Sorry but I'm not buying into the numbers. If the tax credit and subsidized interest rates were taken away, purchases would be down. The stimulus will be taken away in the Spring of '10. That will be the real test. When mortgage rates go up and the tax credit expires, prices will continue to drop and buyers will continue to wait to see how low they go. The fact of the matter is that buying when rates are at historic lows is not necessarily a good investment, or the best time to buy. Of course, Realtors and the media want you to believe otherwise.

If you buy a home and finance 250k at 5%, that payment is equivalent to a loan of 185k at 8%. While interest rates NOW may not be that high, one should expect in the future that they most certainly will go up. There are no investors in mortgage backed securities other then the Fed right now. Private investors will demand a much higher rate of return. While some may think 8% is way too high and unrealistic, I beg to differ. That's what rates were BEFORE the bubble. Also, you need to keep in mind that rates were well on their way to 7% right before the Fed lowered the Discount and Federal Funds Rate. Even when Bernanke cut these rates in hopes of lowering mortgage rates, they failed to do so. This is why the Fed began the mortgage backed securities program in the first place!!!!!! The open market did not buy them at the rates Bernanke was targeting, so the only way to get rates down was for the Fed to buy mortgages.

We all should want rates to go up. Why? When rates go up, prices will go down. The only way to compensate for the higher rate is for prices to go down to compensate for the payment factor. Low interest rates is what drove prices up. Interest rates CAN NOT stay this low indefinitely. It is only a matter of time when they go up. One should ask themselves why they want high real estate prices. The days of seeing your home appreciate 20% a year are long over. The way of EARNING equity in the future will be by paying down the principal and home appreciation that keeps up with inflation. Using your home as an ATM is no more.

Also, you have to factor in the fact that '09 foreclosures eclipsed foreclosures of '08. It is expected that '10 will surpass those of '09. Take into account that roughly 50% of all outstanding mortgages are underwater. This fact alone will continue to contribute to the "strategic defaults" that are taking place. You can't have home prices appreciate when rates go up, unless there is MASSIVE inflation. It is just a fact.

Also take into consideration that underwriting guidelines will continue to tighten as debt to income ratios will be going down even further in the near future. As debt to income ratios become tighter, prices will have to go down as more borrowers won't qualify for the higher loan amounts. Yes, I am a pessimist in the real estate market. But reality and what you wish for are not always the same thing. When prices come down to more affordable levels, without stimulus from subsidized interest rates and tax credits, then we will see a true recovery.

Hey, Frank, keep in mind when you throw around phrases like "the media want you to believe otherwise" that I'm part of this much-maligned group. Do you honestly think I'm trying to sell anyone on anything here? The points you're making about the stimulus effect are in today's story, which notes that the real test for the market comes once that stimulus is gone.

This post is just pointing out what happened last year. It's not suggesting that past results will equal future performance. :-)

I am sorry for not clarifying, but I think you do a great job on here offering many different perspectives of the housing market. I did not mean you personally. Rather, I was referring to the main stream media outlets. I do not think you are trying to sell anyone or anything on here at all. I agree the real test will be when the stimulus is taken away. I just think many will be surprised or disappointed if housing does not recover when it happens. I apologize if you feel that was directed towards you.

No need to apologize, Frank -- I just didn't want you to think I was clacking away at my keys, cackling madly as I tried to convince everyone of some opinion about the housing market.

Members of my family will sometimes gripe about the "mainstream media," and my standard response is, "Hey, I'm sitting right here!"

"Baltimore-area home prices were 98 percent higher in the third quarter of last year than they were in 2000... the second-largest increase among metro areas...

Depending on your point of view, that's either good news or bad. I'll let you all do the editorializing.
===

OK. ;)
I'm willing to allow that a few properties will have significantly (like 98%) increased in real value over that ten year period for legitimate and objective reasons. A few.

And I'm even willing to allow that the entire market will have modestly increased (like 30% on average) in real value over ten years.

But anyone who attempts to assert that the entire market has legitimately increased by 98% is out of their ever loving minds or is trying to sell you something.

And anyone who is willing to support this delusion by buying the plain vanilla common housing stock at those (still far elevated) prices must not be using their own money.

(btw 99% of properties are plain vanilla common housing stock)

Mr. Rizzo,

Over the top dogmatiism is unhelpful and hardly persuasive, though I appreciate your interest in trying to provide an opinion on the data. But I think that many of your statements are either non sequitors or equivocal.

1. When mortgage rates go up and the tax credit expires, prices will continue to drop and buyers will continue to wait to see how low they go." Learn to use the subjunctive tense rather than write with such strong dogmatism.

2. here are no investors in mortgage backed securities other then the Fed right now. Simply untrue.

3. That's what rates were BEFORE the bubble. At times. New RM models can support lower rates.

4. This is why the Fed began the mortgage backed securities program in the first place!!!!!! Untrue, unless you subscribe to some populist theory of economics. Read some material from the Chicago School.

5. The open market did not buy them at the rates Bernanke was targeting, so the only way to get rates down was for the Fed to buy mortgages. Yet, they weren't at 8%, unless of course you argue that the curve was deflated because of risks in other markets.

6. If you buy a home and finance 250k at 5%, that payment is equivalent to a loan of 185k at 8%. Equivocal since you are neglect to mention tax rates, both income and property which effect affordability and the psychological change that buying a lower priced asset with higher financing changes. Further, the discount range changes when people--whether through rough intuition or modeling--do their DCF models. I suspect the number, given all those facets is more around the 225k range.

7. Take into account that roughly 50% of all outstanding mortgages are underwater. You are exaggerating the numbers of a forecast (48% in coming years) by a pseudo economist who prognosticated before the recent turns in the market by using poor financial models.

8. You can't have home prices appreciate when rates go up, unless there is MASSIVE inflation. What happened in the late 90's? . And MASSIVE huh? I won't even comment.

9. When prices come down to more affordable levels, without stimulus from subsidized interest rates and tax credits, then we will see a true recovery. This begs the question to some degree (what exactly constitutes affordable given the myriad of variables).

""I'm willing to allow that a few properties will have significantly (like 98%) increased in real value over that ten year period for legitimate and objective reasons. A few.

1. What if we remove newly more gentrified areas of the City, like Harbor East, Fells Point, Federal Hill, etc... What is the change?

2. What are the numbers of middle/middle upper class neighborhoods like Roland Park?

3. What about more traditionally wealthy neighborhoods like Guiliford?

4. And what about more working class neighborhoods?

I would like to see how the numbers are within different segments of the City.

it's all one big Ponzi scheme...and with any Ponzi scheme, the only certainty is that it will come crashing down. It is just a matter of time.

Little Debbie:

Stop being such a school marm. And if you insist, get it right: subjunctive is a mood, not a tense; and you don't understand the difference between "affect" and "effect."

Averages have never painted the real picture of an individual much less a home sales price.To say 2009 shook off the housing slump is a bit of a stretch. Try telling that to the folks with their homes listed and they cant sell them, especially in the higher end markets.I am a realtor & an appraiser.Real estate effects so many other areas of business and I dont think everyone is ready to say the big slump is over just yet!Lets hope for a better 2010.

Hi KellyG -- I don't think anyone here (me included) is arguing that the market is back to normal now. Both homeowners I interviewed for Saturday's story are trying to sell rather than selling, including one who's been trying for two years.

What made 2009 different from 2008, 2007 or 2006 is that the number of homes changing hands rose rather than dropped. We'll just have to wait and see whether that trend continues, how long it'll take to get back to typical sales numbers and when it will be that everyone can sell for more than their purchase price.

Little Debbie-

I appreciate your thoughtful response, however most of your rebuttals are untrue. If you look at the Fed MBS data, you will see that the Fed has purchased roughly 99% of all MBS. They allocated $1.25 TRILLION towards buying mortgages. That money will be used up by the spring of '10. The Fed has hinted that they will not be extending the MBS purchase program. When this happens, private investors will most certainly demand a higher rate on MBS purchase from PRIVATE capital markets. For the past year, the Fed has controlled interest rates. If you don't believe me, look it up.

Again, if you really believe that rates were this low before the bubble, do some research. Rates were not this low until after 9/11 when Greenspan cut the Discount and Fed Funds rate to 1%.

So if the Fed did not start buying mortgages because the open market did not drive rates down, then why did the Fed start buying? Again, do some research. Look up what rates were when Bernanke cut the Discount and Fed Funds rate. Being in the mortgage business, I know exactly what rates were before and after the rate cuts. I can tell you that rates did not go down until the Fed began buying. That is the ONLY reason rates are what they are today.

I did not say that rates were 8% before the Fed began buying mortgages. I said that is what they will go up to when they stop buying. At some point, that is where they are headed. They can't stay this low forever, even in a recession.

The price comparison I made was not including escrow. That is a fixed cost and fluctuates. The best measure to compare payments is principal and interest since taxes and insurance can change every year. It does not matter which model you use. It all comes down to the final payment. When rates go up, your debt to income ratio goes up. The only way to compensate for that is with a lower loan amount.

As far as the late '90s are concerned, you have to also remember that values plummeted earlier that decade due to the savings and loan crisis in the '80s. That bubble led the economy into the internet bubble. You remember, the Nasdaq? People saw their money in stocks go up and they were able to buy homes again. Prices went up because of capital gains. When that bubble came crashing down, home values did not go up again until interest rates plummeted, which drove up prices.

A home is truly affordable when housing ratios do not exceed 31% of NET INCOME and total debt does not exceed 45% of net income. Right now, underwriting is based on gross income. That soon will change as we will all see our taxes go up. When you have less disposable income, you have less money to pay your bills. Current underwriting guidelines continue to tighten up. Credit score requirements have increased and debt to income ratio thresholds have been lowered.

The big problem here is that housing still has more deleveraging that needs to occur. Nothing has been to reverse the foreclosure trend. Foreclosures have continued to increase year over year. If
'10 foreclosures exceed '09, values have to go down further. There is no way around it.

As others have pointed out, many people have their home for sale that is not moving in the market. Why is this? It probably has more to do with that there are homes down the street that have sold at distress prices. Sellers are still asking too much on their home. Buyers will not purchase a home if they think their investment will fall another 10% to 20% in a year or two. Buyers are looking for bargains. List price and the actual selling price is the real story.

I appreciate your responses.

I am aware of the fed's program to increase liquidity in the market and know that things will change.

"f you look at the Fed MBS data, you will see that the Fed has purchased roughly 99% of all MBS. " Citation? Read this: "PIMCO’s MBS purchases are plateauing at a very high level. We still like mortgages very much. We think that government-guaranteed or explicitly supported Agency MBS is still very inexpensive, particularly compared to Treasuries, which actually have a similar risk profile. We think Agency MBS represent excellent value relative to both Treasuries and swaps, and that they offer investors some of the highest risk-adjusted returns." From S. Simon of PIMCO.

"At some point, that is where they are headed." Future interest rate swaps only suggest 6-6.5? Other data would include futures on 10 year bonds saying the same thing. Or why wouldn't current jumbo rates be a good litmus test (unless you argue that those rates are artificially low because of the Fed funds spread.... to which I would argue "what about the MBS Treasury purchases when rates were 6.5 Oct 08" = "I can tell you that rates did not go down until the Fed began buying."). I can't find any data to support your assertion, unless you think those markets are incorrect (which they might be). But that is a big gamble because they are already hedged positions. I suspect that they will go up, but 8% seems unlikely, but hey, the most noteworthy market calls are those that go against the markets and conventional wisdom.

I think that you are equivocating my doubt of 8% mortgage rates with an argument that they will stay below 5%. I'm simply suggesting 6-6.5%. Rates have been that low plenty of times, and I don't think using period of inflation or different models of risk management to arrive at an average of the last 100 years is helpful, either.

There are plenty of liquid investment vehicles that would appreciate if we see 8% interest rates. Which one's are you invested in? Let's see some skin in the game.

I appreciate that being from the mortgage business you have a bottom-up approach.

As for NET INCOME: that's interesting. How would you determine that? And what specifically would you do to model effective tax rates given all the deductions/credits.

Little Debbie-

Rates of 6% to 6.5% are most likely to occur in the summer when the Fed stops purchasing MBS in the spring. If you look back the past few years, mortgage rates usually increase during those months and go down during the holidays. Rates of 8% may not occur in '10, but they are most certainly on the horizon.

The main reason PIMCO is still buying bonds at these low rates is because inflation SO FAR has been under control. I suspect inflation will become a factor later down the road. The most common way to reduce inflation is, you guessed it, raise interest rates. Some analysts are even predicting hyperinflation. I hope that does not happen, but either way, rates can not and will not stay at these levels. In anticipation of future interest rates going up from all time lows, I am invested in ETF's that short Treasuries. The most common is TBT. That ETF tracks the 20 Year Treasury average. The ETF I am invested in is TYO. That tracks only the 10 Year Note. These funds will go up when interest rates go up. As you may already know, when you buy Treasuries, price goes up and yields go down. When you short Treasuries, you are betting rates will go up, therefore price goes down. The reason I like TYO more is because it is a 3X ETF. Also, if you look at the max chart for the 10 Year, you will see that the last time rates were this low, they went up to 18% over a 10 year period. I am not saying that they will go up that high this time around, but I would not be surprised to see it at 10%, or even higher in a long term approach.

As for net income in measuring debt to income ratios, you would require tax returns to see what has been deducted from income. This is always a requirement for self employed and commissioned borrowers. Certain line items are added back in such as depreciation and interest expenses. This is not a requirement W-2 salary employees right now, but I think this is where it is headed.

Here is a good video that shows where we are headed. I know some of you may think I am overly negative on real estate, but I like to think I am a realist. We can all hope real estate recovers in '10, but I just don't see it.
The next wave of foreclosures may prove to be even more devastating than the sub prime crisis.

http://www.brasschecktv.com/page/705.html

Frank & Little Debbie,
Your commentary is very entertaining and mostly true. I hope the market continues to fall further, much further, because I, and people like me, will be there scooping them up at ridiculous prices. I've been investing in real estate for 24 years and I'm having the time of my life right now. So keep telling everyone the sky is falling and the thousands of real estate investors out there will be there to step right in. At the end of the day, though, the market will come back and housing prices will appreciate to higher levels. People have to live somewhere. If the selling market is bad, the rental market is hot and vice versa. I'm glad I live in Maryland and not Miami!

Frank is right
Lil Debbie is scared
BOBBYD is playing with fire
Jamie is a great hostess
and Darwin Rules