Archive for 2009

Nothing in your hand; it is what underwater homedebtors have. They occupy a house -- just like renters do -- but most of them do so at a huge premium to renting. Underwater homedebtors have no equity; what they do have is the dream of equity in the future. They have a position in a financial market that most resembles an option contract that is out-of-the-money.guilt_mortgage People who are underwater today and paying a premium are still hoping they will get a return on those premium dollars when their house value rises above their mortgage and puts them back in-the-money. Mostly this is based on fantasy or Zillow Zestimates or some other such nonsense, when in reality, their property values will likely decline further, and it will take much longer than they want for prices to come back. That is the way[READ MORE]

Today I briefly want to again Revisit Option ARMs, and I want to address a common misperception about REO; lenders do not have to sell REO due to regulatory pressure. Shareholders may dissuade lenders from becoming real estate investors, but the banking regulators will not.

The Option ARM Kingpins: Who Holds the Elusive Option ARMs?

$189 Billion Securitized and Outstanding and big Three of Wells Fargo, JP Morgan, and Bank of America Playing with Time.

There have been many charts ... and much of the confusion is around a few key points: -1.  Banks have been circumspect given the actual number of option ARMs -2.  Many option ARMs are in California (roughly 60 percent of the market) -3.  Many of those behind on payments are now simply not paying their mortgage but banks are not moving It is hard to quantify the above data since this is something banks would like to[READ MORE]

The California housing market is volatile, but people only see the ups. Trying to capture appreciation, they "stretch" to get into a property by putting larger and larger percentages of their income toward housing (until the entire system collapses). This stretching is (1) recorded in the aggregate debt-to-income ratio for a particular market and (2) observed in the struggles of individual homeowners. Irvine debt-to-income ratios 1975-2009   As you might surmise, the peaks in the DTI ratios correspond to peaks in our three California housing bubbles. Comparison of home prices and value - Irvine California - 1975-2009   Today, I want to move from the macro down to the micro; the charts above show aggregate numbers and big-picture relationships, but what about the individual? What struggles does all of this mean for you and me? From Mark Hanson[READ MORE]

Four Major Variables that Determine Market Price

Over the last four days we looked at the four main variables that determine home price:candy_man_unemployed_mortgage_broker
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. downpayment requirements.
Today we are looking at tax implications and opportunity costs because these number will give you a more accurate measure of the impact home ownership will have on the owner's financial life.

Taxes

Owning real estate has two significant tax benefits: (1) favorable capital gains tax exemptions and (2) income tax benefit through the home mortgage interest deduction (HMID). Be forewarned that this is not an exhaustive treatise on every permutation in the tax code. I am going to look at the general case the most people will find themselves in.

Capital Gains Taxes

If you own a home more than two years, you can ignore the gains on the first $250,000 or $500,000 if your married. If[READ MORE]

Four Major Variables that Determine Market Price

Over the last three days we looked at the four main variables that determine home price:superheroes
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. downpayment requirements.
Today we are looking at homeowners associations because this expense (1) reduces your payment to the lender, (2) reduces the amount you can borrow and bid, and thereby (3) reduces the value of real estate. People can persuasively argue that HOAs add more value than they cost, and I believe this is true, but that value is reflected in market comps. When you examine the details of cashflow, HOAs are a cost, nothing more. The following is the words of our guest author OC Progressive.

Avoiding the toxic condo association

As the housing crisis continues, some condo associations can be dominos lined up to fall.

This is not to say that you should avoid any[READ MORE]

Four Major Variables that Determine Market Price

Over the last two days we looked at the four main variables that determine home price:California_Ponzi_housing_market
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down paymentrequirements.
Today we are looking at some of the minor cost inputs that work by influencing the four major ones; property taxes and Mello Roos taxes. When you qualify for a loan, the difference between what your income can support and the payment you can make to the lender is a number of related expenses that only homeowners must pay; property taxes, special assessments and Mello Roos, insurance and homeowners associations. These expenses (1) reduce your payment to the lender, (2) reduce the amount you can borrow and bid, and thereby (3) reduce the value of real estate. Over the rest of this week, we will look at these costs of ownership.

Property Taxes

Property taxes have long[READ MORE]

Four Major Variables that Determine Market Price

Yesterday, we discussed the four variables that determine the purchase price of a property:too_little
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down payment requirements.
Today we are looking at interest rates and down payment requirements.

Interest Rates

Interest rates go up, and interest rates go down. Interest rates are the yield on debt instruments. If investors lose their appetite for mortgage debt, prices of mortgage-backed securities goes down, payment yields go up, and mortgage interest rates go up with them. This concept is important to understand because right now, the Federal Reserve is the only buyer of agency paper at price levels yielding 4%. Private investors are demanding higher returns due to the obvious risk of loss in a declining market. The Federal Reserve feels it needs to step in to stabilize crashing markets by preventing an over-correction in risk premiums[READ MORE]

Four Major Variables that Determine Market Price

There are four variables that determine the purchase price of a property:back_to_Iraq_for_job
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down payment requirements.
These variables are impacted by some other minor cost inputs which I will be discussing on Wednesday through Friday, but for the most part, the variables above determine market pricing. The first two variables are the focus of today's post, and the last two are the topics for tomorrow. Payment is a direct link to borrower gross income. The debt-to-income ratio allowed by a lender applied to the borrower's monthly income is the maximum allowable monthly housing expense an underwriter will consider. From this amount, a lender will subtract an allowance for taxes and insurance to calculate the total amount of the available housing expense applicable to debt service. Here is where interest rates enter the calculation. Lenders have[READ MORE]

housing_crashThe mess in our housing and financial markets are slowly draining the life out of us. The powers-that-be are killing us softly with their endless song and dance. Our government and the Federal Reserve want to engineer the fabled "soft landing." So how would we measure their success? A soft landing for the FED would be a slow and controlled decline of house prices to levels sustainable by local incomes and free-market financing conditions. The reason they will let it drop is to shorten the time they have to support the market. The reason the Federal Reserve does not want to let it crash hard... they do not want their member banks to lose any more money. Wait, perhaps you thought it was because the US Government cares about you and your home prices... victim of the spin machine. The FED's mechanism for[READ MORE]

The median sales prices does not give any indication of what was obtained for the money spent. Median prices may be flat while people are either getting more for their money or settling for less. Also, the median sales price when charted over time occasionally gives false signals when prices appear to be moving on one direction when the prices of individual properties in the market are moving another. To deal with these problems with the median, alternate measures of pricing are used.I_want_to_believe

Cost Per-Square-Foot

Many data reporting services measure, record, and report the average sales cost on a per-square-foot basis to address the problem of evaluating what buyers are getting for their money. For instance, in a declining market if people start buying much larger homes at the limit of affordability, the generic median sales price would remain unchanged, but since buyers are[READ MORE]

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