Down payments are the bedrock of the housing market. Large down payments preserve home ownership, reduce volatility in the market, and reduce the risk to our financial system. The only people who oppose them are realtors and originate-to-sell lenders who see down payments as an impediment to profits and left-wing housing advocates who see down payments as a barrier to putting unqualified borrowers into houses. Down payments preserve home ownership because people who've put down large down payments rarely default. In purely economics terms, people shouldn't consider sunk costs like down payments in their decision making. However, homeowners do. People simply don't walk away from properties where they've put a lot down, even if they're deeply underwater. The decision is more emotional than logical, but coupled with the emotional desire to "own" these two forces prevent most people from[READ MORE]
Archive for April, 2013
I have been accused of being "old school" because I never embraced the innovations in real estate finance that inflated the housing bubble. In 2006 preparing for home ownership only required finding a house and signing a few loan documents. It's a lot more difficult today. Now the old rules are back. Buyers today have to save for a down payment and make sure the payments are affordable. Since so many forgot the old ways, I felt it necessary to revisit these old methods to educate the next generation -- and perhaps reeducate the old one.
Adjusting your financesPeople can adjust to whatever income and expenses they have if given a little time. Transitioning from renting to home ownership shouldn't be a difficult adjustment if you follow a few simple guidelines for structuring your finances while you're still renting. To[READ MORE]
Since the end of 2008 the Federal Reserve has had a Zero Interest Rate Policy (ZIRP), which is the overnight rate interest rate changed to it's member banks, it's called the federal funds rate. This interest rates influences treasury yields, corporate bonds, and mortgage rates. The current rate is about .25% or less on a annual basis. In addition, they Federal Reserve also creates money in a program called Quantitative Easing. The Federal Reserve justifies these policies by claiming the recession is so extremely bad (and it is) that's its necessary to set the rate to almost zero to simulate business borrowing (expansion) and and home purchasing. The negative affect of this policy is on retired people's savings because they have been suffering by having less than 1% returns on CD'S and money market accounts. This is saving that most retired people have accumulated their entire lives[READ MORE]
The valuation of land used for residential housing is mysterious and often misunderstood. The valuation of lots and raw land requires a detailed knowledge of construction and marketing costs as well as a good estimate of the sales price of the final product: a residential housing unit. In short, the value of a lot is the total revenue (sales price of the home) minus the costs of production and the necessary profit. Land value is a residual calculation. The value of a piece of land is whatever is “left over” after all the other costs of production and profits are subtracted from revenue. This is a key point. Land for residential home use has no intrinsic value. It is a commodity useful for the production of houses just like lumber or concrete. For a given price level, if the[READ MORE]
The mainstream media housing market cheerleaders have been touting the declining delinquency rates as a sign of market health. As I recently pointed out, contrary to media spin, mortgage delinquencies are trending higher. We know that lenders don't want to foreclose and recognize losses, particularly since banks are still exposed to $1 trillion in unsecured mortgage debt. If they were forced to write down the losses on their bad loans or approve too many short sales, the losses would drive them out of business -- either that, or we would have another massive government bailout to deal with. The only way lenders can avoid recognizing losses is to avoid foreclosure and deny short sales until[READ MORE]
Typically, January is the slowest month of the year for real estate sales. Sales volume rises each month through July or August when it peaks as buyers rush to get into homes before their children start a new school year. When sales volumes decline on a monthly basis during the first half of the year, it's often a troubling sign for the real estate market. Sales volumes declined in March, and it is a sign of a problem in the housing market: a lack of inventory.
Sales of previously owned homes fell by 0.6% in March from February, causing some analysts to second guess the housing rebound.In the post The bearish case for another leg[READ MORE]
Besides, OC real estate has been and will continue to be desirable. It’s also very cyclical and I knew there would be another cycle coming much sooner than the bears predicted. This place has never had “flat” home prices… ever.Apparently this commenter had faith in the successful efforts of market manipulators and the herd behavior of California buyers. The last year has done much to reaffirm the faith that was sternly tested by a 40% decline. The problem with blind faith is that it doesn't ask "why." Faith just accepts things as is and doesn't demand an explanation. Unfortunately, with financial markets, the "why" matters. California had a housing bubble in the 1970s because lenders adjusted to a high-inflation environment by[READ MORE]
Economists are busy studying the "wealth effect" to determine how important it is to the country's economic health. Unfortunately, they don't really understand the mechanics behind what they are studying. The basic assumption economists make is the people spend more of their liquid savings when assets they own increase in value. This basic assumption is flawed. In my opinion, The “wealth effect” is the most dangerous euphemism in economics. What happens in the real world is not an increase in spending of savings, but an increase in Ponzi borrowing based on inflated asset values. It’s the behavior that lead so many to foreclosure as I document daily. The wealth effect is help the economy doesn’t need.
Carl Case and Robert Shiller are pioneers in the study of the wealth[READ MORE]
What was the tagline for Jaws 2? "Just when you thought it was safe to get back into the water". Eminent Domain is the seizing of private property at market rates for public use for example roads, schools, and other infrastructure. Robert Shiller is to my surprise, a proponent of using eminent domain. How is purchasing a mortgage which is a security agreement between the lender and the borrower qualifies as a public use? Eminem domain just a backdoor way to force a principal balance write down on a mortgage by using local government's police power. The principal reductions completely let's the borrower off the hook and encourages additional moral hazard type behavior. Oh, and the new term is now called "targeted mortgage reduction". Now there is an second attempt by California local[READ MORE]
Monday, in the post Can the Fed reflate the housing bubble without negative side effects?, I discussed the various market distortions resulting from the federal reserve's zero-interest-rate policy. The inflated asset values are byproducts of the fed's actions, but with respect to housing, the distortion of market prices is what the federal reserve wants to happen. To make the stimulus have good effect, lenders stopped foreclosing on delinquent mortgage squatters and hoped to bait them into temporary loan modifications with the carrot of rising home prices. The slowdown in foreclosures caused the MLS inventory to evaporate. The result of the federal reserve stimulus and the lack of MLS inventory is a supply of homes that fails to meet current demand. Builders are taking advantage of the situation to ramp up construction to deliver the supply the banks are[READ MORE]