Uh Oh...Bears Capitulating?

The bearish narrative has relied heavily upon the "shadow inventory" angle for some time. So I was pleasantly surprised to see this graph put up on one of the oh so scary bearish blogs. We've all seen the official inventory numbers decline significantly and the corresponding months of supply go way down. But here is a look at the supposedly threatening shadow inventory. Looks to be down by about 1/3 and dropping quickly.

All the data keeps clearly showing the whole housing bubble (and subsequent crash) story has largely played out. We have another year or two of churning to do before really getting on super solid ground, but by that time the bears will just finally start realizing that the bust is over and they will only be 4 years too late. At first the story was "oh just wait for the shadow inventory", and now it's "yeah it's getting better I guess but it's all because of the Fed/banks/gov, etc (insert conspiracy theory here). Just you wait". Good luck trying to bid on prime properties now, let alone in another year or two when things are even stronger...

On another note, rates keep coming in. Looking at where mortgage bonds are trading, it seems the banks are slow playing the rate decline a bit in that their spreads have widened out as they aren't passing on anything close to the full post QE3 rate declines yet. So I'm not in a hurry but I'm thinking of refinancing in the not too distant future. Given that I plan on paying down the mortgage quickly, I'm thinking I will probably stick with a 5/1 ARM. I think something in the low 2's might be possible at some point. Or I guess I could extend out with a 7/1 ARM for a little higher rate. Remember, these probably aren't great products for everyone but I can bear the interest rate risk. What are you guys doing these days? Oh, and along these lines, I read a funny comment on another blog where a guy half jokingly said that rates are getting so low there won't be any tax advantages for the government to take away even if they ever go that route. Paying so little interest as is... 

Home Builder ETF

This is the 1 year graph of XHB (home building ETF). There are a bunch of housing related names in this basket in addition to the actual builders. Wall Street is having a major love affair with anything and everything housing related. I think there could be a near term pull back after this huge run but I'm posting this graph because it is obvious that future housing strength is being priced into the market. This means price increases as well. When are the bears going to say "ok, we're wrong, things are obviously getting better"? Along those lines, why should I even keep this blog going when I am so obviously right? Do people really care about watching prices inch back towards all time highs? (yeah, that's what's happening right now...)

Rates are dirty low and they don't look like they are going up any time soon. If anything other than low inventory is preventing you from buying then you are wrong; even my puppy knows that.

And finally, speaking of bears, how ironic is it that "latesummer2009" chose that as his handle? Late summer of 2009 would have been a great time to buy! Even I was not smart enough to recognize that at the time! Sadly, he is still bearish, wrong, and has missed a decent move off the bottom (not to mention any quality inventory that comes up nowadays is super tough to secure). 

Culver City Rent vs Own

4419 Vinton is a 3 bed/1.75 bath 1,400 sq ft house.

Based on comps in similar locations in Carlson Park, I think this place could be worth $835k or so.

But it was just listed as a rental and was leased out at $3,200/month.

What would this cost to own?

Interest is about $2,600/month and Principal is about $1,250/month. I am assuming 0% down to take into account opportunity cost on your down payment.

Taxes come in at about $830/month. Throw in another $300/month for insurance and maintenance.

Total is about $5,000/month on a gross basis. But you gotta take out principal as that is essentially just forced savings. Then you need to net out some tax break on the taxes and interest. At a conservative 25% rate you get back $850/month. So the new net total "expense" comes to $2,900/month.

$2,900 is less than the $3,200 they just rented it for.

Of course, in the real world, a responsible buyer is putting down 20%. That 20% was earning just about zero in the bank. So if you assume no opportunity cost on that money you are looking at a gross cost that is $750/month cheaper ($4250 vs $5000) and a net cost that is $400/month cheaper ($2500 vs $2900).

I am assuming a mortgage rate of 3.75% and no PMI.

This is why people are buying and why prices are firm. Case closed.


...for fun, running the same numbers assuming a purchase price of $1mm gets me to a net cost of just under $3,400/month assuming zero down or a net cost of just over $2,900 assuming 20% down and no opportunity cost.

Bernanke To Bears: "Buy A House...or stocks, HY bonds, gold, etc"

Mrs Warchest (with confused and distgusted look on her face): "Are you seriously doing a post with a picture of Ben Bernanke?"

Yes! The Fed wants people to go out and spend more money. The idea is that there is a lack of demand. If people would demand more goods and services, businesses would have to ramp up and hire more people. It's all about trying to get more people hired in the end. Reduce unemployment, reduce unemployment, reduce unemployment...in case you haven't heard that enough from the stupid politicians lately.

But how do you get people to spend when they aren't feeling exceptionally confident? Well that's easy. Make them feel richer! People feel richer and are more likely to boost spending when their houses go up in value and stocks go up. Stocks are really secondary beneficiaries but they react most quickly and are the most visible of asset classes. But much of our morass revolves around housing and housing is a powerful engine of economic growth. So that's where the focus is and that's why the Fed is buying mortgage backed securities. Extending the commitment to low rates until 2015 helps too. The idea is to get rates down even further (or at worst keep them very low) so that buying houses is even more attractive. Existing owners also have the opportunity to save money by refinancing at lower rates. More people buying (i.e. demanding) houses should boost the economy as builders will build more new houses, and existing house prices should rise.

The Fed is telling you they are trying to boost home values (and stock values)! Ben explicitly said this in the Q and A session. I'm not saying I agree with everything the Fed is doing and I don't really care about debating the longer term costs to this...I'm just saying that I was surprised by the explicit language used surrounding the "we want houses and stocks to go higher" topic. With the strength we've already seen in the housing market during the last year, I would imagine this very powerful statement by the Fed will only serve to keep conditions firm. "dwr" is probably right; doubling down on real estate is likely not a bad move.

Paying Down The Mortgage?

 You guys paying down principal faster than you need to these days? Cash in the bank making zero (and won't be making anything for years). Kind of hard to argue any other asset classes are "cheap" these days (see my last post on stock market levels). 30 years is way too long to have a mortgage and prepayment penalties are largely a thing of the past. I've never had any debt and can't stand the idea of paying interest even if it is at a low rate. So I made a few prepayments these past few months. With rates as low as they are combined with a greater than 20% down payment and these prepayments, I am a luxury vehicle away from having my regularly scheduled monthly payments be an equal portion principal and interest. Even though I have a 5/1 ARM which amortizes over a traditional 30 year period, I am trying to at least pay principal down on a 15 year schedule if not significantly faster. I'm willing to listen to views on why this is a bad idea but I have to imagine some of you are doing the same thing, no? Thoughts?

PS: I'm not convinced my attitude towards leverage is in the minority these days, especially among the buyers in more expensive areas. If I am right, this of course would be bullish. Strong, conservatively financed buyers are putting in a solid floor on this market in my view (contrary to the "everyone is using FHA financing" crap you might read elsewhere).

Reason #1,437 Why The Bears Are Wrong

If you've been listening to politicians and the news recently you would think the economy really must be in terrible shape and the stock market must really be suffering. I won't argue that everything is hunky-dory but I did want to draw some attention to what's been happening in the stock market. We are now at roughly four and a half year highs and are about 8% off of all time highs. But I don't see or hear a lot of folks talking about it. I don't really want to get into politics but if I were Obama, I would constantly have this chart with me on a big poster board. "Oh, I'm not business friendly and my supposedly socialist policies are wreaking havoc? See the chart". It's kind of like when the other team is talking trash during a game where you are winning by a good margin. All you have to do is say "scoreboard".

Anyways, this is a housing blog and I think people should remember that your average upper middle class person will feel better as their retirement and other investment account balances grow as a result of this bull market. I think this can, has been, and will continue to have a positive impact on the housing market. Then when you look at the real upper income/wealth folks you really see a boost. The types of buyers in Santa Monica are pretty likely to have a significant exposure to risk assets.

So while it isn't politically correct to talk about how upper income folks are doing well or how the stock market is making cycle highs despite a persistently high unemployment rate, these are the realities on the ground. And that's why highly desirable housing markets have been so firm and why I think they will continue to hold in well.

Little Short Sale *Update 1*

Back in June I featured the short sale at 2321 Washington.

Previous Purchase: 8/8/06 - $1,215,000

Listing History: 6/18/12 - $1,050,000
Increased post escrow - $1,164,000

SOLD: 8/31/12 - $1,175,000

Once again, it certainly doesn't hurt to list a little low and build the excitement. No bargains here...you really can't be opportunistic in this market unless you are bidding on junky stuff. Everything else is pretty firm.

While this on the surface looks like just a 3.3% decline from the peak, the sellers put a little money into it (nothing huge but it all adds up) so the decline is larger. And please shut up about selling costs, holding costs, etc. We are tracking prices here...