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Monday, August 08, 2005

Shuttle Still Up, Housing Headed Down

This will probably be my last post on the subject, because from here on in local factors will have more influence than anything else. If you are holding a mortgage which will become unaffordable within a few years or you have little or no equity in your home, you may find yourself in a heap of trouble next year. Even Democratic Underground understands that the merry-go-round is about to stop.

See Krugman in the NY Times and LA Times on San Diego. Let me tell you what the LA Times isn't writing. A family member of mine just moved out of San Diego. There's a waitlist for movers. They are having trouble getting the trucks back there because so many people are leaving and so few people are moving in:
Kemper figures his town home in Rancho Bernardo, a suburban community in the northern part of the city, surged about 50% in value since he bought it new two years ago. Seeking a bigger house for his five kids under age 8, Kemper put the unit on the market early last month at an asking price of $624,975.

But it's competing against about a dozen others for sale in the neighborhood. With a dearth of offers, many sellers have set price ranges instead of a fixed listing price. Kemper cut his price to $615,000.
Yeah, well. He'll probably have to keep cutting, because people can't afford to buy these homes on conventional mortgages, long-term interest rates are rising, and banks are getting worried so financing is going to become much harder to get:
San Diego has been a standout in the use of unconventional lending. It ranks No. 1 in the use of so-called piggyback loans, which let borrowers with low down payments finance a home purchase without paying for mortgage insurance. And the majority of buyers in San Diego still use loans with an "interest only" option, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years before the monthly payment mushrooms.

"In order to purchase a home, a lot of people have to resort to risky mortgages," said Celia Chen, an economist with the national research firm Economy .com in West Chester, Pa.
But it's not just San Diego, believe me. In many markets at least 30% of the people who bought in the last two years are going to having a lot of trouble paying their mortgage in a few years. Add in the speculators, who are going to stop buying and start trying to unload. Add in increasing long-term interest rates. Add in bankers tightening loan policies, and you have a perfect storm. Many of the recent buyers have little or no equity, and will be badly impacted even by a stall in home values. This will curb real-estate lending at banks that must now guard their real-estate portfolios very carefully. Since home equity lending has been putting a lot of money into the real estate market, that's a double whammy.

And prices have to drop considerably in many markets before the affordability index rises, especially if long-term interest rates are rising at the same time. The final factor involved is pure demographics. Many of the people who have had houses for a long time in urban/suburban hot markets are in their 50's and 60's, and are thinking of selling and moving upon retirement. They will be more likely to do so when they see the market headed down.

I think long-term interest rates are going to continue to rise, in part because China unpegged their currency from ours. See Mover Mike for updates on currency flows and trends. I think that one move alone will make various countries tend to shift out of some US dollar buys, and that means less dollars will be available which will push long term interest rates up. I think money has been flowing heavily out of Asia into the US and now that flow will drop considerably. I also think that speculative Asian dollars have flowing specifically into US real estate in hot markets, and I believe that trend is about to reverse itself.

So basically what I am saying is that all the trend lines indicate that in general housing prices should start heading down. When you see something like this it is real. Furthermore, never in all our history have so many interest-only no-equity loans been out there. This results could be quite dramatic in some markets over the next two years. In economics, small changes in demand or affordability can have a big impact.

Almost everyone who could buy at these prices took advantage of the low interest rates to do so. With interest rates rising, effective real estate prices are rising even if the list prices aren't. How much long-term interest rates rise is one major factor in the housing market, but even if interest rates turned around and started to drop, the housing market would have lost its oomph and would continue a slow decline in most areas.

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