House Prices and Interest Rates
Submitted by
CalculatedRisk on Wed, 12/03/2008 - 6:18pm (206 comments)
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Oh yeah
I'm sorry CR, I can't stop laughing...
Price to income, period.
And it's not looking so hot for income.
First . . . Yeah!!!
Dam
CR-
You know the reason the Gov't doesn't say it right now . . . Because they want the Dems to do it. The government said they would maintain positive net worth through the end of 2009. At that point, Obama has to pull another $5 trillion on the Gov't balance sheet. Then the repubs in 2010 can say the democrats increased the federal debt by 50% in their first year of power.
I think this is a ploy by government entities (states, counties & cities) to keep property taxes where they are and not let them go lower. Because of property values drop, property taxes drop. I think that's how it works? Anyone?
Denniger...how cool would it've been if he'd been named derringer? Yeah I know--lay off the sauce.
How To Create A Depression - The Market Ticker
ot sure how it goes in usa, but in canada, if the property values drop, then the mill rate (in toronto) would just have to be increased, assuming city hall wanted to keep on spending what they previously had, so one's property taxes could stay constant, despite falling property values
ofcourse all municipalities in usa and canada are going to start facing the fact of trying to collect property taxes from a group of home owners who i have to imagine are going to (as a group) include property taxes as a payable to be stretched/delayed.......all the better to see what orgs respond most quickly/stringently, and thereby help the homeowner prioritize said payables
happy happy joy joy!! (ren and stimpy)
this is a bad idea and leaking it is a terrible idea...
wait, the Treasury has had good ideas?
An excellent spreadsheet that models the rent vs. buy question is "The Bubblizer" by Randolph Harrison over at CAPITALISM2.ORG
http://randolfe.typepad.com/Resources/Bubblizer.xls
It takes many permutations, but it also pretty clearly shows that housing is still overvalued in many markets (unless your Intangibles value is incredibly high relative to payments).
Great read! Thanks CR.
The problem I believe is twofold:
CR, can't we just agree that the people at Global Insight who wrote this stuff are MORONS?
Can't we also agree that the people who are "leading" Treasury at the moment are also MORONS?
I could be all wet on this, but my thoughts:
Residential real estate prices are generally set by the irrational buyer, at least in hot markets. Isn't there an old saw about the appraisal being an estimate of what the second-biggest fool would be willing to pay?
I thought the process was qualify first ("You can afford $x per month, and with your down payment, that means you can afford a house that costs $y") Then your agent takes you to see the houses that y buys, and you bid against your financial peers. You're bidding against the same peer group regardless of interest rates, and if the bank says you can all bid y, that's what you're going to pay.
orma--in about 2011-2012, municipal bankruptcy is going to be a hot field. It will take awhile for various reasons, but it's coming . . .
CR--you are right, of course. I don't think interest rate drops will increase demand for houses until potential homeowners regain confidence that their investment will resume appreciating, rather than continuing to decline. Buying a home is the biggest purchase most people ever make (remember that line). Nobody in his/her right mind is going to make that kind of a commitment unless they have more confidence than anybody in his/her right mind would have in the current environment.
i know this is going to sound very bizarre...
and i appologize ahead of time
but CRs latest post sounds like 50% CR and 50% Tanta in terms of the combination of detial, overview, and analysis...
im sorry this perception is probably my current mental state...really worried about whats going to happen because of kids and the future..
anyway..really excellent CR
and thanks CR for all you have done for us
the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.
BINGO!
CR, you make 2 assumptions that are somewhat laughable:
1. 10% down. LOL. The average american has $9k in CC debt. How the heck are they going to a) save enough to pay off the debt then b) save enough for a 10% down on even 200k home?!
2. (I'm a bit more serious about this one) You use the 'rational' buyer as your model. There is no such thing. If you're approved to borrow more, you borrow as much as you can. This is the American way. People will borrow 50% DTI if they're allowed, regardless of if it works in their budget or not (of course, they dont really have one).
I would say lower rates would be less likely to push up prices during a time when so many people are worried about keeping their jobs.
In addition to plummeting Treasury yields, the massive corporate hacking of jobs is another true indicator of a profound downturn.
Even ignoring any sense of loyalty to employees (which went out years ago), companies would not hack so many jobs so fast if they felt they would need to hire them back in a year or two.
It's all about trying to protect corporate cash and earnings. But in many companies, it's the people who drive earnings after the economy turns back up. So, the lack of cohesive corporate teams could hold back earnings even after the economy rebounds. This is very negative for stocks.
It's the Circuit City effect. In a service-driven economy, trying to drive corporate earnings by lopping good people doesn't work, on many levels.
Also, there's a prisoner's dilemma going on. If one company slashes 5,000 jobs, that company may achieve benefits. But if all companies slash 5,000 jobs, everybody loses.
Including housing prices.
Uh, is there an unintended consequence here? All those people who are underwater - wouldn't this encourage them to walk away and get a better deal on a new mortgage than they can get on a work-out?
The problem is more elemental than described.
Government cannot set prices.
Until that simple fact can be accepted there will only be more damage wrought.
I'll see your 4.5% and lower to 3.
Mr. Mortgage’s Guide to the TRUTH!
Isn't this how we drove into this hole in the first place?
Actually this could cause more homes to fall down to the 417K area.
is there an index to double short suburbia?
Government cannot set prices.
Meh, what the hell do you know?
Anybody here able to post that CR companion add on for Firefox for me? I don't care about being first, but I do like to get in before the comments get out of hand.
For example, a conventional 30-year mortgage of $200,000 carries a monthly cost of $1,468 with mortgage interest rates of 8 percent. At 6 percent, however, a home buyer could service a far higher $245,000 mortgage with the same monthly expense.
We don't distinguish between the cost of renting money and the cost of buying a house in this country. This is part of the paper blindness that the fiat regime has brought upon us.
Moreover, artificially suppressing interest rates for mortgages played a central role in the overproduction of housing and the gross misallocation of resources.
This is an inevitable consequence of the government undoing the decisions of market participants every time they begin acting rationally, and actively supporting them when they behave irrationally.
This phenomenon is the root cause of all the destruction currently taking place in the economy.
And yet we cannot stop trying to find more and more ways to do exactly the sort of things that got us where we are.
Control over our future is rapidly slipping out of our hands.
Anybody here able to post that CR companion add on for Firefox for me? I don't care about being first, but I do like to get in before the comments get out of hand.
aClem
Agreed, this would be appreciated
Another thing I'm sensing.
For every job that actually gets hacked in this economy, ten people get more worried their jobs will get hacked.
When you hear of a person you know who got hacked, you can't help but think "I'm next."
although I don't understand why the government just doesn't announce the GSE debt is backed by the U.S. Government
The whole purpose of privatizing FNM was to keep the obligations of the government's balance sheet. An explicit guarantee of the GSE debt would put the obligations back on the balance sheet.
If we look at the Global Insight methodology for evaluating home prices, we see:
Yet another example of "models" overriding common sense.
All "models" should be ignored until prices are near their long-term norms.
CR Companion:
link
OT (quite daring this early in a thread) -
Even Rove has started to turn on Bush - anybody catch the article today? Wonder how long it will take for the next wave of Bush era tell-alls.
Feckless,
I doubt anybody who "walks away" would have a good enough credit score to qualify under the current "stringent" standards. (Even if it was "good enough", prior to the walk-away).
Denniger...how cool would it've been if he'd been named derringer? Yeah I know--lay off the sauce.
http://market- ticker.denninger.n...Depression.html
That graph tells you everything you need to know, don't it?
The two biggest consumer driven reasons for the housing boom were-
Do I need to say more?
The solution to pollution is dilution.
MBS's are packed full of toxic waste that is eating through the stainless steel containment vessel. What I've gathered from the prior post comments is that the economy as a whole (or hole?) would likely benefit from lower mortgage rates as follows:
1) You can start to fill the MBS vessel with good, new, clean loans with terms that keep qualified people paying the monthly nut. Dilution.
2) More homes being bought yields more work for RE agents, mortgage brokers, movers...One of the hardest hit parts of the economy is given a life line as long as there is churn, any kind of churn. Employment.
3) The fees generated will benefit the pipe line of blood suckers all the way to China. IB's/banks start lending.
...sorry forgot: kick the can down the road.
"All "models" should be ignored"...
Does that include Heidi Klum?....DAMN!!!
... although I don't understand why the government just doesn't announce the GSE debt is backed by the U.S. Government.
Why would they want to commit to taking on that liability?
Why not maintain the option to back out?
Seems straightforward to me...
You nailed it CR. More dumbass ideas floated from the same bunch of dumbasses that helped get us here. I don't trust the skipper for a second trip, when the first started out as a 3 hour tour. Jobs drive income but maybe they have a point here because house prices have driven jobs and income for a decade. Revive the housing market and revive jobs. It beats printing money and causing admittance to worldwide manipulation of monitary, fiscal, and economic policy. It just may stave off the revolution.....because the natives are fed up with the FED and every other governmental agency or sponsored entity.
Government cannot set prices.
You're obviously not a philatelist, Rob.
GM, Chrysler Said to Consider Bankruptcy to Get U.S. Bailout
GM, Chrysler May Accept Bankruptcy to Receive Bailout (Update5) - Bloomberg.com
Dec. 3 (Bloomberg) -- General Motors Corp. and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multibillion-dollar government bailout, said a person familiar with internal discussions. ...
Did you watch the latest CR video?
Krugman: $10 trillion available for economic rescue
Insert "capital equipment" for "house," and this is also a perfect explanation for the destructive effect of continuously falling interest rates on business.
The ability to refinance is not automatic, and bankruptcy is not far behind as debt contracted at a higher interest rate becomes impossible to service. Competitors can price lower (i.e. the landlords here) with financing at the new lower level. More bankruptcies ensue- and the deflationary spiral is underway.
You're obviously not a philatelist, Rob.
Shnaps
Ummm, errr... well. Okay, who told you? I am so embarrassed.
Seriously, even that has slipped the surly bonds. FedEX, UPS, email, etc.
I suggest an Exorcism!
The system is run by witch doctors as it is, so maybe an exorcism would stimulate housing demand.
Most people care only care about the monthly payment - especially idiot 'victims' of the foreclosure crisis.
In fact, Mrs. Cthulhu and I are renters waiting to buy for the first time, and the fact that the government is considering (effectively) subsidizing interest rates certainly has persuaded us to further delay our decision to purchase.
It is true that this would be terribly bad policy, but in desperation (and from homebuilder/NAR/lender persuasion) the next Administration may well cave and enact bad policy. If they're going to do so, I certainly want to wait to buy until they do.
The only event that would make us buy before prices fall further is if the Administration tries to inflate its way out of this problem, as that would destroy the downpayment we've saved.
But that would be a suicidal decision, since it would magnify the value of everyone's existing debt, and trigger a new wave of bankruptcies and foreclosures.
Maybe I'm unduly cynical, but there's nothing in these articles that leads me to think this leak came from Treasury or that the "consideration" that it's being given by Treasury is anything more than a short journey from inbox to circular file.
thank you, King Canute
Formerly Ni - since we're all subprime now, where are they gonna find enough new buyers to make this scheme work? Given the market, the lending industry can have standards or it can make loans. Can't do both.
Here's the Rove worm turning:
Is Bush the Worst President in the Last 50 Years? - ABC News
Does that include Heidi Klum?....DAMN!!!
That kind of model doesn't require scare quotes. You can continue to watch those models from an appropriate distance.
A rational person will wait another year or so and buy the same house cheaper. Deflation defers demand.
This is just another classic example of not being able to find their ass with both hands. Which problem is more severe a) a never ending supply of empty houses courtesy of the homebuilders or b) existing mortgage holders drowning under current/future resets? I vote "b"; the effect of fixing consumer's debt service to income cash flow where salvagable will go a lot further in keeping sheeple in their homes while improving existing MBS defaults.
"But that would be a suicidal decision, since it would magnify the value of everyone's existing debt, and trigger a new wave of bankruptcies and foreclosures."
If the Administration "inflated its way out of the problem"- this would relieve debtors as debt payments would cost less in real terms (i.e. wouldn't you love for your mortgage to be in Zimbabwe dollars).
Beach ..."Most people care only care about the monthly payment - especially idiot 'victims' of the foreclosure crisis."
That's not at all uncommon situation. Many years ago, I did a stint selling cars, and MANY buyers were totally focused on the monthly payment of their purchase. It does make some sense; most wage slaves know what they make per month, and how much "extra" there is.
Krugman: $10 trillion available for economic rescue
Well, I hope Krugman isn't extrapolating to much from Japan's situation because we really haven't seen that one play out yet.
Especially when you see countries all around the world becoming saturated with debt, which may limit their ability to take on the debt of other countries.
The real problem, for the billionth time, is that taking on this additional debt doesn't appear to be generated real GDP growth.
We've been gorging on debt for 25 years now and look where it's gotten us.
Why should there be any expectation then that this debt can be paid off? What reason is there to believe that it is anything but dead weight dragging down the economy?
10m Krugmans? What is that about?
Is it it an immigration policy? Do they all get to bitch and moan while others do the hard lifting?
C
Hey guy, Re Heidi Klum, the Victoria Secrete Fashion Show is on CBS right now. PST.
At least it's not what's been floated by Gordon Brown in the UK.
He was wondering about whether those with problem mortgages - underwater or in arrears - be allowed to have two years without mortgage payments in order to pull themselves together.
I agree, it's so utterly braindead that it was never really meant to see the light of day...
Krugman: $10 trillion available for economic rescue
REBear, wonder if Krugman is aware of that total debt to GDP figure. If this wasn't going to be such a disaster, it would almost be funny.
If the Administration "inflated its way out of the problem"- this would relieve debtors as debt payments would cost less in real terms (i.e. wouldn't you love for your mortgage to be in Zimbabwe dollars).
And it would relieve lenders of the desire to ever loan out real capital again.
PeakVt..."You can continue to watch those models from an appropriate distance."..Regarding "safe distance", I'm from the school of "should I call you in the morning, or should I just nudge you?"...
But that would be a suicidal decision, since it would magnify the value of everyone's existing debt, and trigger a new wave of bankruptcies and foreclosures.
On second thought, inflation erodes the burden of existing debt, doesn't it? I shouldn't post this late in the evening.
Hmm. Not good. When you're saving, deflation doesn't look half as bad as inflation.
Y'know, I'm going to take a little look at the whole Leviticus Jubilee thing as handled with third world debt several years ago.
How might that work on a societal level?
tranche water said:
If the Administration "inflated its way out of the problem"- this would relieve debtors as debt payments would cost less in real terms (i.e. wouldn't you love for your mortgage to be in Zimbabwe dollars).
Yeah. Just figured that out, thanks. I suppose I ought to turn in.
orma,
Thanks...LOL...having Waaay too much fun here. though.
ac(Unrated) writes:
If the Administration "inflated its way out of the problem"- this would relieve debtors as debt payments would cost less in real terms (i.e. wouldn't you love for your mortgage to be in Zimbabwe dollars).
And it would relieve lenders of the desire to ever loan out real capital again.
ac | 12.03.08 - 11:57 pm | #
Well, I am not quite so sure about the 'ever again' bit. Germany seems to be able to borrow again after the Weimar hyperinflation. I don't know enough to advocate any solution, but forever is a long long time.
rich,
I missed your first call on SLW, but caught it when you mentioned it a few nights ago...have added to my watch list...thanks.
[This is a bad idea from the Treasury. And leaking this story is a terrible idea, since some potential homebuyers might potentially wait for lower interest rates. ]
I agree it's a bad idea but it might work to stabilize the market more quickly. And the argument that interest rates will be higher in the future so prices will drop doesn't square with the plan.
The plan is to juice up inflation so the dollar makes a trip through a paper shredder and nominal prices will rocket over time so price is no obstacle.
Great column, CR, until the last paragraph.
Thank goodness Treasury keeps hedging on that.
mp: current Treasury management is a problem. Yes it is, but Geithner and Summers are more of the same.
$200K house at an artificial 4.5% rate means 5 yrs from now when rates are 8-10% that same house will have to sell for 180K to sell at all
tranche water | 12.03.08 - 11:47 pm | #
and then of course from two years ago
Tanta remarked about bong-water
combining the two...
tranches of bong-water
anyone who wants the handle can have it
Dear Hank,
You're an idiot. Housing was a symptom of your failed economic policies. Now give back your 900 million and leave the Country immediately.
it probably rightfully belongs to the poster a year ago who first penned the handle, "tranches of love"...and all the variations there-after
Brad Setser: Follow the Money » Blog Archive » Should the currency of the country with a large and growing trade surplus and large and growing reserves depreciate against the dollar?
Why the strange behavior in asian etfs? Competitive devaluation?
Did Krugman's noble prize come with lipstick?
Dear Hank,
You're a criminal genius. Housing was the means for your thieving fraudulent economic policies. Now give back your 900 million and prepare for prosecution.
a homemade take on supply-side history:
YouTube - Hey Dad! Supply Side Grampa is Broke
Well, I am not quite so sure about the 'ever again' bit. Germany seems to be able to borrow again after the Weimar hyperinflation. I don't know enough to advocate any solution, but forever is a long long time.
Well there's some hyperbole there.
But look at Argentina. It really seems like they've been unable to recover from hyperinflation there.
My personal theory is that hyperinflation is far more socially corrosive than deflation simply because we live in a country where the dollar is our "religion", our daily motivation, and our binding cause.
I think we need to be very careful about destroying what is probably the most important social contract in terms of our stability as a nation.
Such are the perils of a secular, non-ideological nation.
"When the dollar dies, the mound dies."
Or something like that...
I missed your first call on SLW
I think I've sold in and out of SLW about 6 times in the past three months. It's like a slow drawn-out SKF.
What fun news today. Tomorrow will be fun as well.
Also, have the official holiday shopping figures been released for Black Friday? A friend of mine was commenting that they haven't released the data yet, and were holding it back for fear of causing more tightening...
Problem with assuming more debt is assuming more creditors will line up to underwrite it. Peak Oil? Peak Credit. Anyone with sense now is looking for other alternatives for their capital than aiding American consumption. Turning their back on a dessicated has-been ready for the grave, hoping only that the estate sale will meet their debt terms. Dead man dying.
Republicans are traitors...
you are probably right , he was an idiot
but im a paranoid schizophrenic
so i always see connections, plots, and rationales that are not there
Did Krugman's noble prize come with lipstick?
REBear
Hahaha....
Er, ahem. That's not very nice.
Basel Too,
I tend to be longer term, except on the short side, under these conditions.
Mock upthread. I had the same impression when reading the post, and it's a good thing.
The tax man will not be shy about foreclosing, so he'll get his slice.
"But look at Argentina. It really seems like they've been unable to recover from hyperinflation there."
I think their problem is that they peaked circa world war 1 and had franco and mussolini as their models during their decline.
I'm wondering just how bad the "official" employment figures will be on Friday...
I bought into SLW and am thinking about bailing on it. It's been tracking with stocks. Being that I'm pretty bearish all around I'd rather be out of it now...
This is a good time to reread last Friday's London Banker
post...
Especially this part:
As Jim Rohm observed, Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgement, repeated every day.
Errors in judgment, repeated every day, is about the most concise description I can think of for how the government has handled this crisis, and especially the plans aiming to manipulate the price of credit (interest rates).
So far, all the price controls have done is to drive away private-sector supply, as expected...
yogi
appreciate your perspective
i was weirded out..but in a good way
xcept wondered if i was more nuts than ususal
YSLP,
I'm conflicted between playing the miners, and playing the metals, themselves.
this would be a great idea if they offered 4% for reif's... Open to all homeowners that qualify. Could potentially keep a lot of homeowners from going BK and free up cash flow for the more solvent homeowners. As far as this helping move more units - agree with CR - doubtful at best.
ac I think you are onto something
"mock turtle writes:
i know this is going to sound very bizarre..."
I felt the same thing...
well 4.5 mortgages are certainly normal in a world where the 30 is under 3%, and that world may exist for the first time in history tomorrow.
Cliche of course but the best tribute is to continue with due diligence.
Also - is Libor like a Liger?
bob m
check thanks
tpfk as ni
hold the physical metal in my humble opinion
(remember, i am paradoid and an idiot)
Dear Hank,
You're a criminal genius. Housing was the means for your thieving fraudulent economic policies. Now give back your 900 million and prepare for prosecution.
Mock,
I'm humbled in the presence of your genius.
"paranoid schizophrenic"
read: critical thinker
Republicans are TRAITORS
you are too kind
i would have never got the idea if you didnt start the ball rolling
hat tip to you
mock,
I know that you, as well as more than a few others here, hold/believe in the physical holding of PMs, and I can't say you're wrong.
I've been offering even money that Hank is under indictment or living in exile by the end of 2009.
But I'm fairly certain he will get a pardon.
Well I don't understand why us CR readers believe that others in America are like us. We represent 5% of the country and probably less. Think of most people as being about a year behind or worse. This is one of the "human nature" observations I have made this year. Maybe it's just me but a lot of people assume others are like them, I know I did. I'm sure everyone here knows a few people trying to catch some knives right now.
Honestly I can see the value in not having all my capital tied up in one asset... and if home-values do skyrocket I'm sure there is some suitable investment I can make that will provide me with similar gains.
Either way; just like the bailout that didn't have enough votes; I'm sure an 800 point down day tomorrow will be enough conviction for Senators to flip and buy into the hype that they can stop the oncoming pain just by throwing a bit more money at the problem.
I'm going to make sure I put my limit-order's in tonight.
YSLP,
Was that steel balls I heard clanking, or did you just come into the room?...
Wisdom Seeker thanks for the london banker link. Appears we in the west have our priorities stuck sideways up our @$$
Blue - I think Libor's more like lunner. It's all about positioning, really. Lunner or Ligor - eat or be eaten.
We need a spreadsheet and more details to work it out exactly.
Yes
All other variables held constant, a lower interest rate increases the financial value proposition.
More pissing in the wind...
" a lower interest rate increases the financial value proposition."
that's the theory, crowd all treasury holders into equities by making a 2% yield seem huge relative to japan-circa-1998 long bonds.
ac,
Other than hyperinflation, is the only other option default? Do you see another outcome, another possibility?
Oops. Lunner or Liger, I mean.
Yogi - a pardon would almost mandate exile, would it not? Far from the madding crowd, as it were.
Mock - perfect paranoia is perfect awareness, as my former boss likes to say.
the poster formerly know as ni
hey appreciate it
and you know i could well be all wrong here
cause it depends on the objective of your play
like mp said two weeks ago...he sees PMs gold etc as a hedge (i see it as an insurance policy
but playing the mining companies is a legit equities move...
and given the destruction of the dollar may be smart
heres the most important thing i can say on the subject
im not so smart...and
we are off the charts...even the gurus are confused...
No WAY this scheme works. People in Cali were borrowing 110% of the "value" (whatever that means) of some Enron appraised value, refi 6 months later to buy that sweet E500, add a 3rd for a pool (with palms) and fly to Hawaii becuase they worked hard designing the pool. Those were the undocumented workers that BofA qualified to buy 500k properties. Trust me, I sold one. You can lower the interest rate to zero and the people in that home are still unemployed. Maybe, Hank can hire them to clean his daughters hampster cage.
That clanking was probably the steel plate in my head...
Japan is not following our move so I think we'll have a 7-handle tommorrow morning. No? Maybe it's the yentervention..
the poster fomerly known as ni writes:
YSLP,
I'm conflicted between playing the miners, and playing the metals, themselves.
the poster fomerly known as ni
I hold both, but unless you know how to value mining stocks yourself, hold physical. Many mining companies will be bankrupted by lack of available capital. I am also paranoid and an idiot.
I have a question - Why are people paying money for CDS on 10 Year Treasuries? The only situation in which they would pay out would be a US Sovereign Default... Which would make the US dollar worthless - which is what the CDS would pay out in... I would love to be on the sell side of that trade, but why are people lining up on the buy side?? No one has been able to give a solid answer to this yet. BNP swap spreads are lower than the US gov... WTF.
How well has 0% financing boosted car sales lately?
... and anyways, why go in at 4.5%? Perhaps if you wait another 6 months or so the prices will start to fall again and they will offer 3.5%...
Avoid mining companies like the plague unless you fully understand their debt/equity ratios... A good number of them will be going BK soon as their access to credit dries up. A lot of the mining companies feed on credit - keeping that equipment running isn't cheap. Watch out for the Australian mining companies. It's about to get Mad Max over there.
"crowd all treasury holders into equities"
I suspect one day the critical mass is going to flock to gold. After all, it's hard to default on debt denominated in a fiat currency that the debtor controls.
Then what are they going to do? Capital controls, outlaw PM again, directly tax hard assets? At this rate, I wouldn't rule anything out. They are playing a very dangerous game.
anon @ 12:37,
I know there's company specific risk, when playing the miners; all are not "created equal".
mock,
I'm sure no guru...hence taking baby steps these days...on both upside and downside.
blueblls - My understanding is that CDSes pay out on a schedule, not only on actual default. And secondly, it seems to me that a default would make USD worth less, not worthless.
"but playing the mining companies is a legit equities move..."
the tough think about PM miners is that almost all of those assets are overseas and could theoretically be 'nationalized' by the host countries. this kind of thing happened to much of the global economy in the 30s, unless I'm mistaken.
the more I ponder all forms of equities in the coming years, the more I hate them. the gubmint is just going to crowd out any attempt at a market-based recovery as far as housing and the finance biz goes, and the demographics and debt burden are mind-blowingly burdensome.
one other thing - the real estate blow up in Australia is going to be even worse... They are the most leveraged people on the planet
http://hobochili.org/chili/?p=128
"Why are people paying money for CDS on 10 Year Treasuries?"
I was joking about this very topic the other day. It's a silly accounting game.
bgates,
I know what you're saying about the threat of nationalization. I'm long oil stocks in core portfolio...(rode 'em up and rode 'em down...still holding), and that's one of the first things I look at. Stayed away from BP because of Russian exposure...(mostly in CanRoys).
Allen C - I was joking too until I looked at the spreads relative to the risk. There is a lot of action in that space. I went from laughing to crying...
I wouldn't worry about house prices and interest rates. The geopolitical story of failing economies and war is playing out as written time and again.
"BEIJING China's chief trade envoy urged Washington on Thursday to stabilize its economy and protect Beijing's U.S. investments as the two sides opened economic talks overshadowed by the global financial crisis and tensions over currency."
US, China Headed For Possible Clash Over Currency
flaminia writes:
How well has 0% financing boosted car sales lately?
It's done wonders for treasuries.
" I'm long oil stocks in core portfolio..."
I rode E all the way down this summer. horrible. I got a small rally out of DIG to take the sting out, but, still, ouch.
SOS
An aside: In the ongoing battle between the FED/Treas and the De-leveraging process there has been some debate here over inflation, deflation. While for the near term I fall in the deflation camp, the arguement that we can't have inflation without wage increases is simply not true. I was at ground zero in the 1970's to the early 80's and I can say that wages in no way shape or form kept up with inflation. Not even close.
HP: Ben, low rates not are not enough...
BB: What about no doc with a 2yr intro rate and pick-a-pay?
HP: Brilliant!
and I don't they they want to explicitly guarantee because that hard to take back, though they have to do as the Chinese bond buyers are just substituting Tsy for GSE debt...
Once the folks with hard assets realize that the govi is after their money one way or another, we're going to witness some bizarre activity. QE after a decade of decline with a large national savings is VERY different than QE from the outset of decline with a large aggregate debt and a global slowdown.
bgates,
Core portfolio is geared towards yield (retirement money), and so far, have had only 1 divvie/dist. cut, so despite price drops, am doing fine on the yield end. Although given the drop in oil/gas prices, further cuts wouldn't be a big surprise.
Some real out of the box thinking is needed, and not patches, fixes and weekly changes in direction.
We have too many fearful for their jobs and risk adverse until the sky is blue again.
We have way to many empty houses.
We have even more houses about to be empty.
People are way over their head in debt (on the average), have less than perfect credit records, and aspirations that exceed their income (short and mid-term).
So: Why not have the government get into the landlord biz for housing rental. Rake in all the bad mortgages, foreclosures, and about-to-be's (because of interest resets, lower salaries, or whatever), and put the inventory into rentals at market rates. Sit on those houses until (if?) housing recovers, drawing rental income.
People would have housing at affordable rates, the bad mortages are off the banks books, and the economy might have air to restart.
Meanwhile, regulate anything related to lending, within an inch of its life. Reduce financial services to less than 10% of the economy, and pass a law that any Wall Streeter (or their lobbyist) will be arrested if they appear within 50 miles of DC.
It's time to say FU to the financial psychopaths.
RE: Devaluation of the Yuan
"I really do believe that we are on the brink of a very ugly period for trade relations."
This may be a historical understatement.
Here is some analysis on the 70s inflation. It does a good job debunking the impact of the oil shock.
I suspect going off the gold standard played a significant role.
http://www.j-bradford-delong.net/pdf_files/Peacetime_Inflation.pdf
I like the auto lottery idea. Instead of just giving money to Auto makers, buy 1 million cars for 34 billion and just raffle them off to taxpayers that are current on their taxes. Would spur consumption as options are extra...
And isn't that nuts, something like 30 billion for car makers just to stay in business. That's nuts. GM supposedly spend 17 million on Viagra via its health plan last year. That's about $5.25 PER CAR!!
An old car sales ploy regarding prices is to explain if you wanted to build your own car and bought everything off the market it would cost you $250,000.
$5.25 per car for Viagra is the same kind of logic.
When did HBS become such an easy target?
"Harvard is an easy target for the woes of our economy. Its business school produced George W. Bush, the fellow who's presided over the current economic catastrophe, and Rick Wagoner, the CEO of the largest automobile maker who's led its stock down 95% in the last eight years and now wants $25 billion worth of taxpayer money to keep the millions rolling into his bank account. But Harvard had these folks for just two years, so it's tough to blame the school for the current predicament."
Is Harvard's endowment crushing stocks? - BloggingStocks
Last one for the night.
Cramer for SEC Chairman. Bizarro world.
Jim Cramer: Make Me The Next SEC Chairman
If Detroit automakers file BK, I am totally fine with bailout funds as part of the BK package. Wipe out equity, can current management and give control to creditors' committee. Use bailout funds to assist laid off line workers retrain or something. If GM files and that somehow pushes Chrysler into BK, that would be great. Wipe out Cerberus...
On a slightly different note...Paulson worst Treasury Secy ever, hands down.
I actually know someone who plans to buy an "Income Property" soon.Because prices are so low...7x median income is now our median price.He has been quite obnoxious,and has loudly and publicly lectured me on why prices will never drop here (september 07)and why the economy will recover in the spring (3 weeks ago)I responded with a smile.I hope he finds a nice condo in oakland or mcmansion in merced at a price he likes...and it is price to income,not the freaking rate that matters.
"I went from laughing to crying..."
The govi continues to throw enormous amounts of money at the problem and yet we seem to be continually at the precipice.
The "Treasury" can't buy a damn thing. Instead it has to borrow the money -- mostly from foreigners, e.g. Arabs and Chinese, which future generations then have to pay pack. I wonder how they feel about having their pockets picked under coercion so that the pockets of foreign bond holders can be stuffed and Joe Six Pack can be enticed to buy a house? I know how I'd feel: fuck you Paulson.
Exactly CR, lower interest rates now means lower appreciation once interest rates go back up (i.e. buying power goes down). Thus nullifying what nowadays is the #1 criteria for buying a house (appreciation).
Of course, it used to be people bought houses to live in them. This is why in Japan, even though houses declined for 17 years straight they were considered a good investment - it's in the utility. Just like how a car depreciates but you still buy one.
King Canute:
CR Companion:
https://addons.mozilla.org/en-US/...efox/addon/ 9437
King Canute | Homepage | 12.03.08 - 11:39 pm | #
Nice addon king thanks
To add to that, with unemployment rapidly increasing on a monthly basis, sellers will outnumber buyers. We've seen just how many houses go unsold and are taken off the market - sometimes the owner desperately rents it out at a loss hoping for a housing recovery.
House prices are dropping so rapidly you're effectively paying double rent - once to cover P+I, the other in lost equity due to monthly depreciation.
A couple hundred bucks due to a lower interest rate doesn't compare to a couple thousand bucks in depreciation. Plus a lower interest rate saps appreciation because when the interest rate goes back up people will demand lower prices - you're now trapped without equity in "your" home.
I would like to draw your attention to a french study on the french real estate market adressing this very issue of interest rates.
The link is Home prices in France property prices in France house prices in France
real estate prices in France home price index in France property price index in
France house price index in France statistics , click on "Long term charts" and open the related doc file.
Look at the figures p.3 (affordability index - impact of interest rates). The key point is the following :
"One can see that the curves (at real as well as nominal interest rate) are no flatter than the simple curves of home price indices relative to disposable income per household shown on the previous page. This is related to the fact that, historically on the last 40 years in France, changes in home price indices divided by disposable income per household (as well as in nominal or constant currency) show little correlation with changes in (nominal or real) market interest rates.
The weakness of this correlation (which is the basis of the diversifying power of the investment in housing with respect to investment in bonds) is paradoxical at first sight (since around half of the amount of housing purchased has been financed by mortgages on the period considered) but is less so if one considers that the impact of interest rate variations may be hidden by non correlated phenomena, such as imitation (rises generating further rises, and falls generating further falls), or by negatively correlated ones (for instance, lower interest rates often coincide with lower economic growth thus lower households income)."
On a side note, please admire the huge housing bubble here in France... (fig. 2.2 and 2.4)!
"But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price."
Bill, that's where you make the economist's mistake. Potential buyers compare only other houses they can buy with the money. They don't see renting and buying as anything like perfect substitutes. They don't compare the return inherent in the price on a rental yield basis with other investments.
That's why we had a housing bubble in the first place.
Only two questions are asked: How much can I afford to borrow? Will someone lend it to me? After that, the potential buyer will simply buy the best house that they can get with that money.
There are too few "rational buyers" for the economic theory to work. As Shiller says, these are sociological issues.
I like the comment of "AC"
Once you get into subsidizing interest rates, you open a big can of worms. Housing prices will be higher than market price with subsidized interest rates - but high house prices are the problem! Houses prices rise, people can't afford to buy at current prices and INTEREST rates, goobermint will rinse and repeat. Of course, goobermint actually doesn't have the money from revenues to subsidize house prices directly or by interest rates - it will use the printing press. And everybody will buy the most expensive house (at subsidized interest rates)they can so that they can pay back the low fixed mortgage with ever more worthless dollars. We end up pretty much where we are now, but even worse off.
CR,
The mortgage rate peg by Treasury story seems to have been denied. I'm not sure it is worth giving it any more credibility. Let others in the mainstream press get played by the NAR as suckers.
If this were a normal world maybe a lot more people would consider buying a home but it isn't a 'normal' world.
If you have $25,000 cash do you really want to exchange that for 8 or 9 times that amount of debt? Like diamonds, a mortgage is damn near forever and selling a house in unsettled economic times can be difficult. Unless you have a 'tenured'
job why encumber yourself with debt and limit your mobility in these uncertain times?
... the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.
Sorry CR, but the universe of buyers I know never follow a chain of reasoning this deep. If you hadn't pointed it out, I would not necessarily have followed it either. I think you are confusing rational with "reasonable to expect." It's not reasonable to expect everyone to think three moves ahead. We don't all have the time or energy or inclination. We rely upon experts in so many araes of our lives, so that we may save our thinking capacity for what's important to us. It's rational, from our point of view, to farm out some thinking. In this case to realawhores - how else to have the time to master football and baseball fandom? And yes, we pay dearly for our ignorance and short-sightedness.
That's why I accept that I'm a born and bred dope.
Up until now, many experts have been saying that reaching the "bottom" of the financial crisis was contingent upon home prices coming down to truer valuations. This move seems likely to delay that process, no?
CR-
You know the reason the Gov't doesn't say it right now . . . Because they want the Dems to do it. The government said they would maintain positive net worth through the end of 2009. At that point, Obama has to pull another $5 trillion on the Gov't balance sheet. Then the repubs in 2010 can say the democrats increased the federal debt by 50% in their first year of power.
The problem is more elemental than described.
Government cannot set prices.
And yet the goldbugs want the government to set the price for gold.
I haven't read all the posts but several hit the nail on the head. 95% of the buyer will either have a lender tell them or the RE agent calculate what they can afford to buy based on what monthly payment they can swing. Lower the rate and they can pay more. that creates more demand. last prices move up and they are buying the same home they could buy now, just for more money with a cheaper rate. It may actually bring down some houses just over the conforming limit.
Love CR, but he's losing his fastball lately.
First, interest rates affect the values of all assets that provide a future stream of income or benefits. That is elementary economics. Of course interest rates affect home prices! And office building values, and stock values, and farmland values, and timberland values, etc etc.
Second, it is (or should be) real rates that matter. So let's factor that in before we draw conclusions.
At some point, people, there is going to be a tide of good news for housing and most people here are going to try to explain it all away because they are stuck on a negative call.
And of course the PROBLEM with having the bank tell you what you can afford is that many people believed that the bank based that number on an anticipation of being repaid over the term of the loan.
If you tie house prices to interest rates - as both the stories you cite have done - then you must accept both the ups and downs. You've made houses become like bonds: fluctuating investments.
Since the notion of speculation in houses is one of the drivers that got us in the fix we are in now and since we've also learned what people do when they are upside-down on a mortgage, it should be obvious that there could not be a more dangerous way of valuing houses.
One thing that has become crystal clear during the debacle of the last two years is that there is an amazing number of people at very high levels of authority and responsibility who have no clue whatsoever about what they are doing or about how things work. This is true in government, in business, in banking and in economics.
Think of how tortuous and convoluted this is--rate breaks for new buyers to help the soon-to-be-foreclosed upon?
To accept that this will work, you must believe 1) people are losing their homes ONLY because their prices have fallen--Tanta's elusive "ruthless borrowers" 2) the rate cut will boost home prices in a market with a huge inventory overhang during a collapsing economy 3) all this magic will happen so quickly that people 60- or 90-days overdue will be able to instantly refinance or sell.
Really? Is this really the theory?
Or is this just a gimme to NAR and the developers--just another scam from the long line of pigs at the bailout trough?
OT: Geithner May Seek to Push Bair Out After Clashes During Crisis
Geithner Seeks to Push FDIC’s Bair Out After Clashes (Update1) - Bloomberg.com
I think that Bair has done the best job in the admin. Her ideas are better then his and she should not be pushed out.
declining home prices don't cause local property taxes to decline it doesn't even cause the actual dollars in property taxes to change. The3 property tax rate may go up. What does cause property taxes to decline is if homes are abandoned or homeowners stop paying taxes.
Consequently as is so often the case- confusing means with ends- the aim should not be to prevent foreclosure but rather to ensure that foreclosed properties are moved back into home ownership and not left vacant.
crazyvermonter, maybe not where you live. But here the property taxes are based on the assessed value. When the assessed value falls the amount of taxes owed falls.
The same is true for the excise tax collected on the face value of a real property sale. Because the tax is a percentage of the sales price.
Not the least reason is because it will destroy the MBS market...
k,
Sorry kid. Market derrived interest rates drive market prices. Governmentally mandated low interest rates:
1. affect prices only to the extent that the rates stay low. That is, delaying the inevitable.
2. divert resources from other beneficiaries (i.e.: innovative technology, health and human services, etc.)
"At some point, people, there is going to be a tide of good news for housing"
Normalizing prices to historical normalcy IS good news. Real estate costs drive production costs. The temporary abberation you take as "good" is crushing the US's ability to compete in all areas of manufacturing.
Once again, I find myself agreeing with lama. Falling house prices are NOT the problem. Rather they are indications that there IS a problem. And that problem is that house prices are too high. I see Paulson in the role of king Knut (Canute) here: the tide is comming in. There's really nothing that he can do to stop it. It makes more sense to move to higher ground than issue ever more strident orders for it to stop.
This is a bit from a SF housing bull blog run by a SF realtor:
SFHomeBlog.com - A San Francisco Real Estate Blog
SF is finally 'officially' a Buyer's Market
"Despite month's of negative news regarding real estate, San Francisco has proven amazingly resilient to price decreases (southern neighborhoods such as South of Market not withstanding) that is, until quite recently.
Below is an analysis of Inventory Supply in San Francisco, compiled by Patrick Carlisle , showing a sharp change occurring in the market since September. The changes are particularly dramatic in several neighborhoods that have been very strong sellers markets heretofore."
I post the above only to indicate the decline is moving up stream into the higher end markets due to a significant lack of sales velocity, or very few buyers. Much of this decline is due to lack of move up buyers into the >500K and above price points. Sales velocity is good below
$400K put really slows as it moves up steam.
The upshot is there's more housing units than people who need them. Eventually population growth will catch up with it. Until then, all these efforts to tinker with it are just moving houses around from one owner to another but not solving the fundamental problem of more housing units than we need.
How come these so called experts always equate lower rate with higher values but never higher rates with lower values. We are partially in this mess because when real rates stopped dropping the mortgage industry created these affordability products to produce artificially lower qualifying rates. If home prices are allowed to reach a natural equilibrium the market will right itself.
Check out this site Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.
for an interesting analyis of the costs to rent vs. owning.
All we're doing here is moving from underpricing risk to shifting risk to taxpayers. No free lunch.
The problem here is that Global and Treasury assumes a pool of not only rational buyers but qualified buyers. The later is I think a very important piece of this puzzle. That is to say that many were able to purchase said homes with funny structured mortgage loans that provided 20% down and interest only. Lowering the rate would not make homebuyers qualified in the eyes of a bank. Will treasury force banks to approve all potential homebuyers? Didn't we see this movie already?
Taking on a mortgage is a long term commitment. In uncertain times, people are loathe to take on long term commitments. So, the economy will have to pick up before buyers come back in force. But supposedly the housing market is the key to any economic recovery. Seems like quite a conundrum.
I tried selling for six months and didn't even sniff an offer despite being willing to take a loss so that I could relocate closer to work. Then over the last two months, I suddenly got flooded with offers to lease my house even though I was not marketing as a rental. I went ahead and decided to lease.
Buyers are irrational. For a long time, the conventional wisdom was to buy even when the buying decision was irrational. Now the conventional wisdom is to rent even if it doesn't make econnomic sense. A cut of 1 - 1.5% in the prevailing 30 year interest rate won't do much to change the mentality.
Throwing money at the housing market will just be throwing good money after bad until the fundamentals of household creation and job growth are back in balance with supply.
I am really puzzled by the furor over providing $25-$39 billion to the auto industry when the government seems to think nothing of throwing hundreds of billions at MBS. Investing in industry and infrastructure will stimulate growth and yield lasting benefits. The basic underlying problem with this bubble, as well as all others, was the inefficienct over-allocation of resources. Too much money flowed into real estate. The answer to putting too many resources into real estate is not putting more resources into real estate! If the government is going to spend trillions of dollars, put the resources into areas that suffer from under-allocation.
Government cannot set prices.
Actually one of the more interesting things about recent fed announcements is that the stated intent of specific actions is to influence market pricing.
Not to control inflation or promote growth.
It used to be you had to read the attempt to impact prices into the announcements yourself. Now it's explicit.
I wonder:
Lower interest rates raise demand because housing becomes (relatively) cheaper. People who could not afford housing now can, so they begin to buy. Prices beging to rise. As prices rise, that same group of people who were beginning to buy are once again priced out of the market. And we're back to where we started: no change in prices.
It's like CR says - people's real budget contraints are what's holding down prices. HEY TREASURY: NOBODY HAS ANY MONEY, CAPICHE?
Rational buyers did not cause the bubble.
Irrational buyers look at the payments and not the risk of prices refusing to attract more irrational behavior/exuberance than their's.
Thanks.
Lower interest rates may not increase housing demand per se (although I'd venture that they would to at least some small extent), but they will help to prop up housing values. Irrational though it may be, the fact is that in the case of big-ticket purchases, monthly payment is the new price for many consumers. Home prices are notoriously sticky to the downside for the simple reason that once a homeowner gets the idea that her home is worth $x, she is loath to sell for less. So in that sense, lower interest rates will prop up housing values, which in turn will reduce ruthless defaults to the benefit of financial institution balance sheets.
For example, a conventional 30-year mortgage of $200,000 carries a monthly cost of $1,468 with mortgage interest rates of 8 percent. At 6 percent, however, a homebuyer could service a far higher $245,000 mortgage with the same monthly expense.
Buyer A looks at House B when rates are 8%. The price of House B is $200,000. When Buyer A decides to look at House B when rates are 6%, the price of house B will be $245,000.
The only way Buyer A can get House B for $200,000 at 6% is if the seller does not know that interest rates dropped. If the buyer and seller both get the supply/demand information at the same time, the price adjusts accordingly.
When the information discovery is equal, ou don't get MORE house when rates are down, you get the SAME house at the same monthly payment.
Back in the high-interest rate days of Volcker, the only reason house prices appeared to aprpeciate greatly was due to inflation; demand was not increasing. People were gushing at their 16% appreciation during a time of 18% inflation.
oops my analysis is flawed. Probably should be sticking to my day job anyway...
Refi's HAVE to be included! How do they think ALL these houses landed on the market at this time happened in the first place?
Refi's will provide homeowners with lower payments, allowing them to HOLD onto their homes AND provide them with MORE monthly monies for other things besides mortgages!
The other thing to remember is fixed interest rates with sensible underwriting really don't make a bit of difference in demand. Gimmicks/teaser rates are what increase demand, convincing Sucker A that they can afford a loan when they probably can't and convincing Sucker B that said loan is sound when it probably isn't.
Old&Feeble, saw that this AM. It points out the affordability factor. Which I think is far more important than the interest rate.
Prices are still to high to be affordable.
No one else here has pointed out the error in Global Insight's method. A similar bit of stupidity turned up in some academic models, by professors who denied there was a bubble, in 2006.
"Our approach to determining fair value in the housing market is statistical in orientation. This
contrasts with financial asset valuation, where a vast body of theoretical and empirical literature
addresses the question of intrinsic value. Rather, our approach examines a particular historical period Q1/1985 to Q3/2008 and accepts that
house prices, on average, adhered to some normal relationship to underlying determinants during that time."
In other words: "We have ignored the epic bubble which is now deflating. Instead of adjusting our method, or throwing out bubble years from the data, we pretend that all years of history are equally valid in predicting fair value. Our analysts know this, and are subtlely telling you they know it. However, because our customers like the high fair value estimates currently being produced, we have left our method unchanged, and continue to get paid."
Note that the coauthor of the housing price forecasts is National City. How is that working out for them? Over the last year their stock has lost over 90% of its value. They've agreed to be acquired. They are laying off thousands of employees.
I'm guessing crap housing price models contributed to the problem.
Exactly right, CR. We can look at the long bonds to figure out what's going on. Unless the Fed can somehow convince the world that 4.5% is the "new reality" this won't significantly impact prices. In fact in the short term when prices are falling so steeply and with significant oversupply, such monetary easing moves are but a fart in the wind. The 4.5% play would only have effect years from now unless they think investors are ready to be fooled twice.
Am I missing something? If house prices are overvalued shouldn't we let them fall and decreasing interest rates for home purchases won't help. Shouldn't lower rates be offered to poele who can afford their homes and need to refi?
Yes Bill.
Actually, the only reason we initially bought a house was to get the tax break, which at 12.5% in the 80s, was huge.
So in some cases, lowering the interest rate, and thus the taxes, would make it LESS likely people would buy a house.
Rent vs. Buy is no brainer, but most people buy a house because of lifestyle, not just how much they can rent a cheap house for. For most people who buy a house in a particular neighborhood it's a lifestyle they calculate is worth paying for, in human terms...unless you want to raise your family in a inner city apartment. Principal reduction happens, potential appreciation is icing on the cake. For a lot of people who never make a decision in any part of their life, analysis paralysis is just an excuse and attempt to convince people that they actually do have a reasonable life.....down by the river.
So in some cases, lowering the interest rate, and thus the taxes, would make it LESS likely people would buy a house.
donna| 12.04.08 - 12:12 pm |
Well, that's correct Donna, but I can undo your arguement with the following nonsensical statement.
"You know, there's a BIG tax advantage to owning your own home! Renters don't own anything but a big box of rent receipts."
"This is a bad idea from the Treasury. And leaking this story is a terrible idea"
What, a stupid idea from the Administration of the Damned? And a counterproductive, self-destructive leak to go with it?
Who'd a thought THAT would happen.
Anonymous writes:
$200K house at an artificial 4.5% rate means 5 yrs from now when rates are 8-10% that same house will have to sell for 180K to sell at all
Anonymous | 12.04.08 - 12:06 am | #
This is why I think at the end of the day it only makes sense to buy if:
The it is less expensive to buy than rent AND you plan on being in the property basically forever or at least as long you can ride out any ups and downs in the market.
If you are planning on staying for ten years and then moving or trading up or down it probably does not make sense.
It only makes sense if you get some non-pecuniary benefit from owning that home. For instance you have money to burn and like the idea of owning and having a family home. You like that your kids have a nice place to live the whole time they are growing up. You are buying into a community that has no rental properties. I am sure there are lots that people can come up with.
None of these apply to my fiancee and myself. We have a great apartment in a neighborhood we could never afford to own in (at least not for a very long time.) We don't have to pay the maintenance bills on our 100 year old apartment, including the exterior painting bill which is at least $20,000. We save at least $2000 a month over what a condo of that size in our neighborhood would cost if it were even available. (or at least what it would have cost before prices started to decline slightly.)
So we have 2,000 extra a month to invest in the stock market which is down 30 to 50% right now for retirement. Hopefully this will work out in our favor and not just end up losing us all the savings.
Oh and if my fiancee loses his job we can pack up and move at very little notice. No house to sell at a loss. Of course I might feel differently if I had a pack of kids, but maybe not if I could afford to save for their college education.
Interest rates don't affect prices of capital assets???? Puh-leaze!
I think you are way off on this.You or I my not think it's rational, but many potential home buyers prefer to own a home if they can afford it. Home prices are all about affordability, and the interest rate is one of the key components (along with down payment requirement and debt to income ratio). The entire bubble and subsequent pop is attributable to the changes in these three factors between 2001 and now; just look at which markets have been most affected and their affordability indexes. I worked through the math here Residential Property Analytics: Effect of Interest Rate Changes on Home Values and here Residential Property Analytics: Blame Your Neighbor for Your Falling Home Value
The real inducement for the run-up in home prices was the ease in obtaining financing. I did a lot of work in establishing pricing for a homebuilder during the boom years and followed trends very closely. I was really very surprised by how little impact increasing interest rates had on demand and pricing. I see no reason why lower interest rates should have a dramatic effect on the other end in the face of a difficult financing environment and declining prices. The Treasury program would have some effect sure, but I doubt it would be dramatic. Prices aren't going up until the supply overhang is substantially reduced. Demand isn't going to increase substantially until financing becomes more widely available. Financing isn't going to be become more widely available until prices start going up. It's going to be a long slow process getting out of this mess. We're probably close to the bottom, but there is absolutely no reason to expect a housing led recovery.
The benefits of owning a home versus renting are enomous if you are going to stay in one place for a long time. It's a great time to buy if you can do it, but this "leak" has the potential to do tremendous harm. If I were looking to buy now, I would place my plans on hold and try to hold out for the 4.5% rate. If too many people do that, sales plunge even further taking prices with them creating more foreclosures. Can Treasury really create enough 4.5% mortgages to carry the whole market? Seems doubtful. In that light, this idea seems like it will be a good deal for a few and a bad deal for the many if it goes through. Typical Paulson.
seems that a rational buyer would buy when rates are high. that way they can refi down to a lower rate if they choose to stay, or command a higher sales price if they want to go! (and rent or downsize)
High interest rate is coupled with soaring property price have only impacted the affordability of demand, buyers however continues to persist and would become stronger and more intense in near future.
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