Friday, April 04, 2014

Low interest rates will alter the housing market for decades.

Over the past couple of days I've been reading article after article asking "Where are the sellers"? This sends me into a bit of exasperation. I can tell immediately these writers have almost certainly never owned a house. Houses are a number on a screen. They don't understand the psychology of the market now. I am not confused at all why sellers are well... not selling. The only thing that confuses me is how this will turn out in the end.

Presumably these writers think that as soon as people are not in negative equity they will choose to sell. But why would they? The 20% who are still deeply underwater have now been paying on their houses for at least 6 years. They had to have had pretty stellar credit and enough resources to keep paying their mortgages through arguably one of the most financially terrifying times in their lives. I know one guy who is still paying close to 7% interest. A couple of days ago he told me that he just got his house appraised. So, I know he is finally getting to go through the process. I'm not sure yet when he bought. It had to have been between 2004-2007. I've been watching this guy through the whole recession. Hoping he would make it. He wasn't speculating. He borrowed money from his house to build a commercial building for his business. Something that people have done as long as I've been alive. A very normal thing people do to get ahead in life.

I knew when the banks finally refinanced him home prices would be very nearly the top. Which we are. Some neighborhoods are skirting the top. My house is still "effectively" underwater. Which means I would still lose money, but I have equity.

Now, why would someone who's been paying 7% interest suddenly sell because he's magically not underwater anymore? Especially when he's gone through hell just trying to get refinanced for the house he has now? I can assure you - there are a lot of people who are too raw to take on the risk of buying a new house. He's been living that risk for 6-7 years! He's just gotten to the point where he probably feels like he isn't going to lose his properties. At least the place he has now - he apparently has equity or the banks wouldn't touch him. You know that guy has been fighting for his financial life. He is dead tired.

I  also suspected he was one of the people The Motley Fool wrote about in this article: Citigroup Will Soon Be Haunted by $19 Billion.

"Just when you thought the financial crisis was in the rearview mirror, a final aftershock is about to hit the nation's third largest bank by assets. According to Citigroup's (NYSE: C ) recent annual filing, nearly $19 billion of potentionally toxic home equity lines of credit, or HELOCs, dating back to the housing bubble will soon begin coming due. "

I couldn't just ask him. It's a really sensitive topic. But given his circumstances I was sure he was facing a reset soon. I was facing one in 2016. I had two years left. A couple of days ago he admitted that next year his HELOC was resetting. We were in the market about at the same time. No matter how good your credit was - it was impossible to get a loan that didn't reset. Impossible. It was all they offered. I'm sure because I don't take risks with loans. Even I wound up with a 10 year reset. I've always preferred a fixed rate.

Bright side is - hopefully since this guy is getting refi'ed, maybe the risk to the banks is not as severe as what people write about. They obviously know how this turns out. But no matter - prices still need to go up for them to refi you. Period. Which is going to be tricky. This segment is going to be risk adverse for a very long time. When you have a reset - every single day feels out of control because you don't know when interest rates are going to skyrocket. And you see how the banks treat their best risks. Every single day you are aware you could be shut out of the market even though you are a stellar risk. I was only paying slightly over 6% interest. That guy ... when you are paying 7% and almost everyone else is paying 4% - it burns like the surface of the sun. I assure you.

Now onto the segment of the market who's finally been able to refi. The 4%ers. Well... consider that market almost dead. I newly fit into this category. I have wanderlust for houses. But now that I'm in a low interest rate loan - it changes how you feel about moving. I hope it doesn't stick too long with me. But it can forever take a house out of rotation. Mr S's mom bought a house in 65 before interest rates spiked in the 70's. She never moved because she wouldn't have been able to afford a higher interest rate. And I believe a big segment of the refi group will never sell their houses. I know if I have this impulse, other people have it more.

In some ways the market is worse off than before. You have large swaths of the market that are in stasis now because the attitude of moving has changed quite dramatically. More people are choosing to be "happy where they are". Yet with economic growth pretty paltry considering how much the government spent- you have to wonder how they will stimulate the economy when the inevitable comes. Interest rates can almost not get any lower. Plus, you don't think the stock market goes up forever. Do you?

And then.... there are those pesky inventory rises. For the past few days I've been seeing articles that report that Sacramento has had an almost 90% side in housing inventory since the beginning of the year. Which is quite dramatic for three months. So, it's going to be quite the nail biter to see if those 20% underwater and HELOCs can make it before the market reverses. Sacramento doesn't seem to be alone. Las Vegas has had a 92% increase in inventory. The article was written from the buyers standpoint, because rising inventory means lower prices for buyers. But rising inventories are a worrisome trend for the overall economy. Really worrisome.

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