Open Thread 6-6-2009

Is it only the blogs that noticed a huge spike in interest rates over the last couple of weeks?

Stuck inside these four walls, sent inside forever,

Band on the Run — Paul McCartney and Wing

One of the advantages of reading topic-specific blogs like the IHB is that you find out about things before they reach general public awareness. For instance, last week, there was a sudden and dramatic rise in interest rates. Mr. Mortgage has written extensively about this and its ramifications in posts: 5-28 – Potential Consequences of 5.5% Mortgage Rates, 5-29 – ‘The Day After’ the Interest Rate Spike , 6-5 Beware Real Estate False Bottoms (Link to 69 page PDF file.) Some other bloggers have been on the case including Calculated Risk: Rising Rates: The Next Fed Meeting Will be Interesting. For the most part, the mainstream media has not been covering this story and its important ramifications.

I had the following email exchange with a mortgage broker:

Question: With our limited inventory, many affordable properties are seeing numerous
bids, sometimes over the ask. Do you think this phenomenon will stop due to the
higher rates?

Answer: This rate Tsunami hasn’t even made the news yet. When I mean news, I mean buyers don’t realize that their Pre-Qual letters are now worthless and payment expectations are shattered. Realtors also have no idea what will happen when 45% of all sales suddenly stop – meaning 1st timers will start holding back buying distressed homes. These buyers are very rate sensitive and will sit idly by waiting for rates to improve. Since rates won’t be back in the sub 4.5% range (7.0 point cost today to get a 4.5% rate!) only price reductions will make the sales perk back up. This is a 30 day problem. In other words, the fit has hit the shan and 30 days from now is when everyone will finally get a whiff of the trouble this means.

In our forums, this same broker had this to say:

Here’s how I think it’s playing out – from a cynics perspective.

Timmy G went to Beijing for a dressing down. Our Chinese Overlords
(OCO) are not going to invest long term at sub 3% rates. The short term
rate auctions last week went well, but next week comes a 3y/10y/30yr
auction that was likely to be a disaster. Timmy convinced OCO that if
the US floats rates to the upper 3’s – as they are now – that OCO
should invest. Next week you’ll either see a great Treasury auction or
a crappy one. If OCO buys a bunch, mortgage rates which are currently
way oversold will settle into the upper 4’s, low 5’s. If the auction is
a steaming pile, 6.0% mortgage rates are on their way.

That said though, of the 1.2t the Gubmint is committing to spend on
Mortgage Backed Securities, they’ve only spent 500b. A TARP’s worth of
ammo is still out there.

I think the above observations are on the mark.

We know there are a number of properties going to hit the market due to the pent up supply of the foreclosure moratoria. The price levels we will see this fall and winter will be influenced by the amount of supply, but it will largely be determined by the terms of financing and in particular mortgage interest rates. If rates go back up to 6% or higher, prices are going to fall a great deal. If they can be maintained at 5% or less, the drop will be much more subdued. We will see what happens.

45 thoughts on “Open Thread 6-6-2009

  1. scott

    But our OCO need the US consumer to continue to buy our baubles and beads to keep their factories humming along. Else, revolution there. So it isn’t like OCO buying Treasuries out of altruism.

    1. david

      True, though they may buy short-term securities if they fear future inflation from the Fed. The Fed’s quantitative easing program appears to have backfired as inflationary expectations have risen, along with mortgage rates and other long-term rates.

  2. MalibuRenter

    I think that small variations in interest rates have mostly short term effects. I think that people who are actively looking at homes might slow down and wait if rates go up. If they think rates will be up for a while, they eventually buy.

    1. Illuminatus

      They may buy, but not at the price when the rates were in the 4 percent range. I’m one of those fence-sitters, and I am going to get another 1 year lease come August (and reevaluate the situation next summer). I’m not worried that I will be “priced out” in a year. There is no rush to grab an asset that will stay the same or fall in price over the next year. The short and long term stakes are too high when you are talking about spending 750K to 1 mil. for a house (at least they are for me). I can’t afford to gamble on my family’s future, in terms of the current risk present. I hate renting for many reasons, but not enough to buy if rates stay up, for the time being.

      1. Kelja

        Exactly my sentiments. We rent and will keep renting for at least 6 months to a year. Worse case scenario (for us) is housing prices stop sliding and stabilize. But no one seriously thinks housing prices will appreciate anytime soon. Do they?

        1. MalibuRenter

          No one who has done any real analysis thinks home prices in LA will go up soon.

          The people who think interest rates will rise, and that the rise will be large enough to counteract the decline in prices at least have a plausible case. What they typically miss is the option to refinance later at a lower interest rate.

  3. Lee in Irvine

    Despite special one-time tax credits/advantages

    Despite subsidized mortgage rates

    Despite 30%(+) decline in prices

    Despite most realtors in The OC screaming “bottom”

    Orange County managed to transact just 2,517 homes in the last 22 business days. The local REIC calls this a spring rally.

    Monthly OC sales per year~

    1988 – 5,032
    1989 – 4,331
    1990 – 3,330
    1991 – 3,175
    1992 – 2,893
    1993 – 2,979
    1994 – 3,280
    1995 – 2,760
    1996 – 3,345
    1997 – 3,816
    1998 – 4,533
    1999 – 4,567
    2000 – 4,383
    2001 – 4,096
    2002 – 4,506
    2003 – 4,868
    2004 – 4,478
    2005 – 4,519
    2006 – 3,277
    2007 – 2,275

    1. Lee in Irvine

      BTW, bottoms are formed when we see a significant, unsubsidized and sustainable increase in home sales. How is this current smoke and mirrors scheme sustainable, when the Fed is already losing control of interest rates. What’s gonna happen if God-forbid, mortgage rates increase another 75-100 basis points before the summer.

      Per DataQuick Archives, Orange County Median year end price and average sales per month.

      1994 ~ $205,000 ~ 3,280
      1995 ~ $190,000 ~ 2,760
      1996 ~ $195,000 ~ 3,345 <- Bottom Jan 1996 ($184,000) 1997 ~ $210,000 ~ 3,816 1998 ~ $229,000 ~ 4,533 1999 ~ $258,000 ~ 4,567 2000 ~ $292,000 ~ 4,383 2001 ~ $322,000 ~ 4,096 2002 ~ $385,000 ~ 4,506

      1. IrvineRenter

        “BTW, bottoms are formed when we see a significant, unsubsidized and sustainable increase in home sales.”

        Yes, they cannot be formed artificially.

        Also, bottoms are formed in the absence of kool aid. When fantasies of appreciation are crushed, real appreciation at a sustained rate can resume.

        1. MalibuRenter

          You also have to have a large number of people who don’t believe prices will keep going down, and are willing to bet their downpayment on it.

          I have been very surprised at how many people believed that prices would either stop declining or go up over the past few years.

          1. awgee

            Weren’t there also a large number of buyers at the top of there market in 2005 and 2006? The more buyer there are, the more convinced I am that prices are going off a cliff.

      2. Kelja

        “What’s gonna happen if God-forbid, mortgage rates increase another 75-100 basis points before the summer.”

        Unmitigated disaster will happen.

    2. Lee in Irvine

      One more point~

      What’s gonna happen to all the OC home-debtors, who are patiently waiting for a housing market recovery, in order to re-fi their time-bomb mortgage, which is presently at a 100-130 percent LTV, and set to recast at a much higher payment in the coming months.

  4. Modguy

    I wish this was Headline news. The expectations and sense of entitlement coming from our del’q borrowers gets worse every day.

    This week seems the worst… I called-out approvals as low as 3%* and got swore at and hung-up on. They seem to forget that we’re under no obligation to offer them anything; that they are already a bad risk, but getting this offer to stop the FC save their home and all at no cost!

    Even if they had stellar credit, lots of equity, and thousands of dollars to refinance, they would not get these low rates!

    * full disclosure… To get some people an affordable payment, this might be combined with a 20-yr balloon or the rate might convert to 5% or 6% in 4 years, but the point is the same… We’re offering to cut the payment over 30%, and they’re not satisfied!!! It gets a bit frustrating… But I feel better seeing the home FC after they turn down these bank offers 🙂

    1. Dan in FL

      Thanks to all the interest-only and negative am loans, I’d say 50% of the time these loan modifications end up with a higher monthly payment, not a lower one.

      And usually, the banks refuse to do a forebearance of any of the unpaid interest. So many loan mods end up with a higher principal amount as well.

      Loan mods were actually better before the Obamamod plans came out.

  5. thrifty

    An excellent column by Alan Abelson in Barron’s today discussing the coming housing glut now that the foreclosure moratoria are history:
    An interesting quote from the article:
    “One of the scarier charts in the report — but which, we think, brings into jarring focus mortgage credit’s current perilous condition — lists how much each of the various types of loans is severely underwater. To wit: 73% of option ARMs, 50% of subprime, 45% of Alt-A and 25% of prime mortgages are in that uncomfortable category.”

    1. lagunalover

      Foreclosure moratoria are history? There’s a new three month foreclosure moratorium starting in California on June 15.

      1. thrifty

        LIke Will Rogers, I only know what I read in the newspaper (and irvinehousingblog). Do you have a link discussing the new moratorium? I haven’t seen it discussed.

          1. thrifty

            Apparently there is a 90 day moratorium that began June 1. It isn’t clear to me that it is binding, however. One article states that there may be a loophole (or more):
            “So where’s the loophole in this? The bank only needs to have a loan modification program in place – there is no requirement for them to actually be issuing loan modifications.
            If the moratorium does delay f/c 90 days it isn’t clear it will make any difference. Either the individuals needing it have lost their jobs or their houses are so far underwater that they see nothing to gain in hanging on to them. And apparently only about 5% of those eligible have applied.
            I think anyone considering buying and knowing about the moratorium will simply wait it out and watch supply suddenly increase even more when it finishes. Meantime, interest rates aren’t helping anyone. It’s a mess that continues to build.

  6. Chris

    I think Mish has also mentioned the spike in long term and intermediate term rates as well. As a matter of fact, my GNMA fund got whacked last week as a result of this. Similar pattern can be seen on bond funds with investment grading (not junk).

    For every naysayers’ sake on this board, I hope you’re right on the fall/winter price prediction. Anything above 5.5% will spell doom for the current price level on desirable zip codes. Let’s all cross our fingers on this.

  7. newbie2008

    To really get a quantitative assessment how much trouble the house Ponzi scheme is in, a weighed value should be used. Having 20% of the loans underwater can be $1 under water per house or $200000 per house. It’s a big difference. On the FEDDIE FC’ed house, it looked like an average of $100000 per house on previously FC houses. Note I wrote house loan not home loan, because home is where the heart is. A house is a building.

    Chinese news reported that the students were laughing at TG’s speech (met to be a serious discussion on American M policy). People are starting to see the emperor has no clothes.

    A raise in both long and short interest rates will confirm the bad policy of print until we drop and rewarding the abusers (banks and house loan abuser) and punishing the innocent (responsible taxpayers, borrowers and non-debtors).

  8. Dan in FL

    I’m not too worried about OCO. I keep going back to that old saying:

    “If you owe the bank $1,000, the bank owns you. If you owe the bank $1,000,000,000, you own the bank.”

    1. Geotpf

      I’ve always heard it as something like, “If you owe the bank $10 thousand dollars and can’t pay, you have a problem. If you owe the bank $10 million dollars and can’t pay, the bank has a problem.”

  9. ockurt

    Good Yahoo! Finance article…

    ALL BUSINESS: Bond-market rout lifts mortgage cost- AP

    The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

  10. thrifty

    One bank lender whose mortgage rates I’ve been following has gone from 4.75% with 0.625 pts on a 30 yr fixed loan to 5.125% with 2.75 pts. in 2 weeks. If the 3/10/30 treasury sale next week is a bust, mortgage rate changes will be brutal.

  11. San Diego Homes

    So much for the 2% loans from the taxpayers to the banks to get them to lend. The banks took the money and shirked off that policy advice. It goes to show that interest rates are set by international demand for US bonds, not by cheap money pumped into the banks by the taxpayers. The next step I’d anticipate is international inter-governmental bribery of a similar scale. That should keep rates down for a while longer.

    1. no_vaseline

      Or, the new bottom you called in San Diego low end properties is simply a getting on point for knife catchers. Either one.

  12. priced_out

    Hi IR,

    What’s up with that second cartoon?

    Am I the only one who was reminded of this?

    (Going to try html here, though, I’ve never quite figured out why it’s failed me before…)

  13. Nancy

    I’ve observed homes in WestPark II going in just a few days, reminds me of the market in 2002, but with 2006-7 prices. These homes aren’t staying in the market even more than a week. Who’s buying these homes? Foreign cash money. Yes, people who are making 100% cash offers. Market timers hoping to catch market bottoms and sitting on the sidelines hoping for further depreciation and foreclosures may be in for a surprise in such neighborhoods attracting foreign money. Even the seldom short sells are going in matter of days, at market price. So it seems, the pigs will be always be priced out.

    1. Marc

      Hahaha. I always knew real estate agents are good fairy tale tellers, but this story is a great one. “Foreign” cash investors are buying Socal real estate. Haven’t they already lost enough money buying stakes in US banks and government bonds? The only thing that prices in Irvine will do is drop and no cash investor is stupid enough to buy into this falling market. Get an evening job, agent, since the good times are gone.

      1. Nancy

        Wrong guess; I’m not an agent or affiliated at all with real-estate. I’m a long-term homeowner in WP II and glad to see foreign savings invested in my neighborhood, which would otherwise have depreciated like the rest of up-nose neighborhoods who don’t welcome such diversity and foreign investors.

        Just visit local schools here and see the children, they’re some of the most studious and smartest; they replenish this country with talent and ambition. And they will be our future scientists, engineers, physicians, the people who’ll continue to build and operate this country, while the “entitled” others figure out how to consume more products and fatten up beyond obese.

        This type of buyout should not come as a surprise… it happened in the 70’s when foreigners with strong money bought up homes in most desirable neighborhoods in Beverly Hills during the recession. Now, who’s the Mayor of Beverly Hills, you think?

        And it’s happening again while the dollar continues to slide at rapid pace again, and while countries like China have long held their currency at 30% or more undervalued terms (just imagine buying a home at 30% discount; yes, strong foreign money is just like that, it’s a HUGE advantage for savers).

        Diligent research findings, I’m willing to spend my time reading; not cheap talk. It’s easy to pontificate on a blog. Get off your buns, close the laptop, and take a walk in the backstreets of WP II; just see who’s moving in the neighborhood.

    2. San Diego Homes

      Thanks for sharing your observation Nancy. Don’t expect a fair hearing in here. Most of these folks are disgruntled in one way or another. We’ve seen a lot of foreign investment in San Diego too… and a lot of all-cash offers. But many of the upscale San Diego area homes are selling to US citizens who have a lot of money… not just foreigners. We’re seeing longer market times for luxury homes, but any houses priced under $400,000 are selling in less than a week… not all cash, but lots of people who had been waiting on the sidelines for prices to come down. Most of these people have gotten really tired of being renters, and they are buying homes for the long term.

  14. Nancy

    The below excerpt from (on the right bottom section of their Overview section); IMO, we’re rather fortunate the people in category #1 are willing to invest their savings in our homes; you think they give a Foreigner Newbie a loan here? No, they are bringing all-cash offers:

    Who Lives In West Park?

    People who live in this neighborhood

    1. Non-native Newbies
    — Foreign-born individuals who just moved to U.S.
    2. Urban Power Families
    — High-income couples with children.

    3. Corporate Climbers
    — High-income, high-expense urban singles.

    1. Marc

      Dream on. Irvine (and CA as a whole) is fundamentally overpriced and nothing is going to change that. People are leaving the state since taxes are too high and the state finances are a mess (=either more taxes or cuts in services). $700k for a 3BR house with a tiny garden – you must be kidding me. I am making good money but I am not going to waste it on real estate.
      Prices will fall to a reasonable level. PS I am not disgruntled, I just think it is hilarious how you can be so far removed from reality. Foreign money supposedly also bought a lot of units in the Plaza on Jamboree, didn’t stop the prices from falling there either…Foreign buyers were also supposed to save prices in Manhattan (according to the home owners & agents over there who drank too much cool aid), which never happened. Prices here are fundamentally out of whack and no foreign cash is going to change them from coming down. Anyone who buys now will lose his equity during the next 2 years – a very slow recovery will start in 2010-2011 if not later.

  15. Nancy

    California will always be too expensive for certain people, especially non-savers (the majority). Chances are, you won’t be happy with the schools here either. I’ve known a few who relocated out of Irvine b/c their children had difficulties competing with the Asian students.

    The reality of being priced out is just hard to accept for some. Fact is, there is practically no inventory in WPII and what little comes in the market, is gone in days.

  16. Marc

    I doubt that CA will always be too expensive. The price correction is going right now (already 30% down, and according to most research another 25% to go) until prices reach a reasonable level.
    You will find a lot of people like me who have the savings and income but are not willing to pay these crazy prices and waste my money on overpriced real estate.
    Why would I pay 700k for a 3BR? For the beaches and the sun? No way. But that’s my personal opinion. If the 700k house is at 400k in 2 years I will think about it. If not I will move.
    The schools are good but there are many excellent schools in other places as well (hopefully a little more diversity than only Asians…).
    I don’t know why you continue to talk about being “priced out”. Prices are coming down so very few people will be priced out. I think a lot of the locals here have problems understanding that are a lot of places as attractive as SoCal but with much lower cost of living. The high prices here are the result of an artifical bubble created by the locals, but there are not enough people out there willing to pay these crazy prices anymore (even if they have the money). Prices will fall a lot more until they are more reasonable again.

  17. Nancy

    Marc, some Irvine neighborhoods have retained their values very well. Those are the ones with good schools and who lived quiet, frugal family lives, not like the Jonses or Jonses wanna-be’s who’re now in desperation and dragging down their neighborhood prices with them.

    I’ve been looking to buy in Westside (Brentwood/ Westwood), moving up from Westpark. I had your mentality. If you think homeonwers don’t spend on their homes in Irvine, you should see Westside, it’s unbelievably rundown. The homes in Westside are dingy, the owners stingy, not a penny spent on upgrades or even basic maintenance/repairs, and yet they want over a million for fixer-uppers. I used to get angry visiting their dingy open houses. Eventually I realized this is a cash market area, and I’m a puny figure in the midst of giants who know and play the real estate market with pocket money. I’ve waited on the sidelines saying the same thing, “I’m not gonna pay a million for this dumpster!” Now I realize I’m only kidding myself. This is the Westside market, like it or not. There will NEVER be bargains here, at levels I’m willing to pay. Who’s delusional? I was, for sure. The sellers are just exploiting the high demand for their properties.

    “Value” in real estate is purely a social construct. Much like value in the US Dollar fiat currency. That’s why the dollar never collapses – when things get cheap enough, the tide always turns. We live in the new age of bubbles, so don’t expect to have seen the last of asset bubbles. Do you see oil quickly climbing up again? How about the recent massive market run-up, ever see anything like it? Where should we park our money, in banks paying 0.5%? When the inevitable recovery picks pace, who will be the market winners? The ones who stayed in the sidelines waiting for market bottoms to tops, i.e., the pigs?

    1. thrifty

      Nancy: you may (or may not) be right. Easiest way to find out is to check the 1998-1999 prices in the area you’re looking to buy and compare to where you live (or whatever your reference point is) during the same time frame. If there is a difference for comparable homes, that supports your theory. But eventually the high priced areas will also come down. The next 12-18 mos. will be the time to watch.

  18. Nancy

    Thrifty, in 1999, Westpark II was only 3-4 years old and builders were happy to sell at post-recession recovery levels. However there was demand, and homeowners were on waiting list to buy here. I gather you’re not from SoCal or missed watching OJ’s trials… Brentwood on the other hand has always been prime real estate in CA; it’s the celebrities’ enclave (no, I’m not one). Its values always hold up, much as the good neigborhoods in Irvine did. Not all that glitters in Irvine is gold, and some basic facts hold true everywhere: e.g., if your school is top-rated, your neighbors didn’t all buy in the peak years 2003-2007, your association fee reasonable ($1000/mo is a total rip-off!!), and you’re not next to a busy streets/highways, dumpster of high-voltage lines (or bus parking lots or recycling/concrete factories), chances are your home hasn’t depreciated much in Irvine at all from it’s 2007 peak… as mine hasn’t. I’m glad I bought a smaller home in a more desirable and established nighborhood and highly-sought school district, than buying space-wasting homes in newer developments such as Alisio Viego, with lower-performing schools. The great education and safety that this place affords me are truly priceless. Many homeowners in my tract have paid off or have negligible mortgages.

    1. thrifty

      Nancy: I’ve lived in so cal since 1971 and owned in San Clemente from 1978-1999. I agree there is a price differential between Westpark and Westwood. My point is that many high priced ($750K and higher) homes will be dropping in price during the next 12-18 mos to a much greater extent than those priced less than $750k. For that reason, I would wait to see how much if I might be interested in buying up.
      The comparison I suggested was between prices of similar homes in Westpark and Westwood in 1998-99. I thnk the ratio may well be similar again in 12-18 mos (but suspect it is higher now since the Westwood priced homes haven’t yet declined like they will).

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