July RMLS Market Action Part 2
By Charles Turner
Tom pointed out that I hadn’t posted the above with the inventory numbers last week. I’d planned to this morning but the day got away from me (I did change the poll. Do open houses work?).
So what do we think of the above graphic from RMLS Market Action July? Numbers are worse in almost every category but I don’t see that the sky is falling (even if the weather does suck for August). You’ll have to go to another Realtor if you want double digit appreciation forecasts (found one last night) but the train appears to still be moving forward. We question how much stock we can put in these numbers every month but they are the best consistent numbers we seem to be able to agree to argue about.
Thanks for all the comments on previous posts. They’ve remained civil and well thought out.
The August numbers will be interesting and more telling. The latest round of tightening started about the last week of July and into early August (and continues). Some big lenders (like AHM) are now gone. Lots of people who would have had no problem getting a loan just a few months ago are now finding it difficult – higher FICO requirements, more money down required, etc.
Today Fannie Mae skipped it’s August debt offering:
“Though mortgage lending via the quasi-governmental agency appears to be the only game in town amid [a mortgage-backed security] investor boycott, this news suggests that demand [for] even high-rated mortgage paper is scant at the moment and impacting funding plans at the agency,” said an entry on Action Economics’ Web site.
From the MarketTicker blog:
“For the un-initiated, Fannie and Freddie both are reliant on securitization to clear the mortgages held on their books. If that conduit collapses then so does the ENTIRETY of the conforming loan marketplace for US Homeowners!”
Doesn’t sound like a positive sign…
I dunno, Charles, I see the sky not only falling but that train jumping the tracks.
Do you really think a 100% increase in 9 years or less is sustainable? Do you really think a region with a 46K median income can support a starter home price of 325K?
No, I don’t think that 100% increase in 9 years will be repeated but I don’t think the market is going to give much, if any back. So I guess it follows that I think the $46k median income can support a median $300k market.
Hmmm. Countrywide next story after commercials on KGW….
So I guess it follows that I think the $46k median income can support a median $300k market.
It could support it back when all the looney-loans were being made that allowed that kind of leverage. Those days are now over. [Actually, I think the median is $51K now, but that extra $5K/year doesn't help much when it's a $300K house]. We’ll see prices move more in line with income. For Realtors(TM) such as yourself, Charles, the quicker that happens the better because it’s better to get a commission on a $250K house sale than to get no commission on a house priced at $300K that’s languishing on the market for many months.
No, Charles, I’m afraid the die is now cast. The easy money that supported the rapid price appreciation is now gone, so we’re back to incomes having to support prices just like it was in the olden days (well, till the mid-90s at least). The only way that changes is if Bernanke starts dropping free money out of helicopters and thus lives up to his nickname – possible I suppose, but I wouldn’t bet on it. The market appears to have completely lost it’s taste for mortgage backed securities (even for the prime stuff, it would seem) and it’s going to take a while for it to get hungry for that stuff again.
BTW: anybody try to get their money out of Wells Fargo today? Heard something about a computer glitch that’s given them trouble for 24 hours now, just wondering if that’s also the case here at Wells Fargos in PDXville. The timing seems, well, I don’t want to get too tinfoil-hat here, but it seems a bit suspicious.
I tried to put money into my local Wells Fargo today. Even that was hard; it was system wide. They were very upbeat by what was going to be a very long day. Apparently their system updates over the weekend had issues.
I just can’t see prices falling like that. Maybe your crystal ball is clearer than mine. Anybody have the figures of which is increasing faster: the number of houses in Portland or the number of people qualified/who want to buy them?
I have always been interested in actually putting this in mathematical terms:
“…because it’s better to get a commission on a $250K house sale than to get no commission on a house priced at $300K that’s languishing on the market for many months.”
It’s clear that some commission is better than no commission, but if we assume that the owner actually wants to sell, then no sale is worse than a sale. The question here is pricing at a point where both parties are happy. I understand there are costs associated with any listing, thus the agent wants to make sure that there is at least some chance for a sale.
It is most often the case that the agent would be willing to price lower than the owner, but this must be tempered with what other agents are suggesting. If an owner is not careful, then it can be a contest of who can tell the biggest lie. Then once the listing is locked in, if the seller really wants to sell, then they must lower the price. Thus the agent captured the business by over-pricing the property.
At the same time I note that no sale => no commission, so the agent needs to balance the suggested listing price with both the chance of losing the listing as well as a reasonable chance of sale.
One last consideration: The discount rate of the seller versus the discount rate of the agent. If the agent’s discount rate is too high, then he is likely to price the property too low. If the seller’s discount rate is too low, then he is likely to ask too much, as time is not really an issue.
I have spoken with some sellers who suggest, “I will just wait until I get the price I want…” That person’s discount rate is what I would term “too low.”
One day I will formalize it to a mathematical system where we can actually analyze the player’s actions.
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On a different topic-
TiP, what do you expect to happen to real estate prices if we are to enter an inflationary period? What about a deflationary period?
“Anybody have the figures of which is increasing faster: the number of houses in Portland or the number of people qualified/who want to buy them?”
Isn’t this reflected by looking at inventory numbers? In the last Inventory has doubled and the amount of inventory covers a much greater time, given past sales history.
Based on inventory, it looks like the number of available property is increasing faster than buyers. In fact, based on “closed sales” data above, maybe the number of buyers is decreasing!
“Do you really think a 100% increase in 9 years or less is sustainable?”
Let’s take out the “or less,” so we have a specific point.
Personally I do think a double every 9 years is sustainable. By the “Rule of 72,” a doubling every 9 years is the same as an approximate 8% annual return (72/9=8). The stock market has returned about 10% historically speaking (This depends on which one of the market studies you want to use).
If you ask me if Real Estate can produce returns similar to the domestic stock market over the long-run, I would suggest yes. However, it’s a bumpy ride sometimes… …and I suggest that buying low and selling high is a better strategy than buying high and selling higher…
Maybe someone can cite some good real estate studies about historic returns?
Previous post on historic returns.
Some of those high growth periods were inflationary meaning incomes were rising also. That isn’t the case today. It was all smoke and mirrors. Mirrors about to shatter all over Portland real estate.
It amazes me that people think Portland is going to escape the downturn and coming meltdown in real estate.
First, as far as the doubling in 9 years goes, I think Naysayer actually had the duration set too high: I think prices actually doubled in something closer to 5 years – depends on the part of town, though, certainly some areas doubled even faster than that. The main thing to emphasize, though, is that incomes didn’t come close to keeping up. I don’t have the official numbers handy, but IIRC incomes are up only a few percent above their 2000 levels when adjusted for inflation.
JP: interesting game theory angle. The thing you have to add in to your game is the elimination of a large number of potential buyers who qualified under the looser lending standards that prevailed until a few weeks ago (or even until March of this year – the first tightening). Which brings us to Charles’ question:
Anybody have the figures of which is increasing faster: the number of houses in Portland or the number of people qualified/who want to buy them?
Looks like inventory increased another 2.4% last week (according to http://housingtracker.net ). Given that we’ve got a high inventory and given that a certain percentage of buyers has been eliminated from the market in the last few months (and especially in the last few weeks) I would suggest that inventory is growing faster than the population of qualified buyers. And this without even a recession yet. Of course, we don’t know exactly what that percentage is that’s been eliminated – but with all the talk about the return to a 20% down, for example, and the complete death of subprime and the near death of Alt-A I think we can guess that it’s more than 10%. Didn’t someone post the IO and Option ARM numbers for Oregon a few days back? Wasn’t it something in the 20% range?
Also, if you’re talking about people moving into the area, there was some discussion on another Portland housing blog a while back about how a lot of the younger folks moving here are doing so without having a job lined up. I doubt that kind of move gets you a mortgage anymore (might of last year).
JP asked:
what do you expect to happen to real estate prices if we are to enter an inflationary period? What about a deflationary period?
If we enter a true inflationary period where incomes are also going up we would likely see housing prices go up after a pause of a year or two. This would be the helicopter-Bernanke scenario. But keep in mind that your dollars would be worth a lot less in this scenario, so the rise on paper might look impressive, but in reality the currency would be debauched. And I emphasize that incomes would also have to be going up at that same rate of inflation. Still, I think even in this scenario housing prices take at least a pause for a couple of years and perhaps go down some more.
The deflationary scenario seems pretty clear: Think the 1930s.
Then there’s also the stagflationary scenario – like the 1970s. Slow growth, high inflation, high unemployment. The medicine for that is to raise rates as Volker did in the late 70s early 80s…
that killed the housing market for a few years there, but it was necessary medicine.
Seems like there are shades of gray between each of these scenarios: If Bernanke decides to loosen things up too much by lowering rates in the next month or two then he may be wanting to inflate his way out of this mess (certainly a lot of precedent for that approach). But even if he does lower rates, it won’t help the housing market much in the short term (for the next year or so) because you can’t force investors to buy mortgage backed securities which they’ve really lost an appetite for – it’ll take a couple of years at least for that loss of appetite to change. Just like it took a few years after the tech bubble popped for VCs to start investing in tech startups again.
We definitely seem to be entering a deflationary period as far as housing is concerned, though. But commodities could continue to be priced high due to demand from other parts of the world (China & India) – as you pointed out JP, high oil prices can have a deflationary impact by dampening demand for other things. It could be that the market is predicting deflation as well because of the sudden drop in short-term T-Bill rates over the last week: yields went from 4.75% last week to 1.25% today – a larger drop than the drop around the time of the ’87 crash and larger than the 9-11 drop as well. Lots of people heading for safety and eschewing risk.
Ah, but all this macro-economic speculation about what’s going to happen is making my head hurt… Let’s stick to what we know right now: housing inventories are way up, the pool of qualified buyers is shrinking because of a return to sane lending practices, looney-loans are gone so housing prices need to be supported by incomes… therefore home prices will fall to be more inline with incomes…
Oh, wait, according to this NYTimes article real incomes actually fell between 2000 and 2005.
Of course real incomes fell for the commoners. Republican policies of the last 30-40 years have skewed wealth creation to the top 10%.
And in-migration rates here are lower than other places that are suffering a housing debacle. Think Arizona and Florida. And don’t give me that UGB thing. That’s another red herring.
Portland is in for a real reality check as far as housing prices.
PS. I got the “doubling in 9 years” from the reports that the median doubled since 98. But yes, in some places it was faster and greater than that.
JP: Yup, foreclosures way up in CA and it’s only gonna get worse as the rate of ARM resets accelerates into the Fall. And remember, jumbos are much tougher to come by these days as compared to even a month ago and in CA it’s pretty much all jumbo due to the high prices there. CA is falling off a cliff; It’s not looking so good here, but nothing like what they’re facing.
By the way, most people call suggest “I own my home,” but in time it seems that the ‘bank’ was the true owner, as the borrowers knew they could never pay the debt down.
Very few people actually own their home. We paid off our mortgage several years ago and years early. I don’t personally know anyone else who is a ‘homeowner’ who doesn’t have a mortgage.
Most people understanding that the gas will only take you so far, yet when it comes to rent, they expect it to last forever. It does not matter that there are various expenses, such as taxes, insurance (or acceptance of risk), association dues, maintenance, repair, and so on. Why is it that so many renters ignore the true expense of real estate ownership?
Not sure I understand the question: did you mean to say that “when it comes to buying” instead of “when it comes to rent”? If so, then I’d say it’s optimism; not a bad thing, of course, but in recent years a lot of people got into the unrealistic optimism zone. Sure some of them realized that after the reset they wouldn’t be able to afford the payments, but they either thought that their income would go way up before then or that the price of the house would go way up and that it would be easy to sell…. so much for that plan.
TiP-
The idea is that many rentors have the feeling that they don’t get anything for the rent paid. Yet the same person pays and uses gas without expecting it to be worth much after use.
I guess the same is true about money: People want to aviod interest, no matter how small. As a borrower, when do you want to pay back very low interest money? I’d rather have the loan with a pile of cash in the bank rather than pay down cheap money.
By the way, the property next door to me finally sold for $300,000, and a “for rent” sign went right up. Asking monthly rent is $1,500. Thus the choices are: 1. Shell out $300,000 plus transactional costs, and then pay the taxes, repair, maintenance, and so on, or 2. pay $1,500 per month.
Seems like such an easy decision to rent, yet I know people who would suggest that paying the $1,500 per month is “throwing money away.”
I guess the same is true about money: People want to aviod interest, no matter how small. As a borrower, when do you want to pay back very low interest money? I’d rather have the loan with a pile of cash in the bank rather than pay down cheap money.
Well, in my case it was an 8% loan so it wasn’t quite as cheap money as now (well, assuming the 30 year fixed loans are still going for around 6.5%). And while everybody and his brother was playing tech stocks in the late 90′s and they told me I should be doing the same, I didn’t figure I’d be able to consistently get a safe 8% return. I’m really glad I didn’t take the tech-stock gamble (sure I played with a little bit of money in tech stocks and basically lost it all, but the $ amount was relatively small). Had I put all that money into the stock market back then instead of my mortgage I’d still by paying off my mortgage and I would have lost a big chunk of money playing the market.
Today 8% is not cheap money! I have a friend who prepaid 2.75% money. What’s worse is that it was fixed rate student loan debt, so it had all the great terms and conditions as well as the tax benefits that go along with such debt. He suggested that he “didn’t want to pay all that interest.”
Well, I bet you can guess what happened… …he found himself in an illiquid situation one day… …so he borrowed money on a credit card at 21%… …without the good terms and conditions…
He ended up paying a much greater rate on a smaller amount of money, but in the end, he was worse off by paying the debt down. I advised him to never pay cheap debt with good terms. In any event, he’ll never get that 2.75% debt back.
From strictly a financial standpoint, for a small negative rate spread or better, I would much rather rent.
“Foreclosure filings rose 9 percent from June to July and surged 93 percent over the same period last year…”
“California cities continued to dominate top metropolitan foreclosure rates.”
I think it is safe to say that people are losing their homes. It’s just not happy times for homeowners. By the way, most people call suggest “I own my home,” but in time it seems that the ‘bank’ was the true owner, as the borrowers knew they could never pay the debt down.
I have to laugh, however, at a friend who suggested that after many years the only thing a rentor has to show is a box of receipts. I wonder how many people would suggest that some homeowners only have a foreclosure on the credit record to show for the home. Or how about those who sell below puchase price–what do they have to show?
Here is what I really do not understand, and I hope one of you can help me. When a person fills his car up with gas, rarely does he expect it to last forever. Most people understanding that the gas will only take you so far, yet when it comes to rent, they expect it to last forever. It does not matter that there are various expenses, such as taxes, insurance (or acceptance of risk), association dues, maintenance, repair, and so on. Why is it that so many renters ignore the true expense of real estate ownership?
Student Loans Fixed Rates
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