by Calculated Risk on 9/23/2005 07:44:00 PM

The NYTimes has an article comparing buying and renting in New York and San Francisco: Is It Better to Buy or Rent?

"... renting might deserve another look right now. After five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before.
...
Add it all up - which The New York Times did, in an analysis of the major costs and benefits of owning and renting, including tax breaks - and owning a home today is more expensive than renting in much of the Northeast, Florida and California. Only if prices rise well above their already lofty levels will home ownership turn out to be the good deal that it is widely assumed to be."

Check the graphics on the left of the article. The New York house, selling for $1 Million $750 thousand (corrected) could be rented for $2400 per month. A $1 million house in San Francisco rents for $2500 per month. The article compares the total costs for buying and renting, including all tax deductions and renting comes out ahead unless property values continue to rise faster than historical norms.

The analysis was very generous to buyers. They assume the homebuyers receive the entire benefit of the interest and property tax deduction. The article correctly points out this may not be true:

"Don't be buying a house because you think you're saving on the taxes," said Frank Borges LLosa, owner of FranklyRealty.com, a brokerage in Arlington, Va. "You'll save even more by not buying and renting."

Mr. LLosa added: "I'm not saying not to buy. I'm saying don't buy just for the tax reasons."

Many homeowners also do not receive the full deductions from home ownership. In the Northeast and California, homeowners now have so many deductions that some must pay the alternative minimum tax. This tax effectively wipes out part of their property-tax deduction, further cutting into the benefits of home ownership.

Other homeowners do not itemize their deductions or, if they do so, end up with total deductions only a little larger than the standard deduction that the government offers to all taxpayers, even renters.

"A lot of people hugely overvalue the mortgage deduction," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington, "because they compare it to no deduction instead of comparing it to the standard deduction."

The article also points out some of the extra benefits of ownership, like stability and being able to choose the "color of their living room walls", but there advantages to renting too - like being able to move easier.

If I was moving to a new bubble area, I would definitely rent.

by Calculated Risk on 9/23/2005 01:00:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Applications Steady During Holiday Shortened Week

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending September 16. The Market Composite Index — a measure of mortgage loan application volume – was 772.2, an increase of 1.5 percent on a seasonally adjusted basis from 760.6 one week earlier. On an unadjusted basis, the Index increased 11.9 percent compared with the previous week and was up 12.0 percent compared with the same week one year earlier.

What I found puzzling is that refinance activity is still strong, even though rates have been flat or rising for some time:

The refinance share of mortgage activity increased to 45.6 percent of total applications from 42.9 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 29.8 percent of total applications from 28.2 percent the previous week.

It appears homeowners are still pulling equity out of their houses. Also, given the narrow spread between products, I'm surprised at the volume of ARMs.

by Calculated Risk on 9/22/2005 10:59:00 PM

The Independent reports: This IS global warming, says environmental chief

Super-powerful hurricanes now hitting the United States are the "smoking gun" of global warming, one of Britain's leading scientists believes.

The growing violence of storms such as Katrina, which wrecked New Orleans, and Rita, now threatening Texas, is very probably caused by climate change, said Sir John Lawton, chairman of the Royal Commission on Environmental Pollution. Hurricanes were getting more intense, just as computer models predicted they would, because of the rising temperature of the sea, he said. "The increased intensity of these kinds of extreme storms is very likely to be due to global warming."

There is no question that warmer waters lead to more intense hurricanes. From NOAA: Global Warming and Hurricanes

"...we cannot say at present whether more or fewer hurricane will occur in the future with global warming, the hurricanes that do occur near the end of the 21st century are expected to be stronger and have significantly more intense rainfall than under present day climate conditions."

And there is no question that waters are getting warmer; a fact that is not in dispute. The only question has been if man is contributing to the warming trend. And the overwhelming scientific evidence is that man's activities are a major factor in the warming trend. From the American Association of the Advancement of Science annual meeting: Scientists on AAAS Panel Warn That Ocean Warming Is Having Dramatic Impact

Strong new evidence shows that ocean temperatures are rising because of human activity, and the impact on people and ecosystems worldwide could be severe, scientists on a AAAS panel warned Thursday.

The evidence-based on computer models and observations in the field-is so strong that it should put to an end any debate about whether human-caused global warming is a real phenomenon, said Tim Barnett, a research marine physicist in the Climate Research Division at Scripps Institution of Oceanography at the University of California-San Diego.

"The temperature-driven impact that these models predict over the next 30-40 years is severe, not only for the Western United States, but for China and Peru," Barnett said.

"Other parts of the world will face similar problems," he added in an unpublished paper released to reporters. The climate models "suggest that these scenarios have a high enough probability of actually happening that they need to be taken seriously by decision makers...if it is not already too late."

The FT also quoted the AAAS report: "‘Global warming real’ say new studies"

They found that the "warming signals" in the oceans could only have been produced by the build-up of man-made carbon dioxide in the atmosphere. Non-human factors would have produced quite different effects.

Tim Barnett, the Scripps project leader, said previous attempts to show that human activities caused global warming had looked for evidence in the atmosphere. "But the atmosphere is the worst place to look for a global warming signal," he said. "Ninety per cent of the energy from global warming has gone into the oceans and the oceans show its fingerprint much better than the atmosphere."

And on the "debate", Sir John Lawton commented:

"There are a group of people in various parts of the world ... who simply don't want to accept human activities can change climate and are changing the climate."

"I'd liken them to the people who denied that smoking causes lung cancer."

The scientific debate is over. It is time for action.

by Calculated Risk on 9/22/2005 01:37:00 PM

SNL Financial reports:

Golden West CEO concerned about underwriting of competitors amid talk of housing bubble Golden West Financial Corp. Chairman and Co-CEO Herbert Sandler attempted to hammer home to investors that the company focuses on quality in underwriting mortgages, as opposed to some who just focus on generating volume, a practice that concerns the executive.

"Are we concerned about what we see happening in the field? Are we concerned about throwing around the so-called 1% payment rate on the option ARMs, attracting people who are not really qualified for loans? Yes, I'm scared to death about that," Sandler said at the Banc of America Securities 35th Annual Investment Conference. "We leave volume on the table because we give the correct appraisal [on properties]."
...
the executive pointed to the dramatic increase in the secondary market over the last year, with a number of players focusing on volume. And the executive believes that companies engaging in such a practice will face problems when interest rates eventually increase and home prices flatten or decline.

Sandler added that in some markets such as Las Vegas, Orange County, Calif., and Southern Florida — where housing prices escalate as investors purchase homes and look to make a quick profit by flipping the property — housing prices could drop dramatically.

"You're are going to see losses up the gazoo on those loans and you've got to be very careful about lending you do in any lending you do in those geographic areas," Sandler said.

And NBC follows up with this article: No down payment? No sweat

Push-the-envelope loans and low interest rates have taken housing to extraordinary levels in price and homeownership rates. And as lenders found more creative ways for people to buy, the higher prices attracted speculators.

Many warn this volatile combination could end in a prolonged period of stagnant or falling home values. That could bring more foreclosures and bankruptcies and undermine an economy relying heavily on housing.
...
Chris Thornberg, a senior economist with the UCLA Anderson Forecast, argues that the dramatic rise in what he calls "ultra-high-risk" mortgage financing is a sign of a "distended market."

"What happens when you run out of people who could even qualify to buy a house with an interest-only, (zero-down), variable-rate mortgage?" Thornberg asked. "The answer is ... there are no more shills to enter the bottom of this pyramid and, therefore, the pyramid scheme will have collapsed into itself. We are in the midst of the biggest bubble we've ever seen."

Blunt talk on a serious problem.

by Calculated Risk on 9/22/2005 12:43:00 PM

Radar: Houston / Galveston and Lake Charles, LA


Map from: Weather Underground

The US already has a significant portion of oil and gas production shut-in due to Katrina. UPDATE: Another report on Rita/Katrina Production Shut-In

Today’s shut-in oil production is 1,379,000 BOPD. This shut-in oil production is equivalent to 91.93% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today’s shut-in gas production is 6.594 BCFPD. This shut-in gas production is equivalent to 65.95% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

Click on graph for larger image.

The graph from the EIA's Daily Report adds Rita to the comparison of the recovery from Katrina to Ivan last year.

Here is an interactive map showing the oil rigs in Rita's path.

My thoughts are with the residents of the Gulf Coast. Best to all.