• 65% of homebuyers in the Bay Area in 2004 chose adjustable mortgages to qualify for expensive homes
• 62% of total San Francisco loans in 2004 were interest only (ref: LoanPerformance.). Up to 70% for Jan-Feb 2005! read here. SJ is up to 61%, up from 9% in 2002.
• Typical monthly mortgage payment for Bay Area buyers in Feb 2005: $2,460 in February - an all-time high. A year ago it was $2,008.
• Great Article on computing the real costs/profits on a home
• Since 2001, 43% of all net private sector jobs created have been in housing-related industries.
• More than 60% of bank assets are currently tied to mortgages. from here

Understanding China and Real Estate

• Well articulated here

Quotes:

• Greenspan:
  • ``There are a few things that suggest, at a minimum, there's a little froth in this market,'' Greenspan said. While ``we don't perceive that there is a national bubble,'' he said that ``it's hard not to see that there are a lot of local bubbles.''
  • "Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems,"
• Paul Krugman (see this): 'Macro indicators suggest that the market is speculative mania. Day trading cannot be sustainable. There is a real bubble mentality in the US housing market,'' Prof Krugman said, adding that prices of US housing were 250% of their real values.

Drawing a Circle Around it

• In Feb 2005...
  • 576 homes were sold in San Mateo county (same as 2004). Median price, $686k. Total price volume: $395 Million. SMC population: ~ 700,000. 8 houses were sold per 10,000 people. ~260,000 housing units.
  • 41800 sold statewide. State population: ~35,500,000. 12 houses sold per 10,000 people. ~12,000,000 housing units.
• Interest only loans... from here, data from LoanPerformance
  • In 2001: 1.4%
  • In 2004: 47%
• In a 2003 survey of 500 appraisers by a private firm, 55 percent of appraisers said they'd felt pressure to overstate values, according to Demos, a public policy center. from here

Freddie/Fannie Statistics (from here)

• Government-chartered but stockholder-owned
• They benefit from hundreds of millions of dollars in federal subsidies, such as cheap borrowing costs.
• They buy mortgages from banks so that banks can lend more money to home buyers.
• Fannie and Freddie mostly bundle the home loans into securities they sell to investors, but in the past decade they increasingly have held onto the loans or bought back the securities for their own investment portfolios.
• Together, they hold $1.5 trillion in loans and loan-related securities
• This is 20 percent of the nation's $8 trillion of outstanding mortgages
• See here for a long writeup.
  • Frightening: Freddie and Fannie are responsible for $3 trillion in debt securities. The National Debt is 8 trillion.

In 1989, due to Congress classifying the debt of Fannie Mae and Freddie Mac as “low risk,” the two Government Sponsored Enterprises (GSEs) started receiving larger pools of money which would then be provided to private mortgage institutions such as banks and mortgage lenders. Over time, and once housing prices began to rise again in the late 1990s, lending institutions were originating more mortgages–yet holding fewer of them–than they had in the past. These banks and lenders could simply originate the mortgage, take their fee, and immediately pass off the risk of the loan by selling it to Fannie Mae and Freddie Mac. When the lenders realized this, the standards by which prospective homebuyers were judged began a descent that continues to reach new lows.

'Investment' areas - most popular areas for investment, ranked as a percentage of all homes bought solely for investment in 2004.

Defaults:

• California defaults in 2004: 56,125 - lowest since 1992. 2003: 83,600 2003. Worse, 1996: 217,410.
• San Mateo County:

Notices of Default

Defaults

Building Permits, Single Family Houses, SMC

References:

• http://www.mortgagebankers.org/briefs/03/0815c.html
• http://www.dqnews.com/RRFor0205.shtm
• http://quickfacts.census.gov/qfd/states/06/06081.html
• Building Permits: http://censtats.census.gov/cgi-bin/bldgprmt/bldgdisp.pl

East Bay Renter:

Your $850k calculation is pretty close...I come up with $3300 effective payment with 28% Federal + 8.5% State deductions on the interest portion.

You do save less in interest as time goes on...effective out the door cost goes up 1% for the first 3 years, then 2% through year 9, and so on. After 5 years, you're saving $200 less. After 10 years you are saving half as much ($1600).

I guess of course since no one in this insane market actually wants to OWN or live in a house for > 5 years (hence the ARMs) no one really cares.

On the positive side, @ 5.75% , $680k financed you are, at least for the first few years, paying around $2626 in 'throw away' money if you subtract off principal. Rents are around $2500 for an $850k house. So, as long as your house doesn't lose money, you are temporarily paying more.

Well almost...I can earn around 6% in a tax-free municipal fund (ACTFX, but closed to new investors). My $200k down payment alone would will earn me $1000 a month. Even at a pretty conservative 3%, that's $500.

Soooo...it all comes down to this...if you keep your house for 5 years, it must appreciate by just under 3% to break even for lost interest and your 6% commission. That sounds like an easy goal, but that means you have 5 years for your $850k to be worth $1M.

Factor one other thing in...let's say interest rates go up by a measly 1% to 6.75% by 2010. The same out the door costs to finance $680k @ 5.75% will only cover $610k @ 6.75%. That means that from the buyer's perspective, he has to live with a 4.7% yearly increase. Are people going to be earning 25% more after inflation in 5 years?

Say value goes up only 2% per year...owning will than cost you $40,000. Or if it only goes up 1%/year...$82,000. What if values drop by 1%/year - or 5% total? Your cost: $167,000.

MAC made a comment along the lines of this: if SJ property dropped where you could get a house for $300k, everyone would buy them, and the prices wouldn’t stay low for more than a hummingbird’s heartbeat.

Well, if you believe Robert Campbell and his book (http://www.realestatetiming.com/buyit/buyit.htm) then the thing is that there is a kind of shifting psychology.

When people see that prices are continually going up, they are pushed into buying when they might not otherwise so as not to miss the profits or a once in a lifetime buying opportunity.

But similarly, when people see prices going down, they are disuaded from buying when they might otherwise do so because they are worried they are not at or close to the bottom.

Think about it…if you take a $700k SJ house, and take 15% appreciation, that means it went up ~$300 a day, or $2000 a week.

Now flip it around. If prices drop by 15%, that means that new buyers on the downward slope LOSE $2000 A WEEK! That’s most if not all what even BA people net after taxes. That means your entire paycheck is going into covering depreciation.

This is why it IS possible to have prices drop to what would now seem like unbelievable prices. Campbell’s book claims that this is why there are cycles in Real Estate…the mania causes an overshoot, and the panic causes an oversell.

Just as someone posted, yes, Real Estate is not as liquid and immediately tradeable as stocks, and hence has more resistance to tanking. BUT it also has more resistance to recovery, because while I can buy 10 shares of stock, I have to make a BIG committment to buy a house.

-- MattWalsh - 18 Mar 2005