannie, Freddie Asset Caps Should Stand (Update3)
http://www.bloomberg.com/apps/news?pid=20601087&sid=apbjRCn0Q7iE&refer=home

Housing crisis keeps buyers on sidelines
http://www.reuters.com/article/bondsNews/idUSN2735472220070828?sp=true

Ed Smith, vice president of government affairs for the California Association of Mortgage Brokers, blamed “media hype” for the worries over declining property values. “It’s not fueled by empirical data,“ he said.
...
I’ve been saying to people, if you can afford to buy in a decent neighborhood right now with a decent (mortgage) product, you should do that,“ said Lori Gay, chief executive of Los Angeles Neighborhood Housing Service, a nonprofit affordable housing lender and developer. “Hoping that there might be a phenomenal deal a year from now in that nice neighborhood might not be the way to play it.“
...
I’m a little hesitant to jump right in immediately, because I think that prices are still going to go down,“ said Duplessis, who has been paying $2,600 a month in rent since she sold her last home in the city of Inglewood near Los Angeles a year and a half ago.

“I’m not at this point too anxious,“ she said. “You know why rich people are rich? Because they shop around.“

Housing crisis keeps buyers on sidelines

http://www.ft.com/cms/s/0/9fd5e4de-558e-11dc-b971-0000779fd2ac.html

“Without significant increases in unemployment, there is no precedent to falling housing prices.“

We are definitely in uncharted waters. We don’t have any precedence for giving out Option ARMS and liar loans to 80% of purchasers either (2005 & 2006 stats.) Unemployment is only one source of foreclosures and must-sell inventory. People buying too much home is another.

It is also a misnomer than unemployment caused the last housing downturn. The job losses came after the downturn started. It probably delayed the recovery a bit, but it was not the causal factor.

“As for inflation at 3%, I thought we dispelled that notion yesterday. I thought we agreed that “real inflation” was much higher 6%+.“

Wage growth is 3%, and it is wage growth that ultimately determines rents and the value of houses. Inflation, if you believe the CPI, has been running less than 3% since the early 80’s when we finally got inflation under control. Now lately the FED has been turning a blind eye to inflation outside of the CPI, so I think a convincing argument can be made that inflation is running at a greater than 3% rate.

However, inflation has nothing to do with house prices. If you want to have a meaningful discussion about house prices and inflation, we will need to contain the discussion to wage and rent inflation.

The historic rate of home price appreciation of greater than 6% cannot be sustained. It has happened due to a lowering of interest rates since the early 80s and and increase in the debt-to-income ratios people have utilized to buy homes.

http://www.irvinehousingblog.com/2007/04/30/appreciation-is-dead/

The system is at the breaking point. Interest rates can’t go any lower, and people cannot put higher percentages of their income toward housing.

There has been much debate lately over future FED policy. I am one who believes the FED will not lower interest rates because it will cause the dollar to crash and inflation to rise. Plus, there is no reason to think the lowering of the FED funds rate will translate into lower mortgage interest rates. The risk premium between the two is increasing because lenders are losing so much money. IMO, the FED will not and can not ride to the rescue.

The proximity of new homes is so close that there’s more privacy available if you share a wall with a neighbor.  Then there are no windows to see and hear things through.

“Prices will not be “sticky” on this decline because there will be so many foreclosures.“

I agree, but assuming no measurable economic downturn, or unemployment increase in Irvine homeowners, isn’t it possible that the median could drop dramatically (30%+) for a year or two on very low sales volume, but once the mortgage market loosens due to the vast majority of loans performing well, that the median could pop back-up 20%+? (apolgize for the run-on).

IR, I have been reading here for about a month. Did you read the book “Sell now?“By John Talbott? I finished that book in July. and its amazing because many things he stated or predicted have occured. Also you tend to repeat his ideas.

none of my family or friends read this stuff or care.

Conventional wisdom is not always right.

I listened to a CD set Called turning debt into wealth.

very conservative. like your Minnisota phlosophy.

When im ready to buy I plan to pay off early.

I will have to by less house/Condo. plan to pay 3 or 4 times my salary.

Thanks for the advice. regardless of the home prices your statments about value, debts and rampent consumerism help me keep a leavel head and not buy what I dont need.

BOB.

disparity in rates…..

I have a client buying a home in manhattan beach for 995k.  Downpayment of 578k and a 30yr fixed loan of 417k for 6.375%.  NO BUYDOWN.  awesome deal.

If I try and run the loan through as 418k, he loses conforming pricing and the rate jumps to 8.125%!!!!!!  I am not kidding. 

The massive disconnect between jumbo and non-jumbo pricing is stunning.  The spread also seems to be widening by the day.

40% housing decline.  Ok, I am in the 10-15% camp personally. I noticed a large portion of your housing decline analysis was based on the San Diego number from the early nineties.  Please remember that San Diego was faced with huge decline in government jobs related to the unwinding of military operations and related defense services. 

If fact, unemployment is an enormous factor that may serve to buoy housing prices over time.  Over that past 100 years, now is the only YOY period of outright HPA depreciation not accompanied by rising unemployment.  Respective to Irvine, unemployment levels are even lower that the national average, leading me to believe that there is more built in wage support.

Without significant increases in unemployment, there is no precedent to falling housing prices.  We are, as I think everyone can agree, going to witness return of marginal home buyers to the rental market.  Home ownership rate will fall from the high of 69% toward the old 65% mark, but they probably won’t ever get there.  Why? The Federal government likes homeowners.

As for the belief that the Fed/Congress will not act in some way to stave off a collapse of the home market as you predict, it is simply that, a belief.  I believe that the Fed/Congress will act, to save the marginal owner from losing the house through a combination of subsidized loans and lower interest rate.  Again, that is just my belief.  I am not happy about it, since I am one of the fully hedged home owners sincereley hoping for a drop in housing (I will admit it, I would love to upgrade to a McMansion someday!).

Options are a part of every housing purchase.  The owner buys a put option on the mortgage that goes into the money everytime the rate falls.  Hedging against inflation is a risk that is the market is willing to pay for (See TIPS).  This additional value varies by individual, but it has a market value.  Additionally, just because you believe that HPA will be non-existent doesn’t mean that the option premium is zero, it means that the option at expiration is zero.  There is a difference.  Every heard of term life insurance? Think of the part of the excess cost of ownership as an insurance premium.

As for the substition effect between local housing markets, yes clearly it exists.  But of course again you assume that I think only Irvine will appreciate.  All SC real estate will appreciate along with the COLA, while some more desireable areas will appreciate slightly faster.  As population pressure mounts, traffic condition worsen (ever driven through the “Orange Crush”), premium locations (read: those that are close to work and recreation), will be value higher relative to others.

As for inflation at 3%, I thought we dispelled that notion yesterday.  I thought we agreed that “real inflation” was much higher 6%+. 

Response to Anonymous:  Most Investors are Fools.  I do like your analysis for PTI measurements and comparisons over time.  IR, have you run those numbers anywhere?

Bingo.

In fact, we just changed the payment schedule on our 30 year so that the money gets paid bimonthly.  I think this turns the loan into a 25 year loan.

Add to that the fact that we can make extra payments and then the loan shrinks.

Of course, you should only do this after you are maxing out your 401K contribution.