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From Boston.com site


Mortgage rates fell to a four-year low a day after the Federal Reserve cited a weakening economy in its emergency reduction of the benchmark overnight lending rate.

The average rate for 30-year fixed mortgages declined to 5.31 percent yesterday, the lowest since March 2004 when the Fed's benchmark rate was 1 percent, according to research firm Bankrate Inc.

"An increase in mortgage refinancings will eventually be a game-changer, turning the dynamic on mortgage payments into a positive from a negative," said Crescenzi at Miller Tabak, a securities firm that specializes in institutional investors.

Also, applications for US home mortgages jumped for a third consecutive week, an industry group said yesterday.

The Mortgage Bankers Association said its seasonally adjusted index of refinancing applications surged 16.9 percent in the week ended Jan. 18 to 4,178.2, the highest level since March 2004. The activity was up 92 percent since the beginning of November and more than offset a 4.6 percent fall last week in the index for home purchase applications to 439.9, it said.

Refinancings accounted for two-thirds of all applications.

The MBA's market composite index, a measure of overall mortgage loan application volume, rose last week by 8.3 percent to 981.5.

Homeowners will face more hurdles this time around in obtaining the loans, said Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Association.

"With tighter credit conditions we do not know how many of these applications will become loans," Brinkmann said.

[john p]

I just did a quick calc (very quick) to get a sense of this.

Look at the economic fault line due to the delta in jumbo rates for over $417k and those under... For a house that is only $25k more you have to pay about $450 more a month!

Compare these two current scenarios:

House cost $500k
5% down payment-$25k
80% loan ($400k) @ 5.25%
15% piggyback loan($75k)@6.75
mortgage payment- approx. $3,176 (before tax savings on interest shelter)


House cost $525k
5% down payment - $26,250
80% loan ($420,00k)@ 6.4 NOTE JUMBO AMT (ABOVE 417) CURRENT RATE IS HIGHER
15% piggyback loan ($78,750)@6.75
mortgage payment- approx. $3,618 before tax savings on interest

Now compare the $500k house back in late Fall 2006 (higher priced homes with higher interest rates). Assume 6.6% for main loan and 8.25%for piggyback, same breakdown as above - monthly mortgage $3,600k. So guy's a $500k home today costs you $422 less per month than if you bought in the Fall of 2006, just on interest rate alone.

NOW GUYS NOTE THIS: YOU CAN BUY MORE HOUSE FOR $500K TODAY THAN YOU COULD IN THE FALL OF 2006. Apples to apples- a $600k house in the Fall of 2006 is selling now for about $520k (SAME HOUSE).

If you could buy a $600k house in the Fall of 2006 with the corresponding interest rates back then (HIGHER) for say $520k today (slide under the jumbo amount with the 80%) with today's LOWER rates, you'd save about $800 a month!

I calculate $4,160 mortgage for the $600k house in the Fall of 2006 @6.4% for the big note and 8.25% for the piggyback. For the $520k house now, I calculate $3,350 for a mortgage payment using a 5.25% and 8% piggyback. (assume 5% down payment in both scenarios).

GUYS THAT IS LIKE A 25% PRICE CORRECTION!!!!

It get's better, people who recently bought will refinance to the lower, current amount. This gets a lot more folks into the game.

I don't know if these rates will last or if the FED will get back to business trying to fight inflation. If he let's inflation serve as a corrective measure, everything will be dilluted for a while...

[john p]

For the reasons I mentioned above, plus two years of salary increases, I think Merrill Lynch is wrong and if Bernanke drops rates again, we will see a slight uptick in prices this Spring 2008.

I feel totally alone out here on this limb, and I swear, I have nothing to gain one way or another. I guess I'd be happy for rates to lower a bit more and I'd refinance, but I think I must be crazy to think this, but that's where my head's at for some reason.

Underlying this is that the Jackass (joe six-packs, Tommy and Gina's) is/are not as dumb as the elites think; they are my people and I believe in them, and in fact, the elites are the idiots. The elites think that the joe six-packs caused this problem with their "Irrational Exhuberance", but the truth is that the FED did by dramatically lowering rates. And screw Europe, nobody is going to blow down the USA. You can huff and puff, but don't for a second think that Tommy and Gina USA are not worth investing in. We'll take the Pepsi Challenge any friggin day.

The only wildcard left is the realization that we all have to face in that we can not have: Guns, Butter, Nation Building, and Tax Cuts at the same time.

[admin]

[john p]

I know there are widespread abuses, but the regular folk were more on the receiving end of things in my view. It wasn't regular folk that decided to drop rates to unprecedented levels, it wasn't regular folk who invented crafty new methods of creating mortgage deals, it wasn't regular folks who bundled these mortgages into bonds, it wasn't regular folks that thought it was ok to let this industry be unregulated. This is the context they were asked to operate in. Sure, people like me waited and rented in a rat hole apartment and didn't take the bait, but most had to get on with their lives and they had no idea when and if things were ever going to be possible.

You introduced me to the term "moral hazard" http://en.wikipedia.org/wiki/Moral_hazards
just flip this in your mind to the responsibilities of the wealthy and banking elite. They are getting bailed out. It's kind of like how if the only way to win a contract is to tell white lies, the rewards will go to those that lie. Pretty soon, IF YOU DON'T LIE, you'll go hungry. This is Big Dig, Casino culture 101.

My belief is that the elites are lightweights and that a minority of regular folks are as well, but the majority of our people, our constitution is load bearing. I think the advantage that regular folks have right now is that we know other stand up people that belive that they can generate the abundance necessary, and the elites only know themselves and so therefore are fearful because all they see are lightweights, rodents that got caught when the lights went on.

[admin]

[admin]

To the original poster...

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- admin

[JCK]

[john p]

check out these two :

First one Hanover, MA, $550k, 5B, 2.5BA, 3,416 sf (assessed at $580k)

http://www.realtor.com/ ...truncated...

Second one Hanover, MA $730k, 4B, 2.5BA, 2,444 sf (assessed at $524k)

http://www.realtor.com/ ...truncated...

Now this is kind of crazy. Same town, same 4 square colonial, comperable neighborhood. Why on earth would someone pay $180k more to have 1 fewer bedroom and about a thousand square feet less?

You have to expand your hunt above and below your "price range" and find a winner like the first and with the current rate situation, you can really do pretty well right now. Now the cheaper house has a "disclosure" on the listing "All offers will be considered;subject to bank approval.....". Sounds like a motivated seller to me. So say you get this place for $500k; a much smaller house is selling in the same town for $229k more.

If you've been patiently waiting and you can put these portfolio of hunting skills together, I think you can score pretty well in today's market.

JCK: I know there are mixed reports out there, but if you were a young couple with good credit and were able to put 5% down and had cash reserves for a 8 month emergency fund and to cover closing costs and modest home personalization, would you be thinking of buying, and if so what type of low-ball situation would you be looking at in aggregate...

Admin et. al: If you think I'm ready for a straight jacket, please shoot me straight with what I'm weighing too much. In the past, you said that I overweigh interest; I get that, but this is a big drop on the heels of two years of price drops and salary increases. Now many could argue that the actual cost of living has outpaced salary cost of living increases and that property taxes are going up and younger people have more student loan debt. I buy all of that, but am not as sensitive to the extent of it. I think the biggest fear right now and the reason to not buy, is the overwhelming sentiment that we are going to hit a recession. If you are in a stable situation, this is grist for the low-ball mill.

Editor's Note: This post was edited to abbreviate URLs which were widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URLs still point to the original destinations - only their displays have been shortened.

[admin]

Personally, I get the feeling that Merrill Lynch is overcompensating for being broadsided by the subprime implosion. Nobody appears to be taking their prediction seriously enough to trade futures based on it. However, oddly enough, Shiller himself said recently that he thought the futures contracts which bear his name were priced too optimistically.

John, one thing that I would take issue with in your analysis is that you are using two years ago as a baseline. Income increases since then have been meager, and in fact the official statistics had median income for the state declining in 2006, and that is even before adjusting for inflation. Data for 2007 is not out yet, but for the sake of argument let's assume that incomes increased, at least in nominal terms. Using the S&P/Case-Shiller Index for Boston, the price to income ratio had been over one standard deviation above the running average for the seven years leading to 2005 inclusive, and two years of modest price declines has not been enough to correct that.

I also do not think that a 25% reduction in payments is equivalent to a 25% correction, specifically because that conflates temporary interest rates with the long term value of the property. I realize that interest rate differences are only one contributing factor to your argument, though, and that another factor is that the same amount of money can buy a better place now and that the median and average are therefore distorted. However, the S&P/Case-Shiller Index corrects for precisely this by chaining together same home sales, and it is only down 6.42% from the peak, in nominal terms, here in Boston (I would normally adjust for inflation, but I'm just comparing it with your correction figure at the moment).

Another part of your correction factor is that it is based on the lower prices that people can attain now. I'm on board with that. This part of the correction would not have shown up yet in the S&P/Case-Shiller Index since it is constructed using past sales. To say that the correction has occurred and will just take time to show up in the sales data sounds reasonable enough to me. I think you are right and it may be a decent time to start low-balling based on where prices would need to be for market equilibrium and for personal financial soundness. I would just go into it with the expectation that it could take awhile since many sellers and agents are still adjusting to the new reality.

- admin

[john p]

I think you're spot on.

You have to admit, if a new buyer goes through my thought process, they might get that initial knee-jerk reaction; I mean that's the definition of a "stimulus". In the second level of my analysis, when you see a house selling for $180k less than a comperable, or should I say a smaller comperable, that's a real motivation to pull the trigger, especially if people have been in a holding pattern and waiting for the stars to align. Also, I'm slammed at work and we're hiring, so I guess I'm in a bubble about growth so regardless of what an individual's situation you're right, you need to benchmark against the average...

But admit it, when you look at the current high end and low end of a price range for the same type of house in the same town, and then you layer in the interest rate delta from the more expensive when you're talking jumbo (over a point more), and the difference is huge. I mean run the numbers for the $729k versus the $550k. The $729 might be a jumbo situation and the $550k most likely would be under the jumbo amount after the down payment and possible piggyback... My point is, Shiller's Index is this black box that distills and filters and spits out a number and here is a small New England town and it's not like one house has a view of the ocean or something and the price range for the same type house is $200k. I mean don't you think it is dizzying for people to in their minds juggle the Shiller/Macro thinking with the boots on the ground reality (I can't believe I used that ridiculous analogy...)

What' you're saying is really like really judging the depth of the water in the pool before you dive in....

If you want to talk people down off the diving board because you think the water is too shallow or at least get them to pause and consider, the P/I ratio needs to be where in your guess? What other criteria or key inflection points do you think we need to align with?

[admin]

Speaking to the two example properties that you posted, I think it's important to note that the savings you are referring to is for the first home versus the second, and not the first home versus market price. The second home is priced way above the assessed value and the seller is probably either on a fishing expedition or living in a bubble. The first home, on the other hand, is priced at a decent discount to assessed value. I think you are right to point out that the first seller may be motivated and you could get a good deal there, but using a mis-priced equivalent for comparison does overstate the savings.

[john p]

Totally solid points.

I think the biggest take-away is to not go crazy patting yourself on the back by benchmarking against something wildly overpriced. It's a great thing to brag about at a bar, but in the end there are a lot of alternatives and they seem to be constantly going up and down with value and merit...

The other point about one standard deviation of the historical average: What do you think is the historical average mortgage rate? If we were at a historical norm of percentage of household income needed to service mortgage payment you wouldn't be swayed a little? I know, I'm a broken record with the interest, but I just don't see interest rates hitting like 9 percent, drastically dropping prices and then within a couple of years nosediving to 4% so you can refinance. That's a risk to hold out for that.

The other thing is that sometimes you have to play the hand you are dealt to the best of your abilities and if being flexible and renting is within your range, it might work out ok.

The last thing I'd say is that what matters are the other buyers looking at the same neighborhoods you are. If they are in your age and economic cohort, that's ultimately going to be the group that will end up with the properties, so the numbers you choose need to align with those properties and that profile buyer...

[admin]

[JCK]

I've been thinking a bit about the relationship between prices, the decision to purchase, and interest rates. I don't think you can simply ignore it as a factor, but it really depends on how long you expect to live in whatever home you purchase.

I agree with admin that the risk with interest rates is on the upside here, simply based on the historical data.

If you're going to stay in a place for a long time, and can get a good deal now, I think there's a good argument to locking in the low rate, rather than waiting to see if prices will drop.

Admin, if you think you're going to be concerned with resale value in the medium term (5-7 year timeframe), I agree you're better off waiting to buy. Prices are likely to trend lower for a while, and, because you may move again at some point, the value of a low rate is somewhat limited.

On the other hand, if you're making a purchase that you plan to stay in for longer (10+ years), then the lower rate has a lot more value. Over the longer term, your house will likely rise in price, and having your debt locked at a fixed rate is a huge bonus.