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Rising Interest Rates Mean Falling Home Prices

Posted in Just the Facts with tags , , , , , , , , , on February 13, 2011 by marcitz

A recent broadcast on NPR called Buyers Face Gamble with Rising Mortgage Rates made it clear that buying a house now may be a very bad idea.  While they gave some very good points they missed some very key (and much more concerning) points.

While they pointed out that its dangerous to buy now because prices are due to fall another 10% but that threat existed  before interest rates rose.  With interest rates rising that will be a new and different reason to drive housing prices down leading to enhanced price decreases.  Afterall the logic is housing prices go up when interest rates fall because its cheaper to buy that house (you pay less on your mortgage purely because of interest rate) so you have more to bid in getting that house.  Well the same logic applies in the negative.  Prices go down when interest rates go up because people have to put more of their budget into servicing the mortgage debt and less into the principle so they get a smaller loan.

Oh and one other thing.  With rising interest rates those that have to refinance will be less able to do so for two reasons.  The comps will fall with enhanced falling prices (so they’ll get lower appraisals and won’t be able to refinance as much) and they will be less able to afford the refinance as well as the whole point of the refinance was to lower your monthly payments.  Bonus issue is with falling prices they’ll just be more foreclosures anyway.  The net of these two-plus issues is that foreclosure rates will increase again creating more supply providing the third impetus for housing price declines.

Don’t anyone let you believe the market turns around this year or in 2012.  We’ve got until 2013/2014 before anything long term happens (not these little short-term govt incentive inspired blips) and that won’t be spectacular.  Get into a mental place where a good housing market means flat growth.

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Your House “Value” Has NOT Changed

Posted in Just the Facts, Stories with tags , , , , , , , , , , on April 8, 2010 by marcitz

There is a mad rush to protect the American Dream of home ownership.   But its not under any threat because the “American Dream” value of that home hasn’t changed.  People buy homes because they want that American Dream.  The most commonly reasons people VALUE having a home are:

  • A place to call my own
  • A place to raise my children (schools, friends, etc…)
  • A place to plant a garden
  • Build up a nest egg for when I retire

Well last time I checked none of that has changed so why the panic and the rush to save people?   Granted your nest egg may be a little smaller but at least you won’t waste your money all those years on rent and over the long term this will recover, you just have to be in it for the long term.

Why do I bring this up?  Well its because I think we, in our rush to help the so-called “vicitms” of the housing crash, are confusing the issues in a detrimental way.  If you bought a house for the above (long-term) reasons then nothing has changed so you don’t NEED a bailout. If you bought it solely as a short-term investment then you are a SPECULATOR and DON’T DESERVE a bailout.  Often the former is used to justify the latter and that needs to stop.

From a recent New York Times article came this quote,  ”There is also the risk that more people will decide that they are so far underwater — that is, they owe so much more than their homes are worth — that it makes more sense to just walk away.”

True but is that right?  Look when you bought your house you clearly said “this asset gives me value for the price I paid for it” otherwise you wouldn’t have made the single most expensive purchase in your life.  For most home owners that value is that “sense of place” (see the list above) and regardless of underlying “pricing comps” that place (and related value)  is still very much the same (garden, kid’s school, etc…) .  If you can still afford the payments isn’t it providing the same value/sense of place regardless of the underlying price?  Also if you plan on being there for a long time (isn’t the main reason for homeownership “stability”) then short term price drops don’t really matter.   When you invest in a stock you don’t drop it the minute it dips.  

If you feel you should walk away then you are treating your house MOSTLY as a short-term investment and not as your long-term commitment to the “American Dream” so you can’t use those arguments in justifying help for those investors.  Oh and if you can’t afford the payments then you can’t afford the house so its better to get you into a living situation you can afford so you can start your discretionary consumer spending again (which is what the economy really needs). 

One additional argument is “well they lost their job”.  Unfortunately we all are at risk of that so when chosing your living situation you need to assume that is part of the model when calculating the purchase price of a house.   Renters also lose their jobs and none of them are clamoring for rental reductions.

Given that here’s another crazy solution.  Why not put less money into housing subsidies and more into supporting all unemployed people regardless of their chosen model for putting a roof over their head.  This current HAMP plan (especially the unemployment provisions) show that the government doesn’t want everyone to have a roof over their heads.  Just the homeowner.  IMHO housing (regardless of financial structure) should be a right in general, the financial form it takes (renting versus mortgaging) to obtain it should not matter.

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Economic Racism is Alive and Well at the New York Times

Posted in Just the Facts, Stories with tags , , , , , , , , , , , , , , on April 3, 2010 by marcitz

My love-hate relationship with the New York Times continues.  Recently an article deal entitled Help Paying Mortgages Elicits Anger (by Tara Siegel Bernard who can be emailed at tsbernard@nytimes.com)  tried to make the point that fairness isn’t important what needs to be done should just be about the greater good over the long term.  Unfortunately, because of the prevailing and irrational home ownership bias in this country all assumptions were based on just that, preserving home ownership even if its bad for the owners themselves.   In pulling apart the arguments in the piece I found a new way to look at this homeownership bias.  It is actually a form of “economic racism” that, in a post Civil Rights world, fills the racism void.

For me the AHA! moment was when I read this quote that was designed to defend government bailouts of homeowners –   “It (the fall in house prices) shouldn’t be something people should be punished for,” said Robert Shilller.

AHA! Having some one leave a house they couldn’t afford and instead live in some other, presumably more affordable rental property is PUNISHMENT!  There it is – that subtle nasty  undercurrent (“economic racism”) that “renting is bad” that fuels even Robert “Da Man” Shiller’s argument.  Ms Bernard even says  ”a government should consider the greater good over the long-term” in which she is implying that home ownership is the “greater good”.  Categorically it is NOT true as per these sources:

Don’t get me wrong.  I think home ownership is a fine tool for many people (those with enough means to support all the ancillary costs of home ownership in both money and time, those for whom mobility is not an issue) but renting is a fine tool for many others (those with less means, who need mobility, don’t have time/money for all the home ownership maintenance issues).  Neither one is categorically better all the time and their mix of appropriateness changes as prices in both markets ebb and flow.

Recently (in the New York Times) there was a great piece (the “love” in my “love/hate” relationship) that pointed out that Tea Party arguments against health care reform are really about racism and having to embrace a new world of Blacks, Latinos and Women .  I would like to argue that Ms. Bernard’s (and Dr. Shiller’s and most other “pro-housing”  arguments) are about fear of embracing a world of renting as opposed to owning.  Like white majority, homeownership has been the goal and desire of those in power over the past 80 – 100 years at least.   It may be time for a change that no one wants to embrace.   Not surprising it was our current President who was the first one  to try and  find a way to phase out the mortgage income tax deduction.

Unfortunately the “greater good over the long-term” is that everyone gets over their social security blanket (or economic racism)  that home-ownership is the only valid and right way of living (it’s the “white makes right” equivalent of modern US economics).  Unfortunately the only way to do that is to encourage people to try other forms of living to see that in many (but not all) cases those other ways are actually better but that is not what is happening.  If you have easy access to a mortgage hammer then everything becomes a home ownership nail and we’ll never know.  I HAVE A (different view of the American) DREAM!!!…

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Countdown to Renter’s New Year

Posted in Uncategorized with tags , , , , , , , , , , , on March 30, 2010 by marcitz

Well it’s almost the New Year for the Renter.

Today is Christmas in that the government will officially stop buying Mortgage Backed Securities allowing housing prices to resume their downward spiral towards reality and affordability. 

When this countdown timer reaches zero the government’s Home Buyers Tax Credit will expire at which point all renters should unite and scream “Happy Renter New Year!” that is unless we wake up hungover the next morning only to find out that the government has again taken away the punchbowl of renter justice.

Or are we going to be able to “Party Like Housing was Priced in 1999″?

Click to see the countdown timer

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Learn to Fish Or You’re Fucked

Posted in Financial Literacy, Just the Facts with tags , , , , , on November 5, 2009 by marcitz
Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. 
                                                                                                                                                   – Chinese Proverb

In dealing with the housing crisis or even the larger economic crisis two things have been happening.  The government has been throwing money at the problem and now they are throwing regulations at the problem.  Let me first start off by saying that this is not a post about whether either of those is right or wrong (both are probably right to some degree).   This is about the fact that that won’t actually protect people from the next big bubble in which everyone, blinded by greed and ignorance, will get suckered again.    That’s because the next bubble is all about something that isn’t covered by regulation.  It won’t be housing, it will be something else (my bet is on “green” stocks in about 2017 or Gold 9 months from next Tuesday).  In short the government is giving everyone a fish in terms of regulation, they are not teaching us how to fish in the form of education.

Don’t believe me?  Well lets see how well governments have prevented bubbles from reoccurring in the past.   To do that check out these stories and articles:

Well those books go so far back that maybe they were just stupid in the dark ages.  Fine lets go more recently to America where we have brilliant financial minds, computers and Jimmy Dean Sausage-on-a-Stick.

So three bubbles and three new sets of regulations and someone still found another bubble that wasn’t covered by the previous regulations (as they have been doing for 800 years, long before computers or Jimmy Dean).  One can argue that the regulations at least prevented the bubble happening in the same area but alas another bubble still happened.

What this means is that the government really should be teaching the American public HOW TO FISH or at least how to smell something that’s fishy because in the end there will be another bubble, followed by another set of regulations, followed by another bubble.  Regulations always arrive to late so you, the indivdual, have to survive on your wits for a bit.

Up until now, however, have you heard anyone in Congress talk about introducing financial literacy into the schools? NO!   Are we worried people won’t be interested?  Au contraire mon frere as you can check out the most popular class at Wellesley which teaches the basics of personal finance.

Is the government producing and distributing basic facts on making large financial decisions to the public? NO!   Maybe they just don’t want to draw attention to how many kids graduate public school and can’t read.

So in short if you don’t get yourself educated you are completely screwed when the next bubble comes along.  If you don’t believe me remember I’ve got 800 years of history, 2 Harvard economics professors (one a Nobel prize nominee), the former chief economist for Bear Stearns (she got out long before “that” happened), and a 24 pack of Jimmy Dean Sausage-on-a-Stick on my side.

And to make sure I end on a depressing note I’m not even sure regulation can prevent the same type of bubble from happening again.  In 1997 the FDIC published a study called “History of the Eighties – Lessons for the Future” in which you can find this little gem: 

Third, the banking problems of the 80s and 90s came primarily, but not exclusively, from unsound real estate lending.  It is instructive to note that the real estate boom and lending fiasco appears to have started in the United States.

…Excess real estate lending, powered by rapidly rising rents and prices, rapidly occured worldwide.  But more than anything else, real esate lending became the fashion, the ‘new’ banking idea of the times.

So PLEASE President Obama, take us to the nearest lake or stream and show us how to cast an economic line as we shouldn’t be the ones taking the bait.  Sure spend some time on regulation but more (or at least some) time on EDUCATION.   The best I can do in the short term is send you to an excellent site called the Khan Academy (look under the “Finance” or “Credit Crisis“ section) which has some great educational videos.

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Why Higher Prices are a Bad Sign

Posted in Just the Facts with tags , , , , , on October 11, 2009 by marcitz

In the San Francisco Chronicle this week there was an article that tried to find a positive sign of a housing recovery from the fact that house listing prices had started to rise.  The article did point out that this was strange given that all other stats (selling price, # of sales, and price per square foot) had been falling at the same time.  Still the general consensus was that a good thing was happening and I quote “this optimism is a trend for the area…”  Try again…

What is really going on here is quite a bad sign and represents the last ditch efforts of sellers to deal with increasing buyer negotiating power (and proof that they finally accept the switch to a “buyers market”).   Specifically sellers now know they will be forced to negotiate A LOT more than they thought up until now.  In fact they all have in their heads a percentage (much larger than before they adopted this strategy) of how much they will have to lower the price of their house to get the deal done and they believe that is an absolute.  As a result the only way to combat that is to raise the price so when the required and large discount happens you still can capture some upside.

Here is an example from the recession of 1980.  My father sold window coverings to bring in some money above his teaching salary.  Typically they are priced with 50% margin (so window blinds he lists for $100 cost him $50).  He carried sheets that had these list prices on them and his customers all knew what the margin was (most people assume 50% for most products regardless of the truth).  Then one day his distributor, during the economic downturn of the early 80s,  offered him some “60% markup sheets”.  Simply put these were the same list price sheets but they had a 60% margin built in.  So now the same blinds had a list price of $125.

The result?  Well without saying anything (because of the common market belief in a 50% margin) he could offer his customers 50% off (in theory offering the blinds “at cost”) making them extremely happy and more willing to buy even during that recession.  In reality he still got to pocket 10% ($12.50) margin and no one argued.  Afterall you can’t get something below cost can you?  This was also very believable to the customer because it was a recession so my father should just be happy to sell at cost just to keep his business around, if not profitable.

So that is what is going on here.  Sellers are increasing the implicit markup knowing they have to sell “at cost”.  In this case the “cost” is the minimum price at which the seller is willing to offload the house.  The “markup” is actually the percentage that they know they will have to reduce the price to move the sale given current market conditions.  Like the story above they just pad the “markup” so when that percentage comes off they get to preserve some margin.  Assuming this works.

Don’t get me wrong, when the market does truly recover of course listing prices will rise, justifiably.  The difference  here, however, is that none of the “true” stats (those that represent actual buyer behavior as opposed to seller aspirations and packaging) show this upward momentum.   Remember listing prices don’t actually mean anything.  In the world of economics (as opposed to the world of real estate fantasy) the true “market clearing price” of an object is what the buyer is willing to pay (and actually close the transaction) NOT at what price the seller is initially willing to sell.

So in the end this strategy is a form of seller capitulation and not market improvement.  Sellers now know they must discount heavily (not just a token amount) and are trying to preserve some minimal upside.  Strap in because this ride is a lot longer than most wish to believe.  To the 5 year old real estate optimists in the back seat “no honey, we’re not there yet, why don’t you nap some more.”

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Why Case-Shiller Is A Bit Fucked

Posted in Just the Facts with tags , , , , , , , on October 4, 2009 by marcitz

As the old Real Estate aphorism goes “Only 3 things matter – location, location, location”.  So the issue with relying on Case-Shiller (which has been “growing” for three months – yippity f-ing doodah!)  is that the “city” used for valuation is usually a multi-county location with each location being at a different stage in the price cycle.  The “San Francisco” area ranges from Pacific Heights to the Brentwood suburbs over 55 miles away.  Brentwood may have bottomed but it will take some time for the Silicon Valley and the “City by the Bay” to follow it into the abyss.  Oh and by-the-way Silicon Valley, typically considered Santa Clara county, is not actually in the index.

The recovery that Case-Shiller has been talking about is allowing the far out suburbs to mask further falls in the inner-core. The net result is, as Case-Shiller recovers, people closer to the namesake city buy too soon under the false pretense that their little pocket of the world has improved with the broader index.  Ironically those in the exurbs will now do better than those closer to the city named in the index.

How will prices in the inner core eventually fall into the abyss?  Simple migration.  The cheapest areas will draw from their neighbors (Brentwood from Dublin) lowering the prices for the neighbors as well (as Brentwood represents a “substitute” in classic economic parlance).  Those now lower price neighbors will then draw from their neighbors one step closer to the inner core (Dublin from Castro Valley) drawing down the prices there.  This will then continue  as such – Castro Valley from Fremont, Fremont from Mountain View and finally Mountain View from Palo Alto.  In the end nature abhors a pricing vacuum and one currently exits in the exurbs.  It will take some time before it really sucks here in Palo Alto.  But it will suck!

The net-net is the worst place to buy right now is anywhere near the city named in the index.   Oh and if your not actually in the index then purchase at your own risk.  You say you live in the “San Francisco” area but remember that it is a spiritual and not a statistical distinction according to Messrs. Case and Shiller.

To add to the scary (and highly varied picture) take a look at this chart which shows how wildly different the valuation story is WITHIN  the “San Francisco” area:

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

Also look at this analysis as why Palo Alto is in for a fall (albeit 2 years later) like Brentwood: http://invisiblerenters.com/2009/06/23/why-palo-alto-housing-will-fall-30-or-more/

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A New Measurement for House Price Declines

Posted in Just the Facts with tags , , , , on August 3, 2009 by marcitz

Given the severity of house price declines it only seems like it merits its own measurement as neither the English system (inches, feet, pounds, etc…) nor the Metric system (meters, kilometers, grams, etc…) can properly convey the magnitude of the fall.  For this I propose a new measurement called the Greenspan which measures the distance between the value of your house at the peak of the market and what it will measure at the bottom of the market (whenever that occurs).

Why call it the Greenspan?  Here are three very sound reasons:

  • “Green” is, of course, the symbol (in the US) of money and wealth.  For example “after the latest economic collapse I have a lot LESS green.”
  • “Span” measures distances and often LARGE ones (like bridges and the distance from one side of the Grand Canyon to the other).
  • “Greenspan” as in Alan Greenspan the person who is significantly responsible for this mess.  It it is time he is honored for his role in this.

As a baseline, a single Greenspan is a 25% fall in value from peak.  Given that the average US market will probably fall by as much as 2 Greenspans in total.  Certain markets (like Vallejo, California) could see a drop of 3 Greenspans.

Remember real estate is local so your Greenspans may vary. 

See how Palo Alto, California is due for AT LEAST a 1.2 Greenspan drop.

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Why Palo Alto Housing Will Fall 30% or More

Posted in Just the Facts with tags , , , , , , , , , , , , , on June 23, 2009 by marcitz

Green shoots, the recovery is here, houses are bottoming!

Not so fast!  Yes many areas may be reaching a bottom but that does not mean that all places have hit bottom.

For example it is believed that housing bubble ground zero locations like Vallejo, California have come close to a bottom.  Therefore, hot areas like Palo Alto, must also be similarly close to that bottom eventhough prices there have not fallen (on a percentage basis) nearly as much.

The typical explanation for the differential treatment is that Palo Alto is desireable and therefore immune to a large price decline. I would like to suggest that its not about “absolute” price but “relative” value.

Yes, a house in Palo Alto will ALWAYS be worth more than a house in Vallejo but I argue that the RATIO of house prices should remain close to constant. If Vallejo rises in value then Palo Alto will rise in value but if you divide the value of a house in Palo Alto by the value of a house in Vallejo the resulting number should, over the long term, be relatively the same. So that is what I did.

Using data from Zillow I took the sales price per square foot of houses in Palo Alto over the past 10 years (2000-present) and divided it by the same metric from Vallejo to plot the ratio. For extra credit I also calculated the ratio of Palo Alto to both Hayward and Mountain View.

Why Hayward and Mountain View? Simply put Hayward is a little closer in and a more rational commute (not many people would think you were NUTS to commute to the Silicon Valley/San Francisco job centers from there). I chose Mountain View because that is the, only slighly less desireable, southern neighbor to Palo Alto.

So here is a picture of what I found:

Price Per Sq Ft Ratios

What does this all mean?  Well let me state one other assumption and that is let’s assume the year 2000 was a ratonal year and that that ratio represents a normal premium of Palo Alto over the other cities.  (older data was not available from Zillow)

Lets divide the chart into 3 segments:

  • 2000-2001 – The “normal” period in which the ratios represent the typical balance.
  • 2002-2006 – The “bubble” in which all hell broke loose.
  • 2007-2009 – The “deflation” of the bubble. (NOTE most people agree that the bubble started deflating in 2006-2007 across the US.)

So in the “normal” period we see the ratios between Palo Alto and its neighbors staying relatively confined (maybe a 5-10% swing at most).  This is what you would expect.

Now if we look at the “bubble” period we see a relatively dramatic drop in the ratio which means that Vallejo and Hayward were gaining on Palo Alto.  Did they actually become more desirable?  Well traffic would go up (more people were moving there driving up those prices) so I would say “no”.  What it really means is that the bubble valuations hit Vallejo first.

Now if we look at the “deflation” period we see the ratio turning DRAMATICALLY in the other direction and well above the historical norm.  This means that either (or both) that deflation hit Vallejo first and the bubble hit Palo Alto second.

One might argue that this means Palo Alto is safe EXCEPT for the fact that the ratio has so dramatically outpaced where it was in the “normal” period in 2000-2001.   If it had returned to the levels of the normal period in 2000 then there would be nothing noteworthy here.  In fact Vallejo returned to almost the exact same price per square foot in 2009 that it was in 2000 where as Palo Alto was still almost double where it was in 2000 as shown here.

price comparison

So what would it take for this ratio to fall back into line (and deflation to hit Palo Alto second)?  Simply put, compared to Vallejo, Palo Alto prices would have to fall 39%.  Compared to Hayward they would have to fall 26%.  This of course assumes that Vallejo and Hayward have truly bottomed out which is probably not the case.  Assuming they have even the most conservative estimate pegs Palo Alto at a 26% fall.

Heck even compared to it’s neighbor Mountain View it would have to fall 11% to come into line with the historical ratio.

In short Palo Alto has some falling to do.  It just was late to both parties.

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Killing MORE Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , on May 4, 2009 by marcitz

So my last article on the myths of homeownership was so popular I decided to produce a sequel.  This is not so hard because there are so many.  Enjoy!

Myth #6 – Once you pay off your home you get to live in it for free

The theory goes you have 30 years of payments (lets assume you haven’t, like friends of mine, refinanced it over-and-over again pushing out the end of the loan).  After that you have no more payments.  With rent you will have payments every month forever.   The latter is true, the former notsomuch.  In fact there are many substantial ongoing payments you will encounter with your house including:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent both in its ongoing behavior and the fact that it can change and grow over time.  Here’s another thought to consider.  Property tax is a major source of school financing.  Given the “great recession” we are in (and will continue to be in for the next 2-5 years) other sources of funding are being cut making schools even more dependent on property taxes.  As school quality is a major contributor to housing values expect home owners to be extorted into paying increased property taxes to preserve their home values.
  • Maintenance also goes on forever and that is variable and unpredictable. So it also behaves like rent but much more violent in its swings.  I never got a bill from my landlord for $15,000.  As a homeowner its only a matter of time before you get that bill for a new roof ($15,000) or new pipes ($thousands).  Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.  Oh and if you live in New York City you are familiar with “maintenance payments” which are often substantial (in the thousands) and are paid monthly (like rent).

Myth #7 – At least your monthly payments are predictable and won’t go up like rent

Well this really depends on how you financed it. A very large percentage (and possibly the majority) of mortgages done in the past 8 years were adjustable-rate.   That could swing way above rent or way below depending on the interest rate environment.  Given the dramatically low interest rates that drove the housing bubble and there is really no where for your mortgage payment to go but up.  Combine this with the large amount of cash being pumped into the economy (which will lead to inflation) and you are looking at MASSIVE interest rate adjustment 2-5 years out meaning your “rent” is going to go up possibly 20-100% (my rent has never gone up more than 10% and that was during a boom and during a bust it actually went down).

So remember, homeowners and renters are not so different except for the massive loss in equity that ownership is currently providing. 

Please feel free to bust more housing myths in the comments section.

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