A brief history of recent events

"Freddie Mac said average interest rates on mortgage loans in 2008 could fall to 5.5 percent, the lowest level since it started tracking rates in 1963."

Is this really true or exaggeration? I got my 7/1 ARM at 4.25% in 2003 (lifetime rate is 9.25% max). Currently 7/1 ARM is around 5.5-6.0%. Boo Hoo.

Unless the house price drops 40-50%, otherwise it's just a boo hoo hype and exaggeration. Dropping 8% is nothing boo hoo! House price rose 50-60% between 2000-2006.

Ni,

Thanks for the question. I should have been more precise. The Freddie Mac projection is for the average interest rate on 30-year fixed-rate loans. I've updated the entry.

I think you put two sentences so close to each other that it may cause readers some confusion.

Well, before I say that, I think the Globe's reporter should clarify - regarding the 8% drop in prices, they surely didn't mean "Boston" they meant "Massachusetts" or "Eastern Massachusetts", right?

And, regarding any drop in pricing in Massachusetts - if the projection is that prices will fall, I don't think foreclosures will be the cause of the drop, and I also don't think there is a flood of foreclosures on the Boston market.

And, since Warren Group has stopped including foreclosures n their valuations, you may not "see" the drop, at all.

John,

Thanks for your comments. "Boston" means the Boston area. I've updated the post.

As for the role of foreclosures, most experts disagree with you. A significant portion of the new inventory in the local market are foreclosed homes being resold by mortgage companies.

The Warren Group was for a long time in the habit (the very silly habit) of counting the foreclosure itself as a sale. But the resale of foreclosed properties is still included in the Warren data.

Boston prices have dropped more than 8% since the peak. Case Shiller reports a 10% decline, just about, as of last December.

Now, a question:

Does anyone think to ask economists to justify their predictions of a recovery in 2009? The last housing price decline lasted 54 months. We are only 17 months into this decline. Why should this one turn around so quickly?

Will the recovery be driven by an economy in recession, a global credit crunch, a banking system that now has less than zero non-borrowed capital, a record overhang of inventory and vacant housing, a declining population or demographic shifts that will pull Boomers out of the SFH market? Which of these positive indicators will be responsible for the "boom of 2009?"

Why does no one ask these questions?

Marcus,

There is no consensus methodology for measuring home prices. Moody's calculates that prices in the Boston area have dropped 7 percent from the peak. Case-Shiller says more.

As for justifying predictions, what I'd really like to know is this: When is the last time any of these analysts was right?

The only thing they seem to do well is predicting the direction of the immediate future, which strikes me as the equivalent of announcing that truck moving forward at 60 MPH will still be moving forward 10 seconds from now: True, but probably not actionable.

Yes, I don't have much faith in much of these predictions.

That leads me to repeat my favorite quote, attributed to Lou Gorman. He was being peppered with questions about deals in the works, etc., at Spring Training, one year.

"All I know is," he said, "The sun will rise, the sun will set, and I'll have lunch."

I LOVE THAT!

"I don't think foreclosures will be the cause of the drop, and I also don't think there is a flood of foreclosures on the Boston market"

Sure about that John?

There has been an almost 300% increase in foreclosures in Boston (Yes, B-O-S-T-O-N) since the beginning of year compared to the same period last year .

BTW from today:

IndyMac Bank said the delinquency rate on prime loans rose to 6.85 percent from 3.83 percent in last year’s first quarter, there goes your "it's only subprime" theory....

Hard Rain - I really *do* think you need a hug!!

While foreclosures may have increased in the lesser neighborhoods of Boston (i.e. Dorchester and Mattapan), sales and prices in the Golden Triangle of Boston, namely the boutique neighborhoods of Back Bay, South End and Beacon Hill have only continued to increase. John K himself even saw an increase in the appraised value of his own happily located South End home!

So whilst your "Hard Rain" might be falling in places like Lawrence, Worcester and Brockton, here in Boutique Boston the sun is shining brighter and stronger than ever!! If this is what a recession brings, I can only say "Bartender, make it a DOUBLE!!!"

"Freddie Mac said average interest rates on 30-year fixed-rate mortgage loans in 2008 could fall to 5.5 percent"

Okay but what about jumbo-loans? what will the rate be?
If the jumbo-rates stay high then the pain train will keep chugging along...

Quote: "The Warren Group was for a long time in the habit (the very silly habit) of counting the foreclosure itself as a sale."

How is the foreclosure not a sale? Are you referring to the scenario where the lender holding the mortgage bids for the property at foreclosure? Are they excluding only that scenario or do they exclude anybody who purchases a property at the time of foreclosure?

George,

Thanks for the question. It's perhaps worth sketching the process: When a mortgage company forecloses on a property, an auction is held. Anyone can buy the property by paying the outstanding debt. In most cases, no one does.

As a consequence -- precisely because no sale happened -- the property reverts to the mortgage company. This is recorded as a sale in the amount of the outstanding debt. And until recently, the Warren Group counted that outcome as a sale.

But it's not. It's the absence of a sale. And the "price" is an artifact.

So these transactions are no longer included in the Warren Group's count of sales, or in its calculations of average prices.

(Please note that any subsequent sale of the property by the mortgage company to a new buyer is included in the data.)

I hope that answers your question.

Binyamin thanks, that answers most of my question, and that is roughly how I thought it worked. However, what happens if somebody actually does buy the property at the auction? Would The Warren Group also exclude that?

As an aside, I'm not entirely convinced that the price is merely an artifact and should be ignored. If somebody else had bid more than the debt, then the property would not revert to the mortgage holder. One could argue that the market price is therefore lower than what got recorded since nobody was willing to pay that much, and so including those as sales would at least be moving prices in the right direction (albeit not by enough).

George,

I'd suggest the issue is that it's still not an open market sale. Bidders at auction can't get a home inspection, or negotiate the price or set other standard conditions on the sale. In many cases, they can't even go inside the property.

As a result, it's possible that the market would pay a higher price for the property than the auction price -- they simply won't do it until they get to go inside.

For this reason, it wouldn't trouble me if Warren excluded properties purchased at auction from its stats. I don't know if they do, but I'll find out and report back.