Archive for 2017

https://www.youtube.com/watch?v=Jj4nJ1YEAp4 Several years ago, I was playing craps in Las Vegas when the shooter went on a long, long run. After about 40 minutes without rolling a seven, I had about $750 I took off the table in front of me, and I had about $500 still sitting on the table from the numerous times I pressed my bets or let it all ride. In the middle of the pandemonium at the table, I had a funny feeling. Despite the euphoria around me, I felt it was time to leave. Before I could think more about it, I found the words coming out of my mouth, "Please, take down all my bets." Some of the people at the table ridiculed me, and everyone else thought I was insane. It took two rolls for the pit boss to color me up; both were winners, and the gamblers at the table now openly laughed at[READ MORE]

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

Nemo_loan_teaser_rateLet’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 necessarily create a housing bubble as long as loans were based on verifiable income and reasonable debt-to-income ratios on conventionally amortizing mortgages. The loose lending standards of 2004-2006 allowed many people to buy homes, but it was the combination of liar loans, unlimited debt-to-income ratios, and negatively amortizing[READ MORE]

Homebuilders believe less regulation and a stronger economy are in store thanks to the election of Donald Trump.

Despite being in California where an overwhelming majority of people are Democrats, homebuilders are mostly Republican in California and across the nation. Homebuilding is an entrepreneurial business that chafes at regulation, so it shouldn’t be terribly surprising to see so many Republican homebuilders. Since Donald Trump won the election, it's also reasonable to expect homebuilder confidence would rise. 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 running the country. Since the election, everyone in the industry[READ MORE]

Negative equity decreased by $26 billion in 2016, saving lenders from potential losses on millions of home loans. Can-kicking works.

When lenders first began can-kicking bad loans in 2008, I didn't believe the policy would succeed, and for the first four years, it didn't. However, with no viable alternatives, all lenders embraced can-kicking through loan modifications and a permissive attitude toward long-term delinquent mortgage squatting. I believed the policy would fail because it was a cartel arrangement. Each bank gained more by foreclosing and recovering their capital than waiting because prices were still falling, and many banks needed the cash to survive the recession. However, the federal reserve and the federal government stepped in to save the day. The federal reserve provided unlimited liquidity to member banks at zero percent rates, and federal legislators relaxed the mark-to-market accounting rules to allow banks to[READ MORE]

Politicians and special interest groups utilize increasingly sophisticated ways of confiscating the wealth of private landowners.

The resale value of a house in California is only loosely tethered to construction costs. While homebuilders won't construct a house if they can't sell it for enough to recoup their costs, once house prices rise above construction costs, the key variable that fluctuates most radically is the residual land value. Land value is a residual calculation, meaning it's calculated by determining the market sales price and subtracting off all the costs of production. Since land residual is determined by whatever is left over, rising market prices fall entirely to the bottom line, and any increases in costs come directly out of the bottom line. Residual land values can be negative because prices can fall so low that the cost of construction exceeds the value of the house, which happened across[READ MORE]

The new and improved USA Housing News reports launches soon! Now with complete national coverage!

The housing market reports are back! It's a long story, but the bottom line is that I now have control over my housing market reports again. I am working on a website to sell subscriptions to these reports as the USA Housing News. I will talk more about this as I get closer to launch. I found a new data source the allows me to provide national coverage. In fact, I now cover all 50 states, 443 metros, 1045 counties, 9,525 cities, 5,619 neighborhoods, and 11,325 zip codes. That's a lot of data. I can create custom reports with varying degrees of detail with up to 52 distinct areas in each report. For example, the Orange County report contains the county, 37 cities, and 14 neighborhoods. When I[READ MORE]

Americans borrow more money for consumption rather than the acquisition of assets.

Not all debt is created equal. I borrowed large sums to buy cashflow properties in Las Vegas, debt backed by a cashflow-producing asset. The income stream repays the debt with interest, and if for some reason I am unwilling to pay back the loan, the lender can auction the property and either receive their money back or obtain cashflow equal to or greater than the payment on the debt. That is asset-backed debt. Lenders provide asset-backed debt for the purchase of property, plant, and equipment. When lenders evaluate these loans, they consider the useful life, the recovery and resale value, and the cashflow the asset may generate (if any). Asset-backed lenders assume the debtor’s word means nothing and any recovery of capital will come solely from the collateral pledged to cover the loan.[READ MORE]

As house prices rise and more homeowners possess equity again, some are withdrawing this money at low rates and spending it, stimulating the economy.

hungry-homeownersDuring the housing mania, people bought homes because house prices rose rapidly, and lenders gave equity to homeowners at 100%+ of the value set by recent comps. Under such circumstances, houses were very desirable, and unlimited access to home equity fueled the housing mania and funded millions of personal Ponzi schemes. Homeowners like mortgage equity withdrawal because it provides them instant access to the free money bestowed upon them by the magic appreciation fairy. Even better, they didn't have to sell the golden goose: they got to keep their home and wait for it to grant them even more free money. It was like owning a personal printing press. Homeowners gladly suspended their disbelief[READ MORE]

A cap on loans and increased builder costs forces builders to increase density to meet the burgeoning demand of Millennial buyers.

Millennials find very little available for sale on the MLS in their price range because the previous generation, Generation X, is still trapped in their starter homes, lacking the equity to make a move-up trade. Nearly 6 million people remain trapped in their entry-level homes they purchased a decade ago. Perhaps they enjoy their gilded cage, but since they may not leave without severe financial consequences, their homes resemble a debtor’s prison. People also remain in their homes longer because even with the newfound equity from reflating the old housing bubble, without increases in pay, they face limitations on borrowing enough to complete a move up. While their house increased in value, the move-up house they desire also increased in[READ MORE]

California's wall is a barrier of high home prices caused by a lack of supply created by nimby resistance in areas dominated by California Progressives.

President Donald Trump's policies, like Donald Trump himself, enjoys very little support among California voters. When Trump campaigned in California during the primaries, it caused riots. During the general election, Trump lost California by nearly 4 million votes. California Progressives resist and detest everything Donald Trump proposes and stands for, particularly his immigration policies, which include proposals to deport undocumented workers illegal immigrants and build a wall to keep out future undocumented workers illegal immigrants. Surprisingly, California Progressives and Donald Trump both embrace exclusionary policies that prevent people from taking up residence in California. Whereas Trump's policies are openly hostile to immigrants, particularly illegals, Trump's proposal to build a[READ MORE]

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