Archive for 2009

Imagine living in a world without consumer debt. The first credit cards did not appear until after WWII. Prior to WWII, if you wanted to buy something, you needed to save money from your wage income until you could afford to pay cash for it. There was an absolute dependency upon wage income to provide a lifestyle; living beyond your means was not possible unless you had previously saved money, and it could not continue beyond the day you went broke. Times have changed. With the invention of credit cards, it became possible to borrow from future earnings to live better today--better than people can currently afford. Credit cards make it possible for people to live beyond their means. However,…[READ MORE]

Rather than paraphrase, below is the full text of OC Progressive's post: Housing Bubble Busts Every Local Budget - Get Ready for Extreme Makeovers In trying to follow local politics here in Orange County, I've been looking very closely at local government budgets, and there' s one trend that seems to be emerging rapidly. We're seeing a precipitous decline in local sales tax revenue. And this is not going to be a temporary problem, but rather one with serious long term impacts. I was absolutely floored by OCTA's fiscal review that showed a difference over three years, in the projection of revenue from sales tax, that lowered the 2009-2010 projection of sales tax countywide by 19% over their previous projections.…[READ MORE]

Despite the news headlines of a real estate bubble and economic termoil, many sellers believe their properties have appreciated since they paid peak prices. They are asking, "What Bubble?" Denial comes in many flavors. One of the more interesting forms of denial is exhibited by those sellers who are completely oblivious to the price crash. Either these people are completely ignorant to what is happening, or they are willfully ignorant and believe the problems all around them do not apply to their property. If I had to guess, I would lean toward willful ignorance as the most likely explanation. The market for mid- to high-end homes is like playing the lottery. There are very few sales occurring at these price…[READ MORE]

Many of the sob stories in the mainstream media have been focused on what are characterized as "responsible homeowners" who are in danger of losing their homes. Several articles of this type have been posted here, and many commenters have noted the extravagances and poor decisions that often make these homeowners look less than completely responsible. Let's be clear about one thing: Responsible homeowners are NOT losing their homes. To see the truth in this statement, one needs to have a clear definition of "responsible homeowner." A "responsible homeowner" is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum…[READ MORE]

Japan simultaneously inflated massive financial bubbles in real estate and stocks during the late 1980s. The slow deflation of this bubble and the general economic malaise that impacted Japan during the years that followed became known as the "Lost Decade." The United States is facing a similar set of circumstances in the aftermath of the Great Housing Bubble. So far, we have been following the same policy actions as the Japanese did. Perhaps our officials have come to believe a Lost Decade is preferable to the next Great Depression. Today, I want to demonstrate how easy it would be to have a similar result in our own housing market. By lowering interest rates to artificially low levels, the Federal Reserve…[READ MORE]

The obsession we have in California with picking market bottoms is an unusual but necessary function of the extreme volatility in our real estate market.  When prices are extremely volatile, as they are here in California, proper timing of a real estate purchase is very important. However, if markets were to stabilize and remain stable, picking a bottom would be unimportant. Stable markets are always at the bottom. A stable market, a market that is at the bottom, is a combination of psychological and technical factors. Psychologically, in a stable market, there is an absence of belief in appreciation. When people believe prices are going to rise significantly (faster than wages or other investments), markets become unstable because people buy…[READ MORE]

Flying high is dangerous; just ask Icarus. Everybody was flying high on free money but they got too close to the sun and got burnt. When they fell back to earth, their impact created a debt crater that the rest of us are being asked to fill in. Borrowers took on enormous risks during The Great Housing Bubble. If this were not the case, we would not now be facing a foreclosure crisis that eclipses the magnitude of the Great Depression. As a society we need to accurately identify the risks assumed by borrowers that caused them to lose their homes. We must enact legislation that limits or reduces these risks in the future. We need to do this for…[READ MORE]

Below is the post in its entirety: The California Foreclosure Rules or “So What Happens If I Let My California House Go Back To The Bank?” I get this question a lot.  The answer is, IT DEPENDS.   That’s a slippery lawyer’s response (someone called me that yesterday) but the outcome in your situation could be 1.                  You still owe the bank a big slug of money; 2.                  You have a big income tax bill with no cash to pay it; 3.                  You owe the bank a big slug of money and you have a big tax bill ; or 4.                  You owe the bank nothing and you do not have a tax bill. Everyone wants to be the last case.…[READ MORE]

Have you ever stopped to ponder the issue of moral hazard? At its most basic, moral hazard is any change in behavior that comes about when people believe their actions have no consequences. The housing bubble was built on moral hazard. None of the parties to the real estate transaction believed they had any risk. Borrowers and lenders both believed real estate always goes up, so there was no market risk. Some savvy borrowers realized that 100% financing was transferring all the risk to the lender, so they risked nothing other than their credit score. Most lenders believed they were transferring the risk either to investors or counterparties to their credit default swaps. The people assuming these risks ran their…[READ MORE]

Desire, greed, avarice: house prices rose at unprecedented rates because people motivated by greed were enabled by lenders (who were also motivated by greed) to bid prices higher and higher. There is a certain Karmic justice to the idea of the market perishing in fire. Those who were motivated from desire should suffer in direct proportion to the greed to which they succumbed. In fact, all moral hazard problems emanate from this relationship. If people are not punished by this behavior, it is magnified in the next generation as more and more people choose to behave unwisely. In short, each bubble grows bigger than the last because the survivors tell their tales. If you don't believe this is true, take…[READ MORE]

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