Author Archive: Irvine Renter

Investors will supplement down payments in exchange for a share of future profits. Would you make a deal like that?

Are there any circumstances under which homebuyers would be willing to share in the upside of home price appreciation? Would you sell an option worth 35% of the upside in exchange for half (10%) of your down payment? You wouldn't have any payments like a second mortgage, and if you sell for a loss, the investor shares in the losses with you. When you reflect on it, the main reason you wouldn't participate is because you believed you will make a fortune on appreciation, and you don't want to share it. Strong arguments can be made for a ten to twenty year bear market in real estate. We are at the bottom of the interest rate cycle, and for the next thirty[READ MORE]

Any legislation or policy that promotes housing production is better than producing no housing at all.

In the post, Will building more roads and houses merely increase demand?, I lamented that nimbys managed to turn the solution into part of the problem. They embrace the idea of "induced demand," a belief that providing more roads or housing fails to alleviate supply shortages because it stimulates demand. It's the ultimate weapon against new development because we're damned if we don't build, but we're doubly damned if we do build. The real solution to the housing affordability problem is to provide sufficient supply to meet the needs of the growing economy and population. As long as California creates many jobs but builds few houses, there will be a shortage of housing. And as long as a shortage persists, prices will remain high relative[READ MORE]

Dodd-Frank should prevent house prices from rising so high that only fools and millionaires can afford them.

When house prices rise rapidly and mortgage rates go up, the cost of ownership rises even more rapidly, and realtors stoke fears with “buy now or be priced out forever.” Under these circumstances, it’s easy to get stressed out and worry about what’s outside of your control. I didn’t buy an OC house at the bottom of the downturn. I knew it was a good time to buy, but for a variety of reasons, I was not in a position to buy when the market was ripe. Now that the cost of ownership is 50% higher, I am less motivated to buy a home, not more. Am I stressed about it? Not really. And you shouldn’t be either. One of the blessings of Dodd-Frank nobody[READ MORE]

Social scientists contend providing more roads and houses leads to "induced demand" and fails to alleviate shortages.

The recent presidential election illuminated the problem of confirmation bias, particularly when emotional, political issues are involved. We all want to believe we are rational beings who make decisions based on solid facts and sound reasoning. The truth is that our decisions are often irrational based on faulty reasoning with a self-selected group of facts. One party's fake news is another party's gospel Truth. Take for example the decision to buy a home. Many analytical people convince themselves they want a particular home because the deal makes sense. Perhaps the house is selling below comps, or below rental parity, or it's in an area with above-average appreciation. While these are all sound financial reasons to buy a house, these reasons seldom drive the actual purchase decision. Usually, the purchase decision is made entirely[READ MORE]

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]

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