Feb062012
Record low interest rates fail to spur demand
Interest rates are at record lows, and prices are at or below rental parity in most markets, yet demand is low and sales volumes are weak. Most real estate shills blame intransigent buyers. Many realtors believe legions of buyers are fence-sitting due to falling prices. In their world, if buyers could just be cajoled into buying, everything would be okay.
The main reason buyers aren’t buying is because they can’t. The buyer pool has been depleted by the recession. Fewer buyers qualify for loans because they have bad credit from excessive debt loads or a recent foreclosure or short sale. Plus, few people have the requisite down payments to buy a house at California prices. Prices are now affordable on a monthly payment basis, but until people go back to work, repair their credit, and form new households, demand will remain weak. Further, since the collapse of prices has wiped out so much equity, there is no viable move-up market. This will be a drag on high-end pricing for many more years. Expect to see high-end prices languish even after the bottom tier of the market finds stability.
We are in the early stages of the foreclosure liquidations. The month-to-month changes in foreclosure processing don’t mean much. Lenders have been managing foreclosures to match the rate of MLS liquidations for the last two and a half years. This is evidenced by the disconnect between mortgage delinquency rates and foreclosure rates. We won’t see a sustained drop in foreclosure activity until we get rid of the backlog of shadow inventory. That could potentially take years. Lenders and the GSEs are approaching private equity firms to buy and rent their REOs because they have so many of them.
Buyers cannot buy because they lack the credit scores, the income, and the down payment to buy at these prices. The problem in housing is a deep structural problem, not a psychological one. There are some buyers waiting out the price drop to see if they can get a better deal, but not so many as to impact the market. The real weakness in the market is caused by a depleted buyer pool and an excess of inventory. Those two problems will persist for several more years.
U.S. Mortgage Rates Hit Record Lows, Again
Posted by David Barley 02/02/12 12:00 PM EST
Based on Freddie Mac latest Primary Mortgage Market Survey (PMMS), the average mortgage rates dropping to new all-time record lows as data on economic growth fell short of market projections. All products in the PMMS survey, except the 1-Year ARM, averaged new lows.
The 30-year fixed-rate mortgage (FRM) averaged 3.87 percent with an average 0.8 point for the week ending February 2, 2012, down from last week when it averaged 3.98 percent. Last year at this time, the 30-year FRM averaged 4.81 percent.
When I prepare posts each week, I got to Bankrate.com to check the 30-year FRM rates for the cost of ownership calculations. Over the last month, rates have been less than 4%. I never thought we would see rates this low. And who knows how long they are going to last?
Published: Tuesday, 31 Jan 2012 — By: Diana Olick — CNBC Real Estate Reporter
Anyone with any cash in hand should be buying a house right now.That’s what any real estate agent will tell you, obviously, but that’s also what many investors now believe.
Unfortunately, the potential home-buying public…isn’t buying it.
January’s consumer confidence report found a drop in the number of Americans who plan to buy a home in the next six months.
People change their plans for several reasons, and many of those who said they were not going to buy a home in the next six months may simply be responding to the reality of their inability to consummate the transaction. Even those who plan to buy in the next six months might find they are unable to do so.
If, however, you take out the confidence issue, the fundamentals for buying are strong:
Home prices nationally are down 33 percent from their bubble peak, according to the latest S&P/Case-Shiller report, mortgage rates are hovering near record lows, and housing supply, while falling, is still historically high. In other words, it’s more of a buyer’s market than it’s ever been.
And yet the home ownership rate continues to fall, and rental demand, occupancies and rates continue to rise.
Rising rents will be what pushes many into home ownership. With the falling rents of the 2007-2010 period, there was no urgency to buy. Rents were falling and prices were above rental parity. With prices below rental parity and rising rents, many will get pushed to buy because the savings on their monthly expenses.
“Federal plans to sell real estate owned properties to investors might provide some relief, but rental value growth is still likely to hit 3 percent this year and average rental yields may rise to around 5.5 percent,” wrote Paul Diggle of Capital Economics, who believes the downturn in homeownership may still have further to run.
Both Diggle and Standard and Poors’ David Blitzer cite still tight credit as the major obstacle to housing demand. Rates are low, but to get those rates you need a significant down payment. The low down payment route, the FHA, has raised fees and premiums, which for some are a barrier to entry. A full third of the market is now all-cash.“We have to get the demand up, we have to tighten the supply a little bit before we will see any shift in prices and we haven’t seen that,” said Blitzer in an interview on CNBC. …
Demand will not be up in most areas due to the problems discussed at the opening of this post. Plus, it’s difficult to tighten supply when the banks already have more houses than they could possibly sell. Even with the bulk foreclosure deals on the horizon, banks are going to have MLS inventories stuffed to capacity for several more years while they liquidate their REO.
OC Housing News readers are active
Shevy tells me he and his team have been very active with buyers since the start of the year. Apparently, a chance to get a home with a cost of ownership below rental parity outweighs the risks of falling prices and rising interest rates. These buyers know the risks — because most are readers, and Shevy explains the risks to them — and they are choosing to buy despite the potential problems. Unlike five years ago when disaster was certain, today’s buyers are locking in a cost of ownership lower than rent, and for those who plan to live in the same house for several years, the savings versus renting has value. Can anyone say with certainty today’s buyers are making a mistake?
”I see deflation in the things you own and inflation in the things you need”—Kyle Bass
Succinct statement of the next several years in this country. Sad but true.
He made a lot of money on CDS the last few years. First on MBS and next on sovereign bonds. Now he is a gold bug….kinda like Peter Schif.
Good article as always.
Re house in example. Do people actually get 3.92% interest rate for $1.04MM jumbo mortgage after 20% down payment?
Would the banks actually approve mortgage for people with the savings and income listed in your example? (~$365k saving, ~$250k income)…?
Anybody knows? Thanks.
I don’t know, but if you could finance just $730K, then yes, you could receive an FHA loan below 4%.
I don’t believe so, those rates are for conforming loans (<$625,000). I would expect a jumbo to be at least 50-100 basis points higher but more informed posters may want to chime in.
I should update my formula to automatically at 50 basis points to any loan over $729,750. That would resolve the problem.
I think that is a good idea IR. It will actually reflect what the real case scenario would be.
“The real weakness in the market is caused by a depleted buyer pool and an excess of inventory. Those two problems will persist for several more years.”
If the monetary policy in the US doesn’t radically change, I fear this will last a decade or more. Govt and Fed intervention is not enough anymore to spur more malinvestment . Their efforts ahve succeeded only in increasing market uncertainty and delaying confidence. Even if you’re a qualified “fencesitter” in the eyes of the NAR and Bernanke, do they not understand that Americans still have to fill their vehicles with fuel and their refrigerators with food? Matters are bad, but they’re probably only going to get worse, which slices more money out of available funds for monthly housing expense. If you have by chanced saved even one grocery receipt from 2005 and compare it to 2012 you will be freaking shocked.
Also, it’s not even summertime in OC yet and check this out:
http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/CAmetro.asp
Bernanke should just raise rates, allow home prices to fall, rip off the bandaid off and get all this sewage out of our system. It’s going to suck for bankers, but in 3 or 5 years the US market and economy will be so much stronger for it.
“Their efforts ahve succeeded only in increasing market uncertainty and delaying confidence.”
The greatest challenge to predicting future house prices is government policy.
Imagine what would happen if they implemented widespread principal reduction, eliminated loan qualification standards on government-backed loans, and raised the conforming limit to $1,000,000. Demand would increase, and the Ponzi scheme would reflate for a while, then when the defaults hit, the taxpayer would absorb all the losses.
Now imagine what would happen if they eliminated all government subsidies including the home mortgage interest deduction, stopped insuring all loans through the GSEs and FHA, and forced the banks to mark their books to market. The housing market would crash hard.
Both extremes of government policy are advocated by someone out there, and politicians are under a lot of pressure to make house prices go up. Who knows what could happen?
Well said.
When clients ask me if now is the time to buy, I ask them to tell me what housing policy the gov will roll out and I can give them the answer.
I think now is a OK – good time to buy depending on area and assuming a long ownership period. Issue the gov could cause housing prices to crash another 25%, or re-inflate them. Beyond me what they will do, but I if they will loan me 4% – 5% money, I will buy a few. As good of a risk as anything else I see out there.
Rates are so crazy low, that we could refinance our house today (that we’ve “owned” for nearly five years) into a 15 year loan at 3.25% and our mortgage payment would only increase $150. The catch is, we’d have to drain our savings to pay-off the underwater portion and to get down to 80% LTV. Although, MIP is only 50 bps on an FHA 97.75% LTV 15 year loan.
It may not be a bad idea to make that loan. It might seem painful today, but 15 years from now, you’d be very happy.
The problem is that the government has already conned nearly everyone that can be conned with low interest rates. That created the false bottom. Everyone else watched the first con go down and is running away from the three card monte table. It has nothing to do with affordability and everything to do with people not wanting to volunteer for a $25-50k loss. Just like people flooded the market when the popular belief was $25-50k appreciation a year, the current drought will last until the masses see houses going up in value again.
I’d say the problem is that you have too many people pretending to own houses combined with a weakness in Democracy in that:
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury
In my opinion, we need a more balanced portfolio of renters to owners. What you have at present is a 60-something percentage majority house owners attempting to vote themselves the largesse of the treasury. As a result we see policy after policy written in favor of maintaining the status quo where we all spend and live beyond our means.
i don’t believe this.
i personally don’t know anyone that can afford a house that has waited more than a year to buy.
i was talking to a realtor and she was saying she’s never seen anyone looking for more than 8 months, and that we were the most patient people she’s ever seen (she saw us about a year earlier, remembered us and was shocked we were still looking).
my point is that when people decide to buy, then almost never wait more than a year because people are impulsive despite how much they claim they aren’t.
if people aren’t buying it’s much more likely that they can’t afford it instead of waiting by being prudent, patient buyers that have studied and actually understand the real estate market.
why? people are lazy and impulsive. if they could have bought they would have. even people that intellectually know that prices should fall will still buy.
Well,
Here I am, I can afford to put a 50% down payment on a median house in Irvine, and I have the income to easily maintain it.
I am not buying precisely because that 25k-50k loss I could suffer over the next 1-2 years about what I can save during the same period. I could care less if rates start to go up because I have a large down payment. The way I see it the only risk I take is if rates go up and prices do not concurrently go down. I don’t see that happening soon.
So, I wait until I see some appreciation and I rent and save money.
I feel like a bottom will be reach when friends and family start wondering about whether or not housing a a good buy. Everyone is still telling me now is the time to buy. I figure after a few more years of this the average person will be saying that maybe, just maybe, real estate wasn’t the investment we all thought it was, and that we aren’t better off for having bid up prices with other peoples money. When that happens, and housing becomes a detested asset class you will know the bottom is in. It’s getting, over the years I see more and more people catching on. It just takes time.
Ditto Sam.
It is dead wrong to assume all those that could buy already have. I can buy a median home all cash if I wanted, but no way it is going to happen in the next 12-18 months.
I’ll buy using leverage and at I time when I am confident I wont lose 50K per year. The areas where I’d like to live (coastal OC) still have a quite a bit of downside risk. If I lived in PHX, LV or a few other cities it would be a different story.
I could get nudged in if I see rate going up drastically, but that is still 18 months out AT LEAST.
“my point is that when people decide to buy, then almost never wait more than a year because people are impulsive despite how much they claim they aren’t.”
I have observed the same. True fence sitters are rare. Most people get “go fever.” Once they decide it’s time to “look,” most end up buying within nine months with three to six months being the norm.
Just want to make a few quick points regarding low Orange County home sales.
It is EASY to get financing today if you have 3.5 percent down payment, you don’t have too much debt, and you have a 6 digit income. FHA will finance people with a 600+ fico score, and debt to income at 48% (that’s liberal people). FHA will even finance people with a 500+ fico score with a higher down payment. So this story of there being no financing is BS … the biggest problem is the monthly payment is too high, and potential borrowers either have too much debt, or they don’t have enough income to qualify. FHA will finance previous short sellers after 2 years, and previous foreclosures after 3 to 4 years.
“Pent up demand” will trigger a bottom when OC pricing reaches a level that is attainable for all these future buyers to get off the fence. We’re not there yet … in fact, current home sales indicate we’re not close to a bottom.
I’d say that it is safe to assume that the days of 20% down are long over. At least for the remainder of our lifetimes. My guess is that the next sleight of hand will be a 31 year mortgage. Democracy has spoken and the people want their taxes to backstop the housing market.
Most of the buyers who plan on occupying the home and put 20% or more down payment, have already purchased a home. Move up buyers are dead in the water.
Wrong!
The govt has spoken and wants to tax the people more to backstop housing.
IrvineRenter –
The wonk in charge of the Federal Reserve could summarize it for us all as the Diminished Returns rule. I am sure that he heard of it at some point at the Economic Voodoo Training Academy where he earned his receipt of tuition paid.
We are the seeds that he fertilizes by dumping manure all over us. Dump a pound of manure on us and twice as many people will buy a house. Dump two pounds of manure on us and the yield of house buyers only increases to two and a half.
They can make it cheaper for people to borrow and spend but they can’t make people borrow and spend. Without the prospect of prices rising, people are forced to soberly evaluate the downside of being stuck in a 30 year mortgage. It may work for some people, not for others. I personally enjoy the freedom that renting affords me. In order to leave Phoenix to take the new job in San Jose, I just waited for the lease to expire and then hit the road with no strings attached. If I had been hitched to a house, I very likely could not have made the move. On the flip side, if someone is ready to lay down some roots and settle in with reasonable employment prospects – buying is not necessarily a bad thing. The point is that when people are not under the influence of “buy now or be priced out” continuously pouring more and more alcohol in the punch bowl at a party with only a few people still sticking around is going to have little affect on the whole.
Little Effect. Apologies to the grammar police.
“They can make it cheaper for people to borrow and spend but they can’t make people borrow and spend.”
The federal reserve is shooting pool with a rope. Eventually, the low rates will stimulate demand, but only once the buyer pool has the credit and the down payment to buy. Right now, there simply aren’t’ enough qualified buyers to absorb the inventory.
Google updated their page ranks over the weekend, and OC Housing News obtained its first rating. Thanks to the readers of this blog, OC Housing News has a page rank of 5. Thank you all for your readership and support.
IrvineRenter –
The IHB seems a shell of what it once was. I read it from time to time for posterity but the writing is just not there. It fails to inspire any discussion. Keep up the good work.
Maybe because it is a shell and they have moved everything over here…
😉
Also, thanks for following the OC regional blogs, they were all ranked in the first month.
“Rents were falling and prices were above rental parity. With prices below rental parity and rising rents, many will get pushed to buy because the savings on their monthly expenses.”
I don’t feel that:
($1,520) ………. Equity Hidden in Payment
Should be included in the rental parity calculation, and that the average person only cares about:
$6,369 ………. Monthly Cash Outlays
The statement in quotes above only comes true when “Monthly Cash Outlays” is below the cost of rent. That is the only place where there can be a savings on monthly expenses. That hidden equity comes with a cost of not being able to access that money on a monthly basis. Rental Parity should be when Monthly Cash Outlays = Rental costs. We aren’t there yet, but once we hit it I will agree that it is a better time to buy.
I’m wondering if rents will be negatively affected by the new federal government plan to sell buckets of houses to funds that will rent them out. It really feels like there has be a saturation point on rents in Irvine, what can the market really bear? Average household income is what? 95k? Something like that? That’s like 6k a month take home. You rent and $2000 or 1/3rd of your monthly is gone, and that is about right. Much more than that and I would expect people to leave over time, its not sustainable long term without increasing wages.
At the same time, a family can drop 3.5% and scoop up a 325-375k place in Irvine for a monthly of $1800-$2000 a month. In my mind, prices in this range are going to be about what the average renting family can transition into without much of a down payment. Properties in that price range are getting scooped up quick in Irvine right now. However, is it really better than renting? Same living conditions as renting, just now I eat the maintenance and “build equity” in a market that is still declining. It costs ~6% to sell. So, assuming prices don’t go down I get to spend my first three years of “Equity Hidden in Payment” to sell. As an investment. . . that s**t doesn’t float. It must still be an emotional decision at these prices.
Using the Rental Parity analysis would suggest that the same family could go up to around 500k, and break even compared to renting at $2000 a month even though the family must now pay $2700 a month. Yet the family would actually have ~$700 less each month to spend. . . all of that going into a forced savings account of hidden equity. So, unless that 3.5% down payment family was saving $700 a month (>10% of their take home salary) they just can’t afford it. If they were saving $700 they had better have a nice buffer in place because they aren’t going to be building a buffer anymore. In my limited sphere of the world, I have seen 4 families/individuals borrowing that 15-20k down payment from family because they don’t have the savings for it. So. . . where is that extra $700 a month coming from. . . it’s not like they were saving it before buying. Therefore, they only could and did buy at around the $2000-$2200 price point (some went just slightly more than they were renting for). That seems more like Rental Parity to me.
The institutional, PE and individual speculator groups I’m familiar with no longer green-light deals at rental-par because the metric does not discount a risk factor.
At the current juncture, about 28-32% below parity appears to be the target-buy consensus with most.
Agreed. As a buyer, you are taking equity risk due to potential interest rate hikes, shadow inventory, changes in lending standards, potential mortgage rate tax deduction withdrawal, mobility of renting etc. Don’t know what the “factor” is, but it is interesting to see that they are discounting by 28-32%. I think I will put that in my model. I thought 20% was enough, but it looks like I need to discount even more.
“…and that the average person only cares about: ………. Monthly Cash Outlays”
This. There are lots of properties in OC that hit IR’s rental parity bar, but very few that are cheaper to own on a how-much-a-month basis.
The bubble caused a lot of people to forget that it’s normal (and expected, if you think through the economics) for renting to cost more than buying.
“The bubble caused a lot of people to forget that it’s normal (and expected, if you think through the economics) for renting to cost more than buying.”
Everyone certainly forgot this in California. I remember many people who used to talk about an ownership premium as if that were normal. Who in their right mind pays a premium to have liquidity risk, maintenance expenses, and high transaction costs?
“Apparently, a chance to get a home with a cost of ownership below rental parity outweighs the risks of falling prices and rising interest rates”
IR:
I wish you’d stop it with the fake rental parity. When California house prices move down to the national average of $250,000, then you can do a meaningful “rental parity” analysis.
Foreclosures at the high end increase across the Bay Area
“Like others in their situation, the former owners have no interest in talking about it publicly.
“Most of these higher-end people are, like, 45 years old plus, and they’ve gone through all their assets,” Walker said. “It’s a really devastating situation for them. They thought they had planned. They had their kids’ college fund, they had their 401(k)s, the stock, the mutual funds, and they’ve been hanging on for the last three years. They’ve gone through everything, and they have nothing left, not even the house.”
“Record low interest rates fail to spur demand”
And yet…
“Demand for O.C. homes surges 24% in 2 weeks”
http://lansner.ocregister.com/2012/02/07/demand-for-o-c-homes-surges-24-in-2-weeks/158243/
that’s odd, my reply to your post disappeared into the missing post vortex. LOL
It also happened to me…