The housing market has changed dramatically in the bubble markets since last year. Back in the summer of 2005 bidding wars were common and inventory was very low in the bubble markets across the USA. Those days are long gone.
Today, a new reality faces both buyers and sellers. Inventory has increased dramatically in most bubble markets in the past 8 months. In Phoenix, inventory rose from 10,748 on 7/20/05 to 43,900 on 5/02/06 according ZipRealty and Bubble Markets Tracking Inventory.
Some real estate agents are even claiming that is now a buyer's market due to the increased inventory, lack of bidding wars and the small reductions in prices.
So is it a good time to buy in the bubble markets?
Real prices will continue to decline in the bubble markets for many more years. The bubble markets will experience price declines of at least 20% in real dollars [inflation adjusted] over the course of 3 years [from the peak]. In most bubble markets, the peak price was reached late summer 2005. Most bubble markets will experience real price declines signifcantly greater then 20%. Some may experience price declines of 60% in real dollars over the course of 3 years. Many markets may experience real dollar declining prices for more then 3 years.
Just as importantly, monthly rents are generally cheap compared to buying in the bubble markets. Buying in the bubble markets generally costs 1.25 to 2.5 times the cost of renting ( for a similar property; assuming 30yr fixed, solid credit, property taxes, and typical interest rate tax deduction). Each month hundreds if not thousands of dollars can be saved and invested if one chooses to rent as opposed to owning.
Buying now in a bubble market does not make financial sense. As housing inventory continues to rise and prices decline there will be lots of buying opportunities in the future. If you earn a reasonable income it is an absolute fallacy that you need to "Buy now or be priced out forever." Renting and waiting is fiscally prudent. Don't be fooled.
Alway remember: Renters are people too. We are NOT second class citizens!
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I think that they are using the phrase "buyer's market" as a euphemism for a market that is not good for sellers. The problem is, just because the market is bad for sellers doesn't mean it is good for buyers - it seems pretty bad across the board right now. I propose a new term: we're currently in a "renter's market". It *is* a good time to be renting.
ReplyDelete"I propose a new term: we're currently in a "renter's market". It *is* a good time to be renting."
ReplyDeleteLOL!
currently in bubble markets at least 50% reduction would make it a buyer's market...wait. boycott. whatever works.
ReplyDeleteA 50% reduction would make a depression. Better have alot of cash because you may not have a job or stock portfolio.
ReplyDeleteDo you think your baseless assertions are more persuasive in bold type?
ReplyDelete"I propose a new term: we're currently in a "renter's market".
ReplyDeleteI was thinking about another new term: "HUD house market"
Thank you anonymous at 5:58 a.m.
ReplyDeleteSell your houses if you can. Take anything you can get. The bubble is forever popping and the sky is falling. See? Don't you see? It's all here in my factless claptrap! Ruuuuun!
A chunk of sky just fell and landed next to my apartment building. It has begun! I sure hope the maintenance crew gets around to cleaning it up before another chunk of the sky falls. Wait... the apartment complex maintenace crew isn't working today because they are demonstrating for their right to sneak into the country across the Mexican border...
ReplyDeleteI think that prices will have to drop enough (& rents rise) so that the cost of renting = cost of buying. It amazes me that people will buy when even a simple analysis shows how much more it costs in the current DC/MD/NoVA market to buy vs. rent. It only makes sense if you're willing to bet on rapid price appreciation to make up the difference. I'm too risk averse for that and have missed out on the great market in the past few years. I don't begrudge those that have done well though - I look at it the same way I do when I see people bet huge sums of money in Vegas. Good luck, but it's not for me.
ReplyDeleteHere's a good video from ABC showing what happens when ARMS adjust. She took the gamble and lost.
http://abcnews.go.com/Video/playerIndex?id=1752600
" A 50% reduction would make a depression"
ReplyDeleteThese are REAL dollar. NOT nominal price drops.
Rents are about to SKYROCKET in the DC area. You people are going to be screwed.
ReplyDeleteANON 6:28,
ReplyDeleteNot with all those flippers looking to rent out all those flopping properties.
Morad- rents have never = buying costs in this area. This is my 25 yr experience in N.VA.
ReplyDeleteAh, the imaginary flopping properties will keep you safe! Good idea. Have fun in the renter's crisis of 2007.
ReplyDeleteSeriously. i would NOT want to be a renter in this market. Hot economy, slowdowns in new building and renovations, high cost of owning the real estate. BOOM. Your rents are about to double and triple.
ReplyDeleteactually the DC Council just reduced the rent ceiling. So rent can't skyrocket.
ReplyDeleteAnon 6:28: I don't see how rents can rise enough. There is no creative financing for paying rent.
ReplyDeleteVA investor: I realize there are intangibles that make people prefer buying instead of renting. I'm new to the area, have you ever seen things this far out of alignment?
Yeah, like the real estate moneyed interests aren't going to be able to get the council to toss the rent ceiling altogether if the situation calls for it. Keep deluding yourself.
ReplyDeleteAs for creative financing, hahaha. There is plenty of spending money in this economy. Particularly the lawyer-driven dc condo economy.
Like I said, I would not want to be a renter in DC right now.
dc too,
ReplyDeletesounds like all you have to go on is "the thing that happened this one time." difference this time is that the economy - and the DC area economy in particular - are extremely strong. commerce is booming locally, professionals are flocking to the city and the area, and there is simply no surpluss of housing.
All of your inventory figures are missing one thing - HISTORICAL INVENTORY LEVELS. What you fail to understand is that inventory right now is NORMAL and that prices are AFFORDABLE for the professional class of people interested in buying property here.
I think it’s an "absolute fallacy" to use so many generalizations to dismiss the idea of buying. If you would like to buy, you should keep looking now just as much as before the run up in prices, or as much as you plan to after the highly anticipated 50% crash. The conclusion of your post, I presume, since there's no support, is based upon median home prices vs. median rent prices across a geographic area. Making financial decisions based on such generalized data is foolish. That's like deciding, for example, not to buy stock in a particular gold mining company just because of the commodities index is overpriced rather than looking at the metrics of the particular gold mining company. I agree that median homes are overpriced, but there are properties available which make financial sense to buy, of course they aren’t easy to find, and you’ll never find them as long as you dismiss the whole idea of buying.
ReplyDeleteWhy would DC area rents "skyrocket" now?
ReplyDeleteFirst off, they aren't skyrocketing. In fact, from what I have seen, they are flat or down, and almost undoubtedly down in real terms.
Secondly, there is a huge supply of condos and apartments coming on line. Why would you expect rent to rise?
A Redskins fan
dc_too,
ReplyDeleteI don't know the D.C. market including what happened there in the early 90's. I do, however, know the N.VA. market.
Condo's fell up to 40%; single family about 25%. There was a time period in the later 90's (due to prices and interest rates) where a 20% downpayment could achieve a break-even cash flow.
That is what I know.
Gee, maybe because of the limited supply and very high demand? And rents are very much rising all over the city. You're even more delusional than I thought if you're denying that of all things.
ReplyDeleteva investor,
ReplyDeletemaybe you should try to buy real estate in virginia in the late 1990s then. OOPS! Too late.
DC_Too: I like the 50-month multiplier comment. Do you know what the multiplier would be for 1999-2000 before the rapid escalation began? What do you think it is up to now? 250-months?
ReplyDeleteIt sounds like we're all happy. Those that rent are glad they don't own, and those that own are glad they don't rent.
"Seriously. i would NOT want to be a renter in this market. Hot economy, slowdowns in new building and renovations, high cost of owning the real estate. BOOM. Your rents are about to double and triple."
ReplyDeleteDriving through the DC metro area, I always see apartment complexes with "for-lease signs". In my apartment complex (in Silver Spring) I see a whole alot of empty apartments. The apartment complex next door to me is offering 2 bedrooms for $80 less than my one bedroom apartment.
For rents to double or triple, there would have to be a hugh influx of people looking for housing. If all apartment managers would be foolish enough to double the rent, then the bubblicous houses would once again become attractive. Also there are plenty of jobs outside DC metro, which means the apartment managers just price themselves out of the market. (Like soaring college expensives are increasing community colleges enrollment)
I'm not an econmonist nor a housing market forcaster, so I'm not going to attempt to predict where the rents are going. However I don't see how apartment rents are going to double.
Anon 6:55,
ReplyDeleteI think that I bought 4 or 5 places around that time frame. Thanks for the advice.
CLANG!
ReplyDeleteDid you hear that?! another chunk of the sky just fell!
The sky is falling! Hundreds of thousands of homeowners are going to be forced out into the streets. The banks will evict them en-emasse and sell to us apartment dwellers for pennies on the dollar!
Wheee!
Now if only the economic indicators from this morning weren't so strong. I hate it when the economy looks strong... but I'm keeping the faith!: economic devestation for the masses! Wheee!
d.c._too,
ReplyDeletePlease enlighten us with your experience/knowledge of rents over the past 25 yrs.
I don't see any evidence of rents rising in the DC area. I don't know the data; I'm just talking about what I see.
ReplyDeleteI know that in Silver Spring, the apartment complexes seem desperate for renters. And more condos are coming up all over the place, probably mostly owned by "investors" who will be looking to rent them.
There seems to be plenty of housing, and no reason to raise rents. But I could be wrong.
A Redskins fan
I have a friend who rented a condo in DC a couple months ago. When they first moved in, the condo was relatively empty. But lately, they've been seeing it fill up with more and more renters. In fact he thought that maybe 50% of the condo was occupied by renters.
ReplyDeleteJust a thought.
I think this is an excellent market in which to buy a new primary residence SFH...thanks to all the hysteria over never-ending declines in real prices for homes. As a buyer, I say thank you to the doom & gloomers.
ReplyDeleteI bought in december 2005...at a considerably lower price than comparables for July 2005...but now my neighborhood (Bethesda, MD SFHs) is selling homes for more than I bought...at a decent pace too. Teardowns don't sell too quickly anymore...but what do you expect when short-term borrowing costs increase. Interest rates are cyclical...when they come back down...I think price appreciation will accelerate.
I agree that there are lots of condos in parts of DC and NOVA...though I was able to sell my condo in a few weeks for asking price. It still went for about 10% more than comparables for the previous year. My buyer got to think about their decision more than people could in the past..which is good I think, even if it made me a bit of a nervous seller.
I knew this post would generate a huge amount of comments.
ReplyDelete1) Keep it civil. No name calling on both sides.
2) Opposing opinions are welcome. :-)
3) We can all learn from each other.
4) Thanks for reading.
"" A 50% reduction would make a depression"
ReplyDeleteGee, prices were half of today's levels prior to 2002. Did we have a depression back then because home prices were so low? Of course not. Can you imagine the horror of people being able to afford homes and spend money on other productive assets - yeah, that would be horrible for our country.
People can assert as many inconsequential factors as they want (like DC is special becuase ______), but that won't change the fact that prices are whacky and are far out of sync with fundamentals like income and rents on a historical basis. We all know this. Unfortunately some of the posters here are trying to convince the "sheep" otherwise in hopes that if this keeps up long enough we'll enter into a permanent "new paradigm." Sorry folks, it just aint' happening.
Ok, let's sum this up - although there is no evidence of this, only good things are about to happen to the downtrodden renters. Also, although there is REALLY no evidence of this, terrible things are about to happen - nay, already happening - to homeowners.
ReplyDeleteOooo, I saw a bunch of "for rent" signs in my neighborhood! That means I'm going to be rich even though I'm a 40 y/o man making 46k/year at a non-profit! Whee!
Sorry folks. The housing market has not priced itself out of people's ability to afford it, no matter what you bottom-feeders must assume your neighbors are earning, and the economy is far too strong for any rational person to predict a housing decline over anything but the shortest time span.
Too bad my buddy David here isn't going to start a blog dedicated to pointing out all of the wrongheaded things he and the rest of you were predicting here at bubble meter, and accepting the blame.
"thanks to all the hysteria over never-ending declines in real prices for homes"
ReplyDeleteLOL. I certainly believe that there will be serious declines in real prices for homes, but I don't know anyone outside of blogs that agrees with me. There certainly isn't any "hysteria."
A Redskins fan
Yes, the day is coming, and coming soon, when one out of every three homes in every single neighborhood is standing empty. The former occupants forced out by the ruthless mortgage companies that FORCED them to sign for loans they couldn't afford. Heck, ENTIRE NEIGHBORHOODS are likely to be ghost towns before the end of the year.
ReplyDeleteNow, if I could only figure out where all those people will go.... I guess since they are part of a bubble, they will simply vanish into thin air when the bubble bursts. I mean, really, the DEMAND for housing will certainly DECLINE as a result of all of this.
I'm going to buy vacant houses by the dozen this summer!
Anon 7:54
ReplyDelete"Sorry folks. The housing market has not priced itself out of people's ability to afford it"
WHAT!?
""Sorry folks. The housing market has not priced itself out of people's ability to afford it"
ReplyDeleteWHAT!? "
Uh, it's true. Do you have any idea what the billion lawyers in this city are making?
"" A 50% reduction would make a depression"
ReplyDelete___________________________________
This is an interesting statement, it's as if he's saying a depression isn't possible, therefore a 50% deduction isn't possible. Twin Deficits, rising interest rates really putting the brakes on the housing bubble, the end of the carry-trade and foreigners not buying anymore US debt/flight from the dollar, plus higher gas prices could cause a HUGE depression in this country. And they're all interelated, so one feeds off the other like dominoes going over. They're not pie in the sky maybe one or two possibly happening, they're facts and they're all intertwined supporting each other. A depression and consequetly a 90% decline in house prices is a very real possibility.
"the economy is far too strong"
ReplyDeleteThis is an interesting topic that should be discussed further. I think a more appropriate statement might be "the economy appears strong".
Yes everyone is driving around in fancy new cars, yes everyone is shopping and spending like crazy, yes everyone is eating out at restaurants all the time, and yes everyone is renovating their house to add marble and stainless. Yes, yes, yes.
But its all being accomplished by overspending. The personal saving rate is negative. Personal debt is at all time highs. We are collectively spending more than we earn. Sure our homes have gone up in value, but will this "value" hold? And why do we feel the need to spend all of our housing appreciation?
We've become a society that appears to be doing well but the facts such as savings rates and debt levels tell another story. I don't see how anyone can say the economy is really strong and healthy when the only reason for robust consumption is people essentially borrowing from our future savings.
"The housing market has not priced itself out of people's ability to afford it..."
ReplyDeleteThen answer this for me:
Why are asking prices being reduced in the DC Metro Area if they are affordable at current asking prices?
Sorry folks. The housing market has not priced itself out of people's ability to afford it, no matter what you bottom-feeders must assume your neighbors are earning, and the economy is far too strong for any rational person to predict a housing decline over anything but the shortest time span.
ReplyDeleteIf memory serves, something like four out of five recent DC-area mortgages are of the "creative", ticking-bomb variety -- option ARM's and the like. It seems pretty likely that the great majority of those were issued to people who simply couldn't afford "their" homes otherwise, and who consequently are going to be in a dire situation when the payments start to rise. We'll see how many people can "afford" a house when that happens. Hint: That shiny new car in the driveway, bought with borrowed money, may not be quite the proof of affluence that you think.
-- sglover
"Why are asking prices being reduced in the DC Metro Area if they are affordable at current asking prices? "
ReplyDeleteThe answer is that some are reduced and some are exceeded and some are met precisely. The ones that are reduced are never reduced by very much.
Sorry.
Anon 8:21
ReplyDelete"Uh, it's true. Do you have any idea what the billion lawyers in this city are making?"
What percentage of the population are these "billion lawyers"?
Better yet...what percentage of the population makes 6 figures or more?
Third question...is housing affordable for the rest of us who are making less than 6 figures? I would venture a guess that us sub 6 figure people are a majority within the DC metro area.
Therefore I'm back to my original question ..... WHAT!?
"If memory serves, something like four out of five recent DC-area mortgages are of the "creative", ticking-bomb variety -- option ARM's and the like. It seems pretty likely that the great majority of those were issued to people who simply couldn't afford "their" homes otherwise"
ReplyDeleteAnd you are positive that they took these mortgages, not because they were just a good deal, but because they couldn't afford their homes otherwise. Why exactly?
"What percentage of the population are these "billion lawyers"?
ReplyDeleteBetter yet...what percentage of the population makes 6 figures or more?
Third question...is housing affordable for the rest of us who are making less than 6 figures? I would venture a guess that us sub 6 figure people are a majority within the DC metro area.
Therefore I'm back to my original question ..... WHAT!? "
And there are plenty of affordable neighborhoods for you people too. That's why god made Anacostia, Brookland, etc. etc. etc.
Does anyone have a reliable source for information on the number of home (including and excluding condos) sales in the last two years that were "investment" or non-primary residences?
ReplyDeleteThese figures would be very useful in this discussion.
bryce
not to be a wet blanket, but; you can go to any big defense contractor in the region (and there are many), walk down any given hallway in any given building, and I suspect that 50% of the thousands of people you see will be in the "six figure" salary category.
ReplyDelete"Sorry folks. The housing market has not priced itself out of people's ability to afford it"
ReplyDeletePeople who say this are patting themselves on the back b/c it makes them feel richer than others.
But in reality, all owning means is the bank said you can afford to make this mortgage payment each month, even it if is 30 - 50% of your take-home. The bank does not care whether your kids go to college or whether you retire on more than SS or your 401K. In my world, "affording" a house at the expense of other things is not truly affording.
You may say "But I have built equity and that will pay for retirement!" As a renter, my answer is “so have I.” Every penny that I don't have to spend on real estate taxes, new paint, furniture, home maintenance, and yes, interest, has been invested. And with rents as low as they have been, my household runs a $4-5K surplus each month. (Which clearly indicates the bank would lend me enough to "afford" a house in the DC area.) Difference between your equity and mine is that mine is liquid. That means I can access it without having to add to my mortgage. It means if I lose my job, I can get to that $ without having to worry about the interest rates.
Books like "The Millionaire Next Door" and "The Truth About Money" emphasize that those who truly grow their wealth sink as little as possible into their housing. They don't pre-pay mortgages because that $ should be going towards investments with better returns.
Yes, lots of people make good money in DC (my hh income = $176K) and yes, they could “afford” if they wanted to. But right now, it is not a financially sophisticated decision to make.
And you are positive that they took these mortgages, not because they were just a good deal, but because they couldn't afford their homes otherwise. Why exactly?
ReplyDeleteI didn't say I was "positive", I said "it seems pretty likely". You're the one making making unqualified, unsupported blanket statements. I only pointed out that there are underlying facts that cast doubt on confident proclamations of how "affordable" houses really are. Next time, try reading the quotes you cite, OK?
-- sglover
"Books like "The Millionaire Next Door...""
ReplyDeleteSo true. I read this book years ago and learned a lot from it. (more millionaires drive Ford F-150s than any other vehicle comes to mind. I wonder if that changed since the book was published?)
Anyway, external displays of "wealth" are typically smoke and mirrors. People who aren't leveraged over their heads typically aren't very flashy, while someone with the flashy car and the 5000sf house doesn't have any real wealth.
That said: there are more millionaires in the US now than ever before. I wonder how many own real estate? (most, I suspect. If only to get a tax break) Anyone have stats on that?
bryce
"I didn't say I was "positive", I said "it seems pretty likely". You're the one making making unqualified, unsupported blanket statements. I only pointed out that there are underlying facts that cast doubt on confident proclamations of how "affordable" houses really are. Next time, try reading the quotes you cite, OK?"
ReplyDeleteNext time try not jumping to every inference that supports your preferred conclusion, OK?
Anon 8:35
ReplyDelete"And there are plenty of affordable neighborhoods for you people too. That's why god made Anacostia, Brookland, etc. etc. etc." (Talking about people who make less than 100K year).
I see no point in aurguing with you.
Anon 8:40
"not to be a wet blanket, but; you can go to any big defense contractor in the region (and there are many), walk down any given hallway in any given building, and I suspect that 50% of the thousands of people you see will be in the "six figure" salary category."
I work for a big defense firm and
I know for a fact that most engineers in these "big defense contracters" make less the 100K.
In my firm the halls are full of senior level engineers and most of them say either
"I can't afford the house that I live in now"
or
"I rent because I can't afford anything here".
Most of the well educated, smart, college + graduate degree people I know are aghast at the idea of interest only and exotic loans. These are the people making 100-200K + per year. The oft mentions "rich lawyer group." These people are not getting the heavily leveraged loans because they're not willing to take such a big risk on what is essentially a residence. Instead, they buy within their means and invest their money elsewhere.
ReplyDeleteSo then, if the smart, wealthy subset has either already purchased or run the numbers and decided to rent versus an exotic loan, then who are the 4 out of 5 people getting the exotic loans in this area?
When most people carry high monthly credit card debt, can't explain how interest financing works, and live paycheck to paycheck, I don't have faith that they know enough to stay away from ARMs and Interest only loans...
My $0.02.
I work for a big defense firm and
ReplyDeleteI know for a fact that most engineers in these "big defense contracters" make less the 100K.
I thought that, if anything, technology salaries had declined somewhat from the salad days of the internet boom.
-- sglover
Nobody said 4/5 of buyers were getting interest-only loans and that sort of "exotic" arrangement. ARMs were listed as one form of "exotic" loan. I assume 3/1, 5/1, 7/1 ARMs qualify to. Are your lawyer friends "aghast" and 5/1 arms? What about when the first 5 years is at 4% or so? Still aghast?
ReplyDelete"I thought that, if anything, technology salaries had declined somewhat from the salad days of the internet boom."
ReplyDeleteYeah, defense spending is in the toilet these days. Oh, wait ...
"Most of the well educated, smart, college + graduate degree people "
ReplyDeleteHere is where demographics come into play again. DC metro area is the "most educated" region in the country. More people here have advanced degrees than anywhere else in the country.
I agree that these people aren't taking out risky loans.
bryce
Yes, most of them are still aghast. They're looking to buy homes and start a family and want the gaurantee of a fixed mortgage. They're not willing to mess around for the first 3/5/7 years when they don't have to.
ReplyDelete"I work for a big defense firm and
ReplyDeleteI know for a fact that most engineers in these "big defense contracters" make less the 100K."
sounds like a master's degree is in order for you! can you afford that? or do you just not have the energy?
It's too bad that the time series for the US personal savings rate is not accompanied by demographic data. An older, retiring population will be more likely to save less and/or spend down a portion of built up wealth...and thereby skew the national rate for the entire population.
ReplyDeletealso, in regards to incomes and affordability....Ziprealty.com has data by zipcode for household income...so anyone can check to see what those "lawyers" are making if they wish.
Assuming the same gutless anonymous person spewed both of these:
ReplyDeleteYeah, defense spending is in the toilet these days. Oh, wait ...
I dunno, every month or so I look at DC area technology job listings. I don't see many that talk about six-figure salaries. This might be news to you, but not everyone feeding off those luscious "homeland security" dollars is a senior engineer or manager.
sounds like a master's degree is in order for you! can you afford that? or do you just not have the energy?
Kind of interesting how, whenever your blunderbuss assertions are challenged with facts or anecdotes, you respond with an insult. I wonder what that tells us about your "logic"?
-- sglover
anon 9:14
ReplyDelete"sounds like a master's degree is in order for you! can you afford that? or do you just not have the energy?"
I have a master's in Electrical Engineering plus 22 years of experience.
If you have statistics on income levels vs. percentage of population in the DC metro area I would love to continue this conversion with you.
"I thought that, if anything, technology salaries had declined somewhat from the salad days of the internet boom.
-- sglover
"
This is correct.
so... asking you if you should pursue an advanced degree is an insult?
ReplyDeleteThe thing about you have a low energy level was a bit uncalled-for. But it certainly wasn't an insult.
Does your employer have a tuition reimbursement policy?
A Master's in EE and 22 years experience?
ReplyDeleteHow much does that pay? No offense, but if you're good, you are WAY underpaid.
Anon 9:30
ReplyDelete"How much does that pay? No offense, but if you're good, you are WAY underpaid."
Go to salary.com and do a search on engineering salary with a master's degree and 20+ years experience in the DC metro area. After that, let's talk.
LOL! salary.com wants $80 from me before revealing what a M.S.E.E with 22 yrs experience in DC should make.
ReplyDeleteI guess when the gun was placed to your head, and you were FORCED to go into your profession (and subsequently suffer from ongoing economic hardships), you really had no choice in the matter, and thus you had no influence over your own future. Is that what you are telling everyone?
Temporarily Blogging from Santiago, Chile...
ReplyDeleteRents in Santiago are around 200 u.s. dollars a month and there are plenty of jobs for skilled engineers, business people etc.
America cannot have rents at 3000 dollars a month and maintain a competitive position in the world.
Seriously, David- are you becoming a media pundit? You post your comments as if they are factual statements (and of course you statements are based on doom and gloom).
ReplyDeleteFor crying out loud, why can't you do the IMHO? And whoever said it earlier is right: just cause you bold it doesn't mean Jack.
Don't let your blog "Jump the Shark" based on your bias.
"Also, the W. Post has reported that 54%, not a typo, fifty-four percent, of home mortgage originations in DC last year were of the "Interst Only" variety. So, at a minimum, over half of new homeowners are making no payment towards loan principle in what is now a stagnant sales market."
ReplyDeleteUm, no, at a MAXIMUM half are not paying principle. They point of an IO loan isn't that you Can't pay principle, it's that you're not required to - for a time, and then you are required to.
I've said this many times here before, but it bears repeating. Look on the census website what the median and average HOUSEHOLD incomes were in DC and the surrounding counties.
ReplyDeleteThe typical household in the DC area is not bouncing from one six-figure job to the next.
It's not to say the area isn't doing well now (it is), but let's be realistic about income levels and use real data, not just anecdotal stories.
And for the person who said that there are a bunch of educated people in the DC area, so what? Who do you think got burned on internet stocks in the 1990s?
This is a great discussion. I would also note that it does seem to me that there is a difference in tone recently for the housing defenders on these blogs. They used to come to blogs like this and mock increduously, like they couldn't believe anyone would harm themselves so much by not buying real estate. Now they seem a little more desperate, like they are beginning to worry. But I could be wrong.
A Redskins fan
David, I assume you will be buying put options here:
ReplyDeletehttp://www.cme.com/trading/prd/env/housingover16250.html
If not, seems like you don't believe your own hype, no? I'd think taking ALL the money you are saving from renting and buying some spring 2008 put options on the DC housing market index would be in line with what you have been writing about for months, no?
"David, I assume you will be buying put options here:
ReplyDeletehttp://www.cme.com/trading/prd/env/housingover16250.html
If not, seems like you don't believe your own hype, no? I'd think taking ALL the money you are saving from renting and buying some spring 2008 put options on the DC housing market index would be in line with what you have been writing about for months, no? "
I am indeed interested. Have not figured out how all it works. Plus I'm concerned about the data coming from the NAR.
"For crying out loud, why can't you do the IMHO? And whoever said it earlier is right: just cause you bold it doesn't mean Jack."
ReplyDeleteBecause it is obviously in my own opinion. I do NOT have crystal ball into the future. These are predictions.
"just cause you bold it doesn't mean Jack"
For those who don't want to read the whole article they can just read the bolded parts.
All the statistics and general discussion aside, let me tell you my experience.
ReplyDeleteI moved to DC last year. I evaluated the real-estate prices vs. rents and decided to rent. I just renewed my lease and my rent went up $25 per month.
While I was considering whether to renew my lease I became interested in a beautiful 3 bed / 3 bath townhome in old-town Alexandria. It was originally listed for $850k, but after two reductions, it is currently being offered for $769k.
In my personal experience, I have just saved myself $81k. For the last year I have lived in a smaller place and made do without a backyard. But for the amount of money we are talking about it hasn’t been that difficult.
"It should not be discounted, denied, and especially not celebrated, by anyone."
ReplyDeleteI couldn't agree more. Thanks for looking up those figures. They are very relevant to the discussion.
"They used to come to blogs like this and mock increduously, like they couldn't believe anyone would harm themselves so much by not buying real estate."
I'm not sure this is accurate; but then what antecdotal observation can be deemed accurate?
Let's all agree that antecdotal perceptions are not a sound basis upon which to make sweeping generalizations. Reading other people's observations and ideas IS an interesting pursuit, which is why we are all here I imagine. But I'm not going to make financial decisions, one way or another, based solely upon one or a few things I read here.
bryce
"made do without a backyard."
ReplyDeleteFor vast numbers of people, NOT having a back yard is a positive thing!
"I have just saved myself $81k."
Did you buy it? If you haven't bought it, you have NOT yet realized any benefit from waiting to buy it.
"Right now where I am, that looks like renting."
ReplyDeleteGenerally speaking, what geographic location are you in?
I predict: Housing will fall out of fashion. I mean, really, who needs it?
ReplyDeleteBasic demand-side economics will prevail. Far fewer people will demand a place to call "home" than ever before, and thus the prices of homes will fall.
I am also looking into the CME housing puts as a hedge. I have alot of RE exposure but no desire to sell. Did anyone else catch Shiller on CNBC?
ReplyDelete"If he _had_ bought it, he would be out $81K compared to if he had decided to buy it now. Yes? "
ReplyDeleteBut if he _wants_ it and hasn't bought it yet, then he hasn't "saved" that $81K that he claims to have "saved".
I'm not arguing with your point - it is valid. But he's claiming to be $81K ahead of the game. Come on...
"It will be nice to walk down the street, and sit, on a lovely bench, that is not cluttered with the lockboxes of speculators, trying to unload...."
ReplyDeleteLOL!
The current issue of the New Yorker has a article by James Suroweiki (at NewYorker.com) that covers the same subject as Anon 10:39 but from a housing price insurance angle.
ReplyDeleteRebar
David
ReplyDelete"Most bubble markets will experience real price declines signifcantly greater then 20%. Some may experience price declines of 60% in real dollars over the course of 3 years. Many markets may experience real dollar declining prices for more then 3 years."
Yes prices are falling and I can not see any reason why this trend will not continue. How are you able to come up with specific numbers for the declines (20% to 60%) and time period (more than 3 years)?
ARRRGH!
ReplyDeleteI've been trying to ignore comments like this:
*************
"Anonymous said...
I predict: Housing will fall out of fashion. I mean, really, who needs it?
Basic demand-side economics will prevail. Far fewer people will demand a place to call "home" than ever before, and thus the prices of homes will fall.
May 04, 2006 11:45 AM "
*************
But I can't anymore. Let's take an example. In Ballston/NOVA I've watched 1 bd condos go from 100K and change to nearly 400K. Let's say you bought March'05 and are sitting on a juicy 6% YOY gain. Well, now the place is "worth" $424K. Though if you sell, you're out the entire gain due to commission.
Over the past year, your payments were roughly $600/100K or $2400 plus taxes (4K/yr), ins (1K/yr), condo fees (200/mon). This may not be precise but it's the right ball park. So you're at about $3000/month for your living expense. Let's say, all of your $2400 is interest so you're getting back the equivalent of $800/month in taxes. You're still out $2200 per month in interest, taxes, etc.
What's rent for a nice one bedroom place? $1500? Maybe $1800 at the most? With home appreciation beginning to move sideways, there is no great incentive to buy that condo anymore. I can save that $400-700 difference per month and save up for a down payment. I'm not losing ground because price appreciation has leveled.
That's where demand will drop off. Just because everyone will still be living somewhere, doesn't mean there will be a demand TO BUY.
As an aside, look what happens to this ficticious buyer if the market doesn't stay flat but declines a modest 5%. He's out on a leveraged 5% plus another 6% in commission if a sale is necessary.
I don't expect prices to come crashing down. I'm not a complete sky is falling person. I do however, expect prices to begin moving sideways for at least a couple of years. And a minor retracement wouldn't surprise me. Expectations of the masses are finally beginning to change.
My $0.02.
Sarah please read my comment at 6:54am. You must have skipped over it.
ReplyDeletedc_too,
ReplyDeleteI am still waiting to hear your info on rents. Please don't make statements you can't back up.
My statements are based on my own personal experience. Take them for what they are worth.
Yea, I could have bought positive cash-flow 4 plexes by Gaulludet in the 80's or 90's - but passed on them. I only buy property that I would live in myself. That is one of my criteria.
steinravnik is correct.
ReplyDeleteBrand new article (hours old) alluding to why strong job growth doesn't equal sales...
A third tenet holds that home values never drop in areas where employment is rising. But today some of the hardest-hit regions rank among the strongest job machines, notably Northern Virginia and San Diego. The reason: Young buyers filling those jobs can't afford the houses for sale. (See a gallery of markets that are due for a fall, and ones that will hold up.)
http://money.cnn.com/2006/05/03/news/economy/realestateguide_2_fortune/index.htm
Same series, DC is considered a "Dead Zone" BTW.
Why so angry and insulting dc_too.
ReplyDeleteYou have your opinions and I have mine. We can disagree without the personal attacks.
What price levels are you arguing about? I don't get the point of your attacks.
ReplyDelete"Interest rates are cyclical...when they come back down..."
ReplyDeleteHoney, the only way our government is going to pay down it's massive debt is hyperinflation. Interest rates won't be low for a L-O-N-G time.
dc_too,
ReplyDeleteI have no clue what you are talking about.
Nice double and triple posting, Bryce. Respond to your own fake anonymous posts much? Didn't people do that on Yahoo Finance message boards in, like, 1998?
ReplyDeleteAnguish and anger on display, as I said before. Read "Araby" for a literary excursion through vanity like Bryce's about his GREAT INVESTMENT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! The truth hurts.
Jerkstore
"The ICE....is gonna BREAK!"
ReplyDelete-- Christopher Walken, "The Dead Zone"
Jerkstore
Sarah_in_DC;
ReplyDeleteCould you do me a favor?
"And we're only a few blocks from the Ballston metro. "
Could you NOT call yourself "Sarah in DC"? Because you are NOT in DC! Sheese. There's a big difference between Arlington County and Washington DC. I'll enumerate some of the differences here if you'd like.
bryce
Spongeworthy,
ReplyDeleteThey have these little pills now: they help to alleviate the paranoia you are exhibiting....
Now go back to your drab WASPy cubicle of a housing arrangement on that island you're so proud to proclaim that you live upon.
bryce
Wow. This blog is funny. Here I'll throw more wood to the fire.
ReplyDeleteI bought my first Arlington Courthouse condo in 1997. The seller was selling at $30K loss from his 1987 peak price, about a 20% decline. Everyone I knew who was selling that year was selling at a loss. I sold that condo in 2004 and made a nice chunk of change. Could have made more if I waited a year but better out first rather than last.
Crashes do happen, no matter how good the economy looks. Recovery takes a long time. The crash that started in the late 80s did not start recovering until over 10 years later in this present boom.
Now for the reasoning behind ARMs being taken out by those who could afford fixed rate loans. I bought a detached home and took out a 5 yr ARM at 3.875% vs 30 yr fixed at 5.25%. Over a 5 year period I would be saving about 25K in interest payments. With a cap of 2% per year and max 8% interest, why would I opt for the 30 yr fixed especially when after 6 years I would be looking for a bigger home?
If prices drop 50%, I'll simply forfeit my home as collateral and let the bank eat the loss on the loan. I'll turnaround and pay 100% cash for all the new homes that suddenly became quite affordable. What do I care about a credit report when I don't need to borrow?
Being leveraged doesn't always mean you are in trouble. Although it is a pretty good indicator of stupidity if your big loans are for cars that drop 20% in value the minute they get purchased. That being said, I feel pitty for condo owners since condos are the first to take the price hit and the biggest hit in a recession. This year, next year, in the long run cycles always have someone who believes the ride will never end.
I know a bunch of people who are "from DC" and live in Herndon, and Gaithersburg, etc. Where does it end?
ReplyDeleteLiving in DC is beneath many people, yet everyone is "from DC". Sheese indeed.
bryc
Interesting discussion here
ReplyDelete>"If he _had_ bought it, he would be out $81K compared to if he had decided to buy it now. Yes? "
>
>But if he _wants_ it and hasn't bought it yet, then he hasn't "saved" that $81K that he claims to have "saved".
One of the cardinal rules of investing "Avoid losses". What is different between successful and unsuccessful investors is the way they manage their loss.
Not only has this guy avoided 81K in losses, but he has made extra returns on 81K if it was invested otherwise.
Given a choice between having a portfolio with and without the house, the without-the-house investment is up by 81K in a year.
So this guy has made a wise investment decision.
This is rarely understood by anyone - if you lose, just to get even with someone who avoided the loss needs extraordinary performance.
X original investment, 20 % loss gets you to 80% of original i.e 0.8X
Now your principal is only 0.8X
For that to get back to X you need 0.2X in returns. And 0.2X is 25% of 0.8X
You lose 20%, just to get even, you need 25% return
Oh, well..
"Rents are about to SKYROCKET in the DC area. You people are going to be screwed."
ReplyDeleteSkyrocket based on what? Skyrocketing incomes? Skyrocketing in-migration?
I agree with MyTwoCents (12:12) argument. I decided to use the townhouse next door (sold in Jan 06 for $470,000) to compare rent vs. buy. This is in Falls Church and close to the Metro if that makes any difference.
ReplyDeleteE-loan mortgage calculator shows fixed 30-year (6.375%) monthly mortgage payment of a little over $2,900. Property tax is approximate $350/mo. I don't know how much to add in for the HOA fees and insurance, so I'll ignore those. If I assume that I can deduct the entire mortgage payment (almost all interest initally) & property taxes then the after-tax cost to me is about $2175/mo. Once I factor in the HOA fees, insurance, and the standard tax deduction that I give up by itemizing it seems obvious to me that buying is quite a bit more expensive than my $1850/mo rent payment. Another perk is that I don't have to worry about upkeep on the residence. The downside is that my rent could rise or my lease could be terminated.
I'm one of the many single-income households in the area, so I decided to look at the 2004 census data (http://www.census.gov/hhes/www/income/medincearnersandstate.html) to see what the median incomes are in the area. The data is by state, so I expected the amounts to underestimate those in the DC/MD/NoVA area, but after seeing the DC data I am now not so sure. I assumed a 5% annual increase to estimate the 2006 data.
1-income 2-income 1-income 2-income
2004 DC: $38,349 $91,865 2006 DC: $42,280 $101,282
2004 MD: $46,624 $83,603 2006 MD: $51,403 $92,173
2004 VA: $41,779 $73,840 2006 VA: $46,062 $81,409
Okay, Morad, now factor in a very modest 3% appreciation rate on the $470,000 townhome.
ReplyDeleteI'm not making any wild assumptions here. Just 3%. That's the historical average of real estate appreciation.
That's $15,100 a year, $1,250 per month in capital appreciation.
How bad does buying look now?
Of course, you might have a risk premium, since real estate is volatile, or some preference for geographic mobility.
You most likely believe that real estate prices follow a mean reverting pattern, so the recent big runup will be followed by a big drop. But that's also speculative.
And you might need a very large down payment for the house to get the 6.375% rate.
So buying's not a slam dunk, but it's not total foolishness.
And while rents won't double in a year like some moron claimed, they are increasing at about a 7% rate in the Dc area.
http://www.deltaassociates.com/content/marketinformation/marketinformation.php#multi
If we treat that as a 5% real rate of appreciation, that means rents will double in 14-15 years.
There's a good case to be made for a strong sideways movement in the market, especially in SFHs. Historically, housing markets often go through big runups followed by long slow periods of slow decline or flatness. Remember, people would just as soon stay in their house rather than take a loss on selling it, so inventory and time on the market can grow without necessarily creating a price decline.
The big X factors in this particular story are those funky mortgages, which could force people to sell at a loss if people really can't afford the reset payments, and the big condo inventory pipeline. I think condos are severely overvalued, and are in for a steep decline.
But a townhome in Falls Church (one of my favorite suburbs) near the metro for $470,000? I've heard worse.
Morad,
ReplyDeleteThanks for the sanity check. I would also caution you on the use of the E-Loan calculator. Often times those things use a single interest rate with a very straight-forward 30 year term loan calculation. In reality, unless you have a 20% downpayment, you'll have a primary loan and a secondary loan. The secondary loan will help avoid PMI but that comes at an interest premium so that pushes your costs up. Plus, your primary loan is likely a jumbo loan so again, you're not going to get the prime rate quoted by all of the lenders.
My $0.02.
Since when did home ownership boil down to opportunity cost in the form of a rate of return on a downpayment & monthly payments, versus the intangibles of actually *owning a home*?
ReplyDeleteI've been a homeowner twice, and a renter more times than I remember. Each instance was what was appropriate for me at the time; so what does that mean to any of you? If you care about that, I'm worried about you.
There is a distinct difference between coming home to a "home" that I own vice coming back to an apartment that I'm renting. This is an intangible, quality-of-life issue that cannot be quantified.
Anyone trying to reduce an aspect of life (homeownership) that brings joy and contentment to millions of people, down to opportunity costs and rates of returns, really needs to get a personality transplant.
bryce
Anon 6:29,
ReplyDeleteI think those are good points about even a conservative rate of appreciation and also the requirements to actually get the 6.375% rate I used. I am hoping that prices will revert to the mean as you surmised. If I believed that rates only moved upwards (even at a modest 3% as you quoted) then the analysis would begin to look more favorable towards buying. I would have to factor in what kinds of returns I could expect on my money in other less leveraged investments. I support any property buyers/owners that had the good sense to perform some sort of analysis and are comfortable with their results. I think alot of people were preyed upon by lenders and have gotten themselves into commitments they didn't understand. It annoys me as much as car dealers that ask how much I want to pay per month when I try to get a price quote on a vehicle.
FYI - You can choose "Other" and pick a name that is more descriptive than Anonymous without registering on this site.
Folks -- I'm a new lawyer at a large corporate firm, and many of my friends are also lawyers at similar firms. The salary at these firms for a first-year lawyer is $135K, with about a $10K increase each year. Yet no one I know is looking to buy right now, and the only person I know who has bought since January 2005 did so in an up-and-coming neighborhood in DC where prices were somewhat lower. Highly educated lawyers are the last people who will buy into the NAR hype that real estate never goes down.
ReplyDeleteBryce,
ReplyDeleteYou're correct that the intangibles of owning a home come into play. The knowledge that you can knock a hole in the wall, create a window, paint at will, etc. That has a value.
The purpose of examining the cost of renting vs buying is to see what that delta is. In my example, the delta was as much as $700 per month and I think that was a reasonable assumption. For $700 per month I can afford several nice vacations a year, save for a rainy day, or feed an expensive hobby. Those are intangibles of life too.
At this point in my life, I'd rather have the flexibility to go out, travel, and enjoy myself than to be house poor. It's my decision and it meets my needs. There's no right or wrong here. Well, there is a wrong - it's assuming your decisions are applicable to everyone else and then insisting their choice is wrong.
My $0.02.
Sorry, but a lot of posts on this thread should be deleted by the moderator. The whole EE degree thing, and the insults back and forth should all be deleted. Completely off base and uncalled for.
ReplyDeleteI have a house in Columbia, between DC and Baltimore, that I bought in March 2004. It has appreciated approximately 30% since then, but I am deeply concerned that it will shrink back down (and it probably will).
Although my fiancee has said several times that she wanted to tap equity in the house to do some fix-up work, I always said no. I told that what goes up sometimes comes back down, and that I would rather wait until the economy is healthy and the real estate market is back to normal. Until then, we save up for anything we want to fix.
"Yet no one I know is looking to buy right now, and the only person I know who has bought since January 2005 did so in an up-and-coming neighborhood in DC where prices were somewhat lower. Highly educated lawyers are the last people who will buy into the NAR hype that real estate never goes down. "
ReplyDeleteThat, and first-year associates don't have down-payment money.
Anon 5:30
ReplyDeleteElectrical Engineer V -
Arlington, VA 22206
25th%ile - $101,861
Median - $109,716
75th%ile - $117,426
Do you know what an Electrical Engineer V is?
He is a department head with maybe 20 to 50 employees under him.
How many engineers make it at this level?
FEW!
I deleted a few posts as they were way off topic and insulting.
ReplyDelete"bryce said...I'm not making any wild assumptions here. Just 3%. That's the historical average of real estate appreciation."
ReplyDeleteI never said that. Please take another look at what/whom you are trying to quote. (because I don't know either!)
bryce
Oh I see; an Anonymous poster said something, and you are attributing it to me. Your assumption is incorrect.
ReplyDeletebryce
If lenders tightened up, then prices would have to fall to the levels that people could afford.
ReplyDeleteRight now the norm is qualification for 4 times (plus even) of your income. I wonder if we'll fall back to 3 times.
If so, prices will have to do the same.
"Exactly. Average is 3%. Since the rate has been running in double digits for a number of years now, how far does it have to fall in order to get back to a long-term average of 3%? "
ReplyDeleteZero. The average IS 3%. Including the years your folks were floundering.
dc too - that's not how it works. The individual bank makes an evaluation of the individual building. Thanks for playing, though. Now back to your regularly scheduled hatred of homeowners.
ReplyDeleteDoes anyone have a good source as to what banks/companies are exposed to the types of loans that dc_too mentioned? As well as exposed to ARM and interest only? My understanding (albeit shallow) was that Fanny/Freddie would purchase most of the loans that banks were creating even though lending standards had plummeted. However, if the banks are indeed carrying these loans than the risk will remain with them. I'm curious to see if Fanny/Freddie were allowing themselves to be swept up inthe lax lending. If so, then the money being paid to the securities backed by mortgages are at risk of greater default, yet they're still likely paying only measly returns because interest rates are so low...
ReplyDeleteMy $0.02.
Anonymous 7:37,
ReplyDeleteThen please enlighten us. After the individual bank individually evaluates an individual property, what does it do with the mortgage note? Does it simply sit back and collect interest for the next 30 years? I'm not well versed in the secondary market for mortgages but I do not believe this is how it works. It needs to resell that mortgage to "cash out" as it were so that it has the money to lend to the next person. To stay liquid as dc_too pointed out.
Someone is willing to buy that mortgage for the long term to collect the interest. And whoever that entity is, they're taking on a bigger risk for a lower premium when lending standards get lax.
If we're still playing, then I await your turn at bat.
My $0.02.
"There is a distinct difference between coming home to a "home" that I own vice coming back to an apartment that I'm renting. This is an intangible, quality-of-life issue that cannot be quantified. "
ReplyDeleteHmmm... let me try to quantify it for myself. As a rough estimate, it would certainly be worth less than $1000 a month in increased payments.
A Redskins fan
Dc_too, that is incorrect. Loans not meeting Fannie or Freddie guidelines--for whatever reason, be it investor condos, loans over their statutory limit ($417K) or others--are still made and securitized in the secondary market, just at slightly (maybe 12.5 or 25 bps max) higher rates.
ReplyDeleteThat you would say:
"There will be no mortgage loan until owner-occupancy levels "conform" to Fannie/Freddie requirements."
makes me really wonder about the existance of a bubble, since you and many others one this board have no actual idea of how the finance part of the housing market works. Every mortgage in America over $417K does no "conform" and yet, amazingly, these loans are still made. Wow...
"Hmmm... let me try to quantify it for myself. As a rough estimate, it would certainly be worth less than $1000 a month in increased payments."
ReplyDeleteTo each his own. Is everthing beige in your suburban apartment? Or "Redskins Burgandy" in color?
Quality of life does not equate to $1000 per month. Oddly enough, $1000 per month is an amount some people spend on dining out each month. That equates to going to a nice place; dinner and drinks for two, ten times per month. Pretty hard to fathom, huh?
bryce
a lawyer said,
ReplyDeleteIsn't that a non-sequitur? How does a lack of knowledge of the secondary mortgage market by an end consumer translate into a basis for no housing bubble? Unless I'm misinterpreting what you said?
If anything, the fact that Fanny/Freddie is sitting up and asking for banks to be more prudent in their loans because they're concerned about the soaring number of exotic loans entering the system would seem to indicate the opposite.
Which brings us back to dc_too's comment. If Fannie starts saying "no" or raise your standards, then it makes it harder for the banks to justify the loans which means they may have to look more closely at the owner/occupancy ratios to satisfy the Maes...
My $0.02.
PS I see anonymous 7:37 doesn't seem to have a retort...
"Isn't that a non-sequitur? How does a lack of knowledge of the secondary mortgage market by an end consumer translate into a basis for no housing bubble? Unless I'm misinterpreting what you said?"
ReplyDeleteThe point is that you people are idiots and everything you say is suspect.
$1000 a month dining out? Wow. My household income is in the 6 digit area and we don't even come close to that amount. I flinch if the dining out part of the budget exceeds $100 a month.
ReplyDeleteThen again, I'll drive my car until the wheels fall off before I even consider getting another one. To each his/her own.
Just curious, but you didn't happen to run up your credit cards during college did you? I've known people who fork out $100 in bar bills each weekend and wonder how come they can't save any money.
The point is you made an entire post built around the actions of the secondard market loan purchasers when you have no clue how the secondary market operates. Long experience has taught me that when people expound at length about matters on which they are substantively clueless but made broad, sweeping assertions, treat everything else they say and do as highly suspect. Hence I will not hazard any guesses as to the existance of a housing bubble but will say that most of the posts on this site meet the criteria I described about above.
ReplyDeleteI will say this: you cannot possibly understand the liquidity part of the housing market, and in turn the broader housing market, without understanding the secondard loan market, Fannie and Freddie, the political and other forces that those entities feel, and their role in the larger U.S. economy.
LOL! This is really entertaining today!
ReplyDeleteNope, I didn't run up my credit cards in college. In fact, I paid for grad school out-of-pocket with money that I earned in the job market.
I own my car outright, and I have the option (which I often take) of NOT driving it at all - for weeks at a time. So the wheels aren't going to fall off any time soon, although my intent when I purchased the car was to keep it for as long as possible.
I'm guessing that your priorities are different from my own. Dining out at a decent place twice per week is an extravagence? Yep, it sure would have been when I was in college way back in the 1980s. Not now. That's fine, right? Isn't variety "the spice of life" and all that?
bryce
Fine. Here's your correction:
ReplyDeleteYou said:
Mainstream banks will not make mortgage loans for the purchase of condominium apartments if the number of "investor owned" (rental) units exceeds Fannie and Freddie limits, because they can't sell the loans, they have to hold them until paid in full.
This at a minimum strongly implies that the only way banks can offload their mortgages in the secondard market is through Fannie and Freddie (if it doesn't imply that, please explain what other meaning you could have meant to associate with that statement).
That implication is 100% false with respect to a huge percentage of mortages (at a minimum, EVERY mortage over $417K, EVERY co-op mortgage, etc). You were using the assertion "a bank would not make a loan it cannot sell to a GSE" as one of the bases for your arguments about the existance of a bubble, and that assertion is completely, undeniably fasle, and can only be made out of a complete lack of understanding of how the mortage markets work.
Note I don't even really disagree with you about these wacky condos--but when people give false reasons for an argument it gives rise to suspicion as to the argument itself.
a lawyer said,
ReplyDeleteThank you for taking the time to inform everyone of their ignorance. Your dismissive tone is also refreshingly condescending.
Fine, your experience quickly enables you to see a lack of knowledge of the system in these posts. However, you haven't really provided any value than to say "I'm smarter than you." That may very well be. In the meantime, can you provide some links, sources, insight, as to how the secondary market works?
Thank you,
My $0.02.
Not critizing Bryce. Just curious. My friends surprise me a lot because I inadvertantly place my notions of spending priorities to be their notions. Same with value of my time.
ReplyDeleteI think I do that a lot when I think about investments. This whole bubble question is something I need to figure out. Peoples attitude towards spending and their emotions will greatly affect how this will play out.
Clearly people on this Board have no desire to leaven their rants with some actual knowledge. Fair enough, I'll take my leave. Again, I *generally* agree with the underlying thesis of many posts on this Board--that many parts of the U.S. have gone condo-crazy and there are some stupid, speculative properties out there and some buyers who are going to be very, very sorry. But I feel equally sorry for anyone who is holding off buying a house because of posts on messageboard about the financial aspects of the housing market which are not even sprinkled, let alone doused, with reality. Regards.
ReplyDeleteThe reason that lending institutions have been able to loosen standards and do exotics, etc., things that Fannie Mae wouldn't bite on is that loans aren't sold in toto in the secondary markets, but "repackaged". You can find the detailed info on the internets, but the simple version is that 100 loans of certain credit-worthiness and features are put together in a pool. The packagers will sell a bond that represents only the interest, a bond that represents the first 100 principle payments, one for the second 100, etc. The problem for many of these marginal banks is that they have to keep a significant portion of the risk.
ReplyDeleteAll of this exists in a market, tightening standards are reflected everywhere. So it may indeed become unfeasible to get a mortgage in a building without enough owner/occupiers or percent sold (as it was in certain markets in the early 90's - it kept me from being able to buy one NYC apartment).
It absolutely may be unfeasible but that doesn't have anything to do with Fannie and Freddie, as was asserted.
ReplyDeletedc too = PWN3D
ReplyDelete"Where prices have risen far faster than underlying incomes, only two possibilities exist.
ReplyDeleteEither prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications."
- Martin Wolf, in a recent article in FT.
why would rents skyrocket if there are plenty of rentals on the market? If they are competing with each other for renters and there are no buyers because people are already renting... it would take more demand for rentals and a tighter availability for the rents to skyrocket don't you think?
ReplyDelete"why would rents skyrocket if there are plenty of rentals on the market? If they are competing with each other for renters and there are no buyers because people are already renting... it would take more demand for rentals and a tighter availability for the rents to skyrocket don't you think? "
ReplyDeleteBecause there aren't "plenty or rentals" on the market. Why do you expect housing prices to fall when there are more than enough high-income professionals coming to DC all the time to sustain them?
Can anyone explain what would happen if there is a big enough drop in prices that people decide to declare bankruptcy in order to walk away from their debt? If the lenders have already bundled and sold off the mortages, it seems like they get away with the lax lending standards with no negative repercussions.
ReplyDelete