The Opportunity And The Sacrifice In California
The Orange County Register reports from California. “Yes, we now hear pundits claiming the recent advances in home prices should be viewed with steep skepticism, as in the minds of these purported experts these price increases may already be overdone. I’m all for a healthy debate. But some of these comments feel more like sour grapes from a bunch of market observers who not too long ago thought prices had further to fall. I’m not saying that future gains are by any means guaranteed or that the local housing market isn’t vulnerable to shocks, especially large economic ones. But in the broadest sense, Orange County’s housing market is still in the early recovery stage. Bubble? Hardly!”
CBS Los Angeles. “A dozen pre-qualified buyers have pitched tents in front of the still under-construction Brightwater Capri development in Huntington Beach. Before the first sale on March 2, the home builder believes there will be as many as 30 buyers camped out for a chance to buy a home between $800,000 and $900,000. ‘So if you want the opportunity, you gotta make the sacrifice,’ camper Terry Torline said. ‘Based on what’s out there in the marketplace, it’s a real good deal right now.’”
The San Gabriel Valley News. “The Century 21 Marty Rodriguez team in Glendora managed to rise above those challenges last year to rank No. 1 in Century 21’s nationwide network. The office’s total volume of more than $3.9 million in commissions was more than double the production of the second-ranked Century 21 team. The Marty Rodriguez team sold a total of 409 housing units in 2012. Rodriguez said about 40 percent of the transactions her office handles these days involve Chinese investors who put 30 percent or more down on the homes.”
“‘They think it’s a better investment,’ she said.”
The Santa Clara Valley Signal. “The hunger for listings is so intense that I listed a property at 8 p.m. a week ago Monday only to have 12 offers on it by 2:30 p.m. the next day. None of the offers came from prospective buyers who had even seen the property; all 12 were all-cash offers; and, all of the offers were at list price, with the exception of one offer, which was significantly higher than list.”
From KFSN. “Merced County has often had one of the highest foreclosure rates in the state, and even the country over the past few years. But now the numbers have dropped dramatically. ‘The days of going home to go and sleep on it are over. If you see something you like you better make an aggressive offer,’ Realtor Andy Krotik said.”
The Victorville Daily Press. “The Victor Valley housing market has shown a steady recovery in the past year as home prices rose 23.5 percent. The recent price hike is largely due to a lack of homes for sale in the market and a growing demand from buyers. The January inventory was about a half of what it was in 2012. Quality homes under $200,000 get multiple offers in a matter of a few days, local real estate agents say. But regular homebuyers who have to take out loans are having difficulty competing against cash investors.”
“Investors are buying Victor Valley homes and planning to sit on them for seven to 10 years before they start selling at increased prices, said Ben Lamson, who manages local properties for a few out-of-the-area investors. For now, these investors are renting out the houses.”
US News & World Report. “Could California’s battered housing market finally be pulling out of its long and painful decline? As with all news that seems ‘almost too good to be true,’ it probably is. That’s because the major drop in foreclosures is tied to recent state legislation passed—dubbed the Homeowner Bill of Rights—that went into effect January 1. More recently, foreclosure prevention laws in Washington and Nevada have followed a similar boomerang pattern—albeit a pattern that took longer to develop.”
“A July 2011 law in Washington state triggered a 12-month foreclosure slowdown, but the state’s foreclosure starts have now increased on an annual basis over the last seven months, hitting a 26-month high in September 2012. Meanwhile, Nevada foreclosure starts rebounded to a 16-month high in January after a 14-month foreclosure hiatus following a new law that took effect in October 2011. Maybe the pattern will be different with the California Homeowner Bill of Rights. But don’t count on it.”
The Desert Sun. “Foreclosures plunged across the Coachella Valley, Inland Empire and California in January, and the new California Homeowners Bill of Rights is being given credit for a big part of the drop-off. Real estate professionals and analysts said another reason for the drop in foreclosures is that homeowners have an ever-expanding array of programs available to help avoid default.”
“Pat Veling, CEO of Brea-based real estate analysis firm Real Data Strategies, said much of the inventory of lower priced homes is now gone, and some banks are holding on to properties. ‘The banks are clearly manipulating to add value to the assets they are holding,’ Veling said.”
The Monterey County Herald. “A Florida couple have filed a lawsuit alleging two local real estate professionals conspired to enlist them in a fraudulent home loan to secure a house in Pacific Grove. Seemingly backed up with tape-recorded evidence, the couple claim loan officer Robert Walker and Realtor Deba Christensen tried to persuade them to fabricate a lease agreement and rental income on their Florida residence to qualify for a loan. When they balked, commercial pilot David Hurstfield-Meyer said, he lost more than $13,000 he had placed in deposit.”
“According to the suit, Christensen and Walker conference-called Hurstfield-Meyer’s girlfriend, Tracey Michel in mid-December and told her underwriters might require that the couple lease their Florida home to show additional income. Both allegedly told Michel the lease did not need to be authentic. ‘All (they) had to do was to get a friend to draw up a lease agreement with them and get the friend to deposit a check into their account until the loan was approved … then tear it up,’ the suit states.”
“When Hurstfield-Meyer objected that the plan would be illegal, the suit alleges that Christensen told him: ‘Money is tight in today’s market and people are looking for ways to get loans approved. It’s not like trail blazing, everyone does it.’”
“Sandy Haney, CEO of the Monterey County Realtor’s Association, and former state Real Estate Commissioner Jeff Davi said loan fraud remains a problem, in part due to strict lending practices put in place after the housing market crash. ‘Fraud is still a big thing on the Department of Real Estate’s radar because the market is so tight, people are desperate,’ Haney said. Said Davi: ‘After what we’ve been through in the last six years … I’m surprised that there are still people out there who think it’s still OK to lie to a lender, (but) it happens a lot.’”
The Mercury News. “Don Faught, a 25-year veteran of the real estate business, is this year’s California Association of Realtors president. In an interview, Faught talked about the housing crash and nascent recovery and his plans as the association’s president this year. Q: What do you hope to accomplish during your year in office?”
“A: We’re working on professionalism and ethics. This distressed property market seems to have brought out some bad actors. We have a task force working on changing the licensing laws.”
“Q: Any advice for homebuyer? A: I would tell the buying public, be cautious. Buyers who are waiving inspections and doing anything they can to get into properties may wake up with a huge hangover the next day.”
“But some of these comments feel more like sour grapes from a bunch of market observers who not too long ago thought prices had further to fall.”
It’s definitely those bitter priced-out renters mouthing off again!
From the OCR piece:
‘Based on DataQuick’s median, the Orange County median selling price peaked in June 2007 at $645,000…A near-collapse of the world’s financial markets…helped push Orange County home prices down to their most recent cyclical bottom of $370,000 in January 2009. That was a 43 percent drop in 19 months.’
‘In the four years since the bottom, Orange County prices have risen 24 percent to January’s median selling price of $460,000. That’s only an annualized rate of recovery of 5.6 percent. Remember: In the 1990s, it took almost seven years to regain the losses – at least, as measured by DataQuick’s median’
‘Our latest wild ride will turn 6 years old in June, dating back to the 2007 pricing peak. So far, in 66 months, only one-third of the price drop – as measured by DataQuick – has been restored. We’re running quite behind the rebound pace from the previous real estate darkness of the 1990s.’
Which is a long winded way of saying, ‘$460,000 is NOT a sh*tload of money!’
Let’s put the matter of insane prices aside; I might be convinced this was a “recovery” if, interest rates weren’t being manipulated to absurd lows. If the central bank wasn’t buy $40 billion in MBS a month. If the lending institutions were private, not government zombie institutions. If banks had accounting rules put back like they were and couldn’t sell foreclosures when it suited them. If there weren’t a dozen government loan programs designed to keep FB’s in the house no matter how impossible to actually pay for it. There’s probably more. But for California, don’t forget this:
http://www.capradio.org/articles/2013/02/28/report-foreclosure-sales-continue-to-fall
‘RealtyTrac’s Daren Blomquist says there were 235,000 foreclosure-related sales during the year…representing 38% of all sales in California. “…but that was down from 44% of all sales in 2011, it was down from 49% of all sales back in 2010.”
‘Despite those decreases, California still had the highest percentage of foreclosure sales of any other state in the country.’
“I might be convinced this was a “recovery” if, interest rates weren’t being manipulated to absurd lows. If the central bank wasn’t buy $40 billion in MBS a month. If the lending institutions were private, not government zombie institutions. If banks had accounting rules put back like they were and couldn’t sell foreclosures when it suited them. If there weren’t a dozen government loan programs designed to keep FB’s in the house no matter how impossible to actually pay for it. There’s probably more.”
I find it interesting that amateur journalist Ben Jones can come up with ten spurious reasons for bubble price reflation off the top of his head which the OC Register reporters never bother to mention.
It’s the reporters job to ignore it and pretend everything is better now. Buy while you can, it’s a great investment!
Newspapers and realtors… two dying industries trying desperately to prop each other up.
Newspapers and realtors… two dying industries trying desperately to prop each other up.
The newspaper in the small town where my parents live just went under after more than 100 years of operation. There was a change such that it no longer got to print the foreclosure notices and that was enough to put it in the red.
The newspaper in a neighboring town also just went under. I’ve also heard the newspaper in the nearest “large” (50K-ish residents) town is also having trouble.
Craigslist really put the crimp on local newspapers. Places like WalMart are very picky on prices when they decide to distribute their glossy adverts via newspaper inserts vs. direct mail.
“Newspapers and realtors… two dying industries”
At least WRT newspapers you may find a graph of subscription rate vs subscriber age to be highly informative. Dying… literally.
Lets just say the odds are extremely high that someone in a retirement community is a subscriber, like in excess of 80%. Alternately, for those born after 1980, the ratio is nearly reversed in that its almost certain that a 30 yr old is not a subscriber.
I believe newspapers are better modeled like The Lawrance Whelk Show than like hair dye sales in that as the population ages nobody starts buying newspapers because they saw their first gray hair or whatever. They’ve got till the end of the boomers at most, then they’re gone like “weekly newsmagazines” of which I believe all have closed down.
Speaking of which I have a funeral of a very distant relative to attend at a nursing home chapel this week, and I’m going to comb the halls if possible to see if the home has converted from Lawrence Whelk to Led Zeppelin yet. That conversion is inevitable, and is certain to be very strange.
Obviously the odds vary based on market and my data is about 10 years out of date. However this anecdote was brought to you by a long former employee of one of the many sub companies of the local media conglomerate who also owns the local fishwrap. Frankly, its terrifying. For example the average subscriber is going to be dead in 20 years but they just invested millions in a new press plant that supposedly was budgeted to last 50 years. I’m like, what are you guys thinking?
Interest rates are the driver….Change that metric, and things would be much different…Inventory would increase and we would stop seeing the current chapter of insanity…And, thats how I see it…”Insane”…At least in my area…
Insane is a good word for it.
Question though for you…how many “all cash” offers are you hearing about? I spoke to a parent of my kid’s classmate over the weekend. He is a RE agent, and noted that a significant number of offers are all-cash. That indicates to me that at least in his market, interest rates are not the sole driver of prices–sentiment has also shifted.
Of course low interest rates are the reason for all these cash sales. They are chasing returns anywhere they can find them.
These are homes that do not work as rentals…they are $1MM and up.
‘a significant number of offers are all-cash’
‘The L.A. Times reports that Colony Capital, Tom Barrack’s Santa Monica-private equity firm, has won an auction to buy “970 foreclosed homes in California, Arizona and Nevada from mortgage titan Fannie Mae for $176 million. But here’s the salient part of Alejandro Lazo’s story:
‘In a sign of how competitive the bidding for the foreclosed homes was, the firm paid 112% of the properties’ estimated worth, according to a breakdown of the transaction by Fannie Mae.’
http://www.scpr.org/blogs/economy/2013/02/27/12720/investors-seeking-profits-overpay-foreclosures-cal/
Where are they getting all this cash? If they’re pulling it from the mattress, then banks are not involved, and Ben’s list of financial machinations does not apply. If the cash if money they borrowed at low interest and are hoping that rent gives a better ROI then the interest rate… well look out below. Home repairs are a huge expense and collecting rent is a huge hassle.
@Ben,
I heard this yesterday (about Colony), that they are acquiring on a projected rental yield only, not looking at resale value as much…perhaps on the theory that eventually resale value will rise based on the rental yields.
@Oxide
Some are cashing out stock to buy (which they can sell at high prices because the Fed has chased everyone into risky assets);
Some are using investor’s money (like pension funds, etc.). Those investors are desperate for yield, so they are fleeing cash/bonds to buy rental property;
Some are pulling it out from under the mattress (banks), since they are earning $0, and figure that eventually the Fed’s policies will result in higher inflation (and owning hard assets is better overall than holding $’s)…but in the meantime, leaving $ in the bank means that the Fed is stealing $0.02 to $0.03 of purchasing power each year.
Even though they aren’t getting money directly from the banks or the Fed, the Fed’s policies are pushing people into risk assets, including real property. The question for those buying rental homes is if they are buying the homes at prices that will give them good enough yields for a higher interest rate environment, or whether they have chased prices up (and yields down) to an unreasonable level. Based on the money still flowing into the rental space, the big money’s answer to this question is clearly that they feel the yields are high enough for the longer term.
I’ve now heard of two of the major rental groups tapping public markets for more investment capital; Colony (raising money to invest in a sub), and American Homes 4 Rent (filing an S-1 within approximately 2 months).
“Let’s put the matter of insane prices aside; I might be convinced this was a “recovery” if, interest rates weren’t being manipulated to absurd lows.”
Well…. a “recovery” by it’s definition is demand going to historical levels. But that’s not what we’re seeing. Demand is at 17 year lows. Why? It’s quite simple. Inflated prices are keeping demand down and falling. And until that reverses, there will be no “recovery in housing.
‘The banks are clearly manipulating to add value to the assets they are holding,’
So long as they are not coordinating these efforts, there is no illegal collusion.
BTFD
“That’s because the major drop in foreclosures is tied to recent state legislation passed—dubbed the Homeowner Bill of Rights—that went into effect January 1. More recently, foreclosure prevention laws in Washington and Nevada have followed a similar boomerang pattern—albeit a pattern that took longer to develop.”
Try not to invest in California real estate, only to get hit in the back of the head by a foreclosure boomerang.
In December 2012, approximately 11% of sales were REO/foreclosure, and approximately 25% were short sales.
As noted before, the biggest change that the new law causes is lack of an ability for lenders to dual track loans…which means that you can’t be processing a foreclosure at the same time you are negotiating a mod/deed-in-lieu/short sale.
So, as long as short sales are popular with the banks, you should expect to see fewer foreclosures being filed.
Does the drop in foreclosure filings mask the actual number of homes in distress? Yes.
Did the prior number of foreclosure filings overstate how many homes actually completed the foreclosure process (and not a mod/deed in lieu/short sale)? Yes
Will the law stop people from losing their homes to deed-in-lieu/short sales/foreclosure? Nope.
The question is how much the pace of reduction in non-current loans will change (if at all). New LPS mortgage monitor for the end of January is due out any day now…will be the first measure of whether the non-current loan rate in CA continues to fall. My guess is flat to up, just a bit, to resume the fall in February.
“The question is how much the pace of reduction in non-current loans will change (if at all).”
An easy prediction is that passing into law a Homeowner Bill of Rights will embolden owners who have struggled over time to stay current on their mortgages to stop making payments, on the presumption that it just became easier to avoid foreclosure, even if you aren’t paying your mortgage.
Isn’t it about time to pass a Renter Bill of Rights law to protect renters from landlords who unfairly try to kick out tenants who stop making rent payments?
It is not easier to avoid foreclosure. That’s the point.
If the bank wants to foreclose, my understanding is that the new rules for the banks are:
1. They need to have a single point of contact;
2. They need to make sure the documents are in order (which has been the case for a long time already), or face a $7,500 fine;
This is very similar to what those who were part of the mortgage settlement already agreed to (the CA law extends these rules to ALL lenders).
HOWEVER, if a bank wants instead to pursue a short sale, or loan modification, or deed-in-lieu, they cannot do so if they are processing a foreclosure. Short sales have been getting more and more popular, which pulls distress from the foreclosure pool.
Before, banks would be processing a foreclosure AND negotiating a short sale/loan modification, etc., and at the last minute, pull the rug out from under the borrower and complete the foreclosure instead of the short sale/mod, etc.
Now, if the bank is processing a foreclosure on your house…you are getting foreclosed–the lender by law cannot be working on any other avenue–so you better pack your belongings.
“Before, banks would be processing a foreclosure AND negotiating a short sale/loan modification, etc., and at the last minute, pull the rug out from under the borrower and complete the foreclosure instead of the short sale/mod, etc.”
This happened to my ex-neighbor. He had a BofA ex-Countrywide loan. He was trying to work some modification with BofA but then the simply foreclosed on him, booting him out in Januar.
@DennisN-
And now, the your ex-neighbor would have either:
a) Been able to negotiate without the foreclosure proceeding;
or
b) Not been negotiating at all while his foreclosure was proceeding, but knowing that his days were numbered in that house–since the bank would have only been processing foreclosure documents, not talking about short sale/mod/etc.
Sorry that’s in CA only, not here in ID.
I think in ID it depends on the lender. My understanding is that the national mortgage settlement included the major lenders, and that they do not dual track anymore. Smaller lenders in places like ID can (and I’m sure still do) dual track.
The obama housing bubble v2.0 marches on…
Forward.
Forward
Paul Ryan would have had the country well into a sustainable recovery by now.
“This distressed property market seems to have brought out some bad actors. We have a task force working on changing the licensing laws.”
An insider view from the legal profession….
Attorneys that get disbarred for ethics violations generally end up getting a license and selling real estate.
A hilarious blooper in the same article…..
“In 2006 you could buy a house for 100 percent down. You had no skin in the game. When Wall Street finally blew up, it was easy to walk away from your home. ”
In ANY year you can always buy a house for 100% down. LOL.
it was easy to walk away from your home ??
But here is the real underlying problem….Three years later they are allowed to get another mortgage…No lasting damage for some that were as corrupt as any…
“Investors are buying Victor Valley homes and planning to sit on them for seven to 10 years before they start selling at increased prices, said Ben Lamson, who manages local properties for a few out-of-the-area investors. For now, these investors are renting out the houses.”
Haven’t we seen this movie before?
We have. And my concern is that, just like before, the wave will roll from California westward. At this point we aren’t any better than a relapsing addict.
Except we never even got clean. We’re like a cigarette smoker who “quit” and went on the patch…except started sneaking smoked within a few days, too. And now we’re addicted to both.
Except we never even got clean ??
Thats the catch22….We will never know what the cleansing would have wrought…Paulson & others thought it would have brought a world wide depression…
I have listened to a lot of intelligent people over the last 5 years or so discuss the issue…Many books have been written…Not saying things could have been done differently, I think thats likely the case…However, I am convinced that what they did do avoided a meltdown that none of us would have liked…We are just now seeing the unfortunate consequences of their actions…Rampent speculation and accumulation of debt…
However, I am convinced that what they did do avoided a meltdown that none of us would have liked
Maybe. But I think that you and others who hold this same view make a lot of assumptions that are not necessarily correct. Both in regard to the meltdown as well as what others would have liked. I was ready and willing to take quite a bit of pain to purge the fraud out of the system, and I think there were many others who felt the same. And I think that whatever is ahead of us will be even worse than what it would have been to take the pain then.
“Paulson & others thought it would have brought a world wide depression…”
No, they saw their bets going south, and came up with a ruse to get the taxpayer to eat their losses.
Paulson was on the correct side of that trade…betting on the housing market crashing. They thought the housing crash was going to be so bad that it would bring depression, which is why they were betting against the housing market.
If anything, the propping up of the market reduced their gains somewhat.
Carl, you may have been ready and willing, but do we have any stats on how ready the general population was? I’m thinking of all the blue-collar workers who didn’t get paid because companies couldn’t get the 30-day revolving credit loan to make payroll.
The systemic problem is how interconnected everything is. Why does the paycheck of, say, a UPS driver have to depend on whether one share of Vanguard’s money market fund is worth 100¢ or 99¢?
“Paulson was on the correct side of that trade…betting on the housing market crashing. They thought the housing crash was going to be so bad that it would bring depression, which is why they were betting against the housing market.”
I am talking about Hank Paulson.
‘what they did do’
This isn’t past tense. All this corrupt throwing around of borrowed money and interest rate manipulation is ongoing. There was a time when fed funds rates would be lowered for a quarter or three. Maybe a few more highway contracts let out. But now we are told, ALL interest rates will be held down indefinitely. Wall Street will be the conduit for hundreds of billions, trying to get this “consumption based” economy going. You know what’s crazy? Even exporting countries like China, Canada and Australia are on the edge of economic collapse. What chance do countries that have borrowed more than they ever can pay have?
I’m not really that interested in going over 4 year old spilt milk. For instance it’s nuts to sit around arguing over who “caused” the housing bubble when the govt/Fed is making a much bigger disaster as I type. We’re going on how many years since saved money can earn interest? That’s robbing people of retirement. And what pops up? The flimsiest stock bubble imaginable. To top it off, look at the junk bond market. Good gravy, Hank Paulson can pound sand, but I don’t think he’s the immediate problem here.
“But now we are told, ALL interest rates”
With all due respect, sir, rates are only being held down for megabanks, at the retail level credit cards are 30%, and most advertised low loan rates are scams (see the fine print, “well qualified buyers” the other 99% pay subprime loanshark rates)
Meanwhile payday loanshark joints sprouting like mushrooms from manure around here. Why does a 100K person city “need” an eleventh loansharking operation? And no, we’re not an oasis in a desert of loansharks, go 5 miles east to the local meth use capital, and there’s one famous street with a payday loanshark in every stripmall, every couple thousand feet. Must be dozens, hundreds of them there.
This market bifurcation where the “imaginary” interest rate that the public is not allowed to experience is “zero” but in reality its more like “30″ is the most interesting feature of all.
A research project or graph of interest rate vs “something” in population would be interesting. My suspicion is the 1% get 1%ish but by the time you descend to 10% its 10%ish and the great unwashed get 30% to 1200% at the legal loanshark offices.
The “national interest rate” is irrelevant and pushing on a string… the key is that now unlike the past, its irrelevant for most of the nation, and pay vs earn rates no longer have any relationship whatsoever.
I think this is the problem with “why hasn’t ZIRP jump started the economy” Well, its not ZIRP, its “thirty percent interest rate policy” not “zero”. If you analyze overall economic response to a 30% interest rate during a severe post bubble depression, suddenly things make more sense than an analysis at a 0% rate that actually applies to almost no one.
Carl, you may have been ready and willing, but do we have any stats on how ready the general population was?
So instead we’ll see how ready they are for something even worse. It’s just another thing we’re kicking the can on.
‘rates are only being held down for megabanks’
What about the people who have a CD? It’s pretty close to zero. If you run the numbers on 10 year treasuries, a bond holder is paying the govt to hold the money. I didn’t mean stuff like credit cards or payday loans. But if you’ll buy a house from Fannie Mae, the rates are absurdly low for the risk of default. This is what drives people into stocks or houses.
robbing people of retirement….
This is real for me. The money in my pantry pickle jar earns as much as the money in the bank, while food costs have doubled, also thanks to the low interest rate. It helps to prop up the house market too in a way. I have one contemporary that just bought a house cash because her retirement savings wern’t earning anything. P Bear mentions something about this. It was also in the 60 minutes China documentary.
Our lawmakers are willing to throw every one under the bus, young and old, except their corporate sponsors.
Most of us here are familiar with the ghost cities phenomenon, but that 60 Minutes segment on China was remarkable and horrifying nonetheless.
Talk about futile gradiosity. In the long run all that building will be about as effective as the Great Wall. And it won’t even be a tourist attraction.
The jenga tower is swaying.
“‘rates are only being held down for megabanks’
What about the people who have a CD?”
The Megabank is the borrower and the people with the CDs are the lenders in this example — i.e. they are on opposite sides of the trade. The ultra-low rates that make it cheap for Megabank, Inc to borrow are the same ones that make it hard for Grandpa and Grandma to live off their CD income.
Do you mean eastward?
I was wondering if he meant China and Australia.
You’re right. Jesus, I need to get out a #%@*(% compass.
Buying up in Victor Valley is scary…a LOT of land around…yes, you need to get it entitled, which can take a while, but there is a lot. And demand will dry up in the VV very quickly with any blip in the economy…not much in the way of jobs up there.
All the same mortgage loan commercials are back on the radio just like 2005
biggest no brainer ” is back sounds exactly the same as 2005
what a way to run an economy
same mortgage loan commercials are back on the radio just like 2005 ??
And the $99.00 seminars on how to get rich in Real estate also…You know the party is over when you see these…
I am seeing an absolute EXPLOSION in for rent houses on Craigslist.
Yep. I monitor the same in various cities. Vegas, Phoenix, Miami, DC, Boston and NYC seems to grow by the day.
My wife was just advised by her (military wife) hairdresser that there has never been a better time to buy. Reasons?
1. Interest rates are not going to go any lower.
2. Prices are low, but headed up.
The hairdresser is looking for an investment property in Jacksonville, FL, hopefully a safe distance away from any sinkholes.
(Shakin’ my head…)
She’s right.
“1. Interest rates are not going to go any lower.”
And when they reverse, it will happen so rapidly that there won’t be any opportunity to exit.
….but she’s wrong here.
“2. Prices are low, but headed up.”
Prices aren’t remotely close to being “low”. In fact prices are still at the grossly inflated levels of 2004. Worse for her, #2 is predicated on #1.
PW you are correct but, I think what you’re missing is a simply astounding fraction of the population thinks price and interest rate are directly rather than inversely correlated.
They’re actually dumb enough to believe that raising interest rates raises prices and vice versa. I’ve been told this hundreds of times by people who are basically innumerate and no amount of explanation will ever convince them. Given that flawed mentality, yeah, they better buy cheap now, before rates and therefore prices go up.
“I think what you’re missing is a simply astounding fraction of the population thinks price and interest rate are directly rather than inversely correlated.”
I suspect there is a sizable overlap between this group and the one that is destined to be left holding the bag when the Bernanke bond bubble pops.
Vince, go back to your post about the 1% getting 1% interest rates while the great unwashed get 30% interest rates.
If we go by this, then rising interest rates WILL raise house prices, or at least keep them from falling. How? When interest rates rise, let’s say to 7%, the rich hedge funds will buy up those houses with cash on hand and rent to the poor. It doesn’t matter what the % rate is when you buy cash. Or, if the rich hedge funds don’t have the cash on hand, they can borrow cash at 1%, buy the houses outright, and still rent to the poor. They will effectively buy a house at 1% interest.
So the prices will go up because the hedge funds will bid up prices when they compete with each other. (This isn’t new — look at what happened when the home builders bid up the prices of prime buildable land during the bubble. They didn’t build, they just competed for the options on the land.)
When the hedgies compete, J6P won’t be able to buy ANYTHING because the howmuchamonth at 7% is just too much. All they can do is watch and wonder how many families they need pack in just to make the rising rent.
That’s what the PTB want, you know. They don’t want us to own ANYthing. The idea of J6P walking in, paying cash, walking out with something permanent, and never coming back, is the PTB’s worst nightmare. They don’t want us to pay off houses. They don’t want us to pay off cars. They don’t want us to buy a CD of Microsoft Office outright; they want us to rent it from the Cloud. Hell, they don’t even want us to be able to buy the economy bottle of shampoo. They want everything to be small sizes at the dollar store, or small payments at the rental office.
Because that’s the most profitable.
When interest rates rise, let’s say to 7%, the rich hedge funds will buy up those houses with cash on hand and rent to the poor.
This is a serious question. I ask that you answer it.
WHERE do you come up with this stuff? Where??
Where do I get this stuff? It’s called “critical thinking.”
Bingo.
It’s why all of the apartment complexes in my area are being gobbled up by these mega-property-management companies.
It’s really scary.
“When interest rates rise, let’s say to 7%, the rich hedge funds will buy up those houses with cash on hand and rent to the poor.”
I thought there was already an army of too-clever-by-half investors out there snapping up U.S. residential real estate with plans to make a bundle by renting to Lucky Ducky.
Interest rates aren’t going to 7% for another decade, at least, so I am missing the relevance of your scenario to the situation at hand.
“It doesn’t matter what the % rate is when you buy cash.”
Economists have a concept called ‘opportunity cost’ which you ought to study before engaging in too much critical thinking on economics topics.
But in short, yes it does matter what the % rate is when you buy cash.
It’s called “critical thinking.”
Well. There you have it folks. Our resident NAR consultants magical answer for this unprecedented, first time in history notion that “hedge funds are going to buy up all the houses and hold them” is “critical thinking”.
The truth? Once again, she believed what she was told, hook line and sinker. What an inversion huh? There isn’t any thinking. It’s a gullible person believing everything she’s told.
I hate to break it to you Ox, but your logic makes no sense to me. That said, real estate is not as simple as “interest rates rise, values fall”. The context in which rates rise is critical.
Basically, all-else equal, with higher interest rates, the risk free yield available in the market is higher. As such, the price of real estate will tend to fall somewhat, so that the yield on the real estate will rise–to keep the yield premium over risk free assets constant. In this way, the capital value of real estate acts much like a bond–and falls in a higher rate environment.
However, all-else is frequently NOT equal. Is there strong economic growth/low unemployment going along with the higher interest rates? Is there a bout of inflation? If so, in both cases, rent growth is likely somewhat stronger than the low rate environment–this rent (yield) growth over time allows people to justify paying a slightly lower yield (higher price) than you might otherwise expect based on the higher interest rate environment.
A guy I know was tasked with researching cap rates (yields) for NNN retail properties over various economic environments. The group tasking him with the research expected a certain result…namely that there was very strong correlation between interest rates and cap rates (ie. that with higher interest rates, there would be lower real estate values–higher cap rates/yields). The result was somewhat surprising. While there was a correlation, it was weaker than expected.
BTW, hedge funds don’t have some magical line of credit that is immune to the forces of the global financial system. If interest rates rise, so will the interest cost to hedge funds. Not to mention the fact that hedge funds don’t do a tremendous amount of investing in illiquid assets (ie. real estate).
I realize I’m posting really late, sorry, but “because the howmuchamonth at 7% is just too much” was too funny not to respond.
No, the howmuchamonth at 7% = howmuchamonth at 4% = howmuchamonth at 18%. All identical to the penny.
The part that varies is the principle. Look, I make about 90th percentile income for my metro area. Doesn’t feel wealthy but it does feel like I’m doin’ OK. My howmuchamonth is in the 90th percentile of howmuchamonth. I WILL be living in a 90th percentile house. (Well, actually I intentionally live downscale in about a 50th percentile house for a variety of intelligent budgeting decisions, and yet I still don’t feel all that “rich”, but you get the idea). The only thing interest rates change is how much retirement nest egg the selling babyboomers get as a windfall from me, and the magnitude of my loss at my eventual sale.
In times like this you make a sole decision what is best for you.
With such low rates if you can make a profit and buy lower then you sold then go for it, as long as you plan on staying for at least 7 years.
Many builders bought distressed land that had the infrastructure completed.This sometimes translate to buying a new home at a good price I say sometimes because a builder doesn’t have to tell you he stole the development in foreclosure and pass the savings on to you.
“Many builders bought distressed land that had the infrastructure completed.This sometimes translate to buying a new home at a good price I say sometimes because a builder doesn’t have to tell you he stole the development in foreclosure and pass the savings on to you.”
Yes, but many of these finished lots that were sold during the worst of the downturn were sold BY the builders to get cash tax refunds from the Feds, and were purchased by investors (like Paulson, and others).
These investors figured that if the cost of infrastructure was $10MM, and they bought the property for $3MM, the value would eventually come back to AT LEAST the infrastructure cost. Currently builders are starting to scramble for land because they don’t have enough of the “cheap” finished lots anymore, and the investors who bought are being patient…waiting for values to get closer to $10MM before they sell.
The problem is that today’s home values don’t always support the higher finished lot costs, so in the meantime, supply of new homes is constrained.
You don’t know what you’re talking about.
All these “investors” snapping up single family houses to use them as rentals my be in for a shock when tenants with nothing to lose trash the houses, don’t pay the rent, sublet them without asking, etc.
I hope so…the all cash offers from speculators and flippers are real where I live (Santa Rosa, CA 50 miles north of S.F.) and made it hopeless for me trying to buy anything priced right in a good neighborhood, made full price (or slightly above) offers on several houses and all were ignored in favor of the cash bids…finally gave up after a year of this. There have to be many others like me that were trying to buy a house for the right reason (TO LIVE IN) who are now on the sidelines. Hopefully when some of the speculators figure out that being a landlord is a royal PITA some of these places will be back on the market…
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