It looks like the bottom-callers of 2012 were right. Continued interference in the mortgage market by the federal reserve lowered mortgage interest rates to record low levels. Plus, changes in policy at the major banks held back the tide of foreclosures and greatly restricted the MLS inventory. Demand was up slightly, mostly due to investors as owner-occupants remained absent from the market. First-time homebuyer participation fell to very low levels. The small uptick in demand, fueled by record low interest rates, and the dramatic decline in for-sale inventories caused prices to bottom in 2012. It isn't how the bottom callers thought it would happen (most predicted a surge in demand), but being right for the wrong reasons is good enough. It certainly beats being wrong for the right reasons like the bears were.
Archive for 2012
People form strong attachments to their homes. Walking away is never a decision they take lightly. We can discuss the pros and cons and come up with our own beliefs and attitudes about it, but the turnover of our housing stock caused by the housing crash will be very painful for those who go through it.
Ruthless default or accelerated default?I write often about hidden premises buried within the arguments writers make. These distinctions are important, and unless we uncover our fallacious beliefs, we make erroneous judgments and carry false beliefs. I have written many times about strategic default, and in my last post on the subject, I uncovered something new. There is no accepted definition of strategic default. Lenders have tried to define the issue as any borrower who is capable of making a payment and chooses not to. On[READ MORE]
Real estate investors during the housing bubble put their money to work on faith. There is no logical reason to believe house prices only go up. In fact, there have been two prior periods in California's recent history where house prices did, in fact, go down. However, with kool aid intoxication, otherwise known as faith-based investing, reality is ignored. If you truly believe house prices only go up, no price is too high, and you don't have to worry about a backup plan if house prices don't go up. There is only one viable backup plan when a speculative play on appreciation does not pan out: renting the property until you get out at breakeven. For some people, this was as far as they took their analysis. A glib idea of renting it out gave them all the assurance they needed to[READ MORE]
Californian's believe house prices go up by magic. Real estate appreciation is religion in California as people blindly accept the Truth of never-ending price increases. Few question current prices or wonder why current pricesgo up as most fool themselves with wishful thinking, cockeyed optimism, and kool aid intoxication. Most people do not understand real estate prices -- they think they do -- every Californian is an expert on real estate, after all, we have about half a million realtors, but few people really understand markets. Motivated by greed, blinded by ignorance and enabled by lenders, borrowers inflated The Great Housing Bubble. A foundational understanding of house prices and housing markets is critical. From 2003 onward, with exception of those who purchased houses with conservative financing, which was rare, most buyers bought in ignorance. Some were undeniably stupid and irresponsible, but most were simply ignorant going with the herd believing everyone couldn't[READ MORE]
Satire is often more revealing than detailed explanations. The pathology of a collection of beliefs becomes apparent when the natural end result of a group of people acting on those beliefs is an absurd contradiction and an obviously unsustainable state. The following is a satirical essay written from the point of view of a desperate homeowner trying to sustain the Ponzi Scheme of the Great Housing Bubble:
The California Social ContractYou fence-sitters are failing to fulfill your part of the California Social Contract. Your failure to continue buying homes is disrupting the social order, and it is causing those of us who bought before you psychological, emotional and financial damage. It is time for you to get off the fence and buy–NOW!!! In any social contract, you give up something personally for the greater good. When those of us who bought[READ MORE]
Negotiating the sale of residential real estate is no more difficult that negotiating for any other product of service that does not have a fixed price; however, due to the colossal cost of houses, the process is more important financially than negotiating for other big-ticket items like automobiles. A mistake made while buying or selling a house could cost as much as a new car; sometimes such mistakes could pay for many cars. Skilled negotiators can obtain favorable pricing and terms without the assistance of a broker, but the novice who is inexperienced at this process often will not. Novice negotiators can benefit from using a professional real estate agent.
Perceptions and Motivations of the NegotiatorsWhen two parties enter into a negotiation, they hope to reach agreement and close the deal because negotiations without a deal are a complete waste of time for all parties involved. The one goal both parties[READ MORE]
Can you name all the bailouts to banks, homeowners, and government sponsored enterprises? It’s many more than you think
Last week I published a post that predicted that the Federal Reserve will start bailouts by performing principal reductions for underwater homeowners. I wanted to detail exactly how did we reach that stage. So, I wanted to briefly detail the last five years of housing bailouts. It was just an impossible task to sum up in a few paragraphs due the sheer number of programs.
If fact I should have have created this list first, would have made writing easy. I will attempt to name the program, the beneficiary of the program, and a brief description of the program. California local programs are not listed here, because I'm sure that there are dozens if not hundreds of local and state bailout programs.
|Market-to-Market accounting change||Banks||It allowed to banks not document[READ MORE]
Back in the early 1970s, Richard Nixon took America off the gold standard. It was a watershed moment in monetary policy the implications of which were not recognized at the time. As long as we were tied to a gold standard, theoretically, we could run out of money. We couldn't spend any more money as a country than what we had in gold to back it up. Once we were off the gold standard we ceased to be a currency user, and the United States became a currency issuer. Unlike a household or an individual that can run out of money, a currency issuer can simply print more. The only restriction on a currency issuer is inflation. If they print too much money, it devalues it, and goods and services produced outside the economy of the currency issuer[READ MORE]
The restricted inventory condition we are dealing with here in the Southwest has caused prices to go up. However, for buying to keep pushing prices higher, interest rates must keep falling to sustain affordability at higher price levels. In a market like ours where demand is less than robust (most increased demand this year came from all-cash investors and hedge funds), any decrease in affordability is going to hurt sales. At first it will show up in decreased sales volumes. If affordability continues to crumble, prices will begin falling again.
Lenders in California are placing their faith in the success of loan modifications. Of course, to them success can mean something different than what it means to a loanowner. Success to a lender can be defined as obtaining a few more payments prior to a short sale or foreclosure. With prices rising, lenders benefit two ways from loan modifications. First, they get cashflow from non-performing loans. They know this is likely temporary as about 50% of loan modifications fail each year, but some cashflow is better than none. Plus, since prices are rising, when they do finally approve a short sale or foreclose on the property, they will recover more of their original capital than if they were to foreclose today. Lenders are kicking the can and playing the amend-extend-pretend music.