bubbleinfo.com

So if this scenario does happen, is it better to buy a house in the next 6 months when loans are not yet super tight and suffer the price depreciation, or is it better to wait?

Also will this mean rents go way up as more and more people simply cannot buy no matter how much they want to buy?

Or will prices correct faster than anyone thinks once no more money is available to buyers and the only ones left are those sitting on half a mill or more in cash and the cash buyers sensing blood push and push sellers?

Bob - thank you for three excellent questions. I work a lot of nights and weekends, and I'm booked solid today and tomorrow - but I will address strategies for buying in the coming resetting-neg-am era by Monday.

The obvious one is wait it out, you really can't go wrong with that. I'll give you something to think about besides that one.

Jim,

Is that rate still available after Fannie-Freddie Friday?

Looks to me like rates spiked yesterday.

Bob,

My opinion about your 3 questions:

1) better to wait it out

2) I don't think rents are going to go up much, if at all. In fact, I will not be surprised to see them hold steady or even fall slightly. Rents don't have the luxury of creative financing like we saw over the last few years, which allowed people to buy more than they really could afford. Typically, rents more accurately reflect supply and demand than home prices. Prevailing wages of the community are very important too, as are jobs and population decline or growth. If wages aren't going up, the rental supply is growing, people are losing jobs, and more people are leaving the area then arriving (we're currently seeing all of these factors), then rents most likely will not increase.

3) the supply and demand dynamic was distorted during the housing boom by several factors, such as creative financing and speculation. People were able to get into homes that they really could not afford, by using loans with low initial monthly payments. By lowering lending standards to almost none, more and more buyers were able to buy homes. The result was an artificially increased demand, leading to artificially elevated home prices. Once these factors are removed from the system, and as financing gets tighter, the number of able and willing buyers will shrink dramatically. Prices of homes will have to fall until there are enough buyers who can buy with at least a 20% down payment, good credit, verifiable income, etc. My guess is that home prices will fall much further here in So. Cal, and 1/2 million in cash will not be necessary. There aren't enough people around with $100,000 saved up for a 20% down payment on a $500,000 home to keep the market elevated. But there are a lot more people with $50,000 saved up for a 20% downpayment on a $250,000 home. One wild card, though: my guess is that we're going to see further bailout plans - will any of these plans be able to keep home prices artificially inflated?

Jim,
I am a little shocked about the loan you quoted. How many points are you talking to get that rate? I have checked extensively with legit wholesale brokers, who have access to consolidated (automated) national loan searching, and for loans over $1M, the best they can find right now is 8.5% par on a 30-year fixed with 70% LTV. This can be bought down to just under 7% (6.9%) by paying 3.8 pts. On a $1.5M loan that's $57,000 to buy it down to a rate close to what you quoted.

I'm not trying to call your bluff, but inquiring minds want to know where to find such a loan as you mentioned.
Thanks in advance,
CV Watcher

Further input: I'm told that Super Jumbo's basically can't be sold on the secondary market anymore, so the companies that are offering them have to keep them in-house, and to compensate for the risk they are building in 2 - 2 1/2% over conforming rates. Does this concur with what you are seeing? I have seen 30-year fixed with the rate you mentioned, but they have a max 1st position loan amount of no more than $900K.

Hey Bob,

my personal take on your question (and please keep in mind most advice offered for free is worth what you paid for it):

The feedback dynamic of interest here is that if it becomes very difficult to obtain a loan, sellers will have no choice but to lower prices until more buyers become qualified. That balance between home prices and willingness to grant loans will set the new market prices.

Problem is, the two key processes -- decisions about whether to make loans, and decisions on how to price houses -- are made by different people, with very different time scales. A bank or other mortgage lender can, as we have seen lately, change policy on a time scale of just a few days. On the other hand sellers, again as we have seen recently, can hold stubbornly to their prices and won't go lower for months if not years (in extreme cases). So my own take is that we are currently in the phase where important adjustments to loan-granting have been made -- which only support lower house prices -- yet sellers are still stuck in the old regime. I think the mid and higher end house prices will come down as a result. The low end seems to have equilibrated already, exactly for the reason that bank foreclosures are not too stubborn to lower prices to the new equilibrium selling point.

Here is a 92130 condo pricing over one unit's lifetime, which I think is interesting as it spans 2 housing bubbles. This condo was recently foreclosed upon and sold. The place was built in 1991 - basically the peak of the prior run up in prices. Here is its sales history. The person who bought in '91 had for 6 years and lost $37K when they sold it. The next owner did well by making $300K when they sold after 7 years. The last owner let the bank foreclose and they lost $95k after 4 years...

May 13, 1991 $190,875 --
Aug 29, 1997 $153,500 -3.4%/yr
Mar 23, 2004 $427,000 16.9%/yr
Feb 04, 2008 $332,409 -6.3%/yr