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Housing market in 2010
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melonrightcoast



Joined: 22 Feb 2009
Posts: 236
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PostPosted: Sun Jan 10, 2010 4:56 pm GMT    Post subject: rent vs. buy 2010 Reply with quote

Quote:
...$2.5K/mth renting vs $5K/mth to own the same pad...


This is a no-brainer, I wouldn't buy either. But how about our specific situation, where our house would rent for between $2200-$2700/mo and our PITI costs are $3150/mo? This does not include the tax break on the interest. Even at that $ difference, we probably wouldn't have bought if we didn't have almost school age kids AND we really wanted to buy AND the house was exactly what we needed/wanted AND it was in our price range (~4x income). Our previous rent at a newer apartment was $1925/mo, for less than half the square footage.

I think it was admin that said on one of these threads that the rent to buy ratio is getting closer, and I agree, as long as you factor in a 20% down payment.

I'm still a bear on housing, as I think that the fundamentals (specifically median income vs. median sale price) point toward further price declines. But then you throw in the wild cards (gov. intervention, foreign debt holders, terrorism, natural disasters) and I have no idea what that mix will do to housing prices.
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melonrightcoast



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PostPosted: Sun Jan 10, 2010 5:11 pm GMT    Post subject: addition to previous post Reply with quote

i should have said "...AND we really wanted to buy" FOR THE LONG TERM

Unless one has money to burn, I don't think buyers should be buying a house right now unless they can live in it for 10+ years.

And I should probably add that buyers have sufficient cash savings to last at least a year being unemployed.
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PostPosted: Sun Jan 10, 2010 7:42 pm GMT    Post subject: Reply with quote

Quote:
And I should probably add that buyers have sufficient cash savings to last at least a year being unemployed.


Well the above is mission critical. Do people, in general, have enough savings or stock holdings?

I guess the way I view it is that the prudent down payment, ~$80-100K, is actually 2 or more years of living expenses if one's out of a job. Now, if that's tied up in a property, it becomes inaccessible equity and if we're in a decade long bear channel, then banks won't be issuing lines of credit against it, for future hardships.

Thus, the average new homeowner needs twice the down payment, to be able to get into a home, and still have enough to whether the tumultuous job market. I think that's asking a lot given the current prices for real estate.
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melonrightcoast



Joined: 22 Feb 2009
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PostPosted: Sun Jan 10, 2010 8:28 pm GMT    Post subject: Reply with quote

Quote:
Thus, the average new homeowner needs twice the down payment, to be able to get into a home, and still have enough to whether the tumultuous job market. I think that's asking a lot given the current prices for real estate.


I agree. However, people need to realize that they cannot, and more importantly, should not, rely on credit (especially *gasp* home equity) to get them through difficult times. Until more buyers start realizing this, or it is forced down their throats by the banks as is currently happening, then buyers will continue to use most-to-all of their savings as a down payment.
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PostPosted: Mon Jan 11, 2010 2:10 pm GMT    Post subject: Reply with quote

Just a bit of a response -

1) I am not a frustrated/confused seller/buyer or a broker (very thankfully). I am a fund manager. I relocated from London in 04, looked at the market and decided to rent and was bearish on the housing market until last year. Bought late last year and will not consider buying/selling for a long time.

2) I think we cannot categorize people as permabear/bull simply because of the conviction of their call or tone of their writing. My way to detect permabear/bull is to see if they can come up with (similar to what admin already did) scenarios that will break their thesis. If you cannot find a realistic scenario that will make your "thesis" break, then there is a problem.

3) I am not terribly bullish about the market, and for the record I believe it's impossible to forecast market movement short term. But I do think 15%-20% drop is a very bearish case.

I remember Prof. Rogoff from Harvard had an interest study in Dec 08 about financial crises, which examined all housing related crises ever recorded both developed and emerging countries. The average peak to trough price decline is around 35%, duration about 6 years. The closet comparable to US is I think 90s in Japan which declined 36-7%. Case shiller 20 home index dropped around 33% peak to trough, entering 5th year.

All I am doing here is to put the current crsis in historical perspective. If we think the housing market will drop another 20% next year, peak to trough it will make the current crisis around 10% worst than the Japan bubble (the one that at one time the value of Japan Palace is higher than the whole California). I am not saying it's impossible, but that will be a very very bearish case. Almost Armaggedon-type bearish. Trying not to sound like an alarmist, but most people in MA do not realize how big the fall we already had and how close we were in falling to the abyss in 2008. If market does drop another 20%, the problem will be much larger than you think (think Geopolitic tension, government default possibility, financial system collapse again, etc) and the value of housing will probably not a concern anymore.
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melonrightcoast



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PostPosted: Mon Jan 11, 2010 2:21 pm GMT    Post subject: Reply with quote

Quote:
If market does drop another 20%, the problem will be much larger than you think (think Geopolitic tension, government default possibility, financial system collapse again, etc) and the value of housing will probably not a concern anymore.


I believe this is why the fed. gov. will do EVERYTHING in it's power to keep home prices from declining further. Too many things are riding on high housing prices (baby boomer's retirement, solvency of banks, paying for college, keeping people in the work force as indentured servants) for the fed. gov. to allow prices to continue to fall. This does not mean that all their intervention will work, and if it doesn't, then all the scenarios you listed, and possibly worse, will likely come to fruition.
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PostPosted: Mon Jan 11, 2010 2:37 pm GMT    Post subject: Reply with quote

CL wrote:

I remember Prof. Rogoff from Harvard had an interest study in Dec 08 about financial crises, which examined all housing related crises ever recorded both developed and emerging countries. The average peak to trough price decline is around 35%, duration about 6 years. The closet comparable to US is I think 90s in Japan which declined 36-7%. Case shiller 20 home index dropped around 33% peak to trough, entering 5th year.


What happens if you normalize the declines by the run-ups that preceded them (inflation adjusted, of course)? Judging from Shiller's graph of US prices from 1890 - now, the run-up from 1999 - 2005 was far greater than normal. It may not be enough to say that the decline thus far has been about the same as other declines as a percentage of price because it may not yet match other declines as a percentage of the preceding bubble.

melonrightcoast wrote:

I believe this is why the fed. gov. will do EVERYTHING in it's power to keep home prices from declining further.


Assuming that's true, you need at least two important qualifiers: nominally and nationally.

- admin
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PostPosted: Mon Jan 11, 2010 3:13 pm GMT    Post subject: Reply with quote

Admin - sorry should write more clearly, but the % house price decline mentioned is already in real term in Rogoff paper, using local CPI as deflator. The CS % peak to now drop, in real term, should be around 33%-34% if I remember correctly from your post about real CS SFH data.

Looking at % of unwinding is interesting and probably a superior way, but will be hard to execute since not every bubble has a clear set off date (i.e. hard to define bubble start date) and defining start date may be arbitrary. Peak to trough is more comparable that way.
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balor123



Joined: 08 Mar 2008
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PostPosted: Mon Jan 11, 2010 3:47 pm GMT    Post subject: Reply with quote

melonrightcoast wrote:

I believe this is why the fed. gov. will do EVERYTHING in it's power to keep home prices from declining further. Too many things are riding on high housing prices (baby boomer's retirement, solvency of banks, paying for college, keeping people in the work force as indentured servants) for the fed. gov. to allow prices to continue to fall.


I think they won't let prices fall fast, not that they won't let them fall. It's going to become a battle between government debt and the housing market and I think government debt will win because, as I described elsewhere, you can fire government employees, trim social security, cut back on medicare, etc or you can let housing fall. Which do you think will be more popular?

That aside, not all housing rises and falls at the same rate and that which helps the market may not help Boston. Suppose, for example, that the housing credit were expanded from $8k to $20k while the mortgage rates were allowed to rise, which is likely to be much cheaper (bills vs trillions). Such a change would be great for most of the country but would primarily hurt NY and MA. CA and FL have already seen large declines and houses are cheap everywhere else so a credit makes more sense than an interest rate subsidy, I think because the latter is a direct subsidy for every home owner while the former is only directly for buyers and indirectly for owners (or in many states home builders).
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melonrightcoast



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PostPosted: Mon Jan 11, 2010 4:11 pm GMT    Post subject: Reply with quote

Quote:
melonrightcoast wrote:

I believe this is why the fed. gov. will do EVERYTHING in it's power to keep home prices from declining further.


Quote:

Assuming that's true, you need at least two important qualifiers: nominally and nationally.


Not exactly sure what you mean by this, but "everything" IS a bit vague Smile. Keeping housing prices up is essentially synonymous for keeping the banks solvent, keeping the baby boomers from falling into poverty when they retire, keeping parents paying (too much) for a college education for their kids, keeping people working to pay their large mortgages, and keeping consumers consuming. As many people have said, it is a house of cards. If housing prices continue to fall, then so does the rest of our economy, which is what the US society is all about.

What do I think the US fed. gov. will do to keep housing prices up? I think the tax credits for home buyers will be extended/reinstated if home prices do not stabilize, and the same with Treasury purchasing MBSs to keep interest rates down. I think the US fed. gov. will continue to do this, even if the dollar is about the collapse and/or we default on our debt. Unemployment insurance will be extended to keep people paying their mortgages. More "creative" ideas will emerge, like the one where homeowners can rent their foreclosed home back from the bank. Anything to keep the banks from having to write down their bad debts. Seriously, if the major banks have not been declared insolvent or made to take a serious hair cut by now, over a year after the financial meltdown, AND after a change in fed. gov. leadership, I don't think they'll ever be expected to...unless there is another financial meltdown. And I think housing prices, though one might argue indirectly, will influence diplomacy and trade negotiations with other countries (i.e. steel tariffs on China helps keep US steel industry going keeps people employed, keeps people paying for their mortgage). And I think it is entirely plausible that we'll have a large-scale war at some point, as we did after the Depression.

Just MHO Laughing Laughing
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PostPosted: Mon Jan 11, 2010 4:29 pm GMT    Post subject: Reply with quote

melonrightcoast wrote:
Quote:
melonrightcoast wrote:

I believe this is why the fed. gov. will do EVERYTHING in it's power to keep home prices from declining further.


Quote:

Assuming that's true, you need at least two important qualifiers: nominally and nationally.


Not exactly sure what you mean by this, but "everything" IS a bit vague Smile.


I meant that prospective buyers in Boston should not assume that government intervention will make now as good of a time to buy as any. By "nominally", I meant that if they do attempt to keep nominal prices from falling further, that may require high inflation. Flat nominal prices when inflation is at say 10% will make for poor real returns. By "nationally", I meant that if The Fed wants to do everything in its power to stop further price declines, it will target prices at the national level - it won't intervene on behalf of local markets if most loans have stabilized nationally.

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Renting in Mass



Joined: 26 Jun 2008
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Location: In a house I bought in December 2011

PostPosted: Mon Jan 11, 2010 4:44 pm GMT    Post subject: Reply with quote

I'll cop to being a permabear if we define it as someone who's been bearish on housing since 2005. Of course we'll need a label for people who weren't bearish over that time frame. I propose permawrong.
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Renting in Mass



Joined: 26 Jun 2008
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Location: In a house I bought in December 2011

PostPosted: Mon Jan 11, 2010 5:12 pm GMT    Post subject: Reply with quote

Here's some red meat for my bearish breathren Wink

http://www.ritholtz.com/blog/wp-content/uploads/2010/01/EMPLOYMENT-RATE-58.2.png

http://www.ritholtz.com/blog/wp-content/uploads/2010/01/PERCENT-OF-UNEMPLOYED-27-WEEKS-+-40.png
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melonrightcoast



Joined: 22 Feb 2009
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PostPosted: Mon Jan 11, 2010 7:50 pm GMT    Post subject: Reply with quote

Quote:
admin wrote:

I meant that prospective buyers in Boston should not assume that government intervention will make now as good of a time to buy as any.


Very true. That's why if a buyer REALLY wants to buy right now, they better be in it for the long haul AND be financially prepared for some craziness.


Quote:
admin wrote:

By "nominally", I meant that if they do attempt to keep nominal prices from falling further, that may require high inflation. Flat nominal prices when inflation is at say 10% will make for poor real returns.


I agree, especially with the inflation bit. A primary residence should not be viewed as an investment, but as HOUSING. The renting vs. owning cost comparisons really come into play with this.

Quote:
admin wrote:

By "nationally", I meant that if The Fed wants to do everything in its power to stop further price declines, it will target prices at the national level - it won't intervene on behalf of local markets if most loans have stabilized nationally.


I don't know about that. There is a national reason to do so, and it is the major national banks. An example of this is recourse states vs. non-recourse states. Price declines in non-recourse states (CA, FL, TX) are (generally) much higher than in recourse states, and that cannot be good for the national banks' bottom lines. I wouldn't be surprised if there was some sort of federal legislation/law superseding states laws about non-recourse laws. Or at least some attempt by the banks to do so.

Additionally, I read an interesting article about how bulldozing entire neighborhoods in cities like Detroit that have half their population and economy compared to their height. Instead of blighted, crime-filled neighborhoods with cheap houses, bulldoze them and build parks and green-ways for the current population. Decreasing housing supply, decreasing crime, increasing parks ... sounds like a recipe for increasing housing prices to me. Smile I can see the fed. gov. getting involved in the form of "grants" or "incentives" to the local governments.

I know this makes me sound like a housing bull, but I'm not. I've just been trying to understand WHY the government is blatantly trying to keep housing prices up. Now that I think I understand why (collapsed economy and political instability), I truly do not think there is much the fed. gov. will not do to keep the house of cards standing. If they do not try, then the outcome is a collapsed economy and political instability: the world as THEY (banks and fed. gov.) prefer it will be "damaged". So, they will try to keep the house of cards propped up as long as they are able. They might fail to keep house prices up anyway, and then we have another financial crisis, and a political crisis.
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PostPosted: Mon Jan 11, 2010 7:55 pm GMT    Post subject: Reply with quote

Quote:
Trying not to sound like an alarmist, but most people in MA do not realize how big the fall we already had and how close we were in falling to the abyss in 2008. If market does drop another 20%, the problem will be much larger than you think (think Geopolitic tension, government default possibility, financial system collapse again, etc) and the value of housing will probably not a concern anymore.


I think the region which has experienced a type of housing Armageddon was central valley CA along with downtown Miami and Vegas. In contrast, the Boston area has been relatively stable the whole time. Now, if you contrast eastern MA with let's say upstate NY, Albany to Buffalo, Boston has actually never experienced a true economic doldrum based around the losses in manufacturing, high local/states taxes, and combined with a multi-decade flat housing market. Upstate NY has had all those things and so you see houses, circa $90-120K, in every city across the upstate. Today, the fundamentals of the Boston area are closely mirroring upstate NY with high taxes, low investment in infrastructure, stagnating large tech (EMC, Boston Scientific), and more and more of our corporate mainstays (Gillette, Reebok, Fidelity, etc) shrinking or packing up for greener pastures with a few MIT startups near Kendall Sq expecting to re-invent to state (read the history of DEC, Polaroid, Lotus, etc).


So with the above in mind, perhaps this region isn't out of the water just yet. Soon, the housing markets will start to re-collorate with an authentic job market so it might actually be a real bottom for Buffalo/Rochester NY or Ontario CA. And as for the coastline, perhaps from Baltimore to Wilmington to Philly. MA, however, needs the govt or health care industry to mop up all the unemployed as MIT startups basically hire recent MIT grad students and a pool of experienced professionals from the Kendall circus while the principals start to partner up with an offshoring company in east Asia.
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