Real Estate Market / Inflation / Recession / Depression (Denver, Colorado Springs: mortgage, credit, loans)

[multitrak]

Originally Posted by Bob from down south

OKC also has this sort of constant urban renewal thing going on...the severe thunderstorms, hail and tornadoes wipe neighborhoods out, then they build new ones.

yeah, riiight...

F5 and EF5 Tornadoes of the United States - 1950-present (SPC)

USTORNADOES 1950-2005

USTORNADODEATHMAPS

aside from the 1999 f5 and 2003 f4 tornados, central oklahoma has been relatively quiet for the last several decades. the front range gets their fair share of tornados too (though not as violent as in "tornado alley") as does the midwest. and don't get me started about all the property damage caused by the july 1991 denver storm, which was the costliest hail storm in the history of the u.s. (been there, done that). dude, check your facts first...

[Bob from down south]

Originally Posted by multitrak

aside from the 1999 f5 tornado, central oklahoma has been relatively quiet for the last several decades. the front range gets their fair share of tornados too as does the midwest. and don't get me started about all the property damage caused by the july 1991 denver storm, which was the costliest hail storm in the history of the u.s. (been there, done that). dude, check your facts first...

So are you telling me that one should only worry about F5 (now F5E) twisters?

A buddy of mine lives in Edmund OK, a suburb of OKC, and he tells me there were scary tornadoes there in 1978, 1986, 1999, and just a few weeks ago in Mar 2008. They also have shooting rampages there in the off years to keep things lively.

I wonder how often places like Miami get hit by hurricanes (including the wimpy Cat I through IV varieties) in comparison.

Anyway, one deciding factor for Colorado Springs was the absence or low incidence of earthquakes, hurricanes, tornadoes, floods, landslides, wildfires, smog and other disasters. People also do not die of boredom there. I lived in Altus, OK for a few months and almost needed defibrillation to wake up those last few days. If it weren't for two Brahm's ice cream shops in town I'd probably have been a goner.

And the prairie dogs there are ugly.

[sterlinggirl]

Cmon Bob....OKC isn't that boring compared to COS. All you have to do for some excitement is to go down to the U-Haul place and ask if they know where to buy fertilizer

Speaking of excitement, are you the one that got Pele upset again?

[multitrak]

Originally Posted by Bob from down south

And the prairie dogs there are ugly.

yeah, but they're very spiritual in the bible belt... http://www.technovelgy.com/graphics/...og-rapture.jpg

[Bob from down south]

Originally Posted by multitrak

yeah, but they're very spiritual in the bible belt... http://www.technovelgy.com/graphics/...og-rapture.jpg

If we were in California I'd sue you for the coffee I just spurted through my nose all over my expensive computer monitor...

Now, back to depressing real estate market inflation thoughts...

Seriously, there's another aspect of this downturn to consider. We know that prices were bid up to unsustainable heights by easy lending of cheap money. And we know that in Aug 07 easy money stopped flowing, and it appears from watching the bond markets, inflation, and the fed, that cheap money is about to be taken off the table as well. This has a very chilling effect on house prices, as people cannot borrow nearly as much as they could in the market orgy of 2005-2007.

But the assumption is that we are returning to the old standards, in particular down payments (bad for a nation with negative savings rate) and long-established debt-to-income ratios (DTI). Those traditional ratios are 28/36. The 28 max "front end" ratio means 28% of gross income going to service housing-related expenses (principal, interest, property taxes, and property/mortgage insurance), and the 36 max "back end" ratio means no more than 36% of gross income going to housing costs plus all other debt servicing (auto, credit card, medical and all other forms of debt).

Those standards have worked well for decades, and I think the underlying assumption now is that we will have to "suffer" living with these old standards again as we reel and recover from our collective lunacy.

I challenge that assumption, and here's why. Those DTI ratios were established based on outdated average family spending patterns. As inflation, measured by a CPI that used to include increases in energy and food costs (pre Clinton administration) raised costs, the costs remained, for the most part, similarly proportioned. As prices rose, the percentage of family income going to one type of expense or another didn't really change much. But post-Clinton, the CPI index that theoretically tells us how much inflation is affecting us does not include either energy or food costs. And with a 100% increase in gas prices, and major increases in the costs of propane, natural gas, and electricity, the proportion of costs in a family budget owing to energy are rising dramatically. Add to that the double-digit percentage rises in food costs--also not captured in the new post-Clinton CPI--and we have a sizeable displacement of costs in a family budget that is not seeing wages rise with the "cooked books" CPI, much less with the cost increases including energy/food.

So back to DTI ratios. If a family must spend a much larger proportion of its income on energy and food, then the old tried-and-true 28/36 ratios may not (and in fact probably do not) remain valid any longer. A family spending an extra 10% on energy has to take it from elsewhere in the budget. Likewise for food. And I haven't even mentioned that the old ratios were derived before the average family also had to take money out for their 401(k) or other defined contribution retirement savings--the old ratios were derived in the days of the trusty and all-but-extinct defined benefit pension plan. Nor have I mentioned the rise in costs for health care premiums. At some point the bankers will realize that even people with good credit scores and allowable DTI numbers are having trouble paying, because there are tremendous additional demands on incomes not reflected in the old DTI numbers.

So the point of all this is we should expect to see, in addition to down payment requirements, a reduction in allowable DTI beyond just returning to days of old. And this will reduce borrowing power of an already hideously overextended population that much further.

This jives with what I am seeing in the higher price segments of the Colorado Springs housing market. House sales above the $350,000 price range are much slower than the overall numbers might suggest...and the overall numbers are down 19% YOY. Without assuming any of the effects of a prolonged and deep recession, just the rises in interest rates and requirements for down payments are going to clamp demand, especially in higher priced houses. Add to that the effects of this displacement of income. And then add to that the effects of unemployment in a recession.

Home prices in the Colorado front range above the $350K threshold are going to be under intense pressure in the next few years--more in some places than others. Move-up buyers aren't there, because there is a drought of entry-level buyers with the needed borrowing power available to buy in and "push" others up into move-up housing. I think it only makes sense to buy at those higher price ranges now if you intend to hold the property for 10 years or more, and only if it doesn't bother you that you could have waited a year or two and saved many tens of thousands of dollars.

[multitrak]

what you're trying to do is a tap dance on a high wire over a lava pit...if interest rates go up 2% (5 to 7%) in the next year or two and in the meantime your hypothetical $350K house goes down in price $30K to $320K, then you might save $30K upfront but you would lose nearly $48K to increased interest costs over a 10 year period. if house prices stay the same or go up, then you're fried...

30 yr fixed rate 5% $350K total interest = $162,162
30 yr fixed rate 7% $330K total interest = $210,076

[jazzlover]

multitrak,

In your example, the price decline between $350,000 and $330,000 is a paltry 5.71%, according to my HP12C. Stick a 30% or 40% decline in your calculator and see what the numbers look like. And, yes, I think declines of that magnitude are not only possible, but likely, in that price range of house over the next couple of years. It comes back to a basic disagreement between Bob and I on one side, and you on the other about just how ****ed up this economy is and just how bad things may get--in Colorado and all across the country. Time will tell who is right.

As far as Bob's last post goes, I think he's spot on. I'd bet in a year or two, he'll be able to take some of that cash he has stuck in Treasuries or insured accounts and buy one of those $350K houses in the Springs for 50 or 60 cents on the dollar or less from the REO's of some sweatin' bank and they'll be glad to take it. As the ol' sayin' goes, the new mantra will be, "Is this cash, or just foolin' around?"

[jazzlover]

Just to add a little more grist to the mill, this article on MSN by Bill Fleckenstein ( Why we can't cruise past a recession - MSN Money ) makes a pretty compelling case why we haven't even seen the real beginning of troubles yet. The most telling sentence in the article is a comparison between the US real estate bubble and the one in Japan that burst in 1989. Fleckenstein noted that the overall real estate market in Japan declined over 80% in the decade following the bursting of that bubble. The Japanese had a much greater aversion to debt (outside of real estate speculation) and much greater savings rates at that time than do current debt-ridden Americans. Can anyone imagine what an 80% decline in real estate would do to the American economy and individual Americans? It would make the Great Depression look like a minor case of indigestion. A 40% decline would leave the majority of Americans functionally bankrupt.

I pity the many 20-something posters on this forum who post that they love Colorado, they are going to come here, find great jobs, buy a house, have their 2.5 kids, and enjoy life. Thanks to the debt-happy, resource-hogging, speculation binge that their parents and maybe even grandparents have collectively been having, I can only say this:

I just don't think it's gonna be happenin' for ya.

[CosmicWizard]

jazzlover wrote:

I pity the many 20-something posters on this forum who post that they love Colorado, they are going to come here, find great jobs, buy a house, have their 2.5 kids, and enjoy life. Thanks to the debt-happy, resource-hogging, speculation binge that their parents and maybe even grandparents have collectively been having, I can only say this:

I just don't think it's gonna be happenin' for ya.

My usual one word response for predictions: TimeWillTell They just might surprise us with their ingenuity. TimeWillTell

[Bob from down south]

Originally Posted by multitrak

what you're trying to do is a tap dance on a high wire over a lava pit...if interest rates go up 2% (5 to 7%) in the next year or two and in the meantime your hypothetical $350K house goes down in price $30K to $320K, then you might save $30K upfront but you would lose nearly $48K to increased interest costs over a 10 year period. if house prices stay the same or go up, then you're fried...

First, as Jazz points out, this isn't about me. I intend to pay cash for a house and be carried out feet-first at some point in the (hopefully distant) future. In fact I hope it doesn't increase in value after I buy, since that just means more property taxes.

You fail to mention the chilling effect a 2% increase in interest rates would have on prices. When money becomes expensive, then house prices are under considerably more downward pressure since the average buyer generally finances close to his/her borrowing limits and has his borrowing limit reduced to keep payments within ratio limits. Higher rates would force many of the few remaining buyers in the upper price ranges down to lower price segments.

Second, if you buy at a higher price but at the lower interest rate, and have to sell at a lower price due to higher rates in the future, your net doesn't look so hot when all is said and done. Those that only concern themselves with payment affordability are the banker's lawful prey. That's why car salesmen always ask what kind of payment you want, not how much you want to pay for the car. Lawful prey...like a prairie dog invited to lunch in the eagle's nest.

Last, I think that there are far fewer buyers waiting in the wings than the RE industry hopes. The housing bubble was quite pervasive...there aren't that many people that wanted to buy but didn't. Heck, anyone with any inkling of desire to buy, regardless of their actual financial capacity, bought in the bubble. Most potential buyers in these higher price ranges will have to get out from under their current house before they can buy anything else, and once they do they can't borrow as much as before in the absence of all those crazy toxic loan products. And millions are underwater on their current houses after tapping into their illusory home equity like it was money in a debit account.

Let's take a prime (FICO 720+) buyer and a hypothetical $400,000 house, with 5% ($20,000) down and 6% interest. The PITI, including PMI, is $2825, meaning the buyer needs to make $121,000 a year to meet the 28% front end ratio...and with no more than $800 a month in all other debt (auto/cc/student loans etc).

At 7% interest PITI plus PMI goes to $3025, requiring nearly $132,000 a year in income.

At 8% you need $143,000 in income to qualify.

Or to look at it another way, if the aforementioned buyer making $121,000 a year wants to buy the house at 7%, he needs the price to come down to around $361,000 to qualify at his income.