bostonbubble.com

[peterpan]

Over the past year I have been observing rental markets both in California,where I live ,and in Rhode Island,where I purchased a house in 2/07, renovated, and want to rent out. Is it me or are there a significantly larger amount of rentals out there? Seem like in CA there are more "for rent" signs than for sale! Where do you think this is all going?

[john p]

If a house goes on the market and doesn't sell and then goes empty, after a while you need cash flow just to cover some of the mortgage and property taxes so I think people lose hope in trying to sell and just want cash flow.

Beyond that, perhaps people feel that the market will rebound in the next year or so (maybe not to 2005 levels) so they weigh losing three or four hundreds bucks a month for two years in the rental scenario versus losing $100k in selling it while it is at its bottom.

My sister and brother in law bought a house in 05 for $685k in Jersey, they just got it appraised at $550k. He is thinking about relocating because his company went tits up.

Here's the thing though, he bought his first house for $240k and sold it in 05 for $450k, so he's got almost $200k of profit along the way. It would be a bummer for him to sell for this type of loss, but he can do it. The guy that can't do it, is the guy that bought his prior house for $450k as a first time buyer.

What frustrates me is that this whole bailout puts the novacane all over the body and not on the toothache. The people that got hit by this tsunami were the younger first time buyers in the past four years who didn't overextend. One could argue that you shouldn't have bought to begin with, but it is unreasonable to expect that nobody buys houses in a five year period. Prior to that, things aligned with fundamentals and any hardships were self created. We have people that cashed in on the stock market bubble, cashed in on the housing bubble now going to collect on the bailout bubble. This is crazy.

Beyond that, we had a lot of single women buying during the boom and maybe they found the man of their dreams and the two have two properties and need to pair down. Of course you also have the investors and flippers. I kind of have a feeling that we're going to see a diaspora of people fleeing States that have become economically unsustainable such as New Jersey and California.

[admin]

[john p]

It is unreasonable because not everyone is reasonable and that is a reality you have to factor in.

Further, the government might take unusual steps that you might not consider. Bailing out people that took on too much risk fundamentally changes the viscosity of the racetrack. I mean they significantly lowered interest rates to help bail out the stock market; who knows how they might interfere today? I didn't want Obama because I believed it would hurt people that worked hard and played by the rules and by absorbing risk of others that had changed the nature and properties of the economy and behavior. The good people that played by the rules are now stuck in the same fly paper. So, yes, sitting on the sidelines is what a responsible person might have done; I hope that you guys don't get screwed for being responsible.... I honestly hope I have the wrong concept of Obama and he surprises me, I’m open to that only because anyone with intelligence surrounding him will give him the 4-1-1 and hopefully he can use his political skills to get the herd to follow even if it is counter to what he was saying earlier….

This is the whole theory I was talking about earlier rheology.

http://encyclopedia2.thefreedictionary.com/Rheology

I mean you can have two skiers go down the same track at different times of the day and at one time it is a bit faster than the other, the properties of the track (the ice cover) change the speeds. Now, of course there are seasonable aspects, like a great skier going down the slope when it has no snow might get a worse time than a terrible skier going down it when it has snow. Beyond that, the viscosity, the stickiness relates to solvency. You might have a price structure that is inflated, but you need to heat up the situation and start to see people get laid off and lose their jobs before the properties of the situation unleash the inertia of the potential situation. I honestly didn't see the job losses that we're getting today. I knew that the industries that traded on volume in thin margins like a Circuit City would lose out because the interest rates to buy their inventories would clean out their thinning margins. Beyond that, it was those that were losing to jobs going overseas.

Further, there will always be the bargain shoppers that cut against the grain. When it is "safe" to go back into the water you'd have had a flood of buyers if it gamed out that everyone sat on the sidelines. Come to think about it, that's kind of what happened before, you had all this pent up demand due to the recessions of the early/mid 90's and afterwards nice houses started getting snatched up so fast that people were trying to find out about them before they went on the market.

Yes, the way things would have been better is if the percentages tuned right like more of those that were in a position to hold off buying held off and reduced the surcharge of buyers in the market.

Five years isn't long, I agree; you're talking to someone that waited till his mid 30's to buy. However, if you buy, you'll only have 25 years left on your mortgage when the guy that waited 5 years has 30. I have friends that bought when they were 25 and even with this downward period, they are way ahead. I'm not saying it isn't possible, happened in the early 90's, you just have to weigh it. The interest rates are a wild card too. I get the whole get the lowest price for the house, but do you think that we'll see super low interest again? Are you willing to gamble on that or is there a basis for why one might think that? I'm not saying there isn't, but until I hear one it's a wildcard.

Like I mentioned, my brother-in-law and sister have a 200k cushion to absorb because they bought around 2000 and caught the bubble. I have a friend who bought a house in Marblehead around 1999 or so for $300k and he put in about $70k and it could sell for about $600k today. The "cushion" they might have is affected if they have begun to have a lifestyle that they can't backtrack from.

I'm trying to mention all this because when I was going through it, the most unsettling thing was when I discovered that there was a perspective I hadn't thought about and I had almost chiseled my framework of thinking and I had to reorder. I'd rather consider something and maybe not put much value in it, than be set in my ways and be blindsided with a situation and get nervous. I mean what if someone had their money for their down payment invested in the past five years; they might not have any gains or worse, lost.

Someone write earlier that one of the big wildcards was this Enron mentality where all the bookkeeping was garbage and who knows what things are worth. That was sort of the reason why people gravitated to real estate after the past stock market significant drop.

[admin]

I should probably clarify... I was using "expect" in the same sense as I expect all drivers to be courteous. Obviously, that isn't going to happen (especially around Boston), it is just the ideal.

No, I don't anticipate that interest rates will be super low again or even remain as low as they are now (although that is a distinct possibility given that rates have followed a downward trend over the centuries). You're looking at it from the point of view that you want to get in on the low rates so that your mortgage payment goes further, but I'm looking at it the other way. If people are bidding based solely on what monthly payment they can afford, then lower rates don't make houses more affordable because the total prices being bid simply scale up. Higher interest rates would in fact be preferable because that would reduce the overall purchase price, which will matter when it comes time to sell again. More importantly, it also reduces the risk of adverse interest rate movements after you buy - when it comes time to sell, if rates are higher than when you bought, those buying from you will be able to pay less. A lower purchase price would also reduce the risk of loss if you are forced to sell due to changing economic conditions (like a recession) or changing family conditions. I would definitely prefer to buy when rates are higher because of the reduced risk.

- admin

[john p]

I'm just trying to throw out for consideration that we know that prices to incomes are higher than historical norms, but interest rates are lower than historical norms.

I think what you're saying is that in choosing the two having the lower house prices is preferable. I think you're right, but you have to play the hand you're dealt because it might be longer than you think for the stars to align the way you want.

As much as I'm trying to feel bad for my sister and brother-in-law, the flip side is many of the areas they are looking at relocating to have also seen significant price drops so if they lose $120k in their house, the comperable house they're looking at will be most likelly $120k cheaper than 2005 as well. What we're really talking about are first time buyers because they are the ones that will really benefit from the lower house prices, most everyone else, it's kind of relative.

So, looking at the first time buyer situation, many might miss out on opportunities because they don't have the higher down payments they are requiring. When it hits the sweet spot, I wonder if there is a little pent up demand. I'd imagine that we're going to see more people leave Massachusetts for retirement, so that will totally help out. Beyond that, solvency might be an issue because younger people often aren't as established and haven't found their niche in the workplace and sometimes get laid off if they're in that younger, still finding myself in the world place. Some people take longer than others to find the right company, the right people, and the right role so in tough times, the core people that perfectly fit a business model or company profile are usually the keepers. Many might want the flexibility to not be tied down during tough times so renting offers that.

Because there is so much potential for further drops now due to solvency (job losses), if I were a first time buyer I'd wait unless I found the perfect place and a seller accepted a low-ball offer... you got a really sweet deal... People simply aren't going to sell their home to you for a song unless they are totally desperate or can get a place in Florida for a tune. I think the job market and bond market will determine the next 6-9 months of the housing market.

[CC]

[john p]

The stock market is turbulent, we know that.

The bond market is much, much larger than the stock market and it is fragile right now. If the bond market shits the bed the economy is in deep yogurt.

direct answer-

http://www.deloitte.com/dtt/article/0,1002,sid%253D15288%2526cid%253D53715,00.html


A primer-

http://finance.yahoo.com/education/bond/article/101196/Risk_vs_Reward_How_Bonds_Behave

http://www.pimco.com/LeftNav/Bond+Basics/2006/Role+of+Housing.htm


current status-
http://www.forbes.com/markets/bonds/2008/11/14/bonds-consumer-sentiment-markets-equity-cx_md_1114markets26.html

back in January-
http://www.marketwatch.com/news/story/fed-uncertainty-recession-risk-clouds/story.aspx?guid=%7BFA0C2951%2D3D6F%2D46F0%2D97DB%2D2665723472ED%7D

In January- from the article above

[Guest]

I got one quuestion for you John P...

If you had a crystal ball and saw could go back 2 years-- knowing everything that you do...

would you have bought?

As for people missing the opportunity due to higher down payments-- perhaps but muy guess is that this is not going to see a 1-2 year down cycle, followed by a sharp uptick in pricing--- my guess as these buyers will have the time required to save--- but then again maybe with the current state of the economy they will lose there jobs....

we are holding strong-- but RI is taking a dump in unemployment-- and we will not be far behind

[john p]

Making me reflect....

Here is one way to benchmark it:

I bought my house for $543k on Sept.1, 2006 with a 5% down payment, 15% piggyback note at prime rate (8%) and the primary note at 6.5%.

My neighbor's house sold for about $530k this past March and it zillows for $609k. My house zillows at $575k. So if this guy's house sold for 87 percent of zillow's estimate, that would mean my house was worth $500k. My neighbor has a pool, but I have a family room addition and a breezeway between the garage and 4-square part of the colonial, so I think due to the useful square footage, my place is worth a little more than his, but for this exercise, I'll assume it is the same percentage of Zillow's estimate.

I just ran the numbers and that figures out to being about $500 less per month if I bought at $500k today, I would have had another 5% saved to bring it to a 10% down payment and the rates are slightly better, I'm assuming 6.25% which would have left me with just a 10% piggyback, I'm assuming the prime rate is 8% or close to it...

Now if I had any brains, I would have refinanced at 5.75 earlier this year, but I was pretty comfortable that the FED would have continued lowering rates to make a softer landing with housing and to have prevented this current situation. The FED was wrong and I bet he would have done what Bill Gross advised... Anyway, that is part of the reason why I am always saying to not underestimate the lack of rationality in the market.

$500 a month of savings, that's a big deal. Again, I think my place is worth a bit more than the neighbors so the difference would really be close to $50 a month savings. In which case, it would be a no brainer that I was right to buy.

I'm trying to answer this in a way that is useful to everyone. To me, I love my place and there would be no way I'd sell it for less than I paid unless I was totally desperate. If I did sell it, I'd have to face the fact that not many buyers are out there now so even though it is worth it to me, I'd be at the mercy of what someone would pay for it. I look at asking prices of other houses and I don't see any advantage of making a trade right now.

However, I almost bought another house prior to the one I got. I had offered $515 for the place and had some trouble with the negotiations, so I let the offer expire. This place zillows at $461k and if you take 87% of that number it is only $401k.

So look at how those scenarios played out, one $514k house (2006) is now worth assume 87% of zillow's estimate of $461k or $401k (2008), and by spending a little more in 2006 to get a house that was almost 1,000 square feet more for $543k (2006) this place zillows at $575k and if you take 87% of that it is $500k. So, basically if I made the prior deal, I'd be screwed, and because I got a very good deal, I bought a nice cushion to absorb quite a bit of the shock.

In the big picture, I was ready for the next chapter of my life. I've hosted two Christmas's, a Thanksgiving, some family parties, had family over for extended vacations and have gotten involved in the local community. My life is comfortable so I'm pretty happy.

What would have changed my mind is if I wasn't so spatially constrained in our old place in Waltham. We got a large sized dog and we had to pay for doggie day care at $25 per day so there's my $500k; we have a dog door and electric fence... I came from a quiet suburb and it kind of wore on me to have a stop sign and street light every 100 yards. Although I loved the restaruants in Waltham, I was getting kind of old for the crowds except the local places with the karaoke I used to frequent, but driving through a pastoral area with cranberry bogs, horse farms, the ocean marshes and woods and lakes was more my speed. I say this because if your decision making surrounds fixing a cramped situation, there may be more comfortable rental options that would tide you over. I know my mental calculus isn't entirely balanced with the numbers and I may be rationalizing stuff emotionally, which might naturally happen, but for whatever reason, my wife and I are happy with our decision. If we bought the other place, we'd be pretty pissed I'd have to say.

NOW, moving forward is another thing. In a year this thing might blow over or blow up. I might be crying like a baby in a year.

Looking for a place put a lot of strain on my life, so these sorts of forums are very good to help people weigh what is important for them and apply what they hear based on their own strategy...

[john p]

Susan: [telling Ricky why he should get back into racing]

It's because it's what you love to do. It's who you were born to be. And here you sit--thinking! Well, Ricky Bobby is not a thinker. Ricky Bobby is a driver. He is a doer, and that's what you need to do. You don't need to think. You need to drive. You need speed. You need to go out there, and you need to rev your engine. You need to fire it up. You need to grab ahold of that line between speed and chaos, and you need to wrestle it to the ground like a demon cobra. And then, when the fear rises up in your belly, you use it. And you know that fear is powerful, because it has been there for billions of years! And it is good! And you use it! And you ride it; you ride it like a skeleton horse through the gates of hell, and then you win, Ricky! You WIN! And you don't win for anybody else. You win for you, you know why? Because a man takes what he wants. He takes it all. And you're a man, aren't you? Aren't you?!
Ricky: Susan, I've never heard you talk like that... Are we about to get it on? Because I'm as hard as a diamond in an ice storm right now.

[john p]

http://www.youtube.com/watch?v=7fR0Hb6yc6k&feature=related