Rise and Fall of the USD

Seems wars and the Fed have destroyed our wealth. Maybe its time to rethink wars and the Fed?

Click here for full sized picture and then click again to zoom in.

What Lenders Look For

Are you financial ready to buy when the opportunity presents itself? I would like to talk to you about mortgages, debt and preparing to purchase a home.

How to prepare to purchase a home:

1. Reduce your current debt
2. Increase or maintain your credit rating
3. Save cash to make a large down payment

Whether looking at a fixed mortgage, jumbo mortgage, VA mortgage, or a reverse mortgage acquiring financing in these tumultuous times is probably the most intimidating and daunting aspect of purchasing a home. Before exploring the many different mortgage options and mortgage rates available, you need to know just how lenders will review your application and decide whether or not to approve your request for a mortgage loan. There are a couple criteria that lenders look at when they evaluate your mortgage-worthiness. As one would expect, the first thing that they are going to check for is your ability to pay back the mortgage loan. Lenders determine whether or not you can repay your loan based on an assessment of your income stability and your total monthly income versus total monthly debt. Lenders will look at your salary, financial assets, and verifiable income over the past two years. Generally, a monthly income to total debt ratio of 32-36% is desirable. Obviously, the higher your income to debt ratio, the lower your chances are of being approved for a mortgage. It is important to pay down your debt so you can buy a home when it is right for you.

Another factor that lenders assess is your credit rating. Generally, the lower your credit score, the lower your chances are of being approved. If you do manage to get approved despite having a low or bad credit score, you will mostly only qualify for high interest rates and subsequently pay higher points and fees. It is important to monitor your credit and not do anything to negatively impact your rating.

Lenders also look for a low loan-to-value ratio as they like borrowers who are willing to make a large investment on the property via down payment. Lower loan-to-value ratios result from higher down payments. It is recommended that a borrower put down a big down payment as doing so will reduce the overall size of the mortgage as well as start the borrower off with a lot of equity upfront. A borrower putting down a small down payment is considered to be more of a risk and subsequently pays for the higher risk in the form of less attractive mortgage terms and conditions.

Maryland Housing Statistics April 2009

It has been a few months since I've posted. I wanted to update everyone with the most recent Maryland Housing Statistics as of April 2009. The data is from www.mris.com.

This analysis covers all Maryland Counties including Allegany County, Anne County, Baltimore City, Baltimore County County, Calvert County, Caroline County, Carroll County, Cecil County, Charles County, Dorchester County, Frederick County, Garrett County, Harford County, Howard County, Kent County, Montgomery County, Prince George's County, Queen Anne's County, Somerset County, St. Mary's County, Talbot County, Washington County, Wicomico County and Worcester County. Additionally I have calculated the Baltimore Metro region (city and 5 counties) and the Baltimore Metro region excluding Baltimore City. The analysis was broken down by 5 different metrics:

Housing Sales, page 1 - 9
Median Price, page 10 - 18
Average Price, page 19 - 27
Inventory, page 28 - 36
Months of Supply, page 37 - 45

Many people are wondering if we will see recovery in the coming months. My opinion on housing prices is that it lags any general economic recovery. I also do not believe we are even half way to the bottom. I'm personally targeting 2012 with the understanding that 70-80% of all the correction will be complete while any remaining correction will play out from 2012 - 2020.

The next wave of the housing crisis will be the high end homes since the food chain of move up buyers has been destroyed and many owners of these homes are in interest only loans and/or are currently struggling to make the principle and interest payments.

I'm still not sure where I think prices will fall to, but I believe it to be somewhere between 2000 and 2002 prices. Should prices continue to fall below 2000 prices, then I believe the entire economy will need a reset.

As always please feel free to communicate with me via email at bubblemore@gmail.com

April 2009 Maryland Housing Statistics

New Home Buyer Tax Credit Equals Government Subsidy

I’d like to comment on the Baltimore Sun's Jamie Smith Hopkins blog post on the new buyer tax credit.


Subsidizing housing now will only make the situation that much worse once the subsidy is removed. The subsidy given the new buyer, the new home buyer now actually pays the same amount of money for the home with or without the subsidy; it is the seller of the home to the new home buyer who receives the benefit from the tax credit. Even though the credit goes to the home buyer, the subsidy would be priced into supply equation.
If a home on the market was not selling, the seller would probably cut the price. The tax credit to the buyer is literally a cut in the price, but the only difference is it merely transfers the liability from the home seller to the government. As a home buyer you may think you are really getting a credit back, but it is like saying your getting free zero % financing on a new car. It is never free, it is priced in somewhere. The same goes for anything that appears free; free shipping, free gift wrapping, free maintenance, etc...


Now back on topic, once the subsidy is removed for the new home buyer, the price of homes will literally be worth less equal to the value of the former subsidy. So the new home buyer who got a credit for buying a home will now be the bag holder for the credit since their home will be worth less without the subsidy.
The same thing can happen with interest rates. Think of low interest rates also as a subsidy. Once the subsidy is removed, the homes will be worth less.


The problem with subsidies is they create artificial demand for a product which causes producers (in this case home builders) to produce more supply than would be needed without the artificial demand. This causes over supply and will cause prices to decline. Does any of this sound familiar in recent history? The last few years we had a housing boom fuel by cheap and easy credit, aka as a subsidy. This created artificial demand and home builders not only built more homes than needed (excess supply), but also in locations that didn't make sense, especially in places where build-able land was restricted.

If you’d like a free simple lesson in economics, might I suggest reading Economics in One Lesson by Henry Hazlitt. You can read it for free online (click here for free online book).

Maryland Housing Statistics November 2008

I know its been a while since the last posted, but I figured it would be nice to update anybody who still has an RSS feed to my site with the November 2008 Housing Statistics. The most shocking statistics, in my opinion, is the Months of Supply which begins on page 37 of 45. Enjoy and please leave a comment with your thoughts if you read this posting.

Maryland Housing Statistics November 2008

so long and thanks for all the fish

As Kevin posted yesterday, after some discussion over the last month we have decided it was time to close the blog.

Although I initially wanted to try and keep it going till the end of the year, I think this is the right time for us to wind things down. When I was telling people back in 2006 that this housing run up in Baltimore was going to end badly everyone looked at me like I was a nutball. Well 2 years and trillions in taxpayer funds later and I feel vindicated.

As I told Kevin when I started doing posts I have always looked at this as community service more than anything else. I am glad to see that we did build a pretty large audience and from looking at the google stats a very affluent one at that.

Now that we are probably at the eye of the storm it makes sense to move on as I have other things I now want to focus my energy on.

As for predictions.....this was the biggest run up in history and it will over correct to the downside I guarantee. As I sit here this morning and watch the CNBC talking heads argue about the sell off in stocks due to hedge fund redemption I have to agree with the one sane person of them all Mark Haines. His rant this morning said it best.

"This is not rosy and is not going to be for years and years. Am I the only one willing to say the truth that this horrible? This was lead by housing! Housing takes years to unwind due to the transaction costs. This happened because people got loans they never had any hope of paying back."

For those of you who think that in 5 years we will be back to peak I have a news for you, that is not going to happen. All the growth since 2000 was due to "creative lending". Think about that.....this means no home equity lines of credit and essentially lower consumption. If people want to sell, they are going to have to come to the table with money.
People are going have to....(gasp) SAVE if they want to buy a big ticket item.

Unlike the bubble markets of the west (CA, NV, AZ) and Florida, we are winding down in a more orderly fashion. That being said this will drag out the pain for us. More people who did not speculate are going to get hit by this (baby boomers who bought 20+ yrs ago) than if it quickly imploded like Florida.

We are going to develop a market very similar to Southern California after the late 80's bubble. Homes that were bought at peak will sit as the guy next door sells his for 40% off a couple years later. If you bought in a neighborhood you "settled on" in hope of selling and moving up in a couple years, I would recommend you re-adjust your priorities. Get to know your neighbors, get involved in your community, and make do with what you have.

If you want one good easy button to click and see if it's time to buy click here. You will see we are the most overheated market from a price/income ratio. Hell even Bethesda's market down in DC makes more sense. When we get below 3 on the housing barometer it's time.

One part of this that is overlooked by many in the mainstream press is the effect this crash will have on the young folks coming out of college and are a few years into the workforce. They have never lived through a real recession like the misery from 79-83. To them this is going to change them for the rest of their lives. They will be a lot more thrifty and are not going to speculate on homes.

They will not have access to no money down loans and unlike the generation before they are likely on the hook for 10's of thousands of dollars in Student Loan debt. This is debt that never goes away and will really hurt the purchasing power of the new pipeline of homebuyers. Saving up a 20% downpayment is going to be difficult. Hell even trying to save up 5% for a FHA loan(3% down 2% for transaction costs) is near impossible. If you think housing is expensive now, wait 10 years and your going to be shocked that how the "investment" is actually "consumption".

I would like to share another aspect of this that I have come to terms with over the past 2 months. The 30 year fixed mortgage was great in the economy of the 1960's where people went to work for one company for 30+ years. They were stable and buying a house made sense as they were not going anywhere.

The 21st century economy is not one of long commitments. Companies and workers are now viewing each other as a short term relationship. People who are mobile have a competitive advantage over people who are stuck because they are in a mortgage that is underwater. They cannot take that promotion in another town or take a new job that pays a lot more in a cheaper market because they have a housing noose around them. This new paradigm, as it takes shape over time will make owning less attractive, especially to single folks. This is the starter rung on the property ladder and until they return in large numbers the rest of the market will stay sluggish.

Another aspect is many of the brightest and best went to school to get a finance degree. Today the world of high finance deleveraging to 1/3 the size it was in 2007. That is a hell of a lot of jobs. Think millions of jobs. They are now unprepaired because they are not going to make 100k+ 2 years out of school. Expectations are going to have to be adjusted. Retooling with an engineering degree is recommended. 2 billion people in China and India want your standard of living. They already graduate more engineers than the US. If we do not have the workforce that drives innovation our standard of living will go down over time.

As for Adam's prediction of when we get out of this hole we have dug? I see us as having 2 options.

1. War. Massive world war on the scale of world war II. This is what happens under normal conditions to something like this.

2. Massive investment in the creation of a domestically produced cheap energy infrastucture.

This will only happen if adults are running the show. It will take America experimenting and willing to do it all (clean-coal, natural gas, nuclear, solar, wind, geo-thermal and yes even off shore oil). The growth of the 1990's was not by accident it was from efficiency created by information technology and just in time logistics. To create income growth we need to become the most energy efficent location to do business on the planet.

This is may create another bubble but at least we get something out of it, unlike the housing bubble that gave us nothing but massive debts and pissed off people.

I hope this blog was helpful to those of you looking for information besides what the realtor cheerleaders were telling you. These people are essentually used house salemen(women) they have a vested intrest in you spending more than your means. It's a tranaction based business. As Kevin said we are going to leave this up as a reference for a while.

Good luck and remember the first rule of real estate for the next 5 years. If the house was bought from 2002-2008 and they want more than they paid for it, move on as it is overpriced.

Closing Blog

I have decided to shut down the blog since most things I spoke of on this blog and in real life regarding housing and economics have come to pass. My goal was to provide a counter balance to the perma bulls and housing shills and to help anybody who would listen not to buy a home or encourage over extended homeowners to sell as soon as possible since things would only get much worse. I spoke of depression over a year ago on this blog back when the media could not even fathom the concept of a mild recession. Now the main stream media admits to a prolonged multi year recession, but they are still underestimating the full extent of the contraction of credit.

I have no intent on kicking people while they are down, but its seems that now the news has turned bearish, any posting only seems to do just that. I do not want to remind people that they might be losing their jobs, losing their homes, be unable to feed and clothe their families, be unable to retire, etc... I hope those of you who read my blog took action just like the dozens of people in real life who heard my rants on housing, economics and the stock market. I also know some people are still in denial and claim Maryland is different, but I can assure you Maryland is not.

I wish you all well and best of luck weathering this storm.

-Kevin

p.s. Adam from time to time might still post his rants.