Undecided

It’s funny how things change.  When I first moved to the (SF) Bay Area back in 2001, I briefly joined and spent time with the local Nortel user’s group (a group of other telecom professionals who all work on the same telecom equipment I do).  During my time with them about 6 years ago (2002 or 2003) I was talking with one of the members who said that historically the housing market goes through a cycle and, on average, that cycle is every 5-7 years.  He said that the previous re-adjustment had been in 2000 or 2001 (I forget now) and that the next would come in 2007 or thereabouts.

Since I had really not been wise with my money prior to moving to the Bay Area, I really could not afford to buy a house.  I could have done one of those interest only loans, and depending on where in the Bay Area I had been willing to live, I could have maybe even put a percentage of the total mortgage down, but since I could not manage to put down 20% it almost seemed smarter at the time to either keep my money in the bank/stocks/etc and get a 100% financed home or continue to wait.

I’m a patient person by nature and at the time, I decided it would be better to wait for the next down turn in the real estate market and save money between now and then, rather than having a lot of debt.  After all, we’d had Sept 11 in 2001, and things were still very shook up and uncertain.

Now, 5-6 years after listening to that advise, the real estate market has definitely “adjusted.”  Time authored an article which Yahoo is currently hosting about the bank bailout side effects.  According to the article, the mortgage interest rate has had it’s largest one-week hike in 21 years.  The by product of this increased interest rate is that a $600,000 home would now cost a buyer an extra $500 per month.  Since the terms for houses are fairly fixed (30 year terms being the average length to repay), that works out to be about $4300 per month in payments. 

Unfortunately, I tried to arrive at the same numbers that the author did and I couldn’t.  Based on a $600K mortgage and a 6.74 interest rate with a 30 year term, I came up with a $3887 monthly payment.  So, using my numbers…  a $3887 monthly payment would have gained you an additional $32000 on your loan (at half an interest point lower).

What do all of these numbers mean?  It means that in order for someone to afford a $3887 per month house payment, the house price has to drop $32000 (based on my figures, it’s probably quite a bit more based on whatever figures the original authored used.)  Which means that the rising interest rate is likely to drive housing costs down.

What’s more, if you don’t have “perfect credit” (and I don’t, it’s good-near-excellent, but not perfect) you’re going to probably end up paying an additional half a percentage point, which means a downward adjustment of an additional $32000 (based on my numbers) to the housing price.  All of which means that this week, in order for people to sell houses to the same people they would have sold them to last week, they have to drop their house price $64K, or almost an 11% downward adjustment in housing prices for a single point increase in interest.  (Possibly a much higher downward adjustment, depending on whatever numbers the original author used.)

Failure to adjust the asking price means that your pool of potential buyers shrinks.

The upshot of all of this is that when I was having this discussion almost 7 years ago now saying that last year there should be a re-adjustment in the housing market, I anticipated in a down turn based on the information at my disposal.  I would have never anticipated this economic crisis or it’s cause-effect relationship with the housing market.

As a result, I’m anticipating for at least the next year that housing prices will continue to adjust downward (especially in the Bay Area).  If a previously $600000 home comes down to the $400000, I just might seriously consider buying in.  Even with another point increase in interest, if the houses drop $200000 in price, my estimate $3887 monthly payment drops to less than $2800.  And that’s whith an interest rate of 7.74%.  I honestly don’t think it’ll drop that much, but while we struggle through this economy, fewer and fewer people who can afford housing in this economy will be buying, which means more and more houses on the market, more forclosures, and more opportunities to drive that housing cost down further.  So we might see a 20-25% decline in housing costs before things begin to stabilize.  Even at $450K-480K, that house is much more affordable in a year than it is today.

Granted, it’s all pure speculation, but it’ll be interesting to see how close my nearly uninformed/uneducated estimate comes to reality in a year.

Thank you Ron Paul;

I agree something has to be done, but I don’t think a “no strings attached” bailout of 700B for the executives who caused this problem in the first place is the answer.  If you hand those executives $700,000,000,000 without any oversight or strings attached, you’re not fixing the problem, you’re only going to make it worse (or at best, prolong the issue for another 4 years until it’s election time again and the issue comes back to haunt us.)

In an effort to remain politically impartial (I’m just posting food for thought, I don’t think either side is the right answer… it’s really a question of making sure the wrong lizard doesn’t get in to office, not a question of picking the right one.)

As the comments say on this video, Bush did encourage reduction of the federal interest rate which only fueled the subprime mortgage lending. Without the interest rate cuts, many people would never have considered the “interest only” motgages that have been the cancer of the mortgage industry this last year (and several months.)

Democrats did not cause the problem alone, but their generalized fiscal policy is a horrible thing for our economy.

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Most of my friends wouldn’t think of my as incredibly sentimental or even very affected by events that occur in the world around me, but 9/11 made a terrible impact on me like so many other people, and I was across the country in San Francisco when it happened.

I still remember vividly being called my a co-worker of mine early in the morning before I’d normally wake, being urged despite my groggy state, to turn on the TV.  I remember snapping instantly awake at the horror on TV, while something that looked like a bad movie played itself out on the news.

I remember calling my boss next, and several friends after, to let them know about the tragedy in New York and to ask if they were ok.  My boss had it bad at the time, as he was originally from New York and still had family there.  Thankfully we later learned that no one he knew worked in or lived near the WTC and they were all ok, but I did know people who lost friends or loved ones in the attack or later in the brave attempt of fire fighters and police to rescue the victims of that attack.

As with Matt Tobey over at Comidy Central, I find myself somewhat retarded in expressing myself.  But I am heartened to see that there are still some who yearly pay their respects to the tragedy of that day.  I still well up with emotion thinking about that day and how impossible it is to express with words the loss and horror experienced by so many and how we were all united in our grief.  Matt provided a few clips of the first Daily Show (I normally don’t watch, so this is my first time seeing it) that aired after 9/11.  As this is a notebook mostly for me, I thought it was worth saving.  But if I do have any regular readers (hi Scott), take a moment and remember.

And thank you Matt for finding a clip that helps express the same emotional state I found myself in on that terrible day.