Author Archive: Irvine Renter
Large down payments shut many borrowers out of the housing market — many unreliable ones -- which is why large down payments make housing so stable. It's also why many rally against it.
Repost from OC Housing News 2011-2016Down payments form the bedrock of the housing market. Large down payments serve the interests of homeowners and politicians by
- preserving homeownership,
- lowering volatility in the market, and
- reducing the risk to our financial system.
People who live in houses they don’t pay for are viewed as folk heroes by some and contemptible deadbeats by others.
Repost from OC Housing News 2011-2016Have you noticed that most of the human interest stories from the housing bubble have no heroes? The housing bust has brought out the worst in mankind. Every party involved seeks to avoid any financial responsibility while simultaneously looking for ways to game the system to their advantage. The cast of characters includes lenders, realtors, delinquent mortgage squatters, holdover tenants, mortgage brokers, basically anyone involved with real estate. Are delinquent mortgage squatters heroes fighting the system or deadbeats gaming the system? These people quit paying their mortgages, many quit paying several years ago, and banks are either unwilling or unable to force them out and resell the property to[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 analysisToday 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. [READ MORE]
Politicians favor home ownership because it serves as a proxy for retirement savings; however, unrestricted mortgage equity withdrawal defeats the purpose.
Repost from OC Housing News 2011-2016Politicians provide many reasons for supporting home ownership through policy initiatives and outright subsidies, but one of the primary reasons they support home ownership is the forced savings account properties of an amortizing mortgage. History has shown that homeowners have more comfortable retirements than renters, and an abundance of home equity is one of the main reasons. Unfortunately, politicians allow homeowners to raid this retirement piggy bank with unrestricted mortgage equity withdrawal — an allowance politicians don’t provide to retirement savings accounts. People are still allowed to borrow against their retirement savings for specific things, like a mortgage down payment, but the system is heavily regulated to make[READ MORE]
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.
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 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]