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Are Homes now "Cheap"?
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balor123



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PostPosted: Wed Dec 30, 2009 3:05 am GMT    Post subject: Are Homes now "Cheap"? Reply with quote

Are Homes now "Cheap"?

Just another interesting article.
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admin
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PostPosted: Wed Dec 30, 2009 2:49 pm GMT    Post subject: Reply with quote

Yeah, this is what I've been saying. Monthly payments in isolation may be reasonable (nationally anyway), but tunnel vision on monthly payments is a mistake (and was one of the causes of the bubble in the first place). The abnormally low interest rates which support the abnormally high reach of current monthly payments also come with a higher resale risk, which isn't reflected at all when only monthly payments are considered.

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balor123



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PostPosted: Wed Dec 30, 2009 4:20 pm GMT    Post subject: Reply with quote

HGTV shows just how messed up the housing market is. Either the typical American now makes $130k or they're shopping based on monthly payment. Most of them only seem to only have 3 - 4% down as well and getting that seems like a big hurdle for them (last week I saw a couple who lived in their parent's basement for 1 year just to amass $10 - $15k. I'm seeing a lot of people who are stressed by small unexpected fees here and there. You'd think that someone buying a $400k house wouldn't have a big problem covering closing cost fees of a few thousand. That's only a few percent of the expected 20% downpayment.
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PostPosted: Thu Dec 31, 2009 2:36 pm GMT    Post subject: Reply with quote

Every time I'm around a television with HGTV on, I and up wondering and asking: what year was this filmed? Lending standards still seem way too loose. I do not understand how we are in a "credit crunch." There seems to be ample room for much more crunchiness.

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balor123



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PostPosted: Thu Dec 31, 2009 3:39 pm GMT    Post subject: Reply with quote

Me too. And it's usually surprisingly recent. Most of those I'm watching are now were made in 2008 or 2009.
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CL
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PostPosted: Mon Jan 04, 2010 3:11 pm GMT    Post subject: Reply with quote

I in generally agree with the observation that low interest rate leads to higher reach of housing with fixed monthly payment, which in turn leads to bigger re-sale risk, if rate spike up AND buyer purchasing power remains the same.

In general, mortgage rate has 2 components - existing short term rate (controlled by Fed), a time series of forward rate (controlled by market inflation expectation). So if rate goes up, it's either because inflation expectation is spiking or because Fed is raising short rate (which is probably due to inflation).

If we expect the rate to go higher because of inflation, it's very important to understand WHY inflation goes higher. Typically, rent-equivalent being the biggest component in the inflation calculation. Second is commodity price (which is cyclical and correlate to economic growth prospect). So it is hard to imagine inflation (thus rate) spiking up when these 2 factors are spiralling down. And if inflation is indeed up, that points to rent equivalent and commodity price is up, which seems to me as economy going up, which means buyer purchasing power/confidence to purchase should go up as well.

So in short, when inflation does come back, economy probably is recovering and thus one should not expect buyer purchasing power/willingness to purhcase remains the same.

BTW, I agree typically HGTV buyers are very agressive with their finance.
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PostPosted: Mon Jan 04, 2010 3:26 pm GMT    Post subject: Reply with quote

While inflation may be caused by (or at least correlate with) an improving economy, it may also be caused by expansion of the monetary supply. That is my concern, given the massive expansion that has occurred recently. We had stagflation in the 1960s through 1980s, with high unemployment and high inflation, so there is recent precedent for inflation not correlating with a strong economy.

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CL
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PostPosted: Mon Jan 04, 2010 4:00 pm GMT    Post subject: Reply with quote

Correct me if I am wrong, but I always thought the problem of 70s stagflation is due to supply shock (oil) when OPEC constrained supply, not expansionary policy?
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balor123



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PostPosted: Tue Jan 05, 2010 12:58 am GMT    Post subject: Reply with quote

It can be caused by any event which causes a sudden increase in the cost of providing goods. The price of many goods is directly or indirectly priced by oil so a rise in the price of oil increases to some degree the price of nearly all goods. Interest rates are similar to oil - the higher the interest rate the more expensive borrowed goods become, keeping in mind that people would still be spending the same amount of money in the end on a house but forking more of it over to the lender. In a normal market, mortgage rates would be determined by inflation but not in one where mortgages are completely nationalized, as we have right now. For the moment putting the government stamp on them seems to be appeasing people, as the Fed is serving as a machine that converts mortgage backs securities into treasuries.
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PostPosted: Tue Jan 05, 2010 4:37 am GMT    Post subject: Reply with quote

CL wrote:
Correct me if I am wrong, but I always thought the problem of 70s stagflation is due to supply shock (oil) when OPEC constrained supply, not expansionary policy?


My point was only that the 1960s - 1980s demonstrate that inflation need not imply economic growth. I didn't mean to imply that expansionary policy is the only mechanism that can lead to inflation in a stagnant economy.

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PostPosted: Tue Jan 05, 2010 2:13 pm GMT    Post subject: Reply with quote

balor123 - I agree with you that the housing market is increasingly socialized. US is the only developed country that is so heavily involved in housing market even before the housing crisis. After 2008, FHA got expanded, Fannie and Freddie got into government hands, Fed keeps buying MBS, direct tax credit, etc. It certainly helped arrest the housing freefall to some degree. But the unintended consequence for socialization is a disconnect between who gains (homeowners or potential homeowners, MBS holders, etc) to who loss/bear the risk (taxpayer, saver, USD holder/earner, etc).

My guess is given the huge exposure the current government (Fed, FHA, Fan and Fred) has to housing market, they simply cannot afford to let housing market die. Removing the cap on Treasury subsidy to Fannie and Freddie from 400 billion to unlimited on 12/24 is one example that they will be increasingly aggressive in preventing another housing freefall. Just think - who is the biggest loser if housing drops another 10% this year? It's not homeowner who probably still have the income to service the mortgage and generally not forced to sell. It's Fed (when MBS securities drops in value), Fannie and Freddie and state/local government (reduction in property tax). Who loses when government loses? Taxpayer. So if they succeed in propping up housing, homeowner wins, but if they fail, taxpayer will share the majority of loss. It's bad from a capitalist point of view but it has become more and more a economic guessing game than looking at fundamental analysis.

Admin - I agree with you inflation does not imply economic growth, and understanding what drives inflation is important. Tthe reason why I question expansionary policy is that expansionary policy is monetary which causes inflation (in cost of living) but also leads to asset inflation (ie. bubble) so in theory both will rise. But if it's due to oil shock, only cost of living will rise, asset price (other than oil which has to be imported) will not. That will suck big time.
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balor123



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PostPosted: Wed Jan 06, 2010 1:31 am GMT    Post subject: Reply with quote

Just because they cannot afford to let the housing market die doesn't mean that they can afford to fix it either. I don't see any policies implemented that fix housing over the long term.
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CL
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PostPosted: Wed Jan 06, 2010 12:46 pm GMT    Post subject: Reply with quote

What do you mean by "fixing housing" though? If you mean fixing equals letting the market force drives housing market, all the government needs to do is to withdraw policy from tax exemption to killing Fannie and Freddie, and let the invisible hand of market does it work. They can certainly do it but as you said, you cannot afford to.

My point is housing is increasingly driven by things other than fundamentals, government being the biggest wild card. It's just simply not a free market. As such, looking at housing through the narrow lens of price-to-rent and price-to-income is likely to miss the big picture (and probably frustrating when things don't add up).
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PostPosted: Wed Jan 06, 2010 1:48 pm GMT    Post subject: Reply with quote

CL wrote:
As such, looking at housing through the narrow lens of price-to-rent and price-to-income is likely to miss the big picture (and probably frustrating when things don't add up).


What else is there, though? If government manipulation is overriding the market, then there is no good metric for predicting where prices are likely to go. However, the metrics you mentioned are still useful in that they indicate where prices could go if the free market were to become the dominant factor again, willingly or not, and as such at least give you an idea of how much risk you're taking on personally. Also, the metrics won't be limited to that use forever because they will eventually reflect the new level of government intervention as these years get incorporated into the average.

This is also far from the first time that the government has increased its intervention in the housing market. It is possible that the current increase in intervention is merely a continuation of past trends, in which case the ratios may not need any catch-up time at all. Is the rate of increase in government intervention itself increasing?

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PostPosted: Wed Jan 06, 2010 4:16 pm GMT    Post subject: Reply with quote

Admin - to your first point, unfortunately not much. But I am not saying P/Income and P/Rent is useless. They are useful, critical even, in certain context, as with demographics, credit availability, etc.

What we do need to remember is all these ratios have assumptions embedded. They assume there is a instrinic normal level that the market will revert to. How to determine the "normal" level is the tricky part. A lot of people think 1. the market should return to a magic number (think in stock market, the P/E of 15, in housing, P/Income of 3), or 2. the market should return to historical level. First method is arbitrary and second method assume market norm as stationary. So both have flaws. Still useful, but not a golden rule, esp for short term price movement.

A bit of my personal view - I hate housing as an investment asset class. Price discovery too slow, opaque and transaction cost way too high. So instead, I would approach it from an consumer perspective, and it makes more sense to -
1. Acknowledge future house price (as with all asset price) is almost impossible to predict precisely
2. Buy attributes that don't depreciate (i.e. new kitchen cabinets depreciates, a good school system and close to public transportation don't)
3. Using fundamental analysis NOT to time the entry point or predict short term price movement (like 1-2 years) but to avoid really stupid mistake (like buying when the market is very obviously out of whack),
4. Lengthen your time horizon and ride out short term price movement.

Your second point - I think what government trying hard to do is to establish a floor. So I think government action is largely reactionary, and whenever there is a large price freefall, government will do whatever it can to arrest it. The larger the fall, the more agressive it becomes. As such, I think it takes the 15%-20%drop out of the picture. So the rate of government intervention is correlated with how sharp the "pain" it has to endure.
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