Archive for October, 2013

The housing market and the mortgage market has stalled.   With the elimination of most of affordability products and mortgage rates that can't go too much lower price gains have stopped and lending has greatly decreased, see graph below from Confounded Interest. Now the housing industry is trying to recycle old ideas to stimulate lending activity and home prices.  However with Dodd-Frank most of those affordability products will not qualify as Qualified Mortgages.  This has reduce the ability of banks to inflate home values.  However, there some ways to expand lending by broadening scope of FHA and the GSEs beyond principal residences.  WHY THE FHA SHOULD BE OPENED TO INVESTORS FHA mortgages are supposed to be a vanishing species but the…[READ MORE]

In February I made the case that future housing markets will be very interest rate sensitive. When you look at the mechanisms used to inflate previous bubbles — using teaser rates, allowing excessive DTIs, and abandoning amortization — these were banned by the new residential mortgage rules. Lenders aren’t be able to use these tools to soften the impact of interest rate fluctuations or provide “affordability” when the market reaches its friction point. This is the main reason the market changed so dramatically and so suddenly when mortgage rates surged in June. Today, I want to follow up and show the mounting evidence of the housing markets extreme sensitivity to interest rate fluctuations. We've all been following the headlines over…[READ MORE]

Corelogic is a data company spun off from First American Title a few years ago. Their business is to sell information and analysis; therefore, their credibility is paramount. It's been argued this makes them nearly infallible. Today, I will argue otherwise. Corelogic has established themselves as the authority on shadow inventory. They publish a periodic report that is widely covered by the mainstream media. Their methodology is sound, and their data is accurate. However, as with any study the devil is in the details. There is one small detail that makes their reporting on shadow inventory very misleading. According to DS News, "Properties that are not yet delinquent but may become delinquent in the future are not included in CoreLogic’s…[READ MORE]

Everyone wants to live in Coastal California, so we are running out of land. Prices are supported by fundamentals, and it's different this time. Prices are rising rapidly, so you better buy now, or you will be priced out forever. Does any of that nonsense sound familiar? Each of those made my list of common fallacies that were widely believed during the housing bubble. Except for the brief hiatus caused by a nasty real estate price crash which exposed these myths for the nonsense they are, these wildly popular beliefs are making their way back into the collective consciousness. We can add new fallacies to the list thanks to the housing bubble. How about, "The government will either support house…[READ MORE]

Lower limits on conforming loans guaranteed by the GSEs or the FHA will lower sales volumes and prices in the price ranges no longer financeable with government loans. Everyone who understands the relationship between easy-money financing and aggregate house prices knows this, and those most interested in reflating the housing bubble and maintaining sales volumes (realtors mostly) are doing everything possible to make sure these conforming loan limits stay as high as possible. Of course, this is contrary to the greater good and the stated goals of the Obama administration that wants to reduce the footprint of government in home finance, but realtors aren't concerned with the greater good, they are concerned about commission income. Watching the realtor lobby work…[READ MORE]

When the restriction of MLS inventory caused the housing market to bottom, prices were well below their historic relationship between the cost of ownership and the cost of rental. The undervalued condition didn't last long as the 18 month rally from March of 2012 to September of 2013 coupled with the interest rate surge of June 2013 dramatically decreased affordability in the Orange County housing market. From the time prices began to rise, the big question overhanging the market is what would happen to sales volumes and pricing when the market was no longer undervalued. I speculated that appreciation would dramatically slow down, but I also figured that momentum might carry the market higher, particularly since such a high percentage…[READ MORE]

Since the 1920's the suburbs have grow with after the invention of the car and demise of the family farm.  I like and loved growing up in the suburbs, but I wish there was little more open spaces and few more farms.  Core cities have some advantages, but you always have higher criminal activity and a lack of your private space unless you are rich. Because there was so much speculation construction  in 2000's the growth in the suburbs has slowed somewhat, this is just a pause until population growth catches up.  But, so some reason Sam Zell thinks nearly 100 years of growth is going to reserve itself. 'End of suburbia' may nearly be upon us: Sam Zell Young…[READ MORE]

I have written about amend-extend-pretend since early 2009 when government regulators relaxed accounting rules and ushered in the era of mark-to-model accounting (AKA mark-to-fantasy). This accounting rule change allowed banks to report the value of a loan based on statistical modelling rather than on current market prices. Since the banks can use whatever bogus assumptions they want in their accounting models, it quickly devolved into a way for banks to disguise losses they will inevitably take. Mark-to-model accounting allows banks to report higher book values than the free market would pay for their assets. This in turn allows them to report capital reserves in excess of what they really hold. This puts them in compliance with capital reserve ratios and…[READ MORE]

Reflating the housing bubble requires copious quantities of cheap debt. Soon to be Fed Chair Janet Yellen's loose monetary policies will likely keep the spigots of cheap money flowing into the economy, much of this directed specifically at housing through the federal reserve's $45B monthly purchases of mortgage-backed securities. Yellen's penchant for printing money provides the best opportunity for those desiring reflation of the housing bubble. If Yellen continues to embrace the policies of Ben Bernanke, which seems likely, she will print too much money for too long. I wrote about this problem in How the federal reserve’s printing money impacts housing: Icarus and endless quantitative easing Rising interest rates will hurt the banks by making it more difficult to…[READ MORE]

I liked being a housing bear. If you don't participate in a financial mania, you see the insanity for what it is, and although nobody likes a Cassandra, as the financial mania loses its grip on the masses, those lone voices of reason shine through. Some of the most rewarding moments from the housing bust came when people thanked me for saving them hundreds of thousands of dollars and many sleepless nights. The memory of those thank yous keeps me going, and it reminds me that I have a unique way I can contribute and better people's lives. I am cautious by nature. I have a good bullshit detector, and I'm and not blinded by foolish optimism and wishful thinking.…[READ MORE]