Irvine Housing Blog

The argument for renting:
Flexibility & excessive transaction costs.

My sister-in-law may need to move after only 2 years of living in her home.  She’s looking at a potential $54k loss from 10% price decline and realtor commissions.  Her ‘cost of ownership’ is around $1900/mo.  Her amortized loss over two years is $2250/mo.  Taken to 3 years is still $1500/mo.  She could have been renting something for $3400/mo over three years and been in the same position.  That difference would get you a home with nearly twice the square footage, on a larger lot, closer to town. 

Rising prices covered up this calculation during the first half of the 2000-2010 decade.  Short term ownership of homes was actually preferred because of the quick profits to be had.  The potential losses if you need to move quickly will keep a large number of people from buying.

My guess is that anyone who bought 2008-2011 will eventually default.  Probably most will be strategic defaults as whatever they bought during those years will loose value.  This is a perpetual motion machine.  “They” have been telling the world, 3-4 years and everything will be fine.  “Fine” will be when the home you buy today is worth what you paid for it 3 years from now.  Without adding any improvements you might like to make.

Not buying this interval of 3-5 years to a substantial clean-up of the problem.

Children are moving back in with their parents after college: with no job and high debt loads, they aren’t buying. Boomers are ending their careers, perhaps involuntarily, with little to retire on, so they’ll be selling or walking away. The sorts of salaried positions which pay for non-slum houses are diminishing in number and total compensation: this part of the middle class will be walking away or paying less.

That’s three facts: two will shrink demand, and the third will grow supply.

The only end, quick or slow, to this crisis, will occur at MUCH lower prices.

As to Guy Cecala’s belief that it will take at least two more years to resolve this, I can only marvel at that lower limit. I don’t see how prices can fall that far in two years, but Guy’s technically right: 10 > 2, so it is genuinely “at least” two years.

I left one thing out: Considering the numbers of suckers who are still willing to purchase for $350 per square foot in places where the median income lies well below $100K/yr., there is plenty of fresh supply in the foreclosure pipeline.

Looks like the non-foreclosed will consist largely of those who purchased before 2000 and kept their hands outta the HELOC pie. How many such are out there? A lot, but are they even a majority of owners?

What will happen to prices when rates rise / normalize or even reflect serious inflation?  This same 785K house might loose another 30% in value if rates go to 8%....

Thoughts? 

BD

“When” will those rates go to 8%?

Does anyone want to bust out their magical crystal ball?

I don’t know which scenario is more likely slowly rising rates and grinding of prices for a decade or a digital move in rates and hard hit to prices over the next 5 years. 

Lots of money being printed and handed out… QE 3 coming and helicopter ben dropping money on europe now!  Seeds for serious inflation…in my .02

BD

It’s interesting to hear all of the opinions regarding the time until the housing market bottoms out and/or stabilizes.  Four years ago, as I was watching our regrettable house purchase start to plummet in value, I wondered why the banks were withholding their “shadow” inventory from the market.  At that time, I thought it was because they thought the market would come back and they could sell their REOs at a minimal loss.  Even back then I remember thinking that if one of the major banks was savvy and willing to buck the system, they would just list ALL of their REOs and beat the other banks to the market, thereby getting maximum return on thier assets (or minimal loss) while simultaneously crushing the value of their competitors assets. 

I have no formal education in finance or economics so bear with me, but how would the past three years have played out differently if say Chase listed all of their REOs in 2008, flooding the market with supply but getting a lot of inventory moved prior to the value drop of the past 1-2 years?

IR:

I’ve been looking into the backstory for some of the economic events that never made sense to me, and found these, which provide some illumination:

1) BofA was interested in doing the Countrywide and Merrill Lynch deals because BofA was legally too large to merge with retail deposit banks (the 10% merger cap), but could continue to grow into real estate and other services:

Market Share Caps

2) The proposed $5 account fee likely didn’t fail directly because of public sentiment, but because BofA is under an OCC consent order plus other supervision, and cannot afford any negative numbers, like losing a million accounts.

Google for “bofa occ consent order”

3) Gingrich keeps protesting that he’s a historian and not a lobbyist because:

a) he never registered as a lobbyist, as legally required for his activities

b) and registering as a lobbyist would likely end his career as a viable candidate for higher office, thus reducing his ability to charge lobbying fees.

cbsnews.com: Newt Gingrich not technically a lobbyist, but…

(On Washington Week, a speaker called Gingrich “the definition of a demagogue”, and not in a good way.)

IrvineRenter, you compared mortgages with put options.

But bankers have their own put options too (for which they didn’t pay): taxpayer bailout.

The chain of put options: buyers got put options from the banker, bankers got put options from the taxpayer, and the taxpayer got left holding the bag.

Did anyone see this article?
http://www.ajc.com/news/atlanta/103-year-old-woman-1245741.html

Obviously, at her age she hasn’t learned that there are consequences to not paying the mortgage, and I guess for her there aren’t any!