Install this widget on your website for free in less than a minute!
Today we bring you an interview with Patrick Duffy of of the Housing Chronicles Blog. Patrick is also the Founder and Managing Principal of MetroIntelligence Real Estate Advisors, as well as a former Managing Director of Consulting with Hanley Wood Market Intelligence. Below, he shares his thoughts on housing prices, loan modifications, and the pros and cons of renting, among other topics.
Today we bring you an interview with Raul Black of HousingCorrection.com, which contains a collection of online house valuation tools. Below, Raul shares his thoughts on housing prices, buying versus renting, and foreclosure.
Mortgage Calculator: I’d like to begin by asking you about your background. What made you decide to join the ranks of housing watchers? How would you summarize your approach to the (current) housing market, and how has your background informed this approach?
In 2005 I began searching for a house near my place of employment in order to reduce my 3-hour round-trip commute. I couldn’t help but notice everything in my region seemed overpriced. I began exploring housing data in an effort to understand why prices appeared to be unsustainably high. I wound up becoming hooked on the subject matter.
My approach to understanding the housing market is highly data-concentric, which fits well with my occupation as a data analyst. Unfortunately, data tells a large part of the story, but it doesn’t tell the entire story. If prices maintained strict relationships to popular fundamentals, we would have never had a housing bubble. Thus, I attempt to balance my data-driven approach with other techniques such as observing market psychology and using good old fashioned common sense.
Since random unforeseen future events have not been captured in my historical data sets, betting the farm on a promising historical pattern is not my goal. Instead, I attempt to assign relative probability measures to various potential outcomes and continue to adjust these forecasts as new data arrives and my understanding of the subject increases.
Mortgage Calculator: It seems both the housing bubble and its bursting have been characterized by important regional disparities, so it’s not really meaningful to make generalizations on a national basis. Do you think that the recovery, whenever it cements itself, will also adhere to this pattern? Based on the data that you diligently display on your website, are their some markets that you would avoid, but other areas that you would gravitate to?
The price of each region is a function of local, national, and global economic factors. In my opinion, global and national economic factors (such as the Fed’s open market operations) will continue to influence price, but so will each region’s individual economic situation. Thus, we’ll see general national trends accompanied by continued price disparities among regions.
Northwest cities such as Seattle, WA and Portland, OR have a high probability of continued depreciation due to prices being well out of line with historical fundamentals. Despite prices being extremely cheap by historical standards in Phoenix and Las Vegas these areas still have extremely high foreclosure heat and will most likely continue to correct. Further east, I’m negative on Chicago and New York. That’s kind of a popular forecast of the Case-Shiller 20, but it fits well with what I’m seeing.
There are areas in the U.S., such as Sioux Falls, SD and Lincoln, NE that have remained more immune to the housing bubble and the national economic downturn than others. Buying into this pattern is a safer bet than buying in cities that ran way up in price, got nailed by the economic downturn, and have yet to come back to earth.
(Cleveland appreciated 4.5% per year from 1985 to 2006, eventually giving way to a rocky local economy.
Areas, such as Cleveland, that appreciated at a steady rate over the long term and were hit by the economic downturn could be setting up for modest gains if the economy continues to improve.
Given time, bubble cities such as Vegas will look like outrageous bargains. But don’t jump too soon, or you could get burned by continued foreclosure problems.
Mortgage Calculator: What do you think it will take for people to accept the notion that home prices don’t appreciate much faster than the rate of inflation, over a long-term period of time?
I think the short answer is time. It will most likely require several years before people develop fresh memory patterns that become etched deeper than the memory of their euphoric bubble experience. In the meantime, I believe lots of people will lose their homes and their money. Losing money tends to have a sobering effect on optimistic mania.
Mortgage Calculator: HousingCorrection.com suggests that housing prices will continue to fall. Is this based on the forecasting tools available on your website, other experts, or your own intuition?
It’s based on a combination of all three factors. Using data-driven techniques, I have attempted to test a number of experts’ forecasts. In doing so, I’ve learned at least as much from others as I have from studying the data. As for intuition, I believe it can be a powerful tool when used in limited amounts. However, it’s important to not get intuition confused with emotion. In my experience, emotion-based decisions generally yield a poorer return on investment than decisions arrived at through logic and intuition.
Mortgage Calculator: The data suggests that foreclosures will continue to rise. Do you think that government programs and lender initiatives will be enough to forestall this? Do you think that strategic defaults will continue to be a factor?
I trust what the data says. Foreclosures will continue to cause distress in the market for the next several years.
The government is good at applying bandages that temporarily conceal gaping wounds, but they have little experience fixing deep underlying economic problems. A good example is May existing house sales. Most experts expected more homes to sell in May than April due to buyers having rushed to beat the tax credit deadline. But when the data came out, it showed that sales dropped. The government has a poor reputation when it comes to bang for the buck.
Bringing back high-paying jobs in this country is a much better fix for the housing market than government gimmicks aimed at propping up prices above what people can afford to pay. Our nation’s leaders have thrown a kitchen sink full of expensive gimmicks at the foreclosure problem; yet, RealtyTrac track indicates bank repossessions hit a record monthly high in May.
Knowing that the government’s ability to bring house prices back to bubble levels is severely restricted, who wouldn’t be tempted to mail their keys back to the bank if they were underwater on their home? Despite what most real estate agents claim, homes typically represent highly leveraged investments. When you gamble and win, it’s great! When you gamble and lose, you renege. The banks did it, and homeowners are doing it too. If provided a path, it’s human nature to walk away from bad deals.
Mortgage Calculator: Do you generally believe that renting is more economical (and more sensible!) than buying, even when the ratio of rent to home prices is more in line with long-term averages?
I believe different people extract different forms of value from homes. Owning a home within your financial means can provide a sense of belonging, stability, and security. However, that same home outside of your financial means becomes a nightmare. On the other hand, renting relieves occupants of numerous responsibilities and allows packing up and moving without having to pay 8% of the home price for taxes and real estate commissions.
It is up to each individual to measure the value they get out of renting the home compared to purchasing it. From a purely investment standpoint, I would be very reluctant to purchase a home in my area that is not rentable as cash-flow positive after having put 20% down. Anything outside of this range sets off warning signals for me. If a home doesn’t make financial sense to me as an investment, it doesn’t make financial sense as a personal residence.
Mortgage Calculator: How would you reconcile government and seller incentives and low interest rates with the possibility that home prices could fall further, when advising someone thinking about buying their first home? Would you advise them to buy, wait for a while, or wait forever?
Government incentives are great for house sellers but they are not always favorable to house buyers—especially when offered at the bust end of a pyramid scheme. They tend to temporarily inflate prices but, once the support is withdrawn, prices continue to correct. With seller incentives buyers pay more in order to get perks that must be paid for over the life of the loan. Low mortgage rates only make sense if you are buying in an area that has overcorrected to the point of prices being cheap by historical standards. Otherwise (barring wage inflation) when rates go up, house prices will go down so that buyers can afford the monthly payments.
It’s typically very difficult to save a down payment because rising home prices eat into the cash you save. The current environment of flat to declining home prices provides an unusually good opportunity to live frugally while saving up down payment equity. In most cases, I recommend keeping an eye on the jobs data in your area, as it is a leading indicator of where house prices are heading. While unemployment is high, saving a down payment is a much safer bet than attempting to catch a falling knife.
Ultimately, whether to buy or wait depends on your job security, the area where you live, what your specific needs are, how long you plan living in the home, your views on future inflation and the future of jobs in your region, and several other factors. If you’ve decided you need to buy a house, don’t buy the first house you see, and don’t depend on your real estate agent to be the expert. Do your own research and become informed about your specific market. In addition, it’s important to keep your impulsivity and emotions in check during the buying process.
In my opinion, the market will eventually heal itself. Increasing population growth accompanied by record low building starts will eventually improve the supply/demand ratio. It’s important to become an informed buyer in the meantime. This provides insurance against becoming one of the millions of foreclosure casualties throughout the country.
Today we bring you an interview with William Gloede of Big Builder Online. Below, Mr. Gloede shares his thoughts on the recovery in housing prices and the government’s role in the housing market.
Today, we’re proud to bring you an interview with Dan Green, a loan officer with Waterstone Mortgage in Cincinnati and the author of The Mortgage Reports.
Today we bring you an interview with Steve Waldman of Interfluidity. Following up on a post I wrote last Monday (Short Sale or Strategic Default: What’s the Best Choice?), I decided to focus the interview around strategic default and the ever-expanding role of the government in the housing market.
Today, we bring you an interview with Somesh Gaur, editor of Housing Bubble Bust, which takes a quantitative approach to understanding housing prices. The site also offers an excellent “Anatomy of the Housing Bubble” and data feeds on everything related to the housing market.
Today, we bring you an interview with Peter Peter Giardini of Bigger Pockets. Pete is a successful real estate investor who started with $25K in 2001 and has never looked back. He took full advantage of the “craziness” of the market and sold his entire rental portfolio at the very top in 2006. In addition to his own investing, Pete founded The Club, LLC, a real estate investing coaching program that focuses on strong relationships, accountability, one-on-one coaching and strong local resource networks. You can find out more about Pete here or via his coaching program. Pete can also be heard every Thursday night at 11PM on his radio show.
As part of our continuing series, today we bring you an interview with John M. of Housing Doom, who despite not yet having achieved macroeconomic enlightenment, was one of the first bloggers to spot the housing bubble, and comment on the impossibility of getting “something for nothing.” Enjoy!
As part of a new series, the Mortgage Calculator will begin interviewing other housing columnists/bloggers. The following is our first interview, with Patrick Killelea of Patrick.Net, one of the most widely read blogs on the housing crash.
Despite his vast readership, “Patrick has no background in real estate at all. He is the author of the O’Reilly book Web Performance Tuning. He lives in Menlo Park, CA.” In his own words, “You should not believe anything he says until you understand the math yourself. Here’s the math:
If you understand that, then you probably understand the rest of this [my] site as well. If your job depends on not understanding that, then you won’t understand it.”
Mortgage Calculator: Given the sub-title of your blog, is it fair to say that you believe the housing market hasn’t yet bottomed?
Yes, I think the housing market has much further to fall on the coasts and in expensive areas. But in some poor neighborhoods, prices have fallen back into line with rents already, meaning that it’s about the same to rent or buy there. So those poor areas seem close to a bottom.
Mortgage Calculator: You write that when interest rates rise, housing prices generally fall. How do you square this with the notion that interest rates will probably rise when there is evidence of an economic recovery, at which point borrowers will be in better positions for buy expensive homes?
Prices on the coasts are so far beyond the range of the median salary that any small increase in salary is insignificant compared to small increases in interest rates. It is still common for borrowers in California to have ten times their annual income in debt. They can pay their mortgage only at extraordinarily low adjustable interest rates, and only until the mortgage resets. A reset from 4% to 6% means 50% more interest every month.
Mortgage Calculator: Do you think, then, that when the Fed finally raises rates, that home prices will start to once again fall?
Start once again? Not sure what you mean there, since prices are still falling right now. For a realistic view, avoid all news which quotes used-house salesmen (realtors) because they will say anything that parts fools from money.
But yes, rising rates will definitely push prices down even more.
Mortgage Calculator: Given the lopsided relationship between housing prices and rental rates, do you that it makes sense for real estate investors to look at buying rental properties?
Only in poor neighborhoods, so far. You can easily calculate the annual rent to purchase price ratio and see what kind of gross return you can expect as a percentage. Returns in wealthy areas are too low to justify the high prices, about 3%, but there are poor parts of Oakland, for example, where the return is over 10%.
Mortgage Calculator: On a related note, do you generally believe that renting is more economical than buying, even when the ratio of rent to home prices is more in line with long-term averages?
No, if you think about it for a minute, you see that renting must have been more expensive historically than owning, or landlords would have gone out of business. If their mortgage and expenses are $2000 per month, but the tenant is paying $1500 per month in rent, the landlord is losing money.
The basic theme of my site is that that relationship is inverted now, and landlords in middle-class and better areas are giving a huge gift to renters. It’s a fantastic time to be a renter. You get the use of a house for free, paying only the property tax and maintenance.
Mortgage Calculator: You pointed to appraisers as facilitating the rise in housing prices, because of the way they are incentivized. Recently, there have been reports that appraisers are dragging their heals in the opposite direction, wary of fomenting another bubble in housing? Do you think these reports tell the story? How do you think this will changed as a result of the new laws which require appraisers be appointed directly by the lenders?
No, I think all those stories about appraisers dragging their heels are just the used-house salesmen complaining that appraiser honesty is putting a damper on their business. The business of realtors is deception. Honesty doesn’t sell houses.
But I have little faith in those laws. There is so much money to be made by fleecing buyers that realtors will find ways to eliminate the honest appraisers. The NAR (National Association of Realtors) is one of the biggest lobbyists in DC, and lobbyists literally write the laws and hand them to congressmen these days. The NAR will find a way to defeat honest appraisals unless we have sweeping campaign finance reform.
Mortgage Calculator: Many analysts have argued that the apparent stabilization in the housing market is being supported by a glut of first-time buyers, driven by the government’s $8,000 incentive plan. You wrote recently, however, that there is “Shortage of first-time buyers.” Can you explain?
Everyone who could afford a house already bought one. And then people who could not afford a house bought one too. And then the builders kept on building. New people do come into the market, but compared to the saturation level, there are just not that many first-time buyers. No glut.
The $8,000 tax incentive did nothing but keep prices $8,000 higher than the market would have set. Those who bought with that incentive actually got no benefit. The real solution to help buyers is the lower prices that the market would set based on rents and salaries. But that harms banks, and banks are also big lobbyists in DC. So the incentive was an $8,000 per-sale gift to banks, not to common people. So again, corporate control of government is being used to part people and their money. Campaign finance reform would help.
Mortgage Calculator: What do you think it will take for people to accept the notion that home prices don’t appreciate much faster than the rate of inflation, over a long-term period of time?
They have to grow up seeing that fact in front of them every day. The Japanese now have seen 15 years of continuous residential real estate declines. I imagine the psychology is finally changing there.
It would also help if there were an open market in real estate, where every bid had to be validated by a bank, and published in the papers. Realtors lie about bidding wars all the time, but because bids are not public, they get away with it.
Mortgage Calculator: How would you reconcile government and seller incentives and low interest rates with the possibility that home prices could fall further, when advising someone thinking about buying their first home? Would you advise them to buy, wait for a while, or wait forever?
Rather than look at macroeconomics, I would say they should look at two aspects of their own situation:
- Rent for a comparable place
- Their salary
They should wait if renting is cheaper than owning at a 30-year fixed mortgage rate. And they should wait if the debt they are thinking of taking on is more than 3 times their salary in a secure job.
If rent would be significantly more than owning that same thing, then it makes sense to buy. Also, if someone has the cash on hand, or if they have a much larger secure income than is needed to service the expenses, then it’s also OK to buy if they plan to stay there a long time.
The entire goal is not to waste life as a debt-slave. But it takes independent thought and determination to avoid that fate.
Would your customers benefit from a free mortgage calculator on your website? Learn how to add a calculator to your website in less than a minute - FREE!
