Archive for 2007

In an earlier post, How Sub-Prime Lending Created the Housing Bubble, I gave a brief description of the impact of adding a large number of new buyers to the market. However, the title is somewhat misleading because it does not fully explain how the bubble was inflated. In this post, I hope to provide a more detailed explanation of what factors and conditions combined to drive prices so high. The Great Real Estate Bubble was caused by 4 interrelated factors: Separation of origination, servicing, and portfolio holding in the lending industry. Innovation in structured finance and the expansion of the secondary mortgage market. The lowering of lending standards and the growth of subprime lending. Lower FED funds rates as a…[READ MORE]

When the market turned up in the late 1990's the balance of power in the market shifted. During the last decline, the buyers had an advantage. During the bubble the advantage went to the sellers. The seller's market went on for so long and became so feverish that people have forgotten (or may never have known) what it was like to see buyers in control of the action. The purpose of this post is to re-educate buyers on how to behave in a buyer's market. Buyers have the Power As a buyer, you must remember you are the one in control. You are the scarce commodity in the marketplace. The seller is one of many for you to chose from,…[READ MORE]

Like the change of seasons, real estate markets move in cycles. During the last cycle, the real estate market peaked in 1990, and the market bottomed in 1997. The primary reason the bottom formed was because incomes and rents finally caught up to housing prices. They say a picture is worth a thousand words.These images are both from 1997. The first appears to be from a condo development in Orange. The actual pricing is not important: the relationship between the cost of a rental and the cost of ownership is very important. This is why the bottom formed. The next time someone tries to convince you the cost of ownership is near the cost of rental, remember the simple calculation…[READ MORE]

Do you remember in Houses Should Not Be a Commodity, there was a long discussion on the stages of grief as they relate to the housing market? The market is shifting from denial into bargaining. Jim Cramer has made news lately with his antics. The links below are to videos where he has demonstrated for us the following progression as it relates to the chart above: Denial -- On housing, November 2006 Anger -- He is always angry. His show is Mad Money... Depression and Detachment -- Plow under the Inland Empire Dialogue and Bargaining -- Lobbying for a Rate Cut When you think about it, isn't the whole discussion about a bail-out bargaining? We all know the government is…[READ MORE]

The valuation of land used for residential housing is mysterious and often misunderstood. The purpose of this post is to explain how residential land is valued. Once the forces governing land value are understood, it becomes obvious why the Irvine Company is so protective of house prices in Irvine, and why the Irvine Company wants to maximize salable density on its land holdings. The equations which govern the valuations of large parcels are very similar those which determine the value of an individual lot; therefore, to better understand the valuation of large parcels, one should fully understand how to evaluate an individual lot. Individual Lots The market value of a individual lot is equal to the revenue it could generate…[READ MORE]

A great many people like it when houses go up in price. During a rally the bulls become intoxicated with greed and obsessed with owning real estate as an investment. However, once houses become an investment, the prices of houses begin to behave like an investment, and volatility is introduced into the system. You do not want houses to trade with the volatility of a commodities market. It causes more harm than good. Price volatility is a very disruptive feature in a housing market: the upswings are euphoric, and the downswings are devastating -- and there are downswings. Declining house prices are emotionally and financially draining both to individuals and to the economy as a whole. The upswings create massive…[READ MORE]

Bulls have opinions; bears have opinions. How do can you tell who's opinion is more likely to become future reality? What characteristics are exhibited by an analysis with good predictive power versus those without? How do you tell the difference between an opinion based on emotion, fantasy and wishful thinking from an opinion based on a rigorous, unbiased examination of the facts? These are the questions I wish to explore today. As part of my job, I obtain market studies to evaluate various land uses for specific pieces of property. Based on the quality of the information in these reports, I make and implement recommendations on the purchase and development of multi-million dollar properties. If my analysis is faulty, or…[READ MORE]

Why do we get so much pleasure from failed flips? I can think of no other human endeavor which has engendered so much pleasure in the misfortune of others. In my opinion, the outpouring of schadenfreude we are seeing as the housing bubble deflates is a mixture of Greek tragedy and bad karma. In short, bubble participants should have seen it coming, and they are getting what they deserve. Schadenfreude is not a spiritually uplifting response. Most religious traditions would counsel us against it. In Buddhist teaching, people are taught to cultivate feelings of compassion for the misfortune of others -- feeling empathy and sadness for the slings and arrows of outrageous fortune when they impact another. The near enemy…[READ MORE]

So, bye-bye, Miss American Pie Drove my Chevy to the levee But the levee was dry And them good old boys were drinkin' whiskey and rye Singin' this'll be the day that I die This'll be the day that I die Don McLean - American Pie One of the hallmarks of a great song is its ability to be interpreted in different ways. American Pie is an allegory of our times, an ode to the death of our housing market. With leverage drying up, the party is over. The last drink is for the death of the market itself, and with it's death, the death of the American Dream of home ownership for thousands of overextended homedebtors. When a bubble…[READ MORE]

Financial markets represent the collective result of individual actions. To fully understand how our current housing bubble was inflated, one needs to understand how the actions of the individual market participants impacted house prices. In my last analysis post, Your Buyer’s Loan Terms, I discussed future interest rates and debt-to-income ratios and their impact on future housing prices. In that post, I made a blanket assumption that interest-only and negative amortization loans will simply not be available in the future. It is a debatable assumption. In this post, I want to show more clearly how these two loan types created this bubble and why I believe they will not be available in the future. In short, I will describe the…[READ MORE]

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In Memoriam: Tony Bliss 1966-2012
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