Archive for 2009

I drive a convertible; I rarely put the top up. When my family makes weekend plans, we don't worry about the weather. The climate in Coastal California is nearly perfect, and I enjoy it every day. The narrow coastal band of properties in California have a unique and very high quality climate. Cold I grew up in Central Wisconsin. Like much of the country, there are four distinct seasons there, but in Wisconsin, the winters are particularly brutal. I remember one full week in February of 1985, the high temperature never got above zero degrees. Each day, the high would be -8 to -2, and the lows would drop down well below -20. One morning, it was -38 when I…[READ MORE]

Major cultural events like The Great Housing Bubble change people's lives. The populace built mountains of paper through burning consumerism; paper that is now smoldering in the ashes of our economic fire. Statistics measure the economic fallout, but more interesting is the impact on the people. One trend in our consumer society has been an increase in our collective sense of entitlement. People came to believe in the permanence of the supply of consumer goods they enjoyed, the exaggerated sense of self-importance they created, and the unsustainable level of lifestyle spending they deserved. Since this sense of entitlement was only enabled by a massive Ponzi Scheme, many people in the aftermath must adjust to a new lifestyle that is considerably…[READ MORE]

In 2004, Alan Greenspan, then the head of the Federal Reserve, had this to say, "Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade." Many people took this as a tacit endorsement of these loans by the head of the Federal Reserve. The ignorance of Greenspan's statement reveals a pathological mindset among policy makers in Washington; the people in charge genuinely believed the general population capable of managing their own financial risks -- risks they often are not aware of and obviously do not understand. For evidence of this ignorance one has to look no further than…[READ MORE]

What were the market conditions in 1997 at the last market bottom? The market peaked in the spring of 1990 at $245,000. In early 1997, the median was $223,750. It dropped for 7 consecutive years (The data series is a bit noisy, but the lowest low was recorded at $192,750 in May of 1994). There where bear rallies almost every year similar to what we are seeing now. The median household income was $62,022. The median home price was $223,750. Mortgage interest rates were at 7.6%. Rates had been steadily falling since 1982. If a borrower puts 20% down on a $223,750 home, they are putting $44,750 down and borrowing $179,000. The payment on $179,000 at 7.6% interest is $1,263.87.…[READ MORE]

One of the most important "big picture" lessons of The Great Housing Bubble is that when people believe they have no risk, they behave in very foolish ways. One of the most destabilizing impacts on our financial system was the development and widespread use of credit default swaps that convinced lenders and investors that they had no risk in large financial transactions. The people originating and pricing these instruments did not property analyse and price the risks they were taking on, and the resulting collapse destabilized our entire financial system and created the financial debacle we are enduring today. This foolish belief that there is such a thing as a no-risk financial transaction filtered down to individual buyers of residential…[READ MORE]

Regulatory Solutions The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text follows: Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value…[READ MORE]

What is Rental Parity? Rental Parity is a mathematical relationship between rental rates and property values where rent is equal to the monthly cost of ownership. There are many assumptions and variables that impact Rental Parity -- so many that it takes a spreadsheet to try to explain it. (We have a calculator that provides the total cost of ownership on a monthly basis to compare to the cost of renting. What is perhaps more useful to buyers is the ability to run the calculation in reverse -- If you know what you spend on rent, you can estimate how much house you can afford.) The fluid relationship between rents and prices provides a conceptual understanding of value. Rental rates…[READ MORE]

Unlike the heyday of the Great Housing Bubble when 100% financing was readily available, it now takes cash to close a real estate deal. If you have no cash, you get no house. So how much cash does it take to close a deal? and how much cash do you need to have available to get through the process and still have a life? The actual cash demands during the process come from four main areas: Downpayment -- 3.5% - 20%+ Closing Costs -- 1% - 3% Inpsection Contingencies -- 0% - 5%+ Furnishing and Move In -- 2% - 5%+ The down payment is the largest and most obvious use of cash in the homebuying process. Down payments are…[READ MORE]

People buying for cashflow are not concerned with resale value because they do not intend to resell. Profit and loss for a cashflow investor is determined by its income not its resale costs decades into the future. The Federal Reserve with the blessing of the Treasury Department of the US Government is orchestrating 4.5% interest rates to entice cashflow investors back into residential real estate. Without cashflow investors this mess will never get cleaned up. If prices fall low enough, and if interest rates drop low enough, returns to cashflow investors become very large. In fact, they come to be greater than all competing investments in the marketplace. Under those circumstances, money will flow back into residential real estate, and…[READ MORE]

Negotiating the sale of residential real estate is no more difficult that negotiating for any other product of service that does not have a fixed price; however, due to the colossal cost of houses, the process is more important financially than negotiating for other big-ticket items like automobiles. A mistake made while buying or selling a house could cost as much as a new car; sometimes such mistakes could pay for many cars. Skilled negotiators can obtain favorable pricing and terms without the assistance of a broker, but the novice who is inexperienced at this process often will not. Novice negotiators can benefit from using a professional real estate agent. Perceptions and Motivations of the Negotiators When two parties enter…[READ MORE]

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