Author Archive: Irvine Renter

Today is part 3 in the ongoing series on Ownership Cost:OCHN_good_news Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs

Four Major Variables that Determine Market Price

Over the last two days we looked at the four main variables that determine home price:
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down payment requirements.
Today we are looking at some of the minor cost inputs that work by influencing the major ones; property taxes and Mello Roos taxes, HOAs, and insurance.

PITI

lenders have an acronym called PITI, which stands for principal, interest, taxes, and insurance.To that we can add HOA dues and other known costs. When people qualify for a loan, the difference between what their income can support and the payment they can make to the lender[READ MORE]

Many housing analysts suggest the lack of inventory is because potential sellers are concerned they can't find another home to buy. This is a red herring. The real reason is the lack of move-up equity.

Repost from OC Housing News 2011-2016

Back in 2012, I postulated that homeowners would list their homes as soon as prices reached near-peak levels when they could get out without completing a short sale. After watching prices inflate to peak levels and the listings failed to materialize, I concluded that the lack of equity to complete a move-up is what kept supply from coming to market. Loan modifications kept homes off the market to facilitate the recovery. As these loan modifications expired, some of these properties came to market as equity sales, but if the homeowner's financial situation improved enough for them to endure the payments, many opted[READ MORE]

Today is part 4 in the ongoing series on Ownership Cost:OCHN_Greater_knowledge Ownership cost: income, payments and house prices Ownership cost: interest rates and down payment requirements Ownership cost: property taxes, insurance, Mello Roos, and HOAs Ownership cost: taxes and opportunity costs

Four Major Variables that Determine Market Price

Over the last four days we looked at the four main variables that determine home price:
  1. borrower income,
  2. allowable debt-to-income ratios,
  3. interest rates, and
  4. down payment requirements.
Today we are looking at tax implications and opportunity costs because these number will give you a more accurate measure of the impact home ownership will have on the owner’s financial life.

Opportunity Cost

When a buyer puts money into real estate and takes ownership, it changes their financial life. Money for a down payment had to come out of some other asset even if this is only a savings account or CDs. The place[READ MORE]

Government programs ostensibly designed to benefit homeowners were really intended to bail out the banks.

Repost from OC Housing News 2011-2016

In April of 2008, I wrote a post about the psychology behind the various government programs designed to help banks kick the can until conditions got better. In the nine years that transpired since then, their efforts went from frantic, to desperate, to sublimely ridiculous. Each step along the way, the sheeple were strung along and enticed to make a few more mortgage payments in what will prove an ultimately futile effort to benefit from occupying a property they can’t afford. Over the years, others picked up on the nonsense. This in 2011 from US Congressional Representative Patrick McHenry: How Homeowners Are Hoodwinked. This in 2012: Billions of dollars wasted on program that created false hopes among homeowners. Most of the stories written about this phenomenon were written by people on the[READ MORE]

The OC Housing News provides detailed ownership cost calculations for every family home for sale on the local MLS.

A point-in-time analysis

Today is reality; tomorrow is a fantasy. The ownership cost calculation is a snapshot of the cost of ownership at the time of first payment. It makes no projections for future changes such as home price appreciation. This analysis purposely does not project future changes for two reasons: First, the costs at the time of first payment are concrete and knowable. It requires fewer assumptions and no crystal ball. Second, most people who estimate future appreciation wildly overestimate. Very small changes in rates of appreciation make very large differences over 10 or more years. Overestimating appreciation always makes owning a property look very desirable financially. It's a mistake many people made who bought at the peak of the housing bubble. registered user_05d[READ MORE]

When the federal reserve prints money to buy mortgage-backed securities, it lowers mortgage rates and allows potential buyers to borrow more money and push house prices higher.

Repost from OC Housing News 2011-2016

The federal reserve sets policy in meetings of the Federal Open Market Committee (FOMC), a group of bankers. The FOMC sets target interest rates and directs its traders to either buy or sell securities to meet interest rate targets. When the federal reserve buys Treasuries, the price goes up, and interest rates go down. When the federal reserve sells Treasuries, the price goes down, and interest rates go up. Prior to the financial meltdown in 2008, the federal reserve only bought short-term Treasuries, but in an effort to rescue housing, they began an unprecedented campaign of buying 10-year Treasuries and mortgage-backed securities in order to drive down mortgage interest rates. [READ MORE]

Anyone considering buying a house needs to understand debt-to-income ratios because these measures of a borrower's capacity to repay the debt is fundamental to mortgage underwriting.

Repost from OC Housing News 2011-2016

Debt-to-income ratios are concerned with monthly income. These are not measures of total debt or total income, only the monthly payments on debt compared to monthly gross income. Notice also that the benchmark is monthly gross income, not take-home pay. The monthly gross income standard is important because tax policy can pose problems for borrowers with high debt-to-income ratios because after paying their mortgage and their taxes, they don't have much left over to live a life. Strangely, lower income borrowers can often endure higher debt-to-income ratios because they receive other tax benefits that compensate. The middle- and upper-income tax brackets pay higher tax rates, but they also gain the advantage of[READ MORE]

Since lenders will can-kick during future times of economic weakness, houses may not be affordable, bringing sales volumes down, but prices probably won't decline much.

Repost from OC Housing News 2011-2016

In 2004-2006, the pundits said that appreciation would moderate and resume its “normal” 5%+ yearly rates in the future. Gary Watts even assured us that “Fifteen percent is pretty much in the bag for Orange County in 2006,” he says. “It’s impossible for prices to go down this year.” It’s difficult to imagine a statement that was more wrong. But Gary Watts wasn't alone in his delusions. Most people who bought property in 2004-2006 assumed house prices were going to rise 10%+ per year forever. Recency bias pervades financial markets and taints investors' decisions. Prices fell steeply in the bust from 2007-2009. Real estate markets ordinarily don't move down quickly, so[READ MORE]

Low or falling mortgage interest rates are better for housing costs than high or rising rates.

From a consumers point of view, higher interest rates are bad because borrowing money becomes more expensive. All things being equal, higher mortgage interest rates make for a higher cost of ownership and visa versa. When actively looking to purchase a home, shopping around for the lowest rate can save thousands of dollars over the life of the loan. The Consumer Financial Protection Bureau launched a Rate Checker to help consumers verify if the rate they are quoted is good or not.casino helos Since rising mortgage interest rates makes borrowing more expensive, it's also detrimental to home prices, so nobody in real estate relishes the idea of higher mortgage interest rates. In a previous post I discussed the four variables that determine the purchase price[READ MORE]

The American Dream used to symbolize the rewards from hard work and sacrifice. During the housing mania, it became associated with conspicuous consumption, sloth, immediate gratification, and entitlement.

Repost from OC Housing News 2011-2016

The American Dream?

Many people want to immigrate to the United States so they too can have a chance at obtaining the American Dream. Can you imagine the stories that recent immigrants must have relayed to those in the “old country” when the housing boom was going on? How do you explain to someone who comes from a stable (or practically non-existent) housing finance system that doesn’t “innovate” what went on in America in 2004, 2005, and 2006? Immigrant: “In America, they will give you a house with no job and no savings.” Back Homey: “We have government housing too.” Immigrant: “No, here in America, they give you the home. You own it.” Back[READ MORE]

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