Love how the positive outlooks always come from the real estate industry economists. I think there is way to much false information being fed to folks tied to the real estate market. I spoke to a friend yesterday who works for an Orange County based home builder. He just purchased a home in one of their Irvine developments. He indicated that the company has told employees that 85% of their home purchases are to cash buyers. I find this statistic extremely hard to believe. He then went on to tell me how he anticipates his $800k house to appreciate another $100k in the next year. Misinformation and magical thinking.....
Don,
living in irvine, I've got to say people here are living as if they'll die tomorrow - overleveraging is the name of the game - there is no way 85% are cash buyers.
So 6-12% nowadays is considered modest? I bet, she also believes that it is practically risk-free, because everyone knows that RE prices only go up, right?
With the internet bubble there was some nice sizzle to get excited about - New Economy, disruptive technology, paradigm change, etc. The RE bubble is lacking in creativity - it is because prices go up, stupid. At least all the young realtors are good-looking
Good point. Not sure if anyone caught the current issue of the freebie OC magazine that you see at all lunch type places that had an article on "who is buying the high rise condos in OC." The start of the article featured a 25 year old handsome mortgage broker who had just purchased the $1.7mm penthouse in the towers going up on Jamboree and Michelson. Hope he saved some money from the good years.....
As Americans it is our duty to be loyal to faith based reality that way we will keep winning and winning in Iraq. If you wish upon a house it's price will go up and you will have more money to save in lower taxes. If you do the mathematics all of us owners should be billioniasres by 2015.
The thing that we need is a constitutional amendment that will let George Bush be president for life. Also we need fiscal responsibility which means no federal money to democratic run state and local governments since they spend irresponsibly. In this way we preserve our freedoms.
Nicholas raises Greenspan's question to which Sir Alan and all his resources and experience replied: "It's a conundrum."
But does that deter me from piling on with my 2 cents?
Never.
Unless you are baiting the hook here and then I feel that this would be Uncivilized. Ok, impolite.
Your views first, sir?
Nicholas, as calmo said - that is Greenspan's conundrum ... but, I ask the question the other way: With the delta so small, why are 30% of new loans ARMs?
I expect the answer is people are still speculating with excessive leverage.
From Prudentbear's Noland:
"Purchase Applications were up 3% from one year ago, with dollar volume up almost 11%. Refi applications dropped 10.5% to a 19-week low. The average new Purchase mortgage declined to $240,900, while the average ARM increased to $367,900. The percentage of ARMs slipped to 28.8% of total applications".
This means more expensive houses are overly represented by ARMs. With the spread at less than 1%, it is hard to argue with CR's view of speculators not interested in making payments for the other 29 yrs. (28% is down from previous highs when the spread was wider and the fixed mortgage looked reasonably competitive.
Refi transactions dropping 10% mean that cash-outs are less attractive due to rising rates and/or houses have not appreciated enough to cover the transaction costs.
I don't think it's only the speculators who use ARM loans. I'm sure a lot of people who buy a home as a primary residence are thinking with a 3 to 5 years horizon and using 3/1 and 5/1 ARM because they are still cheaper than the fixed ones, provided they sell before the rate resets.
Presumably they think they will be able to trade up before then...
This bubble is too big to be burst over night. There are too many people dreaming of making thousands in appreciation to change the momentum that is present. I suspect even the speculators will hold on until the last minute before bailing out. Therefore I don't see things moving down quickly for another 3 to 4 years when most of the interest only loans expire.
Although long-term interest rates may spike transiently at some time in the near future, there is at present no force in view that one would expect to cause them to stay high if they were to rise. Any puncturing of the real estate bubble is going to cause the US savings rate to rise, as baby-boomers nearing retirement become aware that they're not going to be able to live on profits from real estate appreciation. Unless there's a revolution in China, there's not going to be any substantial change in their practice of recycling dollars back into US treasuries to keep their exchange rate low and their export industries humming. Same for Japan. And same for the Arab oil producing countries.
So the supply of borrowable funds is not going to fall a lot, and with such a large percentage of US borrowing being for real estate purchases, an end to the bubble means a major fall-off in loan demand. It is likely that the only people hurt by ARMs will be those who can't withstand even short-duration spikes, and those who have used ARMs to leverage themselves into homes whose price depreciation will wipe them out. (I expect to see home prices fall all the way back to mid-90's levels, and stay there for a very long time; so anyone who bought at recent prices with a small down payment will be upside down by $100,000+.)
op writes "Therefore I don't see things moving down quickly for another 3 to 4 years when most of the interest only loans expire."
But does this pacify the crowd here?
No, they think that housing is the only thing that works in America and if that even stalls for a month we are pickled.
Housing has leveraged the entire economy in their view. They have not heard of nano technology and how we'll be using elevators to get to the moon in a few short years. They have not heard of the stem cell research that will provide the missing brain cells in certain prominent political families. They need a good distraction to release the grip that Housing has on their imaginations.
How about the coming flu pandemic?
Keep the troops motivated and firing, lest their defensive positions get overrun
How does one keep a sinking ship afloat? I guess they figure if the keep baling quickly enough, they won't all drown.
Love how the positive outlooks always come from the real estate industry economists. I think there is way to much false information being fed to folks tied to the real estate market. I spoke to a friend yesterday who works for an Orange County based home builder. He just purchased a home in one of their Irvine developments. He indicated that the company has told employees that 85% of their home purchases are to cash buyers. I find this statistic extremely hard to believe. He then went on to tell me how he anticipates his $800k house to appreciate another $100k in the next year. Misinformation and magical thinking.....
Rates are moving up... soon people will be forced to move out...
Don,
living in irvine, I've got to say people here are living as if they'll die tomorrow - overleveraging is the name of the game - there is no way 85% are cash buyers.
So 6-12% nowadays is considered modest? I bet, she also believes that it is practically risk-free, because everyone knows that RE prices only go up, right?
With the internet bubble there was some nice sizzle to get excited about - New Economy, disruptive technology, paradigm change, etc. The RE bubble is lacking in creativity - it is because prices go up, stupid. At least all the young realtors are good-looking
Silly question: WHY is the delta between ARMs and 30 year fixed so low.
Miro -
Good point. Not sure if anyone caught the current issue of the freebie OC magazine that you see at all lunch type places that had an article on "who is buying the high rise condos in OC." The start of the article featured a 25 year old handsome mortgage broker who had just purchased the $1.7mm penthouse in the towers going up on Jamboree and Michelson. Hope he saved some money from the good years.....
As Americans it is our duty to be loyal to faith based reality that way we will keep winning and winning in Iraq. If you wish upon a house it's price will go up and you will have more money to save in lower taxes. If you do the mathematics all of us owners should be billioniasres by 2015.
The thing that we need is a constitutional amendment that will let George Bush be president for life. Also we need fiscal responsibility which means no federal money to democratic run state and local governments since they spend irresponsibly. In this way we preserve our freedoms.
Nicholas raises Greenspan's question to which Sir Alan and all his resources and experience replied: "It's a conundrum."
But does that deter me from piling on with my 2 cents?
Never.
Unless you are baiting the hook here and then I feel that this would be Uncivilized. Ok, impolite.
Your views first, sir?
Nicholas, as calmo said - that is Greenspan's conundrum ... but, I ask the question the other way: With the delta so small, why are 30% of new loans ARMs?
I expect the answer is people are still speculating with excessive leverage.
Best Regards.
could it be that people expect the fed to stop tightening soon and begin cutting by the end of 2006?
From Prudentbear's Noland:
"Purchase Applications were up 3% from one year ago, with dollar volume up almost 11%. Refi applications dropped 10.5% to a 19-week low. The average new Purchase mortgage declined to $240,900, while the average ARM increased to $367,900. The percentage of ARMs slipped to 28.8% of total applications".
This means more expensive houses are overly represented by ARMs. With the spread at less than 1%, it is hard to argue with CR's view of speculators not interested in making payments for the other 29 yrs. (28% is down from previous highs when the spread was wider and the fixed mortgage looked reasonably competitive.
Refi transactions dropping 10% mean that cash-outs are less attractive due to rising rates and/or houses have not appreciated enough to cover the transaction costs.
I don't think it's only the speculators who use ARM loans. I'm sure a lot of people who buy a home as a primary residence are thinking with a 3 to 5 years horizon and using 3/1 and 5/1 ARM because they are still cheaper than the fixed ones, provided they sell before the rate resets.
Presumably they think they will be able to trade up before then...
This bubble is too big to be burst over night. There are too many people dreaming of making thousands in appreciation to change the momentum that is present. I suspect even the speculators will hold on until the last minute before bailing out. Therefore I don't see things moving down quickly for another 3 to 4 years when most of the interest only loans expire.
Although long-term interest rates may spike transiently at some time in the near future, there is at present no force in view that one would expect to cause them to stay high if they were to rise. Any puncturing of the real estate bubble is going to cause the US savings rate to rise, as baby-boomers nearing retirement become aware that they're not going to be able to live on profits from real estate appreciation. Unless there's a revolution in China, there's not going to be any substantial change in their practice of recycling dollars back into US treasuries to keep their exchange rate low and their export industries humming. Same for Japan. And same for the Arab oil producing countries.
So the supply of borrowable funds is not going to fall a lot, and with such a large percentage of US borrowing being for real estate purchases, an end to the bubble means a major fall-off in loan demand. It is likely that the only people hurt by ARMs will be those who can't withstand even short-duration spikes, and those who have used ARMs to leverage themselves into homes whose price depreciation will wipe them out. (I expect to see home prices fall all the way back to mid-90's levels, and stay there for a very long time; so anyone who bought at recent prices with a small down payment will be upside down by $100,000+.)
op writes "Therefore I don't see things moving down quickly for another 3 to 4 years when most of the interest only loans expire."
But does this pacify the crowd here?
No, they think that housing is the only thing that works in America and if that even stalls for a month we are pickled.
Housing has leveraged the entire economy in their view. They have not heard of nano technology and how we'll be using elevators to get to the moon in a few short years. They have not heard of the stem cell research that will provide the missing brain cells in certain prominent political families. They need a good distraction to release the grip that Housing has on their imaginations.
How about the coming flu pandemic?