Aug312015
Should homebuyers worry about a California housing bubble?
Resting on a foundation of stable loan products and backed by can-kicking loss mitigation practices, the risk of future real estate declines is low.
Real estate prices do not always go up. Prior to the housing bubble, and despite two previous bubbles in California where house prices went down, most buyers clung to the belief that real estate prices only go up. The housing bust ended this delusion forever, and in the process created a latent fear of future price declines.
The fear of falling prices is rational. Without this fear, buyers become foolish and pay any price even when it’s way, way too much. The lack of fear of falling prices contributed to the housing bubble. But is this fear rational today?
For house prices to crash, two conditions must exist: first, aggregate loan balances must drop significantly, and second, large numbers of must-sell homes must come to market. Based on current conditions in the housing market, neither condition is likely to be met.
Back in August 2007, the mortgage market suffered an abrupt credit crunch as investors stopped funding toxic loan products such as option ARMs and interest-only loans, the primary products used to inflate mortgage balances and house prices. Overnight the credit crunch reduced the amount lenders were willing to loan by about 30%.
There was no way for the market to adjust to such a large and abrupt decline in aggregate loan balances without adjusting price. At first, sales volumes dropped significantly, and if no must-sell inventory came to market, the crash might have been less violent, but some amount of price correction was inevitable.
The credit crunch occurred for a reason: it wasn’t some exogenous shock like an asteroid impact. Lenders stopped originating option ARMs and interest-only loans because borrowers were defaulting in large numbers. These defaults were processed according to the loss mitigation procedures in place at the time — which meant foreclosure — and the resulting flood of must-sell bank-owned inventory pushed prices lower quickly.
Could it happen again today? Not likely.
The unstable loan products that caused the bubble and the credit crunch were effectively banned by Dodd-Frank, and none of these loans have been originated since 2007. For the last eight years, the housing market has been built on a base of stable loan products.
It is still possible for aggregate loan balances to drop, and this is a concern. To prop up real estate prices, mortgage interest rates were pushed down to record lows. As mortgage rates rise back up to their historically normal levels, this will put pressure on aggregate loan balances unless wages rise significantly to take up the slack. However, this transition is likely to be far more orderly than the credit crunch of 2007, and mortgage rates probably won’t rise faster than rising wages will allow. If they do, sales volumes will suffer.
The biggest lesson lenders learned during the housing bust was that they must keep must-sell inventory off the market. They learned to can-kick bad loans and deny short sales in order to remove supply from the market to prop up prices. While I believe this is a dangerous form of moral hazard likely to lead to reckless lending in the future, in the short term, it solved the problem, and these new loss mitigation procedures will be used again if prices weaken.
In short, between the stable loan products and the new loss mitigation procedures, I think another epic bust with a 30% or more decline in house prices is very unlikely, and fear of such a bust shouldn’t deter people from buying homes in today’s market.
Bubbles Don’t Correct, They BURST!
by Harry Dent • August 25, 2015
it’s time to put the word out that the second greatest bull march in history is finally coming to an end. It’s done.
Wall Street thinks this is a correction – a 10% drop, maybe 20% at worst, followed by more gains. They think we’re just six years into a 10 if not 20 year bull market. This is just a healthy breather.
Of course they think that! It’s the same “bubble-head” logic you find at the top of any extreme market in history!
Every single time – without exception – we delude ourselves into believing there is no bubble. We think: “Life’s good, why should we argue with it?”
And every time, we’re shocked when it’s over. Only in retrospect do we realize, yes, that was clearly a bubble, and oh, how stupid we were for not seeing it.
Bubbles don’t correct. They burst. They always do. And if anyone is still doubting whether this is a bubble, they need to get with the program – now! …
China’s stock market will also keep crashing – it’s already down 42%. When it does, its real estate will follow – with devastating consequences to real estate in the U.S. and the globe. And over the next several years, we’ll see the greatest global crash in real estate in modern history.
Yikes!
Op-Ed Is L.A. in another real estate bubble?
By William Yu, August 20, 2015
As home prices rise ever higher in Los Angeles, some are beginning to wonder if the region is in another housing bubble, one that’s ready to burst. Real estate blogs add to the hysteria by pointing to the most ridiculous listings, the million-dollar bungalows in need of a complete renovation, the $3-million teardowns.
Dear Dr. Housing Bubble,
That one was aimed directly at you. You are adding to the bubble hysteria! Great work! Keep it up!
But the data suggest that the market is not, in fact, on the brink of collapse.
Using the all-transactions house price index from the Federal Housing Finance Agency, I examined price history in Los Angeles County, adjusted for inflation, from 1975 to the present — 1975 being the first year data were available. Along with some short-term fluctuations, we can see four major housing price cycles in Los Angeles since 1975:(1) Bull market (first quarter of 1975 through the third quarter of 1980): real home price increased by 69% over 23 quarters.
Bear market (1980 Q4 to 1984 Q2): real price decreased by 9% for 15 quarters.
(2) Bull market (1984 Q3-1989 Q4): up 67% for 22 quarters.
Bear market (1990 Q1-1997 Q2): down 37% for 30 quarters.
(3) Bull market (1997 Q3-2006 Q4): up 166% for 38 quarters.
Bear market (2007 Q1-2012 Q2): down 43% for 22 quarters.
(4) Bull market (2012 Q3-2015 Q1): so far the price is up 27% for 11 quarters.
Can these past cycles help us predict the future? To some degree, yes.
Actually, no, they can’t. Looking at cyclical ups and downs is like trying to trade an Elliot Wave: in retrospect everything looks obvious, but in real-time, it never is.
His analysis lacks one very important component: a measure of value. I use rental parity, the balance point where the cost of a rental equals the cost of ownership. The relationship of current pricing to rental parity establishes a basis of value.
Using this basis of value, and changes in the new mortgage rules, I was able to predict that the housing market would hit a ceiling of affordability at a very specific price level, and this ceiling has held prices in a tight range for the last two years.
I don’t believe LA is currently in a housing bubble because current prices are not above fundamental values. I don’t rely on vague interpretations of cycles; I rely on verifiable data with a simple and unambiguous interpretation.
Which method fills you with more confidence?
Unlike the stock market, real estate dynamics tend to hold over time, in part because transaction costs keep prices from bouncing around wildly in response to external events.
If history is any guide, the L.A. housing price cycle seems to last about 12 years on average, of which seven years is spent in the bull market with at least 65% real price appreciation, and five years is spent in the bear market. We are three years into the housing recovery that started in 2012, with 27% appreciation so far. On average, there will be four more years or 38% more price growth before we reach the turning point.
Of course, it’s possible the bear market could come earlier or later than four years, but that is quite unlikely to happen in the very near future.
Does this analysis have any predictive power at all? If so, I don’t see it.
Prices may or may not go down earlier or later than four years from now. That clears it up, doesn’t it?
The data suggest that the market is not, in fact, on the brink of collapse. –
How can I be so sure?
I’m eager to know too….
Often, during a bubble-making period, we see an accelerating rate of home price appreciation, as in 1988-89 and 2004-06. In the last two years, we haven’t seen that kind of rapid appreciation in Los Angeles.
Actually, yes we have.
Look at the report below from 2014. At the end of 2013, the year-over-year change was nearly 50% — in one year!
If a lack of rapid appreciation is his basis, he is mistaken.
Another way to understand housing price cycles is by looking at building permit numbers. Speaking roughly, if developers are investing in new properties, that’s a good sign that demand, and prices, are rising or keeping steady. If developers are holding back, that suggests demand, and prices, will soon fall.
Actually, no.
I know many developers who were active in 2008 and 2009 buying broken projects for pennies on a dollar.
Further, most developers were busy acquiring and building projects late into 2007 when the real estate market was completely unraveling.
L.A. housing permit units peaked in 1977, 1988 (50,500 units) and 2004 (26,900 units), one to three years ahead of the real housing price peaks in 1980, 1989 and 2006. Permits bottomed in 1982, 1993 (7,300 units) and 2009 (5,700 units), a few years before the housing price troughs in 1984, 1997 and 2012.
Over the last three years, we have seen L.A. building permits increase from 11,200 units in 2012 to 18,200 units in 2014. The 2015 number will most likely be higher than 2014. Therefore, we can predict the next home price peak is at least two years away.
His prediction may prove to be true, but he would be right for the wrong reasons.
Yet another measure of rational housing value is a simple price-to-rent ratio. The ratio is calculated by taking the median home price over the annual median rent in L.A. If the ratio is high — meaning that home prices are beyond their fundamental value based on expected rental revenues — that points to a bubble. Again, let’s look at history.
Two previous peaks were in December 1989, with a ratio of 14.8 to 1, and in February 2006, with a ratio of 24.4. According to Zillow, the current price-to-rent ratio in L.A. was 17.1 in May, which is far below the 2006 bubble level but still higher than any time before 2003.
His analysis is getting closer to the truth here, but he still misses the mark.
The price-to-rent ratio fails to account for the impact of interest rates. I discussed this at length in Price-to-rent ratio suggests housing is 30% overvalued. The price-to-rent ratio signals a bubble, but since he has no benchmark of value, he can’t see the problem.
That doesn’t worry me, though. A high ratio doesn’t spell danger for Los Angeles because, similar to New York (ratio: Manhattan 25, Brooklyn 23) and San Francisco (ratio: 21), it’s now a “superstar” city.
This evidence doesn’t mean LA is not in a bubble. Unless he establishes that neither New York nor San Francisco are in a bubble (good luck with that), then he can’t establish LA is not in a bubble: all three may be bubbled.
L.A.’s size, amenities, weather and geography make its houses an investment target for the global elite. Wealthy individuals from all over the world don’t care that it might make more financial sense to rent, because they’re not simply buying Los Angeles houses to live in them, they’re also trying to diversify their financial portfolios.
Now he appeals to the fallacy that everyone wants to live here. Fail.
Even though Los Angeles is one of the least affordable cities in the U.S., all factors indicate that it is not in a housing bubble. Of course the bull market will end eventually, but that doesn’t mean we’re heading for a devastating crash, like in 1990 or 2007. Whether you should put up a million bucks for that bungalow is another story.
William Yu is an economist at the UCLA Anderson School of Management.
Mr. Yu’s predictions will turn out to be right, but not for any of the reasons he outlines.
While prices are high in California, they are not in bubble territory. While the potential for a minor price decline to to rising mortgage rates is real, the chances of a catastrophic price collapse is low, and fear of such a drop shouldn’t prevent anyone from buying a home.
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The Chinese super-rich are about to flood the US real-estate market
http://finance.yahoo.com/news/chinese-super-rich-flood-us-175936584.html
good thing Suzanne let the Chang’s know… they can do this!
+1 LOL!
https://www.youtube.com/watch?v=20n-cD8ERgs
I wonder if this will make up for the loss of Russian Billionaires losing their wealth to crashing oil prices?
It could just as easily have gone the other way, and if problems get worse at home, pressure will mount for that money to flow back home, not away from home.
People often lose sight of China being a communist nation that change rules over night. Their government has already openly spoken of money fleeing China. Its just a matter of time before they crack down and tighten.
Looks like it didn’t take long at all. Couple days later they announce their attempt to tighten outflows:
http://www.wsj.com/articles/china-boosts-efforts-to-keep-money-at-home-1441120882
I certainly agree that you should look at value (rental parity) however it would be foolish to ignore the cycles as they show how much California can over shoot value.
In fact the majority of the time valuation in California has been above rental parity over the past 30-40 years.
Fortunately we are in one of the rare situations currently where prices are at or below rental parity. Bubble mania can push this far out of whack in the future.
The real estate market certainly has moved in big cyclic swings in the past, but I believe Dodd-Frank will soften the highs and lows. Also, just because prices move up, as they have over the last three years, doesn’t mean we are restarting the cycle. I think the evidence is compelling that the rally in 2012-2013 was really a continuation of the previous cycle as the market recovered from an undervalued state.
If house prices start moving off the fair value line where they are today, then I will start to talk about a bubble and a new cycle. Over the last two years, the market hasn’t behaved cyclically at all.
There are many possible scenarios, this is just one that I believe could play out:
+ interest rates rise slightly
+ rents continue to rise with rising salaries for higher skilled labor and lack of supply
+ deflation of global commodities (oil, raw materials, food)
+ continued inflation of domestic necessities: housing near urban job centers, high quality food,health care, etc
In this scenario you can see rental parity disappear and have housing at a 10% premium with potential inflation concerns in prime desirable areas. This may still mean house prices are flat or slightly up or down but at a rental premium.
International Officials Urge Fed to Proceed With Rate Increase
International officials and bankers have voiced that they are tired of the hesitancy seen within the Federal Reserve when discussing interest rate increases.
“If you delay something that you were planning to do, then you leave the impression that your compass is different than what you led markets to believe,” Jacob Frenkel, chairman of J.P. Morgan Chase International and former head of the Bank of Israel, said in an interview with the Wall Street Journal. “Market drama is increased by delay,” he added.
Discussion at the Fed’s annual retreat this week consisted of officials and bankers from all over the world urging the Fed to proceed with the rate hike and “get on with it already,” according to an article featured on the Wall Street Journal.
People forget that California produces a lot of oil.
Home Price Declines Riskiest in Oil-Producing States
As gas prices continue to decline, oil-producing states remain at high-risk for home price decreases, according to Fannie Mae’s recent edition of Housing Insights.
Oil price declines within the past two months show no signs of a fast rebound, and the idea of a protracted bust prompts comparisons to the oil price slump of the 1980s, the report says.
“While most Americans enjoyed lower gas prices at the time, others felt a negative impact as large employment losses occurred in the oil industry followed by a general economic slowdown in many oil-producing states,” Fannie Mae said. “This often led to house price declines. Prices in Texas, for example, fell 11 percent from 1983-1988 during a time when national home prices rose by 32 percent.”
The top five states with the most significant projected home price index changes includes Wyoming, North Dakota, Alaska, Oklahoma, and Louisiana.
Looking at oil prices, oil industry employment, and home price growth, Fannie Mae projects “that the negative effect on house prices is likely to be less severe for most oil-producing states than in the 1980s. However, three states (Arkansas, North Dakota, and Wyoming) are at risk of experiencing significant price declines.”
Bakersfield is getting monkey-hammered from both sides. Not only is oil in a cyclical bear, but agriculture is hurting due to the ongoing drought.
Buying opportunity?
If you believe the depressed conditions are temporary, then it is a buying opportunity. If you believe the problems are intractable, then not so much.
Google Plunges Into Home Services Market
Internet users querying Google for terms like “clogged toilet” and “lock repair” now get more than advice on how to fix their problems. Google Inc. is pairing prescreened professionals – plumbers, electricians and other local home-service providers – with desperate clients.
The long-awaited addition to its sponsored results, which rolled out Friday in and around San Francisco, rachets up competition with companies like Amazon.com Inc., Yelp Inc., Angie’s List Inc. and TaskRabbit.
Developed by its advertising technology team, it is part of Google’s paid app for small businesses called AdWords Express. Servicemen pay to be ranked among the first search results and are connected with potential customers through the app after having been screened and qualified by Google.
According to a Google spokesperson, services are so far available for plumbers, handymen, locksmiths and house cleaners – terms that customers enter millions of times a day in the Google search bar. In order to qualify, participating small businesses must undergo procedures such as license, insurance and background checks as well as mystery shopping.
Customers can review the service operator, place a call directly and send multiple requests straight from Google’s results page. Never having to leave the Google website, and thus saving clicks, is a feature that differentiates Google’s services from those of most other providers.
No bubble?
In San Francisco’s Bidding Wars, Home Prices Go Ballistic
In the San Francisco Bay Area’s hot real-estate market, the question for many sellers isn’t whether they’ll get an offer. It’s how much over the asking price the offer will be.
“It’s easy to sell,” said Ken DeLeon, a real-estate agent based in Palo Alto. “The key is getting the extra $100,000.”
Even in an extreme seller’s market where bidding wars are common, upfront prep work and smart marketing are essential to getting top dollar for a property, homeowners and real-estate agents say. Sellers who invest $15,000 or more when listing their homes can recoup their costs many times over.
Several weeks before listing their 1,800-square-foot, loft-style condominium on Haight Street in San Francisco, Melanie and Adam Gensler spent $6,639 to repaint and recarpet the unit, $1,740 to repair and refinish the concrete floors and nearly $13,000 on staging—complete with contemporary paintings leased from local galleries through the San Francisco Museum of Modern Art. The effort was coordinated by the couple’s real-estate agents, Gregg Lynn and Alex Hachiya, of Sotheby’s International Realty.
The Genslers—he’s a financial and tax planner and she works in advertising sales—said they understood the need to freshen up and stage their condo before selling because they’d recently been house-hunting themselves. “For me the contrast has been pretty stark,” said Mr. Gensler, whose home’s interiors were handled by Mark Lopez at Guild Staging and Design. “Though I was surprised at the cost.”
The Bay Area’s latest market boom has been driven by an influx of high-paying tech jobs and, in some areas, overseas buyers looking for investment properties. A scarcity of listings is sending prices to new highs. In June, the number of new listings in San Francisco was down 23.1% from a year prior, according to the San Francisco Association of Realtors. The average listing spent 26 days on the market, compared with 31 days in June 2014. Median sales prices were up to $1.177 million—a 12.1% jump from a year ago. Real-estate agents say bidding wars are most common on properties priced below $2.5 million, and that buyers often make offers on numerous properties—anywhere from two to 20—before finally winning one.
It sounds like the author of this article has no idea what the word “ballistic” means. Unless the author is making a subtle case for a market crash in SF.
The tech sector is in a bubble and San Franciso real estate is just a symptom of that. Currently, there are more billion dollar start ups with no earnings than during the late 90’s dotcom bubble. The only difference is that these companies are privately owned, so you don’t hear as much about them.
http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-insane-math-that-s-creating-so-many-billion-dollar-tech-companies
http://fortune.com/2015/01/22/the-age-of-unicorns/
Another reason for the Fed to raise short-term rates. Easier to justify gambling on a startup when the cost of money is low and safe investments are returning less than inflation. Result is less money going into R&D in real companies that show actual profits.
I agree with Mellow Ruse on this one. San Francisco may endure a price correction, but not because housing is overvalued by any conventional measure. Both rents and house prices are correspondingly high, and both are inflated by the cheap money flowing into startups. The economy and the housing market there are as stable as this flow of money is — which may not be very stable.
Definitely a huge tech bubble in the Bay Area – funny money all over the place but the party has definitely quieted down a bit this year. It’s gone from being a drunken rager to being a festive happy hour.
It’s beyond insane in the Bay Area. I am looking forward to leaving.
Great to hear from you AZDavid, I was wondering how things were going for you… I figured you had hit it big with stock options, equity, etc etc.. You had perfect timing.
PR – Yup. Looking forward to living mortgage free back in AZ. It was definitely worth a few years in CA.
AZDave nice job… Congratulations
But the weather?!?!?
Stay for the children
LOL
Ah, yes, “the children”… Taxed to death up here and the schools are mostly lousy along with the general infrastructure. Completely souless but great weather and hiking.
The real geniuses are the Irvine Company – they have been building up apartment communities in North San Jose near the local stinky landfill next to an old mental asylum and are charging people nearly 3K a month for small 2BR’s and folks are flooding in. Field of Dreams – if you build it, they’ll come ( with their children ).
You live in a bad part of the Bay Area… But that’s that heart of the action.
In the Bay Area you can live much less congested than southern CA. The hiking, weather, outdoor activities are amazing. You can also get amazing public schools. The problem for those in Siicon Valley is the commute, from nice areas,,it has gotten completely insane and worse daily.
I’m surprised to hear you say it’s cooling.. traffic seems to get worse every time I’m around that area.
I see a pattern here… The Irvine Company and stinky landfills….
AZDavidSanJose,
It’s good to hear from you. Come by more often.
BTW, I still use several of your cartoons.
I miss the cartoons and the daily schadenfreude >:-]
Irvine Renter –
Yes, too long but it certainly seems that not much has changed since I last checked in. The Fed is still up against the corner that it painted itself into and the used house sellers still believe that today is the greatest possible moment in the history of the universe to buy a house.
Hope springs eternal. Or is that delusion never dies? Sometimes I fail to see the difference.
I’ve actually been pleasantly surprised the kool aid intoxication isn’t worse after the big rally off the bottom.
I hope you stop by more often. We miss your sense of humor and good comments.
Will Fed start buying mortgages again?
For some, it’s scarier than Mr. Toad’s Wild Ride at Disneyland. No, I’m not talking about the stock market gyrations. I’m talking about the recent slow and stingy rate improvement for fixed mortgages that usually shadow the 10-year U.S. treasury rates.
On Monday, the 10-year touched below 2 percent for the first time since April 28th. Yet, the 30-year fixed rate costs roughly .625 more in points than any identical fixed rate just four short months ago. On a $400,000 loan, that’s $2,500 more expensive. Ouch!
“This is a symptom that investors are getting nervous,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.
The Federal Reserve is holding 1.7 trillion dollars in mortgage backed securities or MBS’s (pools of mortgages packaged and sold in large bulks) purchased under the quantitative easing program.
Once these pooled mortgages are released in the market, then that they likely will reduce the value of all mortgage-backed securities.
To compete with the predictable, stable investment offered by the 10-year T-Bond, MBS’s have to offer a better return to investors. This is called a steepening yield curve.
When is the other shoe going to drop? When are we going to get hit with this mortgage dump?
Or, will the Federal Reserve start buying up mortgages in another round of quantitative easing since many of the world’s economies are slowing?
Typically, the Fed is not saying.
The Federal Reserve is not going to raise short-term rates next month, according to Lazersons’ crystal ball. If we end up having a bear market on Wall Street (that is more than a 20 percent decline) you can expect the Fed to start another round of quantitative easing.
The bottom line is rates aren’t moving more than a half-point one way or the other for the foreseeable future.
Orange County is happy and healthy in an economic sense. The Mortgage Bankers Association just released a research paper indicating that housing demand is going to grow big-time between now and 2024.
Buy. Sell. Improve your property. Or do none of the above, but don’t be afraid because rates are incredibly cheap.
The spread between jumbo and conventional rates at Wells Fargo is 3/8ths!
LOL! Good one.
Since when did they stop buying?
https://twitter.com/DavidSchawel/status/579722814325915648/photo/1
and continue to buy ….
http://www.newyorkfed.org/markets/ambs_operation_schedule.html
Very interesting…
I thought they quit buying these last year. Or is it that they just stopped increasing their purchases and these purchases merely maintain the portfolio?
The biggest fraud people believe is that quantitative easing ended. It has NEVER ended it just is not in expansion.
The Fed announced that they would continue reinvesting principal payments and rolling over maturing Treasuries when they concluded the Taper. Reinvesting should have a more-or-less neutral effect on MBS prices. But el O already knows that.
http://www.federalreserve.gov/newsevents/press/monetary/20141029a.htm
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”
I’m not so sure this has a neutral effect. It’s still buying. If the simply held these securities to maturity and “unprinted” the principal, it would have a neutral effect because such a policy would not prompt any buying or selling. The existing policy is still stimulative, IMO, because they are buying on the open market.
That’s a good point. The Fed is still buying on the open market at ~15B/mo. But I’m not sure how much effect it is having on prices/rates. The Fed was buying an additional $85B/mo. in UST/MBS a little over a year ago, and yet rates are still in the low 4s.
Everyone was sure that The Taper meant rates would jump up above 5%. Now that the Fed has reduced its purchases by 85%, rates are still bouncing along the bottom. How much effect could the last 15% have?
With all the other QE from Europe/Japan and Chinese currency manipulations, the 15B/mo. from the Fed may just be neutralizing some of the negative effects on the dollar. I don’t think it is a simple matter of the Fed buying MBS therefore they are keeping rates low and stimulating the housing market. There are other factors to consider.
Mr. Toad’s Wild Ride is considered a scary ride?
Sounds like the guy liked the name but has never actually been on the ride.
Yep, he just lost all credibility as a mortgage broker. 😉
1)the current biggest bubble of all time is in the money (aka USD)
2)the world does NOT revolve around California
3)due to globalization, EVERYTHING is connected
4)homedebtors carry the rollover risk
5)current price model is dependent on the continuance of negative real rates
Question is…
are homedebtors, who bought-in to the MSM’s multi year long teaser rates narrative (“buy now… rates are @ once in a lifetime lows”) about to wake-up trapped in a debt spiral of rising rates?
If so, sellers are gonna have to lower prices substantially to complete a sales transaction.
This is a real danger. If mortgage rates rise without a commensurate increase in salaries, today’s buyers do face a rollover risk. While those with conventional fixed-rate financing won’t need to roll over their debt, if they want to sell, their take-out buyer will need to obtain financing, so today’s buyers face an indirect rollover risk. I believe this will translate into low appreciation, but depending on the timing, it could trap some of today’s buyers in their properties if they want to sell in the next 3 to 5 years.
So, are you forecasting dramatically rising mortgage rates (5%+) within the next couple of years?
u r ‘leading the witness’ 😉
A Q&A does not equate to a forecast. jussay’n.
Do you work for the banks? I can understand why the chairman of J.P. Morgan Chase International would want rates to rise now that the distressed inventory has been dealt with (manipulated); but why don’t you want buyers to wait for rates to rise? If you are buying within your means, low rates are a windfall.
Unless you are buying with cash, higher rates profit the banks, not the homeowners. There is always a risk in committing to long-term debt on an illiquid asset, but there is also a risk that rent will rise.
If you wait until rates are at 5%, there is always the chance they go to 6%. At 6%, rates could go to 7%. How long do you wait? When will you know that rates have peaked? 18%? Even if you pay cash, opportunity costs will have also risen with rising rates since the foregone return will also have risen.
I’m not sure what a debt-spiral is exactly, is it a new amusement park ride?
The debt spiral is a ride that spins rapidly, pinning your to the wall while the floor drops away. Then they abruptly stop (credit crunch) the spinning (serial refinancing), and the people on the ride fall into a black hole never to been seen again.
Ideally…
In practice: the ride, the park, and the rest of humanity fall into the black hole, while the debt-spiral riders get a free lifetime pass. It’s good to be a gangster… 😉
Serial refinancing is only possible with falling rates, and looser standards. How is the debt spiral even possible with rising rates and tight credit? el O is describing an alternate universe where debt levels rise as rates rise – at the same time that home prices fall.
LTVs may rise, but the debt, and more importantly the debt-service, remain the same. More like an asset spiral, where asset values fall faster than the loan. Similar to buying a new car where depreciation can exceed amortization.
ABA launches its first social media lobbying campaign to protect loan-forgiveness program
http://www.abajournal.com/news/article/aba_launches_its_first_social_media_lobbying_campaign_to_protect_loan_forgi/?utm_source=maestro&utm_medium=email&utm_campaign=weekly_email