Irvine Housing Blog

I’d like you to caveat this statement, “Since most people (in IRVINE, or CA) finance to the maximum allowed by a lender to get the most expensive home they can acquire,”  Financing to the hilt is not universal, as your previous post about median home price to median income ratio showed.  Some areas have people stretching much more than other areas do.  Where people are stretched, interest rates will have a first-order impact on prices.  Where people are not stretched it will not.

The average down payment in Coto de Caza for the last year is 42%.

No, it is not due to any extraordinary number of all cash buyers.  You can read about it here:

http://www.cotohousingblog.com/?p=14740

There is a 10 year auction today and the yield on the open market is now at 3.28%.  What does the open market know?

Before we get the usual objections to mortgage modifications, I need to remind readers that in the old fashioned days of banking, when bank kept the loans they made, it would be unthinkable NOT to modify a mortgage or any other loan when a borrower got in trouble, assuming the borrower was viable. “Viable” means that the borrower still has enough income to pay enough that the bank still comes out ahead by modifying the loan rather than other recovery strategies, which for a mortgage loan means foreclosure.

“...The problem is that people in high prices areas like Orange County cannot afford the higher priced home. They never could…”

But I’ve watched the Housewives of Orange County.  None of those people, wives or husbands, even have a college degree, yet they’re living fabulously well.  Luxury cars, huge beautiful homes, nannies, etc…

Wait… Hold on… Lee in Irvine posted an update yesterday…

As a reminder, one of the main reasons why The Ben Bernak did QE2 is to keep mortgage rates low.  Sorry Benny, it ain’t working!

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WaPo OptEd Nov 4, 2010

What the Fed did and why: supporting the recovery and sustaining price stability

...“The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.”

...<i>“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.”
—————————————————————————

Well Bernak, after 6-8 years of extremely low interest rates, everyone (that could) in The OC has already refinanced or HELOC’d the hell out of their home.

Look, I agree that borrowers are not blameless.  BUT - who’s money was it?  As my dad used to say, “Be 100% sure you will be repaid, otherwise consider it a gift.”  So, Mr. Lender, were you really 100% confident you would be repaid on a no-doc, stated income, negative amortizing, zero down mortgage?  If so, you deserve to take the hit because you are a fool.

If a buyer is looking at a $400,000 home, very low interest rates make the payment affordable, but when interest rates go up, it will be harder and harder to finance that $400,000 home. In fact, if interest rates go up a full point, a buyer might lose as much as $100,000 in buying power;

The problem with the higher rates pushing prices lower scenario is that it’s not proportional.

If rates rising a full point makes you afford $100k less house, will sellers really lower their homes $100k in response?

The psychology of a seller is more stubborn than that of your urgent realtor.

Heard at PTA meeting that Irvine school district enrollment currently at 27,000 is forecast to increase by 12,000 over
the next ten years based on homebuying patterns.

I think a lot of current and future sellers aren’t understanding the math and are going to be very pissed off. If rates get back to more historic norms, an entire pool of potential buyers in OC will be effectively swept away.  Sellers will HAVE to lower their prices.

The other thing is that there are quite a few people in OC who are at, or approaching retirement age. Some of the “approachers” still have to drum up a lot of cash to pay for their kids college (and holy crap, have you seen the increases in the cost of higher education the last 5 years!). Some just want to downsize. 

There’s going to be mushroom clouds of anger around the county when rates continue to rise.  There’s a lot of homes in trouble who can’t sell at lower prices. But there’s probably a considerable number of people who want to sell, but are unsatisfied with market prices in OC right now and somehow think prices will rebound back to the crack-smokin’ levels of 2005 without improvements in the job market, economy and state budget situation.  They are dreaming.

Those that sold their homes at OC market peak price back in 2006 - man, did they made out like bandits or what?

Meh, buyers won’t even really notice until the number starts with a “5”, and even then that’s a historically low rate.

This is another Long pin in the Real Estate Voodoo Doll. Bonds and Interest Rates. Looks like the Chinese are going to demand higher rates now that we “kicked the can” on our huge deficit. Those low interest rates are going to move in the near future. The 2 yr moved up 16%. 5 yr 9%. 10yr. + 4.6%. Thats just for Today. By this time next year maybe double digit ?  Ouch. This country better get its head out of the sand and have a plan to trim these deficits. Or this is going to get way worse real quick. Wait till the vote to raise the debt ceiling. Thats going to be interesting. Vote NO and we default. Think about it.

I have a question.

If somebody gets a fixed rate mortgage from a bank now, can the bank increase the rate on it in the future when inflation heats up? Why would a bank lend at 5%, when inflation is at 15%?

We’re going to see some of the fence sitters jump into the pond. Anyone in negotiation on a property, haggling about a $1,000 fence repair cost is going to keep a sharp eye on their 60 day rate lock expiring. They’ll “clear the deck” and close ASAP. The big question is “Now what?”. I’ve long believed that once the population gets a taste of sub reality rates, they’ll never go back to anything else. Witness where auto loan rates have been hovering around since 2001. Anything over 0.00 is a non starter for most. Same with housing rates.

Motivating buyers to purchase before they get priced out due to rates (forever..) is the oldest con around. It’s the champagne of nonsense from the Realtor community. Expect nothing else.

As to the mortgage industry, that sound of crickets is also the sound of layoffs. Sure, there’s plenty of people still able to refinance, but with the mushrooming refi companies (Greenlight, CashCall, etc) wondering when the next phone call is coming in reminds me of 2005. We just finished a great refi boom from 2003-2004. Rates came up a bit, so out came the exotics - 100% financing, stated stated NINJA loans. That ship has sailed and ain’t coming back. The second wave of exotics were the loans that submarined the industry - 1.0% Option ARMS. They ain’t coming back either. So what do you do with a room full of processors and silent phones? You raise the unemployment rate a few percentage points. It’s Gar-on-teed to happen…. unless The Ben Bernank comes out with a banzai run into Mortgage Backed Securities to push rates back sub 4.25%.

PIMCO loaded up on MBS’s over the past 60 days. perhaps they see Helicopter Ben readying a Divine Wind attack soon.

My .02c

Soylent Green Is People.

Actually if they don’t buy them, their currency starts to rise against the dollar and their export market collapses.  They really don’t want 1 billion pissed off unemployed people so they have little choice.  They have to keep selling stuff to us and that means it has to be cheap.

You ask: Have we reached the bottom of rates for this cycle?

In my article, Mortgage Backed Bonds And Real Estate Tumble Lower As The Ten Year Interest Rate Moves Higher, I wrote:

Now with the Interest Rate on the US Ten Year Note, $TYX, moving progressively higher, real estate shares are turning lower as the entitlement to value real estate at manager’s best estimate rather than at market has been terminated.

Apartment Investment And Management CO, AIV, -2.4%
Brookfield Properties, BPO, -1.6%
Industrial And Office Real Estate, FIO, -1.9%
Vornado Real Estate, VNO, -1.6%
PSR Active Real Estate, PSR, -1.8%
Real Estate, IYR, -1.5%
Residential Real Estate, REZ, -2.0%
Simon Property Group, SPG, -1.7%
Stanwood Property Trust, STWD, -4.1%

The Interest Rate on the US Ten Year Note, $TYX, rose 0.38% higher today, causing bonds, overall, BND, to fall sharply 0.52% lower, and the Mortgage Backed Bonds, MBB, to fall 0.32%.

Needless to say, today, December, 8, 2010, it was a slaughterhouse in the bond market with those invested in bonds getting slashed left and right. The End of Credit commenced November 4, 2010 with higher interest rates and falling currency price.

November 4, 2010, was the tipping point of the age

The world tipped from the “age of debt liquidity” …. and into “the age of debt deflation”… where there has been disinvestment from Emerging Markets, EEM, Asia Excluding Japan, EPP, Utilities, IPU, and diversified utilities, CNP, and Junk Bond, JNK, emerging market bonds, EMB, international corporate bonds, PICB, World Government Bonds, BWX, short duration corporation bonds, LQD, as well as total bonds, BND.

It was on November, 4, 2010, bond vigilantes called the Interest Rate on the US Ten Year Note, $TYX, and the Interest Rate Higher on the 30 Year US Government Bond, $TNX, higher as Ben Bernanke’s QE2 constitutes monetization of debt. 

The anticipation of Quantitative Easing Two created a liquidity trade, that was a safe money trade, a money good trade. But investors sold Ben Bernanke’s actual announcement of QE 2.

And it was on November 4, 2010, that the currency traders followed on the heels of the bond vigilantes and sold the world’s major currencies, DBV, and the emerging market currencies, CEW, causing the US Dollar, $USD, to rise. 

In summary, it was debt deflation, that is currency deflation, seen in DBV and CEW, stimulated by rising interest rates, that turned emerging markets, EEM, Asia Excluding Japan, EPP, Utility Stocks, IPU, and Total Bonds, BND, lower.

Of significant summary note, world government bonds, BWX, fell lower on today’s falling major currencies, DBV.

And emerging market bonds, EMB, fell lower on today’s falling emerging market currencies, CEW.

I believe that the Morgan Stanley Cyclical Index, $CYC, ^CYC, which is the “investment of risk”, that is the investment of global economic expansion, which is currency trading driven, is going to turn lower very soon, most likely tomorrow, December 9, 2010, on carry trade disinvestment.

..Respondents see the recession and job losses as the main reasons for the foreclosure problem, a shift from last year when they were more likely to blame homeowners who bought homes they could not afford.

MJ