When I developed the OC Housing News Report, one of the biggest challenges was to develop a rating system that would time the housing market to maximum advantage. As we’ve all seen over the last few years of constant government manipulation, its very hard to pick the exact bottom, and although it looks like the bottom was earlier this year, that is not yet certain. Changes in government or banking policy could easily result in more foreclosures finding their way to the MLS causing prices to fall again. Despite these challenges, there are certain key indicators one can look for to evaluate market timing. I discuss these at length on the market report sign up page. In short, the best market conditions are when prices and rents are rising slowly and prices are undervalued by historic norms. These conditions usually occur only at the bottom of large market corrections like the one we just witnessed. Based on my metrics, the housing market timing looks very good.
We plan to discuss that further at tonight’s event.
I first wrote about the importance of market timing back in 2008, today I want to revisit that post.
Timing the housing market is important
Today, we will look at two families, the Peakers and the Troughers (gotta love those names, right?) Both families have a combined family income of $150,000 per year, and they have both saved $100,000 they can put toward a down payment on a house.
It is the Summer of 2006, and each family is looking at a $1,000,000 home. The Peakers think the property is a good deal, so they put their $100,000 down and borrow $900,000 with an adjustable-rate mortgage starting at 6% with a 10-year fixed period followed by a 20 year fully amortized payment at a new interest rate. Their monthly payments are $4,500 a month, but after all of the adjustments for taxes and fees and the other costs of ownership, their total monthly cost of ownership is $6,000 per month.
The Troughers, on the other hand, made the same calculation and decided that the cost was simply too high. They decided to rent and wait for prices to drop to rental parity. As it turns out, this $1,000,000 home can be rented for $3,000 per month (the cost of ownership was double the cost of rental in the summer of 2006.) In order to make this comparison apples-to-apples, the Troughers have decided that will live the same lifestyle as the Peakers, so they will put $3,000 per month into their down payment fund while prices are dropping.
Fast forward to 2011: five years later, rents have been increasing at about 4% per year, so the Troughers are now paying $3,500 per month in rent, houses similar to the Peakers are now selling at rental parity which is about $560,000. During this five-year period, the Peakers and the Troughers have enjoyed exactly the same lifestyle: both have had use of a house with similar characteristics, and both have been living on the same amount of disposable income. The Peakers are now $340,000 underwater 5 years into their 10-year fixed term, and they are stressed about what will happen. The Troughers have a mountain of cash, and they are about to buy a home.
The Troughers have accumulated $325,000 in their down payment fund by adding the rent savings each month and having this compound at 5% interest (the calculations are too cumbersome to post.) The Troughers now buy the comparable house for $560,000 using all of their $325,000 down payment. This only leaves a $235,000 first mortgage. These Troughers are thrifty people, and in keeping with our all-things-being-equal example, the Troughers are going to continue to put away the same $6,000 a month the house is costing the Peakers. They will put $4,543 toward their mortgage, and the remainder toward other ownership costs. By making this $4,543 monthly payment — something they were used to doing from their 5 years of renting and saving — they will pay off the mortgage completely in 5 years. 
Fast forward to 2016: It is now 10 years since the Peakers have purchased, and they still owe $900,000 on the house. Let’s assume they got very lucky, and we quickly inflated another housing bubble that brought the resale value of their home up to $1,000,000 — breakeven. The Peakers are facing a dramatically escalating payment as the 900,000 is about to convert to a fully-amortizing loan over the remaining 20 year term. Their payment will now rise to $6,447. Let’s hope they are making more money to pay for it.
Here we are in 2016, both families have enjoyed the same amount of spending money each month and the same lifestyle (remember the tax benefits are already figured in to the cost of ownership.) The Peakers have a $1,000,000 house on which they owe $900,000. They will either need to make a $6,447 payment or refinance again. The Troughers also own a $1,000,000 house, but their mortgage is completely paid off. Their only cost of ownership is reduced to taxes, insurance and maintenance. Whereas the Peakers are trying to figure out how they are going to make payments, the Troughers suddenly have $4,500 a month extra in their monthly budget, and their net worth is $900,000 higher than the Peakers.
What happens if we do not inflate another bubble, and comparable houses are only worth $800,000? What if interest rates go up to 8% or higher? The Troughers couldn’t care less, they are saving money versus renting, and they have plenty of equity; however, the Peakers are in trouble, and they may lose their home. People who bought at the peak are betting on appreciation, and they are betting against higher interest rates. Not a good bet to make when interest rates are near historic lows and prices relative to fundamental valuations are at unprecedented highs.
You can spin this example any number of ways, no matter how the Troughers save or spend their money, they will come out far, far ahead of the Peakers. They could either enjoy a better lifestyle (no mortgage equity withdrawal for the Peakers,) or save for retirement, or save for their larger downpayment. In the real world, those who did not buy at the peak can balance those options to best suit their needs and wants, the Peakers do not have these options. They are imprisoned in their house. Let’s hope it is a gilded cage.
6313 W Washburn Road, Las Vegas, NV 89130
The hypothetical scenario above is playing out in most markets across the country, but in the extreme bubble markets, the difference is even more dramatic. For example 6313 W Washburn Road, Las Vegas, NV 89130 was purchased on 11/23/2004 for $238,000. According to Zillow, the value peaked at $280,000 in December of 2005. Now imagine a buyer considering paying $280,000 at that time putting 20% down. They would spend $56,000 cash plus closing costs. Their payment would have been about $1,500 per month based on the 6.5% interest rates at the time.
Now consider the renter who chose to rent that house for $1,000 per month instead. That renter put $1,000 down, and saved $500 per month for the following six years. That’s a savings of $36,000 just on the monthly cost of ownership not considering any return on that saved money. If that owner combined the $56,000 they didn’t put down plus the $36,000 they saved, they would have $92,000 in early 2012. Well, guess what? The property sold for $92,000 on 2/8/2012 — $10,000 less than its 2/12/1993 purchase price of $102,000… you read that right, its 1993 purchase price. The Troughers could have paid cash.
At this point, the peak buyer is about $120,000 underwater and still paying $1,500 per month. The renter / trough buyer has $92,000 equity, and they are paying about $150 per month taxes and insurance. The peak buyer has $212,000 less in equity, and they are paying $1,350 per month more in housing costs each month.
Which party would you rather be?
Timing the housing market really is very important.
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Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
Ponzis through and through
No matter how many of these HELOC abuse stories I cover, I am constantly amazed at how people could live this way. Sure, I see the temptation, but somewhere along the way, doesn’t common sense kick in and say, “the world can’t work this way?” If a little voice inside these people sends them that message, apparently they don’t hear it. I suppose most don’t want to.
- This property was purchased on 9/22/1995 for $425,000. The owners used a $340,000 first mortgage and a $85,000 down payment.
- On 7/2/1998, they refinanced with a $525,000 and went Ponzi.
- On 6/7/2001 they obtained a $175,000 HELOC.
- On 7/18/2002 they refinanced with a $646,000 first mortgage and obtained a $174,000 HELOC.
- On 12/19/2002 they opened a $185,000 HELOC and a $102,000 HELOC.
- On 4/28/2003 they refinanced with a $940,000 first mortgage and opened a $185,000 HELOC.
- On 6/4/2003 they obtained a $89,000 HELOC and a $100,000 HELOC. BTW, opening two HELOCs on the same day looks very suspicious.
- On 5/21/2004 they got a $550,000 loan from a private party.
- On 1/6/2005 they refinanced with a $1,000,000 first mortgage and obtained a $300,000 HELOC.
- On 1/18/2005 they got a $550,000 HELOC.
- On 5/15/2006 the opened a $660,000 HELOC.
- On 4/10/2007 they obtained a $485,000 HELOC.
- It’s difficult to tell exactly how much they pilfered from the banks, but it was at least a million dollars.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
We're sorry, but we couldn't find MLS # S716236 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
18 MARANA San Clemente, CA 92673
$899,900 …….. Asking Price
$425,000 ………. Purchase Price
9/22/1995 ………. Purchase Date
$474,900 ………. Gross Gain (Loss)
($34,000) ………… Commissions and Costs at 8%
============================================
$440,900 ………. Net Gain (Loss)
============================================
111.7% ………. Gross Percent Change
103.7% ………. Net Percent Change
4.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$899,900 …….. Asking Price
$179,980 ………… 20% Down Conventional
3.45% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,920 …….. Mortgage
$177,391 ………. Income Requirement
$3,213 ………… Monthly Mortgage Payment
$780 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$225 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$365 ………… Homeowners Association Fees
============================================
$4,583 ………. Monthly Cash Outlays
($712) ………. Tax Savings
($1,143) ………. Equity Hidden in Payment
$195 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
============================================
$3,055 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,499 ………… Furnishing and Move In at 1% + $1,500
$10,499 ………… Closing Costs at 1% + $1,500
$7,199 ………… Interest Points
$179,980 ………… Down Payment
============================================
$208,177 ………. Total Cash Costs
$46,800 ………. Emergency Cash Reserves
============================================
$254,977 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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17 Responses to “Timing the housing market is important”
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Perhaps this will bring some sellers back to the market. It certainly doesn’t look like the banks are going to add any inventory soon.
Redfin: Sellers Gaining Confidence as Market Shifts
Home sellers are already showing optimism for the 2013 selling season, according to a survey from Redfin.
The company’s Real-Time Seller Survey for Q4 showed increased confidence about the housing market’s future, with 83 percent of sellers saying they believe they would get a higher price for their home by waiting one to two years. That number is up from 80 percent in the previous survey.
Nearly three-quarters—74.6 percent—of sellers believe prices will rise in their neighborhood over the next 12 months, a slight increase from last quarter. Meanwhile, the number of those who expect prices will stay the same or drop backed off a percentage point in each category.
In addition, 15 percent believe it is a good time to sell (up from 13 in the last quarter), and 58 percent believe it is a good time to buy (down from 61 percent before). According to Redfin, “[t]aken together, these indicate that sellers sense a slight market shift in their favor.”
The majority of sellers intend to list their homes sometime in the next months—an expected result, as that period includes the heavier spring selling season. Surprising,
though, was the fact that the number of sellers whose homes are currently listed increased six percentage points from the last survey to 31 percent. The fourth quarter is typically the slowest season for new listings, according to Redfin.
Another indicator of increased confidence among sellers is the fact that selling has gained popularity against renting. The number of respondents who are considering renting out their home was 43 percent in the most recent survey, down from 46 percent in the last quarter.
“The changes were slight, but they all pointed in the same direction: Sellers are becoming a little more confident about their chances on the market, a little less interested in alternatives to selling (such as renting out the home), and a little less concerned about the economy,” Redfin analyst Tim Ellis said in a blog post.
If these trends continue, Ellis added, 2013 will likely begin to see “an easing of the big inventory squeeze that has made headlines throughout 2012” as sellers are drawn back to the market.
That’s definitely good news, says Redfin CEO Glenn Kelman, as the housing market hasn’t been able to get very far this year without a strong seller presence.
“At this point in the housing market, the only opinion that matters is that of the would-be sellers trying to decide whether to put their home on the market,” Kelman said. “Economists agree that the market hit bottom some time earlier this year and low interest rates have brought out more buyers than we’ve seen in years, but most sellers decided to wait for better prices.
“These attitudes aren’t changing dramatically from one quarter to the next, but the direction has been remarkably consistent among both buyers and sellers: the market is slowly tilting in sellers’ favor.”
Sellers’ return to housing market could be slow, surveys indicate
When will sellers return? That’s a burning question in residential real estate circles these days as inventory has fallen and the market has grown increasingly competitive.
Having more people put their homes up for sale could help relieve some pressure, but most current homeowners appear to believe that time is on their side, recent surveys show.
The online real estate broker Redfin on Monday released a quarterly study of its homeowners. The survey showed that only about 15% of those potential sellers think it’s a good time to sell, up only marginally from 13% from the last time Redfin surveyed sellers last quarter. Eighty-three percent of those homeowners thought they would get a higher price by waiting one to two years.
“At this point in the housing market, the only opinion that matters is that of the would-be sellers trying to decide whether to put their home on the market,” Redfin Chief Executive Glenn Kelman said in a news release. “These attitudes aren’t changing dramatically from one quarter to the next, but the direction has been remarkably consistent among both buyers and sellers: the market is slowly tilting in sellers’ favor.”
The most recent Fannie Mae National Housing survey showed that about 19% of Americans viewed the current market as a good time to sell, the highest point since the survey began in June 2010.
I believe a lot of squatters say why sell when I can just live here for free? There is really no pressure to do so. They don’t even get a deficiency judgment and they don’t pay taxes on the debt forgiveness. Of course, the debt forgiveness could change.
There is no incentive for a squatter to sell, and there is little incentive for the bank to foreclose on the squatters right now, so in all likelihood, we won’t see much come to the market any time soon.
Everyone will use the weather as an excuse for the poor market performance over the fall and winter. As prices rise and buyers get frustrated with the lack of supply, demand is crumbling. The only thing that will revive demand right now is an increase in inventory.
Mortgage applications continue to plummet
Mortgage applications continued to decline in the wake of Hurricane Sandy, according to the Mortgage Bankers Association’s (MBA) most recent Weekly Mortgage Applications Survey.
The trade association’s Market Composite Index decreased 5.0 percent on a seasonally adjusted basis for the week ending November 2. The decline was no different on an unadjusted basis.
Refinance activity also decreased from the previous week, falling 5 percent. The Refinance Index has declined for five straight weeks and is resting at its lowest level since the end of August, MBA reported. Meanwhile, the refinance share of mortgage activity stayed flat at 80 percent.
While refinances fell, HARP activity did see an increase. The HARP share of refinance applications rose to 27 percent from 25 percent the previous week.
Purchase applications experienced the same decline as the other categories, falling on a seasonally adjusted basis by 5 percent.
The unadjusted Purchase Index was down 7 percent compared to the prior week.
Geographic data suggest the weekly decrease came about mostly as the result of Hurricane Sandy.
“Last week’s storm had a significant impact on application volumes on the East Coast,” said Mike Fratantoni, MBA’s VP of research and economics. “Applications fell more than 60 percent compared to the prior week in New Jersey, almost 50 percent in New York and nearly 40 percent in Connecticut. Other East Coast states also saw declines over the week, while many states in other parts of the country had increases in application volumes.”
MBA’s release follows an earlier report from Mortgage Daily showing an 11 percent drop in mortgage applications for the same week.
While Sandy’s impact may have led to bigger losses for the week, Capital Economics’ Ed Stansfield believes the sustained decline in mortgage applications throughout October suggests a larger trend at work.
In a response to the data, Stansfield—chief property economist for the firm—wrote that the steady drop in activity “suggests that tight lending criteria are continuing to act as a brake on the level of active demand in the U.S. housing market.”
“On balance, today’s MBA data on mortgage applications and mortgage interest rates were disappointing. Although it is clearly early days, they suggest that QE3 has so far given little, if any, additional impetus to the housing recovery,” Stansfield said. “Indeed, the bottom line from today’s figures is that mortgage-dependent buyers are still only bit-part players in the U.S. housing market recovery.”
The lack of supply, particularly at the low end, is causing investors and first-time homebuyers to pull back significantly. These two buying groups are critical to a sustained recovery.
Investors and first-time homebuyers are exiting the housing market
All-cash home purchases, which are typically made by investors, were also down. In the third quarter, the share of cash purchases stood at 27 percent, down from 29 percent in the second quarter and third quarter of 2011.
Investors accounted for 17 percent of all transactions in the third quarter compared to 19 percent in the second quarter and 20 percent a year ago.
First-time buyers, who compete with investors for lower-priced homes, accounted for 32 percent home sales in the third quarter, down from 34 percent in the second quarter and unchanged from a year ago.
“The modest decline in first-time buyers and investors shows the impact of limited inventory in the lower price ranges from a shrinking share of distressed homes, which are popular with both of these groups,” Yun noted.
Total existing-home sales, which also include condos, rose 3.2 percent quarter-over-quarter to a seasonally adjusted annual rate of 4.68 million. Year-over-year, sales rose 10.3 percent.
The third quarter concluded with 2.32 million existing homes available for sale, 20 percent lower than the close of third quarter last year.
Consumers surrender to the federal reserve’s efforts to create housing inflation
The positive outlook on home prices was further strengthened in Fannie Mae’s most recent housing survey.
In the October survey, respondents raised their expectation for home price growth in the next 12 months to 1.7 percent, up from 1.5 percent in September. In October 2011, consumers expected prices to fall by 0.3 percent.
In addition, only 10 percent of respondents expect home prices to drop during the same one-year period, and 36 percent say prices will go up and 48 percent say they will stay the same.
“This has been a year of steady growth in the percentage of consumers with positive home price expectations,” said Fannie Mae chief economist Doug Duncan in a release.
Consumers’ placed even more confidence in rent prices, stating they expect prices to rise by an average of 3.9 percent in the next 12 months, up from 3.1 percent in September. A mere 3 percent expect rent prices to go down, and 50 percent expect rent prices to move higher.
“Increasing household formation, encouraged by an improving labor market, is adding additional momentum to the housing recovery and putting upward pressure on rental price expectations. Expected increases in both owning and renting costs may encourage more consumers to buy and add further strength to the housing recovery already under way,” Duncan added.
Even though home prices have been on the rise, a large majority of consumers still think it’s a buyer’s market, with 72 percent stating now is a good time to buy. If respondents were to move, 66 percent said they would buy, a drop in 3 percentage points from the month before. Less than a third, 29 percent, say they would rent.
After a steep decline in September, the percentage of respondents who say mortgage rates will go up rose to 37 percent in October from 33 percent the month before. Only 7 percent believe rates will fall further.
Most respondents, 56 percent, say they think the economy is heading in the wrong direction, while 38 percent believe the economy is on the right track.
Less than half, or 43 percent of respondents, expect their financial situation to improve in the next 12 months, while 13 percent expect their situation to worsen.
Nineteen percent of respondents reported significantly higher household income compared to 12 months ago, a small increase from 17 percent last month. Sixty-four percent say household income has stayed the same.
The survey is a representative sample that polled 1,001 respondents.
It looks like mortgage rates have bottomed out. I pretty sure we have reached the bottom. I think not even the Fed’s new enhanced QE3 printing plans will push it down.
I’m not so sure about that. The margin between current Treasury rates and mortgage rates is unusually high, and right now, lenders are not charging for refinances because their margins are so high. There is plenty of room for lenders to lower rates if they want to. If demand remains low, they may be forced to lower rates to increase volume. Rates even lower than today’s are necessary to push prices back up quickly.
I like the story, but those numbers are a bit off from what I see in South Orange County (beach cities). Around here, a million dollar house in 2006 would rent for about $4000 a month, and now about $4500. And today it would be selling for about $800K. Still worth a comparison for savings vs buying at the peak, but the savings advantages, and the current affordability of such a home for the Toughers, aren’t quite as pretty.
Another way to take out shadow inventory.
Sandy damages, losses estimated at $50 billion: New York governor
NEW YORK | Thu Nov 8, 2012 12:57pm EST
(Reuters) – Superstorm Sandy caused an estimated $50 billion in damages and economic losses for the U.S. Northeast region, with New York state sustaining $33 billion in damages, New York Governor Andrew Cuomo said on Thursday.
“That is a staggering number, especially with the financial situation we’ve been in,” Cuomo told a news conference.
I saw Bruce Norris speak last night and he is an incredible wealth of real estate knowledge. Larry you should check him out sometime if you haven’t already. His views are similar to yours, although I would say he is 100% bullish right now. He thinks the ’08-’09 foreclosed owners are going to start piling into this market with FHA loans, especially in the Inland Empire. Based on that, he’s expecting the IE to lead the recovery with stronger price gains than OC & LA. This is the reverse of how a normal recovery would take shape, with the coastal areas typically leading the way. He blames the reverse phenomenon on the artificial nature of this market. Aside from that, he also hinted about some insider knowledge that appraisal standards were about to be loosened. He didn’t elaborate, but it will be interesting to see if that comes to pass.
I think his take on the nature of the recovery is right. It’s more than just the manipulation of the market. I think it’s a matter of relative valuations. The coastal areas never fully deflated from the bubble whereas the Inland Empire was crushed. We do see undervaluations here in OC due to the low interest rates, but the undervaluation is much greater in the beaten down markets like the Inland Empire, or dare I say, Las Vegas. The beaten down markets will appreciate faster because they have farther to go to be brought back up to their historic valuation measures relative to rental parity.
Uh….appraisal standards are typically loosened once market-makers have determined transaction channels have reached stall-speed. This is a huge red flag. Thx for the tip.
btw, pertaining to markets… it’s somewhat easy to forecast what’s likely ahead as long as you get the model right. In the early 2000′s, Norris got the model right and reaped substantial rewards. However, if you’re saying he is now 100% bullish while believing that people who likely lost their jobs in 08 and 09 and were subsequently foreclosed upon are now going to pile back into the market with FHA loans while simultaneously acknowledging the artificial nature of this market, then clearly, he does not have the model right.
His views are similar to Larry’s in that he is expecting the Fed to reinflate a bubble before things come crashing down again. He’s not your typical RE economist that relies on models per se. He literally has millions of his own money at stake if his calls are wrong.
All I know is he told people that prices were going to double starting in 1997 and people said he was crazy. Later he told people to exit the market in ’04-’05 and again, they said he was crazy.
He sold about 130 houses at the market peak.
He has been consistently correct in his calls. He called the top a bit early, but nobody goes broke taking profits!
Don’t get me wrong muchacho, I’m well aware of Norris’s past calls and have had the utmost respect for him for quite some time. It’s just that credit is signaling major event risk continues to increase, not decrease, so I’m not buy’n what he’s sell’n this time around