Archive for February, 2013

Few deny that we are reflating the housing bubble. Most use the comforting euphemism "recovery," but this is not semantically correct. The housing bubble was characterized by an unprecedented detachment from fundamental values. The deflation of the housing bubble was the recovery. What we have now is a concerted attempt by lenders, the central bank, and government officials to reflate the bubble because the banks can't afford the loss of capital associated with sales at "recovered" prices. Since banks stopped foreclosing on properties when the settlement agreement was reached, the MLS inventory dried up. Corresponding to this reduction in supply was a 30% decline in mortgage interest rates which greatly increased the ability of borrowers to bid up prices. Even…[READ MORE]

Housing markets in Coastal California are dominated by high wage earners. In the more affluent markets, the GSE conforming loan limit is $625,000, yet the FHA limit is $729,750. GSE conforming loans can be obtained with only 5% down with private mortgage insurance of around 0.62%. FHA loans previously could be obtained with 3.5% down with an PHA insurance premium of 1.25%. The FHA loan which only requires 3.5% down instead of 5% has been very popular despite the onerous insurance premiums because after a massive debt binge and severe recession, most potential homebuyers are still broke. The loan limits create large breakpoints where borrower costs escalate rather dramatically. Borrowing more than $625,000, the GSE loan limit, requires FHA insurance.…[READ MORE]

There are many reports showing increasing home prices of 5% or more; for 2012 Case Shiller, Core Logic, NAr, Data Quick, and many others.  In addition, it seems like home builders are having a rally as their stock prices have increased.  However, there is one overall factor that determines home values.  The main driver of this increase are mortgage rates, the cost of renting money from lenders.  The home values increases not due to economic activity, increased wages, easy credit, or some sort of miracle recovery.  Since 2007  mortgage rates have dropped almost 40% at the end of 2012 where they were at all time lows.   This has increased the average buyer's purchasing power so much that it stopped the…[READ MORE]

Paul Simon wrote There Are 50 Ways to Leave Your Lover. There are many ways people can leave their unwanted properties, but if the debt is recourse, they can't walk away from the debt as the lender can track them down to force repayment. In fact, zombie debt collection will be a significant growth industry over the next decade as those who thought their mortgage debts were extinguished find out otherwise. You can't just "step out the back, Jack." Most banks will now let borrowers off the hook if they complete a short sale. Of course, banks use the opportunity to demand the borrower liquidate other assets to repay the debt or they won't approve the short sale. The main…[READ MORE]

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