The Greedy Calling That Will End In Tears
Readers suggested a topic on interest rates. “How much higher will thirty-year Treasury yields go up from here in the near future? And btw, in the absence of extreme intervention, long-term Treasury yields are roughly about 99% correlated with 30-year mortgages. 30-yr T-bond yields, 5/01/13 2.83, 5/23/13 3.20, + 37 bps increase over 22 days. It doesn’t look like a big deal until you run the numbers on how much somebody who bought a 30-year T-bond on 5/01/2013 had already lost by yesterday. Answer: 7.1% and growing.”
One said, “FNMA is up 892% and FMCC 822% over the last three months. Why now?”
A reply, “Of cours they’re profitable, considering that they pay nothing for the government-backed insurance that they sell to others, and have an unlimited ZIRP credit-line to draw upon if losses ever come down the pipeline. That’s like a license to steal.”
The Plain Dealer in Ohio. “The lowest mortgage interest rates may be behind us. Rates have increased each of the last few weeks and are up a quarter-point from three weeks ago, and that seems to be dampening some of the refinance bonanza. ‘Mortgage rates increased to their highest level since March last week, leading to the largest single week drop in refinance applications this year,’ said Mike Fratantoni, the Mortgage Bankers Association’s VP of research and economics. Refinance activity has dropped by 19 percent in the past two week and is at its lowest level since March.”
“Purchase volume, however, is up about 10 percent from this time last year. About 32 percent of refinance applications are for the Home Affordable Refinance Program, the government-sponsored effort to allow people to get approved for lower-interest-rate loans even if they owe more than the home is worth.”
From Yahoo Finance. “One sure sign of a housing bubble is home affordability that’s considerably worse than long-term averages. At current interest rates, which are below 4 percent for the most creditworthy borrowers, no big city stands out as having a bubble. But prices are rising by double-digit percentages in some areas, which obviously makes homes more expensive. And if mortgage rates rise to 5, 6, or 7 percent — which is quite possible once the Federal Reserve begins to tighten its loose-money policy — it would harm affordability and possibly undercut the entire housing recovery.”
“Research firm Zillow has estimated what will happen in 30 big housing markets if mortgage rates rise. If rates hit 5 percent, six of those markets will have affordability worse than historical averages, qualifying as modest bubbles. At rates of 6 percent, the list swells to 11 cities. At 7.1 percent (the long-term U.S. average), bubbles would become more pronounced, and undoubtedly problematic. As the following chart shows, bubbles would be worst in San Jose, Calif.; Los Angeles; San Diego; San Francisco; Portland, Ore.; Denver; Riverside, Calif.; Miami; Seattle; and Sacramento.”
“It’s nothing like a normal housing market. The recovery has been fueled by artificially low interest rates engineered by the Federal Reserve, and virtually all new mortgages these days are underwritten by the back-from-the-dead federal agencies Fannie Mae and Freddie Mac. Worse, more than one-quarter of all homeowners with a mortgage are still ‘underwater’ on their homes. Since those people would lose money if they sold their homes, they tend to keep them off the market, which constricts the supply of homes and pushes up prices for those that are on the market.”
“Those types of distortions are what may be causing another bubble. It may not be apparent now, but the test will be what happens if interest rates rise by 2 or 3 percentage points, which many economists think is likely during the next several years. Mortgage rates of 6 or 7 percent, compared with less than 4 percent now, would still be in the normal historical range, but they could dramatically change the equation for buyers.”
“‘No doubt you can buy a house today and get a really good price and a low-interest loan,’ Jeff Greene, president of Florida Sunshine Investments, said at the recent Milken Institute Global Conference in Los Angeles. ‘But if you want to sell that house to somebody two or three years later and he doesn’t have a 3 percent loan, how much is he going to pay for that house?’”
From Reuters on Canada. “The Bank of Canada should raise interest rates now because five years of low rates are creating distortions in the economy, such as excessive debt and an overheated housing market, a former advisor to central bank Governor Mark Carney said. Paul Masson, now a professor at the University of Toronto’s Rotman School of Management, said the central bank should tighten monetary policy to lean against asset price bubbles rather than focus exclusively on inflation.”
“‘Some of the symptoms of inefficient investment and asset price bubbles are already evident in Canada, in the housing sector for instance,’ Masson said in a paper published by the C.D. Howe Institute, a think tank. Masson said financial imbalances and risky investment decisions are spreading. In addition to the overheated housing market, he cited record-high levels of household debt. ‘The longer the boom lasts, the more likely it will end in tears,’ he wrote.”
The Otago Daily Times in New Zealand. “Flat-screen televisions, cash for groceries and even iPads - banks are competing to offer more attractive prizes to sweeten home loan deals as higher interest rates are forecast. Finance Minister Bill English yesterday warned higher interest rates were expected late this year or early next.”
“Economic commentator Bernard Hickey said similar giveaways were seen during the 2002-2007 property boom. ‘But then, the banks tended to simply use price as their main way to win market-share. This time, they are being a bit more cautious about that, mainly because they want to preserve their profit margins. The cost of such incentives were often simply added on to the mortgage, Mr Hickey said. ‘What they are doing with these offers, is essentially buying your business with your money.’”
The Advertiser in Australia. “I’ve just finished writing a song that celebrates something loved by property owners everywhere. You can sing it to the tune of O Christmas Tree or any other motivational rock anthem that you like. It goes a little somethin’ like this:”
“O interest rates, O interest rates, you’re groovy when you’re falling,
O interest rates, O interest rates, we want you to keep falling,
‘Cos 3 per cent is nice and low, but two per cent is better,
O interest rates, O interest rates, please hear our greedy calling.”
‘A little more than 31 percent of homeowners in King, Pierce and Snohomish counties were underwater on their home loans in the first quarter of 2013, meaning they owed more on their mortgage than their home was worth. At the end of the first quarter March 31, there were 206,094 homes in negative equity territory in the metro Seattle area, Zillow says.’
‘Nearly half of all homeowners in the Seattle area had 20 percent or less equity in their homes, which Zillow calls the “effective” negative equity rate. With little or no equity, these homeowners are less likely to be moving up to a new more expensive home, “tying them to their current homes and contributing to inventory shortages,” Zillow says.’
‘Nationally, about 13 million homeowners with a mortgage were underwater at the end of the first quarter. But when homeowners with less than 20 percent home equity are included, the “effective” negative equity rate was 44.6 percent, or 22.3 million homeowners.’
‘But if you want to sell that house to somebody two or three years later and he doesn’t have a 3 percent loan, how much is he going to pay for that house?’” ??
That is the money sentence right there…Bug hits windshield…
‘About 32 percent of refinance applications are for the Home Affordable Refinance Program’
Which default at a rate of close to 40% in the first two years. I can hear the wailing; “I should never have been approved for that loan. It was designed to fail.”
Boy oh boy, have these bankers and politicians pulled one over. Even at 3 percent, you are paying much more interest than a 13% loan at pre-bubble prices. And you could pay it off in 15 years back then too.
I agree Ben….I just wonder how ugly it could get…And if it gets real ugly does it morph into civil unrest….What is the unintended consequence facing us down the road….
The Free Sh*t Army expects to be fed. And housed. And have free medical care. And free education. And a free cell phone too.
The 47% have spoken.
And the PTB have answered by enabling them to mire their households in collateralized debt which will go underwater as soon as interest rates rise towards historic levels.
But it’s all good, as this will give Democratic politicians yet another excellent opportunity to demonize banks and play the fairy godmother who offers underwater households personal bailouts, such as taxpayer-funded principle writedowns to keep them above water.
I expect this to start happening shortly after Mel Watt takes over at FHFA. And there will be a dearth of MSM stories to explain how the principle writedowns are worth a handout north of $100K in many cases, as financial journalists are either too clueless or too scared to report the truth.
“I should never have been approved for that loan. It was designed to fail.”
You will also soon be reading about how this program and other similar ones targeted minorities with predatory loans.
The question of interest to me is not what the Fed will try to do going forward. It seems quite obvious they will continue to do everything possible to keep mortgage rates pinned to the mat, in order to avoid catching the blame for another leg down in the housing market.
Rather the interesting question is whether exogenous forces in the global economy which lie beyond their control could cause their rate suppression policy to fail. That is the $10 trillion dollar question, so far as I am concerned.
A further question of interest is whether housing prices will soon resume their decline even if rates remain low. I note such a decline against a backdrop of low rates has played out in Japan over the past 2+ decades. Time will tell.
Washington state, and in particular Seattle and Yakima are housing disasters ready to implode.
My cuz lives in Yakima. If housing blows up there, I won’t be surprized if he gets caught up in the downdraft…
It already blew up. Now it’s party time again.
‘it’s party time again’
But it’s not a very fun party. Think about it; we’ve had a zero rate policy since 2008. Unemployment is still high, wages are flat or falling. The highest poverty level since the 1930’s. This is as good as it’s going to get! Now we have millions of people deeper in debt. Savers have lost years of compound interest. Stock bubble, bond bubble and housing bubble. Whoopee!
“This is as good as it’s going to get! Now we have millions of people deeper in debt.”
But we also have bailout facilities ready in the waiting to help these people avoid the consequences of their poor personal financial decisions.
It’s turtles all the way down from here!
The Fed is foaming the runway for a fully loaded 747 which has lost all power and is unable to dump its fuel load. We’ll see how it turns out. My guess is they will keep pumping, and pumping, and pumping liquidity until the liquidity bomb is the actual detonator that brings the whole sh!thouse down. The Fed knows pump, and that’s what the Fed is hell bent upon doing- pumping the biggest bubble ever known to mankind.
I might add that the stock market has been calling the Fed’s bluff:
“I know you can’t and won’t stop pumping, so I am going to keep going higher, and higher, and higher, nanananananaaaahh!”
“I might add that the stock market has been calling the Fed’s bluff:…”
Luckily for U.S. real estate investors, the housing market is completely decoupled from the stock, bond and commodities markets, as all of the latter three asset classes have recently showed visible signs of weakness.
But it’s not a very fun party.
When your friends smuggle some junk into the hospital so you can shoot up there after almost ODing before, it’s never going to be THAT fun. But hey, it’s still better than rehab and having to listen to all those losers.
‘the liquidity bomb is the actual detonator’
If only it was just the Federal Reserve. This zero (or near zero) rate policy is global. Allow me to run through places with astounding increases in real estate prices; Iran, Kurdistan, Israel, Dubai, Saudi Arabia, Denmark, Estonia, Latvia, London, Canada, Columbia, India, New Zealand, Australia, Indonesia, China, Thailand, Singapore, Macau, Philippines. There’s more, but that’s what comes to me in a of couple minutes. If you add the basket cases, like Spain and Japan, the list gets much longer.
How could something not go wrong? Then consider the other side effects of low rates; stock bubbles, govt. bonds markets with trillion$ earning less than inflation. Junk bond markets pouring billions into corporations, many of whom should have gone out of business years ago. With all that, many of the largest countries are either in recession or on the brink. Everywhere there’s debt, debt, debt. I don’t think the central banks will raise rates. IMO, circumstances are going to do that for them.
“circumstances are going to do that for them.”
BINGO
The previous defaults never cleared the market. They were reworked, shaped into a turd and polished up for appeal.
Now the more recent vintage paper is beginning to default. Compound this with the recent return of liar loans results in disaster of gigantic proportions and as you state, it’s global.
“But it’s not a very fun party”
Not if you’re still sitting on the sidelines whining about how expensive things are how we’re in a bubble. Those of us invested are enjoying the ride up once again.
‘Those of us invested are enjoying the ride up once again’
If you don’t sell, how are you enjoying it?
“Those of us invested are enjoying the ride up once again.”
Let us know how your crash and burn goes. Of course, you’re not making a dime right now either. Those who brag on blogs about money usually have none.
“If you don’t sell, how are you enjoying it?”
I was wondering this myself.
My question on interest rates is, how fast can they increase? They aren’t going to go from 3.9% to 7% in two years, are they?
Banks and multinational corps have priced those low interest rates into their business models. Profits depend on it. Interest rates aren’t likely to skyrocket.
‘how fast can they increase’
For mortgages, this is complicated. The Fed has been buying US bonds and MBS. Does that end with a possible rate increase? There are the GSE’s; in all this time a market based mortgage market hasn’t been formed. If house prices head down, what will investors want to take the risk of GSE bonds in a falling market? Well, they supposedly have the backing of the govt. But if you look at the fine print, these corporations are bankrupt and in receivership.
This question is different today than the past few years. In 2010 or 2011, the issue was “will a rate increase begin the next leg down for house prices.” Now, in a few US markets, we’re near all time highs. That’s a fresh hell we weren’t facing just two years ago.
“I don’t think the central banks will raise rates. IMO, circumstances are going to do that for them.”
Clearly QE3 is all about preventing circumstances (i.e. market forces) from pushing up interest rates.
So the real question is, are circumstances likely to develop in the foreseeable future which will render QE3 incapable of keeping the lid on long-term Treasury yields?
As the saying goes, “Don’t count your chickens before they hatch.”
I personally expect we will soon witness once again the unpleasant site of eggs smashed all over the ground. But then I am a professed bear…perhaps I am unduly pessimistic, and the newest army of real estate investors will all get rich, unlike the late wave of post-1850 prospectors who lost their shirts in the aftermath of the gold rush.
“My question on interest rates is, how fast can they increase? They aren’t going to go from 3.9% to 7% in two years, are they?”
Unless this time is different, that seemingly-small increase will take over a decade. For a historical comparison, note the last historical long-term bottom in U.S. Treasury yields, at only slightly higher levels than today’s occurred in the early-1960s. It took two decades to increase from 30-year Treasury yields around 3% to the 14% level reached in the early-1980s.
“Not if you’re still sitting on the sidelines whining about how expensive things are how we’re in a bubble.”
I can’t recall this sentiment expressed very often since about 2006 or so. Back then we used to hear it around here ALOT!
‘March 28, 2012. A new survey says 20% of Canadian households would be significantly hampered in their ability to afford their homes if rates rose by two percentage points. Bank of Montreal stress tested Canadian households to see how they would stack up in a rising rate environment and found more than half of Canadian households could handle that 200 basis point increase. While 20% said they couldn’t, another 23% of respondents said they were unsure if a rate hike would affect them.’
‘Truthfully I think 2% is pretty reasonable to expect,’ said Laura Parson, BMO area manager of mortgage specialists for the district of Calgary, Manitoba and Northwest Ontario. ‘At 2.99% that is the lowest mortgage rate in the past 50 years. If you had told me when we were lending money at 21% that we one day be down to 2.99% I’d have been laughing.’
Foolish kool-aid drinking reporters never understand that HIGHER interest rates will lead LOWER home prices…
‘March 28, 2012. A new survey says 20% of Canadian households would be significantly hampered in their ability to afford their homes if rates rose by two percentage points.
Who knows: Maybe some of the clueless will find my illustration below and digest it. Stranger things have probably occurred in the history of journalism.
Maybe because housing prices don’t go down in times of high interest rates?
Since rates are currently at a record-low level, you are talking about something that never before happened: Rates increasing off the current record low.
Neither you, nor I, nor even the FOMC members have any idea how this will play out from here, as there is no empirical evidence from which to draw on past experience.
What you apparently are missing is the inverse relationship between interest rates and purchase budgets. I encourage you to read my other posts from earlier today if you want to educate yourself.
“Maybe because housing prices don’t go down in times of high interest rates?”
You’re going to be schooled the hard way.
You guys are forgetting about inflation.
In the 80’s interest rates were 20%. Housing did not decrease in price at that time.
Of course, inflation was 17%.
There is no “inflation”.
And yes… housing prices fell quite dramatically during the 1980’s.
“Foolish kool-aid drinking reporters never understand that HIGHER interest rates will lead LOWER home prices…”
They were decoupled in the early 80’s entirely, house prices and interest rates were climbing at the same time.
“They were decoupled in the early 80’s entirely, house prices and interest rates were climbing at the same time.”
Both were increasing in lockstep due to something entirely missing at this point: Inflationary pressure.
The two paths to higher interest rates seem to be:
1. Bond vigilantes beat the Fed (rates rise despite the Fed’s desire to keep rates low via QE); or
2. The Fed takes their foot off the accelerator in the face of better economic times and/or inflation above their 2% target.
#2 seems more likely at this point. I don’t know if there are enough vigilantes to go toe-to-toe with the Fed.
“HIGHER interest rates will lead LOWER home prices…”
We hear about all these cash buys today. Imagine the cash buyers coming out of the woodwork when interest rates rise and prices fall to truly low levels. If it actually happens that way. From ‘08 until last year, we saw both rates and prices fall in tandem. In normal times, you might call that pairing an outlier, but the times aren’t normal.
The good thing (for the patient) is many of these “cash buyers” have already spent their cash. Even the hedge funds are borrowing money now.
But with a potentially endless supply of Fed-funded printing press money available to loan out, why should the fact that the “cash buyers” are now borrowing to buy slow down the army of real estate investors one bit?
Depending on the way they are structured and who their limited partners are, some hedge funds can’t use borrowed money. They have to make capital calls on the limited partners to get the new money. If the limited partners decide they don’t want to invest more money in the strategy, they have to leave. It is a very delicate balancing act for the hedgies. They can suspend exits from the fund (refuse to allow people to cash out), but that is going to end all new investors. Current investors might be stuck while redemptions are suspended, but they will find a way to get out eventually.
“Current investors might be stuck while redemptions are suspended, but they will find a way to get out eventually.”
Watching the hedgies get trampled in the race to the exits the next time a black swan descends on U.S. residential real estate could get pretty entertaining.
Got popcorn?
‘A structural twist has positioned Blackstone as the favorite to complete the first “REO-to-rental” securitization. Working with bookrunner Deutsche Bank, the asset-management giant presented S&P and Morningstar with details of a proposed transaction in recent weeks. In the meantime, it’s finalizing details of its issuing strategy — which already has taken a few turns.’
‘Ever since the Federal Housing Finance Agency proposed in 2011 to sell foreclosed-upon homes to investors who would convert the properties into rentals, industry professionals have been looking for ways to fund those efforts through securitization. They initially focused on the possibility of issuing bonds backed by the rental streams, but quickly encountered a range of concerns about those cashflows.’
‘In one incarnation, for example, Deutsche suggested securitizing payments on a syndicated warehouse line of $2.1 billion that it supplies to finance purchases of “real estate owned” assets by the firm.’
‘The latest evolution: Blackstone has set up an entity to write mortgages on many of the properties it already has purchased through the Deutsche-supplied warehouse. Under the proposed structure, those loans would serve as bond collateral — with the underlying rentals paying back the accounts. “It’s akin to securitizing a mortgage payment, with Blackstone providing a guarantee in the event of a default,” one source said.’
‘its proposal is likely to face close scrutiny from the rating agencies as they continue to wrestle with factors including whether the securitization trusts or even issuers might be liable for injuries to occupants of collateral properties.’
http://www.abalert.com/headlines.php?hid=180799
‘In addition to spending its own vast cash resources, Blackstone has secured a loan for at least $300 million from Deutsche Bank to leverage additional purchases, The Wall Street Journal reports.
http://www.vcstar.com/news/2012/dec/22/giant-investment-firm-plans-to-convert-scores-of/#ixzz2UPjfcVBW
- vcstar.com
Didn’t the Deutsche bags lose a bundle in the 2008 financial collapse?
I expect next time to be no different.
Can we separate “hedge funds” from “private equity” funds? I know they are flavors of the same food (private pools of capital investing in stuff), but some common assumed differences are: Hedge funds generally invest in more liquid assets and thus offer more frequent times for their investors to get out (at the investor’s request); Private Equity Funds generally invest in more illiquid assets and thus offer few times for their investors to get out.
Sometimes, hedge funds invest in more illiquid assets, and sometimes such investing can make redemptions difficult.
Sometimes, more traditional PE funds invest in more liquid assets.
If you were one of the people with the discipline to save a 20% down payment, and NOT buy when everyone was screaming to buy in 2004-2006 (ie. not a sheep/lemming/follower), do you think you would plunk your hard-earned down payment while prices were falling 10%-20% per year, with no end in sight, even with low interest rates?
Hell no.
In fact prices falling brought out more sellers (walking away), and even fewer buyers. Lower prices brought more supply and less demand.
Econ -101. Things work funny sometimes with leveraged assets.
My point–low rates did not convince these folks to put their down payment at risk. Low rates only did that after cash buyers set the floor in prices.
The hope and change of the obama housing bubble v2.0
Forward.
“It’s nothing like a normal housing market. The recovery has been fueled by artificially low interest rates engineered by the Federal Reserve, and virtually all new mortgages these days are underwritten by the back-from-the-dead federal agencies Fannie Mae and Freddie Mac. Worse, more than one-quarter of all homeowners with a mortgage are still ‘underwater’ on their homes.
“Those types of distortions are what may be causing another bubble. It may not be apparent now, but the test will be what happens if interest rates rise by 2 or 3 percentage points, which many economists think is likely during the next several years. Mortgage rates of 6 or 7 percent, compared with less than 4 percent now, would still be in the normal historical range, but they could dramatically change the equation for buyers.”
‘According to the California Association of Realtors’ Traditional Housing Affordability Index, the percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California fell 44 percent in the first quarter of 2013, down from 56 percent in first-quarter 2012 and from 48 percent in fourth-quarter 2012. The index measures the percentage of all households that can afford to purchase a median-priced, single-family home in the state.’
‘Home buyers needed to earn a minimum annual income of $66,800 to qualify for the purchase of a $350,490 statewide median-priced, existing single-family home in the first quarter of 2013. The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $1,670, assuming a 20 percent down payment and an effective composite interest rate of 3.55 percent. The effective composite interest rate in first-quarter 2012 was 4.16 percent and 3.49 percent in the fourth quarter of 2012. The median home price was $279,190 in first quarter 2012, and an annual income of $56,320 was needed to purchase a home at that price.’
‘Santa Clara County home buyers needed a minimum annual income of $134,370 to qualify for the purchase of a $750,000 median-priced, single-family home in the first quarter of 2013. The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $3,360 assuming a 20 percent down payment and an effective composite interest rate of 3.55 percent.’
‘At an index of 77 percent, Madera County was the most affordable county of the state, while San Francisco and San Mateo counties tied for the least affordable at 23. In Santa Clara County, the affordability index dropped to 30 percent in first-quarter 2013, down from 42 percent in first quarter 2012 and from 32 percent in fourth quarter 2012.’
‘Shalini Devid has been caught by the federal government’s move to reduce the maximum amortization period from 30 years to 25 years on CMHC-insured mortgages. (Buyers with a down-payment of less than 20 per cent of the purchase price are required to buy mortgage insurance through Canada Mortgage and Housing Corporation.) The shorter amortization means higher monthly payments, equivalent to paying almost 1 per cent more on your mortgage rate.’
“I was ready to jump right in and buy,” says Devid, who was looking for a condo in the $350,000 to $400,000 price range. “But the change in the amortization period made a huge difference.”
‘For example, a $300,000-mortgage at 4 per cent and amortized over 30 years would cost $1,426 a month to pay back. The same mortgage amortized over 25 years would cost $1,578 per month, an increase of $152. After she did detailed calculations using different scenarios, Devid worried that, once she pays the mortgage, condo fees and utilities, she’ll be stretched too thin.’
“Looking at monthly payments, (amortization) is one of the biggest things for me,” says the first-time buyer, who now thinks she’ll save for a few more years until she has a 20 per cent down payment. “It’s unfortunate, because I’d rather be an owner than a renter,” she says.’
‘But there is a silver lining to the amortization cloud: With five fewer years to pay off a mortgage, home owners will see substantial savings in interest charges. That $300,000 loan, for example, will cost almost $47,000 less than if it was repaid over 30 years.’
federal government’s move to reduce the maximum amortization period from 30 years to 25 years on CMHC-insured mortgages.
Let’s watch this as a case study. Shorter amortization means a higher PITI, which is effectively the same as a higher interest rate.. Let’s see how long it takes for this higher PITI to drop house prices.
Good observation!
“One sure sign of a housing bubble is home affordability that’s considerably worse than long-term averages. At current interest rates, which are below 4 percent for the most creditworthy borrowers, no big city stands out as having a bubble. But prices are rising by double-digit percentages in some areas, which obviously makes homes more expensive. And if mortgage rates rise to 5, 6, or 7 percent — which is quite possible once the Federal Reserve begins to tighten its loose-money policy — it would harm affordability and possibly undercut the entire housing recovery.”
There is so much impressionistic financial journalism on the connection between mortgage rates and home prices. For instance, the bolded sentence above seems to completely miss how ever-lower interest rates are directly connected to ever-more expensive home prices. Somebody should just come up with a simple illustration of the relationship.
Wait for it…I just did it!
Assumptions:
Annual Income $100,000
Multiplier 30%
Monthly Payment $2,500
Term 30 years
Interest Rate / Purchase Budget / Loss on 10bps increase / Cumulative loss
3.8% $536,529.79
3.9% $530,033.61 -1.21% -1.2%
4.0% $523,653.10 -1.20% -2.4%
4.1% $517,385.85 -1.20% -3.6%
4.2% $511,229.49 -1.19% -4.7%
4.3% $505,181.71 -1.18% -5.8%
4.4% $499,240.25 -1.18% -7.0%
4.5% $493,402.90 -1.17% -8.0%
4.6% $487,667.51 -1.16% -9.1%
4.7% $482,031.96 -1.16% -10.2%
4.8% $476,494.20 -1.15% -11.2%
4.9% $471,052.22 -1.14% -12.2%
5.0% $465,704.04 -1.14% -13.2%
5.1% $460,447.75 -1.13% -14.2%
5.2% $455,281.45 -1.12% -15.1%
5.3% $450,203.32 -1.12% -16.1%
5.4% $445,211.56 -1.11% -17.0%
5.5% $440,304.41 -1.10% -17.9%
5.6% $435,480.15 -1.10% -18.8%
5.7% $430,737.11 -1.09% -19.7%
5.8% $426,073.64 -1.08% -20.6%
5.9% $421,488.14 -1.08% -21.4%
6.0% $416,979.04 -1.07% -22.3%
6.1% $412,544.80 -1.06% -23.1%
6.2% $408,183.94 -1.06% -23.9%
6.3% $403,894.98 -1.05% -24.7%
6.4% $399,676.48 -1.04% -25.5%
6.5% $395,527.05 -1.04% -26.3%
6.6% $391,445.31 -1.03% -27.0%
6.7% $387,429.93 -1.03% -27.8%
6.8% $383,479.58 -1.02% -28.5%
6.9% $379,593.00 -1.01% -29.3%
7.0% $375,768.92 -1.01% -30.0%
We’re already seeing burnout at the low rates. There is only so much refi and new loan demand.
PB, wouldn’t it be more fair to start the scale at the 3.125% that is available today?
OK.
Annual Income $100,000
Multiplier 30%
Monthly Payment $2,500
Term 30
Interest Rate / Term (yrs) Purchase Budget Loss on 10bps increase Cumulative loss (%)
3.125% $583,600.20
3.225% $576,255.41 -1.26% -1.3%
3.325% $569,044.18 -1.25% -2.5%
3.425% $561,963.70 -1.24% -3.7%
3.525% $555,011.18 -1.24% -4.9%
3.625% $548,183.94 -1.23% -6.1%
3.725% $541,479.33 -1.22% -7.2%
3.825% $534,894.77 -1.22% -8.3%
3.925% $528,427.73 -1.21% -9.5%
4.025% $522,075.76 -1.20% -10.5%
4.125% $515,836.46 -1.20% -11.6%
4.225% $509,707.45 -1.19% -12.7%
4.325% $503,686.46 -1.18% -13.7%
4.425% $497,771.23 -1.17% -14.7%
4.525% $491,959.57 -1.17% -15.7%
4.625% $486,249.34 -1.16% -16.7%
4.725% $480,638.43 -1.15% -17.6%
4.825% $475,124.81 -1.15% -18.6%
4.925% $469,706.46 -1.14% -19.5%
5.025% $464,381.43 -1.13% -20.4%
5.125% $459,147.81 -1.13% -21.3%
5.225% $454,003.73 -1.12% -22.2%
5.325% $448,947.35 -1.11% -23.1%
5.425% $443,976.91 -1.11% -23.9%
5.525% $439,090.64 -1.10% -24.8%
5.625% $434,286.84 -1.09% -25.6%
5.725% $429,563.84 -1.09% -26.4%
5.825% $424,920.01 -1.08% -27.2%
5.925% $420,353.76 -1.07% -28.0%
6.025% $415,863.52 -1.07% -28.7%
6.125% $411,447.77 -1.06% -29.5%
6.225% $407,105.01 -1.06% -30.2%
6.325% $402,833.80 -1.05% -31.0%
6.425% $398,632.70 -1.04% -31.7%
6.525% $394,500.32 -1.04% -32.4%
6.625% $390,435.30 -1.03% -33.1%
6.725% $386,436.29 -1.02% -33.8%
6.825% $382,502.01 -1.02% -34.5%
6.925% $378,631.17 -1.01% -35.1%
7.025% $374,822.52 -1.01% -35.8%
7.125% $371,074.85 -1.00% -36.4%
7.225% $367,386.96 -0.99% -37.0%
7.325% $363,757.68 -0.99% -37.7%
7.425% $360,185.88 -0.98% -38.3%
7.525% $356,670.43 -0.98% -38.9%
7.625% $353,210.24 -0.97% -39.5%
7.725% $349,804.25 -0.96% -40.1%
7.825% $346,451.40 -0.96% -40.6%
7.925% $343,150.68 -0.95% -41.2%
8.025% $339,901.07 -0.95% -41.8%
8.125% $336,701.62 -0.94% -42.3%
8.225% $333,551.34 -0.94% -42.8%
8.325% $330,449.31 -0.93% -43.4%
8.425% $327,394.61 -0.92% -43.9%
8.525% $324,386.35 -0.92% -44.4%
8.625% $321,423.63 -0.91% -44.9%
8.725% $318,505.60 -0.91% -45.4%
8.825% $315,631.43 -0.90% -45.9%
8.925% $312,800.28 -0.90% -46.4%
9.025% $310,011.35 -0.89% -46.9%
9.125% $307,263.84 -0.89% -47.4%
9.225% $304,557.00 -0.88% -47.8%
9.325% $301,890.06 -0.88% -48.3%
9.425% $299,262.28 -0.87% -48.7%
9.525% $296,672.93 -0.87% -49.2%
9.625% $294,121.31 -0.86% -49.6%
9.725% $291,606.72 -0.85% -50.0%
…
My illustration (when it shows up) is based on a simple scenario: A household with $100,000 in annual income uses 30% of their income stream to purchase a home with a zero-downpayment 30-year mortgage. The question is, how much principle (purchase budget) does their monthly payment buy them which they can apply to a purchase transaction?
I know this is a simplification for many reasons:
1. There are other kinds of loan products available (ARMs of various terms, 15-year fixed, etc).
2. Making a down payment can increase the amount a household can “afford” at the same monthly payment amount.
3. Sellers who can’t sell for what they think their home is worth can keep their homes off the market indefinitely, avoiding sales to buyers who are unwilling or unable to pay the seller’s wishing price.
4. Not everyone in the market has $100,000 income.
5. The percentage of a household’s income stream used to make a home purchase can vary.
6. All-cash buyers are not constrained by interest rates.
Despite these any myriad other complications, the simple fundamental relationship between mortgage loan interest and purchase budgets remains: When rates rise from their current historically-low levels to 7%, mortgages financed over 30 years will provide for 30% less principle to finance a home purchase than they do at current rates.
And this is why I believe the Fed will do everything within its power to suppress mortgage rates and avoid taking away the housing market punch bowl, as otherwise they are likely to get blamed for popping the echo bubble. I’m sure they have at least a handful of economists in their stable who can replicate my calculation and understand the implications of allowing rates to revert to historic norms.
“Research firm Zillow has estimated what will happen in 30 big housing markets if mortgage rates rise. If rates hit 5 percent, six of those markets will have affordability worse than historical averages, qualifying as modest bubbles. At rates of 6 percent, the list swells to 11 cities. At 7.1 percent (the long-term U.S. average), bubbles would become more pronounced, and undoubtedly problematic. As the following chart shows, bubbles would be worst in San Jose, Calif.; Los Angeles; San Diego; San Francisco; Portland, Ore.; Denver; Riverside, Calif.; Miami; Seattle; and Sacramento.”
This is fantasy talk. Given that the Fed is already ruminating over when to take away the housing market punch bowl, what force of man or nature is going to hold mortgage rates at historic lows forever, or even for a very long time?
And what is going to keep that army of all-cash fly-by-night investors from cashing out of their residential real estate investments in bubble zones once they realize they stand to lose a bundle of money when rates rise?
WHACK!!!!!!!!!!!!!!!
“WHACK!!!!!!!!!!!!!!!”
Keep dreaming kid, when rates rise they will do so slowy and in small increments. There will be plenty of time to make adjustments.
‘There will be plenty of time to make adjustments’
Explain “adjustments” please. Like refinancing at a higher rate?
I think he meant plenty of time to unload his real estate investments and leave long-term owner-occupants holding the bag…
Regardless of “rates”, resale housing prices will continue to work lower considering replacement costs are 40% less than resale asking prices.
Again…. why buy a 50 year old house when you can buy a new one for 40% less?
‘Regardless of “rates”, resale housing prices will continue to work lower considering replacement costs are 40% less than resale asking prices.’
There’s that. Also noteworthy that Japanese home prices are still falling after two decades of on-and-off-again declines, all against the backdrop of ultra-low interest rates.
Take home lesson in experience’s dear school for greater fools:
Rock-bottom interest rates are not insurance against loosing alot of money in real estate investments — ALOT!
Japanese real estate prices aren’t dropping as fast as they used to!
ASIA NEWS
March 24, 2013, 12:57 p.m. ET
Japan’s Property Market Shows Signs of Stabilization
By KOSAKU NARIOKA
TOKYO—Japan’s long-troubled property market is showing fresh signs of stabilizing, another encouraging sign for investors amid high expectations for the government’s attempts to turn the economy around.
In a report released last week, the government said land prices fell for the fifth straight year—but by just 1.8%, the slowest pace since 2008, as demand in Japan’s main urban centers helped slow the downward trend.
…
Falling at a slower rate? Thank God they’ll only hit the wall at 200 mph not 250.
Again…. why buy a 50 year old house when you can buy a new one for 40% less?
Again… because those 50 year old houses sit on fairly valuable pieces of land within a reasonable commuting distance of a career job.
because those 50 year old houses sit on fairly valuable pieces of land within a reasonable commuting distance of a career job ??
Save your breath….RAL has a difficult time understanding common sense…
You two fools still yapping the same rusty rhetoric?
Your “it’s the land” foolishness doesn’t get you any closer to your fantasy prices than your other excuses.
Whats your next excuse?
Let’s hear it Dave “the contractor”.
“And what is going to keep that army of all-cash fly-by-night investors from cashing out of their residential real estate investments in bubble zones once they realize they stand to lose a bundle of money when rates rise?”
They don’t even need to become net sellers of RE to cause a lot of damage in the bubble zones…all they have to do is stop buying.
If 25%, 30%, 40% of market demand goes poof, then what?
“If 25%, 30%, 40% of market demand goes poof, then what?”
That’s when the all-cash foreign investors, hedge funds and Megabanks loaded with ZIRP loans swoop in to snap it up at fire sale prices.
And if worse comes to worst, the Fed can buy up real estate. Oops…that’s already underway.
And if worse comes to worst, the Fed can buy up real estate. Oops…that’s already underway.
Did I miss something, PB? Or were you merely referring to the MBS purchases, which are, I suppose, a distant cousin form of “buying up real estate.”
MBS are a pool of mortgages. So far as I know, when a lender owns a mortgage that goes into default, they gain the right to take possession of the collateral as REO (real estate owned).
I actually don’t know whether the same principle applies to the Fed when they purchase MBS (a pool of mortgages, some of which are likely to eventually go into default).
That said, so far as I know, there is no rule that prohibits the Fed from purchasing real estate outright, either. Whether or not they have done so or plan to in the future is another matter, but I don’t see why they couldn’t if they decided it was in the best interest of all Americans.
I don’t see why they couldn’t if they decided it was in the best interest of
allthe right Americans.The rhyme fits “O Tannenbaum” better with an added word:
“O interest rates, O interest rates, you’re groovy when you’re falling,
O interest rates, O interest rates, we want you to keep falling,
‘Cos 3 per cent is nice and low, but two per cent is better, so
O interest rates, O interest rates, please hear our greedy calling.”
Will interest rates ever go up? Or is this the new normal for the next 10 years? Back in 2004/2005 I remember telling a co-worker that one day cash would be king again, who would have thought it would take so long?
Here in the Philly suburbs, things are getting bubbly. Not yet back to peak prices, but things are being sold as soon as they list. One house we looked at last year sat on the market for a year. They took it off and relisted at the same price and it was gone within 2 weeks. This with all the local pharma companies announcing rolling layoffs.
Still trying to wait, but hubby would love some land for extra garages for his hobby cars and I would love a nice backyard while the kids are still willing to play outside.
‘things are being sold as soon as they list…This with all the local pharma companies announcing rolling layoffs’
IMO you answered your own question. Does it make sense to have bidding wars, etc, when the jobs situation is what it is?
Nobody can know exactly what’s going to happen with rates. But here’s an interesting theory:
‘Will Obama reappoint Bernanke again? No way. But who? The high rollers are already betting on Janet Yellen, vice chairman of the Fed, long-time monetary insider. Former San Francisco Federal Reserve Bank CEO. A crash is more likely to happen in August 2013 than in 2015 when the next presidential election campaign is kicking into high gear. So start preparing for a crash when the new Fed chairman ends cheap money.’
‘Why an August trigger? Here’s the logic: Obama reappointed Bernanke in August 2009. He’s predictable. August is quiet. Earnings season over. Congress on vacation, not that they haven’t been on vacation for a while. Wall Street will be sunning on Fire Island and Nantucket.’
‘So August is a good time to sneak in an appointment. More important than the timing is what happens after Obama broadcasts his choice of a new Fed chairman. We got a big clue: A couple years ago the New York Times noted that Yellen had a major role at the Fed to provide “forward guidance” about monetary policy, several years ahead, while “persuading investors that it is safe to accept lower interest rates.”
‘Yet when asked, Yellen was clear: “When the time has come, am I going to support raising interest rates? You bet.”
Here is something else:
Remember how the sequester was supposed to cause an economic calamity? So far, there is none in site, is there?
However, if a new Fed chair takes over and takes away the punch bowl as a first step to distinguish herself from her predecessor, several things will predictably happen:
1) There will be a near-term selloff on Wall Street.
2) There will be a renewed U.S. economic slowdown, which can easily be blamed on the Republican-driven sequester, as it is difficult to separate the effects of simultaneous influences on the economy.
3) The stage will be set for another wave of economic recovery just as the 2016 election season is warming up for which Obama can credit Democratic economic policy, taking away the economy as a Republican campaign issue.
If I were a Democratic party strategist, I know what strategy I would be pursuing about now…
LOL.
So you acknowledge prices are massively inflated with nothing but hot air under them, layoffs looming and massive housing delinquencies on the horizon….
Oh the games some play.
As a noted housing analyst stated;
“Get what you can get for your house today because it’s going to be much less tomorrow for many years to come.”
There Will Be No Economic Recovery. Prepare Yourself Accordingly.
Everything you need to know that the media is not telling you…
http://www.youtube.com/watch?//&v=bYkl3XlEneA
Civilian employment-population ratio is currently approaching its level in the 1950s — WHEN WOMEN WERE NOT PART OF THE WORKFORCE (but presumably were counted in the labor force).
Ouch!
After a whole hour of mind-numbing statistics, his advice is to buy some gold and some food and make friends with your neighbors? I heard the same advice from Peter Schiff eight years ago. Meh.
I keep pinching myself. I cant believe that they are trying to blow this up again. INSANITY! and we are seeing it happen in slow motion. Here we go again.
‘Santa Clara County home buyers needed a minimum annual income of $134,370 to qualify for the purchase of a $750,000 median-priced, single-family home in the first quarter of 2013. The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $3,360 assuming a 20 percent down payment and an effective composite interest rate of 3.55 percent.’
Even with a 20% down payment, the mortgaged amount is still 4.5x the annual income of $134K.
Why on earth is the MSM floating these numbers? What happened to the tried & true buy at 2.5x to 3x gross income? They will say anything to justify current pricing.
Look who wrote it:
By Rose Meily, for Silicon Valley Community Newspapers
Information in this column is presented by the Silicon Valley Association of Realtors at silvar.org. Send questions to rmeily@silvar.org.
Where’s our apologists on this flat out corrupt misrepresentation of reality by realtors?
“silvar.org”
Strike the ‘v’ and you’ll have an anagram for ‘liars.org.’
‘Stockman’s latest book, The Great Deformation: The Corruption of Capitalism in America, expounds on his anger over the Fed’s flow of “mad” and “phony” money that he says is ruining the country.’
‘My point is, none of this makes any sense and it’s not simply a matter of recalibrating the dials,” said Stockman. “We have lost our way with the central bank. It was never meant to rig the interest rates, to set 10-year bonds at 1.7 percent, which assuredly it is, because it’s buying [so many] billions of bonds a month.’
“If you’re buying half the new debt issued by the Treasury – one big fat thumb on the scale, one huge bid out in the market – well, all the other smart guys, the hedge funds, the traders, they know that as long as the Fed is buying the bond, they can buy it, too. They can front-run the Fed. The price of the bond won’t fall, and they put it up as collateral in what’s called the repo market, which means that you borrow overnight, 98 cents on the dollar.’
“You pay 10 basis points in the repo market to borrow; everything is borrowed; you earn 1.7 percent interest on the bond, and you laugh all the way to the bank. That’s where the so-called bond vigilantes have gone.”
‘Stockman was getting warmed up. He’d been on tour for his book and histrionics were all part of the “style” he has honed over the last few years. He went on: “They [the bond vigilantes] haven’t disappeared. They’re not in hiding. They haven’t endorsed this crazy fiscal policy that [Paul] Krugman keeps telling you is OK because the bond market likes it. No,” said Stockman, working himself into a bit of a froth now. “Everything is distorted, deformed, and undermined by a central bank that has gone crazy printing money.’
http://www.thefiscaltimes.com/Articles/2013/05/02/Stockman-The-Fed-Is-a-Central-Bank-Gone-Crazy.aspx#page1
This is how yachts are purchased, and pigmen laugh amongst each other.
As I mentioned, the low rate environment is encouraging risky behavior. I am more convinced the institutional investors buying single family houses is a sign of a mania:
‘Investors seeking single-family homes to rent are buying land and newly built properties as foreclosures dwindle and existing home prices in the U.S. rise at their fastest pace since 2006. Landsmith paid $32.5 million this month for 250 Houston-area houses built last year. The firm, which began buying properties to rent in 2009, has 2,000 lots for new homes under contract and expects to purchase a total of 4,000 new houses this year, according to CEO James Breitenstein in San Francisco.’
‘American Homes 4 Rent, a Malibu, Calif.-based company headed by Public Storage (PSA) founder B. Wayne Hughes, bought from Lennar (LEN), KB Home (KBH) and from M/I Homes (MHO) in Hillsborough County, Fla., property records show.
Blackstone, which has acquired more than 24,000 houses in the past year, has bought five Lennar homes in that county since September. The new houses, sold for $200,000 to $257,000, are in low-crime areas with good schools and can make money from rent or price appreciation, says Eric Elder, spokesman for Invitation Homes, Blackstone’s single-family rental division.’
‘American Residential Properties (ARPI), a Scottsdale, Ariz.-based rental firm that raised $288 million in an initial public offering last week, bought 21 to-be-built Las Vegas houses in 2012 from William Lyon Homes, the last of 325 lots in a subdivision that opened in 2003.’
OK, so here’s a question for these masters of the universe; why would the builders sell these gems to you if they were great money making rental opportunities? Better yet, why not become a builder, build them for yourself and rent them out? Lookie here, one tried just that:
‘Beazer Pre-Owned Rental Homes, a venture by private-equity firm KKR & Co. (KKR) and Beazer Homes USA (BZH), begun in 2012 with190 houses in Phoenix and Las Vegas, hasn’t been able to find new houses to rent fitting its criteria, according to CEO Patrick Whelan. “It’s harder to make the math work on new houses to rent, and they are often located in inferior submarkets,” Whelan said. “Buying for less than replacement cost is a key metric we focus on.”
http://news.investors.com/business-inside-real-estate/051613-656329-private-equity-taps-home-builders-for-rentals.htm#ixzz2UPxnhaku
American Homes 4 Rent has extended their reach as far as tiny Locaville. Their criteria is 3 br, 2 ba and less than 20 yrs old. My guess is they are aiming for the resale market.
“I am more convinced the institutional investors buying single family houses is a sign of a mania:”
What is there plan to do with these when this goes bust? Sell them back to the GSEs or perhaps the Fed?
It’s turtles all the way down again, except it is much harder at this point than back in 2008 to figure out what turtles stand ready to back Fannie, Freddie and Feddie…
It’s turtles all the way down again, except it is much harder at this point than back in 2008 to figure out what turtles stand ready to back Fannie, Freddie and Feddie…
Is that a trick question? The taxpayers stand ready to back them, of course…
Too bad the taxpayers are tapped out to the max…bad choice of turtles to step on, IMO.
Waypoint just filed to go public.
American Homes 4 Rent announced their intention to do the same.
If they a public entity, and renting the homes for cash flow (and actually generating that cash flow), why would they ever sell en masse?
They wouldn’t unless there was even more money to be made by selling. But I can’t see any way that they will make the expected cash flow required to keep improving stock value long term. Best case this is the latest Boston Chicken plan. Pump up the numbers, sell to the public and let them take the loss.
Whelan said. “Buying for less than replacement cost is a key metric we focus on.” ??
I can here RAL screaming right now…Why buy existing when you can build for 40% less…Well, RAL, make contact with the CEO Whelan…Educate him with your special insight…
Hey “contractor”,
How many times you gonna put your foot in your mouth?