Here’s the audio of my weekly Wheels up! segment with Bill Meyer over at KMED radio in Medford, Oregon! We talked about the bag of rotting lemons Dodge got – and what we’re getting on account of it:
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Here are domestic auto sales chart:
https://fred.stlouisfed.org/series/DAUTOSA
As you can see the trend is heading toward zero – and with car MSRP going up – we can expect new car sales to continue to go down.
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Here is a chart of average sale price of homes in USA:
https://fred.stlouisfed.org/series/ASPUS
Here is the 30 year fixed rate for USA home mortgages:
https://fred.stlouisfed.org/series/MORTGAGE30US
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Here is Zero Hedge chart, above the above 2 metrics combined into one chart, the affordibility of homes combing price and interest:
https://cms.zerohedge.com/s3/files/inline-images/monthly%20payment_0.jpg?itok=G8b60JLC
As a result of high monthly payments, mortgage applications have plummeted:
https://cms.zerohedge.com/s3/files/inline-images/home%20purchase%20application%20index.jpg?itok=td7Dn5ao
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Here is my chart what has to happen next:
https://i.ibb.co/tPLwS9W/monthly-payment-0.jpg
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If you want to know how far home prices have to decline, use a home mortgage calculator, and 8% annual rate.
In order to get monthly payments back to $1,000 a month, with an interest of 8%, the principle on the loan would have to be $100,000. But average home values are 5x that.
https://www.zillow.com/mortgage-calculator/
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Obviously, all the banks that lent on homes are now bankrupt. Even a mere 10% decline in home values will topple most banks.
Obviously, all those speculating in the US market better get out quick before the collapse.
Obviously, we are in a real estate bubble of Biblical proportions. The unwind will make the Great Depression look like a picnic.
Obviously the criminal government will start a world war in order to save their own necks for what they have done to us.
Obviously, the (((banksters))) and their fiat money machine need to be severely punished for running this scam on us.
I don’t see why home prices can’t stay high with high rates. There is no supply of houses for sale. People will stay put and pay their low rate mortgages. A frozen market doesn’t mean it will crash. Who says monthly payment levels are any concern of lenders? People who are not able to purchase at high prices and high rates, won’t.
Why would a bank that lent on a home at a lower rate than current rates be bankrupt? Either the borrower pays or they don’t. If they pay, they get their money back plus interest. If they don’t, the bank takes possession and values it at a market rate. A mortgage is not a security like a bond that goes down in value (marked to market) when rates go higher than what it was issued at. A mortgage backed security (basket of mortgages put together, portions of which are sliced and diced and sold to investors) might, but even then you have the same situation. If the borrower(s) pay (there is always some level of defaults assumed), the mortgages that make up the security are money good an it can be held to maturity for full value. None of this is an issue for prices until you see mass defaults on mortgage repayment like you did in ’08. IMO, the financial crisis spiraled the housing crisis, not the other way around. It was an operation for favored cronies to kill off unfavored competitors.
You know what higher rates hurt now? Gov’t securities. Treasuries. Banks were/are loaded to the gills with these “safe” instruments. It’s why Bankman-Fried’s shop blew up. Not crypto, although there were likely some shenanigans with Dems and Ukraine but that’s money laundering they wanted to hide, not losses. What did the Fed do to stop runs like at FTX (the runs forced sales at lower market prices)? The FDIC said it insured every deposit (jawboned, it’s theoretical only) and told banks to mark every gov’t security “held to maturity” rather than “marked to market.” Voila, all losses erased. All banks solvent. For now.
Hmmm, “I don’t see why home prices can’t stay high with high rates.”
Hmmm, “People who are not able to purchase at high prices and high rates, won’t.”
Some bits & titles from HBB:
US Existing Home Sales fell 17% over the last year, the 23rd consecutive YoY decline. That’s the longest down streak since 2007-2009.”
“US housing affordability is worse today than the peak of the last housing bubble. The median American household would need to spend 43% of their income to afford the median priced home.”
“With 30-year mortgage rates >7%, a house purchased for $500k w/20% down=finance charges of 207k just 24 months ago…same purchase today=finance fees of 600k over 30 years. So, a $500k house now effectively costs $1.1M over its financing period.”
‘After A Period When Prices Have Defied Gravity, Sellers May Finally Be Getting A Dose Of Reality’
“Before the banks collapsed, most of Redwood Trust’s business involved buying jumbos from independent mortgage brokers and selling them to banks. Now it is the opposite: Dozens of banks are flooding the firm with requests to potentially unload their jumbo loans. Banks will find it harder to make bespoke loans since they have to be standardized to sell to third parties, Abate said.”
‘Popping A Property Bubble Hurts’
“‘The greatest price drop in the luxury market this year can be seen in San Francisco, where the median sale price of luxury homes fell a record 12.7% year over year, and prices are continuing to fall faster than anywhere else in the country.”
‘We’re Starting To See The Bubble Pop And Ponzi Schemes And Pyramid Schemes Failing’
‘The median home sale price reached an extreme high of $682,000 on Jan. 2, the highest price so far this year, according to Redfin. In July, Whatcom’s median home sale prices decreased, dropping to $524,250 on July 31’
Good thing everybody put $200,000 down!”
I wonder what all that does to the comps? Hmmm.
This focus on “affordability” is strange. The affordable thing is to keep paying your low rate mortgage. If, for some reason, you can’t pay the current mortgage, that’s a problem. But that’s not the case in anything I see you posted. No supply for sale=high prices. New buyers won’t be able to afford high prices at high rates. So they won’t buy. That’s not a bubble popping.
Why would mortgage brokers having trouble selling loans or buying loans have an effect on the fact no one is selling? $200,000 down? Comps? What are you talking about?
“Why would a bank that lent on a home at a lower rate than current rates be bankrupt? ”
Because if the home value drops below the principle, the bank will demand the homeowner cough up the difference, which is why most home lenders require 20% down in the first place – to protect the bank’s note on the property.
Banks are leveraged, they lend more than they have, so a small decline in home prices wipes out their assets.
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There is much speculation why home prices are not plummeting … yet. First of all home prices have reversed and all across Zillow, there are substantial price reductions in the asking price.
The best Youtuber on this topic is Reventure Consulting
https://www.youtube.com/channel/UCVTQunGrE3p7Oq8Owao5y_Q
(The kid knows his shit, and has been spot on for years.)
Second, many sellers do not want to admit the price they think is not what the market will bear. So because of the extreme bullish sentiment, they are holding out … and, like every bubble, as soon as the market reverses, the speculators are the first to unload.
———————
Zillow lost it’s ass buying homes:
Guardian – The $300m flip flop: how real-estate site Zillow’s side hustle went badly wrong
Zillow reportedly has about 7,000 homes that it now needs to unload – many for prices lower than it originally paid
It did a lot of buying, but hasn’t been so great at the selling. This week the company announced that its home-buying division, Offers, had lost more than $300m over the last few months. Offers will now be shut down and about 2,000 people laid off. Zillow reportedly has about 7,000 homes that it now needs to unload; many for prices lower than it originally paid.
————–
San Fran home price crash well underway:
https://wolfstreet.com/2023/02/17/san-francisco-bay-area-housing-market-crashes-prices-plunge-35-from-crazy-peak-where-is-demand-supposed-to-come-from/
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Real Estate is not free, you must pay a whopping annual fee to the government called property tax. And since most people borrow to buy, you must also pay interest on the loan, and the bank also requires home insurance. In many areas there are other fees, like community fees, and maintenance fees.
So in order for real estate to be a money maker, the price must keep going up, but as soon as that reverses, the selling starts … especially if interest rates go up … because you can park your money in FDIC insured CDs or US Treasuries.
Just wait till the panic starts, when the crowd realizes the declines are not temporary.
—————
Commercial real estate getting hammered as people work from home, and do not want to go downtown to homeless infested shitholes.
https://fortune.com/2023/06/23/commercial-real-estate-crash-office-values-unlikely-to-recover-by-2040-says-capital-economics/
I call bullshit. No bank watches the so-called “value” of a home and demands homeowners cough up the difference between it and what was lent at the time of purchase. This never happened. I challenge you to provide one example. Imagine that being done to folks in the 29th year of a 30 year mortgage. Banks are leveraged so a small decline in a home’s value in their mortgage portfolio wipes out their assets? Please stop.
First of all home prices have reversed and all across Zillow, there are substantial price reductions in the asking price.
—Not in the area where I live, which I watch closely as a hobby. Is this true where you live? New purchaser “affordability” is increasing! I would also be curious if any other commenters on here are seeing this trend near them.
Homeowners with low rate mortgages will do what’s “affordable” for the, and continue to pay them and not sell to buy into a much higher rate environment. No supply=high prices. Big mystery.
Second, many sellers do not want to admit the price they think is not what the market will bear. So because of the extreme bullish sentiment, they are holding out … and, like every bubble, as soon as the market reverses, the speculators are the first to unload.
—So are you talking about sellers generally or speculators? I can’t tell.
Real Estate is not free, you must pay a whopping annual fee to the government called property tax. And since most people borrow to buy, you must also pay interest on the loan, and the bank also requires home insurance. In many areas there are other fees, like community fees, and maintenance fees.
So in order for real estate to be a money maker, the price must keep going up, but as soon as that reverses, the selling starts … especially if interest rates go up … because you can park your money in FDIC insured CDs or US Treasuries.
—So it’s not a place to live? Shelter? Can just be treated as fungible with buying Treasuries? Can you sleep in Treasuries? Shower?
Commercial RE is a totally different thing. Don’t conflate the two.
It seems like you’re going out of your way not to see.
RE: “First of all home prices have reversed and all across Zillow, there are substantial price reductions in the asking price.
—Not in the area where I live, which I watch closely as a hobby. Is this true where you live?”
Prices are dropping worldwide. There are many and sundry examples galore here:
http://housingbubble.blog/
‘The One-Way Bet On Property Is Now Waning As The Myth That Prices Will Keep Rising Has Been Broken’
“It just started increasing and increasing and by the time June came around of this year our payments were more so 2,300 a month…It’s been very stressful, financially…I’m hoping I won’t have to continue doing two jobs but our mortgage rate is still high as opposed to what it was last year,’ she said. ‘So I may have to continue this into the new year”
A mortgage may have a low rate, the monthly mortgage payment, howevah; fluctuates.
RE: “$200,000 down? Comps? What are you talking about?”
Um, respectfully, you may be in over your head on this subject.
Why would the payment on a fixed rate mortgage fluctuate, except in a very minor way due to adjustments in escrows? An ARM would, of course but that’s a different story, one you would be made aware of when getting into it.
Yeah, don’t elaborate on what you meant by $200k down and comps vis a vis the actual reality of continuing high prices in the face of high rates. Must be some secret doomer code on bubble blog.
I don’t know why you’re using it as an example but here’s some more accurate info about Whatcom county than what you quoted above:
https://www.redfin.com/county/3105/WA/Whatcom-County/housing-market
In July 2023, Whatcom County home prices were down 1.8% compared to last year, selling for a median price of $560K. On average, homes in Whatcom County sell after 14 days on the market compared to 8 days last year. There were 246 homes sold in July this year, down from 306 last year.
— Wow down a whole 1.8% yoy from ATH’s! Selling time two whole weeks instead of one! The sound of bubbles popping, lol!
“secret doomer code on bubble blog”?
Man, shades of 2004 there. I take it you’re personally heavily invested in real estate & depend upon high prices forevah.
Do you also hope The Fed keeps creating more & more fiat Dollars to keep the rainbows, skittles & unicorn gravy train a rollin’?
The comps = comparable sales.
Value is subjective, if your neighbor sells his house which is nearly identical for $50,000 less than you value yours, it’s not good odds you’ll ever get your asking price if you sell. Ect..
Lower prices is a good thing.
The example of $200,000 down was, I thought, obvious sarcasm. Nobody puts 20% down. The woman in the example will owe more than her house is worth so if she tries to sell she’ll have to bring money to the table. …How’s she gonna do that? She can hardly make ends meet working two jobs as it is.
That’s what Mises called, a malinvestment.
The sooner the millions of people like her get out from under that, the better.
You ask, “Why would the payment on a fixed rate mortgage fluctuate”
Insurance premiums go up.
Property taxes go up.
The Housing Bubble Blog focuses on facts & real live examples, consider spending a bit more time there, maybe?
The trend is down for prices. And, there’s no shortage of houses – there’s a million excess houses out there.
“The third chart shows that the US population rose by 4 million 2019-2023 while housing expanded by 5 million units. Um, OK, where is the scarcity when housing per capita (per person) is at record highs?”…
https://www.oftwominds.com/blogaug23/hoarding-housing8-23.html
Yeah, I mentioned “escrows” changing in small amounts on a fixed rate mortgage due to property taxes, insurances, etc. going up. But never in extremis like the anecdote you posted. And higher rates or lower comp “values” NEVER affect the principal/interest payment, which is what I suspect you were falsely insinuating.
Yeah, comps and down payments. Another one of your misdirections. Just like I thought. If you don’t need to sell, comps mean nothing. Down payments are made at the time of purchase and are never renegotiated due to lower prices a la Yukon’s fugazy statement. So, if you stay put and don’t sell NONE of this matters. That’s what people are doing and why prices are high while rates are high. People who don’t have or want to sell won’t.
There isn’t any scarcity. The population numbers you mention are another red herring? How many babies? How many teens? How many people who are of home buying age? The market is frozen. At high prices with high rates. For the reasons mentioned.
If the BS cherry picked stats you mentioned about Redfin/Whatcom County are any indication, I’ll continue to pass on bubble blog and it’s wrong predictions.
Do you hope the Fed’s rate hikes will “work” to bring down home prices? Talk about faith in the Fed. They can print all that money, play with the “price” of it and beat inflation? Sure. Ever hear of “stagflation”?
For the record, I make no recommendations. Just observations. I own no investments. I have no debt. I own my house outright. I bought it in a place I love to live there until they take me out toes up. I follow economics and asset classes as an intellectual pursuit. This whole line of argumentation just that for me. Don’t take it the wrong way, I know you’re good people on here.
“which is what I suspect you were falsely insinuating.”
“what I suspect you were falsely insinuating.”
“Another one of your misdirections.”
“If the BS cherry picked stats you mentionedIf you don’t need to sell, comps mean nothing.”
“Don’t take it the wrong way, I know you’re good people on here.”
Ya just repeatedly called me a liar.
I guess I’m taking it the wrong way.
You’ve clearly chosen not to see. 2004 redux. Adios.
If I had simply called you a liar I would understand you getting all sniffy. Instead, I refuted you point by point as soon as you elaborated on your cryptic comments. I’ve chosen not to see, eh? Yeah, you’re not lying, you’re just regurgitating the propaganda from that BS site you relentlessly pimp. Quoting false statistics and irrelevant arguments. In other words, talking out your ass.
Still refusing to see, you are.
‘There Simply Is A Huge Oversupply Of Property’
“Median single-family home price fell by 8.7% year/year in July …”
http://housingbubble.blog/?p=7772
Prices falling all over the world, eh? Who’s still choosing not to see?
https://www.foxbusiness.com/economy/home-prices-could-surge-next-year-affordability-crisis-worsens
From link:
In a new analysis, Zillow economists estimated that home prices will rise by 6.5% between July 2023 and July 2024 because of limited inventory and stronger-than-expected demand. By comparison, home prices as tracked by the S&P CoreLogic Case-Shiller index typically climb by about 5.21% each year.
Even though mortgage rates are nearly double what they were three years ago, home prices have hardly budged. That is largely due to a lack of available homes for sale. Sellers who locked in a low mortgage rate before the pandemic began have been reluctant to sell, leaving few options for eager would-be buyers.
I stand corrected, banks do NOT make margin calls like stocks.
>Because if the home value drops below the principle, the bank will demand the homeowner cough up the difference
No, that is not correct. To begin with, in most cases of “conforming” loans, the originator of the loan, whether a commercial bank, savings and loan, credit union, or mortgage lender/broker, seldom retains possession of the note. Typically, the note is sold into a secondary market, then packaged and “securitized” as a mortgage backed security. The originator may or may not retain the servicing of the loan, meaning collecting the payments.
Loans with less than 20% down typically require some type of mortgage insurance to protect the interest of the lender. For the standard FHA 203B mortgage, the minimum down payment is 3%, and the so-called “Mutual Mortgage Insurance” premium is 0.5% per annum, which is rolled into the monthly payment. So, it the note rate is 7%, the borrower will pay 7.5%.
In case of conventional 30 year loans, the minimum down payment is typically 10%, which will require a Private Mortgage Insurance (PMI) payment of 0.25%. So, if the note rate is 7%, the borrower will pay 7.25%.
How do I know this? At one time in my life, I sold mortgage money for a living, which, in the State of California, requires a state license. I prepared for the state license test by taking community college classes in real estate law and real estate finance.
Thanks, Adi. Though I have had mortgages and second mortgages in the past and knew this was some insane BS from Yukon, it’s been 15 years and I thought maybe I was taking crazy pills and started researching this issue.
The terms of a first mortgage are sacrosanct, though escrows may increase/change as I mentioned to Helot. What I learned is that HELOCs nowadays (always?) have these terms where lenders can reduce the amount available for drawdown based on lower home value based on comps. However, they cannot ask for money back on money already loaned. So, if you draw down the entire amount, your payment won’t change and they can’t ask for money to “make up the difference” even if you are “upside down” due to a lower (unrealized) home value based on comps.
Hi, Funk Doctor,
AFAIK, (and IANAL) the basic principle is that the property is collateral security to insure payment of the debt, and the lender must look to the property alone for satisfaction in case the borrower defaults on payment. The lender’s sole remedy, in that case, is to foreclose on the property and sell it. To my knowledge, the lender has no recourse to seek payment from the borrower in case the auction value of the property is not sufficient to satisfy the debt.
Common sense dictates that the more equity the borrower has to lose, the more incentive he has to keep the loan current, and avoid foreclosure. Loans where the borrower has put down less than the traditional 20% are considered riskier by the lender, and that is why we have mortgage insurance, which protects the lender’s interest in the property, not the borrower’s.
In like manner, a lender will *always* require homeowners’ insurance, to protect his interest in case the structure(s) are damaged by fire or other calamity, such as hurricanes or tornadoes.
FWIW, HECMs (Home Equity Conversion Mortgages, a.k.a. “reverse” mortgages) are FHA insured, and therefore require the same 0.5% MMI as an FHA 203B. Once again, the lender’s recourse is to the property, not to the borrower, in case of default.
For anyone seeking more knowledge about real estate loans, I recommend Professor Guttentag’s website.
>Jack M.Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania.
His website:
https://www.mtgprofessor.com/ext/home1.aspx
Default, in the case of a HECM, would involve not keeping the property tax current. By its nature, there are no payments by the borrower to the lender on a HECM. However, if property taxes are not paid, the County will foreclose, and sell the property for back taxes. That is the reason for MMI on a HECM.
Thanks for clearing it up. Stock margin accounts do get a call to shore up if underwater, but I guess banks do not force homeowner to do the same, although the margin call should be the same if both are underwater.
So if you buy stocks on the margin, meaning you borrow money to buy additional stocks, and the stock price declines you can get a margin call.
But for the home buyer, if they are underwater so long as they keep making payments then they are ok, unless they sell while underwater, which means they would have to pay the bank money during closing.
So having experience in that trade, what happens when a home is sold while it is underwater, meaning the home value is less than the note value?
>what happens when a home is sold while it is underwater
Excellent question, Jack.
Google “What happens in a property short sale?”
for further information.
The bottom line is that the lender must approve the sale by negotiation, as it will be accepting less than the outstanding amount as full satisfaction of the debt. The lender’s alternatives are a) foreclosure, and b) a deed in lieu of foreclosure (so-called “jingle mail,” as in “here are the keys”).
Lenders do not want REO (Real Estate Owned), as it generates no income and must be disposed of, which incurs a cost for disposal, so they have an incentive to cut a deal in order to minimize their loss. Laws vary among states, but, AFAIK, in California (where I live) there is no possibility of a deficiency judgment in this situation.
HTH.