Sunday, May 02, 2010

The Eye of the Hurricane

The newspapers are all claiming that the housing market is coming back. Something isn’t quite right here. The banks aren’t about to loan any one money for a home unless they have a 20% down payment. Of course, if you want to buy a Fannie Mae foreclosure, all you need is 5% down and the government gets another bad loan off the books. This isn’t a bank loan; it’s a government loan that happens to be part of the national debt. The phrase "No skin in the game," seems to echo in the background.

Then you hear about the 20% of house sales that are completely cash sales. You have to wonder, where did they get the money? With 1 out of 17 homes in the US facing the possibility of foreclosure and then we have 1 out of 5 buyers paying all cash? I find it hard to believe. Common sense suggests, why buy one house? Investors only need 20% down, buy 5 and share the risk with the bank, the interest rate can’t be beat.

Three years ago, anyone that wanted a loan could have gotten one. And now you can’t get a loan without a substantial down payment. The marginal buyers (no doc’s) are gone and so is their demand for housing.

The housing market is not coming back, the surge of baby boomers has peaked, the Silver Foxes are looking for smaller retirement homes, not the McMansions that have been built. Real demand is declining. Our government wants to keep home prices from collapsing so people don’t take a walk; otherwise Freddie and Fanny get more home loans to eat. They have painted themselves into a real neat corner; 5% down moves you in and of course they’ll throw in $20,000 for repairs.

Right now the housing market is in the eye of a hurricane, enjoying the calm. The 5/30 interest only loans are starting to convert to conventional loans. Unemployment is getting worse. State tax collections are abysmal. On top of that, the baby boomers are getting ready to retire; they will be trying to sell their homes and move to Arizona (Mexico’s Northern most State). Why buy a home from a Silver Fox when you can buy one from Fannie Mae and get cash back? I just love these government programs, sure beats renting.


Bob Barker said...


Love the blog. You nail it every time. My wife thinks I'm a lunatic tell her that we must continue to hoard cash. Something doesn't add up here. Who are these buyers? Plus, even if there are buyers, it's all about household formation, otherwise every buyer becomes a seller or there's another unit for rent. High unemployment means no household formation and thus no net new homebuyers. The shell game continues. Never underestimate the ability of the zombiness to remain longer than any of us can imagine.

Jim in San Marcos said...

Hi Bob

Glad you like the blog, thank you.

There are two things you need to consider, every woman wants a home no matter what. I think that's what gets a family into trouble, the nesting concept.

The other is price. I am seeing in the San Marcos area, the junk homes are not selling. The million dollar homes are now selling for a half million. What's that do to the average price of housing being sold? It shows that home prices are increasing when they are not.

I remember driving through Southern Florida with my Dad in the 1980's and he pointed to the houses and said, you could have bought anyone of them for $500 in 1935.

If your wife finds a home you like that is about 3.5 times your earnings, I don't think you can go wrong.

I wish you luck, try to keep the wife happy.

Thank you for your comments.

Tyrone said...

There's a video at the link, as well.

City of Fresno Declares Fiscal Emergency
FRESNO, Calif. (KFSN) -- The city of Fresno is facing a $30.6 million budget shortfall and the mayor announced she wants to cut hundreds of city jobs.

Mayor Ashley Swearengin says 225 jobs will be eliminated and 81 vacancies will go unfilled. It means roughly one out of every 12 city workers will be let go.

At a news conference Monday, Swearengin says the city is in a state of "fiscal emergency."

In addition to the cuts, outsourcing city services to the private sector and charging a franchise fee is a big part of her plan. In return the city would receive millions of dollars in revenue.

Swearengin said, "These economic conditions force us to be innovative and creative. And we've responded with a budget filled with pain. But it's also a budget with promise."

Jim in San Marcos said...

Hi Tyrone

Thank you for the link.

I guess when it rains, it pours.

California's tax receipts dropped 30 percent.

Here is a Link.

Take care.

Tyrone said...

30% below expectations. Wow!

And exactly why is Greece front-page news and California is not?


Don't look over here, look over there.

Rob in Ns said...


I grew up in a town that had it's heyday over a hundred years ago. The people of means back then built huge McMansions too. Some are still single family homes but most have been turned into apartments. I'm not sure how well this will work in Modern subdivisions. We'll see how it turns out but I suspect that it will not be good for property values and the consequent downward impact on municipal revenues.

Anonymous said...

Who are these cash buyers? Well, me, for one, if my offer's accepted.

We've been living cheap. I would LOVE a new sports car, but I keep driving the 10-year-old truck, and putting away 30-40% of income (which means eating out is rare and vacations are road trips to dive motels, but our savings is sufficient to buy a few houses cash). We hope to finance the property, but a cash offer improves our chances of getting a decent price. Meantime, rents are way down and we're looking at properties that cash-flow even with low rents. We look at social security averages and look for 1-BRs that cash flow with rents at 25% of SSI; 2 BRs that cash flow at 38% of SSI.

Meantime, we keep living in a tiny cottage that's almost paid-off. We run investment property projections w/25% vacancy ratios and plan to keep more than 1 years' expenses in cash reserves. But when we compare cash-flow on rental property to what we could get by annuitizing our pension balance, investment property is a far better option (about 2x the income).

A woman who hates her "nest" but hopes a solid financial foundation will provide a better "nest" later