Jul272012
Does increasing payment affordability make houses a bargain?
When I checked bankrate.com yesterday, the rate on a 30-year mortgage was 3.55%. That is the lowest reading I have ever seen, and we should be seeing news reports about new record low mortgage interest rates. These new low rates are making my reports on affordability show housing is a screaming buy in many cities even here in Orange County. However, super low interest rates have a problem. What happens when interest rates go up? Will rising interest rates cause house prices to crash?
I don’t think interest rates will rise fast enough to cause house prices to crash again. The federal reserve needs to bail out its member banks by pushing house prices back up to the peak to put collateral value behind the trillions of dollars in underwater mortgages. I believe the fed will keep interest rates low even if that means inflation becomes a problem. I don’t think they have a choice. Consumers need debt relief, and banks need higher house prices. Banks may not like getting repaid in devalued currency, but it beats the alternative of not getting paid back at all.
If interest rates get low enough — and they are probably low enough now — debt becomes an attractive inflation play. If you can borrow money at 3.55% today and lock that rate in for 30 years, it’s very likely inflation will rise above that value for some period during the loan term. In fact, we may see inflation much higher than 3.55% once the deflationary headwinds abate. If inflation is higher than the interest rate on your long-term fixed-rate mortgage, the currency is devaluing faster than the debt is growing. Assuming wages or other investments keep pace with inflation (it may not), borrowers with cheap long-term debt gain a tremendous benefit.
But does inflation greater than the interest rate make house prices a bargain? Well, the nominal prices may still be inflated, but if you finance most of the purchase with really cheap debt, even outrageously high prices become manageable. Even cash buyers may find the nominal prices more attractive because their returns in competing investments are even worse. Saving 3.55% on a mortgage is better than earning 0.25% in a CD.
Since banks are unwilling or unable to lower the cost of houses and remain solvent, the only solution available to them is to keep lowering interest rates. That’s why the fed keeps working to push mortgage rates lower, and now some want to see just how low rates can go.
Why not Uncle Ben’s Crazy Housing Sale?
By Ezra Klein, Published: July 23
… there’s a real mystery as to why the Federal Reserve is not doing more to help the economy. Ben Bernanke, after all, keeps saying the central bank can do more, and if the economy gets worse, it will do more. But the economy keeps getting worse, and the Fed keeps not doing more.
When I say “the economy is getting worse,” I’m using the Fed’s own data. In January 2010, the Fed projected that that the economy would grow 4.15 percent in 2012. By June 2011, it had revised that down to 3.5 percent. By April 2012, it was down to 2.65 percent. And in June, officials lowered expectations once again, saying they expect economic growth to be a mere 2.15 percent in 2012. Ouch.
I can’t believe anyone put out such Pollyana projections with a straight face. With the debt overhang and a broken housing ATM, where was this money going to come from?
Some argue that there’s nothing more the Fed can do. But Bernanke is not one of these people. “I wouldn’t accept the proposition, though, that the Fed has no more ammunition,” he said in June. “I do think that our tools, while they are nonstandard, still can create more accommodative financial conditions, can still provide support for the economy, can still help us return to a more normal economic situation.”
I have no doubt the federal reserve can screw up the economy further with more market manipulations and distortions. Perhaps they should let things be?
So why isn’t the Fed using those tools? Explanations vary. Some believe the Fed doesn’t think it can do much more, and it prefers to hold the few options it has left in reserve in case there’s another major crisis.
That would be wise… which probably means that isn’t why the federal reserve isn’t doing more.
Others think Bernanke is cowed by Republican pressure and dissent among the Board of Governors. Another explanation — and the one Bernanke has voiced — is that, right now, the Fed believes the risks of doing more outweigh the benefits, but that if the economy worsens, that calculus might change.
I don’t pretend to know what is truly in the heart of our top central banker. But in conversations with Fed watchers and economists, I am convinced that there is something more the Fed can do, and that now is the right time for them to do it. I call it Uncle Ben’s Crazy Housing Sale.
Everyone has lost faith in the free market. Any time we have a problem, we must look to the government or the federal reserve to “fix” it. Perhaps our problems are the result of all the “fixing” they have done already?
Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5 percent and holding it there for one year, and one year only.
The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.
What a dumb idea. Didn’t we try something similar in 2010 with tax credits? We gave people credits of $8,000 nationally and an additional $10,000 in California to anyone who wanted to buy a house. As a result, people overpaid by $40,000 or more to take advantage of the credits. Of course, as predicted, when the credits expired, sales volumes plummeted and prices soon followed. Do we want to repeat that disaster?
This is a particularly good time for Uncle Ben to launch his sale, because the housing market appears to be turning: More houses are being built, the price of existing homes is beginning to rise, and inventory levels are falling. A recent Wall Street Journal poll of economic forecasters found that 44 percent thought housing had bottomed out, while only 3 percent thought the housing market had further to fall.
The housing bottom consensus could be very wrong.
The Fed, in other words, would be working with the economic trends rather than against them. People already sense that the housing market is recovering, and that this might be the time to buy — in the unusual, self-perpetuating way of the economy, that’s part of why the housing market is recovering. But with an announcement like this and the attendant media coverage — people would know, with some certainty, that this is the time to buy, and there won’t be a better one for a long time.
Everyone is doing their duty to dupe buyers into acting. The entire economy is a confidence game, right?
This idea comes with high-profile supporters. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former associate director of the Federal Reserve’s Monetary Affairs Division, has a proposal along these lines. Dan Tarullo and Janet Yellen, both members of the Federal Reserve Board, and Charles Evans, Eric Rosengren, and John Williams, who lead the Federal Reserve’s Chicago, Boston and San Francisco branches, have all suggested that the Fed should buy more mortgage-backed securities. Even Bernanke has called it “a viable option.”
So come on, Ben. Start the sale.
Despite how dumb this idea is, the federal reserve is working to lower mortgage interest rates to spur demand. They haven’t put a target or a timetable as Mr. Klein suggests, but they have been following his suggested policy. It may or may not be a good policy for the country, but it’s necessary to save the banks, so that’s what’s going to happen. After all, the financial elites must be saved, right?
so when the rate goes back up to +8% or so, in let’s say 10 years or more, who will be able to afford the monthly payment..so while you might be able to afford the house now, i dont see how the price wont fall. perhaps the rate will stay around quite low for +10 years like Jpn. i think you had a calculation shows that for every 1% increase in rate, the house value has to fall b/t 7-12% or so, depending on lots factors. so how is US diff from Jpn again?
The US economy will look much like Japan for the next several years. The main difference between us and Japan is that we still have a growing population while they have been enduring a declining population due to low birth rates and net out migration.
If interest rates rise without any increase in wages, house prices will go down. If interest rates rise sharply, house prices will crater. I just don’t think the federal reserve will allow this. I believe they will chose inflation over higher interest rates to support housing and their member banks.
The first read on Q2 GDP Growth…1.5% annual rate…in several of the last quarters the first read was high and had to be revised downward when more accurate numbers came in. It could be the economy is growing at an annual rate of 1% or so right now.
1/4 of the 1.5 percent was due to increases in inventory. This quarter will be worse.
A 1.5% annual growth rate won’t even absorb the new college graduates much less employ anyone else. We need to grow the economy at 2% per year just to break even on jobs growth.
What won’t be revised is that over the past two years, the US has added 2.42x more debt than it has added GDP.
and all who say corporations benefit from the relevering of the sovereign host due to some wrong equation they learned in Econ 101 may want to take a long hard look at Q2 corporate revenues and then explain why it has just printed the first year over year decline since the Lehman collapse.
http://www.zerohedge.com/news/q2-america-added-233-debt-every-100-gdp
tic…tic…tic….
IR,
Look at this post & the chart accompanied, you might have to rethink your statement of the US growing population
http://globaleconomicanalysis.blogspot.com/2012/07/housing-headwinds-us-birthrate-lowest.html
That is new. The birthrate in the US has never been below 2 that I am aware of. In Japan it got below 1.3. Of course, we still have plenty of in-migration, both legal and illegal, which is making our population grow.
Without the high birth rates of 1st and 2nd generation immigrants, the US birth rate would be similar to Europe’s. White folks just aren’t having kids like they used to, especially when you subtract Mormons from the mix. (Utah has the highest birthrate of any state, I believe). It amazes me how many people in their mid- to late- thirties are totally focused on career at the expense of having a family. Many don’t want the expense or hassle of kids or don’t want to sacrifice their lifestyle. It’s going to be interesting to see what effects this has on our society over the next 40 years.
” It’s going to be interesting to see what effects this has on our society over the next 40 years.”
The low birth rates have been very disruptive in Japan, and government attempts to force it in China have been even more disruptive.
Wow! Look at that gap between the cost of ownership and the costs of renting in Anaheim. It seems the costs of financing has decreased faster than rent increases. But then again, I can’t believe we are even discussing the possibility of 3.0% 30 year fixed mortgage rates.
Mortgage Rates Follow Treasury Yields to New Lows
Lingering worries about the European debt crisis continue to drive investors to U.S. government bonds, sending fixed mortgage rates down to another record low.
According to Freddie Mac’s Primary Mortgage Market Survey (PMMS), the 30-year fixed-rate mortgage (FRM) averaged 3.49 percent (0.7 point) for the week ending July 26, down from 3.53 percent the previous week. At the same time in 2011, the 30-year FRM averaged 4.55 percent.
The 15-year fixed averaged 2.80 percent (0.7 point), a drop from 2.83 the week before.
Adjustable rate mortgages (ARMs) actually saw a small boost, with the 5-year ARM averaging 2.74 percent (0.6 point), an increase from 2.69 percent the previous week. The 1-year ARM averaged 2.71 percent (0.5 point), up from 2.69 percent previously.
“Market concerns over the strength of the economic recovery brought long-term Treasury yields to new lows this week, allowing fixed mortgage rates to reach record levels,” said Frank Nothaft, Freddie Mac VP and chief economist. “The Conference Board Leading Economic Index showed the largest monthly decline in June since September 2011. Existing home sales fell to 4.36 million homes (annualized) in June and represented the slowest pace since October 2011. Similarly, new home sales fell in June to their lowest level since January of this year.”
Bankrate also posted record results for the fourth week in a row, with the 30-year fixed falling to 3.75 percent from 3.78 percent the previous week. The 15-year fixed fell to 3.00 percent from 3.04 percent.
According to Bankrate’s data, 5/1-year ARMs averaged 2.89 percent, the same as the week before.
Only a fool would think that just because OC prices are down 30-45% from the peak, they’re currently a bargain. What is relevant is WHY. Also, the problem for those hoping for future inflation to outpace the value of their ultra-low 30yr mortgage rate, with regard to movement, home prices tend to correlate with the price of the 10 or 30yr bonds. Oops!
May stores will mark up the price then announce a 40% off sale. Many people will flock to the store for the great sale.
JCP tried to get rid of their 1 day, 3 day, 7 day sales with every day low pricing. The pricing scheme didn’t work for JCP, because the urgency of buying before the prices goes up was removed. RE: Buy before you’re priced out of the market. It’s gone down 30%, buy before the price goes back up.
el O, where do you think Irvine house prices will be in the next year and 5 years? I’ve seen S. Irvine prices go down about 10% in the last 4 years and most of it appears like noise.
Less than 10% of TARP housing money spent
Less than 10% of the $45.6 billion Congress allocated for federal and state housing programs after the crisis has been spent as of June 30, according to the special inspector general of TARP.
One $8.1 billion program would have allowed current underwater borrowers get a principal reduction and then refinanced into a new Federal Housing Administration-backed loan. But only 1.7% of the funds have been spent and fewer than 1,500 borrowers made it through the program since it launched in September, according to a SIGTARP report released Wednesday.
This FHA Short Refi was originally thought to reach as many 1.5 million borrowers.
Roughly $29.9 billion was allocated for the long hindered Home Affordable Modification Program and its many sub projects for short sales and unemployment forbearance. But just 6.4% of that money was spent through June. Roughly 1 million borrowers received a permanent HAMP workout so far. A recent expansion is expected by some analysts to bring in another 500,000, but it will still land far short of the original 3 million to 4 million estimate.
Only 1.7% of the $7.6 billion Hardest Hit Fund money was spent as well. This money, initially released in early 2010, went to state housing finance agencies to use for principal reduction, modification and unemployment programs.
In its report released Wednesday, SIGTARP criticized the Treasury Department for not setting goals for the states taking money from HHF.
“Rather than set meaningful goals for HHF and measure progress against those goals, Treasury chooses instead to rely on its requirement that each state estimate the number of households to be assisted. This number has limited usefulness,” SIGTARP said. “By refusing to set any goals for the programs, Treasury is subject to criticism that it is attempting to avoid accountability.”
Other programs outside of TARP proved more successful, especially the recently expanded Home Affordable Refinance Program for Fannie Mae and Freddie Mac loans. The program doubled this spring, but the boom may slow by September, according to some.
House Republicans voted to end these housing programs last year, but the Senate never acted on the bills. The Obama administration even extended HAMP another year to the end of 2013.
Senate Democrats are still looking to expand refinancing programs in particular. The most recent one from Sen. Jeff Merkley, D-Ore., could reach as many as 8 million borrowers paid for by selling government bonds.
The real expense will come in when the new GSE backed loans or modification have 2 or more years of overdue payment (non-payments) and will need to be cured by FC on the taxpayers’ dime. Those the defaulted on an low interest USDA home loans are in a world hurt. The USDA is known for aggressiveness in collecting, FC’ing and many garnishing wages for missing payments and fees.
The cost of financing is not the only expense. There’s also monthly expenses of RE taxes $500 and upkeep. If my condo’s HOA is $430 per month for outside not including the patio and front gated area, I would expect without HOA my maintenance would be about $300 per month plus the inside maintenance/replacement of $100 per month for HVAC, painting, carpet, etc. (The reduction on outside maintenance is DIY and no management fees to pay.) The big cost will be upon sale of the property ($7% plus the loss on the RE). The later can be avoided if the govt allows low interest, 50% DTI, and no or negative down again.
Ben’s and the Fed’s priorities are:
1. To protect the bank exec.
2. To protect the bank exec.
3. To protect the bank (not its shareholders)
4. To transfer the banks liabilities to the taxpayers.
OChousingnews readers: why are most Americans believing the economy is improving?
People want to be deceived, so, deceive them.
Nonetheless, as the debt has risen, the economy slides….
http://confoundedinterest.files.wordpress.com/2012/07/realgdp1947.gif
The next leg down will be brutal.