"point to home prices moving back in line with past historical 'equilibrium' levels in 12 to 18 months..."
Huh... I'm predicting that we're about to (or just have) enter the 18 months of the greatest price declines. Yea... some areas will bottom earlier.
I put the earliest bottom in 2011 but most likely later. We're going to undershoot and have Thornberg's 2 to 3 year flat price ("The bog" as some bloggers have called it due to the stickyness.)
No overshoot possible eh? Yea... I'm not exactly optimistic on California incomes for a bit. Maybe its because we have no budget and everytime I turn around the budget deficit for FY2009 grows! About 6 weeks ago it was $17Billion. Is there a new number yet?
Prices are lubricated this time around and will overshoot the bottom due to psychological reasons versus economical (rent ratios). Then prices will stagnate/be stuck for several years due to continuing inventory overhang issues from the catastrophic levels of overbuilding during the bubble.
"There's a purging going on," [Jack McCabe, McCabe Research & Consulting LLC] said. "It's my belief that the vulture buyers would form the bottom of the real estate market, and we're almost there. That bottom may last for three years as foreclosure sales go on."
According to the Bloomberg article, all of this bottom calling happened because some Philly PE firm bought 120 condos.
Of course, PE firms never make mistakes? Right? Smartest guys in the room? RIGHT?!
101,
For fun, I recommend watching mortgage brokers and real estate agents houses and toys get foreclosed and repossessed. But, be warned, it is only fun if you have cash and can buy the toys for pennies on the dollar.
I keep hearing anecdotal reports from various areas about rents falling in some areas. If that becomes a national phenomenon, the bottom could wind up a good bit lower than these sorts of analyses predict.
Wachovia Preferred Funding Corp. Declares Dividend on Series A Preferred Securities
Last update: 9/4/2008 12:00:00 PM
CHARLOTTE, N.C., Sept 04, 2008 /PRNewswire-FirstCall via COMTEX/ -- Wachovia Preferred Funding Corp. (WNA.PR) announced today that its board of directors has declared a regular quarterly dividend on its Series A 7.25% preferred securities. The dividend is equal to $0.453125 per Series A security.
Of course it's only on the preferred shares. Right hand pays left hand
The bottom is so far below the horizon that it's not worth trying to see. There are development projects still under construction - these need to stop before any speculation on a bottom.
I know someone whose company has a couple billion to invest--not all in Florida certainly.
I don't think we are near bottom yet.
There are an incredible number of condo towers being built in Downtown Miami, Miami Beach, etc. There is no way they can sell those towers.
CR's estimate has Miami down a total of 35%. I think it's gonna be more like 50%, and the condo towers to be down 80-90%, no kidding.
I might have posted this acnedote before, but there is ahouse in Hollywood (Ft Lauderdale) purchased at peak for $280,000. Short sale preapproved for $110,000; nobody is interested. It's nice inside & has appliances. Seems you could at least break even on rent. Maybe the bank would take 100k.
This doesn't end until prime neighborhoods are priced correctly.
The bubble has clearly popped in subprime land, and will shortly pop in alt-a land. But I know of many, many people living in prime neighborhoods confidently making their interest-only payments on overpriced homes.
It is unclear what sequence of events fill force prime homeowners to begin folding their hands: recession and job loss, large rise in interest rates, fear of impending loss, etc.
But I don't think this ends until the choicest properties are on sale.
Countrywide immediately sent them documents making the new monthly payment less than $1600 per month by giving them 2% interest only for the next 5-years. At the end of 5-years it returns to its original terms, which will be a fully-amortizing loan that must pay off within the remaining 23-years. At this point undoubtedly the borrower will default. This 5-year deal is far worse than an original 100% 2/28 or Pay Option ARM ever was (9/3/2008, full article at Mr. Mortgage).
Actually I think price/rent is useful. The only other option is sleeping on a heating grate. It sort of removes general economic issues from the analysis.
However the ratio only means something if the rate of change in either value is not rocketing either way. Both numbers are moving fast. I can see rents plunging once vultures start slashing rents, in a race to the bottom...
if the room is a recently foreclosed apartment/condo, possibly. if the PE guys have a Chrysler parked outside, probably not. the smartest guy is the renter kicked out yesterday.
Curious to hear what LLiz and Cobradriver have to say.
homedad43 | Homepage | 09.04.08 -
We are closing on a couple of properties next week. Already rented a few that were just purchased last month. My old man put in some extreme lowballs 12-14 months ago and a couple of banks have finally capitulated. I realy didn't want to get in SFR's again but the returns are too good to pass up(25-35%). The extreme low end has bottomed/is really close. Short of the banks actually paying to make the stuff go away,it can't get much cheaper. The only way this makes sense is we do all the work to prep properties for rentals. You would go broke paying someone. We also have a pretty long list of waiting renters at certain price points...
There is money to be made for the frugal in this market. BTW,I figure our area is a GOOD year to 18 months ahead of the rest of the country.
As with anything many valuations should be applied and context given. many commentators say stocks are fairly valued at these levels. the problem is we aren't coming from undervaluation but from massive overvaluation. we're falling from lofty heights and need to go to undervalued. same with houses.
how many indicators are there for valuing houses? replacement cost. price to rent. % of your income or a certain multiple of your income. we should be looking at a range of indicators.
BORROWER: WELLS FARGO CAPITAL XV
AMT $1.75 BLN COUPON 9.75 PCT MATURITY PERPETUAL
TYPE FXD-FLT PPS ISS PRICE 100 FIRST PAY 3/26/2009
MOODY'S Aa2 YIELD 9.75 PCT SETTLEMENT 9/10/2008
S&P AA-MINUS SPREAD 680 BPS/ PAY FREQ SEMI-ANNUAL
FITCH N/A MORE THAN TREAS NON-CALLABLE 5-YEARS
* $1000 PAR FXD TO FLT RATE NORMAL PFD PURCHASE SECURITIES.
YEARS 0-5: JR SUB NTS AND FORWARD PURCHASE CONTRACT (FIXED VS
5-YEAR). THEN: PERP FRN DRD PFD, FLOATING QTLY VERSUS 3MO-LIBOR
PLUS 583 BPS. New Issue-Wells Fargo Capital sells $1.75 bln
| Reuters
And people are bitching about their mortgage rates. LOL
price/rent and price/income certainly provide good long term metrics, but in the short term (1-3 years) I think there are lots of variables that move things above or below the "right" ratio.
We'll go below the "right" ratios because 1) oversupply of housing as compared to those who wish to buy 2) tight credit preventing the purchases that would be needed to support prices (for investors or owner/occupiers) 3) falling prices dissuading purchases even if they price might pencil out v. renting.
Basically, the inverse of all the things that led to the boom will cause the bust to overshoot.
I had sold all my investment real estate by Apr '06 precisely because I saw a decline in the denominator. The vaunted Price/Rent ratio is going to be crushed by several factors. There are millions of surplus/second properties out there with a pre-bubble cost basis not to mention decades plus purchased purposeful rental units. A supply surplus and low break even will flush out any higher priced rents translating into vastly lower mean/median rents. Ultimately P/R valuation is chasing a falling knife this time.
My parents own a 4-plex in the Southern Wash area and are having quite a time keeping rents where they are at. They currently have two units that will be vacated and turned over. The bigger issue is finding people w/o defaults....
big issue for alot of rental property owners...the big "recycle" of tenants going on now.
Finding people without defaults. I'm a renter and passed a credit check. But if landlords hold the credit check standard to usual levels, foreclosees and families are going to up S Creek.
Poor credit will have to be tolerated if you want to rent to the current crop of potential tenants now. I suggest not renting to anyone with intentional defaults though.
"LOL! Are you laundering money for drugs?"
Anonymous | 09.04.08 - 1:36 pm |
Nope. You just have to be comfortable with the deposit/rent/current employment of the tennant to make it worthwhile to rent. Frankly the cost basis we work from is so tiny it doesn't take much. Such is the joy of owning for 15+ years and not pissing profits away...
I don't see rents falling. In fact, I see rents surprising to the upside.
All those second homes in vacation areas are useless to people who need to rent near where they work. I don't think McMansions are attractive rentals either for a variety of reasons - utils, maintenance, cleaning, commuting costs, etc.
ren,
credit scores and profiles are deteriorating rapidly..automated underwriting will keep score as a factor but reduce it's % weight of overall decision and increase % weight of other factors like PTI, DTI, repos current, job security etc.
Definitely job growth in learning how to read credit stories correctly and making sound credit decisions for your client (property mgmnt)or customers.
I don't see rents falling. In fact, I see rents surprising to the upside. <
Please elaborate......the "mcmansion" argument aside how are rents going to surprise to the upside with the pool of potential tenants looking like the pool of deteriorating homes from whence they came from??
Add in crappy credit and you have a surprise...but not to the upside IMO.
Wait until the banks who own said properties start renting them......they have skated long enough on filing NOD's..they will have to at some point then the realization of income (ANY income) will begin to drive supply above and beyond what it is now......in the rental market.
Could you elaborate, Cobra?
Doggy Dog World | 09.04.08 - 1:41
We completely gave up running credit checks. Like I said the parents cost basis is so low and the rents are so cheap nobody can compete. We also seem to have an unusual amount of people recommending friends. Our pet surcharge is pretty minor also. That seems to help.
I will say 12-18 months ago you couldn't find renters at any price. I honestly think the worst is behind us employment wise in this area of Fl. Not a single tennant moved due to job loss in the last 6-7 months. 2 years ago this was horrid.
Now,empty SFR's. That's a whole nuther ball game...
That's a pretty good article about Hollywood, Florida. I don't know how many poor people there are in Florida these days. But I know it's more than were there this time last year. And lots more are starting to think and feel poor.
The following is a comment about economics and politics and where they merge. When I watch the Republicans on TV, I see zero interest in attracting poor people, blacks or Hispanics. I mean, they are just kissing all those people goodbye, in public.
So, how many of them are there in, say, Florida? Of 19 million people in FL, about 18% are Hispanic and 18% are non-white. So, between those groups and the white trash poor, you're looking at maybe 40-45%.
How can you kiss off 40-45% of the people in the most swing state there is and expect to win?
I have written at Market Trends: Alabama Real Estate That it is virtually impossible for prices to level or recover before about March of 2009, strictly due to seasonal factors. In the last ten years for the markets I watch, sales contract from now through March. That would be regardless of government action or otherwise. It won't be different this year the only question will be what happens March and later. I believe that we will begin to see the less affected markets level out around then, but the more severe areas will extend out for some time beyond.
That Hollywood article is pretty rough. Interesting how it is written by a foreign reporter. I loved this paragraph.
It is not the kind of story that a generally patriotic American press likes to investigate. But in that one skip, in a small corner of a picture-perfect American city, all the evidence shows repayment claims from banks, car companies, credit-card providers, all turning into so much worthless paper.
"Like I said the parents cost basis is so low and the rents are so cheap nobody can compete."
I thought a low cost basis gave you the luxury of selecting good renters versus sticking anyone who will pay in there. Cash flow is good until they trash the place and beat you senseless with a stick or send their pitbull after you when you come to collect rent.
Price to rent ratio unfortunately disregards the variations in interest rates; at the peak in 1988 to 1990, 30 year rates were above 10%, making the cost peak much higher than it appears. The fact that home prices dropped as far as they did while interest rates were also dropping rapidly makes me believe that the correction this time will be even more severe as rates and loan availability get worse.
Oh, yeah, it will overshoot...
WASHINGTON (Dow Jones)-Federal regulators are caught in the middle of a multi-billion dollar dispute between the banks and their accountants over auditors' treatment of battered mortgage and debt investments. Ê U.S. accounting rules require such investments to be recorded at their "fair value" when prices decline so much that firms might not recoup what they paid for them. Ê The determination is quite subjective. Banks say they are being forced to record losses on mortgage-related securities that continue to pay timely principal and interest but have plunged in price amid mounting mortgage defaults.
Even when house prices stop falling, for some time thereafter many homes will be sold at a loss. In other words, money will continue to be lost probably years beyond the time that a bottom is reached.
Price-to-rent ratios are useful, but somewhat flawed. They give a general idea about house prices, but there are other important factors (like inventory levels, price to income and credit issues). We are getting closer on prices, but I think we still have a ways to go.
I have to disagree with this assertion. Price-to-rent ratios are not perfect, but are the closest thing to a "PE ratio" for housing, as it compares the cost of ownership to the actual ROI for that asset.
Another advantage of PtR ratios is they can easily account for regional differences in overall housing costs and incomes. Housing in CA --buy or rent-- is more expensive than most anywhere else. PtR ratios don't care about incomes, just the purchase price compared to the only viable alternative --renting.
Thanks for the info. With or without tent cities though, imho, the next few years are going to make a Grapes of Wrath style impression on the public. Foreclosure. Everybody's doing it. Even the renters with the wrong landlord get involuntarily relocated as landlord gets foreclosed.
Same way the GOP did in 2000 & again in 2004, you don't let them vote.
Plus, remember the "Solid South"? Disenfranchise one class (by race) & persuade the lower income people to vote Dem by appealing to various fears.
After reading what seem to me to be phenomenally stupid letters to the editor in various local papers in OR regarding our economic problems, how to solve them, & the several candidates, it seems that nothing is too stupid for some people to believe.
How many $600k houses today are you aware of that can rent for $5000 per month? To attract a reasonable rental market that rental price would need to fall about 60% to $2000 per month, making the home "worth" $240,000 if it were a rental. Keep in mind that $2000 is a lot to throw around as rent when you can live in an abandoned REO for free.
probably too late to comment here...but I have been looking at rentals in Miami - I saw a really nice townhouse for rent or for sale by a forelorn "realtor/owner" and he was willing to rent it for a year and then he suggested 9 months. The rent was reasonable, price to purchase, way too high. So I figure anyone renting that place will be evicted when he is foreclosed on. The only safe rental would be a rental complex.
ren-so true..
foreclosures are a necessary unpleasentness of life, best to avoid but if a person needs to walk to help his family I'm not opposed to it..They will use are tax dollars to bail out banks..not joe 6 pac so good for him if he saves 1400 on his mos. payment by walking...
Please elaborate......the "mcmansion" argument aside how are rents going to surprise to the upside with the pool of potential tenants looking like the pool of deteriorating homes from whence they came from??
Do you charge more or less for a risky tenant? Also, in my experience banks don't rent.
Two years ago I suggested rents would rise. I was severely heckled. However, thru 6/08 the yoy rate of change for the housing component of CPI was + 3.9%. The 3 month rate of change was + 6.5%. Rents are accelerating.
If a house rents for 5000/month or
60K annually, What is its price at
price to rent ratio of 1?
The price at which the montly cost of ownership - which generally translates as PITI - equals the cost of monthly rent.
There are a number variables that can impact the specific monthly PITI for any given house and for any given owner, such as current interest rates, local prop. tax rate, the local cost of insurance, the cost of maintenance/upkeep, and the impact of MID. However, using today's average 30-yr FRM as a yardstick (6.19%), and assuming a prop. tax rate of 2%, it would probably be close to $550,000.
Yup, the old 120x montly rents ratio is a nice rule-of-thumb too. It's crude, but quick and doesn't require any complicated math --and is usually close to the mark.
What are the equivalent rent figures over the same time series?
I get tempted to mention local/anecdotal info in comments, but then think better of it because it's not particularly useful to other readers whose interest is in some other major market or is national.
Is it possible to see the Case-Shiller 10-cities rental prices graphed over the same period, broken out by city? I'm willing to believe San Francisco isn't experiencing this in the same way as Miami, or that Atlanta rents behave in unique ways. Would love to get a look at historic data.
Two years ago I suggested rents would rise. I was severely heckled. However, thru 6/08 the yoy rate of change for the housing component of CPI was + 3.9%. The 3 month rate of change was + 6.5%. Rents are accelerating.
Aside from the largely fictitious CPI, do you have any stats to back that up? I'm not seeing any major rent hikes here in a traditionally very high rent region (Bay Area, NCAL). I believe CR has also made a number of recent posts indicating rents are not rising in most regions of the U.S.
Rents will drop back as home values head lower, pretty obvious and then the flippers that rentals will be screwed on cashburn, once again, as they chase bad deals!
Can someone explain how you can have lower rents in a high foreclosure area? It seems counter intuitive. If there are more people dumping houses and renting, wouldn't the demand for rentals go up, as the supply of renters goes up? Why wouldn't that cause a spike in rents?
I wouldn't rent to a risky tenant. Costs associated to remove/turnover far outweigh any rent they could ever pay.
Your "stats" are pegged to CPI.......not worth the paper they are printed on. Take a look around instead. Having your argument pegged to those is like saying there is no inflation or investing in TIPS....try again.
As far as banks not renting......wait. It will happen.
Bubble-fueled construction has increased the number of housing units that could be rented out. As people move into the surplus housing, it may depress rents. That means P/R ratio falling toward parity will be more visible in the form of falling purchase prices instead of being offset by rising rents. Given how fast the number of houses and condos has increased, it's hard to see rents rising soon.
Did any of you read the linked Bloomberg article titled "Florida Real Estate Bottom Signaled by Sale of Distressed Condo"???
If this indicates a bottom, then folks aren't awake yet. This sounds to me like another creative vendor-financing kind of deal:
Perez's partnership bought the condos from his own development company and a partner, Atlanta-based Cousins Properties Inc., which built the 54-story tower.
Did this sound fishy to anybody else here? I mean, it sounds like the guy raised cash from new investors to bail out his souring investment...no?
"Angry Saver writes:
I don't see rents falling. In fact, I see rents surprising to the upside.
All those second homes in vacation areas are useless to people who need to rent near where they work. I don't think McMansions are attractive rentals either for a variety of reasons - utils, maintenance, cleaning, commuting costs, etc."
Exactly - rents are indeed rising in some areas and falling in others. Generally they are rising in core areas of cities - mostly because gas prices have pushed the more price sensitive renters out of their exurban apts and into ones closer to their jobs. On city fringes the reverse is happening, rising vacancy rates and falling rents.
"The price-to-rent ratio would suggest that parts of Florida are indeed "almost there". "
This analysis ignore that rents are likely to begin to drop as the historically unprecedented vacant inventory continues to be converted to rentals. The "shadow inventory" will become real rental inventory as denial is purged from the psyche.
Speed writes:
Can someone explain how you can have lower rents in a high foreclosure area? It seems counter intuitive. If there are more people dumping houses and renting, wouldn't the demand for rentals go up, as the supply of renters goes up? Why wouldn't that cause a spike in rents?
You're making a few questionable assumptions here:
Every single foreclosed former "owner" becomes a net-new renter.
Reality: Many FBs were speculators that owned multiple houses. When their failed flips go back to the bank, some of them stay in their existing house --the one they originally bought for shelter. Others go back to living with their parents. Others will double or triple-up with other renters --especially if they become unemployed-- which actually decreases demand for individual rental units (b/c fewer units are being rented due to more tenants per unit).
Every single foreclosed house was purhcased as shelter and occupied by the former "owner".
See #1. Tons of houses (esp. condos) were empty flips from day one.
None of the foreclosed houses will be converted to rentals, thereby adding to housing stock.
Google "repartments". Also, many FBs, not wanting to mail the keys to the bank out of pride, shame or loss aversion, will turn their failed flip SFRs into private rental stock.
...rents are indeed rising in some areas and falling in others. Generally they are rising in core areas of cities - mostly because gas prices have pushed the more price sensitive renters out of their exurban apts and into ones closer to their jobs. On city fringes the reverse is happening, rising vacancy rates and falling rents.
There is definitely some merit to the idea that rents near major employment/urban centers will hold up better than outer suburbs/exurbs. Higher gas prices/Peak Oil is yet another variable that may work in favor of urban LLs. However, the data suggests that rents even in "desirable" urban centers are barely treading water --even ignoring inflation-- and rents in suburban exurban areas are dropping like a stone.
HARM,
First how about a hat tip for all the crap I took at patrick's for falling rents two freakin' years ago? Then moving on we need to examine the assertion that the jobs being preserved are core employment. I don't think so.
Oh, and regardless of price:rent, price:income & cap rates, let's not forget about the option-ARM reset (or is it "recast"?) tsunami that's about to hit shore from 2009-2012:
This next recast wave will impact the credit markets with at least as much force as the Alt-A resets that are currently killing lenders & FBs alike.
I disagree with sanguine forecasts about hitting a bottom in the next 18 months or so. No way we can hit bottom until the bulk of option-ARMs recasts are behind us. Still far too many FBs living in negatively amortizing time bombs that have yet to go off.
The media proclaims once we get back to 6 months or less inventory everything will get better.
Something tells they're ignoring a minor factor called jobs.
It doesn't matter how few homes there remaining for sale. If people are concerned they'll lose their jobs they're not exactly going to jump up and buy because the NAR called the bottom again.
"HARM writes...
Oh, and regardless of price:rent, price:income & cap rates, let's not forget about the option-ARM reset (or is it "recast"?) tsunami that's about to hit shore from 2009-2012:"
The only problem with that is that its so area specific. In the area I am looking, I recently found out that only 0.7% of all homeowners have option ARM junk products. Compare that to the exurbs wher its like 7-8% and in areas like CA where its as high as 12%. Sure the CA tsunami will cause banks to tighten up big time, but with so few desperate sellers out there, its not gonna be that big a deal.
CR: Thanks so much again for providing such uniquely helpful and quantitative information on this most critical issue of housing prices -- and some objective sense of how far we are yet from equilibrium.
But if landlords hold the credit check standard to usual levels, foreclosees and families are going to up S Creek.
Landlords will have to rent to foreclosees, because there wont't be anyone else to rent to. Who else is going to go into the foreclosed properties bought by investors, or rentals vacated by owner-occupiers buying foreclosures?
In my area, Boise ID, there are many houses being put on the rental market as the owners give up trying to sell them. The rental inventory is booming and it looks like they are having problems maintaining rental prices.
When will the GOP let "Caribou Barbie" talk to the press without a teleprompter? If ever?
Look for her to occupy Cheney's same bunker (closet) in DC for four years...unless of course she becomes president, God forbid...
"point to home prices moving back in line with past historical 'equilibrium' levels in 12 to 18 months..."
Huh... I'm predicting that we're about to (or just have) enter the 18 months of the greatest price declines. Yea... some areas will bottom earlier.
I put the earliest bottom in 2011 but most likely later. We're going to undershoot and have Thornberg's 2 to 3 year flat price ("The bog" as some bloggers have called it due to the stickyness.)
Got Popcorn?
Neil
Please look later in the blog link CR posted.
Top of the Ticket | White House gatecrashers? So yesterday | Los Angeles Times
laland/2008/09/nerdvana-chart.html
Price to income has a later bottom.
No overshoot possible eh? Yea... I'm not exactly optimistic on California incomes for a bit. Maybe its because we have no budget and everytime I turn around the budget deficit for FY2009 grows! About 6 weeks ago it was $17Billion. Is there a new number yet?
Got Popcorn?
Neil
Prices are lubricated this time around and will overshoot the bottom due to psychological reasons versus economical (rent ratios). Then prices will stagnate/be stuck for several years due to continuing inventory overhang issues from the catastrophic levels of overbuilding during the bubble.
"There's a purging going on," [Jack McCabe, McCabe Research & Consulting LLC] said. "It's my belief that the vulture buyers would form the bottom of the real estate market, and we're almost there. That bottom may last for three years as foreclosure sales go on."
According to the Bloomberg article, all of this bottom calling happened because some Philly PE firm bought 120 condos.
Of course, PE firms never make mistakes? Right? Smartest guys in the room? RIGHT?!
Anyone got any ideas on fun things to do for the next three years?
I'm getting bored reading about knife catchers.
PE firms in a declining cycle are overrated. The easy money they made in the bubble will not come easily for several years. Buying now is foolish.
Of course, PE firms never make mistakes? Right? Smartest guys in the room? RIGHT?!
safe_as_apartments
ROTFLMAO
RIGHT!
Warning: I'm agreeing as I just left Lefty's.
Got Popcorn?
Neil
Wasn't there something about more Miami condos are coming online in 2009/10than were absorbed in the prior 10 years?
Pretty shocking stat.
101,
For fun, I recommend watching mortgage brokers and real estate agents houses and toys get foreclosed and repossessed. But, be warned, it is only fun if you have cash and can buy the toys for pennies on the dollar.
Miami will almost certainly overshoot. For a look at the Miami-Dade foreclosures by year: Miami and South Florida Condo Bubble and Real Estate Crash Blog
. It's quite impressive.
Good job CR, that was a Tanta sized post.
Is there a data for price/rent ratio adjusted for GDP deflator or inflation?
What's the word on the ground from FL?
Curious to hear what LLiz and Cobradriver have to say.
"Is there a data for price/rent ratio adjusted for GDP deflator or inflation?
DrChaos "
I take my request back, inflation adjusted price to rent ratio does not make sense.
I keep hearing anecdotal reports from various areas about rents falling in some areas. If that becomes a national phenomenon, the bottom could wind up a good bit lower than these sorts of analyses predict.
The magic of Fed Window application:
Wachovia Preferred Funding Corp. Declares Dividend on Series A Preferred Securities
Last update: 9/4/2008 12:00:00 PM
CHARLOTTE, N.C., Sept 04, 2008 /PRNewswire-FirstCall via COMTEX/ -- Wachovia Preferred Funding Corp. (WNA.PR) announced today that its board of directors has declared a regular quarterly dividend on its Series A 7.25% preferred securities. The dividend is equal to $0.453125 per Series A security.
Of course it's only on the preferred shares. Right hand pays left hand
Ciao
MS
The bottom is so far below the horizon that it's not worth trying to see. There are development projects still under construction - these need to stop before any speculation on a bottom.
I know someone whose company has a couple billion to invest--not all in Florida certainly.
I don't think we are near bottom yet.
There are an incredible number of condo towers being built in Downtown Miami, Miami Beach, etc. There is no way they can sell those towers.
CR's estimate has Miami down a total of 35%. I think it's gonna be more like 50%, and the condo towers to be down 80-90%, no kidding.
I might have posted this acnedote before, but there is ahouse in Hollywood (Ft Lauderdale) purchased at peak for $280,000. Short sale preapproved for $110,000; nobody is interested. It's nice inside & has appliances. Seems you could at least break even on rent. Maybe the bank would take 100k.
But, no offers.
Rising rents, eh? We shall see.
This doesn't end until prime neighborhoods are priced correctly.
The bubble has clearly popped in subprime land, and will shortly pop in alt-a land. But I know of many, many people living in prime neighborhoods confidently making their interest-only payments on overpriced homes.
It is unclear what sequence of events fill force prime homeowners to begin folding their hands: recession and job loss, large rise in interest rates, fear of impending loss, etc.
But I don't think this ends until the choicest properties are on sale.
New "creative financing" moves from Countrywide:
Countrywide immediately sent them documents making the new monthly payment less than $1600 per month by giving them 2% interest only for the next 5-years. At the end of 5-years it returns to its original terms, which will be a fully-amortizing loan that must pay off within the remaining 23-years. At this point undoubtedly the borrower will default. This 5-year deal is far worse than an original 100% 2/28 or Pay Option ARM ever was (9/3/2008, full article at Mr. Mortgage
).
Actually I think price/rent is useful. The only other option is sleeping on a heating grate. It sort of removes general economic issues from the analysis.
However the ratio only means something if the rate of change in either value is not rocketing either way. Both numbers are moving fast. I can see rents plunging once vultures start slashing rents, in a race to the bottom...
"Smartest guys in the room? RIGHT?!"
if the room is a recently foreclosed apartment/condo, possibly. if the PE guys have a Chrysler parked outside, probably not. the smartest guy is the renter kicked out yesterday.
safe as renters!
If we all put our heads together, I think we can get a 500 point drop today!
Curious to hear what LLiz and Cobradriver have to say.
homedad43 | Homepage | 09.04.08 -
We are closing on a couple of properties next week. Already rented a few that were just purchased last month. My old man put in some extreme lowballs 12-14 months ago and a couple of banks have finally capitulated. I realy didn't want to get in SFR's again but the returns are too good to pass up(25-35%). The extreme low end has bottomed/is really close. Short of the banks actually paying to make the stuff go away,it can't get much cheaper. The only way this makes sense is we do all the work to prep properties for rentals. You would go broke paying someone. We also have a pretty long list of waiting renters at certain price points...
There is money to be made for the frugal in this market. BTW,I figure our area is a GOOD year to 18 months ahead of the rest of the country.
Here is a recent price point...
12/2001 IMPROVED $125,000
2 /2005 VAC-MULTI $250,000
5 /2006 IMPROVED $350,000
7 /2008 IMPROVED $100 (FC'd)
This house sold in 1995 for about 65k(paper records). 4/3/3. On 5 acres. Current MLS list is 125k. It is worth about 50k-60k due to needed repairs...
Chris
As with anything many valuations should be applied and context given. many commentators say stocks are fairly valued at these levels. the problem is we aren't coming from undervaluation but from massive overvaluation. we're falling from lofty heights and need to go to undervalued. same with houses.
how many indicators are there for valuing houses? replacement cost. price to rent. % of your income or a certain multiple of your income. we should be looking at a range of indicators.
BORROWER: WELLS FARGO CAPITAL XV
AMT $1.75 BLN COUPON 9.75 PCT MATURITY PERPETUAL
TYPE FXD-FLT PPS ISS PRICE 100 FIRST PAY 3/26/2009
MOODY'S Aa2 YIELD 9.75 PCT SETTLEMENT 9/10/2008
S&P AA-MINUS SPREAD 680 BPS/ PAY FREQ SEMI-ANNUAL
FITCH N/A MORE THAN TREAS NON-CALLABLE 5-YEARS
* $1000 PAR FXD TO FLT RATE NORMAL PFD PURCHASE SECURITIES.
YEARS 0-5: JR SUB NTS AND FORWARD PURCHASE CONTRACT (FIXED VS
5-YEAR). THEN: PERP FRN DRD PFD, FLOATING QTLY VERSUS 3MO-LIBOR
PLUS 583 BPS.
New Issue-Wells Fargo Capital sells $1.75 bln
| Reuters
And people are bitching about their mortgage rates. LOL
price/rent and price/income certainly provide good long term metrics, but in the short term (1-3 years) I think there are lots of variables that move things above or below the "right" ratio.
We'll go below the "right" ratios because 1) oversupply of housing as compared to those who wish to buy 2) tight credit preventing the purchases that would be needed to support prices (for investors or owner/occupiers) 3) falling prices dissuading purchases even if they price might pencil out v. renting.
Basically, the inverse of all the things that led to the boom will cause the bust to overshoot.
Bartender writes:
If we all put our heads together, I think we can get a 500 point drop today!
...be still my heart.
Cobradrive,
Hope you get good renters that dont burn your cash; I'm sure getting rid of them in a recession will be easy !
Everyone is so concerned with the numerator.
I had sold all my investment real estate by Apr '06 precisely because I saw a decline in the denominator. The vaunted Price/Rent ratio is going to be crushed by several factors. There are millions of surplus/second properties out there with a pre-bubble cost basis not to mention decades plus purchased purposeful rental units. A supply surplus and low break even will flush out any higher priced rents translating into vastly lower mean/median rents. Ultimately P/R valuation is chasing a falling knife this time.
Re: .be still my heart.
I think PPT is on holiday and this one may just plunge today
My parents own a 4-plex in the Southern Wash area and are having quite a time keeping rents where they are at. They currently have two units that will be vacated and turned over. The bigger issue is finding people w/o defaults....
big issue for alot of rental property owners...the big "recycle" of tenants going on now.
Ciao
MS
How do screen for renters now days? I would worry that job losses would be a factor in renting, so how do you deal with that?
OT:
EWZ continues it's cliff dive from yesterday. Now -6.5%
Ciao
MS
Finding people without defaults. I'm a renter and passed a credit check. But if landlords hold the credit check standard to usual levels, foreclosees and families are going to up S Creek.
Got Tent Cities?
It's always great to rent from someone that took advantage of someone else. Landlords always get what they deserve!
Renter credit will need to be adjusted. Just one BK is OK!
OT
consensus payroll = -75K and that is baked i
"But if landlords hold the credit check standard to usual levels, foreclosees and families are going to up S Creek."
ren | 09.04.08 - 1:28 pm | #
There are ways around this. It is how we have a wait list.
Chris
we have a wait list.
LOL! Are you laundering money for drugs?
There are ways around this. It is how we have a wait list.
Could you elaborate, Cobra?
BTW, thanks for the graphs CR!
Poor credit will have to be tolerated if you want to rent to the current crop of potential tenants now. I suggest not renting to anyone with intentional defaults though.
occum's razor gets tested....
Ciao
MS
"LOL! Are you laundering money for drugs?"
Anonymous | 09.04.08 - 1:36 pm |
Nope. You just have to be comfortable with the deposit/rent/current employment of the tennant to make it worthwhile to rent. Frankly the cost basis we work from is so tiny it doesn't take much. Such is the joy of owning for 15+ years and not pissing profits away...
Chris
Boots on the ground in Hollywood, FL:
Jonathan Franklin on the former Florida boomtown where repossessions are at an all-time high |
Business |
The Guardian
I don't see rents falling. In fact, I see rents surprising to the upside.
All those second homes in vacation areas are useless to people who need to rent near where they work. I don't think McMansions are attractive rentals either for a variety of reasons - utils, maintenance, cleaning, commuting costs, etc.
ren,
credit scores and profiles are deteriorating rapidly..automated underwriting will keep score as a factor but reduce it's % weight of overall decision and increase % weight of other factors like PTI, DTI, repos current, job security etc.
Definitely job growth in learning how to read credit stories correctly and making sound credit decisions for your client (property mgmnt)or customers.
Wow. Even SRS is going up. It's like a freakin' apocalypse.
Please elaborate......the "mcmansion" argument aside how are rents going to surprise to the upside with the pool of potential tenants looking like the pool of deteriorating homes from whence they came from??
Add in crappy credit and you have a surprise...but not to the upside IMO.
Wait until the banks who own said properties start renting them......they have skated long enough on filing NOD's..they will have to at some point then the realization of income (ANY income) will begin to drive supply above and beyond what it is now......in the rental market.
Ciao
MS
Could you elaborate, Cobra?
Doggy Dog World | 09.04.08 - 1:41
We completely gave up running credit checks. Like I said the parents cost basis is so low and the rents are so cheap nobody can compete. We also seem to have an unusual amount of people recommending friends. Our pet surcharge is pretty minor also. That seems to help.
I will say 12-18 months ago you couldn't find renters at any price. I honestly think the worst is behind us employment wise in this area of Fl. Not a single tennant moved due to job loss in the last 6-7 months. 2 years ago this was horrid.
Now,empty SFR's. That's a whole nuther ball game...
Chris
That's a pretty good article about Hollywood, Florida. I don't know how many poor people there are in Florida these days. But I know it's more than were there this time last year. And lots more are starting to think and feel poor.
The following is a comment about economics and politics and where they merge. When I watch the Republicans on TV, I see zero interest in attracting poor people, blacks or Hispanics. I mean, they are just kissing all those people goodbye, in public.
So, how many of them are there in, say, Florida? Of 19 million people in FL, about 18% are Hispanic and 18% are non-white. So, between those groups and the white trash poor, you're looking at maybe 40-45%.
How can you kiss off 40-45% of the people in the most swing state there is and expect to win?
OT - Very Interesting Stuff on gold.
Facts, Evidence and Logical Inference by Frank A. J. Veneroso | Gold Anti-Trust Action Committee
I have written at Market Trends: Alabama Real Estate That it is virtually impossible for prices to level or recover before about March of 2009, strictly due to seasonal factors. In the last ten years for the markets I watch, sales contract from now through March. That would be regardless of government action or otherwise. It won't be different this year the only question will be what happens March and later. I believe that we will begin to see the less affected markets level out around then, but the more severe areas will extend out for some time beyond.
That Hollywood article is pretty rough. Interesting how it is written by a foreign reporter. I loved this paragraph.
It is not the kind of story that a generally patriotic American press likes to investigate. But in that one skip, in a small corner of a picture-perfect American city, all the evidence shows repayment claims from banks, car companies, credit-card providers, all turning into so much worthless paper.
"Like I said the parents cost basis is so low and the rents are so cheap nobody can compete."
I thought a low cost basis gave you the luxury of selecting good renters versus sticking anyone who will pay in there. Cash flow is good until they trash the place and beat you senseless with a stick or send their pitbull after you when you come to collect rent.
rich
Palin isn't exactly popular with the Jewish voters either and they are muy importante in Florida.
oops.
Price to rent ratio unfortunately disregards the variations in interest rates; at the peak in 1988 to 1990, 30 year rates were above 10%, making the cost peak much higher than it appears. The fact that home prices dropped as far as they did while interest rates were also dropping rapidly makes me believe that the correction this time will be even more severe as rates and loan availability get worse.
Oh, yeah, it will overshoot...
WASHINGTON (Dow Jones)-Federal regulators are caught in the middle of a multi-billion dollar dispute between the banks and their accountants over auditors' treatment of battered mortgage and debt investments. Ê U.S. accounting rules require such investments to be recorded at their "fair value" when prices decline so much that firms might not recoup what they paid for them. Ê The determination is quite subjective. Banks say they are being forced to record losses on mortgage-related securities that continue to pay timely principal and interest but have plunged in price amid mounting mortgage defaults.
sorry, can't link to it
Even when house prices stop falling, for some time thereafter many homes will be sold at a loss. In other words, money will continue to be lost probably years beyond the time that a bottom is reached.
ew thread
Price-to-rent ratios are useful, but somewhat flawed. They give a general idea about house prices, but there are other important factors (like inventory levels, price to income and credit issues). We are getting closer on prices, but I think we still have a ways to go.
I have to disagree with this assertion. Price-to-rent ratios are not perfect, but are the closest thing to a "PE ratio" for housing, as it compares the cost of ownership to the actual ROI for that asset.
Another advantage of PtR ratios is they can easily account for regional differences in overall housing costs and incomes. Housing in CA --buy or rent-- is more expensive than most anywhere else. PtR ratios don't care about incomes, just the purchase price compared to the only viable alternative --renting.
if a house rents for 5000/month or
60K annually, What is its price at
price to rent ratio of 1?
in other words, how do you calculate
price/rent ratio?
Thanks in advance
After looking into it, I think 'scum' is a Hate word.
Should be banned.
Why not use PITI (or just PI) to Income ratios and remove interest rate variability?
Another excellent metric for estimating a bottom is the capitilization ("cap") rate:
Capitalization rate - Wikipedia, the free encyclopedia
Rent vs. Sell House - Forbes.com
@cd
Thanks for the info. With or without tent cities though, imho, the next few years are going to make a Grapes of Wrath style impression on the public. Foreclosure. Everybody's doing it. Even the renters with the wrong landlord get involuntarily relocated as landlord gets foreclosed.
Rich at 1:58pm
Same way the GOP did in 2000 & again in 2004, you don't let them vote.
Plus, remember the "Solid South"? Disenfranchise one class (by race) & persuade the lower income people to vote Dem by appealing to various fears.
After reading what seem to me to be phenomenally stupid letters to the editor in various local papers in OR regarding our economic problems, how to solve them, & the several candidates, it seems that nothing is too stupid for some people to believe.
"Price-to-rent ratios are useful, but somewhat flawed"
CR, I would love for you to elaborate on this if you have time. Is not a property's value the discounted sum of future potential cash flows?
DH,
5000 X 120 = $600,000
How many $600k houses today are you aware of that can rent for $5000 per month? To attract a reasonable rental market that rental price would need to fall about 60% to $2000 per month, making the home "worth" $240,000 if it were a rental. Keep in mind that $2000 is a lot to throw around as rent when you can live in an abandoned REO for free.
probably too late to comment here...but I have been looking at rentals in Miami - I saw a really nice townhouse for rent or for sale by a forelorn "realtor/owner" and he was willing to rent it for a year and then he suggested 9 months. The rent was reasonable, price to purchase, way too high. So I figure anyone renting that place will be evicted when he is foreclosed on. The only safe rental would be a rental complex.
ren-so true..
foreclosures are a necessary unpleasentness of life, best to avoid but if a person needs to walk to help his family I'm not opposed to it..They will use are tax dollars to bail out banks..not joe 6 pac so good for him if he saves 1400 on his mos. payment by walking...
MS,
Please elaborate......the "mcmansion" argument aside how are rents going to surprise to the upside with the pool of potential tenants looking like the pool of deteriorating homes from whence they came from??
Do you charge more or less for a risky tenant? Also, in my experience banks don't rent.
Two years ago I suggested rents would rise. I was severely heckled. However, thru 6/08 the yoy rate of change for the housing component of CPI was + 3.9%. The 3 month rate of change was + 6.5%. Rents are accelerating.
If a house rents for 5000/month or
60K annually, What is its price at
price to rent ratio of 1?
The price at which the montly cost of ownership - which generally translates as PITI - equals the cost of monthly rent.
There are a number variables that can impact the specific monthly PITI for any given house and for any given owner, such as current interest rates, local prop. tax rate, the local cost of insurance, the cost of maintenance/upkeep, and the impact of MID. However, using today's average 30-yr FRM as a yardstick (6.19%), and assuming a prop. tax rate of 2%, it would probably be close to $550,000.
What would my mortgage payment be with a fixed rate loan? - Financial Calculators from Dinkytown.net
"How can you kiss off 40-45% of the people in the most swing state there is and expect to win?"
Because only 40% vote, and 90% of those who vote are old white people.
5000 X 120 = $600,000
Yup, the old 120x montly rents ratio is a nice rule-of-thumb too. It's crude, but quick and doesn't require any complicated math --and is usually close to the mark.
What are the equivalent rent figures over the same time series?
I get tempted to mention local/anecdotal info in comments, but then think better of it because it's not particularly useful to other readers whose interest is in some other major market or is national.
Is it possible to see the Case-Shiller 10-cities rental prices graphed over the same period, broken out by city? I'm willing to believe San Francisco isn't experiencing this in the same way as Miami, or that Atlanta rents behave in unique ways. Would love to get a look at historic data.
Two years ago I suggested rents would rise. I was severely heckled. However, thru 6/08 the yoy rate of change for the housing component of CPI was + 3.9%. The 3 month rate of change was + 6.5%. Rents are accelerating.
Aside from the largely fictitious CPI, do you have any stats to back that up? I'm not seeing any major rent hikes here in a traditionally very high rent region (Bay Area, NCAL). I believe CR has also made a number of recent posts indicating rents are not rising in most regions of the U.S.
I think rents are falling based on the the fact that you can live in an abandoned REO for free. Hard to compete with that.
Rents will drop back as home values head lower, pretty obvious and then the flippers that rentals will be screwed on cashburn, once again, as they chase bad deals!
For the "rents are shooting up" Kool-Aid drinkers:
Calculated Risk: Downward Pressure on Rents
Home-Sellers-Pain-Is-Renters-Gain: Personal Finance News from Yahoo! Finance
Can someone explain how you can have lower rents in a high foreclosure area? It seems counter intuitive. If there are more people dumping houses and renting, wouldn't the demand for rentals go up, as the supply of renters goes up? Why wouldn't that cause a spike in rents?
AS-
I wouldn't rent to a risky tenant. Costs associated to remove/turnover far outweigh any rent they could ever pay.
Your "stats" are pegged to CPI.......not worth the paper they are printed on. Take a look around instead. Having your argument pegged to those is like saying there is no inflation or investing in TIPS....try again.
As far as banks not renting......wait. It will happen.
Ciao
MS
Bubble-fueled construction has increased the number of housing units that could be rented out. As people move into the surplus housing, it may depress rents. That means P/R ratio falling toward parity will be more visible in the form of falling purchase prices instead of being offset by rising rents. Given how fast the number of houses and condos has increased, it's hard to see rents rising soon.
Did any of you read the linked Bloomberg article titled "Florida Real Estate Bottom Signaled by Sale of Distressed Condo"???
If this indicates a bottom, then folks aren't awake yet. This sounds to me like another creative vendor-financing kind of deal:
Perez's partnership bought the condos from his own development company and a partner, Atlanta-based Cousins Properties Inc., which built the 54-story tower.
Did this sound fishy to anybody else here? I mean, it sounds like the guy raised cash from new investors to bail out his souring investment...no?
"Angry Saver writes:
I don't see rents falling. In fact, I see rents surprising to the upside.
All those second homes in vacation areas are useless to people who need to rent near where they work. I don't think McMansions are attractive rentals either for a variety of reasons - utils, maintenance, cleaning, commuting costs, etc."
Exactly - rents are indeed rising in some areas and falling in others. Generally they are rising in core areas of cities - mostly because gas prices have pushed the more price sensitive renters out of their exurban apts and into ones closer to their jobs. On city fringes the reverse is happening, rising vacancy rates and falling rents.
SC-
Same type of deals going on in San Diego....they are getting creative I'll give them that.
The problem with these is the reporting....no one calls a spade a spade anymore.
http://www.nctimes.com/articles/2008/08/16/business/z49597e3f40b4acfc8825749700767894.txt
Ciao
MS
"The price-to-rent ratio would suggest that parts of Florida are indeed "almost there". "
This analysis ignore that rents are likely to begin to drop as the historically unprecedented vacant inventory continues to be converted to rentals. The "shadow inventory" will become real rental inventory as denial is purged from the psyche.
Speed writes:
Can someone explain how you can have lower rents in a high foreclosure area? It seems counter intuitive. If there are more people dumping houses and renting, wouldn't the demand for rentals go up, as the supply of renters goes up? Why wouldn't that cause a spike in rents?
You're making a few questionable assumptions here:
Reality: Many FBs were speculators that owned multiple houses. When their failed flips go back to the bank, some of them stay in their existing house --the one they originally bought for shelter. Others go back to living with their parents. Others will double or triple-up with other renters --especially if they become unemployed-- which actually decreases demand for individual rental units (b/c fewer units are being rented due to more tenants per unit).
See #1. Tons of houses (esp. condos) were empty flips from day one.
Google "repartments". Also, many FBs, not wanting to mail the keys to the bank out of pride, shame or loss aversion, will turn their failed flip SFRs into private rental stock.
Long way to go. The Manhattan bubble hasn't even been pricked yet !!
It's a long way down....
Burbed writes:
...rents are indeed rising in some areas and falling in others. Generally they are rising in core areas of cities - mostly because gas prices have pushed the more price sensitive renters out of their exurban apts and into ones closer to their jobs. On city fringes the reverse is happening, rising vacancy rates and falling rents.
There is definitely some merit to the idea that rents near major employment/urban centers will hold up better than outer suburbs/exurbs. Higher gas prices/Peak Oil is yet another variable that may work in favor of urban LLs. However, the data suggests that rents even in "desirable" urban centers are barely treading water --even ignoring inflation-- and rents in suburban exurban areas are dropping like a stone.
HARM,
First how about a hat tip for all the crap I took at patrick's for falling rents two freakin' years ago? Then moving on we need to examine the assertion that the jobs being preserved are core employment. I don't think so.
Hey, Dawg - you were definitely ahead of the cuve, fo' sho. And IIRC, I regularly had your back on that
.
Oh, and regardless of price:rent, price:income & cap rates, let's not forget about the option-ARM reset (or is it "recast"?) tsunami that's about to hit shore from 2009-2012:
Cedit-Suisse reset chart 2009-2015
Fitch Warns on Option-ARM defaults
This next recast wave will impact the credit markets with at least as much force as the Alt-A resets that are currently killing lenders & FBs alike.
I disagree with sanguine forecasts about hitting a bottom in the next 18 months or so. No way we can hit bottom until the bulk of option-ARMs recasts are behind us. Still far too many FBs living in negatively amortizing time bombs that have yet to go off.
The media proclaims once we get back to 6 months or less inventory everything will get better.
Something tells they're ignoring a minor factor called jobs.
It doesn't matter how few homes there remaining for sale. If people are concerned they'll lose their jobs they're not exactly going to jump up and buy because the NAR called the bottom again.
"HARM writes...
Oh, and regardless of price:rent, price:income & cap rates, let's not forget about the option-ARM reset (or is it "recast"?) tsunami that's about to hit shore from 2009-2012:"
The only problem with that is that its so area specific. In the area I am looking, I recently found out that only 0.7% of all homeowners have option ARM junk products. Compare that to the exurbs wher its like 7-8% and in areas like CA where its as high as 12%. Sure the CA tsunami will cause banks to tighten up big time, but with so few desperate sellers out there, its not gonna be that big a deal.
CR: Thanks so much again for providing such uniquely helpful and quantitative information on this most critical issue of housing prices -- and some objective sense of how far we are yet from equilibrium.
But if landlords hold the credit check standard to usual levels, foreclosees and families are going to up S Creek.
Landlords will have to rent to foreclosees, because there wont't be anyone else to rent to. Who else is going to go into the foreclosed properties bought by investors, or rentals vacated by owner-occupiers buying foreclosures?
Burbed said:
"In the area I am looking, I recently found out that only 0.7% of all homeowners have option ARM junk products."
Where did you find this data?
Thanks.
In my area, Boise ID, there are many houses being put on the rental market as the owners give up trying to sell them. The rental inventory is booming and it looks like they are having problems maintaining rental prices.