Author Archive: Irvine Renter

Higher interest rates reduce housing demand by causing mortgage applications to decline, reducing loan balances, harming employment, and suppressing wages.

Repost from OC Housing News 2011-2016

permanently_high_plateauThe federal reserve establishes interest rate policy, and for six years, the federal reserve held the benchmark federal funds rate to zero to stimulate the economy. They finally raised rates last December and followed with a second boost this December, the first rate hikes in a decade. During the period when interest rates were held at zero percent, the federal reserve applied stimulus through a policy known as quantitative easing, a fancy term for printing money. Quantitative easing and mortgage interest rate stimulus were designed to bail out Wall Street, not benefit Main Street. In[READ MORE]

The industrial midwest did not participate in the growth of the last 40 years.

Repost from OC Housing News 2011-2016

Once in a while, I wonder what life would have been like if I stayed in my small hometown in Wisconsin. Members of my extended family and friends from school still live there, and I generally visit every year, so I know the progress -- or lack thereof. I find it comforting when I go back that very little changed over the last 40 years. Some of the storefronts are different, but for the most part, the built environment is as it was when I grew up. In many respects, it's the realization of the nimby dream of "preserving neighborhood character." It's like the entire town was cast in amber years before I was born, and nothing has changed since. While I may find it[READ MORE]

With no rigid cap on front-end DTIs, those with no consumer debt could borrow more to finance a home purchase.

Repost from OC Housing News 2011-2016

It’s no secret that I don’t think consumer debt is a good idea (See: Think you want consumer debt? Think again…) With the ongoing war on savers waged by the federal reserve, it’s been a difficult time to maintain a discipline of saving instead of consuming. However, buried in the new qualified mortgage rules is a loophole that may give those with little or no consumer debt a major competitive advantage when bidding on houses. The new qualified mortgage rules cap overall debt at 43% of gross income. Legislators enacted this provision in response to the enormous debt burdens exposed when lenders abdicated all lending prudence and gave Ponzis unlimited debt. The back-end ratios of the average[READ MORE]

One man’s mortgage debt is an entire neighborhood’s equity. Higher mortgage rates put pressure on the size of mortgage balances, potentially eroding homeowner equity.

Repost from OC Housing News 2011-2016

When a buyer purchases a house, their purchase sets a standard by which the value of other houses is inferred. When a house sells for a high price, the new sale boosts the value every property in the neighborhood. Of course, as many lamented during the bust, when a house sells for a new low price, the sale drags down neighborhood values as well. When prices rise, neighbors cheer each new high comparable sale because it adds to their net worth, illusory though it might be. Many people enjoy checking their Zillow Zestimate, particularly during a boom, because it makes them feel rich. While everyone wants to be rich, what lenders did during the[READ MORE]

It takes more than a manic desire to inflate a bubble. The ability to deliver capital to the market is also an essential element.

Repost from OC Housing News 2011-2016

Many people who believe in the wisdom of the markets subscribe to the efficient markets theory. It postulates that market participants have equal access to good information and they make rational judgments based on the available data. The theory appeals to vanity as everyone likes to believe they demonstrate above-average financial acumen and make rational decisions. Unfortunately, that isn’t the world we live in. People often fall victim to groupthink, pick and chose what data to believe and what to ignore, and seek the perceived safety of the herd when making financial decisions. The housing bubble was defined by one fallacious belief that overrode all reason: house prices only go up. The mantra of the National[READ MORE]

More than eight years after the government took over mortgage finance, the US taxpayer still insures the bulk of the loans in the housing market.

Repost from OC Housing News 2011-2016

Prior to the collapse of the housing bubble, when lenders foolishly loaned money to people operating personal Ponzi schemes, it was theirs to give — and to lose. But when the losses overwhelmed our banking system, the government took conservatorship of the GSEs, and they backstopped the largest banks with our too-big-to-fail guarantees. With those two steps, the government now assumes nearly all risk of loss in the US mortgage market. With taxpayers absorbing future losses through explicit and implicit guarantees, lenders have no reason to fear inflating another housing bubble. Another bubble would generate enormous fee income at origination and interest income through ever-increasing loan balances, and when the bubble bursts,[READ MORE]

Hedge funds profited from banks that failed to execute the same business plan to recover more of their original loan capital.

Repost from OC Housing News 2011-2016

If banks had taken the same approach to the bust as hedge funds, they could have recovered much more on their bad bubble-era loans. By 2012 they bankers finally realized they could stop foreclosing and selling the REO for rock-bottom prices and instead wait until prices recovered to execute an equity sale. However, there was another business model they could have used to recover more money quicker.

Special Home Investment Trust

By far the fastest and most efficient way to recover lender capital was to foreclose on their non-performing loans, rent the properties (perhaps even to the former owners), package the properties into a REIT, and sell this REIT for enough to recover all their capital. As banks[READ MORE]

We need policies that help stabilize tenancy and facilitate renters saving for retirement.

Repost from OC Housing News 2011-2016

The US government treats renters like second-class citizens. Our current policies make it very difficult for renters to stabilize their housing costs or save for a comfortable retirement. Perhaps in an era where homeownership was attainable for everyone, such policies were tenable, but now with coastal states restricting new construction, significant portions of the population simply can't afford a home. Current government policies irreparably harm these renters. Politicians believe that high rates of homeownership foster social stability because people won't loot and riot if they feel invested in the community. Social engineering aside, there is one particularly strong financial reason politicians favor widespread homeownership: it allows them to maintain a less expensive social safety net for retirees. Imagine a world without homeownership. There would be no[READ MORE]

The homeownership rate is plunging because the housing bust tarnished the American Dream dream, and a new generation chooses to rent instead.

Repost from OC Housing News 2011-2016

For nearly 100 years, US government housing policy maximized the homeownership rate and the rate of growth in house prices. Politicians characterized homeownership as the best investment a middle-class family could make, and home ownership equated with the American Dream. american_dream-foreclosure During the early 00s, on the surface conditions looked great. House prices appreciated rapidly, mortgage equity withdrawal fueled an economic boom, subprime lending provided home ownership opportunities to everyone, and a record number of Americans realized the American Dream. Government officials touted the success of their policies, and critics of these policies were mocked or widely ignored as the ravings of madmen. Unfortunately, homeownership is not[READ MORE]

Lower house prices due to higher mortgage rates still result in a higher cost of home ownership.

Repost from OC Housing News 2011-2016

housing-stagflationEveryone shopping for a home wants to see lower prices. For most products, paying less for it means the buyer keeps more money to purchase other goods and services, but with houses, this isn’t necessarily the case. Most people borrow a great deal of money to buy a house, often 80% to 96.5% of the purchase price. In fact, the cost of borrowing money is largely what determines how much someone can borrow and bid to buy a house. (See: Your neighbor’s debt creates your home equity) When mortgage rates go up, the cost of borrowing increases, and unless wages rise considerably, the cost of borrowing will increase faster than wages go[READ MORE]

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