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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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 Posted: Sun Apr 06, 2014 5:52 pm GMT Post subject: Of course there is little chance of Big Price increases |
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Interest rates hit their low and have been bouncing up.
Prices of home are driven by peoples ability to borrow and we just passed through a low of a lifetime.
I agree there is a good chance inventory remains tight. People living in homes they can't really afford who should have been foreclosed on and bail out programs like HAMP.
Hard to know what a fair value is for real estate when you have low inventory.
Don't mean to sound like a commercial - sadly people are over loaded with commercials from real estate lobby or the mutual fund lobby. I'm just passionate about people mis-led by Wall Street and Real Estate.
kind regards. |
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Richthofen
Joined: 02 Apr 2014
Posts: 69
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| Posted: Sun Apr 06, 2014 6:54 pm GMT Post subject: |
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"The 'best case' for prices is that we have slowly growing prices with slowly rising interest rates in a moderately recovering economy. "
I just can't see that. I feel like we're right now at a peak in affordability. If interest rates continue to rise, doesn't affordability continue to tank? Has there been a period of rising interest rates combined with rising home prices?
Even though so much of the market is now investor driven, or cash buyer driven, a majority of the buyers need mortgages. If interest rates go up they can afford a smaller mortgage than before.
Also, if the market is recently filled with cash buyers, and prices level off or decline, it feeds into itself by scaring away all that money. It's why none of the 'permanently high plateau' stuff came true in 2007.
Housing is a momentum play now, like the stock market. It's what monetary 'magic' from the Central Banks does. It's a slow momentum though, because it takes months or years for price data to filter out there.
Eventually, the economy will go into recession again. |
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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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| Posted: Mon Apr 07, 2014 12:29 am GMT Post subject: Real estate momentum - just like the 1980s |
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Consider what happened in the late 1980s. Real estate contunue to increase in value as interest rates rose and then one day the music stop. A real estate recession just appears and catches a lot of folks 'with their pants down' and their rear ends exposed.
Here is a graph of Home prices vs Mortgage rates - notice once real estate prices stall the only thing that got prices stabilized and going again was falling mortgage rates (9% down to 7%)
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu Apr 10, 2014 2:59 pm GMT Post subject: |
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@Richhofen If you believe everything you wrote above, then why are you even agonizing over whether to buy ? It would be a no brainer to wait.
| Richthofen wrote: | "The 'best case' for prices is that we have slowly growing prices with slowly rising interest rates in a moderately recovering economy. "
I just can't see that. I feel like we're right now at a peak in affordability. If interest rates continue to rise, doesn't affordability continue to tank? Has there been a period of rising interest rates combined with rising home prices?
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Two things: First interest rates don't rise for no reason. Rising interest rates mean an improving economy, which means more people can afford to buy at a given price level. The answer to your last question is 'absolutely'. For example, the period 2003-2006 which was the sharpest run up in the bubble had rising interest rates. I suspect this is the norm in about the last 20 years.
Second, in a rising interest rate environment you have tighter supply, because people's current mortgage is better than the one the buyer would get. So all else being equal the house is worth more to the seller than the buyer. You see that now with just a small increase in rates. What that means is that even if affordability went down, prices could still rise.
| Richthofen wrote: |
Eventually, the economy will go into recession again. |
Maybe, maybe not. Up until about 20 years ago, most recessions were caused by the business cycle, aka the Fed not being able to control inflation precisely enough, and having to overshoot on interest rates.
Since about 20 years ago, all recessions have been caused by other shocks: Asian crisis, tech crash, financial crisis. These are by definition less predictable.
Its not really clear to me that one should expect the first kind of recession in our current low inflation, sluggish economy. The second kind yes, b ut you can't really know when those might occur. |
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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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| Posted: Thu Apr 10, 2014 4:15 pm GMT Post subject: Interest rates and recessions |
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MPR,
You really crack me up. 
You did see the fantastic returns for the stock market over the last few years while the economy struggles to create jobs (u6 unemployment =12-13%). Today there are lots of signs the stock market is running out of steam. Especially for Massachusetts companies:
Today you can see the unraveling beginning by looking at specific stocks (remember, 70% of the stock market trading volume is done by computers and the computers will rotate their positions in order to keep making money...until one day when the rotation may stop working).
Companies that are unraveling include:
3D systems trades as DDD- was $97 per share and now at $51
Concur Technologies - trades as CNQR - high this year was $130, now $91/share
Yelp - hit a high of $101 and now trading at $67 (most of this collapse happened in the last month)
WorkDay a Boston area high flier - hit $116/share is now $77 per share
= it is dropping 7% today - this collapse has happened in the last 4-5 weeks
Fleetmatics Group - high this year $41 and is today trading at $29- down 25% this year.
OvaScience hit $16 share in the last year - today $9 - down 40% plus
How about InVivo Therapeutics Holdings- 52 week high was $6.20 and today is trading at $1.70
Idera Pharmaceuticals, 52 week high was $6.87 - today $3.71
I know I cherry picked these companies to make my case.
All is not well with our economy....and while these companies go down things like GLD or TGLDX will go up.
kind regards |
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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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| Posted: Thu Apr 10, 2014 6:19 pm GMT Post subject: Servicenow and IBB |
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Forgot to add...
ServiceNow - a Massachusetts high flier - trades as NOW- hit $70 March 4th and today trades at $51.22 - and the Biotech Indes (Biotech being the forever strong new industry that will protect Boston area real estate foreva - at least that's what the R/E bulls say) hit at high of $273 in February 2014 and today is $223 - 20% drop in Five Weeks - wow.
Be not afraid - this must be a buying opportunity of a life time....it's very possible that the Fed decides it is time not to taper and the bleeding may stop...? |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Apr 11, 2014 3:23 am GMT Post subject: |
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| Not sure what you point is FA. I didn't say anything about the stock market. |
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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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| Posted: Fri Apr 11, 2014 11:21 am GMT Post subject: Stock market and Real estate |
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MPR,
If you don't see that real estate and the stock market and the economy are tied to quantitative easing by the Federal Reserve then I really can't help you.
Have you notice some of the best gains in the stock market in the last two years while some of the best gains in real estate in the last two years..
Where the stock market goes is where your real estate market will go...
The stock market is one of the best barometers of where things are going in the future.....and the news so far this year is a wee bit scary.
kind regards. |
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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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| Posted: Fri Apr 11, 2014 1:04 pm GMT Post subject: Psychology impacts of stock market |
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A follow on to my explanation of why falling or flat stock market matters.
Hubris of participants in the real estate market is a psychological off-shoot from a rising stock market. People see their 401K balances and their taxable brokerage accounts going up it fills them with optimism. Many have no idea about why the stock market is booming or are aware of margin levels being at all time highs.
Sadly, humans don't try to understand the good fortune that they have been handed and just except todays present values as signs of the future.
This is why people can't sell at market peaks and they sell great companies when they experience a down turn before the big run up.
kind regards....and thank you for listening. |
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Richthofen
Joined: 02 Apr 2014
Posts: 69
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| Posted: Sun Apr 13, 2014 12:34 am GMT Post subject: |
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"For example, the period 2003-2006 which was the sharpest run up in the bubble had rising interest rates. I suspect this is the norm in about the last 20 years. "
And, as a result of that bubble, affordability tanked. The only reason that prices continued to rise post 2003 was that loan underwriting guidelines were essentially nonexistent. So in order for home prices to continue to rise while wages stagnate, we would have to see banks relax their lending significantly. We would need to see interest-only loans return. We would need to see 100% LTV again. Can that happen without the securitization market? Mortgage originations are tanking right now. 80% of originations come from the gov't sponsored entities (Fannie, Freddie, FHA), who aren't giving away crazy-pants loans.
So, in order for prices and interest rates to continue up in lockstep, we would need to see incomes rise to make the payment affordable. Incomes haven't. Instead, a large amount of all-cash investor buying has buoyed the market for the last 3 years. That money has slowed. (Whether it's good for America's residential communities to have investors instead of homeowners is another question. Typically owner-occupants have more invested in the community and make stronger communities).
So will wages explode upward (is there 'pent up' wage increases out there?) Will investors dump even more money in the market? Or will inventory dwindle until only one SFH per town is sold per year? |
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Former Arlingtonian
Joined: 23 Oct 2013
Posts: 141
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| Posted: Sun Apr 13, 2014 12:21 pm GMT Post subject: Cash buyers have always been 30% |
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Let's dig into the issue of the exploding number of cash buyers.
You need to do some investigation to discover there is a lot of leverage in many of these cash buyers, but they aren't gaining leverage through mortgage debt and are instead taking on business debt.
Check out how Waypoint Homes - a company that buys homes and rents them out - financed a all the homes they have used loans from Citi Bank.
http://online.wsj.com/news/articles/SB10000872396390443493304578034550531072048
Waypoint now trades as ticker SWAY. SWAY now has a $500 Million revolving line of credit and I'm sure Waypoint/SWAY is not the only investor using non-mortgage debt for leverage.
Here is the 10K for Starwood- Starwood has purchased 5000 homes around the US using loans.
BTW- cash buyers historically have always represented approximately 30% of residential real estate sales annually. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Sun Apr 13, 2014 3:01 pm GMT Post subject: |
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| Richthofen wrote: | The only reason that prices continued to rise post 2003 was that loan underwriting guidelines were essentially nonexistent. So in order for home prices to continue to rise while wages stagnate, we would have to see banks relax their lending significantly.
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No, not the only reason.
| Richthofen wrote: |
So will wages explode upward (is there 'pent up' wage increases out there?) Will investors dump even more money in the market? Or will inventory dwindle until only one SFH per town is sold per year? |
We haven't seen wages rise (much), but we also haven't seen interest rates rise much. If (remember this was a best case scenario) the economy continues recovering, then wages will rise more, interest rates will rise, and yes inventory will dwindle. So its numbers 1 and 3 in your list. I think you're overly focused on the investment cash buyers. That may be a factor in some areas, not where you've expressed a desire to live.
But, again, I ask, if you're so convinced of your view, why are you agonizing over whether to buy ?
@FA your thesis that real estate is drive by stock market movements is not borne out historically. It may be true over the very short term (a few months), when you get very sharp corrections, but some of the biggest run ups in real estate have been after stock market crashes. (think post '87 and 2000). |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Sun Apr 13, 2014 3:08 pm GMT Post subject: |
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BTW, areas where investor cash buyers play a big role are areas where it is cheaper to buy than rent. That's *why* those investors are buying the properties - to rent them out at a profit.
This can be the case in distressed areas. For example @FA's link is to a company that buys foreclosed homes. The whole reason @Richthofen is agonizing over the decision is that it is presumably not obviously cheaper to buy than rent in Belmont (the area mentioned). Correspondingly that isn't a distressed area - there are almost no foreclosures - and I wouldn't expect cash buyers to play a big role. |
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Richthofen
Joined: 02 Apr 2014
Posts: 69
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| Posted: Sun Apr 13, 2014 6:41 pm GMT Post subject: |
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| mpr wrote: | | some of the biggest run ups in real estate have been after stock market crashes. (think post '87 and 2000). |
That's because when the stock market tanks, the Federal Reserve has opened the liquidity spigots and knocked down interest rates. Falling interest rates increase the amount homeowners can borrow and still make the monthly payment. Low interest rates don't help borrowers (despite what the government will tell you), they simply let you borrow more.
The root of this behavior is that housing demand has been less than housing supply in Massachusetts for a long time. Every year the population grows. The housing stock doesn't keep up.
Check out 4 Oak St in Belmont. Sold in 1988 for $231k. Selling now for $800k. According to the CPI inflation calculator $231k in 1988 dollars would be $458k in 2014 dollars. Why is the house selling for twice as much? Hardly any new houses built, and in 1988 interest rates were 8.75% to 10.5%
http://www.zillow.com/homes/4-oak-st-belmont-ma_rb/
At $458k, This house would be $3,534.65 a month before taxes with 20% down at 9% interest rates. At today's 4.5% interest rates and a price of $819K, the monthly price is $4,171.91. So today's monthly payment is 18% more, but the owner is now being socked with twice the annual tax and has to come up with $160K downpayment instead of 80K. So we can see the power of interest rates. When rates did go up (in the last twenty-five years they've been trending down), the system broke. It didn't break all at once. Instead people got priced out, and lenders had to stretch their requirements gradually. Real estate moves in slow motion for the most part. Peak house prices were 2006, but the bottom didn't come in until 2009. And the new Peak took until 2013.
So, I repeat my question, how do prices go up if people aren't making any more money? Where is the money going to come from? It came from lower interest rates from the late 1980s on. It got extended-and-pretended throughout the 2000s. Now Wall St.'s money came in for a smash-and-grab from the real estate market. So, what's next?
And, to answer your question, I am agonizing over this because I can't provide the house my family needs. I want to provide a more stable environment, guarantee my son will go to school in a good neighborhood, and be able to make a 'home'. I would like to establish roots and participate with my neighbors in building a community. Hard to do those things when renting. Also, I've been waiting a long time. If you knew the price of a house was going to be $10 but you would be 70 years old when that price arrived, would you wait? |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Mon Apr 14, 2014 12:34 am GMT Post subject: |
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| Richthofen wrote: |
That's because when the stock market tanks, the Federal Reserve has opened the liquidity spigots and knocked down interest rates.
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Yes, thats a large part of it. But it doesn't change the fact that it hard to predict RE from the stock market.
| Richthofen wrote: |
So, I repeat my question, how do prices go up if people aren't making any more money? Where is the money going to come from?
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It comes because people *do* make more money (2-3% raises a year), and because supply will be constrained. As you remarked this is one of the main long term drivers in the Boston area anyway.
| Richthofen wrote: |
And, to answer your question, I am agonizing over this because I can't provide the house my family needs. I want to provide a more stable environment, guarantee my son will go to school in a good neighborhood, and be able to make a 'home'. I would like to establish roots and participate with my neighbors in building a community. Hard to do those things when renting. Also, I've been waiting a long time. If you knew the price of a house was going to be $10 but you would be 70 years old when that price arrived, would you wait? |
I understand the desire to own, but the idea that you can't make a 'home' while renting is a uniquely American one. Only in the US is owning a home regarded as a mark of superior moral character.
We're not talking about what happens when you're 70 years old but in the next few years. If you're convinced that prices will fall don't buy.
I think that's kind of a one eyed view, and its better to be realistic about the risks. Buying a leveraged asset like a house is never risk free. I'm trying to explain to you why I think, right now the risks are balanced. You might get slow steady price growth with a recovering economy and somewhat higher interest rates. I personally think that's the best case, and probably most likely outcome. I don't see big declines in the market without some kind of external shock. But external shocks do happen.
It seems to me that the bottom line is that you want the (emotional) security of owning without the financial risk. Well it doesn't work that way. |
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