A reader forwarded a link to a blog post titled Our Worst Fears Are Coming True: California Housing Is Double-Dipping Right Now and asked me to share with the blog for your comments.
This article raises some interesting points and contains many graphs and charts. [Perhaps I can recreate some of these charts for the Reno market.]
Will Nevada, and in particular Reno, experience a similar scenario?
DonC
Is there a double dip California? Could be. But there is no way to know and in fact it doesn’t really matter. As for whether Reno will experience a double dip, that doesn’t seem likely in the near term since it doesn’t appear that it’s gone up, which would be necessary in order for it to go down.
There is always a lot of noise in the signal when buying any investment. With stocks you always have a thousand different people with different opinions, each of whom can make a case for why their opinion is right. But at the end of the day it’s mostly about PE ratios. When the ratio is significantly above 15 the market is overbought and likely to drop. When it’s significantly below it’s oversold and likely to rise.
More or less the same with residential real estate in that what matters is afford ability and demographics. When a median income family can’t remotely afford the median home houses are overvalued and are likely to drop on price. When a median income can easily afford the median home houses are undervalued and likely to rise. Nothing else really matters.
Paul
There are some real headwinds pushing against residential real estate stabilization. 1) Alot of demand has simply been moved forward by the homebuyer tax credit. So many people have had their credit damaged in some way by this economy that the pool of buyers acceptable to institutional lenders (720+ FICO, light or no debt burden, documented income) has shrunk to an all-time low. Many from that pool have bought recently, incentivised by the tax credit. I suspect that much demand from those so situated has been moved forward and there will be a substantial drop in sales after the expiration of the tax credit.
2) BofA, and presumably other lenders are going to accelerate forclosure actions and bring even more properties to market after the tax credit expiration. Again, more inventory while many in the qualified pool have already spent their wad.
3) Interest rates will have to rise in the near future to attract foreign capital to fund US Govt borrowing (deficits). Given any market rent, higher interest rates imply a lower loan amount and purchase price.
inclinejj
Fed Pulls Plug; World Does Not EndBy Alyssa Katz Mar 31st 2010 @ 1:30PM
Filed Under: News, Economy
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A A A Tomorrow is the big day – the day the Federal Reserve pulls the plug on its purchases of mortgage-backed securities. Since December 2008, the Fed has kept the mortgage-backed securities market going by buying $1.25 trillion in securities issued by Fannie Mae, Freddie Mac and Ginnie Mae that no one else wanted. The massive program has helped keep home loan interest rates low during the financial crisis.
The securities — comprised of residential mortgages bundled to diversify risk — have long greased the wheels of the housing market. But after the subprime meltdown, investors viewed mortgage securities as unacceptably risky.
Starting tomorrow, private investors have to step back up to the plate to buy up the $1.5 trillion in mortgage-backed securities likely to be produced this year. Will they? Or will the government withdrawal leave a vacuum in the housing market that could push interest rates higher, as some fear?
“We will be watching the end of the Fed program very closely,” said Mark Fogarty, editor of National Mortgage News. “We have heard predictions both ways — that the end of the program will cause a big bump in interest rates and that it will have little effect at all.”
So far, investors seem to be warming up to the idea of putting their money into mortgages again. Strict screening of borrowers and cautious lending under Fannie, Freddie and Ginnie means that mortgage pools are once again safe bets, and private investors are currently buying more than two-thirds of the securities. Prices of short-term securities are competitive with other investments, and have stabilized since the Fed started its buying program, a sign that investors now trust them.
And the federal wind-down has been orderly. It has signaled its intent to end the program, and has been steadily reducing its purchases since the beginning of the year.
As a result, the market has not been jolted, says Fogarty. Private bond investors seem to be picking up the slack for the Fed. Average interest rates for 30-year home loans have stayed under 5 percent, near its historic low point recorded at the end of last year, according to the Freddie Mac Primary Mortgage Market Survey for March 25.
“There has been a relatively liquid and stable market for Freddie Mac securities throughout the capital crisis,” says Freddie Mac spokesman Michael Cosgrove. “What’s important is that there is liquidity in the market and there have been investors that have been stepping up to buy.”
There’s still unfinished business to deal with, however. The Fed still has that $1.25 trillion in securities on its balance sheet – far more than it spent bailing out AIG and other credit insurers. One-fourth of all Fannie and Freddie securities are now the Fed’s property. (Fannie and Freddie themselves hold another 25 percent.) Some conservative economists have expressed concern that when the Fed tries to unload all that debt, it risks increasing inflation. (For a paper by Stanford University economist and monetary policy expert John B. Taylor on the topic, check out this pdf).
But overall it’s pretty hard to find the bad news here. Interest rates are likely to go up a quarter of a percent at most, much lower than many had predicted. The Fed has been generating tens of billions in income off these investments. And while inflation poses all kinds of problems for an economy, it also has a silver lining, because mortgage payments may end up taking less of a bite out of a household’s income.
Bendix Anderson contributed reporting to this story.
DonC
inclinejj — I don’t think most people understand what the Fed was doing here. Rather than thinking of this program as housing specific, think of it as supporting the financial markets in general. There is a supply of paper and a demand for it. When the Fed absorbed $1.2T of paper related to housing, which was relatively low risk, it forced investors to look at higher risk paper, namely corporate debt.
The resulting demand for corporate debt boosted the bond market. The upswing in the bond market then fueled a stock market rally, which in turn strengthened the bond market even more. At this point the bond market is up — much higher than it was before the meltdown.
Basically the program has succeeded. Perhaps beyond expectations though I’m not privy to what the Fed expected. At this point there is no need to further strengthen the bond market — it’s fine. The financial markets are stable and the usual process of recovery has taken hold. Investors will now be able to move back into the market for mortgage back securities. I’d expect some movement from the corporate bond. Interest rates for mortgages may creep up from where they are — you’d expect a rise but there’s a lot of money still on the sideline. But rising interest rates would actually be a good sign and shouldn’t interfere with a housing recovery, especially if the rise is accompanied by mortgage standards returning to more traditional levels.
smarten
I didn’t spend much time on the link Guy provided because the data was overwhelming, but it seemed to me the charts were talking about unit sales versus pricing; and, it related to the State of CA. as a whole. Am I wrong?
In any event and FWIW, we were in the Bay Area last week and a newspaper article highlighted that in the San Francisco Bay Area, prices were actually up about 9% YOY.
Also I saw something I haven’t seen before. An unusual number of “Coming Soon” realtor for sale signs.
Tom
For whatever it is worth I have noticed local news articles in the Los Angeles area on prices being “up” over previous numbers. But upon digging in to that info, it becomes apparent that the writers are talking about the sales prices of what might be called modest properties going up, because that is where the substantial majority of the sales are taking place. The mid-range and upscale properties are not necessarily increasing; it is just that the under $500,000 houses are selling better now, some receiving multiple offers, I am told. So I suppose that does reflect a price increase trend, but in my opinion, it only does so for that particular market segment.
Miller
I want to see a link to this newspaper article that says prices are up 9% in the Bay Area YoY.
I live in the East Bay, and I say my ass prices are up 9% YoY.
smarten
Sorry Miller. My wife heard the comment on a Bay Area radio talk station [I thought she read it somewhere].
But what she probably heard is what I picked up over the internet as follows: “San Diego County home prices were up 5.9 percent in January compared to the same month a year ago, the most recent Standard & Poor’s/Case-Shiller home price index revealed this morning. It was the second-largest increase among any of the 20 urban areas studied nationwide in the index, behind San Francisco’s 9 percent rise” [http://www.voiceofsandiego.org/survival/article_535b753c-3c14-11df-8159-001cc4c002e0.html].
smarten
Here it is Miller [ http://blogs.wsj.com/economics/2010/03/30/a-look-at-case-shiller-by-metro-area-march-update/ ].
DonC
smarten — I wonder if you heard about some other report? The Case-Shiller index was released this week so it would have been difficult to learn about it last weekend. Would be interesting to know if two reports had the same numbers.
No big deal. At the end of the day most would say Case-Shiller is the best index you can find and it does say that San Francisco was up 9% YOY.
Hope Miller’s rear end is not too red.
inclinejj
Also I saw something I haven’t seen before. An unusual number of “Coming Soon” realtor for sale signs.
Reo Listing agents have been doing this for awhile now. Its just to create buzz and get the phone to ring..
Case-Shiller..Shill is right. Isn’t this the game group that said prices can never fall???
This Case-Shiller nonsense isn’t worth the paper it is printed on.
DonC
inclinejj — The Case-Shiller index is without question the gold standard of housing indexes. It’s so good it’s what traders use when shorting the residential housing market. Next you’re going to say that the S&P Index isn’t any good. You’re being ridiculous.
FWIW Shiller is a great bear. He’s plays the pessimist to Siegal’s optimist. http://cowles.econ.yale.edu/news/shiller/rjs_02-05-bloomberg_shil-sieg.htm
billddrummer
To inclinejj,
FWIW, I think all of us thought that housing would never go down.
It’s only the lucky few who actually bought credit default swaps on subprime mortgage pools back in 2005 who didn’t believe it.