January 2, 2014

Mortgage Rates Are Back Above 4.5 Percent And Sales Have Slowed

The average rate for a conforming 30-year mortgage ticked up to 4.53 percent over the past week to within 5 basis points of the 4.58 percent two-year high recorded this past August. The 30-year rate is now 1.22 percentage points higher than the all-time low of 3.31 percent in November 2012.

The average 30-year fixed mortgage rate was 3.34 percent at this time last year, less than half the 6.71 percent it has averaged since 1990. The fixed 30-year mortgage rate has averaged 8.61 percent over the past 40 years.

While money remains historically cheap, the pace of pending home sales in the U.S. has slowed and is down 1.6 percent on a year-over-year basis. Recorded home sales in San Francisco were down 14 percent on a year-over-year basis in November and the city is on track to close 2013 with fewer recorded sales than in 2012.

First Published: January 2, 2014 10:30 AM

Comments from "Plugged In" Readers

Raise your hand if you bought at the top!

Bueller?....Bueller?

Posted by: two beers at January 2, 2014 12:03 PM

I just closed on a duplex last week. Two detached townhouses, 1600 sq ft each for $780k. On the Peninsula, West of El Camino. Cashflows from day 1. Zillow is $1.47M.

Got a 4% 15-year fixed non-owner-occupied conforming loan with ~32% down.

Conclusion: world is not ending just yet.

Posted by: Jimmy the House Flipper at January 2, 2014 12:40 PM

I don't think we are at a "top," at least not in the 2007-08 sense. I do think that we will see far more modest housing appreciation over the next several years than we saw in the last two, driven largely, but not entirely, by interest rates. Look for a return to normal or a tad better, with appreciation at about inflation plus a little bit more. The 2010-11 "steals" are gone. But I don;t think today's buyers will get hammered if they have to sell for some reason in the next few years (other than the typical very high transaction costs of home selling).

Jimmy, that sounds like you really got a great buy.

Posted by: anon at January 2, 2014 1:36 PM

i think there were steals through 2012 as well

Posted by: jill at January 2, 2014 1:41 PM

Jimmy,
Is $780K for both units or each one?
If 780 each, than I doubt it's cash flowing positive from day 1. With 20% down each unit would have to bring in $4,616/month in rent to break even, and that's before you even factor in any insurance and maintenance. A 1,600sq ft condo will not fetch $4,616 rent in SF, let alone peninsula west of El Camino.

If you paid 780 for both and rent is at least $2,500/month per unit then it's a great buy and congrats!


Posted by: asiago at January 2, 2014 1:50 PM

It is for both.... I would not have bought them otherwise. Overpaying is for the retail set.

Posted by: Jimmy the House Flipper at January 2, 2014 1:54 PM

Sales are only down because inventory is down more - around 25% YOY as per Redfin.

and no signs we are at, or have passed, the top, SF median $ per sq foot has increased steadily since Oct and currently stands at a record high.

[Editor’s Note: Inventory levels in San Francisco were running an average of 3 percent lower on a year-over-year basis from September through November.

At the same time, over the past couple of months, sales volumes for the lowest cost areas in San Francisco have dropped significantly more than for the highest cost areas, changing the mix of sales and driving up the average and median cost per square foot.]

Posted by: DontfeartheREpa at January 2, 2014 1:55 PM

... amazing how you can take an instant dislike to someone.

Posted by: Sierrajeff at January 2, 2014 2:50 PM

I am not too impressed with your prognostication skills two beers. You were one of those who predicted that Noe Valley homes would drop 50% from peak to trough in 2008. Do you get a kick out of spreading FUD?

Posted by: NoeValleyJim at January 2, 2014 5:31 PM

Jimmy, what are the rents on your dup? You gonna keep em or flip em?

Posted by: poor.ass.millionaire at January 2, 2014 9:57 PM

$5,050/mo

Barely breaks even on an income basis at +$200/mo, however on a balance sheet basis, I am at about +$2500/mo due to principal repayment on the underlying note. On this basis, I'm getting approximately an 11.8% return on my total cash investment (downpayment and closing costs).

Ultimately I will subdivide it into either TICs or Condos (the latter, depending on planning approval) and re-sell after at least a 1-year hold.

I'm in this one for the long term!

Posted by: Jimmy the House Flipper at January 3, 2014 11:00 AM

Indeed, and what city are these in?

If not frisco, not sure about a tic market (condo probably fine.) if you want to sell at top dollar, being the "first" with tic's in a market not used to them is generally not a good idea. I'd even check out condos carefully over there. Avoid the white elephant!

Posted by: poor.ass.millionaire at January 3, 2014 11:48 AM

We shall see what can be done down here on the Peninsula! In the meantime I am not unhappy to collect an 11.8% return on my money.

I even have a draft Sirkin TIC agreement in my hot little hands right now...

I'll be sure to report back next year with the results.

Posted by: Jimmy the House Flipper at January 3, 2014 12:05 PM

Yes, you're right: I was very wrong.

But tell me, how did you know that the Federal Reserve would spend $85 billion/month, split between a)buying up bloated MBS from Goldman, Chase, Wells, Citi, and BOA, and b)hording Treasuries to drive interests to functional zero, giving you the longest period of artificially-depressed mortgage rates in history?

I mean, I knew the fix was in, but QE2? I can imagine how grateful you must be for Helicopter Ben. That Fed policies propped up Wall St and housing, while decimating Main St...who cares, right?

Posted by: two beers at January 3, 2014 12:49 PM

Do you mean who could have guessed that Bernanke, a student of deflation in Japan and the Great Depression in the United States would have had the Federal Reserve work in concert with tremendously powerful too-big-to-fail banking institutions in order to prevent the wholesale meltdown of the US financial system? To fight unemployment through monetary stimulus while congress dickers?

I think some people saw that coming.

Posted by: soccermom at January 3, 2014 2:16 PM

Ben didn't fight unemployment. His only concern was for Wall St assets.

He could have saved the economy for a fraction of the trillions of dollars given to Wall St by:

1. writing down homeowner debt ("cramdown")
and
2. with direct fiscal stimulus to workers and productive businesses (instead of to the extractive financial businesses).

Instead, Wall St, after committing the greatest financial crime in history, was gently chided, forgiven, and given trillions of dollars, which is why we are still in precarious, unstable times characterized by inequality greater than in the Great Depression.

Posted by: two beers at January 3, 2014 4:21 PM

^You can certainly argue that things maybe should have been done differently, but your first argument was "Who could have seen this coming?" and um, well, a lot of people. Bernanke's actions weren't exactly unsurprising.

Posted by: anon at January 3, 2014 5:08 PM

"You can certainly argue that things maybe should have been done differently, but your first argument was "Who could have seen this coming?" and um, well, a lot of people. Bernanke's actions weren't exactly unsurprising."

Who, exactly? Almost everyone on this site denied the previous bubble, until blood was in the streets. Then, the people who attacked me and the few others on this site who sounded the alarm ahead of time, said that _everyone_ knew there was a bubble. Total revisionism.

None of you thought there was even a bubble;so don't tell me you all knew BB was going to do what he did to you bail your bubble butts out!

More revisionism. Just like all of you current bubble deniers will say you knew it all the time, after this one collapses.

Posted by: two beers at January 4, 2014 5:31 PM

Macroeconomics 101 tells us that there are two essential 'evils' for the economy that a central bank can try to manage: inflation and unemployment.

When the economy is moving too fast, we get uncontrolled inflation, an increase in the general price level which hurts savers and decreases spending power. It makes investment more difficult to predict. If inflation is observed, the central bank should raise rates and make it more difficult (expensive) to borrow. This is meant to slow the economy so that only the very best ideas and investments get funded (and or price increases slow down and or reverse).

When the economy is moving too slowly, we get unemployment. People can't find jobs, their skills atrophy, they have no money, they don't buy stuff and then more people get laid off. When unemployment is high, the fed is supposed to lower interest rates (and/or buy bonds which lowers rates) in order to make more money available for people to invest.

The Fed isn't tasked with deflating bubbles, to the extent they don't impact the overall economy. Fed presidents can and do make observations that are meant to give pause to market participants (Greenspan's 'Irrational Exuberance' comment on lat 90's equity markets). In retrospect everyone would have been better off with a few more harsh words from the Fed about the perils of inflated housing markets. The too-big-to-fail problem was not widely enough appreciated until Lehman was allowed to go down. By that point it was too late.

In a financial panic, with an economic slowdown, unemployment will increase, and the Fed will fight interest rates down. You should expect this to happen. It's a moral hazard problem for sure.

Janet Yellen will probably keep (buying bonds, rates low, loose money policy) current policy until there is a real and pronounced decrease in unemployment that is explained by something other than people leaving the workforce. Guessing if and when they actually raise rates is not easy, but you can bet if there is some semi-exogenous stress event (China's credit edifice crumbles more rapidly than we are seeing now, Russia takes a stronger hand in the near east, North Korea brings the Dennis Rodman nuclear program on-line) that would cause the economy to contract and unemployment to increase, the Fed will open the spigots back up full force. It's the mandate.

Posted by: soccermom at January 4, 2014 8:04 PM

@two beers - I bought in 2009 and only started reading this site in 2011, so not sure who you're talking about.

Posted by: anon at January 4, 2014 9:04 PM

@ two beers, there has not been a big national trend toward double digit appreciation over the past couple years. The bubble argument is to do with a liquidity event's lack of sustainability, and not what you're saying.

Posted by: Truth at January 5, 2014 1:34 PM

I was over at patrick.net from 2005 to 2008 with all the gloom and doomers over there. I suspected that we were in a housing bubble as early as 2005 and was sure of it when The Economist had their famous housing bubble cover story in 2008. I really wanted to sell my place, but my spouse was having nothing of it.

I was still in shock when I saw how it almost led to the collapse of the banking system after Lehman fell. I had no idea how intertwined the banking and housing markets were and how much the financial system had been betting on home price appreciation with things like Synthetic CDOs (collateralized debt obligation). Bernanke really did save the financial system and probably capitalism itself.

I did not see the sudden run up recently though, that was a big surprise. Usually housing cycles take longer to complete and prices don't recover until all the bad debt is worked through the system. The Fed goosed it all this time. Perhaps too much.

Posted by: NoeValleyJim at January 6, 2014 7:53 AM

NoeValleyJim, we must be leading parallel lives. I tried hard to get my wife to agree to sell our place in 2008, rent a nice place and wait for the crash, then buy up. She didn't want "the hassle." She did, however, later admit that I was right and that we should have done exactly that. The financial crash that followed the housing crash also surprised me in its severity.

Worked out okay for us as we ended up buying a bigger place in January 2012 and sold our old place a little over a year later at probably about 2008 prices. But we'd likely be several hundred thousand ahead under my original plan given all the places we could have put those funds.

Next bubble -- and I'm not missing out on shorting this one -- is tech stocks. Fortunately, it is way easier to bet on stock declines than housing declines. Tough part is the timing. Don't think this one is quite at its peak yet.

Posted by: anon at January 6, 2014 8:09 AM

The Fed goosed it all this time. Perhaps too much.

Tell that to the unemployed. The Fed has been FAR too timid, the reason for our still way too high unemployment rate.

Posted by: anon at January 6, 2014 8:09 AM

"The 20's were a time of great prosperity. Prosperity was high because people had discovered the secret to endless free money. You see, all you had to do was borrow money and buy stock with it. Then, when the stock had gone up you sold it, payed off the loan and kept the excess. It was so easy, and best of all, ANYONE could do it. You could do it with stocks, you could do it with bonds, you could do it with real estate. As long as banks were willing to lend ever increasing amounts of money and borrowers were willing to borrow ever increasing amounts of money asset prices could go on increasing forever.

The era of endless free money, where everyone would be rich forever, had arrived. No one ever need work again. Just keep flipping assets and collecting the profits.

But, as always happens, asset prices finally got so far out of whack that the people woke up. They decided to hold off on buying, so prices stopped going up. As the short term balloon mortgages of the day started coming due the investors had to sell their assets to pay off the loans. This put downward pressure on asset prices. As prices went down loans started going bad so bankers pulled back on their lending, no longer lending any amount of money to anyone who wanted it. Without access to credit fewer buyers could pay the high prices, so prices fell. With prices falling people stopped wanting to invest. The market got into a positive feedback spiral with fewer buyers willing to buy, fewer borrowers willing to borrow, fewer lenders willing to lend.
As the people stopped receiving free money and had to start paying it back they stopped their discretionary spending. Economic activity crashed throwing people out of work. People out of work could no longer pay back their loans leading to even more losses. Eventually the financial system imploded under the burden of unpayable bad debt.

The chairman of the federal reserve, Dr. Bernanke, is said to be an expert on the Great Depression. I think he is going to get a chance to test out his theories on how to prevent one from happening again.

Posted by: diemos at November 23, 2007 3:30 PM"

And for the record I'm quite glad the Ben whistled up 16 Trillion out of nowhere and used it to prop up the financial system. Letting it all blow up and sort itself out would have been an unmitigated disaster.

As for the future … all shall be as Janet Yellin wills it to be.

Posted by: diemos at January 6, 2014 8:09 AM

Well timed by diemos, evidently.

For me a key observation is that even if it isn't working particularly well at fighting unemployment, the Fed will keep using easy money as the only tool (hammer) to whack every macroeconomic problem (nail). What did Greenspan say about the precision of monetary policy? Something like, "[You're] driving a car at night and you can only see out of the rear view mirror." There is only so much the Fed can control.

So, people with the wherewithall to intelligently borrow money will continue to take advantage of the low rates and continue to prosper while the unskilled end of the spectrum falls behind, without jobs and with lousy credit.

The Fed would much rather that easy money was not used by Wall Street and speculators to profit, but at the same time Wall Street and speculators are those best positioned to use cheap money effectively.

At best, we can hope that the construction jobs filling our streets and skies are keeping the economy churning.

FWIW, I think borrowing in the 4's to buy assets with cap rates in the 4's isn't likely to end well, but as long as rents keep going up, I will continue to be wrong(!)

Posted by: soccermom at January 6, 2014 9:19 AM

Tell that to the unemployed. The Fed has been FAR too timid, the reason for our still way too high unemployment rate.

There is only so much The Fed can do. The Fed cannot directly put people to work, the way Federal and local government can. There is a ton of infrastructure that needs fixing, almost free money for borrowing and lots of people out of work. Seems like a match made in heaven to me.

I mostly blame the GOP in Congress for our persistently high unemployment. The Democrats would probably not do much more even if they could however. Both parties are tools of the plutocracy.

Posted by: NoeValleyJim at January 6, 2014 4:22 PM

There may be only "so much" the Fed can do, but there's no reason to believe that they're anywhere near their limit. They have a dual mandate, yet have cowered under the pressure of the gold buggers and refused to commit to fixing the unemployment half of their mandate.

If QE3 can be $85 billion a month, there's no reason to assume that they couldn't do $200 billion a month.

I wish our Fed had some balls like the newly changed Japanese central bank, who just like that was able to solve their "unsolvable" 20 year deflation problem by you know, doing something, rather than claiming that they could "only do so much".

Posted by: anon at January 6, 2014 5:50 PM

^And I'm certainly not saying that expansionary fiscal policy would be unwelcome, but it ain't necessary. Central banks can easily, easily fix a problem like we've seen over the last five years. Heck, Bernanke's entire academic career focused on the ways to fix it - he simply failed to act in the ways that he so often talked before he was in the political spotlight.

Reading his lectures to the Japanese from the 90s would be a good start for him, and then maybe following the prescriptions that he offered them at the time.

Posted by: anon at January 6, 2014 5:53 PM

Two beers- c'mon man, join the dark side!

I'm sure you and jimmy (the flipper) would make great partners; you could use some cash profit and he could use a conscious. Together you'd make a great team!

Whatever happened with "the Great Recession" it's over, at least as far as SF RE is concerned. Been over for almost 2 years now. Ask jimmy ;)

Posted by: poor.ass.millionaire at January 6, 2014 5:59 PM

I think you mean "conscience."

Thanks for thinking of me... but I have to guy buy a place off an 80-year old in Burlingame with dementia tonight. I'm getting a steal on it!

Posted by: Jimmy the House Flipper at January 6, 2014 6:06 PM

That should read "go buy a place" ... you get the idea.

Posted by: Jimmy the House Flipper at January 6, 2014 6:08 PM

I knew you'd take it as a compliment :)

Posted by: poor.ass.millionaire at January 6, 2014 8:06 PM

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