Does ‘It’s Just A Boom’ Still Hold True?
A weekend post on bubble recognition. The Seattle Bubble, “Housing Bubble 2.0: The Perma-Bears Respond. “Ben Jones, who has been blogging about the housing bubble from down in Arizona since late 2004 at The Housing Bubble Blog linked to my ‘Welcome to Housing Bubble 2.0′ post yesterday, prompting an interesting discussion in the comments. Here’s a selection from the conversation that ensued: Comment by Ben Jones - ‘I’ve called this the ‘it’s not 2000-pick your year’ excuse. Sure, house prices are up up UP! There are people camping out for pre-construction houses, multiple offers over asking, investors running wild. Shortages, man, shortages! But; there are not the exact circumstances of the pick your year. The bubble is in the minds of the participants, and it couldn’t be more clear. All the proof you need is in the prices. It doesn’t matter how you get there.’”
“I disagree with the premise that ‘all the proof you need is in the prices.’ If that were true, then New York and San Francisco have basically been in a perpetual housing bubble since the middle of the twentieth century. There is a lot more to recognizing a housing bubble than just the prices.”
“For perspective on where Ben and most of his commenters are coming from (and to explain my use of the term ‘perma-bears’), in early 2012 when I was saying that ‘I suspect that we’re basically at ‘the bottom’ for home prices,’ here’s what Ben was saying: ‘It’s difficult to understand where we are with the global housing bubble, because the media ignore it. So anyone interested has to glean what they can from various sources. IMO, many countries or entire regions are either at all time highs, or just barely off the peak. I don’t have time or space to post them all…’”
“‘I read the NAR economists saying prices were up in the US in almost every state. I don’t know about that, but even if it’s true, they are up in Jakarta too. So what? What should matter is are house prices too high. Are lending standards where they need to be. Again, if ‘affordability is at an all time high’ as the NAR says, how come the govt is doing all the lending at under 4% with little to nothing down? I don’t see how this situation isn’t ringing alarm bells around the world. I guess it is, but not many are listening.’”
“The focus of Ben’s blog is typically on the ‘global housing bubble,’ which he seems to believe is still going strong. I’m not making any particular claims about anything global since the focus of my blog is local, but I do try to do my best to stay aware of what’s going on in the big picture.”
“To reiterate my point, I do think we are currently in the beginning stages of another housing bubble. However, I think that it is building up very differently than the one that inflated 2004-2007, and will therefore have a very different outcome than the last one. I don’t yet know what that will look like (no one does), but I strongly suspect it will not include a dramatic increase in inventory, a flood of foreclosures, and rapid decreases in home prices.”
Then a couple of days ago there was this: ‘Warning: New Housing Bubble Ahead.’
“This comment left by Ryan strikes me as a clear warning sign of another housing bubble inflating in Seattle. ‘Just pulled the trigger on buying a townhouse in Fremont for $745k. Haven’t closed yet so don’t want to link to the MLS. Thought I would share my thinking on why I bought and what the situation was like. List was for around $650k. Property had multiple offers, most within a few $k of the accepted price. List to accepted offer in about 7 days.”
“‘Three quarters of a mil for a townhouse seems insane but we feel good about the purchase for a few reasons: My office is on the same block as the unit, can’t beat that commute. I’ve lived in Fremont for years and want to stay for the long haul both a resident and business owner. The unit was unusual in a number of ways, all good. Exceptional build quality. Units sold nearby with same square footage for similar price that are absolute garbage. We wanted a house but didn’t have the capital to buy and then remodel, most things in our geographic range needed work.’”
“‘I felt good about the potential future appreciation of the property due to being so close to all of the major tech employers.’”
“‘On the downside it’s definitely on the high end of what anyone paid for a townhouse in Fremont and there is no way around the fact that it’s insane amount of money. If tech is in a bubble it still feels like the early stages of the bubble and we didn’t see the situation improving. Mid term (5 year range) it seems that traffic will get drastically worse as everything under construction comes online, so it seemed smart to set up our lives not to have to leave the neighborhood.’”
“‘Just one perspective from someone helping to inflate both the tech and housing bubble.’”
“Here’s what concerns me the most: $745k for a townhouse. In Fremont. The home sold for $100k over list price with multiple offers at that level. The buyer cites that he ‘felt good about the potential future appreciation’ as partial justification for paying so much.”
“I still don’t think we’re likely to see another big price crash (yet) but stories like this one definitely scream ‘housing bubble’ to me.”
From an article I posted in the comments yesterday, “Matthew Gardner remains comfortable with these steeply rising housing prices. The long-time Seattle economist — who does a lot of work in the housing market — thinks the dramatic price increases will continue this year and possibly for the next few years because inventory remains tight. But he notes that the really big jumps are mainly in “close-in Seattle” — particularly places like Queen Anne and Capitol Hill. Across the metropolitan area prices haven’t and won’t climb so steeply. Those locations are in fact still affordable, he said.”
“Well, these close-in price hikes are starting to get into OMG territory so Crib Notes asked Gardner, who is principal of Gardner Economics, and some other experts to answer this question: When does this stop, and how? These increases can’t keep going. It’s not natural, not sustainable. A huge question on a lot of folks’ minds is: Will this end with a ’soft landing’ or something more like a slam down? You know, like something bursting?”
“Crib Notes wrote a year ago: People, it’s a boom, not a bubble, because there isn’t the crazy-bad lending, appraising and non-regulation now that stoked THAT bubble. But dang, does ‘It’s just a boom’ still hold true? How about that recently headline saying Seattle’s median home price rose 18.9 percent from March to March, to a hefty $535,000. Really, 18.9 percent!”
“Gardner made a key point: The crazy lending that fueled the last big bubble and burst is not happening this time. ‘There isn’t any subprime now,’ he said. The science of it starts with income levels. If incomes climb enough to support the higher monthly house payments created by these big fat house prices, then they are sustainable. If prices rise too high, then the market corrects.’”
“‘We forecast close to 48,000 new jobs in the metro area this year,’ he said. ‘Seattle remains one of the best locations relative to potential growth in 2015. We still have some potential for prices to move higher without a bubble forming.’”
“To reiterate my point, I do think we are currently in the beginning stages of another housing bubble collapse.”
Fixed it!
“I disagree with the premise that ‘all the proof you need is in the prices.’ If that were true, then New York and San Francisco have basically been in a perpetual housing bubble since the middle of the twentieth century. There is a lot more to recognizing a housing bubble than just the prices.”
Any mention of NY and SF immediately tips off the persons agenda.
It’s the CHANGE in price that is the real indicator for me. Any place any time period where there is double digit price gains for 3 years is in a bubble. A bubble is rapid price increase craziness not based on fundamentals. Beanie Babies. Beanie Babies.
It’s the CHANGE in price that is the real indicator for me. Any place any time period where there is double digit price gains for 3 years is in a bubble. A bubble is rapid price increase craziness not based on fundamentals.
+1. Except that I could imagine a case where double-digit price gains for 3yrs might not be a bubble, if an area’s fundamentals really had changed dramatically. But I think that is pretty rare.
Many folks that I know are currently arguing that the fundamentals in Seattle really are changing that rapidly, as the tech industry grows with more large employers opening offices here. I’m not sure I buy it, though. Sure, Amazon is hiring lots of folks, but the city’s median wage probably isn’t budging much at all.
It still rings of “its different here” to my ear. And with so many places around the globe going up at once, it must be different everywhere—again.
People can argue whatever they want but they can never back up their BS with data showing their claim of changing fundamentals, in this case that being wages increasing by double digits every year also. I call BS on this claim. During the dotcom boom I saw it, but now ain’t then.
“+1. Except that I could imagine a case where double-digit price gains for 3yrs might not be a bubble, if an area’s fundamentals really had changed dramatically. But I think that is pretty rare.”
Show me ANY area where median income went up that dramatically in 3 years. It doesn’t exist. A bubble is a bubble.
Agree…also the bit about S.F. being in a bubble since the mid 20th century is absolute nonsense, S.F. was affordable for many until the 80’s. I’m a native and large parts of town were working class, blue collar, and middle class and renting or buying was affordable if you had a half decent job back in the day.
The first time I had close contact with a California native was back in the late seventies. He was a college kid who played cello in an orchestra I was in at the time.
He gave the impression at the time that one could survive in CA on $20 a week or so, if you lived frugally.
It’s different this time, PERMABEAR, so shush it!
In retrospect, a short-term bottom was in at that point, thanks to the onset Fed’s massive QE3 housing price reflation scheme after the publication of Ben Bernanke Fed’s white paper on housing in January 2012 to legitimize the exercise. I’m sure Mr Genius here completely understood that official efforts were underway to reflate the bubble when he made his bottom call.
I don’t wanna hear about how there are no subprime loans now. That is simply horseshit. (And that word needs to be used, apologies). They are still freely lending to noncreditworthy people. Call it what you will. The tricks and scams and dissemblings are even worse because now people know that there won’t be any consequences and there will be a bail out.
These words were spoken to me by a realtor last week:
“Zero Down”
Zero Down.
Zero Down.
Zero Down.
That’s right. When I was in Texas last summer I saw this amazing amount of new construction around Prosper, north of Dallas. The billboards everywhere said, ’starting at’ 2-3-400k. Almost all included ZERO DOWN.
And what I saw was not even new build. This was a plain old house in the neighborhood. Mortgage broker tent set up outside the open house, realtor pimping inside.
I think a big part of the problem now is that there are different markets in different phases. The investors pulled out of PHX about a year before LA I think. They’re all going the same place though.
W. C. Fields — ‘I like children. If they’re properly cooked.’
I, too, like children, if they are properly exploited.
Zero down will save the children.
A MODEST PROPOSAL
For preventing the children of poor people in Ireland,
from being a burden on their parents or country,
and for making them beneficial to the publick.
by Dr. Jonathan Swift
…
W. C. Fields would have a tough row to hoe in these politically correct times.
I love children, but I just can’t eat a whole one.
Russ — I guess you aren’t related to the Clintons, then?
There is a sign on the corner where my new gig is located in south Phoenix. “We pay cash for houses”. Now tell me there is not another bubble.
Those signs never entirely went away up here. Been seeing them since the early 2000’s.
and GSE 3% down is nothing more than Zero down. A distinction without a difference and the definition of sub-prime.
It’s rare that I don’t hear an ad for some type of a a “Home Affordable” loan when I turn on the radio. No-doc, no appraisal, 125% LTV (which is kinda meaningless if there isn’t an appraisal) and a re-default rate of something like 30% in the first two years!
It would be interesting to see how the public gets stuck with the tab by these loans.
“It would be interesting to see how the public gets stuck with the tab by these loans.”
I hope it happens *after* I’m long gone.
There were truly good deals in some places around 2010-2012, especially if you bought with cash at auctions. However, the prices in San Diego did not reach sanity. Of course, in retrospect, San Diego residents may kick themselves for not buying an overpriced house at that time. However, like PB says, how could they have possibly known what lengths the Federal Reserve would go through to reflate such a destructive economic defect?
And this guy in Seattle (what’s his name) really should at least try to understand the implications of a global bubble in housing. I mean, why housing? And why does the stock market seem to ride in tandem on this wave? There is something important in that information.
When you have an unexplained defect, and you see an elephant in the room, then you ought to consider whether or not the elephant has anything to do with it.
I must have missed a slash with the italics, sorry.
“Gardner made a key point: The crazy lending that fueled the last big bubble and burst is not happening this time. ‘There isn’t any subprime now,’ he said. The science of it starts with income levels. If incomes climb enough to support the higher monthly house payments created by these big fat house prices, then they are sustainable. If prices rise too high, then the market corrects.’”
The home lending business hasn’t yet run out of liars who perpetuate the myth that subprime lending is a thing of the past.
Your Money
Home Loan Programs Let Buyers Put Less Down
FEB. 6, 2015
Credit Robert Neubecker
Your Money
By TARA SIEGEL BERNARD
One of the biggest hurdles to buying a home is accumulating the pile of cash for a down payment. By some estimates, it could take two decades to come up with a respectable 10 percent.
With the introduction of several new programs, prospective home buyers with little money to put down now have more options to consider. But they will need to sort through the many rules and fine print to find the most cost-effective loan, and they may ultimately come to the realization that it actually pays to wait and save a bit more.
Both Fannie Mae and Freddie Mac recently introduced similar programs aimed at middle-income borrowers that permit down payments as low as 3 percent. And the Federal Housing Administration, which insures loans and generally requires down payments of at least 3.5 percent, recently lowered one of its fees, making the program a bit more competitive with the two new options.
Whether it is prudent to buy a home with so little down is the first question borrowers need to answer. Critics have already questioned whether borrowers’ having such small stakes in their homes will potentially result in another rush of defaults, which tend to be higher on mortgages with smaller down payments.
But it is important to know that the low-down-payment options now available are not synonymous with the subprime loans that proliferated during the housing bubble, which often required little more than a pulse to qualify. Without these new programs, advocates said swaths of the population will be locked out from the forced savings plan that is homeownership. After all, it would take 20 years for a household earning about $50,000 to save 10 percent, plus closing costs, for a $158,000 home, according to calculations by the Center for Responsible Lending.
“Right now, we have excessively tight lending standards and thousands of creditworthy borrowers are losing out on an opportunity to build wealth through homeownership at a time when we are experiencing historically low interest rates,” said Nikitra Bailey, an executive vice president at the center.
Low-Down-Payment Mortgage Options
Prospective homebuyers have several new options allowing them to make down payments as low as 3 percent, and an existing program, through the Federal Housing Administration, lowered some of its costs. Here is how much the same homebuyer might pay under several different loan options.
…
Borrowers who determine they are in a position to push ahead have a few avenues to consider. Fannie’s new offerings are two-pronged. Its first program permits all first-time home buyers — that is, at least one co-borrower must not have owned a home in three years — to put as little as 3 percent down. They must also pay mortgage insurance, a requirement on all traditional mortgages with down payments of less than 20 percent.
But these borrowers will pay significantly more for mortgage insurance compared to someone who waited to save enough to make a down payment of 5 percent or more, explained Erik Johansson, vice president for lending at Guaranteed Rate, a home loan lender based in Chicago. “The difference may make it worthwhile to wait and make the larger down payment,” he added. Poor credit scores will also obviously make borrowing more expensive.
Then there is Fannie’s new MyCommunityMortgage program, as well as Freddie’s HomePossible. These programs are a bit different in that they are available to people with lower and moderate incomes based on where they live; the limit is generally about $128,865 in the high-cost New York metropolitan area, for instance. Taking these loans may require borrowers to have some form of “prepurchase” counseling. (Fannie also requires a minimum credit score of 620, while Freddie, whose program becomes available in late March, said its minimum score is determined by its automated software and varies based on borrowers’ other characteristics; for manually underwritten loans, it’s 660.)
Those two options have several benefits: Borrowers are likely to receive better pricing on interest rates and pay less for mortgage insurance, and gifts and certain grants can be used toward the down payment. Fannie’s program requires that at least one co-borrower be considered a first-time home buyer, while Freddie’s program is open to all.
Then there is the F.H.A. option: It permits credit scores as low as 580 with a down payment of at least 3.5 percent, which is slightly higher than Fannie and Freddie require. “F.H.A. is more flexible on credit scores and debt loads,” relative to income, said Bill Banfield, a vice president at Quicken Loans.
With F.H.A. mortgages, borrowers will now pay an annual mortgage premium of 0.85 percent of the loan amount, down from 1.35 percent, on 30-year fixed mortgages with down payments of 5 percent or less. That fee is broken down into monthly payments. But borrowers must also pay an upfront mortgage premium of 1.75 percent of the loan amount, which is often rolled into the mortgage.
People with weak credit scores may still be better off going through the F.H.A. program, since it tends to be more forgiving (though lenders that sell mortgages can require higher scores), brokers and counselors said. One drawback, however, is that the F.H.A. does not allow borrowers to drop mortgage insurance once they have built up enough equity — 20 percent of the original home value — as Fannie and Freddie do.
Given the many highly personal moving pieces — credit scores, total income and how long the homeowner plans to live in the home, among other things — borrowers will need to run the numbers carefully. Lenders may tack on their own stricter criteria: higher credit scores, lower debt loads or some other hurdle.
But here is how the options might stack up for a person with a solid credit score of 720 and a down payment of 3.5 percent ($14,000) on a $400,000 home in New York. The Fannie MyCommunityMortgage loan is the most economical option: The total monthly mortgage payment, including mortgage insurance, is about $2,092, according to calculations made by Quicken Loans. But to use that option, a borrower or borrowers living in one of the higher-cost counties in New York — Kings, Queens, Nassau or Westchester, for example — must earn less than $128,865 or so.
A loan backed by the F.H.A. (which can wrap the upfront mortgage premium into the loan and has no income ceiling restrictions) would cost about 4.3 percent more, at nearly $2,182 monthly. The Fannie loan with no income restrictions would cost the most, at $2,281 monthly. (If a borrower has saved up for a 10 percent down payment, however, the payment drops to about $1,875.)
If the borrower had a subpar credit score of 620, the F.H.A. loan might be a slightly better deal. In that case, the monthly payments would still be $2,182, compared to $2,200 through MyCommunityMortgage.
Several large banks, including Bank of America, JPMorgan Chase and Wells Fargo, said they had not yet decided whether they would participate in the low-down-payment programs. And Guy Cecala, publisher of Inside Mortgage Finance, said he expected the larger players to remain reluctant to take the risks.
“The smaller nonbanks are much more excited about these programs both at Fannie, Freddie and the F.H.A. than the large banks who dominate the mortgage market,” Mr. Cecala said. “If you want a low-down-payment mortgage, you are likely to see more products and better pricing from the smaller nonbanks than you are larger banks.”
…
‘Mortgage finance giant Fannie Mae just debuted its new “HomePath Ready Buyer Program,” which lets first-time homebuyers get up to a 3% rebate of a home’s purchase price if they buy a Fannie Mae property, so long as they complete an online homebuyer education course which costs $75.00.’
‘The new HomePath Ready Buyer Program, as described by Fannie Mae, could create $4,500 in savings on a $150,000 home for first-time buyers, (defined as borrowers who have not owned a home in the prior three years).’
‘In addition to the 3% rebate, Fannie Mae will refund the cost of the homebuyer education course. Still many of the borrowers targeted for the new programs don’t earn more than their area’s median income.’
‘This new program comes after Melvin Watt, director of the Federal Housing Finance Agency, announced last December that Fannie Mae and Freddie Mac would soon start buying mortgage securities backed by 30-year loans with just 3% down payments, which banks largely halted delivering two years ago, instead demanding 20% down.’
‘All part of the Obama Administration’s push to make homeownership affordable to a bigger group of borrowers.’
‘Will taxpayers be on the hook for another mega-bailout, given that Fannie and Freddie combined were one of the biggest bailout cases of all, at $187.5 billion? Another argument: why are these supposedly private sector companies still acting like gigantic federal slush funds doing the whim of politicians and mortgage executives seeking to make a buck?’
And the kicker:
‘The latest “affordable housing” push by the Administration comes as mortgage originations have declined precipitously. Lenders sold about $1.12 trillion in mortgages in 2014, down nearly 40% versus a year earlier; and the lowest amount sold since 1997, says the Mortgage Bankers Association.’
The thing that makes my blood boil the most about this is calling it first time home buyers but it really is anyone who hasn’t owned a house in only the last 3 years.
Aimed directly at those who should not be owning and proved it last time. THIS IS A CASE OF THANKS OBAMA!
And there are plenty of dumb people lining up for it. The positive side is that most of these imbeciles will default within 36 months.
Also don’t overlook the anticipated future pleasure in mocking the innocent victims who signed the dotted lines on these “deals.”
Thanks Obama, indeed.
“Making Housing Affordable Through Higher Prices”
Truly newspeak propaganda.
And it’s an interesting thing, this propaganda. They are determinedly blind to the fact that pumping tax money into the housing market drives up prices, while at the same time touting how they seek to make those every more expensive houses affordable through yet more debt.
Curious.
Exactly.
These programs are almost comical. I have a hard time believing this is what has become of the housing market, and our country in general. Just sickening.
But it is important to know that the low-down-payment options now available are not synonymous with the subprime loans that proliferated during the housing bubble,
The permabears are leaving out something important. You’re paying too much attention to down payment. But the bubble subprime loans were NOT fully amortized. People got away with interest-only or even less than interest-only for 3-5 years. These new loans, even with low-no money down, require full payment up front. If someone can’t afford the monthly, you’ll know right away, not years from now. No time to flip, either.
And didn’t I predict this a while ago? The gov would put money down for people so that people who wanted to buy could buy, AND people who already bought don’t go back underwater.
This has been happening for decades in several industries: rent, food, credit, medical care, housing. If you raise the price of some necessity high enough, the gov will step in and subsidize part of it for you. It keeps the middle class in the game and prevents the rich from taking over everything, but it also creates a new normal and prompts cries of “Things were so much better before the government meddled in it.”
You’re defocusing off the issue Donk.
Current asking prices of resale housing are 250% higher than long term trend and 2x reproduction cost.
“I still don’t think we’re likely to see another big price crash (yet) but stories like this one definitely scream ‘housing bubble’ to me.”
There’s an audble increase in the volume of whistling as these folks offering bubble assurances stroll past the graveyard.
“I still don’t think we’re likely to see another big price crash (yet) but stories like this one definitely scream ‘housing bubble’ to me.”
This did strike me as a huge non sequitur.
If something is screaming “housing bubble”, why should one expect _not_ to see a “big price crash”.
Isn’t a fundamental characteristic of bubbles that they tend to pop?
History doesn’t show a lot of bubbles deflating slowly and safely.
“The wiggle sentence”. It is the thought that contradicts itself, and will be pulled out of a pocked later on to prove that the author of the sentence was not wrong.
Bubble denial is once again quite palpable. Is it really that hard for folks with PhDs in finance or economics to realize that home price to income ratios in many locales are more out of whack now than in 2007?
“Is it really that hard for folks with PhDs in finance or economics to realize that home price to income ratios in many locales are more out of whack now than in 2007?”
If the thinking of these PhD guys is that high home prices are vital to the economy because high home prices produce jobs through such things as the wealth effect and equity cash outs then it follows from this thinking that falling housing prices will destroy the wealth effect and destroy equity and thus destroy the opportunity for equity cash outs.
So after cutting through the crap, the bottom line looks something like this:
High housing prices are good for the economy and falling housing prices are bad for the economy.
And since there are many people - the majority of people (debt slaves and others) - who have a stake in high housing prices this high-house-prices-is-good concept is an easy sell to the voters.
It may not be the BEST thing for these voters but if you are a politician it doesn’t have to be the best thing, it only has to SEEM to be the best thing.
So the PhDs come out with their theories and arguments and nobody throws rotten tomatoes at them so these theories and arguments take hold and even get reinforced by those who need to have these theories and arguments supported.
And so here we are. If wages aren’t high enough to support housing prices then debt will need to step in to take up the slack. If the debt that is available is not enough to take up the slack then the debt will somehow have to be increased.
Whatever, whatever it takes. Once the concept of high-housing-prices-is-good takes hold and goes beyond being a mere concept and becomes a given then there should be no limit to the tactics that need to be taken to support high housing prices because the alternative, according to this entrenched thinking, is economic catastrophe.
‘High housing prices are good for the economy’
It’s not good enough for prices to be high, they have to be ever higher. Only then is the housing market “good”.
There’s been some subtle changes in how this is addressed. At one point it was ‘prices got so low, that’s why prices are going up.’
OK, they aren’t low any more. In many cases higher than ever. So why are they still going up? Here’s the bit they sneak in; ‘Oh, we’re not quite back to the peak, but give it a year maybe two,’
Folks, there were long lines of experts and economists and even politicians telling everybody prices back in 2005 or 6 or 7 were artificial. Stupid, an illusion, those prices weren’t real, as in not reality. Now HTF did we get back to this place without the media looking back at those statements and asking, ‘hey, you said…’
‘High housing prices are good for the economy’
I’m not sure why this fallacy is missed by everyone. Nothing could be further from the truth.
Remember when Obama was pushing the refinance thing. He said, imagine if all these homeowners have a little more money in their pocket every month, how that will boost the economy.
I asked, imagine if we were all paying less for a roof over our heads, forever!
I’m not playing along with this fairy tale. Prices took off as a direct result of unprecedented government policy manipulation and central bank shenanigans, quickly picked up by greedy speculators. It can’t last, is harmful to the economy, and will likely end in many tears.
IMO it’s the same bubble. Prices didn’t find their natural level. There weren’t enough speculators burned. And look how quickly Jane and Joe became house gamblers again.
“I’m not sure why this fallacy is missed by everyone. Nothing could be further from the truth.”
IMO it’s because housing - buying a house - is considered to be a decision that relates to an investment and not an expense.
If one RENTS a house then he has an expense. But if one BUYS a house then he has an investment.
This is not necessarily true for other things. For example, if one rents a car then he considers this renting to be an expense. And if he buys a car then this, too, he considers to be an expense. One who buys a car expects to drive it but he doesn’t expect it to increase in value.
But one who buys a house both expects to live in the house AND he expects the house to increase in value.
And this, IMO, is the difference.
Further to the point; All the interventions resulting in unprecedented market distortions reinforced all these false notions.
We’re fast approaching the time to take a long position in Kleenex.
You don’t see a cry throughout the land that we need higher car prices even though people spend some hefty buck for cars because THE THINKING of the masses - the conditioning of the thinking of the masses - is that one should not expect car prices to remain high.
But the conditioned thinking of the masses is that one should expect prices of houses to remain high.
It’s almost un-American to think otherwise.
Some time ago, on this blog, a poster said:
“I was lucky in that I grew up during the Great Depression.”
And hence this person’s thinking about eagerly taking on debt - on eagerly becoming a debt-slave - was forever conditioned against the idea.
And this thinking was a good thing for him but it would be a terrible thing to happen to our debt-fueled consumer-based economy if everybody thought this way because our economy has grown to be so dependent on debt that it can’t function without it.
And IMO this is a really stupid position to be in but nevertheless this seems to the situation and I haven’t a clue as to how to change it. So the only thing I can think of to do is the un-fashionable thing, the un-American thing, the self-centered micro economic thing, which is to remain frugal and debt-free and cook up a batch of popcorn now and then as I sit back and watch events unfold.
Cars are neither valuable nor durable enough to create the practical potential for the central bank to inflate car prices, then encourage cash-out car equity lending to finance other consumption expenditures. That only works with housing, due to the massive amounts of leverage involved.
Further to the point; All the interventions resulting in unprecedented market distortions reinforced all these false notions.
+infinity. The moral hazard has been poured forth in abundance.
Combotechie: And IMO this is a really stupid position to be in but nevertheless this seems to the situation and I haven’t a clue as to how to change it.
Not kicking the habit
The world is still addicted to debt
Feb 7th 2015
The Economist
EIGHT years have passed since subprime mortgages started to go disastrously wrong, but the after-effects of the debt crisis are still around. So, as a new report from the McKinsey Global Institute* makes clear, is the debt. In fact, there is even more of it.
Global debt has risen by $57 trillion since 2007—an annual increase of 5.3%. That is not dramatically slower than the 7.3% annual growth rate between 2000 and 2007, a period widely seen as a credit boom.
The lack of deleveraging since the crisis indicates the sheer difficulty of eliminating a high debt burden. Write-offs may merely transfer the burden from one party to another. Inflation can work for a while, although eventually creditors will get wise to what is happening and demand higher nominal interest rates to compensate. The key to bringing down a high debt ratio is rapid economic growth, which the developed world has struggled to bring about.
The report cites the examples of Sweden and Finland, which emerged from debt crises in the 1990s. But it points out that both countries were open to trade, and were able to use currency depreciation to boost their exports when the global economy was strong. Today’s economic problems are widespread and not all currencies can depreciate at once. It is therefore hardly surprising that central banks have set interest rates near zero, or even below it: their economies could not stand the strain of higher rates.
Reducing tax incentives for debt is another good idea, but one sure to meet fierce resistance, particularly in America, where tax relief on mortgages is regarded as a human right. After a while, like any feel-good drug, debt becomes addictive.
http://www.economist.com/news/finance-and-economics/21642198-world-still-addicted-debt-not-kicking-habit
“…ever higher…”
Isn’t that a reasonably good two word summary of the policy objective of modern central banking?
It’s not good enough for prices to be high, they have to be ever higher. Only then is the housing market “good”.
Right, there needs to be ever increasing prices to sustain the Ponzi, the same way a shark needs to keep swimming forward in order to breathe. Without constant ahistorical appreciation the whole scam falters and collapses.
Fun fun fun while the heroin high lasts.
There is a built-in conflict between macro-economic theory and micro-economic theory in that what may be good for a society in a macro sense can be totally destructive for an individual in a micro sense.
Debt-slavery is one of these conflicts. A person willing to take on debt and do some spending will benefit his fellow man in that the borrowed money he spends ends up flowing throughout the economy and causes some economic activity to happen. But at the same time he is helping his fellow man he is taking on a personal burden, he is acting to punish himself.
But these PhDs don’t consider this individual punishment, or if they do consider it they will over ride it by their BIG PICTURE thinking, their thinking as to the benefit of society as a whole.
“Debt-slavery is one of these conflicts.”
To the fundamental point of all this; If you have to borrow for 15 or 30 years, you can’t ‘afford’ it nor is it affordable.
Dude, the rental office called. You’ve only pre-paid 10 years of your rent. They want the other 5-20.
Donk,
Renters pre-pay 30 days in advance. It was you who pre-paid a grossly inflated amount for a depreciating asset, 30 years in advance. And you doubled down on that loss by borrowing.
It’s the grasshopper vs. ant problem.
Modern economic planners want “grasshoppers”: debt-indifferent, eager to spend every dollar they make, and more, with any savings being put into the stock market for retirement.
But, there are the “ants”: debt-averse, they like to save money, suspicious of volatile financial products and complexity.
The planners have been pressuring the ants with de facto inflation and zero interest rates and asset bubbles.
But… expecting an ant to behave like a grasshopper, short of currency destruction and hyperinflation, is not going to happen.
“But… expecting an ant to behave like a grasshopper, short of currency destruction and hyperinflation, is not going to happen.”
BINGO
Why do politicians favor grasshoppers over ants?
No sense parsing and getting lost in the weeds, just ask the question;
Just what housing-centric outfits are these fable-telling fools working for?
And once again;
Lesson: Never pay more than reproduction costs for a depreciating asset. If you paid more than reproduction costs ($55/square foot), you got ripped off.
Here’s an example, can you spot a bubble?
‘The Bay Area’s hot economy and the limited number of properties for sale have pushed the median price for Santa Clara County homes to a record high, $879,000, and the rest of the region is not far behind.’
‘Median sale prices in Alameda County climbed to $665,000 in March, a hair below the 2007 peak of $669,500, according to data released Friday by real estate information service CoreLogic. After hitting a new peak of $1,060,000 in February, prices in San Mateo County dipped slightly to $995,000 but that mile-high figure still represented nearly a 5 percent increase over the year before. Contra Costa County prices climbed as well, to $470,000, a 10.6 percent increase.’
‘It’s a sellers’ market everywhere, but Silicon Valley is leading the pack.’
“It feels like a standard Silicon Valley spring: challenging,” said James Yang, a Palo Alto-based agent with the Sereno Group. “It’s been consistently crazy for the last four or five years — multiple offers, bidding over the list price, a consistent pattern. If there are 10 offers on one home, those nine others are going to continue to shop. And if you got beat out at $2.5 million, there’s kind of an understanding of where you need to be the next time.”
Stop right there; Where you need to be ‘next time’? OK, on with the show…
‘A year ago, Paul and Irene Goh of San Jose sold their townhouse, moved into an apartment with their three children and began the hunt for a house.
“In this one year, we went to open houses every weekend and probably looked at over 100, maybe 200 houses,” said Paul Goh, a software engineer. “After losing three or four times, it gets more and more depressing. Sometimes you don’t lose by a small margin — you lose by $300,000 or $400,000, so you get some sense of your competition.”
‘They bid on nine houses and lost every time.’
‘On March 23, a 1,600-square-foot, four-bedroom house with a detached office came on the market for $959,000 in San Jose, near Campbell. They saw it March 26, bid $1,120,000 that night and the next day went to the Santa Cruz Mountains to pray. Hours later, their agent called: offer accepted. “We’re finally done with open houses, and so are our kids,” Irene Goh said.’
‘Stories like that of the Gohs abound throughout the Bay Area as buyers compete. “You have some areas where you’ve had higher sales and some areas with fewer sales, although the pricing is almost 100 percent all increasing,” said Jennifer Branchini, past president of the Bay East Association of Realtors. “Very interesting market. Every one says, ‘What’s the best time to buy? What’s typical of this market?’ There’s nothing typical anymore. We’re in completely different waters.”
It’s the Mercury News, so you have to have this line:
‘Buyers have to be willing to act quickly and overbid.’
But, what’s this?
‘Last month’s sales volume for all kinds of homes was still 19.6 percent below the March average going back to 1988, when the service began compiling data.’
I bet there were a lot fewer people living there in 1988. Well, don’t let a collapsing bubble ruin your chance to rope in a few more FB’s. That’s what the media seems to exist for anymore.
Collapsing demand in these fraud-driven areas is all anyone needs to understand.
Alameda County, CA Housing Demand Plummets 11% YoY
http://files.zillowstatic.com/research/public/County/County_Turnover_AllHomes.csv
Here’s an example of how crazy it is around here. This house was purchased for $600k about a year ago and was completely torn down and rebuilt. It is now for sale for $1.488 million.
https://www.redfin.com/CA/Santa-Clara/2334-Cabrillo-Ave-95050/home/1559700
If you enter this address in google maps, you’ll see that it is surrounded by tar and gravel roofed Eichlers. Insane!
And not a buyer in sight at a fraction of that price.
If you have to go to the Santa Cruz mountains to pray, then you’re already stupid and I can’t help you.
‘Realtor group Re/Max says home prices soared in Toronto and Vancouver in the first quarter with some of the effects spilling over into nearby regions. The average sale price of a home in Vancouver grew seven per cent year over year to $874,869, a figure that includes everything from condos to detached homes.’
‘In the Greater Toronto Area, the average residential sale price grew eight per cent from a year ago to $594,827.’
‘Gurinder Sandhu, executive vice-president at Re/Max Ontario Atlantic, says a growing number of Canadians who work in pricey Toronto and Vancouver are buying homes in nearby areas where they can get more for their money.’
‘Victoria saw sales climb 23 per cent with average prices up two per cent to $569,070, while Barrie saw sales grow 11 per cent year-over-year as the average price gained six per cent to $365,201. In the Hamilton-Burlington region, the average sale price increased by eight per cent to $443,706.’
“Regions outside of Vancouver and Toronto, including Victoria, Hamilton-Burlington, Barrie, have all reported this spillover effect from Canada’s highest priced regions,” Sandhu said. “These regions have seen more sales activity, as well as price gains, as buyers look to get more value for their money by expanding their boundaries. They’re willing to go for a longer commute and get larger properties for the money that they spend.”
‘In Toronto, more and more buyers are putting in offers on properties before they are even listed online, Sandhu said. Real estate agents are tapping into their networks to learn about places about to go on sale by word of mouth, in order to help clients secure purchases in a fiercely competitive market.’
‘Price gains across the remainder of the country were more modest, in the low single-digit range, with a handful of regions registering slight declines.’
The title:
‘No housing bubble burst in GTA’
‘Prices continue to grow at a tremendous pace and growth now spilling over to the suburbs…’
Check.
‘Home equity loans continue to be a popular source of quick cash for homeowners, who use HELOCs to borrow against the values of their home.’
‘According to RealtyTrac’s first U.S. Home Equity Line of Credit Report, there were 798,000 HELOCs originated in the 12 months ending June 2014 — up 20.6% from a year earlier and the highest figure recorded since mid-2009.’
‘But there’s an underlying threat derived from home equity loans that borrowers may not know about, says Greg McBride, chief financial analyst at Bankrate.com: Home equity lines of credit from the days of the housing boom can sting borrowers with sharply higher payments upon reset.’
‘A $30,000 balance at a current prime rate of 3.25% carries a minimum payment of $81.25. But, once that same $30,000 balance recasts to a 20-year repayment schedule, the monthly payment more than doubles, to $170.16. “It’s this conversion from interest-only payments to principal and interest payments that could pose problems for unsuspecting or ill-prepared borrowers, particularly at a time when household budgets are still very tight and income gains have been hard to come by,” McBride says.’
‘Wary homeowners offered new ways to finance their next move’
‘Lenders are introducing products aimed at getting would-be sellers and buyers off the sidelines and into the game. Among them are adjustable-rate mortgages (ARMs) that reset after 15 years instead of annually and bridge loans for people who need to buy a new home before selling the old one.’
‘ARMs “work well for move-up buyers who want to keep their payments low and who plan to pay down their balance once they have the equity in hand from the sale of their previous home,” says Gregg Busch, vice president of First Savings Mortgage Corp. in McLean.’
‘To woo prospective customers, lenders are also backing off some of the stringent requirements introduced in recent years.’
“People like these ARMs when they know they will sell in a few years or they’re payment-conscious now but anticipate being able to handle higher payments in the future,” Busch says.’
“Move-up buyers have a few options, including getting a home-equity line of credit established before they put their home on the market so they can access that money,” Busch says. “They can look for bridge loans that are cross-collateralized between both properties, because more lenders are offering them. Another option is to look for a loan that they can recast into lower payments as soon as they have the profits from the sale of their first home that can be applied to the new mortgage.”
‘“FHA recently lowered their mortgage insurance premiums, but the downside is that you need to pay those premiums for the entire loan,” Busch says.’
‘Private mortgage insurance (PMI) on conventional loans is eliminated after the loan-to-value ratio reaches 80 percent by virtue of the loan’s being paid down or the property’s appreciation. Many lenders offer the option of “lender-paid” PMI to borrowers if they have excellent credit.’
“Lender-paid PMI feels like no PMI to borrowers because the lender pays the premiums upfront and the borrower pays a slightly higher interest rate,” Cohen says. “Even with the higher rate, your payments will be lower than they would be with PMI. Plus, your interest is all tax-deductible.”
“People like these ARMs when they know they will sell in a few years or they’re payment-conscious now but anticipate being able to handle higher payments in the future,” Busch says.
Funny how Joe Sixpack is always overconfident, nothing ever goes wrong that has real consequences.
Future victims and bailout whiners in the making…
‘In recent years, people in China — who tend to save significantly more than their Western counterparts — sunk their excess savings into the real estate market.’
‘Now that the bubble in housing is deflating, they are latching onto the skyrocketing stock market. Investors opened 4.8 million new stock trading accounts in March and then another million more in early April, according to the Financial Times.’
‘Several Chinese retail investors polled by CNNMoney said they trade stocks frequently — up to several times a day — in part to have fun. One Shanghai woman, who didn’t give her full name, said she’s not worried about trading expenses hurting performance because “fees tend to drop during bullish markets anyway.”
‘Hoping to avoid a so-called “hard landing,” China’s central bank is pumping liquidity into the market by cutting rates. That’s good for risky assets like stocks, but liquidity-driven moves are susceptible to bubbles.’
‘Liquidity is also being pumped by the Hong-Kong Shanghai Stock Connect Program, which allows investors to buy Shanghai stocks through Hong Kong — and vice versa. Not only is fresh foreign capital flowing onto Mainland China for the first time, but excess liquidity inside China is flooding into Hong Kong.’
‘Goldman Sachs isn’t worried: Of course, not everyone believes it’s time to call China’s rapid rise a bubble.’
Timothy Moe, co-head of macro research in Asia at Goldman Sachs, told CNBC the market “certainly is getting frothy” amid “very frenetic retail activity.” “Is that a bubble that will crash the system? The answer is not yet,” Moe said.’
‘In other words, just because Chinese stocks look very speculative doesn’t mean the party has to end today.’
‘One possibility, Patel said, is for the bubble to end “benignly” if China’s growth regains momentum, justifying current valuations. He said that looks unlikely and there’s a better chance the opposite will occur.’
‘Another possible outcome is the stock market keeps roaring ahead before imploding, like it did the last time.’
“To be clear, what’s underway in China is an out-and-out bubble, but there’s plenty of money to be made riding bubbles up a bit,” Bespoke Investment Group wrote in a note to clients.’
“’To be clear, what’s underway in China is an out-and-out bubble …”
Wow, so the best decision you could make is to take your money out while you still have a chance, right?
“‘… but there’s plenty of money to be made riding bubbles up a bit …’”
What? Who are you giving such obviously stupid advice to?
“… Bespoke Investment Group wrote in a note to clients.’”
“To clients.”
What a surprise!
Might have something to do with collecting … collecting fees.
If clients took their investment money out of the bubble then just where would the fees come from?
“Never underestimate the power of incentives.” - Charlie Munger
If these people had any imagination, then they would take their earnings and open up a grilled cheese truck. But no, brokers gonna broke. It’s what they do.
‘Now that the bubble in housing is deflating, they are latching onto the skyrocketing stock market. Investors opened 4.8 million new stock trading accounts in March and then another million more in early April, according to the Financial Times.’
Short sellers stand to make a bundle shearing these sheep.
i’ve said this for years if your job/ business is walking distance then overpaying and getting rid of the car (or 2nd car) might actually be a good deal
———My office is on the same block as the unit, can’t beat that commute.
Bicycle - think bicycle.
I’ve been biking to/from work every day for thirty-five years which allowed my family to be a one-car family for thirty-four years (it took me the first year of biking to/from work to discover that we didn’t need a second car).
And I do this year round because:
1. I can.
2. It’s mostly flat.
3. It seldom rains, or seldom rains enough to force me to drive.
4. There’s no snow or other such evil and outrageous abominations to contend with.
Oh, and as for those nasty Southern California traffic jams?
What’s a traffic jam?
Just make sure that some idiot who’s texting while driving doesn’t send you off to meet St. Pete.
Perhaps it is just me, but I find high house prices attributed to various Tech Booms rather ironic, as there is no new technology.
Thank you. Exactly. Making a watch out of a Smart Phone is not “new technology”. It’s consumer packaging.
‘The abundance of low- and no-downpayment mortgages for first-time and repeat buyers; today’s mortgage rates at ultra-low levels; plus, a recent surge in buyer foot traffic has kept builder confidence near its highest point since mid-last decade. It’s an excellent time to be shopping for a home.’
‘Thankfully, mortgage guidelines are loosening. Today’s home buyers have an easier time getting approved for a mortgage as compared to several years ago. Banks are reducing approval standards, lowering minimum credit score requirements, and have made it simpler to get access to low-downpayment mortgages and no-money-down loans.’
‘FHA mortgages are easier for which to qualify, for example. As compared to the last year, improving market condition have prompted many banks to lower their minimum credit score thresholds. Combined with a reduction in FHA MIP rates, this has put FHA loans within reach of more U.S. buyers; and, Fannie Mae and Freddie Mac continue to support their five percent downpayment mortgage programs.’
‘VA loans and USDA loans remain popular, too. Neither requires a downpayment. VA loans are available to eligible active-duty military personnel, veterans of the armed services, members of the national guard and reserves, and surviving spouses. VA loans offer 100% financing and require no mortgage insurance. Approval standards are flexible and mortgage rates are often lower than with comparable conventional loans.’
‘USDA loans are also no money down. USDA loans are backed by the U.S. Department of Agriculture and can be used in many rural and suburban areas nationwide. USDA mortgage rates are typically the lowest of all government-backed loans, and mortgage insurance rates are minuscule compared to other low-downpayment programs.’
‘With home prices expected to rise through 2015 and into 2016, the availability of low- and no-downpayment mortgages will be a boon to U.S. buyers — especially if mortgage rates remain low.
To borrow and invoke; America will be hard pressed to survive the lies that it lives.
So as I understand it, the FED is keeping ZIRP in place, playing global chicken with Greece and China to see who will pop first and crash the global economy. Corporations have be taking out ZIRP loans to buy back their own stock as investors have left our market and they are preparing for the “adjustment”. China’s stock market has gone wild with people who have left their crashed housing market and they are pumping that bubble. And Greece is just behaving badly.
Looking at our market on Friday, I had the feeling I should get some popcorn for Monday. Is this something that is going to take place over months or is it going to crash?
If our stock market crashes, do more people go invest in the housing market? If investors have already left the stock market, have they already put it in the housing market? Or does our housing market crash with the stock market?
What matters is falling prices. Falling prices=Good.
Falling prices = IMPROVEMENTS
“If our stock market crashes, do more people go invest in the housing market?”
So far investors have gone hog wild in both stocks and housing, on the Fed’s open encouragement to eschew savings in safe places in favor of risk assets.
Given perfectly correlated irrational exuberance in both categories of risk asset, wouldn’t a simultaneous reversal of both housing and stocks make more sense than some kind of substitution of one for the other?
“wouldn’t a simultaneous reversal of both housing and stocks make more sense than some kind of substitution of one for the other?”
From my perspective, housing will be hot until I’m dead. Housing will always be the sector to “buy more.” I say this because I have many teacher-friends who now own multiple houses. I would have predicted that this number would have dropped in the last five years, but housing’s volatility seems to have drawn more people in.
I don’t know why this happens, other than the fact that you can roll the dice and still “win big.” If stocks go down, you have nothing. If housing goes down, put a renter in it.
I don’t know why this happens, other than the fact that you can roll the dice and still “win big.” If stocks go down, you have nothing. If housing goes down, put a renter in it.
I can tell you why it happens: OPM. When you are rolling the dice in Vegas, you have to put real money down. When you are rolling the dice in the stock market, you have to put real money down.
When you are rolling the dice in housing, you can put hardly any money down; the taxpayers are the ones who are really on the hook.
“”Looking at our market on Friday, I had the feeling I should get some popcorn for Monday.”
No popcorn is necessary. A closely-watched pot never boils over.