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"Home Prices Are Going Lower" -
Published
November 2021 Gary Lewis Evans - In August, I Sold a home in LA in Anticipation
Commercial Property Will Do Worse
Real Estate Observations,
News and
Comments
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Banking Executive - FinTech Banking Pioneer
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Skilled Receiver
I have been part of housing cycles since the
mid 70s when home price discovery was near imposable for lenders. I became a
banker in 1971, and pioneered Internet banking in 1994. In 1971 real estate
appraising was cumbersome at best and was a skill profession. All history,
if any, was on paper. In the late 80s, the rapidly changing world of technology was
emerging with profound implications for every aspect of life, personal and
professional. I have seen historic real estate price data move from
difficult to find to being easily accessible to everyone.
I have seen many housing cycles and always performed well. In one cycle I purchased a home for about
50% of its high price. I believe that we are at a cycle peak at this time.
March/April 2022.
The 2021/22 Cycle is unique. The historic low
interest rates is an anomaly that allowed people to qualify for mortgage
loans at greater relative levels than ever before.
In other words, lower interest rates supported higher home prices.
In financial terms, lower interest rates leads to a lower risk free rate and
lower cap rates. Lower Cap rates raises asset values. Real estate is not
immune from economics.
This DFIN example below demonstrates how an August 2021 $700,000 home sale in Los
Angelous, CA may trap owners into the home because of the future price drop. When interest rates go back to
8% the recent $700,000 purchase may result in a loss in value of more than
$200,000. Why are we so confident of such a loss? It is the math and payment
affordability. When interest rates increase asset prices drop and when
interest rates go down asset values go up. The interest rate is a key
element for investor Cap Rates.
HOME
DYNAMICS
Consumers
typically purchase the most expensive home that they can afford. In
other words, the purchase is payment driven and the payment is based
upon the interest rates. The lower the rate the more buyers can afford
to pay.
In 2022
Interest rates are going to increase and home prices will
come Down.
I have been a real estate lender for over 40 years including about
30 years as a bank president. I have successfully worked through
every boom and bust since the early 1970s. This includes the high
mortgage rates of 14%+ in the early 1980s and the recent
mortgage rate lows of 2.50%.
Table A column 1 below Illustrates
the real home sale in
late 2021 and section B column 3 illustrates home pricing requirements if
mortgage rates were 8%. A reasonable home loan payment would
require a price $230,000 lower when rates move from 3.14% to 8%.
The demographics of the home sold is a middle to the lower-middle-income community of Winnetka CA. Example 1 in Table A represents that the home sold for
a little over $700,000, the down payment was $140,000. The monthly payment was $3,201 which is 35% of the minimum monthly income requirement of $9,150 and the annual income required is $109,800.
This is real.
What if the mortgage rate was 8% instead of 3.15%? Example 2 in Table A illustrates that to
be affordable the original $700,000 purchase price the buyer would need to earn $168,000 per year to cover
the 35% requirement for loan approval. As is, the 8% payment would be $4,904 which is over 50% of
the buyers gross monthly income.
If the
original buyer wanted to purchase the home in an 8% world,
how much should the buyer offer? In other words, with all else being equal, what would the home need to sell for to be affordable to a new buyer with the same income characteristics as the 2021 original buyer?
See Table B Colum 3. The home would need to sell for approximately $470,000. This is a loss of approximately $230,000.
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Table A Original $700,00 Purchase |
Table B Lower Purchase Price Because of Higher Mortgage Interest
Rates |
EXAMPLE |
1 - Real Sale Base Case |
2 - Same as 1 But 8% Rate Characteristics
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3 - Assume Borrower is the Same - How Much
Can Borrower Pay For the Home at an 8% Mortgage Rate |
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Aug 2021 Sale |
What is Payment if Rate Was 8% |
What Could a Current Buyer Afford if
Income Was the Same and Rates Were 8%? |
Purchase Price |
$700,000
Because Rate is so Low |
$700,000
What if Rate is 8% |
$470,000
Max Loan at 8% and Current Income |
20% Down Payment |
$140,000 |
|
$94,000
Paid Less so Lower Down Payment |
Loan Amount |
$560,000 |
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$376,000 |
Term |
30 Years |
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Rate |
3.15% |
8%
Buyer Could Not Purchase the Home at 8% |
8%
A Person That Would Want to Live in This
Neighborhood Could Not Afford to Purchase When Rates are Higher. |
FICO |
740+ |
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Monthly Taxes
1.25%
of Price Div. By 12 |
$729 |
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$495 |
Payment |
$3,201 |
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$3,349 |
Required
Monthly
Income at 35% Max
Payment to Income |
$9,150 |
$14,000 |
$9,568 |
Annual Income |
$109,800 |
$168,000 |
$115,000 |
Payment to
Income
Ratio |
35% |
54% |
Approx. 35% |
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Prices of New Houses Drop, Sales
Drop, Supply Jumps
Homebuilders are trying all kinds
of stuff to get sales going in this environment of 7%-plus
mortgage rates, including cutting prices, building at lower
price points, piling on incentives (such as free upgrades),
and the biggie, buying down mortgage rates, which can get
expensive for builders. Neither incentives nor mortgage-rate
buydowns are reflected in the prices of homes sold, and yet
prices have dropped, and sales have dropped too below 2019
levels, and inventory increased, and months supply jumped.
By Wolf Richter for WOLF STREET.
https://wolfstreet.com/2023/09/26/prices-of-new-houses-drop-sales-drop-inventory-supply-jump/
As US home prices decline, number of buyers with underwater
mortgages swells
An alarming number of new homeowners are discovering they
owe more on their mortgage than their home is worth as
surging interest rates send housing prices spiraling down.
By Megan Henney FOXBusiness
December 13, 2022 12:37pm EST
https://www.foxbusiness.com/economy/us-home-prices-decline-number-buyers-underwater-mortgages-swells
Homebuilders say they’re on the
edge of a steeper downturn as buyers pull back
Housing starts for single-family
homes dropped nearly 19% year over year in September,
according to the U.S. Census. Building permits, which are an
indicator of future construction, fell 17%. MON,
OCT 31 20222:12 PM EDT
https://www.cnbc.com/2022/10/31/homebuilders-say-steeper-downturn-is-coming-as-buyers-pull-back.html
More homebuyers look to ARMs to
finance their home… CNBC
CNBC’s Diana Olick joins Shep Smith to report on rising
mortgage rates, which have hit their highest level in 20
years, and the impact it’s having on homebuyers.
Thu, OCT 20 2022 7:31 PM EDT
https://www.youtube.com/watch?v=9_70uRY_QX4
Think
mortgage rates are high now? Homebuyers in the 1980s were paying 19%
Strait recalled one couple who were actually relieved when they
locked in a 30-year fixed-rate mortgage at 19% in September 1981.
By Anna Bahney, CNN
Business Published 2:43 PM EDT, Thu September 29, 2022
I took out an adjustable rate loan at about that time and
the teaser rate was about 14%. At that time people acted like rates
would never come down. I opened a 12% IRA CD at that time.
https://www.cnn.com/2022/09/29/homes/1980s-mortgage-rates-home-affordability/index.html
Three Hotels Approaching Foreclosure in the Heart of Portland Offer a
Warning to City Leaders
“The
banks are trying to keep these properties off the foreclosure list,
because why would you want to take something back that you know is a
bloody mess? But eventually they have to.”
By Sophie Peel September 07, 2022 at 5:30 am PDT
https://www.wweek.com/news/2022/09/07/three-hotels-approaching-foreclosure-in-the-heart-of-portland-offer-a-warning-to-city-leaders/
‘Poison’ Ivy Zelman—the analyst who predicted the
2008 housing bust—sees
U.S. home prices falling in both 2023 and 2024. Here’s how much
When Toll Brothers CEO Bob
Toll tried to say the housing market had bottomed out in 2006, Zelman
famously quipped back, “Which Kool-Aid are you drinking, because I want
some.” Of course, Zelman’s housing-bust fears proved more than correct,
and all those at the time who thought demographics would continue to
propel the aughts’ home prices forward were proved dead wrong.
BYLANCE LAMBERT September 6, 2022 at
6:30 AM PDT
https://fortune.com/2022/09/06/home-price-forecast-prediction-2023-2024-ivy-zelman-housing-market/
Daily
Mail: US housing market is in 'much worse shape' than Fed is letting on,
economist warns :
The U.S. housing market is in significantly
worse shape than the Federal Reserve is saying, a top economist has
warned - and prices will soon fall sharply. Ian Shepherdson, chief
economist at Pantheon Macroeconomics, said that the outlook for housing
sales is even more grim than the Fed has said, and the 'worst is yet to
come' for home prices. He tweeted on Tuesday that he had been 'bearish
as hell about housing for months' - meaning that he predicted a
significant slump in the market. August 25, 2022 Daily Mail
https://www.dailymail.co.uk/news/article-11144025/US-housing-market-worse-shape-Fed-letting-economist-warns.html
Mortgage rates jump above 4% — prompting borrowers to return to a staple
of the housing bubble MARCH 21, 2022 :
ARM Loans is not a smart
alternative with rates being this low. "mortgage rates have been
on the rise and this week topped 4% for the first time since May 2019.
That's pushing more buyers to take out adjustable-rate mortgages — one
of the financial products blamed for the 2006 housing crisis."
https://www.cbsnews.com/news/mortgage-rates-4-percent-adjustable-rate-mortgages/
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California's real estate market continues to be extremely competitive
March 16, 2022 :
FOX 11's Hailey Winslow was in Mission Viejo as the demand for homes
remain extremely high across Orange County.
https://www.youtube.com/watch?v=vm1mOprNjyQ
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A ‘perfect storm’ is driving up home prices, expert says April 2, 2022:
Many are missing
a key point. When mortgage rates were 14% home supply was very
low. Today when home prices are very high, supply is very low. I suggest
that the perfect storm referenced in the article will hurt a lot of
people.
https://money.yahoo.com/perfect-storm-home-prices-144142637.html
The Mortgage Bankers Association
reported that the medium mortgage application payment jumped to $1,736, both
home prices and interest rates went up:
March 2022:

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