Marketplace

It all depends what do you mean by “interest rates”

For example, some GMAC bonds yield 30-40% in the secondary market. This is true for many well known companies with less than perfect balance sheets.

Also, since there is no financing for many companies at this time, one could argue that yields, for those companies, tend to infinity.

I think for Chris Thornberg to say that California home prices will be down another 40% is irresponsible. It is likely true that California home prices have not bottom-out yet, due to the fact that home foreclosure rate has not slowed down. Nonetheless, there are positive signs. If my recollection is correct, monthly pending home sales volume and home sales closing volume has been going up for a few months straight now. That means, some buyers and/or investors are seeing value in home prices in the current market. (Why not? Some of the home prices are way below the new home construction cost.)

I do think it’s irresponsible to tell potential buyers to continue to stay at the sidelines and wait for home prices to drop further more. That kind of mentality can create a dangerous deflationary enviornment in this already beaten-down home market.

Oh, if Chris Thornberg can enlighten us, how did he come up with 40% from his assessment?

Mike,

Hmm, you wouldn’t happen to be a real estate agent, would you?

And all this garbage about houses costing less then new home construction cost — part of why costs were so high for so long was the demand for building supplies and building labor during the bubble — for example, check out the price of copper!

The prices of homes are tied to incomes and rents, with some moderation for interest rates. Even with recent declines, prices are still far above there normal ratios, so more decline is likely and in fact needed in order to restart the market.

The best way to get past the deflationary period is to set prices to clear the market and get people purchasing homes they can afford, that is the responsible advice from Thornburg.

David,

There are some good discussion points from you. Fortunately, I don’t make my living in real estate. In this market, it could be really tough for real estate agents. I think my comments could come from more emotional perspective, rather than analytical perspective.

I am a home owner. As a home owner, it’s really not very pleasant to see home prices continue to tumble down. When home prices go south, there will be more home owners find themselves in the situation of having negative equity, and therefore there is less incentive for them to continue to make payments to their home mortgage. The end result is a new wave of foreclosures coming from ordinary folks who did not get themselves involved in the sub-prime loan scheme. Fortunately, I’m not in that situation. If home prices continue to fall, I can imagine many people would take the election of ruining their own credit and walk away from their home. That situation can further depress housing prices, and then we would find the whole home market in a vicious cycle. Base on this trend of thought, I dislike it whenever I hear someone is advising potential buyers to walk away. It’s not helpful to drive fear into people’s minds, when there is already enough fear to go around.

By the way, I did check the home price-to-income ratio in my local market. It’s difficult to determine what is the “normal ratio” in a “normal market”. I am taking the range of price-to-income at year 2000 and before. The number is between 3 to 4. The latest data I can find is from 3Q of 2007. At the time, the number is just sitting at 5. It’s been about a year, and my local market’s median home price is down about 20%. So I would think we are approaching “normalcy” at least in my local metro market. Therefore, I would again argue against the idea that this market can be driven down another 40%. In addition, at my local market, the home price-to-rent ratio has remained at near constant rate over these years. So I feel rent level should not be a significant factor.

This might be a bit off topic, but….. I am a little stumped as to why CD rates are so low. I would think that banks that are trying to raise short term cash would be pretty aggressive in pushing CDs. What gives? Anyone know?

Doug

Doug,

I am guessing that it takes more time and effort for banks to raise short term cash from consumer market, and currently they have other resources to do so.

Federal Reserve had been pumping a lot of cash into their TAF auctions (Term Auction Facility). Because of the ample cash available in these auctions, banks can borrow money in short term basis (~1 month or 3 months) at fairly low interest rates. Such borrowing can boost banks’ short term cash reserve fairly inexpensively. Therefore there is no incentive to raise the interest rates in consumer market.

This is my estimation. Anyone else has ideas?