Jan 4th 2009 05:38 pm It was the best of times, it was the worst of times…..
With apologies to Charles Dickens, which is this, the best or worst time to buy a house or refinance your mortgage? Those are two completely different questions, but the short answer is that it’s a lousy time to buy and not all that good a time to refi, either, despite record low mortgage rates.
Home prices are down nationally and you’d think that would make this a good time to buy but it isn’t. That’s because values are STILL DROPPING. The time to buy an asset is when it is just starting to appreciate. I’m not demanding here that every potential home buyer try to time the market but it is simple logic that it makes little sense to buy something today if you can buy it cheaper tomorrow. Home prices are dropping and it looks like they will continue to drop at least through 2010 and maybe even to 2012 according to the S&P/Case-Shiller Housing Futures Index traded on the Chicago Mercantile Exchange. The Case-Shiller is the best indication we have of where housing prices are headed. And though the index has shortened a bit in recent months from predicting a 2013 housing market bottom, renting still looks smarter than buying until at least 2011.
If you are selling, not buying, it doesn’t look all that good, either. Yes, sell now if you can’t wait for 2013 or later when some price recovery will have finally taken place, but there aren’t that many buyers out there specifically because the smart money is still waiting for the market to hit bottom. Houses will always sell at the right price but these days the right price sucks.
What about refinancing your mortgage, then, and hanging onto your house? The perception in the news is that rates are down and refinancing is hot, hot, hot, except not that many people are actually getting loans. Fannie Mae and Freddie Mac lending guidelines have just tightened-up. Banks are demanding bigger down payments, more reserves, and dramatically higher credit scores than in the past. Today the rate you could get a year ago with a 660 credit score requires a 740 number. Ouch!
And all those properties that are under water with their owners having no equity at all and owing more than the house is worth – those properties are IMPOSSIBLE to refinance under current circumstances.
What we’ll see then in the coming months is a small bump in refi business but not at all the resurgence one might expect. Defaults and foreclosures will continue to rise for at least another year or more no matter what the Obama Administration does.
So this would be a great time for someone to come up with a new approach to home finance, please, because things are going to get a lot worse before they’ll get better.
Sorry.
Posted by cringely / What Passes for Wisdom
johnson on 04 Jan 2009 at 5:46 pm #
amen brother!
Yudur House on 04 Jan 2009 at 5:47 pm #
Bob—I agree this is a good time to take the trash out and start anew. 2009 will be an interesting rocket ship to somewhere
HumbleOpinion on 05 Jan 2009 at 12:37 am #
I don’t know if they’re still available, but earlier this decade I used to refinance several times each year with a no-fee mortgage, locking in the lower rates as they ratcheted down. The finance companies may have caught on to the practice, though
el al on 06 Jan 2009 at 8:14 am #
It’s very shortsighted of banks if they really are refusing to refinance people in negative equity. Wouldn’t it be in a bank’s interest to refinance the mortgage at a lower rate to allow the borrower to make more inroads into the capital, thereby reducing the risk of a coslty foreclosure?
JeffJak on 07 Jan 2009 at 1:02 pm #
Someone mentioned to me that Austrialia has some system where they allow you to put all your monthly expenses (groceries, gas, etc.) on to a credit card which then related to your mortgage. I guess some company does it in the U.S. Supposedly you can take a decade off of your mortgage using this method. I would love to get your take on that. It sounded too good to be true, so I have stayed away from it.
Bill McGonigle on 08 Jan 2009 at 5:24 pm #
Yeah, I can confirm some of this first hand. I’m attempting to consolidate debt via refinance while there are still any loans available and so far I’ve found out that Freddy/Fannie are taking a quarter point for themselves, just ‘cuz, on everybody’s loans, and that, at least at my bank, it costs $1000 extra if you’re below 720.
JaromSki on 11 Jan 2009 at 4:06 pm #
@ HumbleOpinion
There is no such thing as a “no-cost” refi. They just jack up the interest rate on you and make more points on the back-end when the broker sells your note to the now defunct secondary market. I believe the technical term for this is “yield spread premium”
@ JeffJak
http://articles.moneycentral.msn.com/Banking/HomeFinancing/ANewWayToPayOffYourHouse.aspx
The idea is you use a variable note (indexed off LIBOR rates) and instead of having separate checking,savings, and mortgage accounts you have one account. Your paycheck goes against this note minimizing the amount you borrow at any given point in time. You also can charge your monthly expenses against this account. Everything works great as long as you have positive cash flow. Otherwise it just becomes a negative amortization type loan and you can get into more trouble. It seems like a product that requires a huge amount of discipline to execute and not for everybody.
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ron connor on 17 Jan 2009 at 4:22 pm #
I was referred here by a smart friend who tells me your a smart guy but i’m not familiar with you work. good analysis on most points but i see some over simp from some angles of the RE transaction. I’m an RE agent in NJ with a pretty large (and healthy) practice.
the “smart money buyers” you mention are not as populated as you may think. they may be the “i’ll buy if i get a great deal buyers” agents always have in the database but they are psuedo investors or dreamer big shots. Real estate is driven by BIRTH, DEATH, MARRIAGE, DIVORCE AND SCHOOLS. new babies motivate ppl to buy not rent. Also renting long term scares ppl from a investment POV so they brave the buying market. Thinking from that perspective you’ll see that there is a real underlying support for RE transactions. Your view on price is basically sound but i don’t agree it will decline thru 2010. just 2009. but that is a minor detail.
The big culprit has been mortgage money or lack there of - taking most buyers out of the market. October 08 saw a tremendous freeze in the MBS market, aka secondary mortgage market as well as cred default swaps. As I’m sure you know. The buyers have been here all along its just that as a result rates shot up and house prices hadn’t moved down making things even more unaffordable. But as of today rates are down and prices have and will continue to come down. We are already seeing an increase in activity in the first 2 weeks of 09. and it’s freezing outside. the rate drop was orchestrated by the fed and the house, treas and fed still can do more to keep rates under 5, even 4.5. Also the GSEs raised the conforming loan limit in most counties of the US back in July. That had and will continue to have a big impact.
So when you add all that to the long term transaction drivers birth, marriage and schools, people have the will to buy w/o the pure analytics of “where/when is the bottom?”
so that’s the buyer side.
seller side is REALLY impacted by birth, death, marriage, divorce and schools.
when your kid is 4 and you live in a terrible school district you are particularly motivated. (especially in my market were over 75% of my clients have PhDs. they really care and can’t afford private school.)
the big one is divorce. can you image a divorcing couple deciding to hold onto their house and rent it for 3 years to get a better price? ouch. I could go on but I won’t, it’s your blog. Just though I could add some color.
Thanks and I’ll keep reading.
ps
i think you’ll be able refi in the next 8 months into a very nice FIXED mortgage. good luck. (Is the home you mention in SC a second home?)
trent on 21 Jan 2009 at 12:59 am #
Interesting blog. I’m fortunate in that I bought my home in coastal So. Cal with excellent public schools near the end of 1996 at the trough of the previous cycle. I got lucky in my timing which in no way was planned. Prices had been going down in So. Cal since their peak in 1989. I was encouraged by my then future wife to “buy something” although I was quite happy renting on the beach. The owner of the 13 unit apartment building I lived in offered a “partnership” interest in 1995. Seems he had refied the units prior to 1989 and with prices down for so long he was having trouble making the payments. He indicated that he had been in this game since the 1970’s. Taking “free” money out while prices were rising was standard operating procedure. Price cycles were a fact of life; however, this downward cycle from 1989 to 1997 had lasted longer than any other previous cycle and my landlord had been “upside down” for too long. Eventually some of the units did have a new owner (not me) who likely did quite well after 1997.
The distortions in the current boom/bust bubble ( Fed induced bargin basement interest rates and inflation of money supply) make the previous 1984-1997 cycle pale in comparison.
I guess my point is that guessing when home prices will stabilize can not be reliably predicted. IMO (barring hyperinflation or unprecedented gov intervention) it is irrationally optimistic to expect prices to bottom out in the next year or two; there is no prior precedent I am aware of that supports this scenario. Based on past experience the length of cycle can not be predicted but the transition changes can. There is an adage that the best time (most reliable) to sell is when prices are 5% down from their peaks while the best time to buy is when prices are 5% up from their trough. That said, this cycle may not follow the “old rules.”
I do think it is a good time to add a much needed addition onto my house as I need the space and plan to continue living in my house. I think of my house primarily as a house, not an investment vehicle.
Best wishes
Alan Gregory on 27 Jan 2009 at 4:22 am #
The problem appears to be down to the banks not lending because they are afraid that they won’t get their money back, yet repossessions must be one of the least efficient way of the banks achieving their goal, which is to lend people money who will repay the loan over a period of time with a nice cut for the bank on top.
These, so called, toxic mortgage debts are being written off because the financial institutions don’t believe that they will or can ever be repaid.
Lets change this. I think it’s time for the banks to play nice. Each and every bank has thousands of trained financial advisors whose job is to sell people financial products such as bonds, mortgages, investments, insurance, etc.
It would be a fair assumption that these people aren’t doing much business at the moment (and they are probably in danger of losing their jobs), so why not put them to work helping people discuss their mortgage deals with the banks on a no fee basis?
Extend mortgages, let the bank take greater equity stakes in the property, help them meet more suitably qualified people if necessary. But above all, look at each individual and discuss their best way forward, without trying to sell stuff on commission or make a profit. Give them the authority to make a deal.
Yes this will cost the banks money, but it would cost the banks money to get rid of these people anyway, it would cost the banks even more money to get these people back when things pick up. Based upon the average loss on each and every foreclosure each financial advisor would only need to come up with a acceptable and viable plan for five homeowners in order to cover the cost of employing them for a year on basic salary. Anything more, then the banks are turning toxic debts into valuable, sellable assets.
Even better the banks are getting a greater understanding of their customers. Through this they are maximizing the chances of getting their money back. It keeps a veritable army of financial advisors in a job, helping the economy. The banking sector will then start to garner the kind of publicity that money can’t buy (and let’s face it, they do need an image makeover).
Let’s get back to the friendly banker, with a real knowledge and stake in the community. The George Bailey kind of banker is what we all need right now.
Karthik on 24 Feb 2009 at 10:58 pm #
Housing Market has played a major part in leading the nation to the sub prime crisis.