bubbleinfo.com

No way. Sorry Jim, I'm not going to give it away;)

I have financing from my employer (institutional self-finance, no bank) up to $900k, and a fat down payment $300k-$400k. Instead of buying, I am sitting in an apartment in CV waiting for sellers to get a clue. Ever get stuck behind some pack of idiots day dreaming or window shopping on the street, or in the store? Yeah.

Jim, hasn't anyone told you that real estate always goes up? What kind of realtor are you?

Those high end sellers are for the most part just as underwater as the low end guys. They can't lower their price unless they want to enter short sale territory, so for the time being they hold on hoping they can get out with the shirt still on their backs. It'll take a few more months until they realize they can't.

Great post Jim. This is another facet of the overall squish-down to the higher end homes.
The price set by most of the sellers I have been dealing with is kind of like a shiny object in a monkey trap. It is a small box/ cage with a hole just large enough for an open hand to reach in. A visible shiny object which is attractive to the monkey is placed in the box. When the monkey reaches in and grabs the shiny object their hand makes a fist which they cannot remove from the hole in the box. The monkey will hold so tightly to the shiny object that a hunter can merely walk up to it and club it over the head. All the monkey had to do to get away was JUST LET GO.
To all sellers with your unrealistic inflated bubble pricing mindset. If you can, save yourself and just let go.

So on the one hand we have the freight train of loan unavailability bearing down on the market. On the other hand we have the tidal wave of neg-am loan resets gathering on the horizon. On the third hand (thanks for lending a hand Jim) the spring selling season is disappearing in our rear-view mirror, and we are sailing straight into the selling doldrums season. Put them all together, and what do you get? A metaphor so mixed that Ben Bernanke is desperately writing new regulations to restrict it, but in any event, a pretty awful market if you're selling.

And I'm sure when Freddie & Fannie tank that will just add fuel to the inferno.

http://money.cnn.com/2008/07/08/news/economy/fannie_freddie/index.htm?postversion=2008070816

We're living in interesting times.

oops..

I'd love to hear some mortgage interest rate predictions.

From what I've tried to gather, if you have good credit, 20% down payment, and want a non-jumbo loan interest rates are still pretty low around 6%. If you are not that type of borrower, the rates go up much more significantly then they have during the boom and overall harder to get. Is that right?

How high do you think conforming loan interest rates will go and when and for how long? Do you think they might go into double digits? I thought interest rates would be much higher then they are by now. Is it because the stock market is hurting so people are moving there money to "safer" investments and funding the loans?

I feel like I know a lot of little tidbits of info, but not nearly enough to form any kind of solid prediction. I'm a first time buyer and would think the market would bottom in the next year or two with very little if any price increases for a long time if interest rates stayed about the same, but I think the interest rate variable can have huge implications to my timing and I don't feel like I have a clue what could/will happen.

I believe there are two types of high end sellers. The first is younger and may be stretched in terms of buying too much home in the last 5 years. They will become "must sellers" soon. The second are older and have plenty of equity. The problem here is these boomers probably have a majority of their retirement funds in the home and don't want to admit their retirement package is less than previously thought. They may try to wait it out.

If I hear one more person on the street tell me that it will turn around in a couple of years.

I got a long letter from a past and desperate realtor I have used stating how it's the "PERFECT" time to buy and I should act quick as this is the bottom. Shouldn't those types of statements get people in jail?

Scumbags!

Todd and others,
Although I feel almost as much as you that a real estate agent that tells you this is the 'perfect time to buy' should get at least some time in jail, could it not be arguable that it is getting awfully close to being a 'good time to buy'?

I am thinking about all of the curves that should be placed in a graph for a person to decide when to buy a home. The four I can come up with easily are 1) price of house I would buy, 2) price of selling my house, 3) ability to get a loan, and the 4) interest rate of said loan.

The curve for the price of the house I am buying is clearly going down. How much lower will it go? Yes it would seem that this curve is facing a down trend for the foreseeable future.
The curve for selling my house is basically following the same curve. Now I live in Seattle so my curve has been going down much less than San Diego. However I am figuring that it will begin to catch up later this year. So selling sooner is clearly more prudent. Since there is no way my family is going to sell, rent, then buy, I clearly need to sell and buy in the same few months period.
The curve for getting a loan has been way too low (easy) in the last five years but now it is getting harder (finally); however it is likely to swing too far and get quite hard soon (especially as Jim noted in this post for homes in the 800k+ range).
The interest rate is basically same shape as the ability to get loan curve. However as some have noted in this post this curve might go back to the real historical high rates (that is, double digits).

So given the current direction of these curves, it would seem that I should buy sooner rather than later. That is, because a loan is going to cost a lot soon and may even be too hard to get. Yes buying sooner rather than later will surely mean I spend too much for the house but since I plan to live in it for a long long time; who cares as much. In fact given a lower interest rate, the cost over the 30 years might be lower than if I wait and save a hundred thousand up front.

I am much the pessimist regarding the housing market. However given the likely direction of lending as noted in this post, I have recently become a bit concerned about waiting too long. That is, if I wait too long it will be too easy to wait a lot longer. And that throws off the fifth curve; my happiness curve (I hate living in Seattle and want to come back home...).

Somebody tell me something to make me feel better about waiting for no more than a year or two more! Or am I stuck in Seattle for awhile given my strong inclination to being financially prudent?

Somebody tell me something to make me feel better about waiting for no more than a year or two more! I could but you've already discounted it. If selling and renting isn't an option, then you need to get your head checked. If you are really looking at 800k, a 25% drop (not unreasonable is 200k. You can't convince your wife that 200k is worth renting for? Are you just one of those people who thinks renting makes them less of a person?

To have the prescience available to you that you do and not take advantage of it is worse than silly. I'm trying to tone down my posts, so I won't use the types of descriptives I might have just several interest rate cuts ago.

keith R,
interest rates and house prices are relative to each other.
Historically rates over the last 50 years or so have average about 8%, the exception being the jimmy carter years 76-80 when rates went up to 17.5%
Do not purchase a home a car or any product based on interest rate or payment alone, the purchase price is the most important factor(this could be a subject for another thread).

Example if the interest rates would go up to 8% from 6% a 25% increase, the price of the house in theory would have to drop 25% for the buyers to qualify for the new loan.

In reality some homes would drop less, depending on location and price point, but typically the higher end over 750k gets crushed.

I will let some of the other posters jump in to explain why.

I share the same feelings as KeithM and Keith Rettig.

I too am a potential first time home buyer and worry about interest rates sky rocketing as well a Gov bailout to ruin my chances to get in the real estate market. I have sold my condo and am currently going to be moving to a rental as a home base to free myself up to jump on the best offer I can find in my price range that will work for my family before things start to change (i.e. interest rates/ home prices/ loan availability). I get scared I will become another statistic or a 'knife catcher', but if I can get a 30 fixed and afford the payments every month I will be happy to raise my children there for many years.
I am thankful that both KeithM and Keith Rettig were able to write down exactly how I am feeling as well.

Thanks guys.

I was almost a 1st time home buyer last year. I guess you can say I dropped the knife. Best decision I ever made.

When interest rates rocket the prices have to come down to make the house affordable. Then I'll take advantage of the lower property tax and also all the interest I'm paying will be a tax write-off. When interest rates drop again in the future I'll refinance.

I'll just keep banking and keep stuffing my 401k until 2011.

I agree with everything Barnaby33 said.

Keith Retting, you build your theory on the assumption that your curves behave independently, which is not the case.

For example, say right now the prices have declined by 30% and the interest rate is 7%. You are arguing that if the interest rates go up, you will can buy less house tomorrow than you can today. But most of other buyers (of which there is a limited number, despite what some realtors might tell you) are in the same boat as you are. Hence, in a speculator-free market the rising interest rates will push the prices further down to make the transactions possible.

I am a potential first-time buyer too, but I will be thrilled if the interest rates skyrocket. That will add so much value to my downpayment, and I will be able to refinance in the future to a much lower payment.

Purchasing a house when interest rates are low because of affordability concerns might be very short term thinking. As interest rates go up, it tends to push the price of housing down, so at least in perfect theory, affordability should not change.

The thing about purchasing a house is: the price never changes. You pay what you pay. Interest rates change all the time though, and therefore the affordability of your original loan payment can improve by refinancing (I know, based on recent history, the opposite can happen too based on explodng option arms, etc., but that is not the point here).

So better to buy low at a high interest rate, than high at a low interest rate. Don't get to hung up on current interest rates making homes affordable. Even if rates skyrocket, affordability will eventually improve nonetheless.

looks like bearing01 and Sandi Egan already made my point while I was writing the previous post.

After reading some of Jim's posts, as well as other information, it seems like there is a strong possibility $800K plus home prices will be heading south. How much? Don't know. But another 15% to 25% is certainly not unreasonable. What is the probability that those home prices will have a nice bounce in the next 6 months to a year. With all the headwinds were are facing I think a probability factor of 2% seems generous. Risk/reward tells me to wait to buy another home. Pretty simple analysis really. I can give you at least five good reasons why it is probable home prices will go down. How many reasons can one give home prices will go up? Hard to even imagine one legitimate reason. Oil prices tank, stock market rallies....but would folks still view real estate as a "good investment" like before? No, they would likely put their money in other alternative investments and home prices will be stable at best. Maybe Jim's fellow realtors don't appreciate his good critical analysis and thinking, but jeez how can one argue with his logic and reasoning that sellers need to cut prices NOW.

Neil Diamond, you said, "I too am a potential first time home buyer ... I have sold my condo..." How are you a first time home buyer if you just sold your condo?... I thought it was simply funny to point that out for fun.

Now I would like to participate in this group therapy session and get my feelings out as well. "Good" and "Bad" are very relative terms. I'm reading this and countless other blogs daily. Normally, when home prices see declines, we see headlines like "a BAD month for home prices" or "the real estate marked WORSENS". Why so negative? For someone like me, all these monthly statistics are fantastic. I sold my house a year ago and I have "lowered" myself to rent (that was for Barnaby33) until I can get a ridiculous deal on a house. I plan on putting 50% down (or more if prices come down enough). Therefore, all these market factors are positive to me. I know I'm not alone. Therefore, I petition Jim to redefine these trends. Jim, next time someone from the paper asks for your comment, tell them something like, "April to May were the best declines we've seen so far....I expect prices to improve another 20% by the end of the year...", I would feel so much better...

...Ahhhhh, I feel so much better now that is off my chest. Can we talk about our parents next?

Loharp

Love it, loharp! :)

To add to the points already made above about low price/high interest...think of housing prices like bond prices. The prices and rates tend to move in opposite directions.

As long as you are very **well-qualified,** you cannot be priced out of the market...you are the market!!!!!

Good to be reminded about interest rate & home price inverse relationship. This makes me fear higher interest rates no longer; many thanks. I like Kingside's comment, "So better to buy low at a high interest rate, than high at a low interest rate." the best.

Regarding not selling then renting then buying. It is not because of renting being less than owning; I don't feel that way at all. It has everything to do with the fact that my mortgage is currently $1500 and I have 3600 square feet of stuff that would need to be moved twice if I followed that plan. We don't need to move whatsoever; the desire to move is simply for better weather and thus a happier life (pretty flimsy reason huh!). We both have our own businesses that have about a third of dependency on being here. So any potential gains of the 'sell, rent, then buy' strategy are totally outweighed by the inconvenience and the fact that I don't think I can rent for anywhere low enough to make a real profit off the strategy. Hell the duplexes in the neighborhood surrounding us are half the size and the rent is $200-300 more per month. Renting a house like what we want in San Diego is going to cost more than $6000 per month (and what we currently have here is about $4000 there). My mortgage is at 4.125% (bought 10 years ago and refinanced with no MEW) so it is quite cheap to live where we are as is.

This is why there is such a brittle barrier between waiting a little longer and a lot longer to make the move to San Diego. Living here longer just makes CA renter's comment, "As long as you are very **well-qualified,** you cannot be priced out of the market...you are the market!" become more true every month.

One additional point - when you buy low you pay lower property taxes too.

Want your cake and eat it too?

Buy a house today at 20% below 'market'. Low price, low rate, low taxes - bingo!

What it doesn't include is any assurance that you bought low enough, or bought at the bottom. But if you are satisfied at buying within 10% of the bottom, and the bottom ends up 30% lower than today, you're right where you wanted to be.

"We don't need to move whatsoever; the desire to move is simply for better weather and thus a happier life (pretty flimsy reason huh!)."

I'd say it's the best reason of all. Doing something out of desire rather than need means that when and if you do it is totally under your control. The only suggestion I would make is to amend your reasons to be "for better weather AND a better house, and thus a happier life. There's no reason to be in any hurry to make a move unless you come across that special kind of house that isn't likely to come along again for years whether the market is good or bad.

"I too am a potential first time home buyer ... I have sold my condo..." How are you a first time home buyer if you just sold your condo?...

Touché

loharp - Excellent point. I have lived in apartments most of my life with adjoining walls, and a lot of people everywhere making odd noises through the walls and strange food smells creeping into the place. This was similar to our condo which in my mind’s eye was a really nice apartment I was paying a bank rather than a landlord to live there (bank/ landlord, semantics I guess). I keep forgetting that our condo purchase was a "home" purchase. Thanks for setting the record straight.

How long does it take between the raising of interest rates and the decline of home prices? When interest rates increase does it take 6 mo. before home prices drop to correct the relationship between the two as referenced above?

I am not kidding myself that I am not hurting by holding out. Rent is 3500/mo (for 800K worth of a house) that's about 45K/mo. And that's for 4b/2.5ba basic kinda house in 92011. I figured if this bottoming takes about 5 more years I am out 250K and 5 years into my 30 years loan. My landlord just raised rent and we aren't moving because the moving cost probably ended up being more than the extra rent.

At this point I am more about finding the right house (west of 5 in 92011 w/ decent size lot) than finding the best deal. Unfortunately, it seems the inventory evaporated overnight. The few that got on the market got snatched up quickly and sold very close to last year.

If price in this zip code 92011 doesn't come down at least more than 5%/year renting & waiting just isn't worth it.

Seattle guy. How do you know what neighborhood to buy in. Many neighborhoods in Carmel Valley. Rent.The cost to move again will be a one month drop in prices in 2009. Wait until all the people who have option arm loans in Carmel Valley or Carlsbad go bad.

These homeowners are paying $2200-2500 a month instead of $4500. When the loan recast in the next few years, the loan will recast to 5000 plus 1000 for property taxes (don't forget homeowner and mellow monthly fee). Its going to get ugly along the coast of North County. Such an easy call.

The economy after the election is going down big time plus the stock market of India and China are warning a sharp drop. Steel stocks are the infrastructure warning of a booming economy going good or bad. Watch out Seattle guy for the falling knive. The big drop will end about 2012.

"Unfortunately, it seems the inventory evaporated overnight."

This is pretty typical in a down market. Once the reality of the situation sinks in, anyone who doesn't have to sell doesn't list. This limits the inventory to mostly homes belonging to (or foreclosed from) people who have already demonstrated their inability to handle home ownership, with predictable effects upon the quality of what is available.

Buy a house today at 20% below 'market'. Low price, low rate, low taxes - bingo!

Hehe.
May I wait until it falls another 30% and then buy at 20% below market?

Hopefully, you are going to personally help me with that purchase :)

People need to stop looking at interest rates as a reason to buy/not buy. I get sick to my stomach when I hear people saying I should buy because rates are so low.

An earlier poster said, correctly, look at the PRICE. Buy at a low price. Shopping based on rates means shopping based on a monthly payment. This invariably leads to overpaying, and to poor use of credit. That's how we got into this mess. Look at the PRICE people! Yes, low rates are good, but you can always refinance if rates drop significantly.

With that said, I hope and expect rates to go up. The fed has been lowering overnight rates, but mortgage rates have risen to cover investors' newfound risk. Wait until the fed starts raising rates - it's only a matter of time. The dollar is too weak, oil price keeps rising, and the economy keeps hurting. But there's nowhere left to turn. This country needs to take its medicine. And don't even get me started on the bailouts!

Thanks for letting me vent, Jim.

The Blur:

I'm worried that prices will come down to a point where it makes since for me to buy and then rates shoot up afterwards, leaving me with a higher principle and property tax rate then if I had waited.

So you think rates are going to go up, but didn't you think they would be up by more then they are right now? I sure did and it is making me second guess my predictions and doubt my knowledge on the subject. How high do you think they might go and how long do you think they will be "high"?

My revised analysis:
Subprime lenders fail first, subprime loans are then hard to get and expensive. Alt-A lenders like Indymac failing, so now Alt-A loans are hard to get and expensive. GSEs will be failing soon, the stock market finds a bottom so people stop putting their money into "safe" bonds, and the fed raises rates to fight oil/inflation and then the rates for the good borrowers shoot up. So maybe by this time next year we will be seeing 8-9% for a conforming loan? You think higher or lower? And for how long?

KeithM,

The only reason banks don't ask for 20%/year interest on mortgages, is because the market will not bear it. Every potential buyer has a specific amount that he or she can pay each month. So if the rates hike as high as you think it inevitably will push the prices further down. Even if the prices had reached what seemed to be a bottom prior to the rate hike.

The only case the additional drop in prices will not happen is if the prices were on their way up before the hike in rates. I don't think we should worry about that next 3-6 years. People are starting to despise Real Estate the same way they were shunning hi-tech stocks in 2001-2004.

Sandi:

"Even if the prices had reached what seemed to be a bottom prior to the rate hike."

Exactly my point for why I asked for people's prediction and reasoning on interest rates in my first post. I guess I didn't ask it the right way because people keep saying don't buy because interest rates are low or higher interest rates means lower prices - when I read those posts I'm saying to myself - um, ya, okay, I already know that and why are you responding to me with those factoids?

Keith,

I hear you. I think about the same thing. Yes, I did think rates would have risen by now, but I am of the opinion the FRB has put their collective head in the sand hoping we can somehow miraculously escape this recession. (I certainly don't claim to be as informed as Bernanke, so this is IMHO.) I think there's been too much pressure from Wall St., which can't see past tomorrow.

I won't guess what a conforming rate will look like next year, but 8-9% doesn't sound unreasonable. Like you say, Alt-A's are next to implode, and I'm not convinced financials have priced this exposure yet. I keep hearing in the news "we're out of the credit mess" because we've sifted through most subprime, but there could be a bigger mess with the high $$ Alt-A's and the rest (again, as you mention.) How long will they be high? Until we break out of this economic mess - but the sooner we take our medicine, the sooner we'll rebound.

So as investors recognize further risk, and if the FRB finally raises rates, conforming loans could get up there IMHO, which would be great for where I'm sitting (on the sideline.) This will further drop housing prices. For the same monthly payment, I'd rather have a lower cost basis and higher interest payments than vice versa: more appreciation potential, and a larger tax write off.

Where I differ from you is your definition of "where it makes sense to buy." I don't think it's when I can afford the monthly payment. It's when the price of the house is reasonable. I'll worry about financing after that. If you stick to this mindset, you're less likely to experience the scenario you mentioned above.

While I badly want to own a home today, I might be waiting a couple more years . . .

Thanks for your response Blur, that was the kind of input I was looking for :)

"I don't think it's when I can afford the monthly payment. It's when the price of the house is reasonable."

I completely agree and would have been in a condo a couple of years ago if I didn't. It is all about rent vs buy calcs to me for deciding what a reasonable price is, which interest rates heavily influence. If I feal rates have peaked and I find a place I love that is reasonably priced at that peak rate, that is when I'm jumping in head first :)

"I did think rates would have risen by now"

Based on what I hear from the loan broker who did my purchase last year, what is happening right now is instead of raising rates higher the banks are tightening the qualification requirements so much that anyone with a FICO under 800 stands a good chance of being turned down for a single late payment on a credit card. I suppose the banks are trying to avoid raising the rates to a point where they'll lose the people they'd still like to loan money to.

The Blur,

I agree with most of your thoughts.

I don't think it's when I can afford the monthly payment. It's when the price of the house is reasonable.

Then the question is what is a reasonable price?
Once someone is convinced the prices are not going to fall anymore, he or she will make a decision to buy. Now, most people are buying all home they can afford. It's a psychological issue, has nothing to do with finances. And that's when the monthly payment gets into play.

Apparently, it will be very difficult to get a loan where your P&I is greater than 31% of your gross monthly income. I bet the majority of the transactions will have P&I at around 30% no matter what the house prices and interest rates might be at that point. People will buy the best home they can afford. When the prices and interest rates go up or down, what really changes is the homes you are shopping for, while your projected monthly payment remains roughly the same.

KeithM illustrated my point: he used to look for a condo, but now he is looking at houses.

Does that make sense?

Sandi, it makes sense what you're saying. I think we're all in agreement here, actually.

Naturally, the interest rate will affect the initial affordability of the home. But we want to buy at the bottom, right? This keeps us from losing equity or being stuck in a house we can't get rid of. That is why I say to stay focused on price.

I also believe that if interest rates should rise, that will make the bottom even lower. On the other hand, if rates stay reasonable, prices may hold more ground. Either way the monthly payments should be about the same because, as I think you correctly suggest, loans will again be approved based on debt to income ratios.

Assuming there's some merit to this theory, I'd prefer higher interest rates to drive down prices as low as possible. If rates drop, I can always refinance and lower my payments. If my house price drops, nothing I can do but hope Jim doesn't make an example out of me on his blog!

So to answer your question, "When is the right time to buy?" The bottom! (Much easier said than done;))

Yep, we are saying the same thing