Comments on: Nostradamus in the House. Looking at 4 Potential Scenarios for Southern California Housing. http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/ How I Learned to Love Southern California and Forget the Housing Bubble Wed, 08 Oct 2008 08:28:48 +0000 http://wordpress.org/?v=2.2.2 By: Dr Housing Bubble http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1612 Dr Housing Bubble Wed, 08 Aug 2007 02:56:00 +0000 http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1612 @d.a.,<br/><br/>You’ve pointed out an important point that after 30 years, whether doing a 40 or 50 year loan doesn’t really do much in terms of the monthly nut. Yet if you calculate mortgage charges, you’ll realize that you are making the lender a lot wealthier. Just run a simple savings calculator and see how much $100 saved per month is worth after 30, 40, or 50 years at 7 percent. You’ll see exactly why this is smart for lenders, bad for you. <br/><br/>@realist,<br/><br/>It is the case that housing prices are set at the margins. In any given point in time, not all homes are for sale. In fact, only a very small portion. But this portion is impacted by interest rates, appreciation, and market perception. At this point, no longer are people buying expecting double-digit returns, or having the ability to get extremely dangerous loan products. So what we are seeing, is a margin squeeze on the housing market. Does this impact everyone? Absolutely not. But it does impact those looking to buy and sell.<br/><br/>@jeremy,<br/><br/>Glad you caught that. In fact, this highlights the point even further. I was generous on the loan terms and also overstated income by nearly 10 percent to highlight the point that even with “the perfect world” scenario, housing is in Wonderland here in LA. Even with that, you can still see how outrageously priced homes are in LA County. <br/><br/>By the way, I've seen a few rate sheets and stated income and shady loans are still being used (not to the extent of last year but incredibly, they are still somehow being funded). @d.a.,

You’ve pointed out an important point that after 30 years, whether doing a 40 or 50 year loan doesn’t really do much in terms of the monthly nut. Yet if you calculate mortgage charges, you’ll realize that you are making the lender a lot wealthier. Just run a simple savings calculator and see how much $100 saved per month is worth after 30, 40, or 50 years at 7 percent. You’ll see exactly why this is smart for lenders, bad for you.

@realist,

It is the case that housing prices are set at the margins. In any given point in time, not all homes are for sale. In fact, only a very small portion. But this portion is impacted by interest rates, appreciation, and market perception. At this point, no longer are people buying expecting double-digit returns, or having the ability to get extremely dangerous loan products. So what we are seeing, is a margin squeeze on the housing market. Does this impact everyone? Absolutely not. But it does impact those looking to buy and sell.

@jeremy,

Glad you caught that. In fact, this highlights the point even further. I was generous on the loan terms and also overstated income by nearly 10 percent to highlight the point that even with “the perfect world” scenario, housing is in Wonderland here in LA. Even with that, you can still see how outrageously priced homes are in LA County.

By the way, I’ve seen a few rate sheets and stated income and shady loans are still being used (not to the extent of last year but incredibly, they are still somehow being funded).

]]> By: JR http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1617 JR Tue, 07 Aug 2007 21:26:00 +0000 http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1617 Dr. HB,<br/> I believe the housing prices and incomes you cite in your scenario analysis are all in nominal terms, which is fine but potentially misleading. A 5% annual drop in nominal prices is actually a much larger drop in real prices. <br/><br/>It would be interesting to look at a scenario where nominal housing prices stay flat over a number of years, following an initial decline in prices caused by an initial shakeout of unqualified homeowners. In this case there certainly would be a decline in home values, even if only in real terms. I believe this would be accompanied by a period of time with greatly reduced home turnover.<br/><br/>Those who won't need to sell, just won't sell. Dr. HB,
I believe the housing prices and incomes you cite in your scenario analysis are all in nominal terms, which is fine but potentially misleading. A 5% annual drop in nominal prices is actually a much larger drop in real prices.

It would be interesting to look at a scenario where nominal housing prices stay flat over a number of years, following an initial decline in prices caused by an initial shakeout of unqualified homeowners. In this case there certainly would be a decline in home values, even if only in real terms. I believe this would be accompanied by a period of time with greatly reduced home turnover.

Those who won’t need to sell, just won’t sell.

]]> By: vinny http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1616 vinny Tue, 07 Aug 2007 20:47:00 +0000 http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1616 The Housing market runs in seven year cycles. If you take June 2005 as peak which is was the cycle will not even hit bottom until 2012. By then housing prices will have declined by some 40 to 50%. Layoffs in the financial industry are soon to pick up pace, as will housing prices. It took a long time to get to this point, and it is going to take some time before we rebalance. At least one major bank and many hedge funds will go bust before we reach bottom. Hang on to your hats it going to be a very,very rough ride.<br/><br/>Vinny The Housing market runs in seven year cycles. If you take June 2005 as peak which is was the cycle will not even hit bottom until 2012. By then housing prices will have declined by some 40 to 50%. Layoffs in the financial industry are soon to pick up pace, as will housing prices. It took a long time to get to this point, and it is going to take some time before we rebalance. At least one major bank and many hedge funds will go bust before we reach bottom. Hang on to your hats it going to be a very,very rough ride.

Vinny

]]> By: Jeremy http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1611 Jeremy Tue, 07 Aug 2007 13:52:00 +0000 http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1611 Hey - You're figuring a 6.5% interest rate for a 30 year fixed... Not to be rude, but what are you smoking?!? Rates are going to go up because banks are widening their spreads in order to make up for the losses of the subprime. 7% is a great rate nowadays - as of this past week. On top of that, stated income loans are a thing of the past. So, this will be a huge burden. Everything you write of is true - But, everything will be worse because of the tightening of credit and spreads increasing. Hey - You’re figuring a 6.5% interest rate for a 30 year fixed… Not to be rude, but what are you smoking?!? Rates are going to go up because banks are widening their spreads in order to make up for the losses of the subprime. 7% is a great rate nowadays - as of this past week. On top of that, stated income loans are a thing of the past. So, this will be a huge burden. Everything you write of is true - But, everything will be worse because of the tightening of credit and spreads increasing.

]]> By: Realist http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1610 Realist Tue, 07 Aug 2007 12:46:00 +0000 http://www.doctorhousingbubble.com/nostradamus-in-the-house-looking-at-4-potential-scenarios-for-southern-california-housing/#comment-1610 Dr. Housing Bubble,<br/><br/>I agree that the bubble will burst... and am hoping for really big pop. I don't know if forecasting using family median income is the most accurate way, though. I say this because prices aren't set by every household in the area. Prices are set by those who choose to or are forced to sell, and the people who are financially ready and willing to buy. A retired couple living off of $2000 per month, living in a paid off house will not be looking to buy a house. That couple's family income brings down the median family income for the area. I think that a more accurate measure would be income levels of people that have bought houses within the last couple of years. I don't know how those numbers could be obtained... especially with the liar's loans distorting reality. But these numbers would likely represent the incomes of real buyers. Once those numbers are obtained, forget about the 41% of income for housing. Calculate it at the 28%-33% of either net or gross (I was a child back when lending was responsible, so I'm not exactly clear on what a sane ratio is really supposed to be). I think that these old fashioned ratios will return, though, and I welcome them. Dr. Housing Bubble,

I agree that the bubble will burst… and am hoping for really big pop. I don’t know if forecasting using family median income is the most accurate way, though. I say this because prices aren’t set by every household in the area. Prices are set by those who choose to or are forced to sell, and the people who are financially ready and willing to buy. A retired couple living off of $2000 per month, living in a paid off house will not be looking to buy a house. That couple’s family income brings down the median family income for the area. I think that a more accurate measure would be income levels of people that have bought houses within the last couple of years. I don’t know how those numbers could be obtained… especially with the liar’s loans distorting reality. But these numbers would likely represent the incomes of real buyers. Once those numbers are obtained, forget about the 41% of income for housing. Calculate it at the 28%-33% of either net or gross (I was a child back when lending was responsible, so I’m not exactly clear on what a sane ratio is really supposed to be). I think that these old fashioned ratios will return, though, and I welcome them.

]]>