Archive for 2013

Sometime in late 2011 or early 2012, lenders changed their internal policies regarding foreclosure processing on delinquent borrowers. Prior to that time, most major lenders, and in particular the GSEs, were processing foreclosures to reduce the level of shadow inventory and stop delinquent mortgage squatters from enjoying a free ride. Lenders were still slow at this processing, and the shadow inventory was enormous, but they were processing just the same. Lenders finally came to realize that continued foreclosure processing was providing a steady stream of distressed properties, and these distressed property sales were keeping prices down. They correctly reasoned that if they stopped foreclosure processing, they could greatly reduce the supply of must-sell distressed inventory and alleviate the pressure on…[READ MORE]

It's been called "sticker shock," but perhaps a more apt term would be "price revulsion." The cost of ownership rose so high so fast that buyers simply stopped buying. Between rising prices and rising interest rates, houses have reached the limit of affordability in many markets, and buyers are either unwilling or unable to push them any higher -- and which of those factors it is will determine what happens going forward. Housing bulls postulate buyers are merely adjusting to the new price levels, and probably next spring, they will be out in force to push the market even higher. In other words, they believe it's buyer choice that causing prices to flatten and sales volumes to plummet. Housing bears…[READ MORE]

Actions have consequences -- which is not to say that many bailout advocates want everyone to avoid these consequences -- but in the real world, the decisions we make impact our lives. When rational people make good decisions, they carefully consider the potential consequences of their actions. Bailouts that soften these consequences invariably leads to more high-risk behavior, poor decision making, and an increased sense of entitlement. I was an early advocate of strategic default, and as it turned out borrowers who strategically defaulted early on made the best choice. These early strategic defaulters recognized their shortest path to future home equity was to quit paying, wait the necessary penalty period, then buy again when prices were lower. Those that…[READ MORE]

We haven't inflated a new bubble yet on this cycle, but we have reached a point where we've fully reflated the old one in several markets. Today, I want to take a detailed look at the Irvine, California, housing market. Irvine is a good proxy for other desirable Coastal California markets. What's happening in Irvine is happening elsewhere. In a healthy housing market, the cost of ownership in Irvine exceeds the cost of renting by 15%. Much of Irvine is a move-up market, so people take their equity from a previous sale and bid prices up higher than rental parity. Just one year ago, Irvine was undervalued by nearly 25%. The cost of ownership was lower than the cost of…[READ MORE]

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]

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