Sunday, July 16, 2006

Easy Terms

Whatinthehell are these people thinking? They've got and ARM that will reset to levels they cannot afford. Don't blame Greenspan. His comments about the benefits of Adjustable Rate Mortgages were misinterpreted as an endorsement going forward when in fact all he said was they were really helpful in the past. Anyway, say you are the bank and you've got the fish on the line with an ARM and a nice margin that protects you from swings in the economy. These fish can barely afford what they've got now and they come looking for a way out. Well the only way out is a fixed at an even higher rate! They caannot afford that either. Indeed many will need to cough up some income documentation under the newer rules. Now they really don't qualify. They are going to walk out of the bank with the same loan they walked in with. Who in the world wants to give 30 yr fixeds to subprimes and no equity who can't cover their current lower payments? Sell and rent? Who'll give them a loan to close with? And renting? Rents are going way up with inflation and all the other things I've bloviated on about ad nauseum.

I hereby cristen these unfortunate house prisoners: The Immobil Class.


Anonymous said...

Can you link to to your ad nauseum blovation on rent increases? I don't know why rents would inflate if real estate is deflating.

Anonymous said...

My thoughts exactly. The tightening of the rental market is, IMHO, a short-term condition. Would-be first time buyers are presently locked-out of the housing market and vacancies are low. As failed flippers give-up on the prospect of a break-even sale, rental inventory will increase.

Rob Dawg said...

Perhaps one of my most controversial positions. Rents will go up. Rents have already been going up after a prolonged period of flat or slightly declining pricing. Rents didn't go up because landlords like me had very low long term cost basises. We long term real landlords have been recently getting out. The new owners have unbelievably high costs. The last house I sold, the new owner took on property taxes that alone consume 30% of the gross rent. As the cost basis shifts the increases will be passed on. The BLS and Fed are currently worried about the devils bargain they made using OER, Owners Equivalent Rent. At ~27% of the CPI it has been a recent large contributor to inflation measures. In the short term you may find some cheap housing but if you think a flopper is going to sign a lease for the entire school year you are mistaken. He cannot afford it and you don't want to rent anything that may cause you to uproot your family with 30 days notice.

Chuck Ponzi said...


I still disagree with you on this topic. It is supply vs. demand that determines prices, not input prices. For example, what would it have cost to have a wagon wheel made in 1970? Or, a ox-pulled plowshare in 1985?

If rental housing stock exceeds the rental demand, prices fall, that's a simple economics principle. There are some excellent examples of that; look at small urban centers in places like the Southern Tier of New York, or upstate for that matter, as well as many places in Pennsylvania. Real rents have been falling in some places for 30 or more years because of excessive supply. Nominal rents are down for the past 15 years due to major pullouts in several cities.

In a balanced market, you're right that costs get pushed through, but in an unbalanced market with substantial new stock, it doesn't matter what someone paid for it.

Hoping rents will rise because someone paid a lot for something is like buying a stock at an inflated price and hoping company earnings increase because you bought it for so much.

Rob Dawg said...

John Doe,

You are in the majority with your analysis. Nearly everyone thinks declining purchase prices translate to lower rents. This is perhaps my most controversial position. First remember that a half dozen years of rapidly rising purcase prices didn't show up as rising rents. With that why should the reverse obey the rules? Second, remember rents need to track costs. When I sold my last rental for 4x what I paid the person who bought it needs to be the new baseline. Good thing I have thick skin and a long perspective. My opinion of rent v. price is so controversial that you need to understand my circumstance. I "had" a fully amortized rental that cost less than $2000 per year and generated $10,000 per year. I sold this pig. Pig? Huh? Yes, pig. 273 times rent to sell the pig. A good rent is 90x, a fair rent is 100x and given special circumstances like Prop 13 and such 120 is a sustainable rent. If things only revert to mean I'll buy two with the proceeds. I expect ot buy three but I'm an optimist (pessimist?).