CFAH

While mortgage rates ticked-up a few basis points over the past week, the average rate for a 30-year mortgage (3.82 percent) remains below four percent for the twelfth week in a row.

And with Federal Reserve Governor Daniel Tarullo publicly challenging the Federal Reserve Chair’s suggestion last month that an increase in the federal funds rate by the end of the year makes sense, the probability of a rate hike in 2015 has dropped to 30 percent in the eyes of the futures market.  March 2016 remains the first month in which the probability of a hike is currently over 50 percent.

Comments from Plugged-In Readers

  1. Posted by anon

    The probability of a 2015 hike has always been 0.0%. ZIRP forever! Or better yet NIRP. But spreads should start to expand meaningfully.

  2. Posted by Dave

    ZIRP has held mortgage rates to historically low levels and in large part the housing rebound has resulted. The plan of course.

    But the housing rebound has limits and I think that is being seen in SF and the inner Bay Area. Mortgage rates may be 3.5% or so and one may have a techy job paying 100K plus but, unless one has a ton of cash to put down, it is a hard sell.

    Rates can’t be artificially low forever and though they are low, the surge is in folks renting and the drop is in owner occupied.

    For now, IMO, the rental market will continue to boom while home prices will stall at least in over-inflated areas such as the inner Bay Area.

    • Posted by anon

      Rates are low because the wicksellian interest rate is still negative, not because of anything the Fed is doing.

  3. Posted by Dave

    Speaking of the rental market, I exchanged a home near Sacramento renting for 1100/month for 2 homes (new) in Ohio renting for 1200/monh each.

    Rentals are in demand everywhere in this cycle. Despite the low interest rates.The homes in Ohio both rented within a week of going on the market.

    The lesson remains that low interest rates right now may have done as much as they can and, despite them, there is a large younger set of the millennial generation looking to rent.

    So, in a way, this prediction – if it comes to pass – makes no never-mind.

    • Posted by BayviewSF

      You can get over 10% rental yield in Ohio, but the appreciation might be negligible, rent increase might also be limited. Lower rental yield in Sacramento and San Francisco are supported by expectations of rapidly increasing rent and rapid appreciation. Appreciation and rent increase is exponential while fixed high rental yield is linear.

      • Posted by Dave

        True. But my bet is that appreciation being much higher in SF than the rest of the country will slow some. Sacramento – forget it. It still is 20% below the peak. I could have sold my Rockling home for a fair amount more in 2009 than I did in 2014.

        I am speaking to cash flow which is better in many other markets than SF or even Sacramento (had positive cash flow there) and after the run up in SF over the past 2 years I would not bet on continued rapid price increases here – JMHO).

        Not for the next 6/7 years anyways at which point there is likely to be another real estate price boom not just in SF or Sacramento but across the country. Because of the millennial bubble group hitting 33/34.

        Rental rates surprised me in Ohio. I did due diligence and can’t speak to other markets. A 180K new home getting 1400/month beats out a 900K Sunset home getting 4K per month. And surely my 290K Sacramento home renting for 1200/per month.

        It is a balancing act to be sure – appreciation versus cash flow.

        • Posted by SFrentier

          Yeah that’s the big question now- what will the appreciation rate be like in SF for the next 12 months? Zillow or whoever had a doomsday type headline how SF appreciation is going to slow down dramatically! Oh wow, so instead of about 12% appreciation it’s *only* going to be 5-6% this coming year. Ummm…okay…I’m totally cool with that.

          It’s clear that double digit gains can’t be sustained. As long as we don’t start going backwards, what is there to complain about?

          • Posted by Dave

            The double digit gains could never have been sustained. The glass ceiling has been hit when high paid techies can’t afford homes in SF or Silicon Valley. Short of a huge cash down-payment which most don’t have.

            A more realistic 4 or 5 percent appreciation is good. Rebalancing.

            In Ohio for instance during the boom their prices just notched up 5% per year. And, in the area I purchased in, the downturn was ameliorated and about 10 – 15 %. In Sacramento where I had a rental the gains were far greater leading up to the crunch and the fall far greater.

            SF won’t go backwards but the rest of the country will, relatively, catch up to it somewhat. The disparity could never be sustained. SF is more unaffordable than its historic norm and many of these other markets (Ohio) are more affordable than their historic norm.

            I am speaking as an investor. I am also an SF homeowner and, for potential homeowners in SF and the Bay Area who can afford to buy a personal residence here, I’d say absolutely go for it. For investors – no way at this point. Look East young man or woman investor.

          • Posted by SFrentier

            I think it’s foolish to invest in fly over states. They do not have any appreciation to speak of and often don’t keep up with inflation. Rent growth is very low as well. Low end tenants = high maintenance. Capital expenses eat up your meager cash flow. The only people that make money there are the tur(d)n key providers that sell rich Californians these investments. It’s a fools game.

            Expensive and highly desireable blue chip locations like SF start to decouple from affordability. There are many trade up buyers that have previous home equity, plus we’re a magnet for wealthy foreign investors. Also many existing long term investors want to keep their SF props. So even during the Great Recession there was never a high inventory available in SF. And the result was that the good hoods only fell 10-20%, and quickly recovered beyond last cycle’s highs. If you can afford to invest here, why the hell would you want to buy out of state?

  4. Posted by Dave

    @ SFRentier

    You are way over generalizing about “fly over” country investment.

    I invested in the Sacramento area 15 years ago. I had a “turn-key” manager who did not call himself that but basically he did everything. In the end I visited the property once a year. My manager was not getting rich off of his rentals.

    The home was getting old and I was thinking of exchanging within Sacramento.

    In the last 10 years I became involved in a real estate education group. Learned a lot. So I thought of exchanging out of state. I had access to a huge network of Bay Area folks who had done this and listened to their experiences/recommendations. I made the leap after doing a lot of due diligence. Took mew 9 months to decide.

    The key is finding a growing urban area with growing job opportunities and a healthy mix of jobs. On top of which the area I chose has military bases, large medical facilities and educations institutions.

    I exchanged one home in Sacramento for two out of state (wasn’t quite even – I had to put in 40K additional). Both rented within a week. One to a military couple and the other to a nurse practioner. My rental income has doubled.

    Hardly low end tenants and the maintenance costs – one of the homes is brand new and has a 5 year maintenance warranty on it.

    Most US markets have seen modest home appreciation over the years historically. A bit above inflation. I went into this market knowing that. The appreciation in the Bay Area is an aberration and if one can’t afford to invest here then one needs to accept the “real” world of real estate outside of a few markets like the Bay Area..

    Rents have not slid at all in the area I bought in. They are on par with Sacramento though the housing cost itself is lower. The next 7 years with the millennial bubble group and the large immigration to the US will see a big rental demand. If one is in a good market rents will increase.

    My manager is not getting rich off this. She is making a living – indeed her management fee is less percentagewise than I was paying in Sacramento. Plus I don’t need a gardener. The “guys” drink beer on Saturday afternoon and do th lawn. It is a different world back there. That I don’t deny.

    Just saying there are lots of especially young people who want to get into real estate butcan’t afford to in the Bay Area. Those folks should consider out of area/state investing. But first get educated. I was lucky to find a group that is the real deal. Check out Pulte Heritage in Dublin. That was one of their syndication I invested in and it hit a home run. The group sold to Pulte for 50% more than the initial projection was 3 years ago when the syndication started.

    Profitable real estate investment opportunities are not limited to the Bay Area.

    • Posted by Ohlone Californio

      Where in Ohio is a growing urban area with growing job opportunities and close to military, medical, and educational institutions? Greater Columbus?

      • Posted by Dave

        BTW, I am not pretending to be a font of all real estate wisdom. I’ve been fortunate to connect with a great network which has informed me as to good and bad markets, PL, syndications. IRA investing.

        In the end it remains my money and my decision to invest or not.

  5. Posted by Dave

    Actually closer to Cincinnati than Columbus, but still about halfway in-between.

    The military couple one of the homes is rented to works/are stationed at Wright /Patterson. Second largest US continental military base. Half the homes my “turn-key” rents to re folks associated in some way with Wright/Patterson.

    Cincinnati is part of the 23th largest U.S. metropolitan area and it is growing fast! Dayton and Cincinnati are rapidly coming together in a rush of housing, retail and commercial development across Warren and Butler counties. My homes are in Butler County.

    Ohio was my choice. I considered other great markets. There are many – Oklahoma City, Kansas City, much of Texas and Virginia, Little Rock (believe it or not).

    In the end it was the personal connection with the manager that swayed things for me.

    I am not saying invest in Ohio, I am not saying don’t invest in the Bay Area (I just could not afford to) I am saying opportunities are out there beyond the Bay Area and, if one is so interested, get educated. That is the starting point.

    • Posted by Ohlone Californio

      So Dayton. OK. Definitely it checks the schools and the military boxes. Not too sure about the job opportunities aspect.

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