Archive for December, 2016

House prices exceeded the 2006 housing bubble peak in 2016, but when adjusted for inflation, house prices may never reach that benchmark.

The NASDAQ recently surpassed the tech bubble high from 2000. Anyone who bought the index in March of 2000 could finally sell their holdings without losing money. While some investors cheer this victory, those investors who didn't take a loss received dollars back from the trade that retained significantly less buying power than they held in 2000. In fact, after adjusting for the erosion of buying power, these investors still lost a third or half of their money. Investors in real estate make the same mistake. I recently demonstrated that an investor can sell a house for $100,000 profit and still lose money by ignoring carrying costs, transaction costs, and inflation. Many real estate industry watchers celebrated home price indices reaching their bubble-era peak this year. But like the stock[READ MORE]

California creates more jobs than houses, so people leave the state for cheaper housing.

In the early 1970s, California began restricting new development. At first, it wasn't a problem, but when California voters later passed Proposition 13, they made residential real estate much less desirable than commercial properties because the latter provides both jobs and sales tax revenue, whereas housing barely provides enough revenue to cover the cost of providing services. Municipalities began shunning housing in favor of commercial development, and nimbys joined the chorus, complaining about traffic and the "loss of neighborhood character," whatever that means. The natural advocates for housing are realtors, but since they only make money on resale houses, their advocacy for new construction is tepid at best. Further, many real estate agents actually oppose new developments because restricting supply makes houses more valuable, increasing the size of[READ MORE]

About 25% of potential homebuyers react with foolish urgency, but nearly half respond by either substituting down in quality, delaying their purchase, or canceling it altogether.

The national association of realtors is notorious for spinning data to support a false narrative the instills urgency with potential homebuyers. The minions working for the association routinely seek out data points supporting their narrative even when that narrative doesn't mirror reality -- in fact, the less their narrative reflects reality, the more they work to spin the data. For example, NAr pending home sales data is worthless and misleading. realtors represent themselves as experts on real estate whose advice can be relied upon by market participants. However, realtors care not whether it's truly is a good time to buy or sell because for them, it’s always a good time to generate a commission. This conflict of[READ MORE]

Should everyone really own a house? Are renters so much less a part of their communities that the government must spend billions of dollars subsidizing home ownership? These are important questions. How we answer them will guide how we remake our housing finance system which was destroyed with the collapse of the housing bubble. The current system of government props with the taxpayer insuring more than 80% of the mortgages in the US is not tenable or desirable. Is there a balance between public and private sector appropriate to the housing market?

Overzealous Intervention Dooms the Market

Edward J. Pinto
Those who want government guarantees for mortgages see them as a path to encourage homeownership and market stability, but instead guarantees pose needless risks to homeowners and taxpayers. Government guarantees suffer from three flaws: the inability and unwillingness to price for risk, asset allocation[READ MORE]

Removing the supply of distressed homes created a supply shortage homebuilders responded to by providing more houses, hiring construction workers, and stimulating the economy.

vacant_hinterlands If I understand Keynesian theory properly — which is important to understand federal reserve policy — inflating asset values through low interest rates triggers businesses to expand because borrowing costs are so low, they can make marginal opportunities productive. As businesses expand, they hire more people for their operations. The newly employed create demand for goods and services, stimulating more demand for goods and services, which in turn creates more business demand, puts more people back to work, and so on — a virtuous circle. Unfortunately, during periods of overcapacity, the expansion proceeds slowly because businesses make use of existing labor, property, plant, and equipment rather than creating new[READ MORE]

Lenders lower standards to qualify more borrowers and increase business, a precursor to another bubble, but only if risk is again mispriced.

The recipe for a housing bubble includes many ingredients such as loose lending standards. However, loose standards merely qualify more borrowers. While qualifying more borrowers may extend the rally, it requires a gross mispricing of risk and enormous capital flows into unstable loans before prices get pushed up into bubble territory.Nemo_loan_teaser_rate Let’s assume for a moment all qualification standards were eliminated and anyone who wanted to borrow money could get a loan, similar to what happened in 2004 through 2006. Would this cause a housing bubble? In my opinion, it would not. It would inflate prices, and it would cause a great deal of downward substitution of quality to get a property, but it wouldn’t[READ MORE]

Homebuilder confidence rose the most on record last month entirely due to the election of Donald Trump.

I spent most of the last four months meeting with homebuilders. The people in my office spend most of their time dealing with homebuilders. As a group, we interact with all of them, so we have a unique perspective on homebuilders' world view. Despite being in California where an overwhelming majority of people are Democrats, homebuilders are mostly Republican. Homebuilding is an entrepreneurial business that chafes at regulation, so it shouldn't be terribly surprising to see so many Republican homebuilders. If Hillary Clinton had won, I don't believe homebuilders would have been despondent, but they would have expected more of the same -- increasing regulations and slow economic growth. When Trump surprised everyone and won the election, homebuilders were thrilled at the idea of a real estate entrepreneur[READ MORE]

Forcing communities to accept housing like we force them to accept solar panels could solve California's housing crisis.

Actions speak louder than words. Politicians pontificate on many issues, and they pander to their constituents to gain reelection. However, the laws they pass reflect what they really mean and value. Based on that criteria, California politicians clearly want solar panels and green energy far more than they want sufficient housing to accommodate our growing population. Once the cost of solar panels came down enough to be cost effective, the early installations weren't greeted with universal acclaim. Early solar panel arrays were large, bulky, and unattractive. Solar panels generally must face south (in the Northern Hemisphere) to point at the sun. If the south side of the house faced the street, many homeowners resisted installing these ugly panels on the front of their homes[READ MORE]

Due to a high rate of amateur participation and a lack of accurate information, housing markets are among the least efficient in the financial world.

California_real_estate_billionaireThe efficient markets theory postulates that speculative asset prices always incorporate the best information about fundamental values. Adherents to this theory believe that prices change only because new information enters the market and investors act in an appropriate, rational manner with regards to this information. It's a gratifying theory that portrays investors as wise and rational. Unfortunately, it has no basis in reality. Efficient markets theory dominated academic fields in the early 1970s. Academics attempted to tether asset prices to fundamentals through the common-sense notion that people would invest their money rationally. This theory encapsulates the “value investment” paradigm prevalent in much of the investment community.

Efficient Markets Theory

In an efficient market, prices tether to perceived fundamental valuations.[READ MORE]

If mortgage rates keep rising, home sales will be lower in 2017 than in 2016, prompting talk of another housing recession.

distressed_borrowersRemember all those stories assuring us that higher mortgage rates wouldn't cause any problems with housing? Well, today's featured article is the story where they debunk years of wishful thinking and expose the masses to basic math. It was a long time coming, but I'm glad the financial media is finally breaking the bad news. This isn't rocket science. It doesn't take a supercomputer or a math savant to calculate how much rising mortgage rates will hurt the market. And it doesn't take a genius or a housing market guru to decipher how this will impact housing. For every 1% mortgage interest rates rise, it raises the cost of ownership by 11%. As ownership costs rise faster than incomes, marginal buyers get priced[READ MORE]

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