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Archive for September, 2012

Demand for houses by owner occupants has been anemic for nearly three years after four years of steep and unprecedented declines. Despite the refrain of increased demand from the bottom-calling glee club, the data clearly shows any increase in sales volume and demand this year is entirely due to cash investors, largely hedge funds buying low-end properties in beaten down markets. The decline in purchase applications is caused by two factors: potential buyers do not have the down payment, and potential borrowers cannot qualify for the loan. During the housing bubble, debt was cheap and plentiful, so many Americans stopped saving in favor of taking on copious amounts of debt. The Great Recession depleted the savings of the few Americans…[READ MORE]

Forecasting interest rates is very difficult. I haven't had much success at it. The first challenge is to figure out what the market would do if left to its own devices. With the plethora of variables in play, that's no easy task. Further complicating the problem is the federal reserve which will often intervene to make interest rates do the exact opposite of what a natural market would do. It's very difficult to figure out when the federal reserve will move in and mess everything up. For example, when the housing bubble burst, a free-market would have taken mortgage interest rates sky high. Mortgage rates were too low during the bubble as risk was mispriced. After prices turned south, the…[READ MORE]

Most people are cautious by nature waiting for others to pioneer new places, new ideas, and new patterns of behavior. People will observe the results of pioneering behavior, and if the pioneers are rewarded and recommend what they did to others, the herd will follow. If the pioneers are handsomely rewarded and  strongly recommend a course of action to others, the herd can turn into a stampede. The rewards of strategic default has bankers worried. With 11 million underwater loan owners, the last thing bankers want is a wave of strategic default as overextended borrowers realize they can eliminate their debt-service payments with little or no penalty. The onerous burden of housing debt may be soothed by rising prices, but…[READ MORE]

When you were in high school, did your parents ever caution you about the company you keep? The people you share common interests with can be either a positive or a negative influence on your decision making. They can lead to to success, or they can lead you astray. When lenders want to evaluate a potential borrower, they don't interview friends, but they do examine the financial characteristics of a borrower's life, and they make determinations based on the historical behavior of others with the same characteristics. That's the whole point of a FICO score. The Fair Isaac Corporation built a successful business around classifying and categorizing large groups of people based on similar financial characteristics. If people in your…[READ MORE]

In The Great Housing Bubble, I wrote about how we could prevent the next housing bubble: 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 of the property at the time of sale or refinance: All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income. The total debt-to-income of all debt obligations cannot exceed 36% of a…[READ MORE]

I recently wrote that the housing bubble creates a no-win political situation for either presidential candidate. Despite the political minefield housing policy creates, Mitt Romney has published a very brief and vague plan he hopes will excite voters. It won't. Housing: Fulfillment of the American Dream Overview For millions of Americans, homeownership is about more than just a place to live.  For many, owning a home is the fulfillment of the American Dream.  Yet today, the dream of home ownership is out of reach for many Americans as a result of President Obama’s failed policies and stalled economy. Owning a home is oftentimes the most significant investment a family makes during their lifetime.  The housing crisis of the last few…[READ MORE]

Shadow inventory is primarily a problem for major commercial banks. The GSEs have been processing their foreclosures, and although delinquencies at the FHA are increasing, these are fresh delinquencies, not long-term shadow inventory. The too-big-to-fail commercial banks have been endlessly can-kicking to delay what I believe are inevitable write downs. For as long as records on delinquencies were kept, rarely did the rate exceed 2%. Currently, it is over 10%! To make matters worse, the delinquency rate for commercial banks is not declining as fast as delinquencies overall. Over the last two years, the rate dropped from from a peak of 11.2% to the current 10.2%. If lenders continue at that pace, it will take another 16 years for delinquency…[READ MORE]

The Republicans under George Bush passed a series of tax cuts that are due to expire at the end of 2012. Republicans are making this a campaign issue by scaring voters with the specter of a "fiscal cliff." Economists have stepped forward with varying but dire predictions of the end of the US economy. Republicans hope they can scare enough people to win the upcoming election. They just might. Lost in the campaign rhetoric is a careful examination of what the expiration of the various tax cuts really means. Will expiring tax cuts cause housing to fall off a fiscal cliff? It might, but not in the way most pundits imagine. The real danger is not from a damaged economy.…[READ MORE]

When I grew up, I watched my parents work hard and pay their bills. Their house payment was the largest of of their bills, but they sacrificed to pay down their mortgage to eventually become payment free. This was the experience of most Americans, a collective lesson we learned about responsibility and deferred gratification. Lenders destroyed that and replaced it with a culture of Ponzi borrowing and a series of poisonous beliefs that turned responsible homeowners into reckless and irresponsible loanowners. How sweet it is... It wasn't enough to merely give millions of Ponzis billions in free-money loans. That alone would have irreparably harmed out culture. No, lenders didn't stop there. When the ATM benefits ran out, they allowed the…[READ MORE]

California has a long history of real estate bubbles. Cycles of boom and bust range back to the gold rush in the nineteenth century. Over the last forty years, California has experienced three major real estate bubbles. Each of them had different causes and sprung forth from different circumstances, but they all shared the common cycle of irrational exuberance leading to a boom followed by a crash back to fundamental values of rental parity. Historic Valuations by city Over the last month, I commissioned Brian Nadel (thanks, Brian) to download MLS rental data back to 2000. From other sources, I extrapolated rental rates back to 1988. I also purchased the resale data back to 1988 from DataQuick. From these various…[READ MORE]

Monthly Housing Report

In Memoriam: Tony Bliss 1966-2012