Posted: 12 Mar 2011 02:30 AM PST
Housing markets around the country are plunging to new lows. it has renewed the debate as to how low and how long.
Irvine Home Address ... 122 STREAMWOOD Irvine, CA 92620
When is the right time to buy? Timing does matter. Be always too soon, be never too fast. The people who bought the dip in 2007 or 2008 were too fast. Were the 2009 buyers too fast or too soon?
Early 2009 was not the bottom. In fact, the artificial bottom delayed the durable bottom, probably for a couple of years because the capitulatory selling and the destruction of debt has not been allowed to occur. Rather than a steep dive, we are gliding to a higher bottom years later than it should have been. Perhaps it was worth it to save the banks. Homeowners will almost certainly agree the heroic efforts and market manipulation was worthwhile. Renters and prospective buyers, not so much.
By Les Christie, staff writer -- March 6, 2011: 5:02 PM ET
Wow! Robert Shiller is really bearish. A decline that substantial would require the complete breakdown of the lending cartel and higher interest rates. As the economy improves, people will go back to work, and housing demand will pick up, albeit slowly. Low interest rates, increasing demand, and prices already below rental parity in most markets would suggest prices would not decline that significantly.
For prices to go down, loan balances need to decrease, and more supply needs to be released to the market. Interest rates are still low, and if they stay low, prices will stabilize near where they are now. If interest rates continue go up, which is a more likely scenario given we are near historic lows, then mortgage balances will stagnate, and prices will trend lower.
We are in a market trying to avoid catastrophe. The risks are to the downside.
I would put myself in the Dean Baker camp. The below median stuff is near the bottom, perhaps less than 5% to drop. The next tier up -- the properties readers here find most interesting -- probably will drop 10% to 15% over the next couple of years. The high end that still requires financing is going to drop 15% to 25% more over the next few years. The stuff currently priced near $1.5M will bottom last, and it will drop the most from today.
Some of the discrepancy in the price-to-rent ratio is caused by the distortion of asset value caused by very low interest rates. The only reason we in Irvine look at a $650,000 house and feel the price is reasonable is because based on our incomes, we know we can get financing for that amount. If interest rates were 9% -- which is the 40-year average -- the same house at $475,000 seems pricy.
I said this in a post last week. It all depends on how you define a "major hit" and what it would take for that to happen. If you know you are going to sell in less than 5 years, you probably shouldn't buy because you may not cover your real estate commission on the way out. Even if you think you are going to stay longer, beware that you may need to sell at the bottom, and after commissions, half or more of your 20% down payment would be lost.
However, people who are going to live in the same house for seven to ten years or longer can take advantage of the low interest rates and fixed-rate financing to lock in a payment lower than rental parity in most markets. In that instance riding out a 10% decline is not a "major hit."
Also, buying the bottom tick of the market may not lock in the lowest cost of ownership for a financed buyer. If prices are going down because interest rates are going up, the cost of ownership is unchanged. Only the price of money has gone up. The lowest cost of ownership may actually be obtained at a higher price point. That being said, I don't think we have seen the bottom in affordability either.
Yun waits until the housing market collapses before he says something intelligent. That wasn't the song and dance the NAr used back in 2006. Take careful note of the section that says REAL ESTATE IS A GREAT INVESTMENT.
OMG! What are people's expectatioins? Is a housing market underperforming if it doesn't produce 10%+ annual appreciation? Now I see where the general public picks up its dumb ideas.
The issues of rising interest rates and lingering bad debt and shadow inventory will be with us for the rest of the 10s. We haven't crested the top of the forclosure wave yet. Which means we have three to five more years of processing new buyers into foreclosed homes and eliminating old borrowers from the buyer pool while their credit repairs, a process that takes at least two years, with problems lingering for up to seven.
With the turmoil from the bubble being so long lasting, it is difficult to foresee what will happen to house prices beyond the bubble. If we print a lot of money, inflation will bring values up by devaluing houses relative to everything else. You can put $12 gas in your $50,000 Honda Civic parked in your $500,000 house. If we don't go crazy printing money, and if unemployment lingers, appreciation could be tepid for a long time.
Americans are optimists.
That is among the dumbest quotes of the bubble by Lawrence Yun. The smart money is making their move... Makes you want to be one of those savvy investors that's "in the know." A spinmeister in action.
Lawrence Yun could polish a turd.
Processing shadow inventory
This weekend's featured property is a small condo that a bear rally buyer picked up on 8/2/2007 for $229,000. He used a $206,100 first mortgage and a $22,900 down payment. He quit paying sometime before September of 2009.
The lender waited until December to foreclose paying $128,000 on 12/13/2010. This is now REO.
Earlier when I was saying the below median is at or near the bottom. This is what the bottom looks like. This property is selling for more than 40% off its purchase price from 2007. This was after the peak in 2006 when this property hit maximum value.
Couple a 40% decline in price with interest rates below 5%, and affordability is outstanding. Now if the rest of the market continues to compress, we may see affordability become the norm -- even in Irvine.
Irvine Home Address ... 122 STREAMWOOD Irvine, CA 92620
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