The Market Ticker
Commentary on The Capital Markets- Category [Housing]

This is utter crap:

To put a price tag on the possible cost of waiting to buy a home, real estate information website Zillow Inc. assumed that the rate on a 30-year fixed-rate mortgage would rise 1 percentage point. It calculated how that higher rate -- which would be about 5.1 percent -- would affect a buyer's monthly mortgage payments. Zillow applied that rate to the median home price in 35 metropolitan areas, assuming a 20 percent down payment and a 30-year fixed-rate mortgage.

Zillow (like the rest of the Real Estate industry) assumes that prices will not decline as rates rise.

That's because on average, over time rates have gone exactly one direction since 1980 -- down.

But in fact virtually everyone shops a payment when they buy a house, not a price.  

This is why prices went up -- and it is exactly why prices will go down.

Incidentally, this also means you're going to have a lot of underwater landlords too.  That should make things doubly-interesting.

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Why does anyone tolerate this sort of intentional and, it appears, knowing misdirection and worse?

Nine reasons to love your mortgage?  I'll give you the first one, it probably is the cheapest way for you to borrow.  But the others?  Well, let's look.

2. It's a negative bond. 

That's bad, not good!  Why would you want a negative bond?  That this clownface nearly led with this reason is all you ought to need to know to go find him, warm up the tar and find the bag of feathers.

3. It leverages your entire financial life.

How is that good?  Oh yes, he does note that leverage multiplies both losses and gains, but then he makes a statement that while factually true is radically misleading -- while a brokerage can call a margin loan that is underwater, your bank can't on a mortgage.  

That doesn't matter, however, because the loss is still yours, and what's even worse is that you get to pay interest on lost money and you're locked in and forced to do so.  There is a ying for every yang; your brokerage will typically call your margin loan at the point it goes into negative equity -- while you've then lost everything you had in the account the bleeding stops there.  With a mortgage this is demonstrably not true!  If you put 5% or 10% down and the house goes down in value by more than that amount you are now paying interest on lost funds and unless you have the deficiency you cannot sell because you cannot extinguish the note, so the loss is yours on both a present and continuing basis, not the bank's!

4. It's a backup source of emergency money.  

No it's not, really.  If you have a job and other assets you can sell the assets or borrow against them.  If you lose your job getting a home equity line will be virtually impossible.  Further, see #3 -- increasing your leverage is always dangerous and with a mortgage due to the relative illiquid nature of real estate the risk is very-much tilted toward you.

5. It makes inflation your friend.

The hell it does.  The payments on a fixed-rate mortgage may stay the same but the value of the home does not if rates rise because the buyer has to finance with today's rates, not yesterday's.  There is no free lunch -- the premise of "inflation being your friend" is a false one, stoked with a 30-year trend of decreasing interest rates.  We're at the lower boundary for that and any pickup in inflation is either going to result in no benefit in that regard or worse, higher rates that destroy value and render your mortgage "upside down."

6. It lets you profit from falling interest rates.

Yes, but not really as this guy suggests.  Refinancing resets the amortization clock and since most of your payment in the first few years on a mortgage goes to interest doing this, even at lower rates, is a huge lose for you if you have a number of years into the original mortgage.  So the truth is that this only helps you if you just got the loan, where the clock reset doesn't hurt much.  Where falling rates do help is that they make it possible to finance more house with the same payment, and this tends to drive up prices.  Now tell me -- which is more likely over the next 20 years -- lower or higher rates?

7. It's an effective way to build wealth.

No, it's not.  As noted the actual appreciation in price barely outstrips inflation.  The problem with "forced savings" is that it's a chimera; you cannot both have forced savings and a home equity line, for example, nor can you have forced savings and constant refinancing.  So which is it, *******?

8. It's your default investment.

And a poor one at that.  Next.

9. Paying it off can drastically reduce your cost of living.  

Well, yes.  And not having it in the first place can do so sooner.  This is particularly true when you consider that the average $200,000 mortgage costs you nearly $150,000 more in interest (assuming a 30 year, 4% loan.)  People will often claim that due to inflation the "real cost" is much lower, but that's false; the problem with the claim is that most of the interest cost is front-loaded due to how amortized loans work (that is, the early years are mostly interest) and you lose the purchasing power immediately, along with the inability to invest those funds in something productive.  And no, that's not necessarily a bubbly thing like the stock market either!

So all-in Jonathan has 1 out of 9, with the other 8 reasons to "love" your mortgage really being reasons to hate it instead, along with pelting him with rotten tomatoes wherever you may see him for trying to goad you into destroying your financial life.

PS: Once you're out of the plane you will discover that "parachute" you were handed is in fact a knapsack.  

Bon voyage.

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I chuckled when I read this over the weekend...

You can now nab a 30-year fixed mortgage for under 4%. That’s the second week in a row, by the way, that rates have been so low. As of this writing, the numbers tick slightly, but the range remains remarkably low – 3.96% to 4.08%. In either extreme, extremely weird, and stunning when you consider we are supposedly in the latter stage of a recovery.

Usually at this point in an economic turnaround, things are rocking, and interest rates are jumping. But we all know the economy isn’t rocking. And as a result, interest rates are not jumping. What’s weird is those rates are dropping, which usually presages something bad happening.

Then again, this hasn’t been your father’s recovery, has it? Even with absurdly-low interest rates for what’s been years now, it’s hard to make the case they’ve triggered any kind of housing boom. Sales of new single-family homes fell 4.9% through the first six months of the year. They were down 8.1% in June. So let’s just say the trend is not the housing industry’s friend.

Neil goes on to moan about people being "tentative" or even "skeptical" about buying a house, but offers no answers for the reason we're seeing what is happening.

That's because he is either deluded or intentionally refusing to talk about the facts -- although he does dance awfully close to the truth with his last sentence:

None of this means housing still isn’t a compelling investment, but when real estate trendsetter Zillow estimates some home values may take another few years to reach their pre-meltdown peak…it’s enough to make you…puke.

Really Neil?

How did we get those so-called values that render getting "back there" in a "few years" something that's puke-worthy?

It was all fraud -- and in fact had been for the last 30 years in one form or another.

That's the dirty secret.

How does housing go up in "value" without median family income also rising?  It cannot, except through two mechanisms -- ever-falling rates and fraud.

That is, loans that are not really loans -- they're speculative leverage vehicles where the only rational expectation for ability to pay is the ever-decreasing rate of interest and/or ever-looser standards for said loans, so you can roll it over into a new loan with a higher alleged "value" for your house.

What is a 2/28 or 3/27 other than this?  There was never an expectation that the alleged "borrower" could pay at the 28 or 27 rate.  The 2 (or 3) rate was "affordable", but this was nothing more than a gambling vehicle, with the gamble being that you could come back and refinance before the 2 or 3 year period expired.

The "benefit" to such a gamble is that each such refinance generates more closing fees and costs, stealing money from you and putting it in the banksters pockets.  The problem with such a gamble is that first it effectively extends forever the time in which you have an essential zero in equity in your home (in other words you're renting it for the price of the monthly payment) and the roll-over risk is yours; if you cannot roll the loan at an acceptable price when the time comes since you can't afford the fully-amortized payment you lose the house and have nothing.

Incidentally, that same scheme was a huge part of the reason The Depression was so damaging -- the exact same game was played with balloon mortgages in the 1920s and Fannie Mae was created as a specific response to it.  Unfortunately like nearly all government "intervention" that simply substituted one fraud for another and vectored the benefit of same toward a politically-favored few while shrouding the scam in a legal protection racket.

At the core the entire housing market over the last 30 years has been a gigantic leverage machine, predicated on the fact that everyone buys a payment, not a house.  That in turn means that the secular, 30 year trend toward lower rates as shown here has created a false belief of home price "appreciation" that has become ingrained into the national psyche, along with the pronouncements of people like Neil and, of course, the NAR.

Unfortunately that which is false always eventually percolates to the surface, and the truth becomes known.  The simple fact of the matter is that housing is not an investment, it is a depreciating and relentlessly taxed capital asset that one factually rents forever, and one only does that because it is cheaper than renting and the buyer has the personal and financial stability necessary to make the transaction costs rational (meaning, you're going to be there for a good long time.)

We've spent more than 30 years destroying that second premise along with the interest-rate distortions.  The relentless drive to offshore labor, to sell worthless degrees and lard up educational costs to the point that the marginal value of college has been siphoned off to a large degree by banks and universities and the biggest con game of all -- federal deficit spending -- has eviscerated what's necessary for home purchases to make sense for most Americans.

Many people like to blame The Fed but in fact it is Congress and The Executive that are responsible for the destruction of purchasing power that has occurred -- all of it.  It is Congress that allows banks to lie about how they operate; the common chestnut of banks taking in and then lending out deposits is a factual lie and everyone in the industry knows it.  Instead the banks literally print money and then when those funds are spent and deposited by a merchant the "reserve requirement" (such as it is) is met ex-post facto, which is in fact fraud -- never mind the various dodges to avoid even that tiny constraint on bank leverage.

The Fed, government and media have spent most of the last 5 years trying to convince people that fraud is good instead of bad, and that they should jump back into a game that marks them as losers.  So far it's not working out very well -- while there are those who are going for it, enough thus far are simply saying "No!"

It's about damn time.

PS: Those buildings Neil used in his image at the top?  They're not houses -- those are hotels in the game Monopoly.  It would figure that a limousine rider like Neil wouldn't know that, as he has never stooped so low as to play an actual board game.

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