Sep242015
The prime homebuying season is right now!
September and October provides an abundance of motivated sellers and fewer competing buyers, making it the best time of year to shop for a home.
“It’s always a good time to buy or sell a house
“
anonymous realtor
“They deem him their worst enemy who tells them the truth.”
Plato
realtors proclaim that it’s always a good time to buy or sell a house because it’s always a good time for them to earn a commission. The reality is there are some times when markets favor sellers and some times when markets favor buyers. It can’t simultaneously be a good time to buy and a good time to sell.
During the housing bubble rally, the housing market strongly favored sellers. Buyer demand was nearly infinite due to the proliferation of toxic financing products, so any seller had multiple offers and buyers resorted to writing sappy letters to convince sellers to select their offer out of the crowd.
When the toxic financing was removed, the market abruptly shifted from a seller’s market to a buyer’s market. The number of motivated sellers ballooned, and the number of buyers collapsed overnight in a thunderous credit crunch. The buyer’s market reached a crescendo in late 2011 when there were multiple sellers for every buyer, and buyers could dictate both price and terms.
Then it all changed again. In early 2012, the inventory dried up due to changes in lender policy, and the buyer’s market quickly transformed into a deep seller’s market with multiple offers over asking price. This continued until mid 2013 when the taper tantrum caused a spike of mortgage rates that removed the frenzied buyer motivation (and ability to finance).
These tidal forces rocked the market back and forth for years, but since mid 2013, the market has been far more balanced, and the shifts between seller domination and buyer domination resumed their more seasonal pattern.
Seasonal patterns
The real estate market exhibits strong seasonal patterns. Since many sellers give up and take their homes off the market during the holidays, the low for sales and home inventory is nearly always the first of January. Inventory and sales generally rise through the year peaking in July or August, then both sales and inventory taper off the rest of the year.
The closing of a real estate deal usually occurs 30 to 45 days after the parties reach and agreement, so for sales to peak in July or August, the negotiations for the sale must conclude in May or June. Since properties are generally showcased on the MLS for 15 to 60 days prior to sale, most sellers list their homes between March and May in order to complete the sale by July or August.
April is a rough time to shop for a home. In April, sellers know they still have plenty of time to complete a sale, and they haven’t had their house on the market so long that they fear missing their chance. Plus, buyer competition is increasing — and sellers know it — so sellers simply aren’t motivated to lower price or offer concessions to make a deal. Most sellers reason that if the current offers aren’t good enough, more offers will come along. Unfortunately for buyers, sellers are often correct in this assumption. Buyers who complete their deals in April generally pay top dollar.
So what is the best time to shop for a house? I believe it’s September or October. Sellers know they missed the prime selling season, and there are still many hopeful sellers keeping their properties on the market. Further, many buyers drop out of the competition because they can’t complete the deal in time to enroll their children in school to avoid a mid-year transfer. Larger numbers of motivated sellers and less buyer competition makes September and October a prime time to shop for a home.
Big Data Analysis Reveals October is Best Month to Buy a Home in U.S.
Residential News » Irvine Edition | By Miho Favela | September 11, 2015
Irvine, Ca based RealtyTrac recently took a big-data approach to analyzing over 32 million single family home and condo sales in the U.S. over the past 15 years. RealtyTrac compared average sale prices to average estimated market value at the time of sale to determine whether buyers paid a premium or bought at a discount.
Based on the closing date of the sale, RealtyTrac broke down the data by month … to identify when buyers historically have realized the biggest discounts. Below are high-level findings of their big data analysis.
The best month to close on the purchase of a home is October
- Out of 2.7 million single family home and condo sales over the last 15 years that closed in October, buyers realized an average discount of 2.6 percent below full estimated market value at the time of sale.
- Following October as best months to buy were February, July, December and January — all fall or winter months except for July, which was a surprise given that conventional wisdom would suggest that is a good time to sell but not necessarily to buy to buy at a bargain price.
- The worst month of the year to close on the purchase of a home is April, when buyers over the last 15 years have purchased at an average premium of 1.2 percent above estimated market value at the time of sale.
There is never a perfect time to buy a house. Considering all the variables that influence market timing, including sentiment of buyers and sellers, one or more of the variables will always be cautionary. I developed a market timing system to review what I believe are the most important mechanical considerations, but my system only considers what’s happening with price. It doesn’t take into account market sentiment, fluctuations in inventory or sales volume, nor does it consider the potential impact of policy changes. I ignore these features partly for simplicity, and partly because their influence is minor.
In my opinion, it’s better to focus on a few key variables than paralyze people by examining minor variables and assigning too much importance to them. That being said, these other variables do influence the housing market in the short term, and that’s why we explore and discuss them daily on this blog. Right now, we enter the time of the year when buyers generally have the upper hand. So is it a buyer’s market?
A buyer’s market?
This is an unusual buyer’s market. In a typical buyer’s market, sellers must compete for the few available buyers by lowering their price. That isn’t happening this time around for two reasons: (1) many discretionary sellers are merely testing the market and not really motivated, and (2) many would-be sellers who are motivated are trapped in cloud inventory and unable to lower their prices due to the large outstanding balance on their loans. The market dynamics favor lower pricing, but I don’t believe we will see much, if any, reduction in sales prices because the sellers who can lower price aren’t motivated to do so, and those that are motivated are unable to do so. It’s a recipe for very low sales volumes.
That being the case, if there is a deal to be found, now is the time to find it.
Happy house hunting!
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We Still Aren’t Sure What Will Cause Janet Yellen to Pull the Trigger
The central bank is facing a communications problem.
http://www.bloomberg.com/news/articles/2015-09-24/what-will-cause-janet-yellen-to-pull-the-trigger-
If she just said rates were going to be kept negative in real terms for an extended period of time and real inflation on all necessities and anything premium would be high… There would be no communication problem.
Of course she isn’t going to say that.
Who says we need to have a clear goalpost? I suppose if I were trading in short-term bonds, I might bitch about the ambiguity, but for everyone else, who cares?
We all know the federal reserve will raise rates sometime soon, but we don’t know when, we don’t know how high, and we don’t know how quickly subsequent raises will come — nor should we know. Even if the federal reserve announced a time-certain for raising rates, if the data changes, they would change their minds anyway.
These people are whining about having uncertainty about the future. Well, guess what? The future is uncertain. That’s life.
These same defined periods are prime rental season too, apparently. We were renting an Irvine house. When our eighteen month lease expired in June, the landlord wasn’t interested in accommodating us for six more months. His concern was that the market for his Irvine five bedroom house is families who want their kids to attend Irvine schools. He always has trouble finding tenants when it’s available after schools begin in August.
If the profiled house actually has a 3300 sq ft lot it’s the biggest and best 3300 lot I’ve ever seen. Views are great, I always have a view at every house I have bought. That helps, but this lot looks like it plays more like a 5000 sq ft lot. Small but nice.
Homebuilders acknowledge two strange features of the housing recovery
We’re seeing signs that the current “A Lot,” 750-plus FICO, cash-flush, wants-not-needs housing recovery is getting long in the tooth. If we’ve learned nothing else about housing and real estate over the past 10 years, we’ve learned that it’s a series of linkages–supply to demand; jobs to household formation; loans to the ability-to-repay them; and the daisy-chain of household types from financially-supported living, to market rate, to the various tiers of homeownership, starting with entry-level.
We may believe-because of appearances–that these linkages are not in play. But that’s because we’re human and prone to error. They’re never not in play.
Fact is, two very strange paradoxes have showed up in the latest recovery. One is this, and it applies to square footage. Common sense might dictate that if one could divide 10,000 square feet of built residential space into 10 homes it would be worth more to the builder/developer than to divide that same 10,000 square feet into five homes.
It’s a paradox in today’s market that fewer homes with larger square footage are more profitable than greater density, smaller square footage homes.
Secondly, there’s the mental paradox around supply and demand. One doesn’t normally associate supply constraints as powerful enough inhibitors to hold back a housing juggernaut in the making. Today’s market seems–counterintuitively–to be proving that scarcity of predictably and manageably priced labor and predictably and manageably priced lots can be as potent a suppressor of gains as a lack of willing or able buyers.
Fact is, if you’re a “willing” buyer with a cap on what you’re “able” to buy, then chances are that you’re currently on the sidelines in the current market, because there’s nothing out there for you.
Lenders Offering More Second Chances With Increased Number of Subprime Loans
First mortgages, home equity installment (HE) loans, and home equity lines of credit (HELOCs) all experienced an uptick in subprime originations compared to the same period last year. The amount of first mortgage originations to borrowers with subprime credit scores increased 30.5 percent, HE loans rose 29.5 percent, and HELOCs rose 20.4 percent.
What could go wrong?
San Francisco Fed President Says Rate Hike Later in 2015 Would Be ‘Appropriate’
Federal reserve communications are transparent as mud
An influential monetary policymaker said this week that it would be appropriate for the Federal Reserve to raise the federal funds target rate later this year despite declining to do so in the September meeting of the Federal Open Market Committee (FOMC).
San Francisco Fed President and CEO John C. Williams said in an address to a symposium on China and U.S. financial systems in Armonk, New York, that he believes a rate hike would be appropriate for 2015. Williams presented cases both for and against raising rates in his speech, saying that economic turmoil overseas and low inflation made the case for the patient approach to raising rates.
“In the past, I have found the arguments for greater patience to clearly outweigh those for raising rates,” Williams said. “The labor market was still far from full strength and the risk to the recovery’s momentum was very real. As the economy closed in on full employment, the other side of the ledger started gaining greater weight and the arguments have moved into closer balance.”
When presenting the case for raising rates, Williams turned to the insight of Milton Friedman, who once won the Nobel Prize in Economics, who pointed out the long and variable lags of monetary policy.
“I use a car analogy to illustrate it,” Williams said. “If you’re headed toward a red light, you take your foot off the gas so you can get ready to stop. If you don’t, you’re going to wind up slamming on the brakes and very possibly skidding into the intersection. In addition, an earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization. That would give us space to fine-tune our responses to react to economic conditions; raising rates too late would force us into the position of a steep and abrupt hike, which doesn’t leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy.”
The herd of economists (83%) incorrectly predicted a September rate increase. Despite their lack of credibility to speak on this issue, they were interviewed for this article.
“While the policy normalization process didn’t begin with this meeting, absent any major setback, liftoff is highly likely before the end of the year,” said Robert Denk, Assistant VP for Forecasting and Analysis at the National Association of Home Builders (NAHB). “The economic projection materials, and (Fed Chair Janet) Yellen in her comments, indicated that 13 of 17 FOMC members still anticipate the first rate increase before the end of the year. The ‘dot plots’ show seven of those members expect a 25 basis point increase by year-end, five expect a 50 point increase, and one 75 point increase.”
Because of the potential rate increase later in the year, those who are considering the purchase a home next year might want to think about doing it before the end of this year, according to one economist.
“Those planning to get into the housing market in 2016 may want consider a home purchase before the end of the 2015,” said Jonathan Smoke, chief economist for Realtor.com. “When rates go up, not only will monthly mortgage payments increase, that increase will also lessen some buyers’ ability to get approved for a home loan – due to an increased debt to income ratio.”
“I use a car analogy to illustrate it,” Williams said. “If you’re headed toward a red light, you take your foot off the gas so you can get ready to stop. If you don’t, you’re going to wind up slamming on the brakes and very possibly skidding into the intersection. In addition, an earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization.”
IF you are headed toward a red light, and you are close enough that you are nearing the minimum stopping distance based on speed, vehicle weight, brake design and road surface conditions; then yes, it would be a good idea to take your foot off the gas.
If, however, the red light is a long ways off and the car is only going half the posted limit, you might want to step on the gas so that when it turns green again you make the light.
Inflation is half the 2% goal by its most common measure. Wages have yet to rise in any meaningful way. And yet the Fed is seriously discussing raising rates like we are doing double the speed limit recklessly towards a red-light intersection? By what measure?
When you have a debt-bubble red lights start to look like green lights and vice-versa, anyway. Following normal economic policy during an atypical economic situation may have the opposite expected effect. Its entirely possible to redline the engine and not go any faster when you are stuck in an economic quagmire. Throttling back at the wrong time may sink you back in the mud.
I think there is a good case for raising rates, however. Not to put a brake on the economy, but to shift assets out of equity and back into income. The torque to the wheels has to match the ground conditions. Putting the transmission in a higher gear may result in less spin, better traction and acceleration. By raising rates the net effect may be to slow the engine, speed up the wheels, and speed up the car.
Paul Krugman floated the idea that the major commercial banks are the ones applying the pressure to raise rates.
Rate Rage
OK, I should have seen that one coming, but didn’t: the banking industry has responded to the Fed’s decision not to hike rates with a primal cry of rage. And that, I think, tells us what we need to know about the political economy of permahawkery.
The truth is, I’ve been getting this one wrong. I’ve tried to understand demands that rates go up despite the absence of inflation pressure in terms of broad class interests. And the trouble is that it’s not at all clear where these interests lie. The wealthy get a lot of interest income, which means that they are hurt by low rates; but they also own a lot of assets, whose prices go up when monetary policy is easy. You can try to figure out the net effect, but what matters for the politics is perception, and that’s surely murky.
But what we should be doing, I now realize, is focusing not on broad classes but on very specific business interests. In particular, commercial bankers really dislike a very low interest rate environment, because it’s hard for them to make profits: there’s a lower bound on the interest rates they can offer, and if lending rates are low that compresses their spread. So bankers keep demanding higher rates, and inventing stories about why that would make sense despite low inflation.
Now, you can argue, as Brad DeLong does, that easy money is in the long-run interest of commercial banks — that in the end the nominal interest rate depends on the rate of inflation, and that locking us into a lowflation or deflation world would be very bad for the banks. But nobody has ever accused bankers of being especially clear about macroeconomics, and in any case what matters for today’s bank executives is not the long run but the next few years, during which they either will or won’t be getting big bonuses; in the long run they are all full-time golfers.
So the demand for higher rates is coming from a narrow business interest group, not the one percent in general. But it’s an interest group that has a lot of clout among central bankers, because these are people they see every day — and in many cases are people they will become once they go through the revolving door. I doubt there’s much crude corruption going on at this level (or am I naive?), but officials at public monetary institutions — certainly the BIS, but also the Fed — are constantly holding meetings with, having lunch with, commercial bankers who have a personal stake in seeing rates go up no matter what the macro situation.
Like everyone, the bankers no doubt are able to persuade themselves that what’s good for them is good for America and the world; more alarmingly, they may be able to persuade officials who should know better. Does this explain the puzzling divergence between the views of Fed officials and those of outsiders like Larry Summers (and yours truly) who have a similar model of how the world works, but are horrified by the eagerness to raise rates while inflation is still below target?
I don’t know about you, but I feel that I’m having an Aha! moment here. Oh, and raising rates is still a terrible idea.
Rate Rage in 1932
Both Rob Johnson and Peter Temin direct me to a paper by Gerald Epstein and Thomas Ferguson on the Fed’s strange, destructive turn away from expansionary policy in 1932. They look carefully at the archival evidence, and find that a key factor was the complaints of commercial banks that low interest rates on government securities were squeezing their profits. That is, the turn to tight money in the face of deflation and a collapsing real economy was driven by the same narrow banker interests I have suggested explain current demands for higher rates despite low inflation.
It makes sense that commercial bankers want to be first in line. They are used to having first access to money. Now that solvency issues have been dealt with, any small amount of inflation will result in a corresponding rise in rates.
This means that commercial banks will be first in line for rising profits from the recovery. It makes sense to me. It’s not like the banks caused the recession, they should be the first to benefit, right?
Dodd-Frank is not killing mortgage access for home buyers
Facts won’t stop Jeb Hensarling from claiming otherwise
New rules designed to make sure borrowers can repay their mortgages haven’t curtailed the ability to buy a home, a Federal Reserve study says.
The Fed, as part of its annual look at home mortgage disclosure data, looked at the impact of ability-to-repay and qualified mortgage rules put into affect in January 2014. The new rules were created by the Consumer Financial Protection Bureau as mandated by the Dodd-Frank bank-reform law.
The rules require lenders to make sure home buyers can afford a mortgage. Lenders have to verify a customer’s income, debt load and credit history, among other things. And in most cases buyers can’t qualify for a mortgage unless the ratio of debt to income is 43% or below.
The Fed study didn’t find any evidence of credit restriction as a result of the rules.
For instance, black and Hispanic borrowers, who tend to have fewer assets and lower credit scores, actually saw their share of mortgages rise in 2014 after several years of decline. There also wasn’t much of a change in the frequency in which debt-to-income was cited by lenders as a reason for denial (it rose slightly for purchase applications and fell slightly for refinancing).
The Fed suggests the new rules had little effect because lenders had already tightened standards after the 2008 financial crisis. Lenders may also have adjusted to the new rules prior to implementation.
Well just look at who finances his campaigns.
https://www.opensecrets.org/politicians/summary.php?cid=N00024922
California’s Housing Gold Rush Driving Demand for Jumbo Loans
I left my wallet in San Francisco.
The tech-sector gold rush in recent years has made San Francisco the nation’s most expensive place to buy a home, with a median sale price of $1,312,500, according to the California Association of Realtors (CAR).
Home prices are high in popular areas elsewhere in the state as well. In Los Angeles, the median home price is $486,310. But home buyers who want to live in L.A.’s most desirable areas will pay much more, and inventory is tight, says Eric Lavey, director of the estate division of Beverly Hills-based The Agency.
“Demand is high at every level and every price point,” he says. For homes priced at $2 million and under—even up to $3 million—the market is “insane” right now.
All of coastal California is basically insane right now, referring to real estate, of course. Yet government-backed conforming loans are capped at $625,500 in high-priced areas. So unless they can make a substantial down payment to qualify for a Fannie Mae, Freddie Mac or FHA loan, the only way many Californians can finance their mortgage will be a jumbo loan.
“California is by far the biggest lending state when it comes to jumbo mortgages—both in dollar amount and number of loans,” says Guy Cecala, publisher of Inside Mortgage Finance, which covers the industry. Bank of the West, which lends in 22 states, has its largest market share in California, says Paul Wible, senior executive vice president. “The ability to lend in the jumbo loan sizes here is critically important,” he says.
More than half of Bank of America ’s jumbo lending is originated and closed in California, and dollar volume from January through August 2015 was up 20% over a year ago, says Ann Thompson, Bank of America’s regional sales executive for Northern California.
“Demand is high at every level and every price point,” he says. For homes priced at $2 million and under—even up to $3 million—the market is “insane” right now.”
Up to $3M? WTF?
Mortgage rates decline after Fed punts on rate hike
Average fixed mortgage rates declined following the Federal Reserve’s decision to defer a hike in the Federal funds rate, according to Freddie Mac.
The 30-year fixed-rate mortgage averaged 3.86% with an average 0.7 point for the week ending September 24, 2015, down from last week when it averaged 3.91%. A year ago at this time, the 30-year FRM averaged 4.2%.
These low rates gave a big boost to mortgage applications this past week.
“Global growth concerns and lackluster inflation convinced the Fed to defer a hike in the Federal funds rate. In response, Treasury yields fell about 9 basis points over the week, with some larger day-to-day swings along the way,” said Sean Becketti, chief economist at Freddie Mac. “In response, the interest rate on 30-year fixed rate mortgages dropped by 5 basis points to 3.86%.
“Mortgage rates have remained below 4% for 9 consecutive weeks and have remained range-bound between 3.8 and 4.1% since May. These low mortgage rates have supported strong home sales, and 2015 is on pace to have the highest home sales total since 2007,” he said.
We’re now in the week where we could have locked for 90 days at no cost (we paid an eighth 30 days ago). In hindsight, the lock doesn’t look to have protected us from a higher rate (the next few days will confirm), despite the 10Y UST increasing 30+ bps during this period, only to fall back down 20 bps.
However, there’s still some value in the eighth cost. The 90-day no-cost lock includes no float-down option. Our current 150-day lock includes a one-time float-down option from late October through closing. Let’s have a couple more VW and Caterpillar news items hit over the next few weeks, and floating-down might be available.
I think it was a good move to select that loan. It’s like a entering a trade with a stoploss. Your risk is limited, and you have an opportunity to book profits if the rate moves lower.
Reminder: there is NO such thing as a free lunch (especially when it comes to money).
When the last consolidation event commenced back in 08, it was savers, pensioners and seniors living on fixed income who ‘paid the price’ (bailed out the debtors). This go-around, the debtors are gonna have to ‘pay the price’ simply because savers, pensioners and seniors living on fixed income have already been squeezed financially to the max.
How would debtors pay?
1) ie., in a currency reset/devaluation event of ~30% …the home loan remains in old dollars, which means the cost to service the old debt would just about double.
2) tax-wise, RE is a fixed target
Probability of # 1 occurring? 0%. As for # 2, Prop 13 protects CA homeowners. So a state Constitutional amendment would be required to overcome its protections.
The US wouldn’t force a devaluation like a third-world country, but we could print enough money to devalue the currency if we really wanted to. However, the “begger thy neighbor” policy only works if all our neighbors aren’t doing the same. With Japan, China, and Europe all trying to devalue even more than we are, devaluation today would take something really unprecedented on the part of the federal reserve.
Agreed, and this remote possibility would benefit everyone who took on the most possible debt to buy real estate.
If # 1 happens, the people with the most debt benefit the most… The debt becomes completely worthless… $100,000 is now what people are paid in 1 week… If you have a job