John Hussman: This reset profile is of great concern, because the majority of resets are still ahead. Moreover, the mortgages to which these resets will apply are primarily those originated late in the housing bubble, at the highest prices, and therefore having the largest probable loss. Some of my friends have started asking if it’s time to buy a house. As noted previously, there is a potential false bottom here in housing as mortgage defaults should (theoretically) be declining in the next few months because there are fewer resets. Obviously, that’s not the only cause of default as a lot of homeowners are still losing jobs and that’s a bigger concern than an increase in mortgage payments. Also note that despite the fact that mortgage interest rates are very low, that doesn’t mean that these resets are not a big concern. A large part of the resets ahead of us are the so-called “option ARMs” which typically have negative amortization (the borrower hasn’t even been paying enough to cover the interest, so their balance has been rising). These borrowers will see large increases in their monthly payments. While the banks are getting better at dealing with restructuring, this just means more losses for the banks and more foreclosed or fire-sale homes on the market. More losses for the banks will not be helpful for the rest of the economy. For local data, even though it’s probably based on a model that’s not much better than the ones the investment banks and rating agencies were using that showed an essentially non-existent potential for the situation we now find ourselves in, you can check out Deutsche Bank’s projections for price declines going forward. They think New York is in the worst shape, with 47% further declines coming from the current prices. South Florida is right behind that. So. When should you think about buying if you still want to own a home? First, I don’t think it’s worth the closing costs and hassle if you aren’t pretty sure you’re going to stay for at least five years. The broker fee (when you sell) is the biggest reason for this. Second, you should compare the total costs of owning (principal and interest, taxes, insurance, any condo or HOA fees, etc.) to what it would cost to rent a similar place. The calculation I’ll save for another post but for a rough guide, you’ll want to pay about 10-12 times the annual rent. The psychology of having your own place and controlling your costs is important here. Thinking that you’re making an investment is not. Except for the current boom since the mid-90s, housing doesn’t significantly outperform inflation. The $8,000 tax credit is also a factor. Third, remember that real estate is very local. There’s a significant fudge factor here based on local economy and other factors (however, “character” of a particular place is accounted for in how much you would pay to rent it). I’m happy to discuss/fix anything you think is incorrect.
John Hussman:
This reset profile is of great concern, because the majority of resets are still ahead. Moreover, the mortgages to which these resets will apply are primarily those originated late in the housing bubble, at the highest prices, and therefore having the largest probable loss.

Some of my friends have started asking if it’s time to buy a house. As noted previously, there is a potential false bottom here in housing as mortgage defaults should (theoretically) be declining in the next few months because there are fewer resets. Obviously, that’s not the only cause of default as a lot of homeowners are still losing jobs and that’s a bigger concern than an increase in mortgage payments. Also note that despite the fact that mortgage interest rates are very low, that doesn’t mean that these resets are not a big concern. A large part of the resets ahead of us are the so-called “option ARMs” which typically have negative amortization (the borrower hasn’t even been paying enough to cover the interest, so their balance has been rising). These borrowers will see large increases in their monthly payments. While the banks are getting better at dealing with restructuring, this just means more losses for the banks and more foreclosed or fire-sale homes on the market. More losses for the banks will not be helpful for the rest of the economy.

For local data, even though it’s probably based on a model that’s not much better than the ones the investment banks and rating agencies were using that showed an essentially non-existent potential for the situation we now find ourselves in, you can check out Deutsche Bank’s projections for price declines going forward. They think New York is in the worst shape, with 47% further declines coming from the current prices. South Florida is right behind that.

So. When should you think about buying if you still want to own a home? First, I don’t think it’s worth the closing costs and hassle if you aren’t pretty sure you’re going to stay for at least five years. The broker fee (when you sell) is the biggest reason for this. Second, you should compare the total costs of owning (principal and interest, taxes, insurance, any condo or HOA fees, etc.) to what it would cost to rent a similar place. The calculation I’ll save for another post but for a rough guide, you’ll want to pay about 10-12 times the annual rent. The psychology of having your own place and controlling your costs is important here. Thinking that you’re making an investment is not. Except for the current boom since the mid-90s, housing doesn’t significantly outperform inflation. The $8,000 tax credit is also a factor. Third, remember that real estate is very local. There’s a significant fudge factor here based on local economy and other factors (however, “character” of a particular place is accounted for in how much you would pay to rent it).

I’m happy to discuss/fix anything you think is incorrect.

Notes

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