Mortgage rates basically track the 10 year rate (+ a spread). Calculated risk has a post right now about the real time movements in the mortgage market. It looks like conforming rates are getting near 5% after being in the low 4% area. This makes sense as the 10 year Treasury rate has also moved up about 1% during the past little spike.
Now rates rising on their own would be a significant negative for home prices. But in case you haven't been paying attention, the economy doesn't look too bad right now. A more stable and now growing economy should in fact elicit higher interest rates. So you have to ask yourself how much higher interest rates should be given the better economy and better outlook for growth next year.
Overall, I think rates are still really low and I don't view the current rise as significant enough to cause a significant disruption in the housing market, especially because a big reason for most of the interest rate rise is due to an improving economic picture in my opinion.
Other than this story, I don't really have much to say about the housing market right now. It is the seasonally slow time of year. Not much going on, prices don't seem to be moving much from the limited data points I see coming in for our local market.
I don't see the economy in such a sanguine way. With 12+% unemployment and real UE at about 20%, a budget shortfall of 28 BILLION dollars, I'm having trouble believing that California's economy is gaining traction. I predict a second dip coming soon. Calculated Risk also notes that the future does not look very bright.
ReplyDeleteI would very much welcome a discussion of how readers of this blog see the economy. I think that it is likely unwise to ignore all the positive developments and the positive momentum (here and worldwide). There are no doubt major challenges (again, here and worldwide) and that is why we aren't seeing the types of growth rates which are traditionally associated with recession recoveries. But so many people seem to be thinking that the entire notion of any sort of recovery, regardless of its strength, is all some type of giant mirage.
ReplyDeleteAs for the guy who writes Calculated Risk, I think he has certainly become incrementally more positive. He even did a post not long ago highlighting all the positive data coming out and he has been saying that he anticipates job numbers better than the consensus. Just right now there is a post up about apartment rents rising, multifamily construction picking up, and residential investment likely making its first positive contribution to GDP in 2011 since 2005. So I think you are not reading things correctly to say that he is implying the future does not look very bright. He spends a lot of time on negatives as well, but we are in a muddle along, sub-par recovery and he specifically made a big point of saying he thinks we won't have a double dip (and he as well as I have been correct about that so far).
I think it simply depends on if you believe debt = wealth. Because as it stands right now the only fix western economies have is to shift private debt onto public balance sheets and to keep it going until the next debt crash occurs. The growth you are seeing is coming from deficit spending. That's it - that's their solution.
ReplyDeleteIt also depends on your age bracket. If you're 60+ you figure there's not much you can do about your situation now and will take whatever savings/equity/pension you have and ride it out. Those 40 and below should realize that there are severe debt shocks in the future and those that are relying on leveraged assets will be decimated. The working class will be pushed to the curb like a snowplow working city streets. 80% of college graduates move back with their parents and those kids aren't counted on unemployment rolls. Jobs numbers are not representative of the health of the economy. All you have to do is look at debt levels - personal, corporate, state, federal.
Things are not great overall, but this blog is about SM real estate, which the top 1/2 of 1% is fighting over. I'm not sure the same rules that apply to Riverside apply here. Quite the contrary, if the middle class is being decimated, people with means will flock to those few areas that will remain somewhat safe, a la Argentina.
ReplyDeleteThis country is facing a host of both long term and immediate challenges but, as always, real estate is a local phenomenon. That said, California is in worse shape that even the US. Our governor-elect is implying severe cuts to the budget, and that will ripple out even to the privileged class. Prices remain very high not just in SM, but throughout less attractive communities in LA. If the number of potential buyers for all these $1+ million dollar houses declines, that will adversely affect prices across the board....
ReplyDeleteAnd dwr, god help us if we turn out to be Argentina, because that country saw it's peak more than 50 years ago and has never been back...
How might this effect the continuing erosion of prices in residential RE?
ReplyDeletehttp://www.latimes.com/business/la-fi-mortgage-deduction-20101220,0,2642237.story
All I really hear are negatives from you guys. Nobody seems willing to accept the fact that as dwr says, things are not great overall, but as I say, things aren't completely terrible either. I think it is easy to look at the big structural problems and give up and say "we're all screwed so any notion of growth, recovery, job creation, etc isn't possible or if it is, its just artificial and we are due for a great double dip, etc". But I reject that notion. We have major problems to work through and that process of adjusting will likely manifest itself in a longer term headwind to growth and job creation, I still think we muddle along.
ReplyDeleteIn my muddle along scenario we don't see big future drops in house prices (in Santa Monica and other places). As Calculated Risk highlights, several of the house price indices are currently showing modest declines once again after being flat to slightly up for much of the last year. I think prices modestly decline for a while during the first half of 2011 and then we see stabilization followed by a more normalized seasonal trend. I think Santa Monica could show a similar trend. If I had to choose higher or lower prices a year from now, I think they will be lower but not by a huge amount, and if rates rise you may actually end up with a higher payment!
I don't think they will eliminate the mortgage interest deduction. I bet they do nothing, but if something gets done, it would likely be phased in over a good chunk of time and maybe they compromise and say only the first $500k is deductible instead of $1mm or something. This should have a negative effect on prices at the margin but I don't think it will be enough to seriously dent prices here. I don't own any real estate so I'm not talking my book. I'm just reminding you guys that things aren't totally terrible out there and I think we will need to see some big exogenous event to bring prices dramatically lower.
I'm as bearish as anyone, but the tax/unemployment compromise removed a significant headwind. An abrupt end to most/all stimulus plus a big tax increase would have been a good reason for a double-dip... that risk is now gone.
ReplyDeleteThat said, I do think there is a lot of regional variability, and California still looks bleak. I still think, fundamentally, we have an aggregate demand problem, and California budget cuts will only make that worse locally.
Further... the tax cut compromise just kicked the problem down the road. It's not an engine for new growth. It's not a new Interstate Highway Act, Apollo Program, New Deal, etc... it's just a temporary crutch. I still don't see where this country gets any growth beyond population increase. Without growth, higher interest rates will push housing prices down... even if the macroeconomic conditions for a crash have been substantially lessened by additional (temporary) deficit spending.
Warchest,
ReplyDeleteWith the recent positive news there does not seem to be an imminent double dip. However, growth is anemic, and there are both structural problems in the US and abroad. We also seem perilously close to following Japan's path of the last 20 years following their own housing debacle. They have also muddled along, and housing prices there have suffered now for decades. Whether Santa Monica remains immune from the rest of society will be interesting to see....
"I still don't see where this country gets any growth beyond population increase."
ReplyDeleteSo you saw the Internet explosion coming and foresaw Google, Amazon, etc.? The one certainty is that there will be innovation for as long as humans are alive, and I don't believe a significant portion of it'll come from China, India, Brazil, or Russia, at least not in the near future. This country is not perfect, but somehow we come up with most/all of the Apples, Intels, Microsofts, of the world.
Warchest-
I think your blog is infested with permabears. Yes, there is always a reason to be negative. But to always see the negative is not good. The one thing the housing bubble should have taught people is, when everyone is headed one way, go the other. Now everyone thinks this country is doomed, the majority of people in a recent poll think China's economy is bigger than ours. Everyone is pessimistic, and the average person is almost always wrong.
To those who say "prices are too high" (and since this is a SM blog, I take your comments as pertaining to SM), do you really have any idea who today's buyers of SM real estate are compared with 10 years ago? They're not the same category. Do you factor in interest rates into your determination? When I was out looking, I saw many houses where the mortgage payment was 15-20% higher than for the same house in the mid to late 90s, assuming a jumbo rate of around 8.5% in the 90s. Yes, if we get an interest rate spike to the 7s or 8s, prices are going to come down hard. But I'm not betting against the Fed.
Let me start a new thought.
ReplyDeleteOn the NyTimes Economix blog, the author (an economist) makes the point that a ratio of house price / yearly rent should not be greater than 15 or else the benefits of renting exceed the benefits of buying. What does the group feel about that, given that in Santa Monica the prices I see exceed that ratio?
Anecdotes are the response of the ignorant.
ReplyDeleteSure, we have Google, and Facebook, etc., but we also have declining capital infrastructure, a diminishing set of native engineering PhDs, reduced R&D spending and a declining share of the world's intellectual property, as measured by academic articles and patent applications. Moreover, these are policy choices: California, for example, has stopped subsidizing higher education, and the result is that our world beating UC system is in decline. Our visa policies changed after 9/11, such that foreign students and scholars come to this country in diminishing numbers. Our infrastructure spending is anemic... fewer things are more disheartening than international business trips these days, seeing the new airports, roads, and trains in Asia, then landing back at LAX and taking the 405 home...
But the close cousin to the anecdote is the epithet. Why look at the facts when you can just call me a permabear? I'm bearish solely because we're a nation overrun by morons who just assume things will get better... that another Google will come along and save us all... instead of a nation invested in doing the things that will make us better.
Long term reader, first time commenter - thanks for the great blog Warchest. A few points:
ReplyDelete1. As you've pointed out many times, the Santa Monica SFR buyer is not your typical Californian. They probably lie in the upper 98th-99th percentile of the US income distribution, with household incomes of $250,000 or more. I think one important (non-anecdotal!) piece of information to remember is that the Gini coefficient, a standard measure of inequality, peaked in 2006, dropped precipitously in 2007, and has been steadily marching upward since. With deepening income inequality in the US, even in a long-term stagnant growth scenario the very top of the income ladder may still drive prices in SM slightly upwards as they become richer.
2. The 12% U3 rate in CA might be inconsequential in that respect because nearly half of the unemployed have now been out of work for 6 months or more, a situation that has no historical analogue. This hard core of potentially unemployable workers almost certainly had no bearing on the SM housing market to being with, which is to say that perhaps the better "read" on the unemployment rate as it propagates up to the SM house buying class is probably closer to 7% (or 6% nationally). In fact, the hard core of unemployed might actually on net average contribute to the disposable income of the SM home buyer because they drive down unskilled labor prices throughout the economy.
3. I don't think that your Santa Monica homebuyer is all that sensitive to interest rates. For the Sunset Park $750k to $1 million crowd of single $250k incomes or dual $120k+ couples, as you've pointed out regularly the biggest impediment to buying is saving for the down payment. A rise of interest rates to 7% would be a $600/month (deductible) extra expense on a $700k-ish loan - harsh but not a dealbreaker. I think the effect on SM prices in this range would likely be secondary, as other palatable alternatives, say in Culver City, get driven down. For the NOMA crowd, they're above the mortgage interest deduction threshold anyways so I suspect that a decent proportion of them are buying in cash (I have to admit I don't have a great understanding of the buyers in that market though).
4. On larger macro trends: If the Fed really gets into a currency/QE war we could see the bond markets begin to factor in inflationary expectations and push long-term interest rates up. They are playing a very dangerous game but they may have no choice. OTOH much of the rest of the developed world (Europe, Japan) faces way worse debt problems than we do, and any crisis there may provide a flight to safety that will keep our interest rates depressed.
5. One of the first places that expansion of the money supply is felt is in real estate prices (look at the Shanghai market right now). For those worried about the US's massive long term entitlements and debt - what do you think is more politically palatable? Increased taxes and cuts in entitlements, or a decoupling of entitlements from the CPI and an expansionary monetary policy? What does QE2 (+ QE3 + QE4...) look like?
Late to the post and it's been a long time, but GOOGs and MSFTs mainly end up creating a few thousand jobs here and there and funneling billions up to the highest few. Doesn't sound like a formula for restoring the middle class and economic stability.
ReplyDelete"California, for example, has stopped subsidizing higher education, and the result is that our world beating UC system is in decline."
ReplyDeleteIn decline says who? Compared to what? The last time I checked, the UC has 6 or 7 of the top 50 universities in the world. Did one of them slip one spot in the last rankings!? Oh no, it's all over for the UC system.
Even worse than anecdotes are unfounded conclusions based on nothing.
"GOOGs and MSFTs mainly end up creating a few thousand jobs here and there and funneling billions up to the highest few"
And for every GOOG and MSFT there are hundreds or thousands of smaller companies that consult for them, and the GOOG and MSFT employees in the money spend lots of that money, creating jobs for scores of other industries.
How exactly does an economy prosper if it's not through new companies that dominate in newly created fields, creating lots of new wealth which spreads throughout the entire economy? Please enlighten me.