Archive for March, 2013

If you have been watching rental rates over the past 5 years you noticed a increasing trend.  After some decreases in 2009 rents bounced back up by 2012 past pre-recession levels in some cases.  As rental rates have increased mortgage rates have dipped to the lowest levels since World War II.   These two trends have switched the cost of ownership making owning more affordable than renting as compared to the early 2000's when owning was twice the cost.  But in the last 12  months the pace of rental increases have slowed (see OCHN March graph below).  Are rental rates now peaking for the foreseeable future? The cost of owning and rental rates play a game.  Sometimes it costs more to…[READ MORE]

Every successful loan modification undertaken by the GSEs or FHA is paid for by the US taxpayer -- paid for by you. The GSEs have already required a $150 billion government bailout, and the FHA is next on the bailout horizon. The losses on these entities that are not recovered are supplemented with tax dollars that you paid. So what's the big deal? We pay for wasteful government programs all the time. The difference is simple. The money these entities lose, particularly those through loan modifications or principal forgiveness has no benefit to you whatsoever, but instead it's a direct transfer of wealth from you to a banker and a borrower -- and neither party deserves the money. The malfeasance…[READ MORE]

This won't come as any surprise to regular readers of this blog, but a new paper confirms the erroneous beliefs about sustainable home price appreciation drove much of the demand from the housing bubble. Many people who believe in the wisdom of the markets subscribe to the efficient markets theory. It postulates that market participants have equal access to good information and they make rational judgements based on the available data. The theory has an appeal to vanity as everyone likes to believe they have above average financial acumen and that they make rational decisions. Unfortunately, that isn't the world we live in. People often fall victim to groupthink, pick and chose what data to believe and what to ignore,…[READ MORE]

I write often about investment and compare that to what I consider speculation. I originally wrote this post on the subject more than five years ago, but since I have picked up many new readers along the way, I felt it was time to revisit this important topic. Speculation or Investment? Real estate is viewed by many people as a good investment. Realtors often use this idea as part of their sales pitch. This view is fallacious and it is one of the beliefs responsible for creating an asset price bubble. To understand why houses are not a good investment, one needs to understand the difference between investment and speculation. An investment is an asset purchased to obtain a predictable…[READ MORE]

There are two main barriers to home ownership: how much a potential buyer can borrow, and how much they have to put down. Today, I want to focus on the impact of down payment requirements. There are many more potential buyers with little or no savings than there are those with hundreds of thousands in cash in the bank. The size of the potential buyer pool rises or falls dramatically with changes in down payment requirements. A high down payment requirement greatly reduces the potential buyer pool whereas a low down payment requirement greatly increases it. This basic fact is why lenders and their lobbyists are working so hard to get down payment requirements lowered or eliminated. Any down payment…[READ MORE]

With as difficult as it is to predict interest rates, why are people so sure interest rates will go up? Well, the basis of all interest rates is the federal funds rate controlled directly by the federal reserve. This rate is not just at a historic low, it's at zero. It can't go any lower unless the federal reserve starts paying people to borrow money. This strongly suggests that interest rates will go up. The federal funds rate has been at zero for nearly four years now. When short-term rates are very low, investors looking for higher returns are forced to buy bonds with longer maturities. This flattens out the yield curve. At some point, investors start to worry about…[READ MORE]

We just had a small spike in the number of new home starts, Larry Roberts just had a excellent post on the historical size of this increase.  In addition, with banks very successfully stopping cloud inventory from going on the market, builders are wasting no time to build more housing units.  This is not a thriving recovery, it's recovery where patient that has been given CRP and now has a stable pulse.  The mix is different in this construction cycle as multifamily units are  being constructed in a larger portion.  So many multifamily units have hit the market that it has stopped or slow the rental increases.  However, builder confidence has dropped in the beginning of the selling season and…[READ MORE]

Most financial manias share a common belief that the supply of some precious resource is running out. The notion that they're running of of land has sparked several financial manias. California has land booms and busts at various times in its history. Florida had a huge land boom and bust in the 1920s. Given the millions of acres of undeveloped land in California and Florida, particularly 100 years ago, the rationality of these booms and busts is rather suspect. But once people start to believe the shortage is real, the frenzy mentality takes over, and rationality is discarded in favor of greed and stupidity. Sounds like the current attitude toward housing in Coastal California, wouldn't you say? Space is the…[READ MORE]

Bullishness is everywhere in real estate these days. People who follow the new construction market are touting the year-over-year increases with great exuberance. Homebuilding is certainly coming back, and as someone who spent most of my career working in the industry, I think that's a good thing. However, the bullishness could use a little perspective. New home starts just surpassed the lowest low of the forty years prior to the collapse of the housing bubble. Further, the current pace of construction is still well below the stable average of the last five decades. It's hardly a building boom. Also, the demand is entirely predicated on the restriction of MLS inventory and low interest rates -- both market manipulations based on…[READ MORE]

I first began writing about strategic default back in 2008 in the post Should you walk away from home debt?. Many people were facing a cost of ownership greatly exceeding the cost of a comparable rental, and with declining prices, they were sinking underwater and had no realistic hope of future equity. On a purely financial basis, it was wise to strategically default. The shortest path to equity was to walk away from the huge debt, save money, and wait until the credit scores improved enough to repurchase again at lower prices. I gave that advice frequently from 2008 through 2011, and recent stories from boomerang buyers are proving that thesis correct. Calif. couple shows there's life after foreclosure By…[READ MORE]

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