Wednesday, May 28, 2008

Buy vs Rent:Long Time Renter Takes The Plunge

From a recent client discussion:

"The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble. All this time, I have been a renter myself, ... [but] the housing market has, obviously, changed quite a bit since our last move, in 2005....This month, we found a house that we really liked, and we made an offer. It was accepted.I’m still not sure how good our timing was. Based on the backlog of houses on the market, I fully expect that our new house will be worth less in six months than it is today. ...In fact, if you’re now renting - almost anywhere - and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way. But it’s O.K. with me if our timing wasn’t perfect.
Leonhardt isn't buying for appreciation, and he realizes the price will probably still decline further. He is buying because prices have fallen enough that the intangibles of homeownership (as he and his wife value them) outweigh the extra costs of owning a home compared to renting."

Friday, May 2, 2008

Chaos in Luxury Finance. The Other Shoe Has Dropped.

This week we witnessed a dramatic change within the jumbo mortgage and luxury financing space that has broad implications for housing markets across the country. It appears to have started with Wells Fargo on Monday and spread within a day to all investors whether bank, insurance, pension or hedge fund money sources. Remember we had earnings from all banks and insurance companies in the last two weeks. This allowed all market participants to peek under the hood and see that the credit engine is leaking oil.

The market above 1m had become restrictive in the last few months moving to a fully documented income, 720 minimum FICO playing field for most loan scenarios. Lending to the wealthy seemed stable. Then this weeks major crack in the 2m+ market which we specialize in, we knew another shoe had dropped in the credit meltdown. Granted 1-20m property finance is a niche within the 10 trillion dollar mortgage industry. But, the changes forecast major declines in luxury markets as this further decreases the available pool of buyers and will pressure prices.

Program loan to value limits were cut between 5-10% at most investors. We received dozens of calls from brokers, realtors, and loan officers across the country desperatly searching for 20-25% down financing for their purchases that now require 30-35% down or millions in reserves which most clients don't have. Programs are available to put 20% down on property up to 6m but they require 1-3m plus in liquid assets beyond the down payment. It will take a few weeks for this meltdown to be seen in asking prices as housing markets move VERY slowly. Not like your gas station that changes prices every afternoon right before you pull up to fill the tank on the weekend.
As proof of the credit market distress I would like you to consider the 1Y USD LIBOR chart below. This is May 1st 2007 to May 1st 2008. With hundreds of billions that the European Central Bank and FED Central Bank action in March we had a great move down in LIBOR as they flooded the market with cash in exchange for illiquid securities from banks. Now we have spiked up again and the market is saying that their is huge demand for money and supply is constrained. Lenders are afraid to lend so they are increasing the price. So econ 101 dictates prices must rise hence we have moved up about .75% in the last 30 days. Every borrowing cost is rising yet the FED just cut rates on Wednesday and the market is not responding. Remember the FED rate cuts only matters to banks who can borrow at the window or for your HELOC which is based on prime. The majority of corporate borrowing and 80-90% of adjustable rate mortgages are based on LIBOR. The LIBOR movement has a direct impact on what rate someone gets today and if someone is adjusting now they will move up or down based on LIBOR every 6 months per their jumbo loan contract.

Well another happy piece of news for folks on the sidelines waiting to buy. Enjoy your weekend and someday this meltdown will be over. Just not for several years. It took time to create the largest asset bubble in history and it will take time to deflate back to the fundamentals.

Extra reading for you credit crunch junkies:

The Fed is apparently still worried about the LIBOR, from the WSJ: Central Banks Ponder Dollar-Debt Rate
Central banks on both sides of the Atlantic are debating causes of the surge in interest rates on commercial banks' dollar-borrowing in money markets and considering what they can do about it.A major source of stress has been the London interbank offered rate, or Libor, a benchmark for the rates banks pay on dollar loans in the offshore market. It remains unusually high compared with expected Federal Reserve interest rates...