Archive for July, 2013

I am perhaps the most widely known renter in Orange County. I've been writing under the moniker Irvine Renter for over six years now. Are renters like me less happy that those who bought homes? First, I want to point out I was not always a renter. Like many others, I bought a house (actually I designed and built it). I know the emotional satisfaction that can come from having a house to call my own. In my opinion and experience, there is an emotional quality to owning a house that is not replicated in a rental. When I owned my house, I spent hours tinkering in the yard with landscaping, and my house plants looked like a greenhouse. Since…[READ MORE]

The federal reserve has been printing money to stimulate the economy off and on for five years now. Prior to the housing bust, the federal reserve had never purchased any security other than a short-term US Treasury. In order to drive down interest rates and stimulate housing, the federal reserve printed $1.2 trillion to buy mortgage-backed securities, and when that proved insufficient, they increased their purchases by $40 billion per month on an ongoing basis. They are still buying. The mere suggestion that the federal reserve might slow down it's purchases caused a wild selloff in the bond market that drove mortgage rates from 3.5% to 4.5% in about one month. Clearly, nobody wants to be the bagholder when the…[READ MORE]

It's widely believed mortgage interest rates will rise in the future, perhaps for a very long time. The mainstream media is littered with articles about how this won't hurt the housing recovery to provide loanowners and prospective buyers assurance that prices will keep rising. To better understand why rising interest rates are such a big issue to housing, it's worth reviewing the impact falling interest rates have had on house prices for the last 25 years. House prices and rental parity The basis of all house prices valuations is rental parity, the price point where the cost of ownership equals the cost of a comparable rental. Rental parity is a tether on house prices because if resale values become detached…[READ MORE]

Whenever a borrower is unable to make current debt-service obligations from current income, they have two choices: either declare bankruptcy, or use more debt to pay their debt service. Once a borrower starts using debt to pay debt, they've gone Ponzi. During the housing bubble, many borrowers went Ponzi. It was characterized as a "sophisticated" method of managing personal finances. Since many homeowners came to view their house as another breadwinner, they believed this additional debt was income, and they treated it as such. Now with the home ATM machine broken, perhaps permanently, many Ponzis are struggling to pay their bills. Many have already defaulted and lost their homes (as evidenced by my daily property profiles). Those that are hanging…[READ MORE]

House prices show a consistent seasonal pattern. Prices generally rise during the spring at their fastest rate. During the fall they slow down, and during the winter, when sellers who missed the spring rally get more motivated to sell, prices generally decline. At the end of each spring selling season, it's possible to make an educated guess as to the direction and magnitude of the price movement in the fall and winter. In 2010, the expiration of the tax credits made a strong pullback a likely and predictable result. In 2011, the complete lack of a spring rally portended severe price declines in the fall and winter. In 2012, the complete lack of inventory and upward price movement made a…[READ MORE]

As mortgage rates increase it will put the mortgage interest deduction question back into focus. This has been a rumor that has circulated for several years.  For the extreme high income earners the mortgage interest tax deduction has a phase scale.  It's called the PEP and Pease tax rules that phases out the mortgage interest for couple earn more than $25o,000 per year.  The PEP and Pease is the first successful attempt to reduce the deduction.  There are other several proposals to phase it out, but it will probably a modification of this law that will pass.  If fact, Congress would have to do is just lower the income threshold and increase the phase out calculation to apply the PEP…[READ MORE]

After writing the post Sell now, mortgage interest rates to keep rising, I received an email from John H. Dolan ([email protected]), Independent Market Maker –CME Case Shiller Futures & Options. He pointed out that sellers who are worried about potential declines in house prices don't need to sell their homes. Instead, they can sell futures contracts (short the market) that will rise in value if the Case-Shiller index goes down. Futures Markets From Wikipedia: In finance, a futures contract (more colloquially, futures) is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the futures price or strike price) with delivery and payment occurring at a…[READ MORE]

The recent sudden spike in mortgage interest rates shows no signs of abating; in fact, it is getting much worse. The yield on a 10-year Treasury has moved up from about 1.7% in May to 2.7% today. Since mortgage interest rates and 10-year Treasury rates correspond strongly (they are competing investment alternatives subject to substitution), mortgage rates are also expected to move up a full 1% from their May levels. That translates to a jump from about 3.5% to 4.5%. Yesterday, there was another huge selloff of the 10-year Treasury. Mortgage interest rates may hit 4.75% shortly. Mortgage rates poised to jolt up again July 7, 2013, 3:07 PM ... on Friday, the 10-year Treasury yield posted a large jump,…[READ MORE]

All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental. As many of you know, I went out to Las Vegas to purchase rental homes. Back in August of 2010, I wrote the post Buy Las Vegas real estate where I made the case for buying undervalued homes and holding them for cashflow and apprciation. Not long after that, Wall Street also came to believe this was a good idea, and the REO-to-rental business model took off. The activity of investors like me and the Wall Street giants helped form a bottom in the Las Vegas housing market and other markets across the country. To buy a large number of homes,…[READ MORE]

The housing market bottomed in early 2012 due to a combination of restricted inventory, record low mortgage rates, and increased investor participation in the housing market. I thought the rally was a seasonal bounce, and I was not convinced of the durability of this bottom until it became clear the banks were going to kick-the-can forever, and Ben Bernanke pledged to keep mortgage interest rates low for as long as possible. My perception of the power of Bernanke's statement contained a hidden assumption, that the federal reserve would be able to keep interest rates low through continued quantitative easing. I am now calling into question that assumption. Recent events show that the federal reserve is losing control of the long-end…[READ MORE]

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