Tuesday, October 20, 2009

Dogma or Doghouse?

I'm one to continually reassess my views as new information comes in. If you had told me at this time last year that we would be purchasing a house in February, I would have looked at you with an incredulous stare.

Up till now, I figured the worst of the price declines were behind us.....but I am beginning to reconsider. Today's WSJ development's blog had a very disturbing statistic that really jarred me. The post was about the fact that the FHA, VA and other government backed, low down payment, loans account for an overwhelming proportion of the market. The post noted that "In Northern California, for example, builders said that the government accounted for 76% of all mortgages."

I had seen a couple posts on Dr. Housing Bubble and Calculated Risk which broke out purchases by loan type, with roughly 28% using FHA, and 26% using cash (investors), for Sacramento. This seemed reasonable given the tax incentives and distressed inventory, but 76% for the region is downright frightening. Assuming 25% investor purchases, this suggests there is absolutely no demand without government subsidization.

I shudder to think about the fate of our housing market if this is true. With interest rate likely to rise as the government pulls out of the mortgage backed securities market, and very little organic demand......we may be in for a bigger drop than I had originally foreseen. The only saving grace is the continued reduction in inventory.....but in the face of these statistics, I'm not sure it will be enough.


smf said...

How can you be surprised?

Just look around you, examine the statistics.

The fact remains that there are more houses than people available to purchase them AT ANY PRICE.

The mantra during the bubble was 'if you build it, they will come'

This is how you get such a large # of new hotels in Las Vegas, with no prospects of a decent occupancy rate in the foreseeable future.

How about those 'waterfront' communities? For many years, the few around the Sacramento area still had empty lots, even though they had been aroound for years.

But during the bubble, several were FULLY built out. What changed to allow this to happen?

No, this is far from over. And what few are mentioning are that the future hinges of population growth rate that simply will not happen.

husmanen said...

It is commendable that you reassess your views as new information comes in. There are many, if not most people, that do not. They either fall into the ‘perma bear’ or ‘perma bull’ category when referring to housing.

Based on new evidence you are reassessing. I thought things would play out a lot faster in all markets, not just the lower end, and I was very surprised by the level of government intervention.

If there is a pullback from the government buying mortgage backed securities and no extension/increase in the buyers credit things will get closer to the fundamentals faster, otherwise not. I don’t foresee any changes in the new subprime, i.e. FHA, in the near future. But I have been wrong many a time.

But from behind it all there has to be a sustainable economy, we have taken some very heavy hits but the increases in unemployment appear to be decreasing, ie slowing down.

As for a saving grace with inventory…. well, I think that dam will not hold forever, just don’t see why it would change drastically in the near future (<6 months).

lamaiahoffmann said...

I don't know if I read the article right, but I interpreted that quote as 76% of all mortgages in the new house market.
If that is correct (as a relatively uneducated reader of blogs) I would think that the impact on Sacramento's market on the whole wouldn't be dramatic since I thought that new home sales were a relatively small portion of all area home sales. That would also jive more easily with the loan break outs you'd seen for Sacramento.
What do you guys think?

radiophilejapan said...

We had here an interesting discussion on pricing of homes according to their price tiers a few weeks ago. The lower priced homes have been moving and prices stabilizing. This is probably related to the OP - that 76% of all mortgages must have been on the lower priced homes. The medium and high priced homes are not moving as much and prices are bound to decline further, who knows until when. The pace at which banks foreclose the delinquent mortages will have a big impact in the offer of the high priced homes, and thus on their prices. Not sure if by design or sheer incompetence, the financial entities have been pushing out on foreclosing which may be a time bomb unless they manage to spread it along the next many years.
I decided to stop speculating and I put an offer on an REO in Rocklin and a short sale in Granite Bay today. Let's see how it jives out.

Buying Time said...

Lamaia -
I certainly hope so....76% of new homes would be much more reasonable.

Radiophile -
Good luck with the offers...keep us posted. Curious about why you picked GB and Rocklin...Schools? Price? Location?

Husmanen -
Saw your post on Lander's blog about your rental.....seems to be more and more common lately. Either the LL is defaulting, or renters are getting kicked out so that the LL can move in. In any case, moving is no fun.

husmanen said...

Yeah, moving is not going to be fun, but at least I was not blind sided by it and now we have a plan.

I honestly don't think the LL will move back. Checked the loans on her house in the South Bay area and she is doing well.

Also, she probably won't get a mod as the bank will drag out the process. However, she hasn't paid in over 6 months, so besides contributing to a flood, I don't see why they would wait on foreclosure. The loan amount is only about 10% above current market value and 20% above rental parity. I have seen much worse sell by banks, e.g. >40% reductions of loan amounts.

This house I would put in the middle tier of values, possibly a sign that the banks are starting to move into the upper priced homes.

husmanen said...

PS. I also read the 76% as pertaining to new homes.

patient renter said...

continued reduction in inventory

Inventory is being artificially restricted by many institutions. Even the State is in on the act.

radiophilejapan said...

BT, thanks.
GB – location. Being a desirable area and largely built up, I believe it will hold value better.
Rocklin – It was the lowest US$/SQF home that we liked the lay out and location (Whitney Ranch). Prices will likely decline further but a good deal may offset it.
No kids living with us so the house will be for our shelter and enjoyment and part of our investment portfolio. It was also discussed here (what hasn’t been?) that a home is not an investment, but I like it or not it will be an important part of our assets and I believe it will be a good portfolio diversifier, keeping up with inflation in the long run (over 10 years). I’m not trying to time the real estate market, just stating a historic fact, which I believe will repeat in the future.
We decided to focus on the I-80 corridor – GB, Roseville, Rocklin and to a less extent Lincoln. During our house hunting trip last week, we made an exception and visited Pulte in Serrano. We loved the model homes, but they were too expensive for our budget, albeit I’m sure far below the list price 3 years ago. We may check on REOs and short sales in the area from time to time.

Giacomo said...

radiophile said: "Prices will likely decline further but a good deal may offset it."

Err, that sounds a bit wonky to me. The price you pay today IS today's market price. Your "deal" may be setting a new, lower value (for a given house and its neighborhood) but if you're dealing with an open market, you're not getting a 2013 price in 2009.

Kudos to AB for having the courage to re-access. Maybe at some point, she'll estimate for us how much house ownership is costing her family so far...? Would be interesting to know the price tag on those intangibles.

Buying Time said...

Radiophile - Thanks for the response. I have only been to the Whitney Ranch club house once, but it was very swanky. Developments with communal facilities are great. We made the same assessement on the Pulte Serrano homes as well.

Giacomo -
Why would ownership cost my family more? If we had to sell right away, it might....but that holds true even in normal times.

radiophilejapan said...

I believe that the residential real estate is not an efficient market as it is said to be of the stock market. Therefore there should be opportunities of buying lower than the average market price, especially when individual situations of the sellers vary substantially. With so many distressed properties out there, the banks have thrown one additional market price disturbance factor as their motivation to sell follow different criteria from the owners. Our real estate agent was telling us that the unpredictability of the banks have changed the market substantially – sometimes they accept unbelievably lowball offers and sometimes refuse perfectly reasonable offers only to sell even lower later (as in the BT’s short sale story). I suppose this criteria has to do with upper management’s guidance regarding write downs of these assets prior to closing of their financial books.
The question is why should I be one of the smart or lucky recipients of a great deal. Well, there are no guarantees, of course, but I do my research (this blog being a great source of unbiased view of the market), I am patient, and I am financially prepared. This should tip the scale a bit in our favor. Luck will certainly help too.

Giacomo said...

radiophile said: "Our real estate agent was telling us..."

LOL, say no more!

husmanen said...

BT, Giacomo may have been referring to 'rental parity' regarding it costing more. I believe you mentioned before that you PITI was pretty close, especially after tax deductions.

However, I could be wrong in both cases (Giacomo reference and PITI).

Buying Time said...

Yes, my after deductions PITI was lower than rent in order to set aside some $$ for maintanence/backyard. And so far we are saving a bundle on heating/cooling costs compared to our 2 story rental.

Giacomo said...

"Giacomo may have been referring to 'rental parity' regarding it costing more."

Not really. In my mind, that calculation is only useful in a STABLE market, which this is not.

If I wasn't clear, I think that the drop in the value of BT's (AB's) house can be considered a "cost" of the decision to buy early (during a price crash). She conceded up front that she expected prices to fall further, but calculated that the intangibles of ownership would still make it worthwhile for her family. So it seems disingenuous to ignore that variable now, AFTER the purchase.

So, what's the number?

Hey, how about just posting a screenshot of the 1-year Zestimate chart on the property? (no address, obviously) We'll all promise not to take it too seriously. ;)

husmanen said...

Giacomo. Hmmm, I misinterpreted your 'cost', rental parity is my big metric and seems to work well so far.

Those that have been flowing this and other local blogs have a good idea of the area and price of BT's (AB's) home. BT has been very forthright in sharing very personal information. Just like the the intro of this blog, BT reassesses the situation after new data/info.

From my knowledge of the area and past blog entries I have a pretty good idea of the purchase price and the rental parity in the area. From my analysis BT (AB) got a future price last year. What future I don't know. It appears that that future price is still valid as others in the area have not dipped below that price. So, not speaking for BT (AB), I can say they are still 'cost' free according to "Giacomo's" definition of cost.

Having said that, this blog entry was steering towards that 'cost' question. With new data it appears that last years estimates, given certain assumptions, may have been off, even if conservative. However, it appears in this case no 'cost' has been assumed.

Lastly, there are plenty of examples from Zillow to pull out, so called Knife Catchers, that have definitely overpaid even when they bought the home. Sad but true. I have an example where I work right now, looking at comps and no other metrics. That's is one of the elements that got us in this mess in the first place.

Giacomo said...

I think it's a bit dangerous to be focusing on a statistical "metric," especially if what you're really looking for is some justification that let you pull the trigger on something you really just WANT.

Remember when most everyone accepted the notion that MLS inventory levels were an important measure of balance in the market? Who still thinks that?

Take a step back and look at the big picture. The situation is TERRIBLE. We're looking at sustained high levels of unemployment, high debt loads, higher taxes, largely unabated foreclosures -- almost everything points to further erosion in house values, across the board. People should be building financial cushions, not scraping together down payments to roll the dice in a wobbly RE market. Everyone needs shelter -- but BUYING a house is an elective.

Deflationary Jane said...

Even I have to admit there were some good deal last year as long as you weren't in an area that had the speculatards attention.

But those prices are also very helpful now. Because of the FTHB expiring, price jumped a little from last year... about $8 go figure >; )

But my girlfriend used last years prices and documented the momentum for homes in her neighborhood, in her exact lot position, size, etc and got the bank to agree to a nice reduction on the list, 3% for closing, 2% for points buy down, and several grand for repairs.

Now, I did break out SAS and eighty bagillion data sets but at least I was able to something good with all these years of reading >; )

husmanen said...

Agreed one metric is dangerous, I use a few. What metrics do you use Giacamo? I can always add a few.

I like the rental parity because no speculation is involved, you can pay the rent on future unearned income streams. However, you can pay higher than historic rents if you are employed in a bubble sector and it has not ‘deflated’. Piggington’s blog has done some extensive work on rents and bubbles and found that there has been an influence but it has been minor and currently there is no ‘rental bubble’, this is however in San Diego, probably more prone to a rental bubble than the Sacto area. Having tracked the rents in EDH and Folsom for a while I don’t think there is a rental bubble, but there is pressure based on macro issues that you mention. There are attempts to increase rental rates but they soon fall back as there are no takers. I have examples of 20% reductions in initial rental ‘wishing prices’, the market works when not messed with.

DJ. I like the momentum concept. I use Enterprise Guide nowadays, so much easier that ‘normal’ SAS. But that is a different subject. Usually I have to push the data to Excel in the end anyway to make some good graphs. But I will keep the momentum idea in mind.

husmanen said...

That is supposed to say...

"... you CANNOT pay rent based on future unearned income streams"

radiophilejapan said...

Just an update: the owner at the GB property not only ignored my offer (10% below asking price) but raised the listing by 5%...go figure.

Deflationary Jane said...

There are some people who paid over 45K on a property just to get the 8k credit. I had one in my office. The 8k was used to pay down a credit card and she plans to squat in the property if things get worse. Why she didn't just walk away from the CC instead? I have no idea.

The point is that there were people over paying and now some people are thinking it's the morn again. And if someone pays it? One more idiot buyer out of the housing gene pool is how I see it.

husmanen said...

DJ. We could start a Darwin award for home purchases and see what happens. But you never know, there are a lot of selfish genes out there.

Buying Time said...

DJ - Nice to hear from you. Glad to see you haven't forsaken us.

Giacomo -

While I acknowldedged we were likely to see further price drops, I also noted that "cost" as you call it, was not likely to be an issue since we planned to say put for a long time.

Just because my 401k was off 50% or so in March does not mean I lost money. It is the price I sell at that matters.

I suppose one way to interpret cost, would be to see what we could have purchased for the same amout of $$ a year later? But this assumes we want/need something nicer/bigger. In the time since we purchased, I have seen very few homes on the MLS that meet so many of our criteria. This was the heart of the issue....not much out there meeting all our wish list.

husmanen said...

At the a thrift store today at lunch I overheard a real estate agent discussing a deal where the $8k credit was a deal breaker. A couple of things:

1) During the height of the bubble years I never once heard real estate agents discussing deals at the thrift store. Interesting change, a sign of tough times or a return to 'normal'?

2) $8k is great from a buyer's perspective, especially ignoring the macro affects. But if $8k is going to break your deal in CA you should be re-evaluating your situation, especially with an FHA loan (close to negative equity).

Signs of the times.

PS I have gone to thrift stores since a child, love the treasure hunt.

Giacomo said...

Semantics (and strict accounting definitions) aside, I don't meet a lot of people who bought in 2005-2006 who do not see their decision as having a "cost," whether or not they've had to sell. Everyone understands it's better to pay less than to pay more --to get the same thing.

Bryan said...

I see the basic point, but if it were generally true, everyone would wait 3 years to buy outdated and very cheap computers. Why don't most people wait? In the case of computers it's because there's a very high value attached to having the faster stuff now (I'm not talking THE uber-fastest premium stuff) than an older machine. Yes, it's "the same thing" in three years as it is now, but not having it now represents a liability.

I think the same can go for houses. When the expected (what I'll call) Giaco-loss on the house appears to be less than the pain of not having the particular house, buying doesn't seem unreasonable. That irrationality may play a part I'll grant, but making all decision based 100% on a currency-only cost-benefit analysis without considering the personal utility of any other factor, may itself represent a particularly amusing mode of irrationality.

If you're unlikely to end up having to sell during any negative equity period (which hopefuly you're totally avoiding by an appropriate down payment), and you can happily make the payment, and having the house this year as opposed to in a couple of years from now has value to you...then it's not going to be felt as a loss. Even if Father Giacomo disapproves. ;)

So let me suggest a revision to the Law of Giacomo: "it's better to pay less than to pay more--to get the same thing...at the same time. A forward time differential may itself be a 'cost' to properly consider in addition to other factors in making any purchase decision." It's not catchy, but I think it's more accurate.

As for me, I'm waiting.

Giacomo said...
This comment has been removed by the author.
PeonInChief said...

Rents don't have "bubbles," as there is no speculative interest for tenants in rental property. Rents are most closely determined by the income of the community (not, interestingly, by vacancy rate), so as incomes fall, rents will fall too.

But because rents are "sticky" on the down, they won't fall as fast or as far as incomes. People don't move to save $5 a month in rent. In fact, rents have to fall 10% before it makes sense for people to move for either better space at the same price or equivalent space for cheaper rent.

RV6Flyer said...

"DJ. I like the momentum concept. I use Enterprise Guide nowadays, so much easier that ‘normal’ SAS. But that is a different subject. Usually I have to push the data to Excel in the end anyway to make some good graphs. But I will keep the momentum idea in mind."

DJ and BT, how do you calculate momentum? Are you compiling price or rent data into SAS or excel to come up with a function with which you can multiply inventory with the first derivative? I have never put much thought into price momentum or stochastics on rents, but I like the idea as a good indicator of overall economic health for a region or neighborhood.

verification "prici"

Deflationary Jane said...

That is exactly what I am doing using SAS.

Someday I'll be able to publish measures and be famous but for now I think of it as the Heisenberg's Uncertainty Principle of Real Estate. We can know the price or the direction but never both >; )

husmanen said...

Did you see 2432 Telegraph-Hill Rd, EDH has dropped the price even further.

Now it is at $374,900.

Should we throw out some guesses on what it will eventually sell for? My guess, $315k.


radiophilejapan said...

I am surprised that BT has not posted for a long time, given the recent flood of news and articles on the real estate market. It is true though that fundamentally the situation hasn't changed much especially at the higher end of the market. Unemployment still rampant, a wave of new foreclosures looming on the horizon, extension and expansion of the tax credit, etc.
On my personal side, none of my offers did go through and I'm back to the drawing board. Did lots of vicarious house visits in GB and Auburn through the real estate agent's eyes and camera, and google earth, but it hasn't yielded anything compelling. Starting to consider EDH. Time is running, will be permanently deployed to the area on Dec 22nd. I miss BT's posts.

husmanen said...

I miss them too.

Giacomo said...

It's true that there's been a lot of news lately, but I think that informed observers will be interpreting it as mostly BAD -- bad for the economy, bad for a RE "recovery."

RE: BT not posting:
--if I had bought a house in the last year I wouldn't be in the mood to talk about RE either.

Buying Time said...

Thanks for the inquiries...I know some of you were becoming concerned....it means a lot to me that you checked in.
Time is flying by, and I didn't realize how long it had been since posting. Day job is busy, daycare is closing abruptly (not enough enrollement), we are hosting a big Turkey day at our house, and Mr.BT is having a B-day....hopefully I will find some time next week.

Giacomo - I can't tell if you are jealous or really spiteful. I tend toward the latter since you suggested letting your employee go without AC in a Sacramento summer.

I am happy for all those who have the fortitude to wait out the market...your patience will certainly be rewarded.....but for us a house is a home not just an asset on the family balance sheet. Please respect that.

Bryan said...

To amuse myself, I've written down a few trollish things on my notepad here by my computer which I predict Giacomo will say in response. It was pretty easy. You take half-a-cup of self-congratulating sanctimony, a good deal of finger-wagging and economic moralizing, a pinch of defensiveness, and you make sure not to include any self-reflection whatsoever (it's critical that you not know how you sound to other people). Now that I think about it, that comes close to describing me as well. Maybe that's why I found it so easy to channel Giacomo.

I was tempted to post my predictions, but then that would only ensure Giacomo would not cooperate, and my pride would go ungratified. But I watch with anticipation.

Giacomo said...

So glad to know BT and her family are well and happy in their new home.

Never did fix the AC in the truck.

Wow it rained hard today!

Hope Bryan will stay away from poker games.

husmanen said...

Giacamo's point of not wanting to talk about a home purchase in the last year is very true of the entire market, although may not be the case for Average Buyer.

Unless someone feels like they got a future price, i.e. 2010 or 2011, then they don't talk about it because prices are still under great pressure to fall to fundamentals. For example, El Dorado County's median fell 25% from a year ago:


I personally avoid speaking about RE at social occasions because it can be explosive, literally I have had people get physically upset at me - these are the same people that thought they were the "King of the Bar" and a "genius" just a few years ago.

Word Verification: exesses

radiophilejapan said...

Still lots of conflicting data on the market recovery (or not). We decided that, short of an outstanding buying opportunity (either THE dream home, or a very good deal US$/sqF) we will be renting the first 6 months to a year. Good rental offers in EDH it seems: newer and large homes with monthly rent around 0.80U$/sqF.
Happy Thanksgiving to all, especially to the host of this blog. BT, enjoy your Holidays at your new home. This is priceless.

patient renter said...

Still lots of conflicting data on the market recovery

There's not a lot of conflict when you consider what is directly influencing the "recovery", where the inventory is (not out in public), and what lies ahead (higher rates, pending resets).

radiophilejapan said...

I suppose you're referring to:
1. purchase pull in to take advantage of the 8K credit inflating the recent sales figures.
2. Lowering inventory figures don't include the shadow inventory of REOs at banks,and NODs that the banks and the government are avoiding to foreclose.
3. End of government purchase of mortgages in Q2 next year will drive mortgages rates up.
I agree that all this is still indicating further decline of prices especially at the high end, but if the #2 above drags on forever, it will slow down the price decline until the time unemployment finally eases and prices do indeed stabilize. As far as I am concerned, I won't try to time the market any further. Losing 10% on a purchase now or paying 10% more for the same house a year from now is OK with me. The problem is the lack of non-short sales choices. So I will be patient too and wait until the right home shows up in the market.

husmanen said...

Non short-sale and non-bank would be considered 'organic' or 'normal', we have a long way to go before we have those buyers back, maybe 2012.

radiophilejapan said...

Not sure if I want to wait that long, but while renting I'll keep putting offers 10% below asking price on short sales and REOs that I find interesting.

Giacomo said...

Housing is not in recovery any more than the economy is.

Government and NAR inventory numbers are mainly tools of persuasion now, rather than data worth analyzing.

Likewise, the buyers' tax credits and the mortgage modification programs are just part of the smoke and mirrors; in reality (as PR says), there are still huge numbers of unsustainable loans out there -- even as government-backed loans are STILL being made to unqualified buyers during this phony "bounce."

Add to this the effect of a weakened future buyer (faced with higher interest rates and higher taxes), and employers who are afraid to hire (while the rules of the game are in flux), and you see that nothing is in place that would push house prices higher.

10% off today's asking price is pitifully little protection against the downside risk.

husmanen said...

Giacomo. I agree there is a lot of downsize risk. Have you seen Dr. Housing Bubble's latest, scary.

patient renter said...

if the #2 above drags on forever, it will slow down the price decline until the time unemployment finally eases and prices do indeed stabilize

Full employment doesn't effect prices so much as inventory and affordability do (employment was fine when prices first started crashing to hell).