Sunday, July 02, 2006

The Price of Being Short-sighted

One of the things that amazes me the most about this housing bubble is that people who buy houses these days show no interest or concern for the absolute amount of debt they are taking on nor how long it will take to pay it off. Instead, we have become so short-sighted that all that matters is the monthly nut. Sure, I understand the pragmatism of focusing on the monthly mortgage payment, but surely one would think that overall debt accrual would enter into the buyer's thinking at some point.

Well, if it is only the monthly mortgage payment that effectively governs how much someone is willing to pay for a house, then it is easy to understand that as interest rates go lower, the amount of debt one can "afford" to take on increases. As one can take on a larger loan for the same monthly mortgage "cost", the overall price of houses increases while the monthly mortgage payment stays about the same.

It seems reasonable then to suppose that the reverse process is equally true in a rising interest rate environment: the monthly payment must remain approximately constant. Given that interest rates are rising and the monthly payment must remain the same, then the only factor that is left to freely adjust is the absolute price of a house which must come down in a rising interest rate environment as long as the monthly payment must stay about the same. Either that or incomes rise.

Well, as incomes are not rising at a particularly perky clip -- suck it up sellers and deal with it:

4 Comments:

Blogger Nozferatu said...

Good read.

You have to understand that people in this country don't care about debt. They never have...never will. Instant gratification is what it's all about so why care about debt.

The same goes for the way people here shop for clothes, cars, and other material items...with the exception of food. Americans are exceptionally cheap when it comes to spending on food.

That's why the montly payment is so important...sort of like the 0-60 times of cars...quite a stupid performance measure but everything thinks of that number first and foremost.

The problem is that the circumstances under which people heve been buying homes in the past few years have been so wacked and out of touch with reality that you can't have a case against people who got lucky and made alot of money. When you try to explain things to them, they shrug our analyses off because they're already sitting on $300K of equity from buying a pile of garbage.

I don't know what's going to come out of all this because while the interest rates are going up, prices of homes, say in parts of the San Fernando Valley, are still up in the mid-700's. Think about tha MID-700's!!! If I had that kind of money to blow, why the FRAK would I buy a home here....I'd go buy it in the South of France.

Point is the sellers are very sticky...very greedy. And they can come down quite a bit before they lose money. Now the stupid buyers see price corrects of $100K from an house that's $300K overpriced, and they're all gaga...

It's education and intelligence that will solve the housing problems...not interest rates, not supply/demand, not jobs.

Living amongst such stupid fortunates isn't easy...and that's why I think debt will rise more and it's time to leave.

Jul 3, 2006, 9:25:00 AM  
Blogger fredtobik said...

I worry about monthly nuts, so I know how much is left for me to invest. Sure my dream is to never NEED a bank, but long term planning and dreaming don't mix.

I think most people don't factor in inflation, or other things when selling a home, they simply look at a lump sum, and if it is more than what they put down they are happy.

Jul 5, 2006, 11:25:00 AM  
Blogger buyer2be said...

I believe it will take a bit more for the sellers to face reality. That is becuase agents don't want to see commissions down, so they are keeping the pressure on.

I think a lot of the flippers are in wait and see, and as long as they can keep putting it in and out of the MLS - they are holding out. I am sure cashflow is not an issue for some in Marin.

Jul 5, 2006, 2:42:00 PM  
Blogger rejunkie said...

I believe it will take a bit more for the sellers to face reality. That is becuase agents don't want to see commissions down, so they are keeping the pressure on.

Agents don't care about high the price is -- they want volume. This is why the current commission structure does not lend itself well to encouraging the agent to truly act in their client's interests. For instance, a $100k drop in a listing price is a difference of 5-6k in fees split between both agents and their brokerages. This is peanuts compared to the amount of time they might have to invest in marketing the hell out of something to get it to go for top dollar. So, they will forego a few thou to get it over with. 20% of the effort to get 80% of the potential commission is how they view it.

Jul 7, 2006, 8:51:00 AM  

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