Update on Real Estate Market Outlook for 2007
Posted by Frugal on February 27th, 2007
I am really stomping my feet for not taking up the private offer by Euro-Pacific for shorting against low-quality mortgage (required $100K investment). Things have changed so much in just a span of three months. Previously when I forecasted that housing market in California would fall just 5%, it was based on the knowledge of continual lax lending standards from my friend in mortgage business. Due to the recent blow-ups in subprime mortgage companies, and bankruptcies/scaling down in 20+ major lending originators, I believe that the housing market will be falling by more than 5%, possibly by 7% to 8% in California. Note that other regional markets may fall/rise more or less. However, as a rule of thumb, weaker markets tend to fall more. California real estate market should be the one of the stronger market, but also the priciest.
Here are some recent subprime lender stock casualties:
NFI, falling 70% in 3 months.
LEND, falling 20% in 3 months, possibly more very soon.
NEW, falling 50% in 3 months.
I think this year in 2007, more real estate agents will go “hungry” and shocked by the time on the market, inventory level, and the price reduction required. It will be possible to see some homes staying on the market for more than 365 days this year or next. For the people who are home shopping in spring & summer, they could face the biggest personal loss when the time reaches fall/winter. Mortgage underwriting standards tightening should kick into effect definitely by the end of summer. Mortgage resetting should also be in full force at that time bringing ever more sellers to the market for anyone who cannot refinance and roll-over under an increasingly tighter lending control. The end result from all of these should be more homes at all price levels, less qualified first-time home-buyers, more failed refinancing deals and short sales and foreclosures. And of course, helicopter Ben Bernanke will probably come in and lower the interest rate by probably 2 notches towards year end I believe.
For all the people who are waiting for the real estate bubble to burst, your days in victory are coming. I believe 2007 housing fall will be the banner year for first real significant (5%+) year-to-year decline in most real estate markets. And you will have time too to scoup up these deals, or I should say depreciating “assets” possibly in 2008 and even 2009. For anyone whose loan terms are set to resett and go up before 2011/2012, more than likely they are asking for troubles. If you want to refinance, refinance to at least 7 years ARM (in which case, the interest rates may not be much better than 30 years fixed). You don’t want to be like everyone else, going for the easiest refinancing terms (in terms of monthly payment). You have to be different to get away from the “poor house”.
Don’t buy a house if you don’t have to. By the way, lock in your rent if you could. Don’t be the home-owning fools who are nudged over because your rent has just risen by 8%. Paying rent is not throwing money away; paying mortgage interests (even after accounting tax benefits) on a over-priced over-sized loan is.
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February 27th, 2007 at 6:44 am
Frugal:
Great post today. Like you, I truly believe the housing market is literally a “house of cards” that is starting to crumble and will come down hard. I don’t believe the reports that the housing market will have a soft landing. That information is being stated by individuals (i.e. National Association of Realtors) who are trying to protect their liveliehood.
At 37 years old with a wife and two kids, I’m glad my home is paid off and have no other debts. I live in a respectable southwest suburb of Cleveland, Ohio where many people have extended themselves by purchasing +$400,000 homes with ARMs and little money down. I believe these people are in for a rude and frightening awakening.
February 27th, 2007 at 6:45 pm
I sold a condo and purchased a home in Southern California in early 04 at the peak of the housing market (well a few months off the actual peak , but very close). I did a 30 fixed rate and a 10 year interest only 2nd, a few months later, rates dropped slighty and I refinanced at 5.5 percent 30 year fixed, with a 6 percent fully amortized 15 year second. My payment went up nearly 300 on my second , but dropped 150 off my first. The result is, I am under no pressure with my loan. I suggest, if you are in the market for a home, this is still a good time, you can negotiate with much more authority and rates are still really good, it’s easy to get a 30 year fixed at 6 percent. The key, IMO, is don’t buy too much house, if you can afford the payments with a fixed rate, your good to go!
February 27th, 2007 at 11:10 pm
Hi Frugal, this post is really educational for me. Thanks for the great article.
I am in the SF Bay Area, and currently looking to buy a house. The funny thing is while everyone says it’s a good time to buy, the inventory for desirable homes is quite low. This is keeping the prices stable here. The people who are selling are selling because of “life changes” whatever it is. Anyone whose planning for profit is basically camping at home and waiting it out for a long time, i guess.
I have noticed that 30yr rates are getting lower than 5/1 or 7/1 arms. It seems mortgage companies are trying to lock people into 30yr fixed now, knowing rates will drop by 2 points by the end of the year.
So, in my case, I will be getting a mortgage soon, and I’d like your opinion on what is a good strategy- what loan product to get knowing rates may drop 2 points by end of the year?
Thanks in advance.
February 28th, 2007 at 5:38 am
Mike: I am from San Francisco and have been watching the market for years, even after moving to Scottsdale.
Get a 30-year loan if you want, but with no pre-payment penalty and no origination fees. I believe that the short-term rates for 5-1 ARMs will come back down as the Fed starts their easing process fairly soon.
March 2nd, 2007 at 5:35 pm
Hi Larry,
Thanks for the advice. Do you know how long do mortgage interest rates take to actually change say; after the Feds announce rate changes? My understanding is that those Fed public announcements only affect short term rates like credit card prime rates but NOT the mortgage products. I read somewhere that mortgage products follow a completely different Index which may not be directly affected, T-Bill, MTA, LIBOR etc etc. which I assume are slower moving indexes.
Hope you can provide some answers…
Say I closed my loan @ 6% 7/1 ARM today. Now, if mortgage interest rates drop, and my exact loan product 7/1 ARM at Jan 01, 2008 is at 6.7%; I am screwed because my loan is not even 1 year, and if I re-finance, I will be paying penalties, title fees or what-ever else refi fees, if I want a lower rate on the SAME product.
Any advice?? Thanks!